Future of Business – BUSS1000 (Semester 1, 2019)

Topic Notes

Introduction Megatrends are large, transformative processes with ‘global reach,

to broad scope and a fundamental and dramatic impact’ (Naisbitt)
megatrends • They are poised to ‘throw companies, individuals and societies into
freefall’ (Hajkowicz)
• They are interlinked and involve a significant shift in
environmental, societal and economic conditions
• For business, these represent challenges and opportunities
• We do not know what will happen tomorrow, but we can analyse
the megatrends for an idea of the future

Wicked Wicked problems are complex social and policy problems

problems • “The term ‘wicked’ in this context is used, not in the sense of evil,
but rather as an issue highly resistant to resolution.” (Tackling
Wicked Problems, 2017)
• Wicked problems are different to megatrends, but are in many
ways products of megatrends
• You can tame wicked problems, but cannot solve them
• Examples include: water and food shortages, youth
unemployment, population growth, poverty, climate change –
Inequality, global security

Jerry Leung 1
 Wicked Characteristics of wicked problems include:
problems • The problem involves many stakeholders with different values
and priorities
• The issue’s roots are complex and tangled
• The problem is difficult to come to grips with and changes with
every attempt to address it
• The challenge has no precedent
• There is nothing to indicate the right answer to the problem

Role of Introduction to basic economics

businesses
The economy is the total sum of all the economic activity within a given
Introduction region. It is complex and constantly in motion.
to basic • Economics is the study of how a society uses its scarce resources
economics to produce and distribute goods and services
• Microeconomics is the study of how consumers, businesses and
industries collectively determine the quantity of goods and
services demanded and supplied at different prices
• Macroeconomics is the study of ‘big-picture’ issues in an
economy, including competitive behaviour among firms, the effect
of government policies and resource allocation issues

Factors of production

Factors of production include:

• Natural resources include land, forests, minerals, water and other
tangible assets usable in their natural state
• Human resources are all the people (and their individual talents
and capacities) who work in an organisation or on its behalf.
• Capital describes the funds that finance the operations of a
business as well as the physical, human-made elements used to
produce goods and services such as factories and computers.
• Entrepreneurship is the combination or spirit of innovation,
initiative and willingness to take the risks required to create and
operate new businesses.
• Knowledge is the collective intelligence of an organisation which is
expertise gained through experience or association

Jerry Leung 2
 Role of The economic impact of scarcity
businesses
Scarcity is the condition of any productive resource that has finite supply.
Introduction All the factors of production (above) are limited. This results in:
to basic • Competition in resources – businesses compete with each other
economics for materials, employees and customers whilst consumers
compete with other consumers
• Trade-offs – entities must give up something to get something
else (e.g. allocation of money on advertising versus production
materials or customer support)

Opportunity cost refers to the value of the most appealing alternative

from all those that were not chosen.

Economic systems

An economic system involves the policies that define a society’s

particular economic structure – the rules by which a society allocates
economic resources to satisfy citizens’ needs.

In free-market systems, individuals and companies are largely free to

decide what to produce, how to produce them, whom to sell to and what
price to sell them (otherwise described by capitalism, private enterprise)
• However, local, state, national and even international
governments intervene in the economy to accomplish goals that
leaders deem socially or economically desirable
• This practice of limited intervention is characteristic of a mixed
economy or mixed capitalism
• This could be in the form of price controls, which can involve
maximum allowable prices and minimum allowable prices

In a planned system, governments largely control the allocation of

resources and limit freedom of choice in order to accomplish their goals.
• In pursuit of social equality, private enterprise is generally
regarded as wasteful and exploitative
• Communism involves the state ownership of all major productive
resources without class divisions
• Socialism lies between communism and capitalism with a fairly
high degree of government planning and some government
ownership of capital resources

Jerry Leung 3
 Role of Economic systems (continued)
businesses
Capitalism and socialism are competing philosophies but are not
Introduction mutually exclusive – for example, public schools and major health care
to basic programs in capitalist systems (e.g. the United States and Australia) are all
economics programs that fit the economic definition of socialism.

Nationalisation and privatisation

Nationalising is a government’s takeover of selected companies or

industries. Privatising is turning over services once performed by the
government of private businesses (generally in hope that private firms
motivated by the profit incentive will do a more efficient job)

The forces of supply and demand

The forces of supply and demand determine the quantity of goods and
services produced alongside the prices in which they are sold.

Demand refers to buyers’ willingness and ability to purchase products at

various price points at a given time.

Supply refers to the specific quantity of a product that the seller is able
and willing to provide at various price points at a given time.

Demand

A demand curve is a graph that shows the relationship between the

amount of products will purchase at various prices with all other factors
being equal. They will typically slope downwards.

Jerry Leung 4
 Role of Supply
businesses
A supply curve is a graph of the quantities of a product that sellers will
Introduction offer for sale, regardless of demand, at various prices. They will typically
to basic slope upwards.
economics

Interactions between supply and demand

Buyers wish to buy at the lowest possible price whilst sellers wish to sell
at the highest possible price. The market therefore arrives at a
compromise which is the equilibrium point – the point at which the
quantity supplies is equal to the quantity demanded.

Jerry Leung 5
 Role of Understanding how an economy operates
businesses
Competition
Introduction
to basic Competition is the situation in which two or more suppliers of a product
economics are rivals in the pursuit of the same customers.

The business cycle

The economy is always in a state of change, expanding and contracting in

response to many different factors.

Economic expansion is occurring when the economy is growing and

consumers are spending more money, which stimulates higher
employment and wages.

Economic contraction occurs when such spending declines, employment

drops and the economy as a whole slows down.
• If the period of downward swing is severe, the nation may enter
into a recession – a period during which national income,
employment and production all fall (defined as at least six months
of decline in the gross domestic product)
• A deep and prolonged recession can be considered a depression

When a period of recession is over, the economy enters into a period of

recovery – such up and down swings are commonly known as a business
cycle (or more accurately, economic fluctuations)

Jerry Leung 6
 Role of Understanding how an economy operates (continued)
businesses
Unemployment
Introduction
to basic The unemployment rate is the percentage of the labour force (everyone
economics over 16 who has or is looking for a job) currently without employment.

Inflation

Inflation is a steady rise in the average price of goods and services

throughout the economy. Deflation is a sustained fall in average prices.
• Inflation is a major concern for consumers, businesses and
government leaders because it affects purchasing power – the
amount or good or service you can buy with a given amount on
money. When prices go up, purchasing power goes down
• If wages keep pace with prices, inflation is less worrisome

The role of government in a free-market system

Regulation describes the reliance more on laws and polices than on

market forces to govern economic activity. Reasons for regulation:
• Companies cannot always be depended upon to act in accordance
with stakeholder interests and that the markets
• The market cannot be relied upon to prevent or punish abuses and
failures of corporations

Jerry Leung 7
 Role of Understanding how an economy operates (continued)
businesses
The role of government in a free-market system
Introduction
to basic Deregulation involves removing regulations that allow the market to
economics prevent excesses and correct itself over time. Reasons for deregulation:
• Government can stifle innovation that ultimately help everyone by
boosting the economy
• Regulations burden individual companies and industries with
unfair costs and limitations

Protecting stakeholders

Stakeholders of businesses may include colleagues, employers,

supervisors, investors, customers, suppliers etc. In serving one
stakeholder, businesses may sometimes neglect the interests of other
stakeholders – hence, regulatory agencies have been established.

Fostering competition

Based on the belief that competition benefits the economy and society in
general, governments intervene in markets to preserve competition and
to ensure no single enterprise becomes too powerful (see page 5).
• Antitrust legislation limits what businesses can and cannot do to
ensure all competitors have a chance of succeeding
• Previously, a few large companies (known as trusts) in some
industries controlled enough of the supply and distribution in
their respective industries that they could muscle smaller
competitors out of the way
• Governments may occasionally prohibit mergers or acquisitions
to preserve competition and consumer choice (or only permit
them with conditions fulfilled, e.g. divesting some parts of the
company or making other concessions)

Encouraging innovation and economic development

Governments can encourage the development and adoption of

innovations that they consider beneficial (e.g. solar panel subsidies). They
can also establish economic development zones to encourage businesses
to locate or expand in particular geographic areas – by providing
incentives such as tax credits, low-interest loans and reduced utility
rates which meet required criteria.

Jerry Leung 8
 Role of The role of government in a free-market system (continued)
businesses
Stabilising and stimulating the economy
Introduction
to basic Monetary policy involves adjusting the nation’s money supply (the
economics amount of spendable money in the economy at any given time) by
increasing or decreasing interest rates.

Fiscal policy involves changes in the government’s revenues and

expenditures to stimulate a slow economy or dampen a growing economy
that is in danger of overheating and causing inflation.
• This can be done by altering tax rates or stimulating the economy
through increasing purchases (e.g. creating new programs or
projects to expand employment opportunities, increase demand
for goods and services)
• Governments may sometimes step in to rescue specific
companies, with the rationale that its collapse would harm a
significant portion of economy as a whole

Economic measures and monitors

Economic indicators are statistics such as interest rates, unemployment

rates, housing data and industrial productivity data that lets businesses
and political leaders measure and monitor economic performance.

Leading indicators suggest changes that might happen to the economy in

the future which are useful for planning) (e.g. housing starts, durable-
goods orders). Lagging indicators provide confirmation that something
has occurred in the past (e.g. corporate profits, unemployment rate)

Price indexes offer a way to monitor the inflation or deflation in various

sectors of the economy. An index is a convenient way to compare
numbers over time and is completed by dividing the current value of
some quantity by a baseline historical value and multiplying by 100.
• The consumer price index (CPI) measures the rate of inflation by
comparing the change in prices of a representative ‘basket’ of
consumer goods and services (e.g. clothing, food, housing etc.)
• The producer price index (PPI) measures prices at the producer or
wholesale level, reflecting what businesses are paying for the
products they require

Jerry Leung 9
 Role of Economic measures and monitors (continued)
businesses
The gross domestic product (GDP) is the value of all the final goods and
Introduction services produced by businesses located within a nation’s borders. It
to basic excludes outputs from overseas operations of domestic companies.
economics • It measures a country’s output – its production, distribution and
use of goods and service
• This is through computing the sum of all goods and services
produced for final use in a country during a specific period

Role of Businesses have increasingly by viewed as a major cause of social,

businesses environmental and economic problems, even as they have begun to
embrace corporate responsibility.
Creating • This diminished trust in business leads political leaders to set
shared value policies that undermine competitiveness and hinder economic
growth – hence, business is caught in a vicious circle
• A part of the problem lies with companies themselves, as they
view value creation narrowly – optimising short-term financial
performance in a bubble whilst missing customer needs and
broader influences that determine long term success (e.g.
depletion of natural resources)
• This problem has been exacerbated by attempting to address
social weaknesses at the expense of business

Introduction to creating shared value

The concept of shared value can be defined as the policies and operating
practices that enhance the competitiveness of a company while
simultaneously advancing the economic and social conditions in the
communities in which it operates.
• Creating shared value aims to create economic value in a way
that also creates value for society by addressing its needs and
challenges – by focussing on identifying and expanding the
connections between social and economic progress
• This requires a deeper appreciation of societal needs, a greater
understanding of the true bases of company productivity and the
ability to collaborate across profit/non-profit boundaries
• In neoclassical thinking, a requirement for social improvement
imposes a constraint on the corporation (e.g. hiring disabled).
Adding a constraint to a firm that is already maximising profits,
says the theory, will inevitably raise costs and reduce profits

Jerry Leung 10
 Role of Introduction to creating shared value (continued)
businesses
• A related concept (with the same conclusion) is the notion of
Creating externalities – which arise when firms create social costs that
shared value they do not have to bear (e.g. pollution)
• Thus, society must impose taxes, regulations and penalties so
that firms ‘internalise’ these externalities (the rationale behind a
lot of government policy)
• Corporate responsibility programs have typically been a reaction
to external pressure to improve firms’ reputation and are now
perceived as a necessary expense – however, societal issues are
still rarely approached from a value perspective but treated as a
peripheral matter

How shared value is created

The three avenues for creating shared value are listed below. They are
mutually reinforcing and intertwined.

Reconceiving products and markets

• The social benefits of providing appropriate products to lower-
income and disadvantaged consumers can be profound, while the
profits for companies can be substantial
• Creating this kind of shared value is to identify all the societal
needs, benefits and harms that are or could be embodied in the
firm’s products (these constantly change)
• Meeting needs in underserved markets often requires redesigned
products or different distribution methods which may
consequently trigger fundamental innovations that also have
applications in traditional markets

Redefining productivity in the value chain1

• A company’s value chain inevitably affects and is affected by
numerous societal issues such as natural resource and water use,
health and safety, working conditions and equal treatment in the
workplace. Opportunities to create shared value arise because
societal problems can also create economic problems in the
firm’s value chain (i.e. externalities inflicting internal costs)

1
A value chain is a set of activities that a firm operating in a specific industry performs in order to deliver a
valuable product or service for the market.

Jerry Leung 11
 Role of How shared value is created (continued)
businesses
Redefining productivity in the value chain2
Creating • Energy use and logistics – better technology, recycling,
shared value cogeneration and numerous other practices have the potential to
create shared value (e.g. logistical systems beginning to be
redesigned to reduce shipping distances, streamline handling,
improve vehicle routing – cheaper costs, environmentally friendly)
• Resource use – heightened environmental awareness and
advances in technology are catalysing new approaches in areas
such as utilisation of water, raw materials and packages as well as
expanding recycling and reuse (similar to above)
• Procurement – the traditional playbook calls for companies to
commoditise and exert maximum bargaining power on suppliers
to drive down prices even when purchasing from small
businesses/subsistence-level farmers, empowering local suppliers
through financial grants and practical assistance can increase
supplier profits and local employment whilst also resulting in a
more reliable supply chain (hence creating shared value)
• Distribution – examining this from a shared value perspective can
lead to more cost-effective, environmentally friendly and/or
humanitarian distribution models (e.g. digitisation of information)
• Employee productivity – traditional approaches to minimise the
cost of expensive employee health care coverage resulted in lost
workdays and diminished productivity, investment in wellness
programs creates shared value (benefits employees’ health whilst
also resulting in a more present and productive workforce)
• Location – the oversimplified thinking that ‘the cheaper the
location, the better’ is being challenged by rising costs of energy
and carbon emissions but also a greater recognition of the
productivity cost of highly dispersed production systems/hidden
costs of distant procurement, remaking value chains closer to
home as to establish deep roots in important communities can
lower production costs and foster local employment

2
A value chain is a set of activities that a firm operating in a specific industry performs in order to deliver a
valuable product or service for the market.

Jerry Leung 12
 Role of How shared value is created (continued)
businesses
Building up supportive industry clusters at the company’s locations
Creating • Productivity and innovation are strongly influenced by clusters or
shared value geographic concentrations of firms, related businesses, suppliers,
service providers and logistical infrastructure in a particular field
• They play a crucial role in driving productivity, innovation and
competitiveness. Capable local suppliers foster greater logistical
efficiency and ease of collaboration
• Firms create shared value by building clusters to improve
company productivity while addressing gaps or failures in the
framework conditions surrounding the cluster – this can also lead
to more open and transparent markets
• Enabling fair and open markets can allow a company to secure
reliable supplies and give suppliers better incentives for quality
and efficiency while also substantially improving the incomes and
purchasing power of local citizens (job creation)
• To support cluster development in the communities in which they
operate, companies need to identify gaps and deficiencies in
areas such as logistics, suppliers, distribution channels, training,
market organisation and educational institutions
• Then, the task is to focus on the weaknesses that represent the
greatest constraints to the company’s own productivity and
growth, and distinguish those areas that he company is best
equipped to influence directly from those in which collaboration
is more cost-effective
• Enhancing infrastructure and institutions in a region often
requires collective action (i.e. collaboration with private sector,
trade organisations, government agencies, NGOs) as to share the
cost, win support and assemble the right skills

Creating shared value in practice

Profits involving a social purpose represent a higher form of capitalism –

one that enable society to advance more rapidly while allowing
companies to grow even more.
• The result is a positive cycle of company and community
prosperity, which leads to profits that endure
• Creating shared value highlights the immense human needs to be
met, the large new markets to serve and the internal costs of
social and community deficits – as well as the competitive
advantages available from addressing them
• If a company can improve societal conditions, it will often
improve business conditions and trigger positive feedback loops

Jerry Leung 13
 Role of Government regulation and shared value
businesses
Regulation is necessary for well-functioning markets, something that
Creating became abundantly clear during the recent financial crisis. However, the
shared value way regulations are designed and implemented determine whether they
benefit society or work against it.

Regulates that enhance shared value have the following characteristics:

• They set clear and measurable goals (e.g. involving energy use,
health matters, or safety)
• They set performance standards but do not prescribe the
methods to achieve them
• They define phase-in periods for meeting the standards, which
reflect the investment or new-product cycle in the industry (this
gives businesses time to develop and introduce new products and
processes consistent with the economics of their business)
• They put in place universal and performance reporting systems,
with the government investing in infrastructure for collecting
reliable benchmarking data – this motivates continual
improvement beyond current targets
• They require the efficient and timely reporting of results which
can be audited by the government if necessary (rather than
imposing detailed and expensive compliance processes)

Distinguishing corporate social responsibility from creating shared value

Jerry Leung 14
 Role of In French, the term ‘entrepreneur’ describes someone who undertakes a
businesses significant project or activity.
• More specifically, it came to be used to identify the venturesome
Social individuals who stimulated economic progress by finding new
entrepreneur and better ways of doing things (i.e. create value)
-ship • According to Schumpeter, entrepreneurs are the change agents in
the economy as they serve new markets or create new ways of
doing things to move the economy forward
• Drucker does not require entrepreneurs to cause change but sees
them as exploiting the opportunities that change creates (‘the
entrepreneur always searches for change, responds to it and
exploits it as an opportunity’).
• An opportunity, presumably, means an opportunity to create
value in this way. Entrepreneurs have a mindset that sees the
possibilities rather than the problems caused by change
• Drucker also notes that not every new small business is an
entrepreneur, nor does entrepreneurship require a profit motive
• Stevenson added an element of resourcefulness to the
opportunity-oriented definition of an entrepreneur, asserting
that entrepreneurs mobilise the resources of others to achieve
their own entrepreneurial objectives

Social entrepreneurs are entrepreneurs with a social mission which is

explicit and central. They may be involved in social purpose business
ventures, hybrid organisations with non-for-profit and for-profit
elements, exclusively not-for-profit organisations or even business
owners who integrate social responsibility into their operations.
• Wealth is just a means to an end for social entrepreneurs
• Wealth creation is a way of measuring value creation for
business entrepreneurs (as they are subject to market discipline),
as if they do not shift resources to economically productive uses,
they tend to be driven out of business
• An entrepreneur’s ability to attract resources in a competitive
marketplace is a reasonably good indication that the venture
represents a more productive use of these resources than the
alternatives it is competing against
• Entrepreneurs who can pay the most for resources are typically
the ones who can put the resources to higher valued uses, as
determined in the marketplace
• Value is created in business when customers are willing to pay
more than it costs to produce the good or service being sold. The
profit (revenue minus costs) that a venture generates is a
reasonably good indicator of the value it has created

Jerry Leung 15
 Role of Social entrepreneurs (continued)
businesses • If an entrepreneur cannot convince a sufficient number of
customers to pay an adequate price to generate a profit, this is a
Social strong indication that insufficient value is being created to justify
entrepreneur this use of resources
-ship • A re-deployment of the resources happens naturally because
firms that fail to create value cannot purchase sufficient
resources or raise capital
• It is much harder to determine whether a social entrepreneur is
creating sufficient social value to justify the resources used in
creating that value. The survival or growth of a social enterprise
is not proof of its efficiency or effectiveness in improving social
conditions. It is only a weak indicator, at best.

Social entrepreneurs play the role of change agents in the social sector.
The attack underlying causes of problems and seek to create systemic
changes and sustainable improvements by:
• Adopting a mission to create and sustain social value (not just
private value) – social impact is the gauge
• Recognising and relentlessly pursuing new opportunities to serve
that mission – persistence and adaptability to seek opportunity
• Engaging in a process of continuous innovation, adaptation, and
learning – does not necessarily involve inventing something
wholly new, it can simply involve apply an existing idea in a new
way or to a new situation (despite uncertainty, risk of failure)
• Acting boldly without being limited by resources currently in
hand – skilled at doing more with less and at attracting resources
from others, use scarce resources efficiently by drawing in
partners and collaborating with others, take calculated risks
• Exhibiting heightened accountability to the constituencies served
and for the outcomes created – take steps to ensure they are
creating value, assess the needs and values of individuals within
communities in which they operate, understand the expectations
and values of investors, seek to provide real social improvements
and provide attractive return to their investors, assess progress in
terms of social, financial and managerial outcomes

Jerry Leung 16
 The internal The role of resources and capabilities in strategy formulation
environment
Strategy is concerned with matching a firm’s resources and capabilities to
the opportunities that arise in the external environment

Basing strategy on resources and capabilities

Resource-based view of the firm: role of resources and capabilities as the

principal basis for firm strategy and the primary source of profitability
• In a world where customer preferences are volatile and the
identity of customers and the technologies for serving them are
changing, a market-focused strategy (‘Who are our customers?
Which of their needs are we seeking to serve?’) may not provide
the stability and constancy of direction needed to guide strategy
over the long term –rather, the bundle of resources and
capabilities a firm possesses may be a much more stable basis on
which to define its identity
• Capabilities have the potential to be ‘roots of competitiveness,’
the sources of new products, and the foundation for strategy
• In general, the greater the rate of change in a firm’s external
environment, the more likely it is that internal resources and
capabilities rather than external market focus will provide a
secure foundation for long-term strategy
• Companies that attempted to maintain their market focus in the
face of radical technological change have often experienced huge
difficulties in building the new technological capabilities needed
to serve their customers

Resources and capabilities as a source of profit

Superior profitability – from industry attractiveness and most

importantly, competitive advantage
• Internationalization and deregulation have increased
competitive pressure within most sectors
• Establishing competitive advantage through the development
and deployment of resources and capabilities, rather than
seeking shelter from the storm of competition, has become the
primary goal of strategy
• The profits arising from market power are referred to as
monopoly rents; those arising from superior resources are
Ricardian rents

Jerry Leung 17
 The internal Resources and capabilities as a source of profit (cont.)
environment
• Porter’s five forces framework suggests that industry
attractiveness often derives from the ownership of strategic
resources
• When the primary concern of strategy was industry selection and
positioning, companies tended to adopt similar strategies
• The resource-based view, by contrast, recognises that each
company possesses a unique collection of resources and
capabilities; the key to profitability is not doing the same as other
firms but rather exploiting differences
• Establishing competitive advantage involves formulating and
implementing a strategy that exploits a firm’s unique strengths

____________________________________________________________

Identifying resources and capabilities

Resources are the productive assets owned by the firm; capabilities are
what the firm can do
• Individual resources must work together to create/result in
organisation capability
• Organisational capability, when applied through an appropriate
strategy, provides the foundation for competitive advantage

Identifying resources

Tangible resources are financial resources and physical assets valued in

the firm’s balance sheet
• Primary goal of resource analysis is to understand the potential
for tangible resources to generate profit
• What opportunities exist for economising on their use? Can we
use fewer resources to support the same level of business or use
the existing resources to support a larger volume of business?
• Can existing assets be deployed more profitably?

Intangible resources tend to be more valuable than tangible resources

but are either undervalued or omitted from balance sheets (hence,
divergence between balance-sheet and stock-market valuations)
• Most important intangible resources are brands
• Trademarks provide the legal basis for brand ownership

Jerry Leung 18
 The internal Identifying resources (cont.)
environment
Intangible resources (cont.)
• Other types of intellectual property are patents, copyrights, and
trade secrets which form the proprietary knowledge assets of the
firm – increasingly valuable resources (often defended through
litigation) in an increasingly knowledge-based economy
• Firm relationships (are also intangible resources) provide a firm
with access to information, know-how, inputs, and a wide range
of other resources that lie beyond the firm’s boundaries. Being
embedded within an inter-firm network also conveys legitimacy
upon a firm, which can enhance its survival capacity
• Organisational culture (also an intangible resource) is ‘an
amalgam of shared beliefs, values, assumptions, significant
meanings, myths, rituals, and symbols that are held to be
distinctive.’ – exerting a strong influence on organisational
capabilities developed and their efficiency

Human resources comprise the skills and productive effort offered by an

organization’s employees (not on balance sheet).
• Competency modeling involves identifying the set of skills,
content knowledge, attitudes, and values associated with superior
performers within a particular job category, then assessing each
employee against that profile
• The importance of psychological and social aptitudes in
determining superior work performance has been recognised

Identifying organisational capabilities

An organisational capability is a ‘firm’s capacity to deploy resources for a

desired end result.’ To perform a task, resources must work together.

Classifying capabilities
• This is useful in providing a comprehensive view of an
organisation’s capabilities but may fail to identify those
idiosyncratic capabilities that are truly distinctive and critical to
an organisation’s competitive advantage
• A functional analysis identifies organisational capabilities within
each of the firm’s functional areas (e.g. operations, sales)
• A value chain analysis identifies a sequential chain of the main
activities that the firm undertakes, distinguishing between primary
activities and support activities
• Routines and processes integrate individual actions to create
higher-level capabilities

Jerry Leung 19
 The internal Classifying capabilities (cont.)
environment • The capabilities of an organisation may be viewed as a
hierarchical system in which lower-level capabilities are
integrated to form higher-level capabilities
• Dynamic capabilities—capabilities that allow the modification and
adaptation of lower-level operational and functional capabilities
• The effectiveness of a firm’s capabilities depends upon the extent
to which they are mutually reinforcing in delivering the firm’s
value proposition (‘corporate coherence’)

____________________________________________________________

Appraising resources and capabilities

Strategically important resources and capabilities are those with the

potential to generate substantial streams of profit for the firm.

Appraising the strategic importance of resources and capabilities

Establishing competitive advantage

• Relevance: A resource or capability must be relevant to the key
success factors in the market-in particular, it must be capable of
creating value for customers.
• Scarcity: If a resource or capability is widely available within the
industry, it may be necessary in order to compete but it will not be
an adequate basis for competitive advantage.

Sustaining competitive advantage

• Durability: The more durable a resource, the greater its ability to
support a competitive advantage over the long term.
• Transferability: Competitive advantage is undermined by
competitive imitation. If resources and capabilities are
transferable between firms, then any competitive advantage that
is based upon them will be eroded.
• Replicability: If a firm cannot buy a resource or capability, it must
build it. Capabilities based on complex organizational routines are
less easy to copy.
• Appropriating the returns to competitive advantage

Jerry Leung 20
 The internal Appraising the relative strength of a firm’s resources and capabilities
environment
Benchmarking – the process of comparing one’s processes and
performance to those of other companies—offers an objective and
quantitative way for a firm to assess its resources and capabilities relative
to its competitors.

____________________________________________________________

Developing strategy implications

Exploiting key strengths – the foremost task is to ensure that the firm’s
critical strengths are deployed to the greatest effect:

Managing key weaknesses – the most decisive, and often most

successful, solution to weaknesses in key functions is to outsource

Superfluous strengths – selective divestment, or attempt to develop

innovative strategies that turn apparently inconsequential strengths into
key strategy differentiators

The industry context of resource analysis – resource and capability

analysis is important in determining the industry and market segments
best aligned with a firm’s strengths and weaknesses – however, criteria of
strategic importance and relative strength are context-dependent but
also individual resources and capabilities are multidimensional
aggregations (i.e. complex in nature and complex to nature)

The external The environment is what gives organisations their means of survival. In
environment the private sector, customers keep an organisation in business whilst in
the public sector, it is the government, clients, patients or students. Yet,
it is also the source of threats.

Jerry Leung 21
 The external The macro-environment
environment
The PESTEL framework

The PESTEL framework provides a comprehensive list of influences on the

possible success or failure of particular strategies.
 Politics – role of governments
 Economics – macro-economic factors
 Social influences – changing cultures and demographics
 Technological influences – innovations
 Environmental influences – ‘green’ issues
 Legal – legislative constraints and changes

It is important for managers to analyse how these factors are changing

and how they are likely to change in the future, drawing out implications
for organisations. Many of the factors are linked together.

The key drivers for change are environmental factors that are likely to
have a high impact on the success of failure of strategy. They differ by
industry or sector.

Building scenarios

Scenarios are detailed and plausible views of how the business

environment of an organisation might develop in the future based on key
drivers for change about which there is a high level of uncertainty.
 Scenarios are particularly useful where there are a limited number
of key drivers influencing the success of strategy, where there is a
high level of uncertainty about such influences, where outcomes
could be radically different and where organisations have to make
substantial commitments into the future that may be highly
inflexible and hard to reverse in adverse circumstances
 Sharing and debating alternative scenarios improves
organisational learning by marking managers more perceptive
about the forces in the business environment
 They should evaluate and develop contingency plans for each
scenario, adjusting strategies accordingly in response to the
environment

Jerry Leung 22
 The external Industries and sectors
environment
An industry is a group of firms producing the same principal product or
service or more broadly, a group of firms producing products that are
close substitutes for each other.

Porter’s five forces framework

Porter’s five forces framework helps identify the attractiveness of an

industry or sector in terms of competitive forces.

The five forces are detailed below.

The threat of entry

The ease of entering an industry influences the degree of competition.

Threat of entry depends on the extent and height of barriers to entry –
factors that need to be overcome by new entrants if they are to compete
successfully (high barriers of entry are good for incumbents as they
protect them from new entrants), Typical barriers to entry are:
 Scale and experience – economies of scale being important in
some industries (accentuated by high investment requirements),
an experience curve which gives incumbents a cost advantage
(proficient for efficiently doing a task compared to new entrants)
 Access to supply or distribution channels – direct ownership
(vertical integration), customer or supplier loyalty

Jerry Leung 23
 The external The threat of entry (continued)
environment
 Expected retaliation – price war or pricing blitz
 Legislation or government action – patent protection, regulation
of markets, direct government action
 Differentiation (providing a product or service with higher
perceived value than competitors)

The threat of substitutes

Substitutes are products or services that offer a similar benefit to an

industry’s products or services, but by a different process. They can
reduce demand for a particular class of products as customers switch to
other alternatives available.

There does not have to be much actual switching for the substitute threat
to have an effect. The simple risk of substitution puts a cap on the prices
that can be charged in an industry. Two important points to consider are:
 The price/performance ratio – a substitute is still an effective
threat even if more expensive, so long as it offers performance
advantages that customers value
 Extra-industry effects (the core of the substitution concept) –
substitutes come from outside the incumbent’s industry (not to be
confused for competitors’ threats within the industry), the value
of the substitution concept is to force managers to look outside
their own industry to consider more distant threats and
constraints (more threats of substitution, less attractive industry)

The power of buyers

Buyers are the organisation’s immediate customers, not necessarily the

ultimate customers. They can have such high bargaining power that their
suppliers are hard pressed to make any profits at all. Buyer power is likely
to be high when some of the following conditions prevail:
 Concentrated buyers – few large customers account for the
majority of sales causes buyer power to increase, if a product or
service accounts for a higher percentage of the buyers’ total
purchases their power is also likely to increase as they are more
like to ‘shop around’ and ‘squeeze’ suppliers for the best price
(even for trivial purchases)
 Low switching costs – leads to strong negotiating position

Jerry Leung 24
 The external The power of buyers (continued)
environment ‘
 Buyer competition threat – if the buyer has some facilities (or can
acquire such facilities) to supply itself it tends to be powerful as it
can raise the threat of doing the suppliers’ job themselves
(backward vertical integration)

The power of suppliers

Suppliers are those who supply the organisation with what is required to
produce the product or service and includes labour and sources of
finance. The supplier power is likely to be high when there are:
 Concentrated suppliers – few suppliers dominant supply
 High switching cost – expensive or disruptive to move suppliers
 Supplier competition threat – can cut out buyers who are acting
as intermediaries (forward vertical integration), moving closing to
the ultimate customer

Competitive rivalry

The previous wider competitive forces (four forces mentioned above) all
impinge on the direct competitive rivalry between an organisation and
the most immediate rivals. The more competitive rivalry there is, the
worse it is for incumbents within the industry.
 Low barriers to entry increase the number of rivals
 Powerful buyers with low switching costs force suppliers to high
rivalry in order to offer the best deals

Competitive rivals are organisations with similar products and services

aimed at the same customer group. There are a number of additional
factors that directly affect the degree of competitive rivalry:
 Competitor balance – where competitors are of roughly equal size
there is the danger of intense competition (competitors
attempting to dominate others), less rivalrous industries typically
have few dominant organisations and smaller players reluctant to
challenge these organisations
 Industry growth rate – in situations of strong growth, an
organisation can grow with the market whilst in situations of low
growth/decline, any growth is likely to be at the expense of a rival
(growth rate influenced by industry life cycle)

Jerry Leung 25
 The external Competitive rivalry
environment
 High fixed costs – industries with high fixed cost (e.g. high
investments in capital equipment/initial research) are likely to be
highly rivalrous as organisations seek to reduce unit costs by
increasing their volumes which typically involves price cuts
(leading to pricing wars), if extra capacity can only be added in
large increments the competitor making such an addition is likely
to create short-term overcapacity in the industry and result in
increased competition to use capacity
 High exit barriers – high barriers to closure or disinvestment (e.g.
high redundancy costs) increases rivalry and organisations fight to
maintain market share
 Low differentiation – rivalry is increased in commodity markets
where products or services are poorly differentiated, little to stop
customers switching as the only way to compete is price

Implications of Porter’s five forces analysis and key issues

Porter’s five forces analysis allows for the assessment of the

attractiveness of an industry – a judgement of whether the industry is a
good one to compete in or not. The analysis should prompt investigation
of the implications of the forces, with questions such as:
 Which industries to enter (or leave)
 What influence can be exerted
 How are competitors differently affected

Key issues with using the framework are:

 Defining the right industry – which segment of the industry?
 Converging industries – convergence is where previously separate
industries begin to overlap in terms of activities, technologies,
products and customers, which can lead to difficulties in defining
an industry which has constantly changing boundaries
 Complementary products – complementors are products or
services which customers are prepared to pay more if together
than if they stand alone; they provide opportunities for
cooperation (Porter’s five forces sees organisations as battling
against each other for a share of industry value, dissimilar to how
complementors may cooperate to increase the value of the whole
cake) but may give the potential for some complementors to
demand a high share of the available value for themselves

Jerry Leung 26
 The external The dynamics of industry structure
environment
Competitive forces change over time. The key drivers for change are likely
to alter industry structures and scenario analyses can be used to
understand possible impacts.

The industry life cycle

The power of the five forces typically varies with the stages of the
industry life cycle. The industry life cycle is typically comprised of stages
unpredictable length which include stages of:
 Development – few players exercising little directly rivalry, highly
differentiated products, weak five forces, profits may actually be
scarce because of high investment requirements
 Rapid/high growth – rivalry low due to plenty of market
opportunity, buyers keen to secure supplies and lack
sophistication about what they are buyer (lower buyer power),
barriers to entry may be low and the power of suppliers if there is
a shortage of components of materials
 Shake out – growth rate starts to decline (market share is key to
survival), increased rivalry forces weakest new entrants out of the
market, barriers to entry tend to increase as control over
distribution is established alongside economies of scale and
experience curve benefits which come into play, products or
services tend to standard, increased buyer power as they become
confident in switching between suppliers
 Decline – extreme rivalry (especially if there are high exit barriers)

Jerry Leung 27
 The external Hypercompetition and competitive cycles
environment
Cycles of competition comprises of sequences of move and counter-
move – whereby competitors constantly interact in terms of competitive
moves (e.g. matching of price cuts, imitation of innovation)
 In some industries, these interactions become so intense and fast
that industry structures are constantly undermined
 Such industries are hypercompetitive – trapped by the aggressive
interactions of competitors into negative downward cycles for all
concerned, with competitors attacking and counter-attacking each
other in a way that precludes stability and makes sustainable
profits impossible. This known as hypercompetition, which occurs
where the frequency, boldness and aggressiveness of dynamic
movements by competitors accelerate to create a condition of
constant disequilibrium and change
 The cycle of competition concept underlines the fact that industry
structures are not natural but are often created and reshaped by
the deliberate strategies of competitors

Multi-point competition describes the competitive dynamics between

organisations competing in different product or geographical markets.
The possibility of this does not necessarily increase competitive rivalry –
indeed, it can reduce competitive rivalry by raising the costs and risks of
aggressive moves and counter-moves.

Jerry Leung 28
 The external Comparative industry structure analyses
environment
The industry life cycle and cycles of competition notions underline the
need to make industry structure analysis dynamic. One effective means of
doing this is to compare the five forces over time in a ‘radar-plot’.

If one of the forces is very adverse, then this might nullify positive
assessments on the other four axes.

Competitors and markets

Strategic groups

Strategic groups are organisations within an industry or sector with

similar strategic characteristics, following similar strategies or competing
on similar bases (e.g. supermarkets, convenience stores and corner
stores). The scope of an organisation’s activities (e.g. product range) and
the resource commitment (e.g. brands, marketing spend) distinguishes
strategic groups from one another.

Jerry Leung 29
 The external Strategic groups (continued)
environment
The strategic group concept is useful in:
 Understanding competition – enabling managers to focus on their
direct competitors within their particular strategic group,
establishing what distinguishes them from other groups
 Analysis of strategic opportunities – identifying the most
attractive ‘strategic spaces’ within an indsutry
 Analysis of mobility barriers – identifying obstacles for movement
from one strategic group to another

Market segments

A market segment is a group of customers who have similar needs that

are different from customer needs in other parts of the markets. This
concept brings up separate important issues:
 Customer needs – bases of segmentation (e.g. buyer behaviour,
purchase value), see excerpt below
 Relative market share – organisations that have built up the most
experience in serving a particular market segment should not only
have lower costs in so doing, but also have built relationships
which may be difficult for others to break down
 How market segments can be identified and serviced

Jerry Leung 30
 The external Identifying the strategic customer
environment
The strategic customer is the person(s) at whom the strategy is primarily
addressed because they have the most influence over which goods or
services are purchased.
 Unless there is clarity on who the strategic customer is, managers
can end up analysing and targeting the wrong people
 It is the desires of the strategic customer that provides the starting
point for strategy. For example, for many consumer goods, the
retail outlet is the strategic customer as the way it displays,
promotes and supports products in store is hugely influential on
the final customer preferences

Understanding what customers value – critical success factors

Critical success factors (CSFs) are those product features that are
particularly valued by a group of customers and, therefore, where the
organisation must excel to outperform competition (these can be
visualised through a strategy canvas – compares competitors’ positions in
a market and potential in different segments).

A customer clarity and viewpoint about strengths may not be easy to

achieve for the following reasons:
 Sense making – managers may not be able to make sense of the
complex and varied behaviours they experience in their
behaviours, unable to draw useful conclusions from data
 Distance from the ultimate customer – may be out of touch with
what is ultimately driving demand for their product/service due to
several intermediaries distancing a company from final users
 Internal biases of managers

Jerry Leung 31
 The external Opportunities and threats
environment
A strategic gap is an opportunity in the competitive environment that is
not being fully exploited by competitors.
 W. Chan Kim and Renee Mauborgne have argued that if
organisations simply concentrate on competing head to head
with competitive rivals, this will lead to competitive convergence
where all ‘players’ find the environment tough and threatening.
 This is known as a ‘red ocean’ strategy – red because of the
bloodiness of the competition and the red ink caused by financial
losses. They urge managers to attempt ‘blue ocean’ strategies

Six types of opportunities are particularly important:

 Opportunities in substitute industries
 Opportunities in other strategic groups or strategic spaces
 Opportunities in targeting buyers (neglected strategic customers
or neglected influencers of purchasing decisions)
 Opportunities for complementary products and services
 Opportunities in new market segments
 Opportunities over time (in the future)

Jerry Leung 32