CHAPTER SIX ENVIRONMENTAL ASSESSMENT By Kutay Kalkan for Dr. DeMicco

1. CHAPTER SIX ENVIRONMENTAL ASSESSMENT By KutayKalkan for Dr. DeMicco

2. OBJECTIVES • Develop an improved understanding of the relationships between the remote and task environments. • Be capable of establishing the appropriate domain definition for the firm. • Achieve a greater understanding of the structure of the industry, including customers, competitors, suppliers, regulators, and potential competitors.

3. Objectives • Develop an improved understanding of the relationships between the remote and task environments • Remote Environment : Ecological, political, social, and technological factors or forces that affect a form's decision making abilities and freedom, but are beyond its control or influence. • Task Environment : is a theoretical construct which is supposed to supply the goal relevant consequences of allowable moves in performing the task. • The forces in the remote environment have a causal effect on firms through the task environment, which consists of the following subcategories: • Customers • Competitors • Regulators • Suppliers

4. Objectives • It is important to recognize that forces in the remote environment are likely to affect the elements of the task domain differently. Ex1: Effect of terrorism on the airline industry and the attitude of the regulators against this predicament. Ex2: Effect of the increasing oil prices on the airline industry and how low-cost and how-cost airline companies react to it. • Please read page 163 in the textbook for the details of these examples. These examples point out how different players in an industry sector can be impacted in different ways and with different timing to the same forces emerging from the remote environment. Yet understanding the impact of these causal relationships is important in determining the strategic direction for the firm. In the following slide, please pay attention to how environmental scanning has a direct effect on the strategic direction of the firm!

5. Strategic Management Model ! Environmental Scanning Strategic Direction Strategic Plans Organizational Assessment Performance Evaluation Implementation

6. Objectives • Be capable of establishing the appropriate domain definition for the firm. • The Domain : is the context in which the organization or firm competes. • Critical Success Factor(CSF) : is a business term for an element which is necessary for an organization or project to achieve its mission. • Money : positive cash flow, revenue growth, and profit margins. • Your future : Acquiring new customers and/or distributors. • Customer satisfaction : How happy are they? • Quality : How good is your product and service? • Product or service development : What's new that will increase business with existing customers and attract new ones? • Intellectual capital : Increasing what you know that's profitable. • Strategic relationships : New sources of business, products and outside revenue. • Employee attraction and retention : Your ability to do extend your reach. • Sustainability : Your personal ability to keep it all going.

7. The Customer/Demand Curve • In defining the domain, the manager must begin with the customer analysis. • Who is my customer? • Do the broad forces driving change in the remote environment affect my customer? • Demand Curve : Sum of total of all customers who will purchase the products and services offered by the firm. • Please read pages 163 through 166 in the text book. The exhibit in the next slide illustrates how the analysis of the demand curve may be approached in terms of identifying key target market descriptors or variables(value drivers) used to estimate demand. The exhibit after the next slide presents a conceptual map of the probable variables that must be considered when seeking to prepare a forecast of the future cash flows of the firm.

8. Example of Target Market Descriptors for Harrah’s Casinos

9. Variables Influencing the Demand Curve Price Quantity

10. Objectives • Achieve a greater understanding of the structure of the industry, including customers, competitors, suppliers, regulators, and potential competitors. Ex1: The impact of the growing online travel arrangements --via the internet-- by the customers on travel agents and hospitality products and services. • Result : Decrease in bookings through travel agents. Ex2: The effects of mad cow disease, Asian bird flu, or SARS on health and safety concerns of customers. • Result : Decline in customer demand in those parts of the world most directly affected by these events. Ex3: The effects of 9/11 event on the airline industry. • Result : Frightening many people away from air travel permanently. • Please read page 167 in the textbook for the details of these examples.

11. The Competitor-Industry Analysis • The domain definition continues with the analysis of the competitors, which can be thought of as the major firms that are leading the industry within the domain of analysis. • A firm’s competitive set, or strategic group, sets the competitive pace and must be monitored in any task environment analysis. • CSFs play a big role on a company’s competitive power against the leading firms. The exhibit in the next slide shows the lodging industry critical success factors between 1985 and 1999. The exhibit after the next slide provides an example of comparing the situation of a firm --with the help of CSFs-- with respect to the industry leaders.

12. Lodging Industry Critical Success Factors

13. Industry strategic group comparison on lodging industry CSFs

14. Industry Value Drivers • Value Driver : an important factor that determines or causes an increase in value of a business, as viewed by investors. • Ex1 : For a brand new startup (i.e., a business still in the Shaping stage of the Venture Value Chain), key value drivers can include the assembly of a strong management team, a seasoned and influential board of directors and advisory board, the development of a compelling business plan, and the ability to produce a demonstrable prototype of product. • Ex2 : Key value drivers for early-stage ventures (in the Launch stage) can include the completion of a first commercial version of the product and attracting the first paying customers. • Ex3 : Important value drivers in the Scale stage usually include a strengthened management team, expanded infrastructure for sales, distribution and customer support, and predictably ramping revenue. • Value drivers are likely to affect all firms the same way within the sector. • To have a better understanding, please read pages 171 through 174 in the textbook. The exhibit in the next slide refers to a recent study in which key value drivers affecting the casual theme restaurant industry were investigated.

15. Inflation Key Value Drivers Affecting Operational Cash Flow Variance in the Casual Theme Restaurant Sector Economic Environment R2=67% Sensitivity Unanticipated Effects on Industry Operating Performance CPISEA t-1 PPI t-3 Commodity – 8.893 3.557 Index of Operating Cash Flow per Unit (IOCFPU) EMPPP t-2 6.712 Labor Market PPILEFE t-3 – 13.423

16. Competitive Methods Competitive Method : A unique bundling of goods and services by the firm that cannot be easily duplicated. Ex1 : WestIn’s Heavenly Bed. Click here to go to the website. Ex2 : Wyndham ByRequest. Click here to go to the website. • Please read pages 174 through 183 in the text book for detailed information.

17. Competitive Forces • Buying Groups • Ex : Tour operators, travel clubs, professional associations, corporate clients. • Suppliers • Capital Supply • Labor Supply • Raw Materials • Ex: Energy costs, occupancy costs, insurance premiums. • Regulators • Potential Competitors and substitute products The exhibit on the next slide explains the competitive forces model. You can also refer to section 1 for detailed information on competitive forces model. Please read pages 183 through 193 for detailed information

18. Porters Competitive Forces Model Potential New Entrants Intra-Industry Rivalry Strategic Business Unit Bargaining Power of Suppliers Bargaining Power of Buyers Substitute Products and Services

19. Readings and Videos • Article 1 – Darden Carves into a New Market with Longhorn • Article 2 – GE’s Results Pull Plug on WallStreet • Article 3 – The Leader of Casual Dining: Darden Restaurant(textbook) • Article 4 – The Value Adding Manager(textbook website) • Video 1– Ideas In Action (Ross Mackay)– Click here to watch the video please.

20. Chapter Questions 1. Which statement is not true? • The Internet makes it easy for customers to purchase products and services. • The Internet gives the providers of products and services more control over the buyers. • The Internet makes the purchases of hospitality products and services more transparent in terms of pricing. • The Internet makes it easy for customers to get information about their travel needs. 2. To obtain a competitor's information, a manager can go to: • industry related news. • suppliers. • shows and conferences. • consultants. • all of the above.

21. 3. Which is not a common competitive feature of low-cost air carriers?  • Use of primary airport • Use of a single type of aircraft • Lowest fare pricing • Direct city-to-city route • Web-based booking 4. Which is not a competitive feature of Outback? • Open only for dinner • Uses secondary real estate locations • Limits number of customers per server • Limited customer seating space

22. 5. The forces developed in the remote environment will have an impact on each general category of the task environment equally. • True • False 6. It is important to know that the boundaries of industry domain can be changed; it becomes a part of environmental scanning to assess the change. • True • False 7. When you compare the critical success factors between the lodging and restaurant industries, you find that they are completely different. • True • False

23. 8. What are critical success factors? 9. What is a demand curve? 10. Discuss the relationship between the customer and forces in the remote environment. 11. Define competitive method. 12. What are some of the key performance indicators in the hospitality industry?

24. Student Learning Objectives On completion of this chapter, you will be able to; • Identify and define the remote and task environment. • Identify and define the domain. • Identify and define the variables influencing the demand curve. • Identify the critical success factors for the lodging and restaurant industry. • Apply Porter’s competitive forces model into hospitality. • Have a better understanding of the importance of Porter’s competitive forces model for environmental assessment.

25. Case Study Answers 1) Tougher economic times, busier lifestyles, an aging population with more discretionary income (despite higher oil prices), rising interest rates, and the continued growth of women in the workforce are value drivers within the remote environment that influence the entire foodservice industry. Under the influence of these value drivers, America has moved upscale from midscale and increased the expectations for convenience and value. As a result, despite the nation’s economic downturn, casual-dining operators are surviving and even prospering. Nowadays, although some overextended multi-concept casual-dining operators are shrinking their portfolios, a number of top number casual-dining operators nonetheless are ambitious about expanding the emerging brands that they own. 2) In the remote environment, the growing consumer concern over safety and health expects restaurants to stress the importance of safety and sanitation in food preparation and services. In the task environment, the growing sophistication of dinners and heavy competition because of an increasing number of chefs and professionally trained culinarians, are forcing restaurants to focus on ingredient quality and culinary authenticity and keep the concept fresh. Specifically, Darden has adopted a series of actions such as introducing higher-priced menu items, expanding on the wine lists, and launching curbside takeout. Consequently, in 2006, Darden was the nation’s largest casual-dining company, and is the only one company in the industry with two popular brands, generating more than $2 billion each in annual sales.

26. Case Study Answers 3) The first advantage of mergers and acquisitions is the reduced risk because company can get the knowledge about the profitability and popularity of this brand based on its prior performance. Additionally, to acquire a developed brand can save the marketing expense because this brand is already identified by the customers. On the other hand, mergers and acquisitions are not as independent as internal development, in which situation the company owns and operates 100% of its restaurants. What’s more, internal developed brand can be integrated better with other brands in the same family than the acquired brands. Finally, most of brands developed internally are uncommon in the industry and are more likely to reflect the new customer demand. 4) The key determinants of the demand curve for Darden’s concepts are product, price, income level, age, gender and occupation/education. In my opinion, every concept within Darden has its own appeal and particular market. Specifically, Red Lobster is aiming to be a “significantly better seafood restaurant”; Oliver Garden is Italian-themed restaurant; Bahama Breeze is Caribbean taste; Season 52 is health-conscious concept; Smokey Bones is barbecue-oriented. The similarities among these concepts are high quality, up-scale and high value. The combination of these concepts diversifies the operation of Darden, increasing its competency in different markets.

27. Case Study Answers 5) The key competitors of Red Lobster are Lee Roy Selmon's within OSI Restaurant, Shell’s Seafood, Landry’s Restaurant, Joe’s Crab Shack, and the Crab House. Carrabba's Italian Grill and Carrols Italian Restaurant are the main competitors for Oliver Garden. For Bahama Breeze, there are few competitors such as Pusser's Caribbean Grilles. Carrabba's Italian Grill and Bonefish Grill within OSI Restaurant is main competitor for Smokey Bones. Season 52 has few competitors in their markets. 6) Among the competitors above, OSI Restaurant, which possess a series of concepts and is one of the largest casual dining restaurant companies in the world, is competing Darden Restaurant in developing new products and services.

28. Case Study Answers 7) For Red Lobster, the key elements of the supplier include the capital, electronic energy, human resources, and raw materials such as dairy products, seafood and other protein items. Regulators mainly refer to ISO (International Organization for Standardization), World Trade Organization, Restaurant Association, national and local government and so on. Cooking at home, home meal replacements, personal chefs, and other seafood restaurants are substitutes of Red Lobster. Potential competitors include some small seafood restaurants that are popular in public and are growing rapidly, or new seafood concepts developed by large restaurant chains. 8) One conclusion I have from the case is that fresh concept and high quality are the key for casual dining industry sector. In my opinion, the safety and health concern will continue to increase in the next five years, so restaurants have to stress the investment in improving food safety and developing new concepts of healthful and tasty food.