PART TWO" t t

,

9*r ;$Scanning the Environment

E nvironmental Scanningand IndustryAnalysis

An. event defined the global automotive industry in l9l3 - Henry Ford's moving assembly l ine.\-f It paved the way for mass production and consumption of cars; it led to the birth of the world'sfirst blockbuster car - the legendary model T; it spawned dozens of gigantic automotive companieswhose revenues rivalled the GDPs of many nations; it made car manufacturing one of the most exaltedltrrms of industrial activity.

Ninety years later, the automotive industry is perhaps in the middle of the second such definingmoment *'the moving design linel The moving design line was conceived more than a decade ago.The break up of the automotive engineering design process and the dispersed development of thebuilding biocks are now a way of life for carmakers. They have demonstrated a strong tendency to

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5O PART TWO STANNIN6 THI TNVIRON^4ENT

pass on R&D, design,engineering and prototyping responsibil i ty to vendors. They have also preferred

to outsource what little design responsibility was 1eft n'ith them. But recently, this moving design line

has started behaving l ike a snake on steroids. It is growing continuousiy and has reached India - ali

the way from Detroit to Bangalore, Chennai and Pune. Several companies i ike Ford, General Motors,

DaimlerChrysler, Toyota, Honda, Nissan, BMW Robert Boschm Johnson Controls now have in-

house engineering design centres in India or outsource work to third-party vendors in India. Indian

firms are working on atleast $500 mill ion rvorth of automotive engineering design services proiects.

That l igure could double iu two ,vears, perhaps earljer.rCompanies made huge business because of their abil ity to adapt to environmental change. The

aforementioned Auton-robile industr,v exan-rple shows how a. changing environmenl can create new

opportunii ies at the same titne it destroys old or.res. The iesson is sirnple: 'fo be successful over time,

an organization needs to be in tune with its external environment. There r.nust be a strategic fit between

what the environment u,ants and 'w'hat the corporation has to offer, as well as between what the

corporatiolt needs and what the environment carr provide'

Cur rent predictions are that the environment for all organizations r^,' i l l become even more uncertajn

u,ith everv passing ye ar. What is environmental uncertainty? It is the degree of comptrexity plus the

degree of change existing in an organization's external environment. As more and tnore markets

become global, the number of factors a company must consider in any decision become huge-more

complex. With new techno)ogies being discovered every ,vear, nrarkets change and products must

change with thern.On the one hand, environmental uncertainty is a threat to strategic managers because it hampers

their abil ity to develop Iong-range plans and to make strategic decisions to keep the corporation in

equilitlrium with its external environment. On the other hand, environmental uncertainty is an

opportunity because it creates a new playing field in which creativity and innovation can have a rnajor

oart in strategic decisions.

I fnvironmentol Sconning

Before an organiz-ation can begin strategy formulatit in, it must scan the external environment to

identifu possible opportunities and threats and its internal environrnent for strengths and weaknesses.

Environmental scanning is the monitoring, evaluating, and disseminating of information from the

external and internal environments to key people within the corporation. A corporation uses this tool

to avoid strategic surprise and to ensure its iong-term health. Research has found a positive relation-

ship between environmental scanning and profits.r

IDENTIFYING EXTERNAL ENVIRONMENTAL VARIABLESIn undertaking environmental scanning, strategic managers must f irstbe aware of the manyvariables

within a corporation's societal and task environments. The societal environment includes general

forces that do not directl1,16s6h on the short-run activit ies ofthe organization but that can, and often

do, influence its long-run decisiols. These, shown in Figure l-3,are as follorvs:

. Economic forces that regulate the exchange of materials, money, energy, and information

. Technological forces that generate problern-soh'ing inventions

. Political-legal forces that allocate power and provide constraining and prolecting iaws and

regulations. SocioCultural forces that regulate the values, mores, and customs of sociefy

The task environment includes those elements or groups that directlv affect the corporation and, in

turn, are affected by it. These are govetnments, Iocal communities, suppliers, competitors, customers,

creditors, employees/labor unions, special-interest groups, and tra<ie association.s. A corporation's task

environment is typicalli' the industry within which that firm operates. Industry analysis refers to an

i,:

T|IAPTIR THREE ENVIRONMINTAI SIANNING AND INDUSTRY ANALYSIS 5-I , ,:

in-depth examination of key factors within a corporation's task environment. Both the societal and

task environments musr be monitored to detect the strategic factors that are likely to have a strong

impact on corporate success or failure.

Sconning the Societol Environment

The number of possible strategic factors in the societal environment is very high. The number becomes

enornous when we realize that, generally speaking, each country in the world can be represented by

its ou.n unique set of societal forces-some of u'hich are verv similar to neighboring countries and

some of rvhich are very different.For exanple, even though Korea and China share Asia's Pacific Rint area u'ith Tiraiiand, Taiwan, alld

Hong Kong (sharing manl' similar cultural values), they have ver,v different viervs about the role of

br-rsjness ir.r societ1,. it is generally beiieved in Korea and China (and to a lesser extent in ]apan) that the

t'ole of busine ss is prin.rari l l ' to contribute to national developrrent; t 'hereas in Hong Kong, Tairvan, and

Thailand (a6 j to a lesser exteut in the Ptri l ippines, hrdonesia, Sineapore, and N4alaysia), the role of

business :is prirrari ly to malie profits for the shareiicl lders.'1 Such differences mav translate into different

trade rcgulaiions and varying difficulry in the repatriation ofprofits (transferring profits from a foreign

subsidiarv to a corporation's headquarters) fron.r one group of Pacific Rim countries to another.

Moniforing Sociefol Trends

As noted in Table 3-l, large corporations categorize the societal environment in any one geographic

region inlo four areas and focus their scanning in each area on trends with corporatewide televance.

Obviqusly trends in an1, I area may be very important to the firms in one indr-rstry but of lesser

importance to firms in other industries.Trends in lhe e conomic parl of the societal e nvironnretrt can have an obvious irapact on business

activity. For example, an increase in interest rates means ferver sales of major hone appliances. \\4ry?

A rising interest rate tends to be reflected in higher mortgage rates. Because irigher mortgage rates

increase the cost of buying a house, the dernand for new and used houses tends to fall. Because most

major honre appliances are sold u'hen people change houses, a reduction irt holtse sales soon translates

into a dccline jn sale s of refrigerators, stoves, and dishn'asl.rcrs and reduced profrts for everyone in that

ind ustrl'.Charrges in Lhe tcchnological part of the societal environment can also have a great imPact on

multiple industries. For example, implovements in contputcr nricroprocessors have not only led to

the widesplead r-rse of home computers, but also to better auton'robile ertgine performance in terms

of porver and lr,rel ecor.ron-r1'through the use of microprocessors to monitor luel injection. Researchers

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T o b l e 3 - l S o m e l m p o r t o n t V o r i o b l e s i n t h e S o c i e t o l E n v i r o n m e n l

Economic Technological Polit ical-Legal Sociocultural

GI)P trendsInterest ratesMoney supplyInflation ratesUnernployment levelsWage/price contrtllsDevaluation/revaluationEner:gy availability and cc-rstDisposable anddiscretionary income

Tcrtal government spending1or R&DTotal industrv spendingfor R&f)Focus of technologicai effcrrtsPatent protectlonNe rv prod uctsNerv deve lopments in

technology transfer frcm labto marketplaceProductivity improvementsthrough automationlnternet avaiJabi l i ty

Antitrust regulationsEnvironmenlal

Protectlon lawsTax lawsSpecial incentivesForeign trade regulat ionsAttitudes torvard foreigncompaniesLaws on hiring andpromotionStability of government

Lifestyle changesCareer expectationsConsumer activismRate oI family formation

Growth ,rate of populationAge distribution ofpopulationRegional shif ts in popuiat ion

Life expectanciesBirth ratbs

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5 2 PART IWO SIANNIN6 TI]I TNVIRONMEN]

at George \\rashington Universityhave identified a number of breakthrough developments in technol-

ogy, whlch they forecast wil l have a significant impact during the decade from 2000 to 2010:

. Portable Information Devices and Electronic Networking: Combining the computrng Power

of the personal computer, the networking of the Internet, the images of the television, and the

convenience ofthe telephone, these uppliurrces wil l soon be used by over 30% ofthe population

of industrialized nations to make phone calls, send e-mail, and transmit data and documents' Fven

now, homes, autos, and offices are being connected (via wires and wireless) irrto ir-rtell igent

netr,r 'orks that interact rvith one another. The traditional stand-alone desktop computel maY soon

join the manual typewriter as a historical curiosity'. Fuel cells and Alternative Energy sources: The use of wind, geothermal, hydroelectric, solar'

biorlass, and other alterLative energy sources should increase fror.n their present level of I096 to

about 30% by the end of tbe decade. Or-rce used exclusively to power spacccraft, fuel celis offcr the

prospect of pollution-free electrical power. Fuel cells chemically conlbine hydrogen and oxygen to

prc,duce ele ctrrcrtY with water as a byproduct. Although it rvil i take a number of 1'ears before fuel

ceils replace gas-pou,ered engiles or vast po\\ 'el genelalion planls' this technology is already

providing an allemate soLlrce of power for lar.ge buildings'. Precision Farming: The conipuierized rnanageilent of crops to sui't variations in land charac-

terisrics rvil l make farming more efficie nt'. Virtual Personal Assistants: Very smart comPuter proglams that monitor e-mail ' faxes' and

pho'e calls wil l be able to take over routine taski, such as writ ing a letter, retrieving a fi le' making

a phone call, or screening requests. Acting i ike a secretary, a person's virtual assistant (VA) could

s , ' . bs t i t u te fo rape rsona tmee t i ngso r i r r dea l i ngw i th rou t i neac t i ons .. GeneticallyAltered Organisms: A convergence of biotechnology and agriculture is creating a new

field of l i fe science s. ir lait seeds can be ger.reticall,v modified to produce n]cre needed vitamins or

to tre iess attractive to pests and more ubl. to sur-vive. Animals (and peopie) could be similarly

modified for desirable charactelistics and to eliminate genetic disabii it ics and diseases'

. Smart, Mobile Robots: Robot developm€l]t has be en l imited by a lack of sensory devices and

sophisticated artif lcjal intell igence systems. Improvements in these areas mcan that robots u'i l l be

perforrTr ing more sophist ica ied factory,uork, .un er t -ands, do household chc-rcs ' and assis t t l le

handicapped.a-lreirds inthe polit ical-legal part of the socictal enlirontne nt have a significant irnPact not only on the

level of competit ioll -rthln an intlustry, but also ot't which strate gies might be successful's ror cxarnplc'

cha'ges in the law by the Government to ailorv private fuel retail outlets in 2002 has led to the entrl '

of Pri 'ate sector enterprises l ike Reliance, Essar and Shell to enter the market and compcte with the

Public sector giants l ike IOC, HPC and BPCL. In Europe, the formation of the European Union l-ras

led to an increase ln merger sct iv i t ) / across I la t ional boundar ies '

Demographict rendsaiep,ar t o f rhesociocul t t t ra laspectof thesocieta] envi ronment ' lnd ia 'smiddle

class constitutecl less than t o% of the population in 1984 and I 985, according to the National,cor'rncil

of Applied Economic Research (NCAER). Since then, it has more than tripled, but is sti l l less than 20ozir

of the popululation. If the Indian economy grows at the rate of 7o/u over the ibreseeable future and

if the population rncreases annuall l 'by 1.5%, if the l iteracy rate keeps rising and if we-assume the

historical n-riddle-class gro\{th rate of the past 15 years, then half of india u'ill turn middle class between

2020 a'd 2040. Much ojwest and south India wil i turn middle class by 2020, but the backward states

like Bihar, Uttar pradesh and orissa won't get there before 2040. Disparit ies are obviously bad, but

vigorous migration helps to ameliorate them and creates pressule on the backward states to catch-

up. At these milesto.t.r, bur.d or.r the same growth assumPtions l isted above' india's individual

purcl]asi.rg porver rvil l cl imb from $2,i49 in tsss to $5,653 pel Pelson in 2020 - and to $16'500 itt

2040. This trend can mean increasing sales for f irms like Maruti (Cars), BPL (Consumer Durables)'

HLL IFMCG) , among o the rs .

Seven socioculturai trends that are helping to define what the world will soon look like are:

1. Increasing environmental awareness: Recycling and conservation are becoming more than

sloeans. Tata International, for example, at the Dewas tannery developed a Process for using

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tHAPTiR THRtI iNVlR0l'l//'ENTAL S[A|{NiNG AtlD INDUSTRY ANALYSIS

7.

chromed leather shaving dust for Biomethanation to generate fuel gas and save energy-bysubstituting coal.Growth of the seniors rnarket: As their numbers increase, people over age 55 wiil become an evenmore important market. Already some companies are segmenting the senior population intoYoung N{atures, Older N4atures, and the Elderll'-each having a different set of attitudes andinterests.Impact of Generation Y boomlet: Born after 1980 to the boomer and X generations, this cohortmayend up being as large as the boomer generation. In1957,the peakyear of the postwar boom,4.3 mill ion babies were born. In 1990, there were 4.2 miil ion births. By the mid- 1990s, elementataschools were becoming overcron'ded.6 As a result, both Republican and Democratic candidatesin the 2000 presidential electioir made "education" a primary issue. The U.S. census bureau projectsGeneration Y to crest at 30.8 mill ion births by 2005. Expect this cohort to have a strong in.rpacton fu lu re p roduc ts and se rv i ces .Decline of the mass market: Niche marl<ets are beginning to define the marketers' euvironment.People want products and services that are adapted more to their personal needs. "lr4ass

customizatior.r"-the nraking and marketing of products tailored to a person's requirernents (e.g.,

Dell and Gater,r 'ay Computers)-is repiacing the mass production and marketing of the sameproduct in some markets.Changing pace and location of life: Instant communication via fax machines, cell phones, andovernight mail enhances efficiency, but it also puts more pressure on people. Merging the personalcomputer with the communication and entertainment industry through teiephone lines, satellitedishes, and cable television increases consumers' choices and allows workers to leavc overcrou'dedurban areas fcrr sniall to'wns and "telecommute" via personai cornputers and rnodems.Changing household composition: Single-person households could become the most commonhousehold type in the United States after the year 2005. By 2005, only households composed ofmarried couples u,ith no children wll i be larger.T Although the Y generation baby boomlel mayalter this estimate, a household cleady is r.ro longer the same as it was once portrayed in The i3radyBunch in the 1970s or even The Cosbv Shou' in the 1980s.Increasing diversity of workforce and markets: Minorit l 'groups are increasing as a Fercentageof the total U.S. population. Frorn 1996to 20-50, group percentages are expected b1'the U.S. Censusllureau to changc as follows: rvhites-frorn 83% to 75(h; Afrtcan Anrericans-from 13olo to 159'o;Asian-from 40/o to 9o/o; American Indian-slight increase. Hispanics, lr.ho can be of anl'race,are projecte d to grow from 10% Io 25o/o during this timc pcritrd.sTraditional minority groups areincreasing their numbers in the workforce and are being identif ied as desirabie target markets.For example, the South Dekalb Mall in Atlanta, Georgia, restyled itself as an'Afrocentric re*.ailcenter" in response to the rapid growth of theAfricanAmerican 18-to-34 age group.o

In ternoi icnol Societo l Considerot ions

Each country cr group of countries in which a company operates presents a whoie ne\v societalenvironment with a different set of economic, technological, political-1egal, and 3ociocultural variablesfor the company to face. International societal environments vary so widely that a corporation'sinternal environment and strategic management process must be very flexible. Culturai trends inGermany, for exampie, have resulted in the inclusion of worker representatives in corporate strategicplanning. Differences in societal environments strongly affect the ways in rvhich a multinationalcorporation (MNC), a company with significant assets and activit ies in muitiple countries, conductsits marketing, f inancial, manufacturing, and other functional activit ies. For example, the existe nce ofregional associations l ike the European Union, the North American Free Trade Zone, and Mercosurin South America has a significant impact on the competitive "rules of the game" both for those MNCsoperating within and for those MNCs wanting to enter these areas.

To account for the many differences among societal environments from one country to another,consider Table 3-2. It includes a l ist of economic, technological, polit ical-legal, and socioculturalvariables for any particular country or region. For example, an important economic variable for any

' :

PART TWO.WO

SIAN[liNG IiJI ENViRONMINT

firm investing in a foreign country is currency convertibility. without convertibility, a companyoperatlng in Russia cannot convert its profits from rubles to dollars. In terms of socioculturalvariables' many Asian t"lt-ot.: (especially china) are less concerned with the value of human rightsthan are European and North American cultures. Some Asians actually contend that Americancompanies are trying to impose \vestern human rights requirements on them in an attempt to makeAsian products less competit ive by raising their costs.t0Before pianning its strategl' fo, u pa.i ic,rlar international location, a company must scan theparticular country environrnent(s) in question for opportunities and threats, and compare these withits own organizational strengths and weaknesses. For exampie, to operate successfully in a globali irdustry such as automobijes, t ires, electronics, or watches, a company must be prepared to establisha sigrrif icant Presence in the three developed areas of the world known collectiveiy as the Triad. Thisterm was coined by the Japanese management expert, Kenichi ohmae, and it refers to the threede veloped markets of lapan, North Ameiica, and western Europe, *hi.h ,ro, form a single r'arketwith co'lrnon neecs'l lFocusing on the l i iad is essential fo. uri MNC pursuing success in a globalindustry' according to ohmae,r because close to- 90% of all high-value-addecl, lr igh-technologymanufactured goods are produced and consumed in North An-rJ.icu, western Europe, and Japan.Idealiy a company shouid have a significant presence in each of these regions so that it can develop,produce' and nlarke t its products simultane.usly in all three areas. otherwrse, it u.i l l lose competit iveadvantage to Jiiad-orien-ted MNCs. No longer can_ an MNC develop and nrarket a new product inone part of the worrd before it exports it totther deveroped co,,rrt. i"s.

Focusing only on the developed nations, however, causes a corporation to miss important market.pportunitics in the developing nations of the world. Although these nations may not have developedto tl ie poinl that they have significant demand for a broad splct.,rrn of products, they may very l ikeiybc on the threshold of rapid growth in the demand f.,r specrfic p.;;r;;, This would be rhe idea, t irnefor a conrpany to enter this market-before competil ion is established. The key is to be able to identi iythe "trigger point" rvhen demantl for a particular product or service is ready to boom. See the {311Global Issue feature for a-n in-depth expianation .fa rech'ique to identify the optirnurn time to entera par t icu lar market in a developing nat ion.

Sconning the Tosk Envi ronmeniAs shor'vn in Figure 3-1, a corporatjon's scanninq of the envjronment rvi l i include anal1,5s5 of al l therelevant elenents in the task environment. These analyses take the form of individual reports writ ten

T o b l e 3 - 2 s o m e l m p o r t o n t v o r i o b l e s i n t h e l n l e r n q t i o n o l s o c i e t o l E n v i r o n m e n r s

Economic Technological Political-Legal SocioculturalEconomic developrnentPer capita incomeClimateGDP trendsMonetary and fiscal poli-ciesUnemploynent leveiCurrency convertibilityWage IeveisNature of competit ionMembership in regional eco-nornlc assocratrons

Regulat ions on technologytransferEnergy availability/costNatural resource availabilityTransportation networkSkill level of work forcePatent - t radcmark pro lec t ionInternet availabilityTelecommunicati onInfrastructure

Forrn of governmentPolitical ideologyTax larvsStabi l i ty of governmentGovernment attitude towardforeigncompaniesRegulations on fcrreign own-ership of assetsStrength of opposition groupsTrade regulat ionsProtectionist sentimentForeign pol iciesTerrorist activityLegal system

Customs, norms, valuesLangrugsDemographicsLif-e expectanciesSocial institutionsStatus slmbolsLifesryleReligious beliefsAttitude.s toward foreignersLiteracy levelHuman rightsEnviron mental isnr

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f) e,sear-ch by thc Del, ' i t te & Touche Consult ing GroupI\ 'everls that thc demirn, l f t i r a specif ic product irr-creases exponential ly at certtr in points in 3 country'sdeveloprnent. ldentifying this tr.igger point of denrandis thus cri t ical to entet ing emerging markets at the besttime. A trigger point is the time when enough peoplehave enough mone)' to buy what a compan)r ha.s to sel l ,but befrrre con'rpetition is established. This can be doneby using the concept of purchasing power pari ty(PPP), which measlrres the cost in doilars of the U.S.-produced ecluivalent volume of goods that an economy

lroduces.PPP offers an estimate of the material wealth a

nation can purchase, rather than the f inancial wealth i tcreates as typical ly mcasured by Gross Domestic.Prod-uct (GDP). As a result, restat ing a irat ion's GDP in PPPterms reveals much greater spendirrg polver than rnarketexchange rates would suggest. For example, a shoe shinccosting $5 to $10 il Nc1rr York City can be purrhasedfor 50( in Mexico Citv. Consequently the people of

F igu re 3 - lScann ing t he Ex le rna l F ) r v i r onmen l

Mexico Citycan enjoythe same standard of living {withrespect to shoe shines) as people in NervYork City withonly 5ozir to I09o of the money. Correcting for PPPrestates all Mexican shoe shines.at l-heir U.S. purchasevalue of $5. lf one million shoe shines were purchasedin Mexico iast year, using the PPP model would effec-tively increasc N{edcan GDP by $5 rnillion to $10million. Using PPP, China becomes the world's secondlargest economy after the LTnited States, with Brazi l ,Mexico, and lndia moving ahead of Canada into theI op I 0 rvor Jd ma rkc ts .

Trigger points identiiywhen demand for a particularprodr:ct is about to rapidly increase in a countr)'. Thiscan be a very useful technique to identi fy when to entera nerv market in a developing nation- Trigger pointsvary for different products. For exan-rple, an apparenttrigger point fol long-distance telephone services is at$7,500 in GDP per capita-a point when demand forteiecommunications services increases rapidly. Oncenational rvealth surpasses $15,000 per capita, demandincrcases at . i much slower rate wilh further increases inweaLth. The trigger poinl fbr life insurance is around$8,000 in GDP per capita. At this point, the demandiirr iife insurance increase.s betwcen 200o/o and 3(l0o/oabove those countr ies lvi th GDP per capita beiow thetr igger point.

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Analysis ol Societal EnvironmentEcononric, Socioculturai. Technological, Political-Legal Factors

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by'r'arious peopie in different parts of the firm. At Procter & Gamble (p&G), for example, people fromeach of the brand managemcnt teams work with key peopie frorn the sales and market researchdepartments to research and r,r 'r ite a "competit ive activity ref ort" each quarter on each of the productcategories in which P&G competes. People in purchasing also rvrite simiiar reports .orr..r.rirg .r.*developments in the industries that supplv P&G. These and other reports are then summarized andtransmitted up the corporate hierarchy for top nanagement to use in strategic decision making. I i anew developl.t lent is reported regarding a particular product category, top management may then sendIllentos asking people tl.rrouehout the organization to rvatch for and report on cievelopmenis in relatedproduct areas. The nlanv rePorts resulting from these scanning efforls, when boiled down to theiressent ia ls , act as a deta i lcd l is t o fexternal s t rategic factors.

IDENTIFYING EXTERNAL STRATEGIC FACTORS\ \ ' l -ry do conlpanies often respond dif l 'erently to the sanie environmentai changes? one reason isbecausc ofdif ferences in the abi l i ty ofmanagers to recognize and unclerstand exter nal strategic rssuesand factors. No f irn.r can successfir l ly monitor al l extenial factors. Choices rnust be rnade regar.dingrvl.r jch factors are inlportant and wlr ich are not. Even though managers agree that strategic implrtancedctcrmines\vhat Yariables are consistently tracked, they sometimes miss or choose to ignore crucialnew develoPments-12 Personal values and functicnal experiences of a corporation's managers as rvel las the success ofcurrent strategies are l ikely to bias both their perception ofwhat is im-portant tomonitor in the external environment and t l ieir interpretat ions of n,hat thev perceive. r3

This u' i l l ingness to reject unfamil iar as well as negative information is cal led strategic myopia. la I fa l l rm needs to change i ts strategy, i t might not be gathering the appropriate exte rnal intbrmation tocirange strategies successful ly.

One wa1'to identi fy arld analyze developrnents in the external environment rs to u.se the issuespriori ty matrix (Figure 3-2) as fol lows:

Figure 3-2Issues Pr iontr ' lv{a1rix

Frobable lmpact on Corporation

Source: Repr inted f ronr L. L. Lederman, "Foresight Act iv i t ies i ' the U.s.A. : T ime for aPlantr ing (June 1984), p.46. copyr ighr o I9g4. Repr inted wi th permission f rom Else' ier

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AN ALYS ISTHAPTER T|]REE INVIROt,lMIl.{TAt STANNING AND INDUSiRY ANATYSIS 57

l. ldentifv a number of l ikely trends emerging in the societal and task eirvironmrnts. These are

strategic environmental issues-those important trends that, if the,v occur, determine r,r'hat the

industry or the r,r'orld will look like in the near future.

2. Assess the probabil ity of these trends actually occurring from low to high.

3. Attempt to ascertain the l ikeiy impact (from low to high) of each of these trends on the

corporation bein g examined.

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A corporation's external strategic factors are those key environmental trends that are judged to

have both a medium to high probabil ity of occurrence and a rnedium to high probabil ity of impact

on the corporat ion. The issues pr ior i tv matr ix can then be used to help managers decide which

environmental trends should be merely scanned (low priority) and rvhich should be n'ronitored as

strategic factors (high priority). Those euvironnental trerrds judged to be a corporatiot.t 's strategic

factors are then categorized as opportur.rit ies and threats and are included in strategy- formulation-

Industry Anolysis: Anolyzing the Tosk Environment

An industry is a group of f irms producing a similar product or sen'ice, such as soft driuks or f inancial

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 analysrs.

PORTER'S APPROACH TO INDUSTRY ANALYSISMichael Porter, an authorit l 'cn con.rpetit ive strateg)., contends that a corporation is most concerned

wi ththeintensi tyofcornpet i t ionwi th in i ts i r . rdustr ,v .Thelevelof th is inteni i t f isdeterrn inedbvbasic

competit ir.e forces, nl 'r ich are depicted in Figure 3-3. "The collective strength of thcse forces," he

contends, "determines rhe ultimate profit potential in the industry, wl-re re profi1 poter.rt ial is measured

in terms of long-run return on invested capital."l5 ln carefuliy scattniug its industr,v, the corporation

must assess the importance to i ts success of each of the s ix forces: lhreat of ntn 'et l t ra l l ts , r ivah ' r 'a lnong

existi i.rg firms, threat of substitute products ol services, bar gaining power of buvers, bargaining;rower

ofsuppl iers, and re lat ive pon,er ofother s takeholders. l6 The st rongcr each of thesc forces, the more

lin-rited companies are in tl.reir abil ity to raise prices and earn greaier prc.tf its. Although Porter tncntions

only five fcrrces,'a si-rth-other stake]-rolders-is added here to reflect the porver thal governnrents, local

cornmunities, and othel groups from the task environrnent wield over it idustrv activit ies.

Usir.rg thc ntodel in Figure 3-3, a high fcrrce can bc regarded as a threat because it is l ikel,v to re duce

profits. A lon,force, in contrast, can be vierved as an opporlunity becatrse i l ntal 'a1lou'the con.rpanv

to earn grealer profits. In the short run, these forces act as constraittts on a colrpail,v's activit ies. In

rhe long run, holr,ever', i t may be possible for a conrpany, through its choice of strategy, to change the

strengtit of one or more of the lbrces to the companv's advantage. For example' i i .r order to pressure

its customers (PC makers) to purchase more of Intel 's iatest microprocessors for use in their PCs, Intel

supported the deveiopment of sophisticated software needing increasingiy iarger xmoullts of process-

i1g power. ln the mid- 1990s Intel began sell ing 3D graphics chips-not because it n'anted to be in that

business, but because 3D chips neecied large amounts of processing power (provided of course by

Intel). intel aiso introduced software that made it easier for network administrators to manage PCs

on the ir networks, which Intel believed would help sell more PCs and neutralize a threat from netu'ork

cornputers.lTA strategist can analyze any industr,v by rating each cornpelitive force as high, medium, or low in

strength. For exarnple, the athletic shoe industry couid be currentiy rateci as follows: rivalry is high

(Nike, Reebok, Adidas, and Converse are strong competitors worldwide); threat of potential entrants

is low (industry has reached maturity; sales growth rate has slowed); threat of substitutes is low (other

shoes don't provide support for sports activit ies); bargaining power of suppliers is medium but rising

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Figure 3-3Forces Driving Industn' Competition

BelativePower

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(suppliers iI l Asian countries are increasing in size and abil ity); bargainine po.rver of buyers is medjum,but increasing (athletic shoes are dropping in popularity us b.o*r, shoes gain); threat of otherstakeholders is medium to high (government regulations and human rights concerns are growrng).Based or.r current trcnds in each of these con.rpetit ive forces, the industrv appears to be increasrng rnits level of competit ive intensity, meaning profit margins wil l be fall ing for the industry as a whole.

Threot of New EntrontsNew entrants to an industry typically bring to lt new capacity, a desire to gain market share, andsuLrstantiai resources. They are, therefore, threats to an established corporation. The threat ofentrydepends on the presence of entry barriers and the reaction that can be expected from existrngcompetitors' An entry barrier is an obstruction that makes it diff icult for a iompany to enter anindustrl For example, no i lew companies successfully enter the Indian FMCG market because of thehigh product differentiation and the need for a strong dealer distribution network. Some of the possibleba r r i c r s t o en t r y a re :

' Economies of Scale: Scale economies in tire protluction and sale of microprocessors, for example,gave Intel a significant cost advantage over any new rival.

' Product Differentiation: Corporations like Procter & Gamble which manufacture products likeTide and Ariel, create high entry barriers through their high levels of advertising a.rj promotion.' Capital Requirements: The need to invest huge financialiesources in manufacturing facilities inorder to produce large commercial airplanes creates a significant barrier to entry to a"ny competr-tor for Boeing and Airbus.

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IHAPTER T|lRII INVIRONMENTAT SCANNING AND INDUSTRY ANALYSIS 59

' Switching Costs: Once a softi,r'are program like Excel or \Alord becomes established in an office,office managers are very reluctant to switch to a new program because of the high training costs.

. Access to Distribution Channels: Small entrepreneurs often have difficultyobtaining supermar-ket shelfspace for their goods because large retailers charge for space on their shelves and giveprioritvto the established firms who can pay for the advertising needed to generate high customerdemand.

' Cost Disadvantages Independent of Size: Once a new product earns sufficient market share tobe accepted as the standard for that type of product, the maker has a key advantage. Microsoft 'sdevelopment of the first rvideiy adopted operating system (MS-DOS) for the IBM tlpe personalcomputer gave it a significant competit ive advantage over potential competitors. Its introductionof \\t indows helped to cement that advantage so that the Microsoft operating system is now onover 90%o of personal computers worldwide.

. Government Policy: Governnents can limit entry into an industry through licensing require-ments by restricting access to law nraterials, such as oil-dri l i ing sites in protected areas.

Rivolry Among Existing FirmsIn most industries, corporations are mutually dependent. A conrpetit ive move by one firm can beexpected to have a noticeable effect on its competitors and thus may cause retaliation or counterefforts.For examplc, the entry by mail order companies such as Dell into a PC industry previously dominatedby IBM, Apple, and Compaq increased the level of competit ive activity to such an extent that any pricereduction or new product introduction is now quickly followed by similar moves from other PCmakers. According to Porter, intense rivalry is,related to the presence of several factors, including:

. Number of Competitors: When cornpetitors are few and roughly equal in size, such as in theIndian two-wheeler and rnajor home appiiance industries, they watch each othe r carefuliy to makesure that any move by another firm is matched by an equal countermove.

. Rate of Industry Growth: Any slowing in passenger traffic tends to set off price wars in the airlineindustry because the only path to growth is to take sales away from a competitor.

. Product or Service Characteristics: Many people choose a videotape rentai store based or-rlocation, variety of selection, and pricing because they vien' videotapes as a commodity-a productwhose characteristics are the same regardless of n'ho sells it.

. Amoun to fF i xedCos ts :P ,ecausea i r l i nesmus t f l y . t l . r e i r p l anesonaschedu le rega rd lesso f thenumber of paying passengers for any one fl ight, they offer cheap standby fares n henever a piane

has empty 'seats.. Capacity: If the only way a manufacturer can increase capacity is in,a large increment by building

a new plant (as in the paper industry), it wil l run that new plant at full capacity to keep its unit

costs as lorv as possible-thus producing so much that the sell ing price falls throughout the

industrl'.. Height of Exit Barriers: Exit barriers keep a companl'from leaving an industry. The brewing

industry, for example, has a low percentage of companies that voluntarily leave the industrybecause breweries are specialized assets with few uses except for making beer'.

. Diversity of Rivals: Rivals that have very different ideas of how to compete are likely to cross paths

often and unknowingly challenge each other's position. This happens often in the retail clothing

industrywhen a nurnber of retaiiers open outlets in the same location-thus taking sales away

from each other.

Threot of Substifute Products or ServicesSubstitute products are those products that appear to be different but can satisfy the same need as

another product. For example, fax machines are a substitute for FedEx, Sugarfree is a substitute for

sugar, and bottied water is a substitute for a cola. According to Porter, "substitutes l imit the potential

returns of an industry by placing a ceiling on the prices firms in the industry can profitably cha-rge." r6

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To the extent that swjtching costs are low, substitutes may have a strong effect on an industry. Tea canbe considered a substitute for cofTee. Ifthe price ofcoffee goes up high enough, coffee drinkers wil lsiordv begin switching to tea. The price of tea thus puts a price ceil ing on the price of coffee. Identifyingpossible substitute producls or services is sometimes a diff icult task. It neans searching for productsor services that can perform tlre same function, even though they have a different appearance and maynot appear to be easily substitutable.

Borgoin ing Power of BuyersBuvers affect an industrl ' through their abil ity to forcc dor,r 'n priccs, bargain for l"righer quaiity or moresen,ices, and play competitors against each othe;'. A buyer or a groul of buyers is powerful if sorleof the follou'ing factors lroid true:

. A buver purchases a large proportion of the seller's product or service (for example, oil f i i terspu rchased bv a n ra jo r a r t t o make r ) .

. A buver has the potent ia l to in teqr .atc backyard by producing the product i tse l f ( for example, ancwspaper chain could n. rake i ts own paper) . - '

' A l ter-nat ive suppl iers are p lent i fu l because the product is s tandard or undi f ferent ia ted ( for ex-an'rple, motorists can choosc among n-rany petrol retail outlets).

. Changing suppliers costs very l itt lc (for example, office supplies are easy to find).' The pur-chascd pr.oduct represents a high percentage of a buyer's costs, thus providing an incentive

to shop around for a lou'er pricc (for exanrple, precior,rs metals purcl.rased for jewelerv by jewelery

sh ( )ps n ta l i c up ha i f l hc i r l o ta l cos t s ) .. A buyer earns lou,profits and is thus very sensitive to cosls and service differernces (for e-xample,

grocery stores have very srnall margir.rs).' The purchased pr oduct is unimportant to tl.re final quality or price of a buyer's products or services

and thus can bc easily substituted lvithout affecting the final product adversely (for example,e lect r ic wi re bought for use in lamps).

Borgoin ing Power of Suppl iersSr"rppJiers can affect an industr,v through their abil ity to raise prices or reduce the quality of purchasedsr.rods and servjces. A supplier or supplier group is polverful if some of the following factors apply:

. The supplier industrv is dorninated by a fewpetroleurl industry).

' I ts product or serv ice is unique and/or i tprocessing softu'are).

. Subst i tu tes are not readi ly avai labie ( for exarnple, c lect r ic i t l ' ) .' Suppl i r rs are a l r le to in tegrate forward and compete d i rect ly wi th thei r present customers ( for

exarnplc. a rnicroproccssor producer l ike lntel can rnake PCs).'Apu rchas ing i r - rdus t r ybuyson l yasma l l po r t i ono f thesupp l i e rg roup ' sgoodsandse rv i cesand

is tl 'rus unimportanl 1o the supplier (for example, sales of bi-cycle tires are less important to thet i r r ' i ndus l r v t han a re sa les o fau to t i r es ) .

Relotive Power of Other SiokeholdersA sixth force should be added to Porter's l ist to include a variety of stakeholder groups froin the taskenvironrnent. Some of these groups are governments (if not explicit ly included elsewhere), localcornmunities, creditors (if not included with suppliers), trade associations, special-interest groups,unions (if not included with suppliers), shareholders, and complementors. Accordir-rg to Andy Grove,cx-CEO of Intel, a complernentor is a company (e.g., Microsoft) or an industry whose product workswell r.r ' i th another industry's or a firm's (e.g., Intel 's) product and without u'hich the product u'ouidlose much of its value.leAnother example is the tire and autornobile industries.

companies, but it sells to man)/ (for example, the

has built up switching costs (for example, word

iliAPTIR T|1RIE TNVIRClNI'IINTAL STANtlING AND INDUSTRYAN AIYSIS

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The importance of these stakeholders varies by' industrv. For example, environmentai groups in

Maine, Michigan, Oregon, and Iowa successfulh'fought to pass bil ls outlawing disposable bottles and

cans, and thus depositi for most drink cor-rtainers are now required. This effectively raised costs across

the board, u,ith the most impact on the marginal producers who could not internaily absorb all of

these costs. The traditionally strong power of national unions in the U.S. auto and railroad industries

has effectively raised costs throughout these industries but are of l i tt ie importance ln comPuter

sofin'are.

INDUSTRY EVOLUTIONOver time most industries evolve through a series of siages fron.r growth through maturity to eventual

deciine. The strcngth of each of the six forces menti,.ned earlier laries according to the stage of industry

e'olution. The industry l i fe cycle is useful for explaining and predicting trends among the six forces

driving industry competit ion. For example, *'hen an industry is t lerr', people often buy tire product

..gurdi.., of pric. because it fulf i l ls a unique need. This is p,robably a fragmented industry-no firm

has large market share and each firm senres only a small piece of the total market iD competit ion with

others 1:for example, Chinese restaurants and clear.ring services). As new competitors enter the industry'

prices drop as a I esult of competit ion. Cornpanies use the experience curve (to be discussed in Chapter

4) and econon-ries of scale to reduce costs faster than the competit ion' Companies integrate to reduce

costs even furthcr by acquiring their suppliers and distributors. Competitors try to differentiate their

products from one urroth.r', i .t o.d.. to avoid the fierce price competit ion common to a maturlng

industry.By the tin.rc an i ldustry enters maturrtir, ploducts tend to become more l ike commodities' This is

now a consolidated industry-dominated by a fer,r'large firms, each of which struggles to differentiate

its products from the competit ion' As bu1'ers become more sophisticated over time' purchasing

decisions are based on be tter information. Price L'recomes a dominant concern' given a minimum level

of quality and fealures. One example of this trend is the vide ocassette recorder industry' B)'the 1990s'

\/CRs had reached the point lvh"r. ther. were few rnajor clifference s among them. Consumers realized

that because slight improvcments cost significantly more money, ir made litt le sense to pay more than

the lninimum for a VCII.. The same is true of gasoline'

As an industry moves through maturity torn.lrd possibie decline , its producl s' growth rate-of sales

slclws and may even begin to clecrease. To the eitent that exit barriers are low firms u'i l l begin

converting their facil i t ies to alternate uses o1-wil l sell then'r to another firm. The industry tends to

consolidate around ferver but larger competitors. In tl.re case of the Indian tel:vision industry' the

industry changed from being a fralmenteiindustry (pure competit ion) composr:d of hundreds of TV

rnanufacturers in tire industry's eariy years to a consoliclated industry con-rposed of around ten

companies cor-rtroll ing over 957o of TV sales. A similar consolidation is occurring now in European

maior hon-re appliar-rces.

CATEGORIZING INTERNATIONAL INDUSTRIES

According to porter, world industries vary on a continuurn from rnultidomestic to global (see Figure

3-4).ruMultidomestic industries are specific to each country or group of countlries' This type of

international industry is a collection of essentially domestic industries, like retailing a nd insurance' The

activit ies in a subsidiary of a multi lational corporation (MNC) in this qpe of industry are essentialiy

independent of the activit ies cf the lv{NC's subiidiaries in other countries. within each country, it has

a manufacturing faciliti' to produce goods for sale within tlnat countrv' The lv{NC is tJrus able to tailor

its products o, ...rri.., to ihe very specific needs of consllmers in a prarticular country or group of

countries having similar societal environments'

Global industries, ln contrast, operate worldwide, with l-4NCs making oniy small ,adjustments for

country-specific circumstalces. A global industry is one in which an MNC's activities in one country

are significantly affected by its activities in othei countries. N'fNCs Produce products or services in

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Figure 3-4Continuum of lnternational Industries

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Industry in which companies tailortheir products to the specific needsot consumers in a pariicular country. Retai l ing. Insurance. Banking

lndustry in which companies manufactureand sell the same nroducts, with only minoradjUstments made for individual countriesaround the world.. Automobiles. Tires. Television sets

various locations throughout the rn'orld and-seil them, making or.rly minor adjustnrents for specificcountry requirements' Examples of global industries ur. .om-Jr.ial arrcraft, televjsion sets, semlcon-ductors' copiers' auton.robiles, vratJes, and tires. The largest industrial corpol-atjons in the worlri interms of dollar sales are, for the most part, multinational irporations operating in global induslries.The factors that tend to determine r.r'hether an industryn ilibe primarily multidomestic or primarilyglobal are:

l ' Prcssure for coordinatiorr witl.r in the nrultinational corporations operating in that indusrry2' Pressure.for local resltonsi,eness on the part of individuar country marketsTo the extent that the Pressure for coordination is strong and the pressure for local responsi'enessis weak for multinational corporations within a particular industrl ' , that industry wil l tend to becomeglobal' In contrast' when the pressure for locafresponsiveness is'strong and the pressure for coor-dination is weak for multinational corporari 'ns i '

"r i";;r;.;,-that industry wil i tend to bemultidomestic' Between these two extremes iie a number of industries with varying characteristics ofboth multidomestic and global industries. The dl.namic ter.rsion betweer these two factors is co'tainedin the phrase: Think globaltl,, bt.rt act locall1,.

INTERNATIONAL RISK ASSESSMENTSome lirms' such as Tatas and ONGC, develop elaborate information networks and computerizedsystems to evaluate and rank investment risks. Small cornpanies can hire outside cgnsultants such asICRA or crisi l to provide risk assessments. Among rhe many systems that exist to assess polit ical andeconomic risks are the Polit ical System stabil ity Index, the Business Environment fusk Index, Busrnesslnternational's countrvAssessment Service, and Frost and sull ir.an's world polit ical Risk Forecasts.2rBusiness International provides subscribers u,jth continuously updated information on conditrons in63 countries' A Boston company called Intcrnational Strategies offers an Export Hotline (g00 uSA-xPoR:l ') that faxes information to cailers for only the cost ofihe call. (contact.ExportHotline.comOfor a free membership.) Regardless of the source of data, a firm must develop its own method ofassesslng risk' It must decide on its most important risk factors and then assiln weights to each.

STRATEGIC GROUPSA strategic group is a set of business units or f irms that "pursue similar strategies with similarresources"'22 categorizing firms in any one industry into a sei of strategic groups is very useful as away of better understanding the competit ive environment.23 Because a corporation,s structure andculture tend to reflect the kinds of stiategies it follows, companies or business units belonging to aparticular strategic group within the samelndustry tend to be strong rivals and tend to be more similarto each other than to competitors in other strategic groups u,ithii the same industry.

For exampie, although McDonald's and Haldirans u.. a purt of the same restaurant industry, theyhave different missions, objectives, and strategies, and thus Lelong to different strategic groups. Theygenerally have very little in common and pay little attention to .u.h other when planning competitive

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THANER THREI ENVIRONMINTAL SIANNI l lc AND INDUSTRY ANALYSIS 63.

actions. Burger King and Domino's, ho\,ve\rer, have a great deal in common with McDonald's in terms

of their simiiar strategy of producing a high volurne of low-priced meals targeted for saie to the average

family. Consequently they are strong rivals and are organized to oPerate similarll'.

Strategic groups in a particular industry can be mapped by plotting the market positions of industry

competitors on a two-dimensional graph using two strategic variables as the verticai and horizontai

axes. (See Figure 3-5.)

1. Select two broad characteristics, sucit as price and menu, that differentiate the conlpanies in an

industry from one another.2. Plot the firms using these two characteristics as the dimensions.

3. Dran' a circle around those companies that are closest to one another as one strategic group'

varying the size ofthe circie in proportion to the group's share oftotal industry sales. (You could

also name each strategic group in the restaurant industry with an identifying tit ie, such as quick

fast food or buffet style service.)

Other dimensions, such as qualitv, service, location, or degree of vertical integration, can also be

used in additional graphs ofthe restaurant industry to gain a better understanding ofhow the various

firms in the industry compete. Keep in mind, however, that rvhen choosing the two din-rensions, they

should not be highly correlated; otherwise, the circles on the map wil l simply l ie along the diagonal,

providing very l itt le new information other than the obvious.

STRATEGIC TYPESIn analyzing the level of competitive intensity within a particular industry or strategic group, it is useful

to characterize the various competitors for predictive purposes. A strategic type is a category of firms

based on a cornlnon strategic orientation and a combination of structure, culture, and processes

consistent with that strategy. According to Miles and Snow, competing firms n ithin a single industry

can be categorized on the basis of their general strategic orientation into one of four basic tipes.24 This

distinction helps explain why companies facing similar situations behave differently and why they

conlinue to do so over a long period of t imc. Tl.rcsc general t lpes have the follou'ing characteristics:

. Defenders are companies with a l imited product l ine that/ocu-s ort intproving the efficiency of their

existirtgoperations. This cost orientation makes them unlikely to innovate in new areas.. Prospectors are contpanies with fairly broad product l ines that/ocu s on producl inrrovatiort and

market opportunities. This sales orientation makes them somewhat inefficient. They tend to

emphasize creativity over efficicncy.. Analyzers are corporations that operate in at least two different product-market areas, one stable

and one variable. In tl-re stable areas, efficiency is emphasized. ln the variable areas, innovation

is emphasized.. Reactors are corporations that lack a consistent stratcgy-structure-culture relotionship. Their

(often ineffective) responses to environmental pressures tend to be piecemeal strategic changes.

Dividing the competit ion into these four categories enables the strategic manager not only to

monitor the effectiveness of certain strategic orientations, but also to develop scenarios of future

industry developments (discussed later in this chapter).

HYPE RCOMPETITIO NMost industries today are facing an ever-increasing level of environmental uncertainty. They are

becoming more complex and more dynamic. Industries that used to be multidomestic are becoming

globat. New flexible, aggressive, innovative competitors are moving into established markets to erode

rapidly the advantages of large previously dominant firms. Distribution chz.nnels vary from country

to country and are being altered daily through the use of sophisticated information systems. Closer

relationships with suppliers are being forged to reduce costs, increase quality, and gain access to new

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technology' Companies learn to quickly in'r i tate t l .rc successful stratesies of rr.rarket leaders, and i tbecomes harder to sustain anv competit ive advantagr for vcry 1ong. Oonsequentl l , , the le'el ofcompetit ive intensity- j- . increasinq in ntost incjustr. ies.

Richard f) 'A'eni contcnds that as this type of environme ntal turbulence reachcs more industr ies,competit io' becomes hypercompetit ion. Accordins to D,Aveni:

In hypercontpetition thc .frequency, bolclness, and oggressit,cness of d1,716111it ntoyentenl b1, tlte pla1,e75 111;6gl_?'rales tu creale o condit ion n.[ conslanl discqui l ibr ium and changc. Markct stabit i ty isl thrrot)nrr] I ty sl tortprodt'tct life cycles, shor.'t protittct design cvtlt:s, new technol.o:jies, frequcnr. attrv by urtcxpectecl ortsitjers,reposttronit ig by incuntbents, and tacl icnl rcdefinir ions of mariet bo,-tnr]urics ns dit . ,crsc iniustr ies Tvgrgt. Inother words, enyironntcn_ts escalate towart i higher ant) highar let,cls of uncertainrl , , dynamisnl, heterogenett lo.f the ployer5 ond hosti l i ty.25In hwercompetit ive jndustr ies such as computers, competit ive advantage comes from an up-to-

date kr.rorvle dge of environmenial trends and competit ive ait ivi ty coupied with a wil l ingness to r isk acurrent advantage for a possible new advantage. Cornpanies must be r.r, i l l ing to cannibal-- ize their ownproducts (replacing popular products before competitors do so) in order to sustain their competit iveadvantage' As a result, industry or competit ive ir :r tel l igence has never been more important. See theboxed exampie tcl learn horv Microsoft is oper-at ing in the h, lpercourpeti t ive industry of comp'tersoftware. (Hlpercompetit ion is discussed in more detai l in i t

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CHAPTIR THREI EliVIRON/!{TNTAL STANNING AND INDUSTRYANATYSI S

USING KEY SUCCESS FACTORS TO CREATE AN INDUSTRY MATRIX

Within any industry there usually are certain variables-key success factors-that a comPanv's

management must understand in order to be successful. Key success factors are those variables that

can afiect significantly the overall competitive positions of all companies within anv particular industr,v.' l 'hey typicall l,vary from industry to industry and are crucial to determining a company's abil itv to

succeed within that industry. ' f l 'rey are usually deterrnir.red bv the economic and technological char-

acteristics of the industry and by the competit ivc weapons on rvhich the firms in the industry have built

thcir strategies.26 For example, in the major home appliance industrl ' , a firm must achieve low costs,

typicall1'bybuilding largc manufacturing facil i t ies dedicated to making multiple versions of one tlpe

giappliance, such as lvashing machines. Since 900/o of major home appliances in India are sold through

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M i c r o s o f i O p e r o l e s i n o H y p e r c o m p e t ; i i v e l n d u s t r y

Microsoft is a hypercompetitive firm operating in a hypercompetitive industty. lt has used its dominance

in operating systems (DOS and Windows) to nove intc, a ver)'strong position in applicalion prograns like

,,uori proc"isirrg and spreadsheets (Wcrrd and Excel). Even though N4icrosoft held 90% o[the market for

perronal computer operating systems in 1992, it still invested millions in deveJoping the next generation*

Windows 95 and \\rindows NT. lnsread of tr,ving to protect its advantage in the profitable DOS operating

svstem, Microsoft actively soughtto rep)ace DOS with various versions of \\rindol's. Before hlpercompetjtion'

m(,st. experts argued against canr-ribal.ization of a compan)"s orvn productr line because it destroys a very

p1nfitabie product instead of harvestirlg it lii(e a "cash cow."According to this line of thougbt, a company

would be bettcr- off defending i ts olcler products. t , \ew producls u'ould bc inlroduced only i f i t could be

provcn that the.v rvould not takc sales away ltom current products. N'licrosoft $'as orre of the first companies

to disprove this argumcnt against cannibal izat ion.

Bi i Gates, Microsoft 's Cofourrder, Chairmal, and CEO, real ized that i f his company didn't replace i ts

oyp llOS prgduct line rvith a better product, someone else would (such as IB\'l with OS/2 Warp). He knerv

that .succeis in the software ipdustry depends llot so nuch on company size but on moving aggressively

to the ncxt competitive advantage before a compelitor does. "T'his is a hypercompetitive market," explained

Gates. "Scale is not all pnsitive in this business. Cleverness is the positiotr in this business." By 2000'

Microsoft stili controlled over 9001, of operating systems software and had achieved a dominant position

in applications .soflwate as rnrell.

.sorrre: R. A. D'Aveni, Hypercontpetitior: (New lbrk: Free Press, i994), p' 2'

ry?,:]:ryt1 1r1, *:11+.r..'11Lr.

f . D. Hunger, lndustry Matr ix . Copyr ighr o 2001 b,v \ {heelen and Hunger Associates. Repr inted by

PARI IWOI/O STANNIN6 THI TNVIRON[{TNi

"retailers"'a firm must have a strong presence in the distribution channel. It must offer a full l ine ofappliances and provide a just-in-tiJt ati*..y frltem to keep store inventory and ordering costs toa minimum' Because the consumer expects reliability and arriujiiry t,

"n appliance, a firm must have:J:::,',T.:i::ff,I::;ilT,^,oJ.lru*ru****ij;ffi':1i'1..,*...,,rui,v*i,r,r,...,..y

Key success factors are different r'o- ,t.ut.gic factors. Key success factorsdeal with an entlreindustry; whereas, strategic factoru a.ul *it iu particular compan)1An industry -uttt l- ' :1*arizes the key success factors wii i ia partrcurar industry. As shown inTable 3-3' the matrix gives a weight fo. "ui

factor based_on how important that factor-is for successwithin the industry' The matrix"ar,o tp..ia. how r'ell 'arious c.mpetitors in the inclustry areresponding to each factor' To generate a; industry matrix usir.rg trvo industry competitors (called Aand B), cornplete the followin"g sreps for , i. _aurr.y being analyzed:t

:*:LTl.:JITt::::ITi:"'rist the 8 to r0 racrors that appear ro determine current and2' in column 2 (\\reight) assr'gn a.ra,eight to each factor from r.0 (Most Important) to 0.0 (Not' ' Important) based on that fuito.'s priuuui. impacr o' th. ou.ruit i.raurtry,. current and fururesuccess' (All weights must.sum.to r.0 regardiess of the oo-i.. orrtrategic factors.)3' In column 3 (company A I{ating) ."""1,1: a.particular company within the industry_forexan-rple' cornpanvA Assign a rati ig to each factor from 5.0 (outstanding) to r.0 (poor) basedon company A's current. response-tolhat particular factor. Each .ating is a judgment regardinghow well that companf is currently d";;g with each key success tactor.

4.05 .02.03 . 0

Above Average Average Below.Average Poor4' incolumn4(companyAWeightedScore)mul t ip ly theweight incolumn

2foreachfactor t rmesits rating in corumn 3 to obtain that factor,s *.rght"cl ,.;;;;, company A. This resuits in affi:: i"f."r:;for

each key success fac10r ranging from 5.0 (ourstanding) to r.0 (poor) with5' In column 5 (cornpany B Rating) examine a second company within the industry-i ' this case,company B' Assign a,rating to each key success factor from 5.0 (outstanding) to 1.0 (poor)- lur:d-o" Company B s curr-ent r.rporrri to each particular factor.6' Incolumn6(companyBWeightedScore)

multipry,rr.*.igr"rnbotrr*r2foreachfactortimesits rati 'g in column 5 to obtain rhat factor's weighted .i.. fo,. company B.

Finaliy' add the weighted scores for ail the factors in corumns 4 and 6 to determine the total weightedscores for companies A and B' The total rn'eighted score indicare, h;;;; each company is respondingto current and expected key success factorsin the industry', .n.,,i.o.r-.lrt. The industry matrix can be:iifii:tri:i:$""hllli*,T;fffiilpetitors witrrin ." i"a',,.f ,,''pry by adding i," ,lJiii"""r

Much external environmental scanning is done on an informal and individual basis. Information isobtained from a variety of sou'.".-r,rp'pti.rr, Lro-..s, industrypublicatio's, employees, i'dustryexperts' industry conferences, u'td the Inte.net.27 Fo, example, ,.i.'*i*r-.rra engineers working rn afirrl's R&D Iab can learn abcut rrew pr"d;.;r;;; ."mpetitors'ideas at protessionar meetings; someone

mpeiif ive Infell igence

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CHAPTIR IHRIE INV|RONMINTAL SIA}|NI}iG AND INDUSTRYAltALYSI S

from the purchasing department, speaking with supplier-representatives' personnel, may aiso uncover

valuable bits of information about a competitor. A study of product innovation found that 77o/o of

all product innovations in the scientif ic instruments and 67% in semiconductors and printed circuit

boards were init iated by the customer in the form of inquiries and complaints.2sln these industries,

the sales force and sen'ice departments must be especially vigilant.

Competitive intelligence is a formai program of gathering information on a company's competi-

tors. Until recently', very fer,r, Indian companies had fuily developed competitive intelligence programs.

In contrast, all |apanese corporations invoived in international business and most iarge European

companies have active intelligence programs.2eThis situation is changing, however. Competitive intel-

i igence is nou- one of the fastest grou'ing fields within strategic management.30Most corporations rely

on outside organizations to provide thern with environmental data. Firms such as A. C. Nielsen Co.

provide subscribers ivith bimonthly data on brand share, retail prices, percentages ofstores stocking

an item, and percentages ofstock-out stores. Strategists can use this data to spot regional and national

trelds as well as to assess rnarket share. Information on market conditions, gove rnmerlt regulations,

competitors, and nert products can be bought from "informatior.r brokers" such as India Infoline.com.

lr4an,v business corporations have established their own in-house libraries and computerized infor-

mation systems to deal with the growing mass of available information.

Some companies, however, choose to use industrial espionage or other intell igence--gathering

techniqr,res to get their information straight from their competitors. According to the American Society

of Ildustrial Securitl., there were more than 1, I 00 documented incidents of illegal economic espionage

tn 1997 alone.3l Using current or former competitors' employees anci by using private contractors,

some firms attempt to steal trade secrets, technology, business plans, and pricing strategies. For

exanple, Avon Products hired private investigators to retrieve from a public dunpster docutnents

(some of them shredded) that Mary Kay Corporatior.r had throv,,n arr'a)'. Even Procter & Gamble,

which defends itself l ike a fortress from information leaks, is vulnerable. A competitor was able to learn

the prccise launch date of a concentrated laundry detergent in Europe when one of its people visited

the factory.rvhere n.rachit.rery was being made. Simply asking a fcw questions about what a certain

machine did, whon-r it rvas for, and when it would be delivered was all that was necessary'

I " Forecosting

Elvirolmental scanning provides reasonably hard data on the prescnt situation and current trends,

but i l tuit ion and luck are needed to predict accurately if these trends u'i l l continue. The resulting

forecasts are, horvever, usually based on a set of assumptions tl.rat may or may not be valid.

DANGER OF ASSUMPTIONSFaulty underl,ving assumptions are the rnost frequet.rt cause of forecasting errors. Nevertheless many

managers who formulate and implement strategic plans rarely consider that their success is based on

a series of assumptions. Many long-range plans are simply based on projections of the current

situation.One example of what can happen nhen a corporate strategy rests on the very questionable

assumption that the future u'i l l simply be an extension of the present is that of Tupperware, the

compaly that originated air-tight, easy-to-use plastic food storage containers. Much of the company's

success had been based on Tupperware parties in the 1950s when housewives gathered in each other's

homes to socialize and play games while the local Tupperware lady demonstrated and sold new

products. Management assumed during the following decades that Tupperware parties would continue

Leing an excellent distribution channel. Its faith in this assumption blinded it to informatjon about

Ameiica's changing lifestyle (two-career families) and its likeiy impact on sales. Even in the i 990s, rvhen

Tupperware executives realized that their sales forecasts were no longer justified, they were unable to

i*piolr" their forecasting techniques until they changed their assumption that the best way to sell

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i',t ' 68 PART TWO STANNING THE ENVIROI,I '\IINT

luppern,are rvas at a Tupper\,!'are party. consequently' Rubbermaid and other competitors' who chose

t o m a r k e t t h e i r c o r r t a i n e r s i n g r o c e r y a n d d i s c o u n t S t o l e s c o n t i n u e d t o g r o w a t t h e e x p e n s e o fTuPPerrn are'i:

USEFUL FORECASTING TECHNIQUES

various techniques are used to fbrecast future situations. Each has its proponents and crit ics' A study

of nearly 500 of the world,s r".g.ri."rp"rution, revealed trend extrapolation to^be the most widely

practiced lbrm of for ecasting-over 70% use this technique either occisionally or frequentl1"33 Simply

stated,extrapolat ionis theextenslonofpresent t rendsintothefuture. I t restsontheassumpt iont l ratthe world is reasonabll ' to""st"' ' t u"j t l tongt' slowly in the sl-rort r-un' Time-series methods are

approaches of this tvpe ; they att.mpt io .n"y i '"t i t ' oil-ristorical e'ents foru'ard into the future' The

basic pr-oble'] with extrapol"tion i, that a historicai trend is based on a series of patterns or relation-

sh ipsamt l r rgsoma l l yd i f f e ren tva r i ab les t l r a tacha r . rge inanvonecand ras t i ca l l ya j t e r t l r e fu tu rec ] i r ec t rono f the t rend .Asa ru leo f t l r un lb ' t he f r - r r t he rbac l< in to t l r epas i youcan f i nd re ]evan tda tasuppor-ting the trend' the mo.re. confidence you can have in the prediction'

I. lrainstorming, expert oprn,u.,.,a statistical modeling ur. ulru r'rry.pt-rpuiar forecasting tech

,iques. tsrainstorrning is a 'or]quantitative approacl.r ,.qri i. ing slmply the presence of people u'ith

sorne kn.u,ledge of the situatior-r io Ut p"ait*d' ' the basic groit"t l rule is to propose ideas i 'r ' i thout

first r].rentaily screening them. No crit icism is allolved. Ideas''tend to build on previous ideas unti l a

consellsus is reache cl. T.l-ris is a good technique to use r,vit] 'r operating managers w]l.o },]:.T:]: '?:.1

in "gut feel" than in more qual.rt itative "number crunching" techniques' Expert oplnron IS a

nor.rquantitative technique in *,r'riir, .*p.rts in a particulat ar ea aiten'rpt to forecast likely developmcnts'

rir i. t1p. or:iorecast is basea or, , ir. ut it i ty of u t r-rowle dgeable.person(s) 10 constluct Probable future

dcr,elopnrents l-rase d on the interaction of key variabies. orre application is the Delphi technique irr

u4rich scparated experts ir.ra"p.nJ.ntly assess rhe l ikelihoods cif specified event:: lhese assessments are

combi'rec1 and sent back to each expert for f ine tuning unti l an agreencnt is re ached' statistical

modeling is a quantitatir" ,..f-,,-rif,r l thnt utt.rrtpt, to dlsc.ver causal or at least explanatory factors

tl.rat l inhtn,o or rnore tlme serres togetl.rcr. Examples of statistical modcling are regressior.t analysis and

other ecrrometric merhods. elth.;gh u.ry.rr.f,., l for grasping historic trends,.statistical modeling' i ike

tre'd extrapolatio', is based ur.r hirinri.ui data. As th. puttt*t of reiationsl'r ips change' the accuracv

o f the fo recas tde te r - i o ra tes .o t i r e r l b r ccas t i ng techn iques ,suchasc ross - i n tpnc tana l ys i s ( c /A )andtrelld.inl pact atla|ysis(?.IA), have nclt established themselves successfully as regularl,v enrployed tools.

scenario writ ing appears ,o i-,. ir. '" r.nost *,idel,v used forecasting technique -after trend extrapola-

tior.r. Originated by Royal D..itch it,. i t, ,..nu.los are focusecl desciiptions of different l ikel-v futures

pr.r.r ',r. j in a narrative fashion. The "tnu'iu

ti.rus may be n-t"rt ly a *ritten description of some future

State, l l l iermsofkeyvar iablesandissues 'or i tmaybegeneratedi r rcombinat ionwi thother forecast ingtttf l l ::"rtry

scenario is a forecasred description of a particular industry's l ike\'future' l l : l :

scenarlo is deveioped by analyzing the probabie lTPutt oift ' ttttt societal forces on key groups tn a

particular industiy' The process may opetatt as foliows'34 '

1. E";t;; ;o";Uit 'hiftt it' the societal variables globa11y'

2. Ide't ify uncertainties in .u.h of the six forces oithe task envi'onment (for example' potential

ent lants,compet i tors, l ike lysubst i tu tes,buyers,suppl iers,anclotherkeystakel ro lders) .3. M;k; ; 'ungt of plausible assumptions about future trends'

4. combine assun-rptions about individual trends into internaliv consistent scenarios'

S .A t ' i f " t f t e i ndus t r ys i t ua t i on tha twou ldp reva i l unde reachscena r i o '6. Determine the sources of competit ive advantage under each scenario'

7' Predict competitors'behavior under each scenarto'

8. select the scenarios that are either most i ikely to occur or most l ikely to have a strong lmpact on

thefutureof thecompany.Usethesescenar ios inst rategyfornru lat ion.

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I Synthesis of Externol Foctors-EFAS

After strategic managers have scanned the societal and task environments and identif ied a number of

l ikel,v external factors for their particular corporation, the,v may u,ant to reflne their anaiysis of these

factors using a forl-r such as that eir.en in Table 3-4. The EFAS (External Factors Analysis Summary)

Table is one \\.ay to organize tl.re external factors into the generally accepted categories of opportunities

and tl.rreats as u'ell as to analyze holv weli a particular comPany's management (rating) is responding

to tl iese specific factors in l ight of the perceived irnportance (weight) of these factors to the company'

To generate an EFAS 'iable for the company bcing anall 'zed' complete the following steps:

. In Column 1 (Exter la l Factors) , l is t the 8 to 10 most important opportuni t ies and thre ats fac ing

thc con.rpanl'.. ln Column 2 (\\Ieight), assisn a weie|t to each factor from 1.0 (lr '{ost hnportant) to 0'0 (Not

Importalt) based on that factor's probable impact on a particr"rlar comPan)/'s currellt strategic

positicrn. The higlier- the rveight, the mor.e it.nportant is this factor to the cut rent and future success

of thecor .npani ' . (A l lweightsmustsumto l .0regardlessof thenumberof factors. ). In Column 3 (Rar ing) , ass igt . r a rat ing to each factor f rc lm 5.0 (Outstanding) to 1.0 (Poor)based

on manaqement's current response to that particular factor. Each rating is a judgn.rent on hot{

well the cgnp3ny's management is currelt l l 'dealing rvith eacl-r specific external factor.

F o c l o r A n o l y s i s S u m m o r y ( E F A S ) : A s i o n P o i n t s L i m i i e d ( A P L ) o s

o f S t r o t e g i c F o c t o r s ) *

Weight RatingWeighted

Score Comments

Consohdation in decorative segment

Flnd user ah'areness

Low APL pl'esence AsIa

Exterior and econornY segments

All iances requlred

Well posit ioned\Vell positionedAPL rveak cornparitivelY

QuestionableNon-tariff barriers

T o b l e 3 - 4 E x l e r n o i

E x o m p l e ( S e l e c t i o n

Externai Factors

0pportunit ies0l Boom in constructior, industry

02 Demographics f-avor mass

customization03 Economic develoirment of

Asia and India04 Growth in rr.rral Indian nrarket

05 Prornising auto and rvhitegoorls industry

ThreatsTi Liberal Governmeut pol iciesT2 St rong c l r incesc co i lpe t i t i r r r tT3 ICI and Berger strong globalh'T4 Ncw I ' roJuc t . rdvanecsT5 Strict environmental laws

worid over

Total Scores 1 . 0 0 3 . 2 7

Notes:1 . L i s t oppo r t un i t i e s and t h rea t s ( 8 -10 ) i n co l umn l .2. Weight each factor fron ,l.0 (N{ost lmportant) to 0.0 (Not lmportant) in Column 2 based on that factor's

the companv's st rategic posi t ion. The tota l weights must sum to 1.00.

3. Rate each factor f ror l 5.0 (Ourstanding) to 1.0 (Poor) in Column 3 based on the conpany's resPonse 10

4. Multiplv each factor's weight times its rating to obtain each factor's 'n'eighted score in Coiumn 4.

5. Use Column 5 (comments) for rat ionale used for each factor .6. Add the indiv idual weighred scores to obtain the tota l weighted score for the company in Column 4. This

company is responding to the strategic factors in i ts external environment '

probable inpact on

that factor.

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O STANNING Ti l I INVIRONI i INT

' In Column 4 (Weighted Score), multipii'the u'eight in Column 2 for eachfactor times its raringin Column 3 to obtain each factor's weighted score. This results in a weighted score for each factorranging from 5.0 (Outstanding) to 1.0 (poor) u,ith 3.0 as average.

' In Column 5 (Comments), note whv a particular factor was selected and/or how its weieht andrating were estimated.

Finalll', add the individual weighted scores for all the external iactors in Column 4 to determrnethe total weighted score for that particular company. The total weighted score indicates how well aparticular companY is responding to current and expected factors in its external environment. Thescore can be used to compare that firrn to other firms in its industry. The total weighted score for anaverage firm in an industry is alu'ays 3.0.

As an exatnple of this procedure, Table 3-4 includes a number of external factors for Asian paintsLimited ivith corresirondins rt 'eights, ratings, and weighte<l score s provided. This table is appropriatcfor I995be{oreMaytag qold its European an<iAustralian operations. Note that l{aytag's total weightis 3.1 5, meaning that the corporation was slightly above average in the major ho,r-,. uppliun.e industrya t t h a t l i r n e .

j lmpoct of the Internell l t r ^ l InousTry Anotysts

on Environmentol Sconning ond

The I nternet has changed the way t he strategisl engages in environmental scan ning. It provides thequickest means to obtain data on almost any subject. A recent joint study o,f 77 companies by theAmerican Productivity & Quality Center and the Society of Competitive Intelligence professionalsreveals that 73o/o of the firms ranked the Internet as being used to 2 'lgreat"

or;u..y great" extent.Other mentioned sources of information were competiror offering.s &products (6i%),industryexperts(62%),personalindustrycontacts (600/o),onlinedakbases(SSVa,marketresearch(55%),and the sales force (54%).3s Although the scope and quality of Internet information is increasinggeonletrically, it is also l ittered with "noise," misinformation, anrl utter nonsense. For e*umple, Inrunb,er of corporate We b sites are sending unwanted f{uests to specially constructed bogn. W.bsites ! 16

Unlike the library, the Internet lacks the tight bibliographic control standards that exist in theprint world. There is no ISBN or Dewey Decimal System to identifir, search, and retrieve a documenlMany Web documents lack the name of the author and the date of publication. A Web pageproviding useful information may be accessible on the Web one day uni gon. the nextl Unlrappyex-employees, far-out environmentalists. and prank-prone hackers creat. W.l, ,it., to attack anddiscredit an otherwise reputable corporation. Rumors with no basi.s jn fact are spread via chatrooms and personal Web sites. This creates a serious problem for the researcher. How can oneevaiuate the information found on the Internet?

A basic rule in intell igence gathcring is th a t before a piece of informa tion cau be used in any reDortorbr ic f ing, i tmu$f i rs tbeevaluatedintwoways. F i rs t , thesourceof theinformat ionshouldbejudgedin,terms of its truthfuln-es.s and reliability. How irustworthy is the ,t,rr..t Ho* *"ff .""-. ,"**-.i*rely upon it for truthful and correct information? One approach is to rank the reliability of therour:..::.u sc{1 from A (extremely reliable), B (reliablei, c (unknown reliability), D rpr"u"tryunreliable), to E (very questionable reliability). The reliability ofa source can be judged o1 the basisof the author's credentials, the organization sponsoring the information, and'pasi performance,

lmong other factors . Sccotd, the information or rlata siould be judged in termi of i is l ikelihood of

being to.rrec.t. The correctnlss 9f f

e data may be ranked on a scale from I (correct), 2 (probablycorrect)' 3 (unknown ), 4 (doubtful), to 5 (erlren-rely doubtful). The correctness of a pjece of dataor information can be judged on the basis of its agreement with other bits oIseparatelv obtainedinformation or with a general trend supported by previous data. For every piece of informationfound on the Internet, list not only the Web address of the Web page, but jso the evaluation of

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IHAPTLR THRIE iI iVIROt{fiIINTAL STANI.iING AIiD INDUSTRY ANALYSIS / I

the information frorn Al (good stuff) to E5 (bad doodoo). Information found through libraryresearch in sources such as Moody's Indtrstrials, Standard dn Poor's, ar Valuc Litrc can generally beevaluated as having a reliabil i ty of A. Tbe correctncss of the data can sti l l range anpvhere front 1to 5, but in most instances is tikely to be either 1 or 2, but probabiy no worse than 3 or 4. Othersources may be less -reliable I

Sites such as those hosted by the Director General, Commercial lntelligence and Statistics(DGCIS)(www.dgciskol.nic.in) orDirectorGeneralof Foreign Tiade (DGFT) (rww.dgftcom.nic.in)are extremely reliable. Company sponsored Web sites are generally relial-rle'br.rt are not the place togo for trade secrets, strategic pians, or proprietary infonnation. For one thing, manl'firrns thinkof their Web sites primarily in terms of rnarketing, and they provide little data aside from productdescriptions ancl distribution channels. Other conr.panies provide thcir latest f inanciai statementsand linl<s to other useful Web sites. Nerertheless, some conUrnnis5 in rery competitiv€ industriesmay install .software on their \\reb site to ascertain a visitor's \\'eb address. \risitors from acompetitor's domain name are thus screened before tl.rey are allowed to access certain \Veb sites.They rna1, not be allon'ed beyond the product information page or thcy may be sent to a bogusWeb site containing nrisinformation. Cisco SysLerns, fcrr example, uscs its Web site to send visitorsfrom other hjgh-tech firms to a special\d/eb page asking if theywould like to applyfrrr a job at Ciscol

Time searching the lnternet can be saved by using search engines-\{eb sites that search theInternet for narnes and products typed in by the user. The searcil engines rrost used by competitiveintelligence professionals are AltaVista (500/o), Yahoo! (75o/o), and Lycos (15%). Otirers areWebCrawler (7.5o/o), Sr,r ' i tchboard (7-5o/o),lnfoseel< (5%), and Metacrawler (5ol').17

Although information about publiclylield corporations is widely availairle, it is much harder toobtain information or:r privately held companies. For a comparison of the qpe of informationgenerally available on publicly and privatell 'held companies, see lhe

$f:l Internet Issue feature for competitor infonnation available on the lnternet.

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. From lgg-1 to 2010, thc number of pcople l iv ing in povert) / rv i l l incrcase 1l 'onr 3.7 b i l l ion to -1.9 b i l i ion

. F rom 1994 t o 2010 , t he ave rage nun rbe r o f ch i l d ren p r ' r won ran u ' i l l d cc r casc f r ou r - l . l t r ) l . ; . r '

1 . Discuss how a developn.rent in a corporat ion 's socie la l

environment can af fect the corporat ion through i ls task

environment.

2. According to Porter , u 'hat determines the lcvel of com-

pet i t ive intensi ty in an industr ,v?

3. According to Porter 's d iscussion of industry analvsis, i -s

Pepsi-Cola a subst i tute for Coca-Cola?

iStrotegic Proctice

What are the forces driving industry competition in theairline industry? Read the following paragraphs. Using Porter'sapproach to industry analysis, evaluate each of the six forcesto ascertain what drives the level of competit ive intensity inthis industry.

Recently India has deregulated i ts air l ine industry. Sincebeing deregulated, long established PSU airiines such as Indian

Hou'can a decis ion mal<er idenl i f t 's t rategic lactors in the

corporat ion 's er ternal internat ional environncnt?

C)ompare and contrast t rend extrapolat ion l t i th the wr i t -

ing of scenar ios as forecast ing technic lues.

Ail l lnes, Al l ianct ' and A.ir India have lost Lrusiness to upstartsl ike ]et Airrvays and Air Sahara. I t appeared that almost any-one could buy a few used planes to serve the smaller ci t ies.Econony plai'ers like Air Deccan and l(ing Fisher have aiso

entered the narket. I t has led to a major price n'ar among the

players also. I{ai l and bus transportat ion have started taking a

back seat. The competit ive pressure has also resulted in dor,r 'n

Discussion

7=:-

Wi*r;;i,',,#. r'

STANNING TilI INViROIiMINT

tiy-,r*, fi:f"i*7'. Lr,;r,,',1tr,

COMPETITORINFORMATIONAVAILABLE ON THEINTER N ET

Type of InformationLikelihood of Finding Data on the

Net for Publicly Held CompanyLikel ihood of Finding Data on theNet for Privately Held Company

Total Annual Saies

S . r l r ' s aoc l P ro l j r r h i l i L ) . b1 . p . oc i uc rLine or Distr ibut ion Channel

Marke{ Sizes . in Segrnenrs ofl l r t e res t

'1- i . "L, i " Market i r rg, 1 'echnologv,

D i s t l i bu r i on

\ /ery h igh

Verr low

Depends on the marker: High forlarge companies, lorv for small" n i chc " f i rms

Same as aboye

Very low

Very low

Same as for pubJic lv held

Same as for publicly held

Priccs, Inciuding the Lur lesr pr ices \7cry lonto llest Custornc-rs Very low

l \ I r rk. ' t ing Slr . r tcgy Some inforrnar ion avai lable f rom trade Even less than for publ ic lv helda r t i c l c s and , nu t y r f , . po r r r , ; ; ; " ' " " .

:ncomplete and dated

Sales anr i ' Iechuical L i teraturc on Strons .Uhel i iood, but of tcnProd ricts ilcomplcte; less chancc fr:r detaileci

t c chn i ca l i n f o r . l na t i o l r

i-\umbcr of Ernployecs \4rorking on Highly Lrnlikell. I{-crtain l)rod.cts or in Partlcuiat Jighly unlii<ely l

l)epartments

Compensat ion Levels Top managsrngnt generally available; Will not be founduthers unl ikelv

;::::fi,::";::i,ftf:;0,"* Arairabrc r-,1.:..,^1".1':cles a1d ress rikery than for pubricry herd_ industry reports; at best, may beincomplete and dated

Feedback on Firm's Own products WiIl not be found; Iook for I , Same as for publiclv heldarrdservices ira.p.;a."i'J;;;;;";;, I ' ,

:

:-"........-

ll;i:' *^'"d from c' F'lein' "overcoming 'Net Disease,"' cpmpetitive Intelligencn MagaTine(July-Septernbe r 1999))

sizing the HR in in the PSUs and reduced costs bI inst i tut ing

a cap on travel agent commissions. Tra'r'el agencies rvere livid

at this cut in their l ivel ihood, but they needed the air l ines'

business in order to offer customers a total travel package.G1obal1y it seemed as though every natior-t had to have its

or,r 'n air l ine for national prestige, These state-ou'ned air l ineswere expensive, but the governlnents subsidized them u.i th

money and support ing regulat ions. For exanrple, a foreign

airhne was normally al lou'ed to f l1' onl,v into one of a countr)"sairports, forcing travelers to su' i tch to the national air l ine to

go to other cit ies. l)urine thc I98()s and 1990s, hor,r 'cvcr, manr'

countr ies began privatizing their air l ines as e.overnnents tr ied

to improve their budgcts. ' ib be l ' iable in an incrcasingly giobal

industr l ' , national or regional air l ines werc forced 1o ftrrn.t

al l iances and even purchase an air l i r-re in anotl ' rer countr l / or

l . I lvaluate eacb of the forccs currentJl ' dr iving conrprt i t i ()nThreat of Nerv l lntrantsHigh, I \ '1eci ium, or Lo*'?Rivalry Among Exist ing Firms High, lr4edium,Threat of Substi tutes High, N4ediunr, or Lorr '?Bargair-r ing Pou'er of Buyers/I) istr ibutors I{ igh,Bareaining Por'r 'er of Suppliers High, l t ' lcdium,

Relat ive Pou'er of Other Stakeholders High,

IHAPTIR TIiRiE EI.iVIRONMENIAT SiANNINO AND INDUSTRYAN AtYS IS

region. For example, the Dutch KLM Air l ine acquired halfinterest in the Lr.S Northu'est Airlines in order to obtain notonll'LI.S. destinations, but also Northr'r'est's Asian travel routes,thus making i t one of the few global air l ines.

Costs u'ere stiil relatively high for all of the u.orld's majorair l ines because ofthe high cost ofnew airpianes. Just one ne\\ 'jet plane costs an)'$,here from $25 mil l ion to $I00 mil1ion.Bv 2004, only i ivo airplane manufacturers provided almost al lof the large commercial arr l iners: Boeing and Airbus. Majorair l ines rn'ere forced to purchase nerv planes because thel 'wcremorc.fuel eff icient, safcr, and easier to maintain. Air l ines t l-ratcl- iose to sta) ' \ \ ' i tb an older l lcet of planes had to deal u' i thhigher fuel and maintcnance costs-factors t l-ra1 often ntadei t cheapcr to buv new p lanes .

in thc a i r l ine indus t r r ' :

or l-or'r'7

lvlediun-r, oror Lon'-(lv{edium, or

Lou'?

Low?Such as

Which of these forces is changing? \ \ rhat w' i l l th is rnean to the ovcral l level of compet i t ive intensi tv in the ai r l inc industry

in the future? \ \ /ould you invest or look for a job i r , th is industry?

l . M.Anand, "The Moving Design Line," Br.s incss \ {or ld (14

Feb rua rv ,2005 ) , pp - 34 35 .2 . J . B . Thoma-s , S . t r 4 . C la r k , and D A . G io i a , "S t ra teg i t :

Sensemak ing and Organ i za t i ona l Pe r f o rmance : L i nkages

Among Scanning, Interpretat ion, Act ion, Outcomes," Acad-

enty of Management Journal (April 1993), pp. 239-270; I. A.

Smith, "st rategies for Star t -Ups," Long Range Planning(De remher l 9q8 ) . nn 857 -872 .

3. P. Lasserre and J. Probert, "Competing on the Pacific Rtm:

High Risks and High Returns," Long Range Planning tAprtl

r99a), pp. 12-3s.

1i:,i :iT:T.r..:.;i1i?. 1LrTTiTTTtrIt:lTl1::.r:1

bra ins torming (p . 6B)cannibal ize (p. (r.1)

comp.eti t ive intel l igence (p. 67)complementor (p . 6 l i )conso l ida ted indus t rv (p . 61)De lph i techn ique (p . 6E)EFAS Table (p. 69)en t ry bar r ie r (p . 5B)environmental scanning (p. 50)en'r ' i ronmental uncertainty (p. 50)exit barr iers (p. 59)e v n c r t n n i n i n n f n 6 R \' " r ' _ ' ' r " _ _ ' _ - , r ' " ' ,

external strategic factors (p. 56)

ex t rapo la t ion (p - t rE)f ragmenled indus t ry (p . 61)g loba l indus lq , (p { ,1 )hvpcrconrpeti t ion (p. tr4 )indus t rv (p . 61)industry analvsis (p. 50)i n , l r r r l r r - n r . r t r i x i D n f , l

i ndus t ry scenar io (p . 68)issucs pr io r i t v mat r ix (p . 56)l ley success f: ictors (p. 65)rnu l t idomest ic indus t r ,v (p . 6 i )nult inational cor"poral ion (N,INC) (p5 l )

nc\ \ ' en t ran ts (p . 6 l )purcirasing porr 'er pari t l ' ( Pi)P)( p . s 5 )repat r ia t ion o f p ro l i t s (p . 5 i )scenar io wr i t ing (p . 68)soc ie ta l env i ronmcnt (p . 52)s ta t i s t i ca l modc l ing (p . 68)s t ra teg ic g roup (p . 62)strategic m1'opia (p. 56)strateqic type (p. 63)subs l i tu te p roduc ls (p . ,59)

lask enr. ironment (p. 50)T i iad (p . sa)tnggc l po in l (p . 55)

4. W- E. Haial , "The Top 10 Emerg: ing Technologies," Specia l

Rcport ( ' r \ ror ld FuIure Societ \ . , 2000).5. F. Dobbir and T. I . Dorvd, "Horv Pol icy Si- rapes Conrpet i -

t ion: Ear ly Raj l road Foundings in lv{assachusetts l ' Adnt in-

is t rcr t i t ,c Scicr tce Quarter l l ' (September 1997), pp. 501-529.

6. J. Greco, "Meet Generat ion Y," Forecast (May/ lune, 1996),

pp- 48-54; J. F letcher, 'A Generat ion Asks: 'Can the Boom

Last? ' " 14 'n l l Strect JournL:Ll ( lune , |4, 1996), p. B10.

7 . 'A l one

i n Amer r ca , " Fu tu r i s t (Sep tember -Oc tobe r 1995 ) ,

pp . s6 -57 .

Key

N otes

l7-

1." 74 PART T|ryO SIA|INING THI ENVIRONMINI

8. "Populat ion Growth Slowing as Nat ion Ages, , ' (Ames, IA)Dai ly Tt" ibune (March 14, 1996), p. A7.

9. L. M. Grossman, 'Af ter Demographic Shi f t , At lanta X4al l

Restyles Itself as Blach Shopping Center,,, Wall Sneet Journal(February 26, 1992), p. ts '1.

10. J. Naisbitt, Megatrends Asra (Neu' york: Simon & Schuster,1996), p, 79.

I1. K. Ohmae, "The Tr iad \ \ 'or ld View,, ' lournal of BusinessS t rn teg ; ' (Sp r i ng l 9B7 ) , pp . S *19 .

12. B. K. I3oyd and J. Fulk, "Execut ive Scanning and percejvedLJncerta inry: A Mul t id inrensional Model , , , Journal of Man-a g c n i t t l t , V o l . 2 2 , N o . 1 ( 1 9 9 6 ) , p p . l _ 2 1 .

13 . I t . . { . L } c t1 i s and C . K . p raha lad , , , l - he Don . r i nan t Log i cRelrospecl jve and Extension," Straregic Ma:raeement |our_nal (January 1995), pp.5- t1t J. t r .4. Srof ford and C. \ \ r . F.Baden-Ful lcr , "Creatrng Corps121c E,ntrepreneurship, ' . Sl raI t g r c A lo t l n { cn tu t t J t : un tu ! ( sep ten lbe r 1991 ) , pp . 52 i_536 ; l .l \ '1 . Be,vcr , I , . Chal topadhvar. , E. George , \ \ ' . I . . j . Gl ick. D.Puql iesc, " ' l 'hc 5cle l i t .e f t - rccp1 i i t r r of l \ . ianlqers Rer. is i ted, , ,At t t r lcnt l a. [ L4anttgcmcrt t !ouni , i l ( )une 1997), pp_ 7]6_731 .

l -1. I '1 . I . Anrof f , "st raregir : X4ana,gct .ncrr t in a l { js tor ical l )e ispec_t ivc. ' in I i l t t rnat ional l lcy i t t t , o. l Srrutcgic L, lc t t t t tgct i tcni , yo) .2 , . r - o . t ( 1991 ) , cd i r ed by I ) . 1 . . Hussey (Ch i ches re r , En_g l a n d : \ \ , i J e 1 , , t 9 9 t ) , p . 6 1 .

15. l \J . I r . Porter , Compet i t i l tc Strat tg) , (New york: Free press,l 9 t j 0 ) , p . 3 .

I6. ' l 'h is

summary of the forccs dr iv ing compet i t ive intensi ty istaken f iont Porrer , Cotnpet i t i t ,e Strat tg,v, p1: . 7-29.

17. P. N-. - / rval i iarr , " I 'o l i t ical I {ealr r ies in Stratcgr, . " Strategl , c-Ltadership (October, Novembcr, Dccenrber 1999), pp. aZ4t i -

I8. Por ler , Conpct i t ive .st rareg_r, p. 23.19. A. S. (irovr:, "Strrviving a 10x Force,', -Slrd/eg.I <r Leadership

( J r rua ry /Feb ru t r y t 997 ) , pp_ 3s : 17 .20 . IVJ F . . I ) o r t c r , "Cha l s i ng I ) a l l e rns o l l n l e rna t rona i Co rnpc_

l j t ton," ( ,a l t . {ornia \ Ianagonr:n / Ra. i ly (M' intcr l9g6), pp. 9_4 0 .

2 I . T . N . G lad l v i n , "Asscss in .q t he Muh ina t i ona l Env i r onmen tfor Corporatc Opportuniry," in I lant lbook oJ Business Strnt_cg1' , edi ted by W. l l , Guth ( tsosLon: \ {arrcn, Gorham ancll . an ron l , 1985 ) , pp . 7 .ZB -7 .4 j .

12 . K . ] . Ha l r en and l v { . L . I l a i l en , , ,S t r a res i c l i r oups , , t s ym,n te t r i ca l t r { ob i i i t y l j a r r i e r s , and Con tes rab i l i l ) . , , ; . s l r r r e { , i .Managunent Journal ] t t ly_Augusr l9 i i7) , p. 329.

2-3. A. Fiegenbaum and H. Thomas, ..Strategic Groups as Ref_

. erence Groups: Theory, Modeling and Ernpirical Examina_t ion of Industry and Compet i t ive Strateg, .z, ' , StrategicMat lagemcnt lot t rnal (September 1995), pp. 461_426; H. R.Greve, "Manager ia i Cogni t ion and the Mimet ic Adopt ion oflvlarket Positions: Mrhat you See Is l{&at you Do,,,

'strategic

I t (anagement Journal (October l99g), pp. 967_9gg,24. R. E. l\{iles and C. C. Snou,, Organizational Strategy, Struc-

turc, and Process (Neu, \brk: McGran,_Hi l l , l97gl .2-s. R. A. i)'Aveni, Hypercornltetition (New york: -Ihe

Free press,l99a), pp. x i i i -x j r ' .

26. C. \\r. Hofer and D. Schendel, Stratcgy Fortnulutiort: Analyti_cul Cs715..p75 (Sr, paui , MN: West publ ishing Co., to161, O.7 7 .

27. "Information C)r,erload," Journal of IJusiness Srrutcg_r, ()anu-a r I Feb rua ry l 99 i i ) , p . 1 .

28. E. \ ' t rn Fi tppjc, Srrercc s of lnnoyat ion 0, je rv york: Oxlordt , n i vc r s i t , v p ress , l 9g8 ) , p . 4 .

29. L. I ia l rancr- , Contpe t i t ivc Intc l l igcnct iNni , \brk: ,Simon &Schus te r , I 996 ) .

30 . S . N , i . Sbake r and M . p . Gen rb i c I , . i , l l , a r . l i oo r ; G t t i c l c t oCotnpct i r i t 'c I t t tc l l igcnrc (Neu, york: lv{cGraw-Hi l l , 1999), p.1 0 .

3 l . S . M . Shake r and N4 . p . Gemb ick r , I l a r Roon t Gu t t l e t oCottpcr i r i t ,c lntc l l igutce (New york: l \4cGrarv-Hi l l , 1999), p.202.

32. L. Nl . Grossman, "Fami l ies Have Changed But TuppenvareKeeps I l o l d i ng l t s pa r r i es , ' , ) \ / a l l S t r ce t Jou rna l i ; r t y Z l ,1 9 9 2 ) , 1 , p , A t , A t l .

33 . l l . E . K le rn and R_ L . L i r r neman , , .Env i r onmcn ta l Assess -

nler f : An lnternat ional Studv of Corporatc pract ices, , ' /oar-nai of | t t ts incss Strat tg l , (Sumner l9g4), p.72.

34. This process of scenar io development is adapted f rom 14.f . Por ier , Cotnpct i t ive Adyantnge (Nerv york: I ree press,1 9 8 5 ) , p p . 4 4 8 - . . 1 7 0 .

35. S. H. Mi l lcr , " I )evclopjns a Succcssful Cl l program: prel imi ,narv Study Resulls," C)ontpt:titive Intelligcttct Nlngazine (()c_tobc r - I ) ecember 1999 ) . p . 9 .S. H. Miller, "Bcware Rival's \{eb Site SutrtcrIuge,,I r t , c I t t te l l tgerLce Macaz ine 0anuary_March 2000)S . N l . S b a k c r a n d M . p . C i e m b i c k i , I ( a r R o o r t tCotnpttit ive Inte|!ic|nct (Ncu, yorli: N4cGralr.-Hil l.

PARI

t 6

I t 3 - t i 5 .38. J. Warncr, "2 lst Century Capi ta l ism: Snapshot

Cen1ury," Business lVeelr (November Ig, I994),

Compt t i -

, p . d .

G u i d e t o

1 9 9 9 ) , p p .

of thc Ncxtp . 1 9 4