Environmental Scanning

Definition

• Environmental scanning is the monitoring, evaluating and disseminating of information from the external and internal environments to key people within the corporation.

• It is a tool that a corporation uses to avoid strategic surprise and to ensure long – term health.

Azhar Kazmi, quoted in his book –

“Business Policy and strategic management that

– the process by which organizations monitor their relevant environment to identify opportunities and threats defecting their business is known as environmental scanning.

Factors to be consider for environmental scanning:

1. Events are important and specific occurrences taking place in different environmental sectors.

2. Trends are the general tendencies or the courses of action along which events take place.

3. Issues are the current concerns that arise in response to events and treats.

4. Expectations are the demands made by interested groups in the light of their concern for issues.

Example: Gas leakage accident at the Union Carbide Factory at Bhopal in Dec. 1984.

Event The accident and the resulting holocaust

Trend The authorities and Organizations to be conscious about safety from hazardous exposure to chemicals

Issue A rising concern about environmental pollution

Expectation To legislate changes in rules and regulations pertaining to safety measures and stricter enforcement through various mechanism

Environmental Scanning & MonitoringTechniques

TECHNIQUES FOR ENVIRONMENTAL SCANNING

Involve two phases: Information gathering and Evaluation1) Verbal & Written Information:

verbal information includes, information obtained by direct talk with people, by attending seminars, meetings, etc..

Written or documentary information includes both published and unpublished materials

2) Search and Scanning: this involves research for obtaining the required information

3) Spying: Eve though it is not considered as ethical, spying to get information about the

competitor is not uncommon

These 3 pertains to source of information/methods of gathering information

4) Forecasting: done by corporate planners or other staff personnel or

consultants This pertains to use the information gathered by above

mentioned 3 methods for picturing the future scenario.

The QUEST (Quick Environ mental Scanning techniques)

Report and scenarios are reviewed by a group of strategists who identify feasible strategic options to deal with the evolving environment.

Environmental Scanning & Monitoring-Tools

Environment Scanning

Tools

PEST

SWOT Analysis

Industry Analysis

Competitor Analysis

SWOT(Strength-Weakness-Opportunity-Threat)

Identification of threats and Opportunities in the environment (External) and strengths and Weaknesses of the firm (Internal) is the cornerstone of business policy formulation; it is these factors which determine the course of action to ensure the survival and growth of the firm.

SWOT Analysis

• The SWOT analysis is an extremely useful tool for understanding and decision-making for all sorts of situations in business and organizations. SWOT is an acronym for Strengths, Weaknesses, Opportunities, Threats.

• SWOT analysis came from the research conducted at Stanford Research Institute from 1960-1970. The background to SWOT stemmed from the need to find out why corporate planning failed. The research was funded by the fortune 500 companies to find out what could be done about this failure. The Research Team were Marion Dosher, Dr Otis Benepe, Albert Humphrey, Robert Stewart, Birger Lie.

SWOT: Studying Internal & External Environment

The aim of any SWOT analysis is to identify the key internal and external factors that are important to achieving the objective. SWOT analysis groups key pieces of information into two main categories:

– Internal factors – The strengths and weaknesses internal to the organization.

–External factors – The opportunities and threats presented by the external environment.

Examples of SWOTs

• Strengths and Weaknesses– Resources: financial, intellectual, location – Cost advantages from proprietary know-how – Creativity / ability to develop new products – Valuable intangible assets: intellectual capital – Competitive capabilities – Big campus selection

• Opportunities and Threats– Takeovers – Market Trends – Economic condition – Mergers – Joint ventures – Strategic alliances – Expectations of stakeholders – Technology – Public expectations – Competitors and competitive actions – Poor Public Relations Development – Criticism (Editorial) – Global Markets – Environmental conditions

Uses of SWOT Analysis

• Corporate planning

• Set objectives – defining what the organisation is intending to do

• Environmental scanning – Internal appraisals of the organisations SWOT, this needs to include an

assessment of the present situation as well as a portfolio of products/services and an analysis of the product/service life cycle

Analysis of existing strategies, this should determine relevance from the results of an internal/external appraisal. This may include gap analysis (compare its actual performance with its potential performance which will look at environmental factors)

Strategic Issues defined – key factors in the development of a corporate plan which needs to be addressed by the organisation

Develop new/revised strategies – revised analysis of strategic issues may mean the objectives need to change

• Establish critical success factors – the achievement of objectives and strategy implementation

• Preparation of operational, resource, projects plans for strategy implementation

• Monitoring results – mapping against plans, taking corrective action which may mean amending objectives/strategies.

Also;

Use SWOT analysis for business planning, strategic planning, competitor evaluation, marketing, business and product development and research reports.

PEST Analysis

A scan of the external macro-environment in which the firm operates can be expressed in terms of the following factors:

•Political•Economic•Social•Technological

The acronym PEST (or sometimes rearranged as "STEP") is used to describe a framework for the analysis of these macro environmental factors. A PEST analysis fits into an overall environmental scan as shown in the following diagram:

Environmental Scan

/ \

External Analysis Internal Analysis

/ \

Macroenvironment

Microenvironment

|

P.E.S.T.

Environmental scanning

External analysis

Macro environment

PEST analysis

Micro environment

Five force analysis

Internal analysis

Political Factors

Political factors include government regulations and legal issues and define both formal and informal rules under which the firm must operate. Some examples include:•tax policy•employment laws•environmental regulations•trade restrictions and tariffs•political stability

Economic Factors

Economic factors affect the purchasing power of potential customers and the firm's cost of capital. The following are examples of factors in the macroeconomy:

•economic growth•interest rates•exchange rates•inflation rate

Social Factors

Social factors include the demographic and cultural aspects of the external macroenvironment. These factors affect customer needs and the size of potential markets. Some social factors include:•health consciousness•population growth rate•age distribution•career attitudes•emphasis on safety

Technological Factors

Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions. Some technological factors include:•R&D activity•automation•technology incentives•rate of technological change

Industry Analysis

• An industry is a group of firms producing a similar product or service

• An examination of the important stakeholders’ group in a particular corporation’s task environment is a part of industry analysis

Porter’s approach to Industry Analysis

• A corporation is most concerned with the intensity of competition within its industry

• The level of this intensity is determined by basic competitive forces

• In scanning its industry, the corporation must assess the importance to its success of each of the six forces

Forces Driving Industry Competition

Threat of New Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Relative Power of Unions, Governments, etc.

Potential Entrants

Threat of Substitute Products or Services

Industry Competitors

Rivalry Among Existing Firms

Other StakeholdersBuyers

Substitutes

Suppliers

Threat of New Entrants:Some Barriers to Entry

• Economies of Scale• Product Differentiation• Capital Requirements• Switching Costs• Access to Distribution Channels• Cost Disadvantages Independent of Size• Government Policy

Properties of Entry Barriers

• Entry barriers can and do change as the conditions change

• Entry barriers can change for reasons inside the firm : impact of the firm’s strategic decisions

• Some firms may possess resources or skills which allow them to overcome entry barriers into an industry more cheaply than most other firms

Rivalry Among Existing FirmsIntense Rivalry is Related To:

• Number of Competitors: numerous or equally balanced competitors

• Rate of Industry Growth: slow industry growth• Product or Service Characteristics: Lack of

differentiation or switching costs• Amount of Fixed Costs : high fixed or storage costs

• High fixed or storage costs• Lack of differentiation or switching costs• Capacity augmented in large increments (leading to

overcapacity and price cuttings)• Diverse competitors• High strategic stakes• High exit barriers (specialized assets, fixed costs of

exit, strategic interrelationships, emotional barriers, government and social restrictions)

Shifting Rivalry

• The factors that determine the intensity of competitive rivalry can and do change

• As an industry matures, its growth rate declines, resulting in intensified rivalry, declining profits

• An acquisition can introduce a different personality to an industry

• Focusing selling efforts on the fastest growing segments can reduce the impact of industry rivalry

Entry Barriers and Exit Barriers• When entry barriers are high and exit barriers are

low, entry will be deterred, and unsuccessful competitors will leave the industry

• When both entry and exit barriers are high, profit potential is high, but is usually accompanied by more risks, and unsuccessful firms will fight to stay

• The worst case is when entry barriers are low and exit barriers are high (overcapacity, poor profitability)

Pressure from Substitute Products

• Substitutes limit the potential return of an industry by placing a ceiling on the prices firms in the industry can profitably charge

• Identifying substitute is searching for other products that can perform the same function as the product of the industry

• The impact of substitutes can be summarized as the industry’s overall elasticity of demand

Bargaining Power of Buyers

• Buyers compete by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other

• A buyer’s group is powerful if:1. It purchases large volumes relative to seller sales2. The products it purchases from the industry

represent a significant fraction of the buyer’s cost of purchase (shop for good price)

3. The products it purchases from the industry are standard or undifferentiated

4. It faces few switching costs5. It earns low profits (thus sensitive to costs)6. Buyers pose a credible threat of backward

integration7. The industry’s product is unimportant to the quality

of the buyer’s products or services8. The buyer has full information

Bargaining Power of Suppliers• Suppliers can exert bargaining power over participants in an

industry by threatening to raise prices or reduce the quality of purchased goods and services

• A supplier group is powerful if:1. It is dominated by a few companies2. It is not obliged to contend with other substitute products for

sale to the industry3. The industry is not an important customer4. The supplier’s product is an important input to the buyer’s

business

5. The supplier’s group products are differentiated or it has built up switching costs

6. The supplier group poses a credible threat of forward integration

7. Labor must be considered as a supplier that exerts great power in many industries

Government as a force in industry competition

• Government role as supplier and buyer can be influenced by political factors

• Government regulations can set limits on the behavior of firms as suppliers or buyers

• Government can affect the position of an industry with substitutes through regulations, subsidies, or other means

• Government can affect rivalry among competitors by influencing industry growth

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