ENVIRONMENTAL

SCANNING AND
INDUSTRY ANALYSIS
 Discussion Questions

1. What is an environment?
2. What are the macro external Environmental
factors that might affect a company?
3. What micro/industry factors might affect a
company?
Environmental Scanning
 Before an organization can begin strategy
formulation, it must scan the external environment to
identify possible opportunities and threats and its
internal environment for strengths and weaknesses.
 Environmental scanning
 the monitoring, evaluation, and dissemination of
information relevant to the organizational development
of strategy
 Identifying External
Environmental Variables
 In undertaking environmental scanning, strategic managers
must first be aware of the many variables within a
corporation’s natural, societal, and task environments
 Natural environment
 includes physical resources, wildlife and climate that are an
inherent part of existence on Earth
 form an ecological system of interrelated life

 Changes in the natural environment usually affect a business

corporation first through its impact on the societal environment in
terms of resource availability and costs and then upon the task
environment in terms of the growth or decline of particular
industries.
Identifying External
Environmental Variables
 Societal environment
 mankind’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
 economic, technological, political-legal and sociocultural
 Identifying External
Environmental Variables
 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, unions, special interest groups/trade
associations
 A corporation’s task environment is typically the
industry within which the firm operates.
 Industry analysis (popularized by Michael Porter) refers
to an in-depth examination of key factors within a
corporation’s task environment.
Scanning the Societal Environment:
STEEP Analysis
 STEEP Analysis
 monitoring trends in the societal and natural
environments
 sociocultural, technological, economic, ecological and
political-legal forces
Some Important Variables in the
Societal Environment
Table 2-1 Some important variables in the societal environment
Examples of Current Sociocultural
Trends

 Increasing environmental awareness

 Growing health consciousness
 Declining mass market
 Changing household composition
 Increasing diversity of workforce
International Societal Environments
 Each country or group of countries in which a
company operates presents a unique societal
environment with a different set of economic,
technological, political–legal, and sociocultural
variables for the company to face.
 International societal environments vary so widely
that a corporation’s internal environment and
strategic management process must be very
flexible.
Some Important Variables in International
Societal Environments
Table 2-2 Some important variables in the international societal
environment
 Scanning External Environment
Figure 2-1
Scanning external
environment
 IDENTIFYING EXTERNAL STRATEGIC
FACTORS
 No firm can successfully monitor all external factors.
 Choices must be made regarding which factors are important and
which are not.
 One way to identify and analyze developments in the external
environment is to use the issues priority matrix as follows:
 1. Identify a number of likely trends emerging in the natural,
societal, and task environments.
 These are strategic environmental issues—those important trends that,
if they occur, determine what the industry or the world will look like in
the near future.
 2. Assess the probability of these trends actually occurring, from
low to medium to high.
 3. Attempt to ascertain the likely impact (from low to high) of
each of these trends on the corporation being examined.
 IDENTIFYING EXTERNAL STRATEGIC
FACTORS
 A corporation’s external strategic factors are the 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.
 Porter’s Forces Driving Industry
Competition
Figure 2-2 Forces
driving industry
competition
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
 The threat of entry depends on the presence of entry
barriers and the reaction that can be expected from
existing competitors.
 Entry barrier
 an obstruction that makes it difficult for a company to
enter an industry
Barriers to Entry

Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages due to size
Government policies
Rivalry among Existing Firms
 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.
Rivalry among Existing Firms

Number of Rate of Product or

competitors industry service
growth characteristics

Amount of Capacity Height of exit

fixed costs barriers

Diversity of
rivals
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.
The Bargaining Power of Buyers
 Bargaining power of buyers
 abilityof buyers to force prices down, bargain for
higher quality and play competitors against each other
 Large purchases, backward integration, alternative
suppliers, low cost to change suppliers, product
represents a high percentage of buyer’s cost, buyer
earns low profits, product is unimportant to buyer

Read: Walmart’s Bargaining Power over Suppliers @

Hill & Jones(2012) Essentials of Strategic Management,
page #67
The 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 Bargaining Power of Suppliers
 Supplier or supplier group is powerful if some of the
following factors apply:
 Industry is dominated by a few companies
 Unique product or service

 Substitutes are not readily available

 Ability to forward integrate

 A purchasing industry buys only a small portion of the

supplier group’s goods and services and is thus
unimportant to the supplier
Relative Power of Other Stakeholders

 A sixth force that should be added to Porter’s list to

include a variety of stakeholder groups from the task
environment.
 Government
 Local communities
 Creditors
 Trade associations
 Special interest groups
 Unions
 Shareholders
 Industry Evolution
 Over time, most industries evolve through a series of
stages from growth through maturity to eventual decline.
 The industry life cycle is useful for explaining and
predicting trends among the six forces that drive industry
competition.
 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
 Categorizing International Industries
 According to Porter, world industries vary on a continuum
from multidomestic to global.
 Multi-domestic industries
 specific to each country or group of countries
 This type of international industry is a collection of essentially
domestic industries.
 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
 Continuum of
International Industries

Figure 2-3
Continuum of
international
industries
Strategic Groups
 Strategic group
a set of business units or firms that pursue similar
strategies with similar resources
 Companies or business units belonging to a
particular strategic group within the same industry
tend to be strong rivals
 Thus, tend to be more similar to each other than to
competitors in other strategic groups within the same
industry.
 Strategic Types
 A strategic type is a category of firms based on a
common strategic orientation and a combination of
structure, culture, and processes consistent with that
strategy.
 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
 Hypercompetition
 Most industries today are facing an ever-increasing level of
environmental uncertainty.

 Market stability is threatened by short product life cycles,

short product design cycles, new technologies, frequent entry
by unexpected outsiders, repositioning by incumbents and
tactical redefinitions of market boundaries as diverse
industries merge.

 In hypercompetitive industries, competitive advantage comes

from an up-to-date knowledge of environmental trends and
competitive activity coupled with a willingness to risk a
current advantage for a possible new advantage.
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
 They are usually determined by the economic and
technological characteristics of the industry and by the
competitive weapons on which the firms in the industry
have built their strategies.
Industry Matrix
 Industry matrix
 summarizes the key success factors within a particular
industry

Table 2-3 Industry Matrix

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
Running Case:
✓ Walmart’s Bargaining Power over Suppliers

@ Hill &Jones(2011)Essentials of strategic management page# 67

Strategy in Action 3.1:
✓ Circumventing Entry Barriers into the Soft Drink
Industry 59
@ Hill &Jones(2011)Essentials of strategic management page# 59
Closing Case:
✓ The Pharmaceutical Industry
@ Hill &Jones(2011)Essentials of strategic management page# 79
INTERNAL SCANNING:
ORGANIZATIONAL
ANALYSIS
Internal Scanning

 Internal scanning, often referred to as

organizational analysis, is concerned with
identifying and developing an organization’s
resources and competencies.
A Resource-Based Approach
to Organizational Analysis
 Resources
 an organization’s assets and are thus the basic building
blocks of the organization
 tangible, intangible

 Capabilities
 refer to a corporation’s ability to exploit its resources
 consist of business processes and routines that manage
the interaction among resources to turn inputs into
outputs
A Resource-Based Approach
to Organizational Analysis…
 Core competency
a collection of competencies that cross divisional
boundaries, is wide-spread throughout the corporation
and is something the corporation does exceedingly well
 Distinctive competency
 corecompetencies that are superior to those of the
competition
 VRIO Framework of Analysis
 Barney, in his VRIO framework of analysis,
proposes four questions to evaluate a firm’s
competencies:
1. Value: Does it provide customer value and competitive
advantage?
2. Rareness: Do no other competitors possess it?
3. Imitability: Is it costly for others to imitate?
4. Organization: Is the firm organized to exploit the
resource?
 If the answer to each of these questions is yes for a particular
competency, it is considered to be a strength and thus a
distinctive competence.
 Using Resources to Gain Competitive
Advantage
 Proposing that a company’s sustained competitive advantage
is primarily determined by its resource endowments, Grant
proposes a five-step, resource-based approach to strategy
analysis.
1. Identify and classify resources in terms of strengths and
weaknesses
2. Combine the firm’s strengths into specific capabilities and core
competencies
3. Appraise profit potential—Are there any distinctive
competencies?
4. Select the strategy that best exploits the firm’s capabilities and
competencies relative to external opportunities
5. Identify resource gaps and invest in upgrading weaknesses
 Access to a Distinctive Competency

 A corporation can gain access to a distinctive

competency in four ways:
 Asset endowment
 Acquired from someone else

 Shared with another business

 Built and accumulated within the company

Access to a Distinctive Competency
 The desire to build or upgrade a core competency is
one reason entrepreneurial and other fast-growing
firms often tend to locate close to their competitors.
 Clusters
 geographic concentrations of interconnected companies and
industries
 Clusters provide access to :
 Employees
 Suppliers
 Specialized information
 Complementary products
Determining the Sustainability
of an Advantage
 Two characteristics determine the sustainability of a
firm’s distinctive competency(ies): durability and
imitability.
 Durability
 the rate at which a firm’s underlying resources, capabilities
or core competencies depreciate or become obsolete

 Imitability
 the rate at which a firm’s underlying resources, capabilities
or core competencies can be duplicated by others
 Determining the Sustainability
of an Advantage
 A core competency can be easily imitated to the extent
that it is transparent, transferable, and replicable.
 Transparency
 the speed at which other firms understand the relationship of
resources and capabilities supporting a successful strategy
 Transferability
 the ability of competitors to gather the resources and
capabilities necessary to support a competitive challenge
 Replicability
 the ability of competitors to use duplicated resources and
capabilities to imitate the other firm’s success
 Determining the Sustainability
of an Advantage
 It is relatively easy to learn and imitate another
company’s core competency or capability if it
comes from explicit knowledge.
 Explicit knowledge
 knowledge that can be easily articulated and
communicated

 Tacit knowledge
 knowledge that is not easily communicated because it is
deeply rooted in employee experience or in the
company’s culture
Business Models
 Business model
a company’s method for making money in the current
business environment
 includes the key structural and operational
characteristics of a firm—how it earns revenue and
makes a profit
Business Models
A business model is usually composed of five
elements:
 Who it serves

 What it provides

 How it makes money

 How it differentiates and sustains competitive

advantage
 How it provides its product/service
 Business Models
Some of the many possible business models are:
 Customer solutions model-IBM uses this model to make money not
by selling IBM products, but by selling its expertise to improve its
customers’ operations.
 Profit pyramid model-General Motors offers a full line of
automobiles in order to close out any niches where a competitor
might find a position.
 Multi-component system/installed model-: Gillette invented this
classic model to sell razors at break-even pricing in order to
make money on higher-margin razor blades.
 Advertising model-Similar to the multi-component
system/installed base model, this model offers its basic product
free in order to make money on advertising.
 Switchboard model-In this model a firm acts as an intermediary
to connect multiple sellers to multiple buyers.
 Business Models
 Efficiency model-In this model a company waits until a product
becomes standardized and then enters the market with a low-
priced, low-margin product that appeals to the mass market
 Blockbuster model-In some industries, such as pharmaceuticals and
motion picture studios, profitability is driven by a few key products.
 Profit multiplier model-The idea of this model is to develop a
concept that may or may not make money on its own but, through
synergy, can spin off many profitable products.
 Entrepreneurial model-In this model, a company offers specialized
products/services to market niches that are too small to be
worthwhile to large competitors but have the potential to grow
quickly.
 De Facto industry standard model-In this model, a company offers
products free or at a very low price in order to saturate the
market and become the industry standard.
Value-Chain Analysis
 Value chain
a linked set of value-creating activities that begin
with basic raw materials coming from suppliers,
moving on to a series of value-added activities
involved in producing and marketing a product or
service and ending with distributors getting the final
goods into the hands of the ultimate consumer
Industry Value Chain Analysis
Value chain segments include:
 Upstream

 Downstream

 Center of gravity
 thepart of the chain that is most important to the
company and the point where its core competencies lie
Corporate Value Chain Analysis

Primary activities Support activities

 Inbound logistics  Procurement

 Operations  Technology
 Outbound logistics development
 Human resource
management
 Firm infrastructure
 A Corporation’s Value Chain
A corporation’s
value chain
Corporate Value Chain Analysis

1. Examine each product line’s value chain in terms

of the various activities involved in producing the
product or service
2. Examine the linkages within each product line’s
value chain
3. Examine the potential synergies among the value
chains of different product lines or business units
Basic Organizational Structures

Simple Functional Divisional

Strategic
Business Conglomerate
Units
 Basic Organizational Structures
Basic
organizational
structures
Corporate Culture:
The Company Way
 Corporate culture
 the collection of beliefs, expectations and values
learned and shared by a corporation’s members and
transmitted from one generation of employees to
another.
Functions of Corporate Culture
1. Conveys a sense of identity for employees
2. Generates employee commitment
3. Adds to the stability of the organization as a
social system
4. Serves as a frame of reference for employees to
understand organizational activities and as a
guide for behavior
Corporate Culture:
The Company Way
 Cultural intensity
 the degree to which members of a unit accept the
norms, values and other cultural content associated
with the unit
 shows the culture’s depth

 Cultural integration
 the extent to which units throughout the organization
share a common culture
 culture’s breadth
 Strategic Marketing Issues
 Market position
 refersto the selection of specific areas for marketing
concentration and can be expressed in terms of market,
product and geographic locations
 Market position deals with the question, “Who are
our customers?”
 Marketing mix
 theparticular combination of key variables under a
corporation’s control that can be used to affect demand
and to gain competitive advantage
 In class exercise
 Small- Group Exercise: Analyzing Competitive Advantage
 Break into a group of 3–5 students.

 Drawing on the concepts introduced in this chapter, analyze the

competitive position of your school in the market for business education.
Then answer the following questions:
1. Does your business school have a competitive advantage?
2. If so, on what is this advantage based, and is this advantage sustainable?
3. If your school does not have a competitive advantage in the market for
business education, identify the inhibiting factors that are holding it back.
4. How might the Internet change the way in which business education is
delivered?
5. Does the Internet pose a threat to the competitive position of your school in
the market for business education, or is it an opportunity for your school to
enhance its competitive advantage?
Strategy in Action 4.1:
✓ Learning Effects in Cardiac Surgery
@ Hill &Jones(2011)Essentials of strategic management page# 95

Running Case:
✓ Human Resource Strategy and Productivity at Walmart

@ Hill &Jones(2011)Essentials of strategic management page# 99

Closing Case:
✓ Starbucks
@ Hill &Jones(2011)Essentials of strategic management page# 113