Chapter 2 Analyzing the External Environment of the Firm.docx

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Western University
Management and Organizational Studies
Management and Organizational Studies 4410A/B
Raymond Leduc

Chapter 2 ANALYZING THE EXTERNAL ENVIRONMENT OF THE FIRM September 17, 2013 CREATING THE ENVIRONMENTALLY AWARE ORGANIZATION  3 processes: o Scanning  Enhance environmental awareness o Monitoring   Better understand the environment that surrounds them o Gather competitive intelligence  Develop forecasts about the future  When smart managers feel fx. is murky  cannot foreshadow  build scenarios  scenario planning  anticipate fx. changes in external environment  Use SWOT framework to o Organize their analysis about their outlook of environment o Structure their conclusions about their outlook of environment SCANNING,M ONITORING,COMPETITIVEINTELLIGENCFORECASTING,AND SCENARIOANALYSIS Environmental Scanning  Environmental scanning: surveillance of firm’s external environment to o Predict fx. environmental changes; &  Want to be able to pick up trends before competitors pick up; OR o Detect changes already under way  When trends develop discernible pattern  Knowledge & familiarity with business + customer & eyeing environment  spotting key trends o Listen  Ask customers questions about your products + services  Ask what they’re looking for next  Find out what media they’re watching & what they think of current events o Pay attention  Read trade publications related to industry to identify key issues  Watch industries that are always on cutting edge (i.e. music, fashion, design, etc.)  Discover emerging trends that may affect business o Follow trends online  Web sites  Forums / Chatrooms / Social Media / etc.  Focus groups  Companies will seek insights from studies conducted by outside experts in a particular industry  Example: global automobile industry, key issues o Globalization (trend has intensified)  New opportunities in Asia + Central/Eastern Europe + Latin America  New manufacturers from China + India making presence felt by local markets o Time to market  Gap in product development cycles in US + Europe vs. Japan  Japan move ops to other countries o Shifting roles + responsibilities  Shift: original equipment manufacturers  integrators + other suppliers Environmental Monitoring  Environmental monitoring: tracks evolution of environmental trends / sequences of events / streams of activities o Recognized by firm by accident o Brought to attn. through environmental scanning OR outside organization  Example: global automobile industry o Closely monitor sales in Asia + Central/Eastern Europe + Latin America o Observe how fast competitors (i.e. Japanese) spit out products o Consider rising oil prices + consumer attitudes o Study trends with suppliers/integrators in purchasing + project management + system engineering  Allows for evaluation of how dramatically environmental trends changing competitive landscape  Consider other trends that could affect your industry indirectly Competitive Intelligence  Competitive intelligence: helps firms better define + understand industry & identify rivals’ strengths + weaknesses o Intelligence gathering associated with collection of data on competitors o Interpretation of data for managerial decision making o Helps company avoid surprises by anticipating competitors’ moves & decreasing own response time  Examples: (read the paper) o Banks continually track interest rate on loans charged by competitors o Airlines change fares daily in response to competitors o Car manufacturers aware of cuts/increases in rival production  Competitive Intelligence o Internet o Creative + effective information gathering skills  meaningful intelligence o Specialist firms Competitive Intelligence IS ... Competitive Intelligence IS NOT ...  Information that has been analyzed to the point where you Spying. Spying implied illegal/unethical activities. It is a can make a decision rare activity.  A tool to alert management to early recognition of both  A crystal ball. CI is good approximation of reality. It does threats + opportunities. not predict the future  A means to deliver reasonable assessments.  Database search. Data by itself is not good intelligence.  A way of life, a process.  A job for one smart person  Don’t let aggressive intelligence efforts  unethical/illegal behaviours  Caution: execs should not be caught up monitoring traditional competitors such that they neglect new competitors o Example: Britannica Encyclopedia  Microsoft swept them by selling encyclopedias on CD-ROMs for only $50 vs. $2000  Gave personal computers free copy  Wikipedia is available on Internet  Technology shift from not enough information in past  overwhelmed with information Environmental Forecasting  Environmental scanning + environmental monitoring + competitive intelligence  forecast o All info needs to be raw & reliable o Forecasting  projections about direction + scope + speed + intensity  To predict change o Will present social concern about an issue result in new legislation? o Are current lifestyle trends likely to continue? o How long will it take new technology to reach marketplace?  Example: Bombardier vs. Aviation o Since 1990s: Bombardier contemplate trends in people’s travels  new-gen aircraft 110-135 pax. – invest OR not? o Embraer introduces own version o 5 years later: Bombardier use high oil prices to emphasize design of aircraft  More efficient with redesigned engines (used this excuse for late entry) o Other competitors: Airbu A380 (big guy) *AND* Boeing 787 (small guys, in and out of airport quickly)  Danger of forecasting: view uncertainty as black/white; ignore face that uncertainty is grey o Underestimating uncertainty  strategies that don’t defend against threats OR take advantage of opportunities  Examples:  Digital Equipment Corp: focus on mainframe computers; eaten by personal computers  Ralph Waldo Emerson: focus on telegraph (sceptic of telephone); eaten by telephone  McKinsey: thought few people have cell; everyone has one today o Think world is unpredictable?  abandon planning process & base strategic decisions on gut instinct Scenario Analysis  Draws on range of disciplines + interests o Demographics + psychology + economics + sociology (ALL SOCIAL SCIENCES)  Discuss participants’ thoughts on ways in which politics + economics + societal trends + technology may affect issue  Cope with uncertainty + unpredictability of rapidly changing world  Origins: WWII  cope with multiple challenges, limited resources, great unpredictability in war  Example: o Shell: Used to prep to cope with uncertainty of extreme volatility in oil prices o Levi Strauss: impacts of everything from cotton deregulation to total disappearance of cotton o German insurance company: fall of Berlin Wall and made plans to expand in Central Europe SWOT ANALYSIS  SWOT: Strengths | Weaknesses | Opportunities | Threats o Analyse 4 elements of internal + external environments o ID/eval. opportunities+threats in business envrnmnt & strengths+weaknesses in firm’s internal envrnmnt o Used to stimulate self-reflection and group discussions about how to improve firm and position it for success  Strengths: areas within the firm where it excels, where its traditional points of power + ability + capacity lie o Examples: superior knowledge | strong brands | state-of-the-art facilities | unique access to certain markets | highly motivated workforce | extensive distribution networks | deep financial pockets | strong leadership  Weaknesses: where there may be disadvantages & where it may be lacking relative to its competitors o Examples: Can’t access raw materials | wounded brands | high financial leverage | lawsuits  Opportunities: o Easing regulatory o Improve econ. cndtns  low borrow costs oAging population  oTech. dvlpmnts cond. o New market needs demands new services oTech. convergence o Industry consolidation o New/better ways to address current needs for leisure + convenience oNew applications o New ways to deliver products/services of tech.  Threats o New legislation o Formidable competitors o Aging population o New technology  o Protectionism o Oil crisis o Shifts in tastes/values threaten to make firm’s o Terrorism o Increasing commodity prices of consumers products obsolete  Mngrs should systematically consider each area of general + competitive environments for specific opportunities + threats o Those who rely on traditional definitions of their industry + competitive environment often focus sights too narrowly on current competitors / technologies /customers  Fail to notice important change  may need industry boundaries redefined + new competitive relationships o Don’t focus too much on one moment in time  Managers risk missing changing impact on strategies and competitiveness  Specific trends may benefit some companies but harm others o Example: health and fitness benefit health clubs, but harm tobacco firms and breweries  SWOT limitations o Starting point for discussion among thoughtful managers contemplating challenges + opportunities o List firm’s attributes  identify raw material needed to perform more in-depth strategic analysis o Can’t yield environmental forecasts o Can’t show how to achieve competitive advantage THE GENERAL ENVIRONMENT  Typically, firm has little ability to predict trends + events in general environment o War in Korea & Middle East, SARS, terrorism, economic impacts o Internet impact on national and global economies  6 segments  Global | Demographic/Psychographic | Political | Economical | Sociocultural | Technological THE GLOBALSEGMENT  Globalization provides opportunities to reach larger potential markets & access to broader base of factors of production o Raw materials | labour skilled managers | technical professionals  Important elements in global segment o Global trade o Exchange rates o Fast-growing economies of China | India  China  benefit steel | construction | computers, consumer goods o Trade agreements among regional blocs  Benefit cargo & shipping industries; no touch on service industries  Automobile industry very global... expand into Latin America o Big names set up shop  suppliers follow suit  Low wages & declining trade barriers  Sales increase due to increasing demand  Norweigan Shipping industry rd o 3 largest merchant fleet  Equipment to service oil fields  Built all over the world THE DEMOGRAPHIC/PSYCHOGRAPHIC SEGMENT  Demographics are root of many changes in society o Changes in ethnic composition o Geographic distribution of population o Disparities in income level o Aging population o Rising/declining affluence  Psychographics: attitudes + interests among individuals o Complement demographic characteristics of population o Capture differences among individuals who may belong to particular group, BUT vary widely in perception / priorities / ways they interpret and react to external events  Impact of demographic trend varies across industries o Aging  +ve effect on real estate & consumer industries; -ve impact on manufacturers of diapers + baby food  Baby boomers control 80% of wealth  By 2025, / Canadians 65+  good for drug stores & life insurance; hospitals take hit 5 o Affluence  good for brokerage services + pets/supplies; fast food takes hit  Age 20-29 live with parents  Smaller householders  Don’t want to have children  Baby Boomers’ babies now repeating buying behaviours of boomers THE POLITIC/LEGALS EGMENT  Political processes and legislation define regulations that industries must comply with o Immigration policies o Environmental regulation o Occupational health + safely legislation o Deregulation of utilities + other industries o Increases in provincially mandated minimum wages  Sarbanes-Oxley Act: increased accountability of auditors / executives / BoD / corporate lawyers o Response to perception that existing policies failed to protect interests of creditors + shareholders + employees  Examples of use: Enron, Tyco, WorldCom, Hollinger International  Changes that benefit one industry may adversely affect others  Example: 9/11 o Drop in air travel  government provided bail + financial assistance; no bail for tourism industry  Example: Bombardier o Bailed by Canadian government to enable it to continue assembling planes in Quebec and Ontario THEECONOMIC SEGMENT  Economy affects all industries o Key economic indicators  Unemployment rates | Net disposable income | Interest rates | CPI | GDP  Bad economy  housing market affected; no touch on prescription drugs  Equity market economic indicators o Dow Jones Industrial Index: composed of 30 industrial firms  Index increase  consumer confidence & spending increase THESOCIOCULTURALSEGMENT  Influences values + beliefs + lifestyles of society o Increase temporary workers o Higher %age women in workforce
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