Business Environment

(4)
Environmental Scanning
&
Industry Analysis
(External Environment)
Khalid Azzouz. 1
Environmental Scanning

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 Step 2: Doing an external analysis
 The environmental scanning of
specific and general environments
• Focuses on identifying
opportunities and threats

Environmental Scanning and Industry Analysis

 Environmental Scanning

Environmental scanning
Before an organization can begin strategy formulation (Planning), it
must scan the external environment to identify possible opportunities
and threats
and its internal environment for strengths & weaknesses.

Environmental scanning is the monitoring, evaluating &

disseminating of information from the external & internal
environments to key people within the corporation.
A corporation uses this tool to avoid any contingencies and to
ensure its long-term health.

Disseminate = ‫ي نشر‬ 4-4

 Components of the
External Environment

Natural Environment (Ecology)

Societal Environment (Man-made environment)

Task Environment (Industry Analysis)

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 Identifying External
Environmental Variables

Natural environment
 Includes:
• physical resources,
• wildlife
• climate that are an inherent part of existence on Earth
 form an ecological system of interrelated life

Khalid Azzouz 4-6

 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 forces that regulate the exchange of materials, money,
energy & information.
• technological new developments in technology, new products and
telecommunication infrastructure. That generate problem-solving
inventions.
• political-legal forces that allocate power and provide protecting
laws and regulations.
• Sociocultural forces that regulate the values, principles and
customs of society.
Societal environment = ‫ا لبيئة‬ 4-7
 Identifying External
Environmental Variables

Task environment
 those elements or groups that directly affect a
corporation and, in turn, are affected by it
• suppliers,
• competitors,
• customers,
• New Entrants
• Substitutes
• Stakeholders (Government – Shareholders – Creditors)

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 Identifying External
Environmental Variables
Industry
An industry is a group of firms producing similar products or
services, such as soft drinks or financial services.
 The automotive industry
 The Banking industry
 The food industry

Industry analysis
 an in-depth examination of key factors within a
corporation’s task environment
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 Scanning the Societal Environment: STEEP
Analysis

STEEP Analysis
is a framework for assessing
the key features of the
external environment facing a
business.
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 Scanning the Societal Environment: STEEP
Analysis

STEEP Analysis – may also be called PESTEL.

 monitoring trends in the societal and natural
environments
• sociocultural,
• technological,
• economic,
• ecological and
• political-legal forces

Sociocultural = ‫ا الجتماعية و ا لثقافية‬ 4-11

Some Important Variables in the Societal
Environment

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 From the previous table
Trends in the economic part of the societal environment can have an
obvious impact on business activity. An increase in interest rates will
result in less sales of major home appliances, cars, houses. Why?
a higher interest rate will be reflected in the monthly installments to be
paid for the purchased products.
Consequently, higher mortgage rates increase the cost of buying a
house, the demand for new and used houses tends to fall. Because
most major home appliances are sold when people change houses, a
reduction in house sales soon translates into a decline in sales of home
appliances. P.151 13th ed.

Khalid Azzouz 13
Current U.S. Generations

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 Current Sociocultural Trends
 Increasing environmental awareness
 Recycling and conservation are becoming crucially important.
Eliminating the use of Styrofoam trays in favor of washing and
reusing of plastic trays.
 Growing health consciousness
 Increased concern for personal health increased the need for physical
fitness & healthier living. As a result, sales of fast-foods are slowing down
and even changing public taste.
 Expanding seniors market
 A result of the increased health awareness and increased need for physical
fitness, people over 55 became a more important market segment.
 Impact of Millennials
Sociocultural = ‫ا الجتماعية‬ 4-15
 Current Sociocultural Trends
 Declining mass market
 People want products and services that are more adapted to their
personal needs.
 Changing pace and location of life
 New computer and telecommunication developments in products
increased efficiency of communications (e-mails, cell phones), but it also
puts more pressure on people.
 Changing household composition
 Single parent homes are becoming the most common household type.

 Increasing diversity of workforce and markets

 Heavy immigration from the developing to the developed nations
increased the number of minorities in the workforce of developed nations.

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Technological Breakthroughs
Portable information devices

Electronic networking

Alternative energy sources

Precision farming

Virtual personal assistants

Genetically altered organisms

Smart, mobile robots

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 Climate Change – Categories of Risk

Climate change is an important business issue.

Firm’s reputations, legal responsibilities, regulatory obligations,
financial reporting, operations and supply chains can be affected.

Global and local changes in temperature, the frequency and severity of

extreme weather conditions and the availability of water can have a
direct impact on a firm’s risk profiles and in some cases, its strategic
positioning.

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 Some Important Variables in
International Societal Environments

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Scanning External Environment

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Forces Driving Industry Competition

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 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

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 Barriers to Entry

Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages due to size
Government policies
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 Barriers to Entry
 Economies of scale: Scale economies in the production and sale of microprocessors, for example, gave Intel a
significant cost advantage over any new rival.
 Product differentiation: Corporations such as Procter & Gamble and General Mills, which manufacture
products such as Tide and Cheerios, create high entry barriers through their high levels of advertising and
promotion.
 Capital requirements: The need to invest huge financial resources in manufacturing facilities in order to
produce large commercial airplanes creates a significant barrier to entry to any competitor for Boeing and
Airbus.
 Switching costs: Once a software program such as Excel or Word becomes established in an office, office
managers are very reluctant to switch to a new program because of the high training costs.
 Access to distribution channels: Small entrepreneurs often have difficulty obtaining supermarket shelf space
for their goods because large retailers charge for space on their shelves and give priority to the established
firms who can pay for the advertising needed to generate high customer demand.
 Cost disadvantages independent of size: Once a new product earns sufficient market share to be accepted as
the standard for that type of product, the maker has a key advantage. Microsoft’s development of the first
widely adopted operating system (MSDOS) for the IBM-type personal computer gave it a significant
competitive advantage over potential competitors. Its introduction of Windows helped to cement that
advantage so that the Microsoft operating system is now on more than 90% of personal computers worldwide.
 Government policy: Governments can limit entry into an industry through licensing
requirementsbyrestrictingaccesstorawmaterials,suchasoil-drillingsitesinprotectedareas.

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 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.

Retaliation = counter-attack, the act of returning a military attack - ‫انتقام‬ 4-25

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

Amount of Height of exit

Capacity
fixed costs barriers

Diversity of
rivals

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 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.

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 The Bargaining Power of Buyers

Buyers affect an industry through their ability

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

A buyer or a group of buyers is powerful if

some of the following factors hold true:

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 The Bargaining Power of Buyers
 A buyer purchases a large proportion of the seller’s product or service
(ex: oil filters purchased by a major automaker)
 A buyer has the potential to integrate backward by producing the
product itself (ex: a newspaper could produce its own paper)
 Alternative suppliers are plenty because the product is standard or
undifferentiated (ex: motorists can choose among many gas stations)
 Changing suppliers costs very little (ex: office supplies are easy to find)
 The purchased product represents a high percentage of a buyer’s
costs, thus it is worth looking for a lower price.
 A buyer earns low profits and is thus very sensitive to costs & service
differences (grocery stores have very small gross margins)
 The purchased product is unimportant to the final product quality,
thus can be easily substituted (electric wire for use in lamps)

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The Bargaining Power of Suppliers

Suppliers can affect an industry through their

ability to raise prices or reduce the quality of
purchased goods & services.

A supplier or a group of suppliers is powerful

if some of the following factors hold true:

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 The Bargaining Power of Suppliers
 Industry is dominated by a few companies, but it sells to
many (ex: petroleum industry)
 Its product or service is unique & switching costs are high
(ex: word processing software and other software)
 Substitutes are not readily available (ex: electricity)
 Suppliers are able to integrate forward and compete
directly with their present customers (a microprocessor
producer as intel can make PCs)
 A purchasing industry buys only a small portion of the
supplier’s products or services and is thus unimportant to
the supplier.
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 Relative Power of Other Stakeholders

Government
Creditors
Shareholders

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 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.

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 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

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 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
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Thank you

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