Module 2

Environmental Scanning and Industry Analysis

1
 Learning Objectives
 Recognize aspects of an organization’s environment
that can influence its long-term decisions
 Identify the aspects of an organization’s environment
that are most strategically important
 Conduct an industry analysis to understand the
competitive forces that influence the intensity of
rivalry within an industry
 Understand how industry maturity affects industry
competitive forces
 Categorize international industries based on their
pressures for coordination and local responsiveness
4-2
 Learning Objectives
 Construct strategic group maps to assess the
competitive positions of firms in an industry
 Identify key success factors and develop an
industry matrix
 Use publicly available information to conduct
competitive intelligence
 Know how to develop an industry scenario
 Be able to construct an EFAS Table that
summarizes external environmental factors
 Environmental Scanning

Environmental scanning
 the monitoring, evaluation, and dissemination of
information relevant to the organizational
development of strategy

4-4
 Identifying External
Environmental Variables
Natural environment
 includes physical resources, wildlife and climate
that are an inherent part of existence on Earth
 form an ecological system of interrelated life

4-5
 Identifying External
Environmental Variables
Societal environment
 mankind’s social system that includes general
forces that do not directly touch on the short-run
activities of the organization, but that can
influence its long-term decisions
 economic, technological, political-legal and
sociocultural

4-6
 Identifying External
Environmental Variables
Task environment
 those elements or groups that directly affect a
corporation and, in turn, are affected by it
 government, local communities, suppliers,
competitors, customers, creditors, unions, special
interest groups/trade associations

4-7
 Identifying External
Environmental Variables
Industry analysis
 an in-depth examination of key factors within a
corporation’s task environment

4-8
 Scanning the Societal Environment:
STEEP Analysis
STEEP Analysis
 monitoring trends in the societal and natural
environments
 sociocultural, technological, economic, ecological
and political-legal forces

4-9
Some Important Variables in the
Societal Environment

4-10
Current U.S. Generations

4-11
 Current Sociocultural Trends

Increasing environmental awareness

Growing health consciousness
Expanding seniors market
Impact of Millennials

4-12
 Current Sociocultural Trends

Declining mass market

Changing pace and location of life
Changing household composition
Increasing diversity of workforce and markets

4-13
Technological Breakthroughs

Portable information devices

Electronic networking

Alternative energy sources

Precision farming

Virtual personal assistants

Genetically altered organisms

Smart, mobile robots

4-14
 Categories of Risk

Product and
Regulatory Supply chain
technology
risk risk
risk

Reputational
Litigation risk Physical risk
risk

4-15
 Categories of Risk

Regulatory Risk
 is the risk that a change in regulations or
legislation will affect a security, company.
Corporations are allowed to enter into contracts,
sue and be sued, own assets, remit federal and
state taxes, and borrow money from financial
institutions., or industry.
 Categories of Risk

Supply Chain Risk

 caused by any interruptions to the flow of
product, whether raw material or parts, within
your supply chain. environmental risks — from
outside the supply chain; usually related to
economic, social, governmental, and climate
factors, including the threat of terrorism.
 Categories of Risk

Product and Technology Risk

 Obsolescence risk arises when a product or
process is at risk of becoming obsolete, usually
due to technological innovations. ... Technology-
based companies or companies that rely on
technological advantages are most vulnerable to
obsolescence risk.
 Categories of Risk

Litigation Risk
 is the possibility that legal action will be taken
because of an individual's or corporation's actions,
inaction, products, services, or other events.
 Categories of Risk

Reputation Risk
 can occur in the following ways: Directly, as the
result of the actions of the company itself.
Indirectly, due to the actions of an employee or
employees.
 Categories of Risk

Physical Risk
 include physical discomfort, pain, injury, illness or
disease brought about by the methods and
procedures of the research. A physical risk may
result from the involvement of physical stimuli
such as noise, electric shock, heat, cold, electric
magnetic or gravitational fields, etc.
 Some Important Variables in
International Societal Environments

4-22
Scanning External Environment

4-23
Forces Driving Industry Competition

4-24
 Threat of New Entrants

Threat of new entrants

 new entrants to an industry bring new capacity, a
desire to gain market share and substantial
resources
Entry barrier
 an obstruction that makes it difficult for a
company to enter an industry

4-25
 Barriers to Entry

Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages due to size
Government policies
4-26
 Barriers to Entry

Product Differentiation
 In economics and marketing, product
differentiation (or simply differentiation) is the
process of distinguishing a product or service
from others, to make it more attractive to a
particular target market. This involves
differentiating it from competitors' products as
well as a firm's own products.

4-27
 Barriers to Entry

Economies of Scale
 are cost advantages reaped by companies when
production becomes efficient. Companies can achieve
economies of scale by increasing production and
lowering costs. This happens because costs are spread
over a larger number of goods. Costs can be both fixed
and variable.

4-28
 Barriers to Entry

Capital Requirements
 are regulatory standards for banks that determine
how much liquid capital (easily sold assets) they must
keep on hand, concerning their overall holdings.
Switching Costs
 Switching costs are the costs that a consumer
incurs as a result of changing brands, suppliers, or
products. Although most prevalent switching
costs are monetary in nature, there are also
psychological, effort-based, and time-based
switching costs. 4-29
 Barriers to Entry

Cost disadvantage due to size

 when a company has advantages that cannot be
replicated by the competition, such as proprietary
technology. Government policy: controls the
government has placed on the market, such as
licensing requirements.

4-30
 Barriers to Entry

Government Policies
 Government policies contain the reasons things
are to be done in a certain way and why.
Government policy describes a course of action,
creating a starting point for change. They can
influence how much tax the community pays,
immigration status and laws, pensions, parking
fines, and even where you go to school.

4-31
 Rivalry among Existing Firms

In most industries, corporations are mutually

dependent.
A competitive move by one firm can be
expected to have a noticeable effect on its
competitors and thus may cause retaliation.

4-32
 Rivalry among Existing Firms
Rate of Product or
Number of
industry service
competitors
growth characteristics

Amount of Height of exit

Capacity
fixed costs barriers

Diversity of
rivals

4-33
 Rivalry among Existing Firms

 Number of competitors
 The larger the number of competitors, along with
the number of equivalent products and services
they offer, the lesser the power of a company. ...
Conversely, when competitive rivalry is low, a
company has greater power to charge higher
prices and set the terms of deals to achieve
higher sales and profits.

4-34
 Rivalry among Existing Firms

Rate of industry growth

 is that sector of an economy which experiences a

higher-than-average growth rate as compared to
other sectors. Growth industries are often new or
pioneer industries that did not exist in the past.

4-35
 Rivalry among Existing Firms

Product or service characteristics

 Intangibility: Services are intangible, that is, they
cannot be seen. ...
 Inseparability: Goods being physical entities are
separable from their production systems. ...
 Variability: ...
 Perishability:

4-36
 Rivalry among Existing Firms

 Amount of fixed costs

 Total fixed costs are the sum of all consistent,
non-variable expenses a company must pay. For
example, suppose a company leases office space
for ₱10,000 per month, rents machinery for
₱5,000 per month, and has a ₱1,000 monthly
utility bill. In this case, the company's total fixed
costs would be ₱16,000.

4-37
 Rivalry among Existing Firms

 Capacity

 Capacity for something is your ability to do it, or

the amount of it that you are able to do. ... The
capacity of something such as a factory, industry,
or region is the quantity of things that it can
produce or deliver with the equipment or
resources that are available.

4-38
 Rivalry among Existing Firms

Height of exit barriers

 Barriers to exit are obstacles or impediments that

prevent a company from exiting a market or
industry. Typical barriers to exit include highly
specialized assets, which may be difficult to sell or
relocate, and high exit costs, such as asset write-
offs and closure costs.

4-39
 Rivalry among Existing Firms

 Diversity of rivals

 If the industry is made of different types of

companies who differ in their origins and
strategies, then there may be diverse ways to do
business. These alternate methods may change
the nature of competition and the way of doing
business.

4-40
 Threat of Substitute
Products or Services
Substitute product
 a product that appears to be different but can
satisfy the same need as another product
 The identification of possible substitute products
means searching for products that can perform
the same function, even though they have a
different appearance.

4-41
 The Bargaining Power of Buyers

Bargaining power of buyers

 ability of buyers to force prices down, bargain for
higher quality and play competitors against each
other
 Large purchases, backward integration,
alternative suppliers, low cost to change
suppliers, product represents a high percentage
of buyer’s cost, buyer earns low profits, product is
unimportant to buyer

4-42
The Bargaining Power of Suppliers

Buyers affect an industry through their ability

to force down prices, bargain for higher
quality or more services and play competitors
against each other.

4-43
 The Bargaining Power of Suppliers

A buyer or a group of buyers is powerful if some

of the following factors hold true:
 Industry is dominated by a few companies
 Unique product or service
 Substitutes are not readily available
 Ability to forward integrate
 Unimportance of product or service to the
industry

4-44
 Relative Power of Other Stakeholders

Government
Local communities
Creditors
Trade associations
Special interest groups
Unions
Shareholders

4-45
 Industry Evolution

Fragmented industry
 no firm has a large market share and each firm
only serves a small piece of the total market in
competition with other firms
Consolidated industry
 domination by a few large firms, each struggles to
differentiate products from its competition

4-46
 Categorizing International Industries

Multi-domestic industries
 specific to each country or group of countries
Global industries
 operate worldwide with multinational companies
making only small adjustments for country-
specific circumstances
Regional industries
 multinational companies primarily coordinate
their activities within regions

4-47
 Continuum of
International Industries

4-48
 Strategic Groups

Strategic group
 a set of business units or firms that pursue similar
strategies with similar resources

4-49
Mapping Strategic Groups in the
U.S. Restaurant Chain Industry

4-50
 Strategic Types
 Defenders
 focus on improving efficiency
 Prospectors
 focus on product innovation and market
opportunities
 Analyzers
 focus on at least two different product market areas
 Reactors
 lack a consistent strategy-structure-culture
relationship
4-51
 Hypercompetition

Market stability is threatened by short

product life cycles, short product design
cycles, new technologies, frequent entry by
unexpected outsiders, repositioning by
incumbents and tactical redefinitions of
market boundaries as diverse industries
merge.

4-52
 Using Key Success Factors to Create
an Industry Matrix
Key success factors
 variables that can significantly affect the overall
competitive positions of companies within any
particular industry

4-53
 Industry Matrix

Industry matrix
 summarizes the key success factors within a
particular industry

4-54
 Competitive Intelligence
Competitive intelligence
 a formal program of gathering information on a
company’s competitors
 also called business intelligence
Sources of competitive intelligence:
 Information brokers
 Internet
 Industrial espionage
 Investigatory services
4-55
Useful Forecasting Techniques

Expert
Extrapolation Brainstorming
opinion

Delphi Statistical Prediction

technique modeling markets

Cross impact
analysis

4-56
Synthesis of External Factors—EFAS

4-57
Enjoy Learning

4-58
 End of the Module Activity

 Discuss the Environmental Scanning and Industry

Analysis of your assigned company.

4-59