Welcome to Class 3
Chapter 2
Business Environments are
divided into two
(2) primary Categories
External & Internal
Business Environments
General
External
Competitive
Environments
Resources
Internal
Leadership
The external environment (general & competitive)
1. All issues, occurrences, trends, etc. that are outside the firm
2. Issues are beyond the direct control of the TMT.
The internal environment (resources & leadership)
1. All issues, occurrences, trends, etc. that are within the firm
2. Issues are within the control of the TMT.
Both environments influence strategic planning
Scenario Models
Scenario Models:
1. Tools to aid the rapid adaptation to environmental changes.
2. Help TMTs prepare for a wide range of possible future conditions from
the highly likely to possible but not expected.
3. Are the first step in the preparation of contingency strategies.
4. Are LESS LIKELY to occur but "could happen" scenarios that are refined
into alternate models which form the basis for:
Contingency Strategies.
 Scenario Models are sets of potential environmental conditions that
range from very likely to possible but unlikely.
 Contingency Strategies are alternative strategic plans to match the
conditions highlighted in scenario models.
The General Environment
External
Environment
General
Environment
Competitive
Environment
The Five Factors of the
General Environment
 (1) Sociocultural
 (2) Demographic
 (3) Economic
 (4) Technological
 (5) Political/Legal
Sociocultural
General
Environment
Political/Legal
Technological
Demographic
Economic
General environmental factors are vigorously interactive,
interrelated, and interdependent.
One factor can influence change in another.
For example a weak economy can influence Political/Legal positions.
Sociocultural Factors
 Sociocultural factors relate to a country's:
1.
2.
3.
4.
5.
Dominant religions
The population's general desire for leisure-time
Attitudes toward consumerism
Environmentalism
Gender roles in society and business.
 In general, sociocultural factors are characterized by
 The lifestyles
 Values
 Belief systems of populations
Demographic Factors
 Demographic factors pertain to changes in the:
1. Population size of a country
2. Geographic distribution of people
3. Ethnic mix
4. Income distribution
5. Average age
6. Number of people in the family, etc.
 For example, American families are getting smaller, the
population is getting older, individuals are getting heavier, and
the Latino (sometimes called Hispanic) population is the fastest
growing part of the population.
Economic Factors
 Economic factors relate to a country's:
1. Inflation or deflation rates
2. Interest rates
3. Tariffs
4. Balance of trade issues
5. Growth of national economies
6. Exchange rates
7. Unemployment rates
8. Labor availability
9. Gross domestic products
10. Savings rates, etc.
Technological Factors
 Technological factors pertain to a country’s:
1. Reception to innovation
2. Strength of cultural discouragement for “new” things.
3. Rate of innovation, inventions, patents
Some cultures reject technological advances while
others enthusiastically embrace new technology.
Political/Legal Factors
 Political/Legal Factors center on:
1.
2.
3.
4.
5.
6.
The political stability of a country
Its legal system
Number of Antitrust laws
Success of enforcement
Philosophies of regulations vs deregulation
Its general attitude toward business.
The Competitive Environment
External
Environment
General
Environment
Competitive
Environment
Competitive Environment:
Nine Factors
 (1) Customers
 (2) Suppliers
 (3) Unions
 (4) Associations
 (5) New Entrants
 (6) Interest Groups
 (7) Substitutes
 (8) Competitors
 (9) Creditors
Customers
Suppliers
Creditors
Competitors
Competitive
Environment
Substitutes
Unions
Associations
Interest
Groups
New
Entrants
Factors that AMPLIFY COMPETITIVE
INTENSITY
1. High fixed costs
(costs that cannot be eliminated easily as volume decreases)
2. High storage costs
3. Lack of differentiation between products or services
4. Low customer switching costs
(customer can switch suppliers without significant cost or
inconvenience)
5. High exit barriers for competitors
(difficult for a firm to leave a particular industry)
Competitive Environment &
Porter's Five Forces
 (1) Rivalry among Competing Firms
 (2) Bargaining Power of Buyers
 (3) Bargaining Power of Suppliers
 (4) Threat of Substitutes
 (5) Threat of New Entrants
Rivalry among
Competing
Firms
Bargaining
power of
Threat of
New Entrants
Buyers
Porter's
Five
Forces
Threats of
Substitutes
Bargaining
power of
Suppliers
Rivalry of Competing Firms
Intensity increases when:
1. The size of markets shrinks or ceases to grow.
2. When there are numerous competitors seeking the
same customers
Consequence of Intensity:
1. Prices may fall lowering revenues
2. More favorable shipping terms offered to customers
3. Selling firms may offer more relaxed payment terms
4. Increased expenses as services to customers added
Competitive Environment
Michael Porter's Five Forces offer an informative
portrait of the competitive environment.
The “Forces” become even more acute within …
Strategic Groups
and
Understanding and reacting effectively to the Forces
will determine the degree of …
success or failure
Competitive Environment
&
Strategic Groups
Strategic Groups are clusters of firms that share similar:
1.
2.
3.
4.
5.
6.
7.
8.
Customers
Distribution systems
Vertical integration
Breadth and depth of product/service lines
Pricing for these products/services,
Quality of products/services
Geographic territories
Strategies for competing
Competition within strategic groups is generally
more intense than between strategic groups
because of the similarities
Price wars and other forms of extremely
hostile competitive behavior frequently occur.
Strategic Groups (Cont)
Companies within strategic groups will change over time
thus sustained vigilance is essential.
When competitors within strategic groups change the rules
of engagement change.
Companies can enter a particular strategic group, leave,
and reenter.
The reentry players can be particularly dangerous:
1.
They understand the group
2. May have new or reinforced distinctive competencies
3.
May have new competitive strategies.
Strategic Groups and Points of Similarity
Breadth &
Depth of
Pricing
Products
Vertical
Quality
Integration
Distribution
Geographic
Systems
Customers
Strategic
Group
Strategies
Competitive Environment
&
Strategic Alliances
Strategic Alliances
 Are formal relationships between two or more corporations
with a mutual set of goals.
 They offer Competing companies unique opportunities to
prosper through collaborative efforts rather than
competing activities.
Three most common Strategic Alliances are:
(1) Licensing arrangements
(2) Joint ventures
(3) Cross-holding arrangements (CHAs)
[with CHAs, each company takes equity stakes]
(1) Licensing agreements
Licensing agreements = greatest individuality or distance
between the strategic alliance firms
Parties do not combine their management team, value
chains, primary technologies, or other unique skills sets.
They often involve cross-marketing agreements, sharing
outsourcing activities, and some form of mutual customer
supply agreements.
(2) Joint ventures
 Require more confidence and trust than licensing
agreements.
 Generally involve sharing technologies, processes, various
value-adding assets, and products that more closely align
the two firms.
 Usually designate the financial and technical commitment
of each party.
 Other cooperative agreements include co-production
agreements, research and development or technology
development arrangements. They are not joint ventures
but are similar.
(3) Cross-holding arrangements
 Cross-holding arrangements are near merger-like.
 They are the most complex of the strategic alliances
and require the most care.
 Partners take a significant equity-stake in each other
Competitive Environment
&
Globalization
Globalization
Globalization means nations are becoming more
interdependent.
The global economy is:
1. Characterized by the quick and easy movement of
people, knowledge, and ideas from country to
country.
2. The world-wide economic activity between various
countries that are considered intertwined
3. Capable of having both negative and positive
effects on various countries.
Globalization (Cont)
 Market opportunities not even imaginable a decade
ago are now realities.
 The global economy is also able to deliver new and
more complex commercial threats to every
business competing in this domain.
 Companies cannot compete in the 21st Century with
20th Century ideas or technology.
 Methods of communicating, managing, and competing
are changing rapidly.
BRIEF BREAK
The Internal Environment
Business
Environments
External
Environment
Internal
Environment
The Internal Environment
 The internal environment is comprised of an
organization's:
(a) value-producing resources and
(b) leadership capabilities
These combine to determine the competitive strength of
Strategic Competencies.
 Strategic competencies have three levels:
(1) Basic Competencies (what a firm can do),
(2) Core Competencies (what a firm can do really well), and
(3) Distinctive competencies (what a firm can do really well
AND distinguishes it from competitors)
Value-Producing Resources
Value-Producing Resources – (What a firm has)
Resources are both tangible and intangible.
Tangible resources:
1.
2.
3.
4.
5.
Land
Facilities
Equipment
Financial capital
Inventories, etc.
Intangible resources:
1.
2.
3.
4.
5.
6.
7.
Knowledge capital
Creative and innovative workers
Social relationships
Organizational culture
Beneficial locations
Patents, copyrights, Trademarks
Reputation.
Value-Producing Resources
Tangible
Intangible
Resources
Resources
ValueProducing
Resources
Leadership
Leadership
 Quality Leadership –
1. The ability to craft dynamic strategic plans
2. The skill to implement, direct & control those plans.
 A firm with strong resources and dynamic leadership
will nurture its basic and core competencies into
distinctive competencies.
Leadership Capabilities
 Leadership is art of motivating a group of people to act as a
team striving to achieve a common goal.
Leaders should be
1. Knowledgeable,
2. Ethical,
3. Persuasive,
4. Courageous,
5. Tenacious,
6. Inspiring
The quality of leadership is measured by BOTH their
achievements and their methods.
Excellence in leadership = achieving performance objectives in a
legal, fair, ethical, and moral manner.
Capable Leaders are able to:












 Think critically
 Develop plausible scenario models
 Craft viable strategic plans
 Implement and manage strategic plans
 Maintain an open mindset
 Communicate thoroughly
 Motivate employees
 Make decisions harmonious with the firm's vision and mission
 Balance the interest of all stakeholders
 Promote ethical decisions and behaviors
 Demonstrate courage by always doing the right thing
 Accept responsibility for the consequence of all decisions and
actions
Capable Leaders have knowledge of:
  Human resources
  Corporate cultures and National cultures
  Industry-specific customs, practices, and





procedures
 Accounting and finance
 Techniques for the effective utilization of
corporate resources
 Systems for monitoring and assessing progress
 Analysis methods
 Tactical and strategic planning process
Strategic Competencies
Strategic Competencies –
(What a firm can do)
 Tangible and intangible value-producing resources that
are united, leveraged, and applied = a firm’s strategic
competencies – What it can do.
 Firms with many resources but poor leadership will have
weak strategic competencies.
 Firms with strong leadership but few value-producing
resources will also have weak competencies.
 Only firms with strong, capable leadership and an
adequate supply of value-producing resources have the
potential of developing strategic competencies.
Strategic Competencies
ValueProducing
Capable
Strategic
Resources
Leadership
Competencies
Levels of Strategic Competencies
Distinctive
Competencies
Core Competencies
Basic
Competencies
Levels of Strategic Competencies
1. Basic competencies are what a firm has
demonstrated that it "can do" profitably.
2. Core competencies are what a firm "can do
extremely well" while enhancing its profitability.
3. Distinctive competencies represent not only what the
company can do extremely well but also "what
distinguishes the firm" from competitors.
Distinctive competencies enable a firm to move closer to a
prime objective of achieving and sustaining
above average returns.
When products or services offered by a firm possess
Distinctive Competencies –
they exhibit the following qualities:
 (1) Valuable (The products or services are profitable.)
 (2) Rare (The products or service are extremely uncommon.)
 (3) Difficult to Substitute (They cannot easily be
produced, copied, or substituted by competitors.)
 (4) Growth Potential (They are likely to be increasingly
beneficial to the company in the future.)
Value-Producing
Resources
Distinctive
Competencies
Capable
Leadership
(Good
Governance)
Strategic
Competitiveness
Distinctive
Competencies
Above Average
Returns
Distinctive Competencies
Strategic
Competitiveness
Distinctive
Competencies
ValueProducing
Resources
Good
Governance
&
Sustainable
Competitive
Advantage
Above
Average
Returns
Summary
Environments
Internal
External
General
Competitive
Resources
Leadership
End Business Environments
 Read Chapter Three: Creating Value
Relax! 