1 EXECUTIVE SCANNING IDIS 611 Dr. Jennings August 2008

2 Executive Master of Industrial Distribution Residency Week Executive Scanning: Understanding And Predicting What’s Around The Corner Daniel F. Jennings Ph.D., PE Andrew Rader Professor of Industrial Distribution 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 Flattened the corporate pyramid. Flattened the corporate pyramid. Outsourced capital-intensive manufacturing. Outsourced capital-intensive manufacturing. Forged strategic alliances with suppliers to significantly reduce inventories. Forged strategic alliances with suppliers to significantly reduce inventories.

5 The 21st Century Corporation Sophisticated IT systems 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? What Happened?

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

11 21st Century Corporation We didn’t think clearly. We didn’t think clearly. We didn’t see the downturn coming. We didn’t see the downturn coming. We just projected past performances forward. 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 40 % of their time spent looking forward 40 % of their time spent looking forward 30% of this time spent peering five or more years into the future 30% of this time spent peering five or more years into the future 20% is spent attempting to build a collective view of the future 20% is spent attempting to build a collective view of the future

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

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

24 Environmental Sectors Defined The Competition Sector 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.

25 Environmental Sectors Defined The Customer Sector 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.

26 The Technological Sector 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 Environmental Sectors Defined

27 The Regulatory Sector 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

28 The Economic Sector 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. Environmental Sectors Defined

29 The Sociocultural Sector 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

30 The Present Concept of the Environment General Environment General Environment Task Environment Task Environment Industry Environment Industry Environment

31 General Environment Duncan’s Six Sectors Duncan’s Six Sectors A General Overview A General Overview

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

33 Industry Environment Competitive Forces Analysis Competitive Forces Analysis

34 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

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

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

37 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) (Downey,Hellriegel & Solcum,1975)

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

39 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).

40 Questions What benefits can be derived from investigating PEU?

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

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

43 The Question Answered Aguilar (1967) Aguilar (1967) Daft (1988) Daft (1988)

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

45 Scanning Modes (Choo,2001)

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

47 The Internal Environment The Alignment Trap The Alignment Trap

48 Managing The Business (The Reality) Political Model Mental Model Business Model Operating Model

49 In many companies, the political, mental, business, and operating models are all perfectly aligned. But models don’t last forever. They decay. The Reality

50 FIT Congruence in Strategy, Critical Tasks, People, Formal Organization, Culture SIZE AND AGE Organizations Get Larger, More Structured, and Older INERTIA Structural Cultural SUCCESS In Stable Environments SUCCESS Congruence As A Managerial Trap: The Success Syndrome SUCCESS When Environments shifts

51 Managing The Business (The New View) Political Model Mental Model Business Model Operating Model Space For New Concepts

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

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

54 Core Values Core Values Core Behaviors Core Behaviors Core Competencies Core Competencies Environment

55 Core Values Core Behaviors Core Competencies Environmental Shifts The Confounds

56 The Confounds Signals Signals Blindspots Blindspots Smoke Screens Smoke Screens

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

58 Daniel F. Jennings, Ph.D., P.E. Texas A&M University 3367 TAMU College Station, TX Phone: (979) Fax: (979) © 2007 TAMU