Business Environments:

External and Internal

Welcome to Class 5Part Two

Chapter 2

ExternalEnvironment

General Environme

nt

Competitive

Environment

The Competitive Environment (Cont from Class 4)

Rivalry among

Competing Firms

Bargaining power ofBuyers

Bargaining power ofSuppliers

Threats of Substitutes

Threat ofNew

EntrantsPorter's

Five Forces

We ended our last class by discussing Porter’s Five Forces

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 ofsuccess or failure

Competitive Environment&

Strategic Groups

Strategic Groups are clusters of firms that share similar:

1. Customers2. Distribution systems3. Vertical integration4. Breadth and depth of product/service lines5. Pricing for these products/services, 6. Quality of products/services7. Geographic territories8. Strategies for competingCompetition within strategic groups is

generally more intense than between strategic

groups because of the similaritiesPrice wars and other forms of extremely

hostile competitive behavior frequently occur.

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:1. They understand the group2. May have new or reinforced distinctive

competencies

3. May have new competitive strategies.

Strategic Groups (Cont)

Strategic

GroupCustomers

Distribution

Systems

VerticalIntegratio

n

Breadth &Depth ofProducts

Pricing

Quality

Geographic

Strategies

Strategic Groups and Points of Similarity

Competitive Environment&

Strategic Alliances

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.

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 agreementsLicensing 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.

(2) Joint venturesRequire 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.

(3) Cross-holding arrangementsCross-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

Competitive Environment&

Globalization

Globalization means nations are becoming more interdependent.

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.

Companies cannot compete in the 21st Century with 20th Century ideas or technology.

Methods of communicating, managing, and competing are changing rapidly.

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

The Internal Environment

BusinessEnvironments

External Environme

nt

Internal Environment

The Internal EnvironmentThe 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)

Value-Producing Resources

Value-Producing Resources – (What a firm has)

Tangible resources: 1. Land2. Facilities3. Equipment4. Financial capital5. Inventories, etc.

Intangible resources: 1. Knowledge capital2. Creative and innovative

workers3. Social relationships4. Organizational culture5. Beneficial locations6. Patents, copyrights,

Trademarks7. Reputation.

Resources are both tangible and intangible.

Value-Producing Resources

TangibleResourc

es

Intangible

Resources

Value-Producin

gResourc

es

Leadership

LeadershipQuality 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.

Leadership CapabilitiesLeadership 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.

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

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 =

weak competencies

Capable leadership + MANY value-producing resources = strong competencies

Strategic Competencies

Value-ProducingResources

CapableLeadership

StrategicCompetenci

es

Levels of Strategic Competencies

DistinctiveCompetencies

Core Competencies

Basic Competencies

Levels of Strategic Competencies1. 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.

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 increasinglybeneficial to the company in the

future.)

Value-Producing Resources

Capable Leadership

(Good Governance)

Distinctive Competencies

Distinctive Competencies

Strategic Competitivene

ss

Above AverageReturns

GoodGovernan

ce

Value-Producing Resources

Distinctive Competencies

Strategic Competitivene

ss&

Sustainable Competitive Advantage

Above Averag

e Retur

ns

Distinctive Competencies

Environments

External

General Competitive

Internal

Resources Leadership

Summary

End of Part Two: Business Environments

Read Chapter Three: Creating Value

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