Strategic MGMT Chapter 3 and Four

Chapter Three: Project Situation
Analysis
External Environment
Chapter Objectives
1. Describe how to conduct an external strategic-

management audit.
2. Discuss major external forces that affect organizations:
economic, social, cultural, demographic, environmental,
political, governmental, legal, technological, and
competitive.
3. Describe key sources of external information, including
the Internet.
4. Discuss important forecasting tools used in strategic
management.
5. Discuss the importance of monitoring external trends
and events.
3-2
External Audit
❖ External audit
❑ It focuses on identifying and evaluating trends
and events beyond the control of a single firm
❑ It reveals key opportunities and threats

confronting an organization
❑ So that managers can formulate strategies to
take advantage of the opportunities and
avoid or reduce the impact of threats.
3-3
The Nature of an External Audit
❖ The external audit is aimed at identifying

key variables that offer actionable
responses
❖ Firms should be able to respond either

offensively or defensively to the factors by
formulating strategies that take advantage of
external opportunities or that minimize the
impact of potential threats.
3-4
Key External Forces
External forces can be divided into five

broad categories:
1. economic forces
2. social, cultural, demographic, and natural
environment forces
3. political, governmental, and legal forces
4. technological forces
5. competitive forces
3-5
Relationships Between Key External
Forces and an Organization
3-6
The Process of Performing an External
Audit
❖ First, gather competitive intelligence and information about

economic, social, cultural, demographic, environmental,
political, governmental, legal, and technological trends.
❖ Secondly, Information should be assimilated and evaluated
❖ Thridly, A final list of the most important key external

factors should be communicated
3-7
The Process of Performing an External Audit
Key external factors should be:

1. important to achieving long-term and annual
objectives
2. measurable
3. applicable to all competing firms, and
4. hierarchical in the sense that some will pertain
to the overall company and others will be more
narrowly focused on functional or divisional
areas
3-8
1. Economic Forces
3-9
2. Key Social, Cultural, Demographic, and Natural
Environment Variables
3-10
3. Political, Governmental, and Legal Forces
❖ The increasing global interdependence among

economies, markets, governments, and
organizations makes it imperative that firms
consider the possible impact of political variables
on the formulation and implementation of
competitive strategies.
3-11
Political, Government, and
Legal Variables
3-12
4. Technological Forces
➢ The Internet has changed the very nature

of opportunities and threats by:
❖altering the life cycles of products,
❖increasing the speed of distribution,
❖creating new products and services,
❖erasing limitations of traditional geographic
markets,
❖changing the historical trade-off between
production standardization and flexibility.
3-13
Technological Forces.............
❖ The Internet is altering;

✓ Economies of scale,
✓ Changing entry barriers, and
✓ Redefining the relationship between
industries and various suppliers,
creditors, customers, and competitors
3-14
Technological Forces..........
Technological advancements can:

❖Create new markets,
❖Result in a proliferation of new and improved
products,
❖Change the relative competitive cost positions in
an industry,
❖Render existing products and services obsolete.
3-15
Internal Environment:
By studying the internal
environment, firms identify
what they can do
Unique resources,
capabilities, and core
competencies
(sustainable competitive
advantage)
16
Components of Value Creation
Internal Analysis
Competitive
Core Discovering Core Advantage
Competencies Competencies
Capabilities
Four Criteria Value

Resources of Sustainable Chain
• Tangible
• Intangible Advantages Analysis
• Valuable • Outsource
• Rare
• Costly to Imitate
• Nonsubstitutable
17
Resources What a firm Has...
Resources
Resources represent inputs into a

firm’s production process...
such as capital equipment, skills of
employees, brand names, finances
and talented managers
Discovering Core
Competencies
Resources
• Tangible
• Intangible
Resources are what an Resources represent inputs into an

organization has to work organization’s production
with--its assets--including process... such as capital
its people and the value of equipment, skills of employees,
its brand name brand names, finances and
talented managers
19
Discovering Core
Competencies
Resources
• Tangible
• Intangible
Tangible Resources Intangible Resources

• Financial • Human
• Organizational • Innovation
• Physical • Reputation
• Technological
20
Capabilities What a firm Does...
Capabilities represent...
the firm’s capacity or ability to integrate
individual firm resources to achieve a
desired objective.
Discovering Core
Competencies
Capabilities
Capabilities become important when they are

combined in unique combinations which create core
competencies which have strategic value and can
lead to competitive advantage
22
Discovering Core
Competencies
Capabilities
Capabilities are what an organization does, and

represent the organization’s capacity to deploy
resources that have been purposely integrated to
achieve a desired end state
23
Discovering Core
Competencies
Core
Competencies
Core competencies are resources and capabilities that serve as

a source of competitive advantage over rivals
Core competencies distinguish a company competitively and
make it distinctive
24
Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages
• Valuable
• Rare
Valuable: Capabilities that help an organization

neutralize threats or exploit opportunities
➢ Capabilities that either help a firm to exploit

opportunities to create value for customers or to
neutralize threats in the environment 25
Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages
• Valuable
• Rare
Rare: Capabilities that are not possessed by many

others
❖ Capabilities that are possessed by few, if any, current or
potential competitors
26
Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages
• Valuable
• Rare
Costly to imitate: capabilities that other organizations cannot
develop easily, usually due to
• Unique historical conditions
• Causal ambiguity
• Social complexity
❖ Capabilities that other firms cannot develop easily, usually due to unique
27
historical conditions, causal ambiguity or social complexity
Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages
• Valuable
• Rare
Nonsubstitutable: Capabilities that do not have strategic

equivalents, such as firm-specific knowledge or trust-based
relationships
• Invisible to competitors
• Firm specific knowledge
• Trust-based working relationships between 28
managers and nonmanagerial personnel

VALUE CHAIN ANALYSIS
• Allows the firm to understand the parts
of its operations that create value and •
those that do not

• A template that firms use to:
• Understand their cost position
• Facilitate the implementation of a
chosen business-level strategy
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
– Both value chain (primary) and
support activities should be analyzed
– Competitive landscape demands that
•
value chains and supply chains be

examined in a global context
– Each activity should be examined
relative to competitor’s abilities and
rated as superior, equivalent, or
inferior
To become a core competence and a
source of competitive advantage, a
capability must allow the firm:
•
1. to perform an activity in a manner that

provides superior value relative to
competitors, or
2. to perform a value-creating activity that
competitors cannot perform
VALUE CHAIN ACTIVITIES: activities the
firm completes in order to produce
•
products and then sell, distribute, and

service those products in ways that create
value for customers
SUPPORT FUNCTIONS: activities the firm
completes in order to support the work
being done to produce, sell, distribute, and
service the products the firm is producing
Value Chain Analysis
To identify which resources and capabilities can add value
Support
Activities
Primary Activities
helps to identify which resources and capabilities can add value
Support
Activities
Logistics
Inbound
Primary Activities
Support
Activities
Operations
Logistics
Inbound
Primary Activities
Support
Activities
Operations
Outbound
Logistics
Logistics
Inbound
Primary Activities
Support
Activities
Operations
Outbound
Marketing
Logistics
& Sales
Logistics
Inbound
Primary Activities
Support
Activities
Service
Operations
Outbound
Marketing
Logistics
Inbound
Logistics
& Sales
Primary Activities
Support
Activities
Procurement
Service
Operations
Outbound
Marketing
Logistics
Inbound
Logistics
& Sales
Primary Activities
Support
Activities
Technological Development
Procurement
Service
Operations
Outbound
Marketing
Logistics
Inbound
Logistics
& Sales
Primary Activities
Support
Human Resource Management
Activities
Procurement
Service
Operations
Marketing
Outbound
Logistics
Inbound
& Sales
Logistics
Primary Activities
Firm Infrastructure
Support
Activities
Procurement
Service
Operations
Marketing
Outbound
Logistics
Inbound
& Sales
Logistics
Primary Activities
Firm Infrastructure
Support
Activities
Procurement
Service
Operations
Marketing
Outbound
Logistics
Inbound
& Sales
Logistics
Primary Activities
OUTSOURCING
• Definition: purchase of a value-
creating activity or support function
from an external supplier
• Effective execution includes an increase in •
flexibility and risk mitigation, and a

reduction in capital investment
• Firms must outsource activities where they
cannot create value or are at a substantial
disadvantage compared to competitors
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Outsourcing
- strategic choice to purchase some activities from outside suppliers
Firm Infrastructure
Support
Firms often purchase a portion
Activities of their value-creating activities
from specialty external suppliers
Procurement
who can perform these functions
Procurement more efficiently
Service
Operations
Outbound
Marketing
Service
Logistics
Inbound
& Sales
Logistics
Outbound
Inbound Operations Logistics Marketing
Logistics & Sales
Primary Activities
To capitalize on the usefulness of the
Value Chain concept...
it is important to recognize that...

Value Chains are part of a Total Value System
Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain
Firm Value Chain Channel Value Chain Buyer Value Chain
Supplier Value Chain
Upstream Value
Perform valuable activities
that complement/balance
the firm’s activities
Supplier Value Chain Firm Value Chain Buyer Value Chain
Channel Value Chain
Downstream Value
Each firm must finally find a
way to become a part of some
buyer’s value chain
Supplier Value Chain Firm Value Chain Channel Value Chain
Buyer Value Chain
Ultimate basis for differentiation is

the ability to play a role in a buyer’s
value chain
This creates VALUE!!
❖Chapter Four: Competitive and Industry
Analysis
Competitive Forces
Characteristics of the most competitive
companies:
1.Market share matters
2.Understand and remember precisely what business
you are in
3.Innovate or evaporate
4.Acquisition is essential to growth
5.People make a difference
6.There is no substitute for quality
3-52
Key Questions About Competitors
3-53
Competitive Intelligence Programs
❖ Competitive intelligence (CI)is

 a systematic and ethical process for
gathering and analyzing information about the
competition’s activities and general
business trends to further a business’s
own goals
3-54
Competitive Intelligence Programs
The three basic objectives of a CI program

are:
1. to provide a general understanding of an industry
and its competitors
2. to identify areas in which competitors are
vulnerable and to assess the impact strategic
actions would have on competitors
3. to identify potential moves that a competitor
might make that would endanger a firm’s position
in the market
3-55
Industry Environment
❖ A set of factors that directly influences a company and
its competitive actions and responses
❖ Interaction among these factors determine an industry’s

profit potential.
☺ Threat of new entrants
☺ Power of suppliers
☺ Power of buyers
☺ Product substitutes
☺ Intensity of rivalry
The Five-Forces Model of Competition
3-57
Five Forces Model of Competition
➢ Identify current and potential competitors

➢ and determine which firms serve them
➢ Conduct competitive analysis
➢ Recognize that suppliers and buyers can

become competitors
➢ Recognize that producers of potential

substitutes may become competitors
1. Rivalry among competing
firms
❖ Rivalry among competing firms
 Most powerful of the five forces
 Focus on competitive advantage of strategies
over other firms
3-59
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall
Rivalry among competing firms cont...
3-60
2. Threat of New Entrants
❖ Barriers to entry
➢ Need to gain economies of scale quickly

➢ Need to gain technology and specialized know-how
➢ Lack of experience
➢ Strong customer loyalty
➢ Strong brand preferences
➢ Large capital requirements
➢ Lack of adequate distribution channels
3-61
Barriers to Entry cont...
❖ Government regulatory policies

❖ Tariffs
❖ Lack of access to raw materials
❖ Possession of patents
❖ Undesirable locations
❖ Counterattack by entrenched firms
❖ Potential saturation of the market
3-62
3. Threat of Substitute Products
❖ Product substitutes are strong threat

when:
➢ customers face few switching costs
➢ substitute product’s price is lower
➢ substitute product’s quality and performance

capabilities are equal to or greater than those
of the competing product
4. Bargaining Power of Suppliers
❖ A supplier group is powerful when:

✓ it is dominated by a few large companies
✓ satisfactory substitute products are not available to industry
firms
✓ industry firms are not a significant customer for the supplier
group
✓ suppliers’ goods are critical to buyers’marketplace success
✓ effectiveness of suppliers’ products has created high
switching costs
✓ suppliers are a credible threat to integrate forward into the
buyers’ industry
3-64
Bargaining power of consumers
❖ Buyers (customers) are powerful when:

➢ they purchase a large portion of an industry’s total
output
➢ the sales of the product being purchased account for

a significant portion of the seller’s annual revenues
➢ they could easily switch to another product

➢ the industry’s products are undifferentiated or
standardized, and buyers pose a credible threat if they
were to integrate backward into the seller’s industry
3-65
Sources of External Information
❖ Unpublished sources include customer

surveys, market research, speeches at
professional and shareholders’ meetings,
television programs, interviews, and
conversations with stakeholders.
❖ Published sources of strategic information
include periodicals, journals, reports,
government documents, abstracts, books,
directories, newspapers, and manuals.
3-66
Sources of External Information
❖ marketwatch.multexinvestor.com
❖ moneycentral.msn.com
❖ finance.yahoo.com
❖ www.clearstation.com
❖ us.etrade.com/e/t/invest/markets
❖ www.hoovers.com
❖ globaledge.msu.edu/industries/
3-67
:
❖ What are the five generic competitive
strategies?
❖ 1) Low-cost provider: Striving to achieve
lower overall costs than rivals on products
that attract a broad spectrum of buyers
2) Broad differentiation: Differentiating the

firm's product offering from rivals with
attributes that appeal to a broad spectrum
of buyers
❖ 3) Focused low-cost:-
Concentrating on a narrow price-sensitive buyer segment
and and outcompeting rivals on costs, thus being in position
to win buyer favour by means of lower-priced product
offering
4) Focused differentiation
Concentrating on a narrow buyer segment and outcompeting
rivals with a product offering that meets the specific tastes
and requirements of niche members better than the product
offerings of rivals
5) Best-cost provider:
Combine a strategic emphasis on low-cost with a strategic
emphasis on differentiation Make an upscale product at a
lower cost Give customers more value for the money
❖ Defensive and offensive strategy

Strategic MGMT Chapter 3 and Four

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Strategic MGMT Chapter 3 and Four

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Chapter Three: Project Situation

1. Describe how to conduct an external strategic-

❑ It reveals key opportunities and threats

❖ The external audit is aimed at identifying

❖ Firms should be able to respond either

External forces can be divided into five

❖ First, gather competitive intelligence and information about

❖ Secondly, Information should be assimilated and evaluated

❖ Thridly, A final list of the most important key external

Key external factors should be:

❖ The increasing global interdependence among

➢ The Internet has changed the very nature

❖ The Internet is altering;

Technological advancements can:

Four Criteria Value

Resources represent inputs into a

Resources are what an Resources represent inputs into an

Tangible Resources Intangible Resources

Capabilities become important when they are

Capabilities are what an organization does, and

Core competencies are resources and capabilities that serve as

Valuable: Capabilities that help an organization

➢ Capabilities that either help a firm to exploit

Rare: Capabilities that are not possessed by many

Nonsubstitutable: Capabilities that do not have strategic

managers and nonmanagerial personnel

those that do not

value chains and supply chains be

1. to perform an activity in a manner that

products and then sell, distribute, and

flexibility and risk mitigation, and a

it is important to recognize that...

Supplier Value Chain

Channel Value Chain

Buyer Value Chain

Ultimate basis for differentiation is

❖ Competitive intelligence (CI)is

The three basic objectives of a CI program

❖ Interaction among these factors determine an industry’s

➢ Identify current and potential competitors

➢ Conduct competitive analysis

➢ Recognize that suppliers and buyers can

➢ Recognize that producers of potential

➢ Need to gain economies of scale quickly

❖ Government regulatory policies

❖ Product substitutes are strong threat

➢ substitute product’s price is lower

➢ substitute product’s quality and performance

❖ A supplier group is powerful when:

❖ Buyers (customers) are powerful when:

➢ the sales of the product being purchased account for

➢ they could easily switch to another product

❖ Unpublished sources include customer

2) Broad differentiation: Differentiating the

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