Environmental

Scanning and
Industry Analysis

Chapter 4
 Learning Objectives
 Identify the aspects of an organization’s
environment that are most strategically important
 Conduct an industry analysis to understand the
competitive forces that influence the intensity of
rivalry within an industry
 Understand how industry maturity affects industry
competitive forces
 Categorize international industries based on their
pressures for coordination and local responsiveness

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 Learning Objectives

Construct strategic group maps to assess the

competitive positions of firms in an industry
Identify key success factors and develop an
industry matrix
Use publicly available information to conduct
competitive intelligence
Be able to construct an EFAS Table that
summarizes external environmental factors

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 Environmental Scanning

Environmental scanning
 the monitoring, evaluation, and dissemination of
information relevant to the organizational
development of strategy

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External Assessment

Micro Environment

Suppliers Company Distributers

Competitors Customers

5
 The Nature of an External Audit

 The external audit is aimed at identifying key

variables that offer actionable responses
 Firms should be able to respond either offensively
or defensively to the factors by formulating
strategies that take advantage of external
opportunities or that minimize the impact of
potential threats.

 Offensive: Hits directly to capture Market Share

 Defensive: Tools to keep your customers happy and
your profits stable

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The Process of Performing an External Audit

First, gather competitive intelligence and

information about economic, social,
cultural, demographic, environmental,
political, governmental, legal, and
technological trends.

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 The Process of Performing an External Audit

Key external factors should be:

1. important to achieving long-term and annual objectives
2. measurable
3. applicable to all competing firms, and
4. hierarchical in the sense that some will pertain to
the overall company and others will be more
narrowly focused on functional or divisional areas

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 Identifying External
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, unions, special
interest groups/trade associations

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 Identifying External
Environmental Variables
Industry analysis
 an in-depth examination of key factors within a
corporation’s task environment

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PESTEL Framework

Copyright ©2013 Pearson Education, Inc.

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publishing as Prentice Hall
 Some Important Variables in
International Societal Environments

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 Technological Forces

The Internet has lowered entry barriers,

and redefined the relationship between
industries and various suppliers, creditors,
customers, and competitors.

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Technological Breakthroughs

Portable information devices

Electronic networking

Alternative energy sources

Precision farming

Virtual personal assistants

Genetically altered organisms

Smart, mobile robots

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The Five-Forces Model of Competition

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The Five-Forces Model of Competition

Porter's Five Forces Framework is a tool

for analyzing competition of a business. It
draws from industrial organization (IO)
economics to derive five forces that
determine the competitive intensity and,
therefore, the attractiveness (or lack of it)
of an industry in terms of its profitability.

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 The purpose of Five-Forces Analysis

 The five forces are environmental forces that impact

on a company’s ability to compete in a given market.

 The purpose of five-forces analysis is to diagnose

the principal competitive pressures in a market and
assess how strong and important each one is.
 Threat of New Entrants

 Potential Entry of New Competitors

 Barriers to entry are important
 Quality, pricing, and marketing can overcome
barriers
 Barriers examples:
 Economies of scale
 Cost advantage due to size
 Large capital requirements
 Government regulatory policies
 Switching cost
 Lack of access to raw materials
 Possession of patents: differentiated product industry
 Access to distribution channels

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 Rivalry among competing firms

Rivalry among competing firms

 Most powerful of the five forces
 Focus on competitive advantage of strategies
over other firms

 Example: Sports wear market: Nike, Adidas,

Sketcher, Puma, Under Armour, La Qocque
sportive, Reebok, Diadora, ….

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Rivalry among Existing Firms
Rate of Product or
Number of
industry service
competitors characteristics
growth

Amount of Height of exit

Capacity
fixed costs barriers

Diversity of
rivals

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 Threat of Substitute
Products or Services
 Threat of Potential development of
substitute products
 Pressure increases when:
• Prices of substitutes decrease
• Consumers’ switching costs decrease
• Clothing, bottled water Vs CRM software, TV Cable
Co’s., ….
• Switching costs are the costs that a consumer incurs as a
result of changing brands, suppliers or products. Although most
prevalent switching costs are monetary in nature, there are
also psychological, effort- and time-based switching costs.

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 The Bargaining Power of Buyers

Bargaining power of buyers

 Customers being concentrated or buying in
volume affects intensity of competition
 Consumer power is higher where products are
standard or undifferentiated. Standardized
products where customers can be very sensitive
about price and where group of customers or one
buys in large quantity customer can influence the
company’s profit and production.

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 The Bargaining Power of Suppliers

Bargaining power of suppliers

 is increased when there are:
 Few numbers of suppliers
 Few substitutes
 Costs of switching raw materials is high
 Backward integration is gaining control or
ownership of suppliers
EX: Rare material like cooper, zinc, iron & steel, special fabrics, . .…

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 Relative Power of Other Stakeholders

Government
Local communities
Creditors
Trade associations
Special interest groups
Unions
Shareholders

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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 e.g. Auto repair, Book
publishing, Restaurant industry, Furniture, barbers, ….

Consolidated industry
 domination by a few large firms, each struggles to
differentiate products from its competition e.g.
Public accounting, home appliance, The automobile petroleum
industry, Hardware stores, airline industry, ….

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 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

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Mapping Strategic Groups in the
U.S. Auto Making Industry

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Mapping Strategic Groups in the
U.S. Restaurant Chain Industry

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 Miles and Snow's Typology of
Strategic Types
 Defenders
 Attempt to protect their market from new competitors. Single product
line, capital intensive technology, functional structure, focus on
improving efficiency and cost control.
 Prospectors
 Organizations implementing a prospector strategy are innovative,
seek out new opportunities, take risks and grow.
 Analyzers
 focus on at least two different product lines, they attempt to balance
efficient production for current lines along with the creative
development of new product lines.
 Reactors
 Seldom making reaction until forced to do so, reactors respond to
environmental threats and opportunities in ad hoc
fashion.(Governmental organizations)

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 Market Stability

Market stability is threatened by short

product life cycles, short product design
cycles, new technologies, frequent entry by
unexpected outsiders, repositioning by
incumbents and tactical redefinitions of
market boundaries as diverse industries
merge.

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 Hypercompetition
 Hyper competition: A situation in which there is a
lot of very strong competition between companies,
markets are changing very quickly, and it is easy to
enter a new market, so that it is not possible for one
company to keep a competitive advantage for a long
time. In some cases to succeed in a
hypercompetitive industry, companies must be
willing to cannibalize its own products. (Gillet)

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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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 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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 Industry Matrix

Industry matrix
 summarizes the key success factors within a
particular industry

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 Example Industry Matrix
Industry Matrix

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External Factors Analysis Matrix—EFAS
External Factors Analysis Summary (EFAS)- Is a tool that business
strategists use to organize the external factors into the generally
accepted categories of opportunities and threats as well as to analyze
how well a particular company’s management (rating) is responding to
these specific factors in light of perceived importance (weight) of these
factors to the company.

It has five columns, the first column lists the opportunities and threats,
the second column list the weight assigned to the factor that is
mentioned where the total weights adds up to 1. 0, the third column list
the rating given to each factor from 5 outstanding to 1 poor, the fourth
column list the weighted score which is the rating multiplied by the
weight and the fifth column list the comments for that column giving us a
composite score that range from 1 to 5 about how well the company is
responding to external factors
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Synthesis of External Factors—EFAS

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REVIEW QUESTIONS

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 Questions-Choose one Best Answer

 1) Industry analysis is primarily concerned with a corporation's 1) _______

 A) sociocultural environment.
 B) economic environment.
 C) societal environment.
 D) internal environment.
 E) task environment.

 2) The origin of competitive advantage lies in the ability to 2) _______

 A) gain major stockholders.
 B) serve customers faster.
 C) create surprise for others.
 D) identify and respond to environmental change well in advance of competition.
 E) launch products quickly.
 .

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 Questions-Choose one Best Answer

 3) The combination of the degree of complexity and the degree of change

existing in an organization's external environment is/are called 3) _______
 A) strategic issues.
 B) strategic factors.
 C) environmental uncertainty.
 D) scenarios.
 E) strategic fit.

 4) According to Porter, the corporation is most concerned with 4) _______

 A) a market's position on its life cycle.
 B) the aggregate level of demand for a product line.
 C) the level of government action in an industry.
 D) the intensity of competition within its industry.
 E) the amount of pressure from the societal environment.
.

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 Questions-Choose one Best Answer

5) Which barrier to entry do corporations such as P&G use to

force new entrants to spend heavily to overcome existing
customer loyalty? 5) _______
A) switching costs
B) access to distribution channels
C) rivalry among existing firms
D) capital requirements
E) product differentiation

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 Questions-Choose one Best Answer

 7) Which barrier to entry uses cost advantages associated with large size?
7) _______
 A) cost disadvantages independent of size
 B) rivalry among existing firms
 C) economies of scale
 D) switching costs
 E) capital requirements

 8) A sugar company that is worried that consumers may buy artificial sweetener
instead of sugar is concerned about the 8) _______

 A) bargaining power of suppliers.

 B) threat of substitute products.
 C) bargaining power of buyers.
 D) rivalry among existing firms.
 E) threat of new entrants.

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 Questions-Choose one Best Answer

 9) An industry dominated by a few large firms, all of which struggle with product
differentiation, is known as 9) _______

 A) multidomestic.
 B) consolidated.
 C) indigenous.
 D) global.
 E) worldwide.

 10) When General Motors considers making its own automotive parts, Delphi
Automotive Supply Company would be concerned with the10) ______

 A) rivalry among existing competitors.

 B) bargaining power of suppliers.
 C) threat of new entrants.
 D) threat of substitutes.
 E) bargaining power of buyers.

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 Questions-Choose one Best Answer

 11) A company or an industry whose product works well with a firm's product
and without which the product would lose much of its value is considered to be
a(n) 11) ______
 A) complementor.
 B) staggered company.
 C) oligopoly.
 D) industry leader.
 E) strategic group.

 12) In a fragmented industry12) ______

 A) prices drop as new competitors enter the market.
 B) no firm has large market share.
 C) companies integrate to further reduce costs.
 D) economies of scale are used to reduce costs.
 E) all of the above
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 Questions-Choose one Best Answer

 13) According to Miles and Snow, a company that operates in at least two
different product-market areas in which one product is stable and the other one
is variable, reflects which strategic orientation? 13) ______
 A) initiators
 B) reactors
 C) analyzers
 D) prospectors
 E) defenders

 14) In which type of international industry do corporations tailor their products

to the specific needs of consumers in a particular country? 14) ______
 A) global industry
 B) multidomestic industry
 C) consortium industry
 D) indigenous industry
 E) worldwide industry

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 Questions-Choose one Best Answer

 15) Which of the following is NOT one of the general strategic types according to
Miles and Snow? 15) ______
 A) initiators
 B) reactors
 C) analyzers
 D) prospectors
 E) defenders

 16) What is a set of business units or firms that "pursue similar strategies with
similar resources"? 16) ______
 A) strategic group
 B) strategic assembly
 C) cooperative
 D) integral association
 E) collective collaboration
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 Questions-Choose one Best Answer

 17) Which type of international industry manufactures and sells the same
products with only minor adjustments made for individual countries
around the world? 17) ______
 A) multidomestic industry
 B) worldwide industry
 C) indigenous industry
 D) global industry
 E) consortium industry

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 Questions-Choose one Best Answer

 19) To succeed in a hypercompetitive industry, companies must be willing to

19) ______
 A) pursue market share instead of profits.
 B) cut prices below marginal costs.
 C) operate in the ethical gray zone.
 D) reduce spending on research and development.
 E) cannibalize their own successful product lines.

 20) A table which summarizes the key success factors within a particular industry
is called a(n) 20) ______
 A) SFAS Table.
 B) EFAS Table.
 C) IFAS Table.
 D) industry matrix.
 E) TOWS Matrix.
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 Questions-Choose one Best Answer

 21) A formal program of gathering information on a company's competitors is referred

to as 21) ______
 A) competitive strategy.
 B) qualitative matrix.
 C) statistical modeling.
 D) quantitative forecasting.
 E) competitive intelligence.

 22) The technique recommended by the text to organize an analysis of external

strategic factors is called 22) ______

 A) the issues priority matrix.

 B) SFAS.
 C) SWOT.
 D) IFAS.
 E) EFAS
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© Pearson Education Limited 2015 4-51
 Closing the store game

The story: “a business man has just turned off the

lights in the store when a man appeared and
demanded money. The owner opened a cash register.
The contents of the cash register were scooped up
and the man sped away. A member of the police
force was notified promptly”.

Instructions: read the following statements regarding

the above story. Circle the appropriate answer to show
if the statement is True (T) False (F) or Don't know

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