Pest ANALYSIS

Introduction
In analyzing the macro-environment, it is important to identify the factors that might in turn affect a
number of vital variables that are likely to influence the organization’s supply and demand levels
and its costs (Kotter and Schlesinger, 1991; Johnson and Scholes, 1993). The "radical and ongoing
changes occurring in society create an uncertain environment and have an impact on the function of
the whole organization" (Tsiakkiros, 2002). A number of checklists have been developed as ways of
cataloguing the vast number of possible issues that might affect an industry. A PEST analysis is one
of them that is merely a framework that categorizes environmental influences as political,
economic, social and technological forces. Sometimes two additional factors, environmental and
legal, will be added to make a PESTEL analysis, but these themes can easily be subsumed in the
others. The analysis examines the impact of each of these factors (and their interplay with each
other) on the business. The results can then be used to take advantage of opportunities and to make
contingency plans for threats when preparing business and strategic plans (Byars, 1991; Cooper,
2000).
Kotler (1998) claims that PEST analysis is a useful strategic tool for understanding market growth
or decline, business position, potential and direction for operations. The headings of PEST are a
framework for reviewing a situation, and can in addition to SWOT and Porter’s Five Forces models,
be applied by companies to review a strategic directions, including marketing proposition. The use
of PEST analysis can be seen effective for business and strategic planning, marketing planning,
business and product development and research reports. PEST also ensures that company’s
performance is aligned positively with the powerful forces of change that are affecting business
environment (Porter, 1985). PEST is useful when a company decides to enter its business operations
into new markets and new countries. The use of PEST, in this case, helps to break free of
unconscious assumptions, and help to effectively adapt to the realities of the new environment.
Main Aspects of PEST Analysis
Economic conditions affect how easy or how difficult it is to be successful and profitable at any
time because they affect both capital availability and cost, and demand (Thompson, 2002). If
demand is buyout, for example, and the cost of capital is low, it will be attractive for firms to invest
and grow with expectations of being profitable. In opposite circumstances firms might find that
profitability throughout the industry is low. The timing and relative success of particular strategies
can be influences by economic conditions. When the economy, as a whole or certain sectors of the
economy, are growing, demand may exist for a product or service which would not be in demand in
more depressed circumstances. Similarity, the opportunity to exploit a particular strategy
successfully may depend on demand which exists in growth conditions and does not in recession.
Although a depressed economy will generally be a treat which results in a number of organizations
going out of business, it can provide opportunities for some (Robinson and et al., 1978; Thompson,
2002).
Economic conditions are influenced by political and government policy, being a major influence
affecting government decisions. The issue of whether European countries join, or remain outside,
the single European currency is a case in point. At any one time either exported or imported goods
can seem expensive or inexpensive, dependent upon currency exchange rates. There are many other
ways, however, in which government decisions will affect organizations both directly and indirectly,
as they provide both opportunities and threats.
While economic conditions and government policy are closely related, they both influence a
number of other environmental forces that can affect organizations. Capital markets determine the
conditions for alternative types of funding for organizations. They tend to be a subject to
government controls, and they will be guided by the prevailing economic conditions. The rate of
interest charged for loans will be affected by inflation and by international economics and, although
the determining rate may be fixed by a central bank, as it is the case with the Bank of England, that
will also be influenced by stated government priorities. According to Thompson (2002),
government spending can increase the money supply and make capital markets more buoyant . The
expectations of shareholders with regard to company performance, their willingness to provide
more equity funding or their willingness to sell their shares will also be affected.
The labour market reflects the availability of particular skills at national and regional levels; this is
affected by training, which is influenced by government and other regional agencies. Labour costs
will be influenced by inflation and by general trends in other industries, and by the role ad power of
trade unions.
The sociocultural environment encapsulates demand and tastes, which vary with fashion, disposable
income, and general changes can again provide both opportunities and threats for particular
companies (Thompson, 2002; Pearce and Robinson, 2005). Over-time most products change from
being a novelty to a situation of market saturation, and as this happens pricing and promotion
strategies have to change. Similarly, some products and services will sell around the world with
little variation, but these are relatively unusual. Organizations should be aware of demographics
changes as the structure of the population by ages, affluence, regions, numbers working and so on
can have an important bearing on demand as a whole and on demand for particular products and
services. Threats to existing products might be increasing: opportunities for differentiation and
market segmentation might be emerging.
Technology is widely recognised by various literature on strategic management (Capron and Glazer,
1987; Johnson and Scholes, 1993; Jan, 2002), as part of the organization and the industry part of the
model as it is used for the creation of competitive advantage. However, technology external to the
industry can also be captured and used, and this again can be influenced by government support and
encouragement. Technological breakthroughs can create new industries which might prove a threat
to existing organizations whose products or services might be rendered redundant, and those firms
which might be affected in this way should be alert to the possibility. Equally, new technology
could provide a useful input, in both manufacturing and service industries, but in turn its purchase
will require funding and possibly employee training before it can be used.
How to Write a Good PEST Analysis
As it was discussed above, PEST analysis incorporates four perspectives, which give a logical
structure, providing clear presentation for further discussions and proactive decision-makings. In
writing a good PEST, subject should be a clear definition of the market being addressed, which
might include the following issues of:
• a company looking at its market
• a product looking at its market
• a brand in relation to its market
• a local business unit
• a strategic option, such as entering a new market or launching a new product
• a potential acquisition
• a potential partnership
• an investment opportunity
It is crucial to describe the subject for the PEST analysis clearly so that people, contributing to the
analysis, and those interpreting the results from PEST analysis, could understand the purpose of the
PEST assessment and its implications (Jan, 2002).
Before producing a good PEST analysis, it is of primary importance to, firstly, brainstorm the
relevant factors that apply to the company or to its business environment. Second requirement is to
identify the information that applies to these factors; and thirdly, to draw conclusions from this
information. It is, however, necessary not only to describe factors, but to think through what they
mean and how to they impact the business. PEST analysis is only a strategic starting point, and has
its own limitations, emphasizing the need to test the conclusions and findings against the reality.
In conducting PEST analysis, it is required to consider each PEST factor as they all play a part in
determining the overall business environment. Some examples of topics include the following:
Political: (includes legal and regulatory): elections, employment law, consumer protection,
environmental regulations, industry-specific regulations, competitive regulations, inter-country
relationships/attitudes, war, terrorism, political trends, governmental leadership, taxes, and
government structures.
Economic: economic growth trends (various countries), taxation, government spending levels,
disposable income, job growth/unemployment, exchange rates, tariffs, inflation, consumer
confidence index, import/export ratios, and production levels.
Social: demographics (age, gender, race, family size, etc.), lifestyle changes, population shifts,
education, trends, fads, diversity, immigration/emigration, health, living standards, housing trends,
fashion, attitudes to work, leisure activities, occupations, and earning capacity.
Technological: inventions, new discoveries, research, energy uses/sources/fuels, communications,
rates of obsolescence, health (pharmaceutical, equipment, etc.), manufacturing advances,
information technology, internet, transportation, bio-tech, genetics, agri-tech, waste
removal/recycling, and so on.
After the key trends have been identified, the next step is to analyze the potential each trend has to
disrupt the way the company does business. The company is able to determine the changes needed
to exploit the opportunities, and blunt the threats (Pearce and Robinson, 2005).
When carrying out a PEST analysis it is important to show how and how much the factors that the
firm picks out influence the nature of competition. It is this appraisal of the impact of each factor
that distinguishes an analysis from a mere list. A common error is to try and devise a single analysis
to try and cover the entire history of a firm and an industry. Therefore, the company must keep the
analysis of past developments separate from that of the present situation and future trends. When
analyzing PEST factors in the present, it is required to make it plain why the present is different
from the past, and how the industry may need to change. There is no need to agonise too long over
whether a particular item is political, economic, social and technological in nature. Many important
factors transcend the simple PEST categories. The advent of the microprocessor is a technological
event that has had a broad economic and social impact. The "green" movement my have started as a
social-cultural phenomenon, but it has been translated into legislation and has stimulated
technological change (Byars, 1991). It is perfectly legitimate when using a checklist like PEST to
leave some categories empty. If there are no important political/legal influences on a particular
industry, those conducting PEST analysis do not need to waste time trying to find factors that do not
exist. There should be a limit to relevant factors.
Thompson (2002) states that for any organization certain environmental influences will constitute
powerful forces which affect decision making significantly. For some manufacturing and service
businesses the most powerful force will be customers; for other it may be competition. In some
situations suppliers can be crucial. In the case of some small businesses external forces can dictate
whether the business stays solvent or not. A major problem for these businesses concerns the
management of cash flow, being able to pay bills when they are due for payment and being strong
enough to persuade customers to pay their invoices on time.
Finding Information for PEST Analysis
To understand what kind of environment the company may compete in the near future, it requires
understanding of the forces that will shape the change. For a PEST analysis, that means conducting
a scan of the external events outside of the company, such as potential regulatory issues,
demographic trends, political upheaval, and cutting-edge technology that could move mainstream.
In conducting the analysis it may be essential to look at periodicals, analyst reports, demographics,
and anything that will give the exposure to new trends and possibilities. Any reliable secondary data
source of current events and projected future trends will provide information for the PEST analysis,
including:
• Newspapers, periodicals, current books
• Trade organizations
• Government agencies
• Industry analysts
• Financial analysts
One of the potential disadvantages collecting from the secondary sources is derived from issues of
validity, reliability and relevance. The limitation could be present in the nature of market forces that
reduce the applicability of the information sources to present situations. The problem could arise
based on the past data past events being collected within past environmental conditions. Therefore,
the data has to be checked and be applied to the current business conditions.
Conclusion
PEST analysis looks at the external business environment and is an appropriate strategic tool for
understanding the "big picture" of the environment in which business operates, enabling to take the
advantage of the opportunities and minimize the threats faced by company’s business activities.
When strategic planning is done correctly, it provides a solid plan for your company to grow into
the future.
With a PEST analysis, the company can see a longer horizon of time, and be able to clarify strategic
opportunities and threats that the company faces. By looking to the outside environment to see the
potential forces of change looming on the horizon, firms can take the strategic planning process out
of the arena of today and into the horizon of tomorrow.
PEST is not a set of rigid compartments into which ideas need to be sorted. It is better thought of as
a set of hooks that can be used to fish for important facts. Once the factors have been "fished out", it
does not matter which hook they were attached to. When it comes to writing up the analysis, there is
no need to mention the PEST labels at all.
If you found this article useful please have a look at the other articles we have written: Ansoff
analysis, Porter's 5 Forces analysis, SWOT analysis, BCG Growth-Share Matrix, Porter's Generic
Strategies, Scenario Planning, Value chain analysis, BALANCED SCORECARD, Competitor
Analysis, Critical Success Factors, Industry Lifecycle, Marketing Mix, McKinsey 7S Framework
and Product Life Cycle.

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SWOT

Introduction
Environmental opportunities are only potential opportunities unless the organization can utilize
resources to take advantage of them and until the strategic leader decides that it is appropriate to
pursue the opportunity. It is therefore important to evaluate environment opportunities in relation to
the strengths and weaknesses of the organization's resources, and in relation to the organization's
resources, and in relation to the organizational culture. Real opportunities exist when there is a close
fit between environment, values and resources. An evaluation of an organization's strengths and
weaknesses in relation to environmental opportunities and threats is generally referred to as a
SWOT analysis. The following report will look closely into the SWOT's concept, its main aspects,
and criteria for successful and effective SWOT analysis.
Main Aspects of SWOT Analysis
SWOT has a long history as a tool of strategic and marketing analysis. No one knows who first
invented SWOT analysis. It has features in strategy textbooks since at least 1972 and can now be
found in textbooks on marketing and any other business disciplines. It advocates say that it can be
used to gauge the degree of "fit" between the organisation's strategies and its environment, and to
suggest ways in which the organisation can profit from strengths and opportunities and shield itself
against weaknesses and threats (Adams, 2005). However, SWOT has come under criticism recently.
Because it is so simple, both students and managers have a tendency to use it without a great deal of
thought, so that the results are often useless. Another problem is that SWOT, having been conceived
in simpler times, does not cope very well with some of the subtler aspects of modern strategic
theory, such as trade-offs (De Witt and Meyer, 1998).
Strengths
Determine an organisation's strong points. This should be from both internal and external
customers. A strength is a "resource advantage relative to competitors and the needs of the markets
a firm serves or expects to serve" (http://www.css.nccu.edu.tw/mepa/mepa_course/2005/kao/
20060221_1.ppt#1). It is a distinctive competence when it gives the firm a comparative advantage
in the marketplace. Strengths arise from the resources and competencies available to the firm.
Weaknesses
Determine an organisation's weaknesses, not only from its point of view, but also more importantly,
from customers. Although it may be difficult for an organisation to acknowledge its weaknesses it is
best to handle the bitter reality without procrastination. A weakness is a "limitation or deficiency in
one or more resources or competencies relative to competitors that impedes a firm's effective
performance" (http://gift.postech.ac.kr/admin/bbs/data/summer_session_2004/ Corporate
%20Strategy_ver%5B7%5D_final(1).ppt).
Opportunities
Another major factor is to determine how organisations can continue to grow within the
marketplace. After all, opportunities are everywhere, such as the changes in technology, government
policy, social patterns, and so on. An opportunity is a major situation in a firm's environment. Key
trends are one source of opportunities. Identification of a previously overlooked market segment,
changes in competitive or regulatory circumstances, technological changes, and improved buyer or
supplier relationships could represent opportunities fro the firm.
Threats
No one likes to think about threats, but we still have to face them, despite the fact that they are
external factors that are out of our control, for example, the recent economic slump in Asia. It is
vital to be prepared and face threats even during turbulent times. A threat is a major unfavourable
situation in a firm's environment. Threats are key impediments to the firm's current or desired
position. The entrance of new competitors, slow market growth, increased bargaining power of key
buyers or suppliers, technological changes, and new or revised regulations could represent threats to
a firm's success.
Because SWOT is such as familiar and comforting tool, many students use it at the start of their
analysis. This is a mistake. In order to arrive at a proper SWOT appraisal, other analyses need to be
carrier out first.
• Since opportunities and threats mostly arise from the environment, SWOT analysis needs to
take account of the results of a full environmental analysis.
• It is impossible to gauge what an organisation's real strengths are until you have assessed its
strategic resources - in fact, strategic resources and strength are the same thing. There is a
tendency for students to put down anything vaguely favourable that they can think of about a
company as a strength. This temptation needs to be resisted - a strength is not a strength
unless it makes a genuine difference to an organisation's competitiveness. The same is true
of weaknesses.
For example, look at Southwest Airlines and Amazon.com. Both companies have important groups
of potential customers to whom they offer poor service. Southwest ignores business passengers, and
will not accept transfers from other airlines. Amazon makes people wait days to receive books that
they can obtain instantly from their neighbourhood bookstores, and pay a delivery charge for the
privilege. Surely, these are major threats. Southwest and Amazon have chosen not to give those
customers priority. Serving them would divert resources from the firm's core markets, and dilute
service to their main customers. Not serving them is certainly not a weakness; in a paradoxical way,
it may be a strength.
The wizardry of SWOT is the matching of specific internal and external factors, which creates a
strategic matrix and which makes sense. It is essential to note that the internal factors are within the
control of organisation, such as operations, finance, marketing, and other areas. On the contrary, the
external factors are out of the organisation's control, such as political and economic factors,
technology, competition, and other areas. The four combinations are called the maxi-maxi
(strengths/opportunities), maxi-mini (strengths/threats), mini-maxi (weaknesses/opportunities), and
mini-mini (weaknesses/threats). Weihrich (1982) describes the four combinations as follows:
1. Maxi-maxi (S/O). This combination shows the organisation's strengths and opportunities. In
essence, an organisation should strive to maximise its strengths to capitalise on new
opportunities.
2. Maxi-mini (S/T). This combination shows the organisation's strengths in consideration of
threats, e.g. from competitors. In essence, an organisation should strive to use its strengths to
parry or minimise threats.
3. Mini-maxi (W/O). This combination shows the organisation's weaknesses in tandem with
opportunities. It is an exertion to conquer the organisation's weaknesses by making the most
of any new opportunities.
4. Mini-mini (W/T). This combination shows the organisation's weaknesses by comparison
with the current external threats. This is most definitely defensive strategy, to minimise an
organisation's internal weaknesses and avoid external threats.
How to Write a Good SWOT Analysis
A successfully conducted SWOT involves identifying the following:
• The things an organisation does particularly well (strengths) or badly (weaknesses) at
present.
• The factors that in the future may give the organisation potential to grow and increase its
profits (opportunities) or may make its position weaker (threats). Opportunities and threats
normally arise from changes in the environment, but sometimes have their origin inside the
organisation - for example, if key machinery or people, functioning very effectively at
present, are likely to break down or retire in a few years' time, that is a threat.
It is important to bear in mind what a SWOT is for. It is intended to summarise a strategic situation,
with a view to deciding what the organisation should do next. A SWOT analysis should contain
sufficient information for any reader to be able to see why a particular issue counts as a strength,
weakness, opportunity or threat, and what the implications are for the firm that you are analysing.
For the same reason, there is no room for equivocation in a SWOT analysis - a factor can be a
strength or a weakness, but not both. For example, a firm's IT system may provide good
management reports but poor production control information. It is pointless to put this down as both
a strength and a weakness that partially cancel each other out, since manager have only two choices:
either they upgrade the system or they do not (Mintzberg, 1990). This means that you need to come
to definite answer to the question: On balance, is the IT system a strength or a weakness? Perhaps
the lack of good production information is important, in which case the system needs to be
upgraded. Perhaps it is vital to maintain the flow of management information, in which case the
system should not be touched (Thompson, 2002). SWOT analysis aims to differentiate factors from
being bad or good for the company's performance. In a SWOT analysis, the strengths and
weaknesses of resources must be considered in relative and not absolute terms. It is important to
consider whether they are being managed effectively as well as efficiently. Resources, therefore, are
not strong or weak purely because they exist or do not exist. Rather, their value depends on how
they are being managed, controlled and used.
SWOT analyses should only pick out issues that have a substantial effect on a firm's competitive
situation. You should avoid the temptation to put down under "Strengths" almost everything you can
think of that is vaguely favourable to the firm, and to classify anything remotely unfavourable as a
weakness. It is rare for any firm should be rare, difficult to copy and make a genuine difference to
the organisations' profitability - a strategic resource. A weakness, similarly, is something that affects
the organisation's cost or differentiation advantage. Old-fashioned equipment and authoritarian
management styles, for instance, are only weaknesses if they lead to increased costs, poor quality or
bad customer service (Thompson, 2002; Adams, 2005).
Lists of strengths and weaknesses should not include factors that are common to every firm in an
industry. For example, you could not count "well-known brand" as a strength for a firm in the jeans
or cosmetic industries such as L'Oreal, since many brands are equally famous. Instead of writing
that main opportunities of the company are overseas expansion and brand extension, it is crucial to
replace it with a broader definition and explanation. The example of a more successful explanation
could be: "Eastern European markets, with developing spending power and proven appetite for
Western consumer brands, represent opportunity. 25% of existing sales in airport outlets are to
customers travelling to these countries". Another example could involve: "Competing firms have
extended brands to cosmetics, spectacles, jeans and stationery. Likely opportunity for this firm to
follow suit" (Adams, 2005).
Instead of saying that the threat of a firm is in exchange rate fluctuations, the statements of:
"Appreciation of euro versus dollar likely to lead to reduce value of US profits (25% of total)" or
"This is a specific threat that affects this firm because of its high proportion of US sales" could be
appropriate (De Witt and Meyer, 1998).
In order to write a good SWOT the following criteria must be taken into account:
• Make your points long enough, and include enough detail, to make it plain why a particular
factor is important, and why it can be considered as a strength, weakness, opportunity or
threat. Include precise evidence, and cite figures, where possible.
• Be a specific as you can about the precise nature of a firm's strength and weakness. Do not
be content with general factors like economies of scale.
• Avoid vague, general opportunities and threats that could be put forward for just about any
organisation under any circumstances.
• Do not mistake the outcomes of strength (such as profits and market share) for strengths in
their won right;
• Improvements is not the same as strength - do not confuse the two;
• Avoid contradicting yourself in the course of the analysis, by having strengths and
weaknesses that are essentially different aspects of the same strategy of resource. Come to a
reasoned conclusion about whether the good points outweigh the bad ones, or vice versa.
Where to Find Information for SWOT Analysis
Students, when finding the essential information for conducting SWOT analysis, would have to
look at company's business reports, annual reviews, published performance data on financial
resources, marketing and operations, including current suppliers and key stakeholders groups.
It can also be helpful to search various journals on marketing, strategy, human resources to find out
more published and referenced information on the company's past experience, its current position
and future objectives.
SWOT Analysis Limitations
A key element of strategic option formulation is the matching of organizational strengths and
weaknesses with opportunities and threats which exist in the marketplace. SWOT analysis is widely
recognized in the marketing and strategic management literature as a systematic way of achieving
this end. A number of critics however have claimed that the output from a SWOT analysis is often
either trivial or so broad as to be relatively meaningless in the context of making actual marketing
decisions. Mintzberg (1990), for example, states that the assessment of strengths and weaknesses
may be unreliable, being bound up with aspirations, biases and hopes. Therefore, it is important for
strengths and weaknesses to be defined in the context of a situation. As a consequence, a creative
problem-solving tool such as brainstorming may thus be a useful help in overcoming this difficulty.
SWOT analysis can be used in many ways to aid strategic analysis. The most common way is to use
it as a logical framework guiding systematic discussion of a firm's resources and the basic
alternatives that emerge from this resource-based view. What one manager sees as an opportunity,
another may see as a potential threat. Likewise, a strength to one manager can be a weakness to
another. Different assessments may reflect underlying power considerations within the firm or
differing factual perspectives. Systematic analysis of these issues facilitates objectives internal
analysis (Hill and Westbrook, 1997; Markides, 1999). Understanding the key opportunities and
threats facing a firm helps its managers identify realistic options from which to choose an
appropriate strategy and clarifies the most effective niche for the firm.
One of the historical deficiencies of SWOT analysis was the tendency to rely on a very general,
categorical assessment of internal capabilities. The resource-based view came to exist in part as a
remedy to this void in the strategic management field. It is an excellent way to identify internal
strengths and weaknesses and use that information to enhance the quality of a SWOT analysis.
Similarly, value chain analysis identifies elements of a company's capabilities and operations that
are useful in conducting a SWOT analysis.
Conclusion
SWOT helps a company to see itself for better and for worse. Companies are inherently insular and
inward looking SWOTs are a means by which a company can better understand what it does very
well and where its shortcomings are. SWOTs will help the company size up the competitive
landscape and get some insight into the vagaries of the marketplace.
SWOT analysis has been a framework of choice among many managers for along time because of
its simplicity and its portrayal of the essence of sound strategy formulation - matching a firm's
opportunities and threats wit its strengths and weaknesses. Central to making SWOT analysis
effective is accurate internal analysis - the identification of specific strengths and weaknesses
around which sound strategy can be built.
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PORTERS FIVE FORCES:
Introduction
There is continuing interest in the study of the forces that impact on an organisation, particularly
those that can be harnessed to provide competitive advantage. The ideas and models which emerged
during the period from 1979 to the mid-1980s (Porter, 1998) were based on the idea that
competitive advantage came from the ability to earn a return on investment that was better than the
average for the industry sector (Thurlby, 1998).
As Porter's 5 Forces analysis deals with factors outside an industry that influence the nature of
competition within it, the forces inside the industry (microenvironment) that influence the way in
which firms compete, and so the industry’s likely profitability is conducted in Porter’s five forces
model. A business has to understand the dynamics of its industries and markets in order to compete
effectively in the marketplace. Porter (1980a) defined the forces which drive competition,
contending that the competitive environment is created by the interaction of five different forces
acting on a business. In addition to rivalry among existing firms and the threat of new entrants into
the market, there are also the forces of supplier power, the power of the buyers, and the threat of
substitute products or services. Porter suggested that the intensity of competition is determined by
the relative strengths of these forces.
Main Aspects of Porter’s Five Forces Analysis
The original competitive forces model, as proposed by Porter, identified five forces which would
impact on an organization’s behaviour in a competitive market. These include the following:
• The rivalry between existing sellers in the market.
• The power exerted by the customers in the market.
• The impact of the suppliers on the sellers.
• The potential threat of new sellers entering the market.
• The threat of substitute products becoming available in the market.
Understanding the nature of each of these forces gives organizations the necessary insights to
enable them to formulate the appropriate strategies to be successful in their market (Thurlby, 1998).
Force 1: The Degree of Rivalry
The intensity of rivalry, which is the most obvious of the five forces in an industry, helps determine
the extent to which the value created by an industry will be dissipated through head-to-head
competition. The most valuable contribution of Porter's “five forces” framework in this issue may
be its suggestion that rivalry, while important, is only one of several forces that determine industry
attractiveness.
• This force is located at the centre of the diagram;
• Is most likely to be high in those industries where there is a threat of substitute products; and
existing power of suppliers and buyers in the market.
Force 2: The Threat of Entry
Both potential and existing competitors influence average industry profitability. The threat of new
entrants is usually based on the market entry barriers. They can take diverse forms and are used to
prevent an influx of firms into an industry whenever profits, adjusted for the cost of capital, rise
above zero. In contrast, entry barriers exist whenever it is difficult or not economically feasible for
an outsider to replicate the incumbents’ position (Porter, 1980b; Sanderson, 1998) The most
common forms of entry barriers, except intrinsic physical or legal obstacles, are as follows:
• Economies of scale: for example, benefits associated with bulk purchasing;
• Cost of entry: for example, investment into technology;
• Distribution channels: for example, ease of access for competitors;
• Cost advantages not related to the size of the company: for example, contacts and expertise;
• Government legislations: for example, introduction of new laws might weaken company’s
competitive position;
• Differentiation: for example, certain brand that cannot be copied (The Champagne)
Force 3: The Threat of Substitutes
The threat that substitute products pose to an industry's profitability depends on the relative price-
to-performance ratios of the different types of products or services to which customers can turn to
satisfy the same basic need. The threat of substitution is also affected by switching costs – that is,
the costs in areas such as retraining, retooling and redesigning that are incurred when a customer
switches to a different type of product or service. It also involves:
• Product-for-product substitution (email for mail, fax); is based on the substitution of need;
• Generic substitution (Video suppliers compete with travel companies);
• Substitution that relates to something that people can do without (cigarettes, alcohol).
Force 4: Buyer Power
Buyer power is one of the two horizontal forces that influence the appropriation of the value created
by an industry (refer to the diagram). The most important determinants of buyer power are the size
and the concentration of customers. Other factors are the extent to which the buyers are informed
and the concentration or differentiation of the competitors. Kippenberger (1998) states that it is
often useful to distinguish potential buyer power from the buyer's willingness or incentive to use
that power, willingness that derives mainly from the “risk of failure” associated with a product's
use.
• This force is relatively high where there a few, large players in the market, as it is the case
with retailers an grocery stores;
• Present where there is a large number of undifferentiated, small suppliers, such as small
farming businesses supplying large grocery companies;
• Low cost of switching between suppliers, such as from one fleet supplier of trucks to
another.
Force 5: Supplier Power
Supplier power is a mirror image of the buyer power. As a result, the analysis of supplier power
typically focuses first on the relative size and concentration of suppliers relative to industry
participants and second on the degree of differentiation in the inputs supplied. The ability to charge
customers different prices in line with differences in the value created for each of those buyers
usually indicates that the market is characterized by high supplier power and at the same time by
low buyer power (Porter, 1998). Bargaining power of suppliers exists in the following situations:
• Where the switching costs are high (switching from one Internet provider to another);
• High power of brands (McDonalds, British Airways, Tesco);
• Possibility of forward integration of suppliers (Brewers buying bars);
• Fragmentation of customers (not in clusters) with a limited bargaining power (Gas/Petrol
stations in remote places).
The nature of competition in an industry is strongly affected by suggested five forces. The stronger
the power of buyers and suppliers, and the stronger the threats of entry and substitution, the more
intense competition is likely to be within the industry. However, these five factors are not the only
ones that determine how firms in an industry will compete – the structure of the industry itself may
play an important role. Indeed, the whole five-forces framework is based on an economic theory
know as the “Structure-Conduct-Performance” (SCP) model: the structure of an industry determines
organizations’ competitive behaviour (conduct), which in turn determines their profitability
(performance). In concentrated industries, according to this model, organizations would be expected
to compete less fiercely, and make higher profits, than in fragmented ones. However, as Haberberg
and Rieple (2001) state, the histories and cultures of the firms in the industry also play a very
important role in shaping competitive behaviour, and the predictions of the SCP model need to be
modified accordingly.
How to write a Good Porter's 5 Forces analysis
The Porter’s Five Forces model is a simple tool that supports strategic understanding where power
lies in a business situation. It also helps to understand both the strength of a firm’s current
competitive position, and the strength of a position a company is looking to move into. Despite the
fact that the Five Force framework focuses on business concerns rather than public policy, it also
emphasizes extended competition for value rather than just competition among existing rivals, and
the simpleness of its application inspired numerous companies as well as business schools to adopt
its use (Wheelen and Hunger, 1998).
With a clear understanding of where power lies, it will enable a company to take fair advantage of
its strengths, improve weaknesses, and avoid taking wrong steps. Therefore, to apply this planning
tool effectively, it is important to understand the situation and to look at each of the forces
individually.
In conducting an analysis of Porter’s Five Forces, it is required to brainstorm all relevant factors for
the company’s market situation, and then check against the factors presented for each force in the
diagram above. The next step is to highlight the key factors on a diagram, and summarize the size
and the scale of the force on the diagram. It is suggested to use signs, as for instance, “+” and “--"
signs for the forces moderately in company’s favour, or for a force strongly against.
After identifying favourable and unfavourable forces for the company’s performance and industry’s
attractiveness, it is important to analyse the situation and examine the impacts of the forces. One of
the critical comments made of the Five Forces framework is its static nature, whereas the
competitive environment is changing turbulently. Are the five forces able to foresee industry
expansion? Is it the corporate strategist's goal to find a position in the industry where his or her
company can best defend itself against these forces or can influence them in its favour, or is the goal
to become part of the ongoing commerce with the intention to produce innovative ideas that will
expand the size of the industry? Is it true that the environment poses a threat to the organisation,
leading to the consideration of suppliers and buyers as threats that need to be tackled, or does it
offer the ground for a constitutive industry player co-operation?
By thinking through how each force affects a company, and by identifying the strength and
direction of each force, it provides with an opportunity to identify the strength of the position and
the ability to make a sustained profit in the industry (Mind Tools, 2006).
Limitations of Porter’s Five Force Model
Porter’s model is a strategic tool used to identify whether new products, services or businesses have
the potential to be profitable. However it can also be very illuminating when used to understand the
balance of power in other situations.
Porter argues that five forces determine the profitability of an industry. At the heart of industry are
rivals and their competitive strategies linked to, for example, pricing or advertising; but, he
contends, it is important to look beyond one’s immediate competitors as there are other determines
of profitability. Specifically, there might be competition from substitutes products or services. These
alternatives may be perceived as substitutes by buyers even though they are part of a different
industry. An example would be plastic bottles, cans and glass bottle for packaging soft drinks. There
may also be potential threat of new entrants, although some competitors will see this as an
opportunity to strengthen their position in the market by ensuring, as far as they can, customer
loyalty. Finally, it is important to appreciate that companies purchase from suppliers and sell to
buyers. If they are powerful they are in a position to bargain profits away through reduced margins,
by forcing either cost increases or price decreases. This relates to the strategic option of vertical
integration, when the company acquires, or mergers with, a supplier or customer and thereby gains
greater control over the chain of activities which leads from basic materials through to final
consumption (Luffman and et al., 1996; Wheelen and Hunger, 1998).
It is important to be aware that this model has further limitations in today's market environment; as
it assumes relatively static market structures. Based originally on the economic situation in the
eighties with its strong competition and relatively stable market structures, it is not able to take into
account new business models and the dynamism of the industries, such as technological innovations
and dynamic market entrants from start-ups that will completely change business models within
short times. For instance, the computer and software industry is often considered as being highly
competitive. The industry structure is constantly being revolutionized by innovation that indicates
Five Forces model being of limited value since it represents no more than snapshots of a moving
picture. Therefore, it is not advisable to develop a strategy solely on the basis of Porter’s models
(Kippenberger, 1998; Haberberg and Rieple, 2001), but to examine it in addition to other strategic
frameworks of SWOT and PEST analysis.
Nevertheless, that does not mean that Porters theories became invalid. What needs to be done is to
adopt the model with the knowledge of their limitations and to use them as a part of a larger
framework of management tools, techniques and theories. This approach, however, is advisable for
the application of every business model (Recklies, 2001).
Porter's Six Forces model and its relationship to the standard Five Forces model
Porter’s Five Forces model actually has an extension referred to as Porter’s Six Forces model. It is
considerably less popular than the Five Forces model as its acceptance has been less positive than
the Five Forces model. The Six Forces model though is very similar to the Five Forces model with
the only difference being the addition of the sixth force in the framework. This sixth force in the
model is termed as the relative power of other stakeholders, and can refer to a number of other
groups or entities, depending on the factor which has the greatest influence including:
• Complementors – One school of thought looks at the sixth force to be complementors, which are
businesses offering complementary products to the sector in focus and being analysed (Grove
1996). The author states that these complementary businesses, as a sixth factor, affect the industry
as changes in these businesses (such as new techniques, approaches or technologies) can impact on
the dynamics between the industry and the complementors.
• The government – The sixth force in the framework can also be considered to be the government,
and is included in the framework if it has potential to impact on all the other five forces (Gordon,
1997). Thus, the government can have direct impact in the industry as the sixth force, but can also
have indirect impact or influence by affecting the other five forces, whether favourably or
unfavourably.
• The public – Yet other viewpoints look at the public as the sixth force in the model, particularly if
the public has a strong influence in the dynamics of the sector resulting in changes to the other
forces or in the sector as a whole.
• Shareholders – This group can also be considered potentially as the sixth force. This is more
important in recent years where shareholder activity has increased significantly in the boardroom,
and management of firms has been scrutinised much more and even given ‘threats’ if certain actions
favoured by the shareholders were not pursued.
• Employees – Employees could also be considered as the sixth force if they wielded
extraordinarily strong influence on the firm in a particular sector. The status of employees seems to
follow similar rules in certain sectors, and thus could be considered a strong influence in these
sectors. For example, in the automobile sector in the US, a large part of the work force are
unionised, and thus could be considered the sixth force instead of the government or
complementors.
While a sixth force has been added to Porter’s original Five Forces model, the acceptance of this
framework has been somewhat limited. This could be for two reasons. First, is that there is no
definite and specific sixth force in all sectors, as it is different for each sector. Second, while a sixth
force could be defined for all sectors, the influence of this factor can also be captured in the other
five forces and thus the necessity of having it in the framework is less compelling.
Where to find information for Porter's 5 Forces analysis
In conducting the analysis it is crucial to examine the existing literature:
• Periodicals, business articles on the industry performance, etc;
• Analyst reports and trade organisations;
• Company annual reports and its publications on the main suppliers an distribution network;
• Anything that will give the exposure to the market situation, competitors present in the
market, new emerging companies in the industry.
It is important to make sure that the sources are reliable and relevant to the current condition of the
industry. It has to be viable, reliable and valid, in order to make conduct a good analysis of the
model. For this purpose, the gathered data and information has to be checked and be applied to the
current business conditions. Further limitations could be present in the nature of market forces that
reduce the applicability of the information sources to present situations; and the amount of detailed
information required. This can be prohibitive to its practical use. For example, the level of
competitor information required is very detailed and may not always be available.
Conclusion
Any company must seek to understand the nature of its competitive environment if it is to be
successful in achieving its objectives and in establishing appropriate strategies. If a company fully
understands the nature of the Porter’s five forces, and particularly appreciates which one is the most
important, it will be in a stronger position to defend itself against any threats and to influence the
forces with its strategy. The situation is fluid, and the nature and relative power of the forces will
change. Consequently, the need to monitor and stay aware is continuous.

Some issues during the implementation of these Five Forces are crucially important for
organizations to build long-term business strategy and sustaining competitive advantages rather
than simply list the forces. Successful use of the Porter Model Analysis includes identifying the
sources of competition, the strength and likelihood of that competition existing, and strategic
recommendations for the action a company should take to in order to develop barriers to
competition.
…..................................................................................
ANSOFF

Introduction
The Ansoff matrix presents the product and market choices available to an organisation. Herein
markets may be defined as customers, and products as items sold to customers (Lynch, 2003). The
Ansoff matrix is also referred to as the market/product matrix in some texts. Some texts refer to the
market options matrix, which involves examining the options available to the organisation from a
broader perspective. The market options matrix is different from Ansoff matrix in the sense that it
not only presents the options of launching new products and moving into new markets, but also
involves exploration of possibilities of withdrawing from certain markets and moving into unrelated
markets (Lynch, 2003). Ansoff matrix is a useful framework for looking at possible strategies to
reduce the gap between where the company may be without a change in strategy and where the
company aspires to be (Proctor, 1997).
Main aspects of Ansoff Analysis
The well known tool of Ansoff matrix was published first in the Harvard Business Review (Ansoff,
1957). It was consequently published in Ansoff's book on ‘Corporate Strategy' in 1965
(Kippenberger, 1988). Organisations have to choose between the options that are available to them,
and in the simplest form, organisations make the choice between for example, taking an option and
not taking it. Choice is at the heart of the strategy formulation process for if there were no choices,
there will be little need to think about strategy. According to Macmillan et al (2000), “choice and
strategic choice refer to the process of selecting one option for implementation.” Organisations in
their usual course exercise the option relating to which products or services they may offer in which
markets (Macmillan et al, 2000).
The Ansoff matrix provides the basis for an organisation's objective setting process and sets the
foundation of directional policy for its future (Bennett, 1994). The Ansoff matrix is used as a model
for setting objectives along with other models like Porter matrix, BCG, DPM matrix and Gap
analysis etc. The Ansoff matrix is also used in marketing audits (Li et al, 1999). The Ansoff matrix
entails four possible product/market combinations: Market penetration, product development,
market development and diversification (Ansoff 1957, 1989). The four strategies entailed in the
matrix are elaborated below.
Ansoff Product-Market Growth Matrix

Market penetration
Market penetration occurs when a company penetrates a market with its current products. It is
important to note that the market penetration strategy begins with the existing customers of the
organisation. This strategy is used by companies in order to increase sales without drifting from the
original product-market strategy (Ansoff, 1957). Companies often penetrate markets in one of three
ways: by gaining competitors customers, improving the product quality or level of service,
attracting non-users of the products or convincing current customers to use more of the company's
product, with the use of marketing communications tools like advertising etc. (Ansoff, 1989, Lynch,
2003). This strategy is important for businesses because retaining existing customers is cheaper than
attracting new ones, which is why companies like BMW and Toyota (Lynch, 2003), and banks like
HSBC engage in relationship marketing activities to retain their high lifetime value customers.
Product development
Another strategic option for an organisation is to develop new products. Product development
occurs when a company develops new products catering to the same market. Note that product
development refers to significant new product developments and not minor changes in an existing
product of the firm. The reasons that justify the use of this strategy include one or more of the
following: to utilise of excess production capacity, counter competitive entry, maintain the
company's reputation as a product innovator, exploit new technology, and to protect overall market
share (Lynch, 2003). Often one such strategy moves the company into markets and towards
customers that are currently not being catered for.
Market development
When a company follows the market development strategy, it moves beyond its immediate
customer base towards attracting new customers for its existing products. This strategy often
involves the sale of existing products in new international markets. This may entail exploration of
new segments of a market, new uses for the company's products and services, or new geographical
areas in order to entice new customers (Lynch, 2003). For example, Arm & Hammer was able to
attract new customers when existing consumers identified new uses of their baking soda
(Christensen et al, 2005).
Diversification
Diversification strategy is distinct in the sense that when a company diversifies, it essentially moves
out of its current products and markets into new areas. It is important to note that diversification
may be into related and unrelated areas. Related diversification may be in the form of backward,
forward, and horizontal integration. Backward integration takes place when the company extends its
activities towards its inputs such as suppliers of raw materials etc. in the same business. Forward
integration differs from backward integration, in that the company extends its activities towards its
outputs such as distribution etc. in the same business. Horizontal integration takes place when a
company moves into businesses that are related to its existing activities (Lynch, 2003; Macmillan et
al, 2000).
It is important to note that even unrelated diversification often has some synergy with the original
business of the company. The risk of one such manoeuvre is that detailed knowledge of the key
success factors may be limited to the company (Lynch, 2003). While diversified businesses seem to
grow faster in cases where diversification is unrelated, it is crucial to note that the track record of
diversification remains poor as in many cases diversifications have been divested (Porter, 1987).
Scholars have argued that related diversification is generally more profitable (Macmillan et al,
2000; Pearson, 1999). Therefore, diversification is a high-risk strategy as it involves taking a step
into a territory where the parameters are unknown to the company. The risks of diversification can
be minimised by moving into related markets (Ansoff, 1989).
How to write a Good Ansoff Analysis
It is important for analysts to acknowledge that different strategic options are suitable for companies
operating in different types of industries and markets. No one strategic option for growth is
appropriate for all types of companies at all times. The business environment, including competitive
activity, also plays a key role in determining which strategic choice is most appropriate for a
company. It is not possible to write a good Ansoff analysis without looking at the various factors in
the business environment, which impact the choice of a firm's strategic options. Market penetration,
for example, may prove to be a wise strategy only when the overall market is growing. In a growing
market, companies are often able to increase sales to existing and some new customers without
increasing their relative market share.
Note that companies with low market share in a growing market can make gains by attacking a
competitor head on. For example, Burger King (relatively low market share) to an extent has been
successful at attacking McDonald's sales (relatively high market share). However, it is more
difficult to reap benefits of market penetration strategy in a declining market. Note that each
strategic option brings with it some inherent risks, which can be reduced through careful planning
and implementing control mechanisms. Overall, market penetration strategy is a low risk strategy as
the business parameters of product and market more or less remain the same. It is important to
discuss the benefits and appropriateness of the strategic option for an organisation while mentioning
the risks inherent with each strategic option.
While writing about the product development strategy, it is important to mention that it is often a
part of the natural growth of organisations. Look for the reasons as to why the company selected the
strategy and explain the reasons and implications. In many cases, innovation serves as the most
important reason as it may present an opportunity to take market share from competitors or a threat
to an existing product line. Product development strategy can in some cases be risky, as was the
case of the New Coke. While customers liked the taste of the New Coke in the taste tests conducted
by Coca Cola, customers of the brand favoured Classic Coke over the new product. Clearly
remember the differences between market penetration and product development strategies, as it may
be easy to confuse the two strategies if the analysis is not performed carefully.
Note that the core competency of a firm becomes crucial in case of the market development
strategy. For example, Glaxo has been able to develop new markets for its anti-ulcer drugs by
developing and marketing a lower-strength version of the drug in many countries that can be sold
without prescription as a stomach remedy. Market development strategy, like other strategic
options, entails certain risks also. McDonald's entered a number of new markets in the wake of
globalisation with its existing products. Due to the nature of the company's products, McDonald's
had to make changes in the ingredients of its burgers in order to cater to the market.
It is imperative for analysts who are trying to identify the growth strategies or are formulating
proposals for such strategies for a particular firm, that firms in today's fiercely competitive business
environment often pursue multiple strategies. In fact, most big businesses today pursue multiple
strategies for growth at the same time in order to achieve their strategic objectives. For example, the
two Internet incumbents of Amazon and E*Trade are both operating in a fast evolving, uncertain
business environment and have pursued multiple and high-risk growth strategies, which include
market development, product development and diversification strategies. Amazon focused more on
the diversification strategy while E*Trade focused on market development. The differences in
strategic choices in this case were due to the differences in the type of markets in which both
companies operate. Notably Amazon operates in a wider retail setup while E*Trade operates in a
narrower are of financial services retailing. Both companies chose product development as the
second most preferred strategic option, which shows commitment to innovation in products and
services. Another similarity that comes across in the analysis of the two incumbents is that the low
risk strategy of market penetration was the least favourite option for both companies
(Constantinides, 2004). Therefore, it is crucial to note that one firm may be pursuing multiple
strategies and it is important to write about all the strategic options that the firm is pursuing.
A common mistake made while conducting Ansoff analysis is that analysts are not able to
acknowledge how different growth strategies are suitable for companies operating in different types
of markets, and how changes in business environment make the same company choose a different
strategic option at stage time in its organisational life cycle. Perry (1987) identified product
development and market development as appropriate growth strategies (Watts et al, 1998) for small
and medium enterprises (SMEs). On the other hand, the IT bluehood of the corporate world, IBM,
successfully follows the high-risk diversification strategy. Earlier, IBM followed a vertical
integration strategy wherein it had entered new industries to strengthen the core business model. It
also enjoyed backward vertical integration into the disk drive industry and forward vertical
integration into the consulting services and computer software industries (Hill et al, 2007). IBM's
vertical integration was once widely considered a vital source of competitive advantage. However,
due to the fiercely competitive business environment, IBM has been acquiring a large number of
firms in the last few years and had more than 400 strategic alliances as of 2003 (Thompson et al,
2003). The diversification strategy is deemed as a high risk strategy but IBM has been successful
due to business foresight and effective control mechanisms. Therefore, organisations change their
strategic options in accordance with changes in competitive scenario, and it is important to mention
the transition in the write up of Ansoff analysis.
Where to find information for Ansoff Analysis
Analysts can explore various sources to find information necessary for conducting Ansoff analysis.
Possible sources of information include company and competitor websites as they would highlight
the portfolio of products and services and how the company may have diversified over time. Up to
three years of annual reports of the company can be analysed to see how the company has changed
its business focus, according to changes in the business environment.
Marketing communications tools used by the company can reflect which growth strategy is being
pursued by the company. For example, corporate advertisements along with adverts of products and
services can show whether the company is targeting existing or new customers and/or existing or
new markets. Press releases are also a useful source for evaluating the growth strategy that a firm is
pursuing or should pursue. Journal articles, trade publications and magazines are useful sources of
information to identify growth strategies.
Limitations of Ansoff Analysis
While Ansoff analysis helps in mapping the strategic options for companies, it is important to note
that like all models, it has some limitations. By itself, the matrix can tell one part of the strategy
story but it is imperative to look at other strategic models like SWOT analysis and PESTLE in order
to view how the strategy of an organisation is formulating and might change in the course of its
future. For example, the Ansoff analysis of Virgin Cola shows that the brand has been launched in
the UK and USA using a market penetration strategy, which essentially reflects that the brand needs
to increase its brand recognition (Vignali, 2001). The SWOT analysis conducted by Vignali (2001)
showed an opportunity that Virgin Cola could explore diversification into new ranges of Virgin Cola
products. PESTEL analysis of Virgin Cola showed that there was need to constantly evaluate the
soft drinks industry in all countries, in order to reflect customer trends, thereby allowing the brand
to gain market share and also predict trends faster than the competition. Therefore, the steps to be
taken while conducting a strategic analysis of an organisation include SWOT analysis, PESTEL and
Ansoff matrix as fundamental models of analyses, which should be used in conjunction and not in
isolation, to view the complete strategic scenario. Also, recommendations made on the basis on only
one of the models are not concrete and lack in depth.
The above is also supported by the example of M&S where the company was not able to keep up
with the trends and suffered from decline in sales due to competitors like Next, which were
relatively more aware of customer trends and needs. Marks and Spencer came up with the Per Una
range of clothing in order to compete effectively and gained market share. M&S would not have
been able to identify which strategy to opt for growth, if a PESTEL analysis was not conducted.
While the role of analysis in making strategic choices cannot be undermined, it is imperative to note
that judgement plays a crucial role in making critical strategic choices that may change the future of
the firm (Macmillan et al, 2000). Lastly, the use of Ansoff matrix as a marketing tool may not be
really useful as the matrix is critical for analysing the strategic path that the brand may be
following, and does not essentially identify marketing options.
Conclusion
Ansoff matrix is one of the most well known frameworks for deciding upon growth strategies of an
organisation. Strategic options relating to which products or services an organisation may offer in
which markets are critical to the success of companies. The Ansoff matrix is a useful, though not an
exhaustive, framework for an organisation's objective setting process and marketing audits.
The differences in strategic choices of organisations can often be attributed to the type of market in
which the company operates. Changes in business environment play a crucial role in the strategic
options that an organisation may pursue over its life stages. There are risks associated with all of the
four strategic options entailed in the Ansoff matrix. Market penetration is generally considered as a
low risk strategy while diversification, on the other hand, is deemed as a high risk growth strategy
as it involves moving simultaneously into new products and new markets. Diversification remains a
popular strategic option for firms in today's competitive business arena, and if the diversification
strategy is consistent and well though-out, like the case of IBM, significant improvements in
profitability can be experienced.
Sources of finding information for Ansoff analysis include company websites, marketing
communications activities, company's annual reports, journal articles, trade publications and well
reputed business magazines. Lastly, Ansoff matrix as a strategic model has certain limitations. The
use of SWOT and PESTEL analysis is recommended, along with Ansoff analysis, to be able to
capture a holistic view of the strategic scenario of an organisation.

BCG:

No strategic management or marketing text appears to be complete without the inclusion of the
Boston Consulting Group (BCG) growth-share matrix. When used effectively, this model provides
guidance for resource allocation. And despite its inherent weaknesses, is probably one of the most
widely used management instrument as far as portfolio management is concern. For instant, each
SBU (strategic business unit) of large companies such as General Electric, Siemens, and Centrica
require different strategies to compete effectively and efficiently. It is not a question of one strategy
fits all SBUs since the likelihood for each of them experiencing the same market growth rate,
industry-threats and leverage is very slim. This is where the BCG model comes into play as a
management analytical tool. The ensuing examines the underpinnings of the model, for what it is
used, how to use it and why it is used.
INTRODUCTION
WHAT IS THE BCG GROWTH-SHARE MATRIX?
To begin with, BCG is the acronym for Boston Consulting Group—a general management
consulting firm highly respected in business strategy consulting. BCG Growth-Share Matrix (see
figure 1) happens to be one of many of BCG's strategic concepts the organisation developed in the
late 1970s, and is being taught at leading business schools and executive education programmes
around the world.
It is a management tool that serves four distinct purposes (McDonald 2003; Kotler 2003; Cipher
2006): it can be used to classify product portfolio in four business types based on four graphic
labels including Stars, Cash Cows, Question Marks and Dogs; it can be used to determine what
priorities should be given in the product portfolio of a company; to classify an organisation’s
product portfolio according to their cash usage and generation; and offers management available
strategies to tackle various product lines. Consider companies like Apple Computer, General
Electric, Unilever, Siemens, Centrica and many more, engaging in diversified product lines. The
BCG model therefore becomes an invaluable analytical tool to evaluate an organisation’s diversified
product lines as later seen in the ensuing sections.
WHAT ARE THE MAIN ASPECTS OF THE BCG GROWTH-SHARE MATRIX?
The BCG Growth-Share Matrix is based on two dimensional variables: relative market share and
market growth. They often are pointers to healthiness of a business (Kotler 2003; McDonald 2003).
In other words, products with greater market share or within a fast growing market are expected to
wield relatively greater profit margins. The reverse is also true. Let’s look at the following
components of the model:
Figure 1

Relative Market Share

According to the proponents of the BCG (Herndemson 1972), It captures the relative market share
of a business unit or product. But that is not all! It allows the analysed business unit be pitted
against its competitors. As earlier emphasized above, this is due to the sometime correlation
between relative market share and the product’s cash generation. This phenomenon is often likened
to the experience curve paradigm that when an organisation enjoys lower costs, improved efficiency
from conducting business operations overtime. The basic tenet of this postulation is that the more an
organisation performs a task often; it tends to develop new ways in performing those tasks better
which results in lower operating cost (Cipher 2006). What that suggests is that the experience curve
effect requires that market share is increased to be able to drive down costs in the long run and at
the same time a company with a dominant market share will inevitably have a cost advantage over
competitor companies because they have the greater share of the market. Hence, market share is
correlated with experience.
A case in point is Apple Computer’s flagship product called the iPod, which occupies a dominant
73% share the portable music player market (Cantrell 2006). Analysts believe it is the impetus for
Apple's financial rebirth 40% of Apple's sales is attributed to the iPod product line (Cantrell 2006).
Similarly, Dell’s PC line shares the same market dominance theory as the iPod. The PC
manufacture giant occupies a worldwide market share of 18.1%, which is commensurate to its large
market revenue above its competitors (see figure 2).
Figure 2

Market Growth
Market growth axis, correlates with the product life cycle paradigm, and predicates the cash
requirement a product needs relative to the growth of that market. A fast growing market is
generally considered attractive, and pulls a lot of organisation’s resources in an effort to increase
gains. A case in point is the technological market widely consider by experts as a fast growing
market, and tends to attract a lot of competition. Therefore, a product life cycle and its associated
market play a key role in decision-making.
Cash Cows
These products are said to have high profitability, and require low investment for the fact that they
are market leaders in a low-growth market. This viewpoint is captured by the founders themselves
thus:
The cash cows fund their own growth. They pay the corporate dividend. They pay the corporate
overhead. They pay the corporate interest charges. They supply the funds for R&D. They supply the
investment resource for other products. They justify the debt capacity for the whole company.
Protect them (Henderson 1976).
According to experts (Drummond & Ensor 2004; Kotler 2003; McDonald 2003), surplus cash from
cash cow products should be channelled into Stars and Questions in order to create the future Cash
Cows.
Stars
Stars are leaders in high growth markets. They tend to/should generate large amounts of cash but
also use a lot of cash because of growth market conditions. For example, Apple Computer has a
large share in the rapidly growing market for portable digital music players (Cantrell 2006).
Question Marks
Question Marks have not achieved a dominant market position, and hence do not generate much
cash. They tend to use a lot of cash because of growth market conditions. Consider Hewlett-
Packard’s small share of the digital camera market, behind industry leader Canon’s 21% (Canon
2006). However, this is a rapidly growing market.
Dogs
Dogs often have little future and are big cash drainers on the company as they generate very little
cash by virtue of their low market share in a highly low growth market.
Consider Pfizer’s Inspra (Gibson 2006):
“Pfizer launched this drug in Q4 2003 and continues to pump money into this problem child,
despite anaemic sales of roughly $40 million in the $2.7 billion heart-failure market dominated by
Toprol-XL (metoprolol). It was thought to gain market share and become a star, and eventually a
cash cow when the market growth slowed. But, according to industry’s experts, Inspra is likely to
remain a dog, despite any amount of promotion, given its perceived safety issues and a cheaper,
more effective spironolactone in the same Pfizer portfolio. Because Pfizer invested heavily in
promotion early on with Inspra, the drug's earnings potential and positive cash flow is elusive at
best. A portfolio analysis of Pfizer's cardiovascular franchise would suggest redeploying
promotional spend on Inspra to up-and-coming stars like Caduet (amlodipine/atorvastatin) or
torcetrapib to ensure those drugs reach their sales potential.”
HOW TO DEVELOP GOOD BCG GROWTH-SHARE MATRIX OF A COMPANY?
SBUs or products are represented on the model by circles and fall into one of the four cells of the
matrix already described above. Mathematically, the mid-point of the axis on the scale of Low-High
is represented by 1.0 (Drummond & Ensor 2004; Kotler 2003). At this point, the SBU’s or product’s
market share equals that of its largest competitor’s market share (Drummond & Ensor 2004; Kotler
2003). Next, calculate the relative market share and market growth for each SBU and product.
Figure 3 depicts the formulas to calculate the relative market share and market growth.
Figure 3

Oftentimes, if you are versed with a particular industry and companies operating in it, you could
draw up a BCG matrix for any company without necessarily computing figures for the relative
market share and market growth. Figure 4 depicts a fairly accurate BCG growth-share matrix for
Apple Computer developed in the spring of 2005 without the author calculating the relative market
share and market growth.
Figure 4

Once the products or SBUs have been plotted, the planner then has to decide on the objective,
strategy and budget for the business lines. Basically, at this juncture the organisations should strive
to maintain a balanced portfolio. Cash generated from Cash Cows should flow into Stars and
Question Marks in an effort to create future Cash Cows. Moreover, there are 4 major strategies that
can be pursued at this stage as described in the ensuing section.
AVAILABLE STRATEGIES TO PURSUE
Build
The product or SBU’s market share needs to be increased to strengthen its position. Short-term
earnings and profits are deliberately forfeited because it is hoped that the long-term gains will be
higher than this. This strategy is suited to Question Marks if they are to become stars.
Hold
The objective is to maintain the current share position and this strategy is often used for Cash Cows
so that they continue to generate large amounts of cash.
Harvest
Here management tries to increase short-term cash flows as far as possible (e.g. price increase,
cutting costs) even at the expense of the products or SBU’s longer-term future. It is a strategy suited
to weak Cash Cows or Cash Cows that are in a market with a limited future. Harvesting is also used
for Question Marks where there is no possibility of turning them into Stars, and for Dogs.
Divest
The objective of this strategy is to rid the organisation of the products or SBUs that are a drain on
profits and to utilize these resources elsewhere in the business where they will be of greater benefit.
This strategy is typically used for Question Marks that will not become Stars and for Dogs.
WHERE TO FIND INFORMATION FOR THE BCG GROWTH-SHARE MATRIX?
Information for the BCG Growth-Share matrix is generated from multiple sources including
company’s annual reports, sec fillings and a host of specialised research organisations such as IDC,
Hoover, Edgar, Forrester and many more. Armed with this information, developing a BCG growth-
share matrix should pose less of a problem.
Limitations
The BCG model is criticised for having a number of limitations (Kotler 2003; McDonald 2003):
• There are other reasons other than relative market share and market growth that could
influence the allocation of resources to a product or SBU: reasons such as the need for
strong brand name and product positioning could compel resource allocation to an SBU or
product (Drummond & Ensor 2004).
• What is more, the model rests on net cash consumption or generation as the fundamental
portfolio balancing criterion. That is appropriate only in a capital constrained environment.
In modern economies, with relatively frictionless capital flows, this is not the appropriate
metric to apply – rather, risk-adjusted discounted cash flows should be used (ManyWorlds
2005).
• Also, the matrix assumes products/business units are independent of each other, and
independent of assets outside of the business. In other words, there is no provision for
synergy among products/business units. This is rarely realistic.
• The relationship between cash flow and market share may be weak due to a number of
factors including (Cipher 2006): competitors may have access to lower cost materials
unrelated to their relative share position; low market share producers may be on steeper
experience curves due to superior production technology; and strategic factors other than
relative market share may affect profit margins.
• In addition, the growth-share matrix is based on the assumption that high rates of growth use
large cash resources and that maturity of the life cycle brings about the expected profit
returns. This may be incorrect due to various reasons (Cipher 2006): capital intensity may be
low and the business/product could be grown without major cash outlay; high entry barriers
may exist so margins may be sustainable and big enough to produce a positive cash flow and
a growth at the same time; and industry overcapacity and price competition may depress
prices in maturity.
• Furthermore, market growth is not the only factor or necessarily the most important factor
when assessing the attractiveness of a market. A fast growing market is not necessarily an
attractive one. Growth markets attract new entrants and if capacity exceeds demand then the
 market may become a low margin one and therefore unattractive. A high growth market may
lack size and stability.
Given the aforementioned weaknesses, the BCG Growth-Share matrix must be used with care;
nonetheless, it is a best-known business portfolio evaluation model (Kotler 2003).

MCKINSEY 7S

Introduction
This paper discusses McKinsey's 7S Model that was created by the consulting company McKinsey
and Company in the early 1980s. Since then it has been widely used by practitioners and academics
alike in analysing hundreds of organisations. The paper explains each of the seven components of
the model and the links between them. It also includes practical guidance and advice for the
students to analyse organisations using this model. At the end, some sources for further information
on the model and case studies available on this website are mentioned.
The McKinsey 7S model was named after a consulting company, McKinsey and Company, which
has conducted applied research in business and industry (Pascale & Athos, 1981; Peters &
Waterman, 1982). All of the authors worked as consultants at McKinsey and Company; in the
1980s, they used the model to analyse over 70 large organisations. The McKinsey 7S Framework
was created as a recognisable and easily remembered model in business. The seven variables, which
the authors term "levers", all begin with the letter "S":

Figure 1: McKinsey's 7S Model

These seven variables include structure, strategy, systems, skills, style, staff and shared values.
Structure is defined as the skeleton of the organisation or the organisational chart. The authors
describe strategy as the plan or course of action in allocating resources to achieve identified goals
over time. The systems are the routine processes and procedures followed within the organisation.
Staff are described in terms of personnel categories within the organisation (e.g. engineers),
whereas the skills variable refers to the capabilities of the staff within the organisation as a whole.
The way in which key managers behave in achieving organisational goals is considered to be the
style variable; this variable is thought to encompass the cultural style of the organisation. The
shared values variable, originally termed superordinate goals, refers to the significant meanings or
guiding concepts that organisational members share (Peters and Waterman, 1982).
The shape of the model (as shown in figure 1) was also designed to illustrate the interdependency of
the variables. This is illustrated by the model also being termed as the "Managerial Molecule".
While the authors thought that other variables existed within complex organisations, the variables
represented in the model were considered to be of crucial importance to managers and practitioners
(Peters and Waterman, 1982).
The analysis of several organisations using the model revealed that American companies tend to
focus on those variables which they feel they can change (e.g. structure, strategy and systems) while
neglecting the other variables. These other variables (e.g. skills, style, staff and shared values) are
considered to be "soft" variables. Japanese and a few excellent American companies are reportedly
successful at linking their structure, strategy and systems with the soft variables. The authors have
concluded that a company cannot merely change one or two variables to change the whole
organisation.
For long-term benefit, they feel that the variables should be changed to become more congruent as a
system. The external environment is not mentioned in the McKinsey 7S Framework, although the
authors do acknowledge that other variables exist and that they depict only the most crucial
variables in the model. While alluded to in their discussion of the model, the notion of performance
or effectiveness is not made explicit in the model.
Description of 7 Ss
Strategy: Strategy is the plan of action an organisation prepares in response to, or anticipation of,
changes in its external environment. Strategy is differentiated by tactics or operational actions by its
nature of being premeditated, well thought through and often practically rehearsed. It deals with
essentially three questions (as shown in figure 2): 1) where the organisation is at this moment in
time, 2) where the organisation wants to be in a particular length of time and 3) how to get there.
Thus, strategy is designed to transform the firm from the present position to the new position
described by objectives, subject to constraints of the capabilities or the potential (Ansoff, 1965).

Structure: Business needs to be organised in a specific form of shape that is generally

referred to as organisational structure. Organisations are structured in a variety of ways, dependent
on their objectives and culture. The structure of the company often dictates the way it operates and
performs (Waterman et al., 1980). Traditionally, the businesses have been structured in a
hierarchical way with several divisions and departments, each responsible for a specific task such as
human resources management, production or marketing. Many layers of management controlled the
operations, with each answerable to the upper layer of management. Although this is still the most
widely used organisational structure, the recent trend is increasingly towards a flat structure where
the work is done in teams of specialists rather than fixed departments. The idea is to make the
organisation more flexible and devolve the power by empowering the employees and eliminate the
middle management layers (Boyle, 2007).
Systems: Every organisation has some systems or internal processes to support and implement the
strategy and run day-to-day affairs. For example, a company may follow a particular process for
recruitment. These processes are normally strictly followed and are designed to achieve maximum
effectiveness. Traditionally the organisations have been following a bureaucratic-style process
model where most decisions are taken at the higher management level and there are various and
sometimes unnecessary requirements for a specific decision (e.g. procurement of daily use goods)
to be taken. Increasingly, the organisations are simplifying and modernising their process by
innovation and use of new technology to make the decision-making process quicker. Special
emphasis is on the customers with the intention to make the processes that involve customers as
user friendly as possible (Lynch, 2005).
Style/Culture: All organisations have their own distinct culture and management style. It includes
the dominant values, beliefs and norms which develop over time and become relatively enduring
features of the organisational life. It also entails the way managers interact with the employees and
the way they spend their time. The businesses have traditionally been influenced by the military
style of management and culture where strict adherence to the upper management and procedures
was expected from the lower-rank employees. However, there have been extensive efforts in the
past couple of decades to change to culture to a more open, innovative and friendly environment
with fewer hierarchies and smaller chain of command. Culture remains an important consideration
in the implementation of any strategy in the organisation (Martins and Terblanche, 2003).
Staff: Organisations are made up of humans and it's the people who make the real difference to the
success of the organisation in the increasingly knowledge-based society. The importance of human
resources has thus got the central position in the strategy of the organisation, away from the
traditional model of capital and land. All leading organisations such as IBM, Microsoft, Cisco, etc
put extraordinary emphasis on hiring the best staff, providing them with rigorous training and
mentoring support, and pushing their staff to limits in achieving professional excellence, and this
forms the basis of these organisations' strategy and competitive advantage over their competitors. It
is also important for the organisation to instil confidence among the employees about their future in
the organisation and future career growth as an incentive for hard work (Purcell and Boxal, 2003).
Shared Values/Superordinate Goals: All members of the organisation share some common
fundamental ideas or guiding concepts around which the business is built. This may be to make
money or to achieve excellence in a particular field. These values and common goals keep the
employees working towards a common destination as a coherent team and are important to keep the
team spirit alive. The organisations with weak values and common goals often find their employees
following their own personal goals that may be different or even in conflict with those of the
organisation or their fellow colleagues (Martins and Terblanche, 2003).
Using the 7S Model to Analyse an Organisation
A detailed case study or comprehensive material on the organisation under study is required to
analyse it using the 7S model. This is because the model covers almost all aspects of the business
and all major parts of the organisation. It is therefore highly important to gather as much
information about the organisation as possible from all available sources such as organisational
reports, news and press releases although primary research, e.g. using interviews along with
literature review is more suited. The researcher also needs to consider a variety of facts about the 7S
model. Some of these are detailed in the paragraphs to follow.
The seven components described above are normally categorised as soft and hard components. The
hard components are the strategy, structure and systems which are normally feasible and easy to
identify in an organisation as they are normally well documented and seen in the form of tangible
objects or reports such as strategy statements, corporate plans, organisational charts and other
documents. The remaining four Ss, however, are more difficult to comprehend. The capabilities,
values and elements of corporate culture, for example, are continuously developing and are altered
by the people at work in the organisation. It is therefore only possible to understand these aspects by
studying the organisation very closely, normally through observations and/or through conducting
interviews. Some linkages, however, can be made between the hard and soft components. For
example, it is seen that a rigid, hierarchical organisational structure normally leads to a bureaucratic
organisational culture where the power is centralised at the higher management level.
It is also noted that the softer components of the model are difficult to change and are the most
challenging elements of any change-management strategy. Changing the culture and overcoming
the staff resistance to changes, especially the one that alters the power structure in the organisation
and the inherent values of the organisation, is generally difficult to manage. However, if these
factors are altered, they can have a great impact on the structure, strategies and the systems of the
organisation. Over the last few years, there has been a trend to have a more open, flexible and
dynamic culture in the organisation where the employees are valued and innovation encouraged.
This is, however, not easy to achieve where the traditional culture is been dominant for decades and
therefore many organisations are in a state of flux in managing this change. What compounds their
problems is their focus on only the hard components and neglecting the softer issues identified in
the model which is without doubt a recipe for failure. Similarly, when analysing an organisation
using the 7S model, it is important for the researcher to give more time and effort to understanding
the real dynamics of the organisation's soft aspects as these underlying values in reality drive the
organisations by affecting the decision-making at all levels. It is too easy to fall into the trap of only
concentrating on the hard factors as they are readily available from organisations' reports etc.
However, to achieve higher marks, students must analyse in depth the cultural dimension of the
structure, processes and decision made in an organisation.
For even advanced analysis, the student should not just write about these components individually
but also highlight how they interact and affect each other. Or in other words, how one component is
affected by changes in the other. Especially the "cause and effect" analyses of soft and hard
components often yield a very interesting analysis and provides readers with an in-depth
understanding of what caused the change.
Sources for Data on McKinsey's 7S Model
The main source of academic work on the 7S model has to be the writings of Waterman et al. (1980;
1982), and Pascale and Athos (1981) who came up with the idea and applied it to analyse over 70
large organisations. Since then, it has been used by hundreds of organisations and academics for
analytical purposes. Many such case studies can be obtained from the academic journals and the
books written on the topic. A few case studies, for example the analyses of Coca-Cola and energy
giant Centrica (Owner of British Gas), are also available at this website.
…..............................................................................................
PORTERS GENERIC STRATEGY
The article focuses on the main aspects of Porter's generic strategies. The three generic strategies of
cost leadership, differentiation, and focus are discussed along with the advantages and risks inherent
with each strategic option. The article includes tips for students and analysts on how to write good
generic strategies analysis for a firm. Moreover, sources of findings information for generic
strategies analysis have been discussed. The limitations of Porter's generic strategies analysis have
been discussed, and the relationship between these strategies and industry forces is also discussed.
Introduction
Porter's generic strategies framework constitutes a major contribution to the development of the
strategic management literature. Generic strategies were first presented in two books by Professor
Michael Porter of the Harvard Business School (Porter, 1980, 1985). Porter (1980, 1985) suggested
that some of the most basic choices faced by companies are essentially the scope of the markets that
the company would serve and how the company would compete in the selected markets.
Competitive strategies focus on ways in which a company can achieve the most advantageous
position that it possibly can in its industry (Pearson, 1999). The profit of a company is essentially
the difference between its revenues and costs. Therefore high profitability can be achieved through
achieving the lowest costs or the highest prices vis-à-vis the competition. Porter used the terms
‘cost leadership' and ‘differentiation', wherein the latter is the way in which companies can earn a
price premium.
Main aspects of Porter's Generic Strategies Analysis
Companies can achieve competitive advantages essentially by differentiating their products and
services from those of competitors and through low costs. Firms can target their products by a broad
target, thereby covering most of the marketplace, or they can focus on a narrow target in the market
(Lynch, 2003) (Figure 1). According to Porter, there are three generic strategies that a company can
undertake to attain competitive advantage: cost leadership, differentiation, and focus.

Figure 1: Source: Porter (1985)

Cost leadership
The companies that attempt to become the lowest-cost producers in an industry can be referred to as
those following a cost leadership strategy. The company with the lowest costs would earn the
highest profits in the event when the competing products are essentially undifferentiated, and selling
at a standard market price. Companies following this strategy place emphasis on cost reduction in
every activity in the value chain. It is important to note that a company might be a cost leader but
that does not necessarily imply that the company's products would have a low price. In certain
instances, the company can for instance charge an average price while following the low cost
leadership strategy and reinvest the extra profits into the business (Lynch, 2003). Examples of
companies following a cost leadership strategy include RyanAir, and easyJet, in airlines, and ASDA
and Tesco, in superstores.
The risk of following the cost leadership strategy is that the company's focus on reducing costs,
even sometimes at the expense of other vital factors, may become so dominant that the company
loses vision of why it embarked on one such strategy in the first place.
Differentiation
When a company differentiates its products, it is often able to charge a premium price for its
products or services in the market. Some general examples of differentiation include better service
levels to customers, better product performance etc. in comparison with the existing competitors.
Porter (1980) has argued that for a company employing a differentiation strategy, there would be
extra costs that the company would have to incur. Such extra costs may include high advertising
spending to promote a differentiated brand image for the product, which in fact can be considered
as a cost and an investment. McDonalds , for example, is differentiated by its very brand name and
brand images of Big Mac and Ronald McDonald.
Differentiation has many advantages for the firm which makes use of the strategy. Some
problematic areas include the difficulty on part of the firm to estimate if the extra costs entailed in
differentiation can actually be recovered from the customer through premium pricing. Moreover,
successful differentiation strategy of a firm may attract competitors to enter the company's market
segment and copy the differentiated product (Lynch, 2003).
Focus
Porter initially presented focus as one of the three generic strategies, but later identified focus as a
moderator of the two strategies. Companies employ this strategy by focusing on the areas in a
market where there is the least amount of competition (Pearson, 1999). Organisations can make use
of the focus strategy by focusing on a specific niche in the market and offering specialised products
for that niche. This is why the focus strategy is also sometimes referred to as the niche strategy
(Lynch, 2003). Therefore, competitive advantage can be achieved only in the company's target
segments by employing the focus strategy. The company can make use of the cost leadership or
differentiation approach with regard to the focus strategy. In that, a company using the cost focus
approach would aim for a cost advantage in its target segment only. If a company is using the
differentiation focus approach, it would aim for differentiation in its target segment only, and not
the overall market.
This strategy provides the company the possibility to charge a premium price for superior quality
(differentiation focus) or by offering a low price product to a small and specialised group of buyers
(cost focus). Ferrari and Rolls-Royce are classic examples of niche players in the automobile
industry. Both these companies have a niche of premium products available at a premium price.
Moreover, they have a small percentage of the worldwide market, which is a trait characteristic of
niche players. The downside of the focus strategy, however, is that the niche characteristically is
small and may not be significant or large enough to justify a company's attention. The focus on
costs can be difficult in industries where economies of scale play an important role. There is the
evident danger that the niche may disappear over time, as the business environment and customer
preferences change over time.
Stuck in the middle
According to Porter (1980), a company's failure to make a choice between cost leadership and
differentiation essentially implies that the company is stuck in the middle. There is no competitive
advantage for a company that is stuck in the middle and the result is often poor financial
performance (Porter, 1980). However, there is disagreement between scholars on this aspect of the
analysis. Kay (1993) and Miller (1992) have cited empirical examples of successful companies like
Toyota and Benetton, which have adopted more than one generic strategy. Both these companies
used the generic strategies of differentiation and low cost simultaneously, which led to the success
of the companies.
How to write a Good Porter's Generic Strategies Analysis?
Firms can choose from one of the three generic strategies to compete in the marketplace, regardless
of the context of industry (Porter, 1980). Note that companies that are successful at making use of
the cost leadership strategy are often positioned to capitalize on a value proposition which emerges
from their low cost emphasis, like the classic success story of Tesco , in the UK. These companies
typically focus their efforts on value-oriented customers in the market. Tesco , Value products are
focused on providing value-oriented customers with products that are indeed value-for-money,
relative to competitive offerings. Interestingly, an emphasis on cost leadership in this sense can act
as a form of differentiation. Successful implementation of a cost leadership strategy would benefit
from process engineering skills, products designed for ease of manufacture, access to inexpensive
capital, tight cost control and incentives based largely on quantitative targets (www.wikipedia.org).
McDonalds, restaurants, for example, achieve low costs through standardised products, and
centralised buying of supplies etc. Despite the benefits that the cost leadership strategy entails, there
is limited empirical evidence that supports successful implementation of cost leadership strategies.
Contrary to the cost leadership strategy, there is empirical evidence to support the differentiation
strategy (Pearson, 1999). Hall (1980) investigated sixty-four American companies and the findings
of the study revealed that companies following a differentiation strategy had superior performance
compared to those companies that were not following the same. It is important for analysts to note
that there is more than one way in which a company can make use of differentiation. Differentiation
can be achieved through a differentiated product, superior quality, and customer service etc. A key
question to ask is whether the customers of the company perceive the point of difference as one that
is worth a price premium.
The focal point for the company pursuing a differentiation strategy should be the customer, and not
per se the competitors. Note that for a differentiation strategy to be successful, the point of
differentiation perceived by customers as valuable should coincide with the distinctive competence
of the company (Pearson, 1999). For example, Orange succeeded by providing the most basic
requirements for mobile phone communication, better than the competition, and in that the
company created a differentiation in the minds of the consumers. Orange provided the customers
with mobile phone communication requirements like better network coverage, network reliability,
and charging customers for only what they use, instead of features like free phone calls, which even
have a higher cost for provider (Barwise et al, 2004). Therefore, a customer-focused differentiation
strategy when implemented with a clear vision benefits the company in many ways including price
premium, brand loyalty and sometimes even reduced costs, like the case of Orange. In order to
effectively maintain a differentiation strategy, the firm should have strong skills in R&D, product
engineering, change management, marketing, advertising, and HRM. Continuous innovation plays a
vital role in case of differentiation, as is exemplified by companies like IBM, also referred to as the
IT bluehood of the corporate world. IBM was awarded more US patents in 2003 than any other
company, for the eleventh year running, which qualifies IBM as one of the most innovative and
successful companies in its industry.
Notably, a number of small and medium sized companies have found that the niche strategy is the
most useful strategic area to explore for them (Lynch, 2003). While most companies employ cost
leadership strategy, differentiation, or a mix of these two strategies, there are relatively fewer
companies that adopt a niche strategy. Perhaps one of the most important elements to consider in
case of a niche strategy is whether the size of the market is appropriate from the revenue potential
aspect, and if the company has the capability to provide the specialised products that the consumers
in the niche market need and want.
According to Parnell (2006), the stuck in the middle phenomenon received considerable support in
the 1980s (Dess et al, 1984; Hawes et al 1984) but was later challenged by numerous scholars
(Buzzell and Gale, 1987; Proff, 2000). It has been noted that a shortcoming of the low-cost-
differentiation dichotomy, is that the two strategies are not opposites in entirety, and are neither
always mutually exclusive (Parnell, 1997). Notably, most successful firms exhibit one or more
forms of differentiation, along with forms that are directly associated with cost leadership and even
the focus orientation. This is one of the trickiest areas in the analysis of generic strategies that the
reality can be different and more subtle than the stark contrasts that are highlighted by Porter
(1980). It is important to conduct the analysis with an open mind, and to explore the relative
advantages, disadvantages, and risks that the various strategies may offer to a company vis-à-vis the
competition and overall business environment.
Information Technology and the advent of the Internet have caused major changes in the business
environment and have accelerated the speed of change. Kim et al (2004) have argued that Porter's
generic strategies of differentiation and cost leadership will be applicable to e-business firms in a
broad sense, while the focus/niche strategy will not be as viable for e-business firms, compared to
their traditional counterparts. They suggest that an integration of cost leadership and differentiation
strategies would be the most promising in the e-business context, but individually differentiation
will show superior performance compared to cost leadership. As more and more companies are
transforming their bricks-and-mortar existences to brick-and-click, it is vital for analysts to
understand the role that generic strategies are playing in the digital era.
Where to find information for Porter's Generic Strategies Analysis
Analysts can explore various sources to find information necessary for conducting the generic
strategies analysis. Possible sources of information include company and competitor websites in
order to view the existing portfolio of products or services that are being offered to customers. The
annual reports of the company can used to analyse the relationships between costs and profitability,
and how a particular strategy is affecting the firm's overall performance.
Marketing communications tools used by the company and competitors may also reflect the generic
strategies. Advertisements can be a useful source of information to analyse the strategy that is being
pursued by the company, and how that differs from that of the competition. Journal articles, trade
publications and reputable magazine articles are useful sources of information to analyse industry
trends, customer preferences in a given market, and the strategies that are being pursued by the
companies in a particular industry.
Relationship between Porter's Generic Strategies Analysis & Industry Forces
The three generic strategies suggested by Porter (1980, 1985) can be effectively utilised to defend
against competitive forces in the business environment. The industry forces take the form of
competitive rivalry, barriers to entry, threat of substitutes, buyer power, and supplier power (Lynch,
2003).
Competitive rivalry
If the competition in the industry in which the company operates is fierce, the advantage of a cost
leadership strategy would be that the firm would be able to compete on price. However, cost
leadership strategy is not the most desirable strategy in this event, as competitors may put intense
price pressures, such that all companies would end up reducing their prices drastically.
Differentiation would be a viable strategy in this case as there is a likelihood that the loyal
customers would stay with the company. It would also be hard for competitors to cope with the
specialised needs of customers who are part of a niche segment in the market.
Barriers to Entry
A company employing any one of the three strategies would find it easy to create barriers for new
entrants. The learning curve of cost leaders in an industry, along with the economies of scale
through experience curve effects, would often make it impossible for potential entrants to compete
on price, as the more mature firm can further lower prices without comprising its profitability. High
customer loyalty towards a company's brands, which is true for the differentiation strategy, can play
a vital role in discouraging potential entrants. Customers often choose to be with a niche player
because of a certain core competence that only that particular player is providing in the market.
Also companies that make use of the focus strategy over time often develop a thorough
understanding of their customers' needs, which is a very difficult task for a potential entrant. In this
way, focus can act as an entry barrier also.
Threat of substitutes
It is the differentiation and differentiation-focused strategies that effectively reduce the threat of
substitutes. Threat of substitutes is reduced in case of the differentiation strategy due to customer
loyalty to the unique aspects of a particular product or service, which no substitute product can offer
in the customer's mind. In case of the later strategy, the very nature of the company's products and
core competence of the firm reduce the threat of substitutes.
Buyer Power
The power of buyers changes in accordance with the three generic strategies. Cost leaders have the
unique ability to offer lower price options to large and powerful buyers. However, the scenario
differs for companies making use of the differentiation and focus strategies. Buyers in case of these
two strategies would have less power as there are few alternatives available to them.
Supplier Power
Suppliers can exercise their power primarily in case of differentiation and focus/niche strategies.
Companies making use of these strategies have the ability to pass the price increases of suppliers to
their final customers, through the premium pricing strategy.
Limitations of Porter's Generic Strategies Analysis
During the 1980s, the generic strategies were regarded as fundamental to strategy and the ideas
suggested by Porter were used extensively. It became clear over time that in reality there were some
shades of grey in the distinction between differentiation and cost, compared to the black and white
that is projected in theory. It is very difficult for most companies to completely ignore cost, no
matter how different their product offering is. Similarly, most companies will not admit that their
product is essentially the same as that of others (Macmillan et al, 2000).
It is important for analysts to bear in mind that Porter's generic strategies should be considered as a
part of a broader strategic analysis. The generic strategies only provide a good starting point for
exploring the concepts of cost leadership and differentiation. Perhaps a major limitation of the
generic strategies is that they may not provide relevant strategic routes in the case of fast growing
markets (Lynch, 2003). It is important to conduct other analyses like PESTEL analysis to analyse
how the generic strategy being employed by a company should change in accordance with external
factors. Other useful analyses would include SWOT analysis, analysis of the key success factors
etc.
Conclusion
Porter's generic strategies framework suggests that a company can maximize performance by
striving to be the cost leader in an industry, by differentiating its products or services from those of
other companies, and by focusing on a narrow target in the market. A company that attempts to
combine cost leadership and differentiation strategies would invariably be stuck in the middle,
which according to Porter is not a desirable notion. It is seen that each of the generic strategies has
advantages and inherent risks that should be analysed carefully with respect to the company and its
competitors. It is noted that in practice, most successful companies make use of a combination of
low cost and differentiation strategies, which is true even in the context of online business.
It is seen that Porter's generic strategies can be effective in defending against competitive forces in
the industry. Key sources of information for conducting a generic strategies analysis include
company and competitor websites, annual reports, advertising, and journal articles, trade
publications and reputable magazine articles. Porter's generic strategies have certain limitations
which include shades of grey in the distinction between differentiation and cost, compared to the
black and white approach suggested by Porter. Also, analysts must use the generic strategies
analysis as only a part of a broader strategic analysis. Use of other strategic models and tools like
PESTEL, SWOT etc. is recommended for a more holistic analysis.
….....................................

VALU CHAIN

The article focuses on the main aspects of Value chain analysis. The activities entailed in the
framework are discussed in detail, with respect to competitive strategies and value to the customer.
The article includes tips for students and analysts on how to write a good Value chain analysis for a
firm. Moreover, sources of findings information for value chain analysis have been discussed. The
limitations of Value Chain analysis as a model have also been discussed.
Introduction
The value chain approach was developed by Michael Porter in the 1980s in his book “Competitive
Advantage: Creating and Sustaining Superior Performance” (Porter, 1985). The concept of value
added, in the form of the value chain, can be utilised to develop an organisation’s sustainable
competitive advantage in the business arena of the 21st C. All organisations consist of activities that
link together to develop the value of the business, and together these activities form the
organisation’s value chain. Such activities may include purchasing activities, manufacturing the
products, distribution and marketing of the company’s products and activities (Lynch, 2003). The
value chain framework has been used as a powerful analysis tool for the strategic planning of an
organisation for nearly two decades. The aim of the value chain framework is to maximise value
creation while minimising costs (www.wikipedia.org).
Main aspects of Value Chain Analysis
Value chain analysis is a powerful tool for managers to identify the key activities within the firm
which form the value chain for that organisation, and have the potential of a sustainable competitive
advantage for a company. Therein, competitive advantage of an organisation lies in its ability to
perform crucial activities along the value chain better than its competitors.
The value chain framework of Porter (1990) is “an interdependent system or network of activities,
connected by linkages” (p. 41). When the system is managed carefully, the linkages can be a vital
source of competitive advantage (Pathania-Jain, 2001). The value chain analysis essentially entails
the linkage of two areas. Firstly, the value chain links the value of the organisations’ activities with
its main functional parts. Then the assessment of the contribution of each part in the overall added
value of the business is made (Lynch, 2003). In order to conduct the value chain analysis, the
company is split into primary and support activities (Figure 1). Primary activities are those that are
related with production, while support activities are those that provide the background necessary for
the effectiveness and efficiency of the firm, such as human resource management. The primary and
secondary activities of the firm are discussed in detail below.
Primary activities
The primary activities (Porter, 1985) of the company include the following:
• Inbound logistics
These are the activities concerned with receiving the materials from suppliers, storing these
externally sourced materials, and handling them within the firm.
• Operations
These are the activities related to the production of products and services. This area can be
split into more departments in certain companies. For example, the operations in case of a
hotel would include reception, room service etc.
• Outbound logistics
These are all the activities concerned with distributing the final product and/or service to the
customers. For example, in case of a hotel this activity would entail the ways of bringing
customers to the hotel.
• Marketing and sales
This functional area essentially analyses the needs and wants of customers and is responsible
for creating awareness among the target audience of the company about the firm’s products
and services. Companies make use of marketing communications tools like advertising,
sales promotions etc. to attract customers to their products.
• Service
There is often a need to provide services like pre-installation or after-sales service before or
after the sale of the product or service.
Support activities
The support activities of a company include the following:
• Procurement
This function is responsible for purchasing the materials that are necessary for the
company’s operations. An efficient procurement department should be able to obtain the
highest quality goods at the lowest prices.
• Human Resource Management
This is a function concerned with recruiting, training, motivating and rewarding the
workforce of the company. Human resources are increasingly becoming an important way of
attaining sustainable competitive advantage.
• Technology Development
This is an area that is concerned with technological innovation, training and knowledge that
is crucial for most companies today in order to survive.
• Firm Infrastructure
This includes planning and control systems, such as finance, accounting, and corporate
strategy etc. (Lynch, 2003).
Figure 1: The Value Chain: Source: Porter (1985)

Porter used the word ‘margin’ for the difference between the total value and the cost of performing
the value activities (Figure 1). Here, value is referred to as the price that the customer is willing to
pay for a certain offering (Macmillan et al, 2000). Other scholars have used the word ‘added value’
instead of margin in order to describe the same (Lynch, 2003). The analysis entails a thorough
examination of how each part might contribute towards added value in the company and how this
may differ from the competition. In a study of Saudi companies, Ghamdi (2005) found that 22% of
the companies in the study used value chain frequently, while 17% reported that they somewhat
used it, and 42% did not use the tool at all. An interesting finding of the study was that the
manufacturing firms were frequent users of the tool compared to their service counterparts
(Ghamdi, 2005).
How to write a Good Value Chain Analysis
The ability of a company to understand its own capabilities and the needs of the customers is crucial
for a competitive strategy to be successful. The profitability of a firm depends to a large extent on
how effectively it manages the various activities in the value chain, such that the price that the
customer is willing to pay for the company’s products and services exceeds the relative costs of the
value chain activities. It is important to bear in mind that while the value chain analysis may appear
as simple in theory, it is quite time-consuming in practice. The logic and validity of the proven
technique of value chain analysis has been rigorously tested, therefore, it does not require the user
to have the same in-depth knowledge as the originator of the model (Macmillan et al, 2000). The
first step in conducting the value chain analysis is to break down the key activities of the company
according to the activities entailed in the framework. The next step is to assess the potential for
adding value through the means of cost advantage or differentiation. Finally, it is imperative for the
analyst to determine strategies that focus on those activities that would enable the company to attain
sustainable competitive advantage.
It is important for analysts to remember to use the value chain as a simple checklist to analyse each
activity in the business with some depth (Pearson, 1999). The value chain should be analysed with
the core competence of the company at its very heart (Macmillan et al, 2003). The value chain
framework is a handy tool for analysing the activities in which the firm can pursue its distinctive
core competencies, in the form of a low cost strategy or a differentiation strategy. It is to be noted
that the value chain analysis, when used appropriately, makes the implementation of competitive
strategies more systematic overall. Analysts should use the value chain analysis to identify how
each business activity contributes to a particular competitive strategy. A company may benefit from
cost advantages if it either reduces the cost of individual activities in the value chain or the value
chain is essentially reconfigured, through structural changes in the activities. One of the problematic
areas of the value chain model, however, is that the costs of the different activities of the value
chain need to be attributed to an activity. There are few costing systems that contain detailed
activity level costing, unless an Activity Based Costing (ABC) system is in place in the company
(Macmillan et al, 2003). Another relevant area of concern that analysts must pay particular attention
to is the customers’ view point of value. The customers of the firm may view value in a generic
way, thereby making the process of evaluating the activities in the value chain in relation with the
total price increasingly difficult. It is imperative for analysts to note that the overall differentiation
advantage may result from any activity in the value chain. A differentiation advantage may be
achieved either by changing individual value chain activities to increase uniqueness in the final
product or service of the company, or by reconfiguring the company’s value chain.
The difference between a low cost strategy and differentiation in practice is unlike the rigidity that
is provided regarding the same in theory. Analysts must note that the difference between these two
strategies is one of the shades of grey in real life compared to the black and white that is offered in
theory. For example, Emerson Electric, which is a cost leader, has quality as a strategic concern in
achieving its ‘best costs’ strategy (Pearson, 1999). Ivory Soap, a leading product of P&G, is a broad
differentiator that turned into a cost leader. Quality is a strategic concern for managers of Ivory
Soap, along with delivering a high value product consistently.
Note that in a company with more than one product area, it is appropriate to conduct the value chain
analysis at the product group level, and not at the corporate strategy level. It is crucial for
companies to have the ability to control and make most of their capabilities. In the advent of
outsourcing, progressive companies are increasingly making their value chains more elastic and
their organisations inherently more flexible (Gottfredson et al, 2005). The important question is to
see how the companies are sourcing every activity in the value chain. A systematic analysis of the
value chain can facilitate effective outsourcing decisions. Therefore, it is important to have an in-
depth understanding of the company’s strengths and weaknesses in each activity in terms of cost
and differentiation factors.
The strategy of Wal-Mart worked when the company improved its business through innovative
practices in activities such as purchasing, logistics, and information management, which resulted in
the value offering of “everyday low prices” (Magretta, 2002). It is important to note that refining
business models on a constant basis is as critical to the success of the company as its business
strategy. Notably, both the strategy and business model of an organisation are crucial for the
robustness of the overall value chain.
For example, 7-Eleven had been vertically integrated, controlling most activities in the value chain
by itself. The company has now outsourced many parts of its business including functions like HR,
IT management, finance, logistics, distribution, product development, and packaging. According to
Gottfredson et al (2005), the value chain decisions of companies will increasingly shape their
overall organisational structure. Moreover, the value chain decisions will play a role in determining
the type of management skills that companies may need to develop or acquire to survive in fiercely
competitive business markets.
The Apple podcasting value chain is comprised of nine steps that essentially move from raw content
to the listener. All the steps of the value chain include content, advertising, production, publishing,
hosting/bandwidth, promotion, searching, catching, and listening. It is important to note that each
step in the value chain adds value to the podcast in distinctive ways, has its own sets of challenges
and opportunities.
It is important to note that the nature of value chain activities differs greatly in accordance with the
types of companies and industries. For companies with complex systems like IBM, Accenture and
Cisco etc., it is not possible for one member of the value chain to provide all the products and
services from start to finish. The marketing function in such companies focuses on aligning with
key partners and allies that must collaborate with each other. For example, installing SAP's ERP
system requires direct involvement from companies like HP, Oracle, and Accenture, along with
indirect involvement of companies like EMC, Cisco, and Microsoft, and collaboration between
many departments within the company. The market assets contrast starkly between the companies
with complex systems and those that are driven by volume operations. For example, in case of
Apple’s leading products like Macintosh and the iPod, the entire offer is inside a package, and the
entire value chain is preassembled. The change of supplier for the Macintosh from IBM, to Intel,
improved the system performance while retaining the value in terms of price to the consumer. The
only variable to manage in Apple’s case is the consumers’ preferences. The role of creating
differentiation through unique quality features, along with promotion in order to create brand
awareness, image and eventually brand equity becomes imperative for volume operations driven
companies like Apple (Moore, 2005).
It is imperative to note that the value chains of companies have undergone many changes over the
last two decades, due to the rapidly changing business environment. Information technology and the
Internet have played a fundamental role in transforming certain parts and the interlinkages between
parts of the value chains of companies today. Moreover HRM is increasingly becoming a vital asset
in the value chain that contributes to competitive advantage. Strategic alliances are also becoming
an integral part of the value chains. For example, IBM once enjoyed backward vertical integration
into the disk drive industry and forward vertical integration into the consulting services and
computer software industries (Hill et al, 2007). According to the changing business environment,
IBM had more than 400 strategic alliances as of 2003 (Thompson et al, 2003). Herein, the value
chain analysis is useful in providing a framework to examine the advantages that partners can give
to each other (Pathania-Jain, 2001). It is important to note the source of competitive advantage of a
company for the value chain analysis. The competitive advantage for IBM, for example, lies in
depth, breadth and the geographic spread of its global operations (Rai, 2006) and the loyalty that the
big blue enjoys from its clientele.
Lastly, analysts should look for the managerial implications that the new era of capability
outsourcing may bring. The value chain decisions of companies will increasingly shape their
organisational structure. Furthermore these decisions will determine the types of managerial skills
that companies may need to develop to survive in an increasingly competitive business
environment.
Where to find information for Value Chain Analysis
Analysts can explore various sources to find information necessary for conducting the value chain
analysis. Up to three years of annual reports of the company can be analysed to see how the costing
of the activities are changing over the period and whether they are in unison with the competitive
strategy of the firm. These annual reports of the company can be compared to the annual reports of
the key competitors in order to see how competitive strategies differ between the companies, along
with finding the difference in the contribution of activities to the company’s profitability.
In order to gain knowledge about the core competence of the company, analysts can look at the
company and competitor websites. SWOT analysis of the companies done by companies like
Datamonitor etc. can help the analyst to understand the key strengths and weaknesses of the
company and how the firm differs from its competitors. Furthermore, journal articles, trade
publications and magazines are useful sources of information to identify how value is created in the
particular industry in which the company operates and which activities play a key role in the
generation of that value.
Limitations of Value Chain Analysis
One of the limitations of the value chain model is that it describes an industrial organization which
essentially buys raw materials and transforms these into physical products. Notably, at the time
when the model was introduced (Porter, 1985), service industries in the western countries employed
lesser workforce compared to today’s statistics of the same (www.wikipedia.org). Academics and
practitioners alike have critiqued the model and its applicability in the context of service
organisations. Partnerships, alliances and collaboration along with differentiation and low costs are
common drivers of value today.
The limitations of the model include the fact that ‘value’ for the final customer is the value only in
its theoretical context (Svensson, 2003), and not practical terms. The real value of the product is
assessed when the product reaches the final customer, and any assessment of that value before that
moment is only something that is true in theory. Despite this limitation, analysts can effectively use
the value chain model to determine the value to the final customers in a theoretical way. Use of
other planning tools and techniques like Porter’s generic strategies, analysis of critical success
factors etc. is recommended in conjunction with the value chain framework for a more
comprehensive analysis of a company’s strategy and planning.
Conclusion
The value chain framework has been used as a powerful analysis tool for organisational strategic
planning for nearly two decades now. The value chain framework shows that the value chain of a
company may be useful in identifying and understanding crucial aspects to achieve competitive
strengths and core competencies in the marketplace. The model also reveals how the value chain
activities are tied together to ultimately create value for the consumer. The five primary activities
and four support activities form an interdependent system that is connected by linkages. Analysts
conducting the value chain analysis should break down the key activities of the company according
to the activities entailed in the framework, and assess the potential for adding value through the
means of cost advantage or differentiation. Finally, it is important to determine strategies that focus
on those activities that would enable the company to attain sustainable competitive advantage.
It is important to analyse the value chain of a company with the core competence at its very heart.
The nature of value chain activities differs greatly in accordance with the types of companies and
industries. The value chains of companies have undergone many changes in the last two decades
due to advancements in technology facilitating change at a very rapid pace in the business
environment. Outsourcing will cause major changes in organisations and their value chains, with
significant managerial implications.
Sources for finding information on value chain analysis include three years annual reports of the
particular company and its key competitors, company websites, journal articles, and other reputed
trade magazines etc. Use of other planning tools and techniques like Porter’s generic strategies,
analysis of critical success factors etc. is suggested in conjunction with the value chain framework
for a more comprehensive analysis of a company’s strategic planning.
…....................................................................

MINTZBERG'S MANAGERial

Mintzberg then identified ten separate roles in managerial work, each role defined as an organised
collection of behaviours belonging to an identifiable function or position. He separated these roles
into three subcategories: interpersonal contact (1, 2, 3), information processing (4, 5, 6) and
decision making (7-10).
1. FIGUREHEAD: the manager performs ceremonial and symbolic duties as head of the
organisation;
2. LEADER: fosters a proper work atmosphere and motivates and develops subordinates;
3. LIASION: develops and maintains a network of external contacts to gather information;
4. MONITOR: gathers internal and external information relevant to the organisation;
5. DISSEMINATOR: transmits factual and value based information to subordinates;
6. SPOKESPERSON: communicates to the outside world on performance and policies.
7. ENTREPRENEUR: designs and initiates change in the organisation;
8. DISTURBANCE HANDLER: deals with unexpected events and operational breakdowns;
9. RESOURCE ALLOCATOR: controls and authorises the use of organisational resources;
10.NEGOTIATOR: participates in negotiation activities with other organisations and
individuals.
Mintzberg's Ten Management Roles

This diagram has been recreated by LMC.

LMC explains Mintzberg's Ten Management Roles

Mintzberg's Ten Management Roles are a complete set of behaviours or roles
within a business environment. Each role is different, thus spanning the variety of
all identified management behaviours. When collected together as an integrated
whole (gestalt), the capabilities and competencies of a manager can be further
evaluated in a role-specific way.
The Ten Management Roles
The ten roles explored in this theory have extensive explanations which are
briefly
developed here:

• Figurehead: All social, inspiration, legal and ceremonial obligations. In

this light, the manager is seen as a symbol of status and authority.
• Leader: Duties are at the heart of the manager-subordinate relationship
and include structuring and motivating subordinates, overseeing their
progress, promoting and encouraging their development, and balancing
effectiveness.
• Liaison: Describes the information and communication obligations of a
manager. One must network and engage in information exchange to gain
access to knowledge bases.
• Monitor: Duties include assessing internal operations, a department's
success and the problems and opportunities which may arise. All the
information gained in this capacity must be stored and maintained.
• Disseminator: Highlights factual or value based external views into the
organisation and to subordinates. This requires both filtering and
delegation skills.
• Spokesman: Serves in a PR capacity by informing and lobbying others to
keep key stakeholders updated about the operations of the organisation.
• Entrepreneur: Roles encourage managers to create improvement projects
and work to delegate, empower and supervise teams in the development
process.
• Disturbance handler: A generalist role that takes charge when an
organisation is unexpectedly upset or transformed and requires calming
and support.
• Resource Allocator: Describes the responsibility of allocating and
overseeing financial, material and personnel resources.
• Negotiator: Is a specific task which is integral for the spokesman,
figurehead and resource allocator roles.
As a secondary filtering, Mintzberg distinguishes these roles by their
responsibilities towards information. Interpersonal roles, categorised as the
figurehead, leader and liason, provide information. Informational roles link all
managerial work together by processing information. These roles include the
monitor, the disseminator and the spokesperson. All the remaining roles are
decisional, in that they use information and make decisions on how information is
delivered to secondary parties.
Generalist and specialist management
The core of Mitzberg's Ten Managerial Roles is that managers need to be both
organisational generalists and specialists. This is due to three reasons: