CH-1-3 Strategic Management and Strategic Competitiveness – Strategic Management: Concepts and Cases: Competitiveness and Globalization : Book Guide

This Document Contains Chapters 1 to 3 Chapter 1 Strategic Management and Strategic Competitiveness ANSWERS TO REVIEW QUESTIONS 1. What are strategic competitiveness, strategy, competitive advantage, above-average returns, and the strategic management process? Strategic competitiveness is achieved when a firm successfully formulates and implements a value-creating strategy. A strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. A competitive advantage is achieved when a firm’s current and potential competitors either are not able to simultaneously formulate and implement its value-creating strategy, are unable to duplicate the benefits of the strategy, or find the strategy too costly to imitate. Above-average returns are returns that are in excess of what an investor expects to earn from other investments with a similar level or amount of risk. The strategic management process (see Figure 1.1) is the full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and earn above-average returns. 2. What are the characteristics of the current competitive landscape? What two factors are the primary drivers of this landscape? In the current competitive landscape, the nature of competition has changed. As a result, managers making strategic decisions must adopt a new mind-set that is global in orientation. Firms must learn to compete in highly chaotic environments that produce disorder and a great deal of uncertainty. The two primary factors that have created the current competitive landscape are globalization of industries and markets and rapid and significant technological change. The implication for business firms is that to be successful, they must be able to meet or exceed global performance standards (in terms of such factors as quality, price, product features, speed to market) and be able to keep up with both the rapid pace of technological change as well as the rapid diffusion of innovation. 3. According to the I/O model, what should a firm do to earn above-average returns? The I/O model suggests that conditions and characteristics of the external environment (the general, industry, and competitive environments) are the primary inputs to and determinants of strategies that firms should formulate and implement to earn aboveaverage returns. Assumptions of the I/O model are that: (1) the external environment imposes pressures and constraints that determine which strategies will result in superior profitability, (2) most firms competing in an industry (or industry segment) control similar strategically relevant resources and pursue similar strategies in light of resource similarity, (3) resources used to implement strategies are highly mobile across firms, and (4) decision makers are assumed to be rational and committed to acting in the firm’s best interests. The I/O model thus challenges firms to seek out the industry (or industry segment) with the greatest profit potential and then learn how to use their resources to implement valuecreating strategies given the structural characteristics of the industry. 4. What does the resource-based model suggest a firm should do to earn aboveaverage returns? The resource-based model assumes that each firm is a collection of unique resources and capabilities that provides the basis for its strategy and is the primary source of its profitability. It also assumes that over time, firms acquire different resources and develop unique capabilities. Thus, all firms competing within an industry (or industry segment) may not possess the same strategically relevant resources and capabilities. In addition, resources may not be highly mobile across firms. Thus, the resource-based model challenges firms to formulate and implement strategies that allow the firm to best exploit its core competencies—capabilities that are valuable, rare, costly to imitate, and non-substitutable—relative to opportunities in the external environment. Resources and capabilities that meet the criteria of core competencies then serve as the basis of a firm's sustainable competitive advantage, enabling it to achieve strategic competitiveness and earn above-average returns. 5. What are vision and mission? What is their value for the strategic management process? Vision is a picture of what the firm wants to be, and in broad terms, what it wants to ultimately achieve. Vision is “big picture” thinking with passion that helps people feel what they are supposed to be doing. Strategic mission is externally focused and represents a statement of a firm's unique purpose and the scope of its operations in product and market terms. It provides general descriptions of the products a firm intends to produce and the markets it will serve using its internally based core competencies. The differences between vision and mission are important because of their different focuses. However, they are both highly interdependent and add value to the strategic management process. The externally focused mission provides a sense of purpose for the firm by indicating the products to be provided to specific markets, while the internally set vision indicates what ultimately will be achieved. In other words, taken together, the vision and mission will provide a firm’s managers with the insights needed to effectively formulate and implement the firm’s strategies. 6. What are stakeholders? How do the three primary stakeholder groups influence organizations? Stakeholders are individuals and groups who can affect and are affected by strategic outcomes achieved and who have enforceable claims on a firm's performance. In other words, stakeholders have a stake (or a vested interest) in the actions of the firm. Stakeholders can influence organizations because they have the ability to withhold participation that is essential to a firm's survival, competitiveness, and profitability. The three primary stakeholder groups are: (1) capital market stakeholders, e.g., shareholders, lenders, (2) product market stakeholders, e.g., customers, suppliers, host communities, unions, and (3) organizational stakeholders, e.g., employees, managers, and others. There are many ways that stakeholders can influence organizations. For example, dissatisfied lenders can impose stricter covenants on subsequent borrowing of capital. Dissatisfied stockholders can reflect this sentiment through several means, including selling their stock (which can have a negative effect on its price). Dissatisfied employees can organize for collective bargaining. Dissatisfied community groups could express their disapproval by boycotting the firm’s goods. Stakeholder groups each have ways of bringing their influence to bear on the firm. 7. How would you describe the work of strategic leaders? Strategic leaders are people located in different parts of the firm using the strategic management process to help the firm reach its vision and mission. Regardless of their location in the firm, successful strategic leaders are decisive and committed to nurturing those around them and are committed to helping the firm create value for customers and returns for shareholders and other stakeholders. Strategic leaders can be described as hard working, thorough, honest, questioning, visionary, persuasive, analytical, and decision makers. They also have a penchant for wanting the firm and its people to accomplish more. The work of strategists includes scanning the environment—both internally and externally—to seek out information that will assist the firm in achieving its mission and satisfying its vision. Strategists would think about how the resources and capabilities of the firm could be nurtured and exploited to develop core competencies that would enable the firm to exploit environmental opportunities, achieve strategic competitiveness, and attain a competitive advantage that results in above-average returns. 8. What are the elements of the strategic management process? How are they interrelated? The parts of the strategic management process (illustrated in Figure 1.1) are strategic inputs, strategic actions and strategic outcomes. Strategic inputs are represented by the firm’s vision and mission that result from the assessment of the firm’s resources, capabilities, and competencies and conditions in the external environment. These strategic inputs—vision and mission—drive the firm’s strategic actions or the formulation and implementation of strategy. The strategic outcomes of successfully formulating and implementing value-creating strategies are strategic competitiveness and above-average returns. A feedback loop links strategic outcomes with strategic inputs. INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES EXERCISE 1: Stakeholder analysis, Strategic Planning and Strategic Leadership This exercise is meant to piece together many of the elements that are covered in chapter 1 such as stakeholders, strategic management process and strategic leadership. The exercise brings this all together by asking teams of students to identify a not for profit firm. This forum is used because many times not for profits face unique stakeholder challenges that are interesting to uncover. Additionally most not for profits put their strategic plans in easy to find places on their websites. The key for the student teams is to identify the stakeholders and relevant issues that may face them if the firm implements the items in its strategic plan. You may also make this an individual assignment rather than team if so desired as the exercise would fit well in either scenario. Each team should present its findings as regards the exercise. The instructor should pay particular attention to the teams attentiveness regarding stakeholders. As the team presents, have the students listening participate by: 1. Identifying if there are any stakeholders that seem to be missing. 2. Wrap a discussion around whether the stakeholders the team identifies would support or not the strategic action identified 3. Wrap a discussion around the strategic leaders’ needed actions to gain stakeholder support, if that support would be critical to the strategic actions successful implementation. 4. The instructor can also create an infesting discussion about which stakeholders are most important and whether each stakeholder needs to be considered when strategic actions are contemplated. EXERCISE 2: PUTTING ABOVE AVERAGE RETURNS TO THE I/O MODEL TEST In this exercise, students are asked to individually select a company from Fortune 500’s “Top Companies: Most Profitable Firms” list. The 2012 list is available directly at: http://money.cnn.com/magazines/fortune/fortune500/2012/performers/companies/profits/. Ask for student volunteers to present their findings. You may opt to select a particular industry in which students have selected several firms as a basis of comparison. During the presentations, have the others students in the class participate by: Identifying if there are missing external environment pressures and constraints on the firm in question and identify missing resources. Following the presentations, lead a discussion with the whole class about whether or not the I/O model explains these firms’ above average returns. INSTRUCTOR'S NOTES FOR VIDEO EXERCISES Title: BRAZIL: AN EMERGING ECONOMY WITH STRATEGIC COMPETITIVENESS RT : 7:35 Topic Key: Strategic Competitiveness, Strategy, Hypercompetition, Global Economy, Resources, Capabilities, Core Competencies, Stakeholders, Strategic Leaders With stagnant economies across the world, Brazil’s economy is growing at 7%--3 times faster than America. Brazil is a huge country, slightly larger than the continental US with vast expanses of arable farmland, an abundance of natural resources, and 14% of the world’s fresh water. With the world’s greenest economy, 80% of Brazil’s electricity comes from hydropower and it has the most sophisticated biofuel industry in the world. Brazil is already the world’s largest producer of iron ore and leading exporter of beef, chicken, orange juice, sugar, coffee, and tobacco. China has replaced the US as Brazil’s leading trade partner. Brazilians contend that their size can match China’s dragon-like appetite and they need Brazil to fulfill the Chinese needs. Batista, with Chinese investment, and interests in mining, transportation, oil, and gas is building a huge super port complex north of Rio that will accommodate the world’s largest tankers and speed delivery of iron ore and other resources to Asia. Commodities are not the only things driving the Brazilian boom—Brazil has a substantial manufacturing base and a large auto industry. The world’s third largest aircraft manufacturer also resides in Brazil. Batista says that the one thing Brazil needs more of is skilled labor—more engineers, which he now must import from America. He indicates that Brazil is walking into a phase of almost full employment with the creation of 1.5 million jobs in one year. Brazil has seen periods of prosperity before—only to have the bubbles burst. Brazil spent billions in the 50s and 60s moving its capital to Savannah where it built the futuristic city Brazilia. Brazil then borrowed billions more to develop the county’s interior. Corruption then led to a financial collapse—2000 % inflation and the largest financial rescue package in the history of the international monetary fund. Lula, as President of Brazil, a metal worker with a 4th grade education, receives much credit for turning the country around. Lula, in an interview, indicates that Brazil was a capitalist country without capital. He asserts that Brazil needed a metal worker with socialist views to bring more money for banks, more sales for car companies, and more money to the workers. When asked how, Lula says the success of an elected official is in the art of doing what is obvious—what everyone knows needs to be done but some insist on doing differently. Lula recognized the separation between the rich and poor of Brazil. He gave the poor families a monthly stipend of $115 dollars just for sending their kids to school and taking them to the doctor. Such an infusion of cash helped lift 21 million out of poverty and into the lower middle class, which created an untapped market of first-time buyers for refrigerators and cars. Lula also encouraged growth and development by businesses but created tight banking regulations to maintain conservative fiscal policies. Historically, Brazil had ignored the festering slums overlooking Rio, which was a staging area for street crimes and drug gangs, but now gets the attention of military police. Brazil has massive problems with infrastructure—traffic and roads. Ninety percent of the roads remain unpaved and little public transportation exists in the cities. Delays in building and renovation exist for the upcoming 2014 World Cup. Lula, in the interview, indicates that Brazil will organize the most extraordinary World Cup ever. He says that as he leaves office he told his people that they are not second class citizens—we can get things done, and we can believe in ourselves. People have started to believe—meaning that he expects his momentum to continue for the country. Also check out http://www.cbsnews.com/stories/2011/07/31/60minutes/main20073776.shtml Suggested Discussion Questions and Answers 1. How is Brazil a strategic competitor? Text: Strategic competitiveness is achieved when a firm successfully formulates and implements a value-creating strategy. Strategic competitor: Brazil, after virtual collapse, has become entrepreneurial and market oriented, and has used its competencies for innovation and service. Brazil formulated and implemented a value-creating strategy consisting of: (1) utilizing its natural resources to create hydropower and a biofuel industry, (2) increasing production and exports of commodities and manufactured components such as autos and aircrafts, (3) increasing trade opportunities through the building of port complexes, and (4) using fused resources to raise the standard of living among the country’s poor. Further, Brazil has built on its external and internal resources, created a mission, chosen a strategy, and implemented it through entrepreneurial leadership that has produced above-average returns of a growth of 7%. 2. What is Brazil’s strategy? Text: A strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. A firm has competitive advantage when it implements a strategy that creates superior value for customers and competitors are unable to duplicate or find too costly to try to imitate. Strategy: Growth and Development: Growing at 7% 3. Is Brazil a hypercompetitor? Text: Hypercompetition results from the dynamics of strategic maneuvering among global and innovative combatants. It is a condition of rapidly escalating competition based on price-quality positioning, competition to create new knowhow and establish first-mover advantage, and competition to protect or invade established product or geographic markets. The emergence of a global economy and technology, specifically rapid technological change are two primary drivers of hypercompetitive environments. Hypercompetitor: The world’s greenest economy, most sophisticated biofuel industry in the world, largest producer of iron ore, leading exporter of beef, chicken, orange juice, sugar, coffee, and tobacco, third largest aircraft manufacturer, and world’s largest tankers and delivery speed of iron ore and other resources to Asia 4. What impact does Brazil have in the global economy? Impact in the global economy: • The Brazilian economy is growing at a rate of 7% with vast expanses of farmland, an abundance of natural resources, and 14% of the world’s fresh water. • As the world’s greenest economy, 80% of Brazil’s electricity comes from hydropower and it has the most sophisticated biofuel industry in the world. • Brazil is already the world’s largest producer of iron ore and leading exporter of beef, chicken, orange juice, sugar, coffee, and tobacco. China has replaced the US as Brazil’s leading trade partner. • Batista, with Chinese investment, and with interests in mining, transportation, oil, and gas is building a huge super port complex north of Rio that will accommodate the world’s largest tankers and speed delivery of iron ore and other resources to Asia. • Brazil has a substantial manufacturing base, a large auto industry, and is the world’s third largest aircraft manufacturer. 5. What resources, capabilities, and core competencies does Brazil have? Text: Resources are inputs into a firm’s production process, such as capital equipment, the skills of individual employees, patents, finances, and talented managers. A capability is the capacity for a set of resources to perform a task or an activity in an integrative manner. Core competencies are resources and capabilities that serve as a source of competitive advantage for a firm over its rivals. When resources and capabilities become, rare, valuable, costly to imitate, and nonsubstitutable they become core competencies. Resources: Abundance of natural resources including farmland, iron ore, and 14% of the world’s fresh water. Some evidence exists of oil. Capabilities: Ability to produce hydropower and biofuels, ability to export and distribute resources to top trade partners, ability to manufacture aircraft and autos, and to mine for iron ore Core competencies: manufacturing/production, distribution/transportation and trade, research and development through green technology, biofuel development, and mining 6. Identify and explain the stakeholders associated with Brazil’s thriving economy. Text: Stakeholders are those who can affect, and are affected by, a firm’s strategic outcomes Stakeholders: • Brazilian populations: will be affected by increases in standards of living/changes in social class, increased goods produced and exported, increased economic opportunities (employment) • Global populations: will be affected by quality of goods produced and exported from Brazil • Trading partners: will received greater number of products and opportunities for exchange and appropriate supply to meet population satisfaction • Brazilian government: higher approval ratings • Industry developers: lucrative opportunities to reside and do business in Brazil • Brazilian industries: increased demand for production and manufacturing resources ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. Business success is often tied to effectively managed strategies. Using the Internet, study Starbuck’s current performance. Based on analysis, do you judge Starbucks to be a success? Why or why not? Starbucks Performance: Starbucks is generally considered a success due to its strong brand loyalty, consistent revenue growth, and innovative product offerings. Recent reports indicate robust sales, expansion into new markets, and a commitment to sustainability. However, challenges like rising operational costs and competition remain. Overall, its strategic management positions Starbucks well for continued success. 2. Choose several firms in your local community with which you are familiar. Describe the twenty-first century competitive landscape to them, and ask for their feedback about how they anticipate that the landscape will affect their operations during the next five years. Local Firms Feedback: In the twenty-first century, businesses face increased digital competition, changing consumer preferences, and a focus on sustainability. I would discuss this with local firms like a bakery, a bookstore, and a gym. Their feedback may highlight how they plan to adapt through digital marketing, enhancing customer experiences, and implementing eco-friendly practices to stay competitive. 3. Select an organization (e.g., school, club, or church) that is important to you. Who are the organization’s stakeholders? What degree of influence do you believe each has over the organization and why? Organization's Stakeholders: For a community church, stakeholders include congregants, staff, local businesses, and the wider community. Congregants have direct influence through participation and donations, while staff influence operations and programs. Local businesses can provide sponsorships or support, and the community impacts the church’s outreach effectiveness. Each group’s involvement shapes the church’s mission and activities. 4. Are you a stakeholder at your university or college? If so, of what stakeholder group or groups are you a part? Personal Stakeholder Group: Yes, I am a stakeholder at my university. I belong to the student group, which has influence through feedback on academic programs and campus initiatives. Additionally, I may also be part of the alumni group in the future, impacting the institution through networking and financial support. 5. Think of an industry in which you want to work. In your opinion, which of the three primary stakeholder groups is the most powerful in that industry today? Why? Which do you expect to be the most powerful group in five years? Why? Powerful Stakeholder Group: In the tech industry, consumers are currently the most powerful stakeholders due to their demand for innovative products and ethical practices. In five years, I expect regulators to gain more power as governments emphasize data privacy and security regulations. This shift could influence how companies operate and innovate. 6. Do you agree or disagree with the following statement? “I think managers have little responsibility for the failure of business firms.” Justify your view. Managerial Responsibility: I disagree with the statement. Managers play a crucial role in setting strategic direction, allocating resources, and leading teams. When firms fail, it often reflects managerial decisions regarding risk, innovation, and employee engagement. Accountability is essential for sustainable success in any business. 7. Do vision and mission have any meaning in your personal life? If so, describe it. Are your current actions being guided by a vision and mission? If not, why not? Personal Vision and Mission: Yes, I have a personal vision and mission that guide my actions. My vision focuses on personal growth and community service, while my mission involves pursuing education and contributing positively to society. I strive to align my daily activities with these guiding principles, fostering a sense of purpose in my life. Ethics Questions 1. Can a firm achieve a competitive advantage and, thereby, strategic competitiveness without acting ethically? Explain. Competitive Advantage Without Ethics: A firm can achieve competitive advantage without acting ethically in the short term through practices like cost-cutting or exploitation. However, such actions often lead to long-term consequences, including reputational damage, legal issues, and loss of customer trust, ultimately undermining strategic competitiveness. 2. What are a firm’s ethical responsibilities if it earns above-average returns? Ethical Responsibilities for Above-Average Returns: If a firm earns above-average returns, it has an ethical responsibility to reinvest in its employees, communities, and the environment. This includes fair wages, sustainable practices, and community support. Additionally, maintaining transparency and integrity in operations fosters trust among stakeholders, reinforcing the firm’s long-term success. 3. What are some of the critical ethical challenges to firms competing in the global economy? Global Economy Ethical Challenges: Firms competing globally face ethical challenges like differing labor standards, environmental regulations, and cultural norms. Issues such as exploitation of workers, corruption, and environmental degradation can arise in countries with weaker regulations. Balancing profitability with ethical considerations in diverse markets poses a significant challenge. 4. How should ethical considerations be included in analyses of a firm’s internal and external environments? Ethics in Environmental Analyses: Ethical considerations should be integrated into analyses of a firm’s internal and external environments by evaluating stakeholder impacts and potential ethical dilemmas. This includes assessing how decisions affect employees, customers, and communities, as well as identifying risks related to unethical behavior. Ethical frameworks can enhance strategic decision-making. 5. Can ethical issues be integrated into a firm’s vision and mission? Explain. Integrating Ethics into Vision and Mission: Yes, ethical issues can and should be integrated into a firm’s vision and mission. A clear commitment to ethical standards reflects a company’s values and guides its strategic direction. Incorporating ethics can enhance brand reputation, attract socially conscious consumers, and create a positive workplace culture. 6. What is the relationship between ethics and stakeholders? Ethics and Stakeholders: The relationship between ethics and stakeholders is foundational; ethical behavior builds trust and fosters strong relationships. Stakeholders, including customers, employees, suppliers, and communities, expect firms to act responsibly. Companies that prioritize ethical considerations often enjoy loyalty and support from their stakeholders. 7. What is the importance of ethics for organizational strategists? Importance of Ethics for Organizational Strategists: Ethics is crucial for organizational strategists as it informs decision-making and shapes corporate culture. Ethical strategies lead to sustainable competitive advantage, mitigate risks, and enhance reputation. Furthermore, incorporating ethics into strategic planning aligns organizational goals with societal values, fostering long-term success. Internet Exercise Internet-based services depend heavily on continuous change and rapid strategic decision making. Companies such as Amazon.com that rely on Internet users for their customer base have demonstrated a distinct competitive advantage in serving their customers well. Barnes & Noble (http://www.barnesandnoble.com) is one of Amazon.com’s competitors in the online book and music markets. How does this Web-based expansion affect the stakeholders of each? How does the entrance of these profitable retailers into the online market affect Amazon.com’s competitive advantage? Importance of Ethics for Organizational Strategists: Ethics is crucial for organizational strategists as it informs decision-making and shapes corporate culture. Ethical strategies lead to sustainable competitive advantage, mitigate risks, and enhance reputation. Furthermore, incorporating ethics into strategic planning aligns organizational goals with societal values, fostering long-term success. *e-project: Using other Web resources, such as current business press and financial reports, discuss Amazon.com’s continued growth and limited profits. Chapter 2 The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis ANSWERS TO REVIEW QUESTIONS 1. Why is it important for a firm to study and understand the external environment? The external environment influences the firm’s strategic options as well as the decisions made in light of them. The firm’s understanding of the external environment is especially useful when it is matched with knowledge about its internal environment. Matching the conditions of the two environments is the foundation the firm needs to form its vision, mission, and to take strategic actions in the pursuit of strategic competitiveness and aboveaverage returns. The importance of understanding the external environment is further underscored by the fact that the environmental conditions facing firms in the global economy of the 21st century differ from those firms faced previously. For example, technological changes and the explosion in information gathering and processing capabilities demand more timely and effective competitive actions and responses. The rapid sociological changes occurring in many countries affect labor practices and the nature of products demanded by increasingly diverse consumers. Governmental policies and laws affect where and how firms choose to compete. Competitive advantage goes to those firms who know their external environment and plan their strategies so they are relevant to these conditions. 2. What are the differences between the general environment and the industry environment? Why are these differences important? The general environment represents those elements in the broader society that can influence all (or most) industries and the firms that compete in those industries; it represents elements or segments that firms cannot directly control. The general environment is composed of the following segments: demographic, economic, political/legal, sociocultural, technological, and global. The industry environment is the constellation of factors that directly influences a firm and its competitive actions and responses. Firms are influenced by these factors and should attempt to establish a position in the industry that enables the firm to favorably influence the factors or to successfully defend against the factors’ influence. These factors are: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat from substitute products, and intensity of rivalry among competitors. 3. What is the external environmental analysis process (four parts)? What does the firm want to learn when using this process? The environmental analysis process represents an organized attempt by the firm to better understand turbulent, complex, and global environments. This is achieved by scanning (studying all segments of the general environment to identify existing or potential changes), monitoring (observing the pattern of changes over time in an attempt to detect meaning or identify trends), forecasting (developing feasible projections of what might happen, and how quickly, as a result of changes and trends identified from scanning and monitoring activities) and assessing (determining the timing and significance of environmental changes and trends on the strategic management of the firm). Stated differently, this analysis should examine and process external data on a continuous basis. An important objective of the environmental analysis process is to identify potential threats (conditions that may hinder the firm’s efforts to achieve strategic competitiveness) and opportunities (that may assist or help the firm in its efforts to achieve strategic competitiveness). 4. What are the seven segments of the general environment? Explain the differences among them. The demographic segment is concerned with characteristics of the population or society that makes up the general environment. Characteristics of interest are size, age, structure, geographic distribution, ethnic mix, and income distribution. The economic segment refers to the nature and direction of the economy in which a firm competes or may compete in the future. Important characteristics include inflation and interest rates, trade deficits (or surpluses), budget deficits (or surpluses), individual and business savings and investment rates, and gross domestic product. The political/legal segment is the arena in which organizations and interest groups compete for attention, resources, and a voice in overseeing the body of laws and regulations guiding interactions between nations. In other words, this segment is concerned with how firms and other organizations attempt to influence government and how governmental entities in turn influence them. The sociocultural segment is concerned with the social attitudes and cultural values of different societies. The technological segment is made up of the institutions and activities involved with creating new knowledge and translating that knowledge into new outputs, products, processes, or materials. The global segment includes relevant new global markets and existing ones that are changing, important international political events, and critical cultural and institutional characteristics of relevant global markets. This segment recognizes that firms now compete in a competitive landscape where both competitors and customers are global, due in part to the rapid diffusion of both information and technology. Competitors will no longer be domestic; they can originate from industrialized, newly industrialized, or emerging countries. Customer demands and expectations have changed; they are based on an ever-increasing awareness of global products and services. The physical environment segment refers to potential and actual changes in the physical environment and business practices that are intended to positively respond to and deal with those changes. Ecological, social, and economic systems interact to influence what happens in this segment. Global warming, energy consumption, and sustainability are all examples of issues related to the physical environment. 5. How do the five forces of competition in an industry affect its profit potential? Explain. An industry’s competitive intensity and profit potential can be determined by the relative strengths of five competitive forces. This model of industry competition recognizes that suppliers can influence industry profitability by raising prices or reducing the quality of goods sold if industry participants are unable to recover cost increases through pricing structures. Buyers can influence the profit potential of an industry if the buyer group is able to successfully bargain for higher quality, greater levels of service, and lower prices. Substitute products influence an industry’s profit potential by placing an upper limit on prices that can be charged. New entrants to an industry influence industry profitability because they bring additional production capacity to the industry. Unless product demand is increasing, additional capacity holds down (or reduces) buyers’ costs, reducing profitability for all firms in the industry. The intensity of rivalry among competitors reflects competitor actions and responses as firms initiate moves to improve their competitive position or when they act in retaliation for competitive pressures brought about by the strategic actions of rival firms. Generally, the greater the intensity of competitive rivalry, the lower the overall profitability of an industry. 6. What is a strategic group? Of what value is knowledge of the firm’s strategic group in formulating that firm’s strategy? A strategic group is a group of firms within an industry that generally follow the same (or a similar) strategy, competing along the same strategic dimensions (such as product quality, pricing policy, distribution channels, or level of customer service). The strategic group concept is valuable to a firm’s strategic decision makers because a firm’s primary competitors are those within its strategic group (all group members are selling similar products to a similar group of customers), the strengths of the five competitive forces varies across strategic groups, and strategic groups that are similar (in terms of strategies followed and competitive dimensions emphasized) increase the possibility of increased competitive rivalry between the groups. The notion of strategic groups can be useful for analyzing an industry’s competitive structure. Such analyses can be helpful in diagnosing competition, positioning, and the profitability of firms within an industry. Strategic group analysis shows which companies are competing similarly in terms of how they use similar strategic dimensions. At the same time, research has found that strategic groups differ in performance, suggesting their importance. Strategic group membership also remains relatively stable over time, making analysis easier and more useful. Strategic groups have several implications. First, because firms within a group offer similar products to the same customers, the competitive rivalry among them can be intense. The more intense the rivalry, the greater the threat to each firm’s profitability. Second, the strengths of the five industry forces (the threats posed by new entrants, the power of suppliers, the power of buyers, product substitutes, and the intensity of rivalry among competitors) differ across strategic groups. Third, the closer the strategic groups are in terms of their strategies, the greater is the likelihood of rivalry between the groups. In the end, having a thorough understanding of primary competitors helps a firm formulate and implement an appropriate strategy. 7. What is the importance of collecting and interpreting data and information about competitors? What practices should a firm use to gather competitor intelligence and why? Competitor analysis can help the firm understand and better anticipate competitors’ future objectives, current strategies, assumptions, and capabilities. The firm should gather intelligence about its competitors as well as about public policies in countries across the world, which can serve as an early warning of threats and opportunities emerging from the global public policy environment that may affect the achievement of the company’s strategy. Through effective competitive and public policy intelligence, the firm gains the insights needed to create a competitive advantage and to increase the quality of the strategic decisions it makes when deciding how to compete against its rivals. Firms want to know how competitor intelligence is gathered to determine whether the practices employed are legal and, further, to assess whether these methods are ethical, given the firm’s culture and the image it desires as a corporate citizen. The line between legal and ethical practices can be difficult to ascertain, especially when it comes to electronic transmissions. Often it is difficult for a firm to know how to gather intelligence and how to prevent competitors from gathering competitive intelligence that may threaten its own competitive advantage. Openly discussing intelligence-gathering techniques that the firm employs goes a long way toward assuring that people understand the firm’s convictions about what is ethical and acceptable for use and what is not ethical and is unacceptable for use when gathering competitor intelligence. The firm can frame these practices in terms of respect for the principles of common morality and the right of competitors not to reveal information about their products, operations, and strategic intentions. Despite its importance, evidence suggests that a relatively small percentage of firms use formal processes to study competitors. Beyond this, some firms fail to analyze a competitor’s future objectives when trying to understand its current strategy, assumptions, and capabilities, but it is important to study the present and the future when examining competitors. Failure to do so may lead to incomplete or distorted insights about competitors. INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES EXERCISE 1: CREATING A FIVE FORCES INDUSTRY MODEL The five forces model is designed to better understand the competitive forces in an industry in which a firm competes. This exercise is designed to utilize students’ analytical skills in regards to competitive forces within an industry, in this case the automotive industry. The instructor should select a specific American automobile manufacturer and ask the class to discuss how they ranked the forces for the automobile industry, and how those forces affect the profitability of the selected manufacturer. As an example, you might select Tesla as a newer entrant to the market. You may find the following article about Tesla’s role in the market and surprising success useful as a discussion point: http://blogs.wsj.com/speakeasy/2013/08/09/teslas-success-far-has-some-analysts-eatingcrow/?KEYWORDS=tesla Team rankings are subjective, which allows you to encourage teams to argue their cases against each other as to why they may have chosen one ranking over the over. During the discussion, you can ask probing questions for each of the forces such as: 1) Threat of New Entrants. How might things like capital requirements, brand equity, government policy (things like safety, EPA and emissions regulations), access to distribution channels, etc. influence a new entrant to the market? This article on Tesla’s direct-sales approach may be useful: http://www.huffingtonpost.com/2013/06/28/tesla-direct-sales-autodealers-petition_n_3516836.html 2) Threat of Substitutes. How does depreciation of new vehicles play into switching costs? How does the used car market influence the threat of substitute products? Mass transportation? What other substitutes exist and how do they influence the industry? 3) Bargaining Power of Suppliers. Suppliers may be small are large ranging from small car components, tires, electronics to unionized assembly line workers. How does influence the automobile industry? How do automobile raw materials such as steel and aluminum influence the power of suppliers? 4) Bargaining Power of Buyers. To what degree can buyers push down the price of new vehicles? What does the unheard-of-pricing and discounts offered by dealers suggest? 5) Intensity of Rivalry. How competitive is the industry? Consider things such as fierce advertising campaigns, and product developments. EXERCISE 2: WHAT DOES THE FUTURE LOOK LIKE? The purpose of this exercise it to have the students reflect on the future and its implications for business. This can be done individually or in teams as the instructor deems appropriate. Teams are assumed since individual assignment will be time consuming. A nice way to start this discussion is for the instructor to trace out the brief history of a product or service that students find familiar; such as cell phones or portable music players. Think back 10 years and discuss how rapidly things change. You might also discuss the competitive environment; which firms succeeded and which did not. The world for this product today is very different than just a few short years ago. Now what does the future hold? A good way to implement this assignment is to have each team present the results of their investigation. The instructor can then question each team based on the following to inspire additional discussion: • Of all the trends you identified, why did you choose this one? Which others did you uncover that also were interesting. • How great a change will this be for the marketplace? • Who do you suspect will be the winners or losers if this comes to pass? • Do you suspect that existing firms or new firms will be the ones to implement first? • How disruptive will this be, will entire products or services become unnecessary as a result (typewrite vs. computer). The instructor should, as teams present, keep track of which dimensions of the general environment the teams suggest are impacted by their presentation. At the conclusion of all the presentations, summarize this list and initiate a discussion on what this means. For example if preponderance are technological and global, how will this impact US domestic located businesses? And so on. At the conclusion of the presentations, the instructor should wrap up this exercise by discussing the implications of change. For example, the shifting list of firms that populate the S&P 500, impact of hyper competition, rate of technological change. INSTRUCTOR'S NOTES FOR VIDEO EXERCISES Title: THE NEED TO EXAMINE THE EXTERNAL ENVIRONMENT: DISASTER IN THE GULF THREE-PLUS YEARS LATER RT: 2:32 Topic Key: The External Environment, External Environmental Analysis, Five Forces of Competition, Strategic Groups, Competitor Analysis With oil and tar balls washing up on the Gulf Coast, weddings on the beach became a casualty. The weddings on the beach business evaporated with cancelled orders and local flower shops were on the brink. Lee Kitchens Taylor continues to be devastated from losing 85% of her business and has given up her salary. Her business lost $90,000 dollars and had only received emergency payments of $20,000 to date. She received checks as little as $12.31 for interest payments not knowing where the principal was. BP established a $20 billion fund to compensate victims of the oil spill but only $3.8 billion had been paid out at present. Roughly 2 out of every 5 people who filed a claim had been reimbursed, which created confusion and anxiety. Individuals claim that BP has not fulfilled their obligations. Washington attorney Kenneth Feinberg was appointed by President Obama and BP to oversee the claims fund that pays his firm $15 million a year. Feinberg claims the program is not perfect but is working. He says that 200,000 claimants were paid in 9 months. The beach wedding business of Jeff and Jennie Sherrill indicate they have had to live check by check and day by day. Within three days of the oil spill they had lost 14 weddings at $10,000 each, had depleted their savings, and were on the verge of closing. Months later they received a check that largely covered their 6 figure losses. However, many are still waiting and still losing and speculate they will never recoup their true losses. Also check out http://www.ksdk.com/news/local/story.aspx?storyid=204252 Suggested Discussion Questions and Answers 1. What parts of the external environment (general, industry, and competitive) segments do you think BP considered or didn’t consider prior to their drilling off the Gulf Coast? What should the wedding business owners now consider in their external environment? o BP: Considered economic, political/legal, technological, and global segments in the general environment. Appears to have considered all facets of the industry environment and the competitive environment that may have been their primary motivators for the Gulf offshore drilling o BP: Didn’t consider the following: ▪ General: demographic, sociocultural, and physical environment fully o Wedding business owners: ▪ Need to consider demographic changes for geographic migration, economic segments particularly for rebuilding, the political/legal segment regarding the impact on their business of additional oil company regulation of oil drilling and operations, sociocultural preferences, technology requirements to avoid future business loss, the global segment regarding international company infiltration, and the physical environment to react and overcome disasters in the future 2. How should BP have handled an external environmental analysis and what environmental changes and trends (opportunities and threats) might they have discovered? o External environmental analysis should have included scanning, monitoring, forecasting, and assessing (See Table 2.2) o Opportunities: Other areas less socially affected by drilling, partnership opportunities with wedding businesses, other areas for drilling having less natural pressure, other areas will less oil drilling regulations, and more benefit in alternative energy sources o Threats: Possibilities of increased regulation of operations, increasing environmentally conscious society, and increasing social responsibility perceptions in society and how it impacts purchases 3. Analyze BP using the five forces of competition model, to determine the industry’s attractiveness in terms of profit potential. o Threat of new entrants: Not likely, given the investments and control of the controllers like BP, Exxon, and Shell—Good Profit Potential o Bargaining power of suppliers: BP’s disasters have opened opportunities for competition to be better suppliers—Poor Profit Potential o Bargaining power of buyers: BP’s disasters have created more concerns from society in their purchase behavior—Poor Profit Potential o Rivalry among competing firms: Revenue losses by BP give greater way to competition to compete—Poor Profit Potential o Threat of substitute products: BP continues to be involved in alternative energy sources and may have invested too much in the disaster than needed to be but they are still attempting to produce substitutes themselves—Good Profit Potential 4. Who might be in BP’s strategic group and why? o Text: Strategic group is a set of firms that emphasize similar strategic dimensions and use a similar strategy. o BP’s strategic group: Exxon & Shell 5. What would a competitor of BP discover about them in a competitor analysis? o BP, noted for its later joint ventures, is still driven to source, transport, refine, and distribute oil in the future. o BP currently is moving toward alternative energy sources to reduce emissions as required by law. Additionally, BP will abide by US regulated drilling permits and regulation safety inspections and drilling operations. Within their joint ventures, they will continue to pursue the oil to meet demand outside of heavy regulation in the US and perhaps less natural pressure for drilling. o BP assumes liability under law and operates as the law being the ethical authority. o BP’s capabilities are noted as follows: ▪ Strengths: Ability to source, transport, refine, and distribute oil. ▪ Weaknesses: Lack of awareness of public policies in other countries, lack of knowledge of the physical environment except with regard to earning revenue, and lack of genuine concern for demographic and sociocultural impacts from their business operations ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. Given the importance of understanding the external environment, why do some firms fail to do so? Students can provide examples of firms that did not understand their external environment. What were the implications of the firm’s failure to understand that environment? Failure to Understand External Environment: Some firms fail to understand their external environment due to complacency, lack of resources, or overconfidence in their products. For example, Blockbuster didn’t recognize the shift toward digital streaming, leading to its decline. This failure to adapt resulted in lost market share and eventual bankruptcy, illustrating the critical need for environmental awareness. 2. Have students select a firm and describe its external environment. What actions do you believe the firm should take, given its external environment, and why? External Environment of a Firm: Let’s consider Starbucks. Its external environment includes economic factors like rising coffee prices, social trends favoring sustainability, and competitive dynamics with other coffee shops. To thrive, Starbucks should focus on sustainability initiatives, diversify its product offerings, and enhance digital engagement to attract tech-savvy consumers, ensuring alignment with current market trends. 3. How is it possible that one firm could see a condition in the external environment as an opportunity whereas a second firm sees it as a threat? Opportunity vs. Threat Perception: A firm may view an external condition as an opportunity while another sees it as a threat based on their strategic positioning and resources. For instance, a tech firm might see the rise of AI as a growth opportunity for innovation, while a traditional manufacturing firm may view it as a threat that could disrupt their operations. Perspectives vary based on organizational goals and capabilities. 4. Select a firm in the local community. What materials would help one understand the firm’s external environment? How could the Internet be used to complete this activity? Understanding Local Firm’s External Environment: To understand a local firm like a community grocery store, materials such as market research reports, customer feedback, and competitive analysis would be useful. The Internet can facilitate this by providing access to industry trends, consumer reviews, and competitor websites, enabling a comprehensive view of the external environment influencing the store. 5. Have students select an industry that is of interest to them. What actions could firms take to erect barriers of entry to this industry? Barriers to Entry in an Industry: In the tech industry, firms can erect barriers to entry through strong brand loyalty, proprietary technology, and high research and development costs. Additionally, establishing exclusive partnerships or creating regulatory compliance hurdles can deter new entrants. These strategies protect market share and ensure sustainable competitive advantages. 6. What conditions would cause a firm to retaliate aggressively against a new entrant to the industry? Aggressive Retaliation Conditions: A firm may retaliate aggressively against new entrants if the entrant threatens its market share, profits, or brand reputation. Conditions such as established customer loyalty, significant market presence, or previous experience with aggressive competition can trigger this response. Additionally, if the new entrant employs disruptive pricing strategies, retaliation becomes more likely to maintain competitive positioning. Ethics Questions 1. How can a firm use its “code of ethics” to analyze the external environment? Using Code of Ethics to Analyze External Environment: A firm can use its code of ethics to evaluate external factors by establishing clear principles for assessing relationships with stakeholders. This helps identify ethical dilemmas in areas such as supplier practices, customer interactions, and community engagement. By aligning environmental analysis with ethical standards, firms can enhance their reputational capital and stakeholder trust. 2. What ethical issues, if any, may be relevant to a firm’s monitoring of its external environment? Does use of the Internet to monitor the environment lead to additional ethical issues? If so, what are they? Ethical Issues in Monitoring the External Environment: Ethical issues in monitoring the external environment include respecting privacy, obtaining consent for data collection, and avoiding deceptive practices. Using the Internet for monitoring can raise additional concerns, such as data security and the ethical implications of surveillance. Companies must balance information-gathering with respect for individual rights and ethical standards. 3. Think of each segment in a firm’s general environment. What is an ethical issue associated with each segment? Are firms across the globe doing enough to deal with the issue? Ethical Issues in General Environment Segments: Each segment presents unique ethical issues: • Economic: Fair labor practices and wage equity. • Political/Legal: Compliance with regulations and anti-corruption. • Social: Diversity and inclusion in the workplace. • Technological: Data privacy and cybersecurity. Many firms are making strides but often fall short in adequately addressing these ethical challenges globally. 4. What is the importance of using ethical practices between a firm and its suppliers? Importance of Ethical Practices with Suppliers: Ethical practices between a firm and its suppliers foster trust, reliability, and long-term partnerships. Adhering to ethical standards ensures fair treatment, compliance with labor laws, and sustainable practices, ultimately enhancing brand reputation. Ethical supplier relationships can also mitigate risks associated with supply chain disruptions. 5. In an intense rivalry, especially one that involves competition in the global marketplace, how can the firm gather competitor intelligence ethically while maintaining its competitiveness? Gathering Competitor Intelligence Ethically: Firms can ethically gather competitor intelligence by using publicly available information, attending industry conferences, and conducting surveys. They should avoid deceptive tactics like impersonation or corporate espionage. Transparency and adherence to legal standards are crucial to maintaining competitiveness while respecting ethical boundaries. 6. Ask the class what they believe determines whether an intelligence-gathering practice is or is not ethical? Do they see this changing as the world’s economies become more interdependent? If so, why? Do they see this changing because of the Internet? If so, how? Determining Ethical Intelligence-Gathering: Class opinions on ethical intelligencegathering practices may vary based on context, intent, and methods used. As global economies become interdependent, ethical standards may shift to accommodate different cultural norms. The Internet can influence this by providing access to vast information, raising concerns about privacy, consent, and the potential for misuse, thereby redefining ethical boundaries. Internet Exercise Firms rely on gathering and analyzing the general, industry, and competitor environments to assess their potential for global growth and profitability. Go to the website for the US retail chain Walmart at http://www.wal-mart.com. Walmart’s global expansion plans are extensive. List how each of the six segments of the general environment prompted Walmart to expand into the markets that it has. Target is a major US competitor of Walmart. Check out the Target website at http://www.target.com. What are the firm’s plans for global expansion? What types of opportunities and threats would prohibit Target from taking Walmart’s route? Would the students consider Target a future key global rival of Walmart? *e-project: What US firms offer global Web shopping in other countries’ currencies and shipping specifications? How do their non-US websites compare with their US websites? Chapter 3 The Internal Organization: Resources, Capabilities, Core Competencies, and Competitive Advantages — ANSWERS TO REVIEW QUESTIONS 1. Why is it important for a firm to study and understand its internal organization? As they analyze their internal environment, a manager should think of the firm as a bundle of heterogeneous resources and capabilities that can be used to create an exclusive market position. This means that firms should no longer focus only on the traditional sources of competitive advantage (e.g., labor costs, access to capital, and raw materials) as these advantages can be overcome through an international strategy and the relative free flow of global resources. Instead, firms should seek out those resources and capabilities that other firms do not have, at least not in the same combinations. A firm’s resources are the source of its capabilities, some of which can lead to core competencies that enable a firm to perform value-creating activities better than its competitors or that its competitors cannot duplicate. 2. What is value? Why is it critical for the firm to create value? How does it do so? Value is represented by the bundle of performance characteristics and attributes that a firm provides to customers in the form of goods or services for which customers are willing to pay. Broadly speaking, value can be provided by a product's/service's low cost, highly differentiated features, or a combination of the two (when these strategies are superior to those offered by competitors). Ultimately, it is critical that a firm be able to create customer value since it is the source of a firm's potential to earn above-average returns. Therefore, in the rapidly changing environments of the 21st century competitive landscape, firms must evaluate continuously the degree to which their core competencies create customer value. What the firm intends to do to create value affects its choice of business-level strategy and its organizational structure 3. What are the differences between tangible and intangible resources? Why is it important for decision makers to understand these differences? Are tangible resources more valuable for creating capabilities than are intangible resources, or is the reverse true? Why? Tangible resources are represented by assets that can be seen and quantified. They are not only represented by the firm's physical resources (such as plant and equipment), but also by other assets, such as the firm's borrowing capacity, the skills and attributes of its staff, and its technological capacities. Intangible resources (because they are less visible and more embedded in the firm's history) are more difficult for competitors to understand and imitate. These include such resources as scientific capabilities, knowledge within the firm, organizational routines, or the firm's reputation for quality. Resources are the source of a firm's capabilities. Capabilities are the source of a firm's core competencies, which are the basis of competitive advantages. Intangible resources (as compared to tangible resources) are a superior and more potent source of core competencies. In fact, in the global economy, intellectual and systems capabilities are more important to the success of a corporation than are its physical assets, and the capacity to manage human intellect is now a critical executive skill. Intangible resources are less visible and more difficult for competitors to understand, purchase, imitate, or substitute, and thus firms prefer to rely on these resources as the foundation for their capabilities and core competencies. Therefore, unobservable (i.e., intangible) resources provide a better platform for competitive advantage than do tangible resources. And unlike tangible resources, the use of intangible resources can be leveraged for even greater benefits to firm performance. 4. What are capabilities? How do firms create capabilities? Capabilities represent the firm's capacity or ability to successfully integrate sets of firm resources and deploy these resources to achieve some desired end. Capabilities evolve or develop over time through interactions among and between tangible and intangible resources. It is also critical to recognize that capabilities are based on the development, carrying, and exchange of information and knowledge by the firm's human capital. Thus, a firm's capabilities are a reflection of its knowledge base: the skills and knowledge of its employees and (often) their functional expertise. Global business leaders increasingly support the view that the knowledge possessed by human capital is among the most significant of an organization’s capabilities and may ultimately be at the root of all competitive advantages. But firms must also be able to utilize the knowledge that they have and transfer it among their business units. Given this reality, the firm’s challenge is to create an environment that allows people to integrate their individual knowledge with that held by others in the firm so that, collectively, the firm has significant organizational knowledge. 5. What four criteria must capabilities satisfy for them to become core competencies? Why is it important for firms to use these criteria to evaluate their capabilities’ valuecreating potential? Capabilities are a firm's core competencies when they satisfy the four criteria of sustainable competitive advantage: they must be valuable, rare, costly to imitate, and nonsubstitutable. A capability is valuable when it helps a firm exploit opportunities or neutralize threats in its external environment. A capability that is rare is possessed by few, if any, current or potential competitors. Capabilities are costly to imitate when other firms cannot develop them except at a cost disadvantage relative to firms that already possess them. (This can be the case when the capabilities derive from unique historical conditions, are causally ambiguous, or socially complex.) Finally, capabilities are nonsubstitutable when they do not have strategic equivalents. It is important for these criteria to be used because a competitive advantage is sustainable over time only when competitors are unsuccessful at duplicating the benefits of the firm's strategy or when they are unable to imitate the strategy. 6. What is value chain analysis? What does the firm gain by successfully using this tool? The value chain is a template that the firm uses to understand its cost position and to identify the multiple means that might be used to facilitate the implementation of its business-level strategy. Managers would use value chain analysis to examine the firm's resources and capabilities in relationship to the activities performed in the design, manufacture, and distribution of products. Specifically, this framework differentiates primary activities (those involved with a product's physical creation, its sale and distribution to buyers, and its service after the sale) from support activities (which provide the support necessary for the primary activities to take place). Managers should scrutinize and assess activities and capabilities with competitors' capabilities in mind because the firm must be able to either perform an activity in a manner that provides value superior to or better than any competitor or identify and perform valueadding activities that competitors are unable to perform, if these capabilities are to be a source of competitive advantage. Nonetheless, it is important to remember that value chain analysis is a highly subjective process. Just as identifying and valuing a firm's resources and capabilities requires judgment, so does the process of assessing the relative value added by activities performed. Studying the value chain will enable managers to better understand their cost structure and the activities in which they can create and capture value. 7. What is outsourcing? Why do firms outsource? Will outsourcing’s importance grow in the future? If so, why? Outsourcing is the purchase of a value-creating activity from an outside supplier that can provide the greatest value. A firm is likely to engage in outsourcing when it identifies primary and support activities in which its resources and capabilities are neither sources of competence nor of sustainable competitive advantage. In such instances, firms should consider purchasing these activities from firms that can add value to the activity (relative to the firm's competitors). Outsourcing has several advantages for firms but also carries some important risks as well. Outsourcing can potentially reduce costs and increase the quality of the activities outsourced. In this way, it adds value to the product provided to consumers. Thus, outsourcing can contribute to a firm’s competitive advantage and its ability to create value for its stakeholders. However, the risk of the outsourcing partner’s learning the technology and becoming a competitor is very real and should be taken seriously. Outsourcing is important to firms competing in the 21st century landscape because few, if any firms possess all of the resources and capabilities that are necessary for them to achieve competitive superiority in all necessary primary and support activities. By outsourcing activities in which it lacks the competence to create value and by nurturing a few core competencies, a firm increases its probability of developing a sustainable competitive advantage. To maximize value, firms should scan the entire globe to locate the source (supplier or performer) of the to-be-outsourced activity to locate the best producer in the world of the activity that is being outsourced. Given the increasing complexity of products/services offered (e.g., based on combined, sophisticated technologies), firms looking forward should anticipate that even more outsourcing of non-strategic activities is likely to be necessary. 8. How do firms identify internal strengths and weaknesses? Why is it vital that managers have a clear understanding of their firm’s strengths and weaknesses? By completing the internal analysis, firms can (must) identify their strengths and weaknesses in resources, capabilities, and core competencies. For example, if they have weak capabilities or do not have core competencies in areas required to achieve a competitive advantage, they must acquire those resources and build the capabilities and competencies needed. Alternatively, they could decide to outsource a function or activity where they are weak in order to improve the value that they provide to customers. Firms need to have the appropriate resources and capabilities to develop the desired strategy and create value for customers and shareholders as well. Having many resources does not necessarily lead to success. Firms must have the right ones and the capabilities needed to produce superior value to customers. Undoubtedly, having the appropriate and strong capabilities required for achieving a competitive advantage is a primary responsibility of toplevel managers. These important leaders must focus on both the firm’s strengths and weaknesses. 9. What are core rigidities? What does it mean to say that each core competence could become a core rigidity? Core rigidities can be viewed as yesterday’s sources of competitive advantage. These are capabilities that the organization does well but that have little current value from a competitive standpoint. When environments shift firms need to deploy resources and capabilities, and develop competencies that lead to competitive advantage. Continuing to invest in or perform activities with low competitive value is both expensive and inefficient. INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES EXERCISE 1: WHAT MAKES A GREAT OUTSOURCING FIRM? The goal of this exercise is to investigate from the perspective of the firm who solicits for outsourcing work rather than from the outsourcer themselves. Accordingly students are asked to develop a roadmap of why successful outsourcers are so. You should encourage (or maybe provide incentives depending upon your own preference) that some teams choose non U.S. based firms to add variety to the assignment. As an additional reading assigning Strategic Sourcing From Periphery to the Core. By: Gottfredson, Mark, Puryear, Rudy, Phillips, Stephen, in Harvard Business Review, Feb2005, Vol. 83, Issue 2 provides a strong context to the chapter and the exercise. In it Gottfredson et al. identify firms that both develop capabilities that can be turned into their own outsourcing opportunities and a discussion regarding the basis for competitive advantage going forward; the shift from tangible to intangible assets. Ask each student team to present their findings to the class. To obtain variety in the presentations, ask several questions during the presentations. For instance: • Why did you pick the firm you did? • Why did you pick a U.S. firm vs. a foreign one or vice versa (assuming the incentive option wasn’t exercised)? • How does your perspective change, or does it, when you think about a firm that provides outsourcing service vs. a firm that seeks to outsource? • In the outsourcing industry, do you think there is such a thing as a sustainable competitive advantage? If the firm you analyzed were your firm, how would you position its resources and capabilities going forward? If there is sufficient time available and you assign the extra reading from Gottfredson et al., you could ask each team to plot on the sources opportunity map their firm and how that firm positions itself to win (or retain) outsourcing business. EXERCISE 2: WHAT IS YOUR COMPETENCY? This exercise is intended to be reflective for your students while emphasizing the concept of core competencies as a foundation for establishing a competitive advantage. A good starting point for discussion as a class is to refresh everyone’s memory on what the four criteria used to determine whether resources and capabilities are core competencies. Ask for volunteers to discuss their core competencies. Ask some questions to get the students talking and sharing: ▪ How difficult was the process? Was it rewarding? ▪ What sorts of resources were bundled to create capabilities as the foundation of those competencies? ▪ What were some of the competency gaps that they identified? How will they address those gaps? ▪ How might that core competency serve as a competitive advantage in the workplace marketplace? Have the students think about the differences between personal and corporate core competencies. Select a core competency identified by the University of Victoria (http://www.uvic.ca/coopandcareer/assets/docs/corecompetencies/10core.pdf) or one identified by a student and discuss the selected core competency as it relates to a corporation. As an example, you might select Social Responsibility as a core competency and ask students to provide examples of companies which have utilized a social responsibility core competency to translate into a competitive advantage. Each student should submit their core competency profile so that you may provide feedback. This should be constructive so that the students can see the power in their core competencies. INSTRUCTOR'S NOTES FOR VIDEO EXERCISES Title: ORGANIZATIONAL CULTURE CREATES STRATEGIC COMPETITIVENESS: TONY SHAY/CEO/Zappos.com RT: 7:06 Topic Key: Value, Resources, Capabilities, Core Competencies, Sustainable Competitive Advantage, Outsourcing Opening with a bald and blue day where employees, even the boss, can either shave their head or dye it blue is just part of the wacky world of Zappos.com. As an online shoe retailer where business is unusual, it is thriving among struggling retailers. Derived from the Spanish word for shoes, zapatos, Zappos is out in front with a unique company culture and their 36-year-old CEO, Tony Shay. Zappos believes that everyone is a little weird somehow. Shay says it’s a fun way to say that we want people’s true personality to shine in the workplace. Shay believes he has learned how to create both passion and profits, which is outlined in the book, Delivering Happiness. He insists, in the book, that it is possible to make employees happy, customers happy, investors happy, and still make profit. Zappos has been so successful that Amazon was willing to purchase it for $1.2 billion. Never imagining himself in the shoe industry, Tony Shay works out of a cubicle and earns less than $37,000 dollars a year as CEO. He recognized that selling shoes on the Internet was a particular challenge—overcoming the need to try on shoes before buying. With free shipping and free returns for up to a year, Zappos overcame the challenge when other retailers were cutting costs and outsourcing call centers overseas. The Zappos call center is located in Las Vegas where operators are members of the customer loyalty team. Shay indicates that every phone call to the call center is a branding opportunity with no planned scripts and no time limits to follow. Every operator is given the opportunity to do whatever it takes to make a customer happy, which was indicated through mock call ins, operator videotapes, and interviews with operators. While making customers happy, Shay wants his 1400 employees to be happy as well. He wants employees to not think of their job as work but a place they want to be for life. Zappos provides full medical insurance, free meals, and opportunities for a variety of breaks throughout the company. Interviews with warehouse shoe pickers indicate that working for Zappos is work but is more rewarding than just a job. Zappos is so determined to keep dedicated workers that it tests their loyalty by offering them money to quit. The sense of security and company benefits means more than the salaries, which are on par with Zappos competitors. The executive editor for Fortune magazine believes employees feel empowered at Zappos. Having been listed in Fortune magazine’s 100 best companies to work for over the past two years, the editor believes the employees feel respected and have the ability to make decisions on their own. Though successful, Fortune wonders if Zappos is getting the full range of perspectives, particularly from customers, if everybody is so cheerful. Tony Shay hopes that other companies can follow the Zappos example of making the world a better place. Also check out http://www.zappos.com/ Suggested Discussion Questions and Answers • How is Zappos’ organizational culture creating value? o Text: Value is measured by a product’s performance characteristics and by its attributes for which customers are willing to pay. An organizational culture is a source of advantage when employees are held together tightly by their belief in it. The more intangible and hence invisible capabilities are, the more difficult it is for firms to find substitutes and the greater the challenge is to competitors trying to imitate a firm’s value-creating strategy. o Zappos: Zappos’ customers are willing to pay for the weird yet unlimited service they receive from Zappos employees. The Zappos culture provides an opportunity for real personalities to shine in the workplace, unlimited employee dedication and happiness within customer loyalty teams that is passed on to customer happiness, and a sense of security, empowerment, and respect that is rewarding beyond the salaries. The organizational culture is a source of advantage because Zappos employees are held together by their loyalty, which is tested through payment to quit offers by the company. • What resources and resulting capabilities and core competencies do you see within the Zappos organization that gives it strategic competitiveness? o Tangible Resources: Financial: No indication from the video but it was certainly viable given Amazon’s willingness to purchase; Organizational: No formal reporting structure but the informality is productive; Physical: Domestic and non-outsourced call centers and distribution centers; Technological: No specific technological resources noted from the video but they do have to maintain some online technology as an electronic retailer. o Intangible Resources: Human: Due to the unorthodox culture, employees feel secure and appear to collaborate well; Innovation: None noted within the video; Reputational: Shay indicates that every phone call and call center is a branding opportunity, unlimited happiness and devoted reputation with each customer. o Capabilities: Motivating, empowering, and retaining employees, distribution, management information systems, effective customer service; innovative e-commerce activity, ability to maintain the culture o Core Competencies: Distribution, Human Resources, Management Information Systems, Marketing, and Management • Will Zappos’ competitive advantage be sustainable? o Text: A sustainable competitive advantage exists only when competitors cannot duplicate the benefits of a firm’s strategy or when they lack the resources to attempt imitation. The four criteria of sustainable competitive advantage include valuable capabilities, rare capabilities, costly to imitate capabilities, and nonsubstitutable capabilities. o Zappos’ unique organizational culture is its competitive advantage and can be sustainable as long as it continues to produce value, remains rare, unimitatable, and nonsubstitutable. The Zappos culture is very intangible making it difficult for firms to imitate or find substitutes. • What value chain activities performed by Zappos help to create value for its customers? o Support Activities: Technology and Human Resources o Primary Activities: Distribution and Customer Service • Why do you think Zappos is not outsourcing its call centers? o Text: Firms must recognize that only activities where they cannot create value or where they are at a substantial disadvantage compared to competitors should be outsourced. o Zappos believes they can still create value through its call centers and they have the resources and capabilities required to achieve competitive superiority. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. Several companies use their brand as a competitive advantage. Ask the class, given their knowledge about the global economy, which brands they believe have the strongest likelihood of remaining a source of advantage in the twenty-first century? Why? What effects do they believe the Internet’s capabilities will have on this brand, and what should the owner of the brand do in light of them? Brands as Competitive Advantage: Brands like Apple, Nike, and Coca-Cola are likely to remain strong competitive advantages in the twenty-first century due to their established customer loyalty and global recognition. The Internet can amplify their reach and engagement, but also increase competition and scrutiny. Brand owners should leverage digital marketing, invest in customer experience, and stay responsive to consumer feedback to maintain their edge. 2. Students should visit the manager of a local store to obtain the following information. Using the definition presented in the chapter, define value for the manager. Ask the manager if the definition is consistent with how her or his firm thinks of value. If there is a difference, ask the manager to assess why the difference exists. Defining Value for a Local Store Manager: Value for the manager may be defined as the perceived benefits customers receive from products relative to the price paid. The manager might confirm or differ from this definition based on their focus on customer satisfaction, community impact, or unique offerings. Differences could arise from varying priorities or interpretations of what constitutes value in their specific market context. 3. Have students consider a group (e.g., a fraternity or sorority, Toastmaster’s, or a volunteer organization) in which they hold membership. Using the categories shown in Tables 3.1 and 3.2, list what they perceive as the group’s tangible and intangible resources. Show the list to another member of the group. Does that person agree with your assessment of the group’s resources? If not, what might account for the differences? If differences do exist between you and your colleague, what is the meaning of such differences in terms of trying to form the group’s capabilities? Tangible and Intangible Resources in a Group: Tangible resources might include physical items like meeting spaces and supplies, while intangible resources could encompass community spirit, networking opportunities, and shared values. Sharing this list with another member may reveal differing perceptions due to personal experiences or priorities. Such differences highlight the diversity of viewpoints and the complexity of forming cohesive group capabilities. 4. Refer to the third question. Ask students if it was easier to list the tangible or the intangible resources? Why? How confident are they with their assessments? Easier to List Tangible or Intangible Resources?: Students may find it easier to list tangible resources because they are more visible and concrete. Intangible resources require deeper reflection on the group's culture and relationships, which can be subjective. Confidence in assessments may vary, often depending on personal engagement and familiarity with the group's dynamics. 5. What competitive advantage do individual students feel that the university or college possesses? What evidence can they provide to support this opinion? Does the class as a whole agree with the assessments? If not, why not? Competitive Advantage of University or College: Many students may feel that their university’s competitive advantage lies in its strong alumni network, reputation for academic excellence, or unique programs. Evidence could include job placement rates, faculty expertise, or partnerships with industry. Class consensus may vary, reflecting diverse experiences and perspectives on what aspects of the university are most valuable. 6. Ask students what effects they believe the Internet will have on the university or college within the next five years as it seeks to develop new competitive advantages. In their view, do the strategic decision makers in your educational institution understand the Internet’s capabilities? If not, why not? Internet's Effects on University Competitive Advantages: Students might believe that the Internet will facilitate online learning, enhance research capabilities, and improve student engagement over the next five years. Opinions may differ on whether strategic decision-makers understand these capabilities, with some feeling there is a knowledge gap or slow adaptation to digital trends, which could hinder competitive positioning. 7. Trust is identified in the chapter as a potential source of competitive advantage. Ask students if they have ever been involved in a situation in which trust was instrumental in accomplishing an organization’s goals? If so, what outcomes were made possible because of trust? Trust as a Source of Competitive Advantage: Students may recount experiences where trust within a team led to successful project completion or stronger collaboration. Trust can enable open communication, reduce conflicts, and enhance commitment to shared goals. Outcomes made possible by trust include improved performance, innovation, and a supportive work environment, illustrating its critical role in achieving organizational objectives. Ethics Questions 1. Can efforts to develop sustainable competitive advantages result in employees using unethical practices? If so, what unethical practices might be used to compare a firm’s core competencies with those held by rivals? How do the Internet’s capabilities affect actions taken to form competitive advantages that will help the firm in its efforts to outperform its rivals? Sustainable Competitive Advantages and Unethical Practices: Yes, efforts to develop sustainable competitive advantages can lead employees to engage in unethical practices, such as misrepresentation of capabilities, data manipulation, or even corporate espionage to benchmark against rivals. The Internet can exacerbate these behaviors by providing easy access to competitor information and tools for data analysis. Companies may prioritize competitive gain over ethical considerations, leading to a culture of justifying unethical actions. 2. Do ethical practices affect a firm’s ability to develop brand as a source of competitive advantage? If so, how does this happen? Can you think of brands that are a source of competitive advantage at least in part because of the firm’s ethical practices? Ethical Practices and Brand Advantage: Ethical practices significantly impact a firm’s ability to develop its brand as a competitive advantage. Consumers increasingly favor brands that demonstrate social responsibility and transparency, enhancing loyalty and trust. Companies like Patagonia and Ben & Jerry’s exemplify this, as their commitment to ethical sourcing and activism has strengthened their brand equity and attracted a loyal customer base. 3. What is the difference between exploiting a firm’s human capital and using that capital as a source of competitive advantage? Are there situations in which the exploitation of human capital can be a source of advantage? If so, can you name such a situation? If the exploitation of human capital can be a source of competitive advantage, is this a sustainable advantage? Why or why not? Exploiting vs. Utilizing Human Capital: Exploiting human capital refers to using employees’ skills without fair compensation or consideration for their well-being, while using it as a source of competitive advantage means leveraging talent through support, development, and engagement. Exploitation can lead to shortterm gains in scenarios like high-pressure sales tactics, but it typically results in high turnover and a negative reputation, making it unsustainable in the long run. 4. Are there any ethical dilemmas associated with outsourcing? If so, what are they? How would you deal with outsourcing ethical dilemmas you believe exist? Ethical Dilemmas in Outsourcing: Outsourcing can present ethical dilemmas, including labor exploitation, poor working conditions, and environmental concerns. To address these issues, firms should establish strict ethical guidelines for suppliers, conduct regular audits, and ensure compliance with labor laws. Transparency and open communication with stakeholders can also help mitigate ethical risks associated with outsourcing. 5. What ethical responsibilities do managers have if they determine that a set of employees has skills that are valuable only to a core competence that is becoming a core rigidity? Managerial Ethical Responsibilities with Core Rigidities: If managers identify valuable skills that have become part of a core rigidity, they have a responsibility to either redeploy these skills into more innovative areas or support affected employees in finding roles that utilize their talents effectively. Ethical leadership involves recognizing when to adapt or let go of outdated competencies to maintain a healthy organizational culture and workforce morale. 6. Through the Internet, firms sometimes make a vast array of data, information, and knowledge available to competitors as well as to customers and suppliers. What ethical issues, if any, are involved when the firm finds competitively relevant information on a competitor’s website? Ethical Issues with Competitor Information: When firms access competitively relevant information from a competitor's website, ethical issues may arise concerning the intention behind the data collection and the potential for misuse. Firms should respect the spirit of competition and avoid leveraging sensitive information in ways that could harm competitors or violate privacy expectations. Maintaining ethical boundaries is crucial in a competitive landscape. 7. Firms are aware that competitors read information that is posted on their websites. Given this reality, is it ethical for a firm to include false information, for example, about its sources of competitive advantage on its website in hopes that the information will influence competitors to take certain actions as a result of viewing it? Ethics of False Information on Websites: It is unethical for a firm to include false information about its competitive advantages on its website. Misleading competitors can lead to trust violations and reputational damage if the truth comes to light. Ethical business practices should prioritize honesty and transparency, even in competitive environments, as integrity fosters long-term relationships and sustainable success. Internet Exercise A fairly recent global development in the automobile industry has been the mergers and acquisitions going on among firms. These include the coupling of Daimler-Benz with Chrysler; VW with Audi, Rolls Royce, and Bentley; GM with Saab; and Ford’s acquisition of Volvo. The new partnerships have allowed firms to combine resources and capabilities to build a new breed of universal car. Explore the websites of these firms. Is there still a specific brand identification associated with each type of car? How important will branding be in the future for these products? *e-project: Imagine that you are able to purchase your dream car from among the current year’s models. Before buying though, you would like to learn something about how the car is produced. For example, is your Rolls Royce being assembled alongside a Beetle? Using Internet sources, attempt to trace the origins of the car’s major components, technology, and performance-testing resources, as well as the production and advertising or marketing facilities. Solution Manual for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781285425184, 9781285425177, 9780538753098, 9781133495239, 9780357033838, 9781305502208, 9781305502147