CH4.

Environmental Scanning and Industrial Analyses

Environmental scanning is the monitoring, evaluation, and dissemination of information from the
external and internal environments to key people within the corporation. To define the strategic factors
and to avoid strategic surprise and to ensure its long-term health

IDENTIFYING EXTERNAL ENVIRONMENTAL VARIABLES

1. Natural environment includes physical resources, wildlife, and climate that are an
inherent part of existence on Earth. These factors form an ecological system of
interrelated life.
2. The societal environment is mankind’s social system that includes general forces
that do not directly touch on the short-run activities of the organization that can, and
often do, influence its long-run decisions. These factors affect multiple industries and
are as follows:
 Economic forces that regulate the exchange of materials, money, energy, and
information.
 Technological forces that generate problem-solving inventions.
 Political–legal forces that allocate power and provide constraining and protecting
laws and regulations.
 Sociocultural forces that regulate the values, mores, and customs of society.
3. The task environment includes those elements or groups that directly affect a
corporation and, in turn, are affected by it. These are governments, local
communities, suppliers, competitors, customers, creditors, employees/labor unions,
special-interest groups, and trade associations. A corporation’s task environment is
typically the industry within which the firm operates.

Scanning the Natural Environment

A business corporation must thus scan the natural environment for factors that might
previously have been taken for granted, such as the availability of fresh water and clean air.
Global warming means that aspects of the natural environment, such as sea level, weather,
and climate, are becoming increasingly uncertain and difficult to predict

Scanning the Societal Environment: STEEP Analysis

STEEP Analysis, the scanning of Sociocultural, Technological, Economic, Ecological, and

Political-legal environmental forces
Industry analysis (popularized by Michael Porter) refers to an in-depth examination of key
factors within a corporation’s task environment. The natural, societal, and task
environments must be monitored to detect the strategic factors that are likely in the future
to have a strong impact on corporate success or failure. Changes in the natural environment
usually affect a business corporation first through its impact on the societal environment in
terms of resource availability and costs and then upon the task environment in terms of the
growth or decline of
particular industries.

Eight current sociocultural trends are transforming North America and the rest of the
world:

1. Increasing environmental awareness: Recycling and conservation are becoming

more than slogans.
2. Growing health consciousness: Concerns about personal health fuel the trend toward
physical fitness and healthier living. As a result, sales growth is slowing at fast-food “burgers
and fries” retailers such as McDonald’s. Changing public tastes away from sugar-laden
processed foods forced Interstate Bakeries, the maker of Twinkies and Wonder Bread, to
declare bankruptcy in 2004.

3. Expanding seniors market: As their numbers increase, people over age 55 will become
an even more important market. Already some companies are segmenting the senior
population into Young Matures, Older Matures, and the Elderly—each having a different set
of attitudes and interests. Both mature segments, for example, are good markets for the
health care and tourism industries; whereas, the elderly are the key market for long-term
care facilities.

4. Impact of Generation Y Boomlet: Born between 1978 and 1994 to the baby boom and
Xgenerations, this cohort is almost as large as the baby boom generation.. By 2000, they
were overcrowding elementary and high schools and entering college in numbers not seen
since the baby boomers. Now in its teens and 20s, this cohort is expected to have a strong
impact on future products and services.

5. Declining mass market: Niche markets are defining the marketers’ environment.
People want products and services that are adapted more to their personal needs and
marketing of products tailored to a person’s requirements

6. Changing pace and location of life: Instant communication via e-mail, cell phones,
and overnight mail enhances efficiency, but it also puts more pressure on people. Merging
the personal computer with the communication and entertainment industries through
telephone lines, satellite dishes, and cable television increases consumers’ choices and
allows workers to leave overcrowded urban areas for small towns and telecommute via
personal computers and modems.

7. Changing household composition: Single-person households, especially those of

single women with children, could soon become the most common household type in the
United States.

8. Increasing diversity of workforce and markets: Between now and 2050, minorities
will account for nearly 90% of population growth in the United States. Heavy immigration
from the developing to the developed nations is increasing the number of minorities in all
developed countries and forcing an acceptance of the value of diversity in races, religions,
and life style.

Scanning the Task Environment

As shown in Figure 4–1, a corporation’s scanning of the environment includes analyses of
all the relevant elements in the task environment. These analyses take the form of individual
reports written by various people in different parts of the firm.
IDENTIFYING EXTERNAL STRATEGIC FACTORS
The origin of competitive advantage lies in the ability to identify and respond to
environmental change well in advance of competition. 41 Although this seems obvious, why
are some companies better able to adapt than others? One reason is because of
differences in the ability of managers to recognize and understand external strategic issues
and factors.
No firm can successfully monitor all external factors. Choices must be made regarding which
factors are important and which are not. Even though managers agree that strategic
importance determines what variables are consistently tracked, they sometimes miss or
choose to ignore crucial new developments. 43 Personal values and functional experiences of
a corporation’s managers as well as the success of current strategies are likely to bias both
their perception of what is important to monitor in the external environment and their
interpretations of what they perceive.44 This willingness to reject unfamiliar as well as
negative information is called strategic myopia.

4.2 Industry Analysis: Analyzing the Task

Environment
PORTER’S APPROACH TO INDUSTRY ANALYSIS
Threat of New Entrants
New entrants to an industry typically bring to it new capacity, a desire to gain market
share, and substantial resources. They are, therefore, threats to an established corporation.
The threat of entry depends on the presence of entry barriers and the reaction that can be
expected from existing competitors. An entry barrier is an obstruction that makes it
difficult for a company to enter an industry. Some of the possible barriers to entry are:
_ Economies of scale: Scale economies in the production and sale of microprocessors, for
example, gave Intel a significant cost advantage over any new rival.
_ Product differentiation: Corporations such as Procter & Gamble and General Mills, which
manufacture products such as Tide and Cheerios, create high entry barriers through their
high levels of advertising and promotion.
_ Capital requirements: The need to invest huge financial resources in manufacturing
facilities in order to produce large commercial airplanes creates a significant barrier to entry
to any competitor for Boeing and Airbus.
_ Switching costs: Once a software program such as Excel or Word becomes established in
an office, office managers are very reluctant to switch to a new program because of the high
training costs.
_ Access to distribution channels: Small entrepreneurs often have difficulty obtaining
supermarket shelf space for their goods because large retailers charge for space on their
shelves and give priority to the established firms who can pay for the advertising needed to
generate high customer demand.
_ Cost disadvantages independent of size: Once a new product earns sufficient market
share to be accepted as the standard for that type of product, the maker has a key
advantage. Microsoft’s development of the first widely adopted operating system (MSDOS)
for the IBM-type personal computer gave it a significant competitive advantage
over potential competitors.
_ Government policy: Governments can limit entry into an industry through licensing
requirements by restricting access to raw materials, such as oil-drilling sites in protected
areas.

Rivalry among Existing Firms

According to Porter, intense rivalry is related to the presence of several factors, including:
_ Number of competitors: When competitors are few and roughly equal in size, such as in
the auto and major home appliance industries, they watch each other carefully to make sure
that they match any move by another firm with an equal countermove.
_ Rate of industry growth: Any slowing in passenger traffic tends to set off price wars in
the airline industry because the only path to growth is to take sales away from a competitor.
_ Product or service characteristics: A product can be very unique, with many qualities
differentiating it from others of its kind or it may be a commodity, a product whose
characteristics are the same, regardless of who sells it. For example, most people choose a
gas station based on location and pricing because they view gasoline as a commodity.
_ Amount of fixed costs: Because airlines must fly their planes on a schedule, regardless
of the number of paying passengers for any one flight, they offer cheap standby fares
whenever a plane has empty seats.
_ Capacity: If the only way a manufacturer can increase capacity is in a large increment by
building a new plant (as in the paper industry), it will run that new plant at full capacity to
keep its unit costs as low as possible—thus producing so much that the selling price falls
throughout the industry.
_ Height of exit barriers: Exit barriers keep a company from leaving an industry. The
brewing industry, for example, has a low percentage of companies that voluntarily leave the
industry because breweries are specialized assets with few uses except for making beer.
_ Diversity of rivals: Rivals that have very different ideas of how to compete are likely to
cross paths often and unknowingly challenge each other’s position. This happens often in
the retail clothing industry when a number of retailers open outlets in the same location—
thus taking sales away from each other. This is also likely to happen in some countries or
regions when multinational corporations compete in an increasingly global economy.

Threat of Substitute Products or Services

A substitute product is a product that appears to be different but can satisfy the same
need as another product. For example, e-mail is a substitute for the fax, Nutrasweet is a
substitute for sugar, the Internet is a substitute for video stores, and bottled water is a
substitute for a cola.
According to Porter, “Substitutes limit the potential returns of an industry by placing a
ceiling on the prices firms in the industry can profitably charge.” 50 To the extent that
switching costs are low, substitutes may have a strong effect on an industry. Tea can be
considered a substitute for coffee. If the price of coffee goes up high enough, coffee drinkers
will slowly begin switching to tea. The price of tea thus puts a price ceiling on the price of
coffee.
Bargaining Power of Buyers
Buyers affect an industry through their ability to force down prices, bargain for higher
quality or more services, and play competitors against each other. A buyer or a group of
buyers is powerful if some of the following factors hold true:
 A buyer purchases a large proportion of the seller’s product or service
 A buyer has the potential to integrate backward by producing the product itself
 Alternative suppliers are plentiful because the product is standard or
undifferentiated.
 Changing suppliers’ costs very little (for example, office supplies are easy to find).
 The purchased product represents a high percentage of a buyer’s costs, thus
providing an incentive to shop around for a lower price (for example, gasoline
purchased for resale by convenience stores makes up half their total costs).
 A buyer earns low profits and is thus very sensitive to costs and service differences.
 The purchased product is unimportant to the final quality or price of a buyer’s
products or services and thus can be easily substituted without affecting the final
product adversely.
Bargaining Power of Suppliers
Suppliers can affect an industry through their ability to raise prices or reduce the quality of
purchased goods and services. A supplier or supplier group is powerful if some of the
following factors apply:
 _ The supplier industry is dominated by a few companies, but it sells to many (for
example, the petroleum industry).
  _ Its product or service is unique and/or it has built up switching costs (for example,
word processing software).
 _ Substitutes are not readily available (for example, electricity).

 _ Suppliers are able to integrate forward and compete directly with their present
customers (for example, a microprocessor producer such as Intel can make PCs).
 _ A purchasing industry buys only a small portion of the supplier group’s goods and
services and is thus unimportant to the supplier (for example, sales of lawn mower
tires are less important to the tire industry than are sales of auto tires).
Relative Power of Other Stakeholders
A sixth force should be added to Porter’s list to include a variety of stakeholder groups from
the task environment. Some of these groups are governments (if not explicitly included
elsewhere), local communities, creditors (if not included with suppliers), trade associations,
special-interest groups, unions (if not included with suppliers), shareholders, and
complementors. According to Andy Grove, Chairman and past CEO of Intel, a
complementor is a company (e.g., Microsoft) or an industry whose product works well with
a firm’s (e.g., Intel’s) product and without which the product would lose much of its value. 51
An example of complementary industries is the tire and automobile industries.

INDUSTRY EVOLUTION
The industry life cycle is useful for explaining and predicting trends among the six forces
that drive industry competition. For example, when an industry is new, people often buy the
product, regardless of price, because it fulfills a unique need. This usually occurs in a
fragmented industry—where no firm has large market share, and each firm serves only a
small piece of the total market in competition with others (for example, cleaning services). 52
As new competitors enter the industry, prices drop as a result of competition. Companies
use the experience curve (discussed in Chapter 5) and economies of scale to reduce costs
faster than the competition. Companies integrate to reduce costs even further by acquiring
their suppliers and distributors. Competitors try to differentiate their products from one
another’s in order to avoid the fierce price competition common to a maturing industry.
By the time an industry enters maturity, products tend to become more like commodities.
This is now a consolidated industry—dominated by a few large firms, each of which
struggles to differentiate its products from those of the competition. As buyers become more
sophisticated over time, purchasing decisions are based on better information. Price
becomes a dominant concern, given a minimum level of quality and features, and profit
margins decline. The automobile, petroleum, and major home appliance industries are
examples of mature, consolidated
industries each controlled by a few large competitors

CATEGORIZING INTERNATIONAL INDUSTRIES

According to Porter, world industries vary on a continuum from multidomestic to global (see
Figure 4–4).53 Multidomestic industries are specific to each country or group of
countries.

The factors that tend to determine whether an industry will be primarily multidomestic or
primarily global are:
1. Pressure for coordination within the MNCs operating in that industry
2. Pressure for local responsiveness on the part of individual country markets
To the extent that the pressure for coordination is strong and the pressure for local
responsiveness is weak for MNCs within a particular industry, that industry will tend to
become global.
In contrast, when the pressure for local responsiveness is strong and the pressure for
coordination is weak for multinational corporations in an industry, that industry will tend
to be multidomestic. Between these two extremes lie a number of industries with varying
characteristics of both multidomestic and global industries. These are regional industries,
in which MNCs primarily coordinate their activities within regions, such as the Americas or
Asia.54 The major home appliance industry is a current example of a regional industry
becoming a global industry

STRATEGIC GROUPS
A strategic group is a set of business units or firms that “pursue similar strategies with
similar resources

STRATEGIC TYPES
A strategic type is a category of firms based on a common strategic orientation and a
combination of structure, culture, and processes consistent with that strategy. According to
Miles and Snow, competing firms within a single industry can be categorized into one of four
basic types on the basis of their general strategic orientation. 59 This distinction helps explain
why companies facing similar situations behave differently and why they continue
to do so over long periods of time.60
_ Defenders are companies with a limited product line that focus on improving the
efficiency of their existing operations. This cost orientation makes them unlikely to innovate
in new areas. With its emphasis on efficiency, Lincoln Electric is an example of a defender.
_ Prospectors are companies with fairly broad product lines that focus on product
innovation and market opportunities. This sales orientation makes them somewhat
inefficient. They tend to emphasize creativity over efficiency.
_ Analyzers are corporations that operate in at least two different product-market areas,
one stable and one variable. In the stable areas, efficiency is emphasized. In the variable
areas, innovation is emphasized.
_ Reactors are corporations that lack a consistent strategy-structure-culture relationship.
Their (often ineffective) responses to environmental pressures tend to be piecemeal
strategic changes. Most major U.S. airlines have recently tended to be reactors—
HYPERCOMPETITION
Most industries today are facing an ever-increasing level of environmental uncertainty. They
are becoming more complex and more dynamic. Industries that used to be multidomestic
are becoming global. New flexible, aggressive, innovative competitors are moving into
established markets to rapidly erode the advantages of large previously dominant firms.
Distribution channels vary from country to country and are being altered daily through the
use of
sophisticated information systems. Closer relationships with suppliers are being forged to
reduce costs, increase quality, and gain access to new technology. Companies learn to
quickly imitate the successful strategies of market leaders, and it becomes harder to sustain
any competitive advantage for very long. Consequently, the level of competitive intensity is
increasing in most industries.
In hypercompetitive industries such as computers, competitive advantage comes from an
upto- date knowledge of environmental trends and competitive activity coupled with a
willingness to risk a current advantage for a possible new advantage. Companies must be
willing to cannibalize their own products (that is, replace popular products before
competitors do so) in order to sustain their competitive advantage
USING KEY SUCCESS FACTORS TO CREATE AN INDUSTRY MATRIX
Within any industry there are usually certain variables—key success factors—that a
company’s management must understand in order to be successful. Key success factors
are variables that can significantly affect the overall competitive positions of companies
within any particular industry

An industry matrix summarizes the key success factors within a particular industry. As
shown in Table 4–4, the matrix gives a weight for each factor based on how important that
factor is for success within the industry. The matrix also specifies how well various
competitors in the industry are responding to each factor. To generate an industry matrix
using two industry competitors (called A and B), complete the following steps for the
industry being analyzed:
1. In Column 1 (Key Success Factors), list the 8 to 10 factors that appear to determine
success in the industry.
2. In Column 2 (Weight), assign a weight to each factor, from 1.0 (Most Important) to 0.0
(Not Important) based on that factor’s probable impact on the overall industry’s current and
future success. (All weights must sum to 1.0 regardless of the number of strategic
factors.)
3. In Column 3 (Company A Rating), examine a particular company within the industry—
for example, Company A. Assign a rating to each factor from 5 (Outstanding) to 1 (Poor)
based on Company A’s current response to that particular factor. Each rating is a judgment
regarding how well that company is specifically dealing with each key success factor.
4. In Column 4 (Company A Weighted Score), multiply the weight in Column 2 for each
factor by its rating in Column 3 to obtain that factor’s weighted score for Company A.

Competitive intelligence is a formal program of gathering information on a company’s

competitors. Often called business intelligence, it is one of the fastest growing fields within
strategic management. Research indicates that there is a strong association between
corporate performance and competitive intelligence activities

SOURCES OF COMPETITIVE INTELLIGENCE

Most corporations use outside organizations to provide them with environmental data,
internet, industrial espionage, former competitors’ employees and private contractors, some
firms attempt to steal trade secrets, technology, business plans, and pricing strategies.
investigatory services

The primary activity of a competitive intelligence unit is to monitor competitors—

organizations that offer same, similar, or substitutable products or services in the business
area in which a particular company operates.

USEFUL FORECASTING TECHNIQUES

1. extrapolation is the extension of present trends into the future. It rests on the
assumption that the world is reasonably consistent and changes slowly in the short
run. Time-series methods are approaches of this type; they attempt to carry a series
of historical events forward into the future. The basic problem with extrapolation is
 that a historical trend is based on a series of patterns or relationships among so
many different variables that a change in any one can drastically alter the future
direction of the trend
2. Brainstorming is a non-quantitative approach that requires simply the presence of people with
some knowledge of the situation to be predicted. The basic ground rule is to propose ideas
without first mentally screening them
3. Expert opinion is a nonquantitative technique in which experts in a particular area attempt to
forecast likely developments. This type of forecast is based on the ability of a knowledgeable
person(s) to construct probable future developments based on the interaction of key variables.
4. Delphi technique, in which separated experts independently assess the likelihoods of specified
events. These assessments are combined and sent back to each expert for finetuning until
agreement is reached. These assessments are most useful if they are shaped into several
possible scenarios that allow decision makers to more fully understand their implication.
5. Statistical modeling is a quantitative technique that attempts to discover causal or at least
explanatory factors that link two or more time series together. Examples of statistical modeling
are regression analysis and other econometric methods. Although very useful in the grasping of
historic trends, statistical modeling, such as trend extrapolation, is based on historical data. As
the patterns of relationships change, the accuracy of the forecast deteriorates.
6. Prediction markets is a recent forecasting technique enabled by easy access to the Internet.

4.6 Synthesis of External Factors—EFAS