Scanning and Analyzing the Business Environment
Scanning and Analyzing the Business Environment
Industries vary in their economic characteristics, competitive situations, change drivers, firm strategic choices, and level attraction. In addition, factors such as overall size and market growth rate, demand and supply forces, product availability and substitutability, the extent to which costs are affected by economies of scale, and the types of distribution channels used to access buyers affect the structure and competitive characteristics of the industry. Industries also differ in terms of the competitive emphasis put on price, product quality, performance features, service, advertising, and promotion. The economic and competitive conditions of the fast food industry are very different than those of the computer industry.
In making strategic decisions about the future directions of their organizations, top executives must consider the industry's economic traits and competitive conditions, how they are expected to change, and whether future profit outlooks will be poor, average, or excellent. Managers can use environmental scanning to spot changing patterns in their industry and generate important clues about driving forces to prepare or maneuver their organizations strategically. Environmental scanning can be accomplished by monitoring and studying current events, constructing scenarios, and employing qualitative tools and analytical tools (such as the Delphi technique, SWOT, stakeholder analysis, etc.) to develop common understandings about future trends. Let's face it, the appeal of environmental scanning, although speculative in nature, is in expanding the intuitive decision making span of managers. Scanning the environment allows decision-makers to apply more informed judgment about market penetration and segmentation, establishing joint ventures, forming strategic alliances, etc. Ultimately the objective is to use analytical tools to help managers lengthen their planning horizon and translate ambiguous environmental opportunities into clear strategic issues.
Insightful answers to seven diagnostic questions can help increase the likelihood of companies to cope with driving forces in their domain of operations. (For a thorough treatment of these questions, see Thompson, A. A. & Strickland, A. J. (1998). Strategic Management, New York: Irwin, McGraw-Hill)
1. What are the industry's dominant economic features?
The analysis covers such features as market size, scope of competitive rivalry (number of rivals and their relative sizes); growth rate and pattern of industry development; number of buyers, opportunities for vertical integration; types of distribution channels to access buyers; pace of technological change; product differentiation (are rival firms produce unique or identical products?); economies of scale in purchasing, manufacturing, marketing; capacity utilization and its effects on low-cost production efficiency; resource requirements and barriers to entry and exit.
The airline industry, for example, is capital-intensive industry in which spreading the burden of high fixed costs of multimillion-dollar jets is achieved by cutting ground time at airport gates and by maximizing the number of flights per day with the same jet. In the saturated telecommunication industry, on the other hand, companies spend time and money in R&D and use the stately of product innovation to survive. And in the semiconductor industry companies rely on learning experiences to reduce cost-per-unit in manufacturing and leverage that knowledge to develop new products and achieve greater market share.
2. What is competition like and how strong are each of the competitive forces?
Michael Porter of the Harvard Business School conceived a powerful tool for systematically diagnosing the primary competitive pressures in a market and assessing the significance of each one to the success of the business firm. The state of competition in an industry is a composite of five competitive forces:
- The intensity of the rivalry (e.g., cloning, lower prices, special promotions, product or service quality, customer service, etc.) among competing sellers in the industry. For example, rivalry intensifies as the number of competitors increases and as the competitors become more equal in size and capability. One example of such intense rivalry currently occurs in the telecommunication industry. Can you reason the causes?
- The market attempts of companies in other industries to win customers over to their own substitute products. Firms in one industry are often in close competition with firms in other industries. The sugar industry, for example, is in close competition with companies that produce sweeteners and high-fructose corn syrup.
- The potential entry of new competitors and the types of entry barriers including: economies of scale, access to technology, learning experience, brand preferences and loyalty of customers, resource requirements (i.e., capital, distribution, etc.), costs advantages (including access to suppliers and distributors), regulatory policies, tariffs and international trade restrictions.
- The bargaining power and leverage suppliers of inputs can exercise. Suppliers tend to have more power if they are large-scale companies operating in a tight market (i.e., with high concentration). Big suppliers with excellent reputations and growing demand for their goods enjoy greater bargaining power vis-à-vis users than struggling suppliers (in low concentrated industries) who compete among themselves for larger share of users (customer base.) Similarly, when there are good substitutes for the products provided by the suppliers or when switching costs are relatively low, suppliers tend to have less leverage to bargain over prices and terms of purchase. This is especially true when the firm they are supplying is a major customer.
- The bargaining power and leverage that buyers can exercise over purchasing decisions. Among the factors that shape the bargaining power of buyers are: costs of switching brands, number of buyers, size of buyers and threats of backward integration, and the amount of discretion buyers have in purchasing decisions (e.g., you will most likely purchase a PC with equipped with a Pentium if Intel chip is critical for you.)
You can find more details about the five-forces model in: Porter, M. E. (1980), Competitive strategy?Techniques for analyzing industries and competitors, New York: Free Press.
3. What are the drivers of change in the industry and what impact will they have?
Driving forces have the biggest influence on the kind of change that will take place in the industry's structure and operating environment and therefore identifying their nature and impact is extremely important for the success of the business. The most common driving forces are: changes in the long term industry growth rate; changes in who buys the product and how they use it; product innovation; technological change; marketing innovation; entry or exit of major firms; diffusion of technical know-how; globalization; changes in cost and efficiency; emerging buyer preferences; regulatory influences; demographic changes; reductions in uncertainty and decline in perceived business risks.
4. Which companies are in strongest/weakest positions?
Looking at the industry as a whole and considering the strategic standing of each firm within the industry can serve as a powerful tool to assess the relative strengths and weaknesses of the competing firm. For example, companies in the same strategic group may have a number of structures and processes in common. Alternatively, rival firms may pursue a distinct competitive approach and occupies a substantially different competitive position in the marketplace. Thus, identifying the characteristics that differentiate companies can help in benchmarking decisions, investments in market/product development etc.
5. What strategic moves are rivals likely to make next?
A company cannot really outmaneuvered its rivals without closely monitoring their behaviors and actions, understanding (and even replicating!) their strategies, and anticipating what moves they are likely to make in the near future. A good source of information include the company's annual reports, CEO speeches, Internet, rival's customers, and talking with suppliers and rival's employees.
6. What are the key factors for competitive success?
An industry's KSF concern the product attributes, competencies, competitive capabilities, and market achievements with the greatest direct bearing on company profitability. For example, the beer industry relies on a strong network of wholesale distributors to gain access to retail outlets while in apparel manufacturing, the KSFs are appealing designs and color combinations coupled with low-cost manufacturing efficiency. Three questions are critical:
On what basis do customers choose between the competing brands of sellers?
What must a seller do to be competitively successful?what resources and competitive capabilities does it need?
What does it take for sellers to achieve a sustainable competitive advantage?
7. Is the industry attractive and what are its prospects for above-average profitability?
Answering the above seven questions can help top executives to draw conclusions about the relative attractiveness or unattractiveness of the industry, both near term and long term. Other strategic issues involve the industry's growth potential, the impact of driving forces on the industry's profitability, and the firm's core competencies and its competitive advantage.
In conducting environmental scanning the task of analyzing a company's external situation is not mechanical or uniform in which data and facts are used to produce definitive conclusions. Strategic analysis always leaves room for variances in interpretations, formation of multiple options or scenarios, and the feasible choices available for top executives. Managers become better strategists when they know what analytical questions to pose, have the skills to read clues about new or upcoming trends, and the ability to use tools and techniques to derive conclusions that significantly affect the success oftheir organization.
A review by Alan Belasen
Last modified: Friday, July 14, 2017, 5:06 PM