FTU, Hanoi, Vietnam

Strategic Management: Business Level

Strategy
Session 4: Ch 4
Dr. Noel Jones, PhD
International Business & Management Consultant

Dr. Noel Jones

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.
1
Strategic Management and
Business Policy 15e, Global Edition
Chapter 4
Environmental
Scanning and
Industry Analysis

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

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

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-3
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

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-4
Environmental Scanning
• Environmental scanning
– the monitoring, evaluation, and dissemination
of information relevant to the organizational
development of strategy

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-5
Identifying External
Environmental Variables (1 of 4)
• Natural environment
– includes physical resources, wildlife, and
climate that are an inherent part of existence
on Earth
– form an ecological system of interrelated life

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-6
Identifying External
Environmental Variables (2 of 4)

• Societal environment
– humankind’s social system that includes
general forces that do not directly touch on the
short-run activities of the organization, but that
can influence its long-term decisions
– factors: economic, technological, political-legal,
sociocultural

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-7
Identifying External
Environmental Variables (3 of 4)
• 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

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-8
Identifying External
Environmental Variables (4 of 4)
• Industry analysis
– an in-depth examination of key factors within a
corporation’s task environment

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-9
 The Importance of Analyzing and
Understanding the Firm’s External
Environment
• Given that the external environment will continue to change—and that change may be unpredictable
in terms of timing and strength—a firm’s management is challenged to be aware of, understand the
implications of, and identify patterns represented in these changes by taking actions to improve the
firm’s competitive position, improve operational efficiency, and to be effective global competitors.

• External environmental factors—like war and political unrest, variations in the strength of national
economies, and new technologies—affects a firm’s growth and profitability in the U.S. and beyond.

• Environmental conditions in the current global economy differ from those previously faced by firms:
– Technological advances require more timely and effective competitive actions and responses.
– Rapid sociological changes abroad affect labor practices and product demand of diverse
consumers.
– Governmental policies and laws affect where and how firms may choose to compete.
– Changes to nations’ financial regulatory systems also impact firms.

• Understanding the external environment helps to build the firm’s base of knowledge and
information which can:
– (1) help to build new capabilities,
– (2) buffer the firm from environmental impacts, and
– (3) build bridges to influential stakeholders.

Dr. Noel Jones

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.
10
 The External Environment

Dr. Noel Jones

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.
11
 Define and Describe the General Environment
and the Industry Environment

• The firm’s understanding of the external

environment is matched with knowledge
about its internal environment (discussed in
Session 3) to form its vision, to develop its
mission, and to take strategic actions that
result in strategic competitiveness and
above-average returns.

Dr. Noel Jones

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.
12
 The External Environment
• The three components of a firm’s external environment and the elements or factors that are part of each component. They are:

1. the general environment

• Demographic

• Political/Legal

• Socio-cultural

• Economic

• Technological

• Global

• Physical

2. the industry environment

• Threat of New Entrants

• Power of Buyers

• Power of Suppliers

• Intensity of Rivalry

• Product Substitutes

3. the competitor environment

Dr. Noel Jones
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.
13
 The General Environment: Segments
and Elements
• Competitor analysis represents the firm’s understanding of its current
competitors. This understanding will complement information and
insights derived from investigating the general and industry
environments.
• The following are important distinctions to make regarding different
external analyses:
• Analysis of the general environment focuses on the future.
• Industry analysis focuses on factors and conditions influencing a firm’s
profitability within its industry.
• Competitor analysis focuses on predicting the dynamics of rivals’
actions, responses, and intentions.
• Performance improves when the firm integrates the insights provided
by these analyses of the general environment, the industry
environment, and the competitor environment.
Dr. Noel Jones
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.
14
 What Firms Can Do!
• It should be noted that, while firms cannot
directly control the elements of the general
environment, they can influence—and will be
influenced by—factors in their industry and
competitor environments.
• The strategic challenge is to develop an
understanding of the implications of these
elements and factors for a firm’s competitive
position. Processes and frameworks for the
analysis of the external environment are
provided in this session.
Dr. Noel Jones
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.
15
 Components of the External
Environmental Analysis
• Scanning entails the study of all segments in the general
environment. Firms use the scanning process to either detect
early warning signals regarding potential changes or to detect
changes that are already underway. In most cases, information
and data being collected or observed are ambiguous,
incomplete, and appear to be unconnected. Scanning is most
important in highly volatile environments, and the scanning
system should fit the organizational context (e.g., scanning
systems designed for volatile environments are not suitable for
firms competing in a stable environment).
• Scanning may signal a future change in the needs and
lifestyles of baby boomers as they approach retirement age.
This may not only provide opportunities for financial institutions
as they prepare for an increase in the number of retirees, but
also may provide opportunities for packagers and marketers of
retirement communities and other products specifically targeted
to this segment.
Dr. Noel Jones
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.
16
 Monitoring
• Monitoring represents a process whereby analysts observe
environmental changes (over time) to see if, in fact, an
important trend begins to emerge.
• The critical issue in monitoring is that analysts be able to detect
meaning from the data and information collected during the
scanning process.
• However, data are generally ambiguous, incomplete and
unconnected.
• Effective monitoring requires the firm to identify important
stakeholders. Because the importance of different stakeholders
can vary over a firm’s life cycle, careful attention must be given
to the firm’s needs and its stakeholder groups over time.
• Scanning and monitoring can also provide information about
successfully commercializing new technologies.
Dr. Noel Jones
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.
17
 Forecasting & Assessing
• The next step is for analysts to take the information and data gathered
during the scanning and monitoring phases and attempt to project
forward.
• Forecasting represents the process where analysts develop feasible
projections of what might happen—and how quickly—as a result of the
changes and trends detected through scanning and monitoring.
• Because of uncertainty, forecasting events and outcomes accurately is
a challenging task.
• Assessing represents the step in the external analysis process where
all of the other steps come together.
• The objective of assessing is to determine the timing and significance
of the effects of changes and trends in the environment on the
strategic management of a firm.
• Getting the strategy right will depend on the accuracy of the
assessment.
Dr. Noel Jones
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.
18
 Some Cautions!
• A major challenge for managers and firms engaging in the
process of external analysis is to recognize biases and
assumptions that may affect the analysis process.
• This is important, because these may limit the accuracy of
forecasts and assessments.
• For example, managers may choose to disregard certain
information, thus missing critical indicators of future
environmental changes.
• Or, past experiences may prejudice the ways that opportunities
or threats are perceived—if they are perceived at all.
• One solution might be to solicit multiple inputs so a single
source is not able to manipulate the information and to seek
frequent feedback regarding the accuracy or usefulness of
forecasts and assessments.

Dr. Noel Jones

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.
19
Scanning the Societal Environment:
STEEP Analysis
• STEEP analysis
– monitoring trends in the societal and natural
environments
– sociocultural, technological, economic,
ecological, and political-legal forces

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-20
Table 4-1: STEEP Analysis: Monitoring Trends in
the Societal and Natural Environments

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-21
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/).

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-22
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

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-23
Technological Breakthroughs
• Portable information devices and electronic
networking
• Alternative energy sources
• Precision farming
• Virtual personal assistants
• Genetically altered organisms
• Smart, mobile robots

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-24
Categories of Risk: Climate Change
• Regulatory
• Supply chain
• Product and technology
• Litigation
• Reputational
• Physical

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-25
Table 4-3: Some Important Variables in
International Societal Environments

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-26
Figure 4-1: Scanning the External Task
Environment

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-27
Figure 4-2: Forces Driving Industry
Competition

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-28
Threat of New Entrants
• Threat of new entrants
– new entrants to an industry bring new capacity,
a desire to gain market share and substantial
resources
• Entry barrier
– an obstruction that makes it difficult for a
company to enter an industry

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-29
Barriers to Entry
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 policies

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-30
Rivalry Among Existing Firms (1 of 2)
• 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.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-31
Rivalry Among Existing Firms (2 of 2)
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

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-32
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.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-33
The Bargaining Power of Buyers
(1 of 2)
• Buyers affect an industry through their
ability to force down prices, bargain for
higher quality or more services, and play
competitors against each other.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-34
The Bargaining Power of Buyers
(2 of 2)
• Bargaining power of buyers:
– 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

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-35
The Bargaining Power of Suppliers
(1 of 2)
• Suppliers can affect an industry through
their ability to raise prices or reduce the
quality of purchased goods and services.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-36
The Bargaining Power of Suppliers
(2 of 2)
A buyer or a group of buyers is powerful if some of
the following factors hold true:
• Industry is dominated by a few companies
• Unique product or service
• Substitutes are not readily available
• Ability to forward integrate
• Unimportance of product or service to the industry

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-37
Relative Power of Other Stakeholders
• Government
• Local communities
• Creditors
• Trade associations
• Special-interest groups
• Unions
• Shareholders
• Complementors

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-38
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

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-39
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

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-40
Figure 4-3: Continuum of International
Industries

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-41
Strategic Groups
• Strategic group
– a set of business units or firms that pursue
similar strategies with similar resources

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-42
Figure 4-4: Mapping Strategic Groups in
the U.S. Restaurant Chain Industry

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-43
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

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-44
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

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-45
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

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-46
Table 4-4: Industry Matrix
• Industry matrix
– summarizes the key success factors within a
particular industry

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-47
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

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-48
Useful Forecasting Techniques
Some useful forecasting techniques are:
• Extrapolation
• Brainstorming
• Expert opinion
• Delphi technique
• Statistical modeling
• Prediction markets
• Cross-impact analysis (CIA)

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-49
Table 4-5: Synthesis of External Factors—
EFAS

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

4-50