Course Material: Strategic Management (BSBA4115 - MANG4401)

University of Technology and Applied Sciences ,
Department of Business Administration
Course Material
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Strategic Management
(BSBA4115_MANG4401)
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Chapter 1
Strategic Management and Strategic Competitiveness
LEARNING OBJECTIVES
1. Define strategic competitiveness, strategy, competitive advantage, above-average returns,

and the strategic management process.
2. Describe the competitive landscape and explain how globalization and technological changes
shape it.
3. Use the industrial organization (I/O) model to explain how firms can earn above-average
returns.
4. Use the resource-based model to explain how firms can earn above average-returns.
5. Describe vision and mission and discuss their value.
6. Define stakeholders and describe their ability to influence organizations.
7. Describe the work of strategic leaders.
Define strategic competitiveness, strategy, competitive advantage,

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above-average returns, and the strategic management process.
Strategic competitiveness is achieved when a firm successfully formulates and implements a

value-creating strategy. By implementing a value-creating strategy that current and potential
competitors are not simultaneously implementing and that competitors are unable to
duplicate, or find too costly to imitate, a firm achieves a competitive advantage.
Strategy can be defined as an integrated and coordinated set of commitments and actions
designed to exploit core competencies and gain a competitive advantage.
So long as a firm can sustain (or maintain) a competitive advantage, investors will earn
above-average returns. Above-average returns represent returns that exceed returns that
investors expect to earn from other investments with similar levels of risk (investor
uncertainty about the economic gains or losses that will result from a particular investment).
In other words, above average-returns exceed investors’ expected levels of return for given
risk levels.
The Strategic Management Process
• Analysis, in the form of information gained by scrutinizing the internal environment and
scanning the external environment, are used to develop the firm's vision and mission.
• Strategic actions are guided by the firm's vision and mission, and are represented by
strategies that are formulated or developed and subsequently implemented or put into
action.
• Desired performance—strategic competitiveness and above-average returns—result when

a firm is able to successfully formulate and implement value-creating strategies that others
are unable to duplicate.
Describe the competitive landscape and explain how
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globalization and technological changes shape it.
THE COMPETITIVE LANDSCAPE
The competitive landscape can be described as one in which the fundamental nature of
competition is changing in a number of the world’s industries. Further, the boundaries of
industries are becoming blurred and more difficult to define.
Consider recent changes that have taken place in the telecommunication and TV industries—
e.g., not only cable companies and satellite networks compete for entertainment revenue
from television, but telecommunication companies also are stepping into the entertainment
business through significant improvements in fiber-optic lines. Partnerships further blur
industry boundaries (e.g., MSNBC is co-owned by NBC, itself owned by General Electric
and Microsoft).
The contemporary competitive landscape thus implies that traditional sources of competitive
advantage—economies of scale and large advertising budgets—may not be as important in
the future as they were in the past. The rapid and unpredictable technological change that
characterizes this new competitive landscape implies that managers must adopt new ways of
thinking. The new competitive mind-set must value flexibility, speed, innovation, integration,
and the challenges that evolve from constantly changing conditions.
The Global Economy
A global economy is one in which goods, services, people, skills, and ideas move freely
across geographic borders. The emergence of this global economy results in a number of
challenges and opportunities. For instance, Europe is now the world’s largest single market
(despite the difficulties of adapting to multiple national cultures and the lack of a single
currency. The European Union has become one of the world’s largest markets, with 700
million potential customers.
Globalization is the increasing economic interdependence among countries as reflected in the

flow of goods and services, financial capital, and knowledge across country borders. This is
illustrated by the following:
• Financial capital might be obtained in one national market and used to buy raw materials
in another one.
• Manufacturing equipment bought from another market produces products sold in yet
another market.
• Globalization enhances the available range of opportunities for firms.
Use the industrial organization (I/O) model to explain how firms

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can earn above-average returns.
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publicly accessible website, in whole or in part.
THE I/O MODEL OF ABOVE AVERAGE RETURNS
The I/O or Industrial Organization model adopts an external perspective to explain that
forces outside of the organization represent the dominant influences on a firm's strategic
actions. In other words, this model presumes that the characteristics of and conditions present
in the external environment determine the appropriateness of strategies that are formulated
and implemented in order for a firm to earn above-average returns. In short, the I/O model
specifies that the choice of industries in which to compete has more influence on firm
performance than the decisions made by managers inside their firm.
The I/O model is based on the following four assumptions:

1. The external environment—the general, industry, and competitive environments impose
pressures and constraints on firms and determine strategies that will result in superior
returns. In other words, the external environment pressures the firm to adopt strategies to
meet that pressure while simultaneously constraining or limiting the scope of strategies
that might be appropriate and eventually successful.
2. Most firms competing in an industry or in an industry segment control similar sets of

strategically relevant resources and thus pursue similar strategies. This assumption
presumes that, given a similar availability of resources, most firms competing in a specific
industry (or industry segment) have similar capabilities and thus follow strategies that are
similar. In other words, there are few significant differences among firms in an industry.
3. Resources used to implement strategies are highly mobile across firms. Significant
differences in strategically relevant resources among firms in an industry tend to disappear
because of resource mobility. Thus, any resource differences soon disappear as they are
observed and acquired or learned by other firms in the industry.
4. Organizational decision-makers are assumed to be rational and committed to acting only

in the best interests of the firm. The implication of this assumption is that organizational
decision-makers will consistently exhibit profit-maximizing behaviors.
Based on its four underlying assumptions, the I/O model prescribes a five-step process for
firms to achieve above-average returns:
1. Study the external environment—general, industry, and competitive—to determine the

characteristics of the external environment that will both determine and constrain the
firm's strategic alternatives.
2. Locate an industry (or industries) with a high potential for returns based on the structural
characteristics of the industry. A model for assessing these characteristics, the Five Forces
Model of Competition, is discussed in Chapter 2.
3. Based on the characteristics of the industry in which the firm chooses to compete,
strategies that are linked with above-average returns should be selected.
5. Acquire or develop the critical resources—skills and assets—needed to successfully
implement the strategy that has been selected. A process for scrutinizing the internal
environment to identify the presence or absence of critical skills, including training
and development.
6. The I/O model indicates that above-average returns will accrue to firms that successfully
implement relevant strategic actions that enable the firm to leverage its strengths
(skills and resources) to meet the demands or pressures and constraints of the industry
in which it has elected to compete.
Use the resource-based model to explain how firms can earn

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above average-returns.
THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS
The resource-based model adopts an internal perspective to explain how a firm's unique
bundle or collection of internal resources and capabilities represent the foundation on which
value-creating strategies should be built.
Resources are inputs into a firm's production process, such as capital equipment, individual
employee's skills, patents, brand names, finance, and talented managers. These resources can
be tangible or intangible.
Capabilities are the capacity for a set of resources to perform—integratively or in

combination—a task or activity.
Core competencies are resources and capabilities that serve as a source of competitive
advantage for a firm. Often related to functional skills (e.g., marketing at Philip Morris), core
competencies—when developed, nurtured, and applied throughout a firm—may result in
strategic competitiveness.
The resource-based model of above-average returns is grounded in the uniqueness of a firm's

internal resources and capabilities. The five-step model describes the linkages between
resource identification and strategy selection that will lead to above-average returns.
1. Firms should identify their internal resources and assess their strengths and weaknesses.
The strengths and weaknesses of firm resources should be assessed relative to
competitors.
2. Firms should identify the set of resources that provide the firm with capabilities that are
unique to the firm, relative to its competitors. The firm should identify those capabilities
that enable the firm to perform a task or activity better than its competitors.
3. Firms should determine the potential for their unique sets of resources and capabilities to
outperform rivals in terms of returns. Determine how a firm’s resources and capabilities
can be used to gain competitive advantage.
4. Locate an attractive industry. Determine the industry that provides the best fit between
the characteristics of the industry and the firm’s resources and capabilities.
5. To attain a sustainable competitive advantage and earn above-average returns, firms

should formulate and implement strategies that enable them to exploit their resources and
capabilities to take advantage of opportunities in the external environment better than
their competitors.
5 Describe vision and mission and discuss their value.
VISION AND MISSION
Vision is a picture of what the firm wants to be, and in broad terms, what it wants to
ultimately achieve. Vision is “big picture” thinking with passion that helps people feel what
they are supposed to be doing.
Vision statements:
• Reflect a firm’s values and aspirations
• Are intended to capture the heart and mind of each employee (and hopefully, many of its
other stakeholders)
• Tend to be enduring, whereas its mission can change in light of changing environmental
conditions
• Tend to be relatively short and concise, easily remembered
• Rely on input from multiple key stakeholders
Mission
A firm's mission is an externally focused application of its vision that states the firm's unique
purpose and the scope of its operations in product and market terms.
As with the vision, the final responsibility for forming the firm’s mission rests with the CEO,
though the CEO and other top-level managers tend to involve a larger number of people in
forming the mission. This is because middle- and first-level managers and other employees
have more direct contact with customers and their markets.
6 Define stakeholders and describe their ability to influence organizations.
STAKEHOLDERS
Stakeholders are the individuals and groups who can affect and are affected by the strategic
outcomes achieved and who have enforceable claims on a firm's performance.
Classification of Stakeholders
The stakeholder concept reflects that individuals and groups have a "stake" in the strategic
outcomes of the firm because they can be either positively or negatively affected by those
outcomes and because achieving the strategic outcomes may be dependent on the support or
active participation of certain stakeholder groups.
8 Explain the strategic management process.
THE STRATEGIC MANAGEMENT PROCESS

The strategic management process is the full set of commitments, decisions, and actions
required for a firm to achieve strategic competitiveness and earn above-average returns.
The parts of the strategic management process are strategic inputs, strategic actions and
strategic outcomes. Strategic inputs are represented by the firm’s vision and mission that
result from the assessment of the firm’s resources, capabilities, and competencies and
conditions in the external environment. These strategic inputs—vision and mission—
drive the firm’s strategic actions or the formulation and implementation of strategy. The
strategic outcomes of successfully formulating and implementing value-creating
strategies are strategic competitiveness and above-average returns. A feedback loop links
strategic outcomes with strategic inputs.
Application Discussion Questions
1. Choose one firm in your local community with which you are familiar. Describe the its
competitive landscape and anticipate how the landscape will affect their operations
during the next five years.
2. Think of an industry in which you want to work. In your opinion, which of the three
primary stakeholder groups is the most powerful in that industry today? Why? Which do
you expect to be the most powerful group in five years? Why?
3. Do you agree or disagree with the following statement? “I think managers have little
responsibility for the failure of business firms.” Justify your view.
4. Do vision and mission have any meaning in your personal life? If so, describe it. Are
your current actions being guided by a vision and mission? If not, why not?
Ethics Questions
1. Can a firm achieve a competitive advantage and, thereby, strategic competitiveness
without acting ethically? Explain.
2. Can ethical issues be integrated into a firm’s vision and mission? Explain.
Internet Exercise
Internet-based services depend heavily on continuous change and rapid strategic decision making.
Companies such as Amazon.com that rely on Internet users for their customer base have demonstrated a
distinct competitive advantage in serving their customers well. Barnes & Noble
(http://www.barnesandnoble.com) is one of Amazon.com’s competitors in the on-line book and music
markets. How does this Web-based expansion affect the stakeholders of each? How does the entrance of
these profitable retailers into the online market affect Amazon.com’s competitive advantage?
*e-project: Using other Web resources, such as current business press and financial reports, discuss
Amazon.com’s continued growth and limited profits.
Chapter 2
The External Environment
LEARNING OBJECTIVES
1. Explain the importance of analyzing and understanding the firm’s external environment.
2. Define and describe the general environment and the industry environment.
3. Discuss the four parts of the external environmental analysis process.
4. Name and describe the general environment’s seven segments.
5. Identify the five competitive forces and explain how they determine an industry’s profit
potential.
6. Define strategic groups and describe their influence on firms.
7. Describe what firms need to know about their competitors and different methods
(including ethical standards) used to collect intelligence about them.
Explain the importance of analyzing and understanding the firm’s external

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environment.
External environmental factors—like war and political unrest, variations in the strength of
national economies, and new technologies—affect firm growth and profitability in the US and
beyond.
Environmental conditions in the current global economy differ from those previously
faced by firms:
• Technological advances require more timely and effective competitive actions and
responses.
• Rapid sociological changes abroad affect labor practices and product demand of diverse
consumers.
• Governmental policies and laws affect where and how firms may choose to compete.
• Changes to nations’ financial regulatory systems.
• Understanding the external environment helps build the firm’s base of knowledge and
information that can be used to: (1) help build new capabilities and core competencies, (2)
buffer the firm from negative environmental impacts, and (3) pursue opportunities to better
serve stakeholders’ needs.
Define and describe the general environment and the industry

2
environment.
THE GENERAL, INDUSTRY, AND COMPETITOR ENVIRONMENTS
1. The general environment
• Demographic • Political/Legal • Sociocultural

• Economic • Technological • Global
• Physical
2. The industry environment
• Threat of New Entrants • Power of Buyers • Power of Suppliers

• Intensity of Rivalry • Product Substitutes
3. The competitor environment
The general environment is composed of elements in the broader society that can
indirectly influence an industry and the firms within the industry. But firms cannot
directly control the general environment’s segments and elements.
The industry environment is the set of factors—threat of new entrants, suppliers, buyers,
product substitutes, and the intensity of rivalry among competitors—that directly influence
a firm and its competitive decisions and responses.
Competitor analysis represents the firm’s understanding of its current competitors. This
understanding will complement information and insights derived from investigating the
general and industry environments.
The following are important distinctions to make regarding different external analyses:
• Analysis of the general environment focuses on the future.
• Industry analysis focuses on factors and conditions influencing firm profitability within
its industry.
• Competitor analysis focuses on predicting the dynamics of rivals’ actions, responses,
and intentions.
Performance improves when the firm integrates the insights provided by analyses of the
general environment, the industry environment, and the competitor environment.
Discuss the four activities of the external environmental analysis

3
process.
EXTERNAL ENVIRONMENTAL ANALYSIS
• In addition to increasing a firm’s awareness and understanding of an increasingly turbulent,

complex, and global general environment, external environmental analysis also is necessary to
enable the firm’s managers to interpret information to identify opportunities and threats.
Opportunities represent conditions in the general environment that may help a company
achieve strategic competitiveness by presenting it with possibilities, whereas threats are
conditions that may hinder or constrain a company’s efforts to achieve strategic
competitiveness.
Scanning
Scanning entails the study of all segments in the general environment. Firms use the
scanning process to either detect early warning signals regarding potential changes or to
detect changes that are already underway. In most cases, information and data being
collected or observed are ambiguous, incomplete, and appear to be unconnected. Scanning
is most important in highly volatile environments, and the scanning system should fit the
organizational context (e.g., scanning systems designed for volatile environments are not
suitable for firms competing in a stable environment).
The Internet provides significant opportunities to obtain information. For example,

Amazon.com records significant information about individuals visiting its website,
particularly if a purchase is made.
Monitoring
Monitoring represents a process whereby analysts observe environmental changes over time
to see if, in fact, an important trend begins to emerge. The critical issue in monitoring is that
analysts be able to detect meaning from the data and information collected during the
scanning process. (Remind students that these data are generally ambiguous, incomplete, and
unconnected.)
Forecasting
The next step is for analysts to take the information and data gathered during the scanning
and monitoring phases and attempt to project forward. Forecasting represents the process
where analysts develop feasible projections of what might happen—and how quickly—as
a result of the changes and trends detected through scanning and monitoring. Because of
uncertainty, forecasting events and outcomes accurately is a challenging task.
Assessing
Assessing represents the step in the external analysis process where all of the other steps
come together. The objective of assessing is to determine the timing and significance of
the effects of changes and trends in the environment on the strategic management of a
firm. Getting the strategy right will depend on the accuracy of the assessment.
4 Name and describe the general environment’s seven segments.
SEGMENTS OF THE GENERAL ENVIRONMENT
The general environment consists of seven segments: demographic, economic,
political/legal, sociocultural, global, technological, and the physical environment. The
challenge is to scan, monitor, forecast, and assess all six segments of the general
environment, focusing the primary effort on those elements in each segment of the general
environment that have the greatest potential impact on the firm.
The Demographic Segment
• The demographic segment is concerned with a population’s size, age structure, geographic
distribution, ethnic mix, and distribution of income.
Geographic Distribution
• Population shifts—as have occurred in the US—from one region of a nation to another or
from metropolitan to non-metropolitan areas may have an impact on a firm’s strategic
competitiveness. Issues that should be considered include:
• The attractiveness of a firm’s location may be influenced by governmental support, and
a shrinking population may imply a shrinking tax base and a lesser availability of
official financial support.
• Firms may have to consider relocation if tax demands require it.
• Advances in communications technology will have a profound effect on geographic
distribution and the workforce.
The Economic Segment
The economic segment of the general environment refers to the nature and direction of the
economy in which a firm competes or may compete. Analysts must scan, monitor,
forecast, and assess a number of key economic indicators or elements, including levels and
trends of
• Inflation rates and interest rates
• Trade deficits and surpluses
• Budget deficits and surpluses
• Personal savings rates
• Business savings rates
• Gross domestic product
• Currency valuation
• Unemployment rates
• Energy and commodity prices
for both domestic and key international markets. In addition, the implications of changes
and trends in the economic segment may affect the political/legal segment both
domestically and in other global markets. This may be of critical importance as nations
eliminate or reduce trade barriers and integrate their economies.
The Political/Legal Segment
The political/legal segment is the arena in which organizations and interest groups
compete for attention, resources, and a voice in overseeing the body of laws and
regulations guiding the interactions among nations as well as between firms and various
local governmental agencies. In other words, this segment is concerned with how interest
groups and organizations attempt to influence representatives of governments (and
governmental agencies) and how they, in turn, are influenced by them. This segment is
also concerned with the outcomes of legal proceedings in which the courts interpret the
various laws and regulations.
The Sociocultural Segment
• The sociocultural segment is concerned with different societies’ social attitudes and cultural
values. This segment is important because the attitudes and values of society influence and
thus are reflected in changes in a society’s economic, demographic, political/legal, and
technological segments.
Analysts are especially cautioned to pay attention to sociocultural changes and effects that
they may have on:
• Workforce composition, and the implications for managing, resulting from an increase
in the number of women, and increased ethnic and cultural diversity
• Changes in attitudes about the growing number of contingency workers
• Shifts in population toward suburban life, and resulting transportation issues
• Shifts in work and career preferences, including a trend to work from home made
possible by technology advances
The Technological Segment
As noted in many of the other segments of the general environment, and as discussed in
Chapter 1 as a key driver of the new competitive landscape, technological changes can
have broad effects on society. The technological segment includes institutions and
activities involved with creating new knowledge and translating that knowledge into new
outputs, products, processes, and materials.
Firms should pay careful attention to the technological segment, since early adopters can
gain market share and above-average returns.
Important technology-related issues that might affect a broad variety of firms include:
• Increasing plant automation
• Internet technologies and their application to commerce and data gathering
• Uses of wireless technology
The Global Segment
Among the global factors that should be assessed are:
• The potential impact of significant international events such as peace in the Middle
East or the recent entry of China into the WTO
• The identification of both important emerging global markets and global markets that
are changing
• The trend toward increasing global outsourcing
• The differences between cultural and institutional attributes of individual global
markets (the focus in Korea on inhwa, or harmony, based on respect for hierarchical
relationships and obedience to authority; the focus in China on guanxi, or personal
relationships; the focus in Japan on wa, or group harmony/social cohesion)
• Global market expansion opportunities
• The opportunities to learn from doing business in other countries
• Expanding access to the resources firms need for success (e.g., capital)
The Physical Environment Segment
The physical environment segment refers to potential and actual changes in the physical
environment and business practices that are intended to positively respond to and deal
with those changes. Ecological, social, and economic systems interact to influence what
happens in this segment. Global warming, energy consumption, and sustainability are all
examples of issues related to the physical environment.
Identify the five competitive forces and explain how they determine an
5
industry’s profit potential.
INDUSTRY ENVIRONMENT ANALYSIS
An industry is a group of firms producing products that are close substitutes for each
other. As they compete for market share, the strategies implemented by these companies
influence each other and include a broad mix of competitive strategies as each company
pursues strategic competitiveness and above-average returns.
The Five Forces Model of Competition
The Five Forces Model of Competition indicates that these forces interact to determine the
intensity or strength of competition, which ultimately determines the profitability of the
industry.
• Threat of New Entrants

• Threat of Substitute Products
• Bargaining Power of Buyers (Customers)
• Bargaining Power of Suppliers
• Rivalry Among Competing Firms in an industry
Threat of New Entrants
New entrants to an industry are important because with new competitors, the intensity of
competitive rivalry in an industry generally increases. This is because new competitors
may bring substantial resources into the industry and may be interested in capturing a
significant market share. If a new competitor brings additional capacity to the industry
when product demand is not increasing, prices that can be charged to consumers generally
will fall. One result may be a decline in sales and lower returns for many firms in the
industry.
The seriousness or extent of the threat of new entrants is affected by two factors: barriers
to entry and expected reactions from—or the potential for retaliation by—incumbent firms
in the industry.
Barriers to Entry
• Barriers to entering an industry are present when entry is difficult or when it is too costly and
places potential entrants at a competitive disadvantage (relative to firms already competing in
the industry). Seven factors represent potentially significant entry barriers that can emerge as
an industry evolves or might be explicitly “erected” by current participants in the industry to
protect profitability by deterring new competitors from entry.
Bargaining Power of Suppliers
• The bargaining power of suppliers depends on suppliers’ economic bargaining power relative
to firms competing in the industry. Suppliers are powerful when firm profitability is reduced
by suppliers’ actions. Suppliers can exert their power by raising prices or by restricting the
quantity and/or quality of goods available for sale.
Suppliers are powerful relative to firms competing in the industry when:

• The supplier segment of the industry is dominated by a few large companies and is
more concentrated than the industry to which it sells
• Satisfactory substitute products are not available to industry firms
• Industry firms are not a significant customer group for the supplier group
• Suppliers’ goods are critical to buyers’ marketplace success
• Effectiveness of suppliers’ products has created high switching costs for buyers
• Suppliers represent a credible threat to integrate forward into the buyers’ industry,
especially when suppliers have substantial resources and provide highly differentiated
products
In the airline industry, suppliers’ bargaining power is changing. There are few suppliers, but
demand for the major aircraft is also low. Boeing and Airbus compete strongly for most orders
of major aircraft.
Bargaining Power of Buyers
While firms seek to maximize their return on invested capital, buyers are interested in
purchasing products at the lowest possible price (the price at which sellers will earn the
lowest acceptable return). To reduce cost or maximize value, customers bargain for higher
quality or greater levels of service at the lowest possible price by encouraging competition
among firms in the industry.
Buyer groups are powerful relative to firms competing in the industry when:
• Buyers are important to sellers because they purchase a large portion of the supply
industry’s total sales
• Products purchased from a supply industry represent a significant portion of the seller’s
annual revenues
• Buyers are able to switch to another supplier’s product at little, if any, cost
• Suppliers’ products are undifferentiated and standardized, and the buyers represent a
real threat to integrate backward into the suppliers’ industry using resources or
expertise
Threat of Substitute Products
All firms must recognize that they compete against firms producing substitute products,
those products that are capable of satisfying similar customer needs but come from outside
the industry and thus have different characteristics. In effect, prices charged for substitute
products represent the upper limit on the prices that suppliers can charge for their
products.
The threat of substitute products is greatest when:

• Buyers or customers face few, if any switching costs
• Prices of the substitute products are lower
• Quality and performance capabilities of substitutes are equal to/greater than those of the
industry’s products
Firms can offset the attractiveness of substitute products by differentiating their products
in ways that are perceived by customers as relevant. Viable strategies might include price,
product quality, product features, location, or service level.
Intensity of Rivalry Among Competitors
The intensity of rivalry in an industry depends on the extent to which firms in an industry
compete with one another to achieve strategic competitiveness and earn above-average
returns because success is measured relative to other firms in the industry. Competition
can be based on price, quality, or innovation.
• Because of the interrelated nature of firms’ actions, action taken by one firm generally will
result in retaliation by competitors (also known as competitive response). In addition to
actions and reactions that result as firms attempt to offset the other competitive forces in the
industry—threat of new entry, power of suppliers and buyers, and threat of substitute
products—the intensity of competitive rivalry is also a function of a number of other factors.
Describe what firms need to know about their competitors and different
7 methods (including ethical standards) used to collect intelligence about them.
COMPETITOR ANALYSIS
Competitor analysis represents a necessary adjunct to performing an industry analysis. An

industry analysis provides information regarding potential sources of competition
(including the possible strategic actions and reactions and effects on profitability for all
firms competing in an industry). However, a structured competitor analysis enables the
firm to focus its attention on those firms with which it will directly compete, and is
especially important when a firm faces a few powerful competitors.
Competitor analysis is interested ultimately in developing a profile on how competitors

might be expected to respond to a firm’s strategic moves. The process involves developing
answers to a series of questions about competitors such as:
• Competitors’ future objectives
• Competitors’ current strategy
• Competitors’ assumptions about the industry
• Capabilities, as shown by competitors’ strengths and weaknesses
• Competitor intelligence is critical to competitor analysis because it helps a firm understand
competitors’ intentions and the strategic implications resulting from them. Competitor
intelligence is performed both for domestic and international competitors.
ETHICAL CONSIDERATIONS
A major concern of many managers is the methods used to gather data on competitors, a
process generally referred to as competitor intelligence. The illustration of Microsoft’s
struggle to understand Google is especially helpful in explaining this concept. It is a great
managerial challenge to ensure that all data and information related to competitors are
gathered both legally and ethically. This is important because many employees may feel
pressure to rely on techniques that are questionable from an ethical perspective to gather
information that may be valuable to their firm, especially if they perceive value to their
own careers from successfully obtaining such information.
It seems obvious that information that (1) is either publicly available (annual reports,
regulatory filings, brochures, advertising and promotional materials) or (2) is obtained by
attending trade shows and conventions can be used without ethical or legal implications.
However, information obtained illegally cannot—or, at least, should not—be used since
its use is unethical as well as illegal.
ADDITIONAL QUESTIONS AND EXERCISES
The following questions and exercises can be presented for in-class discussion or assigned as
homework.
Application Discussion Questions
1. Given the importance of understanding the external environment, why do some firms fail to
do so? What were the implications of the firm’s failure to understand that environment?
2. Select a firm and describe its external environment. What actions do you believe the firm
should take, given its external environment, and why?
3. How is it possible that one firm could see a condition in the external environment as an
opportunity whereas a second firm sees it as a threat?
4. Select a firm in the local community. What materials would help one understand the firm’s
external environment? How could the Internet be used to complete this activity?
5. What conditions would cause a firm to retaliate aggressively against a new entrant to the
industry?
Ethics Questions
1. How can a firm use its “code of ethics” to analyze the external environment?
2. Determine whether an intelligence-gathering practice is or is not ethical?
Internet Exercise
Firms rely on gathering and analyzing the general, industry, and competitor environments to
assess their potential for global growth and profitability. Go to the website for the US retail
chain Walmart at http://www.wal-mart.com. Walmart’s global expansion plans are extensive.
List how each of the six segments of the general environment prompted Walmart to expand
into the markets that it has. Target is a major US competitor of Walmart. Check out the Target
website at http://www.target.com. What are the firm’s plans for global expansion? What types
of opportunities and threats would prohibit Target from taking Walmart’s route? Would the
students consider Target a future key global rival of Walmart?
Chapter 3
The Internal Organization:
Resources, Capabilities, Core Competencies, and Competitive
Advantages
LEARNING OBJECTIVES
1. Explain why firms need to study and understand their internal organization.
2. Define value and discuss its importance.
3. Describe the differences between tangible and intangible resources.
4. Define capabilities and discuss their development.
5. Describe four criteria used to determine whether resources and capabilities are core
competencies.
6. Explain how firms analyze their value chain for the purpose of determining where
they are able to create value when using their resources, capabilities, and core
competencies.
7. Define outsourcing and discuss reasons for its use.
8. Discuss the importance of identifying internal strengths and weaknesses.
OPENING CASE
Zara: The Capabilities behind the Spanish “Fast Fashion” Retail Giant
Zara has established itself as the world’s largest fashion retailer through the use of
branded products and company-owned stores. It opened its six thousandth store in
London in 2012. Zara uses its resources and capabilities as the foundation for its core
competencies. Two rules guide the company: Give customers what they want, and get it
to them faster than anyone else. To do this Zara has developed several capabilities
including the ability to design quickly, collect timely information on customer tastes and
habits, and manage its supply chain more efficiently than competitors. Customers
appreciate the rapid inventory turnover which encourages them to visit the stores
frequently. In addition, the rarity of individual pieces gives customers a sense of
individuality and has created a large online following. Zara owns most of its stores and
has developed long-term relationships with suppliers. Many of the garments it sells are
manufactured in its own factories which improves quality control.
ANALYZING THE INTERNAL ORGANIZATION
The Context of Internal Analysis
In the global economy, traditional factors such as labor costs, access to financial resources and
raw materials, and protected or regulated markets continue to be sources of competitive
advantage, but to a lesser degree (mostly because the advantages created by these more
traditional sources can be overcome by competitors through an international strategy and by
the flow of resources throughout the global economy).
Increasingly, those analyzing their firm’s internal environment should use a global mind-set
(i.e., the ability to study an internal environment in ways that are not dependent on the
assumptions of a single country, culture, or context).
Analysis of the firm’s internal environment requires that evaluators examine the firm’s
portfolio of resources and the bundles of heterogeneous resources and capabilities managers
have created. Understanding how to leverage the firm’s unique bundle of resources and
capabilities is a key outcome decision makers seek when analyzing the internal environment.
Creating Value
Some thoughts on “value”:

• Firms create value by exploiting core competencies and meeting the standards of global
competition.
• Value is measured by the product’s performance and by its attributes for which customers
are willing to pay.
• Firms must provide value to customers that is superior to the value provided by competitors
in order to create a competitive advantage.
• Customers perceive higher value in global rather than domestic-only brands.
• Firms create value by innovatively bundling and leveraging their resources and capabilities.
• Ultimately, value is the foundation for earning above-average profits.
• Core competencies, combined with product-market positions, are the most important
sources of advantage.
• The core competencies of a firm, in addition to analysis of its general, industry, and
competitor environments, should drive its selection of strategies.
The Challenge of Analyzing the Internal Organization
Correctly identifying, developing, deploying, and protecting firm resources, capabilities, and
core competencies requires managers to make difficult decisions. In part, these challenges are
a result of characteristics of both the internal and external environments of the firm. This
challenge is multiplied because of three conditions that characterize important strategic
decisions—uncertainty, complexity, and intraorganizational conflict.
Conditions Affecting Managerial Decisions about Resources, Capabilities, and Core

Competencies
Uncertainty is present because of the inherent difficulty in identifying, assessing, and

predicting changes and trends in characteristics of the external environment. Among these
characteristics are correctly predicting the extent, direction, and timing of changes in the
general environment, such as those resulting from societal values, political and economic
conditions, customer preferences, and emerging technologies from other industries (and how
they might ultimately affect the firm).
Complexity is increased because of the uncertain nature of interrelationships among the
characteristics of the external environment and the related challenge regarding how to assess
the effects of changes in one set of characteristics on other characteristics. The issue becomes
more complex when managers must relate the complex external environment to their
assessment of the firm's internal environment and thus affects decisions regarding the firm's
resources, capabilities, and core competencies, and their relationship to opportunities in the
external environment that can be exploited successfully to achieve a competitive advantage.
Intraorganizational conflicts often develop as a result of uncertainty and complexity. When

managers make decisions regarding the identification of the firm's capabilities and choose to
nurture them (with resources) to develop core competencies that can be exploited to achieve a
competitive advantage, they must make these important decisions without absolute certainty
that the decision is correct. And, such decisions may result in changes or shifts in power and
interrelationships among individuals and groups within the firm. When this occurs, there may
be conflict as those who are affected adversely—or perceive that they will be so affected—
may resist these changes. In some cases, managers faced with decisions that may have
unpleasant consequences or are uncomfortable often experience denial, an unconscious
coping mechanism used to block out and not initiate major changes that may have some pain
associated with them.
Thus, managers that must make decisions under conditions of uncertainty, complexity, and
intraorganizational conflict must exercise judgment, a capacity for making a successful
decision in a timely manner when no correct model is available or when relevant data are
unreliable or incomplete.
RESOURCES, CAPABILITIES, AND CORE COMPETENCIES
Resources represent inputs into a firm's production process, such as capital equipment, the
skills of individual employees, brand names, financial resources, and talented managers.
By themselves—or individually—resources generally will not enable a firm to achieve a

competitive advantage. They must be combined or integrated with other firm resources to
establish a capability. When these capabilities are identified and nurtured, they can result in
core competencies, which may lead to a competitive advantage. A firm's resources can be
classified either as tangible or intangible.
Tangible Resources
Tangible resources are assets that can be seen or quantified, such as a firm's physical assets
(e.g., its plant and equipment). Tangible resources are classified in one of four ways, as
A firm's tangible resources generally can be placed into one of four categories:
• Financial resources, such as borrowing capacity
• Organizational resources, such as its formal reporting structure and systems
• Physical resources, such as location
• Technological resources, such as patents and trademarks
Intangible Resources
A firm's intangible resources may be less visible, but they are no less important. In fact, they
may be more important as a source of core competencies. Intangible resources range from
innovation resources, such as knowledge, trust, and organizational routines, to the firm's
people-dependent or subjective resources of know-how, networks, organizational culture, to
the firm's reputation for its goods and services and the way it interacts with others (such as
employees, suppliers, or customers).
Intangible Resources
A firm's intangible resources can be classified as:

• Human resources, such as knowledge, trust, and managerial capabilities
• Innovation resources, such as scientific capabilities and capacity to innovate
• Reputational resources, such as the firm's reputation with customers or suppliers
Capabilities
As implied in the definition, a firm’s capabilities represent its capacity to integrate individual
firm resources to achieve a desired objective, though this ability does not emerge overnight.
Capabilities develop over time as a result of complex interactions that take advantage of the
interrelationships between a firm’s tangible and intangible resources that are based on the
development, transmission, and exchange or sharing of information and knowledge as carried
out by the firm’s employees (its human capital).
A firm’s ability to achieve a competitive advantage is thus reflected in its knowledge base and
the ability of its human capital to successfully exploit firm capabilities. Thus, human capital is
of significant value in the firm’s ability to develop capabilities and core competencies to
achieve strategic competitiveness.
Core Competencies
Once a firm has identified its resources and capabilities, it is ready to identify its core
competencies, the resources and capabilities that are a source of competitive advantage for the
firm over its competitors. Core competencies emerge over time through an organizational
process of accumulating and learning how to deploy different resources and capabilities. As
the capacity to take action, core competencies are the “crown jewels of a company,” the
activities the company performs especially well compared with competitors and through
which the firm adds unique value to its goods or services over a long period.
Not all of a firm’s resources and capabilities are strategic assets—that is, assets that have
competitive value and the potential to serve as a source of competitive advantage. Some
resources and capabilities may result in incompetence, because they represent competitive
areas in which the firm is weak compared to competitors. Thus, some resources or capabilities
may stifle or prevent the development of a core competence.
When the firm's resources and capabilities result in a core competence, the firm will be able to
produce goods or services with features and characteristics that are valued by customers. This
implies that firms can implement value-creating strategies only when its capabilities and
resources can be combined to form core competencies.
BUILDING CORE COMPETENCIES
This section discusses two conceptual tools/frameworks firms can use to identify competitive
advantages:
• Four criteria determine which of the firm’s resources and capabilities are core
competencies.
• Value chain analysis, a tool for determining which value-creating competencies should be
maintained, upgraded, and developed and which should be outsourced.
Four Criteria for Sustainable Competitive Advantage
The Four Criteria of Sustainable Strategic Capabilities
Before they can be sources of competitive advantage, capabilities must be:
• valuable • rare • costly-to-imitate • nonsubstitutable
It is important to understand that a firm’s capabilities must meet all four of the criteria noted
earlier before they can be core competencies and enable the firm to achieve a sustainable
competitive advantage. However, a short-term competitive advantage is available when firm
capabilities are valuable, rare, and non-substitutable.
Valuable
Capabilities that are valuable help a firm exploit opportunities and/or neutralize threats in the
external environment. Valuable capabilities allow a firm to develop and implement strategies
that create customer value.
Rare
Capabilities are rare when they are possessed by few, if any, current or potential competitors.
If many firms have the same capabilities, the same value-creating strategies will be selected.
As a result, none of the firms will be able to achieve a sustainable competitive advantage. A
competitive advantage will be achieved by firms that develop and exploit capabilities that are
different from those held by other firms.
Costly to Imitate
Capabilities are costly to imitate when other firms are unable to develop them except at a cost
disadvantage relative to firms that already have them. This usually is a result of one or a
combination of three conditions:
1. Unique historical conditions can make duplication of capabilities costly. For example,
establishing facilities in a key location that can preempt competition when no other locations
have similar value-related characteristics or developing a unique organizational culture in the
early stages of the organization's life may not be cheap to duplicate by firms that are
developing theirs at a different time.
2. Causal ambiguity also may prevent competitors from perfectly imitating a competency if
the link between a firm's capabilities and core competencies is not identified or understood.
Competitors may not be able to identify or determine how a firm uses its competencies to
achieve a sustainable competitive advantage.
3. Social complexity means that a firm's capabilities are the product of complex social
phenomena such as interpersonal relationships within the firm (e.g., how managers and
subordinates at Hewlett-Packard work with each other) or a firm’s reputation with its
customers and suppliers.
Nonsubstitutable
A firm's capabilities are nonsubstitutable when they do not have strategic equivalents. Firm
resources are strategically equivalent when each can be separately exploited to implement the
same strategies. If capabilities are invisible, it is even more difficult for competitors to
identify viable substitutes. Examples of capabilities that can be difficult to identify or to find
suitable substitutes include firm-specific knowledge and trust-based working relationships.
Value Chain Analysis
A framework that firms can use to identify and evaluate the ways in which their resources and
capabilities can add value is value chain analysis. This framework is useful because it enables
firms to understand which parts of their operations or activities create value by segmenting the
value chain into primary and secondary activities as illustrated in Figure 3.3.
A Model of the Value Chain
Value chain activities represent traditional line activities such as supply chain management,
operations, distribution, marketing, and follow-up service.
Support functions are represented by a firm's staff activities and include its financial
infrastructure, human resource management practices, and management information systems
activities.
Supply-chain management consists of activities including sourcing, procurement,

conversion, and logistics management that are necessary for the firm to receive raw
materials and convert them into final products.
Operations consists of activities necessary to efficiently change raw materials into

finished products. Developing employees’ work schedules, designing production
processes and physical layout of the operations’ facilities, determining production capacity
needs, and selecting and maintaining production equipment are examples of specific
operations activities.
Distribution consists of activities related to getting the final product to the customer.
Efficiently handling customers’ orders, choosing the optimal delivery channel, and
working with the finance support function to arrange for customers’ payments for
delivered goods are examples of these activities.
Marketing (including sales) consists of activities taken for the purpose of segmenting
target customers on the basis of their unique needs, satisfying customers’ needs, retaining
customers, and locating additional customers. Advertising campaigns, developing and
managing product brands, determining appropriate pricing strategies, and training and
supporting a sales force are specific examples of these activities.
Follow-up service consists of activities taken to increase a product’s value for customers.
Surveys to receive feedback about the customer’s satisfaction, offering technical support
after the sale, and fully complying with a product’s warranty are examples of these
activities.
Creating Value Through Support Functions
Finance consists of activities associated with effectively acquring and managing financial
resources. Securing adequate financial capital, investing in organizational functions in
ways that will support the firm’s efforts to produce and distribute its products in the short-
and long-term, and managing relationships with those providing financial capital to the
firm are specific examples of these activities.
Human Resource consists of activities associated with managing the firm’s human
capital. Selecting, training, retaining, and compensating human resources in ways that
create a capability and hopefully a core competence are specific examples of these
activities.
Management Information Systems consists of activities taken to obtain and manage
information and knowledge throughout the firm. Identifying and utilizing sophisticated
technologies, determining optimal ways to collect and distribute knowledge, and linking
relevant information and knowledge to organizational functions are activities associated
with this support function.
Using the value chain framework enables managers to study the firm’s resources and
capabilities in relationship to the primary and support activities performed to design,
manufacture, and distribute products, and to assess them relative to competitors’ capabilities.
For these activities to be sources of competitive advantage, a firm must be able to:
• Perform primary or support activities in a manner superior to the ways that competitors
perform them
• Perform a primary or support activity that no competitor is able to perform to create
superior value for customers and achieve a competitive advantage
OUTSOURCING
Outsourcing describes a firm's decision to purchase a value-creating activity from an external

supplier. Outsourcing has become important—and may become more important in the
future—for two reasons:
• There are limits to the abilities of firms to possess all of the bundles of resources and
capabilities that are required to achieve superior performance (relative to competitors) in all
its primary and support activities.
• With limited resources and capabilities, firms can increase their ability to develop
resources and capabilities to form core competencies and achieve competitive advantage by
nurturing a few core competencies.
Firms engaging in outsourcing can increase their flexibility, mitigate risks, and reduce their
capital investment.
Example of Discussion QUESTIONS
1. Why is it important for a firm to study and understand its internal organization?
A manager should think of the firm as a bundle of heterogeneous resources and capabilities
that can be used to create an exclusive market position. This means that firms should no
longer focus only on the traditional sources of competitive advantage (e.g., labor costs, access
to capital, and raw materials) as these advantages can be overcome through an international
strategy and the relative free flow of global resources. Instead, firms should seek out those
resources and capabilities that other firms do not have, at least not in the same combinations.
A firm’s resources are the source of its capabilities, some of which can lead to core
competencies that enable a firm to perform value-creating activities better than its competitors
or that its competitors cannot duplicate.
2. What are the differences between tangible and intangible resources? Why is it
important for decision makers to understand these differences? Are tangible
resources more valuable for creating capabilities than are intangible resources, or is
the reverse true? Why?
Tangible resources are represented by assets that can be seen and quantified. They are not
only represented by the firm's physical resources (such as plant and equipment), but also by
other assets, such as the firm's borrowing capacity, the skills and attributes of its staff, and its
technological capacities. Intangible resources (because they are less visible and more
embedded in the firm's history) are more difficult for competitors to understand and imitate.
These include such resources as scientific capabilities, knowledge within the firm,
organizational routines, or the firm's reputation for quality.
Resources are the source of a firm's capabilities. Capabilities are the source of a firm's core
competencies, which are the basis of competitive advantages. Intangible resources (as
compared to tangible resources) are a superior and more potent source of core competencies.
In fact, in the global economy, intellectual and systems capabilities are more important to the
success of a corporation than are its physical assets, and the capacity to manage human
intellect is now a critical executive skill. Intangible resources are less visible and more
difficult for competitors to understand, purchase, imitate, or substitute, and thus firms prefer
to rely on these resources as the foundation for their capabilities and core competencies.
Therefore, unobservable (i.e., intangible) resources provide a better platform for competitive
advantage than do tangible resources. And unlike tangible resources, the use of intangible
resources can be leveraged for even greater benefits to firm performance.
3. What is value chain analysis? What does the firm gain by successfully using this tool?
The value chain is a template that the firm uses to understand its cost position and to identify
the multiple means that might be used to facilitate the implementation of its business-level
strategy. Managers would use value chain analysis to examine the firm's resources and
capabilities in relationship to the activities performed in the design, manufacture, and
distribution of products. Specifically, this framework differentiates primary activities (those
involved with a product's physical creation, its sale and distribution to buyers, and its service
after the sale) from support activities (which provide the support necessary for the primary
activities to take place).
Managers should scrutinize and assess activities and capabilities with competitors' capabilities
in mind because the firm must be able to either perform an activity in a manner that provides
value superior to or better than any competitor or identify and perform value-adding activities
that competitors are unable to perform, if these capabilities are to be a source of competitive
advantage. Identifying and valuing a firm's resources and capabilities requires judgment, so
does the process of assessing the relative value added by activities performed. Studying the
value chain will enable managers to better understand their cost structure and the activities in
which they can create and capture value.

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University of Technology and Applied Sciences ,

Department of Business Administration

1. Define strategic competitiveness, strategy, competitive advantage, above-average returns,

Define strategic competitiveness, strategy, competitive advantage,

Strategic competitiveness is achieved when a firm successfully formulates and implements a

The Strategic Management Process

• Desired performance—strategic competitiveness and above-average returns—result when

THE COMPETITIVE LANDSCAPE

The Global Economy

Globalization is the increasing economic interdependence among countries as reflected in the

Use the industrial organization (I/O) model to explain how firms

The I/O model is based on the following four assumptions:

2. Most firms competing in an industry or in an industry segment control similar sets of

4. Organizational decision-makers are assumed to be rational and committed to acting only

1. Study the external environment—general, industry, and competitive—to determine the

Use the resource-based model to explain how firms can earn

THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS

Capabilities are the capacity for a set of resources to perform—integratively or in

The resource-based model of above-average returns is grounded in the uniqueness of a firm's

5. To attain a sustainable competitive advantage and earn above-average returns, firms

5 Describe vision and mission and discuss their value.

VISION AND MISSION

6 Define stakeholders and describe their ability to influence organizations.

8 Explain the strategic management process.

THE STRATEGIC MANAGEMENT PROCESS

Application Discussion Questions

Explain the importance of analyzing and understanding the firm’s external

Define and describe the general environment and the industry

THE GENERAL, INDUSTRY, AND COMPETITOR ENVIRONMENTS

• Demographic • Political/Legal • Sociocultural

2. The industry environment

• Threat of New Entrants • Power of Buyers • Power of Suppliers

3. The competitor environment

Discuss the four activities of the external environmental analysis

EXTERNAL ENVIRONMENTAL ANALYSIS

• In addition to increasing a firm’s awareness and understanding of an increasingly turbulent,

The Internet provides significant opportunities to obtain information. For example,

4 Name and describe the general environment’s seven segments.

SEGMENTS OF THE GENERAL ENVIRONMENT

The Demographic Segment

The Economic Segment

The Political/Legal Segment

The Sociocultural Segment

The Technological Segment

The Global Segment

Among the global factors that should be assessed are:

The Physical Environment Segment

INDUSTRY ENVIRONMENT ANALYSIS

The Five Forces Model of Competition

• Threat of New Entrants

Bargaining Power of Suppliers

Suppliers are powerful relative to firms competing in the industry when:

Threat of Substitute Products

The threat of substitute products is greatest when:

Intensity of Rivalry Among Competitors

Competitor analysis represents a necessary adjunct to performing an industry analysis. An

Competitor analysis is interested ultimately in developing a profile on how competitors

Application Discussion Questions

ANALYZING THE INTERNAL ORGANIZATION

The Context of Internal Analysis

Some thoughts on “value”:

The Challenge of Analyzing the Internal Organization

Conditions Affecting Managerial Decisions about Resources, Capabilities, and Core