LECTURE NOTES

Chapter 5 – Environmental Analysis and Strategic Uncertainty

Content of Chapter 5

1. Under technological trends there is a distinction between transformational, substantial, and

incremental innovations. This is more thorough in the “creating new business” in Chapter 12. Such
new technologies have the potential to create new markets. Of note is the study showing that such
an innovation does not necessarily kill the growth of the existing products (witness razors, for
example).

2. Among the consumer trends is the green movement. An issue is why there is much attempt to
become more green? Another is how to get credit for it?

3. Understanding economics is important because strategies during and before a recession require
adjustments, but reducing budgets during a recession is too simplistic a policy.

4. One output of an external analysis in general and environmental analysis in particular is points of
uncertainly. Two ways of handling that uncertainty are proposed. One, an impact analysis is based
upon evaluating each uncertainty in terms of immediacy and impact. The second is scenario
analysis.

Technological Types

Ask for examples of incremental, substantial and transformational innovations. It will become
clear that it is not so easy to categorize at the margin. Was Bayer 81 a subtanital or transformation
innovation? A transformational innovation should change what customers are buying and change the
assets and competencies that are needed to succeed. Cirque du Soleil is an example. Too many think
that all R&D and innovation is the same. It is healthy to show that it is complex.

A fascinating study, reported on page 81, shows that apparently “obsolete technologies” can
have a lot of growth—examples were steam locomotives, fountain pens, and safety razors. When
examples of transformational innovations get placed on the table, ask what will happen to the old
technology. Will it die? How long will it take? A prediction that the “checkless” society was around the
corner was made in an HBR article in the 1960s. Around 50 years later, we are still writing checks, and
in fact the “checkless” technology is only now even getting traction.

The Green Movement

The Wal-Mart turns green insert is on page 86. Should any company become environmentally
sensitive? What would the motivation be? Milton Friedman famously argued that the business of
business is to be profitable and the business of government is to address society’s issues. To bring it
home, ask whether Exxon should invest in money-losing efforts to build solar power. Or should the
government make it profitable by subsidizing it as Spain does? Should your neighborhood ice cream
store use containers that customers dislike because they are environmentally better? This chapter

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suggests three motivations: First, there is practical value in organic foods, and insulation and energy
conserving appliances. Second, there is a need to address global warming and everyone needs to chip
in. Third, goodwill and customer relationships could be improved. Customers like to do business with
firms they respect.

Another issue is how to get credit for what you do. 61% of Americans can’t even name one
“green” firm. So how do you get traction? Branding products (Prius) or programs (GE’s ecomagination)
or repositioning the corporate brand (BP’s Beyond Petroleum) are possibilities.

Handling Uncertainty using Impact Analysis or Scenario Analysis

Ask to identify points of uncertainty for an industry such the grocery business and a chain such
a Safeway. For each, evaluate them as to their immediacy and impact. For those high on both
dimensions, create a plan going forward for gaining information and reducing uncertainty.

For one in that category create two or three scenarios. For each scenario, describe it in as
much detail as possible and create the optimal strategy choice.

FOR DISCUSSION:

1. What did the fax machine replace, if anything? What will replace (or has replaced) the fax
machine? When will the fax machine disappear?

The fax machine replaced snail mail, priority mail and in some cases UPS. The fax is being
replaced by email and the Internet. The fax machine will be replaced when a faster, cheaper,
and safer method to transmit documents in developed. The Internet is almost there. Also, there
are some laggard adopters of fax machines who may never switch to email or the Internet
because they may be afraid of the Internet or not own a computer.
The fax machine is still a useful tool for transmitting hard copy or hand written documents that
are not in electronic format and if the customer does not own a scanner.

2. Develop a scenario based on the proposition that hybrid cars will continue to improve and take
15 percent of the automotive market in a few years. Analyze it from the point of view of an
energy company like Shell, or a car company like Mercedes.

From the point of view of Shell, if 15% of the automobile market is going to be hybrid cars, Shell
will need to discover IF and HOW they can be a player in that market. Will re-charging stations
need to be developed? Can they be profitable? Can they use existing stations that only need to
be modified or will a whole new crop of “service” stations need to be developed? Are service
stations currently too far apart to service the target market and will more stations need to be
built? The dimensions to be considered are: R&D, feasibility, profitability, competitive intensity,
and opportunities for alliances. Also to be considered will be the affect on the existing oil
business and the impact that it will have on their business overall and more specifically on R&D,
drilling operations, marketing, processing, etc.

From the view point of Mercedes, they need to decide how much to invest in this direction. A
consideration will be the impact on its diesel business.

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3. Consider mobile computing using smart phones. Will this change the use of desktop
computers? Laptop computers? How? Will it change the type of computers made?

For some the applications for mobile computing will just add to the time spent with a computer
and for others it will replace time at desktop and laptop computers? How would you estimate
the extent to which either will happen? It will undoubtedly be application specific. And the
estimation is made harder because some applications have not be invented yet.

4. Pick a company or brand/business on which to focus. What are the major trends that come out
of an environmental analysis? What are the major areas of uncertainty? How would a major
company in the industry handle those best?

Selecting the automotive industry, some areas of uncertainty are governmental regulations, fuel
costs and availability, and the risk of currency exchange rates.

5. Focusing on the airline industry, develop a list of strategic uncertainties and possible strategic
actions.

Some strategic uncertainties may include: if the price of gasoline goes up significantly or
significantly down what will the impact be on the demand for air travel? Or will terrorism or the
availability of air traffic control or gasoline make air travel rationed? What then?
Will some alternative replace airline travel as we know it today (teleconferencing, telesales
meetings, etc.)?
If some unexpected tragic event should happen to dissuade customers from choosing air travel
as a means of transportation, what will replace it?

6. Address the questions in the Wal-Mart insert.

See the discussion above.

7. Consider Cisco “telepresence” in videoconferencing which upgrades the quality of the

experience. Will it change the incidence of usage? What is driving usage (or lack of usage) of
videoconferencing?

This is a good context to try out many of the concepts in the chapter. What are the driving
forces? The quality of the technology? The availability of airline service (a terrorist event could
change the acceptance of travel quickly)? The acceptance of videoconferencing (why has it
been slow—is it because of the quality of the technology)? The ability to market the new
technology?

8. Visible criticism has been leveled at the bottled water industry including the claim that their
product is not better than tap water in many locals (some brands are even said to have an
unpleasant aftertaste). And that the plastic bottles are carbon costly to make and are not
biodegradable. What programs would you consider to combat these arguments if you were
Pepsi the maker of Dasani?

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 A recycling program could address the second. And a program of water recovery might also
serve to present Pepsi in a better light. The first involves substance and it might be helpful to
show the value of the bottled water. It might also be good to move from water to water with
additives.

Some Additional Quotes

“A decision is the action an executive must take when he has information so incomplete that the answer
does not suggest itself.”
- Admiral Arthur W. Radford

“Its easy to make decision when there are no bad options.”

- Robert Half

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