Environmental Scanning

What Tools Are Useful in Assessing Strengths and Weaknesses i.e. Resources, Capabilities, and Core Competencies?

Goal: objective assessment of your strengths and weaknesses

relative to competitors important to customers
Note: This is difficult to do well.

Identifying, developing, protecting, and deploying resources, capabilities, and core competencies

Inputs into a firms production process such as capital equipment, skill of individual employees, patents, finance, and talented managers
Tangible Resources Assets that can be seen and quantified Intangible Resources Family commitment, networks, organizational culture, reputation, intellectual property rights, trademarks, copyrights

By themselves, resources do not create a strategic advantage for the firm.

Capacity to deploy resources that have been purposely integrated to achieve a desired end state. Primary base for the firms capabilities is the skills and knowledge of its employees. Just because the firm has a strong capacity for deploying resources does not mean it has a competitive advantage.

Resources and capabilities serve as a source of competitive advantage for a firm over its rival. Not all resources and capabilities are core competencies. Many suggest that firms should identify and concentrate on only 3 or 4 core competencies.

Core competencies must be distinctive.

Identifying core competencies is key to development of sound strategy. We use the value chain to help identify core competencies.

Capabilities that are done better than competitors

A framework for identifying core competencies Can be used to

Inside the firm In the supply chain

Identify strengths and weaknesses Identify sources of competitive advantage Identify market opportunities

The Value Chain

Firm Infrastructure

Supporting Activities

Human Resource Management Technological Development Procurement

Inbound Operations Logistics

Outbound Marketing Service Logistics & Sales

Relationship with Suppliers

Relationship with Buyers

Elapsed Time - Value added time cost

Inbound Logistics
Materials handling, warehousing, inventory control used to receive, store and disseminate inputs to a product Fertilizer and chemical storage, delivery of inputs, application of inputs Take inputs from inbound logistics and convert to final products Plowing, planting, spraying, harvesting, feeding, medicating, weighing,etc. Collecting, Storing, and physical distribution of the final product. Crop storage, finished hog handling, Processing and determining delivery dates, delivery to the packer or elevator etc.

Operations

Outbound Logistics

Marketing and Sales

Provide means through which customers can purchase products and to induce them to do so Advertising, communicating with buyers, developing customer relationships, pricing products (futures, hedging, forward contracting, etc.), delivery scheduling

Service
Activities designed to enhance or maintain a products value Timely delivery, identity preservation, ISO9000, certifying as organic, etc.
Procurement Human Resource management Human Resources

Firm Infrastructure

Inbound Logistics

Operations

Outbound Logistics

Marketing and Sales

Service

Procurement Technological Development Human Resources Firm Infrastructure

Procurement

Service Inbound Logistics Operations Outbound Logistics Marketing and Sales

Technological Development

Activities to purchase the inputs needed to produce products Negotiating with suppliers, standard timing of replenishing part and tools, setting up buying groups, etc.

Human Resources

Activities that improve the firms products and/or processes Volunteering for test plots, being a part of feeding trials, attending technology seminars/field days, designing equipment to make specific production tasks more efficient, etc. Recruiting, hiring, training, developing, and compensating all personnel

Human Resource management Procurement

Technology Firm Infrastructure

Service Inbound Logistics Operations Outbound Logistics Marketing and Sales

Firm Infrastructure

General Management, planning, finance, accounting, legal support, governmental relations, etc. Establishment of accounting practices, management information systems, compliance with environmental regulations, tracking and reporting for government programs, etc. Where strategy development takes place identifying opportunities and threats, resources and capabilities, and support of core competencies

Margins

Capture the value from performing valuecreating activities as cheaply as possible The basic idea is that the consumer is willing to pay a certain amount for the value you create. This is depicted as the size of the overall pentagon. The size of the individual activity boxes represents the cost of performing those particular activities. Thus, the smaller the size of the individual activity boxes relative to the value the consumer is willing to pay, the greater the MARGIN will be for the firm.

A firms value chain must be compared to competitors value chains to determine where competitive advantages exist. To be a source of competitive advantage a resource or capability must allow a firm to:
Perform an activity in a manner that is superior to competitors performances Perform a value-creating activity that competitors cannot complete

SWOT analysis is a tool for helping assess the current situation for the firm. However, we need to be able to combine the information in the SWOT analysis in a meaningful way to generate alternative strategies that we might pursue. The TOWS matrix is a tool designed to match external opportunities and threats with our internal strengths and weaknesses

Internal Environment

Strengths 1. 2. 3.

Weaknesses 1. 2. 3.

External Environment

Opportunities 1. 2. 3.

Threats 1. 2. 3.

Technique used in strategy formulation for combining

External analysis
Opportunities Threats

Internal analysis
Strengths Weaknesses

Opportunities: 1. 2. 3.

Threats: 1. 2. 3. ST Strategies Take advantage of Strengths to avoid threats WT Strategies Defensive strategies to minimize weaknesses and avoid threats
Source: Weihrich

Strengths: 1. 2. 3.

SO Strategies Use strengths to take advantage of opportunities

Weaknesses: 1. 2. 3.

WO Strategies Use Opportunities to overcome weaknesses

A continuous process which includes

Scanning: Identifying early signals of environmental changes and trends Monitoring: Detecting meaning through ongoing observations of environmental changes and trends Forecasting: Developing projections of anticipated outcomes based on monitored changes and trends Assessing: Determining the timing and importance of environmental changes and trends for firms strategies and their management

Analysis of general environment Analysis of industry environment

Analysis of competitor environment

The External Environment Strategic Intent Strategic Mission

Analysis of general environment

POLITICAL ECONOMIC SOCIAL/CULTURAL TECHNOLOGICAL

Analysis of general environment

SOCIAL/CULTURAL LEGAL ECONOMIC POLITICAL TECHNOLOGICAL

Analysis of general environment

POLITICAL ECONOMIC SOCIAL/CULTURAL TECHNOLOGICAL LEGAL ENVIRONMENTAL/ECOLOGICAL

A set of factors that directly influences a company and its competitive actions and responses Interaction among these factors determine an industrys profit potential

Threat Of New Entrants Power Of Suppliers Power Of Buyers Product Substitutes Intensity Of Rivalry

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

Five Forces of Competition

Bargaining Power of Buyers

Barriers to entry

Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy Expected retaliation

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

Buyers (customers) are powerful when:

they purchase a large portion of an industrys total output the sales of the product being purchased account for a significant portion of the sellers annual revenues they could easily switch to another product the industrys products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the sellers industry

Product substitutes are strong threat when:

customers face few switching costs substitute products price is lower substitute products quality and performance capabilities are equal to or greater than those of the competing product

Intensity of rivalry is stronger when competitors:

are numerous or equally balanced experience slow industry growth have high fixed costs or high storage costs lack differentiation or low switching costs experience high strategic stakes have high exit barriers

Common exit barriers include:

specialized assets (assets with values linked to a particular business or location) fixed costs of exit such as labor agreements strategic interrelationships (relationships of mutual dependence between one business and other parts of a companys operation, such as shared facilities and access to financial markets) emotional barriers (career concerns, loyalty to employees, etc.) government and social restrictions

Competitor intelligence is the ethical gathering of needed information and data about competitors objectives, strategies, assumptions, and capabilities

what drives the competitor as shown by its future objectives what the competitor is doing and can do as revealed by its current strategy What the competitor believes about itself and the industry, as shown by its assumptions What the the competitor may be able to do, as shown by its capabilities

Future Objectives:
Future objectives

How do our goals compare with our competitors goals? Where will the emphasis be placed in the future? What is the attitude toward risk?

Current Strategy:
Future objectives

Current strategy

How are we currently competing? Does this strategy support changes in the competitive structure?

Future objectives

Assumptions:

Current strategy

Assumptions

Do we assume the future will be volatile? Are we operating under a status quo? What assumptions do our competitors hold about the industry and themselves?

Capabilities:
Future objectives

Current strategy

What are our strengths and weaknesses? How do we rate compared to our competitors?

Assumptions

Capabilities

Future objectives

Response

Response:
Current strategy

Assumptions

Capabilities

What will our competitors do in the future? Where do we hold an advantage over our competitors? How will this change our relationship with our competitors?

Components of the General Environment

Economic
Demographic Industry Environment Competitive Environment Political/ Legal Technological Global

Sociocultural

(a) Competitors, industry size and competitiveness, related issues (b) Suppliers, manufacturers, real estate, services (c) Labor market, employment agencies, universities, training schools, employees in other companies, unions (d) Stock markets, banks, savings and loans, private investors (e) Customers, clients, potential users of products and services (f) Techniques of production, science, research centers, automation new materials

(j) International Sector (i) Socio-cultural Sector (h) Government Sector (g) Economic Conditions Sector

(a) Industry Sector

DOMAIN

ORGANIZATION

(f) Technology Sector

(e) Market Sector

(g) Recession, unemployment rate, inflation rate, rate of investment, economics, growth (h) City, state, federal laws and regulations, taxes, services, court system, (b) Raw Materials political processes Sector (i) Age, values, beliefs, education, religion, (c) work ethic, consumer Human Resources and green Sector movements (j) Competition from (d) Financial and acquisition by Resources foreign firms, Sector entry into overseas markets, foreign customs, regulations, exchange rates

Components of the General Environment

Demographic Segment Population size Age structure Geographic distribution Inflation rates Interest rates Trade deficits or surpluses Budget deficits or surpluses Ethnic mix Income distribution Personal savings rate Business savings rates Gross domestic product Labor training laws Educational philosophies and policies Concerns about the environment Shifts in work and career preferences Shifts in preferences regarding product and service characteristics Focus of private and government-supported R&D expenditures New communication technologies Newly industrialized countries Different cultural and institutional attributes Economic Segment

Political/Legal Segment

Antitrust laws Taxation laws Deregulation philosophies Women in the workforce Workforce diversity Attitudes about work life quality

Sociocultural Segment

Technological Segment

Product innovations Applications of knowledge

Global Segment

Important political events Critical global markets

External Environmental Analysis

The external environmental analysis process should be conducted on a continuous basis. This process includes four activities: Scanning
Identifying early signals of environmental changes and trends

Monitoring Detecting meaning through ongoing observations

of environmental changes and trends

Forecasting Developing projections of anticipated outcomes

based on monitored changes and trends

Assessing

Determining the timing and importance of environmental changes and trends for firms' strategies and their management

Industrys dominant economic traits

Competitive forces and strength of each force Drivers of change in the industry

Predicting the moves of competitors

Key success factors

Conclusions: Industry attractiveness

Market size and growth rate Scope of competitive rivalry Number of competitors and their relative sizes Prevalence of backward/forward integration Entry/exit barriers Nature and pace of technological change Product and customer characteristics Scale economies and experience curve effects Capacity utilization and resource requirements Industry profitability

Economic Feature
Market Size Market growth rate Capacity surpluses/shortages Industry profitability Entry/exit barriers Product is big-ticket item for buyers Standard products Rapid technological change Capital requirements Vertical integration Economies of scale Rapid product innovation

Strategic Importance
Small markets dont tend to attract new firms; large markets attract firms looking to acquire rivals with established positions in attractive industries Fast growth breeds new entry; slow growth spawns increased rivalry & shakeout of weak rivals Surpluses push prices & profit margins down; shortages pull them up High-profit industries attract new entrants; depressed conditions lead to exit High barriers protect positions and profits of existing firms; low barriers make existing firms vulnerable to entry More buyers will shop for lowest price Buyers have more power because its easier to switch from seller to seller Raises risk; investments in technology facilities/equipment may become obsolete before they wear out Big requirements make investment decisions critical; timing becomes important; creates a barrier to entry and exit Raises capital requirements; often creates competitive & cost differences among fully vs. partially vs. non-integrated firms Increases volume & market share needed to be cost competitive Shortens product life cycle; increases risk because of opportunities for leapfrogging

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Threat of New Entrants

Economies of Scale

Barriers to Entry

Product Differentiation Capital Requirements

Switching Costs
Access to Distribution Channels Cost Disadvantages Independent of Scale Government Policy

Expected Retaliation

An experience curve exists when unit costs decline as cumulative production volume increases because of

Accumulating production know-how

Growing mastery of the technology

Substitution of capital for labor

The bigger the experience curve effect, the bigger the cost advantage of the firm with the largest cumulative production volume

FIGURE 5.2

$1 $1
.90 .80 .70 .81 .64 .512 .729 10% Cost

Cost per Unit

Reduction 20% Cost Reduction 30% Cost Reduction

.49
.343

1 2 Million Million Units Units

4 Million Units

8 Million Units

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Suppliers

Suppliers are likely to be powerful if:
Suppliers exert power in the industry by: * Threatening to raise prices or to reduce quality

Supplier industry is dominated by a few firms Suppliers products have few substitutes Buyer is not an important customer to supplier Suppliers product is an important input to buyers product

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Suppliers products are differentiated

Suppliers products have high switching costs Supplier poses credible threat of forward integration

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Bargaining Power of Buyers

Buyer groups are likely to be powerful if: Buyers are concentrated or purchases are large relative to sellers sales Purchase accounts for a significant fraction of suppliers sales Products are undifferentiated Buyers face few switching costs Buyers industry earns low profits Buyer presents a credible threat of backward integration Product unimportant to quality

Buyers compete with the supplying industry by:

* Bargaining down prices * Forcing higher quality * Playing firms off of each other

Buyer has full information

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Threat of Substitute Products

Threat of Substitute Products

Keys to evaluate substitute products: Products with similar function limit the prices firms can charge Products with improving price/performance tradeoffs relative to present industry products Example: Electronic security systems in place of security guards Fax machines in place of overnight mail delivery

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers

Threat of Substitute Products

Rivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:
Jockeying for strategic position Using price competition

Staging advertising battles Increasing consumer warranties or service Making new product introductions

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse off Advertising battles may increase total industry demand, but may be costly to smaller competitors

Rivalry Among Existing Competitors

Cutthroat competition is more likely to occur when: Numerous or equally balanced competitors Slow growth industry

High fixed costs High storage costs

Lack of differentiation or switching costs Capacity added in large increments Diverse competitors High strategic stakes

High exit barriers

Rivalry Among Existing Competitors

High exit barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable. Specialized assets Fixed cost of exit (e.g., labor agreements) Strategic interrelationships Emotional barriers Government and social restrictions

Objective is to craft a strategy that will:

Insulate firm from competitive forces Influence competitive pressures in ways that favor company Build a sustainable competitive advantage

Effects of Entry Barriers and Exit Barriers on Industry Profits

Exit Barriers Low High

Low Entry Barriers

High

Effects of Entry Barriers and Exit Barriers on Industry Profits

Exit Barriers Low High

Low Entry Barriers

Low, Stable Returns

High

Effects of Entry Barriers and Exit Barriers on Industry Profits

Exit Barriers

Low

High

Low Entry Barriers

Low, Stable Returns

High

High, Stable Returns

Effects of Entry Barriers and Exit Barriers on Industry Profits

Exit Barriers

Low

High

Low Entry Barriers

Low, Stable Returns

Low, Risky Returns

High

High, Stable Returns

Effects of Entry Barriers and Exit Barriers on Industry Profits

Exit Barriers Low High

Low Entry Barriers

Low, Stable Returns

Low, Risky Returns

High

High, Stable Returns

High, Risky Returns

Competitor Analysis
The follow-up to Industry Analysis is effective analysis of a firms Competitors

Industry Environment Competitive Environment

Successful strategists take great pains in scouting competitors

Understanding their strategies Watching their actions Evaluating their vulnerability to driving forces and competitive pressures Sizing up their resource strengths and weaknesses and their capabilities Trying to anticipate rivals next moves

Competitive Scope Local

Strategic Intent Be dominant leader Overtake industry leader Be among industry leaders Move into top 10 Move up a notch in rankings Maintain current position Just survive

Market Share Objective Aggressive expansion via acquisition & internal growth Expansion via internal growth Expansion via acquisition Hold on to present share Give up present share to achieve short-term profits

Competitive Position Getting stronger; on the move Wellentrenched Stuck in the middle of the pack Going after a different position Struggling; losing ground Retrenching to a position that can be defended

Strategic Posture Mostly offensive Mostly defensive Combination of offensive & defensive Aggressive risk-taker Conservative follower

Competitive Strategy Striving for low-cost leadership Mostly focusing on a market niche Pursuing differentiation based on Quality Service Technology superiority Breadth of product line Image & reputation More value for the money Other attributes

Regional

National

Multicountry

Global

Transnational

Predicting rivals next moves involves

Analyzing their current competitive positions Examining public pronouncements about what it will take to be successful in industry Gathering information from grapevine about current activities and potential changes Studying past actions and leadership Determining who has flexibility to make major strategic changes and who is locked into pursuing same basic strategy

Competitor Analysis
Assumptions What assumptions do our competitors hold about the future of industry and themselves? Current Strategy Does our current strategy support changes in the competitive environment? Future Objectives How do our goals compare to our competitors goals? Capabilities How do our capabilities compare to our competitors?

Response
What will our competitors do in the future? Where do we have a competitive advantage?

How will this change our relationship with our competition?

Competitor Analysis
Future Objectives
How do our goals compare to our competitors goals? Where will emphasis be placed in the future? What is the attitude toward risk?

What Drives the competitor?

Competitor Analysis
Future Objectives
How do our goals compare to our competitors goals? Where Current Strategy will emphasis be placed in the future? currently How are we What is the attitude competing? toward risk? Does this strategy support changes in the competitive structure?

What is the competitor doing? What can the competitor do?

Competitor Analysis
Future Objectives
How do our goals compare to our competitors goals? Where Current Strategy will emphasis be placed in the future? How are we currently What is the attitude competing? Assumptions toward risk? Does this strategy Do we assume the future support changes in the will be volatile? competition structure? What assumptions do our competitors hold about the industry and themselves? Are we assuming stable competitive conditions?

What does the competitor believe about itself and the industry?

Competitor Analysis
Future Objectives
How do our goals compare to our competitors goals? Where Current Strategy will emphasis be placed in the future? How are we currently What is the attitude competing? Assumptions toward risk? Does this strategy Do we assume the future supportwill be volatile? changes in the competition structure? What assumptions do our competitors hold about the Capabilities industry and themselves? What are my competitors Are we operating under strengths and weaknesses? a status quo? How do our capabilities compare to our competitors?

What are the competitors capabilities?

Competitor Analysis
Future Objectives
How do our goals compare to our competitors goals? Where Current Strategy will emphasis be placed in the future? How are we currently What is the attitude competing? Assumptions toward risk? Does this strategy Do we assume the future supportwill be volatile? changes in the competition structure? What assumptions do our Capabilities competitors hold about the industry and themselves? What are my competitors Are we operating under strengths and weaknesses? a status quo? How do our capabilities compare to our competitors?

Response
What will our competitors do in the future? Where do we have a competitive advantage? How will this change our relationship with our competition?

Industrys market size and growth potential Whether competitive conditions are conducive to rising/falling industry profitability Will competitive forces become stronger or weaker Whether industry will be favorably or unfavorably impacted by driving forces Potential for entry/exit of major firms Stability/dependability of demand Severity of problems facing industry Degree of risk and uncertainty in industrys future

Two things to keep in mind:

1. Evaluating industry and competitive conditions cannot be reduced to a formula-like exercise-thoughtful analysis is essential 2. Sweeping industry and competitive analyses need to done every 1 to 3 years