CHAPTER 3: THE EXTERNAL ENVIRONMENT: OPPORTUNITIES, THREATS AND

INDUSTRY COMPETITORS

Learning Objectives
At the end of this module, students are expected to;
 Understand the nature of an external audit
 Explain Key External Forces
 Explain Competitive Intelligence Programs
 Enumerate and explain Porter’s Five Forces
 Explain sources of external information and Forecasting Techniques

THE NATURE OF AN EXTERNAL AUDIT

The purpose of an external audit is to develop a finite list of opportunities that could benefit a
firm and threats that should be avoided.

It reveals key opportunities and threats confronting an organization, so managers can

formulate strategies to take advantage of the opportunities and avoid or reduce the impact
of threats.

To perform an external audit, a company must first gather competitive intelligence and
information about economic, social, cultural, demographic, political, governmental, legal and
technological trends

KEY EXTERNAL FORCES

FIVE CATEGORIES:

1. Economic force- has a direct impact on the potential attractiveness of various strategies.
Example: when interest rates rise, funds needed for capital expansion become more costly
or unavailable.
Key Economic Variables to be monitored:

a. Availability of Credit
b. Level of Disposable Income
c. Propensity of people to spend
d. Interest Rates’
e. Inflation Rates
f. GDP trends
g. Unemployment Trends
h. Price Fluctuations’
i. Monetary and Fiscal Policies
j. Stock Market Trends’

2. Social, cultural, demographic, and environmental forces- have a major impact upon
virtually all products, services, markets, and costumer.

Key Social Variables to be monitored:

a. Growth Rate
b. Birth Rate
c. Death Rate
d. Life Expectancy Rate
e. Attitudes toward product quality

3. Political, governmental, and legal forces- can represent key opportunities or threats for
both small and large organization.

Key Political Variables to be monitored:

a. Environmental Regulations
b. Labor Laws
c. Tax Laws
d. Oil Price Hike

4. Technological forces- technological changes and discoveries are having a dramatic

impact on the organizations. Superconductivity advancements alone, which increase the
power of electrical products by lowering resistance to current, are revolutionizing business
operations, especially in the transportation, utility, healthcare, electrical, and computer
industries.

Results of technological advancements are varied, as shown in the following list:

a. They represent major opportunities and threats that must be considered in

formulating strategies.
 b. They can dramatically affect organizations’ products, services, markets, suppliers,
distributors, competitors, customers, manufacturing processes, marketing practices,
and competitive position.

c. They can create new markets, result in a proliferation of new and improved products,
change the relative competitive cost positions in an industry, and render existing
products and services obsolete.

d. They can reduce or eliminate cost barriers between businesses, create shorter
production runs, create shortages in technical skills, and result in changing values
and expectations of employees, managers, and customers.

e. They can create new competitive advantages that are more powerful than existing
advantages.

5. Competitive forces- collecting and evaluating information on competitors is essential for

successful strategy formulation.

An important part of an external audit is identifying rival firms and determining their
strengths, weaknesses, capabilities, opportunities, threats, objectives, and strategies.

Collecting and evaluating information on competitors is essential for successful strategy

formulation. Identifying major competitors is not always easy because many firms have
divisions that compete in different industries.
COMPETITIVE INTELLIGENCE PROGRAMS- is a systematic and ethical process for
gathering and analyzing information about the competition’s activities and general business
trends to further a business own goal.

It is formally defined by the Society of Competitive Intelligence Professionals (SCIP), is a

systematic and ethical process for gathering and analyzing information about the
competition’s activities and general business trends to further a business’s own goals (SCIP
website). Good competitive intelligence in business, as in the military, is one of the keys to
success. The more information and knowledge a firm can obtain about its competitors, the
more likely the firm can formulate and implement effective strategies. Major competitors’
weaknesses can represent external opportunities; major competitors’ strengths may
represent key threats

Various legal and ethical ways to obtain competitive intelligence include the following

• Hire top executives from rival firms

• Use surveys and interviews of customers, suppliers, and distributors.
• Conduct drive-by and on-site visits to rival firm operations.
• Search online databases.
• Contact government agencies for public information about rival firms.
• Systematically monitor relevant trade publications, magazines, and newspapers.

COMPETITIVE ANALYSIS: PORTER’S FIVE-FORCES MODEL

 1. RIVALRY AMONG COMPETING FIRMS
-is usually the most powerful of the five competitive forces. The strategies pursued
by one firm can be successful only to the extent that they provide competitive
advantage over the strategies pursued by rival firms.

2. POTENTIAL ENTRY OF NEW COMPETITORS

-whenever new firm can easily enter a particular industry, the intensity of
competitiveness among firms increases.

3. POTENTIAL DEVELOPMENT OF SUBSTITUTE PRODUCTS

-in many industries, firms are in close competition with the producers of
substitute products in other industry.

Producers of eyeglasses and contact lenses, for example, face increasing competitive
pressures from laser eye surgery. Producers of sugar face similar pressures from artificial
sweeteners. Newspapers and magazines face substitute-product competitive pressures
from the Internet and 24-hour cable television

4. BARGAINING POWER OF SUPPLIERS

-affects the intensity of the competition in an industry, especially when there is
a large number of suppliers, when there are only a few good substitute raw materials, or
when the cost of switching raw materials is especially costly.

5. BARGAINING POWER OF CONSUMERS

-when customers are concentrated or large, or buy in volume, their bargaining
power represents a major force affecting the intensity of competition to the industry.
Rival firms may offer extended warranties or special services to gain customer loyalty
whenever the bargaining power of consumers is substantial

Consumers gain increasing bargaining power under the following circumstances:

1. If they can inexpensively switch to competing brands or substitutes

2. If they are particularly important to the seller
3. If they are informed about sellers’ products, prices, and costs

SOURCE OF EXTERNAL INFORMATION

A wealth of strategic information is available to organizations from both published and

Unpublished sources.

Unpublished sources include customer surveys, market research, speeches and

professional and share holders’ meeting, television programs, interviews, and
conversation with stakeholders.

Published sources of strategic information include periodicals, journals, reports,

government documents, abstract, directories, newspaper, and manuals.

FORECASTING TOOLS AND TECHNIQUES

Forecasts are educated assumptions about future trends and events. Forecasting is a
complex activity because of factor such as technological innovation, cultural changes,
new products, improved services, stronger competitors, shifts in government priorities,
changing social values, unstable economic conditions, and unforeseen.

MAKING ASSUMPTIONS

ASSUMPTIONS- McKinney defines assumptions as the ‘’best present estimates of

the impact of major external factors, over which the manager has a little if any control, but
which may exert a significant impact on performance or the ability to achieve desired
results.
By identifying future occurrences that could have a major effect on the firm and by
making reasonable assumptions about those factors, strategist can carry the strategic
management process forward. Without reasonable assumptions, the strategy-formulation
process could not proceed effectively.
 CHAPTER 4: THE INTERNAL ORGANIZATION: RESOURCES, CAPABILITIES, CORE
COMPETENCIES AND COMPETITIVE ADVANTAGES

Learning Objectives
At the end of this module, students are expected to;
 Understand the roots of competitive advantage
 Explain the Value Chain
 Explain the building blocks of competitive advantage
 Explain the Durability of the Competitive Advantage

THE ROOTS OF COMPETITIVE ADVANTAGE

A company has a competitive advantage over its rivals when its profitability is greater than
the average profitability of all companies in its industry. It has a sustained competitive
advantage when it can maintain above-average profitability over a few years.

The primary objective of strategy is to achieve a sustained competitive advantage, which in

turn will result in superior profitability and profit growth.

DISTINCTIVE COMPETENCIES

Competitive advantage is based upon distinctive competencies. Distinctive competencies

are firm-specific strengths that allow a company to differentiate its products from those
offered by rivals, and/or achieve substantially lower costs than its rivals .

Toyota pioneered an entire range of manufacturing techniques, such as just-in-time

inventory systems, self-managing teams, and reduced setup times for complex equipment.
These competencies, collectively known as the “Toyota lean production system,” helped the
company attain superior efficiency and product quality as the basis of its competitive
advantage in the global automobile industry.

Distinctive competencies arise from two complementary sources: resources and

capabilities.

RESOURCES

Resources refer to the assets of a company. A company’s resources can be divided into two
types: tangible and intangible resources.

Tangible resources are physical entities, such as land, buildings, manufacturing plants,
equipment, inventory, and money.

Intangible resources are nonphysical entities that are created by managers and other
employees, such as brand names, the reputation of the company, the knowledge that
employees have gained through experience, and the intellectual property of the company,
including patents, copyrights, and trademarks
Resources are particularly valuable when they enable a company to create strong demand
for its products, and/or to lower its costs. Toyota’s valuable tangible resources include the
equipment associated with its lean production system, much of which has been engineered
specifically by Toyota for exclusive use in its factories. These valuable tangible resources
allow Toyota to lower its costs, relative to competitors. Similarly, Microsoft has a number of
valuable intangible resources, including its brand name and the software code that
comprises its Windows operating system. These valuable resources have historically
allowed Microsoft to sell more of its products, relative to competitors

CAPABILITIES

It refers to a company’s resource-coordinating skills and productive use. These skills reside
in an organization’s rules, routines, and procedures, that is, the style or manner through
which it makes decisions and manages its internal processes to achieve organizational
objectives.3 More generally, a company’s capabilities are the product of its organizational
structure, processes, control systems, and hiring strategy. They specify how and where
decisions are made within a company, the kind of behaviors the company rewards, and the
company’s cultural norms and values

Competitive advantage leads to superior profitability. At the most basic level, a company’s
profitability depends on three factors: (1) the value customers place on the company’s
products, (2) the price that a company charges for its products, and (3) the costs of creating
those products. The value customers place on a product reflects the utility they get from a
product, or the happiness or satisfaction gained from consuming or owning the product.
Value must be distinguished from price. Value is something that customers receive from a
product

THE VALUE CHAIN

The term value chain refers to the idea that a company is a chain of activities that transforms inputs
into outputs that customers value.

The trans formation process involves both primary activities and support activities that add value to
the product.

Primary Activities Primary activities include the design, creation, and delivery of the product, the
product’s marketing, and its support and after-sales service.

The primary activities are broken down into four functions: research and development, production,
marketing and sales, and customer service.
PRIMARY ACTIVITIES

Research and Development Research and development (R&D) refers to the design of
products and production processes. Although we think of R&D as being associated with the
design of physical products and production processes in manufacturing enterprises, many
service companies also undertake R&D. For example, banks compete with each other by
developing new financial products and new ways of delivering those products to customers.
Online banking and smart debit cards are two examples of the fruits of new product
development in the banking industry. Earlier examples of innovation in the banking industry
included ATM machines, credit cards, and debit cards.

Production Production refers to the creation process of a good or service. For physical
products, this generally means manufacturing. For services such as banking or retail
operations, “production” typically takes place while the service is delivered to the
cus tomer, as when a bank makes a loan to a customer. By performing its activities
efficiently, the production function of a company helps to lower its cost structure

Marketing and Sales There are several ways in which the marketing and sales func tions
of a company can help to create value. Through brand positioning and advertising, the
marketing function can increase the value that customers perceive to be contained in a
company’s product (and thus the utility they attribute to the product).

Customer Service The role of the service function of an enterprise is to provide after sales
service and support. This function can create superior utility by solving customer problems
and supporting customers after they have purchased the product.
SUPPORT ACTIVITIES

The support activities of the value chain provide inputs that allow the primary activities to
take place. These activities are broken down into four functions: materials management (or
logistics), human resources, information systems, and company infrastructure

Materials Management (Logistics) The materials-management (or logistics) function

controls the transmission of physical materials through the value chain, from procurement
through production and into distribution

Human Resources There are numerous ways in which the human resource function can
help an enterprise to create more value. This function ensures that the company has the
right combination of skilled people to perform its value creation activities effectively. It is also
the job of the human resource function to ensure that people are adequately trained,
motivated, and compensated to perform their value creation tasks. If the human resources
are functioning well, employee productivity rises (which lowers costs) and customer service
improves (which raises utility), thereby enabling the company to create more value.

Information Systems Information systems are, primarily, the electronic systems for
managing inventory, tracking sales, pricing products, selling products, dealing with customer
service inquiries, and so on. Information systems, when coupled with the communications
features of the Internet, are holding out the promise of being able to improve the efficiency
and effectiveness with which a company manages its other value creation activities.

Company Infrastructure Company infrastructure is the companywide context within which

all the other value creation activities take place: the organizational structure, control
systems, and company culture. Because top management can exert considerable influence
upon shaping these aspects of a company, top management should also be viewed as part
of the infrastructure of a company.

THE BUILDING BLOCKS OF COMPETITIVE ADVANTAGE

Four factors help a company to build and sustain competitive advantage:

1. Superior efficiency
2. Quality,
3. Innovation
4. Customer responsiveness.

Each of these factors is the product of a company’s distinctive compete

EFFICIENCY

A business is simply a device for transforming inputs into outputs. Inputs are basic factors
of production such as labor, land, capital, management, and technological knowhow.
Outputs are the goods and services that the business produces.

One common measure of efficiency is employee productivity. Employee productivity refers

to the output produced per employee. For example, if it takes General Motors 30 hours of
employee time to assemble a car, and it takes Ford 25 hours, we can say that Ford has
higher employee productivity than GM and is more efficient. As long as other factors are
equal, such as wage rates

QUALITY

A product is said to have superior quality when customers perceive that its attributes provide
them with higher utility than the attributes of products sold by rivals. For example, a Rolex
watch has attributes—such as design, styling, performance, and reliability—those customers
perceive as being superior to the same attributes in many other watches

WHAT IS QUALITY?

 “Quality is fitness for use. ”

 “The totality of features and characteristics of a product or service that bear on its
ability to satisfy a given need.”
 “Quality involves meeting customers need, preferences and exceeding it.”
 “Quality also encompasses people, process and environment.”
 The Quality Control Process

Process Improvement
 Customer loyalty is driven by delivered value
 Delivered value is created by business processes
 Sustained success in competitive markets requires a business to continuously
improve delivered value
 To continuously improve value creation ability, a business must continuously improve
its value creation processes
 Continuous process improvement is an old management concept dating back to
1895. However, those approaches were mainly productivity related.
 More recently (1951) Toyota implemented Just-In-Time which relies on zero defects
and hence continuous improvement

KAIZEN Japanese for gradual and orderly continuous improvement over a long
period of time with minimum financial investment, and with participation by everyone in the
organization.
Improvement in all areas of business serves to enhance quality of the firm.

Three training required for successful kaizen program:

a. operating practices
b. total involvement
c. Training

Operating practices expose opportunities for improvement. JIT revels waste and
inefficiency as well as poor quality.
 Every employee strives for improvement. Top management vies improvement as part
of strategy and supports it. Middle management can implement top management
improvement goals by establishing, maintaining, and upgrading operating standards.
Workers can engage through suggestions, small group activity.
 Middle management can help create conducive environment for improvement by
improving cooperation amongst departments, and by making employees conscious of
their responsibilities for improvement.
 Supervisors can direct their attention more on improvement than supervision, which
will facilitate communication
KAIZEN: IMPLEMENTATION (PDSA)
1. Plan – study the current system; identifying problems; testing theories of causes; and
developing solutions
2. Do – Plan is implemented on a trial basis. Data collected and documented
3. Study – determine whether the trial plan is working correctly by evaluating the result
4. Act –improvement are standardized and final plan is implemented

Variation of PDSA cycle; FADE - Focus, Analyze, Develop and Execute cycle!

5S Practices or 5S Tools – the Japanese equivalent names for the five practices
start with the alphabet “S”. Practicing them meticulously and correctly will definitelyadd to
improvement of quality in the organization.

5S are 5 Japanese Words

 SEIRI
 SEITON
 SEISO
 SEIKETSU
 SHITSUKE

5S means:
 Seiri (short) – items for keeps and items for wastebasket, separate out all
unnecessary things and eliminate them
 Seiton (Segregate) – arranged in order for easy use, arrange the essential things in
order, so that they can easily accessed
 Seiso (Sanitize) – cleaning the workplace, Keep machinery and working
environment clean
 Seiketsu (systematize) – high standard of housekeeping, make and checking as a
routine practice
 Shitsuke (standardize) – training and disciplining people to follow 5S, Standardize
the previous steps

5S: In Japanese, English and Tagalog

 Seiri Sort Suriin
 Seiton Segregate Salansanin
 Seiso Sanitize Simutin
 Seiketsu Standardize Siguruhin
 Shitsuke Self Discipline Sariling kusa

The 5 S’s is the practice of good housekeeping.

How do you describe your work place?

 Is it 1st Class?
No one throws trash around.
 Is it 2nd Class?
Some people throw trash and some clean.
 Or is it 3rd Class?
Everyone throws trash and no one cleans.

1. SEIRI (Sort) – the objective is to sort and throw away unnecessary items. Separate
tools, machinery, product, inspection, work in progress, and documentation into
necessary and unnecessary and discard unnecessary items.
• Look and see the things of use and not of use.
• Sort useful from useless
• No use: throw away!
• No use: not yours
Not yours: ask whose
Don’t know whose, no use: throw away!

Why 5S (SEIRI) Fails

 KASI:
 “Sayang, Wag mong itapon”
 “Puede pang magamit yan”
 “Itabi mo muna”
 “Me centimental value sakin yan”
 “Akin nalang”
 “mapapag kakitaan pa yan”Etc.

Standard of Seiri (Sort)

 Sort items that are useful from items that no longer of use
 Throw away items that are useless
 Useless items that are not yours, return to owner

2. SEITON (SEGREGATE) – the purpose of this tool is to arrange necessary items into a
neat, proper manner so that they can be easily retrieved for use and to return them to
their proper locations for use.
 Means items in proper order for easy use and safekeeping
- Always in use, near you
- Less in use, further from you!
- Seldom use, much further
- Put labels, colors
 - Fixed place for items
- Items can be seen
- Items can be taken out
- Items can be returned
 Tools & Systems in Segregation
- Storage place
- Open shelves
- Labels
- Code Name
- Color coding
- Numbering
- Alphabets
-
SEITON: fix positions (Segregate)
 General division, then sub division, example:
D/A Materials -> leadframe -> package -> supplier
-> Solder -> solder type -> supplier
 Use of shelves for easy ID
 Use of labels, color coding,

SEITON: Organizing
1. Can see - Where?… Fixed position
2. Can take out - What? … Fixed items
3. Can return - How many? … Fixed quantity
Why SEITON Fails
 Lack of knowledge in organization and classification
 Lack of creativity to use names, titles, colors, numbers, alphabets, etc. to segregate
things
 Have the habit of “maňana system in filing”….. “filing can be done later when I have
time”.
 Do not know the value of classification, segregation and filing as part of job.
 “Minamaliit ang trabaho ng pagpa-file”.

Standard of SEITON
 Decide which things should be put where:
 Always in use, place near you
 Less in use, place further from you
 Seldom in use, place slightly further away
 Label items and storage areas to identify what is kept and to distinguish them from
other necessary items
 Put labels, colors, numbering, alphabet
 Fixed place for items
 Items can be seen immediately
  items can be taken out immediately
 items can be returned immediately

3. SEISO (Sanitize) – the objective of Seiso tool is to clean and inspect the respective work
places thoroughly, so that there is no dust on the floor, machinery and equipment. Keep
machinery and work environment clean.
 To clean your work place so that there would be no dust anywhere.

How to Practice SEISO (SANITIZING)

 “lugar mo, linis mo”
 “lugar mo, linis ko rin”
 “lugar ko, alaga ko”
 “di ko lugar, alaga ko rin”
 “lugar ko linis ko gabi at araw”
 “di ko lugar, mas lalo kong dapat pangalagaan”

Why SEISO Fails

 Kasi:
- “Tamad maglinis!”.
- “Hindi tinatapon sa tamang lagayan ang basura
- “Inaasa pa sa Environmental Aides (EA’s) ang paglilinis!”
- “Hindi marunong sumunod sa cleaning schedule at responsibilities na inatas sa
kanila!”

Standard of SEISO
 Don’t wait until things get dirty, clean them regularly.
 Put aside 5 minutes of your first and last hour of work to clean your workplace.
 Never throw anything around or dirty any place.
 Organize cleaning responsibilities and procedure.
 Make a cleaning schedule.

4. SEIKETSU (Systematize) – the objective of this tool is to maintain high standards of

work place organization by keeping everything clean and orderly at all times. Develop
routine practices for cleaning and checking.
 Means maintaining high standard of housekeeping:
- No unnecessary items
- No mess
- No dirt
- Daily cleaning
- Monthly Inspections and Evaluations

Why SEIKETSU Fails

 Frequent change of standards
  5S is not recognized as one of the factors to look into employee’s performance
 Because employees are not aware of the standards of 5S.

SEIKETSU: Standards
 Create a maintenance system
 Hold a departmental competition
 Establish continuous improvement programs
 Include 5S in employee’s Key Result Areas (KRA)
 Include 5S in performance appraisal of each department and employee

5. SHITSUKE (Standardize) – the objectives of the last 5S tool is to make the previous
four steps part of the daily routine and to observe self-discipline through continuous
practice. Follow procedures and standardize continuously to improve processes and re-
establish standards.

Spontaneous practice of 5S
 No need to be told
 No need to be scolded
 No need to be reminded -- JUST DO IT !
 No complaints

SHITSUKE: self discipline

 Reflection of personality, habits and attitudes
 A way of life
 Definition of character and life style
Why SHITSUKE Fails
 Kasi:
- “Ang nagpapatupad ay hindi sumusunod sa alituntunin!”
- “Hindi consistent sa pagpapatupad.”
- “Nasa kultura na nila ang pagiging madumi sa sarili!”

SHITSUKE: Standards
- Always remember the value of your housekeeping efforts.
- Treat your workplace as your second home.
- Aside from cleaning, think of how you can beautify your workplace.

5S: Impact
- Efficiency
- Quality
- Safety
- Timeliness
- Profitability
- Longevity
 - Cost Effectiveness
- Graceful Lifestyle

Reasons why some people do not practice 5S?

- Because they are lazy!
- Because they were not trained and educated to do so!
- Because they feel degraded when doing so!
- Because they came from a 3rd class environment

INNOVATION

Innovation refers to the act of creating new products or processes. There are two main types
of innovation: product innovation and process innovation.

Product innovation is the development of products that are new to the world or have
superior attributes to existing products

Process innovation is the development of a new process for producing products and
delivering them to customers. Examples include Toyota, which developed a range of new
techniques collectively known as the “Toyota lean production system” for making
automobiles: just-in-time inventory systems, self-managing teams, and reduced setup times
for complex equipment.

CUSTOMER RESPONSIVENESS

Customer response time: the time that it takes for a good to be delivered or a service to be
performed.18 For a manufacturer of machinery, response time is the time it takes to fill
customer orders. For a bank, it is the time it takes to process a loan, or that a customer must
stand in line to wait for a free teller. For a supermarket, it is the time that customers must
stand in checkout lines. For a fashion retailer, it is the time required to take a new product
from design inception to placement in a retail store

THE DURABILITY OF COMPETITIVE ADVANTAGE

The next question we must address is how long a competitive advantage will last once it has
been created. In other words: What is the durability of competitive advantage given that
other companies are also seeking to develop distinctive competencies that will give them a
competitive advantage? The answer depends on three factors: barriers to imitation, and
the general dynamism of the industry environment.

Barriers to imitation are a primary determinant of the speed of imitation. Barriers to

imitation are factors that make it difficult for a competitor to copy a company’s distinctive
competencies, the greater the barriers to imitation, the more sustainable a company’s
competitive advantage. Barriers to imitation differ depending on whether a competitor is
trying to imitate resources or capabilities.
Factors that make it difficult for a competitor to copy a company’s distinctive competencies

Industry Dynamism A dynamic industry environment is one that changes rapidly. The most
dynamic industries tend to be those with a very high rate of product innovation—for instance,
the customer electronics industry, the computer industry, and the telecommunications industry.
In dynamic industries, the rapid rate of innovation means that product life cycles are shortening,
and that competitive advantage can be fleeting. A company that has a competitive advantage
today may find its market position outflanked tomorrow by a rival’s innovation