02 NOV 2021
Fundamentals of
strategic management.
1st. september 2018
CIVITAS
This PDF Contains
Chapter 1. About strategic management (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN), p.RB-1.1
2.1. The firm’s future direction, p.RB-2.1
2.2. Firm performance: value creation, p.RB-2.4
2.3. Corporate stakeholders and corporate governance, p.RB-2.6
2.4. Corporate values, p.RB-2.8
02 NOV 2021
PAGE RB-1.1
Fundamentals of strategic management. 1st. september 2018
INTRODUCCIÓN
Chapter 1. About strategic management (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
Ch apt er 1
About strategic management
JOSÉ EMILIO NAVAS LÓPEZ
LUIS A. GUERRAS MARTÍN
Sumario:
1.1. Strategic decisions
1.1.1. The concept of strategy
1.1.2. Other major concepts
1.1.3. Levels of strategy
a. Corporate strategy
b. Competitive strategy
c. Functional strategies
1.2. The process of strategic management and its responsibility
1.2.1. Phases of the strategic management process
1.2.2. Responsibility for strategic decisions
1.2.3. Fit and change in the strategic management process
1.3. Strategic management as a field of study
1.3.1. Approaches to strategic management
1.3.2. Towards a holistic view of strategic management
LEARNING GOALS
- Define the main concepts of strategy.
- Delimit the different phases involved in the process of Strategic Management and analyse their potential advantages.
- Analyse the process rationale and the factors upon which it depends.
- Establish a framework of analysis for Strategic Management based on a holistic approach encompassing economic-rational issues and
those of an organisational nature.
02 NOV 2021
PAGE RB-2.1
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 2. Future direction and values (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
2.1. The firm’s future direction
2.1. THE FIRM’S FUTURE DIRECTION
It is very important in the Strategic Management process to define the four basic concepts that, from a general perspective, are to act as a
guide for a firm’s future operations: vision, mission, strategic objectives and values. Although different, these four concepts are closely linked
to one another, so they need to be analysed jointly.
Figure 2.1: Definition of the firm’s future direction
Source: Adapted from Dess et al. (2014:23)
For the effectiveness of this entire system of vision, mission, strategic objectives and values, it must involve all the organisation’s members,
from the most senior managers down to grassroots employees. The responsibility for achieving the vision is a reciprocal one, which means
shared gains and shared sacrifice.
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PAGE RB-2.4
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 2. Future direction and values (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
2.2. Firm performance: value creation
2.2. FIRM PERFORMANCE: VALUE CREATION
The previous chapter has stated that strategy’s overriding purpose is to improve the firm’s performance or bottom line, whereby a better
performance means a greater level of success. It is also, therefore, an indicator of the quality of the endeavour made by management and the
organisation as a whole in pursuit of that success. This being the case, performance should be the guide or criterion for strategic decisionmaking. Those decisions that improve performance will be considered the right ones, while those that compromise it will be considered the
wrong ones. This means that monitoring firm performance serves a dual purpose. On the one hand, for applying a criterion for guiding
strategic decisions. On the other, for the subsequent appraisal of the strategy’s degree of success or failure, and thus the quality of the work
undertaken by the management team.
The problem with performance is that it is a concept that can be readily understood from a very general perspective, yet difficult to pin down
in terms of its measurement. There are several reasons for this (Amason, 2011: 19). Firstly, it is a multidimensional concept in the sense that
there are different ways of defining and measuring it, and not all of them produce the same results. Thus, an improvement in one of the
possible measurement variables may involve a loss in another. Secondly, and because of this, the choice of its definition and metrics is
critical, whereby the consideration of a strategy’s success or failure depends partly on how performance is defined and measured. For
example, maximising short-term term profits may compromise long-term returns, and vice versa.
According to the financial theory that prioritises shareholders as owners and holders of the firm’s ownership rights, these seek to maximise
the return on their investment. In operational terms, this maximisation of shareholders’ wealth is achieved, in turn, through the
maximisation of the firm’s equity on the market over the long term.
The maximisation of shareholder wealth is a redefinition of the objective of the neoclassical theory of the firm as a profit-maximiser. The
firm’s objective is therefore identified with the maximisation of its market value, as this in turn will have a knock-on effect on its
shareholders’ investment. This therefore provides an unequivocal yardstick for measuring performance. In short, the aim is to assess the
firm’s ability to generate rents.
The problem this objective poses in practical terms is that most firms cannot easily measure this value, as their shares are not listed. There
are two different ways of measuring a firm’s performance, each one of which has different variations. Firstly, the accounting approach to
performance based on the items of profit/return. Secondly, the market approaches centred on value. We shall now discuss the main aspects
of these two approaches.
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Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 2. Future direction and values (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
2.3. Corporate stakeholders and corporate governance
2.3. CORPORATE STAKEHOLDERS AND CORPORATE GOVERNANCE
When establishing objectives, there are two procedural issues that are especially relevant given the importance of this stage in the strategic
management process. Firstly, there is the matter of who establishes the objectives, which is related to the distribution of power within the
firm. Even though shareholders can be considered the holders of this right, the appearance of other major groups, such as managers, may
bring into question the initial distribution of power.
Secondly, a firm contains people and groups with their own agendas. They are likely to come into conflict because they are not necessarily
compatible. More importantly still, the objectives and interests of these people and groups may come into conflict with those of the firm as a
whole. This renders it necessary to analyse the process of establishing objectives, possible conflicts of interest and, therefore, the way of
resolving such conflicts.
The principle of maximising shareholder wealth has a clear economic-financial focus. Nevertheless, it is subject to certain limitations, which
the shareholders themselves should take into account. Basically, these limitations stem from the presence in the firm of other stakeholders
that call for the fulfilment of their own objectives that differ from those of shareholders. This means there is a need to assess the role played
in the identification of the firm’s objectives by stakeholders –meaning other individuals or power groups with their own expectations
regarding the organisation’s operations–.
Analysis
An analysis on the concept of stakeholders and their role in corporate governance can be found in Freeman, R. E.; Reed D. L.
(1983), “Stockholders and Stakeholders: A new perspective on corporate governance”, California Management Review, vol. 25, no. 3,
pp. 88-106. https://doi.org/10.2307/41165018
An especially prominent stakeholder group is the one formed by the firm’s top management. Today, the classical figure of entrepreneur as
owner and at the same time managing director and supreme decision-maker in the firm has become redundant following the appearance of
a professionalised managing class that governs the firm’s destinies without necessarily holding any of its stock. This managerial or executive
class normally has considerable decision-making power given its greater knowledge, autonomy and permanent contact with the reality of the
business world.
This separation between ownership and management may raise a number of major issues for value creation, as top managers have specific
interests in the firm, arising from their own utility function, which may come into conflict with the owner’s. Conflicts may also arise between
different types of shareholders, such as majority and minority ones, or between members of the board of directors. All these conflicts of
interest may undermine the achievement of the firm’s core objective. The study of the control mechanisms that regulate these kinds of
relationships is referred to as corporate governance.
In spite of these limitations, the firm’s objective can be formulated only in terms of the maximisation of value. All decisions need to be taken
with regard to that objective, whose achievement is measured and controlled by the financial markets, and therefore appears as a general
criterion of choice assessed from outside the firm. Yet it is also reasonable to ask the question: who does it create value for? (Grant, 2016).
Nonetheless, the growing importance of other stakeholders, especially top managers, requires analysing the role different groups play
regarding the general principle of value creation. Accordingly, the following sections are devoted to an analysis of a firm’s different
stakeholders and corporate governance.
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PAGE RB-2.8
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 2. Future direction and values (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
2.4. Corporate values
2.4. CORPORATE VALUES
A firm’s values cover the set of principles, beliefs, standards and commitments designed to steer its progress toward the achievement
of its vision and mission. These reflect the actual road to be followed, while the values inform the way in which to do so.
The basic adage is that the end does not always justify the means. In other words, however attractive the vision may be, it cannot be
achieved by any old means. The way in which the firm goes about its business conditions the validity of its vision and mission and renders its
operation more or less appealing to its stakeholders. Its values therefore have to be consistent with the vision and the mission because they
are the general guidelines for achieving them both. Indeed, as we have seen, the firm’s values may be included as part of its mission.
On the one hand, values are operating guidelines that seek to influence the way in which the organisation’s members conduct their business
(Grant, 2016). On the other, they reflect the way in which the firm relates to its stakeholders, which is encapsulated in two aspects: corporate
social responsibility and business ethics.
Access Proview
See Application 2.11: Values at Triodos Bank, by Javier Amores Salvadó
© 2018 [Thomson Reuters (Legal) Limited / José E. Navas López y Luis A. Guerras Martín (dirs.)]© Portada: Thomson Reuters (Legal) Limited
02 NOV 2021
Fundamentals of
strategic management.
1st. september 2018
CIVITAS
This PDF Contains
Chapter 3. Environmental analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN), p.RB-3.1
I. The business environment, p.RB-3.1
3.2. Analysis of the general environment, p.RB-3.2
3.2.1. The environment’s strategic profile, p.RB-3.2
3.2.2. Industrial districts, p.RB-3.3
02 NOV 2021
PAGE RB-3.1
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 3. Environmental analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
Ch apt er 3
Environmental analysis
JOSÉ EMILIO NAVAS LÓPEZ
LUIS A. GUERRAS MARTÍN
Sumario:
I. The business environment
3.2. Analysis of the general environment
3.2.1. The environment’s strategic profile
3.2.2. Industrial districts
3.3. Analysis of the competitive environment
3.3.1. Defining the competitive environment
3.2.2. Analysis of the industry’s structure
3.3.3. Limitations and extensions of the five-forces model
3.3.4. Industry segmentation: Strategic groups
LEARNING GOALS
- Identify the firm’s environment and single out its threats and opportunities.
- Study techniques for analysing both the general and the competitive environments.
- Identify segments within an industry, especially from a supply-side perspective.
02 NOV 2021
PAGE RB-3.1
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 3. Environmental analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
I. The business environment
I. THE BUSINESS ENVIRONMENT
The concept of environment refers to everything over which a firm has no control as an organisation (Mintzberg, 1979). According to this
definition, the environment is extremely far-reaching. More specifically, a business environment is made up of all those external factors that
have a bearing on a firm’s decisions and performance (Grant, 2016: 64). As they are external factors, a firm cannot control them, but they
may however have a significant impact on the success of its strategy. Their analysis allows identifying that influence, which may be positive
or negative, and therefore decide upon the most appropriate way of responding to them.
When analysing the environment, a distinction tends to be made between two levels, namely, general and competitive, with this
differentiation being explained by both the methodology involved and the objectives pursued (figure 3.1). The general environment refers
to the external medium surrounding the firm from an overall perspective; that is, the socio-economic system within which it operates. The
competitive environment, by contrast, refers to that part of the environment that is closest to its everyday operations; that is, the industry to
which the firm belongs.
Figure 3.1: General environment and competitive environment
The great challenge the environment poses for management stems from the uncertainty surrounding it, as there are factors a firm cannot
control. In general, it may be said the more dynamic, complex, diverse and hostile an environment is, the greater the uncertainty the firm has
to face. The current environment is characterised by high uncertainty due to multiple factors in the recent evolution of the economic,
political and social system, which include the globalisation of the economy, the acceleration of technological change, the progressive removal
of international trade barriers, and changes in society’s cultural, environmental and ethical values, amongst others.
A firm’s management needs to furnish itself with the best possible information on the nature of the environmental factors affecting it and the
manner in which they do so. Those factors that favour its operations are known as opportunities, whereas those other ones that constitute a
hindrance are referred to as threats. With a view to identifying and evaluating both of these, presentation is made here of several different
techniques designed for analysing both the general environment and the competitive one.
02 NOV 2021
PAGE RB-3.2
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 3. Environmental analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
3.2. Analysis of the general environment
3.2. ANALYSIS OF THE GENERAL ENVIRONMENT
The purpose of analysing the general environment is to identify different variables that affect the firm’s operations from a dual perspective:
1) those related to the general political, economic and social system surrounding the firm, and 2) those linked to its localisation in a specific
country, region or geographical area, as not all economic areas or systems are equally attractive for the pursuit of business activities.
Among the former, some of the more significant would be the country’s provision of infrastructures (transport, telecommunications,
education, etc.), the market’s regulatory framework (goods and services, labour market, etc.), public policies (public expenditure and deficit,
fiscal and monetary policy, and welfare costs), business culture or the assessment that society makes of its business fabric, and the conduct of
the social partners (business and labour organisations) (Cuervo, 1993: 364-366).
As regards those variables related to localisation, the model referred to as the Porter Diamond suggests each country or nation has its own
idiosyncrasies for explaining why some are more competitive than others and why certain industries within each country are more
competitive than others. The aim, therefore, is to explain how belonging to a specific country and to a certain industry in that country
influences the way a firm obtains an advantageous position for competing with firms from other countries. This model is based on four
factors whose combined effect informs a country’s competitiveness (Porter, 1990: 78): 1) provision of relevant and specialised production
factors, 2) conditions of domestic demand, 3) highly competitive similar and auxiliary sectors, and 4) the strategy, structure and rivalry of
existing firms.
Access Proview
See Application 3.1: Spain`s global competitiveness index, by Jorge Cruz González and Application 3.2: Marca España (Brand
Spain), by Marta Beatriz García Moreno and Susana M.ª García Moreno
It should be noted that as the implementation of a strategy will extend over a long period of time, it seems expedient to investigate how
external factors, both those arising from the general environment and those from the competitive one, will manifest themselves in the future.
In a turbulent environment in which changes abound, prospective measures are required for defining such factors. These methods are
characterised by providing a more global vision of the future, giving special importance to qualitative and subjective aspects, assuming that
the relationships between variables are dynamic and evolve over time, accepting that the future depends upon the past and on the decisions
made in the present, and therefore adopting an essentially proactive and creative attitude toward the future (Menguzzato and Renau, 1991).
One of the instruments given the greatest importance and exposure in the analysis of highly changing future environments is the scenarios
method. A scenario is defined as a description of the circumstances, conditions or events that may depict the environment at a future
moment in time. This means that a scenario is more of a teaching and learning instrument that helps to better understand the way the future
may unfold, and in which the effort a firm’s top managers make to define it is just as important, or even more so, than the final outcome that
may be achieved. Its design requires considering the relevant variables to be incorporated, their interrelation, and the ramifications of
strategic decisions, thereby preparing management to better adapt to the environment’s contingencies.
Access Proview
See Application 3.3: Scenarios for the bailout of the Spanish financial system, by Jorge Cruz González
The purpose of analysing the general environment is to evaluate the wealth and prosperity of the firm’s external context, which may have a
bearing on its performance potential. We shall therefore study two approaches, namely, the environment’s strategic profile and industrial
districts.
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Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 3. Environmental analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
3.2. Analysis of the general environment
3.2.1. The environment’s strategic profile
3.2.1. THE ENVIRONMENT’S STRATEGIC PROFILE
The environment’s strategic profile is used to conduct a diagnosis of the general setting. This profile is created in two stages. The first
involves drafting a list of what we have referred to here as key factors in the environment, which are the significant variables that should be
analysed. These key factors tend to be grouped according to different dimensions. The second one is designed to assess the impact those
variables have on the firm’s business in order to single out the main opportunities and threats.
In view of the broad diversity of variables and the complexity posed by the general environment, there is a prior need to define the
boundaries of the analysis, both from a territorial perspective (world, country, region, etc.), and according to the relevance of the variables
themselves. Lederman (1984) suggests that this selection involves considering two aspects: the possibility of its occurrence and the size of the
impact on the firm if and when it does.
With a view to improving the analysis, the variables tend to be organised into several dimensions, which for our purposes here are as
follows: 1) political-legal, economic, demographic, socio-cultural, technological and ecological (figure 3.2).
The political and legal dimension is related to government stability and the general policies public administrations follow in areas such as
taxation, labour legislation, foreign trade or social welfare. The economic dimension affects the nature and direction of the economic system
in which the firm operates and is given by its main economic indicators. The demographic dimension covers the main changes in the
population’s structure, such as the population pyramid, life expectancy, birth rate, ethnic diversity and migration.
The socio-cultural dimension includes both the beliefs, values, attitudes and life-styles of the people who make up society and the cultural,
ecological, demographic, religious, educational and ethnic conditions of the social system as a whole.
The scientific and technological framework that defines the state of a system is contained in the technological dimension. Finally, the
ecological dimension refers to aspects such as the availability of natural resources, renewable energies, climate change, recycling and waste
management, and in general, everything affecting sustainability.
Figure 3.2: The environment’s strategic profile
The second stage involves rating the behaviour of each of the key factors on a Likert scale from one (1) to five (5) or, to put it another way:
very negative (VN), negative (N), neutral or indifferent (I), positive (P) and very positive (VP) (Likert, 1967). Figure 3.2 provides an example of
a strategic profile. It can be used to observe and readily identify opportunities (scores toward the right) and threats (scores toward the left).
The environment’s strategic profile is a very simple and easy-to-interpret tool that involves two major issues: a) identifying the key variables
in the general environment, and b) assessing the impact this has on the firm’s business. This rating is provided in a subjective manner by the
firm’s management, as it reveals the way it perceives the different variables in the environment. Different managers or analysts might
therefore reach different conclusions, which means the involvement of several people in the process might reinforce this perception if there
is convergence, or generate a different positioning regarding the same situation if there is divergence. What’s more, the correct use of this
tool requires considering three important aspects:
- Not all the variables on the general environment have a significant impact on a specific industry or firm, so the relevant factors have to
be identified in each individual case.
- Similar characteristics of the general environment may have different effects in different industries (Dess et al., 2014: 46).
- The impact the general environment has may vary significantly even among firms in the same industry.
Application 3.4:
Economic effects of the change toward a healthier lifestyle
by Jorge Cruz González
The economic growth that Spain has recorded in recent decades has meant our country’s productive system has undergone a farreaching modernisation. This progress has had a significant impact on aspects such as the labour market, demography and the
everyday habits of the Spanish people. In the first of these three cases, the manual labour that is the hallmark of primary sectors
has been steadily replaced by more mental work, and women now feature more prominently in the labour market. In the second
case, there has been a continuous process of mass migration from the countryside to the cities. Last but not least, and largely due
to the two preceding cases, Spanish people now lead a more sedentary life, spending a large part of their time sitting down at work
or during their daily commute. According to Spain’s 2012 National Health Survey, 41.3% of the population describes itself as
sedentary, and almost half the population does not do any sport at all, according to the special Eurobarometer on Sport and
Physical Activity published in 2014, which makes Spain one of the most sedentary countries in the European Union.
In addition, women’s access to the labour market poses difficulties for the reconciliation of work and family life in households,
with less time available for doing the shopping, cooking and even eating. This situation has led to the gradual displacement of the
Mediterranean diet, low in fats and high in fruit, vegetables, fish and olive oil, by foodstuffs with a higher calorie content and a
high percentage of saturated fats.
Due to these two factors, a sedentary lifestyle and a poor diet, there has been a surge in chronic pathologies linked to unhealthy
lifestyles, such as high blood-pressure, high cholesterol, obesity and diabetes. For example, the rate of obesity has increased from
7.4% to 17% over the past 25 years, whereby 17% of those over the age of 18 are now obese, while 37% are overweight. Among
minors, 10% of children and adolescents are obese, and 20% are overweight.
Nevertheless, these figures seem to have been a wake-up call that is bringing about a change in mentality among a significant
number of people, and it seems to be spreading. Accordingly, the 2014 Eurobarometer on Sport and Physical Activity reported that
the number of Spanish people playing regular sport (five times a week) was one of the highest in Europe (15%).
This phenomenon of greater awareness of the need to adopt healthier lifestyle habits is clearly having positive effects on sundry
business sectors, such as, for example, those related to greater fitness or dietary care. The former includes such highlights as the
manufacture and sale of sports clothing, as well as sports equipment and accessories (bicycles, pedometers, heart rate monitors,
etc.), and sports facilities (gyms or yoga centres). Regarding the diet, there is a higher consumption of sugar-free sweeteners that
are low in calories, such as saccharine, or those based on natural components, such as stevia. By contrast, in other sectors this
change of mindset has had a negative impact, such as, for example, the tobacco industry (between 2006 and 2012 the number of
smokers fell from 26.4% to 24%, the lowest figure for 25 years) and the sugar industry.
Nevertheless, in several cases, the effects are not uniform, even within the same business sector. For example, the non-alcoholic
beverages industry has recorded sharp growth in the consumption of energy drinks, although the consumption of traditional
sweet carbonated soft drinks has tended to flatline or even fall. Something similar is occurring in the food industry, which has
recorded major growth in healthy foodstuffs (fat-free and low-fat products, or ones that help to reduce cholesterol), while those
people that are more conscious of health lifestyle habits avoid consuming foodstuffs with a high content of saturated fats and
calories. Finally, the hospitality sector has been affected in different ways by this change in lifestyle, with sharp growth in health
food restaurants while, by contrast, there has been a slowdown in the growth of the large chains of fast-food outlets.
Sources:
- The Mediterranean diet is at risk of extinction (El Mundo, 26/10/2011)
- Spain’s 2012 National Health Survey (Spain’s National Office of Statistics, 14/03/2013)
- Special Eurobarometer 412: Sport and Physical Activity Report – (European Commission, 03/2014)
FOOTNOTES
1
This analysis has numerous variants and names depending on the authors. Among the best known is PESTEL or PESTLE Analysis, which is an acronym of
the dimensions involved: Political, Economic, Social, Technological, Legal and Ecological (Johnson et al., 2017).
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Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 3. Environmental analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
3.2. Analysis of the general environment
3.2.2. Industrial districts
3.2.2. INDUSTRIAL DISTRICTS
An industrial district, also referred to as a cluster (Porter, 1998), is a numerous group of similar firms and institutions connected by the
same economic activity and located in a specific geographical environment. A district includes both those firms belonging to the main
industry identifying it and those institutions or other businesses related to it. An industrial district tends to consist of the following types of
agents (figure 3.3):
Analysis
An analysis of the role of clusters in competition can be found in Porter, M. E. (1998), “Clusters and the new economics of
competition”, Harvard Business Review, November-December, pp. 77-90: http://hbr.org/
- Businesses dedicated to the same activity and which provide end products and services. It may sometimes involve a single large
corporation that makes up the district.
- Different types of institutions, both public and private, which provide specialised technical support and information, such as
universities, research centres, standards agencies, training centres, business associations, financial institutions and government
agencies.
- Businesses located upstream and downstream of the main or focus product, such as suppliers of raw materials, components,
machinery and specialised services, or distribution companies and client businesses.
- Business in related industries, which provide products that supplement the main product.
Figure 3.3: Types of agents in an industrial district
Considering a district’s components, its boundaries will rarely coincide with the traditional classifications of economic sectors, as they
include institutional agents and relationships between different industries. Its analysis is therefore more closely related to the general
environment, albeit referring to a smaller geographical arena, as the aim is to define the role that a firm’s location, as an aspect of the
environment, plays in its competitiveness. Belonging to an industrial district may favour a firm’s competitiveness on the basis of various
factors (Porter, 1998):
1. Increase in productivity: given the easy access to certain specialist resources in the district, such as suppliers, qualified labour,
information, infrastructures, communications networks, etc., made possible by geographical proximity and which would otherwise be
difficult or expensive to obtain.
2. Boost for innovation: given their closeness to research centres or due to their actual internal interrelations, the companies belonging
to a district tend to perceive new customer needs and new trends in technology more quickly than their isolated competitors, thereby
favouring innovation processes. What’s more, internal competitive pressure forces them to distinguish themselves in a more creative
manner, increasing the onus on them to innovate.
3. New start-ups: The district’s very existence favours the incorporation or entry of new companies that will join it to make it stronger
and more competitive. The entry barriers are lower, as they can gain easier access to the specialist human and material resources they
require. Furthermore, the financing for setting up new businesses tends to be cheaper, as the risk premium required by financial
institutions is lower because of the greater number of potential clients and the prior experiences of other existing companies.
Analysis
An analysis of the role of regional clusters in global competition can be found in Andersen, P. H. (2006): “Regional clusters in a global
world: production relocation, innovation, and industrial decline”, California Management Review, vol. 49, no. 1, pp. 101-122:
https://doi.org/10.2307/41166373
In short, industrial districts are a combination of competition and cooperation, as on the one hand they generate direct rivalry between
companies that compete with one another in the same type of business, yet on the other hand they generate symbiotic relationships that are
advantageous to all concerned, both because they are located in a common environment and because of the complementarities emerging
between them.
Application 3.5:
The Parque Joyero (Jewellery Park) industrial district in Cordoba
by Javier Amores Salvadó
The origins of the jewellery trade in Cordoba date back to the 16th century, when local silversmiths began to organise themselves
into guilds. Both then and now, activity in the sector was centred on the existence of myriad small workshops which, over the
years, have managed to keep the business alive. Thanks to this, its importance has been steadily growing until it has now become a
collective with a considerable specific weight, comprising one thousand manufacturers and accounting for 20% of the province’s
industrial fabric. It currently employs 15,000 people and generates an annual turnover of more than 600 million euros, in turn
accounting for 60% of domestic output.
Nevertheless, Cordoba’s traditional jewellery trade lacked an industrial structure and was excessively fragmented, with a raft of
companies competing with one another for a similar market share, holding back the industry’s modernisation and hindering the
necessary unity of action for facing the growing outside competition both from the European Union (mainly Italy) and from
several Asian countries that are competitive in terms of cheap labour.
With a view to overcoming these limitations, the Parque Joyero (Jewellery Park) opened in Cordoba in 2005, with its purpose being
to group together on a single site the main companies in the jewellery, costume jewellery, silverwork and watch-making sectors,
thereby facilitating business cooperation and the implementation of structures for industrial research, business cooperation, and
the generation and transfer of technological expertise in the various fields.
Covering a total floor area of 140,500 square metres, in 2015 the Parque Joyero in Cordoba was home to 169 firms, of which 100
belonged to the jewellery, watch-making and silverwork sector, as well as a further 30 ancillary businesses dedicated to working in
precious stones, pearls, the sale of metal, advertising photography for jewellery, and security, as well as another 20 firms that
provide backup and related services, such as banks, courier services, cleaning, and insurance companies.
Furthermore, it has the institutional support of the regional government, the Junta of Andalusia, through the Centro Tecnológico
Andaluz del Diseño (Andalusian Design Technology Centre), as well as other agencies, such as the Consorcio Escuela de Joyería
(Jewellery College Consortium) and its technical office, which supports companies in schemes related to quality, occupational
safety, and training.
© 2018 [Thomson Reuters (Legal) Limited / José E. Navas López y Luis A. Guerras Martín (dirs.)]© Portada: Thomson Reuters (Legal) Limited
02 NOV 2021
Fundamentals of
strategic management.
1st. september 2018
CIVITAS
This PDF Contains
3.3. Analysis of the competitive environment, p.RB-3.4
3.3.1. Defining the competitive environment, p.RB-3.4
3.2.2. Analysis of the industry’s structure, p.RB-3.5
3.3.3. Limitations and extensions of the five-forces model, p.RB-3.6
3.3.4. Industry segmentation: Strategic groups, p.RB-3.7
02 NOV 2021
PAGE RB-3.4
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 3. Environmental analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
3.3. Analysis of the competitive environment
3.3. ANALYSIS OF THE COMPETITIVE ENVIRONMENT
As we have seen, the competitive environment refers to that part closest to the firm’s business. It features the main players it deals with, such as
competitors, customers and suppliers. Therein lies the importance of its analysis. According to Pearce and Robinson (2015: 109), an analysis of the
competitive environment requires answering the following four crucial questions: 1) Who are our business competitors? 2) What are the industry’s
boundaries? 3) What is the industry’s structure? 4) What are the competition’s determinants? The answers to these questions will directly help to
define the competitive strategy.
02 NOV 2021
PAGE RB-3.4
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 3. Environmental analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
3.3. Analysis of the competitive environment
3.3.1. Defining the competitive environment
3.3.1. DEFINING THE COMPETITIVE ENVIRONMENT
The concept of a firm’s competitive environment seems to be an easy one to understand, yet it is often difficult to define for a specific firm, so it
should answer the following questions: who are our business competitors? What are the boundaries of the industry I am competing in? The
answer to these questions is not always obvious and, moreover, it is especially relevant. Firstly, because it delimits the arena that subsequently needs
to be analysed in order to identify opportunities, threats and key factors of success. Secondly, because a poor definition of the competitive arena may
mean the analysis omits firms from other industries or sectors that may compete directly for some customers. Thirdly, because it may compromise the
definition of the most appropriate competitive strategy because it does not consider all the agents involved.
According to an initial approach, the answer to the above questions is related to the type of business the firm pursues, that is, to the industrial sector
in which it is located. An industry is defined as “a group of companies offering products or services that are close substitutes for each other”
(Hill et al., 2017: 44). This definition contains an initial interpretation of who these rivals may be: all those firms that provide substitute products. This
substitute nature, nevertheless, may be measured by two criteria: technology and market.
The technological criterion is applied from the standpoint of supply, and defines an industry as the sum of firms that use similar operating processes
or raw materials in the manufacture of one or more products. The key, therefore, to this definition is the degree to which these operating processes
are interchangeable. The market criterion is applied from the demand side, and picks out the sum of firms manufacturing products that are closely
interchangeable from the perspective of catering for customers’ needs.
Both definitions give rise to the same classification of an industry when the products can be substituted for purchasers and producers alike; yet this
will not always be the case, as there are cases in which the degree of substitution differs substantially for one or the other. For example, in the case of
a consumer of leisure, a book, album or cinema ticket may be considered close substitutes, but this is not the case from the viewpoint of supply, given
that the operating processes used are very different. The opposite case may apply to men’s and women’s clothing, which can hardly be considered
substitutes, yet their operations involve very similar techniques and processes.
With a view to delimiting the different industries, use is often made of the classifications and nomenclatures that different institutions establish by
breaking down all economic activities into sectors and subsectors, such as the Clasificación Nacional de Actividades Económicas in Spain (CNAE,
www.ine.es/dyngs/INEbase/en/operacion.htm?c=Estadistica_C&cid=1254736177032&menu=ultiDatos&idp=1254735976614) and the North American
Industry Classification System (NAICS), developed by the US, Canada and Mexico in 1997, which partially replaces the more traditional Standard
Industrial Classification (SIC) codes in the US (http://siccode.com).
Besides the traditional concept of industrial sector, there is a need to define others closely related to it, such as industry, business and market, which
may help to resolve the aforementioned demarcation problems. Following Abell’s approach (1980), the competitive environment may be defined on
the basis of three dimensions (figure 3.4):
1. Groups of customers served, that is, the target consumers of products or services.
2. Functions the products or services cover for said customers, which is closely related to the needs met.
3. Technology used or how the product is supplied, that is, the manner in which a function is covered.
Based on these definitions, three basic concepts may be defined that will help us to identify and delimit the competitive environment.
- Industry: It consists of the series of firms that, based on a specific technology, seek to attend to all their customer groups and cover all possible
functions. Accordingly, this concept would delimit the industrial sector on the supply side (figure 3.4). For example, the air transport industry,
which is very different to the ones involving road and rail, respectively.
Figure 3.4: Schematic of an industry
- A firm’s business: An industry may contain numerous firms. Each one of them decides, according to the technology chosen, to cater for one or
more types of customer groups and cover one or more functions or needs. The concept of business is therefore the specific selection each firm
makes of the functions and customer groups it wishes to cater for. Figure 3.5 shows how different companies may define their business in the
same industry in very different ways; while firm A chooses to cover one function for a wide range of customer groups, firm B prefers to cater for
a single customer group by covering a whole raft of functions. For its part, firm C decides to specialise in a single function for a single customer
group. Likewise, a firm might dedicate itself to different businesses belonging to different industries. For example, there are firms within the
publishing industry that publish only text books, periodicals, poetry, etc. Others encompass a wide range of publications, with some of them
pertaining to business groups that also operate in other industries, such as radio broadcasting.
Figure 3.5: Different businesses in the same industry
- Market: This includes the sum of companies that cover the same function for the same group of customers, irrespective of the industry in which
they operate, that is, of the technology they use (figure 3.6). This concept is related to the definition of the industrial sector from the demand
side. For example, the entertainment function may be served by different industries, such as cinema, theatre, television, theme parks, etc. They
are different ways of catering for the same need. One might, therefore, refer to the entertainment market in which sundry industries are
involved.
From the perspective of strategic analysis, the most important step is to define a firm’s competitive environment. As we noted at the beginning, this
consists of competitors, customers and suppliers. The concept of market we have defined is, therefore, closer to the definition of the competitive
environment, as it includes both competitors and customers. Thus, if the definition of market is extended to include suppliers, this provides the
competitive environment the firm needs to analyse. From a customer’s perspective, replaceability –products or services that cover the same basic
need– is the key to defining a firm’s competitive environment (Amason, 2011).
Once we have decided upon the concept of market, all that remains is to specifically identify a firm’s competitors:
- If an industry caters solely for one specific function for one particular group of customers and all the companies in that industry define their
businesses in a highly similar way regarding the three basic dimensions, it will not be difficult to identify the firm’s competitive
environment, as all its rivals come from the same industry and cover the same set of functions for the same groups of customers.
Figure 3.6: Concept of market
Source: Adapted from Abell (1980: 197)
- It sometimes occurs that companies from the same industry define their businesses differently. Indeed, many industries can be divided up
into smaller competitive scopes through the identification of segments. The criteria for delimiting these segments will be studied in due course.
- A third situation arises when companies from different industries seek to cover the same functions for the same customer groups (using,
therefore, different technological alternatives). In this situation, firms compete only in those activities in which they coincide because of the
function covered and because of their target customer group. In these cases, it tends to be said that the competitive environment is
heterogeneous.
Identifying the competitive environment may give rise to situations that, at a first glance, may seem somewhat surprising. Thus, we may come across
companies in the same industry that are not direct rivals because they cover different functions for different customer groups. Such would be the
case of two airlines that service different routes, whereby they do not compete for the same customers.
On a similar note, there are frequently situations in which direct competitors come from different industries. Such is the case of passenger transport
between two cities. This function may be covered by airlines, railway companies, coach firms or even by the customers themselves in their own cars.
In these situations, the concept of industry on the supply side is irrelevant from a strategic perspective, as it does not help to identify competitors.
In short, defining the competitive environment and identifying the main competitors constitute a difficult yet crucial issue for the outside analysis
that requires prudence and, on occasions, imagination (Pearce and Robinson, 2015). It might be equally mistaken to define the boundaries too broadly
or too narrowly. These should therefore be defined by managers based not only on the objective data available but also on their own judgement
depending on the purpose of each analysis and its context. There is a need, therefore, to establish certain boundaries that include the main rivals,
considering other more distant competitors as potential ones or substitutes (Porter, 2008; Grant, 2016).
Application 3.6:
Application of the Abell model to the media
The figure accompanying this box provides an approximate view of the application of the Abell model to the media. The latter fulfil a series
of functions and target different types of customers (we have chosen the geographic variable for their segmentation). Each medium may be
considered a different technology or specific way of covering the functions. Accordingly, one may refer to different industries, such as
“newspapers”, “magazines”, “radio”, “television”, “websites” and “mobile apps”. Each one of them may seek to meet the varying needs of
different customer groups.
Most of the functions described are common to all the media. Nevertheless, each company belonging to one of the industries may or may
not cater for the different needs of all or part of the various customer types. For example, a public radio broadcaster –such as Radio
Nacional de España– does not cover the function of advertising or provide an outlet for it; while a local newspaper –such as La Rioja or El
Norte de Castilla– caters solely for customers in their regional catchment area. This means the three dimensions of the Abell model can be
defined as follows:
Functions: Latest news, creation of opinion, service information (duty pharmacies, cinema listings, the weather, traffic reports in the city,
etc.), leisure, culture, advertising, the purchase of products or services (internet shopping), intermediation and contacts (online job offers,
classified ads, etc.).
Customer groups: local, regional, national, international.
Technologies: periodicals (newspapers), magazines, radio, television, websites and mobile apps.
The business refers to the manner in which each company defines the scope of the firm as a series of needs, customer groups and
technologies. Some companies define their businesses in a very broad way, such as the Prisa Group, for example, which is involved in
several industries (newspapers, radio stations, TV channels, websites and mobile apps), seeking to cover all the functions and targeting all
nature of customers (local, national and international). Other companies define their businesses in a very narrow way. For example,
Segunda Mano (Second Hand) caters solely for the functions of “intermediation” and “advertising medium” through the channels of the
printed press and internet. Other similar websites are fotocasa.es for the property market, coches.net for cars, and infojobs.net for
employment.
Concerning the concept of market, it is defined by a function or group of customers. Thus, the advertising market is referred to as the
function of “advertising medium” and its scope is, for example, nationwide, regardless of the industry from which that service is covered. It
should be noted that some of the functions included in the figure may be covered by companies from other industries. For example, the
function of advertising medium may be covered also by advertising hoardings, buses, etc., which means these companies compete with the
media to cover that function. Likewise, the leisure function may also be covered by many other industries, such as the cinema, music,
books, etc, which are in direct competition especially with TV and radio.
All this means a company needs to define its competitive environment for each targeted function and customer group, in other words, for
each market in which it operates. It will therefore know who its direct and indirect competitors are, and thereby analyse the characteristics
–opportunities and threats– of its environment. This definition is not always an easy one to make, as each combination of functions and
customer groups may feature competitors from very different industries to the one in which the company is located.
02 NOV 2021
PAGE RB-3.5
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 3. Environmental analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
3.3. Analysis of the competitive environment
3.2.2. Analysis of the industry’s structure
3.2.2. ANALYSIS OF THE INDUSTRY’S STRUCTURE
The aim of analysing the industry’s structure is to highlight the opportunities and threats it poses for a firm and which determine its capacity for
returning profits, which constitutes the industry’s attractiveness. This analysis answers the question: how do firms compete in the industry? The
underlying adage in this analysis is that the industry’s structure conditions the firm’s behaviour and profitability.
In an industry in a state of perfect competition, there are very few options available to a firm, being restricted to the application of the market price,
with no capacity for influencing supply and demand. It is those industries in a state of imperfect competition that the possibilities arise for
higher earnings, if one is capable of properly exploiting opportunities and tackling threats. There follows a description of an analytical model based
precisely on this hypothesis, involving imperfect markets in which it is possible to outperform one’s competitors. From this perspective, opportunities
will be factors that reduce competition and allow above average earnings. Threats will involve aspects that may increase the level of competition,
leading companies in the sector to a more tempered performance. The greater the opportunities and the fewer the threats, the more attractive the
industry will be, that is, the higher the expectations on returns.
Porter (1980:2) posits the so-called five-forces model of industry competition, which is the most widely used methodology for investigating these
opportunities and threats. According to Porter 2), an industry’s level of attractiveness is informed by the action of five basic competitive forces, which
overall define the possibility of recording a better performance, provided threats are tackled and opportunities taken. These five forces, shown in
figure 3.7, are as follows:
Analysis
An analysis of the five-forces model can be found in Porter, M. E. (2008), “The five competitive forces that shape strategy”, Harvard Business
Review, Special HBS centennial issue, January, pp. 78-93: http://hbr.org/
Figure 3.7: The five-forces model of industry competition
Source: Porter (1980: 4)
a) The intensity of rivalry among established competitors
The first of the forces refers to the behaviour of competitors in the industry at a given moment. A study is made here of the industry’s basic
characteristics that define the general framework for competitors, as well as the possible actions and reactions of already established companies that
may alter the intensity of this rivalry. As the intensity of the competition increases, the possibility of higher returns is reduced and, therefore,
the industry’s attractiveness diminishes. The intensity of this rivalry is the outcome of a series of structural factors, such as (Porter, 1980: 18-21):
- Numerous or equally balanced competitors: as the number of established competitors increases, with greater balance between them, the
intensity of the competition will also increase. This factor is associated with the industry’s degree of concentration, which explains how each
competitor’s market share is distributed. This means industries may be concentrated or fragmented, with the intensity of the competition being
lower in the former case.
- Industry’s growth rate: as the industry’s growth rate slows, the intensity of the competition increases. If we take our reference to be the
industry’s life-cycle, a distinction may be made between industries that are emerging, growing, maturing and declining. As an industry enters
the stages of maturity or decline, the intensity of competition increases, as turnover stagnates or falls and competitors are required to be more
aggressive to capture new customers or sustain their current ones.
- Mobility barriers: those obstacles or hindrances that stop firms moving from one segment to another within the same industry. The presence of
mobility barriers restricts the competition to those firms included in each segment, so its intensity for the industry as a whole diminishes.
- Exit barriers: these are factors that impede or hinder the departure from an industry, even in the case of poor or negative results. Their
presence forces firms to continue competing in order to survive, so the intensity of the competition increases. The main exit barriers are as
follows: specialized assets that are difficult to reuse outside the industry, fixed exit costs such as severance pay or the liquidation of stock,
strategic interrelationships between some businesses and others that require sustaining all of them, emotional or psychological barriers, and
social restraints (industrial action, demonstrations, product boycotts, etc.) or political ones (legislation, political pressure, etc.), which make it
difficult to terminate the business (Porter, 1980: 20-21).
- Companies cost structure: the greater weight of fixed costs over variable ones drives firms to operate at full capacity in order to reduce their
average costs. This tends to increase the output of products and force their sale on the market, thereby increasing the intensity of competition.
- Product differentiation: as an industry records a higher level of product differentiation, the intensity of competition diminishes, as customers
show loyalty to differentiated products.
- Switching supplier costs: these involve the expense a customer has to incur when switching suppliers. Their existence reduces the intensity of
competition, as it hinders the customer’s choice and protects the supplier from an aggressive approach by competitors.
- Installed operating capacity: an excess of installed operating capacity in the industry leads to an imbalance between supply and demand. This
forces firms in the sector to be more aggressive in their competitive approach in order to provide an outlet for their production outputs.
- Competitor diversity: when rivals differ as regards strategies, national origins, personality, relations with their parent companies, objectives,
size and ways of competing, competition may become more intense due to the difficulty in establishing rules of the game that are generally
accepted or in predicting competitors’ behaviour.
- Strategic interests: as more firms become interested at the same time in an industry’s success, competition intensifies, as they will be willing to
undertake all kinds of actions to achieve their aim, even though they may have to sacrifice their results in the meantime.
b) The threat of new entrants
Potential entrants are those new firms wishing to enter an industry. Generally speaking, it may be affirmed that the more attractive an industry is,
the more potential rivals there will be. An industry’s level of attractiveness will diminish if potential competitors manage to enter it and compete on
similar terms to current competitors, otherwise it will increase. The possibility that new competitors will enter and start competing depends on two
factors: the industry’s entry barriers and the manner in which established competitors react toward new entrants.
b.1) Entry barriers: They may be defined as those factors that hinder the entry into the industry of new firms, normally through the higher costs
incurred, which means a decrease in the financial expectations of possible new competitors. The presence of entry barriers reins in the appearance of
new entrants, protecting those firms already installed, and therefore sustaining their financial expectations. In general, it may be said that industries
with entry barriers have higher average returns, and the presence of such barriers is a requisite if an industry is to uphold its attractiveness over
time. Indeed, if an industry is profitable but does not have any entry barriers, many companies will install themselves in it drawn by the higher
returns, thereby inevitably increasing the intensity of competition. Two main kinds of entry barriers may be singled out:
- Absolute entry barriers: those that are very difficult or impossible to overcome, regardless of the resources the firm may have, except in
exceptional cases. The most typical case would involve those industries in which a government licence is required for operating, such as, for
example, television channels, lottery concessions or, in Spain at least, chemists.
- Relative entry barriers: those that can be overcome depending on the firm’s resources and capabilities, although they pose different levels of
difficulty. They are linked to the additional costs that potential competitors have to assume to enter the industry. Of course, if the level of entry
costs is very high, these may become an insurmountable de facto barrier for some firms.
Once this differentiation has been established, an industry’s main entry barriers involve the economies of scale and scope that current competitors
enjoy, other cost advantages (such as patented product technology, favourable access to raw materials, location advantages, the learning or
experience curve, etc.), product differentiation in favour of established firms, start-up capital needs, the costs for customers of switching from
current firms to new entrants, access to distribution channels (restricted for new competitors or available at a high cost) or government policy that
favours established companies (e.g., subsidies, restrictions on licences, ecological or safety legislation, etc.) (Dess et al., 2014: 50-51).
Whatever the case, the barriers’ effectiveness depends on the resources and capabilities the new entrants have (Grant, 2016: 72). In fact, firms
with high competencies (in financial resources, technology, image, brand, innovation capacity, etc.) may quite easily overcome these barriers and pose
a real threat to those already established in the industry. In the financial industry, for example, the use of new information technologies has enabled
certain financial institutions to open virtual branch-offices on the internet, thereby overcoming the entry barrier involving the extensive branch
network in traditional banking.
Analysis
An analysis of how Tesla has overcome barriers entering the automobile industry can be found in Stringham, E. P.; Miller, J. K.; Clark, J. R.
(2015), “Overcoming barriers to entry in an established industry: Tesla Motors”, California Management Review, vol. 57, no. 4, pp. 85-103:
https://doi.org/10.1525/cmr.2015.57.4.85
b.2) Reaction of established competitors: Insofar as current competitors are able to react strongly, new entrants tend to be dissuaded. The
conditions that signal a likelihood of reprisals are an industry’s track record in this matter, which might take the form of price wars, blanket
advertising campaigns, special offers or other emotional or localist aspects, with the aim of established companies being to dissuade the new entrant
through their major resources for defending themselves (surplus liquidity, surplus operating capacity, etc.) or advantages in distribution channels.
c) Threat of substitute products
Substitute products are those that fulfil the same customer needs as those already provided by the industry, being all those that play the same
roles from the customers’ perspective, regardless of the industry producing them. This consideration leads us back to Abell’s model (figure 3.4), which
features the different industries covering the same functions for different customer groups.
As an industry finds substitute products, its level of attractiveness will tend to diminish and, therefore, its expectations of profitability. The existence
of substitute products forces established firms to convince their customers of the advantages of consuming their products in terms of quality, price,
characteristics, fulfilment of needs, ease of use, etc., as opposed to those produced by other industries. The threat of substitute products depends on
the following factors:
- The extent to which the substitute products provide a better quality-price ratio for customers.
- The costs of switching to the alternative products are low.
- The substitute products are produced by high-return industries that can sacrifice part of their profits and reduce their prices.
On certain occasions, the industry’s own specific pricing level sets the threshold above which alternative products may become economically viable,
as occurs, for example, with oil as a source of energy as opposed to alternative energies such as solar or wind power. By contrast, when substitute
products are tendered at lower prices, the companies in the industry are forced to lower their own, reducing their profit margins, unless they can find
new ways of reducing their costs. This situation is often seen in the rivalry between air and rail transport.
Access Proview
See Application 3.7: Competitive structure of the Spanish automotive industry, by Daría Sánchez Fernández
d) Bargaining power of suppliers and customers
We define the bargaining power of suppliers or customers as the ability to impose conditions on their transactions with firms in the industry.
These conditions may come in many different forms, such as the right to discounts, deferred payment, quality requirements, delivery times, returns,
complaints, etc. When suppliers, including those providing labour, or customers have a high negotiating power, they put pressure on prices or costs
and seek to capture part of the value added generated in the industry and therefore, reduce its profitability. This means the greater the bargaining
power of suppliers and customers, the lesser the industry’s attractiveness.
The bargaining power of suppliers and customers is obviously not the same across the board, just as it is not for the different firms in the industry.
Nevertheless, there are factors that do have an influence, in a general way, on that bargaining power, favouring one or other agents. We may consider
that the factors explaining the bargaining power of suppliers and customers are similar and are linked to the general supplier-customer relationship.
We are therefore going to analyse them jointly, noting when they favour a supplier’s position and when they favour a customer’s one. This will allow
integrating the analysis of the two competitive forces simply by considering that the firms in an industry act as customers as regards their suppliers
and, in turn, as suppliers to their customers. Therefore, in practice, the analysis should be conducted twice: once, when the firm acts as a customer,
and the other time when the firm acts as a supplier.
Analysis
An analysis of the structure and evolution of the Japanese software industry can be found in Cole, R. E. and Nakata, Y. (2014), “The Japanese
software industry: What went wrong and what can we learn from it?”, California Management Review, vol. 57, no. 1, pp. 46-43:
https://doi.org/10.1525/cmr.2014.57.1.16
The main factors with an impact on the bargaining power of suppliers and/or customers are the following (figure 3.8): degree of concentration in
relation to the industry, volume of transactions arranged with firms in the industry, degree of importance of the purchases made in relation to a
customer’s costs, degree of differentiation of the products or services subject to the transaction, the customer’s level of profits in relation to the
supplier, the real threat of forward or backward vertical integration, the importance of the product or service sold for the quality of the buyer’s
products or services, whether or not the product may be stockpiled, level of information of one of the parties as regards the other one.
Figure 3.8: Factors affecting the bargaining power of suppliers and customers
FOOTNOTES
2
This section is based on chapter 1 by Porter (1980).
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PAGE RB-3.6
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 3. Environmental analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
3.3. Analysis of the competitive environment
3.3.3. Limitations and extensions of the five-forces model
3.3.3. LIMITATIONS AND EXTENSIONS OF THE FIVE-FORCES MODEL
The five-forces model is widely accepted for analysing the competitive environment, and even though it is a very sound model, it can be improved or
extended. First of all, not all the forces carry the same weight and not all the factors with a bearing on each force have the same importance.
One needs to recognise the critical factors with a decisive impact on an industry’s attractiveness. Furthermore, there are certain limitations and
extensions of particular relevance that we need to analyse:
1. Relative importance of the industry’s structure: A common criticism of the logic of the five-forces model is that it gives too much importance
to an industry’s structure when explaining a firm’s performance. If an industry’s degree of attractiveness were to be the main determinant of a
firm’s performance, its strategy would simply involve choosing the right industry and understanding the competitive forces better than its rivals.
Competitive forces are the same for all the firms operating in the same competitive environment, whereby in theory they all have the same
performance opportunities. Reality, however, shows that firms in the same industry record very different performances. This can only be
explained by the difference in their resources and capabilities –a matter that will be addressed in the next chapter–.
Access Proview
See Application 3.8: Industry effect and firm effect on corporate performance, by José Ángel Zúñiga Vicente
2. Boundary agents: Besides suppliers and customers, firms have dealings with other stakeholders, called boundary agents, whose actions may
limit an industry’s attractiveness. These agents include public authorities, consumer organisations, ecologists and other similar groups.
3. Complementary products: A question of particular relevance is the fact the model considers the existence of substitute products that reduce
the degree of attractiveness but not the complementary products (Brandenburger and Nalebuff, 1996). Nevertheless, in many industries there are
complementary products that in conjunction with the industry’s own ones can considerably increase an industry’s level of attractiveness. A
product complements another when a customer values it more when it is sold or used in conjunction with the complementary one than when it is
sold on its own. An example of this case is the relationship between electric cars and vehicle recharge points or POD points.
4. Industry dynamics: The model provides a snapshot of the characteristics of competition at a given moment, but does not consider the possible
changes that may occur and which introduce new conditions on the nature of competition and, therefore, on the expectations for future
performance. Changes in an industry may stem both from factors that we could describe as external to established competitors (e.g., those arising
from the general environment) and from those that we could refer to as internal, due to the strategic actions of the established firms themselves
(e.g., brand policies, innovations, product differentiation, merges, alliances, etc.).
5. Hypercompetitive industries: Some authors have focused the spotlight on the ever more frequent presence of hypercompetitive industries, in
which the pace of change is fast and increasingly more intense (D’Aveni, 1994). In these cases, the industry becomes increasingly more complex
and dynamic, whereby the uncertainty associated with the competitive environment increases exponentially and the industry evolves in an
unstable and unpredictable manner (Barney, 2014). The key question for considering an industry to be hypercompetitive is the speed of change
(Grant, 2016: 93). Most of the industries related to information technologies could be included under this heading, as well as many internetrelated businesses. The problem with these industries is that their structure is constantly changing, their competitors’ bases are constantly
evolving, and doing so in an unpredictable manner, which means that the usefulness of the five-forces model is greatly diminished.
02 NOV 2021
PAGE RB-3.7
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 3. Environmental analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
3.3. Analysis of the competitive environment
3.3.4. Industry segmentation: Strategic groups
3.3.4. INDUSTRY SEGMENTATION: STRATEGIC GROUPS
Identification can be made in most industries of smaller competitive areas in which the dynamics of competition is structured in a particular way.
This process, which completes an industry-level competitive analysis, involves identifying segments, through what is referred to as industry
segmentation.
The most traditional way of performing this segmentation is based on demand variables such as the characteristics of products (quality, price,
physical size, presentation, etc.) or customers (geographical areas, distribution channel, life-style, population types, etc.). Each one of these segments
may be applied the same analytical instruments as the industry for estimating their degree of attractiveness.
Besides this conventional approach, the possible division of an industry into smaller competitive environments may be investigated from a supply
perspective through what are known as strategic groups, defined by Porter (1980: 129) as “the group of firms in an industry following the same or
a similar strategy along the strategic dimensions”. These strategic dimensions may include variables such as broad product line, geographical
scope, distribution channels, product quality, pricing policy, cost structure, degree of vertical integration, technology, customer care, after-sales
service, etc.
Analysis
An analysis of the concept and the role of strategic groups in industry analysis can be found in McGee, J.; Thomas, H. (1986): “Strategic
groups: theory, research and taxonomy”, Strategic Management Journal, vol. 7, no. 2, pp. 141-160: https://doi.org/10.1002/smj.4250070204
An analysis of strategic groups may help to understand the dynamics of the competition between direct rivals better than when it is performed for the
industry as a whole. In fact, in most industries it is relatively easy to find firms that coincide in the way they compete in some of the aforementioned
dimensions, and which in turn do so differently to another set of companies. It is in these circumstances that one may affirm there are strategic
groups.
Through the selection of two significant dimensions, the groups could be shown on a map of strategic groups, such as the one appearing in
applications 3.9 and 3.10. These figures reveal the homogeneity of the dimensions chosen for the firms included in each one of the groups. The
diameter of the circles depicts the collective involvement in the market of the firms pertaining to each strategic group. The identification of each
group permits the firms included in each one to know who their most direct rivals are, as in addition to being in the same industry, they compete in
the same way. In turn, it permits isolating oneself to a certain extent from all the other competitors, for although they are in the same industry, they
compete in a different way.
Access Proview
See Application 3.9: Strategic groups in the urban hotel industry, by Eva Pelechano Barahona and Fernando E. García Muiña
On the other hand, each group has its own degree of attractiveness as it will have a different set of opportunities and threats, and therefore different
expectations in terms of performance. It therefore needs to be considered whether a firm may move from one strategic group to another, and at what
cost (permeability of groups). This will depend on the existence of mobility barriers that will make it difficult for firms in one group to change their
way of competing across the strategic dimensions mentioned earlier. These mobility barriers include both those on entering a new strategic group
and those that may appear when leaving the group in which the firm is currently competing (Hill et al., 2017: 59-60).
When an industry with strategic groups is devoid of mobility and exit barriers, firms may easily move from groups performing less well to ones
performing better, balancing out the competitive opportunities of all the firms, thereby increasing the intensity of the rivalry in the industry as a
whole, as noted above. Otherwise, the firms in a group may be protected from the competition of other firms, which although operating in the same
industry do not compete in the same way because they are in a different strategic group.
Application 3.10:
Strategic groups in food retailing
The food retail industry contains different strategic groups, which according to the basic variables of pricing and size of the establishment
(range of products provided), could be depicted as follows in the figure below.
The characteristics of the groups portrayed in this manner in the figure are as follows:
Group A (Hypermarkets): Very large establishment, relatively low prices, very wide product range, low customer service, located on the
fringe of urban areas, reduced additional sale services, and open all day. This group includes firms such as Carrefour, Alcampo, Hipercor
and Eroski.
Group B (Supermarkets): Medium size, medium-low prices, middling product range, low-medium customer service, within the urban
area. This group includes chains such as Mercadona, Supercor, Carrefour Market, Simply Market, Eroski Center and Ahorramás.
Group C (Discount stores): Medium size, very low prices, medium-low product range, low customer service, services reduced to a
minimum. This group includes chains such as DIA, Lidl and Plus.
Group D (Corner shops and convenience stores): Small size, medium-high prices, reduced product range, medium-high customer service,
close to customers, and open all hours. Apart from traditional local shops, this group could also include the chains Supercor Express o
Carrefour Express.
Group E (Specialised shops): Small size, medium-high prices, reduced product range (high in their segment), high customer service, high
quality produce. This group includes greengrocers, fishmongers and butchers, as well as specialised off-licences or a shop dedicated to
coffee or tea products.
Group F (Delicatessens): Small size, very high price, reduced or segmented product range, very high customer service, luxury or carefully
selected produce, attractive presentation of products. This group includes the Gourmet shops in El Corte Inglés, some wine shops, and very
select bakers or cake shops.
Besides identifying these groups, recent years have shown how the success of the Mercadona Group has led to at least two movements
between groups. For example, firms in Group C (discount stores) have sought to improve their product range and quality in terms of both
their products and their customer service, which has meant bringing their model closer to Mercadona’s. On the other hand, some of the
stronger firms in the overall industry, and which competed especially in the group of hypermarkets, have invested in new establishments
in the group of supermarkets in order to draw closer to customers and feature in the most successful group. This has been the case with the
supermarkets in El Corte Inglés, the Carrefour Market, the Simply Market (Alcampo) and the Eroski Center.
SUMMARY BOX
THE BUSINESS ENVIRONMENT
- Concept and types of environment: general and competitive
- Objective: Identify opportunities and threats
ANALYSIS OF THE GENERAL ENVIRONMENT
- Concept of the general environment and the importance of analysing it
- The Porter Diamond as a model for measuring the competitiveness of countries
- Concept of the strategic profile of the environment and design methodology: basic dimensions
- Expediency, advantages and drawbacks of the strategic profile
- Concept of industrial district (cluster) and types of agents
- Advantages for a company locating in an industrial district
ANALYSIS OF THE COMPETITIVE ENVIRONMENT
- Definition of an industrial sector
- Concepts of industry, business, market and competitive environment
- Forces that define the degree of attractiveness of an industry and variables upon which it depends: intensity of rivalry among established
competitors, threat of new entrants, threat of substitute products and bargaining power of suppliers and customers
- Limitations of the five-forces model: relative importance of the industry’s structure, boundary agents, complementary products, industry
dynamics and hypercompetitive industries
- Criteria for defining segments in an industry
- Concept of strategic groups and design of representative maps
QUESTIONS ON THE CHAPTER
- Differences between the general environment and the competitive environment.
- Critical analysis of the environment’s strategic profile as well as the analysis technique.
- Advantages and drawbacks of belonging to an industrial district.
- Identifying the differences between the concepts of industry, business and competitive environment.
- Influences of entry, mobility and exit barriers on the different forces in Porter’s model.
- Concept and expediency of identifying strategic groups within an industry.
- Variables for defining strategic groups.
ACTIVITIES
a) Choose any one company and identify those factors in the general environment that will affect it, and how.
b) Take any economic sector and use it to identify the concepts of industry, market, business (for a specific firm) and competitive environment.
c) Apply Porter’s five-forces model to any one industry, identifying its main threats and opportunities.
CASE STUDIES
Besides the brief cases mentioned in the text, and which can be accessed in Proview, the following case is presented for discussion in Guerras and
Navas (2014):
- Case 2: Rioja: A century-old wine-based industrial district (www.guerrasynavas.com/case02_5ed_outline.htm)
- Case 5: The hotel industry in Spain (www.guerrasynavas.com/case05_5ed_outline.htm)
- Case 6: The digital content industry in Spain (www.guerrasynavas.com/case06_5ed_outline.htm)
FURTHER READING
The following will help you to further develop the content of this chapter: Guerras and Navas (2015, chap. 4 and 5), Dess et al. (2014, chap. 2), Grant
(2016, chaps. 3 and 4) and Porter (1980, chaps. 1 and 7).
© 2018 [Thomson Reuters (Legal) Limited / José E. Navas López y Luis A. Guerras Martín (dirs.)]© Portada: Thomson Reuters (Legal) Limited
02 NOV 2021
Fundamentals of
strategic management.
1st. september 2018
CIVITAS
This PDF Contains
4.1.1. A firm’s identity, p.RB-4.1
4.1.2. A firm’s functional analysis and its strategic profile, p.RB-4.2
4.2.1. Value chain activities, p.RB-4.3
4.2.2. Value chain interrelations, p.RB-4.4
4.3. Analysis of resources and capabilities, p.RB-4.5
02 NOV 2021
PAGE RB-4.1
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 4. Internal analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
4.1. A firm’s internal diagnosis
4.1.1. A firm’s identity
4.1.1. A FIRM’S IDENTITY
An initial approach to the study of a firm’s internal environment involves defining what we shall refer to as its identity, with its purpose being to
determine a firm’s nature and its fundamental characteristics. The aim is not, therefore, to identify strengths and weaknesses directly, but instead
to improve our understanding of the traits defining it for their use as supplementary information in a more thorough analysis involving other
techniques. The following are some of the essential features that may be considered:
- Age: this refers to the historical stage or moment in which the firm is operating. Generally speaking, the main stages that can be singled out are
as follows: start-up, adolescent, developed or balanced, mature or adult, and anaemic or old.
- Size or dimension, especially in relation to all the other firms in the sector. From this perspective, and in very general terms, a firm may be
considered small, medium or large. This is an indicator of the amount of resources a firm has at its disposal. The variables most often used for
measuring size are turnover, total assets and headcount.
- Scope of the firm: combination of products and markets to which a firm is dedicated or, alternatively, functions or needs it seeks to meet, its
target customer groups, and the technologies used accordingly.
- Type of ownership: whether the firm is public or private. In the latter case, whether its ownership structure involves a family, a concentration
of a few shareholders or a diffuse ownership.
- Geographical scope: this refers to the extension of the geographical area catered for. A firm may therefore be local, regional, national or
multinational. Furthermore, a distinction may be made between single-plant firms (single-site facilities) and multi-plant ones (several facilities).
In this latter case, it would be convenient to know whether the facilities are geographically concentrated, close to each other, or dispersed.
- Legal structure: a distinction may be made between, among others, the following types, public limited companies, limited liability companies,
cooperatives, etc. In addition, it may refer to its single-company regime (a single firm for all the operations) or multi-company arrangement
(business group).
The consideration of these factors allows identifying a firm’s general characteristics through an overall image of it. A small family business devoted to
a single activity is not the same as a diversified multinational corporation. A young firm with a flexible approach is not the same as an old company
with a major aversion to change, nor is highly concentrated ownership the same as a disperse shareholding structure that requires seeking
appropriate governance solutions.
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Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 4. Internal analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
4.1. A firm’s internal diagnosis
4.1.2. A firm’s functional analysis and its strategic profile
4.1.2. A FIRM’S FUNCTIONAL ANALYSIS AND ITS STRATEGIC PROFILE
The classic approach to internal analysis looks for a firm’s strengths and weaknesses in its various functional areas. These are the different specialised
activities that every firm pursues, such as production, marketing, financing, human resources, and organisation. This approach to internal analysis is
referred to as functional analysis.
A firm’s strategic profile is an internal analytical technique used to identify its weak and strong points through a study and analysis of its
functional areas. From a formal standpoint, the drafting of this profile is very similar to that of the environment’s strategic profile, as described in
chapter 3, albeit obviously with a different content and objective. While the environment’s profile seeks to identify threats and opportunities
according to the analysis of a set of external variables, the aim of a firm’s profile is to single out strengths and weaknesses on the basis of a series of
internal variables. The drafting of the profile, as it appears in the figure 4.1, therefore consists of two parts:
- List of variables: these are the core aspects or factors whose proper functioning determines, to a lesser or greater extent, a firm’s ability to fulfil
its objectives. In sum, these variables underpin the main weak and strong points and are used to conduct a more in-depth diagnosis. These
variables are grouped into functional areas. The functional areas to be considered, the number of variables to be identified and the content of
these variables depend on each firm, as the same aspect may vary considerably in importance according to the type of firm involved, its operating
industry, the manner in which it competes in the industry, and so on.
- Evaluation of variables: this normally involves the use of a Likert scale scoring from 1 to 5, rating each variable’s respective performance as
very negative (VN), negative (N), neutral or indifferent (I), positive (P) or very positive (VP). This evaluation is to be undertaken by top managers
in response to their perception of the state of each variable.
It is easy to interpret a strategic profile. Depending on whether the graphic portrayal moves further to the right or to the left, it will indicate a more
favourable or unfavourable profile, respectively. Those deviations toward the right in the figure, away from the middle, represent strong points,
whereas those deviations toward the left are indicative of weak points.
The strategic profile is a highly intuitive and qualitative instrument that is simple to use. Its design provides us with a graphic depiction that is very
straightforward to interpret in terms of a firm’s situation. Its main use is as a systematic medium for suitably diagnosing the situation, through the
identification of the key variables on a firm’s internal performance and how each one of them behaves.
Figure 4.1: A firm’s strategic profile
Nevertheless, a strategic profile should be handled with a certain amount of care due to certain limitations that need to be taken into account:
- It is relative, as the information it provides should not be considered in absolute terms. A firm will have strengths or weaknesses insofar as it
performs better or worse than its rivals. It is therefore advisable to have a benchmark profile with which to compare its weak and strong points,
as shown in figure 4.1. This yardstick for the profile may be the industry average, the main competitor, the industry leader, or an ideal profile.
- It is subjective, which may lead to a problem of self-complacency on the part of the firm’s top managers, as they might consider that selfcriticism may be contrary to their own interests. This aspect should receive special attention, as any complacent or overly critical approach will
stop the firm suitably preparing to address its challenges successfully.
- It is static, as it provides a snapshot of the firm at a given moment in time. This limitation could be overcome by defining several profiles for the
same firm over differing time periods. This would allow monitoring the evolution of weak and strong points over time.
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Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 4. Internal analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
4.2. The value chain
4.2.1. Value chain activities
4.2.1. VALUE CHAIN ACTIVITIES
The value chain is built by breaking the firm’s activities down according to their direct or indirect link to its operations, as depicted in figure 4.2
(Porter, 1985: 39-43; Dess et al., 2014: 72-80). Based on this criterion, these activities may be classified as follows:
1. Primary activities: those that are directly part of the core operating process, as well as their transfer to customers and after-sales service.
They are as follows:
- Inbound logistics: reception, stockpiling, control of stock and the internal distribution of raw and ancillary materials through to their inclusion
in the production process.
- Operations or production in the true sense of the term: activities linked to the physical transformation of factors into products or services.
- Outbound logistics: activities involving the stockpiling and physical delivery to customers of finished products.
- Marketing and sales: activities designed to drive the sale of products.
- After-sales service: activities linked to maintaining the conditions of use of the products sold.
Figure 4.2: Porter’s value chain
Source: Porter (1985: 37)
2. Support activities: they are not directly part of the production process, but they do provide support for primary activities, guaranteeing the
firm’s normal operations, being as follows:
- Procurement: the activity of purchasing the factors to be used. These factors should be understood in the widest possible sense, including raw
materials, ancillary materials, machinery, buildings, and all kinds of services, for example.
- Technology development: activities for obtaining, improving and managing technologies, regarding both products and process, or for
"management".
- Human resource management: activities related to the search, recruitment, training, motivation, assessment, remuneration, etc. of all nature
of personnel. It provides vital support for primary activities, as well as for all the other support activities, and even for the firm as a whole.
- Firm infrastructure: activities that may be grouped under the general definition of administration, and may include planning, control,
organisation, information, accounting, finance, etc. It provides support for the firm as a whole rather than for individual activities.
Competitive advantage may lie in an excellent design or performance of any one of these activities. For example, one of the keys to a firm’s success
may lie in its great capacity for technological development that enables it to provide the market with advanced and innovative products. One of the
reasons behind the success of a telecommunications firm might reside in the quality of its customer service (call centre), which is associated with its
after-sales service.
Application 4.1:
The Atresmedia Group’s value chain
by Eva Pelechano Barahona and Fernando E. García Muiña
Atresmedia is one of Spain’s largest listed media groups, with its biggest shareholder and parent company being the Planeta de Agostini
group with 41% of its capital stock. Atresmedia was created in 2012 following the merger of the groups Antena 3 and Gestora de
Inversiones Audiovisuales La Sexta. Antena 3 de Televisión was incorporated in 1988 with a view to securing one of Spain’s first private
television licences. The group was subsequently characterised by ongoing and rapid growth in different media businesses (television, radio,
press, and advertising, among others). The following have been some of its more prominent shareholders over these years: Antena 3 de
Radio, Grupo Zeta, Telefónica and Grupo Planeta. The Gestora de Inversiones Audiovisuales La Sexta was awarded its broadcasting licence
towards the end of 2005, with one of its main differentiating features being its focus on free-to-air football matches. Initially, its main
shareholder was Mediapro.
The Atresmedia Group covers the value chain in the audiovisual sector by producing and distributing content in several different formats:
television, radio and cinema. In 2015, and in order to adapt to the possibilities provided by the internet and new technologies, as well as to
new social needs, it began to adjust and extend its range of content to different free-to-air, pay and on-demand formats through the
development of new platforms such as Atresplayer. Advertising is its main sources of income, so it has specialised in the marketing of its
advertising slots across its different media, as well as in the business of publicity consulting, on the back of the experience it has
accumulated over the years. The search for alternative sources of income has led to the development of new products and markets related
to e-commerce (Tualbum.es –digital photo editing– and EnglishHouse.tv –remote language courses–), catering (Atresmedia Café restaurant)
and the organisation of events (music, fashion, conferences on business management, and Branded Content, among others*).
* The definition of the value chain has also included some of the competitive advantages arising from the relationships between the firm’s
own activities (horizontal links, HL) and the relationships with other agents in the value system (vertical links, VL). In the case of horizontal
links, they are listed for their identification with complementary activity/activities.
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Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 4. Internal analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
4.2. The value chain
4.2.2. Value chain interrelations
4.2.2. VALUE CHAIN INTERRELATIONS
A competitive advantage may stem not only from a specific activity, but also from the interrelations that may emerge between the activities in the
firm’s value chain and/or between the firm’s value chain and the value system constituted with customers and suppliers. The generic term used to
describe these interrelations is links (Porter, 1985). The competitive advantage through these links may be achieved basically according to two
criteria:
- Optimisation: The best performance of an activity may allow reducing costs in the undertaking of other activities.
- Coordination: In this case, the advantage arises through the attainment of a high degree of coordination between activities whereby they are
both undertaken more efficiently.
Two types of interrelations or links may be identified (Porter, 1985):
1. Horizontal links: these arise when two or more internal activities interact. The most typical of these are the relationships between primary
activities or between these and support activities. In all cases, application may be made of the two aforementioned criteria on gaining an
advantage. For example, the optimisation of quality control in production operations leads to a reduction in after-sales service costs due to the
fewer number of faulted products.
2. Vertical links: these are the result of the relations between the firm’s value chain and that of its suppliers or customers. The proper
management of these interrelations may benefit both the firm and its suppliers or customers, whereby the outcome favours both parties involved
at the same time. An example of a vertical link is to be found in the well-known production system referred to as “just-in-time”, which is based on
a perfect coordination between suppliers and the firm’s production systems that permits, among other things, reducing intermediate inventories
and, therefore, the costs involved.
In both cases, a decisive role is played by the information system of both the firm itself and of suppliers and/or customers, as thanks to new
information and communications technologies it becomes a key variable for ensuring both the optimisation and coordination of activities.
Access Proview
See Application 4.2: Supplier dealing at Ford España and Application 4.3: Costumers’ external reporting system: the Nike case, by Carmen
De Pablos Heredero
The activities that make up a firm’s value chain may be overly general for an in-depth analysis, so they can be broken down into more specific
activities. This itemisation depends on the level of detail targeted by the analysis, as well as on the possibility of finding competitive advantages in
specific activities or in the interrelationships between them within the same general activity. By contrast, some of these activities may also be
discarded, as is the case, for example, in services firms in which no raw materials or end products are handled (Dess et al., 2014: 81-82).
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PART I. STRATEGIC ANALYSIS
Chapter 4. Internal analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
4.3. Analysis of resources and capabilities
4.3. ANALYSIS OF RESOURCES AND CAPABILITIES
Although the abovementioned techniques are important for an internal analysis, there is no doubt that the methodology providing the greatest
explanatory power for the identification of a firm’s strengths and weaknesses is the so-called Resource-Based View, whose aim is to assess a firm’s
potential for establishing competitive advantages through the identification and strategic evaluation of the resources and capabilities it
possesses or to which it may have access.
This theory considers that when faced with turbulent environments, such as today’s, in which changes are ever more frequent, it seems more
appropriate to base strategy on internal aspects rather than on external ones. The greater the importance of changes in a firm’s environment, the
more likely it is that its resources and capabilities will provide the sound foundations for its long-term strategy (Grant, 2016).
The Resource-Based View is based on two key premises: firstly, firms are different to one another because of the resources and capabilities they have
at any given moment, and because of the different characteristics these have (heterogeneity). Accordingly, the firm is considered a series of
technologies, skills, expertise, etc., that are created and augmented over time; in other words, as a unique combination of heterogeneous resources
and capabilities. Secondly, these resources and capabilities are not available to all firms under the same conditions (imperfect mobility) (Barney,
1991).
Analysis
An analysis of the origins and grounds of the Resource-Based View can be found in Wernerfelt, B. (1984), “A resource-based view of the
firm”, Strategic Management Journal, vol. 5, no. 2, pp. 171-180: https://doi.org/10.1002/smj.4250050207
If this is the case, an analysis of a firm’s resources and capabilities becomes a vital instrument for internal analysis and strategy formulation.
Accordingly, it is essential to consider three fundamental activities (figure 4.3):
- First, a firm needs to identify and measure its own resources and capabilities (R&C) in order to gain an in-depth understanding of its initial
potential for defining its strategy. This phase is especially important for intangibles.
- Second, it needs to strategically evaluate its resources and capabilities; that is, decide the extent to which they are useful, appropriate and
valuable for the achievement of a competitive advantage, sustaining it over time and collecting the returns.
- Third, there is a need to analyse how corporate management may obtain the resources it requires, both internally and externally, and how to
exploit the current provisioning of resources at the level of both competitive and corporate strategy.
Figure 4.3: Analytical model of resources and capabilities
© 2018 [Thomson Reuters (Legal) Limited / José E. Navas López y Luis A. Guerras Martín (dirs.)]© Portada: Thomson Reuters (Legal) Limited
02 NOV 2021
Fundamentals of
strategic management.
1st. september 2018
CIVITAS
This PDF Contains
4.3.1. Identifying resources and capabilities, p.RB-4.5
a. Identifying resources, p.RB-4.5
b. Identifying capabilities, p.RB-4.6
4.3.2. Strategically evaluating resources and capabilities, p.RB-4.7
a. Criteria for obtaining a competitive advantage, p.RB-4.7
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Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 4. Internal analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
4.3. Analysis of resources and capabilities
4.3.1. Identifying resources and capabilities
4.3.1. IDENTIFYING RESOURCES AND CAPABILITIES
The first step in the analysis involves identifying the different resources and capabilities available to a firm. The initial problem we
encounter involves the terminology to be applied. Indeed, different authors have used different terms such as assets, resources, capabilities,
skills and competences, and not always with precise meanings, so when some refer to resources in a very general way, including both assets
and capabilities (Barney, 1991; Hall, 1992), others apply a dual level of analysis (Dess et al., 2014; Grant, 2016).
We shall apply this latter criterion, accepting that the two concepts are interrelated and represent two levels of aggregation of the aspects
that determine a firm’s competitive potential. The first level contains the individual resources or assets that constitute the basic units of
analysis. These may be defined as the sum of factors or assets a firm possesses or controls, with the following being examples of
resources: money, fixed assets, patents, commercial brands and human resources.
Nevertheless, in most cases, these resources do not create value by themselves, but instead they need to be suitably combined and managed,
generating a capability that refers to a firm’s skill at undertaking a specific activity and implies a combination of resources and
organisational routines or guidelines. Examples of capabilities may range from the arrangement of a loan with a bank, managing an urgent
delivery with a courier company, or creating and implementing an R&D project or an advertising campaign.
Capabilities constitute a second level of analysis and may also be understood as the organisation’s collective competences or skills. This
means a firm’s resources and capabilities may be construed as the sum of elements, factors, assets, skills and attributes a firm possesses or
controls, and which enable it to formulate and implement a competitive strategy and, as appropriate, influence certain aspects of its
corporate strategy.
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Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 4. Internal analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
4.3. Analysis of resources and capabilities
4.3.1. Identifying resources and capabilities
a. Identifying resources
a. Identifying resources
In this first step in the analysis, the aim is to draw up an inventory of the firm’s resources, which is not always an easy task. Indeed, although
many resources may be easily identified and measured through a firm’s financial statements, others tend not to appear in those documents,
thereby complicating their identification and measurement. With a view to understanding this inventory, it may be useful to classify the
different resources by categories, with the most generally accepted one distinguishing between tangibles and intangibles. Figure 4.4 provides
a graphic depiction of a classification of different types of resources, according to this criterion.
Figure 4.4: Classification of resources
Tangible resources are those that physically exist and are normally easier to identify and measure through the information provided by
financial statements. Specifically, they are recorded on a firm’s balance sheet and measured according to accounting standards. A distinction
may be made within tangible resources between physical or material assets (property, machinery, furnishings, tools, etc.) and financial
assets (cash or similar, accounts receivable, stocks, bank deposits, etc).
Intangible resources are based on information and knowledge, and do not therefore physically exist. A distinction may be made within
intangible resources between human and non-human resources depending on whether or not they are directly linked to the people
comprising the firm. Intangible resources that are non-human, or independent of people, may in turn be classified into technological and
organisational. The former include the technologies and know-how available for manufacturing the firm’s products or providing its
services, and may be embodied in patents, designs, databases, etc. The latter include the brand, logo, prestige, reputation, customer portfolio,
etc.
Access Proview
See Application 4.4: Best Spanish and global brands, by Jorge Cruz González
Regarding human resources, which in economic terms are referred to as "human capital", they do not refer to people as such but rather to
their knowledge, training, experience, motivation, adaptability, reasoning and decision-making skills, loyalty, and commitment to the firm,
etc.
Intangible resources tend to be invisible to accounting data, whereby their identification and measurement are somewhat more complicated,
especially when they are based on knowledge of a tacit nature, as may be the case of human emotions, customer loyalty, or even
organisational culture.
The accounts feature tangible assets, with no valuation of intangibles through the consideration of good-will, except in exceptional cases such
as, for example, acquisitions or merger processes. The absence of intangible assets on financial statements explains the differences
between a firm’s book value and its market value (Grant, 2016: 120-121). While the former considers solely the value of material assets, the
latter includes the valuation economic agents make of the firm as a whole. Furthermore, they perform very differently to tangible assets
because they are slow and costly to accumulate, their property rights tend to be poorly defined, they are difficult to sell on the market and
are liable to multiple uses, and their value normally increases over time (Fernández Rodríguez, 1993).
02 NOV 2021
PAGE RB-4.6
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 4. Internal analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
4.3. Analysis of resources and capabilities
4.3.1. Identifying resources and capabilities
b. Identifying capabilities
b. Identifying capabilities
Capabilities allow an activity to be suitably developed according to the combination and coordination of the individual resources
available. Prahalad and Hamel (1990) use the term core or distinctive competences to refer to the same concept, relating it not to the skill
to undertake an activity but to the possibility of performing it better than one’s competitors.
We may generally affirm that capabilities are linked to human capital and are based above all on intangible assets, especially a firm’s
technological and organisational know-how (Fernández et al., 1997: 13). Capabilities are, by definition, intangible, so it is not always easy to
distinguish between intangible resources –especially organisational ones– and capabilities per se. Hence the reason many authors prefer to
talk about resources in general to refer to both concepts. López Sintas (1996) establishes two key criteria for distinguishing between
resources and capabilities:
- The stock nature of resources as opposed to the flow nature of capabilities (Penrose, 1959; Mahoney and Pandian, 1992). This
basically means that resources are things or elements that are possessed or controlled, being relatively independent of the specific use
they are given in a firm. In turn, capabilities represent ways of performing activities, of using resources.
- The collective nature of capabilities and the individual nature of resources. Indeed, as opposed to each person’s individual skills,
capabilities exist solely insofar as these persons collaborate with one another, teaming up to use other factors or assets to resolve a
problem or undertake an activity. Without this collective character there are no organisational capabilities.
In view of all the above, it is much more difficult to identify and classify a firm’s capabilities than its resources. Nevertheless, it is important
for the firm to draw up an inventory of the activities and problems it can properly undertake or resolve, respectively. To do so, it may be
convenient to classify capabilities according to a functional criterion or based on the use of the value chain (Grant, 2016).
Regarding the classification of capabilities, an interesting proposition is the one made by Hall (1993), who distinguishes between functional
and cultural capabilities. The former are those designed to resolve specific technical or management issues (manufacture a product,
arrange a loan, quality control, etc.). For their part, cultural capabilities are more closely associated with people’s attitudes and values, such
as the ability to manage organisational changes, innovate, work in a team, etc.
Nevertheless, the challenge for management is not limited to the identification of a firm’s resources and capabilities, but rather involves
discovering how to pass from individual skills and resources to collective capabilities, which is determined by what are referred to as
organisational routines. According to Grant (2016: 124), capabilities are organised into hierarchical structures. Individual resources are
used as the basis for creating specific capabilities for very concrete tasks or simple capabilities; the latter, in turn, are integrated within more
complex capabilities at a higher level, and so on successively. In order to integrate resources, skills and knowledge, the firm’s management
may resort to the following:
- Formal coordination mechanisms: such as the normalisation of tasks, organisational handbooks, integrating managers, etc.
- Organisational routines: the above mechanisms do not usually suffice for the necessary integration of resources, whereby
organisational routines are the key to this analysis. Nelson and Winter (1982) define them as regular and predictable models or
patterns of activities made up of a sequence of actions coordinated by individuals.
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See Application 4.5: Organisational routines in holding an exam at university
Organisational routines are the equivalent of people’s individual skills and, therefore, the platform for the generation of valuable capabilities
or distinctive competences in the firm, constituting the main way of storing information and knowledge within the organisation. Just as
individual skills are acquired over time, organisational routines improve through experience and practice, becoming atrophied when not
used. Managerial skill is important for creating new organisational routines and improving existing ones, thereby turning them into valuable
competences for achieving significant competitive advantages.
As with intangibles, capabilities pose serious difficulties for their identification and measurement. The Knowledge-Based View uses the term
intellectual capital to identify and measure all knowledge-based resources, that is, the intangible resources and capabilities that are, by
definition, intangible. Although there are different propositions, the models of intellectual capital develop a series of variables and indicators
for an approximate measurement of a firm’s array of intangibles.
Analysis
An analysis of the origins and grounds or the Knowledge-Based View of the firm can be found in Grant, R. M. (1996), “Toward a
knowledge-based theory of the firm”, Strategic Management Journal, vol. 17, special issue, pp. 109-122:
https://doi.org/10.1002/smj.4250171110
Special mention should be made of the so-called dynamic capabilities, which refer to a firm’s ability to integrate, build and adjust
internal and external competences to deal with rapidly changing environments (Teece et al., 1997). In a more comprehensive manner,
Wang and Ahmed (2007) report that dynamic capabilities are related to the firm’s behaviour designed to integrate, reconfigure, renew and recreate its resources and capabilities and, more importantly, update and rebuild its core capabilities in response to a changing environment in
order to achieve and maintain its competitive advantage.
Dynamic capabilities are therefore an especially complex type of capability; that is, they do not refer to specific activities that resolve specific
problems (functional capabilities), but instead to those high-level capabilities that guide the change in capabilities of a lower order (Grant,
2016). Some of the capabilities referred to as cultural are related to this, such as the ability to innovate, learn, assimilate external knowledge
or tackle strategic and organisational changes.
Analysis
An analysis of the concept and grounds of dynamic capabilities can be found in Teece, D. J.; Pisano, G.; Shuen, A. (1997), “Dynamic
capabilities and strategic management”, Strategic Management Journal, vol. 18, no 7, pp. 509-533: https://doi.org/10.1002/(SICI)10970266(199708)18:7<509::AID-SMJ882>3.0.CO;2-Z
02 NOV 2021
PAGE RB-4.7
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 4. Internal analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
4.3. Analysis of resources and capabilities
4.3.2. Strategically evaluating resources and capabilities
4.3.2. STRATEGICALLY EVALUATING RESOURCES AND CAPABILITIES
Having resources or capabilities is not enough to enjoy a competitive advantage: in addition, they need to be valuable in the sense of being
relatively different and better than those of other rival firms (heterogeneity of resources) and relatively immobile or unassailable to ensure a
competitive advantage can be sustained over time. Business rents stem from the sole ownership of certain resources and capabilities that are
the outcome of an unequal distribution of resources, as a result of market imperfections, information asymmetries, or even the luck factor
(Cuervo, 1993).
Consequently, the next stage of the analysis involves assessing the potential each one of these has for generating and sustaining a competitive
advantage that creates value for a firm. There are various models that propose different assessment criteria, with an example being the ones
propounded by Barney (1991) 1), Amit and Schoemaker (1993), Peteraf (1993) and Grant (2016). Each one of these assessment criteria
conditions the potential for generating income. Those that satisfactorily comply with most of them are called strategic or distinctive
resources and capabilities, as they permit the firm to obtain, sustain and enjoy the benefits derived from a competitive advantage (figure
4.5).
Figure 4.5: Strategic evaluation criteria for resources and capabilities
Source: Own elaboration following Amit and Schoemaker (1993) and Grant (2016)
FOOTNOTES
1
Barney (1991) proposes the well-known test referred to as VRIN, an acronym for the four characteristics that measure a resource’s competitive power:
Valuable, Rare, Inimitable, Non-substitutable. These four characteristics are implicitly or explicitly included in the extended model we are proposing.
02 NOV 2021
PAGE RB-4.7
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 4. Internal analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
4.3. Analysis of resources and capabilities
4.3.2. Strategically evaluating resources and capabilities
a. Criteria for obtaining a competitive advantage
a. Criteria for obtaining a competitive advantage
If a resource or capability is to generate a competitive advantage, it needs to fulfil two requirements:
a.1) Scarcity: A resource is scarce when it is not available to all competitors. When a resource or capability is important or essential for
pursuing a business activity but is accessible to all the firms in an industry, it becomes a necessary condition for competing but not a
differential aspect that entails a competitive advantage. Thus, for example, having a suitable fleet of coaches for a road passenger transport
firm is not a distinctive feature if all the other firms have similar vehicles, but if that firm has a bespoke software system for the design of
routes that is beyond the reach of its rivals, it would give it competitive superiority.
a.2) Relevance: It refers to its expediency for competing in a specific industry; in other words, it is related to one of the key factors of success.
Thus, for example, having a major capability in research and development may be extremely valuable in cutting-edge technology industries,
but would be irrelevant in those industries in which technology is not vital for competing.
© 2018 [Thomson Reuters (Legal) Limited / José E. Navas López y Luis A. Guerras Martín (dirs.)]© Portada: Thomson Reuters (Legal) Limited
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b. Criteria for sustaining a competitive advantage, p.RB-4.8
c. Criteria for appropriating the rents from a competitive advantage, p.RB-4.9
4.3.3. Managing resources and capabilities, p.RB-4.10
02 NOV 2021
PAGE RB-4.8
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 4. Internal analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
4.3. Analysis of resources and capabilities
4.3.2. Strategically evaluating resources and capabilities
b. Criteria for sustaining a competitive advantage
b. Criteria for sustaining a competitive advantage
The strategic value of a resource or capability does not depend solely on its aptitudes for achieving competitive advantages, as it also depends
on the time during which those advantages may be sustained, which will be contingent on the following criteria:
Analysis
An analysis of the evaluation criteria of resources can be found in Barney, J. B. (1991), “Firm resources and sustained competitive
advantage”, Journal of Management, vol. 17, no. 1, pp. 99-120:
https://doi.org/10.1177/014920639101700108
b.1) Durability: A resource or capability is lasting when it does not lose its potential for generating a competitive advantage over the passage
of time; in other words, it sustains or increases its usefulness. This characteristic has a decisive impact on intangibles, for while tangible
resources tend to depreciate as they are used, intangibles tend to increase their value with use. This occurs, for example, with brands and
trademarks or with organisational routines that are inclined to remain over time, and even improve, as they are used repeatedly and
experience is gained in their operation. Nevertheless, this circumstance does not have an equal bearing on all resources, as the speed of
technological change reduces the useful life of some of them, such as capital goods or patents.
On the other hand, it should be noted that as intangibles are based on information and knowledge they have a further two characteristics
that extend their durability:
- They are susceptible to simultaneous use for different functions, without forgoing their usefulness in any one of them. Such is the case
of a brand, which may be used for different products at the same time.
- They are of unlimited application in their use, whereby they may be used indefinitely as often as required in different processes or
products.
b.2) Transferability: This criterion is largely associated with the existence or not of a market for the conveyance of assets between firms. If
there is a market, resources may be transferred between firms by means of purchase and sale processes. Yet when there is no market or the
resources are difficult to convey, those firms owning them may sustain their competitive advantage over time.
Certain resources, above all tangible ones, can be easily transferred between firms, such as, for example, raw materials, components,
property, etc., for which there is a traditional market. Other resources, however, are not so easy to transfer. For example, certain tangible
resources, such as large plants and machinery, pose the problem of geographical immobility due to the difficulty in changing their location.
For their part, most intangibles pose serious problems of transferability for the following reasons:
- Their specifically intangible nature: the fact many intangibles are based on tacit, non-codifiable knowledge whose control rights are
difficult to specify, causes many inconveniences for their evaluation and sale, derived largely from the information asymmetries between
buyer and seller.
- They are specific assets: some resources, such as technological know-how and brands, are a firm’s specific assets in the sense their
value may diminish when they are transferred to another firm.
In view of the above, the transaction costs incurred by the transfer of these resources and capabilities are high. This is especially true in the
case of complex capabilities, as their acquisition requires transferring the whole set of resources making them up. Such would be the case of
a firm seeking to acquire another firm’s capability for innovation or a rival’s organisational culture. Therefore, firms whose competitive
advantage depends on complex capabilities run a smaller risk of those capabilities being bought by their competitors than others whose
advantage depends on individual resources that are more readily transferrable.
The problem of transferability impacts especially on human resources, whose very nature means they can move between firms. Everyday
reality provides examples of employees moving from one firm to another, even between direct competitors. Nevertheless, people tend to
work in teams, whereby they may often lose significance when their move does not involve their former team, which clearly tends to be the
case.
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See Application 4.6: The transfer of managers between Hewlett Packard and Oracle, by Jorge Cruz González
b.3) Imitability: this criterion refers to the capability competitors have to replicate the resources and capabilities the benchmark firm
possesses, internally developing other like or similar ones that have the same effects. To the extent a firm has inimitable resources, it may
sustain its competitive advantage over time. The best protection against possible imitation is the lack of knowledge among rival firms of the
foundations upon which this advantage is built, which is referred to as causal ambiguity (Lippmann and Rumelt, 1982).
Yet even when there is no causal ambiguity and resources and capabilities can be imitated, time plays in favour of the firm that already
possesses them. In fact, many complex capabilities are slow and costly to accumulate and arise out of experience itself through a unique oneoff process. Variables such as image or reputation, corporate culture, organisational routines or technological knowledge are built up
gradually through a firm’s experience and history. As they have emerged from its historical trajectory, they are path-dependent, which means
it will be almost impossible to reproduce them in the future.
When an imitating firm seeks to reproduce a valuable resource or capability, the firm imitated has time to reinforce it. Furthermore, if the
imitating firm tries to reduce the time for developing that key resource or capability by investing heavily, the associated costs favour the firm
imitated, as it has already incurred them in a fractionated manner over time, and they discourage a potential imitator.
As with prior criteria, the more complex a capability, the more difficult it is to imitate. This is due to greater causal ambiguity and the need to
imitate a series of resources and the manner in which they interrelate. Nonetheless, the chances of resources and capabilities being imitated
or replaced by competitors will depend on their potential for replicating them or finding alternatives.
b.4) Substitutability: when rival firms cannot turn to the market for the valuable resources and capabilities possessed by another firm and
they are also unable to imitate them, they have a third way of undermining that competitive advantage: seeking alternative resources and
capabilities that provide the same effects or outcomes under similar conditions.
Just as a product may be substituted on the market, so can a productive factor. If a capability refers to a way of solving a problem,
substitutability refers to the alternative ways of addressing and resolving that selfsame problem. Insofar as a firm’s resources and
capabilities do not have any alternatives for their substitution, they will have greater value for the firm possessing them, as competitors will
find it more difficult to achieve the resources and capabilities they need to undermine the competitive advantage.
For example, the Spanish banking sector has a valuable capability through its extensive nationwide branch network. Non-domestic banks
have sought to achieve this capability through the acquisition of Spanish banks or imitate it by creating their own branch network. Yet almost
all these attempts have failed due to the high costs of both these options. Some banks have tried to replace the traditional way of attending to
customers through branch offices by using new technologies, such as internet banking. This has enabled them to attract a significant amount
of deposits without having to buy or imitate the basic capability of traditional banking.
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Answer Short Case 30: The spell cast by La Bruja de Oro lottery office, by Miguel Blanco Callejo
b.5) Complementarity: both resources and capabilities can be combined with each other for the better development of certain business
activities. Resources and capabilities are said to be complementary when their joint value exceeds the sum of their individual parts. The
existence of complementarity implies that a firm’s resources and capabilities are more difficult to transfer, imitate and substitute, as
competitors are required to avail themselves of them in a simultaneous and suitably combined manner in order to achieve the same
advantages.
For example, a firm’s capability for innovation may depend on an interdisciplinary team in which the complementarity of the contributions
made by each researcher renders the value of the team greater than the sum of each individual’s separate role. Moreover, the research team
is complemented by other resources, such as sophisticated laboratories, access to databases, membership of scientific fora, etc. In this case,
any firm seeking to acquire this capability for innovation will need to recruit the entire team or create a similar team of its own, which is
much more difficult than hiring a single researcher.
02 NOV 2021
PAGE RB-4.9
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 4. Internal analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
4.3. Analysis of resources and capabilities
4.3.2. Strategically evaluating resources and capabilities
c. Criteria for appropriating the rents from a competitive advantage
c. Criteria for appropriating the rents from a competitive advantage
Even when a firm manages to gain and sustain a competitive advantage over its rivals, it may not be able to appropriate the extraordinary
rents generated by its advantageous positioning. Whether or not it manages to do so will depend on the control rights over the assets
available. The criterion of appropriation refers to the extent of the definition of the control rights over the resources and capabilities that
are a source of competitive advantage. To the extent those rights are well established, the firms owning the resources appropriate the
resulting rents. Otherwise, that appropriation cannot be guaranteed.
The control rights over tangible resources –financial and material assets– are readily identifiable. They may also establish control rights over
certain intangible assets, such as patents, brands or logos. Nevertheless, for many other intangibles (the workforce, reputation, culture,
customer loyalty, the trust of allies, etc.), these rights cannot be defined because their very nature impedes it.
Nonetheless, although it may not be possible to establish control rights insofar as the resources are integrated, forming socially complex
capabilities or ones that are specific to the owning firm, the possibilities of appropriation are increased. Such is the case, for example, of a
firm’s reputation and culture, whose highly complex formation within it and the fact they are wholly specific to it render them susceptible to
appropriation.
Particularly interesting is the case of human resources, over which a firm obviously cannot establish control rights, as each person is the
owner of their own skills and attitudes. This circumstance is related to what is said about the criterion of transferability regarding the
possibility employees have of changing firms, taking their skills with them. The only way a firm therefore has of ensuring individuals place
their skills at the service of the organisation is through the arrangement of the corresponding contracts of employment. Likewise, the
existence of a strategic leadership approach and a business project that are motivational may lead to a higher level of commitment and
engagement among employees, even when they have better options outside the firm.
Nevertheless, the drafting of contracts of employment lends considerable importance to the relative power of negotiation between a firm and
its employees in order to decide upon the distribution of rents among them, so the greater people’s negotiating power, the lower the
appropriation of rents by the firm.
When human capital is the main source of a firm’s competitive advantage, employees may threaten to leave and join a competitor, thereby
increasing their negotiating power. This means that the more obvious an individual’s contribution to the firm’s success or the more specific
their duties are (by virtue of their knowledge, skills, experience, etc.), the greater their negotiating power for appropriating the rents
forthcoming. By contrast, if an individual’s skills are integrated within collective capabilities in which it is very difficult to single out their
personal contribution, their negotiating power will be reduced.
One alternative a firm has to increase its rents stems from the arrangement of contracts of employment in which employee remuneration
depends on each one’s contribution to the overall business performance. This means that an individual’s interests are aligned with the firm’s
objectives.
Application 4.7:
Resources and capabilities in a sports team
For a better understanding of the Resource-Based View (RBV), we are going to assume the case of a sports team; for example, a
football team. Its success on and off the pitch is closely linked to the existence of distinctive resources and capabilities at the club
in a greater number and of better quality than its rival teams.
Identification of resources: the success of a football team depends largely on the resources available to it, which may involve the
following:
- Material tangibles: stadium, properties, etc.
- Financial tangibles: cash or similar.
- Non-human intangibles: prestige (one team earns more than another in a friendly match because of its prestige or record),
management systems (economic, season ticket holders, etc.), name of the team, logo.
- Human intangibles: players in the squad (each one with their specific skills), trainer (leadership capability, technical
expertise), management.
Identification of capabilities: a football team’s success does not usually depend solely on its resources, but also, and especially, on its
capabilities. A team full of stars does not necessarily perform better than another with fewer starts and greater cohesion. Capabilities
represent the team’s collective skills to play and win matches and championships. These capabilities will be distinctive insofar as they are
better than their rivals’.
The way of achieving capabilities –playing as a team- largely depends on organisational routines. These may include, for example, the
positioning of the players on the pitch, the distribution of roles among them, the one chosen to take free-kicks or carry out a pre-set move, or
the use of off-side tactics.
In this last case, for example, it requires each defender to be quickly aware of the situation in which it should be applied –individual skills-, as
well as a tacit and synchronised coordination of movements in order to leave the opposition off-side –collective skill-. The slightest error in
the application of the tactics may expose the team. The team that executes this tactic perfectly achieves a distinctive capability that reduces
its opponents attacking options.
- Scarcity: not all teams can generally afford the best players. For example, top goal scorers are few and far between on the market,
thereby making them extremely valuable. Those teams that can sign them will be in a position of superiority over all the others.
- Relevance: a team’s mission is to win matches, which it achieves by scoring goals or not letting them in. This gives relevance to certain
types of players that are better at performing one or other function. This means the positions of centre forward, goalkeeper or central
defender tend to be more highly valued than others. The same could be said regarding collective skills, in the sense of the importance
tactics have for the purpose of winning matches.
- Durability: the performance of individual resources –players– can be improved through training, tactical nous, etc. The improvement
in collective capabilities depends largely on keeping the players in the squad –low turnover of players–, sustaining their performance –
motivation, avoidance of injuries– and keeping the same trainer. The more individual and collective abilities are practised, the better the
team’s performance tends to be. Furthermore, the management’s attitude and approach have an impact: planning of resources, up-andcoming youth players, consistency in decision-making, long-term view, etc. Accordingly, and due to the above factors, it seems that a
team’s long-term success is very difficult, or even impossible, to achieve (fortunately for the interest of championships), which suggests
that durability, in the best of cases, is not very great.
- Transferability: the possibility of a team losing its competitive capabilities is linked to the likelihood that other teams will sign one or
more of its most valuable players or its trainer. These capabilities are almost impossible to transfer, as not all the players, the trainer,
technical team, etc. can be transferred at the same time to another team, unless it is actually bought out. Thus, to the extent that a team’s
success depends on its collective capabilities rather than on its individual resources, the departure of a player to another team need not
necessarily constitute a significant reduction –apart from in exceptional cases– in its competitive capability.
- Imitability: this refers to the possibility of other teams reproducing the capabilities, as imitating the resources, which are highly
individualised, is practically impossible. The more a team’s success depends on collective capabilities rather than individual ones, the
more difficult it will be for any of its rivals to imitate or reproduce all its success factors.
- Substitutability: although one player may be substituted by another, the most valuable players can be hard to replace, given their
unique abilities. The usual way of winning a match, through better players or tactics, could be replaced by bringing pressure to bear on
the referee or on the organisers to make certain favourable decisions that open up the road to success. This could involve bribing the
referee, the precautionary suspension of disciplinary measures, pressure on fans or the media, etc.
- Complementarity: this refers to the fact certain players are capable of performing better than others when they line up alongside those
players with whom they have a better understanding in that team than in another. The same may be said for certain playing tactics that
are better suited to some teams than to others. Although players may be transferred and some organisational routines imitated –the offside tactic–, the success of a team that properly combines valuable resources, effective organisational routines and distinctive collective
capabilities, will be difficult to imitate, at least in the short term.
- Appropriation: players’ skills belong to them as individuals and, therefore, the club may only appropriate them while the player offers
his or her services to it. The club seeks to exercise control over its players through appropriate contracts. When players are signed by
another club, they take their individual skills with them, but not the collective ones.
One risk a club faces is that players may decide not to use their skills to the advantage of the collective. There is no hard and fast way of
making them do so. One way of protecting against this stance is by linking players’ salaries to their individual performances (matches
played) or collective ones (bonuses for winning matches). A further aspect of interest regarding appropriation involves the distribution
of rents among players. Insofar as a player’s individual contribution to a team’s success is more significant and the team depends on that
person’s skills, the player may negotiate substantial improvements in their contract under the threat of signing for another team.
Finally, it should be acknowledged that the “luck” factor plays a significant role in a team’s success over the course of a championship. The
fact is, as the fans say, that’s football!
02 NOV 2021
PAGE RB-4.10
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 4. Internal analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
4.3. Analysis of resources and capabilities
4.3.2. Strategically evaluating resources and capabilities
4.3.3. Managing resources and capabilities
4.3.3. Managing resources and capabilities
From the perspective of an internal analysis, the identification and evaluation of the firm’s different resources and capabilities allow
diagnosing the strong points upon which to build or formulate a strategy (more valuable resources and capabilities) and the weak points
(resources and capabilities that are not particularly valuable or which do not exist in the required amounts and/or quality).
Furthermore, to the extent that a firm’s resources and capabilities provide the foundations for defining its strategy, at both a competitive and
corporate level, 2) they need to be suitably managed, which implies two types of important activities (figure 4.6):
- Improving the provision of resources and capabilities, which includes developing new internal resources, improving existing ones,
capturing new ones from outside and adapting them to the firm.
- Strategically exploiting the resources and capabilities it has through their more efficient application to the strategy rolled out by the
firm and the search for alternative and inventive uses of those available to it
These activities are crucial to a strategy’s success and may be considered an especially valuable dynamic capability designed to improve,
refresh or extend the allocation of resources and capabilities and profitably exploit existing ones. The responsibility for their management
lies with top management, so their analysis is directly linked to managerial capabilities. This is what some authors have referred as the
ability to “orchestrate resources” (Sirmon et al., 2007, 2011).
Figure 4.6: The management of resources and capabilities
FOOTNOTES
2
The provision of resources and capabilities also plays an important part in the success of functional capabilities, although this aspect is not the focus of
this book’s analysis.
© 2018 [Thomson Reuters (Legal) Limited / José E. Navas López y Luis A. Guerras Martín (dirs.)]© Portada: Thomson Reuters (Legal) Limited
02 NOV 2021
Fundamentals of
strategic
management.
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2018
CIVITAS
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a. Improving the provision, p.RB-4.10
b. Exploiting the provision, p.RB-4.10
4.4. Swot analysis, p.RB-4.11
02 NOV 2021
PAGE RB-4.10
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 4. Internal analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
4.3. Analysis of resources and capabilities
4.3.2. Strategically evaluating resources and capabilities
4.3.3. Managing resources and capabilities
a. Improving the provision
a. Improving the provision
Improving the provision of resources and capabilities refers both to sustaining and improving
the current provision and to extending the resource base that can be used in the future. Once
the resources and capabilities available to the firm have been identified and evaluated, the
following may be deduced:
- The nature of the resources and capabilities that entail the greatest potential for
generating, sustaining and appropriating competitive advantage.
- The firm’s relative positioning regarding its rivals in terms of its current provision of
resources and capabilities.
- The firm’s deficit or shortfalls regarding its current provision.
- The firm’s future requirements in terms of new resources and capabilities.
Based on this analysis, a firm should improve its current provision, increasing the value of the
ones it has from a strategic perspective or obtaining new resources it still does not have. This
involves two major options:
a.1) External acquisition: this means looking outside for the necessary resources, either
through direct purchase (if there is a market) involving traditional purchase-sale arrangements,
or by taking over already existing companies or business units, or else forging alliances in order
to share resources with a partner, or through so-called benchmarking, seeking to imitate or
improve the internal performance of activities by comparing them to those firms that undertake
them in the best possible way. Buying on the outside has the advantage of shortening the time
needed to obtain the resources and capabilities compared to their internal generation. However,
it does not always provide access to the most valuable resources, as these are at the disposal of
other firms, either because they have generated them themselves or because they, too, have
acquired them on the market.
a.2) Internal development: this involves acquiring them through internal operations such as
investing in R&D to generate new technological know-how, advertising campaigns designed to
increase brand recognition, internal processes of continuous improvement that reinforce
organisational routines, social responsibility actions that enhance the firm’s image, public
relations with suppliers or customers, etc. Although the most important actions undoubtedly
involve investing in human capital, as the ultimate repository of knowledge in the firm.
Nevertheless, the accumulation of intangibles usually requires a long timeframe and high
amounts of investment, and may pose problems of appropriation (above all in relation to human
resources) and they tend to be assets with a high degree of specificity, in other words, they are
useful within the firm generating them, but less so in other external applications (Salas, 1996).
For success in the generation of valuable internal resources, it is important to introduce a
flexible organisational structure, facilitating the flow of knowledge and organisational learning.
It is likewise important to implement a human resources policy that fosters aspects such as the
long-term assessment of targets, promotion based on seniority or experience, commitment to the
firm, collaboration, continuous improvement, or training. Finally, the organisational culture
should reinforce prior policies through the promotion of values and beliefs that favour the
accumulation of specialist knowledge and a desire for continuous improvement and life-long
learning (Fernández Rodríguez, 1993; Salas, 1996; Nonaka and Takeuchi, 1999).
02 NOV 2021
PAGE RB-4.10
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 4. Internal analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
4.3. Analysis of resources and capabilities
4.3.2. Strategically evaluating resources and capabilities
4.3.3. Managing resources and capabilities
b. Exploiting the provision
b. Exploiting the provision
Nonetheless, there is little point in having better resources and capabilities than one’s
competitors if one does not know how to exploit them properly or identify the ones that will be
more important for achieving success. The strategy that will subsequently be defined needs to
take into consideration how to effectively exploit the strengths derived from resources and
reduce the vulnerability represented by weaknesses. The ways in which a more appropriate use
may be made of the strengths forthcoming from a better provision of resources may be both
internal (competitive and corporate strategy) and external (marketing of resources):
b.1) Competitive strategy. The main route for exploiting resources and capabilities is through
their use in a firm’s current operations. If the resources are strategically valuable they are the
basic foundations upon which a firm’s competitive strategy is built in order to generate a
competitive advantage.
b.2) Corporate strategy. A firm may have surplus resources and capabilities that may be used
more effectively in alternative activities. It should be remembered that intangible resources and
capabilities tend to be based on information and knowledge, which means they do not have a
specific limit on their use. This alternative use of surplus resources may help to guide corporate
strategy, meaning the scope of its activities, in two directions:
- Through diversification processes, extending the scope of the firm with new products or
markets. The possibility of generating synergies in a related diversification strategy resides
mainly in the resources and capabilities that are shared or transferred between businesses
(Salas, 1996).
- Through internationalisation processes, in which the scope of the firm extends from a
geographical perspective, based on valuable or surplus resources and capabilities that can
be used in other countries (Dunning, 1988, 1991).
b.3) Through the marketing of resources and capabilities that are not specific to the firm and
may be useful for other firms. If a firm is to turn to the outside for the resources it needs but
does not have, there has to be another firm that sells or leases them to it. This means that firms
with a greater and better provision of resources may find an additional source of revenue
through the external exploitation of their portfolio of resources and capabilities. Such is the case
of an innovative firm that besides using its proprietary technology leases it through licensing
contracts in return for payment of the corresponding rights. The resources and capabilities that
can be marketed are, in general, clearly those that are not the cornerstone of a firm’s
competitive advantage, thereby avoiding the possibility of imitation or appropriation by rival
firms.
02 NOV 2021
PAGE RB-4.11
Fundamentals of strategic management. 1st. september 2018
PART I. STRATEGIC ANALYSIS
Chapter 4. Internal analysis (JOSÉ EMILIO NAVAS LÓPEZ y LUIS A. GUERRAS MARTÍN)
4.4. Swot analysis
4.4. SWOT ANALYSIS
A SWOT analysis is an overview of the entire strategy, both internally and externally, through
the joint presentation of the main conclusions reached in the process. SWOT is the acronym of
Strengths, Weaknesses, Opportunities and Threats.
It basically involves using each one of the four areas in a SWOT matrix to present, respectively,
an organisation’s strong and weak points, as well as the opportunities and threats a firm may
encounter in its environment. The matrix’s design is purely qualitative, with each quadrant
expressing the most relevant aspects for each factor. The figure in application 4.8 presents a
SWOT matrix.
A SWOT analysis may be conducted at the beginning of the strategic analysis process, as a form
of brain-storming to bring its main aspects to the table. In our view, however, it should be
conducted at the end of the process as a synthesis or summary of the main conclusions obtained
with other tools, such as the strategic profile, the five-forces model, the value chain, etc. This
matrix is used to summarise the internal and external analysis, providing an overall view of the
state a firm is in with a view to designing its strategy.
Furthermore, it raises management’s awareness of the key issues to be addressed when choosing
a strategy. The SWOT analysis therefore prompts the main actions of a generic nature that need
to be undertaken when choosing a good strategy: exploiting opportunities in the environment,
avoiding its threats, maintaining and reinforcing strengths, and correcting the firm’s weaknesses
(Duncan et al., 1998). Finally, it should be noted that the SWOT analysis is a very popular, and
therefore standard, tool. This popularity stems from the very simple conceptual nature of its
application.
In spite of the above advantages, it is a static tool that provides a snapshot of the situation at a
given moment in time but does not shed any light on the either the environment or the firm’s
performance in the past or its possible evolution in the future. Nonetheless, it lacks integration
between an internal and external analysis by not establishing relationships between the key
variables that make up both systems. What’s more, a SWOT analysis does not lead to the
identification of the best strategy for the firm, nor does it indicate the right steps to be taken for
making a necessary strategic change (Dess et al., 2014). The actions suggested are very general
and can apply to any situation, without actually specifying how to do so in each specific case.
Application 4.8:
SWOT matrix for the Atresmedia Group
by Eva Pelechano Barahona and Fernando E. García Muiña
OPPORTUNITIES
THREATS
• People spend a lot of time watching
TV, with growth in the use of mobile
devices that allow distributing
content of higher value added: TV on
demand
• Fall in public and private funding
in the audiovisual industry
• Restricted advertising on TVE – the
Spanish public broadcaster (Law
8/2009) and closure of other
channels
• Fewer exit barriers: easier to rent
or convey TV broadcasting licences
(Law 7/2010)
• Greater pressure on the closure of
illegal internet websites
• Major negotiating power with
advertisers and advertising agencies
• Weaker entry barriers as there are
fewer legal and technological
restrictions on competing
• Fewer mobility barriers between
free-to-air and pay TV and between
the different technologies (DTT,
Cable, Satellite and IP)
• Changing tastes and trends in
society
• New technology platforms that
enable advertisers to access the
target population directly
OPPORTUNITIES
THREATS
• Joint leadership in the audiovisual
and advertising market
• Sustained loss of audience on its
main flagship channel (Antena 3)
• Diversification of revenue: radio, ecommerce, organisation of events,
consultancy, etc.
• Complex cultural, organisational
and productive integration across
group companies
• Reputation before the different
agents and CSR
• High risk arising from vertical
integration and close relationship
between businesses
• Major capabilities in digital
marketing and neuromarketing
• Limited international presence
• Major capacity in technology and
innovation
• High level of borrowing (especially
current liabilities)
•
Better
readiness
for
the
distribution of on-demand content
via
the
internet
(AtresPlayer
platform)
• Difficulty in refinancing debt
SUMMARY BOX
A FIRM’S INTERNAL DIAGNOSIS
- Significance of internal analysis for understanding the firm’s competitiveness
- A firm’s key characteristics
- Functional analysis and drafting of a firm’s strategic profile
- Comparative analysis of weak and strong points in relation to competitors
- Limitations of a strategic profile as an instrument of analysis: relative, subjective, static
THE VALUE CHAIN
- Identification of the sources of competitive advantage through the criteria for the
breakdown of activities: primary and support activities
- Competitive advantage in individual activities
- Interrelations between activities: horizontal links
- Interrelations with the value system: vertical links
- Criteria for the evaluation of links: optimisation and coordination
ANALYSIS OF RESOURCES AND CAPABILITIES
- Identification: concepts and types of resources and capabilities
- Measuring intangibles: intellectual capital
- Criteria for gaining a competitive advantage: scarcity and relevance
- Criteria for sustaining a competitive advantage: durability, transferability, imitability,
substitutability, complementarity
- Criteria for the appropriation of rents from a competitive advantage: appropriability
- Improving the current provision of resources and capabilities: external acquisition as
opposed to internal development
- Strategic exploitation of resources and capabilities: competitive strategies, corporate
strategies and marketing of resources
SWOT ANALYSIS
- Overview of the strengths, weaknesses, opportunities and threats in strategic analysis: the
SWOT matrix
- Use of a SWOT analysis
QUESTIONS ON THE CHAPTER
- What is the purpose of a firm’s internal analysis?
- How is a firm’s strategic profile built?
- Where can the sources of competitive advantage be found in the analysis of the value
chain?
- Explain why intangibles (both resources and capabilities) may provide a better platform
for a firm’s sustainable competitive advantage.
- Comparative analysis of the criteria for evaluating resources and capabilities.
- What options does a firm have for acquiring the resources and capabilities it needs?
- How can existing resources and capabilities be exploited in a firm’s corporate strategy?
- What is the purpose of a SWOT analysis?
ACTIVITIES
a) Choose a firm and define its identity, strategic profile and value chain.
b) Choose a firm and identify its resources and capabilities and assess each one’s strategic
potential.
c) Identify how a firm improves its provision of resources and capabilities, and how it
applies them to its competitive strategy, its corporate strategy and its marketing.
d) Draw up a SWOT matrix for a firm of your choice.
CASE STUDIES
Besides the brief cases mentioned in the text, and which can be accessed in Proview, the
following case is presented for discussion in Guerras and Navas (2014):
- Case 7: Meliá Hotels International: Transition to a knowledge-based hotel model
(www.guerrasynavas.com/case07_5ed_outline.htm)
FURTHER READING
The following will help you to further develop the content of this chapter: Guerras and Navas
(2015, chap. 6), Barney (2014, chap. 5), Dess et al. (2014, chap. 3), and Grant (2016, chap. 5).
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