The General Environment

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 towards decision scenarios. PEST Analysis * PEST analysis is simply another tool to help the organization detect and monitor those weak signals in the hope of recognizing the discontinuities or fractures shaping the environment. * PEST analysis can be used to help detect trends in the external environment that will ultimately find their way into the competitive environment.

It provides a link between the general and competitive environments in that weak signals in the general environment can become key forces for change in the competitive environment. SWOT Analysis Scenario planning and PEST analysis can help to identify the external opportunities and threats (OT) facing an organization. The firm’s internal strengths and weaknesses (SW) can best be determined following an appraisal of its resources and capabilities. SWOT analysis allows an organization to assess its current strategy in light of its changing environment and to help turn potential threats into opportunities and weaknesses into strengths.

A key point to keep in mind is that it is the external analysis that precedes the internal analysis of a firm’s resources and capabilities. SUMMARY OF RM-6 “Sustaining Competitive Advantage in the Global Petrochemical Industry: A Saudi Arabian Perspective” From a global perspective, the competitiveness of some firms arises from macro-economic phenomena directed by exchange rates, deficit of the national budget or interest rates (Passemard and Kleiner, 2000). Competitiveness also arises from factors other than macro-economic, such as availability of raw materials, cheaper work force or technological superiority.

Porter (1980) is credited with being the pioneer in identifying factors that contribute to national advantage. Porter (1985) made valuable contributions in identifying important factors that contribute to national advantage, that is the factor conditions of a nation, such as infrastructure and the availability of resources; demand conditions in the home country; the presence or absence of related and supporting industries necessary for being competitive in the global market; the firm’s strategy, structure and rivalry with other ompanies that influence how firms are established, organised and managed; and the nature of the rivalry affects the competitive advantage of industries and nations (Porter, 1990). Saudi Arabia is well known throughout the world as a leading producer and exporter of oil. For many years prior to the 1970s, a large volume of associated gas by products which were produced in the process of crude oil production, had been flared into the atmosphere.

However, in the early 1970s the Saudi Arabian government initiated a plan to utilize these precious hydrocarbon and mineral resources for the production of various petrochemicals, fertilizers, iron and steel. Saudi Arabia accounts for a little more than 5% of the world’s petrochemicals production. However, Saudi Arabia is the largest producer of MTBE (Methyl Tertiary Butyl Ether) with a global share of around 15%. It has also a big market share in the production of methanol (around 12%) and ethylene glycol (14%). Domestic consumption in Saudi Arabia is low, due to the small size of the market.

The industry in general has therefore pursued an ‘export-orientated’ strategy, as a result of which more than 76% of its petrochemicals production is being exported. The two major markets for the Saudi petrochemical exports are the Middle Eastern and East Asian region. The strength & weakness of Saudi petrochemical industry: * Strength: Low cost due to economic of scale, initial cost, feed-stock, and utilities. Presence of efficient infrastructure * Weakness: Lack of management expertise, marketing approach, product development, and technology Main issue:

From those strength & weaknesses above, we could see that Saudi petrochemical industry was depending on the comparative advantage rather than the support of competitive advantage to sustain in global competition. Analysis: Using Porter’s five force model above, we could analyze that: * The entry of competitors: raw materials controlled by many firms, new and high technology, large & complex operational, high investment * The threat of substitutes: concerns on biochemical substitution * The argaining power of buyers: find alternative market, focus on domestic and foreign customers * The bargaining power of suppliers: change the supplier with low cost, find reasonable price and obtaining credit facilities, no substitute of aluminum alkyls high threat * The rivalry among the existing players: zero differentiation, see the competitor like SABIC, Exxon, Shell, BASF, Dow, Mitsubishi in equal size and market power oversupply

Solution: * Improve human resources department to develop the technical and managerial skills of local employees * Increase the effort in marketing, distribution Penetrated global market, and research & development division to modify manufacturing process which safe for environment * Increase productivity and cut loss, merge small to medium firms to strengthen capital base. Lesson learned: Based on analysis using Porter’s model, it is illustrate that Saudi petrochemical industry environment able to help other firms to formulate the strategy, not only consider to the general environment and competitor analysis but also to the Porter’s model itself. * Realize that external factors will influence the firm, directly and indirectly. The firm also has to formulate their strategy based on the external factor (which couldn’t be controlled), how to match the next action with their capacity.