Strategic Management Module Review#3

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Environmental Scanning and Industry Analysis

Chapter 4

Learning Objectives

Recognize aspects of an organization’s environment that can influence its long-term decisions

Identify the aspects of an organization’s environment that are most strategically important

Conduct an industry analysis to understand the competitive forces that influence the intensity of rivalry within an industry

Understand how industry maturity affects industry competitive forces

Categorize international industries based on their pressures for coordination and local responsiveness

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After reading this chapter, you should be able to:

• Recognize aspects of an organization’s environment that can influence its long-term decisions

• Identify the aspects of an organization’s environment that are most strategically important

• Conduct an industry analysis to understand the competitive forces that influence the intensity of rivalry within an industry

• Understand how industry maturity affects industry competitive forces

• Categorize international industries based on their pressures for coordination and local responsiveness

Learning Objectives

Construct strategic group maps to assess the competitive positions of firms in an industry

Identify key success factors and develop an industry matrix

Use publicly available information to conduct competitive intelligence

Know how to develop an industry scenario

Be able to construct an EFAS Table that summarizes external environmental factors

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After reading this chapter, you should be able to:

• Construct strategic group maps to assess the competitive positions of firms in an industry

• Identify key success factors and develop an industry matrix

• Use publicly available information to conduct competitive intelligence

• Know how to develop an industry scenario

• Be able to construct an EFAS Table that summarizes external environmental factors

Environmental Scanning

Environmental scanning

the monitoring, evaluation, and dissemination of information relevant to the organizational development of strategy

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Environmental scanning is the monitoring, evaluation and dissemination of information relevant to the organizational development of strategy

Identifying External Environmental Variables

Natural environment

includes physical resources, wildlife and climate that are an inherent part of existence on Earth

form an ecological system of interrelated life

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The natural environment includes physical resources, wildlife and climate that are an inherent part of existence on Earth. These factors form an ecological system of interrelated life.

Identifying External Environmental Variables

Societal environment

mankind’s social system that includes general forces that do not directly touch on the short-run activities of the organization, but that can influence its long-term decisions

economic, technological, political-legal and sociocultural

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The societal environment is mankind’s social system that includes general forces that do not directly touch on the short-run activities of the organization, but that can influence its long-term decisions. These factors affect multiple industries and are as follows: economic, technological, political-legal and sociocultural.

Identifying External Environmental Variables

Task environment

those elements or groups that directly affect a corporation and, in turn, are affected by it

government, local communities, suppliers, competitors, customers, creditors, unions, special interest groups/trade associations

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The task environment includes those elements or groups that directly affect a corporation and, in turn, are affected by it. These are governments, local communities, suppliers, competitors, customers, creditors, employees/labor unions, special-interest groups and trade associations.

Identifying External Environmental Variables

Industry analysis

an in-depth examination of key factors within a corporation’s task environment

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Industry analysis is an in-depth examination of key factors within a corporation’s task environment.

Scanning the Societal Environment: STEEP Analysis

STEEP Analysis

monitoring trends in the societal and natural environments

sociocultural, technological, economic, ecological and political-legal forces

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This scanning can be called STEEP Analysis, the scanning of sociocultural, technological, economic, ecological, and political–legal environmental forces.

Some Important Variables in the Societal Environment

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As shown in Table 4–1, large corporations categorize the natural and societal environments in any one geographic region into five areas and focus their scanning in each area on trends that have corporatewide relevance.

Current U.S. Generations

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For example, the demographic bulge in the U.S. population caused by the baby boom after WWII continues to affect market demand in many industries. This group of 77 million people now in their 50s and 60s is the largest age group in all developed countries, especially in Europe. (See Table 4–2.)

Current Sociocultural Trends

Increasing environmental awareness

Growing health consciousness

Expanding seniors market

Impact of Millennials

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

• Increasing environmental awareness

• Growing health consciousness

• Expanding seniors market

• Impact of Millennials

Current Sociocultural Trends

Declining mass market

Changing pace and location of life

Changing household composition

Increasing diversity of workforce and markets

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The others are:

• Declining mass market

• Changing pace and location of life

• Changing household composition

• Increasing diversity of workforce and markets

Technological Breakthroughs

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Researchers at George Washington University have identified a number of technological breakthroughs that are already having a significant impact on many industries:

• Portable information devices and electronic networking

• Alternative energy sources

• Precision farming

• Virtual personal assistants

• Genetically altered organisms

• Smart, mobile robots

Portable information devices

Electronic networking

Alternative energy sources

Precision farming

Virtual personal assistants

Genetically altered organisms

Smart, mobile robots

Categories of Risk

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The effects of climate change on companies can be grouped into six categories of risks: regulatory, supply chain, product and technology, litigation, reputational and physical.

Regulatory risk

Supply chain risk

Product and technology risk

Litigation risk

Reputational risk

Physical risk

Some Important Variables in International Societal Environments

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To account for the many differences among societal environments from one country to another, consider Table 4–3. It includes a list of economic, technological, political–legal and sociocultural variables for any particular country or region.

Scanning External Environment

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As shown in Figure 4–1, a corporation’s scanning of the environment includes analyses of all the relevant elements in the task environment.

Forces Driving Industry Competition

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Michael Porter, an authority on competitive strategy, contends that a corporation is most concerned with the intensity of competition within its industry. The level of this intensity is determined by basic competitive forces, as depicted in Figure 4–2.

Threat of New Entrants

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

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New entrants to an industry typically bring to it new capacity, a desire to gain market share and potentially substantial resources.

An entry barrier is an obstruction that makes it difficult for a company to enter an industry.

Barriers to Entry

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Some of the possible barriers to entry are:

• Economies of scale

• Product differentiation

• Capital requirements

• Switching costs

• Access to distribution channels

• Cost disadvantages due to size

• Government policies

Economies of scale

Product differentiation

Capital requirements

Switching costs

Access to distribution channels

Cost disadvantages due to size

Government policies

Rivalry among Existing Firms

In most industries, corporations are mutually dependent.

A competitive move by one firm can be expected to have a noticeable effect on its competitors and thus may cause retaliation.

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In most industries, corporations are mutually dependent. A competitive move by one firm can be expected to have a noticeable effect on its competitors and thus may cause retaliation.

Rivalry among Existing Firms

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According to Porter, intense rivalry is related to the presence of several factors, including:

• Number of competitors

• Rate of industry growth

• Product or service characteristics

• Amount of fixed costs

• Capacity

• Height of exit barriers

• Diversity of rivals

Number of competitors

Rate of industry growth

Product or service characteristics

Amount of fixed costs

Capacity

Height of exit barriers

Diversity of rivals

Threat of Substitute Products or Services

Substitute product

a product that appears to be different but can satisfy the same need as another product

The identification of possible substitute products means searching for products that can perform the same function, even though they have a different appearance.

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A substitute product is a product that appears to be different but can satisfy the same need as another product. The identification of possible substitute products or services means searching for products or services that can perform the same function, even though they have a different appearance and may not appear to be easily substitutable.

The Bargaining Power of Buyers

Bargaining power of buyers

ability of buyers to force prices down, bargain for higher quality and play competitors against each other

Large purchases, backward integration, alternative suppliers, low cost to change suppliers, product represents a high percentage of buyer’s cost, buyer earns low profits, product is unimportant to buyer

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Buyers affect an industry through their ability to force down prices, bargain for higher quality or more services and play competitors against each other. A buyer or a group of buyers is powerful if some of the following factors hold true: large purchases, backward integration, alternative suppliers, low cost to change suppliers, product represents a high percentage of buyer’s cost, buyer earns low profits and product is unimportant to buyer.

The Bargaining Power of Suppliers

Buyers affect an industry through their ability to force down prices, bargain for higher quality or more services and play competitors against each other.

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Buyers affect an industry through their ability to force down prices, bargain for higher quality or more services and play competitors against each other.

The Bargaining Power of Suppliers

A buyer or a group of buyers is powerful if some of the following factors hold true:

Industry is dominated by a few companies

Unique product or service

Substitutes are not readily available

Ability to forward integrate

Unimportance of product or service to the industry

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A buyer or a group of buyers is powerful if some of the following factors hold true:

• Industry is dominated by a few companies

• Unique product or service

• Substitutes are not readily available

• Ability to forward integrate

• Unimportance of product or service to the industry

Relative Power of Other Stakeholders

Government

Local communities

Creditors

Trade associations

Special interest groups

Unions

Shareholders

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A sixth force should be added to Porter’s list to include a variety of stakeholder groups from the task environment.

Some of these groups are:

• Government

• Local communities

• Creditors

• Trade associations

• Special interest groups

• Unions

• Shareholders

Industry Evolution

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 struggles to differentiate products from its competition

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A fragmented industry is one where no firm has large market share, and each firm serves only a small piece of the total market in competition with

others (for example, cleaning services).

A consolidated industry is one dominated by a few large firms, each of which struggles

to differentiate its products from those of the competition

Categorizing International Industries

Multi-domestic industries

specific to each country or group of countries

Global industries

operate worldwide with multinational companies making only small adjustments for country-specific circumstances

Regional industries

multinational companies primarily coordinate their activities within regions

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Multidomestic industries are specific to each country or group of countries. This type of international industry is a collection of essentially domestic industries, such as retailing and insurance. Global industries, in contrast, operate worldwide, with MNCs making only small adjustments for country-specific circumstances. Regional industries are those in which MNCs primarily coordinate their activities within regions, such as the Americas or Asia.

Continuum of International Industries

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According to Porter, worldwide industries vary on a continuum from multi-domestic to global (see Figure 4–3).

Strategic Groups

Strategic group

a set of business units or firms that pursue similar strategies with similar resources

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

Mapping Strategic Groups in the U.S. Restaurant Chain Industry

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Strategic groups in a particular industry can be mapped by plotting the market positions of industry competitors on a two-dimensional graph, using two strategic variables as the vertical and horizontal axes (see Figure 4–4).

Strategic Types

Defenders

focus on improving efficiency

Prospectors

focus on product innovation and market opportunities

Analyzers

focus on at least two different product market areas

Reactors

lack a consistent strategy-structure-culture relationship

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These general types have the following characteristics:

Defenders are companies with a limited product line that focus on improving the efficiency of their existing operations.

Prospectors are companies with fairly broad product lines that focus on product innovation and market opportunities.

Analyzers are corporations that operate in at least two different product-market areas, one stable and one variable.

Reactors are corporations that lack a consistent strategy-structure-culture relationship.

Hypercompetition

Market stability is threatened by short product life cycles, short product design cycles, new technologies, frequent entry by unexpected outsiders, repositioning by incumbents and tactical redefinitions of market boundaries as diverse industries merge.

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Using Key Success Factors to Create an Industry Matrix

Key success factors

variables that can significantly affect the overall competitive positions of companies within any particular industry

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Key success factors are variables that can significantly affect the overall competitive positions of companies within any particular industry.

Industry Matrix

Industry matrix

summarizes the key success factors within a particular industry

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As shown in Table 4–4, the matrix gives a weight for each factor based on how important that factor is for success within the industry. The matrix also specifies how well various competitors in the industry are responding to each factor.

Competitive Intelligence

Competitive intelligence

a formal program of gathering information on a company’s competitors

also called business intelligence

Sources of competitive intelligence:

Information brokers

Internet

Industrial espionage

Investigatory services

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Competitive intelligence is a formal program of gathering information on a company’s competitors. Often called business intelligence, it is one of the fastest growing fields within strategic management. Sources of competitive intelligence are:

• Information brokers

• Internet

• Industrial espionage

• Investigatory services

Useful Forecasting Techniques

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Some useful forecasting techniques are:

• Extrapolation

• Brainstorming

• Expert opinion

• Delphi technique

• Statistical modeling

• Prediction markets

• Cross impact analysis

Extrapolation

Brainstorming

Expert opinion

Delphi technique

Statistical modeling

Prediction markets

Cross impact analysis

Synthesis of External Factors—EFAS

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After strategic managers have scanned the natural, societal and task environments and identified a number of likely external factors for their particular corporation, they may want to refine their analysis of these factors by using a form such as that given in Table 4–5.

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