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    Strategy

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    Martin Joseph orquin
    strat

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    © All Rights Reserved
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    es ENVIRONMENTAL SCANNING Learning Objectives: After you have studied this chapter, you should be able to: 1, enumerate and discuss the market structure; discuss the five forces model of Michael Porter; explain the five main P strategies; define and discuss competitive intelligence; and yen know the meaning of SWOT analysis. One of the best management models in environmental scanning is Michael Porter’s Five Forces Model Framework. It assumes that there are five forces which may affect a company’s competitive power and position in a particular environment. But before that, it is crucial to discuss the structure of the market. Environmental scanning is the process of conducting research through surveys, observation and other methods, and gathering and analyzing information for the organization. The external environment has two parts: task and social environment. The task environment consists of those aspects of the organization that affect the company itself. These factors are the stakeholders such as community, creditors, suppliers, cystomers, competitors, and other organizations. The social environment includes the political, legal, economic, sociocultural, and techno- logical aspects. The political environment consists of government rules and regulations which the organi- zations follow. These include taxes and licenses, policies on health and sanitation, registration, among others. When there are changes in government legislations, companies may be affect- ed either negatively or positively. There are of course legal requirements that the companies should follow. On the other hand, there are changes in the overall economy where the organization operates. There are price fluctuations that a company should monitor the prices of its raw materials and other costs related to the production of the product. An organization should be able also to monitor present monetary and fiscal policies, specifically interest rates or money market rates. Seer ee The present inflation rate is studied together with the demand shiftsin 800d5 and seryj Present economic trends related tothe behavior of primary products and fens ndserces, affect the company’s Product or service offerings shouldbe taken into considecnse eh Recently, there is a clamor also for protecting the environment ead the , ronment friendly goods and services. The combined economic and legel igre oan ie tion of goods and services provide constraints on the part of the company to prean rou: and environment-riendly goods and services, a a considerable price. Produce quality On the social side, consumer demographics are co, general population affect the demand for goods and ser there is a widening gap between the rich and the poor and services that companies should offer. nsidered. The characteristics of the vices. In the Philippines for example, rand this affects the kind of Products shampoos, facial cleansers, cooking oil, detergents, among others. Even toothpastes, deodor- ants, and baby powders are now Offered in sachets. In developed countries, seldom can one find products in sachets. They are packaged in big Contaiers, cartons or boxes. This buying Power is determined by their purchasing power, MARKET STRUCTURE The role of the market structure is that managers would be able to predict market out- comes through the extent of competition in the market. There are three important structural features of the market which should be considered by any organization. 1, Market Concentration. It is the degree by which a small number of companies dominate a particular market. It explains a number of companies which are competing in the ‘market. It then predicts for new entries on how to enter the market. In some instances, it also Provides decisions on what to expect and whether it is possible to enter the market at this time or in a particular period or season. 2. Entry Barriers. These refer to the difficulties and challenges by potential new entrants which are entering the ‘market. New companies should be ready to face the barriers that existing firms would pose in the chosen industry. Itis crucial to anticipate these challenges because existing players would not take it sitting down and make any moves to avoid any company that would rival and challenge their existence. 3. Product Differentiation. It refers to the degree by which a company is able to distinguish its product or service to other players in the market as valued by consumers. Itis the uniqueness of the features in a particular brand or service. It is the ability to innovate and develop a certain position, totally distinct from other brands. Generally, the more concentrated the number of players are, the higher the oe barriers. Since there are only few players in the market, they would not want a Bote new company to enter the market which may grab a significant market share. re the a i concentrated the market, the greater the product differentiation because each ares ee out of its way to maintain the market share and make its product or service offerings unique and different. . aoe The market for oil was highly concentrated decades ago. The big ses ate per Chevron, and Shell. These competitors tend to be interdependent. It took quite before new entrants such as Unioil Ee , Total, Flying V, among others were able to enter the Ina concentrated market, the strategies of one player can have a tremendous impact on oth i the ou er players. Thus, the tendency is to engage in countermaneuvers or counteroffensive With the market structure characterizing the market, Bain and Qualls (1976 cited in Mas- son and Qualls, 2008) developed another m: i ivi . a arket structure which subdi is- tics into subcategories. vided the characters Based on market concentration, Bain and Qualls categorized the following market struc- ture based on the number of sellers in the market. Atomistic. There are many small sellers with a low level of interaction to one another. There is an absence of economies of scale because firms are so numerous and they cannot set their own prices. Atomistic competition is tantamount to perfect competition. In this kind of setup, usually there are low profits for the suppliers and low prices for consumers. Oligopolistic. Few large sellers have a high level of interaction with one another. Usually players in the oligopolistic competition can set their own prices, and competition is somewhat fierce. Most of the industries in the Philippines aside from the oil industry are under oligopo- listic competition. Competition is so high that a new player will have a hard time entering a chosen industry. There are product offerings that are semi-standardized with differentiation. Monopoly. There is one seller who dominates the market. The company can dictate its own price. Whereas in monopolistic competition, companies sell products that are differenti- ated from one another. No one producer has the monopoly over the price. On the other hand, the characteristics of product differentiation are divided into two categories. Homogeneous Products. There are products that are highly identical. The characteristics of the product are not differentiated from one supplier to another. The wet market is usually the popular place for many homogeneous products like salt, fish, vegetables, fruits, meat, poultry, among others. Differentiated Products. There are products differentiated by design, quality, branding, among others. They have certain features which differentiate them from one another. These are branded products with distinctions on features, design, and quality. Their unique charac teristics connote a certain price. On the third dimension, ease of market entry, There are no difficulties in entering the market. New entrants will not have There are minimal barriers to entry and if there are, they are there are three subtypes. Ease of Entry. difficulty in entering the market. manageable. Moderately Difficult Entry. There are barriers but not too difficult for sellers to oe lize the market. However, it may be difficult to enter the market. Sellers may monopoliz market. . Blockaded Entry. There are barriers that are too high which potential players cannot enter. The present companies monopolize the prices. It is very difficult to enter the market More often than not, existing companies would make it difficult for new players to enter the market. THE FIVE FORCES MODEL POTENTIAL ENTRANTS | Threat of New Entrants INDUSTRY COMPETITORS, Bargaining Power Bargaining Power of Suppliers of Buyers SUPPLIERS |} > _————__ surers RIVALRY AMONG EXISTING FIRMS Threats of Substitute Products or Services sussTITUTES Figure 2.1. Porter's Five Forces Model 1. Power of Buyers. An organization should not underestimate the power of buyers to drive pric- POWER OF BUYERS es down. How important each individual buyer is to = Number of customers ~ Size of each order ~ Differences between competitors the company is something to reckon with. If buyers feel that it will take a high price on the part of the organization if it loses one major buyer, they can put the organization in a very alarming position and feel that they can dictate their own terms or negotiate for lower prices, putting the pressure and sometimes making deals with threats of switching to another — Price sensitivity ~ Ability to substitute ~ Cost of changing, etc. company. 2. Rivalry of Competitors. It is very important RIVALRY OF COMPETITORS | to understand the strengths of the competitors. It is Number of competitors good to know how capable they are, how many they diferences are, and how attractive their products or services are. ~ Quality From there, a company can also determine its own Other differences strengths. If a company realizes that it has something — Switching costs more to offer than other companies, then this particular — Customer loyalty company has the potential to make it. ~ Costs of leaving market, etc. 3. Power of Suppliers. A company should realize that POWER OF SUPPLIERS | suppliers can easily drive up their prices. They can easily put ~ Number of suppliers control in a particular organization depending on how impor ~ Size of suppliers tant or crucial the materials are to the company, Suppliers can - Uniqueness of service | Si2@ up an organization and put some pressure on it driven by ~ Ability to substitute the number of suppliers in each key input and the uniqueness = Cost of changing, et. Of the product or service. If a company has few suppliers and when they feel that the company needs them, more powe gained by suppliers. 4, — Threat of Substitutes. If a company is not greatly af- THREAT OF fected by its rival competitors, a company’s strength may still SUBSTITUTES be affected when customers find something different from another product or service which can substitute the compa- ny’s product or service offerings. One of the threats right now Cost of change, etc. is the power of outsourcing. This is a cheaper substitute to an actual process, a high-priced software or employment of high caliber personnel. Outsourcing a process to a third party becomes a threat for a company which offers for example manpower, software or technology. Substitute performance 5. _ Threat of New Entrants. fit is easy for a new company to enter the industry where the company is in, then the latter’s power can be affected. In addition, if a new player is equally competitive and there are no durable barriers to enter in the market, then a company can weaken its position in the market. There are industries where forces are really intense. These industries are airlines, hotelsandthe lke. Acompany | 7REAT OF NEW ENTRANTS in the industry does not really earn a very attractive return | ~ Time and cost of entry on investment. = Specialist knowledge However, ifthe forces are notas intense, for example, | ~ Economies of scale in soft drinks or toiletries and the like, companies earn | ~ Cost advantages quite well. ~ Technology protection Competitive forces differ considerably among indus- | ~ Barriers to entry, etc., tries. For example, in the movie industry, there are new substitute forms of entertainment that have shortened the lines of moviegoers in theaters. Despite the huge, high-tech sound and gigantic screen, more and more people are inclined to watch their favorite stars on television. The rise of cable TV plus the power of movie producers and distributors to supply movies in a cheaper form is crucial. There is also the proliferation of piracy which is rampant in this side of the world. In the streets of Quiapo, a movie buff can buy 3 DVDs without the hard jacket for a mea- sly P50.00. Three DVDs with the hard jacket cost P'100.00. An original DVD costs from P250.00 to P450.00. The strongest competitive force, which is, in this case, the threat of substitute can deter- “ mine the profitability of an industry. Another classic example is the low returns in the photographic film industry. Kodak and Fuji, the world’s leading producers of photographic film were adamant with the arrival of digital photography. it was a hard lesson learned when people switched to a superior product: digital photography. In the local furniture industry, the bargaining power of buyers comes in the form of con- sumers who buy furniture on a staggered basis. Usually, consumers buy furniture on the basis of budget availability. They do not buy every year or every so often. They can choose not to buy for a long period of time until the present one perhaps deteriorates or no longer usable. COMPETITIVE INTELLIGENCE Managers and top executives make strategic deci- | Competitive Intelligence is sions for an organization. They need information about | ™more concerned with doing products, customers and competitors, and any aspect in | the right thing, than doing the the environment which may be crucial in making their} ting right. decisions and planning their strategies. Competitive intelligence is the act of gathering, analyzing, and distributing vast informa- tion, coined as intelligence about anything that would help competing in the market. One of the benefits of competitive intelligence is that it identifies the company’s possible risks before the company makes an important decision, On the other hand, opportunities are identified for the company to better manage its resources and make necessary allotments and Priorities for possible new product or service offerings. Itis more than the financial reports, market statistics, and data available from libraries and other institutions. It is the perspective in the situations and events to gain competitive advantage. It is about the knowledge of what the competitors will do before they actually do it. Major Areas. Competitive intelligence works on the performance of the following areas: assessment of strategies, perception of competitor strategies, effectiveness of current opera- tions, capabilities of competitors, and long-term market prospects. In short, there is a great deal of work to be able to practice competitive intelli- gence. The assessment of current opera- Tactical Intelligence is a small-scale tions while looking at long-term market intelligence and operational in the short run.) prospects makes it important for a com- pany to have some knowledge about how competitors behave in the marketplace. Strategic Intelligence is understanding the competitors’ future prospects and goals. Counter Intelligence is knowing how to defend company secrets. These areas operate in three approaches: strategic, tactical, and counter intelligences. Strategic Intelligence is being able to understand the competitors’ future prospects and goals. This also includes the competitors’ major customers and suppliers. Tactical Intelligence is a small-scale intelligence and operational in the short run. This includes the competitors’ terms of sale, pricing policies, and plans. Information gathered is usually used by middle-level managers. Counter Intelligence is knowing how to defend company secrets. Competitors are equally interested in the company’s secrets. Therefore, it has to ensure that company secrets are not divulged in the wrong places. The company should not underestimate revelations of employees who are fired. PEEP EOIN co nate

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