Fundamentals Of International Business Management PDF

FUNDAMENTOS DE DIRRECCIÓN DE EMPRESA INTERNACIONAL CHAPTER 1: ABOUT STRATEGIC MANAGEMENT 1. STRATEGIC DECISIONS Strategic management as a field first appeared in the 1960s. Pioneers: Chandler (1962), Boston Consulting Group (1963), Andrews (1965), Ansoff (1965) and Michael Porter (5 forces). S...

FUNDAMENTOS DE DIRRECCIÓN DE EMPRESA INTERNACIONAL CHAPTER 1: ABOUT STRATEGIC MANAGEMENT 1. STRATEGIC DECISIONS Strategic management as a field first appeared in the 1960s. Pioneers: Chandler (1962), Boston Consulting Group (1963), Andrews (1965), Ansoff (1965) and Michael Porter (5 forces). Strategic decisions- make the firm more competitive which means improving its performance. 1. The firm-environment 2. Strategy 3. Performance 4. Stakeholders ABC Model (Academics, Business, Consultants) Advantages: greater wealth of knowledge and a certain equilibrium between practice and theory Problem: It is not easy to organize and systematically arrange the knowledge generated or transfer know-how between the various players in the discipline’s history Academic contributions to Strategic Management Economics (Agency Theory and Transaction Cost Theory) Industrial Organization Organization Theory Behavioral sciences (Psychology) International academic associations Strategic Management Society Strategic Management Division (Academy of Management) Strategy Section (ACEDE, Spanish Academy of Management) STRATEGIC ANALYSIS STRATEGIC FORMULATION STRATEGIC IMPLEMENTATION 1. Future direction and 4. Competitive strategies 8. Evaluation and values implementation 2. Environmental analysis 5. Directions for strategic development 3. Internal analysis 6. Methods of development 7. Internationalization 1. STRATEGIC ANALYSIS Strategic analysis refers to the process of conducting research on a company and its operating environment to formulate a strategy. The definition of strategic analysis may differ from an academic or business perspective, but the process involves several common factors: 1. Identifying and evaluating data relevant to the company’s strategy 2. Defining the internal and external environments to be analyzed 3. Using several analytic methods such as Porter’s five forces analysis, SWOT analysis, and value chain analysis  2. STRATEGIC FORMULATION In strategy formulation, organizations meticulously analyze their internal and external environments, define clear mission and vision statements, set achievable objectives, and develop robust strategies. This process, grounded in comprehensive research and analysis. It facilitates the creation of actionable plans that steer the organization towards sustainable growth and success. Strategy formulation is a critical phase in the strategic management process where organizations define clear objectives and develop a blueprint to achieve them. This phase necessitates the integration of insights from various functional areas like marketing, finance, and operations to craft strategies aligned with the organization’s mission and vision. The ultimate goal is establishing a competitive advantage and fostering sustainable growth, ensuring the organization’s long-term viability and success. - TMSC Taiwan - NVIDIA USA - ASMC 3. STRATEGIC IMPLEMENTATION Strategy implementation is the act of executing a plan to reach the desired goal or set of goals. The brainstorming process helps formulate these ideas, while the implementation process puts those strategies or plans into action. Strategy implementation depends heavily on feedback and status reports to ensure the strategy is working and to rework any areas that may need improvement. Strategy implementation is important because it involves taking action instead of simply brainstorming ideas. It helps show the team that the strategies discussed are viable. It's also a great tool for team development because everyone can participate. Strategy implementation depends on thorough communication and the right tools to facilitate the strategy. 2. THE CONCEPT OF STRATEGY “Strategy is the dynamics of the firm’s relation with its environment for which the necessary actions are taken to achieve its goals and/or to increase performance by means of the rational use of resources” Source: Ronda & Guerras (2012:182) AIR BNB case: the main problem are stakeholders. Apart from the profits it generates, it is not profitable for neighbors and governments. Why does a firm seek to improve its performance? 1. Long -term direction 2. Managing resources and capabilities 3. Definition of the scope of the firm CHARACTERISTICS OF THE STRATEGIC DECISIONS 1. High Uncertainty: BANI environment, business highly scalable and globalization - Artificial intelligence 2. Complex Nature: social preferences, political tensions and regulation. - Global tensions 3.Holistic approach to the organization - Mission: where you want to get - Vision: how you want to get - Values 4. Impact upon the sum of the firm´s decision: structural trends, main growths drivers and social. 5. Changes in organizations: management, people, environment. 6. Network of outside relations: environment, social, governance. GOOD STRATEGIES 1. Fit with the context and internally consistent 2. Different from the competitors’ strategy 3. Sustainable over time, thereby ensuring the firm’s long- term survival. BAD STRATEGIES 1. A poor analysis or diagnosis of the problem 2. Mistake objective for strategy 3. Poor definition of strategic objectives 4. Organizational inertia 5. The Icarus paradox or “dying from success.” 6. Identifying the strategic process with a formal process STRATEGIC FAILURE Poor analysis or diagnosis of the problem: wrong diagnosis or the failure to identify properly the different options. Mistake objective for strategy: define a strategic objective without specifying how is it to be achieved. Poor definition of strategic objectives: objectives that lead nowhere or objectives to `lease stakeholders that becomes impossible to set a clear heading. Organizational inertia: not adapting to the necessary changes (e.g. using a traditional way of doing things) The Icarus paradox or “dying from success”: highly successful firms that don’t change their strategy in order not to lose their status and they become unable to stop other firms to ousting them from the market. Identifying the strategic process with a formal process: not a real strategic process 3. OTHER MAJOR CONCEPTS 1. The firm: strengths and weakness (resources and capabilities) – environment: opportunities and threats – in order to respond to the environment the firm has a series of resources and capabilities. 2. Strategy: corporate, competitive and functional 3. Performance: profitability, value creation 4. Stakeholders: managers, employee, customers, society…  4. LEVELS OF STRATEGY 1. Corporate strategy: formed of the top of the company. Typically focused on long term objectives but may influence near term activities. Purpose: Establish a firm’s general guidance Contents: future direction, search for value and opportunities for value creation, defining the scope, how to grow or develop in the future or how to create and develop synergies. E.g. 5 Business strategies of Google 2. Business Unit strategy: defined on the segment and emphasizes products or services and attaining competitive advantage. Purpose: How to compete more effectively in a series of businesses or strategic business units Contents: creating & sustaining a competitive advantage, and the creation, improvement and exploitation of valuable resources, tangibles, and intangibles as well as capabilities E. g. Mobile first to AI 3. Functional strategy: designs the approach for functions or departments, e.g. how marketing, supply chain, engineering should run their departments. Purpose: How to use and apply resources and capabilities within each functional area Contents: strategies for functional areas such as operations, marketing, financing, human resources, and technology E.g. Heinekens or Mercadona 5. PHASES/ PROCESS OF STRATEGIC MANAGEMENT 1. STRATEGIC ANALYSIS Definition of the firm’s future orientation: External analysis: opportunities and threats Internal analysis: strengths and weaknesses 2. STRATEGIC FORMULATION Design of strategic options: competitive and corporative strategies. 3. STRATEGIC IMPLEMENTATION: Strategy assessment and selection: suitability, feasibility, acceptability. Implementation: Organizational medium and strategic planning. Strategic control: review of the strategic decision-making process. 6. RESPONSIBILITY FOR SRATEGY According to Certo and Peter the persons and groups involved are top management, the board of directors and he staff involved in strategic planning or corporate development. It might be said that the main responsibility for the process befalls a firm´s top management, as a strategic decisions impact upon the firm as a whole or upon a significant part of it and have major long-term implications. Top management: CEO and functional managers (operations management, commercial management or administration management). While the former are directly responsible for corporate strategy, functional managers for defining and aligning functional strategies. 1. Top managers: responsible of adopting the decisions designed to formulate and implement the strategy for the achievement of the overall goals 2. Board of directors: responsible for the overall supervision of the process and the evaluation and control of top managers in its strategic tasks (enhance its quality and defend shareholders interests in terms of value creation) through Strategy Committees or the Board as a whole. 3. Strategy and corporate development staff: responsible for advising top management and ultimately the board of directors (by gathering and analyzing info). E.g. independent advice provided by strategic consultancy firms. In some firms it exists the figure of the chief strategy officer, who is responsible for a strategic staff involving those of internal consultancy, link to the provision of advice when formulating strategies. 7. FIT AND CHANGE IN THE PROCESS Strategic fit: much between the context in which the strategy is to be developed and the chosen strategy itself. Context defined by the environment affirms own specific characteristics (resources and capabilities) and the strategic goals defined by management. There is also a need for organizational fit (match between the chosen strategy and the organizational characteristics of the firm in which data strategy is to be implemented) Also highlight the strategic change (adapt to the changes so the firm doesn’t suffer the consequences). 8. APPROACHES TO STRATEGIC MANAGEMENT Rational approach: instruct senior managers how strategies should be formulated (maximize firm performance) inspired by the rational decision model pronounced by economic theory and based on a study of the environment’s possibilities and the firm’s capabilities Organizational approach: How strategic decisions are made, bounded rationality decision model, based in Organization, theory descriptive nature. Holistic approach: merging economic and organizational considerations and selecting the most interesting contributors. “Ideal process”: far-reaching search for data has been made, a number of alternatives had been considered and assessed by a objective criteria. Rational strategic decision-making process: More systematic, logical and rational analysis More proactive than reactive when outlining its own future All organization members understand what the firms wants to achieve Evaluate less strategic decisions made by lower-level managers Assessment and control of the strategy´s progress in the future  Allows the involvement of more people in the strategic management process Nevertheless, reality shows that this process does not always unfold in this manner and does not guarantee the strategy´s success, because rational process takes place under conditions of uncertainty. This model is criticized due to: Sometimes involves the alternative that satisfies the achievement of the goals proposes but not the one that maximizes the results. The learning throughout the decision-making process The political aspects and the luck, chance and intuition of a brilliant idea may play in the choice of strategic options and their success or failure Strategic decisions making process may be understood in terms of the complementary between rational and less rational aspects. The model in each organization may depend on the characteristics of the environment and the firm itself. A rational approach is not so clearly defined in everyday business with some of the parts implicitly undertaken or by obeying the business owner´s intuition or experience. A holistic view of strategic management seeks to merge the rational and organizational approaches according to the key notion and that both are valid as they stem from the same reality. 2 issues: The distinction and the complementary between strategies that are deliberate or intentional and the emergent ones The consideration of the more organizational and less-economic rational aspects In order to complete the holistic approach, it´s important to stress the necessary complementarity between the more economic-rational aspects of the strategic management process and those in which the organizational approach carries more weight à strike a suitable balance between them to guarantee the strategy´s success. *Organizational problems take on special significance in the definition of a firm´s mission and goals. The existence of different stakeholders generates a situation of potential conflict in objectives that needs to be resolved à analysis of a firm´s governance, social responsibility or business ethics. At the strategy formulation phase à relational strategies: involve seeking privileged relationships with sundry agents in the environment over and above the normal relations established within a market context à protect the firm from its competition by looking for “safe zones” that remove part of the uncertainty from the environment. Regarding the evaluation and selection of strategies à analyze the consequences they may have for the different stakeholder groups related to the firm, the possibility of conflict and the need to handle it properly. The implementation phase signals the appearance of key organizational problems for the strategies´ success: The design of the organizational structure Organizational change The leadership role Human resources policy The role of organizational culture The importance that organizational aspects have in the strategy´s success has been growing in recent years as more attention has been paid to individual factors and the relationships between individuals (more attention is being paid to cognitive and emotional aspects, and to the social relationship among the people that make up the organization). These aspects have a bearing on how decisions are made within the firm, and therefore on the type of strategies chosen and, indirectly, on their outcomes. This is relevant when analyzing the role played by top management or the strategy leader in the strategies chosen and their success CHAPTER 2: FUTURE DIRECTION AND VALUES 2.1. FIRMS FUTURE DIRECTION Define 4 basic concepts: mission, vision, strategic objectives and values → involve all the organization members. 2.1.1. CORPORATE VISION What a firm will or should be in the more distant future and it lays down the criteria the organization has to apply to mark out the path to be followed (usually 5 to 10 years or more). Its definition should be one of the leaders’ key roles. According to Hamel and Prahalad: Incorporate a profound sense of success Be stable over time Make the workforce´s effort and commitment to its achievement worthwhile A vision should be a realistic dream that is worth the collective effort. The definition of vision should not be addressed in terms of profit or value creation for shareholders. 2.1.2. CORPORATE MISSION Constitutes a firms identity and personality, consider the firm´s reason for existing and how understands its business, constituting a statement of principles through which the firm presents itself to society. The mission tends to remain stable over time never, nevertheless it should be understood as a dynamic concept that evolves like the rest of the organization key features. It involves the following variables: Definition of the scope of the firm: different businesses in which a firm operates or may operate in the future, this definition is linked to the products or service provided the markets served or the geographic sphere covered. The identification of the core capabilities: this highlights the way it competes on the market. Based on them affirmatives its sustainable competitive advantage. Values, beliefs and attitudes: the approach it adopts to its operation or the principles that govern its relations with its various stakeholders. 2.1.3. STRATEGIC OBJECTIVES In order to overcome the effort needed to achieve the future a firm pursues; the vision should be broken down into strategic objectives → business challenges (e.g. internalization) → concrete outcomes that are to be achieved in the short and medium terms. According to Fitzroy, they should be: Measurable attribute or characteristic Yardstick for measuring the attribute A target that is to be met Timeframe for its achievement The achievement of each one will act as a stimulus and motivation for creating new challenges more ambitious. They are based on several criteria:  According to the nature of the objectives: distinction between financial and strategic objectives. According to the timeframe: preference between short and long-term objectives. According to the degree of the precision: consideration may be given to open-ended objectives (improving from day to day) or set targets (annual growth of 20%). According to scope: line between ambitious objectives and impossible ones. According to the strategic level: need to define corporate, competitive and functional objectives. Necessary to stablish priorities within objectives. Examples Microsoft Vision: to create a local opportunity, growth and impact in every community and country around the world. Mission: to empower every person and every organization on the planet to achieve more Values: innovation, diversity and inclusion, corporate social responsibility, philanthropy, environment and trustworthy computing. Google Vision: to provide access to the world´s information in one click Mission: to organize the world´s information and make it universally accessible and useful. 2.2. FIRM PERFORMANCE: VALUE CREATION A better performance means a greater level of success, so right decisions improve performance and wrong ones compromise it. Performance is a multidimensional concept (different ways of measuring it with different results), the improvement of one of the possible measurement variables, may cause a loss in other. According to financial theory shareholders are owners and holders of the firm´s ownerships rights, these seek to maximize the return of their investment, so the firm´s objective is to maximize its market value. Guiding decision making Assessing the strategy´s degree of success and failure Assessing the quality of the management team´s work 2.2.1. Measuring performance through profit/return Accounting profit: difference between the income and expenditure in a period of a time or the difference between the book value at the beginning and the end of the period. Accounting indicators: EBITDA: value of sales and their cost EBIT: net income ROA: economic performance of assets ROE: dividing net income by the sum of equity. Considers the result of the firm and the outcome of the financial structure designed. Economic profit: firm´s profit considering the cost of production factors, including that of equity. EVA: profitability based on economic profit. Difference between EBIAT and the product between the book value of the firm´s assets and the average costs of the capital invested including equity capital. 2.2.2. Measuring performance through value A firm´s value for shareholders is given by its capacity to generate rents or earnings by the return on its productive assets by virtue of which someone is prepared to pay for their ownership. To know if a firm is creating value, its value needs to be determined at a given moment in time, which may be calculated on the basis of theoretical value and market value. Firm´s theoretical value: calculating the current net value of the future cash flows generated by the economic entity, discounted at an appropriate rate adjusted to inflation and risk à a firm will create value when its theoretical value increases. Firm´s market value or capitalization: the product of the number of shares and the price of each one à value is created when there are positive differences in capitalization at 2 different moments in time. From a shareholder´s perspective, although the earnings from capital gains for shareholders involves the increase in the firm´s value over a year divided by its capitalization at the start of the year, this return is not the same thing as value creation for the shareholder (difference between the true return and the minimum acceptable Ke they require to invest in the firm). This value creation only takes place when this return is higher than the shareholder´s minimum required rate of return (Ke) à it will create value for shareholders when the return is higher than the Ke. In many instances shareholders may establish other benchmark criteria for estimating the return on their investment: Whether the return obtained is positive Comparing the return with a risk-free asset, with firms in the same industry or other stock market index 2.3. CORPORATE STAKEHOLDERS AND CORPORATE GOVERNANCE 2 issues: Who establish the objectives: distribution of power within the firm (shareholders or other major groups, such as managers) People inside the firm have their own agendas and objectives that sometimes may come into conflict with those of the firm as a whole The principle of maximizing shareholder wealth has a clear economic-financial focus. Nevertheless, it is subject to certain limitations, which stem from the presence of stakeholders. 2.3.1. CORPORATE STAKEHOLDERS Stakeholders are people or groups of people related to a firm who have their own objectives, whereby the achievement of these objectives is linked to the firm's operations. Theory of Organizational Equilibrium: a firm´s objectives are understood to be the result of a negotiation and adjustment process between the various stakeholders, whereby they all consider their own particular objectives have been fulfilled, at least at a sufficiency level. The conflict of objectives between stakeholders is due to the inability to meet all their expectations fully. Negotiation is used to strike a balance, setting an objective that goes some way to integrating the objectives of all those involved. Any imbalance or non-integration affecting each group´s interests leads to a bargaining process or confrontation between them, with the firm´s survival becoming a priority objective that is more important than individual or group interests. This means that all stakeholder groups have the same decision-making power and the same freedom to take part. In practice it doesn´t happen exactly. It should be accepted then that the group wielding the greatest power in the firm conditions all the other groups, imposing its objectives and restricting those of the other stakeholders. Why stakeholders analysis is so relevant? Firm´s resources are scarce making it difficult to address stakeholder objectives at the highest level If stakeholders are not satisfied by the objectives, they’ve achieved they may pressure top management or withdraw their support. Strategic analysis of stakeholders: 1. Identification of stakeholders and their objectives: - Internal stakeholders: shareholders, managers and the workforce/employees → they influence within the company (they have to be aligned) *Shareholders invest through equity (they own a percentage of the company) - External stakeholders: customers, suppliers, financial institutions, labor organizations, local community, social organizations and the state → somehow you can have an influence on them When identifying stakeholders and their particular objectives: Their influence is rarely manifested on an individual basis, being instead a collective force through the sharing of common interests The same individual may belong to more than one stakeholder group, and its interests and behavior will depend on the one in which it´s included for the analysis. The existence of these groups responds to formal criteria derived from the organization´s ordinary business (departments, business units), and concrete situations in which for sundry reasons (crisis, threats, special opportunities) they may spontaneously arise. 2. Evaluating each group’s importance: evaluation will inform the decisions made and actions finally taken, paying greater attention to one specific group or dismissing another. STAKEHOLDER MAP → identify major stakeholders and classify them according to their importance and possible impact upon the firm´s objectives. a) Power: the real possibility of imposing one´s own objectives on other stakeholders. Such power may stem form a hierarchical position (formal authority) or from the ability to influence (informal authority) /Status of its members /Availability of basic strategic resources for the firm /Control of key external factors for its operations b) Legitimacy: the perception that a stakeholder´s objectives are socially desirable or accepted → they fall in line with a social system´s rules, values or beliefs. Legitimacy is provided by the appraisal of other, not by each group to itself. c) Urgency: a stakeholder´s interest in exerting influence and adopting a hands-on approach in order to achieve its objectives, which depends on the importance it attributes to that achievement. Groups may be active or passive toward the achievement of their objectives CRUCIAL STAKEHOLDERS: stakeholder that meets all three characteristics - it would have a great interest in influencing the firm´s objectives - it would be socially legitimated to do so - it would have the power mechanisms required to impose its own objectives  EXPECTANT STAKEHOLDERS: they meet 2 characteristics, which require a certain amount of attention from the firm´s management. LATENT STAKEHOLDERS: they meet only one characteristic NO STAKEHOLDER: without any of those characteristics. 3. Implications for management: THE IMPORTANCE OF EACH STAKEHOLDER DETERMINES: - The degree of attention to be paid → priority will be given to those objectives associated with the most relevant stakeholders - The effort made to attend and fulfil its objectives or to keep them informed about the firm´s performance POTENTIAL DAMAGE FOR MANAGEMENT: - To strike a certain balance between the different objectives of relevant stakeholders → failing to do so may jeopardise its very own survival - The possibility of wielding excessive power by any one group is limited by market conditions → increasingly more competitive markets - Creating value as a requirement for survival 2.3.2. CORPORATE GOVERNANCE The fact that many companies separate ownership and management → diverging interests and information asymmetry between these 2 groups. Agency theory considers the problems that may emerge in a business relationship when one person delegated decision-making authority to another one. It may be understood then how top managers don´t always proceed in a manner that is advantageous to shareholders, as they have different utility functions. Top manager´s interests, derived from their own utility function, have monetary components (remunerations, incentives) and non-monetary ones (promotion, autonomy, prestige, power), besides security and permanence in management. Consequently, the interests of top managers may easily come into conflict with shareholder´s objectives → the maximization of shareholder´s wealth will be replaced by objectives that are more meaningful to managers. The issue arises of the control of management by shareholders in order to avoid the former acting alone when setting the company´s objectives and without suitably catering for the latter´s objectives → compatibility between shareholder and management interests. The issue of shareholder control over management and the mechanisms available for exercising that control → corporate governance. Each company will choose the governance mechanism it deems most suitable bearing in mind the cost (money, time and resources) each one involves as regards their efficacy. A. INTERNAL MECHANISMS OF MANAGEMENT CONTROL: Those originating within the company itself, which are designed by shareholders to exercise direct control over the company´s most senior managers, which pass on to the managers reporting to them. i. DIRECT SUPERVISION: THE BOARD OF DIRECTORS: Direct supervision → continuous control shareholders exercise over managers in order to ensure they conduct themselves in keeping with their interests. Control of the board of directors → body representing shareholders in decision-making. Control of large shareholders (interested in avoiding any discretional approach by top management that may compromise their interests)  Hiring of independent auditors or consultants for performing control duties or holding internal audits in different areas of the firm. Mutual observance between managers, stemming from the internal organizational hierarchy that favors the control of top managers over the rest. The board´s main remit involves general supervision: - Strategic responsibility → orienting and driving company policy - Surveillance responsibility → controlling the management echelons - Reporting responsibility → acting as a go-between with shareholders TYPES OF DIRECTORS: a) Inside directors: those who are also top managers within the firm b) Outside directors: representing shareholders and not holding a management position. a.1) Proprietary: representing major o reference shareholders a.2) Independent: representing minority shareholders or the company´s floating capital Not involved in executive management → they act on behalf of shareholders´ interests, especially independent ones , as they defend general objectives. In fact, inside directors end up controlling the board, whereby it fails to fulfil its key role of controlling management. Therefore, governments and stock markets have sought to redress this situation by adopting various measures (operating regulations or codes of good governance) to uphold the key role the board of directors plays in a company in the defense of shareholders´ interests. CODE OF GOOD GOVERNANCE (2015): based on 25 principles and 64 recommendations governed by the principle of “compliance or explanation” being applicable to all listed companies. Although their application is voluntary, firms are to explain the reasons for possible non-compliances. *Section of recommendations includes criteria on corporate social responsibility. Restriction on voting: the General Meeting of Shareholders shouldn´t restrict the maximum number of votes a single shareholder may cast, generally avoiding any measures that hinder a public offering of shares (Rec. 1) Regulations on the General Meeting of Shareholders: transparency of information, right to attend and take part, and policies on attendance fees (Rec. 6-11) Size of the board: no fewer than 5 members and no more than 15 to ensure its efficacy and participation (Rec. 13) Policy on the appointment of directors: it is to be specific, objective and verifiable, favoring the diversity of knowledge, experiences and gender (Rec. 14) Composition of the board: a clear majority of outside directors, with only the minimum required number of inside directors. A balance should be struck between directors representing major shareholders and independent ones. Public transparency is recommended regarding directors (Rec. 15-19) Chair: to avoid the Chair accumulating too much power when this person is also the firm´s most senior executive, one of the independent directors will be appointed as coordinator director with special powers to convene meeting of the board, include points of the agenda, coordinate outside directors and head the board´s assessment of the Chair (Rec. 33-34) Remuneration of directors: the appropriate remunerations are specified for each type of director, especially the variables linked to the firm´s performance, seeking to avoid the excessive assumption of risk and the rewarding of a poor performance (Rec. 56-64) The code of government also includes recommendations related to: Reporting to shareholders The equal treatment of shareholders Restrictions on the dismissal and resignation of directors The board´s ordinary business The creation of special committees → executive, auditing and appointment, and remunerations The performance assessment of the board, its members and its various committees The promotion of social responsibility policies ii. INCENTIVE SCHEMES: To link top manager´s interests to those of shareholders through the arrangement of contracts that associate management´s own objectives with value creation. - Systems of direct variable remuneration: linking the manager´s salaries to the posting of profits or to value creation. They involve the achievement of management targets, firm performance or special bonuses. - Systems based on shareholding: through the delivery to top management of fully or partially paid-up stock, rights over increases in the value of stock, or stock options (important instrument when delivering shares in the company at a pre-set purchase price and date). Then, the greater the value creation, the greater a manager´s incentive to exercise the options at the preordained moment. - Professional promotion: by linking a professional career to the successes achieved in management or to the length of service in the company → avoid the threat of dismissal if there´s no value creation. - Other forms of remuneration: o Payment in kind (provision of housing, cars) o Contributions to pension funds o Welfare services (medical insurance, life assurance) o Public acknowledgement of work well done B. EXTERNAL MECHANISMS OF MANAGEMENT CONTROL: Based on the disciplinary power sundry markets may exert on top management without shareholders having to assume any extra costs for their use. If these mechanisms are successful, shareholders will have a greater ability to control management → they will have less discretionary power → the objectives of both these groups will tend to converge. I. THE MARKET FOR CORPORATE CONTROL: If managers don´t maximize a firm´s value due to the desire to achieve personal objectives at the expense of shareholders, and the firm´s financial performance doesn´t fulfil its full potential → outside investors could be encouraged to purchase the firm and replace its current management (public takeover bids to gain control) II. THE CAPITALS MARKET: If managers perform well, this will be mirrored in the capitals market by an increase in the company´s valuation (higher share price). If the market value is lower than it should be, the current shareholders may act to remove the firm´s top management or they may arrange changes in stock ownership through the market of corporate control in order to oust the present management. The debt capital market (DCM) also requires managers to obtain a minimum return to cover interest and the repayment of capital. III. THE LABOUR MARKET FOR TOP MANAGEMENT: This market values the knowledge and experience of senior executives and how they apply themselves to value creation in the firms they are working for. Those managers who have made a significant contribution to the firm´s performance will tend to be more highly valued on the market, increasing their present and future earning power. However, senior executives tend to arrange “golden parachute” clauses in their contracts to protect themselves if they are fired, which limits shareholders´ punitive powers. IV. THE MARKET FOR GOODS AND SERVICES: The sole option in a perfectly competitive market is the optimum assignment of the resources that maximize a firm´s value. When a firm operates in a competitive environment, the market´s competitive forces exert pressure on it so that its objective is the maximization of value. Therefore, if it´s not fulfilled, the firm´s very survival will be compromised. 2.4. CORPORATE VALUES Set of principles, beliefs, standards and commitments designed to steer a firm´s progress toward the achievement of its vision and mission (inform the way in which to do so). The basic adage is that the end doesn´t always justify the means → the way in which the firm goes about its business conditions the validity of its vision and missions and renders its operation more or less appealing to its stakeholders. Its values have to be consistent with the vision and the mission because they are general guidelines for achieving them both. They are operating guidelines that seek to influence the way in which the organization´s members conduct their business They reflect the way in which the firm relates to its stakeholders. 2.4.1. Corporate social responsibility A firm´s approach to the demands of a social nature made by society at large in response to its operations, to the evaluation and compensation of the social costs it generates, and to the extension of the scope of its objectives through the definition of the social role it should play. It transforms the classical governance formula based on the bilateral relationship between shareholders and management into another multilateral one involving all stakeholders It modifies the decision-making process by extending the criteria of economic efficiency to include the consideration of the environmental and social impact of the firm´s operations It´s of voluntary application Some authors have maintained that a firm shouldn´t assume any kind of social responsibility because it´s incompatible with the classical principle of maximizing profits or value creation → social responsibility is a self-imposition that reduces a firm´s earnings Friedman: a firm´s overriding responsibility lies in providing the best possible returns for its shareholders, and any tendency that advocates its social responsibility is a substantially subversive doctrine capable of undermining the foundations of a free society In contrast, a firm has to be considered as a social institution that is not impervious to the political and social impacts of its environment → the assumption of responsibility by a firm doesn´t need to be incompatible with the objective of value creation for shareholders. By adopting a criteria of social responsibility, a firm may advance its relationships with different stakeholders, reduce conflicts and improve the conditions of its environment → more sustainable. This reinforces the legitimacy and reputation of the firm itself, which in the long-term may help to create more value. CONTENT OF CSR: a) Economic-functional area: related to the company´s normal operations in terms of the production of goods and services society requires. o Creation of direct and indirect employment o Generation of income and wealth o The occupational training of workers o The provision of funds for public policies through the payment of tax A firm´s economic activity contributes to society → no contradiction between economic and social responsibility, with the economy being considered an essential and basic part of society. b) Quality of life era: related to how a firm is raising or lowering the general standard of living in society and what it´s doing to mitigate the negative externalities caused by its operations. o Produce high quality or socially accepted goods o Maintain proper relations with a firm´s employees, customers or suppliers o Measure the effort made to preserve the environment *Environmental management and the notion of sustainable business activity are framed within this level. c) Social action/investment area: the degree to which a firm uses its financial and human resources to resolve issues in the community. o Sponsor education, culture, sports and art At this level, a firm transcends its function as the manufacturer of goods or the provider of services to become a partner in resolving the problems of society at large. Each company should choose its own levels of social responsibility, with its system of objectives incorporating those specific to shareholders and those of all the other social groups involved in it. The key question is whether the social responsibility is beneficial for companies and why companies in a market economy decide to embrace it. Legal factors: legal influences are determined by respect for the laws and regulations with which society (through institutions elected for that purpose) chooses to furnish itself. *The minimum threshold companies are required to observe. Political factors: these stem from the need to consider a firm´s stakeholders, especially those adjudged to be the most significant ones. Regarding internal stakeholders → employees tend to be the priority group Regarding external stakeholders → consumers when they apply social, environmental or ethical criteria in their purchase decisions Strategic and competitive factors: SR may enable a company to improve its competitive positioning and create value. Mechanisms through which a firm may generate value: ❖ Create valuable intangible assets like legitimacy or reputation ❖ Differentiate products and processes to imbue them with attributes or specifications that are positively valued by customers ❖ Improve the competitive context within which the firm operates ❖ Reduce risks in stakeholder relations and avoid the costs of socially irresponsible behavior ❖ Access valuable resources in better conditions than other companies Ethical-moral factors: SR is linked to a company´s values and the ethical behavior of its shareholders and management, as well as to those of the society in which it operates → society´s ethical criteria tend to be more readily assumed by a company and exert pressure on it to perform in a socially responsible manner. IMPACT THAT SOCIAL RESPONSIBILITY HAS ON FIRM PERFOMANCE: Orlitzky: there´s a strong, positive relationship between social responsibility and performance. This relationship occurs in different industries and different geographical contexts. There´s a kind of virtuous cycle → firms investing in social responsibility record a better long-term performance, which enables them to reinforce their investment. In spite of this, several authors note that there are objective difficulties for measuring social responsibility, which could explain the diversity of conclusions reached in the different empirical studies. When this relationship is positive → a firm might be expected to be socially responsible out of its own interest, as it doesn´t conflict with value creation for shareholders. There´s no reason for the market to penalize socially responsible firms Managers may use social responsibility as another instrument at the service of strategy for improving performance There would be no need for excessive interventionism on the part of the public authorities to force socially responsible behavior, as firms would conduct themselves in that manner out of choice. 2.4.2. Business ethics The professional or public behavior that identifies what is or is not considered acceptable by society (including the law) and by the conscience and values of stakeholders. There´s no agreement on what is or what is not considered acceptable in dealings with stakeholders, so each firm has to decide how far it wants to go in its relationship with them. Therefore, a firm´s level of ethical conduct may be a crucial differentiating factor for attracting customers and/or investors. Business ethics: moral fundaments that characterize the relationships that firms maintain with social agents or stakeholders (what is right or wrong, good or bad, damaging or beneficial regarding decisions and actions in business transactions) → how people´s moral standards are applied to the firm´s operations and objectives. The pertinence of the study of business ethics lies in the rapid process of moral decline in public life, brought to light trough business scandals involving finances or corruption, and send shock waves through public opinion due to their scale and frequency. The need for an ethical approach to business is an issue that has been widely discussed. For some, partly as a result of the scandals, a firm can sometimes be perceived as an agent in a wild and adulterated world governed by the “minimal ethics” consisting of avoiding problems with the judicial and legal systems. From the opposite standpoint, it may be reasoned that without a high level of ethics, it´s impossible to gain the confidence of those stakeholders with whom the company has dealings, being a prerequisite for the high performance of business over the long-term. Ethical behavior also may save on many costs in terms of litigations and fines, and it may avoid the deterioration in relations with stakeholders. There´s a need to spell out the moral content of what is and what is not acceptable and implement the appropriate mechanisms for ensuring employee´s general conduct is ethical. To achieve this, it´s advisable to draw ethical codes or codes of conduct that include the firm´s commitments to its members and the latter´s commitments toward the firm itself, for fully upholding the law and ethics in their professional undertakings. The interest in their definition lies in the fact that all the organization´s members will be directly and explicitly capable of understanding their content. ETHICAL CODE: - Behaviors expressly forbidden for employees, pursuant to legal or contractual provisions. - The promotion of positive values that a firm may embrace and that express its culture and personality - The procedural guidelines for certain situations involving professional conduct or decisions that are bordering on the fringes of ethical principles  - Sanctions (in the event of non-compliance) imposed both in-house (warning, demotion, dismissal) and by the courts (civil, criminal, administrative) Corporate governance, social responsibility and business ethics are closely interrelated issues with each other and with values. Governance is related to manager´s proper attitude toward the fulfilment of the main corporate objectives → rendering it essential for top management to behave in an ethical manner. Thus, many codes of conduct seek to regulate this behavior in order to favor the firm´s general interests. While social responsibility sets out to satisfy stakeholder expectations in terms of their objectives, governance focuses its attention on the relationship between the interests of shareholders and management. A firm´s corporate social responsibility reports tend to include aspects of good governance along with information on the ethical values or codes of conduct implemented. Over and above codes of good governance and firm´s efforts in pursuit of sustainability, it´s the people working in them who need to embrace these values → what a truly sustainable firm will do. Otherwise, the lack of consistency between the values expressed and its true behavior may compromise its relationship with its stakeholders and its business performance. CHAPTER 3: ENVIRONMENTAL ANALYSIS 3.1. THE BUSINESS ENVIRONMENT Environment: everything over which a firm has no control as an organization and has a significant impact on the success of its strategy, so it is necessary to analyze if it has a positive or negative impact. When analyzing the environment, there is a distinction into general environment (socio-economic system within which it operates) and competitive environment (part of the environment that is closest to its everyday operations). The current environment is characterized by high uncertainty due to multiple factors (globalization technological change removal of internal trade barriers changes in culture), these factors are known as opportunities and threats. 3.2. ANALYSIS OF THE GENERAL ENVIRONMENT When analyzing the general environment, we identify different variables: 1. General political economic and social system 2. Localization in a specific country, region or geographical area To study variables related to localization, we have the Porter Diamond model (explains why some countries or industries inside them are more competitive than others). This model is based on 4 factors: 1. Provision of production factors 2. Conditions of domestic demand 3. Highly competitive similar and auxiliary sectors 4. This strategy, structure and rivalry of existing firms As the implementation of a strategy will extend over a longer period of time, we study how external factors will manifest in the future. For that, we use prospective measures (provide a more global vision of the future, which depends upon the past and on the decisions made in the present). One of the instruments uses is the scenarios method, defined as a description of the circumstance conditions or events that may depict the environment in the future. 3.2.1. The environments strategic profile. Environment strategic profile: diagnosis of the general setting in two in two stages: 1. Drafting a list of the key factors in the environment 2. Assess the impact those variables have on the firm's business (opportunities and threats) There is a prior need to define the boundaries of the analysis from a territorial perspective and according to the relevance of those variables, considering 2 aspects: the possibility of its occurrence and the size of the impact (Lederman). Variables tend to be organized into several dimensions: political and legal dimension economic dimension demographic dimension sociocultural dimension technological dimension ecological dimension Rating the behavior of each of the key factors on a Likert scale from 1 to 10 or in another way, from: very negative, negative, indifferent, positive and very positive. The environment strategic profile is a very simple and easy to interpret tool that involves two major issues: a) identifying the key variables in the general environment b) assessing their impact on the firm's business But considering 3 important aspects: Not all the variables on the general environment have a significant impact on a specific industry or firm Similar characteristics of the general environment may have different effects in different industries The impact the general environment has may vary significantly even among firms in the same industry 3.2.2. Industrial districts Industrial district (cluster): numerous group of similar firms and institutions connected by the same economic activity are located in a specific geographical environment. Includes films belonging to the main industry or related to it. Types of agents in the industrial district: Businesses dedicated to the same activity: provide end products and services. Different types of institutions: provide a specialized Technical Support and information (universities or research centers) Businesses located upstream and downstream of the main or focus product: suppliers of raw materials, components, machinery and specialized services. Business in related industries: provide products that supplement the main product. Belonging to an industrial district may favor a firm's competitiveness on the basis of various factors: 1. Increasing productivity: easy access to certain specialist resources. 2. Boost for innovation: closeness to research centers or due to their actual internal interrelations. 3. New startups: is incorporation of new companies to make it stronger and more competitive (lower entry barriers, cheaper financing for setting up new businesses, lower risk) 3.3. ANALYSIS OF THE COMPETITIVE ENVIRONMENT 3.3.1. Defining the competitive environment Who are our business competitors? What are the boundaries of the industry I am competing with? The answer to these questions is not always obvious and it´s especially relevant because: It delimits the arena that needs to be analyzed to identify opportunities, threats and key factors of success. A poor definition of the competitive arena may mean the analysis omits firms from other industries or sector that may compete directly for some customers It may compromise the definition of the most appropriate competitive strategy because it doesn´t consider all the agents involved. The answer to the above questions is related to the type of business the firm pursues → the industrial sector in which it´s located. Industry: a group of companies offering products or services that are close substitutes for each other. Therefore, rivals are those firms that provide substitute products. This substitute nature may be measured by 2 criteria: (when products can be substituted for purchasers and producers alike) A. Technological criterion: applied from the standpoint of supply) defines an industry as the sum of firms that use similar operating processes or raw materials in the manufacture of one or more products (degree to which these operating processes are interchangeable) B. Market criterion: applied from the demand side) picks out the sum of firms manufacturing products that are closely interchangeable from the perspective of catering for customer´s needs. There are cases in which the degree of substitution differs substantially for one or the other. Besides the traditional concept of industrial sector, there´s a need to define others closely related to it. Following Abell´s approach, the competitive environment may be defined based on 3 dimensions: Groups of customers served: target consumers of products or services Functions the products or services cover for said customers: closely related to the needs met Technology used (how the product is supplied): the manner in which a function is covered Based on these definitions 3 basic concepts may be defined: Industry: series of firms that, based on a specific technology, seek to attend to all their customer groups and cover all possible functions. This concept would delimit the industrial sector on the supply side. Firm´s business: the specific selection each firm makes of the functions and customer groups it wishes to cater for. An industry may contain numerous firms. Each one of them decides, according to the technology chosen, to cater for one or more types of customer groups and cover one or more functions or needs. Also, a firm might dedicate itself to different businesses belonging to different industries. Market: the industrial sector from the demand side. It includes the sum of companies that cover the same function for the same group of customers, irrespective of the industry in which they operate (the technology they use). From the perspective of a strategic analysis the most important step is to define a firm's competitive environment, these consist of competitors customers and suppliers. The concept of market is closer to the definition of the competitive environment. All that remains is to specifically identify a firm's competitors: If an industry caters solely for one specific function for one particular group of customers and all the companies in that industry define their businesses in a highly similar way regarding the 3 basic dimensions, it won´t be difficult to identify the firm´s competitive environment (all rivals come from the same industry and cover the same set of functions for the same groups of customers) Sometimes, companies from the same industry define their businesses differently. Many industries can be divided up into smaller competitive scopes through the identification of segments. Companies from different industries seek to cover the same functions for the same customer groups (using different technological alternatives). Then, firms compete only in those activities in which they coincide because of the function covered and because of their target customer group → heterogeneous competitive environment Companies in the same industry that aren´t direct rivals because they cover different functions for different customer groups (2 airlines that service different routes). Direct competitors that come from different industries (passenger transport between 2 cities → airlines, railway companies, coach firms, customer´s own cars) → the concept of industry on the supply side is irrelevant from a strategic perspective (it doesn´t help to identify competitors). Defining the competitive environment and identifying the main competitors constitute a difficult yet crucial issue for the outside analysis that requires prudence and, on occasions, imagination. These should be defined by managers based on the objective data available and on their own judgement depending on the purpose of each analysis and its context. *There´s a need to establish certain boundaries that include the main rivals, distant competitors, potential ones or substitutes → the definition of the boundaries not too broadly or too narrowly 3.3.2. Analysis of the industry’s structure The aim of analyzing the industry´s structure is to highlight the opportunities and threats it poses for a firm and which determine its capacity for returning profits, which constitutes the industry´s attractiveness → how do firms compete in the industry? → through prices: High prices (high margin) and low volume Low prices and high volume Price-quality *The industry´s structure conditions the firm´s behavior and profitability. In an industry in a state of perfect competition, there are very few options available to a firm, being restricted to the application of the market price, with no capacity for influencing supply and demand. Those industries in a state of imperfect competition have possibilities with higher earnings (if the firm is capable of properly exploit opportunities and tackle threats) → analytical model → involving imperfect markets in which it´s possible to outperform one´s competitors. From this perspective: Opportunities will be factors that reduce competition and allow above average earnings Threats will involve aspects that may increase the level of competition, leading companies in the sector to a more tempered performance The greater the opportunities and the fewer the threats, the more attractive the industry will be → the higher the expectations on returns. Porter posits the so-called 5 forces model. 1. INTENSITY OF RIVALRY AMONG COMPETITORS Behavior of competitors, possible actions and reactions that may alter intensity of thus rivalry. As the intensity of the competition increases the possibility of higher returns is reduced (industry attractiveness diminishes) Numerous or equally balanced competitors: as the number of established competitors increases (with greater balance between them), the intensity of the competition will increase. It´s associated with the industry´s degree of concentration (how each competitor´s market share is distributed) → industries may be concentrated or fragmented (intensity of competition lower in the former) Industry´s growth rate (emerging, growing, maturing and declining industries): as the industry´s growth rate slows, the intensity of the competition increases. As an industry enters the stages of maturity or decline, the intensity of competition increases (turnover stagnates or falls and competitors are required to be more aggressive to capture new customers or sustain their current ones) Mobility barriers: obstacles or hindrances that stop firms moving from one segment to another within the same industry. The presence of these barriers restricts the competition to those firms included in each segment, so its intensity for the industry as a whole diminishes. Exit barriers: factors that impede or hinder the departure from an industry. Their presence forces firms to continue competing in order to survive → intensity of competition increases. o Specialized assets that are difficult to reuse outside the industry o Fixed exit costs (severance pay or liquidation of stock) o Strategic interrelationships between some businesses and other that require sustaining all of them o Emotional or psychological barriers o Social (industrial action, demonstrations, product boycotts) or political restraints (legislation, political pressure) which make it difficult to terminate the business. Companies cost structure: the greater weight of fixed costs over variable ones drives firms to operate at full capacity in order to reduce their average costs → increase the output of products and force their sale on the market → increasing the intensity of competition. Product differentiation: as an industry records a higher level of product differentiation, the intensity of competition diminishes (customers show loyalty to differentiated products) Switching supplier costs: the expense a customer has to incur when switching suppliers. Their existence reduces the intensity of competition → it hinders the customer´s choice and protects the supplier from an aggressive approach by competitors Installed operating capacity: an excess of installed operating capacity in the industry leads to an imbalance between supply and demand. This forces firms in the sector to be more aggressive in their competitive approach in order to provide an outlet for their production outputs. Competitor diversity: when rivals differ as regard strategies, national origins, personality, relations with their parent companies, objectives, size and ways of competing → competition becomes more intense due to the difficulty in establishing rules of the game that are generally accepted or in predicting competitor´s behavior. Strategic interests: as more firms become interested at the same time in an industry´s success, competition intensifies, as they will be willing to undertake all kinds of actions to achieve their aim. 2. THREATS OF NEW ENTRANTS Potential entrants: new firms wishing to enter an industry. The more attractive an industry is, the more potential rivals there will be. An industry´s level of attractiveness will diminish if potential competitors manage to enter it and compete on similar terms to current competitors (otherwise it will increase). The possibility that new competitors will enter and start competing depends on: a) ENTRY BARRIERS: factors that hinder the entry into the industry of new firms, normally through the higher costs incurred (decrease in financial expectations of possible new competitors). The presence of entry barriers reins in the appearance of new entrants, protecting those firms already installed and sustaining their financial expectations. Industries with entry barriers have higher average returns and they uphold its attractiveness over time. *If an industry is profitable but doesn´t have entry barriers, many companies will install in it drawn by the higher returns → intensity of competition increases. Absolute entry barriers: very difficult or impossible to overcome, regardless of the resources the firm may have (requirement of a government license for operating) Relative entry barriers: can be overcome depending on the firm´s resources and capabilities. They are linked to the additional costs that potential competitors have to assume to enter the industry. INDUSTRY´S MAIN ENTRY BARRIERS o Economies of scale and scope that current competitors enjoy o Cost advantages (patented product technology, favorable access to raw materials, location advantages, the learning/experience curve) o Product differentiation in favor or established firms o Start-up capital needs o Costs for customers of switching from current firms to new entrants o Access to distribution channels (restricted for new competitors or available at a higher cost) o Government policy that favor established companies (subsidies, restrictions on licenses, ecological/safety legislation) The barriers´ effectiveness depends on the resources and capabilities the new entrants have. Firms with high competencies may easily overcome these barriers and pose a real threat to those already established in the industry. b) REACTION OF ESTABLISHED COMPETITORS: as current competitors are able to react strongly, new entrants tend to be dissuaded. The conditions that signal a likelihood of reprisals are an industry´s track record in this matter (price wars, blanket advertising campaigns, special offers or emotional or localist aspects) with the aim of established companies being to dissuade the new entrant through their major resources for defending themselves (surplus liquidity, surplus operating capacity) or advantages in distribution channels. 3. THREAT OF SUBSTITUTE PRODUCTS: Substitute products: those that fulfil the same customer needs as those already provided by the industry, regardless of the industry producing them. As an industry finds substitute products, its level of attractiveness will diminish (also its expectations of profitability). The existence of substitute products forces established firms to convince their customers of the advantages of consuming their products in terms of quality, price, characteristics, fulfilment of needs, ease of use… as opposed to those produced by other industries. THREAT OF SUBSTITUTE PRODUCTS DEPENDS ON:  The extent to which the substitute products provide a better quality-price ratio for customers → better fulfilment of customer´s needs and lower prices The costs of switching to the alternative products are low The substitute products are produced by high-return industries that can sacrifice part of their profits and reduce their prices On certain occasions, the industry´s specific pricing levels sets the threshold above which alternative products may become economically viable. By contrast, when substitute products are tendered at lower prices, the companies in the industry are forced to lower their own → reducing their profit margins (unless they can find new ways of reducing their costs) 4. BARGAINING POWER OF SUPPLIERS AND CUSTOMERS: The ability to impose conditions on their transactions with firms in the industry (discounts, deferred payment, quality requirements, delivery times, returns, complaints). When suppliers or customers have a high negotiating power, they put pressure on prices or costs and seek to capture part of the value added generated in the industry, reducing its profitability. The greater the bargaining power, the lesser the industry´s attractiveness. The bargaining power of suppliers and customer is not the same across the board, just as it´s not for the different firms in the industry. There are factors that have an influence on that bargaining power, favoring on or other agents. The factors explaining the bargaining power of suppliers and customers are similar and are linked to the general supplier-customer relationship→ they will be analyzed jointly, noting when they favor a supplier´s position and when they favor a customer´s one. *The firms in an industry act as customers as regards their suppliers and, in turn, as suppliers to their customers. FACTORS WITH AN IMPACT ON THE BARGAINING POWER: Degree of concentration in relation to the industry Volume of transactions arranged with firms in the industry Degree of importance of the purchases made in relation to a customer´s costs Degree of differentiation of the products or services subject to the transaction Customer´s level of profits in relation to the supplier Real threat of forward or backward vertical integration Importance of the product or service sold for the quality of the buyer´s products or services Whether or not the product may be stockpiled Level of information of one of the parties as regards the other one 3.3.3. LIMITATIONS AND EXTENSIONS OF PORTER Not all the forces carry the same weight and not all the factors with a bearing on each force have the same importance. One needs to recognize the critical factors with a decisive impact on an industry´s attractiveness. Relative importance of the industry´s structure: the five-forces model gives too much importance to an industry´s structure when explaining a firm´s performance. If an industry´s degree of attractiveness were to be the main determinant of a firm´s performance, its strategy would simply involve choosing the right industry and understanding the competitive forces better than its rivals.  Competitive forces are the same for all the firms operating in the same competitive environment → they all have the same performance opportunities. In reality, firms in the same industry record very different performances (difference in their resources and capabilities) Boundary agents: besides suppliers and customers, firms have dealings with other stakeholders (boundary agents→public authorities, consumer organizations, ecologists or similar groups) whose actions may limit an industry´s attractiveness. Complementary products: in many industries there are complementary products that in conjunction with the industry´s own ones can increase an industry´s level of attractiveness. A product complements another when a customer values it more when it´s sold or used in conjunction with the complementary one that when it´s sold on its own. Industry dynamics: the model doesn´t consider the changes that may occur and which introduce new conditions on the nature of competition and on the expectations for future performance. Changes in an industry may stem from: o Factors external to established competitors (those arising from the general environment) o Internal factors, due to the strategic actions of the established firms themselves (brand policies, innovations, product differentiation, alliances) Hypercompetitive industries: in which the pace of change is fast and more intense. The industry becomes more complex and dynamic → the uncertainty associated with the competitive environment increases exponentially and the industry evolves in an unstable and unpredictable manner. *Industries related to information technologies could be included, as well as internet-related businesses. The problem with these industries is that their structure is constantly changing, their competitors´ bases are constantly evolving, and doing it so in an unpredictable manner → the usefulness of the five-forces model is diminished. 3.3.4. Industry segmentation: Strategic groups Industry segmentation: process, which completes an industry-level competitive analysis, that involves identifying segments (smaller competitive areas in which the dynamics of the competition is structured in a particular way) Traditional way of performing segmentation → demand variables → characteristics of products (quality, price, physical size, presentation) or customers (geographical areas, distribution channel, life- style, population types). *Each one of these segments may be applied the same analytical instruments as the industry for estimating their degree of attractiveness. Other way of dividing an industry into smaller competitive environments → strategic groups: group of firms in an industry following the same or a similar strategy along the strategic dimensions (broad product line, geographical scope, product quality, pricing policy, cost structure, technology, customer care, after-sales service). The analysis of strategic groups may help to understand the dynamics of the competition between direct rivals better than when it´s performed for the industry as a whole. Through the selection of 2 significant dimensions, the groups could be shown on a map of strategic groups. It reveals the homogeneity of the dimensions chosen for the firms included in each one of the groups. This maps let firms included in each group know who their most direct rivals are, as in addition to being in the same industry, they compete in the same way. In turn, it permits isolating oneself from all the other competitors, for although they are in the same industry, they compete in a different way. *Diameter of the circle → collective involvement in the market of the firms pertaining to each strategic group. Each group has its own degree of attractiveness as it will have a different set of opportunities and threats, and different expectations in terms of performance. It needs to be considered whether a firm may move from one strategic group to another, and at what cost (permeability of groups). This will depend on the existence of mobility barriers (entering a new strategic group or leaving the group) that will make it difficult for firms in one group to change their way of competing across the strategic dimensions. When an industry with strategic groups is devoid of mobility and exit barriers, firms may easily move from groups performing less well to ones performing better, balancing out the competitive opportunities of all the firms → increasing the intensity of the rivalry in the industry as a whole. Otherwise, the firms in a group may be protected from the competition of other firms, which although operating in the same industry don´t compete in the same way because they are in a different strategic group.