Business Environment Dr. Raj Agrawal Director AIMA

Outline Introduction The Company’s Macro-environment The Competitors Porter's Five Forces ModeL Internal Environment

Introduction Definition: The Company’s environment consists of "the actors and forces that affect management's ability to develop and maintain successful transactions with its target customers"

Introduction (cont’d) Companies must evaluate both micro and macro-environment to identify any trends that may affect their strategies, and opportunities that can be developed into competitive advantages Porter's Five Forces model analyses market structures to determine market attractiveness taking into consideration the micro and macro environments in its construction

Company’s Macro-environment Relates to the larger forces having an impact on society as a whole A company has little influence on these forces and therefore can only adapt its marketing mix to account for the resulting opportunities and threats

What the Firm Might Do What the Firm Can Do External Environment Five Forces Analysis Internal Environment Resources, Capabilities and Core Competencies SustainableCompetitiveAdvantage

Major forces of the macro- environment Demographic Economic Natural Technological Cultural Political/legal

Demographic Environment Demographic trends: Changing age structure Changing family structure Geographic shifts in population Higher education level & more white collar job holders Increasing globalization of cities such as Singapore

Economic Environment Economic trends affecting consumers buying power and spending pattern Change in per capital real income Disposable Discretionary Income distribution Savings & debt Consumer expenditures Change in interest rates and cost of living

Natural environment Natural trends include those natural resources used in production or those affected by marketing activities Raw material shortages Increase in energy cost Increase pollution levels Increase in Governmental intervention in natural resource management

Technological Environment Consists of forces that affect new technology, new product development and market opportunities Faster pace of technological change Shorter PLC Higher R&D budgets Concentration on minor improvements Increased regulations

Cultural Environment Affect society's basic values, perceptions, preferences and behaviors Core cultural values and beliefs Secondary cultural values Sub cultures

Legal and Political Environment Trends in the legal and political environment include Increased legislation regulating business Singapore’s Fair Trading Act (impending) Changing government agency enforcement Growth of public interest groups Regional groupings ASEAN FTZ

Competitive Analysis Who are the competitors? Do we know about our close competitors’ strengths and weaknesses? How detail should we analyze the competition? Use a systematic approach Analysis competition at various levels (next slide)

Industry Competition Different industries can sustain different levels of profitability; partly due to the difference in industry structure Porter’s Model of Industry Competition, commonly know as Porter’s Five Forces provides a framework for analyzing the influence of the forces on the industry to determine the industry’s profitability and competitiveness

Porter’s Model of Industry Competition Industry degree of rivalry BuyersSuppliers Barriers to Entry Substitutes

STRENGTHS A STRENGTH is something a company is good at doing or a characteristic that gives it an important capability. Possible Strengths: Name recognition Proprietary technology Cost advantages Skilled employees Loyal Customers

WEAKNESSES A WEAKNESS is something a company lacks or does poorly (in comparison to others) or a condition that places it at a disadvantage Possible Weaknesses: Poor market image Obsolete facilities Internal operating problems Poor marketing skills

STRENGTHS AND WEAKNESS FORM A BASIS FOR INTERNAL ANALYSIS By examining strengths, you can discover untapped potential or identify distinct competencies that helped you succeed in the past. By examining weaknesses, you can identify gaps in performance, vulnerabilities, and erroneous assumptions about existing strategies

TOOLS USEFUL IN ASSESSING STRENGTHS AND WEAKNESSES ? Resources Capabilities Core Competencies and Competitive Advantage

RESOURCES Inputs into a firm’s production process such as capital equipment, skill of individual employees, patents, finance, and talented managers Tangible Resources – Assets that can be seen and quantified Intangible Resources – Family commitment, networks, organizational culture, reputation, intellectual property rights, trademarks, copyrights By themselves, resources do not create a strategic advantage for the firm.

CAPABILITIES Capacity to deploy resources that have been purposely integrated to achieve a desired end state. Primary base for the firm’s capabilities is the skills and knowledge of its employees. Just because the firm has a strong capacity for deploying resources does not mean it has a competitive advantage

CAPABILITIES Capacity to deploy resources that have been purposely integrated to achieve a desired end state. Primary base for the firm’s capabilities is the skills and knowledge of its employees. Just because the firm has a strong capacity for deploying resources does not mean it has a competitive advantage.

CORE COMPETENCIES Resources and capabilities serve as a source of competitive advantage for a firm over its rival. Not all resources and capabilities are core competencies. Many suggest that firms should identify and concentrate on only 3 or 4 core competencies.

KEY VARIABLES Valuable Capabilities Rare Capabilities Costly to Imitate Capabilities Non-substitutable capabilities

IDENTIFYING AND BUILDING CORE COMPETENCIES Core competencies must be distinctive. Capabilities that are done better than competitors Identifying core competencies is key to development of sound strategy. We use the value chain to help identify core competencies.

THE VALUE CHAIN A framework for identifying core competencies Inside the firm In the supply chain Can be used to Identify strengths and weaknesses Identify sources of competitive advantage Identify market opportunities

THE VALUE CHAIN Strategic value analysis focuses on a firm ’ s relative value position vis- à -vis its rivals. Strategic cost analysis focuses on a firm ’ s relative cost position vis- à -vis its rivals.

Resources * * Tangible * * Intangible Capabilities Teams of Resources Teams of Resources Sources of Core Competencies Competitive Advantage Strategic Competitiveness Above-Average Returns Competitive Advantage Gained through Core Competencies Discovering Core Competencies Value Chain Analysis Valuable Rare Costly to Imitate Nonsubstitutable * * * * * Outsource Criteria of Sustainable Advantages Discovering Core Competencies