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Strategic MGT - 2

Strategic Management Note 2

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Strategic MGT - 2

Strategic Management Note 2

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mitrajeetsarkar
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© © All Rights Reserved
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MBA‘A01(C6 ABER) Note No: 2 BUSROSEMONY Business environment refers to those aspects of the surroundings of business enterprise which have influence on the functioning of business, An organisation can survive and grow only when it continuously and quickly adapts to changing environment. According to Wheeler, “Business Environment is the total of all things external to business firms and industries which affect their organisation and operations.” “Business Environment is the aggregate of all conditions, events and influence that surround and affect the business."- Keith Davis. iponentsion WsineSsiEnvironnn On the basis of the extent of intimacy with the firm, the environmental factors may be classified in to two types , i) the internal environment, ie, factors internal to the firm and ii) external environment, ie, factors external to the firm which have relevance to it. Extemal Envitonment Internal Environment Value System Mic: ‘Macro Exvironment ioeion se 1 ke + Chjectives + Organisational + Suppliers of Input + Economic Stor ture + Custorners + Political- Legal + Comorate + Marketi + Teckmological Culture Intermediaries + Global + Qualityof + Competitors + Sovio- cultural Human + Publics + Demographic Resources + Natural + Lebour Unions + Ecological + Physical Resources and Technological Fig: Components of Business vironment ‘The internal factors are generally regarded as controllable factors because the company has control over these factors; it can alter or modify such factors as its personnel, physical facilities, organization and functional means, such as marketing mix, to suit the environment. The external factors, on the other hand, are, by and large, beyond the control of a company. The external or environmental factors such as the economic factors, socio-cultural factors, government and legal factors, demographic factors, geo-physical factors etc; are, therefore, generally regarded as uncontrollable factors. age | MBA/RGU a It may, however, be noted that a firm may not sometimes have complete control over all the internal factors. Also, it is sometimes possible to change certain external factors. Some of the external factors have a direct and intimate impact on the firm {ike the suppliers ana distributors of the firm). These factors are leer Pais seven so kn jieetiad rating environment. There are other very general (such sind ply, demogeaphi actors et). They conse what is called ‘macro environment, general environment or remote environment. i it ents, many Although business environment consists of both the internal and external environm: ly people often confine the term to the external environment of business. an ae 1. Internal Environment The important internal factors which have a bearin| below. @& Value System ‘The value system of the founders and those at the helm of affairs has important bearing on the choice of business, the mission and objectives of the organization, business policies and practices. It is a widely acknowledged fact that the extent to which the value system is shared by all in the organization is an important factor contributing to success, ‘@ Vision, Mission and Objectives The business domain of the company, ig on the strategy and other decisions are outlined Priorities, direction of development, business philosophy, business policy etc, is guided by the vision mission and objectives of the company. ‘@ Management Structure and Nature ‘The organizational structure, the composition of the Board of Directors, extent of professionalisation of management etc, are important factors influencing business decisions. Some management structures and styles delay decision making while some others facilitate quick decision making. °S Internal Power Relationship —_— actors like the amount of support the top management enjoys from different levels of employees, rhareholders and Board of Directors have important influence on the decisions and their implementation. The relationship between the members of Board of Directors and between the chief executive and the Board are also critical factors. (@ Human Resources: ‘The characteristics of the human resources like skill, quallty, morale, commitment, attitude etc, could contribute to the strength -and weakness, of an organtzation. Some organizations find it dificult to carry out estrueturing or modernization because of resistance by employees whereas they are smoothly done in some tthere, The involvement, initiative ete, of people at different levels may vary from organization to organization, The organizational culture and overall environment have bearing on them. (Company Image and Brand Equity. “The image of the company matters while raising finance, forming joint ventures or other alliances, soliciting marketing intermediaries, entering purchase or sale contracts, launching new, products etc. Brand equity is also relevant in several of these cases. {@ Miscellaneous Factors There are a number of other internal factors which contribute to the business success/failures or influence the decision-making. They include the following. 1. Physical Assets and Facilities like the production capacity, technology and efficiency of the productive apparatus, distribution logistics etc, are among the factors which influence the competitiveness of a firm. 2. R & D and Technological Capabilities, among other things, determine a company's ability to innovate and compete. 3, Marketing Resources like the organization for marketing, quality of the marketing men, brand equity and distribution network have direct bearing on marketing efficiency. They are important also for brand extension, new product introduction etc. 4, Financial Factors like financial policies, financial position and capital structure are also important internal environment affecting business performances, strategies and decisions. 2. External Environment ‘As stated earlier, the external business environment consists of micro environment and macro environment. A) Micro Environment The micro environment consists of the actors in the company's immediate environment that affects the performance of the company. These include the suppliers, marketing intermediaries, competitors, customers and the publics. ‘@ Suppliers ‘An important force, in the micro environment of a company is the suppliers, ie, those who supply the i ait like raw materials and components to the company. The importance of reliable source/sources of Supply ———————— MBA/RGU the smooth functioning of the business is obvious. Uncertainty regarding the supply oF other supply constraints often compels companies to maintain high inventories causing cost increases. (> Customers {As it is often exhorted, the major task of a business Is to create and sustain customers. A business exists only because, of its customers. Monitoring the customer sensitivity is, therefore, a prerequisite for the business success. A company may have different categories of consumers like individuals, households, industries and other commercial establishments, and government and other institutions. (& Competitors ‘A firm's competitors include not only the other firms which market the same or similar products but also all those who compete for thee discretionary income of the consumers. ‘The immediate environment of a company may consist of a number of marketing intermediaries which are “firms that aid the company in promoting, selling and distributing its goods to final buyers. (& Publics A company may encounter certain publics in its environment. A public is any group that has an actual or potential interest in or impact on an organization's ability to achieve its interests. Media publics, citizen's action publics and local publics are some examples. B) Macro Environment Important macro environment factors include economic environment, political and regulatory environment, social/cultural environment, demographic environment, technological environment, natural environment, and global environment. (@ Technological Environment ‘Technology is understood as the systematic application of scientific or other organized knowledge to practical tasks. Technology changes fast and to keep pace with it, businessmen should be ever alert to adopt changed technology in their businesses. (@ Economic Environment There is close relationship between business and its economic environment. Business obtains all its needed inputs from the economic environment and it absorbs the output of business units. «@ Political Environment It refers to the influence exerted by the three political institutions viz,, legislature executive and the judiciary in shaping, directing, developing and controlling business activities. A stable and dynamic political environment is indispensable for business growth. (= Natural Environment Business, an economic pursuit of man, continues to be dictated by nature. To what extend business depends on nature and what is the relationship between the two constitutes an interesting study. = Global or international Environment i PEE MBA/RGU ‘Thanks to liberalization, Indian companies are forces to view business issues from a global perspective. Business responses and managerial practices must be fine-tuned to survive in the global environment. It refers to people's attitude to work and wealth; role of family, marriage, religion and education; ethical issues and social responsiveness of business. Environmental analysis is a strategic tool. It is a process to identify all the external and internal elements, which can affect the organization's performance. The analysis entails assessing the level of threat or opportunity the factors might present. These evaluations are later translated into the decision-making process. The analysis helps align strategies with the firm's environment. Environmental analysis has three basic goals. First, the analysis should provide an understanding of current and potential changes taking place in the environment. It is important that one must be aware of the existing environment. At the same time one must have a long term perspective too. Second, environmental analysis should provide inputs for strategic decision making, Mere collection of data is not enough. The information collected must be used in strategic decision making. Third, environment analysis should facilitate and foster strategic thinking in organisations - typically a rich source of ideas and understanding of the context within which a firm operates. It should challenge the current wisdom by bringing fresh view-points into the organisation. To be specific, the benefits of environmental study are as follows: ha > > Development of broad strategies and long-term policies of the firm. Development of action plans to deal with technological advancements. To foresee the impact of socio-economic changes at the national and international levels on the firm’s stability. Analysis of competitors’ strategies and formulation of effective counter-measures. > Tokeep oneself dynamic. In order to survive and grow in this competitive environment, it is essential for every business organization to undertake SWOT analysis. The process by which the enterprises monitor their relevant environment to identify their business opportunities and threats affecting their business is known as environment analysis or SWOT analysis. In other words analyzing the surrounding environment before framing policies and taking business decisions is called as SWOT analysis. »SW" stands for strengths and weaknesses — MBA/RGU Page 5 — oT” stands for opportunities and threats Strengths and weaknesses are derived from internal environment. Opportunities and threats arise from external environment, SWOT analysis helps the business unit to know its positive points as well as negative points. strength is an inherent capacity which an organization can use to gain strategic advantage over its competitors c.g. Marketing of Hindustan Leaver Limited, they have around 15 lakhs retail outlets for distributing their various products in India, Strength is something a company is good at doing or a characteristic that gives it an important capability. Possible strengths are: = Name recognition = Proprietory technology = Cost advantages * Skilled employees * Loyal customers etc. A Weakness is something a company lacks or does poorly (in comparison to others) or a condition that places it at a disadvantage. Possible weaknesses are: * Poor market image = Obsolete facilities * Internal operating problems = Poor marketing skills etc. Weaknesses is an inherent limitation, which creates a strategic disadvantage for the organization e.g. limited finance. Opportunities - An opportunity is a major favorable situation in the firm’s environment. Key trends represent one source of opportunity. Identification of a previously overlooked market segment, changes in competitive or regulatory circumstances, technological changes, and improved buyer or supplier relationships could represent opportunities for the firm. Threats - A threat is a major unfavorable situation in the firm's environment. It is a key impediment. to the firm's current and / or desired future position. The entrance of a new competitor, slow market growth, increased bargaining power of key buyers or supplier, major technologies change, and changing regulations could represent major threats to a firm’s future success. TOWS Matrix: TOWS Matrix follows the roots of SWOT Analysis but is quite indifferent from the same as SWOT ‘Analysis mainly focuses on the aspects of opportunities and threats whereas TOWS Matrix is the tool for strategy generation and selection. SWOT Analysis is the tool for audit and analysis of the business and is used at the beginning of the planning process and TOWS Matrix is opted at the later part of the planning process to decide the way forward for the business. It is the work of the trade-off between the internal and external factors of the company and the outside environment that affects the operations and overall objectives of the business. MBA/RGU Page 6 strengths and weaknesses are a part of the internal environment of the business that comprises policies, work culture, nature, features, and attributes of the products and ‘and techniques, goals and objectives, the internal factors are controllable The of employees and staff, HR offered to the target market, manufacturing processes services ny, Most of the times, core values, and fundamentals of the compar in nature. ‘The opportunities and threats are a part of the external environment that comprises of government te direct and indirect competition in the market, evolving and changing tastes and preferences ‘and fluctuation rates of the raw materials required any a times not in control of the polici of the customers, dynamic nature of the market, for the production along with other such extrinsic factors that are m business and management of the company. The 4 TOWS Matrix Strategies: ADS DAI Suing soa STRATEGIES 1) Strengths and Opportunities in TOWS Matrix / SO This strategy is also name as Maxi-Maxi strategy. SO Strategy tells about how to utilise your internal strength to grab external opportunity. For eg. high brand loyalty & good quality, helps the company to enter into new market or launch new product. 2) Weakness and Opportunities in TOWS Matrix / WO This strategy is also said as mini-maxi strategy. This strategy tells the company to strengthen their weaknesses to take benefit of prevailing opportunities. For eg. Product high price is creating a hindrance to enter in a new market. Therefore by upgrading production technology can lead to reduction in price of product. 3) Strengths and Threats in TOWS Matrix / ST This strategy is also name as maxi-mini strategy. In this situation company tries to minimise threats by their strength. This strategy empowers the company, because by this company knows why they are existing and how they can manage external threats. Page 7 MBA/RGU. fi 4) Weaknesses and Threats in TOWS Matrix / WT his strategy is also known as mini-mini strategy. This can be considered as @ defensive strategy, ‘here company tries to minimise their weakness and avoid external threats. This could involve closing out poor-selling products, terminating under-performing employees and developing more aggressive selling technique: RESTEU/FESTUBANALYSIS A PESTEL analysis or PESTLE analysis (formerly known as PEST analysis) is a framework or tool tased to analyse and monitor the macro-environmental factors that may have a profound impact on an organisation's performance. This tool is especially useful when starting a new business or entering a foreign market. Its often used in collaboration with other analytical business tools such se the SWOT analysis and Porter's Five Forces to give a clear understanding of a situation and related internal and external factors. PESTEL is an acronym that stands for Political, Economic, Social, ‘Technological, Environmental and Legal factors. {@ Political Factors: ‘These factors are all about how and to what degree a government intervenes in the economy or a certain industry. Basically all the influences that a government has on your business could be classified here. This can include government policy, political stability or instability, corruption, foreign trade policy, tax policy, labour law, environmental law and trade restrictions. Furthermore, the government may have a profound impact on a nation’s education system, infrastructure and health regulations. These are all factors that need to be taken into account when assessing the attractiveness of a potential market. (@ Economic Factors: Economic factors are determinants of a certain economy's performance. Factors include economic growth, exchange rates, inflation rates, interest rates, disposable income of consumers and unemployment rates. These factors may have a direct or indirect long term impact on a company, since it affects the purchasing power of consumers and could possibly change demand/supply Page & MBA/RGU models in the economy. Consequently it also affects the way companies price their products and services. (@ Social Factors: This dimension of the general environment represents the demographic characteristics, norms, customs and values of the population within which the organization operates. This inlcudes population trends such as the population growth rate, age distribution, income distribution, career attitudes, safety emphasis, health consciousness, lifestyle attitudes and cultural barriers. These factors are especially important for marketers when targeting certain customers. In addition, it also :s something about the local workforce and its willingness to work under certain conditions. {@ Technological Factors: ‘These factors pertain to innovations in technology that may affect the operations of the industry and the market favorably or unfavorably. This refers to technology incentives, the level of innovation, automation, research and development (R&D) activity, technological change and the amount of technological awareness that a market possesses. These factors may influence decisions to enter or not enter certain industries, to launch or not launch certain products or to outsource production activities abroad. By knowing what is going on technology-wise, you may be able to prevent your company from spending a lot of money on developing a technology that would become obsolete very soon due to disruptive technological changes elsewhere. (& Environmental Factors: Environmental factors have come to the forefront only relatively recently. They have become important due to the increasing scarcity of raw materials, polution targets and carbon footprint targets set by governments. These factors include ecological and environmental aspects such as weather, climate, environmental offsets and climate change which may especially affect industries such as tourism, farming, agriculture and insurance. Furthermore, growing awareness of the potential impacts of climate change is affecting how companies operate and the products they offer. ‘This has led to many companies getting more and more involved in practices such as corprate social responsibility (CSR) and sustainability. (> Legal Factors: Although these factors may have some overlap with the political factors, they include more specific laws such as discrimination laws, antitrust laws, employment laws, consumer protection laws, copyright and patent laws, and health and safety laws. It is clear that companies need to know what is and what is not legal in order to trade successfully and ethically. If an organisation trades globally this becomes especially tricky since each country has its own set of rules and regulations. In addition, you want to be aware of any potential changes in legislation and the impact it may have on your business in the future. Recommended is to have a legal advisor or attorney to help you with these kinds of things. IMENTAITHREATS AND/OPPORTUNITY PROFILR(ETOP) ‘There are many techniques available for environmental appraisal (assessment), one such technique suggested by Glueck is ETOP the preparation of ETOP involves dividing the environment into MBA/RGU gisferent sectors & then analyzing the impact of each sector on the organization. The preparation of No political impact | Regulatory y Decrease in Import duty; Environmental clearance hurdle; Social = —_ No Social impact as mostly B2B ‘Supplier wp NoApparent impact Technological yy Less advanced technology ‘The profile involves, Environment, Threats & Opportunities Profile A] ENVIRONMENTAL FACTORS It presents the impact of each environmental factor like economic, political & social on the organization. The important factors are as follows,- SLNo | FACTORS COULD INVLOVE a Political international trade taxation policy 2 Economic interest rates, exchange rates, national income, inflation, unemployment, Stock Market 3 Social ageing population, attitudes to work, income distribution 4 Technological innovation, new product development, rate of technological obsolescence 5 Environmental _| global warming, environmental issues 6 Legal competition law, health and safety, employment law B] THREAT MATRIX ————— MBA/RGU Page 11 a spe treats restrain them from entering into new business lines. Low nici Low PROBABILITY OF OCCURENCE, C] OPPORTUNITY MATRIX ‘The opportunity of the firm indicates new lines of the business. nich ATTRACTIVENESS HIGH Low PROBABILITY OF OCCURENCE ADVANTAGES / DISADVANTAGES Pros ¥ Help to determine the key factor of threats and opportunities. ¥ Good tool to qualify the factors related to company’s strategy. ¥ Can consider many factors for each special case. ¥ It provides a clear of which sector & subsectors have favorable impact on the organization. ¥ Ithelps to interpret the result of environmental analysis. ¥ The organization can assess its competitive position. ETT? MBA/RGU Page 12 v Appropriate strategies can be formulated to take advantage of opportunities & counter the threat, Cons ¥ Itdoesn’t show the interaction between the factors. ¥ It can't reflect the dynamic environment, ¥ It's a subjective analysis tool Every firm has strategic advantages and disadva strength but they tend to move slowly, quickly. No firm is equally strong in all as weaknesses, intages. For example, large firms have financial compared to smaller firms, and often cannot react to changes its functions. In other words, every firm has strengths as well Strategists must be aware of the strategic advantages or strengths of the firm to be able to choose the best opportunity for the firm. On the other hand they must regularly analyse their strategic disadvantages or weaknesses in order to face environmental threats effectively. In this session, we shall examine the strategic advanta, diagnoses to determine the internal stren; opportunities and threats from the environm In the discussion of these factors, it is not possible to consider in detail, subject matter which are covered by courses on Marketing, Human Resources, Finance Management etc, Only a listing of these factors will be presented. Students should refer to books and courses that they have attended for details. The order of discussion does not indicate importance of the subjects, Itis just a convenient ordering of line and staff factors. These factors will be covered under the following broad headings: ige factors that management analyses and igths and weaknesses with which it must face the ent. Marketing and Distribution R & D and Engineering Production and Operations Management Corporate Resources and Personnel Finance and Accounting SANA N PROFILE OF SAP It shows in way of chart of each organizations strength & weaknesses on the basis of its different factors. Here we prepare a profile about hoe our company is superior in comparison to other companies. Here we are looking at the environmental aspects & preparing the strategy which can relate our strengths to our opportunities. It enables us to focus on our competencies (strengths) & how to use them. FUNCTIONAL AREA CORE FACTORS Cher) Production & operation Good production facilities Page 13 MBA/RGU. + Old plant & machinery ©) Personal factors * Young & motivated force (+) |__* Poor union relation (-) Finance & Accounting * Tax holiday G) | Costly finance (+) | Marketing operations ‘* Effective communication mix (4) * Costly employees () * Rich experiences in market (+) R&D & Engineering * No design protection () * Well developed laboratory (+) * Highly qualified research staff (+) Organization system © High tech MIS (+) * Effective delegation & decentralization (+) L + No. MBE () Five forces model was created by M. Porter in 1979 to understand how five key competitive forces are affecting an industry. Porter's Five Forces Model, also known as the competitive forces model, is a competitive analysis model that was developed by Michael Porter. The purpose of Porter's © Forces Model is to determine the profit potential of a market ie. business sector. According to Michael Porter each business sector is potentially influenced by five factors that he refers to as forces. The combined power of Porters Five Forces determines the eventual profit potential of the business sector, ‘The Porter’s Five Forces Model and therefore the opportunities for making a profit differ from business sector to business sector. Porter's Fi 1 The five forces are: + Supplier power + Buyer power Threat of substitutes and complementary goods + Threat of new entrants on the market + Competitive rivalry MBA/RGU Page 14 ae Threat of entry Bargaining power of buyers Bargaining power of suppliers substitutes ‘Threat of new entrants: This force determines how easy (or not) it is to enter a particular industry. If an industry is profitable and there are few barriers to enter, rivalry soon intensifies. When more organizations compete for the same market share, profits start to fall. It is essential for existing organizations to create high barriers to enter to deter new entrants. Threat of new entrants is high when: = Low amount of capital is required to enter a market; + Existing companies can do little to retaliate; + Existing firms do not possess patents, trademarks or do not have established brand reputation; + There is no government regulation; + Customer switching costs are low (it doesn’t cost a lot of money for a firm to switch to other industries); + There is low customer loyalty; + Products are nearly identical; + Economies of scale can be easily achieved. Bargaining power of suppliers: Strong bargaining power allows suppliers to sell higher priced or low quality raw materials to their buyers. This directly affects the buying firms’ profits because it has to pay more for materials. Suppliers have strong bargaining power when: + There are few suppliers but many buyers; + Suppliers are large and threaten to forward integrate; + Few substitute raw materials exist; + Suppliers hold scarce resources; * Cost of switching raw materials is especially high. nn 77S MBA/RGU. Page 15, Bargaining power of buyers: Buyers have the power to demand lower price or higher product quality from industry producers when their bargaining power is strong. Lower price means lower revenues for the producer, while higher quality products usually raise production costs, Both scenarios result in lower profits for producers. Buyers exert strong bargaining power when: Buying in large quantities or control many access points to the final customer; + Only few buyers exist; + Switching costs to other supplier are low; + They threaten to backward integrate; + There are many substitutes; + Buyers are price sensitive, Threat of substitutes: This force is especially threatening when buyers can easily find substitute products with attractive prices or better quality and when buyers can switch from one product or service to another with little cost. For example, to switch from coffee to tea doesn't cost anything, unlike switching from car to bicycle. Rivalry among existing competitors: This force is the major determinant on how competitive and profitable an industry is. In competitive industry, firms have to compete aggressively for a market share, which results in low profits. Rivalry among competitors is intense when: + There are many competitors; + Exit barriers are high; + Industry of growth is slow or negative; + Products are not differentiated and can be easily substituted; rs are of equal size; + Compe + Low customer loyalty. Although, Porter originally introduced five forces affecting an industry, scholars have suggested including the sixth force: complements. Complements increase the demand of the primary product with which they are used, thus, increasing firm’s and industry's profit potential. For example, iTunes was created to complement iPod and added value for both products, As a result, both iTunes and iPod sales increased, increasing Apple's profits WANUEGHAINTANALYSIS This article explains the Porter’s Value Chain Analysis, developed by Michael Porter in a practical way. After reading you will understand the basics of this powerful management tool. What is a Value Chain Analysis? The value chain also known as Porter's Value Chain Analysis is a business management concept that was developed by Michael Porter. In his book Competitive Advantage (1985), Michael Porter explains Value Chain Analysis; that a value chain is a collection of activities that are performed by a company a Page 16 MBA/RGU create value for its customers. Value Creation creates added value which leads to competitive 0 “ Ultimately, added value also creates a higher profitability for an organization. advantage. porter's Value Chain Analysis: ‘The strength of the Porter's Value Chain Analysis is its approach. The Porter's Value Chain Analysis focuses on the systems and activities with customers as the central principle rather than on departments and accounting expense categories. This system links systems and activities to each other and demonstrates what effect this has on costs and profit. Consequently, it (Value Chain Analysis) makes clear where the sources of value and loss amounts can be found in the organization. nl Gperations ||] outbound}! ‘Marketing & Logistics Logistics Sales sas sere Primary et Activities iH sees ary Value Chain Porter’s Value Chain Analysis consists of a number of activities, namely primary activities and support activities. Primary activities have an immediate effect on the production, maintenance, sales and support of the products or services to be supplied. These activities consist of the following elements: Inbound Logistics These are all processes that are involved in the receiving, storing, and internal distribution of the raw materials or basic ingredients of a product or service. The relationship with the suppliers is essential to the creation of value in this matter. Production These are all the activities (for example production floor or production line) that convert inputs of products or services into semi-finished or finished products. Operational systems are the guiding principle for the creation of value. — MBA/RGU. Page 17 outbound logistics these are all activities that are related to delivering the products and services to the custome! include, for instance, storage, distribution (systems) and transport. ‘These Marketing and Sales These are all processes related to putting the products and services in the markets including managing and generating customer relationships. The guiding principles are setting oneself apart from the competition and creating advantages for the customer. Service This includes all activities that maintain the value of the products or service to customers as soon as a relationship has developed based on the procurement of services and products. The Service Profit Chain Model is an alternative model, specific designed for service management and organizational growth, is: ‘Support activities within the Porter’s Value Chain Analysis assist the primary activities and they form the basis of any organization. In the figure dotted lines represent linkages between a support activity and a primary activity. A support activity such as human resource management for example is of importance within the primary activity operation but also supports other activities such as service and outbound logistics. Firm infrastructure This concerns the support activities within the organization that enable the organization to maintain its daily operations. Line management, administrative handling, financial management are examples of activities that create value for the organization. Human resource management This includes the support activities in which the development of the workforce within an organization is the key element. Examples of activities are recruiting staff, training and coaching of staff and compensating and retaining staff. Technology development These activities relate to the development of the products and services of the organization, both internally and externally. Examples are IT, technological innovations and improvements and the development of new products based on new technologies. These activities create value using innovation and optimization. Procurement These are all the support activities related to procurement to service the customer from the organization. Examples of activities are entering into and managing relationships with suppliers, negotiating to arrive at the best prices, making product purchase agreements with suppliers and outsourcing agreements. Organizations use primary and support activities as building blocks to create valuable products, services and distinctiveness. eee eaeeean Page 18 MBA/RGU (gIORAUISIS pio framework is tl they can bea source of Su he tool used to analyze firm's internal resources and capabilities to find out if stained competitive advantage. to understand the sources of competitive advantage firms are using many tools to analyze ternal (Porter's S Forces, PEST analysis) and internal (Value Chain analysis, BCG Matrix) ‘ernal resources is VRIO analysis. The tool was irm Resources and Sustained Competitive resources must possess in order to in ordet their ex environments. One of such tools that analyze firm's int originally developed by Barney, J. B. (1991) in his work *F ‘Advantage’, where the author identified four attributes that firm's come a source of sustained competitive advantage. According to him, the resources must be valuable, rare, imperfectly imitable and non-substitutable. His original framework was called VRIN. tn 1995, in his later work ‘Looking Inside for Competitive Advantage’ Barney has introduced VRIO framework, which was the improvement of VRIN model. VRIO analysis stands for four questions that ask ifa resource is: valuable? rare? costly to imitate? And is a firm organized to capture the value of the resources? A resource or capability that meets all four requirements can bring sustained competitive advantage for the company. 1S THE RESOURCE OR CAPABILITY...? Is THE COMPANY WELL...? YES (SUSTAINED COMPETITIVE (ADVANTAGE ‘COMPETITIVE COMPETITIVE — TEMPORARY, | UNUSED COMPETITIVE | COMPETITIVE DISADVANTAGE © PARITY Peeper ‘ : ADVANTAGE ADVANTAGE v Valuable The first question of the framework asks if a resource adds value by enabling a firm to exploit opportunities or defend against threats. If the answer is yes, then a resource is considered valuable. Resources are also valuable if they help organizations to increase the perceived customer value. This is done by increasing differentiation or/and decreasing the price of the product. The resources that cannot meet this condition, lead to competitive disadvantage. It is important to continually review the value of the resources because constantly changing internal or external conditions can make them less valuable or useless at all. ee ._ER Page 19 MBA/RGU an example of a valuable resource might be your R&D team. They allow you to constantly innovate so you don't fall behind your competition. v Rare Resources that can only be acquired by one or very few companies are considered rare. Rare and valuable resources grant temporary competitive advantage. On the other hand, the situation when more than few companies have the same resource or uses the capability in the similar way, leads to competitive parity. This is because firms can use identical resources to implement the same strategies and no organization can achieve superior performance. Even though competitive parity is not the desired position, a firm should not neglect the resources that are valuable but common, Losing valuable resources and capabilities would hurt an organization because they are essential for staying in the market. As an example of a rare resource consider Google. They have the most used search engine in the world. This scale is rare and difficult for competitors to beat. Y Inimitable Imitability of the resources is concerned with the long-term competitive advantage of the company. If the resources available in the organization can be easily duplicated or imitated, then such resources do not provide competitive advantage in long-term. For resources to be competitive, the cost of imitability should be very high. If the resources are imitable, in this competitive business environment, it won't take much for competitors to share the market in the respective environment. As an example of an inimitable resource consider Coca-Cola. The Coca-Cola recipe is secret thus and impossible to imitate. Even if a competitor created a cola that tasted exactly the same it still couldn't say it was using the Coca-Cola recipe. Y Organized The resources themselves do not create any advantage for a company if the company is not organized in way to adequately exploit these resources and capture the value from them. The focal company therefore needs the capability to assemble and coordinate resources effectively. Examples of these organizational components include a company’s formal reporting structure, strategic planning and budgeting systems, management control systems and compensation policies. Without the correct organization to acquire, use and monitor the resources involved, even companies with valuable, rare and imperfectly imitable resources will not be able to create a sustainable competitive advantage. When all four resource attributes are present, a company is save to assume it has a distinctive competence that can be used as source of sustainable competitive advantage. a Page 20 MBA/RGU t q SmI aaa rowan PUNT) ere EVs Bris Pre tL EUs ea aa nes «Ifthe resource is not valuable it should be outsourced because it brings no value to us. «if the resource is valuable but not rare the company is in competitive conformity/parity: It means we are not worse than our competition. «Ifthe resource is valuable and rare but it is not expensive to imitate it, we have a temporary competitive advantage. Other companies will try to imitate it in the near future, then we lost our competitive advantage. «Ifthe resource is valuable, rare and is expensive to imitate it but we are not able to organize it in our company, the resource become expensive for us (unused incurred costs) = If we can manage the advantages and we are able to organize our company and temporary competitive advantage, it becomes as sustainable competitive advantage. McKinsey 7s model is a tool that analyzes firm's organizational design by looking at 7 key internal elements: strategy, structure, systems, shared values, style, staff and skills, in order to identify if they are effectively aligned and allow organization to achieve its objectives McKinsey 7s model was developed in 1980s by McKinsey consultants Tom Peters, Robert Waterman and Julien Philips with a help from Richard Pascale and Anthony G. Athos. Since the introduction, the model has been widely used by academics and practitioners and remains one of the most popular strategic planning tools. It sought to present an emphasis on human resources (Soft S), rather than the traditional mass production tangibles of capital, infrastructure and equipment, as a key to higher organizational performance. The goal of the model was to show how 7 elements of the company: Structure, Strategy, Skills, Staff, Style, Systems, and Shared values, can be aligned together to achieve MBA/RGU Page 21 eqtiveness in a company: ‘The key point of the model is that all the seven areas are interconnected eff change in one area requires change in the rest ofa firm for it to function effectively. ae petow you can find the McKinsey model, which represents the connections between seven areas and divides them into ‘Soft Ss’ and ‘Hard Ss’. The shape of the model emphasizes interconnectedness of the elements. ‘Hard Ss" Se “Hard Ss" Sub - “Soft Ss’ = sae “Soft Ss" ‘The model can be applied to many ae and is a valuable tool when organizational design is at question. The most common uses of the framework are: + To facilitate organizational change. + Tohelp implement new strategy. ‘To identify how each area may change in a future. ‘To facilitate the merger of organizations. Zs factors: In McKinsey model, the seven areas of organization are divided into the ‘soft’ and ‘hard’ areas. Strategy, structure and systems are hard elements that are mu ich easier to identify and manage when compared to soft elements. On the other hand, soft areas, although harder to manage, are the fourdation of the organization and are more likely to create the sustained competitive advantage. 7s factors Hard S strategy Istyle Dd | Istructure staff | Je [systems skills aE MBA/RGU. | shared Values = i seratogy 1 plan developed by a firm to achieve sustained competitive advantage and successfully compete in the market. What does a well-aligned strategy mean in 7s McKinsey model? In general, a sound strategy is the one that's clearly articulated, is long-term, helps to achieve competitive vevantage and is reinforced by strong vision, mission and values. But it's hard to tell if such strategy aiveleatigned with other elements when analyzed alone. So the key in 7s model Is not to look at sour company to find the great strategy, structure, systems and etc, but to look if its aligned with vner elements. For example, short-term strategy is usually a poor choice for a company but if its aligned with other 6 elements, then it may provide strong results, Structure represents the way business divisions and units are organized and includes the information of who is accountable to whom. In other words, structure is the organizational chart of the firm. It is also one of the most visible and easy to change elements of the framework. Systems are the processes and procedures of the company, which reveal business’ daily activities and how decisions are made. Systems are the area of the firm that determines how business is done and it should be the main focus for managers during organizational change. Skills are the abilities that firm's employees perform very well. They also include capabilities and competences. During organizational change, the question often arises of what skills the company will really need to reinforce its new strategy or new structure. Staff element is concerned with what type and how many employees an organization will need and how they will be recruited, trained, motivated and rewarded. Style represents the way the company is managed by top-level managers, how they interact, what actions do they take and their symbolic value. In other words, it is the management style of company’s leaders. Shared Values are at the core of McKinsey 7s model. They are the norms and standards that guide employee behavior and company actions and thus, are the foundation of every organization. Page 23

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