Environmental scanning & Corporate Strategy

Environmental Factors

As pointed our earlier, the managers should identify their relevant environment so that they can
analyse the various elements in order to relate their organizations with the environment. However,
there may be a number of such factors and can be classified in various ways. Since the orientation
towards relevant environmental factors differs for organizations because of the reasons noted
earlier, there may be back of unanimity on such factors. Similar is the case with management
literature. For example, Duncan has classified the relevant components of environment for an
organization into five categories: consumer component, supplier component competitor
component, socio-political component and technological component. On the other hand, Glueck
has grouped the environmental factors in six broad categories: economic, government-legal, market
competitive, supplier -technological, geographic, and social. D .R. Singh, while analyzing
environmental issues taken up by multinationals in the host country, has emphasized the following
factors: economic situation, political situation, and Financial situation. He has further classified the
political situation into industrial development policy, foreign investment policy, corporate taxation
policy, import-export policy, industrial licensing, foreign exchange control, and capital issue control.
These classifications suggest that the environmental factors may be classified in various ways.
However, the classification of these factors must be in such a way that it presents some framework
by which to view the total situation with which the managers confront. This provides managers a
sharp focus on the relevant factors of the environment. They make decisions in the light of the
various environmental forces as perceived by them. This requires the classification of environmental
forces which distinguishes each element from others so that managers can pinpoint the impact of
each on their organizations. However, it can be emphasized here that environmental factors are
intertwined; they affect each other and are affected by others. For example, the economic factors of
a country are likely to be affected by the political and legal aspect of the country. In the same way,
economic aspect may determine technological factor but is affected by the latter. This international
feature makes the classificatory scheme even more flexible. However, an analytical classification of
various environmental factors may be:

Economic environment,

Political-legal environment,

Technological environment,

Socio-cultural environment, and

International environment.

These environmental factors would ultimately determine- the nature of an industry and its
competitive environment which is more relevant to an organization.

2 Economic Environment

Economic environment is by far the most important environmental factor which the business
organizations take into account. In fact, a business organisation is an economic unit of operation.
Since the measurement of organizational performance is mostly in the form of financial terms, often
managers concentrate more on economic factors. The economic environment is also important for
non-business organizations too because such organizations depend on the environment for their
resource procurement which is greatly determined by the economic factors. As such, the
understanding of economic environment is of crucial importance to strategic management.
Economic environment covers those factors, which give shape and form to the development of
economic activities and may include factors like nature of economic system, general economic
conditions, various economic policies, and various production factors. From analytical point of view,
various economic factors can be divided into two broad categories: general economic conditions and
factor market. The discussion of these factors will bring out the nature of total economic
environment.

General Economic Conditions

General economic conditions of a country determine the extent to which various organizations find
the economic forces. favorable or unfavorable. Many forces such as economic system monetary
policy fiscal policy and industrial policy of the country shape general economic conditions. However,
the general economic conditions are also affected by the political and social factors too. These
economic conditions affect national income, distribution of income, level of employment, factor
market and product market. In turn, all these factors affect the business organizations. An analysis of
these will give a picture of the conditions in which the organizations have to operate.

1. Economic System

The economic system of a country determines the extent to which the organizations have to face
different constraints and controls by the economic factors. In three alternative economic systems-
capitalistic, mixed, and socialistic-organizations have to face different types of control ranging from
total freedom to total control. An economic system puts certain restrictors over the functioning of
the organization. Second, it provides lot of protection to an organization depending on its nature.
For example, public sector organizations are protected from private organizations, local
organizations from foreign organizations, small organizations from large organizations, and so on.

2. National Income and its Distribution

National income is defined as the money value of economic activities of a country during a particular
/ period, normally one year. National income determines the purchasing power of people and
consequently the demand for products. Distribution of national income determines the types of
products that may be demanded by the people.

3. Monetary Policy

Monetary policy regulates the economic growth through the expansion or contraction of money
supply. There are three basic objectives of Indian monetary policy:

i. To provide necessary finance to the industries, particularly in private sector

ii. To control the inflationary pressure in the economy; and
iii. To generate and maintain high employment.
4. Fiscal Policy

Fiscal policy deals with the tax structure and governmental expenditure. Generally the Fiscal policy is
adopted for

i. Mobilizing maximum possible resources.

ii. Optimal allocation of resources so as to attain rapid growth.
iii. Attainment of greater equality in the distribution of income; and
iv. Maintenance of reasonably possible stability of prices.

There are two aspects of fiscal policy relevant to strategic management.

First, how tax structure is affecting the growth of individual organizations and the industry as a
whole.

Second, how governments spending affects economic activities.

Factor Market or Supplier Component

Organizations employ many factors of production-land, labour, capital, managerial personnel, etc.
The management should appraise the availability of these factors so that suitable strategies can be
adopted for their procurement and utilization. The easy availability of these resources facilitates the
organizational functioning. While analyzing the factor market aspect of economic environment,
following considerations should be taken into account.

1. Natural Resources

The availability of natural resources-land, minerals, fuel, etc.- becomes a strategic planning factor for
organizations requiring such resources in the production process. Normally location pattern is
decided on the basis of availability of these factors. In our country, there are plenty of natural
resources-land, water: and minerals of various types. However, in the absence of their proper
exploitation and uses, these resources are not able to give adequate benefits. Moreover, there is
lack of certain critical factors, for example, electricity, fuel, etc. which affect the organizational
efficiency adversely.

2. Infrastructure Facilities

Infrastructure provides the various supporting elements for the efficient functioning of the
organizations. These may include transportation, communication, banking services, financial
services, insurance, and so on. In our country, while these facilities are available in plenty and at
satisfactory level at some places, there is total absence or inadequacy at other places. For example,
in urban areas, these facilities are available to a reasonably satisfactory level but these are lacking in
rural areas where the scope for opening more business operations is quite high. The government is
emphasizing the development of backward areas by giving various concessions to the organizations
and through creating the provisions for infrastructure.
3. Raw Materials and Supplies

An organization requires continuous flow of raw materials and other things to maintain its
operations. The price of materials, frequency and regularity of supply: and other terms and
conditions are important considerations in this respect. All these factors, in turn depend on the
availability of natural resources infrastructure facilities and general economic development of the
country.

4. Plant and Equipment

An organization invests money in plant and equipment because it expects a positive rate of return
over cost in future. The revenue from the use of the plant and equipment should be sufficient so as
to cover the invested money, operating costs, and generate enough profit to satisfy the organization.
Greater uncertainty in these would make the cost of plant and equipment a more important
strategic factor. The availability of plant and equipment is dependent on the technical development
of the country and the governments approach towards foreign technical collaboration.

5. Financial Facilities

Financial facilities are required to start and operate the organisation. The external sources of finance
are share capital, banking and other financial institutions, and unorganized capital markets. The
recent changes in the Indian capital market indicate the availability of plenty of finance both from
the financial institutions as well as from general public. In fact the organisation and working of Indian
capital market can be compared favourably with many industrially advanced countries. The
availability of finance coupled with various incentives attached is a facilitating factor. However, such
facilities have been utilized by the few large scale and medium scale organizations.

6. Manpower and Productivity

While the availability of factors of production affects the development of the country as well as
individual organizations, the level of productivity affects the organizational efficiency and
profitability. The productivity of both human and physical factors is dependent on many factors, for
example, the type of technology used, the production process applied, the organizational processes,
and the use of managerial techniques. While analysing the economic environment, the organization
intending to enter a particular business sector may ask the following questions:

1. Does the economic system allow entering the business sector sought? Communist
countries‟ economic systems have a lot of such barriers.
2. What is the stage of economic growth and what is the rate of growth? “Is it maturing,
declining, or at take-off stage?
3. What is the level of income-national and per capita? Does it offer market of large size?
4. What are the incidents of taxes, both direct and indirect, in general and on specific
products?
5. What are the infrastructure facilities available and what are bottlenecks therein?
6. Are critical raw materials and components available and at what costs?
7. What are the sources of financial resources and what are their costs?
8. Is adequate manpower-managerial, technical and workers available and what are their
salary and wage structures? What is the level of their productivity?
Political and Legal Environment

Political-legal environment is an important factor particularly in a mixed economy like ours, and
affects the working of business organizations significantly. Political-legal environment of a country
includes the following elements:

1. Political system such as political processes, political organizations-political parties and their
ideologies, political stability, and extent of bureaucratic delays and red tapism;
2. Defence and foreign policies like defence expenditure, maintenance of external relationships
with other countries, defining most favoured countries from business point of view, etc.; and
3. Legal rules of the game of business-their formulation, implementation, efficiency, and
effectiveness.
4. Political-legal environment of a country can be bifurcated into two parts depending on the
nature of their impact on business organizations: 5.

Promoting environment and Regulatory environment.

Promoting Environment

Promoting environment of political-legal aspect of business includes the stimulation of business

through the provisions of various facilities and incentives, protecting home markets from the
invasion of foreign competitors, taking direct role of promoting business organizations, and
purchasing from business organizations.

For instance, the Government has provided all these in Indian economic system.

It has involved itself in providing various facilities in the form of infrastructure-transport, electricity,
banking and finance, postal and telecommunication, etc.; helping to promote Indian business
abroad; promotion of business organizations in public and joint sectors; provisions of concessions
and benefits of various types for industries located in specified areas; and so on. Though many
features of these have changed over the period of time, they have contributed a lot to the
development of industries in India.

Regulatory Environment

Regulatory environment is just opposite to promoting environment; it puts certain restrictions on

the operations of business organizations. However, these restrictions are not of arbitrary nature but
are based on the nature of a social system. In a social system, there is no freedom without clearly
defined area of freedom. In fact, this is a very old story reaching down through the history of
mankind: there is no freedom without laws. In Indian context, regulatory environment consists of
the factors related to the regulation of business operations of organizations by prescribing their
freedom to operate in certain areas of business and the practices that they are required to follow in
conducting their business. These have been prescribed by legislative measures in the form of various
laws and policy formulation from time to time. Though many changes have taken place in India’s
regulatory environment, discussed later in this chapter, major regulations in force are as follows: -

1. Control through industrial policies and licensing.

2. Control of monopolies and restrictive trade practices.
 3. Control through Foreign Exchange Management Act.
4. Control on import and export.
5. Control over foreign operations, collaboration, and joint ventures.
6. Control over distribution and pricing of certain goods.
7. Control to protect consumer interest.
8. Control over environmental pollution, and
9. Control of procedural matters through the Companies Act.

All these controls are exercised within the framework of the Constitution of India which has
provisions to put control over the arbitrary actions of the government. In analysing political-legal
environment, an organization may put the following questions:

1. How does the political system influence the business?

2. What are the approaches of the government towards business? Are they restrictive or
facilitating/promoting in nature?
3. What are facilities and incentives offered by the government?
4. What are the legal restrictions in entering a particular industry segment either because of
licensing requirement or it being reserved to a specific sector such as public sector or small
scale sector?
5. What are the restrictions in importing technology, capital goods, and raw materials?
6. What are the restrictions in, exporting products and services? What are the export
obligations?
7. What are the restrictions on pricing and distribution of goods?
8. What are the procedural formalities required in setting a business?

Technological Environment

Technological environment is important for business as it affects the type of conversion process that
it may adopt for its purpose. The technological environment refers to the sum total of knowledge
providing ways to do things. It may include inventions and techniques, which affect the ways of
doing things, that is designing, producing, and distributing products. A given technology affects an
organisation in the way it is organized and faces competition. From strategic management point of
view, technology has following implications:

1. Technology is a major source of productivity increase. Though human beings are primarily
responsible for handling technology, their efficiency is determined by the type of technology being
used.

2. Various jobs in an organisation being performed by individuals are determined by the technology
being used. If there is a change in technology, the jobs are changed because technology determines
the level of skills required.

3. Technology influences the social situation, that is, the size of groups, membership of group;
patterns of interpersonal interactions, opportunity to control activities are influenced in a variety of
ways by technology.
4. Organizations become more secured by developing efficiency through the adoption of efficient
technology. However, as the technology becomes more complex, it becomes relatively more difficult
for new organizations to enter the field.

5. There is a time gap in employing new technologies both within an organisation and among
organizations in a field. Time gap within the organisation means that adjustment to technological
innovation will be spread over a number of years and is not amenable to a direct, one-change
solution. With the industry, it means that if a new technology is adopted by an organisation, others
in the same industry will follow soon, however, because of time gap, the first organisation will have
some sort of monopolistic advantages. Petrov has analysed the strategic implication of technological
environment as follows:

1. It can change relative competitive cost position within a business;

2. It can create new markets and new business segments; and

3. It can collapse or merge previously independent businesses by reducing or eliminating their

segment cost barriers. The technological environment of the country is fast changing because of
import of technology from foreign countries or because of technology generated out of research and
development within the country. The Government is quite liberal in regard to the import of
appropriate technology from foreign. It is also encouraging the development of internal technology
though various incentives to the business organizations concerned as well as through other
institutions and laboratories of Council of Scientific and Industrial Research and other technical
institutions. Thus, the managers have to work in an environment where technological change - is the
order of day. Its result is that they have to be more conscious to take the advantages of such
changes. In analysing technological environment, the organisation may ask the following questions:

i. What is the level of technological development in the country as a whole and specific business
sectors

ii. What is the pace of technological changes and technological obsolescence?

What are the sources from which technology can be acquired?

What are the restrictions and facilities for technology transfer and time taken for absorption of
technology?

Socio-Cultural Environment

Social and cultural environment is quite comprehensive because it may include the total social
factors within which an organisation operates. In fact, the political and legal environment is closely
intertwined with social and cultural environment because laws are passed as a result of social
pressures and problems. The socio-cultural environment of business can be defined or viewed as
follows: Social and cultural environment consists of attitudes, beliefs, desires, expectations;
education and customs of the society at a given point of time. Thus, social and cultural environment,
in its broad sense, includes many-aspects of society and its various-constituents.
From business organizations point of view, it may include:

(i) Expectations of the society from the business;

(ii) Attitudes of society towards business and its management;
(iii) Views towards achievement of work;
(iv) Views towards authority structure, responsibility and organizational positions,
(v) Views towards customs, traditions, and conventions;
(vi) Class structure and labour mobility; and
(vii) Level of education.

The various elements of social and cultural environment affect the working of the organizations
mainly in three ways:

1. Organizational objective setting

2. Organizational processes and
3. Products to be offered by the organization.

Through these, they affect the total functioning of the organisation. The social and cultural factors
affect the basic objectives of the organization by prescribing the norms within which the
organizational objectives are formulated. For example, to what extent, social responsibility will be
an organizational objective is determined by the various social factors in which organisation
functions. Similarly organizational processes are also designed keeping in view the various social and
cultural factors otherwise they will not work. For example, the various control and decision
processes in our social organizations are based on the basic values of joint family system and caste
system. Similar is the case with other organizational processes. Social and cultural factors also affect
the goods and services that can be offered by the organisation. Since the organisation works as
mediator for converting inputs into outputs, and these outputs are given to the society, it can
produce only those things, which are accepted by the society-which a

ctually „buys‟ the

products. Often the managers in formulating or implementing their strategies do not consider the
social and cultural factors adequately. The result is that their sound strategies in all other aspects
may fail! Many products, even by well-established manufacturers, have failed because these could
not match the social values. Similarly many products, which may not seem to be economically well,
may succeed because of their social and cultural values. Further the organizations have to follow
social expectations in their objective setting and working, as discussed in the previous chapter.
However, the social and cultural factors are also subject to change, though the change is gradual and
steady which can be forecast with comparative ease once the managers get an insight of these
factors. In analyzing social and cultural factors, the organisation can ask the following questions:

1. What are approaches of the society towards business in general and in specific areas?
2. How do social, cultural and religious factors affect acceptability or otherwise, of (our)
product?
3. What is the life style of the people and our products fit their life style?
4. What is the level of acceptance of, or resistance to, change?
 5. What are the values attached to particular products? Do people: see possessive value or
functional value in the product?
6. Do people buy specific products for specific occasions necessitated by social and religious
requirements?
7. What is the propensity to consume and to save?

International Environment

Today’s economy has globalized in which geographical boundaries of a country have only political
relevance; the economic relevance has extended beyond these. Today, market classification does
not take into account only national parameters but global parameters. In this globalization, many
multinationals like Exxon, Mobil Oil, Coca-Cola, Avon, Unisys, etc. derive more than half of their
revenues from their overseas operations. This is true for many Indian companies particularly in
information technology sector such as Infosys Technologies, Wipro, Satyam Computer, Penta Media
Graphics; Hughes Software, etc. These companies drive more than 70 per cent of their revenues
from overseas operations. Therefore, there is a need for scanning international environment. From
strategic management point of view, the analysis is required from two angles:

1. Open operations abroad and to understand the implications of entry of multinational

corporations in the country and
2. The freedom of importing products & services from abroad. For operation abroad, the
analysis of the following factors is important:

Economic Factors

1) Rate of economic growth.

2) Income distribution pattern.
3) Size of market for companies products.
4) Infrastructure and physical facilities.
5) Sources of funds and their cost.
6) Availability of foreign exchange for remittances.

Tax Factors

1) Tax rate trends on various types of taxes-corporate, indirect taxes such as custom, excise,
sales, local, etc.
2) Joint tax treaties with home country and other countries.
3) Duty and tax drawbacks on exports.
4) Availability of tariff protection.

Political-Legal Factors

1) Political system and stability of political process.

2) Government’s approach towards foreign investment.
3) Restrictions imposed on foreign investment.
4) Incentives provided on foreign investment.
Human Resource Factors

1) Local availability of human resources of various types.

2) Degree of skills and competence of different types of personnel.
3) Attitudes towards work and productivity.
4) Status of unionization and its approach towards management.
5) Availability of amenities for expatriate personnel and their families.

Geographic and Competitive Factors

1) Efficiency of transport system.

2) Proximity of site to export markets.
3) State of marketing and distribution system.
4) Profit margin on operations.
5) Competitive situation in the industry.

Socio-Cultural Factors

1) Attitudes of local population towards foreign companies and products.

2) Degree of acceptability of innovative products.
3) Life style of people and consumption pattern.
4) Peculiar socio-cultural differences affecting business prospects adversely.

In the case of analyzing international environment in the context of threats through import and
operations of MNCs (Multi-National Companies) in the country, the important factors are:

1. Comparative cost advantages through technological advancement, high volume of

production, or both.
2. Tariff structure affecting, favourably or unfavourably, imports.
3. Attitudes of exporting nations and companies in the form of dumping and other means to
take advantages over local companies.
4. Degree of subsidies and incentives, financial and nonfinancial, available to exporting
companies.

Later types of factors have become more crucial in the liberalized Indian economy because it has
opened its markets to MNCs almost in every sector and that too in unrestricted form. Therefore,
Indian companies have to be more cautious than what they used to be.

INDIA’S ECONOMIC GROWTH

Changing Indian Business Environment: -

We have seen that environment is dynamic and change(s) take place in it continuously. In the Indian
business scene, many changes have taken place in the liberalization process, which was introduced
in 1990s, and the process still continues. On one hand, these changes have provided opportunities to
Indian corporate sector; on the other hand, these have thrown many challenges to it because of
unrestricted imports and entry of MNCs. Some of the major changes are as follows:

Macro and Monetary Policy Changes; Fiscal and Monetary Policy Changes
 i. Rationalization of corporate and income tax.
ii. Rationalization of excise duties.
iii. Rationalization and reduction in custom duties.
iv. Lowering of interest rates

Banking Sector Changes

i. Entry of private sector banks.

ii. Equity dilution in public sector banks.
iii. Phasing out of priority lending.
iv. Operational freedom in lending rates.
v. Operational freedom in deposit rates.
vi. Adherence to capital adequacy norms and income recognition.

Capital Market Changes

i. Abolition of Controller of Capital Issues.

ii. Creation of Securities Exchange Board of India (SEBI)
iii. Free pricing of new equity issues.
iv. Opening of capital markets to foreign institutional investors.
v. Entry of foreign broking houses.
vi. Freedom for Indian companies to raise funds through ADRs / GDRs.
vii. Index and scrip-based future and option trading

STRUCTURAL CHANGES Market driven Pricing

i. Phasing out of subsidies.

ii. Phasing out of administered price mechanism.
iii. Abolition of control on distribution system

Public Sector Policy Changes

i. Disinvestments in and divestment of public sector undertakings.

ii. Reduced role of public sector.
iii. Abolition of price preference to public sector.
iv. No new establishment in public sector.

Exit Policy Changes

i. More freedom for closing industrial undertakings.