CHAPTER 3.

ENVIRONMENT

3.1. THE MACRO-ENVIRONMENT

We are going to analyze the different macro-forces that affect an organization.

MEGATRENDS

A shift in behavior or attitudes that has global impact and crosses industries.

Needs to:

- last 5/10/15 years

- affect most industries
If NOT, it is a simple industry trend

UNDERLYING FORCES DRIVING CHANGE THAT WILL SHAPE THE WORLD IN 2030:

- Shifting economic power

- Population change
- Technology
- Environmental shifts and pressures
- Changing values

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PESTEL : Wide overview

These are all EXTERNAL factors affecting the industry, and they are INTERCONNECTED.

POLITICAL
Decisions made by the government. Very related to the legal factor.

ECONOMIC
We are not talking about industry. These are macroeconomic factors (GDP, unemployment rate,
inflation, etc.)

It is very important to set the scope: Europe, for ex. This will direct the analysis you do.

SOCIOCULTURAL
The consumers habits, fashion trends, demographics, …

TECHNOLOGICAL
Related to technological advances. If you are a high-tech company this will be more relevant.

ENVIRONMENTAL
Planet conservation, climate change, etc.

LEGAL
Very broad. Acquisitions, regulations, sound limitation, employees rights, etc.

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KEY DRIVERS FOR CHANGE
The key drivers for change are environmental factors that are likely to have a high impact on the
success or failure of strategy.

They vary depending on the industry or sector

They help managers prioritize PESTEL factors

SCENARIOS
Detailed and plausible views of how the business environment of an organization might develop in
the future based on groupings of key environmental influences and drivers of change about which
there is a high level of uncertainty

The point is to consider plausible alternative futures

This happens when there is a high level of UNCERTAINTY

Scenarios are especially useful if:

- limited number of key drivers
- high level of uncertainty
- Radically different outcomes
- Substantial commitments, highly inflexible and hard to reverse in adverse circumstances
(DRAGGING COSTS)

3.2. INDUSTRIES AND SECTORS

An Industry is a group of firms producing products and services that are essentially the same.

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COMPETITIVE FORCES - FIVE FORCES FRAMEWORK
Michael Porter’s five forces framework helps identify the attractiveness of an industry or sector
in terms of competitive forces.

If these are weak, then industry is much more attractive.

The structure of the sector and the industry are explained by the five forces.

We need to look beyond what is happening to us, and look what is happening to other forces.

5 FORCES
COMPETITIVE RIVALRY: They are organizations
with similar products/services aimed at the same
customer group. = Direct competitors.

Incumbents: players in the game.

Competitive rivalry will be high when:

- Competitors are in balance: They are more or

less the same size
- Slow market growth
- High fixed costs: It is an exit barrier
- Discontinuous growth: When you can only
grow a lot, not little by little. If a company
grows the others will follow since the growth is
very big, which will leave them behind.
- High exit barriers
- Markets are undifferentiated.
POTENTIAL ENTRANCE: NOT COMPETITORS,
which are already in the industry. They are potential companies that will enter the industry.

These entrances depend on the BARRIERS TO ENTRY: factors that need to be overcome by new
entrants if they are to compete in an industry. Such as:

- Economies of scale
- Capital requirements of entry
- Experience
- Access to supply or distribution channels
- Customer or supplier loyalty
- Expected retaliation
- Legislation or government action
- Differentiation

SUBSTITUTES: They are products/services that offer a similar benefit to an industry’s products/
services, but by a different process.

For ex: train for the airline industry.

2 important points:

- Price/ performance ratio is critical to substitution threats.

- Extra-industry effects are the core of the substitution concept.
-
SUPPLIERS: They supply the organization with what is required to produce the product/service,
and include labour and sources of finance.
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They have bargaining power, they have power to negotiate the price. Their power is likely to be
high when there is/are:

- Concentration of suppliers: When there are little suppliers to choose from, they have more
power.
- Customers fragmented and with low bargaining power.
- High switching costs: It is more difficult for the company to change suppliers, giving them
power.
- Powerful supplier brand
- Possible forward integration by the supplier: If they can become their own manufacturers, they
have more power

BUYERS: They are the organization’s immediate customers, NOT necessarily the ultimate
customers.

They have bargaining power, since their buying power makes them able to negotiate price. Their
power is is likely to be high when there is/are:

- Concentration of buyers
- Many small operators in the supplying industry
- Alternative sources of supply
- Low switching costs
- Components/materials that are high percentage of cost to the buyer leading to “shopping
around”
- A threat of backward integration

EXAM QUESTION: Assess the attractiveness of the industry/ explain Porter’s 5 forces.

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THE DYNAMICS OF INDUSTRY STRUCTURE

In order to know in which stage of the life cycle we are, we compare demand and supply.

D > S —> there is growth.

S < D —> the industry is declining. Mature markets/ Saturated markets. New entrants won’t be a
threat. Rivalry will be an issue, maybe substitutes. Clients will be very powerful.

COMPARATIVE INDUSTRY STRUCTURE ANALYSES

RADAR PLOT

High is in the middle because the pentagon depicts

the profit potential of the industry, so if these forces
are strong, the shape gets smaller, showing the
industry is not that desirable.

This plot could be used to compare different

industries or the same one in different moments of
time.

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3.3. COMPETITORS AND MARKETS
STRATEGIC GROUPS
Strategic groups are organizations within an industry or sector with similar strategic
characteristics, following similar strategies or competing on similar bases.

How do we identify groups within an industry?

- Scope of activities:
- Product/ service diversity: the wider the portfolio, the more diverse.
- Geographical coverage: In how many countries are you present?
- Number of market segments served
- Distribution channels
- Resource commitment:
- Extent of branding
- Marketing effort
- Extent of vertical integration
- Products/service quality
- Technological position: are you a leader or a follower?
- Size of organization
We need to look at how companies perform, because that way we can find variables making
certain companies high-performing ones.

EXAMPLE - INDIAN PHARMACEUTICAL INDUSTRY

The numbers in brackets are the number of firms in the group

If you were an exploiter company that wanted to become an

outsourcer, explorer or emergent global, what would you need to
do?

You need to invest more on R+D and follow an

internationalization strategy.

Is this possible? It depends on the barriers there may be.

USES OF STRATEGIC GROUP ANALYSIS

- Understand who are the most direct competitors
- Establish different bases of competitive rivalry within and between the strategic groups. This
means that we can learn what are companies competing on.
- Assess if an organization could move from one group to another, which depends on barriers to
entry.
- Identify opportunities and threats. Changes in the macro-environment may create strategic
space.

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MARKET SEGMENTS
A market segment is a group of customers who have similar needs that are different from
customer needs in other parts of the market.

3 IMPORTANT ISSUES

- Variation in consumer needs

- Specialization
- Strategic consumers:
The strategic customer is the person(s) at whom the strategy is primarily addressed because
they have the most influence over which goods or services are purchased.

BLUE OCEAN THINKING

The ocean is a metaphor for the market.

Blue oceans are new market spaces where competition is minimized.

The last line of the table speaks about the idea of breaking trade-offs (coste de oportunidad).

Michael Porter said that you can be a cost leader or a differentiator, but you have to choose, you
cannot be both. If you do, you will become something mediocre in the middle.

The Blue Ocean strategy goes against this, saying that you can break that trade-off strategy. You
can make choices that allow you to be a cost leader and a differentiator.

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VALUE INNOVATION: THE CORNERSTONE OF BLUE OCEAN
STRATEGY

EXAMPLE OF BLUE OCEAN THINKING - CASELLA WINES

They wanted to expand to the US wine market, so they had to do an analysis.

They came up with the idea that the US market was following a very traditional strategy, meaning
that all companies were competing in the same things.

They also found that the demand for alternatives was much bigger than the demand for wine.
Therefore, there was a challenge with the inexperienced palate.

They decided to create a social drink accesible to anyone.

This canvas shows in which variables

companies are competing.

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They thought about what they wanted to create, eliminate, reduce and raise

They created a new canvas

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3.4. OPPORTUNITIES & THREATS

SOME CONSIDERATIONS
Goal: reduced identified threats and take advantage of the best opportunities.

TECHNIQUES AND CONCEPTS TO IDENTIFY THREATS AND OPPORTUNITIES

- Pestel analysis
- Key drivers for change
- Porter’s 5 forces analysis
- Blue Ocean Thinking

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CHAPTER 4. STRATEGIC
CAPABILITIES
Resource-based view of strategy: the competitive advantage and superior performance of an
organization is explained by the distinctiveness of its capabilities

- Companies are heterogeneous, not homogenous.

- It is not that easy to copy high performers
- We need to maintain the competitive advantage, which is what consumers see as different from
other companies. Its rooted in the strategic capability.

4.1. CORE ACTIVITIES AND REQUIRED CAPABILITIES

CAPABILITY PROFILE

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4.2. FOUNDATIONS OF STRATEGIC CAPABILITY

Strategic capabilities are the capabilities of an

organization that contribute to its long-term survival
or competitive advantage.

STRATEGIC CAPABILITY

Resources Competences
Assets that organizations The ways those assets are
have or can call upon used or deployed effectively

Competences are related to how we really get advantage of our resources.

Assets may be tangible or intangible (experience, brand, patent, knowledge, reputation)

GENERIC DYNAMIC CAPABILITY

- Sensing capabilities – constantly scanning and exploring new opportunities across markets
and technologies (e.g. R & D and market research)
- Seizing capabilities – addressing opportunities through new products, processes and
activities
- Re-configuring capabilities – new products and processes may require renewal and re-
configuration of capabilities and investment in new technologies.

THRESHOLD AND DISTINCTIVE CAPABILITIES

Threshold capabilities are those capabilities needed for an organization to meet the necessary
requirements to compete in a given market and achieve parity with competitors in that market.

They are the basic capabilities you need to compete. Productions costs, raw material, packaging,
etc.

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Distinctive or unique capabilities are those capabilities that critically underpin competitive
advantage and that others cannot easily imitate or obtain.

They are those things that make a company different. When we refer to strategic capability we are
referring to these capabilities.

Resources Competences

Threshold capabilities Threshold resources Threshold competences

Required to be able to compete
in a market

Distinctive capabilities Distinctive resources Distinctive competences

Required to achieve competitive
advantage

For each resource we can define a competence. When we define a resource we can speak about
the ability to do something. “I have the ability to create/maintain/take advantage of/…”

ROYAL OPERA HOUSE EXAMPLE

Resources Competences

Threshold capabilities Opera house Ability to develop an performance

Required to be able to compete Cast Ability to reach an audience
in a market Administrative staff Ability to choose titles, artists,
Financial resources etc.

Distinctive capabilities Elite cast, designers, orchestra, “Ability to reach out to as wide
Required to achieve competitive contacts, etc. (quality) and diverse a community as
advantage Well established reputation possible.”
Ability to deliver highest quality
operas.
Ability to create engagement

We will focus on the distinctive resources and competences.

4.3. STRATEGIC CAPABILITIES AS A BASIS FOR

COMPETITIVE ADVANTAGE
Jay Barney, a leading proponent of Resource-based view (RBV) proposes four key criteria by
which capabilities may be assessed in terms of their providing a basis for achieving such
competitive advantage:

- Value
- Rarity
- Inimitability
- Organizational support

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V - VALUE OF STRATEGIC CAPABILITIES
Capabilities should be distinctive and generate value
- Value for consumers or other stakeholders: Ability to perform what consumers
or other stakeholders consider valuable.
- Value to the organization: the product or service must be provided at a cost that still allows the
organization to achieve the expected results.

We are creating value because we are taking advantage of opportunities and minimizing threats.

To be valuable capabilities need to provide the potential to address the opportunities and threats
that arise in the organization’s environment. Capabilities are valuable if they address opportunities
and/or threats and generate higher revenues or lower costs or both compared to if the
organization did not have those capabilities

Attention to changes in the competitive environment.

R - RARITY
Rare capabilities are those possessed uniquely by one organization or by a few others.

Museums, for examples, are an example of rare resources since their paintings are only in there.

2 important issues:

- Rarity, of itself, is of little value unless the resources or capabilities lead to outputs in the form of
products or services that meet customer needs and are therefore value to them.

- Rarity could be temporary. Moreover, it may be dangerous to assume that resources and
capabilities that are rare will remain so. If an organization is successful on the basis of
something distinctive, then competitors will very likely seek to imitate or obtain that
distinctiveness. So it may be necessary to consider other bases of sustainability.

This creates a problem since if you create a new unique product that is really successful you
need to protect that rarity since others will copy you.

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I - INIMITABILITY (VERY RELEVANT)
Inimitable capabilities are those that competitors find difficult to imitate or obtain.

If we wanna define the robustness of strategic capability we need to look at different factors:

- Complexity:
- Internal linkages: Knowledge is not only in the staff minds, but it is shared between all of
them. This makes the strategic capability more complex, and therefore, robust.
- External linkages: You need to develop relationships with the clients and create a network
with them. This makes the strategic capability more complex, and therefore, robust.

- Culture and history:

- Taken for granted activities:
- Path dependency:
- Causal ambiguity: the idea that sometimes we can see that things are different and know its
cause, but sometimes it is not that obvious. We know performance is difference but we cannot
that easily explain why. Performance is the result of many decisions, which is why it is difficult
to understand why someone performs the way it does.

- Change: We should

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O - ORGANIZATIONAL SUPPORT
The organization must be suitably organised to support the valuable, rare and inimitable
capabilities that it has.

Is a firm organized to exploit the full competitive potential of its resources and capabilities?

Numerous components of a firm’s organization are relevant when answering the question of
organization, including its formal reporting structure, its explicit management control systems, and
its compensation policies. These component are referred to as complementary resources because
they have limited ability to generate competitive advantage in isolation. However, in combination
with other resources and capabilities, they can enable a firm to realize its full competitive
advantage.

4.4. SWOT
Summarizes the analysis of:

- Business environment: opportunities & threats

- Strategic capabilities: strengths & weaknesses

Used for comparison with competitors

Focuses on future choices and capability of organization to support them.

Problems:
- Can generate long lists: need to focus on key issue.
- Danger of over- generalization: not a substitute for rigorous strategic analysis

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