C HAPTER 4 E NVIRONMENTAL S CANNING AND I NDUSTRY A NALYSIS S TRATEGIC M ANAGEMENT AND B USINESS P OLICY 11 th Edition Thomas L. Wheelen J. David Hunger

2 It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change. – Charles Darwin External Assessment Nothing focuses the mind better than the constant sight of a competitor who wants to wipe you off the map. – Wayne Calloway, Former CEO, PepsiCo Environmental Scanning & Industry Analysis

3 External Strategic Management Audit Societal Environmental Scanning Task Environment - Industry Analysis Environmental Scanning & Industry Analysis

4 Identify & Evaluate factors beyond the control of a single firm  Increased foreign competition  Population shifts  Information technology External Strategic Management Audit

5 Environmental Scanning & Industry Analysis Purpose of External Audit  Identify Opportunities Threats External Strategic Management Audit

6 Environmental Scanning & Industry Analysis Key External Forces Political, governmental & legal forces Economic forces Social, cultural, demographic & environmental forces Technological forces Competitive forces

7 Environmental Scanning & Industry Analysis Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services Key External Forces Opportunities & Threats Key External Forces and the Organization

8 Environmental Scanning & Industry Analysis Gather competitive intelligence – Social Cultural Demographic Environmental Economic Political, legal governmental Technological External Audit

9 Environmental Scanning & Industry Analysis External Audit – Sources of Information Internet Libraries Suppliers Distributors Customers Competition

10 Environmental Scanning & Industry Analysis Performing External Audit -- Variables Market share Breadth of competing products World economies Foreign affiliates Proprietary account advantages Price competitiveness Technological advancements Interest rates Pollution abatement

11 Environmental Scanning & Industry Analysis Industrial Organization (I/O) View -- Industry factors more important than internal factors Performance determined by industry forces

12 Environmental Scanning & Industry Analysis Economies of Scale Industry Properties Barriers to market entry Product differentiation Level of competitiveness I/O Perspective Firm Performance

13 Environmental Scanning & Industry Analysis Political, Government & Legal Forces Key opportunities & threats Antitrust legislation Tax rates Lobbying efforts Patent laws Government Regulation

14 Environmental Scanning & Industry Analysis Political, Government & Legal Forces Political variables impact –  Formulation of strategies  Implementation of strategies Increasing Global Interdependence

15 Environmental Scanning & Industry Analysis Political, Government & Legal Forces Strategists in a global economy --  Forecast political climates  Legalistic skills  Diverse world cultures Increasing Global Interdependence

16 Environmental Scanning & Industry Analysis Political, Government & Legal Forces Worldwide trend toward similar consumption patterns Global buyers and sellers E-commerce Technology for instant currency transfers Globalization of Industry

17 Environmental Scanning & Industry Analysis Key Political, Governmental, & Legal Variables Special tariffs Tax law changes Political parties Voter participation rates Regulation/deregulation

18 Environmental Scanning & Industry Analysis Key Political, Governmental, & Legal Variables (cont’d) Environmental protection laws Changes in patent laws Equal employment legislation Government subsidies Number of patents

19 Environmental Scanning & Industry Analysis Key Political, Governmental, & Legal Variables (cont’d) Import/export regulations Global relationships Political conditions Location and severity of terrorist activity Anti-trust enforcement

20 Environmental Scanning & Industry Analysis Economic Forces Availability of credit Level of disposable income Interest rtes Inflation rates Money market rates Fed Gov’t deficits GDP trend Consumption patterns

21 Environmental Scanning & Industry Analysis Key Economic Variables Value of the dollar in world markets Worker productivity levels Stock market trends Foreign economic conditions Unemployment trends

22 Environmental Scanning & Industry Analysis Key Economic Variables Income differences by region/customer Demand shifts for goods/services Price fluctuations Exportation of labor and capital Import/Export factors

23 Environmental Scanning & Industry Analysis Key Economic Variables Tax rates Fiscal policies OPEC policies ECC policies Monetary policies

24 Environmental Scanning & Industry Analysis Social, Cultural, Demographic & Environmental Forces Major Impact – Products Services Markets Customers

25 Environmental Scanning & Industry Analysis Key Social, Cultural, Demographic & Environmental Variables Number of marriages & divorces Number of special interest groups Number of births & deaths Immigration & emigration rates Childbearing rates

26 Environmental Scanning & Industry Analysis Actuarial rates Monitor Key Variables Per capita income Attitudes toward business Avg. disposable income Social, Cultural, Demographic & Environmental Forces Consumer behavior

27 Environmental Scanning & Industry Analysis Monitor Key Variables Ethical concerns Attitudes toward saving Racial equality Social, Cultural, Demographic & Environmental Forces Avg. educational level Governmental regulation

28 Environmental Scanning & Industry Analysis Monitor Key Variables Attitudes toward customer service Attitudes toward quality Social, Cultural, Demographic & Environmental Forces Energy conservation Social responsibility Leisure time values

29 Environmental Scanning & Industry Analysis Monitor Key Variables Recycling Social, Cultural, Demographic & Environmental Forces Waste management Air & water pollution Ozone depletion Endangered species

30 Environmental Scanning & Industry Analysis Technological Forces Major Impact – Internet Communications Semiconductors

31 Environmental Scanning & Industry Analysis

32 Environmental Scanning & Industry Analysis Technological Forces Essential for nearly every strategic decision Technology-based issues

33 Environmental Scanning & Industry Analysis Competitive Forces Collection & evaluation of data on competitors is essential for successful strategy planning, thus leading to Competitive Intelligence

34 Environmental Scanning & Industry Analysis Competitive Forces Strengths Weaknesses Capabilities Opportunities Threats Objectives Strategies Identifying Rival Firms

Competitive Intelligence (CI), sometimes named Business Intelligence, is a formal program of gathering information on a company’s competitors. Competitive Intelligence (CI) is both a process and a product. The process of CI is the action of gathering, analyzing, and applying information about the competitors’ products, customers…etc. for the short and long term planning of an organization. The product of CI is the output dictated by the needs of an organization, e.g. a competitive advantage attained. Environmental Scanning & Industry Analysis 35 Competitive Intelligence

36 Environmental Scanning & Industry Analysis Key Questions Concerning Competitors Their objectives and strategies Their weaknesses Their responses to external variables Their vulnerability to our alternative strategies Their strengths

37 Environmental Scanning & Industry Analysis Key Questions Concerning Competitors (cont’d) Entry and exit of firms in the industry Our product/service positioning Key factors for our current position in industry Sales/profit rankings of competitors over time Our vulnerability to strategic counterattack

38 Environmental Scanning & Industry Analysis Key Questions Concerning Competitors (cont’d) The threat of substitute products/services Nature of supplier & distributor relationships Should we keep our strategies secret from employees and stakeholders?

39 Environmental Scanning & Industry Analysis Competitive Forces 1. Market share matters 2. Understand what business you are in 3. Broke or not, fix it 4. Innovate or evaporate 5. Acquisition is essential to growth 6. People make a difference 7. No substitute for quality 7 Characteristics of most Competitive U.S. Firms:

Competitive Intelligence Goals of CI:  Detecting competitive threats  Working on eliminating/lessening surprises  Enhancing competitive advantage by lessening reaction time  Working on strengths and finding new opportunities Environmental Scanning & Industry Analysis 40

Identifying External Strategic Factors Environmental Scanning & Industry Analysis 41 Choices must be made regarding the level of importance of the scanned factors. Strategic Myopia – rejecting unfamiliar or information with negative impact. Issues Priority Matrix – help identify external strategic factors.

Egypt in Transition 1950 – Now Socialism Communism Capitalism State ownership Private ownership Public sector Private and business sector Protected markets Open markets Limited competition Severe competition Low quality High quality Low customer & market focus High customer & market focus Price control limited price control No punishment systems Punishment & reward systems Low income Moderate to high income Machine technology / Eastern Digital technology/ Western 42 Environmental Scanning & Industry Analysis

43 Environmental Scanning & Industry Analysis General Forces- External Factor Evaluation (EFE) Matrix Summarize & Evaluate PEST forces

Matrix is developed in 5 steps: 1. List the key external factors, opportunities first then threats. 2. Assign each factor a Weight from 0 (not important) to 1 (very important). (weight presents the relative importance of that factor to the firms’ success) N.B.: Sum of all weights must add up to 1 3. Assign Rating (from 1 to 4) to indicate how effectively the firm’s current strategies respond to that factor. Environmental Scanning & Industry Analysis 44 General Forces- External Factor Evaluation (EFE) Matrix

4. Multiply Weight x Rate = Weighted Score 5. Sum the weighted score to determine the total; highest is 4, i.e. response to external O&T is outstanding, while lowest is 1, i.e. firm’s strategies are not capitalizing on O or avoiding T. The total weighted score indicates how well the company is responding to the key success factors in its’ external environment. Environmental Scanning & Industry Analysis 45 General Forces- External Factor Evaluation (EFE) Matrix

EFE – Gateway Computers (2003) Key External Factors WeightRating Wtd Score Opportunities O1: Global PC market expected to grow 20% in O2: Cost of PC component parts expected to decrease 10% O3: Internet use growing rapidly O4: China entered WTO; lowered taxes for importing PC’s General Forces- External Factor Evaluation (EFE) Matrix 46 Environmental Scanning & Industry Analysis

EFE – Gateway Computers (2003) (cont’d) Key External Factors WeightRating Wtd Score Opportunities (cont’d) O5: The average income for PC worker has declined from $40K/yr to $30k/yr O6: Modernization of business firms and government agencies O7: U.S. (& world) economies recovering O8: 30% of Chinese population can afford a PC; only 10% of homes have a PC General Forces- External Factor Evaluation (EFE) Matrix 47 Environmental Scanning & Industry Analysis

EFE – Gateway Computers (2003) (cont’d) Key External Factors WeightRating Wtd Score Threats T1: Intense rivalry in industry0.101 T2: Severe price cutting in PC industry T3: Different countries have different reg’s and infrastructure for PC’s T4: Palm & PDA becoming substitutes General Forces- External Factor Evaluation (EFE) Matrix 48 Environmental Scanning & Industry Analysis

49 Environmental Scanning & Industry Analysis EFE – Gateway Computers (2003) (cont’d) Key External Factors WeightRating Wtd Score Threats (cont’d) T5: Demand exceeds supply of experienced PC workers T6: Birth rate in U.S. declining annually T7: U.s. consumers and businesses delaying purchase of PC’s T8: PC firms diversifying into consumer electronics Total General Forces - External Factor Evaluation (EFE) Matrix

50 Environmental Scanning & Industry Analysis Total weighted score of 4.0 Organization response is outstanding to threats General Forces- External Factor Evaluation (EFE) Matrix Total weighted score of 1.0 Firm’s strategies are not capitalizing on opportunities or avoiding threats

51 Environmental Scanning & Industry Analysis General Forces- External Factor Evaluation (EFE) Matrix Understanding the factors used in the EFE Matrix is more important than the actual weights and ratings assigned. Important --

52 Environmental Scanning & Industry Analysis Industry Analysis - Porters’ Five-Forces Model of Competition Rivalry among competing firms Threat of substitute products Threat of new entrants Bargaining power of suppliers Bargaining power of consumers

(1) Rivalry among competing firms Changing prices (either by increasing or decreasing). Improving product differentiation Creativity in using channels of distribution (backward/forward integration) Exploiting relationships with suppliers. Intensity of rivalry Industry Analysis - Porters’ Five-Forces Model of Competition 53 Environmental Scanning & Industry Analysis

(2) Potential development of substitute products Substitute products are those products that appear to be different but can satisfy the same need as another products (Fax vs. Fedex). Products’ price elasticity Industry Analysis - Porters’ Five-Forces Model of Competition 54 Environmental Scanning & Industry Analysis

(3) Bargaining power of consumers Buyers are powerful if: 1. Buyers’ high volume of purchase. 2. Buyer possessing credible backward integration. 3. Alternative suppliers are plentiful. 4. Low switching costs. 5. Concentrated buyers. Monopsony: relationship between the power of buyer & the producing firm. Buyers are weak if: 1. Buyers’ low volume of purchase. 2. Producer possessing credible forward integration. 3. Limited suppliers. 4. High switching costs. 5. Fragmented buyers. Industry Analysis - Porters’ Five-Forces Model of Competition 55 Environmental Scanning & Industry Analysis

(4) Bargaining power of Suppliers Supplier is powerful if: 1. Concentration of suppliers. 2. High product differentiation. 3. Limited substitutes. 4. Suppliers threat to integrate forward. 5. Significant costs to switch suppliers. Supplier is weak if: 1. Suppliers are plentiful. 2. Standardized products 3. Limited substitutes. 4. Buyers threat to integrate backward. 5. Low costs to switch suppliers. Industry Analysis - Porters’ Five-Forces Model of Competition 56 Environmental Scanning & Industry Analysis

(5) Potential entry of new competitors “Entry-deterring price” From a strategic perspective, some barriers could be created to enhance a firm’s competitive advantage. Industry Analysis - Porters’ Five-Forces Model of Competition 57 Environmental Scanning & Industry Analysis

External Factors Analysis Summary - EFAS Once the Societal AND Task environments have been scanned, and their external factors have been identified and classified, company undergoes an EFAS 58 Environmental Scanning & Industry Analysis