Environmental

Scanning and
Industry Analysis

Chapter 4
 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
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 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
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 Environmental Scanning

 Environmental scanning
 the monitoring, evaluation, and dissemination of information
relevant to the organizational development of strategy
 The societal environment is 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.
 The number of possible strategic factors in the societal
environment is very high.
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 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.
 Until the 20th century, the natural environment
was generally perceived by business people to be
a given—something to exploit, not conserve.
 It was viewed as a free resource, something to be
taken or fought over, like arable land, diamond
mines, deep water harbors, or fresh water
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 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

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 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

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 Identifying External
Environmental Variables
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/PESTEL
 monitoring trends in the societal and natural environments
 sociocultural, technological, economic, ecological and political-legal
forces.
 Economic forces that regulate the exchange of materials, money,
energy, and information.
 ■

 Technological forces that generate problem-solving inventions.


Political–legal forces that allocate power and provide constraining
and protecting laws
and regulations.

Sociocultural forces that regulate the values, mores, and customs
of society.
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Some Important Variables in the Societal
Environment

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Current U.S. Generations

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Copyright © 2015 Pearson Education, Inc. 12
 Current Sociocultural Trends

 Increasing environmental awareness: Recycling

and conservation are becoming more than
slogans.
 Growing health consciousness: Concerns about
personal health fuel the trend toward physical
fitness and healthier living
 Expanding seniors market: Eg. Senior citizens
 Impact of Millennials: this cohort is expected
to have a strong impact on future products and
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 Current Sociocultural Trends
 Declining mass market: Niche markets are defining the
marketers’ environment. People
want products and services that are adapted
more to their personal needs
 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.
 Changing household composition: Single-person
households, especially those of single women with
children
 Increasing diversity of workforce and markets:
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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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 Categories of Risk

Supply chain Product and

Regulatory
risk (high technology
risk
cost) risk

Reputational
Litigation risk Physical risk
risk

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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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 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.

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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

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

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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.

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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

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 Relative Power of Other Stakeholders

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

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 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. Most of the industries
in Ethiopia are characterized by this
Consolidated industry
 domination by a few large firms, each struggles to
differentiate products from its competition
Eg. Commercial Bank of Ethiopia vs. other banks.
Eg. EIC and private Insurance Companies
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 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
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 Continuum of
International Industries

The factors that tend to determine whether an industry will be primarily

multi-domestic 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

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

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Strategic Groups

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Mapping Strategic Groups in the
U.S. Restaurant Chain Industry

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 Strategic Types
Strategic Choices of companies: (1) Cost Focus, (2) Product
Focus or (3) Customer Focus
 Defenders
 focus on improving efficiency
 Prospectors
 focus on product innovation and market opportunities
 Analyzers
 focus on at least two different product market areas (efficiency
or innovation)
 Reactors
 lack a consistent strategy-structure-culture relationship
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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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Useful Forecasting Techniques

Expert
Extrapolation Brainstorming
opinion

Delphi Statistical Prediction

technique modeling markets

Cross impact
analysis

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 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 (Time series)
Brainstorming is a non-quantitative approach
that simply requires the presence of people
with some knowledge of the situation in
order to concept out the future.
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 Useful Forecasting Techniques
 Expert opinion 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(s)
to construct probable future developments based
on the interaction of key variables.
 Delphi Technique, in which separated experts
independently assess the likelihoods of specified
events.

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 Useful Forecasting Techniques
 Statistical modeling is a quantitative technique that
attempts to discover causal or at least explanatory
factors that link two or more time series together.
 Prediction markets is a recent forecasting technique
enabled by easy access to the Internet. As
emphasized by James Surowiecki in The Wisdom of
Crowds, the conclusions of large groups can often be
better than those of experts because such groups
can aggregate a large amount of dispersed wisdom

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 Useful Forecasting Techniques

Scenario writing is the most widely used

forecasting technique after trend
extrapolation. Originated by Royal Dutch
Shell, scenarios are focused descriptions of
different likely futures presented in a
narrative fashion.

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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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 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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 Industry Matrix

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

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Synthesis of External Factors—EFAS

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