Current Challenges in Management

PESTEL: A Framework for Considering Challenges

The PESTEL framework highlights six critical factors for management to consider when approaching the general business environment.

Learning Objectives

Assess opportunities and threats within the context of external factors using the PESTEL framework

Key Takeaways

Key Points

  • Politics play a role in business, as there is a balance between free markets and systems of control.
  • Economic factors are metrics which measure and assess the health of a given economic region or environment.
  • Social factors, or demographic factors, assess the mentality of the individuals/consumers within a given market.
  • Recognizing the potential technologies available to optimize internal efficiency, or to avoid letting a product or service become technologically obsolete, is a large challenge for management.
  • Consumers and governments both penalize companies who have a large adverse affect on the environment (or reward those who have a positive impact ).
  • Understanding the varying laws and regulations in a given region of operation is critical to avoiding unnecessary legal costs.

Key Terms

  • anti-trust: A set of laws that ensures no company dominates an industry (i.e. creates a monopoly).
  • macro environment: As pertaining to the macro-environment, these factors are indicative of the entire business environment as a whole.
  • gross domestic product: A fiscal measure of an entire region’s economic production over a specific time frame.

Organizations are faced with a variety of external factors that provide potential opportunities and threats for short-term and long-term success in any given environment. Encompassing a macro-environmental perspective, these factors can be effectively summarized with the acronym PESTEL.

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PESTEL Analysis Diagram: This chart illustrates the PESTEL factors an organization faces.

PESTEL stands for the political, economic, social, technological, environmental, and legal influences a businesses encounters as it pursues its objectives. Analyzing the entirety of the macro-environment is an extensive and complex task, but understanding the framework of basic influences allows for an organized and strategic approach to isolating each opportunity or threat. It is common to conduct a PESTEL assessment before any serious decisions are made or any large projects undertaken. Understanding each of these influencing factors is the first step to addressing them properly.

Political

Politics play a role in business, as there is a balance between free markets and systems of control. Political factors affecting business specifically revolve around taxes, import and export tariffs, environmental and labor laws, potential subsidies, and the stability of a given operational region. As global economics now supersede domestic economics for many businesses, companies must consider a number of opportunities and threats when expanding into new regions or identifying optimal areas for production, sales, or corporate headquarters.

Economic

Economic factors are metrics that measure and assess the health of a given economic microcosm within the entire global economy. These factors incorporate exchange rates, gross domestic product (GDP), consumer purchasing indices, interest rates, inflation, and a number of other indicators of economic health or direction. These indicators are critical to management, as they can reveal a good time to borrow, as well as whether an economy will be friendly to an industry where businesses fluctuate substantially with GDP or spending power, etc.

Social

Social factors could loosely be defined as a demographic analysis, where specific groups display preferences or tendencies that can be leveraged or that can threaten a given incumbent. For example, in the United States, consumers are becoming more health-conscious. This trend affords the food industry opportunities to create products that meet this social desire; as a result, candy manufacturers may want want to consider diversification. The social movement of living “green” is another example of this kind of macro-environmental opportunity or potential threat.

Technological

Technology plays a larger and larger role each year in business and will continue to do so as research and development drive new innovations. Recognizing the potential technologies available to optimize internal efficiency is a powerful asset in management. Technology also presents a number of threats, as CD-player manufacturers and Blockbuster Video can attest. These companies were hurt by “disruptive innovations” such as the MP3 player and Netflix. Keeping pace with technology and adapting accordingly are important strategies to sidestep threats and embrace opportunities.

Environmental

The impact of business upon the environment is a growing concern, and companies must consider both the social and political segments of PESTEL in conjunction with environmental factors. Consumers and governments both penalize companies that adversely affect the environment. Governments levy enormous fines upon companies that pollute beyond given specifications, and consumers are more than willing to switch brands if they perceive that a business is ignoring its environmental responsibilities. The environment can also be a source of benefit to a company, such as running water for a hydro-power plant.

Legal

The last factor in PESTEL concerns legal elements, which can also be tied to the political framework. Legal issues such as affirmative action, patent infringements (a recent example being Apple vs. Samsung), antitrust laws (see Microsoft), health regulations, and safety regulations can all significantly affect a company that does not act responsibly. Understanding this legal landscape is important for businesses that want to avoid legal pitfalls and remain within the confines of established regulations.

The Challenge of Globalization

Globalization is the international integration of intercultural ideas, perspectives, products/services, culture, and technology.

Learning Objectives

Assess the evolution of globalization in the business world and the challenges this has created

Key Takeaways

Key Points

  • Globalization is an influential modern topic that highlights the growing interdependence between different countries worldwide, necessitating managers to appropriately incorporate this trend within their strategies.
  • The speed of modern globalization is often attributed to technological developments in communication and transportation, tasking managers with appropriately leveraging these technologies internally.
  • Multinational companies cumulatively employ nearly half of the world’s population, creating a need for managers with a strong international awareness.
  • Managers must understand that some processes can be performed universally and internationally, while others must be done in a localized fashion to adhere to each specific region’s tastes and customs.
  • Critics of globalization cite the way in which it motivates an international culture over established domestic ones, as well as the negative environmental effects that result from business expansion.
  • Being mindful of the potential opportunities in a global economy, along with knowledge of how to localize and sidestep the negatives in an international marketplace, can capture large value for effective managers.

Key Terms

  • Localizing: The act of altering a product or service to better acclimate to a local environment.
  • Intercultural: Representative of many different cultures simultaneously.
  • Multinational Enterprises: Businesses that operate in more than one country.

Globalization is a hot topic in the business world today, garnering enormous attention as imports and exports continue to rise with companies expanding across the global marketplace. Understanding the basic overview of the global economy underlines highly relevant managerial and business level applications that provide useful insights to modern-day managers.

In general terms, globalization is the international integration of intercultural ideas, perspectives, products/services, culture, and technology. This has resulted in large scale interdependence between countries, as specialization (arguably the root cause of globalization) allows for specific regions to leverage their natural resources and abilities to efficiently produce specific products/services with which to trade for another country’s specialization. This allows for a higher standard of living across the globe through higher efficiency, lower costs, better quality, and a more innovative and dynamic workforce.

Growth of Globalization

The ease of modern globalization is often attributed to rapid technological developments in transportation and communication. These form the central system of international exchange, allowing businesses to create meaningful relationships worldwide with minimal time investment and costs. Management is tasked with ensuring these resources are available to employees and properly leveraged to optimize the geographic reach of a business’s operations. This has led to the existence of many multinational enterprises (MNEs), who argue that survival in the newly globalized economy requires sourcing of raw materials, services, production, and labor.

From a managerial perspective, the global workplace implies an enormous amount of diversity management. Estimates of the world labor pool in 2005 noted that multinational companies employed a stunning 3 billion workers cumulatively, which is nearly half of the entire world population. As a manager, this means developing a globally aware perspective that lends itself well to the specific geographic needs, values, and customs in which the business operates. Developing this global skill set is a powerful managerial skill.

Challenges of Globalization

Managers should also be aware of the best way to approach global demographics from a business to consumer perspective, taking an international product or service and localizing it successfully. This is a significant challenge, necessitating consideration for different tastes and branding strategies during the implementation process. This chart illustrates the process of moving from an international product to a localized product step by step, making note of the element of production that can be universally applied compared to those that need a localized touch.

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Globalization Process: This chart illustrates the complementary localizing and internationalizing responsibilities of a globalizing organization. The organization must place an international focus on product design, development, and QA to ensure its broad relevance while also localizing marketing to tailor its appeal to individual markets.

Managers must also be particularly aware of the current criticisms of a highly global society, particularly as it pertains to ethical and environmental considerations. A global economy is, in many ways, enforcing a global culture. This global culture is often criticized for taking the place of previously established domestic cultures (and motivating consumerism).

As a result, managers should carefully consider how to best localize products to retain cultural identity in the regions they operate. Environmental concerns are of large importance as well, as the constant energy utilization required for this interchange pollutes the environment and uses high quantities of valuable energy-creating resources. Minimizing the damage done to the environment, and offsetting it as best as possible through philanthropic giving, is not only a wise marketing move but also a critical ethical consideration.

Conclusion

Combining these points, the globalized society presents enormous opportunity for businesses. Intercultural marketplaces allow for differing demographics, larger market potential, a more diverse customer base (and therefore more diverse product offering) and a highly valuable human resource potential. On the other end of the bargain, managers are tasked with localizing products and services effectively in a way that minimizes the adverse cultural and environmental effects caused by this rapid global expansion to maintain an ethical operation.

The Challenge of Ethics and Governance

Ethics is at the core of corporate governance, and management must reflect accountability for their actions on a global community scale.

Learning Objectives

Explain the role of management in setting strategic governance policies that conform to ethical and legal standards

Key Takeaways

Key Points

  • Business itself cannot be ethical: only the managers and corporate strategists can implement ethics within the framework of the business strategy.
  • Corporate ethics and shareholder desires for profitability are not always aligned, and it is the responsibility of executive management to ensure ethics supersede profitability.
  • In its simplest form, corporate ethics is a legal matter. Abiding by laws protecting workers’ rights and appropriate compensation is a top priority for management.
  • Corporate governance and ethics become more difficult with the indirect implications of particular practices, making it important to assess the way in which certain operations may adversely affect the community at large.
  • Managers are the primary decision makers, and therefore must hold themselves accountable for the way in which a business operates and affects stakeholders, shareholders, employees, and the community at large.

Key Terms

  • profitability: The capacity to generate capital.
  • accountability: Individuals’ responsibility for their own work and acceptance of the repercussions of their actions.

Accountability

First and foremost in corporate governance is the strict adherence to business ethics on a professional level. The figure highlights the primary responsibilities of corporate managers; the upper left corner—accountability—is of particular significance. Understanding the rules and regulations in place, along with societal and personal expectations of ethical actions, is an absolutely critical and fundamental concern for all managers. The complexities and responsibilities of running a business and managing employees is the first priority for managers, as it holds the highest repercussions, both personal and fiscal, for all parties involved.

Economist Milton Friedman makes an insightful observation when he states “…the only entities who can have responsibilities are individuals…A business cannot have responsibilities.” Though this sounds like common sense, it is a fact often overlooked that the only parties capable of acting ethically are those in charge. Furthermore, ethics often contrasts with the basic premise of capitalism and the demands of shareholders: profitability. Therefore, the most difficult decisions in corporate governance—those at the ethical level—must be made through the more complex assessment of societal, corporate, and personal values.

Legal Foundations

At its most basic, ethical behavior can first be derived via the laws, rules, and regulations of the country in which a business operates. In the United States, workers are imbued with very specific rights regarding the risks they take, the hours they work, the breaks they deserve, and the benefits they are provided. Managers are the responsible parties in ensuring these are delivered to the employees in an equitable and legal way. When working over 40 hours a week, hourly employees are entitled to overtime pay. When working long shifts, employees are entitled to breaks. When working in dangerous conditions, employees are entitled to protective gear and training.

At their core, these regulations approach the fundamental dissonance alluded to above: profit-maximizing behavior as it contrasts with non-economic concerns. This dissonance is exacerbated by the global economy, which sees businesses operating within communities towards which they have no dependence or direct sensitivity. As a result, to ask the question, “What does this practice mean for the people in the area in which we operate?” is crucial in ensuring adherence to a community-first action plan.

The 2008 Financial Collapse

Complexities begin to arise as the the ethical implications within an economic system become more subtle. The 2008 financial collapse is a wonderful yet terrifying example of exactly what can go wrong and why corporate governance and ethics is of such importance to both a business and the society in which it operates. Leading up to the mortgage-backed security fallout of 2008, banks and investors began to prioritize profitability over ethics. Banks eliminated certain rules and regulations (though the government did as well), allowing employees to sell mortgages that were unlikely to be repaid. Following this, upper management deemed it fit to package these risky securities into bundles and sell them as safe investments (though they were in fact risky derivatives), in order to capture yet more value. Though this is only a simplified and small analysis of a complicated issue, it succinctly describes how corporate management saw each echelon of leadership ignore the core responsibility of ensuring ethical standards in lieu of capital gains. Management is at fault for this oversight; it was a failure in corporate governance.

The 2008 collapse is a powerful reminder that managers must keep in mind that their primary goal for shareholders is to maximize profits, while their primary goal to the community at large is to provide products without adverse effects on that community. Managing employees responsibly and putting their well-being first is an important step in this process, as is considering the wider implications of opening a new factory that pollutes or selling a highly unhealthy food product. Managers must be responsible because businesses as a whole cannot, and this responsibility towards integrity lies at the heart of management.

The Challenge of Diversity

Globalization demands a diverse workforce, and assimilating varying cultures, genders, ages, and dispositions is of high value.

Learning Objectives

Explain the inherent value diversity generates in the competitive landscape and the challenges globalization presents

Key Takeaways

Key Points

  • In the 1960s, the U.S. begin identifying trends in workplace diversity and addressed them with legislation. This evolved into a societal change that embraces diversity as both valuable and ethical.
  • Diversity poses various challenges in communication, from differences in language to differences in culture. Understanding these cultural differences and what they may accidentally communicate is critical to effective communication.
  • Majority cultures have a tendency to create a homogeneous environment, possibly limiting the potential diverse opinions can provide.
  • Groupthink is a threat of which managers must be aware, particularly in meetings where dominant opinions steal most of the spotlight. Different perspectives are where the highest value can be captured in diverse environments.
  • The ability to manage diversity, as well as refine actions to communicate accurately and intentionally, are valuable and necessary aspects of effective management.

Key Terms

  • Hegemony: The dominance of one social group over another.
  • groupthink: Decision making that is often characterized by a high degree of conformity.

The Value of Diversity

Globalization has resulted in enormous cross-cultural relationships, along with high percentages of domestic diversity. As globalization creates higher potential value in approaching diverse markets and demographics, understanding how to manage a diverse community internally is a priority for management.

Through creating a more international community and increasing variety among workforces, companies stand to benefit enormously from meaningful diversity in opinions and perspectives. This opportunity, if not properly utilized, becomes a threat as the competition grows more effective at leveraging diversity to create synergy. Therefore, staying competitive requires the creation of an effectively diverse workplace.

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Ethnic diversity map: This map illustrates the level of diversity worldwide. Areas like sub-Saharan Africa tend to be more heterogenous than, for instance, states in Europe.

Stemming from various legislative initiatives in the 1960s, the concept of equality and a fair distribution of opportunity became a domestic focus in the United States. As the decades passed, this focus shifted from a legal requirement to a social expectation. Finally the idea of equality became a societal norm that recognizes both the importance and the value of diversity. This evolving outlook on a diverse workplace has ultimately resulted in the recognition and implementation of diversity management and intercultural understandings within organizations, creating stronger and more ethical business practices.

Challenges of Diversity

Despite this successful trajectory, challenges to diversity naturally occur as a result of communication (languages and values), majority hegemony, and groupthink.

Communication

Communication is at the heart of diversity management, but not necessarily for obvious reasons. Linguistic differences, while certainly a challenge, are tangible and straightforward. Learning new languages or translating materials is a reasonably effective approach to addressing these difficulties.

The more difficult challenge is the intangibles in communication that arise not from literal words but from cultural expectations. Different cultures not only speak different languages but adhere to different values, draw different assumptions, and define different actions as appropriate or inappropriate. Overlooking these cultural differences can result in miscommunication that may go unrecognized. For example, in China it is quite important to understand the concept of guanxi (face), particularly as it pertains to paying respect to guests or superiors. Overlooking these customs sends unintentional messages that can do irreversible damage.

Majority Hegemony

Majorities in businesses creating a homogeneous culture is also a substantial threat, as company culture is a direct product of the participants (employees). This can result in a business that creates and promotes a particular culture over other minority cultures, usually unintentionally as a result of numbers. This hegemony can create tension between different groups, ultimately resulting in the smaller groups moving towards the culture of the larger ones to close the dissonance, a practice called assimilation. Assimilation should be a shared responsibility, not simply assumed by those in the minority group.

Groupthink

The most substantial threat these communicative barriers and homogeneous tendencies create could loosely be defined as groupthink. Groupthink is when many people within the same organization begin to adopt similar perspectives, usually to simplify meetings and minimize discord. On the surface, this consensus sounds like a good thing. However, as the global economy requires businesses to understand varying perspectives, it also necessitates the cultivation of these diverse perspectives internally. Groupthink will often result in the assimilation of dissenting perspectives. The opportunity cost is precisely these different viewpoints. Without differences in perspective, companies have little room to expand into new demographics or innovate new solutions.

The Role of Management

Different cultural norms offer an interesting study in diversity management. Etiquette for receiving a business card in China requires accepting it with both hands and taking a full moment to read it. Following this, recipients place the card face up on the table in front of them during the meeting, referring to it when necessary. In the U.S., a strong handshake and self-introduction is a polite start to a meeting. Conversely, in Japan, it is appropriate to wait to be introduced and then bow following the greeting.

Managers must be not only aware of diversity in the workplace but also open-minded and empathetic to perspectives other than their own. Effective managers in diverse situations have a highly developed degree of cultural competence that empowers them to use careful observation skills to determine what gestures, phrases, customs and values would be most appropriate in a given circumstance. Adroit management must also work actively against groupthink, empowering everyone not only to speak but to be brave enough to go against the majority opinion. The goal for management is to ensure everyone is working to assimilate to everyone else in a balanced and effective manner that harvests differences rather than smoothing them over.

Example

Different cultural norms offer an interesting study in diversity management. Etiquette for receiving a business card in China requires accepting it with both hands and taking a full moment to read it. Following this, recipients place the card face up on the table in front of them during the meeting, referring to it when necessary. In the U.S., a strong handshake and self-introduction is a polite start to a meeting. Conversely, in Japan, it is appropriate to wait to be introduced and then bow following the greeting.

The Challenge of Technology

Technology management is crucial in offsetting the risks of new technology while acquiring the operational benefits it provides.

Learning Objectives

Recognize the opportunities and threats inherent in the technological landscape from a business perspective, and how to manage these

Key Takeaways

Key Points

  • Managing new technology requires a thorough understanding of business technology management, which consists of four general parts.
  • Managers must understand how to achieve internal efficiency by applying new technology to operational processes.
  • Businesses should create strategic business units focused solely upon managing a company’s technological strategy.
  • Keeping pace technologically requires extensive research and strategic analysis of the potential value of acquiring innovations.
  • Implementing new technology requires retraining staff and eliminating the natural friction that results from making operational changes.
  • Managers should be aware of the value in research, development, and forecasting future technological innovations to keep ahead of the competition.

Key Terms

  • evolves: Constantly changes and develops.
  • Synergy: The concept that a whole can derive more value than the combination of the individual parts.
  • competitive advantage: Something that places a company or a person ahead of a competing business.

Technology and Management

Managing technology is an intrinsic part of managing a business, and effectively balancing resources to optimize efficiency is an important operational objective for all managers. Varying perspectives and strategies in technology management abound, all revolving around a few simple needs being filled to move the business towards a competitive advantage. The reason behind the prioritization of technology management is that new, disruptive technology constantly threatens to result in higher efficiency of competitors. On the other hand, effectively managed technology affords businesses the opportunity to outpace the competition (see figure below).

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Disruptive technology: This graph underscores the concept that technology advancement is both a constant opportunity and a constant threat.

Business Technology Management (BTM)

From a general standpoint, business technology management focuses on understanding how technology fits into an organization ‘s processes and structure. It provides the opportunity to streamline operations and produce higher quantities of quality information. BTM can therefore be divided into four elements:

  • Process: Businesses, whether they provide products or services, always have a set of processes that define how deliverables are generated. These processes need to be assessed for efficiency and effectiveness, particularly as they allow for optimal potential modern technology.
  • Organization: Businesses are constructed under the assumption of synergy. Each of the strategic business units (SBUs), or facets of the organization, complements one another to create an ability greater than the sum of its parts. Establishing an information technology (IT) department within a business that will function with upper management and throughout the ranks allows for proper implementation of BTM.
  • Information:Technology evolves exponentially, often changing faster than businesses can easily monitor. Performing appropriate research and analysis of the current technological environment generates the highest return on the (often expensive) investments demanded by keeping pace technologically.
  • Implementation: After a business organization has a mature IT department that understands the company processes, the department can work with an understanding of the available technologies to upgrade and implement these innovations. Implementation includes training employees, monitoring the return on investment, maintaining new technology, and eliminating friction from the necessary operational changes. Change is always complicated, and businesses benefit greatly by adopting change-management techniques when integrating new technology.

Keeping up with Technological Progress

While managers are focused upon these four aspects of BTM, they must also keep future growth and technology scaling in mind. As innovation continues to demand a central role in businesses, research and development will continue to be critical to a healthy organization. Appropriately funding research initiatives that not only keep track of new innovation but actively seek out strategic solutions creatively offers companies the best chance of survival in the global marketplace.

Managers must also realize the importance of acquiring technology talent that can keep pace with the environment. This is important for two reasons:

  • The potential to uncover new competitive advantages through internal development
  • The capacity to forecast up-and-coming technologies to construct an investment road map that always keeps the competition a technological step behind

Developing new technologies in-house is particularly relevant to industries on the cutting edge (e.g., semiconductors, green energy initiatives, TVs, etc.), while forecasting is more critical for the users/consumers of these industries on the business level.

Combining BTM with research and development will ensure managers are properly equipped to tackle the challenges of modern-day innovations, leveraging these capabilities to differentiate from the competition and derive stronger margins. Managers across the board must be aware of the importance of these technological developments, as well as the operational challenges in researching and implementing them.

The Challenge of Competition

Managers must understand a company’s competitive advantage and build a strategy that takes into account the competitive landscape.

Learning Objectives

Describe competitive strategies such as low cost, differentiation, and internal competition and the role of the external competitive landscape in developing them

Key Takeaways

Key Points

  • Managers must know their business’s strengths and integrate them into the appropriate strategy to remain competitive.
  • Low-cost strategies are when companies sell a product or service at the lowest possible price point to stay competitive.
  • Differentiation is an alternative strategy to low cost in which companies fill a specific need that is not being filled or generate a brand image that increases their value-added proposition.
  • High quality is the antithesis of low cost; instead of efficiency, the strategy focuses on effectiveness, creating the best possible product to capture market share.
  • Companies also compete internally, either developing naturally competitive products or battling for funding based upon unit success.
  • Managers must understand all of these competitive strategies and align them with their perceived strategic advantage to stay competitive.

Key Terms

  • competitive advantage: Something that places a company or a person ahead of competing businesses.
  • differentiation: A strategy focused on creating a distinct product for a specific population.
  • Branding: A business’s ability to communicate a specific image, generally one that will entice consumers or add value.

Competitive Strategies

From a managerial perspective, competition generally falls into the external environment, though it can also take shape in the internal environment through rivalry between strategic business units (SBUs). For managers, understanding the external competitive landscape is a critical factor in assessing company strategies and benchmarking appropriately to ensure the competitiveness of the firm. Businesses that fail to keep pace with their rivals will eventually be overpowered and often forced to develop an exit strategy.

Avoiding the risks of competitive factors demands a strong understanding of operational efficiency (low cost), quality production, differentiation, and competitive advantage —or who you target and whether or not you have a cost or quality advantage (see figure below).

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Cost vs. quality: Companies generally achieve either a cost or a quality advantage (very rarely, both). In panel A, both companies’ products have the same cost, but Company I’s product has higher value. In panel B, both companies’ products have the same value, but Company I’s product has lower cost. In panel C, Company I’s product has both higher value and lower cost (this is the rarest situation).

Low-Cost and Branding

The simplest perspective on competition is in industries where products are homogeneous (or very alike). In such a situation, companies compete directly. For example, bottled-water producers are directly involved in such a framework and thus adopt two basic competitive strategies: low-cost and branding.

Low-cost suppliers find ways to optimize their production and distribution to offer consumers the lowest possible price on one bottle of water. Low-cost suppliers often benefit largely from economies of scale. Branding, on the other hand, aims to convince the consumer that a higher price point is worth paying based upon the company’s name, reputation, or other distinguishing characteristic. For example, Dasani brand water costs more than generic store brand water, despite being essentially the same product. Commercials, aesthetic presentation, goodwill, and factors other than price may then influence a consumer’s purchasing decision.

Differentiation

Most products and services are not homogeneous, however, allowing incumbents in an industry to compete with one another by means of various competitive strategies. Differentiation is a competitive tactic wherein companies approach certain niche needs within an industry to capture a segment of the market share.

An example of differentiation might be cereal. There are hundreds of different kinds of cereals. The need being filled is sustenance: people need to eat. The producers of these cereals use differentiation to capture a share of the cereal market: some brands focus on their organic nature, others their sugary appeal, and still others on being “cool.” Branding plays an important role here as well, though assessing niche consumer needs and filling them is the principal focus.

Quality

Finally, there is the potential to compete externally based upon quality. Toyota makes both the Corolla and the Lexus, thereby targeting both ordinary automobile drivers and those in the luxury-car consumer bracket. Quality competitive strategies, while related to branding, provide a particular level of quality to capture a specific income or interest demographic. The opportunity cost of efficiency is associated with quality, which generally sees higher price points. Quality is therefore a strong antithesis to the low-cost strategy.

Internal Competition

Businesses also compete internally, an intrinsically complex issue. On the surface, internal competition involves either direct product substitutes or funding competition (among different business units). An example of internal competition is PepsiCo. Pepsi makes both colas and sports drinks, all of which sit on the shelf next to one another. When a customer sees the sports drink and chooses it over the cola, the cola has lost a sale to an internal competitor. Pepsi, however, did not lose a sale; it merely lost one segment of the business while gaining another.

With these points in mind, managers must thoroughly understand the products they are pitching and which strategy will help them avoid going toe-to-toe with other businesses with whom they cannot compete. Starting up a car manufacturing business to compete with Hyundai in the low-cost market is extremely difficult, as Hyundai has economies of scale in place that will almost always beat smaller competition on a low-cost strategy. This example illustrates an extremely important point in business: rely on strengths. Managers must understand their own competitive advantage (what they do better than the competition) to adopt the appropriate competitive strategy to gain market share and remain profitable.