Environmental Scanning and Industry Analysis

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

Environmental Scanning

The Components of a Company’s Macro-Environment

MACROENVIRONMENT

Legislation and

Regulation

Societal Values

and LifestylesPopulatio

n

Demographics

Technology

The Economy at Large

COMPANY

Suppliers Substitutes

Buyers

NewEntrants

Rival Firms

IMMEDIATE INDUSTRY

AND COMPETITIVE ENVIRONMENT

CompetitorsSuppliers

Other projectsCreditors

cultureEmployees

CommunitiesEconomy

StockholdersLabor UnionsGovernmentGeographyResourse

Key External Forces

Opportunities&

Threats

Key External Forces & the Organization

PEST analysis

•What environmental factors are effecting organization?

•Which of these are the most important at the present time?

•Whish of these can become important in

the next few years?

Political / Legal

Economic Social Technological

Environmental regulation and protection

Economic growth (overall; by industry)

Income distribution (change in distribution of disposable income)

Government spending on research

Taxation (corporate, consumer)

Monetary policy

(interest rates) Demographics (age structure of the population; gender; family size and composition; changing nature of occupations)

Government and industry focus on technological

effort

International trade regulation

Government spending (overall level; specific spending priorities)

Labor / social mobility New discoveries and development

Consumer protection

Policy towards unemployment (minimum wage, unemployment benefits, grants)

Lifestyle changes (e.g. Home working, single households)

Speed of technology transfer

PEST analysis: some principles and conclusions: • Things that make activity more difficult for people

or organizations raise the cost of doing business.

• The higher the cost of doing business in a region, the more project profitability is squeezed or eliminated.

• And the lower the amount of economic activity, the poorer and less capable societies tend to be. 

• Wherever there is rapid or major change in an area, there are likely to be new opportunities and threats that arise.

• Few situations are perfect: it is up to us to make the most of the situation in which we find ourselves.

The Issues Priority Matrix

Probable Impact on Corporation

High Medium Low

Highpriority

Highpriority

Medium priority

Highpriority

Mediumpriority

Lowpriority

Mediumpriority

Lowpriority

Lowpriority

Pro

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f O

ccu

rren

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Hig

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The Five-Forces Model of Competition (Porter’s approach)

Potential development of substitute products

Rivalry among competing firms

Bargaining power of suppliers

Potential entry of new competitors

Bargaining power of consumers

The stronger that each of these five forces is, the more limited is the ability of established companies to raise prices and earn greater profits within their industry.

Strength of forces may change

How the Five-Forces shape Competition within an Industry

Threats of new competitors entering the market. Thethreat of entry depends on the presence of entrybarriers and the reaction that can be expected fromexisting competitors. The possible barriers to entry:• economies of scale• product differentiation• capital requirements• switching costs• access to distribution channels• cost disadvantages independent of size• governmental policy

Potential entry of new competitors

Intensity of rivalry among firms in the industry.

Corporations are mutually dependent.

Intense rivalry is related to the presence of several

factors:• number of competitors• rate of industry growth• product or service characteristics• amount of fixed costs• capacity• height of exit barriers• diversity of rivals

Rivalry among competing firms

Substitute products or services are those products/services that appear to be different but can satisfy the same need as another product/service.

“Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge.” (M. Porter)

Potential development of substitute products

Is Pepsi Cola a substitute for a Coca-Cola?

A buyer or a group of buyers is powerful if:• a buyer purchases a large proportion of the

seller’s product or service (oil filters purchased by a major auto maker)

• alternative suppliers are plentiful because the product is standard or undifferentiated (gas stations)

• changing suppliers costs very little• a buyer earns low profits and thus sensitive to

costs and service differences (grocery stores)• the purchased product is unimportant to the final

quality or price of buyer’ products or services (electric wire bought for use in lamp).

Bargaining power of consumers

Suppliers can affect an industry through their ability

to raise prices or reduce the quality of purchased

goods and services:– the supplier industry is dominated by a few companies,

but it sells to many (petroleum industry)– its product or service is unique and/or has built up

switching costs (Word software)– substitutes are not readily available (electricity)– suppliers are able to integrate forward and compete

directly with the present customers (Intel can make PCs)

– a purchasing industry buys only a small portion of the supplier group’s goods and services and its unimportant for supplier

Bargaining power of suppliers

The Five-Forces Model of Competition

• An unattractive industry is one in which intense rivalry already exists among competitors, there are substantial threats in terms of new competitors and substitute products, and suppliers and buyers are very powerful in bargaining over prices and quality.

• An attractive industry is one with less intense competition, few threats from new entrants or substitutes, and low bargaining power among suppliers and buyers.

Things to Consider inAssessing Industry Attractiveness

• Industry’s market size and growth potential• Whether competitive conditions are conducive to

rising/falling industry profitability• Will competitive forces become stronger or weaker • Whether industry will be favorably or unfavorably

impacted by driving forces• Potential for entry/exit of major firms• Stability/dependability of demand• Severity of problems facing industry• Degree of risk and uncertainty in industry’s future

Strategic Group Mapping

• 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

Identifying IndustryKey Success Factors

• Answers to three questions pinpoint KSFs– On what basis do customers choose between

competing brands of sellers?– What resources and competitive capabilities

does a seller need to have to be competitively successful?

– What does it take for sellers to achieve a sustainable competitive advantage?

• KSFs consist of the 3 - 5 really major determinants of financial and competitive success in an industry

Common Types ofKey Success Factors

Distribution-related

Marketing-related

Skills-related

Organizational capability

Other types

Technology-related

Manufacturing-related

Scientific research expertise; Product innovation capability; Expertise in a given technology; Capability to use Internet to conduct various business activities

Low-cost production efficiency; Quality of manufacture; High use of fixed assets; Low-cost plant locations; High labor productivity; Low-cost product design; Flexibility to make a range of products

Strong network of wholesale distributors/dealers; Gaining ample space on retailer shelves; Having company-owned retail outlets; Low distribution costs; Fast delivery

Fast, accurate technical assistance; Courteous customer service; Accurate filling of orders; Breadth of product line; Merchandising skills; Attractive styling; Customer guarantees; Clever advertising

Superior workforce talent; Quality control know-how; Design expertise; Expertise in a particular technology; Ability to develop innovative products; Ability to get new products to market quickly

Superior information systems; Ability to respond quickly to shifting market conditions; Superior ability to employ Internet to conduct business; More experience & managerial know-how

Favorable image/reputation with buyers; Overall low-cost; Convenient locations; Pleasant, courteous employees; Access to financial capital; Patent protection

Strategic Management Principle

A sound strategy incorporates efforts

to be competent on all industry key

success factors and to excel on an

least one factor!

Forecasting

Environmental scanning provides reasonably hard data on the present situation and current trends , but intuition and luck are needed to predict accurately if these trends will continue.

Faulty underlying assumptions are the most frequent cause of forecasting errors.

ForecastingVarious techniques are used to forecast future:• Extrapolation is extension of present trends into the future.• Brainstorming is no quantitative approach requiring simply the

presence of people with some knowledge if the situation to be predicted.

• Expert opinion is no quantitative technique in which experts in a particular area attempt to forecast likely developments.

• Delphi technique in which separated experts independently assess the likehoods of special events. These assessments are combines and send back to each expert for fine tuning until an agreement is reached.

• Statistical modeling is a quantitative technique that attempts to discover casual or ay least explanatory factors that link two or more time series together.

• Scenario writing is focused descriptions of different likely future presented in a narrative fashion (Royal Dutch Shell).

• Industry scenario is a forecasted description of particular industry’s likely future.

Industry Analysis: The External Factor Analysis Summary (EFAS) Matrix

CompetitivePoliticalCultural

Technological

EnvironmentalSocial

Governmental

DemographicEconomic

Summarize & Evaluate

EFAS – Maytag (1995)

Key External Factors Weight RatingWtd

Score

Opportunities

1. Economic integration of European Community

0.20 4.1 0.82

2. Demographic favor quality appliances

0.10 5.0 0.50

3. Economic development of Asia 0.05 1.0 0.05

4. Opening of Eastern Europe 0.10 2.0 0.10

5. Trend to “Super Stores” 0.1 1.8 0.18

EFAS – Maytag (1995) (cont’d)

Key External Factors Weight RatingWtd

Score

Threats

1. Increasing government regulations 0.10 4.3 0.43

2. Strong U.S. competition 0.10 4.0 0.40

3. Whirlpool and Electrolux strong globally

0.15 3.0 0.45

4. New product advances 0.05 1.2 0.06

5. Japanese appliance companies 0.10 1.6 0.16

Total Scores 1.0 3.15

Total weighted score of 5.0• Organization response is outstanding to threats

and weaknesses

Total weighted score of 1.0• Firm’s strategies not capitalizing on opportunities

or avoiding threats

Industry Analysis EFAS

The Maytag’s total weight is 3.15 means that the corporation was slightly above average in the major home appliance industry in 1995.

Wayne Gretzky: The key to winning is skating not where the puck is but

to where it is going to be.

People talk about skating, puck handling and shooting, but the whole sport is angels and caroms, forgetting the straight direction the puck is going, calculating where it will be diverted, factoring in all the interruptions.

Conclusion

The key to winning is not to assume that your industry will continue as it is now but to assume that the industry will change and to make sure that your company will be in position to take advantage of that change.