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
GDP trends Interest rates Money supply Inflation rates Unemployment levels Wage/price controls Devaluation/revaluation Energy availability and cost Disposable and discretionary income

Technological
Total government spending for R&D Total industry spending for R&D Focus of technological efforts Patent protection New products New developments in technology transfer from lab to marketplace Productivity improvements through automation

Political-Legal
Antitrust regulations Environmental protection laws Tax laws Special incentives Foreign trade regulations Attitudes toward foreign companies Laws on hiring and promotion Stability of government

Sociocultural
Lifestyle changes Career expectations Consumer activism Rate of family formation Growth rate of population Age distribution of population Regional shifts in population Life expectancies Birth rates

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 Analysis Competitor Analysis Supplier Analysis Interest Group Analysis Selection of Strategic Factors • Opportunities • Threats Governmental Analysis

Strategic Issues and Strategic Factors
S te icIs u s tra g s e

Trends likely to affect future environment

S te icF c rs tra g a to

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

Probability of Occurrence

Medium

High

High Priority

High Priority

Medium Priority

High Priority

Medium Priority

Low Priority

Low

Medium Priority

Low Priority

Low Priority

Source: Adapted from L. L. Lederman, “Foresight Activities in the U.S.A.: Time for a 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.

Other Stakeholders

Industry Competitors

Bargaining Power of Buyers Buyers

Suppliers Bargaining Power of Suppliers

Rivalry Among Existing Firms

Threat of Substitute Products or Services

Substitutes

Source:  Adapted/reprinted with permission of The Free Press, an imprint of Simon & Schuster, from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980 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
In n eR a isR la dT : te s iv lry e te o

 

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)

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
3.

Bargaining Power of Suppliers

 1. 2.

3. 4.

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: It is dominated by a few companies It is not obliged to contend with other substitute products for sale to the industry The industry is not an important customer The supplier’s product is an important input to the buyer’s business

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
5.

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 multidomestic 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 multidomestic and global industries The dynamic tension between those 2 factors is : THINK GLOBALLY, ACT LOCALLY

Continuum of International Industries
Mltid ms u o e tic G bl lo a

Industry in which companies tailor their products to the specific needs of consumers in a particular country. • Retailing • Insurance • Banking

Industry in which companies manufacture and sell the same products, with only minor adjustments made for individual countries around the world. Automobiles • Tires • 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

Price

Ponderosa 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 productmarket areas. Emphasis on efficiency in stable areas. Emphasis on innovation in variable areas Reactors : corporations that lack a consistent strategy- structureculture 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
Strategic Factors 1 Weight 2 Company A Rating 3 Company A Weighted Score 4 Company B Rating 5 Company B Weighted Score 6

Total

1.00

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

  CSF’s Wt

Gateway Rating

Apple

Dell Wt’d Scor e

Wt’d Rating Scor e

Wt’d Rating Scor e

Market share Inventory sys Fin position Prod. Quality Cons. Loyalty Sales Distr Global Exp. Org. Structure

0.15 0.08 0.10 0.08 0.02 0.10 0.15 0.05

3 2 2 3 3 3 3 3

0.45 0.16 0.20 0.24 0.06 0.30 0.45 0.15

2 2 3 4 3 2 2 3

0.30 0.16 0.30 0.32 0.06 0.20 0.30 0.15

4 4 3 3 4 3 4 3

0.60 0.32 0.30 0.24 0.08 0.30 0.60 0.15

  CSF’s (cont’d) Wt

Gateway Rating

Apple

Dell Wt’d Scor e

Wt’d Rating Scor e

Wt’d Rating Scor e

Prod. Capacity E-commerce Customer Serv Price competitive

0.04 0.10 0.10 0.02

3 3 3 4

0.12 0.30 0.30 0.08

3 3 2 1

0.12 0.30 0.20 0.02

3 3 4 3

0.12 0.30 0.40 0.06

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. 2.

3.

4. 5.

Why do your competitors exist? to make profits or to support another unit? Where do they add customer value? Higher quality, lower price, credit terms, better service? Which of your customers are the competition most interested in? best customers or the ones you don’t want? What is their cost base and liquidity? Are they less exposed with their suppliers than your firm?

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?
6.

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

Environmental Scanning

Present Trends and Fashions

Forecasting Future Trends and Fashions

Assumptions for Strategic Planning and 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 Strategic Factors Opportunities 1 Weight 2 Rating 3 Weighted Score 4 Comments 5

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 2004 2. Cost of PC component parts expected to decrease 10% - 2004 3. Internet use growing rapidly 4. China entered WTO; lowered taxes for importing PC’s 5. The average income for PC worker has declined from $40K/yr to $30k/yr 0.10 0.10 0.05 0.10 0.05 3 3 2 1 3 0.30 0.30 0.10 0.10 0.15

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

Key External Factors

Weight

Rating

Wtd Score

Opportunities (cont’d)
6. Modernization of business firms and government agencies 7. U.S. (& world) economies recovering 8. 30% of Chinese population can afford a PC; only 10% of homes have a PC 0.05 0.05 0.05 0.10 0.10 2 3 1 1 1 0.10 0.15 0.05 0.10 0.05

Threats
1. Intense rivalry in industry

EFE – Gateway Computers (2003) (cont’d) Key External Factors
Weight Rating Wtd Score

Threats (cont’d)
2. Severe price cutting in PC industry 3. Different countries have different reg’s and infrastructure for PC’s 4. Palm & PDA becoming substitutes 5. Demand exceeds supply of experienced PC workers 6. Birth rate in U.S. declining annually 0.10 0.05 2 1 0.20 0.05

0.05 0.05

3 4

0.15 0.20

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 purchase of PC’s 8. PC firms diversifying into consumer electronics 0.05 2 0.10

0.05

3

0.15

Total

1.00

2.40

External Factor Analysis Summary (EFAS): Maytag as Example
External Strategic Factors Opportunities
• Economic integration of European Community • Demographics favor quality appliances • Economic development of Asia • Opening of Eastern Europe • Trend to “Super Stores”

Weight 1
.20 .10 .05 .05 .10 .10 .10 .15 .05 .10

Rating 2
4 5 1 2 2 4 4 3 1 2

Weighted Score 3
.80 .50 .05 .10 .20 .40 .40 .45 .05 .20

Comments 4
Acquisition of Hoover Maytag quality Low Maytag presence Will take time Maytag weak in this channel Well positioned Well positioned Hoover weak globally Questionable Only Asian presence is Australia

5

Threats • Increasing government regulations
• Strong U.S. competition • Whirlpool and Electrolux strong globally • New product advances • Japanese appliance companies

Total Scores

1.00

3.15

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