Environmental Scanning and Industry Analysis

BASIC MODEL OF STRATEGIC MANAGEMENT

Environmental Scanning Strategy Formulation Strategy Implementation Evaluation & Control

Feedback and Learning

Environmental Scanning

Environmental Scanning
Monitoring and interpreting sweep of social, political, economic, ecological, and technological events to spot budding trends that could eventually impact industry

Definition

Environmental Scanning
Raise consciousness of managers about potential developments that could Have important impact on industry conditions Pose new opportunities and threats

Purpose

The External Scan

the context in which you do business } look for key emerging trends, issues } consider competition and industry
3-7

} define

Environmental Scanning:
} The

monitoring, evaluating, and disseminating of information from the external environment to key people within the organization to avoid strategic surprise and ensure the long-term health of the firm. to assess Macro (PESTE), Industry Specific (5 Forces) and Competitor (Group Map) issues of an external environmental scan is to identify Opportunities and Threats

} Need

} Objective

Key Frameworks for Conducting an External Scan

} Environmental } PESTE

variables

analysis } Porter 5 forces analysis, macro view } Issues Matrix } Strategic Group Map

Environmental Scan/Trends for a Company

} companies

are continually acquiring info on external events & then interpreting trends } first define your target market, the product and industry } pick which major environ categories affects your business } secondly write facts. then explain the relevant business ripple impact in detail!!
} }

Trends & Issues Impact & Initiative

Environmental Uncertainty
} degree

of complexity plus degree of change existing in an organizations external environment. both a THREAT and an OPPORTUNITY

} is

Reducing Uncertainty
}

} }

You need to assess this in order to develop strategies to respond to issues Many of these external factors are outside your control! The more you anticipate them, the less you need to react to them, the more you can plan for them You want to REDUCE UNANTICIPATED SURPRISES!

3-13

External Environment Analyze in 3 ways to reduce uncertainty:

1. 2. 3.

Macro/Societal environment Task environment Industry analysis

Societal Environment
}

General forces that do not directly touch on the short-run activities of the organization but can, and often do, influence its long run decisions.

Societal Environment Forces

Scanning the External Environment

} Political

Legal
power, provide laws and regulations

} Allocate

} Economic
} Regulate

the exchange of materials, money, energy, and information

} Sociocultural
} Regulate

values, mores, and customs

} Technological
} Generate

problem-solving inventions

} Environment
} Regulate

environmental sustainability

Important Variables for PESTE

Political-Legal
Antitrust regulations Environmental protection laws Tax laws Special incentives Foreign trade regulations Attitudes toward foreign companies Laws on hiring and promotion Stability of government

Economic
GDP trends Interest rates Money supply Inflation rates Unemployment levels Wage/price controls Devaluation/ revaluation Energy availability and cost Disposable and discretionary income

Sociocultural
Lifestyle changes Career expectations Consumer activism Rate of family formation Growth rate of population Age distribution of population Regional shifts in population Life expectancies Birth rates

Technological
Total government spending for R&D Total industry spending for R&D Focus of technological efforts Patent protection New products New developments in technology transfer from lab to marketplace Productivity improvements through automation

Environmental
Trend on green companies Increasing environmental awareness Environmental sustainability programs Availability/ Sustainability of natural resources

Task Environment
}

Elements or groups that directly affect the corporation and, in turn, are affected by it. The task environment is the industry within which that firm operates. Need to focus on issues and challenges specific to your industry (Macro faces all) Conduct detailed industry analysis using

Task Environment Forces

Scanning the External Environment

Issues Priority Matrix

is a way to identify and analyze developments in the external environment.
Probability of O ccurrence H igh Probable Impact on Corporation High Medium Low

High Priority

High Priority

Medium Priority

M edium

High Priority

Medium Priority

Low Priority

Medium Priority Low

Low Priority

Low Priority

Steps on how to use Issues Priority Matrix:

1.

2.

3.

Identify the number of likely trends (strategic environmental issues) emerging in the societal and task environments. Assess the probability of these trends actually occurring from low to high. Attempt to ascertain the likely impact (from low to high) of each of these trends on the corporation being examined.

Issues Priority Matrix

}

Managers can use it to decide which environmental trends should be merely scanned (low priority) and which should be monitored as strategic factors (high priority). probability that will occur and likely impact if it does
} }

} Determine

Focus time and resources on high impact events likely to occur Do not waste time on low impact events unlikely to occur

A corporations external strategic factors are those 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. Those environmental trends judged to be a corporations strategic factors are then categorized as opportunities and threats and are included in strategy formulation.

Industry Analysis:
Analyzing the Task Environment

Industry Analysis
}

Industry
A group of firms producing a similar product or service, such as soft drinks or financial services. Need to assess: 1. Suppliers 2. Buyers 3. Substitutes 4. Potential Entrants 5. Other Stakeholders

Goal: to describe the level of rivalry (amount of and characteristics of direct competition) which exists within your industry which should govern strategy choices.

Industry Analysis
} An

in-depth examination of key factors/competitors within a corporations task environment.

Take a Realistic Industry Snapshot

} To

assess

balance of industry power level of competition identify real competitors & potential entrants

gl

Industry Analysis
} Refers

to an in-depth examination of key factors within a corporations task environment.

Forces Driving Industry Competition

of new entrants } Rivalry among existing firms } Threat of substitute products or services } Bargaining power of buyers } Bargaining power of suppliers } Relative power of other stakeholders
} Threat

Threat of new entrants

} New

entrants to an industry typically bring to it new capacity, a desire to gain market share and substantial resources.

continuation

Porter's Five Forces Analysis

} is

an important tool for assessing the potential for profitability in an industry. With a little adaptation, it is also useful as a way of assessing the balance of power in more general situations

} Supplier

Power: The power of suppliers to drive up the prices of your inputs. } Buyer Power: The power of your customers to drive down your prices. } Competitive Rivalry: The strength of competition in the industry. } The Threat of Substitution: The extent to which different products and services can be used in place of your own. } The Threat of New Entry: The ease with which new competitors can enter the market if they see that you are making good profits (and then drive your prices down).

Threat of New Entrants

} The

competition in an industry will be the higher, the easier it is for other companies to enter this industry. In such a situation, new entrants could change major determinants of the market environment (e.g. market shares, prices, customer loyalty) at any time. There is always a latent pressure for reaction and adjustment for existing players in this industry.

Barriers to Entry
} The

threat of new entries will depend on the extent to which there are barriers to entry. These are typically

} } } } } } } } } } }

Economies of scale (minimum size requirements for profitable operations), High initial investments and fixed costs, Cost advantages of existing players due to experience curve effects of operation with fully depreciated assets, Brand loyalty of customers Protected intellectual property like patents, licenses etc, Scarcity of important resources, e.g. qualified expert staff Access to raw materials is controlled by existing players, Distribution channels are controlled by existing players, Existing players have close customer relations, e.g. from long-term service contracts, High switching costs for customers Legislation and government action

Rivalry among Existing Players/Firms

} This

force describes the intensity of competition between existing players (companies) in an industry. High competitive pressure results in pressure on prices, margins, and hence, on profitability for every single company in the industry.

Competition between existing players is likely to be high when

} } }

There are many players of about the same size, Players have similar strategies There is not much differentiation between players and their products, hence, there is much price competition Low market growth rates (growth of a particular company is possible only at the expense of a competitor), Barriers for exit are high (e.g. expensive and highly specialized equipment).

Threat of Substitutes
}

Substitute Products are those products that appear to be different but can satisfy the same need as another product. A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. This category also relates to complementary products.

Similarly to the threat of new entrants, the threat of substitutes is determined by factors like Brand loyalty of customers, } Close customer relationships, } Switching costs for customers, } The relative price for performance of substitutes, } Current trends.
}

Bargaining Power of Buyers

}

the bargaining power of customers determines how much customers can impose pressure on margins and volumes.

Customers bargaining power is likely to be high when

} } } } } } } } } }

They buy large volumes, there is a concentration of buyers, The supplying industry comprises a large number of small operators The supplying industry operates with high fixed costs, The product is undifferentiated and can be replaces by substitutes, Switching to an alternative product is relatively simple and is not related to high costs, Customers have low margins and are price-sensitive, Customers could produce the product themselves, The product is not of strategical importance for the customer, The customer knows about the production costs of the product There is the possibility for the customer integrating backwards.

Bargaining Power of Suppliers

term 'suppliers' comprises all sources for inputs that are needed in order to provide goods or services. } Suppliers can affect an industry through their ability to raise prices or reduce the quality of purchased goods and services.
} The

Supplier bargaining power is likely to be high when:

} } } } } } } } }

The market is dominated by a few large suppliers rather than a fragmented source of supply, There are no substitutes for the particular input, The suppliers customers are fragmented, so their bargaining power is low, The switching costs from one supplier to another are high, There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins. This threat is especially high when The buying industry has a higher profitability than the supplying industry, Forward integration provides economies of scale for the supplier, The buying industry hinders the supplying industry in their development (e.g. reluctance to accept new releases of products), The buying industry has low barriers to entry.

} In

such situations, the buying industry often faces a high pressure on margins from their suppliers. The relationship to powerful suppliers can potentially reduce strategic options for the organization.

Relative Power of Other Stakeholders

}

A sixth force should be added to Porters list to include a variety of stakeholder groups from the task environment. Includes governments, local communities, creditors, trade associations, special interest groups, unions, shareholders, and complementors (a company or an industry whose porduct works well with another industrys or a firms product and without which the product would lose much of its value e.g. tire and autombile industry; microsoft and intel)

References
Management and Business Policy by Wheelen and Hunger } www.fox.temple.edu/iei/documents/envir onmentvariablesME.. } External Scanning by Fall, 2006 } http://wiki.answers.com/Q/What_is_issues _priority_matrix#ixzz1emwKX7Pl } http://www.themanager.org/Models/p5f. htm
} Strategic