MBA II (SEM IV) Strategic Management

Unit – II
Environmental Appraisal

 Concept of Environment
The concept of business environment states that any and all factors and forces, both
external and internal, that influence, affect, or shape in any way the policies, decisions,
strategies, and operations of a business comprise the business environment of that
business. It operates in a dynamic environment. Environmental adaptation is the
essence of business survival and growth. The aggregate name of factors and forces that
influence business and business related activities is business environment. Business
environment consists of sum total of all factors forces, events and institutions that
surround business. They influence its performance, development and outcome. The
internal environmental forces are located within the business and can be controlled and
define the scope of business, whereas external environmental forces are located outside
the business and are complex in nature. However, both internal and external
environmental forces play on important role in influencing the outcome of business.

This business environment can be divided into two parts:

The internal environment is made up of all the factors that are under the control of the
firm. The business can change these to fit its policies and objectives. So changes in these
factors and the effect they will have are predictable and can be easily adjusted by the
business.

External environment: These are factors that cannot be controlled by the company.
These factors are usually unpredictable as well. Due to their unpredictable nature, the
effects they have on the business cannot be foretold. These effects can be beneficial or
harmful for the company.

 External Environmental Sector

The term "external environmental sector" typically refers to the external influences and
factors that affect a particular industry, organization, or system. These influences can
come from various sources, including the political, economic, social, technological,
environmental, and legal (often abbreviated as PESTEL or PESTLE) factors.

Here's a brief overview of each component of the external environmental sector

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1. Technological Factors

Technological developments are making significant changes in every industry, and

companies need to adopt technology to gain a competitive edge in the market. For
instance, a GPS manufacturing company for the vehicle would have to face decreasing
sales because of the integration of mobile devices with GPS. But it can deal with this
challenge by launching new integrated products.

Healthcare companies should come up with the latest methods and techniques in terms
of gathering information from the patients. The patient record and care system should
be in alignment.

2. Economic Factors

The economic factors play a significant role in terms of impacting our daily life to the
growth of the company. When the country‘s economy is in recession, then the
unemployment rate would be higher. Companies have to work extra hard in order to
retain their workforce and make changes in order to maintain their revenue stream. If
the company is in the business of manufacturing retail products, then it has to decrease
its prices to amplify the sale to maintain its profitability. Some of the determinants
considered for analysis are:

 The inflation rate

 The interest rate
 Disposable income of buyers
 Credit accessibility
 Unemployment rates
 The monetary or fiscal policies
 The foreign exchange rate

3. Social Factors

When people live together in a society, then their social status and personal choices
would influence their purchase decision in terms of what and where they should buy.
While developing the product/service, companies keep in mind various social factors
because various social issues, events, and movements impact their decision.

For instance, a feminist organization that endorses the women‘s cause and movement
would earn the trust and loyalty to the women‘s customer market. When you‘re
targeting a specific segment of the market, then you should keep in mind their
preference and potential influences on them in recent years. You can use such factors

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for your business growth and satisfy the needs of customers. Some of the social factors
analysed:

 The cultural implications

 The gender and connected demographics
 The social lifestyles
 The domestic structures
 Educational levels
 Distribution of Wealth

4. Political Factors

Every new political party comes to the government with its new policies and gets rid of
old policies, and their change in policies would impact relevant businesses and
companies. With the inconsistencies in the political environment of the country,
businesses and companies have to pay heed to the legislation and the upcoming bills in
order to prepare themselves for the potential changes. Some of the policies that could
influence the business are as follows;

 Intellect Property Rights

 Import Restrictions
 Competition Regulations
 Employment Laws
 Tariffs
 Taxation

The political regulations have a great impact on the company‘s operations, and the
business has to comply with the new legislation in order to keep things going

5. Legal Factors

Legal factors comprise the law of the country impacting the company that how it
should operate its business and behavior of customers. Some of the main areas that fall
under its category are the viability of the certain product in certain markets, profit
margin, and product transportation.

When it comes to the sale of sharp objects, drugs, and others; the legal factors help you
to decide whether the company should offer it or not. Some main laws that fall under its
category are as follows;

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 Import and Export Laws

 The legality of Pyramid Scheme
 Fraud Law
 Employment Law
 Health and Safety Laws
 Copyrights Laws
 Discrimination Laws
 Consumer Laws

6. Demographic factors

Companies with successful products and services evaluate the demographics of their
target market to ensure they meet the needs of those who benefit from their offerings.
They also perform tests to measure how well they serve their customers. This helps
them understand if their target market has changed and how they can develop better
ways to serve their loyal customers and earn new ones. Demographics that affect
business decisions and processes include:

 Age
 Gender
 Race
 Nationality
 Belief system
 Marital status
 Occupation
 Income
 Level of education

For example, when mobile phone companies emerged in the 1990s, their marketing
efforts focused on young, successful professionals. Now, people of all ages use mobile
devices daily. Telecommunications companies have adapted to this change by
modifying the features of their products and taking different approaches to advertising
methods.

7. Environmental Factors: Concerns about climate change, sustainability, and

environmental conservation are increasingly influencing consumer behavior and
regulatory requirements. Industries may face pressure to adopt eco-friendly practices or
develop greener products.

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8. Competitive Factors: The actions of competitors within the sector, including their
strategies, market share, strengths, and weaknesses, can shape the external environment
for other organizations operating within the same industry.

9. Global factors

Executives have a duty to keep track of both domestic and global issues, especially if
they conduct business internationally. By learning about social issues that affect those in
other countries and their cultural norms, consumer trends and economic status,
company leaders can provide their teams with relevant training. This enables them to
develop products or offer services that meet the needs of international customers by
providing solutions to challenges they face as consumers.

10. Ethical factors

Because each individual has a distinct concept of ethics and morality, some companies
may find it challenging to balance the personal lives of staff members with their
expectations in the workplace. Employees' leisure activities, such as social media
accounts, can reflect on their employer. As representatives of the company, they have a
responsibility to avoid behavior that could negatively affect the business. Managers can
address issues such as sharing classified information or the harassment of a colleague
outside of work by establishing guidelines and taking disciplinary action when
necessary.

 Environmental Scanning
Environmental scanning is a process of gathering information about the events and
their relationship with the internal and external environment of the organization. The
primary aim of environmental scanning is to find out the future prospects of business
organization.

As a significant resource to the management, the Environmental Scanning Committee

enables the management to make decisions from fundamental analysis of historical
events to estimate future events. The committee also helps in creating action plans to
address these upcoming events, analyzing action plans and arranging appropriate
resources for those plans, and putting management in contact with fellow employees
with the knowledge set to provide quality data for decision making.

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Environmental Scanning Definition

The process of collecting, evaluating, and delivering information for a strategic purpose
is defined as environmental scanning. The process of environmental scanning requires
both accurate and personalized data on the business environment in which the
organization is operating or considering entering.

Characteristics of Environmental Scanning

 Continuous Process- The analysis of the environment is a continuous process rather

than being sporadic. The rapidly changing environment has to be captured
continuously to be on track.
 Exploratory Process- Scanning is an exploratory process that keeps monitoring the
environment to bring out the possibilities and unknown dimensions of the future. It
stresses the fact that ―What could happen‖ and not ‖What will happen‖.
 Dynamic Process- Environmental scanning is not static. It is a dynamic process and
depends on changing situations.
 Holistic View- Environmental Scanning focuses on the complete view of the
environment rather than viewing it partially.

Components of Environmental Scanning

Internal Environmental Components- The components that lie within the organization
are internal components and changes in these affect the general performance of the
organization. Human resources, capital resources and technological resources are some
of the internal environmental components.

External Environmental Components: The components that fall outside the business
organization are called external environmental components. Although the components
lie outside the organization, they still affect the organizational activities. The external
components can be divided into micro environmental components, and macro
environmental components.

Micro environmental components include competitors, consumers, markets, suppliers,

organizations, etc. Macro environmental components include political, legal, economic,
cultural, demographic, and technological factors.

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Significance of Environmental Scanning:

 Achieving goals and objectives:

The targets of an association can‘t be satisfied except if it adjusts to the changes in the
environment. One needs to change the methodologies to fit in the changing requests of
the environment.

 Identification of weaknesses and threats:

For an association to develop, it should limit its weaknesses, threats and distinguish its
shortcomings. This can be made conceivable with the assistance of filtering the
environment with better techniques, strategies that can be created.

 Forecasting the future:

Environmental changes are regularly capricious. An association can‘t expect every one
of things to come in the future; however, in light of the examination, it can settle on
better essential choices later on. Consequently, environmental investigation assists with
determining the possibilities of the business.

 Knowledge of the market:

Every association should know about the continuous changes prevailing in the market.
Assuming it neglects to join vital changes because of evolving requests or demands, it
can not accomplish its targets.

 Zero in on the Customer:

Environmental examination and scanning make an association subtle to the changing

requirements and assumptions for the client.

 Identification of opportunities:

With the examination of the current situations in the environment, an association will
actually want to recognise the potential chances and make vital strides.

Techniques of Environmental Scanning

 SWOT Analysis- SWOT analysis is an acronym for Strengths, Weaknesses,

opportunities and threats analysis of the environment. Strengths and weaknesses are
considered as internal factors whereas opportunities and threats are external factors.
These factors determine the course of action to ensure the growth of the business.

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 PESTLE Analysis- PEST stands for Political, economic, social, and technological
Legl, Environmental analysis of the environment. It deals with the external macro-
environment.
 ETOP- ETOP stands for the Environmental Threat Opportunity Profile. It helps an
organization to analyze the impact of the environment based on threats and
opportunities.
 QUEST- QUEST stands for the Quick Environmental Scanning Technique. This
technique is designed to analyze the environment quickly and inexpensively so that
businesses can focus on critical issues that have to be addressed in a short span.

Process of Environmental Analysis

 Scanning- The process of analyzing the environment to spot the factors that may
impact the business is known as Environmental Scanning. It alerts the enterprise to
take suitable strategic decisions before it reaches a critical situation.
 Monitoring- The data is gathered from various sources and is utilized to monitor
and find out the trends and patterns in the environment. The main sources of
collecting data are spying, publication talks with customers, suppliers, dealers and
employees.
 Forecasting- The process of estimating future events based on previously analyzed
data is known as environmental forecasting.
 Assessment- In this stage, the environmental factors are assessed to identify
whether they provide an opportunity for the business or pose a threat.

 Internal Appraisal-
Dynamics of Internal Environment

Dynamics of Internal Environment: The internal environment is a part of the business

environment, and it is made up of numerous components found within the company
that may influence or be influenced by the organization‘s choices, actions, and
decisions.

Climate, culture, machines/equipment, work and work processes, members,

management, and management methods are all part of it.

In other words, the internal environment refers to an organization‘s culture, members,

events, and other elements that might impact the organization‘s actions, particularly its

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human resource behaviour. All individuals who are directly or indirectly associated to
the organisation, such as the owner, shareholders, managing director, board of
directors, workers, and so on, are referred to as members.

Internal variables are those that are within the organization‘s control yet have the
potential to impact company strategy and other actions.

It contains the following items:

1. System of Values:

The value system is made up of all the elements that make up regulatory frameworks,
such as the organization‘s culture, environment, work procedures, management
practises, and conventions. Employees should carry out their duties within the
parameters of this framework.

An organization‘s value system is often known as the philosophy of the organisation.

Work procedures, culture, norms, environment, and work processes are all part of an
organization‘s value system.

An organization‘s value system determines how it operates and treats its workers and
customers. Furthermore, an organization‘s value system governs how its personnel
should carry out their responsibilities. They should carry out their duties while
adhering to the value system.

2. Vision, Mission, and Goals:

The company‘s vision outlines its future position, its purpose identifies its business and
the reason for its existence, and its objectives identify the company‘s ultimate goal and
the paths to achieving those goals.

The goal and objectives of a company are critical in determining the organization‘s
future status and market position. The internal environment of the organization‘s
business strategy is created, and resources are utilised to meet the goals.

3. Organizational resources:

They are bundle of tangible and intangible resources. Human, physical and financial
resources , tangible. Intellectual resources are intangible.

4. Organization behavior:

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It affects efficient use of resources. The factors are: management philosophy, shared
values, quality of work life, organizational politics and use of power.

5. Organizational Culture

Corporate culture, also known as organisational culture, refers to the organization‘s

values, beliefs, and behaviour that determines how workers and management interact
and conduct external affairs.

6. Strengths and weakness:

The combination of organizational resources and organization behavior create strengths

and weakness. Reduced strategic advantage.

7. Synergistic effects:

They make 2+2=5.They measured ability to make good on a new product market entry.
Synergistic effects emerge from cost saving. Elimination of duplicate facilities and
effective use of resources. Its magnitude depends on compatibility of exiting product
market with new product market.

8. Distinctive competency:

Core competencies are organization's well performed activities. They become

distinctive competencies when organization does them well compared to competitors.
They can be result from innovation, special skills information technology, low costs,
better services.

9. Organizational capabilities:

Capability is what an organization can be well. It is skills at coordinating resources

putting them to productive use. It is sum total of resources behavior, strengths,
weaknesses, synergistic effects and distinctive competencies. It enable an organization
to exploit opportunities and minimize threats.

IFE Matrix (Internal factor evaluation)

IFE (Internal factor evaluation) matrix is one of the best strategic tools to perform
internal audits of any firm. IFE uses for internal analysis of different functional areas of
business such as finance, marketing, IT, operations, accounts, Human Resources, and
others depend upon the nature of business and its size.

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Before going into further details, there are some important terms in the IFE matrix
which should be known to the individual who shall be using this tool of internal
analysis of any Company or Organization. The explanation of each term would be
clearly explained in order to make it easier to understand the concept for when you
further go into details.

Following are the important components of the IFE Matrix:

Internal Factors

Internal factors are the outcome of a detailed internal audit of a firm Obviously, every
company has some weak and strong points, therefore the internal factors are divided
into two categories namely strengths and weakness.

Strengths

Strengths are the strong areas or attributes of the company, which are used to overcome
weaknesses and capitalize to take advantage of the external opportunities available in
the industry. The strengths could be tangible or intangible; such as brand image,
financial position, income, human resource.

Weaknesses

Weaknesses are the risky areas that need to be addressed on priority to minimize its
impact. The competitors always searching for the loopholes in your company and put
their best effort to capitalize on the identified weaknesses.

How we can differentiate strengths and weaknesses in the IFE matrix?

If this question comes into mind then don‘t worry its a good question and I will be the
happy man to answer this one. The strengths and weaknesses are organized in the IFE
matrix in different portions mean all strengths are listed first under internal factors and
then comes the internal weakness. In case if all the factors are listed altogether then the
rating will help you out to identify internal strength and weakness.

Rating

Rating is a common word I hope you are aware of it, in IFE rating is the way out to
differentiate internal strengths and weaknesses. Internal weakness are further divided
into two categories namely minor weakness and major weakness the same goes of the
strengths (minor strength and major strength)

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There are some important points related to a rating in the IFE matrix.

 Rating is applied to each factor.

 A major weakness is represented by 1.0
 A minor weakness is represented by 2.0
 Minor strength represented by 3.0
 Major Strength represented by 4.0

Major weakness needs company attention to change into minor weakness then strength
and finally major strength. As compared to major strength minor weakness need little
efforts of the company to change it into strength. The range of rating starts from
minimum 1.0 which is worst and maximum 4.0 which is the best factor of the company.

Weight

The weight attribute in the IFE matrix indicates the relative importance of factor to
being successful in the firm‘s industry. The weight range from 0.0 means not important
and 1.0 means important, the sum of all assigned weight to factors must be equal to 1.0
otherwise the calculation would not be considered correct.

Weighted Score

The weighted score value is the result achieved after multiplying each factor rating with
the weight.

Total Weighted Score

The sum of all weighted scores is equal to the total weighted score, the final value of the
total weighted score should be between range 1.0 (low) to 4.0(high). The average
weighted score for the IFE matrix is 2.5 any company total weighted score fall below 2.5
consider weak. The company‘s total weighted score higher then 2.5 is considered as
strong in position.

 Evolution of Internal Appraisal

Internal appraisal means to evaluate the firms own capacities and to meet the
requirements of existing activities efficiently and effectively and also to meet the
challenges or threats indicated on the basis of external appraisal.

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It further identifies the strengths, weaknesses, and resources of the company

Importance of internal appraisal

It is very much essential for the organisation to withstand global competition and gain
competitive advantage.

Internal appraisal helps the organisation to develop core competencies to gain their
competitive advantage.

Core competencies involve a firm‘s resources and capabilities that give it a distinct
advantage over its competitors. Developing the core competencies will create ‗value‘ for
their customers. Core competencies are actually a value-creating system through which
a company tries to achieve strategic competitiveness and positions itself above
competition.

An Internal audit provides important information about an organisation‘s specific

assets, skills, work activities and work relationships in order to determine as to what is
good about them and what is lacking.

Prior to internal analysis of the company‘s strengths and weakness can be made, it is
important to identify some of the weakness that leads the company to fail.

Also, there are some factors that contribute to the success of the company. These factors
are known as ―Critical success factors‖ (CSF).

Critical Success Factors are those unique characteristics of an organisation, which are
essential for competitive advantage.

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For example-

CSF of Walmart is Everyday Low Pricing (EDLP) and that of APPLE is innovation in its
products and services.

 Porter’s Value Chain Analysis

Porter‘s Value Chain is a way to map out how your business creates value for the
market. In simple terms every organisation takes a collection of inputs and produces
output. The output has more value to their audience than the inputs.

Your business makes a margin by increasing the gap between the cost of creating that
value and the value itself.

Porter's value chain analysis is a framework developed by Michael Porter that helps
businesses identify and understand the primary activities and support activities that
create value for the organization and its customers. The concept is based on the idea
that businesses are a series of interlinked activities that add value to a product or
service. The value chain analysis consists of two main types of activities: primary
activities and support activities.

Primary Activities:

 Inbound Logistics: Activities related to receiving, storing, and distributing inputs or

materials needed for production.
 Operations: Activities involved in transforming inputs into finished products or
services. This includes manufacturing, assembling, and packaging.
 Outbound Logistics: Activities involved in delivering the finished product or
service to customers. This includes warehousing, order fulfillment, and
transportation.
 Marketing and Sales: Activities related to promoting and selling the product or
service. This includes advertising, sales promotions, and customer relationship
management.
 Service: Activities aimed at maintaining and enhancing the value of the product or
service after it has been sold. This includes customer support, maintenance, and
warranties.

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Support Activities:

 Procurement: Activities related to sourcing and acquiring inputs or resources

needed for the primary activities. This includes supplier selection, negotiation, and
contract management.
 Technology Development: Activities aimed at improving product or service design,
process efficiency, and innovation. This includes research and development (R&D),
technology acquisition, and process automation.
 Human Resource Management: Activities related to recruiting, training, and
retaining employees. This includes workforce planning, performance management,
and employee development.
 Infrastructure: Activities that provide the foundation for the organization's
operations. This includes systems, structures, and processes such as finance, legal,
and administration.

Value chain analysis involves examining each of these activities to identify

opportunities for cost reduction, differentiation, or competitive advantage. By
understanding the value chain and how each activity contributes to the overall value
creation process, businesses can make strategic decisions to optimize their operations,
enhance customer satisfaction, and improve profitability.

 SWOT Analysis
SWOT stands for Strengths, Weaknesses, Opportunities, and Threats, and so a SWOT
analysis is a technique for assessing these four aspects of your business.

SWOT Analysis is a tool that can help you to analyze what your company does best
now, and to devise a successful strategy for the future. SWOT can also uncover areas of
the business that are holding you back, or that your competitors could exploit if you
don't protect yourself.

A SWOT analysis examines both internal and external factors – that is, what's going on
inside and outside your organization. So some of these factors will be within your
control and some will not. In either case, the wisest action you can take in response will
become clearer once you've discovered, recorded and analyzed as many factors as you
can.

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Components of SWOT Analysis

Every SWOT analysis will include the following four categories. Though the elements
and discoveries within these categories will vary from company to company, a SWOT
analysis is not complete without each of these elements:

Strengths:

Strengths in SWOT refer to internal initiatives that are performing well. Examining
these areas helps you understand what‘s already working. You can then use the
techniques that you know work—your strengths—in other areas that might need
additional support, like improving your team‘s efficiency.

When looking into the strengths of your organization, ask yourself the following
questions:

 What do we do well? Or, even better: What do we do best?

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 What‘s unique about our organization?

 What does our target audience like about our organization?
 Which categories or features beat out our competitors?

Example SWOT strength:

Customer service: Our world-class customer service has an NPS score of 90 as

compared to our competitors, who average an NPS score of 70.

Weaknesses:

Weaknesses in SWOT refer to internal initiatives that are underperforming. It‘s a good
idea to analyze your strengths before your weaknesses in order to create a baseline for
success and failure. Identifying internal weaknesses provides a starting point for
improving those projects.

 Identify the company‘s weaknesses by asking:

 Which initiatives are underperforming and why?
 What can be improved?
 What resources could improve our performance?
 How do we rank against our competitors?

Example SWOT weakness:

E-commerce visibility: Our website visibility is low because of a lack of marketing

budget, leading to a decrease in mobile app transactions.

Opportunities

Opportunities in SWOT result from your existing strengths and weaknesses, along with
any external initiatives that will put you in a stronger competitive position. These could
be anything from weaknesses that you‘d like to improve or areas that weren‘t identified
in the first two phases of your analysis.

Since there are multiple ways to come up with opportunities, it‘s helpful to consider
these questions before getting started:

 What resources can we use to improve weaknesses?

 Are there market gaps in our services?
 What are our business goals for the year?
 What do your competitors offer?

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Example SWOT opportunities:

Marketing campaign: To improve brand visibility, we‘ll run ad campaigns on YouTube,

Facebook, and Instagram.

Threats:

Threats in SWOT are areas with the potential to cause problems. Different from
weaknesses, threats are external and out of your control. This can include anything
from a global pandemic to a change in the competitive landscape.

Here are a few questions to ask yourself to identify external threats:

 What changes in the industry are cause for concern?

 What new market trends are on the horizon?
 Where are our competitors outperforming us?

Example SWOT threats:

New competitor: With a new e-commerce competitor set to launch within the next
month, we could see a decline in customers.

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 Competitive Advantage and Firm Resources

Competitive Advantage
Competitive advantage refers to the ways that a company can produce goods or deliver
services better than its competitors. It allows a company to achieve superior margins
and generate value for the company and its shareholders.

A competitive advantage is something that cannot be easily replicated and is exclusive

to a company or business. This value is created internally and is what sets the business
apart from its competition.

What are Some Examples of Competitive Advantage?

Competitive advantages come in many shapes and sizes. They include, but are not
limited to, some of the following:

 Access to natural resources not available to competitors

 Highly skilled labor
 Strong brand awareness
 Access to new or proprietary technology
 Price leadership
 Components of Competitive Advantage

For a competitive advantage to be established, it is important to know the following:

Value proposition: A company must clearly identify the features or services that make
it attractive to customers. It must offer real value in order to generate interest.

Target market: A company must establish its target market to further engrain best
practices that will maintain competitiveness.

Competitors: A company must define competitors in the marketplace, and research the
value they offer; this includes both traditional as well as non-traditional, emerging
competition.

Firm Resources
Firm resources refer to the tangible and intangible assets that a company possesses and
controls, which are used to conduct its business activities and pursue its strategic
objectives. These resources can vary widely across different organizations and

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industries, and they play a crucial role in determining a firm's competitiveness and
ability to create value. Here are some key categories of firm resources:

1. Tangible Resources:

Financial Resources: Cash, capital, and financial assets that a firm can use to fund its
operations, investments, and growth initiatives.

Physical Resources: Physical assets such as manufacturing facilities, machinery,

equipment, real estate, and inventory.

Technological Resources: Tools, systems, and technologies that enable the organization
to innovate, improve efficiency, and develop competitive products or services.

Organizational Resources: Structural elements of the organization, including its formal

structure, processes, and systems, as well as its reputation and relationships with
stakeholders.

2. Intangible Resources:

Human Capital: Knowledge, skills, expertise, and experience of the workforce. This
includes employees' capabilities, creativity, and ability to innovate.

Intellectual Property: Patents, trademarks, copyrights, and other forms of intellectual

property that provide legal protection for the firm's innovations, brands, and creations.

Brand Equity: The value and perception associated with the firm's brand name,
reputation, and identity in the marketplace. Strong brands can command premium
prices and customer loyalty.

Relationships and Networks: Relationships with customers, suppliers, partners, and

other stakeholders that provide access to resources, information, and opportunities.

3. Strategic Resources:

Core Competencies: Unique capabilities, skills, and know-how that distinguish the firm
from competitors and enable it to deliver superior value to customers.

Innovation Capabilities: The ability to generate and commercialize new ideas,

products, and services, as well as to adapt to changing market conditions and
technological advancements.

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Strategic Alliances: Partnerships, collaborations, and alliances with other organizations

that provide access to complementary resources, expertise, or markets.

4. Reputational Resources:

Brand Reputation: The perceived quality, reliability, and trustworthiness associated

with the firm's brand, products, and services.

Corporate Social Responsibility (CSR): The firm's reputation for ethical behavior,
social responsibility, and sustainability practices, which can enhance its image and
attract customers, investors, and employees.

 Generic Strategies and Competitive Advantage

Porter's Generic Competitive Strategies (ways of competing)

A firm's relative position within its industry determines whether a firm's profitability is
above or below the industry average. The fundamental basis of above average
profitability in the long run is sustainable competitive advantage. There are two basic
types of competitive advantage a firm can possess: low cost or differentiation. The two
basic types of competitive advantage combined with the scope of activities for which a
firm seeks to achieve them, lead to three generic strategies for achieving above average
performance in an industry: cost leadership, differentiation, and focus. The focus
strategy has two variants, cost focus and differentiation focus.

Generic Strategies

These three approaches are examples of "generic strategies," because they can be
applied to products or services in all industries, and to organizations of all sizes. They
were first set out by Michael Porter in 1985 in his book, "Competitive Advantage:
Creating and Sustaining Superior Performance."

Porter called the generic strategies "Cost Leadership" (no frills), "Differentiation"
(creating uniquely desirable products and services) and "Focus" (offering a specialized
service in a niche market). He then subdivided the Focus strategy into two parts: "Cost
Focus" and "Differentiation Focus." These are shown in figure 1 below.

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Cost Leadership:

In cost leadership, a company aims to become the lowest-cost producer in its industry.
By minimizing costs at every stage of the value chain, the company can offer its
products or services at lower prices than competitors.

Cost leadership often involves achieving economies of scale through large-volume

production, efficient operations, and tight cost control measures.

This strategy targets a broad market and aims to appeal to price-sensitive customers
who prioritize cost savings over other factors.

Differentiation:

Differentiation strategy involves offering unique and distinct products or services that
are perceived as superior in the eyes of customers.

Differentiation can be achieved through product features, quality, brand image,

customer service, innovation, or other factors that set the company apart from
competitors.

By providing something that customers value and are willing to pay a premium for, a
company can create a competitive advantage and capture higher profit margins.

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This strategy often targets a specific market segment or niche where customers are
willing to pay extra for the unique value proposition.

Focus (or Niche) Strategy:

Focus strategy involves concentrating on a specific market segment, niche, or target

audience and tailoring products or services to meet their specific needs.

While cost leadership and differentiation strategies aim for broad market appeal, focus
strategy aims for depth rather than breadth.

Focus can be based on a particular customer group, geographic region, product line, or
distribution channel.

By serving a smaller, specialized market segment, a company can develop a deeper

understanding of customer needs, build stronger relationships, and achieve higher
levels of customer loyalty.

Examples of Porter's Generic Strategies in Action

To better understand how Porter's Generic Strategies can be implemented in real-world

scenarios, let's take a look at some examples of businesses that have successfully used
these approaches:

Walmart: Cost Leadership

Walmart is a prime example of a business that has implemented the cost leadership
strategy. By leveraging economies of scale, reducing overhead costs, and streamlining
operations, Walmart has been able to offer low-priced products to a broad market. Their
focus on cost leadership has allowed them to dominate the retail industry and maintain
a competitive advantage.

Apple: Differentiation

Apple is another example of a business that has successfully implemented Porter's

Generic Strategies. By creating a unique product that is both visually appealing and
easy to use, Apple has been able to differentiate itself from competitors. Their focus on
differentiation has allowed them to maintain a premium brand image and a loyal
customer base.

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Southwest Airlines: Focus

Southwest Airlines is a great example of a business that has implemented the focus
strategy. By targeting a specific niche market, Southwest has been able to tailor its
products and services to meet the unique needs and preferences of its customers. Their
focus on providing affordable, convenient, and reliable air travel has allowed them to
dominate the domestic airline industry.

 Dynamics of Competitive Advantage

The dynamics of competitive advantage encompass the ever-changing factors and
forces that influence a company's ability to gain, sustain, or lose its competitive edge in
the marketplace. These dynamics are shaped by a multitude of internal and external
factors, and understanding them is crucial for businesses to adapt and thrive in
competitive environments. Here are some key dynamics of competitive advantage:

Market Evolution: Markets are dynamic and constantly evolving due to changes in
consumer preferences, technological advancements, regulatory shifts, and competitive
pressures. Companies must continuously monitor market trends, anticipate shifts in
demand, and adapt their strategies to remain competitive.

Innovation and Technology: Innovation plays a central role in maintaining competitive

advantage. Companies that invest in research and development, embrace new
technologies, and drive innovation in their products, processes, and business models
are better positioned to differentiate themselves and stay ahead of competitors.

Customer Centricity: Understanding and meeting customer needs is essential for

sustaining competitive advantage. Companies that prioritize customer satisfaction,
engage in market research, and offer superior customer experiences can build strong
brand loyalty and gain a competitive edge over rivals.

Operational Excellence: Operational efficiency and effectiveness are critical for cost
leadership and differentiation strategies. Companies that optimize their processes,
streamline operations, and leverage economies of scale or scope can reduce costs,
improve productivity, and deliver value to customers more efficiently than competitors.

Human Capital and Talent Management: People are a valuable source of competitive
advantage. Companies that attract, develop, and retain top talent, foster a culture of
innovation and collaboration, and empower employees to contribute their best ideas
and efforts are better positioned to drive performance and outperform competitors.

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Strategic Alliances and Partnerships: Collaboration with other organizations can

enhance a company's competitive position by providing access to complementary
resources, capabilities, or markets. Strategic alliances, joint ventures, and partnerships
can enable companies to achieve strategic objectives more effectively and respond to
market opportunities or challenges.

Brand and Reputation Management: Building a strong brand and reputation can create
a sustainable competitive advantage. Companies that invest in branding, marketing,
and corporate social responsibility initiatives can differentiate themselves, build trust
with customers, and command premium prices for their products or services.

Regulatory and Legal Environment: Compliance with regulations and laws is essential
for operating in a competitive marketplace. Companies must stay informed about
changes in the regulatory landscape, mitigate risks, and ensure that their business
practices align with legal requirements to avoid penalties or reputational damage.

Globalization and International Competition: Globalization has intensified

competition by opening up markets, increasing consumer choice, and enabling
companies to operate across borders. Companies must navigate international markets,
adapt to diverse cultural norms, and develop global strategies to compete effectively on
a global scale.

Disruptive Forces and Industry Disruptions: Disruptive technologies, business

models, or market entrants can rapidly change competitive dynamics within an
industry. Companies must be vigilant, agile, and responsive to emerging threats or
opportunities to stay ahead of disruption and maintain their competitive advantage.

 Porter's Five Forces Model

Michael Porter's five-force strategic analysis model, introduced in a 1979 article
published in the Harvard Business Review, remains a fundamental tool for strategic
analysts plotting the competitive landscape of an industry.

In a bid to mirror the complexity real strategists would face while keeping their
strategic analysis manageable, Porter set out five forces at play in a given industry:
internal competition, the potential for new entrants, the negotiating power of suppliers,
the negotiating power of customers, and the ability of customers to find substitutes.
Below, we take you through each of Porter's five forces, detail the significant critiques of
his approach, and show how to apply the model to specific markets.

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1. Threat of New Entrants

When an industry starts becoming profitable, it will entice new entrants. If the barriers
to entry are low, new entrants can easily capture market share and threaten
profitability.

New entrants undercut prices and offer valuable alternatives to what your industry
currently provides.

A practical example of a new entry and high threat to existing players is Apple‘s
entrance into the music distribution industry with the iPod. Apple entered into a new
market, stole market share from existing players, and completely changed the way we
consume music and audio content today.

On the other hand, if barriers to entry are high, it‘s much harder for new entrants to
threaten your industry‘s profitability.

According to Porter, there are 7 main sources that influence the height of entry
barriers:

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1. Supply-side economies of scale: Production at higher volumes and low costs per
unit force new entrants to come in on a large scale or at a cost disadvantage.
2. Network effect: Buyer‘s willingness to pay increases as the number of buyers or
sellers for the business grows. Customer loyalty or a buyer's preference for a bigger
"network" discourages new entrants by limiting buyers‘ willingness to buy from
someone new.
3. Switching costs: The higher prices/costs a customer has to pay to switch from one
supplier to another, the higher the entry barrier will be.
4. Capital requirement: The entry barrier can be significant for new entrants on
account of the hefty financial investment required. However, investors can provide
new entrants with the required capital if the industry returns are high and lower the
entry barrier.
5. Unfair advantage: Industry leaders have cost or quality advantages derived from
resources that are hard to copy. An example would be patent technology, exclusive
access to raw materials sources, a strong brand identity, or a favorable geographical
location.
6. Unequal access to distribution channels: Considering the power of existing players,
it might be difficult for new competitors to break into existing distribution channels.
As an alternative, companies typically bypass traditional distribution channels or
create new ones. An example is low-cost airlines that started selling tickets on their
own websites.
7. Government policy: Government policy can lower or increase entry barriers for new
entrants. Licensing requirements, for example, can increase entry barriers. In
contrast, subsidies can make entry easier.

Questions you can use during analysis:

 How expensive would it be, and how long would it take a new competitor or
startup to enter your market?
 Is there strong customer loyalty in your industry? Would it be difficult for a new
competitor to woo customers away from your products or services?
 Are there any additional barriers to entry a new player could encounter (e.g.
regulation, intellectual property, access to distribution channels, etc.)?
 What‘s your industry structure like? How strictly is it regulated?
 Is your key technology protected?

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2. Threat of Substitute

All firms in an industry are competing with other industries that make substitute
products or services. An example is a messaging app that is a substitute for e-mail. Or
an airline website replacing travel agents with its own ticket booking system.

If buyers can satisfy their needs with a different product or service from an alternative
industry, that will put a lid on how high your industry can set its price.

The more attractive a substitute, the firmer the lid on industry profits. If there are many
substitutes that can perform a similar function as your product or service, then the
threat of substitutes is high.

If there are few substitutes that provide the same function as your product or service,
the threat of substitution is low.

Questions you can use during analysis:

 How many substitute products/services are in your industry?

 How similar are those products/services from a functional standpoint?
 What differentiates your products/services from those substitutes?
 Are those products/services affordable?
 What is the buyer‘s cost of switching to a substitute product? Is it low-cost or
high-cost?
 Are you able to offer a new product or service that can become a substitute for a
market leader? If so, what is it?

3. Bargaining Power of Buyers

In Porter's Five Forces model, buyers are your customers. At the expense of industry
profitability, strong buyer power can lower prices, pit rivals against each other, and
demand higher quality or service.

The power of customers is higher when they are few in number and have many sellers
to choose from. Beyond this, if a large portion of a seller‘s revenue is determined by a
handful of buyers, those buyers will have more leverage.

Switching costs should also be considered when determining the buyers' bargaining
power.

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Questions you can use during analysis:

 How many potential buyers are in your industry compared to the number of
sellers?
 Does a handful of buyers make up the majority of your revenue?
 What is the size of the orders you receive?
 How easy would it be for your buyer to switch from one seller to another?

4. Bargaining Power of Suppliers

Suppliers offer your industry the needed inputs to operate (e.g. components, materials,
and services). When the bargaining power of suppliers is high, there‘s a strong chance
your suppliers could set higher prices for those inputs or reduce quality without
retaliation.

If you have a number of suppliers to choose from, their bargaining power is likely low,
so you will not have a problem switching suppliers if needed.

As an example, let's take a look at the automotive industry.

Volkswagen Group's suppliers have limited bargaining power due to VW's global
presence with suppliers scattered around the globe. On top of that, Volkswagen has at
least 1 or 2 backup suppliers for each part and can shift demand between them.

On the contrary, many automotive suppliers manufacture only a specific part and are
heavily dependent on the industry. These dynamics of the automotive industry put
Volkswagen in a superior position while its suppliers have relatively low bargaining
power.

If you don‘t have the option to choose between a number of suppliers, there is no
substitute for what the supplier provides, or the switching cost of suppliers is high, they
will have stronger bargaining power, and you will have to rethink your business
strategy.

Questions you can use during analysis:

 Who are your key suppliers?

 How many competent suppliers does your company have to choose from?
 How many alternative suppliers can you find?
 How difficult or expensive would it be to change your suppliers?

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5. Rivalry among Existing Competitors

Although rivals are subject to the same industry forces as yourself, the force of
competitive rivalry is often the largest determinant of an attractive industry since it is
affected by the four previous forces. In order to capture their share of the market, rivals
will compete on price, quality, service, marketing spend, etc.

Competitive intensity is the highest when your buyers have plenty of alternatives, there
is little service or product differentiation between rivals, and when industry growth is
slowing. If the buyer can choose from a fair number of competitors, the buyer can start
bidding wars and reduce profits.

When there is little differentiation between rivals, your product or service will be
perceived as a commodity, and the buyer will purchase solely on price.

If an industry‘s growth is slowing, the existing firms will be in a fight to maintain their
piece of the market share. We've written extensively about VRIO Analysis that can help
you find your competitive advantage and then turn that into a sustainable competitive
advantage.

Questions you can use during analysis:

 What is the number of competitors in your industry?

 Who is your biggest competition?
 What makes your product/service different from your rivals?
 Are there any barriers that would prevent your customers from switching
providers? If so, what are they?
 Is your industry shrinking or growing?

 Competitive Advantage to Corporate Strategy

Moving from competitive advantage to corporate advantage involves leveraging the
strengths and resources of a company not only to outperform competitors in individual
markets but also to create sustainable value across the entire corporation. While
competitive advantage focuses on beating rivals within specific product markets or
industries, corporate advantage takes a broader perspective, considering how the
organization as a whole can achieve superior performance and create long-term
shareholder value. Here's how a company can transition from competitive advantage to
corporate advantage:

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Integration and Synergies: Instead of optimizing performance within individual

business units or divisions, companies can seek opportunities for integration and
synergies across different parts of the organization. By aligning strategies, sharing
resources, and leveraging economies of scale or scope, the corporation as a whole can
achieve greater efficiency and effectiveness.

Diversification: Diversifying into new markets, products, or industries can help spread
risk, capture new growth opportunities, and enhance the overall resilience of the
corporation. Diversification can be achieved through organic expansion, strategic
acquisitions, or partnerships that complement existing capabilities and leverage core
competencies.

Vertical Integration: Vertical integration involves expanding control over the supply
chain or distribution channels to capture more value and reduce dependence on
external suppliers or distributors. By integrating backward into suppliers or forward
into distribution or retail channels, companies can capture additional margins and
improve overall profitability.

Global Expansion: Pursuing international growth opportunities can help companies

access new markets, customer segments, and talent pools, while also diversifying
revenue streams and reducing dependence on any single market or region. Global
expansion requires careful market analysis, localization of products or services, and
adaptation to local regulations and cultural norms.

Innovation Ecosystems: Building innovation ecosystems involves collaborating with

external partners, including startups, research institutions, and industry consortia, to
co-create new products, technologies, or business models. By tapping into external
expertise and networks, companies can accelerate innovation, stay ahead of
competitors, and drive corporate growth.

Brand Portfolio Management: Managing a portfolio of brands allows companies to

address diverse customer needs and preferences, target different market segments, and
mitigate brand-related risks. By strategically allocating resources, investing in brand
equity, and optimizing brand portfolios, companies can enhance corporate value and
maintain competitive advantage across multiple markets.

Corporate Reputation and Social Responsibility: Building a strong corporate

reputation and demonstrating social responsibility can enhance customer loyalty,
attract top talent, and foster long-term stakeholder trust. Companies that prioritize
ethical business practices, environmental sustainability, and community engagement

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can differentiate themselves, mitigate risks, and create a positive corporate image that
contributes to overall corporate advantage.

Talent Development and Organizational Culture: Investing in talent development and

fostering a strong organizational culture can drive employee engagement, innovation,
and performance excellence. By attracting, retaining, and empowering top talent,
companies can build a sustainable competitive advantage that transcends individual
markets and business units, contributing to overall corporate success.

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