Introduction to

Strategic Management
GEM 411
Learning Unit 2

Environmental Scanning and Industry Analysis

Environmental Scanning and
Industry Analysis
 1. Identifying External
Environmental Variables – PESTEL
Framework
1. Political-legal forces that allocate power and provide constraining and
protecting laws;

2. Economic forces that regulates the exchange of materials, money,

energy, and information;

3. Socio-Cultural forces that regulate the values, mores, and customs of

society, and

4. Technological forces that generate problem-solving inventions;

 Identifying External Environmental
Variables – PESTEL Framework
• Environmental factors are important due to the increasing
scarcity of raw materials; pollution targets; doing business as an
ethical and sustainable company; carbon footprint targets.

• Legal factors include health and safety; equal opportunities;

advertising standards; consumer rights and laws; product
labeling and product safety.

• Identifying External Strategic Factors

 Why is ENVIRONMENT Important?
• The only unchanging phenomenon of an environment
(business environment) is change.

• The environment (external business environment) is

always changing.

• Changing environment  Opportunity and/or Threat for

a business.
 External Environment
• Changing environment can create new opportunities
and at same time can destroy old ones.

• Changing environment can also create new threats and

eliminate old threats.

Never forget these two mantras !!

 Strategic FIT
• An organization needs to be in tune with its external environment.

• There must be a STRATEGIC FIT with what the environment wants and
what the corporation has to offer, and

• As well as between what the corporation needs and what the

environment can provide.

Two Levels of Fit

 Political-Legal Environment

•Trends in the political-legal part of the

societal environment have a significant
impact not only on the level of
competition within an industry but
also on which strategies might be
successful.
 Variables
Antitrust Regulations Environment Protection Laws

Global Warming Legislation Immigration Laws

Tax Laws Special Incentives

Foreign Trade Regulations Attitude Towards Foreign Comp.

Laws on Hiring & Promotion Stability of Government

Outsourcing Regulation Foreign “sweatshops”

 Economic Environment
• Trends in the economic part of the societal
environment can have an obvious impact on business
activity.

• An increase in interest rates means fewer sales of credit

products of financial institutions.
 Variables
GDP Trends Devaluation/Revaluation

Interest Rates Energy Alternatives

Money Supply Energy Availability and Cost

Inflation Rates Currency Markets

Unemployment Levels Global Financial System

Wage/Price Controls Disposable & Discretionary Income

 Socio-Cultural Environment
• Demographics trends are part of the
sociocultural aspect of the societal environment.

• These trends are changing in very faster rate

than we can imagine.
 Current Socio-Cultural Trends
Transforming the World
1. Increasing Environmental Awareness
2. Growing Health Awareness
3. Expanding Senior Markets
4. Impact of Generation Y Boomlet
5. Declining Mass Market
6. Changing Pace and Location of Life
7. Changing Household Composition
8. Increasing Diversity of Workforce and Market
 Variables
Life Style Changes Career Expectations
Consumer activism Rate of Family Formation
Growth Rate of Population Age Distribution of Population
Regional Shift in Population Life Expectancies
Birthrates Pension Plans
Health Care Level of Education
Living Wages Unionization
 Technological Environment
• Changes in the technological part of the societal
environment can also have a great impact on multiple
industries.

• We can discuss numerous examples on how the new

innovations in technology has made impact in the
business community and different Industries.
 Major Technological Breakthroughs
having Impact on Businesses
• Portable Information Devices and Electronic Networking

• Alternative Energy Sources

• Precision Farming

• Virtual Personal Assistants

• Genetically Altered Organisms

• Smart, Mobile Robots

 Variables
• Total Gov’t Spending for R&D
• Total Industry Spending for R&D
• Focus on Technological Efforts
• Patent Protection
• New Products
• New Development in Technology Transfer from Lab to Marketplace
• Productivity Improvement through Automation
• Internet Availability
• Telecommunication Infrastructure
• Computer Hacking Activity
 Ecological Environment
• Trends in the ecological part of the environment have been
accelerating at a pace that is difficult to stay up with.

• This element is focused upon the natural environment and its

consideration/impacts upon the operation of business.

The effects of climate change on companies can be grouped into six

categories of risks. Regulatory Risk, Supply Chain Risk, Product &
Technology Risk, Litigation Risk, Reputational Risk, and Physical Risk.
 Identifying External Strategic
Factors
• The origin of competitive advantage lies in the ability to identify and
respond to environmental change well in advance of competition.

• Although this seems obvious, why are some companies better able to
adapt than others?

• One reason is because of differences in the ability of managers to

recognize and understand external issues and factors.
 Identifying External Strategic
Factors
• No firm can successfully monitor all strategic factors.
Choices must be made regarding which factors are
important and which are not.

• Even though managers agree that strategic importance

determines what variables are consistently tracked,
they sometimes miss or choose to ignore crucial new
developments.
 Identifying External Strategic
Factors
• Personal values and functional experiences of the managers, as
well as the success of the current strategies, are likely to bias both
their perception of what is important to monitor and their
interpretations of what they perceive.

• This willingness to reject unfamiliar as well as negative information

is called strategic myopia.

• If the firm needs to change its strategy, it might not be gathering

the appropriate external information.
 Industry Analysis: Analyzing the
Task Environment
• Industry:
• An industry is a group of firms that produces a similar product or service,
such as soft drinks or financial services.

• This definition should be viewed from a “competition” perspective.

• You can place a geographic boundary to this definition, but again, this
should also be based on competition perspective.

• Make your understanding CLEAR !!!

 Industry
• An examination of the important stakeholder groups, such as
suppliers and customers, in a particular corporation’s task
environment is a part of industry analysis.

• An industry is a group of firms producing similar products and services

that satisfied similar needs.

• This definition encompasses “substitute” inside the term “industry”.

 Industry Analysis with Special
Reference to Michael Porter’s 5
Forces Model
• Michael Porter, an Authority on competitive strategy,
contends that a corporation is most concerned with the
intensity of competition within an industry.

• This level of competition is determined by the 5+1 basic

competitive forces in the following figure.
 Why add the 6th Force ?
• Although Porter mentions only 5 forces, a 6th – other
stakeholders – is added here to reflect the power that
government, local communities, and other groups from
the task environment put over industry activities.

• Lets now discuss them.

 Threat of New Entrant
• New Entrants to an industry typically bring to it new capacity,
a desire to gain market share, and potentially substantial
resources.

• They are, therefore, threats to an established corporation.

• The threat of entry depends on the presence of entry barrier

and the reaction that can be expected from existing
competitors.
 Entry Barrier
• An obstruction that makes it difficult for a company to enter an industry.

• Some of the possible barriers to entry are:

• Economies of scale
• Product Differentiation
• Capital requirements
• Switching costs
• Access to distribution channels
• Cost disadvantages independent of size
• Government policy
 Rivalry among Existing Firms
• In most industries, corporations are mutually dependent.

• A competitive move by one firm can be expected to have a noticeable

effect on its competitors and thus may cause retaliation.

• Examples ???
 Rivalry among Existing Firms
• According to Porter, intense rivalry is related to the presence of several
factors, including:

• Number of competitors
• Rate of industry growth
• Product or service characteristics
• Amount of fixed costs
• Capacity
• Height of exit barriers
• Diversity of rivals
 Threat of Substitute Products or
Services
• A substitute product is a product that appears to be
different but can satisfy the same need as another
product.

• According to Porter, “substitutes limit the potential

returns of an industry by placing a ceiling on the prices
firms in a industry can profitably charge”.
 Threat of Substitute Products or
Services
• To the extent that switching costs are low,
substitutes may have a strong effect on an
industry.

• Examples ???
 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.

• Examples ???
 Factors when Buyers are Powerful
• A buyer purchase a large proportion of the seller’s product or services.
• A buyer has the potential to integrate backward by producing the
product itself.
• Alternative suppliers are plentiful because the product is standard or
undifferentiated.
• Purchases product represents a high percentage of a buyers’ cost.
• A buyer earns low profits and is thus very sensitive to cost and service
differences
• The purchased product is unimportant to the final quality or price of
buyer’s product.
 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.

• Examples ???
Factors when Suppliers are Powerful
• The supplier industry is dominated by a few companies, but sells to
many.
• Its product or service is unique and/or it has built up switching costs.
• Substitutes are not readily available.
• Suppliers are able to integrate forward and compete directly with
their present customers.
• A purchasing industry buys only a small portion of the supplier
group’s goods and services and is thus unimportant to the supplier.
 The Relative Power of other
Stakeholders
• Governments
• Local Communities
• Creditors
• Trade Associations
• Special Interest Groups
• Unions
• Shareholders
• Complementors
 Industry Evolution
• The strength of each of the six forces mentioned earlier
varies according to the stages of industry evolution.

• The industry life cycle is useful for explaining and

predicting trends among the six forces.
 Fragmented Industry
• When an industry is new, people often buy the product, regardless of
price, because it uniquely fulfills an existing need.

• This usually occurs in a fragmented industry where no firm has large

market share, and each firm serves only a small piece of the total
market in competition with others.

• As new companies enter the industry, prices drop as a result of

competition.
 Consolidated Industry
• By the time an industry enters maturity, products tend to become
more like commodities.

• This is now a consolidated industry dominated by a few large firms,

each of which struggles to differentiate its products from those of the
competition.

• As buyers become more sophisticated over time, purchasing decisions

are based on better information.
 Strategic Grouping
• A Strategic Group is a set of business units or firms that
“pursue similar strategies with similar resources.”

• Categorizing firms in any one industry into a set of

strategic groups is very useful as a way of better
understanding the competitive environment.
 Strategic Types
• In analyzing the level of competitive intensity within a
particular industry or strategic group, it is useful to
characterize the various competitors for predictive
purpose.

• A strategic type is a category of firms based on a common

strategic orientation and combination of structure,
culture, and processes consistent with that strategy.
 Strategic Types
• According to Miles and Snow, competing firms within a
single industry can be categorized into one of four basic
types on the basis of their general strategic orientation.

1. Defenders – Cost Orientation

2. Prospectors – Sales Orientation
3. Analyzers – Multiple Operation
4. Reactors – Piecemeal Strategy
 Competitive Intelligence
• A formal program of gathering information on a
company’s competitors.

• Often called business intelligence.

• One of the fastest growing fields within strategic

management.
 Sources of Competitive Intelligence
• Much external environment scanning is done on an informal and
individual basis.

• Most corporations rely on outside organizations to provide them with

environmental data.

• Sources: Suppliers, Customers, Industry publications, Employees,

Industry experts, Industry conferences, and the INTERNET.
Preparation of External Factors Analysis Summary
(EFAS) Matrix/Table & Competitive Profile Matrix

• After managers have scanned the societal and task

environment and identified numbers of likely external
factors, they may want to refine their analysis of these
factors using EFAS.

• EFAS is one way to organize how well a particular

company’s management (rating) is responding to these
specific factors in light of the perceived importance
(weight) of these factors to the company.