Reading in Environmental Scanning

Environmental scanning

SOCIETAL
ENVIRONMENT

TASK
ENVIRONMENT

INTERNAL
ENVIRONMENT

Strategic Management 1
Reading in Environmental Scanning

Societal environment covers the following Political legal forces

Economic forces
Sociocultural factors
Technological factors

Task environment covers the following Suppliers

Shareholders
Government
Special interest groups
Customers
Creditors
Trade Association
Competitors
Employer/Trade Union

Internal environment covers the following Structure

Culture
Resources

In undertaking environment scanning, strategic managers must be aware of the many variable
within corporation’s societal and task environment.

The societal environment includes general forces that do not directly touch on the short run
activities of the organisation but that can, and often does, influence long run decision.

Some important variables in the societal environment:

Political-legal Economic Socio-cultural Technological

 Regulations  GDP trends  Lifestyles  Total

 Environment  Interest rates changes government
protection laws  Money supply  Career speeding in
 Taxation  Inflation rates expectations R&D
 Special  Unemployment  Consumer  Total industry
incentives levels activitism spending in
 Foreign trade  Wage/price  Rate of family R&D
regulations controls formation  Focus of
 Attitudes  Income level  Demography technological
towards foreign  Age distribution efforts
companies of population  Patent
 Laws on hiring  Regional shifts protection
and promotion in population  New product
 Stability of the  Life innovation
government expectancies  Productivity
 Birth rates. improvement.

Strategic Management 2
Reading in Environmental Scanning

Some important variables in the international societal environment:

Political-legal Economic Socio-cultural Technological

 Form of  Economic  Customs, norms,  Regulation on

government development values technology
 Political  Per capita income  Language transfer
ideology  Climate  Life expectancies  Energy availability
 Tax laws  GDP trends  Social institutions  Natural resource
 Stability of  Monetary and  Status symbols availability
government fiscal policies  Life style  Transportation
 Government  Unemployment  Religious beliefs network
attitude toward level  Attitudes toward  Skill level of work
foreign  Currency foreigners force
companies convertibility  Literacy level  Patent trademark
 Regulation on  Wage levels  Human rights  Information flow
foreign  Nature of  Environmentalism infrastructure.
ownership of competition
assets  Membership in
 Trade regulation economic
 Protectionist association
sentiment
 Foreign policies
 Terrorist activity.

Industry Analysis: Analysing the task environment,

An industry is a group of firms producing a similar product or service such as soft drinks or
financial services. An examination of the important stakeholder groups, such as suppliers and
customers; in particular corporation’s task environment is part of the industry analysis.

Porter’s Approach to Industry Analysis.

In carefully scanning the industry, the corporation he stated that there are five forces and the
corporation must assess the importance of its success of each of the five forces.

 The threat of new entrants

 Rivalry between firms
 Threat of existing substitute and services
 Bargaining power of suppliers
 Bargaining power of suppliers

Strategic Management 3
Reading in Environmental Scanning

Potential
entrants

Threat of new entrants

Bargaining
power of
Bargaining
Suppliers Industry power
competitors Buyers

Firm rivalry

Threat of

Substitutes

Threat of new entrants.

New entrants to an industry typically bring to it new capacity, a desire to gain market share,
and substantial resources. They are, therefore, threats to an established corporation. The
threat of entry depends on the presence of entry barriers and the reaction that can be
expected from existing competitors. An entry barrier is an obstruction that makes it difficult for
a company to enter an industry.

What are the possible barriers to entry?

 Economics of scale. Such scale in the production and the sale of mainframe
computers, for example, gave IBM a cost advantage over many rivals.
 Product differentiation. Corporation like 3M, Proctor and Gamble create high entry
barriers through their high levels of advertising and promotion.

Strategic Management 4
Reading in Environmental Scanning

 Switching cost. When the cost of switching from one product to another becomes
high, individual or companies become reluctant to change the product to other
competitors or new entrants.
 Capital requirements. The need to invest huge financial resources in manufacturing
facilities in order to produce computer microprocessors creates a significant barrier to
entry to any competitor for Intel.
 Cost disadvantage. Microsoft’s development of the first MS-DOS for the IBM type
personal computer gave it significant advantage over potential competitors. Its
introduction of Windows helped cement that advantage.
 Government policy. Government can limit entry into an industry through licensing
requirements by restricting access to raw materials, such as offshore oil drilling sites.

Rivalry among existing firms

In moist industries, firms are mutually dependent. A competitive move by one firm can be
expected to have a noticeable effect on its competitors and thus cause retaliation or counter
efforts. According to Porter, intense rivalry is related to the presence of several factors,
including:
 Number of competitors. When competitors are few and roughly equal in size they will
watch each other carefully to make sure that any move by another firm is matched by
equal counter move.
 Rate of industry growth. Any slowing in passenger traffic tends to set off price wars in the
airline industry because the only path to growth is to take sales away from a competitor.
 Product or service characteristics. Many people choose a videotape rental store based
on location, variety of selection, and pricing because they view VCD’s as a commodity of
entertainment- a product whose characteristics are the same regardless of who sells it.
 Amount of fixed cost. Because airline must fly their planes on a schedule regardless of
the number of flying passengers for any one flight, they offer cheap standby fares
whenever the plane has empty seats.
 Diversity of rivals. Rivals that may have different ideas of how to compete are likely to
cross paths often and unknowingly challenge each other’s position.
 Heights of exit barriers. Exit barriers keep companies from leaving the industry. The
brewing industry for example, has low percentage of companies that leave the industry
because breweries are specialised assets with few uses except for beer making.

Threat of substitutes products and services.

Substitutes products are those products that appear to be different but can satisfy the same need
as another product. For example, the fax is a substitute for Fed Ex. Nutrasweet is a substitute for
sugar and bottled water is a substitute for cola.
According to Porter, substitute limit the potential returns of an industry by placing a ceiling on the
prices firm in the industry can profitably charge.

Bargaining power of buyers.

Buyers affect an industry through their ability to force down the prices, bargain for higher quality
or more services and play competitors against one another.
A buyer or a group of buyers is powerful if some of the following factors hold true:
 A buyer purchases a large proportion of the seller’s product or service.
 A buyer has the potential to integrate backward by [producing the product itself.
 Alternatively suppliers are plentiful because the product is standard or undifferentiated.
 Changing supplier’s cost very little.
 The purchased product represents a high percentage of the buyers’ costs, thus proving
an incentive to shop around for lower prices.
 A buyer earns low profits and is thus price sensitive.

Strategic Management 5
Reading in Environmental Scanning

 The purchased product is unimportant to the final quality or price of a buyer’s products or
services and thus easily substituted without affecting the final product adversely.

Bargaining power of suppliers

Suppliers can affect the industry thorough their ability to raise prices or reduce some quality of
purchased products and services. A supplier or group of suppliers is powerful if some of the
following facts apply:
 A few companies dominate the supplier but it sells to many. Its product or services unique
and/or has built up switching cost
 Substitutes are not readily available
 Suppliers are able to integrate forward and compete directly with their present customers
 A purchasing industry buys only a small portion of the supplier’s goods and services and
is thus important to the supplier.

Industry evolution.
Over time most industries evolve through a series of stages from growth through maturity to
eventually decline. The strength of each one of the five forces mentioned varies to the stage of
industry evolution.

Fragmented industry – When an industry is new, people often buy the product regardless of the
price because it fulfils a unique need. No firm has a large market share and each firm only serves
small piece of the total market in competition with others. As new competitors enter the industry,
prices drop as a result as a result of competition. Companies use the experience curve and
economics of scale to reduce cost further by acquiring their suppliers and distributors.

Consolidated industry - By the time the industry enters maturity products tend to become more
like commodities. This s dominated by a few large firms, each of which struggles to differentiates
its products from the competitors, As buyers become more sophisticated over time, purchasing
decision are based on better information. Prices become more dominant, given a level of quality
and features.

As an industry moves towards maturity, toward possible decline, its products’ growth rate if sees
slows and may even begin to decrease. To the extent that exit barriers are low, firms will begin to
convert

Strategic Group Map.

A strategic group is a set of business units or a firm that ‘pursue similar strategy with similar
resources’. Categorising firms in one industry into a set of strategic group is a very useful way to
better understand its competitive environment.

Firms in same strategic group have two or more competitive characteristics in common . . .

 Sell in same price/quality range

 Cover same geographic areas
 Be vertically integrated to same degree
 Have comparable product line breadth
 Emphasize same types of distribution channels
 Offer buyers similar services
 Use identical technological approaches

Strategic Management 6
Reading in Environmental Scanning

Example: Strategic Group Map of Retail Jewellery Industry

Successful strategists take great pains in scouting competitors

 Understanding their strategies
 Watching their actions
 Evaluating their vulnerability to driving forces and competitive pressures
 Sizing up their resource strengths and weaknesses and their capabilities
 Trying to anticipate rivals’ next moves

According to Miles and Snow, competing firms within a single industry can be
categorised onto the basis of their strategic orientation into one of the four basic types.
This helps explain why firms behave differently and why they continue to do so over a
long period of time.

Defenders They are companies with limited product line that focus on
improving the efficiency of their existing operations. The cost
orientation makes them unlikely to innovate over the next few
years.

Prospectors They are companies with fairly broad product lines. That focus on
product innovation and market opportunities. This sales orientation
makes them somewhat inefficient.

Analysers Corporation that operate in at least two different product market

areas, one stable and one variable. In the stable area, efficiency is
emphasised, In the variable, innovation is emphasised.

Reactors Corporations that lack consistent strategy-structure-culture

Strategic Management 7
Reading in Environmental Scanning

relationship. Their response to environment pressure tends to be

piecemeal strategic changes.

Dividing the competition into these four categories enables the strategic manager not
only to monitor the effectiveness of the four categories of certain strategic orientation,
but also to develop scenarios of future developments.

Strategic Management 8