Chp-2 Strategic Analysis External

Environment
Environmental analysis is the process by which strategists monitor the
economic, governmental/legal, market/ competitive, supplier / technological,
geographic and social settings to determine opportunities and threats to their
firms. -by William F. Guleck

The analysis is the critical starting point of strategic thinking.

- by Kenichi Ohmae

Introduction

 There are different kinds of business activities that take place in an organizational setting, and
a cursory look into their world reflects a wide variety of organisations ranging from small local
businesses to international or multinational corporations’ level. Generally, organisations are
distinguished based on their size, type of products, markets, geographical coverage, legal status,
and like because of vast organisational diversity.

 Whatever their size or other distinguishing feature they do not operate in a vacuum. They
continuously act and react to what happens outside their periphery. The factors that are outside
the business operations are typically referred to as organisational / business environment. In
other words, and in the specific context of business, environment may be defined as a set of all
external factors that weigh in the minds of the managers. Drawing an analogy with the term
‘atmosphere’ one could envision layers of such influences.

Objective of Strategy

 Its objective is to compile information about internal and external environments in order to
assess possibilities while formulating strategic objectives and contemplating strategic activities

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 Strategic Analysis

 Strategy formulation is not a task in which managers can get by with intuition, opinions, instincts,
and creative thinking.
 Judgments about what strategies to pursue need to flow directly from analysis of a firm’s
external environment and its internal resources and capabilities.
 Environmental scanning is a natural and continuous activity for every business and some do it on
an informal basis, while others have a formal structure to collect meaningful information.
 It is just as important to learn about changes in tax regulations through television news as it is
through a well-established reading material from experts.
 The capacity to collect important information in informal settings usually separates great
entrepreneurs and managers.
 Using just informal techniques, on the other hand, exposes the organisation to missed
opportunities and unanticipated hazards.
 A systematic approach to environmental assessment is essential for managing risk and
uncertainty.
 The strategic analysis is a component of business planning that has a methodical approach, makes
the right resource investments, and may assist business in achieving its objective.

Two important situational considerations are

(1) industry and competitive conditions, and
(2) an organisation’s own capabilities, resources, internal strengths, weaknesses, and market position.
Identify
External Analysis opportunity,
Evaluation
Current Threats

Vision
Analysis
Mission

Goals Identify
Strength,
Strategies
Internal Analysis Weakness

 “Accurate diagnosis of the business situation is necessary for managerial”

preparation to decide on a sound long-term direction, setting appropriate objectives, and crafting
a winning strategy. Without perceptive understanding of the strategic aspects of a company’s
external and internal environments, the chances are greatly increased that managers will finalize
a strategic game plan that doesn’t fit the situation well, that holds little prospect for building
competitive advantage, and that is unlikely to boost company performance.

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Limitation of Strategic Analysis
 First, it gives a lot of innovative options but doesn't tell which one to pick. The options can be
overlapping, confusing or difficult to implement.

 Second, it can be time-consuming at times, hurting overall organisational functioning and also
strain other efficient innovations such as developing a new product or a service.

Issues To Consider For Strategic Analysis

Strategy evolves over a period of time

 Each strategic decision must balance the different factors that impact and constrain strategy.
 A key element of strategic analysis is the probable outcomes of everyday decisions.
 A current strategy is the result of several little choices taken over a protracted period of time.
 A management radically changes strategy when they try to speed up the organisational growth.
Strategy is influenced by experience, but it has to be updated when the results become clear.

Balance of external and internal factors

 Strategic analysis necessitates creating a reasonable balance between many and conflicting
challenges, because a perfect fit between them is unlikely.
 Management must consider opportunities, influences, and constraints while taking a strategic
decision.
 There are factors driving a decision, such as entering a new market. Concurrently, here exist
constraints that limit the option, such as the presence of a large opponent.
 These limiting constraints will have various implications on the kind, degree, volume, and
significance of the impact.
 While some of these aspects are under your control, there will be others way beyond the existing
capabilities.

Risk
 In strategic analysis, the principle of maintaining balance is important. However, the complexity
and intermingling of variables in the environment reduces the strategic balance in the
organization.

 Competitive markets, liberalization, globalization, booms, recessions, technological advancements,

inter-country relationships all affect businesses and pose risk at varying degrees. An important
aspect of strategic analysis is to identify potential imbalances or risks and assess their
consequences. A broad classification of the strategic risk that requires consideration in strategic
analysis is given below:

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 TIME Short time Long time
STRATEGIC
RISKS
External Errors in Changes in the
interpreting the environment lead to
environment cause obsolescence of
strategic failure strategy
Internal Organizational Inconsistencies
capacity is unable to with the strategy
cope up with are developed on
strategic demands account of changes
in internal
capacities and
preferences.

 External risk is on account of inconsistencies between strategies and the forces in the
environment. Internal risk occurs on account of forces that are either within the organization or
are directly interacting with the organization on a routine basis.
STRATEGIC ANALYSIS
External Analysis Internal Analysis
Customer Analysis: Performance Analysis:
Segments, motivations, Profitability, sales,
unmet needs. Competitor customer satisfaction,
Analysis: Strategic product quality, relative
groups, performance, cost, new products,
objectives, strategies, human resources.
culture, cost structure. Determinants Analysis:
Market Analysis: Size, Past and current
growth, profitability, entry strategies, strategic
barriers. problems, organizational
Environmental Analysis: Capabilities and
Technological, constraints, Financial
government, economic, resources, strengths, and
cultural, demographic. weaknesses.

Opportunities, threats, Strategic strengths,

trends, and strategic, weaknesses, problems,
uncertainties constraints, and
uncertainties

Strategy Identification &

Selection
▪Identify strategic alternatives
▪Select strategy
▪Implement the operating plan
▪Review strategies

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It is evident that industries differ widely in their economic characteristics competitive situations,
and future profit prospects.
 The economic character of industries varies according to such factors as overall size and market
growth rate, the pace of technological change, the geographic boundaries of the market (which
can extend from local to worldwide), the number and size of buyers and sellers, whether sellers’
products are virtually identical or highly differentiated, the extent to which costs are affected
by economies of scale, and the types of distribution channels used to access buyers, marketing
opportunities, disposable income of prospective buyers, government support, etc.
 Competitive forces can be moderate in one industry and fierce, even cutthroat, in another. In
some industries competition focuses on who has the best price, while in others competition is
centered on quality and reliability (as in monitors for PCs and laptops) or product features and
performance (as in mobile phones) or quick service and convenience. (as in online shopping and fast
foods) or brand reputation (as in laundry detergents and soft drinks). In other industries, the
challenge is for companies to work cooperatively with suppliers, customers, and maybe even select
competitors to create the next round of product innovations and open up whole new vistas of
market opportunities.

Strategy And Business Environment

To accomplish the goals and objectives of a business, business strategist creates strategies and
formulate policies considering both internal and external factors. A framework for adjusting to the
demands of an unpredictable environment and an uncertain future is provided by strategic
management.

Management

Strategy Environment

Resources

Importance of Formulating Strategy after strategic analysis

1. Give direction for growth: The interaction with the environment enables the business to identify
the areas for growth and expansion of their activities. Once the business is aware and
understands the changes happening around, it can plan and strategise to have successful business.

2. Meeting Competition: It helps the businesses to analyse the competitors’ strategies and
formulate their own strategies accordingly. The idea is to flourish and beat competition for its
products and services.

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3. Continuous Learning: The managers are motivated to continuously update their knowledge,
understanding and skills to meet the predicted changes in the realm of business

4. Image Building: Environmental understanding helps the business organizations to improve their
image by showing their sensitivity to the environment in which they operate. For example, in view
of the shortage of power, many companies have set up captive power plants with their factories
to meet their own requirement of power as well as extend surplus capacities in the vicinity.
Understanding the needs of the environment help to showcase that the business is aware and
responsive to the needs. It creates a positive image and helps it to prosper and win over the
competitors.

5. Determine opportunities and threats: The interaction between the business and its environment
would explain opportunities and threats to the business. It helps to find new needs and wants of
the consumers, changes in laws, changes in social behaviours, and tells what new products the
competitors are bringing in the market to attract consumers.

 As the world is getting smaller and competition is increasing organisations have an increasing
pressure to develop their businesses and strengthen their competitiveness. Strategic analysis
covering internal and external environment is highly relevant and important for the strategists in
organisations in order to achieve competitive advantage, as well as ensure high performance for
survival and growth.

To flourish, a business must be aware of, assess, and respond to the many opportunities and threats
present in its environment. In order to succeed, the business must not only be aware of the
numerous aspects of its surroundings but also be able to handle and adapt to them. The business
must continuously evaluate its environment and modify its operations in order to thrive and expand.

Micro Environment

 Micro-environment is related to small area or immediate periphery of an organization. It

influences an organization regularly and directly.

 Micro environment consists of suppliers, consumers, marketing intermediaries, competitors, etc.

These are specific to the said business or firm and affect its working on a direct and regular
basis.
Issues to be Considered in analyzing micro environment
 The employees of the firm, their characteristics and how they are organised.
 The existing customer base on which the firm relies for business.
 The ways in which the firm can raise its finance.
 Who are the firm suppliers and how are the links between the two being developed?
 The local community within which the firm operates.
 The direct competition and their comparative performance.

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The factors in micro environment often relate an organization to the macro issues influencing the way
a firm reacts in the market place. The macro environment is the portion of the outside world that
significantly affects how an organisation operates but is typically much beyond its direct control and
influence.

Macro Environment

 Macro environment has broader dimensions as it consists of economic, sociocultural, technological,

political and legal factors.

 The classification of the relevant environment into components or sectors helps an organization
to cope with its complexity, comprehend the different influences operating, and relating the
environmental changes to its strategic management process.

“The environment includes factors outside the firm which can lead to opportunities for, or threats
to the firm. Although, there are many factors, the most important of the factors are socio-
economic, technological, supplier, competitors, and government.”

The external environment of an organisation is made up of all the individuals, teams, organisations,
agencies, and factors that it routinely interacts with when conducting business. In addition to carrying
out transactions, it develops and puts into action pertinent plans and policies to address environmental
changes. It negotiates its way into the future as well.

Element of Macro Environment

1. Demographic Environment
Demographics are the characteristics of a population that have been classified and explained
according to certain criteria, such age, gender, and income, in order to understand the features of a
specific group.

Demographical analysis considers

 factors such as race,
 age,
 income,
 education,
 possession of assets,
 house ownership,
 job position,
 region,
 and the degree of education

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Marketers and other social scientists regularly divide up populations based on their demographic
makeup. India has relatively younger population as compared to many other countries. Many
multinationals are interested in India considering its population size.

Issue to be addressed
What demographic trends will affect the market size of the industry?
What demographic trends represent opportunities or threats?

The size, age distribution, geographic dispersion, ethnic mix, and income distribution of a
population are all of great importance to the organisation.

2. Socio-Cultural Environment

 A general factor that influences almost all enterprises in a similar manner. It represents a
complex group of factors such as social traditions, values and beliefs, level and standards of
literacy, the ethical standards and state of society, the extent of social stratification, conflict,
cohesiveness and so forth.

 It differs from demographics in the sense that it is not the characteristics of the population,
but it is the behaviour and the belief system of that population.

 Socio-cultural environment consists of factors related to human relationships and the impact of
social attitudes and cultural values which has bearing on the operations of the organization. The
beliefs, values and norms of a society determine how individuals and organizations should be
interrelated.

3. Economic Environment
 The economic environment refers to the overall economic situation around the business and
include conditions at the regional, national and global levels. It encompasses conditions in the
markets for resources that have an effect on the supply of inputs and outputs of the business,
their costs, and the dependability, quality, and availability.

 Economic environment determines the strength and size of the market. The purchasing power in an
economy depends on current income, prices, savings, circulation of money, debt and credit availability.
Income distribution pattern determine the business possibilities.

 These include gross domestic product, per capita income, markets for goods and services,
availability of capital, foreign exchange reserve, growth of foreign trade, strength of capital
market, interest rates, disposable income, unemployment, inflation, etc. All these factors
generally tell the state of the economy. Whether it is doing good or is it performing poorly.

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4.
Political-Legal Environment
general level of political development,
the degree to which business and economic issues have been politicised,
the degree of political morality,
the state of law and order,
political stability,
the political ideology and practises of the ruling party,
the effectiveness
and purposefulness of governmental agencies, and the scope and type of governmental
intervention in the economy and industry.
 It is partly general to all similar enterprises and partly specific to an individual enterprise
 Taxes and duties
 Businesses prefer to operate in a country where there is a sound legal system.
However, in any country businesses must have a good working knowledge of the major laws
protecting consumers, competitions and organizations. Businesses must understand the relevant
laws relating to companies, competition, intellectual property, foreign exchange, labour and so
on.

Nationalism supports measures aimed at enhancing the position of a country in

International business. Presently, there is immense thrust on nationalism in Indian
business through policies like Make in India and Aatmanirbhar Bharat. Production Linked
Incentives scheme, another step in the direction, rewards businesses for increased sales of
goods produced domestically. The scheme encourages foreign businesses to open
businesses in India, and at the same time incentivises domestic businesses to open or
expand their manufacturing facilities, create more jobs, and lessen India's reliance on
imports.

5. Technological Environment
 Technology and business are linked and are interdependent on one another. Businesses help
society access the outcomes of technological research and development, raising everyone's
standard of living. As a result, business leverages technology. Businesses use new discoveries to
adapt themselves for the advancement of society.

 Technology has impacted on how businesses are conducted

PESTLE– A TOOL TO ANALYSE MACRO ENVIRONMENT

 PESTLE is often used to describe a framework for analysis of macro environmental factors.

 PESTEL analysis is frequently used to assess the business environment in which a firm operates.
Political, economic, social, and technological (PEST) analysis was the name given to the framework

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 in the past; however, later, the framework has been expanded to include environmental and legal
factors as well.

PESTLE analysis is an increasingly used and recognized analytical tool, and it is an acronym for:
P- political
E- economic
S- socio-cultural
T- technological
L- legal
E- environmental

The PESTLE analysis is simple to understand and quick to implement. The advantage of this tool is
that it encourages management into proactive and structured thinking in its decision making.

The Key Factors

1. Political factors are how and to what extent the government intervenes in the economy and the
activities of business firms. Political factors may also influence goods and services which the
government wants to provide or be provided and those that the government does not want to be
provided. Furthermore, governments have great influence on the health, education and
infrastructure of a nation.

2. Economic factors have major impacts on how businesses operate and take decisions. For example,
interest rates affect a firm's cost of capital and therefore to what extent a business grows and
expands. Exchange rates affect the costs of exporting goods and the supply and price of imported
goods in an economy. The money supply, inflation, credit flow, per capita income,
growth rates have a bearing on the business decisions.

3. Social factors affect the demand for a company's products and how that company operates.

4. Technological factors can determine barriers to entry, minimum efficient production level and
influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead
to innovation.

5. Legal factors affect how a company operates, its costs, and the demand for its products, ease of
business.

6. Environmental factors affect industries such as tourism, farming, and insurance. Growing
awareness to climate change is affecting how companies operate and the products they offer--it is
both creating new markets and diminishing or destroying existing ones.

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On the basis of these, it should be possible to identify a number of key environmental influences,
which are in effect, the drivers of change. These are the factors that require to be considered in
making meaningful decisions. Take a look at the table given below:

Political Social
 Political stability  Lifestyle trends
 Political principles and ideologies  Demographics
 Current and future taxation policy  Consumer attitudes and opinions
 Regulatory bodies and processes  Brand, company, technology image
 Government policies  Consumer buying patterns
 Government term and change  Ethnic/religious factors
 Thrust areas of political leaders  Media views and perception
Economic Technological
 Economy situation and trends  Replacement technology/solutions
 Market and trade cycles  Maturity of technology
 Specific industry factors  Manufacturing maturity and capacity
 Customer/end-user drivers  Innovation potential
 Interest and exchange rates  Technology access, licensing, patents, property
 Inflation and unemployment rights and copyrights
 Strength of consumer spending

Legal Environmental
 Business and Corporate Laws  Ecological/environmental issues
 Employment Law  Environmental hazards
 Competition Law  Environmental legislation
 Health & Safety Law  Energy consumption
 International Treaty and Law  Waste disposal
 Regional Legislation

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 PORTER FIVE FORCE

Basics

 To understand the competitive environment of the company the managers need to focus only on
the important tasks rather than gathering bulk of unimportant information.
 The task of focusing only on important task can be done with the help of some well-defined
concepts and analytical tools.
 A powerful and widely used tool for systematically diagnosing the significant competitive
pressures in a market and assessing the strength and importance of each is the five-force model
of competition.
 This model holds that, the state of competition in an industry is a composite of competitive
pressures operating in five major areas of the market

How to use it?

The strategists can use the five-forces model to determine what competition is like in a given
industry by undertaking the following steps:
 Step 1: Identify the specific competitive pressures associated with each of the five forces.
 Step 2: Evaluate how strong the pressures comprising each of the five forces are (fierce,
strong, moderate to normal, or weak).
 Step 3: Determine whether the collective strength of the five competitive forces is conducive
to earn attractive profits.

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1. Threat of New Entrants
 Profitability tends to be higher when other firms are blocked from entering the industry.
 New entrants can reduce industry profitability because
 they add new production capacity
 leading to increase supply of the product
 even at a lower price
 and can substantially erode existing firm’s market share position.
 To discourage new entrants, existing firms can try to raise barriers to entry.
 Barriers to entry represent economic forces (or ‘hurdles’) that slow down or impede entry by
other firms.

Barriers to entry (New Entrants)

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a. Capital Requirements
 When a large amount of capital is required to enter an industry,
 firms lacking funds are effectively barred from the industry,
 thus enhancing the profitability of existing firms in the industry.
 for example, huge investments are needed to build production facilities and establish
brand awareness among people for entry into the pharmaceutical industry.
 This makes the entry of new companies into this sector very difficult.
b. Economies of Scale
 Economies of scale refer to the decline in the per-unit cost of production (or other activity) as
volume grows.
 A large firm that enjoys economies of scale can produce high volumes of goods at successively
lower costs.
 This tends to discourage new entrants.
 For example, in the semiconductor industry, larger companies, such as IBM, Intel, Samsung
and Texas Instruments, enjoy substantial economies of scale in the production of advanced
microprocessors, communication chips and integrated circuits that power most consumer
electronics, personal computers (PCs) and cellular phones.
 This acts as a barrier for new entrants.

c. Product Differentiation
 Product differentiation refers to the
 physical or
 perceptual differences,
 or enhancements,
 that make a product special or unique in the eyes of customers.
 Firms in the personal care products and cosmetics industries actively engage in product
differentiation to enhance their products’ features.
 Differentiation works to reinforce entry barriers because the cost of creating genuine
product differences may be too high for the new entrants.

d. Switching Costs
 New entrant must be able to persuade existing customers of other companies to switch to its
products.
 To make a switch,
 buyers may need to test a new firm’s product,
 negotiate new purchase contracts, and
 train personnel to use the equipment, or
 modify facilities for product use.
 Buyers often incur substantial financial (and psychological) costs in switching between firms.
 When such switching costs are high, buyers are often reluctant to change.
 For example, high switching costs in moving away from Microsoft’s Windows operating systems
used in personal computers and corporate servers powered the company’s stunning growth over
the past decade in the software industry.

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e. Brand Identity
 The brand identity of products or services offered by existing firms can serve as another
entry barrier.
 Brand identity is particularly important for infrequently purchased products that carry a
high unit cost to the buyer.
 New entrants often encounter significant difficulties in building up the brand identity, because
to do so they must commit substantial resources over a long period.
 For example, during the 1970s, Japanese companies such as Toyota, Nissan, and Honda had to
spend huge sums on new product development and promotional activities to overcome the
American consumer’s preference for domestic cars.

f. Access to Distribution Channels

 The unavailability of distribution channels for new entrants poses another significant entry
barrier.
 Despite the growing power of the internet, many firms may continue to rely on their control of
physical distribution channels to sustain a barrier to entry to rivals.
 For example, because of control over distribution channels in India by HUL, P&G and Godrej
etc., small entrepreneurs find it very difficult to sell their products through the existing
channels.

g. Possibility of Aggressive Retaliation

 Sometimes the mere threat of aggressive retaliation by incumbents can deter entry by other
firms into an existing industry. For example, introduction of products by a new firm may lead
incumbents firms to reduce their product prices and increase their advertising budgets.

2. Bargaining Power of Buyers

 The bargaining power of the buyers influences not only the prices that the producer can charge
but also influences costs and investments of the producer.
 This is because powerful buyers usually bargain for better services which involves more
investment on the part of the producer.
 Buyers of an industry’s products or services can sometimes exert considerable pressure on
existing firms to secure lower prices or better services. This leverage is particularly evident when
 Buyers have full knowledge of the sources of products and their substitutes.
 They spend a lot of money on the industry’s products i.e. they are big buyers.
 The industry’s product is not perceived as critical to the buyer’s needs and buyers are more
concentrated than firms supplying the product. They can easily switch to the substitutes
available.

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3. Bargaining Power of Suppliers
 The more specialised the offering from the supplier, greater may be its clout. Suppliers can
influence the profitability of an industry in a number of ways. Suppliers can command bargaining
power over a firm when
 Their products are crucial to the buyer and substitutes are not available.
 They can lead to high switching costs.
 They are more concentrated than their buyers.

4. The Nature of Rivalry in the Industry

 The intensity of rivalry in an industry is a significant determinant of industry attractiveness
and profitability.
 The competitors influence strategic decisions at different strategic levels.
 The impact is more evident at functional level, like in the prices being charged, more aggressive
advertising, and building pressures on costs, product and so on.
 The intensity of rivalry can influence the costs of suppliers, distribution, and of attracting
customers and thus directly affect the profitability.
 The more intensive the rivalry, the less attractive is the industry.
 Rivalry among competitors tends to be cutthroat and industry profitability low when
1. An industry has no clear leader.
2. Competitors in the industry are numerous.
3. Competitors operate with high fixed costs.
4. Competitors face high exit barriers.
5. Competitors have little opportunity to differentiate their offerings.
6. The industry faces slow or diminished growth.

a. Industry Leader: A strong industry leader can discourage price wars by disciplining initiators of
such activity. Because of its greater financial resources, a leader can generally outlast smaller rivals
in a price war. Knowing this, smaller rivals often avoid initiating such a contest. For example, India’s
domestic air travel industry has no definite leader, and hence, we often see cut throat price wars.

b. Number of Competitors: Even when an industry leader exists, the leader’s ability to exert pricing
discipline diminishes with the increased number of rivals in the industry as communicating
expectations to players becomes more difficult. For example, majorly in unorganised sectors like
handicrafts, due to huge number of producers, the internal rivalry is immense.

c. Fixed Costs: When organisations operate with high fixed costs, they are motivated to utilize their
capacity and therefore, are inclined to drop prices when they have excess capacity. Price cutting
causes profitability to fall for all firms in the industry, as the firms seek to produce more to cover
costs that must be paid regardless of industry demand, i.e. the fixed costs. For this reason,
profitability tends to be lower in industries (For example, airline, telecommunications) characterized
by high fixed costs.

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d. Exit Barriers: Rivalry amongst competitors declines, if a few competitors leave the industry.
Profitability therefore tends to be higher in industries with few exit barriers. Exit barriers come in
many forms. Assets of a firm considering exit may be highly specialized and therefore of little value
to any other firm. Therefore, such firm may not be able to find a buyer for its assets. This
discourages exit. When barriers to exit are powerful, competitors desiring exit may refrain from
leaving. Their continued presence in an industry exerts downward pressure on the profitability of all
competitors. The crux is, if an organisation cannot exit, it would fight for its survival, and thus,
intensify competition.

e. Product Differentiation: Firms can sometimes insulate themselves from price wars by
differentiating their products from those of its rivals. As a consequence, profitability tends to be
higher in industries that offer opportunity for differentiation. Profitability tends to be lower in
industries involving undifferentiated commodities such as, memory chips, natural resources,
processed metals and railroads. For example, ONGC and Indian Oil, cannot offer major product
differentiation in their products. Hence, the level of competition would always be high.

f. Slow Growth: Industries whose growth is declining tend to face more intense rivalry. It is so
because, as an industry’s growth declines, rivals would often fight harder to grow or sustain their
existing market share. The resulting intensive rivalry tends to reduce profitability for all.

5.Threat of Substitutes
 To predict profit pressure from this source, firms must search for products that perform
the same, or nearly the same, function as their existing products.
 Real estate, insurance, bonds and bank deposits for example are clear substitutes for common
stocks, because they represent alternate ways to invest funds.
 The threat of substitutes is great in many high tech industries as well.
 For example
 introduction of digital filmless cameras virtually replace the film cameras and threatened the
existence of Eastman Kodak and Fuji Film.
 Further, the introduction of smartphones has replaced cameras to a great extent.

ATTRACTIVENESS OF INDUSTRY

The industry analysis culminates into identification of various issues and draw conclusions about the
relative attractiveness or unattractiveness of the industry, both near-term and long-term.
Strategists assess the industry outlook carefully, deciding whether industry and competitive
conditions present an attractive business opportunity for the organisation or whether its growth and
profit prospects are gloomy.

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This is important because companies invest capital, either the promoters or from the public and should
be inherent careful in choosing an industry. The important factors on which the management may base
such conclusions include:
 The industry’s growth potential, is it futuristically viable?
 Whether competition currently permits adequate profitability and whether
 competitive forces will become stronger or weaker?
 Whether industry profitability will be favourably or unfavourably affected by the prevailing
driving forces?
 The competitive position of an organisation in the industry and whether its position is likely
to grow stronger or weaker. (Being a well-entrenched leader or strongly positioned contender
in an otherwise lackluster industry can still produce good profitability; however, having to
fight an uphill battle against much stronger rivals can make an otherwise attractive industry
unattractive).
 The potential to capitalize on the vulnerabilities of weaker rivals (perhaps converting an
unattractive industry situation into a potentially rewarding company opportunity).
 Whether the company is able to defend against or counteract the factors that make the
industry unattractive?
 The degrees of risk and uncertainty in the industry’s future.
 The severity of problems confronting the industry as a whole.
 Whether continued participation in this industry adds importantly to the firm’s ability to be
successful in other industries in which it may have business interests?
 As a general proposition, if an industry’s overall profit prospects are above average, the industry
can be considered attractive; if its profit prospects are below average, it is unattractive.
However, it is a mistake to think of industries as being attractive or unattractive to all firms in
the industry and all potential entrants. Attractiveness is relative, not absolute. Industry
environments unattractive to weak competitors may be attractive to strong competitors.

 An assessment that the industry is fundamentally attractive typically suggests that current
industry participants employ strategies calculated to strengthen their long term competitive
positions in the business, expanding sales efforts and investing in additional facilities and
equipment as needed. If the industry and competitive situation is judged relatively unattractive,
more successful industry participants may choose to invest cautiously, look for ways to protect
their long-term competitiveness and profitability, and perhaps acquire smaller firms if the price
is right; over the longer term, strong companies may consider diversification into more
attractive businesses. Weak companies in unattractive industries may consider merging with a
rival to bolster market share and profitability or, alternatively, begin looking outside the
industry for attractive diversification opportunities.

PANORAMIC EDUCATION 18
 VALUE CREATION

 The concept of value creation was introduced primarily for providing products and services to the
customers with more worth. Value is measured by a product’s features, quality, availability,
durability, performance and by its services for which customers are willing to pay. Further, the
concept took more space in the business and organizations started discussing about the value
creation for stakeholders.

Customer’s Value to customer

surplus
Price
Profitable
Pricing
Firms’s Band
Margin
Firm’s Cost of Value
Creation
 Thus, we can say that the value creation is an activity or performance by the firm to create value
that increases the worth of goods, services, business processes or even the whole business
system. Many businesses now focus on value creation both in the context of creating better value
for customers purchasing its products and services, as well as for stakeholders in the business
who want to see their investment in business appreciate in value. Ultimately, this concept gives
business a competitive advantage in the industry and helps them earn above average
profits/returns.

 Competitive advantage leads to superior profitability. At the most basic level, how profitable a
company becomes depends on three factors:
(1) the value customers place on the company’s products;
(2) the price that a company charges for its products; and
(3) the costs of creating those products.

 The value customers place on a product reflects the utility they get from a product—the
happiness or satisfaction gained from consuming or owning the product.
 Utility must be distinguished from price. Utility is something that customers get from a product.
It is a function of the attributes of the product, such as its performance, design, quality, and
point-of-sale and after-sale service.
 Companies are ultimately aiming to achieve sustainable competitive advantage, which enables them
to succeed in the long run. Michael Porter argues that a company can generate competitive
advantage in two different ways, either through differentiation or cost advantage.
 According to Porter’s, differentiation means the capability to provide customers superior and
special value in the form of product’s special features and quality or in the form of aftersales

PANORAMIC EDUCATION 19
 customer service. As a result of differentiation, a company can demand higher price for its
products or services.
 A company will earn higher profits due to differentiation in case the expenses stay comparable
to the costs of competitors.
 The above-mentioned differentiation and cost advantage will affect a company’s ability to achieve
competitive advantage, but there are many different organizational functions that will influence
whether a company can achieve cost advantage or differentiation advantage.
 Michael Porter used the concept of value chain to explore closer different functions of the
organisations and mutual
 interactions among those functions. Value chain analysis provides an excellent tool to examine the
origin of competitive advantage.
 It divides the organisations into two different strategically important group of activities, namely,
primary activities and supporting activities, which can help to comprehend the potential sources
for differentiation and to understand an organisation’s costs behaviour.
 It is basically the value consumer wants to pay, over and above the price that the business wants
to charge from the consumer. This excess amount is called value creation, wherein the consumers
value the product or service more than it actually costs them.

 VALUE CHAIN

 Value chain analysis is a method used by strategists to break down each process that their
business employs.
 This analysis could be used to improve the sequence of operations, enhancing efficiency and
creating a competitive advantage.
 Value chain analysis can be used by businesses of all sizes, from sole proprietorships to
multinational organisations.
 Each organisation has a unique set of procedures to perform its duties, and they may all benefit
from value chain analysis to evaluate and optimise their processes.

Definition
 Value chain analysis has been widely used as a means of describing the activities within and around
an organization and relating them to an assessment of the competitive strength of an organization
(or its ability to provide value-for-money products or services).
 Value chain analysis was originally introduced as an accounting analysis to shed light on the ‘value
added’ of separate steps in complex manufacturing processes, in order to determine where cost
improvements could be made and/or value creation improved.

PANORAMIC EDUCATION 20
Steps to evaluate and assess value added activities by Michael Porter has been divided into two
set:
The primary activities of the organization are grouped into five main areas: inbound logistics,
operations, outbound logistics, marketing and sales, and service.

 Inbound logistics: are the activities concerned with receiving, storing and distributing the inputs
to the product/service. This includes materials handling, stock control, transport etc. Like,
transportation and warehousing.

 Operations transform these inputs into the final product or service: machining, packaging,
assembly, testing, etc. convert raw materials in finished goods.

 Outbound logistics: collect, store and distribute the product to customers. For tangible products
this would be warehousing, materials handling, transport, etc. In the case of services, it may be
more concerned with arrangements for bringing customers to the service, if it is a fixed location
(e.g. sports events).

 Marketing and sales: provide the means whereby consumers/users are made aware of the
product/service and are able to purchase it. This would include sales administration, advertising,
selling and so on. In public services, communication networks which help users’ access a particular
service are often important.

 Service are all those activities, which enhance or maintain the value of a product/service, such as
installation, repair, training and spares.

Each of these groups of primary activities are linked to support activities. These can be divided
into four areas;

 Procurement: This refers to the processes for acquiring the various resource inputs to the
primary activities (not to the resources themselves). As such, it occurs in many parts of the
organization.

 Technology development: All value activities have a ‘technology’, even if it is simply know-how.
The key technologies may be concerned directly with the product (e.g. R&D product design) or
with processes (e.g. process development) or with a particular resource (e.g. raw materials
improvements).

 Human resource management: This is a particularly important area which transcends all primary
activities. It is concerned with those activities involved in recruiting, managing, training,
developing and rewarding people within the organization.

PANORAMIC EDUCATION 21
 Infrastructure: The systems of planning, finance, quality control, information management, etc.
are crucially important to an organization’s performance in its primary activities. Infrastructure
also consists of the structures and routines of the organization which sustain its culture.

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

SUPPORT
ACTIVITIES TECHNOLOGY DEVELOPMENT

PROCUREMENT

Outbound Marketing
Inbound Operations Service
Logistics & Sales
Logistics


MARKET AND CUSTOMER

 A market is a place for interested parties, buyers and sellers, where items and services can be
exchanged for a price. The market might be physical, such as a departmental store where people
engage in person. They may also be virtual, such as an online market where buyers and sellers do
not meet in person but tools of technology to strike a deal. In addition to this broad definition,
the term market can apply to a wide range of contexts.
 For example, it might be used to describe the stock exchange, where securities are traded. It
may also refer to a group of individuals trying to buy a specific commodity or service in a specific
place, such as grain or vegetable market where farmers come to sell their produce. It may also
be used to define a business or industry, such as the global oil market. While the market is a
place, business strategist work on marketing to improve the chances of success. The term
"marketing" encompasses a wide range of operations, including research, designing, pricing,
promotion, transportation, and distribution.
 Often market activities are categorised and explained in terms of four Ps of marketing – product,
place, pricing, and promotion. These four kinds of marketing activities help marketers identify
customer needs so they may meet their demands and deliver satisfaction. Delivering the best
customer experience and establishing, maintaining, and growing relationships with customers are
the main goals of marketing.
 The orientation of product marketing has evolved and acquired different dimensions centred
around product, production, sales and customers. Businesses that have product orientation think

PANORAMIC EDUCATION 22
 that buyers will choose those products that have the best quality, performance, design, or
features. Next, there are production oriented businesses that believe that customers choose low
price products. Sales-oriented businesses believe that if they spend enough money on
advertisement, sales and promotion, customers can be persuaded to make a purchase.
 In a customer or market-oriented approach strategists prioritise efforts on their customers. In
order to create better value propositions for customers, businesses gather, disseminate, and use
customer and competitive information. A customer centric business is one that continuously learn
from its customers' needs and market dynamics. In the present times success, many business lies
in customer centric approaches.

CUSTOMER

 A customer is a person or business that buys products or services from another organisation.
Customers are important because they provide revenue and organisations cannot exist without
them. All businesses vie for customers, either by aggressively marketing their products or by
lowering their pricing to boost their customer bases.

 The terms customer and consumer are practically synonymous and are frequently used
interchangeably. There is, however, a thin distinction. Individuals or businesses that consume or
utilise products and services are referred to as consumers. Customers are the purchasers of
products and services in the economy, and they might exist as consumers or only as customers.
In homes groceries are often bought by a parent and consume by all the members of family.

 Businesses routinely research the characteristics of their consumers in order to finetune their
marketing strategies and adjust their inventory to attract the most customers. Customers are
frequently categorised based on demographics like as age, race, gender, ethnicity, economic level,
and geographic region, which may all assist businesses in developing a profile of a perfect
customer.

CUSTOMER ANALYSIS

 Customer analysis is an essential marketing component of any strategic business plan. It identifies
target clients, determines their wants, and then defines how the product meets those needs.
Thus, it involves the examination and evaluation of consumer needs, desires, and wants.

 Customer analysis includes the administration of customer surveys, the study of consumer data,
the evaluation of market positioning strategies, development of customer profiles, and the
selection of the best market segmentation techniques. Using the facts generated by customer
analysis, an effective profiling of customers may be established. Customer profiles can reveal
demographic information about customers. A number of parties, including buyers, sellers,
distributors, salespeople, managers, wholesalers, retailers, suppliers, and creditors, can assist in

PANORAMIC EDUCATION 23
 gathering information to effectively assess the needs and desires of consumers. Successful
businesses constantly monitor the behaviour of existing and prospective customers.

CUSTOMER BEHAVIOUR

 Customer behaviour moves beyond the identification of customers to explain how they purchase
products. It examines elements like shopping frequency, product preferences, and the perception
of your marketing, sales, and service offerings. Understanding these details allows businesses to
communicate with customers in an effective manner. Understanding the behaviours of customers
enables businesses to establish effective marketing and advertising campaigns, provide products
and services that meet their needs, and retain customers for repeat sales.

 Consumer behaviour may be influenced by a number of things. These elements can be categorised
into the following three conceptual domains:
 External Influences: External influences, like advertisement, peer recommendations or social
norms, have a direct impact on the psychological and internal processes that influence various
consumer decisions. The focus of external effects is on the numerous elements that have an
impact on customers as they choose which needs to satisfy and which products to use to do
so. These aspects are divided into two groups – the company's marketing efforts and the
numerous environmental elements.

 Internal Influences: Internal processes are psychological factors internal to customer and
affect consumer decision making. Consumer behaviour is influenced by a combination of
internal and external influences, including motivation and attitudes.

External Factors
Market Stimuli
Environmental Factors Purchase and
Decision Post purchase
Making Actions
Internal Factors

 Decision Making: A rational consumer, as decision maker would seek information about
potential decisions and carefully integrate this with the existing knowledge about the product.
After weighing the advantages and disadvantages of each option, they would make a decision.
The stages of decision making process can be described as:
 Problem recognition, i.e., identify an existing need or desire that is unfulfilled
 Search for desirable alternative and list them
 Seeking information on available alternatives and weighing their pros and cons.
 Make a final choice

PANORAMIC EDUCATION 24
This behaviour of making decisions happens very frequently. However, it mostly applies when the
purchase is one that is significant to the customer, such as when the product could have a significant
influence on their health or self-image. The process is extremely valid when purchasing a car,
television or a refrigerator in contrast to purchase of ice creams or soft drinks.

 Post-decision Processes: After making a decision and purchasing a product, the final phase in
the decision-making process is evaluating the outcome. The consumer's reaction may vary
depending upon the satisfaction. While a happy customer may make repeat purchase and
recommend to others, customer with dissonance will neither purchase the product again nor
recommend it to others.

INTERNATIONALIZATION OF BUSINESS

 Internationalization has emerged as the dominant commercial trend over the last couple of
decades. It enables a business to enter new markets in search of greater earnings and less
expensive resources. Additionally, expanding internationally enable a business to achieve greater
economies of scale and extend the lifespan of its products.

 The strategic-management process is essentially the same for global firms as it is for domestic
firms; nevertheless, international processes are much more complicated due to additional
variables and linkages. A business can approach internationalisation systemically with the aid of
international strategy planning. One method for an organization to identify opportunities and
threats in global markets is by scanning the external environment. The development of effective
strategies and the formulation of global strategic objectives are made feasible by
internationalisation.

Characteristics of a global business

To be specific, a global business has three characteristics:
 It is a conglomerate of multiple units (located in different parts of the globe) but all linked by
common ownership.
 Multiple units draw on a common pool of resources, such as money, credit, information, patents,
trade names and control systems.
 The units respond to some common strategy. Besides, its managers and shareholders are also
based in different nations.

Developing internationally
International development is expensive and challenging. Moving on in a thorough and structured
manner is thus the ideal approach to adopt. The steps in international strategic planning are as follows:
 Evaluate global opportunities and threats and rate them with the internal capabilities.
 Describe the scope of the firm's global commercial operations.
 Create the firm's global business objectives.
 Develop distinct corporate strategies for the global business and whole organisation.

PANORAMIC EDUCATION 25
Why do businesses go global?
Technological developments and evolving political views are two important factors in the rapid rise of
multinational organisations. Because of technological advances, the process of internationalisation is
now simpler than it was previously. Worldwide communication makes it easier to define and implement
global strategy by linking corporate headquarters with their abroad operations. In addition,
introduction of improved transportation has increased the mobility of money, people, raw materials,
and finished items. There are several reasons why companies go global.

These are explained as follows:

 The first and foremost reason is the need to grow. It is basic need of every organisation. Often
finding opportunities in the other parts of the globe, organisations extend their businesses and
globalise their operations.
 There is rapid shrinking of time and distance across the globe, because of faster communication,
speedier transportation, growing financial flow of funds and rapid technological changes.
 It is being realised that the domestic markets are no longer adequate. The competition present
domestically may not exist in some of the international markets.
 There can be varied other reasons such as need for reliable or cheaper source of raw-materials,
cheap labour, etc. Many foreign businesses shift and set up some of their operations to take
advantage of availability of vast pool of talent.
 Companies often set up overseas plants to reduce high transportation costs. It may be cheaper
to produce near the market to reduce the time and costs involved in transportation.
 When exporting organisations find foreign markets to open up or grow big, they may naturally
look at overseas manufacturing plants and sales branches to generate higher sales and better
cash flow.
 The rise of services to constitute the largest single sector in the world economy; and regional
economic integration, which has involved both the world’s largest economies as well as certain
developing economies.
 The apparent and real collapse of international trade barriers redefines the roles of state and
industry. The trend is towards increased privatization of manufacturing and services sectors, less
government interference in business decisions and more dependence on the value-added sector
to gain marketplace competitiveness. The trade tariffs and custom barriers are getting lowered,
resulting in increased flow of business.
 Globalization has made companies in different countries to form strategic alliances to ward off
economic and technological threats and leverage their respective comparative and competitive
advantages.

PANORAMIC EDUCATION 26
 INTERNATIONAL ENVIRONMENT

The social, cultural, demographic, environmental, political, governmental, legal, technological factors
that an international organisation faces are nearly limitless, and the number and complexity of these
factors increase manifold as the number of products produced and geographic areas served increase.
An assessment of the external environment is the first step toward internationalisation. Analysing
international environment is important since it allows organisation to discover opportunities in the
global market and evaluate feasibilities of capitalising on these opportunities. Assessments of the
international environment can be done at three levels: multinational, regional, and country.

 Multinational environmental analysis involves identifying, anticipating, and monitoring significant

components of the global environment on a large scale. Understanding global developments
covering economic and other macro elements is important. Governments may have free or
interventionist tendencies in economies that needs to be carefully considered. These
characteristics are evaluated based on their present and expected future impact.

 Regional environmental analysis is a more in-depth evaluation of the critical factors in a specific
geographical area. The emphasis would be on discovering market opportunities for a goods,
services, or innovations in the chosen location.

 Country environmental analysis has to take a deeper look at the important environmental factors.
Study of economic, legal, political, and cultural dimensions is required in order for planning to be
successful. The analysis must be customized for each of the countries to develop effective
market entrance strategies.

International environment has become an inherent part of strategic management for businesses of
all sizes with global interests. It essentially involves various global aspects like political risks, cultural
differences, exchange rate fluctuations, legal compliances and taxation issues. Thus, it becomes more
important for the people at the decision-making levels to focus on factors comprising the international
environment.

PANORAMIC EDUCATION 27
 PRODUCT AND INDUSTRY

Characteristics of Business Product

 Products are either tangible or intangible. A tangible product can be handled, seen, and physically
felt, such as a car, book, pen, table, mobile handset and so on. Alternatively, an intangible product
is not a physical good, such as telecom services, banking, insurance, or repair services.

 Product has a price. Businesses determine the cost of their products and charge a price for them.
The dynamics of supply and demand influence the market price of an item or service. The market
price is the price at which quantity provided equals quantity desired. The price that may be paid
is determined by the market, the quality, the marketing, and the targeted group. In the present
competitive world price is often given by the market and businesses have to work on costs to
maintain profitability.

 Products have certain features that deliver satisfaction. A product feature is a component of a
product that satisfies a consumer need. Features determine product pricing, and businesses alter
features during the development process to optimise the user experience. Products should be
able to provide value satisfaction to the customers for whom they are meant. Features of the
product will distinguish it in terms of its function, design, quality and experience. A customer's
cumulative experience with a product from its purchase to the end of its useful life is an
important component of a product feature.

 Product is pivotal for business. The product is at the centre of business around which all strategic
activities revolve. The product enables production, quality, sales, marketing, logistics and other
business processes. Product is the driving force behind business activities.

 A product has a useful life. Every product has a usable life after which it must be replaced, as
well as a life cycle after which it is to be reinvented or may cease to exist. We have observed
that fixed line telephone instruments have largely been replaced by mobile phones.

PRODUCT
 LIFE CYCLE

 It is a useful concept for guiding strategic choice.

 Essentially, PLC is an S-shaped curve which explains the relationship of sales with respect to
time.
 It diagnoses the business portfolio or the product portfolio and establishes the stage.
 Depending on the diagnosis, appropriate strategic choices could be made.
 According to PLC a product passes through the four successive stages of
 Introduction (slow sales growth),
 Growth (rapid market acceptance)

PANORAMIC EDUCATION 28
  Maturity (slowdown in growth rate) and
 Decline (sharp downward drift).

 The first stage of PLC is the introduction stage in which competition is almost negligible, prices
are relatively high, and markets are limited. The growth in sales is at a lower rate because of lack
of knowledge on the part of customers.

 The second phase of PLC is the growth stage. In the growth stage, the demand expands
rapidly, prices fall, competition increases, and the market expands. The customer has knowledge
about the product and shows interest in purchasing it.

 The third phase of PLC is maturity stage. In this stage, the competition gets tough and the
market stabilises. Profit comes down because of stiff competition. At this stage, organisations
have to work for maintaining stability.

 In the declining stage of PLC, the sales and profits fall down sharply due to some new products
replacing the existing product. So, a combination of strategies can be implemented to stay in the
market either by diversification or retrenchment.

Depending upon stage in which the business/ product exists,

a. Expansion may be a feasible alternative for businesses in the introductory and growth
stages.
b. Mature businesses may be used as sources of cash for investment in other businesses
which need resources.

EXPERIENCE CURVE

 Experience curve akin to a learning curve which explains the efficiency increase gained by workers
through repetitive productive work. Experience curve is based on the commonly observed
phenomenon that unit costs decline as a firm accumulates experience in terms of a cumulative
volume of production. It is based on the concept, “we learn as we grow”.

 The implication is that larger firms in an industry would tend to have lower unit costs as compared
to those for smaller companies, thereby gaining a competitive cost advantage.

 Experience curve results from a variety of factors such as learning effects, economies of scale,
product redesign and technological improvements in production.
Experience curve has following features:
 As business organisation grow, they gain experience.
 Experience may provide an advantage over the competition. Experience is a key barrier to
entry.
 Large and successful organisation possess stronger “experience effect”.

PANORAMIC EDUCATION 29
 Cost
per
unit

Cummulative Production in units

A typical experience curve may be depicted as follows:

 As a business grows, it understands the complexities and benefits from its experiences.

 The concept of experience curve is relevant for a number of areas in strategic management. For
instance, experience curve is considered a barrier for new firms contemplating entry in an
industry. It is also used to build market share and discourage competition. In the contemporary
Indian automobile industry, the experience curve phenomenon seems to be working in Maruti
Suzuki. The likely strategic choice for competitors can be a market niche approach or
segmentation based on demography or geography.

COMPETITIVE STRATEGY

 Competition is a fundamental attribute of economic systems and business, and it is frequently

connected with small and large organisations.

 Businesses compete with each other for the same set of resources and customers. Within a
industry, competition is frequently encouraged with the wider goal of attaining and achieving
higher quality services or superior goods that the firm may manufacture or develop.

 The competitive strategy of a business is concerned with how to compete in the business areas
in which the organization operates.
 In other words, competitive strategy defines how a firm expects to create and sustain a
competitive advantage over competitors. Having a competitive advantage over competitors means
being more profitable in the long run.
 The competitive strategy of a firm within a certain business field is analysed using two criteria:
the creation of competitive advantage and the protection of competitive advantage.

 An important component of industry and competitive analysis involves delving into the industry’s
competitive process to discover what the main sources of competitive pressure are and how
strong each competitive force is.

PANORAMIC EDUCATION 30
 This analytical step is essential because managers cannot devise a successful strategy without in-
depth understanding of the industry’s competitive character. Even though competitive pressures
in various industries are never precisely the same, the competitive process works similarly enough
to use a common analytical framework in gauging the nature and intensity of competitive forces.
 Porter’s five forces model is useful in understanding the competition.
 It is a powerful tool for systematically diagnosing the main competitive pressures in a market and
assessing how strong and important each one is.
 Not only is it the widely used technique of competition analysis, but it is also relatively easy to
understand and apply.


COMPETITIVE LANDSCAPE

 Competitive landscape is a business analysis which identifies competitors, either direct or

indirect.
 Competitive landscape is about identifying and understanding the competitors and at the same
time, it permits the comprehension of their vision, mission, core values, niche market, strengths
and weaknesses.
 Understanding of competitive landscape requires an application of “competitive intelligence”.
 An in-depth investigation and analysis of a firm’s competition allows it to assess the competitor’s
strengths and weaknesses in the marketplace and helps it to choose and implement effective
strategies that will improve its competitive advantage.
 Thus, understanding the competitive landscape is important to build upon a competitive advantage.
Steps to understand the Competitive Landscape

i. Identify the competitor: The first step to understand the competitive landscape is to identify
the competitors in the firm’s industry and have actual data about their respective market share.

This answers the question:

 Who are the competitors and how big are they?

ii. Understand the competitors: Once the competitors have been identified, the strategist can use
market research report, internet, newspapers, social media, industry reports, and various other
sources to understand the products and services offered by them in different markets.

This answers the question:

 What are their product and services?

iii. Determine the strengths of the competitors: What are the strengths of the competitors? What
do they do well? Do they offer great products? Why are consumers liking their product/service? Do
they utilize marketing in a way that comparatively reaches out to more consumers? Why do customers
give them their business?

PANORAMIC EDUCATION 31
This answers the questions:
 What are their financial positions?
 What gives them cost and price advantage?
 What are they likely to do next?
 How strong is their distribution network?
 What are their human resource strengths?

iv. Determine the weaknesses of the competitors: Identify the areas where the competitor is
lacking or is weak. Weaknesses (and strengths) can be identified by going through consumer reports
and reviews appearing in various media. Financial strength and weakness can always be learnt from
annual reports.
This answers the question.
 Where are they lacking?

v. Put all of the information together: At this stage, the strategist should put together all
information about competitors and draw inference about what they are not offering and what the
firm can do to fill in the gaps. The strategist can also know the areas which need to be strengthen
by the firm.
This answers the questions:
 What will the business do with this information?
 What improvements does the firm need to make?
 How can the firm exploit the weaknesses of competitors?

Key factors for competitive success

 An industry’s Key Success Factors (KSFs) are those things that most affect industry members’
ability to prosper in the marketplace
- the particular strategy elements, product attributes, resources, competencies, competitive
capabilities, and business outcomes that spell the difference between profit and loss and,
ultimately, between competitive success or failure.
KSFs by their very nature are so important that all firms in the industry must pay close attention
to them.

Key success factors are the prerequisites for industry success or, to put it another way, KSFs
are the factors that shape whether a company will be financially and competitively successful.

The answers to three questions help identify an industry’s key success factors:
 On what basis do customers choose between the competing brands of sellers? What product
attributes are crucial to sales?
 What resources and competitive capabilities does a seller need to have to be competitively
successful, better human capital, quality of product or quantity of product, cost of service, etc.?
 What does it take for sellers to achieve a sustainable competitive advantage, something that can
be sustained for long term?

PANORAMIC EDUCATION 32
Question Bank
Porter’s Five Forces Mode
1. Correct/Incorrect.
Substitutes can also exert significant competitive pressures.
The statement is correct.
 According to porter’s five forces model, a final force that can influence industry
profitability is the availability of substitutes for an industry’s product. To predict profit
pressure from this source, firms must search for products that perform the same, or
nearly the same, function as their existing products
2. Correct/Incorrect.
Economies of scale discourages new entrants.
The statement is correct.
 Economies of scale refer to the decline in the per-unit cost of production (or other
activity) as volume grows. A large firm that enjoys economies of scale can produce high
volumes of goods at successively lower costs. This tends to discourage new entrants
3. Correct/Incorrect.
Porter’s five forces model considers new entrants as a significant source of competition.
The statement is correct.
 Porter’s five forces model considers new entrants as major source of competition. The new
capacity and product range that the new entrants bring in throw up new competitive
pressure. The bigger the new entrant, the more severe the competitive effect. New
entrants also place a limit on prices and affect the profitability of existing players.
4. What are the common barriers that are faced by new entrants when an existing firm
earns higher profits?
Or
Rahul Sharma is Managing Director of a company which is manufacturing trucks. He is
worried about the entry of new businesses. What kind of barriers will help Rahul against
such a threat?
A firm’s profitability tends to be higher when other firms are blocked from entering the
industry. New entrants can reduce industry profitability because they add new production
capacity leading to increase supply of the product even at a lower price and can substantially
erode existing firm’s market share. Barriers to entry represent economic forces (or ‘hurdles’)
that slow down or impede entry by other firms. Common barriers to entry include:
(i) Capital requirements: When a large amount of capital is required to enter an industry,
firms lacking funds are effectively barred from the industry, thus enhancing the
profitability of existing firms in the industry.
(ii) Economies of scale: Many industries are characterized by economic activities driven by
economies of scale. Economies of scale refer to the decline in the per-unit cost of
production (or other activity) as volume grows. A large firm that enjoys economies of
scale can produce high volumes of goods at successively lower costs. This tends to
discourage new entrants.

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 (iii) Product differentiation: Production differentiation refers to the physical or perceptual
differences, or enhancements, that make a product special or unique in the eyes of
customers. Firms in the personal care products and cosmetics industries actively engage
in product differentiation to enhance their products’ features. Differentiation works to
reinforce entry barriers because the cost of creating genuine product differences may
be too high for the new entrants.
(iv) Switching costs: To succeed in an industry, new entrant must be able to persuade existing
customers of other companies to switch to its products. To make a switch, buyers may
need to test a new firm’s product, negotiate new purchase contracts, and train personnel
to use the equipment, or modify facilities for product use. Buyers often incur substantial
financial (and psychological) costs in switching between firms. When such switching costs
are high, buyers are often reluctant to change.
(v) Brand identity: The brand identity of products or services offered by existing firms can
serve as another entry barrier. Brand identity is particularly important for infrequently
purchased products that carry a high unit cost to the buyer. New entrants often
encounter significant difficulties in building up the brand identity, because to do so they
must commit substantial resources over a long period.
(vi) Access to distribution channels: The unavailability of distribution channels for new
entrants poses another significant entry barrier. Despite the growing power of the
internet, many firms may continue to rely on their control of physical distribution channels
to sustain a barrier to entry to rivals. Often, existing firms have significant influence
over the distribution channels and can retard or impede their use by new firms.
(vii) Possibility of aggressive retaliation: Sometimes the mere threat of aggressive
retaliation by incumbents can deter entry by other firms into an existing industry. For
example, introduction of products by a new firm may lead existing firms to reduce their
product prices and increase their advertising budgets
5. Explain briefly the competitive forces in any industry as identified by Michael Porter.
Or
What are the five competitive forces in an industry as identified by Michael Porter?
Five forces model of Michael Porter is a popular tool for systematically diagnosing the
significant competitive pressures in the market and assessing their strength and importance.
The model holds that the state of competition in an industry is a composite of competitive
pressures operating in five forces as follows:
1. Threat of new entrants: New entrants place a limit on prices and affect the profitability
of existing players. The new capacity and product range the new entrants bring increases
competitive pressure, bigger the new entrant, the more severe the competitive effect.
2. Bargaining power of customers: The bargaining power of the buyers influences not only
the prices that the producer can charge but also influence costs and investments of the
producer. This force will become heavier depending on the possibilities of the buyers
forming groups or cartels, particularly in case of industrial products.
3. Bargaining power of suppliers: Often suppliers can exercise considerable bargaining
power. If the suppliers are also limited in number they stand a still better chance to
exhibit their bargaining power. The bargaining power of suppliers determines the cost of

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 raw materials and other inputs of the industry and, therefore, can affect industry
attractiveness and profitability.
4. Rivalry among current players: The rivalry among existing players is quite obvious. This
is what is normally understood as competition. The impact is evident more at functional
level in the prices being charged, advertising, and pressures on costs, product and so on.
5. Threats from substitutes: Substitute products are a latent source of competition in an
industry. Substitute products offering a price advantage and/or performance
improvement to the consumer can have significant impact.
The five forces together determine industry attractiveness/profitability. This is so because
these forces influence the causes that underlie industry attractiveness/ profitability
6. Eco-carry bags Ltd., a recyclable plastic bags manufacturing and trading company has
seen a potential in the ever-growing awareness around hazards of plastics and the positive
outlook of the society towards recycling and reusing plastics.
A major concern for Eco-carry bags Ltd. are paper bags and old cloth bags. Even though
they are costlier than recyclable plastic bags, irrespective, they are being welcomed
positively by the consumers.
Identify and explain that competition from paper bags and old cloth bags fall under which
category of Porter’s Five Forces Model for Competitive Analysis?
 Eco-carry bags Ltd. faces competition from paper bags and old cloth bags and falls under
Threat of Substitutes force categories in Porter’s Five Forces Model for Competitive
Analysis. Paper and cloth bags are substitutes of recyclable plastic bags as they perform
the same function as plastic bags. Substitute products are a latent source of competition
in an industry. In many cases, they become a major constituent of competition. Substitute
products offering a price advantage and/or performance improvement to the consumer
can drastically alter the competitive character of an industry.
7. Competitive pressures operate as a composite in five areas of the overall market.
Elaborate.
Competition makes organizations work harder, however, it is neither a coincidence nor bad
luck. All organizations have competition and its benefit are enjoyed by the markets. The
customers are able to get better products at lower costs. They get better value for their
money because of competition. A powerful and widely used tool for systematically diagnosing
the significant competitive pressures in a market and assessing the strength and importance
of each is the Porter’s five-forces model of competition. This model holds that the state of
66 competition in an industry is a composite of competitive pressures operating in five areas
of the overall market as follows:
(i) Rivalry among current players: Competitive pressures associated with the market
manoeuvring and jockeying for buyer patronage that goes on among rival sellers in the
industry.
(ii) Threat of new entrants: Competitive pressures associated with the threat of new
entrants into the market.
(iii) Threats from substitutes: Competitive pressures coming from the attempts of
companies in other industries to win buyers over to their own substitute products.

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 (iv) Bargaining power of suppliers: Competitive pressures stemming from supplier bargaining
power and supplier-seller collaboration.
(v) Bargaining power of customers: Competitive pressures stemming from buyer bargaining
power and seller buyer collaboration.
8. Buyers can exert considerable pressure on business. Do you agree? Discuss.
Buyers of an industry’s products or services can exert considerable pressure on existing firms
to secure lower prices or better services. This is evident in situations where buyers enjoy
superior position than the seller of product. This leverage is particularly evident when:
i. Buyers have full knowledge of the sources of products and their substitutes.
ii. They spend a lot of money on the industry’s products, i.e., they are big buyers.
iii. The industry’s product is not perceived as critical to the buyer’s needs and buyers are
more concentrated than firms supplying the product. They can easily switch to the
substitutes available.
9. Discuss in what conditions rivalry among competitors tends to be cut-throat and
profitability of the industry goes down.
The intensity of rivalry in an industry is a significant determinant of industry attractiveness
and profitability. The intensity of rivalry can influence the costs of suppliers, distribution,
and of attracting customers and thus directly affect the profitability. The more intensive
the rivalry, the less attractive is the industry. Rivalry among competitors tends to be
cutthroat and industry profitability low when
(i) An industry has no clear leader.
(ii) Competitors in the industry are numerous.
(iii) Competitors operate with high fixed costs.
(iv) Competitors face high exit barriers.
(v) Competitors have little opportunity to differentiate their offerings.
(vi) The industry faces slow or diminished growth.
10. Easy Access is a marketing services company providing consultancy to a range of business
clients. Easy Access and its rivals have managed to persuade the Government to require
all marketing services companies to complete a time-consuming and bureaucratic
registration process and to comply with an industry code of conduct. Do you think that
by doing this Easy Access and its rivals has an advantage in some way to fight off
competitors? Explain.
 Yes, Easy Access and its rivals get advantage by this move. The new bureaucratic process
is making it more complicated for organizations to start up and enter in Easy Access
market, increasing barriers to entry and thereby reducing the threat of new entrants.
New entrants can reduce an industry’s profitability, because they add new production
capacity, leading to increase in supply of the product, sometimes even at a lower price and
can substantially erode existing firm’s market share position. However, New entrants are
always a powerful source of competition. The new capacity and product range they bring
in throws up a new competitive pressure. The bigger the new entrant, the more severe the
competitive effect. New entrants also place a limit on prices and affect the profitability
of existing players, which is known as Price War.

PANORAMIC EDUCATION 36
11. There are many companies in the market offering COVID vaccine. Analyse the product
in terms of threat of new entrants.
 There are three companies offering a vaccine for COVID-19 in India and a fourth company
is awaiting approval from authorities.
 This product involves huge capital requirements and hence not every existing pharma
company is likely to get into the competition. However, once approved for use, the entire
world is the target market. This would lead to economies of scale helping the company to
recover the investments made. The product differentiation is in terms of the low after
effect of the vaccine and the effectiveness of the vaccine in controlling COVID-19. Brand
identity is becoming very important with people preferring international brands compared
to a home ± grown company. Factors like switching cost, access to distribution channels
and possibility of aggressive retaliation do not apply at present because governments
across the world are controlling these factors and the vaccine has not entered the phase
of free competition.
12. "The bargaining power of suppliers determines an industry's attractiveness and
profitability." Discuss.
Quite often, suppliers too, exercise considerable bargaining power over purchasing companies.
The more specialised the offering from the supplier, greater may be its clout. Further, when
the suppliers are limited in number, they may openly exhibit their bargaining power. The
bargaining power of suppliers determines the cost of raw materials and other inputs of the
industry, and therefore, an industry’s attractiveness and profitability. Suppliers can influence
the profitability of an industry in a number of ways. Suppliers can command bargaining power
over a firm when;
(i) Their products are crucial to the buyer and substitutes are not available.
(ii) They can erect/ensure high switching costs.
(iii) They are more concentrated than their buyers. Less suppliers, more buyers
13. Baby Turtle is a children’s clothing brand that has been created a new age demand for
washable diapers. The major benefit for the brand has been that not many companies
have shown interest in the product, thinking it is not viable, however customers majorly
working mothers are loving their product. The core material needed for production is
also used in many other water proofing products in various industries. Baby Turtle sources
this material from a renowned supplier at comparatively low prices. Which of the five
forces of competitive pressure would Baby Turtle experience due to above setup and
what are major factors that create such pressure for a product? Do you think Baby
Turtle has an advantage in some way to fight off this pressure?
Baby Turtle would experience, Bargaining Power of Suppliers, as a competitive pressure for
their washable diaper product. This is because the core material for production is sourced
from a single supplier, who is renowned and in a position to create pressure in terms of prices.
Further, other factors that lead to such pressure are:
1. Their products are crucial to the buyer and substitutes to the material required for
production are not available.
2. Suppliers can manipulate switching cost as the brand is in inception stage and making
margins are important. An advantage that Baby Turtle has is even though the material

PANORAMIC EDUCATION 37
 required has no substitutes but it used to make many other products and thus there are
many other suppliers who can provide that material. It might affect operations in short
term but will help to fight off the pressure created by existing supplier.
14. What are the factors which determine the nature of rivalry in an industry?
The intensity of rivalry in an industry is a significant determinant of an industry’s
attractiveness and profitability. The intensity of rivalry can influence the costs of suppliers,
distribution, and of attracting customers and thus, can directly affect the profitability. “The
more intensive the rivalry, the less attractive is the industry”. Rivalry among competitors
tends to be cutthroat and an industry’s profitability is low when;
(i) An industry has no clear leader. Therefore, continuous war for leadership.
(ii) Competitors in the industry are numerous.
(iii) Competitors operate with high fixed costs. Thus, aiming for better Return on Investment
with more fierce tactics.
(iv) Competitors face high exit barriers, and therefore, continue to fight for market share.
(v) Competitors have little opportunity to differentiate their offerings.
(vi) The industry faces slow or diminished growth.
15. A startup company is thinking of launching of a low cost detergent powder in the market.
The market of the said product is already dominated by a big FMCC player.
You are advised to put forward your suggestions to the management of the company to
deal with the problems of 'Entry 'Barrier' while launching the low cost detergent powder.
There are number of factors that can act as entry barrier for the start-up company. An
FMCG, big in size, is already dominating the market space and will act as a strong deterrent
for the new start-up. The following will be some suggestions to the management of the start-
up to deal with the problem of entry barriers.
1. The company is working on producing low cost detergent. Keeping other expenses also on
the lower side the management can create price advantage that is competitive to the
existing established players including the large FMCC.
2. The company focusing on single product in comparison to multiple products of an FMCC can
develop competencies to produce and sell the low cost detergent that are difficult to deploy
by the FMCG by its strategy that addresses needs of multiple products.
3. The start-up needs to have strong financial strength to sustain the onslaught from the
dominant FMCG and other players. The start-up can identify sources of capital well in
advance and be able to use it judiciously to their advantage.
4. The start-up should identify the customer segments that are likely to switch to the product
well in advance so as to target the same and generate the initial hold on the market. Once
the product gets some hold and their brands get some identity, the market can be further
developed to address other customers.
5. The start-up should identify the environmental factors that go to their advantage. These
may include special scheme of the government to encourage entrepreneurs, tax holiday, low
interest rates, advantages available to small and medium sized enterprises alike.
6. It has to create an image in the market that its products are qualitative and 'Made in India'
to attract a particular segment of customers.

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 7. They need to have a team of experts and dedicated management professionals who can
implement strategies formulated by top management
16. Rajiv Arya is owner of an electrical appliance company that specializes in manufacturing
of domestic vacuum cleaners. There are four other manufacturers with similar products
and sales volume. Current rival firms also own a number of patents related to the product.
The supplier base for procurement of raw material is also very large as there are multiple
suppliers.
Identify Porter’s Five Forces that may be classified as significant for the company?
Explain
 The competitive rivalry will be a significant force in case of company of Rajiv Arya as all
the rivals are similar in sizes and are manufacturing similar products. It is difficult for
any single manufacturer to dominate the market. Large number of patents will make it
difficult for new entrants to break into the market. Further, as there are a large number
of small suppliers the power that suppliers can exert will also be low.
 There is no information relating to substitutes and bargaining power of customers in the
information given in scenario. However, a domestic vacuum cleaner will directly compete
with other options such as house maids. Availability of house maids at low cost can
significantly disturb the sales of products.
 Further, as the products are similar customers can easily shift from one company to
another. This will only enhance competitive rivalry.
 The competitive rivalry will be significant in Rajiv Arya's dealing industry as all rivals are
similar in sizes and manufacture similar products, making it difficult for anyone
manufacturer to dominates the market or gain market share. The large number of patents
will make it hard for new entrants to break into the market, while the fact that Rajiv
Arya buys from a large number of small suppliers suggests that supplier power is also low.
Finally, there is no information relating to substitutes and bargaining power of customers
in the information given in scenario.
Globalisation / Internationalisation
1. Why companies should go global? Mention any five reasons.
There are several reasons why companies go global. These are discussed as follows:
 One reason could be the rapid shrinking of time and distance across the globe - thanks to
faster communication, speedier transportation, growing financial flows and rapid
technological changes.
 It is being realized that the domestic markets are no longer adequate and rich. Companies
globalize to take advantage of opportunities available elsewhere.
 A new product may gradually get acceptance and grow locally and then globally. This may
initially be in form of exports and then later production facilities may begin in other
countries.
 Organizations may go global to take advantage of cheaper raw material and labour costs.
 Companies often set up overseas plants to reduce high transportation costs.
 The motivation to go global in high-tech industries is slightly different. Companies in
electronics and telecommunications must spend large sums on research and development

PANORAMIC EDUCATION 39
 for new products and thus may be compelled to seek ways to improve sales volume to
support high overhead expenses.
 The companies may also go global to take advantage of local taxation laws.
 To form strategic alliances to ward off economic and technological threats and leverage
their respective comparative and competitive advantages.
Product Life Cycle
1. ABC Ltd. manufactures and sells air purifier ‘Fresh Breath’. The ‘Fresh Breath’ hasseen
sales growth of around 1% for the last two years, after strong growth in the previous
five years. This is due to new products entering the market in competition with the
‘Fresh Breath’. ABC Ltd. is therefore considering cutting its prices to be in line with its
major rivals with a hope to maintain the market share. Market research indicates that
this will now cause a significant increase in the level of sales, even though in previous
years price cuts have had little effect on demand. ABC ltd. is also planning to launch a
promotional campaign to highlight the benefits of the ‘Fresh Breath’ against its rival
products.
Identify and explain the stage of the product life cycle in which ‘Fresh Breath’ falls.
 Product Life Cycle is a useful concept for guiding strategic choice. PLC is an S-shaped
curve which exhibits the relationship of sales with respect of time for a product that
passes through the four successive stages of introduction (slow sales growth), growth
(rapid market acceptance) maturity (slowdown in growth rate) and decline (sharp downward
drift).
 The product ‘Fresh Breath’ of ABC Ltd. falls under Maturity stage of product life cycle.
In this stage, the competition gets tough and market gets stabilised. Profit comes down
because of stiff competition. At this stage, ABC Ltd. have to work for maintaining stability
by cutting the prices to be in line with its major rivals with a hope to maintain the market
share and by launching a promotional campaign to highlight the benefits of the ‘Fresh
Breath’ against its rival products.
2. Write a short note on Product Life Cycle (PLC) and its significance in portfolio diagnosis.
 Product Life Cycle is an important concept in strategic choice and S-shaped curve which
exhibits the relationship of sales with respect of time for a product that passes through
the four successive stages.
 The first stage of PLC is the introduction stage in which competition is almost negligible,
prices are relatively high and markets are limited. The growth in sales is also at a lower
rate.
 The second stage of PLC is the growth stage, in which the demand expands rapidly, prices
fall, competition increases and market expands.
 The third stage of PLC is the maturity stage, where in the competition gets tough and
market gets stabilized. Profit comes down because of stiff competition.
 The fourth stage is the declining stage of PLC, in which the sales and profits fall down
sharply due to some new product replaces the existing product.

PANORAMIC EDUCATION 40
  PLC can be used to diagnose a portfolio of products (or businesses) in order to establish
the stage at which each of them exists. Particular attention is to be paid on the businesses
that are in the declining stage. Depending on the diagnosis, appropriate strategic choice
can be made.
 For instance, expansion may be a feasible alternative for businesses in the introductory
and growth stages. Mature businesses may be used as sources of cash for investment in
other businesses which need resources.
 A combination of strategies like selective harvesting, retrenchment, etc. may be adopted
for declining businesses. In this way, a balanced portfolio of businesses may be built up by
exercising a strategic choice based on the PLC concept.
Competitive landscape / strategy
1. Suresh Singhania is the owner of an agri-based private company in Sangrur, Punjab. His
unit is producing puree, ketchups and sauces. While its products have significant market
share in the northern part of country, the sales are on decline in last couple of years.
He seeks help of a management expert who advises him to first understand the
competitive landscape.
Explain the steps to be followed by Suresh Singhania to understand competitive
landscape.
Or
Explain the steps to understand the competitive landscape?
Or
Dinesh Yadav is the owner of a beverage-based private company in Sonipat, Haryana.
His unit is producing fruit juices, cold drinks, soda and lime. While its products have
significant market share in the northern part of country, the sales are on decline in last
couple of years. He seeks help of a management expert who advises him to first
understand the competitive landscape. Explain the steps to be followed by Dinesh Yadav
to understand competitive landscape.
Steps to understand the competitive landscape
i. Identify the competitor: The first step to understand the competitive landscape is to
identify the competitors in the firm’s industry and have actual data about their respective
market share.
ii. Understand the competitors: Once the competitors have been identified, the strategist
can use market research report, internet, newspapers, social media, industry reports, and
various other sources to understand the products and services offered by them in
different markets.
iii. Determine the strengths of the competitors: What are the strength of the competitors?
What do they do well? Do they offer great products? Do they utilize marketing in a way

PANORAMIC EDUCATION 41
 that comparatively reaches out to more consumers. Why do customers give them their
business?
iv. Determine the weaknesses of the competitors: Weaknesses (and strengths) can be
identified by going through consumer reports and reviews appearing in various media.
After all, consumers are often willing to give their opinions, especially when the products
or services are either great or very poor.
v. Put all of the information together: At this stage, the strategist should put together all
information about competitors and draw inference about what they are not offering and
what the firm can do to fill in the gaps. The strategist can also know the areas which need
to be strengthen by the firm.
2. "Understanding the competitive landscape is important to build upon a competitive
advantage". Explain.
Or
What do you understand by ‘Competitive Landscape’? What are the steps to understand
the competitive landscape?
Competitive landscape is a business analysis which identifies competitors, either direct or
indirect.
Competitive landscape is about identifying and understanding the competitors and at the same
time, it permits the comprehension of their vision, mission, core values, niche market,
strengths and weaknesses.
An in-depth investigation and analysis of a firm’s competition allows it to assess the
Competitor’s strength and weaknesses in the marketplace and helps it to choose and
implement effective strategies that will improve its competitive advantage.
Steps to understand the competitive landscape for building competitive advantage are:
i. Identify the competitor: The first step to understand the competitive landscape is to
identify the competitors in the firm’s industry and have actual data about their respective
market share.
ii. Understand the competitors: Once the competitors have been identified, the strategist
can use market research report, internet, newspapers, social media, industry reports, and
various other sources to understand the products and services offered by them in
different markets.
iii. Determine the strengths of the competitors: What are the strength of the competitors?
What do they do well? Do they offer great products? Do they utilize marketing in a way
that comparatively reaches out to more consumers. Why do customers give them their
business?
iv. Determine the weaknesses of the competitors: Weaknesses (and strengths) can be
identified by going through consumer reports and reviews appearing in various media.
After all, consumers are often willing to give their opinions, especially when the products
or services are either great or very poor.
v. Put all of the information together: At this stage, the strategist should put together all
information about competitors and draw inference about what they are not offering and
what the firm can do to fill in the gaps. The strategist can also know the areas which need
to be strengthen by the firm.

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