Table of Contents

Introduction ................................................................................................................................ 1

1. Companies can be successful even with much more effort in usual economic times ............ 2

1.1 Understanding external competitive environment ........................................................ 2

1.2 Implement strategic planning and management ........................................................... 5

2. Seeking a competitive advantage in current economic times ................................................ 7

Conclusion .................................................................................................................................. 9

References ................................................................................................................................ 10
“In usual economic times when economies are growing, companies can be successful
without too much effort.

In difficult times, such as the current global economic downturn, some companies can
become very successful by taking advantage of the situation.”

Introduction

In current globalizing world, businesses always have to face with need to change themselves
by implementing of appropriate strategies all in good time to achieve success in today’s
difficult and competitive economic environment. Michael Dell, CEO and chairman of Dell
Inc., once said: “No [competitive] advantage and no success is ever permanent. The winners
are those who keep moving. The only constant in our business is that everything is changing.
We have to be ahead of the game.” (Eisenhardt, 1999) His words have proved prophetic, as
Dell is now struggling to retake the top spot in PC sales from rival Hewlett-Packard
(msnbc.com, 2007). Even in usual economic times when economies are growing, although
companies have more opportunities to gain competitive advantages, they have to be aware of
the importance of selecting and implementing particularly effective business strategies. On
the contrary, in difficult times, despite of coping with more challenges, companies still have
any chances to become very successful in case they realize how to taking advantage of this
situation. Through the analysis of this essay on the competitiveness of external and internal
environment, we will see more clearly the necessity of exploitation of strategic management
for companies to achieve value creation and opportunities for growth in usual times as well as
difficult times. Besides, it will also base on Porter’s Five Force Model, and the Balanced
Scorecard of Kaplan and Norton to analyze organizational examples so that we can
understand that companies should always try their best in seeking more competitive
advantages not only in hard times but also usual times.

1. Companies can be successful even with much more effort in usual economic times

1.1 Understanding external competitive environment

In usual economic times, there are more business enter the industry, thus all organizations
also face more intense competition for resources, customers, sales revenues and profits. It is
very important for managers to position their businesses strategically in order to compete
successfully. The managers are required to understand the functions of their industries, the
trend of their firms’ external environments as well as the basic economic markets. With the
external environment analysis, it can help companies to identify opportunities and threats in a
complex economic environment.

The external environment of a firm profoundly influences the company’s growth, profitability
(Sirmon, Hitt, & Ireland, 2007) as well as strategic options and the decisions. It comprises
dimensions into six environmental segments: demographic, economic, political/legal,
sociocultural, technological, and global. Although firms cannot directly control the general
environment’s segment, successful companies can gather the information they need to
understand each segment and its implications for selecting and implementing appropriate
strategies (Hoskisson, Hitt, Ireland, & Harrison, 2008). More importantly, compared with the
general environment, the industry environment more directly affects the intensity of industry
competition, and profit potential that are functions of Porter’s Five Forces Model of
competition: the threat of new entrants, the power of suppliers, the power of buyers, product
substitutes, and the intensity of rivalry among competitors.

Figure 1: The Five Forces of Competition Model

Firstly, identifying new entrants is very important because they can threaten the market
share of existing competitors. Therefore, existing competitors try to develop barriers to entry
that make difficult for new firms to enter an industry and increase the returns for existing
firms and may allow them to dominate the industry (Robinson, & McDougall, 2001). In
contrast, potential entrants seek markets where there are no entry barriers in order to increase
the profitability. There are several kinds of entry barriers, including economies of scale,
product differentiation, brand identification, switching costs, access distribution channels,
industry regulation and behavioral entry barriers (Porter, 1980). The second of the five forces
is the threat of substitute products. If the substitute products or service exit in the market,
firms in the industry are at the high risk of suffering lower average profitability. The third
force is the power of suppliers. If they have enough power to an industry, they may extract
higher prices, and then reducing average industry profitability. There are two most critical
factors in determining supplier power, including number of important suppliers and the
importance of the components or materials being supplied. Just as powerful suppliers can
make an industry less attractive and two factors that determine their power, powerful buyers
can also extract price concessions for products or service that lead to the reduction of industry
profitability. The fifth and final of the five forces is the competitive rivalry among exiting
firms in an industry. In an industry, firms are mutually dependent; actions taken by one
company usually invite competitive responses. Competitive rivalry increases when a firm
copes with competitor’s actions (Hoskisson, Hitt, Ireland, & Harrison, 2008). In general, the
more companies in an industry, the greater will be the rivalry.

The personal computer market offers an interesting example for a clear look at the completion
in economic environment and position of a firm in the industry in which there is a group of
companies producing close substitutes products as well as its old rivals. The increasingly
intense competition among personal computer manufacturers results from three of five forces
in Porter’s model, while none of the two of forces play any role in the industry at all.

In particularly, in the early of 1980s, when IBM prepared to introduce its own line of personal
computers, the company’s managers decided develop microprocessor and operating systems.
This decision allowed the company to bring its product to market very quickly. Because
IBM’s decision to rely on Intel and Microsoft to supply microprocessor and operating systems
also make a very easy entry into the personal computer market for its new entrant rivals.
Almost immediately, Compaq and a few other companies began manufacturing the similar
products to IBM. Therefore, IBM could face with the threat of substitute products from its
competitors. However, in the early time, IBM still had the high competitive advantages
compared with its rivals when IBM’s competitors were restricted by the threat of entry into
the computer personal industry because IBM developed its own excellent reputation that
allow it some opportunities to differentiate its own products as well as IBM’s customers were
still more hesitant to shift their loyalty as well as afraid of incurring “switching cost” by
buying products or services from its competitors.
However, by the 1990s period, IBM were in tough time when it did not and properly could
not maintain a technological edge over its competitors, because all markets had access to
Intel’s microprocessors and Microsoft’s operating systems. Besides, it also must confront with
the burden from the widespread availability of manufacturers producing keyboards, monitors,
disk drives, and other components. At the same time, the power of supplier, particularly Intel
made IBM be in serious difficult. Before that, IBM had selected Intel to make the
microprocessors, but also required Intel to license its technology to other suppliers to make
sure a “second source”. However, with its significant technological capabilities and with the
microprocessors so critical to the performance of personal computers, Intel had almost
monopoly-like power that led IBM was not really in a position to argue. IBM’s rivalry also
adopted mass marketing techniques, selling computers through electronics and appliance
superstores and even through discount retailers meanwhile the decrease in sales had happened
as it did not create the most distinguishing feature among the various producers (Bourgeois,
Duhaime & Stimpert, 1999).

1.2 Implement strategic planning and management

As above, evaluating the Five Forces Model helps firms understand the nature and level of
competition in its industry, and its profit potential. Beside, the information getting from it can
be used to develop strategies for dealing with each of the forces, improve firms’ strength and
reduce weakness. There are several strategic planning and management systems have been
commonly applied, and one of them is the balanced scorecard of Robert Kaplan and David
Norton. It is used extensively in business and industry, government, and nonprofit
organizations worldwide to align business activities to the vision and strategy of the
organization, improve internal and external communications, and monitor organization
performance against strategic goals (Balanced Scorecard Institute, 2011).

Figure 2: The Balanced Scorecard

 Source: Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a
Strategic Management System,” Harvard Business Review (January-February 1996): 76.

Kaplan and Norton defined Balanced Scorecard as “a set of measures that gives top managers
a fast but comprehensive view of the organization” (Harvard Business Review, 1992).
Therefore, a lot of companies have successfully implemented this system to their own
organizations in the strategic development such as Centrelink Australia, Sears Roebuck,
Mobil Oil…etc. More particularly, the table below is one of the detailed examples showing
the measure in each objective’s perspective of Southwest Airlines, the successful and largest
“low-cost” airline in the world.

Table 1: Southwest Airlines’ Balanced scorecard Framework

 Source: Computerworld.com

The table above shows how Southwest used this framework to figure out balanced scorecard
model. The first Objective column expresses what each strategy must achieve and what is
critical to its success. The Measurement column shows how success in gaining each strategy
will be measured and tracked. The Targets indicates the level of performance or rate of
improvement that is needed. The Initiatives contains key action programs to achieve
objectives. All of the Measures, Targets and Initiatives are all aligned to each objective.
Through these clear perspectives that help Southwest clarify their vision, strategy and key
performance measures in each segment for operating and interpreting them into
implementation.

2. Seeking a competitive advantage in current economic times

At present, all around the world has to deal with the very turbulent time when the global
financial crisis started effects all around the world since the middle of 2007. At the same
times, wars, terrorism as well as government instability has been gradually increasing that
lead the global financial economy fall into the bad situation; affect every company and even
the livelihoods of almost everyone in an increasingly inter-connected world.

In this context, most firms face external environments that are highly turbulent, complex, and
global conditions that make interpreting them increasing difficult (Song, Calantone, &
Anthony, 2002). However, the external environment with a mixture of six segments has not
been changed; it just becomes more fluctuate, more flexible and more challenging. Therefore,
as discussed above, analyzing external environment becomes more important for companies
to identify opportunities and threats in current economic recession. On the other hand,
organizations must also follow a business model to such increase the value of the goods or
service. Thus, the roles of resources, capabilities and exploiting core competencies in creating
the sustainability of a competitive advantage are very critical for the firms. By studying the
external environment, firms identify what they might choose to do while studying the internal
environment; they determine what they can do. Through the value chain, firms can understand
how a product moves from the raw-material stage to the final customer. In present globally
competitive and turbulent economy, the most valuable links on the chain tend to belong to
people who have knowledge about customers (Stewart, 1999). To be a source of competitive
advantage, a resource or capability allow the firms to perform an activity in a manner superior
to the way competitors perform it, or to perform a value-creating activity that competitors
cannot perform. Only under these conditions does a firm create value for customers and have
opportunities to capture that value (Hoskinsson, Hitt, Ireland, & Harrison, 2008).

Figure 3: The Value Chain by Michael Porter

Source: http://enduragement.wordpress.com

Some businesses are seeking competitive advantage and creating value by implementing and
combining primary parts of the value chain such as service, marketing sales, outbound
logistics, operations and inbound logistics. Since 2003, McDonalds has focused on improving
the food, service, atmosphere and marketing at its existing outlets. The result has been a
broader menu that features items ranging from salads topped with poblano peppers to a
Southern-style chicken biscuit served at breakfast, and restaurants adorned with leather seats
and flat-screen television sets. McDonald's 32,000 outlets -- 14,000 of which are in the U.S. --
now feed 58 million customers a day or two million more than a year ago. As the global
economy worsens, the company changed a primary activity when putting more emphasis on
creating and marketing lower-priced items, and technology development (support activity) by
implementing computerized systems in more outlets that allow restaurants to adjust prices
based on customer demand. As a result, McDonald's was one of only two Dow Jones
Industrial Average stocks that ended 2008 with a gain (Adamy, 2009).

Conclusion

In any case, either usual economic times or difficult times, the businesses have to understand
the external and internal environment of their own industry as well as following a business
model in order to implement strategies effectively, especially, at present when the global
economy has been faced with the serious crisis, the competitiveness is even more intense,
complex and challenging to almost companies. They must consider the current situations and
address what they can do to seek competitive advantages to be successful, remain and
improve their position in global market. More importantly, in turbulent time, firms also need
attempt to take the advantage of this situation effectively to overcome difficulties and jump
further if they can create flexible strategies.

References

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