The Concept of the Environment
Philosophically, the environment of a corporation includes all those realities whose existence may effect the corporation directly in any perceptible way. These realities may be sorted out in the following four categories:
- The “Community” that is made up of all the human begins that inhabit it and all their social organizations of all kinds
- The “Culture” that is made up of all the constructs of the human mind that affect the behaviour of all these individuals and organizations
- The “Habitat” that includes all the physical features of this environment
- The “Product” that includes all things made and services rendered by man
Applying the prevailing culture and using and consuming natural features of the habitat and the product of past periods, the entries of the community have an existence and generate goods and services.
Operationally, however, there are two main types of business environment: corporate environment and product/market environment. The corporate environment is classified in three parts: external, operating, and internal. The external environment comprises political, social, technological, and economic forces at work surrounding the organization. The operating environment refers to interaction with and between those entities having a stake in the organization. The internal environment constitutes forces at work within the organization. The operating environment is significant for day-to-day decisions and is, therefore, exclude from further discussion here. The remaining two environments are appropriate for strategic planning.
Importance of Business Environmental Scanning
Without taking into account relevant environmental influences, a company cannot expect to develop its strategy. It was the environmental influences emerging out of the energy crisis that were responsible for the popularity of smaller, more fuel-efficient automobiles and that brought about the demise of less efficient rotary engines. It was the environmental influence of a coffee bean shortage and geometric price increases that spawned the “coffee-saver” modification in Mr. Coffee automatic drip coffee makers. Shopper and merchant complaints from an earlier era contributed to the virtual elimination of deposit bottles; recent pressures from environmental groups, however, have forced their return and have prompted companies to develop low-cost, recyclable plastic bottles. Another environmental trend, Americans’ insatiable appetite for eating out worries food companies such as Kraft. In response, Kraft is trying to make cooking as convenient as eating out (e.g., by providing high-quality convenience foods) to win back food dollars. The sad tales of companies that seemingly did everything right and yet lost competitive leadership as a result of technological change abound. Du Pont was beaten by Celanese when bias-ply tire cords changed from nylon to polyester. B.F. Goodrich was beaten by Michelin when the radial overtook the bias-ply tire. NCR wrote off $139 million in electro-mechanical inventory and the equipment to make it when solid-state point-of-sale terminals entered the market.
Xerox let Canon create the small-copier market. Bucyrus-Erie allowed Caterpillar and Deere to take over the mechanical excavator market. These companies lost even though they were low-cost producers. They lost even though they were close to their customers. They lost even though they were market leaders. They lost because they failed to make an effective transition from old to new technology. In brief, business derives its existence from the environment. Thus, it should monitor its environment constructively. Business should scan the environment and incorporate the impact of environmental trends on the organization by continually reviewing the corporate strategy. The underlying importance of environmental scanning is captured in Darwinian laws: (a) the environment is ever-changing, (b) organisms have the ability to adapt to a changing environment, and (c) organisms that do not adapt do not survive. We are indeed living in a rapidly changing world. Many things that we take for granted today were not even imagined in the 1960s. As we enter the next century, many more “wonders” will come to exist. To survive and prosper in the midst of a changing environment, companies must stay at the forefront of changes affecting their industries. First, it must be recognized that all products and processes have performance limits and that the closer one comes to these limits the more expensive it becomes to squeeze out the next generation of performance improvements. Second, one must take all competition seriously.
Normally, competitor analyses seem to implicitly assume that the most serious competitors are the ones with the largest resources. But in the context of taking advantage of environmental shifts, this assumption is frequently not adequate. Texas Instruments was a $5- to $10-million company in 1955 when it took on the mighty vacuum tube manufacturers RCA, GE, Sylvania, and Westinghouse and beat them with its semiconductor technology. Boeing was nearly bankrupt when it successfully introduced the commercial jet plane, vanquishing larger and more financially secure Lockheed, McDonnell, and Douglas corporations. Third, if the environmental change promises potential advantage, one must attack to win and attack even to play the game. Attack means gaining access to new technology, training people in its use, investing in capacity to use it, devising strategies to protect the position, and holding off on investments in mature lines. For example, IBM capitalized on the emerging personal computer market created by its competitor, Apple Computer. By becoming the low-cost producer, distributor, seller, and service of personal computers for business use, IBM took command of the marketplace in less than two years. Fourth, the attack must begin early. The substitution of one product or process for another proceeds slowly and then predictably explodes. One cannot wait for the explosion to occur to react. There is simply not enough time. B.F. Goodrich lost 25 percentage points of market share to Michelin in four years. Texas Instruments passed RCA in sales of active electronic devices in five to six years. Fifth, a close tie is needed between the CEO and the operating managers. Facing change means incorporating the environmental shifts in all aspects of the company’s strategy.