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STRATEGIC MANAGEMENT

02 Environmental Scanning & Industry Analysis


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Environmental Scanning
Environmental scanning is the monitoring, evaluation and dissemination of information from the external and internal environments to key people within the corporation. It is in the environment that all the opportunities are embedded. By tapping the opportunities, the firm achieves its objectives of sales, profits, growth, et al. In the environment only all the threats lie.

IKEA (Slide 1)
As a young person in Sweden after the Second World War, Kamprad observed that many young families had a hard time buying Swedish furniture because of its high price. He saw a way to offer good quality furniture at substantially lower prices.

IKEA (Slide 2)
What were the options available with Kamprad? His cost cutting strategy included:

Buy large volumes The furniture would be designed in knockdown form Customers would see the assembled furniture in showroom, make selection, locate furniture items, pay and drive home avoiding delivery costs Customers would assemble the furniture themselves Ikea stores work on a low markup and high volume

The Swedish manufacturer of home furnishings, Ikea group, wants to double the goods it sources from India to 1 billion. But plans to sell the companys products in the country are hampered by restrictions on overseas investments in retail.
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IKEA (Slide 3)
Their idea is to provide good design, good function, but at very, very low prices. The company does not prefer to be in joint ventures (JV). There is a very high urbanization rate in India and that will only continue. Entry barrier is that the firms plan to sell its products in India, are hampered by restrictions on overseas investments in retail. Economic conditions are improving dramatically in India, for all people. There is really room for all the traditional local home furnishing firms and also for Ikea because the market and the need will grow so dramatically in the coming 10-20 years.

Spotting the Opportunities & Threats


Where is the environment heading? What trends are emerging therein? What are the threats and opportunities embedded in the trends? What should be the firms response to these trends?

Analysis helps the firm highlight opportunities for growth within and outside the existing businesses of the firm.
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Trends & Megatrends


A trend is a direction or sequence of events that has some momentum and durability. A trend reveals the shape of the future and provides many opportunities. The concept of e-books is gaining ground.

Trends & Megatrends


Megatrends are described as large social, economic, political and technological changes that are slow to form but once in place, they influence us for long time. In the 20th century, our lives were revolutionised by things like the automobile, airline travel, the personal computer and family planning. The next big thing is the wellness revolution. The desire for wellness already pervades our decisions, from which toothpaste and shampoo we use in the morning to what we eat throughout the day to the bedding and cosmetics we use at night.
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Trends & Megatrends

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Trends & Megatrends


We demand more safety from our products; we want more prevention from them. And yet we are only at the beginning of the public consciousness of this growing need. We are now at the beginning of the next trillion dollar industry, the wellness industry. The wellness industry is being spawned by scientific breakthroughs in biology and cellular bio-chemistry. The wellness industry is tackling one of the most profound issues of life, solving one of the few remaining mysteries of human existence, age and vitality, on which technology has yet to make its mark.
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Fad
A fad is any form of behavior that develops among a large population and is collectively followed with enthusiasm for some period, generally as a result of the behavior's being perceived as novel in some way.

Though the term trend may be used interchangeably with fad, a fad is generally considered a fleeting behavior whereas a trend is considered to be a behavior that evolves into a relatively permanent change.
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Fad
Fads of the 2000s

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Fad
Fads of the 2000s

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Political Factors

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Components of Environment
Political factors
Stability of the government Government type (dictatorship, democratic, monarchy, etc) Economic policy of the government Diplomatic events in surrounding countries Taxation policy Foreign policy Trade regulations and trade policy Social welfare policies
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Economic Factors

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Components of Environment
Economic factors
GNP/GDP trends Business cycles Interest rates Money supply Inflation Unemployment Disposable income

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Socio-cultural Factors

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Components of Environment
Socio-cultural factors
Population demographics Income distribution Social mobility Cultural diversity Lifestyle changes Attitude towards work and leisure Consumerism Levels of education Skilled manpower availability
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Technological Factors

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Components of Environment
Technological Factors
Government spending on research and development Government and industry focus on technological efforts New discoveries, innovations and development Speed of technology transfer Rates of obsolescence
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Environmental Factors

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Components of Environment
Environmental factors
Environmental protection laws Waste disposal regulations Energy consumption and production Competition law

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Legal Factors

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Components of Environment
Legal factors
Monopolies legislation Employment law Health and safety Product safety and liability regulations Exit policy
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Current Trends

Increasing environmental awareness Growing health consciousness Expanding seniors market Impact of the Generation Y boomlet Declining mass market Changing pace and location of life Changing household composition Increasing diversity of workforce & market

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Business Ethics
Argument that there is no such thing it is an oxymoron

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Corporate Practices
Massive write-downs and restatements of profit
Misclassification of expenses as capital expenditures Pirating corporate assets for personal gain

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Strategic Myopia
Willingness to reject unfamiliar as well as negative information

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Issues Priority Matrix

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Issues Priority Matrix


Identify a number of emerging trends Assess the probability of these trends Attempt to ascertain the likely impact of each of these trends

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Industry Analysis
An industry is a group of firms producing a similar product or service An examination of the important stakeholders group in a particular corporations task environment is a part of industry analysis

Porters Five Forces Model

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Threat of New Entrants


A new entrant creates new capacity for gaining and sustaining market share. New entrant can destabilize the competition, creating a shakeout in the market. The most attractive segment is that in which entry barriers are high and exit barriers low. When both entry and exit barriers are high, profit potential is high. When both entry and exit barriers are low, the returns are stable and low. The worst case is when entry barriers are low and exit barriers high. The result is chronic overcapacity and depressed earnings.
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Porters Five Forces Model of Competition


Threat of Threat of New New Entrants Entrants

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Threat of New Entrants


Economies of Scale

Barriers to Entry

Product Differentiation Capital Requirements

Switching Costs
Access to Distribution Channels Cost Disadvantages Independent of Scale Government Policy

Expected Retaliation
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Threat of New Entrants

Economies of scale means where companies are able to drive down unit costs of a product or service as the volume increases. An entrant has two options, either to match or outperform the level of economies of scale or to start at a level where the economies of scale are less and accept that there will be cost disadvantages.
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Threat of New Entrants


Economies of Scale

Barriers to Entry

Product Differentiation Capital Requirements

Switching Costs
Access to Distribution Channels Cost Disadvantages Independent of Scale Government Policy

Expected Retaliation
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Threat of New Entrants


Product differentiation implies that established companies within the industry have had time and opportunity to build customer loyalty through product differences, branding and marketing communications. A new entrant will have to invest significantly in product differences and marketing communication to establish its brand in the marketplace. This will be resources-intensive with no guarantees that the brand will find a position that generates suitable returns on the investment.
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Threat of New Entrants


Economies of Scale

Barriers to Entry

Product Differentiation Capital Requirements

Switching Costs
Access to Distribution Channels Cost Disadvantages Independent of Scale Government Policy

Expected Retaliation
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Threat of New Entrants


Capital requirements means substantial investment may be required to enter and establish a new brand. The venture is considered highly risky and the financial risk may deter potential entrants.

Switching costs means costs incurred in changing suppliers. These costs will occur because of retraining staff, installation and testing of new equipment, acquisition of ancillary materials and time needed to build relationships with new suppliers.
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Threat of New Entrants


Economies of Scale

Barriers to Entry

Product Differentiation Capital Requirements

Switching Costs
Access to Distribution Channels Cost Disadvantages Independent of Scale Government Policy

Expected Retaliation
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Threat of New Entrants


Access to distribution channels means that established companies will have already efficient channels of distribution. The new entrant will have to either find a new avenue for distribution which will incur training costs or else persuade existing distributors to make extra shelf space which will result in additional incentives.

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Threat of New Entrants


Economies of Scale

Barriers to Entry

Product Differentiation Capital Requirements

Switching Costs
Access to Distribution Channels Cost Disadvantages Independent of Scale Government Policy

Expected Retaliation
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Threat of New Entrants


Cost disadvantages independent of scale means cost advantages beyond economies of scale in terms of technical know-how, patents, direct access to raw materials, ideal location, government subsidies and significant industry or marketing experience. Government policy means policies that range from regulation of certain industries such as nuclear industry to protectionist policies for local industry to environmental legislation.

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Porters Five Forces Model of Competition


Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

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Bargaining Power of Suppliers


Suppliers are likely to be powerful if:
Suppliers exert power in the industry by: * Threatening to raise prices or to reduce quality

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

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

Suppliers products are differentiated


Suppliers products have high switching costs Supplier poses credible threat of forward integration
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OPEC
The Organization of the Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq, with the signing of an agreement in September 1960 by five countries, the founder members, Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. These countries were later joined by Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Gabon and Angola. Gabon terminated its membership in 1995. Indonesia suspended its membership in January 2009. Currently, the Organization has a total of 12 Member Countries.
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Porters Five Forces Model of Competition


Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

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Bargaining Power of Buyers


Buyer groups are likely to be powerful if: Buyers are concentrated or purchases are large relative to sellers sales Purchase accounts for a significant fraction of suppliers sales Products are undifferentiated Buyers face few switching costs Buyers industry earns low profits Buyer presents a credible threat of backward integration Product unimportant to quality

Buyers compete with the supplying industry by:


* Bargaining down prices * Forcing higher quality * Playing firms off of each other

Buyer has full information

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Porters Five Forces Model of Competition


Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Threat of Substitute Products

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Threat of Substitute Products


Keys to evaluate substitute products: Products with similar function limit the prices firms can charge 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
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Porters Five Forces Model of Competition


Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers

Threat of Substitute Products

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Rivalry Among Existing Competitors


Intense rivalry often plays out in the following ways:
Jockeying for strategic position Using price competition

Staging advertising battles Increasing consumer warranties or service Making new product introductions

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
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Industry Evolution
Over time industries evolve through a series of stages from growth through maturity to eventual decline The strength of each force of the six forces varies according to the stage of industry evolution Fragmented industry : no firm has large market share and each firm serves only a small piece of the total market in competition with others Consolidated industry : dominated by a few large firms, each of which struggle s to differentiate its products from the competition

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Continuum of International Industries


Multidomestic Global

Industry in which companies tailor their products to the specific needs of consumers in a particular country. Retailing Insurance Banking

Industry in which companies manufacture and sell the same products, with only minor adjustments made for individual countries around the world. Automobiles

Tyres
Television sets
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Strategic Groups
Is a set of business units or firms that pursue similar strategies with similar resources To understand the competitive environment in an industry, firms can be categorized into a set of strategic groups Strategic groups of an industry can be plotted on a two dimensional graph (price, product line breadth, quality, service, location)
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Strategic Types
Defenders Prospectors Analyzers Reactors

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Strategic Types
Defenders Companies with a limited product line that focus on improving the efficiency of their existing operations Prospectors Companies with fairly broad product lines that focus on product innovation and market opportunities
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Strategic Types
Analyzers Corporations that operate at least in 2 different product-market areas. Emphasis on efficiency in stable areas. Emphasis on innovation in variable areas Reactors Corporations that lack a consistent strategystructure- culture relationship. Ineffective responses to environmental pressures
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Hyper-competition
In hyper-competition the frequency, boldness, and agressiveness of dynamic movement by the players accelerates to create a condition of constant disequilibrium and change Market stability is threatened by short product life cycles, short product design cycles, new technologies, frequent entry by unexpected outsiders, redefinition of market boundaries as diverse industries merge Environments escalate towards higher levels of uncertainty, dynamism, heterogeneity of the players and hostility
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Hyper-competition
Companies must be willing to cannibalize their own products (replacing popular products before competitors do so) in order to sustain their competitive advantage As a result, it is important to study industry or competitive intelligence

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Key Success Factors


KSFs are those variables that can affect significantly the overall competitive positions of all companies within any particular industry. They vary from industry to industry and are crucial to determine a companys ability to succeed within the industry. Key success factors are different from strategic factors : Key Success factors deal with an entire industry. Strategic factor deal with a particular company.
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Competitive Intelligence
Is a formal program of gathering information on a companys competitors Most corporations rely on outside organizations to provide them with environmental data. Information on market conditions, government regulations, competitors and new products can be bought from information brokers

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Competitive Intelligence
Industrial espionage is considered illegal Unethical tactics; bribery, wiretapping, computer break-ins should never be used to get information

10 questions to monitor competitors for strategic planning


1. Why do your competitors exist? to make profits or to support another unit? 2. Where do they add customer value? Higher quality, lower price, credit terms, better service? 3. Which of your customers are the competition most interested in? best customers or the ones you dont want? 4. What is their cost base and liquidity? 5. Are they less exposed with their suppliers than your firm?

10 questions to monitor competitors for strategic planning


6. What do they intend to do in the future? Target your market segments? Growing? 7. How will their activities affect your strategies? Should you adjust your plans and operations? 8. How much better than your competitor do you need to be in order to win customers? 9. Will new competitors appear over the next few years? 10.If you were a customer, would you choose your product over those offered by your competitors?

Forecasting
Intuition and luck are needed to predict trends in the future, These trends are based on assumptions. Faulty assumptions are cause of forecasting errors. Many long-range plans are based on projections of the current situation.

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The Role of Forecasting

Environmental Scanning

Present Trends and Fashions

Forecasting Future Trends and Fashions

Assumptions for Strategic Planning and Decision Making

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