Environmental Scanning and Industry Analysis

1. Environmental Scanning and Industry Analysis

2. Environmental Scanning is the monitoring, evaluating and disseminating of information from the external and internal environments to key people within corporation.

3. The Components of a Company’s Macro-Environment MACROENVIRONMENT The Economy at Large Legislation and Regulation Technology Suppliers Substitutes COMPANY Rival Firms Buyers New Entrants Societal Values and Lifestyles Population Demographics  IMMEDIATE INDUSTRY AND COMPETITIVE ENVIRONMENT

4. Key External Forces & the Organization Competitors Suppliers Other projects Creditors culture Employees Communities Economy Stockholders Labor Unions Government Geography Resourse Key External Forces Opportunities & Threats

5. PEST analysis • What environmental factors are effecting organization? • Which of these are the most important at the present time? • Whish of these can become important in the next few years?

7. PEST analysis: some principles and conclusions: • Things that make activity more difficult for people or organizations raise the cost of doing business. • The higher the cost of doing business in a region, the more project profitability is squeezed or eliminated. • And the lower the amount of economic activity, the poorer and less capable societies tend to be.  • Wherever there is rapid or major change in an area, there are likely to be new opportunities and threats that arise. • Few situations are perfect: it is up to us to make the most of the situation in which we find ourselves.

8. The Issues Priority Matrix Probable Impact on Corporation High Probability of Occurrence Medium Low

9. The Five-Forces Model of Competition (Porter’s approach) Potential development of substitute products Rivalry among competing firms Bargaining power of suppliers Bargaining power of consumers Potential entry of new competitors

10. The stronger that each of these five forces is, the more limited is the ability of established companies to raise prices and earn greater profits within their industry. Strength of forces may change How the Five-Forces shape Competition within an Industry

11. Potential entry of new competitors Threats of new competitors entering the market. The threat of entry depends on the presence of entry barriers and the reaction that can be expected from existing competitors. The possible barriers to entry: • economies of scale • product differentiation • capital requirements • switching costs • access to distribution channels • cost disadvantages independent of size • governmental policy

12. Rivalry among competing firms Intensity of rivalry among firms in the industry. Corporations are mutually dependent. Intense rivalry is related to the presence of several factors: • number of competitors • rate of industry growth • product or service characteristics • amount of fixed costs • capacity • height of exit barriers • diversity of rivals

13. Potential development of substitute products Substitute products or services are those products/services that appear to be different but can satisfy the same need as another product/service. “Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge.” (M. Porter)

14. Is Pepsi Cola a substitute for a Coca-Cola?

15. Bargaining power of consumers A buyer or a group of buyers is powerful if: • a buyer purchases a large proportion of the seller’s product or service (oil filters purchased by a major auto maker) • alternative suppliers are plentiful because the product is standard or undifferentiated (gas stations) • changing suppliers costs very little • a buyer earns low profits and thus sensitive to costs and service differences (grocery stores) • the purchased product is unimportant to the final quality or price of buyer’ products or services (electric wire bought for use in lamp).

16. Bargaining power of suppliers Suppliers can affect an industry through their ability to raise prices or reduce the quality of purchased goods and services: • the supplier industry is dominated by a few companies, but it sells to many (petroleum industry) • its product or service is unique and/or has built up switching costs (Word software) • substitutes are not readily available (electricity) • suppliers are able to integrate forward and compete directly with the present customers (Intel can make PCs) • a purchasing industry buys only a small portion of the supplier group’s goods and services and its unimportant for supplier

17. The Five-Forces Model of Competition • An unattractive industry is one in which intense rivalry already exists among competitors, there are substantial threats in terms of new competitors and substitute products, and suppliers and buyers are very powerful in bargaining over prices and quality. • An attractive industry is one with less intense competition, few threats from new entrants or substitutes, and low bargaining power among suppliers and buyers.

18. Things to Consider inAssessing Industry Attractiveness • Industry’s market size and growth potential • Whether competitive conditions are conducive to rising/falling industry profitability • Will competitive forces become stronger or weaker • Whether industry will be favorably or unfavorably impacted by driving forces • Potential for entry/exit of major firms • Stability/dependability of demand • Severity of problems facing industry • Degree of risk and uncertainty in industry’s future

19. Strategic Group Mapping • Firms in same strategic grouphave two or more competitive characteristics in common • Sell in same price/quality range • Cover same geographic areas • Be vertically integrated to same degree • Have comparable product line breadth • Emphasize same types of distribution channels • Offer buyers similar services • Use identical technological approaches

20. Identifying IndustryKey Success Factors • Answers to three questions pinpoint KSFs • On what basis do customers choose between competing brands of sellers? • What resources and competitive capabilities does a seller need to have to be competitively successful? • What does it take for sellers to achieve a sustainable competitive advantage? • KSFs consist of the3 - 5really major determinants of financial and competitive success in an industry

21. Technology-related Scientific research expertise; Product innovation capability; Expertise in a given technology; Capability to use Internet to conduct various business activities Manufacturing-related Low-cost production efficiency; Quality of manufacture; High use of fixed assets; Low-cost plant locations; High labor productivity; Low-cost product design; Flexibility to make a range of products Distribution-related Strong network of wholesale distributors/dealers; Gaining ample space on retailer shelves; Having company-owned retail outlets; Low distribution costs; Fast delivery Marketing-related Fast, accurate technical assistance; Courteous customer service; Accurate filling of orders; Breadth of product line; Merchandising skills; Attractive styling; Customer guarantees; Clever advertising Skills-related Superior workforce talent; Quality control know-how; Design expertise; Expertise in a particular technology; Ability to develop innovative products; Ability to get new products to market quickly Organizational capability Superior information systems; Ability to respond quickly to shifting market conditions; Superior ability to employ Internet to conduct business; More experience & managerial know-how Other types Favorable image/reputation with buyers; Overall low-cost; Convenient locations; Pleasant, courteous employees; Access to financial capital; Patent protection Common Types ofKey Success Factors

22. Strategic Management Principle A sound strategy incorporates efforts to becompetent on all industry key success factors and toexcel on an least onefactor!

23. Forecasting Environmental scanning provides reasonably hard data on the present situation and current trends , but intuition and luck are needed to predict accurately if these trends will continue. Faulty underlying assumptions are the most frequent cause of forecasting errors.

24. Forecasting Various techniques are used to forecast future: • Extrapolation is extension of present trends into the future. • Brainstorming is no quantitative approach requiring simply the presence of people with some knowledge if the situation to be predicted. • Expert opinion is no quantitative technique in which experts in a particular area attempt to forecast likely developments. • Delphi technique in which separated experts independently assess the likehoods of special events. These assessments are combines and send back to each expert for fine tuning until an agreement is reached. • Statistical modeling is a quantitative technique that attempts to discover casual or ay least explanatory factors that link two or more time series together. • Scenario writing is focused descriptions of different likely future presented in a narrative fashion (Royal Dutch Shell). • Industry scenario is a forecasted description of particular industry’s likely future.

25. Economic Demographic Governmental Social Environmental Technological Cultural Political Competitive Industry Analysis: The External Factor Analysis Summary (EFAS) Matrix Summarize & Evaluate

28. Industry Analysis EFAS Total weighted score of 5.0 • Organization response is outstanding to threats and weaknesses Total weighted score of 1.0 • Firm’s strategies not capitalizing on opportunities or avoiding threats The Maytag’s total weight is 3.15 means that the corporation was slightly above average in the major home appliance industry in 1995.

29. Wayne Gretzky: The key to winning is skating not where the puck is but to where it is going to be. People talk about skating, puck handling and shooting, but the whole sport is angels and caroms, forgetting the straight direction the puck is going, calculating where it will be diverted, factoring in all the interruptions. Conclusion The key to winning is not to assume that your industry will continue as it is now but to assume that the industry will change and to make sure that your company will be in position to take advantage of that change.