1. CHAPTER 2 and 3 External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis Internal Environment: Resources, Capabilities, and Core Competencies

2. FIGURE 2.1 The External Environment
Population
Opportunities and Threats
Environment
By studying the external environment firms identify what they might choose to do.

3. Analysis of the External Environments
General environment
Focused on the future
Industry environment
Focused on factors and conditions influencing a firm’s profitability within an industry
Competitor environment
Focused on predicting the dynamics of competitors’ actions, responses and intentions

4. TABLE 2.1 The General Environment: Segments and Elements

5. General Environment
Dimensions in the broader society that influence an industry and the firms within it
Resources Obstacles
Political
Economic
Social including population and cultural dimensions
Technological
Environmental
Legal

6. Industry Environment
The set of factors directly influencing a firm and its competitive actions and competitive responses
Threat of new entrants
Power of suppliers
Power of buyers
Threat of product substitutes
Intensity of rivalry among competitors

7. Competitor Analysis
Gathering and interpreting information about all of the companies that the firm competes against.
Understanding the firm’s competitor environment complements the insights provided by studying the general and industry environments.

8. Competitor Analysis Competitor Intelligence
The ethical gathering of needed information and data that provides insight into:
A competitor’s direction (future objectives)
A competitor’s capabilities and intentions (current strategy)
A competitor’s beliefs about the industry (its assumptions)
A competitor’s capabilities

9. Opportunities and Threats
Opportunity
A condition in the general environment that, if exploited, helps a company achieve strategic competitiveness.
Threat
A condition in the general environment that may hinder a company’s efforts to achieve strategic competitiveness.

10. Industry Environment Analysis
Industry Defined
A group of firms producing products that are close substitutes
Firms that influence one another
Includes a rich mix of competitive strategies that companies use in pursuing strategic competitiveness and above-average returns

11. FIGURE 2.2 The Five Forces of Competition Model

12. Threat of New Entrants: Barriers to Entry
Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale
Government policy
Expected retaliation

13. Barriers to Entry Economies of Scale
Marginal improvements in efficiency that a firm experiences as it incrementally increases its size
Factors (advantages and disadvantages) related to large- and small-scale entry
Flexibility in pricing and market share
Costs related to scale economies
Competitor retaliation

14. Barriers to Entry (cont’d)
Product differentiation
Unique products
Customer loyalty
Products at competitive prices
Capital Requirements
Physical facilities
Inventories
Marketing activities
Availability of capital
Switching Costs
One-time costs customers incur when they buy from a different supplier
New equipment
Retraining employees
Psychic costs of ending a relationship
Access to Distribution Channels
Stocking or shelf space
Price breaks
Cooperative advertising allowances

15. Barriers to Entry (cont’d)
Cost Disadvantages Independent of Scale
Proprietary product technology
Favorable access to raw materials
Desirable locations
Government policy
Licensing and permit requirements
Deregulation of industries
Expected retaliation
Responses by existing competitors may depend on a firm’s present stake in the industry (available business options)

16. Bargaining Power of Suppliers
Supplier power increases when:
Suppliers are large and few in number.
Suitable substitute products are not available.
Individual buyers are not large customers of suppliers and there are many of them.
Suppliers’ goods are critical to the buyers’ marketplace success.
Suppliers’ products create high switching costs.
Suppliers pose a threat to integrate forward into buyers’ industry.

17. Bargaining Power of Buyers
Buyer power increases when:
Buyers are large and few in number.
Buyers purchase a large portion of an industry’s total output.
Buyers’ purchases are a significant portion of a supplier’s annual revenues.
Buyers’ switching costs are low.
Buyers can pose threat to integrate backward into the sellers’ industry.
Buyer has full information.

18. Threat of Substitute Products
The threat of substitute products increases when:
Buyers face few switching costs.
The substitute product’s price is lower.
Substitute product’s quality and performance are equal to or greater than the existing product.
Differentiated industry products that are valued by customers reduce this threat.

19. Intensity of Rivalry Among Competitors
Industry rivalry increases when:
There are numerous or equally balanced competitors.
Industry growth slows or declines.
There are high fixed costs or high storage costs.
There is a lack of differentiation opportunities or low switching costs.
When the strategic stakes are high.
When high exit barriers prevent competitors from leaving the industry.

20. Interpreting Industry Analyses
Low entry barriers
Suppliers and buyers have strong positions
Unattractive Industry
Strong threats from substitute products
Intense rivalry among competitors
Low profit potential

21. Interpreting Industry Analyses (cont’d)
High entry barriers
Suppliers and buyers have weak positions
Attractive Industry
Few threats from substitute products
Moderate rivalry among competitors
High profit potential

22. FIGURE 2.2 Competitor Analysis Components

23. Strategic Groups Strategic Dimensions
Extent of technological leadership
Product quality
Pricing Policies
Distribution channels
Customer service

24. Complementors Complementors
The network of companies that sell complementary products or services or are compatible with the focal firm’s own product or service.
If a complementor’s product or service adds value to the sale of the focal firm’s product or service, it is likely to create value for the focal firm.
However, if a complementor’s product or service is in a market into which the focal firm intends to expand, the complementor can represent a formidable competitor.

25. What Are the Key Factors for Competitive Success?
KSFs are competitive elements that most affect every industry member’s ability to prosper in the marketplace
Specific strategy elements
Product attributes
Resources
Competencies
Competitive capabilities
KSFs spell difference between
Profit and loss
Competitive success or failure

26. Identifying Industry Key Success Factors
Answers to three questions pinpoint KSFs
On what basis do customers choose between competing brands of sellers?
What must a seller do to be competitively successful -- what resources and competitive capabilities does it need?
What does it take for sellers to achieve a sustainable competitive advantage?
KSFs consist of the really major determinants of financial and competitive success in an industry

27. KSFs for Beer Industry
Utilization of brewing capacity -- to keep manufacturing costs low
Strong network of wholesale distributors -- to gain access to retail outlets
Clever advertising -- to induce beer drinkers to buy a particular brand

28. KSFs for Apparel Manufacturing Industry
Fashion design -- to create buyer appeal
Low-cost manufacturing efficiency -- to keep selling prices competitive

29. Example: KSFs for Tin and Aluminum Can Industry
Locating plants close to end-use customers -- to keep costs of shipping empty cans low
Ability to market plant output within economical shipping distances

30. Strategic Management Principle
A sound strategy incorporates efforts to be competent on all industry key success factors and to excel on at least one factor!

31. Competitive Advantage
Firms achieve strategic competitiveness and earn above-average returns when their core competencies are effectively:
Acquired.
Bundled.
Leveraged.
Over time, the benefits of any value-creating strategy can be duplicated by competitors.

32. Competitive Advantage (cont’d)
Sustainability of a competitive advantage is a function of:
The rate of core competence obsolescence due to environmental changes.
The availability of substitutes for the core competence.
The difficulty competitors have in duplicating or imitating the core competence.

33. Internal Analyses’ Outcomes
Unique resources, capabilities, and competencies (required for sustainable competitive advantage)
By studying the internal environment, firms identify what they can do best.

34. The Context of Internal Analysis
Global Economy
Traditional sources of advantages can be overcome by competitors’ international strategies and by the flow of resources throughout the global economy.
Global Mind-Set
The ability to study an internal environment in ways that are not dependent on the assumptions of a single country, culture, or context.
Analysis Outcome
Understanding how to leverage the firm’s bundle of heterogeneous resources and capabilities.

35. FIGURE 3.1 Components of Internal Analysis Leading to Competitive Advantage and Strategic Competitiveness

36. Creating Value
By exploiting their core competencies or competitive advantages, firms create value.
Value is measured by:
Product performance characteristics
Product attributes for which customers are willing to pay
Firms create value by innovatively bundling and leveraging their resources and capabilities.
Superior value  Above-average returns

37. Creating Competitive Advantage
Core competencies, in combination with product-market positions, are the firm’s most important sources of competitive advantage.
Core competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should drive its selection of strategies.

38. The Challenge of Internal Analysis
Strategic decisions in terms of the firm’s resources, capabilities, and core competencies:
Are non-routine.
Have ethical implications.
Significantly influence the firm’s ability to earn above-average returns.

39. The Challenge of Internal Analysis (cont’d)
To develop and use core competencies, managers must have:
Courage
Self-confidence
Integrity
The capacity to deal with uncertainty and complexity
A willingness to hold people (and themselves) accountable for their work

40. FIGURE 3.2 Conditions Affecting Managerial Decisions about Resources, Capabilities, and Core Competencies
Source: Adapted from R. Amit & P. J. H. Schoemaker, 1993, Strategic assets and organizational rent, Strategic Management Journal, 14: 33.

41. Resources, Capabilities and Core Competencies
Are the source of a firm’s capabilities.
Are broad in scope.
Cover a spectrum of individual, social and organizational phenomena.
Alone, do not yield a competitive advantage.
Discovering Core
Competencies
Core
Competencies
Resources
Are a firm’s assets, including people and the value of its brand name.
Represent inputs into a firm’s production process, such as:
Capital equipment
Skills of employees
Brand names
Financial resources
Talented managers
Capabilities
Resources
Tangible
Intangible

42. TABLE 3.1 Tangible Resources
Financial Resources • The firm’s borrowing capacity
• The firm’s ability to generate internal funds
Organizational Resources • The firm’s formal reporting structure and its formal planning, controlling, and coordinating systems
Physical Resources • Sophistication and location of a firm’s plant and equipment
• Access to raw materials
Technological Resources • Stock of technology, such as patents, trademarks, copyrights, and trade secrets
Sources: Adapted from J. B. Barney, 1991, Firm resources and sustained competitive advantage, Journal of Management, 17: 101; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 100–102.

43. TABLE 3.2 Intangible Resources
Human Resources • Knowledge
• Trust
• Managerial capabilities
• Organizational routines
Innovation Resources • Ideas
• Scientific capabilities
• Capacity to innovate
Reputational Resources • Reputation with customers
• Brand name
• Perceptions of product quality, durability, and reliability
• Reputation with suppliers
• For efficient, effective, supportive, and mutually beneficial interactions and relationships
Sources: Adapted from R. Hall, 1992, The strategic analysis of intangible resources, Strategic Management Journal, 13: 136–139; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 101–104.

44. Resources, Capabilities and Core Competencies
Represent the capacity to deploy resources that have been purposely integrated to achieve a desired end state
Emerge over time through complex interactions among tangible and intangible resources
Often are based on developing, carrying and exchanging information and knowledge through the firm’s human capital
The foundation of many capabilities lies in:
unique skills and knowledge of employees
The functional expertise of those employees
Capabilities are often developed in specific functional areas or as part of a functional area.
Discovering Core
Competencies
Core
Competencies
Capabilities
Resources
Tangible
Intangible

45. TABLE 3.3 Examples of Firms’ Capabilities
Functional Areas Capabilities
Distribution Effective use of logistics management techniques
Human resources Motivating, empowering, and retaining employees
Management Effective and efficient control of inventories through
Information Systems point-of-purchase data collection methods
Marketing Effective promotion of brand-name products
Effective customer service
Innovative merchandising
Management Ability to envision the future of clothing
Effective organizational structure
Manufacturing Design and production skills yielding reliable products
Product and design quality
Miniaturization of components and products
Research & Innovative technology
Development Development of sophisticated elevator control solutions
Rapid transformation of technology into new products and processes
Digital technology

46. Resources, Capabilities and Core Competencies
Four criteria for determining strategic capabilities:
Value
Rarity
Costly-to-imitate
Nonsubstitutability
Discovering Core
Competencies
Core
Competencies
Capabilities
Resources
Tangible
Intangible

47. TABLE 3.4 The Four Criteria of Sustainable Competitive Advantage
Valuable Capabilities • Help a firm neutralize threats or exploit opportunities
Rare Capabilities • Are not possessed by many others
Costly-to-Imitate Capabilities • Historical: A unique and a valuable organizational culture or brand name
• Ambiguous cause: The causes and uses of a competence are unclear
• Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers
Nonsubstitutable Capabilities • No strategic equivalent

48. Resources, Capabilities and Core Competencies
Resources and capabilities that are the sources of a firm’s competitive advantage:
Distinguish a company competitively and reflect its personality.
Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities.
Activities that a firm performs especially well compared to competitors.
Activities through which the firm adds unique value to its goods or services over a long period of time.
Discovering Core
Competencies
Core
Competencies
Capabilities
Resources
Tangible
Intangible

49. Building Sustainable Competitive Advantage
Valuable capabilities
Help a firm neutralize threats or exploit opportunities.
Rare capabilities
Are not possessed by many others.
Nonsubstitutable Capabilities
No strategic equivalent
Firm-specific knowledge
Organizational culture
Superior execution of the chosen business model
Discovering Core
Competencies
Four Criteria of Sustainable Advantages
Valuable
Rare
Costly to imitate
Nonsubstitutable

50. Building Sustainable Competitive Advantage
Costly-to-Imitate Capabilities
Historical
A unique and a valuable organizational culture or brand name
Ambiguous cause
The causes and uses of a competence are unclear
Social complexity
Interpersonal relationships, trust, and friendship among managers, suppliers, and customers
Discovering Core
Competencies
Four Criteria of Sustainable Advantages
Valuable
Rare
Costly to Imitate
Nonsubstitutable

51. Outcomes from Combinations of the Four Criteria
Costly to Imitate?
Nonsubstitutable?
Valuable?
Competitive
Consequences
Performance
Implications
Rare? No No No No
Competitive
Disadvantage
Below Average
Returns
Yes No No
Yes/ No
Competitive
Parity
Average Returns
Yes
Yes No
Yes/ No
Temporary Com-
petitive Advantage
Above Average to Average Returns
Yes
Yes
Yes
Yes
Sustainable Com-
petitive Advantage
Above Average Returns

52. Table 3.5 Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage