Lecture Outline

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Lecture Outline
MAN 6721 Strategic Management
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Class 2
Evaluating a Firms External Environment Evaluatin
g a Firms Internal Environment Saturday,
January 7, 2006
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Strategic Management Process
External Analysis
Strategic Choice
Strategy Implementation
Competitive Advantage
Mission
Objectives
Internal Analysis
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SWOT Analysis
Internal External

Strengths
Opportunities
-
Weaknesses
Threats
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Value of SWOT Analysis
Internal External

Strengths
Opportunities
Helps organization prioritize opportunities and
develop realistic, well-informed goals and
strategies
-
Weaknesses
Threats
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SWOT Analysis

• Conducting an Internal Analysis
• Purpose is to identify assets, resources, skills,
  and processes that represent either strengths or
  weaknesses for the organization.
• Evaluating the External Environment
• Purpose is to identify those aspects of the
  environment that represent either an opportunity
  or a threat for the organization.

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Areas That Should Be EvaluatedBy An External
Analysis(1 of 2)

• General Environment
• Includes environmental forces that are beyond the
  influence of the organization and over which it
  has no (or little) control.
• Task Environment
• Includes environmental forces that are within the
  organizations operating environment and may be
  influenced to some degree.

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Areas That Should Be EvaluatedBy An External
Analysis(2 of 2)
General Environment
Economic Factors
Technological Factors
Sociocultural Factors
Political-Legal Factors
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Areas That Should Be EvaluatedBy An External
Analysis(3 of 3)
Task Environment
Competition
Customers
Communities In Which the Firm Operates
Suppliers
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What External Analysis Leads To

• Economic Factors
• State of the economy
• Level of disposable income
• Consumer spending patterns

• Social Factors
• Social cultural trends
• Demographic changes
• What people think is in

• Business and/or Product Opportunity Gap
• Difference between whats available and whats
  possible

New Business and Product Ideas

• Technology Advances
• New technologies
• Emerging technologies
• New uses of old technologies

• Political Regulatory Changes
• Changes in political arena
• New laws and regulations

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Integral to Environmental Analysis(And the
decision whether to pursue on opportunity)
Industry Analysis
Competitor Analysis
Business research that focuses on the potential
of an industry
A detailed analysis of a firms competitors
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The Five Forces Model of Environmental Threats
Higher Threat
Lower Average Profits
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Threat 1Threat of New Entrants(1 of 5)

• Threat of New Entrants
• If firms can easily enter the industry, any above
  normal profits will be bid away quickly.
• Barriers to entry lower the threat of entry.
• The existence of barriers to entry make an
  industry more attractive
• This is true whether the focal firm is already in
  the industry or is thinking about entering it.
• Qualification There is a difference between
  entering vertical and horizontal markets.
  (Stubhub case)

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Threat 1Threat of New Entrants(2 of 5)

• Traditional Barriers to Entry
• Economies of Scale
• Firm that cant produce the minimum efficient
  scale will be at a disadvantage.
• Product Differentiation
• Entrants are forced to overcome customer
  loyalties to existing products.
• Cost Advantages Independent of Scale
• Incumbents may have learning advantages, location
  advantages, etc.
• Government Policies
• Governments may impose trade restrictions and/or
  grant monopolies.

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Threat 1Threat of New Entrants(3 of 5)

• Non Traditional Barriers to Entry
• It is difficult for start-ups to execute barriers
  to entry that are expensive, such as economies of
  scale, because money is usually tight.
• Start-ups have to rely on nontraditional barriers
  to entry to discourage new entrants, such as
  assembling a world-class management team that
  would be difficult for another company to
  replicate.

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Threat 1Threat of New Entrants(4 of 5)
Nontraditional Barriers to Entry
Barrier to Entry
Explanation
If a start-up puts together a world-class
management team, it may give potential rivals
pause in taking on the start-up in its chosen
industry.
Strength of management team
If a start-up pioneers an industry or a new
concept within an existing industry, the name
recognition the start-up establishes may create a
formable barrier to entry.
First-mover advantage
If the employees of a start-up are highly
motivated by the unique culture of a start-up,
and anticipate large financial rewards through
stock options, this is a combination that cannot
be replicated by larger firms. Think of the
employees of a biotech firms trying to find a
cure for a disease.
Passion of the management team and employees
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Threat 1Threat of New Entrants(5 of 5)
Nontraditional Barriers to Entry (continued)
Barrier to Entry
Explanation
If a start-up is able to construct a unique
business model and establish a network of
relationships that makes the business model work,
this set of advantages create a barrier to entry.
Unique Business Model
Inventing a new approach to an industry and
executing the idea in an exemplary fashion
If a start-up invents a new approach to an
industry and executes it in an exemplary fashion,
these factors create a barrier to entry for
potential imitators.
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Threat 2 Threat of Rivalry

• Rivalry Among Existing Firms
• High rivalry means firms compete vigorouslyand
  compete away above average profits.
• Industry conditions that favor rivalry
• Large number of competitors
• Slow or declining growth
• High fixed costs/and or high storage costs
• Low product differentiation
• Industry capacity can only be added in large
  increments

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Threat 3 Threat of Substitutes

• Substitutes
• Substitutes fill the same need but in different
  ways.
• Coke and Pepsi are rivals, milk is a substitute
  for both
• Substitutes creates a price ceiling because
  consumers switch to the substitute if price the
  price gets too high.
• Substitutes will likely come from outside the
  industrybe sure to look.

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Threat 4 Threat of Suppliers

• Threat of Suppliers
• Powerful suppliers can squeeze (lower profits)
  of the focal firm.
• Industry conditions that facilitate supplier
  power
• Small number of firms in suppliers industry
• Highly differentiated product
• Lack of close substitutes for suppliers product
• Supplier could integrate forward
• Focal firm is an insignificant customer of
  supplier

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Threat 5 Threat of Buyers(1 of 2)

• Threat of Buyers
• Powerful buyers can squeeze (lower profits) the
  focal firm by demanding lower prices and/or
  higher levels of quality and service.
• Industry conditions that facilitate buyer power
• Small number of buyers for focal firms output
• Lack of a differentiated product
• The product is significant to the buyer

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Threat 5 Threat of Buyers(2 of 2)

• Threat of Buyers
• Industry conditions that facilitate buyer power
  (continued)
• Buyers operate in a competitive marketthey are
  not earning above normal profits
• Buyers can vertically integrate backward
• Many small buyers can be united around an issue
  to act as a block

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Porters Five Forces Model
If all threats are high
Expect normal profits
If all threats are low
Expect above normal profits
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In-Class Exercise
Determining the attractiveness of an industry
using the five-forces model
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Application of Model for Startups
Using the Five Forces Model to Pose Questions to
Determine the Potential Success of a New Venture
in a Particular Industry
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Complementors As Another Force

• Complementors As Another Force
• Complementors Increase the Value of the Focal
  Firms Product
• Customers perceive more value in the focal firms
  product when it is combined with the
  complementors product
• Complementors may be found outside the focal
  firms industry

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Exploiting Industry Structure Opportunities
Most Common Industry Structures
Fragmented Industry
Mature Industry
Emerging Industry
Declining Industry
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Fragmented Industry Structure
Industries in which a large number of small or
medium-sized firms operate and no small set of
firms has dominant market share or creates
dominant technologies
Industry Characteristics
Opportunity

• Large number of small firms
• No dominant firms
• No dominant industries
• Commodity type products
• Low barriers to entry
• Few, if any, economies of scale

• Consolidation
• Buy competitors
• Build market power
• Exploit economies of scale

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Emerging Industry Structure
Emerging industries are newly created industries
formed by technological innovations, changes in
demand, the emergence of new customer needs, and
so forth
Industry Characteristics
Opportunity

• New industry based on break through
• technology or product
• No product standard has been
• reached
• No dominant firm has emerged
• New customers come from non-
• consumption not from competitors

• First mover advantages
• Technology
• Locking-up assets
• Creating switching costs

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Mature Industry Structure
Mature industries are characterized by declining
growth in total industry demand
Industry Characteristics
Opportunity

• Slowing growth in industry demand
• Technology standard exists
• Increasing international competition
• Industry-wide profits declining
• Industry exit is beginning

• - Refine current products
• Improve service
• Process innovation

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Declining Industry Structure
A declining industry is an industry that has
experienced an absolute decline in unit sales
over a sustained period of time
Industry Characteristics
Opportunity

• Industry sales have sustained pattern
• of decline
• Some well-established firms have
• exited
• Firms have stopped investing in
• maintenance

• - Market leadership
• Niche
• Harvest
• Divest

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Reducing Industry Threats
Increasing Competitiveness By Asking Shoppers
for Feedback
Stu Leonards Grocery Store
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Competitor Analysis

• What is a Competitor Analysis?
• A competitor analysis is a detailed analysis of a
  firms competition.
• It helps a firm understand the positions of its
  major competitors and the opportunities that are
  available.
• A competitive analysis grid is a tool for
  organizing the information a firm collects about
  its competitors.

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Identifying Competitors
Types of Competitors Firms Face
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Sources of Competitive Intelligence(1 of 2)

• Collecting Competitive Intelligence
• To complete a competitive analysis grid, a firm
  must first understand the strategies and
  behaviors of its competitors.
• The information that is gathered by a firm to
  learn about its competitors is referred to as
  competitive intelligence.
• A new venture should take care that it collects
  competitive intelligence in a professional and
  ethical manner.

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Sources of Competitive Intelligence(2 of 2)
Ways that a firm can ethically obtain information
about its competitors

• Attend conference and trade shows
• Read industry related book, magazines, and Web
  sites
• Talk to customers about what motivated them to
  buy your product
• as opposed to your competitors
• Purchase competitors products to understand
  their features,
• benefits, and shortcomings
• Study competitors Web sites
• Study Web sites that provide information about
  companies

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Completing a Competitive Analysis Grid(1 of 2)

• Competitive Analysis Grid
• A tool for organizing the information a firm
  collects about its competitors
• It can help a firm see how it stakes up against
  its competitors, provide ideas for markets to
  pursue, and identify its primary sources of
  competitive advantage.

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Completing a Competitive Analysis Grid(2 of 2)
Competitive Analysis Grid for Activision
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What Does Internal Analysis Tell Us?
What are a firms strengths?
Internal analysis provides a comparative look at
a firms capabilities
What are a firms weaknesses?
How do these strengths and weaknesses compare to
competitors?
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Why Does Internal Analysis Matter?
Internal Analysis Helps a Firm
Determine if its resources and capabilities are
likely sources of competitive advantage
Establish strategies that will exploit any
sources of competitive advantage
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SWOT Analysis
Internal External

Strengths
Opportunities
-
Weaknesses
Threats
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The Theory Behind Internal Analysis

• The Resource-Based View
• Developed to answer the question Why do some
  firms achieve better economic performance than
  others?
• Used to help firms achieve competitive advantage
  and superior economic performance
• Assumes that a firms resources and capabilities
  are the primary drivers of competitive advantage
  and economic performance

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The Resource-Based View

• Resources and Capabilities
• Resources
• Tangible and intangible assets of a firm
• Tangible buildings, equipment, money in the bank
• Intangible reputation, brand, patents,
  trademarks, skill of employees
• Capabilities
• A subset of resources that enable a firm to take
  full advantage of other resources
• Marketing skill, cooperative relationships,
  professional and social network of the employees
  of the firm

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Four Categories of Resources

• Financial
• Cash, retained earnings
• Physical
• Plant equipment, geographic location
• Human
• Skills abilities of individuals, working
  relationships
• Organizational
• Reporting structures, relationships

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Two Critical Assumptions of the Resource Based
View
Resource Heterogeneity
Resource Immobility
Different firms may have different resources
It may be costly for firms without certain
resources to acquire or develop them
Some resources may not spread from firm to firm
easily
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What These Assumptions Really Mean

• If one firm has resources that are valuable and
  other firms dont, and.
• If other firms cant imitate these resources
  without incurring high costs, then.
• The firm possessing the valuable resources will
  likely gain a sustained competitive advantage

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Resource Heterogeneity

• Heterogeneity of resources typically occurs as
  the result of bundling the resources and
  capabilities of a firm
• Managers of a firm could take resources that seem
  homogeneous and bundle them to create
  heterogeneous combination
• Competitive analysis typically stems from several
  resources and capabilities bundled together

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The Internal Analysis Tool

• The VRIO Framework
• Four questions you must ask about a resource or
  capability
• to determine its competitive potential
• Value
• Rarity
• Imitability
• Organization

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The VRIO Framework
If a firm has resources that are
valuable,
rare, and
costly to imitate, and
the firm is organized to exploit these
resources,
then the firm can expect to enjoy a
sustained competitive advantage.
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Video Case
Resources and Strategies
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Video Case
Determining whether resources measure up
3M
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The VRIO Framework

• Applying the Tool
• A resource or bundle of resources is subjected to
  each question to determine the competitive
  implication of the resource
• Each question is considered in a comparative
  sense (competitive environment)

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Applying the VRIO Framework(1 of 9)

• The Question of Value
• In theory Does the resource enable the firm to
  exploit an external opportunity or neutralize an
  external threat?
• The practical Does the resource result in an
  increase in revenues, a decrease in costs, or
  some combination of the two?
• Example Levis reputation allows it to charge a
  premium for its Dockers pants

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Applying the VRIO Framework(2 of 9)

• The Question of Rarity
• If a resource is not rare, then perfect
  competition dynamics are likely to be observed
• No competitive advantage, no above normal profits
• A resource must be rare enough that perfect
  competition has not set in (unfair advantage)
• Thus, there may be other firms that possess the
  resource, but still few enough that there is
  scarcity
• Example Several pharmaceutical companies sell
  cholesterol-lowering drugs, but the drugs are
  still scarcelook at the prices

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Applying the VRIO Framework(3 of 9)
Valuable and Rare
If a firms resources are
The firm can expect
Not Valuable
Competitive Disadvantage
Valuable, but not rare
Competitive parity
Valuable and rare
Competitive advantage (at least temporarily)
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Applying the VRIO Framework(4 of 9)

• The Question of Imitability
• The temporary competitive advantage of valuable
  and rare resources can be sustained only if
  competitors face a cost disadvantage in imitating
  the resource
• Intangible resources are usually more costly to
  imitate than tangible resources
• Example Harley-Davidsons styles may be easily
  imitated, but its reputation and brand image
  cannot

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Applying the VRIO Framework(5 of 9)

• The Question of Imitability (continued)
• If there are high costs of imitation, then the
  firm may enjoy a period of sustained competitive
  advantage
• A sustained competitive advantage will last only
  until a duplicate or substitute emerges
• If a firm has a competitive advantage, others
  will attempt to imitate it
• Example Razor scooters were a big hit and others
  quickly imitated them

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Applying the VRIO Framework(6 of 9)
The Question of Imitability Costs of Imitation
Unique Historical Conditions (Caterpillar)
Causal Ambiguity (Southwest Airlines)
First mover advantages Path dependence
Causal links between resources and competitive
advantage may not be understood Bundles of
resources fog these causal links
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Applying the VRIO Framework(7 of 9)
The Question of Imitability Costs of Imitation
Social Complexity (Word Perfect)
Patents
Patents may be a two-edged sword Offer a period
of protection if the firm is able to defend its
patent rights Required disclosures may actually
decrease the cost of imitation, and the timing
The social relationships entailed in resources
may be so complex that managers cannot really
manage them or replicate them
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Applying the VRIO Framework(8 of 9)
Valuable, Rare Imitability
If a firms resources are
The firm can expect
Valuable, rare, but not costly to imitate
Temporary competitive advantage
Valuable, rare, and costly to imitate
Sustained competitive advantage (if organized
appropriately)
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Applying the VRIO Framework(9 of 9)

• The Question of Organization
• A firms structure and control mechanisms must be
  aligned so as to give people ability and
  incentive to exploit the firms resources
• Example Formal and informal reporting
  structures, management controls, compensation
  policies, relationships, etc.
• These structures and control mechanisms
  complement other firm resourcestaken together,
  they can help a firm achieve a sustained
  competitive advantage
• Example 3M

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The VRIO Framework(1 of 2)
Costly to Imitate?
Exploited by Organization?
Competitive Implications
Valuable?
Rare?
No
No
Disadvantage
Parity
Yes
No
Temporary Advantage
Yes
Yes
No
Sustained Advantage
Yes
Yes
Yes
Yes
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The VRIO Framework(2 of 2)
Costly to Imitate?
Exploited by Organization?
Competitive Implications
Economic Implications
Valuable?
Rare?
Below Normal
No
No
Disadvantage
Parity
Normal
Yes
No
Temporary Advantage
Above Normal
Yes
Yes
No
Above Normal
Sustained Advantage
Yes
Yes
Yes
Yes
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Entrepreneurial and International Applications of
the VRIO Framework(1 of 4)

• The Logic Remains the Same
• Small firms and start-ups can apply the VRIO
  framework to their resources and capabilities
• Competitive advantage vis-à-vis larger firms can
  often be identified
• Recognizing if and why larger firms face high
  costs of imitation can be critical to small firm
  success

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Entrepreneurial and International Applications of
the VRIO Framework(2 of 4)

• The International Context
• Two reasons for international expansion
• To exploit current resource and capability
  advantages in a new market
• To develop new resources and capabilities in a
  foreign market

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Entrepreneurial and International Applications of
the VRIO Framework(3 of 4)

• The International Context
• Critical Caveat
• Resources and capabilities that generate an
  advantage in one market may or may not generate
  an advantage in a new market
• Firms should re-apply the VRIO framework when
  entering new markets!

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Entrepreneurial and International Applications of
the VRIO Framework(4 of 4)

• The International Context
• As a firm enters a new market a disciplined
  learning mentality is imperative for success
• What resources and capabilities meet the VRIO
  criteria in the new market
• What can the firm learn from partners in the new
  market?
• Example GM learned from Toyota in the NUMMI
  alliance

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Internal Analysis

• Assumes
• Determinates of economic performance are
  firm-level characteristics (resource and
  capabilities)
• Firms may be different (heterogeneity)
• Differences may be enduring (immobility)
• Competitive advantage stems from resources and
  capabilities that meet the VRIO criteria

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The Resource-Based View
Valuable
CA will be sustained if
Rare
other firms costs of imitation are
greater than benefit of imitation
Costly to Imitate
Organized to Exploit
the firm is organized to exploit advantages
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Internal Analysis

• Tells us
• What the firm should do, given the relative
  strengths and weaknesses of resources and
  capabilities
• Managers Job
• Bundle resources and capabilities to achieve
  competitive advantage
• Summary
• VIRO Framework helps managers recognize sources
  of competitive advantage