CHAPTER FOUR
ENVIRONMENTAL SCANNING AND INDUSTRY ANALYSIS
This chapter examines key aspects of the external environment of the corporation with special emphasis on
environmental scanning, industry analysis, and forecasting. Environmental scanning is presented as the first part of
the strategic management model and a crucial task for strategic managers. The emphasis is upon monitoring
strategic factors and utilizing possible sources of information. Porter’s approach to industry analysis is discussed in
some detail. Forecasting is then addressed in terms of assumptions and basic techniques. Industry scenario
construction/writing is explained. The chapter ends with a suggested way to synthesize external factors through the
use of an EFAS Table.
LEARNING OBJECTIVES
1. List the aspects of an organization’s environment that can influence its long-term decisions.
2. Identify the aspects of an organization’s environment that are most strategically important.
3. Conduct an industry analysis to explain the competitive forces that influence the intensity of rivalry within
an industry.
4. Discuss how industry maturity affects industry competitive forces.
TOPICS OUTLINE COVERED
1. Aspects of Environmental Scanning
a. Identifying External Environmental Variables
2. Strategic Importance of the External Environment
3. Industry Analysis: Analyzing the Task Environment
a. Porter’s Approach to Industry Analysis
4. Using Key Success Factors to Create an Industry Matrix
5. Competitive Intelligence
6. Forecasting
a. Danger of Assumptions
b. Useful Forecasting Techniques
7. The Strategic Audit: A Checklist for Environmental Scanning
8. Synthesis of External Factors—EFAS
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SUGGESTED ANSWERS TO MYMANAGEMENTLAB QUESTIONS
4-1. How does STEEP analysis aid in the development of the strategy in a company?
STEEP analysis is designed to monitor trends in the society and natural environments. In doing so, this analysis
4-2. The effects of climate change on companies can be grouped into six categories of risk. Use any two of
these to explain the impact upon the resort hotel industry.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS:
4-3. Explain why environmental analysis is considered to be an important activity for the strategy
formulation process of an organization.
Scanning and assessing the environment of an organization is necessary for making appropriate decisions and
adapting strategies to a context during turbulent changes. Before managers can begin strategy formulation, they must
4-4. How would you determine the level of competitive intensity in an industry?
The answer to this question can be found in Figure 4.2 in Chapter 4. By this time, students should be able to list the
five forces presented by Michael Porter plus the sixth force (other stakeholders) proposed by Ed Freeman. They are
briefly:
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the airline industry. Would they invest or look for a job in this industry?
The authors’ opinions regarding the current level of these forces are as follows. The overall level of competitive
intensity is high and bound to get higher. Feel free to disagree.
4-5. Is Pepsi Cola a substitute for Coca Cola?
This is a good question to check how well students understand the basic concepts of industry analysis. Those with a
very superficial understanding of the topics discussed in this chapter will tend to answer “yes” to this question. They
4-6. What are the most significant implications of a strategic group analysis of an organization?
A strategic group is the group of organizations in an industry working together by adopting some similar cooperative
strategies in the same market. These strategies might include product offerings, geographical location, choices of
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4-7. How is Porter’s five force framework related to the identification of key success factors?
The five force framework provides the basis for identifying an industry’s attractiveness. One of the objectives of an
ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS
These are not found in the text and may be used by the instructor for classroom discussion or exams.
A4-1. Why is environmental uncertainty an important concept in strategic management?
A key part of strategic management, environmental scanning is a tool used to help avoid strategic surprise and cope
A4-2. What can a corporation do to ensure that information about strategic environmental factors gets the
attention of strategy makers?
This is a very real problem in most large corporations given the usual obstacles to good communication. The very
people who are in the best positions to gather this data are often the ones who either fail to pass it on because it’s too
A4-3. If most long-term forecasts are usually incorrect, why bother doing them?
This question is based on the assumption that most long-term forecasts are usually incorrect. One must keep in mind
that some things are easier to forecast than others. For example, a forecasted drop in the demand for tricycles in
three years will very likely occur if it is based on a strong drop in the present birth rate. Nevertheless, most people
would probably agree that forecasts going out five to ten years have a low probability of becoming reality in today’s
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SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE
How far should people in a business firm go in gathering competitive intelligence? Where do you draw the line?
This is an interesting exercise to use not only for covering ethics in Chapter 3, but also for introducing some of the
concepts found in Chapter 4, Environmental Scanning and Industry Analysis. For this reason, you might want to use
this exercise when discussing ethics in Chapter 3 rather than at the end of Chapter 4.
Approach 1: First, ask your students to complete this exercise. Second, list all the items on the blackboard in which a
Approach 2: Have the class complete the exercise and hand in their ratings anonymously on a separate sheet of
paper. Have them keep one copy of their ratings. After class, calculate the means for each item, put them into one of
This exercise was developed from a questionnaire constructed by William Jones, Jr. and Norman Bryan, Jr. of
Georgia State University for their article “Business Ethics and Business Intelligence: An Empirical Study of
Information-Gathering Alternatives,” in the June 1995 issue of the International Journal of Management (pages
204–208). A total of 108 undergraduates in a strategic management class completed the questionnaire during the
early part of the term, prior to a discussion of ethics. The resulting mean responses were as follows:
The business firm should try to get useful information about competitors by:
4.55 Careful study of trade journals.
1.13 Wiretapping the telephones of competitors.
1.44 Rewarding competitors’ employees for useful “tips.”
4.00 Questioning competitors’ customers and/or suppliers.
1.97 Buying and analyzing competitors’ garbage.
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1.58 Releasing false information about the company in order to confuse competitors.
3.70 Questioning competitors’ technical people at trade shows and conferences.
Jones and Bryan indicated that appropriate actions received mean responses between 3.51 and 5.00. Those items
with a mean between 2.5 and 3.5 reflected student uncertainty about whether the action was appropriate or not.
Items with a mean response of less than 2.5 were judged inappropriate.
ADDITIONAL TEACHING MODULE
(Use when discussing forecasting)
THE ROLLING J-CURVE
When current environmental trends (such as the price of oil) look bad or when a new product introduction is not
doing as well as expected, managers and analysts are tempted to use the infamous rolling J-curve style of
forecasting, in which present trends are discounted in the hope that everything will soon improve as hoped. Well-
known among strategic planners, the rolling J-curve forecast is feared with good reason by most executives. For