Strategic Management and

Business Policy 15e, Global Edition

Chapter 4
Environmental
Scanning and
Industry Analysis

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Learning Objectives (1 of 2)
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

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4-2
Learning Objectives (2 of 2)
4-6 Identify key success factors and develop an industry
matrix
4-7 Construct strategic group maps to assess the
competitive positions of firms in an industry
4-8 Develop an industry scenario as a forecasting technique
4-9 Use publicly available information to conduct competitive
intelligence
4-10 Be able to construct an EFAS Table that summarizes
external environmental factors

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4-3
 Prentice Hall, Inc. © 2018

Environmental Analysis
• Environmental uncertainty
– The degree of complexity plus the degree of
change that exists in an organization’s external
environment.
• Environmental Scanning
– Monitoring, evaluation and dissemination of
information relevant to the organizational
development of strategy

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4-4
 Strategic Management Process

Environmental
Scanning

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 Prentice Hall, Inc. © 2008

Environmental Variables
• Natural Environment
– Physical resources, wildlife, climate – an inherent
part of existence on Earth
• Societal Environment
– Social system including general forces that do not
directly touch on the short-run activities of the
organization but can influence its long-term
decisions.
 political-legal , Economic, socio-cultural
technological (PEST) or (STEEP) or (SLEPT)
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Environmental Variables

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Environmental Variables

• Task environment
– those elements or groups that directly affect a
corporation and, in turn, are affected by it
– government, local communities, suppliers,
competitors, customers, creditors,
employees/labor unions, special-interest groups,
and trade associations
• Industry Analysis
– In-depth examination of key factors within a
corporation’s task environment.
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4-8
Scanning the Societal Environment:
STEEP Analysis
• STEEP analysis
– monitoring trends in the societal and natural
environments
– sociocultural, technological, economic,
ecological, and political-legal forces

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Table 4-1: STEEP Analysis: Monitoring Trends in
the Societal and Natural Environments

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4-10
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1-
Table 4-3: Some Important Variables in
International Societal Environments

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Table 4-2: Demographic trends are part of the
sociocultural aspect of the societal environment.

SOURCES: Developed from Pew Research Center analysis of census bureau population projections (September 3, 2015),
(http://www.people-press.org/2015/09/03/the-whys-and-hows-of-generations-research/generations_2/).

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Current Sociocultural Trends
• Increasing environmental awareness
• Growing health consciousness
• Expanding seniors market
• Impact of millennials
• Declining mass market
• Changing pace and location of life
• Changing household composition
• Increasing diversity of workforce and markets

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4-14
 Prentice Hall, Inc. © 2008

Activity: Identify major STEEP

variables in the UAE
• Sociocultural • Technological • Economical • Political

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Figure 4-1: Scanning the External Task
Environment

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 4-3 Conduct an industry analysis to explain the competitive forces that
influence the intensity of rivalry within an industry

Porter’s five forces Model

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 Task Environment
Prentice Hall, Inc. © 2008

Industry
A group of firms that produces a similar product or
service such as drinks or financial services.

Industry Analysis --
– In-depth examination of key
factors/stakeholders/shareholders/suppliers/custo
mers within a corporation’s task environment

– High force –High Competitive intensity – less

chances of raising prices- reduces profits
– Low force – Low competitive intensity- more
chances to increase price - increases profits
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Figure 4-2: Forces Driving Industry
Competition

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 Analyzing the Prentice
TaskHall,Environment
Inc. © 2008

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21
Assumptions of Porter’s Model

• A corporation is most concerned with the

intensity of competition within its industry
• The level of this intensity is determined by
basic competitive forces
• “The collective strength of these forces
determines the ultimate profit potential in
the industry
• Profit potential is measured in terms of long-
run return on invested capital.
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22
Assumptions of Porter’s Model

• The stronger each of these forces is, the

more limited companies are in their ability to
raise prices and earn greater profits.
• In the short run, these forces act as
constraints on a company’s activities. In the
long run, however, it may be possible for a
company, through its choice of strategy, to
change the strength of one or more of the
forces to the company’s advantage.
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23
Porter’s Approach to Industry Analysis Prentice Hall, Inc. © 2008

1. Threat of New Entrants

Entry barrier: An obstruction that makes it difficult for a company to
enter an industry

Why new entrants are a threat to the existing firms?

The “barriers to entry”
– Economies of scale
– Product differentiation
– Capital requirements
– Switching costs
– Access to distribution channels
– Cost disadvantages
– Government policy

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 When is threat of new entrant
‘low’
• Low amount of capital is required to enter a market;
• Existing companies can do little to retaliate;
• Existing firms do not possess patents, trademarks or do not have
established brand reputation;
• There is no government regulation;
• Customer switching costs are low (it doesn’t cost a lot of money for a
firm to switch to other industries);
• There is low customer loyalty;
• Products are nearly identical;
• Economies of scale can be easily achieved.

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 Porter’s Approach to Industry Analysis Prentice Hall, Inc. © 2008

2. Rivalry Among Existing Firms

Depends on:
– Number of competitors more/few competitors - high rivalry
– Rate of industry growth slow growth - high rivalry
– Product or service characteristics undifferentiated/commodities -
high rivalry
– Amount of fixed costs high fixed costs high rivalry
– Height of exit barriers high exit barriers high rivalry
– Diversity of rivals high diversity high rivalry

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 Porter’s Approach to Industry Analysis
3. Threat of Substitute Products or
Services
• Substitute product
– a product that appears to be different but can
satisfy the same need as another product

• The identification of possible substitute products

means searching for products that can perform
the same function, even though they have a
different appearance.
• Price ceiling
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 Porter’s Approach to Industry Analysis

4. The Bargaining Power of Buyers

• Buyers affect an industry through their ability to force down
prices, bargain for higher quality or more services, and play
competitors against each other.

• When is bargaining power of buyers high

– Large purchases
– Backward integration
– Alternative suppliers
– Low cost to change suppliers
– Product represents a high percentage of buyer’s cost: Incented to
shop around
– Buyer earns low profits: Cost/service sensitive
– Product is unimportant to buyer
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 Porter’s Approach to Industry Analysis

5. The Bargaining Power of Suppliers

• Suppliers can affect an industry through their ability to
raise prices or reduce the quality of purchased goods and
services.
A supplier or a group of supplier is powerful if some of the
following factors hold true:
• Industry is dominated by a few companies (suppliers)
• Unique product or service
• Substitutes are not readily available
• Ability to forward integrate

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When bargaining power of
supplier ‘high’
• There are few suppliers but many buyers;
• Suppliers are large and threaten to forward integrate;
• Few substitute raw materials exist;
• Suppliers hold scarce resources;
• Cost of switching raw materials is especially high.

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6. Relative Power of Other
Stakeholders
• Government
• Local communities
• Creditors
• Trade associations
• Special-interest groups
• Unions
• Shareholders
• Complementors

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 Prentice Hall, Inc. © 2018

Activity 2: find out high medium and

low competitive industries in the UAE
• High • Medium • Low • Intensity of • Profitability
competition

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4-32
 Prentice Hall, Inc. © 2018

Activity 2: find out high medium and

low competitive industries in the UAE
• High • Medium • Low • Intensity of • Profitability
competition

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 Athletic Shoe Industry
(Nike, Reebok, New Balance, Converse, Adidas)

Forces Level Aggregate Intensity of Profit

Forces competition Potential

Threat of new High

entrant

Rivalry High
Threat of Low
substitutes
Bargaining Rising Medium
Power of
suppliers
Bargaining Rising Medium
Power of
buyers
Threat of High
other
stakeholders

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Industry Evolution
• Fragmented industry
– no firm has a large market share and each firm
only serves a small piece of the total market in
competition with other firms
• Consolidated industry
– domination by a few large firms, each struggles
to differentiate products from its competition

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Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved

36
Categorizing International Industries
• Multi-domestic industries
– specific to each country or group of countries
• Global Industries
– operate worldwide with multinational
companies making only small adjustments for
country-specific circumstances
• Regional industries
– multinational companies primarily coordinate
their activities within regions
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Figure 4-3: Continuum of International
Industries

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Strategic Groups
• Strategic group
– a set of business units or firms that pursue
similar strategies with similar resources
– A strategic type is a category of firms based on
a common strategic orientation and a
combination of structure, culture, and
processes consistent with that strategy

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Figure 4-4: Mapping Strategic Groups in
the U.S. Restaurant Chain Industry

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Strategic Types
• Defenders
– focus on improving efficiency
• Prospectors
– focus on product innovation and market opportunities
• Analyzers
– focus on at least two different product market areas
• Reactors
– lack a consistent strategy-structure-culture relationship

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Hypercompetition
Market stability is threatened by:
• short product life cycles
• short product design cycles
• new technologies
• frequent entry by unexpected outsiders
• repositioning by incumbents
• tactical redefinitions of market boundaries as
diverse industries merge

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Using Key Success Factors to Create
an Industry Matrix
• Key success factors
– Variables that can significantly affect the overall
competitive positions of companies within any
particular industry

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Table 4-4: Industry Matrix
• Industry matrix
– summarizes the key success factors within a
particular industry

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Competitive Intelligence
• Competitive intelligence
– a formal program of gathering information on a
company’s competitors
– also called business intelligence

• Sources of competitive intelligence:

– information brokers
– Internet
– industrial espionage
– investigatory services

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Useful Forecasting Techniques
Some useful forecasting techniques are:
• Extrapolation
• Brainstorming
• Expert opinion
• Delphi technique
• Statistical modeling
• Prediction markets
• Cross-impact analysis (CIA)

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Table 4-5: Synthesis of External Factors—
EFAS

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