PYQ-SM-CHAPTER 3

CHAPTER 3: THE EXTERNAL ASSESSMENT - PAST SEM QUESTIONS
PREPARED BY: WIRDA BINTI OSMAN (2010356463) –BMB5Bc

JAN 2012 – PART B (QUESTION 3)
(b) Discuss threat of entry affecting industry structure in the Porter’s Five-Forces Model. Give two (2) appropriate examples of companies or products faced with entry threat. (8M)

APRIL 2011 – PART B (QUESTION 3)
Based on an industry of your choice, discuss Porter’s 5-Forces Model. (20M)

OCT 2007 – PART B (QUESTION 4)
(a) Using Porter’s 5-forces model, evaluate the competitiveness of an airline company of your choice (choose either MAS or Air Asia as your reference company). (12M)
(b) Describe four (4) opportunities and four (4) threats faced by the airline company above. (8M)

APR 2007 – PART A (QUESTION 12)
Explain the components of Michael porter’s competitive forces model. Using the model illustrate the competitiveness of KBB. (12M)

The Five-Forces Model of Competition

According to Porter, the nature of competitiveness in a given industry can be viewed as a composite of five forces:
1. Rivalry among competing firms.
• Starting point to analyzing the industry.
• Usually the most powerful of the five competitive forces.
• Focus on competitive advantage of strategies over other firms.
• This describes the intensity of competition between existing firms in an industry.
• If entry to an industry is easy then competitive rivalry will likely to be high.
• If it is easy for customers to move to substitute products such as from coke to water, then again the rivalry will be high.
• Generally, competitive rivalry will be high if:
i- High number of competing firms
ii- Similar size of firms competing
iii- Similar capability of firms competing (similar strategies)
iv- Failing demand for the industry’s product
v- Failing product/service prices in the industry
vi- Consumers can switch brands easily
vii- Barriers to leaving the market is high
viii- Barriers to entering the market is low
ix- Fixed costs are high among firms
x- The product is perishable
xi- Rivals have excess capacity
xii- Consumer demand is falling
xiii- Rivals have excess inventory
xiv- Rivals sell similar products/services
xv- Mergers are common in the industry
xvi- It is costly to leave the industry hence they fight to just stay in (exit barriers)
xvii- Little differentiation between competitor’s products and services.
• High competitive generally earn low returns because the cost of competition is high.

2. Potential entry of new competitors.
• There is always the possibility that new firms may enter an industry.
• In theory, any firms should be able to enter and exit a market and if free entry and exit exist, and then profits always should be average.
• In reality, however, some industries possess characteristics that protect the high profit levels of firms currently in the market and make it difficult for additional firms to enter the market. These characteristics are barriers to entry.
• It is easy to enter an industry if there is:
i- Common technology
ii- Limited brand strength
iii- Access to distribution channels
iv- A low production scale threshold
• It is difficult to enter if there is:
i- Patented or proprietary know-how
ii- Difficulty in brand switching
iii- Restricted distribution channels
iv- A high production scale threshold
• It is easy to exit an industry if there are:
i- Salable assets
ii- Low exit costs
iii- Independent business units
• It is difficult to exit if there are
i- Specialized assets
ii- High exit costs
iii- Interrelated businesses
• Barriers to entry. Including :
i- Would government legislation prevent them or encourage them to enter the industry
ii- The need to gain economies of scale quickly
iii- Strong customer loyalty
iv- The lack of experience
v- Strong brand preferences
vi- Lack of adequate distribution channels
vii- Lack of access to raw materials
viii- Possession of patents
ix- Undesirable location
x- large capital requirements
• The threat of a new organization entering the industry is high when it is easy for an organization to enter the industry i.e. entry barriers are low.
• Higher quality, lower pricing and substantial marketing resources can overcome barriers.

3. Potential development of substitute products.
• Substitute products refer to products in other industries that meet the same/similar need.
• Threat of substitutes occur when there are alternative products that customers can purchase over your product that offer the same benefit for the same or less price.
• To an economist, a threat of substitutes exists when a products demand is affected by the price change of a substitute product.
• In many industries, firms are in close competition with producers of substitute products in other industries.
• E.g: Plastic container producers competing with glass, paperboard and aluminum producers.
• The presence of substitute products put a ceiling on the price that can be changed before consumer will switch to the substitute product.
• Price ceilings equate to profit ceilings and more intense competition among rivals.
• E.g: producers of eyeglasses and contact lenses. Face increasing competitive pressures from laser eye surgery. Producers of sugar face similar pressure from artificial sweeteners.
• Pressure increases when:
i- Prices of substitutes decrease
ii- Consumers switching costs decrease
• The competitive strength of substitute products is the best measured by the inroads into the market share those products obtain as well as those firms plans for increased capacity and market penetration.

4. Bargaining power of suppliers.

• Suppliers are also essential for the success of an organization.
• Suppliers supply the raw materials. Raw materials are needed to complete the finish product of the organization.
• This is how much pressure suppliers can place on a business.
• If one supplier has a large enough impact to affect a company’s margins and volume, then it holds substantial power.
• E.g: suppliers can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry’s profit. This describes supplier power.
• Bargaining power of suppliers is increased when there are:
i- Very few suppliers of a particular product
ii- There are no substitute
iii- Switching to another (competitive) product is very costly or the organization switching from one supplier to another.
iv- The product is extremely important to buyers-can’t do without it
v- The supplying industry has a higher profitability than the buying industry
• Firms may pursue a backward integration strategy to gain control or ownership of suppliers to reduce inventory and logistic costs.
• This strategy is especially effective when suppliers are unreliable, too costly or not capable of meeting a firm’s need on a consistent basis.
• Firms generally can negotiate more favorable terms with suppliers when backward integration is commonly used strategy among rival firms in an industry.
• However, in many industries, it is more economical to use outside suppliers of components parts than to self-manufacture the items.
• In more and more industries, sellers are forging strategic partnerships with select suppliers in effort to:
i- Reduce inventory and logistic cost (e.g: through just in time deliveries)
ii- Speed the availability of next-generation components
iii- Enhance the quality of the parts and components being supplied and reduce defect rates
iv- Squeeze out important cast savings for both themselves and their suppliers.

5. Bargaining power of consumers.
• The power of buyers is the impact that customers have on a producing industry.
• In general, when buyer power is strong, the relationship to the producing industry is near to what an economist terms a monopsony-a market in which there are many suppliers and one buyer.
• Under such market conditions, the buyer sets the price.
• In reality few pure monopsonies exist, but frequently there is some asymmetry between a producing industry and buyers.
• This is how much pressure customers can place on a business.
• If one customer has a large enough impact to affect a company’s margins and volumes, then the customer hold substantial power.
• Customers’ being concentrated or buying in volume affects intensity of competition.
• Rival firms may offer extended warranties or special services to gain customer loyalty whenever the bargaining power of consumers is substantial.
• Consumer power is higher where products are standard or undifferentiated. When this is the case, consumers often can negotiate selling price, warranty coverage and accessory package to a greater extent.
• The bargaining power of consumers can be the most important force affecting competitive advantage.
• Conditions where consumers gain bargaining power:
i- If buyers can inexpensively switch
ii- If buyers are particularly important
iii- If sellers are struggling in the face of falling consumer demand
iv- If buyers are informed about sellers’ products, prices and costs.
v- If buyers have discretion in whether and when they purchase the product.


APRIL 2011 – PART B (QUESTION 4)
(a) State the reasons why a firm needs to conduct an external audit. (5M)

APRIL 2009 – PART B (QUESTION 1)
(a) Why does a firm need to conduct an external audit? (5M)

OCT 2006 – PART B (QUESTION 3)
(a) State the purpose why a firm needs to conduct an external audit. (5M)

APRIL 2006 – PART B (QUESTION 4)
(a) What is the purpose of conducting an external audit?  (5M)

• External strategic management audit sometimes called environmental scanning or industry analysis.
• An external audit focuses on identifying and evaluating trends and events beyond the control of a single firm, such as increased foreign competition, population shift to Sunbelt, an aging society, consumer fear of travelling and stock market volatility.
• An external audit reveals key opportunities and threats confronting an organization so that managers can formulate strategies to take advantage of the opportunities and avoid or reduce the impact of threats.
• The purpose of an external audit is to develop a finite list of opportunities that could benefit a firm and threats that should be avoided.
• As the term finite suggests, the external audit is not aimed at developing an exhaustive list of every possible factor that could influence the business; rather, it is aimed at identifying key variables that offer actionable responses.
• Firms should be able to respond either offensively or defensively to the factors by formulating strategies that take advantage of external opportunities or minimize the impact of potential threats.


APRIL 2011 – PART B (QUESTION 4)
(b) Briefly discuss the following major external forces that affect organizations: (15M)
i- Economic
ii- Technological
iii- Competitive

OCT 2008 – PART A (QUESTION 1)
What external forces would affect the growth of food and beverage industry in Malaysia and ASEAN region in future?

OCT 2006 – PART B (QUESTION 3)
(b) State the purpose why a firm needs to conduct an external audit. (5M)
(c) Briefly discuss the following major external forces that affect organizations: (15M)
i- Economic
ii- Technological
iii- Competitive

APRIL 2006 – PART B (QUESTION 4)
(a) Discuss and describe the five (5) categories of the external forces. (15M)


External forces can be divided into five broad categories:
1. Economic forces

• Economic factors have a direct impact on the potential attractiveness of various strategies.
• For example:
(a) When interest rates rise, funds needed for capital expansion become costly or unavailable.
(b) When interest rates rise, discretionary income declines, and the demand for discretionary goods falls.
(c) When stock price increase, the desirability of equity as a source of capital for market development increases.
(d) When the market rises, consumer and business wealth expands.
• An economic variable of significant importance in strategic planning is gross domestic product (GDP), especially across countries.
• For example- key economic variables to be monitored;
(a) Import/export factor
(b) Price fluctuation
(c) Tax rates
(d) Level of dispose income
(e) Propensity of people to spend
(f) Interest rates
(g) Inflation rates
(h) Fiscal policies
(i) Monetary policies
(j) Stock market trends
• Trends in the dollar’s value have significant an unequal effects on companies in different industries and in different locations
• For example; the pharmaceutical, tourism, entertainment, motor vehicles, aerospace, and forest products industries benefit greatly when the dollar falls against the yen and euro.
• Unemployment rates increase.
• Advantages of a weak dollar for domestic firms;
(a) Leads to more exports
(b) Leads to lower import
(c) Combats deflation by pushing up prices of import
(d) Can contribute to rise in stock prices in short run
(e) Stimulates worldwide economic recession
(f) Encourages foreign countries to lower interest rates
(g) Encourages firms to globalize
• Disadvantages of a weak dollar for domestic firms;
(a) Can lead to inflation
(b) Can cause rise in oil prices
(c) Can weaken government
(d) Makes it unattractive for country to travel globally
(e) Can contribute to fall in stock prices in long run.


2. Social, cultural, demographic and natural environment forces
• Social, cultural, demographic and natural environmental changes have a major impact on virtually all products, services, markets and customers.
• Small, large, for profit and nonprofit organizations in all industries are being staggered and challenged by the opportunities and threats arising from changes in social, cultural, demographic and environmental variables.
• US facts;
(a) Aging population
(b) Less white
(c) Widening gap between rich and poor
(d) 2025=18.5% population> 65 years
(e) 2075= no ethnic or racial majority
• Trends;
(a) There are now more American households with people living alone or with unrelated people than there are households consisting of married couples with children.
• Social, cultural, demographic and environmental trends are shaping the way American live, work, produce and consume.
• New trends are creating a different type of consumer and consequently, a need for different products, different services and different strategies.
(b) The Aging Americans population affects the strategic orientation of nearly  all organization
- The trend toward an older America is good news for restaurants, hotels, airlines, cruise lines, tours, resorts, theme parks, luxury products and services, recreational vehicles, home builders, furniture producers, computer manufacturers, travel services, pharmaceutical firms, automakers, and funeral homes.
-  Older Americans are especially interested in health care, financial services, travel, crime prevention and leisure.
- For example; Apartment complexes for the elderly with one meal a day, transportation and utilities included in the rent, have increased nationwide.
- Called life care facilities.
• Key social, cultural, demographic and natural environment variables;
(a) Childbearing
(b) Number of marriages
(c) Number of divorces
(d) Pollution control
(e) Social programs
(f) Air pollution
(g) Government regulation
(h) Lifestyles
(i) Attitudes toward work
(j) Social security programs

3. Political, governmental and legal forces
• Federal, state, local and foreign governments are major regulators, deregulators, subsidizers, employers and customers of organization
• Political, governmental and legal factors therefore can represent key opportunities or threats for both small and large organizations.
• For industries and firms that depend heavily on government contracts or subsidies, political forecast can be the most important part of external audit.
• Key opportunities & threats; Changes in patent laws, antitrust legislation, tax rates and lobbying activities can affect firms significantly.
• The increasing global interdependence among economies, markets, governments and organizations makes it imperative that firms consider the possible impact of political variables on the formulation and implementation of competitive strategies.
• Local, state and federal laws; regulatory agencies and special interest groups can have a major impact on the strategies of small, large, for profit and nonprofit organizations.
• Many companies have altered or abandoned strategies in the past because of political or governmental actions.
• Protectionist policies
• Government taking equity stakes in companies.
• Some political, governmental and legal variables;
(a) Government regulation or deregulations
(b) Changes in tax laws
(c) Special tariffs
(d) Political action committees
(e) Voter participation rates
(f) Import-export regulation
(g) Lobbying activities
(h) Size of government budgets
(i) Local, state and national elections
(j) Environmental protection laws.

4. Technological forces
• Major impact – Internet
-the internet has changed the very nature of opportunities and threats by altering the life cycles of products, increasing the speed of distribution, creating new products and services, erasing limitations of traditional geographic markets and changing the historical trade-off between production standardization and flexibility.
-the internet is altering economies of scale, changing entry barriers and redefining the relationship between industries and various suppliers, creditors, customers and competitors.
• Significance of IT – to effectively capitalize on e-commerce, a number of organizations are establishing two new positions in their firms; CIO and CTO.
• This trend reflects the growing importance of information technology (IT) in strategic management.
• Chief Information Officer & Chief Technology Officer:
• A CIO and CTO work together to ensure that information needed.
• These individuals are responsible for developing, maintaining and updating a company’s information database.
• The CIO is more a manager, managing the firm’s relationship with stakeholders; the CTO is more technician, focusing on technical issues such as data acquisition, data processing, decision support systems and software and hardware acquisition.
• Technology forces represent major opportunities and threats that must be considered in formulating strategies.
• Technology advancements;
(a) Can dramatically affect organization’s products, services, markets, suppliers, distributors, competitors, customers, manufacturing process, marketing practices and competitive position.
(b) Can create new markets, result in a proliferation of new and improved products, change the relative competitive cost positions in an industry and render existing products and services obsolete.
(c) Can create new competitive advantages that are more powerful than existing advantages.
• Technological changes can reduce or eliminate cost barriers between businesses, create shorter production runs, create shortages in technical skills and result in changing values and expectations of employees, managers and customers.
• Essential for nearly every strategic decision
• Examples of the impact of wireless technology
(a) Airlines- many airlines now offer wireless technology in flight
(b) Automotive – vehicles are becoming wireless
(c) Banking – visa send text message alerts after unusual transactions
(d) Energy – smart meters now provide power on demand in your home or business.
(e) Publishing – eBooks are increasingly available.

5. Competitive forces
• Collecting and evaluating information on competitors is essential for successful strategies formulation
• Identifying major competitors is always easy because many firms have divisions that compete in different industries.
• Many multidivisional firms do not provide sales and profit information and a divisional basis for competitive reasons.
• Also, privately held firms do not publish any financial or marketing information.
• Identify rival firms; strengths, weaknesses, capabilities, opportunities, threats, objectives and strategies.
• Competition in virtually all industries can be described as intense. Sometimes cutthroat.
• Key questions concerning competitors:
(a) Their strength
(b) Their weaknesses
(c) Their objectives and strategies
(d) Their responses to external variables
(e) Their vulnerability to our alternative strategies
(f) Our vulnerability to strategic counterattack
(g) Our product/service positioning
(h) Entry and exit of firms in the industry
(i) Key factors for our current position in industry
(j) Sales/ profit ranking of competitors over time
(k) Nature of supplier and distributor relationship
(l) The threat of substitute product/services
• 7 characteristics of most competitive firms;
(1) Market share matters
(2) Understanding what business you are in
(3) Broke or not, fix it
(4) Innovate or evaporate
(5) Acquisition is essential to growth
(6) People make a difference
(7) No substitute for quality
• Using;
(a) Competitive intelligence
• A systematic and ethical process for gathering and analyzing information about the competition’s activities and general business trends to further a business’s own goals.
• Sources of competitive intelligence; internet, employees, managers, suppliers, distributors, customers, credits, consultants, trade journals, want ads, newspaper articles, government filings and competitors.
• Objectives of competitive intelligence: provide a general understanding of industry and competitors, identify areas where competitors are vulnerable and assess impact of actions on competitors, and identify potential moves that a competitor might make.
(b) Market commonality
• The number and significance of markets that a firm competes in with rivals.
(c) Resource similarity
-Extent to which the type and amount of a firm’s internal resources are comparable to a rival.


OCT 2009 –PART B (QUESTION 4)
Explain the process of performing external and internal audit. (20M)

External Audit
- The process of performing an external audit must involve as many managers and employees as possible.
- Involvement in the strategic management process can lead to understanding and commitment from organizational members.
- Individuals appreciate having the opportunity to contribute ideas and to gain a better understanding of their firms industry, competitors and markets.

1. Gather competitive intelligence
- To perform external audit, a company first must gather competitive intelligence and information about economic, social, cultural, demographic, environmental, political, governmental, legal and technological trends.
- Individuals can be asked to monitor various sources of information, such as key magazines, trade journals and news papers.
- These persons can submit periodic scanning reports to a committee of managers charged with performing the external audit.
- This approach provides a continuous stream of timely strategic information and involves many individuals in the external-audit process.
- The internet provides another source for gathering strategic information, as do corporate, university and public libraries.
- Suppliers, distributors, salespersons, customers and competitors represent other sources of vital information.

2. Assimilate information
- Once information is gathered, it should be assimilated and evaluated.
- A meeting or series of meetings of managers is needed to collectively identify the most important opportunities and threats facing the firm.
- These key external factors should be listed on flip carts or a chalk-board.
- A prioritized list of these factors could be obtained by requesting that all managers rank the factors identified, from 1 for the most important opportunities/threat to 20 for the least important opportunity and threat.
- These key external factors can vary over time and by industry.

3. Evaluate
- Relationships with suppliers or distributors are often a critical success factor.
- Other variables commonly used include market share, breadth of competing products, world economies, foreign affiliates, proprietary and key account advantages, price competitiveness, technological advancements, population shifts, interest rates and pollution abatement.
- Freund emphasized that these key external factors should be
(1) Important to achieving long term and annual objectives
(2) Measurable
(3) Applicable to all competing firms
(4) Hierarchical in the sense that some will pertain to the overall company and others will be more narrowly focused on functional or divisional areas..
- A final list of the most important key external factors should be communicated and distributed widely in the organization.
- Both opportunities and threats can be key external factors.

Internal Audit
- The process of performing an internal audit closely parallels the process of performing an external audit.
- Representative managers and employees from throughout the firm need to be involved in determining a firms strength and weaknesses
- The internal audit requires gathering and assimilating information about the firm’s management, marketing, finance/accounting, production/operations, research and development (R&D) and management information system operations.
- Compared to external audit, the process of performing an internal audit provides more opportunity for participants to understand how their jobs, departments and divisions fit into the whole organization.
- This is great benefit because managers and employees perform better when they understand how their work affects others areas and activities of the firm.
- For example; when marketing and manufacturing managers jointly discuss issues related to internal strength and weaknesses, they gain a better appreciation of the issues, problems, concerns and needs of all the functional areas.
- In organization that do not use strategic management, marketing, finance, and manufacturing managers often do not interact with each other in significant ways.
- Performing an internal audit thus is an excellent vehicle or forum for improving the process of communication in the organization.
- Communication may be the most important word in management.

1. Gathering
2. Assimilating
3. Evaluating

- Performing an internal audit requires gathering, assimilating and evaluating information about the firms operations.
- “Managers and employees from all areas provide information”
- Critical success factors consisting of both strength and weaknesses
- “The development of conclusions; a team manager then selects 10 to 15 key organizational strength and weaknesses to focus on.”
- Strategic management is a highly interactive process that requires effective coordination among management, marketing, finance/accounting, production/operations, R&D, and management information systems managers.
- Although the strategic management process is overseen by strategist, success requires that managers and employees from all functional areas work together to provide ideas and information
- Financial managers for example may need to restrict the number of feasible options available to operations managers or R&D managers may develop products for which marketing managers need to set higher objectives.
- A key to organizational success is effective coordination and understanding among managers from all functional business areas.
- Through involvement in performing an internal strategic management audit, managers from different departments and division of the firm come to understand the nature and effect of decisions in other functional business areas in their firm
- Knowledge of these relationships is critical for effectively establishing objectives and strategies.
- A failure to recognize and understand relationships among the functional areas of business can be detrimental to strategic management and the number of those relationships that must be managed increases dramatically with a firm’s size, diversity, geographic dispersion and the number of products or services offered.
- Governmental and nonprofit enterprises traditionally have not placed sufficient emphasis on relationship among the business functions.
- Some firms place too great an emphasis on one function at the expense of others.
- Ansoff explain;
- During the fifty years, successful firms focused their energies on optimizing the performance of one of the principal functions: productions/operations, R&D, o marketing. Today due to the growing complexity and dynamism of the environment, success increasingly depends on a judicious combination of several functional influences. This transition from a single function focus to a multifunction focus is essential for successful strategic management.
- Financial ratio analysis;
- Exemplifies the complexity of relationships among the functional areas of business
- A declining ROI or profit margin ratio could be the result of ineffective marketing, poor management policies, R&D errors or weak MIS.
- The effectiveness of strategy formulation, implementation and evaluation activities hinges upon a clear understanding of how major business functions affect one another
- For strategies to success, a coordinated effort among all the functional areas of business is needed.




















OCT 2006 – PART B (QUESTION 4)
Write notes on the following:
(a) Industrial Organizational View. (5M)
JAN 2012 – PART B (QUESTION 3)
(a) Distinguish Resource-based view (RBV) from Industrial Organizational (IO) view. (12M)

Industrial Organizational View (IOV)
• Approach to competitive advantage advocates that external industry factors are more important than internal factors in a firm achieving competitive advantage.
• Organizational performance will be primarily determined by industry forces.
• Porter’s Five Forces Model is an example of the I/O perspectives which focuses on analyzing external forces and industries variables as a basis for getting and keeping competitive advantage.
• According to I/O advocates, competitive advantage is determined largely by competitive positioning within an industry.
• Managing strategically from the I/O perspective entails firms striving to compete in attractive industries, avoiding weak or faltering industries and gaining a full understanding of key external factor relationship within that attractive industry.
• I/O research provides important contributions to our understanding of how to gain competitive advantage.
• I/O theorists contend that external factors in general and the industry in which a firm choose to compete has a stronger influence on the firm performance than do the internal functional decision managers make in marketing, finance and the like.
• Firm performance, they contend, is primarily based more on industry properties such as economies of scale, barriers to market entry, product differentiation, the economy and level of competitiveness than on internal resources, capabilities, structure and operations.
• The global economic recession’s impact on both strong and weak firms has added credence of late to the notion that external forces are more important than internal.
• The I/O view has enhanced our understanding of strategic management.
• However, it is not a question of whether external or internal factors are more important in gaining and maintaining competitive advantage.
• Effective integration and understanding of both external and internal factors is the key to securing and keeping a competitive advantage.


Resource-Based View (RBV)
• An approach to competitive advantage contends that internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage.
• In contrast to I/O theory, proponents of the RBV view contend that organizational performance will primarily be determined by internal resources that can be grouped into three all encompassing categories: physical resources, human resources, and organizational resources.
• Physical resources include all plant and equipment, location, technology, raw materials, machines.
• Human resources include all employees, training, experience, intelligence, knowledge, skills abilities.
• Organizational resources include firm structure, planning processes, information systems, patents, trademarks, copyrights, databases.
• RBV theory asserts that resources are actually helps a firm exploit opportunities and neutralize threats.
• The basic premise of the RBV is that the mix, type, amount and nature of firm’s internal resources should be considered first and foremost in devising strategies that can lead to sustainable competitive advantage.
• Managing strategically according to the RBV involves developing and exploiting a firm’s unique resources and capabilities and continually maintaining and strengthening those resources.
• The theory asserts that it is advantageous for a firm to pursue a strategy that is not currently being implemented by any competing firm.
• According to RBV theorists, when other firms are unable to duplicate a particular strategy, then the focal firm has a sustainable competitive advantage.
• For resources to be valuable, it must be either rare, hard to imitate or not easily substitutable.
• Often called “empirical indicator”, these 3 characteristics of resources enable a firm to implement strategies that improve its efficiency and effectiveness and leads to sustainable competitive advantage.
• The more a resource is rare, non-imitable and non-substitutable, the stronger a firm’s competitive advantage will be and the longer it will last.
• Rare resources  are resources that other competing firms do not possess
• If many firms have the same resources, then those firms will likely implement similar strategies, thus giving no one firm a sustainable competitive advantage.
• This is not to say that resources that are common are not valuable; they do indeed aid the firm in its chance for economic prosperity.
• However, to sustain a competitive advantage, it is more advantages if the resources are rare.
• It is also important that these same resources be difficult to imitate.
• RBV theorists say, if firms cannot easily gain the resources, then those resources will lead to a competitive advantage more so than resources easily imitate.
• Even if a firm employs resources that are rare, a sustainable competitive advantage may be achieved only if other firms cannot easily obtain these resources.
• The third empirical indicator that can make resources a source of competitive advantage is substitutability.
• Borrowing from Porter’s Five Forces Model, to the degree that there are no substitutes, a firm will be able to sustain its competitive advantage.
• However, even if competing firm cannot perfectly imitate a firm’s resource, it can still obtain a sustainable competitive advantage of it’s by obtaining resources substitutes.
• The RBV has continued to grow in popularity and continues to seek a better understanding of the relationship between resources and sustained competitive advantage in strategic management.