sogjél ‘system and, the to do the business, how . a business and if yes wl ~ factors which constitute cultural factors; demog, illustrates the impact of The business ecolog matter). Just as the survivi factors (the external envi The external enviro threats to business. Similar 2s the physiological and psychological factors — to which the environment is conducive to the development of the individual, the survival and success of a business firm depend on its innate physical resources, financial resources, organisation — and its aday is favourable to the development of the organisation. The si depend on two sets of factors, viz., the internal factors (the intern: its decisions and performance are ii tors. Important decisions related to business such as what business to do, which should be the ns od to busi uch as what b : I i isi q : au) Customer segments to target at and what strategies be adopted, where to do the businé to do the business, whether to continue a business, whether to expand where and how to expand it, and so on are influenced by a number of what is generally referred to as the business environment. MEANING OF BUSINESS ENVIRONMEN’ | nt consists of all those factors that have a bearing on the business, such Business Environmer n s . Ae Strengths, weaknesses, intemal power relationships and orientations of the organisation; government policies and regulations; nature of the economy and economic conditions; socio. raphic trends; natural factors; and, global trends and cross-border developments. Transformation of the Indian Two-wheeler Market given at the end of the chapter business environment on the business. BUSINESS ECOLOGY y indeed is very similar to the human ecology (or any ecology for that al and success of any individual depend on his innate capability — such to cope up with the environment and the extent Strength — resources at its command, including » human resources, the inter-linkages and synergy, skill and Prability to the environment and the extent to which the ewitonment urvival and success of a firm, thus, ‘al environment) and external ronment). ment has, broadly, two components, viz., rly, the organisational environment has two n. Thus, strategy formul business opportunities and components: BUSINESS-ENVIRONMENT INTERRELATIONSHIP Any me: should be bases the internal and opportunities and ie strengths and weaknesses of the © management process, therefore, is one of the first steps Pings ‘arge extent, is a dependent factor 7 the importance of environmental Scanned with CamScaReo ae ™ Internal Environment External Environment Factors Tafluencing Business Decision Gia ola NMA aN On the basis of the extent of intimacy with the firm, the environmental factors may be classified into different types or levels. As indicated above, there are, broadly, two types of environment, the internal environment, i., factors internal to the firm and external environment, ie, factors extemal to the firm which have relevance to it. The intemal factors are generally regarded as controllable factors because the company has control over these factors; it can alter or modify such factors as its personnel, physical facilities, organisation and functional means, such as marketing mix, to suit the environment The external factors, on the other hand, are, by and large, beyond the control of a company. The external or environmental factors such as the economic factors, socio-cultural factors, government and legal factors, demographic factors, geo-physical factors etc, are, therefore, generally regarded as uncontrollable factors. It may, however, be noted that a firm may not sometimes have complete control over all the internal factors. Also, it is sometimes possible to change certain external factors, Some of the external factors have a direct and intimate impact on the firm (like the suppliers and distributors of the firm). These factors are classified as micro environment, also known as task envitonment and operating environment. There are other external factors which affect an industry very generally (such as industrial policy, demographic factors etc). They constitute what is called macro environment, general environment or remote environment, environment efvteanent Although business environment consists of both the internal and extemal environments, many people often confine the term to the external environment of business. In this book too, in the subsequent chapters, the term refers mostly to extemal environment of business INTERNAL ENVIRONMENT 1s which have a bearing on the strategy and other decisions are Micro endtonmerttaskenvronmervoperaing eavienmant Macro envronmetigener Internal emvirnment The important internal factor outlined below. Business endronment may be considered alte levels 6 Watue system, The value system of the founders and those at the helm of affairs has important bearing on the choice of business, the mission and objectives of the organisation, business policies and practices. It is a widely acknowledged fact that the extent to which the value system is shared by all in the organisation is an important factor contributing to success. Scanned with CamScaobjectives sete | Vision, mission and lion stategy, HM, ‘The va system of ines pt “nately direction, eaters portfolio ‘shategy and CSR. The value system of JRD Tata and the acceptance of it by others whose matter were responsible for the voluntary incorporation in the Articles of Association of TISCO, its social and moral responsibilities to consumers, employees, shareholders, society and the people. ‘After the EID Parry Group was taken over by the Murugappa Group, one of the most profitable businesses (liquor) of the ailing Parry Group was sold off as the liquor business did not fit into the value system of the Murugappa Group. The value system and ethical standards are also among the factors evaluated by many companies in the selection of suppliers, distributors,-collaborators etc. Infosys Technologies Limited is a publicly held company based in India that provides information techaotd consulting and software services to Fortune 1000 companies and employs more than 3,000 people worldwide Infosys has based its growth on several key principles of corporate governance: best practices, financial markets, ‘and human capital, ls core value: To achieve our objectives in an environment of fairness, honesty, transparency, and courtesy towards our customers, employees, vendors, snd society at lane AU Infosys activites ave continually benchmarked with global best practices. Te Firm's quality control aud project management hae helped it achieve toad ualty management accreditation, Feedback fom process ‘uals enable the reenginering nf interna procesea nen requited. International accounting prosties are ab Jollved. Infosys publishes all financial ports according to bath US and Indian Generally Averpted Accounting Practices. Hest practcesit Infosys are rapture through a Knoeede management waters that rusk gained from various client assignments freely available in an intranet r sperience rl direct listing om w US market, Infisrys bexan trading on Nasday in March 1999, The first Indian-segist Infosys viewed the listing asa way to achirre employees and future acquisitions. It anticipates th greater comfort and confidence in the company re options) for attracting the best 7 will give potential ¢ fas one of its wated the cuncept af the efits allows Inf to attouet Infosys views its employees as its hey rewurce objectives, Infosys provides innovative compensati ‘employee stock ownership plan in Indiv. Infosys housing, and personal assistance series. This comb top talent to contribute to its growth (1999), instisuted by the Ministry of Finance and Infosys won the first National Corporate Governance sponsored by the UT. Financial Times, reproduced in MLR. Iskander and N, Chamlou, Corporate Governance: Source: A Framework for lmplemer Vision, Mission and Objectives The business domain of the company, priorities, direction of development, business philosophy, business policy etc., are guided by the vision, mission and objectives of the company. Ranbaxy’s thrust into the foreign markets and development were drive a research-based _ international pharmaceutical company”. Arvind Mills’ mission - “To achi global dominance in select businesses built around Gur core competencies through continuous product and technical innovation, customer orientation and focus on cost effectiveness’, — has driven its future development strategy including the portolio strategy, and indicated the thrusts “tequired in the functional areas to help achieve the mission. i ~ Management Structure and Nature The organisational structure, the composition of the Board of Directors, extent of professionalisation of management etc., are important factors influencing business decisions. by its mission “to become / Scanned with CamScaSome management structures and styles delay decision-making while some others fac decision-making itate quick The Board of Directors being the highest decision-making body which sets the direction for the development of the organisation and which oversees the performance of the organisation, the quality of the Board is a very critical factor for the development and performance of company. ‘The private sector in India presents extreme cases in this respect. At one end, there are companies with highly qualified and responsible Board and at the other end there are companies which do not possess these qualities. The shareholding pattern could have important managerial implications. There are very large companies where majority of the share is held by the promoters (like Wipro) and there are large firms where the promoters’ position is very vulnerable (like the Tata Group of Companies) Financial institutions had large shareholding in many Indian companies. The stand of nominees of financial institutions could be very decisive in several critical instances. <4) Internal Power Relationship Factors like the amount of support the top management enjoys from different levels of employees, shareholders and Board of Directors have important influenice on the decisions and their implementation. The relationship between the members of Board of Directors and between the chief executive and the Board are also a critical factors. Human Resources The characteristics of the human resources like skill, quality, morale, commitment, attitude etc., could contribute to the strength and weakness of an organisation. Some organisations find it difficult to carry out restructuring or modernisation because of resistance by employees whereas they are smoothly done in some others. The involvement, initiative etc., of people at different levels may vary from organisation to organisation. The orgenisational culture and overall environment have bearing on them. John Towers, M.D., Rover Group, observes that a Japanese company of 30,000 employees is 30,000 process improvers. In a Western company, it is 2,000 process improvers and 28,000 workers." ‘And in’an Indian company? total ats detain to potential ofa company to meat the endronmentalehallnges Company Image and Brand Equity The image of the company matters while raising finance, forming joint ventures or other alliances, soliciting marketing intermediaries, entering purchase or sale contracts, launching new products etc. Brand equity is also relevant in several of these cases. Miscellaneous Factors ‘There are a number of other internal factors which contribute to the business success/failures or influence the decision-making. They include the following. 1. Physical Assets and Facilities like the production capacity, technology and efficiency of the productive apparatus, distribution logistics etc., are among the factors which influence the competitiveness of a firm. For example, as quality is very important in the pharmaceutical industry, particularly for a global player, in the case of Core Healthcare not only there is no compromise on quality but also the company made the quality norms stricter than international or other relevant standards and the quality mantra has been well imbibed throughout the organisation Scanned with CamScaea company’s ability 2. R&D and Technological Capabilities, among other things, deter to innovate and compete. sation for marketing, quality of the marketing men, have direct bearing on marketing efficiency. They new product introduction etc. position and capital structure are also strategies and decisions. 3. Marketing Resources like the organi brand equity and distribution network ‘are important also for brand extension, i ial poli ncial 4. Financial Factors like financial policies, fina important internal environment affecting business performances, ) EXTERNAL ENVIRONMENT: ‘shape the organisational strength | Both angle and inangble asets the scr and nt ofan [As stated earlier, the external business environment consists of a micro environment and a macro environment. Micro Environment tng that affect all the actors in the company’s micro environment — namely, the demog i 2 i i 2 i ionmenial frees have a dct ‘on tho operations ofthe fm. Environment and Operating Environment because tha mie e “The micro environment consists of the actors in the company’s immediate environment that affect the performance of the company. These include the suppliers, marketing intermediaries, competitors, customers and the publics.”? The macro environment consists larger societal c= phic, ic, natural, technical, political and cultural forces.”? econor It is quite obvious that the micro environmental factors are more intimately linked with the company than the macro factors. The micro forces need not necessarily affect all the firms in a particular industry in the same way. Some of the micro factors may be particular to a firm. For example, a firm which depends on a supplier may have a supplier environment which is entirely different from that of a firm whose supply source is different. When competing firms in an industry have the same micro elements, the relative success of the firms depends, inter alia, on their relative effectiveness in dealing with these elements, Suppliers ‘An important force in the micro environment of a company is the suppliers, i.¢,, those who supply the inputs like raw materials and components to the company. The importance of reliable source/sources of supply to the smooth functioning of the business is obvious. Uncertainty urding, the supply or other supply constraints often compel companies to maintain high inventories causing cost increases. It had been pointed out that factories in India maintained indigenous stocks of 3-4 months and imported stocks of 9 months as against an average of a few hours to two weeks in Japan.‘ The liberalisation, however, has caused a significant change in the situation, Because of the sensitivity of the supply, many companies give high importance to Vendor development. Vertical integration, where feasible, helps solve the supply problem. For example Nirma has always been a believer of the logic that captive production plants for taw mateta isthe best way to production costs in check and it has gone for a mammoth backward integration In many cases, however, outsourcing is more beneficial, I is very risky to depend on a single supplier because a strike, lock out or any other Fyoduction problem with that supplier may seriously affect the company. Similarly, a change in attitude or behaviour of the supplier may also affect the company. ti i of supply often help reduce such risks. Pany: Hence, malible sources ‘Supply chain management is ‘ical to be efceney ofa fim, TI he supply management assumes more importance in a scarcity environment. “Company urchasi “ Pp ne. agents are learning how to “wine and dine” suppliers to obtain favourable treatment during periods of shorta itself t0 supplier 2 8° I” ether words, the purchasing department might have to “market” OCaNNeU WIL LdlndcaRecognising the critical importance of the supply factor, companies all around the world are increasingly resorting to partneringirelationship marketing. (For details, see the author's Business Marketing (Himalaya Publishing House). Partnering is becoming more and more international and this provides a challenging opportunity for Indian suppliers to become international players. Qcustomers [As itis often exhorted, the major task of a business is to create and sustain customers. A business exists only because of its customers. Monitoring the customer sensitivity is, therefore, a ness success. — prerequisite for the bu: ‘A company may have different categories of consumers like individuals, households, industries and other commercial establishments, and government and other institutions. For example, the Customers of a tyre company may include individual automobile owners, automobile manufacturers, public sector transport undertakings and other transport operators Depending on a single customer is often too risky because it may place the company in a poor bargaining position, apart from the risks of losing business consequent to the winding up of business by the customer or due to the customers switching over to the competitors of the company. With the growing globalisation, the customer environment is increasingly becoming global. Not only that the markets of other countries are becoming more open, the Indian market is becoming more exposed to the global competition and the Indian customer is becoming more “global” in his shopping, Competitors —~ A firm's competitors include not only the other firms which market the same or similar products but also all those who compete for the discretionary income of the consumers. For example, the competition for a company's televisions may come not only from other T.V. manufacturers but also from [Link], refrigerators, cooking ranges, stereo sets and so on and from firms offering savings and investment schemes like banks, Unit Trust of India, companies accepting public deposits or issuing shares or debentures etc. This competition among these products may be described as desire competition as the primary task here is to influence the basic Gesire of the consumer. Such desire competition is generally very high in countries characterised by limited disposable incomes and many unsatisfied desires (and, of course, with many alternatives for spending/investing the disposable income). \n choosing the customer segments, a company should conser such factors asthe lave rota, ‘dependabty, stab of demand, gown prospects andthe extent of competion, CCompeition has aiterent levels end dimensions, If the consumer decides to spend his discretionary income on recreation (or recreation-cum- education), he will still be confronted with a number of alternatives to choose from like T.V., Stereo, two-in-one, threein-one etc. The competition among such alternatives which satisfy a particular category of desire is called generic competition. If the consumer decides to go in for a T.V., the next question is which form of the T.V. — black and white or colour with remote control or without it etc. In other words, there is a product form competition. Finally, the consumer encounters the brand competition, i.e, the competition between the different brands of the same product form. ‘An implication of these different demands is that a marketer should strive to create primary and selective demand for his products. Consequent to the liberalisation, the competitive environment in India has been undergoing @ sea change. Many companies restructured their business portfolio and strategies. In many industries where a seller's market existed a buyer's market has emerged. “The iberasaton has dramatiealy transformed the Scanned with CamScaucture of Industries The competitive environment is detailed in the sectios Competitive Str -ompetiti ied i in later in this chapter. sist of a number of marketing intermediaries (U\Marketing Intermediaries selling and distributing its goods to final The immediate environment of a company may con: which are “firms that aid the company in promoting, Sl and merchants who “help The marketing intermediaries include middlemen a Eeraed bution firms which “assist | the company find customers or close sales with thern”7 physical distrbovieh Te Ue the company in stocking and moving goods from their origin to their destination’ Butt is warehouses [Link] fim; marketing service agencies which “assist Me company. targeting and promoting its products tothe right markets" such as advertising agencit®, metkling research firms, media firms and consulting firms; and financial intermediaries "marketing activities and insure business risks. - Marketing intermediaries are vital links between the company and the final consumers. A dislocation or disturbance of the link, or a wrong choice of the link, may cost the company very heavily. Retail chemists and druggists in India once decided to boycott the products of a leading company on some issue such as poor retail margin. This move for collective boycott was, . however, objected to by the MRTP Commission; but for this the company would, perhaps, have been in trouble. Hindustan Lever too faced major challenge when it faced a collective boycott in Kerala on the issue of trade margin. Financiers Another important micro environmental factor is the financiers of the company. Besides the financing capabilities, their policies and strategies, attitudes (including attitude towards risk), ability to provide non-financial assistance etc. are very important 5) publics A company may encounter certain publics in its environment. “A public is any group that has an actual or potential interest in or impact on an organisation's ability to achieve ite interects "10 Media publics, citizens action publics and local publics are some examples, Some companies are seriously affected by such publics, For exam, ir n a s. ample, one of the lead Sarr anes, i9 India was frequently under atack by the media public, particularly by a leading daily which was allegedly bent on bringing down the share prices of the, company by tarnishing meas mounting op ragetinment organisations (NGOS), particularly in developed count, hea en a up Protests against child labour, sweat labour, cruelty agsinet animal environmental problems, deindustrialisation resul i ing from im _ Particularly, are affected by such developments nts0 om Exton of developing counts, ness. Some of the actions of the publics ics are an opportunity for the business, an opportunity for the business, The | May Cause problems for comy However, some publ -) may s for companies. However, fessmen, for examp! rd consumerism as 1, for example, regard consumerisi company and the local community. ‘ oCalneu Wit LalnscaA Glimpse of Business Environment fT J] Macro (General/Remote) Environment Political/Govt. environment Legal environment Micro (Task/Operating) Environment Financiers Internal Environment |= - Promoters'/shareholders’ values Suppliers 1 Mission/Objectives Management structure Internal power relationship Physical assets and facilities Customers Demographic environment. Global environment Business Decision Company Image/brand equity Publics Human resources Financial capabilities 1 Technological capabilities Marketing capabilities Marketing intermediaries é 8 g & 3 RS 3 Social/Cultural environment Technological/Natural environmentENVIRONMENTAL ANALYSIS AND FORECASTING Scanned with CamScaes, need a clear identification of the relevant Business decisions, particularly strategic ones, nee the variables and a detailed and in-depth analysis of them to understand thelr impact and implication, isation. For example, what is the impact of the different aspects of li ion on Boo ore? What are the implications of the liberalisation for the company? In other words, what are th and what are the opportunities unfolded by the the threats posed by the liberalisation , saenieion? A thorough analysis of the environment is necessary for finding answers to these, STAGES OF ENVIRONMENTAL ANALYSIS | The process of environmental analysis may be divided into the following four stages:! 1, Scanning the environment to detect warming signals. 2. Monitoring specific environmental trends. rection of future environmental changes. 3. Forecasting the 4. Assessing current and future environmental changes for their organisational implications, (Sometimes, the term environmental scanning and monitoring is used very broadly to encompass the environmental analysis.) Scanning Scanning is the process of analysing the environment for the identification of the factors which impact on or have implications for the business. Such factors may include those which have appeared suddenly or evolved over time. Identification of emerging/ensuing trends is a critical purpose of the environmental scanning, In this, “prospective mode scanning focuses on identifying precursors or indicators of potential environmental changes and issues. Environmental scanning is thus aimed at alerting the organisation to potentially significant external impingement before it has fully formed or crystallised. Successful environmental scanning draws attention to possible changes and events well before occurrence, allowing time for suitable strategic action."? Monitoring Monitoring entails perspective follow-up and a more in-depth analysis of the relevant environmental trends identified at the scanning stage. The effort here is more focused and systematic than in scanning. Scanning is essentially exploratory in nature and, therefore, it often involves a very wide examination of the environment. As the relevant factors have already been identified, monitoring lends itself for a focused and systematic approach. "The purpose of monitoring is 0 assemble sufficient data to discern whether certain patterns are emerging.” However, “they are likely to be a complex of discrete trends. For example, an emergent lifestyle pattern may include changes in entertainment, education, consumption, work habits and domicile-location preferences. In the initial stages of monitoring, the patterns are likely to be hazy because they are the outputs of scanning: the analyst has only a vague notion of what to look for.”? The outputs of monitoring are threefold:* a specific description of environmental patterns to be forecast; identification of trends for further monitoring and identification of pattems requiring further scanning. Forecasting Anticipating the future is essential for identifying the future threats and opportunities and for formulating strategic plans. “Forecasting is concerned with the development of plausible directions OCaNNeu WIL LdlnscaRenter? ‘of directions, scope, speed, and intensity of environmental change, to lay out the evolutionary path of anticipatory change.”> ‘The characteristics of the variables or their trends may undergo changes. Further, new variables may emerge as critical or the relevance of certain variables may decline. It is, therefore, 2 necessary to monitor such changes. Sometimes, the changes may be very significant so as to call 3% for a reforecasting. 38 a ‘Assessment ea Bes The purpose of environmental analysis is to assess the impact of the environmental factors 8 2 2 on the organisation’s business or their implications for the organisation. Assessment, thus, involves drawing up implications/possible impacts. “In assessment, the frame of reference moves from me understanding the environment — of the focus of scanning, monitoring and forecasting — to 23% eee identifying what that understanding of environment means for the organisation."* There are broadly two approaches to environmental analysis: 1. Outside-in (macro) approach 2. Inside-out (micro) approach The [Link] or macro approach takes a very broad view of the business environment (hence the term macro approach) with a long-term perspective and develops alternative scenarios ‘of the future. The implications of the alternative scenarios for the industry and the organisation ate drawn up with reference to the different scenarios. Thus, “scenario analysis is a technique used to forecast the occurrence of complex environmental events, It is particularly useful for forecasting events in which many variables play 2 role, Scenarios allow the integrated consideration of these multiple variables in explaining the emergence of future conditions. A scenario is a detailed description of how certain events may occur in the future and their consequences for the organisation."7 The following steps have been suggested to develop scenarios.* 1. Identify strategic environmental issues that are likely to affect the industry/fimm. Priortise these issues in order of their importance to the firm. 2. Select the most important issues as the focus for scenario development. List the organisational assumptions with respect to these issues and identify the possible variations in these assumptions. 3. Prepare a preliminary description of these issues and how they evolved, include the key economic, social, political, and cultural influences that affect them, Do this with the help of outside industry experts 4. Draw out the implications of the issue for organisational performance. What has the organisation done and what can it do to cope with the issues? Identify those variables shaping the issue that the management can control and partially control. Also, identify those variables over which management has no control, 5. Develop detailed descriptions of the future in the form of scenarios, Scenarios are constructed under a worst case, best case, anc most likely case set of assumptions. Draw out the implications of these scenarios for future performance of the company. Scanned with CamSca6. Discuss the scenarios with top management and refine them. 7. Develop contingency action plans for each scenario. The inside-out (micro) approach, which takes a rather narrow view of the environment, forecasts the immediate future environment on the basis of the ongoing environmental monitoring and derives the implications of it for the industry and firm out of it [Link] ENVIRONMENTAL ANALYSIS | $22 Techniques for environmental analysis refer to the methods of gathering the relevant Su information for appraising the environment, gsi William Glueck mentions four techniques for environmental analysis: Verbal and Written AF % Information; Search and Scanning; Spying; and Forecasting and formal studies. zee: zEes Verbal and Written Information A lot of documented information, published or unpublished, is available on many matters However, people may not like to put on record certain types of information which they may be prepared to divulge orally, sometimes on condition of anonymity or confidentiality. Tact and Proper approach are required to obtain such information. Verbal information is significant in several other situations. The situation might have changed after the documentation of the information, necessitating personally contacting knowledgeable people to get the latest information, Personal contacts will be helpful in getting more details of the written information. Personal contacts will also be useful in obtaining diverse views of different people. There are indeed many matters on which written information is non-existent or scanty. All these highlight the importance of verbal information in environmental analysis. While using written information, several factors such as the purpose for which it was prepared, the methodology used for collection of the information, reliability of the sources of information, the ideology/orientation of the individual/organisation that prepared the information etc. need to be evaluated. Such cautions should also be exercised while going in for verbal information. Sources of verbal information also include electronic media, seminars, workshops etc. Search and Scanning Even when the required information exists somewhere, it may not become readily available. Search and scanning are, therefore, needed, many a time, to identify the sources of information and to manage the timely availability of the required information. A number of organisations have clipping service which constantly scan newspapers, periodicals etc. and prepare clippings containing information required by different departments/executives of the organisation. Many organisations have Management Information System for systematic gathering, processing, storing and disseminating information. An MIS is generally regarded as very useful. Spying, Spying, albeit regarded unethill by many, is not very uncommon in business. This has been used to a considerable extent to obtain secret information regarding defence and space research. ocadlneu WIT LamocaThere are many instances of industrial espionage also. This i is used most! iti information ly to gather competitive The fourth approach to environmental analysis is formal forecasting. This is described in the following, section The important steps in environmental forecasting are the following. Identification of Relevant Environmental Variables The first most important step in environmental forecasting is identification of the environmental variables critical to the firm. All environmental variables do not have the same relevance to all the industries or firms. A variable that is relevant to one industry may not be relevant for another. Again, important developments in some market may not have any implications for some other markets. For example, the high level of penetration of microwave ovens in some of the developed countries like USA is a critical variable as far as food processing industry in that market is concerned; but it is not relevant in markets where the microwave ovens have not penetrated — if microwaveable packaging increases the cost of the product it could be a negative factor in such markets. Similarly, a factor relevant in one technological environment may not be relevant in a different environment. Diesel price is a critical factor for railways which use that energy source but not for those which depend on electricity (assuming that there is no competition between those depending on these two different energy sources). Some demographic trends have implications for certain business. A falling birth rate is a threat to several businesses (for example, for companies like Johnson & Johnson, which depends heavily on the baby segment of the market). The increase in the longevity and the resultant increase in the number of aged generates good demand for several goods and services. To envision the future environment, it is essential to identify the critical environmental variables and to predict their future trends. Omission of any critical variable will affect the assessment of the future environment and strategies based on that premise. Similarly, inclusion of variables which are not adequately relevant could have misleading effects Pearce and Robinson point out that the list of key variables that will have make or break consequences for the firm can be kept to manageable size by limiting key variables in the following ways." 1, Include all variables that would have a significant impact although their probability of occurrence is low. Delete others with little impact and low probability 2. Disregard major disasters, such as nuclear war. 3. Aggregate when possible into gross variables (e.g, a bank loan is based more on the dependability of a company’s Cash flow than on the flow’s component sources) 4. If the value of one variable is based on the value of the other, separate the dependent variable for future planning." Collection of Information The key environmental variables having been determined, the next important step is the collection of the needed information. This involves identification of the sources of information, determination of the types of information to be collected, selection of methods of data collection and collection of the information. OCaNNeu WIL Ldlnoca “The steps in envronmentl forecasting ae sar tothe steps in omulaing and executing a research projec‘The depondsbitly and usefuness sreeconomie forecasts The oho forcest depend all on the ¥@ 88 a dase for deriving Industry and company forecasts, {echnique used Selection of Forecasting Technique The choice of forecasting technique depends on such considerations as the nature of the forecast decision, the amount and accuracy of available information, the accuracy required, the time available, the importance of the forecast, the cost, and the competence and interpersonal relationships of the managers and forecaster involved.™? One issue often debated is the quantitative techniques versus qualitative techniques. The fact is that each has its own merits and limitations. Some people have a mistaken notion that quantitative techniques are highly dependable and qualitative techniques are often too subjective that they are not reliable. The dependability of the quantitative techniques is affected by the accuracy/ reliability of the data used. It is pointed out that the difference in the predictions using each type Of approach is often minimal. Additionally, subjective or judgement approaches may often be the only practical method of forecasting political, legal, social, and technological trends in the Femote external environment. The same is true of several trends in the task environment, especially customer and competitive considerations.!3 Monitoring The characteristics of the variables or their trends may undergo changes. Further, new variables may emerge as critical or the relevance of certain variables may decline. It is, therefore, necessary to monitor such changes. Sometimes the changes may be very significant so as to call for a reforecasting. ES ‘OF FOREGASTINI | orecasts of the important business environments, viz., economic environment, social Environment, political environment etc. would be useful’ in formulating plane and strategies Economic Forecast The fact that economic environment is a very critical determinant of Underscores the importance of economic foreca: business prospects st. Important economic factors often considered incl Browth rate, per capita income, distribution of incom and output trends in different sectors and subsectors/in etc. lude general economic conditions, GDP 'e, structural changes in GDP, investment 'dustries, price trends, trade and BoP trends There are indeed a number Organisations like World Bank, Asian Development Bank economic forecasts, ‘dium and long-term forecasts, International » UN, WTO etc. and regional organisations like nal publications which provide, inter alia, I" becomes more useful when disaggregated details of the estimates/forecasts are available When reliable for recasts are not available from i : own ent the secondary source, a firm has to make its oCalneu wit ValnscaEnvironmental Analysis and Forecasting Short-term economic forecasts are very useful for demand and sales forecasting and marketing strategy formulation, Both quantitative methods such as econometsic methods, and time series models and qualitative techniques like judgement models can be used for economic forecasts. Social Forecasts There ar very essenti number of social factors which have profound impact on business. Its, therefore, to forecast the possible changes in the relevant social variables. Important factors include population growth/decline, age structure of population, ethnic composition of population, occupational pattem, rural-urban distribution of population, migration, factors related to family, litestyle, income levels, expenditure pattern, social attitudes etc. As in the case of ec nomic factors, there is a wealth of published and unpublished data of forecasts of social trends available, International organisations like the UN and its organs, World Bank etc., academic organisations and government organisations do considerable work in these areas. for example, a considerable amount of data is available regarding future trends in birth and death rates and population size, age structure, ethnic composition etc. of different nations. Certain aspects of this are dealt with in the chapters Societal Environment and Demographic Environment. Quantitative techniques like time series analysis and econometric methods and qualitative methods like Delphi method or a combination of both quantitative and qualitative techniques may be used for social forecasts. One of the most popular methods is scenario building which involves drawing up alternative future scenarios, based on different assumptions or predictions of developments, nds have. significant i for businass stalegy soci imp Pol al Forecasts Political forecast has an important part in envisioning properly the future scenario of business. There are even chances of a country undergoing a drastic shift in the political system (Example: USSR and Eastern Europe in the late 19803). Changes in the relative power of political parties, changes in the intemal power structure of political parties (including changes in leadership and its implications), political alliances and political ideologies etc. may have implications for business. Some political factors may be embedded in social factors Some political changes are sudden and unpredictable, There are, however, several changes which are reasonably predictable. For example, the sweeping political and economic changes in the erstwhile USSR and Eastern Europe and the general liberalisation trend in many other counties could be regarded as an indicator that liberalisation would set in India too. The liberalisation ushered in 1991 indicated that there would be privatisation (which even at the end of 1990s has hot assumed a serious intent and real earnest in India) and other liberalisation. The discussions on decentralisation and government pronouncement on this enabled the prediction of administrative decentralisation in several States in India. With the decentralisation, decision-making process in the government has changed and this has important implications for business, y, commercial polcy and fiscal policy. Political forecasts also cover industrial. pol There are several factors which have intemational or global overtones, Sanctions, formal or informal, which have serious consequences for business are not very rare. Increasing world interdependence makes it imperative for firms of all sizes to consider the international political implications of their strategies. Companies, research organisations and consultants have developed a variety of approaches {0 international forecasts of which political factors are an important component. Harner’s Business Environmental Risk Index, for instance, monitors a number of economic and political variables OCAMNed WIL Lalldcaannually a Global Competitiveness jomic Forum brings out ae ‘openness and institutions (see the es. , in many coun eight set of factors including government, based on eigl caper von Global Competitiveness for more details). Technological Forecast / / Innovation and other technological developments can drastically alter the business environment. Technological forecasts, therefore, assumes great significance. Technological forecast encompass not only technological innovations but also the pace and extent of diffusion and penetration of technologies and their implications. For example, what will 4 _ be the pace and extent of penetration of PCs and the internet and their implications for businesst How far can and will the existing and new technologies be applied in diverse areas and what = are their implications? z = It may be noted that one of the eight components of the world competitiveness index used in the World Competitiveness Report is technology which measures computer usage, the spread of new technologies, the ability of the country to absorb new technologies and the level and quality of Research and Development. The Technology Information, Forecasting and Assessment Council (TIFAC) established in 1988 has done considerable work to draw up a Technology Vision 2020 for India. It is among the tasks of TIFAC to look ahead at the technologies emerging worldwide and pick those technology trajectories which are relevant for India and should be promoted. Brainstorming and Delphi methods are popular in technology forecasting. TECHNIQUES FOR ENVIRONMENTAL FORECASTING | Ee ee ‘As mentioned earlier, there are a number of quantitative and qualitative techniques used in environmental forecasting. Some important techniques are mentioned below. aro generally based onempiical data, Econometric Techniques Quanta forecasts Econometric techniques involve casual models to predict major economic indicators. When there is a well established relationship between two or more variables, that casual relationship can be used to forecast the future. For example, if demand is a function of consumer income, the impact of an increase in consumer income on demand can be predicted using the equation representing the relationship between these two key variables, ° The econometric models may “utilise complex simultaneous regression equations to relate rom Oceurrences to areas of corporate activity. They are especially useful when information is available on casual relationships and when large changes are anticipated,”"* The most commonly used econometri ni sting techniques are multiple ed econometric environmental foreca sting techniqu regression analysis and time series regression models. Trend Extrapolation Time series models assu is , me that the past is a historical data to the future. The technique may use non-linear relationships to forecast trends. prologue to the future and extrapolate the simple linear relationship or more complex scanned with Camscaace Scenario Development A very popular and useful forecasting method is development of alternative scenarids. When it is not possible to accuratel managers 0 formulate strategies to coy (under political forecasts), ly forecast the future, the alternative scenarios help pe with different possible future situations. As hinted earlier i Royal Dutch Shell’s anticipation of a possibility of a substantial crash in oil prices in future prompted it cut exploration costs by pioneering advanced exploration technologies, massive investments in cost-efficient refining facilities etc., so that by 1989 its exploration costs at $2 per barrel were less than half the industry average. “Scenario analysis is a technique used to forecast the occurrence of complex environmental events. It is particularly useful for forecasting events in which many variables play a role, Scenarios allow the integrated consideration of these multiple variables in explaining the emergence of future conditions. A scenario is a detailed description of how certain events may occur in the future and their consequences for the organisation."'5 Shrivastava suggests the following steps to develop scenarios.'® 1. Identify strategic environmental issues that are likely to affect the industry/firm. Prioritise these issues in order of their importance to the firm. Select the most important issues as the focus for scenario development. List the organisational assumptions with respect to these issues and identity the possible variations in these assumptions. Prepare a preliminary description of these issues and how they evolved. Include the key economic, social, political, and cultural influences that affect them. Do this with the help of outside industry experts 4, Draw out the implications of the issue for organisational performance. What has the organisation done and what can it do to cope with the issues? Identify those variables shaping the issue that the management can control and partially control. Also, identify those variables over which management has no control 5, Develop detailed descriptions of the future in the form of scenarios. Scenarios are constructed under a worst case, best case, anc most likely case set of assumptions. Draw out the implications of these scenarios for future performance of the company. 6. Discuss the scenarios with top management and refine them. 7. Develop contingency action plans for each scenario. { Developing alternative scenarios is common in economic planning too. The Planning Commission of India, for example, have drawn up alternative scenatios regarding growth rates of different sectors, poverty ratios etc. under different assumptions. Many forecasts which use the scenario method draw up three alternative scenario — a most likely scenario, a pessimistic scenario and an optimistic scenario. However, forecasts having more than three scenarios are not uncommon. Scanned with CamSca