Environmental Scanning and Industry Analysis PDF

BM2212 ENVIRONMENTAL SCANNING AND INDUSTRY ANALYSIS Aspects of Environmental Scanning Environmental scanning refers to an in-depth examination of key factors that influence...

BM2212 ENVIRONMENTAL SCANNING AND INDUSTRY ANALYSIS Aspects of Environmental Scanning Environmental scanning refers to an in-depth examination of key factors that influence the business operations of a firm. It involves carefully studying a firm’s external environment to predict environmental changes and detect changes already underway. Therefore, critical trends and events will signal an alert before it develops a discernible pattern and before competitors recognize them. In undertaking environmental scanning, strategic managers must first be aware of the variables that may affect a firm’s short-term and long-term decisions as follows: A. 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 in which the business is embedded. In a world concerned with climate change, 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 on the natural environment Example: Chevron, a multinational energy corporation, could measure and reduce its carbon footprint or the amount of greenhouse gases it emits into the air, considering the rising concerns about climate change. B. Societal environment. It is mankind’s social system that includes general forces that do not directly affect the short-run activities of the firm but can influence its long-term decisions. These forces are as follows: Economic forces. These regulate the exchange of materials, money, energy, and information. Technological forces. These generate problem-solving inventions. Political-legal forces. These allocate power and constrain and protect laws and regulations. Sociocultural forces. These regulate the values, morals, and customs of society. C. Task environment. It includes elements or groups that directly affect a firm and, in turn, are affected by it. These elements are as follows: Customers. They have the power to create or reduce the demand for a product or service. Suppliers. They provide a product or service to another business. Competitors. They provide a better or similar product to the same target segment. Employees. They directly participate in activities that help fulfill the firm’s goals. Government Regulations. Any change in tax law will impact the business operation. Special Interest Groups. They bring attention to the firm and could affect the operation in either a positive or negative way. 05 Handout 1 *Property of STI  [email protected] Page 1 of 7  BM2212 Industry Analysis: Analyzing the Task Environment An industry is a group of firms that produces a similar product or service. Part of the industry analysis examines the important stakeholder groups, like suppliers and customers, in a particular corporation’s task environment. The following are the common methods used by firms in conducting industry analysis: A. SWOT Matrix. It is a framework used to evaluate a firm’s competitive position by listing the conditions inside and surrounding it. SWOT assesses internal, external, current, and future potential factors that may affect the market position of a particular organization. Figure 1. Example of SWOT Analysis Matrix Source: Strategic Management and Business Policy (15th ed.), 2018. p. 127 Strengths. These are the internal areas where an organization excels and factors that separate an organization from its competitors. These include a strong brand image, loyal customer base, a strong balance sheet, and unique technology. Example: McDonald’s has the following strengths: strong brand name and image, stable income, tasty foods, technological innovations, real estate ventures, global expansion strategies, effective and efficient marketing strategies, and health and quality control protocol. Weaknesses. These are the internal areas that hinder an organization from performing at its optimum level. The business needs to make improvements to remain competitive in these areas. These include a weak brand, higher-than-average turnover, high levels of debt, an inadequate supply chain, or lack of capital. Example: McDonald's has the following weaknesses: limited food options, unhealthy food image, aggressive competition, easily imitated menu, and low process flexibility due to standardization. 05 Handout 1 *Property of STI  [email protected] Page 2 of 7  BM2212 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, increasing sales and a larger market share. Example: McDonald's has the following opportunities: developing an innovative and healthier menu, partnering with other brands, and expanding in emerging markets. Threats. These are the factors that may pose potential harm to an organization. For instance, a drought threatens 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 regarding healthy food consumption, economic downturn, and intense competition. B. PESTEL Analysis. It is a tool to identify the external forces that may affect an organization positively and negatively. Figure 2. Example of PESTEL Analysis Source: Strategic Management and Business Policy (15th ed.), 2018. p. 129 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. 05 Handout 1 *Property of STI  [email protected] Page 3 of 7  BM2212 Economic. These factors determine the impact of the economy and its performance on an organization and its profitability. These include interest rates, employment or unemployment rates, raw material costs, and foreign exchange rates. Example: McDonald's may capitalize on the opportunity for slow but stable growth in developed countries and rapid growth in developing countries. Social. These factors determine the impact of the social environment and emerging trends on the business profitability of an organization. These also help marketers to understand the changing preferences of the customers further. 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 trends as both an opportunity and a threat. Technological. These factors determine the impact of technological innovation and development on a particular market or industry. These include digital or mobile technology changes, automation, research, and development. Moreover, these also include technological influence on distribution, manufacturing, and logistics methods. Example: McDonald's may capitalize on the opportunity to increase business automation and customer preferences on ordering food using their mobile devices. Environmental. These factors determine the influence of the surrounding environment and ecological aspects' impact on 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. Legal. These factors determine the importance of understanding legal laws and procedures in a given territory where a business operates. These include employment legislation, consumer law, health and safety, and international and trade regulations 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. C. 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. 05 Handout 1 *Property of STI  [email protected] Page 4 of 7  BM2212 Figure 3. Porter’s Five Forces Source: Strategic Management Cases (10th ed.), 2018. p. 51 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: The bargaining power of suppliers in the case of McDonald's is weak based on a large number of suppliers and the high overall supply of raw materials. 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 the cost to the buyer of switching from one supplier to another. For instance, a few powerful business buyers can often dictate terms. Example: McDonald’s must address the power of their customers on business performance since they have a strong bargaining power based on low switching costs, a large number of providers, and the high availability of substitutes. Competitive rivalry. This force examines the intensity of competition in the marketplace. 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 intense, advertising and price wars can ensue, negatively impacting the business in the long run. Example: 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. 05 Handout 1 *Property of STI  [email protected] Page 5 of 7  BM2212 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: The high substitute availability and the low switching costs make the threat of substitution a strong force in the case of McDonald’s. 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. 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: 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). D. 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. Figure 4. Ecosystem Assessment Tool Source: https://www.business-to-you.com 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: Customers. These are the people or parties that buy the products and services of an organization. Additional customers mean more revenue, leading to a larger market share. Customers can be 05 Handout 1 *Property of STI  [email protected] Page 6 of 7  BM2212 end-consumers or other companies that will eventually take the products to the consumer market. Suppliers. These parties provide the resources 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 vital to keep a good and meaningful relationship with the suppliers or spread risk by having multiple options. Competitors. These parties fight over an organization's market share by offering similar products or services and targeting similar customers. However, companies often view competition as too narrow, failing to foresee upcoming threats. Although competitors are often seen as parties to fight over market share, it is also possible to collaborate with them. Complementors. These organizations offer complementary or harmonizing products or services that could work well with a company’s products to make the result more attractive to consumers. References Bamford, C., Hoffman, A., Hunger, D., & Wheelen, T. (2018). Strategic management and business policy: Globalization, innovation and sustainability (15th ed.). United Kingdom: Pearson Education Limited. Dess, G., Eisner, A., Lee, S., McNamara, G. (2021) Strategic Management: Creating Competitive Advantages (10th ed.) New York. McGraw-Hill Education. Ecosystems Knowledge Network. (n.d) National ecosystem approach toolkit. Retrieved on April 4, 2019, from http://neat.ecosystemsknowledge.net/evaluate.html Kenton, W. (2022). Strength, weakness, opportunity, and threat (SWOT) analysis. https://www.investopedia.com/terms/s/swot.asp Greenspan, R. (2022). McDonald’s PESTLE Analysis https://panmore.com/mcdonalds-pestel-pestle- analysis-recommendations Gregory, L. (2022). McDonald’s five forces analysis (porter’s model) & recommendations. http://panmore.com/mcdonalds-five-forces-analysis-porters-model. Witcher, B. (2020) Absolute Essentials of Strategic Management. New York. Taylor & Francis Group Ltd. 05 Handout 1 *Property of STI  [email protected] Page 7 of 7