EXTERNAL

ENVIRONMENT
 Strategic Analysis

• Strategic decisions should be based on a systematic analysis of

both the external environment and internal resources and
capabilities.
• The process of monitoring and interpreting information from the
external environment, should be an ongoing activity for
businesses. It helps in identifying opportunities and threats.
• While some organizations informally gather information, others
have formal structures in place. Having a systematic approach to
collect and analyze data is crucial for managing risks and
uncertainties effectively.
• Strategic analysis is a key component of business planning,
helping in making informed resource investments and achieving
objectives.
 Contd.

• The analytical sequence for strategic analysis, includes assessing

the external and internal situation, evaluating alternative
strategies, and finally selecting the most appropriate strategy.
 Issues to be considered for
Strategic Analysis
• Recognizing that strategy evolves over time is crucial. A strategy
is not a static plan but a dynamic process that adapts to
changing circumstances.
• Achieving the right balance between internal capabilities and
external factors is a key challenge in strategic analysis.
Organizations must consider both opportunities and constraints
in the external environment while aligning them with their
internal strengths and weaknesses.
• Identifying potential imbalances or threats in the environment
and assessing their potential impact on the organization. Both
external and internal risks needs to be evaluated.
 Contd.

• External analysis involves assessing the industry's economic

characteristics, competitive forces, market dynamics, and
future profit prospects.
• Internal analysis focuses on evaluating an organization's
strengths and weaknesses.
• Understanding competitive forces within an industry is critical.
This involves analyzing factors such as the intensity of
competition, market share, pricing strategies, and
differentiation.
• Industries vary significantly in terms of economic traits, growth
rates, technological changes, and competitive intensity.
Recognizing these differences is vital for determining profit
prospects.
Contd.
 Contd.

• Jet Airways suspended its operations on April 17, 2019, due to its
inability to secure emergency funding and pay outstanding dues
to various stakeholders, including employees, lessors, and
creditors.
• Videocon Industries faced severe financial distress due to its debt
burden and operational challenges. The company struggled to
repay its debts, leading to insolvency proceedings.
 Strategy and Business
Environment
• Determining Opportunities and Threats
• Giving Directions for Growth
• Continuous Learning
• Image Building
• Meeting Competition
 Contd.

• Image Building example: In view of the shortage of

power, many companies have set up captive power
plants with their factories to meet their own
requirement of power as well as extend surplus
capacities in the vicinity. It creates a positive image
and helps it to prosper and win over the competitors.
 Micro Environment

• Definition: The micro-environment refers to the immediate

surroundings of an organization that directly and regularly
influence its operations.
• Components: It includes components such as suppliers,
consumers, marketing intermediaries, and competitors that are
specific to the organization's business.
• Key Considerations: In the micro-environment, organizations
need to address factors like their employees, customer base,
financing methods, supplier relationships, local community, and
direct competitors.
• Impact on Strategy: Factors in the micro-environment play a
crucial role in shaping how an organization operates in its
market. These factors often relate to how a firm reacts to macro-
level issues.
 Macro Environment

• Definition: The macro-environment encompasses the broader

external factors that significantly affect an organization's
operations, but they are typically beyond the organization's
direct control.
• Examples: It includes factors such as economic conditions,
technological advancements, political and legal regulations,
sociocultural trends, and environmental concerns.
• Indirect Influence: Organizations have limited control over
macro-environmental factors, but these factors can have a
profound impact on an organization's strategies and decisions.
• Strategic Adaptation: Organizations must adapt their strategies
and operations to align with macro-environmental changes to
remain competitive and responsive to market dynamics.
 Elements of Macro
Environment
Demographic Environment:
Business Context:
•Demographics involve categorizing population characteristics like
age, gender, income, and more.
•These criteria help understand specific group features and are vital
for informed decision-making.

Factors Considered:
•Demographic analysis considers factors such as race, age, income,
education, assets ownership, and more.
 Contd.

Importance for Businesses:

•Demographics help businesses understand their target market. For
instance, India's young population makes it attractive for many
multinational companies.
•Businesses need to assess how demographic trends will impact
their industry's market size and identify opportunities or threats.
Key Considerations:
•Factors like population size, age distribution, geographic spread,
ethnic diversity, and income distribution significantly affect
business strategies.
•Adapting to changing demographic characteristics is essential for
maintaining competitiveness.
 Contd.

Socio-Cultural Environment:
Business Context:
•It encompasses a complex set of factors, including social
traditions, values, beliefs, literacy levels, ethics, societal conditions,
social stratification, cohesion, and more.
Distinct from Demographics:
•Unlike demographics, which focus on population characteristics,
the socio-cultural environment deals with the behavior and belief
systems of a population.
Factors in the Socio-Cultural Environment:
•Includes elements related to human relationships and the impact
of social attitudes and cultural values.
 Contd.

Impact on Organizations:
•The beliefs, values, and norms of a society determine how
individuals and organizations should interact.
•Core beliefs within a society tend to be persistent and challenging
for businesses to change, becoming key determinants of their
functioning.
Impact on Strategic Management:
•Primarily affects the strategic management process within an
organization, particularly in mission and objective setting and
decisions related to products and markets.
 Contd.

Economic Environment:
Business Context:
•Influences business strategies directly.
•Includes regional, national, and global economic conditions.
Market Strength and Size:
•Determines the market's strength and size.
•It affects the purchasing power of consumers, which depends on
factors like current income, prices, savings, money circulation, debt,
and credit availability.
 Contd.

Income Distribution:
•Income distribution patterns within an economy influence
business opportunities.
•Understanding how income is distributed helps businesses tailor
their strategies to target specific customer segments.
Impact on Business Operations:
•Businesses need to assess the effect of economic prospects,
growth, and inflation on their operations.
•Economic conditions can influence pricing strategies, production
levels, and overall business sustainability.
 Contd.

Political-Legal Environment:
Business Context:
•Includes political development, politicization of economic issues,
political morality, law and order, stability, ruling party ideology,
government effectiveness, and intervention in the economy.
Government Influence:
•The type of government in a country significantly influences
business operations.
•Businesses must adapt to changes in government policies and
regulations.
 Contd.

Taxation and Duties:

•Taxes and duties imposed by the government can have a
substantial impact on business profitability and operations.
Legal Framework:
•Businesses prefer operating in countries with sound legal systems.
•Understanding key laws related to consumers, competition,
companies, intellectual property, foreign exchange, and labor is
essential.
 Contd.

Technological Environment:
Business Context:
•Technology is a highly significant factor in the modern era,
fundamentally changing how people communicate and conduct
activities.
•Technology has transformed the way businesses operate, making
them interdependent on technological advancements.
Mutual Influence:
•Businesses contribute to society by providing access to
technological innovations, raising the overall standard of living.
 Contd.

Impact on Business Operations:

•Technology has streamlined business processes, reducing
paperwork, improving payment scheduling, and enhancing
inventory management efficiency.
•This efficiency helps cut costs, reduce time and distance
constraints, and gain a competitive edge.
Business Opportunities and Challenges:
•Technology creates new business opportunities while rendering
existing products and services obsolete.
•Effective adoption of technological innovations can be an
opportunity for businesses, but technologies like artificial
intelligence and machine learning can also pose threats.
 Internationalization of
Business
Internationalization:
•It is a dominant commercial trend in recent decades, enabling
businesses to enter new markets for increased earnings and cost-
effective resources.
•It also allows businesses to achieve economies of scale and extend
product lifespans.
Complexity of International Processes:
•While the strategic management process is similar for global and
domestic firms, international processes are more complex due to
additional variables and linkages.
•International strategic planning helps organizations identify global
market opportunities and threats, facilitating the development of
effective strategies.
 Contd.

Characteristics of a Global Business:

•A global business comprises multiple units across the globe linked
by common ownership.
•They respond to a common strategy, and managers and
shareholders may be based in different nations.
Steps in International Strategic Planning:
•Evaluate global opportunities and threats, aligning them with
internal capabilities.
•Define the scope and establishes global business objectives.
•Develop distinct corporate strategies for the global business and
the entire organization.
 Contd.

Reasons for Going Global:

•Technological advancements and evolving political views have
accelerated the growth of multinational organizations.
•Reasons for going global include the need for growth, reduced
time and distance due to improved communication and
transportation, access to new markets, sourcing raw materials,
labor cost savings, proximity to markets, and strategic alliances.
 International Environment

Overview:
•It is characterized by a wide range of factors including social,
cultural, demographic, environmental, political, governmental,
legal, and technological elements.
Importance of Assessing International Environment:
•Assessing the international environment is the initial step towards
internationalization.
•It helps organizations identify global market opportunities and
evaluate the feasibility of capitalizing on these opportunities.
 Contd.

Levels of Environmental Analysis:

•Multinational Analysis: Involves identifying, anticipating, and
monitoring significant components of the global environment on a
large scale.

•Regional Analysis: A more in-depth evaluation of critical factors in

a specific geographical area.

•Country Analysis: Requires a detailed examination of essential

environmental factors within a specific country. Includes economic,
legal, political, and cultural dimensions, customized for each
country for effective market entrance strategies.
 Contd.

Integration into Strategic Management:

•The international environment is now an integral part of strategic
management for businesses with global interests.
•It encompasses aspects like political risks, cultural differences,
exchange rate fluctuations, legal compliance, and taxation issues.
•Decision-makers need to focus on these factors to make informed
international business decisions.
Understanding Products and
Industry
Products in Business:
•Products are goods or services that fulfill customer needs.
•They can be tangible (physical items) or intangible (services or
experiences).
•Pricing is influenced by market dynamics, quality, marketing, and
customer targeting.
Product Features:
•Features enhance user satisfaction and affect pricing.
•They differentiate a product in terms of function, design, quality,
and overall experience.
•The entire customer journey with a product is an essential part of
its features.
 Contd.

Central Role:
•Products are at the core of business operations.
•They drive production, quality, sales, marketing, and other
processes.
Product Life Cycle:
•Products have a useful life and a life cycle.
•Evolution and reinvention occur as products become obsolete or
require replacement.
 Product Life Cycle

• PLC is a concept that represents the life stages of a product,

characterized by an S-shaped curve depicting sales over time.
• It consists of four successive stages: Introduction, Growth,
Maturity, and Decline.
 Contd.

Introduction Stage:
•In this stage, sales growth is slow, competition is low, prices are
relatively high, and the market is limited.
•Customers have limited awareness of the product.
Growth Stage:
•Rapid market acceptance characterizes this stage.
•Demand expands quickly, prices drop, competition intensifies, and
the market grows.
•Customers are knowledgeable about and interested in the
product.
 Contd.

Maturity Stage:
•Sales growth rate slows down in this stage.
•Competition becomes fierce, and the market stabilizes.
•Profits may decrease due to strong competition, and organizations
focus on maintaining stability.
Decline Stage:
•Sales sharply decline as a new product replaces the existing one.
•Profits and sales plummet, requiring strategic decisions to either
diversify or retrench from the market.
 Contd.

Advantages of PLC Approach:

•PLC helps diagnose the stage of products (or businesses) in a
portfolio.
•It aids in making appropriate strategic choices based on the
product's stage.
•Strategies like expansion, resource allocation, selective harvesting,
and retrenchment can be tailored to each stage, creating a
balanced business portfolio.
 Value Chain Analysis –
Michael Porter
• It is a method used to break down an organization's processes
and activities to evaluate how much value it generates.
• It helps improve the sequence of operations, enhance efficiency,
and create a competitive advantage.
 Contd.

Origin:
•Value Chain Analysis originally aimed to determine the 'value
added' at each step in manufacturing processes to identify cost
improvements and value creation opportunities.
Competitive Advantage through Value Activities:
•Value Chain Analysis recognizes that organizations are more than a
collection of resources; they create value through activities and
linkages between them.
 Contd.

Primary Activities:
•Inbound Logistics deals with receiving, storing, and distributing
inputs.
•Operations transform inputs into the final product or service.
•Outbound Logistics collects, stores, and distributes products to
customers.
•Marketing and Sales make consumers aware of and able to
purchase the product.
•Service activities enhance or maintain product/service value
through installation, repair, training, and more.
 Contd.

Support Activities:
•Support activities include Procurement (acquiring resource
inputs), Technology Development (R&D, process development),
Human Resource Management (recruiting, managing, training), and
Infrastructure (planning, finance, quality control, information
management).
 Industry Environmental
Analysis
• It assesses key industry characteristics, competition, drivers of
change, rival firms, success factors, and profit potential.
• Aims to determine industry profitability and inform strategic
decisions.
• Provides a broader context for understanding business
environment.
• Helps align strategy with changing industry conditions.
 Contd.

Porter Five Forces

•Developed by Michael Porter, this framework is a
fundamental tool for assessing the competitive
dynamics within an industry.
•It's used to understand the attractiveness and
profitability of an industry by analyzing the five forces
that shape competition.
•These forces help strategists evaluate a company's
competitive position and formulate strategies to
enhance its competitive advantage.
 Contd.

Rivalry among Existing Firms:

•This force reflects the intensity of competition among
firms already operating in the industry.
•Key factors include the number and size of
competitors, pricing strategies, product
differentiation, and market growth.
•High rivalry often leads to price wars and reduced
profitability.
 Contd.

Threat of New Entrants:

•This force assesses the ease with which new
companies can enter the industry.
•High barriers to entry, such as significant capital
requirements or strict government regulations, deter
new entrants.
•Existing firms aim to establish barriers to protect
their market share and profitability.
 Contd.

Bargaining Power of Buyers:

•Buyers' power refers to their ability to influence
prices, demand better quality, or seek other favorable
terms from the firms in the industry.
•Buyers' power increases when they are informed,
make bulk purchases, or have various choices.
•Companies may adjust pricing, product features, or
services to meet buyer demands.
 Contd.

Bargaining Power of Suppliers:

•Suppliers' power is the ability of suppliers to dictate
terms, such as prices or delivery schedules, to the
firms they supply.
•Suppliers gain power when they provide unique or
essential inputs, have limited substitutes, or are
concentrated.
•Companies can seek multiple suppliers or integrate
backward to reduce supplier power.
 Contd.

Threat of Substitutes:
•This force examines the availability of alternative
products or services that can fulfill the same needs as
those offered by the industry.
•Substitutes can limit price increases and impact
demand for an industry's products.
•Companies must monitor technological
advancements and changing consumer preferences
for potential substitutes.
 Contd.

Industry Impact and Profitability:

•The combination of these five forces determines the
overall impact and profitability of an industry.
•If the forces are strong and favor the industry,
profitability is likely to be low.
•Conversely, weaker forces and a favorable industry
structure can result in higher profitability.
 Contd.

Dynamic Nature:
•It's crucial to note that the strength of these forces
can change over time due to various factors, such as
market shifts, technological advancements, or
regulatory changes.
•Firms need to regularly reassess their competitive
environment and adjust their strategies accordingly.
 Contd.

Attractiveness of the Industry

It is a critical consideration in strategic analysis,
impacting a company's investment decisions and
long-term success. Key factors in assessing industry
attractiveness include:
•Growth Potential: Evaluating whether the industry
has sustainable growth prospects is crucial. Industries
with promising future growth are more attractive.
•Profitability: Analyzing current and projected
profitability is essential. A high-profit potential makes
an industry attractive.
 Contd.

• Competitive Forces: Assessing the strength of

competitive forces is vital. Understanding whether
competition allows for adequate profits and whether it's
likely to intensify or weaken matters.
• Driving Forces: Recognizing the impact of driving forces
shaping the industry's future profitability is important.
Favorable driving forces enhance attractiveness.
• Competitive Position: Examining the company's
competitive position in the industry and whether it's
poised to grow stronger or weaker is a key factor.
• Leveraging Weaknesses: Identifying opportunities to
capitalize on weaker rivals' vulnerabilities can turn an
unattractive industry into a rewarding business
opportunity.
 Contd.

• Defensive Capabilities: Determining the

company's ability to defend against unfavorable
industry factors is critical.
• Risk and Uncertainty: Assessing the level of risk
and uncertainty associated with the industry's
future is important for decision-making.
• Industry-Wide Problems: Understanding the
severity of issues facing the industry as a whole is a
crucial aspect of assessment.
• Synergy with Other Industries: Examining
whether participation in this industry contributes
significantly to the firm's overall business success is
essential.
 Contd.

Experience Curve
The experience curve represents cost reductions and
efficiency gains as a business gains more production
experience.
•Cost Reduction: More production experience leads to
lower unit costs due to factors like learning effects,
economies of scale, and technological improvements.
•Competitive Advantage: Larger firms often have
lower costs than smaller competitors, giving them a
competitive edge.
•Barrier to Entry: The experience curve can deter new
entrants who struggle to match the cost advantages of
established players.
 Contd.

• Strategic Use: Companies can strategically use

the experience curve to build market share and
deter competition.
• Market Niches: Competitors facing strong players
benefiting from the experience curve may pursue
niche strategies.
 Contd.

Value Creation
It is the process by which businesses enhance the
worth of their products, services, or overall business
system.
•Customer Focus: Businesses aim to create better
value for their customers by offering products and
services that exceed customer expectations.
•Competitive Advantage: Value creation gives
businesses a competitive edge, helping them earn
above-average profits. This is linked to the value
customers place on the products and the prices
charged for them.
 Contd.

• Sustainable Competitive Advantage:

Sustainable competitive advantage is the long-term
ability to succeed. It can be achieved through
differentiation (providing superior value through
special features, quality, or services) or cost
advantage (lower costs than competitors).
• Value Chain Analysis: Michael Porter's value
chain analysis breaks down an organization's
functions into primary and supporting activities. It
helps identify potential sources of differentiation
and cost behavior.
 Market and Customer

Market:
•A place for buying and selling goods and services.
•Can be physical or virtual.
•Applies to various contexts, including stock exchanges
and specific industries.
Marketing:
•Involves research, product design, pricing, promotion,
transportation, and distribution.
•Focuses on the four Ps: product, place, pricing, and
promotion.
•Aims to understand and meet customer needs, deliver
satisfaction, and build lasting relationships.
 Contd.

Marketing Orientations:
•Product-oriented: Emphasizes quality, performance,
design, or features.
•Production-oriented: Offers low-cost products.
•Sales-oriented: Invests in advertising and promotion
to boost sales.
•Customer-oriented: Prioritizes understanding and
meeting customer needs, using customer feedback,
and adapting to market dynamics.
•Customer-centric businesses continuously learn from
customers for ongoing success.
 Contd.

Customer:
•Buys products/services from an organization.
•Vital for revenue generation and business existence.
•May be consumers or buyers in households or businesses.
Customer Analysis:
•Identifies target customers, their needs, and product
alignment.
•Involves data analysis, surveys, market evaluation, and
segmentation.
•Helps create customer profiles and assess demographics.
•Enables effective understanding of customer preferences.
 Contd.

Customer Behavior:
•Goes beyond customer identification.
•Examines shopping frequency, preferences, and
perception of marketing.
•Aids in creating marketing campaigns and products.
•Influenced by external and internal factors.
•Decision-making involves problem recognition,
alternative search, information seeking, and final
choice.
•Post-decision processes include evaluating
satisfaction, repeat purchases, and recommendations.
 Competitive Strategy

• Businesses compete for resources and customers.

• Competitive strategy focuses on how to compete
and achieve a competitive advantage.
• A competitive advantage leads to long-term
profitability.
• Analyzed based on creating and protecting
competitive advantage.
• Porter's five forces model is a powerful tool for
analyzing competitive pressures.
• Common analytical framework to assess nature and
intensity of competitive forces.
 Contd.

Competitive Landscape:
•Identifies direct and indirect competitors.
•Involves understanding competitors' vision, mission,
values, market, strengths, and weaknesses.
•Utilizes competitive intelligence for in-depth analysis.
•Helps assess competitors' positions in the
marketplace.
•Guides the development of effective strategies for a
competitive advantage.
 Contd.

Steps to Understand Competitive Landscape:

•Identify competitors and determine their market
share.
•Understand their products and services in different
markets.
•Determine competitors' strengths and what they do
well.
•Identify areas where competitors are lacking or weak.
•Synthesize information to identify gaps and areas for
improvement.
 Contd.

Key success Factors for competitive success:

•Determine industry members' ability to prosper.
•Include strategy elements, product attributes,
resources, competencies, and business outcomes.
•Critical for competitive success or failure.
Three questions to identify KSFs:
•What basis do customers use to choose between
competing brands?
•What resources and competitive capabilities are
needed for success?
•What is required to achieve sustainable competitive
advantage?
 Contd.

• Example in apparel manufacturing: appealing

designs, low-cost manufacturing efficiency.
• Understanding industry KSFs is crucial for strategy.
• Misdiagnosing KSFs can lead to misdirected
strategies.
• Excelling at one or more KSFs offers a competitive
advantage.
• KSFs vary by industry and change over time.
• Typically, only three or four KSFs exist, with one or
two being most important.
• Focusing on minor factors defeats the purpose of
identifying critical success factors.