STRATEGIC

MANAGEMENT

1. FUNDAMENTALS OF STRATEGIC MANAGEMENT

This sentence reflects the importance of knowing the fundamentals of a specific area if
you want to achieve success. The same rule applies to strategic management; if you
want your company to be successful you need to be familiar with its fundamentals.

In this initial module, we will learn various aspects of business strategy, starting from its
basic concept and ending with its different definitions.

Moreover, we will place much value on all functions and characteristics of strategic
management and also take a look at the three types of analysis that will help us to get a
better picture of the dimensions of strategy, covering the strategic analysis as well as
internal and external analysis.

All these factors are of great importance for any company. However, when it comes to
strategy and meeting objectives, both human and cultural aspects of an organisation
play a fundamental role. In addition to technical issues that we will mention during this
course, we should never underestimate the two above-mentioned aspects that are
essential for achieving success.

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1.1. STRATEGY: THE CONCEPT AND ITS ORIGIN

Every company starts surrounded by other organisations that aim high and go to great
lengths to fulfil their goals. Nowadays, companies coexist in a very competitive
environment where only those that have defined their strategy and have considered all
the fundamental elements of success will remain. Thus, one of the main questions that
every company should ask itself is: ’What is our purpose?’ In short, one needs to be
aware of the value of steering a growing business in the right direction, the mission. One
of the major mistakes is that most companies waste their time, as they do not identify
where they want to go and they do not outline specific steps that will take them there.
Thus, before starting the process, one needs to set a clear goal.

Overall, having a mission gives direction and keeps us on track during our daily activities
at work. Moreover, and linked to the mission, we should mention the vision, which
refers to the long-term image that a company has of itself. It can be said that the mission
refers to what a company needs to do in order to live up to its vision. In this way, the
first components to be defined in any strategic process should be the main goals of a
company, as they introduce the context and the criteria by which emerging companies
are assessed. The main goal needs to articulate a company’s mission statement,
reflecting the reason why the company was founded. Most profit-seeking companies
will prioritise the maximization of the dividends for shareholders. On the other hand,
the secondary goals are usually objectives that a company establishes to support the
main goal.

The origin of the strategy concept stems from the terminology used in military camps.
This term appears in economic and academic fields following the Theory of Games and
Economic Behaviour by Von Neumann and Morgenstern, 1944. Nevertheless, in both
cases, this term makes reference to competition; an action against the opponent aimed
at achieving previously established objectives. In a way, it is a sort of a fight, in which
the strongest wins.

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The strategy was introduced into the business field through the theories of Chandler
(1962), Andrews (1962) and Ansoff (1976) that define strategic management as the
ability to jointly determine the objectives set by a company and the course of action
developed along the way in order to achieve them. From this definition, we understand
that strategic management is an adaptive procedure, aimed at achieving a goal or
purpose, a mediating force between intentions and results through interaction with the
environment and the deployment of a company's resources and efforts to meet those
goals.

Strategic Management

Strategic management is the set of actions that achieve a competitive advantage that
remains over time. A feasible strategy, which is determined regarding competition, has
to jointly use resources and skills within an organisation and its environment.

The strategy needs to be consistent with the goals and needs of different groups within
a company. One of the fundamental elements, when developing a strategy, is the
previous analysis of the environment, the market and the competitors in order to be
able to adapt to them. Nowadays, when the information society makes changes,
companies have to develop the necessary capabilities to properly adapt to these
changes, taking advantage of the ability to anticipate future situations and to generate
and promote innovative ideas. This implies exercising a proactive strategy aimed at
keeping a company successful.

Ultimately, the strategy needs to be seen as the driving force behind any action carried
out by a company; a search for different fundamental action plans that are in hand with
the current and potential resources of a company, with the main aim of getting an
optimal inclusion in the socio-economic environment in which it operates.

Thus, strategic management is presented as a creative and effective way to achieve

planned goals. Identifying strategies is an analytical step that allows setting in motion
available means within a company, which are any specific actions that permit fulfilling
predefined goals.

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In order to have a better idea of "strategy/strategic management", let us take a look at
its definitions.

"Determination of impulses for the future development of the company. "
H.I. Ansoff (1979-1980)



"Active process of determining and guiding the course of a company toward its
goal"
H.I. Ansoff (1965)


"Business Strategy is the pattern of decisions in a company that determines and
reveals its objectives, purposes, or goals, produces the principal policies and plans
for achieving those goals, and defines the range of business the company is to
pursue, the kind of economic and human organization it is or intends to be.”
Kenneth Andrews (1980)

These three definitions of Business Strategy gave rise to a new concept of the
management system, also required by the structural transformation that has
occurred in the mid 70s.


" The essence of formulating competitive strategy is relating a company to its
environment and including an offensive or defensive action to create a defensible
position against the five competitive forces in the industrial sector in which is
present and thus, obtain a higher yield over the company’s investment. It’s called
“competitive” due to its external perspective, related to the Industrial Economy"
M.E Porter (1980)
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In order to understand the concept of strategy, it is necessary to answer the following
question:

How do we achieve the established goals?

The creation of strategy begins with the definition of the objectives to be achieved,
following the route represented in the following graph:

Defining goals

Understanding Formulating an

the results Action plan

Making a
decision to
achieve the
goals

1.1.1. Characteristics of the strategy
When a company implements a strategy into its action plan, it needs to bear in mind a
series of aspects that have to be respected in order to achieve the established objective,
since the most difficult task is not to design a strategy but to carry it out with good
results.

The strategic process is not limited to the design of a determined line of action, as we
also need to consider the following elements or factors:

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▪ It integrates and adds consistency to the company's decisions.
▪ It selects those businesses in which the company wants to be present, either now
or in the future.
▪ It presents short, middle and long-term objectives, in addition to the adequate
resources needed to achieve them in all the functional areas of the company.
▪ It defines what kind of company is suitable to face the business.
▪ Frequently, the environment determines the company, and may even determine
the development of the strategy.
▪ It always aims to optimize the competitive position of the company.
Now, we will move to defining a set of premises which are related to strategy and help
to achieve successful results:

1. Strategies need to represent the means or the ways that allow reaching the goals;
that is to say, the goals are the "aims" and the strategies are the "means" that
allow achieving them (effectiveness).
Effectiveness can be related to the ability to achieve the desired or wanted effect,
without depriving a company of its resources.
The objectives set by the company should be useful because they need to meet
certain characteristics that help the company to improve some aspects previously
raised.
2. Strategies should lead to the accomplishment of the objectives with the least
amount of resources and in the shortest time possible (efficiency).
Efficiency could be understood as the ability to achieve an objective using the best
possible means.
3. Strategies should be clear and understandable for everyone.
Once everyone knows the goals established by the company, it is necessary that
the whole team follow the same path.
4. Strategies have to be consistent with the values, principles, and culture of the
company.
The values of the company symbolise the basic beliefs that represent the individual
and collective behaviour of the company. They set patterns that have to be
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followed in the company and, consequently, become the basis of the strategic
objectives of the business. Every action carried out in a company should be aligned
with its values.
5. The capacity and resources of the organisation need to be carefully considered.
The objectives and strategies that are implemented have to be within the
company’s reach, so it is necessary to carry out an analysis of what is available and
what can be achieved, and once the assets are known, a realistic action plan can
be formulated.
6. Strategies need to pose a challenge to the company.
When we talk about the challenge, we refer to innovation and creativity as
necessary abilities, since strategies should lead us to achieve an objective.
However, we cannot forget that they themselves represent the path to success, so
they must bring about change in the company.
7. They need to be executed within a reasonable time.
The time limit is one of the most important factors, so we should consider obtaining
results in the medium-term (> 6 months) or in the long-term (> 1 year) because
when the time limits are exceeded, it is less likely the goal will be fulfilled.

1.1.2. The Function of strategy in the business field

▪ Support for decision making
Decision-making is embedded in the everyday activities of any organisation. However,
sometimes the decision-making requires a certain complexity, especially when there are
a lot of resources involved, the risk level and uncertainty are high, the information is
limited or the company's future depends on the decision to be made. Hence, a decision-
making process usually entails a high degree of responsibility that businesspeople are
unable to avoid. In any case, being a business executive and/or entrepreneur means
being constantly willing to decide rationally and, if it is possible, quickly (do not confuse
with prematurely).

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A decision needs to be made when a problem is detected, that is when there is a
deviation from what has been planned or simply when something turns out completely
wrong. Anticipating problems or detecting opportunities can also lead to implementing
actions aimed, in the first place, at counteracting any negative influence and, second, at
seizing the business opportunities. Essentially, the strategic process is designed to boost
the stability and development of the organisation.

▪ Business guideline to follow

The above-mentioned pattern allows uniting all the decisions and efforts in order to
achieve the same goals and make the whole community, which is part of the company,
go in the same direction. In this way, the strategy itself already implies a change in the
organisation and business management since it is intended to reach the finish line; that
is, the success of the strategy implementation.

1.1.3. The success or failure of strategy

One of the main difficulties that will need to be overcome are the tasks that arise at the
time of achieving the objectives set by the company, since on many occasions they take
up too much time, thus moving us away from the pre-established goal. The difference
between the success and failure of organisations is that successful organisations
consider their values all the time in everything they do, so it is important to be aware
that the company's values should remain stable over time.

Most of the handicaps that prevent the achievement and implementation of the
predefined strategy are related to the company's structure. Hence, we should stress
some difficulties or problems that prevent strategies from being successful:

▪ The lack of support and approval by the management. This lack of guidelines may
result in the strategy being poorly executed and, as a consequence, in not
achieving the established goals.
▪ The lack of understanding and adaptation of both, the organisational areas and
the staff assigned to the implementation of strategy.

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▪ The low capacity to handle the change that comes along with new processes as
well as organisational practices that require the execution of strategy, in addition
to the lack of commitment to the strategy and appropriation of the strategy
within the different organisational levels.
▪ The inadequacy of communication when it comes to the exchange of information
between collaborators and the areas of the organisation involved in the
execution of strategy.
▪ In the management control, the most significant obstacle is the lack of a control
system during the execution, which is related to the lack of performance
indicators that allow measuring and monitoring the strategy implementation.
In order to define a strategy that allows entrepreneurial success, one should consider
the following aspects:

✓ It should have a relatively broad time frame.

✓ It should set clear and decisive goals implying a qualitative leap for the company,
but it also needs to determine the means to achieve them.
✓ It must be consistent so that the goals and policies that it defines go in the same
direction without inconsistencies.
✓ There should be a concentration of efforts. An effective strategy usually requires
concentrating the activity, effort or attention on a quite reduced number of
goals, which implicitly reduces the resources available for other activities.
✓ It needs to be flexible. The environment is very dynamic and strategy has to
adapt to such changes without clinging to approaches overtaken by reality.
✓ It should be feasible and adjusted to the situation and capabilities of the
company, without exhausting the available resources or generating problems
that are difficult to solve.
✓ It needs to be based on a coordinated and committed leadership. A strategy
encompasses a broad spectrum of activities and requires all levels of the
organisation to act towards reinforcing its implementation.
✓ It should facilitate the creation or maintenance of the competitive superiority of
the company.
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It is true that what really permits us to know if we have managed to reach the goal that
has been set is the measurement of the benefits obtained by the company.

Supplier

Employees Society

Managers Government
Company

Owners Creditors

Customers

The benefits are obtained and shared directly or indirectly with all the shareholders in a
company. The term "shareholder" refers to a person, company or other institution that
has at least one share in a company and, therefore, has real or potential power to
influence the managerial decisions. For this reason, shareholders affect and are affected
by the actions, decisions, policies, or business practices that are used to achieve their
joint goals. They are also responsible for providing workers with moral, economic and
social support, and defending their rights.

These are:

▪ Suppliers: a company creates strategic alliances in order to create added value

with their partners and suppliers.
▪ Society and the general public: it is committed to environmental responsibility
and the society where it works.
▪ Government: it is committed to environment and society where the
entrepreneurial activity is developed.

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▪ Creditors: the creation of value for both companies, that is, investors and
financial institutions with companies.
▪ Customers: a company will need to maintain contact with their customers and
involve them in the development of corporate social responsibility.
▪ Owners: they are committed to the environment and the society.
▪ Managers: they are committed to society, trying to improve the quality of life
within the community or area where their business operates.
▪ Employees: the company is committed to its employees, seeking quality of life
and defending their labour rights.


1.2. CORPORATE STRATEGY VS. BUSINESS STRATEGY

The strategic analysis allows us to express what the organisation wants to be,
strengthens the company’s commitment to the environment and, defines missions and
objectives. This enables the organisation to determine threats, strengths, and
weaknesses. As is well known, the majority of strategies implemented will aim to
enhance the profit margin. It is necessary, in this regard, to be familiar with two types
of strategies that will help to achieve the objectives and, as a result, bring benefits to
the companies. We are talking here about corporate strategies and business strategies.

We understand corporate strategy as the strategy related to the global scope of the
organisation that aims to live up to the expectations of the owners and others interested
in the organisation. Corporate strategies permit us to:

✓ Identify the business in which the company should engage in the future.
✓ Know which products to offer and which markets to serve.
✓ Assess the environment, resources and the company's objectives.

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Business strategy is the way in which a business competes in a particular sector. The
strategic decisions made at a business level are related to issues such as pricing or
efficiency in manufacturing and advertising. Business strategy is mainly based on
obtaining a competitive advantage in the market.

Corporate strategy should be used to consider general matters, while business strategy
should be used to address specific problems. In general, corporate strategies are more
stable, and should not be changed frequently. Business strategy, on the other hand, can
be changed on a regular basis so as to respond to changes in the marketplace.

For example, let us say that we are directors of a new low-cost airline. In this case, the
corporate strategy is used to provide air transport services to all passengers, while the
business or management strategy refers to offering our customers low-cost flights.

Currently, an example that can help to differentiate between those two strategies would
be the case of Inditex. In this context, the corporate strategy refers to providing trendy
clothing that caters for all ages, while the business strategy refers to the fact that what
Inditex offers meets the market needs so, in this case, the fact that it provides trendy
clothing at a very competitive and affordable price for everyone should be highlighted.

1.3. STRATEGIC ANALYSIS

The strategic analysis deals with collecting and studying data related to the state and
evolution of internal and external factors that affect a company: the environment and
resources, as well as the capabilities that are part of the organisation. The internal
analysis is based on an evaluation of the performance of the organisation, but should
also include a potential evaluation, taking into account future projections that may arise.
This analysis comes in handy when the organisation wants to review its position in light
of strategic challenges. The strategic analysis has to be based on the philosophy of the
company, reflected in the mission and vision of the market position.

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This need stems from the idea that the company should identify the market in which it
wants to compete and define a strategy (where it wants to go and what it wants to be)
so as to be present in a branch of activity.

A. The mission:
It is the ultimate purpose for which the organisation struggles and exists. The
mission should collect the set of assets of the organisation and instil awareness
of social responsibility (ethical position on issues of security, ecology, quality,
etc.). The mission should be recognized and shared by all members of the
organisation in order to achieve a high degree of harmony in the joint action.

The mission defines:
▪ What the company aims to fulfil in its environment or social system in which
it operates.
▪ What it aims to do.
▪ For whom is it intended.

The mission is influenced by some elements such as the history of the company,
the preferences of the management and/or the owners, the external or
environmental factors, the available resources and their distinctive capacities.
Complementing this definition, we will cite the concept of Thompson and
Strickland that says:


"What a company currently tries to do for their customers is often
described as the company's mission, an exhibition of which is often
used to bring attention to the business a company is presently ind,
and the customers’ needs that it tries to serve.”



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B. The vision:
It represents current expectations about the organisation’s future direction and
business makeup. It is a guiding concept for what the organisation is trying to do
and become. It refers to the position that the company wants to reach in the
future and it represents a challenge for the company. The vision defines the
business project that will take shape over time.

According to Jack Fleitman, in the business world, vision is defined as the path
that the company will follow in the long term and serves as a course and
incentive to guide strategic decisions of growth along with those of
competitiveness.

Nevertheless, Arthur Thompson and A. J. Strickland claim that simply stating
clearly what you are doing today does not say anything about the future of the
company, nor does it incorporate the sense of necessary change and long-term
direction. What is essential is to consider what the company should do to meet
the needs of its customers tomorrow and how the business configuration should
evolve so that it can grow and prosper.

Therefore, managers are obliged to look beyond the current business and think
strategically about the impact of new technologies, the needs and changing
expectations of customers and the emergence of new market conditions, among
other factors. As the bar is set higher and higher, they should make fundamental
considerations about where they want their company to go.

Both concepts are closely related. The businessperson, the entrepreneur or
senior management have a vision of a business project that they transmit to their
collaborators and it subsequently becomes materialised in the mission of the
organisation. This mission is stable for a while until a new strategic challenge
arises and forces the company to question its viability. As a result, the

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management has to generate a new vision for the future, which again
materialises in a new company mission for the next years.

In relation to these two concepts, and in order to make them more visual, we will
present the following example:

Let us suppose that we are the directors of a company dealing with selling appliances.
In this area, the market is really competitive, so we set a vision to be among the top five
companies engaged in the sale of appliances in our city. Therefore, in accordance with
this vision, we need to focus on a series of actions that will make up the mission. In this
case, our mission could be to work with the most prestigious appliance brands, offer
personalized post-purchase customer service or implement the delivery and installation
of the products in 24 hours.

Basically, we have to decide where we want to go and what we must do to achieve our
goal.

Once these concepts are established, the company should carry out an evaluative
analysis of its strengths and weaknesses that will include the analysis of the company’s
external and internal elements. This analysis will be conducted through a SWOT, which
helps to provide a broader picture of the company’s situation and indicate in which ways
it can advance.

▪ SWOT (strengths, weaknesses, opportunities, and threats)

The SWOT Analysis has become an aspect of major importance within the strategic
direction of the company. Its aim is to reflect, in a graph or a summary table, the
evaluation of the company's strengths and weaknesses (competence or ability to
generate and sustain its competitive advantage) and the threats and opportunities that
come from the environment, in coherence with the logic that the strategy needs to
achieve an adequate adjustment between its capabilities, limitations, and competitive
position in the market.

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The SWOT analysis is usually represented as a matrix using the following methodology:

POSITIVE NEGATIVE
To achieve the goal To achieve the goal
INTERNAL ORIGIN STRENGTHS WEAKNESSES
The company’s attributes Internal factors of the Internal factors that might
company that can facilitate affect negatively the
the fulfilment of the fulfilment of the
objectives. objectives.

EXTERNAL ORIGIN OPPORTUNITIES THREATS
Attributes of the External factors that can External factors that might
environment facilitate the fulfilment of affect negatively the
the objectives. fulfilment of the objectives
of the company.

As we have seen, it is an analysis that includes two dimensions, the internal and the
external. In this way, it is possible to recognize those elements of the company that can
be considered strengths and those that can be seen as weaknesses, as well as those
elements and factors of the environment that can contribute to the development and
success of the company.

Thus, the main objective of this analysis is to help the organisation or company to detect
those critical strategic factors and those elements that give it a competitive edge over
the competition in order to determine its strategy and attain the proposed objectives.

Regarding the external analysis, we should consider all the elements of the environment
that may have some kind of connection with the company.

Here, we should analyse aspects such as:

- Political: focusing on factors such as the political stability of the country, the
government system, international relations and the possible restrictions on
imports and exports.
- Legal: taking into account issues related to fiscal trends and legislation.
- Economic: bearing in mind aspects such as public debt, the level of salaries and
prices, and foreign investment.

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- Social: paying special attention to issues related to population growth and
distribution, employment and unemployment, and the health and hygiene
system, among other factors.
- Technological: addressing issues concerning the speed of technological advances
and changes in systems.

Analysing these factors, we should be able to determine those elements that can help
the company to achieve its goals and those that can impede it from doing so.

Regarding the internal analysis, we will focus on determining the internal strengths and
weaknesses that the company has in relation to the availability of resources of capital,
assets, personnel, product quality, internal and market structure, consumers’
perception, among others.

This analysis will help us to detect competitive advantages so that we can concentrate
on them to attain our goals.

Basically, we have to identify those elements that we own and that we should use to
achieve our objectives, as well as those that we should avoid since they can be
detrimental.

In connection to the SWOT analysis, it is crucial to discuss the CAME Analysis, a strategic
diagnostic tool that defines the type of strategy that should be used and followed by a
company after having identified, through the SWOT analysis, the key aspects that
characterise it, taking into consideration the internal and external areas.
Its name comes from the actions of Correcting, Adapting, Maintaining and Exploring,
and its main task is to correct the weaknesses, adapt to threats, maintain the strengths
and explore the opportunities derived from the SWOT analysis.

With regard to the type of strategy, four different types can be distinguished:

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- Offensive strategy: This first strategy combines the strengths of the company
with the opportunities of the environment. In this way, this strategy represents
the “E” of explore. It is characterised by the exploitation of new lines of business
and new markets, as well as the exploitation of relationships with customers,
both domestically and internationally.
- Defensive strategy: This strategy aims to combine the strengths of the company
with the threats of the environment, representing the “M” of maintain.
Defensive strategies are the expansion of the range of products or services, the
comprehensive development of the quality plan aimed at reaching maximum
customer satisfaction or improving the management of products and stocks.
- Refocusing strategy: This strategy combines the weaknesses of the company
with the opportunities of the environment, representing the “C” of correct.
Some of the actions that are involved in a strategy of refocusing are the
internalization of the management of the main raw materials, a maximum
investment in R & D or the increase of productive capacity with the aim of
embracing new clients in the market, both nationally and internationally.
- Survival strategy: The last strategy refers to the combination of the weaknesses
of the company with the environmental threats, so it refers to the “A” of adapt.
Here we can highlight actions such as the development of an adequate
information system or the search for adequate resources, among others.

We have to select those elements on which we will work in our strategy so that they will
allow us to determine those actions that we will carry out to achieve our goals. For
example, a competitor has introduced a new product into the market, which can serve
as a substitute for ours, so we decided to take advantage of this threat and carry out a
defensive strategy. We launch a new product on the market that outsmarts our
competition or, on the contrary, we decide to highlight the possibilities of our product
and chose to reposition it in the market, trying to reach a wider number of customers.

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In this sense, it is very important that the choice of strategy is in line with the goals that
we intend to fulfil.

1.4. EXTERNAL ANALYSIS

1.4.1. Sector Analysis
A sector is a group of companies that supply a market. The difference between sector
and market structure is that in the sector analysis it is understood that the profitability
of the sector is determined by competition in two markets: the product and the factor
markets.

The prerequisite for an effective analysis of the environment is to distinguish the vital
from the merely important. Three types of players comprise the sector environment:
customers, suppliers, and competitors.

Macroeconomic factors may be critical to the opportunities and threats that the
company may face in the future. Among the determining factors are the national and
international economy, technology, the government and politics, environment, the
demographic and social structure. The benefits earned by companies in a sector are
determined by three factors: the value of the product for the customer, the intensity of
the competition and the bargaining power of the suppliers.

The sector analysis allows the identification of the relevant market, so it needs to be
carried out from the perspective of the customer, which simply means addressing needs
of a particular group. It is possible to identify relevant markets by examining different
dimensions because that can give us different points of view.

These are:

▪ The basic service provided by the product in order to meet a need (basic
function).
▪ The technologies that can be used to fulfil that basic function.
▪ The different groups of customers that make up the market as a whole.

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The sector analysis enables us to identify the factors that encourage the improvement
of the company through an in-depth knowledge of the sector in which it operates.
Thanks to it, we can stay up to date with all the innovative projects in the sector so we
can take advantage of the trends and maintain a higher competency level.

In relation to this issue, the concept of market niches arises. It refers to an analysis of
the needs of customers and weaknesses of the competition in order to adapt the
company's objectives to the weaknesses detected.

1.4.2. The Dynamism of a company

▪ Dynamics and the environment
Companies are an open system that is in constant interaction with the environment. In
this sense, its internal dynamics and the dynamics of the environment constitute an
inseparable dialectical unit. It stems from the fact that the internal results of the
company depend, to a great extent, on the characteristics of the environment in which
it operates and on the company's ability to assimilate this environment and effectively
manage it.

A quick look at the current environment of companies shows us that this is not linear
and that it does not only consist of quantitative variables easily manipulated through
econometric models, with which the company intends to make a forecast of the
company and make decisions. On the contrary, the driving forces behind the dynamics
of the environment are composed of qualitative aspects (relationship between
economic interests and power relations of influence, structural differentiation of
companies, etc.) that make the operating scheme of companies complex.

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1.4.3. The macro environment and the microenvironment

▪ Macro environment
The generic environment of the company refers to all those factors that affect all sectors
of the economy and that may have an influence on business results. The company
cannot control those factors but should take them into account when formulating and
adapting its strategy. The uncertainty of the environment is one of the main problems
for companies. Thus, when the environment is complex and dynamic, it is much more
difficult to make decisions. In order to analyse the environment, we use a PEST analysis
(legal-political, economic, socio-cultural and technological factors).

At the end of this section, we will explain the way in which we can perform the PEST
analysis, in order to be able to analyse, in the best possible way, the environment that
surrounds us and therefore, detect all the factors that can impact the organisation,
either positively or negatively.

▪ Micro environment
There are elements of the environment that can only affect companies in a certain
sector, such as the behaviour of customers, competitors or suppliers. An economic
sector is the set of companies that develop the same economic activity with similar
products or production processes. The activity sector is the framework for analysing the
competitiveness of the company, that is to say, its situation in respect of the competitors
and its capacity to survive.

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Organisations need to obtain results and the structure should contribute to achieving
these results. In general, the damage that an unsound structure can do is greater than
the benefits of good results to which a reasonably planned organisation can lead. In any
case, the results are threatened in times of crisis. Is the company "prepared" from an
organisational point of view?

For more than twenty years, it has been stressed that organisations need to change in
order to face a changing economic environment and new risks.

From the point of view of the structure, which should be conceived as one of the main
tools to achieve the strategic objectives, management specialists highlight these new
needs:

✓ Having flexible and adaptable organisations.

✓ Strengthening and concentrating on the processes that create value for
customers.
✓ Implementing multidisciplinary approaches in management.
✓ Steering the activity towards the desired outcome.
✓ Developing motivating approaches to the talent and people management.
✓ Generating mechanisms that facilitate permanent product and process
innovation.

The tendencies to organise companies under these parameters have been diverse. Of
course, not all of them can be generalised and applied, isolated or simultaneous, for all
kinds of businesses.

Here we have some examples:

✓ The vision of the organisation as a set of processes and the management of the
company around them, including relations with customers and suppliers.
✓ Focusing on the core of the business, with the outsourcing, in many cases, of
supporting activities.
✓ Reticular and virtual organisations that limit risks and provide flexibility.
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✓ The centralisation of corporate functions and in this way obtaining savings in
administrative management.
✓ A better management of information, sharing it among different departmental
areas and providing key information in real-time with the aim of facilitating
decision-making and anticipating risks.
✓ Addressing organisational re-engineering, processes or systems to achieve
dramatic improvements in the management.
✓ The knowledge-based organisation and the management of intangibles assets as
a fundamental asset of the company.

In this context, many companies have been putting into practice changes regarding the
management aimed at achieving the established goals. They started to create better
conditions to achieve better results, have better information management and
streamline business processes.

These actions have sometimes resulted in significant investments in information

systems, which, in many cases, have led to a greater organisational rigidity; efforts to
change the model of the supply chain or client management together with expansion
projects dealing with risks related to financial policies or diversify sales channels and
markets. Organisational flexibility or the introduction of mechanisms to generate
innovation have been, in general, the issues into which less effort has been put.

Sometimes, organisational changes have been dealt with, focusing only on the structure,
without addressing them from a wide perspective that considers other elements with
organisational impact: internal processes such as business processes, information
systems, or external relations.

Finally, and in relation to external analysis, we need to mention the PEST analysis, which
refers to the identification of political, economic, social and technological factors of the
company’s external environment. Because of their external nature, they are out of the
company’s scope of control so it is important to clearly identify these factors.

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Since these are political, economic, social and technological elements, many of them are
specific to a particular country or region, so if the same company operates in several
countries, this analysis should be conducted in relation to all the regions in which it
operates. A general analysis is not valid. It is clear that the legal conditions of a company
in Spain are different from the regulations of a company located in Asia. Therefore, this
analysis is a key to knowing which elements can affect the company and if these
elements can present a threat or an opportunity for its success.

Below, we present a matrix with the elements that we should consider in the PEST
analysis.

POLITICAL ECONOMIC SOCIAL TECHNOLOGICAL

Regulations and Economic growth. Distribution of income. Expenditure on
environmental Interest rates and Demographics. research from the
protection. monetary policy. Labour and social administration.
Fiscal policies. Public spending. mobility. Priority is given by the
Regulations on Policies on Changes in lifestyle. industry to progress.
International Trade and unemployment. Attitudes to work, New inventions and
its restrictions. Taxation. career, and leisure. development.
Legislation on the Exchange rates. Education. The rate of transfer of
enforcement of Stage of the business Awareness of health, technology.
contracts and cycle. welfare, and safety. Lifespan and speed of
consumers protection. technological
Legislation on obsolescence.
employment. Use and cost of energy.
Organisation and Changes on the
attitude of the Internet and, new
administration. information, and
Political stability. communication
networks.

Regarding the items detected in each of the factors and analysed fields, it is very
important that we also analyse the impact so that the company can assess how those
elements need to work to achieve a greater benefit.
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1.4.4. The five forces of Porter
It goes without saying that a company is not isolated, but rather it forms part of a
network with other companies. Due to globalization, the bar for companies is set higher
and higher and competitiveness constantly increases. It is very important, has been
pointed out, to carry out both an internal and external analysis, since knowing the
environment can help to develop a range of strategies necessary for being competitive
in an increasingly tumultuous market. The company's results depend on its environment
and proper management. Companies are not only governed by quantitative variables,
but also have to take into consideration qualitative variables that further complicate the
scheme of operation.

Each company and the sector to which it belongs, has a few different fundamental
analyses but the five forces help to determine which elements have an impact on the
profitability in each industry, what the trends and the rules of the game in the sector are
and what the complications or restrictions are when it comes to access.

The objective of this developed model is to calculate the profitability of the sector,
taking into account the current value and the projection of the entrepreneurs.

Bargaining power of

consumers



Threat of
Bargaining
introduction
power of Rivalry between of substitute
suppliers competitors products.

Threat of entry of new

competitors
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This point is in the middle of the scheme because it is the most
powerful of all forces. It refers to the competitiveness of the
Rivalry between
competitors companies that are in the same industry and offer the same
product, which entails the development of strategies aimed at
outperforming and outsmarting the rest of the competitors. The
threat of entry of new competitors depends mainly on barriers to entry and the reaction
of companies, already established within the sector, to the newcomers.

This threat depends on the following factors:

▪ Power of the competitors.
▪ Power of suppliers.
▪ Industrial growth.
▪ Industrial overcapacity.
▪ The diversity of competitors.

We talk about the threat of entry of new competitors when companies that produce
and sell the same type of product enter the game. The
threat is intensified when companies easily enter an
industry, which is when they have products of a higher
Threat of entry of new
competitors quality than the existing ones, lower prices or better
advertising. When analysing the entry of new
competitors, strategies that allow us to strengthen the barriers to entry or face the
competition that may enter can be carried out. The enterprises of an industrial sector
may be in direct competition with other different sectors when the products can be
replaced. Some of the strategies that could improve the situation would be to increase
the quality of products, reduce prices, increase sales channels, increase advertising, or
offer better conditions, among others.

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This threat depends on such factors as:
▪ Economies of scale.
▪ Differences in the product in terms of properties.
▪ Brands value.
▪ Capital requirements.
▪ Access to the distribution.


Companies that produce or sell alternative products enter the
market which poses a threat to the industry. The existence of
Threat of
substitute products sets a limit on the price charged for a
introduction
of substitute product. The analysis of this threat permits us to formulate
products. strategies designed to prevent the entry of companies that
produce or sell these products, or in any case, strategies that
allow us to compete with them.

This threat depends on factors such as:

▪ The propensity for replacing the buyer.

▪ Relative prices of substitute products.
▪ Cost and ease of changing the buyer.
▪ Perceived level of differentiation of the product or service.
▪ Availability of close substitutes.

It is related to the power that the suppliers of the industry have

to raise the prices and be less concessive. The lower the
Bargaining
power of number of suppliers, the greater the bargaining power. Since
suppliers
there is not a great supply of raw materials, they can easily
increase their prices and be less concessive.

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This analysis of the bargaining power of suppliers enables us to formulate strategies
aimed at reducing their bargaining power and achieve better conditions or a greater
control over them.

This threat depends on the following factors:

▪ The number of providers versus the number of companies.
▪ The volume of the purchase.
▪ The amount of alternative raw materials that exist.
▪ The cost that changing the materials would entail.
▪ The number of substitute products available in the market.

It refers to the power that consumers or buyers in the
Bargaining power of industry use to obtain good prices and conditions.
consumers
The fewer buyers there are, the greater their negotiating
capacity is. Since these are not high-demand products,
consumers or buyers may demand lower prices and better conditions.

This threat depends on the following factors:

▪ The number of customers versus the number of companies.
▪ The possibility of negotiation, especially in those sectors with high fixed costs.
▪ The high purchase volume.
▪ Costs or facilities so that customers can change the company.
▪ Information available for the consumer.

Analysing these forces allows us to determine the degree of competition that exists in
the industry, and thus see how high it is, as well as detect opportunities and threats, and
in this way, develop strategies that will enable us to take advantage of these
opportunities and/or face threats.

The success of the strategy depends on its effectiveness in handling the changes that
occur in the competitive area. Accelerated competition indicates that it is no longer

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possible to wait for the action of the competitor, but that we have to be prepared to
face any eventuality or to use those factors that allow surviving in the market in a
competitive way through the use of strategies.

These strategies are related to two key points:

A. Satisfying customers and their needs

This point refers to the importance of knowing our customers, the needs they
have and how they position themselves in light of the various offers available.
B. Surviving the competition
One of the most crucial points is the analysis of the competition because it
determines the subsequent design of strategies that allow us to keep ahead of
the competition and improve the products.

It is necessary to carry out a survey of customers, as in this way an appropriate strategy
adapted to their needs can be formulated.

1.5. INTERNAL ANALYSIS

The internal analysis aims to identify both the strengths and the weaknesses of a
company when performing its activity. One of the origins of this analysis can be found
in the work of Edith Penrose (1959), known as The Theory of the Growth of the Firm,
which is concerned with the management of the resources as the main factor in the
company's growth.

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The internal analysis within the company:

▪ is an analytical process.
▪ helps to get a better picture of the situation of an organisation at a given
moment.
▪ contributes to discovering problems and areas of opportunity, in order to correct
the former and take advantage of the latter.
The success of a company in a certain industry depends on its internal factors. The
resources and capabilities of the company make us understand why a certain strategy is
followed by the industry and why some companies are more successful than others.

Now what comes into play is the profitability shown by a company:

▪ Special resources such as the company's assets (patents, brand image, access to
raw materials, machinery, technology, etc.) and, on the other hand, human
assets (leadership, experience, relationships, motivation, etc.).
▪ Profitability shows distinctive capabilities, something that the company does
better than the rest, in other words, its competitive advantage.

Therefore, it can be said that the resources and valuable capabilities are the ones that
allow obtaining a profitability rate higher than that of the competitors and, in addition,
generate the capacity to create and maintain a competitive advantage over time.

It is necessary to bear in mind that key resources and capabilities cannot be easily
acquired in the market. A sustainable strategy should be based on resources and
capacities difficult to acquire by the competition.

In order to be sure that the resources and capacities of the company are valuable, they
need to have the following characteristics (Amit and Shoemaker (1993) and Grant
(1996):

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1. Shortage. With regard to this first characteristic, the competitors’ availability of
resources and capabilities needs to be assessed. It is important to keep in mind
that our resources and capabilities are valuable if they are limited so that
competitors cannot easily obtain them. Moreover, we can acknowledge that a
resource is more strategic when the company is the only one that possesses it and
the possibilities of competitors owning it are low.
2. Relevance. In relation to the relevance or the valuable nature of the resource, this
refers to those resources and capabilities that give the company the opportunity
to conceive or implement a range of strategies that improve its effectiveness and
efficiency. Thus, it is about the connection of the resource with the success factors
of the sector that marks the degree of its utility.
3. Durability. It refers to the lifespan of the resource and the capabilities that provide
the company with a competitive advantage. In relation to the durability factor, we
need to consider the fact that certain resources and capacities have a shorter life
cycle than others, such as technological resources that, due to advances, can
become obsolete in a short time. So this factor needs to be taken into account.
4. Imitability. It refers to the speed with which competitors can imitate the resources
that are part of the competitive advantage of the company. In order to assess the
degree of replicability of the company's resources and capabilities, the following
questions should be answered: How difficult is it for competitors to copy the
resources and capabilities of the company? How much time do they need?
Basically, it is about determining if competitors can easily copy our resources and
capacities in order to know if we have really valuable resources and capabilities
that represent a good competitive advantage.
5. Transferability. This feature refers to the difficulty that the companies may have
selling and buying resources. This element is strictly related to the existence or not
of a market so that the transfer of assets among companies can happen. Thus, if
there is a market, resources can be moved among enterprises by buying and selling,
whereas, if there is no market or resources are difficult to transfer, companies with

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such resources or capabilities will have a whole range of assets that will enable
them to maintain that competitive edge over time.
6. Substitutability. The more irreplaceable a resource is, the more valuable it
becomes. A resource is irreplaceable when there are no alternatives to replace it.
Such alternatives refer to actions such as replacing them with a similar or
equivalent resource or capacity. In this way, we will have valuable resources and
capabilities as long as the competitors cannot substitute these resources or
capabilities with others that have the same features.
7. Complementarity. This element refers to the possibility of certain resources and
capacities being valuable when they are together so that their individual value is
lower. This implies that when we have certain resources or values that complement
each other and give us a good competitive advantage, they will be more difficult to
transfer, imitate and substitute by our competitors.
8. Appropriability. This last characteristic refers to the fact that a company
appropriates and makes its own resources and capabilities in a way that they
become its distinctive signs, implying a competitive advantage over competitors,
and difficulty in obtaining them.

1.5.1. The VRIO model
The VRIO analysis, which was developed by Jay Barney (1991), is a tool used to analyse
a company’s internal resources and capabilities to find out if they can be a source of
sustained competitive advantage.

To perform the VRIO Analysis, the resources regarding the tangible and intangible assets
of the company need to be identified. They can be classified into financial, physical,
individual and organisational.

The evaluation of the resources of the company, aimed at determining its competitive
potential, is conducted by considering the following aspects: the value, the rarity, the
inimitability and the organisation.

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To determine if a company has resources that meet the VRIO characteristics, the
following questions can be used:

✓ Value: Does the resource add value to the competitive position of the company?
✓ Rare: Is the resource currently controlled by only a small number of competing
companies?
✓ Inimitability: Are companies that do not have the resource at a disadvantage?
✓ Organisation: Are companies’ operations organised to support the exploitation
of its resource?
Finally, we will present the matrix that facilitates this analysis:

V R I O
FINANCIAL RESOURCES
PHYSICAL RESOURCES
INDIVIDUAL RESOURCES
ORGANISATION'S RESOURCES

Having in mind all types of resources, the company should specify which resources are
available and evaluate them, including resources such as infrastructure, employees,
corporate image, or relations with suppliers, among others. Basically, everything that
characterises a company has to be assessed so as to determine in which areas it
outperforms its competitors, i.e., to determine its competitive advantage.

1.5.2. The resources of a company

We understand resources as those elements that are required for a company to achieve
its objectives.

All business activities constantly struggle with the problem of how to do the job as well
as possible, in minimum time, with minimum effort and, of course, at the lowest cost.
Neither the companies nor the economic conditions remain static; therefore, the

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policies, the organisational system and/or the systems and procedures that proved
satisfactory can be obsolete and inefficient, due to rapid changes and unforeseen
trends.

Resources and basic elements of a company that are used to fulfil the objective are
human, material, technical or financial.

Material
Tangibles
Financial
Resources
No human
Intangibles
Human



Tangible resources are those that have a material part, i.e., are quantifiable and
measurable thanks to their physical nature. There are different types of tangible
resources: fixed assets referring to the ground, buildings, facilities and the stock that
refers to raw materials.

Finally, the financial assets are those related to capital and the collection rights.

Managing the tangible resources in a positive way means making optimal use of those
assets. Thus, it is essential to take advantage of them in order to achieve success.

On the other hand, the intangible resources of a company are those that, unlike tangible
resources, are not measurable, quantifiable or physical. They are, instead, a type of
information and knowledge; everything that is immaterial, so they cannot be measured.

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The immateriality of intangible resources makes it difficult to manage them since, on
many occasions, it is difficult to see these goods with objectivity and be able to evaluate
them. Unlike tangible resources that wear out from use, intangible resources gain
strength, quality, and value over time. This plays a key role in the final success of the
company: the philosophy of the company transmits a specific image to the customers,
associated with: values, the choice of the human capital to form part of this project, the
creation of an attractive logo, personal relationships within the company and with
suppliers and customers.

The challenge that a company needs to face is to learn how to manage intangible
resources as they generate values that can significantly contribute to building customer
trust and differentiating a company from its competition.

1.5.3. Value chain

✓ The concept
A company’s value chain breaks down the flow of production into categories and each
of them represents an opportunity for the firm to maximize efficiency and create a
competitive edge.

The set of value chains where we can find the value chain of the company, the suppliers,
and the clients is known as the value system. The objective of this system is to identify
the sources of competitive advantages for the company (contribution to the generation
of total value).

✓ Elements

Basic activities:

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Primary activities

They form the basic production process of the company from the physical point of
view; its transfer and post-sales customer care. The value chain model
differentiates five primary activities:

• Internal logistics: includes operations of reception, storage, and distribution

of raw materials.
• Operations (production): processing of raw materials to transform them into
the final product.
• External logistics: storage of the final products and distribution of the
product to the consumer.
• Marketing and sales: activities associated with promoting the product.
• Service: after-sales service or maintenance: gathering the activities aimed
at maintaining and enhancing the product's value through the application of
guarantees.

Secondary activities

The secondary activities are the following:

● The infrastructure of the organisation: activities that support the entire

company, such as planning, accounting, and finance.
● Human resources management: search, hiring, and motivation of staff.
● Development of technology, research, and development: generators of
cost and value.
● Purchases.

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