02 - Environmental Scanning and Industry Analysis

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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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P


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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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Barriers to

Entry


Government Policy

Economies of Scale



Switching Costs



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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Barriers to

Entry


Government Policy

Economies of Scale



Switching Costs



of Scale



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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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Barriers to

Entry


Government Policy

Economies of Scale



Switching Costs



of Scale



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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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Barriers to

Entry


Government Policy

Economies of Scale



Switching Costs



of Scale



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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.



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Bargaining

Power of

Suppliers

Threat ofNew

Entrants

Threat of

New

Entrants


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.



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Bargaining

Power of

Buyers

Threat ofNew

Entrants

Threat of

New

Entrants

Bargaining

Power of

Suppliers


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



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Threat of

Substitute

Products

Threat of

New

Entrants

Threat ofNew

Entrants

Bargaining

Power of

Buyers

Bargaining

Power of

Suppliers



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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



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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

Documents

02 - Environmental Scanning and Industry Analysis