1. Business Environments: External and Internal
Welcome to Class 5
Part Two
Business Environments: External and Internal
Chapter 2

2. The Competitive Environment
(Cont from Class 4)
External
Environment
General Environment
Competitive Environment

3. Rivalry among Competing Firms Threats of Substitutes
We ended our last class by discussing Porter’s Five Forces
Rivalry among Competing Firms
Bargaining power of
Buyers
Suppliers
Threats of Substitutes
Threat of
New Entrants
Porter's
Five Forces

4. Competitive Environment
Michael Porter's Five Forces offer an informative portrait of the competitive environment.
The “Forces” become even more acute within …
Strategic Groups
and
These can play a major role in a firm’s degree of
success or failure

5. Competitive Environment & Strategic Groups

6. Competition within strategic groups is generally
Strategic Groups are clusters of firms that share similar:
Customers
Distribution systems
Vertical integration
Breadth and depth of product/service lines
Pricing for these products/services,
Quality of products/services
Geographic territories
Strategies for competing
Competition within strategic groups is generally
more intense than between strategic groups because of the similarities
Price wars and other forms of extremely
hostile competitive behavior frequently occur.

7. Strategic Groups (Cont)
Companies within strategic groups will change over time thus sustained vigilance is essential.
When competitors within strategic groups change the rules of engagement change.
Companies can enter a particular strategic group, leave, and reenter.
The reentry players can be particularly dangerous:
They understand the group
May have new or reinforced distinctive competencies
May have new competitive strategies.

8. Strategic Groups and Points of Similarity
Customers
Distribution
Systems
Vertical
Integration
Breadth &
Depth of
Products
Pricing
Quality
Geographic
Strategies

9. Competitive Environment & Strategic Alliances

10. Strategic Alliances Three most common Strategic Alliances are:
 Are formal relationships between two or more corporations with a mutual set of goals.  They offer Competing companies unique opportunities to prosper through collaborative efforts rather than competing activities.
Three most common Strategic Alliances are:
(1) Licensing arrangements
(2) Joint ventures
(3) Cross-holding arrangements (CHAs)
[with CHAs, each company takes equity stakes]

11. (1) Licensing agreements
Licensing agreements = greatest individuality or distance between the strategic alliance firms
Parties do not combine their management team, value chains, primary technologies, or other unique skills sets.
They often involve cross-marketing agreements, sharing outsourcing activities, and some form of mutual customer supply agreements.

12. (2) Joint ventures
Require more confidence and trust than licensing agreements.
Generally involve sharing technologies, processes, various value-adding assets, and products that more closely align the two firms.
Usually designate the financial and technical commitment of each party.
Other cooperative agreements include co-production agreements, research and development or technology development arrangements. The are not joint ventures but are similar.

13. (3) Cross-holding arrangements
Cross-holding arrangements are near-merger like.
They are the most complex of the strategic alliances and require the most care.
Partners take a significant equity-stake in each other

14. Competitive Environment & Globalization

15. Globalization
Globalization means nations are becoming more interdependent.
The global economy is:
Characterized by the quick and easy movement of people, knowledge, and ideas from country to country.
The world-wide economic activity between various countries that are considered intertwined
Capable of having both negative and positive effects on various countries.

16. Globalization (Cont)
Market opportunities not even imaginable a decade ago are now realities.
The global economy is also able to deliver new and more complex commercial threats to every business competing in this domain.
Companies cannot compete in the 21st Century with 20th Century ideas or technology.
Methods of communicating, managing, and competing are changing rapidly.

17. Globalization (Cont)
Disruptive technologies = “cutting edge to obsolete”
These can emerge with little or no warning and push an industry from "cutting edge" to one that is "irrelevant and obsolete."
e.g. 8-track tapes to cassettes to CDs to MP3 and beyond
Alertness is an essential skill for competent TMTs

18. The Internal Environment
Business
Environments
External Environment
Internal Environment

19. The Internal Environment
The internal environment is comprised of an organization's:
(a) value-producing resources and
(b) leadership capabilities
These combine to determine the competitive strength of Strategic Competencies.
Strategic competencies have three levels:
(1) Basic Competencies (what a firm can do),
(2) Core Competencies (what a firm can do really well), and
(3) Distinctive competencies (what a firm can do really well AND distinguishes it from competitors)

20. Value-Producing Resources

21. Value-Producing Resources – (What a firm has)
Resources are both tangible and intangible.
Tangible resources:
Land
Facilities
Equipment
Financial capital
Inventories, etc.
Intangible resources:
Knowledge capital
Creative and innovative workers
Social relationships
Organizational culture
Beneficial locations
Patents, copyrights, Trademarks
Reputation.

22. Value-Producing Resources
Tangible
Resources
Intangible
Value-Producing

23. Leadership

24. Leadership Quality Leadership –
1. The ability to craft dynamic strategic plans
2. The skill to implement, direct & control those plans.
A firm with strong resources and dynamic leadership will nurture its basic and core competencies into distinctive competencies.

25. Leadership Capabilities
Leadership is art of motivating a group of people to act as a team striving to achieve a common goal.
Leaders should be
1. Knowledgeable,
2. Ethical,
3. Talented,
4. Courageous,
5. Tenacious,
6. Inspiring
The quality of leadership is measured by BOTH their achievements and their methods.
Excellence in leadership = achieving performance objectives in a legal, fair, ethical, and moral manner.

26. Capable Leaders are able to:
 Think critically
 Develop plausible scenario models
 Craft viable strategic plans
 Implement and manage strategic plans
 Maintain an open mindset
 Communicate thoroughly
 Motivate employees
 Make decisions harmonious with the firm's vision and mission
 Balance the interest of all stakeholders
 Promote ethical decisions and behaviors
 Demonstrate courage by always doing the right thing
 Accept responsibility for the consequence of all decisions and actions

27. Capable Leaders have knowledge of:
 Human resources
 Corporate cultures and National cultures
 Industry-specific customs, practices, and procedures
 Accounting and finance
 Techniques for the effective utilization of corporate resources
 Systems for monitoring and assessing progress
 Analysis methods
 Tactical and strategic planning process

28. Strategic Competencies

29. Strategic Competencies – (What a firm can do)
Strategic Competencies evolve from Value-Producing Resources that are united, leveraged, & applied
Many resources + POOR leadership =
weak competencies
Strong leadership + FEW value producing resources =
Capable leadership + MANY value-producing resources = strong competencies

30. Strategic Competencies
Value-Producing
Resources
Capable
Leadership
Strategic
Competencies

31. Levels of Strategic Competencies
Distinctive
Competencies
Core Competencies
Basic Competencies

32. Levels of Strategic Competencies
1. Basic competencies are what a firm has demonstrated that it "can do" profitably.
2. Core competencies are what a firm "can do extremely well" while enhancing its profitability.
3. Distinctive competencies represent not only what the company can do extremely well but also "what distinguishes the firm" from competitors.
Distinctive competencies enable a firm to move closer to a prime objective of achieving and sustaining
above average returns.

33. When products or services offered by a firm possess Distinctive Competencies – they exhibit the following qualities:
(1) Valuable (The products or services are profitable.)
(2) Rare (The products or service are extremely uncommon.)
(3) Difficult to Substitute (They cannot easily be produced, copied, or substituted by competitors.)
(4) Growth Potential (They are likely to be increasingly beneficial to the company in the future.)

34. Value-Producing Resources Capable Leadership Distinctive Competencies
(Good Governance)
Distinctive Competencies
Distinctive Competencies
Strategic Competitiveness
Above Average
Returns

35. Distinctive Competencies
Good
Governance
Value-Producing Resources
Distinctive Competencies
Strategic Competitiveness
&
Sustainable Competitive Advantage
Distinctive Competencies
Above Average Returns

36. Summary Environments External General Competitive Internal Resources
Leadership
Summary

37. End of Part Two: Business Environments
Read Chapter Three: Creating Value
Smile! 