SM 3. Environment Scanning

8/2/2019 SM 3. Environment Scanning

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Environmental Scanning &

AnalysisBusiness Environment

Industry Analysis


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Environmental Scanning

Environmental scanninganalyzesinformation about every sector of theexternal environment that can helpmanagement to plan for the organization'sfuture.

Scanning covers not only competitors,suppliers, and customers, but also includes

technology, economic conditions, politicaland regulatory environment, and social anddemographic trends.


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Scope

Environmental scanning usually refers

to the macro environment. It can also include industry and

competitor analysis, consumer analysis,

product analysis and the company'sinternal environment.


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4

transformationprocess

internal environment

the organisation

industry environment

customerssuppliers

competitors

market

regulatory and professionalgroups

inputs outputs

Technological and eco-environmental forces

social and legal forces

economic forces

political forces

macro environment

The Corporate Environment


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Does Scanning Improve

PerformanceNewgren et al (1984)

Scanning firms significantly outperformed non-scanning firms

(50 US firms, P/E ratios, 1975-1980)

West (1988)

Daft, Sormunen and Parks (1988)

CEOs of high performing firms scanned more frequently,

intensely and broadly

(50 SMEs in Texas)


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Macro Economic Environment

General economy

Industry

Markets


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General Economy

Macro economics (fiscal & monetarypolicy, GDP, NI)

Govt. Regulation (Labor laws, exit

policy, minimum wages, EXIM policy) Political (Govt. stability, ideology,

liberalization)


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Industry

Competitors

Suppliers

Products/Services

Technology


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Markets

Customers

Demographics

Socio-cultural factors (Consumer

tastes & styles)


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Objectives of EnvironmentalAnalysis Identify changes or trends in

environmental factors.

Focus on those forces & trends which

seem to be most relevant & critical tothe business.

Think through the implications of thesechanges for the future direction &

strategies of the organization.


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Critical Success Factors

A few driving forces in theenvironment will be more influential indetermining a firms performance than

others. These forces are called critical

success factors (CSFs).

It is vital to focus the firms scanningefforts on them.


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Critical Core Competencies

Effective CSF analysis should benefitlater stages of planning.

They disclose specific internal

capabilities that must be strengthenedto a point where they become sourcesof distinctive competitive competence.

These competencies may be

designated as critical corecompetencies (CCCs).


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Porters Five Forces Model

Industry Analysis


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Overview An industryis a group of firms producing

products that are close substitutes.

Porter and others believe that compared to

the overall external environment, theindustry environment often has a moreprofound effect on

a companys competitiveness

an industrys profit potential.


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Industry Forces The long-term return on invested

capital within a given industry is afunction of five competitive forces.


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BuyersSuppliers

Substitute

products

Potential

entrants

Industry competitors

Rivalry among

existing firms

Threat of

new entrants

Bargaining power

of suppliers Bargaining powerof buyers

Threat of

substitutes

Porter's Five Forces Model

Source: Michael E. Porter Competitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)


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Threat of New Entrants New entrants to an industry typically bring to it

new capacity

a desire to gain market share

substantial resources.

Many companies often find it difficult to identify new

industry entrants (i.e., new competitors). New entrants are threats to established

corporations.

The extent of the threat depends on Existing barriers to entry

The combined reaction/retaliation from existingcompetitors.


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Threat of Substitute Products

or Services Substitute productsare those products that appear to be

different but can satisfy the same need as another product.

Substitutes limit the potential returns of an industry by placinga ceiling on the prices that firms in that industry can profitablycharge.

Substitute products that deserve the most attention are thosethat Are subject to trends improving their price/performance value

relative to an industrys product or

Are produced by industries earning high profits.

Differentiating a product along dimensions that customersvalue (e.g., price, quality, or service) reduces a substitutesattractiveness.


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Bargaining Power of Buyers

Buyers affect an industry through their ability to force down prices

bargain for higher quality or more services

play competitors against each other.

A buyer or a group of buyers is powerful under thefollowing conditions: It is concentrated or purchases large volumes relative to seller

sales

The products it purchases from the industry are standard or

undifferentiated The buyer faces few switching costs

The buyer poses a credible threat of backward integration

The industrys product is unimportant to the quality of thebuyers products or services.


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Bargaining Power of Suppliers

Suppliers can affect an industry through their abilityto raise prices or reduce the quality of purchasedgoods and services. A supplier group will bepowerful in the following circumstances: The supplier group is dominated by a few companies and is

more concentrated than the industry it sells to.

The supplier group is not obliged to contend with substituteproducts for sale to the industry.

The industry is not an important customer of the supplier

group. The suppliers product is an important input to the buyers

business.

The supplier groups products are differentiated or it has builtup switching costs.

The supplier group poses a credible threat of forwardintegration.


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Rivalry Among Existing Firms

Rivalry among existing competitors takes the formof jockeying for position.

Firms use tactics like Price competition

Advertising battles

Product introductions

Increased customer service or warranties.

Rivalry occurs when competitors sense the

pressure or act on an opportunity to improve theirposition.

Often, rivalry is based on price, quality, andinnovation.


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Interpreting a Five-Forces

Analysis Firms can determine an industrys

attractiveness in terms of the potential to earnadequate or superior returns on invested

capital. The stronger the competitive forces, the lower

the potential profit for firms within the industry. An attractive industry has

high entry barriers suppliers with little bargaining power

buyers with little bargaining power

few competitive threats from product substitutes

relatively moderate rivalry among competing firms.

SM 3. Environment Scanning

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