Find Strategic Opportunities

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 1/34

Chapter 4

External Environmental Analysis

Belinda Images / SuperStock

Learning Objectives

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 2/34

By the time you have completed this chapter, you should be able to do the following:

Conduct an industry and competitive analysis and understand why it is important. Conduct a market analysis and understand why it is important. Scan the general environment for any changes or trends that might favor or adversely affect the company.

An analysis of the external environment covers the industry or segment in which the company competes, its competitors, markets, and other relevant environmental trends and changes. The purpose is to understand how the environment relevant to the company is changing and might change in the future --in this sense, "relevant" means anything the company might affect or could be affected by. Without such an understanding, doing strategic planning becomes much more dif�icult.

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 3/34

Assembling a group of knowledgeable people can be very helpful when performing an industry analysis.

Ryan McVay/Photodisc/Thinkstock

4.1 Industry and Competitive Analysis

An industry analysis is the study of a �irm's industry and the forces that might be causing it to change. It involves using a number of standard but indispensable tools, including Porter's �ive-forces model, industry attractiveness (part of the GE Matrix), driving forces, critical-success factor analysis, and strategic groups, all discussed in this chapter. Because the ways in which an industry changes can dramatically affect the decisions a company makes, an industry analysis has become a key element in strategic planning.

The word industry in "industry analysis" can mean a segment of a larger industry or the industry itself. If a company manufactures disk drives for personal computers, for example, it could say that it competes in the disk- drive industry for purposes of doing a strategic analysis, even though that is really a segment of the computer industry. What we are really analyzing is the arena in which the company competes.

One thing to keep in mind when conducting an industry analysis is to write down what is true for the industry, not for the company under analysis. Sometimes industry data are easy to obtain because they are regularly published or because trade groups or consulting �irms keep tabs on industry statistics. However, many industries are not tracked by any group, or they consist largely of privately held �irms. This makes it dif�icult to get industry data and complete an industry analysis.

To minimize errors when using inadequate data or relying on one person's estimates, it is advisable to assemble a group of people to share perspectives and use shared estimates in the analysis. If the group is fairly knowledgeable about the industry, the perceptions gathered about the industry will be more useful and make the understanding more complete. Group members who have differing estimates and opinions will be forced to explain their views and, in the process, either convince others they are correct or be persuaded to change their own views or estimates. In this way, a shared perspective leads to greater understanding.

Doing an Industry Analysis

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 4/34

The purpose of doing an industry analysis is to answer the following kinds of questions:

What are the dominant economic characteristics of the industry? In what ways is the industry changing, and why? Do buyers and/or suppliers have greater bargaining power? How steep are entry barriers? Is the industry concentrated or fragmented? What must one do well in order to succeed in this industry? How appealing is the industry?

Dominant Economic Characteristics of an Industry

Economic characteristics can vary by industry but generally are applicable throughout business and include the following:

Industry size—total dollar sales of all �irms in the industry. Industry growth rate—percentage increase or decrease over the previous year. Scope of competitive rivalry—local, regional, national, international. Number of competitors—if known. Stage in the industry's lifecycle:

emerging—must be a brand-new industry with total industry sales less than 5%. growth—total industry sales growing at over 5% per year. shakeout—a transitional period between growth and maturity where some competitors fail, others are acquired, and the total number of competitors shrinks. mature—total industry sales of between 0–5% declining—the growth rate must be negative for several years in a row.

The customers or buyers—Who are they? Where are they? How many are there? Degree of vertical integration—How many companies in the industry are vertically integrated forward? How many are vertically integrated backward? How many are vertically integrated in both directions? Rate of technological innovation—How dependent is the industry on technological innovation? How much innovation is taking place? Product characteristics—Are the products commodity-like or differentiated? This determines to a large extent the bargaining power the industry has with respect to buyers. Are the products high- or low-tech? Economies of scale—for example in purchasing, production, shipping, distribution, or advertising. Capacity utilization—Is capacity utilization in the industry high or low? How sensitive are variations in capacity utilization to pro�its? In commodity-like industries, pro�its are very sensitive to capacity utilization. Industry pro�itability—If pro�itability in the industry is not high, what are some causes? Commodity-like industries are low-pro�it, while those with differentiated companies command higher pro�its.

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 5/34

Forces Driving Industry Change

To understand how an industry is changing, identify the driving forces causing those changes. The following are examples of driving forces:

Changes in the industry growth rate Changes in who buys the product and how customers use it Product or marketing innovations Changes in technology Exit or entry of major �irms Circulation of technical knowledge Increasing global scope of the industry Changes in cost and ef�iciency, for example, in process innovations Emerging buyer preferences for differentiation Changes in governmental or economic policy Deregulation or increasing regulation of an industry Changes in societal attitudes, concerns, and lifestyles Reductions or increases in uncertainty and business risk Likelihood that this and one or more other industries will merge or converge

It is one thing to ascertain that an industry has been and is changing, but quite another to gauge the way it will change in the future. That is, however, the challenge managers must face. If one can come to understand how an industry is changing and what is causing it to change, the chances are good that future changes can be predicted and possibly anticipated. In many industries today, rapidly advancing technology is changing everything about the industry—the product itself, how it is made, how it is distributed, and how it is used. The examples provided of driving forces may provide a starting point for an examination of a particular industry and how it may be changing. Of course, it is important to keep in mind that every industry is unique and may have driving forces other than those listed here.

Bargaining Power

What exactly is bargaining power? In simple terms, it comes down to who dictates the terms such as price, delivery, quality, and the like in a negotiation. Consider the example of someone trying to sell a used car. There is a certain "Blue Book" price for a car of a certain model, age, mileage, condition, and options. If the make and model is in high demand, the car at issue has low mileage, and is in good condition, then the price will be higher. It is possible that several potential buyers may actually bid up the price. The seller in that situation may demand full payment in cash and other conditions, and will probably have those demands met. In this case, the seller has bargaining power and will end up making a favorable deal. On the other hand, if the seller is desperate to sell the car, or it is not in very good condition, perhaps needing

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 6/34

major repairs, and the seller has to incur costs to advertise extensively, he may have to accept the �irst offer that comes along, even at some fraction of his asking price. In this case, the buyer would have all the bargaining power and the seller none.

Sometimes both buyers and suppliers have bargaining power. In that situation it is likely that the industry in question has low pro�itability, the product is viewed as a commodity, rivalry among competitors is �ierce, and innovation is relatively low. On the other hand, if companies in the industry have more bargaining power than both buyers and suppliers, the chances are that it is pro�itable, the products and competitors are differentiated and have strong brands, competition is controlled as it is in monopolistic competition, and innovation may be fairly rapid.

For another example of bargaining power, consider the unfortunate predicament of a California tool manufacturer. About 90% of the company's production was going to one customer. Pro�it margin was understandably low. One day the customer demanded a price reduction of 10% and delivery in small quantities at frequent intervals, thus forcing the tool manufacturer to carry even more inventory and increase its costs. If the company had not been so dependent on this one customer, it might have refused to supply it but it could not. Instead, it got squeezed. It's not dif�icult to tell who had the bargaining power here.

This example is true and, while unfortunate, illustrates how shortsighted companies can be. The customer in this case did not appear to care that it might drive one of its principal suppliers out of business. Walmart is another example of a company that, because of its size and in�luence with its customers, retains the bargaining power when negotiating with its suppliers. It, too, appears to run many of its suppliers into the ground in its drive for ever-lower costs.

In contrast, Toyota and other companies practice Kaizen, a system in which independent suppliers sign long-term agreements with the manufacturer, practically collocate with the manufacturer, earn fair pro�its, and are given help and training to supply products and parts at the desired level of quality and delivery.

If a company has many suppliers all competing for the contract to supply it, the company has bargaining power. If it has to purchase a component, however, and only one company can supply it, that supplier will have bargaining power. One strategy that suppliers have for retaining bargaining power is to raise the switching costs of the buyer, that is, make it so expensive for a buyer to switch to a competing supplier that it will not do so. Consider a supplier that provides its customer's procurement staff with computer terminals that are tied in with its own system, enabling the customer to order at any time, track the status of delivery of any order, and so on. The service could be so convenient, and the purchasing company's people so well trained and comfortable in using the ordering system, that it might not change suppliers even if a lower-cost competitor came along.

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 7/34

Porter's Five-Forces Model

In 1980, Michael E. Porter of the Harvard Business School developed what is probably the most in�luential tool for assessing the structure and competitive threats of an industry. Porter proposed a framework that in a given industry, �ive forces determine the degree of competitiveness in that industry. Competitiveness, in turn establishes the attractiveness or pro�itability of the industry. This model can be used by organizations considering a wide range of strategic plans, including entry into the industry and beyond. The �ive forces described by Porter are

Rivalry among existing competitors Bargaining power of buyers Bargaining power of suppliers Threat of new entrants Threat of substitutes

Figure 4.1 depicts Porter's �ive-forces model in diagrammatic form. The �ive main boxes in the shape of a cross constitute the actual model. The four "analysis" boxes in each corner add meaning to the model and enhance the industry analysis.

In the model, the terms buyers and suppliers are self-evident; these are the customers of the industry and the �irms that supply the raw materials, respectively. Rivals are all of the companies presently competing in the industry. New entrants are �irms not currently engaged in the industry but which could potentially compete in the future. For example, British supermarket chain Tesco PLC entered the U.S. grocery industry in 2007 under the brand Fresh and Easy, with an aggressive growth plan, concentrating primarily on the Southwest states. Although Tesco did not open Fresh and Easy locations in all U.S. markets, or even in all Southwestern communities, existing grocers were wise to be aware of the Fresh and Easy threat.

Figure 4.1: Porter's �ive-forces model

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 8/34

Source: Adapted from Alexander Osterwalder and Yves Pigneur, Business Model Generation: A Handbook for Visionaries, Game Changers, p. 99.Copyright © 2010 John Wiley & Sons. Reprinted with permission.

Substitutes are products in other industries that have the potential to draw customers away and are, in effect, also competitors. The concept of substitutes is sometimes hard to grasp; accordingly, the following example may help. The founder of a for-pro�it theater company in a moderately sized California town believed he had no competition as there was no other theater company in the town. Yet when his season tickets went on sale in the fall, they did not sell out. In fact, far from selling out, many tickets remained unsold all season long. He remained puzzled by this until someone asked him what a person in the town could do with $20 on a Friday or Saturday night. Well, he replied, that person could go to the movies, out to dinner, watch TV, go for a walk, go to a ballgame, go shopping, or visit with friends, among many other options. It turned out that "going to the theater" ranked quite low on this list, accounting for the dearth of ticket sales. This impressed on the theater owner that his real competition came from substitutes.

To perform an industry analysis for a particular company using Porter's model, one would begin by listing the company name as well as those of its principal competitors in the Rivals box. Next, write a description of the buyers and suppliers of the industry (not the company under study) in the respective boxes. Be careful not to list distributors or retail channels as buyers, even though they may purchase the products for resale. Porter intended that buyers for companies that make frames for glasses be listed as people, not optometrists. The names of any �irms that could possibly enter the industry are entered in the New

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 9/34

Entrants box. If no potential new entrants can be identi�ied, the box should be marked "unknown." Finally any substitutes to what the industry produces are written in the box so labeled.

Once the �ive boxes have been �illed in on the model, then write a brief assessment of the intensity of rivalry (low, medium, or high, and why), bargaining power of buyers and suppliers (low, medium, or high, and why), entry barriers (low, medium, or high, and what they are), and threat of substitutes (low, medium, or high, and why) in each of the corner analysis boxes.

Porter's model provides a clear, straightforward way to assess the nature of competition in any industry. Users should take care not to be misled by the seemingly simplistic nature of this tool. Strategic thinkers must be thorough and wide-ranging in their thinking when analyzing each element within the context of their business, industry, and environment. As the theater owner's case illustrates, shortsighted or narrow thinking may lead to an inaccurate assessment of the elements and potentially negative implications for pro�it, public relations, employee morale, and more.

Barriers to Entry

High entry barriers keep potential entrants out of an industry. This is a good thing for a company that is already in the industry, but a bad thing for a company trying to enter the industry. Barriers to entry could take any of several forms. An industry that requires a signi�icant capital investment to enter has a high barrier to entry, particularly to smaller �irms. Another type of barrier is the need for expertise in a certain technology or manufacturing process, a core competence, or proprietary technology, which could cost a lot or take a long time to develop. Electronics and biotechnology industries have this barrier. An established brand name and customer loyalty, both of which take time to develop, may also provide a deterrent to would-be entrants. When an industry includes competitors with signi�icant market share and market power or competitors with low costs that realize signi�icant economies of scale, prospective entrants would probably view this as a barrier.

What if the potential entrant is a much larger corporation with more than adequate �inancial resources and possibly also a strong brand identity in a related market? The results of this assessment might turn out quite differently. The issue is to try to imagine (a) who the likely potential entrant might be; (b) why it might want to enter this industry now; and (c) make as best an assessment as you can. What is perceived by one �irm to be a high barrier to entry may not present a deterrent to another.

Also, in some industries it may be easy to enter the industry but dif�icult to compete effectively on a national or global scale once having entered. For example, in the donut industry, anyone can open a single donut shop that serves local customers ("easy to enter"). Yet such an

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 10/34

Beauty salons are an example of a fragmented industry.

Inga Ivanova/iStock/Thinkstock

entrant would unlikely compete with the large national chains like Dunkin Donuts, Winchell's, and Krispy Kreme, and so would not present a threat at all ("hard to compete with").

Industry Concentration

A concentrated industry is one in which a few �irms in the industry account for a large portion of total industry sales. Examples are commercial aircraft manufacturing, in which only two �irms compete (Boeing and Airbus), or the business of auditing public companies in the United States, in which 96% of the work is shared among the "Big Four" certi�ied public accounting (CPA) �irms. Even six to eight �irms, accounting for upwards of 40% of an industry's sales, would qualify to be called concentrated.

A fragmented industry is one in which no one �irm has more than a fraction of a percent in market share. Examples are beauty salons and the auditing of privately held businesses. Bookstores and fast-food restaurants used to be fragmented industries, but now are fairly concentrated due to franchising and the emergence of dominant chains.

For a company in a fragmented industry, it is dif�icult to increase market share unless you clone or standardize the business and duplicate or franchise it (Porter, 1982). This is what some fast-food companies did and what enabled

them to become global giants such as McDonald's, KFC, Burger King, and so on.

Critical Success Factors

When a potential company is assessing an industry, it often needs to identify the industry's critical success factors (CSFs). Think of them as constituting the rules of the industry. Just as every sport has its own set of unique rules, there is no way that one can "play" in an industry, let alone dominate it, without knowing and playing by those rules. CSFs attach to an industry, not to a company, and every industry has a different set. Ideally, a �irm should be able to identify six to eight CSFs. One way is to come up with a much larger number �irst and then edit them down to those that are really essential to succeeding in its particular industry.

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 11/34

The value of identifying the industry's critical success factors becomes evident when they are used to compare a company with its key competitors. A CSF analysis allows a company to compare itself with its principal competitors using CSFs as the dimensions to do so (Table 4.1).

After choosing six appropriate CSFs for the industry, the example company was rated along the dimensions of the listed CSFs on a scale of 0– 10, 10 being highest. The same was done for each competitor in the table.

Table 4.1: Critical-success-factor analysis

Critical-Success Factor Company Competitor A Competitor B Competitor C Competitor D

Strength of brand 10 8 9 8 10

Distribution channels 6 10 9 8 7

New-product development 8 5 10 7 8

Financial strength 9 6 10 8 9

Customer service 8 7 8 9 5

Low costs 5 6 5 6 9

Totals 46 39 51 46 48

In the example shown, the company under analysis rated a total of 46 out of a possible 60. Comparing the scores gives a rough idea of how the company "stacks up" against its competitors, as well as how each of the key competitors stacks up against the others. To the extent that your ratings of a company and those of its competitors are accurate or realistic, the analysis provides useful information regarding whether or not the company has competitive advantages or vulnerabilities and which competitors are most dangerous.

Looking across the rows, the table reveals where there may be a competitive advantage or competitive vulnerability. In this example, the company's strong brand may constitute a competitive advantage. Competitor A may have one in its extensive distribution system, and Competitor B one in its ability to generate new products rapidly. Any rating of 5 in the table would signify a competitive vulnerability, something that should be addressed in that company's short-term plans (like the company's and Competitor B's costs).

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 12/34

Looking down the columns, the analysis identi�ies which competitors are more dangerous than others. In the table, judging from the totals at the bottom, the company lies in the middle of the pack, with Competitors B and D to be more feared than the other two competitors. Competitive analysis includes how the company might react to attacks, especially from strong competitors (Coyne & Horn, 2009).

Industry Attractiveness

Can one measure industry "attractiveness," and is it important? The answers to these questions are yes and yes, but the measurement is highly subjective and the result is more useful in some situations than others. Industry attractiveness is based on of a number of attributes or characteristics. To discover them, imagine what an ideal industry would look like. It would, for example, have a huge market (potential customer base), be growing rapidly, be hugely pro�itable, have few competitors, be unregulated, have high entry barriers, and not need technological expertise. This would yield the following initial list of factors for an industry-attractiveness analysis:

Size of the potential market Industry growth rate Intensity of competition Degree of regulation Entry barriers Degree of technological innovation

These factors, of course, constitute an incomplete list; they may be changed or ampli�ied. Notice also that the factors are stated in a neutral way: "size of the potential market," not "large market."

To perform an industry-attractiveness analysis, �irst assign a weight to each of these factors as a percentage according to their perceived importance. Next rate each factor from the point of view of the company doing the analysis on a scale of 0–1.0. Finally, multiply the weight by the rating for each factor. Be careful in two instances: (a) If degree of competition is high, the rating should be low because it makes the industry less attractive, and (b) if degree of regulation is low, the rating should be high as it makes the industry more attractive. Remember that the rating should be high for any factor that makes the industry more attractive, and low if the opposite. Add up the products to yield a percentage �igure.

Table 4.2 below shows an industry-attractive matrix, which is a weighted technique based on a number of factors to determine how attractive an industry is. The industry-attractiveness (I.A.) index of 75.6 shows this to be an attractive industry, attractive enough to stay in it and invest in improving the company's position. When such an analysis yields a result of less than 50%, then the company might well ask the fateful question, "Should we continue to be in this industry, or should we exit?"

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 13/34

Table 4.2: Industry-attractiveness matrix

Factor Weight Rating Product

Industry growth rate 24 0.8 19.2

Pro�itability 20 0.7 14.0

Size of potential market 18 1.0 18.0

Intensity of competition 16 0.3 4.8

Entry barriers 12 0.8 9.6

Degree of regulation 10 1.0 10.0

Totals 100 I.A. Index 75.6

Strategic-Group Map

In industries that contain disparate competitors, a strategic-group map is a useful technique to cluster and identify strategically similar competitors. Competitors can show differences—and similarities—to each other on various factors (Porter, 1982). Those that are similar to each other belong to the same strategic group; the more distant one strategic group is from another re�lects the extent to which they are dissimilar and therefore, not direct competitors.

An industry often consists of a small number of distinct strategic groups. A strategic-group map is a two-dimensional representation of an industry's strategic groups. To create one, choose two strategic dimensions that are not correlated with each other, as are price and quality, and that have the capacity to separate the competitors in the industry. For example, if all companies in the industry have broad product lines, choosing this dimension as one of the axes will not work—all the competitors would be bunched up at one end. On the other hand, positioning might be a useful dimension to use if there are some companies at the high end, some at the midlevel, and some at the low end of the industry. Other than the two guidelines given previously, there is no rule for choosing strategic dimensions that would serve as axes for the strategic-group map. The dimensions chosen as axes for a strategic-group map should embody strategic variables, not performance. Try several and see which two separate the competitors or rivals into clusters on the map. When you have several clusters that make sense and

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 14/34

Budweiser is in the same strategic group as Miller Brewing company, but in a different group than microbrewers.

Daniel Acker/Bloomberg via Getty Images

can articulate the strategy of each cluster, you have a useful strategic-group map. Naturally, using the technique presupposes a good working knowledge of competitors in a particular industry.

Figures 4.2 and 4.3 show examples of strategic-group maps. Figure 4.2 is a simple strategic- group map that represents the pharmaceutical industry. Figure 4.3 shows a slightly more complex strategic-group map of selected retail chains. The �igures display different strategic dimensions in use and underscore the fact that companies in the same strategic group compete more intensely with each other, while competition between distant groups is virtually nonexistent.

Figure 4.2: Simple strategic-group map of the pharmaceutical industry

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 15/34

Source: Charles W. L. Hill and Gareth R. Jones, Strategic Management: An Integrated Approach, 10th ed., p. 96. Copyright © 2013 Cengage Learning. Reprinted by permission.

Figure 4.3: Strategic-group map of selected retail chains

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 16/34

Source: Adapted from Arthur A. Thompson, Jr., John E. Gamble, and A. J Strickland III, Strategy: Core Concepts, Analytical Tools, Readings, p. 68. Copyright © 2004 Irwin McGraw-Hill. Reprinted with permission.

What can be learned from a strategic-group map? First, the companies in a particular strategic group are strategically similar and constitute the group's key competitors. Those in a nearby group form the next tier of competitors. In all likelihood, companies in a distant strategic group are not really competitors although they are in the same industry. For example, in the U.S. beer industry, Anheuser Busch competes with Miller Brewing in the same strategic group, but not with the many microbrewers and some of the imported high-end beers, which are in distant strategic groups. In another example, this time in the hospitality industry, Days Inn (low end) does not compete with Ritz Carlton (high end) because they are strategically dissimilar and in different strategic groups; their markets are quite different.

Secondly, the implications of Porter's �ive-forces model are different for different strategic groups. Entry barriers vary among the groups, as does bargaining power with suppliers and customers, the threat of substitutes, and the intensity of intra-group rivalry. Thus, it could be more

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 17/34

It is imperative to know as much about your competitors as possible.

Zefa/SuperStock

desirable to be in one strategic group than another (there could be more opportunities and fewer threats) (Hill & Jones, 2001). For example, in retailing, a recession would adversely affect high-end department stores but actually increase demand for discounters and mass merchandisers. Because of such differences, it may be worthwhile for a company to move consciously from one strategic group to another. The ease of doing so depends on the size of mobility barriers between the groups (factors that inhibit both entry into and exit from a group). For example, in Figure 4.2, Greenstone is a generic pharmaceutical company that competes with others in its strategic group; it would �ind it very dif�icult to move into the proprietary strategic group with companies like Valeant Pharmaceutical and Merck. This is because Greenstone lacks the necessary R&D skills and resources that would take time and a great deal of capital to acquire.

Thirdly, one could discover some unserved demand in an area of a strategic-group map not occupied by any strategic group. In creating a strategic-group map of the automobile industry, using pricing and safety as the two strategic dimensions, a group of business students found that no company was offering a low-priced, high-safety automobile. Such a car might appeal to parents with teenagers and possibly older drivers (Harrison, 2003).

Finally, it is possible for a company to belong to more than one strategic group. In the hospitality industry, Hilton Hotels and Marriott compete in both the high end and affordable ends, through the lower-rate Hampton Inns and Courtyards by Marriott, respectively. In this illustration, each company, rather than surmount mobility barriers by moving to another strategic group, has penetrated another strategic group through internal diversi�ication and acquisition.

Competitive Analysis

Strategy began as a military concept. Before going into battle, and during the battle itself, generals would try to �ind out everything they could about the enemy: their strength in numbers, their weaponry, supplies, communications capability, precise locations, intents, and strategies. To go into a battle with no information about the enemy would be to put an army at considerable risk and its chances of success at virtually zero. It is only with good intelligence about the enemy—their movements, resources, and strategies—that a general or leader can plan strategy and deploy resources to win the battle or achieve a military objective.

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 18/34

The same imperative exists in business today. In virtually every business, companies must be aware of and know how to deal with their competitors. The �irst step is to ask, "How much do I know about my competitors?" One should know—or try to obtain—at least the following information about one's competitors:

Market share—Many industries have publications that track these data, but companies will occasionally have to determine a competitor's market, or industry, share on their own. Geographic scope—Are your competitors local, regional, national, or international/global competitors? Diversi�ication—Are your competitors conglomerates with a portfolio of businesses in unrelated industries, companies with many related businesses, companies with many strategic alliances, or companies in only one business? Vertical integration—The degree to which competitors are vertically integrated, especially backwards along the supply chain, may give them cost and competitive advantages that can be dif�icult to overcome. Competitive advantage—Do your competitors possess a competitive advantage? What is it? How large is it? How have they sustained it? Core competence—What are the core competences that underlie your competitors' strategies? Strategic intent—How are your competitors trying to position themselves in the industry? Are they aggressively trying to overtake rivals on their way to market dominance, or are they more concerned with defending their ranking and maintaining market share? Strategy—What strategies are your competitors following? In most cases, they can be inferred from other information known about the companies and what they are actually doing. Have the strategies been working, or are they about to be changed? Are mergers among key competitors likely? Are any of them looking to be acquired? If in a high-tech industry, what is their investment in R&D as a percent of sales? Resources and capabilities—How strong �inancially and technologically are each of your competitors? How �lexible are they to adapting to the changing environment? How well managed? How fast do they bring new products to market? Do they have innovative cultures and a record of innovation? Which one just got a new CEO?

Trying to get this kind of information about key competitors also reveals how much or how little a company knows about them.

Discussion Questions

1. What additional information might an industry analysis provide that simply monitoring a company's competitors does not? After all, isn't the industry just an aggregate of all competitors?

2. Porter's �ive-forces model is a useful tool to analyze the competitive forces and structural characteristics of an industry. But isn't this, at best, a snapshot at a point in time? How could one get a more dynamic perspective?

3. Suppose a company has very little bargaining power with suppliers; in fact, its industry also is plagued with weak bargaining power. What are some ways of gaining more bargaining power?

4. What might be a method for identifying an industry's driving forces other than simply brainstorming?

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 19/34

5. Can a company be more pro�itable in a concentrated industry (not one of the industry leaders) or a fragmented one? Give your reasons either way.

6. The industry-attractiveness matrix is a highly subjective exercise. So what are the bene�its of doing one despite the subjectivity?

7. A strategic-group map groups together strategically similar companies in an industry on a two-dimensional space. Yet, movement from one strategic group to another could experience mobility or entry barriers, different competitors, and signi�icant investment. Does that make each strategic group an industry segment? Explain.

8. Once an industry's dominant economic characteristics and driving forces have been identi�ied and Porter's �ive-forces analysis has been performed, how can the rules of the game for this industry and the critical success factors be discerned? Explain the steps this would take.

9. A critical-success-factor analysis can be very useful to a company in analyzing how it stacks up to its competitors. How might you tell if the numbers used in that analysis are realistic? Is there another kind of analysis you could do that would also yield good comparative data with your competitors?

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 20/34

4.2 Market Analysis

We now turn to an examination of a company's customers, which could be companies in another industry, like the auto industry, or individual consumers. A market analysis is an umbrella term covering the collection and analysis of data and information about a company's customers, which could be companies in another industry or individuals (consumers). While it is relatively straightforward to get information about a customer industry, getting useful information about consumers is more dif�icult. The demographic or socioeconomic groups of some consumers make them harder to analyze and understand. It is important to keep in mind the target market and degree of market penetration, changing customer needs, and distribution channels and pricing, as discussed in the following sections.

Target Market and Market Penetration

First consider the target market. For example, if banks buy your product, your market is banks. But are you targeting all banks worldwide (which is the overall market), only the large banks, only neighborhood banks, only banks with over $2.0 billion in deposits or over 500 branches, or middle-market banks nationally? Very few companies can target the entire population of their markets although there are exceptions such as Coca-Cola, Microsoft, and so forth. So a company needs to de�ine its target market—what is it, how large is it, and how fast is it growing? It also must decide who is the served market, or that portion of the target market that is either currently served by the company or its current focus.

Another factor to establish is the degree of market penetration. How far have all the companies in the industry penetrated the market? In other words, what proportion of the target market has bought a product/service from your industry? If the answer is 60%, the market is said to be 60% penetrated, leaving 40% that is unserved or underserved among them. When a market is 100% penetrated, it is considered saturated.

The degree of penetration is, however, more complex than the illustration discussed here. For example, not all of the target market may purchase a product from the industry for various reasons— they cannot afford to, don't need to, and the like. So the target market is often reduced to what is called a served market made up of viable customers who could buy the product or service. Also, though rare, it is possible for markets to be more than 100% penetrated, as when households own more than one TV or car.

Changing Customer Needs

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 21/34

What are customers' current needs? From what is known of a company's customers and industry, can their needs be inferred? And can the degree to which such needs are currently satis�ied be assessed? When we speak of "needs," we mean bene�its or what we now term value propositions. Companies that are constantly listening to their customers will know their needs and how they are changing (Ulwick & Bettencourt, 2008).

What will the customer need in the future? This is a chicken-and-egg situation. New products and services often affect customers and satisfy needs they never knew they had, and sometimes unsatis�ied needs are the spark that causes new products and services to be introduced. Try to address the question "How are customers' needs changing?" The extent to which this proves dif�icult to answer indicates whether the company is in touch with its customers or doesn't know enough about them.

Distribution Channels and Pricing

The next stage of the market analysis is a consideration of the company's distribution channels. This means learning how the industry's products reach the market. One must �ind out whether the industry typically supplies products to wholesalers, distributors or retail outlets. In some industries it is standard practice to employ salespersons to make direct sales calls, while in other industries, catalogs and direct mail are the norm. The extent to which the Internet is used as a distribution channel is increasingly important. Note any differences between the distribution channels the company uses and those used by the industry in general. Another way of looking at this is to ask how customers buy the products. What is the decision process they go through before they decide to buy (Court, Elzinga, Mulder, & Vetvik, 2009)?

An analysis of the distribution channels would not be complete without determining the size of channel markups. That is, for each stage in the distribution channel, what price is paid by the wholesaler, the distributor, the retailer, and what price is paid by the �inal customer? If volume discounts are expected and offered at each stage, the quantities at which these become applicable and the amount of the discount are key data points. While a company's pro�its depend on the price it receives for the product, its competitiveness depends on what the customer will pay.

One also needs to establish the degree to which customers are price-sensitive in the target market. Price sensitivity is critical with respect to how prices are set and changed and, indeed, which distribution channels are used. The following example of the law �irm illustrates the importance of knowing how price-sensitive customers are (see Case Study: Price Sensitivity and a Law Firm).

Any current trends in customer behavior are vital to an understanding of how the target market may be changing. Are customers buying differently? Are they becoming more demanding? Any other aspect of industry customers not covered elsewhere should be covered here. For example, increasingly, customers of brick-and-mortar bookstores like Barnes & Noble are actually buying their books on Amazon.com.

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 22/34

If a company does business in several markets, such as different countries, this type of detailed market analysis should be completed for each of those markets. Companies that target business customers (B2B) would do well to analyze the value chain of their major customers in order to discover which part of it is unserved and take advantage of the opportunity to move in to �ill that need (Crain & Abraham, 2008).

Case Study Price Sensitivity and a Law Firm

A patent-law �irm once held a retreat to go through a strategic-planning process. During the process, the partners in attendance maintained that it was the best �irm of its kind in the large metropolitan region it served. A review of its �inances revealed that its billings (i.e., sales) were �lat, a situation that prompted the retreat in the �irst place. During the competitive-analysis phase, the �irm acknowledged that it had about �ive principal competitors, all of which charged higher hourly rates than it did. Reluctantly, the partners �inally admitted that hourly rates generally correlated with reputation; the higher the fee charged, the better the �irm was perceived to be. Worse, it turned out that several of the �irm's partners were offering discounted rates to clients for fear that they would not even get their business. They expressed the fear that if they raised their rates, the �irm would suffer a drastic decline in business. They felt hamstrung. The answer, of course, was that they were either serving the wrong kinds of clients, or they were not as good as they claimed to be. The latter conclusion was perhaps closer to the truth given their discounting behavior. Certainly, the market was not nearly as price-sensitive as they thought it was, as evidenced by the fees its competitors were charging—and getting.

Discussion Questions

1. Why is de�ining your target market so dif�icult? If you agree, suggest how it can be made easier and yield accurate results at the same time.

2. Is distinguishing between "market," "target market," and "served market" useful? In what ways? 3. How might you discover that your target market would welcome opportunities to co-create value with your company? 4. What surveys would you take of your customers that would help guide what products to produce and how to persuade them to buy?

5. If you were designing a customer-relationship-management (CRM) system, what elements would you include and why? 6. Why is it that customers of highly differentiated companies are not that price-sensitive?

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 23/34

7. Customers buy products because, for the most part, the products satisfy their needs. (The exceptions are impulse buys.) Are "needs" and the "bene�its" they receive from using the product the same thing?

8. List the bene�its you might experience from buying each of the following: A movie ticket A logo t-shirt A novel A car An iPod A vacation cruise Flowers for your spouse or date

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 24/34

Analyzing environmental trends involves looking at what is changing and its potential impact on the company.

Wavebreakmedia Ltd/Thinkstock

4.3 Environmental-Trend Analysis

The almost dizzying pace of change going on in technology and business requires companies to plan differently than they have in the past. In order to keep pace with the rapidly changing environment, companies should divide the environment into categories or manageable pieces and, in each category, try to articulate (a) what is changing and in which direction, and (b) with what impact on the company. If the change has no relevance for the company or for what it might do in the future, then it deserves to be ignored. If a trend cannot be clearly de�ined in terms of direction (for example, something getting larger or smaller, increasing or decreasing), then it should be omitted. Saying, for example, that the "economy is in a recession" is not useful as a trend.

Environmental scanning is a common name given to identifying and analyzing trends that are external to the business (Fahey & Narayanan, 1986). People who engage in it have found that it is easy to get caught up in what they are discovering. Before they know it, they are collecting information for its own sake. Most companies cannot afford that luxury. Again, the search should be con�ined to trends that are relevant to the company, speci�ically any trend that affects the company or that may affect it in the future.

The currency of the collected data in environmental scanning is a valuable resource. Typically, one can �ind information on trends using historical data. However, the milieu in which strategic planning takes place, or the period during which the consequences of present decisions play out, is the future. A trend noticed during the 2004–2009 time frame, for example, may have limited value or even none at all in the 2012–2017 time frame. However, if the

trend can be extrapolated or extended in a justi�iable manner to the future time frame in question, then it becomes valuable. Nevertheless, �irms must be cautious, because some trends are discontinuous, meaning that behavior in the future is different from behavior in the past. While simple extrapolations can be performed by almost anyone, more complex forecasting, such as technological forecasting, must be done by an expert and may require consulting assistance. For such projects, the organization must have the requisite time and resources. The tradeoff between spending resources to do something properly and taking educated guesses when such resources are unavailable is something that the company will have to consider carefully.

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 25/34

In many cases, rather than doing the forecasting internally, a �irm can �ind estimated or projected data on trends to �it its future time frame. For example, demographic data taken from census data contain projections for at least 30 years into the future. Whenever using such projections, it is important to know how reliable the source is and, preferably, how the projections were derived. The more critical such data are to the company, the more care the company should exercise to ensure that reliable data and analyses are being used. Economic forecasts, for example, are particularly dif�icult to verify as to quality; economists can be wrong even for short-term forecasts.

Finally, the environmental scan should cover a geographic scope that matches the arena in which the company competes. For example, a distribution company operating and competing only in New England should pay more attention to what is happening in the New England economy rather than what may be happening nationally. Figure 4.4, for instance, shows the strategic group for the wholesale lumber industry. A large multinational company would have to extend its scan into every country in which it does business (buying, manufacturing, or selling) as well as include exchange rates between those countries and how events or trends in one of the countries might affect any of the others. The international environment is far more complex than dealing with just one country. For example, managers in each country are typically asked to complete an environmental analysis in their own country along with other analyses and projections required for strategic planning.

Figure 4.4: Strategic group map of the wholesale lumber industry

Source: Reprinted by permission from the Case

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 26/34

Research Journal, Copyright © 1992 by the North American Case Research Association and the author.

When conducting an environmental-trend analysis, there are seven common categories that the company should consider: economic, regulatory/legislative, political, demographic, sociocultural, attitude/lifestyle, and technological. No one category is more important than another per se, though certain categories can be more relevant to a particular company and so demand more of its attention.

Economic Trends

Of the seven categories of trends, we are �looded with opinions and doom-and-gloom prognostications about the economy the most. The news media thrive on stories about how stocks are being buffeted by economic forecasts and events such as bank bailouts or even bailouts of countries like Greece. Unless one has a direct �inancial stake, a lot of such news is just "noise." Economic data look very different and can provide a more solid feel as to how a country's economy is faring and how its currency is faring with respect to the world's major currencies. Economists monitor a number of principal indicators to identify trends:

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 27/34

"Structural shift" is a term that describes a trend from an industrial economy to a service economy, or from a predominantly manufacturing to a knowledge-based economy. Structural variables are factors such as energy costs rising faster than raw material costs, or general or minimum wage rates changing. In�lation and unemployment rates have historically tended to have an inverse relationship; as one goes up, the other typically goes down, and vice versa. Both are affected by �iscal policy controlled by the government and monetary policy controlled by the Federal Reserve Board, which also controls interest rates. Interest rates are the most watched economic indicator. These re�lect the cost of loans, mortgages, and credit, as well as how much savings and certi�icates of deposit (CDs) can earn. The consumer price index (CPI) is a relative indicator of how far and how fast prices have risen compared to a base year. Housing starts are a leading indicator of whether the economy might turn down or up. Balance of trade is the net difference in value between a country's exports and imports. A positive �igure re�lects a trade surplus while a negative �igure indicates a trade de�icit. For decades, the United States has run an annual trade de�icit. Exchange rates re�lect the value of one country's currency against another. A declining value of the U.S. dollar, for example, means that U.S. exports will be more competitive in world markets and imports more expensive, while a rising value of the dollar means that imports will become cheaper and U.S. goods in world markets more expensive. Personal disposable income is often associated with income data (demographic) and very useful when combined with demographic data such as geographic data, age, and ethnicity.

Regulatory/Legislative Trends

Regulations differ from laws in that they are made and enforced by city, state, and federal regulatory agencies whereas legislation refers to laws enacted by state assemblies and Congress. For both laws and regulations, indications of impending changes can be discerned by close observation of the political process at the appropriate level of government. Also, rules are made according to well-de�ined processes that include opportunities for rebuttals by industry or interested parties.

The volume of regulations enacted each year keeps increasing as re�lected in the number of pages in the Federal Register devoted to them. It behooves a company to monitor potential changes to regulations governing the industry in which it competes. Some industries, such as railroads and airlines, are so heavily regulated that they are called "regulated industries." Many regulations cut across all industries. Examples of these include tax regulations, workplace safety, insider trading, bargaining in good faith in labor negotiations, anticompetitive practices, and price-�ixing. All industries encounter some form of regulation, even those not considered "regulated." Deregulation of an industry can have an enormous impact. Examples of deregulated industries are telecommunications and electric power. Other industries such as airlines, banking, and transportation have seen a degree of deregulation. The merging of industries can have enormous implications for companies in each. An example of this trend has been the convergence of the banking, insurance, and brokerage industries into what is now called �inancial services.

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 28/34

The standards set by regulation in an industry may change. In the automobile industry, for example, this can be seen in the standards for crash resistance, fuel economy, and exhaust emissions. Other industries are affected by environmental standards for allowable concentrations of contaminants or impurities in air and water. Labeling requirements on all packaged and processed foods is another such example. Trade regulations at the international level may impose tariffs or set quotas to limit imports into a country or make imported goods more costly. Regulations may also prohibit the importation of certain agricultural products or require the quarantining of animals to prevent diseases or invasive species from entering the country. All the preceding regulatory trends affecting an industry may occur at both state and federal levels, as well as in many foreign countries.

Political Trends

Politics is not just for politicians. Politics is about power, the powerless, and the actions and activities people take to redress perceived inequities. The "Occupy" movement that spread from Wall St. to Main Street in many cities across the country is a stunning example of this. Such trends could have a signi�icant effect on some companies and their perceived public reputation.

The relative in�luence and power of interest groups in every sphere of economic and social activity in the United States is a matter of growing debate. From professional organizations such as the American Medical Association, to industry groups like the National Association of Manufacturers and demographic collectives exempli�ied by the American Association of Retired Persons (AARP), interest groups are more organized and more in�luential than ever before. The term lobbyist is used in some circles as a pejorative term, giving some indication as to the controversial nature of this trend. Fighting against or demanding enforcement of regulations or laws is a trend observed in the nation's courtrooms. The United States has always been a highly litigious society and that trend is only increasing.

Demographic Trends

This category is important only to companies that market directly to consumers. Because many companies' products target speci�ic demographic groups, monitoring trends in this category is imperative. Demographic trends are by de�inition concerned with groups identi�iable by speci�ic common characteristics such as age, gender, income, national heritage, and many others.

A country's population growth (or decline) is a demographic trend with implications for most industries. The growth rate of a particular age group such as the 25–39 or over-65 age group gives clues as to whether the population of a country is aging or getting younger, or has a "demographic bulge" moving through it. The geographic distribution of population reveals migration patterns affecting local markets. Signi�icant trends concerning gender, particularly gender differences, or in conjunction with one or more other demographic characteristics such as age, ethnicity, education, income levels, and others have critical strategic implications in a wide range of

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 29/34

industries. Changes in ethnic mix reveal the extent to which regions or cities are growing more diverse or becoming dominated by one ethnicity. Data on income levels show patterns of wealth distribution and indicate relative purchasing power, especially in combination with geographic data concerning average individual income and household income. Literacy rates re�lect the extent to which a population has received basic education and can read its own language.

Attitude/Lifestyle Trends

This category of trends also concerns only companies targeting consumers. These shed light on how people live—their patterns of living— making the trends highly interrelated with one another as well as with demographic information. These are also an outward manifestation of people's attitudes and values.

Household formation includes the family structure one chooses to establish such as married-couple families, one-parent families with either female or male head of household, couples with no children, and gay or lesbian couples. Also of interest is the average number of persons per household. Trends in the type of work and who is working are important to consumer-oriented industries. For example, the rise of women in the workforce, especially in professional and technical jobs, and the increase of two-income households have had a tremendous effect on spending patterns and the types of products brought to market. Similarly the tendency of more elderly people delaying retirement and continuing to work is a growing trend. Trends in the type and level of education achieved are signi�icant, particularly when the data are combined with ethnicity, race, and sex demographic variables. Companies producing for consumers need to be aware of changes in the consumption patterns of goods and services, especially homes, durable goods, furnishings, automobiles, clothes, beverages, and personal services and shifts in patterns within each category. Consumer choices with respect to leisure activities are constantly changing. This includes all types of sports and physical-�itness activities, cultural events, movie attendance, travel, and home-centered activities such as watching network and cable television and videos, reading, gardening—anything people choose to do in their free time.

Sociocultural Trends

This category focuses on broader changes in society and the extant culture and becomes important only if societal or cultural changes might affect the business. For example, producing a movie that may not be suitable for young people and therefore is rated NC-17, could in turn translate to lower revenues at the box of�ice.

Changes in social regulations—such as increases in consumer and environmental protection, changes in Supreme Court rulings, trends of the courts deciding issues that the political process cannot.

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 30/34

Changing social expectations are constantly in �lux. Businesses need to be aware of and prepared to respond to evolving consumer values across a wide range of issues. Examples include changing attitudes toward work, rising consumer demands, greater acceptance of sex and violence in popular culture, a growing emphasis on personal health and physical �itness, and increasing activism among women and minority groups. Changes in economic values have recently come to the forefront, most evident in the genesis of the Tea Party and Occupy movements. Many people have expressed increasing concern with how economic bene�its are distributed in society and how people are taxed. It can be argued that there is less acceptance of economic growth today as an unquali�ied bene�it to society. Changes in political priorities affect entire industries and even regions of the country. For example, choices made between defense versus nondefense appropriations will be of tremendous concern to any business that supplies the military or is located in regions where aerospace contractors or military bases are located.

Technological Trends

This category covers the entire swath of technology, from new energy sources, communication technologies, health care modalities and cures, food, agriculture, product and process innovations, and so on. Clearly, high-tech or technology-based companies must be current on technological developments in their �ields and how those advances affect people, businesses, and society. In rapidly changing �ields, it is possible to detect early signs of new technologies by going to professional-society meetings and listening to presentations on new processes and techniques, which often precede their introduction by several years.

The pace of change of basic science or research is manifested in the number and nature of new patents applied for and issued. The number and location of new companies formed to exploit new technologies and products based on new technologies are indicators of technology trends. Changes in the average percentage of sales spent on research and development (R&D) in a particular high-technology industry and for particular competitors, if publicly held are critical trends for companies to monitor. Trends in technology diffusion describe changes in the time required for a new technology to become accepted in general use. Innovation lag indicates the period between when the scienti�ic solution to a technological need is �irst recognized and the emergence of the �irst viable product using the solution technology and its successor.

A careful analysis of all relevant environmental trends will provide a company with an indication of strategic opportunities, that is, trends that might have a strong positive impact on the company, and looming threats or trends that might have a strong negative impact on the company. Environmental scanning should not be limited only to the period immediately preceding a strategic-planning session. Ideally, environmental scanning should be an ongoing, year-round activity done by many people throughout the organization. If done year-round, it would be unlikely that the company would be blindsided by any changes in its environment—and it would also be one of the �irst to notice opportunities as they arise. This last point is worth emphasizing, because the earlier an opportunity is noticed, the more lead time the company would have to exploit it.

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 31/34

Clearly, trends that have an immediate impact within the planning horizon—whether the impact is positive or negative—should receive the greatest attention. Trends that require a longer time to affect the company beyond the planning horizon are correspondingly less important but should nevertheless be monitored. Trends that have no impact on the company should be ignored.

Discussion Questions

1. Which environmental categories most need scanning if your company: Produces cell phones? Is a mass merchandiser? Produces steel tubing? Supplies lumber for the construction industry? Is a four-year university? Publishes books? Sells nutritional supplements online?

2. List some sources of information for each category of environmental scanning. 3. We know why environmental scanning is considered part of strategic planning, but why is it part of strategic thinking? 4. Economic and demographic data are often quantitative, which makes it easier to identify trends and their impact on the company. But attitude, lifestyle and sociocultural trends are "soft," subjective, and elusive. How can one understand better what's going on in these areas?

5. Scanning the technological environment is dif�icult for anyone but scientists or engineers in the �ield. Realizing what's happening today in this environment is too late, because developing technology takes years. How can one �ind out now what might be developing several years from now?

6. Assessing threats is a critical part of an external analysis that should precede, or be a part of, the strategic-planning process. But the world is not "convenient" in this respect. Forces that may adversely affect the company are constantly changing. How can a company monitor these so that it is never caught unawares?

7. What happens when threats are underestimated? Whose fault is it? Discuss.

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 32/34

Summary

This chapter explored the importance of and tools to help in analyzing a company's external environment—its industry, competitors, markets, and general environment.

Several useful tools for doing an industry and competitive analysis were presented and discussed, including Porter's �ive-forces model, industry-attractiveness matrix, strategic-group maps, and critical-success-factor analysis. In addition, identifying the industry's dominant economic characteristics and driving forces add to one's knowledge about the industry and how it might be changing—critical knowledge when deciding what strategy to pursue.

An industry sells its products or services to customers, so a key part of the external analysis is �inding out all one can about a company's customers (market). Included in a market analysis is distinguishing between a market, target market, and served market (which could be a niche), determining the size of it and whether it is growing (not to be confused with industry growth rate), how far the market is penetrated, what customers' needs are and whether these are changing, the distribution channels used, whether the market is price-sensitive, and any relevant trends, for example, in buying habits.

The chapter then provides a discussion and pointers to scan the general environment for any changes or trends that might favor (opportunities) or adversely affect (threats) the company. The general environment includes seven categories, not all of which are relevant to any one company: economic, regulatory/legislative, political/legal, demographic, attitude/lifestyle, sociocultural, and technological.

Concept Check

Key Terms

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 33/34

bargaining power An ability to dictate the terms—price, delivery, quality, and the like—in a trading negotiation.

concentrated industry One in which a few �irms in the industry account for a large portion of total industry sales (opposite of fragmented industry).

critical success factors (CSFs) What a company must do well in order to succeed in the industry; however, they attach to an industry, not a company (think of them as constituting "rules of the industry").

distribution channel How a product �inally reaches the customer (can include directly via salespeople, wholesalers, distributors, retailers, mail order, and the Internet).

driving forces Trends responsible for how an industry is changing.

entry barriers Factors that could, if suf�iciently high (like capital required, distribution channels, brand reputation, technological knowhow, etc.), prevent a company from entering an industry.

fragmented industry One in which no one �irm has more than a fraction of a percent in market share (opposite of concentrated industry).

industry attractiveness matrix A weighted technique based on a number of factors to determine how attractive an industry is.

industry attractiveness (I.A.) index The �inal result achieved from using the industry-attractiveness matrix, usually expressed as a percentage.

market analysis An umbrella term covering the collection and analysis of data and information about a company's customers, which could be companies in another industry or individuals (consumers).

market penetration The proportion of a market that has bought a product/service from the industry (can vary from 0 for a brand new market to 100% and beyond, as when people own more than one car or TV).

Porter's �ive-forces model An analytical tool developed by and named after Michael E. Porter to assess the �ive sources of competitive threat extant in an industry and causes of industry pro�itability.

price sensitivity How sensitive buyers are to variations in price. If a slight drop in price causes customers to buy, they are very price- sensitive; if price goes up a lot and customers still buy, they are not at all price-sensitive.

1/9/2018 Print

https://content.ashford.edu/print/AUMGT450.12.2?sections=ch04,sec4.1,sec4.2,sec4.3,ch04summary&content=content&clientToken=5487ed43-e985-bc05-f644-e0b4130e540c&np=sec2.9 34/34

served market That portion of the target market that is currently served by the company or is the focus of the company.

strategic-group map A technique to cluster, in a two-dimensional space, strategically similar competitors in industries, especially useful when industries contain disparate competitors.

target market The group of customers targeted by a company (could be companies or consumers, domestic or international).