Environmental Scanning and Industry Analysis Continuation

8/3/2019 Environmental Scanning and Industry Analysis Continuation

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EnvironmentalEnvironmentalScanning andScanning andIndustry AnalysisIndustry Analysis


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EnvironmentalEnvironmental

ScanningScanning

StrategyStrategy

FormulationFormulation

StrategyStrategy

ImplementationImplementation

EvaluationEvaluation

& Control& Control

BASIC MODEL OF STRATEGICMANAGEMENT

Feedback and LearningFeedback and Learning


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Environmental Scanning


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Environmental ScanningEnvironmental Scanning

Monitoring and interpreting

sweep of social, political,economic, ecological, andtechnological events to spot

budding trends that could

eventually impact industry

Definition


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Environmental ScanningEnvironmental Scanning

Purpose

Raise consciousness of

managers about potentialdevelopments that could

Have importantimpact on industryconditions

Pose new

opportunities andthreats


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3-7

The External Scan}define the context

in which you do

business} look for key

emerging trends,issues

}considercompetition andindustry


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} The monitoring, evaluating, and disseminatingof information from the external environmentto key people within the organization to avoid

strategic surprise and ensure the long-termhealth of the firm.

}Need to assess Macro (PESTE), Industry Specific

(5 Forces) and Competitor (Group Map) issues

}Objective of an external environmental scan isto identify Opportunities and Threats

Environmental Scanning:


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Key Frameworks forConducting an External Scan

}Environmental variables

}PESTE analysis

}Porter 5 forces analysis, macro view

} Issues Matrix

}Strategic Group Map


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Environmental Scan/Trendsfor a Company

} companies are continually acquiring info onexternal events & then interpreting trends

} first define your target market, the product andindustry

} pick which major environ categories affectsyour business

} secondly write facts. then explain the relevantbusiness ripple impact in detail!!

} Trends & Issues

} Impact & Initiative


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Environmental UncertaintyEnvironmental Uncertainty

} degree of complexity plus degree ofchange existing in an organizations

external environment.

} is both a THREAT and an OPPORTUNITY


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Reducing Uncertainty} You need to assess this in order

to develop strategies to respondto issues

} Many of these external factorsare outside your control!

} The more you anticipate them,the less you need to react to

them, the more you can plan for

them} You want to REDUCE

UNANTICIPATEDSURPRISES!


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ExternalExternal EnvironmentEnvironment AnalyzeAnalyzein 3 ways to reduce uncertainty:in 3 ways to reduce uncertainty:

1. Macro/Societal environment

2. Task environment

3. Industry analysis


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Societal Environment} General forces that do not directly touch on the

short-run activities of the organization but can,

and often do, influence its long run decisions.


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Societal Environment Forces


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Scanning the External EnvironmentScanning the External Environment


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} Political Legal

}Allocate power, provide laws and regulations

} Economic

} Regulate the exchange of materials, money,energy, and information

} Sociocultural

} Regulate values, mores, and customs

} Technological

}Generate problem-solving inventions

} Environment

} Regulate environmental sustainability


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Important Variables for PESTEEconomic

GDP trends

Interest rates

Money supply

Inflation rates

Unemploymentlevels

Wage/pricecontrols

Devaluation/

revaluation

Energy availabilityand cost

Disposable anddiscretionaryincome

Technological

Total governmentspending for R&D

Total industry

spending for R&DFocus of

technologicalefforts

Patent protection

New products

New developments

in technologytransfer from labto marketplace

Productivityimprovementsthroughautomation

Political-Legal

Antitrust regulations

Environmentalprotection laws

Tax laws

Special incentives

Foreign traderegulations

Attitudes towardforeigncompanies

Laws on hiring andpromotion

Stability ofgovernment

Sociocultural

Lifestyle changes

Careerexpectations

Consumer activism

Rate of familyformation

Growth rate ofpopulation

Age distribution ofpopulation

Regional shifts inpopulation

Life expectancies

Birth rates

Environmental

Trend on greencompanies

Increasing

environmentalawareness

Environmentalsustainabilityprograms

Availability/Sustainability ofnatural resources


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Task Environment} Elements or groups that directly affect the

corporation and, in turn, are affected by it.

} The task environment is the industry within which thatfirm operates.

} Need to focus on issues and challenges specific toyour industry (Macro faces all)

} Conduct detailed industry analysis using


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Task Environment Forces


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Scanning the External EnvironmentScanning the External Environment


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Issues Priority Matrixis a way to identifyand analyzedevelopments in the

externalenvironment.

Probable Impact on Corporation

Probability

ofOccurrence

High Medium Low

High

High Priority High Priority Medium Priority

M

edium

High Priority Medium Priority Low Priority

Low Medium Priority Low Priority Low Priority


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Steps on how to use IssuesPriority Matrix:

1. Identify the number of likely trends(strategic environmental issues) emerging

in the societal and task environments.

2. Assess the probability of these trendsactually occurring from low to high.

3. Attempt to ascertain the likely impact

(from low to high) of each of these trendson the corporation being examined.


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Issues Priority Matrix} Managers can use it to decide which

environmental trends should be merely scanned(low priority) and which should be monitored as

strategic factors (high priority).

}Determine probability that will occur and likelyimpact if it does

} Focus time and resources on high impact events likely to

occur} Do not waste time on low impact events unlikely to occur


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A corporations external strategic factorsare those key environmental trends that are

judged to have both a medium to highprobability of occurrence and a medium tohigh probability of impact on the

corporation.

Those environmental trends judged to be a

corporations strategic factors are then

categorized as opportunities and threatsand are included in strategy formulation.


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Industry Analysis:Analyzing the Task Environment


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Industry Analysis} IndustryAgroup of firms producing asimilar product or service,such as soft drinks or financial services.

Need to assess:

1. Suppliers2. Buyers3. Substitutes4. Potential Entrants5. Other Stakeholders

} Goal: to describe the level of rivalry (amount of andcharacteristics of direct competition) which existswithin your industry which should govern strategychoices.


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Industry Analysis

}An in-depth examination of keyfactors/competitors within a corporations

task environment.


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Take a Realistic Industry Snapshot

} To assess

} balance of industry power

} level of competition

} identify real competitors & potentialentrants

gl


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Industry Analysis

} Refers to an in-depth examination of keyfactors within a corporations task

environment.


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Forces Driving IndustryCompetition

} Threat of new entrants

} Rivalry among existing firms

} Threat of substitute products or services

} Bargaining power of buyers

} Bargaining power of suppliers

} Relative power of other stakeholders


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Threat of new entrants

}New entrants to an industry typically bringto it new capacity, a desire to gain

market share and substantial resources.


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continuation


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Porter's Five Forces Analysis

} is an important tool for assessing thepotential for profitability in an industry.

With a little adaptation, it is also useful asa way of assessing the balance of powerin more general situations


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} Supplier Power: The power of suppliers to drive

up the prices of your inputs.} Buyer Power: The power of your customers to

drive down your prices.

}Competitive Rivalry: The strength of

competition in the industry.} The Threat of Substitution: The extent to which

different products and services can be used in

place of your own.

} The Threat of New Entry: The ease with whichnew competitors can enter the market if they

see that you are making good profits (andthen drive your prices down).


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Threat of New Entrants

} The competition in an industry will be thehigher, the easier it is for other companies

to enter this industry. In such a situation,new entrants could change majordeterminants of the market environment(e.g. market shares, prices, customer

loyalty) at any time. There is always alatent pressure for reaction andadjustment for existing players in thisindustry.


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Barriers to Entry

} The threat of new entries will depend onthe extent to which there are barriers to

entry. These are typically


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} Economies of scale (minimum size requirements for

profitable operations),} High initial investments and fixed costs,

} Cost advantages of existing players due to experiencecurve effects of operation with fully depreciated assets,

} Brand loyalty of customers

} Protected intellectual property like patents, licenses etc,} Scarcity of important resources, e.g. qualified expert

staff

} Access to raw materials is controlled by existing players,

} Distribution channels are controlled by existing players,

} Existing players have close customer relations, e.g. fromlong-term service contracts,

} High switching costs for customers

} Legislation and government action


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Rivalry among ExistingPlayers/Firms

} This force describes the intensity ofcompetition between existing players

(companies) in an industry. Highcompetitive pressure results in pressure onprices, margins, and hence, onprofitability for every single company in

the industry.


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Competition between existingplayers is likely to be high when

} There are many players of about the same size,

} Players have similar strategies

} There is not much differentiation between playersand their products, hence, there is much pricecompetition

} Low market growth rates (growth of a particularcompany is possible only at the expense of a

competitor),} Barriers for exit are high (e.g. expensive and highly

specialized equipment).


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Threat of Substitutes} Substitute Products are those products that appear to be

different but can satisfy the same need as another

product.} A threat from substitutes exists if there are alternative

products with lower prices of better performanceparameters for the same purpose. They could potentiallyattract a significant proportion of market volume and

hence reduce the potential sales volume for existingplayers. This category also relates to complementaryproducts.


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Similarly to the threat of new entrants, the

threat of substitutes is determined by factorslike

} Brand loyalty of customers,

} Close customer relationships,

} Switching costs for customers,

} The relative price for performance of

substitutes,

} Current trends.


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Bargaining Power of Buyers

} the bargaining power of customersdetermines how much customers can

impose pressure on margins and volumes.


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Customers bargaining power islikely to be high when

} They buy large volumes, there is a concentration of buyers,

} The supplying industry comprises a large number of small operators

} The supplying industry operates with high fixed costs,

} The product is undifferentiated and can be replaces by substitutes,

} Switching to an alternative product is relatively simple and is not

related to high costs,

} Customers have low margins and are price-sensitive,

} Customers could produce the product themselves,

} The product is not of strategical importance for the customer,

} The customer knows about the production costs of the product

} There is the possibility for the customer integrating backwards.


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Bargaining Power ofSuppliers

} The term 'suppliers' comprises all sourcesfor inputs that are needed in order to

provide goods or services.

} Suppliers can affect an industry throughtheir ability to raise prices or reduce thequality of purchased goods and services.


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Supplier bargaining power islikely to be high when:

} The market is dominated by a few large suppliers rather than a fragmentedsource of supply,

} There are no substitutes for the particular input,

} The suppliers customers are fragmented, so their bargaining power is low,} The switching costs from one supplier to another are high,

} There is the possibility of the supplier integrating forwards in order to obtain

higher prices and margins. This threat is especially high when

} The buying industry has a higher profitability than the supplying industry,

} Forward integration provides economies of scale for the supplier,

} The buying industry hinders the supplying industry in their development (e.g.

reluctance to accept new releases of products),

} The buying industry has low barriers to entry.


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} In such situations, the buying industryoften faces a high pressure on margins

from their suppliers. The relationship topowerful suppliers can potentially reducestrategic options for the organization.


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R

elative Power ofO

therStakeholders} A sixth force should be added to Porters list to include

a variety of stakeholder groups from the task

environment.} Includes governments, local communities, creditors,

trade associations, special interest groups, unions,shareholders, and complementors (a company or anindustry whose porduct works well with anotherindustrys or a firms product and without which theproduct would lose much of its value e.g. tire andautombile industry; microsoft and intel)


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References

} Strategic Management and BusinessPolicy by Wheelen and Hunger

}www.fox.temple.edu/iei/documents/environmentvariablesME..

} External Scanning by Fall, 2006

} http://wiki.answers.com/Q/What_is_issues

_priority_matrix#ixzz1emwKX7Pl

} http://www.themanager.org/Models/p5f.htm

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Environmental Scanning and Industry Analysis Continuation

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