Principles of Management

Module 4: Environments and Strategic Management

The Role of Strategy in Management
Understanding The Role of Strategy in Management

A company strategy
• is a comprehensive plan to achieve a
goal
• keeps company aligned with
customer’s needs
• involves a significant commitment of
resources

Competitors are firms that provide

similar products or services.

Companies must “beat” competitors

by striving to improve offerings to
customers and be better than
alternatives.
Competitive Advantage

When customers perceive the

distinction as being valuable, they will
prefer to purchase the business’s
product over a competitor’s.

Companies strive to provide a

product or service that is distinct,
or differentiated, in some way from
their competitors.

The best businesses provide a

combination of unique attributes that
competitors cannot match.
Creating Competitive Advantage
It may seem that the best way to create competitive advantage is to
do everything well. Unfortunately, this is not possible.

Businesses create competitive advantage by doing some things better than

their competitors.

Businesses that try to do too many things well often don’t succeed at doing
anything extremely well and don’t produce distinction. This is referred to as
being “stuck in the middle.”

The goal of companies is to create competitive advantage in ways that are

difficult or costly for competitors to copy. This is called a sustainable
competitive advantage.
The Value Proposition

• Statement a company uses to

convince customers that its product
or service provides more value than
a competitor’s

• Communicates to customer main

reason a product/service is the best

• Communicated through webpage,

advertising, or social media- must
grab attention
Strategic Management
• Process of integrating all functions in an organization into a whole
• Allows organization to develop synergy

• Has Two main functions:

• Determine how company will create competitive advantage
• Make sure people in organization support the strategy

• Instils a culture of excellence

Strategic Management
• Rather than looking at individual functions or activities, strategic management
considers the entire organization and how the pieces fit together.
• Good strategic management allows an organization to develop synergy.
• That is, the pieces support each other so that the total output is greater than the
sum of the output of individual functions.

• An excellent example is the value statement for the Apple MacBook. It shows an
edge-on image of a MacBook with the caption “MacBook: Light. Years ahead.” This
very cleverly conveys the important distinctions of the MacBook. First, it’s a really
slick design. In the edge-on view the computer almost disappears. Second, it is
light. In the laptop market, weight is important. Both the image and the statement
emphasize that the MacBook is easy to carry around. Finally, it emphasizes
MacBook’s advanced technology, “Light years ahead.” In a very small space, Apple
conveys the main differentiators for the MacBook—its weight and its advanced
technology.
Industry Analysis

• a method for a company to assess its market position relative to its

competitors.
• helps a company review various market and financial factors in its industry
that affect the business, including evaluating the competition.
• helps managers understand the important factors of the marketplace and
how these factors may be used to gain a competitive advantage.
• are an important tool for companies to assess their strategy in a shorter time
frame.
Class Discussions: Car Company Differentiation

Consider the following car companies. Is there a particular characteristic or

quality that you associate with each of them?

• Porsche
• Volvo
• Hyundai
• Toyota
• Ford

What is their competitive advantage? Summarize in your own words for they
differentiate from their competitors.
Common Frameworks for Evaluating the
Business Environment
Common Frameworks for
Evaluating the Business Environment
• Environmental scanning
• high-level, broad-based process of gathering, analyzing, and dispensing information
for new strategies
• helps managers avoid being taken by surprise
• Entails getting both factual data and qualitative opinions

• PESTEL
• organizing framework that allows decision makers to understand and make
connections with a mass of information
• key macro-environmental factors in order to understand interactions
PESTEL Factors

• Political: function of how much government intrudes or is involved in

organization’s operations- taxation/tariffs, regulations, elections, etc.
• Economic: growth, employment, inflation, and interest rates- foreign
operations will worry about exchange rates
• Social: demographics such as population growth, age distribution, and
attitudes toward safety and health- rising rates of obesity as example
• Technological: research and development, automation, and incentives
• Environmental: weather, climate change, air quality, natural disasters- risks
with manufacturing, agriculture, tourism, and sports entertainment
• Legal: discrimination laws, consumer protection laws, and employment
health and safety policies- antitrust, piracy, and copyright laws affect how
organizations operate
Porter’s Five Forces

Michael Porter, a well-known business consultant and professor at Harvard

University, identified five critical external factors that affect strategies being
developed by organizations in any industry.

This system, known as Porter’s Five Forces, has become an important

management strategy tool.

It measures the competitiveness of an industry and thus its attractiveness or

potential profitability. An unattractive industry is one in which the combination
of these five forces acts to drive down overall profitability.
Porter’s Five Forces
Five critical external factors that affect strategies being developed by
organizations in any industry
• Threat of new entrants:
• threat that new competitors pose to existing business in industry
• Threat of substitute products or services:
• different product or service but performs the same purpose in the mind of the
consumer
• Competitive rivalry within industry:
• intensity of competition is main force to determine profitability
• Bargaining power of buyers:
• amount of pressure customers can put on a seller
• Bargaining power of suppliers:
• limits ability of the seller to make a profit- can pressure buyers by raising prices, lowering
quality
• An important thing to remember about Porter’s Five Forces is that it is useful at
an industry level and not for groups or segments of a market.
• It is also a “snapshot” of what the industry looks like at a particular time and
needs to be updated regularly.
• And as with any management tool, it is not perfect and infallible.
• When considered as a starting point for discussion and further investigation,
however, Porter’s Five Forces is very useful.
Competitor Analysis

• A robust competitive analysis will allow you to focus on those companies that
will compete for customers in your target market.
• A company’s analysis looks at a competitor and inquires about:
• General Background information
• Financial inquiries
• Products that they sell
• Customers that they serve
• Advertising and Sales distribution channels
• Personnel and their plans for hiring
Practice Question 1

What resources would be valuable to a researcher to conduct a competitive

analysis?
1. Competitor's annual report and quarterly filings.
2. Independant industry analysts reports.
3. Consumer focus groups.
4. Search engine analysis.
5. Observations from ex-employees (Glassdoor, etc.).
6. Social media.
7. Competitor press releases and public statements.
8. Secret shoppers.
9. Interviews with common vendors.
Class Activity: PESTLE vs Porter’s Five Forces

Compare and contrast the value of using the PESTLE process and Porter’s Five
Forces for completing an environmental scan for a business. What are the
negative and positive aspects of both approaches?

Use examples of businesses to discuss your answers.

Present: PESTLE vs Porter’s Five Forces
Common Frameworks for Situational Analysis
Understanding Common Frameworks for Situational
Analysis

Situational Analysis
• Looks more closely at external and internal conditions that affect particular
organization
• Considers what impact these factors may have on a specific organization

Five Key Components for Situational Analysis

• Customers
• Competitors
• Suppliers
• Government
• Legal issues (regulations and advocacy)
Situational Analysis Components

• Customers: identify target customer, understand specific customer needs,

show how product or service meets those needs
• Competitors: must be able to identify specific competitors and assess
potential for taking market share
• Suppliers: supply chain is a system comprised of organizations, information,
resources, etc. that brings products to consumer
• Regulations: affects investment and spending, corporate image, and risk
management- greater burden on small companies unless exempted due to
size
• Advocacy Groups: aim is to influence public opinion, public policy, and
company behavior- represent political, economic, and social interests
What Does a Situational Analysis Provide?

A Customer Analysis :
• Identifies the target customer.
• Is this customer base growing or is it decreasing?
• What are your customer demographics (age, income, location, gender, politics, etc.)?
What is the revenue of these customers?
• How much discretionary income do they have?

• Builds understanding of the specific customer needs

• Why do they buy certain brands?
• How do make their purchasing decisions?
• Do they purchase in person or online?

• Shows if and how your product or service meets those needs.

Competitors, Suppliers, and Regulations
• identify an organization’s specific competitors and assess their potential for
taking market share.
• be aware of future initiatives of the competition (as much as is possible)
• examine the competitors’ financial and marketing performances.

• The supply chain is a system comprised of organizations, information,

resources, people, technology, and activities that bring products or services
from a supplier to a consumer.

• Complying with regulations often involves a trade-off between short-term

profits and long-term public relations and social responsibility.

• Advocacy groups are also known as special interest groups, public interest
groups, environmental groups, or political support groups.
• influence public opinion, public policy, and company behavior.
SWOT: A Situational Analysis Summary

• Method that examines internal

strengths and weaknesses of an
organization and external
opportunities/threats

• SWOT
• Strengths- particular skills and
resources to pursue goals effectively
• Weaknesses- where it is lacking
resources and prevented from pursing
goals
• Opportunities- conditions favorable to
organization
• Threats- conditions that prevent
organization from achieving its goals
Practice Question 2

To which quadrant of a SWOT analysis would this example belong?

“-Vertical Integration: competitors have control of supply and distribution

channels to control the market.
-Price fluctuations: prices of ingredients are elastic and fluctuate without
warning.
-Marketing costs: competitive marketing campaigns need to be extensive and
are quite expensive.”

1. Strengths
2. Weaknesses
3. Opportunities
4. Threats
Resource-based View Strategic Approach (RBV)

The resource-based view (RBV) argues that focusing on an organization’s

strengths is essential to achieve a sustained competitive advantage.

• Tangible assets are physical things such as land, equipment and machines,
and real estate. Although they are necessary, they aren’t unique and
competitors can fairly easily acquire these kinds of assets.

• Intangible assets are anything an organization can own that is not physical.
Examples include brand names, intellectual property, and the organization’s
reputation and goodwill. These kinds of assets are not easily acquired and
usually contribute heavily toward a sustained competitive advantage.
VRIO Framework

VRIO stands for the four key characteristics that a resource must have if it is to
produce sustained competitive advantage.

• Valuable. A resource is valuable if it enables the company to take

advantage of opportunities or defend against threats.
• Rare. If only one or two companies can acquire a resource it is considered
rare.
• Inimitable. If another organization can’t copy, buy, or find a replacement for
the resource, it is inimitable.
• Organized to capture value. The three characteristics listed earlier are
“necessary but not sufficient conditions” to achieve a sustained competitive
advantage.
Stages and Types of Strategy
Strategic Management Process

• Strategic Objectives and Analysis:

• defines vision, mission, and values combined with PESTEL and SWOT

• Strategic Formulation:
• PESTEL
• SWOT

• Strategic Implementation
• Sometimes referred to as strategic execution

• Strategic Evaluation and Control

Porter’s Competitive Strategies

• Low Price Leadership

• Reduces buyer bargaining, forces out
less efficient rivals, makes it hard for
new entrants to compete

• Differentiation Leadership Strategy

• Buyers are less price-sensitive, rivalry is
reduced, difficult for new entrants to
copy product/service, uniqueness
makes it hard to substitute

• Integrated
• Provides values to two types of
customers, forces out less efficient
rivals
E-Business and E-Commerce

E-Business is business that takes place over digital processes using computer
network rather than in physical location
• Relates to decreasing production costs and increasing efficiency
• Creates a customer focus
• Addresses internal management

E-Commerce refers to exchanges or transactions that occur electronically.

• Many organizations have sales and marketing teams dedicated to devising
strategies for capturing their share of the growing online market.
How Environment Affects Strategy
Understanding How Environment Affects Strategy

• Stability
• The rate at which change occurs- in a stable environment, change is slow
• A dynamic environment is rapidly changing
• Complexity
• Number of elements in organization’s environment and their connections—variables
hard to identify and measure and often to understand
• Resource scarcity
• Availability of critical resources or those in high command
• Uncertainty
• How predictable environmental conditions are
Class Activity: Strategy and the Business
Environment
Conditions of instability, complexity, resource scarcity, and uncertainty make it
impossible for managers to anticipate change and make rational decisions.
Instead, they must operate with incomplete data and base decisions on
assumptions and best guesses.

Choose a product that you use in everyday life to discuss in small groups. Using
the four factors that influence the business environment, discuss ways in which
you would need to consider each in your management role.
Quick Review

• Explain the concept of competitive advantage and value proposition and

how they relate to the overall business management
• Explain environment scanning and the PESTEL checklist for a company’s
general environment
• Describe the impact of Porter’s “five forces” on industry profits and explain
competitor analysis
• Differentiate among five components of industry environment and explain
SWOT/resource-based view of strategy
• Explain the stages of strategy, Porter’s types of strategies, and e-commerce
strategy
• Explain the key aspects of the environment that can affect strategy