R: Strategic Analysis

Introduction
Once a company has an understanding of what its intentions are and where it is heading,
it can perform external and internal analyses. This is a way of understanding its strengths
and weaknesses (internally) and the opportunities and threats it faces (externally). It is a
process of establishing what the strategic position currently is and what it might be in the
future. There are countless tools available to perform internal and external analyses. The
ones we will consider here are far from comprehensive, but they are the most common
and provide an insight into the types of issues that other sorts of external and internal
analyses might also focus on and reveal.

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External Analysis
With regard to external analyses, key areas that need consideration are the opportunities
and threats that exist within the wider, "macro" environment, and within the industry in
which the company is operating.

Macro-environment analysis

Organisations depend upon their macro-environments for their survival (Whittington et

al., 2021). In order to look at the factors which may be important to a business, we
defined environments in their widest sense. We thus include political, economic, social,
technological, and legal and ecological factors when we consider what is going on in the
environment. Large-scale environmental factors, or changes, can often seem too
complicated for managers to get a handle on. Issues can therefore sneak up on them until
it is too late to avoid the threats or opportunities that these issues pose.

Therefore, when we perform a macro environmental analysis, we are mainly seeking to

spot threats and opportunities so that we can minimise or seize them respectively.
Therefore, the model we will consider here, provides a way of categorising
environmental factors according to the six key types listed above: political, economic,
social, technological, ecological, and legal.

PESTEL analysis

The PESTEL framework is just one of many frameworks which organise environmental
factors into groupings. Within a PESTEL analysis, strategic analysts need to consider
both the market environment and the non-market environment. The market environment
focuses on those aspects of the environment which are involved in the economic
activities in the market in which the company or organisation in question is operating.
This may include customers, suppliers, and competitors. The non-market environment
focuses on elements which are not directly related to the economic activities of the
market in which the company is operating. They may, however, be loosely involved in
such economic activities. This may include government departments, campaign groups,
the media, and non-governmental organisations (NGOs). (Whittington et al., 2020).

We will now consider each of the PESTEL elements in turn.

Political: the political aspect of the PESTEL analysis highlight the role of government
and other political factors and actors. In particular, this could include the role of the state,
for example as a regulator of businesses or even as a customer, supplier, or owner.

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Economic: the macro environment is influenced by large scale, or macro, economic
factors. These will include exchange rates, tax rates, fluctuate in economic growth and so
forth. Understanding how issues such as exchange rates may impact the prices of supplies
and the relative price that foreign buyers are prepared to pay for products is an important
aspect of a PESTEL analysis.

Social: social factors can include demographics, geography, culture, and distribution of
wealth. These aspects of the society in which an organisation operates can have a
significant impact on supply and demand. They can also shape opportunities for
innovation.

Technology: technologies are widespread and should be considered as such within a

PESTEL analysis. Key areas that a manager conducting a PESTEL analysis may want to
consider include new technology developments within and outside the industry in
question; typical research and development budgets; and patents which are relevant for
the company in question and its industry and related industries.

Ecological: here, strategic analysts are thinking about environmental issues and topics,
such as pollution, climate change, and environmental regulation. The impact of
environmental and ecological issues and therefore the need to consider them in a
PESTEL analysis may be based on how pressing they are; how seriously they are taken
within the industry and related industries; the personal values of the organization's
leadership (whether these align with the organisation’s values or not) and its
organisational strategy.

Legal: Lastly, legal aspects cover a wide range including Labour laws, environmental
laws, consumer regulation, taxation, corporate governance rules, and competition law.
Relaxation of law can create new opportunities, but additional regulation on existing or
new industries can create fresh sets of challenges.

You can find a worked example of a PESTEL (or PESTLE as shown in the example)
analysis in the UK retail industry as at November 2020 here.

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Advantages of a PESTEL analysis include its simplicity, and its focus on understanding
the wider business environment. It recognises the need for businesses to try to anticipate
future threats to be able to try to manage them, and future opportunities to try to exploit
them.

However, it can be overly simplistic, putting complex data into six boxes and acting as
though that is sufficient. It can also be easy to generate too much data, and not be able to
see what is actually important. And, whilst it can reveal information that managers
weren’t aware of before, they can still overlook key issues that may not come to their
attention during the analysis. This problem can be compounded because having done the
analysis, managers can feel prepared for all eventualities, and as such, they can be
complacent. Therefore, macro-environmental analysis should be performed regularly, and
managers should aim to stay up to date with macro-environmental issues so that they can
spot those which could impact on their business. We will look at the idea of future
thinking and trend spotting in more detail in a later unit. When we do so, you will also
engage with another macro-environmental analysis tool: scenario planning.

For the moment, we will move on to look at the other element of external analysis:
industry analysis.

Q) Carry out an industry-level PESTEL analysis for the airline industry, or for an
industry of your choice, using this template.
>>

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Political

Political aspects to consider may

include:

Government policy

Overseas political
stability/instability

Foreign trade policy and

relationships

Tax policy

Employment laws

Terrorism and military

considerations

Environmental laws

Funding grants and initiatives

Trade restrictions

Fiscal policy

Economic

Economic aspects to consider may

include:

Economic growth

Interest rates

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Exchange rates

Inflation

Disposable income of consumers

Disposable income of businesses

Taxation

Wage rates

Financing capabilities

Social

Social aspects to consider may

include:

Population growth

Age distribution

Health consciousness

Career attitudes

Customer buying trends

Cultural trends

Demographics

Industrial reviews and consumer

confidence

Organisational image

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Technological

Technological aspects to consider

may include:

Producing goods and services

Emerging technologies

Maturity of technologies

Distributing goods and services

Communicating with target markets

Potential copyright infringements

Increased training to use innovation

Potential return on investment

(ROI)

Ecological

Ecological aspects to consider may

include:

The decline of raw materials

Pollution and green house gas

emissions

Promoting positive business ethics

and sustainability

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Reduction of their carbon foot
print.

Climate and weather

Environmental legislation

Geographical location (and

accessibility)

Legal

Legal aspects to consider may

include:

Health and safety

Equal opportunities

Advertising standards

Consumer rights and laws

Product labelling

Product safety

Safety standards

Employment laws

Future legislation

Competitive legislation

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Industry analysis

We can think about any organisation as having different layers in its business
environment. You have already learnt about the microenvironment and engaged in
macro-environmental analysis in the form of a PESTEL analysis. We will now turn our
attention to the industry and competitor environments, in the form of industry analysis.

Industry analysis originates in the work of Michael Porter, who was for many years the
dominant academic in the field of strategy. He argued:

"The essence of formulating competitive strategy is relating a company to its

environment. Although the relevant environment is very broad, encompassing social as
well as economic forces, the key aspect of the firm’s environment is the industry or
industries in which it competes." (Porter, 1980)

His research showed that some industries were more profitable than others, through a
combination of five forces. These five forces impact prices, costs, and investment
requirements, and thus influence how easy it might be for a firm to earn a decent return in
that industry.

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In detail, the five forces are as follows:

1. Threat of new entrants

These are factors which affect how easily a new player can enter the industry. The factors
include: the need for economies of scale in order to be profitable capital costs to enter the
market how restricted access is to distribution channels the degree to which existing firms
are benefited by subsidies and regulations restricted access to essential inputs, such as
raw goods needed to produce the goods how loyal customers are to the firms already in
the market.

2. Competitive rivalry

Strong competitive rivalry lowers profitability, and occurs when: there is low industry
growth there are many firms in the industry market growth is slow products are similar
exit costs are high.

3. Power of buyers

Where buyers look for lower prices or higher quality relative to the prices, they force
down profitability. Buyer power is higher when

• Buyers have lots of alternative sources of supply

• There are low switching costs for buyers
• The product or service is not deemed as essential by buyers

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 • Buyers are motivated to seek lower costs because the product or service represents
a big yet essential spend to buyers
• Buyers may realistically be able to produce the good or service in-house

4. Power of suppliers

When suppliers have more bargaining power, they drive up the cost of the goods and
services used by the industry in question to produce the goods or services for the
industry. Supplier power is higher when: there are few suppliers the cost of switching
from one supplier to another is high it is hard (or impossible) to substitute the supplier’s
goods the supplier could extend their business to compete in the industry in question the
customer is a small or infrequent purchaser.

5. Threat of substitutes

Substitutes are products in other industries that can perform the same role or purpose as
the industry’s product or service. For example, coach travel may be a viable substitute to
train travel. Threat of substitutes is higher when: buyers are willing to change their habits
buyers have low switching costs to the new category the products or services deliver
comparable or more reasonable benefits relative to costs (c.f. Boddy, 2019;
Whittington et al., 2020; Willman, 2014).

The greater the strength of the forces, the less profitable the industry is. The weaker the
forces are, the more profitable the industry is.

Firms will want the forces to be low in order for the market to have less competitive
rivalry and to be a more competitive place to play. A Porter’s Five Forces analysis always
occurs at industry level – never at the level of a company.

Example:

Coffee Shop Industry in the UK

Prior to the global Covid-19 pandemic, the popularity of coffee shops in the UK was
significant and growing. In 2018, the industry achieved a turnover of £10.1 billion,
growing 7.9 per cent on the previous year (UK-coffee-shops-achieve-20-years-of-
sustained-grow)). At that point, there were 25,483 outlets, of which 8,149 were branded
stores (eg, Starbucks, Costa, Caffe Nero).

These trends point towards coffee shops overtaking pubs within ten years, in terms of
number of outlets and turnover, as the nation changes its socialising habits
(wholesalecoffeecompany).

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Branded coffee shops continue to seek out new outlets in a range of locations, including
high streets and out-of-town retail shopping. Their presence on the high street stands in
contrast to clothing and other high street retailers who have been forced to close their
doors recently (eg, Topshop, Debenhams) due to falling sales and high property rent
charges.

Aside from this one third of the market is dominated by branded coffee shops, the
remainder is fragmented, with a large and broad range of independent traders who are
able to set up stores with minimal investment and only a small amount of training
required.

However, coffee bean prices have fluctuated greatly in recent years, due to a handful of
factors including weather conditions, long-term increases in demand, and growing
problems including coffee rust fungus and climate change threats to pollinators
(lanabandoim).

However, with the average customer more than willing to pay £2.70 or more for a cup of
coffee (the same price as it would cost to buy 100g of instant coffee that would make at
least 50 cups at home), there are high profit margins possible, as long as the coffee shops
can cover their staffing costs and rental overheads. Many coffee drinkers would argue
that instant coffee at home is inferior to the coffee they can buy from their favourite
coffee shop.

Requirements

Q) Prepare a Porter’s Five Forces analysis for the coffee shop industry prior to the Covid
pandemic.

The Porter’s Five Forces analysis needs to have been conducted at industry level – not
looking at an individual firm. Remember that the Five Forces model is always applied
at the level of industry.

Competitive rivalry

• The high number of coffee shops results in high competition.

• High fixed costs lead to high store rental charges which will increase ferocity of
competition as they have overheads to cover.
• The industry’s good growth prospects will alleviate some of the pressure, as there
is a good number of customers to target.

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Threat of new entrants

• Low costs of entering the market will make it easier for new entrants to set up.
• There is some brand loyalty, which may be hard to displace and to gain a foothold.

Threat of substitutes

• Spaces to socialise with drinks/food: pubs, restaurants, fast food outlets, other
sorts of cafés.
• The need for a coffee or similar drink: instant coffee could be made at home; a
mobile coffee outlet may move near your shop, with small tables on the street.

NB: It can be hard to establish precisely what is a substitute and what is inside the
industry. The best way to do this is to think about what the substitute offers that
customers may visit the focus industry to receive. Here, it’s spaces to socialise with
drinks and food, as well as the desire to drink coffee.

Power of buyers

• Easy to switch from one coffee shop to another, and switching costs are negligible.
• Some brand loyalty slightly erodes the price sensitivity of customers and their
likelihood to switch. Choice of coffee shop can become force of habit. Preference
may be linked to range and type of food provided to consume with coffee eg, lots
of vegan options.

Power of suppliers

• Employees (they are a supplier of labour) are low-skilled staff so they do not have
much power.
• Coffee growers appear to set the prices which are then passed on to the coffee
shops, suggesting that coffee shops do not have much power to set prices.
Governments may set minimum export prices, particularly if coffee is a key
commodity in their economy, for example, Ethiopia in March 2020
(source addisfortune.news).

Conclusion

• The market is a mixed bag; it is easy to enter but harder to gain a foothold. If a
foothold is gained, then assuming costs can be kept down, it is possible to make a
profit. The industry could be analysed, based on the evidence in the case, as
relatively attractive.

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 Applying External Analyses
For potential new entrants to an industry, they can ascertain how profitable they might
be. The conventional way this is done is in Figure 13.2. The axes are measured and
positions plotted; when the axes are joined, the larger the area, the more attractive the
industry.

For existing firms in an industry, it allows them to estimate the current profit
possibilities in the industry in question. They can also use the analysis to explore how
they might change the factors in the market to make it more profitable (Willman, 2014).
A company could, for example, look at how it can reduce the bargaining power of
suppliers or buyers – either just for them or for the industry as a whole. By showing
buyers that their product is the market-leader and available at a very good price, they may
not be as exposed to the bargaining power of buyers as other players in the market, for
instance. They could build barriers to entry, too – for example, Google’s search engine
responses are a difficult barrier for a new company that relies on online sales to overcome
(Boddy, 2019).

Strategic responses may, however, include exiting the industry if they find it unprofitable
(or, in the case of a potential new entrant, being discouraged from entering at all).

Porter’s Five Forces and the idea of industry analysis that it ushered in, have been
extremely influential. However, it is worth mentioning several limitations, noted by a
variety of critics. Firstly, it is backward looking and reflective, providing only insights as

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opposed to recommendations. We could say the same for PESTEL, and for the resource-
based view approach you are going to look at in relation to internal analysis. In a way, it
seems an unfair criticism, as these models are about reflection. However, you may ask
why Porter did not use his analysis of industry competitiveness to provide specific
recommendations about how to achieve improvements.

It also, increasingly problematically, assumes that bounded industries exist, distinct from
others. This is less and less true. Look at the publishing industry: should we include self-
publishing? Where do e-readers and their producers fit in? And, around the other way,
how do we classify companies as being in one industry, when increasingly they straddle
many. What industry would we put Amazon in? Tesla? Google?

Being able to identify a better strategic position is one thing, but being able to move the
company to occupy it is another. Organisations are complex entities, and it is not easy to,
for example, increase barriers to entry, reduce the bargaining power of suppliers, or the
threat of substitutes. If these were easy things to do well and get right, all firms would be
doing them. And finally, what happens when more than one company identifies a new
spot in the market that they would like to adopt, and a competitor identifies the same
position? What should happen then? The model doesn’t look at the dynamics of
competition at all (Willman, 2014).

One final area of oversight, but one which is significant for the work that we are going to
turn to next, is that Porter’s Five Forces focuses so entirely on industry factors. As you
have just learnt, in treating companies as though they are chess pieces that can be moved
around to a different industry position, they are neglecting the complexity that is inside
them, which may make them more or less able to adopt a particular industry position. The
combination of resources, processes, people and culture that the firm is comprised of is
designed to operate in their current position in the market. It is not just a case of moving
them elsewhere – this ‘bundle of resources’ is central to the firm’s approach to the market
and how they are known to be. In overlooking this, Porter makes it sound far too simple
to move the organisation around. We need to take what goes on inside a company much
more seriously – factoring in what they do and how they do it. We have thought about the
opportunities and threats of the macro-environment and the industry that it is in; but we
need to consider more seriously the strengths and weaknesses inside the firm.

R: Strategic Analysis 15
 Strategic Analysis
External and Internal Analysis
Video Lecture
EXTERNAL ANALYSIS
Macro-environmental analysis mainly looks at threats and opportunities in order to
miniise or seize them respectively. In other words, to minimise threats and seize
opportunities.
PESTEL model provides a lens through which to look to categorise enironmental factors
according to six key types: political, econonmic, social, technological, ecological, and
legal factors.

1. Political Factor
• Government policy
• Overseas political stability/instability
• Foreign trade policy and relationships
• Tax policy
• Employment laws
• Terrorism and military considerations
• Environmental laws
• Funding grants and initiatives
• Trade restrictions
• Fiscal policy

2. Economic Factor
• Economic growth
• Interest rates

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 • Exchange rates
• Inflation
• Disposable income of consumers
• Disposable income of businesses
• Taxation
• Wage rates
• Financing capabilities

3. Social Factor
• Population growth
• Age distribution
• Health-consciousness
• Career attitudes
• Customer buying trends
• Cultural trends
• Demographics
• Industrial reviews and consumer confidence
• Organisational image

4. Technological Factors
• Producing goods and services
• Emerging technologies
• Maturity of technologies
• Distributing goods and services
• Communicating with target markets

R: Strategic Analysis 17
 • Potential copyright infringements
• Increased training to use innovation
• Potential return on investment (ROI)

5. Ecological Factors
• The decline of raw materials
• Pollution and greenhouse gas emissions
• Promoting positive business ethics and sustainability
• Reduction of their carbon footprint
• Climate and weather
• Environmental legislation
• Geographical location (and accessibility)

6. Legal Factors
• Health and safety
• Equal opportunities
• Advertising standards
• Consumer rights and laws
• Product labelling
• Product safety
• Safety standards
• Employment laws
• Future legislation
• Competitive legislation

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 Industry Analysis
Porter’s Five Forces (1979)
1. Threat of new entrants
How likely is it that new players will enter the market?
(If you are already in the market, you want the threat of new entrants to be low.)
Is the market attractive?
• High industry growth
• High profit margins
• Few existing competitors
• Easy customer switching
What are the barriers to entry?
• Economies of scale
• Brand loyalty
• Capital requirements
• Access to distribution
• Patents
• Government subsidies

2. Threat of substitutes
Are substitutes available and are consumers likely to switch to them?
Availability of different substitutes
• From different industries (eg, substituting rail travel for air travel)
• From sub-industries (eg, tinned vs frozen dog food)

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Increased likelihood
• Price of substitute is low
• Low perceived switching costs
• Relative benefits/performance of the substitute are comparable

3. Buyer power
Do customers have enough bargaining power to push down prices?
This will be higher if there are:
• Small numbers of large competitors
• Large numbers of competitors
• Low levels of product differentiation
• Low switching costs
• The customer’s own profitability is low
• High degree of price transparency in the market

4. Supplier power
Do suppliers have enough bargaining power to increase their prices?
Several different types of suppliers should be considered
• Providers of raw materials
• Service providers and outsourced services
• Employees and hire workers

Their bargaining power will be increased if:

• There are a few large suppliers
• The supplier’s products are differentiated

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 • High switching costs for the customers (the industry being analysed)
• The supplier has other buyers that it can sell to instead

5. Intensity of rivalry (between existing firms)

How intense is the competition between existing players in the market?
This will be higher if there are:
• Large numbers of existing competitors
• High levels of fixed costs
• Low industry growth
• Low switching costs
• High exit barriers
• High strategic importance

Proter’s 5F Star Plot

Star plots
Analysis
1. Define the industry.
2. Plot positions on each axis (if it’s low, put the dot nearer the outside of the star plot; if
it’s high, put the dot nearer the inside of the star plot).
3. Join the positions – the larger the area, the more attractive the industry.
4. Manage industry structure?

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Critical Evaluation of Porter’s Five Forces
• Five Forces is backward-looking and reflective (but we could say the same about all
internal/external analytic models)
• No specific recommendations about how to achieve improvements
• Assumes you can draw a neat boundary around an industry
 Look at the publishing industry: should we include self-publishing? Where do e-
readers and their producers fit in? What industry would we put Amazon in? Tesla?
Google?
• Organisations are complex entities, and it is not easy, for example, to increase barriers
to entry, reduce the bargaining power of suppliers, or the threat of substitutes; if these
were easy things to do well and get right, all firms would be doing them
• What happens when more than one company identifies a new spot in the market that
they would like to adopt, and a competitor identifies the same position? What should
happen then? The model doesn’t look at the dynamics of competition at all (Willman,
2014)

A Key Oversight: It’s What’s Inside That Counts

• Porter’s Five Forces focuses entirely on industry factors.
• The combination of resources, processes, people, and culture that the firm is
comprised of is designed to operate in their current position in the market.
• It is not just a case of moving them elsewhere – this “bundle of resources” is central
to the firm’s approach to the market and how they are known to be.
• In overlooking this, Porter makes it sound far too simple to move the organisation
around.
• We need to factor in what organisations do and how they do it.
• External analysis considers the opportunities and threats of the macro-environment
and the industry that it is in; but we need to consider more seriously the strengths and
weaknesses inside the firm – internal analysis.

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Q) How might a manager use the information generated in a Porter’s Five Forces
analysis to improve its business?

You will need to develop a scenario outlining what the analysis indicates, and then how
the manager might act on it eg, supplier power is strong.

Make links to topics you have covered, to build your ability to synthesis information
from different parts of the course.

HRM Activities and VRIO

Thinking back to the Human Resource Management unit, you were introduced to Ulrich,
and the three core activities that he suggests the HR department can undertake:

• Shared services
• Centres of expertise
• Business partnerships

Select an example practice from each type of core activity and evaluate whether this can
be considered valuable, rare, difficult to imitate, and whether the activity would enable
the organisation to be organised to exploit these capabilities.

Which of the core activities do you think is most aligned with providing sustained
competitive advantage to the organisation, if any?

Looking Inside the Firm

We have seen, through the macro environmental analysis and through the industry
analysis that the external environment provides a range of opportunities and threats for a
business and therefore its managers to deal with. However, in exploring the criticisms of
Porter's Five Forces, we have recognised that the internal environment of a company
needs to be considered too. you will be able to see, by considering the supermarket
industry in your own country, that supermarkets are far from standard. Some are more
successful than others. It is often not their characteristics of an industry environment
which explain the differences in performance of companies within that industry, but
rather differences in organisational resources and capabilities. Variations between
companies in the same industry and how they vary in the resources they have, and how
they use those resources will affect their success.

An internal analysis provides important information about a firm or organisation’s

resources and capabilities. "An organisation’s resource are its assets – financial,
physical, human, and intangible – that it uses to develop, manufacture, and deliver

R: Strategic Analysis 23
products to its customers. They’re “what” the organisation has. (Robbins and Coulter,
2021, p. 256). An internal analysis should be able to identify organisational strengths and
weaknesses.

Where resources are what a company has, capabilities are what a company does.
Resources and capabilities are typically related as the table below shows.

Resources: what we have Capabilities: what

we do

Machines, buildings, raw materials, patents, Physical Ways of

databases, computer systems, vehicles successfully
utilising machinery,
efficiency,
productivity,
flexibility,
marketing
Balance sheet, cash flow, suppliers of funds Financial Ability to raise
funds and manage
cash flows, debtors,
creditors, etc

Managers, employees, partners, supplier Human How people gain

relationships, customer relationships and use experience,
skills common
knowledge, build
relationships,
motivate others and
innovate

Table adapted from Whittington (2021, p. 96)

This focus on the internal resources of the firm was initially proposed by Penrose (1959).
She maintained that firms can create economic value not due to mere possession of
resources, but due to effective and innovative management of resources.

"Unused productive services are, for the enterprising firm, at the same time a challenge to
innovate, an incentive to expand, and a source of competitive advantage. They facilitate

R: Strategic Analysis 24
the introduction of new combinations of resources – innovation – within the firm."
(Penrose, 1959, p. 85, c.f. Willman, 2014)

Penrose developed the idea that all firms have slack, or unused resources, that these
offer value-creating opportunities if recognised and exploited by managers.

These ideas were developed within the strategy discipline by Barney (1991) and became
the resource-based view (RBV) of the firm.

For Barney, resources are the tangible and intangible assets that a firm controls, which it
can use both to conceive of and to implement its strategies. They are of different types –
they can be financial, physical, human, and organisational. He distinguishes capabilities –
a subset of the firm’s resources which are the assets that enable a firm to take full
advantage of the other resources it controls.

The resource-based view is a model that looks internally, arguing that sustained
competitive advantage requires unique resources and capabilities within the firm. Such
resources might include technological skills, teamwork capability, business processes,
leadership, innovation, and organisation culture, as well as the sorts of factors in the table
above. This is not a conclusive list and managers may find, when analysing their own
organisations, that something else appears as a relevant resource.

The essence of this approach is exploiting difference: the idea that apparently similar
firms may possess different bundles of resources which give them their essence and allow
them to compete.

For difference (often labelled heterogeneity in relation to RBV) to persist, the differences
must be Valuable, Rare, Inimitable (hard to copy), and Organised (VRIO).

R: Strategic Analysis 25
For a resource to be Valuable, it must create a product or service or value to customers
which allows the organisation to respond to opportunities or threats in the environment.
For example, it is no use for a company to have a resource that allows them to create only
a product or service that customers are not interested in or do not place any value on. It's
also important for the resources to be able to address opportunities and threats in the
market and the wider environment. For example, the UK bookstore Waterstones is able to
compete with online retailer Amazon because of the quality of its bricks-and-mortar book
stores with curated selections, expert booksellers, and an environment which customers
appreciate, stimulates sales. Additionally, the product or service needs to be provided at a
cost that allows the organisation to generate sufficient revenue and profit in order to
survive and hopefully thrive.

For a resource to be Rare it needs to be possessed by only a few organisations in an

industry, well ideally only one. Common resources allow competitors to copy
innovations quickly, but if a resource is rare, competitive advantage is longer lasting.
Patents and copyright help companies to maintain rarity. Strong brands also create rarity,
as only that company’s product is perceived to fill the needs of the customer. Prime
locations, staff capabilities, key industry web addresses (such as diy) and business
processes developed overtime are all other examples of rare resources. Not everyone in
the industry has them.

For a resource to be Inimitable it must be difficult to copy. Inimitable resources and

capabilities are those that it is hard for competitors to imitate or substitute, either due to
the difficulty of doing so or the cost. Generally, it is unusual for competitive advantage to
be able to be explained by tangible resources in organisations, because generally
speaking these can be acquired (reducing rarity) or copied (reducing inimitability) over
time. However, capabilities in management, leadership, and so forth, can be much more
difficult and more expensive to imitate. Therefore, we could see how an IT system itself
would be easy to imitate. However, the capability to operate that system, to manage it,
and to fully deploy it would be far more difficult to imitate (Whittington et al., 2021).

There are three criteria that make resources and capabilities inimitable:

• Complexity

What resources and capabilities are complex and involved lots of interlinkages, then it
can be really hard to imitate them. an example would be a furniture company with a
strong customer focus. This may not come just from the sales department, or the
customer services department, or production having a really good understanding of the
customer’s requirements for their furniture. It may instead come from the connections,
the linkages and the complexity of these elements taken together. Partnerships with other
organisations can also add complexity which it is hard to replicate. Apple has many links

R: Strategic Analysis 26
with app developers, music labels, and even with Samsung who provide the high-tech
glass for their phone screens (an example of competitors becoming coopetitors in some
parts of the supply chain).

• Causal ambiguity

It can be hard from an outside perspective for a competitor to identify that causes and
effects which underpin an organization's success. What has led them to where they are? If
you cannot figure out what has caused what, then as a company, you cannot attempt to
copy it. Rivals cannot replicate or reverse-engineer the resource. It is relatively easy to
reverse-engineer a physical device, it can be bought and taken apart to identify
components and how they connect, but this is much more difficult for less tangible
processes. For example, with Amazon, they made a number of wrong steps on their route
to the Kindle. Which of these were key to the success of the eventual device? Which need
to be replicated, and which can be ignored? These steps may not even be detectable to an
outside observer.

• Culture and history

Rivals cannot replicate the historical sequence of events that a company has followed to
develop a resource. They have happened at a particular point in time, have led culture to
develop in a particular way, and will mean that the resource’s value is deeply embedded
in the culture and history of the firm. Many firms look to industry leaders and think, "we
would like to have their culture" – recognising that it provides a great platform for that
other firm to exploit their resources. However, companies are often forced to recognise
that they cannot develop the same culture as they are a very different firm with a different
history and it would not work.

And finally, a company must be Organised to take advantage of resources and support
capabilities. For example, the organisation’s structure, formal processes, control systems
and management must be organised in a way that supports and facilitates the maintenance
and, where relevant, further development of resources. Without this element, some of the
value of the resource will be lost.

The VRIO framework can be laid out graphically as follows:

>>

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Note how, as you move up the diagram, what the resource can give you becomes better.
If a resource isn’t even valuable, then you have competitive disadvantage. If it is valuable
but not rare, it leads to competitive parity, and so on. It is only when a resource
is valuable and rare and inimitable and organised that sustained competitive advantage
can be achieved.

However, a focus on internal capabilities can mean that important changes in the business
environment are not explicitly evaluated. It may be that being organised means that
horizon scanning, awareness of competitor activity and keeping in line with regulatory
changes are part of the organisation’s overall capability. There is no detail in the VRIO
model to ensure the external view is incorporated – what it means to be organised
depends on the organisation itself.

It can be difficult when looking at resources and capabilities to ascertain precisely where
the advantage lies. Is it in an IT system or the management of the IT system, or in the
way that the IT system allows the firm to codify knowledge?

Q) Think about a place you have worked or studied. Can you identify three resources or
capabilities the organisation had. Evaluate each of them using the VRIO framework. Can
you identify which of them would deliver sustained competitive advantage?

R: Strategic Analysis 28
Barney’s idea that firms with similar resources might be organised differently and that
this is what can provide competitive advantage. However, these resources cannot be
sustained indefinitely. The market changes, and they will need to change. Competitors
figure out how to copy or better the resources. Organisations need to have the capacity to
change. Teece et al. (1997) developed the dynamic capabilities approach, where a
dynamic capability is an "organisation’s ability to renew and recreate resources and
capabilities that meet the needs of changing environments". (Whittington et al., 2021, p.
116).

Teece suggests that there are three generic dynamic capabilities:

• Sensing, where organisations and their employees look for, analyse and exploit
opportunities in the market and more broadly. The UK supermarket industry
sensed the threat from online supermarkets.
• Seizing, where organisations address the opportunities they have sensed. This
could be the launch of new products or services; the use of new processes; or
undertaking new activities. UK Supermarkets such as Tesco seized the opportunity
to launch their own online supermarket.
• Reconfiguring, where renewal and reconfiguration of the business needs to take
place in order to take advantage of the new opportunities. In the UK, Tesco added
"Stores" to their property portfolio, which were essentially warehouses where
order fulfilment staff would shop on behalf of customers who had placed orders
online.

Whether these actions are sufficient for traditional supermarkets to survive the online
retail space which is increasingly dominated in the UK by online-only players, such as
Ocado, or whether they will need to undertake further "sensing, seizing, and
reconfiguring" if they are to survive remains to be seen. It appears the picture is similar in
Europe and the US, too.

Internal analyses, such as the resource-based view and the model of dynamic
capabilities add a useful dimension to strategic analysis. In parts of the literature, Porter’s
Five Forces and the resource-based view are assessed as alternative ways of doing
strategy and often presented as diametrically opposed. However, they are better viewed
as complementary in presenting different perspectives on the questions of who a
company is, what they do, and how they make money. The competence approach tends
towards the conclusion that industry does not matter at all, since products flow from
competence application. In contrast, Porter’s Five Forces suggests that industry is almost
all that matters. The analyses work well together, each offsetting the other’s weaknesses.

The internal view has much more value than Porter’s Five Forces or PESTEL when used
with companies that are not defined by industry boundaries. A manager would struggle to

R: Strategic Analysis 29
analyse Amazon’s industry using Porter’s Five Forces or PESTEL, because Porter’s Five
Forces can only handle one industry at a time, and a PESTEL would become unwieldy if
conducted across multiple industries. Resource-based view can provide an organisation-
level analysis in a way that the external tools of analysis could not.

Internal analysis recognises the value of resources for a firm, and encourages firms to
focus on gaining and sustaining resources that appear to have value to them. It provides a
recipe for companies to follow when they are trying to ascertain what it is that makes
them attractive, or not, to customers.

Some have questioned whether anything original is being offered because surely this is
just saying that firms survive when they are good at what they do in a way that no other
companies are, because customers choose to shop with them over others (Amit and
Schoemaker, 1993).

Also, it reflects the idea that competitive advantage must be built and nurtured, where
Porter’s Five Forces treats competitive advantage as a one-shot move (Willman, 2014).
Success, under the RBV, depends on continuous renewal of advantages through
management activity (being organised to take advantage).

However, it can be difficult when looking at resources and capabilities to ascertain

precisely where the advantage lies. Is it in an IT system or the management of the IT
system, or in the way that the IT system allows the firm to codify knowledge? And is it
because of the IT system, or is the firm just very good at codifying knowledge because it
was founded by an ex-teacher and the idea of transmitting knowledge is at the heart of its
culture?

RBV and the concept of dynamic capabilities also have the limitation of being tools that
try to make retrospective sense of success. It can be very easy to suppose, in hindsight,
that you have worked out what led to success. We could look at Amazon and say that it
was Bezos’ dogged belief in being an "Everything Store". Or we could say it was the
people he hired, or his reliance on data, or his desire to be totally customer-centric. We
won’t ever really know.

If we are a manager in a company and we are assessing our own resources, we can only
hope that we understand what it is that is driving success. But of course, our perspective
will be just one interpretation of the facts. It will not provide us as managers with specific
guidance on how to increase the VRIO qualities of our resources.

*To this point, we have covered three major elements in the strategy process.

R: Strategic Analysis 30
In this most recent section, we have explored methods of internal analysis. If we pair
these with external analysis at the level of industry and the macro-environment, we gain a
relatively well-rounded view of the firm’s environment. As a result of this, and in
combination with the mission, goals and stated objectives of the firm, the firm can begin
to make strategic choices, formulating strategies that fit with its mission, vision, values,
objectives, opportunities, threats, strengths, and weaknesses. We will pick up on this in
the subsequent sections.

Strategic Analysis
Internal Analysis
Why Undertake an Internal Analysis?
• In exploring the criticisms of Porter’s Five Forces, we have recognised that the
internal environment of a company needs to be considered too.
 For example, supermarkets are far from standard. Some are more successful than
others.
• Industry environment does not explain the differences in performance of companies
within that industry.
• Variations in the resources they have, and how they use those resources will affect
their success.

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Q) What Is Internal Analysis?
• An internal analysis provides important insight into a firm’s or organisation’s
resources and capabilities
“An organisation’s resource are its assets – financial, physical, human, and intangible –
that it uses to develop, manufacture, and deliver products to its customers. They’re ‘what’
the organisation has” (Robbins and Coulter, 2021, p.256).
• Should be able to identify organisational strengths and weaknesses
• Resources are what a company has, capabilities are what a company does

Resource or Capability?

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The Resource-Based View (RBV)
Inimitable Resources and Capabilities
Hard for competitors to imitate or substitute, as a result of one or more of the following:
• Complexity
Where there are lots of interlinkages between processes, stakeholders, customers, etc.
• Causal ambiguity
Where it’s hard to identify causes and effects which underpin success. What has led them
to where they are? Rivals cannot replicate or reverse-engineer the resource.
• Culture and history
Rivals cannot replicate the historical sequence of events – they occurred at a particular
point in time, led the culture to develop in a particular way, and as such value is
embedded in culture and history.

Appraising Resources and Capabilities

Dynamic Capabilities

• Teece et al. (1997) suggest that resources for competitive advantage cannot be
sustained indefinitely, and developed the dynamic capabilities approach.
 The market changes, and they will need to change.
 Competitors figure out how to copy or better the resources.
 Organisations need to have the capacity to change.

• A dynamic capability is an “organisation’s ability to renew and recreate resources and

capabilities that meet the needs of changing environments” (Whittington et al., 2021,
p.116).

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Three Generic Dynamic Capabilities
1. Sensing, where organisations and their employees look for, analyse, and exploit
opportunities in the market and more broadly
• The UK supermarket industry sensed the threat from online supermarkets.
2. Seizing, where organisations address the opportunities, they have sensed – such as
a launch of new products or services, the use of new processes, or undertaking
new activities
• Tesco seized the opportunity to launch their own online supermarket.
3. Reconfiguring, renewal, and reconfiguration of the business to take advantage of
the new opportunities
• Tesco added “stores” to their property portfolio, warehouses where order
fulfilment staff would shop for customers who had placed orders online.

Applying Internal Analyses

• Porter’s Five Forces and the resource-based view are assessed as alternative ways of
doing strategy but are better viewed as complementary. The analyses work well
together, each offsetting the other’s weaknesses.
• The resource-based view can provide an organisation-level analysis regardless of
industry boundaries.
• It encourages firms to focus on gaining and sustaining resources that appear to have
value to them.
• It is a recipe for companies to follow to ascertain what it is that makes them attractive,
or not, to customers.

Evaluation of RBV

• Some have questioned whether anything original is being offered – firms survive
when they are good at what they do.
• Success depends on continuous renewal of advantages through management activity
(being organised).
• It is difficult to ascertain precisely where the advantage lies.

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  Is it in an IT system or the management of the IT system, or in the way that the IT
system allows the firm to codify knowledge?
• RBV and dynamic capabilities try to make retrospective sense of success.
 We could look at Amazon and say that it was Bezos’ dogged belief in being an
“Everything Store”. Or we could say it was the people he hired, or his reliance on
data, or his desire to be totally customer centric. We won’t ever really know.
• It will not provide managers with specific guidance on how to increase the VRIO
qualities of our resources.

Conclusion

• If we pair internal analysis with external analysis at the level of industry and the
macro-environment, we gain a relatively well-rounded view of the firm’s
environment.
• As a result of this, and in combination with the mission, goals, and stated
objectives of the firm, the firm can begin to make strategic choices, formulating
strategies that fit with its mission, vision, values, objectives, opportunities, threats,
strengths, and weaknesses.

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