Strategic Management and Business Policy PDF

CHAPTER 4 environmental scanning and Industry Analysis Environmental Strategy Strategy Evaluation...

CHAPTER 4 environmental scanning and Industry Analysis Environmental Strategy Strategy Evaluation Scanning: Formulation: Implementation: and Control: Gathering Developing Putting Strategy Monitoring Information Long-range Plans into Action Performance External Mission N t l Natural Reason Reason ffor or Objectives Environment: existence Resources and Wh t What climate results l to Strategies accomplish h Societal by when Pl to Plan Environment: achieve hi the Policies General forces mission & objectives Broad Programs Task guidelines id li and Tactics Environment: for decision Industry analysis making Activities needed d d to Budgets accomplishh a plan Cost Cost off the thhe Procedures Internal programs Structure: Sequence S equence Performance off steps Chain of command needed to Culture: do the job Actual results Beliefs, expectations, values Resources: Assets, skills, competencies, knowledge Feedback/Learning: Make corrections as needed MyManagementLab® Improve Your Grade! Over 10 million students improved their results using the Pearson MyLabs.Visit mymanagementlab.com for simulations, tutorials, and end-of-chapter problems. 124 DESIGN SERVICES OF # 111708   Cust: PE/NJ/B&E   Au: Wheelen  Pg. No. 124 C/M/Y/K M04_WHEE0811_14_GE_CH04.indd 124 Title: Strategic Management and Business Policy     Server: Jobs4 Short / Normal S4carlisle Publishing Services 5/20/14 10:49 AM  Learning Objectives After reading this chapter, you should be able to: Recognize aspects of an organization’s Construct strategic group maps to assess environment that can influence its long- the competitive positions of firms in an term decisions industry Identify the aspects of an organization’s Identify key success factors and develop an environment that are most strategically industry matrix important Use publicly available information to Conduct an industry analysis to understand conduct competitive intelligence the competitive forces that influence the Know how to develop an industry scenario intensity of rivalry within an industry Be able to construct an EFAS Table that Understand how industry maturity affects summarizes external environmental industry competitive forces factors Categorize international industries based on their pressures for coordination and local responsiveness No More Oil Depending upon whom you listen to, the world will either run out of oil within 50 years or there will be oil for much longer because of new oil extraction techniques and undiscovered reserves. Both approaches suggest significant price increases to keep using oil as we do; however, the view you take for your business is likely to cause significantly different decisions. According to a study by HSBC (the second largest bank in the world), at our current world- wide consumption rate (that does not include growth), the world is likely to have little or no oil left in 50 years. Enormous oil price increases will no doubt cause a significant drop in consump- tion and the associated extension of oil’s availability. However, a change away from oil as a pri- mary input to business will impact every economic enterprise on the earth. These changes are generally being ignored by the vast majority of businesses, and yet it’s one area where proper planning can make a difference. On the other side of this debate is an argument that there are many means with which to attain energy in a useable form. This includes oil sands, deep-water drilling, new oil extraction techniques like horizontal drilling, fracking, synthetic oils, and coal liquefaction to name a few. This supply/demand approach suggests that as price and demand rises, so will the means by which businesses satisfy those needs. What might this mean for the economies of the world and the speed with which this event will arrive? What companies are working on alternative approaches to the use of oil? It is in- cumbent upon business leaders to think about the future and prepare their organizations for changes in the environment—be it the natural environment, competitive environment, political environment, technological environment, or social environment. SOURCES: J. C. Rudolf, “Less than 50 Years of Oil Left, HSBC Warns,” The New York Times (March 30, 2011), (http://green.blogs.nytimes.com/2011/01/20/less-than-50-years-of-oil-left-hsbc-warns/); C. Krauss, “There Will Be Fuel,” The New York Times (November 16, 2010), (http://www.nytimes.com/2010/11/17/business/energy- environment/17fuel.html). 125 DESIGN SERVICES OF # 111708   Cust: PE/NJ/B&E   Au: Wheelen  Pg. No. 125 C/M/Y/K M04_WHEE0811_14_GE_CH04.indd 125Management and Business Policy     Server: Jobs4 Title: Strategic Short / Normal S4carlisle Publishing Services 5/20/14 10:49 AM  126 PAR T 2    Scanning the Environment A changing environment can help as well as hurt a company. Many pioneering companies have gone out of business because of their failure to adapt to environmental change or, even worse, because of their failure to create change. For example, Baldwin Locomotive, the major manufacturer of steam locomotives, was very slow in making the switch to diesel locomo- tives. General Electric and General Motors soon dominated the diesel locomotive business and Baldwin went out of business. The dominant manufacturers of vacuum tubes failed to make the change to transistors and consequently lost this market. Eastman Kodak, the pio- neer and market leader of chemical-based film photography, has been in a long decline as it struggles to find its place in the post-film world. Failure to adapt is, however, only one side of the coin. The aforementioned oil example shows how a changing environment usually creates new opportunities at the same time it destroys old ones. The lesson is simple: To be successful over time, an organization needs to be in tune with its external environment. There must be a strategic fit between what the environment wants and what the corporation has to offer, as well as between what the corporation needs and what the environment can provide. Current predictions are that the environment for all organizations will become even more uncertain with every passing year. What is environmental uncertainty? It is the degree of complexity plus the degree of change that exists in an organization’s external environment. As more and more markets become global, the number of factors a company must consider in any decision increases in size and difficulty. With new technologies being discovered every year, markets change and products must change with them. On the 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 play a major part in strategic decisions. Environmental Scanning Before managers can begin strategy formulation, they must understand the context of the en- vironment 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 encompass- ing the monitoring, evaluation, and dissemination of information relevant to the organiza- tional development of 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.1 A 2011 study by McKinsey & Company found that executives ranked Macrolevel trends as the most important input to be considered when developing corporate strategy.2 Identifying External Environmental Variables In undertaking environmental scanning, strategic managers must first be aware of the many variables within a corporation’s natural, societal, and task environments (see Figure 1–3). The 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 DESIGN SERVICES OF # 111708   Cust: PE/NJ/B&E   Au: Wheelen  Pg. No. 126 C/M/Y/K M04_WHEE0811_14_GE_CH04.indd 126 Title: Strategic Management and Business Policy     Server: Jobs4 Short / Normal S4carlisle Publishing Services 5/20/14 10:49 AM  CH A PTER 4   Environmental Scanning and Industry Analysis 127 life. The societal environment is mankind’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 follows: Economic forces that regulate the exchange of materials, money, energy, and information. Technological forces that generate problem-solving inventions. Political–legal forces that allocate power and provide constraining and protecting laws and regulations. Sociocultural forces that regulate the values, mores, and customs of society. The task environment includes those elements or groups that directly affect a corporation and, in turn, are affected by it. These are governments, local communities, suppliers, competi- tors, customers, creditors, employees/labor unions, special-interest groups, and trade associa- tions. A corporation’s task environment is typically focused on the industry within which the firm operates. Industry analysis (popularized by Michael Porter) refers to an in-depth exami- nation of key factors within a corporation’s task environment. 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 (resource availability and costs), and finally the task environment because it impacts the growth or decline of whole industries. Scanning the Natural Environment The natural environment includes physical resources, wildlife, and climate that are an inher- ent part of existence on Earth. Until the 20th century, the natural environment was gener- ally 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, deep water harbors, or fresh water. 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 pollu- tion, 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 embed- ded.3 For more information on innovative approaches to this issue, see the Sustainability Issue feature. 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. 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 con- cerned with climate change, a company could measure and reduce its carbon footprint—the amount 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 environmen- tally friendly products or processes.4 See the Sustainability Issue feature to learn how the high-end car companies saw an opportunity in green cars. DESIGN SERVICES OF # 111708   Cust: PE/NJ/B&E   Au: Wheelen  Pg. No. 127 C/M/Y/K M04_WHEE0811_14_GE_CH04.indd 127Management and Business Policy     Server: Jobs4 Title: Strategic Short / Normal S4carlisle Publishing Services 5/20/14 10:49 AM  128 PAR T 2    Scanning the Environment sustainability issue Green SuperCars The move to greener cars cuts fuel consumption by more than 40%. The price has finally reached ultra- tag is something to see, however. The vehicle will most high-end car companies, likely be priced above US$850,000. Porsche already has including Porsche, Ferrari, hybrid versions of its Cayenne SUV and Panamera four- and Bentley. The push to get door cars, clocking in at US$70,000 and US$96,000, re- car manufacturing companies to spectively. However, they are also gearing up for a new increase gas mileage and reduce emissions has come from 918 Spyder sports coupe to be released for the 2014 a combination of regulations, purchasing patterns, and model year, which will cost more than US$950,000. pressure from environmental groups. Although some form Even venerable Bentley is planning a plug-in hybrid ver- of hybrid vehicle technology has been around since the sion of its SUV that will come with a price tag of around beginning of the automobile, the Toyota Prius, introduced US$250,000. to the Japanese market in 1997, quickly became the stan- All of these vehicles require battery packs that weigh in dard of economy in the industry. excess of 1000 pounds and must be disposed of when the Higher-end car makers have been making hybrid ve- vehicle is no longer useful. The increase in sustainability hicles for some time, even though the price of these vehi- from an environmental approach on one end triggers an cles has kept their sales relatively modest. BMW offers the environmental issue at the other end of the product’s use- 750i, four-door sedan for US$101,000, while the equiva- ful life. So what is the right answer for these companies? lent Mercedes sedan (S400) goes for roughly US$92,000. And what about the environment? Despite this, ultra-luxury car makers waited until the 2013 model year to release their hybrid models. Sources: http://www.hybridcars.com/history/history-of-hybrid- Ferrari announced the F70, which has two electric vehicles.html; T. Ebhardt, “Supercar Makers Seek a Different Shade of motors along with a 12-cylinder gasoline engine that Green,” BusinessWeek (May 28, 2012), (www.businessweek.com). Scanning the Societal Environment: STEEP Analysis 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. For example, even though Korea and China share Asia’s Pacific Rim area with Thailand, Taiwan, and Hong Kong (sharing many similar cultural values), they have very different views about the role of business in society. It is generally believed in Korea and China (and to a lesser extent in Japan) that the role of business is primarily to contribute to national develop- ment. However, in Hong Kong, Taiwan, and Thailand (and to a lesser extent in the Philippines, Indonesia, Singapore, and Malaysia), the role of business is primarily to make profits for the shareholders.5 Such differences may translate into different trade regulations and varying difficulty in the repatriation of profits (the transfer of profits from a foreign subsidiary to a corporation’s headquarters) from one group of Pacific Rim countries to another. STEEP Analysis: Monitoring Trends in the Societal and Natural Environments. As shown in Table 4–1, 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 cor­ poratewide relevance. For ease of remembering the approach, this scanning can be called STEEP Analysis, the scanning of Sociocultural, Technological, Economic, Ecological, and Political–legal environmental forces.6 (It may also be called PESTEL Analysis for Political, Economic, Sociocultural, Technological, Ecological, and Legal forces.) Obviously, trends in any one area may be very important to firms in one industry but of lesser importance to firms in other industries. Demographic trends are part of the sociocultural aspect of the societal environment. Even though the world’s population has grown from 3.71 billion people in 1970 to 7.03 billion in DESIGN SERVICES OF # 111708   Cust: PE/NJ/B&E   Au: Wheelen  Pg. No. 128 C/M/Y/K M04_WHEE0811_14_GE_CH04.indd 128 Title: Strategic Management and Business Policy     Server: Jobs4 Short / Normal S4carlisle Publishing Services 5/20/14 10:49 AM  CH A PTER 4   Environmental Scanning and Industry Analysis 129 TABLE 4–1 Some Important Variables in the Societal Environment Sociocultural Technological Economic Ecological Political–Legal Lifestyle changes Total government GDP trends Environmental Antitrust regulations Career expectations spending for R&D Interest rates protection laws Environmental pro- Consumer activism Total industry spend- Money supply Global warming tection laws ing for R&D impacts Global warming Rate of family Inflation rates formation Focus of technologi- Non-governmental legislation Unemployment levels cal efforts organizations Immigration laws Growth rate of Wage/price controls population Patent protection Pollution impacts Tax laws Devaluation/ Age distribution of New products Reuse Special incentives revaluation population New develop- Triple bottom line Foreign trade Energy alternatives Regional shifts in ments in technology Recycling regulations transfer from lab to Energy availability population Attitudes toward marketplace and cost Life expectancies ­foreign companies Productivity im- Disposable and dis- Birthrates cretionary income Laws on hiring and provements through Pension plans promotion automation Currency markets Health care Stability of Internet availability Global financial government Level of education Telecommunication system Outsourcing Living wage infrastructure regulation Unionization Computer hacking Foreign “sweatshops” activity 2012 and is expected to increase to 8.72 billion by 2040, not all regions will grow equally. Most of the growth will be in the developing nations. It is predicted that the population of the developed nations will fall from 14% of the total world population in 2000 to only 10% in 2050.7 Around 75% of the world will live in a city by 2050, compared to little more than half in 2008.8 Developing nations will continue to have more young than old people, but it will be the reverse in the industrialized nations. 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. (See Table 4–2.) Although the median age in the United States will rise from 35 in 2000 to 40 by 2050, it will increase from 40 to 47 during the same time period in Germany, and it will increase to up to 50 in Italy as soon as 2025.9 By 2050, one in three Italians will be over 65, nearly double the number in 2005.10 With its low birthrate, Japan’s population is expected to fall from 127.6 million in 2004 to around 100 million by 2050.11 China’s stringent birth control policy is predicted to cause the ratio of workers to retir- ees to fall from 20 to 1 during the early 1980s to 2.5 to one by 2020.12 Companies with an eye on the future can find many opportunities to offer products and services to the growing number of “woofies” (well-off old folks)—defined as people over 50 with money to spend.13 These people are very likely to purchase recreational vehicles (RVs), take ocean cruises, and enjoy leisure sports, in addition to needing financial services and health care. Anticipating the needs of seniors for prescription drugs is one reason Walgreens opened 261 new stores in 2011!14 To attract older customers, retailers will need to place seats in their larger stores so aging shoppers can rest. Washrooms will need to be more handicap-accessible. Signs will need to be larger. Restaurants will need to raise the level of lighting so people can read their menus. Home appliances will require simpler and larger controls. Automobiles will need larger door openings and more comfortable seats. Zimmer Holdings, an innovative manufacturer DESIGN SERVICES OF # 111708   Cust: PE/NJ/B&E   Au: Wheelen  Pg. No. 129 C/M/Y/K M04_WHEE0811_14_GE_CH04.indd 129Management and Business Policy     Server: Jobs4 Title: Strategic Short / Normal S4carlisle Publishing Services 5/20/14 10:49 AM  130 PAR T 2    Scanning the Environment TABLE 4–2 Generation Born Age in 2010 % of Total Adult Population Current U.S. Current U.S. WWII / Silent 1936–1945 65–74 16% Generations Generations Generation Baby Boomers 1946–1964 46–64 34% Generation X 1965–1976 43–45 19% Millennials 1977–1992 18–33 30% Sources: Developed from K. Zickuhr, “Generations 2010,” Pew Research Center (December 16, 2010), (www.pewinternet.org/reports/2010/generations-2010.aspx). of artificial joints, is looking forward to its market growing rapidly over the next 20 years. According to J. Raymond Elliot, Chair and CEO of Zimmer, “It’s simple math. Our best years are still in front of us.”15 Eight current sociocultural trends are transforming North America and the rest of the world: 1. Increasing environmental awareness: Recycling and conservation are becoming more than slogans. Busch Gardens, for example, has eliminated the use of disposable Styrofoam trays in favor of washing and reusing plastic trays. 2. Growing health consciousness: Concerns about personal health fuel the trend toward physical fitness and healthier living. There has been a general move across the planet to attack obesity. The U.S. Centers for Disease Control and Prevention cites that more than two-thirds of American adults and one-third of American youth are now obese or over- weight. A number of states have enacted provisions to encourage grocery stores to open in so-called “food deserts” where the population has virtually no access to fresh foods.16 In 2012, Chile decided to ban toys that are included in various fast-food meals aimed at children in order to increase the fight against childhood obesity.17 3. Expanding seniors market: As their numbers increase, people over age 55 will become an even more important market. Already some companies are segmenting the senior pop- ulation into Young Matures, Older Matures, and the Elderly—each having a different set of attitudes and interests. Both mature segments, for example, are good markets for the health care and tourism industries; whereas, the elderly are the key market for long-term care facilities. The desire for companionship by people whose children are grown is caus- ing the pet care industry to grow by more than 5% annually in the United States. In 2012, for example, 72.9 million households in the United States spent US$52 billion on their pets. That was up from just above US$41 billion just five years ago.18 4. Impact of Millennials: Born between 1977 and 1992 to the baby boomers and Genera- tion Xers, this cohort is almost as large as the baby boom generation. In 1957, the peak year of the postwar boom, 4.3 million babies were born. In 1990, there were 4.2 million births in Millennials peak year. By 2000, they were overcrowding elementary and high schools and entering college in numbers not seen since the baby boomers. Now in its 20s and 30s, this cohort is expected to have a strong impact on future products and services. 5. Declining mass market: Niche markets are defining the marketers’ environment. People want products and services that are adapted more to their personal needs. For example, Estée Lauder’s “All Skin” and Maybelline’s “Shades of You” lines of cosmetic products are specifically made for African-American women. “Mass customization”—the mak- ing and marketing of products tailored to a person’s requirements is replacing the mass production and marketing of the same product in some markets. The past 10 years have seen a real fracturing of the chocolate market with the advent of craft chocolate making DESIGN SERVICES OF # 111708   Cust: PE/NJ/B&E   Au: Wheelen  Pg. No. 130 C/M/Y/K M04_WHEE0811_14_GE_CH04.indd 130 Title: Strategic Management and Business Policy     Server: Jobs4 Short / Normal S4carlisle Publishing Services 5/20/14 10:49 AM  CH A PTER 4   Environmental Scanning and Industry Analysis 131 and flavored chocolates. These products command significantly higher margins and have become a force in the retailing environment. By 2010, 43% of chocolate sales occurred in nontraditional channels.19 6. Changing pace and location of life: Instant communication via e-mail, cell phones, and overnight mail enhances efficiency, but it also puts more pressure on people. Merging the personal or tablet computer with the communication and entertainment industries through telephone lines, satellite dishes, and Internet connections increases consumers’ choices and allows workers to telecommute from anywhere. 7. Changing household composition: Single-person households, especially those of single women with children, could soon become the most common household type in the United States. According to the U.S. Census, married-couple households slipped from nearly 80% in the 1950s to 48% of all households by 2010.20 By 2007, for the first time in U.S. history, more than half the adult female population were single.21 Those women are also having more children. As of 2012, 41% of all births in the United States were to unmarried women.22 A typical family household is no longer the same as it was once portrayed in Happy Days in the 1970s or The Cosby Show in the 1980s. 8. Increasing diversity of workforce and markets: Between now and 2050, minorities will account for nearly 90% of population growth in the United States. Over time, group percentages of the total U.S. population are expected to change as follows: Non- Hispanic Whites—from 90% in 1950 to 74% in 1995 to 53% by 2050; Hispanic Whites—from 9% in 1995 to 22% in 2050; Blacks—from 13% in 1995 to 15% in 2050; Asians—from 4% in 1995 to 9% in 2050; American Indians—1%, with slight increase.23 Heavy immigration from developing to developed nations is increasing the number of mi- norities in all developed countries and forcing an acceptance of the value of diversity in races, religions, and lifestyles. For example, 24% of the Swiss population was born elsewhere.24 Traditional minority groups are increasing their numbers in the workforce and are being identified as desirable target markets. Coca-Cola, Nestlé, and Pepsi have targeted African- American and Latino communities for the sale of bottled water after a study by the department of pediatrics at the Medical College of Wisconsin in 2011 found that African-American and Latino families were three times more likely to give their children bottled water as compared to white families.25 Changes in the technological part of the societal environment can also have a great im- pact on multiple industries. Improvements in computer microprocessors have not only led to the widespread use of personal computers but also to better automobile engine performance in terms of power and fuel economy through the use of microprocessors to monitor fuel injec- tion. Digital technology allows movies and music to be available instantly over the Internet or through cable service, but it has also meant falling fortunes for movie rental shops such as Blockbuster and CD stores like Tower Records. Advances in nanotechnology are enabling companies to manufacture extremely small devices that are very energy efficient. Developing biotechnology, including gene manipulation techniques, is already providing new approaches to dealing with disease and agriculture. 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: Combining the computing power of the personal computer, the networking of the Internet, the images of television, and the convenience of the telephone, tablets and Smartphones will soon be used by a majority of the population of industrialized nations to make phone calls, stay connected in business and personal relationships, and transmit documents and other data. Homes, autos, and offices are rapidly being connected (via wires and wirelessly) into intelligent DESIGN SERVICES OF # 111708   Cust: PE/NJ/B&E   Au: Wheelen  Pg. No. 131 C/M/Y/K M04_WHEE0811_14_GE_CH04.indd 131Management and Business Policy     Server: Jobs4 Title: Strategic Short / Normal S4carlisle Publishing Services 5/20/14 10:49 AM  132 PAR T 2    Scanning the Environment networks that interact with one another. This trend is being accelerated by the develop- ment of cloud computing, in which a person can access their data anywhere through a Web connection.26 This is being dramatically improved by companies like Microsoft who are releasing cloud versions of their Office package available for rent.27 The traditional stand-alone desktop computer will someday join the manual typewriter as a historical curiosity. Alternative energy sources: The use of wind, geothermal, hydroelectric, solar, biomass, and other alternative energy sources should increase considerably. Over the past two decades, the cost of manufacturing and installing a photovoltaic solar-power system has decreased by 20% with every doubling of installed capacity.28 Precision farming: The computerized management of crops to suit variations in land characteristics will make farming more efficient and sustainable. Farm equipment deal- ers such as Case and John Deere now add this equipment to tractors for an additional US$6,000 or so. It enables farmers to reduce costs, increase yields, and decrease envi- ronmental impact. The old system of small, low-tech farming is becoming less viable as large corporate farms increase crop yields on limited farmland for a growing population. Virtual personal assistants: Very smart computer programs that monitor e-mail, faxes, and phone calls will be able to take over routine tasks, such as writing a letter, retrieving a file, making a phone call, or screening requests. Acting like a secretary, a person’s virtual assistant could substitute for a person at meetings or in dealing with routine actions. Genetically altered organisms: A convergence of biotechnology and agriculture is creating a new field of life sciences. Plant seeds can be genetically modified to produce more needed vitamins or to be less attractive to pests and more able to survive. Animals (including people) could be similarly modified for desirable characteristics and to ­eliminate genetic disabilities and diseases. Smart, mobile robots: Robot development has been limited by a lack of sensory devices and sophisticated artificial intelligence systems. Improvements in these areas mean that robots will be created to perform more sophisticated factory work, run errands, do household chores, and assist the disabled.29 Trends in the economic part of the societal environment can have an obvious impact on business activity. For example, an increase in interest rates means fewer sales of major home appliances. Why? A rising interest rate tends to be reflected in higher mortgage rates. Because higher mortgage rates increase the cost of buying a house, the demand for new and used houses tends to fall. Because most major home appliances are sold when people change houses, a reduction in house sales soon translates into a decline in sales of refrigerators, stoves, and dishwashers and reduced profits for everyone in the appliance industry. Changes in the price of oil have a similar impact upon multiple industries, from packaging and automobiles to hospitality and shipping. The rapid economic development of Brazil, Russia, India, and China (often called the BRIC countries) is having a major impact on the rest of the world. By 2007, China had become the world’s second-largest economy according to the World Bank. With India graduating more English-speaking scientists, engineers, and technicians than all other nations combined, it has become the primary location for the outsourcing of services, computer software, and telecommunications.30 Eastern Europe has become a major manufacturing supplier to the European Union countries. According to the International Monetary Fund, emerging markets make up less than one-third of total world gross domestic product (GDP), but account for more than half of GDP growth.31 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 DESIGN SERVICES OF # 111708   Cust: PE/NJ/B&E   Au: Wheelen  Pg. No. 132 C/M/Y/K M04_WHEE0811_14_GE_CH04.indd 132 Title: Strategic Management and Business Policy     Server: Jobs4 Short / Normal S4carlisle Publishing Services 5/20/14 10:49 AM  CH A PTER 4   Environmental Scanning and Industry Analysis 133 consideration/impacts upon the operation of a business. The effects of climate change on companies can be grouped into six categories of risks: regulatory, supply chain, product and technology, litigation, reputational, and physical.32 1. Regulatory Risk: Companies in much of the world are already subject to the Kyoto Pro- tocol, which requires the developed countries (and thus the companies operating within them) to reduce carbon dioxide and other greenhouse gases by an average of 6% from 1990 levels by 2012. The European Union has an emissions trading program that al- lows companies that emit greenhouse gases beyond a certain point to buy additional allowances from other companies whose emissions are lower than that allowed. Com- panies can also earn credits toward their emissions by investing in emissions abatement projects outside their own firms. Although the United States withdrew from the Kyoto Protocol, various regional, state, and local government policies affect company activi- ties in the United States. For example, seven Northeastern states, six Western states, and four ­Canadian provinces have adopted proposals to cap carbon emissions and establish carbon-trading programs. 2. Supply Chain Risk: Suppliers will be increasingly vulnerable to government regulations— leading to higher component and energy costs as they pass along increasing carbon-related costs to their customers. Global supply chains will be at risk from an increasing intensity of major storms and flooding. Higher sea levels resulting from the melting of polar ice will create problems for seaports. China, where much of the world’s manufacturing is currently being outsourced, is becoming concerned with environmental degradation. Twelve Chinese ministries produced a report on global warming foreseeing a 5%–10% reduction in agricul- tural output by 2030; more droughts, floods, typhoons, and sandstorms; and a 40% increase in population threatened by plague.33 The increasing scarcity of fossil-based fuel is already boosting transportation costs significantly. For example, Tesla Motors, the maker of an electric-powered sports car, transferred assembly of battery packs from Thailand to California because Thailand’s low wages were more than offset by the costs of shipping thousand-pound battery packs across the Pacific Ocean.34 3. Product and Technology Risk: Environmental sustainability can be a prerequisite to profitable growth. Sixty percent of U.S. respondents to an Environics study stated that knowing a company is mindful of its impact on the environment and society makes them more likely to buy their products and services.35 Carbon-friendly products using new technologies are becoming increasingly popular with consumers. Those automobile com- panies, for example, that were quick to introduce hybrid or alternative energy cars gained a competitive advantage. 4. Litigation Risk: Companies that generate significant carbon emissions face the threat of lawsuits similar to those in the tobacco, pharmaceutical, and building supplies (e.g., asbestos) industries. For example, oil and gas companies were sued for greenhouse gas emissions in the federal district court of Mississippi, based on the assertion that these companies contributed to the severity of Hurricane Katrina. 5. Reputational Risk: A company’s impact on the environment can affect its over- all reputation. The Carbon Trust, a consulting group, found that in some sectors the value of a company’s brand could be at risk because of negative perceptions related to climate change. In contrast, a company with a good record of environmental sustainability may create a competitive advantage in terms of attracting and keeping loyal consumers, employees, and investors. For example, Wal-Mart’s pursuit of environmental sustain- ability as a core business strategy has helped soften its negative reputation as a low-wage, low-benefit employer. By setting objectives for its retail stores of reducing greenhouse DESIGN SERVICES OF # 111708   Cust: PE/NJ/B&E   Au: Wheelen  Pg. No. 133 C/M/Y/K M04_WHEE0811_14_GE_CH04.indd 133Management and Business Policy     Server: Jobs4 Title: Strategic Short / Normal S4carlisle Publishing Services 5/20/14 10:49 AM  134 PAR T 2    Scanning the Environment gases by 20%, reducing solid waste by 25%, increasing truck fleet efficiency by 25%, and using 100% renewable energy, it is also forcing its suppliers to become more envi- ronmentally sustainable.36 Tools have recently been developed to measure sustainability on a variety of factors. For example, the SAM (Sustainable Asset Management) Group of Zurich, Switzerland, has been assessing and documenting the sustainability performance of over 1000 corporations annually since 1999. SAM lists the top 15% of firms in its Sustainability Yearbook and classifies them into gold, silver, and bronze categories.37 BusinessWeek published its first list of the world’s 100 most sustainable corporations January 29, 2007. The Dow Jones Sustainability Indexes and the KLD Broad Market Social Index, which evaluate companies on a range of environmental, social, and gover- nance criteria are used for investment decisions.38 Financial services firms, such as Gold- man Sachs, Bank of America, JPMorgan Chase, and Citigroup have adopted guidelines for lending and asset management aimed at promoting clean-energy alternatives.39 6. Physical Risk: The direct risk posed by climate change includes the physical effects of droughts, floods, storms, and rising sea levels. Average Arctic temperatures have risen four to five degrees Fahrenheit (two to three degrees Celsius) in the past 50 years, leading to melting glaciers and sea levels rising one inch per decade.40 Industries most likely to be af- fected are insurance, agriculture, fishing, forestry, real estate, and tourism. Physical risk can also affect other industries, such as oil and gas, through higher insurance premiums paid on facilities in vulnerable areas. Coca-Cola, for example, studies the linkages between climate change and water availability in terms of how this will affect the location of its new bottling plants. The warming of the Tibetan plateau has led to a thawing of the permafrost—thereby threatening the newly-completed railway line between China and Tibet.41 Trends in the political–legal part of the societal environment have a significant impact not only on the level of competition within an industry but also on which strategies might be successful.42 For example, periods of strict enforcement of U.S. antitrust laws directly affect corporate growth strategy. As large companies find it more difficult to acquire another firm in the same or a related industry, they are typically driven to diversify into unrelated industries.43 High levels of taxation and constraining labor laws in Western European countries stimulate companies to alter their competitive strategies or find better locations elsewhere. It is be- cause Germany has some of the highest labor and tax costs in Europe that German compa- nies have been forced to compete at the top end of the market with high-quality products or else move their manufacturing to lower-cost countries.44 Government bureaucracy can create regulations that make it almost impossible for a business firm to operate profitably in some countries. The World Bank’s 2012 report on red tape around the world found amazing exam- ples of government bureaucracy, including: 1) A company in the Congo with a profit margin of 20% or more faces a tax bill of 340% of profits; 2) obtaining a construction permit in Russia requires 51 steps; 3) enforcing a contract through the courts takes 150 days in Singapore and 1,420 in India; 4) while winding up an insolvent firm, creditors in Japan can recover 92.7 cents on the dollar, those in Chad get nothing.45 The US$66 trillion global economy operates through a set of rules established by the World Trade Organization (WTO). Composed of 155 member nations and 29 observer nations, the WTO is a forum for governments to negotiate trade agreements and settle trade disputes. Origi- nally founded in 1947 as the General Agreement on Tariffs and Trade (GATT), the WTO was created in 1995 to extend the ground rules for international commerce. The system’s purpose is to encourage free trade among nations with the least undesirable side effects. Among its prin- ciples is trade without discrimination. This is exemplified by its most-favored nation clause, which states that a country cannot grant a trading partner lower customs duties without granting them to all other WTO member nations. Another principle is that of lowering trade barriers gradually though negotiation. It implements this principle through a series of rounds of trade DESIGN SERVICES OF # 111708   Cust: PE/NJ/B&E   Au: Wheelen  Pg. No. 134 C/M/Y/K M04_WHEE0811_14_GE_CH04.indd 134 Title: Strategic Management and Business Policy     Server: Jobs4 Short / Normal S4carlisle Publishing Services 5/20/14 10:49 AM  CH A PTER 4   Environmental Scanning and Industry Analysis 135 negotiations. As a result of these negotiations, industrial countries’ tariff rates on industrial goods had fallen steadily to less than 4% by the mid-1990s. The WTO is currently negotiating its latest round of negotiations, called the Doha Round. The WTO is also in favor of fair compe- tition, predictability of member markets, and the encouragement of economic development and reform. As a result of many negotiations, developed nations have started to allow duty-free and quota-free imports from almost all products from the least-developed countries.46 International Societal Considerations. Each country or group of countries in which a company operates presents a unique societal environment with a different set of sociocultural, technological, economic, ecological, and political-legal variables for the company to face. International societal environments vary so widely that a corporation’s internal environment and strategic management process must be very flexible. Cultural trends in Germany, for example, have resulted in the inclusion of worker representatives in corporate strategic planning. Because Islamic law (sharia) forbids interest (riba), loans of capital in Islamic countries must be arranged on the basis of profit-sharing instead of interest rates.47 Differences in societal environments strongly affect the ways in which a multinational corporation (MNC), a company with significant assets and activities in multiple countries, conducts its marketing, financial, manufacturing, and other functional activities. For example, Europe’s lower labor productivity, due to a shorter work week and restrictions on the ability to lay off unproductive workers, forces European-based MNCs to expand operations in countries where labor is cheaper and productivity is higher.48 Moving manufacturing to a lower-cost loca- tion, such as China, was a successful strategy during the 1990s, but a country’s labor costs rise as it develops economically. For example, China required all firms in January 2008 to consult employees on material work-related issues, enabling the country to achieve its stated objective of having trade unions in all of China’s non-state-owned enterprises. By September 2008, the All-China Federation of Trade Unions had signed with 80% of the largest foreign companies.49 See the Global Issues feature to see how demand for SUVs has exploded in China. To account for the many differences among societal environments from one country to another, consider Table 4–3. It includes a list of economic, technological, political–legal, and sociocultural variables for any particular country or region. For example, an important economic variable for any firm investing in a foreign country is currency convertibility. With- out convertibility, a company cannot convert its money. Almost all nations allow for some method of currency conversion. As of 2012, only the Cuban national peso and the North Korean won are nonconvertible. In terms of sociocultural variables, many Asian cultures (especially China) are less concerned with a Western version of human rights than are European and North American cultures. Some Asians actually contend that U.S. companies are trying to impose Western human rights requirements on them in an attempt to make Asian products less competitive by raising their costs.50 Before planning its strategy for a particular international location, a company must scan that country’s environment(s) for its similarities and differences with the company’s home country. Focusing only on developed nations may cause a corporation to miss important mar- ket opportunities. Although those nations may not have developed to the point that they have significant demand for a broad spectrum of products, they may very likely be on the threshold of rapid growth in the demand for specific products. Using the concept of entering where the competition is not, this may be an opportunity for a company to enter this market—before competition is established. The key is to be able to identify the trigger point when demand for a particular product or service is ready to boom. Creating a Scanning System. Although the Internet has opened up a tremendous volume of information, scanning and making sense of that data is one of the important skills in an effective manager. DESIGN SERVICES OF # 111708   Cust: PE/NJ/B&E   Au: Wheelen  Pg. No. 135 C/M/Y/K M04_WHEE0811_14_GE_CH04.indd 135Management and Business Policy     Server: Jobs4 Title: Strategic Short / Normal S4carlisle Publishing Services 5/20/14 10:49 AM  136 PAR T 2    Scanning the Environment TABLE 4–3 Some Important Variables in International Societal Environments Sociocultural Technological Economic Ecological Political–Legal Customs, norms, Regulations on Economic Non-governmental Form of government values technology transfer development groups Political ideology Language Energy availability/ Per capita income Passion for environ- Tax laws Demographics cost Climate mental causes Stability of Life expectancies Natural resource GDP trends Infrastructure to government availability handle recycling Social institutions Monetary and fiscal Government atti- Transportation policies tude toward foreign Status symbols network companies Lifestyle Unemployment levels Skill level of Regulations on foreign Religious beliefs Currency workforce ownership of assets convertibility Attitudes toward Patent-trademark Wage levels Strength of opposi- foreigners protection tion groups Literacy level Nature of competition Internet availability Trade regulations Human rights Membership in Telecommunication Protectionist regional economic Environmentalism infrastructure sentiment associations—e.g., EU, “Sweatshops” Computer hacking NAFTA, ASEAN Foreign policies Pension plans technology Membership in World Terrorist activity Health care New energy sources Trade Organization Legal system Slavery (WTO) Global warming laws Outsourcing capability Immigration laws Global financial system global issue SUVs Power on in China U.S. and European auto- being drawn to the flexibility of the SUV. A Ford spokesper- makers are looking to China son said that “For Tiger Moms—and other moms—SUVs for most of their growth offer great appeal as the whole family can be transported potential in the next two de- safely and in style.” The sharp increase in demand has cades. The Chinese middle class drawn in the ultra-high-end car companies as well. Maserati is expected to grow to between and Lamborghini have both announced new SUVs for the 600 million and 800 million consumers in the next 10 to Chinese market starting in 2013 and 2014, respectively. 15 years. That is a market that is equivalent to the ENTIRE BMW has approached the market with products that population of the Unites States AND every country in the they sell around the world, including the BMW X5. This is European Union combined. an example of a global organization. On the other hand, This growing middle class in China (it stood at less than Mercedes-Benz is producing a Chinese-built GLK SUV that 300 million in 2012) has spurred a huge demand for sport is tailored to the market. This is an example of a multi­ utility vehicles (SUVs). Ford, BMW, Mercedes-Benz, and domestic organization. Figuring out how to address global Porsche are all selling SUVs at a significant clip. The total markets is a key strategic area for any management team. SUV market in China is predicted to grow by more than 100% in the next three years. BMW reported that they sold more than 20,000 SUVs in the first quarter of 2012. That SOURCES: “China’s Soccer Moms Want SUVs, Too,” Bloomberg was a 92% increase over the same quarter a year earlier. BusinessWeek (May 7, 2012), (www.businessweek.com/articles/ 2012-05-03/chinas-soccer-moms-want-suvs-too); Eurostat news Growing prosperity is leading to this push by consumers. release, “EU27 population 502.5 million at 1 January 2011”. BusinessWeek reported seeing the same trend in China that Accessed 5/30/13, http://epp.eurostat.ec.europa.eu/cache/ITY_ has been seen in the United States, with women in particular PUBLIC/3-28072011-AP/EN/3-28072011-AP-EN.PDF). DESIGN SERVICES OF # 111708   Cust: PE/NJ/B&E   Au: Wheelen  Pg. No. 136 C/M/Y/K M04_WHEE0811_14_GE_CH04.indd 136 Title: Strategic Management and Business Policy     Server: Jobs4 Short / Normal S4carlisle Publishing Services 5/20/14 10:49 AM  CH A PTER 4   Environmental Scanning and Industry Analysis 137 FIGURE 4–1 Scanning External Analysis of Societal Environment Environment Sociocultural, Technological, Economic, Ecological & Political-Legal Factors Market Analysis Community Competitor Analysis Analysis Supplier Analysis Selection of Interest Group Strategic Factors Government Analysis Analysis Opportunities Threats It is a daunting task for even a large corporation with many resources. To deal with this problem, in 2002 IBM created a tool called WebFountain to help the company analyze the vast amounts of environmental data available on the internet. WebFountain is an advanced information discovery system designed to help extract trends, detect patterns, and find rela- tionships within vast amounts of raw data. For example, IBM sought to learn whether there was a trend toward more positive discussions about e-business. Within a week, the company had data that experts within the company used to replace their hunches with valid conclusions. Scanning the Task Environment As shown in Figure 4–1, 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. At Procter & Gamble (P&G), for example, people from each of the brand management teams work with key people from the sales and market research departments to research and write a “competitive activity report” each quarter on each of the product categories in which P&G competes. People in purchasing also write similar reports concerning new developments in the industries that supply P&G. These and other reports are then summarized 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 then send memos asking people throughout the organization to watch for and report on developments in related product areas. The many reports resulting from these scanning efforts, when boiled down to their essentials, act as a detailed list of external strategic factors. Identifying External Strategic Factors The origin of competitive advantage lies in the ability to identify and respond to environmen- tal change well in advance of competition.51 Although this seems obvious, why are some com- panies better able to adapt than others? One reason is because of differences in the ability of managers to recognize and understand external strategic issues and factors. Booz & Company found that companies that are most successful at avoiding surprises had a well-defined system that integrated planning, budgeting, and business reviews.52 DESIGN SERVICES OF # 111708   Cust: PE/NJ/B&E   Au: Wheelen  Pg. No. 137 C/M/Y/K M04_WHEE0811_14_GE_CH04.indd 137Management and Business Policy     Server: Jobs4 Title: Strategic Short / Normal S4carlisle Publishing Services 5/20/14 10:49 AM  138 PAR T 2    Scanning the Environment No firm can successfully monitor all external factors. Choices must be made regarding which factors are important and which are not. Even though managers agree that strategic im- portance determines what variables are consistently tracked, they sometimes miss or choose to ignore crucial new developments.53 Personal values and functional experiences of a corpora- tion’s managers, as well as the success of current strategies, are likely to bias both their per- ception of what is important to monitor in the external environment and their interpretations of what they perceive.54 This willingness to reject unfamiliar as well as negative information is called strategic myopia.55 If a firm needs to change its strategy, it might not be gathering the appropriate external information to change strategies successfully. For example, when Daniel Hesse became CEO of Sprint Nextel in December 2007, he assumed that improving customer service would be one of his biggest challenges. He quickly discovered that none of the current Sprint Nextel executives were even thinking about the topic. “We weren’t talking about the customer when I first joined,” said Hesse. “Now this is the No. 1 priority of the company.”56 Hesse insists that “great customer service costs less—when we were last in the industry, we were spending twice as much.” By 2012, Sprint had closed down 29 call centers and was answering calls faster than ever. The second quarter of 2012 saw Sprint receiving the fewest calls ever from customers.57 Industry Analysis: Analyzing the Task Environment An industry is a group of firms that produces a similar product or service, such as soft drinks or financial services. An examination of the important stakeholder groups, like suppliers and customers, in a particular corporation’s task environment is a part of industry analysis. Porter’s Approach to Industry Analysis 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 inten- sity is determined by basic competitive forces, as depicted in Figure 4–2. “The collective strength of these forces,” he contends, “determines the ultimate profit potential in the in- dustry, where profit potential is measured in terms of long-run return on invested capital.”58 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 rela- tive power of other stakeholders.59 The stronger each of these forces are, the more limited companies are in their ability to raise prices and earn greater profits. Although Porter men- tions 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 the model in Figure 4–2, 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 ad- vantage. For example, Dell’s early use of the Internet to market its computers was an effective way to negate the bargaining power of distributors in the PC industry. DESIGN SERVICES OF # 111708   Cust: PE/NJ/B&E   Au: Wheelen  Pg. No. 138 C/M/Y/K M04_WHEE0811_14_GE_CH04.indd 138 Title: Strategic Management and Business Policy     Server: Jobs4 Short / Normal