Business Question

CH A PTER 4   Environmental Scanning and Industry Analysis
139
teams work with key people from the sales and market research departments to
research and write a “competitive activity report” each quarter on each of the product categories in which P&G competes. People in purchasing also write similar
reports concerning new developments in the industries that supply P&G. These
and other reports are then summarized and transmitted up the corporate hierarchy
for top management to use in strategic decision making. If a new development
is reported regarding a particular product category, top management may then
send memos asking people throughout the organization to watch for and report on
developments in related product areas. The many reports resulting from these scanning efforts, when boiled down to their essentials, act as a detailed list of external
strategic factors.
Identifying External Strategic Factors
The origin of competitive advantage lies in the ability to identify and respond to environmental change well in advance of competition.52 Although this seems obvious,
why are some companies better able to adapt than others? One reason is because of
differences in the ability of managers to recognize and understand external strategic
issues and factors. Booz & Company found that companies that are most successful at
avoiding surprises had a well-defined system that integrated planning, budgeting, and
business reviews.53
No firm can successfully monitor all external factors. Choices must be made regarding which factors are important and which are not. Even though managers agree that
strategic importance determines what variables are consistently tracked, they sometimes
miss or choose to ignore crucial new developments.54 Personal values and functional
experiences of a corporation’s managers, as well as the success of current strategies,
are likely to bias both their perception of what is important to monitor in the external
environment and their interpretations of what they perceive.55
This willingness to reject unfamiliar as well as negative information is called ­strategic
myopia.56 If a firm needs to change its strategy, it might not be gathering the appropriate external information to change strategies successfully. For example, when Daniel
Hesse became CEO of Sprint Nextel in December 2007, he assumed that improving
customer service would be one of his biggest challenges. He quickly discovered that
none of the current Sprint Nextel executives were even thinking about the topic. “We
weren’t talking about the customer when I first joined,” said Hesse. “Now this is the
No. 1 priority of the company.”57
Hesse insists that “great customer service costs less—when we were last in the
industry, we were spending twice as much.” By 2012, Sprint had closed down 29 call
centers and was answering calls faster than ever. The second quarter of 2012 saw Sprint
receiving the fewest calls ever from customers.58
Industry Analysis: Analyzing the Task Environment
4-3. Conduct an industry analysis to explain
the competitive forces
that influence the
intensity of rivalry
within an industry
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An industry is a group of firms that produces a similar product or service, such as soft
drinks or financial services. An examination of the important stakeholder groups, like
suppliers and customers, in a particular corporation’s task environment is a part of
industry analysis.
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PART 2    Scanning the Environment
Porter’s Approach to Industry Analysis
Michael Porter, an authority on competitive strategy, contends that a corporation is
most concerned with the intensity of competition within its industry. The level of this
intensity is determined by basic competitive forces, as depicted in Figure 4–2. “The
collective strength of these forces,” he contends, “determines the ultimate profit
potential in the industry, where profit potential is measured in terms of long-run
return on invested capital.”59 In carefully scanning its industry, a corporation must
assess the importance to its success of each of six forces: threat of new entrants,
rivalry among existing firms, threat of substitute products or services, bargaining
power of buyers, bargaining power of suppliers, and relative power of other stakeholders.60 The stronger each of these forces is, the more limited companies are in their
ability to raise prices and earn greater profits. Although Porter mentions only five
forces, a sixth—other stakeholders—is added here to reflect the power that governments, local communities, and other groups from the task environment wield over
industry activities.
Using the model in Figure 4–2, a high force can be regarded as a threat because
it is likely to reduce profits. A low force, in contrast, can be viewed as an opportunity
because it may allow the company to earn greater profits. In the short run, these forces
act as constraints on a company’s activities. In the long run, however, it may be possible
for a company, through its choice of strategy, to change the strength of one or more of
the forces to the company’s advantage. For example, Dell’s early use of the Internet to
market its computers was an effective way to negate the bargaining power of distributors in the PC industry.
A strategist can analyze any industry by rating each competitive force as high,
medium, or low in strength. For example, the global athletic shoe industry could be
rated as follows: rivalry is high (Nike, Reebok, New Balance, Converse, and Adidas
are strong competitors worldwide), threat of potential entrants is high (the industry has
seen clothing firms such as UnderArmour and Fila as well as specialty shoe brands like
the wildly popular Vibram Five Fingers shoes), threat of substitutes is low (other shoes
FIGURE 4–2
Forces ­Driving
Industry
Competition
3
2
1
M04B_WHEE5488_15_GE_C04.indd 140
Leverage
of
suppliers
Competition
among
existing
companies
Superior or
lower-cost
substitute
products
4
Openness to
new
competitors
5
Profit
Potential of
Industry
Buyers’
influence
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CH A PTER 4   Environmental Scanning and Industry Analysis
141
don’t provide support for sports activities), bargaining power of suppliers is medium
but rising (suppliers in Asian countries are increasing in size and ability), bargaining
power of buyers is medium but increasing (prices are falling as the low-priced shoe
market has grown to be half of the U.S.-branded athletic shoe market), and threat of
other stakeholders is medium to high (government regulations and human rights concerns are growing). Based on current trends in each of these competitive forces, the
industry’s level of competitive intensity will continue to be high—meaning that sales
increases and profit margins should continue to be modest for the industry as a whole.61
Threat of New Entrants
New entrants to an industry typically bring to it new capacity, a desire to gain market
share, and potentially substantial resources. They are, therefore, threats to an established corporation. The threat of entry depends on the presence of entry barriers and
the reaction that can be expected from existing competitors. An entry barrier is an
obstruction that makes it difficult for a company to enter an industry. For example, no
new, full-line domestic automobile companies have been successfully established in
the United States since the 1930s (although Tesla is now growing its line of vehicles)
because of the high capital requirements to build production facilities and to develop a
dealer distribution network. Some of the possible barriers to entry are:
Economies of scale: Scale economies in the production and sale of microprocessors,
for example, gave Intel a significant cost advantage over any new rival.
■■ Product differentiation: Corporations such as Procter & Gamble and General Mills,
which manufacture products such as Tide and Cheerios, create high entry barriers
through their high levels of advertising and promotion.
■■ Capital requirements: The need to invest huge financial resources in manufacturing
facilities in order to produce large commercial airplanes creates a significant barrier
to entry to any competitor for Boeing and Airbus.
■■ Switching costs: Once a software program such as Excel or Word 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: Smaller new firms often have difficulty obtaining
supermarket shelf space for their goods because large retailers charge for space on
their shelves and give priority to the established firms who can pay for the advertising needed to generate high customer demand.
■■ Cost disadvantages independent of size: Once a new product earns sufficient market share to be accepted as the standard for that type of product, the maker has
a key advantage. Microsoft’s development of the first widely adopted operating
system (MS-DOS) for the IBM-type personal computer gave it a significant competitive advantage over potential competitors. Its introduction of Windows helped
to cement that advantage so that the Microsoft operating system is now on more
than 90% of personal computers worldwide.
■■ Government policy: Governments can limit entry into an industry through licensing requirements by restricting access to raw materials, such as oil-drilling sites in
protected areas.
■■
Rivalry among Existing Firms
In most industries, corporations are mutually dependent. A competitive move by
one firm can be expected to have a noticeable effect on its competitors and thus
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PART 2    Scanning the Environment
may cause retaliation. For example, the successful entry by companies such as Samsung and Amazon and unsuccessful entries by HP and RIM into a tablet industry
previously dominated by Apple changed the level of competitive activity to such an
extent that each new product change was quickly followed by similar moves from
other tablet makers. The same is true of prices in the United States airline industry.
According to Porter, intense rivalry is related to the presence of several factors,
including:
Number of competitors: When competitors are few and roughly equal in size, such
as in the auto and major home appliance industries, they watch each other carefully
to make sure they match any move by another firm with an equal countermove.
■■ Rate of industry growth: Any slowing in passenger traffic tends to set off price wars
in the airline industry because the only path to growth is to take sales away from
a competitor.
■■ Product or service characteristics: A product can be very unique, with many qualities differentiating it from others of its kind, or it may be a commodity, a product
whose characteristics are the same, regardless of who sells it. For example, most
people choose a gas station based on location and pricing because they view gasoline as a commodity.
■■ Amount of fixed costs: Because airlines must fly their planes on a schedule, regardless of the number of paying passengers for any one flight, some offer cheap standby
fares whenever a plane 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 will run that new plant at
full capacity to keep its unit costs as low as possible—thus producing so much that
the selling price falls throughout the industry.
■■ Height of exit barriers: Exit barriers keep a company from leaving an industry. The
brewing industry, for example, has a low percentage of companies that voluntarily
leave the industry because 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
frequently in the retail clothing industry when a number of retailers open outlets
in the same location—thus taking sales away from each other. This is also likely to
happen in some countries or regions when multinational corporations compete in
an increasingly global economy.
■■
Threat of Substitute Products or Services
A substitute product is a product that appears to be different but can satisfy the same
need as another product. For example, texting is a substitute for e-mail, Stevia is a
substitute for sugar, the Internet is a substitute for video stores, and bottled water is a
substitute for a cola. Effective substitutes are a limiting factor for companies. To the
extent that switching costs are low, substitutes may have a strong effect on an industry. Tea can be considered a substitute for coffee. If the price of coffee goes up high
enough, coffee drinkers will slowly begin switching to tea. The price of tea thus puts a
price ceiling on the price of coffee. Sometimes a difficult task, the identification of possible substitute products or services means searching for products or services that can
perform the same function, even though they have a different appearance and may not
appear to be easily substitutable.
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The Bargaining Power of Buyers
Buyers affect an industry through their ability to force down prices, bargain for higher
quality or more services, and play competitors against each other. A buyer or a group
of buyers is powerful if some of the following factors hold true:
A buyer purchases a large proportion of the seller’s product or service (for example,
oil filters purchased by a major automaker).
■■ A buyer has the potential to integrate backward by producing the product itself (for
example, a newspaper chain could make its own paper).
■■ Alternative suppliers are plentiful because the product is standard or undifferentiated (for example, motorists can choose among many gas stations).
■■ Changing suppliers costs very little (for example, office supplies are easy to find).
■■ The purchased product represents a high percentage of a buyer’s costs, thus providing an incentive to shop around for a lower price (for example, gasoline purchased
for resale by convenience stores makes up half their total costs).
■■ A buyer earns low profits and is thus very sensitive to costs and service differences
(for example, grocery stores have very small margins).
■■ The purchased product is unimportant to the final quality or price of a buyer’s
products or services and thus can be easily substituted without affecting the final
product adversely (for example, electric wire bought for use in lamps).
■■
The Bargaining Power of Suppliers
Suppliers can affect an industry through their ability to raise prices or reduce the quality of purchased goods and services. A supplier or supplier group is powerful if some
of the following factors apply:
The supplier industry is dominated by a few companies, but it sells to many (for
example, the petroleum industry).
■■ Its product or service is unique and/or it has built up switching costs (for example,
word processing software).
■■ Substitutes are not readily available (for example, electricity).
■■ Suppliers are able to integrate forward and compete directly with their present
customers for example, a microprocessor producer such as Intel can make PCs).
■■ A purchasing industry buys only a small portion of the supplier group’s goods and
services and is thus unimportant to the supplier (for example, sales of lawn mower
tires are less important to the tire industry than are sales of auto tires).
■■
The Relative Power of Other Stakeholders
A sixth force should be added to Porter’s list to include a variety of stakeholder groups
from the task environment. Some of these groups are governments (if not explicitly
included elsewhere), local communities, creditors (if not included with suppliers), trade
associations, special-interest groups, unions (if not included with suppliers), shareholders, and complementors. According to Andy Grove, Chairman and past CEO of Intel, a
complementor is a company (e.g., Microsoft) or an industry whose product works well with
a firm’s (e.g., Intel’s) product and without which the product would lose much of its value.62
The importance of these stakeholders varies by industry. For example, environmental groups in Maine, Michigan, Oregon, and Iowa successfully fought to pass bills
outlawing disposable bottles and cans, and thus deposits for most drink containers are
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PART 2    Scanning the Environment
now required. This effectively raised costs across the board, with the most impact on
the marginal producers who could not internally absorb all these costs. The traditionally strong power of national unions in the United States’ auto and railroad industries
has effectively raised costs throughout these industries but is of little importance in
computer software.
Industry Evolution
4-4. Discuss how
industry maturity
affects industry
­competitive forces
Over time, most industries evolve through a series of stages from growth through maturity to eventual decline. The strength of each of the six forces mentioned earlier varies according to the stage of industry evolution. The industry life cycle is useful for
explaining and evaluating trends among the six forces that drive industry competition.
For example, when an industry is new, people might buy the product, regardless of
price, because it uniquely fulfills an existing need. This usually occurs in a fragmented
­industry—where no firm has a large market share, and each firm serves only a small
piece of the total market in competition with others (for example, cleaning services).63
As new competitors enter the industry, prices drop as a result of competition. Companies use the experience curve(discussed in Chapter 5) and economies of scale to reduce
costs faster than the competition. Companies integrate to reduce costs even further
sometimes by acquiring their suppliers and distributors. Competitors try to differentiate
their products from one another’s in order to avoid the fierce price competition common to a maturing industry.
By the time an industry enters maturity, products tend to become more like commodities. This is now a consolidated industry—dominated by a few large firms, each of
which struggles to differentiate its products from those of the competition. As buyers
become more sophisticated over time, purchasing decisions are based on better information. Price becomes a dominant concern, given a minimum level of quality and features, and profit margins decline. The automobile, petroleum, and major home appliance
industries are examples of mature, consolidated industries, each controlled by a few large
competitors. In the case of the United States’ major home appliance industry, the industry changed from being a fragmented industry (pure competition) composed of hundreds of appliance manufacturers in the industry’s early years to a consolidated industry
(mature oligopoly) composed of three companies controlling over 90% of U.S. appliance
sales. A similar consolidation is occurring now in European major home appliances.
As an industry moves through maturity toward possible decline, its products’ growth
rate of sales slows and may even begin to decrease. To the extent that exit barriers are
low, firms begin converting their facilities to alternate uses or sell them to other firms.
The industry tends to consolidate around fewer but larger competitors. The tobacco
industry is an example of an industry currently that appeared to be in decline just a few
years ago but has been re-born with the advent of e-cigarettes.
Categorizing International Industries
4-5. Categorize
international industries based on their
pressures for coordination and local
responsiveness
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According to Porter, worldwide industries vary on a continuum from multidomestic
to global (see Figure 4–3).64 Multidomestic industries are specific to each country
or group of countries. This type of international industry is a collection of essentially domestic industries, such as retailing and insurance. The activities in a subsidiary of a multinational corporation (MNC) in this type of industry are essentially
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‫المملكة العربية السعودية‬
‫وزارة التعليم‬
‫الجامعة السعودية اإللكترونية‬
Kingdom of Saudi Arabia
Ministry of Education
Saudi Electronic University
College of Administrative and Financial Sciences
Assignment 1
Strategic Management (MGT 401)
Due Date: 05/10/2024 @ 23:59
Course Name: Strategic Management
Student’s Name:
Course Code: MGT 401
Student’s ID Number:
Semester: First
CRN: 11952
Academic Year:2024-25-1st
For Instructor’s Use only
Instructor’s Name: Shatha Almehmadi
Students’ Grade:
/Out of 10
Level of Marks: High/Middle/Low
General Instructions – PLEASE READ THEM CAREFULLY
•
•
•
•
•
•
•
•
The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.
Assignments submitted through email will not be accepted.
Students are advised to make their work clear and well presented, marks may be reduced
for poor presentation. This includes filling your information on the cover page.
Students must mention question number clearly in their answer.
Late submission will NOT be accepted.
Avoid plagiarism, the work should be in your own words, copying from students or other
resources without proper referencing will result in ZERO marks. No exceptions.
All answered must be typed using Times New Roman (size 12, double-spaced) font. No
pictures containing text will be accepted and will be considered plagiarism).
Submissions without this cover page will NOT be accepted.
Learning Outcomes:
CLO1- Recognize the basic concepts and terminology used in Strategic Management.
CLO2-Describe the different issues related to environmental scanning, strategy formulation, and
strategy implementation in diversified organizations
CLO5-Demonstrate how executive leadership is an important part of strategic management.
Assignment Question(s): (2.5 marks for each question)
1. Why is strategic management important for a corporation’s competitive advantage?
2. How does strategic management typically evolve in a corporation? Give examples
3. Why does a corporation need a board of directors? What is the relationship between
corporate governance and social responsibility? Give examples from the actual
market.
4. Choose any corporation from the Saudi market and discuss the forces driving its
industry competition (review chapter 4-slide 18).
Notes:
– Your answers MUST include at least four scholarly peer-reviewed references, using a proper
referencing style (APA). Remember that these scholarly references can be found in the Saudi
Digital Library (SDL).
– Make sure to support your statements with logic and argument, citing all sources referenced.
Answers
1. Answer-
2. Answer-