CBMEC 413 Strategic Management Environmental Scanning and Industry Analysis PDF

SUPPLEMENTARY NOTES 2 CBMEC 413 – STRATEGIC MANAGEMENT ENVIRONMENTAL SCANNING AND INDUSTRY ANALYSIS LEANING OBJECTIVES At the end of the module, the learners must be able to: recognize aspects of an organization’s environment that can...

SUPPLEMENTARY NOTES 2 CBMEC 413 – STRATEGIC MANAGEMENT ENVIRONMENTAL SCANNING AND INDUSTRY ANALYSIS LEANING OBJECTIVES At the end of the module, the learners must be able to: recognize aspects of an organization’s environment that can influence its long-term decisions; identify the aspects of an organization’s environment that are most strategically important; conduct an industry analysis to understand the competitive forces that influence the intensity of rivalry within an industry; understand how industry maturity affects industry competitive forces; and categorize international industries based on their pressures for coordination and local responsiveness. ASPECTS OF ENVIRONMENTAL SCANNING Before managers can begin strategy formulation, they must understand the context of the environment in which it competes. It is virtually impossible for a company to design a strategy without a deep understanding of the external environment. Once management has framed the aspects of the environment that impact the business, they are in a position to determine the firm's competitive advantages. Environmental scanning is an overarching term encompassing the monitoring, evaluation, and dissemination of information relevant to the organizational development of a strategy. 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 refers to an in-depth examination of key factors that influence the business operations of a corporation. According to Bamford, Hoffman, Hunger, and Wheelen (2018), the natural, societal, and task environments must be monitored to examine the strategic factors that have a strong impact on corporate success or failure. Significant changes in the natural environment tend to impact the societal environment of the business, and the task environment impacts the growth or decline of whole industries (Bamford et al., 2018). In undertaking environmental scanning, strategic managers must first be aware of the variables that may affect a corporation’s short-term and long-term decisions as follows: Natural Environment. It includes physical resources, wildlife, and climate that are an inherent part of existence on Earth. These factors form an ecological system of interrelated life. Bamford et al. (2018) cited that a business must scan the natural environment for factors that might previously have been taken for granted, such as the availability of fresh water and clean air. Moreover, management must scan not only the natural environment for possible strategic factors, but also include in its strategic decision-making processes the impact of its activities upon the natural environment (Bamford et al., 2018). For instance, a company could measure and reduce its carbon footprint or the amount of greenhouse gases it is emitting into the air, considering the rising concerns about climate change. Societal Environment. It is mankind’s social system that includes general forces that do not directly affect the short-run activities of the organization but can influence its long-term decisions. These forces are as follows: a. Economic Forces. These regulate the exchange of materials, money, energy, and information. b. Technological Forces. These generate problem-solving inventions. c. Political-Legal Forces. These allocate power and constrain and protect laws and regulations. d. Sociocultural Forces. These regulate the values, morals, and customs of society. 1  Task Environment. It includes elements or groups that directly affect a corporation. These are governments, local communities, suppliers, competitors, customers, creditors, employees/labor unions, special-interest groups, and trade associations. A corporation’s task environment is typically focused on the industry within which the firm operates. SCANNING THE NATURAL ENVIRONMENT The natural environment includes physical resources, wildlife, and climate that are an inherent part of existence on Earth. Until the 20th century, the natural environment was generally perceived by business people to be a given—something to exploit, not conserve. It was viewed as a free resource, something to be taken or fought over, like arable land, diamond mines, deepwater harbors, or freshwater. Once they were controlled by a person or entity, these resources were considered assets and thus valued as part of the general economic system—a resource to be bought, sold, or sometimes shared. Side effects, such as pollution, were considered to be externalities, costs not included in a business firm's accounting system, but felt by others. Eventually, these externalities were identified by governments, which passed regulations to force business corporations to deal with the side effects of their activities. The concept of sustainability argues that a firm's ability to continuously renew itself for long-term success and survival is dependent not only upon the greater economic and social system of which it is a part but also upon the natural ecosystem in which the firm is embedded. A business must scan the natural environment for factors that might previously have been taken for granted, such as the availability of freshwater and clean air. Global warming means that aspects of the natural environment, such as sea level, weather, and climate, are becoming increasingly uncertain and difficult to predict. Management must, therefore, scan not only the natural environment for possible strategic factors, but also include in its strategic decision-making processes the impact of its activities upon the natural environment. In a world concerned with climate change, a company could measure and reduce its carbon footprint—the number of greenhouse gases it is emitting into the air. Research reveals that scanning the market for environmental issues is positively related to firm performance because it helps management identify opportunities to fulfill future market demand based upon environmentally friendly products or processes. See the Sustainability Issue feature to learn how the high-end car companies saw an opportunity in green cars. SCANNING THE SOCIETAL ENVIRONMENT The number of possible strategic factors in the societal environment is very high. The number becomes enormous when we realize that, generally speaking, each country in the world can be represented by its own unique set of societal forces—some of which are very similar to those of neighboring countries and some of which are very different. STEEP Analysis. It is a framework that is used to scan and analyze the natural and societal environment. It stands for sociocultural, technological, economic, ecological, and political-legal. It is widely-used in scanning each area on trends that have corporate-wide relevance. a. Sociocultural Trends ▪ increasing environmental awareness ▪ growing health consciousness ▪ expanding senior market ▪ impact of millennials 2  ▪ declining mass market ▪ changing pace and location of life ▪ changing household composition ▪ increasing diversity of workforce and markets b. Technological Trends ▪ portable information devices and electronic networking ▪ alternative energy sources ▪ precision farming ▪ virtual personal assistants ▪ genetically-altered organisms ▪ smart, mobile robots c. Economic Trends ▪ increasing interest rates ▪ changing prices of basic and common commodities ▪ emerging markets ▪ GDP trends ▪ unemployment levels ▪ membership in economic associations d. Ecological Trends ▪ effects of climate change posing regulatory, supply chain, product and technology, litigation, reputational, and physical risks ▪ passion for environmental causes e. Political-Legal Trends ▪ strict enforcement of antitrust laws and other laws ▪ high levels of taxation ▪ constraining labor laws ▪ government bureaucracy ▪ international societal considerations and foreign policies ▪ trade regulations ▪ terrorist activities INDUSTRY ANALYSIS: ANALYZING THE TASK ENVIRONMENT An industry is a group of firms that produces a similar product or service. Industry analysis (popularized by Michael Porter) refers to an in-depth examination of key factors within a corporation’s task environment. Part of the industry analysis is an examination of the important stakeholder groups, like suppliers and customers, in a particular corporation’s task environment. The following are the common methods used by corporations in conducting industry analysis: SWOT Matrix. It is a framework used to evaluate a company's competitive position. SWOT analysis assesses internal, external, current, and future potential factors that may affect the market position of a particular organization. The following are the components of SWOT Matrix: a. Strengths. These are the internal areas where an organization excels and factors which separate an organization from its competitors. These include a strong brand image, loyal customer base, a strong balance sheet, and unique technology, among others. EXAMPLE: McDonald's has the following strengths: distribution potential, world-class facilities, strong brand image, and standardized processes (Greenspan, 2017). 3  b. Weaknesses. These are the internal areas that hinder an organization from performing at its optimum level. These are areas where the business needs to make some improvements to remain competitive. These include a weak brand, higher-than-average turnover, high levels of debt, an inadequate supply chain, or lack of capital, among others. EXAMPLE: McDonald's has the following weaknesses: limited food options and low process flexibility due to standardization (Greenspan, 2017). c. Opportunities. These are favorable external factors that could give an organization a competitive advantage. For instance, if a country cuts tariffs, a car manufacturer can export its cars into a new market, which will lead to increased sales and larger market share. EXAMPLE: McDonald's has the following opportunities: development of innovative and healthier menu, partnership with other brands, and expansion on emerging markets. d. Threats. These are the factors that may pose potential harm to an organization. For instance, a drought is a threat to a wheat-producing company, as it may destroy or reduce the crop yield. Other common threats include rising costs for materials, increasing competition, tight labor supply, and disruption through emerging technologies that may drive products or services obsolete. EXAMPLE: McDonald's faces the following threats: changing customer preferences in terms of healthy food consumption, economic downturn, and strong competition. PESTEL Analysis. It is a tool used to identify the external forces that may affect an organization positively and negatively. This tool is composed of the following factors: a. Political. These factors determine the impact of government and government policy on a particular organization or a specific industry. It includes trade, fiscal, and taxation policies, among others. EXAMPLE: McDonald's may capitalize on the opportunity for increased international trade agreements because it enables easier business expansion to foreign countries. The company also needs to consider governmental guidelines for diet and health and evolving public health policies as an opportunity to innovate their products or as a threat if they fail to innovate. b. Economic. These factors determine the impact of the economy and its performance, to an organization and its profitability. These include interest rates, employment or unemployment rates, raw material costs, and foreign exchange rates, among others. EXAMPLE: McDonald's may capitalize on the opportunity for slow but stable growth of developed countries and rapid growth of developing countries. c. Social. These factors determine the impact of social environment and emerging trends to business profitability of an organization. These also help marketers to further understand the changing preferences of the customers. These include changing family demographics, education levels, cultural trends, attitude changes, and changes in lifestyles, among others. EXAMPLE: McDonald's may capitalize on the opportunity for rising disposable incomes and busy lifestyles in urban communities since it will increase their sales growth. On the other hand, the company needs to consider increasing cultural diversity and healthy lifestyle trend as both an opportunity and threat. d. Technological. These factors determine the impact of technological innovation and development on a particular market or industry. These include changes in digital or mobile technology, automation, research, and development. Moreover, these also include technological influence on methods of distribution, manufacturing, and logistics. EXAMPLE: McDonald's may capitalize on the opportunity for increasing business automation and increasing customer preferences on ordering food using their mobile devices. 4  e. Environmental. These factors determine the influence of the surrounding environment and the impact of ecological aspects to a market or industry. These include climate, recycling procedures, carbon footprint, waste disposal, and sustainability. EXAMPLE: McDonald's may capitalize on the opportunity for increasing emphasis on sustainable business strategies while considering the threat of changes in climate conditions in some regions where their business operates. f. Legal. These factors determine the importance of understanding legal laws and procedures on a given territory where a business operates. These include employment legislation, consumer law, health and safety, international as well as trade regulation and restrictions. EXAMPLE: McDonald's needs to review the threat brought by increasing health regulations in workplaces and schools and rising legal minimum wages imposed by some countries where their business operates. Porter's Five (5) Forces. It is developed by Michael E. Porter as a framework for assessing and evaluating the competitive strength and position of a business organization. The following are the components of this tool: a. Supplier Power. This force analyzes how suppliers can easily influence price increases. This is driven by the following factors: number of suppliers of each essential input; uniqueness of their product or service; relative size and strength of the supplier; and cost of switching from one supplier to another. EXAMPLE: According to Gregory (2018), the bargaining power of suppliers in the case of McDonald’s is weak based on the large number of suppliers and the high overall supply of raw materials. b. Buyer Power. This force analyzes how buyers can easily influence price decreases. This is driven by the number of buyers in the market, the importance of each buyer to the organization, and cost to the buyer of switching from one supplier to another. For instance, a few powerful buyers of a business are often able to dictate terms. EXAMPLE: According to Gregory (2018), McDonald’s must address the power of their customers on business performance since they have a strong bargaining power based on low switching costs, large number of providers, and high availability of substitutes. c. Competitive Rivalry. This force examines the intensity of competition in the market place. This is driven by the number and capability of competitors in the market. Rivalry competition is high when there are few businesses equally selling a product or service, when the industry is growing, and when consumers can easily switch to a competitor's product for a cheaper cost. When rivalry among competitors is high, advertising and price wars can ensue, which can pose a negative impact on the business in the long run. EXAMPLE: According to Gregory (2018), McDonald’s faces tough competition because the fast- food restaurant market is saturated. The strong force of competitive rivalry is influenced by the high number of firms, high aggressiveness of firms, and low switching costs. d. Threat of Substitution. This force is threatening when buyers can easily find substitute products with attractive prices or better quality, and when buyers can switch from one product or service to another with little cost. For example, switching from coffee to tea does not cost anything, unlike switching from car to bicycle. EXAMPLE: Gregory (2018) stated that the high substitute availability and the low switching costs make the threat of substitution a strong force in the case of McDonald’s. e. Threat of New Entrants. This force determines how easy or difficult it is to enter a particular industry. If an industry is profitable and there are few barriers to enter, rivalry soon intensifies. 5  When more organizations compete for the same market share, profits start to fall. It is essential for existing organizations to create high barriers to enter to deter new entrants. EXAMPLE: Gregory (2018) stated that the moderate threat of new entrants in the case of McDonald’s is based on the low switching costs (strong force), highly variable capital cost (moderate force), and high cost of brand development (weak force). Ecosystem Assessment Tool. The business ecosystem is demonstrated by a network composing four (4) types of players in the industry: customers, suppliers, competitors, and complementors. The term “ecosystem" is derived from the concept of the biological system in the environment. According to Hayes (2018), the connection of these players demonstrates a constantly evolving relationship in which each entity must be flexible and adaptable to survive, similar to the biological system. Moreover, each player in the business ecosystem offers opportunities for cooperation with a particular company, including the competitors. Bradenburger & Nalebuff (1996) summarizes the components of this tool: a. Customers. These are the people or parties that buy products and services of an organization. Additional customers mean more revenue, which in turn lead to a larger market share. Customers can be end-consumers or other companies that will eventually take the products to the consumer market. b. Suppliers. These are the parties that provide the resources needed to produce or sell finished products or services. They are classified as external factors, which may affect an organization since suppliers have the potential to raise prices and/or reduce the quality of the purchased inputs or raw materials. It is therefore important to keep a good and meaningful relationship with the suppliers or spread risk by having multiple options for them. c. Competitors. These are the parties that fight over the market share of an organization by offering similar products or services and targeting similar customers. However, companies often view competition way too narrow, thereby failing to foresee upcoming threats. For instance, most people would agree that two (2) airline companies with the same destinations are considered competitors. Railroad companies with international high-speed trains, on the other hand, are often not included in the competitor analysis even though they fulfill the same customer need: traveling. Although competitors are often seen as parties to fight over market share with, it is also possible to collaborate with them as well. On the supplier side, competitors could combine forces when purchasing similar raw materials to lower the overall cost per unit. On the customer side, companies in the automotive industry like Nissan and Renault combined their complementary capabilities to produce high-quality vehicles, which they sell in different geographical markets. d. Complementors. These are the organizations that offer complementary or harmonizing products or services that could work well together with a company’s products to make the end result more attractive to consumers. For instance, software and hardware companies work together to enhance the user experience for computers. Other examples are the airline and tourism industries. When consumers head to a tourist destination, they often get there on an airplane. Similarly, whenever consumers travel on an airplane, they are likely visiting a destination which is a part of the tourism industry, such as a hotel, camping, or a rental car agency. The government in general and government regulatory agencies relevant to the company’s industry can also be part of complementors. 6