Strategic Management

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Strategic Management

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Strategic Management

1. Introduction ........................................................................................................................................... 5
1.1 Levels of strategy ................................................................................................................................ 5
2. Process of Strategy ................................................................................................................................ 7
2.1 Strategic intent .................................................................................................................................... 7
2.2 Environmental analysis ....................................................................................................................... 8
2.3 Evaluation of strategic alternatives ..................................................................................................... 8
2.4 Choice ............................................................................................................................................... 10
2.5 Strategy implementation ................................................................................................................... 11
2.6 Strategy evaluation and control......................................................................................................... 12
3. Mission, Vision and Values ................................................................................................................ 12
3.1 Strategic Intent .................................................................................................................................. 12
3.2 Vision ................................................................................................................................................ 13
3.3 Mission.............................................................................................................................................. 13
3.4 Values ............................................................................................................................................... 14
4. Environmental Analysis ...................................................................................................................... 15
4.1 PESTEL Framework ......................................................................................................................... 15
5. Competitive Environment ................................................................................................................... 16
5.1 Porter’s 5 forces model ..................................................................................................................... 16
5.2 Strategic group mapping ................................................................................................................... 18
6. Internal Analysis ................................................................................................................................. 19
6.1 Resource based view of the firm ....................................................................................................... 19
6.2 Critical success factors ...................................................................................................................... 20
6.3 Value chain framework ..................................................................................................................... 20
6.4 Balance scorecard ............................................................................................................................. 22
6.5 Benchmarking ................................................................................................................................... 23
6.6 SWOT analysis ................................................................................................................................. 23
7. Industry Life Cycle ............................................................................................................................. 25
8. Porter’s Generic Strategies.................................................................................................................. 26
9. Corporate Strategies ............................................................................................................................ 28
9.1 Stability Strategy ............................................................................................................................... 29
9.2 Growth Strategy ................................................................................................................................ 29
9.3 Retrenchment strategy ...................................................................................................................... 33
9.4 Combination Strategy ....................................................................................................................... 35
10. Diversification................................................................................................................................. 35
10.1 Related Diversification (Concentric Diversification) ..................................................................... 36
10.2 Unrelated Diversification (Conglomerate Diversification) ............................................................. 36
10.3 Rationale for Diversification ........................................................................................................... 36
10.4 Mergers and acquisitions ................................................................................................................ 37
11. Business portfolio analysis.............................................................................................................. 39
11.1 BCG’s growth share matrix ............................................................................................................ 39
11.2 GE’s strategic business planning grid ............................................................................................. 41
11.3 Product life cycle, PLC ................................................................................................................... 43
11.4 Experience curve ............................................................................................................................. 45
12. Strategy and Structure ..................................................................................................................... 46
13. Evaluation of strategy ..................................................................................................................... 46
13.1 Process of Evaluation ...................................................................................................................... 46

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Strategic Management

1. Introduction
The top management of an organization is always concerned with selection of a course of action from
among different alternatives to meet the organizational objectives. The process by which objectives are
formulated and achieved is known as strategic management and strategy acts as the means to achieve
the objective.

Strategy is the grand design or an overall 'plan' which an organization chooses in order to move or react
towards thee set objectives by using its resources. Strategies most often devote a general programme of
action and an implied deployment of emphasis and resources to attain comprehensive objectives. An
organization is considered efficient and operationally effective if it is characterized by coordination
between objectives and strategies. There has to be integration of the parts into a complete structure.
Strategy helps the organization to meet its uncertain situations with due diligence. Without a strategy, the
organization is like a ship without rudder. It is like a tramp, which has no particular destination to go to.
Without an appropriate strategy effectively implemented, the future is always dark and hence, more are
the chances of business failure.

A few aspects regarding nature of strategy are as follows:

 Strategy is a major course of action through which an organization relates itself to its
environment particularly the external factors to facilitate all actions involved in meeting the
objectives of the organization.
 Strategy is the blend of internal and external factors. To meet the opportunities and threats
provided by the external factors, internal factors are matched with them.
 Strategy is the combination of actions aimed to meet a particular condition, to solve certain
problems or to achieve a desirable end. The actions are different for different situations.
 Due to its dependence on environmental variables, strategy may involve a contradictory action.
An organization may take contradictory actions either simultaneously or with a gap of time. For
example, a firm is engaged in closing down of some of its business and at the same time
expanding some.
 Strategy is future oriented. Strategic actions are required for new situations which have not arisen
before in the past.
 Strategy requires some systems and norms for its efficient adoption in any organization.
 Strategy provides overall framework for guiding enterprise thinking and action.

The purpose of strategy is to determine and communicate a picture of enterprise through a system of
major objectives and policies. Strategy is concerned with a unified direction and efficient allocation of an
organization's resources. A well made strategy guides managerial action and thought. It provides an
integrated approach for the organization and aids in meeting the challenges posed by environment.

1.1 Levels of strategy

It is believed that strategic decision making is the responsibility of top management. However, it is
considered useful to distinguish between the levels of operations of the strategy. Strategy operates at three
levels: Corporate Level, Business Level, Functional Level.

There are basically two categories of companies- one, which have different businesses organized as
different directions or product groups known as profit centres or strategic business units (SBUs) and
other, which consists of companies which are single product companies. The example of first category

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can be that of Reliance Industries Limited which is a highly integrated company producing textiles, yarn,
and a variety of petro chemical products and the example of the second category could be Ashok
Leyland Ltd which is engaged in the manufacturing and selling of heavy commercial vehicles.

The SBU concept was introduced by General Electric Company (GEC) of USA to manage product
business. The fundamental concept in the SBU is the identification of discrete independent product/
market segments served by the organization. Because of the different environments served by each
product, a SBU is created for each independent product/ segment. Each and every SBU is different from
another SBU due to the distinct business areas it is serving. Each SBU has a clearly defined
product/market segment and strategy. It develops its strategy according to its own capabilities and needs
with overall organizations capabilities and needs. Each SBU allocates resources according to its
individual requirements for the achievement of organizational objectives.

Figure: Levels of strategy

The three levels are explained as follows:

Corporate Level Strategy

At the corporate level, strategies are formulated according to organization wise polices. These are value
oriented, conceptual and less concrete than decisions at the other two levels. These are characterized by
greater risk, cost and profit potential as well as flexibility. Mostly, corporate level strategies are futuristic,
innovative and pervasive in nature. They occupy the highest level of strategic decision making and cover
the actions dealing with the objectives of the organization. Such decisions are made by top management
of the firm. The examples of such strategies include acquisition decisions, diversification, structural
redesigning etc. The board of Directors and the Chief Executive Officer are the primary groups involved
in this level of strategy making. In small and family owned businesses, the entrepreneur is both the
general manager and chief strategic manager.

Business Levels Strategy

The strategies formulated by each SBU to make best use of its resources given the environment it faces,
come under the gamut of business level strategies. At such a level, strategy is a comprehensive plan
providing objectives for SBUs, allocation of resources among functional areas and coordination between
them for achievement of corporate level objectives. These strategies operate within the overall
organizational strategies i.e. within the broad constraints and polices and long term objectives set by the
corporate strategy. The SBU managers are involved in this level of strategy. The strategies are related
with a unit within the organization. The SBU operates within the defined scope of operations by the

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corporate level strategy and is limited by the assignment of resources by the corporate level. Business
strategy relates with the "how" and the corporate strategy relates with the "what".

Functional Level Strategy

This strategy relates to a single functional operation and the activities involved therein. This level is at the
operating end of the organization. The decisions at this level within the organization are described as
tactical. The strategies are concerned with how different functions of the enterprise like marketing,
finance, manufacturing etc. contribute to the strategy of other levels. Functional strategy deals with a
relatively restricted plan providing objectives for specific function, allocation of resources among
different operations within the functional area and coordination between them for achievement of SBU
and corporate level objectives.

Sometimes a fourth level of strategy also exists. This level is known as the operating level. It comes
below the functional level strategy and involves actions relating to various sub functions of the major
function. For example, the functional level strategy of marketing function is divided into operating levels
such as marketing research, sales promotion etc.

2. Process of Strategy
The process of strategy is cyclical in nature. The elements within it interact among themselves. According
to C.K. Prahalad, the process comprises of following six steps:

I. Strategic Intent
II. Environmental Analysis
III. Evaluation of strategic alternatives
IV. Choice
V. Strategy Implementation
VI. Strategy Evaluation and Control

We will discuss each of these steps in detail.

2.1 Strategic intent

Setting of organizational vision, mission and objectives is the starting point of strategy formulation. The
hierarchy of strategic intent lays the foundation for the strategic management of any organization. The
strategic intent makes clear what an organization stands for. It is reflected through vision, mission,
business definition and objectives.

Vision serves the purpose of stating what an organization wishes to achieve in long run. The process of
assigning a part of a mission to a particular department and then further sub dividing the assignment
among sections and individuals creates a hierarchy of objectives. The objectives of the sub unit contribute
to the objectives of the larger unit of which it is a part. From strategy formulation point of view, an
organization must define ‘why’ it exists, ‘how’ it justifies that existence, and ‘when’ it justifies the
reasons for that existence. The answers to these questions lie in the organization’s mission, business
definition, objectives and goals. These terms become the base for strategic decisions and actions.

The vision of an organization is the expectation of the owner of the organization and putting this vision
into action is mission. Often these terms are used interchangeably, but both are different. Mission is
relatively less abstract, subjective, qualitative, philosophical and non-imaginative. Mission has a societal
orientation and is a statement which reveals what an organization intends to do for a society. It is a public

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statement which gives direction for different activities which organizations have to carry on. It motivates
employees to work in the interest of the organization.

The answer to the question that ‘how’ does an organization justifies its existence is defining business of
the organization. A business definition is the clear cut statement of the business or a set of businesses, the
organization engages or wishes to pursue in the future. It also defines the scope of the organization.

Once the organization’s mission and vision have been determined, its objectives, desired future positions
that it wishes to reach, should be identified. Organizational objectives are defined as ends which the
organization seeks to achieve by its existence and operation. Objectives represent desired results which
the organization wishes to attain. They indicate the specific sphere of aims, activities and
accomplishments. An organization can have objectives in terms of profitability and productivity.
Objectives provide a direction to the organization and all the divisions work towards the attainment of the
set objectives. Objectives and goals are the terms which are used interchangeably.

2.2 Environmental analysis

Every organization operates within an environment. This environment may be internal or external. For
conducting an environmental analysis, the strategic intent has to be very clear. This clarity in definition of
mission and objectives helps in the detailed analysis of the environment. Environmental analysis, also
known as environmental scanning or appraisal, is the process through which an organization monitors and
comprehends various environmental factors and determines the opportunities and threats that are provided
by these factors. There are two aspects involved in environmental analysis:

I. Monitoring the environment i.e. environmental search

II. Identifying opportunities and threats based on environmental monitoring i.e. environmental
diagnosis.

The environmental analysis plays a very important role in the process of strategy formulation. The
environment has to be analysed to determine what factors in the environment present opportunities for
greater accomplishment of organizational objectives and what factors present threats. Environmental
analysis provides time to anticipate the opportunities and plan to meet the challenges. It also warns the
organization about the threats. The analysis provides for elimination of alternatives which are inconsistent
with the organizations objectives. Due to the element of uncertainty, environmental analysis provides for
certain anticipated changes in the organization’s network. The organization equips itself to meet the
unanticipated changes and face the ever increasing competition.

An organization has to continuously grow in term of its core business and develop core competencies.
Through organizational analysis, the organization has to understand its strengths and weaknesses. It has to
identify the strengths and emphasize on them. At the same time, it has to identify its weaknesses and
improve them or try to eliminate them. Organizational threats and opportunities, strengths and
weaknesses help in identifying the relevant environmental factors for detailed analysis.

2.3 Evaluation of strategic alternatives

After environmental analysis, the next step is to identify the various strategic alternatives. After the
identification of strategic alternatives they have to be evaluated to match them with the environmental
analysis. All alternatives cannot be chosen even if all of these provide the same results. Obviously,
managers evaluate them and limit themselves. There are basically four grand strategic alternatives:

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I. Stability
II. Expansion
III. Retrenchment
IV. Combination

Stability: In this, the company does not go beyond what it is doing now. The company serves with same
product, in same market and with the existing technology. This is possible when environment is relatively
stable.

Expansion: This is adopted when environment demands increase in pace of activity. Company broadens
its customer groups, customer functions and the technology. These may be broadened either singly or
jointly. This kind of a strategy has a substantial impact on internal functioning of the organization.

Retrenchment: If the organization is going for this strategy, then it has to reduce its process of strategy
scope in terms of customer group, customer function or alternative technology. It involves partial or total
withdrawal from three things. For example L & T getting out of the cement business. The objective varies
from company to company.

Combination: When all the three strategies are taken together, this is known as combination strategy.
This kind of strategy is possible for organizations with large number of portfolios.

Apart from these four grand strategies, different strategies which are used commonly are as follows:

Modernization: In this, technology is used as the strategic tool to increase production and productivity or
reduce cost. Through modernization, the company aims to gain competitive and strategic strength.

Integration: The company starts producing new products and services of its own either creating facility
or killing others. Integration can either be forward or background in terms of vertical integration. In
forward integration it gains ownership over distribution or retailers, thus moving towards customers
while in backward integration the company seeks ownership over firm’s suppliers thus moving towards
raw materials. When the organization gains ownership over competitors, it is engaged in horizontal
integration.

Diversification: Diversification involves change in business definition either in terms of customer

functions, customer groups or alternative technology. It is done to minimize the risk by spreading over
several businesses, to capitalize organization strength and minimize weaknesses, to minimize threats, to
avoid current instability in profit & sales and to facilitate higher utilization of resources. Diversification
can be either related or unrelated, horizontal or vertical, active or passive, internal or external. It is of the
following types:

I. Concentric diversification
II. Conglomerate diversification
III. Horizontal diversification

Joint Ventures: In joint ventures, two or more companies form a temporary partnership ( consortium).
Companies opt for joint venture for synergistic advantages to share risk, to diversify and expand, to bring
distinctive competences, to manage political and cultural difficulty, to take technological advantage and
to explore unexplored market.

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Strategic Alliance: When two or more companies unite to pursue a set agreed upon goals but remain
independent it is known as strategic alliance. The firms share the benefits of the alliance and control the
performance of assigned tasks. The pooling of resources, investment and risks occur for mutual gain.

Mergers: It is an external approach to expansion involving two or more than two organizations.
Companies go for merger to become larger, to gain competitive advantage, to overcome weaknesses and
sometimes to get tax benefits. Merger takes place with mutual consent and common goals.

Acquisition: For the organization which acquires another, it is acquisition and for organization which is
acquired, it is merger.

Takeovers: In takeovers, there is a strong motive to acquire others for quick growth and diversification.

Divestment: In divestment, the company which is divesting has no ownership and control in that business
and is engaged in complete selling of a unit. It is referred to the disposing off a part of the business.

Turnaround Strategy: When the company is sick and continuously making losses, it goes for turnaround
strategy. It is the efforts in reversing a negative trend and it is the efforts to keep an organization alive.

All these alternatives are available to an organization and according to its objectives, it can decide on the
one which is most suitable.

2.4 Choice
The next logical step after evaluation of strategic alternatives is choice of the most suitable alternative.
For a business group, it may be possible to choose all strategic alternatives but for a single company it is
quite difficult. The strategic alternatives have to be matched with the problem. While making a choice,
two types of factors have to be considered:

I. Objective factors
II. Subjective factors

Objective factors are the ones which can be quantified while subjective factors are the ones which cannot
be quantified and are based on experience and opinion of people. Strategic choice is like a decision
making process. There are three objective ways to make a choice:

I. Corporate Portfolio Analysis

II. Competitor Analysis
III. Industry Analysis

Corporate Portfolio Analysis

When the company is in more than one business, it can select more than one strategic alternative
depending upon demand of the situation prevailing in the different portfolios. It is necessary to analyze
the position of different business of the business house which is done by corporate portfolio analysis. This
analysis can be done by using any of the seven technologies given below:

I. Experience curve
II. Product Life Cycle PLC concept
III. BCG Matrix
IV. GE nine cell Matrix

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In the experience curve technique, the experience of the strategist enables him to decide which
businesses to enter or quit.

Depending upon the stage of the product life cycle of the business, one can make a strategic choice for
different portfolio.

Boston consultancy developed a matrix called BCG Matrix which is helpful to make strategic choice. In
this, the products are positioned based on various external and internal factors to know the continuity,
growth and discontinuing product. The factors given are specific in nature and attempt has been made to
quantify them.

The GE Nine Cell Matrix is a matrix in which nine positions are defined in terms of business strength
factors and industry attractiveness factors. The business strength factors include market share, profit
margin, ability to compete, market knowledge, competitive position, technology, and management caliber
and the industry attractiveness factor include market size, growth rate, profit, competition, economics
of scales, technology and other environmental factors. Nine cells are divided into three zones and
depicted by different colours i.e. green, yellow and red. Each zone of matrix presents a specific type of
strategy or set of strategies.

Competitor Analysis
In this analysis, we try to assess what the competitor has and what he does not have. We explore
everything with respect to the competitor. In competitor analysis, focus is on external environment as one
of the components of external environment is the competitor. The difference between SWOT analysis and
competitor analysis is that in competitor analysis we are concerned with only one component of the
environment i.e. competitor while in SWOT analysis we take about all the factors of the environment.

Industry Analysis
In industry analysis, all the competitors belonging to the particular industry with which the organization is
associated, are looked at. All the members of the industry are considered as a whole. In competitive
analysis, only the major competitors are assessed while in industry analysis all the competitors belonging
to the industry are looked at.

2.5 Strategy implementation

After the evaluation of the alternatives, the choice of strategy is made. This choice now needs to be
implemented i.e. strategy is now put into action. This step of strategy process is the implementation step.
This includes the activation of the strategic alternatives chosen. Strategy making and strategy
implementation are two different things. Strategy making requires person with vision while strategy
implementation requires a person with administrative ability. If the strategy made is not implemented
properly then the objectives would be lost. Strategy implementation is as good as starting a new business.
The stage requires looking at the problems and eliminating them. In strategy implementation, one has to
pass through different steps:

I. Project Implementation
II. Procedural Implementation
III. Resource Allocation
IV. Structural Implementation
V. Functional Implementation
VI. Behavioural Implementation

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2.6 Strategy evaluation and control

This is the last step of the strategy making process. This is an ongoing process and evaluation and control
have to be done for future course of action as well. To get successful results and to achieve organizational
objectives, there has to be continuous monitoring of the implementation of strategy.

The evaluation and control of strategy may result in various actions that the organization may have to take
for successful well being, such actions may involve any kind of corrective measures concerned with any
of the steps involved in the whole process be it choice for setting mission or objectives. The process of
strategy formulation is considered as a dynamic process wherein corrective actions are taken and change
is brought in any of the factors affecting strategy.

Evaluation of strategy is done by the top managers to determine whether their strategic choice is
implemented in a manner that it is meeting the organization’s objectives. Evaluation emphasizes
measurement of results of a strategic action. On the other hand, control emphasizes on taking necessary
action in the light of gap that exists between intended results and actual results in the strategic action.
When evaluation and control is carried out efficiently, it contributes in three basic areas:

I. Measurement of organizational process

II. Feedback for future actions
III. Linking performance and rewards

3. Mission, Vision and Values

Strategies are involved in the formulation, implementation and evaluation of process. The hierarchy of
strategic intent lays the foundation for strategic management process. The process of establishing the
hierarchy of strategic intent is very complex. In this hierarchy, the vision, mission, business definition and
objectives are established. Formulation of strategies is possible only when strategic intent is clearly set
up. This step is mostly philosophical in nature. It will have long term impact on the organization.

3.1 Strategic Intent

The foundation for the strategic management is laid by the hierarchy of strategic intent. The concept of
strategic intent makes clear “what an organization stands for”. Hamel and Prahalad coined the term
strategic intent. A few aspects about strategic intent are as follows:

 It is an obsession with an organization.

 This obsession may even be out of proportion to their resources and capabilities.
 It envisions a derived leadership position and establishes the criterion, the organization will use to
chart its progress.
 It involves the following:
o Creating and Communicating a vision
o Designing a mission statement
o Defining the business
o Setting objectives

Vision serves the purpose of stating what an organization wishes to achieve in the long run. Mission
relates an organization to society. Business explains the business of an organization in terms of customer
needs, customer groups and alternative technologies. Objectives state what is to be achieved in a given
time period.

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The concept of stretch and leverage is relevant in this context. Stretch is a misfit between resources and
aspirations. Leverage concentrates, accumulates, conserves and recovers resources so that a meagre
resource base can be stretched. Leverage reduces the stretch and focuses mainly on efficient utilization of
resources. The strategic fit matches organizational resources and environment. This positions the firm by
assessing organizational capabilities and environmental opportunities.

3.2 Vision
It is at the top in the hierarchy of strategic intent. It is what the firm would ultimately like to become.

Kotler defines vision as “description of something (an organization, corporate culture, a business, a
technology, an activity) in the future. The definition itself is comprehensive and states clearly the
futuristic position.

A few important aspects regarding vision are as follows:

 It is more of a dream than articulated idea.
 It is an aspiration of organization. Organization has to strive and exert to achieve it.
 It is powerful motivator to action.
 Vision articulates the position of an organization which it may attain in distant future.

For example vision statement of Tata Power is:

To be the most admired and responsible Integrated Power Company with international footprint,
delivering sustainable value to all stakeholder.

3.3 Mission
The mission statements stage the role that organization plays in society. It is purpose or reason for the
organization’s existence. Another definition may be “A mission provides the basis of awareness of a
sense of purpose, the competitive environment, degree to which the firm’s mission fits its capabilities and
the opportunities which the environment offers.

The above definition reveals the following:

 It is the essential purpose of organization.
 It answers “ why the organization is in existence”.
 It is the basis of awareness of a sense of purpose.
 It fits its capabilities and the opportunities which environment offers.

For example mission statement of Tata Power is:

We will become the most admired and responsible Power Company delivering sustainable value by:

 Operating our assets at benchmark levels

 Executing projects safely, with predictable benchmark quality, cost and time
 Growing the Tata Power businesses, be it across the value chain or across geographies, and
also in allied or new businesses

Difference in Mission and Vision

A Mission statement tells you the fundamental purpose of the organization. It concentrates on the present.
It defines the customer and the critical processes. It informs you of the desired level of performance. On

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the other hand, a Vision statement outlines what the organization wants to be. It concentrates on the
future. It is a source of inspiration. It provides clear decision-making criteria.

Figure: Vision and mission statements

A mission statement can resemble a vision statement in a few companies, but that can be a grave mistake.
It can confuse people. Following are the differences between vision and mission:

 The vision describes a future identity while the Mission serves as an ongoing and time-
independent guide.
 The vision statement can galvanize the people to achieve defined objectives, even if they are
stretch objectives, provided the vision is specific, measurable, achievable, relevant and time
bound. A mission statement provides a path to realize the vision in line with its values. These
statements have a direct bearing on the bottom line and success of the organization.
 A mission statement defines the purpose or broader goal for being in existence or in the business
and can remain the same for decades if crafted well while a vision statement is more specific in
terms of both the future state and the time frame. Vision describes what will be achieved if the
organization is successful.

3.4 Values
Core Values are the essential and enduring tenets of an organization. They may be beliefs of top
management regarding employees’ welfare, costumer’s interest and shareholder’s wealth. The beliefs
may have economic orientation or social orientation. The core values of Tata’s are different from core
values of Birla’s or Reliance. The entire organization structure revolves around the philosophy coming
out of core values.

A few characteristics of core purpose are as follows:

 It is the overall reason for the existence of organization.
 It is why of an organization.
 This mainly addresses to the issue which organization desires to achieve internally.
 It is the broad philosophical long term rationale.
 It is the linkage of organization with its own people.

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Infosys had pursued value system of C-LIFE — Customer focus, Leadership by example, Integrity and
transparency, Fairness and Excellence in execution, to achieve its goals.

4. Environmental Analysis
Strategic analysis is basically concerned with the structuring of the relationship between a business and
its environment. The environment in which business operates has a greater influence on their successes or
failures. There is a strong linkage between the changing environment, the strategic response of the
business to such changes and the performance. It is therefore important to understand the forces of
external environment the way they influence this linkage. The external environment which is dynamic
and changing holds both opportunities and threats for the organisations. The organisations while
attempting at strategic realignments, try to capture these opportunities and avoid the emerging threats. At
the same time the changes, in the environment affect the attractiveness or risk levels of various
investments of the organizations or the investors.

4.1 PESTEL Framework

The PESTEL framework is designed to provide managers with an analytical tool to identify different
macro-environmental factors that may affect business strategies, and to assess how different
environmental factors may influence business performance now and in the future.

The PESTEL Framework includes six types of important environmental influences: political, economic,
social, technological, environmental and legal. These factors should not be seen as independent factors.

Political factors are how and to what degree a government intervenes in the economy. Specifically,
political factors include areas such as tax policy, labour law, environmental law, trade restrictions, tariffs,
and political stability. Furthermore, governments have great influence on the health, education, and
infrastructure of a nation

Economic factors include economic growth, interest rates, exchange rates and the inflation rate. These
factors have major impacts on how businesses operate and make decisions. For example, interest rates
affect a firm's cost of capital and therefore to what extent a business grows and expands. Exchange rates
affect the costs of exporting goods and the supply and price of imported goods in an economy

Social factors include the cultural aspects and include health consciousness, population growth rate, age
distribution, career attitudes and emphasis on safety. Trends in social factors affect the demand for a
company's products and how that company operates. For example, an aging population may imply a
smaller and less-willing workforce (thus increasing the cost of labor). Furthermore, companies may
change various management strategies to adapt to these social trends (such as recruiting older workers).

Technological factors include technological aspects such as R&D activity, automation, technology
incentives and the rate of technological change. They can determine barriers to entry, minimum efficient
production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs
quality, and lead to innovation.

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Figure: PESTLE framework

Environmental factors include ecological and environmental aspects such as weather, climate, and
climate change, which may especially affect industries such as tourism, farming, and insurance.
Furthermore, growing awareness of the potential impacts of climate change is affecting how companies
operate and the products they offer, both creating new markets and diminishing or destroying existing
ones.

Legal factors include discrimination law, consumer law, antitrust law, employment law, and health and
safety law. These factors can affect how a company operates, its costs, and the demand for its products.

5. Competitive Environment
We just discussed the first level of the external analysis i.e. understanding of the macro environment,
which have an influence on the success or failure of an organisation’s strategies. However, it is the
immediate competitive environment which also influences an organisation and therefore has to be
understood alongside the general environment. The impact of the changes of the macro environment is
felt on the organisation and its strategies through their influences on the competitive forces of the
competitive environment. Hence an in-depth understanding of the industry is the next important step for
an organization as part of its external analysis.

5.1 Porter’s 5 forces model

Michael Porter provided a framework that models an industry as being influenced by five forces. The
strategic business manager seeking to develop an edge over rival firms can use this model to better
understand the industry context in which the firm operates. These five "competitive forces" are:

I. The threat of entry of new competitors (new entrants)

II. The threat of substitutes
III. The bargaining power of buyers
IV. The bargaining power of suppliers
V. The degree of rivalry between existing competitors

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Figure: Porter’s 5 forces

I. Threat of New Entrants: New entrants to an industry can raise the level of competition, thereby
reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry.
High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very
easy to enter (e.g. estate agency, restaurants).
II. Threat of Substitutes: The presence of substitute products can lower industry attractiveness and
profitability because they limit price levels. The threat of substitute products depends on Buyers'
willingness to substitute, the relative price and performance of substitutes, the costs of switching
to substitutes.
III. Bargaining Power of Suppliers: Suppliers are the businesses that supply materials & other
products into the industry. The cost of items bought from suppliers (e.g. raw materials,
components) can have a significant impact on a company's profitability. If suppliers have high
bargaining power over a company, then in theory the company's industry is less attractive. The
bargaining power of suppliers will be high when there are many buyers and few dominant
suppliers.
IV. Bargaining Power of Buyers: Buyers are the people / organisations who create demand in an
industry. The bargaining power of buyers is greater when there are few dominant buyers and
many sellers in the industry, products are standardized.
V. Intensity of Rivalry: The intensity of rivalry between competitors in an industry will
depend on the structure of competition, the structure of industry costs, Degree of
differentiation, Switching costs.

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The diagram shows all the factors of Porter’s five forces.

5.2 Strategic group mapping

Strategic Group Mapping is analytical tool used for showing the different market or competitive
positions that rival firms occupy in the overall industry. It is very important to analyze the industry’s
competitive structure and indentify the strategic groups (strategic group is a set of business units or firms
that pursue similar strategies with similar resources). Each industry contains one or more than one
strategic group depending upon the strategies and market positions of industry members.

Figure: Group mapping

Purpose of Strategic Group Maps

 Identification of close and distant rivals. This is important to know because close strategic groups
have stronger cross-group competitive rivalry.
 Identification of attractive and unattractive positions of the firms in industry. This attractiveness
depends upon the industry driving forces, prevailing competitive pressures and profit potentials of
different strategic groups.
 Strategic group mapping helps in identifying the strategic group a firm should consider entering.

Steps in the Construction of Strategic Group Maps

I. Analyzing the overall industry and indentifying those competitive characteristics that differentiate
firms in the industry. Variables selected as axes for the map could be identified during the process
of industry analysis. Variables selected as axes for the map could be product-line breadth (wide,

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narrow), price (high, medium, low), quality (high, medium, low), geographic coverage (local,
regional, national, global) etc.
II. Using two-variable map, plot all the firms in the industry. For example price (high, medium, low)
can be taken on x axis whereas product-line breadth (wide, narrow) on y axis and all the firms can
be plotted accordingly.
III. All the firms that fall in the same strategy space should be allocated to the same strategic group.
IV. Finally, sketch circles around each strategic group. The size of the circles depends upon the share
of a strategic group in the total industry sales revenue.

Group mapping of retails stores in USA are shown in figure. Two variables chosen are price and
number of locations.

6. Internal Analysis
We have learnt how the ever changing nature of external environment, both at macro and micro level
affect an organisation’s business. The changes in the environment may create opportunities, which the
organisations try to exploit or may bring threats for the organisations, which the latter tries to control or
neutralize.

However, in order to develop successful strategies to exploit such opportunities or control the threats,
analysis of an organisation’s internal capabilities is important for strategy making which aims at
producing a good fit between a country’s resource capability and its external situation. Internal analysis
helps us understand the organizational capability which influences the evolution of successful strategies.
Many of the issues of strategic development are concerned with changing strategic capability better to fit
a changing environment. However, looking at strategic development from a different perspective i.e.
stretching and exploiting the organizations capability to create opportunities, it again becomes important
to understand these capabilities.

6.1 Resource based view of the firm

There are three types of resources – assets, capabilities and competencies, which have been identified
under Resource Based View of the firm (RBV). Strategic thinkers explaining the RBV suggest that the
organizations are collections of tangible and intangible assets combined with capabilities to use those
assets. These help organizations develop understanding these three types of resources and help us to know
how a firm’s internal strength and weaknesses affect its ability to compete.

Core Competencies
Core competencies are those capabilities that are critical to a business achieving competitive advantage.
The concept in management theory was originally advocated by CK Prahalad, and Gary Hamel. In their
view a core competency is a specific factor that a business sees as being central to the way it, or its
employees, works. It fulfills three key criteria:

I. provide access to a wide variety of markets, and

II. contribute significantly to the end-product benefits, and
III. be difficult for competitors to imitate.
Core competencies are what make your organization unique. They are the skills your organization
possesses that set it apart from its peers. They are the sources of competitive advantage. They are the
building blocks to future opportunities.

A core competency can take various forms, including technical/subject matter know-how, a reliable
process and/or close relationships with customers and suppliers. It may also include product development

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or culture, such as employee dedication, best Human Resource Management (HRM), good market
coverage etc.

Apple’s unique competence seems to be its product design process. With the iPod, Apple combined the
elements of jukebox software, which could organize a large amount of songs, and MP3 players, which
held lots of songs. Apple combined these elements in a way that was simple to use. Simplicity turned out
to be the core attribute that made the iPod a revolutionary product, one that changed consumer
expectations.

6.2 Critical success factors

Critical success factors are those which contribute to organization’s success in a competitive environment
and therefore the organization needs to improve on them since poor results may lead to declining
performance. Organizations depending on the environment they operate in and their own internal
conditions can identify relevant critical success factors. CSF for a retail store may be:

 low sales and administrative expense

 efficient distribution systems
 reputation for value
 organization culture
 top management turnover
 supplier relationships

6.3 Value chain framework

This is the other framework most commonly used to guide analysis of any firm’s internal strengths and
weaknesses. In this framework, any business is seen as a number of linked activities, each producing
value for the customer. By creating additional value, the firm may charge more or is able to deliver same
value at a lower cost, either of this leading to a higher profit margin. This ultimately adds to the
organization’s financial performance.

Value Chain Analysis describes the activities that take place in a business and relates them to an analysis
of the competitive strength of the business. The figure shows the list of activities. Influential work by
Michael Porter suggested that the activities of a business could be grouped under two headings:

Primary Activities - those that are directly concerned with creating and delivering a product (e.g.
component assembly); and

Support Activities, which whilst they are not directly involved in production, may increase effectiveness
or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and
support activities.

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Figure: Value chain analysis

What activities a business undertakes is directly linked to achieving competitive advantage. For example,
a business which wishes to outperform its competitors through differentiating itself through higher
quality will have to perform its value chain activities better than the opposition. By contrast, a strategy
based on seeking cost leadership will require a reduction in the costs associated with the value chain
activities, or a reduction in the total amount of resources used.

Primary Activities (Line functions)

Primary Description
Activity
Inbound logistics All those activities concerned with receiving and storing externally sourced materials

Operations The manufacture of products and services - the way in which resource inputs (e.g.
materials) are converted to outputs (e.g. products)
Outbound All those activities associated with getting finished goods and services to buyers
logistics
Marketing and Essentially an information activity - informing buyers and consumers about products
sales and services (benefits, use, price etc.)
Service All those activities associated with maintaining product performance after the product
has been sold

Value chain analysis can be broken down into a three sequential steps:

I. Break down a market/organisation into its key activities under each of the major headings in the
model;
II. Assess the potential for adding value via cost advantage or differentiation, or identify current
activities where a business appears to be at a competitive disadvantage;
III. Determine strategies built around focusing on activities where competitive advantage can be
sustained

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Support Activities (Staff functions)

Secondary Description
Activity
Procurement This concerns how resources are acquired for a business (e.g. sourcing and
negotiating with materials suppliers)
Human Those activities concerned with recruiting, developing, motivating and rewarding the
Resource workforce of a business
Management
Technology Activities concerned with managing information processing and the development and
Development protection of "knowledge" in a business
Infrastructure Concerned with a wide range of support systems and functions such as finance,
planning, quality control and general senior management

6.4 Balance scorecard

The Balanced Scorecard (BSC) is a strategic performance management framework that allows
organisations to manage and measure the delivery of their strategy. The concept was initially introduced
by Robert Kaplan and David Norton in a Harvard Business Review.

The Balanced Scorecard is a strategic performance management framework that has been designed to
help an organisation monitor its performance and manage the execution of its strategy. In a recent world-
wide study on management tool usage, the Balanced Scorecard was found to be the sixth most widely
used management tool across the globe which also had one of the highest overall satisfaction ratings. In
its simplest form the Balanced Scorecard breaks performance monitoring into four interconnected
perspectives: Financial, Customer, Internal Processes and Learning & Growth. The figure shows
essence of all four perspectives.

Here is the definition for the four Balanced Scorecard perspectives:

I. The Financial Perspective covers the financial objectives of an organisation and allows
managers to track financial success and shareholder value.
II. The Customer Perspective covers the customer objectives such as customer satisfaction, market
share goals as well as product and service attributes.
III. The Internal Process Perspective covers internal operational goals and outlines the key
processes necessary to deliver the customer objectives.
IV. The Learning and Growth Perspective covers the intangible drivers of future success such as
human capital, organisational capital and information capital including skills, training,
organisational culture, leadership, systems and databases.

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