Strategic Management




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ENVIRONMENTAL SCANNING AND INDUSTRY ANALYSIS

^ ENVIRONMENTAL SCANNING AND INDUSTRY ANALYSIS


This chapter examines key aspects of the external environment of the corporation with special emphasis on environmental scanning, industry analysis, and forecasting. Environmental scanning is presented as the first part of the strategic management model and a crucial task for strategic managers. The emphasis is upon monitoring strategic factors and utilizing possible sources of information. Porter's approach to industry analysis is discussed in some detail. Forecasting is then addressed in terms of assumptions and basic techniques. Industry scenario construction/writing is explained. The chapter ends with a suggested way to synthesize external factors through the use of an EFAS Table.


^ TOPICS COVERED


• Environmental scanning.


• Monitoring trends in the natural and societal environments.


• Identifying external strategic factors.


• Industry analysis, including industry evolution, strategic groups, and hypercompetition.


• Multidomestic and global industries.


• Using key success factors to create an industry matrix.


• Competitive intelligence.


• Forecasting techniques, including industry scenarios.


• The IFAS Table: a technique to summarize factors.


^ SUGGESTED ANSWERS TO DISCUSSION QUESTIONS:


1. Discuss how a development in a corporation's natural and societal environments can affect the corporation through its task environment.


Developments or trends in a corporation's natural or societal environment typically do not affect the corporation directly but indirectly through their impact on one or more stakeholder groups in the corporation's task environment. As mentioned in the text, the trend toward dual-career couples is a recent development in the societal environment of any company operating in the U.S or Canada. Sociocultural forces regarding the changing role of women plus the trend toward single family households combined with the economic forces of high interest rates and inflation in the 1970s to send both men and women searching for full-time jobs in addition to their being parents. This development in the societal environment continues to effect companies through its impact on employee/union groups (who ask for parental leave and/or company-sponsored day care centers), customers (employed parents who increasingly shop for convenience goods because of time constraints), and special interest groups and even governments (who ask business firms to help support local schools and deal with community social problems). As another example, the trend toward global warming may not directly affect a company making toys, but may affect it indirectly through a sociocultural trend supporting the use of rechargeable batteries and solar cells as replacements for disposable batteries. Such a sociocultural trend may be reflected in changing customer preferences or in new government regulations or incentive programs.


  1. ^ According to Porter, what determines the level of competitive intensity in an industry?



The answer to this question can be found in Figure 4.3 in Chapter Four. By this time, students should be able to list the five forces presented by Michael Porter plus the sixth force (other stakeholders) proposed by Ed Freeman. They are briefly:


-Threat of new entrants

-Rivalry among existing firms

-Threat of substitute products or services

-Bargaining power of buyers

-Bargaining power of suppliers

-Relative power of other stakeholders


Once they have listed the forces, push the students to explain how each of the forces can affect the level of competitive intensity within an industry. Use price of the company's product - How will a change in each of the forces affect the average price of the product? Then look at how changes in each force might affect average product quality and other characteristics of the product offered in this particular industry. Arbitrarily select for analysis a well-known industry like airlines or automobiles. After examining past and present forces operating in a particular industry, ask the students to try to predict what will happen to each of these forces in the future and how these developments might affect the future competitive intensity of the industry. Here’s an example of an exercise you could use in class.


^ What are the forces driving industry competition in the airline industry?


First, ask each person in the class to individually evaluate each of the forces. Alternatively, form groups to evaluate the forces. Next, ask the class (or each group) to indicate whether they marked high, medium, or low for each force. Ask individuals/groups for their rationale to get some discussion going. Next, ask the class which of these forces are changing and to indicate why. The next step is to ask the class to evaluate the future level of competitive intensity in the airline industry. Would they invest or look for a job in this industry?


The authors’ opinions regarding the current level of these forces are as follows. The overall level of competitive intensity is high and bound to get higher. Feel free to disagree.


Threat of new entrants: High. Almost anyone can buy used airplanes and start a charter service. As other nations privatize their high-cost, state-owned airlines, new low-cost entrants will emerge.


^ Rivalry among existing firms: High. As more airlines leave their nationally protected areas, they are entering areas previously controlled by other airlines. Since there are few ways to differentiate airline service, many carriers become commodities - competing primarily on price. Price wars result from this high degree of rivalry.


Bargaining power of buyers/distributors: Medium to Low. As more airlines are selling directly to customers via the internet, etc., travel agents as the primary distributors have become less important to carrier sales. The lowered power of travel agents is indicated by the fact that major airlines were able to institute a cap on travel agent commissions so easily and to emphasize ticket sales via corporate web sites.


^ Bargaining power of suppliers: High. With only two large airframe manufacturers compared to many more airline companies, supplier bargaining power is quite high.


Relative power of other stakeholders: Medium. What are the key stakeholders? Pilot and flight attendant unions are traditionally strong at the established carriers (raising costs). Non-unionized carriers thus gain a cost advantage (raising the level of competitive intensity). Since airline crashes get major attention, governments are quick to pass safety regulations (raising costs and thus competitive intensity). However, national concerns also cause governments to safeguard domestic airlines from strong foreign competition (thus lowering competitive intensity).


^ 3. According to Porter's discussion of industry analysis, is Pepsi Cola a substitute for Coca Cola?


This is a good question to check how well students understand the basic concepts of industry analysis. Those with a very superficial understanding of the topics discussed in this chapter will tend to answer "yes" to this question. They are using their own common sense understanding of a substitute being another product within the same category. Since Coke and Pepsi are both colas, most people think of them as substitutes for one another. They have almost identical product characteristics. According to Porter, however, substitute products are those products that appear to be different but can satisfy the same need as another product. This means that in Porter's mind substitutes do not have similar product characteristics, but are still able to satisfy the same need. This indicates that Porter would not view Pepsi and Coke as true substitutes, but two versions/brands of the same product. Thus, Porter would view coffee and tea (both having caffeine) as being substitutes for a soft drink cola. The whole idea of Porter's approach to industry analysis is to get people to go beyond the obvious when considering what effects the level of competitive intensity within an industry.


^ 4. How can a decision maker identify strategic factors in a corporation's external international environment?


The chapter suggests that one begin by listing three or more trends emerging in each of the four forces of a firm's societal environment in an environmental trend analysis matrix (Tables 4.1 and 4.3). Then estimate the likely impact of these general trends upon the primary stakeholders, e.g., communities, creditors, competitors, etc. These data form a series of strategic issues - those trends and developments that are very likely to determine the future environment. Plot these strategic issues on an issues priority matrix (Fig. 4.2). Those issues judged to have a high probability of occurring and a high probable impact on the corporation are strategic factors. Categorize these factors as opportunities or threats. Keep in mind that some strategic factors may be both opportunities and threats depending upon how they are viewed.


^ 5. Compare and contrast trend extrapolation with the writing of scenarios as forecasting techniques.


As indicated in the chapter, extrapolation is simply the extension of present trends into the future. It relies on the assumption that the environment is reasonably consistent and changes slowly in the short run. As a result, extrapolation is fairly easy to do - as witnessed by its being the most widely used form of forecasting. Nevertheless, extrapolation is like driving a car backwards without using a mirror or twisting one's head to look backward. Everything will be fine until a sudden turn is reached! Like driving backwards, extrapolation is fine if the time frame to be predicted is short and one is lucky. In contrast, scenario-writing is based upon a series of historical data plus informed hunches from key people in the company who have access to environmental information or from a Delphi panel of outside experts. Like extrapolation, scenario-writing is a very popular forecasting technique, but unlike extrapolation, it can get very complicated and time consuming. One approach to constructing an industry scenario is suggested by Porter in the chapter. It has a least one clear-cut advantage over extrapolation: It encourages forecasters to make their assumptions explicit. One is thus more likely to recognize the dangerousness of driving backwards. Scenario writing, if done conscientiously, could thus be seen as an attempt to construct a mirror to use in such hazardous driving!


^ ADDITIONAL DISCUSSION QUESTIONS


A1. Why is environmental uncertainty an important concept in strategic management?


It can be argued that without environmental uncertainty, there would be no need for strategic management. The Arab oil embargo of 1973 is said to be the single most influential event causing the formation of planning departments in most U.S. corporations. The embargo showed managers just how vulnerable their companies were to environmental change. A key part of strategic management, environmental scanning is a tool used to help avoid strategic surprise and cope with an uncertain environment. If the environment was certain and predictable, environmental scanning would be a rather easy chore. Simple extrapolation would be the only type of forecasting needed. In a complex and changing world, however, those corporations which engage in environmental scanning and strategic planning tend to deal better with environmental uncertainty and to be more successful than their non-planning brethren.


^ A2. What can a corporation do to ensure that information about strategic environmental factors gets to the attention of strategy makers?


This is a very real problem in most large corporations given the usual obstacles to good communication. The very people who are in the best positions to gather this data are often the ones who either fail to pass it on because it's too much of a chore or they fail to notice it because no one told them how important certain developments are to top management. Since proper information dissemination is an important part of environmental scanning, corporations attempt to schedule a series of analytical reports for top management's information. Some of these reports are depicted in Figure 4.1 in the chapter. The purchasing department, for example, might be tasked with the job of compiling a quarterly analysis of the availability and reliability of present and future suppliers. The market research department might prepare analyses of present and future customers for certain products and services with special attention to demographic shifts. Each report would need to conclude with a list of strategic factors to monitor in the coming months or years. Other approaches are, of course, possible to get needed information to the attention of strategy makers. It might be useful to generate some of these ideas in class.


^ A3. If most long-term forecasts are usually incorrect, why bother doing them?


This question is based upon the assumption that most long-term forecasts are usually incorrect. One must keep in mind that some things are easier to forecast than others. For example, a forecasted drop in the demand for tricycles in three years will very likely occur if it is based upon a strong drop in the present birth rate. Nevertheless, most people would probably agree that forecasts going out five to ten years have a low probability of becoming reality in today's dynamic world. The text takes the position that even if predictions prove to be wrong, the very act of scanning and forecasting the environment helps managers take a broader perspective. It also forces managers to take an active rather than a passive orientation toward its external environment. It encourages calculated risks over WAHS (wild a -- hunches) and is more likely to result in strategic management instead of reactive management.


^ SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE


How far should people in a business firm go in gathering competitive intelligence? Where do you draw the line?


This is an interesting exercise to use not only for covering ethics in Chapter Three, but also for introducing some of the concepts found in Chapter Four, Environmental Scanning and Industry Analysis. For this reason, you might want to use this exercise when discussing ethics in Chapter Three rather than at the end of Chapter Four.


Approach 1: First, ask your students to complete this exercise. Second, list all the items on the blackboard in which a large percentage of the class rates each of them as 4 or 5. Third, list all the items in which a large percentage of the class rates each of them a 2 or 1. Fourth, list all the items in which a large majority rates them as a 3. Once these three sets of items are listed on the board, ask the class what differentiates one group from another. Try to identify the criteria the class used to rate the items. This provides the rationale the students in your class are using to make ethical decisions. You might also want to challenge the class as a whole by asking for minority opinions - those who rated a particular item significantly differently than did the class as a whole.


Approach 2: Have the class complete the exercise and hand in their ratings anonymously on a separate sheet of paper. Have them keep one copy of their ratings. After class, calculate the means for each item, put them into one of the three categories mentioned above, and list them on a transparency. Show the class their average responses by group. Ask them what differentiates one group from another and probe for the criteria they used to rate the items. Ask them to look again at their personal ratings of the items and identify where they differ from the overall average class rating. Encourage individual students to challenge the average class ratings. Some interesting discussion is bound to result. You may want to provide the class with the average responses found in the Jones and Bryan study cited below.


This exercise was developed from a questionnaire constructed by William Jones, Jr. and Norman Bryan, Jr. of Georgia State University for their article "Business Ethics and Business Intelligence: An Empirical Study of Information-Gathering Alternatives," in the June 1995 issue of the International Journal of Management (pages 204-208). A total of 108 undergraduates in a strategic management class completed the questionnaire during the early part of the term prior to a discussion of ethics. The resulting mean responses were as follows:


The business firm should try to get useful information about competitors by:


4.55 Careful study of trade journals.


1.13 Wiretapping the telephones of competitors.


2.59 Posing as a potential customer to competitors.


1.57 Getting loyal customers to put out a phony "request for proposal” soliciting competitors' bids.


4.21 Buying competitors' products and taking them apart.


3.54 Hiring management consultants who have worked for competitors.


1.44 Rewarding competitors' employees for useful "tips."


4.00 Questioning competitors' customers and/or suppliers.


1.97 Buying and analyzing competitors' garbage.


1.37 Advertising and interviewing for non-existent jobs.


4.09 Taking public tours of competitors' facilities.


1.58 Releasing false information about the company in order to confuse competitors.


3.70 Questioning competitors' technical people at trade shows and conferences.


3.29 Hiring key people away from competitors.


3.59 Analyzing competitors' labor union contracts.


1.46 Having employees date persons who work for competitors.


2.61 Studying aerial photographs of competitors' facilities.


Jones and Bryan indicated that appropriate actions received mean responses between 3.51 and 5.00. Those items with a mean between 2.5 and 3.5 reflected student uncertainty about whether the action was appropriate or not. Items with a mean response of less than 2.5 were judged inappropriate.


Jones and Bryan were surprised to find no statistically significant differences between males and females or on the basis of age. They suggested that the strong emphasis in the business curriculum on strategic management may have tended to suppress any gender and age differences.


^ ADDITIONAL TEACHING MODULE

(Use when discussing forecasting)

THE ROLLING J-CURVE


When current environmental trends (such as the price of oil) look bad or when a new product introduction is not doing as well as expected, managers and analysts are tempted to use the infamous rolling J-curve style of forecasting, in which present trends are discounted in the hope that everything will soon improve as hoped. Well-known among strategic planners, the rolling J-curve forecast is feared with good reason by most executives. For example, if a new program is not resulting in increased sales as anticipated, the person in charge of the program simply alters the forecast by announcing that the decrease is only temporary and that the expected increase will occur sometime soon. Sales can thus be diagramed on a chart with the actual sales figures curving downward over time and the estimated future sales figures forming the upward curve of the J (while everyone continues to hope for a "light at the end of the tunnel"). Companies can go bankrupt using these kinds of forecasts in which hope substitutes for analysis.

^ CHAPTER FIVE

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