Analyzing The Business Environment

Analyzing the Business Environment (The Strategic Position**)
Prof Ashish K Mitra
Analyzing Environment
Awareness of the environment is not a special project to be undertaken only when warning of change becomes deafening
Kenneth R Andrews
Analysis is the critical starting point of strategic thinking

Kenichi Ohmae
It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change
Charles Darwin
STRATEGIC MANAGEMENT PROCESS Company Mission ^

? Possible
<
v External Environment Operating Industry Remote ^
Company Profile (Resources & capabilities) ^
? Desired
Strategic Analysis and Choice Long-term Objectives Annual Plans & Short term Objectives Generic & Grand Strategies Functional / Operating Strategies/ tactics Policies that empower action
Feed Back
Institutionalization of Strategy Strategic Control & continuous improvement

Feed Back
Analyzing Business Environment

Business Environment encompasses
External Environment
Macro external environment - Political, Economic, Social and Technological (PEST) ( some call them as PESTEL) Micro external environment immediate Industry and competitive environment
Internal Environment
Resources Competencies
Layers of the External Business Environment**

The Macro-environment
Industry ( or Sector )
Strategic Group
The Organization Markets Organizational Field
The Firms External Environment
Remote Environment Political Economical Social Technological Ecological Legal
Industry Environment
Operating Environment
The FIRM
Competitive Rivalry Threat of new entrants/ entry barriers Supplier Power Buyer Power Threat of substitute
Competitors Creditors Customers Labor Suppliers
The most general (outer) layer is often referred to as the macro-environment. Broad factors that impact to a greater and lesser extent on almost all organizations. It is important to identify these issues and particularly those that are likely to have a differentially large impact on a specific organization Any specific PESTEL factor will affect some organizations more than others Also it will affect some organizations favorably , whilst posing a threat to others. If the future is likely to be very different from the past it is helpful to construct pictures or scenarios of possible futures. This helps managers consider different ways in which strategies might need to change depending upon how the business environment might unfold.
Next layer would be called industry. This is a group of organizations producing the same products or services. However, we need to recognize that previously separate industries might converge. The Five forces framework (and the concept of hyper competition) can be useful in understanding how the competitive dynamics within and around an industry are changing Within most industries or sectors, there will be many different organizations with different characteristics and competing on different bases. This intermediate layer between the industry and the individual organization is called strategic group. These are organizations within an industry that have similar characteristics to each other but are quite different from those in other strategic groups.
External Environment
The external environment of a business play a principal role in determining the opportunities, threats and constraints a firm faces Macro-external ( remote) environment : Variables originating beyond and irrespective of any single firms operating situation ( political, economic, social, technological , Environmental and Legal forces ) form the remote or macro-external environment . Micro-external environments :Variables influencing a firms immediate competitive situation ( competitive position, customer profiles, suppliers and creditors, and accessible labor market) constitute the operating environment MNCs must evaluate several External environments simultaneously
ELEMENTS OF AN EXTERNAL ANALYSIS
Macro external Environment
An Organization s External Environment
Technological
Micro external environment Industry-Competitors
Economic
Substitute Products
Organization
Current Rivalry
Political
Bargaining Power of Suppliers Bargaining Power of Buyers
Potential Entrants Social
Political environment Political forces influence

Legislations & government rules/ regulations under which the firm operates : Anti-trust laws, patent laws, de-regulation of industries, openness to FDI), employment laws (eg; minimum wages) , social welfare laws, fair trade practices, taxation, pollution laws, pricing policies in certain industries, actions aimed at protecting consumers, local industries and local environment, foreign travel laws Strength & independence of Judicial system. Enforceability of contracts.
Government plays a very significant role in several industries as a supplier, customer or competitor, subsidies/ grants for research, giving permissions. Political / geo-political stability is a very significant impact on the general economic environment (for growth ), particularly in the globalization context Firms analyze governments policies and develop complementary plans, to exploit opportunities Institutions like media, social, religious, pressure groups & lobbies are part of political environment, impacting Industry
Impact of geo-political situation (Indo-Pak tensions) on IT majors in 2002 Indian Govt not allowing ONGC to form JV in Nigeria in 2005, despite winning the bid for a large Nigerian oil reserve Collapse of Soviet Russia on Indian Pharmaceutical companies OPEC decisions impact production , price etc. Interplay between political & legal forces on one hand and industry & firms on the other hand eg. Political noise / opposition against outsourcing in US (more closer to every presidential election)
Economic environment
Economic forces affect general health of a nation or regional economy , which affect companies & industries ability to earn adequate rate of return. Economic environment : is a vital component from the standpoint of strategic planning
Consumption patterns are affected by the relative affluence of various segments of the market . Firms must understand crucial macro-economic trends in the segments that affects its industry. These include GDP growth, prime interest rates, inflation rates, exchange rates, sector-wise growth rates, behavior of capital market, Capital market reforms, FDI regulations general availability of credit, currency convertibility level of disposable income & propensity to spend, availability of skills
National as well as international economic forces like OPEC, EEC ( now EU) ,WTO, tarifffree trade agreements ( like NAFTA) etc affects Industry / firms Natural environment covering ecology, climate and endowment of natural resources
Social Environment
The Social environment is an important factor as changes in the values, beliefs, attitudes, opinions and lifestyle in society create potential opportunities ( threats for some). The cultural, demographic, religious, educational and ethnic conditioning of individuals in society affects the social environment. Social environment being dynamic, for a company to grow, must take advantages of societal changes
Social Environment
A large number of women have stated working outside home created wide range of products and services convenience food, microwave ovens, day-care centers. Composition of work force, capabilities, hiring / compensation policies % of women in workforce increased from 44 to 60 in US issues of equality of pay, sexual harassment at work Demographic Change , birth control, shift in national age distribution, growing senior citizen population shift in demand for products and services, shift in long range marketing strategies , product research by companies. Accelerated interest in quality-of-life issues, leisure Emergence of alternate labor market Signification of family as an institution children as influencer in purchase of goods
Technological environment Technological advancement and its rate of change has very significant influence on Industry & an individual firm. Technological change is both creative and destructive. Technological change can affect the barriers to entry & therefore radically reshape the industry structure & increase the intensity of rivalry, lowering price & profits.
The cost of technology is a significant item in technology-intensive businesses. Firms have to fight obsolescence, keep on constantly adapting new technologies to provide innovative products and services in the market place , market them innovatively in order to survive & grow. Technological innovations can have a sudden and dramatic effect on the environment of a firm. A breakthrough may spawn new markets and products or significantly, shorten the anticipated life of an existing manufacturing facility.
Internet (a major disruptive technology) has lowered the barriers to entry into several industries & changed competitive structure of many industries Remington Rand Corporation ( supreme king of the typewriter industry) failed to see the technology trend well in time Perfection in transistor technology changed the nature of Radio industry Advancement in Xerography spelt doom for carbon paper manufacturers Nucor from nowhere became the most profitable steel company in US in 1970s, due to mini steel plant technology. .
Forces in external environment are so dynamic and interactive that impact of one element can not be disassociated from impact of other elements.
Macro environmental influences-the PESTEL Framework

1. What factors are affecting the Organization? 2. Which of these are most important at present? In the next few years?
Political
Government stability Taxation Policy , industries regulation policies Foreign Trade regulations Social Welfare policies Business cycles GNP trends Interest rates Money Supply Inflation Unemployment Disposable income
Economic factors
Socio-cultural factors
Population Demographics Income distribution Social mobility Lifestyle changes Attitude to Work and leisure Consumerism Levels of Education Government spending on research Government and industry focus on technological effort New discoveries, rate of obsolescence Speed of technology transfer
Technological
Environmental
Environmental protection laws Waste disposal Energy consumption
Legal
Anti-trust / Monopolies legislation Employment law Health and safety Product safety, Product Stewardship
It is important that PESTEL is used to look at the future impact of environment factors, which may be different from the past. Scenarios may help with this.
Scenarios
Scenarios are especially useful in circumstances where it is important to take a long term view of strategy, probably a minimum of 5-10 years; where there are a limited number of key factors influencing the success of that strategy; but there is a high level of uncertainty about such influences A scenario is a detailed & plausible view of the business environment of an organization might develop in the future based on groupings of key environmental influences and drivers of change about which there is a high level of uncertainty. Oil industry raw material availability (oil field discovery), price, demand ( alternate sources of energy) are of crucial importance. The scenarios are not just based on hunch; they are logically consistent but different from each other.
Sharing & debating these scenarios improves organizational learning by making managers more perceptive about forces in the environment. Scenarios have three ingredients: First, building of scenarios around key drivers;Second,the development of strategies ( or contingency plans) for each scenario;Third, the monitoring of the environment to see how it is unfolding, and adjusting strategies & plans accordingly
Key drivers are essential to process of building scenarios.Should be few, complexity increases if their numbers are more.. Focus on factors which have high potential impact & are uncertain Optimistic, pessimistic, most likely scenario
Industry Level Analysis

Industry is a group of organizations producing the same products or services Industries differ widely in their economic characteristics, competitive situations, and future profit prospects When an industry with a reputation for difficult economics meets a manager with a reputation for excellence, it is usually the industry that keeps the reputation in tact Warren Buffet Economic characteristics of an industry vary with factors like overall size & market growth rate, the pace of technological change, numbers & size of buyers and sellers, whether sellers products are vertically integrated or differentiated, economies of scale, distribution channels used.
Competitive forces can be moderate in one industry and fierce, even cut throat in another. Competition focuses in some industries is on who has the best price, while in some industries competition is centered around quality and reliability ( eg Catalysts) or quick service and convenience or brand reputation. An industrys economic traits and competitive conditions, and how they are going to change , determine whether profit prospects are poor, average or excellent. Leading companies in unattractive industries find it hard to earn respectable profits
Exhibit depicts the extent to which the average profitability differs across lines of business or industries or industry groups over long periods of time Estimated cost of equity has been subtracted from the reported profit to determine the true profit in the exhibit It is clear that businesses in some industry groups (e.g.; Pharmaceuticals) have generally operated on high plateaus, whereas businesses in others (e.g.;Steel) have mostly stuck in deep troughs.
Average Economic Profit of US Industry Groups, 1978-1996 (sources: Compustat, Valueline, and Marakon Associates)
S No Industry Group 1 2 3 Toiletries/Cosmetics/Pharma Soft drink Tobacco ROI 16-17% 16% 12% Avg invested Equity < $50b < $50b <$50b
4
5 6 7
Food processing
Household products Electrical equipment Financial services
8.5%
6.5% 5.5% 5%
<$100b
<$150b <$200b <$250b
8
9 10 11
Specialty Chemicals
News Paper Banks Integrated Petroleum
4.5%
2.5% 2% 1.5%
<275b
<300b <450b <650b
Average Economic Profit of US Industry Groups, 1978-1996 (sources: Compustat, Valueline, and Marakon Associates)-contd
S No Industry Group 12 13 14 15 16 17 Telecom Electric Utility Tire & Rubber Medical Services Machinery Auto & truck ROI 0.75% 0.5% -0.25% -0.25% -0.5% -0.5% Avg invested Equity $700b $800b $900b
18
19 20 21
Computer & peripherals

Paper & Forest Air Transport Steel
-1.0%
-2.0% -4.0% -10% $1100b $1200b $1250b
Supply Demand Analysis

Supply demand analysis : Interplay of supply and demand determines a natural price. Supply-demand analysis was incorporated relatively quickly into economics and marketing courses at business schools. Researchers found structure of Industry affected performance of businesses operating in them
While general forces in environment (PESTEL) might influence success or failure of an organizations strategy , most organizations are hugely impacted by competition or forces within their industry or sectors. From strategic management perspective understanding the competitive forces acting on and between organizations in the same industry or sector and the level of competition is very important since level of profit / attractiveness of industry depends to a large extent upon the level of competition. Convergence also do take place between previously separate industries like computing, telecom, entertainment. Boundaries of industries might also be destroyed by forces in macro-environment, creating new business models..
Competition in an industry is determined not only by existing competitors, but also by other market forces such as customers, suppliers, potential entrants and the existence of substitute products Understanding of sources of competition can help the firm to gauge its strengths and weaknesses, and to perceive the trends in industry so that it can position it optimally & choose the way to compete. Some important aspects about competitive forces
Sources of competition** using the 5 forces framework The dynamics of competition & hypercompetition**. Strategic groups within an industry or sector** Organizational fields**
Sources of Competition **
Michael Porter in 1980, in his book , Competitive Strategy, has developed a Five Forces Model framework to help managers identify the sources of competition in an industry or sector & analyze the business environment
When using this framework bear in mind

It must be used at the level of SBUs or Businesses and not at the level of the whole organization It is important not just to describe these forces at present but understand how they are shaping in future & can be countered and overcome in future These forces not only steadily change with time but can be impacted abruptly by changes in macroenvironment. Technological changes can destroy many competitive advantages & current barriers
The 5 forces are not independent of each other. Pressure from one can trigger off changes in another in a dynamic process of shifting source of competition.
Forces Driving Industry Competition

Potential Entrants Threat of New Entrants
Porters Five Forces Model
Bargaining Power of Suppliers Suppliers
Industry Competitors
Bargaining Power of Buyers Buyers
Rivalry Among Existing Firms
Threat of Substitute Products or Services

Substitutes
Degree of Competitive Rivalry among existing Competitors The intensity of rivalry is the most obvious of the five forces on which strategists have focused historically. It determine the extent to which the value created by an
industry will be dissipated through head-to-head competition. Rivalry

occurs when one or more firms make an effort to increase their market share.
Structural determinants of the degree of rivalry are numerous: Equally balanced competitors: When competitors are roughly equal size, there is danger of intense competition, as one tries to get dominance over other Number and relative size of competitors: more concentrated the industry(i.e., fewer firms), the competitors will recognize their mutual interdependence and will restrain their rivalry. Larger is the number of players, more is the competition & tendency to undercut on pricing. Presence of one dominant competitor rather than a set of equally balanced competitors may lessen rivalry. The dominant player may be able to set industry prices and discipline defectors, while equally sized players try to out do one another
In high capital-intensive industries ( high fixed costs) , the level of capacity utilization directly influences firms incentive to engage in price competition to fill their plants. More generally, high fixed costs, excess capacity, slow growth, and lack of product differentiation all increase the degree of rivalry ( e.g.; US Steel industry)
As opposed to Steel industry, Pharmaceutical industry has low fixed manufacturing cost as % of value added, high gross margin ( as high as 90% for some blockbusters, double digit growth rates, differentiation among products, brand identity, and switching cost.
Lack of differentiation : in commodity / undifferentiated markets higher is the rivalry High exit barriers / Strategic stakes of competitors and if competitors are diverse ( eg; foreign competitors in US steel market shattered domestic oligopolistic consensus), the degree of rivalry will be higher. Exit barriers could be
Economical : high investment in non transferable assets, high redundancy cost, high closure cost Strategic : linkage to other business of an organization Emotional
Life Cycle of the industry : move towards maturity stage increases rivalry between the industry players Why Cos go for M&As?
Forces Driving Industry Competition
Evaluating the Five Forces
Current Rivalry among Existing Firms

Threat Numerous competitors Equally balanced competitors Industry sales growth slowing High fixed or inventory storage costs No differentiation or no switching costs Large capacity increments required Diverse competitors High strategic stakes, Loyalty High exit barriers Opportunity Few competitors One or a few strong competitors Industry sales growth strong Low fixed or inventory storage costs Significant differentiation or switching costs Minimal capacity increments required Similar competitors Low strategic stakes Minimal exit barriers
Threat of new entrants

New entrants to an industry bring in new capacities and capture market share from the existing players. This often lead to price wars and falling return for all ( thats why new entrants to an industry often take the acquisition route).
The willingness and ability of firms to enter a particular industry ie Threat of entry depends on the extent to which there are barriers to entry. Entry barrier exists when it is difficult or not economically feasible for an outsider to replicate the incumbents position. Barriers to entry are factors that need to be overcome by new entrants if they are to compete successfully. They should be seen providing delays to entry and not as permanent barriers.
Some of the major entry barriers are (next page):
Threat of new Entrants
..role of entry barriers
Economies of scale: acts as a barrier against firms considering entering an industry with a small capacity. Economies of scale also create barriers in distribution, utilization of sales force etc. Product differentiation: By establishing brand identification and customer loyalty through advertising, customer service, product differences , or first mover advantage etc firms create product differentiation.
New entrants are forced to spend huge amounts to get a foot hold & overcome the advantages of existing players. E.g.; Soft drink, OTC drugs, FMCG , Breweries.
Access to distribution channels :FMCG, Breweries etc employ differentiation along with economies of scale in distribution , production, and marketing to create barriers.
Threat of new entrantsentry barriers

Capital requirements: Capital not only required for production facilities but also R&D, advertisement, customer credit, inventories etc. Huge Capital requirement limit the number of players who can enter. Xerox created a major capital barrier to entry in copiers when it chose to rent out copiers rather than sell outright. This move greatly increased the working capital for all others including entrants Cost disadvantages independent of size: An existing firm may enjoy competitive advantages on account of learning curve, experience curve, proprietary technology, access to best source of inputs, low priced historical assets, government subsidies, strategic location.( e.g.; Steel plant near iron ore mines). Reputation of quality takes years to build and can not be bought through marketing campaigns Expected Retaliation Government Policies
Threat of new entrants

Study of Pharmaceutical vs Steel industry in U.S. Research based Pharmaceutical companies vs manufacturers of generic drugs - High entry barrier through patent protection, high drug development process cost / time, carefully cultivated brand identity Integrated US Steel makers (that uses iron ore as the raw material) were protected initially by huge economic size & cost ( no such new company was built in the last 40 years). But since1960s, mini steel mills technology ( that makes steel from scrap rather than iron ore) has put intense pressure on the integrated steel industry. Mini steel mills has essentially reduced the scale required for efficient operation by a factor of 10 or more and investment per ton capacity by another factor of 10 leading , a hundred fold reduction in barriers to entry. As a result , profitability has collapsed in the segments of steel industry that mini mills have penetrated.
Potential Entrants
Threat No or low economies of scale No other potential cost disadvantages Weak product differentiation Minimal capital requirements Minimal switching costs Open access to distribution channels No government policy protection Opportunity Significant economies of scale Cost disadvantages from other aspects Strong product differentiation Huge capital requirements Significant switching costs Controlled access to distribution channels Government policy protection
Bargaining power of buyers ( customers)

The impact of this force becomes heavier with buyers forming groups or cartels. This phenomenon is seen in industrial and commercial buyers / products. Bulk buyers like supermarkets have greater bargaining power than single customers or small retailer for reducing price or increasing services. Retailers in some industries get significant bargaining power since they influence consumers purchase decisions. E.g.; home appliances, jewelry etc. Porter says buyers are powerful in the following circumstances:
Suppliers are many but buyers are few Buyers purchase in large quantities Buyers can switch between suppliers at low cost ( playing companies off against one another) Feasible for the buyer to purchase inputs from several firms at a time Threat of vertical integration as a device for forcing down prices
Bargaining power of buyers ( customers).

Buyers of auto components like GM, Ford & Chrysler are powerful due to size and concentration, with numerous suppliers of auto-components. Similarly these companies squeeze out the tyre industry Auto-makers historically enjoyed leverage in dealing with steel makers. They were well informed about cost steel makers costs and credibility of threat of backward integration into steel making ( Ford once used this strategy). In contrast, none of these sources of buyer power, historically were evident in the pharmaceutical industry. Steel represents a major slice of costs of many of the end products , from cans to cars. Purchasing decisions focus on large cost items . Hence it is always under pressure. However some specialty steel makers enjoy better return than integrated steel makers because of differentiated products. In Pharma industry no substitute was available for many patented drug.
Bargaining power of buyers ( customers).

US government is a big buyer of pharmaceuticals through its medicaid and medicare programs . Historically however it has not exercised potential power. Risk of failure, high personal cost of any substitutes failure keep high priced branded drug share in the market. The interests and incentives of all players involved in the purchasing decision affects the price sensitivity of the decision. Many doctors and patients traditionally lacked incentives to hold down prices of drug. Because a third party i.e; insurance company footed the bill
Bargaining Power of Buyers

Threat Buyer purchases large volumes Purchases are significant part Purchases standard or undifferentiated Buyer faces few switching costs Buyer's profits are low Buyer can manufacture products Industry's products aren't important to quality of buyer's products Buyers have full information Opportunity Buyer purchases small volumes Purchases aren't significant part of buyer's costs Purchases highly differentiated and unique Buyer faces significant switching costs Buyer's profits are strong Buyer cant manufacture products Industry's products are important to quality of buyer's products Buyers have limited information
The bargaining power of suppliers

Supplier power is the mirror image of buyer power.
As a result, the analysis of supplier power typically focuses first on the relative size and concentration of the suppliers and Second on the degree of differentiation in inputs supplied. The ability to charge customers different prices in line with differences in the value created for each of those buyers, usually indicates high supplier power.
For Pharma industries inputs are usually from several commodity chemical companies. US Steel industry, in contrast, has been ravaged by highly unionized US Steel workers ( a major supplier!).
Relationship with buyers and suppliers have important cooperative as well as competitive elements. Japanese car makers committed themselves to long-run supplier relationships that paid off in terms of higher quality and faster new product development. ( In contrast US car manufacturers pushed their part suppliers to the wall by playing them against one another) Requirement of net-worked economy partnership with suppliers
Bargaining Power of Suppliers

Threat Supplying industry has few companies and is more concentrated Supplier's products dont have substitutes Industry isnt an important customer Supplier's product is an important input Supplier's products are differentiated Significant switching costs Supplier has ability to do what buying industry does Opportunity Supplying industry has many companies and is fragmented Supplier's products do have substitutes Industry is an important customer Supplier's product isnt an important input Supplier's products aren't differentiated Minimal switching costs in supplier's products Supplier doesn't have ability to do what buying industry does
The threat of substitute products

A close substitute is a potential threat to companys product. The existence of a substitute limits the price which can be charged for a product. Threat to profitability depends on the relative price-toperformance ratios of different types of products or services to which customer can turn to satisfy the same basic need. Threat of substitution is also affected by switching costs like retooling, redesigning, retraining etc Substitution process often follows a S-shaped curve. In many cases it starts slowly as a few trendsetters risk experimenting with the substitute, picks up steam if other customers follow suit, and finally levels off when nearly all of the economical substitution possibilities have been exhausted
The threat of substitute products.

Substitute materials that are putting pressure on the Steel industry include plastics, aluminum, and ceramics ( car, can industry). Pharmaceuticals represents a more costeffective form of health care, in many cases, than hospitalization Product for Product substitution Substitution of need
Concept of Value Net

Post 1980, Additional variables were incorporated in Porters five forces framework In 1990, Adam Brandenbueger and Barry Nalebuff (in their book Co-opetition) highlighted the critical role that complementors can play in influencing business success or failure. Stated the value-net framework for analyzing industry environment, very similar to Porters but introducing complementor and lumping together of industry rivals, potential entrants and threat of substitutes as competitors. Complementors are defined as Firms from which customers buy complementary products or services, or to which suppliers sell complementary resources. On the demand side, they increase buyers willingness to pay for the products; on supply side they decrease the price that suppliers require for their inputs.
Concept of Value Net..

Microsoft Windows 95 Operating systems introduction needed more processing power. Hence Intels Pentium chip was more in demand. But Microsofts Windows 95 will not appear in conventional Porters framework screen when analysing Intel Corporation! Intel should recognize Microsoft as a complementor in its competitive landscape. In Pharmaceutical Industry , Doctors greatly influence the success of drugs by prescribing them, thus acting as complementors who increase buyers willingness to pay for particular product. In Paints industry, Architects have strong influencing role for institutional segment.
The Value Net

Customers
Competitors
Company
Complementors
Suppliers
Complementors add a cooperative dimension to the competitive forces approach. Findings ways to make the pie bigger rather than fighting with competitors over a fixed pie. Think about how to expand the pie by developing new complements or making the existing complements more affordable.
Need to manage relationship with suppliers of complements. But how is the value shared between the producers of complements?
Concept of Value Net..

Cooperation with complementors to expand the size of the pie must be supplemented with some considerations of competition with them if the firm is to claim slices of that pie.
Relative concentration : when complementors are more likely to have power to pursue their own agenda? Relative buyer or supplier switching cost Ease of unbundling Rate of growth of pie Difference in pull through: As complementors play a greater role in pulling through demand, their power is likely to expand. ( In entertainment sector , the role of content provider) Assymetric integration threat
Alliances are becoming important with complementors in several cases
Examples concept of complementarity

Industries producing Computer Hardware and Computer Software are the most apparent examples of complementarity ( eg.; demand of Intel processor and increasing the demand of MS Windows). Car industry and Auto loan industry VCR and Video Cassette recorder industry. TV Shows and TV guides Fax Machine and Phone lines Catalogue Sale vs overnight delivery service Video Game consoles and Game developers Mobile service providers & Cell Phone industry TV Channels vs Content Production Houses
Players in analyzing competitive landscape Supply Demand analysis : focused attention on exchange relationship between suppliers and buyers. Five forces framework extends the analysis to supplier->Competitor -> buyer and to consider explicitly possibilities of substitution and new entrants. Value net draws complementary relationships into the picture and accounts for the complication that complimentor can also become a competitor Ghemawat says even more types of players needed to be added, depending on the context
Re-cap of analyzing business environment

Porters Five forces model of competition for Industry analysis Strategic Groups within Industries Industry life cycle analysis
Embryonic stage Growth stage Shakeout stage Mature stage Declining stage
Strategic Groups Within Industries

The concept of strategic groups Within an industry, a competitor grouping using similar strategic characteristics, that differ from other groups within the same industry or sector. There may be different characteristics which distinguish between strategic groups. E.g; Size, geographic coverage, breadth of product range, quality or service level, R &D spending etc Companies in same strategic group follow largely similar strategies or compete on similar bases in the markets
Implications of strategic groups The closest industry competitors are those in the same strategic group. The various industry groups are differentially and competitively advantaged and positioned. Mobility barriers inhibit the movement of competitors from one strategic group to another. Mobility barriers between different strategic groups vary from industry to industry. Could be related to capabilities , resources of the companies in different strategic groups.
Strategic Groups in the Pharmaceutical Industry
The concept of Organizational Fields is a way of understanding this wider network of influences and relationships in business environment. Participants of organizational field interact more frequently with one another than with those outside the field. These relationships often constraint, guide or even dictate economic decisions and priorities such as resource deployment. Organizational field of justice has lawyers, police, courts, prisons, and probation services. Although their roles are different they are all committed to deliver good justice. In case of say telecom company other than value chain partners, it will be regulators, professional associations etc.
Various members of an organizational field are tied together in the ways beyond economic dependency. They share a common set of purposes ( at least at the generic level) and more crucially they are likely to share a set of taken-for-granted beliefs and assumptions. This may be deeply embedded and hard to surface and concern the legitimacy of an organization within an organizational field.
The Industry Life Cycle Model

Stages in the industry life cycle:
The five forces, strategic groups, and life cycle models provide useful ways of thinking about and analyzing the nature of competition within an industry to identify opportunities and threats. However each has its limitations & managers need to be aware of the same. In many industries competition can be viewed as a process driven by innovation. Innovation often causes
changes in the industry life cycle. (several shakeouts in

Telecom industry).
Innovations frequently lower the fixed costs of Production, thereby reducing barriers to entry. A five forces model applied to steel industry in US in 1970 would look very different from that applied today.
Porter in his recent work says innovations unfreeze & re-shape industry structure. He argues that after a period of turbulence triggered by innovation, the structure of an industry once more settles down to a fairly stable pattern , and the five forces and strategic group concepts can once more be applied. Because the five forces and strategic group models present a static picture of competition, they can not adequately capture what occurs during period of rapid changes in the industry environment when value is migrating. Many industries are tending to become hypercompetitive, meaning that they are characterized by permanent and ongoing innovation. The structure of such industries are constantly being revolutionized with few periods of equilibrium. Competitive advantages are quickly eroded A company would not be profitable just because it is based in an attractive industry or strategic group.
Punctuat ed Equilibriu m and Competiti ve Structure

FIGURE 3.4
Entrepreneurship & innovation are fundamental features of competition and driving force behind industry evolution. Innovation represents a perennial gale of creative destruction through which favorable industry structures monopoly in particular contain the seeds of their own destruction. Hyper competition Competition in the new industry ( digital technology)
What are the key forces at work in the competitive environment? These will differ by type of industry. What are the underlying forces in the microenvironment that are driving competitive forces? Eg;
lower cost & high availability of software skills in India is an opportunity & a threat to Us & Eurpean companies Is it likely to change, if so, how? For eg; government action in reducing health care costs & promotion of generics would increase pressure on branded drugs in US. How do competitors stand in relation to competitive forces? Their weaknesses & strengths.
What can managers do to influence the competitive forces affecting an SBU? Can they build entry barriers, power over suppliers or diminish rivalry?
Competitive advantage erodes over time due to forces discussed above and / or competitors will overcome adverse forces. The process of erosion of is getting speeded up by changes in macro-environment such as new technologies, globalization or deregulation. Though time scale differs, Competitive advantages is mostly becoming temporary. Organizations respond to erosion of their competitive position by creating cycles of competition various moves & counter moves on the basis of cost / quality thus shifting the basis of competition.
Organizations are increasingly operating in situation where the speed of the cycles of competition is very fast this has been called hyper competition. Hyper competition occurs where the frequency, boldness and aggressiveness of dynamic movements by competitors accelerate to create a condition of constant disequilibrium and change. Whereas competition in slower-moving environments is primarily concerned with building and sustaining competitive advantages that are difficult to imitate, hypercompetitive environments advantages will be temporary.
Competition is about disrupting the status quo so that no one is able to sustain long-term advantage on any given basis. So long term advantage is gained through a sequence of short lived moves.
Market Segments : A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market. Theoretically different factors could be used to identify market segments.. Demography age, sex, race, income, family size, life cycle stage, Lifestyle, Size of purchase, purpose of use, purchasing behaviour. Industrial markets classification could be based on classification of buyers like domestic industry vs foreign buyers. Identifying strategic customer : Strategic customer is the person(s) who have the most influence over the goods or services that are purchased. Hence strategy must address them. In many markets the strategic customer acts as a gatekeeper to the end user.
Manufacturers have two customers the shops and the shops customers. So there has to be an understanding of what is valued by that strategic customer as a starting point of the strategy. However the requirement of the other customer has also to be met. In many consumer goods, the retail outlet is the strategic customer as the way it displays, promotes & supports products in store is hugely influential on the final consumer preferences. But internet shopping may change this pattern, putting the final consumer back as the strategic customer.
Understanding what customer Values..

Understanding customer needs and how they differ between segments is crucial to developing appropriate strategic capability in an organization. However, value is multi-dimensional & it should be seen through the eyes of the customers. Value of product or services is often wrongly conceived of internally ( eg; designers, engineers, teachers or lawyers) and not tested out with customers or clients. Threshold requirements( product features) are expected from any provider in a given market segment Critical Success Factors (CSFs) are those product features that are particularly valued by a group of customers and, therefore, where the organization must excel to outperform competition. Understanding of the CSFs of a group of customers ( market segment is very important.
Strategic Gaps
The framework of PESTEL ( macro environment factors), Five Forces (Industry environment factors) and others like strategic groups, customer value help managers identify and / or create new market space to gain competitive advantages. Kim & Mauborgne in Blue Ocean Strategy have argued that if organizations concentrate on competing head to head, the environment will get very tough. They have encouraged managers to seek opportunities in business environment which they call strategic gaps. A strategic Gap is an opportunity in the competitive environment that is not being fully exploited by competitors. There may be different opportunities to do this:
Looking across substitute industries : direct rivals tend to trigger a stronger response than potential substitutes. Software companies bringing electronic books & atlases as substitute to paper versions. Looking across strategic groups: particularly if changes in micro environment make new market spaces economically viable. Looking across chain of buyers: adjusting marketing strategy to most profitable buyer or influencer. Looking across complementary products & service offering: like providing wholesome book buying experience instead of just stocking the right books. Looking for new market segment: like no frills segment Looking across / ahead in time
Strategies to Alter Industry Structure
Opportunity to change industry structure in order to alleviate competitive pressure ?
In North America & Europe Petroleum refining earning below cost of capital Reason - many competitors, excess capacity & commodity products Consolidation to increase concentration, capacity rationalization; BP acquired Amoco, then Arco; Exxon merged with Mobil; In Europe Total, Fina & Elf merged. US Airlines - mergers & alliances to reduce competition. In Chemical industry BASF, Dow, ICI & Bayercapacity swapping & rationalization Mittal & Arcelor merger consolidation of fragmented global steel industry
The Rise of strategy consultants

BCG, founded in 1963, had a major impact by applying quantitative research to problems of business and corporate strategy. Its founder, Bruce Henderson believed that good strategy must be based primarily on logic, not .. On experience derived from intuition. Economic theory will eventually lead to the development of a set of universal rules for strategy, rather than strategy being largely intuitive and based upon traditional patterns of behavior which have been successful in past. ( business of selling - powerful over simplifications) BCG came out with the concept of experience curve in 1965-66 to explain price and competitive behavior in extremely fast growing segments of industries for its clients like Texas Instruments, Black and Decker.
Experience curve
BCG , based on close study of fast growing industries propounded that as the total accumulated experience of a firm in the industry increases, it incurs less cost of producing a product. BCG claimed that for each cumulative doubling of experience ( accumulated production over time ) , total costs would decline roughly by 20%-30% because of economies of scale, organizational learning and technological innovation. According to BCGs explanation of its strategic implications, the producer who has made the most units should have the lowest costs and the highest profits. Bruce Henderson claimed that with experience curve, the stability of competitive relationships should be predictable, the value of market share change should be calculable, the effects of growth rate should also be calculable
Eperience curve
Volume effect is not only the one to help reduce cost & increase efficiency , the learning from experience plays a vital role in achieving this. Over time, companies can identify inefficient, ineffective procedures. They reengineer processes, improve material and resource management, strengthen supplier relationships etc.
The Experience Curve
Strategic Analysis
Strategic Analysis is done at
Corporate level Business level
In a multi-business corporation at Corporate level the major strategic decisions are about
What Businesses should the we be in? How should we allocate resources between them? Other important decisions relate to
How do we organize the corporation ? How much decision making should we allow at the level of individual business unit? What activities would benefit from being organized centrally? How do we exploit the potential links between different but related, business units? How do we develop and reward business unit managers?
Two Levels of Strategy

A diversified company has two levels of strategy 1. Corporate-Level Strategy (Company-wide Strategy) How to create value for the corporation as a whole
2. Business-Level Strategy (Competitive Strategy) How to create competitive advantage in each business in which the company competes
Key Questions in Corporate Strategy

1. What businesses should the corporation be in? 2. How should the corporate office manage the array of business units? Corporate Strategy is what makes the corporate whole add up to more than the sum of its business unit parts
Portfolio analysis
Corporate level : tools like BCG Growth-Share Matrix, and GE Nine-Cell planning Grid are used to examine each business as a separate entity and as a contributor to the organizations total business portfolio. The above analysis provides a neutral basis for resource allocation at the corporate level, encourages framing of good strategies at the business unit level and leads to better implementation of strategy because of intensified focus and objectives all across the corporation.
Business units are classified into invest, hold , divest and harvest categories based on the analysis
BCG Growth- Share Matrix

By early 1970s, the experience curve had led to BCGs Growth-Marketshare matrix concept, which represented the first use of portfolio analysis. This approach is widely used in Corporate strategic analysis for managing a portfolio of different business units ( or major product lines). It helps in analyzing likely generators and optimum users of corporate resources. The matrix takes into consideration, the growth rate of the market and relative market share of the business unit In fast growing industries / market provide opportunity for high profits and rapid growth of turnover. High market share gives benefits of economies of scale and better bargaining power in relations to the suppliers and customers for the organization BCG matrix displays position of each business in the two dimensional matrix
BCG Growth Share Matrix

Market Share
High Low
STARS High
QUESTION MARKS
?
Market Growth
Cash Cows Dogs
Low
BCG Growth- Share Matrix.

Business units after due considerations, get classified into one of the four quadrants ( categories), viz; Cash cow, Stars, Question Marks, and Dogs. Cash Cows These business units hold large market share in a mature & slow growing industry Have strong business position & negligible investment requirements. Hence returns from these businesses far outstrips their investment requirements Cash cows are tapped for drawing out resources required elsewhere in the organization.

Stars
These businesses have large market share in growing industries Since industry is growing, to maintain/ grow the market share, firm needs to invest Often investment requirements of Stars are greater than revenues Once the industry reaches the stage of maturity, the stars hardly needs any investment and become major revenue generators

Question Marks
These businesses have a small market share in a high growth market. They demand significant investment because their cash needs are high, a norm in growing industries However, acquiring market share is easier in high growth industry than in a mature market However the chances of success has lot of uncertainties Only a few question marks are finally able to grow into stars

Dogs
These businesses have low market share in an intensely competitive mature industry Characterized by low profits A dog does not need much capital investment, but it ties up capital that could be invested in industries with better returns Firms concentrate on recovering as much as possible from these and undertake ruthless cost cutting Unless there is an over riding larger purpose, an organization should divest dogs Well managed dogs( eg; those having strong control over costs, focus on niches) can be reliable revenue generator. Yet the possibility of being transformed into a cash cow does not exist.

BCGs basic strategy recommendation was to maintain a balance between cash cows ( ie; mature businesses) and stars, while allocating some resources to feed question marks ( that is, potential stars). Dogs are to be sold off.
Since the producer with the largest stable market share eventually has the lowest costs and greater profits, it is becoming vital to have a dominant share in as many products as possible.
Market share in slow growing market can be gained only by reducing the share of competitors, who are likely to fight back. .

If a market is growing rapidly, a company can gain share by securing most of the growth. Thus , while competitors grow, the company can grow even faster and emerge with a dominant share when growth eventually slows
Shortcomings of BCG matrix

BCG Matrix is based on the basic logic that relative market share is linked directly to cash generation and profitability. The firm with the largest cumulative volume gains the benefits of the experience of the experience curve first, so market share is critical. BCG Matrix has been criticized for over-simplification. Firstly it uses just two performance measures. Secondly, direct & inevitable relation between market share and profitability is questioned by some. Besides, relative market share & industry growth rates, there are wide range of other variables. This matrix takes no account of differentiation or focus strategies; it seems to relate best to cost based strategies where price competition is severe and experience curve effects are significant. Companies in focused niches can also have low operating costs.
There can be practical difficulties in deciding whats exactly high and low ( growth and Share) can mean in a particular situation. In many organizations besides cash, the innovative capacity is a critical resource, which consists of time & creative energy of the organizations managers & designers. Stars & Question marks are very demanding on the types of resources. Sometimes dogs are retained to complete product range and a credible presence in the market. They may also be held for defensive reason to keep competitor out. Synergy of the SBU combination? Behavioral implication creation / management of balanced portfolio?
Developments at GE
In1968, CEO of GE asked McKinsey to examine GEs corporate structure. At that time GE consisted of 200 profit centers and 145 departments arranged around 10 groups. Boundaries of these units had been defined around financial control aspects. McKinsey study recommended a formal strategic planning system, which will divide the company into natural business units, later renamed strategic business units ( or SBUs)
GE Nine-Cell Planning Grid
(also called GEMckinsey nine-block matrix)
This is an adaptation of BCG approach. In 1971, GE asked Mckinsey to evaluate strategic plans for its SBUs. GE had already considered using BCG matrix to decide on the fate of its SBUs but its top management had decided that they could not set priorities on the basis of just two performance measures. After studying the problem for 3 months, a Mckinsey team produced what cam to be known as nine-cell matrix. The nine-cell approach used approximately one dozen measures to screen for Industry attractiveness and another set of measures to screen for Business strength or competitive position, although the weights attached to those measures were not specified. This nine-cell grids thus makes an effort to overcome some of the limitations of BCG matrix.

For assessing industry attractiveness, it considers following factors
Market size and growth rate, industry profit margins, competitive intensity, seasonality & cyclical qualities, Barriers to entry, Economies of scale, technology, social, environmental, legal, political and human impacts.
For assessing business strength or competitive position, following factors were used
Relative market share, profit margin, customer & market knowledge ,ability to compete on price or quality, technological capability, image, competitive strengths and weaknesses, caliber of management
Process for deploying Nine-Cell grid analysis

First identify factors contributing to the industry attractiveness. Next assign weights to each attractiveness factor based on its perceived importance relative to other attractiveness factors. Favorable to unfavorable future conditions are forecasted and rated based on a 0 to 1 scale Obtain a weighted composite score for a businesss over all industry attractiveness
Industry Attractiveness Factors

Industry attractiveness factor Weight Ratings Score
Market size
Projected market growth Technological requirements Concentration ( a few large competitors) Political and regulatory factors
20
35 15 30 Must be nonrestricti ve 100
0.5
1.0 0.5 0
10.0
35.0 7.5 0
Total
52.5

A similar procedure is followed in assessing the Business strength Once the comprehensive score has been calculated, the scores are classified into categories such as high, medium or low in terms of projected attractiveness of the industry and projected strength of business. Then business units are classified into three categories: First : Invest / grow Second: Invest selectively and manage for earnings Third : Harvest or divest for resources
Businesses are classified as Invest / grow given same preference as Stars in BCG matrix. Harvest / divest category is managed like dogs in BCG matrix. Businesses classified in the selectivity/earnings category are treated either as cash cows or as question marks Each Business of the firm is represented by a Circle in the nine-cell grid. The Size ( area) of the circle represents the SIZE of The Industry & the shaded area indicate the market share of the firm in the industry.
Business Strength Factors

Business Strength factor Relative Market share Profit Margin Customer & Mkt knowledge Technological capability Image Total Weight 25 25 15 20 15 100 Ratings 0.5 0.8 0.7 0.6 0.75 Score 12.5 20.0 10.5 12.0 11.25 66.25
Industry ( product market) Attractiveness

High
Strong
Medium
Low
Invest /Grow
Invest/Grow
Grow selectively/ mange earning
Business Strength
Average
Invest/Grow
Grow selectively/ manage for earning
Grow Harvest/ selectively/ divest mange earning
Weak
Harvest / divest
Harvest / divest
GE / McKinsey Nine Cell Planning Grid
More sophisticated but more difficult to interpret
As the axes in the GE-Mckinsey matrix become more complex & multidimensional, the advantage of clarity of simple BCG matrix is somewhat lost Although it looks more sophisticated model, it is not easy to plot businesses on the matrix and to interpret what each position means.
Different perspectives
Strategic implications of Industry environments differ most strongly along a number of key dimensions:
Industry concentration State of maturity of the Industry Exposure to international competition
The Industry Life Cycle Model

Stages in the industry life cycle:
Arthur D. Little Life Cycle Approach

This approach to Portfolio Management takes into consideration the business environment in terms of stage of life cycle the business is currently in.
Arthur D. Little Life Cycle Approach
Life cycle stage Position Dominant
Embryonic
Growth
Mature
Aging
Strong
Favorable Tenable Weak
The Life Cycle-Competitive Strength Matrix

Stage of Market Life Cycle
Description of Dimensions Stage of Market Life Cycle: Competitive Strength: Overall subjective rating, based on a wide range of factors regarding the likelihood of gaining and maintaining a competitive advantage Introduction Growth Maturity Decline
High
Low
Directional Policy Matrix developed by Shell (UK) Here the two axes of the matrix are
Business Sector Prospects Companys competitive abilities
A number of factors such as market growth, market quality, market supply and so on , are used to rate the business sector prospects as unattractive , average, or attractive. Similarly, companys abilities are judged as weak, average, or strong The 3x3 matrix forms the basis for classify businesses / major product group.
Different Roles of the Corporate Parent

Portfolio Manager Restructurers Synergy Managers Parental developers
Strategic Analysisat Business level..

Business level Analysis : once business units are classified into invest, hold, divest and harvest categories, SWOT analysis is employed to identify grand strategy options at the business level A SWOT analysis summarises the key issues from the business environment (using Pestel & Industry analysis) & and the strategic capabilities of an organization that are most likely to impact on strategy development. ( strategic
capability is about the ability to provide products with features that are valued by customers, provide competitive advantage if it can do better than competitors)
Understanding What customers value or might value in future is important . This includes customers threshold requirements. It also include critical success factors those factors that customers particularly value and, therefore, where an organization must excel to outperform competition. What customer values will change with time. However, there may be opportunities to exploit core competencies in new markets or arenas
SWOT Analysis
SWOT analysis is grounded in the basic principle that strategy-making efforts must aim at producing a good fit between a companys resource, capability ( as reflected by its balance of resource strengths and weakness) and its external situation . SWOT analysis forces managers to better understand and respond to those environmental factors ( that may be either inside or outside the organization) have the greatest importance for the firms performance. These are strategic issues. Strategic issues rarely arrive on a top managers desk neatly labeled. Instead data from SWOT analysis identify new technologies, market trends, new competitors, and employee morale trends etc. They require interpretation and translation before they are labeled strategic.
SWOT Analysis Diagram

Numerous environmental opportunities
Critical internal weaknesses
Cell 3: Supports a turnaround-oriented / eliminate weakness strategy
Cell 1: Supports an aggressive strategy
Cell 4: Supports a defensive strategy
Cell 2: Supports a diversification / use current strength to build long term adv strategy
Substantial internal strengths
Major environmental threats
STRATEGIC CAPABILITY**
External environment influences an organizations Strategic development by creating both opportunities & threats. However, success of strategy is heavily dependent on the organization having or developing the strategic capability to perform at the level that is required for success. Strategic Capability is the adequacy and suitability of the resources and competences of an organisation for it to survive & prosper. Many of the issues of strategy development are concerned with changing strategic capability better to fit a changing environment 1990s adjustment to strategic capability through adoption of new technologies in mfg industries to increase labor productivity; in 2000s adoption of IT by service industry to stay in the business .
In fast moving ( hypercompetitive) world the only really enduring capability is the ability to change strategy as the basis of competition moves through different phases of the cycle of competition. Indeed stretching IT capabilities and hypercompetitive behavior have been the basis of dot.com companies.
The Roots of strategic Capability Strategic Capability is about providing products or services that are valued by customers or might be valued in the future. The ability to perform at the level required for success. It is underpinned by the resources and competencies of the organization. What customers value is the starting point for understanding strategic capability First are the threshold product features that all potential providers must be able to offer to stay in a particular market or segment. Even these are changing and becoming more demanding over time.
The second are the Critical Success Factors, which are the features that are particularly valued ( form the basis of selection ) by a group of customers and, therefore, where the organization must excel to outperform the competition. Since different Customer groups value different product features, organizations will need to compete on different bases, and through different resources & competencies. Supermarkets follow strategies which providelower prices and one-stop shopping through their resources (store location, scale , product range) and competencies ( knowledge of merchandising, skill of low cost sourcing & computerized supply chain systems)
Corner shop grocery store gains Competitive Advantage over supermarkets by concentrating on those customers whose CSFs are different aspects of service- like, personalized service, extended opening hours, informal credit, home deliveries etc. This strategy may be underpinned by unique resources ( such as shop location, the market knowledge of owner) and core competence ( the personal style and customer relationships sustained by the owner)
Key Success Factors

An industrys KSFs ( or CSFs) are those that most affect industry members ability to prosper in the market place. KSFs by their nature are important to all firms in that industry or segment of the industry. Determining the industrys KSF, given prevailing and anticipated industry and competitive conditions, is a toppriority analytical consideration A sound strategy incorporates efforts to be competent on all industry KSFs and to excel on at least one factor KSF for an industry at any point of time should not be more than 3-5 in numbers
Identifying KSFs Pre-requisites for success
What do customers Want?
How does the firm Survive competition? Analysis of competition What drives competition? What are the main dimension of competition? How intense is competition? How can we obtain superior competitive position?
Analysis of demand Who are our customers? What do they Want? What do they Value most?
Key Success Factors
Identifying KSF for Supermarkets

What do customer want? ( analysis of demand)
Low prices Convenient location Product range adapted to local customer preferences Freshness of produce Cleanliness, service and ambience
How does a firm survive competition (Analysis of competition)

Customer price sensitivity encourages vigorous price competition Excise of bargaining power an important influence on input cost Scale economies in operation and advertisement Markets localized & concentration high
Identifying KSFs for supermarkets

Key Success factors
Low cost operation requires :
Operational efficiency Scale-efficient stores Large aggregate purchases to maximize buying power Low wage costs
Differentiation requires
Large stores ( to allow wide range of products Convenient location Easy parking
Common types of KSFs

Technology related KSFs Scientific research expertise ( important in Pharmaceuticals, Hi-tech industries, Telecommunication industry etc) Technical capability to make production process innovation Product innovation capability Expertise in a given technology Manufacturing-related KSFs Low cost production efficiency ( achieve scale of economies, capture experience curve effects) Quality of manufacture ( fewer defects, less need for repairs) High utilization of fixed assets ( important in capital intensive industries / high fixed cost industries) Low cost Plant locations Ability to deliver products customized to buyer specifications ( flexibility in manufacturing system) Low cost product design and engineering capability( reduces manufacturing cost)

Access to adequate supply of skilled employees High labor productivity Distribution related KSFs A strong distribution network of wholesalers/ dealers Gaining ample space on the retailers shelves Low distribution cost Accurate filling of customer orders Short delivery times Having company owned outlets Integrated distribution information system Marketing related KSFs Courteous customer service Fast accurate technical assistance Breadth of product line and product selection Attractive styling or packaging Clever advertising Accurate filling of buyer orders ( few back orders or mistakes) Merchandising skills

Skills-related KSFs Superior workforce talent ( important in professional services like Accounting and investment banking) Quality control know how Design expertise ( important in fashion and apparel industry , often one of the keys to low cost manufacture) Expertise in a particular technology An ability to develop innovate products and product improvements Organizational Capability Superior Information System ( vitally important in airline, car rental, credit card, Hotel & financial sector industries) Ability to respond quickly to shifting market ( stream lined decision, short lead time to bring new products) Managerial experience Superior ability to deploy e-commerce technologies

Other types of KSFs Favorable image or reputation with buyers Covenient locations ( important in many retailing businesses) Overall low cost operations( not just in manufacturing) Access to financial capital Patent protection Pleasant, courteous employees in all customer contact position KSFs vary from industry to industry and even from time to time within the same industry as driving forces and competitive conditions change.
KSF Examples
In the real estate development industry, acquiring land and maintaining liquidity are the two key success factors. If every other factor concerning the business of the development company is just average, but the land is well located and the firm maintains adequate liquidity, the company will do well. Not that the developer shouldn't attempt to deliver a well-constructed product with good financing. He should. But nothing is a greater determinant of success than having, or not having, the right piece of land, and remaining in a liquid position.
Knowing the importance of land acquisition to his company's success, the Chairman of one of leading real estate developer instructed his managers, "Before you commit to the purchase of any piece of land, I want to walk on it."
KSF Examples
Beer/Brewing Industry Utilization of brewing capacity - to keep manufacturing costs low Developing a strong network of wholesale distributors to gain access to retail outlets Clever advertising - to induce beer drinkers to buy a particular brand
Resources , competencies Experience shows that resources and competencies tend to be easy to imitate in the medium term. Consequently, Competitive Advantage needs to be secured by continually shifting the ground of competition. So a core competence could be the process of innovation which requires the ability to link together many separate areas of knowledge such as brand development, marketing and financial services.
Has an Organization the resources and competencies to provide products / services that meet the customer requirements? Organization capability starts with resources : Available resources to an organization, from both within and those that can be accessed ( network of partners, contacts) , to support its strategies Threshold resources resources needed to stay in the business, otherwise unable to serve particular markets. Threshold standards rise with time. Unique resources to meet critical success factors of a particular segment and create competitive advantages. These are difficult to imitate. Inadequate resources Resources that do not adequately underpin the meeting of threshold product features. They may be adequate for other segments. Redundant resources these are no longer necessary or valued
Competence is created when resources are deployed into activities and into processes through which these activities are linked together. Usually, the key to good or poor performance is found here than in the resources per se. Although an organization will need to reach a threshold level of competence in all activities that it undertakes, only some of these activities are core competences. Core competences are those competences that underpin the organizations ability to outperform competitors by meeting the CSFs better than competitors.
Core Competencies might also provide basis on which strategies might be built to exploit opportunities in other markets where the same or similar critical success factors are valued. Core competencies might also be the basis for creating opportunities in new arenas where the same CSFs would be valued above those that currently prevail. In other words, to change the rules of the game in those new arenas. What customers value will change with time, so core competences will be eroded. However, there may be opportunities to exploit core competencies in new markets or new arenas.
Same as competitors or Easy to imitate
Better than competitors and Difficult to imitate Unique resources
Resources
Threshold resources
Competencies
Threshold Competencies
Core Competencies
Difference in performance between organizations in the same market is rarely explained by differences in their resource base since resource can usually be imitated or traded. Superior performance will be determined by the way in which resources are deployed to create competences in the organizations activities. For example, knowledge of an individual will not improve an organizations performance unless he is assigned ( or allowed) to work on particular tasks which exploits that knowledge, or more importantly, is able to share that knowledge with others who can build on it.
Performance is also affected by the process of linking separate areas of knowledge & activities together both inside and outside the organization. Although an organization will need to achieve a threshold level of competence in all of the activities & processes that support the product & service, only some will be core competence. Core competence are activities or processes that critically underpin an organizations competitive advantage. They create & sustain the ability to meet CSF of particular customer group better than other providers that are difficult to imitate.
Core competencies must fulfill the following criteria The competence must relate to an activity or process that fundamentally underpins the value in the product or services features as seen through the eyes of the customer The competence leads to levels of performance significantly better than competitors. ( Benchmarking may help in understanding performance) The competence must be robust i.e; difficult to imitate. Robustness will be greater where competences are embedded to the extent that managers themselves have difficulty in fully explaining what underpins success.
CSFs ( product features that are particularly valued by customers) like good services , reliable delivery are easy to understand. But core competences are about the activities that underpin the ability to meet these critical success factors, not the factors themselves. Core competence may be embedded deep in an organization at an operation level in the work routines of the organization. They are hidden to the extent that the managers themselves may not explicitly understand them.
How Resources and Capabilities Provide Competitive Advantage

Valuable Allow the firm to exploit opportunities or
Rare Possessed by few, if any, current and
potential competitors neutralize threats in its external environment
Costly to imitate When other firms cannot obtain them or

must obtain them at a much higher cost
Nonsubstitutable The firm is organized appropriately to obtain

the full benefits of the resources in order to realize a competitive advantage
Resources and Capabilities, Core Competencies, and Outcomes

Valuable Core Competencies Competitive Advantage
Rare
Costly to Imitate
Value Creation
Nonsubstitutable
Above Average Returns
Importance of Linkages
Value Chain Value System : The Value System is the set of inter-organizational links & relationships which are necessary to create a product or service.
Internal Analysis of the Firm

Before a firm can start tapping the opportunities provided by the external environment, it has to know its own capabilities, strengths and weaknesses. Internal appraisal has three distinct parts:
Assessment of the strengths & weaknesses of the firm , in different functional areas Appraisal of the status / health of the individual businesses of the firm Identification and assessment of the firms competitive advantage and core competence.
Internal analysis is also the starting point for developing the core competencies (and competitive advantages) required for survival and growth of the firm
SWOT Analysis Diagram

Numerous environmental opportunities
Critical internal weaknesses
Cell 3: Supports a turnaround-oriented / eliminate weakness strategy
Cell 1: Supports an aggressive strategy
Cell 4: Supports a defensive strategy
Cell 2: Supports a diversification / use current strength to build long term adv strategy
Substantial internal strengths
Major environmental threats
SWOT Analysis is a traditional approach that has been in use for decades to help in internal analysis. It offers a generalized effort to examine internal capabilities in light of external factors, most notably key opportunities and threats. Though still used by many, SWOT analysis has limitations linked to the rigor and depth of analysis and the risk of overlooking key considerations.
A SWOT analysis can overemphasize internal strengths and downplay external threats A SWOT analysis can overemphasize a single strength or element of strategy A strength is not necessarily a source of competitive advantage A SWOT analysis can be static and can risk ignoring changing circumstances
Two techniques have emerged that can help overcome some limitations of SWOT analysis by offering more comprehensive approach to identify & assess firms internal resources & capabilities in a more systematic , objective & measurable manner. Value Chain analysis Resource-based View (RBV) is based on the premise that firms build competitive advantage based on unique resources, skills, and capabilities they control or develop, which can become the basis for unique, sustainable competitive advantages that allow them to craft successful competitive strategies
Value Chain Analysis
Marketing and Sales
Inbound Logistics
Outbound Logistics
Primary Activities
Primary and Support Activitie s in the Value Chain
Support Activities
Firm Infrastructure Human Resource Management Technological Development Procurement
Operations
Service
Value Chain Analysis

A Business is seen as a chain of activities ( primary and support activities) that transforms inputs into outputs, that customers value. Value chain analysis analyzes to understand how a business creates customer value by examining the contributions of different activities within the business to the total value. Proponents of VCA believe it allows managers to better identify their firms competitive advantages by looking at the business as a process a chain of activities. Costs / resources incurred in each activity , identify activities or elements within that which differentiate the company, as well as where company has weakness vis-vis the competitors. Spot areas of improvement.
What is the Resource-based View of the Firm?

Firms differ in fundamental ways because each firm possesses a unique bundle of resources tangible and intangible assets and organizational capabilities to make use of those assets
Resource Based View (RBV) Three basic resources : Tangible Assets, Intangible Assets, and Organizational Capabilities.
RBV method of analyzing and identifying a firms strategic advantages based on examining its distinct combination of assets, skills & capabilities and intangibles.
Organizational capabilities are not specific inputs like tangible or intangible assets, rather they are the skills the ability and ways of combining assets, people, and processes that a company uses to transform inputs into outputs.
What makes a resource valuable?

1. Are critical to meet a customers need better than other alternatives 2. Are Scare few others, if any, possesses that resource or skill to the degree your firm has 3. Drive a key portion of overall profits, in a manner controlled by your firm 4. Are relatively more durable or sustainable over time
Wal- Marts Resource Based Competitive Advantage

Resources Industry Avg cost WalMart cost ( % of sale) 0.3 ( store rental space)
Tangible
Store Locations
Intangible
Brand reputation Employee Loyalty
1.2 1.1 0.7
( advertising expenses) (payroll expenses) ( Shrinkage expense)
Capabilities
Inbound Logistic s
1.2 ( distribution expenses) Total Advantage = 4.5%
Internal Analysis: Making Meaningful Comparisons

1. Comparison with past performance
2. Stages of industry evolution
Perspectives to use
4. Comparison with Key Success Factors in industry
3. Benchmarking comparison with competitors
Benchmarking
Benchmarking has revolutionized the culture of business world over Benchmarking is based on premise that in all processes including procurement, production, sales and services, one or other organization has achieved world class competitiveness. Bmarking is a process for improving performance by constantly, identifying understanding and adapting best practices and processes followed inside and outside the company and implementing these adapted practices. Emphasis is on exploiting best practices that lead to best performance, and not merely measuring best performance. It is a continuous process of learning, feedback, reflection and analysis of what works( or does not work) and why
What is Benchmarking?
What is Benchmarking? "Benchmarking is a tool to help you improve your business processes. Any business process can be benchmarked." "Benchmarking is the process of identifying, understanding, and adapting outstanding practices from organizations anywhere in the world to help your organization improve its performance." "Benchmarking is a highly respected practice in the business world. It is an activity that looks outward to find best practice and high performance and then measures actual business operations against those goals."
A Company can compare its total organization or part of it with others and adopt one or more of the following types of benchmarking Strategic Benchmarking studying strategies & long term approaches that helped the best practice companies to succeed. Examine the core competencies, product development and innovation strategies of such companies Competitive or performance benchmarking compare their position with respect to the performance characteristics of key products & services , involving companies from SAME SECTOR Process benchmarking to improve specific key processes and operations with the help of best practices organizations involved in similar work or offering services Functional ( generic) Bmarking- improve their process by comparing with companies from DIFFERENT business sectors involved in similar functions or work processes. ( eg Safety practices) Internal Benchmarking against own units, easy to get data External bmarking help of high end performers/ successful Cos International bmarking
Many business processes are common throughout industry. For example; NASA has the same fundamental Human Resources requirements for hiring and developing employees as does American Express. British Telecom has the same Customer Satisfaction Survey process as Brooklyn Union Gas. These processes, albeit from different industries, are all common and can be benchmarked very effectively. It's called "getting out of the box". By early 1990s, many Fortune 500 were implementing benchmarking. Benchmarking also became a key criterion for Malcolm Balridge Quality award. Xerox, ford, GE, AT&T, Motorola, citicorp early users
Capabilities refer to a companys skills at coordinating its resources and putting them to productive use. These skills reside in an organizations rules, procedures , styles or manner through which it makes decisions and manage internal processes. More generally, Capabilities are result of a firms organizational structure, processes, and control systems. Kind of behaviors that are rewarded, process of decision making, cultural norms and values Capabilities are intangible. They reside not so much in individuals, as in the way individuals interact, cooperate, and make decisions within the context of an organization. A company may have firm specific and valuable resources, but unless it has the capability to use those resources effectively, it may not create distinctive competency.
The Roots of Competitive Advantage
Innovation
The act of creating new products or processes
Product innovation
Creates products that customers perceive as more valuable, increasing the companys pricing options
Process innovation
Creates value by lowering production costs
Perhaps the most important building block of competitive advantage
Responsiveness to Customers
Doing a better job than competitors of identifying and satisfying customers needs
Superior quality and innovation are integral to superior responsiveness to customers Customizing goods and services to the unique demands of individual customers or customer groups
Responsiveness to Customers (contd)

Sources of enhanced customer responsiveness
Customer response time, design, service, after-sales service and support
Differentiates a company/its products; leads to brand loyalty and premium pricing
The Generic Building Blocks of Competitive Advantage
How Resources and Capabilities Provide Competitive Advantage

Valuable Allow the firm to exploit opportunities or
Rare Possessed by few, if any, current and
potential competitors neutralize threats in its external environment
Costly to imitate When other firms cannot obtain them or

must obtain them at a much higher cost
Nonsubstitutable The firm is organized appropriately to obtain

the full benefits of the resources in order to realize a competitive advantage
Resources and Capabilities, Core Competencies, and Outcomes

Valuable Core Competencies Competitive Advantage
Rare
Costly to Imitate
Value Creation
Nonsubstitutable
Above Average Returns
Aspects to be covered in StrengthWeakness analysis

The strengths and weaknesses of the firm have to be assessed in each of the main functions / areas
Marketing Overall growth of the market Market standing / market share Innovation in marketing Customer satisfaction level Customer service level New product capability Pricing / margins Channel position / distribution network Marketing communication on the whole advertising, sales promotion, personal selling Market Research Capability Marketing costs , Marketing organisation Products mix and product lines
Product-wise position with respect to

Profitability Stage of product life cycle Product design / technological strength Differentiation Positioning Brand power
Finance
Assets, liquidity, leverage, gearing, cash flow, cost of capital, profitability, quality of financial management, tax planning
Manufacturing / Operations
Capacity / scale of production, locational advantages, post production facilities, Capacity utilization, cost of production, break even position, productivity, inventory management, flexibilty in manufacturing, automation, availability of trained skills.
R&D
Nature and depth of R&D capability Resource allocated to R&D Quality, expertise and experience of R&D personnel Speed of R&D, capability of engineering products based on R&D Record of patents generated Comparison of R&D investment vs new product launched
Human Resources
Morale & motivation of employees, personnel turnover, quality / expertise of personnel
Corporate / overall resources

Company image , size, quality of top management, corporate performance, innovation record, organization culture , organizational structure, use of information technology, CEO, Board of directors, Overall adequacy of resources etc
Strategic Development Processes in Organizations** Strategic Planning Systems**: Often Strategy development is equated with Strategic planning system. This is manifestation of Design approach to managing strategy. This takes form of highly systemized step by step, chronological procedures involving many different parts of the organization. Formalized Planning provide a structured means of analysis and thinking about complex strategic problems, providing opportunity to managers to question and challenge the received wisdom they take for granted.
It encourages a longer term view of strategy than might otherwise occur. Planning horizons vary . In FMCG, 3-5 years may be appropriate. In companies, which have to take very longterm views on capital investment, such as oil industry, planning horizons can be as long as 14 years ( in Exxon) or 20 years ( in Shell). It can be a useful means of co-ordination and help communicate intended strategy and create ownership of the strategy by involving large number of people in development process. Planning systems provide a sense of security and feel of exercising control over the destiny of the organization.
Viewed through Experience lens, Planning may help in drawing together experiences of people and ensure effective communication. Viewed from Ideas lens, Planning systems provide a selection mechanism by which new ideas can be evaluated. New ideas and innovations compete or prove their worth. There are some pit falls also in the formalization of strategic Planning process:
Line managers, due to their pre-occupation with day to day work, may actually cede responsibility for strategic issues to specialist. This may result in strategic planning becoming an intellectual exercise removed from the reality of operations.
The process of Strategic planning may be so cumbersome that individuals or groups in the firm might contribute to only part of it not understand the whole. Planners may overlook the cultural & political dimensions of the organization , and also importance of experiences of those in the organization. Very formal system of planning, especially with tight mechanism of control, can stifle ideas and have dampening effect on innovative capacity. Planning can become obsessed with search for a definitively right strategy.
Logical incrementalism**: In a study of major multinational businesses, Quinn concluded that the strategic management process could be best described as logical incrementalism. Managers have a view of where they want the organization to be in years to come and try to move towards this position incrementally. They do this by attempting to ensure the success & development of a strong , secure but flexible core business while using the experience gained to develop business and perhaps experiment with side bets. Encourage ideas to emerge from lower levels as well.
The Learning Organization : The concept of the learning organization, and strategy development as a learning process, became popularized in the 1990s . In many respects it corresponds to the aspects of logical incrementalism, especially the argument that the uncertainty & complexity of the world can not be understood purely analytically.
The Learning organization is capable of continual regeneration from variety of knowledge, experience and skills within organization which encourages questioning and challenge around a shared purpose.
Characteristics of the experience and ideas lens more closely match those of learning organization. Experimentation is the norm. Informality and network of working relationships ( rather than hierarchies) help the process. Organizations can be seen as social networks. Political process of bargaining and negotiation is inherent , so conflicts and disagreements will occur due to diversity & variety in the organization. This should not be seen as negative in the process of strategy development.
Strategic Leadership**
Strategic Development may also be strongly associated with an individual. A strategic Leader is an individual upon whom strategy development and change are seen to be dependent. Others in the organization willingly giving him the position. In some organization the individual may be owner or founder, often in case of small businesses. In some cases it could be an individual chief executive who has turned around a business in difficult time. The design lens suggests the individual carries out the analysis & evaluation. These could be using his own logic or using techniques associated with strategic planning & analysis.
The experience lens suggests that strategy advanced by individual is formed on basis of the individuals experience, perhaps within the organization or perhaps from some other organization where he previously worked. The strategy advanced by a chief executive new to an organization may be based on a successful strategy followed in previous organization. The strategy of an organization may be more symbolically with an individual, for example founder in a family controlled business.
Viewed from Ideas lens, Evolutionary theorists emphasize the way in which the strategies develop from competing ideas, so tend to diminish the role of so called strategic leader. However, a strategic leader can provide the vision with sufficient clarity within which the discretion of others in the organization can be exercised.
Organizational Politics**: The political view of strategy development is that strategies develop as the outcome of process of bargaining and negotiation among powerful internal or external interest groups ( or stakeholders). This is the world of boardroom battles portrayed in films & TV dramas. The design lens sees it as inevitable but negative influence on strategy development.
Experience lens helps to explain the likelihood of political activity. People in organizations are rooted in their experience & therefore in approaching major problems, seek to be protective of their views preserving or enhancing the power of their positions. Political activity may then seen as one explanation of incremental, adaptive strategy development. Very significant change to strategy may be very threatening to the power of certain managers. The experience lens also suggests that the analytical processes that go into planning may not be entirely based on objective and neutral facts. Powerful individuals and groups may also strongly influence the identification of key issues and indeed the strategies eventually selected. Planning thus has a political dimension. Political activity has to be taken seriously as an influence on strategy development.
The ideas lens also suggests that organizational politics can be seen as manifestation of the sort of conflict that results from innovation and new ideas. The variety and diversity that exists in organizations takes form in new ideas supported or opposed by different champions.
Imposed Strategy : Imposition of strategy by agencies or forces external to the organization. Government may dictate a particular direction eg: in public sector or when it chooses to privatise a PSU. MNCs are subjected to regulations in different countries. An operating business within a multidivisional organization might see overall corporate strategic direction as an imposition on it. It might be argued that imposed strategy is a way of overcoming the sort of strategic inertia that had arisen as a result of strategies developing incrementally based on history, experience or compromises resulting from bargaining & negotiations of powerful groups.
Multiple Processes of Strategy Development**:

First, there is no one right way. The way in which strategies develop in a fast changing environment is not likely to be same in an environment where little changes. Second, it is very likely that the way the strategies are developed will be seen differently by different people. Senior executives tend to see strategies more in terms of design, where as middle management tend to see them as a result of cultural political processes. Managers who work for government organizations tend to see strategy as more imposed than those in the private sector. There will be multiple processes at work. Even in a predominantly Planning system, some level of political activity and certain elements of imposed strategy is likely to be there.
Implications for Strategy Development Intended and realized Strategies Strategic Drift Strategic Management in Uncertain and complex conditions
Strategic Drift Historical studies of organizations have shown prevalence of processes leading to emergent strategy. There are long periods of relative continuity during which established strategy remains largely unchanged or changes incrementally, there are also periods of flux in which strategies change but in no very clear direction. Transformational change, when there is a fundamental change in strategic direction, does take place but is infrequent. The above pattern is known as punctuated equilibrium.
There are strong forces at work which are likely to push organizations towards this pattern. Incremental strategic change is a natural outcome of the influence of experience. The influence of the paradigm and the way we do things around here is likely to mean that faced with changes in environment, managers try to look for solutions with which they are familiar and therefore minimize the extent to which they face ambiguity and uncertainty. There is a danger that incremental strategic changes are not enough to keep pace with environmental changes, and more fundamental or transformational change is needed. Indeed, often Transformational change tends to occur at times when performance has declined significantly. There is a danger that Organizations under such pressure may be acting reactively to the environment.
Some times strategic action required is outside the scope of current paradigm and existing culture, the core assumptions of managers. Managers are more likely to attempt solutions by searching for solutions within the existing paradigm & as last resort look for a new one as shown in exhibit 2.12 Strategic drift occurs when over a period, the organizations strategy gradually moves away from relevance, with respect to the forces in its environment. Even most successful companies may drift in this way. Indeed, there is a tendency which has become known as the Icarus Paradox for businesses to become victims of the very success of their past.
See Exhibit 2.13 for phases of Strategic drift. Organizations that seek to innovate could also sometimes face problems by developing products or services much ahead of its environment ( market demand) All these goes to emphasize the delicate balance required while developing strategy. Internal cultural pressures tend to constrain strategy development and at the same tome the organizations need to cope with environmental forces.
Strategic Management in Uncertain & complex conditions Different organizations face environments which differ in form & complexity. Since one of the main problems of strategic management is coping with uncertainty , the above aspect is very important. In simple / static conditions, the environment is easy to understand & does not undergo significant change. Raw material suppliers & some mass manufacturing companies are examples. Technical processes may be fairly simple and competition & markets change very little. If environmental changes does occur, analysing past historical patterns / forecasting helps predict them . In situations of relatively low complexity, it may also be possible to identify some predictors of environmental influences. For example birth rates is a good indicator to determine provision for schooling. So in simple / static conditions strategy development in design terms may make sense.
In Dynamic conditions, managers need to consider the environment of future, not just the past. They may employ structured ways of making sense of the future , such as scenario planning, or they may rely more on encouraging active sensing of environmental changes low down in the organization and the sort of diversity and variety seen as through the ideas lens. The emphasis should be on creating organizational conditions which encourage individuals & groups to be intuitive and challenging in their thinking about possible futures through the sort of learning organisation.
Organizations in Complex situations face an environment difficult to comprehend. They may face dynamic conditions too, and therefore combination of complexity & uncertainty. A multinational firm or a government authority with many services, may also be in a complex condition because of diversity, while different operating companies within it face varying degrees of complexity & dynamism Difficult to handle complexity by relying only on analysis & planning. So organizational design is important. Decentralization with different parts of the organization made responsible for different aspects & given the resources and authority to handle their own parts.
Organizations have to learn to cope with complexity in different ways. Top management has to recognize that specialist down the line know more about the environment know more than they do. This strategic competence based on experience may provide competitive advantage . Taken-for-granted has to be challenged
ENVIRONMENTAL CONDITIONS
Strategy development in environmental contexts
Simple Static
Complex
Decentralization of Organization Historical Analysis Forecasting
Experience & Learning
Dynamic
Scenario Planning
Formulation of long term strategies Grand Strategies provide basic directions or options available for a company for strategic actions. Grand Strategies are long term strategies to achieve companys long term objectives ( also called master strategies or business
strategies)
They can be broadly classified into 3 categories

stability strategy / Consolidation Growth strategies Retrenchment strategies Or a combination of the above
Ansoffs Product Market Matrix for Growth
Present Product Present Market
New Products
Market Penetration
Product Development
New Markets
Market development
Diversification
Grand Strategies..
Concentration Market development Product development Horizontal Integration acquiring similar businesses, same stage of Production Marketing chain Vertical Integration forward , backward Tapered Integration Quasi Integration Diversification
Concentric diversification- synergy Conglomerate diversification
JVs Strategic Alliances Consortia Turnaround Divestures Liquidation
Quasi Integration Quasi integration refers to the establishment of a relationship / alliance between vertically related businesses (partners). some of the common forms of quasi integration are:
Minority equity investment Loan or loan guarantees Pre-purchase credits Exclusive dealing arrangement Specialized logistic facilities Co-operative R&D
Benefits of Quasi Integration?
Turnaround Strategy
A turnaround strategy is done through
Cost reduction
Asset reduction
Behavioral considerations affecting strategic choice Strategic analysis rarely identifies one specific superior strategy. Different alternatives with different or similar looking payoffs emerge. Under such circumstances, various factors influence the choice. Some of the factors:
Role of past strategies : inclination towards continuity of past strategy. Thats why Firms sometimes replace key executives when performance of the firm is in adequate over extended period. On the other hand, more successful the strategy becomes, harder is to replace it even under changed circumstances Perception of KSFs & Distinctive competencies
Attitude towards Risk: Range & diversity of strategic choices vary with the risk taking ability of organizations. Another factor influencing managerial propensity towards risk is industry volatility. In highly volatile industries, top managers absorb, and operate with, greater amount of risk than their counterparts in other industries. Firms in early stages of product / market evolution has to cope with higher risks Competitive Reaction: Capacity of competitor to react has to be considered, especially if choosing aggressive strategy. Probable impact of such reaction on the chosen strategy Degree of Firms external dependence on suppliers, customers, Government, competitors, unions etc Values & preferences and actual control of owners / senior managers.

Analyzing The Business Environment

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Analyzing The Business Environment

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Analyzing the Business Environment (The Strategic Position**)

Prof Ashish K Mitra

Analysis is the critical starting point of strategic thinking

STRATEGIC MANAGEMENT PROCESS Company Mission ^

v External Environment Operating Industry Remote ^

Company Profile (Resources & capabilities) ^

Institutionalization of Strategy Strategic Control & continuous improvement

Analyzing Business Environment

Layers of the External Business Environment**

The Organization Markets Organizational Field

The Firms External Environment

Remote Environment Political Economical Social Technological Ecological Legal

Competitors Creditors Customers Labor Suppliers

ELEMENTS OF AN EXTERNAL ANALYSIS

Macro external Environment

An Organization s External Environment

Micro external environment Industry-Competitors

Bargaining Power of Suppliers Bargaining Power of Buyers

Potential Entrants Social

Political environment Political forces influence

Macro environmental influences-the PESTEL Framework

Industry Level Analysis

Computer & peripherals

Supply Demand Analysis

When using this framework bear in mind

Forces Driving Industry Competition

Porters Five Forces Model

Bargaining Power of Suppliers Suppliers

Bargaining Power of Buyers Buyers

Rivalry Among Existing Firms

Threat of Substitute Products or Services

industry will be dissipated through head-to-head competition. Rivalry

Forces Driving Industry Competition

Evaluating the Five Forces

Current Rivalry among Existing Firms

Threat of new entrants

Some of the major entry barriers are (next page):

Threat of new Entrants

..role of entry barriers

Threat of new entrantsentry barriers

Threat of new entrants

Evaluating the Five Forces

Bargaining power of buyers ( customers)

Bargaining power of buyers ( customers).

Bargaining power of buyers ( customers).

Evaluating the Five Forces

Bargaining Power of Buyers

The bargaining power of suppliers

Evaluating the Five Forces

Bargaining Power of Suppliers

The threat of substitute products

The threat of substitute products.

Concept of Value Net

Concept of Value Net..

The Value Net

Concept of Value Net..

Alliances are becoming important with complementors in several cases

Examples concept of complementarity

Re-cap of analyzing business environment

Strategic Groups Within Industries

Strategic Groups in the Pharmaceutical Industry

The Industry Life Cycle Model

changes in the industry life cycle. (several shakeouts in