5What is business environment? Business environment consists of two parts. They are: External and InternalEnvironment is complex, dynamic, uncertain and turbulent. (Nuclear disaster in Japan, Turbulence in Middle East, Fall of the Euro, Debt in Europe, High inflation in India, Credit crunch, Downgrading of India…)Understanding your environment should be continuous, and holistic.Remember that while some may be of advantage to your firm (opportunities), some would trouble your firm…(threats)
6External environment It is divided into: Macro environment (PESTEL framework: Political, Economic, socio cultural, demographic, technological, ecological, legal) and of course global factors….Operating environment (Suppliers, Customers, competitors, creditors, labour market, distributors and retailers, regulations)Industry or micro environment
7ExerciseYou own a retail chain. What are the external factors you should be worried about??
8Measuring the external environment EFE matrixCPM matrix
9EFE MATRIX Steps in developing the EFE matrix: Identify a list of KEY external factors (critical success factors; identify Opportunities and Threats).Assign a weight to each factor, ranging from 0 (not important) to 1.0 (very important).Assign a 1-4 rating to each critical success factor to indicate how effectively the firm’s current strategies respond to the factor. (1 = response is poor, 4 = response is extremely good)Multiply each factor’s weight by its rating to determine a weighted score.Sum the weighted scores. Highest score can be 4 and the lowest 1. A score of 4 means the response of the company to opportunities and threats is ‘OUTSTANDING’, while 1 means ‘poor’.
10ExerciseSTEP 1: You own a retail chain. What are the external factors you should be worried about?? STEP 2: Do an EFE matrix evaluation…
11Competitive profile matrix (CPM) ‘The CPM identifies a firm’s major competitors and their particular strengths and weaknesses in relation to a sample firm’s strategic position’.David 2001, p. 115Key success factors (KSFs)Technology relatedDistribution relatedMarketing relatedSkills relatedOrganisational capabilityOther types of KSFs
13Internal environmentStrategy is matching ‘external environment’ to strengths.This is to find, where the strengths are, the weaknesses.These are internal.There are four criteria which is used for division into strengths or weakness. They are: historical, norm in the industry (capacity utilisation), competitive parity or CSF (advertising is critical for success).There are various models to understand whether the various factors are strengths or weaknesses, like VRIO, 7S etc…
15IFE MatrixRatings are thus company based, whereas the weights in Step 2 are industry based.
16Steps to develop IFE Matrix 1. List key internal factors as identified in the internal audit process. Use a total of from ten to twenty internal factors, including both strengths and weaknesses. List strengths first and then weaknesses. Be as specific as possible, using percentages, ratios, and comparative numbers.2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all important) to each factor. The weight assigned to a given factor indicates the relative importance of the factor to being successful in the firm’s industry. Regardless of whether a key factor is an internal strength or weakness, factors considered to have the greatest effect on organizational performance should be assigned the highest weights. The sum of all weights must equal 1.0.3. Assign a 1 to 4 rating to each factor to indicate whether that factor represents a major weakness (rating = 1), a minor weakness (rating = 2), a minor strength (rating = 3), or a major strength (rating = 4). Note that strengths must receive a 4 or 3 rating and weaknesses must receive a 1 or 2 rating. Ratings are thus company based, whereas the weights in Step 2 are industry based.4. Multiply each factor’s weight by its rating to determine a weighted score for each variable.5. Sum the weighted scores for each variable to determine the total weighted score for the organization.A score of 2.5 is weak and above it is strong….
18Industry Analysis Industry Analysis covers two important parts: Industry environmentCompetitive environment
19Industry AnalysisIndustry Features: Size, growth rate, geographical boundaries, size of competition, pace of technological change and product innovationIndustry Boundaries: Breadth of market, Product service quality, Geographical distribution, vertical integration, profit motivesIndustry environment: Fragmented and consolidated. Can also be classified into: Emerging, mature, declining and globalIndustry structure: Concentration(extent to which industry sales are dominated by only a few firms), Economies of scale, product differentiation and Barriers of entryIndustry attractiveness: Profit potential, growth prospects, competition and industry barriersIndustry performance: Production, sales, profitability and technological advancements.Industry practices: Various policies on product, price, promo, distribution, R&D and competitionIndustries future prospects…
21The purpose of Five-Forces Analysis The five forces are environmental forces that impact on a company’s ability to compete in a given market.The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.
22Porter’s Five Forces Model of Competition Threat of New Entrants11
23Threat of New Entrants Economies of Scale Product Differentiation Government PolicyEconomies of ScaleProduct DifferentiationCapital RequirementsSwitching CostsAccess to Distribution ChannelsCost Disadvantages Independent of ScaleBarriers to EntryExpected Retaliation12
24Bargaining Power of Suppliers Porter’s Five ForcesModel of CompetitionThreat of New EntrantsThreat of New EntrantsBargaining Power of Suppliers14
25Bargaining Power of Suppliers Suppliers are likely to be powerful if:Suppliers exert power in the industry by:* Threatening to raiseprices or to reduce qualityPowerful suppliers can squeeze industry profitability if firms are unable to recover cost increasesSupplier industry is dominated by a few firmsSuppliers’ products have few substitutesBuyer is not an important customer to supplierSuppliers’ product is an important input to buyers’ productSuppliers’ products are differentiatedSuppliers’ products have high switching costsSupplier poses credible threat of forward integration15
26Bargaining Power of Buyers Porter’s Five ForcesModel of CompetitionThreat of New EntrantsThreat of New EntrantsBargaining Power of BuyersBargaining Power of Suppliers17
27Bargaining Power of Buyers Buyer groups are likely to be powerful if:Buyers are concentrated or purchases are large relative to seller’s salesPurchase accounts for a significant fraction of supplier’s salesProducts are undifferentiatedBuyers face few switching costsBuyers’ industry earns low profitsBuyer presents a credible threat of backward integrationProduct unimportant to qualityBuyer has full informationBuyers compete with the supplying industry by:* Bargaining down prices* Forcing higher quality* Playing firms off ofeach other18
28Bargaining Power of Suppliers Bargaining Power of Buyers Porter’s Five ForcesModel of CompetitionThreat of New EntrantsThreat of New EntrantsBargaining Power of SuppliersBargaining Power of BuyersThreat of Substitute Products20
29Threat of Substitute Products Keys to evaluate substitute products:Products with similar function limit the prices firms can chargeProducts with improving price/performance tradeoffs relative to present industry productsExample:Electronic security systems in place of security guardsFax machines in place of overnight mail delivery21
30Bargaining Power of Suppliers Porter’s Five ForcesModel of CompetitionThreat of New EntrantsThreat of New EntrantsBargaining Power of SuppliersRivalry Among Competing Firms in IndustryBargaining Power of BuyersThreat of Substitute Products23
31Porter’s Five Force’s Model 1. Rivalry Among Existing CompetitorsInnovation; First to enter the market2. Substitute ProductsCompetitors with similar products3. Powerful SuppliersForward Integration4. Powerful BuyersBackward Integration5. Threat of EntryAdvanced KnowledgeCapital Requirement
32Porter Competitive Model Heavyweight Motorcycle Manufacturing Industry Parts ManufacturersElectronic ComponentsSpecialty Metal SuppliersMachine Tool VendorsLabor UnionsIT VendorsForeign ManufacturerEstablished CompanyEntering a New MarketSegmentNew StartupPotential New EntrantIntra-Industry RivalrySBU: Harley-DavidsonRivals: Honda, BMW, Suzuki, YamahaBargaining Power of SuppliersBargaining Power of BuyersRecreational CyclistYoung AdultsLaw EnforcementMilitary UseRacersAutomobilesPublic TransportationMopedsBicyclesSubstitute Product or Service
33Rivalry Among Existing Competitors Intense rivalry often plays out in the following ways:Jockeying for strategic positionUsing price competitionStaging advertising battlesMaking new product introductionsIncreasing consumer warranties or serviceOccurs when a firm is pressured or sees an opportunityPrice competition often leaves the entire industry worse offAdvertising battles may increase total industry demand, but may be costly to smaller competitors25
34Rivalry Among Existing Competitors Cutthroat competition is more likely to occur when:Numerous or equally balanced competitorsSlow growth industryHigh fixed costsLack of differentiation or switching costsHigh storage costsCapacity added in large incrementsHigh strategic stakesHigh exit barriersDiverse competitors26
35The overall attractiveness of the industry If all the five forces are strong, industry profitability would be expected to be low regardless of the products/services being produced. Conversely, weak forces permit higher prices and above-average industry profitability.Firms can influence the five forces through the strategies they pursue.Some innovations can lead to a short-term advantage. But if every player in the industry is forced to follow suit, it can result in the whole industry being worse off.For example, the first firm to advertise on television may gain an increase in market share. If everyone else imitates this strategy, it may result in a stalemate with the only winners being the advertising agencies and the television companies.
36The crucial question, in determining profitability is whether firms in the industry can capture and retain the value they create for buyers, or whether this value is lost to others in fending off competition. Industry structure determines who captures the value :New entrants can compete away value, passing it on to buyers through lower prices, or they dissipate the value created by raising the costs of competing.Buyers who are powerful can retain most of the value created for themselves.
37Substitutes place a ceiling on prices. Suppliers that are powerful can appropriate the value created for buyers.Rivalry, like entry, results either in value being passed on to buyers (in the form of lower prices) or it raises the costs of competing (e.g. greater investments in product development and marketing).
38The Five Forces are Unique to Your Industry Five-Forces Analysis is a framework for analyzing a particular industry.Yet, the five forces affect all the other businesses in that industry.
39EXERCISEPresentation on an industry of choice and how the five forces act on one another
41Indian Dairy Industry Strengths: Weaknesses: Opportunities: Threats: SWOTStrengths:Margins are goodFlexibility of product mix: Tremendous.Availability of raw material: Abundant.Technical manpower: Professionally-trained, technical human resource pool, built over last 30 years.Weaknesses:PerishabilityLack of control over yieldLogistics of procurementProblematic distributionCompetitionOpportunities:Value additionExport potentialThreats:Threat from the unorganized sectorIndian Dairy Industry
42The purpose of SWOT Analysis It is an easy-to-use tool for developing an overview of a company’s strategic situationIt forms a basis for matching your company’s strategy to its situation
43SWOT is the starting point It provides an overview of the strategic situation.It provides the “raw material” to do more extensive internal and external analysis.
44OpportunitiesAn OPPORTUNITY is a chance for firm growth or progress due to a favorable juncture of circumstances in the business environment.Possible Opportunities:Emerging customer needsQuality ImprovementsExpanding global marketsVertical Integration
45ThreatsA THREAT is a factor in your company’s external environment that poses a danger to its well-being.Possible Threats:New entry by competitorsChanging demographics/shifting demandEmergence of cheaper technologiesRegulatory requirements
46Do a SWOT analysis of a company of your choice. EXERCISEDo a SWOT analysis of a company of your choice.
47VRIO FRAMEWORKChecking your companies internal capabilities and resources
48Creating Strategic Fit to Leverage Internal Strengths INSTRUCTOR: An Interactive video activity is available online through McGraw-Hill Connect on this section of the text.
49What Does Internal Analysis Tell Us? Internal analysis provides a comparative look ata firm’s capabilities• what are the firm’s strengths?• what are the firm’s weaknesses?• how do these strengths & weaknesses compareto competitors?
50Why Does Internal Analysis Matter? Internal analysis helps a firm:• determine if its resources and capabilities arelikely sources of competitive advantage• establish strategies that will exploit any sourcesof competitive advantage
51The Resource-Based View Resources and CapabilitiesResources:• tangible and intangible assets of a firmtangible: factories, products intangible: reputation• used to conceive of and implement strategiesCapabilities:• a subset of resources that enable a firm totake full advantage of other resources» marketing skill, cooperative relationships
52The Resource-Based View Four Categories of Resources• Financial (cash, retained earnings)• Physical (plant & equipment, geographic location)• Human (skills & abilities of individuals)• Organizational (reporting structures, relationships)
53Tangible and Intangible Resources INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.
54Capabilities Organizational capabilities: Routines and standard operating proceduresOutstanding customer serviceExcellent product development capabilitiesInnovativeness or products and servicesAbility to hire, motivate, and retain human capital
55Resources and Capabilities Are these resourcesor capabilities?Firm Assets:Machinery?Collective Product Design Skill?Recruiting Skill?Engineering Skill of Individuals?Mineral Deposits?
56Linking Resources and Capabilities to Firm Performance INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.
57Company Examples of Core Competencies & Applications EXHIBIT 4.3Company Examples of Core Competencies & Applications
59The Internal Analysis Tool The VRIO FrameworkFour Important Questions:• Value• Rarity• Imitability• Organization
60The Question of Value: "Is the firm able to exploit an opportunity or neutralize an external threat with the resource/capability?"The Question of Rarity: "Is control of the resource/capability in the hands of a relative few?"The Question of Imitability: "Is it difficult to imitate, and will there be significant cost disadvantage to a firm trying to obtain, develop, or duplicate the resource/capability?"The Question of Organization: "Is the firm organized, ready, and able to exploit the resource/capability?"
61The 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 sustainedcompetitive advantage.
62The VRIO Framework Costly to Imitate? Exploited by Organization? CompetitiveImplicationsEconomicImplicationsValuable?Rare?BelowNormalNoNoDisadvantageYesNoParityNormalTemporaryAdvantageAboveNormalYesYesNoSustainedAdvantageAboveNormalYesYesYesYes
63Applying RBV: Decision Tree Competitive Implications EXHIBIT 4.5Applying RBV: Decision Tree Competitive Implications