CHAPTER 4

Environmental Scanning and

Industry Analysis

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 Environmental Scanning
• The monitoring, evaluating and disseminating
of information from the external and internal
environments to key people within the
organization.
• A corporation uses this tool to avoid strategic
surprise and to ensure its long-term health.

• Research has found a positive relationship

between environmental scanning and profits.
 External Environmental Variables

• In undertaking environmental scanning,

strategic managers must first be aware of the
variables within a corporation’s natural,
societal, and task environments.
 Environmental Scanning
Societal/General Environment
Socio-cultural Influences Economic Influences

Task/operating Environment
Competitors
Activist Local
Groups Communities
The Organization
Suppliers Customers
Owners/Board of Directors
Managers
Unions Employees The Media

Financial Government Agencies

Intermediaries and Administrators

Political/legal Influences Technological Influences

 Environmental Scanning

Natural Environment includes physical resources,

wildlife and climate that are an inherent part of
existence on Earth. These factors form an
ecological/environmental system of interrelated life.

Societal environment is mankind’s social system that

includes general forces that do not directly touch on the
short-run activities of the organization that can, and
often do, influence its long-run decisions.

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 Societal Environment and Trends

Economic Forces

–Forces that Regulate the exchange of

materials, money, energy and information.

–E.g. An increase in interest rates can have an

obvious impact on business activity.

–Such as an increase in interest rates means fewer

sales of major home appliances.

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 Assignment

• Download/Read Economic survey 2024-25

• Federal Budget 2024-25

 Societal Environment

Technological Forces

–Forces that generate problem-solving

inventions.
For example Improvements in computer
microprocessors have not only led to the widespread
use of personal computers

But also to better automobile engine performance in

terms of power and fuel economy through the use of
microprocessors to monitor fuel injection.

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 Societal Environment

Trends in Technological part

•Portable information devices and electronic
networking
•Alternative energy sources
•Precision farming (computerized management of
crops)
•Virtual personal assistants
•Genetically altered organisms ( In Animals)
•Smart mobile robots

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 Societal Environment

Political-legal Forces allocate power and provide

constraining and protecting laws and regulations.

Trends in the political–legal part of the societal

environment have a significant impact not only
on the level of competition within an industry

But also on which strategies might be successful

For example Laws for manufacturers, Retailers

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 Societal Environment

Sociocultural Forces

–Regulate values, mores, and customs of

society.

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 Transformational Sociocultural Trends

7 Current Sociocultural Trends

–Increasing environmental awareness

–Growing health consciousness
–Expanding seniors market
–Declining mass market
–Changing pace and location of life (through
communications)
–Changing household composition
–Increasing diversity of workforce & market

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 Scanning the Societal
environment
STEEP Analysis (Table 4.1)
The scanning of Sociocultural,
Technological, Economic,
Ecological, and Political-legal environmental
forces.
• It may also be called PESTEL Analysis
(Political, Economic, Sociocultural,
Technological, Ecological, and Legal
forces.)
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 Task Environment

Task environment

–Includes those elements or groups that

directly affect a corporation and are affected by
it.
Governments, local communities, suppliers, competitors,
customers, creditors, employees/labor unions, special-interest groups
and trade associations.
A corporation’s task environment is typically
the industry within which the firm operates.

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 Task Environment

Industry Analysis --

–In-depth examination of key factors within a

corporation’s task environment.
–(popularized by Michael Porter)

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 Scanning the Task
Environment
• Corporation’s scanning of the environment
includes analyses of all the relevant elements
in the task environment.
• These analyses take the form of individual
reports written by various people in different
parts of the firm. (Figure 4.1)
Scanning the Task Environment

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 Identifying External Strategic Factors

• Origin of competitive advantage lies in the ability to

identify and respond to environmental change well
in advance of competition.
• Why are some companies better able to adapt than
others?
• One reason of differences is the ability of managers
to recognize and understand external strategic issues
& factors.
Identifying External Strategic Factors
• No firm can successfully monitor all external factors.

• Choices must be made regarding which factors are

important and which are not.

• Personal values and functional experiences of

managers matter to monitor in the external
environment and their interpretations of what they
perceive.
Identifying External Strategic Factors
Strategic Myopia: Willingness to reject
unfamiliar as well as negative information.

• If a firm needs to change its strategy, it might

not be gathering the appropriate external
information to change strategies successfully.
 Issues Priority Matrix
• One way to identify and analyze developments in
the external environment is to use the issues
priority matrix.
 Issues Priority Matrix
1.Identify a number of likely trends emerging in the
natural, societal, and task environments.
• These trends determine what the industry or the
world will look like in the near future.

2. Assess the probability of these trends actually

occurring, from low to medium to high.

3. Attempt to ascertain the likely impact (from low to

high) of each of these trends on the corporation
being examined.
Issues Priority Matrix

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 Issues Priority Matrix

• A corporation’s external strategic factors are

the key environmental trends.
• Factors that are judged to have a medium to
high probability of occurrence and a medium
to high probability of impact on the
corporation are key external trends.
 Benefits of Issues priority matrix

• Help managers to decide:

• Which environmental trends should be merely
scanned (low priority)
• Which should be monitored as strategic factors
(high priority).
• Categorized as opportunities and threats and are
included in strategy formulation.
 Industry Analysis: Analyzing the Task
Environment
• An industry is a group of firms that produces a
similar product or service, such as soft drinks
or financial services
• An examination of the important stakeholder
groups, such as suppliers and customers, in a
particular corporation’s task environment is a
part of industry analysis
Porter’s Approach to Industry Analysis

• Michael Porter, argue that a corporation is

most concerned with the intensity of
competition within its industry.
• In carefully scanning its industry, a
corporation must assess the importance to its
success of each of six forces.
Porter’s Approach to Industry Analysis

• A high force can be regarded as a threat

because it is likely to reduce profits.

• A low force, in contrast, can be viewed as an

opportunity because it may allow the company
to earn greater profits.
Analyzing the Task Environment

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 Porter’s Approach to Industry Analysis

Threat of New Entrants

New entrants to an industry typically bring to it new
capacity, a desire to gain market share and substantial
resources.
They are, therefore, threats to an established
corporation.
The threat of entry depends on the presence of entry
barriers and the reaction that can be expected from
existing competitors.
An entry barrier is an obstruction that makes it difficult
for a company to enter an industry.

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 Porter’s Approach to Industry Analysis

Some of the possible barriers to entry are:

–Economies of scale
–Product differentiation
–Capital requirements
–Switching costs
–Access to distribution channels
–Cost disadvantages independent of size
–Government policy

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 Porter’s Approach to Industry Analysis

Rivalry Among Existing Firms

–Number of competitors
–Rate of industry growth
–Product or service characteristics
–Amount of fixed costs
–Capacity
–Height of exit barriers
–Diversity of rivals

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 Porter’s approach to industry analysis

•Threat of Substitute Products or Services

•Bargaining Power of Buyers

•Bargaining Power of Suppliers

•Relative Power of Other Stakeholders

 Industry Evolution
Over time, most industries evolve through a
series of stages from growth through maturity
to eventual decline.

• Strength of each of the six forces varies

according to the stage of industry evolution.
 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.
• For example, when an industry is new, people
often buy the product, regardless of price, because
it fulfills a unique need.

• By the time an industry enters maturity

Final Term up to this slide
 Industry Evolution
Consolidate industry
• Dominated by a few large firms, each of which
struggles to differentiate its products from those
of the competitors
• As an industry moves through maturity toward
possible decline, its products’ growth rate of sales
slows and may even begin to decrease.
• The tobacco industry is an example of an industry
currently in decline.
 Strategic Groups
• A set of business units or firms that pursue
similar strategies with similar resources.

• Research shows that some strategic groups in

the same industry are more profitable than
others.
 Strategic Types
In analyzing the level of competitive intensity
within a particular industry or strategic group.
Strategic type
• A category of firms based on a common
strategic orientation/direction and a
combination of structure, culture, and
processes consistent with that strategy.
 Strategic Types
• According to Miles and Snow, competing
firms within a single industry can be categorized
into one of four basic types on the basis of their
general strategic orientation.

• Defenders
• Prospectors
• Analyzers
• Reactors
 Strategic Types

General Types of Strategies

Defenders – companies with a limited product

line that focus on improving the efficiency
of their existing operations.

Cost orientation makes them unlikely to

innovate in new areas.

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 Strategic Types

General Types of Strategies

Prospectors –companies with fairly broad

product lines that focus on product innovation
and market opportunities.

Emphasize creativity over efficiency.

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 Strategic Types

General Types of Strategies

Analyzers –corporations that operate in at least

two different product-market areas.

one stable and one variable

In the stable areas, efficiency is emphasized.

In the variable areas, innovation is emphasized.

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 Strategic Types

General Types of Strategies

Reactors –Reactors are corporations that lack a

consistent strategy-structure-culture relationship.

Their (often ineffective) responses to

environmental pressures tend to be
piecemeal/slowly strategic changes.

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 Competitive Intelligence

Competitive Intelligence
often called business intelligence

Gathering information on a company’s

competitors
• Product/offering – features, functionality,
pricing, targets, etc.
•Company – size, profitability, margins, target
markets, apparent strategy, etc.

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 Forecasting
Forecasting Techniques
Various techniques are used to forecast future situations
Extrapolation – the extension of present trends into the
future.
It rests on the assumption that the world is reasonably
consistent/constant and changes slowly in the short run.
From the past to the future
Brainstorming –non-quantitative approach that requires
simply the presence of people with some knowledge of
the situation to be predicted.
Expert opinion – Expert opinion is a non-quantitative
technique in which experts in a particular area attempt to
forecast likely developments.
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 Forecasting

Forecasting Techniques

Delphi technique – separated experts

independently assess the likelihoods of specified
events.
These assessments are combined and sent back
to each expert for fine tuning.

Statistical modeling -quantitative technique that

attempts to discover causal or at least explanatory
factors that link two or more time series together.
Examples are regression analysis and other
econometric methods.
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 Forecasting

Forecasting Techniques

Prediction markets is a recent forecasting technique

enabled by easy access to the Internet.
The Wisdom of Crowds,

Scenario writing is the most widely used forecasting

technique after trend extrapolation.

A scenario thus may be merely a written description of

some future state, in terms of key variables and issues, or

It may be generated in combination with other forecasting

techniques.
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