External Scanning Chapter 4 Fall 2006 Environmental Scanning

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External Scanning

• Chapter 4
• Fall 2006

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Environmental Scanning
Definition

• Monitoring and interpreting sweep of social,
  political, economic, ecological, and
  technological events to spot budding trends that
  could eventually impact industry

Purpose

• Raise consciousness of managers about potential
  developments that could
• Have important impact on industry conditions
• Pose new opportunities and threats

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The External Scan

• Define the context in which you do business
• look for key emerging trends, issues
• consider competition and industry

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4.1 Environments

• Environmental scanning
• The monitoring, evaluating, and disseminating of
  information from the external environment to key
  people within the organization to avoid strategic
  surprise and ensure the long-term health of the
  firm.
• Need to assess Macro (PEST), Industry Specific (5
  Forces) and Competitor (Group Map) issues
• Objective of an external environmental scan is to
  identify Opportunities and Threats

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Key Frameworks for Conducting an External Scan

• Environmental variables p30
• PEST analysis table 3-1 p 35
• Porter 5 forces analysis, macro view p39
• Issues Matrix page 38 ( sensitivity table)
• Strategic Group Map - p.45 Figure 3-6

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Environmental Scan/Trends for a Company

• Companies are continually acquiring info on
  external events then interpreting trends
• first define your target market, the product and
  industry
• pick which major enviro categories affects your
  business
• secondly write facts. then explain the relevant
  business ripple impact in detail!!
• Trends Issues
• Impact Initiative

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4.2 Reducing Uncertainty

• Environmental uncertainty
• The degree of complexity plus the degree of
  change existing in an organizations external
  environment.
• You need to assess this in order to develop
  strategies to respond to issues
• Many of these external factors are 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 UNANTICIPATED SURPRISES!

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4.2 Reducing Uncertainty

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4.2 External Environment Analyze in 3 ways to
reduce uncertainty

• Macro/Societal environment (PEST)
• General forces that do not directly touch on the
  short-run activities but often influence its
  long-run decisions.
• Task environment (5 forces)
• 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.

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External Environment

• Variables
• Industry analysis (Group Map)
• An in-depth examination of key factors/competitors
  within a corporations task environment.

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4.3 External Environment

• Macro/Societal environment forces (PEST)
• Economic forces
• Regulate the exchange of materials, money,
  energy, and information
• Technological forces
• Generate problem-solving inventions

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4.3 (contd) External Environment

• Societal environment forces
• Political-legal forces
• Allocate power, provide laws and regulations
• Socio-cultural forces
• Regulate values, mores, and customs
• Refer to complete chart with detailed issues p.
  35

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4.3 Macro/Societal Environment Important
Variables for PEST
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
RD Total industry spending for RD 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 Environmenta
l 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
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4.4 Issues Priority Matrix

• Technique to help managers prioritize myriad of
  external factors
• Determine probability that will occur and likely
  impact if it does
• Focus time and resources on high impact events
  likely to occur
• Dont waste time on low impact events unlikely to
  occur (p. 38)
• (later - Assignment 10)

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4.5 Task Environment

• Need to focus on issues and challenges specific
  to your industry (Macro faces all)
• Conduct detailed industry analysis using Porters
  5 forces analysis

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4.5 Industry Analysis

• Industry
• A group of firms producing a similar product or
  service, such as soft drinks or financial
  services.
• Need to assess (p. 39 chart)
• Suppliers
• Buyers
• Substitutes
• Potential Entrants
• Other Stakeholders
• Goal is to describe the level of rivalry (amount
  of and characteristics of direct competition)
  which exists within your industry which should
  govern strategy choices

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Take a Realistic Industry Snapshot

• To assess
• balance of industry power
• level of competition
• identify real competitors potential entrants

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Five Competitive Forces Model (Porter)

• How to use Industry Structure Analysis.
• Analyze each of the five factors using the
  determinants.
• Rank whether the Intensity, threat, or
  power, of each of the five factors is High,
  Medium or Low.
• Look at all five factors together. Whats
  pulling the business? (I.e. balance now and in
  the future)
• Assign an overall attractiveness level.

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Barriers to Entry

• economies of scale
• product differentiation
• capital requirements
• switching costs
• access to distribution channels

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Common Barriers to Entry

• Sizable economies of scale
• Inability to gain access to specialized
  technology
• Existence of strong learning/experience curve
  effects
• Strong brand preferences and customer loyalty
• Large capital requirements and/or other
  specialized resource requirements
• Cost disadvantages independent of size
• Difficulties in gaining access to distribution
  channels
• Regulatory policies, tariffs, trade restrictions

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4.5 When is rivalry intense?

• Few competitors roughly equal in size
• Slow or no growth in industry
• Presence of commodity characteristics
• High fixed costs
• Excess capacity
• High exit barriers
• High rival diversity
• Will result in CUT THROAT competition with price
  wars, stealing/buying of market share . . .

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Rivalry Among Competing Sellers

• Usually the most powerful of the five forces
• The big factor determining the strength of
  rivalry is how actively and aggressively are
  rivals employing the various weapons of
  competition in jockeying for a stronger market
  position and seeking bigger sales
• Is price competition vigorous?
• Active efforts to improve quality?
• Are rivals racing to offer better performance
  features?
• Are rivals racing to offer better customer
  service?
• Lots of advertising/sales promotions?
• Active efforts to build a stronger dealer
  network?
• Active product innovation?
• Active use of other weapons of rivalry?

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Factors That Affect the Strength of Rivalry

• Rivalry is generally stronger when
• Rivals are active in making fresh moves to
  increase sales and market share
• Buyer demand is growing slowly
• The number of rivals ranges from at least 5 to
  upwards of 12 or more
• Rivals are of roughly equal size and capability
• Buyer costs to switch brands are low
• One or more rivals is dissatisfied with their
  current position and market share and make
  aggressive moves to improve their market
  prospects
• When rivals have diverse strategies and
  objectives and are located in different countries
• When one or two rivals have powerful strategies
  and other rivals are scrambling to stay in the
  game

• The Weapons of Competitive Rivalry
• Lower prices
• More appealing features
• Better product performance
• Higher quality
• Strong brand image and appeal
• Better customer service capabilities
• Wider product selection
• Bigger/better dealer network
• Stronger product innovation capabilities
• Longer warranties
• Higher levels of advertising

Rivalry among Competing Sellers Efforts of
rivals to gain better market position, higher
sales and market share, and competitive advantage

• Rivalry is generally weaker when
• Rivals move only infrequently or in a
  non-aggressive manner to draw sales and market
  share away from rivals
• Buyer demand is growing rapidly
• Buyer costs to switch brands are high

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4.6 Complementor (6th force)

• (PC sales and chips tires and cars) are a sixth
  force recently added demand for one drives
  demand for other

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4.11 Strategic Groups

• 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.

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4.11 Defining a Strategic Group

• Identify Key Success Factors
• Will differ for each segment/niche
• Draw a grid using two KSF and rating each
  competitor according to these criteria
• May need two or three maps to develop a strong
  understanding of segment and basis for
  competition

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Strategic Group Mapping (p 45)

• Firms in same strategic group have two or more
  competitive characteristics in common
• Sell in same price/quality range
• Cover same geographic areas
• Be vertically integrated to same degree
• Have comparable product line breadth
• Emphasize same types of distribution channels
• Offer buyers similar services
• Use identical technological approaches

What business are we in?
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Guidelines Strategic Group Maps

• Variables selected as axes should not be highly
  correlated
• Variables chosen as axes should expose big
  differences in how rivals compete
• Variables do not have to be either quantitative
  or continuous
• Drawing sizes of circles proportional to combined
  sales of firms in each strategic group allows map
  to reflect relative sizes of each strategic group
• If more than two good competitive variables can
  be used, several maps can be drawn

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3.2 Strategic Groups and Mobility Barriers
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4.11 Competitor Analysis

• Strategic Groups
• A set of business units or firms that pursue
  similar strategies with similar resources geared
  towards similar segment

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External Analysis - 2. The Competition
Competitive Strength Grid
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4.11Choice of a Strategic Group

• Market needs you are able to meet versus what you
  would like to meet each niche has Key Success
  Factors
• Consider resources such as manpower, expertise,
  financial resources, profile, brand loyalty etc.
• Consider barriers to entry for various segments
  of market (technology, cost, learning effect,
  productivity, brand loyalty)
• May be unable to move from one group to another
  (even though the segment has potential)

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4.9 Strategic Types

• Defender
• Limited product line, focus on operational
  efficiency, cost orientation e.g. Michelin
• Prospector
• Broad product lines, focus on innovation and
  opportunity, strong sales orientation, emphasize
  creativity over efficiency e.g. Pepsico
• Analyzer
• Operate in at least two different product
  markets, stalbe and variable, careful approach to
  product development, innovation is emphasized
  e.g. Proctor and Gamble
• Reactor
• Lack consistent strategy, gut reactions to
  changing environmental conditions, little
  identify, little market or brand loyalty e.g.
  Kmart, Bay

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Discussion Questions

• Discuss how a development in an organizations
  societal environment can affect the organization
  through its task environment
• According to Porter, what determines the level of
  competitive intensity in an industry?
• According to Porters discussion of industry
  analysis, is Pepsi-Cola a substitute for
  Coca-Cola?

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Discussion Questions

• How can a decision-maker identify strategic
  factors in the organizations external
  international environment?
• What are stakeholders and how do they take a role
  in analysis of the environment?

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Hand-in Exercise

• Create an Industry Matrix
• See Assignment sheet