SATHYABAMA

INSTITUTE OF SCIENCE AND TECHNOLOGY

MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

ENVIRONMENTAL APPRAISAL

Environmental Threat and Opportunity Profile [ETOP] Industry analysis -Porter’s 5

forces Model of Competition , Entry and Exit Barriers , Strategies group Analysis.
Analysing companies Internal Environment -Resource based view of a firm , Source of
competitive advantage – VIRO framework , Co -Competence , Benchmarking- Value
Chain Analysis Strategic Advantage Profile, Business Portfolio Analysis – BCG Matrix –
GE 9 Cell Model .

BUSINESS ENVIRONMENT

A firm’s environment represents all internal or external forces, factors, or conditions that
exert some degree of impact on the strategies, decisions and actions taken by the firm. There
are two types of environment:

Internal environment – pertaining to the forces within the organization (Ex: Functional
areas of management) and

External environment – pertaining to the external forces namely macro environment or

general environment and micro environment or competitive environment (Ex: Macro
environment – Political environment and Micro environment – Customers).

EXTERNAL ENVIRONMENT

It refers to the environment that has an indirect influence on the business. The factors are
uncontrollable by the business. The two types of external environment are microenvironment
and macro environment.

a) MICRO ENVIRONMENTAL FACTORS

These are external factors close to the company that have a direct impact on the organizations
process. These factors include:

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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

i) Shareholders

Any person or company that owns at least one share (a percentage of ownership) in a
company is known as shareholder. A shareholder may also be referred to as a "stockholder".
As organization requires greater inward investment for growth they face increasing pressure
to move from private ownership to public. However this movement unleashes the forces of
shareholder pressure on the strategy of organizations.

ii) Suppliers

An individual or an organization involved in the process of making a product or service

available for use or consumption by a consumer or business user is known as supplier.
Increase in raw material prices will have a knock on affect on the marketing mix strategy of
an organization. Prices may be forced up as a result. A closer supplier relationship is one way
of ensuring competitive and quality products for an organization.

iii) Distributors

Entity that buys non-competing products or product-lines, warehouses them, and resells them
to retailers or direct to the end users or customers is known as distributor. Most distributors
provide strong manpower and cash support to the supplier or manufacturers promotional
efforts. They usually also provide a range of services (such as product information, estimates,
technical support, after-sales services, credit) to their customers. Often getting products to the
end customers can be a major issue for firms. The distributors used will determine the final
price of the product and how it is presented to the end customer. When selling via retailers,
for example, the retailer has control over where the products are displayed, how they are
priced and how much they are promoted in-store. You can also gain a competitive advantage
by using changing distribution channels.

iv) Customers

A person, company, or other entity which buys goods and

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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

services produced by another person, company, or other entity is known as customer.

Organizations survive on the basis of meeting the needs, wants and providing benefits for
their customers. Failure to do so will result in a failed business strategy.

v) Competitors

A company in the same industry or a similar industry which offers a similar product or
service is known as competitor. The presence of one or more competitors can reduce the
prices of goods and services as the companies attempt to gain a larger market share.
Competition also requires companies to become more efficient in order to reduce costs. Fast-
food restaurants McDonalds and Burger King are competitors, as are Coca-Cola and Pepsi,
and Wal-Mart and Target.

vi) Media

Positive or adverse media attention on an organisations product or service can in some cases
make or break an organisation.. Consumer programmes with a wider and more direct
audience can also have a very powerful and positive impact, h forcing organisations to
change their tactics.

b) MACRO ENVIRONMENTAL FACTORS

An organizations macro environment consists of nonspecific aspects in the organizations

surroundings that have the potential to affect the organizations strategies. When compared to
a firms task environment, the impact of macro environmental variables is less direct and the
organization has a more limited impact on these elements of the environment. The macro
environment consists of forces that originate outside of an organization and generally cannot
be altered by actions of the organization. In other words, a firm may be influenced by
changes within this element of its environment, but cannot itself influence the environment.
Macro environment includes political, economic, social and technological factors. A firm
considers these as part of its environmental scanning to better understand the threats and
opportunities created by the variables and how strategic plans need to be adjusted so the firm
can obtain and retain competitive advantage.

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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

i) Political Factors

Political factors include government regulations and legal issues and define both formal and
informal rules under which the firm must operate. Some examples include:

• tax policy

• employment laws

• environmental regulations

• trade restrictions and tariffs

• political stability

ii) Economic Factors

Economic factors affect the purchasing power of potential customers and the firms cost of
capital. The following are examples of factors in the macroeconomy:

• economic growth

• interest rates

• exchange rates

• inflation rate

iii) Social Factors

Social factors include the demographic and cultural aspects of the external macro
environment. These factors affect customer needs and the size of potential markets. Some
social factors include:

• health consciousness • population growth rate • age distribution

• career attitudes

• emphasis on safety

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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

iv) Technological Factors

Technological factors can lower barriers to entry, reduce minimum efficient production
levels, and influence outsourcing decisions. Some technological factors include:

• R&D activity

• automation

• technology incentives

• rate of technological change

Environmental Scanning

What is environmental scanning?

Environmental scanning is the process of continually acquiring information on events

occurring outside the organization to identify and interpret potential trends .

Environmental scanning is a process of gathering, analysing, and dispensing information for

tactical or strategic purposes. The environmental scanning process entails obtaining both
factual and subjective information on the business environments in which a company is
operating or consider entering.

Definition

Strategic Management3 In the field of environmental scanning, the first notable study was
carried out by Aguilar (1967). Aguilar defines environmental scanning as acquiring
information about events and relationships in a company’s outside environment, the
knowledge of which would assist top management in its task of charting the company’s
future course of action.

Aaker (1983) pointed out that environmental scanning should focus on target information
needs

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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

Daft and Weick (1984), the way an organisation deciphers its environment in order to learn
from it may be divided into three phases: scanning (information seeking), interpretation
(giving meaning to the collected data) and learning (taking action based on the data).

Lester and Waters (1989) define environmental scanning as a management process of using
information from the environment to aid decision-making

Hough and White (2004) view environment scanning as a process of identifying, collecting,
processing and translating information about external influences into useful plans and
decisions

Environmental scanning in Strategy planning and implementation process

Objectives of Environmental Scanning

Coates (1985) identified the following objectives of an environmental scanning system:

1) Detecting scientific, technical, economic, social, and political trends and events important
to the institution,

2) Defining the potential threats, opportunities, or changes for the institution implied by those
trends and events,

3) Promoting a future orientation in the thinking of management and staff, and

4) Alerting management and staff to trends that are converging, diverging, speeding up,
slowing down, or interacting.

Importance of Environmental Scanning

Oladele (2006) stated some importance to environmental scanning as follows:

a) The environment is dynamic in nature, therefore scanning is necessary to keep abreast of

change.

b) It reveals the elements or factors that constitute threats and opportunity to the overall
objectives of the organization.

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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

c) Competitor’s activities can be monitored and appropriate strategies put in place to check
market incursion.

d) It gives necessary inputs to the formulation and implementation of potent marketing

strategies.

Methods of Environmental Scanning

This aspect of environmental scanning has caused much debate among the scholars in the
field of Management. However, the following are therefore suggested:

➢ Secondary data collection approach such as articles, textbooks, magazines and ready-made
information etc...

➢Primary data collection approach, using research instruments such as questionnaire,

➢Personal interview, personal observation etc.

➢Establish a unit within the organization which will responsible to

scan wide range of environmental factors and makes forecast about specific variables through
qualitative and quantitative means.

Kinds of environmental scanning

[Link]-hoc scanning - Short term, infrequent examinations usually initiated by a crisis

[Link] scanning - Studies done on a regular schedule (e.g. once a year)

[Link] scanning (also called continuous learning) - continuous structured data

collection and processing on a broad range of environmental factors

Environmental Threat and Opportunity Profile

(ETOP)

What is ETOP analysis?

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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

ETOP analysis (environmental threat and opportunity profile) is the process by which
organizations monitor their relevant environment to identify opportunities and threats
affecting their business for the purpose of taking strategic decisions.

Why ETOP is needed?

• Helps organization to identify opportunities and threats

• To consolidate and strengthen organizations position

• Provides the strategists of which sectors have a favorable impact on the organization

• Help organization know where it stands with respect to its environment

• Helps in formulating appropriate strategy

• Helps in formulating SWOT analysis (Strategic weakness, opportunities and threats)

How to prepare an ETOP?

 Dividing the environment into different sectors such as economical, market, social,
international, legal, technological, political, ecological, etc.
 Analyzing the impact of each sector on the organization
 Sub-dividing each environmental sector into sub factors
 Impact of each sub-sector on organization in form of a statement
ENVIRONMENTAL FACTORS

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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

Example of ETOP Analysis

Lets take the example of the environment analysis of Hindustan Aeronautics Limited (HAL)

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INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

Strategic Advantage Profile

What is Strategic Advantage Profile (SAP)?

SAP is the technique of analyzing the internal factors of the organization by preparing a
critical picture of different capacity factors. It is a relative strength of the company over its
competitors.

Strategic advantage profile is a summary statement which provides an overview of the

advantages and disadvantages in key areas likely to affect future operations of a firm.

it is a total for making systematic evaluation of strategic advantage factors which are
significant for the company in its environment. it involves functional areas like marketing,
production, finance, accounting, personnel, human resource and R&D

SAP is a summary statement of corporate capabilities,

STRATEGIC ADVANTAGE PROFILE (SAP)

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INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

SWOT Analysis

A SWOT analysis (alternatively SWOT matrix) is a structured planning method used to

evaluate the strengths, weaknesses, opportunities and threats involved in a project or in a
business venture.

A SWOT analysis can be carried out for a product, place, industry or person.

SWOT analysis was created in the 1960s by business gurus Edmund P. Learned, C. Roland
Christensen, Kenneth Andrews and William D. Book in their book "Business Policy, Text
and Cases" (R.D. Irwin, 1969). While the tool was originally intended for business use, it has
since been adopted to aid personal development.

ANALYSIS OF INTERNAL ENVIRONMENT

Internal analysis is also referred to as “ internal appraisal “ “organisational audit “, “ internal

corporate assessment “ etc . Over the years , research has shown that the overall strengths and
weakness of a firm’s resources and capabilities are more important for a strategy than
environment factors. Even where the industry was unattractive and generally unprofitable,
firms that came out with superior products enjoyed good profits .

Managers perform internal analysis to identify the strength and weakness of a firm’s
resources and capabilities . The basic purpose is to build on the strengths and overcome the

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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

weakness in order to avail of the opportunities and minimize the effects of the threats . the
ultimate aim is to gain and sustain competitive advantage in the market place .

IMPORTANCE OF INTERNAL ANALYSIS

Strategic management is ultimately a “ matching game “ between environmental

opportunities and organisational strengths . But , before a firm actually starts tapping the
opportunities ,it is important to know its own strengths and weakness. Without this
knowledge ,it cannot decide which opportunities to choose and which ones to reject. One of
the ingredients critical to the success of a strategy is that the strategy must place “realistic “
requirements on the firm’s resources. The firm therefore cannot afford to go by some
untested assumptions or gut feelings. Only systematic analysis of its strengths and weakness
can be of help. This is accomplished in internal analysis by using analytical techniques like
RBV,SWOT analysis , Value chain analysis , benchmarking , IFE matrix etc .

Thus , systematic internal analysis helps the firm :

• To find where it stands in terms of its strengths and weakness

• To exploit the opportunities that is in accordance with its capabilities

• To analyse and find ways to rectify its weakness

• To defend against threats

• To assess gaps in its capability and take steps to enhance its

capabilities with a view to achieve its growth objectives

This exercise is also the starting point for developing the competitive advantage required for
the survival and growth of the firm.

Michael Porter’s 5 forces model

Porter’s 5 forces model is one of the most recognized framework for the analysis of business
strategy. Porter, the guru of modern day business strategy, used the or ethical frameworks
derived from Industrial Organization (IO) economics to derive five forces which determine
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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

the competitive intensity and therefore attractiveness of a market. This theoretical framework,
based on 5 forces, describes the attributes of an attractive industry and thus suggests when
opportunities will be greater, and threats less, in these of industries.

Attractiveness in this context refers to the overall industry profitability and also reflects upon
the profitability of the firm under analysis. An “unattractive” industry is one where the
combination of forces acts to drive down overall profitability. A very un attractive industry
would be one approaching “pure competition”, from the perspective of pure industrial
economics theory .

These forces are defined as follows:

a) The threat of the entry of new competitors b) The intensity of competitive rivalry

c) The threat of substitute products or services

d) The bargaining power of customers

e) The bargaining power of suppliers

The model of the Five Competitive Forces was developed by Michael E. Porter. Porters
model is based on the insight that a corporate strategy should meet the opportunities and
threats in the organizations external environment. Especially, competitive strategy should
base on and understanding of industry structures and the way they change . Porter has
identified five competitive forces that shape every industry and every market. These forces
determine the intensity of competition and hence the profitability and attractiveness of an
industry. The objective of corporate strategy should be to modify these competitive forces in
a way that improves the position of the organization. Porters model supports analysis of the
driving forces in an industry. Based on the information derived from the Five Forces
Analysis, management can decide how to influence or to exploit particular characteristics of
their industry.

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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

The Five Competitive Forces are typically described as follows :

a) Bargaining Power of Suppliers

The term suppliers comprises all sources for inputs that are needed in order to provide goods
or services.

Supplier bargaining power is likely to be high when:

• The market is dominated by a few large suppliers rather than a fragmented source of supply

• There are no substitutes for the particular input

• The suppliers customers are fragmented, so their bargaining power is low

• The switching costs from one supplier to another are high

• There is the possibility of the supplier integrating forwards in order to obtain higher prices
and margins

This threat is especially high when

• The buying industry has a higher profitability than the supplying

industry

• Forward integration provides economies of scale for the supplier • The buying industry
hinders the supplying industry in their development (e.g. reluctance to accept new releases of
products)

• The Buying industry has low barriers to entry.

In such situations, the buying industry often faces a high pressure on margins from their
suppliers. The relationship to powerful suppliers can potentially reduce strategic options for
the organization .

b) Bargaining Power of Customers

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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

Similarly, the bargaining power of customers determines how much customers can impose
pressure on margins and volumes. Customers bargaining power is likely to be high when

• They buy large volumes; there is a concentration of buyers

• The supplying industry comprises a large number of small operators

• The supplying industry operates with high fixed costs

• The product is undifferentiated and can be replaces by substitutes

• Switching to an alternative product is relatively simple and is not related to high costs

• Customers have low margins and are price sensitive • Customers could produce the product
themselves

• The product is not of strategical importance for the customer • The customer knows about
the production costs of the product

• There is the possibility for the customer integrating backwards.

c) Threat of New Entrants

The competition in an industry will be the higher, the easier it is for other companies to enter
this industry. In such a situation, new entrants could change major determinants of the market
environment (e.g. market shares, prices, customer loyalty) at any time. There is always a
latent pressure for reaction and adjustment for existing players in this industry. The threat of
new entries will depend on the extent to which there are barriers to entry.

These are typically

• Economies of scale (minimum size requirements for profitable operations),

• High initial investments and fixed costs

• Cost advantages of existing players due to experience curve effects of operation with fully
depreciated assets

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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

• Brand loyalty of customers

• Protected intellectual property like patents, licenses etc,

• Scarcity of important resources, e.g. qualified expert staff

• Access to raw materials is controlled by existing players ,Distribution channels are

controlled by existing players

• Existing players have close customer relations, e.g. from long- term service contracts

• High switching costs for customers • Legislation and government action

d) Threat of Substitutes

A threat from substitutes exists if there are alternative products with lower prices of better
performance parameters for the same purpose. They could potentially attract a significant
proportion of market volume and hence reduce the potential sales volume for existing
players. This category also relates to complementary products. Similarly to the threat of new
entrants, the treat of substitutes is determined by factors like

• Brand loyalty of customers

• Close customer relationships

• Switching costs for customers

• The relative price for performance of substitutes

• Current trends.

e) Competitive Rivalry between Existing Players

This force describes the intensity of competition between existing players (companies) in an
industry. High competitive pressure results in pressure on prices, margins, and hence, on
profitability for every single company in the industry.

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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

Competition between existing players is likely to be high when • There are many players of
about the same size

• Players have similar strategies

• There is not much differentiation between players and their products, hence, there is much
price competition

• Low market growth rates (growth of a particular company is possible only at the expense of
a competitor)

• Barriers for exit are high (e.g. expensive and highly specialized equipment)

Barriers to Entry and Exit

A barrier to entry is something that blocks or impedes the ability of a company (competitor)
to enter an industry. A barrier to exit is something that blocks or impedes the ability of a
company (competitor) to leave an industry.

In general, industries that are difficult for new competitors to enter may enjoy periods of
good profitability and limited rivalry among competitors. Conversely, industries that are easy
to enter attract new companies into the industry during periods of profitability. So, rivalry
among competitors can be intense. On the other end, industries that are difficult to exit have
more rivalry than industries that are easy to leave.

Some of the common barriers to entry and exit are listed below.

Typical Barriers to Entry

➢ Economies of size - The need for a large volume of production and sales to reach the cost
level per unit of production for profitability is a barrier to entry.

➢ Capital intensive - A large capital investment per unit of output in facilities tends to limit
industry entry.

➢ Intellectual property - Patents and other types of proprietary intellectual property are very
effective in limiting industry entry.
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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

➢ High switching costs - The tendency for buyers of an industry’s products to be reticent
about switching to a new supplier tends to limit entry.

➢ Established brand identity - Industries dominated by branded products are difficult to enter
due to the large amount of time and money required to create a competing branded product.

➢ Permitting requirements - Industries where permitting and licenses are required to establish
production tend to have limited entry.

➢Government standards - Industries where rigid industry standards exist tend to have limited
entry.

Typical Barriers to Exit

➢ Investment in specialist equipment - Investments in specialized equipment that cannot

readily be used in other industries tends to be an impediment to leaving the industry.

➢ Specialized skills - Highly specialized skills by industry participants that cannot be utilized
in other industries tend to be an impediment to leaving the industry.

➢ High fixed costs - High levels of dedicated fixed costs tend to be an impediment to leaving
an industry

If we combine entry and exit, we can predict industry rivalry, stability and profitability. As
shown in Figure 1, an industry that is easy to enter but difficult to leave has intense industry
rivalry and low profitability. At the first sign of excess profitability in the industry,
competitors flock to the industry. However, when profitability falls, it is difficult to leave the
industry so profitability remains low.

STRATEGIC GROUPS

Strategic groups are sets of firms within an industry that share the same or highly similar
competitive attributes. These attributes include pricing practices, level of technology
investment and leadership, product scope and scale capabilities, and product quality. By

School of Management Studies 18

 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

identifying strategic groups, analysts and managers are better able to understand the different
types of strategies that multiple firms are adopting within the same industry.

Strategic Group Maps

A useful way to analyse strategic groups is through the creation of strategic group maps.
Strategic group maps present the various competitive positions that similar firms occupy
within an industry. Strategic group maps are not difficult to create; however, there are a few
simple guidelines managers want to use when developing them.

a) Identify Key Competitive Attributes. As mentioned previously, many firms share similar
competitive attributes such as pricing practices and product scope. The first step in
developing a strategic group map is to identify key competitive attributes that logically
differentiate firms in a competitive set. This is not always known in advance of creating the
map so it is important to be ready to create multiple maps using different variables.

b) Create Map Based Upon Two Key Attribute Variables. For the variables selected, assign
each variable to the X and Y axis, respectively. Also, select a logical gradation value for each
axis so that differences will be readily observable. When complete, plot each firm’s location
on the map for the industry being analysed. As each firm is plotted use a third variable—such
as revenue—to represent the actual plot size of each firm. Using a variable like revenue helps
the reader understand the relative performance of each firm in terms of the third variable.

c) Identify Strategic Groups. Once all of the firms have been plotted, enclose each group of
firms that emerges in a shape that reflects the positioning on the strategic group. At this point,
assess whether or not the differences between each group are meaningful or whether other
variables must be selected from which another set of strategic groups can be drawn.

The above is an example of a strategic group map for the retail Industry. Strategic group
creation and analysis provides an effective way to develop a clearer understanding of how
firms within an industry compete. Since each strategic group depicts firms with similar—if
not identical—competitive attributes within the industry ,the map helps managers identify

School of Management Studies 19

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INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

important differences among competitive positions. These differences can be subject to

further analysis to helps explain more subtle differences in performance.

RESOURCE BASED VIEW STRATEGY OF COMPETITIVE ADVANTAGE

As a project resource manager, you very well know your teams’ worth. With the right people
on deck, you feel confident signing off on incoming projects. They use their wealth of
experience and skills to resolve bugs that crop up. This also helps your future projects follow
a better cyclic process. It’s safe to say that so long as they’re invested in productive efforts,
your people remain a valuable resource and their contributions, even more so. After all, no
other resource can be utilized without the right human resource!

Technology touches lives, and as such evolves in response to changing requirements. To keep
up with these changes, you’d need to be on high- alert for resources and capabilities that give
you a competitive advantage. The resource-based view strategy helps you accomplish this by
letting you analyze diversified contributions coming in from different quarters. You can then
match these to opportunities to develop your competitive advantage.

The original theory behind this view emerged from the works of Birger Wernerfelt, Prahalad
and Hamel who argued that the internal environment can be a source of competitive
advantages. Your job doesn’t end at finding and developing a competitive advantage though.
It’s more about sustaining it with the effective and efficient utilization of your people.

CORE COMPETENCY

Core competencies make or break innovation. While everyone can have a business idea, not
all of them have the feasibility to thrive in the market. Those that do, have to be relevant,
useful and adaptive. Simply put, the activities, knowledge and internal organizational
structure within the firm sets you apart from your competitors. The parameters deciding this
are

1. Product reliability

2. Customer insight

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INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

3. Exploitation of emerging ideas and innovation

Core competencies point you to resources with different specializations which can lower your
transactional expenses. This in turn, gives them the freedom to develop new products or
modify existing services as per their skills and capabilities to suit market needs.

Here, heterogeneity plays a pivotal role because if every organization had the same set of
skills and capabilities, they wouldn’t be able to make decisions that strategically differ.

Toyota is one such example of an automobile giant that utilized its resources and capabilities
to raise its product quality. It pioneered a lean production system that proved difficult to
replicate. Further, It introduced the concept of just-in-time manufacturing which reduced its
setup time. The lowered pricing model and lasting efficiency rapidly gained widespread
popularity which helped Toyota retain consumer loyalty. Thus, it was able to still reap profits
while competing against Mercedes and BMW models.

By now these questions would pop up in your mind :

1. Why would customers buy your products or services?

2. How are you different from your competitors?

3. How can you bundle your resources in order to gain a market advantage?

4. What are the key success factors that stamp out the competition?

Core competencies stem from the effective procurement and usage of your resources and
capabilities bundled together. Capabilities drive your firm’s ability to adapt its core
competencies over time.

If your future plans include expanding your presence, you need to evaluate your internal
environment beforehand so as to maximize the value added to the customer chain.

School of Management Studies 21

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INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

The VRIO Framework:

The first step of your competitive advantage starts with evaluating enterprise-wide internal
strengths and weaknesses. It lets you filter out those resources and capabilities that fit like
jigsaw pieces to give you a competitive advantage.

What’s more, you’ll also discover secondary sources of competitive advantages that can be
exploited at a later stage. The questions a VRIO (Value, Rarity ,Imitability ,Organization)
framework brings up are a particular resources’ value, rarity, imitability and the
organization’s means to exploiting these three. Let’s explore how a competitive advantage
can be enhanced using this framework as an enterprise-wide corporate strategy:

1. Value

Your resources use their knowledge to create value. Besides transforming inputs to outputs,
value-addition also occurs when your resources successfully exploit profitable ventures or
bring down external costs

. A competitive advantage is based on the scope of knowledge integration internally. By

widening this scope, you’ll have on board a wide variety of relevant and useful skills that
complement your resources’ experience.

The more experienced your resource pool, the smarter their strategy is at embracing newer
information. Which is why investing in training, workshops and certifications is a worthwhile
cause. These measures can help your resources diversify their professional range which gives
you a competitive advantage, especially against new entrants who are building up on their
expertise.

2. Rarity

While resources devise and implement strategies, capabilities let you take full advantage of
your resources. Immobilizing them may seem like a step backwards. But when you combine
it with the heterogeneity that we mentioned earlier, both resources and capabilities acquire

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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

rarity. This ensures that your competitive advantage can’t be replicated neither easily nor
quickly.

3. Imitability

A subset of rarity, if your resources and capabilities can’t be substituted or reproduced

elsewhere, they’re said to possess lower imitability. Big decisions don’t offer you a
competitive advantage because other firms would hear of it through public announcements.

But the same can’t be said for the cumulative effect of small decisions taken by your
resources. From making your website friendly to disabled users to adopting a new
methodology, smaller decisions can prolong your competitive advantage. The cost to mimic
these capabilities and resources should be higher than the compensation offered. This makes
it hard for firms to entice your best people away from your firm, immobilizing their
capabilities.

4. Organization

Control mechanisms such as formal reporting structures, compensation packages and a

collaborative environment tie these 3 points together, thus helping you capture the actual
value they bring in.

GE Nine Cell Matrix

❖ The GE/McKinsey Matrix is a nine-cell (3 by 3) matrix used to perform business portfolio

analysis as a step in the strategic planning process.

❖ The GE/McKinsey Matrix identifies the optimum business portfolio as one that fits
perfectly to the company strengths and helps to explore the most attractive industry sectors or
markets.

❖ The objective of the analysis is to position each SBU on the chart depending on the SBUs
Strength and the Attractiveness of the Industry Sector or Market on which it is focused. Each
axis is divided into Low, Medium and High, giving the nine-cell matrix as depicted below.

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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

➢ Different factors can be used to define Industry Attractiveness. Like:- Market Size, Market
Growth Rate, Demand variability, Industry Profitability, Competitive Rivalry, Global
Opportunities, Entry and exit barriers, Capital requirement, Macro environmental Factors
(PEST)

➢ Different factors can also be used to define SBU Strength. Like:- Market Share,
Distribution Channel Access, Financial Resources, R&D Capability, Brand equity,
Production Capacity, Knowledge of customer and market, Caliber of management. Relative
cost position

➢ The factors and their relative weightings are selected. The rating values for each factor are
entered for each SBU and Industry.

o Grow – Business units that fall under grow attract high investment. Firms may go for
product differentiation or Cost leadership. Huge cash is generated in this phase. Market
leaders exist in this phase.

o Hold – Business units that fall under hold phase attract moderate investment. Market
segmentation, Market penetration, imitation strategies are adopted in this phase. Followers
exist in this phase.

o Harvest - Business units that fall under this phase are unattractive. Low priority is given in
these business units. Strategies like divestment, Diversification, mergers are adopted in this
phase.

Market Attractiveness

➢Annual market growth rate ➢Overall market size

➢Historical profit margin

➢Current size of market

➢Market structure

➢Market rivalry

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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

➢Demand variability ➢ Global opportunities

Business Strength

➢Current market share

➢Brand image

➢Production capacity

➢Corporate image

➢Profit margins relative to competitors ➢R & D performance

➢Promotional effectiveness Strength

a) It allows intermediate ratings between high and low and between strong and week .

b) It helps in channelling the corporate resources to business and achieving competitive

advantage and superior performance.

c) It helps in better strategic decision making and better understanding of business scope.

Weakness

a)It tends to obscure business that are become to winners because their industries are entering
at exit stage.

b)Assessment of business in terms of two factors is not fair. EXAMPLE OF GE NINE CELL
MATRIX

About Maruti Udyog • Founded in 1981

• Products are Maruti 800, Omni, Alto,SX4,Swift Desire,Swift,A-star, Gypsy,Wagon

R,Ritz,others.

• Vision – “The Leader in the Indian Automobile Industry, Creating Customer Delight and
Shareholder’s Wealth;a Pride of India”

• Core Values : Our Core Values drive us in every endeavour-

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 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

➢Customer Obession,

➢ fast, Flexible & first mover, ➢ Innovation & creativity ➢Networking & Partnership ➢
Openess & Learning

VALUE CHAIN ANALYSIS

A value chain is a set of activities that a firm operating in a specific industry performs in
order to deliver a valuable product (i.e., goodand/or service) for the market. The concept
comes through business management and was first described by Michael Porter in his 1985
best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.

Value chain analysis (VCA) is a process where a firm identifies its primary and support
activities that add value to its final product and then analyze these activities to reduce costs or
increase differentiation.

Porter's Value Chain Analysis

Back in 1985, Michael Porter, a Harvard Business School professor, introduced a basic value
chain model in his book Competitive Advantage. He identified several key steps common
among all value chain analyses and determined that there are primary and supporting
activities that when performed at the most optimal levels will create value for their
customers, such that the value offered to the customer exceeds the cost of creating that value,
resulting in higher profit. Porter’s framework groups activities into primary and support
categories

The primary activities focus on taking the inputs, converting them into outputs, and
delivering the output to the customer. The support activities play an auxiliary role in primary
activities. When a company is efficient in combining these activities to provide a superior
product or service, then the customer is willing to pay more for the product than the cost to
make and deliver the product which results in a higher profit margin.

The firm’s primary activities include:

School of Management Studies 26

 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

 Investment team (portfolio managers, analysts) – tasked with making the

investment decisions.
 Operations and traders – tasked with ensuring the investments are in line with
the guidelines set forth by the client, and the trades are at the best execution price.
 Marketing and sales – responsible for procuring clients.
 Service (client relationship management) – responsible for providing all the
touch points to the client.

Support activities include:

 Technology – designs a trading and client module that is efficient and

effectively allows the team to provide the highest level of service and make the best
investment decisions.
 Human Resources – finds and retains the highest level of talent at the firm.
 Infrastructure – includes the lawyers and risk managers whose oversight is
crucial to ensuring the client’s guidelines are followed, the investment risk is
controlled, and the firm is operating within the regulations established by the SEC.

BENCHMARKING

School of Management Studies 27

 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

Benchmarking Analysis

Benchmarking analysis is a specific type of market research that allows organizations to

compare their existing performance against others and adopt improvements that fit their
overall approach to continuous improvement and culture.
Many types of benchmarking exist; the most commonly recognized are:
 Process — evaluates specific business processes (e.g., purchase planning, e-
procurement, service delivery). Process maps are used to facilitate benchmarking.
 Performance — compares product and service as a way to assess the
organization’s competitive position against same-sector peers. Focuses on costs,
technical quality, ancillary service features, and performance characteristics (also
called competitive benchmarking).
 Strategic — seeks to evaluate the organization’s strategic maturity against
others across various sectors. Focuses on general approach to the development and
management of core competencies, innovations, and change strategies.
Benchmarking analyses often rely on both quantitative and qualitative measures to generate
meaningful results. Quantitative analysis can provide metric-based outcomes, while
qualitative comparisons often reveal best practices. The benchmarking process usually
encompasses four steps:
1. Planning.
2. Analysis.
3. Action.
4. Review.
Step 1: Planning
 Determine the broad business process and tasks to benchmark.
 Identify the resources required for the study.
 Confirm the key activity performance measures or indicators.
 Document the existing process for conducting the activity.

School of Management Studies 28

 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

 Identify appropriate reference models as a starting point for your assessment.

Step 2: Analysis
 Collect information to identify the scope for improvement.
 Compare the existing process with that of appropriate reference models to
identify differences and innovations.
 Agree on expected targets for improvement.
Step 3: Action
 Communicate the results of the study to key stakeholders.
 Develop an improvement plan to implement changes.
 Implement the improvement plan, monitoring progress and reviewing as
necessary.
Step 4: Review
 Review performance when the changes have been implemented; identify and
rectify bottlenecks.
 Communicate the results of the implemented changes.
 Schedule future benchmarking activities to continue the improvement process.

Advantages

 Easy to understand and use.

 If done properly, it’s a low cost activity that offers huge gains.
 Brings innovative ideas to the company.
 Provides you with insight of how other companies organize their operations
and processes.
 Increases the awareness of your costs and level of performance compared to
your rivals.
 Facilitates cooperation between teams, units and divisions.

School of Management Studies 29

 SATHYABAMA
INSTITUTE OF SCIENCE AND TECHNOLOGY
MASTER OF BUSINESS ADMINISTRATION
COURSE MATERIAL
SUBJECT : STRATEGIC MANAGEMENT UNIT II [Link] : SBAA5207

Disadvantages

 You need to find a benchmarking partner.

 It is sometimes impossible to assign a metric to measure a process.
 You might need to hire a consultant.
 If your organization is not experienced at it, the initial costs could be huge.
 Managers often resist the changes that are required to improve the
performance.
 Some of best practices won’t be applicable to your whole organization.

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