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The Factors That Shape Strategy

Organizations do not exist in a vacuum. Many factors enter into the forming of a company's strategy. Each exists within a complex network of environmental forces. These forces, conditions, situations, events, and relationships over which the organization has little control are referred to collectively as the organization's environment. In general terms, environment can be broken down into three areas:

1. the macroenvironment, or general environment (remote environment) - that is, economic, social,
political and legal systems in the country;

2. operating environment - that is, competitors, markets, customers, regulatory agencies, and 3. the internal environment - that is, employees, managers, union, and board directors.
In formulating a strategy, the strategic decision makers must analyze conditions internal to the organization as well as conditions in the external environment, which are described in the following sections. stakeholders; and

Analysis Of The Macroenvironment

An organizations ignores the macroenvironment at its own great peril. Many studies support the concept that there are needs to be a link between the organization's strategic decisions and its environment. All organizations are affected by four macroenvironmental forces: political-legal, economic, technological, and social.

An organizations ignores the macroenvironment at its own great peril. Many studies support the concept that there are needs to be a link between the organization's strategic decisions and its environment. All organizations are affected by four macroenvironmental forces: political-legal, economic, technological, and social.

Political And Regulatory Forces

Political-legal forces include the outcomes of elections, legislation, and court judgments, as well as the decisions rendered by various commissions and agencies. The political sector of the environment presents actual and potential restriction on the way an organization operates. Among the most important government actions are: regulation, taxation, expenditure, takeover (creating a crown corporation, and privatization. The differences among local, national, and international subsectors of the political environment are often quite dramatic. Political instability in some areas makes the very form of government subject to revolutionary changes. In addition the basic system of government and the laws the system promulgates, the political environment might include such issues as monitoring government policy toward income tax, relative influence of unions, and policies concerning utilization of natural resources. Political activity my also have a significant impact on three additional governmental functions influencing a firm's external environment: * Supplier function. Government decisions regarding creation and accessibility of private businesses to government-owned natural resources and national stockpiles of agricultural products will profoundly affect the viability of some firm's strategies.

* Customer function. Government demand for products and services can create, sustain, enhance, or eliminate many market opportunities. * Competitor function. The government can operate as an almost unbeatable competitor in the marketplace, Therefore, knowledge of government strategies can help a firm to avoid unfavorable confrontation with government as a competitor. In general, the impact of government is far-reaching and increasing.

Political-legal forces include the outcomes of elections, legislation, and court judgments, as well as the decisions rendered by various commissions and agencies. The political sector of the environment presents actual and potential restriction on the way an organization operates. Among the most important government actions are: regulation, taxation, expenditure, takeover (creating a crown corporation, and privatization. The differences among local, national, and international subsectors of the political environment are often quite dramatic. Political instability in some areas makes the very form of government subject to revolutionary changes. In addition the basic system of government and the laws the system promulgates, the political environment might include such issues as monitoring government policy toward income tax, relative influence of unions, and policies concerning utilization of natural resources. Political activity my also have a significant impact on three additional governmental functions influencing a firm's external environment: * Supplier function. Government decisions regarding creation and accessibility of private businesses to government-owned natural resources and national stockpiles of agricultural products will profoundly affect the viability of some firm's strategies. * Customer function. Government demand for products and services can create, sustain, enhance, or eliminate many market opportunities. * Competitor function. The government can operate as an almost unbeatable competitor in the marketplace, Therefore, knowledge of government strategies can help a firm to avoid unfavorable confrontation with government as a competitor. In general, the impact of government is far-reaching and increasing.

Economic forces refer to the nature and direction of the economy in which business operates. Economic factors have a tremendous impact on business firms. The general state of the economy (e.g., depression, recession, recovery, or prosperity), interest rate, stage of the economic cycle, balance of payments, monetary policy, fiscal policy, are key variables in corporate investment, employment, and pricing decisions. The impact of growth or decline in gross national product and increases or decreases in interest rates, inflation, and the value of the dollar are considered as prime examples of significant impact on business operations. To asses the local situation, an organization might seek information concerning the economic base and future of the region and the effects of this outlook on wage rates, disposable income, unemployment, and the transportation and commercial base. The state of world economy is most critical for organizations operating in such areas.

Technological Forces
Technological forces influence organizations in several ways. A technological innovation can have a sudden and dramatic effect on the environment of a firm. First, technological developments can significantly alter the demand for an organization's or industry's products or services.

Technological change can decimate existing businesses and even entire industries, since its shifts demand from one product to another. Moreover, changes in technology can affect a firm's operations as well its products and services. These changes might affect processing methods, raw materials, and service delivery. In international business, one country's use of new technological developments can make another country's products overpriced and noncompetitive. In general, Technological trends include not only the glamorous invention that revolutionizes our lives, but also the gradual painstaking improvements in methods, in materials, in design, in application, unemployment, and the transportation and commercial base. They diffusion into new industries and efficiency" (John Argenti). The rate of technological change varies considerably from one industry to another. In electronics, for example change is rapid and constant, but in furniture manufacturing, change is slower and more gradual. Changing technology can offer major opportunities for improving goal achievements or threaten the existence of the firm. Therefore, "the key concerns in the technological environment involve building the organizational capability to (1) forecast and identify relevant developments - both within and beyond the industry, (2) assess the impact of these developments on existing operations, and (3) define opportunities" (Mark C. Baetz and Paul W. Beamish). These capabilities should result in the creation of a technological strategy. Technological strategy deals with "choices in technology, product design and development, sources of technology and R&D management and funding" (R. Burgeleman and M. Maidique). The effect that changing technology can have upon the competition in an industry is also dealt with other chapters. Technological forecasting can help protect and improve the profitability of firms in growing industries.

Social Forces
Social forces include traditions, values, societal trends, consumer psychology, and a society's expectations of business. The following are some of the key concerns in the social environment: ecology (e.g., global warming, pollution); demographics (e.g., population growth rates, aging work force in industrialized countries, high educational requirements); quality of life (e.g., education, safety, health care, standard of living); and noneconomic activities (e.g., charities). Moreover, social issues can quickly become political and even legal issues. Social forces are often most important because of their effect on people's behaviour. For an organization to survive, the product or service must be wanted, thus consumer behaviour is considered as a separate environmental behaviour. Behaviour factors also affect organisations internally, that is, the employees and management. A society's expectations of business present other opportunities and constraints. These expectations emanate from diverse groups referred to as stakeholders. Stakeholders include a firm's owners (stockholders), members of the board of directors, managers and operating employees, suppliers, creditors, distributors, customers, and other interest groups - at the broadest level, stakeholders include the general public. Determining the exact impact of social forces on an organization is difficult at best. However, assessing the changing values, attitudes, and demographic characteristics of an organization's customers is an essential element in establishing organizational objectives.

Analysis Of The Industry

The word industry is used to refer to a group of firms whose products are sufficiently close substitutes for each other that the member firms are drawn into competitive rivalry to serve the same needs of some or all the same types of buyers. In analyzing an industry, it is also useful to determine if the industry is a global industry, that is, an industry that requires global operations to compete effectively Industries differ widely in their economic characteristics, competitive situations, and future outlooks. Understanding industry structure is the logical starting point for strategic analysis at the business level. The key concerns in the industry environment are as follows: 1. 2. 3. 4. 5. 6. 7. The elements of the industry structure The stage in the life cycle of products in the industry. The direction the industry is headed (for example, overcapacity, requiring rationalization). The forces (for example, political, social, economic, technological) driving the industry in a particular direction. The underlying economics and performance of the business (for example, cost structures, profit levels). The key success factors (for example, cost, delivery). Demand segments and strategic groups

The second environment to consider is the competitive environment. The key concerns in the competitive environment are as follows: 1. 2. 3. 4. The forces driving competition in the industry (which is a function of industry structure. The differences in the competitive approaches of rival firms (for example, price competition, advertising battles, increased customer service). Strategies, positions, and competitive strength of market leaders and close rivals. Why some rivals are doing better than others.

The value chain is an important tool for analyzing how a company is faring relative to its competitors. The issues of competitive environment and the value chain are described in Chapter 9.

The Elements Of Industries Structure

Industry structure can be analyzed by using Porter's framework competition in an industry. Professor Michael E. Porter of Harvard University is the nation's leading authority on industry analysis. Porter identifies five basic competitive forces, which determine the state of competition an its underlying economic structure: 1. 2. 3. 4. 5. The threat of new competitors entering the industry The intensity of rivalry among existing competitors The threat of substitute products or services The bargaining power of buyers The bargaining power of suppliers

These five forces of competition determine the rate of return on invested capital (ROI) in industry, relative to the industry's cost of capital. The strength of each of the competitive forces is determined by a number of key structural variables.

Threat Of New Entrants

A major force shaping competition within an industry is the threat of new entrants. The threat of new entrants is a function of both barriers to entry and the reaction from existing competitors. There are several types of entry barriers: Economies of scale. Economies of scale act as barrier to entry by requiring the entrant to come on large scale, risking strong reaction from existing competitors, or alternatively to come in on a small scale accepting a cost disadvantage. Economies of scale refer to the decline in unit costs of a product or service (or an operation, or a function that goes into producing a product or service). Product differentiation. Product differentiation creates a barrier to entry by forcing entrants to incur expenditure to overcome existing customer loyalties. New entrants must spend a great deal of money and time to overcome this barrier. Capital requirements. The capital costs of getting established in an industry can be so large as to discourage all but the largest companies. Cost advantages independent of scale. Existing firms may have cost advantages not available to potential entrants regardless of the entrant's size. These advantages can include access to the best and cheapest raw materials, possession of patents and proprietary technological know-how, the benefits of learning and experience curve effects, having built and equipped plants years earlier at lower costs, favourable locations, and lower borrowing costs. Switching costs. Switching costs refer to the one-time costs that buyers of the industry's outputs incur if they switch from one company's products to another's. To overcome the switching cost barrier, new entrants may have to offer buyers a bigger price cut or extra quality or service. All this can mean lower profit margins for new entrants. Access to distribution channels. Access to distribution channels can be a barrier to entry because of the new entrants's need to obtain distribution for its product. A new entrant may have to persuade the distribution channels to accept its product by providing extra incentives which reduce profits. Governmental and legal barriers. Government agencies can limit or even bar entry by requiring licenses and permits. National governments commonly use tariffs and trade restrictions (antidumping rules, local content requirements, and quotas) to raise entry barriers for foreign firms. The effectiveness of all these barriers to entry in excluding potential entrants depends upon the entrants' expectation as to possible retaliation by established firms. Retaliation against a new entrant may take the form of aggressive price-cutting, increased advertising, or a variety of legal manoeuvres.

Threat Of Substitutes
All firms in and industry compete with other industries offering substitute products or services. Steel producers are in competition with aluminum producers. Sugar producers are in competition with the firms which are introducing sugar-free products. The competitive force of closely-related substitute products impact sellers in several ways. First, the presence of readily available and competitively priced substitutes places a ceiling on the prices companies in and industry can afford to charge without giving customers an incentive to switch to substitutes and thus eroding their own market position.

Another determinant of whether substitutes are a strong or weak competitive force is whether it is difficult or costly for customers to switch to substitutes to substitutes. Typical switching costs include, the cost of purchasing additional equipment, employees retraining costs, the time and costs to test the quality for technical help needed to make the changeover. As a rule, the lower the price of substitutes and the higher the quality and performance of substitutes, the more intense are the competitive pressures posed by substitute products.

Bargaining Power Of Buyers

Buyer power refers to the ability of customers of the industry to influence the price and terms of purchase. The competitive strength of buyers can range from strong to weak. The buyers are powerful when:

They are concentrated and buy in large volume. The buyer's purchases are a sizable percentage of the selling industry's total sales. The supplying industry is comprised of large numbers of relatively small sellers. The item being purchased is sufficiently standardized among sellers that not only can buyers find alternative sellers but also they can switch suppliers at virtually zero cost. The buyers pose a threat of integrating backward to make the industry's product. The sellers pose little threat of forward integration into the product market of buyers. The products are unimportant to the quality of the customer's product or service. It is economically feasible for buyers to follow the practice of purchasing the input from several suppliers rather that one.

These factors change with time and firm's choice of buyers-groups should be regarded as an important element in strategic decision-making.

Bargaining Power Of Suppliers

Supplier power refers to the ability of providers of inputs to determine the price and terms of supply. Suppliers can exert power over firms an industry by raising prices or reducing the quality of purchased goods and services, so reducing profitability. The extent to which this potential impact is realized depends upon a number of factors; in general, a group of suppliers is more powerful if the following apply:

It is dominated by a few firms and is more concentrated than the industry its sells to. When suppliers' products are differentiated to such an extent that it is difficult or costly for buyers to switch from one suppliers to another. When the buying firms are not important customers of the suppliers group. When the suppliers of an input do not have to compete with the substitute inputs of suppliers in other industries. When one or more suppliers pose a credible threat of forward integration into the business of the buyer industry. When the buying firms display no inclination toward backward integration into the suppliers' business.

It is important to recognise that labour is a supplier, and may exert a considerable degree of power in some situation. The power of suppliers can be an important economic factor in the marketplace because of the impact they can have on customer profits.

Bargaining Power Of Suppliers

Supplier power refers to the ability of providers of inputs to determine the price and terms of supply. Suppliers can exert power over firms an industry by raising prices or reducing the quality of purchased goods and services, so reducing profitability. The extent to which this potential impact is realized depends upon a number of factors; in general, a group of suppliers is more powerful if the following apply:

It is dominated by a few firms and is more concentrated than the industry its sells to. When suppliers' products are differentiated to such an extent that it is difficult or costly for buyers to switch from one suppliers to another. When the buying firms are not important customers of the suppliers group. When the suppliers of an input do not have to compete with the substitute inputs of suppliers in other industries. When one or more suppliers pose a credible threat of forward integration into the business of the buyer industry. When the buying firms display no inclination toward backward integration into the suppliers' business.

It is important to recognise that labour is a supplier, and may exert a considerable degree of power in some situation. The power of suppliers can be an important economic factor in the marketplace because of the impact they can have on customer profits.

Rivalry Among Existing Firms

Rivalry refers to the degree to which firms respond to competitive moves of the other firms in the industry. Rivalry among existing firms may manifest itself in a number of ways- price competition, new products, increased levels of customer service, warranties and guarantees, advertising, better networks of wholesale distributors, and so on. The degree of rivalry in and industry is a function of a number of interacting structural features:

Rivalry tends to intensify as the number of competitors increases and as they firms become more equal in size and capability. Market rivalry is usually stronger when demand for the product is growing slowly. Competition is more intense when rival firms are tempted to use price cuts or other marketing tactics to boost unit volume. Rivalry is stronger when the costs incurred by customers to switch their purchases from one brand to another are low. Market rivalry increases in proportion to the size of the payoff from a successful strategic move. Market rivalry tends to be more vigorous when it costs more to get out of a business than to stay in and compete. Rivalry becomes more volatile and unpredictable the more diverse competitors are in terms of their strategies, their personalities, their corporate priorities, their resources, and their countries of origin. Rivalry increases when strong companies outside the industry acquire weak firms in the industry and lunch aggressive, well-funded moves to transform their newly-acquired firms into major market contenders.

Two principles of competitive rivalry are particularly important: (1) a powerful competitive strategy used by one company intensifies competitive pressures on the other companies, and (2) the manner in which rivals

employ various competitive weapons to try to outmanoeuvre one another shapes "the rules of competition" in the industry and determines the requirements for competitive success.

A Framework For Competitor Analysis

A central aspect of strategy formulation is preceptive competitor analysis. There are four diagnostic components to a competitor analysis: future goals, current strategy, assumptions, and capabilities. A basic framework for performing individual competitive analysis has been postulated by Michael Porter.

Future Goals
As can be seen, two factors must be analyzed to determine what drivers the competitor. First, its future goals must be identified. A knowledge of goals will alow predictions about whether or not each competitor is satisfied with its position and financial results, and how likely that competitor is to change strategy. The following diagnostic questions help to determine a competitor's present and future goals:

What have the competitors's major goals been in the relatively recent past? Have these goals been achieved? What strategies has the competitor employed in the relatively recent past? Have these strategies been successful?

Assumptions
The second crucial component in competitors analysis is identifying each competitors's assumptions. These fall into two major categories:

The competitor's assumptions about itself The competitors's assumptions about the industry and the other companies in it.

Answers to the following questions help identify a competitor's assumption:

1. What does the competitor appear to believe about its relative position - in cost, product quality,
technological sophistication, and other key aspects of its business - based on its public statements, claims of management and sales force, and other indications? What does it see as its strengths and weaknesses? Are these accurate? Does the competitor have strong historical or emotional identification with particular products or with particular functional policies, such as an approach to product design, desire for product quality, manufacturing location, selling approach, distribution arrangements, and so on, which will be strongly held to? Are there cultural, regional, or national differences that will affect the way in which competitors perceive and assign significance to events? Are there organizational values or canons which have been strongly institutionalized and will affect the way events are viewed? Are there some policies that the company's founder believed in strongly that may still linger? What does the competitor appear to believe about future demand for the product and about the significance of industry trends? Will it be hesitant to add capacity because of unfounded uncertainties about demand, or likely overbuild for the opposite reasons? Is it prone to misestimate

2.

3. 4. 5.

the importance of particular trends? Does it believe the industry is concentrating, for example, when it may not be? 6. What does the competitor appear to believe about the goals and capabilities of its competitors? Will it over- or underestimate any of them? 7. Does the competitor seem to believe in industry "conventional wisdom" or historic rules of thumb and common industry approaches that do not reflect new market conditions?

History As And Indicator Of Goals And Assumptions

Answers to the following questions provide a historical basis for looking at what are a competitor's goal and assumptions:

1. What is the competitor's current financial performance and market share, compared to that of the 2. What has been the competitors's history in the marketplace over time? Where has it failed or been
beaten, and thus perhaps not likely to tread again? relatively recent past?

3. In what areas has the competitor starred or succeeded as a company? In new product introductions? 4. How has the competitor reacted to particular strategic moves or industry events in the past?
Rationally? Emotionally? Slowly? Quickly? What approaches have been employed? To what sorts of events has the competitor reacted poorly, and why? Innovative marketing techniques? Others?

Current Strategy
The third component of competitor analysis is developing statements of the current strategy of each competitor. Strategy options available to businesses are discussed in detail in next chapter.

Capabilities
A realistic appraisal of each competitor's capabilities - its strengths and weaknesses- is the final diagnostic step in competitor analysis. Its strengths and weaknesses will determine its ability to initiate or react to strategic moves and to deals with environmental or industry events that occur. Identifying strengths and weaknesses is described in more detail in next chapter.

Putting The Four Components Together

After the competitor's future goals, assumptions, current strategies, and capabilities are analyzed, a competitor response profile is developed. This profile, designed to indicate how a competitor is likely to respond in its competitive environment, is based on the answers to four questions: 1. 2. 3. Is the competitor satisfied with its current position? What likely moves or strategy shifts will the competitor make? Where is the competitor vulnerable? 4. What will provoke the greatest and most effective retaliation by the competitor? (Michael E. Porter).

Structural Analysis Within Industries

Definition of an industry is not the same as definition of where the firm wants to compete. In many industries, there are firms that have adopted very different competitive strategy and have achieved differing levels of market share. The following strategic dimensions usually capture the possible differences among a firm's strategic options in a given industry: specialization, brand identification, push versus pull, channel selection,product quality, technological leadership, vertical integration, cost position, service, price policy, leverage, relationship with parent company, and relationship to home and host government. Therefore, a more useful concept than total industry definition is often the identification of strategic groups within industries. This concept bridges the gap between looking at the industry as a whole and considering the standing of each firm separately. Michael Porter points out that "the first step in structural analysis within industries is to characterize the strategies of all significant competitors along these dimensions. This activity then allows for the mapping of the industry into strategic groups. A strategic group is the group of firms in an industry following the same or similar strategy" and having similar strategic characteristics. "A industry could have only one strategic group if all the firms followed essentially the same strategy. At the other extreme, each firm could be a different strategic group. Usually, however, there are a small number of strategic groups which capture - the essential strategic differences among firms in the industry."

Firm's Profitability
In Porter's view, both the industry and strategic groups determine a firm's profitability as follows: I. Common Industry Characteristics 1. Industry-wide elements of structure that determine the strength of the five competitive forces and that apply equally to all firms; these traits include such factors as the rate of growth of industry demand, overall potential for product differentiation, structure of suppliers industries, aspects of technology, and so on, that set the overall context of competition for all firms in the industry. II. Characteristics of strategic group 2. The height of mobility barriers protecting the firm's strategic group. 3. The bargaining power of the firm's strategic group with customers and suppliers. 4. The vulnerability of the firm's strategic group to substitute products. 5. The exposure of the firm's strategic group to rivalry from other groups. III. Firm's position within its strategic group 6. The degree of competition within the strategic group. 7. The scale of the firm relative to others in its group. 8. Costs of entry into the group. 9. The ability of the firm to execute or implement its chosen strategy in an operational sense.

The task of analyzing a company's external situation is not a mechanical exercise in which analysts plug in data and definitive conclusions come out. There can be several appealing scenarios about how an industry will evolve and what future competitive conditions will be like. Moreover, in practice, industry and competitive analysis is an incremental and ongoing process, the result of gradually accumulated knowledge and continuous rethinking and retesting.

Industries Change
Industry structure change, often in fundamental ways. Moreover, some industries go through evolutionary phases or stages development, growth, shakeout, maturity, saturation, and decline, the so-called industry/product life cycle. Industry conditions change because some forces are in motion that create incentives or pressures for change. There are numerous types of driving forces which can exist to produce evolutionary change in an industry:

Changes in the long-term industry growth rate Changes in buyer composition Product innovation Technological change Marketing innovation Entry or exit of major firms Diffusion or technical know-how Increasing globalization of the industry Changes in cost and efficiency Emerging buyer preference for a differentiated instead of commodity product (or for a more standardized product instead of strongly differentiated products) Regulatory influences and government policy changes Changing societal concerns, attitudes, and lifestyles Reduction in uncertainty and business risk

The driving forces work to push the current industry structure into a new structure and they usually create new kinds of competitive pressures - both of which have implications for business strategy.

Internal Organizational Analysis

In formulating a strategy, the strategic decision makers must also analyze conditions internal to the organization. An internal analysis leads to a realistic company profile, which is the determination of a firm's strategic competencies and weaknesses. The development of a company profile in four-step process: * In step 1, managers audit and examine key aspects of the business's operation, seeking to target key areas for further assessment. * Step 2 has managers evaluating the firm's status on these factors by comparing their current condition with past abilities of the firm.

* In step 3, managers seek some comparative basis - linked to key industry or product/market conditions against which to more accurately determine whether the company's condition on a particular factor represents a potential strength or weakness. * The final step in internal analysis is to provide the results, or company profile, as input into the strategic management process. This explains internal analysis as a process, but in practice, efforts to distinguish each step are seldom emphasized because the process is very interactive.

The Areas That Most Businesses Should Analyze

An internal organizational analysis evaluates all relevant factors in an organization in order to determine its strengths and weaknesses. Some of the areas that most businesses should analyze include the following:

1. Financial position. The financial position of a business plays a crucial role in determining what it can
or cannot do in the future.

2. Product position. For a business to be successful, it must be acutely aware of its product position in 3. Marketing capability. Closely allied with an organization's product position is its marketing
capabilities (i.e., its ability to deliver the right product at the right time at the right price). the marketplace.

4. Research and development capability. Every organization must be concerned about its ability to 5. Organizational structure. Organizational structure can either help or hinder an organization in
achieving its objectives. develop new products.

6. Human resources. All the activities of an organization are significantly influenced by the quality and 7. Condition of facilities and equipment. The condition of an organization's facilities and equipment can
either enhance or hinder its competitiveness. quantity of its human resources.

8. Past objectives and strategies. In assessing its internal environment, every business should attempt
to explicitly describe its past objectives and strategies. Internal analysis is difficult and challenging. The checklists provided above can be helpful in determining specific strengths and weaknesses in the functional areas of business.

Environmental Scanning
The second component of environmental analysis is to develop information about the environment. Information has two primary strategic role - in objective setting and in strategy formulation. As managers scan the environment, they interpret environmental influence in the light of their own perceptions, expectations, and values. Environmental scanning is the process of gathering information about events and their relationships within an organization's internal and external environments. The basic purpose of environmental scanning is to help management determine the future direction of the organization. The most widely accepted method for categorizing different forms of scanning divides into the following three types: 1. 2. Irregular scanning systems: These consist largely of ad hoc environmental studies. Regular Scanning systems: These systems revolve around a regular review of the environment or significant environmental components. This review is often made annually.

3. Continuous scanning systems: These systems constantly monitor components of the organizational
environment.

Forecasting The Environment

Macroenvironmental and industry scanning are only marginally useful if all they do is reveal current conditions. To be truly meaningful, such analyses must forecast future trends and changes. Environmental forecasting is a technique whereby managers attempt to predict the future characteristics of the organizational environment and hence make decisions today that will help the firm deal with the environment of tomorrow. Forecasting involves the use of statistical and nonstatistical, or qualitative, techniques. Four techniques can be particularly helpful: time series analysis, judgmental forecasting, multiple scenarios, and the Delphi technique.

SUMMARY
Before managers can begin to formulate an effective strategy, they must make a critical examination of the firms's environment. Assessing the strategic situation is the first phase in determining the content of the proper strategies for a firm. This process begins with an assessment of the general environment of the firm, in terms of economic, technological, social, and political/legal influences. Analyzing the organization's industry is the second major aspect of assessing the firm's strategic situation. An industry structure analysis identifies the major forces affecting competition in an industry and determines the strengths and weaknesses of the business relative to the industry. Michael Porter has identified five basic competitive industry forces: the threat of new entrants in the industry, the intensity of rivalry among existing competitors, the pressure from producers of substitute products or services, the bargaining power of buyers of the industry's outputs, and the bargaining power of suppliers to the industry's companies. Management must find for a firm a position in the industry from which it can best defend itself against these competitive forces or can influence them to its advantages. Another major element of the industry environment is the product/market life cycle which assumes that all products, and, therefore, industries, move through stages of a life cycle. In analyzing an industry, its is also useful to determine if the industry is a global industry, that is, an industry that requires global operations to compete effectively. The organization's internal environment is the third aspect of assessing the strategic situation, which must be done before strategy alternatives are formulated. Several techniques are available to help management develop a worthwhile environmental analysis. Environmental scanning involves studying and interpreting social, political, ecological, and technological events in an effort to spot budding trends and conditions that could affect the industry. Strategic managers must not only understand the current state of the environment and their industry but also be able to forecast its future states. Moreover, once having implemented the environmental analysis process, management should continually evaluate and strive to improve it.