Environmental Scanning

Environmental
Scanning and
Industry Analysis
Professor Robert R. Wiggins
Components of External Analysis

Scanning
Identifying early signals of

environmental changes and trends
Monitoring Detecting meaning through
observations of changes and trends
Forecasting Developing projections of outcomes
based on changes and trends
Assessing
Determining timing and importance
of changes and trends for firms
strategies and management
MGMT 4710

Environmental Scanning and Industry Analysis
The General Environment

DEMOGRAPHIC
SOCIOCULTURAL
POLITICAL/LEGAL
MACROECONOMIC
TECHNOLOGICAL
GLOBAL
MGMT 4710

Demographic Segment
Population size
Age structure
Geographic distribution
Ethnic mix
Income distribution
Education levels
MGMT 4710


Economic Segment
Inflation rates
Interest rates
Trade deficits/surpluses
Budget deficits/surpluses
Personal/Business saving rates
Gross Domestic Product
MGMT 4710


Political/Legal Segment
Anti-trust laws
Tax laws
Deregulation
Labor laws
Educational policies
Political action committees
Term limitations
Balanced budgets
MGMT 4710


Sociocultural Segment
Women in work force
Work force diversity
Quality of work life
Environmental concerns
Work/career preferences
Product/service preferences
Religious influences (or lack thereof)
Crime rates
MGMT 4710


Technological Segment
Product innovations
Process innovations
Applications of knowledge in new arenas
R&D investment
Communication technologies
MGMT 4710

Porters 5 Forces Model

Based on the IO Model
Harvard 1980 and on
Boston Consulting
Group
All U.S. MBA curricula
Recruiters
Common language
MGMT 4710

Potential
Entrants
Threat of New Entrants
Suppliers
Bargaining
Power
of
Suppliers
Industry
Competitors
Rivalry Among
Existing Firms
Bargaining
Power
of
Buyers
Buyers
Threat of Subsitute Products or Services
Substitutes
MGMT 4710

Threat of New Entrants
Barriers to Entry
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Government Policy
Expected Retaliation
Entry Deterring Price
MGMT 4710


Bargaining Power of Suppliers
Dominated by a few large companies;
more concentrated than buyer industry
Substitute products unavailable
Buyers not significant customers
High switching costs
Credible threat of forward integration
MGMT 4710


Bargaining Power of Buyers
Purchase a large portion of industrys
total output
Product accounts for a large portion of
the buyers costs
Low or no switching costs
Products undifferentiated or
standardized
Credible threat of backward integration
MGMT 4710


Threat of Substitute Products
Subject
to trends improving priceperformance tradeoff

Produced by an industry earning
high profits
MGMT 4710


Intensity of Rivalry
Numerous or balanced competitors
Slow industry growth
High fixed or storage costs
Products undifferentiated or
standardized
MGMT 4710

Competition Continuum
PURE
AVOIDED
HYPERMONOPOLY COMPETITION COMPETITION
MGMT 4710
PERFECT
COMPETITION
Factors Affecting Rivalry

The Industrys Structure
Tendency Toward
Avoided Competition
The Possibility for Implicit

Collusion
The Emphasis
Observed in
Any Particular
Market
The Sustainability of
Competitive Advantage
The Stability of the
Environment
The Strategies Pursued
Tendency Toward
Hypercompetition
MGMT 4710
Competition and Industry Life Cycle

Fragmented
Growth
Industries
Consolidated
Mature
Industries
Growth
Emerging Industries
MGMT 4710
Time

Strategic Groups
Groups of firms in an industry following
the same or similar strategies
Analytical tool
Strategic dimensions important
MGMT 4710

Strategic Groups
Cadillac
Mercedes
Buick
High
Porsche
Oldsmobile
Price
Lincoln
Toyota
Low
Nissan
Chevrolet
Pontiac
Dodge
Family-Oriented
Conservative
Sporty-Oriented
Expressive
Image
MGMT 4710

Strategic Groups
Bear Stearns
Goldman Sachs
Salomon Bros.
Price
Charles Schwab
Quick & Reilly
A.G. Edwards
MGMT 4710
Merrill Lynch
Smith Barney
Paine Webber
Service

Scenario Analysis
Dealing
with
uncertainty
Planning tool
Creating internally
consistent views of
what the future may
bring
MGMT 4710
Scenario Analysis: Process
Identify Uncertainties
Determine causal factors
Make range of plausible assumptions
Combine assumptions into scenarios
Analyze industry behavior under each
scenario
Determine strengths/weaknesses
under each scenario
Predict competitor behavior
MGMT 4710

Scenario Analysis
Chain Saw
Industry Example
MGMT 4710

Chain Saw Industry

Scenario Analysis
Context
Domestic Chainsaw Industry
1970s
MGMT 4710

TABLE 13-1 Evolutionary Forces

Driving Industry Structural Change
Long-run changes in growth
Changes in buyer segments served
Buyer learning
Reduction of uncertainty
Diffusion of proprietary knowledge
Accumulation of experience
Expansion (or contraction) in scale
Changes in input and currency costs
Product innovation
Marketing innovation
Process innovation
Structural change in adjacent industries
Government policy changes
Entries and exits
MGMT 4710

TABLE 13-2
Uncertain Elements of Structure in the U.S.
Chain Saw Industry
New Entrants
Buyer Power
Rivalry
Substitute Products
Supplier Power
MGMT 4710

Uncertain Elements of Structure

U.S. Chainsaw Industry
New Entrants/Entry Barriers

Will there be new proprietary product
designs?
How high will future scale economies be in
manufacturing? In marketing?
How difficult will gaining access to each
channel be?
What safety regulations will be enacted?
MGMT 4710


Buyer Power
What will casual user demand be?
What will professional/farm demand be?
What will be the mix of dealer versus
nondealer sales?
How significant will private labeling be
outside of the servicing dealer channel?
Will distribution be direct or through
distributors?
How price sensitive will buyers be?
MGMT 4710


Rivalry
What will be the shape of the casual user
penetration curve?
How will traditional competitors behave?
How will newly acquired competitors behave?
Will additional foreign firms be attracted to the
U.S. Industry?
How high will fixed costs be?
How committed is each competitor to
chain saws?
MGMT 4710

Scenario Variables in Chainsaws

Table 13-3
Most Important Scenario Variables
Level of casual user demand

Shape of casual user penetration curve
Mix of dealer versus non-dealer sales
Extent of private label versus branded sales
through nondealers
Less Important Scenario Variables

Professional and farm demand
Penetration of electric saws
MGMT 4710

Causal Factors Determining

Uncertainties in Chainsaws
Table 13-4
Scenario Variable
Level of casual user
demand
Shape of the casual
user penetration curve
Mix of dealer versus
non-dealer sales
Extent of private label
versus branded sales
Causal Factors
External: Social trends

Internal: Product changes
External: Energy Prices
Internal: Marketing activity
External: Channel product line
Internal: Channel policies
External: Channel/branding
Internal: Branding policies
through non-dealers
MGMT 4710

Determinants of Future Industry

Structure
Causal Factors
Scenario
Variables
Dependent
Elements
Of Structure
Future
Industry
Structure
Predetermined
Structural
Changes
Constant
Elements
Of Structure
MGMT 4710

Range of Assumptions
Table 13-5
Assumptions
Scenario Variables
Level of casual unit demand
Low
Medium
Shape of casual user penetration Steady

curve
increase
Peaked
Mix of dealer versus nondealer

sales
Dealers
dominate
High
Nondealer
Share
Extent of private label versus

branded sales through
nondealers
High percent High

branded
percent
private
label
MGMT 4710
High
Short-term
shift to nondealers, with
return to
dealers in the
long term

Consistency
Eliminating Implausible Scenarios
Casual User Demand
Low
Shape of
the Casual
User
Penetration
Curve
Medium
High
Steady
Rise
Peaked
MGMT 4710

Consistency
Eliminating Implausible Scenarios
Casual User Demand/Penetration
Low/
Steady
Medium/
Steady
High/
Steady
High/
Peaked
Dealers
Dominate
Channel
Mix
High NonDealer
Share
Short-term
Shift to
Non-dealers
MGMT 4710

Consistency
Casual User Demand/Penetration

Low/
Steady
Dealers
Dominate
Channel
Mix
High NonDealer
Share
Short-term
Shift to
Non-dealers
MGMT 4710
TABLE 13-6
Medium/
Steady
High/
Steady
2
3
6
1
High
Percent
Branded
High
Percent
Private
Label
High
Percent
Branded
High/
Peaked
High
Percent
Private
Label
10

Analysis of Chain Saw Scenarios

SCENARIO 1
SCENARIO 7
Casual User Market Never

Materializes
Future Industry Structure
Same as currently
Private Label Dominates

Entry barriers shift toward
scale economies and absolute
cost advantages
Channels increase in power and
price sensitivity
Rivalry pressures increases
Electric saws become a major
product line
Structural Attractiveness
High
Mediocre on average, though a

leader can be profitable
Sources of Competitive
Advantage
Basically unchanged
Market share of causal units

Low-cost product designs
Scale economies in advertising
Automated plants in low-labor
cost areas or Extreme Strength
in professional/farm segment to
insulate a firm from the battle in
the casual user segment
MGMT 4710

Competitor Behavior
Scenario 1
Scenario 7
Casual Market Never Private Label Dominates

Materializes
Key
Uncertainty
in Competitor
Behavior
Alternative
Competitive
Behavior
MGMT 4710
Will McCulloch and

Beaird-Poulan react
correctly?
Maintain
Current
Strategies
Invest in
the casual
user market
anyway
How will Homelite

behave?
Homelite seeks
leadership in
all casual
user segments
Homelite
retreats to
traditional
segments

Figure 13-7. Analysis of an Intermediate Chain Saw Industry Scenario

Industry Scenario and Competitive Strategy under Uncertainty
SCENARIO 9
Casual User Saws Are A Fad
Future
Industry
Structure
Entry barriers shift but not to the extent of Scenario 7

Buyer power varies over time as the mix of channel shifts
Rivalry becomes vicious after the growth spurt is over
Structural
Attractiveness
Moderate in the long term
Sources of
Competitive
Advantage
Competitor
Behavior
Capacity to reap short-term profits on casual saws

Brand awareness with professional users
Low cost position to cope with rivalry
Maintaining dealer loyalty
Avoiding excess capacity
Maintaining traditional strengths
How aggressively will McCulloch
and Beaird-Poulan invest?
Aggressive
MGMT 4710
Scenario 1
Casual User Market
Never Materializes
O
P
T
I
M
A
L
S
T
R
A
T
E
G
Y
Cautious

Scenario 7
Private Label
Dominates
Scenario 9
Casual Users Saws
Are a Fad
Stay the course
Aggressively seek
cost leadership
Do not overreact to the

casual segment
Signal to avoid
mistaken moves
by competitors
Early entry into

new channels
Avoid alienating
dealers or eroding
reputation/franchise
with professional
users
Strategies TOTALLY
INCONSISTENT for
Leaders
Strategies LARGELY
INCONSISTENT
MGMT 4710
Emphasize direct
sales
Followers must
choose focus
strategies or
disinvest
First mover
advantages
make timing
important
Pick up dealers
alienated by
competitors
Reduce costs to defend

against price competition
by firms who invested
in the casual segment


Environmental Scanning

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Environmental Scanning

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Environmental

Components of External Analysis

Identifying early signals of

Professor Robert R. Wiggins

The General Environment

Professor Robert R. Wiggins

The General Environment

Professor Robert R. Wiggins

The General Environment

Professor Robert R. Wiggins

The General Environment

Professor Robert R. Wiggins

The General Environment

Professor Robert R. Wiggins

The General Environment

Professor Robert R. Wiggins

Porters 5 Forces Model

Professor Robert R. Wiggins

Porters 5 Forces Model

Threat of Subsitute Products or Services

Professor Robert R. Wiggins

Porters 5 Forces Model

Professor Robert R. Wiggins

Porters 5 Forces Model

Professor Robert R. Wiggins

Porters 5 Forces Model

Professor Robert R. Wiggins

Porters 5 Forces Model

to trends improving priceperformance tradeoff

Professor Robert R. Wiggins

Porters 5 Forces Model

Professor Robert R. Wiggins

Professor Robert R. Wiggins

Factors Affecting Rivalry

The Possibility for Implicit

Professor Robert R. Wiggins

Competition and Industry Life Cycle

Professor Robert R. Wiggins

Professor Robert R. Wiggins

Professor Robert R. Wiggins

Professor Robert R. Wiggins

Professor Robert R. Wiggins

Scenario Analysis: Process

Professor Robert R. Wiggins

Professor Robert R. Wiggins

Chain Saw Industry

Professor Robert R. Wiggins

TABLE 13-1 Evolutionary Forces

Professor Robert R. Wiggins

Professor Robert R. Wiggins

Uncertain Elements of Structure

New Entrants/Entry Barriers

Professor Robert R. Wiggins

Uncertain Elements of Structure

Professor Robert R. Wiggins

Uncertain Elements of Structure

Professor Robert R. Wiggins

Scenario Variables in Chainsaws

Level of casual user demand

Less Important Scenario Variables

Professor Robert R. Wiggins

Causal Factors Determining

External: Social trends