Lecture 3 Environmental Scanning and Industry Analysis Copyright

Lecture 3 Environmental Scanning and Industry Analysis Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 1

Learning Objectives 1. Recognize aspects of an organization’s environment that can influence its long-term decisions 2. Identify the aspects of an organization’s environment that are most strategically important 3. Conduct an industry analysis to understand the competitive forces that influence the intensity of rivalry within an industry. 4. Construct strategic group maps to assess the competitive positions of firms in an industry 5. Identify key success factors and develop an industry matrix Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 4 -2

Environments Environmental uncertainty: The degree of complexity plus the degree of change existing in an organization’s external environment. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 3

Environments Environmental scanning: The monitoring, evaluating, and disseminating of information from the external and internal environments to key people within the corporation to avoid strategic surprise and ensure the longterm health of the firm. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 4

Identifying External Environmental Variables STEEP Analysis- monitoring trends in the societal and natural environments – Sociocultural- – – Technological. Economic. Ecological /environmental. Political-legal forces Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 4 -5

Identifying External Environmental Variables • Natural environment – includes physical resources, wildlife, and climate that are an inherent part of existence on Earth – form an ecological/ natural system of interrelated life 4 -6

Countries are varied in their societal forces. Countries have a different views about a role of business in society, Examples: - Korea and China believe the role to contribute to national development. - Hong Kong, Taiwan and Thailand, the prime role to make profit. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 4 -7

External Environmental Variables: Societalcommunity environment: environment General forces that do not directly touch on the short-run activities but often influence its long-run decisions. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 8

External Environmental Variables: Task environment: environment Those elements or groups that directly affect the corporation and, in turn, are affected by it. The task environment is the industry within which that firm operates. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 9

External Environmental Variables: Industry analysis: analysis An in-depth examination of key factors within a corporation’s task environment. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 10

External Environment Societal environment forces: forces • Economic forces – Regulate the exchange of materials, money, energy, and information • Technological forces – Generate problem-solving inventions Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 11

External Environment Societal environment forces: forces • Political-legal forces – Allocate power, provide laws and regulations • Socio-cultural forces – Regulate values, morestraditions, and customs Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 12

Societal Environment Important Variables Economic Technological Political-Legal Sociocultural GDP trends Total government spending for R&D Antitrust regulations Lifestyle changes Environmental protection laws Career expectations Interest rates Money supply Inflation rates Total industry spending for R&D Unemployment levels Focus of technological efforts Wage/price controls Patent protection Devaluation/revaluation New products Energy availability and cost New developments in technology transfer from Disposable and lab to marketplace discretionary income Productivity improvements through automation Tax laws Special incentives Foreign trade regulations Attitudes toward foreign companies Laws on hiring and promotion Stability of government Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- Consumer activism Rate of family formation Growth rate of population Age distribution of population Regional shifts in population Life expectancies Birth rates 13

Global Business Environment – The international forces that affect business: 1. International trade agreements (EU, NAFTA, WTO) 2. International economic conditions: inflation 3. Political unrest: Arab spring revolutions. 4. International market opportunities: expand into China. 5. Suppliers outsourcing: contract with consultant companies. 6. Cultural differences 7. Competitors. Copyright and Currency values 2009 Pearson Inc; ©© 2019 Pearson. Education, Developed by Prof. Majed El-Farra 14

Trends in Economic Forces: • • • Increase Interest rates affected negatively on Home sales Increase Oil prices affected negatively on economy. Emerging markets • BRIC countries: Brazil, Russia, India, China: rapid growth and development. • Eastern Europe: major manufacturing supplier to Europe. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 4 -15

The Rising Power of Emerging Markets The Role of BR IC: Brazil, Russia, India, and China. The status of these four nations has risen In International trade for different reasons: ü Brazil is strong in commodities and agriculture, ü Russia Is a powerful energy supplier, ü China is a major hub of manufacturing activity. ü India has become a leading service provider at various levels ranging from basic customer service call centers to engineering solutions providers. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 16

Trends in Technological Forces: – Portable information devices and electronic networking – Alternative energy sources – Virtual personal assistants – Smart, mobile robots Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 4 -17

Trends in Political-Legal Forces: – Enforcement of U. S. antitrust laws – Taxation and labor laws – Government bureaucracy, e. g, speed the processes. – World Trade Organization Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 4 -18

External Environment Socio-cultural Trends • Increasing environmental awareness: green marketing, Recycling. • Growth of the seniors market, mature segments, for example, are good markets for the health care and tourism industries. In 0214, for the desire for companionship, 73 million households in the United States spent US$58 billion on their pets. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 19

External Environment Socio-cultural Trends • Decline of the mass market to mass customization. • Changing pace and location of life. Instant communication via e-mail, cell phones, and • Overnight mail enhances efficiency, but it also puts more pressure on people Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 20

External Environment Socio-cultural Trends • Changing household composition. E. g. , in USA, married-couple households slipped from nearly 80% in the 1950 s to 48% of all households by 2010. • By 2007, more than 50% the adult female population were single. • As of 2012, 41% of all births in the United States were to unmarried women • Increasing diversity of workforce and market. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 21

Table 4 -2: Demographic trends are part of the sociocultural aspect of the societal environment.

External Environment Socio-cultural Trends • Increasing diversity of workforce and market. For example, 24% of the Swiss population was born elsewhere. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 23

Workforce Diversity • Heterogeneous workforce in terms of gender, race, ethnicity, and age. • workforce is getting older • In US Asians and Hispanics are an increasingly large percentage of workforce – “melting pot” approach versus celebration of differences © Prentice Hall, 2002 Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 2 -24 24

External Environment External Strategic Factors influencing the choice of the strategic factors: – – Personal values of managers Functional experience of managers Success of current strategies Strategic myopia/ shortsightedness • Willingness to reject unfamiliar as well as negative information Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 25

External Environment Issues Priority Matrix • Identify likely trends: – Societal and task environments • Strategic environmental issues • Assess probability of trends occurring – Low to High • Ascertainfind likely impact of trends on the corporation – Low to High Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 26

Issues Priority Matrix High Medium Low High Priority Medium High Priority Medium Priority Low Probability of Occurrence Probable Impact on Corporation Medium Priority Low Priority Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 27

External Environment External Strategic Factors Defined: Key environmental trends that are judged to have both a medium to high probability of occurrence and a medium to high probability of impact on the corporation. • Those environmental trends judged to be a corporation’s strategic factors are then categorized as opportunities and threats and are included in strategy formulation. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 28

Industry Analysis Industry A group of firms producing a similar product or service, such as soft drinks, health services or financial services. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 29

Industry Analysis Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 30

Industry Analysis Porter’s approach: Assess the six forces - • • • Threat of new entrants Rivalry among existing firms Threat of substitute products Bargaining power of buyers Bargaining power of suppliers Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 31

Industry Analysis Threat of New Entrants -Barriers to entry: • • Previous experience with retaliation to new entry. Economies of Scale Product Differentiation Capital Requirements Switching Costs to another suppler Access to Distribution Channels Cost Disadvantages Independent of Size: established firms may have, proprietary product technology, favorable access to raw material, learning curve. • Government Policy Copyright © 2019 Pearson Education, 32 Inc; Developed by Prof. Majed El-

The threat of new entry (competitors). New entries expand industry’s productive capacity. “Unless the market grows, a new entries intensifies the fight for market share”. The result is prices go down which, lowering industry profitability. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 33

Industry Analysis Rivalry Among Existing Firms -Intense rivalry related to: • • Number of competitors Rate of Industry Growth Produce or Service Characteristics Amount of Fixed Costs Capacity Height of Exit Barriers Diversity of Rivals Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 34

Industry Analysis Threat of Substitute Products/Services Substitute Products: Those products that appear to be different but can satisfy the same need as another product. To the extent that switching costs are low, substitutes can have a strong effect on an industry. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 35

Industry Analysis Bargaining Power of Buyers -Buyer is powerful when: • • • Buyer purchases large proportion of seller’s products Buyer has the potential to integrate backward Alternative suppliers are plentiful Changing suppliers costs very little Purchased product represents a high percentage of a buyer’s costs • Buyer earns low profits • Purchased product is unimportant to the final quality or price of a buyer’s products Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 36

Industry Analysis Bargaining Power of Suppliers -Supplier is powerful when: • Supplier industry is dominated by a few companies but sells to many • Its product is unique and/or has high switching costs • Substitutes are not readily available • Suppliers are able to integrate forward and compete directly with present customers • Purchasing industry buys only a small portion of the supplier’s goods. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 37

Industry Analysis Industry Evolution most industries evolve through a series of stages from growth to decline: industry lifecycle. Fragmented Industry – No firm has large market share and each firm serves only a small piece of the total market in competition with others. Consolidated Industry – Dominated by a few large firms, each of which struggles to differentiate its products from the competition. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 38

Continuumrange of International Industries Global Multidomestic Industry in which companies tailor their products to the specific needs of consumers in a particular country. • Retailing • Insurance • Banking Industry in which companies manufacture and sell the same products, with only minor adjustments made for individual countries around the world. Automobiles • Tires • Television sets Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 39

Industry Analysis Global Industries Classifying Industry primarily multidomestic or primarily global based on: Pressure for coordination – Within the multinationals in that industry – Pressure for local responsiveness – On the part of Individual country market. If the pressure for coordination with multinationals is strong and the pressure for local responsiveness is weak within a particular industry, the industry is global. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 40

Industry Analysis Strategic Groups Defined: A set of business units or firms that pursue similar strategies with similar resources. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 41

Strategic group analysis • “Aims to identify organizations with similar strategic characteristics, following similar strategies or competing on similar bases”. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 42

Some characteristics for identifying strategic groups To measure how org. are differ based on the following characteristics: 1 - The extent of product diversity. 2 - Extent of geographical coverage. 3 - Number of market segment served. 4 - Distribution channels used. 5 - Number of branding. 6 - Product quality. 7 - Technological leadership. 8 - R&D capability. 9 - Cost position. 10 - Utilization of capacity. 11 - Separate company, or relationship with parent. 12 - Relationship to influence groups, e. g. , government. 13 - Size of organization. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 43

Why strategic group analysis is important? • Identify who most direct competitor. • On what basis the competitors are competing on. • It raises the question of how possible to move from one group to another. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 44

Mapping Strategic Groups in the U. S. Restaurant Chain Industry Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 4 -45

Industry Analysis Strategic Types it is used to analyze the level of competitive intensity within a particular industry. Defined: Category of firms based on a common strategic orientation and a combination of structure, culture, and processes consistent with that strategy. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 46

Industry Analysis Strategic Types – Categorized by one of four general strategic orientations: • Defenders – Companies with a limited product line; focus on improving efficiency of current operations. This cost orientation makes them unlikely to innovate in new areas. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 47

Industry Analysis Strategic Types (continued)– • Prospectors: • Companies with fairly broad product lines; focus on product innovation and market opportunities. They tend to emphasize creativity over efficiency. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 48

Industry Analysis Strategic Types (continued)– • Analyzers: • Corporations that operate in at least two different product-market areas – one stable and one variable. Used by Multidivisional firms. In the stable areas, efficiency is emphasized. In the variable areas, innovation is emphasized. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 49

Industry Analysis Strategic Types (concluded)– • Reactors: – Corporations that lack a consistent strategy-structure-culture relationship. Most major U. S. airlines have recently tended to be reactors Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 50

Hypercompetition Market stability is threatened by: • short product life cycles, • short product design cycles, • new technologies, • frequent entry by unexpected outsiders, • repositioning by incumbents/CEOs • tactical redefinitions of market boundaries as diverse industries merge. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 4 -51

Hypercompetition • Closer relationships with suppliers are being forged to reduce costs, increase quality, and gain access to new technology Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 4 -52

Industry Matrix Key Success Factors Weight 1 Total 2 Company A Rating Company A Weighted Score Company B Rating Company B Weighted Score 3 4 5 6 1. 00 Source: T. L. Wheelen and J. D. Hunger, “Industry Matrix. ” Copyright © 2001 by Wheelen and Hunger Associates. Reprinted by permission. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 53

Industry Analysis Forecasting Techniques: Extrapolation: the extension of present trends into the future. It rest on the assumption that the world change slowly. Time-series methods are used. • Brainstorming • Expert opinion • Statistical modeling • Scenario writing: upon a series of historical data plus informed hunches from key people Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 54

External Factor Analysis Summary (EFAS) Impact on company External Factors Opportunities 1 2 company Response rate Response Rate Comments 3 4 5 Threats Total Weighted Score 1. 00 Notes: 1. List opportunities and threats (5– 10) in column 1. 2. Weight each factor from 1. 0 (Most Important) to 0. 0 (Not Important) in Column 2 based on that factor’s probable impact on the company’s strategic position. The total weights must sum to 1. 00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the company’s response to that factor. 4. Multiply each factor’s weight times its rating to obtain each factor’s weighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how well the company is responding to the strategic factors in its external environment. Source: T. L. Wheelen and J. D. Hunger, “External Strategic Factors Analysis Summary (EFAS). ” Copyright © 1991 by Wheelen and Hunger Associates. Reprinted by permission. Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 55

External Factor Analysis Summary (EFAS) Maytag (produce laundry) (Example Weight External Factors Opportunities • Economic integration of European Community • Demographics favor quality appliances • Economic development of Asia • Opening of Eastern Europe • Trend to “Super Stores” Threats • Increasing government regulations • Strong U. S. competition • Whirlpool and Electrolux strong globally • New product advances • Japanese appliance companies Total Scores 1 Weighted Score Rating 2 3 Comments 4 5 . 20 4 . 80 . 10 5 . 50 . 05. 10 1 2 2 . 05. 10. 20 Low Maytag presence Will take time Maytag weak in this channel . 10. 15 4 4 3 . 40. 45 Well positioned Hoover weak globally . 05. 10 1 2 . 05. 20 Questionable Only Asian presence is Australia 1. 00 Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 3. 15 Acquisition of Hoover Maytag quality 56

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 © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 4 -57

Discussion • Explain in details the relationship between societal environment and task environment? Discuss how a development in a corporation's societal environment can affect the corporation through its task environment? How we indentify the key strategic factors? Be practical in your answer? Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 58

Discussion • How can a decision maker identify external strategic factors in a corporation's external international environment? Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 59

Discussion 1. Compare and contrast trend extrapolation with the writing of scenarios as forecasting techniques Copyright © 2019 Pearson Education, Inc; Developed by Prof. Majed El- 60