ENVIRONMENTAL SCANNING &

ANALYSIS

ENVIRONMENTAL SCANNING Environmental analysis or scanning is a

process by which organizations monitor their internal & external environment to spot opportunities & threats affecting their business

The basic purpose is to help management determine the future direction of the organization

Scanning involves reviewing & evaluating whatever information about internal & external environments can be gained from several distinct sources

SOURCES OF INFORMATION FOR ENVIRONMENTAL SCANNING

International Sources----1. World Development Report2. World Economic Survey3. Year Book of International Trade

Statistics

Government Sources----1. Census of India2. Five Year Plan Reports3. Economic Survey

SOURCES OF INFORMATION FOR ENVIRONMENTAL SCANNING

Other Sources-----1. The Bombay Stock Exchange Directory2. Economic Times3. Business Standards4. Business India5. Agricultural & Industrial Survey by The

Hindu6. Harvard Business Review etc.

TOOLS FOR EXTERNAL ENVIRONMENT ANALYSIS ETOP: It is the acronym for Environmental

Threat & Opportunity Profile It is a summarized picture of the

environmental factors & their likely impact on the organization

The preparation of ETOP helps a firm to identify the segments in a chosen field of activity, presenting excellent growth opportunities

EXAMPLE OF ETOP

E.g., most motorcycle manufacturers in India are trying to create a niche in the high-end motor cycle market

Once this is done, the firm can find out where it stands in the field of comparison to its rivals

EXAMPLE OF ETOPENVIRONMENTAL FACTORS IMPACT (+) OPPORTUNITY

(-) THREAT

TECHNOLOGY (+) NICHE MARKET FOR HIGH-END PRODUCTS(+) VAST, GROWING, EDUCATED YOUTH PREFERRING FUEL EFFICIENT, SLEEK MODELS(+) FREE IMPORTS FROM CHEAPER MARKETS

ECONOMIC (+) RISING INCOME LEVELS IN URBAN AS WELL AS RURAL MARKETS(-) PRICE COMPETITION FROM LOCAL & INTERNATIONAL BRANDS

SOCIAL (+) BUYER PREFERENCE FOR SPORTY, FASHIONABLE, DURABLE MODELS(-) ROAD ACCIDENTS FORCING PEOPLE TO OPT FOR SAFER MODES OF TRANSPORT

SCENARIO BUILDING & ANALYSIS

Scenario Building & Analyzing is a useful way of solving the complexity of environment

Scenarios are stories about what the future environment might hold & how a firm might respond to this

Scenarios help strategists in focusing attention on the emerging picture after thoroughly analyzing the pros & cons of a particular situation

SCENARIO BUILDING & ANALYSIS Scenarios can be developed through the

following steps-----1. Prepare the background by assessing the

overall social environment 2. Select critical indicators & search for future

events that may affect the key trends3. Analyze reasons for past behavior for each

trend4. Forecast each indicator in at least three

scenarios, showing the least favourable environment, the likely environment & the most favourable environment

SCENARIO BUILDING & ANALYSIS

5. Write the scenario from the viewpoint of someone in the future & describe conditions then & how they developed

6. Condense the scenario for each trend to a few paragraphs

TOOLS FOR INDUSTRY & COMPETITIVE ANALYSIS

Porter’s Five Forces Analysis: According to Michael Porter, the nature

& degree of competition in an industry depends on five forces

Threat of Substitute Products

Threat of Substitute Products

Threat of New

Entrants

Threat of New Entrants

Threat of New Entrants

Rivalry Among Competing Firms

in Industry

Rivalry Among Competing Firms

in Industry

Bargaining Power of Buyers

Bargaining Power of Buyers

Bargaining Power of Suppliers

Bargaining Power of Suppliers

Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition

Threat of New EntrantsThreat of New Entrants

Barriers to Entry

Barriers to Entry

Government Policy

Economies of Scale

Product Differentiation

Capital Requirements

Switching Costs

Access to Distribution Channels

Bargaining Power of SuppliersBargaining Power of Suppliers

Suppliers exert power in the industry by:

Suppliers exert power in the industry by:* Threatening to raise* Threatening to raiseprices or to reduce

qualityprices or to reduce quality

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Suppliers are likely to be powerful if:

Supplier industry is dominated by a few firms

Suppliers’ products have few substitutes

Buyer is not an important customer to supplier

Suppliers’ product is an important input to buyers’ product

Suppliers’ products are differentiated

Suppliers’ products have high switching costs

Supplier poses credible threat of forward integration

Bargaining Power of BuyersBargaining Power of Buyers

Buyers compete with the supplying

industry by:

Buyers compete with the supplying

industry by:

* Bargaining down prices* Bargaining down prices

* Forcing higher quality

* Forcing higher quality

Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases are large relative to seller’s sales

Purchase accounts for a significant fraction of supplier’s sales

Products are undifferentiated

Buyers face few switching costs

Buyer presents a credible threat of backward integration

Product unimportant to quality

Buyer has full information

Threat of Substitute ProductsThreat of Substitute Products

Products with similar function limit the prices firms can charge

Products with similar function limit the prices firms can charge

Keys to evaluate substitute products:

Products with improving price/performance tradeoffs relative to present industry products

Example:

Electronic security systems in place of security guards

Fax machines in place of overnight mail delivery

Rivalry Among Existing Competitors

Rivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:

Jockeying for strategic position

Using price competition

Staging advertising battles

Making new product introductions

Increasing consumer warranties or service

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse off

Advertising battles may increase total industry demand, but may be costly to smaller competitors

Cutthroat competition is more likely to occur when:

Rivalry Among Existing Competitors

Rivalry Among Existing Competitors

Numerous or equally balanced competitorsSlow growth industryHigh fixed costs

Lack of differentiation or switching costs

High storage costs

High exit barriers

Diverse competitors

STRATEGIC GROUPS

• Strategic groups are groups of firms that pursue similar types of strategies within the same industry

• Studying characteristics of every firm within an industry is extremely time consuming affair

• Hence, managers generally classify firms within an industry into strategic groups

STRATEGIC GROUPS

•While constructing strategic groups, care should be taken to select only those dimensions (Product Line, Breadth, Type of Technology Used, Type of Buyer Served, Type of Distribution Channel Used, Number of Markets Served etc.) that best describe the firm’s industry environment

STRATEGIC GROUPS•Implications of Strategic Groups---- Firms within a group sell similar products to the same customers . Hence, intense rivalry existsThe strengths of five competitive forces differ across strategic groupsThe closer the strategic groups are in terms of strategies pursued, the greater the rivalry between the groupsFirms within the same strategic group will tend to compete more vigorously with one another than with firms from other strategic groups

STRATEGIC GROUPS

Strategic groups can shift over time, so managers must continue to be aware of how firms may differ in their future competitive strategies

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