There is an increasing trend to market globalisation for a variety of reasons. In some markets, customer needs and preferences are becoming more similar. The opening of McDonalds outlets in most countries of the world signalled similar tendencies in fast food. As some markets globalise, those operating in such markets become global customers and may search for suppliers who an operate on a global basis. The development of global communication and distribution channels may drive globalisation- the obvious example being the impact of the internet. Marketing policies, brand names and identifies, and advertising may all be developed globally. This further generates global demand and expectations from customers, and may also provide marketing cost advantages for global operators.
Cost globalisation may give potential for competitive advantage since some organisations will have greater access to and/be more aware of these advantages than others.
There might also be cost advantages from the experience built through wider scale operations. Other cost advantages might be achieved by central sourcing efficiencies from lower cost suppliers across the world.
Country specific costs such as labour or exchange rates, encourage businesses to search globally for low cost in these respects as ways of matching the costs of competitors that have such advantages because of their location. For example given increased reliability of communication and cost differentials of labour, software companies and call centres are being located in India, where there is highly skilled but low cost staff. Other businesses face high costs of product development and may see advantages in operating globally with fewer products rather than incurring the costs of wide ranges of products on a more limited geographical scale.
The activities and policies of governments have also tended to drive the globalisation of industry.
Changes in the macro environment are increasing the global competition, which, in turn, encourages further globalisation. If the levels of exports and imports between countries are high, it increases interaction between competitors on a more global scale. If a business is competing globally, it also tends to place globalisation pressures on competitors, especially if customers are also operating on a global scale.
Porters 5 forces (diagram p.80)
Porters five forces framework was originally developed as a way of assessing the attractiveness of different industries. As such it can help identifying the sources of competition in an industry or sector. Although initially used with businesses in mind, it is of value to most organisations.
It must be used at the level of SBU’s and not at the level of the whole organisation. For example an airline might compete simultaneously in several different arenas such as domestic and long haul, and target different customer groups such as leisure, business ad freight. The impact of competitive force may be different for each of theses SBU’s.
Understanding the connections between competitive forces and the key drivers in the macro environment are essential. For example technological changes can destroy many of the competitive advantages and barriers that have protected organisations historically.
The five forces are not independent of each other. Pressures from one direction can trigger off changes in another in dynamic process of shifting sources of competition.
Competitive behaviour may be concerned with disrupting these forces and not simply accommodating them.
Threat of entry will depend on the extent to which there are barriers to entry. These are factors that need to be overcome by new entrants if they are to compete successfully. These should be seen as providing delays to entry and not as permanent barriers to determined potential entrants. They may deter some potential entrants but not others. Typical barriers are as follows-
Economies of scale
The capital requirement of entry. The capital cost of entry will vary according to technology and scale.
Access to supply or distribution channels. In many industries manufacturers have had control over supply or/and distribution channels.
Customer or supplier loyalty. It is difficult for a competitor to break into an industry if there are one or more established operators that now the industry well and have good relationships with the key buyers and suppliers.
Experience. Early entrants into an industry gain experience sooner than others. This can give them advantage in terms of cost and/or customer/supplier loyalty.
Legislation or government action. Legal restraints on competition vary from patent protection, to regulation of markets through to direct government action.
Threat of substitutes. Substitutes reduces demand for a particular class of products as customers switch to the alternatives-even to the extent that this lass of products or services become obsolete. This depends on whether a substitute provides a higher perceived benefit or value. Substitution may take different forms-
There could be product for product substitution- for example email, substituting for a postal service. There may also be other organisations that are complementors-meaning that they have products and services that make organisations products more competitive-and vice versa.
There may be substitution of need by a new product or service, rendering an existing product or service redundant. For example, more reliable and cheaper domestic appliances reducing the need for maintenance and repair services.
Generic substitution occurs where products or services compete for disposable income, for example furniture manufacturers compete for available household expenditure with suppliers of televisions, videos, cookers, cars and holidays.
The power of buyers and suppliers. Buyer power is likely to be high when some of the following conditions prevail.
There is a concentration of buyers, particularly if the volumes purchased by buyers are high and/or the supplying industry comprises a large number of small operators. This is the case on items such as milk in the grocery sector in many European countries, where just a few retailers dominate the market.
The cost of switching a supplier is low or involves little risk-for example, if there are no long term contract or supplier approval requirements.
There is a threat of the supplier being acquired by the buyer and/or the buyer setting up in competition with the supplier. This is called backward integration and might occur if satisfactory prices or quality from suppliers cannot be obtained.
Supplier power is likely to be high when:
There is a concentration of suppliers rather than a fragmented source of supply.
The switching costs from one supplier to another are high, perhaps because an organisations processes are dependant on the specialist products of a supplier, as in the aerospace industry, or where a product is clearly differentiated-such as Microsoft products.
There is the possibility of the suppliers competing directly with their buyers(this s called forward integration) if they do not obtain the prices, and hence the margins, that they seek.
Competitive rivals are organisations with similar products and services aimed at the same customer group. There are a number of factors that affect the degree of competitive rivalry in an industry or sector:
The extent to which competitors are in balance. Where competitors are of roughly equal size there is the danger of intense competition as on competitor attempts to gain dominance over another.
Industry growth rates may affect rivalry. The idea of the life cycle suggests that the stage of development of an industry or sector is important in terms of competitive behaviour.
High fixed costs in an industry, perhaps through capital intensity, may result in price wars and low margins if industry capacity exceeds demand as capacity fill becomes a prerogative.
Where there are high exit barriers to an industry, there is again likely to be the persistence of excess capacity and, consequently, increased competition.
Differentiation can, again, be important. In a commodity market, where products r services are undifferentiated, there is little to stop customers switching between competitors increasing rivalry.
The following questions help focus on the implications of these forces-
Are some industries ore attractive than others? This was the original purpose of the 5 forces model, the argument being that an industry is attractive when the forces are weak. For example, if entry is difficult, suppliers and/or buyers have little power and rivalry is low.
What are the underlying forces in the macro environment that are driving the competitive forces? For example, the lower labour costs for software and service operators located in India are both an opportunity and a threat to European and US companies. So five forces needs to be linked to PESTEL as mentioned earlier.
Critical success factors-from the potential providers viewpoint it is valuable to understand which features are of particular importance to a group of customers(market segment). These are known as the critical success factors. Critical success factors are those product features that are particularly valued by a group of customers and, therefore, where the organisation excel to outperform competition.
Strategic capability can be defined as the adequacy and suitability of the resources and competences of an organisation for it to survive and prosper.
Tangible resources- are the physical assets of an organisation such as plant, labour and finance.
Intangible resources- are non physical assets such as information, reputation and knowledge. Typically, an organisations resources can be considered under the following 4 categories:
Physical resources- such as the number of machines, buildings or the production capacity of the orgnaisation. The nature of these resources, such as the age, condition, capacity and location of each resource, will determine the usefulness of suc resources.
Financial resources- such as captal, cash, debtors, and creditors, and suppliers of money (shareholders, bankers, etc)
Human resources- including the number and mix of people in an organisation. The intangible resource of their sills and knowledge is also likely to be important. This applies both to employees and other people in an organisations networks. In knowledge based economies people do genuinely become the most valuable asset.
Intellectual capital is an important aspect of the intangible resources of an organisation. This includes patents, brands, business systems and customer databases. There should be no doubt that these intangible resources have a value, since when businesses are sold part of the value is ‘goodwill’. In a knowledge based economy intellectual capital is likely to be a major asset of many organisations.
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Such resources are certainly important but what an organisation does-how it employs and deploys its resources-matters at least as much as what resources it has. There would be no point in having state of the art equipment or valuable knowledge or a valuable brand if they were not used effectively. The efficiency and effectiveness of physical or financial resources, or the people in an organisation, depends on not just their existence bt how they are managed, the cooperation between people, their adaptability, their innovatory capacity, the relationship with customers and suppliers and the experience and learning about what works well and what does not.
Competences is used to mean the activities and processes through which n organisation deploys its resources effectively. In understanding strategic capability, the emphasis is, then, not just on what resources exist but on ho they are used.
Threshold capabilities are those essential for the organisation to be able to compete in a given market. Without these an organisation is unlikely to be able to survive in the market. The first 2 basic questions are-
-what are the threshold resources needed to support particular strategies? If an organisation des not possess these resources it will be unable to meet customers minimum requirements and therefore be unable to continue to exist. For example, the increasing demands by modern multiple retailers made on their suppliers means that those suppliers have to possess quite sophisticated IT infrastructure to stand a chance of meeting retailer requirements.
Threshold levels of capabilities will change and will usually rise over time as critical success factors change and through the activities of competitors and new entrants. An example is the way in which the premier league developed during the 1990’s created a gulf between those who were able to spend money on players and who were not.
While threshold capabilities are fundamentally important they do not of themselves create competitive advantage. Competitive advantage is more likely to be created and sustained if the organisation if the organisation has distinctive or unique capabilities that competitors cannot imitate. This may be because the organisation has unique resources.
Unique resources- are those resources that critically underpin competitive advantage and that others cannot imitate or obtain. It is, however, more likely that an organisation is able to achieve competitive advantage because it has distinctive, or core, competences.
Core competences- are taken to mean the activities and processes through which resources are deployed in such a way as to achieve competitive advantage in ways that others cannot obtain or imitate. For example, supplier that achieves a competitive advantage in a retail market might have done so on the basis of a unique resource such as powerful brand, or by finding ways of providing service or building relationships with that retailer in ways that its competitors find it difficult to imitate, a core competence.
The summary argument is this. To survive and prosper an organisation needs to address the challenges of the environment that it faces. In particular it must be capable of delivering against the critical success factors that arise from demands and needs of its customers. The strategic capability to do so is dependant on the resources plus the competences it has. These must reach a threshold level in order for the organisation to survive. The further challenge is to achieve competitive advantage. This requires it to have strategic capabilities that its competitors find difficult to imitate or obtain. These could be unique resources but are more likely to be the core competences of the organisation.
Cost efficiency
An important strategic capability in any organisation is to ensure attention is paid to achieving and continually improving cost efficiency. This will involve having both appropriate resources and the competences to manage costs. The management of the cost base of an organisation could be a basis for achieving competitive advantage. However, for many organisations in many markets this is becoming a threshold strategic capability for 2 reasons;
First, because customers do not value product features at any price. If the price rises too high they will be prepared to sacrifice value and opt for a lower priced product.
Second, competitive rivalry will continually require the driving down of cost because competitors will be trying to reduce their cost so as to under price their rivals while offering similar value.
Sustainable competitive advantage
If capabilities of an organisation do not meet customer needs, at least to a threshold level, the organisation cannot survive. If it cannot manage its costs efficiently and continue to improve on this, it will be vulnerable to those who can. However, if the aim is to achieve competitive advantage then this itself is not enough. The question then becomes, what resources and competences might provide competitive advantage in ways that can be sustained over time? If this is to be achieved, then strategic capability has to meet other criteria.
It is important to emphasise that if an organisation seeks to build competitive advantage it must meet the needs and expectations of its customers. There is little point in having capabilities that are ‘valueless’ in customer terms; the strategic capabilities must be able to deliver what the customer values in terms of product or service. Given this fundamental requirement, there are then other key capability requirements to achieve sustainable competitive advantage.
Rarity of strategic capabilities
Competitive advantage cannot be achieved if the strategic capability of an organisation is the same as other organisations. It could, however, be that a competitor possesses some unique r rare capability providing competitive advantage. For example some libraries have unique collections of books unavailable elsewhere. Competitive advantage could also be based on rare competences such as years of experience in, for example, brand management or building relationships with key customers; or perhaps the way in which different parts of a global business have learned to work harmoniously.
Rarity may depend on who owns the competence and how easily transferable it is. For example, the competitive advantages of some professional service organisations are built around the competence of specific individuals- such as a doctor in leading edge medicine.
An organisation may have secured preferred access to customers or suppliers perhaps through an approval process or by winning a bidding process. This may be particularly advantageous if this approval for access cannot be obtained without a specific history of operation or having followed a specified development programme-say with pharmaceutical products. This means that a competitor cannot find a short cut to imitation.
Some competences are situation dependant and not transferable because they are only of value if used in a particular organisation. For example, the systems for operating particular machines are not applicable to organisations that do not use those same machines.
Sometimes incumbent organisations have advantage because they have sunk costs that are already written off and they are able to operate at significantly lower overall cost. Other organisations would face much higher costs to set up to compete.
Whilst rarity of strategic capabilities can, then, provide the basis of competitive advantage, there are dangers of redundancy. Rare capabilities may come to be ‘core rigidities’ difficult to change and damaging to the organisation and its markets.
Robustness of strategic capabilities (diagram p.128)
It should be clear by now that the search for strategic capability that provides sustainable competitive advantage is not straightforward. It involves identifying capabilities that are likely to be durable and which competitors find difficult to imitate or obtain. Indeed the criterion of robustness is sometimes referred to as ‘non-imitable’.
Advantage is more likely to be determined by the way in which resources are deployed to create competences in the organisations activities. For example, as suggested earlier an IT system itself will not improve an organisations competitive standing; it is how it is used that matters. Indeed what will probably make most difference is how the system is used to bring together customer needs with areas of activities and knowledge both inside and outside the organisation. It is therefore to do with linking sets of competences.
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Core competences are likely to be the liked activities or processes through which resources are deployed in such a way as to achieve competitive advantage. They create and sustain the ability to meet the critical success factors of particular customer groups better than other providers and in ways that are difficult to imitate. In order to achieve this advantage, core competences therefore need to fulfil the following criteria:
-they must relate to an actitvity or process that underpins the value in the product or service features-as seen through the eyes of the customer.
-the competences must lead to levels of performance that are significantly better than competitors.
-the competences must be robust-that is, difficult for competitors to imitate.
Stakeholders are those individuals or groups who depend on an organisation to fulfil their own goals and on whom, in turn, the organisation depends. Important external stakeholders usually include financial institutions, customers, suppliers, shareholders and unions.
External stakeholders can be usefully divided into 3 types in terms of the nature of their relationship with the organisation and therefore, how they might affect the success or failure of a particular strategy.
-stakeholders from the market environment such as suppliers, competitors, distributors, shareholders. These stakeholders have an economic relationship with the organisation and influence the value creation process as ‘members’ of the value network.
-stakeholders from the social/political environment such as policy makers, regulators, government agencies who will influence the social legitimacy.
-stakeholders in the technological environment such as key adopters, standards agencies and owners of competitive technologies who will influence the diffusion of new technologies and the adoption of industry standards.
These 3 sets of stakeholders are rarely of equal importance in any specific situation. For example the ‘technological group’ are clearly crucial for strategies of new product introduction whilst the’ social/political’ group are usually particularly influential in the public sector context.
Since the expectations of stakeholder groups will differ, it is quite normal for conflict to exist regarding the importance or desirability of many aspects of strategy.
Stakeholder mapping identifies stakeholder expectations and power and helps in understanding political priorities. It underlines the importance of 2 issues:
-How interested each stakeholder group is to impress its expectations on the organisations purposes and choice of specific strategies.
-Whether stakeholders have the power to do so.
Power/interest matrix(diagram p.182)
It seeks to describe the political context within which an individual strategy would be pursued. It does this by classifying stakeholders in relation to the power they hold an the extent to which they are likely to show interest in supporting or opposing a particular strategy.
Stakeholder mapping might help in understanding better some of the following issues:
-whether the actual levels of interest and power of stakeholders properly reflect the corporate governance framework within which the organisation is operating.
-who the key blocker and facilitors of a strategy are likely to be and how this could be responded to.
-whether repositioning of certain stakeholders is desirable and/or feasible.
-maintaining the level of interest or power of some key stakeholders may be essential. Equally it may be necessary to discourage some stakeholders from repositioning themselves.
Stakeholder groups are not usually ‘homogeneous’ but contain a variety of sub groups with somewhat different expectations and power.
Most stakeholder groups consist of large numbers of individuals (such as customers or shareholders), and hence can be thought of largely independently of the expectations of individuals within this group.
Power
Power is the mechanism by which expectations are able to influence purposes and strategies. It has been seen that, in most organisations, power will be unequally shared between the various stakeholders. For the purposes of this discussion, power is the ability of individuals or groups to persuade, induce or coerce others into following certain courses of action. There are many different sources of power. On the other hand, there is power that people or groups derive from their position within the organisation and through the formal corporate governance arrangement.
since there are a variety of different sources of power, it is useful to look for indicators of power, which are the visible signs that stakeholders have been able to exploit one or more of the sources of power.
Corporate parent
The levels of management above that of business units are referred to as the corporate parent. So, a corporate centre or the divisions within a corporation which look after several business units act in a corporate parenting role. The corporate parent refers to the levels of management above that of business units and therefore without direct interaction with buyers and competitors.
The discussion does not only relate to large conglomerate businesses. Even small businesses may consist of a number of business units. For example, a local builder maybe undertaking contract work for local government, work for industrial buyers and for local homeowners.
Product/market diversity
An underpinning issue related to how a corporate parent may or may not add value to that created by its business units is the extent and nature of the diversity of the products or services it offers.
Diversification may be undertaken for a variey of reasons some more value creating than others. These are as follows-
First, there may be effieciency gains from applying the organisations existing resources or capabilities to new markets and products or services. These are known as economies of scope.
Second, there may also be gains from applying corporate managerial capabilities to new markets and products and services
Third, having a diverse range of products or services can increase market power. With a diverse range of products or services, an organisation can afford to susidise one product from the surpluses earned by another, in a way that competitors may not be able to.
Related diversification can be defined as strategy development beyond current products and markets, but within the capabilities or value network of the organisation. For example procter and gamble and unilever are diversified corporations, but virtually all of their interests are in fast moving consumer goods distributed to retailers, and increasingly in building global brands in that arena. Related diversification is often seen s superior to unrelated diversification, In particular because it is likely to yield economies of scope. However, it is useful to consider reasons why related diversification can be problematic. These include-
-the time and cost involved in top management at the corporate level trying to ensure that the benefits or relatedness are achieved through sharing or transfer across business units.
-the difficulty for business unit managers in sharing resources with other business units, or adapting to corporate wide policies, especially when they are incentivised and rewarded primarily on the basis of the performance of their own business alone.
Unrelated diversification is the development of products or services beyond the current capabilities or value network. Unrelated diversification is often described as a ‘conglomerate strategy’. Because there are no obvious economies of scope between the different businesses, but there is an obvious cost of the headquarters, unrelated diversification companies share prices often suffer.
It is important also to recognise that the distinction between related and unrelated diversification is a matter of degree.
It is the role of any corporate parent to ensure it does add value rather than to destroy it. Indeed how many corporate parents create value is central not only to the performance of companies but also to their survival.
(diagram p.309)The portfolio manager is, in effect, a corporate parent acting as an agent on behalf of financial markets and shareholders with a view to enhancing the value attained from the various businesses in a more efficient and effective way than financial markets could. Its role is to identify and acquire under-valued assets or businesses and improve them. It might do this, for example, by acquiring another corporation, divesting low performance businesses within it and encouraging the improved performance of those with potential.
Portfolio managers seek to keep the cost of the centre low, for example by having a small corporate staff with few central services, leaving the business units alone so that their chief executives have a high degree of autonomy.
Synergy manager a corporate parent seeking to enhance value across business units by managing synergies cross business units. Resources or activities might be shared, for example, common distribution systems might be used for different businesses, overseas offices may be shared by smaller business units acting in different geographical areas. There may exist common skills or competences across businesses.
The parental developer seeks to employ its own competences as a parent to add value to its businesses. Rather parental developers have to be clear about the relevant resources or capabilities they themselves have as parents to enhance the potential of business units. The parental developer; a corporate parent seeking to employ its own competences as a parent to add value to its businesses and build parenting skills that are appropriate for their portfolio of business units.
Managing the corporate portfolio
This section is to do with the models managers might use to make sense of the nature and diversity of the business units within the portfolio, or businesses they might be considering adding given the different rationales described above. A number of tools have been developed to help managers choose what business units to have in a portfolio. Each tool gives more or less focus on one of these criteria:
-the balance of the portfolio, eg in relation to its markets and the needs of the corporation;
-the attractiveness of the business units in the portfolio in terms of how profitable they are or are likely to be and how fast they are growing; and
-the degree of ‘fit’ that the business units have with each other in terms of potential synergies or the extent to which the corporate parent will be good at looking after them.
The growth share (or BCG) matrix (diagram p.315)
One of the most common and long standing ways of conceiving the balance of a portfolio of businesses in terms of the relationship between market share and market growth identified by the Boston Consulting Group. The types f businesses in such a portfolio are-
-star is a business unit which has a high market share in a growing market. The business unit may be spending heavily to gain that share.
-question mark or problem child is a business unit in a growing market, but without a high market share.
Cash cow is a business unit with a high market share in a mature market
Dogs are business units with a low share in static or declining markets.
The growth share matrix permits business units to be examined in relation to (a) market (segment) share and (b) the growth rate of that market and in this respect the life cycle development of that market. It is therefore a way of considering the balance and development of a portfolio.
It is argued that market growth rate is important for a business unit seeking to dominate a ma
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