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STRATEGICMANAGEMENT
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02 Environmental
Scanning&
Industry Analysis
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Environmental Scanning Environmental scanning is the monitoring,
evaluation and dissemination of informationfrom the external and internal environmentsto key people within the corporation.
It is in the environment that all theopportunities are embedded.
By tapping the opportunities, the firmachieves its objectives of sales, profits,
growth, et al. In the environment only all the threats lie.
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IKEA (Slide 1)As a young person in Sweden after the Second World War,Kamprad observed that many young families had a hard
time buying Swedish furniture because of its high price.Hesaw a way to offer good quality furniture at substantially
lower prices.
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IKEA (Slide 2)What were the options available with Kamprad?
His cost cutting strategy included:
Buy large volumes
The furniture would be designed in knockdown form
Customers would see the assembled furniture in
showroom, make selection, locate furniture items,pay and drive home avoiding delivery costs
Customers would assemble the furniture themselves
Ikea stores work on a low markup and high volume
The Swedish manufacturer of home furnishings, Ikea group,wants to double the goods it sources from India to1 billion.But plans to sell the companys products in the country arehampered by restrictions on overseas investments in retail.
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IKEA (Slide 3) Their idea is to provide good design, good function,
but at very, very low prices. The company does not
prefer to be in joint ventures (JV). There is a very high urbanization rate in India and
that will only continue.
Entry barrier is that the firms plan to sell itsproducts in India, are hampered by restrictions on
overseas investments in retail. Economic conditions are improving dramatically in
India, for all people.
There is really room for all the traditional local homefurnishing firms and also for Ikea because the market
and the need will grow so dramatically in the coming10-20 years.
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Spotting the Opportunities & Threats
Where is the environment heading?
What trends are emerging therein? What are the threats and opportunities
embedded in the trends?
What should be thefirms
response to thesetrends?
Analysis helps the firm highlight
opportunities for growth within and outsidethe existing businesses of the firm.
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Trends & Megatrends A trend is a direction or sequence of events
that has some momentum and durability.
A trend reveals the shape of the future andprovides many opportunities.
The concept of e-books is gaining ground.
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Trends & Megatrends Megatrends are described as large social,
economic, political and technological changesthat are slow to form but once in place, they
influence us for long time.
In the 20th century, our lives wererevolutionised by things like the automobile,airline travel, the personal computer and familyplanning.
The next big thing is the wellness revolution.
The desire for wellness already pervades ourdecisions, from which toothpaste and shampoowe use in the morning to what we eatthroughout the day to the bedding andcosmetics we use at night.
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Trends & Megatrends
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Trends & Megatrends We demand more safety from our products; we
want more prevention from them. And yet weare only at the beginning of the public
consciousness of this growing need.
We are now at the beginning of the next trilliondollar industry, the wellness industry.
The wellness industry is being spawned byscientific breakthroughs in biology and cellularbio-chemistry.
The wellness industry is tackling one of the
most profound issues of life, solving one of thefew remaining mysteries of human existence,age and vitality, on which technology has yet tomake its mark.
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FadA fad is any form of behavior that develops among
a large population and is collectively followed withenthusiasm for some period, generally as a result
of the behavior's being perceived as novel in
some way.
Though the term trendmay be used
interchangeably with fad, a fad is generally
considered a fleeting behavior whereas a trend is
considered to be a behavior that evolves into a
relatively permanent change.
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FadFads of the 2000s
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FadFads of the 2000s
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Political Factors
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Components of EnvironmentPolitical factors
Stability of the government
Government type (dictatorship, democratic,monarchy, etc)
Economic policy of the government Diplomatic events in surrounding countries
Taxation policy
Foreign policy Trade regulations and trade policy
Social welfare policies
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Economic Factors
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Components of EnvironmentEconomic factors
GNP/GDP trends
Business cycles
Interest rates
Money supply
Inflation
Unemployment
Disposable income
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http://www.investorwords.com/2247/Gross_National_Product.htmlhttp://www.investorwords.com/2247/Gross_National_Product.html -
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Socio-cultural Factors
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Components of EnvironmentSocio-cultural factors
Population demographics
Income distribution
Social mobility
Cultural diversity Lifestyle changes
Attitude towards work and leisure
Consumerism Levels of education
Skilled manpower availability
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Technological Factors
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Components of EnvironmentTechnological Factors
Government spending on researchand development
Government and industry focus on
technological efforts
New discoveries, innovations anddevelopment
Speed of technology transfer
Rates of obsolescence
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Environmental Factors
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Components of EnvironmentEnvironmental factors
Environmental protection laws
Waste disposal regulations
Energy consumption andproduction
Competition law
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Legal Factors
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Components of EnvironmentLegal factors
Monopolies legislation
Employment law
Health and safety Product safety and liability
regulations
Exit policy
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Current Trends Increasing environmental awareness
Growing health consciousness Expanding seniors market
Impact of the Generation Y boomlet Declining mass market
Changing pace and location of life Changing household composition
Increasing diversity of workforce &market
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Business Ethics
Argument that there is no such thing it is
an oxymoron
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Corporate Practices
Massive write-downs and restatementsof profit
Misclassification of expenses as capitalexpenditures
Pirating corporate assets for personalgain
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Strategic Myopia
Willingness to reject unfamiliar aswell as negative information
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Issues Priority Matrix
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Issues Priority Matrix Identify a number of emerging
trends Assess the probability of these
trends
Attempt to ascertain the likelyimpact of each of these trends
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Industry Analysis
An industry is a group of firmsproducing a similar product or service
An examination of the importantstakeholders group in a particularcorporations task environment is apart of industry analysis
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Porters Five Forces Model
Th t f N E t t
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Threat of New Entrants A new entrant creates new capacity for
gaining and sustaining market share.
New entrant can destabilize the competition,
creating a shakeout in the market.
The most attractive segment is that in whichentry barriers are high and exit barriers low.
When both entry and exit barriers are high,profit potential is high.
When both entry and exit barriers are low, thereturns are stable and low.
The worst case is when entry barriers are lowand exit barriers high. The result is chronicovercapacity and depressed earnings.
Porters Five Forces Model of Competition
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Threat ofNew
Entrants
Threat of
New
Entrants
Porter s Five Forces Model of Competition
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Threat of New Entrants
Barriers to
Entry
Expected Retaliation
Government Policy
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent
of Scale
Th t f N E t t
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Threat of New Entrants Economies of scale means where
companies are able to drive down unitcosts of a product or service as thevolume increases.
An entrant has two options, eitherto match or outperform the levelof economies of scale
or to start at a level where the
economies of scale are less andaccept that there will be costdisadvantages.
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Threat of New Entrants
Barriers to
Entry
Expected Retaliation
Government Policy
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent
of Scale
Th t f N Ent nts
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Threat of New Entrants Product differentiation implies that
established companies within the industryhave had time and opportunity to build
customer loyalty through productdifferences, branding and marketingcommunications.
A new entrant will have to investsignificantly in product differences andmarketing communication to establishits brand in the marketplace.
This will be resources-intensive with noguarantees that the brand will find aposition that generates suitable returnson the investment.
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Threat of New Entrants
Barriers to
Entry
Expected Retaliation
Government Policy
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent
of Scale
Threat of New Entrants
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Threat of New Entrants Capital requirements means substantial
investment may be required to enter andestablish a new brand.
The venture is considered highlyrisky and the financial risk may deterpotential entrants.
Switching costs means costs incurred inchanging suppliers.
These costs will occur because of
retraining staff, installation and testingof new equipment, acquisition ofancillary materials and time needed tobuild relationships with new suppliers.
h f E
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Threat of New Entrants
Barriers to
Entry
Expected Retaliation
Government Policy
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent
of Scale
Threat of New Entrants
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Threat of New Entrants Access to distribution channels means that
established companies will have already
efficient channels of distribution.
The new entrant will have to either finda new avenue for distribution which willincur training costs or else persuade
existing distributors to make extrashelf space which will result inadditional incentives.
Th f N E
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Threat of New Entrants
Barriers to
Entry
Expected Retaliation
Government Policy
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent
of Scale
Threat of New Entrants
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Threat of New Entrants Cost disadvantages independent of scale
means cost advantages beyond economies of
scale in terms of technical know-how,patents, direct access to raw materials, ideallocation, government subsidies andsignificant industry or marketing experience.
Government policy means policies that rangefrom regulation of certain industries such asnuclear industry to protectionist policies for
local industry to environmental legislation.
Porters Five Forces Model of Competition
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Bargaining
Power of
Suppliers
Threat ofNew
Entrants
Threat of
New
Entrants
Porter s Five Forces Model of Competition
Bargaining Power of Suppliers
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Bargaining Power of Suppliers
Suppliers exert power
in the industry by:
* Threatening to raise
prices or to reduce quality
Powerful suppliers
can squeeze industry
profitability if firms
are unable to recover
cost increases
Suppliers are likely to be powerful if:
Supplier industry is dominated by afew firms
Suppliers products have few substitutes
Buyer is not an important customer tosupplier
Suppliers product is an importantinput to buyers product
Suppliers products are differentiatedSuppliers products have highswitching costs
Supplier poses credible threat of
forward integration
OPEC
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OPEC The Organization of the Petroleum Exporting
Countries (OPEC) was founded in Baghdad,
Iraq, with the signing of an agreement inSeptember 1960 by five countries, thefounder members, Iran, Iraq, Kuwait, SaudiArabia and Venezuela.
These countries were later joined by Qatar,Indonesia, Libya, the United Arab Emirates,Algeria, Nigeria, Ecuador, Gabon and Angola.
Gabon terminated its membership in 1995.
Indonesia suspended its membership inJanuary 2009.
Currently, the Organization has a total of 12Member Countries.
Porters Five Forces Model of Competition
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Bargaining
Power of
Buyers
Threat ofNew
Entrants
Threat of
New
Entrants
Bargaining
Power of
Suppliers
Porter s Five Forces Model of Competition
Bargaining Power of Buyers
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Bargaining Power of Buyers
Buyers compete
with the supplying
industry by:
*Bargaining down prices
* Forcing higher quality
* Playing firms off of
each other
Buyer groups are likely to be powerful if:
Buyers are concentrated or purchases
are large relative to sellers sales
Purchase accounts for a significantfraction of suppliers sales
Products are undifferentiated
Buyers face few switching costs
Buyers industry earns low profits
Buyer presents a credible threat ofbackward integration
Product unimportant to quality
Buyer has full information
Porters Five Forces Model of Competition
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Threat of
Substitute
Products
Threat of
New
Entrants
Threat ofNew
Entrants
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Porter s Five Forces Model of Competition
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Threat of Substitute Products
Products
with similar
functionlimit the
prices firms
can charge
Keys to evaluate substitute products:
Products with improving
price/performance tradeoffs
relative to present industryproducts
Example:
Electronic security systems inplace of security guards
Fax machines in place of
overnight mail delivery
Porters Five Forces Model of Competition
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Threat of
Substitute
Products
Threat ofNew
Entrants
Threat ofNew
Entrants
Rivalry Among
Competing Firms
in Industry
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
F F M f mp n
Ri l A E i i C i
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Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:
Jockeying for strategic position
Using price competition
Staging advertising battles
Making new product introductions
Increasing consumer warranties or service
Occurs when a firm is pressured or sees an opportunity
Price competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, but
may be costly to smaller competitors
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Industry Evolution Over time industries evolve through a series of
stages from growth through maturity to eventualdecline
The strength of each force of the six forces variesaccording to the stage of industry evolution
Fragmented industry : no firm has large marketshare and each firm serves only a small piece of thetotal market in competition with others
Consolidated industry : dominated by a few large
firms, each of which struggle s to differentiate itsproducts from the competition
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Continuum of International Industries
Multidomestic
Industry in which companiestailor their products to thespecific needs ofconsumers in a particularcountry.
Retailing
Insurance
Banking
Global
Industry in which companiesmanufacture and sell thesame products, with onlyminor adjustments made forindividual countries aroundthe world.
Automobiles Tyres
Television sets
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Strategic Groups
Is a set of business units or firms that pursuesimilar strategies with similar resources
To understand the competitive environment
in an industry, firms can be categorized intoa set of strategic groups
Strategic groups of an industry can beplotted on a two dimensional graph (price,
product line breadth, quality, service,location)
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Strategic Types
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Strategic Types
Defenders
Prospectors
Analyzers
Reactors
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Strategic Types
Defenders Companies with a limited product line that
focus on improving the efficiency of theirexisting operations
Prospectors
Companies with fairly broad product lines
that focus on product innovation and marketopportunities
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Strategic Types
Analyzers Corporations that operate at least in 2
different product-market areas. Emphasis onefficiency in stable areas. Emphasis on
innovation in variable areas
Reactors
Corporations that lack a consistent strategy-structure- culture relationship. Ineffectiveresponses to environmental pressures
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Hyper-competition In hyper-competition the frequency, boldness, and
agressiveness of dynamic movement by the players
accelerates to create a condition of constantdisequilibrium and change
Market stability is threatened by short product life
cycles, short product design cycles, newtechnologies, frequent entry by unexpectedoutsiders, redefinition of market boundaries asdiverse industries merge
Environments escalate towards higher levels ofuncertainty, dynamism, heterogeneity of the playersand hostility
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Hyper-competition
Companies must be willing tocannibalize their own products(replacing popular products before
competitors do so) in order to sustaintheir competitive advantage
As a result, it is important to study
industry or competitive intelligence
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Key Success Factors
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Key Success Factors KSFs are those variables that can affect
significantly the overall competitivepositions of all companies within anyparticular industry.
They vary from industry to industry andare crucial to determine a companysability to succeed within the industry.
Key success factors are different from
strategic factors : Key Success factorsdeal with an entire industry. Strategicfactor deal with a particular company.
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Competitive Intelligence
Is a formal program of gathering informationon a companys competitors
Most corporations rely on outsideorganizations to provide them with
environmental data.
Information on market conditions,government regulations, competitors and
new products can be bought frominformation brokers
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Competitive Intelligence
Industrial espionage is consideredillegal
Unethical tactics; bribery, wiretapping,
computer break-ins should never beused to get information
10 questions to monitor competitors for
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10 questions to monitor competitors forstrategic planning
1. Why do your competitors exist? to make profits or tosupport another unit?
2. Where do they add customer value? Higher quality,lower price, credit terms, better service?
3. Which of your customers are the competition mostinterested in? best customers or the ones you dontwant?
4. What is their cost base and liquidity?
5. Are they less exposed with their suppliers than yourfirm?
10 questions to monitor competitors
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10 questions to monitor competitorsfor strategic planning
6. What do they intend to do in the future? Target yourmarket segments? Growing?
7. How will their activities affect your strategies?Should you adjust your plans and operations?
8. How much better than your competitor do you needto be in order to win customers?
9. Will new competitors appear over the next fewyears?
10.If you were a customer, would you choose yourproduct over those offered by your competitors?
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Forecasting
Intuition and luck are needed to predicttrends in the future, These trends arebased on assumptions.
Faulty assumptions are cause offorecasting errors.
Many long-range plans are based on
projections of the current situation.
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The Role of Forecasting
EnvironmentalScanning
PresentTrends andFashions
ForecastingFuture Trendsand Fashions
Assumptionsfor StrategicPlanning and
Decision Making