of access to key distribution channels.
In some cases, a weakness may be the flip side of a strength. Take the case in which a firm has a large amount of manufacturing capacity. While this capacity may be considered a strength that competitors do not share, it also may be considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly to changes in the strategic environment.
Opportunities. The external environmental analysis may reveal certain new opportunities for profit and growth. Examples of such opportunities include:
– an unfulfilled customer need;
– arrival of new technologies;
– loosening of regulations;
– removal of international trade barriers.
Threats. Changes in the external environment also may present threats to the firm. Examples of such threats include:
– shift in consumer tastes away from the firm’s products;
– emergence of substitute products;
– new regulations;
– increased trade barriers.
The SWOT Matrix
A firm should not necessarily pursue the most lucrative opportunities. Rather, it may have a better chance at developing a competitive edge by identifying a fit between the firm’s strengths and upcoming opportunities. In some cases, the firm can overcome a weakness in order to prepare itself to pursue a compelling opportunity.
To develop strategies that take into account SWOT profile, a matrix of these factors can be constructed.
SWOT Matrix
– S-O strategies pursue opportunities that are a good fit to the company’s strengths.
– W-O strategies overcome weaknesses to pursue opportunities.
– S-T strategies identify ways that the firm can use its strengths to reduce its vulnerability to external threats.
– W-T strategies establish a defensive plan to prevent the firm’s weaknesses from making it highly susceptible to external threats.
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The Value Chain
To analyze the specific activities through which firms can create a competitive advantage, it is useful to model the firm as a chain of value-creating activities. Michael Porter identified a set of interrelated generic activities common to a wide range of firms. The resulting model is known as the value chain:
Primary Value Chain Activities
Inbound logistics > Operations > Outbound logistics > Marketing & Sales > Service
The goal of these activities is to create value that exceeds the cost of providing the product or service, thus generating a profit margin.
– Inbound logistics include the receiving, warehousing, and inventory control of input materials.
– Operations are the value-creating activities that transform the inputs into the final product.
– Outbound logistics are the activities required to get the finished product to the customer, including warehousing, order fulfillment, etc.
– Marketing & Sales are those activities associated with getting buyers to purchase the product, including channel selection, advertising, pricing, etc.
– Service activities are those that maintain and enhance the product’s value including customer support, after-sale services, etc.
Primary activities may be vital in developing a competitive advantage. For example, logistics activities are critical for a provider of distribution services, and service activities may be the key focus for a firm offering on-site maintenance contracts for office equipment. These five categories are generic and include specific activities that vary by industry.
Support Activities
The primary value chain activities described above are facilitated by support activities. Porter identified four generic categories of support activities, the details of which are industry-specific:
– Procurement – the function of purchasing the raw materials and other inputs used in the value-creating activities.
– Technology Development – includes R&D, process automation, and other technology development used to support the value-chain activities.
– Human Resource Management – the activities associated with recruiting, development and compensation of employees.
– Firm Infrastructure – includes activities such as finance, legal, quality management, etc.
Support activities are often viewed as «overhead», but some firms successfully have used them to develop a competitive advantage, for example, to develop a cost advantage through innovative management of information systems.
Value-Chain Analysis
In order to better understand the activities for a competitive advantage, one can begin with the generic value chain and then identify the relevant firm-specific activities. Process flows can be mapped, and these flows used to isolate the individual value-creating activities.
Once the discrete activities are defined, linkages between activities should be identified. A linkage exists if the performance or cost of one activity affects that of another. Competitive advantage may be obtained by optimizing and coordinating linked activities.
The value chain also is useful in outsourcing decisions. Understanding the linkages between activities can lead to more optimal make-or-buy decisions that can result in either a cost advantage or a differentiating advantage.
The Value System
The firm’s value chain links to the value chain of upstream suppliers and downstream buyers. The result is a larger stream of activities known as the value system. The development of a competitive advantage depends not only on the firm-specific value chain, but also on the value system of which the firm is a part.
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PEST Analysis
A PEST Analysis is an analysis of the external macro-environment that affects all firms. PEST is an acronym for the Political, Economic, Social and Technological factors of the external macro-environment. Such external factors are usually beyond the firm’s control and sometimes present themselves as threats. For this reason, some say that «pest» is an appropriate term for these factors. However, changes in the external environment also create new opportunities and the letters sometimes are rearranged to construct the more optimistic term of STEP analysis.
Many macro-environmental factors are country-specific and a PEST analysis will need to be performed for all countries of interest.
Political Analysis
–Political stability
–Risk of military invasion
–Risk of nationalization
–Legal framework for contract enforcement
–Intellectual property protection
–Trade regulations & tariffs
–Favored trading partners
–Anti-trust laws
–Pricing regulations
–Taxation system – tax rates and incentives
–Wage legislation – minimum wage and overtime
–Work week
–Mandatory