UNIT II

ENVIRONMENTAL SCANNING

Porters Model of Five Strategic Forces Affecting Industry Competition.

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Industry Analysis
3

Industry

A group of companies offering products or services that are close substitutes of each other. Close substitutes are those products or services that satisfies the same customer needs. Strategic forces to be examined in conducting an industry analysis: Threat of new entrants Rivalry among competitors Buyers bargaining power Suppliers bargaining power Threat of Substitutes

Threat of New Entrants

4

Profitable industry----new entrants---large

investments and secure large market share Share growing market with large number of competitive markets. Part with some of their market share. New entrants cause comparatively less sales volume and revenue and lower the return for all firms in the industry.

Threat of New Entrants

5

New entry depends on two factors

Entry barriers Expected retaliation from existing firms Entry barrierssignificant demotivation High cost Higher the entry barrier less likely new entrants

Threat of New Entrants

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Factors influencing entry barriers Economies of scale in production and sale leading to lower cost for existing firms Capital requirement high Switching cost from existing product to new one may discourage customers from new commitments owing to the cost incurred in buying new ancillary equipment, retraining employees or creating new network relationship.

Threat of New Entrants

7

Product differentiation by existing firms based on the

perceived distinctiveness by the customers based on effective advertising, reputation as a service provider, brand loyalty of customers towards existing firms or some such other factor. Access to distribution channel can be monopolized by the existing firms on the basis of their long term relationship with distributors. Cost advantages independent of scale---proprietary products technology, exclusive access to raw materials, favorable location and benefit of govt subsidies

Threat of New Entrants

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Govt policies through licensing or other means Expected Retaliation to the new entrants from

existing firms may be a potential threat to entry--an existing firm with large stake in the industry may lower its price to create difficult situation to new entrants or may alter the basis of competition to discourage new entry. Promising industry-new entry finding market niche not served by existing firms.

Rivalry Among Competitors

9

Competition-game in which one player loses at the

expense of other. Moves and counter moves to protect from danger. Desire to be a market leader or to corner a large market share leads to rivalry among competitors. Extend of rivalry affects competition. Weak rivalrylesser competition High rivalry high level of competition

Rivalry Among Competitors-Dimensions

10

Competitive structureno of competitors, their size and

diversitytwo types Fragmented structure---large no of Small and Medium sized companies, none dominating---low entry barriers and less or no differentiation, leading to product becoming commodities, intense competition ,faces booms and busts leading to frequent changing of structure. Consolidated Structure few large companies(oligopolistic market) or one large firm (monopoly),intensity of competition varies from benign tolerance to fierce rivalry

Rivalry Among Competitors

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Diversity Different firms have different ideas on the

basis of which to compete, different set of goals to achieve or different organizational cultures. Greater diversityhigher potential challenges to existing firms or new industries. Demand conditions high demand or a growing demand tend to moderate competition as each firm has enough for it and need not grab it from others. Stagnant demand may lead to competitive strategies designed to snatch market share from others

Rivalry Among Competitors

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Exit barriers---

Economic
Strategic Emotional

Bargaining power of Buyers

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Bargaining Power of buyers high when

--Few Buyers --Few buyers place large orders individually --Presence of alternate suppliers --Switching Cost low --Purchased product constitutes high percent of buyers cost -- Buyers ability to integrate backwards

Bargaining Power of Suppliers

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Bargaining power of suppliers high when

---Few suppliers but many buyers ---products or services unique and uncommon --- Substitute not freely available --- Low switching costs from one buyer to other --- Supplier is critically dependent --- Purchase by buyer in small quantity --- Suppliers

Threat of Substitute Products

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Different but satisfies the same need

Availability of substitutes constitutes a negative

competitive force No close substitute more attractive. No substitutehigh price Price restricted by price of substitutes

Strategic Implications of Strategic Forces

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Unattractive industry.
Five forces are favorable for the firm. Attractive industry.

Five forces are unfavorable for the firm.

Environmental Scanning
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Monitoring, evaluating and disseminating information from the environment to key people within the corporation. Scan via SWOT analysis: Look for opportunities/threats in the external environment Look for strengths/weaknesses in the internal environment

Environmental Scanning
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External Environmental Variables

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Societal Environment--- do not have influence on short term

decisions but influence long run decisions Political-legal, Economic, Socio cultural, Technological Task Environment-------directly affect the corporation Government, Suppliers, local communities, competitors, customers, creditors, employees labour unions, special interest groups, trade associates. Industry analysis-in-depth examination of key factors with in a corporations task environment

Variables
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Political -legal
Antitrust regulations Environmental Protection

Economic
GDP trends Interest rates

Laws Tax laws Special incentives Foreign trade regulations Attitude towards foreign regulations Laws on hiring and promotion Stability of Govt.

Money supply,
Inflation rates Unemployment levels Wage / price controls Devaluation/revaluation Energy availability and cost Disposable and

discretionary income

Variables
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Sociocultural

Technological
Total Govt spending in R & D Total industry spending in R & D Focus of technological efforts Patent protection New products New3Technology transfer from lab to market place Productivity improvement through automation Internet availability Telecommunication infrastructure

Lifestyle changes Career expectations Consumer activism Rate of family formation Growth rate of population Age distribution of population Regional shift in population Life expectancies Birth rates

Components of External Analysis:

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Scanning

Monitoring

Assessing

Forecasting

Scope of the External Analysis:

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General Environment

Industry Environment

Competitor Analysis

Strategic Groups

External Strategic Factors

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Key Environmental trends that are judged to have

both medium to high probability occurrence and a medium to high probability of impact on the corporation. Enables to decide which environmental trends are to be merely scanned (low priority) and which should me monitored as strategic factors( high priority) Strategic factors are categorized as opportunities and threats and included in strategy formulation.

Factors to be Considered for Environmental Scanning

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Events

Important and specific occurrences taking place in different environmental sectors General tendencies or the courses of action along which events takes place Current concerns that arise in response to events and trends

Trends

Issues

Expectations

Demands made by interested groups in the light of their concern for issues

Approaches to Environmental Scanning

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Systematic Approach

Systematic collection of Informationrelating to markets and customers, changes in legislation and regulation having impact on the activities of organization govt policy pertaining to organizations business and industry etc to be collected to monitor changes Special surveys and studies to deal with specific environmental issues from time to time. Changes and unforeseen developments may also be investigated with regard to their impact on the organization Information available in a processed form, from different sources both inside and outside the organization.

Ad hoc Approach

Processed Form Approach

Approaches to Environmental Scanning

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Use different combination of approaches to monitor

relevant environments. Ranges from an informal assessment( as a reactive measure to a crisis and ad hoc studies) of the environmental factors to highly systematic and formal ( as a proactive measure in anticipation of changes in environmental factors and structured data collection and processing system on a continuous basis) .

Sources of Information for Environmental Scanning

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Documentary or secondary sources

Publications-news papers magazines,,journals,books, trade and industry association news letters,govt publications, annual report of competitor companies, commercial data bases etc. Radio, television, Internet

Mass Media

Internal sources

Company files and documents, internal reports and memoranda, MIS, data bases, company employee, sales staff etc
Customers, marketing intermediaries, suppliers, trade associations, govt agencies etc Employees, MR agencies, consultants and educational institutions Ex employees of competitors, industrial espionage agencies or by planting moles in rival companies

External Agencies Formal Studies Spying and Surveillance

Methods and Techniques Used for Environmental Scanning

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Formal and Systematic methods and techniques

Intuitive Methods

select the ones which suits their needs in terms of quantity,quality,availability,timelines,relevance and cost of environmental information. Techniques based on statistical methods Using software in computer assisted environmental scanning and forecasting By informed judgment and intuition

IT Assisted Techniques
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Artificial Intelligence

Neural Networks
Data Mining Knowledge based Systems

Process Based Techniques

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Quick Environmental Scanning Technique(QUEST)

Scenario writing by a team of strategists

Factors Affecting Environmental Appraisal

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Strategist Related factors

Characteristics s such as age, education, experience, motivation level, cognitive styles, ability to withstand time pressure and strain of responsibility Group characteristics of strategists such as interpersonal relations, team spirit and power equations operating between. Nature of business, age, space ,complexity, nature of its markets or product or services. Information climate assessed through information infrastructure processes, technology, people used in information acquisition and handling. Events, trends, issues and expectations of different interest groups, Influence of each factor on business Identifying high priority environmental issues.

Organizational Related Factors

Environment Related Factors

Identification of External Strategic Factors

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Issues Priority Matrix

Probable Impact on Corporation High Medium Low

High

Probability of Occurrence

High Priority

High Priority

Medium Priority Low Priority

Medium

High Priority

Medium Priority Low Priority

Low

Medium Priority

Low Priority

SWOT Analysis
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Strengths, Weaknesses, Opportunities, Threats

Process that allows companies to evaluate overall

health

Internal (SW) and external (OT)

Most important result of a SWOT analysis is the

ability to draw conclusions about the attractiveness of the companys situation and the need for strategic action

SWOT Analysis of Strengths, Weaknesses, Opportunities, and Threats.

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SWOT

Strengths Any

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resources or abilities the organization can use to take advantage of opportunities or fight off threats

Opportunities

Situations in the external environment that allow the organization to fulfill its vision, mission, and goals Anything, internal or external, that might hurt the organization s ability to fulfill its vision, mission, and goals.

Weaknesses
Deficiencies in organizations resource s or processes that make it vulnerable

Threats

SWOT
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Strength

Weakness

Manufacturing efficiency? Skilled workforce? Good market share? Strong financing? Superior reputation?

Outdated facilities? Inadequate research and development? Obsolete technologies? Weak management? Past planning failures?

SWOT
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Opportunities

Threats

What are our

Opportunities?

Possible new markets? Strong economy? Weak market rivals? Emerging technologies? Growth of existing market?

What are our Threats? New competitors? Shortage of resources? Changing market tastes? New regulations? Substitute products

Structuring the Environmental Appraisal

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ETOP

Environment Threat and Opportunity Profile

Environmental factors Economic Market International

Nature of Impact

Impact of Each Sector

INTERNAL ENVIRONMENT
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Nature of IE depends on

Resources Behaviour S&W Synergistic effects Competencies

Development of strategic advantage-FRAME Work

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Strategic Advantage Organizational capability Competencies Synergistic Efforts Strength & Weakness Organizational Resources Organizational Behaviour

Organizational Resources
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Resource Based Theory Bundle of Resources-----Tangible and Intangible

Assets, Capabilities, Organizational Processes, Information, Knowledge Classification Physical, Human & Organizational

Organizational Resources
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Physical

Technology, Plant & equipment, Geographic location, access to raw material etc Training, experience,judgement,intellig ence, relationships etc present in organization Formal systems & structure, Informal relations among groups

Human

Organizational

Organizational Resources
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Resources lead to Strategic advantage if it posses the

following characteristics. Valuable Rare Costly to imitate Nonsubstitutable Resource based theory is concerned with efficiency of utilization of resources.

Resources & Capabilities

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Analysis of organizational resources and capabilities: Important goal of assessing core competencies. Potential core competencies:
Special

knowledge or expertise. Superior technology. Efficient manufacturing approaches. Unique product distribution systems.

Organizational Behaviuor
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The manifestation of the various forces and

influences operating in the internal environment of an organization that create the ability for , or place constraints on the use of those resources. OB is unique- leads to the development of special identity and character of an organization. Forces & influences affecting the organizational behaviour ---- Quality of leadership, management philosophy, shared values, culture, quality of work environment ,organizational climate, organizational politics, use of power etc

Strength & Weakness

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Strength An inherent capability which an

organization can use to gain strategic advantage Weakness-inherent limitation or constraint which create a strategic disadvantage for an organization.

Synergistic Effects
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Two strong points double the strength

Two weak points double the weakness

Synergistic Effort- The whole is larger or lesser than sum of the parts.

Competencies
49

Special qualities possessed by an organization that

makes them withstand the pressures of competition in the market place. When a special quality is possessed by an organization exclusively or relatively in large measure, it is called distinctive competence. Core competence is an idea around which strategies could be formulated an organization

4.

Select a strategy that best exploits the firms capabilities relative to external opportunities.

Core Competencies and Market Opportunities

Strategy

3.

Appraise the profit generating potential of resources/capabilities in terms of creating, sustaining, and exploiting competitive advantage.
Identify the firms capabilities (What can the firm do?)

Potential for sustainable competitive advantage

5.

Identify resource gaps that need to be filled. Invest in replenishing and augmenting the firms resource base.

2.

Capabilities

1.

Identify the firms resources and locate areas of strength and weakness relative to competitors.

Resources
50

Organizational capability
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Inherent capacity or potential of an organization to

use its strength and overcome its weakness in order to explore opportunities and face the threats in its external environment. Strategic advantage is the outcome of organizational capabilities. Competitive advantage is a special case of strategic advantage where there is one or more identified rivals against whom the rewards or penalties could be measured

Analyzing the Firms Capabilities

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Functional Analysis

Value Chain Analysis

Benchmarking

Organizational Capability Factors

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Financial capability

Marketing capability
Operational capability Personnel capability

Analyzing Capabilities by Functional Areas

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Functional Area

Capability

Corporate Management

Effective financial control systems Expertise in strategic control of diversified corporation Effectiveness in motivating and coordinating divisional and business-unit management Management of acquisitions Values-driven, in-touch corporate leadership
Comprehensive and effective MIS network, with strong central coordination Capability in basic research Ability to develop innovative new products Speed of new product development

Information Management

Research and Development

Factors Affecting Organizational Appraisal

55

Factors relate to Strategists

Organization
Internal environment

Approaches to Organizational Appraisal

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Systematic---A proactive approach when strategist

opt for formal strategic planning systems Ad hoc ------- Reactive measure-in response to crisis

Sources of Information for Organizational Appraisal

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Internalemployees opinion, company files,

documents, financial statements, MIS, other internal sources

External-----company reports, magazines, journals,

consultants

Organizational Appraisal--- Methods and Techniques

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Internal Analysis

VIRO Framework, Value Chain Analysis, Quantitative Analysis(Financial & Non Financial),Qualitative Analysis

Comparative Analysis

Historical Analysis, Industry Norms, Bench Marking

Comprehensive analysis

Key Factors Rating Business Intelligence Systems Balanced Score card

VIRO FRAMEWORK
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VValuable------Egs. High quality after sales service,

capability to generate amicable relationship with Govt I-Inimitable- -- EGS. A favourable corporate image, Ability to acquire & integrate new business R-Rare---capability derived out of an exclusive location or the presence of a highly motivated work force O-Organized for Usageorganizational capabilities used through appropriate organizational structure, business processes, control system and reward systemsEgs. Competent R & D Personnel, Research laboratories or availability of potential business partners

Analyzing the Internal Environment

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Each firm possesses core competence (internal

resources) that are unique to it. A firm should identify what resources, capabilities, and knowledge it has that may be used to exploit market opportunities and avoid potential threats. Resource-based view.

A Simple Value Chain

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Technology
Source Sophistication

Product Design
Function

Manufacturing
Integration

Marketing
Prices Advertising Promotion Sales Force Package

Distribution
Channels Integration Inventory Warehousing Transport

Service
Warranty Dealer Support Availability Speed Prices

Physical Raw Materials Characteristics Patents Capacity Aesthetics Product Process Location Quality Product Choices Procurement Assembly

Parts Production Brand

Quantitative Analysis
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Financial Analysis Ratio analysis EVA Analysis( Economic Value Added)wealth an organization creates for its owners and is expressed as the difference between after tax operating profits and the total cost of capital. Activity Based Cost Accounting----identifies major activities in the value chain and keep a tab on costs with in each activity.

Quantitative Analysis
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Non Financial Quantitative Analysis Egs.

Employee Turnover, absenteeism, market ranking, rate of advertising recall, total cycle time of production, inventory used per period, service call rate, number of patents registered.

Qualitative Analysis
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Based on informed opinion

Judgement
Intuition or hunch

Egs. Tenor of corporate culture Ability to absorb and assimilate knowledge Level of morale among employees Organizational climate

Historical Analysis
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Historical Analysis over a period of timePast

performance of companies
limited to finding reasons for bad performance.---

but required to uncover the reasons for bad performance for corrective measures Measurement on small base could show dramatic performance that could turn to be illusory Shows only ones own performancebut should be concerned with comparison to others

Industry Norms
66

Comparison to the industry to which the firm

belongs on wide parameters

Strategic Groups
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A set of business firms or that pursue similar strategies

with similar resources Categorize one industry into a set of strategic groups for understanding of the competitive environment Units belonging to a particular strategic group with in the same industry tend to be strong rivals than competitors in other strategic group with in the same industry Mapping can be made on a two dimensional graph using two strategic variables as the vertical and horizontal axis. For eg product line breadth and price .

Strategic Types
68

A category of firms based on a common strategic

orientation and combination of structure, and culture, and process consistent with that strategy. Four basic types Defenders Prospectors Analyzers Reactors Dividing the competition into those four categories enables not only to monitor the effectiveness of certain strategic orientation but also develop scenarios of future industrial development.

Strategic Types
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Defenders

Limited product line. Focus on improving the efficiency of their existing operations cost consideration makes them unlikely to innovate. Broad product line. Focus on product innovation and market opportunities This sales orientation makes them inefficient. Emphasize creativity over efficiency. Operates in at least two different Product-market areas, one stable and one variable. In Stable areas-efficiency is emphasized, In variable areas-innovation is emphasized. Lack a consistent strategy-structure-culture relationship . Ineffective responses to environmental pressure tend to be piecemeal strategic changes.

Prospectors

Analyzers

Reactors

Benchmarking
70

Reference point for taking measures against

Finding best practices within and outside the

industry to which an organization belongs. Find best performance in an area so that one could match own performance with them and even surpass them.

Benchmarking involves four stages

71

Identifying activities or functions that are weak and need improvement. 2. Identifying firms that are known to be at the leading edge of these activities or functions. 3. Studying the leading-edge firms by visiting them, talking to managers and employees, and reading trade publications. 4. Using the information gathered to redefine goals, modify processes, and acquire new resources to improve the firms functions.
1.

Key Factor rating

72

Systems developed for analysis of S & W are based

on ratings depending on key factors.

Financial capability factors

Marketing capability factors

Operation capability factors Personnel capability factors

Information management capability factors

General management capability factors

Business Intelligence Systems

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BI is a concept for discovering knowledge various

internal external data repositories available to an organization Defined as broad category of applications and technologies for gathering, storing, analyzing and providing access data to help enterprise users make better decisions DSS, Query & reporting, (OLAP) On Line Analytical Processing, statistical analysis forecasting & data mining

Balance Score Card

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Set of measurers that gives top managers that gives top

managers a fast but comprehensive view of business It identifies four key measures as follows. Customer perspective---How do customers see us Internal business perspective---What must we excel at ? Innovation and learning perspectiveCan we continue to improve and create value Financial perspectiveHow do we look at shareholders

Industry and Environment:

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Analysis of industry and environment: Assessment of macro environment:

Technology. Government. Social structures and population demographics. Global economy. Natural environment.

Analysis of industry environment:

Resource suppliers. Competitors. Customers.

Strategic Intent and Mission

76

Based on analysis of the external and internal

environment. Strategic intent is internally focused, defining how the firm intends to use its resources, capabilities, and core competencies to win competitive battles. Strategic mission is externally focused, defining what the firm plans to produce and market, utilizing its internal core competence.

Key Success Factors

77

Key success factors deal with an entire industry

where as strategic factors deal with a particular industry. Key success factors are those variables that can affect significantly the overall competitive positions of all companies with in any particular industry. Industry matrix summarizes the key success factors with in a particular industry. Weight from 0.00 to 1 Rating from 5.00 to 1.oo

Industry Matrix
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Key Success factors

Weight

Company A rating

Company A weighted score

Company B rating

Company B weighted score

Total

1.00