Welcome to Class 3 Chapter 2

Business Environments are divided into two ( 2 ) primary Categories External & Internal

Business Environments Environments External GeneralCompetitiveInternal Resources Leadership

The The external environment (general (general & competitive) 1. A ll issues, occurrences, trends, etc. that are outside the firm 2. Issues are beyond the direct direct control of the TMT. The The internal environment (resources (resources & leadership) 1. A ll issues, occurrences, trends, etc. that are within the firm 2. Issues are within the control of the TMT. Both environments influence strategic planning

Scenario Models Scenario Models: 1. Tools to aid the r rr rapid adaptation to environmental changes. 2. Help TMTs prepare for a wide range of possible future conditions from the h hh highly likely to p pp possible but not expected. 3. Are the first step in the preparation of c cc contingency strategies. 4. Are L LL LESS LIKELY to occur but " "" "could happen" scenarios that are refined into alternate models which form the basis for: Contingency Strategies. very likely to possible but unlikely Scenario Models are sets of potential environmental conditions that range from very likely to possible but unlikely. Contingency Strategies are alternative strategic plans to match the conditions highlighted in scenario models.

The General Environment External Environment General Environment Competitive Environment

The Five Factors of the General Environment (1) Sociocultural (2) Demographic (3) Economic (4) Technological (5) Political/Legal

SocioculturalDemographicEconomicTechnologicalPolitical/Legal General Environment General environmental factors are vigorously interactive, interrelated, and interdependent. One factor can influence change in another. For example a weak economy can influence Political/Legal positions.

Sociocultural Factors Sociocultural factors Sociocultural factors relate to a country's: 1. Dominant religions 2. The population's general desire for leisure-time 3. Attitudes toward consumerism 4. Environmentalism 5. Gender roles in society and business. In general, sociocultural factors are characterized by In general, sociocultural factors are characterized by The lifestyles The lifestyles Values Values Belief systems of populations Belief systems of populations

Demographic Factors Demographic factors Demographic factors pertain to changes in the: 1. Population size of a country 2. Geographic distribution of people 3. Ethnic mix 4. Income distribution 5. Average age 6. Number of people in the family, etc. For example, American families are getting smaller, the population is getting older, individuals are getting heavier, and the Hispanic population is the fastest growing part of the population. For example, American families are getting smaller, the population is getting older, individuals are getting heavier, and the Hispanic population is the fastest growing part of the population.

Economic Factors Economic factors Economic factors relate to a country's: 1. Inflation or deflation rates 2. Interest rates 3. Tariffs 4. Balance of trade issues 5. Growth of national economies 6. Exchange rates 7. Unemployment rates 8. Labor availability 9. Gross domestic products 10. Savings rates, etc.

Technological Factors Technological factors Technological factors pertain to a country’s: 1. Reception to innovation 2. Strength of cultural discouragement for “new” things. 3. Rate of innovation, inventions, patents Some cultures reject technological advances while others enthusiastically embrace new technology.

Political/Legal Factors Political/Legal Factors Political/Legal Factors center on: 1. The political stability of a country 2. Its legal system 3. Number of Antitrust laws 4. Success of enforcement 5. Philosophies of regulations vs deregulation 6. Its general attitude toward business.

External Environment General Environment Competitive Environment The Competitive Environment

Competitive Environment: Nine Factors (1) Customers (2) Suppliers (3) Unions (4) Associations (5) New Entrants (6) Interest Groups (7) Substitutes (8) Competitors (9) Creditors

CustomersSuppliersUnionsAssociations New Entrants Interest Groups SubstitutesCompetitorsCreditors CompetitiveEnvironment

Factors that AMPLIFY COMPETITIVE INTENSITY 1. High fixed costs (costs that cannot be eliminated easily as volume decreases) 2. High storage costs 3. Lack of differentiation between products or services 4. Low customer switching costs (customer can switch suppliers without significant cost or inconvenience) 5. High exit barriers for competitors (difficult for a firm to leave a particular industry)

Competitive Environment & Porter's Five Forces (1) Rivalry among Competing Firms (2) Bargaining Power of Buyers (3) Bargaining Power of Suppliers (4) Threat of Substitutes (5) Threat of New Entrants

Rivalry among Competing Firms Bargaining power of Buyers Bargaining power of Suppliers Threats of Substitutes Threat of New Entrants Porter's Five Forces

Rivalry of Competing Firms Rivalry of Competing Firms Intensity increases when: shrinks ceases to grow 1. The size of markets shrinks or ceases to grow. 2. When there are numerous competitors seeking the same customers Consequence of Intensity: 1. Prices may fall lowering revenues 2. More favorable shipping terms offered to customers 3. Selling firms may offer more relaxed payment terms 4. Increased expenses as services to customers added

External Environment General Environment Competitive Environment The Competitive Environment

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

Competitive Environment & Strategic Groups

Strategic Groups are clusters of firms Strategic Groups are clusters of firms that share similar: 1.Customers 2.Distribution systems 3.Vertical integration 4.Breadth and depth of product/service lines 5.Pricing for these products/services, 6.Quality of products/services 7.Geographic territories 8.Strategies for competing Competition within strategic groups is generally more intense than b bb between strategic groups because of the similarities Price wars and other forms of extremely hostile competitive behavior frequently occur.

sustained vigilance essential Companies within strategic groups will change over time thus sustained vigilance is essential. competitors change rules change When competitors within strategic groups change the rules of engagement change. enterleave reenter Companies can enter a particular strategic group, leave, and reenter. The reentry players dangerous: The reentry players can be particularly dangerous: 1. They understand the group 2. May have new or reinforced distinctive competencies 3. May have new competitive strategies. Strategic Groups (Cont)

Strategic Group Customers Distribution Systems Vertical Integration Breadth & Depth of Products PricingQualityGeographicStrategies Strategic Groups and Points of Similarity

Competitive Environment & Strategic Alliances

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

(1) Licensing agreements greatest individuality between Licensing agreements = greatest individuality or distance between the strategic alliance firms do not combine 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.

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

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

Competitive Environment & Globalization

Globalization Globalization means nations are becoming more interdependent. global economy is: The global economy is: 1. Characterized by the quick and easy movement of people, knowledge, and ideas from country to country. 2. The world-wide economic activity between various countries that are considered intertwined 3. Capable of having both negative and positive effects on various countries. Globalization

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. 21 st Century Companies cannot compete in the 21 st Century with 20 th Century ideas or technology. changing rapidly Methods of communicating, managing, and competing are changing rapidly.

The Internal Environment Business Environments External Environment Internal Environment

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

Value-Producing Resources

Value-Producing Resources – (What a firm has) Value-Producing Resources – (What a firm has) Tangible resources: 1. Land 2. Facilities 3. Equipment 4. Financial capital 5. Inventories, etc. Intangible resources: 1.Knowledge capital 2.Creative and innovative workers 3.Social relationships 4.Organizational culture 5.Beneficial locations 6.Patents, copyrights, Trademarks 7.Reputation. tangible intangible Resources are both tangible and intangible.

Value-Producing Resources Tangible Resources Intangible Resources Value- Producing Resources

Leadership

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

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 l ll leadership is m mm measured by BOTH their achievements and their m mm methods. Excellence in leadership = achieving performance objectives in a legal, fair, ethical, and moral manner.

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

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

Strategic Competencies

What a firm can do Strategic Competencies – (What a firm can do) Tangible and intangible value-producing resources that are united, leveraged, and applied = a firm’s strategic competencies – What it can do. but Firms with many resources but poor leadership will have weak strategic competencies. but Firms with strong leadership but few value-producing resources will also have weak competencies. Only firms with strong, capable leadership and an adequate supply of value-producing resources have the potential of developing strategic competencies.

Strategic Competencies Value- Producing Resources Capable Leadership Strategic Competencies

Levels of Strategic Competencies DistinctiveCompetencies Core Competencies Basic Competencies

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

Distinctive Competencies 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.)

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

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

Environments External GeneralCompetitiveInternal Resources Leadership Summary

End Business Environments Read Chapter Three: Creating Value Relax!