Unit 3

Strategic Analysis
 Concept of Business Environment
• Business environment is the set of all the conditions
and events that are directly or indirectly related to
the operation and development of the business. It is
formed by internal and external factors.
• The internal factors consists of the conditions
prevailing inside the organization. They are
organizational goals, policies, structure, culture and
resources. The external factors are outside the
organization and consists of the political, economic,
socio-cultural, technological, legal and global
factors.
• Business environment is the aggregate of all
conditions, events and influences that
surround and affect the business.
• Business environment mainly refers to all
external factors that impact business. ( K
Aswathappa )
 Business Environment

Internal Environment

• 1. Organization goals and policies

• 2. Organizational resources ( financial, physical and
human )
• 4. Organizational structure
• 5. Organizational culture
• Task Environment-
• (It is related with competitive position of
business)
1. Customer
2. Suppliers
3. Competitors
4. Financial Institutions
5. Distributors
6. Media
7. Government
8. Pressure group
 EXTERNAL ENVIRONMENT
ECONIMIC ENVIRONMENT

Economic system Economic condition

1. Free market economy 1. Gross domestic product
2. Centrally planned economy 2. Inflation
3. Mixed economy 3. Employment indicators
4. Balance of payment
5. Income distribution
6. Business cycle

Economic policy Economic integration

1. Monetary policy
2. Fiscal policy
3. Industry policy
Political Environment Legal environment
1. Political ideology i) Constitution
2. Constitution ii) Business law
3. Political parties iii) Court of law
4. Government and its institution iv) Law administration
i ) Executive, ii) Judiciary
iii) Legislative
Socio-cultural Environment Technological environment
i) Education i) Level of technology
ii) Language ii) Pace of technology
iii) Technology transfer
iii) Religion iv) Research and development budget
iv) Beliefs
v) Attitude
vi) Family structure & social
organization
Physical environment Global environment
i) Energy consumption
ii) Environmental Law and policy
iii) Natural resources.
 Process of environment analysis
• Environment analysis is an going process by
which strategies were monitor the
environment to determine opportunities and
threats to the firms. The main objective of
external environment analysis is to assess the
likely opportunities and threats arising.
Opportunities helps a firm to increase
competitiveness where as a threat that may
hinders a firm to achieve strategies
competitiveness.
• Process of Environment analysis
• 1. Scanning
Environmental scanning involves gathering
information from the environment to assess its
nature . It helps to identify the early signals of
potential changes in the environment and also
detects changes that are already under way. Many
firm even uses special software and internet for
environmental scanning
• 2. Monitoring
Monitoring is auditing the environment. It involves
observation of environmental changes to see the
trends. It helps to identify the effects of
environment in terms of opportunities and threats .
• 3. Forecasting
• Scanning and monitoring are concerned with
events and trends in the general environment at a
point in time. Forecasting involves developing
feasible projections of what might happen and
how quickly. It is done on the basis of changes
and trends.
• 4. Assessing
• Assessing determines the timing and significance
of the effects of environment changes and trends
that have been identified. It specifies the
implications of the understanding . Assessing
connects the data and information with
competitive relevance.
 Techniques of environment analysis
• There are different techniques of
environmental analysis.
• 1. PEST analysis
• 2. Scenario planning
• 3. Analysis of Industry environment/ Porters
five force model.
• PEST LEG analysis
• It is the political , economic, socio-cultural,
technological, legal and global environment
factors. These factors are uncontrollable to
the organization. They are analysed to identify
the environment trend and assess possible
opportunities or threats. ( Already discuss in
business environment).
• Scenario Planning
• A scenario planning is a detailed and possible view of
how the future based groupings of key environmental
influences and drives of change about which there is a
high level of uncertainty ( Johnson and Scholes, 2010).
• An industry scenario is forecasted description of a
particular industry’s likely future.
• Scenario planning is used for environmental analysis if
the traditional forecasting techniques fail to predict
the changes in environment. It is also called
contingency planning. Scenario are the stories about
how the future might unfold and affect the business
issues. The following are the types of scenarios.
Favourable , Probable and unfavourable
Scenario 1
• Demand is up, but political support is down. This means subsidies are likely to be
rolled back, as will government funding for research & development. Companies will
have to fund their own R&D, and they will have to find ways to increase efficiency so
they can lower costs, so that consumers will be able to afford their products.
Scenario 2
• Political support and demand are both up. This means the government is likely to be
funding R&D and subsidizing consumer sales. The health of the industry will mean a
rise in competition—putting pressure on companies to increase the scale of
production in order to compete.
Scenario 3
• Political support and demand are both down. Companies may need to enlist the help
of lobbyists and marketing specialists in order to rally consumer & political attitudes.
Further, companies will be forced to do everything possible to cut extra costs.
Increasing profit margins on each unit sold will be essential since the number of units
sold will be going down.
Scenario 4
• Political support is up but consumer demand is down. This may mean the market has
become oversaturated. If there are no gains to be made through marketing &
advertisement, companies will have to innovate on the product side. It may become
more important to increase the efficiency of the panels, or to enhance their appeal
in some other way. Or else companies may have to offer new products in addition to
solar panels, such as rooftop wind turbines.
• Porter’s Five Force Model
• According to Porter an industry environment
is composed of the threat of new entrants,
power of suppliers, power of buyers, threat
of product substitute and the rivalry among
competitors. The interactions among these
five factors determine an industry’s profit that
eventually the strategic options of the firms.
The five force are also called porter's diamond.
• Threat of New entrants
• As new entrants bring additional production
capacity, they can threaten the market share
of existing firm. This might result in less
revenue and lower return for the existing
firms. The new entrants normally have a keen
interest in gaining large market share which
may force the existing firms to be more
efficient and competitive.
• There are two factors that is to be considered
to stop the new entrants i.e barriers to entry
expected retaliation
• Barriers to entry
• Firms competing in an industry try to develop
entry barriers to prevent potential competitors.
Following are the factors that create barrier for
competitors.
• 1. Economies of scale
• 2. Capital requirement
• 3. Product differentiation
• 4. Access to distribution channel
• 5. Switching costs
• 6. Government policy
•
• Expected Retaliation
• A high level of retaliation by the existing
company firms creates entry barriers to the
new forms. This is likely when the existing
firms have a major stake in the industry with
substantial resources, and the industry
growth is slow or constrained. For example
any firm attempting to enter the telecom
industry in Nepal at the current situation can
expect significant retaliation from existing
competitors due to their excessive capacity.
• Threats of substitute
• Substitute products are the goods or services that
perform similar functions as a product that a existing
firm produce. Product substitute pose a strong threat
to firm when the switching cost and the price of the
substitute product are lower with similar quality or
performance.
• The following are the factors that determine the threat
of substitution.
• Relative price, performance of substitute product
• Switching cost – Low cost high switching vice versa
• Buyers propensity( tendency) to substitute- high
propensity high threat of substitute
• Buyers power
• Buyers always want to buy at low cost. On the other hand
firms always try to maximize return on the capital. Buyers
bargain for higher quality, greater level of service and low
price. Buyers are powerful in following situation
• 1. Large buyers – purchase of large quantity
• 2. Large number of suppliers
• 3. Lack of product differentiation
• 4. High material cost
• 5. Low switching cost
• 6. Price sensitive customer
• 7. Backward integration- If the buyers have backward
integration, it increase their bargaining power
( acquisition of supplier by buyers)
• Bargaining power of the Supplier
• Supplier exert pressure over the firms on prices and
quality of the products. The following re some of the
conditions in which supplier power is high.
• 1. Large and monopoly suppliers
• 2. Few substitutes
• 3. Powerful brand
• 4. Fragmented buyers
• Forward integration – If the supplier make forward
integration they become more powerful( acquisition
of buyers by supplier).
• Competitive rivalry
• A firm normally compete for the same market and
customers. Competitive rivalry intensifies when a
firm is challenged by a competitors action or when a
firm recognized an opportunity to improve its market
position. The competitive rivalry is high in following
conditions:
• 1. Large numbers of competitors
• 2. Capabilities of competitors is balanced
• 3. High exit barriers
• 4. Lack of product differentiation
• 5. Full capacity utilization by competitors
• 6. Market growth is low
• 7.Global customers
 Strategic Group
• Strategic group is a group of firms in an industry which
follows the same or similar strategy for competitive
advantages.
• The competition between firms within a strategic group
is greater than the competition between a member of a
strategic group and companies outside the strategic
group. Hence, intra-strategic group competition is more
intense than in inter-strategic group competition.
• Strategic groups of firms within an industry constitute a
cluster and imply that the firms in the same industry may
not be direct competitors for other firms. However, they
maintained some distinctiveness to gain and sustain a
competitive advantage.
• The firms in a strategic group may be treated
similar on ground of technological leadership,
product quality, pricing policies, distribution
channels and customer service. The concept
of strategic is useful for analysing an industry’s
competitive structure which is helpful in
diagnosing competition, positioning and the
profitability of the firms within an industry.
 Rolls-
Royce,
Bentley
• High
Ferrari
Aston
• Price Martin BMW
Mercedes
Ford,
Renault,
Honda,
• Low Nisssan,

Low Product Range High

 Hyper Competition

• Hyper-competition is the term used to describe the

realities of the competitive scenery. The
conditions of hyper-competition are based on
market instability and change. It is environment
characterised by intense and rapid competitive
moves. It speeds up the dynamic strategy
interactions among competitors.
• According to D Aveni (1994) In hyper-competition
the frequency , boldness and aggressiveness of
dynamic movement by the players accelerates to
create a condition of constant disequilibrium and
change.
• Market instability is threatened by short product life
cycle, short period designs cycle, new technologies ,
frequent entry by unexpected outsiders, repositioning
by current and tactical redefinition of market
boundaries as diverse industry merges.
• In other words , environment escalate towards higher
and higher levels of uncertainty, dynamism,
heterogeneity of the players and hostility.
• In hyper-competition industries competitive advantages
comes from knowledge of environment trends and
competitive activity . The firms are ready to take for a
possible new advantages, They are willing to replace
their own popular products before competitors do so.
This is done to sustain their competitive advantages.
 Internal Environmental Analysis
• Internal environmental analysis refers to the analysis
of the internal resource and capabilities of an
organization. Resource and capabilities are the source
of strength and weakness, which reside in different
functional units such as production/operation,
marketing human resource, finance and accounting
and research and development.
• Internal analysis involves analysing the series of
different value chains. It ensures resources and
competences fit with the external environment, in
which the business is operating, how far its strategic
capabilities is fit to survive and prosper the
organization.
• Areas in internal environmental analysis
1. Production and operation resources
• Production capacity and utilization
• Economies of scale
• Plant location and layout
• Copyright and patents
• Position of suppliers and relationship
• Inventory management system
• Total quality management
• Maintenance system
• 2. Marketing resources
• Marketing mix
• Product line
• Innovative products
• Market segmentation
• Market share
• Product life cycle
• Pricing policy
• Distribution system
• Promotion system and capabilities
• Relationship marketing
3. Financial resource
• Availability of sources of finance
• Capital structure
• Capital budgeting
• Finance control system
• Cost control ability
• Financial strategies
• Effectiveness in auditing
• International accounting standards
• 4. Human resource
• Working environment of the organization
• Effectiveness of Human resource management
• Competency, knowledge and skills of employees
• Training and development
• Employees turnover, absenteeism, and
indiscipline
• 5. Research and development
• R& D intensity on total sales revenue.
• Technological competency development and
use of innovative technology
• Technology transfer.
 Methods of Internal Environment Analysis

• Value chain analysis

• Cost efficiency analysis
• Effectiveness analysis
• Comparative analysis
• Value chain analysis
• The chain of activities that transforms inputs into
outputs that create customer value. Value chain
analysis is a strategy tool used to analyse internal
firm activities. Its goal is to recognize, which
activities are the most valuable (i.e. are the source
of cost or differentiation advantage) to the firm
and which ones could be improved to provide
competitive advantage.
• VCA refers to the process whereby a firm
determines the costs associated with
organizational activities from purchasing raw
materials to manufacturing products to marketing
those products. David
VALUE CHAIN ANALYSIS
• Primary activities
• Primary activities are related to production and
distribution and services after sales. The
activities are mentioned below:
• 1. Inbound logistics: It includes material
handling, warehousing, inventory control. These
activities are carried out to receive, store, and
disseminate inputs to a product.
• 2. Operations: It includes activities necessary to
convert the inputs provided by inbound logistics
into final products form. For example
assembling, packaging and equipments
maintenance.
• 3. Outbound logistics: It includes activities related
to collecting, storing, and physical distribution of
the final product to customer. For eg finished
goods warehousing, and order processing.
• 4. Marketing and sales: It includes the activities
that provides means through which customer can
purchase product. For eg promotional
campaings, select distribution channnels, support
sales force etc.
• 5. Service: It includes activities designed to
enhance or maintain a product value. For eg
installation, repair, training maintenance etc.
• Supporting activities
• They are the activities which are carried out to
support the primary activities, which are :
• 1. Procurement; It is related to purchase of inputs
needed like raw materials and supplies machinery,
laboratory equipments & others.
• 2. Technological development: It includes activities
related to improve a firm’s products and
manufacturing process.
• 3. Human resource management: It includes
activities related to HR policies and practices
• 4. Firm infrastructure :It includes activities such as
general management, planning, finance,
accounting , legal support and govt relations.
 Benefits of Value Chain Analysis

• Cost Efficiency: Helps identify areas where costs

can be reduced without compromising quality.
• Competitive Advantage: Highlights
opportunities to differentiate products or
services from competitors.
• Process Improvement: Identifies inefficiencies
and bottlenecks within the business operations.
• Customer Value: Ensures all activities contribute
to delivering maximum value to the customer.
 Evaluating the value chain
• Identify Activities: List all activities in your
business processes, both primary and support.
• Analyze Costs and Value: Examine the cost
associated with each activity and its contribution
to customer value.
• Identify Differentiators: Determine which
activities set your business apart from
competitors.
• Optimize Activities: Focus on improving,
outsourcing, or automating non-value-adding
activities to enhance overall efficiency.
• Cost efficiency analysis
• Cost efficiency analysis is the utilization of
firm’s resources in such a way that the costs
are minimized without compromising in the
quality.
• There are different ways of analysing cost
efficiency :
• 1. Economies of scale
• 2. Supply cost
• 3. Product process and design
• 4. Experiences.
• Effectiveness analysis
• The main objective is to enhance product effectiveness
by matching customer requirement and product
features. In this analysis different features of product
and their contribution in customer satisfaction are
analysed and evaluated.
• 1. Customer requirements-
• Product attributes, expected service and price sensitivity
• 2. Value added by organization- Product feature, service
performance, communication to customers.
• 3. Degree of matching- if there is proper matching
between product features and value added by the
organization the level of matching is high which leads to
customer satisfaction.
• Comparative analysis
• It involves the comparison of capabilities of an
organization with the competitors as well as
the comparison of the present performance
with its past performance. There are different
techniques of comparative analysis they are
• 1. Historical analysis
• 2. Industry analysis
• 3. Benchmarking
 SWOT ANALYSIS
• A SWOT analysis is a strategic planning tool
that helps a business owner to identify his or
her own strengths and weaknesses, as well as
any opportunities and threats that may exist in
a specific business situation. A SWOT analysis
is most commonly used as part of a marketing
plan, but it is also a good tool for developing
business strategy.
• SWOT analysis is the acronym for strength,
weakness, opportunity and threats that are
the strategic factor for a company.
• The strength and weakness of the company
are related with the internal environment of
the company whereas the opportunity and
threats are related with the external
environment. The swot matrix is prepared to
match the external components with the
internal capabilities and develop possible
strategic alternatives.
• Components of SWOT Analysis
• Strength- is the power, capabilities and
peculiarities that the orgn can exploit to achieve
goals.
• Strong strategy
• Sound financial conditions
• Strong brand image
• Market leadership
• Sophisticated technology
• Skill and competent manpower
• High product promotion
• Powerful distribution system
• Production efficiency
• Weakness- It is internal characteristics of the
company that might restrict the performance.
• Unclear goals
• Lack of strong strategy
• Lack or poor resources
• Weak financial condition
• Lack of skill and competent manpower
• Inferior product
• Weak marketing and promotional strategy
• Obsolete technology
• Opportunity – It is the conditions in the
general environment, if exploited effectively
helps the company to achieve strategic
competitiveness.
• Product design and development
• Market expansion
• Entry into new business
• New technology
• Strong economy
• Social development
• Threat- A threat is a condition in the general
environment that may hinder a company’s
efforts to achieve strategic competitiveness.
• Entry of the new firm
• Insufficient resources
• Low worker commitment
• Change the needs and preferences of customers
• Unfavourable law and policies
• Strategic option through SWOT Analysis

• Strength and Opportunity

• Issue- How can strength can be used to take
advantage of opportunity?

• Possible strategies

• Expansion
• Product development
• Market development
• Strength and Threats
• Issue- How can strength can be used to avoid
current and potential threats

• Possible strategies

• Diversification
• Consolidation
• Market penetration
• Weakness and Opportunity
• Issue- How can opportunity be used to
overcome the weaknesses of the business?

• Possible strategies

• Strategic alliance
• Collaborations
• Weakness and Threats
• Issue- How can weaknesses can be minimized
to avoid threat of the business?
• Possible Strategies

• Downsize
• Divestiture ( selling stock)
 Resource based view of strategy
• Resources may be defined as the sum of
assets both tangible and intangible, that an
organization used to performed the task
effectively.
• Resource availability and allocation are very
important in strategic management. It
enhance organizational capabilities, provides
strength and enable exploitation of
opportunities. It help sustainable competitive
advantage and achieve long term objectives.
Types of resources
• 1. Available resources
• Currently available resources in the organization.

• Physical resources- Land, building, machinery and

equipments etc
• Human resources- It includes employees having
knowledge, skills, experience and competency.
• Financial resources- Capital , long term loan & financial
ability to use alternative financial strategies.
• Intellectual resources- It include patent right, copyright,
trade mark, goodwill, brand loyalty and customer
database
2. Threshold resources
• The minimum resources required by the
organization to withstand competition. They
are essential to exists and compete
successfully in the market. In this competitive
business world , technology, IT infrastructure,
large scale operation and capital are the
threshold resources. It is essential for
sustainability of business over a long period.
3. Unique resources
• The resources that are critical for gaining
competitive advantage are called unique
resources. It is related to critical success
factors. Unique resources are valuable , non
substitutable, costly to imitate and rare.
 Core Competency

• Core competency is the sum of the

competencies that is widespread within the
firm. It is something that the firm can do
exceedingly well. It is the most important
source of firm’s competitive advantages. It
helps to drive the strategies.
• Core competency are resources and
capabilities that serve as a source of
competitive advantage for a firm over its
rivalry. ( Hitt, Ireland and Hoskisson)
• It is the outcome of cross functional combination
of knowledge, expertise rather than a single
department of work group. Core competency
can be related to the following:
• Expertise in integrating multiple technologies to
create new technology.
• Cost effective supply chain management
• Expertise in service after sales
• Skills in manufacturing high quality of product at
low cost.
 Distinctive capabilities
• When core competency is superior to those of the
competitors, it is said to be distinctive competency.
It is a competitively an important resources of the
firm which strength competency for the following
reasons
• It gives firm competitively valuable capabilities that
is unmatched with competitors.
• It has the potential of being the cornerstone of the
company’s strategy.
• It can produce competitive edge in the market
place since it represent a level of proficiency
• According to Barney to evaluate firm’s
competencies a frame work of VIRO can be
analysed :
• Value: Does it provide customer value and
competitive advantages?
• Rareness: Do no other competitor possess it?
• Imitability: Is it costly for others to imitate?
• Organization: Is the firm organised to exploit
the resources?
Identifying sustainable competitive advantages

• A sustained competitive advantages is

achieved only when competitors cannot
duplicate the benefits of a firm’s strategy or
when they lack the resources to attempt
imitation. Sustainable competitive advantages
results only when all four criteria are satisfied.
The resources must have four attributes
valuable, rare, costly to imitate , and non
substitutable to provide the sustainable
competitive advantage. They are as follows:
• Valuable: Valuable resources enable the firm to
formulate and implement strategies that
improve its effectiveness. It can exploit the
environmental opportunities and mitigate
threats.
• Rare: Rare resources are possessed by very few
competitors. Resources possessed by many
rivals are to be source of competitive advantage
for any one of them.
• Costly to imitate: If the firm is to achieve the
competitive advantage in a sustainable way, the
resources should be such they cannot be
imitated by the competitors.
 Criticism of resource based –view

• It explain very little about how resources are

developed and changed over the time.
• It also does not address the dynamic role played by an
individual within the firm.
• It lacks detail roadmap. Hence it is difficult to
implement.
• It only consider the internal elements of the firm and
does not consider the external factors.
• The resources based view has a limited ability to make
reliable predications for future resource requirements.
• Change in dynamic environment , it is difficult to
achieve sustained competitive advantages.
 Knowledge management
• Knowledge may be defined as the organized body of
information. Information is the relation between the
pieces of data with context. When information is
processed it has the potential for becoming knowledge.
• There are two types of knowledge tacit knowledge and
explicit knowledge.
• Tacit knowledge is that stored in the brain of a person.
• Explicit knowledge that contained in documents or
other forms of storage other than the human brain.
• Explicit knowledge may therefore be stored or imbedded
in facilities, products, process services and systems. Both
knowledge can be produced as a result of interactions or
innovations.
• Knowledge management is the systematic management
of an organization's knowledge assets for the purpose of
creating value and meeting tactical & strategic
requirements; it consists of the initiatives, processes,
strategies, and systems that sustain and enhance the
storage, assessment, sharing, refinement, and creation of
knowledge.
• Knowledge management (KM) therefore implies a strong
tie to organizational goals and strategy, and it involves
the management of knowledge that is useful for some
purpose and which creates value for the organization.
• Expanding upon the previous knowledge
management definition, KM involves the
understanding of:
• Where and in what forms knowledge exists; what
the organization needs to know; how to promote
a culture conducive to learning, sharing, and
knowledge creation; how to make the right
knowledge available to the right people at the
right time; how to best generate or acquire new
relevant knowledge; how to manage all of these
factors so as to enhance performance in light of
the organization's strategic goals and short term
opportunities and threats.
Implementation of Knowledge management
• Implementing knowledge management thus has several
dimensions including:
• Strategy: Knowledge management strategy must be
dependent on corporate strategy. The objective is to
manage, share, and create relevant knowledge assets
that will help meet tactical and strategic requirements.
• Organizational Culture: The organizational culture
influences the way people interact, the context within
which knowledge is created, the resistance they will have
towards certain changes, and ultimately the way they
share (or the way they do not share) knowledge.
• Organizational Processes: The right processes,
environments, and systems that enable KM to be
implemented in the organization.
• Management & Leadership: KM requires competent
and experienced leadership at all levels. There are a
wide variety of KM-related roles that an organization
may or may not need to implement, including a CKO,
knowledge managers, knowledge brokers and so on.
• Technology: The systems, tools, and technologies that
fit the organization's requirements - properly
designed and implemented.
• Politics: The long-term support to implement and
sustain initiatives that involve virtually all
organizational functions, which may be costly to
implement (both from the perspective of time and
money), and which often do not have a directly visible
return on investment.