Theoretical Background

To be familiar with the business environment is crucial for every corporation, since the
environment surrounding them is basically what gives their means to survive as well as the
threats for their existence. Therefore this chapter will elaborate on the importance of knowing the
surrounding business environment, additionally providing frameworks which makes the analysis
of the environment easier.
First of all, why is it so important to analyse the business environment for a corporation?
Well, it offers insightful information about variables that may affect their performance,
operations, and general success. To have a better understanding, it is beneficial to first map out
the different layers of the economy.
The first layer is the Macro Environment, which is accountable for such environmental
factors that has an impact on essentially all of the organisations more or less. These factors are
no other than the political, economic, social, technological, environmental and legal factors,
PESTEL for short. The PESTEL framework is useful to find key drivers of change, thus takes
into account how plans have to be revised in response to the various ways that the business
environment might change.
The second layer of the business environment is the Industry or the Sector. This group
consists of companies that provide identical goods or services. In this case, Porter’s Five Forces
Framework is very helpful in figuring out which industries or sectors are appealing and whether
there are any external challenges to the current group of competitors. It forms the framework of
all industries, largely determining the standards of competition and the underlying drivers of
industrial profitability. The Five Forces Framework represents the challenges created by intense
rivalry, powerful suppliers, strong customers, possible new competitors, and replacement goods.
Porter’s idea was that, in an industry where the threat of entry, the threat of substitutes, the power
of buyers and suppliers and the extent of rivalry is high, then the industry is simply not attractive
to compete in, due to high pressure and low return on investment.
The Competitors and Markets are the last layer surrounding the organisation. Most
industries or sectors will contain a wide variety of organisations, each with unique traits and
competing interests.
Some of them will be closer to a specific organisation, while others will be further away. To
identify the surrounding competitors it is handy to use the concept of Strategic Groups.
This tool helps organisations to map out and categorise their rivals, by creating different strategic
groups. Competitors within one group have similar strategic characteristics, following similar
strategies or competing on similar bases.
Once the business environment is clear for the organisations, it is time for them to figure
out how they can achieve competitive advantage over their rivals. To further elaborate on how a
business can try and gain edge over their competitors it is worth to have look at Porter’s Generic
Strategies. Porter described four strategies for achieving competitive advantage, based on the
market that the business is operating in, wether it can be mass or a niche market. The four
strategies he represented, were Cost Leadership, Differentiation, Cost Focus and Differentiation
Focus. He further added that, a company aiming for competitive advantage is required to make a
choice, about the type of advantage they are going for as well as the market scope within which
the organisation will attain it. The Cost Leadership and Differentiation strategies are for
companies, which are targeting mass markets, while the Focus strategies are for firms, operating
in niche markets.
When a business is winning market share by appealing to cost-conscious or price-
sensitive customers, it is called a Cost Leadership. To achieve it, firstly, firms have to have a
high asset utilisation, which is mainly taking advantage of economies of scale by producing high
volumes of output. Secondly organisations have to achieve low direct and indirect operating
costs, by producing fixed components, not personalised and by building up a cost-conscious
culture with a continuous search for cost reductions. Last but not least, companies have to take
control over the value chain to ensure the lowest possible costs from suppliers.
Differentiation is a strategy which, adds value by creating a product that clearly stands
out from the rivals, thus it enables firms to charge premium prices. This approach works well
when the market is competitive or concentrated, the target customer segment is not price-
sensitive, the customers have very specific needs that may be underserved, and the company has
special resources and capabilities that allow it to meet these needs in ways that are hard for
competitors to match.
 The Differentiation Focus and Cost Focus strategies are, in most of the cases, appropriate
for smaller businesses, targeting a niche segment of the market. It should be also noted that,
these Focus strategies should target such audiences, that are less vulnerable to substitutes or
markets where the competition fails to earn above-average return on investment.

Resource-Based View of Firms

This following paragraph will explore more thoroughly what leads to differential firm
performance. To be able to answer the always burning question, why does one firm out perform
its’ competitors, it is recommended to have a sight at the Resource-Based View of Firms.
First of all, companies can rely on either tangible or intangible resources. Tangible
resources refer to physical things, such as, land, building, equipment or capital. Although these
resources can provide a competitive edge over rivals, it is only short-term, since tangible assets
can be bought on an open market. Intangible assets on the other hand has no physical presence,
such as skills, capabilities, know-how or the processes expertise. Unlike tangible assets, these
resources give companies a long-term advantage, due to the amount of time and money they
require to be developed, as well as the rarity of them on the open market.
The Resource-Based View is also based on two key assumptions, firstly, resources are
heterogeneous and secondly, they are immobile. Heterogeneity in this manner, means that,
possessed resources differ from company to company and even firms with the same external
forces can have different resources, which can eventually lead to differential performances. The
assumption of resources being immobile, refers to the difficulty of taking resources from one
firm to another, in short term. In other words, immobility means that competitors can not
replicate rivals’ resources in the short term.
Additionally according to the Resource-Based View, companies must have very
characteristic resources, in order to obtain competitive advantage. Resources must be valuable,
rare, inimitable and organisational or often referred to as non-substitutional. Valuable resources
should reduce costs, while increase differentiation, hence increase value to the customers.
Resources should not only be rare, meaning that it should not be available to competitors, it
should be also inimitable, meaning that it should be really difficult and costly for rivals to
implement.
Last but not least, resources should be non-substitutional, or often referred to as organisational,
which implicates that they should not be available to replace those resources with any other
option or at least it should be costly for rivals to find a substitutional resource. All of these
factors are needed for a firm to drive its’ competitive advantage.
The Resource-Based View is particularly relevant within the automotive sector, since it is
a highly competitive and technologically driven industry. Similarly to the RBV theory,
automakers with cutting-edge technologies, in-house engine designs, electric vehicle technology,
or autonomous driving systems, have higher chance to gain competitive advantage over their
rivals.
Strong brand reputation is also a key resource within this industry, since people prefer to buy
vehicles from quality and reliable perceived brands. In addition, prestigious reputation allow
firms to command higher prices for their products, while it also helps building up a loyal
customer base. Efficient distribution networks and a high standard relationship with suppliers
and dealers are one of the most important contributors to achieving and obtaining competitive
advantage. While efficient distribution networks allow automakers to attain further cost
reductions, well established relationship with dealers gives them a competitive edge by
expanding its’ reach and strengthening customer service. Last but not least, as it can be seen in
the car manufacturing industry, keeping up the pace with regulatory compliance and safety
standards is inevitable in order to obtain competitive advantage.

Institutional Theory of Firms

The Institutional Theory is built on the assumption, that companies are influenced by
other organisations and institutions. One of the main concepts of the Institutional Theory is
called isomorphism, which in this matter, refers to that, companies become the same over time,
by adapting the same strategy. Isomorphism can mainly occur for three different reasons, firstly
companies can copy a successful competitor’s strategy, secondly organisations become more
professional over time and start to follow specific guidelines to an industry, and lastly, it can
occur when companies have to follow newly adopted laws or regulations.
 This theory is especially useful within the automotive industry, since automakers has to
cope with a lot of the above mentioned external factors. First of all, every participant within this
industry are a subject to numerous regulations and standards related to safety, emissions, and
manufacturing processes. Additionally, the institutional pressure related to environmental and
social responsibility, has never been greater before in the auto industry. As the Institutional
Theory stated, industry norms and practices also shape the organisational behaviour, which is
very present in the automobile sector, since it has been always had established norms regarding
the design, manufacturing processes, and marketing strategies. Furthermore, automakers have to
align their portfolio to consumer expectations, which are shaped by the current societal norms
and values.
Even though the theory suggests that companies become the same overtime, they still
often have different organisational responses to these factors, just like the way BMW is
responding to the combustion engine phase out, in contrast to Mercedes. The reason behind it is
that, in most cases profit maximisation and the external requirements are not really compatible.
This leads to continuous fighting between stakeholders in- and outside the company, to
determine what strategy would be the most appropriate.
Within every company, stakeholders differ as well as the power they hold, therefore the
Stakeholder Mapping is a great tool to help analyse these relationships between the stakeholders
and their influence on the organisation. The Stakeholder Mapping is a matrix based on the level
of interest and the power each stakeholder has. It divides stakeholders into four different groups.
The first group has low interest and power in relation with the company, therefore they require
the least effort to be pleased. The second group has high interest, although they do not have
much power over the processes, it is still recommended to keep them informed. The third group
in this matrix have low interest towards the company, however they hold a lot of power,
therefore the third section have to be kept satisfied. The last group includes the key players
among the stakeholders, both their interest and power towards the organisation is high,
consequently their influence on the operation will be undoubtedly visible.