Scanning Business

Environment

Business environment scanning-Defined

Business environment scanning is concerned

with a clear understanding of both internal and
external business conditions that are critical to
the business operations.

Tools of Analyzing the Business Environment

Strategic management offers a number of tools
that can guide strategic managers to analyze
and understand the business environment in all
its perspectives

 With regards to this course, the main

tool for analysis is going to be SWOT
analysis
Alongside SWOT analysis some minor
tools will be employed namely
PEST for external environmental
scanning, and
Porters Five Forces model for industry
analysis
3

SWOT Analysis
To carry out SWOT analysis the following should
be done
1.Defining the business
2.Identify the opportunities and threats in the
business at that time
3.Determine the business key success factors
4.Looking inward to determine capabilities in
terms of skills and competencies present in the
organization

The Conceptual Framework for SWOT

Analysis
External
Environment
Changes

Changes in Industry
Characteristics

New Business
Opportunities &
Challenges
Formulate, Implement
and Control the
mission, vision,
policies, philosophy
and Organization
Strategy

Key Success Factors

Strengths &
Weaknesses
Resources and
Competencies

Identification of opportunities and

threats
These are identified from the external
environmental factors of the firm.
These include economic, socio-cultural,
political and technological environment
From the economic environment, things
such as economic trends, availability of
credit, level of disposable income and
the propensity of the population to save

Identification of opportunities and

threats
Others include interest rate, taxation, current
exchange rates, international economic trends,
distribution of income in the population and
wage and salary levels.
In the Socio-cultural environment we consider
things such as values and attitudes of the
society, lifestyles and population mix,
demographic characteristics of the population,
religious orientations and the societys attitude
toward the industry

Identification of opportunities and

threats
From the political environment we
consider the laws and regulations
existing, ideology followed by the
government and political attitudes
toward the industry.
The technological environment is looked
at in terms of the scientific discoveries,
technological trends in substitute
industries and those in the industry
8

Identification of key success factors

This is done by looking at the existing
industry characteristics and their
analyses
This entails the determination of
industry characteristics, its long-term
prospects, and how it functions
Industry characteristics are analyzed
based on five dimensions:
9

Porters Five Forces Model

Potential Entrants
Threat of New Entrants

Suppliers

The Bargaining
Power of
Suppliers

Industry Competitors/
Rivarly Among Existing
Firms

The Bargaining
Power of
Customers

Customers

Threat of
Substitutes

Substitutes
10

Nature and degree of competition

The opportunities and threats as well as key
success factors in an industry are a function of
the intensity of rivalry and the competitions
tactics such as price competition, introduction
of new products, advertising wars, improved
customer service, and better warranties.
Rivalry among competing firms is intense when
there are numerous firms in the industry or
major competitors are nearly equal in size.

11

11

Nature and degree of competition

The intensity of rivalry among firms is
high when industry growth is slow;
when industry growth is high and
demand for the product is increasing
rapidly there is enough business for
everybody, hence rivalry among firms
is low
Rivalry among firms is intense when
firms are pressured to produce at or
very near full capacity
12

Nature and degree of competition

Competition is weaker when the products
or services of competing firms are
differentiated enough to provide
protection against competitive onslaughts
Competitive rivalry is intense in industries
characterized by scale economy that
dictate increases in a firms capacity be
made in large increments

13

Nature and degree of competition

Rivalry in the industry is intensified if
there are firms that have much to lose
from failure or much to gain from
success in the market
Inter-firm rivalry is aggravated if exit
barriers, which prevent a firm from
dropping out of the industry, are high.

14

Barriers to Entry
A new firm entering an industry adds to the
production capacity of the industry if the new
entrant has not bought an existing firm as a
means of entry. New entrants come with a
plan to obtain market share, and often
command substantial resources and skills.
The threat of entry is low if barriers to entry
are high and/ or the new entrant expects
massive, hostile retaliation from the other
firms in the industry
15

Barriers to Entry
There are important barriers to entry
in a particular industry as follows:
1. Economies of scale: if scale
economies exist, the new entrant has
two choices-either to enter on a large
scale and enjoy lower costs or on a
small scale and accept cost
disadvantage. Thus economies of
scale lessen the threat of new entry.
16

Barriers to Entry
1. Capital: the larger the total amount of financial
resources needed to enter the market and
compete successfully, the more limited will be
the pool of entrants.
2. Access to distribution channels: creating new
channels for new entrants may be
uneconomical or prohibitively expensive and
the new firm must face the task of inducing
the established distributors to carry its product

17

Barriers to Entry
Brand identification: this differentiates ones
product from competitive products, thereby
creating customer loyalty
To achieve this, massive expenditures in terms
of finances, time are needed
Besides that, a lot has to be done in advertising
and sales promotion
This is a risky business because ones there is
failure, no salvage value

18

Barriers to Entry
Cost Advantages: existing firms may
enjoy cost advantages arises due to
access to cheaper and better quality
raw materials, favorable locations,
assets purchased at pre-inflation
prices, and capital at lower interest
rates.

19

Barriers to Entry
Learning or experience curve: firms
performing intricate tasks or complex
assembly operations, have their unit
costs decline at a predictable and
measurable rate when a firm gains
cumulative experience in producing a
product
This makes life miserable for a new
firm in the industry, if existing firms
embark on aggressive price cutting.
20

Barriers to Entry
Government policy: entry to certain
industry is difficult, limited, or even
disallowed by government policy. This
may be done by licensing
requirements.
Reaction of the existing competitors:
retaliation by incumbents may make
entry by new firms risky, and
unpleasant
21

Barriers to Entry
Switching costs: the higher the costs
incurred by a buyer for switching
from one suppliers product to
another the more the benefits a new
supplier must offer to induce the
buyer to switch from an existing
supplier.

22

Competitive power of substitute

products
Substitutes can limit the potential of
an industry by putting upper limits on
the prices that an industry can charge
for its products
The more attractive the pricesatisfaction tradeoff of substitute
products, the greater is the danger of
losing industry sales to substitute
products
23

Buyer power
Buyers can influence competition in an
industry by demanding lower prices,
higher quality, better service, improved
warranty terms, and forcing sellers to
outdo each other for the buyers business.
Buyer power is determined by the
following:
1. Buyers are few and their purchases
represent a significant part of the
industry sales
24

Buyer power
2. The purchased products account for a significant
portion of the total purchases or cost of the
buyer
3. The supplier industrys products are
undifferentiated and standard
4. When the buyers industry has low profits,
makes the buyer search for low priced items
5. The supplier industrys product is not an
important ingredient or component determining
the quality of the buyers product or service
25

Supplier power
Powerful suppliers can influence the
buying industrys costs, prices,
quality, and ultimately its overall
prospects for growth and profitability
If suppliers can force buyers to accept
their terms on prices and quality of
purchased goods and services, they
have power over them.
26

Supplier power
A supplier group is powerful when:
1. There are few supplier firms and many firms in
the buyer industry
2. The products of each supplier firm are so
differentiated that they make it very costly for
each buyer firm to switch suppliers
3. The supplier industry does not have to worry
about competition from substitute products
4. The suppliers sell to a number of industries
and the buying firms do not account for a
significant portion of the suppliers total
business
27

Supplier power
5. The suppliers product is an important
ingredient in the buyers
manufacturing process or product
quality
6. One or more of the firms in the
suppliers industry present a credible
threat of forming integration to the
buyer industry
28

Evaluation of a firms strengths and

weaknesses
The process involved in the evaluation of a firms
strengths and weaknesses to compete
successfully in the marketplace includes the
following steps:
1. Identify the small number of key success factors
for the business
2. Develop a profile of the firms resources and
skills
3. Compare the firms resources and skills profile to
the key success factors of the business

29

Evaluation of a firms strengths and

weaknesses
4. Identify the areas of major strengths on which
the firm can build a viable strategy to exploit
opportunities in the business and the critical
weaknesses it must minimize to prevent failure
5. Compare the firms strengths and weaknesses
with the strength and weaknesses of its major
rivals in the business
6. Isolate areas in which the firms resources and
skills are significantly stronger or weaker than
those of its major competitors

30

Establishing strength and weakness

Resource and skills capacity profile includes
1. Marketing
2. Research and development
3. Finance
4. Production
5. Management
6. Corporate structure
7. Human resources

31

Organization Strategy
Dimensions

32

Generic Corporate Strategy

Alternatives
There are four principle generic
corporate strategy alternatives that a
company could choose for achieving
its mission and strategic objectives
1. Stability strategy
2. Growth strategy
3. Retrenchment strategy
4. Combination strategy
33

Stability Strategy
This suggests that the organization should
continue doing what it is currently doing,
assuming that the environment will not
change significantly in the future
This strategy is effective in the following
situations:
1. The firm is in mature industry
2. The firm is currently successful
3. The environment of the firm is changing very
slowly
34

Growth Strategy
Growth of a firm is determined by its
financial resources, product or service
dealt with, its external environmental
conditions, and skills of its management.
Growth is pursued for assurance of long
term survival and as an impression that
management is effective
Growth can either be internal or external

35

Internal Growth
This is done by penetrating new markets
so as to increase market share, profits,
sales and profits of the current product
This can also involve expansion by
moving into new geographical areas
with the current product or modifying
the product in some way to provide new
product features that may satisfy buyer
preferences
36

External Growth
This means adding functions or
operations to the current organization.
This can be done through either
integration or diversification.
In the former, the firm stays with the
same product, while in the latter, the
firm moves into products of related or
unrelated industries
37

Integration
This can be horizontal integration, in
which other firms or products are
acquired which use the existing facilities
Vertical forward integration, in which the
firm acquires the distributors to control
the flow of finished goods to consumers
Vertical backward integration, in which
the firm acquires its dominant raw
material supplier
38

Diversification
In this case an organization moves into
similar or new products or services, while
at the same time exploiting the existing
products or services.
Firms opt for diversification for the
following reasons:
1. Competitive pressure, product
obsolescence, or antitrust and tax
legislation
2. Excess cash flow
3. Spreading the risks among more products
4. New challenges for management
39

Diversification
There are two ways a firm may diversify
1. Concentric diversification: the firm buys a
business whose product, service, or technology
is similar to or related to the product, service, or
technology of the current organization
2. Conglomerate: this involves the acquisition of
a firm whose products, service, or technology is
unrelated to its present products, services, or
technology. This may serve as a way of getting
out of declining industry or reduce its risk by
moving into more than a one-product market

40

Retrenchment
A firm that follows a retrenchment
strategy perceives that it is not meeting
its basic objectives via its current
strategy
This is implemented by reducing the
scale of operations
The degree to which a firm should
retrench depends on how serious the
problems are with the current strategy
This involves the following alternatives:
41

Cutback and Turnaround

This is utilized effectively when the
current strategy is threatened by short
term environmental changes, such as
reduced sales or the cutting of the
operational costs
This is a temporary strategy which
consists of the firm reducing the
internal costs of operations in
administration, production, and sales
42

Divestment
This is adopted by reducing the scale
of operations by selling a product line
This is usually a difficult decision to
make because management already
has the product line and is familiar
with it; also management has been
committed to that line and to give it
indicates failure
43

Liquidation
This is the most severe of all type of
retrenchment because this involves selling the
entire organization
This approach may be pursued due to:
1. The top management is approaching retirement
with no trained successors
2. Management may feel that the company is at its
peak and there is no place to go but down
3. Another company may want to buy the company
more than management think it is worth
44

Combination
This is pursued by a company with
many products, or businesses in
their portfolios in which some
products may be in growth phase,
some may be the stability phase,
and a few may be undergoing
retrenchment

45

Organization Strategy
Levels of organization strategy

46

Levels of organization strategy

There are four levels in organization
strategy: societal, corporate, business and
functional strategy
The societal strategy of the firm is
formulated by the board of directors and
this is concerned with the relationship
between an organization and its external
environment as well as broad issues of
corporate citizenship, social responsibility
and accountability, and business ethics
47

Societal Strategy
This is concerned with the relationship
between an organization and its external
environment, as well as the broad issues of
corporate citizenship, social responsibility
and accountability, and business ethics
The main concern of societal strategy is
how the organization intends to function as
a member of the immediate community,
the society, the country, and the global
community.
48

Corporate Strategy
This is the top managements grand design
for managing the whole organization
The aim of this is to manage the companys
current and future portfolio of business to
effect the fulfillment of the companys
strategic objectives
It decides the set of businesses the
organization should be in as well as the
scope and resource deployment among
businesses
49

Identifying the current corporate

strategy
Corporate strategy formulation involves
evaluation of the current business or
businesses and making decisions about:
1. which business deserves greater or fewer
resources in the future;
2. which businesses should be divested or
liquidated;
3. whether new businesses should be added,
and if so which should be added;
4. how each business should be managed in the
future
50

Techniques for the Analysis of

Corporate Strategy
Portfolio analysis is the approach of
corporate strategy analysis in
diversified firms
Two major portfolio analysis
techniques are available; the Boston
consulting group (BCG) growth-share
matrix, and the general electric (GE)
business portfolio matrix
51

The BCG Growth-Share Matrix

This uses a four cells matrix to
analyze businesses, whose
dimensions are growth rate and
relative market share
Where a certain business gets
placed in the matrix depends on
the growth rate of the business and
its relative market share
52

53

Stars

Question
marks

Cash cows

Dogs

Stars:
a star is a business that is growing
rapidly and has a high market share
It may need large amounts of cash to
maintain its relative market share
position
It may be generating sufficient cash
flow to provide for its cash needs
It represents a superior growth and
investment opportunity
54

Cash cows:
a cash cow is a business with high marketshare position, but is in a low growth
business
Such businesses generate large amounts of
cash, far more than they can profitably
invest
They milked for cash to pay dividends, and
interests on corporate debts, finance
research and development, support stars
and provide cash to question mark business
55

Question marks:
these are high growth businesses, but with
low market share
This means low profits and weak cash
flows from operations
They require large amounts of cash to
maintain market share and even large
amounts to increase market share because
they are in rapidly growing markets
The dilemma faced by such businesses is
whether to pump in more money and make
them stars or let them drop into the dog
category
56

Dogs
Dog businesses have low growth rate and
low market share
Their poor competitive position puts them in
a poor profitability position
Dog businesses are often called cash traps
because they can not generate enough cash
for investment
BCG recommends that dog businesses ought
to be harvested, divested, or liquidated
57

Limitations of the BCG Matrix

The high-low classification matrix does not
give enough attention to businesses in an
intermediate position
The two-factor comparisons do not give an
explicit considerations to other important
strategic factors, such as strategic fit across
products, competitive advantage, e.t.c.
Growth rate and market share factors are
not always good indicators of cash flow,
profitability, and business attractiveness
58

The Business Portfolio Matrix

This was developed in recognition of the
shortcomings of the BCG matrix
This consists of nine cells with long-term
product/market attractiveness on one axis
and business strength/ competitive position
on the other axis
The long-term product/market attractiveness
is a composite of factors such as market
size, market growth rate, competitive
environment; and profitability, technological
and human aspects
59

Alternative Investment Strategies

The business
strength/competitive position is
viewed as a function of market
size and growth rate, market
share, profitability, margins,
image, quality of management
and skills
60

General electric business portfolio

matrix
Green Green Orange
Green Yellow Red

Yellow Re d

61

Red

Key
Green invest and grow
Yellow selective investment
Red harvest/divest
Orangesituational investment

62

Alternative Investment Strategies

Invest and Grow: businesses which fall
within this category are those expected to
grow and have considerable profit potential
Such business receive substantial
investments for technology, production
capacity, product improvements, product
design, and improved marketing
This is to increase sales and market share
as well as maintaining the existing
competitive position of the business
63

Alternative Investment Strategies

Selective investment: this is applied to
businesses so as to maximize the returns on
its existing assets, resources, and skills
The cash generated in excess of reinvestment
needs is invested in those businesses that fall
into the invest-and-grow category
Investments to these businesses are aimed at
maintaining the existing investment levels
and improving existing competitive
advantages
64

Alternative Investment Strategies

Harvest/divest: a business that falls
in this group is the loser
It should be harvested by selling idle
equipment, tightening up spending,
cutting costs, aggressively reducing
working capital, and pruning products
Businesses that are likely to drain the
long-term profits of the firm should be
liquidated or divested
65

Alternative Investment Strategies

Situational investment: the level of
investment in a business that falls in this
category is based on the judgment and
experience of the managers
If managers believe it would be feasible
and in the long-term best interests of the
company to build the companys strengths
to succeed in the business, the invest-andgrow strategy is applied. If not, the
harvest/divest strategy is adopted
66

Business Strategy Analysis

Generic Business Strategies

67

 Three generic business strategy

alternatives are available
Overall cost leadership strategy
Differentiation strategy
Focus strategy

68

 Overall cost leadership: this is attained

through construction of efficient-scale
facility, vigorous efforts to get cost
decreases from any learning and
experience curve effects, severe cost
and overhead control, dropping of
marginally profitable customers, and
minimization in areas such as R & D,
service, sales force, and advertising.
69

A low cost position may serve the

following:
A defense against price wars
A shield against powerful buyers
A shield against suppliers
Can enable a firm fortify against
substitute products
Can act as a substantial barrier
against new entrants
70

Differentiation
This strategy focuses on creating a product
or service offering perceived by the
customer as unique so as to attract the
customer and increase sales volume
These can take different forms such as
technology, dealer network, service, brand
image, and superior quality
This protects producers against competitors
because of customers brand loyalty and
the resulting lower sensitivity to price
71

Focus
This strategy involves focusing the
firms attention on a particular buyer
group, segment of the product line, or
geographical area
The aim is to serve a particular target
market exceptionally well
This enables the particular firm achieve
low cost, differentiation, or both from
the perspective of its narrow market
target
72

 The key to getting a strategic

advantage in the market is to adapt
the generic business strategies to
the industry situation and the firms
position
The following are the specific
business strategies for firms in
specific situations
73

Strategies for dominant firms

Dominant firms are concerned mainly with
maintaining or improving their position in
the industry and in so doing do the
following:
Be on the offensive: this involves continuing
with
efforts to increase market share offering new
and improved products and innovate in such
areas as customer service and distribution
channels make cost-cutting discoveries
74

lower product price, and increase

the value received by the customer
from the product
Fortify against the enemy: plug
holes in the companys product line
to keep a competitor from moving
in, and introduce a number of ad
75

 Confrontation: defend the

companys territory by engaging
in expensive promotional or
promotional or price-cutting wars
to punish aggressive competitors.

76

Strategies for low market share firms

Companies with low market share are
concerned with improving their competitive
position and market standing
Small firms cannot achieve this by imitating
the market-share leaders; they must do
something unique
They can segment markets, make efficient
use of R&D, think small or use the vacant
niche; distinctive image, and channel
innovation
77

 Segment markets: select and compete in

market segments in which the firm has
expertise
Efficient use of R&D: smaller companies cannot
win any R&D battles because larger firms can
afford bigger R&D budgets. Hence low market
share companies must use R&D funds by
channel spending into areas that are most likely
to produce the greatest benefits for them
The focus should be on lowering process cost
and/or bringing new products to the market
78

 Think small: low market-share firms

should emphasize profits rather than
sales growth or market share and
specialization rather than
diversification
The vacant niche: find the segments
ignored by competitors and focus on
different areas of this segment.
79

 Ours is better than theirs: implement

focus and differentiation strategies

keyed to product quality
Target marketing efforts to the
performance and quality conscious
buyers
Distinctive image: obtain a strategic
advantage via distinctive image or
appeal
80

 Channel innovation: find innovative

ways of distributing the products

81

Strategies for firms in stagnant

industries
For firms that do business in industries
where demand has weakened or
reached maturity, milking or
harvesting, divestiture, or liquidation
may be appropriate strategies
However abandoning a business just
because it has stopped growing and
become very competitive may not be
always be the corrective alternative
82

 A stagnant business may still be

making a substantial contribution to
the total sales, profits, and overhead
of the firm
It is most appropriate for a stagnant
business to abandon the sales
growth in favor of realistic cash flow
and return-on-investment criteria
83

 The following should be done instead of

harvesting or divesting:
Identify, create, and exploit the growth
segments in the industry
Emphasize product quality and product
innovation
Systematically and constantly improve
efficiency of production and distribution
systems
84

Functional strategy analysis

Functional strategy includes the strategies
developed in each functional area of the
business to support the business strategy
Analysis of the functional strategy focuses
on the evaluation and selection of strategies
in areas such as finance, production, R&D,
marketing, personnel, industrial and labor
relations, government affairs and public
relations
Functional strategies should be internally
consistent both vertically and horizontally
85

Implementation of organization
strategy
This involves the conversion of the organization
strategy into concrete action and results which
is critical to the future success of an
organization
This involves the application of the
management process to obtain the desired
results
The organization strategy can effectively be
implemented if there is consistency between
the strategy on one side and the corporate
culture, organization structure, human
resources, and rewards on the other hand.
86

Corporate culture
This is the complex whole which
includes knowledge, beliefs, art,
morals, customs, and any other
capabilities and habits acquired by
man as a member of society
It is that system of norms, attitudes,
values, believes, and customs that
govern that govern behavior of people
within an organization
87

 It is the sum total of how people in

an organization think and act as the
members of the organization
Once culture is learned and accepted,
it tends to persist
All cultures, including organizational
cultures are changing gradually and
continuously, even though human
beings tend to resist changes
88

 The corporate culture of the firm can be

a major strength if it is consistent with
its organization strategy
Strategists must recognize that a major
shift in the firms strategy will require a
supportive corporate culture that may
be radically different from the old
corporate culture, and that steps must
be taken to close the gaps between the
current and the needed culture
89

 If the cultural gap cannot be closed

sufficiently and within a reasonable
period of time, then there are two
alternatives
1. Modify the strategy to align it with the
corporate culture
2. Abandon the strategy and search for
one that is compatible with the
corporate culture
90

Organization structure
This conveys how work is divided and
assigned to people, and how the
activities of people performing their
duties are coordinated in the enterprise
Since the nature of the work to be
done is determined by the organization
strategy then the organization
structure which coordinates people
performing the tasks must follow the
firms organization strategy
91

Human resources
There should always be a fit between the
nature of the strategy and the individual
with the responsibility for its
implementation
A manager who has experience in one
type of business may have developed and
internalized the culture of that business
and this makes him unsuitable for
management of another type of business
with substantially different culture
92

Organization rewards
Rewards over and above salaries, are
used to elicit desired behavior from
members of the organization
Most large organizations rely on
financial rewards and stock options to
encourage management achieve the
organization objectives

93

 In the course of formulating a compensation

scheme for the top management, the following
aspects are of importance:
Financial instruments: a variety of financial
instruments are available such as cash,
company stock, differed company stock, etc.
Performance measures: management executive
performance can be measured in terms of
product quality, image, customer service
quality, employee morale, and quality of
personnel
94

 Size and frequency of awards: the size of

awards should be commensurate with the
degree of risks assumed by the executives. The
higher the risk that corporate management
wants executives to take given the companys
situation, the higher should be the rewards
As for frequency of awards, the more
frequently bonuses are given, the greater is the
likelihood that executives will focus on short
term performance
95

Control of organization strategy

The control process involves determining the
actual performance, and ensuring that it is
consistent with expected performance. It
involves five steps:
1. Establishing the standards of performance
2. Measuring and evaluating actual performance
against established performance standards
3. Diagnose the reasons for deviations if any
4. Taking corrective action
5. Continue getting feedback from internal and
external environment
96