An organization is a creature of its environment. Its very survival and all of its perspectives, resources, problems, and opportunities are generated and conditioned by the environment. Thus, it is important for an organization to monitor the relevant changes taking place in its environment and formulate strategies to adapt to these changes. In other words, for an organization to survive and prosper, the strategist must master the challenges of the profoundly changing political, economic, technological, social, and regulatory environment. To achieve this broad perspective, the strategist needs to develop and implement a systematic approach to environmental scanning. As the rate and magnitude of change increase, this scanning activity must be intensified and directed by explicit definitions of purpose, scope, and focus. The efforts of businesses to cope with these problems are contributing to the development of systems for exploring alternatives with greater sensitivity to long-run implications. This emerging science has the promise of providing a better framework for maximizing opportunities and allocating resources in anticipation of environmental changes. This article reviews the state of the art of environmental scanning and suggests a general approach that may be used by a marketing strategist. Specifically, the article discusses the criteria for determining the scope and focus of scanning, the procedure for examining the relevance of environmental trends, the techniques for evaluating the impact of an environmental trend on a particular product/ market, and the linking of environmental trends and other “early warning signals” to strategic planning processes.

IMPORTANCE OF ENVIRONMENTAL SCANNING

Without taking into account relevant environmental influences, a company cannot expect to develop its strategy. It was the environmental influences emerging out of the energy crisis that were responsible for the popularity of smaller, more fuel-efficient automobiles and that brought about the demise of less efficient rotary engines. It was the environmental influence of a coffee bean shortage and geometric price increases that spawned the “coffee-saver” modification in Mr. Coffee automatic drip coffee makers. Shopper and merchant complaints from an earlier era contributed to the virtual elimination of deposit bottles; recent pressures from environmental groups, however, have forced their return and have prompted companies to develop low-cost, recyclable plastic bottles. Another environmental trend, Americans’ insatiable appetite for eating out (in 1990, restaurant sales accounted for $0.44 of every $1 spent on food; this number is expected to reach $0.63 by the year 2000), worries food companies such as Kraft. In response, Kraft is trying to make cooking as convenient as eating out (e.g., by providing high-quality convenience foods) to win back food dollars. The sad tales of companies that seemingly did everything right and yet lost competitive leadership as a result of technological change abound. Du Pont was beaten by Celanese when bias-ply tire cords changed from nylon to polyester. B.F. Goodrich was beaten by Michelin when the radial overtook the bias-ply tire. NCR wrote off $139 million in electro-mechanical inventory and the equipment to make it when solid-state point-of-sale terminals entered the market.

Xerox let Canon create the small-copier market. Bucyrus-Erie allowed Caterpillar and Deere to take over the mechanical excavator market. These companies lost even though they were low-cost producers. They lost even though they were close to their customers. They lost even though they were market leaders. They lost because they failed to make an effective transition from old to new technology. In brief, business derives its existence from the environment. Thus, it should monitor its environment constructively. Business should scan the environment and incorporate the impact of environmental trends on the organization by continually reviewing the corporate strategy. The underlying importance of environmental scanning is captured in Darwinian laws: (a) the environment is ever-changing, (b) organisms have the ability to adapt to a changing environment, and (c) organisms that do not adapt do not survive. We are indeed living in a rapidly changing world. Many things that we take for granted today were not even imagined in the 1960s. As we enter the next century, many more “wonders” will come to exist. To survive and prosper in the midst of a changing environment, companies must stay at the forefront of changes affecting their industries. First, it must be recognized that all products and processes have performance limits and that the closer one comes to these limits the more expensive it becomes to squeeze out the next generation of performance improvements. Second, one must take all competition seriously.

Normally, competitor analyses seem to implicitly assume that the most serious competitors are the ones with the largest resources. But in the context of taking advantage of environmental shifts, this assumption is frequently not adequate. Texas Instruments was a $5- to $10-million company in 1955 when it took on the mighty vacuum tube manufacturers RCA, GE, Sylvania, and Westinghouse and beat them with its semiconductor technology. Boeing was nearly bankrupt when it successfully introduced the commercial jet plane, vanquishing larger and more financially secure Lockheed, McDonnell, and Douglas corporations. Third, if the environmental change promises potential advantage, one must attack to win and attack even to play the game. Attack means gaining access to new technology, training people in its use, investing in capacity to use it, devising strategies to protect the position, and holding off on investments in mature lines. For example, IBM capitalized on the emerging personal computer market created by its competitor, Apple Computer. By becoming the low-cost producer, distributor, seller, and servicer of personal computers for business use, IBM took command of the marketplace in less than two years. Fourth, the attack must begin early. The substitution of one product or process for another proceeds slowly and then predictably explodes. One cannot wait for the explosion to occur to react. There is simply not enough time. B.F. Goodrich lost 25 percentage points of market share to Michelin in four years. Texas Instruments passed RCA in sales of active electronic devices in five to six years. Fifth, a close tie is needed between the CEO and the operating managers. Facing change means incorporating the environmental shifts in all aspects of the company’s strategy.

WHAT SCANNING CAN ACCOMPLISH

Scanning improves an organization’s abilities to deal with a rapidly changing environment in a number of ways:

1. It helps an organization capitalize on early opportunities rather than lose these to competitors.

2. It provides an early signal of impending problems, which can be defused if recognized well in advance.

3. It sensitizes an organization to the changing needs and wishes of its customers.

4. It provides a base of objective qualitative information about the environment that strategists can utilize.

5. It provides intellectual stimulation to strategists in their decision making.

6. It improves the image of the organization with its publics by showing that it is sensitive to its environment and responsive to it.

7. It is a means of continuing broad-based education for executives, especially for strategy developers.

THE CONCEPT OF ENVIRONMENT

Operationally, five different types of environments may be identified technological, political, economic, regulatory, and social and the environment may be scanned at three different levels in the organization corporate, SBU, and product/ market level. Perspectives of environmental scanning vary from level to level. Corporate scanning broadly examines happenings in different environments and focuses on trends with corporate-wide implications. For example, at the corporate level IBM may review the impact of competition above and below in the telephone industry on the availability and rates of long-distance telephone lines to its customers. Emphasis at the SBU level focuses on those changes in the environment that may influence the future direction of the business. At IBM, the SBU concerned with personal computers may study such environmental perspectives as diffusion rate of personal computers, new developments in integrated circuit technology, and the political debates in progress on the registration (similar to automobile registration) of personal computers. At the product/market level, scanning is limited to day-to-day aspects. For example, an IBM personal computer marketing manager may review the significance of rebates, a popular practice among IBM’s competitors. The emphasis in this article is on environmental scanning from the viewpoint of the SBU. The primary purpose is to gain a comprehensive view of the future business world as a foundation on which to base major strategic decisions.

STATE OF THE ART

Scanning serves as an early warning system for the environmental forces that may impact a company’s products and markets in the future. Environmental scanning is a comparatively new development. Traditionally, corporations evaluated themselves mainly on the basis of financial performance. In general, the environment was studied only for the purpose of making economic forecasts. Other environmental factors were brought in haphazardly, if at all, and intuitively. In recent years, however, most large corporations have started doing systematic work in this area. A pioneering study on environmental scanning was done by Francis Aguilar. In his investigation of selected chemical companies in the United States and Europe, he found no systematic approach to environmental scanning. Aguilar’s different types of information about the environment that the companies found interesting have been consolidated into five groups: market tidings (market potential, structural change, competitors and industry, pricing, sales negotiations, customers); acquisition leads (leads for mergers, joint ventures); technical tidings (new products, processes, and technology; product problems; costs; licensing and patents); broad issues (general conditions relative to political, demographic, national issues; government actions and policies); other tidings (suppliers and raw materials, resources available, other). Among these groups, market tidings was found to be the dominant category and was of most interest to managers across the board.

Aguilar also identified four patterns for viewing information: undirected viewing (exposure without a specific purpose), conditioned viewing (directed exposure but without undertaking an active search), informal search (collection of purposeoriented information in an informal manner), and formal search (a structured process for collection of specific information for a designated purpose). Both internal and external sources were used in seeking this information. The external comprised both personal sources (customers, suppliers, bankers, consultants, and other knowledgeable individuals) and impersonal sources (various publications, conferences, trade shows, exhibitions, and so on). The internal personal sources included peers, superiors, and subordinates. The internal impersonal sources included regular and general reports and scheduled meetings. Aguilar’s study concluded that while the process is not simple, a company can systematize its environmental scanning activities for strategy development. Aguilar’s framework may be illustrated with reference to the Coca-Cola Company. The company looks at its environment through a series of analyses. At the corporate level, considerable information is gathered on economic, social, and political factors affecting the business and on competition both in the United States and overseas. The corporate office also becomes involved in special studies when it feels that some aspect of the environment requires special attention. For example, in the 1980s, to address itself to a top management concern about Pepsi’s claim that the taste of its cola was superior to Coke’s, the company undertook a study to understand what was going on in the minds of their consumers and what they were looking for. How was the consumption of Coca-Cola related to their consumers’ lifestyle, to their set of values, to their needs?

This study spearheaded the work toward the introduction of New Coke. In the mid-1980s, the corporate office also made a study of the impact of antipollution trends on government regulations concerning packaging. At the corporate level, environment was scanned rather broadly. Mostly market tidings, technical tidings, and broad issues were dealt with. Whenever necessary, in-depth studies were done on a particular area of concern, and corporate information was made available to different divisions of the company. At the division level (e.g., Coca-Cola, USA), considerable attention is given to the market situation, acquisition leads, and new business ventures. The division also studies general economic conditions (trends in GNP, consumption, income), government regulation (especially antitrust actions), social factors, and even the political situation. Part of this division-level scanning duplicates the efforts of the corporate office, but the divisional planning staff felt that it was in a position to do a better job for its own purpose than could the corporate office, which had to serve the needs of other divisions as well. The division also undertakes special studies. For example, in the early 1980s, it wondered whether a caffeine-free drink should be introduced and, if so, when. The information received from the corporate office and that which the division had collected itself was analyzed for events and happenings that could affect the company’s current and potential business. Analysis was done mostly through meetings and discussions rather than through the use of any statistical model. At the Coca-Cola Company, environmental analysis is a sort of forum. There is relatively little cohesion among managers; the meetings, therefore, respond to a need for exchange of information between people. A recent study of environmental scanning identifies four evolutionary phases of activity, from primitive to proactive. The scanning activities in most corporations can be characterized by one of these four phases.

In Phase 1, the primitive phase, the environment is taken as something inevitable and random about which nothing can be done other than to accept each impact as it occurs. Management is exposed to information, both strategic and nonstrategic, without making any effort to distinguish the difference. No discrimination is used to discern strategic information, and the information is rarely related to strategic decision making. As a matter of fact, scanning takes place without management devoting any effort to it. Phase 2, the ad hoc phase, is an improvement over Phase 1 in that management identifies a few areas that need to be watched carefully; however, there is no formal system for scanning and no initiative is taken to scan the environment. In addition, that management is sensitive to information about specific areas does not imply that this information is subsequently related to strategy formulation. This phase is characterized by such statements as this: All reports seem to indicate that rates of interest will not increase substantially to the year 2000, but our management will never sit down to seriously consider what we might do or not do as a company to capitalize on this trend in the pursuit of our goals. Typically, the ad hoc phase characterizes companies that have traditionally done well and whose management, which is intimately tied to day-to-day operations, recently happened to hire a young M.B.A. to do strategic planning. In Phase 3, the reactive phase, environmental scanning begins to be viewed as important, and efforts are made to monitor the environment to seek information in different areas. In other words, management fully recognizes the significance of the environment and dabbles in scanning but in an unplanned, unstructured fashion. Everything in the environment appears to be important, and the company is swamped with information.

Some of the scanned information may never be looked into; some is analyzed, understood, and stored. As soon as the leading firm in the industry makes a strategic move in a particular matter, presumably in response to an environmental shift, the company in Phase 3 is quick to react, following the footsteps of the leader. For example, if the use of cardboard bottles for soft drinks appears uncertain, the Phase 3 company will understand the problem on the horizon but hesitate to take a strategic lead. If the leading firm decides to experiment with cardboard bottles, the Phase 3 firm will quickly respond in kind. In other words, the Phase 3 firm understands the problems and opportunities that the future holds, but its management is unwilling to be the first to take steps to avoid problems or to capitalize on opportunities. A Phase 3 company waits for a leading competitor to pave the way. The firm in Phase 4, the proactive phase, practices environmental scanning with vigor and zeal, employing a structured effort. Careful screening focuses the scanning effort on specified areas considered crucial. Time is taken to establish proper methodology, disseminate scanned information, and incorporate it into strategy. A hallmark of scanning in Phase 4 is the distinction between macro and micro scanning.

Macro scanning

refers to scanning of interest to the entire corporation and is undertaken at the corporate level.

Micro scanning is often practiced at the product/market or SBU level. A corporate-wide scanning system is created to ensure that macro and micro scanning complement each other. The system is designed to provide open communication between different micro scanners to avoid duplication of effort and information. A multinational study on the subject concluded that environmental scanning is on its way to becoming a full-fledged formalized step in the strategic planning process. This commitment to environmental scanning has been triggered in part by the recognition of environmental turbulence and a willingness to confront relevant changes within the planning process. Commitment aside, there is yet no accepted, effective methodology for environmental scanning.