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OBJECTIVES Upon completion of this chapter, you will be able to: • Understand how to scan the remote environment. • Identify value drivers. • List the roles of value drivers as determinants of causal relationships between the firm and its environment. • Estimate the timing of value driver movements and how they impact the firm and its future cash flow streams associated with key competitive methods. • Learn the role of probability theory with respect to creating managerial theories about the firm. • Apply the concepts of this chapter to the Case Study. How Opportunities and Threats Recognized by Managers It is important to note that the remote environment is best thought of as the point of origination for most forces driving change that will essentially affect all activities relative to organizations and people. Read Pages 127 and 128 in the text Strategic Management Model Environmental Events Remote Task Industry Firm Functional Scanning the Remote Environment Scanning the remote environment requires a different approach to thinking than the convention method of thinking. Inductive Thinking Conclusions are drawn after looking at circumstances, information, experiences and other instances. Read pages 129-130 and 147-152 in the text and Article 1 Comparison of Inductive and Deductive Approaches to Environmental Scanning Inductive Deductive A theory is formulated about how this pattern will affect the firm The scanner observes activities in the environment The scanner suggests a hypothesis about these patterns The activities form a pattern of events that will probably shape a trend The scanner observes activities in the environment The scanner suggests a hypothesis about these patterns The scanner confirms the observations with research A theory is formulated about how this pattern will affect the firm Value Drivers A value driver is an independent variable (e.g. the cost of technology) that has a causal impact on a dependent variable (e.g. firm profit). They are both tangible or intangible variables that may be internal and external to an organization. Read pages 130-133 of the text and Article 2 Tracking Value Drivers In order to successfully track value drivers, managers must: • Develop an understanding of key value drivers relate • • d to each category of the environment scanned Establish a base of valid and reliable information Provide a brief outlook on what they expect to happen to those value drivers Read page 134 of the text and Article 4 Tracking Value Drivers Subcategories Key measures of economic well being Identify the primary sources of information How often do you review this information? World Bank OECD Domestic Statistic Offices – US Department of Census Monthly Based upon your information sources used, list and briefly describe the key value drivers you believe are important to monitor in understanding the cause and effect relationship with your firm. KEY value drivers: GDP (Gross Domestic Product) Private consumption Brief outlook on the key value drivers Real GDP growth is projected to decline from 3.4% in 2000 to a range from 2.2 to 2.8% in 2001, and to remain in a range from 2.1 to 3.1% in 2002. Domestic demand is expected to decelerate and the contribution of external trade to growth is projected to weaken significantly in 2001 and to be broadly neutral in both 2001 and 2002. Private consumption growth is expected to decline from 2.7% in 2000 to 2.22.6% in 2001, and to be 2.0-2.3% in 2002. This reflects continued strong growth of real disposable income, mainly due to the implementation of tax reductions in a number of countries. After a year of particularly strong performance, economic growth in the OECD area has been weakening since the autumn of 2000. The 2001 growth rate is projected to be half that of 2000, at around 2% and the longrunning reduction in unemployment is projected to come to a halt. However, the forces dampening economic growth are projected to dissipate in the second half of 2001, leading to a growth rate of 2.5% to 3% over the following twelve months. Inflation is expected to remain low. Cause and Effect Relationships of Value Drivers From the Remote Environment to the Impact upon the Firm Causal Relationships Once the most important value driver has been identified and managers are familiar with their behavior over time, the next step is to identify the primary causal relationships with the internal drivers of the firm. In many cases, quite a few possible relationships exist between the internal and external value drivers. Read Pages 137 and 138 of the text and Article 3 The Relationship of Value Drivers and Possible Outcomes in the Remote and Task Environments of the Hospitality Enterprise Estimating Future Impacts of Value Drivers Managers make guesses about the future all the time based on some belief or passion, rational analysis or, some combination of both. Tracking value drivers associated with specific events makes it much easier to estimate future probabilities. Managers can improve their theories (as outlined in the following graphic) by improving their ability to estimate probabilities for each possible scenario. Read Pages 139 and 140 in the text and Article 2 and 4 Likelihood of Wage Increase due to Settlement with the Union Event (A) Possible wage increase percentage (B) Probability of wage increase (C) Expected value (D) = (B) x (C) Low increase 2% 30% .6 % Medium increase 2.5% 60% 1.5 % High increase 3.5% 10% .35% Total expected percentage increase in wages due to settlement with union 2.45% Estimating Timing of Value Drivers Managers must try to understand the timing of external value drivers and how they move with the general business environment. They following graphics illustrate how this may be done. Read Pages 140-144 in the text Hotel Industry Cycle Curve High 1967 1972 1976 1980 1984 1989 Low 1969 1974 1977 1981 1986 1991 Mean Standard Deviation Hotel Industry Cycle Duration (years) High to High Low to Low Expansion 5 4 4 4 5 4.4 0.5 5 3 4 5 5 4.4 0.9 3 2 3 3 3 2.8 0.4 Contraction 2 2 1 1 2 2 1.7 0.5 Leading and Lagging Indicators for the Hotel industry Tracking Less Quantifiable Data Tracking less quantifiable data while difficult is not impossible. This type of tracking is referred to as an event study and extensive research is often needed. The following graphic illustrated how this is done. Read Pages 144-146 of the text Competitive Methods of Multinational Hotel Companies Over the Ten Year Period of Analysis Number of Competitive Methods •Frequent Stay Programs •Strategic Alliances •Computer Reservation Systems •1985 •Brand Proliferation •Amenity Programs •Use of Technology 1986 •Service Concept •Yield Mgt. •Cost Containment •Price Discounting •Niche Marketing •Purpose of visit marketing and advertising 1987 •Limited Service •Resort Brands •Going Global •Meetings Market 1988 •Courting Travel •Agents •Management Contract 1989 •Human Resource Programs •Revenue Max. Programs •Frequent Stay Perks 1990 Decade of Analysis •Data Base Systems •Business Services •Environment / Conservation 1991 •Return to Core Business 1992 •Direct to Consumer Marketing 1993 1994 True or False? 1. An opportunity discovered based on a manager's "gut feeling may create risks for the stakeholders. True False 2. To enhance the foresight of opportunities, a manager should develop the ability to interpret and synthesize information about emerging patterns of ev ents in his/her business environment. True False 3. A force driving change is brought about by the combination of movement among value drivers. True False 4. Often, it is a combination of movements among value drivers that bring about strong forces driving change. True False Multiple Choice Questions 1. Which statement is NOT true? A. When scanning the remote environment, the manager must engage in inductive thinking. B. When scanning the remote environment, the manager must engage in deductive thinking. C. Managers haven't looked at the remote environment because it is so abstract. D. Managers look more closely at issues surrounding them, such as the task environment. 2. Which is an intangible value driver? A. Disposable income B. Consumer's sense of well being C. Interest rate D. GDP Multiple Choice Continued 3. Which value drivers can be measured easily? A. Traveler's attitude B. Individual's perceptions C. Revenue and expenses D. Employee morale 4. Which is NOT a key category in the remote environment? A. Political B. Economic C. Competitor D. Socio-cultural Case Study Impact of Remote Environmental Factors on the Hospitality and Tourism Industry Case Study can be found in the text Pages 152-159. Case Study Impact of Remote Environmental Factors on the Hospitality and Tourism Industry 1. The hospitality and tourism industry is considered as the industry that is 2. 3. 4. 5. 6. 7. competing for consumers’ discretionary income and time. Discuss the environment al factors that affect this industry in both positive and negative ways. What lessons can we learn as an industry from these factors, and what can we do to tackle these threats and crises? What would you recommend relative to establishing a scanning process to monitor the outbreak of infectious diseases? Explain how you would go about establishing a causal link between the impact of a disease like SARS and the firm’s ability to maintain cash flow. What key value drivers would be important to identify the determine a causal link to the firm? Based on the overview in this case, provide your own theory of how you would respond as a manager to this information. Provide an understanding of how you would estimate the timing associated with this event. Possible Case Study Solution as proposed by Krystal Peters QUESTION ONE Technological advancement in the environmental changes our lifestyle and the way that business responds to these changes by: ◦ ◦ ◦ ◦ Providing personalized service Shorter (or no) wait time Improved customer service Businesses create better, faster, stronger, products to contend with their competitors QUESTION TWO InterContinental commits to technology as one of its competitive methods to gain industry advantage by: ◦ ◦ ◦ ◦ Offering guests some of the most advanced technology available Featuring technology as a point of difference from existing hotels in their market Making the technology seamless: wireless keyboards, cyber concierge, and high-speed internet access (this allows technology functionality to be a platform at InterContinental Hotel Brands Aim to exceed technological expectations Possible Case Study Solution as proposed by Krystal Peters QUESTION THREE Challenges associated with using technology in hospitality organizations as competit ive methods to differentiate among competitors and gain market share are: ◦ ◦ ◦ ◦ Technology and the hospitality industry is constantly evolving, therefore modifications/improvements may be needed quite often Using technology as a differentiator may cause pressure to constantly have the best technological advances available Training staff on how to operate the technology may be a costly and ongoing process Compatibility with other products and online services may be an issue QUESTION FOUR The key determinants behind technology advancement are: ◦ ◦ ◦ ◦ ◦ General Need (sometimes determined by gap in the current market) Purpose Availability Ease of Use Cost Possible Case Study Solution as proposed by Krystal Peters QUESTION FIVE IHG timing its investments in technology at a time when others in the industry were not concerned with such things. It chose a four prong multi-dimensional approach (consumers, customers, franchisees, owners) and, successfully integrated it with key marketing, reservations and operating systems into a strong technology based system. The technology associated with this central reservation system became the largest transaction processing engine in the industry. This system was able to build IHG as a unique industry leader. IHG had a considerable advantage of at least ten years. QUESTION SIX There aren’t really domain differences between the corporation and the two hotels cited at the end of the case but, rather an increase in the focus within a particular domain of the last two hotels. Possible Case Study Solution as proposed by Krystal Peters QUESTION SEVEN Information that would be helpful in determining the overall demand for the technology investments IHG has made over the years are: ◦ ◦ ◦ Environment Current Trends Competitors QUESTION EIGHT Information sources that would be useful in tracking developments in tech nology for the travel industry are: ◦ ◦ ◦ ◦ ◦ ◦ Online booking agents Travel subsidiaries Hotels Media Competitors Customers Supplemental Readings • Article 1: Food Companies Tweak the recipe • Article 2:Jobs Data Suggest U.S. is in Recession • Article 3: The impact of the SARS outbreak on Taiwanese hotel stock performance: An event-study approach • Article 4: Delta Plots Cuts in Jobs, Domestic Routes • Article 5:Harrah’s (available on text’s website as a Case Study) http://wps.prenhall.com/chet_olsen_strategic_3/78/20064/5136447.cw/index.html • Article 6: McDonald’s (available on text’s website as a Case Study) http://wps.prenhall.com/chet_olsen_strategic_3/78/20064/5136447.cw/index.html • Article 7: Starbucks (available on text’s website as a Case Study http://wps.prenhall.com/chet_olsen_strategic_3/78/20064/5136447.cw/index.html • Article 8: Wendy’s (available on text’s website as a Case Study) http://wps.prenhall.com/chet_olsen_strategic_3/78/20064/5136447.cw/index.html Student Objectives Upon completion of this chapter, you should be able to: • Successfully scan the remote environment. • Identify value drivers • List their roles as determinants of causal relationships between • • • • the firm and its environment. Estimate the timing of value driver movements and their impact the firm and its future cash flow streams associated with key competitive methods. Describe role of probability theory with respect to creating managerial theories about the firm. Apply the concepts of this chapter to the Case Study. Create managerial theories about the firm.