ABA Unit Three

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Chapter 3: Internal resources, capabilities and competences

Chapter learning objectives


Upon completion of this chapter, you will be able to:
 develop suitable CSFs for products and services
 define and describe strategic capability, threshold resources,
threshold competences, unique resources and core competences
 use the resource audit to determine organizational strengths and
weakness
 apply the life cycle model and discuss how product costs can change
over a product's life cycle
 perform effective quantitative analysis
 apply the SWOT model in a scenario.

1 Introduction
This chapter looks at the internal position of an organization. This will help
determine how well the organization can cope with the external and
competitive environment which was analyzed in the previous chapter. This
internal analysis focuses on identifying the strengths and weaknesses that
are particular to an organization.
The chapter ends by looking at SWOT analysis, which brings together
internal (strengths and weakness) and external (opportunities and threats)
factors to allow organizations to assess their strategic position.
2 Critical success factors
An important strength for any organization will be the achievement of
critical success factors. This should allow the organization to cope better
than rivals with any changes in its competitive environment.
What are critical success factors?
Critical success factors (CSFs) are performance requirements that are
fundamental to an organization’s success. In this context CSFs should thus
be viewed as those product features that are particularly valued by
customers. This is where the organization must outperform competition.
Examples of CSFs for major industries include:
 in the automobile industry styling, an efficient dealer network,
organization, performance
 in the food processing industry new product development, good
distribution channels, health aspects (e.g. low fat)
 in the life insurance industry reputation, innovative new policies
 in the supermarket industry the right product mix available in each
store, having it actually available on the shelves, pricing it correctly.
Measured targets for CSFs are called key performance indicators (KPIs).

Test your understanding 1


What might a parcel delivery service such as DHL identify as its two main
critical success factors?

The performance pyramids


Developing suitable critical success factors
In developing CSFs from customer needs, the following issues should be
borne in mind:
 Customers' buying decisions are often complex and may involve a
wide range of motivating factors. CSFs need to focus on the most
important factors that ultimately determine the buying decision. Using
IT systems to understand customer needs is particularly important in
consumer markets.
 Many factors are taken for granted by customers (e.g., fitness for
purpose). These give rise to 'threshold' features i.e., all products must
have these simply to enter the market.
 CSFs will vary from segment to segment. The organization will need
to assess its strategic capabilities to identify which segments it should
target.
 Customers' understanding of value can vary over time, so the
organization needs to be open to changing the monitored CSFs.
Example: buying a new car
 Motivating factors include brand, image, price, service interval,
running costs, safety, warranty, performance, reliability, dealer
network, availability and cost of extras (e.g., air-conditioning, leather
seats), fuel economy, economic footprint, depreciation, etc.
 Reliability is likely to be a threshold product feature.
 Corporate purchasers may focus more on price (including discounts),
running costs and depreciation.
 Families may be more concerned about safety whereas single young
males, image and performance.
CSFs then need to be translated into a range of KPIs.

Examples of Critical Success Factors


The syllabus focuses on CSFs linked to customer needs. In practice CSFs
can be much more general than this. An organization will develop its CSFs
when it determines its mission and objectives.
 The mission statement represents the aspirations of the organization.
 Long-term objectives may be expressed in terms of increasing
shareholder returns or shareholder value added for a profit-seeking
company or to relieve poverty in developing nations or save rare
animal species for a charity, i.e., a not-for-profit organization.
 CSFs relate to how objectives can be attained and should be
identified early in the strategic planning process.
 Functions and processes refer to the KPIs that help to measure the
achievement of CSFs.
 Activities refer to the day-to-day functions that drive the organization
and the need to do these with excellence.
For a profit-seeking organization, CSFs should relate to the key factors for
business success, which are typically the following:
 profitability traditionally the primary objective is growth in earnings per
share
 market share
 growth
 innovation
 productivity targets will be associated with manpower, plant, yields
and costs
 customer satisfaction
 the quality of the firm's products.
Not-for-profit organizations should also provide evidence of stakeholder
value and show how its activities are, or will be, able to support its aims.
The CSFs for a charity should relate to the progress the organization’s
work is making towards its charitable objectives. For example, for a charity
aiming to save rare animal species a CSF might be to reduce demand for
clothing made from rare animal fur.
KPIs used to assess performance in relation to the CSFs identified may be:
 quantitative direct measures of sales, costs, ROCE and profit
 qualitative market share, customer base; % sales growth, labor
turnover, % of deliveries on time, customer returns as a % of total
sales, complaints per £ of sales, reduced percentage of local
population contracting HIV/AIDS or the number of countries
prohibiting rare animal fur imports
 relative or absolute relative measures are frequently more useful than
measures in absolute terms, e.g., complaints per customer may be
more useful than simply the number of complaints; gross profit per
unit (or as a % of sales) may be more useful than total gross profit
 value for money (VFM) measures the pursuit of economy,
effectiveness and efficiency are mainly used by the public sector and
other non-profit-seeking organizations.
Measures for service efforts and accomplishment fall into four categories:
 input measures the effort expended on a programmed 'economy' is a
measure of inputs to achieve a certain service
 output measures the level of services provided effectiveness' is a
measure of outputs, i.e., services and facilities
 outcome measures the effect a service has on the programmer’s
stated objectives
 efficiency measures a comparison of the level of inputs with outputs
or outcomes it is the optimum of economy and effectiveness, i.e. the
measure of outputs over inputs.
Charities are very accustomed to measuring in this way:
 they report on the financial resources dedicated to specific
programmed in their financial statements and the non-financial
information about the effort they expend, such as the hours spent
meeting a programmed goal
 output measures are often stated in non-financial terms, e.g., a
homeless shelter may report the number of people housed
 outcome measures gauge how well a programmed accomplished its
goal, e.g., a programmed designed to teach reading to adults may
use the literacy rate for the area served as an outcome measure
 a way to measure the efficiency of this programmed could be to
compute a cost (input) for each adult who reaches a certain reading
level (output).
Illustration 1 Critical success factors
The following is an example of CSFs developed for a shipping terminal.
Test your understanding 2
Using the CSFs previously identified for a parcel delivery company such as
DHL, explain how the company might measure their performance.

3 Strategic capabilities, resources and competences


Strategic capability is the adequacy and suitability of the resources and
competences an organization needs if it is to survive and prosper.
Another way to look at CSFs is to examine an organization’s strategic
capabilities. If a business can obtain unique resources and core
competencies this should lead to its success. This can be explained in the
following table:
So as part of an internal analysis a business should look for any unique
resources that it may own or core competencies that it has created. These
would be significant strengths to any business.

Unique resources and core competencies explained


 Unique resources are those resources that create competitive
advantage and that others cannot imitate or obtain. Examples of
unique resources are:
o brand
o situation, for example, near a source of raw material or a source
of cheap labor
o sunk costs. Competitors have to cover depreciation costs
o right to use a patented process.

Note that if the unique resource is people-based, the people can move to
competitors or start their own business.
 Core competences are the activities, processes and methods through
which an organization uses its resources effectively, in ways that
others cannot imitate or obtain. Examples of core competences are:
o sophisticated IT that, for example, enables complex and
accurate demand forecasting
o a corporate culture that fosters innovation
o the ability to share and lever knowledge throughout the
organization.

More on strategic capabilities


Note that capability refers to resources and competences and their
relationship can be shown as:

Strategic capability can also be divided into threshold capabilities and


capabilities for competitive advantage.
 Threshold capabilities. These are the minimum capabilities needed
for the organization to be able to compete in a given market. They
consist of threshold resources and threshold competences the
resources and competences needed to meet customers' minimum
requirements.
 Capabilities for competitive advantage. The capabilities that allow an
organization to beat its competitors. These capabilities must meet the
needs and expectations of its customers. Unique capabilities are not
enough they must be valued by the customers.
Core competences and threshold competences
Many theorists of strategic planning argue that strategy should be about
developing and extending competences across markets, rather than
focusing on one industry and trying to guess what resources and
capabilities will be needed some years hence. Such thoughts have come
from the study of companies such as Marriott, that one normally associates
with hotels. However, most of the company's profits come from activities
that they learned in the hotel business, but have managed to transfer
across the organization facilities management, hospitality, conference
organization and very many others. The point is that their experience of
competing in hotels has helped them develop arrange of competences in
which they are world-class known as core competences.
These core competences are complex harmonization’s of knowledge,
organizational routines and the integration of production, design and
marketing skills. This is a wider use of the term than simply the
competences one needs to be effective in a particular market. The term
‘threshold competence' is reserved for these skills that the firm must-have
to put a saleable product in front of a customer.
Hamel and Prahalad have argued that thinking of businesses as a portfolio
of products and markets, rather than a bundle of competences, is a critical
mistake. In their view, strategic management is about identifying,
developing and harmonizing the core competences across the
organization. They use the term 'strategic architecture' to discuss the way
that information and skills are moved around the organization. Sony and
Honda, in particular, have a routine of moving experts away from their
expertise into different projects and technologies. Consequently, they have
a large number of expert generalists working on projects, and can bring
technologies together in unexpected ways and find innovative applications
for even relatively straightforward ideas.
Although firms can use all the market research techniques available to any
firm, they can also rely rather more on the strategic architecture to bring
them into contact with customers and partners. Resource-based firms can
then diversify on the basis of superior competences and may shatter the
existing patterns of competitive behavior. For example, Canon entered the
photocopier business against Xerox, a company many times its size.
However, it had had superior skills in optics from its experience in cameras
and had developed technologies that did not infringe Xerox's patents.
Marriott moved into many of its new areas by simply noting what went on in
its hotels, and thinking about the value added of the various activities.

Illustration 2 Capabilities, resources and competences


The Coca-Cola Corporation has, for many years, maintained a very strong
position in the soft drinks market. Consider its flagship product, Coca-Cola.
This has largely survived competition from supermarkets' own-label colas.
There is no great secret in how to make a reasonable imitation (though
purists would maintain the imitations are not as good) and the resources
needed are not demanding. The own-label colas sell at much lower prices,
so high-volume production resources, capable of producing flavored
carbonated water do not seem to be important in keeping production prices
down. So how has Coca-Cola managed to keep its dominant position?
It has been argued above those physical resources do not seem to be
important. Therefore, the answer must lie in non-physical resources (such
as a very powerful brand) and core competences. The core competences
lie in managing the brand by producing memorable global advertising,
global recognition, careful sponsorship, responding to customer
requirements (diet/light products).

Test your understanding 3


Panasonic and Leica formed a joint venture to produce cameras under the
trade name 'Lumix'.
How did this enable the companies to gain both threshold and capabilities
for competitive advantage?

Organizational knowledge as a strategic capability


Knowledge is a strategic capability. An organization’s knowledge of its
environment (such as expected technological changes, changes in
substitute availability etc.) can make it stand out from rivals. It can be more
proactive towards its environment and also be in a position to react quicker
to environmental changes when necessary.
Johnson, Scholes and Whittington define organizational knowledge as:
'The collective experience accumulated through systems, routines and
activities of sharing across the organization.'
Resources (such as staff skills, assets etc.) can be purchased but
capabilities must be developed and grown. Organizations therefore need to
work on this. It is not automatic and problems that are discovered too late
can be difficult to rectify.
Organizational knowledge is cumulative in nature. It will be built up over
time from past experience and actions. But it does not simply follow a
learning curve effect (otherwise organizations of a similar ‘mass' or history
would have similar organizational knowledge which is not often the case).
Organizational knowledge can also be added to and improved.
Environmental analysis, staff development, process improvement,
organizational structure etc. (many of these areas are covered later in the
syllabus) can all impact on and improve organizational knowledge.
Organizations must recognize that successful development of
organizational knowledge can be a critical success factor. A key part of this
can be knowledge management (which is explored in more detail in chapter
5). Organizational learning is also considered later in the text (in chapter
15).

4 The resource audit


Resources are a vital element of strategic capabilities. An organization’s
resource strengths and weaknesses can be evaluated using a resource
audit. This summarizes resources into categories (using words beginning
with 'M'), such as:
 money
 management
 manpower
 manufacturing
 markets
 materials
 make-up

Further explanation of the 'M's' model


5 The life cycle model
One of the parts of the resource audit is "markets". This analysis can be
performed in greater detail using the product life cycle.
The product life cycle analysis is a technique used to plot the progress of a
product through its life span. The model can be used to assess an
individual firm's products (e.g., the iPod Classic), a type of product (e.g.,
CRT televisions) or an industry (e.g., movies).
It is important in exam questions that you recognize the appropriate
lifecycle stage and discuss the implications within the context of the
scenario.
The model can show between four and six stages. Here, we show four
stages:

Typical characteristics of these stages are set out in the following table:
Illustration 3 The life cycle model
PCs
Initially, there were relatively few significant producers. The product was
innovative, non-standardized, of inconsistent quality and expensive.
Once it looked as though it would be a successful product many producers
were attracted into the market. Mass production lowered prices. The range
of technologies used narrowed. Intense competition developed as firms
fought for dominance and market share.
Maturity means that the product has become a commodity. The industry
will be left with just a few large players (Dell, Hewlett-Packard, etc.).
Efficiency is very important to maintain margins. New entrants will be rare
as there is little point in entering an old market.
Decline. Some companies will find that their exit costs are high and will be
willing to manufacture so long as marginal revenue exceeds marginal
costs. Price wars are likely.

Test your understanding 4


Consider where the following items might be in the product lifecycle and
comment on the competitive forces they might experience:
(a)mobile phone services
(b)flat screen (LCD/plasma) televisions.

Strategy implications of life cycle analysis


Life-cycle curves can be useful devices for explaining the relationships
among sales and profit attributes of separate products, collections of
products in a business, and collections of businesses in a conglomerate or
holding company. Life-cycle analysis has been suggested by some of its
advocates as a basis for selecting appropriate strategy characteristics at all
levels. It also may be viewed as a guide for business level strategy
implementation since it helps in selection of functional level strategies.
Introduction stage strategy implications: during the early stages of the life
cycle, marketing strategy should focus on correcting product problems in
design, features, and positioning so as to establish a competitive
advantage and develop product awareness through advertising, promotion,
and personal sales techniques. At the same time, personnel strategy
should focus on planning and recruiting for new product human resource
needs and dealing with union requirements. Also, one would expect the
nature of research and development (R&D) strategy to shift from a
technical research orientation during the phase prior to introduction to more
of a development orientation during actual introduction.
Financial strategy would primarily address sources of funds needed to fuel
R&D and marketing efforts as well as the capital requirements of later
production facilities. Capital budgeting decisions would be outlined during
these early stages so that capacity would be adequate to serve growth
needs when sales volumes begin to accelerate.
Growth stage strategy implications: during the growth stage, strategic
emphases change. Marketing strategy is concerned with quickly carving
out a niche for the product or firm and for its distribution capabilities, even
when doing so may involve risking overcapacity. Too often, firms have
inadvisably accepted quality shortfalls as a necessary cost of rapid growth.
Widening profit margins during the growth phase may even permit certain
functional inefficiencies and risk taking. Communication strategy is directed
toward establishing brand preference through heavy media use, sampling
programmed, and promotion programmed, and strategy should emphasize
resource acquisition to maintain strength and development of ways to
continue growth when it begins to slow.
Personnel strategy may focus on developing loyalty, commitment, and
expertise. Training and development programmed and various
communication systems are established to build management and
employee teams that can deal successfully with the demands of impending
tight competition among firms during the maturity phase.
Maturity stage strategy implications: efficiency and profit generating ability
become major concerns as products enter the maturity stage. Competition
grows as more firms enter the market and the implication is that only the
most productive firms with established niches and competent people will
survive. Marketing efforts concentration maintaining customer loyalty.
Production strategy concentrates on efficiency and, at the same time,
sharpens the ability to meet delivery schedules and minimized effective
products. Cost control systems are often put in place.
Personnel strategy may focus on various incentive systems to increase
manufacturing efficiency. Advancements and transfers are used and some
firms try to fit management positions to managers who have personalities
more attuned to the belt-tightening needs associated with the maturity
stage.
Decline stage strategy implications: when a product reaches the point
where its markets are saturated an effort is often made to modify it so that
its life cycle is either started anew or its maturity stage extended. When
falling sales of a product cannot be reversed and it enters the decline
stage, management's emphasis may switch to milking it dry of all profit.
Advertising and promotion expenditures are reduced to a minimum. People
are transferred to new positions where their experience can be brought to
bear on products in earlier growth stages (if management were skillful
enough to have created such products).
Various strategies have been suggested for products that have entered the
decline stage. Hofer and Schendel suggest four choices when sales are
less than 5% of those of the industry leaders:
 concentration on a small market segment and reduction of the firm's
asset base to the minimum levels needed for survival
 acquisition of several similar firms so as to raise sales to 15% of the
leaders' sales
 selling out to a buyer with sufficient cash resources and the
willingness to use them to affect a turnaround liquidation
 liquidation.

Cost changes during the life cycle


As a product moves through its life cycle it is likely to find that the nature,
value and importance of each of it costs will change. Every product will be
different, but a typical pattern might be:
Further discussion on cost changes
Every product will be different and there are no hard and fast rules to what
will happen to product costs. So, the above table is simply an illustration of
what would 'typically' happen to a product's costs over its life cycle.
If we look at 'competition costs' as an example. Competition costs
represent element such as the cost of matching competitor prices or offers,
the cost of matching their services, or the cost of competing for resources
such as staff and materials that become scarce when competitors enter the
market.
In the early stages of product development and introduction these costs
should be non-existent (if competition do not yet exist) or low (as
competitors enter the market). In the growth phase they will start to rise
though not yet to high levels as there should be less need to compete for
existing customers as there should be plenty of new customers to attract in
order to meet goals. But when the market matures then these costs can be
high as customers become more discerning, it is difficult to find
replacement customers for any that are lost, and rivals look for new ways to
gain a competitive advantage.
In the decline phase these costs might actually ease off. The business
might take a deliberate decision to 'harvest' the product and compete less
aggressively, or competitors might themselves realize that further costs
here create a 'lose-lose' situation, or price stability arises, or competitors
leave the market there are many justifications for a fall in competition costs
at this stage.

6 Quantitative analyses

It is very likely in the exam that the examiner will provide tables and
data in order to provide some of the information that is needed in order to
properly perform the strategic analysis (both external and internal). It will be
vital that students can both interpret and use this information in their
answers.
This information might be provided using various methods and some of the
key methods will be:
Tables of data
In order to reduce the amount of text in a scenario the examiner will often
provide tables of data to provide part of the story. It will be important that a
student can understand what the table is trying to explain, and that this part
of the story is used in the answer to this part of the examination.

Test your understanding 5


The following data is given for sales of cinema tickets in a large country
over the last two years.

Explain what the table tells us and how it might be used in a Five Forces
analysis of the industry's competitive environment.
Financial statements
The examiner might provide sets of financial statements and a student
must use this to pull out the key messages and issues. There will be some
important technique points to this:
 choose three or four key ratios
 there is no need to illustrate the formula or the calculation
 only one comparator should be needed
 focus on the cause of any changes and what this might tell us about
the organization’s position

Explanation of the financial statement analysis technique


 choose three or four key ratios
The aim is to try to pick some ratios that best tell theocratizations "story".
Key ratios might be its sales growth (which can be linked to the PESTEL),
its margins (which can be linked to the 5forces model), and its gearing
(which will give an idea of theocratizations risk profile and its ability to raise
finance for future opportunities).
Ratio analysis has already been examined at the fundamentals level and
we are not trying to show how well we can calculate ten or twelve different
ratios. A ratio should not be included if it adds nothing to the story (for
example, there is little point in calculating receivable days if it has not
changed during the year and the business does not have a problem with
debt collection).
 there is no need to illustrate the formula or the calculation
This has been examined at the fundamentals level and would only waste
time at this level. There is also no need to explain what the ratio means (for
example, comments such as "The gross profit percentage shows how
much profit the business makes per $ of turnover" are unlikely to gain any
marks).
 only one comparator should be needed
The examiner will often provide four- or five-years’ worth of financial
statements. However, in order to get to the key messages for the
company's story we do not need to calculate the ratios for every year.
Normally we simply need to compare this year’s results with last years, or
perhaps this year’s results to the first year’s results.
 focus on the cause of any changes and what this might tell us about
the organization’s position
The key to gaining any marks will be to analyses the data that has been
calculated (simply performing the calculation and not discussing it will not
achieve all of the marks that are available). So, we need to explain why a
ratio has changed (for example, is it due to changes in the external or
internal environment) and what these changes mean for the business (for
example, does it need to react to these changes or can the position be
improved in the future).

Ratio analysis
Ratios
The mechanics of ratio analysis are repeated here for revision purposes.
Profitability ratios

Efficiency ratios
Liquidity ratios

Gearing ratios

Investor ratios

Inter-firm comparisons
Inter-firm comparisons
Inter-firm Comparisons (IFCs) as previously noted, it is possible (through
use of financial ratios) to compare and contrast the performance of one
entity within an industry with that of another within the same industry. It is
also possible to compare and contrast the performance of one firm with that
of the whole industry, or a large sample or particular segment of that
industry. However, these comparisons may suffer from one or more of the
following limitations.
 Different accounting methods may be used by individual firms making
up the industry sample, or by the firm being compared.
 The industry figures may be biased by one or a few very large firms
within the sample.
 Conversely, an industry mean may be misleading for a small or large
firm being compared with the mean. Ratios may vary for different
sizes of firms.
 The companies within the industry sample may span across more
than one industry classification.
 The industry figures may be relevant for a different financial period,
and could possibly be out-of-date.

Key Performance Indicators (KPIs)


Other KPIs may also be presented in the scenario (such as customer return
rates, % of repeat business, market share, age of products etc.).
It will be important to react to this data in the same way that we react to
data that is presented in tables or financial statements that is, to interpret
what they are trying to tell us, and to link these in to the analysis of the
organization’s position.
7 SWOT analysis
Strengths, weaknesses, opportunities and threats
A SWOT analysis can be used as an analysis tool in its own right or can be
used as a summary sheet on which other results can be placed.

 Strengths and weaknesses relate to resources and capabilities: what


is the organization good at? What is it poor at? Where are resources
in short supply? Where are resources excellent?
 Opportunities and strengths relate to external factors: what will the
effect on the organization be of economic changes? Can the
organization make use of new technologies? Are new entrants likely
to enter the market place? Can a powerful customer dictate term?

The examination will feature scenarios detailing the history and current
position of an organization and possible future states. Candidates will
probably have to analyses the organization’s strategic position, i.e., to carry
out a corporate appraisal. It is possible to arrive at a reasonable analysis
merely by producing a SWOT analysis, but it is likely to be more productive
and impressive to use one or more of the other analysis tools, such as
PESTEL, to help generate ideas for the SWOT analysis.
Using a SWOT analysis
The first step is to rank in order of importance the findings of the SWOT
analysis.
 Strengths that match no opportunity are of little use without an
opportunity.
 A distinctive competence is a strength that can be exploited.
Strategies can be developed which:
 neutralize weaknesses or convert them into strengths
 convert threats into opportunities
 match strengths with opportunities.
These are discussed in later chapters.

Illustration of SWOT analysis


Illustration SWOT analysis
We can use the example on the following page to illustrate that the SWOT
analysis yields a much clearer view of the extent to which the
environmental changes and influences provide opportunities or threats,
given current strategies and organizational capabilities.
In this example, we might note that the company is having problems and
might be in imminent danger of losing its existing markets and must
diversify its products, or its products and markets. The new market
opportunity exists to be exploited, and since the number of customers is
currently small, the relatively small size of the existing marketing force
would not be an immediate barrier. A strategic plan could be developed to
buy new equipment and use existing production and marketing to enter the
new market, with a view to rapid expansion. Careful planning of manpower,
equipment, facilities, research and development and so on would be
required and it would be necessary to meet the threat of competition so as
to obtain a substantial share of a growing market. The cost of entry at this
early stage of market development should not be unacceptably high.

Test your understanding 6


What types of strengths, weaknesses, opportunities and threats would a 'no
frills' airline have?

8 Chapter summary
This chapter has covered the following areas:
 defined and described strategic capability, threshold resources,
threshold competences, unique resources and core competences
 explained why cost efficiency is important in all organizations
 described the capabilities needed to sustain competitive advantage
 explained, for a range of organizations, the importance of innovation
in supporting business strategy
 explained the importance of knowledge management for both profit-
seeking and not-for-profit organizations
 described the use of SWOT analysis.

Test your understanding answers

Test your understanding 1


The two main critical success factors would probably be:
 speedy collection from customers after their request for a parcel to be
delivered
 rapid and reliable delivery.
Test your understanding 2
Their performance can be measured by establishing key performance
indicators for each CSF and measuring actual achievements against
them ,e.g.
 Collection from customers within 3 hours of receiving the order, in
any part of the country, for orders received before 2.30 pm on a
working day.
 Next-day delivery for 100% of parcels to destinations within the UK.
 Delivery within 2 days for 100% of parcels to destinations in Europe.

Test your understanding 3


Leica was a very famous and prestigious conventional camera maker,
esteemed for the quality of its lenses; it had no electronics capability.
Panasonic has immense electronics design and production capability; it
has (or had) no optical capability.
Together the partners gained threshold capability in making high- quality
digital cameras good lenses and good electronics.
It's not clear if the joint venture has generated capabilities for competitive
advantage. Certainly, both partners have strong, respected brand names,
but other companies (such as Sony and Canon) are very strong in the
digital camera market also. It has yet to be seen if Lumix will enjoy
protection from competitors that will allow long-term competitive advantage.

Test your understanding 4


(a) Mobile phone services
Probably a mature market. The industry went through a very rapid growth
stage in many countries; most consumers who want a mobile now have
one. There has been consolidation in the industry which, because of the
infrastructure needed, lends itself to supporting a few large suppliers. It is
relatively unlikely that new entrants will appear as they will have to fight for
a share of a saturated market.
Consumers are well informed about call plans and about what competitors
offer. Because a telephone number can be retained there are very low
switching costs and consumers are happy to change suppliers.
No sign of decline.
(b) Flat screen (LCD/plasma) televisions
Probably still in the growth stage. There is a long way still to go before most
conventional TVs are replaced. Prices had been very high initially, but have
come down significantly as competition intensifies and manufacturing runs
become longer. New entrants would remain a threat as there would still be
significant market share to win. Prices will continue to fall and
manufacturing efficiency will become increasingly important.

Test your understanding 5


The table shows two things:
 the market overall is not growing
 no one company dominates the market.
As part of a 5 forces analysis the table is likely to indicate this is a
competitive market when we analyse competitive forces. No company has
significantly better economies of scale in order to achieve cost leadership
and marketing budgets and techniques are likely to be very similar which
will make differentiation strategies harder. The companies will know that, in
order to grow, there is unlikely to be new sales coming into the market and
therefore they will have to tempt customers away from rivals which will
increase the competitive activities in the industry.
The table might also provide information on the difficulty that new entrants
into the market might have in overcoming the position of the four
established providers.
Test your understanding 6

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