Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 1 Environmental Scanning and Industry Analysis Chapter 3

Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis

Page 1

Environmental Scanning and

Industry Analysis

Chapter 3


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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


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3.1 Environmental Scanning

Environment: everything around us.

Business environment: Sum total of all the forces Sum total of all the forces surrounding & influencing the life and surrounding & influencing the life and development of the firm.development of the firm.

Environmental scanning is the monitoring, evaluating, and disseminating of information from external and internal environment to key people in company.


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Opportunities and

Threats

Key External Forces

Competitors

Suppliers

Distributors

Creditors

Customers

Employees

Communities

Managers

Stockholders

Labor unions

External Forces


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Ten Key external forces


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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

Scanning the Societal Environment


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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


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Technological Forces

-Profound impact on organizations Computer Tele communications Internet eCommerce


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-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

Technological Forces


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Political-Legal Forces

-Key opportunities and Key Threats Antitrust legislation Tax rates Patent Laws Quota Lobbying efforts by International


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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


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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


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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


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Competitive Forces:

-Competition in virtually all industries can be described as intense .

-Identifying rival firms Strength Weakness Capabilities Opportunities Threats Objectives Strategies


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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


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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

Bargaining power of consumers


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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.


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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).


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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?


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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)


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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


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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


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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.


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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.


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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:.

3.3 Industry Analysis: The External Factor

Evaluation (EFE) Matrix


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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


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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.


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An Example External Factor Evaluation Matrix for UST, Inc

Key External Factors

Opportunity

Weight Rating Weighted score

Global markets change 0.15 1 0.15

Increased family income 0.05 3 0.15

Population growth 0.05 1 0.05

Joint venture 0.15 4 0.60

Less competitors 0.10 3 0.30

ThreatsLegislation against the tobacco 0.10 2 0.20

Production limits on tobacco 0.05 3 0.15

Smokeless market in US region. 0.05 2 0.10

Bad media exposure from Gov’ agency 0.10 2 0.20

Clinton Administration 0.20 1 0.20

TOTAL 1.00 2.10


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Some issue for Review and Discussion

1. Identify a recent economic, social, political, or technological trend that significantly affects financial institutions.

2. Use Porter’s Five-Force Model to evaluate competitiveness within the Cambodia education industry.

3. Construct and EFE Matrix for an organization of your choice.

4. Discuss the opportunities and threats a firm faces in Siem Reap.

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Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 1 Environmental Scanning and Industry Analysis Chapter 3