1. Environmental Scanning and Industry Analysis
Chapter 3
Environmental Scanning and Industry Analysis

2. Chapter Objectives After finish this chapter student will understand:
What is business environment?
How to scanning an external environment?
External environment analysis
National competitiveness
Porter’s Five Forces model of competition

3. 3.1 Environmental Scanning
Environment: everything around us.
Business environment: Sum total of all the forces surrounding & influencing the life and development of the firm.
Environmental scanning is the monitoring, evaluating, and disseminating of information from external and internal environment to key people in company.

5. Opportunities and Threats
External Forces
Competitors
Suppliers
Distributors
Creditors
Customers
Employees
Communities
Managers
Stockholders
Labor unions
Key
External
Forces
Opportunities and Threats

6. Ten Key external forces

7. Scanning the Societal Environment
Economic
Technological
Political-legal
Socio-cultural
-GDP trends
-Interest rate
-Money supply
-Inflation rate
-Unemployment
-Wages/prices
-Energy availability/cost
-Disposable income
-Total government spending for R&D
-Total industry spending for R&D
-Focus technological efforts
-New products
-New development in technology
-Productivity through automation
-Monopoly regulation
-Environmental protection laws
-Tax law
-Special incentives
-Attitudes toward foreign company
-Laws on hiring and promotion
-Stability of government
-Lifestyle change
-Career expectation
-Regional shifts in population
-Consumer behavior
-Rate of family formation
-Growth rate of population
-Age distribution of population
-Life expectancy
-Birth rate

8. Economic Forces Availability of credit Interest rate Inflation rate
GDP trends
Consumption patterns
Unemployment level
Wage and price control
Demand shift for goods/services
Imports/Export factors
Income difference by region/customer
Monetary policies
Fiscal policy

9. -Profound impact on organizations
Technological Forces
-Profound impact on organizations
Computer
Tele communications
Internet
eCommerce

10. -Internet changes the nature of opportunities and threats
Technological Forces
-Internet changes the nature of opportunities and threats
Alters life cycle of products
Increases speed of distribution
Creates new products and services
Eases limitations of geographic markets
Alters economies of scale
Changes entry barriers

11. Political-Legal Forces
-Key opportunities and Key Threats
Antitrust legislation
Tax rates
Patent Laws
Quota
Lobbying efforts by International

12. Political-Legal Forces
-Key Political-Legal Variables
Government regulation and deregulation)
Tax law changes
Special tariffs
Changes in patent laws
Environment protection laws
Equal employment laws
Level of government subsidies

13. Social-Cultural-Demographic Forces
-Key Variables
Life expectancy rates
Per capita income
Average disposable income
Attitude toward business
Buying habits
Ethical concerns
Attitude toward saving

14. Social-Cultural-Demographic Forces
Monitor Key Variables
Racial equality
Average level of education
Government regulation
Attitude toward customer services
Attitude toward product quality
Social responsibility
Waste management

15. Competitive Forces:
-Competition in virtually all industries can be described as intense .
-Identifying rival firms
Strength
Weakness
Capabilities
Opportunities
Threats
Objectives
Strategies

16. Understand what business you are in Acquisition is essential to growth
Competitive Forces:
-Characteristics of most competitive firms
Market share matters
Understand what business you are in
Acquisition is essential to growth
People make a difference
No substitute for quality
More Innovation

17. 3.2 Competitive Analysis: Porter’s Five Forces Model
Potential development
of substitute products
Rivalry among
competing firms
Bargaining power
of suppliers
Potential entry of new competitors
of consumers

18. Five force model of competition concept
provide you :
Understand how profitable an industry is to be in which can be used to decide whether to enter or exit the market.  
By firms operating in that industry to understand the forces impacting upon industry profitability and change how they operate to become more profitable themselves.

19. Competitive Rivalry
The force will be high and the industry less profitable when:
There are a lot of competitors
There is little difference between the products
Competitors are strong i.e. big, have financial support, economies of scale
There are exit barriers e.g. high cost of leaving a market).

20. Competitors can be analyzed by asking the following questions?
a) What are their objectives?
b) What are their strategies? (e.g. cost leadership, differentiation, market penetration, product development etc.)
c) What are their strengths and weaknesses? (SWOT Analysis/ Value Chain)
d) How will they react to our offensive moves (e.g. price cuts)?
e) What threats do they pose?

21. Threat of new entrants
-The force will be high, and the industry less profitable when:
New companies can easily enter the market)
New companies are likely to or intend to enter the market)
-It is harder to enter the market when there are significant barriers to entry. These can include:
High costs of entry e.g. production facilities, IT, Building, Factory)
Patents (Law)
Customer contracts in place)
Cost advantages of existing competitors are significant (e.g. due to scale of operation)
competitors (Strong brands amongst competitors)

22. Buyer Power -The force is high, and industry less profitable when:
Customers are large and provide a large proportion of company profits
Customers can switch between competitors easily
More choice

23. Supplier Power
-Supplier power is high, and industry less profitable when:
The are few alternative suppliers.
Cost of changing suppliers is high.
Not much choice

24. Substitutes
Substitutes are products which fulfill the same needs as the needs met by the product in the industry being examined. A substitute of cinema might be the theatre, DVD's, sport or other forms of entertainment.)
Where customers can have there needs met from many different types of products, it becomes easy for them to switch, if prices rise for instance. This makes profitability in the industry low.
Switching Cost is also one of example of Substitutes.

25. Group Discussion Break a class in to group (3-5)
Do an Industry analysis on Build Bright University (BM study center only).
Presentation is Optional.

26. 3.3 Industry Analysis: The External Factor Evaluation (EFE) Matrix
An External Factor Evaluation Matrix (EFE) allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, government, legal, technological, and competitive information, can be developed in Five steps:.

27. Step 1. : List 10 to 20 external factors, including both
Step 1 : List 10 to 20 external factors, including both opportunities and threats that affect the firm. Be specific as possible, using percentages, ratios, and comparative numbers whenever possible.
Step 2 : Assign to each factors a weight that ranges form 0.0 (not important) to 1.0 (very important). The weight indicates the relative importance of that factor to be successful.
The sum of all weight assigned to the factors must equal 1.0

28. Step 3. : Assign a 1 to 4 rating to each key external
Step 3 : Assign a 1 to 4 rating to each key external factors to indicate how effectively the firm’s current strategies respond to the factor, where
4 the response is superior, 3 is above average,
2 is average, and 1 is poor
Step 4 : Multiply each factor’s weight by its rating to determine a weighted score.
Step 5 : Sum the weight scores for each variable to determine the total weight score for the firm.
The highest total score is 4.0, the lowest is 1.0, the average is 2.5.

29. An Example External Factor Evaluation Matrix for UST, Inc
Key External Factors
Opportunity
Weight
Rating
Weighted score
Global markets change
0.15 1
Increased family income
0.05 3
Population growth
Joint venture 4
0.60
Less competitors
0.10
0.30
Threats
Legislation against the tobacco 2
0.20
Production limits on tobacco
Smokeless market in US region.
Bad media exposure from Gov’ agency
Clinton Administration
TOTAL
1.00
2.10

30. Some issue for Review and Discussion
Identify a recent economic, social, political, or technological trend that significantly affects financial institutions.
Use Porter’s Five-Force Model to evaluate competitiveness within the Cambodia education industry.
Construct and EFE Matrix for an organization of your choice.
Discuss the opportunities and threats a firm faces in Siem Reap.