BMIB5001 –
International
Business and
Strategy
Lecture 2 - External Environment – Micro Analysis + The Organisational Context
pt1 – The Resource Based View.
Dr Emre Arslan
[email protected]
Lecture Recap
Strategy and Success
• Success is not a sole function of the availability of superior resources and cannot be
exclusively/primarily attributed to luck.
• More often than not, success is underscored by the presence of a clearly articulated and
effectively implemented strategy.
• According to Grant (2013) four common characteristics of successful strategies are:
• Clear, consistent long-term goals
• Profound understanding of the competitive environment
• Objective appraisal of resources
• Effective implementation.
Defining
Strategy
• In a very broad sense, it is how individuals or organisations achieve their objectives.
• Multidimensionality of strategy (Mintzberg, 1987). The strategy should not be restricted to a
single definition:
• Strategy as Plan (purposeful conception preceding action)
• As Ploy (specific intentions as opposed to actual implemented actions)
• Strategy as Pattern (in recognition of consistency in behaviour)
• Strategy as Position (a means of locating the organization in its external environment)
• Strategy as Perspective (not just a position adopted but an ingrained way of perceiving
the world)
Competitive Advantage
• A firm has a competitive advantage when it can create more economic
value than rival firms.
• A competitive advantage enables a company to perform better than its
competitors.
• Thus, the size of a firm’s competitive advantage is the difference
between the economic value a firm can create and the economic value
its rivals can create.
• Therefore, Competitive advantage confers uniqueness to a product or
service – either in exceptional quality and/or comparably low cost (Fan
et al., 2022). This by implication enhances the company’s productivity
and profit margin.
Competitive Advantage
Mechanism Strategic advantage Examples
Novelty in product or Offering something no one else can - Complexity Introducing the first . . . Walkman, fountain pen, camera,
service offering dishwasher, telephone bank, on-line retailer, etc.
Novelty in process Offering it in ways others cannot match – faster, Pilkington’s float glass process, Bessemer’s steel process,
lower cost, more customized, etc. Internet banking, on-line bookselling, etc.
Complexity Offering something which others find difficult to Rolls-Royce and aircraft engines – only a handful of
master competitors can master the complex machining and
metallurgy involved
Legal protection of Offering something which others cannot do unless Blockbuster drugs like Zantac, Prozac, Viagra, etc
intellectual property they pay a licence or other fee
Timing First-mover advantage – being first can be worth Amazon.com, Yahoo – others can follow, but the advantage
significant market share in new product fields ‘sticks’ to the early mover
Robust/ platform Offering something which provides the platform on Intel and AMD with different variants of their microprocessor
design which other variations and generations can be built families Microsoft etc
Rewriting the rules Reconfiguring the parts of the process Transferring Typewriters vs. computer word processing, ice vs.
across different application contexts Others? refrigerators, electric vs. gas or oil lamps
other Innovation is all about finding new ways to do things Napster. This firm began by writing software which would
and to obtain strategic advantage – so there will be enable music fans to swap their favourite pieces via the
room for new ways of gaining and retaining Internet – the Napster program essentially connected person
advantage to person (P2P) by providing a fast link.
The Organisation As a Transformation System
Consumption
INPUTS
OUTPUTS
Land, premises
BUSINESS Goods
Materials
ORGANISATION Services
Labour
Ideas
Technology
Information
Finance
Managerial Skills
The Environment
The environment will have an impact on all stages of the transformation
process.
• Resource Acquisition.
• Conversion / Transformation
• Output
• Consumption
• Feedback
Layers of the Business
Environment
The Firm
(S/W)
Micro Environment
(Industry - O/T)
Macro
Environment
(PESTLE)
Changing conditions in:
• General economic conditions
• Legislation and regulations
• Population demographics
• Societal values & lifestyles
• Technology
Macro Environment -
PESTEL
Some Considerations in Undertaking PESTEL
• Political:
• Home country legislation (current & potential) e.g. taxation and employability, International legislation, Political parties
and alignments, Regulatory bodies and processes, Trading policies & regulations, State ownership of businesses and
attitudes towards competition
• Economic:
• Home economy situation and trends, Overseas economies and trends, Inflation, Interest rates, Currency fluctuations and
exchange rates, Consumer purchasing power, Disposable income, Unemployment, Business set-up & running costs
• Socio-cultural:
• Lifestyle trends, demographics, Consumer attitudes and opinions, Changes in socio-cultural values, Income distribution,
Fashion and role models, Ethnic/religious factors, Education and health
Some Considerations in Undertaking PESTEL
• Technological:
• Competing technology development, Expenditure on R&D and innovation potential, Innovation diffusion and new
technology adoption, Technology legislation and government investment policy, Intellectual property issues (patents,
licensing etc.)
• Environmental:
• Green issues, Pollution, Sustainability, Waste disposal, Climate change and seasonal conditions, Natural disasters,
Natural resources
• Legal:
• Competition law and government policies, Health and Safety law, Employment law, International agreements, Human
rights issues, Environmental policy
Micro (Industry) Environment
Part One - Learning Outcomes
• Understanding Industry (micro) Environment
• Application of the five forces model
• Analysis of the forces in the Internal Environment
Layers of the Business
Environment
The Firm
(S/W)
Micro Environment
(Industry - O/T)
Macro
Environment
(PESTLE)
Changing conditions in:
• General economic conditions
• Legislation and regulations
• Population demographics
• Societal values & lifestyles
• Technology
Quick Definition - Industry
• A group of products or services
associated with service delivery or
common technology
• Concerned with the “players” such as
the competitors in the industry such as:
suppliers, intermediaries or retailers,
customers, competitors, shareholders
and the general public
The Rationale of the Industry Analysis
Organisation performance is
Profitability levels will differ
determined by industry of
industry by industry
choice
Gives an organisation greater
Industry attractiveness may
understanding of their wider
be eroded over time or may
environment allowing better
be temporary
analysis and choice
From Macro to Micro
(Industry) Analysis
The national/ The natural
international environment
economy
THE INDUSTRY
ENVIRONMENT
Legal structure
Technology • Suppliers
• Competitors
• Customers
Government Social
Socialstructure
structure
& Politics
• The Industry Environment lies at the core of the Macro Environment.
• The Macro Environment impacts the firm through its effect on the Industry Environment.
Tools for Industry Analysis
• Examination of the industry forces influencing the organisation –
Porter’s Five Forces Framework
• Identification of what Strategic Group the organisation is in
• Consideration of the Industry Life Cycle
• Focusing on the right Market Segment
Porter’s Five Forces
• Tool for analysing the competition of
a business
• Associated with Michael E. Porter –
published in Harvard Business Review
in 1979.
• SWOT Analysis and Porter’s Five
Forces (Complementary)
• Most commonly used tool for
analysing the competitive
environment.
• Describes the environment in terms
of five basic competitive forces.
• Collectively, the factors determine Figure (1): Porter’s Five Forces (Source: Porter 2008)
the profit potential of an industry.
Porter’s Five Forces
Implications
If Threats are If Threats are
High Low
Expect Expect Above
Normal Profits Normal Profits
Most industries are somewhere between the extremes
Determinants of the Strength
of the Forces BUYER POWER
• Buyers’ price sensitivity
• Buyers’ demand
•Product information
•Switching cost
THREAT OF ENTRY SUBSTITUTE
•Capital requirements INDUSTRY RIVALRY COMPETITION
•Concentration
•Economies of scale • Buyers’ propensity
•Diversity/increase of
•Absolute cost advantage to substitute
competitors
•Product differentiation •Product differentiation . Substitutes’ availability
•Access to distribution •Excess capacity & • Relative prices &
channels exit barriers performance of
•Legal/ regulatory barriers substitutes
. Switching cost
SUPPLIER POWER
• Supply scarcity
•Suppliers’ number/clout
• Substitutes’ scarcity
Threat of New Entrants
Barriers to entry
Economies of Scale
Brand Loyalty
Capital Requirement
For Example:
Cumulative Experience
Government Policies
Access to Distribution Channels
Switching Costs
Bargaining Power of Suppliers
Number and Size of Suppliers
Uniqueness of Each Suppliers Product
Company’s Ability to Substitute
Example: Airline Engines
Bargaining Power of Buyers
Number of Customers
Size of each Customer Order
Differences between Competitors
Price Sensitivity
Buyers Ability to Substitute
Buyer’s Information Availability
Switching Costs
The Threat of Substitute Products
Substitutes can reduce demand for a
particular class of products as
customers switch to alternatives
• Price/performance ratio
• Extra-industry effects
Example: “Airlines, trains, automobiles
Rivalry Among Existing Competitors
Factors affecting rivalry include:
• Competitor balance – size, number of competitors
• Industry growth rate – life cycle model applies
• High fixed costs
• High exit barriers
• Low- differentiation – can customers switch easily?
• Players after a strategic stake in the market
Implications of Porter’s Five Forces Framework
• Identifies the attractiveness of industries – ie. which
industries/markets to enter or leave
• Identifies strategies to influence the impact of the forces – ie.
building barriers to entry by becoming more vertically integrated
• The forces may have a different impact on different
organisations - ie. Large organisations can deal with barriers to
entry more easily than small firms.
The Explainer: The 5 Forces That Make Companies Successful - YouTube
Additional Models – Strategic
Groups Analysis
Strategic groups are organisations within an industry with similar strategic
characteristics, and strategies or competing on similar bases (Johnson et al. 2014).
Airline industry – Legacy, low-cost, niche operators and international airlines
Benefits of Strategic Groups
Understanding competition: Focusing on direct competition
Analysis of Strategic Opportunities: Identifying attractive spaces
Analysis of Mobility Barriers: Moving from one group to another
Johnson et al (2014 p.54)
Additional Models – The Industry Life
Cycle
(Johnson et al. 2014)
Additional Models – Market Segment
A market segment is a group of customers who
have similar needs which are different from
customer needs in other parts of the market
The Role of Market Segmentation
Creates value opportunities:
• Allows an organisation to match its resources to
customers’ requirement
• Identify new segments not identified by
customers
Part Two – Resource-Based View
Part Two: Learning Outcomes
• Analysis of Resource-based View
• VRIO Framework
The Rationale for the
Resource-based
Approach to Strategy
• The resource-based view (RBV) is a model that sees resources
as key to superior firm performance.
• If a resource shows VRIO attributes, the resource enables the firm
to gain and sustain a competitive advantage
• They should look inside the company to find the sources of
competitive advantage instead of looking at the competitive
environment for it
Birger Wernerfelt
Resource-based View
Heterogeneous - skills, capabilities and other
resources that organizations possess differ
from one company to another.
Immobile - Intangible resources, such as
brand equity, processes, knowledge or
intellectual property, are usually immobile.
Appraising Resources
RESOURCE CHARACTERISTICS INDICATORS
Financial Borrowing capacity Debt/Equity ratio
Internal funds generation Credit rating
Tangible Net cash flow
Resources
Physical Plant and equipment: Market value of fixed assets.
Size, location, technology flexibility. Scale of plants
Land and buildings Alternative uses for fixed
Raw materials assets
Technology Patent, copyrights, know how, R&D No. Of patents owned
facilities Royalty income
Intangible Technical and scientific employees R&D expenditure
Resources R&D staff
Reputation Brands. Customer loyalty, company Brand equity
reputation (with suppliers, Customer retention
customers, government) Supplier loyalty
Human Resources Training, experience, adaptability, Employee qualifications,
commitment and loyalty of Pay rates, turnover
employees
The Links Among Resources,
Capabilities and Competitive Advantage
What makes your business
unique? – VRIO Framework
• VRIO Framework is the tool used to analyse a firm’s internal resources and capabilities to find out
if they can be a source of sustained competitive advantage.
• The VRIO framework is an internal analysis that helps businesses identify the advantages and
resources that give them a competitive edge.
• The framework was originally developed by Jay B. Barney (1991) in his work “Firm Resources and
Sustained Competitive Advantage”, where the author identified four attributes that a firm’s
resources must possess to become a source of competitive advantage.
Jay Barney
VRIO Framework (1)
• According to Barney, the resources must be valuable, rare, imperfectly
imitable and non-substitutable. His original framework was called
VRIN.
• In 1995, in his later work “Looking Inside for Competitive Advantage”
Barney introduced the VRIO framework, which improved the VRIN
framework.
• VRIO analysis stands out for four questions that ask if a resource is
valuable? Rare? Costly to imitate? And is a firm organised to capture
the value of the resources?
• A resource or capability that meets all four requirements can bring
sustained competitive advantage.
VRIO Framework (2)
Valuable:
• A resource or capability is said to be valuable if it allows the firm to exploit
opportunities in the environment. If a resource does not allow a firm to
exploit opportunities, it does not enhance the competitive position of the
firm.
Rare:
• Rarity is simply if the resource is not widely owned by other competitors.
Among all VRIO criteria, this is probably the easiest to judge.
Eg: Coke’s brand name is valuable but most of Coke’s competitors (Pepsi,
Sprite, Fanta) also have been widely recognised brands, making it not that
rare. Coke’s brand makes it more valuable but not rare.
Inimitable:
• A resource is inimitable and non-substitutable if it is difficult for
another firm to acquire it or to substitute something else in its place.
Organisation:
• This criteria determines if a resource or capability is the source of
competitive advantage. The firm must likewise have the
organisational capability to exploit the resources.
Using the
Tool
Step 1: Identify valuable, rare and costly to imitate resources
An easy way to identify such resources is to look at the value chain and
SWOT analyses. Value chain analysis identifies the most valuable
activities, which are the source of cost or differentiation advantage.
Finding rare resources:
• How many other companies own a resource or can perform capability
in the same way in your industry?
• Can a resource be easily bought in the market?
• Can competitors obtain the resource or capability in the near future?
Finding costly to imitate resources:
• Do other companies can easily duplicate a resource?
• Can competitors easily develop a substitute resource?
• Do patents protect it?
• Is a resource or capability socially complex?
• Is it hard to identify the particular processes, tasks, or other factors
that form the resource?
Step 2: Find out if your company is organised to exploit these resources
• Does your company have an effective strategic management process in
the organisation?
• Are there effective motivation and reward systems in place?
• Does your company’s culture reward innovative ideas?
• Is an organisational structure designed to use a resource?
• Are there excellent management and control systems?
Step 3: Protect the resources
The first this you should do is to make the top management aware of
such resources and suggest how it can be used to lower the cost or to
differentiate the products and services.
If rivals will not be able to imitate a resource at reasonable prices, it will
stay rare for much longer.
Step 4: Constantly review VRIO resources and capabilities
Competitors are also keen to achieve competitive advantages so they
will be keen to replicate the resources, which means that they will no
longer be rare.
Summary of this week
• Environmental influences can be thought of as layers around an
organisation
• There are a range of approaches used to analyse the external market
environment
• The macro-environment can be analysed in terms of PESTEL analysis
• Industries and sectors can be analysed in terms of Porter’s Fiver Forces
framework
• The inner layer of the environment can be analysed with strategic
group analysis, industry life cycle analysis and market segment analysis
References and Further
Readings
• Porter, M. E., 2008. The Five Competitive Forces that Shape Strategy. Harvard business review, 86(1), 25-40.
• Johnson, G., Whittington, R., Scholes, K., Angwin, D. and Regner, P., 2014. “Exploring Strategy: Text and Cases”.
10th Edition. Pearson.
• Grundy, T., 2006. Rethinking and Reinventing Michael Porter’s Five Forces Model. Strategic Change, 15(5), 213-
229.
• Dobbs, M. E., 2014. Guidelines for Applying Porter’s Five Forces Framework: A Set of Industry Analysis
Templates. Competitiveness Review, 24(1), 32-45.
• Dobbs, M. E., 2012. Porter’s Five Forces in Practice: Templates for Firm and Case Analysis. In: Competition
Forum, 10 (1), 22. American Society for Competitiveness.
• Argyres, N. and McGahan, A. M., 2002. An interview with Michael Porter. Academy of Management
Perspectives, 16(2), 43-52.
• Helms, M.M. and Nixon, J., 2010. Exploring SWOT Analysis–Where are we now? A Review of Academic Research
from the Last Decade. Journal of Strategy and Management, 3(3), 215-251.
• Vining, A.R., 2011. Public Agency External Analysis Using a Modified “Five Forces” Framework. International
Public Management Journal, 14(1), 63-105.
• Ormanidhi, O. and Stringa, O., 2008. Porter’s Model of Generic Competitive Strategies. Business Economics,
43(3), 55-64.
Q&A
Thank you!
Dr Emre Arslan
Email: [email protected]
