 In my introductory class on strategy I had made a reference to the issue of understanding of strategy as to why strategy is not that simple that everybody can easily understand and that it is a little more complicated because of which many of them also misunderstand what strategy is about and each and everyone has a different interpretation of the concept of strategy. But one thing is certain if you ask the question as to what explains the success of companies like an apple or a GE or an IBM or the Tata's there must be something in a formal shape and for management consultants they understand it as strategy and for those who have no clue about strategy they should not think that companies like these have become overnight success stories and it is true that a layman would always believe that the success story of apple is only because they did this thing and he assumes that the strategy of apple itself is an overnight thought process as a result of which it became a successful global company and you can understand that this layman understanding is reasonable but as we go ahead a few of those would appreciate the fact that there is some formal mechanism within each organization and let us say we call this formal mechanism as a strategy map for each organization as a result of which they have been successful or as a result of a poor strategic map they have also been failures. So when we go to the next level there is a recognition of the fact there is something called a strategy for every organization and when we push a little ahead then we realize that the very framework of strategy did not just fall in place just like that there were different inputs which were collated and how the behavior of each of these inputs stack up and these are organization specific and based on these inputs and the availability of resources within an organization different decisions are being taken which are in perfect alignment to a particular strategic objective of an organization and this we can understand as we go a little ahead in our understanding framework of strategy and pushing ahead some will also realize that it is not only the input to the organization factors within an organization there is also something that is exterior to the organization which is also very relevant for the organization and lastly the choice of doing a particular thing remains in perfect alignment to the objective of the organization itself there is no point having a good strategy in place but that strategy is not able to answer what the objective of the organization itself is seeking and once a good strategy is formulated which is in alignment with the core objectives of an organization it then gets implemented and then again the outputs evaluated and again it gets back as a feedback and the entire strategy exercise starts. So you must understand that it is not just a one boardroom discussion over an issue that results in successful strategies that organizations evaluate select implement and then again do this exercise all over it is a combined effort that involves inputs from various stakeholders and the combination of all these viewed from different perspectives will add more meaning to the concept of strategy and I would be discussing on some of these combining factors and see how organizations view them how they handle these factors and how they take inputs from each of these factors in their endeavour to come out with a clear strategy for the organization. Let me begin with the environmental scan this is something that is very important for all organizations the very word environment means internal as well as external that is something that is exterior to the organization and of course there is something that is very internal to an organization. So what happens within an organization let us say organizational specific issues and activities are internal and outside the organization is external and outside there is again something that is called the micro environment and macro environment and micro environment you could include all of those that are external to the organization but very much within the value chain of the organization which means it could include the dealer the supplier the customer also and macro environment which is something beyond very much beyond the value chain of an organization but it is necessary that organizations need to understand the environment around which it is functioning both from an internal perspective as well as an external perspective. Let us begin with the external perspective analysis and there are different ways by which we can analyze what is happening external to an organization and I am talking about the macro economic environment not the micro economic environment one popular model that is being used is the test model which clearly identifies four important influences of the macro economic situation outside the organization which has a very strong bearing on the external environment in which an organization is functioning and the acronym for pest is basically these four influences namely the political the economic social and technological the assumption is these four I am not saying these are the only four but these four influences are the most impactful that alters the behavior of the macro environment which is external to an organization. Let us begin with political factors and analyzing these four factors is important for every organization because they need to know the circumstances under which they have to function. So every organization will definitely undertake to understand the political economic social and technological impact that the organization will have because of changes in any of these four. So if I need to understand the political factors I will begin with political stability at the first place because if I need to do business in a given geography I need to know whether I can be sustainable over a long period of time and if investments are very high I need long term stability in whichever country that I am planning to do my business. So if you ask the question whether it is a good time to do in good time to do business in Egypt now right or wrong is a different issue but it is a very good question that I will have to ask because it is a question that is concerning the political stability of the country Libya in the same case early 90s for India and assume that I am an investor outside and wanting to do business inside India. The political stability of any country will definitely have an impact on the decision making process of organizations and any organization would definitely prefer a stable political scenario so that the convenience of doing business is not that significantly impacted or negatively impacted. The next political factor is the tax policy some countries will have enticing tax mechanisms to attract investors some might have tax rules that are very strict and many of you would have read in the newspapers or know about the tax policy in countries like Mauritius to who in investors so different countries have different tax policies and that also determines the when it comes to taking a decision tax policies definitely help or do not help certain organizations in certain countries. Employment loss this is also something that organizations always look at and especially for professionals assume that you are in the healthcare business what are the employment laws of doctors or businesses that are very labor intensive employment laws on child labor laws on minimum wages so these are all issues that companies and organizations will see likewise environmental regulations the most recent one is on the nuclear plant what are the environmental laws that govern the business in which an organization is willing to invest and what happens if such regulations are not followed take the case of again a most recent example the BP Mexico Gulf oil spill so when tough environmental regulations are there it does not mean that companies do not want to do business there it only means that they have to ensure that they adhere to these tough regulations and adherence to these regulations means extra investment and extra investment means extra money and extra money means more business to have a positive ROI so these are all the issues it might it is not just an environmental regulation appearing in the form of certain rules and regulations in books it also has to be translated and look through a strategic lens next trade restrictions and tariffs trade restrictions and tariffs within a given country the taxes within a given country or global restrictions and tariffs talking about this you know about the WTO now what happens if there are changes that are happening the way in which goods and services are transacted across borders whether certain countries are favored over certain countries and whether that is very much within the framework of the global trade and tariff regulations so these things also organizations will understand and of course the policy decisions policy decisions that the the government in place takes on different decision different businesses whether the US government and especially now it is election time so whether the IT industry is keenly watching on what type of policy decisions would a Republican or a Democratic government would take in the next four years and likewise many investors many companies inside the country also look at policy decisions that are taken across different industries within our country and most of them are aligned with the political forces policy decision at a bureaucratic level is also a factor that we will have to analyze under the political factor spectrum because the way in which and this is true for any country the way in which such decisions are taken are also in alignment with the political machinery so these are the broad factors under the heading political factors that organizations will have to understand interpret based on which they take decisions the next is the economic factors now why is economic factor very important and especially from these two perspectives one from the perspective of a customer and the one the other from the perspective of a company because economic factors affect both it affects a customer because the purchasing power of a customer is dependent on the economic environment and for companies the cost of capital the price that it has to pay to raise capital is again dependent on the economic scene in which it is doing business so what are all the economic factors that organizations would be looking at one straight thing suppose I want to enter into a new geography or a new type of business I would see whether historically this business has been growing or look at it from various political factors and see what is the prospective growth that this business or this geography itself has in the future so the growth it could be a GDP growth or a business growth within a specific industry is a barometer of progress and this is the economic growth so I would definitely measure the historical growth as well as with available data see what is the potential for growth and hence it is very necessary that we need to measure economic growth because that is a proxy to the progress another important parameter that I will be looking at is the interest rates that is a key arbitrator the cost of capital is directly linked to the interest rates at what price at what cost will I be able to raise capital whether it could be the debt market or the equity market but interest rate is something that is very crucial for organizations to do business and I am going to talk about this in detail when I am going to give you an introductory class on economics as well the next is the exchange rates because that demonstrates the strength of the home currency how strong is the home currency and lastly the inflation rate because there is directly linked with the purchasing power of the customer and always it is a tough battle between interest rates and inflation you will understand why later but for the purpose of this class you need to know that when you are talking about economic factors it is about the overall economic growth the interest rates the exchange rates and inflation rate these are the four major economic factors that organizations would be looking at and these are macroeconomic and what type of tools are available I am not going to spend time in detail on that but we need to understand whether proper fiscal and monetary reforms are in place to ensure that these macroeconomic factors are very much under control because it is very essential that we get that confidence level that there are enough fiscal and monetary tools in place to ensure that these macroeconomic indicators the economic indicators are controllable at times of adversity the third important factor in the best framework is the social factors business cannot exist in isolation it is part of an ecosystem in which the culture and demography of the ecosystem has a significant importance on the business you might go to let us say you are a multinational company so different countries have different ways in which different people live and behave there might be a good market a good geography in which health consciousness is very important and this was for example Yili which is again a Chinese diary company they are the ones who sponsored the Beijing Olympics when they entered Mongolia they had a different strategy in place because of the lactose intolerance level of the market there they had to be cognizant of the fact that a market of this type is more health conscious and that explains why you have a good market for organic foods and at times it is this that characterizes the market itself and it cannot it is not an exception and if such behavior characterizes the market then it becomes very important for us to understand that this geography is a little different this market is a little different from the usual markets in which we do business and we also at times look for population growth rate and if the population keeps growing whether it has an impact on our business and if let us say our business is in line with old age consumers then population growth is and especially the aging population growth is good news and suppose my business is mass consumerism population growth is good news and suppose I handle funds that come through the social security in the more and more population more and more social security the more and more funds I get to handle that is good news and within this population growth the rate at which different strata grow that is also becoming a very important indicator nowadays and especially the age distribution very often called the demographic dividend and if the growth of population within let us say the 15 to 25 formative years of any human being now that is a very vibrant population and just to give you an example that population this is a relevant population between 15 to 25 is the highest in India sorry high the Indian population in this relevant age is highest in the world and suppose we have a winning product for this particular population the entire attention will focus towards India like was carrier attitudes of individuals whether a given society is more entrepreneurial driven or very less risk taking these are social factors whether a given society has more importance to safety than anything else these could be social factors and there is always this strong interaction between social factors and economic factors first the question is there a relationship yes there is a relationship and that is why we always use this word socio economic factors because sociology has got a lot to do with economics and there is a separate study that is being done to understand this relationship between sociology and economics I am not going to spend time on that but it is very important for us to know that social factors have a great impact on business decisions that are being taken and lastly the technological factors why is it important because today the rate at which technology is we is growing it is making boundaries disappear and at times if there is access to very good technology that is very expensive it is also reducing entry barriers technology is used to improve production efficiency and what what do I mean by technology factors the intensity with which organizations pursue R&D and that you can see in companies like Intel and other pharma companies or the rate at which they engage automation in their shop floor which characterizes the Japanese manufacture or technology incentives and today we are talking about carbon credits how we can bring in new technologies to reduce the carbon footprints or we should also keep pace with which the rate at which technology is changing that explains how IBM took a major transition everybody knows about the Moore's law IBM's transition from 70s 80s to what it is today is because of the rate at which technology changed itself and IBM had to change to suit to the technology changes so if you are in the business you need to understand what is also happening to the technology domain and how that would impact the way in which we are doing business today what happened in the internet economy and if bookstores are not ready to face the internet economy which is because of the technology transformation then they close shop they have to again embrace this new technology developments and see whether they could do things online so in a nutshell the political economic social and technology factors and to put it in short the pest is a very popular tool that is used by organizations to understand the external environment having said that the SWAT analysis is another important tool which is got through with something more internal to an organization this includes internal in its pure sense as well as the micro economic environment that I explained before there are a few parameters which are very much internal to the firm very controllable and concerning and those would be the strengths and weaknesses of the firm and why do we need to identify these we need to identify strengths of a firm so that we can capitalize on that and weaknesses and many of them don't like the word weaknesses could be easily replaced by areas for improvement so that we showed up those areas of improvement and the micro economic or the micro environmental factors which are concerning but not directly controllable and these are the opportunities and threats why are they important because there are good opportunities I can invest on them and it is very important to identify the threats that an organization has so what is strength to an organization it is those unique ingredients resources and capabilities which are utilized or can be utilized to develop the competitive advantage of an organization and that could come from any source not necessarily tangible it could come from strong brand names like Google or the strength of an organization could be through its patents itself or a good customer reputation or it could get its strength from those cost advantages that it has built or the proprietary knowledge that it has some organizations have great strengths because they have specific access to certain resources they have exclusive access to certain resources some organizations build strength from their access to distribution channels for example the Bajaj auto they also have the Bajaj financials and if they want a Bajaj financials to be distributed they could be distributed through the dealership of Bajaj auto so there is some coherence synergy another example that actually on hindsight this is Lassen and Tubro today they want to get into the financial services market and they are no longer in the cement business had they been in the cement business the strength if they had started a financial services unit would be the dealership network for the cement business so there are different sources of strengths for an organization and organizations capitalize on these strengths to put in place a very sustainable competitive advantage the absence of the above in easy terms is weakness and at times the flip side of strength can also be a weakness if an organization is a large manufacturing capacity and if that is projected to be the strength of an organization it also means that it has high fixed cost and in financial terms it is called high operational leverage and if operational leverage is very high and if the market is so volatile and assume that the demand has reduced what was once the strength of an organization because of its huge manufacturing capacity and high fixed cost is no longer a strength now because it is very difficult to adjust its prices when market is very volatile so at times strengths can also become weaknesses the opportunities invariably comes from the micro environment which can be presented in different forms it could be from an unfulfilled customer need when apple was introduced there were conflicting theories on the sustainable success of apple as a company but it changed the way in which the product was positioned it found that customers were no longer willing to use different gadgets for different purposes one to call one to take a photo one to record a motion picture one for computation so that explains how iPhone now is able to do many of these and that addresses an unfulfilled customer need to have everything one in a single gadget and that has been one of the biggest reasons why apple has been successful in this business or new technologies present a lot of opportunities and that is very visible in the in the pc or the laptop industry new regulations throws open new opportunities and opportunities can also come from either backward integrating or forward integrating backward integrate to see whether you can invest in the supplier side of the business and forward integration into the customer side of the business if you are into institutional sales and if you are able to identify the right set of opportunities which is an alignment with your business objectives or it is going to again further the strengths of the organization or throw up new businesses and that is where investment has to go at times some of those changes happening in the micro environment can also post threats to the organization could be a sudden emergence of a substitute product today online education is a big threat to established formal educational mechanism and if there is a customer shift to these new deliverables then there is a big threat to the organization regulations will also change completely and make an and position unfavorable for an organization and that is also a threat so we need to identify possible threats also and existing threats as well so when we are able to do this if we are able to identify strengths weaknesses opportunities and threats for any given firm then we have a set of strengths weaknesses opportunities and threats and we need to take a decision as to how we can move forward whether I leverage on the strength opportunity combination or the weakness opportunity or the strength threat or the weakness threat combination and if I decide to say that it is going to be the strength opportunities then I it makes sense because it leverages opportunities that are a good fit to the strengths or the weakness opportunity strategies in which case I will address those weaknesses so that they can engage with emerging opportunities or I can put a strategy in place that combines the strengths and threats so that I am able to use the strength of an organization to reduce the vulnerability of external threats or the last one could be a weakness threat strategy which in a sense is building a defense plan to prevent the weaknesses and make it very make it susceptible to external threats and this I will be able to do if I am able to identify at the first place what strengths weaknesses opportunities and threats the organization has so the environmental scan that we were talking till now can be viewed externally through the PEST model and internally through the SWAT these two are the most popular models that are being used not the only models but these two are the most popular models that are being used to understand from a firm's perspective how factors that are external to an organization and how factors that are internal and very much within the vicinity which I call the micro environment affects the conduct of business this is very essential for firms to do because if you are missing these then it is very difficult to have a sustainable strategy in place so if we undertake to come out with a strategy for an organization then we need to understand the strategy shaping factors which are external to the company to the organization combine them with the factors that are internal to the organization and how these factors stack up and after doing this we have to use various strategic models that are available identifying and evaluating what is the right strategic model for which we need to first also understand that these strategic models are in best fit with the objectives of the organization and then evaluate from those the best strategy that we need to put in place implement them and after implement after implementation evaluate the output feedback and see where what went wrong where and if it was successful how we can leverage on the success and again an iterative loop so it is a loop in which what we saw now was the first part how factors that are external and internal are essential in shaping the strategic thought process and for factors that are external we use the best analysis and factors that are internal we use the SWOT analysis and a quick recap of this I will just leave a video for you to watch a small 8 minute video that explains both SWOT as well as PEST with some examples for you to better appreciate why PEST and SWOT is essential from an environment scan point of view thank you