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Науковий вісник Полісся № 1 (13), ч. 2, 2018 Scientific bulletin of Polissia № 1 (13), P. 2, 2018

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МЕНЕДЖМЕНТ

183
Sai D. V., Sevruk I. М., Tunitska J. М. Competitive strategies in retail industry:
development and implementation in conditions of modest economic growth

UDC 658.821:330.366 УДК 658.821:330.366

D. V. Sai, Candidate of Economic Sciences,
I. М. Sevruk, Candidate of Economic Sciences,

J. М. Tunitska, Candidate of Economic
Sciences

Д. В. Сай, к. е. н.,
І. М. Севрук, к. е. н.,

Ю. М.Туніцька, к. е. н.

COMPETITIVE STRATEGIES IN RETAIL
INDUSTRY: DEVELOPMENT AND

IMPLEMENTATION IN CONDITIONS OF
MODEST ECONOMIC GROWTH

КОНКУРЕНТНІ СТРАТЕГІЇ В ГАЛУЗІ
РОЗДРІБНОЇ ТОРГІВЛІ: РОЗРОБКА ТА
РЕАЛІЗАЦІЯ В УМОВАХ ПОВІЛЬНОГО

ЕКОНОМІЧНОГО ЗРОСТАННЯ

Urgency of the research. In the conditions of slow eco-
nomic growth followed by decrease of buyers’ purchasing
power the problem of competitive strategies development
and their implementation assumes a particular importance.

Target setting. Cost leadership as a competitive strate-
gy provides industry leaders with more favorable competitive
position in the realities of Ukraine. For a number of compa-
nies following the differentiation strategy, it is necessary to
identify a set of decisive competitive advantages that would
be different from pricing methods and represent value for the
consumers.

Actual scientific researches and issues analysis. As
a development of classic foreign theoretical works on strate-
gic planning of M. Porter, Ph. Kotler, D. Cravens and
M. McDonald, the problem of strategies’ development is
studied by such Ukrainian scientists as Bay S. I., Karakay
Yu. V., Shershnova Z. Ye. Artemenko L. P. and others. The
problem of retail market development is studied by such
scientist as Mazaraki A. A., Didkivska L. I., Tochylii V. O.,
P’iatnytska G.T. and others.

Uninvestigated parts of general matters defining.
Available quantitative and qualitative features of non-price
factors that determine customer-buying process do not take
into account the specificity of the Ukrainian consumer market.

The research objective. To identify priority areas for
strategic marketing analysis that would take into account the
current state of the industry and market. To explore and
define the features of the development of competitive strate-
gies, their disadvantages and advantages in the conditions
of high degree of uncertainty and variability of the business
environment.

The statement of basic materials. In the conditions of
modest economic growth low price remains the most im-
portant competitive advantage factor in FMCG retail market.
Larger market shares and the continuing growth of leading
companies by expanding are indicators of the competitive
strength of companies following cost leadership strategy.
Market re-partition and increasing intensity of competition
between existing firms are observed.

Conclusions. A proper study of consumer preferences
with regard to alternative retail channels and non-price fac-
tors of competitive strategies will ensure the improvement of
enterprises’ competitiveness in the industry.

Актуальність теми дослідження. В умовах помі-
рного економічного зростання, що супроводжується
зниженням купівельної спроможності населення особли-
вої ваги набуває питання розробки та реалізації конку-
рентних стратегій підприємств роздрібної торгівлі.

Постановка проблеми. Конкурента стратегія
зниження витрат та цін забезпечує більш сприятливу
конкурентну позицію в реаліях України для лідерів галу-
зі. Для низки тих підприємств, що слідують стратегії
диференціації, необхідно ідентифікувати набір виріша-
льних конкурентних переваг, відмінних від цінових ме-
тодів та маючих цінність для споживача.

Аналіз останніх досліджень і публікацій. В роз-
виток класичних закордонних праць з теорії стратегі-
чного планування M. Портера, Ф. Котлера, Д. Кравенса
та М. МакДональда, питання формування стратегій
досліджують такі вітчизняні вчені, як Бай С. І., Каракай
Ю. В., Шершньова З. Є., Артеменко Л. П. та інші. Ви-
вченням питання розвитку роздрібної торгівлі займа-
ються такі вчені економісти як, Мазаракі А. А., Дідків-
ська Л. І., Точилій В. О., П’ятницька Г. Т. та інші.

Виділення недосліджених частин загальної про-
блеми. Наявні кількісні та якісні характеристики неці-
нових факторів, які визначають процес прийняття
рішень про вибір місця здійснення покупки, не відобра-
жають специфіку споживчого ринку України.

Постановка завдання. Визначити пріоритетні на-
прямки для проведення стратегічного маркетингового
аналізу, що враховують сучасний стан галузі та ринку.
Дослідити та визначити особливості розробки конку-
рентних стратегій, їх недоліки та переваги в умовах
високого ступеня невизначеності та мінливості фак-
торів підприємницького середовища.

Виклад основного матеріалу. Ціна залишається
найважливішим фактором конкурентної переваги в
галузі роздрібної торгівлі в умовах повільного економіч-
ного росту. Великі частки ринку та подальший зріст
компаній – лідерів за рахунок експансії є індикаторами
конкурентної сили підприємств – лідерів за витратами.
Спостерігаються процеси перерозподілу ринку та збі-
льшення інтенсивності конкуренції між існуючими опе-
раторами.

Висновки. Належне дослідження споживчих префе-
ренцій стосовно альтернативних каналів роздрібної
торгівлі та нецінових чинників конкурентних страте-
гій забезпечуватиме підвищення рівня конкурентосп-
роможності підприємств в галузі.

Keywords: competitive strategies; strategic marketing
planning; cost leadership; differentiation; retail.

Ключові слова: конкурентні стратегії; стратегіч-
не маркетингове планування; лідерство за витратами;
диференціація; роздрібна торгівля.

Науковий вісник Полісся № 1 (13), ч. 2, 2018 Scientific bulletin of Polissia № 1 (13), P. 2, 2018

МЕНЕДЖМЕНТ

184
Sai D. V., Sevruk I. М., Tunitska J. М. Competitive strategies in retail industry:
development and implementation in conditions of modest economic growth

DOI: 10.25140/2410-9576-2018-2-1(13)-183-190

Urgency of the research. In the conditions of slow economic growth followed by decrease of buy-

ers‘ purchasing power on the one hand and retail market re-partition and increasing intensity of com-
petition between existing companies the other hand, the problem of competitive strategies develop-
ment and their implementation assumes a particular importance.

Target setting. Cost leadership as a competitive strategy provides industry leaders with more fa-
vorable competitive position in the realities of Ukraine. For a number of companies following the differ-
entiation strategy, it is necessary to identify a set of decisive competitive advantages that would be
different from pricing methods and represent value for the consumers.

Actual scientific researches and issues analysis. As a development of classic foreign theoreti-
cal works on strategic planning of M. Porter, Ph. Kotler, D. Cravens and M. McDonald, the problem of
strategies‘ development is studied by such Ukrainian scientists as Bay S. I., Karakay Yu. V., Shersh-
n’ova Z. Ye., Artemenko L. P. and others. The problem of retail market development is studied by such
scientist as Mazaraki A. A., Didkivska L. I., Tochylii V. O., P‘iatnytska G. T. and others.

Uninvestigated parts of general matters defining. Available quantitative and qualitative features
of non-price factors, that determine customer-buying process do not take into account the specificity
of the Ukrainian consumer market.

The research objective. To identify priority areas for strategic marketing analysis that would take
into account the current state of the industry and market. To explore and define the features of the
development of competitive strategies, their disadvantages and advantages in the conditions of high
degree of uncertainty and variability of the business environment.

The statement of basic materials. In the conditions of modest perspectives of economic growth,
reinforced by continuing conflict in the eastern part of Ukraine and considering resistant uncertainty
and volatility of uncontrolled factors of business environment, which is, among others, closely con-
nected to multiplying reforms in a complex political environment, the problem of competitive strategies
development and their implementation should assume a particular importance.

Regardless of the strategy classification according to the different levels of the enterprise or its
place in the strategic hierarchy of the organization – preliminary analysis of influencing external factors
of the business environment is a key to success of the strategy. Depending on its purpose, methods
and outcomes, strategic analysis, first of all, ensures proper determination of the basic long-term goals
and objectives of an enterprise as an essential element of the strategy.

Strategies and notably marketing ones are not formulated and developed in isolation, the last ones
are an outcome of strategic marketing planning. Strategic marketing planning is a part of corporate
planning of the enterprise and is defined by Philip Kotler as ―the managerial process of developing and
maintaining a viable fit between the organization‘s objectives, skills and resources and its changing
market opportunities‖ [1].

Classic Kotler concept of strategic marketing planning is considered as a standard one and con-
sists of such fundamental stages as: strategic marketing analysis, marketing strategies development,
the market offering shaping and managing and delivering marketing programmes.

Among various definitions of ―marketing strategy‖ which for its part comprise such elements of the
concept ―business strategy‖ as “the determination of the basic long-term goals and the objectives of an
enterprise, and the adoption of courses of action and the allocation of resources necessary for carr y-
ing out these goals” (Chandler, 1962), those that address creation of ―competitive advantage‖ as an
integral part of marketing strategy merit especial attention. For example, Day et al.,1990 define mar-
keting strategy as ―marketing activities and decisions related to building and maintaining a sustainable
competitive advantage‖, or Jain, 2000 describes it as ―an endeavour by a corporation to differentiate
itself positively from its competitors, using its relative competitive strengths to better satisfy customers
in a given environmental setting‖ [2].

Some authors even go further and affirm that ―an integral part of any marketing strategy is the
competitive strategy. In other words, how – in detail – will the organization compete within the market
place?‖ [3].

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Sai D. V., Sevruk I. М., Tunitska J. М. Competitive strategies in retail industry:
development and implementation in conditions of modest economic growth

Consequently, understanding of strategic situation in the course of strategic marketing analysis is
vital for development of justifiable competitive strategy. Moreover, due to complexity and variability of
Ukrainian business environment the requirements for information supply and monitoring frequency are
increasing. On the other hand, different enterprises have different levels of information and analytical
support, which is often regrettably underdeveloped at a small and medium-size business because of
limited financing or lack of subject-matter experts.

Considering the needs of small and medium businesses in this context, the approach of some au-
thors to adapt ―The 3 C’s Business Model‖ of Kenichi Ohmae (Kenichi Ohmae, The Mind Of The Strat-
egist: The Art of Japanese Business, McGraw-Hill, 1991) for marketing strategies appears justifiable.

According to Kenichi Ohmae the successful decision maker should focus on the following three fac-
tors of business environment: corporation, customer, competitors. From the point of view of marketing
strategy, the starting point of the strategy development can be reduced to the analysis of the three
―C‘s‖ of strategy as it presented in the Tab. 1.

Table 1
“The three C’s” of marketing strategy [3]

Customers Who are they? When, where and how do they buy? What motivates them? How is the mar-
ket currently segmented? How might it be segmented?

Competitors Who are they? What strategies are they pursuing? What are their strengths and weakness-
es? What are their areas of vulnerability? How are they most likely to develop over the next
few years?

Capabilities: What are the organization‘s relative strengths and weaknesses in each of the market seg-
ments in which it is operating? What levels of investment are available? How might the ca-
pabilities best be leveraged?

The ―3 C‘s‖ concept of marketing strategy also emphasizes the dynamic relation between three var-

iables. That is to say, if one changes the other has to change too and only by integrating these three
elements, a lasting competitive advantage can exist. The rationale behind using this approach by
Ukrainian enterprises with limited analytical capabilities consists in focusing their analytical efforts on
these three decisive factors providing, at the same time, sufficient structured information for competi-
tive strategies elaboration.

Study of the customers and especially market demand and buying power as a monetary expres-
sion of consumers‘ needs and wants is a key issue of superior customer value creation in the form of a
product or a service and getting competitive advantage on the marker. For instance, in retail industry
major dimensions of consumers‘ study can be divided into the following groups:

– economic base analysis encompassing factors from external economic environment such as:
population size, growth rate, structure and density, household size, employment, income, buying pow-
er, consumption patterns, consumer price index;

– consumer behavior studies, including buying patterns, buyer decision processes and attitudes. As
a rule, such type of studies are the subjects of time consuming and quite expensive marketing re-
searches;

– analysis of alternative existing and emerging retail distribution channels as a part of buyers‘ deci-
sion process. In the context of Ukrainian retail industry, such national particularities as «spontaneous
commerce», kiosks, bazaars, local fairs have to be considered from the point of view of customer.

Regardless the growing part of hypermarkets as a modern organization of commerce, the part of
―spontaneous commerce‖ is still important in Ukraine and occupies 40% of FMCG retail market as il-
lustrated in the Fig. 1.

Some precedents give an evidence to suggest that in conditions of further reduction of buying
power, a part of ―spontaneous commerce‖ will increase and that fact should not be ignored anymore
by enterprises of modern trade formats when developing their competitive strategies. Nowadays, con-
sumers‘ behavior and notably buying decision process in this area of Ukrainian retail market are sub-
jects of allegations and reviews that witness lack of statistically reliable data. Being an uninvestigated
part of the general matter defining, this problem deserves to be rigorously studied by means of mod-
ern marketing research methods.

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Sai D. V., Sevruk I. М., Tunitska J. М. Competitive strategies in retail industry:
development and implementation in conditions of modest economic growth

Fig. 1. Market share of different FMCG retail formats in Ukraine, 2015
Source: GfK Consumer Panel Service [4]

In contrast to consumers‘ behavior studies, economic base factors are easily obtainable since they

represent secondary data, published by governmental bodies, international organizations, special
committees and commissions, private commercial and research institutions and media.

Since 60% of the population income is spent in the domain of retail, household income, poverty
rate, employment, social class stratification indicators are essential elements for competitive strategies
development. Such an information shows both the existing picture with regard to customer current
profitability and prospects for the future [5; 6]:

– moderate poverty increased from 15% in 2014 to 22% in 2015, while the poverty rate increased
from 3,3% in 2014 to 5,8% in 2015. In 2016, real household incomes are estimated to have benefited
from stabilization in consumer prices and the modest resumption of economic growth. Inflation slowed
to 12,4% in 2016 from 43,3% at end of 2015 due to exchange rate stabilization and prudent monetary
policy, while real wages increased 11,6% (World Bank);

– labor market conditions remained weak, with unemployment at 9,9% in the first three quarters of
2016 (World Bank);

– the average income per person is 116 USD today, the forecast for year 2020 is 240 USD per per-
son (news. finance.ua);

– being difficult to isolate, social class stratification is, however, performed by ―Razumkov Centre‖
and is represented by 0,8% of upper class, 48, 7% of middle class, 34,7% of lower class and 15,8%
―hard to say answer ‖ for year 2014.

The dynamics of populations‘ income (Fig. 2) shows that by the account of inflation buying power of
the population for 15 years grew quite modestly [6]. Even the last increase of minimum salary up to
3200 UAH will not help to bring real incomes of the population to pre-crisis level.

The results of recent researches provide compelling evidence that the decrease of the incomes of
the population considerably affected consumer buyers‘ behavior and purchase patterns in the follow-
ing ways [7]:

– Ukrainians began to save money, they buy in smaller quantities and they don‘t stock up. About
45% of respondents buy cheaper brands, about 41% stopped to buy some products, 39% of respond-
ents started to buy the usual products in less quantity, and 15% make purchases less often (Research
& Branding Group);

– 73 per cent of buyers claim that they plan shopping before going to the store and 72% buy if there
is a price reduction. Only 9% of buyers do not pay attention to promotional offers (Nielsen Shopper
trends).

From the point of view of investor or operating enterprise all presented data together with other
macro-environmental information, such as GDP, economic growth, inflation rate, may be perceived as
a quite unfavorable background that increases the risks of a strategy and complicates its implementa-
tion. Considering this situation from the point of view of the preferred competitive strategy – the overall
low cast strategy known also as a cost leadership strategy resulting in relatively low market prices will

Hypermarkets
2%

Supermarkets
13%

Discounters
7%

Traditional
28%

Spontaneous
40%

Others
10%

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development and implementation in conditions of modest economic growth

USD; 150
USD; 194 USD; 226 USD; 263 USD; 278 USD; 144 USD; 112 USD; 116

UAH; 1198

UAH; 1540
UAH; 1803

UAH; 2100
UAH; 2227 UAH; 2231

UAH; 2587

UAH; 2968

0

500

1000

1500

2000

2500

3000

3500

2009 2010 2011 2012 2013 2014 2015 2016

definitely bring more benefits to the company in these market conditions. The cost leadership strategy
is commonly used in the markets whose income levels and purchasing power is low and this is particu-
larly true in the realities of Ukraine.

Fig. 2. Ukraine monthly income per person dynamics

In favor of this point of view, there are significant examples showing that Ukrainian FMCG retailers

and particularly the ones pursuing cost leadership strategy not only don‘t suffer hardship and decline
but also show evident signs of growth, increasing the scope of their activity in changing market cir-
cumstances. Firstly, the ranking of modern FMCG retailers is determined on the basis of the quantity
of the point of sales (POS), which can be quite numerous and ranked from convenient shops of 150
m

2
surface to hypermarkets of 12 000 m

2
surface. Secondly, such financial results as turnover, sales

revenue and profit are commonly used to assess the competitive position of the companies in FMCG
retail market. In light of this, quantitative characteristics of Ukrainian FMCG retail industry are present-
ed in the Tab. 2.

Table 2
Quantitative characteristics of leading Ukrainian FMCG retailers

Company/Brands

Turnover
2016 bln.

UAH

Turover
2015 bln.

UAH

Turnover growth
2016/2015

(%)

Number
of POS,

2016

1 ATB Market 58,5 46,7 25,2 835

2 Fozzy Group (Fozzy, Siplo, Le Silpo, Fora,
thrash!)

55,2 46,5 18,6 530

3 METRO Cash &Carry 11,9 10,3 15,5 25

4 Auchan 11,5 8,9 29,9 11

5 Retail Group (Velika Kishenya, Velmart) 7,5 6,1 23,0 65

6 Tavria V 7,4 6,3 17,5 75

7 Varus 6,4 5,4 18,5 59

8 Eco Market 6,2 5,8 6,9 114

9 Novus 6,1 4,8 27,1 36
Source: Ukrainian Retail Association [8]

Generally speaking, Ukrainian FMCG sector growth in the years 2015 and 2016 is considered as

being nominal as a result of consumer price inflation and was not supported by increase in kind. In
spite of the fact that the buyer paid for goods 36% more, a real volume of FMCG market decreased
approximately by 10% [7]. Among markets leaders such companies as ―ATB market‖, ―Auchan‖ and
some formats of ―Fozzy Group‖ are recognized to position themselves as adherents of cost leadership

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Sai D. V., Sevruk I. М., Tunitska J. М. Competitive strategies in retail industry:
development and implementation in conditions of modest economic growth

strategy, which is resulted in a more advantageous competitive stance in the conditions of consumers‘
market stagnation. In the reality of Ukraine this advantage is expressed particularly through the capac-
ity to satisfy buyers’ constant need in lower prices better than competitors and, what is more important
to do it on a constant basis and not occasionally through price reduction, special offers and other in-
struments of sales promotion. To put it another way, the retailers that set out to be cost leaders then
use this lower cost base to reduce prices and in this way build their competitive advantage.

The evident signs of the growth of Ukrainian FMCG retail leaders are manifested through expan-
sion and new shops opening as presented below:

– ―ATB Market‖ opened 111 new shops in 2016 and 47 new shop in the 1
st
half of the year 2017;

– ―Fozzy Group‖ opened 59 new shops in 2016 and 18 new shops in the first half of the year 2017;
– ―Auchan‖ has increased its total sales area portfolio up to 20 shops through purchase of ―Kara-

van‖ supermarket chain. As a result of the acquirement, French FMCG retailer expanded its presence
on the territory of Ukraine and entered in the top five of food retailers according to total sales area
ranking.

The overall dynamics of selling areas development during past five years is presented in the Figure
3. Thus, the modern FMCG retail formats are continuing their development especially in the western
parts of Ukraine where 32% of new shops were opened. Today this geographical area is considered
as one of the most attractive ones because of low level of saturation by modern commerce and high
availability of free spaces for commercial centers construction [9].

Fig. 3. Ukrainian FMCG retail: new shops opening dynamics (* first half of the year 2017)
Source: GT Partners Ukraine

The implications of changes, both macro-environmental, industry & market ones, are significant to

uncover and understand cause-effect relationships, thus providing a basis for strategic changes. The
recent events taking place in FMCG retail such as market leaders growth through geographical ex-
pansion and consolidation processes, the departure of some players, re-branding and re-formatting of
stores provide us with understanding that industry is in the process of re-partition and is moving to-
ward increasing intensity of competition between existing firms. For example, there are 130 FMCG
chains in Ukraine today comparing to 30 ones in Poland and in the conditions of low buying power
there is a high possibility that these entities which fail to create sustainable competitive advantage will
become the subjects of merges and acquisitions.

Although there is an evidence to suggest that cost reduction has always been preferable in condi-
tions of economic regression, there is still a range of companies that are pursuing differentiation strat-
egy from the beginning of their activity in Ukraine or companies that try to follow several generic strat-
egies that are defined as ‗‗stuck in the middle‘‘ by M. Porter (Porter, 1985, p. 16; Walters and Knee,
1989). For instance, Austrian retailer ―Billa‖ sold its 9 shops in the regions of Ukraine to Varus FMCG

185
211

138

202

229

0

50

100

150

200

250

2013 2014 2015 2016 2017*

Q
-T

Y
O

F
N

E
W

S
H

O
P

S

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development and implementation in conditions of modest economic growth

retail chain. In order to reinforce its position in Kiev region, ―Billa‖ changes its communication strategy
with clients as well as renovates its shops making them more convenient.

In spite of the fact that M. Porter assumes that company can only be successful by clearly deciding
in favor of one of the generic strategies: cost leadership or differentiation, there are organizations that
are using both approaches and position themselves as low-cost operators with the option of service
and quality differentiation. ―Le Silpo‖ delicacy supermarkets and ―thrash!‖ discount format supermarket
that are the parts of the same parent company ―Fozzy Group‖ witness in favor of this point of view.

By pursuing the strategy of differentiation, ―organization gives emphasis to a particular element of
the marketing mix that is seen by customers to be important and, as a result, provides a meaningful
basis for competitive advantage‖ [3]. The differentiation strategy is often associated with low market
shares within a FMCG industry, since higher quality market offer for higher price don‘t always corre-
spond with customer needs and wants in this area. In food retail the following major instruments of
differentiation can be recapitulated among others: strong branding, easily accessible store location,
store atmosphere, superior service, convenience, better after sales service, quality and freshness of
products assortment, best customer relationship management, spacious and comfortable parking, E-
Commerce, cleanliness.

The applicability of Porter‘s classic competitive strategies framework in retailing is discussed in
many theoretical works and studies. One of them is ―Competitive strategies in retailing—an investiga-
tion of the applicability of Porter‘s framework for food retailers‖ not only presents a comprehensive
analysis of different approaches but also derives the basic dimensions of competitive advantages from
the point of view of both the managers of retail chains and the consumers in the course of survey re-
search. As a result, ―three basic types of competitive advantage seem to prevail in food retailing: (1)
price, (2) quality (with a comprehensive set of quality orientated instruments, including customer ser-
vice), (3) convenience‖ [10].

Conclusion. In retail industry the rationale for differentiation is a suggestion (Dawson, 2000) that
―consumers are not homogenous and therefore as essential factor of retailer competition is attempt by
a retailer to be different from other retailers in order to better satisfy the particular consumer‖. Among
others, this thesis emphasizes the heterogeneity of the consumers and the importance of the consum-
ers‘ needs identification in the process of effective segmentation, targeting and positioning, three dis-
tinct steps of what is known as an STP-Strategy.

Considering the fact that geographic location is one of the prime factors that retailers compete on,
the geographic boundaries of target market, known as catchment zone, and distinct customers‘ needs
within these boundaries should be rigorously studied.

Therefore, one of the biggest problems faced by retail companies that are developing and adopting
differentiation competitive strategy in the conditions of modest economic growth and, consequently,
low buying power is that the differentiation must be perceived as valuable by the customer, who plac-
es the low price on the first place as a decisive criterion of choice of place of purchase.

References Література

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2. Mongay, J. (2006). Strategic Marketing. A literature
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[in English].

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gipermarketyi-yavlyayutsya-samyim-dinamichno-
razvivayuschimsya-kanalom-sovremennoy-roznitsyi-v-2015-
godu [in Ukrainian]

1. Philip Kotler, Kevin Lane Keller. Marketing Manage-
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as Prentice Hall. pp. 15-60.

2. Jorge Mongay. Strategic Marketing. A literature review
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3. Colin Gilligan, Richard M. S. Wilson. Strategic Market-
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4. GfK: Гипермаркеты — самый динамично развива-
ющийся канал современной розницы в 2015 году [Елек-
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http://retailers.ua/news/menedjment/2592-gipermarketyi-
yavlyayutsya-samyim-dinamichno-razvivayuschimsya-
kanalom-sovremennoy-roznitsyi-v-2015-godu

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МЕНЕДЖМЕНТ

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development and implementation in conditions of modest economic growth

5. Ukraine Economic Update (2017, April).
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http://www.worldbank.org/en/country/ukraine/publication/eco
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fohrafika). [How have the incomes of the Ukrainian changed
over past 15 years (infographics)]. (May 11, 2017).
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7. Hryhorenko, Yu. (2016, December 31). Torgovlya s
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8. Zaitsev, I., Maranchak, M. (2017). Top-10 produk-
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ketov [Supermarket chains began to develop more actively
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razvivatsya-seti-supermarketov/ [in Russian].

10. Morschetta, D., Swoboda, B. & Schramm-Klein, H.
(2006). Competitive strategies in retailing an investigation of
the applicability of Porter‘s framework for food retailers.
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English].

тронний ресурс] / Офіційний сайт світового банку/ – Ре-
жим доступу:
http://www.worldbank.org/uk/country/ukraine/publication/econ
omic-update-spring-2017.

6. Як змінилися доходи українців за 15 років (інфо-
графіка) [Електронний ресурс] / Cайт https://finance.ua/ –
Режим доступу: http://news.finance.ua/ua/news/-
/401212/yak-zminylysya-dohody-ukrayintsiv-za-15-rokiv-
infografika.

7. Григоренко, Ю. Ритейл-2016: Торговля с признака-
ми оптимизма [Електронний ресурс] / Cайт
https://trademaster.ua/ – Режим доступу:
https://trademaster.ua/rukov_ved/312287.

8. Зайцев, І. Найбільші FMCG-мережі України по то-
варообігу в 2016 році [Електронний ресурс] / І. Зайцев, М.
Маранчак, В. Нагорьский // Офіційний сайт Асоціації ри-
тейлерів України https://rau.ua/ – Режим доступу:
https://rau.ua/uk/novyni/krupnejshie-fmcg-2016/.

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http://www.uamarket.info/ – Режим доступу:
http://www.uamarket.info/v-ukraine-stali-aktivnee-
razvivatsya-seti-supermarketov/.

10. Dirk Morschetta, Bernhard Swoboda, Hanna
Schramm-Klein. Competitive strategies in retailing—an inves-
tigation of the applicability of Porter‘s framework for food
retailers. (2006). Journal of Retailing and Consumer Services
13. 2005 Elsevier Ltd. pp 275–287.

Received for publication 25.12.2017

Бібліографічний опис для цитування :
Sai, D. V. Competitive strategies in retail industry: development and implementation in conditions of modest economic

growth / D. V. Sai, I. М. Sevruk, J. М. Tunitska // Науковий вісник Полісся. – 2018. – № 1 (13). Ч. 2. – С. 183-190.

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Strategic Management Journal. Vol. 7, 69-89 {1986)

Environmental Analysis Units an

d

Strategic Decision-making: a Field Study
of Selected ‘Leading-edge’ Corporations
R. T. LENZ
Graduate School of Busitiess, Indiana UniversitY, Indianapolis,
Indiana. U.S.A.
JACKL. ENGLEDOW
School of Business, Butler University. Indianapolis, Indiana,
U.S.A.

Summary
In response to increasing environmental change many corporarions
have developed specialized environmental scanning units. Previous
research reveals conflicting findings regarding the viability of these
units for introducing environmentally relevant information int

o

strategic decision processes. A field study wa.’! conducted on 10
‘leading-edge’ corporations. The results show continuing
experimentation with alternative administrative structures and the
vulnerability of units that are not tightly linked with strategic
planning processes.

A growing concern for executives, academicians and consultants is what appears to be the
increasing volatility of organizational environments. Chronicles of business corporations
are replete with instances of executives whose organizations were caught off guard by large-
scale environmental shifts. In the United States the automobile industry is a prime example.
Automakers experienced huge losses as a consequence of regulatory changes, the shift from
national to global markets, actions by the OPEC cartel, and new lifestyles and preferences
of consumers. Other industries, such as commercial banking and insurance, have also bee

n

radically transformed. New laws and technology have reduced entry barriers in primary
markets and, thereby, broadened the number of competitors and the form of inter-firm
rivalries.

Under such conditions of change there is a growing sense of urgency to develop more
effective ways to provide environmental intelligence to strategic decision-makers (Lenz and
Engiedow, 1984; Klein, 1979; Miller and Friesen, 1983). If extant research on organizations
is correct, firms that can successfully introduce pertinent information about their changing
environments into strategic decision processes have the brightest prospects for long-term
survival (see Hedberg, Nystrom and Starbuck, 1976; Bourgeois, 1978).

During the past few years executives in several organizations have experimented with
specialized organizational units designed to enhance their firm’s capacity to sense and act on
environmental intelligence. These components are usually referred to as environmenta

l

scanning, or analysis, units. The central functions of these units are to gather and interpret
pertinent environmental information and introduce the results of analyses into an
organization’s decision processes. Thus far, the results of these experiments are
inconclusive. A few studies raise serious questions about the long-term viability and
effectiveness of specialized environmental analysis units. Other research and
recommendations of academicians and consultants urge the continued development and
widespread adoption of such units for aiding strategic decision-making activities.

0143-2O95/86/0IOO69-2l$02.l0 Received 25 January 1984
©1986 by John Wiley & Sons, Ltd. Revised tO August 1984

70 R. T. Lenz and J. L. Engiedow

The field study that gave rise to this paper was undertaken with the intent of extending the
line of research on environmental analysis units in major corporations. Of central concern
was further investigation of issues identified in previous studies as well as theoretical
questions regarding the concept of environment. Throughout the study emphasis was placed
on administrative problems associated with structuring, sustaining and using such units. By
increasing knowledge about these ongoing organizational experiments it should be possible
to gain greater insight into the feasibility of this approach for improving the capacity of
organizations to bring environmental information into strategic decisions.

LITERATURE REVIEW

Researchers have focused on a variety of different issues relating to the global problem of
obtaining environmental information and using it to make strategic decisions, ln some
studies attention centers on the information-gathering activities of senior-level executives
(Aguilar, 1967; Keegan, 1974; Hambrick, 1982; Kefalas and Schoderbek, 1973; Hegarty
and Hoffman, 1983; Miller and Friesen, 1983; Segev, 1977). Others have studied various
analytical techniques and formal strategic planning systems (Steiner, 1979; Lorange, 1982;
Post, 1973). A growing body of research focuses attention on social and psychological
processes associated with organizational learning and executive decision-making (Dution
and Duncan, 1983; Weick, 1979; McCaskey, 1982; Dill, 1962). Only a few studies, however,
have investigated the use of specialized formal organization units for environmental
analysis. Within this stream of research there are conflicting findings that raise serious
questions about the practical utility of such units.

AnsofT (1980), Porter (1980) and Wilson (1982) suggest that executives create

a

specialized administrative component for systematic scanning and analysis of the
organizational environment. The exact terminology varies in accordance with each author.
Nevertheless, there Is agreement that environmental analysis should be an independent staff
function positioned among the top levels of an organization’s hierarchy. Most agree that
organizational environments should be subject to wide-angle scanning by a corps of analysts
that goes beyond factors in and around current product line thrusts. This process of
scanning and identification of pending change should occur on a continuous basis, rather
than being driven by the regular schedule of the planning cycle.

Porter suggests that results of environmental analysis be fed directly into the strategic
planning process. Ansoff and Wilson concur on this point, but place greater emphasis on
strategic issues management, rather than strategic planning, as the ongoing focus of
executive action. In their views, members of a specialized environmental analysis unit
should monitor the macro-environment for weak signals that are harbingers of potential
threats or opportunities. The role of this unit is to identify and analyze issues in order to
facilitate executive action on a continuing basis. Thus, strategic issues managemenl does not
replace formal planning. Instead, it supplements this process by addressing issues which,
due lo their nature or the liming of their recognition, do not fit into the regular planning
process.

Thus far there have been five studies of environmental scanning and analysis activities

in

corporations—two of which were replications and extensions. The primary focus of these
efforts has been to assess the state-of-the-art of environmental analysis among a variety of
organizations.

In 1975 Fahey and King (1977) conducted field interviews with executives in 12

Environmental Analysis Units 7

1

organizations. From their data they developed a taxonotny of environmental scanning
models: irregular, regular and continuous. Each model represents a different level of
sophistication and complexity. Of the 12 firms in the study, only two used a continuous
environmental analysis process. Although executives were intent on improving their
capabilities in this area, none had succeeded in integrating their environmental analyses with
the strategic planning process. In 1978, Stubbart (1982) conducted a replication of this study
on the same 12 corporations. Of these, five firms exhibited no change, three increased the
sophistication of their scanning activities, and four had regressed to less systematic
analytical systems.

Fahey, King and Narayanan (!981) used the taxonomy of environmental scanning models
to extend their research. A sample of 36 ‘aware professionals’ were surveyed and their
responses considered in conjunction with the previous field interviews of practitioners. They
found scenario writing to be the most widespread analytical method, and a direct
relationship between the level of capital intensity and the length of the time horizon for
forecasting. However, there was no consensus about how to organize for environmental
analysis activities.

There have been two mailed surveys of environmental analysis units in selected Fortune
500 firms. Based on data gathered in 1977, Diffenbach (1983) found that larger
corporations used a greater variety of techniques for environmental analysis, and executives
were more inclined to use the results of analyses than in small firms. However, he found no
systematic relationship between organizational size and the perceived usefulness of
environmental analyses, the amount of effort spent on analysis, or the time horizon used for
scanning, ln a survey of 186 firms conducted prior to 1979, Jain (1984) reported
substantially different findings. Like Fahey and King (1977), he developed a model for
describing different levels of sophistication in environmental scanning activities. It consists
of four phases: ‘primitive’, ‘ad hoc’, ‘reactive’, and ‘proactive’. Jain provides no
commentary on the relationships between his model and that of Fahey and King (1977).
However, in accordance with Diffenbach (1983) and Stubbart (1982). he found that analysts
have difficulty discerning which parts of the environment to scan, and in establishing the
legitimacy of their efforts in the eyes of line executives.

When considered collectively these studies reveal a disparity between the ‘ideal’ and the
‘real’. Academicians and consultants urge the development of formalized and sophisticated
environmental analysis as a vehicle for improving strategic management practices. Their
implicit assumption seems to be that current organization structures and processes are
partly to blame for some recent failures of corporations to sense and respond to pertinent
environmental information. Many executives readily subscribe to this notion. In practice,
however, firms are experiencing difficulties in implementing and effectively conducting
environmental analysis. Of particular concern are problems associated with designing
environmental analysis units, positioning them in the context of an organization, and
linking them with strategic decision processes. To some extent these problems are similar to
those found in research on the implementation of strategic planning systems, and
management science and operations research units. Resistance from existing power
structures, the quality of executive support, and the capacity of such units to make tangible
contributions to important management decisions are problems often accompanying the
initial introduction of organizational units of this kind (see Lenz and Lyles, 1985; Lyies and
Lenz, 1982; Ewing, 1969; Mintzberg. 1972; Fuerst and Cheney, 1982).

Despite the contributions provided by extant research on environmental analysis units, it
affords limited insight into several critically important issues. There is, for example, little or

72 R. T. Lenz and J. L. Engledow

no specification of contingencies influencing organizational designs and conceptions of
environments sufficient for guiding scanning and analysis activities. Previous studies drew
no distinction between firms that could reasonably be expected to be very good or deficient
at this type of analysis. Due to the methodologies employed there are few insights into ihe
details of alternative administrative structures and their relative strengths and weaknesses.
Therefore, the findings reveal overall practices, but mask experiences of particularly
capable enterprises that are of greatest interest to executives.

In order to gain a more thorough understanding of these problems and the prospect for
using specialized organizational components for environmental analysis, a field study was
undertaken on a sample of ‘leading-edge’ business corporations. Attention centered on the
following questions.

1. How are environmental analysis units organized and staffed, and where are they
positioned within the hierarchies of corporations?

2. What contingencies are of central importance when deciding on the organization and
position of environmental analysis units?

3. What conceptions of the organizational environment are used to guide
environmental scanning and analysis activities?

4. What are the advantages and disadvantages associated with various ways of
organizing an environmental analysis unit?

METHOD

Sample
There was no attempt to select a random sample of corporations for the study. This
procedure was not followed because the investigators were not attempting to contribute to
the existing theoretical knowledge base about features of organizations as a general
population of social entities. Instead, primary emphasis was placed on investigating
corporations that represented the most advanced administrative practice. The purpose of
doing so was to gain a better understanding of the benefits and problems experienced by
corporations that, on an a priori basis, were known for their serious commitment to
environmental analysis activities.’

A central concern when engaged in sample selection was determining wbich firms could
reasonably be described as ‘leading-edge’ (i.e. representing the most advanced current
practice). Economic performance is too far removed from decision practices to serve as a
criterion, and size was not a systematic predictor. In an effort to identify leading-edge
companies, individuals were sought who were the most advanced in terms of their thinking
and practice in this area. This approach Is based on the assumption that leading-edge
companies are in fact on the leading edge because of the activities of the directors of their
environmental analysis units. A panel of management consultants, academicians, and

‘ The methodology employed in this study is somewhai exploraiory and raises a critically imponam question for the
development of theory. Simply stated, can theories of organization ever be more than the best of current praciice? If research
on environmental analysis unils (or other aspects of organizaiions) never goes beyond ihe methodology employed, the answer
to this question is probably no. In the authors’ opinions, extant theories of organii^ation are cast at too general a level Tor
developing hypotheses aboui such specialised organizaiional components: ihereforc, this research program only begins with a
field study. Based on the findings it is already clear that discipline-based research on organizational learning, decision-making
and political processes can be used to develop proposiiions ihai will eclipse curreni practice. These should serve as guidelines
Tor executives and contribuic, in the longer run. to the further development both of theories of organization and theories of
management.

Environmental Analysis Units 7

3

Table 1. Gross sales and major lines or business for companies in the
sample

Company Gross sales Major lines of business

Pipeco

Retco

S4.5 B Gas pipeline. liquid Tuels,
pefrochemicaloperaiions, coal,
natural gas exploration

S30.0 B Mass merchandizing, international
trade, consumer financial services

Foodco
Servco

Chemco

Consco

Telco

Diverco

Enerco

Appco

$7.8 B
S7.5B

$6.3 B

S2.1 B

S65.8 B

$26.5 B

$5.2 B

$2.3 B

Fast foods
Full-line insurance

Diversified chemicals

Food and beverages

Communications services

Factory automation, electrical
products, appliances, defense,
nuclear energy

Petroleum drilling and production,
gasoline refining, chemicals, coal
and synthetic fuels production

Major home appliance manufacturing

practitioners was used to identify and evaluate potential candidates for the study. From this
pool 10 individuals within multi-blllion-dollar corporations were selected as leading
practitioners of environmental analysis. One firm was based in Canada, and the remaining
firms were in the United States. The sample selection was also eonstrained by entry,
research funding, travel time and a firm’s potential interest in the research program. Table 1
provides a summary of the characteristics of the sample.

Design
Field interviews were conducted at corporate headquarters offices with individuals in the ten
firms. Where possible, both the director of the environmental analysis unit and analysts
were interviewed. Discussions lasted from a minimum of 3 hours to a maximum of 5 hours.
A questionnaire which had been pre-tested on a separate sample was used to gather
responses during carefully structured interviews. Where pertinent, corporate documents
(e.g. strategic planning models, procedures for data analysis, internal reports, and
organization charts) and discussions with other corporate staff were used to confirm the
accuracy of verbal reports. In order to encourage candid responses, all members of the
sample were assured anonymity.

FINDING

S

The organization of environmental analysis units
The overall structural characteristics of the environmental analysis units are summarized in
Table 2. The table shows the corporate level staff activity or line function with which each
unit was affiliated, the title of the manager responsible for environmental analysis activities

74 R. T. Lenz and J. L. Engledow

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76 R. T. Lenz and J. L. Engledow

and the approximate percentage of time he/she devoted directly to environmental analysis
activities. Also shown are the number of FTE (full-time equivalent) environmental analysts
in the unit and the degree of specialization of their activities. In addition to the forma!
structure of these units are salient aspects of their operating structure. Operating structure
refers to the network of working relationships that transcend the formal structure and
memberships of the environmental analysis unit. The ‘internal’ operating structure i.̂
comprised of organizational members. In contrast the ‘external’ operating structure is made
up of individuals and organizations (e.g. consulting firms) that provide commissioned
reports, advice, information services, periodic reports and digests on a subscription or
contractual basis. Operating structures, both internal and external, were ways in which
managers of environmental analysis units sought to extend their unit’s intelligence-
gathering capability and enhance analytical expertise.^

When considering both formal and operating structures, there is considerable variety in
the designs of environmental analysis units. There is no evidence of contingent relationships
among such factors as corporate strategy, overall corporate structure, or industry
competitive conditions. Instead, a variety of positions within organizational hierarchies
serves as the primary locus of environmental intelligence-gathering and interpretation.
These units range from newly formed activities to corporate functions that are almost 20
years old.

Directors of environmental analysis units bear a diverse array of titles. For 40 per cent of
these individuals environmental analysis is only a part-time job. Other functions include
managing public affairs, corporate research, strategic planning, overseeing corporate giving
programs, directing social responsibility activities, or product engineering. In short,
managing the environmental analysis function is a responsibility that often must be dealt
with among a series of other job demands.

Two organizations used no environmental analysts at all. This meant that the manager of
the environmental analysis function was also the analyst (i.e. a ‘one-person show’). In
general, there was little specialization of environmental scanning and analysis activities
within these units. Only two corporation.s had more than one full-time equivalent analyst on
staff, and among these firms there was no consistency with respect to specialization. Telco
had four corporate-level analysts, but none were assigned specific scanning and analysis
activities. Instead, projects were self-defined and based largely on an individual’s interest in
a topic or issue. Six analysts comprised a macro-environmental analysis unit at Enerco.
Except for one, they were specialized in accordance with relatively conventional conceptions
of the sectors of organizational environments (i.e. economic, technological, social and
political).

With respect to the ‘internal’ operating structures of environmental analysis units, 50
percent of the organizations relied on corporate monitors. These were organization
members occupying a variety of jobs who typically scanned assigned publications (e.g.
Time, Scientific American) with the purpose of identifying emerging trends. In all but one
case, Appco, monitors were usually non-technical personnel, many of whom volunteered to
take part in the scanning effort. When monitors noted something of potential interest they
would typically prepare an abstract of the article and forward it to the environmental
analysis unit. In addition to corporate monitors, an array of informal mechanisms were
used to enhance intelligence-gathering. Information-sharing among corporate-level staff

‘ During the study il was learned that an cmire industry has formed whose ‘products’ are informaiion on certain aspeas of
organizational environments, and techniques for analyzing information and introducing it inio strategic decision processes.

Environmental Analysis Units 11

departments, ad hoc task forces, and standing committee memberships were also employed,
but with little consistency and varied results across the sample.

The corporations visited spent hundreds of thousands of dollars on information services
and consultants’ reports. The former consisted of subscriptions to organizations providing
data on one or more aspect of the organizational environment (e.g. economic, social
trends). Consultants’ reports typically dealt with a specific topic and an accompanying
interpretation for the subscriber. Reliance on these inputs varied greatly among firms in the
sample. One organization, Telco, considered such information to be useless for its purposes
and, as a consequence, did not subscribe to any services or reports. Other analysis units
depended heavily on such sources and developed in-house information systems for storing
and referencing a diverse array of environmental trends and conditions. In addition lo
consulting services, ad hoc seminars and commissioned task force studies, information-
gathering via professional networks was also used. Overall, however, there was no pattern
in the external operating structures of the environmental analysis units that was
systematically related to other aspects of organization or the director’s influence in decision-
making processes.

Alternative organizational roles
When the gross structural features of each environmental analysis unit were evaluated
independent of their organizational context there was little evidence of regularities or
distinct patterns. However, when the data on structural features were considered in the
midst of information pertaining to the functions of these units and their linkages with
strategic planning and executive decision-making, three broad roles emerged. It would be
misleading to refer to these roles as models or archetypes, for there was no evidence that a
clearly conceived range of ideal types of alternatives for organizing environmental analysis
activities guided these designs. Instead, they should be considered as administrative
structures toward which firms had gravitated. They constitute a taxonomy of emergent
organizational roles that derive from the functions performed by these units within the
broader context of decision-making. Table 3 contains an outline of essential characteristics
of the environmental analysis units cast in three different roles. For purposes of discussion,
each bears a label intended to capture its basic character.

Public policy role
Five corporations exhibited this form of organization. The environmental analysis unit was
assigned the job of scanning, relating and interpreting relevant environmental information.
Primary emphasis was placed on the early detection of emerging issues that were suspected
to be harbingers of broad-scale shifts in societal attitudes, laws, social norms and roles, etc.
Of particular interest were public policy issues likely to affect the corporation as a whole
(e.g. urban decay, women’s rights). In the terminology of extant theory, the general
environment was the principal focus of analysis. Task environment phenomena were
typically analyzed by other organizational units, such as a strategic planning department.*

Within a unit of this kind, environmental assessments are not guided by strategic issues of
current importance to senior-level executives. Instead, environmental analysis usually
consists of nearly random and.highly intuitive search processes. Much time is spent on

‘The terms ‘task’ and ‘general’ environment are used as label.s for those aspects of environment thai were analy%ed by
environmental analysis units. Respondetits did not use these terms nor. for fear of biasing responses, did the investigators. The
purpose of using such terminology is to draw connections between extant theories and administrative practice. Those
unfamiliar with these concepts should see Thompson {1967) and Bourgeois (1980).

78 R. T. Lenz and J. L. Engledow

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Environmental Analysis Units 79

seeking out discrete bits of information and fashioning these into trends. Analysts
functioning in this role seek to add value by identifying emerging trends that are not
revealed by conventional analytical techniques (e.g. competitive anaiysis), and bringing
these to the attention of line executives and board members.

Most unit5 organized in this way had direct access to the top-level power structure of the
corporation. Directors were frequently involved in the formulation of corporate policies on
public issues of national importance. Their primary function was twofold. Most had been
charged with preventing the CEO from being surprised, or ‘blindsided’, by an emerging
issue. Of secondary importance was stimulating managerial thinking via unconventional
perspectives with the intent of creating awareness among executives of broad-scale
environmental shifts.

Linkages with the strategic planning process were tenuous and in some cases virtually
nonexistent. Thus, there were few opportunities to have an explicit impact on key strategic
decisions. In most companies using this form of organization strategic planning is a separate
function (see Appendix 1). The principal opportunities to affect business strategy decisions
were by way of memberships on multi-departmental committees and occasions on which top
management’s thinking could be influenced by presentations or discussions. The locus of
analysis and interpretation of long-term environmental intelligence is at the corporate staff
and board subcommittee levels.

Strategic planning integrated role
Environmental analysis units displaying this type of administrative structure played an
integral role in tbe corporate-wide strategic planning process. Analysis focused on both
general and task levels of the environment. A variety of techniques was used to help ensure
multi-level integration of environmental issues with strategic decision processes. The
environmental analysis unit was typically required to prepare an environmental forecast for
the entire corporation. This forecast, and its attendant assumptions, were distributed to line
and/or staff executives at the beginning of the planning cycle. Subsequently, there was
interaction at key decision points in the strategy formulation phase. Appendix 2 contains a
description of one such process.

Unlike the public policy role, environmental analysis units in the strategic planning
integrated approach were relatively lightly linked to strategic decision-making. Their
function was not only to condition top management’s thinking about broad issues, but also
10 affect decisions on the most basic elements of business-level strategies. Considerable
emphasis was placed on identifying corporate- and business-level strategic issues. These
issues served as a central focus of planning and were used to evaluate the performance of
line executives during subsequent strategy review sessions. A working list of critical
environmental issues served as a linking pin between corporate and business strategic plans.

Function-oriented role
In one sense the function-oriented role is at the opposite end of Ihe continuum from the
public policy role. The latter is concerned with evaluating the general environment for
emerging societal trends. The former centers attention on only those aspects of the
environment thai impinge directly on the activities of the function within the organization
as a whole (e.g. product development, public relations).

Environmental analysis units employed in this role can be housed in functional
departments at either the corporate or division level of an organization. Their scanning and
analysis activities are confined to factors related to current tasks and future concerns of the

80 /?. r. Lenz and J. L. Engledow

functional department in question. Therefore, the relevant environment consists of factors
thought to affect the activities and responsibilities of the department. The corporation using
this type of environmental analysis unit housed it in the product development group. Its
analyses were typically confined to environmental factors affecting product functions,
features and usage. Thus, available raw materials, the relevant spectrum of production
technologies and changing consumer tastes and lifestyles were of central importance.
Technically sophisticated corporate monitors (e.g. Ph.D.s in research activities), research-
for-research agreements with laboratories and universities, and commissioned task forces of
consultants and academicians were typically used to facilitate environmental analyses.
Scanning and analysis are issue-driven; that is, they are carefully targeted with the intent of
providing answers to specific questions or issues.

Managers of environmental analysis units employed in this role do not attempt to
condition top management’s thinking about broad-scale societal change. Neither are there
attempts to provide a genera! forecast of the environment for the entire corporation.
Instead, the function-oriented unit is linked to the strategic planning process via its normal
departmental reporting relationships. Thus the benefits of its activities are reflected in
improved outputs of the function (e.g. product innovation). In this way it does not have to
compete with other organizational units for management’s attention during strategic
planning and decision processes.

Design contingencies
As alluded to previously, no contingent relationships were noted between the structure of an
environmental analysis unit and such factors as size, strategy and organization structure.
The same is true when considering the environmental analysis unit in the broader context of
other administrative processes. Among diversified corporations, for example, the range of
structures included everything from a single director/analyst serving a board subcommittee
to an integrated staff group of six persons whose sole task is environmental analysis. In
functionally structured firms there were also no indications of contingent relationships
between conventionally prominent theoretical variables.

The most significant design contingencies (which were encountered repeatedly) are the
preferences of one or more top-level executives. Virtually every environmental analysis unit
was sponsored, or ‘owned’, by at least one top-level executive officer in the organization.
Most of these units were recent additions to their organizations. They had few
constituencies other than their sponsoring executive—from whom they marshalled
necessary support to survive. As a consequence of these circumstances the structure of a
unit and its role and functions in an organization were largely defined by the sponsoring
executive. This individual was the principal market served.

In general, environmental analysis units added value via interpretation, not data
collection. Effectiveness hinged on the capacity of these units to discern the significance of
environmental trends and conditions for ihe corporation as a whole and for its individual
businesses, products and services. Prior to the conclusion of the field study, three of the 10
environmental analysis units surveyed were, essentially, disbanded. Their functions were
subsequently distributed among other organizational subunits.

Conceptions of environments
During on-site interviews each respondent was asked whether efForts at environmental
analysis are guided by a shared conception of their organization’s environment. A series of
questions were used to explore beliefs and assumptions regarding environmental structure.

Environmental Analysis Units 81

scope and dynamics. Responses to these questions were vague. Many of the executives
indicated that it was a question they had not been asked before, despite the fact that they
were engaged in environmental analysis on an almost daily basis. Only two firms revealed
some attempt to systematically structure thinking about their environments. One firm,
Consco, is a consumer products producer that developed an empirically based proprietary
model composed of variables statistically related to the level of demand for current product
lines (e.g. disposable personal income). The other firm, Enerco, specialized its analysts’
scanning activities in accordance with frequently used sectors of organizational
environments (i.e. economic, technological, social, political). Analysts assigned to these
sectors, however, had no coherent notion of how their portions of the environment were
structured, or what caused them to change. Despite such efforts, neither of these two firms
laid claim to a unified conception of their environment sufficient for guiding a systematic
and comprehensive environmental analysis. Responses from executives at the remaining
eight firms were even less specific. Answers usually consisted of oblique references to such
factors as demographics, economics and lifestyles that were interspersed by descriptions of
analytical techniques. Although each executive was convinced of the need to analyze the
environment, there was no agreement of how to organize and focus such an analysis.

Table 4. Advantages and disadvantages associated with alternative roles for
environmental analysis units

Role

Public
policy
role

Advantages

Direct access to power structure

New perspectives for top
executive group

Stimulates long-term strategic
thinking

Disadvantages

Establishing legitimacy

No direct planning linkage

Survival depends on ‘sponsoring’
executive

Integrated
planning
role

Access to ihe ‘corporate vision’

Direa access to strategic
planning process

Can integrate corporate and
business level environmental
issues

Opponunity to directly
influence corporate strategy

Must compete with strategic
planners for top management’s
attention

Pressure to become short-range
in analyses

Need to confonn to planning
procedures and formats

Tension between line and staff
viewpoints

Function
oriented
role

Environment is more easily
defined

Direa input to key strategy
decisions

No competition with planning
for management attention

Close line-stafl̂ interaction

ResiHcied environmental focus

Limited prospect Tor
unconventional thinking

Short-term orientation

Requires clear and stable
concept or strategy

82 R. T. LenzandJ. L. Engledow

Advantages and disadvantages of each approach to environmental analysis
The three roles of environmental analysis units show different points at which a balance has
been struck between the related tasks of sensing and acting on environmental intelligence.
As a consequence it is possible to comment on their relative effectiveness in fulfilling these
necessary functions.

The public policy role for an environmental analysis unit is an effective arrangement for
channelling unconventional thinking into discussions and decisions occurring among senior-
level executives. Since much of the information flowing into the environmental analysis unit
originates outside the organization and bypasses standard information channels, it arrives
unsanitized and in unanticipated formats. Thus, one of its strengths is to stimulate ideas and
foster novel perspectives among persons in positions of power. The counterpoints to these
advantages, however, are several. First, environmental units of this sort do not fit standard
ideas about legitimate corporate functions. As a consequence it has been espeically difficult
for managers of such units to gain respectability for their work and a defensible position
within organizational power grids. Problems with establishing legitimacy are exacerbated by
limited access to the strategic planning process. Planners typically view inputs from analysts
concerning the general environment as ‘soft science’ and much too long-term in nature to be
of value for business planning decisions. In the absence of this vital connection,
environmental analysts often find themselves competing with planners for the attention of
top executives. Thus, it has proved difficult for environmental analysts operating in this role
to have an influence on substantive aspects of strategic decisions. Instead, their principal
influence has been limited to shaping corporate responses to emerging public policy issues
on a case-by-case basis.

Environmental analysis units whose activities are integrated into strategic planning
processes have a greater chance to influence directly the formulation of strategy. Due to the
fact ihat environmental analysis activities in strategic planning include both general and
task-level phenomena, analysts have a somewhat easier time identifying aspects of
organizational environments that are of direct importance to line executives and planners.
This eases the burden of demonstrating bottom-line results.

Despite the apparent reasonableness of integrating the environmental analysis unit’s
activities into the planning process, there remain some problems. Firsi, in order to gain
acceptance, outputs from the unit must be made to at least generally conform to the
planning format. This can reduce the unconventional character of analyses that might be
otherwise helpful to planners. For example, the need to shorten time horizons and quantify
information which may be better left in a qualitative form can diminish the effectiveness of
environmental analyses. This problem is panicularly detrimental when attempting to spur
innovation in response to qualitative information about lifestyles, values or emerging
legislation. There appears to be a delicate tension to be maintained between time horizons of
line and staff viewpoints. It can be lost if unconventional thinking is filtered out by
standardized planning formats, definitions, data needs and analytical procedures.

The function-oriented role of organization for environmental analysis has several
advantages. First, the environment is more clearly defined than in the other approaches.
Therefore it is easier to carefully target analyses on aspects of the environment which
impinge directly on the activities and interests of a department’s function. The benefits of
such specificity are revealed in greater acceptance by line executives of environmental
analysis activities and results. When environmental information can be related directly to
the institutionalized strategies pursued by line managers, ihe legitimacy and credibility of
the environmental analysis function is greatly enhanced. This encourages close line-staff

Environmental Analysis Units 83

relationships and avoids the problem of having to compete with strategic planners for top
management’s attention. Further, there are numerous opportunities to influence some of
the more fundamental elements of business-level strategies.

A few disadvantages also attend this form of organization. There is the ever-present
danger that environmental analysis will be focused so narrowly on incremental adjustments
to existing departmental orientations that significant change will be missed. Structures of
this form can screen out unconventional views which could afford insight into revolutionary
environmental changes likely to afFect current activities. In order for this structure to work
there must be a clear concept of strategy that is sufficiently stable to warrant investments in
personnel and developing external linkages (e.g. research-for-research agreements)
necessary for information-gathering. Unless such conditions prevail this approach may not
prove to be very effective.

DISCUSSION

The findings are generally consistent with conclusions of previous research concerning the
problems of conducting environmental scanning and analysis. On specific issues there are,
however, points of both commonality and contrast. Like Fahey and King (1977), the results
indicate no association between capital intensity and the design and functioning of
environmental analysis units. Nor, in accordance with DifFenbach (1983), does it appear
that size or the length of planning horizons were systematically related to administrative
structures for scanning and analysis. Unlike the Fahey and King (1977) study, the findings
did not reveal the existence of ‘irregular’, ‘regular’ and ‘continuous’ scanning models. Each
firm in the study was using a continuous process of environmental intelligence-gathering
similar to the ‘proactive’ phase described by Jain (1984) and the ‘discovery’ mode
hypothesized by Daft and Weick (1984). Neither Fahey and King nor Jain stratified tbeir
samples in order to focus attention on what we have termed leading-edge corporations.
Instead, they sought to assess the state-of-the-art of environmental scanning among a
general population of organizations. Therefore, the sample used in this study may not have
been sufficiently heterogeneous to include firms using other scanning modes.

It is apparent that there is still considerable uncertainty about viable structures for
environmental analysis units and significant administrative problems accompanying their
use. The latter is made clear by the fact that environmental analysis units in three of the
firms in the study—Foodco, Telco and Consco—were essentially disbanded after
completion of the research. Subsequent interviews provided some insight into why this
occurred.

There was no single factor that accounted for the demise of the three environmental
analysis units. At Foodco a highly structured system introduced by a director hired from
outside the corporation was never accepted by successful entrepreneurial-style line
managers. Telco’s unit was nominally disbanded because of a corporate reorganization.
However, there was also an uneasiness between members of the environmental analysis
group—all of whom were from outside the corporation and headed by an academician—
and conservative executives used to a numbers-oriented planning system. The Consco unit
functioned for 8 years under the administration of one CEO. When this sponsoring
executive left, following the company’s acquisition, the environmental analysis unit was
disbanded. Standing alone these instances are insufficient to draw hard-and-fast
conclusions. It seems, however, that the generic problems of implementing a novel

84 R. T. Lenz and J. L. Engledow

organizational structure are exacerbated by hiring an outside director who is unfamiliar
with the culture and management style of an organization.

Respondents disagreed about whether an insider or outsider is more likely to succeed as
head of an environmental analysis unit. Among directors of units that were still operating in
the other seven corporations there were both insiders and outsiders. There was also
considerable diversity among their educational backgrounds, career paths, knowledge and
experiences. As Bower (1970) noted when studying the resource allocation process,
credibility is necessary when seeking to affect key strategy decisions. Insiders derived
credibility from previous accomplishments and possessed some power in their organization.
Outsiders saw the need to establish credibility by adding value in decision processes and to
gain influence by developing a network of managerial alliances. There was some evidence
that credibility is a necessary but not sufficient condition for survival. It also required the
support and power of the sponsoring executive. The necessity of this power source for
survival may stem from ambiguity about the appropriate role of environmental analysis
units and the difficulties encountered when trying to add value in strategy formulation
processes.

These results pose serious questions about the long-term viability of some free-standing
environmental analysis units as they are presently employed. The public policy role appears
to be particularly vulnerable amidst the vagaries and demands of organizational life. Recall
that two of the three disbanded units functioned in this role, and were by design the most
loosely linked to strategic planning processes. The integrated strategic planning form is
more promising. As now practiced, this type of structure is generally consistent with
administrative arrangements recommended by Porter (1980), Wilson (1982), and AnsofT
(1980). The emphasis placed on strategic issue identification in one company, in particular,
closely approximates Ansoffs conception of ‘strategic issues management’. This structure
is quite new, however, and must pass the test of time.

It is worth noting that the oldest continuing environmental analysis unit in the sample was
at Appco. The role of this unit was limited. It directly focused on maintaining the
technological leadership of a company whose staff described it as a ‘manufacturing
organization’. This mode of operation is consistent with some notions of outstanding
management practice (see Peters and Waterman, 1982). Whether it is a viable mechanism
for long-term strategic change and adaptation is unclear. If, as some (e.g. Glover, 1966)
suggest, environmental change is evolutionary, not revolutionary, this may well prove to be
an effective structure for sensing and acting on environmental intelligence.

Conventional structural contingencies growing out of general theories of organization did
not appear to have a direct or significant effect on the design of environmental analysis
units. This may stem from the fact that organizations in the sample were extremely large
and complex. With a multinational enterprise, for example, what are the relevant
environmental contingencies (Lawrence and Lorsch, 1967), resource dependencies (Pfeffer
and Salancik, 1978), or key transactions (Williamson, 1975) that should influence the design
of an environmental analysis unit?

Field interviews revealed no evidence that environmental contingencies, resource
dependencies, or the effectiveness and efficiency of transactions were considered, or even
explicitly recognized, during the designing of environmental analysis units. Instead, the
units were created to alter and supplement existing administrative structures in order to
make them better serve the sponsoring executive and other managers, by enhancing
information flows and decision-making about organizational environments. The central
design contingencies were the preferences and power of the sponsoring executive(s). As

Environmental Analysis Units 85

Bobbitt and Ford (1980) note: organizational designs reflect decision-maker choice.
Sponsoring executives in the sampled firms were seeking to change their administrative
context In order to enhance intelligence-gathering and improve the quality of strategic
decisions. This process is not unlike that described by Chandler (1962) and Isenberg (1984)
in which organization structures are manipulated to solve certain administrative problems.

The fact that members of environmental analysis units had no coherent concept of the
environment to guide their scanning and analysis activities may be surprising to some. This
finding is particularly disconcerting in view of the assumption that integrated strategic
planning is assumed to include a comprehensive environmental analysis prior to the
formulation of a strategy. However, as Lenz and Engiedow (1984) found, extant theories of
organization and much corporate planning literature afford little in the way of concepts that
are sufficient for guiding practitioners in truly comprehensive environmental analyses.
Frameworks by Porter (1980) and Freeman (1984) are helpful under certain conditions in
and around the task environment level. However, broader conceptions of organizational
environments concerning the general environment and its functional interdependencies with
task-level phenomena are virtually nonexistent. Analysts attempting to determine the
competitive implications of social and political events were acutely aware of this problem.
The more wide-scale adoption of stakeholders analysis (Freeman, 1984), which does not
employ the concept of hierarchy in describing environments of organizations, may solve
these analytical problems; but it lacks the broad empirical base of industrial organization
research (see Scherer, 1970). As a consequence there are few proven concepts and
empirically grounded heuristics or generalizations for predicting environmental change.
Thus, for now, many analysts are in the unenviable position of studying a phenomenon they
have difficulty defining, describing or relating, in a systematic way, to their organizations.

CONCLUSIONS

The purpose of this study was to further understanding about the viability of specialized
scanning units for introducing environmental information into strategic decision processes.
The findings show that it is still a time of experimentation and that some of these units have
failed. There is evidence that certain administrative structures are more promising than
others; but much remains to be done before definitive answers to several problems are
available.

With respect to other matters, one salient theoretical issue deserves immediate attention.
There is a need for further progress in developing conceptual frameworks that make what is
often referred to as the ‘general’ environment tractable for analysis. The paucity of useful
frameworks for structuring thought and analysis at this broad level leaves even otherwise
able environmental analysts groping. Effective analysis requires some means for better
understanding how, for example, social and political change occur. Further, there is a need
for theories that establish connections between changes in these aspects of the environment
and the technological and economic characteristics of organizations. Industry analysis is
helpful at the task environment level. However, it leaves unaddressed linkages with these
broader contextual elements from which fundamental change is hypothesized to originate.

For practitioners there is one clear implication: the necessity of continuing to experiment
with ahernative structures and processes for enhancing environmental intelligence-gathering
and self-reflective strategic decision-making. The use of a centralized environmental
analysis unit is, to some, a mechanism unlikely to facilitate critical and pertinent thinking

86 R. T. Lenz and J. L. Engledow

about the organizational environment. Such persons (e.g. Argyris, 1982) advocate, instead,
efforts to foster trust and openness in decision processes. This advice, however, begs the
questions of which aspects of environment to analyze and what kinds of structures and
processes should be used and joined in ways that can reduce the incidence of corporate
blind-sidings so common during recent years. One way to improve strategic management
practice is to continue to extend knowledge of how to design and manage organizational
structures and processes that facilitate strategic adaptation. This requires a fuller
understanding of the related problems of sensing as well as acting on essential information.
As Hambrick (1982) notes, firms often sense pertinent intelligence but fail to act on it.
Specialized environmental analysis units may have a contribution to make in resolving the
sensing-action problem. But for organizational adaptation to be genuinely effective, other
mechanisms will be needed as well.

ACKNOWLEDGEMENTS

The authors would like to gratefully acknowledge financial support from the Strategy
Research Center at Columbia University, the Graduate School of Business of Indiana
University and to thank executives participating in this study for their generosity and
cooperation.

APPENDIX 1

EXECUTIVE COMMITTEE

ISSUES MANAGEMENT
COMMirrEE

STEERING COMMITTEE

I

STRATEGIC PLANNING
COMMITTEE

1
RESEARCH CENTER

TREND ANALYSIS
COMMITTEE

I
STRATEGIC PLANNING

UNITS

Environmental Analysis Units 87

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88 R. T. Lenz and J. L. Engledow

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New York, 1982.

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