Chapter - 3

STRATEGIC ANALYSIS: INTERNAL ENVIRONMENT

1. INTRODUCTION
⇢ Internal environment encompasses all aspects shaping an organization's identity which includes ;
· People (individuals, groups, stakeholders).
· Processes (input-throughput-output).
· Physical infrastructure (space, equipment, conditions of work).
· Administrative apparatus (lines of authority, power, responsibility, accountability).
· Organizational culture (relationships, philosophy, values, ethics).
⇢ It is tailored to each organization's structure and business model.
⇢ Includes stakeholders like top management, investors, employees, board of directors, etc.
⇢ Focus Areas:
· Ethics, principles, work environment, employee friendliness.
· Confidence of investors, philosophical, and cultural aspects.
⇢ Thus, it is even more important to understand the internal environment from a strategic analysis perspective.

2. UNDERSTANDING THE KEY STAKEHOLDERS

⇢ Stakeholders:
All those individuals and entities that have a stake in its success and can impact it as well.
⇢ Categories of Stakeholders:
1) Employees. 5) Customers.
2) Shareholders. 6) Regulators.
3) Investors. 7) Others with an interest
4) Suppliers. in success.
⇢ Stakeholders can influence the strategy or performance of the
organization.
⇢ Influence varies based on their role and impact.
⇢ Each stakeholder or group affected by the chosen and implemented
business strategy.
⇢ Recognizing stakeholders aids in understanding and managing diverse
interests.

⇢ Stakeholders vary in influence and levels of interest in the organization.

⇢ Recognizing these differences is crucial.
⇢ Stakeholder expectations shape the organization's strategy.
⇢ Clash of objectives can lead to unfavorable consequences.
⇢ E.g.: - Shareholders wanting quick profits vs. organization's long-term
innovation goals.

★ Mendelow’s Matrix
· A.k.a. "Stakeholder Analysis Matrix"
· Framework for managing key stakeholders in a project.
· Addresses the complexity of managing competing interests.
· Essential for project success.

· Helps determine who needs information, feedback, and final approval.

· Critical for navigating complexities in project management.

· Analyzes stakeholder groups based on Power and Interest.

· Power: Ability to influence organizational strategy/resources.
· Interest: Level of interest in the organization's success.
 · Some stakeholders may seem powerful, but not equally interested.
· Big shareholders likely have high power and interest.
· A big competitor would have high power to impact strategy, but potentially less Interest in success of rival
organisation.

➮ Developing a Grid of Stakeholders

⇝ Strategic Approach:
⁃ Prioritize stakeholders based on Power and Interest.
⁃ Daily communication for high-power, high-interest individuals.
⁃ Minimal effort for low-power, low-interest stakeholders.
⇝ Metrics:

High Power, Low Power,

High Interest: Low Interest:

⇀ Stakeholders needing close management. ⇀ Stakeholders requiring minimal attention.

⇀ Requires significant time and resources. ⇀ Infrequent monitoring and minimal
⇀ Example: CEO, highly influential with a vested resource investment.
interest. Keeping them informed almost daily ⇀ Example: Research institutes seeking
should be a priority. data. Minimum effort expended on them
in terms of time and money.
⇝ Categorisation of stakeholders into four groups by Mendelow’s;

Stakeholder's
Power Interest Management Approach Examples
Category
Regular work to maintain satisfaction. Banks, government,
KEEP SATISFIED High Less
customers
Highly Fully engage, seek advice, and keep well- Shareholders, CEO, Board of
KEY PLAYERS High
Interested informed regularly. Directors
Monitor with no active efforts, minimal Business magazines, media
LOW PRIORITY Low Less
strategic focus. houses
Highly Adequately inform, communicate, and Employees, vendors,
KEEP INFORMED Low
Interested gather real-time feedback. suppliers, legal experts

· Environment is highly dynamic.

· Stakeholders may shift between quadrants based on events.
· Example: Inadvertent violation of a regulation can alter stakeholder positions.
· Strategists should be mindful of potential shifts.
· Regularly re-analyze Mendelow’s grid based on environmental changes.
· Example Scenarios:
◦ Regulatory Body (e.g., Indirect Taxes Department):
⁃ From High Power, Low Interest to High Power, High Interest.
⁃ Requires a different approach in management and communication.
◦ Media Houses:
⁃ From Low Power, Low Interest to Low Power, High Interest.
⁃ Signifies the need for increased attention despite low power.
3. STRATEGIC DRIVERS
⇢ Strategic Drivers identify what sets the organization apart from competitors.
⇢ Analyze key markets, customers, products/services, channels, and competitive advantages.
⇢ Involves analysis of the key markets in which the organisation operates, as well as its key customers, the products
and services it provides, the channels in which the products or services are delivered, and the organisation’s
competitive advantage.
⇢ The key strategic drivers of an organisation includes:
⤷ Industry & markets ⤷ Products/Services
⤷ Customers ⤷ Channels

1)Industry and Markets

⇢ Crucial for organizational awareness.
⇢ Focus on industry and market position.
⇢ Requires thorough analysis and comprehension.
⇢ Basically, industry grouping is based on the primary product that a company makes or sells.
⇢ Example:
1. Maruti, Mahindra, Tata Motors, TVS, Bajaj Auto → Automo ve Industry.
2. Zara, H&M, Marks & Spencer, Pantaloons, Westside, Uniqlo → Apparel Industry.
⇢ Markets:
· The sum total of all the buyers and sellers in the area or region under consideration.
· The value, cost and price of items traded are as per forces of supply and demand in a market.
⇢ Characteristics of Market:
· Can be physical or virtual (e-commerce).
· May be local or global based on business reach.
⇢ Individual Business Markets:
· Each business has its unique market.
· Every product within a business has its distinct market.
· Example: FMCG brand with Shampoos, Dairy Products, Flours, Washing Powder, etc. - Each product line has a
separate market.
⇢ Strategic Implications:
· Businesses should tailor strategies to specific markets of concern.
· Recognition that market differs for each product within a business.

⇨ Strategic Group Mapping (Identifying the Strongest/Weakest Companies)

⇾ Examining the industry's competitive structure involves studying rival companies' market positions.
⇾ Identifying strongest and weakest companies helps understand effective techniques and strategies.
⇾ Strategic group mapping is a useful tool for comparing market positions of firms and grouping them.
⇾ Strategic group consists of rival firms with similar competitive approaches and market positions.
⇾ Firms in the same strategic group can resemble each other in various ways.
⇾ Strategic group map helps visualize differentiating characteristics and competitive positions.
⇾ Strategists can use this analysis to understand the competition by considering different factors, such as reputation
and range of products, in a single graphical representation.
⇾ Procedure for constructing a strategic group map:
1) Identify competitive characteristics that differentiate firms.
2) Plot firms on a two-variable map based on these characteristics.
3) Assign firms in similar strategy space to the same strategic group.
4) Draw circles around each strategic group, proportionate to their share of total industry sales revenues.
⇨ Customers
⇾ Understanding customer types is crucial for deciding product/service offerings.
⇾ Different customer segments have varying needs and require tailored approaches.
⇾ Example: Headphone Brand
∙ High value buyers: Focus on premium products & sales models.
∙ Medium value buyers: Target with mid-range offerings & efficient channels.
∙ Low value buyers: Cater with budget-friendly options & accessible distribution.
⇾ Customer Data for Profit Generation is vital for profit generation; customers plays a key role.
⇾ Collect and display data to reveal customer trends and profitability.
⇾ Identify issues and target growth areas based on data findings.
⇾ Customer vs. Consumer Distinction:
∙ Customer buys the product/service; consumer uses/consumes it.
∙ Example: Parent (customer) buying stationery for kids (consumers).
∙ Marketers must understand both for effective strategies.
⇾ Pricing vs. Value-Creation Focus:
∙ Pricing perspective emphasizes the customer.
∙ Value creation, design, and usability prioritize the consumer.
∙ Balancing both aspects is crucial for successful decision-making.

⇨ Product
⇾ Product refers to the combination of goods and services offered by a company to the target market.
⇾ Strategies are required for managing existing products, introducing new ones, and discontinuing failed
products.
⇾ Decisions on branding, packaging, warranties, and other product features are also important.
⇾ Products can be classified based on industrial or consumer products, essentials or luxury products, and
durables or perishables.
⇾ Quality and workmanship of products can vary and change over time due to dynamic markets.
⇾ Organizations need policies and strategies to adapt to market dynamics.
⇾ Some products have consistent long-term customer demand, while others have shorter life spans.
⇾ Products can be differentiated based on size, shape, color, packaging, brand names, and after-sales service.
⇾ Organizations aim to create the perception that their products are unique, whether the differentiation is real
or psychological.
⇾ Brand names are used to formalize product differentiation and often have legal protection.
⇾ Brands help customers identify the product and the organization, and advertising and promotions build the
product's image.
⇾ Strong brand loyalty can develop among customers over time.
⇾ For a new product, pricing strategies for entering a market need to be designed and for that matter at least three
objectives must be kept in mind:
‣ Have customer-centric approach while making a product.
‣ Product sufficient returns through a reasonable margin over a cost.
‣ Increasing market share
⇾ Heavy investment is required in marketing strategies for products and services to strategically reach customers and
contend with market competition.
↦ Social Marketing:
· Design, implementation, and control of programs for social ideas, causes, or practices
· Example: Prohibition of smoking campaign in Delhi

↦ Augmented Marketing:
· Additional customer services and benefits beyond the core product
· Introduction of hi-tech services, innovative offerings
· Elevate customer service to unprecedented levels
↦ Direct Marketing:
· Marketing through various advertising media that interact directly with consumers
· Calls for direct response from consumers
· Includes catalogue selling, e-mail, telecomputing, electronic marketing, shopping, TV shopping

↦ Relationship Marketing:
· Creating, maintaining, and enhancing strong, value-laden relationships with customers and
stakeholders
· Example: Airlines offering special lounges for frequent flyers
· Building relationships with select customers

↦ Services Marketing:
· Applying marketing concepts, tools, and techniques to services
· Services are intangible activities or benefits offered by one party to another
· Requires different marketing strategies due to unique characteristics

↦ Person Marketing:
· Marketing activities to create, maintain, or change attitudes and behavior towards a particular
person
· Example: Politicians, sports stars, film stars marketing themselves

↦ Organization Marketing:
· Activities to create, maintain, or change attitudes and behavior towards an organization
· Practiced by both profit and non-profit organizations
↦ Place Marketing:
· Activities to create, maintain, or change attitudes and behavior towards specific places
· Examples: Marketing of business sites, tourism marketing

↦ Enlightened Marketing:
· Marketing philosophy supporting long-run performance of the marketing system
· Five principles: customer-oriented marketing, innovative marketing, value marketing, sense-of-mission
marketing, societal marketing

↦ Differential Marketing:
· Market-coverage strategy targeting multiple market segments with separate offers for each
· Example: Hindustan Unilever Limited with different brands in popular and premium segments

↦ Synchro-Marketing:
· Altering demand patterns through flexible pricing, promotion, and incentives
· Used when demand is irregular due to seasons, specific times of the day, or hours
· Example: Lower movie ticket prices on weekdays to generate demand

↦ Concentrated Marketing:
· Market-coverage strategy focusing on a large share of one or few sub-markets
· Can also be niche marketing

↦ Demarketing:
· Marketing strategies to temporarily or permanently reduce demand
· Used in situations of overfull demand
· Example: Regulating demand on overloaded buses, busy roads, crowded zoological parks
⇨ Channels
⇾ They are an essential system for product/service distribution.
⇾ E.g.: -
1) Lakme: -
· Retail stores.
· Intermediary stores (Nykaa, Westside, Reliance Trends).
· Online mode (Amazon, Flipkart, Nykaa, Lakme's website).
2) BoAt Headphones: -
· Solely online via e-commerce platforms (Flipkart, Amazon).
3) Coca - Cola: -
· Retail shops nationwide, in each district, and town.
· Online mode via Dunzo, Blinkit, etc.
⇾ Significance of Robust Channels:
⁃ Wider and stronger channels enhance competitive position.
⁃ Acts as barriers to entry, keeping new players away.
⁃ Crucial for industry dominance and resilience against competition.
⇾ There are typically three channels that should be considered:
Sales Channel Product Channel

Definition: Definition:
Intermediaries involved in selling the Intermediaries physically handling the
product to end-users. product from producer to end-user.

E.g.: - E.g.: -
Fashion designers using agencies to sell to Australia Post delivering online purchases
retail organizations. between seller and purchaser.

Key Question: Focus:

Who needs to sell to whom for your The path a product takes from producer
product to reach the end-user? to end-user.
 Service Channel

Definition:
Entities providing necessary services supporting the product
throughout its lifecycle.

E.g.: -
Bosch dishwasher sold in Bosch showroom, installed by Bosch
contracted plumber.

Importance:
Crucial for complex products in terms of installation or customer
assistance.

⇾ Channel analysis is vital for businesses planning to scale and expand, requiring the identification and utilization of
suitable channels to reach new customers in diverse markets.
4. ROLE OF RESOURCES AND CAPABILITIES: BUILDING CORE COMPETENCY
⇢ Core competencies are capabilities that provide a competitive advantage to a firm.
⇢ Introduced by C.K. Prahalad and Gary Hamel, they involve the collective learning within an organization, including
diverse production skills and integration of multiple technologies.
⇢ Competencies are a combination of skills and techniques, not individual skills.
⇢ They require the integration of many resources, rather than relying on a single capability or technological know-
how.
⇢ Core competencies cannot be built on one capability or single technological know-how; instead, they must be the
integration of many resources.
⇢ The optimal way to define them is by considering them as the sum of 5-15 areas of developed expertise.
⇢ According to Prahalad and Hamel, major core competencies are identified in three areas: competitor differentiation,
customer value, and application to other markets.
⇢ Conditions for Core Competency:
1. Competitor Differentiation:
∙ Competence must be unique and difficult for competitors to imitate.
∙ Provides a competitive edge, allowing the company to offer superior products or services.
∙ Continuous improvement needed to sustain the advantage.
∙ Example: Tesla's patented innovations in electric vehicles.
2. Customer Values
∙ Product or service must deliver fundamental benefits to end customers.
∙ Involves all skills required to provide these benefits.
∙ Impact on the customer's choice to purchase is crucial.
∙ Consumer must value the differentiation for it to be considered a core competence.
3. Application Across Markets:
∙ Core competence must be applicable organization-wide.
∙ Not limited to a specific skill or area; it should be fundamental for the entire organization.
∙ Essential for opening up potential markets and driving overall organizational success.
⇢ Core Competencies are knowledge, skills, and facilities for designing and producing core products.
⇢ They are the result from superior integration of technological, physical, and human resources.
⇢ Components:
- Distinctive skills.
- Intangible, invisible, intellectual assets.
- Cultural capabilities: managing change, learning, and team working.
⇢ View organizations as a bundle of core competencies.
⇢ Supported by several individual skills.
⇢ Benefits:
- Reduces risk and investment.
- Increases opportunities for transferring learning and best practices.
⇢ Corporate assets facilitating access to markets and businesses.
⇢ Should be difficult for competitors to imitate for a competitive advantage.
⇢ Four specific criteria of sustainable competitive advantage that firms can use to determine those capabilities that
are core competencies:
⁃ Exploit opportunities or avert threats in the external environment.
⁃ Create value for customers.
1. Valuable
⁃ Examples: Finance companies' competence in financial services, human capital
importance.
⁃ Few competitors possess them.
2. Rare ⁃ Shared capabilities are not a source of competitive advantage.
⁃ Differentiation from competitors is necessary.
⁃ Competing firms cannot easily develop them.
3. Costly to imitate ⁃ First-mover advantage can be gained.
⁃ Example: Intel's fast R&D cycle time capability.
⁃ No strategic equivalents available.
⁃ Valuable resources that are not rare or imitable.
4. Non Substitutable
⁃ Unique culture, human capital, or protected through copyrights.
⁃ Examples: Tata's low-cost strategy, Apple's iOS operating system.
5. COMBINING EXTERNAL AND INTERNAL ANALYSIS (SWOT ANALYSIS)
.1. SWOT analysis overview:
⇢ Purpose: Analyze business's strengths, weaknesses, opportunities, and threats.
⇢ Objective: Develop full awareness of factors (internal and external) for informed decision-making.

.2. Implementation:
⇢ Timing: Before all company actions, such as exploring new initiatives, policy
changes, growth opportunities, or altering plans.
⇢ Scope: Comprehensive analysis to guide decision-making processes.

.3. Utilization:
⇢ Recommendations: Identify strategies by leveraging strengths and
opportunities to address weaknesses and threats.
⇢ Versatility: Widely used tool for business growth and improvement.
⇢ Periodic Use: Advisable for periodic checks on the business landscape to
enhance operations.

.4. Outcome:
⇢ Insights: Highlights areas of success and areas needing improvement.
⇢ Longevity: Continues to be a valuable tool for business owners since its creation.

Strength Weakness Opportunity Threat

Inherent capability that Inherent limitation or Favorable condition in the Unfavorable condition in the
provides a strategic constraint that creates a organization's environment organization's environment
advantage over competitors. strategic disadvantage. that strengthens its position. that poses a risk or damage
to its position.
6. COMPETITIVE ADVANTAGE: USING MICHAEL PORTER’S GENERIC STRATEGIES
➮ Sustainability of Competitive Advantage:
Characteristics Description
Durability - The longevity of competitive advantage depends on resource and capability deterioration rate.
- Fast-paced industries and management expertise are vulnerable.
- Consumer brand names often have durable appeal.
Transferability - Competitors erode advantage by accessing the same resources and capabilities.
- Ease of transferring resources reduces sustainability.
- Easily transferable resources offer less sustainable advantage.
Imitability - Competitors' ability to replicate a firm's resources and capabilities.
- Complexity and organizational routines make imitation difficult.
Appopriability - The ability of a firm's owners to receive returns on their resource base.
- The issue of who benefits from returns arises even with sustainable advantage.
- Appropriation ensures rewards go to the investors of capital.

➮ Michael Porter’s Generic Strategies

Once we identify these forces and their corresponding strength, the task at hand for the management is to respond
to these forces strategically.
According to Porter, strategies allow organizations to gain competitive advantage from three different bases:
➳ Cost Leadership - Cost leadership focuses on producing low-cost standardized products for price-sensitive
consumers.
➳ Differentiation - Differentiation produces unique products/services for price-insensitive consumers.
➳ Focus - Focus entails catering to niche consumer segments with specific tastes.
⇒ Cost Leadership Strategy
↠ A low-cost competitive strategy aims to reduce costs in procurement, production, storage, distribution,
and overhead to target the broad mass market.
↠ By charging lower prices, the cost leader can still earn satisfactory profits compared to most
competitors.
↠ A primary reason for pursuing forward, backward, and horizontal integration strategies is to gain cost
leadership benefits.
↠ Cost leadership must be pursued with differentiation, considering factors like economies of scale,
learning curve effects, capacity utilization, and supplier/distributor linkages, which affect the
attractiveness of generic strategies.
↠ The internal strategy of sharing resources to build a competitive advantage is called synergy benefit.
↠ Striving to be a low-cost producer in an industry can especially be effective when

market is composed of many price there are few ways to achieve

sensitive buyers product differentiation.
(Indian Market) (ONGC, Petrol)

buyers do not care large number of buyers with

much about brands significant bargaining power
 Advantages Disadvantages
Rivalry - Competitors avoid price wars as Cost advantage may not last long as
the low-cost firm maintains profits despite competitors imitate cost reduction
competition eroding their own. techniques.
Buyers - Powerful buyers can't exploit the Cost leadership requires achieving higher
cost leader firm sales volume
Suppliers - Cost leaders can absorb price Minimizing costs in advertising, market
increases from suppliers. research, and R&D can be expensive in
the long run
Entrants - Barriers to market entry are Technological advancements pose a
created through efficiency and cost threat to cost leaders.
reduction.
Substitutes - Lower costs help retain
customers and develop substitutes.

↠ To achieve cost leadership, following actions could be taken:

1 Prompt forecasting of demand of a product or service.
2 Optimum utilization of the resources to achieve cost advantages.
3 Achieving economies of scale
4 Standardisation of products for mass production to yield lower cost per unit.
5 Invest in cost-saving and advanced technologies for efficient working.
6 Resistance to differentiation till it becomes essential.
⇒ Differentiation Strategy
↠ The strategy targets a broad market and creates a unique product or service, allowing for premium
pricing.
↠ The uniqueness can be associated with product design, brand image, features, technology, dealer
network or customer service.
↠ Differentiation doesn't always ensure a competitive advantage when standard products meet customer
needs or competitors can quickly imitate.
↠ Product development is an example of a strategy that offers the advantages of differentiation.
↠ Differentiation strategy helps firms charge more, gain loyalty, and create attachments through special
features like service, design, performance, and ease of use.
↠ Firms must find durable sources of uniqueness that cannot be imitated quickly or cheaply by rival firms.

Basis of Differentiation

Product Organisation Pricing

⁃ Innovative Products ⁃ Maximizing the power of ⁃ Based on its supply and

⁃ Costly R&D, Production and brand demand
Marketing costs ⁃ Location advantage, name ⁃ Customer’s ideal value for a
recognition and customer product
loyalty ⁃ Offer the lowest price
⁃ Attempt to establish
superiority through higher
prices
 Advantages Disadvantages
Rivalry: Brand loyalty safeguards against Uniqueness is difficult to sustain in the long
competitors. term.
Buyers: Less price negotiation, more special Charging too high a price may lead to customer
features. switch-off.
Suppliers: Can absorb higher costs due to Differentiation fails if not valued by customers.
premium prices.
Entrants: New entrants avoid expensive
innovative features.
Substitutes: Differentiated products have high
brand value.

↠ To achieve differentiation, following actions could be taken:

1 Offer utility to the customers and match products with their tastes and preferences.
2 Elevate/Improve performance of the product.
3 Offer the high-quality product/service for buyer satisfaction.
4 Rapid product innovation to keep up with dynamic environment.
5 Taking steps for enhancing brand image and brand value.
6 Fixing product prices based on the unique features of product and buying capacity of the
customer.
⇒ Focus Strategy
↠ Market penetration and Market development strategies offer significant focusing advantages.
{Dominos Junior Box} {Kohinoor - Ready to Eat}

↠ Most effective when

consumers have distinctive rival firms are not attempting to specialize in the
preferences same target segment
↠ A focus strategy allows organizations to specialize in serving a specific market segment better than
competitors serving a broader market.

Focused Cost Leadership Focused Differentiation

Compete based on price to target a narrow Offer unique features to fulfill the demands of a
market narrow market
Charges low prices relative to other firms in the Concentrate efforts on a particular sales channel
target market or target demographic groups
Emphasizes cost competitiveness within the Emphasizes uniqueness and differentiation
target market within the target market
Targets a narrow market segment Targets a narrow market segment

Advantages Disadvantages
Premium prices can be charged The firms lacking in distinctive competencies
may not be able to pursue focus strategy.
Rivals and new entrants may find it difficult to Costs are high due to the limited demand of
compete. product/services
Niche could disappear or be taken over by larger
competitors by acquiring the same distinctive
competencies.
⇒ BEST-COST PROVIDER STRATEGY

Best-cost provider strategy involves providing customers more value for the money, which can be done
through :-

charging lower price for the Charging similar prices for

same product products with better quality