1. The External Environment
Hanson & Dowling Chapters 2

2. GENERAL ENVIRONMENT INDUSTRY ENVIRONMENT
Demographic
INDUSTRY
ENVIRONMENT
Economic
Socio-
Cultural
New Entrants
Suppliers
Customers
Substitutes
Traditional Rivals
Political
Legal
Global
Technological

3. External Environmental Analysis Scanning Monitoring
Identifying early signals of changes
Monitoring
Detecting meaning through ongoing observation of changes
Forecasting
Developing projections of anticipated outcomes
Assessing
Determining effect of changes upon firm’s strategy

4. Economic Growth Related economies Open trade policies
Economic regulation
National infrastrucure

5. Economic Growth
Economic growth affects individual firms, but they have no control over it
Economic growth:
USA 4.1% (1995–9)
Australia 3.4% (1989–9)
UK 1.9% (1989–9)
Germany 0.6% (1989–9)

6. Australia’s Two Economies
In the ‘global’ cities of Sydney and Melbourne, unemployment is low and incomes are rising
In country areas, unemployment is high (over 10% on average) and property values are falling
In 1996, the average nett household wealth
for the Mersey-Lyell region of Tasmania was $87,314
in 12 middle-class harbourside Sydney suburbs was $393,381

7. Demographics Population Size Age Structure Geographic distribution
Ethnic mix
Income distribution

8. Australia’s Ageing Population
In June 1998, 12% (2.3 million) of the Australian population was aged over 65:
Only 6% in the labour force
Only 58% held superannuation
By 2051, 24% of the population will be 65 or over
Challenges:
Income support
Health infrastructure

9. Declining Birth Rate Replacement rate for a population is 2.1
The birth rate in Australia in 1998 was 1.76
Declining birth rate in the western world:
US birth rate 2.0
NZ birth rate 2.0
British birth rate 1.70
German birth rate 1.5
Italian birth rate 1.2

10. Politico-Legal Segment
Government regulations
Government charges
Legal system
Rule of Law
Government support
Commitment to attaining a national competitive advantage

11. Socio-cultural Segment
Work Habits
Savings
Social Welfare & Health
Environmental concerns
Religion
Educational standards
Workforce diversity

12. Gender Wages Rates
Pay differentials still exist between men and women all over the world
Men earn:
34% more than women in the UK
17% more in Sweden
24% more in Australia

13. Technology Innovation Telecommunications infrastructure Internet
Intellectual property

14. Global Segment New global markets International political events
Global market integration
International Treaties (e.g. WTO)

15. Traditional Competitors
Porter’s 5 forces
Substitute Products
New Entrants
Traditional Competitors
The firm
Suppliers
Customers

16. 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

17. Bargaining Power of Suppliers
Suppliers exert power in the industry by threatening to raise prices or reduce quality
Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases 16

18. Bargaining Power of Suppliers (cont.)
Suppliers will be powerful if:
Supplier industry is dominated by a few firms
Supplier’s products have few substitutes
Buyer is not an important customer to the supplier
Supplier’s product is important to the buyer’s product
Supplier products are differentiated
Supplier’s products have high switching costs
Supplier poses a credible threat of forward integration 16

19. Bargaining Power of Buyers
Buyers compete with the supplying industry by:
Bargaining-down prices
Forcing higher quality
Playing firms off against each other

20. Bargaining Power of Buyers (cont.)
Buyer groups are likely to be powerful if:
Buyers are concentrated or purchases are large relative to the seller’s sales
Purchase accounts for a large part of the supplier’s sales
Products are undifferentiated
Buyers face few switching costs
Buyer’s industry earns low profits
Buyer presents a credible threat of backward integration
Product is not important to quality
Buyer has full information

21. Threat of Substitute Products
Products with similar function limit the prices firms can charge
Products with improving price/performance tradeoffs relative to present industry products eg
Electronic security systems in place of security guards
Fax machines in place of overnight mail delivery

22. Rivalry among Existing Competitors
Jockeying for strategic position
Using price competition
Staging advertising battles
Increasing consumer warranties or service
Making new product introductions

23. Rivalry among Existing Competitors
Intense rivalry occurs when a firm is pressured or sees an opportunity
Price competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, but may be costly to smaller competitors

24. Rivalry among Existing Competitors
Cut-throat competition is more likely to occur with:
Numerous or equally balanced competitors
Slow-growth industry
High fixed costs
High storage costs
Lack of differentiation or switching costs
Capacity added in large increments
Diverse competitors
High strategic stakes
High exit barriers

25. Rivalry among Existing Competitors
High exit barriers can include:
Specialised assets
Fixed cost of exit (e.g. labour agreements)
Strategic interrelationships
Emotional barriers
Government and social restrictions

26. Effects of Entry and Exit Barriers on Industry Profits
Low
High
Low, Stable Returns
Low, Risky Returns
Low
Entry Barriers
High, Stable Returns
High, Risky Returns
High 32

27. Competitor Analysis What drives the competitor?
What can the competitor do?
What does the competitor believe about itself and the industry?
What are the competitors capabilities?
What will the competitor do in the future?
Where do we have a competitive advantage?
How will this change our relationship with our competition?

28. The Internal Environment
Hanson & Dowling Chapter 3

29. Key Questions in Internal Analysis
How do we assemble bundles of resources, capabilities and core competencies to create value for customers?
Will environmental changes make our core competencies obsolete?
Are substitutes available for our core competencies?
Are our core competencies easily imitated?

30. Key Questions in Internal Analysis
Complicated by
Uncertainty
Complexity
Inter-organisational conflicts

31. Discovering Core Competencies
Competitive
Advantage
Gained through
Core Competencies
Value
Chain
Analysis
Strategic
Competitiveness
Above-Average
Returns
Sources of
Core
Competencies
Competitive
Advantage
Valuable
Rare
Costly to Imitate
Non-substitutable *
Criteria of
Sustainable
Advantages
Capabilities
Teams of
Resources
Resources *
Tangible
Intangible 85

32. Resources Tangible Intangible Financial Physical Human Resources
Organisational
Intangible
Technological
Innovation
Reputation (Brand power)

33. Brand Power Brands can provide a company with competitive advantages
Country Road uses a brand to market a range of crockery, tea towels, napkins and vases as well as clothes
The Harley Davidson name also adorns:
A limited-edition Barbie Doll
A restaurant in New York
A line of L’Oreal cologne

34. Knowledge Management
Knowledge is spread widely across all employees, organisations and industry settings
Many companies are now creating the new position of Chief Learning Officer (CLO)
The CLO is responsible for determining how a firm should manage knowledge to derive maximum competitive value from it
In the USA, 78% of companies have indicated they are moving towards becoming knowledge-based enterprises

35. Capabilities
The firm’s capacity or ability to integrate individual firm resources to achieve a desired objective
Develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources and which are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees

36. Capabilities (cont.)
Become important when they are combined in unique combinations that create core competencies which have strategic value and which can lead to competitive advantage

37. Core Competencies What a firm does that is strategically valuable
The essence of what makes an organization unique in its ability to provide value to customers
McKinsey & Co. recommend identifying three to four competencies to use in framing strategic actions

38. Core Competencies It must be: Valuable Rare Costly to imitate
Non-substitutable

39. Competitive Consequences Performance Implications
Costly to Imitate
Non-sub-stitutable
Competitive Consequences
Performance Implications
Valuable
Rare
Below Average
Returns
Competitive
Disadvantage NO NO NO NO
Competitive
Parity
Average
Returns
YES NO NO
YES/NO
Temporary
Competitive
Advantage
Aver./Above Average
Returns
YES
YES NO
YES/NO
Sustainable
Competitive
Advantage
Above Average
Returns
YES
YES
YES
YES 46

40. Core Competencies Costly to Imitate
Unique Historical Conditions An unusual evolutionary pattern of growth may contribute to the development of competencies in a manner unique to those particular circumstances
Causal Ambiguity Competitors are unable to detect how a firm uses its competencies as a foundation for competitive advantage

41. Core Competencies Costly to Imitate
Social complexity A firm’s capabilities are the result of complex social phenomena, such as interpersonal relationships, trust and friendships among managers or a firm’s reputation with suppliers and customers

42. Porter’s Value Chain Model
Production consists of a series of activities that add a margin of value to a firm’s products or services
The added value increases profits, enhances asset value and competitive position
Primary activities
Directly related to production and distribution
Support activities
Make delivery possible
Include organisational structure, HR, technology and procurement

43. Human Resource Management MARGIN Technological Development
Value Chain Analysis
identifies which resources and capabilities can add value
Firm Infrastructure
Human Resource Management
Support
Activities
MARGIN
Technological Development
Procurement
Service
Outbound
Logistics
Marketing
& Sales
Inbound
Logistics
Operations
MARGIN
Primary Activities 59

44. Porter’s Value Chain Model Increase profits by:
Increasing steps that involve primary activities
Reducing steps that involve support activities
Converting support activities to primary activities

45. To capitalise on the usefulness of the Value Chain concept it is important to recognise that Value Chains are part of a::
Total Value System
Supplier Value Chain
Firm Value Chain
Channel Value Chain
Buyer Value Chain 69

46. Total Value System
Firm Value Chain
Channel Value Chain
Buyer Value Chain
Supplier Value Chain
Upstream Value Perform valuable activities that complement the firm’s activities 69

47. Total Value System
Supplier Value Chain
Firm Value Chain
Buyer Value Chain
Channel Value Chain
Each firm must eventually find a way to become a part of some buyer’s value chain 69

48. Total Value System This creates VALUE!!
Supplier Value Chain
Firm Value Chain
Channel Value Chain
Buyer Value Chain
Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain
This creates VALUE!! 69

49. Outsourcing
Firms often purchase a portion of their value-creating activities from specialty external suppliers who can perform these functions more efficiently

50. Strategic Rationales for Outsourcing
Improve Business Focus
Provide Access to World-Class Capabilities
Accelerate Business Re-Engineering Benefits
Share Risks
Free Resources for Other Purposes

51. Cautions and Reminders
Core Competencies:
Cautions and Reminders
never assume that core competencies will continue to provide a competitive advantage
All core competencies have the potential to become core rigidities
Core rigidities sow the seeds of organisational inertia and prevent the firm from responding appropriately to changes in the external environment
Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats

52. Strategic Intent Strategic Mission
Leveraging of a firm’s resources, capabilities and core competencies to accomplish what may appear to be unattainable goals in the competitive environment
Strategic Intent
A statement of the firm’s unique purpose and the scope of its operations in product market terms
Strategic Mission 83

53. Discovering Core Competencies
Competitive
Advantage
Gained through
Core Competencies
Value
Chain
Analysis
Strategic
Competitiveness
Above-Average
Returns
Sources of
Core
Competencies
Competitive
Advantage
Valuable
Rare
Costly to Imitate
Non-substitutable *
Criteria of
Sustainable
Advantages
Capabilities
Teams of
Resources
Resources *
Tangible
Intangible 85