CHAPTER 4

Environmental
Scanning and
Industry Analysis

Continuation of last session’s lecture

THOMAS L. WHEELEN J. DAVID HUNGER

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 Learning Objectives

Learning Objectives
After reading this chapter, you should be able to:
• Apply the resource view of the firm to determine core and
distinctive competencies.
• Use the VRIO framework and the value chain to assess an
organization’s competitive advantage and how it can be sustained.
• Understand a company’s business model and how it could be
imitated.
• Assess a company’s corporate culture and how it might affect a
proposed strategy.
• Scan functional resources to determine their fit with a firm’s
strategy.
• Construct an IFAS Table that summarizes internal factors.

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Strategic Management Basic Model
 Resource-Based Approach to Organizational Analysis

Internal strategic factors–

–Critical strengths and weaknesses that are likely to

determine if the firm will be able to take advantage of
opportunities while avoiding threats

• Resources
• Capabilities
• Competency
• Core competency
• Distinctive competency

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 Resource-Based Approach to Organizational Analysis

• Resources – are an organization’s assets and thus the basic

building blocks of organization (tangible assets, human assets &
intangible assets)
• Capabilities – refer to a corporation’s ability to exploit it
resources
• Competency – is a cross-functional integration and coordination
of capabilities
• Core competency – is a collection of competencies that crosses
divisional boundaries, is widespread within the corporation, and is
something that the corporation can do exceedingly well
• Distinctive competency – when core competencies are
superior to those of the competition

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 Core and Distinctive Competencies

VRIO Framework–

–Value : Does it provide customer value and competitive advantage ?

–Rareness : Do no other competitors possess it?

–Imitability : Is it costly for others to imitate?

–Organization : Is the firm organized to exploit the resource?

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 Resource-Based Approach to Organizational Analysis

5-Step Approach Strategy Analysis–

1. Identify and classify resources

2. Combine strengths into capabilities
3. Appraise profit potential of capabilities
4. Select strategy that best exploits
5. Identify resource gaps invest in weaknesses

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 Sustainability of Advantage

Imitability–

–Rate at which a firm’s underlying resources and

capabilities can be duplicated by others

Durability–

–Rate at which a firm’s underlying resources and

capabilities depreciate or become obsolete

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 Sustainability of Advantage

Core Competency can be imitated–

• Transparency is the speed with which other firms can understand the
relationship of resources and capabilities supporting a successful firm’s
strategy  Gillette has always supported its dominance in the marketing of
razors with excellent R&D. A competitor could never understand how the
Sensor or Mach 3 razor was produced simply by taking one apart. Gillette’s
razor design was very difficult to copy, partially because the manufacturing
equipment needed to produce it was so expensive and complicated.
• Transferability is the ability of competitors to gather the resources
and capabilities necessary to support a competitive challenge  it may
be very difficult for a wine maker to duplicate a French winery’s key resources
of land and climate, especially if the imitator is located in Iowa.
• Replicability is the ability of competitors to use duplicated resources
and capabilities to imitate the other firm’s success  even though many
companies have tried to imitate Procter & Gamble’s success with brand
management by hiring brand managers away from P&G, they have often failed
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to duplicate P&G’s success.
Continuum of Sustainability

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 Business Models

BUSINESS MODEL
Company’s method for making money in the
current business environment

A business model is usually composed of five elements:

• Who it serves
• What it provides
• How it makes money
• How it differentiates and sustains competitive advantage
• How it provides its product/service
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 Business Models

Types of Business Models–

• Customer Solutions Model: IBM uses this model to make money not by
selling IBM products, but by selling its expertise to improve its customers’
operations. This is a consulting model.
• Profit Pyramid Model : GM offers a full line of automobiles in order to
close out any niches where a competitor might find a position. The key is
to get customers to buy in at the low-priced, low-margin entry point
(Saturn’s basic sedans) and move them up to high-priced, high-margin
products (SUVs and pickup trucks) where the company makes its money.
• Multi-Component System/Installed Base Model l: Gillette invented this
classic model to sell razors at break-even pricing in order to make money
on higher-margin razor blades. HP does the same with printers and printer
cartridges. The product is thus a system, not just one product, with one
component providing most of the profits.
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 Business Models

Types of Business Models–

• Advertising Model : Similar to the multi-component system/installed base
model, this model offers its basic product free in order to make money on
advertising. Originating in the newspaper industry, this model is used
heavily in commercial radio and television. Internet-based firms, such as
Google, offer free services to users in order to expose them to the
advertising that pays the bills.
• Switchboard Model : In this model a firm acts as an intermediary to
connect multiple sellers to multiple buyers. Financial planners juggle a
wide range of products for sale to multiple customers with different needs.
This model has been successfully used by eBay and Amazon.com.
• Time Model: Product R&D and speed are the keys to success in the time
model. Being the first to market with a new innovation allows a pioneer like
Sony to earn high margins. Once others enter the market with process
R&D and lower margins, it’s time to move on.
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 Business Models

Types of Business Models–

• Efficiency Model: In this model a company waits until a product
becomes standardized and then enters the market with a low-priced, low-
margin product that appeals to the mass market. This model is used by
Wal-Mart, Dell, and Southwest Airlines.
• Blockbuster Model: In some industries, such as pharmaceuticals and
motion picture studios, profitability is driven by a few key products. The
focus is on high investment in a few products with high potential
payoffs—especially if they can be protected by patents.
• Profit Multiplier Model: The idea of this model is to develop a concept
that may or may not make money on its own but, through synergy, can
spin off many profitable products. Walt Disney invented this concept by
using cartoon characters to develop high-margin theme parks,
merchandise, and licensing opportunities.
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 Business Models

Types of Business Models–

• Entrepreneurial Model: In this model, a company offers specialized
products/services to market niches that are too small to be worthwhile to
large competitors but have the potential to grow quickly. Small, local brew
pubs have been very successful in a mature industry dominated by
Anheuser-Busch. This model has often been used by small high-tech
firms that develop innovative prototypes in order to sell off the companies
(without ever selling a product) to Microsoft or DuPont.
• De Facto Standard Model: In this model, a company offers products free
or at a very low price in order to saturate the market and become the
industry standard. Once users are locked in, the company offers higher-
margin products using this standard. For example, Microsoft packaged
Internet Explorer free with its Windows software in order to take market
share from Netscape’s Web browser.
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 Value-Chain Analysis

Linked set of value-creating activities beginning

with basic raw material and ending with
distributors getting final goods into hands of
customers

Typical Value Chain for a

Manufactured Product

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Corporation’s Value Chain

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 Scanning Functional Resources & Capabilities

Basic Organizational Structures–

• Simple structure
• Functional structure
• Divisional structure
• Strategic Business Units (SBU’s)
• Conglomerate structure

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Basic Organizational Structures

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 Corporate Culture

Collection of beliefs, expectations, and values

learned and shared by a corporation’s members and
transmitted from one generation of employees to
another

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 Strategic Marketing Issues

• Market Position & Segmentation

• Marketing Mix
• Product Life Cycle
• Brand & Corporate Reputation

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Marketing Mix Variables

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Product Life Cycle

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 Strategic Financial Issues

• Financial leverage

• Capital budgeting

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 Strategic Research & Development Issues

• R&D Intensity, Technological Competence

and Technology Transfer

• R&D Mix

• Impact of Technological Discontinuity on

Strategy

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Technological Discontinuity

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 Strategic Human Resource Management Issues

Human Resources Management

• Increasing Use of Teams

• Union Relations and Temporary/Part -Time Workers
• Quality of Work Life and Human diversity

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Internal Factor Analysis Summary Table

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1. What is the relevance of the resource-based view of the firm to
strategic management in a global environment?
2. How can value-chain analysis help identify a company’s
strengths and weaknesses?
3. In what ways can a corporation’s structure and culture be
internal strengths or weaknesses?
4. What are the pros and cons of management’s using the
experience curve to determine strategy?
5. How might a firm’s management decide whether it should
continue to invest in current known technology or in new, but
untested technology? What factors might encourage or
discourage such a shift?

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