Lecture 2: External Environmental Scanning

Sajid Syed
 The external environment of an organisation
can be divided into the general and the
competitive environment
 We shall consider the following components
of the environment in our analysis
 The general environment
 The Industrial environment
 The competitive environment
 Aim is to identify the future opportunity and
threats in the external environment
 A good reader uses judgement with his
experience
 The opportunity cost is the time, effort and
resources devoted to processing the
information, time which could be used for
other purposes
 PEST stands for Political, Economic, Social
and Technological and roughly defines the
scope of what is required
 The underlying thinking of the PEST
analysis is that the enterprise should react
to the changes in its external environment
 This reflects the idea that strategy requires
a fit between the capabilities and the
external environment and so it is necessary
for an enterprise to react to changes.
 Political Environment
 Changes in legislation tend to occur in a cycle
extended over several years.
 Most regulation is announced some years before
it becomes effective and future trends become
apparent even before legislation is formulated
 Should include the changes in
 the domestic political climate
 Change in the government
 Special legislation and regulations
 Again political change may affect certain
industries more than the others
 For instance cigarette industry
 Analyst should consider
 How stable is the political environment?
 Will government policy influence laws that
regulate or tax your business?
 What is the government's position on
marketing ethics?
 Analyst should consider
 What is the government's policy on the
economy?
 Is the government involved in trading
agreements such as EU, NAFTA, or others?
 ecological/environmental issues
 current legislation home market
 future legislation
 European/international legislation
 regulatory bodies and processes
 government policies
 government term and change
 trading policies
 funding, grants and initiatives
 home market lobbying/pressure groups
 international pressure groups
 wars and conflict
 Likely to include the effects of
 Economic cycles
 Patterns of world trade
 currency conversion rate changes
 changes in capital markets
 labour markets and rates
 Almost all businesses would be affected, except
those which are counter cyclical
 Some may be hit early while some may recover
late
 Eg. of counter cyclical industries may include
insolvency practitioners and perhaps book
selling (because reading is cheaper than some
other forms of entertainment
 Each recession tends to have slightly different
characteristics. Simple extrapolation from the
last recession is not enough?
 home economy situation
 home economy trends
 overseas economies and trends
 general taxation issues
 taxation specific to product/services
 seasonality/weather issues
 market and trade cycles
 specific industry factors
 interest and exchange rates
 international trade/monetary issues
 includes the effects of
 demographic patterns,
 tastes and habits and
 concerns about the environment and sustainable
development.
Demographic trends change slowly
Demographic trends are more predictable than long
term social trends
 Changes in tastes and habits on the other
hand may occur very fast and may be totally
unpredictable
 Eg. Fashion businesses tend not to attempt
the future but rather rather to gear
themselves to be able to react fast to changes
as it occurs.
 Factors that should be considered include
 What is the dominant religion?
 What are attitudes to foreign products and
services?
 How much time do consumers have for leisure?
 What are the roles of men and women within
society?
 How long are the population living?
 lifestyle trends
 demographics
 consumer attitudes and opinions
 media views
 law changes affecting social factors
 brand, company, technology image
 consumer buying patterns
 fashion and role models
 major events and influences
 ethnic/religious factors
 advertising and publicity
 ethical issues
 Covers the effects of technological change
 Products,
 processes and
 distribution cycles
 Changes in telecommunications and
information technology have a wider impact
and are likely to affect almost all enterprises
 The impact of the internet and E-Commerce
is the latest wave of change derived from
technological advance in this field.
 Helps to bring about
 Product innovation
 Process innovation
 Product innovation tends to be particularly
important for young and high technology
businesses.
 Process innovation may be more important in
more mature businesses where rate of
change in the product has decreased.
 Transport and communication affect
distribution
 competing technology development
 associated/dependent technologies
 replacement technology/solutions
 maturity of technology
 manufacturing maturity and capacity
 information and communications
 consumer buying mechanisms/technology
 technology legislation
 innovation potential
 technology access
 global communications
 ecological/environmental issues
 current legislation home market
 future legislation
 European/international legislation
 regulatory bodies and processes
 government policies
 government term and change
 trading policies
 funding, grants and initiatives
 home market lobbying/pressure groups
 international pressure groups
 wars and conflict
 Focus on those changes that may affect the
enterprise
 Collection of relevant information
 Global or geographically dispersed
enterprises will have to conduct separate
PEST analyses for the different regions as
trends occur at different rates in different
places.
 Describes a starting point for discussion and
analysis
 • Draws on people’s sense of ‘what is really
going on’
 • Provides information about the origins of
the current situation
 • Contributes to a better understanding of
‘what we’re up against’ (challenges faced and
barriers to be overcome)
 Focuses on analysing the competitors
 In some industries(such as insurance
industry) very detailed information is made
available by an industry association or
independent monitoring agencies.
 In other industries such as the chemical
industry and management consulting, there
is less systematic and public collection of
information.
 If there is enough data then it may be useful
in analyzing the competitors using the
internal analysis technique
 just as analyzing out own capabilities informs
our own strategies.
 Kenichi Ohmae is Japanese and was head of
the managing consulting firm Mckinsey in
Tokyo for many years
 Strategic Triangle
 the company and its competitors are
competing on both cost and value in offering
a product or service to customers
 how the pool of customer’s is fragmented so
that the total market is divided between
separate competitors
 Intensifying functional differentiation.
 Identify key success factors and inject resources in
the most important business function.
 Aim is to invest in that part of the company which
matters the most
 Compare products with the competitors
 Invest selectively either to improve the
attractiveness of the product or to reduce the
cost.
 The aim is to invest in improving the product
in a way that it matters to the customers.
 This requires challenging prevailing wisdom and
practices by asking fundamental questions
 Effective aggressive initiatives result from giving
new answers to old questions.
 One example is of Dr. Land, the inventor of the
Polaroid Camera, being asked by his young
daughter,’ Daddy’ why do we have to wait for
photographs to be developed?’ This led to the
invention of the instant development camera.
 Requires defining the strategic degrees of freedom,
which affect the outcome to the customer and which
are within the control of the provider
 One example here is the taste of coffee is critical to
coffee drinkers. The taste of coffee depends
principally on the quality of the water and on freshly
ground beans. A manufacturer could be exploiting
strategic degrees of freedom if he built a percolator
that integrated these factors into design. This is an
interesting example in that it is clear that coffee
drinkers must also have other needs as simpler and
cheaper coffee machines still exist.
 Difficulties in defining the industry
 do brewers compete in a beer industry, in a
beverages industry, or in the leisure industry?
 a beer drinker chooses between one make of beer
and another
 drinkers may also choose between beer and tea to
quench their thirst so some beer brands may
emphasize the benefits of beer against tea
 Another example includes Coca Cola
 Defining the industry
 Does coca cola compete with Pepsi?
 Does it also compete with Lucozade?

Above examples illustrate the difficulties in defining

the industry
The question ‘What industry are we in is closely
related to the question ‘What business are we in?’.
 Industry Analysis: Porter’s five forces model
and its extension.
 The five forces are
 Threat of Entry of new competitors
 Threat of substitutes
 The bargaining power of suppliers
 The bargaining Power of the buyers
 Degree of rivalry between existing competitors
 High: When industry is attractive and there are
low barriers to entry
 Good profits=attractive industry
 Barriers include: high requirements for capital,
scarce skills, importance of reputation, or
difficulties in access to distribution
 If barriers to entry are low, the threat of entry
places a limit on prices in the industry and may
determine the shape and extent of investment
required to deter new entrants
 High: when the customer’s needs can be met
by buying something other than the product
of the industry
 Depends on the cost of switching & price
performance of substitutes
 High when when the customer’s needs can be
met by buying something other than the
product of the industry
 High when there are less buyers and more
suppliers
 High: when it is difficult to switch from one
supplier to another or if the total supply of the
industry is only a small part of the supplier’s total
output
 For instance: An example of this is the glass
industry that depends on specialized chemicals.
The chemicals are a relatively minor part of the
output of the large chemical companies that
make them. As a result the products are more
important to the glassmakers than to the
chemical companies, so prices are high.
 Rivalry arises, according to Porter, when one
or more competitors are in a squeeze or see
an opportunity to improve their position.
 competition can range from the polite or
gentlemanly to fierce or cutthroat.
 Consider: rate of industry growth and the
strength of brand identities.
 There are industries in which although competition is
apparently intense it is actually limited to very specific
fields. For instance, the makers of chocolate
confectionery compete heavily on advertising but
their prices remain remarkably similar.
 The three leading competitors in the European
market are Mars, Nestle and Cadbury who between
them have over 70% of the UK market. The barriers to
entry are very high and include reputation, brands and
access to distribution. While there appears to be
intense rivalry, some of it is perhaps ritualistic.
 In general the five forces can give valuable
insights into the forces at work within an
industry as it is today. It may lead to glimpses
of the way the industry structure is changing
and hence how the rules of the games may
change in the future
 Lets not forecast as forecasting is difficult
 Scenario Planning offers a fundamentally
different approach
 it postulates possible future scenarios
without making any assessment of the
likelihood that any one scenario will occur
 Involves creation of two to four scenarios
 For instance
 Once scenario may be a long lasting recession
 Second scenario may be the entry of a new
competitor

 The purpose of the strategy process is to help

managers to develop better mental models so that
they can deal with change as it occurs. It turns
planning into exercise and places the emphasis on the
process of planning rather than the resultant plans.