The General Environment

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SUMMARY OF UNDERSTANDING STRATEGIC MANAGEMENT
CHAPTER 2: The General Environment

The external environment facing the organization consists of both: a. A general environment, often referred to as the macro-environment because changes that occur here will have an effect that transcends firms and specific industries. b. A competitive environment, consists of the industry and markets in which an organization competes. In order to scan and monitor their environment, firms require tools of analysis that will allow them to factor in the changes in the general environment and evaluate their impact. One such approach involves scanning the environment to detect signals that will act as a signpost for future changes in the organization’s industry. In addition, an organization must monitor its environment to discern patterns and trends that are beginning to form and try to forecast the future direction of these trends. a. Scanning the environment

Scanning, therefore, is an opportunity for the organization to detect weak signals in the general environment before these have coalesced into a discernible pattern which might affect its competitive environment. The first is that the organization may fail to identify these signals. The second is that the organization may discern a pattern that is not there but is based on the assumptions and mental models that managers carry in their heads.

b. Monitoring the environment
* Monitoring can be seen as the activity that follows these initially disparate signals and tracks them as they grow into more clearly discernible patterns. * Monitoring allows an organization to see how these general environment trends will impact on its competitive environment. * Monitoring uses a finer brush stroke.

* There is no focus for an organization’s monitoring activities. * One way in which an organization might monitor weak signals is to set thresholds such that any activity which occurs above the threshold will be monitored.

c. Forecasting changes in the environment
Three main types of uncertainty (Van der Heijden, 1996):
* Risks: where past performance of similar events allows us to estimate the probabilities of future outcomes. * Structural uncertainties: where an event is unique enough not to offer evidence of such probabilities. * Unknowables: where we cannot even imagine the event.

Scenario planning is a disciplined method for imagining possible future. It is ‘an internally consistent view of what the future might turn out to be’ (Porter 1985, p. 446). A scenario can be seen as a challenging, plausible, and internally consistent view of what the future might turn out to be. They are not forecasts in the sense that one is able to extrapolate using past data. However, they do deal with the future and provide a tool of analysis for the organization to structure the surfeit of information that is contained in the present. In particular, scenarios help organizations recognize the weak signals that signpost changes in its environment. The benefits of scenario planning for Shell have been:

* More robust strategic decisions.
* Better thinking about the future by a ‘stretching mental model’. * Enhancing corporate perception and recognizing events as a pattern (the recognition and monitoring of weak signals until they coalesce into a pattern is clearly important here). * Improving communication throughout the company by providing a context for decisions. * A means to provide leadership to the organization.

A process for developing scenarios is as follows:
* Define the scope. This involves setting the time frame and the scope of analysis. * Identify the major stakeholders.
* Identify basic trends.
* Identify key uncertainties.
* Construct initial scenario themes.
* Check for consistency and plausibility.
* Develop learning scenarios.
* Identify research needs.
* Develop quantitative models.
* Evolve...
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