strategy management 1

MSK7223 STRATEGIC KNOWLEDGE MANAGEMENT I

Chapter 2: Environmental Scanning & Industry Analysis

Current predictions are that the environment for all organisations will become even more uncertain with every passing year.

Environmental uncertainty - degree of complexity plus degree of change existing in an organisation’s external environment.

As more markets become global, the number of factors a company must consider in any decision become huge and complex.

New technologies are being discovered every year, markets change and products must change with them.

Introduction

On one hand, environmental uncertainty is a threat to strategic managers because it hampers their ability to develop long-range plans and to make strategic decisions to keep the corporation in equilibrium with its external environment.

On the other hand, environmental uncertainty is an opportunity because it creates a new playing field in which creativity and innovation can have a major part in strategic decisions.

Introduction

Monitoring, evaluating and disseminating of information from external and internal environment to key people within the corporation.

A corporation uses this tool to avoid strategic surprise and to ensure its long-term health.

Research has found a positive relationship between environmental scanning and profits.

Environmental Scanning

Societal Environment: Economic

Forces that regulate the exchange of materials, money, energy and information

Interest rates, home sales, oil prices.

Technological Generate problem-solving inventions.

Political-legal Allocate power and provide constraining and protecting laws

and regulations. Sociocultural

Regulate the values, mores and customs of society.

Identifying External Environment Variables

Natural Environment: Physical resources Wildlife Climate

Task Environment: Includes those elements/groups that directly affect the

corporation, and in turn, are affected by it. Governments, local communities, suppliers, competitors,

customers, creditors, employees/labour unions, special-interest groups and trade associations.


Industry analysis In-depth examination of key factors within a

corporation’s task environment. All the environmental factors must be

monitored to detect the strategic factors that are likely to have a strong impact on corporate success / failure.


Each country in the world is represented by its own unique set of societal forces.

For example, even though Hong Kong and China share Asia’s Pacific Rim with Thailand, Taiwan etc., the have different views about the role of business in society. Korea and China - role of business is primarily to

contribute to national development. Hong Kong, Taiwan and Thailand - to make profits

for the shareholders.

Scanning the Societal Environment

Large corporations categorise societal environment in any one geographic region into five areas and focus their scanning in each area on trends with corporate-wide relevance (STEEP Analysis): Economic Technological Political-legal Sociocultural Ecological

Trends in any 1 area may be important to firms in one industry but lesser importance to firms in other industries.

Monitoring Societal Trends

Economic GDP trends Interest rates Money supply Inflation rates Unemployment levels Wage/price controls Devaluation/revaluation Energy availability and cost Disposable and discretionary income


Technological Total government spending for R&D Total industry spending for R&D Focus on technological efforts Patent protection New products New developments in technology transfer from lab to

marketplace Productivity improvements through automation. Internet availability Telecommunication infrastructure


Political-legal Antitrust regulations Environmental protection laws Tax laws Special incentives Foreign trade regulations Attitudes toward foreign companies Laws on hiring and promotion Stability of government


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


Each country/group of countries in which a company operates presents a whole new societal environment with different sets of STEEP.

International societal environments vary so widely that a corp’s internal environment and SM process must be very flexible.

Differences in societal environments strongly affect the ways in which a MNC - company with assets and activities in multiple countries - conducts its marketing, financial, manufacturing and other functional activities.

There are 4 important variables in international societal environments.

International Societal Considerations

Economic Economic development Per capital income Climate GDP trends Monetary and fiscal policies Unemployment level Currency convertibility Wage levels Nature of competition Memberships in regional economic associations

International Societal Environments

Technological Regulations on technology transfer Energy availability/cost Natural resource availability Transportation network Skill level of work force Patent-trademark protection Internet availability Telecommunication infrastructure



Political-legal Form of government Political ideology Tax laws Stability of

government Government attitude

toward foreign companies

Regulations on foreign ownership of assets

Strength of opposition groups

Trade regulations Protectionist

sentiment Foreign policies Terrorist activity Legal system


Sociocultural Customs, norms,

values Language Demographics Life expectancies Social institutions Status symbols Lifestyle

Religious beliefs Attitude toward

foreigners Literacy level Human rights Environmentalism

Before planning its strategy for a particular location, a company must scan the particular country environment(s) in question for O&Ts, and compare these with its own S&Ws.

Companies must be prepared to establish a significance presence in 3 developed areas, i.e. Japan, North America and Western Europe, known as the Triad.

90% of high value-added, high-tech manufactured goods are produced and consumed in the Triad.

There is also a good opportunity to enter the market of developing nations before competition is established.

International Societal Considerations

A corporation’s scanning of environment will include analyses of all the relevant elements in the task environment.

These analyses take the form of individual reports written by various people in different parts of the firm.

The reports are then summarised and transmitted up the corporate hierarchy for top management to use in strategic decision making.

If a new development is reported regarding a particular product category, top management may send memos asking people throughout the org to watch for and report on development in related prod areas.

Scanning the Task Environment

The many reports resulting from these scanning efforts, when boiled down to their essentials, act as a detailed list of external strategic factors.

Scanning the Task Environment

Companies responded differently to the same environmental changes because of differences in the ability of managers to recognise and understand external strategic issues and factors.

No firms can successfully monitor all the external factors. Choices must be made regarding which factors are

important and which are not. It is important that managers do not miss or choose to

ignore crucial new developments. Personal values and experiences may bias the managers’

perceptions on what to be monitored and how they interpret the changes.

Identifying External Strategic Factors

Strategic myopia - the willingness to reject unfamiliar as well as negative information.

One way to identify and analyse developments in the external environment is to use issues priority matrix. Identify a number of likely trends emerging in the societal

and task environments (strategic environmental issues). Assess the probability of these trends actually occurring

from low to high. Attempt to ascertain the likely impact (from low to high) of

each of these trends on the corporation being examined.


A corporation’s external strategic factors are those key environmental trends that are judged to have both medium to high probability of occurrence and a medium to high probability of impact on the corporation.

The issues priority matrix can then be used to help managers decide which environmental trends should be merely scanned (low priority) and which should be monitored as strategic factors (high priority).

Those environmental trends judged to be a corporation’s strategic factors are then categorised as O&Ts and are included in strategy formulation.


Porter’s Approach to Industry Analysis Threat of new entrants Rivalry among existing firms Threat of substitute products/services Bargaining power of buyers Bargaining power of suppliers Relative power of other stakeholders

Industry Analysis: Analysing Task Environment

Threat of New Entrants New entrants typically bring in new capacity, a desire

to gain market share and substantial resources. The threat depends on entry barriers and expected

reaction of existing competitors. Some possible entry barriers: Economies of scale Product Differentiation Capital Requirements Switching Costs


Access to Distribution Channels

Cost Disadvantages Independent of Size

Government Policy

Rivalry among Existing Firms In most industries, corporations are mutually

dependent - a competitive move by one firm is expected to have a noticeable effect on its competitors and thus cause retaliation or counterefforts.

Related to the presence of several factors: Number of Competitors Rate of Industry Growth Product/Service Characteristics Amount of Fixed Costs


Capacity Height of Exit

Barriers Diversity of

Rivals

Threat of Substitute Products/Services Substitute products - those products that appear to be

different but can satisfy the same need as another product. For example, fax machines are a substitute of FedEx,

Nutrasweet is a substitute for sugar, bottled water substitute for cola.

Substitute limits the potential returns of an industry by placing a ceiling on the prices firms the the industry can profitably charged.

To the extent the switching costs are low, substitutes may have a strong effect on an industry.

For example, coffee and tea.


Bargaining Power of Buyers Buyers affect an industry through their ability to force down

prices, bargain for higher quality or more services, and play competitors against each other.

A buyer/group of buyers is powerful if: Buyers purchase large proportion of seller’s product. Has the potential to integrate backward by producing the prod itself. Alternative suppliers are plentiful. Changing suppliers cost very little. The purchase prods represents high percentage of buyer’s costs. Buyer earns low profits, thus very sensitive to costs and price

differences. The purchased prod is unimportant to the final quality/price of

prods/services, thus can be easily substituted.


Bargaining Power of Suppliers Suppliers can affect the industry through their ability to

raise prices/reduce the quality of purchased goods/services. A supplier/supplier group is powerful if:

The supplier industry is dominated by few companies, but sell to many.

Its prod/services are unique and/or it has built up switching costs. Substitutes are not easily available. Suppliers are able to integrate forward and compete directly with

their present customers. A purchasing industry buys only a small portion of the supplier

groups’ goods and services and is thus unimportant to the supplier.


Relative Power of Other Stakeholders Some of these groups are government, local

communities, creditors, trade associations, special-interest groups, unions, shareholders and complementors.

Complementors - how a company (like Microsoft) or industry who’s product works well with another industry’s or a firm’s (Intel) product and without which the product would lose much of its value.

The importance of these stakeholders varies by industry.


Industry Evolution Over time, most industries evolve through a series of stages

from growth through maturity to eventual decline. The strength of each of the 6 forces varies according to the

stage of industry evolution. The industry life cycle is useful in explaining and predicting

the trends among the 6 forces driving industry competition. For example, when the industry is fragmented - no firm has

large market share and each serves a small niche market, people will buy the prod regardless of price because of its uniqueness.

As new competitors come in, the price drops.


Industry Evolution Companies use experience curve, economies of scale,

acquiring suppliers and distributors and differentiate their products to reduce costs faster than the competition.

By the time the industry enters maturity, the industry is now a consolidated industry - dominated by few large firms, each differentiates their products from the competition.

Purchasing decisions are based on better information when buyers become more sophisticated over time.

For example, VCRs in the 1990s. When industry moves towards declining stage, sales slow

down and may begin to decline.


Industry Evolution To the extent that exit barriers are low, firms

will begin converting their facilities to alternate uses or will sell them to other firms.

The industry tend to consolidate around fewer but larger competitors.


Categorising International Industries According to Porter, world industries vary on a

continuum from multidomestic to global.


Categorising International Industries Multidomestic industries are specific to each country or

group of countries. A collection of essentially domestic industries, i.e. retailing

and insurance. The activities in a subsidiary of a MNC are essentially

independent of activities of MNC’s subsidiaries in other countries.

Within each country, it has manufacturing facility to produce goods for sale within that country.

The MNC is able to tailor its products or services to the very specific needs of consumers in country(ies) having similar societal environments.


Categorising International Industries Global industries operate worldwide, with MNCs making only

adjustments for country-specific circumstances. An industry in which an MNC’s activities in one country are

significantly affected by its activities in other countries. MNCs produce products/services in various locations throughout

the world and sell them, making only minor adjustments for specific country requirements.

Examples, TV, cars, photostat machine, watches, tires etc. Factors that determine where an industry is primarily

multidomestic or global - (1) pressure for coordination; (2) pressure for local responsiveness.

Think globally, act locally - between these two extremes.


International Risk Assessment Some companies develop elaborate information networks

and computerised systems to evaluate and rank investment risks.

Small companies can hire outside consultants to provide political-risk assessments.

There are many systems exist to assess political and economic risks.

Regardless of the source of data, a firm must develop its own method for assessing risk.

It must decide on the most important risk factors and then assign weights to each.


Strategic Groups A set of business units/firms that “pursue similar strategies

with similar resources”. Categorising firms in any one industry into strategic groups is

very useful to better understand the competitive environment. Companies belong to one strategic group tends to be strong

rival and more similar to each other. McDonalds and Burger King share the same mission,

objectives and strategies, making them strong rivals. Strategic groups in a particular industry can be mapped by

plotting the market positions on a 2-dimensional graph, using 2 strategic variables as vertical and horizontal axes.


Strategic Groups The method: Select 2 broad characteristics, i.e. price and menu that

differentiate the companies in an industry from another. Plot the firms using these 2 characteristics as the

dimensions. Draw a circle around those companies that are closest

to one another as one strategic group, varying the size of the circle in proportion to its market share.

Other dimensions, i.e. quality, service, location etc. can also be used to identify strategic groups


Strategic Groups


Strategic Types A category of firms based on a common strategic

orientation and a combination of structure, culture and processes consistent with that strategy.

Four basic types: Defenders - companies with limited prod line that focus

on efficiency of their existing operations. This cost-orientation makes them unlikely to innovate in new areas.

Prospectors - companies with fairly broad prod lines that focus on prod innovation and market opportunities. This sales orientation makes them somewhat inefficient. Creativity are emphasised rather than efficiency.


Strategic Types Four basic types: Analysers - Corporations that operate in at least 2

different prod-market areas, one stable and one variable. In stable areas, efficiency is emphasised while in variable areas, innovation is emphasised.

Reactors - Corporations that lack of consistent strategy-culture relationship. Their ineffective responses to environmental pressures tend to be piecemeal strategic changes.


Hypercompetition Most industries today are facing ever-increasing level of

environmental uncertainty. They are becoming more complex and more dynamic; local

industries are becoming global; new, flexible, aggressive, innovative competitors are moving into established markets; distribution channels are altered via the use of IS; closer relationships are fostered with suppliers to reduce cost, increase quality and gain access to new technology.

Market stability is threatened by shorter prod life cycle, prod design cycles, new techs and frequent entry by unexpected outsiders, repositioning by incumbents and tactical redefinitions of market boundaries as diverse firms merge.


Hypercompetition Companies learn to quickly imitate the successful

strategies of market leaders, making it hard to sustain CA for long.

As such, CA comes from up-to-date knowledge of environmental trends and competitive activity coupled with a willingness to risk a current advantage for a possible new advantage.

Companies must be willing to cannibalise their own prods in order to sustain CA.

As a result, competitive intelligence is becoming more and more important.


Much external scanning is done on informal and individual basis.

Information is obtained from a variety of sources - customers, suppliers, industry publications, employees, industry experts, industry conferences and Internet.

CI is a formal programme of gathering info on a company’s competitors.

CI is one of the fastest growing fields within SM. Most Japanese and large European countries have active

intelligence programmes, while US is just starting.

Competitive Intelligence

Most corporations rely on outside organisations, i.e. consultancy firms, information brokers, marketing research companies, Internet etc. to provide them with environmental data.

Some companies use industry espionage or other intelligence -gathering techniques to get info straight from their competitors - former competitors’ employees, private contractors.

Some firms attempt to steal trade secrets, technology, business plans and pricing strategies.

The Government has imposed stricter rules on industry espionage - Trade Secrets Act.

Competitive Intelligence

Industry Scenario Forecasted description of a particular industry’s likely

future. Such a scenario is developed by analysing the probable

impact of future societal forces on key groups in a particular industry.

The process: Examine possible shifts in the societal variables globally. Identify uncertainties in each of the forces of the task

environment. Make a range of plausible assumptions about future needs. Combine assumptions about individual trends into internally

consistent scenarios.

Forecasting

Industry Scenario The process:

Analyse the industry situation that would prevail under each scenario.

Determine the source of CA under each scenario. Predict competitor’s behaviour under each

scenario. Select the scenarios that are either most likely to

occur or most likely to have a strong impact on the future of the company. Use these scenarios in strategy formulation.

Forecasting

After strategic managers have scanned the societal and task environments and identified a number of likely external factors for their particular corporation, they may want to refine their analysis of these factors using EFAS (External Factor Analysis Summary).

The EFAS Table organises the external factors into generally accepted categories of O&Ts and analyse how a company’s management (rating) is responding to these factors in light with the perceived importance (weightage) of these factors.

Synthesis of External Factors - EFAS

Column 1 List 8 - 10 most important O&Ts (external factors)

to your company. Column 2

Assign a weight to each factor from 1.0 (most important) to 0.0 (least important) based on the probable impact on the firm’s current strategic position. The higher the weight, the more important is this factor to the current and future success of the company. All weight must sum to 1.0.


Column 3 Assign a rating to each factor, from 5.0 (outstanding) to

1.0 (poor) based on management’s current response to this particular factor.

Column 4 Multiply the weight in Column 2 for each factor times its

rating in Column 3 to obtain each factor’s weighted score. This results in a weighted score for each factor ranging from 5.0 (outstanding) to 1.0 (poor) with 3.0 as average.

Column 5 Note why a particular factor was selected/how its weight

and rating were estimated.


Finally, add up the weighted scores for all the external factors in Column 4 to determine the total weighted score for that particular company.

The total weighted score indicates how well a particular company is responding to current and expected factors in its external environment.

The score can be used to compare that firm to other firms in its industry.

The total weighted score for an average firm in an industry is always 3.0.


strategy management 1

Business

new societal environment

external environment

natural environment

corporations task environment

corps internal environment

environmental factors

economic gdp trends

strategic factors