Analysis and Diagnosis of External Environment

Session III

Definition of Environmental Analysis

• Environment Analysis can be viewed as a process by which corporate planners study the changes in the environmental factors and identify opportunities and threats along with their causes

What is the Environment ?

• Economic Factor• Government• Legal • Market• Competition• Suppliers• Technological advancement• Demographic• Geographic• Social factors

Environmental Diagnosis

• It is setting up an opinion from the environmental analysis to avail an opportunity or to effectively handle a threat or to ignore an environmental change

• It can be viewed as a set of decisions to be made by the corporate planner on the significance of environmental opportunities and threats in order to take further decisions for pro-acting or reacting or setting aside the environmental change noticed during the phase of analysis

EAD – Environmental Analysis and Diagnosis

• Describes the major phase of the strategic management process for focusing on the business environment

During EAD Corporate planners do the following :-

• Identify the current strategy of the firm and the related assumptions and predictions on the environment

• Predict the future environment indicating the tenability of earlier assumptions and predictions

• Assess the significance of difference between current realities and future predictions about the environment

• Indicate what changes in strategy would be useful for future success

EAD and its impact on Business Success

• Miller and Freisen [1977] identified 10 types of firms – – Failing types – & – Successful types

Failing types

• Impulsive – gambler / high risk

• Stagnant Bureaucratic – risk aversive / power hungry

• Headless Giant Firm – no powerful visionary

• Swimming Upstream Firm – weak in strategic base / aware of environmental opportunities but unable to take it.

Successful types

– Giant under Fire Firm – big but hostile environment– Adaptive Firm under Extreme Dynamism – dynamic

top takes all decision after analysis– Adaptive Firm under Moderate Dynamism – mod

dynamism prefers slow changes– Entrepreneurial Firm – grow thru mergers– Dominant Firm – moderate risk taker– Innovative Firm – head a genius enjoys key position &

power in decision making

Impulsive Firm

• Gambler type planner

• Takes high risk

• Tries to do everything

• Multidirectional activities

• Top engaged in multiple decision making

• Hardly gets time to carry out systematic and adequate EAD

Stagnant Bureaucratic Firm

• Risk aversive

• Power hungry planner

• Does not give proper importance to EAD

• Firm gets markedly separated from the environment

• Fails to Perceive environmental changes

• Rarely achieve its objectives

Headless Giant firm

• No powerful and visionary leader

• Management is weak to take bold decisions

• Carries out cursory and inadequate EAD

• EAD not used for strategic planning

Swimming Upstream Firm

• Weak in terms of strategic base

• Aware of the environmental changes

• But not able to take advantage of the Opportunities

• Delayed awareness puts the firm in an unmanageable scarcity of resources

Companies successful in their home markets: strong tendencies to replicate ‘home

country practices’ in the new market• For E.g. • Kellogg's in India presumed that they would easily

break the conventional breakfast habits of Indians• Core principles get sidetracked, • core practices wrongly get endowed with

transformative powers• In reality, principles travel farther, • socio-economic factors dull the edge of

practices

Giant Under Fire

• Faces fierce environment with strict Govt regulations and stiff competition

• Gives high attention to EAD• Does systematic and adequate studies• But the environment complexity forces the

firm to go slow• Risk aversive planning key feature of its

strategic planning

Adaptive Firm under extreme dynamism

Headed by risk taking group of planners• Adequate degree of EAD • Opts for sophisticated techniques for analysis• Prefers innovative ideas for strategy plans• Involves experts for reacting to the changes in the

environment• Decentralised operation in the face of turbulance

Mc Donald’s: ‘adjustments in product as well as value equation’

McAloo Tikki burger for ` 25

Adaptive Firm under moderate Dynamism

• Faces slow environment changes

• Predictable nature of environment

• Centralised decision making system

• Risk taking top management

• Carries out moderate degree of EAD

• Just enough assessment of the business environment

Localized flavors for appeal to Indian palate

Frito-Lay’s in India (Lays Chaat Street/Kurkure)

Entrepreneurial Firm

• Grows externally through mergers

• Thereby invites environmental complexities

• All powerful top management

• Risk oriented decision making

• EAD adequate with corporate experts spending time to analyse

Dominant Firm

• Industry leader

• Moderate risk taker while planning

• Minimum complexity and stable environment

• Thus EAD carried out is minimum

• However this EAD is adequate for future decision making

Innovative Firm

• Headed by a Genius

• Enjoys key position and corporate power in decision making

• Undertakes least amount of EAD

• But always meet the environmental demand for a new product

Key External factors

• Porter 1970 – Key aspect is the Industry or Industries in

which the firm competes– Basic Competitive forces

• Threat from new entrants• Threat from substitutes• Bargaining power of buyers• Bargaining power of suppliers• Rivalry among current competitors

Key factors - continued

• Jauch and Gluek (1988)– General environment

• Socioeconomic

• Technological

• Governmental

Economic factors

• Inflation and Economic flux can bring sweeping changes in the purchasing pattern of the consumers

• Recession brings in unemployment• Tightening of monetary policy may escalate

costs• Tax policies may reduce the purchasing

power of the consumer

Economic Indicator

• Economic Growth – high economic growth reduces industry competition

• Interest Rate – cost of capital for the firm• Exchange rates of currency – dynamicity of

exchange rates determines the competitiveness of our products in international markets

• Inflation Rate – impact on the stability of the company

Governmental Policy

• Liberalization

• Privatization

• Globalization

• Stabilization

Legal factors

• Labour Laws

• Tax Laws

• Trade Laws

• Environment Pollution

Technological Factors

• Systematic usage of scientific or other organised knowledge to economic activities

• Technology change occurs in three stages– Invention– Innovation– Diffusion

Political factors

• Democracy – power in the hands of the people– Security, Dynamicity, Efficiency, Honesty

• Totalitarian – power in the hands of the state

Social Factors

• Changes in – Lifestyles– Social Values– Education Levels– Attitude of people

Geographic factors

• Locational opportunities and Threats

• Cost – Demand advantages

Market factor

• Primary Demand

• Age-wise distribution of the population

• Brand Loyalty

• Market elasticity of demand– Price– Advertisement expenses– Prices of substitute

Competitive Factor

• Planner must know the objectives, strategies, SWOT of major rival

• Absolute cost advantage

• Economies of scale

• Scarcity of raw material

• Product differentiation

• Access to marketing channel

Supplier Factor

• Cost and availability of raw materials

• Reliability of the Suppliers

• Buyer – supplier power play determines the price

Substitution Factor

• Role of substitute industry– Coffee and Tea– Coffee and Soft drink– Coffee and Water

• Pricing of substitutes

• Pricing of raw materials of substitutes

Techniques for Environmental Analysis

• Mathematical form

• Dynamicity

• Degree of uncertainty

• Level of Aggregation

• Level of Demand

Reliability Reliability in an unreliable world

An obsession with competing

The joy of competing

Enhancing and enabling creativity

If you don’t look at things differently you will never get ahead

A case study of an Indian brand trying to go global

• ““Five years ago we were advising multinationals on Five years ago we were advising multinationals on their entry strategy into India, Now our biggest their entry strategy into India, Now our biggest business is advising Indian companies to go global”business is advising Indian companies to go global”

• Manisha Girotra • Head of investment banking , UBS

India.

Global marketing: Standardization –vs- customization: critical balance to

strike• Even corporations are creatures of habit and prejudice• Entry of Procter & Gamble in India

- Pushed for Tide (W) formulation- This formulation lost to low technology Indian detergents on account of low sudsing and poor hard water sustenance- Import content in final formulation pushed up the pricing- Launched Supersoaker Ariel but withdrew it eventually for dilution of equity- Bought the Godrej brands and operations, only to find most of them hardly of much use - Launched Rs. 3 shampoo sachets: larger quantity was seen as sacrosanct- Finally launched smaller cheaper sachets

Companies successful in their home markets: strong tendencies to replicate ‘home

country practices’ in the new market• For E.g. • Kellogg's in India presumed that they would easily

break the conventional breakfast habits of Indians• Core principles get sidetracked, • core practices wrongly get endowed with

transformative powers• In reality, principles travel farther, • socio-economic factors dull the edge of

practices

Challenges Indian brands face in trying to go global

1. Limited knowledge of the target audience2. ‘Made in India’ tag

3. Arriving at the right product – appealing to the target market yet profitable

4. Ensuring a robust distribution network

• 5. Managing investment against local players with deep pockets

Canada: A market of giant banks • Highly competitive

– The big six control 90% of the banking assets

• Leading banks enjoy heritage, reach and trust

• Existing Indian banks like SBI had limited offerings– Only remittance,

export/import support, travel currency etc.

Canadian market: Changing modes of banking

• 39000 ABMs – one of the largest per capita deployment in the world

• Increasing prevalence of non-branch banking– ABM transactions up 32% p.a.– Internet banking up by 56% p.a.– Tele-banking up by 47% p.a.

• New-age banks like ING were capturing the younger market with direct banking

ICICI Bank’s business thrust in Canada

• To establish itself as a mainstream bank

• To address the needs of locals as much as those of the Indian Diaspora

• Manage with optimum investment, limited ground presence

TargetTo achieve a business of 500 million Canadian Dollars in the first year of

operations

How did ICICI manage to swim with the sharks and not get eaten up?

Systematic shoestring marketing

Step #1

Better understanding of the target audience

Understanding the Canadian consumer..

• In order to mitigate the high cost of doing research in Canada;

• ICICI bank in conjunction with Cogito Consulting of FCB-Ulka India conducted an e-mail and a web-poll - at virtually no cost

Banking in Canada: A few research findings…

• Difficult to get older age group to change banks

• Younger Canadians more experimentative

– Open to trying new banks

– Greater acceptance of emerging telephone and internet modes

of banking

• Even then on-ground presence and global network are key

contributors to trust

• Attributes associated with ‘Indians’: dependable, efficient,

ethical and reliable

ICICI Bank thus decided to• Focus on the younger age

group• Leverage the emerging yet

cost effective online medium to reach the target

audience

Step #2

Being only Indian: Not very conducive to be a mainstream bank

Projected the ‘global bank’ character

Building trust..

• ICICI bank: leveraged banking skills cultivated in India

– Ability to manage large sums of money for millions of customers

– Expertise in adapting to diverse customer needs – Making the most of the consumer’s money

• However, projected itself as a global bank

Step #3

A distinct brand idea

What is a brand idea??

• Brand Idea is built on the foundation of the core brand truth– Takes the core truth to the next level

• Transcends beyond just advertising and drives the whole brand experience.

• Has the potential for longevity – Beyond just one single execution

• Is simple, clear and truly creative

Arriving at the core truth of the ICICI brand

• ICICI bank had a very low cost per transaction– Due to India based operations; and

• There exists an inherent difference in interest rates between India and Canada

• This enabled ICICI Bank to offer the highest interest rates on its savings accounts – More than the local competition could ever offer

In short:

ICICI had the ‘Indian Efficiency’ advantage

The brand idea….• Banking with more benefits (than any one else)

– Product idea: savings account with the highest interest rates ever

• The brand idea was…– Acquisition led– Provided a sustainable advantage – Had appeal across customer segments

Hi-SAVE• Simple • Easy to pronounce and remember• Instantly connotes product and benefit

Step #4

Finding a cost effective yet robust means of distribution

Two distribution models existed in Canadian banking

1. Mainly through branches Requiring heavy capital investment

Followed by established banks like Royal Bank of Canada,

Scotia bank, CIBC etc

2. Purely online No branches

Cost Effective

– Successfully implemented and perfected by new entrants like

ING

ICICI made the best of both worlds..

• ICICI adopted a hybrid model : Branch + Online

• Full scale, cost effective online presence

• Plus a focused branch network in key pockets of Canada with Canadian employees – To provide a human face to the bank

Step #5

High impact communication with low budgets

Using money wisely….

• All communication efforts were therefore directed at creating a buzz around Hi-Save– The flagship brand

• Use of innovative yet cost effective media vehicles– Print Ads – Online– Outdoor

TargetTo achieve a business of 500

million Canadian Dollars in the first year of operations

Online Banners

UNION STATION BRANDING

Innovative outdoor presence...

An immensely successful launch

• In Canada, in just one year, book size moved from CAD113 million to CAD 675 million,

against target of CAD 500 million• Success in Canada prompted ICICI Bank to use a

similar model to enter U.K. as well• Not just that, ICICI bank’s success prompted

other Indian banks to enter Canada

ICICI Bank has gone from strength to strength thereafter …

• ICICI bank stepped up efforts to consolidate its position amongst local Canadians

• Focused on expanding its relationship with consumers through new offerings – Money Transfer, Retirement Savings plans,

General Insurance Certificates etc