STRATEGIC MANAGEMENT

#2 – Environmental Scanning: External

 Environmental Scanning
In order to chart a company’s strategic course wisely, managers
must first develop a deep understanding of company’s present
situation. Two facets of a company’s situation are especially
pertinent:
1. Its external environment – most notably, the competitive
conditions of the industry in which the company operates; and
2. Its internal environment – particularly the company’s resources
and organizational capabilities.

◦ Environmental scanning- the monitoring, evaluation and

dissemination of information from the external and internal
environments to key people within the corporation
 PESTEL

Porter’s 5 Forces Analysis

External
Strategy Groups Map
Environmental
Scanning
Frameworks Competitor Analysis
Key Success Factors
(KSF)
EFAS
 External Environmental Scanning
◦ Industry analysis- an in-depth examination of key factors
within a corporation’s task environment
◦ 5 Forces Analysis

◦ PESTEL Analysis- monitoring trends in the societal and

natural environments
◦ Political-
◦ Economic-
◦ Sociocultural-
◦ Technological-
◦ Ecological-
◦ Legal forces-
External Environmental Scanning
 External Environmental Scanning
Industry- a group of firms that produces a similar
product or service

◦ The character and strength of the competitive forces operating in an

industry are never the same from one industry to another.
◦ Using Five Forces Framework to determine the nature and strength of
competitive pressures in a given industry, involves three steps:
◦ Step 1: For each of the five forces, identify the different parties involved, along
with the specific factors that bring about competitive pressures.
◦ Step 2: Evaluate how strong the pressures stemming from each of the five forces
are (strong, moderate, or weak).
◦ Step 3: Determine whether the five forces, overall, are supportive of high industry
profitability.
 Analyzing Task Environment

Threat of new entrants- new entrants to an industry

bring new capacity, a desire to gain market share and
substantial resources

◦ Entry barrier- an obstruction that makes it difficult for a

company to enter an industry • Proprietary technology
◦ Economies of scale (patents, copyrights, trade
secrets)
◦ Product differentiation • Know-how (knowledge,
◦ Capital requirement routines, capabilities)
◦ Switching costs • Geographic locations
◦ Access to distribution channels
◦ Government policy
 Analyzing Task Environment
Rivalry Among Existing Firms- new entrants to an
industry bring new capacity, a desire to gain market share
and substantial resources

◦ Number of competitors
◦ Rate of industry growth
◦ Product or service characteristics
◦ Amount of fixed costs
◦ Capacity
◦ Height of exit barriers
◦ Diversity of rivals
 Analyzing Task Environment

Threat of Substitute Products or Services-

products that appear different but can satisfy the same
need as another product
 Analyzing Task Environment

Bargaining Power of Buyers- ability of buyers to

force prices down, bargain for higher quality, play competitors
against each other

◦ Large purchases
◦ Backward integration
◦ Alternative suppliers
◦ Low cost to change suppliers
◦ Buyer earns low profits
◦ Product is unimportant to buyer
 Analyzing Task Environment

Bargaining Power of Suppliers- ability of

suppliers to raise prices or reduce quality

◦ Suppliers are large and few in number

◦ Unique product or service
◦ Substitutes are not readily available
◦ Ability to forward integrate
◦ Individual buyers are not large customers of suppliers
and there are many of them
◦ Suppliers’ products create high switching costs
 Analyzing Task Environment

Relative Power of Other Stakeholders

(Added)

◦ Government
◦ Local communities
◦ Creditors
◦ Trade associations
◦ Special interest groups
◦ Unions
◦ Shareholders
◦ Complementors- products that work well with a firm’s product
PRIORITY
MATRIX
Analyzing Task Environment
Suppliers and buyers have strong positions
Low entry barriers
Strong threats from substitute products
Intense rivalry among competitors

Unattractive
Industry

Low profit potential

 Analyzing Task Environment
High entry barriers
Suppliers and buyers have weak positions
Few threats from substitute products
Moderate rivalry among competitors

Attractive
Industry

High profit potential

 Strategic Group Mapping
◦ Within an industry, companies commonly sell in different
price/quality ranges, appeal to different types of buyers,
have different geographic coverage, and so on.
◦ Some are more attractively positioned than others.
Understanding which companies are strongly positioned
and which are weakly positioned is an integral part of
analyzing an industry’s competitive structure.
◦ The best technique for revealing the market positions of
industry competitors is Strategic Group Mapping

Strategic group- a cluster of industry rivals that have

similar competitive approaches and market position
 Strategic Group Mapping
The procedure for constructing a strategic group map is straightforward:
1. Identify the competitive characteristics that delineate strategic
approaches used in the industry. Typical variables used in creating
strategic group maps are price/quality range (high, medium, low),
geographic coverage (local, regional, national, global), product-line
breadth (wide, narrow), degree of service offered (no frills, limited,
full), use of distribution channels (retail, wholesale, Internet, multiple),
degree of vertical integration (none, partial, full), and degree of
diversification into other industries (none, some, considerable).
2. Plot the firms on a two-variable map using pairs of these variables.
3. Assign firms occupying about the same map location to the same
strategic group.
4. Draw circles around each strategic group, making the circles
proportional to the size of the group’s share of total industry sales
revenues.
 Strategic Group Mapping

The Value of Strategic Group Maps:

◦ Strategic group maps reveal which companies are close
competitors and which are distant competitors.
◦ Not all positions on the map are equally attractive. Some
strategic groups are more favorably positioned than
others because they confront weaker competitive forces.
 Strategic Group Mapping

◦ Fragmented industry- no firm has a large market

share and each firm only serves a small piece of the
total market in competition with other firms

◦ Consolidated industry- domination by a few large

firms, each struggle to differentiate products from its
competition
 Competitor Analysis (SOAR Framework)

◦ Gathering competitive intelligence (CI) about the strategic

direction and likely moves of key competitors allows a company
to prepare defensive countermoves, to craft its own strategic
moves with some confidence about what market maneuvers to
expect from rivals in response, and to exploit any openings that
arise from competitors’ misssteps.

◦ Studying competitors’ past behavior and preferences provides a

valuable assist in anticipating what moves rivals are likely to
make next and outmaneuvering them in the marketplace.
 Competitor Analysis (SOAR Framework)

Strategic Types

◦ Defenders- focus on improving efficiency of their

existing operations
◦ Prospectors- focus on product innovation and
market opportunities
◦ Analyzers- focus on at least two different product-
market areas; one stable and one variable
◦ Reactors- lack a consistent strategy-structure-culture
relationship
 Key Success Factors (KSF)
◦ An industry’s key success factors (KSFs) are those competitive factors that
most affect industry members’ ability to survive and prosper in the marketplace:
the particular strategy elements, product attributes, operational approaches,
resources, and competitive capabilities that spell the difference between being a
strong competitor and a weak competitor—and between profit and loss.

◦ Key success factors vary from industry to industry, and even from time to time
within the same industry, as change drivers and competitive conditions change.
But regardless of the circumstances, an industry’s key success factors can
always be deduced by asking the same three questions:
1. On what basis do buyers of the industry’s product choose between the competing brands of
sellers? That is, what product attributes and service characteristics are crucial?
2. Given the nature of competitive rivalry prevailing in the marketplace, what resources and
competitive capabilities must a company have to be competitively successful?
3. What shortcomings are almost certain to put a company at a significant competitive
disadvantage?
 EFAS Table
◦ EFAS Table (External Factors Analysis Summary) is one way to
organize the external factors into the generally accepted categories of
opportunities and threats, as well as to analyze how well a particular
company’s management (rating) in responding these specific factors
in light of the perceived importance (weight) of these factors to the
company

◦ The total weighted score indicates how well a particular company is

responding to current and expected factors in its external
environment. The score can be used to compare that firm to other
firms in the industry. The total weighted score for an average firm
in an industry is always 3.0.