Notre Dame of Jolo College

CBME-SM

Environmental Scanning

Is the process of conducting research through surveys, observation and other methods, and analyzing
information for the organization.

Parts of External Environment

1. Task environments

-consists of those aspects of the organization that affect the company itself

 Community  Customers

 Creditors  Competitors

 Suppliers  Other organizations

2. Social environment

 political  Socio cultural

 Legal  technological

 Economic

 Political environment consist of government rules and regulations which the organization follow.

o Taxes and licenses

o Policies on health and sanitation

o Registration

- When there are changes in government legislations, companies may be affected either negatively or positively

 Legal -There are legal requirements that the companies should follow

 Economic – changes in the overall economy where the organization operates. There are price fluctuations that a
company should monitor the prices of its raw materials and other costs related to the production of the product.

 The clamor for protecting the environment and the quest for environment -friendly goods and services. The
combined economic and legal forces on the production of goods and services provide constraints on the part of
the company to produce quality and environment-friendly goods and services, at a considerable price.

 Social – consumer demographics are considered. The characteristics of the general population affect the
demand for goods and services.
In the Philippines for example, there is a widening gap between the rich and the poor and this affects the kind of
products and services that companies should offer.

Five Forces Model

Michael Porter’s Five Forces Model Framework assumes that there are five forces which may affect the company’s
competitive power and position in a particular environment

1. Power of Buyers

- An organization should not underestimate the power of buyers to drive prices down

- If buyers feel that it will take a high price on the part of the organization if it loses one major buyer, they can put
organization in a very alarming position and feel that they can dictate their own terms or negotiate for lower
prices, putting the pressure and sometimes making deals with threats of switching to another company

2. Rivalry of Competitors

- It is very important to understand the strengths of the competitors.

- It is good to know how capable they are, how many they are, and how attractive their products or services are.

- From there, a company can also determine its own strengths

3. Power of Suppliers

- A company should realize that suppliers can easily drive up their prices.

- They can easily put control in a particular organization depending on how important or crucial the materials are
to the company.

- Suppliers can size up an organization and put some pressure on it driven by the number of suppliers in each key
input and the uniqueness of the product or service

Example: Fast Food Industry

Suppliers play a key role in the value chain of the fast food industry. Chain restaurants rely on suppliers for food
items, packaging, napkins, as well as items like plates and spoons. The same suppliers may be serving competing
chains in an industry. This means that the power of these suppliers needs to be assessed by any company looking to
enter the industry. A strong supplier may be able to effect profitability, quality of products and force companies to
raise prices.

• Brand Recognition

Suppliers with their own established brands may have more bargaining power than those that only sell generic
products. The power becomes even greater if the restaurant is using the supplier's brand in their marketing plans to
attract customers. Customers in the food industry are loyal to the brands they like. Many people will travel to a
particular fast food restaurant just because it has a certain supplier's product. For example, some restaurants are
known for only selling Coke products instead of Pepsi and vice versa.
4. Threat of Substitutes

- If a company is not greatly affected by its rival competitors, a company’s strength may still be affected when
customers find something different from another product or service which can substitute the company’s product or
service offerings.

Example: Coca Cola

Produced by the Coca Cola Company, ‘Coke’ is an extremely popular carbonated beverage sold all over the world.
When it was invented in the 19th century, the product was intended to be used as a medicine. It was later purchased
by a businessman, who used clever marketing to position it as a soft drink and eventually led to the brand’s global
position today.

Competitors and Substitutes

The soft drink industry faces intense competition from within its industry as well as from substitutes. The most
major of its competitors is Pepsi Cola which competes in all the same markets and even outsells it in some of them.
Other direct competition comes from local cola drinks, as well as other soft drinks. Close competition comes from
items like fruit juices and other similar beverages. Alternates or substitutes can include water or even coffee or tea
as sources of caffeine.

The Threat of Substitutes

There is medium to high pressure from substitutes in the beverage industry. As a product, most people cannot
differentiate the taste from other similar cola products. So for many, it is an interchangeable product. In addition,
the rising awareness of cola products and their negative repercussions on health have led to other beverages such as
water and juices becoming more sought after.

Example: Airline Industry

From the point of view of airlines themselves, the flying business is very competitive. There are hundreds of airlines
all trying to get a bigger piece of the pie.

There are four types of airlines divided by the types of services they provide. These include:

• International Airlines

• Domestic Airlines

• Regional Airlines

• Cargo Airlines

Threat of Substitutes

Depending on the nature of the airline’s business, the threat of substitutes can range from lower on the scale to
mid-range. For domestic or regional airlines or routes, there is always the option of taking a car, bus or train. It may
take longer but often this consideration is outweighed by the cost advantages of substitute methods
5. Threat of New Entrants

- If it is easy for a new company to enter the industry where the company is in, then the latter’s power can be
affected.

- In addition, if a new player is equally competitive and there are no durable barriers to enter the market, then a
company can weaken its position in the market.

Competitive forces in an industry

For example, in the movie industry, there are new substitute forms of entertainment that have shortened the lines of
the moviegoers in theaters.

The rise of cable tv

Proliferation of piracy

Another classic example, Kodak and Fuji, the world’s leading producers of photographic films were adamant with the
arrival of digital photography. It was a hard lesson learned when people switched to a superior product: digital
photography

Market Structure

The interconnected characteristics of a market, such as the number and relative strength of buyers and sellers and
degree of collusion among them, level and forms of competition, extent of product differentiation, and ease of entry
into and exit from the market.

3 Important Structural Features

1. Market Concentration

- The degree by which a small number of organization dominate a particular market.

- It explains a number of companies which are competing in the market.

2. Entry Barriers

- Refers to the difficulties and challenges by potential new entrants which are entering the market

3. Product Differentiation

- Refers to the degree by which a company is able to distinguish its product or service to other players in the
market as valued by consumers.

- The uniqueness of the features in a particular brand or service.

Generally, the more concentrated the number of players are, the higher the entry barriers. Since there are only few
players in the market, they would not want a potential new company to enter the market which may grab a significant
market share.
Also, the more concentrated the market, the greater the product differentiation because each player will go out of its
way to maintain the market share and make its product or service offerings more unique and different.

Market Structure based on Market Concentration

1. Atomistic

- There are many sellers in the market with a low level of interaction to one another.

- Firms are so numerous and they cannot set their own prices.

- Tantamount to perfect competition.

- In this kind of set-up, usually there are low profits for the suppliers and low prices for consumers

Examples could include farmers markets for a product like potatoes. Many farmers sell their homogeneous product at
the market, enabling customers to easily compare prices.

2. Oligopolistic

- Few large sellers have a high level of interaction with one another.

- Usually players in the can set their own prices and competition is somewhat fierce.

- Most industries in the Philippines aside from the oil industry are under oligopolistic competition.

- Examples could include cellphone companies, softdrinks, tobacco, airlines, etc.

3. Monopoly

- There is one seller who dominates the market

- The company can dictate its own price

Characteristics of Product Differentiation

1. Homogenous products

- Highly identical

- The characteristics of the product are not differentiated from one supplier to another

Example

The wet market is usually the popular place for many homogenous products like salt, fish, vegetables, fruits,
meat, poultry, among others

2. Differentiated products

- Differentiated by design, quality, branding, among others

- They have certain features that which differentiates them from one another

- Their unique characteristics connote a certain price

3 Subtypes of Ease of Market Entry

1. Ease of Entry

- There are no difficulties in entering the market.

- New entrants will not have difficulty in entering the market.

- There are minimal barriers to entry and if there are, they are manageable.

2. Moderately Difficult Entry

- There are barriers but not too difficult for sellers to monopolize the market

- However, it may be difficult to enter the market.

3. Blockaded Entry

- There are barriers that are too high which potential players cannot enter.

- The present companies monopolize the prices

- It is very difficult to enter the market