THE COMPETITIVE ENVIRONMENT: ASSESSING INDUSTRY

EFFECTIVENESS

AND

THE INTERNAL ORGANIZATION: RESOURCES, CAPABILITIES AND

ACTIVITIES

At the end of this topic, students should be able to:

1. Define Porters Five Forces Model

2. Explain the need for firms to study and understand their internal organization
3. Discuss the importance of discovering the firms core competencies.
4. Learn the importance of evaluating a firms strengths and weaknesses.
5. Defining resource-based analysis.
6. Explain how value chain analysis is used to identify and evaluate resources and
capabilities.

Topic outline:

Porters Five Forces Model

Rivalry among competing firms
Potential entry of new competitors
Potential development of substitute products
Bargaining power of suppliers
Bargaining power of consumers
Internal Organization Analysis
Discovering Core Competencies
Resources
Capabilities
Core Competencies
Discovering Core Competencies
SW Analysis
- Ratio analysis
Resource-based Analysis
Value Chain Analysis
- Outsourcing
Core Competencies Cautions and Reminders
The Strategic Management Process
Competitive Analysis: Porters Five-Forces Model
Porters Five-Forces Model of competitive analysis is a widely used approach for
developing strategies in many industries. The intensity of competition among firms varies
widely across industries. For example, in the electrical and electronics industry, collective
impact of competitive forces is so brutal that the industry is clearly unattractive from a
profit-making standpoint. Rivalry among existing firms is severe, new rivals can enter the
industry with relative ease, and both suppliers and customers can exercise considerable
bargaining leverage.

THE FIVE-FORCES MODEL OF COMPETITION

Potential development of
Bargaining power of consumers
substitute products

Rivalry among
competiting firms

Bargaining power of suppliers Potential entry of new competitors

Potential development of substitute products

In many industries, firms are in close competition with producers of
substitute products in other industries. The presence of substitute products
puts a ceiling on the price that can be charged before consumers will
switch to the substitute product. Competitive pressures arising from
substitute products increase as the relative price of substitute products
declines and as consumers switching cost decrease. The competitive
strength of substitute products is best measured by the inroads into the
market share those products obtain, as well as those firms plans for
increased capacity and market penetration.

Bargaining power of suppliers

The bargaining power of suppliers affects the intensity of competition in an
industry, especially when there is a large number of suppliers, when there are
only a few good substitutes of raw materials, or when the cost of switching
raw materials is especially costly. It is often the best interest of both suppliers
and producers to assist each other with reasonable prices, improved quality
and development of new services. Firms may pursue a backward integration
strategy to gain control or ownership of suppliers. This strategy is especially
effective when suppliers are unreliable, too costly or not capable of meeting a
firms needs on a consistent basis. Firms generally can negotiate more
favorable terms with suppliers when backward integration is commonly used
strategy among rival firms in an industry.

Bargaining power of consumers

When customers are concentrated or large, or buy in volume, their
bargaining power represents a major force affecting the intensity of
competition in an industry. Rival firms may offer extended warranties or
special services to gain customer loyalty whenever the bargaining power
of consumers is substantial. Bargaining power of consumers also is higher
when the products being purchased are standard or undifferentiated. When
this is the case, consumers can negotiate selling price, warranty coverage
and accessory packages to a greater extent.
 Potential entry of new competitors
Whenever new firms can easily enter a particular industry, the intensity of
competitiveness among firms increases. Barriers to entry, however, can
include the need to gain economies of scale quickly, the need to gain
technology and specialized know-how, the lack of experience and the
likes. Despite numerous barriers to entry, new firms sometimes enter
industries with higher-quality products, lower prices and substantial
marketing resources. The strategists job therefore is to identify potential
new firms entering the market, to monitor the new rival firms strategies,
to counterattack as needed, and to capitalize on existing threats and
opportunities.

Rivalry among competing firms

This is usually the most powerful of the five competitive forces. The
strategies pursued by one firm can be successful only to the extent that
they provide competitive advantage over the strategies pursued by rival
firms. Changes in strategy by one firm may be met with retaliatory
countermoves, such as, lowering prices, enhancing quality, adding features
and the like. The intensity of rivalry among competing firms tends to
increase as the number of competitors increases, as competitors become
more equal in size and capability, as demand for the industrys products
declines, and as price cutting becomes common. As rivalry among
competing firms intensifies, industry profit decline, in some cases to the
point where an industry becomes inherently unattractive.
The Internal Organization: Resources, Capabilities and Activities

An internal analysis is an exploration of your organizations competency, cost

position and competitive viability in the marketplace. Competency talks about how an
organization uses updated technology systems and equipment to accomplish its work.
Cost position involves the businesss ability to acquire and manage resources and develop
exceptional value to their customers in a way that is unmatched by rival businesses. And
lastly, competitive viability in the marketplace which states the ability of the business to
challenge its rivals to match the service of product it offers, especially if its using cutting
edge proprietary technology and has strongly enforced quality control standards.

Conducting an internal analysis often incorporates measures that provide useful

information about your organizations strengths, weaknesses, resources and capabilities.
The data generated by an internal analysis is important because you can use it to develop
strategic planning objectives to sustain and grow your business.

DISCOVERING CORE COMPETENCIES

1. RESOURCES
What a firm HAS
its assets, including its people and the value of its brand name
represent inputs into a firms production process such as capital
equipment, skills of employees, brand names, finances and talented
managers
has two kinds:
a) Tangible resources: financial, physical, human resources and
organizational
b) Intangible resources: technological, innovation and reputation

2. CAPABILITIES
What a firm DOES
Represent the firms capacity or ability to integrate individual firm
resources to achieve a desired objective
Capabilities develop over time as a result of complex interactions that take
advantage of the interrelationships between a firms 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.
Capabilities become important when they are combined in unique
combinations which create core competencies which have strategic value
and can lead to competitive advantage.

3. CORE COMPETENCIES
What a firm DOES that is strategically valuable
are the essence of what makes an organization unique in its ability to
provide value to customers. - Leonard-Barton, Bowen, Clark, Holloway
& Wheelwright
McKinsey & Co. recommends identifying three to four competencies to
use in framing strategic actions.
 For a strategic capability to be a Core Competency, it must be:
a) Valuable
Capabilities that either help a firm to exploit opportunities to
create value for customers or to neutralize threats in the
environment
b) Rare
Capabilities that are possessed by few, if any, current or
potential competitors
c) Costly to Imitate
Capabilities that other firms cannot develop easily, usually due
to unique historical conditions, causal ambiguity or social
complexity
d) Not substitutable
Capabilities that do not have strategic equivalents, such as
firm-specific knowledge or trust-based relationships
Outcomes from Combinations of the Criteria for Sustainable Competitive
Advantage
Valuable Rare Costly Not Competitive Performance
to Substitutable Consequences Implications
Imitate
Below
Competitive
NO NO NO NO Average
Disadvantage
Returns
Competitive Average
YES NO NO YES/NO
Parity Returns
Temporary Ave./ Above
YES YES NO YES/NO Competitive Average
Advantage Returns
Sustainable Above
YES YES YES YES Competitive Average
Advantage Returns

4. DISCOVERING CORE COMPETENCIES

a) SW ANALYSIS
The internal analysis of an organization should include its
culture, expertise, resources, and unique qualities within the
market place. The extent to which an organization could adapt
to changing circumstances is also a factor that needs to be
considered. Using the SWOT analysis as an interpretative
filter, the firm can reduce these information to a manageable
quantity of key issues that are relevant to the organization or to
the business objective, depending on the level of the SWOT. At
this stage the firm does not need to elaborate on each topic; the
firm just need to decide if it is a strength or weakness.
STRENGTHS
A 'strength' is something that has a positive implication. It
adds value, or offers your organization a competitive
advantage. Strengths include tangible assets such as
available capital, equipment, credit, established and loyal
 customers, existing channels of distribution, copyrighted
materials, patents, information and processing systems, and
other valuable resources. The sort of questions you can ask
to ascertain your strengths are:
1. What do we do well?
2. What qualities or aspects persuaded our customers
to choose our product or service?
3. What resources do we have at our disposal?
4. What do others see as our strengths?
5. What areas are we seen as being expert in?

However you must judge the responses to these questions

from the perspective of your operating environment and not
from an internal aspect. For example, if 'guaranteed next
day delivery' is the norm within your industry then this
cannot really be considered a strength because your
customers would expect it.

WEAKNESSES
These are the characteristics of your product or service that
are detrimental to growth. Weaknesses are those things that
detract from the value of your offering or place you at a
disadvantage when compared with your competitors.
Factors that are identified as weaknesses can often be
remedied with suitable investment or restructuring. The
type of questions you would be asking and discussing to
identify your weaknesses are:
What can be improved or altered?
What do we do badly?
How do we compare with others?
How does our performance compare with our
competitors?
How did we respond to this feedback
Weaknesses can be difficult to discuss honestly and
objectively because doing so can imply criticism of the way
that the organization has been managed.

b) RESOURCE-BASED ANALYSIS
The resource based view suggests that a firms unique
resources and capabilities provide the basis for a strategy.

RESOURCE-BASED DEFINITION ACTION REQUIRED

MODEL
Resources Input to a firms Identify firm resources.
production processes Study strengths &
weaknesses relative to
rivals.
Capability Capacity for integrated Determine what firm
set of resources to capabilities allow to do
integratively perform better than rivals.
a task or activity.
Competitive Advantage
Attractive Industry
Strategy Formulation and
Implementation
Superior Returns
Ability of a firm to Determine how firms
outperform its rivals resources & capabilities
may create competitive
advantage.
Location of an industry Locate an attractive
with opportunities that industry
can be exploited by
firm s firms resources
& resources &
capabilities
Strategic actions taken Select strategy that best
to earn above-average exploits res. & capabilities
returns relative to opportunities in
environments.
Earning of above- Maintain selected strat.
average returns in order to outperform
industry rivals.

c) VALUE-CHAIN ANALYSIS
helps to identify which resources and capabilities can add
value

Outsourcing: - strategic choice to purchase some activities

from outside suppliers. Firms often purchase a portion of their
value-creating activities from specialty external suppliers who
can perform these functions more efficiently. What are the
Strategic Rationales for Outsourcing?
1. Improve Business Focus - Lets company focus on
broader business issues by having outside experts
handle various operational details
2. Provide Access to World-Class Capabilities - The
specialized resources of outsourcing providers makes
world-class capabilities available to firms in a wide
range of applications
3. Accelerate Business Re-Engineering Benefits -
Achieves re-engineering benefits more quickly by
 having outsiders--who have already achieved world-
class standards--take over process
4. Share Risks - Reduces investment requirements and
makes firm more flexible, dynamic and better able to
adapt to changing opportunities
5. Free Resources for Other Purposes - Permits firm to
redirect efforts from non-core activities toward those
that serve customers more effectively
To capitalize on the usefulness of the Value Chain concept it
is important to understand that Value Chains are part of a
Total Value System
1. Supplier Value Chain
- Upstream Value
- Perform valuable activities that complement the
firms activities
2. Firm Value Chain
3. Channel Value Chain
- Each firm must eventually find a way to become a
part of some buyers value chain
4. Buyer Value Chain
- Ultimate basis for differentiation is the ability to
play a role in a buyers value chain
- This creates VALUE!!
Value chains vary for firms in an industry, reflecting each
firms unique qualities

CORE COMPETENCIES--CAUTIONS AND REMINDERS

It should never be taken for granted that core competencies
will continue to provide a source of competitive advantage
All core competencies have the potential to become Core
Rigidities
Core Rigidities are former core competencies that sow the
seeds of organizational inertia and prevent the firm from
responding appropriately to changes in the external
environment
Strategic myopia and inflexibility can strangle the firms
ability to grow and adapt to environmental change or
competitive threats
THE STRATEGIC MANAGEMENT PROCESS

External
Environment Strategic Intent*

Internal Strategic Mission**

Environment

Leveraging of a firms resources,

capabilities and core competencies
* STRATEGIC
to accomplish what may appear to
INTENT
be unattainable goals in the
competitive environment

A statement of the firms unique

** STRATEGIC purpose and the scope of its
MISSION operations in product market
terms
RESOURCES
http://slideplayer.com/slide/5097699
http://slideplayer.com/slide/4848279
http://alum.sharif.ir/~ali_khademian/img/internal_analysis.pdf
https://www.mindtools.com/pages/article/newTMC_05_1.htm
http://smallbusiness.chron.com/internal-analysis-important-80513.html
http://www.free-management-ebooks.com/faqst/swot-
03.htm#ixzz4upgmWune
https://www.smstudy.com/article/what-is-value-chain-analysis
www.mindtools.com/personalswot
EXERCICES

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