Chapter 4 – Environmental scanning and industry analysis

Environmental scanning
is the monitoring, evaluation, and dissemination of information from the external and internal environments to key people within the corporation.
*) Careful monitoring of an organization’s internal and external environments to detect early signs of opportunities and threats that may influence the firm’s plans
External Environmental Variables
In undertaking environmental scanning, strategic managers must first be aware of the many variables within a corporation’s societal and task environments.
Natural environment
includes physical resources, wildlife, and climate that are an inherent part of existence on Earth. These factors form an ecological system of interrelated life.
*) Climate, weather, and natural resources that affect human survival
Societal environment
is mankind’s social system that includes general forces that do not directly touch on the short-run activities of the organization that can, and often do, influence its long-run decisions.
*) Economic, technological, political-legal, and sociocultural environmental forces that do not directly touch on the short-run activities of an organization but influence its long-run decisions
Economic Forces
that regulate the exchange of materials, money, energy and information.
*) Interest rates, inflation, unemployment, economic growth, and other factors that affect the general health and well-being of a nation or the regional economy of an organization.
Technological Forces
that generate problem solving inventions.
*) New developments in methods for transforming resources into goods or services
Political-Legal Forces
that allocate power and provide constraining and protecting laws and regulations.
*) are changes in the way politics shape laws and laws shape the opportunities for and threats to an organization.
Socio-cultural Forces
that regulate the values, mores and customs of society.
*) Different cultural patterns often require changes in brand name, color, label translations, package, and price
Task environment
Includes those elements or groups that directly affect the corporation and, in turn, are affected by it.
*) These are governments, local communities, suppliers, competitors, customers, creditors, employees/labor unions, special interest groups and trade associations.
*) includes the sectors that conduct day-to-day transactions with the organization and directly influence its basic operations and performance
Environmental Sustainability Issue
A MGMT approach that involves developing strategies that both sustain the environment and produce profits for the company.
STEEP Analysis
Monitoring trends in the societal and natural environments
*) scanning of Sociocultural, Technological, Economic, Ecological, and Political-legal environmental forces
Changes in the technological part of the societal environment can also have a great impact on multiple industries. For example:
*) Portable information devices and electronic networking.
*) Alternative energy sources
*) Precision farming
*) Virtual Personal Assistants
*) Genetically altered organisms
*) Smart, Mobile robots.
Eight current sociocultural trends are transforming North America and the rest of the world:
1. Increasing environmental awareness
2. Growing health consciousness
3. Expanding seniors market
4. Impact of the Generation Y boomlet
5. Declining mass market
6. Changing pace and location of life
7. Changing household composition
8. Increasing diversity of workforce & market
1. Increasing environmental awareness
Recycling and conservation are becoming more
than slogans.
2. Growing health consciousness
Concerns about personal health fuel the trend toward physical fitness and healthier living
3. Expanding seniors market
As their numbers increase, people over age 55 will become an even more important market. Already some companies are segmenting the senior population into Young Matures, Older Matures, and the Elderly—each having a different set of attitudes and interests.
4. Impact of the Generation Y boomlet
Now in its teens and 20s, this cohort is expected to have a strong impact on future products and services.
5. Declining mass market
Niche markets are defining the marketers’ environment. People want products and services that are adapted more to their personal needs.
6. Changing pace and location of life
Instant communication via e-mail, cell phones, and overnight mail enhances efficiency, but it also puts more pressure on people.
7. Changing household composition
Single-person households, especially those of single women with children, could soon become the most common household type in the United
States.
8. Increasing diversity of workforce & market
Heavy immigration from the developing to the developed nations is increasing the number of minorities in all developed countries and forcing an acceptance of the value of diversity in races, religions, and life style.
International Societal Considerations
*) Each country or group of countries in which a
company operates presents a unique societal environment with a different set of economic,
technological, political-legal, and sociocultural variables for the company to face.
*) International societal environments vary so widely that a corporation’s internal environment
and strategic management process must be very flexible.
Differences in societal environments strongly affect
the ways in which a multinational corporation (MNC),
MNC
a company with significant assets and activities in multiple countries, conducts its marketing, financial, manufacturing, and other functional activities.
Global Issue
Something that affects every living thing on the planet (disease, terrorism,etc).
Creating a Scanning System.
How can anyone monitor and keep track of all the trends and factors in the worldwide societal environment? With the existence of the Internet, it is now possible to scan the entire world. Nevertheless, the vast amount of raw data makes scanning for information similar to drinking from a fire hose.
The company uses WebFountain to:
*) Locate negative publicity or investor discontent
*) Track general trends
*) Learn competitive information
*) Identify emerging competitive threats
*) Unravel consumer attitudes
The origin of competitive advantage lies in
the ability to identify and respond to environmental change well in advance of competition.
Why are some companies better able to adapt than others?
One reason is because of differences in the ability of managers to recognize and understand external strategic issues and factors.
No firm can successfully monitor all external factors.
Choices must be made regarding
which factors are important and which are not. Even though managers agree that strategic importance determines what variables are consistently tracked, they sometimes miss or choose to ignore crucial new developments.
strategic myopia.
When strategic managers have a willingness to reject unfamiliar as well as negative information.
Issues priority matrix
1. Identify a number of likely trends emerging in the natural, societal, and task environments.
These are strategic environmental issues—those important trends that, if they occur,
determine what the industry or the world will look like in the near future.
2. Assess the probability of these trends actually occurring, from low to medium to high.
3. Attempt to ascertain the likely impact (from low to high) of each of these trends on the
corporation being examined.
External strategic factors
are the key environmental trends that are judged to have both a medium to high probability of occurrence and a medium to high probability of impact on the corporation.
An industry is a
group of firms that produces a similar product or service, such as soft drinks or financial services.
Porters Approach to Industry Analysis
• Porter contends that a Corporation is most concerned with the intensity of competition within its industry.
• The level of this intensity is determined by basic competitive forces.
• The collective strength of these forces determines the ultimate profit potential in the industry, where profit potential is measured in terms of long run return on invested capital.
• In carefully scanning the industry, the corporation must asses the importance to it’s success of each of the six forces:
1. Threats of new entrants,
2. Rivalry among existing firms,
3. Threat of substitute products or services,
4. Bargaining power of buyers,
5. Bargaining power of suppliers,
6. Relative power of other stakeholders.
The stronger each of these forces, the more limited companies are in their ability to raise prices and earn greater profits.
• Although Porter mentions only five forces, a sixth – other stakeholder – is added here to reflect the power that government, local communities, and other groups from the task environment wield over industry activities.
Using Porter’s model a high force can be regarded as a threat because it is likely to reduce profits. A low force, in contrast can be viewed as an opportunity because it may allow the company to earn greater profits.
• In the short run, these forces act as constraints on a company’s activities.
• In the long run, however, it may be possible for a company, through its choice of strategy, to change the strength of one or more of the forces to the company’s advantage.
New Entrants
to an industry typically bring to it new capacity, a desire to gain market share, and substantial resources.
*) new competitors in the market
Entry barriers
is an obstruction that makes it difficult for a company to enter an industry.
*) Conditions that make it difficult or expensive for new firms to enter an industry (government regulation, large start up costs, etc.)
Some of the possible barriers to entry are:
– Economies of scale
– Product differentiation
– Capital requirements
– Switching costs
– Access to distribution channels
– Cost disadvantages independent of size
– Government policy
Intense rivalry is related to the presence of several factors, including:
– No. of competitors
– Rate of industry growth
– Product or service characteristics
– Amount of fixed costs
– Capacity
– Height of exit barriers
– Diversity of rivals
Substitute product
is a product that appears to be different but can satisfy the same need as another product.
A buyer or a group of buyers is powerful if some of the following factors hold true:
*) A buyer purchases a large proportion of the seller’s product or service (for example, oil
filters purchased by a major auto maker).
*) A buyer has the potential to integrate backward by producing the product itself (for example,
a newspaper chain could make its own paper).
*) Alternative suppliers are plentiful because the product is standard or undifferentiated (for
example, motorists can choose among many gas stations).
*) Changing suppliers costs very little (for example, office supplies are easy to find).
*) The purchased product represents a high percentage of a buyer’s costs, thus providing an
incentive to shop around for a lower price (for example, gasoline purchased for resale by
convenience stores makes up half their total costs).
*) A buyer earns low profits and is thus very sensitive to costs and service differences (for
example, grocery stores have very small margins).
*) The purchased product is unimportant to the final quality or price of a buyer’s products or
services and thus can be easily substituted without affecting the final product adversely
(for example, electric wire bought for use in lamps).
A supplier or supplier group is powerful if some of the following factors apply:
*) The supplier industry is dominated by a few companies, but it sells to many (for example,
the petroleum industry).
*) Its product or service is unique and/or it has built up switching costs (for example, word
processing software).
*) Substitutes are not readily available (for example, electricity).
*) Suppliers are able to integrate forward and compete directly with their present customers
(for example, a microprocessor producer such as Intel can make PCs).
*) A purchasing industry buys only a small portion of the supplier group’s goods and services
and is thus unimportant to the supplier (for example, sales of lawn mower tires are
less important to the tire industry than are sales of auto tires).
A complementor
is a company (e.g., Microsoft) or an industry whose product works well with a firm’s (e.g., Intel’s) product and without which the product would lose much of its value
Fragmented industry
where no firm has large market share, and each
firm serves only a small piece of the total market in competition with others (for example,
cleaning services)
Consolidated industry
dominated by a few large firms, each of which struggles to differentiate its products from those of the competition.
Multidomestic industries
are specific to each country or group of countries. This type of international industry is a collection of essentially domestic industries, such as retailing and insurance.
Global industries
in contrast, operate worldwide, with MNCs making only small adjustments for country-specific circumstances.
The factors that tend to determine whether an industry will be primarily multidomestic or primarily global are:
1. Pressure for coordination within the MNCs operating in that industry
2. Pressure for local responsiveness on the part of individual country markets
Regional industries
An industry in which multinational corporations primarily coordinate their activities within specific geographic areas of the world.
International risk assessment
Some firms develop elaborate information networks and computerized systems to evaluate
and rank investment risks.
Strategic group
is a set of business units or firms that “pursue similar strategies with similar resources.
Strategic groups in a particular industry can be mapped by plotting the market positions of industry competitors on a two-dimensional graph, using two strategic variables as the vertical and horizontal axes
1. Select two broad characteristics, such as price and menu, that differentiate the companies
in an industry from one another.
2. Plot the firms, using these two characteristics as the dimensions.
3. Draw a circle around those companies that are closest to one another as one strategic
group, varying the size of the circle in proportion to the group’s share of total industry
sales. (You could also name each strategic group in the restaurant industry with an identifying title, such as quick fast food or buffet-style service.)
A strategic type
is a category of firms based on a common strategic orientation and a combination of structure, culture, and processes consistent with that strategy.
These general types have the following characteristics:
– Defenders
– Prospectors
– Analyzers
– Reactors
Defenders
are companies with a limited product line that focus on improving the efficiency of their existing operations.
Prospectors
are companies with fairly broad product lines that focus on product innovation and market opportunities.
Analyzers
are corporations that operate in at least two different product-market areas, one stable and one variable.
Reactors
are corporations that lack a consistent strategy-structure-culture relationship.
Hypercompetition
applies to industries that are characterized by permanent, ongoing, intense competition brought about by advancing technology or changing customer tastes and fads and fashions. Planning and strategy formulation are much more difficult and risky when hypercompetition prevails.
Key success factors
are variables that can significantly affect the overall competitive positions of companies within any particular industry.
An industry matrix
summarizes the key success factors within a particular industry.
Steps for the industry being analyzed
1. In Column 1 (Key Success Factors), list the 8 to 10 factors that appear to determine success
in the industry.
2. In Column 2 (Weight), assign a weight to each factor, from 1.0 (Most Important) to 0.0 (Not
Important) based on that factor’s probable impact on the overall industry’s current and future success. (All weights must sum to 1.0 regardless of the number of strategic factors.)
3. In Column 3 (Company A Rating), examine a particular company within the industry—for
example, Company A. Assign a rating to each factor from 5 (Outstanding) to 1 (Poor) based
on Company A’s current response to that particular factor. Each rating is a judgment regarding how well that company is specifically dealing with each key success factor.
4. In Column 4 (Company A Weighted Score), multiply the weight in Column 2 for each
factor by its rating in Column 3 to obtain that factor’s weighted score for Company A.
5. In Column 5 (Company B Rating), examine a second company within the industry – in
this case, Company B. Assign a rating to each key success factor from 5.0 (Outstanding)
to 1.0 (Poor), based on Company B’s current response to each particular factor.
6. In Column 6 (Company B Weighted Score), multiply the weight in Column 2 for
each factor times its rating in Column 5 to obtain that factor’s weighted score for
Company B.
7. Finally, add the weighted scores for all the factors in Columns 4 and 6 to determine the
total weighted scores for companies A and B. The total weighted score indicates how
well each company is responding to current and expected key success factors in the
industry’s environment. Check to ensure that the total weighted score truly reflects the
company’s current performance in terms of profitability and market share. (An average
company should have a total weighted score of 3.)
Competitive intelligence
is a formal program of gathering information on a company’s competitors.
To understand a competitor, it is important to answer the following 10 questions:
1. Why do your competitors exist? Do they exist to make profits or just to support another unit?
2. Where do they add customer value—higher quality, lower price, excellent credit terms, or
better service?
3. Which of your customers are the competitors most interested in? Are they cherry-picking
your best customers, picking the ones you don’t want, or going after all of them?
4. What is their cost base and liquidity? How much cash do they have? How do they get their
supplies?
5. Are they less exposed with their suppliers than your firm? Are their suppliers better
than yours?
6. What do they intend to do in the future? Do they have a strategic plan to target your market
segments? How committed are they to growth? Are there any succession issues?
7. Howwill their activity affect your strategies? Should you adjust your plans and operations?
8. How much better than your competitor do you need to be in order to win customers? Do
either of you have a competitive advantage in the marketplace?
9. Will new competitors or new ways of doing things appear over the next few years? Who
is a potential new entrant?
10. If you were a customer, would you choose your product over those offered by your competitors? What irritates your current customers? What competitors solve these particular customer complaints?
Forecasting
Environmental scanning provides reasonably hard data on the present situation and current
trends, but intuition and luck are needed to accurately predict whether these trends will continue.
*) The resulting forecasts are, however, usually based on a set of assumptions that may or
may not be valid
An industry scenario
is a forecasted description of a particular industry’s likely future.
The process may operate as follows:
1. Examine possible shifts in the natural environment and in societal variables globally.
2. Identify uncertainties in each of the six forces of the task environment (that is, potential
entrants, competitors, likely substitutes, buyers, suppliers, and other key stakeholders).
3. Make a range of plausible assumptions about future trends.
4. Combine assumptions about individual trends into internally consistent scenarios.
5. Analyze the industry situation that would prevail under each scenario.
6. Determine the sources of competitive advantage under each scenario.
7. Predict competitors’ behavior under each scenario.
8. Select the scenarios that are either most likely to occur or most likely to have a strong impact
on the future of the company. Use these scenarios as assumptions in strategy formulation.
Useful Forecasting Techniques
• Extrapolation: is the extension of present trends into the future. It rests on the assumption that the world is reasonably consistent and changes slowly in the short run.
• Brain storming: is a non quantitative approach requiring simply the presence of people with some knowledge of the situation to be predicted. The basic ground rules is to propose ideas without first mentally screening them.
• Expert Opinion: it is a non quantitative technique in which experts in a particular area attempt to forecast likely developments. This type of forecast is based on the ability of a knowledgeable person to construct probable future developments based on the interaction of key variables.
• Statistical modeling: it is a quantitative technique that attempts to discover causal or at least explanatory factors that link two or more time series together. Example: Regression Analysis.
The Strategic Audit:
A Checklist for Environmental Scanning
The audit provides a checklist of questions by area of concern.
For example, Part III of the audit examines the natural,societal, and task environments. It looks at the societal environment in terms of economic, technological, political-legal, and sociocultural forces. It also considers the task environment (industry) in terms of threat of new entrants, bargaining power of buyers and suppliers, threat of substitute products, rivalry among existing firms, and the relative power of other stakeholders.
Synthesis of External Factors—EFAS
The EFAS table is one way to organize the external factors into the generally accepted categories of opportunities and threats as well as to analyze how well a particular company’s management (rating) is responding to these specific factors in light of the perceived importance (weight) of these factors to the company.