4-1

THOMAS L. WHEELEN J. DAVID HUNGER

CHAPTER 4

Environmental

Scanning and

Industry Analysis

Continuation of last sessions lecture

3-2

Learning Objectives

Learning ObjectivesAfter reading this chapter, you should be able to:

Apply the resource view of the firm to determine core and distinctive competencies.

Use the VRIO framework and the value chain to assess an organizations competitive advantage and how it can be sustained.

Understand a companys business model and how it could be imitated.

Assess a companys corporate culture and how it might affect a proposed strategy.

Scan functional resources to determine their fit with a firms strategy.

Construct an IFAS Table that summarizes internal factors.

Strategic Management Basic Model

5-4

Resource-Based Approach to Organizational Analysis

Internal strategic factors

Critical strengths and weaknesses that are likely to determine if the firm will be able to take advantage of

opportunities while avoiding threats

Resources

Capabilities

Competency

Core competency

Distinctive competency

5-5

Resource-Based Approach to Organizational Analysis

Resources are an organizations assets and thus the basic building blocks of organization (tangible assets, human assets & intangible assets)

Capabilities refer to a corporations ability to exploit it resources

Competency is a cross-functional integration and coordination of capabilities

Core competency is a collection of competencies that crosses divisional boundaries, is widespread within the corporation, and is something that the corporation can do exceedingly well

Distinctive competency when core competencies are superior to those of the competition

5-6

Core and Distinctive Competencies

VRIO Framework

Value : Does it provide customer value and competitive advantage ?

Rareness : Do no other competitors possess it?

Imitability : Is it costly for others to imitate?

Organization : Is the firm organized to exploit the resource?

5-7

Resource-Based Approach to Organizational Analysis

5-Step Approach Strategy Analysis

1. Identify and classify resources

2. Combine strengths into capabilities

3. Appraise profit potential of capabilities

4. Select strategy that best exploits

5. Identify resource gaps invest in weaknesses

5-8

Sustainability of Advantage

Durability

Rate at which a firms underlying resources and capabilities depreciate or become obsolete

Imitability

Rate at which a firms underlying resources and capabilities can be duplicated by others

5-9

Sustainability of Advantage

Core Competency can be imitated

Transparency is the speed with which other firms can understand the relationship of resources and capabilities supporting a successful firms strategy Gillette has always supported its dominance in the marketing of razors with excellent R&D. A competitor could never understand how the

Sensor or Mach 3 razor was produced simply by taking one apart. Gillettes razor design was very difficult to copy, partially because the manufacturing

equipment needed to produce it was so expensive and complicated.

Transferability is the ability of competitors to gather the resources and capabilities necessary to support a competitive challenge it may be very difficult for a wine maker to duplicate a French winerys key resources of land and climate, especially if the imitator is located in Iowa.

Replicability is the ability of competitors to use duplicated resources and capabilities to imitate the other firms success even though many companies have tried to imitate Procter & Gambles success with brand management by hiring brand managers away from P&G, they have often failed

to duplicate P&Gs success.

5-10

Continuum of Sustainability

5-11

Business Models

BUSINESS MODEL

Companys method for making money in the current business environment

A business model is usually composed of five elements:

Who it serves What it provides How it makes money How it differentiates and sustains competitive advantage How it provides its product/service

5-12

Business Models

Types of Business Models

Customer Solutions Model: IBM uses this model to make money not by selling IBM products, but by selling its expertise to improve its customers operations. This is a consulting model.

Profit Pyramid Model : GM offers a full line of automobiles in order to close out any niches where a competitor might find a position. The key is

to get customers to buy in at the low-priced, low-margin entry point

(Saturns basic sedans) and move them up to high-priced, high-margin products (SUVs and pickup trucks) where the company makes its money.

Multi-Component System/Installed Base Model l: Gillette invented this classic model to sell razors at break-even pricing in order to make money

on higher-margin razor blades. HP does the same with printers and printer

cartridges. The product is thus a system, not just one product, with one

component providing most of the profits.

5-13

Business Models

Types of Business Models

Advertising Model : Similar to the multi-component system/installed base model, this model offers its basic product free in order to make money on

advertising. Originating in the newspaper industry, this model is used

heavily in commercial radio and television. Internet-based firms, such as

Google, offer free services to users in order to expose them to the

advertising that pays the bills.

Switchboard Model : In this model a firm acts as an intermediary to connect multiple sellers to multiple buyers. Financial planners juggle a

wide range of products for sale to multiple customers with different needs.

This model has been successfully used by eBay and Amazon.com.

Time Model: Product R&D and speed are the keys to success in the time model. Being the first to market with a new innovation allows a pioneer like

Sony to earn high margins. Once others enter the market with process

R&D and lower margins, its time to move on.

5-14

Business Models

Types of Business Models

Efficiency Model: In this model a company waits until a product becomes standardized and then enters the market with a low-priced, low-

margin product that appeals to the mass market. This model is used by

Wal-Mart, Dell, and Southwest Airlines.

Blockbuster Model: In some industries, such as pharmaceuticals and motion picture studios, profitability is driven by a few key products. The

focus is on high investment in a few products with high potential

payoffsespecially if they can be protected by patents. Profit Multiplier Model: The idea of this model is to develop a concept

that may or may not make money on its own but, through synergy, can

spin off many profitable products. Walt Disney invented this concept by

using cartoon characters to develop high-margin theme parks,

merchandise, and licensing opportunities.

5-15

Business Models

Types of Business Models

Entrepreneurial Model: In this model, a company offers specialized products/services to market niches that are too small to be worthwhile to

large competitors but have the potential to grow quickly. Small, local brew

pubs have been very successful in a mature industry dominated by

Anheuser-Busch. This model has often been used by small high-tech

firms that develop innovative prototypes in order to sell off the companies

(without ever selling a product) to Microsoft or DuPont.

De Facto Standard Model: In this model, a company offers products free or at a very low price in order to saturate the market and become the

industry standard. Once users are locked in, the company offers higher-

margin products using this standard. For example, Microsoft packaged

Internet Explorer free with its Windows software in order to take market

share from Netscapes Web browser.

5-16

Value-Chain Analysis

Typical Value Chain for a

Manufactured Product

Linked set of value-creating activities beginning with basic raw material and ending with distributors getting final goods into hands of customers

5-17

Corporations Value Chain

5-18

Scanning Functional Resources & Capabilities

Basic Organizational Structures

Simple structure

Functional structure

Divisional structure

Strategic Business Units (SBUs)

Conglomerate structure

5-19

Basic Organizational Structures

5-20

Corporate Culture

Collection of beliefs, expectations, and values learned and shared by a corporations members and transmitted from one generation of employees to another

5-21

Strategic Marketing Issues

Market Position & Segmentation

Marketing Mix

Product Life Cycle

Brand & Corporate Reputation

5-22

Marketing Mix Variables

5-23

Product Life Cycle

5-24

Strategic Financial Issues

Financial leverage

Capital budgeting

5-25

Strategic Research & Development Issues

R&D Intensity, Technological Competence and Technology Transfer

R&D Mix

Impact of Technological Discontinuity on Strategy

5-26

Technological Discontinuity

5-27

Strategic Human Resource Management Issues

Human Resources Management

Increasing Use of Teams

Union Relations and Temporary/Part -Time Workers

Quality of Work Life and Human diversity

5-28

Internal Factor Analysis Summary Table

3-29

1. What is the relevance of the resource-based view of the firm to

strategic management in a global environment?

2. How can value-chain analysis help identify a companys strengths and weaknesses?

3. In what ways can a corporations structure and culture be internal strengths or weaknesses?

4. What are the pros and cons of managements using the experience curve to determine strategy?

5. How might a firms management decide whether it should continue to invest in current known technology or in new, but

untested technology? What factors might encourage or

discourage such a shift?