1 EXECUTIVE SCANNING IDIS 424 Spring 2004

2 Home Improvement Industry 16 th Annual Presidents Council Conference Executive Scanning: Understanding And Predicting What’s Around The Corner Daniel F.Jennings Ph.D., PE Texas A&M University

3 In the year 2000 much was written in the popular press about a certain company. This firm was described by many as the: 21st Century Corporation

4 The 21st Century Corporation l Flattened the corporate pyramid. l Outsourced capital-intensive manufacturing. l Forged strategic alliances with suppliers to significantly reduce inventories.

5 The 21st Century Corporation l Sophisticated IT systems Real time data Detect slightest change in current market conditions Forecast with precision

Revenues$34.3 Billion Net Income$7.4 Billion Market Value$453.9 Billion The 21st Century Corporation

Revenues$22.4 Billion Net Income$(1.1) Billion Market Value$238.9 Billion

8 21st Century Corporation April 2001 $2.2 Billion Inventory Write Down

9 21st Century Corporation What Happened?

10 21st Century Corporation l Over reliance on IT systems. Too much data Not sufficient understanding l Didn’t understand the way our customers managed their business. l Financing from venture capitalists & stock market l Didn’t use cash flow from operations to finance their business.

11 21st Century Corporation l We didn’t think clearly. l We didn’t see the downturn coming. l We just projected past performances forward.

12 21st Century Corporation Cisco Systems

13 21st Century Corporation What Are The Lessons to Be Learned From The Bust?

14 Facing the Future by Prahalad and Hamel

15 What percentage of your time is spent on external issues?

16 How much of this time is spent considering how the world will be different in five or ten years?

17 Of the time devoted to looking outward and forward How much is spent in consultation with colleagues to build a shared, well-tested view of the future?

18 From their research, Prahalad & Hamel reported that the answers of senior executives conform to a rule

19 The Rule l 40 % of their time spent looking forward l 30% of this time spent peering five or more years into the future l 20% is spent attempting to build a collective view of the future

20 The Rule l (40% x 30% x 20%)=2.4% l Thus, on average, senior executives spend less than 3% of their energy in building a corporate perspective of the future

21 What is involved in developing a direction for the future???

22 The External Environment l Awareness l Duncan’s Contributions

23 Environmental Sector l The Competition Sector l The Customer Sector l The Technological Sector l The Regulatory Sector l The Economic Sector l The Sociocultural Sector

24 Environmental Sectors Defined l The Competition Sector This sector includes the firms and products that compete with your company’s products, and companies that make substitute products. It also refers to competitive tactics and actions between you rfirm and the other competing firms in this industry. l The Customer Sector This sector refers to those companies or individuals that purchase the products made by your company. Customers include companies that acquire your products for resale, as well as final consumers.

25 l The Technological Sector This sector includes the development of new production techniques and methods,innovation in materials and products, and general trends in research and science relevant to your company l The Regulatory Sector This sector includes federal and state legislation and regulations, city or community policies, and political developments at all levels. Environmental Sectors Defined

26 l The Economic Sector This sector includes economic factors such as stock markets,rate of inflation, foreign trade balance, federal and state budgets, interest rates,unemployment and economic growth rate. l The Sociocultural Sector This sector comprises social values in the general population, the work ethic, and demographic trends such as an increasing number of women in the work force. Environmental Sectors Defined

27 The Present Concept of the Environment l General Environment l Task Environment l Industry Environment

28 General Environment l Duncan’s Six Sectors l A General Overview

29 Task Environment Specific dimensions l Competitors l Customers l Suppliers l Strategic Allies l Regulators l Employees l Owners

30 Industry Environment l Competitive Forces Analysis

31 Environmental State Dimensions (Duncan’s Model) Small number of factors and components in the environment Factors and components are somewhat similar to one another. Factors and components remain basically the same and are not changing Large number of factors and components in the environment Factors and components are not similar to one another Factors and components remain basically the same. Small number of factors and components in the environment. Factors and components are somewhat similar to one another. Factors and components of the environment are in continual process of change. Large number of factors and components in the environment. Factors and components are not similar to one another. Factors and components of environment are in a continual process of change Static Dynamic SimpleComplex

32 Environmental Uncertainty l Lack of information regarding environmental sectors(components) and environmental factors. l Not knowing the economic impact of an incorrect decision. l Inability to assign probabilities with any degree of confidence

33 Environmental Uncertainty Consider: Actual (objective) Environment = A Perceived Environment = P Does: A = P (or) A P

34 Environmental Uncertainty While it is important to measure the specific objective attributes of the environment, the important phenomenon to measure is the decision - maker’s perception of the environment (Downey,Hellriegel & Solcum,1975)

35 A New Term - Perceived Environmental Uncertainty(PEU) l Sewell Avery l 1995 NEDA Executive Conference.

36 PEU It is probably a mistake to say that environments are uncertain. It is the organization that is uncertain about the environment.(Achrol,Reve & Stem,1983).

37 Questions What benefits can be derived from investigating PEU?

38 Wood’s Study of Distribution Channels (2001) l Why do changes in environmental conditions cause changes to the exchange relationships among channel members ? l Is it the channel members perception of environmental conditions that causes decision - maker’s to take actions that change the channel?

39 An Earlier Important Question l How is information about events, trends, and relationships in an organizations external environment obtained? l How is this information utilized by the gathering organization?

40 The Question Answered l Aguilar (1967) l Daft (1988)

41 Daft’s Model Sector Importance Sector Complexity Sector Rate of Change Perceived Sector Uncertainty Perceived Strategic Uncertainty CEO Scanning Frequency CEO Scanning Mode

42 Scanning Modes (Choo,2001)

43 Environmental Scanning(ES) l Distinct from information gathering l Distinct from competitive intelligence l Distinct from business intelligence l ES gathers and analyzes every sector of the external environment.

44 Executive Scanning Internal Environment Resources Capabilities Innovation Conflict Control Coordination Culture External Environment General Task Industry Confounds Organizational Executives Confounds

45 Executive Scanning l Involves the external and internal scanning activities of senior and middle managers. l Sense making & knowledge

46 Sense Making and Knowledge The ability to understand l The External Environmental Scanning Process l The Internal Environmental Scanning Process l The Confounds

47 Core Values Core Values Core Behaviors Core Behaviors Core Competencies Core Competencies Environment

48 Core Values Core Behaviors Core Competencies Environmental Shifts The Confounds

49 The Confounds l Signals l Blindspots l Smoke Screens

50 Signaling External l The selective communication of information to competitors designed to influence their perception and hence to provoke or avoid certain types of reaction l Signaling may be used to maintain a cozy industry environment of cooperation and restrained competition among firms.

51 Signaling Internal l The selective communication of information to individuals within the organization to influence their perception and hence to provoke or avoid certain types of reaction l Signaling may be used to foster or resolve conflicts and to change or maintain the power of an individual within an organization

52 Observing the strategic actions of an organization suggests that flaws may exist in the scanning analysis. These flaws are referred to as blind spots

53 Blind Spots Why do blind spots exist ? l A mistaken or incomplete view of the external and internal environments. l Poor design of a competitive analysis system. l Managerial perceptions l Ineffective organizational processes. l A discontinuity between the core values, competencies, incentives, and behaviors of organizational members and environmental changes

54 Blind Spots Factors leading to blind spots: 1. Misjudging industry boundaries 2. Poor identification of emerging competition 3. Overemphasis on the visible competence of competitors 4. Faulty assumptions about the competition 5. Paralysis by analysis

55 Smokescreens Undetected Signal Cloaked Signal

56 Executive Scanning: A Structured Approach To Information Gathering July 25, 2003

57 Questions: l Who scans in your organization? l What scanning process is utilized? l How are “findings” reported? l Do you trust their bias? l What signals are they scanning? l Are there undetected hostile coalitions? l How are decisions made? l What are you signaling the competition?

58 As Industry continues towards: Consensus Empowerment Teaming Globalization Real time data Forecasting with “precision” Supply chain alliances Consolidation Some other “next new thing” The need for managed scanning and signaling processes will continue to increase. “MBWA” hasn’t gone away, it has a new component.

59 MBSA “Management By Scanning Around”

60 Daniel F. Jennings, Ph.D., P.E. Texas A&M University 3367 TAMU College Station, TX Phone: (979) Fax: (979) © 2001 Thomas A. Read Center