CHAPTER 4 Environmental Scanning and Industry Analysis

STRATEGIC MANAGEMENT & BUSINESS POLICY

THOMAS L. WHEELEN J. DAVID HUNGER

11TH EDITION

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Environmental uncertainty

Defined: The degree of complexity plus the degree of change existing in an organizations external environment.

Environmental Scanning

Defined: The monitoring, evaluating, and disseminating of information from the external and internal environments to key people within the corporation to avoid strategic surprise and ensure the long-term health of the firm.

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Environmental Scanning

Societal environment: General forces that do not directly touch on the short-run activities but often influence its long-run decisions.

Environmental Scanning

Societal environment -Economic forces Technological forces Political-legal forces Sociocultural forces

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Societal Environment

Economic Forces -Regulate exchange of materials, money, energy and information

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Societal Environment

Technological Forces -Generate problem-solving inventions

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Societal Environment

Political-legal Forces -Allocate power; provide laws and regulations

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Societal Environment

Sociocultural Forces -Regulate values, mores, and customs of society

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Variables in Societal Environment

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Demographic Trends

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Transformational Sociocultural Trends

8 Current Trends
Increasing environmental awareness Growing health consciousness Expanding seniors market Impact of the Generation Y boomlet Declining mass market Changing pace and location of life Changing household composition Increasing diversity of workforce & market

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International Societal Environments

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International Societal Environments

Each country or group of countries in which a company operates presents a unique societal environment with a different set of economic, technological, political-legal, and sociocultural variables for the company to face.

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Task Environment

Task environment -Elements or groups that directly affect a corporation and are affected by it

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Task Environment

Industry Analysis -In-depth examination of key factors within a corporations task environment

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Scanning the Task Environment

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External Strategic Factors

Strategic myopia -Willingness to reject unfamiliar as well as negative information

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Issues Priority Matrix

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Issues Priority Matrix

1. Identify likely trends:

Societal and task environments
Strategic environmental issues

2. Assess probability of trends occurring

Low to High

3. Ascertain likely impact of trends on the corporation

Low to High
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External Strategic Factors

Defined: Key environmental trends that are judged to have both a medium to high probability of occurrence and a medium to high probability of impact on the corporation.

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Industry analysis: Analyzing the Task Environment

Industry
A group of firms producing a similar product or service, such as soft drinks or financial services.

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Industry analysis: Analyzing the Task Environment

Porters approach: Assess the six forces -1. 2. 3. 4. 5. 6. Threat of new entrants Rivalry among existing firms Threat of substitute products Bargaining power of buyers Bargaining power of suppliers Relative power of other stakeholders

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Industry analysis: Analyzing the Task Environment

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Porters Approach to Industry Analysis

Threat of New Entrants Possible barriers to entry Economies of scale Product differentiation Capital requirements (Boeing and Airbus) Switching costs (software programs) Access to distribution channels Cost disadvantages (operating system (MS-DOS) Government policy

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Porters Approach to Industry Analysis

Rivalry Among Existing Firms Rivalry is related to several factors including: Number of competitors Rate of industry growth Product or service characteristics Amount of fixed costs (airlines) Capacity Height of exit barriers Diversity of rivals

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Porters Approach to Industry Analysis

Substitute Products: Those products that appear to be different but can satisfy the same need as another product. To the extent that switching costs are low, substitutes can have a strong effect on an industry. Examples
Email & fax Internet &video stores Bottled water & cola
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Porters Approach to Industry Analysis

Bargaining Power of Buyers Buyer is powerful when:

Buyer purchases large proportion of sellers products Buyer has the potential to integrate backward Alternative suppliers are plentiful Changing suppliers costs very little Purchased product represents a high percentage of a buyers costs Buyer earns low profits Purchased product is unimportant to the final quality or price of a buyers products
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Porters Approach to Industry Analysis

Bargaining Power of Suppliers

Supplier is powerful when:
Supplier industry is dominated by a few companies but sells to many Its product is unique and/or has high switching costs Substitutes are not readily available Suppliers are able to integrate forward and compete directly with present customers Purchasing industry buys only a small portion of the suppliers goods.

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Porters Approach to Industry Analysis

Relative Power of Other Stakeholders A six force should be added to Porters list government
local communities creditors (if not included with suppliers) trade associations special-interest groups unions complementor a company or industry which whose product works well with a firms product and without which the product would lose much of its value such as:
Intel and Microsoft the tire and automobile industries
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Industry Evolution

Fragmented Industry
No firm has large market share and each firm serves only a small piece of the total market in competition with others.

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Industry Evolution

Consolidated Industry
Dominated by a few large firms, each of which struggles to differentiate its products from the competition.

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International Risk Assessment

Continuum of International Industries

The factors that tend to determine whether an industry will be multidomestic or primary 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

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Strategic Groups

Defined: A set of business units or firms that pursue similar strategies with similar resources.

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Strategic Groups

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Strategic Groups

Identifying strategic groups

High

price
low Limited menu Full menu

Product line breadth

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Strategic Types

Defined: Category of firms based on a common strategic orientation and a combination of structure, culture, and processes consistent with that strategy.
General types are: 1. Defenders 2. Prospectors 3. Analyzers 4. Reactors

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Strategic Types

1. Defenders
efficiency product innovation and market opportunities Works in at least two different product-market areas, one stable (efficiency) and one variable (innovation). such as multidivisional firms (e.g. IBM and P&G)

2. Prospectors 3. Analyzers

4. Reactors
Lack a consistent strategy-structure-culture relationship such as major US airlines
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Using key success factors to create an industry matrix-- EFAS External Factor Analysis Summary (EFAS)

External Factors
Opportunities 1

Weight of importance

Firms response Rating

Weighted Score
4

Comments 5

Threats

Total Weighted Score

1.00

Notes: 1. List opportunities and threats (510) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factors probable impact on the companys strategic position. The total weights must sum to 1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the companys response to that factor. 4. Multiply each factors weight times its rating to obtain each factors weighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how well the company is responding to the strategic factors in its external environment. Source: T. L. Wheelen and J. D. Hunger, External Strategic Factors Analysis Summary (EFAS). Copyright 1991 by Wheelen and Hunger Associates. Reprinted by permission.

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Using key success factors to create an industry matrix-- EFAS

Maytag Example
External Factors Weight Rating Weighted Score Comments

Opportunities
Economic integration of European Community Demographics favor quality appliances Economic development of Asia Opening of Eastern Europe Trend to Super Stores

1
.20 .10 .05 .05 .10 .10 .10 .15 .05 .10

2
4 5 1 2 2 4 4 3 1 2

3
.80 .50 .05 .10 .20 .40 .40 .45 .05 .20

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Acquisition of Hoover Maytag quality

Threats Increasing government regulations

Strong U.S. competition Whirlpool and Electrolux strong globally New product advances Japanese appliance companies

Low Maytag presence Will take time Maytag weak in this channel Well positioned Well positioned Hoover weak globally Questionable Only Asian presence is Australia

Total Scores

1.00

3.15

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Using key success factors to create an industry matrix-- EFAS

Industry Matrix
Key Success Factors 1 Weight 2 Company A Rating 3 Company A Weighted Score 4 Company B Rating 5 Company B Weighted Score 6

Total

1.00

Source: T. L. Wheelen and J. D. Hunger, Industry Matrix. Copyright 2001 by Wheelen and Hunger Associates. Reprinted by permission.

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Exercise

Using EFAS, choose a local organization and analyse its external environment.
Group work Written assignment Presentation Deadline: The first lecture of the next week
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