Environmental Scanning & Analysis

Business Environment Industry Analysis

Environmental Scanning
Environmental scanning analyzes information about every sector of the external environment that can help management to plan for the organization's future. Scanning covers not only competitors, suppliers, and customers, but also includes technology, economic conditions, political and regulatory environment, and social and demographic trends.

Scope
Environmental scanning usually refers to the macro environment. It can also include industry and competitor analysis, consumer analysis, product analysis and the company's internal environment.

The Corporate Environment

macro environment political forces economic forces

industry environment market internal environment suppliers inputs competitors transformation process the organisation outputs customers

regulatory and professional groups Technological and ecoenvironmental forces social and legal forces

Does Scanning Improve Performance

Newgren et al (1984) Scanning firms significantly outperformed non-scanning firms (50 US firms, P/E ratios, 1975-1980) West (1988) Daft, Sormunen and Parks (1988)

CEOs of high performing firms scanned more frequently,

intensely and broadly (50 SMEs in Texas)

Macro Economic Environment

General economy Industry Markets

General Economy
Macro economics (fiscal & monetary policy, GDP, NI) Govt. Regulation (Labor laws, exit policy, minimum wages, EXIM policy) Political (Govt. stability, ideology, liberalization)

Industry
Competitors Suppliers Products/Services Technology

Markets
Customers Demographics Socio-cultural factors (Consumer tastes & styles)

Objectives of Environmental Analysis

Identify changes or trends in environmental factors. Focus on those forces & trends which seem to be most relevant & critical to the business. Think through the implications of these changes for the future direction & strategies of the organization.

Critical Success Factors

A few driving forces in the environment will be more influential in determining a firms performance than others. These forces are called critical success factors (CSFs). It is vital to focus the firms scanning efforts on them.

Critical Core Competencies

Effective CSF analysis should benefit later stages of planning. They disclose specific internal capabilities that must be strengthened to a point where they become sources of distinctive competitive competence. These competencies may be designated as critical core competencies (CCCs).

Industry Analysis

Porters Five Forces Model

Overview

An industry is a group of firms producing products that are close substitutes. Porter and others believe that compared to the overall external environment, the industry environment often has a more profound effect on
a companys competitiveness an industrys profit potential.

Industry Forces

The long-term return on invested capital within a given industry is a function of five competitive forces.

Porter's Five Forces Model

Potential entrants
Threat of new entrants Bargaining power of suppliers

Industry competitors Bargaining power

of buyers

Suppliers
Rivalry among existing firms

Buyers

Threat of substitutes

Substitute products
Source: Michael E. Porter Competitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)

Threat of New Entrants

New entrants to an industry typically bring to it

new capacity a desire to gain market share substantial resources.

Many companies often find it difficult to identify new industry entrants (i.e., new competitors). New entrants are threats to established corporations. The extent of the threat depends on
Existing barriers to entry The combined reaction/retaliation from existing competitors.

Threat of Substitute Products or Services

Substitute products are those products that appear to be different but can satisfy the same need as another product. Substitutes limit the potential returns of an industry by placing a ceiling on the prices that firms in that industry can profitably charge. Substitute products that deserve the most attention are those that
Are subject to trends improving their price/performance value relative to an industrys product or Are produced by industries earning high profits.

Differentiating a product along dimensions that customers value (e.g., price, quality, or service) reduces a substitutes attractiveness.

Bargaining Power of Buyers

Buyers affect an industry through their ability to

force down prices bargain for higher quality or more services play competitors against each other.

A buyer or a group of buyers is powerful under the following conditions:

It is concentrated or purchases large volumes relative to seller sales The products it purchases from the industry are standard or undifferentiated The buyer faces few switching costs The buyer poses a credible threat of backward integration The industrys product is unimportant to the quality of the buyers products or services.

Bargaining Power of Suppliers

Suppliers can affect an industry through their ability to raise prices or reduce the quality of purchased goods and services. A supplier group will be powerful in the following circumstances:
The supplier group is dominated by a few companies and is more concentrated than the industry it sells to. The supplier group is not obliged to contend with substitute products for sale to the industry. The industry is not an important customer of the supplier group. The suppliers product is an important input to the buyers business. The supplier groups products are differentiated or it has built up switching costs. The supplier group poses a credible threat of forward integration.

Rivalry Among Existing Firms

Rivalry among existing competitors takes the form of jockeying for position. Firms use tactics like
Price competition Advertising battles Product introductions Increased customer service or warranties.

Rivalry occurs when competitors sense the pressure or act on an opportunity to improve their position. Often, rivalry is based on price, quality, and innovation.

Interpreting a Five-Forces Analysis

Firms can determine an industrys attractiveness in terms of the potential to earn adequate or superior returns on invested capital. The stronger the competitive forces, the lower the potential profit for firms within the industry. An attractive industry has

high entry barriers suppliers with little bargaining power buyers with little bargaining power few competitive threats from product substitutes relatively moderate rivalry among competing firms.