Strategic Management Essentials: External Environment, Competitive Models, and Business Strategy
General Environment: Demographic factors include population size, age structure, geographic distribution, ethnic mix, and income distribution. Economic factors include inflation rates, interest rates, trade deficits or surpluses, budget deficits or surpluses, personal savings rates, business savings rates, and GDP. Political/Legal factors include antitrust laws, taxation laws, deregulation philosophies, labor training laws, and educational philosophies and policies. Sociocultural factors include women in the workforce, workforce diversity, attitudes about quality of work life, shifts in work and career preferences, and shifts in preferences for product and service characteristics. Technological factors include product innovations, applications of knowledge, the focus of private and government-supported R&D expenditures, and new communication technologies. Global factors include important political events, critical global markets, newly industrialized countries, and different cultural and institutional attributes. Physical environment factors include energy consumption, practices used to develop energy sources, renewable energy efforts, minimizing a firm’s environmental footprint, availability of water, environmentally friendly products, and reacting to natural or man-made disasters.
The Two Models
Industrial Organization (I/O) Model
The external environment is the primary determinant of strategy and returns. It rests on four assumptions:
- The external environment imposes pressures and constraints that determine which strategies earn above-average returns.
- Most firms in an industry control similar strategically relevant resources and pursue similar strategies.
- Resources are highly mobile across firms, so differences do not last.
- Decision makers are rational and profit-maximizing.
Steps: study the external environment → locate an attractive industry → identify the strategy that industry calls for → develop or acquire the assets needed → use your strengths to implement it → achieve above-average returns.
Resource-Based Model
Each firm is a collection of unique resources and capabilities, and that uniqueness is the basis of strategy and the primary source of above-average returns. Resources are not highly mobile across firms.
Steps: identify resources → determine capabilities → determine competitive advantage (core competencies) → locate an attractive industry → implement the strategy → achieve above-average returns.
Key Concepts in Competitive Analysis
Business ecosystem: A complex network of interconnected organizations, including suppliers, customers, government agencies, technology suppliers, financiers, and other stakeholders, whose competitive and cooperative efforts are associated with satisfying a particular value proposition (e.g., a product or service).
Competitor analysis: The method by which companies gather and interpret information about their competitors.
Competitor intelligence: The set of data and information a firm gathers to better understand and anticipate competitors’ objectives, strategies, assumptions, and capabilities.
Complementors: Companies or networks of companies that sell complementary goods or services compatible with the focal firm’s goods or services.
General environment: The dimensions of the broader society that influence an industry and the firms within it.
Industry: A group of firms producing products that are close substitutes.
Industry environment: The set of factors that directly influences a firm and its competitive actions and responses: the threat of new entrants, the power of suppliers, the power of buyers, the threat of product substitutes, and the intensity of rivalry among competing firms.
Opportunity: A condition in the general environment that, if exploited effectively, helps a company reach strategic competitiveness.
Threat: A condition in the general environment that may hinder a company’s efforts to achieve strategic competitiveness.
Strategic group: A set of firms emphasizing similar strategic dimensions and using a similar strategy.
Global mind-set: The ability to analyze, understand, and manage an organization in ways that are not dependent on the assumptions of a single country, culture, or context.
Strategic human capital: Allows a firm to develop capabilities by matching the knowledge, skills, and abilities of its employees to particular strategic objectives.
Support functions: The activities or tasks a firm completes to support the work of producing, selling, distributing, and servicing its products.
Value Creation and Quality
Total quality management (TQM): The implementation of appropriate tools and techniques to provide products and services of the best quality to customers.
Value creation system: Each part of a system depends on other parts to create value. If one part does not function properly, it can hold back value creation across the entire system.
Value chain activities: The activities or tasks a firm completes to produce products and then sell, distribute, and service them in ways that create value for customers.
Business-Level Strategy
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 a specific product market.
Business model: Describes what a firm does to create, deliver, and capture value for its stakeholders.
Business model innovation: Occurs when a firm determines that its current business model is outdated and successfully replaces it with a newer one.
Cost leadership strategy: An integrated set of actions taken to produce products with features acceptable to customers at the lowest cost relative to competitors.
Differentiation strategy: An integrated set of actions taken to produce products (at an acceptable cost) that customers perceive as different in ways that are important to them.
Focus strategy: An integrated set of actions taken to produce products that serve the needs of a particular segment of customers.
Integrated cost leadership/differentiation strategy: A firm simultaneously engages in primary value-chain activities and support functions to achieve a low-cost position with some product differentiation.
Market segmentation: The process of dividing customers into groups based on their needs.
Digital Strategy and Platforms
Digital platform: An Internet-based location for exchanges of information, goods, or services between producers, consumers, and other members of the platform community.
Digital strategy: Uses digital technology to help a firm understand its customers and their needs with greater clarity, as a foundation for developing innovations that create more value for those customers.