3

Chapter

The
Management
Environment

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Prentice Hall.
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Organizational environment

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The Management Environment
• External environment
• Internal environment

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FIGURE 2.1 The External Environment

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General Environment
• Dimensions in the broader society that influence
an industry and the firms within it:
– Demographic
– Economic
– Political/legal
– Sociocultural
– Technological
– Global
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TABLE 2.1 The General Environment: Segments and Elements

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Industry Environment
• The set of factors directly influencing a firm
and its competitive actions and competitive
responses
– Threat of new entrants
– Power of suppliers
– Power of buyers
– Threat of product substitutes
– Intensity of rivalry among competitors
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Opportunities and Threats

• Opportunity
– A condition in the general
environment that, if exploited,
helps a company achieve
strategic competitiveness.
• Threat
– A condition in the general
environment that may hinder a
company’s efforts to achieve
strategic competitiveness.
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Segments of the General

Environment
• The Demographic Segment
– Population size
– Age structure
– Geographic distribution
– Ethnic mix
– Income distribution

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Segments of the General

Environment (cont’d)
• The Economic Segment
– Inflation rates
– Interest rates
– Trade deficits or surpluses
– Budget deficits or surpluses
– Personal savings rate
– Business savings rates
– Gross domestic product
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14

Segments of the General

Environment (cont’d)
• The Political/Legal Segment
– Antitrust laws
– Taxation laws
– Deregulation philosophies
– Labor training laws
– Educational philosophies and
policies

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Segments of the General

Environment (cont’d)
• The Sociocultural Segment
– Women in the workplace
– Workforce diversity
– Attitudes about quality of worklife
– Concerns about environment
– Shifts in work and career preferences
– Shifts in product and service preferences

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Segments of the General

Environment (cont’d)
• The Technological Segment
– Product innovations
– Applications of knowledge
– Focus of private and government-supported R&D
expenditures
– New communication technologies

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Segments of the General

Environment (cont’d)
• The Global Segment
– Important political events
– Critical global markets
– Newly industrialized countries
– Different cultural and
institutional attributes

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Industry Environment
• The set of factors directly influencing a firm
and its competitive actions and competitive
responses
– Threat of new entrants
– Power of suppliers
– Power of buyers
– Threat of product substitutes
– Intensity of rivalry among competitors
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FIGURE 2.2 The Five Forces of Competition Model

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Bargaining Power of Suppliers

• Supplier power increases when:
– Suppliers are large and few in number.
– Suitable substitute products are not available.
– Individual buyers are not large customers of suppliers and
there are many of them.
– Suppliers’ goods are critical to the buyers’ marketplace
success.
– Suppliers’ products create high switching costs.
– Suppliers pose a threat to integrate forward into buyers’
industry.
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Bargaining Power of Buyers

• Buyer power increases when:
– Buyers are large and few in number.
– Buyers purchase a large portion of an industry’s total
output.
– Buyers’ purchases are a significant portion of a
supplier’s annual revenues.
– Buyers’ switching costs are low.
– Buyers can pose threat to integrate backward into the
sellers’ industry.
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23

Threat of Substitute Products

• The threat of substitute products increases
when:
– Buyers face few switching costs.
– The substitute product’s price is lower.
– Substitute product’s quality and performance are
equal to or greater than the existing product.
• Differentiated industry products that are
valued by customers reduce this threat.
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Intensity of Rivalry Among

Competitors
• Industry rivalry increases when:
– There are numerous or equally balanced
competitors.
– Industry growth slows or declines.
– There are high fixed costs or high storage costs.
– There is a lack of differentiation opportunities or
low switching costs.
– When high exit barriers prevent competitors from
leaving the industry.
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Barriers to Entry
• Economies of Scale
– Marginal improvements in efficiency that a firm
experiences as it incrementally increases its size
• Factors (advantages and disadvantages)
related to large- and small-scale entry
– Flexibility in pricing and market share
– Costs related to scale economies
– Competitor retaliation

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Barriers to Entry (cont’d)

• Switching Costs
• Product differentiation – One-time costs customers incur
– Unique products when they buy from a different
supplier
– Customer loyalty
• New equipment
– Products at competitive
• Retraining employees
prices
• Psychic costs of ending a
• Capital Requirements relationship
– Physical facilities
• Access to Distribution Channels
– Inventories
– Stocking or shelf space
– Marketing activities
– Price breaks
– Availability of capital – Cooperative advertising
allowances

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Interpreting Industry Analyses

Low entry barriers

Suppliers and buyers

have strong positions
Unattractive
Strong threats from Industry
substitute products

Intense rivalry
Low profit potential
among competitors

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Interpreting Industry Analyses

(cont’d)
High entry barriers

Suppliers and buyers

have weak positions
Attractive
Few threats from Industry
substitute products

Moderate rivalry
among competitors High profit potential

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29

Internal Analyses’ Outcomes

Unique resources,
capabilities, and
competencies
(required for sustainable
competitive advantage)

By studying the internal environment, firms

identify what they can do

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Resources, Capabilities and Core Competencies

• Resources
Discovering Core – Are the source of a firm’s
Competencies
capabilities.
– Are broad in scope.
Core – Cover a spectrum of
Competencies
individual, social and
Capabilities organizational
phenomena.
Resources – Alone, do not yield a
•Tangible
•Intangible competitive advantage.

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Resources
• Resources • Types of Resources
– Are a firm’s assets, – Tangible resources
including people and the • Financial resources
value of its brand name.
• Physical resources
– Represent inputs into a
• Technological resources
firm’s production process,
• Organizational resources
such as:
• Capital equipment – Intangible resources
• Skills of employees • Human resources
• Brand names • Innovation resources
• Financial resources • Reputation resources
• Talented managers

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TABLE 3.1 Tangible Resources

Financial Resources • The firm’s borrowing capacity

• The firm’s ability to generate internal
funds
Organizational Resources • The firm’s formal reporting structure
and its formal planning, controlling, and
coordinating systems
Physical Resources • Sophistication and location of a firm’s
plant and equipment
• Access to raw materials
Technological Resources • Stock of technology, such as patents,
trademarks, copyrights, and trade
secrets

Sources: Adapted from J. B. Barney, 1991, Firm resources and sustained competitive advantage, Journal of
Management, 17: 101; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 100–
102. © 2007 Thomson/South-Western. All rights reserved. 2-32
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TABLE 3.2 Intangible Resources

Human Resources • Knowledge

• Trust
• Managerial capabilities
• Organizational routines
Innovation Resources • Ideas
• Scientific capabilities
• Capacity to innovate
Reputational Resources • Reputation with customers
• Brand name
• Perceptions of product quality,
durability, and reliability
• Reputation with suppliers
• For efficient, effective, supportive, and
mutually beneficial interactions and
relationships
Sources: Adapted from R. Hall, 1992, The strategic analysis of intangible resources, Strategic Management Journal,
13: 136–139; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 101–104.
© 2007 Thomson/South-Western. All rights reserved. 2-33
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Resources, Capabilities and Core Competencies

• Capabilities
Discovering Core – Represent the capacity to deploy
Competencies resources that have been purposely
integrated to achieve a desired end
state
Core
Competencies
– Emerge over time through complex
interactions among tangible and
intangible resources
Capabilities
– Often are based on developing,
carrying and exchanging information
Resources and knowledge through the firm’s
•Tangible
•Intangible
human capital

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Resources, Capabilities and Core Competencies

• Capabilities (cont’d)
Discovering Core – The foundation of many
Competencies
capabilities lies in:
• The unique skills and
Core
knowledge of a firm’s
Competencies employees
• The functional expertise of
Capabilities those employees
– Capabilities are often
Resources developed in specific
•Tangible
•Intangible functional areas or as part of
a functional area.
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TABLE 3.3 Examples of Firms’ Capabilities

Functional Areas Capabilities

Distribution Effective use of logistics management techniques
Human resources Motivating, empowering, and retaining employees
Management Effective and efficient control of inventories through
information systems point-of-purchase data collection methods
Marketing Effective promotion of brand-name products
Effective customer service
Innovative merchandising
Management Ability to envision the future of clothing
Effective organizational structure
Manufacturing Design and production skills yielding reliable products
Product and design quality
Miniaturization of components and products
Research & Innovative technology
development Development of sophisticated elevator control solutions
Rapid transformation of technology into new products and
processes
Digital technology
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Resources, Capabilities and Core Competencies

• Core Competencies
Discovering Core
Competencies
– Resources and capabilities that
are the sources of a firm’s
competitive advantage:
Core
Competencies • Distinguish a company
competitively and reflect its
Capabilities personality.
• Emerge over time through an
Resources organizational process of
•Tangible accumulating and learning how to
•Intangible
deploy different resources and
capabilities.
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Resources, Capabilities and Core Competencies

• Core Competencies
Discovering Core
Competencies – Activities that a firm performs
especially well compared to
competitors.
Core
Competencies – Activities through which the
firm adds unique value to its
Capabilities
goods or services over a long
Resources
period of time.
•Tangible
•Intangible

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Building Core Competencies
• Four Criteria of
Discovering Core Sustainable Competitive
Competencies
Advantage
Four Criteria of – Valuable capabilities
Sustainable
Advantages – Rare capabilities
– Costly to imitate
• Valuable
• Rare – Nonsubstituable
• Costly to imitate
• Nonsubstitutable

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 TABLE 3.4 The Four Criteria of Sustainable Competitive Advantage

Valuable Capabilities • Help a firm neutralize threats or

Rare Capabilities
Costly-to-Imitate Capabilities
Nonsubstitutable Capabilities
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exploit opportunities
• Are not possessed by many
others
• Historical: A unique and a
valuable organizational culture or
brand name
• Ambiguous cause: The causes
and uses of a competence are
unclear
• Social complexity:
Interpersonal relationships, trust,
and friendship among managers,
suppliers, and customers
• No strategic equivalent
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Building Sustainable Competitive
Advantage
• Valuable capabilities
Discovering Core – Help a firm neutralize
Competencies
threats or exploit
opportunities.
Four Criteria of
Sustainable • Rare capabilities
Advantages
– Are not possessed by
many others.
• Valuable
• Rare
• Costly to imitate
• Nonsubstitutable

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Building Sustainable Competitive
Advantage
• Costly-to-Imitate Capabilities

Discovering Core – Historical

Competencies • A unique and a valuable
organizational culture or brand
name
Four Criteria of – Ambiguous cause
Sustainable
Advantages • The causes and uses of a
competence are unclear
– Social complexity
• Valuable • Interpersonal relationships,
• Rare
• Costly to Imitate
trust, and friendship among
• Nonsubstitutable managers, suppliers, and
customers

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Building Sustainable Competitive
Advantage
• Nonsubstitutable
Discovering Core
Competencies Capabilities
– No strategic equivalent
Four Criteria of • Firm-specific knowledge
Sustainable
Advantages • Organizational culture
• Superior execution of the
chosen business model
• Valuable
• Rare
• Costly to imitate
• Nonsubstitutable

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 Outcomes from Combinations
of the Four Criteria

?
?

le
te

b
ita

ta
Im

u
tit
?

to

bs
le

Competitive Performance
tly
ab

su
e?
os
lu

on
Consequences Implications
ar
Va

N
R

No No No No Competitive Below Average

Disadvantage Returns

Yes No No Yes/ Competitive Average Returns

No Parity

Yes Yes No Yes/ Temporary Com- Above Average to

No petitive Advantage Average Returns

Yes Yes Yes Yes Sustainable Com- Above Average

petitive Advantage Returns

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Table 3.5 Outcomes from Combinations of the Criteria for
Sustainable Competitive Advantage

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