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.

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.

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

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