Strategic management

1. Lec. No. 3
PART 2 - Environmental Scanning
External Factor Analysis of Strategic Environment
Dr. Mohamed A. El-araby

2. Environment Scanning + Strategy Formulation +
Strategy Implementation + Strategy Assessment
Strategic Management
(S.M.) =
Internal Analysis + External Analysis
Environment Scanning =
Setting Vision + mission + Str. Objectives + Analyzing
strategic Options + Adopting Strategy (Str. Decision)
Strategy Formulation
(Strategic Planning)or
(Long Range Planning) =
Setting Structure + Annual Objectives + Policies +
Programs + Budgets + Procedures + Rules
Strategy
Implementation =
Detecting Standards + Performance measuring +
Corrective Actions
Strategy Assessment &
Evaluation =

3. Environmental Scanning
External Environment
Internal Environment
S W O T

5. Introduction:
This chapter examines the tools and concepts needed to conduct an
external strategic management audit (sometimes called environmental
scanning or industry analysis).
The purpose of an external audit is to develop a finite list of opportunities
that could benefit a firm as well as threats that should be avoided.
Firms should be able to respond either offensively or defensively to the
factors by formulating strategies that take advantage of external
opportunities or that minimize the impact of potential threats.

6. • Environment literally in general means the surroundings,
objects, influences or circumstances under which
someone or something exists.
• External assessment is a step where a firm identifies
opportunities that could benefit it and threats that it
should avoid.
What is External Environment ?

7. Characteristics of External Environment
1. Complex
2. Dynamic
3. multi –faceted
4. far-reaching impact (on contrary with internal envir.)
5. impact on different firms within the same industry differs
from one project to another.
6. An opportunity for one project could be a threat to
others.
7. Changes in Extr. environment causes other counter
changes to the competitive scenarios or internal plans.
8. Sometimes extr. Conditions are difficult to predict with
any degree of accuracy (uncertainty situation).

9. Types of External Environment
We can designate 3 different layers of external envi. Analysis :
1st Layer
Competitive envi.
2 nd Layer
National envi.
3rd Layer
Global envi.

10. Layer 1

11. (I) Porter’s Five Force Analysis Model
In 1979, the Harvard Business Review published the article “How Competitive
Forces Shape Strategy” by the Harvard Professor Michael Porter. It started a
revolution in the strategy field.
In subsequent decades, “Porter’s five forces” have shaped a generation of
academic research and business practice.
In essence, the job of the strategist is to understand and cope with competition.
However, managers define competition too narrowly, as if it occurs only among
today’s direct competitors.
Yet competition for profits goes beyond established industry rivals. It includes four
other competitive forces as well:
• customers,
• suppliers,
• potential entrants
• and substitutes.

13. The Five Forces model developed by Michnal E. Porter has been the
most commonly used analytical tool for examining competitive
environment.
According to this model, the intensity of competition in an industry
depends on five basic forces. These five forces are:
1. Threat of new entrants
2. Intensity of rivalry among industry competitors
3. Bargaining power of buyers
4. Bargaining power of suppliers
5. Threat of substitute products and services.
Each of these forces affects a firm’s ability to compete in a given market,
Together, they determine the potential direct profits or losses for
particular industry.

15. (II) Industry / Service Analysis Model
1. Industry features
2. Industry boundaries
3. Industry environment
4. Industry structure
5. Industry performance
6. Industry practices
7. Industry attractiveness
8. Industry prospects for future

16. Industry Features
(a) Overall size
(b) Market growth rate
(c) Geographic boundaries of the market
(d) Number and sizes of competitors
(e) Pace of technological change
(f) Product innovations etc.
Industry Boundaries
(a) Breadth of market
(b) Product/service quality
(c) Geographic distribution
(d) Level of vertical integration
(e) Profit motives
Industry Environment
(a) Fragmented enviro. : A fragmented industry consists of a large number of
small or medium-sized companies, none of which is in a position to
determine industry price. Many fragmented industries are characterized by
low entry barriers and commodity type products that are hard to
differentiate.
(b) Consolidated enviro. : A consolidated industry is dominated by a small
number of large companies or in extreme cases, by just one company (a
monopoly). These companies are in a position to determine industry prices.

17. Industry Structure
(a) Concentration
(b) Economies of scale
(c) Product differentiation
(d) Barriers to entry.
Industry attractiveness
(a) Profit potential
(b) Growth prospects
(c) Competition
(d) Industry barriers etc.
Industry performance
(a) Production
(b) Sales
(c) Profitability
(d) Technological advancements etc.
Industry practices
(a) Product policy
(b) Pricing policy
(c) Promotion policy
(d) Distribution policy
(e) R&D policy
(f) Competitive tactics.
Industry’s future prospects
(a) Innovation in products and services
(b) Trends in consumer preferences
(c) Emerging changes in regulatory mechanisms
(d) Product life cycle of the industry
(e) Rate of growth etc.

18. Layer 2

19. External forces can be divided into 4 broad
categories:
(1) economic forces;
(2) social, cultural, demographic, and natural
environment forces;
(3) political, governmental, and legal forces;
(4) technological forces;

23. Technological factors:
A variety of new technologies such as
the Internet of Things, 3D printing, the cloud, mobile devices,
biotech, analytics, auto tech, robotics, and artificial intelligence
are fueling innovation in many industries, and impacting strategic-
planning decisions.
Businesses are using mobile technologies and applications to
better determine customer trends and employing advanced
analytics data to make enhanced strategy decisions.
The vast increase in the amount of data coming from mobile
devices is driving the development of advanced analytics
applications.

24. Layer 3

25. Global
Markets
Regional
Market
National
Market
Native
Markets
Global /
Universal
Scoop
International /
Continental
Scoop
One Nation
State
Native / Local
Communities
SMEs
corporations
SMEs & Big
Institutions
Multi-
National
corporations
International
corporations
Market Hierarchy Layer 3
Layer 1+ 2

26. International Environmental
Conditions effects
Major Challenges to Strategic Management for MNC (Multi-National
Corporation) & international Business & Development Strategies:
• Globalization (WTO, Regional cartelling ..)
• Innovation & Digitalization.
• Sustainability, Rivality, Market Survival.
• Political conditions ( ex. Russia vs. Ukraine war, Regional instability, ….)
• Economic conditions ( ex. USA vs. China commercial wars, EU vs.
Russia energy wars .. Petroleum & Natural Gas.. Effects on
industrialization)
• Global warming & Climate Change, dryness, forest fires , pollutions &
industry ..)
• International Terrorism.
• Illegal Immigrations & work force issues.

27. Analytical tools for a Manager
Studying & understanding External
Conditions with Opportunities &
Threats

28. Competitive intelligence (CI), as formally defined by the Society
of Competitive intelligence Professionals (SCIP), is a systematic
and ethical process for gathering and analyzing information
about the competition’s activities and general business trends to
further a business’s own goals (SCIP website). Good
competitive intelligence in business, as in the military, is one of
the keys to success. The more information and knowledge a firm
can obtain about its competitors, the more likely the firm can
formulate and implement effective strategies. Major competitors’
weaknesses can represent external opportunities; major
competitors’ strengths may represent key threats.
Various legal and ethical ways to obtain competitive intelligence
include the following:

29. 1. • Hire top executives from rival firms.
2. • Reverse engineer rival firms’ products.
3. • Use surveys and interviews of customers,
suppliers, and distributors.
4. • Conduct drive-by and on-site visits to rival firm
operations.
5. • Search online databases.
6. • Contact government agencies for public information
about rival firms.
7. • Systematically monitor relevant trade publications,
magazines, and newspapers.

30. Information gathering from employees, managers, suppliers, distributors,
customers, creditors, and consultants also can make the difference
between having superior or just average intelligence and overall
competitiveness. competitive intelligence is not the following:
1. Is not spying
2. Is not a crystal ball
3. Is not a simple Google search
4. Is not one-size-fits-all
5. Is not useful if no one is listening
6. Is not a job for one, smart person
7. Is not a fad
8. Is not driven by software or technology
9. Is not based on internal assumptions about the market
10.Is not a spreadsheet.

31. Quantitative & Qualitative Information
analysis: Scientific tools
For the above purpose, firms use a number of tools and
techniques depending on their specific requirements in
terms of quality, relevance, cost etc.
Some of the techniques which are generally used for
carrying out environmental analysis are:

32. (1) Time series analysis
(2) Judgmental forecasting
(3) Expert opinion
(4) Delphi’s technique
(5) Statistical modeling
(6) Cross-impact analysis
(7) Brainstorming
(8) Demand/hazard forecasting

33. 1. Time series analysis:
Extrapolation is the most widely practiced form of forecasting. Simply
stated, extrapolation is the extension of present trends into the future.
It rests on the assumption that the world is reasonably consistent and
changes slowly in the short run. They attempt to carry a series of
historical events forward into the future. Because time series analysis
projects historical trends into the future, its validity depends on the
similarity between past trends and future conditions.
2. Judgmental forecasting:
This is a forecasting technique in which employees, customers,
suppliers etc., serve as a source of information regarding future trends.
For example, sales representatives may be asked to forecast sales
growth in various product categories based on their interaction with
customers. Survey instruments may be mailed to customers, suppliers
or trade associations to obtain their judgments on specific trends.

34. 3. Expert opinion:
This is a non-quantitative technique in which experts in a particular area
attempt to forecast likely developments. Knowledgeable people are
selected and asked to assign importance and probability rating to
various future developments. This type of forecast is based on the
ability of a knowledgeable person to construct probable future
developments on the interaction of key variables. The delphi technique
is one such technique.
4. Delphi Technique:
This is a forecasting technique in which the opinion of experts in the
appropriate field are obtained about the probability of the occurrence
of specified events. The responses of the experts are compiled and a
summary is sent to each expert. This process is repeated until
consensus is arrived at regarding the forecast of a particular event.

35. 5. Statistical modeling:
It is a quantitative technique that attempts to discover causal factors
that link two or more time series together. They use different sets of
equations. Regression analysis and other econometric methods are
examples. Although very useful for grasping historical trends, statistical
modeling is based on historical data. As the patterns of relationships
change, the accuracy of the forecast deteriorates.
6. Cross-impact Analysis:
By this analysis, researchers analyze and identify key trends that will
impact all other trends. The question is then put: “If event (X) occurs,
what will be the impact on all other trends”. The results are used to
build “domino chains”, with one event triggering others.

36. 7. Brainstorming:
Brainstorming is a technique to generate a number of alternatives by a
group of 6 to 10 persons. The basic ground rule is to propose ideas
without first mentally evaluating them. No criticism is allowed. Ideas
tend to build on previous ideas until a consensus is reached. This is a
good technique to create ideas.
8. Demand/Hazard forecasting:
Researchers identify major events that would greatly affect the firm.
Each event is rated for its convergence with several major trends
taking place in society and its appeal to a group of the public; the
higher the event’s convergence and appeal, the higher its probability
of occurring.