TOPIC 4

EXTERNAL ENVIRONMENTAL SCANNING

 4.1 Definition of Environmental Scanning

• Environmental scanning
• the monitoring, evaluation, and dissemination of information
relevant to the organizational development of strategy
• Environmental scanning involves surveillance of a firm’s external
environment.
• Predicts environmental changes to come
• Detects changes already under way
• Allows firm to be proactive
 4.2 Environmental Scanning Process

• The purpose of the scan is the identification of opportunities and threats

affecting the business for making strategic business decisions. 
• As a part of the environmental scanning process, the organization collects
information regarding its environment and analyses it to forecast the impact of
changes in the environment.
 4.3 External Environmental Variables

1. Natural environment
• includes physical resources, wildlife, and climate that are an
inherent part of existence on Earth
• form an ecological system of interrelated life
2. Societal environment
• humankind’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
• factors: economic, technological, political-legal, sociocultural
3. 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,
employees/labor unions, special-interest groups, and trade associations
4. Industry analysis
• an in-depth examination of key factors within a corporation’s task
environment
• Economic Forces
• Global and Technological Forces
• Global forces - Falling barriers to international trade have enabled:
• domestic markets enter to foreign markets.
• foreign enterprises to enter the domestic markets.
• Technological forces - Technological change can:
• make products obsolete.
• create a host of new product possibilities.
• impact the height of the barrier to entry and reshape industry structure.
• Demographic, social, and political Forces
• Demographic forces - Outcomes of changes in the characteristics of a
population.
• Social forces - Way in which changing social morals and values affect
an industry.
• Political and legal forces - Outcomes of changes in laws and
regulations.
4.4 External Strategic Factors
• Industry - Group of companies offering products or services that are
close substitutes for each other.
• Products or service satisfy the same basic customer needs.
• Rival - A company’s closest competitor.
• External analysis identifies the company’s industry.
 4.5 Porter’s Approach in Industry Analysis

• Competitive pressures:
• Bargaining power of buyers
• Power of complement providers /
substitute products of firms in
other industries
• Bargaining power of suppliers
• Risk of entry
• Rivalry among established firms in
industry
1. Risk of entry
• 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
• Some of the possible barriers to entry are:
I. Product differentiation
II. Capital requirements
III. Switching costs
IV. Access to distribution channels
V. Cost disadvantages independent of size
VI. Government policies
2. The Bargaining Power of Buyers
• Buyers have bargaining power.
• Buyers can force down prices, bargain for higher quality or more
services, or play competitors against each other.

• Buyer groups are powerful.

• Purchasing standard products are in large volumes.
• Profits are low & switching costs are few.
• Backward integration is possible.
• Buyer’s product quality is not affected by industry product.
3. The Bargaining Power of Suppliers
• Suppliers can exert bargaining power by threatening to raise prices or
reduce the quality of purchased goods and services.

• Supplier groups are powerful.

• Only a few firms dominate the industry.
• There is no competition from substitute products.
• Suppliers sell to several industries.
• Buyer quality is affected by industry product.
• Products are differentiated & have switching costs.
• Forward integration is possible.
4. The Threat of Substitute Products & Services
• Substitute products & services limit the potential returns of an
industry.
• Substitutes come from another industry.
• Substitutes can perform the same function as the industry’s offerings.
• Substitutes place a ceiling on prices that firms in an industry can
profitably charge.
• The more attractive the price/performance ratio, the more the
substitute erodes industry profits.
5. The Intensity of Rivalry among Competitors in an Industry
• Rivalry tactics include price competition, advertising battles, new
product introductions, increased customer service or warranties.
• Interacting factors lead to intense rivalry.
• Numerous or equally balanced competitors
• Slow industry growth
• High fixed or shortage costs
• Lack of differentiation or switching costs
• Capacity augmented in large increments
• High exit barriers
 4.6 Information Gathering Activities about Competitors

• Strategic Group Mapping

• It is a useful technique for graphically displaying different market or competitive
positions that rival firms occupy in the industry.
• A Strategic Group
• It is a cluster of industry rivals that have similar competitive approaches and market
positions.
• Strategic groups can be analytical tools.
i. Helps identify barriers to mobility that protect a group from attacks by other groups
ii. Helps identify groups whose competitive position may be marginal or tenuous
iii. Helps chart the future direction of firms’ strategies
iv. Helps to think through the implications of each industry trend for the strategic
group as a whole
• Strategic Groups Within Industries
• Companies in an industry differ in the way they strategically position
products in the market.
• Product positioning is determined by the:
• distribution channels and market segments served.
• product quality.
• technological leadership.
• customer service.
• pricing and advertising policy.
• promotions offered.
 Implications of Strategic Groups

• Since all companies in a strategic group

pursue a similar strategy:
• customers view them as direct
substitutes for each other.
• immediate threat to a company are rivals
within its own strategic group.
• Different strategic groups have different
relationships to each of the competitive
forces
Constructing a Strategic Group Map
1. Identify the competitive characteristics of strategic approaches used
in the industry.
• Typical variables: the price/quality range, geographic coverage,
degree of vertical integration, product-line breadth, distribution
channels, and degree of service offered.
2. Plot firms on a two-variable map based upon their strategic
approaches.
3. Assign firms occupying the same map location to a common strategic
group.
3. Draw circles around each strategic group proportional to the size of
the group’s share of total industry sales revenues.
The World Automobile Industry: Strategic Groups
 4.7 Opportunities and Threats
• Opportunities and threats are external—things that are going on outside your company,
in the larger market.
• You can take advantage of opportunities and protect against threats, but you can’t
change them.
• Examples:
1. The appearance of new or stronger competitors
2. The emergence of unique technologies
3. Shifts in the size or demographic composition of your market area
4. Changes in the economy that affect customer buying habits
5. Changes in customer preferences that affect buying habits
6. Changes that alter the way customers access your business
7. Changes in politics, policies, and regulations