Environmental

Scanning and
Industry Analysis
Unit II
 Scanning and Industry Analysis
• Aspects of an organization’s environment that can influence its long-
term decisions
• Industry analysis to explain the competitive forces
• International industries based on their pressures for coordination
and local responsiveness
• Key success factors and developing an industry matrix
• Strategic group maps to assess the competitive positions of firms in
an industry
• Industry scenario as a forecasting technique
• Competitive intelligence
• Constructing an EFAS Table that summarizes external
environmental factors
 ENVIRONMENTAL SCANNING

• The monitoring,
• evaluating, and
• disseminating of
• information from
• the external and internal environments
• to key people within the firm.
Environmental Scanning
 Identifying External
Environmental Variables (1 of 4)
• Natural environment
– includes physical resources, wildlife, and
climate that are an inherent part of existence
on Earth
– form an ecological system of interrelated life
 Identifying External
Environmental Variables (2 of 4)
• Societal environment
– humankind’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
– factors: economic, technological, political-
legal, sociocultural
 Identifying External
Environmental Variables (3 of 4)
• 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,
employees/labor unions, special-interest
groups, and trade associations
 Identifying External
Environmental Variables (4 of 4)
• Industry analysis
– an in-depth examination of key factors within
a corporation’s task environment.
– Helps in identifying the attractiveness of the
industry
– Also helps in determining the profitability of
firms in the industry.
 Scanning the Societal Environment:
STEEP Analysis
• STEEP analysis
– monitoring trends in the societal and natural
environments
– sociocultural, technological, economic,
ecological, and political-legal forces.

Note: The external macro analysis comes with different

nomenclatures such as PESTLE, PRESTCOM etc.
STEEP Analysis: Monitoring Trends in the Societal
and Natural Environments
Demographic trends are part of the sociocultural
aspect of the societal environment.

SOURCES: Developed from Pew Research Center analysis of census bureau population projections (September 3, 2015),
(http://www.people-press.org/2015/09/03/the-whys-and-hows-of-generations-research/generations_2/).
 Current Sociocultural Trends
• Increasing environmental awareness
• Growing health consciousness
• Expanding seniors’ market
• Impact of millennials
• Declining mass market
• Changing pace and location of life
• Changing household composition
• Increasing diversity of workforce and markets
 Technological Breakthroughs
• Portable information devices and electronic
networking
• Alternative energy sources
• Precision farming
• Virtual personal assistants
• Genetically altered organisms
• Smart, mobile robots
 Competitive Environment
• Competitive Rivalry
• Competitive Action
• Industry Structure
• Basis of Competition (quality vs price war)
 Organizational Environment
• Resources- Land, Labor, Capital
• Location
• Structure
• Rent Seeking Behavior
 Market Environment
• Customer is the King
• Tastes and Preferences of customers,
brand loyalty, market structure, Purchase
Intention and Decision.
Some Important Variables in International Societal
Environments
Scanning the External Task Environment
Industry Analysis
The Porter’s 5 Force Model
 Five Force Model
• Firm performance (and competitive advantage)
not just determined by competitive position.
Other forces have a role to play too.
• These are related to customer, suppliers, new
entrants, and substitutes.
• How a firm manage the threats posed by the
industry decides its competitive advantage.
• The model also helps in determining whether an
industry is attractive or not.
The Five Forces
 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
• Entry barrier
– an obstruction that makes it difficult for a
company to enter an industry
 Barriers to Entry
Some of the possible barriers to entry are:
• Economies of scale
• Product differentiation
• Capital requirements
• Switching costs
• Access to distribution channels
• Cost disadvantages independent of 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.
• Factors related to intense rivalry
– Number of competitors
– Rate of industry growth
– Product or service characteristics
– Amount of fixed costs
– Capacity
– Height of exit 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
• Buyers affect an industry through their ability to
force down prices, bargain for higher quality or
more services, and play competitors against each
other.
• Bargaining power of buyers:
– Large purchases
– Backward integration
– Alternative suppliers
– Low cost to change suppliers
– Product represents a high percentage of buyer’s cost:
Incented to shop around
– Buyer earns low profits: Cost/service sensitive
– Product is unimportant to buyer
 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.
• A buyer or a group of buyers is powerful if some of the
following factors hold true:
– Industry is dominated by a few companies
– Unique product or service
– Substitutes are not readily available
– Ability to forward integrate
– Unimportance of product or service to the industry
 Relative Power of Other Stakeholders
• Government
• Local communities
• Creditors
• Trade associations
• Special-interest groups
• Unions
• Shareholders
• Complementors
 Industry Evolution
• 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
• Multi-domestic industries
– specific to each country or group of countries
• 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
Figure 4-3: Continuum of International
Industries
 Strategic Groups
• Strategic group
– a set of business units or firms that pursue similar
strategies with similar resources.
• Developed by Hunt, it argues that an industry
contains different strategic groups, and firms in a
strategic group pursue similar strategy or
business model.
• The number of strategic groups in an industry
depends on the factors/dimensions used to
define the groups.
Example: Mapping Strategic Groups in the
U.S. Restaurant Chain Industry
 Conducting Strategic Group
Analysis
• Identify two main dimensions on which the firms
in an industry are competing and place the
dimensions on x and y axis. In the previous
example, the dimensions taken are price and
product-line breadth.
• Position the firms on the map.
• Firms which are closest to each other form a
strategic group
• A 5 Force analysis for each group can be
conducted thereafter.
 Hyper-competition
Market stability is threatened by:
• Short product life cycles
• Short product design cycles
• New technologies
• Easy entry of new competitors
• Repositioning by incumbents
• Tactical redefinitions of market boundaries as diverse
industries merge
• Example: Smart Phone Industry in India
 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.
– Examples include network coverage for
telecom network providers.
– Also known as competitive profiling.
 Industry Matrix
• Industry matrix summarizes the key success
factors within an industry
• It looks something like this
 Illustrative Example- Industry
Matrix for Coca-Cola and Pepsi
Key Success Weight Coca Cola Coca Cola PepsiCo PepsiCo
Factors Rating (1-4) Weighted Rating (1-4) Weighted
Average Average
Distribution 0.20 4 0.8 3 0.6

Product Mix 0.05 4 0.2 3 0.15

Financial 0.10 3 0.3 3 0.3

Position
Global 0.20 3 0.6 2 0.4
Presence
Market 0.20 3 0.6 2 0.4
Share
Advertising 0.15 2 0.3 4 0.6

Brand 0.10 3 0.3 3 0.3

Loyalty
1 3.1 2.75
External Factor Analysis Summary
(EFAS)
• Analytical tool to evaluate the external position
of the firm w.r.t. to opportunities and threats.
• Useful for firm to come up with strategies to
leverage opportunities and minimize the impact
of threats.
 Illustrative Example- EFAS for Tata Sky
Key External Factors Weight Rating (1- Weighted Score
4)

Opportunities
Increased mobility of population 0.15 4 0.1
Growing demand for large sized television 0.15 3 0.45
Growing demand of superior picture quality 0.05 3 0.15
Increasing pace of digitization 0.15 2 0.30
Threats
Emergence of IPTV 0.10 1 0.1
Strong domestic competition 0.15 2 0.3
Increasing government regulations 0.10 1 0.1
Entry of Reliance in DTH space 0.15 2 0.3
Total 1 1.8

Steps to develop EFAS:

1. List opportunities and threats for the firm.
2. Weight each factor from 0 (low) to 1(high) based on its impact on the firm’s strategic position.
The sum of all the factors should be equal to 1.
3. Rate from 1(poor) to 4 (outstanding) based on company’s response to that factor.
4. Multiply weight and rating for each factor to arrive at the weighted score.
5. Add weighted score achieved for each factor.
Thank You