technology & organisational change the external environment hanson & dowling chapters 2

Technology & Organisational Change

The External Environment

Hanson & Dowling Chapters 2

Economic

Technological

Demographic

PoliticalLegal

Global

Socio-Cultural

New Entrants

Suppliers

Customers

Substitutes

Traditional Rivals

GENERALENVIRONMENT

INDUSTRYENVIRONMENT

External Environmental Analysis Scanning

Identifying early signals of changes

MonitoringDetecting meaning through ongoing observation of changes

ForecastingDeveloping projections of anticipated outcomes

AssessingDetermining effect of changes upon firm’s strategy

Economic Growth Related economies Open trade policies Economic regulation National infrastrucure

Economic GrowthEconomic Growth Economic growth affects individual firms, but Economic growth affects individual firms, but

they have no control over itthey have no control over it Economic growth:Economic growth:

USA 4.1% (1995USA 4.1% (1995–9–9)) Australia 3.4% (1989Australia 3.4% (1989–9–9)) UK 1.9% (1989UK 1.9% (1989–9–9)) Germany 0.6% (1989Germany 0.6% (1989–9–9))

Australia’s Two Economies In the ‘global’ cities of Sydney and In the ‘global’ cities of Sydney and

Melbourne, unemployment is low and Melbourne, unemployment is low and incomes are risingincomes are rising

In country areas, unemployment is high (over In country areas, unemployment is high (over 10% on average) and property values are 10% on average) and property values are fallingfalling

In 1996, the average nett household wealthIn 1996, the average nett household wealth for the Mersey-Lyell region of Tasmania was for the Mersey-Lyell region of Tasmania was

$87,314 $87,314 in 12 middle-class harbourside Sydney suburbs in 12 middle-class harbourside Sydney suburbs

was $393,381was $393,381

Demographics Population Size Age Structure Geographic distribution Ethnic mix Income distribution

Australia’s Ageing PopulationAustralia’s Ageing Population In June 1998, 12% (2.3 million) of the Australian In June 1998, 12% (2.3 million) of the Australian

population was aged over 65:population was aged over 65: Only 6% in the labour forceOnly 6% in the labour force Only 58% held superannuationOnly 58% held superannuation

By 2051, 24% of the population will be 65 or By 2051, 24% of the population will be 65 or overover

Challenges:Challenges: Income supportIncome support Health infrastructureHealth infrastructure

Declining Birth RateDeclining Birth Rate Replacement rate for a population is 2.1Replacement rate for a population is 2.1 The birth rate in Australia in 1998 was 1.76 The birth rate in Australia in 1998 was 1.76 Declining birth rate in the western world:Declining birth rate in the western world:

US birth rate 2.0US birth rate 2.0 NZ birth rate 2.0NZ birth rate 2.0 British birth rate 1.70British birth rate 1.70 German birth rate 1.5German birth rate 1.5 Italian birth rate 1.2Italian birth rate 1.2

Politico-Legal Segment Government regulations Government charges Legal system Rule of Law Government support Commitment to attaining a national competitive

advantage

Socio-cultural Segment Work Habits Savings Social Welfare & Health Environmental concerns Religion Educational standards Workforce diversity

Gender Wages RatesGender Wages Rates Pay differentials still exist between men and Pay differentials still exist between men and

women all over the worldwomen all over the world Men earn:Men earn:

34% more than women in the UK34% more than women in the UK 17% more in Sweden17% more in Sweden 24% more in Australia24% more in Australia

Technology Innovation Telecommunications infrastructure Internet Intellectual property

Global Segment New global markets International political events Global market integration International Treaties (e.g. WTO)

Traditional Competitors

The firm

New Entrants

Substitute Products

Suppliers Customers

Porter’s 5 forces

New Entrants: Barriers to Entry Economies of Scale Product Differentiation Capital Requirements Switching Costs Access to Distribution Channels Cost Disadvantages Independent of Scale Government Policy Expected Retaliation

Bargaining Power of Suppliers Suppliers exert power in the industry by

threatening to raise prices or reduce quality Powerful suppliers can squeeze industry

profitability if firms are unable to recover cost increases

Bargaining Power of Suppliers (cont.)Bargaining Power of Suppliers (cont.) Suppliers will be powerful if:Suppliers will be powerful if:

Supplier industry is dominated by a few firmsSupplier industry is dominated by a few firms Supplier’s products have few substitutesSupplier’s products have few substitutes Buyer is not an important customer to the Buyer is not an important customer to the

suppliersupplier Supplier’s product is important to the buyer’s Supplier’s product is important to the buyer’s

productproduct Supplier products are differentiatedSupplier products are differentiated Supplier’s products have high switching costsSupplier’s products have high switching costs Supplier poses a credible threat of forward Supplier poses a credible threat of forward

integrationintegration

Bargaining Power of Buyers Buyers compete with the supplying industry by:

Bargaining-down prices Forcing higher quality Playing firms off against each other

Bargaining Power of Buyers (cont.)Buyer groups are likely to be powerful if:Buyer groups are likely to be powerful if: Buyers are concentrated or purchases are large relative Buyers are concentrated or purchases are large relative

to the seller’s salesto the seller’s sales Purchase accounts for a large part of the supplier’s salesPurchase accounts for a large part of the supplier’s sales Products are undifferentiatedProducts are undifferentiated Buyers face few switching costsBuyers face few switching costs Buyer’s industry earns low profitsBuyer’s industry earns low profits Buyer presents a credible threat of backward integrationBuyer presents a credible threat of backward integration Product is not important to qualityProduct is not important to quality Buyer has full informationBuyer has full information

Threat of Substitute Products Products with similar function limit the prices

firms can charge Products with improving price/performance Products with improving price/performance

tradeoffs relative to present industry products egtradeoffs relative to present industry products eg Electronic security systems in place of Electronic security systems in place of

security guardssecurity guards Fax machines in place of overnight mail Fax machines in place of overnight mail

deliverydelivery

Rivalry among Existing CompetitorsRivalry among Existing Competitors Jockeying for strategic positionJockeying for strategic position Using price competitionUsing price competition Staging advertising battlesStaging advertising battles Increasing consumer warranties or serviceIncreasing consumer warranties or service Making new product introductionsMaking new product introductions

Rivalry among Existing CompetitorsRivalry among Existing Competitors Intense rivalry occurs when a firm is pressured Intense rivalry occurs when a firm is pressured

or sees an opportunityor sees an opportunity Price competition often leaves the entire industry Price competition often leaves the entire industry

worse offworse off Advertising battles may increase total industry Advertising battles may increase total industry

demand, but may be costly to smaller demand, but may be costly to smaller competitorscompetitors

Rivalry among Existing CompetitorsRivalry among Existing Competitors Cut-throat competition is more likely to occur Cut-throat competition is more likely to occur

with:with: Numerous or equally balanced competitorsNumerous or equally balanced competitors Slow-growth industrySlow-growth industry High fixed costsHigh fixed costs High storage costsHigh storage costs Lack of differentiation or switching costsLack of differentiation or switching costs Capacity added in large incrementsCapacity added in large increments Diverse competitorsDiverse competitors High strategic stakesHigh strategic stakes High exit barriersHigh exit barriers

Rivalry among Existing CompetitorsRivalry among Existing Competitors High exit barriersHigh exit barriers can include:can include:

Specialised assetsSpecialised assets Fixed cost of exit (e.g. labour agreements)Fixed cost of exit (e.g. labour agreements) Strategic interrelationshipsStrategic interrelationships Emotional barriersEmotional barriers Government and social restrictionsGovernment and social restrictions

Effects of Entry and Exit Barriers on Industry ProfitsEffects of Entry and Exit Barriers on Industry ProfitsEffects of Entry and Exit Barriers on Industry ProfitsEffects of Entry and Exit Barriers on Industry Profits

High, Risky Returns

Entry Barriers

Exit Barriers

HighLow

Low, Stable Returns

High, Stable Returns

Low, Risky Returns

Competitor Analysis What drives the competitor? What can the competitor do? What does the competitor believe about itself

and the industry? What are the competitors capabilities? What will the competitor do in the future? Where do we have a competitive advantage? How will this change our relationship with our

competition?

The Internal Environment

Hanson & Dowling Chapter 3

Key Questions in Internal AnalysisKey Questions in Internal Analysis How do we assemble bundles of resources, How do we assemble bundles of resources,

capabilities and core competencies to create capabilities and core competencies to create value for customers?value for customers?

Will environmental changes make our core Will environmental changes make our core competencies obsolete?competencies obsolete?

Are substitutes available for our core Are substitutes available for our core competencies?competencies?

Are our core competencies easily imitated?Are our core competencies easily imitated?

Key Questions in Internal AnalysisKey Questions in Internal Analysis Complicated byComplicated by

UncertaintyUncertainty ComplexityComplexity Inter-organisational conflictsInter-organisational conflicts

ResourcesResources

**** TangibleTangibleTangibleTangible**** IntangibleIntangibleIntangibleIntangible

CapabilitiesCapabilities

Teams of Teams of ResourcesResourcesTeams of Teams of ResourcesResources

Sources ofSources ofSources ofSources of

CoreCoreCompetenciesCompetencies

CompetitiveCompetitiveCompetitiveCompetitiveAdvantageAdvantageAdvantageAdvantage

StrategicStrategicCompetitivenessCompetitiveness

Above-AverageAbove-AverageAbove-AverageAbove-AverageReturnsReturnsReturnsReturns

CompetitiveCompetitiveAdvantageAdvantage

Gained throughGained throughGained throughGained throughCore CompetenciesCore CompetenciesCore CompetenciesCore Competencies

Discovering Core CompetenciesDiscovering Core CompetenciesDiscovering Core CompetenciesDiscovering Core Competencies

ValueValueChainChain

AnalysisAnalysis

ValuableValuable

RareRare

Costly to ImitateCostly to ImitateNon-substitutableNon-substitutable

Criteria ofCriteria ofSustainableSustainableAdvantagesAdvantages

Resources Tangible

Financial Physical Human Resources Organisational

Intangible Technological Innovation Reputation (Brand power)

Brand PowerBrand Power Brands can provide a company with competitive Brands can provide a company with competitive

advantagesadvantages Country Road uses a brand to market a range of Country Road uses a brand to market a range of

crockery, tea towels, napkins and vases as well crockery, tea towels, napkins and vases as well as clothesas clothes

The Harley Davidson name also adorns:The Harley Davidson name also adorns: A limited-edition Barbie DollA limited-edition Barbie Doll A restaurant in New YorkA restaurant in New York A line of L’Oreal cologneA line of L’Oreal cologne

Knowledge Management Knowledge is spread widely across all Knowledge is spread widely across all

employees, organisations and industry settingsemployees, organisations and industry settings Many companies are now creating the new Many companies are now creating the new

position of Chief Learning Officer (CLO)position of Chief Learning Officer (CLO) The CLO is responsible for determining how a The CLO is responsible for determining how a

firm should manage knowledge to derive firm should manage knowledge to derive maximum competitive value from itmaximum competitive value from it

In the USA, 78% of companies have indicated In the USA, 78% of companies have indicated they are moving towards becoming knowledge-they are moving towards becoming knowledge-based enterprisesbased enterprises

Capabilities The firm’s capacity or ability to integrate

individual firm resources to achieve a desired objective

Develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources and which are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees

Capabilities (cont.)• Become important when they are combined in

unique combinations that create core competencies which have strategic value and which can lead to competitive advantage

Core Competencies What a firm does that is strategically valuable The essence of what makes an organization The essence of what makes an organization

unique in its ability to provide value to customersunique in its ability to provide value to customers McKinsey & Co. recommend identifying three to McKinsey & Co. recommend identifying three to

four competencies to use in framing strategic four competencies to use in framing strategic actionsactions

Core Competencies It must be:It must be:

Valuable Rare Costly to imitate Non-substitutable

Valuable RareCostly to Imitate

Non-sub-stitutable

Competitive Consequences

Performance Implications

NONO NONO NONO NONO

YESYES NONO NONO YES/NOYES/NO

YESYES NONO YES/NOYES/NOYESYES

CompetitiveCompetitiveDisadvantageDisadvantage

Below Below AverageAverageReturnsReturns

CompetitiveCompetitiveParityParity

AverageAverageReturnsReturns

TemporaryTemporaryCompetitiveCompetitiveAdvantageAdvantage

Aver./Above Aver./Above AverageAverageReturnsReturns

SustainableSustainableCompetitiveCompetitiveAdvantageAdvantage

YESYESYESYES YESYES YESYESAbove Above

AverageAverageReturnsReturns

Core Competencies Costly to ImitateCore Competencies Costly to Imitate Unique Historical ConditionsUnique Historical Conditions

An unusual evolutionary pattern of growth may An unusual evolutionary pattern of growth may contribute to the development of competencies contribute to the development of competencies in a manner unique to those particular in a manner unique to those particular circumstancescircumstances

Causal AmbiguityCausal AmbiguityCompetitors are unable to detect how a firm Competitors are unable to detect how a firm uses its competencies as a foundation for uses its competencies as a foundation for competitive advantagecompetitive advantage

Core Competencies Costly to ImitateCore Competencies Costly to Imitate Social complexitySocial complexity

A firm’s capabilities are the result of complex A firm’s capabilities are the result of complex social phenomena, such as interpersonal social phenomena, such as interpersonal relationships, trust and friendships among relationships, trust and friendships among managers or a firm’s reputation with suppliers managers or a firm’s reputation with suppliers and customersand customers

Porter’s Value Chain Model Production consists of a series of activities that

add a margin of value to a firm’s products or services

The added value increases profits, enhances asset value and competitive position

Primary activities Directly related to production and distribution

Support activities Make delivery possible Include organisational structure, HR, technology and

procurement

SupportActivities

Primary Activities

Value Chain AnalysisValue Chain AnalysisValue Chain AnalysisValue Chain Analysis

Technological DevelopmentTechnological Development

Human Resource ManagementHuman Resource Management

Firm InfrastructureFirm Infrastructure

ProcurementProcurement

identifies which resources and capabilities can add value

MARGIN

Porter’s Value Chain Model Increase profits by:

Increasing steps that involve primary activities Reducing steps that involve support activities Converting support activities to primary

activities

Total Value SystemTotal Value System

Supplier Value Chain Channel Value Chain Buyer Value Chain

To capitalise on the usefulness of the Value Chain concept it is important to recognise that Value Chains are part of a::

Firm Value Chain

Supplier Value Chain

Channel Value Chain Buyer Value ChainFirm Value Chain

Upstream ValuePerform valuable activities that complement the firm’s activities

Supplier Value Chain

Channel Value Chain

Buyer Value ChainFirm Value Chain

Each firm must eventually find a way to become a part of some buyer’s value chain

Supplier Value Chain Channel Value Chain

Buyer Value Chain

Firm Value Chain

Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain

This creates VALUE!!

Outsourcing Firms often purchase a portion portion

of their value-creating activities from specialty external suppliers who can perform these functions more efficiently more efficiently

Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing Improve Business FocusImprove Business Focus Provide Access to World-Class CapabilitiesProvide Access to World-Class Capabilities Accelerate Business Re-Engineering BenefitsAccelerate Business Re-Engineering Benefits Share RisksShare Risks Free Resources for Other PurposesFree Resources for Other Purposes

Core Competencies: Core Competencies: Cautions and RemindersCautions and Reminders never assume that core competencies will never assume that core competencies will

continue to provide a competitive advantagecontinue to provide a competitive advantage All core competencies have the potential to All core competencies have the potential to

become core rigiditiesbecome core rigidities Core rigidities sow the seeds of organisational inertia Core rigidities sow the seeds of organisational inertia

and prevent the firm from responding appropriately to and prevent the firm from responding appropriately to changes in the external environmentchanges in the external environment

Strategic myopia and inflexibility can strangle the Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental firm’s ability to grow and adapt to environmental change or competitive threatschange or competitive threats

Strategic Strategic MissionStrategic Strategic Mission

A statement of the firm’s unique purpose and the scope of its operations in product market terms

Strategic IntentStrategic Intent

Leveraging of a firm’s resources, Leveraging of a firm’s resources, capabilities and core competencies capabilities and core competencies to accomplish what may appear to to accomplish what may appear to be unattainable goals in the be unattainable goals in the competitive environmentcompetitive environment

ResourcesResources

**** TangibleTangibleTangibleTangible**** IntangibleIntangibleIntangibleIntangible

CapabilitiesCapabilities

Teams of Teams of ResourcesResourcesTeams of Teams of ResourcesResources

Sources ofSources ofSources ofSources of

CoreCoreCompetenciesCompetencies

CompetitiveCompetitiveCompetitiveCompetitiveAdvantageAdvantageAdvantageAdvantage

StrategicStrategicCompetitivenessCompetitiveness

Above-AverageAbove-AverageAbove-AverageAbove-AverageReturnsReturnsReturnsReturns

CompetitiveCompetitiveAdvantageAdvantage

Gained throughGained throughGained throughGained throughCore CompetenciesCore CompetenciesCore CompetenciesCore Competencies

Discovering Core CompetenciesDiscovering Core CompetenciesDiscovering Core CompetenciesDiscovering Core Competencies

ValueValueChainChain

AnalysisAnalysis

ValuableValuable

RareRare

Costly to ImitateCostly to ImitateNon-substitutableNon-substitutable

Criteria ofCriteria ofSustainableSustainableAdvantagesAdvantages

technology & organisational change the external environment hanson & dowling chapters 2

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