Enviromental Scanning and Industry Analysis

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    Environmental Scanning andEnvironmental Scanning and

    Industry AnalysisIndustry Analysis

    Prof. Rushen ChahalProf. Rushen Chahal

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    is the monitoring, evaluating and

    disseminating of information from the

    external and internal environments to

    key people within corporation.

    Environmental Scanning

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    The Components of a CompanysThe Components of a Companys

    MacroMacro--EnvironmentEnvironment

    MACROENVIRONMENT

    The Economy

    at Large

    COMPANY

    Suppliers Substitutes

    Buyer

    s

    New

    Entrants

    Rival

    Firms

    IMMEDIATE INDUSTRY

    AND COMPETITIVE

    ENVIRONMENT

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    Competitors

    Suppliers

    Distributors

    CreditorsCustomers

    Employees

    Communities

    Managers

    Stockholders

    Labor UnionsSpecial Interest Groups

    Products

    Services

    Key

    External

    Forces

    Opportunities

    &

    Threats

    Key External Forces & the

    Organization

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    PEST analysis

    What environmental

    factors are effecting

    organization?

    Which of these are

    the most important at

    the present time?

    Whish of these canbecome important in

    the next few years?

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    Political /

    Legal

    Economic Social Technological

    Environmental

    regulation andprotection

    Economic growth

    (overall; byindustry)

    Income distribution

    (change indistribution of

    disposable income)

    Government

    spending onresearch

    Taxation

    (corporate,

    consumer)

    Monetary policy

    (interest rates)

    Demographics (age

    structure of the

    population; gender;

    family size andcomposition;

    changing nature of

    occupations)

    Government and

    industry focus on

    technological

    effort

    International

    trade regulation

    Government

    spending (overall

    level; specificspending priorities)

    Labor / social mobility New discoveries

    and development

    Consumer

    protection

    Policy towards

    unemployment

    (minimum wage,

    unemployment

    benefits, grants)

    Lifestyle changes

    (e.g. Home working,

    single households)

    Speed of

    technology

    transfer

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    PEST analysis: some principles andconclusions:

    y Things that make activity more difficult for people ororganizations raise the cost of doing business.

    y The higher the cost of doing business in a region, the

    more project profitability is squeezed or eliminated.

    y And the lower the amount of economic activity, the

    poorer and less capable societies tend to be.

    y Wherever there is rapid or major change in an area,

    there are likely to be new opportunities and threats

    that arise.

    y Few situations are perfect: it is up to us to make

    the most of the situation in which we find

    ourselves.

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    The Issues Priority Matrix

    Probable Impact on Corporation

    High Medium Low

    High

    priority

    High

    priority

    Medium

    priority

    High

    priority

    Medium

    priority

    Low

    priority

    Medium

    priority

    Low

    priority

    Low

    priority

    Probability

    ofOccurren

    ce

    High

    Medium

    Low

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    The FiveThe Five--Forces Model of Competition (PortersForces Model of Competition (Porters

    approach)approach)

    Potential developmentof substitute products

    Rivalry amongcompeting firms

    Bargaining powerof suppliers

    Potential entry of newcompetitors

    Bargaining powerof consumers

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    The stronger that each of these fiveforces is, the more limited is the

    ability of established companies toraise prices and earn greater profitswithin their industry.

    Strength of forces may change

    How the Five-Forces shape

    Competition within an Industry

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    Threats of new competitors entering the market.The

    threat of entry depends on the presence of entry

    barriers and the reaction that can be expected from

    existing competitors.

    The possible barriers to entry:

    y economies of scale

    y

    product differentiationy capital requirements

    y switching costs

    y access to distribution channels

    y cost disadvantages independent of size

    y governmental policy

    Potential entry of new

    competitors

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    Intensity of rivalry among firms in the industry.

    Corporations are mutually dependent.

    Intense rivalry is related to the presence of several

    factors:

    y number of competitors

    y rate of industry growth

    y product or service characteristics

    y

    amount of fixed costsy capacity

    y height of exit barriers

    y diversity of rivals

    Rivalry among competing firms

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    Substitute products or services are those

    products/services that appear to be different

    but can satisfy the same need as anotherproduct/service.

    Substitutes limit the potential returns ofan industry by placing a ceiling on the

    prices firms in the industry can profitably

    charge. (M. Porter)

    Potential development of

    substitute products

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    Is Pepsi Cola a substitute for aCoca-Cola?

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    A buyer or a group of buyers is powerful if:

    y a buyer purchases a large proportion of the sellersproduct or service (oil filters purchased by a majorauto maker)

    y

    alternative suppliers are plentiful because theproduct is standard or undifferentiated (gasstations)

    y changing suppliers costs very little

    y a buyer earns low profits and thus sensitive to costs

    and service differences (grocery stores)y the purchased product is unimportant to the final

    quality or price of buyer products or services(electric wire bought for use in lamp).

    Bargaining power of consumers

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    Suppliers can affect an industry through their ability

    to raise prices or reduce the quality of purchased

    goods and services:

    the supplier industry is dominated by a few companies,

    but it sells to many (petroleum industry)

    its product or service is unique and/or has built up

    switching costs (Word software)

    substitutes are not readily available (electricity)

    suppliers are able to integrate forward and compete

    directly with the present customers (Intel can make PCs)

    a purchasing industry buys only a small portion of the

    supplier groups goods and services and its unimportant

    for supplier

    Bargaining power of suppliers

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    The Five-Forces Model ofCompetition

    y An unattractive industry is one in which intenserivalry already exists among competitors, there are

    substantial threats in terms of new competitors

    and substitute products, and suppliers and buyers

    are very powerful in bargaining over prices and

    quality.

    y An attractive industry is one with less intense

    competition, few threats from new entrants or

    substitutes, and low bargaining power amongsuppliers and buyers.

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    Things to Consider inThings to Consider in

    Assessing Industry AttractivenessAssessing Industry Attractiveness

    y Industrys market size and growth potential

    y Whether competitive conditions are conducive torising/falling industry profitability

    y Will competitive forces become stronger or weakery Whether industry will be favorably or unfavorably

    impacted by driving forces

    y Potential for entry/exit of major firms

    y Stability/dependability of demandy Severity of problems facing industry

    y Degree of risk and uncertainty in industrys future

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    Strategic Group MappingStrategic Group Mapping

    y Firms in same strategic group have two ormore 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

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    Identifying IndustryIdentifying Industry

    Key Success FactorsKey Success Factors

    y Answers to three questions pinpoint KSFs On what basis do customers choose between

    competing brands of sellers?

    What resources and competitive capabilities does

    a seller need to have to be competitivelysuccessful?

    What does it take for sellers to achieve asustainable competitive advantage?

    y KSFs consist of the 3 - 5 really majordeterminants of financial andcompetitive success in an industry

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    Common Types ofCommon Types of

    Key Success FactorsKey Success Factors

    Distribution-related

    Marketing-related

    Skills-related

    Organizational

    capability

    Other types

    Technology-related

    Manufacturing-related

    Scientific research expertise; Product innovation capability;Expertise in a given technology; Capability to use Internet toconduct various business activities

    Low-cost production efficiency; Quality of manufacture; High useof fixed assets; Low-cost plant locations; High labor productivity;Low-cost product design; Flexibility to make a range of products

    Strong network of wholesale distributors/dealers; Gaining ample

    space on retailer shelves; Having company-owned retail outlets;Low distribution costs; Fast delivery

    Fast, accurate technical assistance; Courteous customer service;Accurate filling of orders; Breadth of product line; Merchandisingskills; Attractive styling; Customer guarantees; Clever advertising

    Superior workforce talent; Quality control know-how; Designexpertise; Expertise in a particular technology;Ability to develop

    innovative products; Ability to get new products to market quicklySuperior information systems; Ability to respond quickly to shiftingmarket conditions; Superior ability to employ Internet to conductbusiness;More experience & managerial know-how

    Favorable image/reputation with buyers; Overall low-cost;Convenient locations; Pleasant, courteous employees; Access tofinancial capital; Patent protection

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    Strategic Management PrincipleStrategic Management Principle

    A sound strategy incorporates efforts

    to be competent on all industry key

    success factors and to excel on an leastone factor!

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    Forecasting

    Environmental scanning provides reasonably

    hard data on the present situation and current

    trends , but intuition and luck are needed to

    predict accurately if these trends willcontinue.

    Faulty underlying assumptions are the mostfrequent cause of forecasting errors.

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    Forecasting

    Various techniques are used to forecast future:

    y Extrapolation is extension of present trends into the future.y Brainstorming is no quantitative approach requiring simply the

    presence of people with some knowledge if the situation to be

    predicted.

    y Expert opinion is no quantitative technique in which experts in a

    particular area attempt to forecast likely developments.y Delphi technique in which separated experts independently

    assess the likehoods of special events.These assessments are

    combines and send back to each expert for fine tuning until an

    agreement is reached.

    y

    Statistical modeling is a quantitative technique that attempts todiscover casual or ay least explanatory factors that link two or

    more time series together.

    y Scenario writing is focused descriptions of different likely future

    presented in a narrative fashion (Royal Dutch Shell).

    y

    Industry scenario is a forecasted description of particularindustr s likel future.

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    Industry Analysis: The External Factor

    Analysis Summary (EFAS) Matrix

    CompetitivePoliticalCultural

    TechnologicalEnvironmentalSocial

    GovernmentalDemographicEconomic

    Summarize & Evaluate

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    EFAS Maytag (1995)

    Key External Factors Weight RatingWtd

    Score

    Opportunities

    1. Economic integration ofEuropean

    Community0.20 4.1 0.82

    2. Demographic favor quality

    appliances0.10 5.0 0.50

    3. Economic development of Asia 0.05 1.0 0.05

    4. Opening ofEastern Europe 0.10 2.0 0.10

    5. Trend to Super Stores 0.1 1.8 0.18

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    EFAS Maytag (1995) (contd)

    Key External Factors Weight RatingWtd

    Score

    Threats

    1. Increasing government regulations 0.10 4.3 0.43

    2. Strong U.S. competition 0.10 4.0 0.40

    3. Whirlpool and Electrolux strong

    globally0.15 3.0 0.45

    4. New product advances 0.05 1.2 0.06

    5. Japanese appliance companies 0.10 1.6 0.16

    Total Scores 1.0 3.15

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    Total weighted score of 5.0x Organization response is outstanding to threats and

    weaknesses

    Total weighted score of 1.0x Firms strategies not capitalizing on opportunities or

    avoiding threats

    Industry Analysis EFAS

    TheMaytags total weight is 3.15 means that the

    corporation was slightly above average in the

    major home appliance industry in 1995.

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    Wayne Gretzky:

    The key to winning is skating not where the puck is but towhere it is going to be.

    People talk about skating, puck handling and shooting, butthe whole sport is angels and caroms, forgetting the straightdirection the puck is going, calculating where it will bediverted, factoring in all the interruptions.

    Conclusion

    The key to winning is not to assume that your industrywill continue as it is now but to assume that theindustry will change and to make sure that yourcompany will be in position to take advantage of thatchange.