Environmental analysis for strategic planning: The case of IIM, Indore Brijesh K Mishra (2014FPM02) Strategic Management: Foundation Course for Doctoral Students Faculty: Prof. D. L. Sunder "It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change." —Charles Darwin 1 Abstract IIM, Indore operates in an atypical environment. Having a well-recognized image- tag of being an IIM makes many things much simpler. But, the vision of IIM, Indore is not just being one of the best; rather it’s about being the best. In such circumstances, it’s imperative that a thorough environmental analysis is done to find out the opportunities and threats present for IIM, Indore. This paper attempts just that. It carries out a PEST analysis to provide a few pointers to work upon. ______________________________________________________________________________ Introduction As per the Annual Report of 2012-13, IIM, Indore (referred to as IIMI henceforth) espouses the following visioni: 1. To have a dominant presence in every segment of management education in India and overseas; 2. To illustrate and experience the uniqueness of embedding a business school in social science setting; 3. To propagate, assimilate, and develop contemporary innovative management practices and systems to contribute to social capitalism; 4. To evolve as a contextually relevant business school with world class academic standards, and 5. To emerge as one of the top 5 management institutes in the country. This vision of IIMI certainly has elements of BHAGSii (Big, Hairy, and Audacious Goals), though the time frame to achieve these goals is conspicuously absent. In order to attain its vision or strategic goals, the first step to be taken by IIMI would be to take an exhaustive scanning of it macro-economic environment. Scanning means, “Identifying early signals of environmental changes and trends”.iii In order to fulfill its strategic goals, IIMI needs to ensure that environmental forces don’t subdue its ambition, while it should be in a position to derive the maximum possible leverage emanating through such forces. In fact, many of these environmental forces will have a bearing on the entire higher management education in the country; they will have important implications for the creation and dissemination of relevant human capital in management field in India. 2 In this paper, an exhaustive analysis of the macro-economic environment for IIMI has been undertaken. There are a number of available tools, such as PEST (Political, Economic, Sociological, and Technological), PESTEL (PEST factors plus Environmental and Legal), PESTLIED (PEST plus Legal, International, Environmental, Demographic), STEEPLE (Social/Demographic, Technological, Economic, Environmental, Political, Legal, Ethical) and SLEPT (Social, Legal, Economic, Political, Technological) to carry out the macro-environmental analysis. Given to the fact that IIMI functions in the sphere of provisioning higher education in the country, the demographics is expected to play a crucial role in determination of a meaningful strategy for the institute. Moreover, the entry of reputed institution of higher learnings from abroad has been under discussion for some time now, hence ‘International’ aspect is also worth taking a note of. In view of the discussion above, it may be argued that we should use a model like PESTLIED, which extends PEST model to specifically incorporate ‘International’ and ‘Demographic’ elements of analysis. But, it is not obvious that why ‘Demographic’ sub-aspect cannot be studied in ‘Social’ aspect, and why ‘International’ sub-aspect cannot be studied under ‘Political’ aspect. As the four elements Political, Economic, Social, and Technological cover the entire gamut of macro-economic factors and as simplicity needs more preference, ‘PEST’ model has been used for undertaking external environment analysis for IIMI. The paper tries to present an exhaustive framework for environmental scanning for higher management education in general and IIMI in specific. To begin with, a literature review of a number of papers has been undertaken to understand the current thinking of academicians/practitioners and to attempt a framework for IIMI based on this accumulated knowledge. This paper solely relies on the data available through secondary sources such as data available from Ministry of Human Resources Development (MoHRD), Government of India; All India Council for Technical Education (AICTE); IIM, Indore; empirical studies reviewed for writing this paper etc. Thereafter, a model for IIMI has been presented using PEST framework. This environmental analysis should prove to be relevant for higher management education as well. 3 Literature Review Environmental scanning helps an organization to monitor, evaluate, and disseminate relevant information from the external and internal environments to key people within an organization (Wheelen and Hunger, 2012)iv. Hence, it is not only scanning the macroenvironment for its sake, rather it involves deriving relevant and actionable information so that the responsible persons will have a potent tool to avoid groping in dark. These information points should be well utilized for formulating and shaping strategy. In fact, keeping its antenna on to changes taking place in its environment is an absolute must for an organization; else there may be adverse surprises in store. Frederick the Great (1740-1786) has been quoted to have remarked, “It is pardonable to be defeated, but never to be surprised” (Calof and Wright, 2008)v . Nearly thirty years ago, Porter (1980) reported that whilst companies were carrying environmental scanning informally, in his opinion this was nowhere near sufficient. He advocated the need for a structured process at all times in order to continuously and systematically identify business opportunities and threats emanating through the environment in which the organization operates. This is why environment has been counted as one of the four components of strategic management: four being environment scanning, strategy formulation, strategy implementation, and evaluation and control (Wheelen and Hunger, 2012). The problem with environmental scanning is that it is not in control of the organization, rather it is a given. This creates uncertainty, and successful organizations learn how to gather relevant information so as to utilize them for better formulation and implementation of their strategies (Hitt, Ireland, and Hokisson, 2011). But, is it possible to list out all the factors that could possibly affect an organization? Or is it necessary indeed? In fact it is neither possible, nor desirable to list all the conceivable factors that could affect an organization. External audit is aimed at identifying finite number of key variables that offer actionable responses (David, 2011)vi. One of the simplest models to scan environment is PEST Analysis. PEST stands for the Political, Economic, Socio-Cultural, and Technological factors that have a bearing on an organization. As has been discussed, the PEST forces give rise to various opportunities and threats that are not within the control of the top management of an organization, at least not in the short-run (Babatunde and Abedisi, 2012)vii. On the question whether PEST forces affect an 4 organization’s performance, an empirical study done by Babatunde and Abedisi revealed that there was significant relationship between strategic environmental scanning and organization performance, the coefficient of determination (R2) being 0.297, which shows that about 30% of the variation or change in effective organization performance is caused by variation in strategic environmental scanning. Another study undertaken by Mashhadi and Ijaz-Ur-Rehmanviii on the Pizza Fast-food industry found that even as Political factors were somewhat insignificant, the other three components of PEST, viz., Economic, Social, and Technological factors significantly related to performance. Another aspect to note is about the extent of planning vis-à-vis dynamism of external environment. As per a study Brews and Purohitix, stable environments were associated with less planning, while the opposite would be observed for more uncertain environments. In view of the discussion above, PEST framework has been found suitable to carry-out an exhaustive macro-environmental analysis of IIMI. PEST Analysis for IIMI The four components, i.e., Political, Economic, Social, and Technical factors would now be discussed in detail for IIM, Indore. Political, Legal, and Governmental Factors Political forces, mainly that emanate from the government, whether the union government or the state government, play a vital role in framing the Political environment for an organization. It is imperative to note that IIMI was set up in 1996 by the government’s support only and still receives substantial grants from it. As per the annual report 2012-13, IIMI received Rs 85.18 Lakhs in 2012-13 as grant from the government. Moreover, the Board of Governors also has government nominees. So even as IIMI, or for that matter, any other IIM may enjoy autonomy in their day-to-day functioning, it is still susceptible to any major changes contemplated or introduced by the government. 5 A case in point is the affirmative action taken by the government to provide reservation to other backward castes (OBCs) in IIMs since 2008. As it was decided to keep the general seats at more or less at the same level, the intake of students and hence the number of faculty needed to be increased substantially. Even as the increase was effected in a gradual manner, it still had disruptive consequences. In fact, most of the IIMs are still going through acute shortage of faculty. Another instance can be cited regarding the recent government decision to set up IIMs in all the political states. In fact the budget for setting up these additional IIMs has already been allocated in the union budget of 2014-15. This is when the seven recently opened IIMs, including IIM Shillong, which was opened in 2007, are yet to move to their permanent campuses and are still to increase their annual intake to substantial levelx. On the top of that, if new IIMs start functioning, it will be a tough task to provide for adequate infrastructure and qualified faculty for all of them. On the face of it, not much of planning has gone into how the basic infrastructure and faculty support would be provided for, especially when the existing IIMs themselves are feeling a shortage of qualified faculty. Increase in number of other IIMs may also cause relocation of many faculty members from one IIM to another, and hence may pose another challenge for established institutes such as IIMI. Moreover, if a few new IIMs may assume the position of prominence in the long run, there may be a threat of reduction in prestige for an established IIM like IIMI vis-à-vis such upcoming IIMs and the same may get reflected in choices made by prospective recruiters and students. A study by Bhargava committee (2008)xi, that was submitted to the government on making IIMs more effective, had made many observations such as- first, it would be enormously challenging to bring the seven new IIMs to the level of even the existing IIMs; second, the quality of research in IIMs lagged behind the status of IIMs; third, IIMs were not able to attract adequate number of faculties especially in view of government determined remunerations; and fourth, directors of IIMs were not able to provide the desired leadership due to lack of role clarity among the directors, the board of governors, and the government etc. Even after passage of over five years since, hardly any action has been taken to ameliorate the shortcomings pointed to by the committee. In fact, instances have been noted wherein government has taken diametrically 6 opposite action vis-à-vis a recommendation of the committee, e.g., the committee categorically noted that the journey for making IIMs as thought leaders would be severely hampered with 13 IIMs, but now there would be an IIM in every state! As and when a positive action is taken by the government on the recommendations of the committee, notwithstanding controversial nature of some of the recommendations (see Amit Gupta and Ganesh N Prabhu, 2011)xii, they are expected to have overall positive impact on the functioning and performance of IIMs including IIMI. The Foreign Educational Institutions (Regulation of Entry and Operations) Bill, 2010xiii is still pending in parliament right now. The preamble of the Bill says: “A BILL to regulate entry and operation of foreign educational institutions imparting or intending to impart higher education (including technical education and medical education and award of degree, diploma and equivalent qualifications by such institutions) and for matters connected therewith or incidental thereto.” As and when the bill is passed and entry of top international universities is allowed for opening their independent campuses, there may be a threat for the IIMs in case Ivy League Universities start offering their acclaimed courses in Indian soil at reasonable costs. To ward off such a competition, all the IIMs need to brace up at the earliest, but the same might require real autonomy and requisite support from the government, else it may be a case of uneven playing field as has been witnessed in so many other sectors in the economy. IIMI has a remote campus in the Middle-East. In future, it may want to expand it and make it a centre of excellence at global scale. Though instead of Dubai, another location in Europe or the Northern America having large Indian diaspora would have been more preferable. In such a scenario, it must be observant of the local laws and any future plans must be drawn after duly accounting for extant rules and regulations. Any proposed changes in relevant rules and regulations should also be studied for their likely impact on the operations of IIMI’s centre abroad. 7 Economic Factors In India, there has been increased emphasis on education as a tool of social and economic development. During the 11th five-year plan (2007-12), per capita public expenditure on education increased from INR 888 in 2004–05 to INR 2,985 in 2011–12. As primary education falls in state list, state governments did the majority of the public spending on education and their spending grew at a robust rate of 19.6 per cent per year during the Eleventh Plan. Public – spending on education by the central government increased at still higher rate of 25% during the same period.xiv Despite this increase in spending on education, the combined public spending by central and state governments on education is still below 4% of GDP, which is way below the figures in developed countries. Moreover, the gross enrolment rate in higher education is only about 18%, compared to 26% in China, and 36% in Brazil.xv As and when the public spending is increased and enrolment to higher education goes up, the demand for all kind of technical and management education may go up, which might be good thing for IIMI if it wants to increase its enrolment. It is also noteworthy that India is projected to be a $1.7 trillion economy, having per capita income of INR 74,920 by the end of FY 2013-14xvi. Even though the economy’s growth rate at estimated 4.9% is termed as sluggish, it is still one of the best across the world considering that most of the countries in developed and developing world are still reeling under the specter of recession. Considering the management education from an elite institution is a kind of ‘luxury good’, it is expected that as and when larger pool of persons, which has increasingly better disposable income, enrolls for higher education, there would be greater number of persons seeking to enter the system of IIMs. Hopefully, the increased number of IIMs would then not result in dilution of quality of their graduates and there will not be any compromise with brand IIM. The working group on management education, which worked under the aegis of the National Knowledge Commission (NKC), submitted its report in 2007. It provides an interesting 8 statistics (it is not clear whether this data pertains to FY 2004-05, or 2005-06) regarding the distribution of management institutes in the countryxvii: State AP BIHAR DELHI GUJARAT HARYANA KARNATKA KERALA MP MAHARASHTRA ORRISA PUNJAB RAJASTHAN TAMIL NADU UTTAR PRADESH UTTARANCHAL WEST BENGAL *OTHERS Total Number 239 14 60 50 34 116 247 51 202 247 25 56 139 181 18 47 35 1761 Percentage 13.5 0.8 3.4 2.8 1.9 6.6 14 2.9 11.5 14 1.4 3.2 7.9 10.9 1 2.9 1.9 100 An analysis of the table shows a correlation between the economic development of a particular state and the number of management institutes in the state (barring a few exceptions such as UP, Punjab, and Orissa). In view of this, it is expected that as the Indian economy grows, there would be increased demand for management professionals from the industry, which would then be met by existing or new set of management schools. There is a word of caution though. Below is given the statistics of growth of management institutes and number of students enrolled in their courses over the past eight years: FY Number of % change over Number of % change over Management Schools the previous year students the previous year 2006-07 2614 247201 2007-08 2915 11.5 275666 11.5 2008-09 3120 7.0 295052 7.0 2009-10 3290 5.4 311129 5.4 9 2010-11 3469 5.4 328057 5.4 2011-12 3541 2.1 334865 2.1 2012-13 3471 -2.0 349369 4.3 3364 -3.1 354421 1.4 2013-14 (Adapted from AICTE’s statistical data accessed through internet)xviii We see that the number of management institutes increased rapidly during the first half of 2000-2010 apparently to cash-in on desperation of students willing to any-how have a management degree. In fact, by taking the figure of over 1700 management institutes in the country, the National Knowledge Commission (NKC) has remarked that more than 1000 of these were added after the year 2000, showing the break-neck speed at which such institutes were openedxix. In the FY 2012-13 and 2013-2014, however, we see that the number of management institutes have in fact closed down apparently due to lack of students. The increase in the number of students taking management courses has also become very modest. This provides a message that a compromise with quality would be detrimental sooner rather than later. This holds a lesson for premier institutes such as IIMs as well, especially in view of increased peer competition and also the imminent competition from formidable institutions of repute, if they are allowed to open their branches in the country. In fact, the annual report 2012-13 of IIMI reveals that the number of students applying to the institute decreased from 168137 (batch 2011-13) to 166457 (batch 2012-14). This may hopefully be a one-time blip, but if recurrent, IIMI needs to take immediate corrective measures to sustain student interest. As IIMI has been doing well on financial front (its Income statement for the year 2012-13 shows a healthy Rs 40.97 crore surplus, while the total capital fund/corpus as on 31/03/2013 was Rs 375.3 crore), it is well placed to exploit growth opportunities/ attract the best talent from within the country or from abroad, if needed, as and when such a flexibility is granted by the government. An editorial in Business Standard recommended the following to the IIMs to attain financial autonomy- they need to be building Harvard-style endowments, obtaining greater industry funding for research projects and consultancy assignments, increasing the intake of higher fee-paying foreign students, and hosting more campuses abroadxx. This advice is over 10 years old now. In the hindsight, one can say that IIMI has done reasonably well by having a healthy endowment in place (though relatively newer IIMs such as IIMI still need some time to have their alumni placed in sufficiently higher positions creating significant amount of wealth in order to donate some endowment), and is already running a campus abroad. It still needs to attract students from abroad in sufficient numbers: such students might be paying more fee than 10 a local student. But attracting student talent from abroad would involve so many things such as having a respectable position in annual rankings such as QS, FT etc., which, in turn, would depend on factors such as research output, interactions with students/teachers abroad etc. IIMI needs to have long term view, in tune with its vision, to climb up such recognized rankings. Socio-Cultural Factors India is country of contrasts. Even as the enrolment rates for the higher education remain low, there are different bases for further division in the society: gender, urban-rural, rich-poor, caste, ethnicity, region, language, and religion. Management education has not remained insulated from the societal realities and has not been available equally to different sections of the populationxxi. Management education in general and IIMs in particular have been grappling with another criticism-that they have become the preserve of engineering graduates, basically because of the way entrance exam is conducted. A Business Standard editorial remarks, “… most Indian businessmen who recruit MBAs from campuses feel that the IIMs produce self-centred careerists who don't have the innate humility to lead people by the power of persuasion and example. Thanks to CAT, the IIMs are actually pre-selecting students from a small group of high IQ individuals. Today's workplace, however, needs a diverse pool of managerial talent that is high not only on IQ, but also EQ (emotional quotient)”xxii. Though IIMs have certainly been trying to introduce more diversity on their campuses, e.g., by giving preferential treatment to female candidates during their admissions, the situation still remains grim. Initiative taken by IIMI by introducing five-year Integrated Program in Management (IPM), in which young minds, picked up a more tender age after completion of their plus two exams, are imparted management education along with subjects from humanities, may prove very promising and one of the differentiators for IIMI. It is yet to be seen that how IPM students, whose first batch are now in the first-year PGP, are viewed upon by the industry. But if proven successful, this model may address some issues: such as addressing the gender inequality at campus to some extent, and emphasizing on training its graduates in diverse areas. The recommendations by the NKC, however, are in contrast to the concept of a course like IPM. NKC advises two pronged approach for admission to the management institutes-first, to provide high weightage to work-experience so that people facing language barrier can also get 11 in, and second to make educational loans more broad-based so that poor and deserving students get equal opportunity for getting admission. As IIMs already place heavy emphasis on workexperience during their admission process, and as it is rather easy for a student admitted to one of the IIMs to get a student loan, it appears that the recommendations of NKC were superfluous in case of IIMs and the real concerns as presented above still remained to be addressed. All the IIMs including IIMI would do well India is one of the youngest countries in the world with median age of its population being less than 25 years at present. And even with low ‘gross enrolment rates’, India also has third largest number of enrolments to the higher education, only after China and the US. The number of students enrolled in the universities and colleges (formal system) has been reported to be 16 Million in academic year 2010-11xxiii. This means that the number of students seeking admission to management institutes imparting quality education such as IIMs may see a steady growth in the long run despite the number of such institutions going up significantly. One should, however, be mindful of cultural implications on education as well. Not very long back, every student wanted to either become a doctor or an engineer, but there are many avenues open for students now such as integrated law courses, journalism, hospitality management etc. IIMs need to be wary of demand shift, if any, in the student and parent community vis-à-vis management education, especially when it is still prohibitively costly for a middle-class family. There are some other issues such as voices of naysayers criticizing the very relevance of management education. Such people say that the correlation of an MBA degree and future career success remains a tenuous one at best and there is hardly any evidence that the management research is indeed helping the business practicesxxiv. There are other authorities like Henry Mintzberg, who also have criticized the management education as it is imparted today. IIMs should be wary of any changes that may take place due to such criticism of the management education in the current form. There is a remote possibility that such people or others inspired by their criticism may attempt to develop a new system of pedagogy, which proves to be more practical and effective. 12 Technological Factors Technological factors have a profound impact on the way education is imparted. Now we have smart lecture theatres with multi-media connectivity, and have libraries that can house hundreds of thousands of publications in soft copies. Technology presents opportunities as well as threats simultaneously. It enables institutions to reach the farthest corners of the country or globe, but at the same time this very fact that others may reach to the same set of people in a better way makes it a threat. One such initiative is courseraxxv, which claims to provide the world’s best courses, online, for free. It has 111 partners as of now: and the partners’ list includes names such as Stanford University, Yale University, and HEC Paris. Though it may not have made much of traction in the country as of now, but such kind technological leverages cannot be ignored. This form of education is free, ‘consumed’ by the recipient at his or her convenience, and doesn’t bother about the local rules and regulations. It is high time that IIMs including IIMI also think of exploiting the technology to further their reach without diluting their brand image. It is also true that the explosion in IT enabled tools and services have shrunk the lifecycles of many a products (electronic typewriters, pagers etc), its effect on education, if seen as a product, may not be that drastic. In fact, it opens newer opportunities to reach and enroll many deserving participants at low costs. Similarly, opportunities to train teachers, or conduct workshops online etc also arise, which must be exploited and hence the required infrastructure should be put in place. There may also be an opportunity to get its own faculty trained by the best institutions across the globe. Conclusion The macro-environmental analysis done for IIMI presents many opportunities and also poses several challenges. Analysis was done using the PEST framework, which provides a simple, yet powerful set-up to analyze the environmental forces, viz., political, economic, social, and technological in detail. PEST framework has been empirically proven to correlate positively 13 with overall performance, hence it is expected that IIMI would also benefit by exploiting the opportunities and minimizing the impact of threats mentioned in the analysis. A summary of PEST framework analysis has been presented as Annexure. i ii Annual Report 2012-13, IIM Indore, Page 4 James C Collins and Jerry I Porras, , Buildi g ou iii iv o pa s isio , HB‘ “epte e -October, page 73 th Hitt, Ireland, Hoskisson; Strategic Management, 9 edition; South-Western, (page 39) th Wheelen and Hunger, 2012, Strategic Management and Business Policy, 13 Edition, Pearson v Jonathan L. Calof Sheila Wright, (2008),"Competitive intelligence", European Journal of Marketing, Vol. 42 Iss 7/8 pp. 717 - 730 vi th Fred R David, 2011, Strategic Management-Concepts and Cases, 13 edition, Prentice Hall, page 61 vii Bayode O. Babatunde and Adebola O. Adebisi, , Strategic Environmental Scanning and Organization Performance in a Competitive Business Environment , Economic Insights – Trends and Challenges, Vol. LXIV No. 1/2012, pp 24-34 viii Aazir Hammad Mashhadi and Qazi Ijaz-Ur-‘eh a , , I pa t of E te al E i o e t o the Pe fo a e of the Fast Food I dust , I te atio al Jou al of Ma age e t, E o o i s a d “o ial “ ie es, , Vol. , pp. 19 –25 ix Peter Brews and Vevavrat Purohit, , “t ategi Pla i g i U e tai E i o e t , L‘P Lo g ‘a ge Planning), 40 (2007) 64-83 x Hari Pulakkat, Rica Bhattacharyya & Kala Vijayraghavan, ET Bureau Jun 19, 2014, Setting up IITs, IIMs in every state a tough proposition xi IIM Review Co ittee hai ed ‘ C Bha ga a, , Negotiati g the Big Leap, IIMs: F o G eat Tea hi g I stitutio s to Thought Leade ship Ce t es xii A it Gupta a d Ga esh N P a hu, , Go e a e of IIMs: A C iti ue of the Bha ga a Co ittee ‘epo t , Economic and Political Weekly, Vol XLVI No 17 xiii Bill No. 57 of 2010, The Foreign Educational Institutions (Regulation of Entry and Operations) Bill, 2010 xiv Twelfth Five Year Plan document, 2012-17, Social Sectors, Part-III, pp. 47 xv B itish Cou il, 4, U de sta di g India: The Future of Higher Education and Opportunities for International Coope atio xvi PTI, Feb 07, 2014, The Economic Times xvii Report of the Working group on Management Education, 2007, National Knowledge Commission, pp. 7 xviii http://www.aicte-india.org/downloads/Growth_Technical_Institutions_310514.pdf#toolbar=0, accessed on 14/09/2014 xix Natio al K o ledge Co issio , , ‘epo t to Natio , Chai ed “a Pit oda xx Busi ess “ta da d, Ju e , 4, Challe ges fa i g IIMs xxi Sanchita and M M Goel, , Challe ges a d Oppo tu ities i Ma age e t Edu atio i I dia , Vie poi t, Vol 3, No.1, January0June, 2012 xxii ibid xxiii Deloitte, , I dia Highe Edu atio “e to , Oppo tu ities Aple t , G o th U li ited! , page xxiv Jeffery Pfeffer and Christina T Fo g, , The e d of usi ess s hools? Less su ess tha eets the e e , Academy og Management Learning and Education, 2002, Vol 1, No. 1, 78-95 xxv https://www.coursera.org/, accessed on 14/09/2014 14 Annexure (O: Opportunities; T: Threats) Political Govt Aids-O,T More IIMs-T Bhargava Committee-O FEI (R&E) Bill-T Campus Abroad-O, T Economic Increase in Per-Capita Income-O Technological IT Explosion- O, T Coursera-T IIM, Indore Inc. in planned exp on edu-O Inc. in GER-O High Growth Rate-O Regional disparity-O Surfeit of MBA-T Social Gender Inequality-T Young population-O Shift in preference-T Alternate system-T 15