ENVIRONMENTAL SCANNING

AND INDUSTRY ANALYSIS

 Environmental Scanning
 Is the monitoring, evaluating, and disseminating of
information from the external and internal
environment to key people within the corporation
 The corporation uses this tool to avoid strategic
surprise and to ensure its long term health
 There is a positive relationship between
environmental scanning and profits
 Environmental Uncertainty
 Degree of complexity
 Degree of change
 Environmental Uncertainty can
hamper the ability of managers to
develop long range plans (threat)
 Environmental uncertainty allows
creativity and innovation to shape
strategic decisions
 Identifying External
Environmental Variables
 The Societal Environment : includes general forces that do not
directly influence the short run activities of the organization,
but influence the long term decisions
 The task Environment : includes elements or groups that
directly affect the corporation and are affected by it (industry
analysis)
 Both the societal and task environments must be monitored
to detect the strategic factors that are likely to have a strong
impact on corporate success or failure
 Monitoring Societal Trends
 Economic forces : regulate the exchange of
materials, money, energy, and information
 Technological forces : generate problem solving
inventions
 Political-Legal forces : allocate power and provide
constraining and protecting laws and regulations
 Socio-cultural : regulate the values, mores, and
customs of society
 Some Important Variables in
the Societal Environment
(PEST analysis)
Economic Technological Political-Legal Sociocultural
GDP trends Total government Antitrust regulations Lifestyle changes
spending for R&D
Interest rates Environmental Career expectations
Total industry spending protection laws
Money supply Consumer activism
for R&D
Tax laws
Inflation rates Rate of family formation
Focus of technological
Special incentives
Unemployment levels efforts Growth rate of
Foreign trade population
Wage/price controls Patent protection
regulations
Age distribution of
Devaluation/revaluation New products
Attitudes toward foreign population
Energy availability and New developments in companies
Regional shifts in
cost technology transfer
Laws on hiring and population
from lab to
Disposable and promotion
marketplace Life expectancies
discretionary income
Stability of government
Productivity Birth rates
improvements through
automation
 Development Trends in
Technology
 Fuel Cells and alternative energy sources (wind,
geothermal, hydroelectric, solar energy sources)
 Portable information devices and electronic networking
 Precision farming, computerized management of
crops, reducing costs, increasing yields
 Genetically altered organisms in plants, animals and
people
 Smart, mobile robots
 Trends in Political Legal
Environments
 Democracy
 Free market economy
 Anti-trust laws
 Trends in Socio-Cultural
Environments (US as Example)
 Increasing environmental awareness (recycling, conservation)
 Growing health consciousness
 Growth of the senior market (woofies, well-off old folks)
 Decline of the mass market and importance of niche markets
 Changing pace and location of life : instant communication,
telecommuting in business
 Changing household composition (single person households)
 Increasing diversity of workforce and markets
 International Societal
Considerations
 Differences in societal environments strongly affect
the way in which a multinational corporation (MNC)
conducts its marketing, financial, manufacturing, and
other functional activities
 Before planning its strategy for a particular
international location, a company must scan the
particular country environments in question for
opportunities and threats, and compare these with its
own strengths and weaknesses
International Societal Environments
 Scanning the Task
Environment
 Analysis of the relevant elements of
the task environment
 Individual reports written by people in
various parts of the firm
 These reports are then summarized
and transmitted up to corporate
hierarchy for top management to use
in strategic decision making
 Scanning the External
Environment Analysis of Societal Environment
Economic, Sociocultural, Technological, Political-Legal Factors

Market
Analysis

Community Competitor
Analysis Analysis

Supplier
Analysis
Selection of
Interest Group Strategic Factors Governmental
Analysis Analysis
• Opportunities
• Threats
 Strategic Issues and
Strategic Factors
StrategicIssues
 Trends likely to affect future environment

StrategicFactors
 Those strategic issues with high
probability of occurrence and high
probable impact on corporation
 Issues Priority Matrix
 Identify a number of likely trends emerging
in the societal and task environments,
determining what the industry or the world
will look like in the near future
 Assess the probability of these trends
actually occurring from low to high
 Attempt to ascertain the likely impact
(from high to low) of each of these trends
on the corporation being examined
 Issues Priority Matrix
Probable Impact on Corporation

High Medium Low

High High Medium

High

Priority Priority Priority

Probability of Occurrence

Medium

High Medium Low

Priority Priority Priority

Source: Adapted from L. L.

Lederman, “Foresight Activities in
Medium Low Low
Low

the U.S.A.: Time for a

Priority Priority Priority Reassessment?” Long Range
Planning (June 1984), p. 46.
Copyright © 1984 by Pergamon
Press, Ltd. Reprinted with
permission.
 Corporation’s External
Strategic Factors
 Are those key environmental trends
that are judged to have both a
medium to high probability of
occurrence and a high probability of
impact on the corporation
 Those factors are categorized as
opportunities and threats and are
included in strategy formulation
 Industry Analysis
 An industry is a group of firms
producing a similar product or
service
 An examination of the important
stakeholders’ group in a particular
corporation’s task environment is a
part of industry analysis
 Porter’s approach to Industry
Analysis
 A corporation is most concerned with the intensity of
competition within its industry
 The level of this intensity is determined by basic
competitive forces
 In scanning its industry, the corporation must assess
the importance to its success of each of the six forces
 Forces Driving Industry
Competition Potential
Entrants

Threat
of New
Entrants

Relative
Power
of Unions,
Governments,
etc. Industry
Other Competitors Bargaining
Stakeholders Power
of Buyers
Buyers

Suppliers Rivalry Among

Bargaining Existing Firms
Power
of Suppliers

Threat of Source:  Adapted/reprinted with

Substitute permission of The Free Press, an
Products
or Services imprint of Simon & Schuster, from
Competitive Strategy: Techniques for
Analyzing Industries and Competitors
by Michael E. Porter. Copyright © 1980
Substitutes by The Free Press.
 Threat of New Entrants:
Some Barriers to Entry
 Economies of Scale
 Product Differentiation
 Capital Requirements
 Switching Costs
 Access to Distribution Channels
 Cost Disadvantages Independent of Size
 Government Policy
 Expected Retaliation
 Properties of Entry Barriers
 Entry barriers can and do change as the
conditions change
 Entry barriers can change for reasons
inside the firm : impact of the firm’s
strategic decisions
 Some firms may possess resources or skills
which allow them to overcome entry
barriers into an industry more cheaply than
most other firms
Rivalry Among Existing Firms

IntenseRivalryisRelatedTo:
 Number of Competitors: numerous or equally
balanced competitors
 Rate of Industry Growth: slow industry growth
 Product or Service Characteristics: Lack of
differentiation or switching costs
 Amount of Fixed Costs : high fixed or storage costs
 High fixed or storage costs
 Lack of differentiation or switching costs
 Capacity augmented in large increments (leading
to overcapacity and price cuttings)
 Diverse competitors
 High strategic stakes
 High exit barriers (specialized assets, fixed costs
of exit, strategic interrelationships, emotional
barriers, government and social restrictions)
 Shifting Rivalry
 The factors that determine the intensity of
competitive rivalry can and do change
 As an industry matures, its growth rate declines,
resulting in intensified rivalry, declining profits
 An acquisition can introduce a different personality
to an industry
 Focusing selling efforts on the fastest growing
segments can reduce the impact of industry rivalry
 Entry Barriers and Exit
Barriers
 When entry barriers are high and exit barriers are
low, entry will be deterred, and unsuccessful
competitors will leave the industry
 When both entry and exit barriers are high, profit
potential is high, but is usually accompanied by
more risks, and unsuccessful firms will fight to stay
 The worst case is when entry barriers are low and
exit barriers are high (overcapacity, poor
profitability)
 Pressure from Substitute
Products
 Substitutes limit the potential return of an industry
by placing a ceiling on the prices firms in the
industry can profitably charge
 Identifying substitute is searching for other products
that can perform the same function as the product
of the industry
 The impact of substitutes can be summarized as the
industry’s overall elasticity of demand
 Bargaining Power of Buyers
 Buyers compete by forcing down prices, bargaining
for higher quality or more services, and playing
competitors against each other
 A buyer’s group is powerful if:

1. It purchases large volumes relative to seller sales

2. The products it purchases from the industry

represent a significant fraction of the buyer’s cost
of purchase (shop for good price)
3. The products it purchases from the industry are
standard or undifferentiated
4. It faces few switching costs

5. It earns low profits (thus sensitive to costs)

6. Buyers pose a credible threat of backward integration

7. The industry’s product is unimportant to the quality of

the buyer’s products or services
8. The buyer has full information
 Bargaining Power of
Suppliers
 Suppliers can exert bargaining power over participants
in an industry by threatening to raise prices or reduce
the quality of purchased goods and services
 A supplier group is powerful if:
1. It is dominated by a few companies
2. It is not obliged to contend with other substitute
products for sale to the industry
3. The industry is not an important customer
4. The supplier’s product is an important input to the
buyer’s business
5. The supplier’s group products are
differentiated or it has built up
switching costs
6. The supplier group poses a credible
threat of forward integration
7. Labor must be considered as a
supplier that exerts great power in
many industries
 Government as a force in
industry competition
 Government role as supplier and buyer can
be influenced by political factors
 Government regulations can set limits on
the behavior of firms as suppliers or buyers
 Government can affect the position of an
industry with substitutes through
regulations, subsidies, or other means
 Government can affect rivalry among
competitors by influencing industry growth
 Industry Evolution
 Over time industries evolve through a series of stages from growth
through maturity to eventual decline
 The strength of each force of the six forces varies according to the
stage of industry evolution
 Fragmented industry : no firm has large market share and each firm
serves only a small piece of the total market in competition with
others
 Consolidated industry : dominated by a few large firms, each of
which struggle s to differentiate its products from the competition
 Categorizing International
Industries
 Multi-domestic industries are specific
to each country or group of countries
(retailing, insurance)
 Global industries : operate worldwide,
with MNCs making only small
adjustments for country specific
circumstances.
 Factors that determine whether an
industry is will be primarily multi-
domestic or primarily global:
1. Pressure for coordination within the
multinational corporation operating in
that industry
2. Pressure for local responsiveness on
the part of individual country markets
 Between these two extremes lie a
number of industries with varying
characteristics of both multi-
domestic and global industries
 The dynamic tension between those
2 factors is :
 THINK GLOBALLY, ACT LOCALLY
 Continuum of International
Industries
Multidomestic Global

Industry in which companies tailor Industry in which companies

their products to the specific manufacture and sell the same
needs of consumers in a products, with only minor
particular country. adjustments made for individual
countries around the world.
• Retailing
Automobiles
• Insurance
• Tires
• Banking
• Television sets
 International Risk
Assessment
 Some firms develop elaborate information networks
and computerized systems to evaluate and rank
investments risks
 Political System Stability Index
 Business Environment Risk Index
 Business International ‘s Country Assessment Service
 Regardless of the source of data, the firm must
develop its own method of assessing risk
 Strategic Groups
 Is a set of business units or firms that pursue similar
strategies with similar resources
 To understand the competitive environment in an
industry, firms can be categorized into a set of
strategic groups
 Strategic groups of an industry can be plotted on a
two dimensional graph (price, product line breadth,
quality, service, location)
Mapping Strategic Groups in the
U.S. Restaurant Chain Industry
High
Red Lobster
Olive Garden
ChiChi's

Perkins
International House
of Pancakes

Ponderosa
Price

Bonanza Shoney's
Denny's
Country Kitchen

Kentucky Fried Chicken

Pizza Hut
Long John Silver's

Arby's Wendy's
Domino's Dairy Queen
Hardee's Taco Bell
Burger King McDonald's

Low
Limited Menu Full Menu

Product-Line Breadth
 Strategic Types

 Defenders
 Prospectors
 Analyzers
 Reactors
 Strategic Types
 Defenders : companies with a limited product line that focus on
improving the efficiency of their existing operations
 Prospectors : companies with fairly broad product lines that focus on
product innovation and market opportunities
 Analyzers : corporations that operate at least in 2 different product-
market areas. Emphasis on efficiency in stable areas. Emphasis on
innovation in variable areas
 Reactors : corporations that lack a consistent strategy- structure-
culture relationship. Ineffective responses to environmental
pressures
 Hyper-competition
 In hyper-competition the frequency, boldness, and agressiveness
of dynamic movement by the players accelerates to create a
condition of constant disequilibrium and change
 Market stability is threatened by short product life cycles, short
product design cycles, new technologies, frequent entry by
unexpected outsiders, redefinition of market boundaries as diverse
industries merge
 Environments escalate towards higher levels of uncertainty,
dynamism, heterogeneity of the players and hostility
 Companies must be willing to
cannibalize their own products
(replacing popular products before
competitors do so) in order to sustain
their competitive advantage
 As a result, it is important to study
industry or competitive intelligence
 Using Key Success Factors to
Create an Industry Matrix
 KSFs are those variables that can affect
significantly the overall competitive positions of
all companies within any particular industry
 They vary from industry to industry and are
crucial to determine a company’s ability to
succeed within the industry
 Key success factors are different from strategic
factors : Key Success factors deal with an entire
industry. Strategic factor deal with a particular
company
Common Types of Key Success
Factors
 TECHNOLOGY RELATED KSFs
 Scientific research expertise
 technical capability to make
improvements in production processes
 Product innovation capability
 Expertise in a given technology
 Capability to use internet to disseminate
information, take orders, deliver products
or services
 MANUFACTURING RELATED KSFs:
 Low-cost production efficiency (achieve scale
economies, capture experience curve effects)
 Quality of manufacture (fewer defects, less need of
repairs)
 High utilization of fixed assets
 Low-cost plant locations
 Access to adequate supplies of skilled labor
 High labor productivity
 Low-cost product design and engineering
 Flexibility to manufacture a range of models and
sizes/take care of customer orders
 DISTRIBUTION RELATED KSFs :
 A strong network of wholesale
distributors
 Gaining ample space on retailers’
shelves
 Having company-owned retail outlets
 Low distribution costs
 Fast delivery
 MARKETING RELATED KSFS:
 Fast, accurate technical assistance
 Courteous customer service
 Accurate filling of buyers’ orders
 Breadth of product line and product selection
 Merchandising skills
 Attractive styling packaging
 Customers guarantees in mail order retailing new
products introduction
 Clever advertising
 SKILLS RELATED KSFs:
 Superior workforce talent
 Quality control know how
 Design expertise
 Expertise in a particular technology
 An ability to develop innovative products and
production improvements
 An ability to get newly conceived products past the
R&D phase and out into the market
 ORGANIZATIONAL CAPABILITY:
 Superior information systems
 Ability to respond quickly to changing market
conditions
 Superior ability to employ the internet
 More experience and managerial know how
 OTHER TYPES OF KSFs:
 Favorable reputation with buyers
 Overall low cost
 Pleasant , courteous employees
 Access to financial capital
 Patent protection
 Industry Matrix
Company A Company A Company B Company B
Strategic Factors Weight Rating Weighted Score Rating Weighted Score

1 2 3 4 5 6

Total 1.00

Source: T. L. Wheelen and J. D. Hunger, “Industry Matrix.” Copyright © 1997 by Wheelen and Hunger
Associates. Reprinted by permission.
  Gateway Apple Dell

CSF’s Wt Rating Wt’d Rating Wt’d Rating Wt’d

Scor Scor Scor
e e e

Market share 0.15 3 0.45 2 0.30 4 0.60

Inventory sys 0.08 2 0.16 2 0.16 4 0.32

Fin position 0.10 2 0.20 3 0.30 3 0.30

Prod. Quality 0.08 3 0.24 4 0.32 3 0.24

Cons. Loyalty 0.02 3 0.06 3 0.06 4 0.08

Sales Distr 0.10 3 0.30 2 0.20 3 0.30

Global Exp. 0.15 3 0.45 2 0.30 4 0.60

Org. Structure 0.05 3 0.15 3 0.15 3 0.15

  Gateway Apple Dell
CSF’s (cont’d) Wt Rating Wt’d Rating Wt’d Rating Wt’d
Scor Scor Scor
e e e

Prod. Capacity 0.04 3 0.12 3 0.12 3 0.12

E-commerce 0.10 3 0.30 3 0.30 3 0.30

Customer Serv 0.10 3 0.30 2 0.20 4 0.40

Price 0.02 4 0.08 1 0.02 3 0.06

competitive

Mgt. experience 0.01 2 0.02 4 0.04 2 0.02

               
Total 1.00   2.83   2.47   3.49
               
 Competitive Intelligence
 Is a formal program of gathering information on
a company’s competitors
 Most corporations rely on outside organizations
to provide them with environmental data.
 Information on market conditions, government
regulations, competitors and new products can
be bought from information brokers
 Industrial espionage is considered
illegal
 Unethical tactics; bribery,
wiretapping, computer break-ins
should never be used to get
information
 10 questions to monitor
competitors for strategic
planning
1. Why do your competitors exist? to make profits
or to support another unit?
2. Where do they add customer value? Higher
quality, lower price, credit terms, better service?
3. Which of your customers are the competition
most interested in? best customers or the ones
you don’t want?
4. What is their cost base and liquidity?
5. Are they less exposed with their suppliers than
your firm?
6. What do they intend to do in the future? Target your
market segments? Growing?
7. How will their activities affect your strategies? Should you
adjust your plans and operations?
8. How much better than your competitor do you need to be
in order to win customers?
9. Will new competitors appear over the next few years?

10.If you were a customer, would you choose your product

over those offered by your competitors?
 Forecasting
 Intuition and luck are needed to
predict trends in the future, These
trends are relying on assumptions
 Faulty assumptions are cause of
forecasting errors
 Many long-range plans are based on
projections of the current situation
 The Role of Forecasting

Present Forecasting Assumptions

Environmental for Strategic
Trends and Future Trends
Scanning Planning and
Fashions and Fashions
Decision Making
 Popular Forecasting
Techniques
 Extrapolation : extension of present trends into the future
 Brain storming
 Expert opinion : attempts to forecast likely developments
 Delphi techniques: different opinions are sent back to fine
tune until agreement is reached
 Statistical modeling : discover causal or explanatory factors
that link trends together
 Scenario writing: focused description of different likely
futures presented in a narrative fashion
 Industry Scenarios

1.Examine possible shifts in societal variable globally.

2.Identify uncertainties in each of the six forces of the task environment.
3.Make a range of plausible assumptions about future trends.
4.Combine assumptions into internally consistent scenarios.
5.Analyze the industry situation under each scenario.
6.Determine sources of competitive advantage under each scenario.
7.Predict competitors’ behavior under each scenario.
8.Select most likely scenario to use in strategy formulation.
 Synthesis of External
Factors
 Using EFAS to refine the analysis of
the societal and task environments
 External Factor Analysis
Summary (EFAS)
External Weighted
Strategic Factors Weight Rating Score Comments
1 2 3 4 5
Opportunities

Threats

Total Weighted Score 1.00

Notes: 1. List opportunities and threats (5–10 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not
Important) in Column 2 based on that factor’s probable impact on the company’s strategic position. The total weights must sum to
1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the company’s response to that factor. 4. Multiply
each factor’s weight times its rating to obtain each factor’s weighted score in Column 4. 5. Use Column 5 (comments) for rationale
used for each factor. 6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how
well the company is responding to the strategic factors in its external environment.
Source: T. L. Wheelen and J. D. Hunger, “External Strategic Factors Analysis Summary (EFAS).” Copyright © 1991 by Wheelen and
Hunger Associates. Reprinted by permission.
 EFE – Gateway Computers (2003)
Key External Factors Weight Rating Wtd
Score

Opportunities
1. Global PC market expected to grow 20% in 0.10 3 0.30
2004

2. Cost of PC component parts expected to 0.10 3 0.30

decrease 10% - 2004

3. Internet use growing rapidly 0.05 2 0.10

4. China entered WTO; lowered taxes for 0.10 1 0.10
importing PC’s

5. The average income for PC worker has 0.05 3 0.15

declined from $40K/yr to $30k/yr
 EFE – Gateway Computers (2003) (cont’d)

Key External Factors Weight Rating Wtd

Score

Opportunities (cont’d)
6. Modernization of business firms and 0.05 2 0.10
government agencies

7. U.S. (& world) economies recovering 0.05 3 0.15

8. 30% of Chinese population can afford a 0.05 1 0.05
PC; only 10% of homes have a PC

Threats 0.10 1 0.10

1. Intense rivalry in industry 0.10 1 0.05

 EFE – Gateway Computers (2003) (cont’d)

Key External Factors Weight Rating Wtd

Score

Threats (cont’d)
2. Severe price cutting in PC industry 0.10 2 0.20

3. Different countries have different reg’s and 0.05 1 0.05

infrastructure for PC’s

4. Palm & PDA becoming substitutes 0.05 3 0.15

5. Demand exceeds supply of experienced 0.05 4 0.20

PC workers

6. Birth rate in U.S. declining annually 0.05 3 0.15

 EFE – Gateway Computers (2003) (cont’d)

Key External Factors Weight Rating Wtd

Score

Threats (cont’d)
7. U.s. consumers and businesses delaying 0.05 2 0.10
purchase of PC’s

8. PC firms diversifying into consumer 0.05 3 0.15

electronics

Total 1.00 2.40

 External Factor Analysis Summary
(EFAS): Maytag as Example
External Weighted
Strategic Factors Weight Rating Score Comments
Opportunities 1 2 3 4 5
• Economic integration of .20 4 .80 Acquisition of
European Community Hoover
• Demographics favor quality .10 5 .50 Maytag quality
appliances
• Economic development of Asia .05 1 .05 Low Maytag presence
• Opening of Eastern Europe .05 2 .10 Will take time
• Trend to “Super Stores” .10 2 .20 Maytag weak in this
Threats channel

• Increasing government regulations .10 4 .40 Well positioned

• Strong U.S. competition .10 4 .40 Well positioned
• Whirlpool and Electrolux strong .15 3 .45 Hoover weak globally
globally
• New product advances .05 1 .05 Questionable
• Japanese appliance companies .10 2 .20 Only Asian presence is
Australia

Total Scores 1.00 3.15