Chapter 3 Environmental Scanning and Industry Analysis Chapter

Chapter 3 Environmental Scanning and Industry Analysis

Chapter Objectives o After finish this chapter student will understand: n n n What is business environment? How to scanning an external environment? External environment analysis National competitiveness Porter’s Five Forces model of competition Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 2

3. 1 Environmental Scanning Environment: everything around us. Business environment: Sum total of all the forces surrounding & influencing the life and development of the firm. Environmental scanning is the monitoring, evaluating, and disseminating of information from external and internal environment to key people in company.

Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 4

External Forces Competitors Suppliers Distributors Creditors Key External Forces Customers Employees Opportunities and Threats Communities Managers Stockholders Labor unions Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 5

Ten Key external forces Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 6

Scanning the Societal Environment Economic Technological Political-legal Socio-cultural -GDP trends -Interest rate -Money supply -Inflation rate -Unemployment -Wages/prices -Energy availability/cost -Disposable income -Total government spending for R&D -Total industry spending for R&D -Focus technological efforts -New products -New development in technology -Productivity through automation -Monopoly regulation -Environmental protection laws -Tax law -Special incentives -Attitudes toward foreign company -Laws on hiring and promotion -Stability of government -Lifestyle change -Career expectation -Regional shifts in population -Consumer behavior -Rate of family formation -Growth rate of population -Age distribution of population -Life expectancy -Birth rate Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 7

Economic Forces § § § Availability of credit Interest rate Inflation rate GDP trends Consumption patterns Unemployment level Wage and price control Demand shift for goods/services Imports/Export factors Income difference by region/customer Monetary policies Fiscal policy Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 8

Technological Forces -Profound impact on organizations § § Computer Tele communications Internet e. Commerce Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 9

Technological Forces -Internet changes the nature of opportunities and threats § Alters life cycle of products § Increases speed of distribution § Creates new products and services § Eases limitations of geographic markets § Alters economies of scale § Changes entry barriers Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 10

Political-Legal Forces -Key opportunities and Key Threats § § § Antitrust legislation Tax rates Patent Laws Quota Lobbying efforts by International Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 11

Political-Legal Forces -Key Political-Legal Variables § § § § Government regulation and deregulation) Tax law changes Special tariffs Changes in patent laws Environment protection laws Equal employment laws Level of government subsidies Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 12

Social-Cultural-Demographic Forces -Key Variables § § § § Life expectancy rates Per capita income Average disposable income Attitude toward business Buying habits Ethical concerns Attitude toward saving Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 13

Social-Cultural-Demographic Forces Monitor Key Variables § § § § Racial equality Average level of education Government regulation Attitude toward customer services Attitude toward product quality Social responsibility Waste management Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 14

Competitive Forces: -Competition in virtually all industries can be described as intense. -Identifying rival firms § § § § Strength Weakness Capabilities Opportunities Threats Objectives Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 15

Competitive Forces: -Characteristics of most competitive firms § Market share matters § Understand what business you are in § Acquisition is essential to growth § People make a difference § No substitute for quality § More Innovation Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 16

3. 2 Competitive Analysis: Porter’s Five Forces Model Potential development of substitute products Bargaining power of suppliers Rivalry among competing firms Bargaining power of consumers Potential entry of new competitors Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 17

Five force model of competition concept o provide you : n n Understand how profitable an industry is to be in which can be used to decide whether to enter or exit the market. By firms operating in that industry to understand the forces impacting upon industry profitability and change how they operate to become more profitable themselves. Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 18

Competitive Rivalry The force will be high and the industry less profitable when: o There a lot of competitors o There is little difference between the products o Competitors are strong i. e. big, have financial support, economies of scale o There are exit barriers e. g. high cost of leaving a market). Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 19

Competitors can be analyzed by asking the following questions? o a) What are their objectives? o b) What are their strategies? (e. g. cost leadership, differentiation, market penetration, product development etc. ) o c) What are their strengths and weaknesses? (SWOT Analysis/ Value Chain) o d) How will they react to our offensive moves (e. g. price cuts)? o e) What threats do they pose? Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 20

Threat of new entrants -The force will be high, and the industry less profitable when: o New companies can easily enter the market) o New companies are likely to or intend to enter the market) -It is harder to enter the market when there are significant barriers to entry. These can include: o High costs of entry e. g. production facilities, IT, Building, Factory) o Patents (Law) o Customer contracts in place) o Cost advantages of existing competitors are significant (e. g. due to scale of operation) o competitors (Strong brands amongst competitors) Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 21

Buyer Power -The force is high, and industry less profitable when: o Customers are large and provide a large proportion of company profits o Customers can switch between competitors easily o More choice Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 22

Supplier Power -Supplier power is high, and industry less profitable when: o The are few alternative suppliers. o Cost of changing suppliers is high. o Not much choice Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 23

Substitutes o o o Substitutes are products which fulfill the same needs as the needs met by the product in the industry being examined. A substitute of cinema might be theatre, DVD's, sport or other forms of entertainment. ) Where customers can have there needs met from many different types of products, it becomes easy for them to switch, if prices rise for instance. This makes profitability in the industry low. Switching Cost is also one of example of Substitutes. Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 24

Group Discussion o o o Break a class in to group (3 -5) Do an Industry analysis on Build Bright University (BM study center only). Presentation is Optional. Strategic Management: Chapter 3 Environmental Scanning and Industry Analysis Page 25

3. 3 Industry Analysis: The External Factor Evaluation (EFE) Matrix An External Factor Evaluation Matrix (EFE) allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, government, legal, technological, and competitive information, can be developed in Five steps: .

Step 1 : opportunities and threats that affect the firm. Be specific as possible, using percentages, ratios, and comparative numbers whenever possible. Step 2 : form 0. 0 (not important) to 1. 0 (very important). The weight indicates the relative importance of that factor to be successful. § The sum of all weight assigned to the factors must equal 1. 0

Step 3 : factors to indicate how effectively the firm’s current strategies respond to the factor, where 4 the response is superior, 3 is above average, 2 is average, and 1 is poor ly Step 4 : determine a weighted score. Step 5 : Sum the weight scores for each variable to determine the total weight score for the firm. § The highest total score is 4. 0, the lowest is 1. 0, the average is 2. 5.

An Example External Factor Evaluation Matrix for UST, Inc Key External Factors Opportunity Weight Rating Weighted score Global markets change 0. 15 1 0. 15 Increased family income 0. 05 3 0. 15 Population growth 0. 05 1 0. 05 Joint venture 0. 15 4 0. 60 Less competitors 0. 10 3 0. 30 Legislation against the tobacco 0. 10 2 0. 20 Production limits on tobacco 0. 05 3 0. 15 Smokeless market in US region. 0. 05 2 0. 10 Bad media exposure from Gov’ agency 0. 10 2 0. 20 Clinton Administration 0. 20 1 0. 20 TOTAL 1. 00 Threats 2. 10

Some issue for Review and Discussion 1. Identify a recent economic, social, political, or technological trend that significantly affects financial institutions. 2. Use Porter’s Five-Force Model to evaluate competitiveness within the Cambodia education industry. 3. Construct and EFE Matrix for an organization of your choice. 4. Discuss the opportunities and threats a firm faces in Siem Reap.