Joseph

Bartlett

COMM 401 Notes

External Environment

The external environment consists of three parts:
1. The general environment
2. The competitor environment
3. The industry environment

An external analysis is What might be done?


SWOT ANALYSIS can be used to summarize internal and external analysis.

Opportunity: A condition in the general environment that, if exploited, helps a firm
achieve a competitive advantage.

Threat: A condition in the general environment that may hinder a firms efforts to
achieve competitive advantage.

Strengths + Weaknesses covered in Internal Environment.


General Business Environment

Political/Legal:
Competition, labour and taxation laws
Education and government philosophies

Economic:
Inflation and interest rates
Personal and business saving rates
Trade deficits
GDP
Recessions

Social/cultural:
Women in the workforce
Diversity
Environmental concerns
Work-life quality attitude
Shift in preferences regarding product characteristics




Joseph Bartlett

Technological:
Product and process innovations
Applications of knowledge
Focus on private and government supported R&D
New communication technologies

Demographic:
Population size
Age structure
Ethnic mix
Geographical distribution
Income distribution
Immigration

Physical Environment:
Soil
Water Supply
Climate

Global:
Important political events
Critical global markets
Newly industrialized countries
Different cultures


Porters Five Forces

Threats of new entrants:
Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages (economies of scale)
Government policy
Expected retaliation

Bargaining power of suppliers:
Supplier industry is dominated by a few firms
Suppliers products have few substitutes
Buyer is not an important customer to the supplier
Suppliers product is an important input to the buyers product
Suppliers products are differentiated
Joseph Bartlett

Suppliers products have high switching costs

Supplier poses credible threat of forward integration

Overall powerful suppliers exert power in the industry by threatening to increase
their prices or reduce the overall quality of their service. They can harm an
industrys profitability if firms are not able to recover the cost increase.


Bargaining power of buyers:
Buyers are concentrated or the purchases are large relative to the suppliers
sales
Purchases account for a significant amount of the industrys sales
The products are undifferentiated
Buyers face low switching costs
Buyer presents a credible threat of backwards integration
The quality of the product doesnt matter in the industry
The buyer has full information

Powerful buyers exert their power in the industry by bargaining down prices,
forcing higher quality and playing firms off of one another


Threat of substitutes:
Substitutes are
o Products or services that have similar functions, limiting the prices
that firms can charge
o Products that have improved price or performance tradeoffs relative
to products currently offered in the industry. Ex: Air travel over cars

Substitutes within an industry and across industry substitutes are different


Rivalry amongst competitors:
How much are people battling for strategic position in the market
How much price competition is being used
The existence of advertising battles
Increased consumer warranties and service
Frequent new product introductions
Existence of high exit barriers
o Are there specialized assets that are hard to sell or fixed exit costs like
labor agreements etc.




Joseph Bartlett

An unattractive industry will have:

Low entry barriers
Strong supplier power
Strong buyer power
High threat of substitutes
Intense rivalry amongst competitors

An attractive industry will have:
High entry barriers
Low supplier power
Low buyer power
Low threat of substitutes
Moderate/low rivalry amongst competitors

Competition

Cutthroat competition is likely to occur when there are numerous or equally
balanced competitors, when it is a slow growth industry, when there are high fixed
costs, when there are high storage costs, when there is lack of differentiation
between the products or service, when there are high switching costs, when
capacity is added in large amounts only and when there are high exit barriers.

A strategic group is a collection of firms that follow similar strategies along similar
dimensions. Each industry is populated with different strategic groups. Competitive
rivalry is greater within a strategic group than it is between different strategic
groups.


Overall an industry analysis consists of six steps:
1. Define the industry
2. Evaluate each of the five forces (including identifying industry participants)
3. Determine overall industry structure
a. Profitability level, controlling forces, positioning of above average
performers
4. Analyze recent and potential future changes for each force
5. Identify industry structure aspects that might be influenced by competitors,
new entrants, or own firm

A competitor environment analysis consists of analyzing:
What drives the competitor as shown by its future objectives
What the competitor is doing and can do as revealed by its current strategy
What the competitor believes about itself and the industry, as shown by its
assumptions
What the competitor may be able to do, as shown by its capabilities
How will the competitor respond to our strategy
Joseph Bartlett

The purpose of this competitor analysis is that it:

Informs the firm about the objectives, strategies, assumptions, and
capabilities of competitors
Examines complementors that support a competitors strategy and major
networks or alliances in which competitors participate
Attempts to identify and carefully monitor major actions taken by firms
that have a poor performance.


Internal Environment

Resources are the source of a firms capabilities. They represent inputs into a firms
production process. Alone they do not create a competitive advantage or allow a
firm to creates value that results in above average returns.

Tangible Resources

Financial: The firms borrowing capacity or ability to generate internal funds.

Organizational: The firms financial reporting structure. Its formal planning,
controlling and coordinating systems.

Physical: Location and sophistication of a firms plant and equipment. A firms access
to raw materials.

Technological: A firms stock of technology such as patents, copyrights, trademarks
and trade secrets.

Intangible Resources

Human:
Knowledge
Trust
Managerial capabilities
Organizational routines

Innovation: Ideas, scientific capabilities, and capacity to innovate.

Reputational:
Reputation with customers
Brand name
Perceptions of product quality, durability, and reliability
Reputation with suppliers
Efficient, effective and supportive mutually beneficial interactions and
relationships
Joseph Bartlett

Capabilities emerge over time through complex interactions among tangible and
intangible resources. They stem from employees and are often developed in specific
functional areas. These unique skills and knowledge are activities through which the
firm adds unique value to its goods and services over an extended period of time.
Capabilities exist when resources have been purposely integrated to achieve a
specific task or set of tasks.

Competitive Advantage
Valuable: Allows the firm to exploit opportunities or neutralize threats in its
external environment.

Rare: They are possessed by only a few, if any, potential competitors.

Imitable: Other firms cannot obtain it, or are only able to obtain it at a higher cost.

Non-substitutable: There are no equivalents to it.

Joseph Bartlett

The value chain is a useful tool to identify and understand internal sources of a
competitive advantage:

Firm Infrastructure

Human Resource Management M

A
Support R
G
IN
Activities Technological Development
Procurement

Service
(Distribution)
Operations

Marketing
Outbound
Logistics

Logistics
Inbound

& Sales
(SCM)

IN
R G
A
M

Primary Activities


Outsourcing is the purchase of value-creating or support functions from an
external supplier. It is rare that a firm is superior in all aspects of the value chain.
Outsourcing activities where a firm is lacking competence allows them to focus on
the areas in which they create value. This frees resources from non-core activities
and directs them to ones that serve customers more effectively. Overall outsourcing
can lead to specialty suppliers performing the required tasks more efficiently as well
as a sharing of risks allowing a firm to be flexible, dynamic, and better able to adapt
to changing opportunities.

Business Level Strategy

When discussing strategy, it can be broken down into business strategy and
corporate strategy.

Business Strategy
Participation Strategy: Which product markets do I compete in?
Competitive Strategy: How can I serve existing customers?
Organization Strategy: How do I mobilize my organization? What is the role
and mix of my leadership team?



Joseph Bartlett

A good strategy makes real choices and trade-offs and creates distinctiveness by
focusing on sources of profitability that competitors cant match. It links choices to
how companies make money over time using their key assets and capabilities,
ensures consistency across the business, and is executable with existing assets,
capabilities and resources.

In creating a strategy, one must understand:
1. Where value is created or destroyed
2. Why value is created or destroyed (market attractiveness, competitive
position)
3. What choices you can make to unlock value (business model)

Overall value can be managed. Better strategies lead to a better performance.

Understanding what choices you can make to
unlock value
Tips and tricks
Profitable Mixed performance, High profit and
usually vulnerable value creation
Participation strategy Estimate
(where to play) Brand 2
position.
Brand 1 Area = profit
Products Use combination
Market attractiveness

of quantitative
Geographies and qualitative
judgement to
Customers Brand 3 define position.
Brand 4
Channels Consider
evolution.
Value chain activities Unprofitable and Mixed performance, Assess how
value destruction usually profitable
Unprofitable businesses are
Disadvantaged Advantaged likely to change
Competitive position
position over
time.
Proposition Operations

Competitive strategy (how to win)

Customers
Who does the company want to serve
What are the needs of these target customers
What is the target customer willing to pay to have these needs fulfilled
How the company will satisfy these needs

Generic approaches consist of cost leadership, differentiation and focus.
Joseph Bartlett

Cost Strategy

When trying to obtain a cost advantage, it can be very useful to:
Standardize the product
Determine and control the cost driver and configure the value chain to focus
on efficiency.

Risks of using a cost strategy include:
Loss of competitive advantage to newer technologies
Failure to detect changes in customer needs
Competitors ability to imitate the cost advantage through their own unique
strategic actions

Differentiation Strategy
A differentiation strategy offers products or services with unique features for which
customers are willing to pay a premium price. This can be done by raising the
performance of the product or service or by increasing a customers unwillingness
to switch to a non-unique product.

A differentiation advantage can also be obtained by raising the willingness for a
customer to pay a premium with only a slight increase in costs. This involves
configuring the value chain/activity system accordingly.

Risk of using a differentiation strategy include:
Customers decide that the differentiation isnt worth a higher price
Competitors offer similar products at a lower cost
Counterfeiters offer knock offs of the product

Joseph Bartlett

Dual Advantage

To achieve a dual advantage, one must provide a low cost with valued
differentiation features. Primary and support activities need to be used to produce
differentiated products at a relatively low cost.

Critical success factors for DA can include TQM, information networks and flexible
manufacturing systems.

Risks in achieving this type of competitive advantage include:
Products or services that lack sufficient low cost or differentiation
To be stuck in the middle which causes the lack of a strong commitment to
either strategy


Corporate Level Strategy

Corporate Strategy
Portfolio Strategy: What is the right size and mix of my portfolio of
businesses? Which businesses will drive growth? Which businesses will fund
growth?
Value-added Strategies: What synergies can I capture across businesses
(shared assets and capabilities) that will deliver more value than the sum of
the parts?
Management Model: How do I manage my portfolio of businesses structure,
processes? What is the role of the center?
Capital Model: How do I allocate capital and other (scarce resources).

Corporate-level strategys value is ultimately determined by the degree to which
the businesses in the portfolio are worth more under the management of the
company than they would be under any other ownership


Paths to grow include:

Market development: Moving into different geographic markets

Product development: Developing new products or significantly improving existing
ones

Horizontal integration: Acquisition of competitors, horizontal movement at the
same point in the value chain

Vertical integration: Becoming your own supplier or distributor through
acquisition; vertical movement up or down the value chain
Joseph Bartlett

Diversification Considerations
What can our company do better than any of its current competitors?
What strategic assets are needed to succeed in the new market?
Can we catch up to competitors in the new market?
Will diversification break up strategies that need to be kept together?
Will we be simply a player in the new market or a leader?
What can we learn by diversifying and are we structured to learn it?

3 reasons to diversify
1. Value creating diversification (economies of scope, financial economies)
2. Value-neutral diversification (tax laws, uncertain future cash flows)
3. Value-reducing diversification (diversify managerial employment risk,
increase managerial compensation)

Reason number one is what really drives diversification. The two main ways
diversification strategies create value are through operational and corporate
relatedness.


Related Diversification
Activity sharing and skills transfer are key success factors for related diversification.

-It is important to understand business interrelationships, value chains, and drivers
for competitive advantage

-Sharing activities can lower costs
Achieve economies of scale
Increase capacity utilization
Move down the learning curve

-Requirements
Existence of strong corporate identity
Corporate mission that emphasizes the importance of integrating business
units
Reward system that emphasizes more than just business unit performance

-Examples
Sharing of distribution network and sales force


Unrelated Diversification
Need to acquire sound and attractive companies
Businesses are autonomous
Acquiring corporations supplies needed capital
Add professional management/control to the businesses
Joseph Bartlett

Business unit managers compensation should be based on unit results

Key success factors
o Managers have more detailed knowledge of firm relative to outside
investors
o Firm can reduce risk by allocating resources among diversified
businesses, although shareholders can generally diversify more
economically on their own

Mergers and Acquisitions

They can be used because of uncertainty in the competitive landscape
They
o Increase market power because of competitive threat
o Spread risk due to uncertain environment
o Shift core business into different markets

-Firms use M&A strategies to create value for all stakeholders, however M&A value
creating is challenging



Joseph Bartlett

Reasons for Acquisition

Increased market power: Acquisitions can bolster market power and leapfrog the
acquirer into a position of leadership through economies of scale/scope, market
share or five forces related competitive advantage.

Overcoming entry barriers: Through cross border acquisitions.

Cost of new product development and increased speed to market: Gain access to
new and current products.

Lower risk compared to developing new products: Less costly and more predictable
than internal product development.

Increased diversification: It is the quickest and easiest way for a business to change
its portfolio.

Reshaping the firms competitive scope: Acquisitions can reduce the negative effect
of an intense rivalry on a firms financial performance and can reduce a firms
dependence on one or more products or markets.

Learning and developing new capabilities: When acquiring firms with different but
related capabilities, they can build their own knowledge base.


Problems with acquisitions
Integration difficulties
Too large
Inadequate target evaluation
Managers overly focused on acquisitions
Large debt
Too much diversification
Inability to achieve synergy
Melding two different corporate cultures
Linking different financial and control systems
Building effective working relationships
Resolving problems regarding status of the two firms executives
Loss of key personnel weakening the acquired firms capabilities and
reducing its value

-Only 20% are successful, 60% are disappointing and 20% are clear failures
-Greater success comes from being able to select the right target, avoiding paying to
high a premium, integrating the operations of the two companies effectively and
retaining the firms human capital.

Joseph Bartlett

Evaluating the Target

Must perform proper due diligence: The process of evaluating a target firm for
acquisition

-Ineffective due diligence may result in paying to much of a premium on the
acquisition

Evaluating the target consists of:
The financing of the intended transaction
The different cultures between the firms
The tax consequences of the transaction
Actions necessary to meld the two workforces
Both the accuracy of the financial position and accounting standards used
and the quality of the strategic fit
The ability of the acquiring firm to effectively integrate the target


Risky debt types

Junk bonds: Financing options where risky acquisitions are financed with money
that provides a large potential return to lenders.

-High debt and junk bonds can increase the likelihood of bankruptcy, lead to a
downgrade of the firms credit rating, and preclude investment in activities that
contribute to the firms long term success.


Synergies are when assets are worth more when used in conjunction with each
other than when they are used separately

-Synergy is created by the efficiencies derived from economies of scale and
economies of scope and by sharing resources across the businesses in the merged
firm

-Failure to achieve synergies can come from transaction costs related to acquisition
strategies as well as the tendency for firms to underestimate indirect costs when
evaluating a potential acquisition

It is possible to over diversify. When this happens, firms can be required to process
too much information. This can lead to focusing on the short term rather than the
long term. Acquisitions can also become substitutes for innovation. Over
diversification can also lead to a decline in performance. Even when a firm is not
over-diversified, a high level of diversification can have a negative impact on the
long-term performance.
Joseph Bartlett

Too large
Additional costs and complexities of management can exceed the economies of scale
and additional market power, creating diseconomies of scope.

The firm should implement formal rules and policies to ensure consistency among
different decisions. This can lead to standardized managerial behavior. Overall being
too large can lead to less innovation.

Three solutions after an acquisition failure

1. Downsizing: Reduction in the number of a firms employees and in the
number of its operating units. This does not change the essence of the
business. It is tactical for the short-term.
2. Downscoping: Refers to divestiture, spinoff or some other means of
eliminating businesses that are unrelated to a firms core businesses.
Strategic for long-term
3. Leveraged buyout: A party buys all of the assets of a business, financed
largely with debt, and takes the firm private. Protection against varying
financial markets.


Joseph Bartlett

International Strategy

Domestic Markets
Stable
Predictable
Less complex
Globalization is reducing the number of domestic-only markets

Global Markets
Unstable
Unpredictable
Complex and risky
Globalization is enabling global markets

Going global has many benefits such as extending a products life cycle, gaining
easier access to raw materials, opportunities to integrate operations on a global
scale, opportunities to use rapidly developing technologies, and gaining access to
consumers in emerging markets.

Basic benefits include:
1. Increase market size: The domestic market may lack the size to support
efficient scale manufacturing facilities (larger international markets can offer
higher returns).

2. Economies of scale and learning: Expanding the size and scope of markets
helps achieve economies of scale in manufacturing, as well as marketing,
Joseph Bartlett

R&D and distribution. Resource and knowledge sharing between country

units can also act as a multiplier for the firms core competencies.

3. Location advantages: Access to low cost labor, critical resources (like raw
materials and energy) and a new and potentially lucrative customer base.

Domestic resources and capabilities are the building blocks for international
capabilities and core competencies.

Germany - the excellent technical training system fosters a strong
emphasis on continuous product and process improvements
Japan - unusual cooperative and competitive systems facilitate the
cross-functional management of complex assembly operations
Italy - the national pride of the countrys designers spawns strong
industries in shoes, sports cars, fashion apparel, and furniture
U.S. - Competition among computer manufacturers and software
producers accelerates development in these industries

Three corporate level international strategies

1. Multi-domestic strategy:
Strategy and operating decisions are decentralized to strategic business units
in each country
Products and services are tailored to the local market
The business units in each country are independent
This strategy assumes markets differ by country or region
Prominent strategy among European firms due to broad variety of cultures
and markets
This strategy results in less knowledge sharing for the corporation as a whole

2. Global Strategy
Firms offer a standardized product across different countries with the overall
competitive strategy being dictated by the home office
Strategic and operating decisions are made at the home office
It involves interdependent SBUs operating in each country
The home office attempts to achieve integration across the different SBUs
which adds management complexity
Produces a lower risk
Emphasizes economies of scale
It requires resource sharing and coordination across borders which can be
hard to manage




Joseph Bartlett

3. Transnational strategy
This strategy seeks to achieve both global efficiency and local responsiveness
It requires centralization (global coordination and control) and
decentralization (local flexibility)
A global competitive landscape fosters intense competition, which pressures
to reduce costs, while at the same time information has increased the desire
for differentiated, customized and specialized products
Firms must pursue organizational learning in order to achieve a competitive
advantage
This strategy is challenging but has become more necessary in order to
compete in international markets
It is becoming more and more popular as a strategy


Methods of entering international markets

Exporting: This is when the firm sends products it produces to international
markets. It involves low expenses to establish operations in a host country. It
involves high transportation costs and often involves contractual agreements. There
is low control over marketing and distribution. A negative factor is that tariffs may
be imposed.

Licensing: This is an agreement that allows a foreign company to purchase the right
to manufacture and sell a firms products within a host countrys market or set of
markets. This involves a low cost to expand internationally and allows the licensee
to absorb some of the risks. There is low control over marketing and manufacturing
and there is a risk the licensee might imitate the technology and product.

Strategic Alliance: This is a collaboration with a partner firm for international
market entry. It involves shared risks of resources and facilitates the development
of core competencies. It involves fewer resources and costs required for entry and
may involve incompatibility, conflict or the lack of trust with a partner. Overall it can
be difficult to manage.

Cross border acquisition: This is when a firm from one country acquires a stake or
purchases 100% of a firm located in another country. It allows for quick access to
the market and involves possible integration difficulties. It can be costly due to debt
financing and it has complex negotiations and transaction requirements.

New wholly owned subsidiary: This is when a firm invests directly in another
country or market by establishing a new wholly owned subsidiary. It is costly and
involves complex processes. It allows for maximum control and has the highest
potential returns. It carries high risk.


Joseph Bartlett

-Exporting, licensing and strategic alliance are good tactics for early market
development. A strategic alliance is used in more uncertain situations.

-A wholly owned subsidiary may be preferred if intellectual property rights in an
emerging economy are not well protected, if the number of firms in the industry is
accelerating and if the need for global integration is high.

-Acquisitions or wholly owned subsidiaries secure a stronger presence in
international markets.

The firm has no foreign manufacturing
expertise and requires investment only Exporting
in distribution.

The firm needs to facilitate the product

improvements necessary to enter Licensing
foreign markets.

The firm needs to connect with an

experienced partner already in the
targeted market or it needs to reduce Strategic Alliance
its risk through the sharing of costs.

The firm must act quickly to gain rapid
access to a new market (and corruption Acquisition
is not an issue).

The firms IP rights are not well

protected, the number of firms in the Wholly Owned Subsid.
industry is growing fast, and the need
for global integration is high.


Two main risks are political and economical:

Joseph Bartlett

Cooperative Strategy

There are three alternative growth and expansion models being internal
development, strategic alliances and mergers and acquisitions.

Collaborate

-Firms collaborate for the purpose of working together to meet a shared objective

-Cooperating with another firm creates value for customers

-It exceeds the cost of constructing customer value in other ways and establishes a
favorable position relative to competitors

Reasons for collaborating in different market types are:

Slow cycle markets: A competitive advantage is shielded here from imitation for
long periods of time and imitation is costly. Collaborating would therefore allow a
firm to gain access to a restricted market, establish a franchise in a new market and
maintain market stability. It is rare today.

Fast cycle markets: A competitive advantage is not shielded here, preventing long-
term sustainability. Collaborating here would allow a firm to speed up product or
service development, speed up new market entry, maintain market leadership, form
an industry technology standard, and overcome uncertainty.

Standard cycle markets: A competitive advantage is moderately shielded from
imitation here. Collaborating would allow a firm to gain market power over
reducing overcapacity, gain access to complementary resources, establish scale
economies, overcome trade barriers, and pool resources for large capital
expenditure projects.


Strategic Alliances are the main way to engage in collaborating strategies. This is a
cooperative strategy in which firms combine resources and capabilities to create a
competitive advantage. There are three types of strategic alliances being joint
ventures, equity strategic alliances, and non-equity strategic alliances (licensing
agreements, distribution agreements, supply contracts and outsourcing
commitments).

Joint Venture: This is when two or more firms create a legally independent company
to share resources and capabilities to develop a competitive advantage. It is optimal
for firms combining resources and capabilities to create a competitive advantage
that is different from individual advantages.

Joseph Bartlett

Equity Strategic Alliance: This is when two or more firms own different percentages
of the company they have formed by combining some of their resources and
capabilities for the purpose of creating a competitive advantage.

Non-equity Strategic Alliance: This is when two or more firms develop a contractual
relationship to share some of their unique resources and capabilities to create a
competitive advantage. A separate independent company is not established here
therefore there are no equity positions.



Business level cooperation strategy: When firms combine resources and capabilities
to create a competitive advantage by competing in one or more product markets.

Complementary strategic alliances: can be vertical (different stages of the
value chain) or horizontal (same stage of the value chain)
Competition response strategy: alliances formed to take strategic action
against competitors moving into their territory and taking share of the
market
Uncertainty-reducing strategy: hedge risk and uncertainty, especially in fast-
cycle markets
Competition-reducing strategies: usually in the form of collusion (illegal,
whether explicit or tacit)


Corporate level cooperation strategy: Firms combine their resources and
capabilities for the purpose of expanding their operations.

Diversifying alliances: sharing resources and capabilities in order to
penetrate new product/service or geographic markets
Synergistic alliances: focus here is on creating economies of scope through
sharing of resources and capabilities
Franchising: where a firm (franchisor) uses a franchise as a contractual
relationship to describe and control the sharing of resources and capabilities
with its partners (franchisees)


Reasons why alliances fail
Environment
o Failure to anticipate changing conditions in tastes, technology,
economy
o Failure to consider differences in national culture, institutions,
government regulations


Joseph Bartlett

Strategy
o Poor partner selection
o Changed partner goals and strategy
o Achievement of partners strategic goals
Structure
o Form does not match purpose
o Lack of flexibility in contract
o Unclear goals
Behavior
o Organizational or national cultures mismatch
o Failure to adapt and adjust to changing circumstances
o Poor implementation
o Lack of top visible management commitment
o Poor systems for information sharing, conflict resolution, and control
o Lack of trust between organizations

Before entering into a strategic alliance, it needs to be asked do we really need one,
does it fit with our strategic goals, what are the transaction and opportunity costs vs
payoffs etc. The partners must be assessed and an agreement must be negotiated.
Creating the venture consists of creating synergies, having objective measures of
performance and having a periodic reevaluation. There constantly needs to be
managing and adapting (working through conflict), managing the alliance network
(avoid competitive grid-locks) and preparing for the future (continuation,
acquisition, termination).