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regarding economies of scale, also due to experience curve which gives incumbents a cost
advantage because they have learnt how to do things more efficiently than an
inexperienced new entrant could possibly do. Access to supply or distribution channels.
Expected retaliation: as a result of a firm considering entering an industry. Existing firms
would retaliate to the extent that the entry would become too costly. Legislation or
government action. Differentiation.
Competitive Rivalry: Competitive rivals are organisations with similar products and services
aimed at the same customer group (that is, not substitutes). Factors affecting degree of
competitive rivalry: Competitive balance: where competitors are of equal size there is no
danger of intense competition as one competitor tries to gain dominance position over
others. Industry growth rate: strong growth results in firm growing in market but in
situations of low growth or decline, any growth is by the means/expense of rivals. High fixed
costs: Industries with high fixed costs would require big investments. High exit barriers:
Existence of high barriers to exit results in an increase in rivalry. Exit barriers may be high
due to high redundancy costs or high investment in specific assets such as plant and
equipment that others would not buy. Low differentiation
Implications and Issues of five forces framework
The analysis prompts the investigation of the implications of the forces. Example: Which
industries to enter (or leave)? What influence can be exerted? How are competitors
differently affected?
Five forces framework it is important to keep in mind to define the right industry
converging industries complementary products
increase competitive rivalry necessarily, it can indeed reduce competitive rivalry by raising
the costs and risks of aggressive moves and counter moves.
Hyper competition occurs where the frequency, boldness and aggressiveness of dynamic
movements by competitors accelerate to create a condition of constant disequilibrium and
change. In hyper competitive conditions, it may not be worth investing heavily in building up
barriers to entry or trying to reduce rivalry, perhaps by acquisition of competitor companies.
Strategic groups
Strategic groups are organisations within an industry with similar strategic characteristics,
following similar strategies or competing on similar bases. The characteristics differ across
industries and sectors.
Characteristics that distinguish between groups:
. Scope of an organisations activities (product range, geographical coverage, etc..)
. Resource commitment (brands, marketing spend, etc..)
The strategic group concept is useful in 3 ways:
. Understanding competition: Managers can focus on their direct competitors within their
particular strategic group, rather than the whole industry. They can also produce the
dimensions that differentiate them most from other groups.
. Analysis of strategic opportunities: Strategic groups can identify the most attractive
strategic spaces; within an industry. Some spaces on the map may be white space,
relatively under-occupied.
. Analysis of mobility barriers: Strategic groups are characterised by mobility barriers, these
are obstacles to movement from one strategic group to another.
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.
. Customer needs may vary for a number of different reasons. Segmentation can occur by
behaviour, lifestyle, etc...
. Relative market share: Organisations that have built up most experience in servicing a
particular market segment should not only have lower costs in doing so, but also have built
relationships which may be difficult for others to break down.
. How market segments can be identified and serviced is influenced by a number of trends in
the business environment. E.g. the wide availability of consumer data and the ability to
It could be worth targeting health and safety executives e.g. at a customer organisation,
they might be willing to pay more for a safe product/service than the usual buyers in the
purchasing department typically more focused on cost.
Chapter 3
Strategic capabilities are the resources and competences of an organisation needed for it to
survive and prosper.
Tangible resources are physical assets of organisations such as plant, people, finance and
knowledge. An organisation is considered under these categories:
. Physical resources: such as the machines, or buildings
. Financial resources: such as capital or cash
. Human resources: such as skills and knowledge of employees
. Intellectual capital: intangible resources such as patents and brands
Competence is the skills and abilities by which resources are deployed effectively through
an organisations activities and processes. There needs to be a distinction between
capabilities that are at threshold level and those that might help the organisation achieves
competitive advantage and superior performance. Threshold capabilities are defined as
those capabilities needed for an organisation in order to meet the necessary requirements
to compete in a given market. These can either be threshold resources or threshold
competences.
The identification and management of threshold capabilities raises 2 significant challenges:
.Threshold levels of capability will change as critical success factors change or through
activities of competitors and new entrants.
. Trade offs may need to be made to achieve the threshold capability required for different
sorts of customers.
While threshold capabilities are important, they do not themselves create competitive
advantage or the basis of superior performance. They are dependent on an organisation
having distinctive or unique capabilities that competitors will find difficult to imitate. This
may have been due to organisation having unique resources which are those resources that
critically underpin competitive advantage and that others cannot easily imitate or obtain.
Then there is core competences which are the skills and abilities by which resources are
deployed through an organisations activities and processes such as to achieve competitive
advantage in ways that others cannot imitate or obtain.
Cost efficiency studies are of great importance towards managers. Customers benefit from
cost efficiencies in terms of lower prices or more product features for the same prices. The
management of the cost base of an organisation could also be a basis for achieving
competitive advantage. However, for many organisations management of costs is becoming
a threshold strategic capability because:
Core competences of a firm may be difficult to imitate/copy due to the fact that they are
complex. This would be because:
. Internal linkages: It may be the ability to link activities and processes that, together,
deliver customer value.
. External interconnectedness: Firms can develop activities together with the customer on
which the customer is dependent on them, this makes it difficult for others to imitate or
gain the firms bases of the competitive advantage.
Core competences can become embedded in an organisations culture and this may not
necessarily be understood by managers explicitly. Thus, there is a need for coordination
between carious activities that occur naturally due to people knowing their part in the
wider picture or because it is taken for granted that activities are done in specific ways.
Causal ambiguity is where competences may be difficult to copy because competitors find it
hard to discern the causes and effects underpinning an organisations advantage. Causal
ambiguity can exist in two different forms:
. Characteristic ambiguity: this is where the significance of the characteristic itself is difficult
to discern or comprehend, perhaps because it is based on tacit knowledge or rooted in the
organisations culture.
. Linkage ambiguity: Where competitors cannot discern which activities and processes are
dependent on which others to form linkages that create core competences.
Substitution is a risk for organisations. Providing value to consumers and holding
competences that are complex, culturally embedded and causally ambiguous may mean
that it is very difficult for organisations to copy them. This substitution take two forms:
. Product or service substitution:
. Competence substitution: E.G. task based industries have often suffered because of an
over reliance on the competences of skilled craft workers that have been replaced by expert
systems and mechanisms.
Strategic capabilities can provide sustainable competitive advantage over time that they are
durable. Conversely, managers claim that hypercompetitive conditions are becoming
increasingly evident and that technology is giving rise to innovation at a faster pace and thus
there is greater capacity for imitation and the substitution of existing products and services.
David Teece discussed the term dynamic capabilities. These are an organisations abilities to
renew and recreate its strategic capabilities to meet the needs of a changing environment.
These capabilities ma be formal, e.g. systems for NPD. They may also take the form of major
strategic moves, e.g. alliances or buy outs. These capabilities may also be informal such as
the way in which decisions are taken faster than usual when a fast response is needed.
. Service: Activities that enhance or maintain the value of the product/service, e.g.
installation, repair, training, etc...
Each of the sections of primary activities is linked to support activities. Support activities
help to improve the effectiveness of efficiency of primary activities. These include:
. Procurement: These are the processes that occur in many parts of the firm for acquiring
the various resource inputs to the primary activities.
. Technology development: All value activities have a technology, even if it is just the
know-how.
. Human resource management: Concerned with activities involved in recruiting, managing,
training, developing and rewarding people within the organisation.
Infrastructure: The formal systems of planning, finance, quality control, informational
management and the structures and routines that are part of an organisations culture.
Value chains are helpful in the analysis of the strategic position of an organisation in 2 ways:
. As generic descriptions of activities that can help managers understand if there is a cluster
of activities providing benefit to customers located within particular areas of the value
chain.
. In terms of the cost and value of activities. Showing what is more profitable than what. E.g.
Uganda fish farmers used value chain analysis and identified what they should focus on in
developing a more profitable business model.
The value network is the set of interorganisational links and relationship[s that are
necessary to create a product or service. Thus, organisations must be clear about what
activities it ought to undertake itself and which it should not (outsource?). Managers need
to understand the whole process and how they can manage the linkages and relationships
to improve customer value, this is because much of the cost and value creation will ovvur in
the supply and distribution chains.
Four key issues arise:
Which activities are centrally important to an organisations strategy capabilities and which
less central?
Where are the profit pools (Profit pools are the different levels of profit available at
different parts of the value network)?
The make or by decision for a particular activity or component is therefore critical
Partnering: Developing relationships with suppliers etc...
Activity Maps
If the strategic capability is to be managed proactively, then finding a way of identifying and
understanding capabilities and the linkages that are likely to characterise competence is
important. One way of undertaking such a thing is by a means of an activity map. This shows
how different activities of an organisation are linked together.
Lessons to learn from activity maps about how competitive advantage is achieved:
. Consistency and reinforcement
. Difficulties of imitation:
. Trade-offs
Benchmarking
Benchmarking is another way of understanding how an organisations strategic capability
compares with those of other organisations.
The different approaches to benchmarking:
. Historical benchmarking: Firms can take into consideration their performance in past
years, this can identify any significant changes. However, the disadvantage of this is that it
can result in complacency since it is the rate of improvement compared with that of
competitors that is really important.
. Industry/sector benchmarking: Looking at the comparative performance of other
organisations in the same industry or sector provides performance indicators. However, a
danger of this is that the whole industry may be performing badly and losing out
competitively to other industries that can satisfy customers needs in different ways.
Another danger is that the boundaries of industries are blurring through competitive activity
and industry convergence.
. Best-in-class benchmarking: This compares an organisations performance against best-inclass performance, and this seeks to overcomes the limitations of the other benchmarking
approaches. It can aid challenge managers mind frames that acceptable improvements in
performance will result from incremental change in resources or competences.
Disadvantages of Benchmarking
. Measurement distortion: It can lead to a situation where you get what you measure and
this may not be what is intended strategically. It can therefore result in changes in
behaviour that are unintended or dysfunctional.
SWOT Analysis
SWOT summarises the key issues from the businese environment and the strategic
capability of an organisation that are most likely to impact on strategy developments. The
aim is to identify the extent to which strengths and weaknesses are relevant to or capable of
dealing with the changes taking place in the business environment. SWOT stands for
strengths, weaknesses, opportunities and threats.
Pitfalls to this:
. It may generate very long lists of apparent, strengths, weaknesses, opportunities and
threats whereas what matters it to be clear about what is really important and what is less
important.
. There is the danger of overgeneralization.
Chapter 8
Internationalisation Drivers
The barriers to international trade, investment and migration are today much lower than
they were years ago. In addition to this, international regulation and governance have
improved, so that investing and trading overseas is less risky. Improvements in
communication and cheaper air travel have also aided in internationalisation. Given the
complexity of internationalisation, international strategy should be underpinned by a
careful study of the strength and direction of trends in particular markets.
George Yips drivers of globalisation framework provide a basis. Yips drivers can be thought
of simply as internationalisation drivers, these include:
. Market drivers: A critical factor for internationalisation is some standardisation of markets.
Three components are needed for this. Firstly, the presence of similar customer needs and
tastes. Secondly, the presence of global consumers. Finally transferable marketing that
promote market globalisation.
. Cost drivers: Costs can be reduced by working internationally. The main factors for this
include. Firstly, increasing the volume beyond what a national market might support allows
for gaining scale economies. Secondly, internationalisation is promoted where it is possible
to take advantage of country-specific differences. Thus, making more sense to locate the
manufacturer etc...
. Government drivers: What this does is both facilitate and incubate internationalisation.
Policies and restrictions have great influence here which range from content requirements
to control over technology transfer.
. Competitive drivers: Competitive drivers have 2 elements. Firstly does interdependence
exist between country operations increases the pressure for global coordination. Secondly,
the presence of globalised competitors increases the pressure to adopt a global strategy in
response due to the fact that competitors may use one countrys profits to cross subsidize
their operations in another. So a firm with loosely coordinated international strategy is
vulnerable to globalised competitors because it cant support country subsidiaries under
attack from targeted and subsidized competition.
Porters Diamond
An organisation can improve the configuration of its value chain and network by taking
advantage of county specific differences as highlighted by Bruce Kogut.
Internationalisation needs to b e based on the possession of some sort of competitive
advantage which has to be sustainable and substantial. Michael Porters Diamond suggests
that there are inherent reasons why some nations are more competitive than others, and
why some industries within nations are more competitive than others. This diamond states
that there are four interacting determinants of national/local advantage. These are:
. Factor conditions: These are the factors of production (land labour, raw material. Such
advantages can be translated into general competitive advantages from national firms in
international markets.
. Home demand conditions: The nature of domestic customers can become a source for
competitive advantage. This is because dealing with customers who are sophisticated and
demanding aids in the training of a company and its workforce to be effective and efficient
overseas.
. Related and supporting industries: Another source of competitive advantage is that of
local clusters of related and mutually supporting industries. An example of this would be
Silicon Valley which forms a cluster of hardware, software, research, etc...
Firm strategy, industry structure and rivalry: This in different countries can be a base for
advantage. Example would ne German companies strategy of investing in technical
excellence allows them a characteristic advantage in engineering industries and creates
large pools of expertise.
Porters Diamong framework has been used by governments in order to increase the
competitive advantage of their local industries. There have been wide changes in policy
making in countries towards encouraging competition rather than defending and protecting
home based industries. This is done by the government through e.g. raising safety or
environment standards or encouraging cooperation between suppliers and buyers on a
domestic level.
The organisation values from Porters Diamond framework by identifying the extent to which
they can build on home-based advantages to create competitive advantage in relation to
others on a global front.
. Cost advantage: These include labour cost, transportation, communications cost, etc.. E.g.
American and European firms place high importance of labour costs.
. Unique capabilities:
National characteristics: This allows firms to develop differentiated product offerings aimed
at different market segments.
International Strategies
The global-local dilemma relates to the extent to which products and services may be
standardised across national boundaries or need to be adopted to meet the requirements of
specific national markets. Television programming for example tastes still seem highly
nationally specific drawing companies to decentralise operations and control as near as
possible to the local market. There are four different international strategies which can be
applied, these include:
. Simple export: This involves the concentration of the activities in one country. The
marketing of the product is very loosely coordinated overseas. Pricing, packaging,
distribution and branding policies may be determined locally. Firms with a strong locational
advantage (Porter Diamond) will choose this.
. Multi domestic: This involves a dispersion overseas of various activities which include
manufacturing and sometimes product development. So, unlike exports products and goods
are produced locally in each national market which is created independently with the needs
of each local domestic market given priority and so multi domestic. Such a strategy is
recommended where there are few economies of scale and strong benefits to adapting to
local needs. This strategy is attractive in professional services where local relationships are
important. However, it does carry risks towards brand and reputation if national practices
become too diverse.
. Complex export: This involves locating most activities in one country, however, with more
coordinated marketing. In manufacturing and R+D, economies of scale can be taken
advantage from while branding and pricing opportunities are more systematically managed.
. Global strategy: This is the most mature international strategy with highly coordinated
activities dispersed geographically around the world. Using international value networks to
the full, geographical location is chosen according to the specific locational advantage for
each activity in order for product development, manufacturing, marketing and headquarters
functions being located in different countries.
The choice of which strategy to choose will be influence by changes in the
internationalisation drivers that were discussed earlier. E.g. tastes are highly standardised,
companies will favour complex export or global strategies. And while economies of scale are
low, then multi domestic strategies.
Retaliation must always be taken into consideration. In the five forces framework,
retaliation potential related to rivalry, however mangers can make use of game theory. The
likelihood and ferocity of potential competitor reactions are added to the simple calculation
for relative market attractiveness. This is done by aligning the countrys market against two
axes. First is market attractiveness to the new entrant (based on PESTEL, CAGE and give
force analyses). The second is the defenders reactiveness which is influenced by the markets
attractiveness to the defender but also by the extent to which the defender is working with
a globally integrated, rather than multi domestic strategy.
A defender will be more reactive of the markers are important to it and it has the
managerial capabilities to coordinate its response.
Entry modes
A business now needs to decide how it wants to enter the country. The main ways for this
are exporting, contractual arrangement through licensing and franchising, joint ventures
and alliance, and FDI. The entry modes are usually selected according to stages of
organisational development. Internationalisation is seen as a sequential process whereby
companies gradually increase their commitment to newly entered markets, accumulating
knowledge and increasing their capabilities along the way. This is a strategy of staged
international expansion. Staged international expansion is whereby firms initially use entry
modes that allow them to maximize knowledge acquisition whilst minimising the exposure
of their assets. Once firms have the sufficient knowledge and confidence then they can
sequentially increase their exposure.
born global firms is something being followed by many small firms today. Small firm
internationalise rapidly at early stages in their development using multiple modes of entry
to several countries.
the scope for the exploitation of economies of scale in production compared with
manufacturing firms
. Internationalisation and Product Diversity: The interaction between internationalisation
and product diversification is an important element to look at.
Roles In An International Portfolio
Strategic leaders are subsidiaries that not only hold valuable resource and capabilities but
are also located in countries that are crucial for competitive success.
Contributors are subsidiaries with valuable internal resources but located in countries of
lesser strategic significance, which none the less play key roles in a multinational
organisations competitive success.
Implementers are executive strategies developed elsewhere and may generate surplus
financial resources to help fund initiative elsewhere.
Black holes are subsidiaries located in countries that are crucial for competitive success but
with low-level resources or capabilities.