CHAPTER 2

STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

OVERVIEW

INTRODUCTION
Organisations are distinguished based on their size, type of products, markets, geographical
coverage, legal status, and like because of vast organisational diversity. Whatever their size
or other distinguishing feature they do not operate in a vacuum. They continuously act and
react to what happens outside their periphery.

The process of strategic formulation begins with a strategic analysis. Its objective is to
compile information about internal and external environments in order to assess possibilities
while formulating strategic objectives and contemplating strategic activities.

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1.STRATEGIC ANALYSIS
Strategy formulation is not a task in which managers can get by with intuition, opinions,
instincts, and creative thinking. Judgments about what strategies to pursue need to flow
directly from analysis of a firm’s external environment and its internal resources and
capabilities.

Environmental scanning is a natural and continuous activity for every business and some do it
on an informal basis, while others have a formal structure to collect meaningful information.

The majority of the rapidly expanding organisations use strategic planning throughout various
stages of their operations. The strategic analysis is a component of business planning that has
a methodical approach, makes the right resource investments, and may assist business in
achieving its objective.

It forces to think about the rivals and aids in the evaluation of business plans to stay ahead
of the competition. The two important situational considerations are:

• Industry and competitive conditions, and

• an organisation’s own capabilities, resources, internal strengths, weaknesses, and
market position.

Accurate diagnosis of the business situation is necessary for managerial preparation to decide
on a sound long-term direction, setting appropriate objectives, and crafting a winning strategy.
The strategic analysis is a continuous process which is not without limitations

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1.1 ISSUES TO CONSIDER FOR STRATEGIC ANALYSIS

➢ Strategy evolves over a period of time: A key element of strategic analysis is the
probable outcomes of everyday decisions. A current strategy is the result of several
little choices taken over a protracted period of time. A management radically changes
strategy when they try to speed up the organisational growth. Strategy is influenced by
experience, but it has to be updated when the results become clear. It therefore evolves
with time
➢ Balance of external and internal factors: Strategic analysis necessitates creating a
reasonable balance between many and conflicting challenges, because a perfect fit
between them is unlikely. Strategy formulation involves matching internal strengths and
weaknesses with external opportunities and threats.
➢ Risk: The complexity and intermingling of variables in the environment reduce the
strategic balance in the organisation. An important aspect of strategic analysis is to
identify potential imbalances or risks and assess their consequences. A broad
classification of the strategic risk that requires consideration in strategic analysis.

External risk is on account of inconsistencies between strategies and the forces in the
environment.

Internal risk occurs on account of forces that are either within the organization or are
directly interacting with the organization on a routine basis.

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1.2 FRAMEWORK OF STRATEGIC ANALYSIS

It is evident that industries differ widely in their economic characteristics, competitive

situations, and future profit prospects.

The economic character of industries varies according to such factors as overall size and
market growth rate, the pace of technological change, the geographic boundaries of the
market (which can extend from local to worldwide), the number and size of buyers and sellers,
whether sellers’ products are virtually identical or highly differentiated, the extent to which
costs are affected by economies of scale, and the types of distribution channels used to access
buyers, marketing opportunities, disposable income of prospective buyers, government support,
etc. Competitive forces can be moderate in one industry and fierce, even cutthroat, in another.

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

The term "business environment" refers to all external factors, influences, or situations
that in some way affect business decisions, plans, and operations. Organisational success
is determined by its business environment, and even more from its relationship with it.

Strategic management is involved with choosing a long-term direction in relation to these

resources and opportunities. This interaction helps in strengthening the business firm and
using its resources more effectively. It helps the business in the following ways:

1. Determine opportunities and threats: The interaction between the business and its
environment would explain opportunities and threats to the business. It helps to find
new needs and wants of the consumers, changes in laws, changes in social behaviours,
and tells what new products the competitors are bringing in the market to attract
consumers.
2. Give direction for growth: The interaction with the environment enables the business
to identify the areas for growth and expansion of their activities. Once the business
is aware and understands the changes happening around, it can plan and strategies to
have successful business.
3. Continuous Learning: The managers are motivated to continuously update their
knowledge, understanding and skills to meet the predicted changes in the realm of
business.
4. Image Building: Environmental understanding helps the business organizations to
improve their image by showing their sensitivity to the environment in which they
operate.
5. Meeting Competition: It helps the businesses to analyse the competitors’ strategies
and formulate their own strategies accordingly. The idea is to flourish and beat
competition for its products and services.

Business strategies relate organisational resources to challenges and opportunities in the

larger environment. The changes happening in the external environment challenge organisations
to find novel and unique strategies to remain in business and succeed.

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

Strategic decisions are significant aspects of business management and are essential for the
success and continued existence. Two crucial aspects for the success include are the function
of top management and the method of formulating strategic.

2.1 MICRO AND MACRO ENVIRONMENT

The environment in which an organization exists can be described in terms of the opportunities
and threats operating in the external environment apart from the strengths and weaknesses
existing in the internal environment.

For making any strategic decision, they should be able to comprehend the facts available and
challenge the underlying assumptions. The external environment can be categorised in to major
types as follows:

• Micro environment
• Macro environment

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

influences an organization regularly and directly.

Micro environment consists of suppliers, consumers, marketing intermediaries, competitors,

etc. These are specific to the said business or firm and affect its working on a direct and
regular basis.

Within the micro or the immediate environment in which a firm operates we need to address
the following issues:

• The employees of the firm, their characteristics and how they are organised.
• The existing customer base on which the firm relies for business.
• The ways in which the firm can raise its finance.
• Who are the firm suppliers and how are the links between the two being developed?
• The local community within which the firm operates.
• The direct competition and their comparative performance.

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The factors in micro environment often relate an organization to the macro issues influencing
the way a firm reacts in the market place. The macro environment is the portion of the outside
world that significantly affects.

Elements of Macro Environment

Macro environment has broader dimensions as it consists of economic, socio cultural,

technological, political and legal factors.

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

The classification of the relevant environment into components or sectors helps an

organization to cope with its complexity, comprehend the different influences operating, and
relating the environmental changes to its strategic management process.

1) Demographic Environment

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

Demographical analysis considers factors such as race, age, income, education, possession of
assets, house ownership, job position, region, and the degree of education.

Data about these qualities across homes and within a demographic variable are of importance
to both businesses and economists. Considering demographics is of immense importance for
any business.

Business Organizations need to study different demographic factors. Particularly, they need
to address following issues:

➢ What demographic trends will affect the market size of the industry?
➢ What demographic trends represent opportunities or threats?

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

Identifying the implications of changing demographic characteristics or population components

for a future strategic competitiveness is often a challenge for strategists.

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2) Socio-Cultural Environment

It represents a complex group of factors such as social traditions, values and beliefs, level and
standards of literacy, the ethical standards and state of society, the extent of social
stratification, conflict, cohesiveness and so forth.

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

Socio-cultural environment consists of factors related to human relationships and the impact
of social attitudes and cultural values which has bearing on the operations of the organization.

Businesses have to adjust to social norms and beliefs to operate successfully. The social
environment primarily affects the strategic management process within the organization in the
areas of mission and objective setting, and decisions related to products and markets.

3) Economic Environment

Economic conditions have a direct bearing over the business strategies. The economic
environment refers to the overall economic situation around the business and include conditions
at the regional, national and global levels.

It encompasses conditions in the markets for resources that have an effect on the supply of
inputs and outputs of the business, their costs, and the dependability, quality, and availability.
Economic environment determines the strength and size of the market.

Income distribution pattern determine the business possibilities. The important point to
consider is to find out the effect of economic prospect, growth and inflation on the operations
of the business.

Higher interest rates are detrimental for the businesses with high debt. In the real
estate market, they reduce the capability of the prospective buyers to avail loan and pay
instalments, thus lower the demand.

These include gross domestic product, per capita income, markets for goods and services,
availability of capital, foreign exchange reserve, growth of foreign trade, strength of capital
market, interest rates, disposable income, unemployment, inflation, etc.

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4) Political-Legal Environment

Political-legal environment takes into account elements like:

➢ the general level of political development,

➢ the degree to which business and economic issues have been politicised,
➢ the degree of political morality, the state of law and order, political stability,
➢ the political ideology and practises of the ruling party,
➢ the effectiveness and purposefulness of governmental agencies,
➢ the scope and type of governmental intervention in the economy and industry.

Business is highly guided and controlled by government policies. Hence the type of government
running a country is a powerful influence on business.

A business has to consider the changes in the regulatory framework and their impact on the
business. Taxes and duties are other critical areas that may be levied and affect the business.

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

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

5) Technological Environment

A highly important factor in the present times is technology. Technology has changed the way
people communicate and do things. Technology has also changed the ways of how businesses
operate now.

Technology and business are linked and are interdependent on one another. Businesses help
society access the outcomes of technological research and development, raising everyone's
standard of living. Technology has impacted on how businesses are conducted.

With use of technology, many organisations are able to reduce paperwork, schedule payments
more efficiently, are able to coordinate inventories efficiently and effectively. This helps to
reduce costs of companies, and shrink time and distance, thus, capturing a competitive
advantage for the company.

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Changes in technology have an effect on how a business runs its operations. The
technological advancements might require a business to drastically alter its operational,
production and marketing strategies.

Technology can act as opportunity, when a business effectively adopts technological innovations
to their strategic advantage.

However, at the same time technology can act as a threat too. Artificial intelligence, machine
learning, robotic process automation is some of the new that businesses are adopting and can
act as both opportunity and threat to a business.

Macro Environment: PESTLE– A tool to Analyse

The term PESTLE is often used to describe a framework for analysis of macro environmental
factors. PESTEL analysis is frequently used to assess the business environment in which a
firm operates.

PESTLE analysis involves identifying the political, economic, socio-cultural, technological, legal
and environmental influences on an organization and providing a way of scanning the
environmental influences that have affected or are likely to affect an organization or its policy.

PESTLE analysis is an increasingly used and recognized analytical tool, and it is an acronym for:

P- political

E- economic

S- socio-cultural

T- technological

L- legal

E- environmental
THE KEY FACTORS

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

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2) Economic factors: Economic factors have major impacts on how businesses operate and
take decisions.
Example: interest rates affect a firm's cost of capital and therefore to what extent a
business grows and expands.
Exchange rates affect the costs of exporting goods and the supply and price of imported
goods in an economy. The money supply, inflation, credit flow, per capita income, growth
rates have a bearing on the business decisions.
3) Social factor: Social factors affect the demand for a company's products and how that
company operates.
4) Technological factors: Technological factors can determine barriers to entry, minimum
efficient production level and influence outsourcing decisions. Furthermore, technological
shifts can affect costs, quality, and lead to innovation.
5) Legal factors: Legal factors affect how a company operates, its costs, and the demand
for its products, ease of business.
6) Environmental factors: Environmental factors affect industries such as tourism, farming,
and insurance. Growing awareness to climate change is affecting how companies operate
and the products they offer--it is both creating new markets and diminishing or destroying
existing ones.
on the basis of these, it should be possible to identify a number of key environmental
influences, which are in effect, the drivers of change. These are the factors that require
to be considered in making meaningful decisions. Take a look at the table given below:

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2.2 INTERNATIONALIZATION OF BUSINESS

Internationalization has emerged as the dominant commercial trend over the last couple of
decades.

The strategic-management process is essentially the same for global firms as it is for domestic
firms; nevertheless, international processes are much more complicated due to additional
variables and linkages.

A business can approach internationalisation systemically with the aid of international strategy
planning. One method for an organization to identify opportunities and threats in global
markets is by scanning the external environment.

Characteristics of a global business

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

Developing internationally

International development is expensive and challenging. Moving on in a thorough and structured

manner is thus the ideal approach to adopt. The steps in international strategic planning are
as follows:

• Evaluate global opportunities and threats and rate them with the internal capabilities.
• Describe the scope of the firm's global commercial operations.
• Create the firm's global business objectives.
• Develop distinct corporate strategies for the global business and whole organisation.

Why do businesses go global?

Technological developments and evolving political views are two important factors in the rapid
rise of multinational organisations. Worldwide communication makes it easier to define and
implement global strategy by linking corporate headquarters with their abroad operations.

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There are several reasons why companies go global. These are explained as follows:

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

2.4 INTERNATIONAL ENVIRONMENT

The social, cultural, demographic, environmental, political, governmental, legal, technological
factors that an international organisation faces are nearly limitless, and the number and
complexity of these factors increase manifold as the number of products produced and
geographic areas served increase.

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Assessments of the international environment can be done at three levels:

➢ Multinational environmental analysis

➢ Regional environmental analysis
➢ Country environmental analysis

Multinational environmental analysis: Multinational environmental analysis involves identifying,

anticipating, and monitoring significant components of the global environment on a large scale.
Governments may have free or interventionist tendencies in economies that needs to be
carefully considered. These characteristics are evaluated based on their present and expected
future impact.

Regional environmental analysis: Regional environmental analysis is a more in-depth evaluation

of the critical factors in a specific geographical area. The emphasis would be on discovering
market opportunities for a goods, services, or innovations in the chosen location.

Country environmental analysis: Country environmental analysis has to take a deeper look at
the important environmental factors. Study of economic, legal, political, and cultural
dimensions is required in order for planning to be successful. International environment has
become an inherent part of strategic management for businesses of all sizes with global
interests. It essentially involves various global aspects like political risks, cultural differences,
exchange rate fluctuations, legal compliances and taxation issues.

3.UNDERSTANDING PRODUCT INDUSTRY

Business products have certain characteristics as follows:

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

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

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 ➢ Products have certain features that deliver satisfaction. A product feature is a
component of a product that satisfies a consumer need. Features determine product
pricing, and businesses alter features during the development process to optimise the
user experience. Features of the product will distinguish it in terms of its function,
design, quality and experience.

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

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

3.1 PRODUCT LIFE CYCLE

An important concept in strategic choice is that of product life cycle (PLC)

PLC is an S-shaped curve which exhibits the relationship of sales with respect of time for a
product that passes through the four successive stages of introduction, growth, maturity and
decline.

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

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

The third phase: of PLC is maturity stage where there is slowdown in growth rate. In this
stage, the competition gets tough, and market gets stabilised. Profit comes down because of
stiff competition. At this stage, organisations have to work for maintaining stability.

the fourth stage: of PLC is declines with sharp downward drift in sales. The sales and profits
fall down sharply due to some new product replaces the existing product. So, a combination of
strategies can be implemented to stay in the market either by diversification or retrenchment
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The main advantage of PLC approach is

• That it can be used to diagnose a portfolio of products (or businesses) in order to

establish the stage at which each of them exists.
• Particular attention is to be paid on the businesses that are in the declining stage.
• Depending on the diagnosis, appropriate strategic choice can be made.
• Mature businesses may be used as sources of cash for investment in other businesses
which need resources.
• A combination of strategies like selective harvesting, retrenchment, etc. may be
adopted for declining businesses.

3.2 VALUE CHAIN ANALYSIS

Value chain analysis is a method used by strategists to break down each process that their
business employs.

This analysis could be used to improve the sequence of operations, enhancing efficiency and
creating a competitive advantage. Value chain analysis can be used by businesses of all sizes,
from sole proprietorships to multinational organisations.

Value chain analysis is a method of examining each activity in value chain of a business in order
to identify areas for improvements. When you do a value chain analysis, you must analyse how
each stage in the process adds or subtracts value from the end product or service.

Value chain analysis has been widely used as a means of describing the activities within and
around an organization and relating them to an assessment of the competitive strength of an
organization.

The two basic steps of identifying separate activities and assessing the value added from each
were linked to an analysis of an organization’s competitive advantage by Michael Porter.

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One of the key aspects of value chain analysis is the recognition that organizations are much
more than a random collection of machines, material, money and people.

It is these competences to perform particular activities and the ability to manage linkages
between activities which are the source of competitive advantage for organizations. Porter
argued that an understanding of strategic capability must start with an identification of these
separate value activities.

The primary activities of the organization are grouped into five main areas:

1) Inbound logistics: are the activities concerned with receiving, storing and distributing the
inputs to the product/service. This includes materials handling, stock control, transport
etc. Like, transportation and warehousing.
2) Operations transform: these inputs into the final product or service: machining, packaging,
assembly, testing, etc. convert raw materials in finished goods.
3) Outbound logistics: collect, store and distribute the product to customers. For tangible
products this would be warehousing, materials handling, transport, etc. In the case of
services, it may be more concerned with arrangements for bringing customers to the
service, if it is a fixed location (e.g. sports events).
4) Marketing and sales provide the means whereby consumers/users are made aware of the
product/service and are able to purchase it. This would include sales administration,
advertising, selling and so on. In public services, communication networks which help users’
access a particular service are often important.
5) Service are all those activities, which enhance or maintain the value of a product/service,
such as installation, repair, training and spares.

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

1) Procurement: This refers to the processes for acquiring the various resource inputs to
the primary activities (not to the resources themselves). As such, it occurs in many parts
of the organization.
2) Technology development: All value activities have a ‘technology’, even if it is simply know-
how. The key technologies may be concerned directly with the product (e.g. R&D product
design) or with processes or with a particular resource.
3) Human resource management: This is a particularly important area which transcends all
primary activities. It is concerned with those activities involved in recruiting, managing,
training, developing and rewarding people within the organization.
4) Infrastructure: The systems of planning, finance, quality control, information
management, etc. are crucially important to an organization’s performance in its primary
activities. Infrastructure also consists of the structures and routines of the organization
which sustain its culture.

4.INDUSTRY ENVIRONMENT ANALYSIS

A combination of ideas and methodologies may be utilised to create a clear picture of

➢ key industry traits

➢ competition intensity
➢ industry change drivers,
➢ rival firms' market positions and tactics,
➢ competitive success, and
➢ profit forecasts.

Industry analysis enable strategic understanding about the entire state of any industry and
make decisions about whether the industry is a lucrative or not.

The goal of the industry environment analysis, which is typically an important step of
strategic analysis, is to estimate the amount of competitive pressures the business is presently
facing and is expected to face in the near future.

The purpose of industrial analysis is to get insight into a wide range of elements within and
outside the business. Analysing these elements enhances knowledge of surrounding and serves
as the foundation for aligning strategy with changing industry circumstances and realities.

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4.1 PORTER’S FIVE FORCES MODEL

Porter's Five Forces analysis is a simple but efficient way for determining the key sources
of competition in business or industry.

It is a powerful and widely used tool to systematically diagnose the significant competitive
pressures in a market and assess the strength and importance of each.

Strategist may use a strong position to organizational advantage or reinforce a weak one to
avoid making mistakes in the future.

Michael Porter believes that the basic unit of analysis for understanding is a group of
competitors producing goods or services that compete directly with each other. It is the
industry where competitive advantage is ultimately won or lost. It is through competitive
strategy that the organisation attempts to adopt an approach to compete in the industry.

The model holds that the state of competition in an industry is a composite of competitive
pressures operating in five areas of the overall market:

➢ Competitive pressures associated with the market manoeuvring and jockeying for
buyer patronage that goes on among rival sellers in the industry.
➢ Competitive pressures associated with the threat of new entrants into the market.
➢ Competitive pressures coming from the attempts of companies in other industries to
win buyers over to their own substitute products.
➢ Competitive pressures stemming from supplier bargaining power and supplier-seller
collaboration.
➢ Competitive pressures stemming from buyer bargaining power and seller buyer
Collaboration.

The strategists can use the five-forces model to determine what competition is like in a
given industry by undertaking the following steps:

Step 1: Identify the specific competitive pressures associated with each of the five forces.

Step 2: Evaluate how strong the pressures comprising each of the five forces are (fierce,
strong, moderate to normal, or weak).

Step 3: Determine whether the collective strength of the five competitive forces is conducive
to earning attractive profits.

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Porter’s five forces model is one of the most effective and enduring conceptual frameworks
used to assess the nature of the competitive environment and to describe an industry’s
structure.

By applying Porter’s five forces model of industry attractiveness to their own industries, the
manager can gauge their own firm’s strengths, weaknesses, and future opportunities.

1) The Threat of New Entrants:

New entrants can reduce industry profitability because they add new production capacity
leading to an increase supply of the product even at a lower price and can substantially erode
existing firm’s market share position.

New entrants are always a powerful source of competition. The new capacity and product range
they bring in throw up new competitive pressure. And the bigger the new entrant, the more
severe the competitive effect.

To discourage new entrants, existing firms can try to raise barriers to entry. Barriers to entry
represent economic forces (or ‘hurdles’) that slow down or impede entry by other firms.

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Common barriers to entry are explained here:

1 Capital When a large amount of capital is required to enter an industry, firms

Requirements: lacking funds are effectively barred from the industry, thus enhancing
the profitability of existing firms in the industry.

2 Economies of Many industries are characterized by economic activities driven by

Scale: economies of scale. Economies of scale refer to the decline in the per-
unit cost of production (or other activity) as volume grows. This tends to
discourage new entrants.

3 Product Product differentiation refers to the physical or perceptual differences,

Differentiation: or enhancements, that make a product special or unique in the eyes of
customers.

4 Switching Costs: To succeed in an industry, new entrant must be able to persuade existing
customers of other companies to switch to its products. To make a
switch, buyers may need to test a new firm’s product, negotiate new
purchase contracts, and train personnel to use the equipment, or modify
facilities for product use

5 Brand Identity: The brand identity of products or services offered by existing firms can
serve as another entry barrier. Brand identity is particularly important
for infrequently purchased products that carry a high unit cost to the
buyer. New entrants often encounter significant difficulties in building
up the brand identity, because to do so they must commit substantial
resources over a long period.

6 Access to The unavailability of distribution channels for new entrants poses

Distribution another significant entry barrier. Despite the growing power of the
Channels: internet, many firms may continue to rely on their control of physical
distribution channels to sustain a barrier to entry to rivals.

7 Possibility of Sometimes the mere threat of aggressive retaliation by incumbents can

Aggressive deter entry by other firms into an existing industry
Retaliation:

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2) Bargaining Power of Buyers:

This force will become heavier depending on the possibilities of the buyers forming groups or
cartels. Mostly, this is a phenomenon seen in industrial products. Quite often, users of
industrial products come together formally or informally and exert pressure on the producer.

The bargaining power of the buyers influences not only the prices that the producer can
charge but also influences in many cases, costs and investments of the producer because
powerful buyers usually bargain for better services which involve costs and investment on the
part of the producer.

Buyers of an industry’s products or services can sometimes exert considerable pressure on

existing firms to secure lower prices or better services.

This leverage is particularly evident when:

• Buyers have full knowledge of the sources of products and their substitutes.
• They spend a lot of money on the industry’s products i.e. they are big buyers.
• The industry’s product is not perceived as critical to the buyer’s needs and buyers are
more concentrated than firms supplying the product. They can easily switch to the
substitutes available.

3) Bargaining Power of Suppliers:

The more specialised the offering from the supplier, greater is his clout. And, if the suppliers
are also limited in number, they stand a still better chance to exhibit their bargaining power.

The bargaining power of suppliers determines the cost of raw materials and other inputs of
the industry and, therefore, industry attractiveness and profitability.

Suppliers can influence the profitability of an industry in a number of ways.

Suppliers can command bargaining power over a firm when:

• Their products are crucial to the buyer and substitutes are not available.
• They can erect high switching costs.
• They are more concentrated than their buyers.

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4) The Nature of Rivalry in the Industry:

The rivalry among existing players is quite obvious. This is what is normally understood as
competition. For any player, the competitors influence strategic decisions at different
strategic levels.

The intensity of rivalry in an industry is a significant determinant of industry attractiveness

and profitability. The intensity of rivalry can influence the costs of suppliers, distribution, and
of attracting customers and thus directly affect the profitability. The more intensive the
rivalry, the less attractive is the industry. Rivalry among competitors tends to be cutthroat
and industry profitability low under various conditions explained as follows:

➢ Industry Leader: A strong industry leader can discourage price wars by disciplining
initiators of such activity. Because of its greater financial resources, a leader can
generally outlast smaller rivals in a price war. smaller rivals often avoid initiating such
a contest.
➢ Number of Competitors: Even when an industry leader exists, the leader’s ability to
exert pricing discipline diminishes with the increased number of rivals in the industry
as communicating expectations to players becomes more difficult.
➢ Fixed Costs: When rivals operate with high fixed costs, they feel strong motivation
to utilize their capacity and therefore are inclined to cut prices when they have excess
capacity. Price cutting causes profitability to fall for all firms in the industry as firms
seek to produce more to cover costs that must be paid regardless of industry demand.
➢ Exit Barriers: Rivalry among competitors declines if some competitors leave an
industry. Profitability therefore tends to be higher in industries with few exit
barriers. Exit barriers come in many forms. Assets of a firm considering exit may be
highly specialized and therefore of little value to any other firm. Such a firm can thus
find no buyer for its assets. This discourages exit. When barriers to exit are powerful,
competitors desiring exit may refrain from leaving.
➢ Product Differentiation: Firms can sometimes insulate themselves from price wars by
differentiating their products from those of rivals. As a consequence, profitability
tends to be higher in industries that offer opportunity for differentiation.
Profitability tends to be lower in industries involving undifferentiated commodities
such as, memory chips, natural resources, processed metals and railroads.
➢ Slow Growth: Industries whose growth is slowing down tend to face more intense
rivalry. As industry growth slows, rivals must often fight harder to grow or even to
keep their existing market share. The resulting intensive rivalry tends to reduce
profitability for all.

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5) Threat of Substitutes

Substitute products are a latent source of competition in an industry. Substitute products

offering a price advantage and/or performance improvement to the consumer can drastically
alter the competitive character of an industry.

Example: coir suffered at the hands of synthetic Fiber

A final force that can influence industry profitability is the availability of substitutes for an
industry’s product. To predict profit pressure from this source, firms must search for
products that perform the same, or nearly the same, function as their existing products.

Example: Real estate, insurance, bonds and bank deposits for example are clear substitutes
for common stocks, because they represent alternate ways to invest funds. The five forces
together determine industry attractiveness/ profitability. This is so because these forces
influence the causes that underlie industry.

4.2 ATTRACTIVENESS OF INDUSTRY

The industry analysis culminates into identification of various issues and draw conclusions
about the relative attractiveness or unattractiveness of the industry, both near-term and
long-term.

The important factors on which the management may base such conclusions include:

➢ The industry’s growth potential, is it futuristically viable?

➢ Whether competition currently permits adequate profitability and whether
competitive forces will become stronger or weaker?
➢ Whether industry profitability will be favourably or unfavourably affected by the
prevailing driving forces?
➢ The competitive position of an organisation in the industry and whether its position is
likely to grow stronger or weaker. (Being a well-entrenched leader or strongly
positioned contender in an otherwise lacklustre industry can still produce good
profitability; however, having to fight an uphill battle against much stronger rivals can
make an otherwise attractive industry unattractive).
➢ The potential to capitalize on the vulnerabilities of weaker rivals (perhaps converting
an unattractive industry situation into a potentially rewarding company opportunity).

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 ➢ Whether the company is able to defend against or counteract the factors that make
the industry unattractive?
➢ The degrees of risk and uncertainty in the industry’s future.
➢ The severity of problems confronting the industry as a whole.
➢ Whether continued participation in this industry adds importantly to the firm’s ability
to be successful in other industries in which it may have business interests?

4.3 EXPERIENCE CURVE

Experience curve akin to a learning curve which explains the efficiency increase gained by
workers through repetitive productive work.

Experience curve is based on the commonly observed phenomenon that unit costs decline as a
firm accumulates experience in terms of a cumulative volume of production. It is based on the
concept, “we learn as we grow”.

Experience curve results from a variety of factors such as learning effects, economies of
scale, product redesign and technological improvements in production.

Experience curve has following features:

➢ As business organisation grow, they gain experience.

➢ Experience may provide an advantage over the competition. Experience is a key barrier
to entry.
➢ Large and successful organisation possess stronger “experience effect”

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A typical experience curve may be depicted as follows:

➢ As a business grows, it understands the complexities and benefits from its

experiences.
➢ The concept of experience curve is relevant for a number of areas in strategic
management.
➢ experience curve is considered a barrier for new firms contemplating entry in an
industry.

Example: the experience curve phenomenon seems to be working in Maruti Suzuki. The likely
strategic choice for competitors can be a market niche approach or segmentation based on
demography or geography.

4.4 VALUE CREATION

The concept of value creation was introduced primarily for providing products and services
to the customers with more worth.

Value is measured by a product’s features, quality, availability, durability, performance and by

its services for which customers are willing to pay.

Thus, we can say that the value creation is an activity or performance by the firm to create
value that increases the worth of goods, services, business processes or even the whole
business system.

This concept gives business a competitive advantage in the industry and helps them earn above
average profits/returns.

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Competitive advantage leads to superior profitability. At the most basic level, how profitable
a company becomes depends on three factors:

➢ the value customers place on the company’s products

➢ the price that a company charges for its products; and
➢ The costs of creating those products.

The value customers place on a product reflects the utility they get from a product—the
happiness or satisfaction gained from consuming or owning the product. Utility must be
distinguished from price.

It is a function of the attributes of the product, such as its performance, design, quality, and
point-of-sale and after-sale service.

Companies are ultimately aiming to achieve sustainable competitive advantage, which enables
them to succeed in the long run.

Michael Porter argues that a company can generate competitive advantage in two different
ways, either through differentiation or cost advantage.

According to Porter’s, differentiation means the capability to provide customers superior and
special value in the form of product’s special features and quality or in the form of aftersales
customer service.

As a result of differentiation, a company can demand higher price for its products or services.

A company will earn higher profits due to differentiation in case the expenses stay comparable
to the costs of competitors.

The above-mentioned differentiation and cost advantage will affect a company’s ability to
achieve competitive advantage, but there are many different organizational functions that will
influence whether a company can achieve cost advantage or differentiation advantage.

Michael Porter used the concept of value chain to explore closer different functions of the
organisations and mutual interactions among those functions.

Value chain analysis provides an excellent tool to examine the origin of competitive advantage.

It divides the organisations into two different strategically important group of activities,
namely, primary activities and supporting activities, which can help to comprehend the potential
sources for differentiation and to understand an organisation’s costs behaviour.

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5.MARKET AND CUSTOMER
A market is a place for interested parties, buyers and sellers, where items and services can
be exchanged for a price.

The market might be physical, such as a departmental store where people engage in person.
They may also be virtual, such as an online market where buyers and sellers do not meet in
person but tools of technology to strike a deal.

For example, it might be used to describe the stock exchange, where securities are traded.

The term "marketing" encompasses a wide range of operations, including research, designing,
pricing, promotion, transportation, and distribution.

The market activities are categorised and explained in terms of four Ps of marketing – product,
place, pricing, and promotion. These four kinds of marketing activities help marketers identify
customer needs so they may meet their demands and deliver satisfaction

The orientation of product marketing has evolved and acquired different dimensions centred
around product, production, sales and customers.

In a customer or market-oriented approach strategists prioritise efforts on their customers.

In order to create better value propositions for customers, businesses gather, disseminate,
and use customer and competitive information.

5.1 CUSTOMER
A customer is a person or business that buys products or services from another organisation.

Customers are important because they provide revenue and organisations cannot exist without
them. Customers are the purchasers of products and services in the economy, and they might
exist as consumers or only as customers.

The terms customer and consumer are practically synonymous and are frequently used
interchangeably. There is, however, a thin distinction. Individuals or businesses that consume
or utilise products and services are referred to as consumers.

Customers are frequently categorised based on demographics like as age, race, gender,
ethnicity, economic level, and geographic region, which may all assist businesses in developing
a profile of a perfect customer.

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Customer analysis

Customer analysis is an essential marketing component of any strategic business plan. It

identifies target clients, determines their wants, and then defines how the product meets
those needs.

Customer analysis includes:

➢ the administration of customer surveys,

➢ the study of consumer data,
➢ the evaluation of market positioning strategies,
➢ development of customer profiles,
➢ the selection of the best market segmentation techniques.

Customer profiles can reveal demographic information about customers. A number of parties,
including buyers, sellers, distributors, salespeople, managers, wholesalers, retailers, suppliers,
and creditors, can assist in gathering information to effectively assess the needs and desires
of consumers.

Customer Behaviour

Customer behaviour moves beyond the identification of customers to explain how they
purchase products. It examines elements like shopping frequency, product preferences, and
the perception of your marketing, sales, and service offerings.

Understanding the behaviours of customers enables businesses to establish effective

marketing and advertising campaigns, provide products and services that meet their needs, and
retain customers for repeat sales

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Consumer behaviour may be influenced by a number of things. These elements can be
categorised into the following three conceptual domains:

1) External Influences: External influences, like advertisement, peer recommendations or

social norms, have a direct impact on the psychological and internal processes that
influence various consumer decisions. The focus of external effects is on the numerous
elements that have an impact on customers as they choose which needs to satisfy and
which products to use to do so. These aspects are divided into two groups – the company's
marketing efforts and the numerous environmental elements.

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

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

This behaviour of making decisions happens very frequently. It mostly applies when the
purchase is one that is significant to the customer, such as when the product could
have a significant influence on their health or self-image.

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

6.COMPETITIVE STRATEGY
Competition is a fundamental attribute of economic systems and business, and it is frequently
connected with small and large organisations.

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Within a industry, competition is frequently encouraged with the wider goal of attaining and
achieving higher quality services or superior goods that the firm may manufacture or develop.

The competitive strategy of a business is concerned with how to compete in the business areas
in which the organization operates.

The competitive strategy of a firm within a certain business field is analysed using two criteria:
the creation of competitive advantage and the protection of competitive advantage.

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

This analytical step is essential because managers cannot devise a successful strategy without
in-depth understanding of the industry’s competitive character, the competitive process works
similarly enough to use a common analytical framework in gauging the nature and intensity of
competitive forces.

Porter’s five forces model is useful in understanding the competition.

6.1 COMPETITIVE LANDSCAPE

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

Competitive landscape is about identifying and understanding the competitors and at the same
time, it permits the comprehension of their vision, mission, core values, niche market,
strengths and weaknesses.

Understanding of competitive landscape requires an application of “competitive intelligence”.

Thus, understanding the competitive landscape is important to build upon a competitive
advantage.

Steps to understand the Competitive Landscape:

1) Identify the competitor: The first step to understand the competitive landscape is to
identify the competitors in the firm’s industry and have actual data about their respective
market share.
➢ Who are the competitors and how big are they?

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

3) Determine the strengths of the competitors: What are the strengths of the
competitors? What do they do well? Do they offer great products? Why are consumers
liking their product/service? Do they utilize marketing in a way that comparatively reaches
out to more consumers? Why do customers give them their business?
This answers the question:
➢ What are their financial positions?
➢ What gives them cost and price advantage?
➢ What are they likely to do next?

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

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

6.2 KEY FACTORS FOR COMPETITIVE SUCCESS

An industry’s Key Success Factors (KSFs) are those things that most affect industry
members’ ability to prosper in the marketplace - the particular strategy elements, product
attributes, resources, competencies, competitive capabilities, and business outcomes that spell
the difference between profit and loss and, ultimately, between competitive success or failure.
KSFs by their very nature are so important that all firms in the industry must pay close
attention to them.
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Key success factors are the prerequisites for industry success or, to put it another way,
KSFs are the factors that shape whether a company will be financially and competitively
successful.

The answers to three questions help identify an industry’s key success factors:

➢ On what basis do customers choose between the competing brands of sellers? What
product attributes are crucial to sales?
➢ What resources and competitive capabilities does a seller need to have to be
competitively successful, better human capital, quality of product or quantity of
product, cost of service, etc.?
➢ What does it take for sellers to achieve a sustainable competitive advantage,
something that can be sustained for long term?

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