So how do managers become environmentally aware?6
Ram Charan, an adviser to many
Fortune 500 CEOs, provides some useful insights with his concept of perceptual acuity.7
He defines it as “the ability to sense what is coming before the fog clears.” He draws on
Ted Turner as an example: Turner saw the potential of 24-hour news before anyone else did.
All the ingredients were there, but no others connected them until he created CNN. Like
Turner, the best CEOs are compulsively tuned to the external environment and seem to have
a sixth sense that picks up anomalies and detects early warning signals which may represent
key threats or opportunities.
How can perceptual acuity be improved? Although many CEOs may complain that the
top job is a lonely one, they can’t do it effectively by sitting alone in their office. Instead,
high-performing CEOs are constantly meeting with people and searching out information.
Charan provides three examples:
• One CEO gets together with his critical people for half a day every eight weeks
to discuss what’s new and what’s going on in the world. The setting is informal,
and outsiders often attend. The participants look beyond the lens of their industry
because some trends that affect one industry may impact others later on.
• Another CEO meets four times a year with about four other CEOs of large, but
noncompeting, diverse global companies. Examining the world from multiple
perspectives, they share their thinking about how different trends may develop. The
CEO then goes back to his own weekly management meeting and throws out “a
bunch of hand grenades to shake up people’s thinking.”
• Two companies ask outsiders to critique strategy during their board’s strategy
sessions. Such input typically leads to spirited discussions that provide valued input
on the hinge assumptions and options that are under consideration. Once, the focus
was on pinpointing the risk inherent in a certain strategy. Now, discussions have led
to finding that the company was missing a valuable opportunity.
We will now address three important processes—scanning, monitoring, and gathering
competitive intelligence—used to develop forecasts.8
Exhibit 2.1 illustrates relationships
among these important activities. We also discuss the importance of scenario planning
in anticipating major future changes in the external environment and the role of SWOT
analysis.9
The Role of Scanning, Monitoring, Competitive Intelligence,
and Forecasting
Environmental Scanning Environmental scanning involves surveillance of a firm’s external
environment to predict environmental changes and detect changes already underway.10,11
This alerts the organization to critical trends and events before changes develop a discernible pattern and before competitors recognize them.12 Otherwise, the firm may be forced
into a reactive mode.13
Experts agree that spotting key trends requires a combination of knowing your business
and your customer as well as keeping an eye on what’s happening around you. Such a bigpicture/small-picture view enables you to better identify the emerging trends that will affect
your business.
Leading firms in an industry can also be a key indicator of emerging trends.14 For example, with its wide range of household goods, Procter & Gamble is a barometer for consumer
spending. Any sign that it can sell more of its premium products without cutting prices
sharply indicates that shoppers may finally be becoming less price-sensitive with everyday
purchases. In particular, investors will examine the performance of beauty products like
Olay moisturizers and CoverGirl cosmetics for evidence that spending on small, discretionary pick-me-ups is improving.
Environmental Monitoring Environmental monitoring tracks the evolution of environmental trends, sequences of events, or streams of activities. They may be trends that the firm
came across by accident or ones that were brought to its attention from outside the organization.15 Monitoring enables firms to evaluate how dramatically environmental trends are
changing the competitive landscape.
One of the authors of this text has conducted on-site interviews with executives from several industries to identify indicators that firms monitor as inputs to their strategy process.
Examples of such indicators included:
• A Motel 6 executive. The number of rooms in the budget segment of the industry in
the United States and the difference between the average daily room rate and the
consumer price index (CPI).
• A Pier 1 Imports executive. Net disposable income (NDI), consumer confidence
index, and housing starts.
• A Johnson & Johnson medical products executive. Percentage of gross domestic
product (GDP) spent on health care, number of active hospital beds, and the size
and power of purchasing agents (indicates the concentration of buyers).
Such indices are critical for managers in determining a firm’s strategic direction and
resource allocation.
Competitive Intelligence Competitive intelligence (CI) helps firms define and understand
their industry and identify rivals’ strengths and weaknesses.16 This includes the intelligence
gathering associated with collecting data on competitors and interpreting such data. Done
properly, competitive intelligence helps a company avoid surprises by anticipating competitors’ moves and decreasing response time.17
Examples of competitive analysis are evident in daily newspapers and periodicals such
as The Wall Street Journal, Bloomberg Businessweek, and Fortune. For example, banks continually track home loan, auto loan, and certificate of deposit (CD) interest rates charged
by rivals. Major airlines change hundreds of fares daily in response to competitors’ tactics.
Car manufacturers are keenly aware of announced cuts or increases in rivals’ production
volume, sales, and sales incentives (e.g., rebates and low interest rates on financing). This
information is used in their marketing, pricing, and production strategies.
Keeping track of competitors has become easier today with the amount of information
that is available on the Internet. The following are examples of some websites that companies routinely use for competitive intelligence gathering.18
• Slideshare. A website for publicly sharing PowerPoint presentations. Marketing
teams have embraced the platform and often post detail-rich presentations about
their firms and products.
• Quora. A question-and-answer site popular among industry insiders who embrace
the free flow of information about technical questions.
• Ispionage. A site that reveals the ad words that companies are buying, which can
often shed light on new campaigns being launched.
• YouTube. Great for finding interviews with executives at trade shows.
At times, a firm’s aggressive efforts to gather competitive intelligence may lead to unethical or illegal behaviors.19 Strategy Spotlight 2.1 provides an example of a company, United
Technologies, that has set clear guidelines to help prevent unethical behavior.
A word of caution: Executives must be careful to avoid spending so much time and effort
tracking the actions of traditional competitors that they ignore new competitors. Further,
broad environmental changes and events may have a dramatic impact on a firm’s viability.
Peter Drucker, wrote:
Increasingly, a winning strategy will require information about events and conditions outside
the institution: noncustomers, technologies other than those currently used by the company
and its present competitors, markets not currently served, and so on.20
Consider the failure of specialized medical lab Sleep HealthCenters.21 Until recently,
patients suffering from sleep disorders, such as apnea, were forced to undergo expensive
overnight visits to sleep clinics, including Sleep HealthCenters, to diagnose their ailments.
The firm was launched in 1997 and quickly expanded to over two dozen locations. Revenue
soared from nearly $10 million in 1997 to $30 million in 2010.
However, the rapid improvements in the price and performance of wearable monitoring
devices changed the business, gradually at first and then suddenly. For one thing, the more
comfortable home setting produced more effective measurements. And the quick declines
in the cost of wearable monitoring meant patients could get the same results at one-third
the price of an overnight stay at a clinic. By 2011, Sleep HealthCenters’ revenue began to
decline, and the firm closed 20 percent of its locations. In 2012, its death knells sounded:
Insurance companies decided to cover the less expensive option. Sleep HealthCenters
abruptly closed its doors.
Environmental Forecasting Environmental scanning, monitoring, and competitive intelligence are important inputs for analyzing the external environment. Environmental
forecasting involves the development of plausible projections about the direction, scope,
speed, and intensity of environmental change.22 Its purpose is to predict change.23 It asks:
How long will it take a new technology to reach the marketplace? Will the present social concern about an issue result in new legislation? Are current lifestyle trends likely to continue?
Some forecasting issues are much more specific to a particular firm and the industry in
which it competes. Consider how important it is for Motel 6 to predict future indicators,
such as the number of rooms, in the budget segment of the industry. If its predictions are
low, it will build too many units, creating a surplus of room capacity that would drive down
room rates.
A danger of forecasting is that managers may view uncertainty as black and white and
ignore important gray areas.24 The problem is that underestimating uncertainty can lead to
strategies that neither defend against threats nor take advantage of opportunities.
In 1977 one of the colossal underestimations in business history occurred when Kenneth
H. Olsen, president of Digital Equipment Corp., announced, “There is no reason for individuals to have a computer in their home.” The explosion in the personal computer market
was not easy to detect in 1977, but it was clearly within the range of possibilities at the time.
And, historically, there have been underestimates of the growth potential of new telecommunication services. The electric telegraph was derided by Ralph Waldo Emerson, and the
telephone had its skeptics. More recently, an “infamous” McKinsey study in the early 1980s
predicted fewer than 1 million cellular users in the United States by 2000. Actually, there
were nearly 100 million.25
Obviously, poor predictions about technology change never go out of vogue. Consider
some other “gems”—predicted by very knowledgeable people: 26
Scenario Analysis Scenario analysis is a more in-depth approach to forecasting. It draws on a
range of disciplines and interests, among them economics, psychology, sociology, and demographics. It usually begins with a discussion of participants’ thoughts on ways in which societal
trends, economics, politics, and technology may affect an issue.28 Scenario analysis involves the
projection of future possible events. It does not rely on extrapolation of historical trends. Rather,
it seeks to explore possible developments that may only be connected to the past. That is, several
scenarios are considered in a scenario analysis in order to envision possible future outcomes.
Consider PPG Industries.29 The Pittsburgh-based producer of paints, coatings, specialty
materials, chemicals, glass, and fiberglass has paid dividends each year since 1899. One of
the key tools it uses today in its strategic planning is scenario analysis.
PPG has developed four alternative futures based on differing assumptions about two key
variables: the cost of energy (because its manufacturing operations are energy-intensive)
and the extent of opportunity for growth in emerging markets. In the most favorable
scenario, cost of energy will stay both moderate and stable and opportunities for growth
and differentiation will be fast and strong. In this scenario, PPG determined that its success
will depend on having the resources to pursue new opportunities. On the other hand, in
the worst case scenario, the cost of energy will be high and opportunities for growth will
be weak and slow. Such a scenario would call for a complete change in strategic direction.
Between these two extremes lies the possibility of two mixed scenarios. First, opportunity
for growth in emerging markets may be high, but the cost of energy may be volatile. In this
scenario, the company’s success will depend on coming up with more efficient processes.
Second, cost of energy may remain moderate and stable, but opportunities for growth in
emerging markets may remain weak and slow. In this situation, the most viable strategy may
be one of capturing market share with new products.
Developing strategies based on possible future scenarios seems to be paying off for
PPG Industries. For the five years ending in 2016, PPG’s stock has enjoyed a compounded
growth rate exceeding 17 percent.
