(KMBN 301): Unit 2: Environmental Scanning

Environmental Scanning

Environmental scanning is like keeping an eye on everything happening around a business that might affect it. Imagine you own a small bakery. To stay successful, you need to know what’s going on in the market, like:

• What customers want (new trends like healthier cakes or gluten-free options).
• What competitors are doing (a new bakery opening nearby).
• Changes in rules or policies (new health regulations).
• Economic factors (rising prices of ingredients).

By watching and gathering this information, you can adjust your business strategy. For example, if you notice more customers asking for vegan options, you might start offering vegan cakes to stay competitive and meet their needs.

So, environmental scanning helps businesses be aware of changes and adapt to them to avoid problems and find opportunities.

Understanding the macro environment

Understanding the macro environment means looking at the bigger picture of factors outside a business that can affect its success. These are things that businesses usually have no control over, but they need to be aware of them to plan well.

Let’s break it down with an example. Imagine you own a clothing store:

• Political Factors: Government decisions or policies, like changes in tax rates, can affect your costs. If the government increases taxes on imported fabrics, your clothing prices might go up.
• Economic Factors: The economy impacts people’s spending. If there’s a recession (economic downturn), people might have less money to spend, so you might see fewer customers in your store.
• Social Factors: Trends and lifestyles matter. If more people start caring about sustainable fashion, they might prefer eco-friendly clothes. You may need to offer more products made from recycled materials.
• Technological Factors: New technology can change how you operate. For example, online shopping and digital payment methods might require you to set up an e-commerce website for your store.
• Environmental Factors: Climate change or environmental concerns can affect your supply chain. If there’s a drought where your cotton is grown, it might become more expensive.
• Legal Factors: Laws like labor laws or safety regulations could impact your hiring practices or the way you design your store.

Understanding these macro environment factors helps businesses plan ahead, make better decisions, and adapt to changes that are beyond their control. For your clothing store, it means being prepared for challenges and staying competitive by adjusting your business accordingly.

PESTEL analysis

PESTEL analysis is a tool businesses use to understand the big-picture factors that might affect them. It looks at six major areas outside the company that can influence decisions. Here's a simple breakdown using an example:

Imagine you own a small cafe. You want to know what’s happening in the world that could impact your cafe, so you use PESTEL analysis:

• Political Factors: These include government policies and regulations. Example: If the local government increases the minimum wage, you’ll have to pay your staff more. This might raise your overall costs.
• Economic Factors: This refers to the state of the economy, like inflation, interest rates, or consumer spending. Example: If there’s an economic downturn (recession), people might spend less money eating out, which could reduce your cafe’s profits.
• Social Factors: These include trends in culture, lifestyle, and behavior. Example: If more people in your area start preferring healthy foods, you might need to add more salads or gluten-free options to your menu to keep up with customer demand.
• Technological Factors: Advances in technology that could help or challenge your business. Example: If more people prefer online food ordering, you might need to create an app or offer delivery services to attract more customers.
• Environmental Factors: This covers the impact of environmental changes or sustainability efforts. Example: If there’s a push for eco-friendly practices, you might switch to recyclable packaging for takeout orders or reduce plastic use to attract environmentally conscious customers.
• Legal Factors: The laws and regulations that affect how you run your business. Example: If new health and safety regulations are introduced for food businesses, you’ll need to make sure your cafe complies, which might involve upgrading your kitchen equipment or training staff.

In summary, PESTEL analysis helps you identify opportunities and threats from the outside world, so you can plan ahead. For your cafe, it means adjusting your business strategy based on what’s happening politically, economically, socially, technologically, environmentally, and legally around you.

Industrial Organization (IO) & the Structure Conduct Performance (SCP) approach

The Industrial Organization (IO) approach is about understanding how industries work and how businesses in those industries behave. It focuses on how the structure of an industry influences how companies within it act, and how that affects overall performance, like profitability.

A key concept in IO is the Structure-Conduct-Performance (SCP) approach, which breaks down into three parts:

• Structure: This is about how the industry is set up. It looks at things like:
• How many competitors are there?
• Is there a dominant company?
• Are there barriers for new companies to enter?

Example: In the smartphone industry, a few big players like Apple and Samsung dominate, while smaller companies find it hard to compete because they don’t have the same resources.

The Structure-Conduct-Performance (SCP) approach is a way to understand how industries and markets work by looking at three key factors:

1. Structure: This refers to how the market or industry is organized. It looks at things like the number of companies in the market, whether they are large or small, and if there are any barriers to entry for new companies. Example: In the smartphone market, there are a few big companies like Apple and Samsung, and many smaller companies. This structure affects how companies compete.

2. Conduct: This focuses on how businesses behave within the market. It includes how they compete with each other, how they set prices, and what kind of marketing strategies they use. Example: Apple might charge higher prices for its smartphones because of its brand, while other companies might compete by offering lower prices or more features.

3. Performance: This is about how well the market performs based on the structure and the conduct of businesses. It looks at things like product quality, customer satisfaction, and how competitive the market is. Example: If Apple and Samsung dominate the smartphone market, there might not be much innovation from smaller companies, and prices could be higher. But if there are many competitors, prices may be lower, and products may improve as companies try to stand out.

In Simple Words, In the SCP approach, the structure of the industry affects how companies conduct themselves, which then impacts the overall performance. If an industry is dominated by a few large companies (like smartphones or airlines), they might have more control over prices and profits. If there are many small companies, competition might be tougher, and prices lower.

So, SCP helps businesses and policymakers understand the link between industry setup, company behavior, and market results.

Porter’s Five Forces Model

Porter’s Five Forces Model is a tool that helps businesses understand the competition in their industry and how different factors affect their ability to make a profit. It was developed by Michael Porter, and it focuses on five main forces that influence any market. Let’s explain it in simple terms with an example.

Imagine you own a pizza shop. Porter’s Five Forces will help you see what’s affecting your business:

1. Threat of New Entrants: This force looks at how easy or hard it is for new businesses to enter your industry and compete with you. Example: If it’s easy to start a new pizza shop (low costs, not many regulations), new competitors can open up and take away your customers. If opening a pizza shop requires a lot of money and permits, fewer people will be able to compete with you, which is good for your business.

2. Bargaining Power of Suppliers: This refers to how much control suppliers (like those who provide your ingredients—cheese, dough, etc.) have over the prices. Example: If there are only a few cheese suppliers in your area, they can charge higher prices because you have no other options. But if there are many suppliers, you can shop around and get better deals, lowering your costs.

3. Bargaining Power of Buyers: This is about how much control your customers have over pricing. Example: If customers have many other pizza shops to choose from, they can demand lower prices, or they’ll go elsewhere. But if your pizza shop is unique or the only one in town, customers have less bargaining power, and you can set higher prices.

4. Threat of Substitute Products: This force looks at whether there are other products or services that could replace yours. Example: If people can easily choose to eat burgers, sushi, or home-cooked meals instead of pizza, then the threat of substitutes is high. You’ll need to work harder to convince people to choose pizza over other options.

5. Competitive Rivalry: This is the direct competition you face from other businesses in your industry. Example: If there are many pizza shops in your area, the competition is intense, and you’ll need to offer better deals, promotions, or unique menu items to stand out. If there’s little competition, you’ll have an easier time attracting customers.

In Simple Words, Porter’s Five Forces helps you understand the strength of competition and where the pressure on your business comes from. By understanding these forces, you can make better business decisions, like lowering costs, improving your offerings, or finding ways to be different from your competitors.

Understanding the Micro Environment

Understanding the micro environment refers to looking at the immediate factors that directly affect a business's operations and success. These factors are close to the company and can be influenced or managed by it.

Key Components of the Micro Environment:

• Customers: The people or businesses that buy your products or services. Example: If you run a coffee shop, understanding your customers’ preferences—like their favorite drinks or snack options—is crucial. If you find out that customers are increasingly asking for plant-based milk, you might decide to offer it to attract more customers.
• Suppliers: Companies or individuals who provide the resources you need to produce your goods or services. Example: In the coffee shop example, your suppliers would be the vendors who deliver coffee beans, milk, pastries, and other items. If your coffee supplier increases their prices, you might need to adjust your menu prices or find a different supplier to keep costs manageable.
• Competitors: Other businesses that offer similar products or services in your area or market. Example: If another coffee shop opens nearby with lower prices or unique offerings (like specialty drinks), you’ll need to think about how to differentiate your shop. You might introduce loyalty programs or special promotions to keep customers coming back.
• Intermediaries: Businesses that help you get your product to customers, such as distributors or retailers. Example: If you decide to sell your coffee in local grocery stores, you’d work with distributors to get your products on their shelves. The effectiveness of these partnerships can directly impact your sales.
• Publics: Various groups that can influence your business, including the media, community groups, and financial institutions. Example: If your coffee shop participates in local events or sponsors community activities, this can enhance your reputation and attract more customers. Positive media coverage can also improve public perception.
• Employees: The people who work for your business and their skills and attitudes. Example: Friendly and knowledgeable baristas can create a welcoming atmosphere that keeps customers returning. If employees are well-trained and motivated, it leads to better service, enhancing the customer experience.

In Simple words, The micro environment consists of all the factors directly surrounding your business that can impact its success. For your coffee shop:

• You need to pay attention to what customers want, how to manage your suppliers, keep an eye on competitors, and ensure your employees are well-trained and happy.
• By understanding and effectively managing these components, you can create a successful business that meets customer needs and stands out from the competition.

Resource-Based View (RBV) Analysis 

The Resource-Based View (RBV) Analysis is a way to look at a business’s internal resources to understand how it can achieve a competitive advantage over others. The idea is that the unique resources and capabilities a business has are the key to its success.

Here’s a simple way to explain it with an example:

Imagine you own a small bakery. According to RBV, you would look at the resources your bakery has that make it stand out from other bakeries and help it succeed. Resources can be anything that gives you an edge, and they can be divided into tangible and intangible:

1. Tangible Resources: These are physical assets you can see and touch. Example: You might have a high-quality oven that bakes cakes faster and more evenly than others, which allows you to produce better-quality baked goods. This equipment is a tangible resource that helps your bakery succeed.

2. Intangible Resources: These are non-physical assets like skills, reputation, or knowledge. Example: Your baking skills or secret family recipes that produce unique flavors are intangible resources. No other bakery can easily copy them, giving you a competitive edge.

3. Capabilities: This refers to how well you use your resources. Example: You may have a great team of bakers who work efficiently together, which allows you to create delicious baked goods quickly, giving you an advantage in customer service.

How RBV Leads to a Competitive Advantage

According to RBV, not all resources are equal. For a resource to give you a long-lasting advantage, it should be:

• Valuable: Does it help you create something customers want? Example: Your secret recipe creates cakes that customers love, making it valuable.
• Rare: Do other competitors have it? Example: If no other bakery in town uses your special recipe, it’s rare.
• Imitable (Hard to Imitate): Can competitors easily copy it? Example: A unique recipe or a special technique you use that is hard for others to replicate gives you an edge.
• Organized: Can your business use it effectively? Example: You might have great recipes, but if you don’t have a good system for baking and serving customers efficiently, you won’t fully benefit from it.

In Simple Words, The Resource-Based View helps businesses focus on the unique strengths they have within their control. For your bakery, it could be your secret recipes, skilled team, or advanced equipment. By identifying and using these resources well, you can gain an advantage over competitors and make your business more successful.

VRIO Framework

The VRIO Framework is a tool businesses use to figure out which of their resources or strengths can give them a long-term advantage over competitors. It helps companies assess whether their resources are Valuable, Rare, Costly to Imitate, and Organized to create a competitive edge.

Let’s break down VRIO with an easy example:

Imagine you own a small clothing store, and you want to see if your resources can give you an advantage over other stores. You would apply the VRIO framework like this:

1. Valuable: Does the resource help you offer something people want or reduce your costs? Example: You have a unique fashion designer who creates exclusive clothing styles that customers love. This is valuable because it helps attract customers and increases sales.

2. Rare: Is the resource unique or not easily available to your competitors? Example: No other store in your area has a designer creating these kinds of exclusive designs. This makes your resource rare since other stores don’t offer the same thing.

3. Imitable (Costly to Imitate): Can other businesses easily copy this resource or replicate your advantage? Example: Your designer’s talent is based on years of experience and a unique creative style. It would be difficult and expensive for other stores to find or train someone to replicate this level of creativity. So, this resource is hard to imitate.

4. Organized: Is your business structured and capable of using this resource effectively? Example: You have a well-organized business model where you promote the designer’s unique clothes online and in-store, and your team works efficiently to turn designs into finished products. This means you are well-organized to take full advantage of this resource.

In Simple Words, If a resource checks all the boxes in the VRIO framework (Valuable, Rare, Hard to Imitate, and Organized), it can give your business a sustainable competitive advantage.

Using resources to gain Competitive advantage & its sustainability

Using resources to gain a competitive advantage means leveraging what you have to make your business stand out from others and be more successful. To keep that advantage going over time (sustainability), those resources need to be hard for others to copy or replace.

Let’s explain it simply with an example:

Step 1: Using Resources for Competitive Advantage

Imagine you own a bakery, and you have a special recipe for cakes that no one else has. You also have a team of highly skilled bakers who can make these cakes quickly and perfectly.

The resource (special recipe) gives you an advantage because customers love your cakes, and no one else can offer the same flavor.

Your team (skilled bakers) makes sure the cakes are always of high quality, delivered quickly, and consistently good.

• Together, these resources help you:
• Attract more customers.
• Charge a bit more because your cakes are unique.
• Build a good reputation.

This is your competitive advantage—something that makes your bakery more appealing than others in the area.

Step 2: Sustainability of Competitive Advantage

To keep your advantage going for a long time, your resources need to be sustainable, which means they are:

• Hard to copy: If other bakeries can’t easily figure out your secret recipe or find bakers with your team's level of skill, you’ll keep your edge.
• Long-lasting: The resource should continue to work well over time. For example, your bakers should stay motivated, and your recipe should remain a customer favorite.
• Protected: You might protect your recipe as a trade secret, so no one else can steal it.

Example of Sustainable Advantage:

Think of companies like Apple. They have a competitive advantage because of their unique product designs, user-friendly technology, and strong brand. Their resources (like innovation and brand loyalty) are hard for competitors to copy, giving them a sustainable competitive advantage. Even though competitors try to match Apple’s products, Apple stays ahead because their resources are difficult to imitate.

Value Chain Analysis 

Value Chain Analysis is a tool businesses use to look at all the activities involved in making a product or delivering a service, to see where they can add value (make the product or service better) and where they can improve efficiency. The goal is to increase customer satisfaction while keeping costs down, so the business becomes more competitive.

Imagine you own a chocolate factory. From getting raw materials (like cocoa beans) to selling chocolate bars in stores, there are many steps involved. Value Chain Analysis helps you break down these steps to see where you can make your product better or reduce costs.

The value chain is divided into two parts: Primary Activities and Support Activities.

1. Primary Activities: These are the main steps that directly involve making and selling the product.

• Inbound Logistics: Getting raw materials and storing them. Example: Your chocolate factory needs to buy cocoa beans, sugar, and milk. If you find a supplier who offers high-quality beans at a lower price, you’ve added value by improving the quality of your chocolate while reducing costs.
• Operations: Turning raw materials into the finished product. Example: In your factory, machines process cocoa beans into chocolate bars. If you invest in faster, more efficient machines, you can make more chocolate in less time, reducing costs and adding value.
• Outbound Logistics: Delivering the product to customers or stores. Example: Once the chocolate is made, it needs to be shipped to stores. If you partner with a reliable, low-cost delivery service, you ensure the chocolate gets to stores quickly and fresh, adding value by keeping your product high-quality.
• Marketing & Sales: Promoting the product and getting customers to buy it. Example: You create ads that show how delicious your chocolate is. If your marketing campaign is effective, more people will buy your product, adding value by increasing sales.
• Service: Helping customers after they buy the product. Example: If your company has great customer service (like handling complaints or returns smoothly), it makes customers happier, adding value and building loyalty.

2. Support Activities: These help make the primary activities more efficient and effective.

• Procurement: Buying the necessary materials and equipment. Example: If you negotiate better deals with suppliers or buy high-quality cocoa at a good price, it supports the whole production process.
• Technology Development: Using technology to improve products or processes. Example: If you use new technology that improves the flavor or texture of your chocolate, you’re adding value by making your product better than the competition.
• Human Resource Management: Hiring and training employees. Example: Well-trained workers are more efficient and produce better-quality chocolate, adding value by improving your operations.
• Firm Infrastructure: The way your business is managed and organized. Example: Good management ensures that everything runs smoothly, from production to sales, adding value by improving the overall efficiency of your business.

By analyzing your value chain, you can see where your business is strong and where it can improve, ultimately helping you stand out from the competition.

Unit 1: Introduction of Strategic Management & Corporate Governance

Unit 3: Strategy Formulation