Strategic Management and Business Policy PDF 2018

02-Sep-21 Strategic Management and Business Policy 15e, Global Edition Chapter 4 Environmental Scanning and...

02-Sep-21 Strategic Management and Business Policy 15e, Global Edition Chapter 4 Environmental Scanning and Industry Analysis Associate Professor Dr. Asif Salam Department of Business Administration Faculty of Economics and Administration King Abdulaziz University Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. Environmental Scanning Environmental scanning – Is the monitoring, evaluation, and dissemination of information relevant to the organizational development of strategy Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-2 1  02-Sep-21 Identifying External Environmental Variables (1 of 4) Natural environment – includes physical resources, wildlife, and climate that are an inherent part of existence on Earth – These factors form an ecological system of interrelated life Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-3 Identifying External Environmental Variables (2 of 4) Societal environment – Is 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 – These factors affect multiple industries and are as follow: – economic, – technological, – political-legal, – sociocultural Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-4 2  02-Sep-21 Identifying External Environmental Variables (3 of 4) Task environment – Includes those elements or groups that directly affect a corporation and, in turn, are affected by it – These are government, local communities, suppliers, competitors, customers, creditors, employees/labor unions, special-interest groups, and trade associations Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-5 Identifying External Environmental Variables (4 of 4) Industry analysis – Is an in-depth examination of key factors within a corporation’s task environment Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-6 3  02-Sep-21 Scanning the Societal Environment: STEEP Analysis STEEP analysis – monitoring trends in the societal and natural environments – Involves sociocultural, technological, economic, ecological, and political-legal forces Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-7 STEEP Analysis: Monitoring Trends in the Societal and Natural Environments Large corporations categorize the natural and societal environments in any one geographic region into five areas and focus their scanning in each area on trends that have corporate-wide relevance: Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-8 4  02-Sep-21 Demographic trends are part of the sociocultural aspect of the societal environment For example, the demographic bulge in the U.S. population caused by the baby boom after WWII continues to affect market demand in many industries. This group of 77 million people now in their 50s and 60s is the largest age group in all developed countries, especially in Europe. 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/). Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-9 Current Sociocultural Trends Eight current sociocultural trends are transforming North America and the rest of the world: 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 Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-10 5  02-Sep-21 Technological Breakthroughs Researchers at George Washington University have identified a number of technological breakthroughs that are already having a significant impact on many industries: Portable information devices and electronic networking Alternative energy sources Precision farming Virtual personal assistants Genetically altered organisms Smart, mobile robots Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-11 Categories of Risk: Climate Change Trends in the ecological part of the environment have been accelerating at a pace that is difficult to stay up with. This element is focused upon the natural environment and its consideration/impacts upon the operation of a business. The effects of climate change on companies can be grouped into six categories of risks: 1. Regulatory risk 2. Supply chain risk 3. Product and technology 4. Litigation risk 5. Reputational risk 6. Physical risk Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-12 6  02-Sep-21 Table 4-3: Some Important Variables in International Societal Environments To account for the many differences among societal environments from one country to another. The table includes a list important variables in international societal environments, (economic, technological, political–legal, and sociocultural) for any particular country or region. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-13 Scanning the External Task Environment a corporation’s scanning of the environment includes 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. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-14 7  02-Sep-21 Forces Driving Industry Competition Michael Porter, an authority on competitive strategy, contends that a corporation is most concerned with the intensity of competition within its industry. The level of this intensity is determined by basic competitive forces. ―The collective strength of these forces,‖ he contends, “determines the ultimate profit potential in the industry, where profit potential is measured in terms of long-run return on invested capital.” In carefully scanning its industry, a corporation must assess the importance to its success of each of six forces: threat of new entrants, rivalry among existing firms, threat of substitute products or services, bargaining power of buyers, bargaining power of suppliers, and relative power of other stakeholders. The stronger each of these forces is, the more limited companies are in their ability to raise prices and earn greater profits. Although Porter mentions only five forces, a sixth— other stakeholders—is added here to reflect the power that governments, local communities, and other groups from the task environment wield over industry activities. Using this model, a high force can be regarded as a threat because it is likely to reduce profits. A low force, in contrast, can be viewed as an opportunity because it may allow the company to earn greater profits. In the short run, these forces act as constraints on a company’s activities. In the long run, however, it may be possible for a company, through its choice of strategy, to change the strength of one or more of the forces to the company’s advantage. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-15 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 Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-16 8  02-Sep-21 Barriers to Entry The threat of entry depends on the presence of entry barriers and the reaction that can be expected from existing competitors. An entry barrier is an obstruction that makes it difficult for a company to enter an industry. 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 Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-17 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. 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. According to Porter, intense rivalry is related to the presence of several factors, including: Number of competitors Rate of industry growth Product or service characteristics Amount of fixed costs Capacity Height of exit barriers Diversity of rivals Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-18 9  02-Sep-21 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 and may not appear to be easily substitutable. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-19 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. 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 or a group of buyers is powerful if some of the following factors hold true. 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 Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-20 10  02-Sep-21 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 Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-21 Relative Power of Other Stakeholders A sixth force should be added to Porter’s list to include a variety of stakeholder groups from the task environment. Some of these groups are governments (if not explicitly included elsewhere), local communities, creditors (if not included with suppliers), trade associations, special-interest groups, unions (if not included with suppliers), shareholders, and complementors. Government Local communities Creditors Trade associations Special-interest groups Unions Shareholders Complementors Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-22 11  02-Sep-21 Industry Evolution Fragmented industry – Is one where 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 – Is domination by a few large firms, each struggles to differentiate products from its competition Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-23 Categorizing International Industries Multi-domestic industries – Are specific to each country or group of countries – This type of international industry is a collection of essentially domestic industries, such as retailing and insurance. Global Industries – operate worldwide with multinational companies making only small adjustments for country-specific circumstances Regional industries – Are those multinational companies primarily coordinate their activities within regions, such as the Americas or Asia. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-24 12  02-Sep-21 Continuum of International Industries According to Porter, worldwide industries vary on a continuum from multi-domestic to global. Multi-domestic industries are specific to each country or group of countries. This type of international industry is a collection of essenttially domestic industries, such as retailing and insurance. The activities in a subsidiary of a multinational corporation (MNC) in this type of industry are essentially independent of the activities of the MNC’s subsidiaries in other countries. Within each country, it has a manufacturing facility to produce goods for sale within that country. The MNC is thus able to tailor its products or services to the very specific needs of consumers in a particular country or group of countries having similar societal environments. Global industries, in contrast, operate worldwide, with MNCs making only small adjustments for country-specific circumstances. In a global industry an MNC’s activities in one country are not significantly affected by its activities in other countries. MNCs in global industries produce products or services in various locations throughout the world and sell them, making only minor adjustments for specific country requirements Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-25 Mapping Strategic Groups in the Restaurant Chain Industry Strategic group – a set of business units or firms that pursue similar strategies with similar resources Strategic groups in a particular industry can be mapped by plotting the market positions of industry competitors on a two-dimensional graph, using two strategic variables as the vertical and horizontal axes Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-26 13  02-Sep-21 Strategic Types These general types have the following characteristics: Defenders are companies with a limited product line that focus on improving the efficiency of their existing operations. Prospectors are companies with fairly broad product lines that focus on product innovation and market opportunities. Analyzers are corporations that operate in at least two different product-market areas, one stable and one variable. Reactors are corporations that lack a consistent strategy-structure-culture relationship. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-27 Hypercompetition Market stability is threatened by: short product life cycles short product design cycles new technologies frequent entry by unexpected outsiders repositioning by incumbents tactical redefinitions of market boundaries as diverse industries merge Richard D’Aveni contends that as this type of environmental turbulence reaches more industries, competition becomes hypercompetition. According to D’Aveni: In hypercompetition, the frequency, boldness, and aggressiveness of dynamic movement by the players accelerates to create a condition of constant disequilibrium and change. Market stability is threatened by short product life cycles, short product design cycles, new technologies, frequent entry by unexpected outsiders, repositioning by incumbents, and tactical redefinitions of market boundaries as diverse industries merge. In other words, environments escalate toward higher and higher levels of uncertainty, dynamism, heterogeneity of the players and hostility. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-28 14  02-Sep-21 Using Key Success Factors to Create an Industry Matrix Key success factors – are variables that can significantly affect the overall competitive positions of companies within any particular industry. – They typically vary from industry to industry and are crucial to determining a company’s ability to succeed within that industry. – They are usually determined by the economic and technological characteristics of the industry and by the competitive weapons on which the firms in the industry have built their strategies. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-29 Industry Matrix Industry matrix – summarizes the key success factors within a particular industry – the matrix gives a weight for each factor based on how important that factor is for success within the industry. – The matrix also specifies how well various competitors in the industry are responding to each factor. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-30 15  02-Sep-21 Competitive Intelligence Competitive intelligence – a formal program of gathering information on a company’s competitors – also called business intelligence, it is one of the fastest growing fields within strategic management Sources of competitive intelligence: – information brokers – Internet – industrial espionage – investigatory services Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-31 Useful Forecasting Techniques Some useful forecasting techniques are: Extrapolation Brainstorming Expert opinion Delphi technique Statistical modeling Prediction markets Cross-impact analysis (CIA) Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-32 16  02-Sep-21 Synthesis of External Factors—EFAS After strategic managers have scanned the natural, 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 by using a form. As an example of this procedure, a number of external factors for Maytag Corporation with corresponding weights, ratings, and weighted scores provided. This table is appropriate for 1995, long before Maytag was acquired by Whirlpool. Note that Maytag’s total weight was 3.15, meaning that the corporation was slightly above average in the major home appliance industry at that time Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. 4-33 17