ENVIRONMENTAL SCANNING

An external Environmental Scanning or Industry analysis focuses on identifying and

evaluating trends and events beyond the control of a single firm, such as increased
foreign competition, population shifts to the urban areas, an aging society, consumer fear
of traveling, and stock market volatility.

Environmental scanning is the screening of large amounts of information to anticipate and

interpret changes in the environment. It’s used by both large and small organizations, and
research has shown that companies with advanced environmental scanning increased
their profits and revenue growth.

The purpose of external audit is to develop a finite list of opportunities that could benefit
a firm and threats that should be avoided.

The external environment consists of those factors and forces outside the organization that affect
the organization’s performance. These factors can be categorized into two categories.
Specific Environment and General Environment.

Specific environment includes those external forces that have a direct impact on
managers’ decisions and actions and are directly relevant to the achievement of the
organization’s goals.

The specific environment is unique and changes with conditions. Following are the main
constituencies of specific environment.
1. Customers
2. Suppliers
3. Competitors
4. Pressure Groups

General environment includes these broad external conditions that may affect the
organization: economic, political/legal, sociocultural, demographic, technological, and
global conditions.
a. Economic conditions include interest rates, inflation rates, changes in disposable
income, stock market fluctuations, and the general business cycle.
b. Political/legal conditions include the general political stability of countries in
which an organization does business and the specific attitudes that elected
officials have toward business. Federal, state, and local governments can influence
what organizations can and cannot do.
c. Sociocultural conditions include the changing expectations of society. Societal
values, customs, and tastes can change, and managers must be aware of these
changes.
d. Demographic conditions, including physical characteristics of a population (e.g.,
gender, age, level of education, geographic location, income, composition of
family) can change, and managers must adapt to these changes.
e. Technological conditions, which have changed more rapidly than any other
element of the general environment.
PEST analysis and SWOT analysis are included in it. All the elements of PEST (Political,
Economical, Social, Technological) have been covered in previous text. On the other
hand, SWOT is an analysis of an organization’s strength, weaknesses, opportunities, and
threats. It brings together the internal and external environmental analysis.

Internal Environment External Environment

Strengths Weaknesses Opportunities Threats

The opportunities and threats are presented by external environmental.

Changes in External forces translate into changes in consumer demand for both
industrial and consumer products and services. External forces affect the types of
products development, the nature of positioning and market segmentation strategies.
External forces directly affect both suppliers and distributors. Identifying and evaluating
external opportunities and threats enables organizations to develop a clear mission, to
design strategies to achieve long-term objectives, and to develop policies to achieve
annual objectives.

RELATIONSHIPS BETWEEN KEY FORCES AND AN ORGANIZATION

Competitors
Suppliers
Distributors
Creditors
Economic forces Employers
Social, cultural, demographic, and natural Communities AN ORGANIZATION’S
environmental forces Managers
OPPORTUNITIES AND
Political, legal, and government forces Stockholders
Technological forces Labor union THREATS
Competitive forces Government
Trade associations
Special interest group
Producers
Services
Markets
Natural environment

SPECIAL NOTE ON COMPETITIVE FORCES

An important part of an external audit is identifying rival firms and determining their
strengths, weaknesses, opportunities, threats, objectives, and strategies.

Collecting and Evaluating information on competitors is essential for successful strategy

formulation.

Competitive information is equally applicable for strategy formulation, implementation, and

evaluation decisions.
 Unethical tactics such as bribery, wiretapping, and computer break-ins should never be used
to obtain information.

Competitive Intelligence (CI) Programs

Competitive intelligence is a systematic and ethical process of gathering and analyzing
information about the competition’s activities and general business trends to further a
business’s own goals.

Good CI in business, as in the military, is one of the keys to success. The more information
and knowledge a firm can obtain about competitors, the more likely it can formulate and
implement effective strategies.

Three strong misconceptions about business intelligence prevail among business executives
today:

i. Running an intelligence program requires lots of people, computers, and other resources.
ii. Collecting intelligence about competitors is an unlawful activity.
iii. Intelligence gathering is an unethical business practice.

The Internet has become an excellent medium for gathering competitive intelligence.

Firms need an effective CI program. 3 basic objectives of a CI program are;

1. To provide a general understanding of an industry and its competitors

2. To identify areas in which competitors are vulnerable and to assesses the impact strategic
actions would have on competitors, and
3. To identify potential moves that a competitor might make that would endanger a firm’s
position in the market.

PORTER’S FIVE-FORCES MODEL

Porter’s Five-Forces Model of competitive analysis is a widely used approach for developing
strategies in many industries.
 These three steps can reveal whether competition in a given industry is such that a firm can
make an acceptable profit:

a. Identify key aspects or elements of each competitive force that impact the firm.
b. Evaluate how strong and important each element is for the firm.
c. Decide whether the collective strength of the elements is worth the firm entering or staying in
the industry.

Threat of Entry of a New Competitor

Whenever new firms can easily enter a particular industry, the intensity of competitiveness
among firms increases.

Barriers to entry, however, can include the need to gain economies of scale quickly, the need
to gain technology and specialized know-how, the lack of experience, strong customer
loyalty. Despite numerous barriers to entry, new firms sometimes enter industries with
higher-quality products, lower prices, and substantial marketing resources.

Threat of Development of Substitute Products

In many industries, firms are in close competition with producers of substitute products in
other industries. If there are more substitute products the industry is less attractive for you to
enter.

Competitive pressures arising from substitute products increase as the relative price of
substitute products declines and as consumers’ switching costs decrease. However, The
presence of substitute products puts a ceiling on the price that can be charged before
consumers will switch to the substitute product.

Bargaining Power of Suppliers.

If Bargaining power of supplier is more, the attractiveness of industry is less and there will be
more competition. The bargaining power of suppliers affects the intensity of competition in
an industry, especially when there are a large number of suppliers, when there are only a few
good substitute raw materials, or when the cost of switching raw materials is especially
costly.

Firms may pursue a backward integration strategy to gain control or ownership of suppliers.
However, in many industries it is more economical to use outside suppliers of component
parts than to self-manufacture items.

Bargaining Power of Consumers.

If Bargaining power of Consumers is more, the attractiveness of industry is less.
When customers are concentrated, large, or buy in volume, their bargaining power
represents a major force affecting intensity of competition in an industry.
In particular, consumers gain increasing bargaining power under the following
circumstances:

o If they can inexpensively switch to competing brands or substitutes.

 o If they are particularly important to the seller.
o If sellers are struggling in the face of falling consumer demand.

Rivalry among Competing Firms

Usually the most powerful of the five competitive forces. All other forces jointly contribute in
this one.

The strategies pursued by one firm can be successful only to the extent that they provide
competitive advantage over the strategies pursued by rival firms.

Free-flowing information on the Internet is driving down prices and inflation worldwide.
The intensity of rivalry among competing firms tends to increase as the number of
competitors increases, as competitors become more equal in size and capability, as demand
for the industry’s products declines, and as price cutting becomes common.

THE INDUTRIAL ORGANIZATION (I/O) VIEW

The industrial organization (I/O) approach to competitive advocates that external
(industry) factors are more important than internal factors in a firm for achieving
competitive advantage. Competitive advantage is determined by competitive positioning
within an industry, according to I/O view.

I/O theories contend that external factors and the industry in which a firm competes has
a stronger influence on the firm’s performance than do the internal functional issues in
marketing, finance and the like. Firm performance, they contend, is based more on
industry properties such as economics of scale, barriers to market entry, product
differentiation, the economy and level of competitiveness than on internal resources,
capabilities, structure and operations.
The I/O view has enhanced our understanding of strategic management.
Porter’s Five-Forces Model is an example of I/O view.

PEST ANALYSIS

1. Political, Governmental, and Legal Forces:

Federal, state, local, and foreign governments are major regulators, deregulators,
subsidizers, employers, and customer of organization. Political, governmental, and legal
factors, therefore, can represent key opportunities and threats for both small and large
organizations. Some variables include,
§ Changes in tax laws
§ Special tariffs
§ Political stability
§ Employments laws

2. Economic Forces
Economic factors have a direct impact on the potential attractiveness of various
strategies.
Economic variables that represent opportunities and threats for organizations like,
 § Inflation rates
§ Interest rates
§ Money market rates
§ Stock market trends etc.

3. Social, cultural, Demographic, and Natural Environment Forces:

Social, cultural, demographic and environmental changes have a major impact on
virtually all products, services, markets, and customers. Small, large, for-profit, and non-
profit organizations in all industries are being staggered and challenges by the
opportunities and threats arising from changes in social, cultural, demographic and
environmental variables. Some variables include,
§ Population growth rate
§ Per capita income
§ Numbers of death
§ Lifestyles

4. Technological Forces:
Technological forces represent major opportunities and threats that must be considered
in formulating strategies. Technological advancements can dramatically affect
organizations products, services, markets, suppliers, competitors, customers etc.
In high-tech industries, identification and evaluation of key technological opportunities
and threats can be the most important part of the external strategic management audit.
Some Technological factors include:
§ R&D activity
§ Automation
§ Technology incentives
§ Rate of technological change