ANALYZING COMPANY EXTERNAL ENVIRONMENT

Lesson 5

• Analyzing the external environment is crucial for relevant and effective strategic
planning

• Analyzing your company's external environment is a critical step in preparing a

strategic plan. This is a complex task because it involves collecting a variety of data to
get an accurate picture of the situation. Based on this analysis, the company can then
make sound decisions to further its growth.

• "The analysis of the external environment is often neglected because many

entrepreneurs feel they know everything about their sector, but they generally don't
have the data that shows them exactly where they stand in relation to others and how
the market is changing," says Lucie Chouinard, Senior Business Advisor and Strategic
Planning Solution Lead, BDC Advisory Services

A. 5 Keys To Analyzing Your External Environment

1. Identify the latest trends

To get a good idea of the latest market trends, several approaches can be used. First,
information can be searched in online databases, including government, industry,
Canadian and U.S. databases.

Let's take the example of a door and window company. "To identify market trends, you
have to start by assessing changes in the construction industry," says Chouinard. “Once
you have determined its growth and identified the major trends, more research is
needed to understand the market developments relating more specifically to the window
and door industry.”

In particular, she looks at the following:

• new technologies used
• major innovations
• the arrival of new players
• key success factors

• Researching the latest trends also requires contacting people directly to ask them
questions.

• “We call clients and suppliers, for example, to find new information and sound out their
needs, to detect or confirm trends," says Chouinard, who has owned businesses.

2. Assess market shares

While you obviously need to know a company’s market share to complete a strategic
planning exercise, finding this information is not that simple. “Sometimes we find precise
data, but if the data doesn't exist, we have to use our creativity to make extrapolations
that are as accurate as possible," says Chouinard.

Let's take the example of architectural products. “They're grouped with other products to
form a broader category, so you'll never find very specific data," she says. “So you have
to look at the company's sales, then talk to various experts and extrapolate to assess
the market shares held.”

3. Analyze the competitive environment

To be well positioned, a company also needs to know who its major competitors are. It
generally does. But have some slipped under its radar?

To conduct an in-depth analysis of the competitive environment, you must first conduct
thorough Web and social media searches. You also need to search various databases,
such as professional associations.

Ms. Chouinard also does not hesitate to ask questions directly to strategic people in the
company’s different departments to bring in new perspectives. She will also interview
external experts and clients to understand in what ways they are satisfied and
dissatisfied.

Once the competitors have been clearly identified, the expert analyzes how the
company sets itself apart. “You have to clearly define these competitive advantages,
which may include quality, price, distribution network, customer service, technologies
used, etc."

4. Identify threats
A business faces various risks, such as political, economic, or legal changes. They can
also be social, environmental or cultural.

"The company has no control over these changes, but you have to examine them to
factor them into your strategic planning because they can have a major impact on your
business," says Chouinard.

5. Draw up a realistic picture of your situation

The analysis of the company’s external environment is therefore a major research effort
to gather a great deal of information from databases, customers and experts.

Based on this analysis, the company can realistically assess the situation and decide,
for example, to invest more in a market segment where there is growth but less
competition.

“To make these kinds of decisions, it is extremely important to be able to base them on
facts," says Chouinard. “Many business people follow their instincts, but at some point
you reach your limit and you have to do more sophisticated strategic planning to enable
the company to go further.”
External audit for Strategic management Report
External audit is a strategic management tool that aims at understanding features
affecting a business but an individual business cannot control. In an external audit, the
focus is on factors that affect a business but the business has nothing much it can do
regarding their effects.

External factors include among others political stability/instability in a county,

technological developments, computer invention, population compositions and foreign
competition.

The process of organizing an external audit

To gather as much information as possible, the management should undertake the
process with as many competent employees as possible. It should also analyze both
published and unpublished data which will assist it in appreciating the need the
prevailing conditions. The following process is followed;
 Gathering of information
 Testing data validity
 nterpolating and analyzing information gotten
 Making strategic decision based on the information gotten

B. The Nature Of External Audit

A. Key External Forces

An external audit addresses five area, they are;
Economic factors
Social and cultural factors
Political/governmental structures
Technology and innovations and
Competitive forces

Opportunities offered by External forces

There are different opportunities that external environment have offered to Ford
Company and the company has taken the advantage;

Technological change
The world is experiencing a rapid technological change; this is brought about by the use
of computers in different sectors of a business (E*TRADE Financial Corporation official
website, 2010). Ford Company has been forced by the prevailing conditions to adopt
the changes; for example the company has a website where a customer can log in and
communicate directly to the company.

These services are available for 24 hours in seven days. In line with the same, the
company has embraced computerized marketing and advertisement where it sells its
products all over the world through the internet (Fred, 2008).
 Population increase
United States has had an increased population, with the greatest number being youth.
As a result the company has been faced with a changing demand of its products. This
has lead to development of various models. Models are sometimes rebranded while
others are just improved to meet the needs of changing customer trends; currently the
company has the following brands; Aston Martin, Lincoln, Mazda, Mercury and Volvo,
Ford and Jaguar (Ford Company Limited official website, 2010).

Managerial processes developments

The model of management has changed with increased enlightened people; customers
are continuously demanding for better treatments form companies in the way they are
served and the production processes involved. Currently social corporate responsibility
management, ethical business products and customer care services have taken center
stage.

The company has embarked on corporate social responsibilities, it practices in

environmental management exercises like tree planting, engage in clean technology
among others. This is in the efforts to meet track with changing need/demand from
customers (Haberbeg & Rieple, 2001)
International and national legislations/regulations
The government of united states is increasingly adopting laws and regulation aimed at
ensuring that business are conducted effectively, standards have been reviewed and
compliance with the treads is important. An Article by Bell, 2010 in Money central says
that there is a change in taxation policies in United States and businesses and
individuals are left with no option other than comply with the set laws.

Social status/ living conditions

United States living conditions are on the rise; this has lead to an increased demand to
the company’s products. As more people are getting stable jobs, the need for a motor
vehicle is increased. Well structured financial institutions have also assisted people to
purchase motor vehicles through loan facilities. This has worked to the benefit of the
company.

Threats offered by External Forces

The company has suffered a number of threats from the outside world; this is in the
following areas;

Foreign competition
Foreign competition is competition from companies situated in other countries than in
United States. The motor industry is targeting international markets with their custom
made products aimed at reaching more customers. Internationally Toyota Company in
Japan is the largest motor industry followed by General motors; they have entered
United States market offering stiff competition to Ford Company.
In the efforts to remain competitive, the company has embarked on making products
that give more satisfaction than its competitors however in some countries, it has not
been able to compete effectively; it has been withdrawn from the markets in such areas.
An example is in 2008, when the company was forced to sell its United Kingdom branch
to Tata limited of India; the sold branch was concentrating on making of Jaguar and
Land Rover (Ford Company Limited official website, 2010).

Global financial crisis

The world is experiencing global financial crisis which started in 2007, the crisis has
affected businesses negatively. Drawbaugh, 2010, in his article in Reuters is of the
opinion that the economy is not fully recovered. Ford Company is not left either; the
company’s sales have reduced with time (Ford Company Limited official website 2010).

This is despite various improvement processes undertaken in the company’s products.

The company has no control of global crisis and thus it is left with no option other than
suffer hard economic times. Associated Press, 2010, is of the opinion that the situation
is changing.

Why Consider How External Factors Will Affect Your Business?

• The economy, politics, competitors, customers, and even the weather are all
uncontrollable factors that can influence an organization’s performance. This is in
comparison to internal factors such as staff, company culture, processes, and finances,
which all seem within your grasp.

• A company’s stability and profitability are interdependent on its ability to quickly

identify and respond to changes in the external environment. Change is inevitable and
having the flexibility to deal with unexpected market mutations can mean the difference
between survival and extinction for an organization.

• Something as common as a shift in government policy could have a significant effect

on a business. Proposed legislation at the federal and state level might legally require a
company to make changes to its operations and therefore become a critical success
factor.

• The COVID pandemic provides a good case study into how significantly external
factors can impact organizations.

• While some were harder hit than others, nearly every business was forced to evaluate
the changing landscape and adopt coping strategies of some kind. In some cases,
survival depended on their ability to pivot.

• Even now, the effects of the pandemic are continuing to unfold, making it necessary
for organizations to continuously reexamine the environment to not only mitigate risk but
also identify opportunities going forward.

B. The Process Of Performing An External Audit

The process of performing an external audit must involve as many managers and
employees as possible.
• Involvement in the strategic-management process can lead to understanding and
commitment from organizational members.

• A company first must gather competitive intelligence and information about economic,
social, cultural, demographic, environmental, political, governmental, legal, and
technological trends.

• Individuals can be asked to monitor various sources of information, such as key

magazines, trade journals, and newspapers.

Once information is gathered, it should be assimilated and evaluated.

• A meeting or series of meetings of managers is needed to collectively identify the most

important opportunities and threats facing the firm.

• These key external factors should be listed on flip charts or a chalkboard. A prioritized
list of these factors could be obtained by requesting that all managers rank the factors
identified, from 1 for the most important opportunity/threat to 20 for the least important
opportunity/threat.

Freund emphasized that these key external factors should be:

1. Important to achieving long-term and annual objectives.
2. Measurable
3. Applicable to all competing firms.
4. Hierarchical in the sense.

• A final list of the most important key external factors should be communicated and
distributed widely in the organization.

• Both opportunities and threats can be key external factors.

C. THE INDUSTRIAL ORGANIZATION (I/O) VIEW

• The Industrial Organization (I/O) approach to competitive advantage advocates that
external (industry) factors are more important than internal factors in a firm achieving
competitive advantage.

• Proponents of the I/O view, such as Michael Porter, contend that organizational
performance will be primarily determined by industry forces.

• Competitive advantage is determined largely by competitive positioning within an

industry, according to I/O advocates.

• Many thousands of internally strong firms in 2006–2007 disappeared in 2008–2009.

D. ECONOMIC FORCES
Key Economic Variables to Be Monitored:
 Inflation rates
 Gross domestic product trend
 Unemployment trends
 Import/export factors
 Price fluctuations
 Tax rates
 Federal government budget deficits

• An economic variable of significant importance in strategic planning is gross domestic

product (GDP), especially across countries.

• Trends in the dollar’s value have significant and unequal effects on companies in
different industries and in different locations.

• For example, the pharmaceutical, tourism, entertainment, motor vehicle, aerospace,

and forest products industries benefit greatly when the dollar falls against the yen and
euro.

• Agricultural and petroleum industries are hurt by the dollar’s rise against the currencies
of Mexico, Brazil, Venezuela, and Australia.

• When the value of the dollar falls, tourism- oriented firms benefit because Americans
do not travel abroad as much when the value of the dollar is low; rather, foreigners visit
and vacation more in the United States.

E. SOCIAL, CULTURAL, DEMOGRAPHIC, AND NATURAL ENVIRONMENT

FORCES
• Social, cultural, demographic, and environmental changes have a major impact on
virtually all products, services, markets, and customers.

• Small, large, for-profit, and nonprofit organizations in all industries are being staggered
and challenged by the opportunities and threats arising from changes in social, cultural,
demographic, and environmental variables.

KEY SOCIAL, CULTURAL, DEMOGRAPHIC, AND NATURAL ENVIRONMENT

VARIABLES
 Number of marriages
 Number of divorces
 Number of births
 Number of deaths
 Immigration and emigration rates
 Life expectancy rates
 Attitudes toward government
  Ethical concerns

F. POLITICAL, GOVERNMENTAL, AND LEGAL FORCES

 Federal, state, local, and foreign governments are major regulators, deregulators,
subsidizers, employers, and customers of organizations.

 Political, governmental, and legal factors, therefore, can represent key

opportunities or threats for both small and large organizations

• For industries and firms that depend heavily on government contracts or subsidies,
political forecasts can be the most important part of an external audit.

• Changes in patent laws, antitrust legislation, tax rates, and lobbying activities can
affect firms significantly.

• The increasing global interdependence among economies, markets, governments, and

organizations makes it imperative that firms consider the possible impact of political
variables on the formulation and implementation of competitive strategies.

SOME POLITICAL, GOVERNMENTAL, AND LEGAL VARIABLES

1. Government regulations or deregulations
2. Changes in tax laws
3. Special tariffs
4. Number of patents
5. Changes in patent laws
6. Environmental protection laws
7. Legislation on equal employment
8. Political conditions in foreign countries
9. Lobbying activities

G. TECHNOLOGICAL FORCES
• Revolutionary technological changes and discoveries are having a dramatic impact on
organizations.

• The Internet has changed the nature of opportunities and threats by altering the life
cycles of products, increasing the speed of distribution, creating new products and
Services.

• To effectively capitalize on e-commerce, a number of organizations are establishing

two new positions in their firms: chief information officer (CIO) and chief technology
officer (CTO).

• This trend reflects the growing importance of information technology (IT) in strategic
management.
• A CIO and CTO work together to ensure that information needed to formulate,
implement, and evaluate strategies is available where and when it is needed.

• These individuals are responsible for developing, maintaining, and updating a

company’s information database

EXAMPLES OF THE IMPACT OF WIRELESS TECHNOLOGY

1. Airlines—Many airlines now offer wireless technology in flight.
2. Automotive—Vehicles are becoming wireless.
3. Banking—Visa sends text message alerts after unusual transactions.
4. Education—Many secondary (and even college) students may use smart phones for
math because research shows this to be greatly helpful.
5. Health Care—Patients use mobile devices to monitor their own health, such as
calories consumed.
6. Politics—President Obama won the election partly by mobilizing Facebook and
Myspace users, revolutionizing political campaigns. Obama announced his vice
presidential selection of Joe Biden by a text message.
7. Publishing—eBooks are increasingly available.

H. COMPETITIVE FORCES
• 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.

• Many multidivisional firms do not provide sales and profit information on a divisional
basis for competitive reasons.

• Also, privately held firms do not publish any financial or marketing information.

CHARACTERISTICS OF THE MOST COMPETITIVE COMPANIES

1. Strive to continually increase market share.
2. Use the vision/mission as a guide for all decisions.
3. Continually strive to improve everything about the firm.
4. Continually adapt, innovate, improve – especially when the firm is successful.
5. Strive to grow through acquisition whenever possible.
6. Hire and retain the best employees and managers possible.
7. Strive to stay cost-competitive on a global basis.

COMPETITIVE INTELLIGENCE PROGRAMS

What is competitive intelligence?

Competitive intelligence (CI), as 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.
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 it is that it can formulate and implement effective strategies.

Major competitors’ weaknesses can represent external opportunities; major competitors’

strengths may represent key threats.

I. COMPETITIVE ANALYSIS: Porter's 5 Forces

What Are Porter's Five Forces?
Porter's Five Forces is a model that identifies and analyzes five competitive forces that
shape every industry and helps determine an industry's weaknesses and strengths.

Five Forces analysis is frequently used to identify an industry's structure to determine

corporate strategy. Porter's model can be applied to any segment of the economy to
understand the level of competition within the industry and enhance a company's long-
term profitability.

The Five Forces model is named after Harvard Business School professor, Michael E.
Porter.

Understanding Porter's Five Forces

• Porter's Five Forces is a business analysis model that helps to explain why various
industries are able to sustain different levels of profitability.

• The model was published in Michael E. Porter's book, "Competitive Strategy:

Techniques for Analyzing Industries and Competitors" in 1980.1

• The Five Forces model is widely used to analyze the industry structure of a company
as well as its corporate strategy. Porter identified five undeniable forces that play a part
in shaping every market and industry in the world, with some caveats.

• The five forces are frequently used to measure competition intensity, attractiveness,
and profitability of an industry or market.

Porter's Five Forces

 Competition in the Industry
The first of the five forces refers to the number of competitors and their ability to
undercut a company. The larger the number of competitors, along with the number of
equivalent products and services they offer, the lesser the power of a company.

Suppliers and buyers seek out a company's competition if they are able to offer a better
deal or lower prices. Conversely, when competitive rivalry is low, a company has
greater power to charge higher prices and set the terms of deals to achieve higher sales
and profits.

 Potential of New Entrants Into an Industry

A company's power is also affected by the force of new entrants into its market. The
less time and money it costs for a competitor to enter a company's market and be an
effective competitor, the more an established company's position could be significantly
weakened.

An industry with strong barriers to entry is ideal for existing companies within that
industry since the company would be able to charge higher prices and negotiate better
terms.

 Power of Suppliers
The next factor in the five forces model addresses how easily suppliers can drive up the
cost of inputs. It is affected by the number of suppliers of key inputs of a good or
service, how unique these inputs are, and how much it would cost a company to switch
to another supplier. The fewer suppliers to an industry, the more a company would
depend on a supplier.

As a result, the supplier has more power and can drive up input costs and push for
other advantages in trade.

On the other hand, when there are many suppliers or low switching costs between rival
suppliers, a company can keep its input costs lower and enhance its profits.

 Power of Customers
The ability that customers have to drive prices lower or their level of power is one of the
five forces. It is affected by how many buyers or customers a company has, how
significant each customer is, and how much it would cost a company to find new
customers or markets for its output.

A smaller and more powerful client base means that each customer has more power to
negotiate for lower prices and better deals. A company that has many, smaller,
independent customers will have an easier time charging higher prices to increase
profitability.

 Threat of Substitutes
The last of the five forces focuses on substitutes. Substitute goods or services that can
be used in place of a company's products or services pose a threat.

Companies that produce goods or services for which there are no close substitutes will
have more power to increase prices and lock in favorable terms. When close substitutes
are available, customers will have the option to forgo buying a company's product, and
a company's power can be weakened.

Understanding Porter's Five Forces and how they apply to an industry, can enable a
company to adjust its business strategy to better use its resources to generate higher
earnings for its investors.

J. Sources of External Information

1. A wealth of strategic information is available to organizations from both published and
unpublished sources.

 Unpublished sources include customer surveys, market research, speeches at

professional and shareholders’ meetings, television programs, interviews, and
conversations with stakeholders.

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

government documents, abstracts, books, directories, newspapers, and
manuals.

2. A company website is usually an excellent place to start to find information about a

firm, particularly on the Investor Relations web pages.

Best small business website examples

 Piboco: App website
 Ception: Tech startup website
 Objective: Lifestyle eCommerce website
 Holyziner: Freelance photography portfolio P
 Puffin Packaging: Eco-friendly packaging website
 Bonny: Creative agency website
 Islango: Yacht rentals website Acupuncture with Fabi:
 Acupuncturist website
 Ducknology: eCommerce jewellery website U
 bio Labs: Mobile accessories website

3. Standard & Poor's (S&P)

Standard & Poor's (S&P) is a leading index provider and data source of independent
credit ratings. The McGraw-Hill Cos. purchased S&P in 1966, and in 2016, the company
became known as S&P Global.

Standard & Poor's is one of the largest credit rating agencies, assigning letter grades to
companies and countries and the debt they issue on a scale of AAA to D, indicating
their degree of investment risk.

The popular S&P 500 Index is perhaps Standard & Poor's best-known product.
The S&P 500 is the basis for many investments, including futures contracts, mutual
funds, and ETFs.

K. Forecasting Tools and Techniques

What is Forecasting?
Forecasting refers to the practice of predicting what will happen in the future by taking
into consideration events in the past and present.

Basically, it is a decision-making tool that helps businesses cope with the impact of the
future’s uncertainty by examining historical data and trends. It is a planning tool that
enables businesses to chart their next moves and create budgets that will hopefully
cover whatever uncertainties may occur.

Forecasting Methods
Businesses choose between two basic methods when they want to predict what can
possibly happen in the future, namely, qualitative and quantitative methods.

1. Qualitative method Otherwise known as the judgmental method, qualitative

forecasting offers subjective results, as it is comprised of personal judgments by experts
or forecasters. Forecasts are often biased because they are based on the expert’s
knowledge, intuition, and experience, and rarely on data, making the process non-
mathematical.

One example is when a person forecasts the outcome of a finals game in the NBA,
which, of course, is based more on personal motivation and interest. The weakness of
such a method is that it can be inaccurate.

2. Quantitative method The quantitative method of forecasting is a mathematical

process, making it consistent and objective. It steers away from basing the results on
opinion and intuition, instead utilizing large amounts of data and figures that are
interpreted.

Features of Forecasting Here are some of the features of making a forecast:

1. Involves future events
Forecasts are created to predict the future, making them important for planning.

2. Based on past and present events

Forecasts are based on opinions, intuition, guesses, as well as on facts, figures, and
other relevant data. All of the factors that go into creating a forecast reflect to some
extent what happened with the business in the past and what is considered likely to
occur in the future.

3. Uses forecasting techniques

Most businesses use the quantitative method, particularly in planning and budgeting

The Process of Forecasting

Forecasters need to follow a careful process in order to yield accurate results. Here are
some steps in the process:

1. Develop the basis of forecasting

The first step in the process is developing the basis of the investigation of the
company’s condition and identifying where the business is currently positioned in the
market.

2. Estimate the future operations of the business

Based on the investigation conducted during the first step, the second part of
forecasting involves estimating the future conditions of the industry where the business
operates and projecting and analyzing how the company will fare.

3. Regulate the forecast

This involves looking at different forecasts in the past and comparing them with the
actual things that happened with the business. The differences in previous results and
current forecasts are analyzed, and the reasons for the deviations are considered.

4. Review the process

Every step is checked, and refinements and modifications are made.

Sources of Data for Forecasting

1. Primary sources
Information from primary sources takes time to gather because it is first-hand
information, also considered the most reliable and trustworthy sort of information. The
forecaster himself does the collection, and may do so through things such as interviews,
questionnaires, and focus groups.

2. Secondary sources
Secondary sources supply information that has been collected and published by other
entities. An example of this type of information might be industry reports. As this
information has already been compiled and analyzed, it makes the process quicker

L. INDUSTRY ANALYSIS: The External Factor Evaluation Matrix

• External Factor Evaluation (EFE) Matrix is a strategic analysis tool used to evaluate
firm’s external environment and to reveal its strengths as well as weaknesses. The
external and internal factor analyses have been introduced by Fred R. David in his
book, Strategic Management

• According to the author, both tools are used to summarise the information gained from
company’s external and internal environment analyses.
External Factor Analysis

Key External Factors

When using the EFE matrix we identify the key external opportunities and threats that
are affecting or might affect a company. By analysing the external environment with the
tools like PESTLE analysis, Porter’s Five Forces or Profile Matrix, the key external
factors can be identified. The general rule is to identify as many key external and
internal factors as possible.

Weights
Each key factor should be assigned a weight ranging from 0.0 (low importance) to 1.0
(high importance). The number indicates how important the factor is if a company wants
to succeed in an industry. If there were no weights assigned, all the factors would be
equally important, which is an impossible scenario in the real world. The sum of all the
weights must equal 1.0. Separate factors should not be given too much emphasis
(assigning a weight of 0.30 or more) because the success in an industry is rarely
determined by one or few factors.

Ratings
The ratings in external matrix refer to how effectively company’s current strategy
responds to the opportunities and threats.

The numbers range from 4 to 1, where

4 means a superior response,
3 – above average response,
2 – average response and
1 – poor response.

Ratings, as well as weights, are assigned subjectively to each factor.

In our example, we can see that the company’s response to the opportunities is rather
poor, because only one opportunity has received a rating of 3, while the rest have
received the rating of 1. The company is better prepared to meet the threats, especially
the first threat

Weighted Score
The score is the result of weight multiplied by rating. Each key factor must receive a
score.

Total weighted score is simply the sum of all individual weighted scores. The firm can
receive the same total score from 1 to 4 in both matrices.
The total score of 2.5 is an average score. In external evaluation a low total score
indicates that company’s strategies aren’t well designed to meet the opportunities and
defend against threats.

In internal evaluation a low score indicates that the company is weak against its
competitors.

M. The Competitive Profile Matrix

The Competitive Profile Matrix (CPM) is a tool that compares the firm and its rivals
and reveals their relative strengths and weaknesses

[1]. In order to better understand the external environment and the competition in a
particular industry, firms often use CPM

[2]. The profile matrix identifies a firm’s key competitors and compares them using
industry’s critical success factors. The analysis also reveals company’s relative
strengths and weaknesses against its competitors. As a result, a company can easily
identify the areas it should improve and the areas it should protect.

Competitive Profile Matrix

Critical Success Factors
Critical success factors (CSF) are the key areas that determine a company’s success in
the industry. To succeed in its industry, a company must perform at the highest possible
level of excellence. These factors vary among industries or even strategic groups. CSF
should include both internal and external factors for analysis. Therefore, if you want a
more robust and accurate analysis, include more, relevant factors.

Weight
Assign a weight ranging from 0.0 (low importance) to 1.0 (high importance) to each
critical success factor. The weight indicates the importance of that factor in the
company’s success. If you don’t assign weights, then all factors would be equally
important. This is an impossible scenario in the real world. The sum of all the weights
must equal 1.0. You should not emphasise separate factors too much by assigning a
weight of 0.3 or more. This is because a company’s success is rarely determined by just
one or few factors.

Rating
The ratings in CPM refer to how well companies are doing in each area. They range
from 4 to 1:

4 means a major strength

3 – minor strength
2 – minor weakness, and
1 – major weakness.
Subjectively assign the ratings and weights to each company. However, this process
can be done easier through benchmarking. Benchmarking reveals how well companies
are doing compared to each other or industry’s average. Note that firms can have equal
ratings for the same factor.

Score
The score is the result of weight multiplied by rating. Each company receives a score on
each factor.

Total score is simply the sum of all individual score for the company.

The firm that receives the highest total score is relatively stronger than its competitors.

ANALAYZING COMPANY RESOURCES AND COMPETITIVE POSITION

Lesson 6
The Nature of Internal Audit
All organizations have strengths and weaknesses in the functional areas of business.
No enterprise is equally strong or weak in all areas. Internal strengths/weaknesses,
coupled with external opportunities/threats and a clear statement of mission, provide the
basis for establishing objectives and strategies. Objectives and strategies are
established with the intention of capitalizing upon internal strengths and overcoming
weaknesses.

A. Key Internal Forces

• It is impossible in a strategic-management course to review in depth all the material
presented in courses such as marketing, finance, accounting, management,
management information systems, and production/operations; there are many subareas
within these functions, such as customer service, warranties, advertising, packaging,
and pricing under marketing.
• However, strategic planning must include a detailed assessment of how the firm is
doing in all internal areas. A complete internal assessment is vital to help a firm to
formulate, implement, and evaluate strategies to enable it to gain and sustain
competitive advantages.

For different types of organizations, such as hospitals, universities, and government

agencies, the functional business areas differ. Functional areas of a university can
include athletic programs, placement services, housing, fund-raising, academic
research, counselling, and intramural programs.

Regardless of the type or size of firm, effective strategic planning hinges on

identification and prioritization of internal strengths and weaknesses.

Strengths that cannot be easily matched or imitated by competitors are called distinctive
competencies. Building competitive advantages involves taking advantage of distinctive
competencies. Strategies are designed in part to improve on a firm’s weaknesses,
turning them into strengths - and maybe even into distinctive competencies.

A. The Process of Performing an Internal Audit

• The process of performing an internal audit closely parallels the process of

performing an external audit. Representative managers and employees from
throughout the firm need to be involved in determining a firm’s strengths and
weaknesses.

• Performing an internal audit requires gathering, assimilating, and evaluating

information about the firm’s operations. Critical success factors, consisting of
both strengths and weaknesses

• Performing an internal strategic-management audit, managers from different

departments and divisions of the firm come to understand the nature and
effect of decisions in other functional business areas in their firm.

The Resource-Based View (RBV)

• The Resource-Based View (RBV) approach to competitive advantage
contends that internal resources are more important for a firm than external
factors in achieving and sustaining competitive advantage.

• Proponents of the RBV view contend that organizational performance will

primarily be determined by internal resources that can be grouped into three
all-encompassing categories:

 physical resources
 human resources
 organizational resources

Physical resources include:

 plant and equipment
 Location
 Technology
 raw materials
 machines

Human resources include:

 all employees
 Training
 Experience
 Intelligence
 Knowledge
 Skills
 Abilities
Organizational resources include:
 firm structure
 planning processes
 information systems
 Patents
 Trademarks
 Copyrights
 databases, and so on.
A firm´s resources can be tangible, such as
 Labour
 Capital
 Land
 Plant
 equipment,

Resources can be intangible, such as:

 Culture
 Knowledge
 brand equity
 Reputation
 intellectual property

• When other firms are unable to duplicate a particular strategy, then the focal
firm has a sustainable competitive advantage, according to RBV theorists.
For a resource to be valuable, it must be either:
 Rare
 hard to imitate
 not easily substitutable

• Often called empirical indicators, these three characteristics of resources

enable a firm to implement strategies that improve its efficiency and
effectiveness and lead to a sustainable competitive advantage.
• The more a resource(s) is rare, hard to imitate, and/or not easily
substitutable, the stronger a firm’s competitive advantage will be and the
longer it will last.

• The RBV has continued to grow in popularity and continues to seek a better
understanding of the relationship between resources and sustained
competitive advantage in strategic management.

• Understanding both external and internal factors, and more importantly,

understanding the relationships among them, will be the key to effective
strategy formulation.

Integrating Strategy and Culture

• Since tangible resources can more easily be bought and sold, intangible resources
are often more important for gaining and sustaining competitive advantage.
• RBV theory asserts that resources are actually what helps a firm exploit
opportunities and neutralize threats.
• The theory asserts that it is advantageous for a firm to pursue a strategy that
is not currently being implemented by any competing firm.

• Every business entity has a unique organizational culture that impacts

strategic-planning activities.

• Organizational culture can be defined as “a pattern of behavior that has

been developed by an organization as it learns to cope with its problem of
external adaptation and internal integration, and that has worked well enough
to be considered valid and to be taught to new members as the correct way
to perceive, think, and feel.”

• This definition emphasizes the importance of matching external with internal

factors in making strategic decisions. Organizational culture captures the
subtle, elusive, and largely unconscious forces that shape a workplace.

Remarkably resistant to change, culture can represent a major strength or weakness for
the firm. It can be an underlying reason for strengths or weaknesses in any of the major
business functions.
Cultural products include:

 Values
 Beliefs
 Rites
 Rituals
 Ceremonies
 Myths
 Stories
 Legends
 Sagas
 Language
 Metaphors
 Symbols
 Heroes
 heroines.
• These products or dimensions are levers that strategists can use to
influence and direct strategy formulation, implementation, and evaluation
activities.

• An organization’s culture compares to an individual’s personality in the

sense that no two organizations have the same culture and no two
individuals have the same personality.

• Both culture and personality are enduring and can be warm, aggressive,
friendly, open, innovative, conservative, liberal, harsh, or likable.

• Organizational culture significantly affects business decisions and thus

must be evaluated during an internal strategic-management audit.

• If strategies can capitalize on cultural strengths, such as a strong work

ethic or highly ethical beliefs, then management often can swiftly and
easily implement changes.
 • The potential value of organizational culture has not been realized fully in
the study of strategic management.

Internal strengths and weaknesses associated with a firm’s culture sometimes are
overlooked because of the inter-functional nature of this phenomenon. It is important,
therefore, for strategists to understand their firm as a sociocultural system. Success is
often determined by linkages between a firm’s culture and strategies. The challenge of
strategic management today is to bring about the changes in organizational culture and
individual mind-sets that are needed to support the formulation, implementation, and
evaluation of strategies.
Management
• The functions of management consist of five basic activities: planning,
organizing, motivating, staffing, and controlling.
• These activities must be examined in strategic planning because an
organization should continually capitalize on its strengths and improve on
its weaknesses in these five areas.
Functio Description Stage of
n Strategic-
management
Process
Planning Planning consists of all those managerial activities Strategy
related to preparing for the future, such as Formulation
forecasting, establishing objectives, devising
strategies, developing policies, and setting goals.
Organizing Organizing includes all those managerial Strategy
activities that result in a structure of task and Implementation
authority relationships, such as organizational
design, job specialization, job descriptions, job
specifications, span of control, coordination, job
design, and job analysis.
Motivating Motivating involves efforts directed toward shaping Strategy
human behavior. Specific topics include Implementation
leadership, communication,
work groups, behavior
modification, delegation of authority, job
enrichment, job satisfaction, needs
fulfillment, organizational change, employee
morale, and managerial
morale.
Staffing Staffing refers to human resource (HR) activities, Strategy
such as wage and salary administration, employee Implementation
benefits, interviewing, hiring, firing, training,
management development, employee safety, equal
employment opportunity, and union relations.
Controlling Controlling refers to all those managerial activities Strategy
directed toward ensuring that actual results are Evaluation
consistent with planned results. Key areas of
concern include quality control, financial control,
sales control, inventory control, and expense control,
analysis of variances, rewards, and sanctions.
Management Audit Checklist of Questions

1. Does the firm use strategic-management concepts?

2. Are company objectives and goals
measurable and well communicated?
3. Do managers at all hierarchical levels plan effectively?
4. Do managers delegate authority well?
5. Is the organization’s structure appropriate?
6. Are job descriptions and job specifications clear?
7. Is employee morale high?
8. Are employee turnover and absenteeism low?
9. Are organizational reward and control mechanisms effective?

Marketing
Marketing can be described as the process of defining, anticipating, creating, and
fulfilling customers’ needs and wants for products and services.

There are seven basic functions of marketing:

1. Customer Analysis - the examination and evaluation of consumer

needs, desires, and wants - involves administering customer surveys,
analyzing consumer information, evaluating market positioning
strategies, developing customer profiles, and determining optimal market
segmentation strategies. The information generated by customer
analysis can be essential in developing an effective mission statement.
Successful organizations continually monitor present and potential
customers’ buying patterns. Business analytics has become an integral
part of customer analysis and strategic planning.
2. Selling Products and Services - Successful strategy implementation
generally rests upon the ability of an organization to sell some product or
service. Selling includes many marketing activities, such as advertising,
sales promotion, publicity, personal selling, sales force management,
customer relations, and dealer relations. These activities are especially
critical when a firm pursues a market penetration strategy. The
effectiveness of various selling tools for consumer and industrial products
varies. Personal selling is most important for industrial goods companies,
and advertising is most important for consumer goods companies.
Determining organizational strengths and weaknesses in the selling
function of marketing is an important part of performing an internal
strategic-management audit.
3. Product and Service Planning – it includes activities such as test
marketing; product and brand positioning; devising warranties;
packaging; determining product options, features, style, and quality;
deleting old products; and providing for customer service. Product
and service planning is particularly important when a company is
pursuing product development or diversification. One of the most
effective product and service planning techniques is test marketing.
Test markets allow an organization to test alternative marketing plans
and to forecast future sales of new products. Test marketing can allow an
organization to avoid substantial losses by revealing weak products
and ineffective marketing approaches before large-scale production
begins.

4. Pricing - Five major stakeholders affect pricing decisions: consumers,

governments, suppliers, distributors, and competitors. Sometimes an
organization will pursue a forward integration strategy primarily to gain
better control over prices charged to consumers. Governments can
impose constraints on price fixing, price discrimination, minimum prices,
unit pricing, price advertising, and price controls. Competing
organizations must be careful not to coordinate discounts, credit terms,
or condition of sale; not to discuss prices, markups, and costs at trade
association meetings; and not to arrange to issue new price lists on the
same date, to rotate low bids on contracts, or to uniformly restrict
production to maintain high prices. Strategists should view price from
both a short-run and a long-run perspective, because competitors can
copy price changes with relative ease.

5. Distribution – it includes warehousing, distribution channels,

distribution coverage, retail site locations, sales territories, inventory
levels and location, transportation carriers, wholesaling, and retailing.
Most producers today do not sell their goods directly to consumers.
Various marketing entities act as intermediaries; they bear a variety of
names such as wholesalers, retailers, brokers, facilitators, agents,
vendors - or simply distributors. Distribution becomes especially
important when a firm is striving to implement a market development
or forward integration strategy. Manufacturers who could afford to sell
directly to the public often can gain greater returns by expanding and
improving their manufacturing operations.

6. Marketing Research – it is the systematic gathering, recording, and

analyzing of data about problems relating to the marketing of goods
and services. Marketing research can uncover critical strengths and
weaknesses, and marketing researchers employ numerous scales,
 instruments, procedures, concepts, and techniques to gather
information. Marketing research activities support all of the major
business functions of an organization. Organizations that possess
excellent marketing research skills have a definite strength in pursuing
generic strategies.

7. Cost/Benefit Analysis – it involves assessing the costs, benefits, and

risks associated with marketing decisions. Three steps are required to
perform a cost/benefit analysis:
(1) compute the total costs associated with a decision,
(2) estimate the total benefits from the decision
(3) compare the total costs with the total benefits

When expected benefits exceed total costs, an opportunity becomes more attractive.
Sometimes the variables included in a cost/benefit analysis cannot be quantified or
even measured, but usually reasonable estimates can be made to allow the analysis to
be performed. One key factor to be considered is risk. Cost/benefit analysis should
also be performed when a company is evaluating alternative ways to be socially
responsible.

Marketing Audit Checklist of Questions

The following questions about marketing must be examined in strategic planning:
1. Are markets segmented effectively?
2. Is the organization positioned well among competitors?
3. Has the firm’s market share been increasing?
4. Are present channels of distribution reliable and cost effective?
5. Does the firm have an effective sales organization?
6. Does the firm conduct market research?
7. Are product quality and customer service good?
8. Are the firm’s products and services priced appropriately?
9. Does the firm have an effective promotion, advertising, and publicity strategy?
10. Are marketing, planning, and budgeting effective?
11. Do the firm’s marketing managers have adequate experience and training?
12. Is the firm’s Internet presence excellent as compared to rivals?

Finance and Accounting

• Financial condition is often considered the single best measure of a firm’s
competitive position and overall attractiveness to investors. Determining an
organization’s financial strengths and weaknesses is essential to effectively
formulating strategies.
• A firm’s liquidity, leverage, working capital, profitability, asset utilization, cash
flow, and equity can eliminate some strategies as being feasible alternatives.
Financial factors often alter existing strategies and change implementation
plans.

Finance/Accounting Functions
 The investment decision, also called capital budgeting, is the allocation
and reallocation of capital and resources to projects, products, assets,
and divisions of an organization. Once strategies are formulated, capital
budgeting decisions are required to successfully implement strategies
 The financing decision determines the best capital structure for the firm
and includes examining various methods by which the firm can raise
capital.
 Dividend decisions concern issues such as the percentage of earnings
paid to stockholders, the stability of dividends paid over time, and the
repurchase or issuance of stock. Dividend decisions determine the
amount of funds that are retained in a firm compared to the amount paid
out to stockholders.

Financial Ratios
 Financial ratios are computed from an organization’s income statement and
balance sheet. Computing financial ratios is like taking a picture because
the results reflect a situation at just one point in time.
 Comparing ratios over time and to industry averages is more likely to
result in meaningful statistics that can be used to identify and evaluate
strengths and weaknesses.

Finance/Accounting Audit Checklist

The following finance/accounting questions, like the similar questions about marketing
and management earlier, should be examined:

1. Where is the firm financially strong and weak as indicated by

financial ratio analyses?
2. Can the firm raise needed short-term capital?
3. Can the firm raise needed long-term capital through debt and/or equity?
4. Does the firm have sufficient working capital?
5. Are capital budgeting procedures effective?
6. Are dividend payout policies reasonable?
7. Does the firm have good relations with its investors and stockholders?
8. Are the firm’s financial managers experienced and well trained?
9. Is the firm’s debt situation excellent?

Production/Operations
• The production/operations function of a business consists of all those
 activities that transform inputs into goods and services. Production/operations
management deals with inputs, transformations, and outputs that vary across
industries and markets.

• A manufacturing operation transforms or converts inputs such as raw

materials, labor, capital, machines, and facilities into finished goods and
services. The extent to which a manufacturing plant´s output reaches its
potential output is called capacity utilization, a key strategic variable. The
higher the capacity utilization, the better; otherwise, equipment may sit idle.

• Production/operations activities often represent the largest part of an

organization’s human and capital assets. In most industries, the major costs of
producing a product or service are incurred within operations, so
production/operations can have great value as a competitive weapon in a
company’s overall strategy.

e Basic Functions (Decisions) within Production/Operations Decision Areas Example

Decisions

1. Process
These decisions include choice of technology, facility layout, process flow
analysis, facility location, line balancing, process control, and transportation
analysis. Distances from raw materials to production sites to customers are a
major consideration.
2. Capacity
These decisions include forecasting, facilities planning, aggregate planning,
scheduling, capacity
planning, and queuing analysis. Capacity utilization is a major consideration.
3. Inventory
These decisions involve managing the level of raw materials, work-in-process, and
finished goods,
especially considering what to order, when to order, how much to order, and materials
handling.
4. Workforce
These decisions involve managing the skilled, unskilled, clerical, and managerial
employees by caring for job design, work measurement, job enrichment, work
standards, and motivation techniques.
5. Quality
These decisions are aimed at ensuring that high-quality goods and services are
produced by caring
for quality control, sampling, testing, quality assurance, and cost control.
Production/Operations Audit Checklist
Questions such as the following should be examined:
1. Are supplies of raw materials, parts, and subassemblies reliable and
reasonable?
2. Are facilities, equipment, machinery, and offices in good condition?
3. Are inventory-control policies and procedures effective?
4. Are quality-control policies and procedures effective?
5. Are facilities, resources, and markets strategically located?
6. Does the firm have technological competencies?

Research and Development

• The fifth major area of internal operations that should be examined for
specific strengths and weaknesses is research and development (R&D).
Many firms today conduct no R&D, and yet many other companies depend
on successful R&D activities for survival. Firms pursuing a product
development strategy especially need to have a strong R&D orientation.

• High-tech firms spend a much larger proportion of their revenues on R&D. A

key decision for many firms is whether to be a first mover or a late follower,
i.e. spend heavily on R&D to be the first to develop radically new products, or
spend less on R&D by imitating/duplicating/improving on products after rival
firms develop them.

• Organizations invest in R&D because they believe that such an investment

will lead to a superior product or service and will give them competitive
advantages.

• Research and development expenditures are directed at developing new

products before competitors do, at improving product quality, or at improving
manufacturing processes to reduce costs.

Internal and External Research and Development

Four approaches to determining R&D budget allocations commonly are used:
(1) financing as many project proposals as possible,
(2) using a percentage-of-sales method
(3) budgeting about the same amount that competitors spend for R&D, or

(4) deciding how many successful new products are needed and working
backward to estimate the required R&D investment. The strengths
(capabilities) and weaknesses (limitations) of R&D play a major role in a
 strategy formulation and strategy implementation.
• Most firms have no choice but to continually develop new and improved
products because of changing consumer needs and tastes, new
technologies, shortened product life cycles, and increased domestic and
foreign competition.

• A shortage of ideas for new products, increased global competition,

increased market segmentation, strong special-interest groups, and
increased government regulations are several factors making the successful
development of new products more and more difficult, costly, and risky.

Research and Development Audit

Questions such as the following should be asked in performing an R&D audit:
1. Does the firm have R&D facilities? Are they adequate?
2. If outside R&D firms are used, are they cost-effective?
3. Are the organization’s R&D personnel well qualified?
4. Are R&D resources allocated effectively?
5. Are management information and computer systems adequate?
6. Is communication between R&D and other organizational units
effective?
7. Are present products technologically competitive?

Management Information Systems

• Information ties all business functions together and provides the basis for all
managerial decisions. It is the cornerstone of all organizations. Information
represents a major source of competitive management advantage or
disadvantage. Assessing a firm’s internal strengths and weaknesses in
information systems is a critical dimension of performing an internal audit.

• A management information system’s purpose is to improve the performance

of an enterprise by improving the quality of managerial decisions. An effective
information system thus collects, codes, stores, synthesizes, and presents
information in such a manner that it answers important operating and
strategic questions. The heart of an information system is a database
containing the kinds of records and data important to managers.

• A management information system (MIS) receives raw material from both the
external and internal evaluation of an organization. It gathers data about
marketing, finance, production, and personnel matters internally, and social,
cultural, demographic, environmental, economic, political, governmental,
legal, technological, and competitive factors externally. Data are integrated in
ways needed to support managerial decision making.
Management Information Systems Audit
Questions such as the following should be asked when conducting this audit:
1. Do all managers in the firm use the information system to make decisions?
2. Is there a chief information officer or director of information systems
position in the firm?
3. Are data in the information system updated regularly?
4. Do managers from all functional areas of the firm contribute input to the
information
system?
5. Are there effective passwords for entry into the firm’s information system?
6. Are strategists of the firm familiar with the information systems of rival firms?
7. Is the information system user-friendly?
8. Do all users of the information system understand the competitive
advantages that
information can provide firms?
9. Are computer training workshops provided for users of the information system?
10. Is the firm’s information system continually being improved in
content and user- friendliness?

Value Chain Analysis

• According to Porter, the business of a firm can best be described as a value

chain, in which total revenues minus total costs of all activities undertaken to
develop and market a product or service yields value.

• All firms in a given industry have a similar value chain, which includes
activities such as obtaining raw materials, designing products, building
manufacturing facilities, developing cooperative agreements, and providing
customer service. Firms should strive to understand not only their own value
chain operations but also their competitors’, suppliers’, and distributors’ value
chains.

• Value chain analysis (VCA) refers to the process whereby a firm determines
the costs associated with organizational activities from purchasing raw
materials to manufacturing product(s) to marketing those products. VCA aims
to identify where low-cost advantages or disadvantages exist anywhere along
the value chain from raw material to customer service activities. VCA can
enable a firm to better identify its own strengths and weaknesses, especially
as compared to competitors’ value chain analyses and their own data
examined over time.
• When a major competitor or new market entrant offers products or services at
very low prices, this may be because that firm has substantially lower value
 chain costs or perhaps the rival firm is just waging a desperate attempt to
gain sales or market share. Thus value chain analysis can be critically
important for a firm in monitoring whether its prices and costs are competitive.

• Value chains differ immensely across industries and firms. However all firms
should use value chain analysis to develop and nurture a core competence
and convert this competence into a distinctive competence.

• A core competence is a value chain activity that a firm performs especially

well. When a core competence evolves into a major competitive advantage,
then it is called a distinctive competence.

Benchmarking
 Benchmarking is an analytical tool used to determine whether a firm’s value
chain activities are competitive compared to rivals and thus conducive to winning
in the marketplace. Benchmarking entails measuring costs of value chain
activities across an industry to determine “best practices” among competing firms
for the purpose of duplicating or improving upon those best practices.
 Benchmarking enables a firm to take action to improve its competitiveness by
identifying (and improving upon) value chain activities where rival firms have
comparative advantages in cost, service, reputation, or operation.
 The hardest part of benchmarking can be gaining access to other firms’
value chain activities with associated costs.

 Typical sources of benchmarking information, however, include published

reports, trade publications, suppliers, distributors, customers, partners,
creditors, shareholders, lobbyists, and willing rival firms. Some rival firms
share benchmarking data.
Due to the popularity of benchmarking today, numerous consulting firms gather
benchmarking data, conduct benchmarking studio.

Crafting a Strategy: The Quest for Competitive Advantage

LESSON 7
What is a Competitive Advantage?
•A competitive advantage is an attribute that enables a company to outperform its
competitors. This allows a company to achieve superior margins compared to its
competition and generates value for the company and its shareholders.
•A competitive advantage must be difficult, if not impossible, to duplicate. If it is easily
copied or imitated, it is not considered a competitive advantage.

Examples of Competitive Advantage

 Access to natural resources that are restricted from competitors
 Highly skilled labor
  A unique geographic location
 Access to new or proprietary technology
 Ability to manufacture products at the lowest cost
 Brand image recognition

Constructing a Competitive Advantage

Before a competitive advantage can be established, it is important to know the:

Benefit: A company must be clear about what benefit(s) their product or service
provides. It must offer real value and generate interest.
Target Market: A company must establish who is purchasing from the company
and how it can cater to its target market.
Competitors: It is important for a company to understand other competitors in the
competitive landscape.
To construct a competitive advantage, a company must be able to detail the benefit
that they provide to their target market in ways that other competitors cannot.

Strategies for Competitive Advantage

There are three strategies for establishing a competitive advantage: Cost Leadership,
Differentiation, and Focus (Cost-focus and Differentiation- focus).
1. Cost Leadership
In a cost leadership strategy, the objective is to become the lowest-cost producer.
This is achieved through large-scale production, where companies can exploit
economies of scale. If a company is able to utilize economies of scale and produce
products at a cost lower than that of its competitors, the company is then able to
establish a selling price that is unable to be replicated by other companies. Therefore, a
company adopting a cost leadership strategy would be able to reap profits due to its
significant cost advantage over its competitors.

2. Differentiation
 In a differentiation strategy, a company’s products or services are differentiated
from that of its competitors. This can be done by delivering high- quality products or
services to customers or innovating products or services. If a company is able to
differentiate successfully, the company would then be able to set a premium price on its
products or services.

3. Focus
In a focus strategy, a company focuses on a narrow target market segment. This
strategy is successful if the company is able to successfully create products/services
that can cater to these customers. The focus strategy also has two variants;
 Cost-focus: Lowest-cost producer in a narrow market segment
 Differentiation-focus: Differentiated products/services in a narrow market
segment

Competitive Advantage in the Marketplace

Three great examples include:

 McDonald’s: McDonald’s main competitive advantage relies on a cost
leadership strategy. The company is able to utilize economies of scale and
produce products at a low cost and, as a result, offer products at a lower
selling price than that of its competitors.

 Louis Vuitton: Louis Vuitton’s advantage relies on both differentiation and a

differentiation-focus strategy. The company is able to be a leader in the
luxury market and command premium prices through product uniqueness.

 Walmart: Walmart’s advantage relies on a cost leadership strategy.

Walmart is able to offer “everyday low prices” through economies of scale.

Importance of Competitive Advantage

A competitive advantage distinguishes a company from its
competitors. It contributes to higher prices, more customers, and
brand loyalty. Establishing such an advantage is one of the most
important goals of any company.
In today’s world, it is essential to business success. Without it, companies will find it
difficult to survive.

The Guide to Making a Competitive Advantage Strategy for a Hotel

 The competitive landscape for existing hotels is more challenging than ever, with
new brands, concepts, and distribution channels opening frequently.
 In this crowded environment, smart lodging operators are finding creative ways to
stand out from the competition.
 While gaining this edge won’t happen overnight, these 10 keys to creating a
competitive advantage in the hotel industry can guide your strategy.
 1. Identify the competition’s advantages to tailor your own
 Knowing the specific advantages the competition leverages allows you to create
 your own stand-out features and services.
 First, create a short list of direct competitors that are similar to your property in
terms of location, price point, audience, and concept. Now that you know who the
competition is, you can focus on their strengths and weaknesses. Where are they
the clear winner? Do they have on-site F&B that draws in groups? Are they a
select service property that commits to 5-star customer service? Where do you
take the lead? Do you clearly outshine the competition when it comes to in- room
amenities?
 Mirroring your competitors’ strategies won’t win the battle, but awareness of their
specialized niches and unique vulnerabilities can help guide your tactics.
Highlight your nearness to the beach and stellar ocean views if they outdo the
partially obscured views of competitors. If your indoor pool can’t match the
themed rooftop pool next door, find another outstanding feature to call out in
promos.
 Porter’s Five Forces Framework is a helpful model for evaluating the competition,
measuring opportunity and profitability, and guiding strategic decisions.

2. Create authentic relationships through guest feedback

 It’s more expensive to attract new business than to cultivate relationships with
returning groups. Listening to guest feedback offers valuable insight into what
you’re doing right—and where to improve. Engage with planners via social media
and travel website reviews to build relationships and increase brand loyalty.
 Responding to all reviews (positive and negative) is essential. These reviews
may also highlight improvement opportunities. If you note overwhelmingly
positive check-in experiences for individuals but sluggish and confusing check-
ins for large groups, perhaps you need to streamline your group check- in
process.
 Rewarding guests creates a sense of trust, and trust leads to repeat stays. A
loyalty program earns extra data, which can be used to design personalized
experiences and targeted offers. Forge long-term relationships by offering a
group loyalty program to encourage corporate events, conferences, and more at
other hotels across your portfolio.

3. Make ‘value added’ meaningful

 Well-implemented perks and extras are a gateway to competitive advantage, as
long as they are tailored to your audience and property. While ‘free’ can be a
strong selling point, the word may devalue the service for some audiences.
Value- conscious traveling sports teams will appreciate free breakfast, while
corporate retreat executives may prefer luxury add-on excursions or experiences,
such as a brewery tour with dinner and a tasting flight.
 Value for your audience may depend on the guest receiving something extra that
they would not have gotten otherwise. But, if the incentive doesn’t align with the
customer’s values, there’s a missed opportunity for connection. A complimentary
bottle of champagne at a romantic dinner is not a one-size-fits-all offering—draw
 in youth athletic leagues with kid-friendly welcome kits or tempt conference
attendees with unrestricted access to the internet or video streaming services
during their stay. Finding appropriate perks for your audience can differentiate
your property from the competition and help you attract new guests.

4. Streamline Direct Booking

 In this age of instant connection, planners value a quick and easy booking
experience. OTAs and travel booking services lure guests with convenience and
promises of low prices, but guests who book directly are 12.5 percent more
profitable for hotels. Leverage direct booking with price incentives, upgrades, and
added perks—and ensure a convenient, simple, and mobile-friendly process.
Make sure the booking option is easy to spot, streamlined, and no more than a
few steps from start to finish.
 Booking through the hotel website offers an opportunity for add-on services, too.
Provide direct booking incentives with offers for room upgrades, free food and
drink, complimentary shuttle services, vouchers, and discounts.
 Finally, direct booking offers the opportunity to connect with group event planners
before they set foot on the property. Try emailing vouchers for free desserts for
the whole group, sharing events that are happening in the area during their stay,
or offering additional nights at a discount for guests to extend their stay after the
conference has ended.

5. Modernize: Stay ahead with high-tech solutions

 Staying on top of innovative technology can make all the difference. An outdated
website won’t earn the same trust as a website with a modern look Likewise,
antiquated methods within your property are likely to turn guests off.
 Allow online check-in/check-out for added convenience.
 Ditch the room key: Provide an alternative with a mobile app or RFID card that
unlocks the door based on proximity.
 Upgrade business centers to high-tech, comfortable co-working spaces that will
appeal to traveling professionals and local remote workers alike. Locals who use
this flexible space close to home may prefer the brand name while traveling,
especially if a loyalty program is available.
 Often, website visitors are looking for answers to specific questions, and live chat
is their preferred method of customer service. Deploy hotel chatbots for instant
answers to common questions, booking assistance, local recommendations,
room service requests, and more—leaving front desk staff available to focus on
the guests in front of them.
 Customize reports and gain insight with hotel CRM software to provide
personalized service.
 Establish your property as the local expert for group activities: Integrate a digital
itinerary builder on the website so guests can create a plan for where to go, what
to see, and where to eat—before they arrive. Include the list, vouchers or
discounts, and additional recommendations with their check-in materials.

6. Build unforgettable brand experiences across the portfolio

  Garner attention and buzz with elements (on-site and off-site) that offer guests a
unique experience. From simple touches to extraordinary gestures, help your
brand stand out in this world of ‘copy and paste’ group business. Go above and
beyond to provide an unforgettable experience, ensuring offerings apply across
the portfolio to establish brand consistency guests can count on.

Some ideas to inspire your own:

 Upgrade the morning coffee routine with in-room latte brewers in each hotel.
 Exhibit artists local to each property on a gallery wall in the lobby; your locations
will become micro art museums worth
 browsing.
 Cater to kids’ sports leagues by scheduling Friday night magic shows or a movie
night.
 Include a personalized ‘welcome’ sign in the lobby on check-in days for family
reunions.
 Call out conference-going thrill-seekers looking for excitement by touting a
nearby adventure experience—and arrange for a shuttle service for after
sessions have ended.
 Build a fondue or s’mores bar guests will remember, share on social media, and
brag about when they return home.

7. Streamline access and polish interactions

 Prime locations are an undeniable draw: Proximity to the airport or a central
position in a bustling neighborhood can earn a competitive advantage because
your property is front and center.
 But whether your hotel is in the thick of it or further afield, make sure you help
your guests get around with ease. Groups, in particular, don’t want to grapple
with complicated logistics to transportation hubs, or to reach local restaurants
and entertainment.
 Ensure area maps are easy to find in the lobby and guest rooms. Offer regular
van service to and from local dining and shopping districts. Offer a fast and
streamlined valet service, so guests never feel stranded. A welcome email with
travel information, local attractions, and transportation links can go a long way
towards making guests feel welcome.
 Prioritize the reliability and availability of staff and support personnel through
every step of the process—from the research phase, booking, and check-in
through the entire stay, check-out, and necessary follow-up. Avoid the bland
“How was your stay?” at check-out—instead, ask open questions to facilitate
thoughtful responses or consider a questionnaire to gauge customer satisfaction.

8. Leverage digital content to engage with guests

 As more hotels offer free Wi-Fi, there is an increased opportunity to engage with
guests directly through digital content. Properties can cater to the connected
traveler with location-specific offerings, valuable area information, or offers
tailored to that guest’s stay.
  Make it easy for event planners and event attendees to become brand
ambassadors by highlighting hashtags throughout the hotel and on the
properties’ digital assets. Create engaging visual displays on-site so that guests
can share images via Instagram. Real-time social feeds on a hotel website can
generate excitement and, as a bonus, increase the amount of time visitors spend
on the site. Create a guest-generated hashtag mosaic and harness the power of
User-Generated Content (UGC) to grow brand affinity.
 All of your digital efforts will create opportunities for engagement with your guests
and
 increase their feelings of loyalty to your hotel.

9. Solve problems—but welcome them, too

 While preventing problems in the first place may be regarded as a mark of
success, there is a benefit in problem-solving. A Gallup poll suggests that issues
that seem ordinary to hoteliers—limited table availability or check-in snafus—can
be enough to ruin a guest’s experience or create an actively disengaged
customer. The vast majority of guests won’t bring up the issues with hotel staff,
so a problem can go unnoticed and uncorrected, leading to more unhappy
guests.
 Providing phenomenal customer service to resolve problems for group business
shows responsiveness and care, which creates engagement and loyalty. Group
CRM software can track performance, help identify problem areas, and facilitate
collaboration across properties. For example, consider a family reunion
organized at one hotel that would be a far better fit at another nearby property
because of outdoor amenities and family-friendly local attractions. The sales
team can make the pitch to the group, which demonstrates thoughtful attention to
detail and is a customer-service win no matter the family’s final decision.
 CRM software can also flag loyal customers and priority group engagements
portfolio wide so staff can keep an extra eye on them to ensure satisfaction—and
save the day should issues arise.

10. Stay agile to sustain your advantage long-term

 Business sustainability comes from versatility and relevance in your market. New
competing properties emerge, prices fluctuate, and the playing field shuffles. Without
making creative changes and upgrades, offerings become stale and the competition
can creep in to gain the advantage.
 Free Wi-Fi and early check-in may have been the gold standard, but keep in mind
that cable TV—and prior to that, color TV— used to be a sign of luxury, too. Guests
are looking for more in their stay than channels they’ll never watch or Wi-Fi that
crawls, especially with a speedy unlimited data plan in their back pocket. Listening to
the target audience and anticipating their needs and wants can keep properties
ahead of the curve for a sustainable competitive advantage. Keep an eye on the
market and trends relevant to your group business segment with these tactics:
  Set up Google Alerts to track brand mentions across the web.
 Follow social media feeds and blogs for competing hotels and see which of their
offerings are performing well.
 Sign up for deal alerts and subscribe to the competitor’s email newsletters to see
what deals they’re offering.
 Keep an eye on SEO and see what competitors rank for consistently using SEM
Rush, Ahrefs, or Screaming Frog.
 Scour reviews websites to see where your competitor needs improvement, then
deliver those services impeccably.
 Pay attention to indirect competitors as well as the brands with whom you
compete directly.

 To create a competitive advantage, know your strengths and weaknesses—then

compare them with the competition.
 A key to gaining the advantage lies in improving the groups’ experiences. Providing
outstanding service means going above and beyond what is considered standard.
 These 10 keys can guide the process as you build a portfolio’s strength and gain an
edge.

Strategy involves determining whether to:

 Concentrate on a single business or several businesses (diversification)
 Cater to a broad range of customers or focus on a particular niche
 Develop a wide or narrow product line
 Pursue a competitive advantage based on
 Low cost or
 Product superiority or
 Unique organizational capabilities

Involves deciding how to:

 Respond to changing buyer preferences
 Outcompete rivals
 Respond to new market conditions
 Grow the business over the long-term
 Achieve performance targets

Our strategy will be . . .

Strategy Is Both Planned and Reactive to Changing Circumstances
 Actual
 Strategy
 Planned (or Intended)
 Strategy
 Adaptive
 Reactions

Three Types of Strategy: What Are They & How to Apply Them
  Within the domain of well-defined strategy, there are uniquely different
strategy types, here are three:

1. Business strategy
2. Operational strategy
3. Transformational strategy

 It is worth noting, that a common consideration across all different types of

strategy are your people, process, and technology. Without this, strategy is a set
of lofty ideas, ungrounded in reality unaccompanied by a plan of action.

1. Business Strategy: Customer Experience

The first of the three types of strategy is Business Strategy and focuses on how your
customer will experience your business. It is primarily concerned with how a company
will approach the marketplace - where to play and how to win.
"Where to play" answers questions like:
 Which customer segments will we target?
 Which geographies will we cover?
 What products and services will we bring to market?

How to win answers questions like:

 How will we position ourselves against our competitors?
 What capabilities will we employ to differentiate us from the competition?
 What unique approaches will we apply to create new markets?
 Senior managers typically create the business strategy. After it is created, business
architects play an important role in clarifying the strategy, creating tighter alignment
among different strategies, and communicating the business strategy across and
down the organization in a clear and consistent fashion.
 Executives are just beginning to bring advanced, highly credible business
architecture practices and purpose-driven CX design into the strategy discussions
early to provide tools, models, and facilitation that enable better strategy
development.

2. Operational Strategy: People & Process

The second of the three types of strategy is Operational focused on your people and
your processes. It is primarily concerned with accurately translating the customer-
centric business strategy into a cohesive and actionable implementation plan.

Operational strategy answers questions like:

 Which capabilities need to be created or enhanced?
 Which processes need improvement or a complete redesign?
 Do we have the people we need and do they have the right skill base? (Ex: talent
retention plans through Strategic Learning and Development programs)

3. Transformational Strategy: Platform Technology

The third of the three types of strategy is Transformational that focuses on how your
technology can enable and transform your organization. We aren't talking about
automation... we are talking about true digital business model transformation. It is seen
less often as it represents the wholesale transformation of an entire business or
organization.

This type of strategy goes beyond typical business strategy in that it requires radical
and highly disruptive changes in people, process, and technology.
 Transformational strategy is generally the domain of the Project Management
Office (PMO), organizational development, and consultants. Few organizations
go down this path willingly and with reasonable expectation of the resources it
takes.
 These efforts are incredibly complex and require highly experienced and
knowledge technical resources. At Accelare, we called them Platform Design
Engineers. There is also significant benefit from applying business architecture
discipline though it is rare to see business architects playing a significant role
here.

What is the Bottom Line?

 Not all strategy work is the same. Each strategy type requires a unique set of
skills, resources, varying approaches, and plans to execute that strategy.
Leadership and business architects who are successfully delivering in one role
should be actively developing the skills they need to move into other strategy
domains.