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What is the General Environment of business?

• Dimensions in the broader society that

influence an industry and the firms within it:
– demographic
– economic
– political/legal
– sociocultural
– technological
– global
– physical
The General Environment: Segments and
Elements
 What is the Industry Environment of business?

• The set of factors directly influencing a

firm and its competitive actions and
competitive responses:
– threat of new entrants
– power of suppliers
– power of buyers
– threat of product substitutes
– intensity of rivalry among competitors
 What is Competitor Analysis?
• Gathering and interpreting information
about all the companies that the firm
competes against.
• Understanding the firm’s competitor
environment complements the insights
provided by studying the general and
industry environments.
 What is included in an External
Environmental Analysis?

• General Environment
– Focused on the future
• Industry Environment
– Focused on factors and conditions influencing
a firm’s profitability within an industry
• Competitor Environment
– Focused on predicting the dynamics of
competitors’ actions, responses and
intentions
What are the Components of the
External Environmental Analysis?
 What is a SWOT Analysis
• Strength – Internal, source of competitive
advantage
• Weakness – Internal, something the firm does
comparatively poorly
• Opportunity – External, A condition in the general
environment that, if exploited effectively, helps a
firm achieve strategic competitiveness.
• Threat – External, A condition in the general
environment that may hinder a firm’s efforts to
achieve strategic competitiveness.
 What is an industry?

• Industry Defined
– A group of firms producing products that are
close substitutes
– Competitive strategies to pursue above-
average returns when competing in a
particular industry
– An industry’s structural characteristics
influence a firm’s choice of strategies
What is Porter’s Five Forces of
Competition Model?
 What are Barriers to Entry?

• Economies of scale
• Product differentiation
• Capital requirements
• Switching costs
• Access to distribution channels
• Cost disadvantages independent of scale
• Government policy
• Expected retaliation
 What kind of power do Suppliers have?

• Supplier can have power when:

– suppliers are large and few in number.
– suitable substitute products are not available.
– individual buyers are not large customers of
suppliers and there are many of them.
– suppliers’ goods are critical to the buyers’
marketplace success.
– suppliers’ products create high switching costs.
– suppliers pose a threat to integrate forward into
buyers’ industry.
 What kind of Bargaining Power do Buyers have?

• Buyers have power when:

– buyers are large and few in number.
– buyers purchase a large portion of an
industry’s total output.
– buyers’ purchases are a significant portion of
a supplier’s annual revenues.
– buyers’ switching costs are low.
– buyers can pose threat to integrate backward
into the sellers’ industry.
 What is the threat of Substitutes?

• Substitute products have power when:

– buyers face few switching costs.
– the substitute product’s price is lower.
– substitute product’s quality and performance
are equal to or greater than the existing
product.

• Differentiated industry products that are

valued by customers reduce this threat
 What is Competitive Rivalry?
• Competitors have power when:
– there are numerous or equally balanced
competitors.
– industry growth slows or declines.
– there are high fixed costs or high storage costs.
– there is a lack of differentiation opportunities or low
switching costs.
– when the strategic stakes are high.
– when high exit barriers prevent competitors from
leaving the industry.
 What is a Strategic Group?
• Strategic Group Defined
– A set of firms emphasizing similar strategic
dimensions and using similar strategies.
– Intra-strategic group competition is more
intense than is inter-strategic group
competition due to similar:
• market positions
• products
• strategic actions
 What are the components of an
Internal Analysis of the Company?
 What are Complementors?
• Complementors
– The network of companies that sell
complementary products or services or are
compatible with the focal firm’s own product
or service.
• If a complementor’s product or service adds value
to the sale of the focal firm’s product or service, it
is likely to create value for the focal firm.
• However, if a complementor’s product or service is
in a market into which the focal firm intends to
expand, the complementor can represent a
formidable competitor.
 What is a Business-Level Strategy?

• An integrated and coordinated set of

commitments and actions the firm uses to
gain a competitive advantage by exploiting
core competencies in specific product
markets.
 How do CoreResources
Competencies affect Strategy?
and superior capabilities that are
Core
sources of competitive advantage over a firm’s
Competencies
rivals

An integrated and coordinated set of actions

Strategy taken to exploit core competencies and gain
competitive advantage

Providing value to customers and gaining competitive

Business-level
advantage by exploiting core competencies in
Strategy
individual product markets
What questions about Customers affect
Business-Level Strategies?

Who will be
served?

Key Issues
in What needs will
Business-level be satisfied?
Strategy

How will those

needs be satisfied?
 How must firms manage their relationships with
customers?

• Firms must manage all aspects of their

relationship with customers.
– Reach: firm’s access and connection to
customers
– Richness: depth and detail of two-way flow of
information between the firm and the
customer
– Affiliation: facilitation of useful interactions
with customers
What is Market Segmentation?
 What are the 2 main categories of business level
strategy?

• LOW-COST STRATEGY - Achieving lower overall costs

than rivals
– Performing activities differently (reducing process
costs)
• DIFFERENTIATION STRATEGY - Possessing the
capability to differentiate the firm’s product or service
and command a premium price
– Performing different (more highly valued) activities.
 What is a Cost Leadership Strategy?

• An integrated set of actions taken to

produce goods or services with features
that are acceptable to customers at the
lowest cost, relative to that of competitors.
• Product Characteristics
– Relatively standardized (commoditized)
products
– Features broadly acceptable to many
customers
– Lowest competitive price
 How does a firm Obtain a Cost Advantage?
Determine Reconfigure
and control Value Chain if
Cost Drivers needed

▪ Alter production process ▪ New raw material

▪ Change in automation ▪ Forward integration
▪ New distribution channel ▪ Backward integration
▪ New advertising media ▪ Change location relative to
▪ Direct sales in place of suppliers or buyers
indirect sales
 What is a Differentiation Strategy?

• An integrated set of actions taken to

produce goods or services (at an
acceptable cost) that customers perceive
as being different in ways that are
important to them.
– Focus is on non-standardized products
– Appropriate when customers value
differentiated features more than they value
low cost
 How do firms Obtain a
Differentiation Advantage?
Control Reconfigure
Cost Drivers if Value Chain to
needed maximize

▪ Lower buyers’ costs

▪ Raise performance of product or service
▪ Create sustainability through:
▪ customer perceptions of uniqueness
▪ customer reluctance to switch to non-
unique product or service
 What is a Focus Strategy?

• An integrated set of actions taken to produce goods or services that

serve the needs of a particular competitive segment.
– Particular buyer group—youths or senior citizens
– Different segment of a product line—professional craftsmen
versus do-it-yourselfers
– Different geographic markets—east coast versus west coast
• Types of focused strategies
Focused cost leadership strategy
Focused differentiation strategy
 What is Diversification?
• Diversification strategies play a major role
in the behavior of large firms.
• Product diversification concerns:
– the scope of the industries and markets in
which the firm competes.
– how managers buy, create and sell different
businesses to match skills and strengths with
opportunities presented to the firm.
Why do companies diversify?
What are the Levels of
Diversification?
What is a Corporate Level Strategy

• Corporate-level Strategy (Companywide)

– Specifies actions taken by the firm to gain a
competitive advantage by selecting and
managing a group of different businesses
competing in different product markets.
What questions does a Corporate-Level
Strategy address?
• Corporate-level Strategy’s Value
– The degree to which the businesses in the
portfolio are worth more under the
management of the firm than they would be
under other ownership.
– What businesses should
the firm be in?
– How should the corporate
office manage the Business Units
group of businesses?
What is Related Diversification?
• Firms create value by building upon or extending:
– resources
– capabilities
– core competencies
• Economies of Scope
– Cost savings that occur when a firm transfers capabilities and
competencies developed in one of its businesses to another of
its businesses.
 What is Unrelated Diversification?

• Little or no sharing across businesses

• Achieves financial economies:
– cost savings realized through improved allocations of financial
resources.
• Based on investments inside or outside the firm
– value created through two types of financial economies:
• Efficient internal capital allocations
• Purchase of other corporations and the restructuring their
assets
 Mergers, Acquisitions, and Takeovers:
What are the Differences?

• Merger
– Two firms agree to integrate their operations
on a relatively co-equal basis.
• Acquisition
– One firm buys a controlling, or 100%, interest in
another firm with the intent of making the acquired
firm a subsidiary business within its portfolio.
• Takeover
– An acquisition in which the target firm did not solicit
the acquiring firm’s bid for outright ownership.
Why do firms make Acquisitions?
Increased
market power
Learning and
Overcoming
developing
entry barriers
new capabilities

Making an Cost of new

Reshaping firm’s
product
competitive scope Acquisition development

Increased Increase speed

diversification Lower risk than to market
developing new
products
 What are entry barriers?
• Entry Barriers
– Factors associated with the market or with the firms
operating in it that increase the expense and difficulty
for new firms in gaining immediate market access.
• Economies of scale
• Differentiated products
• Cross-Border Acquisitions
– Acquisitions made between firms with headquarters in
different countries:
• are often made to overcome entry barriers.
• can be difficult to negotiate and operate because of the
differences in foreign cultures.
 How are acquisitions used to diversify?

• Using acquisitions to diversify a firm is the

quickest and easiest way to change its
portfolio of businesses.
• Both related diversification and unrelated
diversification strategies can be
implemented through acquisitions.
• The more related the acquired firm is to
the acquiring firm, the greater is the
probability that the acquisition will be
Wy do some acquisitions fail?

Integration
difficulties
Inadequate
Too large
target evaluation

Problems
Managers with
overly focused on Acquisitions Extraordinary debt
acquisitions

Too much Inability to

diversification achieve synergy
 What is Restructuring?
• A strategy through which a firm changes its
set of businesses or financial structure.
– Failure of an acquisition strategy often precedes
a restructuring strategy.
– Restructuring may occur because of changes in
the external or internal environments.
• Restructuring strategies
– Downsizing
– Downscoping
– Leveraged buyouts
 What are the Levels of
Diversification?
• Diversified firms vary according to their level of
diversification and the connections between and
among their businesses.
• There are five categories of businesses
according to increasing levels of diversification:
1. Single business
2. Dominant business
3. Related constrained
4. Related linked
5. Unrelated
 What are economies of scope?

• The company using the related diversification strategy

wants to develop and exploit economies of scope
between its businesses.
• Economies of scope are cost savings a firm creates by
successfully sharing resources and capabilities or transferring
one or more corporate-level core competencies that were
developed in one of its businesses to another of its businesses.
• Firms seek to create value from economies of scope through two
basic kinds of operational economies:
1. Sharing activities (operational relatedness)
2. Transferring corporate-level core competencies (corporate
relatedness)
What is Corporate Governance?
• Corporate governance is:
– the set of mechanisms used to manage
relationships among stakeholders and to
determine and control the strategic direction
and performance of organizations.
– concerned with identifying ways to ensure that
strategic decisions are made more effectively.
– used in corporations to establish harmony
between the firm’s owners and its top-level
managers whose interests may be in conflict.
What is the function of the Board of
Directors?
• Board of Directors
– Individuals responsible
for representing the firm’s
owners by monitoring
top-level managers’
strategic decisions.
How are Board of Directors’ Members
classified?
What is an Agency Relationship?
What is a hostile takeover?
What is strategic leadership?
 What is Strategic Leadership?

• Strategic leadership is the ability to anticipate, envision,

maintain flexibility, and empower others to create
strategic change as necessary.
• Strategic change is change resulting from selecting and
implementing a firm’s strategies.
• Multifunctional in nature, strategic leadership involves:
• Managing through others
• Managing an entire organization rather than a functional subunit
• Coping with the rapid and intense changes associated with the
global economy
 What skills does Strategic
Leadership require?
• Effective strategic leaders:
• Meaningfully influence the behaviors, thoughts, and feelings of those
with whom they work by word and by personal example, and through
their ability to envision the future
• Create and then support the context or environment through which
stakeholders (e.g., employees and suppliers) can perform at peak
efficiency
• Implement strategies in ways that lead to above-average returns
• The ability to attract and then manage human capital may be the
most critical of the strategic leader’s skills.
• Especially in the twenty-first century, intellectual capital that the firm’s
human capital possesses, including the ability to manage knowledge
and produce innovations, affects a strategic leader’s success.
 Who has primary responsibility for
Strategic Leadership?)
• The primary responsibility for effective strategic
leadership rests at the top, in particular with the CEO.
• Other strategic leaders include:
• Members of the board of directors
• The top management team
• Divisional general managers
• In practice though, any individual with responsibility for
the performance of human capital and/or a part of the
firm (e.g., a production unit) is a strategic leader.
 What is a transformational leader?

• Transformational leaders:
• Develop and communicate an organizational vision
• Work with others to formulate and execute a strategy to achieve
the vision
• Have a high degree of integrity and recognize its importance
• Respect their employees
• Have emotional intelligence, which involves:
• Understanding themselves well
• Having strong motivation
• Empathizing with others
• Having effective interpersonal skills
• Promote and nurture innovation
 What is the role of the top
management team?
• In a comprehensive sense, top-level managers make
multiple decisions regarding the strategies their firms will
choose and then the implementation of those strategies.
• When making decisions related to using the strategic
management process, managers often use their
discretion (or latitude for action).
• The primary factors that determine the amount of decision-
making discretion a manager has are:
• External environmental sources
• Organizational characteristics
• Managerial characteristics
• How managers exercise discretion when making decisions is critical
to the firm’s success and affects or shapes its culture as well.
 Top Management Teams
- Part 2

• The complex challenges facing most organizations

require the exercise of strategic leadership by a team of
executives rather than by a single individual.
• A top management team is composed of the individuals
responsible for making certain the firm uses the strategic
management process, especially to select and implement
strategies.
• Typically, the top management team includes the officers of the
corporation and/or members of the board of directors.
• Top management teams help CEOs:
• Avoid managerial hubris (overconfidence)
• Make better decisions
 How do
CEO Succession and
Top Management Team Composition affect Strategy?
 What are the five key leadership actions of effective
strategic leadership?

• Effective strategic leadership has five key

leadership actions:
1. Determining the firm’s strategic direction
2. Effectively managing the firm’s resource portfolio
• Exploiting and maintaining core competencies
• Managing human capital and social capital
3. Sustaining an effective organizational culture
4. Emphasizing ethical practices
5. Establishing balanced organizational controls
What is strategic entrepreneurship?
• Entrepreneurship is the process by which individuals, teams, or
organizations identify and pursue entrepreneurial opportunities
without being immediately constrained by the resources they
currently control.
• Strategic entrepreneurship involves taking entrepreneurial actions
using a strategic perspective.
• Firms using strategic entrepreneurship simultaneously engage in
opportunity-seeking and advantage-seeking behaviors.
• The purpose is to continuously find new opportunities and
quickly develop and exploit innovations while simultaneously
exploiting competitive advantages that are creating value
through the products the firm sells currently.
• Corporate entrepreneurship is the use or application of
entrepreneurship within an established firm.
 How does entrepreneurship contribute to
innovation and growth?

• As a process, entrepreneurship results in the

“creative destruction” of existing products (goods
or services) or methods of producing them and
replaces them with new products and production
methods.
• Entrepreneurship positively contributes to
individual firms’ performance and stimulates
growth in countries’ economies.
 In what 3 types of innovative
activities do firms engage?
• Firms engage in three types of innovative activities:
1. Invention
• Invention is the act of creating or developing a new product or
process.
• Invention brings something new into being.
• Firms use technical criteria to determine the success of an
invention.
2. Innovation
• Innovation is a process used to create a commercial product from
an invention.
• Innovation brings something new into use.
• Commercial criteria is used to determine the success of an
innovation.
3. Imitation
• Imitation is the adoption of a similar innovation by different firms.
• Commonly, imitative products have fewer features and a lower
 What are the characteristics of
entrepreneurs?
• Entrepreneurs are individuals, acting independently or as part of an
organization, who perceive an entrepreneurial opportunity and then
take risks to develop an innovation and exploit it.
• Entrepreneurs exist throughout different parts of organizations.
• Entrepreneurs:
• Are highly motivated
• Are willing to take responsibility for their projects
• Are self-confident
• Are often optimistic
• Tend to be passionate and emotional about their innovation-based ideas
• Are able to deal with uncertainty
• Are more alert to opportunities than are others
• To be successful, entrepreneurs often need to have good social
skills and to plan exceptionally well.