RIZAL TECHNOLOGICAL UNIVERSITY

Cities of Mandaluyong and Pasig

SESSION NO. / WEEK NO. 5

Environmental Scanning

Learning Outcomes

After reading this chapter, you should be able to:

4-1. List the aspects of an organization’s environment that can influence its long-term
decisions
4-2. Identify the aspects of an organization’s environment that are most strategically
important
4-3. Conduct an industry analysis to explain the competitive forces that influence the
intensity of rivalry within an industry
4-4. Discuss how industry maturity affects industry competitive forces
4-5. Categorize international industries based on their pressures for coordination and
local responsiveness

Topic Presentation

Identifying External Environmental Variables

In undertaking environmental scanning, strategic managers must first be aware

of the many variables within a corporation’s natural, societal, and task
environments. The natural environment includes physical resources, wildlife,
and climate that are an inherent part of existence on Earth. These factors form
an ecological system of interrelated life. The societal environment is mankind’s
social system that includes general forces that do not directly touch on the
short-run activities of the organization, but that can influence its long-term
decisions. These factors affect multiple industries and are as follows:

■■ Economic forces that regulate the exchange of materials, money, energy,

and information.

■■ Technological forces that generate problem-solving inventions.

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■■ Political–legal forces that allocate power and provide constraining and

protecting laws and regulations.

■■ Sociocultural forces that regulate the values, mores, and customs of society.

Scanning the Natural Environment

The natural environment includes physical resources, wildlife, and climate that
are an inherent part of existence on Earth. Until the 20th century, the natural
environment was generally perceived by business people to be a given—
something to exploit, not conserve. It was viewed as a free resource, something
to be taken or fought over, like arable land, diamond mines, deep water harbors,
or fresh water. Once they were controlled by a person or entity, these resources
were considered assets and thus valued as part of the general economic
system—a resource to be bought, sold, or sometimes shared. Side effects,
such as pollution, were considered to be externalities, costs not included in a
business firm’s accounting system, but felt by others. Eventually these
externalities were identified by governments, which passed regulations to force
business corporations to deal with the side effects of their activities.

Scanning the Societal Environment: STEEP Analysis

The number of possible strategic factors in the societal environment is very

high. The number becomes enormous when we realize that, generally
speaking, each country in the world can be represented by its own unique set
of societal forces—some of which are very similar to those of neighboring
countries and some of which are very different. For example, even though
Korea and China share Asia’s Pacific Rim area with Thailand, Taiwan, and
Hong Kong (sharing many similar cultural values), they have very different
views about the role of business in society. It is generally believed in Korea and
China (and to a lesser extent in Japan) that the role of business is primarily to
contribute to national development. However, in Hong Kong, Taiwan, and
Thailand (and to a lesser extent in the Philippines, Indonesia, Singapore, and
Malaysia), the role of business is primarily to make profits for the shareholders.5
Such differences may translate into different trade regulations and varying
difficulty in the repatriation of profits (the transfer of profits from a foreign
subsidiary to a corporation’s headquarters) from one group of Pacific Rim
countries to another.

Eight current sociocultural trends are transforming North America and

the rest of the world:

1. Increasing environmental awareness: Recycling and conservation are

becoming more than slogans. Busch Gardens, for example, has
eliminated the use of disposable Styrofoam trays in favor of washing and
reusing plastic trays.

2. Growing health consciousness: Concerns about personal health fuel the

trend toward physical fitness and healthier living. There has been a

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general move across the planet to attack obesity. The U.S. Centers for
Disease Control and Prevention cites that more than two-thirds of
American adults and one-third of American youth are now obese or
overweight. A number of states have enacted provisions to encourage
grocery stores to open in so-called “food deserts” where the population
has virtually no access to fresh foods.17 In 2012, Chile decided to ban
toys that are included in various fast-food meals aimed at children in
order to increase the fight against childhood obesity.

3. Expanding seniors market: As their numbers increase, people over age

55 will become an even more important market. Already some
companies are segmenting the senior population into Young Matures,
Older Matures, and the Elderly—each having a different set of attitudes
and interests. Both mature segments, for example, are good markets for
the health care and tourism industries; whereas, the elderly are the key
market for long-term care facilities. The desire for companionship by
people whose children are grown is causing the pet care industry to grow
by more than 5% annually in the United States. In 2014, for example, 73
million households in the United States spent US$58 billion on their pets.
That was up from just above US$41 billion 2007.

4. Impact of millennials: Born between 1980 and 1996 to the baby boomers
and Generation Xers, this cohort is almost as large as the baby boomer
generation. In 1957, the peak year of the postwar boom, 4.3 million
babies were born. In 1990, there were 4.2 million births; the Millennials’
peak year. By 2000, they were overcrowding elementary and high
schools and entering college in numbers not seen since the baby
boomers. Now in its 20s and 30s, this cohort is expected to have a strong
impact on future products and services.

5. Declining mass market: Niche markets are defining the marketers’

environment. People want products and services that are adapted
more to their personal needs. For example, Estée Lauder’s “All Skin”
and Maybelline’s “Shades of You” lines of cosmetic products are
specifically made for African-American women. “Mass customization”—
the making and marketing of products tailored to a person’s
requirements is replacing the mass production and marketing of the
same product in some markets. The past 10 years have seen a real
fracturing of the chocolate market with the advent of craft chocolate
making and flavored chocolates. These products command
significantly higher margins and have become a force in the retailing
environment. By 2010, 43% of chocolate sales occurred in
nontraditional channels.
6. Changing pace and location of life: Instant communication via e-mail,
cell phones, and overnight mail enhances efficiency, but it also puts
more pressure on people. Merging the personal or tablet computer with
the communication and entertainment industries through telephone
lines, satellite dishes, and Internet connections increases consumers’
choices and allows workers to telecommute from anywhere.

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7. Changing household composition: Single-person households,

especially those consisting of single women with children, could soon
become the most common household type in the United States.
According to the U.S. Census, married-couple households slipped from
nearly 80% in the 1950s to 48% of all households by 2010.21 By 2007,
for the first time in U.S. history, more than half the adult female
population was single. Those women are also having more children. As
of 2012, 41% of all births in the United States were to unmarried
women. A typical family household is no longer the same as it was
once portrayed in Happy Days in the 1970s.
8. Increasing diversity of workforce and markets: Between now and 2050,
minorities will account for nearly 90% of population growth in the
United States. Over time, group percentages of the total U.S.
population are expected to change as follows: Non- Hispanic Whites—
from 90% in 1950 to 74% in 1995 to 53% by 2050; Hispanic Whites—
from 9% in 1995 to 22% in 2050; Blacks—from 13% in 1995 to 15% in
2050; Asians—from 4% in 1995 to 9% in 2050; American Indians—1%,
with slight increase.

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■■ Portable information devices and electronic networking: Combining the

computing power of the personal computer, the networking of the Internet, the
images of television, and the convenience of the telephone, tablets and
Smartphones will soon be used by a majority of the population of industrialized
nations to make phone calls, stay connected in business and personal
relationships, and transmit documents and other data. Homes, autos, and
offices are rapidly being connected (via wires and wirelessly) into intelligent
networks that interact with one another. This trend is being accelerated by the
development of cloud computing, in which a person can access their data
anywhere through a Web connection.27 This is being dramatically improved by
companies like Microsoft who are releasing cloud versions of their Office
package available for rent.28 The traditional stand-alone desktop computer will
someday join the manual typewriter as a historical curiosity.

■■ Alternative energy sources: The use of wind, geothermal, hydroelectric,

solar, biomass, and other alternative energy sources should increase
considerably. Over the past two decades, the cost of manufacturing and
installing a photovoltaic solar-power system has decreased by 20% with every
doubling of installed capacity.

■■ Precision farming: The computerized management of crops to suit variations

in land characteristics will make farming more efficient and sustainable. Farm
equipment dealers such as Case and John Deere now add this equipment to
tractors for an additional fee. It enables farmers to reduce costs, increase
yields, and decrease environmental impact. The old system of small, low-tech
farming is becoming less viable as large corporate farms increase crop yields
on limited farmland for a growing population.

■■ Virtual personal assistants: Very smart computer programs that monitor e-

mail, faxes, and phone calls will be able to take over routine tasks, such as
writing a letter, retrieving a file, making a phone call, or screening requests.
Acting like a secretary, a person’s virtual assistant could substitute for a person
at meetings or in dealing with routine actions.

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■■ Genetically altered organisms: A convergence of biotechnology and

agriculture is creating a new field of life sciences. Plant seeds can be genetically
modified to produce more needed vitamins or to be less attractive to pests and
more able to survive. Animals (including people) could be similarly modified for
desirable characteristics and to eliminate genetic disabilities and diseases.

■■ Smart, mobile robots: Robot development has been limited by a lack of

sensory devices and sophisticated artificial intelligence systems. Improvements
in these areas mean that robots will be created to perform more sophisticated
factory work, run errands, do household chores, and assist the disabled.

1. Regulatory Risk: Companies in much of the world were already subject to

the first commitment period of the Kyoto Protocol, which required 37
industrialized countries and the European Community to reduce Greenhouse
Gases (GHG) emissions to an average of 5% against 1990 levels. During the
second commitment period, parties committed to reduce GHG emissions by at
least 18% below 1990 levels in the eight-year period from 2013 to 2020. The
European Union has an emissions trading program that allows companies that
emit greenhouse gases beyond a certain point to buy additional allowances
from other companies whose emissions are lower than that allowed.
Companies can also earn credits toward their emissions by investing in
emissions abatement projects outside their own firms. Although the United
States withdrew from the Kyoto Protocol, various regional, state, and local
government policies affect company activities in the United States. For
example, seven Northeastern states, six Western states, and four Canadian
provinces have adopted proposals to cap carbon emissions and establish
carbon-trading programs.

2.Supply Chain Risk: Suppliers will be increasingly vulnerable to government

regulations—leading to higher component and energy costs as they pass along
increasing carbon-related costs to their customers. Global supply chains will be
at risk from an increasing intensity of major storms and flooding. Higher sea
levels resulting from the melting of polar ice will create problems for seaports.
China, where much of the world’s manufacturing is currently being outsourced,
is becoming concerned with environmental degradation. Twelve Chinese
ministries produced a report on global warming foreseeing a 5%–10% reduction
in agricultural output by 2030; more droughts, floods, typhoons, and
sandstorms; and a 40% increase in population threatened by plague.34 The
increasing scarcity of fossil-based fuel is already boosting transportation costs
significantly. For example, Tesla Motors, the maker of an electric-powered
sports car, transferred assembly of battery packs from Thailand to California
because Thailand’s low wages were more than offset by the costs of shipping
thousand pound battery packs across the Pacific Ocean.

3. Product and Technology Risk: Environmental sustainability can be a

prerequisite to profitable growth. Sixty percent of U.S. respondents to an
Environics study stated that knowing a company is mindful of its impact on the
environment and society makes them more likely to buy their products and
services.36 Carbon-friendly products using new technologies are becoming

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increasingly popular with consumers. Those automobile companies, for

example, that were quick to introduce hybrid or alternative energy cars gained
a competitive advantage.

4. Litigation Risk: Companies that generate significant carbon emissions face

the threat of lawsuits similar to those in the tobacco, pharmaceutical, and
building supplies (e.g., asbestos) industries. For example, oil and gas
companies were sued for greenhouse gas emissions in the federal district court
of Mississippi, based on the assertion that these companies contributed to the
severity of Hurricane Katrina.

5. Reputational Risk: A company’s impact on the environment can affect its

overall reputation. The Carbon Trust, a consulting group, found that in some
sectors the value of a company’s brand could be at risk because of negative
perceptions related to climate change. In contrast, a company with a good
record of environmental sustainability may create a competitive advantage in
terms of attracting and keeping loyal consumers, employees, and investors. For
example, Wal-Mart’s pursuit of environmental sustainability as a core business
strategy has helped soften its negative reputation as a low-wage, low-benefit
employer. By setting objectives for its retail stores of reducing greenhouse
gases by 20%, reducing solid waste by 25%, increasing truck fleet efficiency by
25%, and using 100% renewable energy, it is also forcing its suppliers to
become more environmentally sustainable.37 Tools have recently been
developed to measure sustainability on a variety of factors. For example, the
SAM (Sustainable Asset Management) Group of Zurich, Switzerland, has been
assessing and documenting the sustainability performance of over 1000
corporations annually since 1999. SAM lists the top 15% of firms in its
Sustainability Yearbook and classifies them into gold, silver, and bronze
categories.

BusinessWeek published its first list of the world’s 100 most sustainable
corporations January 29, 2007. The Dow Jones Sustainability Indexes and the
KLD Broad Market Social Index, which evaluate companies on a range of
environmental, social, and governance criteria are used for investment
decisions.39 Financial services firms, such as Goldman Sachs, Bank of
America, JPMorgan Chase, and Citigroup have adopted guidelines for lending
and asset management aimed at promoting cleanenergy alternatives.

6. Physical Risk: The direct risk posed by climate change includes the physical
effects of droughts, floods, storms, and rising sea levels. Average Arctic
temperatures have risen four to five degrees Fahrenheit (two to three degrees
Celsius) in the past 50 years, leading to melting glaciers and sea levels rising
one inch per decade.41 Industries most likely to be affected are insurance,
agriculture, fishing, forestry, real estate, and tourism. Physical risk can also
affect other industries, such as oil and gas, through higher insurance premiums
paid on facilities in vulnerable areas. CocaCola, for example, studies the
linkages between climate change and water availability to decide the location
of new bottling plants. The warming of the Tibetan plateau has led to a thawing

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of the permafrost—thereby threatening the newly-completed railway line

between China and Tibet.

International Societal Considerations

Each country or group of countries in which a company operates presents a

unique societal environment with a different set of sociocultural, technological,
economic, ecological, and political–legal variables for the company to face.
International societal environments vary so widely that a corporation’s internal
environment and strategic management process must be very flexible. Cultural
trends in Germany, for example, have resulted in the inclusion of worker
representatives in corporate strategic planning. Because Islamic law (sharia)
forbids interest (riba), loans of capital in Islamic countries must be arranged on
the basis of profit-sharing instead of interest rates. Differences in societal
environments strongly affect the ways in which a multinational corporation
(MNC), a company with significant assets and activities in multiple countries,
conducts its marketing, financial, manufacturing, and other functional activities.
For example, Europe’s lower labor productivity, due to a shorter work week and
restrictions on the ability to lay off unproductive workers, forces Europeanbased
MNCs to expand operations in countries where labor is cheaper and
productivity is higher. Moving manufacturing to a lower-cost location, such as
China, was a successful strategy during the 1990s, but a country’s labor costs
rise as it develops economically. For example, China required all firms in
January 2008 to consult employees on material work-related issues, enabling
the country to achieve its stated objective of having trade unions in all of China’s
non-state-owned enterprises. By September 2008, the All-China Federation of
Trade Unions had signed with 80% of the largest foreign companies.50 See the
Global Issues feature to see how demand for SUVs has exploded in China.

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Creating a Scanning System

Although the Internet has opened up a tremendous volume of information,

scanning and making sense of that data is one of the important skills of an
effective manager. It is a daunting task for even a large corporation with many
resources. To deal with this problem, in 2002 IBM created a tool called
WebFountain to help the company analyze the vast amounts of environmental
data available on the Internet. WebFountain is an advanced information
discovery system designed to help extract trends, detect patterns, and find
relationships within vast amounts of raw data. For example, IBM sought to learn
whether there was a trend toward more positive discussions about e-business.
Within a week, the company had data that experts within the company used to
replace their hunches with analysis.

Scanning the Task Environment

A corporation’s scanning of the environment includes analyses of all the

relevant elements in the task environment. These analyses take the form of
individual reports written by various people in different parts of the firm. At
Procter & Gamble (P&G), for example, people from each of the brand
management teams work with key people from the sales and market research
departments to research and write a “competitive activity report” each quarter
on each of the product categories in which P&G competes. People in
purchasing also write similar reports concerning new developments in the
industries that supply P&G. These and other reports are then summarized and
transmitted up the corporate hierarchy for top management to use in strategic
decision making. If a new development is reported regarding a particular
product category, top management may then send memos asking people
throughout the organization to watch for and report on developments in related
product areas. The many reports resulting from these scanning efforts, when
boiled down to their essentials, act as a detailed list of external strategic factors.

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References

 Strategic Management A Competitive Advantage, Approach and

Concepts (Fred David and Forest David) 2017
 Strategic Management (Frank Rothaermel) 2017
 Strategic Management and Business Policy “Globalization, Innovation
and Sustainability” (Thomas Wheelen and J. David Hunger) 2018

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