Environmental Scanning and Industry Analysis

Environmental Scanning and Industry Analysis
Lecture 3 Environmental Scanning and Industry Analysis Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

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. Construct strategic group maps to assess the competitive positions of firms in an industry Identify key success factors and develop an industry matrix After reading this chapter, you should be able to: • 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 Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Environments Environmental uncertainty:
The degree of complexity plus the degree of change existing in an organization’s external environment. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Environments Environmental scanning:
The monitoring, evaluating, and disseminating of information from the external and internal environments to key people within the corporation to avoid strategic surprise and ensure the long-term health of the firm. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Identifying External Environmental Variables
STEEP Analysis- monitoring trends in the societal and natural environments Sociocultural- Technological- Economic- Ecological /environmental- Political-legal forces Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

External Environmental Variables:
Societal\community environment: General forces that do not directly touch on the short-run activities but often influence its long-run decisions. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Task environment: Those 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. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

External Environment Societal environment forces: Economic forces
Regulate the exchange of materials, money, energy, and information Technological forces Generate problem-solving inventions Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Societal environment forces:
External Environment Societal environment forces: Political-legal forces Allocate power, provide laws and regulations Socio-cultural forces Regulate values, mores\traditions, and customs Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Societal Environment Important Variables
Economic GDP trends Interest rates Money supply Inflation rates Unemployment levels Wage/price controls Devaluation/revaluation Energy availability and cost Disposable and discretionary income 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 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 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 Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Global Business Environment
The international forces that affect business: International trade agreements (EU, NAFTA, WTO) International economic conditions: inflation Political unrest: Arab spring revolutions. International market opportunities: expand into China. Suppliers outsourcing: contract with consultant companies. Cultural differences Competitors and Currency values Now let’s examine the Global Business Environment. This environment includes the international forces that affect an organization. These include: International trade agreements such as the European Union, Mercosur and others. International economic conditions such as high inflation rates and credit card interest rates in Latin America. Political unrest, which can follow the election of a new president in a country or can involve land reform issues. International market opportunities, such as Wal-Mart expanding into China or Latin America. Suppliers outsourcing, such as airlines or credit card companies locating their call centers in India. Cultural differences—for example, compare the international excitement about soccer, or football as it is called everywhere else in the world, to how the sport is viewed in the United States. Competition, such as Wal-Mart’s chief competitor Carrefour in Europe and Mexico. Currency values, which cause exchange rates to fluctuate and can cause the revenues businesses receive for their products to go down. Teaching Tips: Please join with another class member. In your team please choose one of the international forces that affect a business. Then please briefly discuss and describe an example of the force your team picked. Let’s share our examples with the class. Answers will vary but can build upon examples presented earlier in this slide presentation. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra © 2009 Pearson Education, Inc.

Trends in Economic Forces:
Increase Interest rates affected negatively on Home sales Increase Oil prices affected negatively on economy. Emerging markets BRIC countries: Brazil, Russia, India, China: rapid growth and development. Eastern Europe: major manufacturing supplier to Europe. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

The Rising Power of Emerging Markets
The Role of BR IC: Brazil, Russia, India, and China. The status of these four nations has risen In International trade for different reasons: Brazil is strong in commodities and agriculture, Russia Is a powerful energy supplier, China is a major hub of manufacturing activity. India has become a leading service provider at various levels ranging from basic customer service call centers to engineering solutions providers. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Trends in Technological Forces:
Portable information devices and electronic networking Alternative energy sources Virtual personal assistants Smart, mobile robots Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Trends in Political-Legal Forces:
Enforcement of U.S. antitrust laws Taxation and labor laws Government bureaucracy, e.g, speed the processes. World Trade Organization Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Socio-cultural Trends
External Environment Socio-cultural Trends Increasing environmental awareness: green marketing, Recycling. Growth of the seniors market, mature segments, for example, are good markets for the health care and tourism industries. In 2012, for the desire for companionship, 72.9 million households in the United States spent US$52 billion on their pets. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

External Environment Socio-cultural Trends Decline of the mass market to mass customization. Changing pace and location of life. Instant communication via , cell phones, and Overnight mail enhances efficiency, but it also puts more pressure on people Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

External Environment Socio-cultural Trends Changing household composition. E.g., in USA, married-couple households slipped from nearly 80% in the 1950s to 48% of all households by 2010. By 2007, more than 50% the adult female population were single. As of 2012, 41% of all births in the United States were to unmarried women Increasing diversity of workforce and market. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

External Environment Socio-cultural Trends Increasing diversity of workforce and market. For example, 24% of the Swiss population was born elsewhere. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Workforce Diversity Heterogeneous workforce in terms of gender, race, ethnicity, and age. workforce is getting older In US Asians and Hispanics are an increasingly large percentage of workforce “melting pot” approach versus celebration of differences © Prentice Hall, 2002 Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra 2-21

External Strategic Factors
External Environment External Strategic Factors Factors influencing the choice of the strategic factors: Personal values of managers Functional experience of managers Success of current strategies Strategic myopia/ shortsightedness Willingness to reject unfamiliar as well as negative information Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Issues Priority Matrix
External Environment Issues Priority Matrix Identify likely trends: Societal and task environments Strategic environmental issues Assess probability of trends occurring Low to High Ascertain\find likely impact of trends on the corporation Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Issues Priority Matrix
High Priority Medium Probable Impact on Corporation Low Probability of Occurrence Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

External Environment External Strategic Factors Defined:
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 corporation’s strategic factors are then categorized as opportunities and threats and are included in strategy formulation. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Industry Analysis Industry
A group of firms producing a similar product or service, such as soft drinks, health services or financial services. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Industry Analysis Porter’s approach: Assess the six forces --
Threat of new entrants Rivalry among existing firms Threat of substitute products Bargaining power of buyers Bargaining power of suppliers Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Industry Analysis Threat of New Entrants -- Barriers to entry:
Previous experience with retaliation to new entry. Economies of Scale Product Differentiation Capital Requirements Switching Costs to another suppler Access to Distribution Channels Cost Disadvantages Independent of Size: established firms may have, proprietary product technology, favorable access to raw material, learning curve. Government Policy Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

The threat of new entry (competitors).
New entries expand industry’s productive capacity. “Unless the market grows, a new entries intensifies the fight for market share”. The result is prices go down which, lowering industry profitability. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Industry Analysis Rivalry Among Existing Firms --
Intense rivalry related to: Number of competitors Rate of Industry Growth Produce or Service Characteristics Amount of Fixed Costs Capacity Height of Exit Barriers Diversity of Rivals Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Threat of Substitute Products/Services
Industry Analysis Threat of Substitute Products/Services Substitute Products: Those products that appear to be different but can satisfy the same need as another product. To the extent that switching costs are low, substitutes can have a strong effect on an industry. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Industry Analysis Bargaining Power of Buyers --
Buyer is powerful when: Buyer purchases large proportion of seller’s products Buyer has the potential to integrate backward Alternative suppliers are plentiful Changing suppliers costs very little Purchased product represents a high percentage of a buyer’s costs Buyer earns low profits Purchased product is unimportant to the final quality or price of a buyer’s products Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Industry Analysis Bargaining Power of Suppliers --
Supplier is powerful when: Supplier industry is dominated by a few companies but sells to many Its product is unique and/or has high switching costs Substitutes are not readily available Suppliers are able to integrate forward and compete directly with present customers Purchasing industry buys only a small portion of the supplier’s goods. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Industry Analysis Industry Evolution
most industries evolve through a series of stages from growth to decline: industry lifecycle. Fragmented Industry – No firm has large market share and each firm serves only a small piece of the total market in competition with others. Consolidated Industry – Dominated by a few large firms, each of which struggles to differentiate its products from the competition. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Continuum\range of International Industries
Global Industry in which companies manufacture and sell the same products, with only minor adjustments made for individual countries around the world. Automobiles Tires Television sets Multidomestic Industry in which companies tailor their products to the specific needs of consumers in a particular country. Retailing Insurance Banking Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Industry Analysis Global Industries
Classifying Industry primarily multidomestic or primarily global based on: Pressure for coordination Within the multinationals in that industry Pressure for local responsiveness On the part of Individual country market. If the pressure for coordination with multinationals is strong and the pressure for local responsiveness is weak within a particular industry, the industry is global. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Industry Analysis Strategic Groups Defined:
A set of business units or firms that pursue similar strategies with similar resources. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Strategic group analysis
“Aims to identify organizations with similar strategic characteristics, following similar strategies or competing on similar bases”. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Some characteristics for identifying strategic groups
To measure how org. are differ based on the following characteristics: 1- The extent of product diversity. 2- Extent of geographical coverage. 3- Number of market segment served. 4- Distribution channels used. 5- Number of branding. 6- Product quality. 7- Technological leadership. 8- R&D capability. 9- Cost position. 10- Utilization of capacity. 11- Separate company, or relationship with parent. 12- Relationship to influence groups, e.g., government. 13- Size of organization. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Why strategic group analysis is important?
Identify who most direct competitor. On what basis the competitors are competing on. It raises the question of how possible to move from one group to another. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Mapping Strategic Groups in the U.S. Restaurant Chain Industry
Strategic groups in a particular industry can be mapped by plotting the market positions of industry competitors on a two-dimensional graph, using two strategic variables as the vertical and horizontal axes (see Figure 4–4). Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Industry Analysis Strategic Types
it is used to analyze the level of competitive intensity within a particular industry. Defined: Category of firms based on a common strategic orientation and a combination of structure, culture, and processes consistent with that strategy. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Industry Analysis Strategic Types –
Categorized by one of four general strategic orientations: Defenders Companies with a limited product line; focus on improving efficiency of current operations. This cost orientation makes them unlikely to innovate in new areas. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Industry Analysis Strategic Types (continued)– Prospectors:
Companies with fairly broad product lines; focus on product innovation and market opportunities. They tend to emphasize creativity over efficiency. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Industry Analysis Strategic Types (continued)– Analyzers:
Corporations that operate in at least two different product-market areas – one stable and one variable. Used by Multidivisional firms. In the stable areas, efficiency is emphasized. In the variable areas, innovation is emphasized. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Industry Analysis Strategic Types (concluded)– Reactors:
Corporations that lack a consistent strategy-structure-culture relationship. Most major U.S. airlines have recently tended to be reactors Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

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. Closer relationships with suppliers are being forged to reduce costs, increase quality, and gain access to new technology 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. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Industry Matrix Key Success Factors Company A Rating Company A
Weighted Score Company B Rating Company B Weighted Score Weight 1 2 3 4 5 6 Total 1.00 Source: T. L. Wheelen and J. D. Hunger, “Industry Matrix.” Copyright © 2001 by Wheelen and Hunger Associates. Reprinted by permission. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Industry Analysis Forecasting Techniques:
Extrapolation: the extension of present trends into the future. It rest on the assumption that the world change slowly. Time-series methods are used. Brainstorming Expert opinion Statistical modeling Scenario writing: upon a series of historical data plus informed hunches from key people Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

External Factor Analysis Summary (EFAS)
company Response rate External Factors Impact on company Response Rate Comments 1 2 3 4 5 Opportunities Threats Total Weighted Score 1.00 Notes: List opportunities and threats (5–10) in column Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factor’s probable impact on the company’s strategic position. The total weights must sum to Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the company’s response to that factor Multiply each factor’s weight times its rating to obtain each factor’s weighted score in Column Use Column 5 (comments) for rationale used for each factor Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how well the company is responding to the strategic factors in its external environment. Source: T. L. Wheelen and J. D. Hunger, “External Strategic Factors Analysis Summary (EFAS).” Copyright © 1991 by Wheelen and Hunger Associates. Reprinted by permission. Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

External Factor Analysis Summary (EFAS) Maytag Example
External Factors Rating Weighted Score Weight Comments Opportunities • Economic integration of European Community • Demographics favor quality appliances • Economic development of Asia • Opening of Eastern Europe • Trend to “Super Stores” Threats • Increasing government regulations • Strong U.S. competition • Whirlpool and Electrolux strong globally • New product advances • Japanese appliance companies Total Scores 1 .20 .10 .05 .15 2 4 5 1 2 3 3 .80 .50 .05 .10 .20 .40 .45 4 Acquisition of Hoover Maytag quality Low Maytag presence Will take time Maytag weak in this channel Well positioned Hoover weak globally Questionable Only Asian presence is Australia 5 1.00 3.15 Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

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 Competitive intelligence is a formal program of gathering information on a company’s competitors. Often called business intelligence, it is one of the fastest growing fields within strategic management. Sources of competitive intelligence are: • Information brokers • Internet • Industrial espionage • Investigatory services Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Discussion Explain in details the relationship between societal environment and task environment? Discuss how a development in a corporation's societal environment can affect the corporation through its task environment? How we indentify the key strategic factors? Be practical in your answer? Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

Discussion How can a decision maker identify external strategic factors in a corporation's external international environment? Copyright © 2015 Pearson Education, Inc; Developed by Prof. Majed El-Farra

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