CHAPTER 2 - STRATEGIC ANALYSIS : EXTERNAL ENVIRONMENT

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

• Environmental scanning is a natural and continuous activity for every business and
some do it on an informal basis, while others have a formal structure to collect
meaningful information.
International Politico-legal,
Socio-cultural, Economic,
Decomgrpahic, Ecological
and Teachnological
Environment

Domestic Politico-legal,
Socio-cultural, Economic,
Decomgrpahic, Ecological
and Teachnological
Environment

Industry shaping
competitive force

Firm's
stakeholders

Firm's Internal
Environment
• The two important situational considerations are:
1. Industry and competitive conditions, and
2. an organization’s own capabilities, resources, internal strengths, weaknesses, and
market position.
 LIMITATIONS OF STRATEGIC ANALYSIS
• Strategic analysis is an ongoing process with drawbacks. Two key limitations include:
1. It generates numerous innovative options but does not specify which one to choose.
2. It can be time-consuming, which can affect overall organizational efficiency.
 Risk

• In strategic analysis, the principle of maintaining balance is important.

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

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

• Competitive forces can be moderate in one industry and fierce, even cutthroat, in
another.

• In some industries competition focuses on who has the best price, while in others
competition is centered on quality and reliability.

• In some industries competition focuses on who has the best product features and
performance or quick service and convenience.
• In various industries, successful companies may face challenges in less
appealing sectors, whereas less successful companies might thrive in
attractive sectors.

• Industry attractiveness is influenced by factors such as market size,

growth rate, competition, and regulatory environment.

• A company's strategy and competitive advantage play a vital role in

achieving success. It is essential to comprehend industry dynamics and
assess your company's position to ensure long-term profitability.
STRATEGY AND BUSINESS ENVIRONMENT
 • The business environment is highly dynamic and continuously evolving.

• Strategists provide an interface between the organizational abilities and the

opportunities and challenges it must deal within the larger environment.

The term "business environment" refers to all external factors, influences, or

situations that in some way affect business decisions, plans, and operations.
Organizational success is determined by its business environment, and even
more from its relationship with it.
• There is a close and continuous interaction between a business
and its environment.
 This interaction helps in strengthening the business firm and using its
resources more effectively. It helps the business in the following ways:

• Determine opportunities and threats : Interaction between the business

and its environment helps to find new needs and wants of the consumers,
changes in laws and tells what new products the competitors are bringing
in the market to attract consumers.

• Give direction for growth :Interaction with the environment enables the
business to identify the areas for growth and expansion of their activities.
Once the business is aware and understands the changes happening
around, it can plan and strategize to have successful business.
• Image Building : Environmental understanding helps the business
organizations to improve their image by showing their sensitivity to the
environment in which they operate. . Understanding the needs of the
environment help to showcase that the business is aware and responsive
to the needs. It creates a positive image and helps it to prosper and win
over the competitors.

• Meeting Competition : It helps the businesses to analyze the

competitors’ strategies and formulate their own strategies accordingly. The
idea is to flourish and beat competition for its products and services.

• Continuous Learning : The managers are motivated to continuously

update their knowledge, understanding and skills to meet the predicted
changes in the realm of business.
To flourish, a business must be aware of, assess, and respond to the many opportunities and
threats present in its environment. In order to succeed, the business must not only be aware
of the numerous aspects of its surroundings but also be able to handle and adapt to them.
The business must continuously evaluate its environment and modify its operations in order
to thrive and expand.
 Strategic decisions are important in business management and vital for
success and survival.

Two key factors for success are:

1. Top management's role.

2. How strategic decisions are formulated.

 Micro and Macro Environment

• Business strategists should always be adequately informed on

developments occurring in their company, its industry, and within micro
and macro environment of business.

• The external environment can be categorized in two major types as follows:

1. Micro environment
2. Macro environment
 MICRO-ENVIRONMENT
• Micro-environment is related to small area or immediate periphery of an
organization.
• It influences an organization regularly and directly.
• Micro environment consists of suppliers, consumers, marketing
intermediaries, competitors, etc.
• Within the firm's micro environment, it's important to consider:

1. Employees: Their characteristics and organizational structure.

2. Customer base: Understanding and relying on existing customers.
3. Finance: Exploring ways to raise funds for the firm.
4. Suppliers: Identifying suppliers and developing strong links with them.
5. Local community: Engaging with and operating within the local
community.
6. Competition: Evaluating direct competitors and their performance
relative to the firm.
 MACRO-ENVIRONMENT
• The macro environment is the portion of the outside world that
significantly affects how an organization operates but is typically
much beyond its direct control and influence.

• Macro environment has broader dimensions as it consists of

economic, socio- cultural, technological, political and legal
factors.
 Elements of Macro Environment

1. Demographic Environment
2. Socio-Cultural Environment
3. Economic Environment
4. Political-Legal Environment
5. Technological Environment
 Political-Legal ENVIRONMENT
• The political-legal environment considers factors such as political stability, law
enforcement, government intervention in the economy, and the effectiveness of
government agencies. It also includes the level of political development, the
politicization of economic issues, political morality, and the ideology of the ruling party.
These elements impact how businesses operate and make decisions.

• Business is highly guided and controlled by government policies.

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

• Businesses prefer to operate in a country where there is a sound legal

system.

• Businesses must have a good working knowledge of the major laws

protecting consumers, competitions and organizations. Businesses must
understand the relevant laws relating to companies, competition,
intellectual property, foreign exchange, labour and so on.
 Economic ENVIRONMENT
• Economic conditions have a direct bearing over the business strategies.

• It encompasses conditions in the markets for resources that have an effect on the
supply of inputs and outputs of the business, their costs, and the dependability, quality,
and availability.

• Economic environment determines the strength and size of the market. The purchasing
power in an economy depends on current income, prices, savings, circulation of money,
debt and credit availability.
• Income distribution pattern determine the business possibilities. The important
point to consider is to find out the effect of economic prospect, growth and inflation
on the operations of the business.

Higher interest rates are detrimental for the businesses with high
debt. In the real estate market, they reduce the capability of the
prospective buyers to avail loan and pay instalments, thus lower
the demand.
 Socio-Cultural ENVIRONMENT
• Socio-cultural environment consists of factors related to human
relationships and the impact of social attitudes and cultural values.

• The beliefs, values and norms of a society determine how individuals and
organizations should be interrelated. It is difficult for a business to change
these core values, which becomes a determinant of its functioning.

• This means, that businesses have to adjust to social norms and beliefs to
operate successfully.
 Technological ENVIRONMENT

• Technology has changed the way people communicate and do things.

• Technology and business are linked and are interdependent on one another.
Businesses help society access the outcomes of technological research and
development, raising everyone's standard of living.
• Technology has impacted on how businesses are conducted. With use
of technology, many organizations are able to reduce paperwork,
schedule payments more efficiently, are able to coordinate inventories
efficiently and effectively.

Changes in technology have an effect on how a business runs its

operations. The technological advancements might require a business to
drastically alter its operational, production and marketing strategies.
• Technology can act as opportunity, when a business
effectively adopts technological innovations to their strategic
advantage.

• However, at the same time technology can act as a threat too.

Artificial intelligence, machine learning, robotic process
automation is some of the new technological tools that
businesses are adopting and can act as both opportunity and
threat to a business.
 Demographic ENVIRONMENT
• Demographics are the characteristics of a population that have been
classified and explained according to certain criteria, such age, gender, and
income

• Demographical analysis considers factors such as race, age, income,

education, possession of assets, house ownership, job position, region, and
the degree of education.
 PESTLE– A tool to Analyze Macro Environment

• The term PESTLE is often used to describe a framework for analysis of

macro environmental factors.

• Political, economic, social, and technological (PEST) analysis was the name
given to the framework in the past; however, later, the framework has
been expanded to include environmental and legal factors as well.

P- political
E- economic
S- socio-cultural
T- technological
L- legal
E- environmental
Case Study: Starbucks – PESTLE Analysis
[Link]: Trade policies, coffee bean sourcing regulations affect supply chain.
[Link]: Inflation and fluctuating coffee prices impact profitability.
[Link]: Health-conscious trends push demand for organic and sustainable coffee.
[Link]: Mobile ordering and AI-driven personalization enhance customer
experience.
[Link]: Labor laws and tax policies influence global operations.
[Link]: Sustainability initiatives (recyclable cups, ethical sourcing)
strengthen brand image.
 The Key Factors

Political factors are how and to what extent the government intervenes in the
economy and the activities of business firms.
Economic factors have major impacts on how businesses operate and take decisions.
For example, interest rates affect a firm's cost of capital and therefore to what extent a
business grows and expands.
Social factors affect the demand for a company's products and how that company
operates.
Technological factors can determine barriers to entry, minimum efficient production
level and influence outsourcing decisions.
Legal factors affect how a company operates, its costs, and the demand for its products,
ease of business.
Environmental factors affect industries such as tourism, farming, and insurance.
 GLOBALIZATION
Globalization enables a business to enter new markets in search of greater
earnings and less expensive resources.
• Expanding enables a business to achieve greater economies of scale and
extend the lifespan of its products.
• A business can approach Globalization systemically with the aid of
international strategy planning
• One method for an organization to identify opportunities and threats in
global markets is by scanning the external environment.
 Case Study: McDonald’s – Globalization Strategy
Background: McDonald’s expanded from a U.S. fast-food chain to a global brand with over 100
countries in its footprint.
Globalization Strategy:
• Standardization: Core menu (Big Mac, Fries) ensures brand consistency.
• Localization: Adapts to local tastes (McAloo Tikki in India, Teriyaki Burger in Japan).
• Supply Chain Efficiency: Uses global suppliers while sourcing locally to reduce costs.
• Franchise Model: Rapid expansion through franchising ensures scalability.
 Characteristics of a global business(CCC)

• To be specific, a global business has three characteristics:

• It is a conglomerate of multiple units( number of different and distinct

parts) (located in different parts of the globe) but all linked by common
ownership.

• Multiple units draw on a common pool of resources, such as money,

credit, information, patents, trade names and control systems.

• The units respond to some common strategy. Besides, its managers and
shareholders are also based in different nations.
 There are several reasons why companies go global. These are
explained as follows:
• The first and foremost reason is the need to grow. It is basic need of every
organization.
• There is rapid shrinking of time and distance across the globe, because of
faster communication, speedier transportation, growing financial flow of
funds and rapid technological changes.
• Other reasons such as need for reliable or cheaper source of raw-
materials, cheap labour, etc
• Companies often establish overseas plants to lower transportation costs. Producing near
the market can be more cost-effective by reducing transportation time and expenses.
• Domestic markets may not suffice anymore due to increased global competition. Some
international markets may have different competitive landscapes.
 International Environment

Analyzing the international environment is crucial for organizations to

identify global market opportunities and assess the feasibility of capitalizing
on them.

There are three levels of international environmental analysis:

1. Multinational: Identifying, anticipating, and monitoring key global
environmental factors on a large scale.
2. Regional: Conducting a detailed evaluation of critical factors within a
specific geographical area.
3. Country: Delving deeper into important environmental factors such as
economic, legal, political, and cultural dimensions for effective planning and
success.
 UNDERSTANDING PRODUCT AND INDUSTRY

• Businesses sell products. A product can be either a good or a service.

• It might be physical good or a service, an experience.

Business products have certain characteristics as follows:

• Products are either tangible or intangible.

• Product has a price. Businesses determine the cost of their products and
charge a price for them. In the present competitive world price is often
given by the market and businesses have to work on costs to maintain
profitability.
• Products have certain features that deliver satisfaction. A product
feature is a component of a product that satisfies a consumer need.
Products should be able to provide value satisfaction to the customers for
whom they are meant.

• Product is pivotal for business. The product is at the center of business

around which all strategic activities revolve. The product enables
production, quality, sales, marketing, logistics and other business
processes.

• A product has a useful life. Every product has a usable life after which it
must be replaced, as well as a life cycle after which it is to be reinvented
or may cease to exist.
 Product Life Cycle
• PLC is an S-shaped curve which exhibits the relationship of sales with respect of time
for a product that passes through the four successive stages of introduction, growth,
maturity and decline.
• If businesses are substituted for product, the concept of PLC could work just as well.
 STAGE 1 OF PLC

First stage of PLC is the introduction stage with slow sales growth, in which
competition is almost negligible, prices are relatively high, and markets are
limited. The growth in sales is at a lower rate because of lack of awareness
on the part of customers.
 STAGE 2 OF PLC
Second phase of PLC is growth stage with rapid market acceptance. In the growth stage,
the demand expands rapidly, prices fall, competition increases, and market expands. The
customer has knowledge about the product and shows interest in purchasing it.

STAGE 3 OF PLC
Third phase of PLC is maturity stage where there is slowdown in growth rate. In this
stage, the competition gets tough, and market gets stablized. Profit comes down
because of stiff competition. At this stage, organizations have to work for maintaining
stability.
 STAGE 4 OF PLC
Fourth stage of PLC is decline with sharp downward drift in sales. The sales and profits
fall down sharply due to some new product replaces the existing product. So, a
combination of strategies can be implemented to stay in the market either by
diversification or retrenchment.
 Case Study: Apple iPhone – Product Life Cycle
[Link]: Launched in 2007, the iPhone revolutionized smartphones with touchscreens
and an App Store.
[Link]: Sales surged with new features (Face ID, better cameras), expanding Apple’s market
dominance.
[Link]: Market saturation led to slower growth; Apple introduced premium models (Pro,
Max) and services (iCloud, Apple Pay).
[Link] (Avoided): Instead of decline, Apple sustains demand with yearly upgrades, trade-in
programs, and ecosystem integration (Mac, iPad, Watch).
Outcome: Apple extends the maturity stage through innovation and brand loyalty, preventing
product decline.
• The main advantage of PLC approach is that it can be used to diagnose a
portfolio of products (or businesses) in order to establish the stage at
which each of them exists.

• Expanding can be a good option for businesses in early and growth stages.
For mature businesses, they can use their profits to invest in other ventures
that require resources.

• A combination of strategies like selective harvesting, retrenchment, etc.

may be adopted for declining businesses. In this way, a balanced portfolio
of businesses may be built up by exercising a strategic choice based on the
PLC concept.
 Value Chain Analysis

• Understanding value chain of an organization is critical for evaluating how

much value it generates.

• Value chain analysis is a method used by strategists to break down each

process that their business employs. This analysis could be used to improve
the sequence of operations, enhancing efficiency and creating a
competitive advantage.
• Value chain analysis was originally introduced as an accounting analysis
to shed light on the ‘value added’ of separate steps in complex
manufacturing processes, in order to determine where cost
improvements could be made and/or value creation improved.
 Primary activities
The primary activities of the organization are grouped into five main areas: inbound logistics, operations,
outbound logistics, marketing and sales, and service.

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

♦ Procurement: This refers to the processes for acquiring the various resource inputs to the
primary activities (not to the resources themselves). As such, it occurs in many parts of the
organization.

• Technology development: All value activities have a ‘technology’, even if it is simply know-
how. The key technologies may be concerned directly with the product (e.g. R&D product
design) or with processes (e.g. process development) or with a particular resource (e.g. raw
materials improvements).

♦ Human resource management: This is a particularly important area which transcends all
primary activities. It is concerned with those activities involved in recruiting, managing,
training, developing and rewarding people within the organization.

♦ Infrastructure: The systems of planning, finance, quality control, information

management, etc. are crucially important to an organization’s performance in its primary
activities. Infrastructure also consists of the structures and routines of the organization
which sustain its culture.
Porter’s Five Forces Model
•
 Case Study: Netflix – Porter’s Five Forces Model
[Link] Rivalry: High competition from Amazon Prime, Disney+, and HBO Max forces constant
innovation.
[Link] of New Entrants: High content costs and brand loyalty make entry difficult, but digital
platforms lower barriers.
[Link] Power of Buyers: Consumers can easily switch services, forcing Netflix to invest in
exclusive content.
[Link] Power of Suppliers: Studios demand high licensing fees, leading Netflix to create
original content (Stranger Things, Money Heist).
[Link] of Substitutes: Free platforms (YouTube) and piracy threaten paid streaming services.
• Outcome: Netflix stays competitive by focusing on original content, personalization, and
global expansion.
 The model holds that the state of competition in an industry is a composite of competitive
pressures operating in five areas of the overall market:

• Competitive pressures associated with the market maneuvering and jockeying for buyer patronage
that goes on among rival sellers in the industry.

• Competitive pressures associated with the threat of new entrants into the market.

• Competitive pressures coming from the attempts of companies in other industries to win buyers
over to their own substitute products.

• Competitive pressures stemming from supplier bargaining power and supplier-seller collaboration.

• Competitive pressures stemming from buyer bargaining power and seller- buyer Collaboration.
 Porter’s Five Forces Model

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

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

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

• Step 3: Determine whether the collective strength of the five competitive forces is
conducive to earning attractive profits.
 The Threat of New Entrants

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

• The bigger the new entrant, the more severe the competitive effect.

• New entrants also place a limit on prices and affect the profitability of existing
players.

• To discourage new entrants, existing firms can try to raise barriers to entry. Barriers to
entry represent economic forces (or ‘hurdles’) that slow down or impede entry by other
firms.
Common barriers to entry, these are explained as follows: ( CAPS- Barrier Entry
Point)

• Capital Requirements: When a large amount of capital is required to enter an

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

• Access to Distribution Channels: The unavailability of distribution channels for

new entrants poses another significant entry barrier. Often, existing firms have
significant influence over the distribution channels and can retard or impede their
use by new firms.
• Product Differentiation: Product differentiation means making a product stand
out from others, either through its physical qualities or how customers perceive it.
Companies in industries like personal care and cosmetics often use this strategy to
make their products unique. It's also a way to make it harder for new competitors
to enter the market because creating these differences can be expensive.

• Switching Costs: For new entrants to succeed in an industry, they must convince
customers of existing companies to switch to their products. This often involves
customers testing the new products, renegotiating contracts, and adapting to the
new offerings. These changes can be costly and inconvenient for buyers, making
them hesitant to switch brands, especially when they have invested time and
money in their current choices.
• Brand Identity: Established firms often have strong brand identities for their products
or services, which can act as barriers to entry for new competitors. This is especially true
for products that are purchased infrequently and come with a high price tag. Building a
brand identity takes time and resources, making it challenging for new entrants to
establish themselves in the market. Customers may be loyal to established brands,
making it difficult for new competitors to gain market share.

• Economies of Scale: Many industries are characterized by economic activities driven

by economies of scale. Economies of scale refer to the decline in the per-unit cost of
production (or other activity) as volume grows. A large firm that enjoys economies of
scale can produce high volumes of goods at successively lower costs. This tends to
discourage new entrants.

• Possibility of Aggressive Retaliation: Sometimes the mere threat of aggressive

retaliation by incumbents can deter entry by other firms into an existing industry. For
example, introduction of products by a new firm may lead incumbents firms to reduce
their product prices and increase their advertising budgets.
 Bargaining Power of Buyers

• This is another force that influences the competitive condition of the industry.
This force will become heavier depending on the possibilities of the buyers
forming groups or cartels. Mostly, this is a phenomenon seen in industrial
products.

• The bargaining power of the buyers influences not only the prices that the
producer can charge but also influences in many cases, costs and investments of
the producer because powerful buyers usually bargain for better services which
involve costs and investment on the part of the producer.
• Buyers of an industry’s products or services can sometimes exert considerable
pressure on existing firms to secure lower prices or better services. This leverage
is particularly evident when:

(i)Buyers have full knowledge of the sources of products and their substitutes.

(ii)They spend a lot of money on the industry’s products i.e. they are big buyers.

(iii)The industry’s product is not perceived as critical to the buyer’s needs and
buyers are more concentrated than firms supplying the product. They can
easily switch to the substitutes available.
 Bargaining Power of Suppliers

• Quite often suppliers, too, exercise considerable bargaining power over

companies.

• If the suppliers are also limited in number, they stand a still better chance
to exhibit their bargaining power.

• The bargaining power of suppliers determines the cost of raw materials

and other inputs of the industry and, therefore, industry attractiveness
and profitability.
• Suppliers can influence the profitability of an industry in a number of
ways. Suppliers can command bargaining power over a firm when:

(i)Their products are crucial to the buyer and substitutes are not
available.

(ii)They can erect high switching costs.

(iii)They are more concentrated than their buyers.

 The Nature of Rivalry in the Industry

• The rivalry among existing players is quite obvious.

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

industry attractiveness and profitability.

• The intensity of rivalry can influence the costs of suppliers,

distribution, and of attracting customers and thus directly affect the
profitability. The more intensive the rivalry, the less attractive is the
industry.
Rivalry among competitors tends to be cutthroat and industry profitability low under various
conditions explained as follows: ( PRODUCT- FINES )

• Product Differentiation: Companies can avoid price wars by making their products unique
compared to competitors'. Industries where product differences matter typically see higher
profits. On the other hand, industries dealing with undifferentiated goods, like memory chips or
raw materials, often have lower profits due to intense competition solely based on price.

• Fixed Costs: When competitors have significant fixed costs, they're more likely to slash prices to
fill unused capacity. This drives down profits across the industry as everyone tries to produce
more to cover fixed costs. Therefore, industries with high fixed costs typically see lower
profitability.

• Industry Leader: A strong industry leader can discourage price wars by disciplining initiators of
such activity. Because of its greater financial resources, a leader can generally outlast smaller
rivals in a price war.
• Number of Competitors: Even when an industry leader exists, the leader’s
ability to exert pricing discipline diminishes with the increased number of rivals
in the industry as communicating expectations to players becomes more
difficult.

• Exit Barriers: If competitors exit an industry, competition among the remaining

firms usually eases, leading to higher profitability. Industries with few barriers to
exit tend to have higher profits. Exit barriers can take various forms. For instance,
a firm's assets may be too specialized to sell or find a buyer, discouraging exit.

• Slow Growth: As industry growth slows down, competition among rivals

intensifies as they strive to maintain or increase their market share. This
heightened rivalry typically leads to lower profitability for all firms involved.
 Threat of Substitutes
• Substitute products are a latent source of competition in an industry. In many
cases they become a major constituent of competition.

• A final force that can influence industry profitability is the availability of

substitutes for an industry’s product. To predict profit pressure from this source,
firms must search for products that perform the same, or nearly the same,
function as their existing products.

• The five forces together determine industry attractiveness/ profitability.

 Attractiveness of Industry

• The industry analysis culminates into identification of various issues

and draw conclusions about the relative attractiveness or
unattractiveness of the industry, both near-term and long-term.

• Strategists assess the industry outlook carefully, deciding whether

industry and competitive conditions present an attractive business
opportunity for the organisation or whether its growth and profit
prospects are gloomy.
• In unattractive industries, successful firms often adopt cautious
investment strategies to safeguard their competitiveness and
profitability.

• This could involve acquiring smaller firms at favorable prices or

diversifying into more promising sectors over time. Weaker
companies may choose to merge with competitors to enhance
their market position and profitability, or explore diversification
opportunities outside their current industry.
 Experience Curve
• It explains the efficiency increase gained by workers through repetitive productive
work.

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

• This suggests that larger firms in an industry typically enjoy lower unit costs
compared to smaller competitors, giving them a competitive edge in terms of costs.
 Value Creation

• The concept of value creation was introduced primarily for providing products and
services to the customers with more worth.
• The concept took more space in the business and organizations started discussing
about the value creation for stakeholders.
• We can say that the value creation is an activity or performance by the firm to
create value that increases the worth of goods, services, business processes or even
the whole business system.

• Many businesses now focus on value creation both in the context of creating better
value for customers purchasing its products and services, as well as for
stakeholders in the business who want to see their investment in business
appreciate in value.

• Ultimately, this concept gives business a competitive advantage in the industry and
helps them earn above average profits/returns.
 Competitive advantage leads to superior profitability. At the most
basic level, how profitable a company becomes depends on three
factors:

• the value customers place on the company’s products;

• the price that a company charges for its products; and

• the costs of creating those products.

• The value customers place on a product reflects the utility they get
from a product—the happiness or satisfaction gained from consuming
or owning the product.

• Utility must be distinguished from price. Utility is something that

customers get from a product.

• It is a function of the attributes of the product, such as its performance,

design, quality, and point-of-sale and after-sale service.
 Michael Porter argues that a company can generate competitive advantage in
two different ways, either through differentiation or cost advantage.

• According to Porter, differentiation means offering customers unique value through

product features, quality, or customer service. This allows a company to charge
higher prices for its products or services. If a company can differentiate effectively
without significantly increasing costs, it can earn higher profits than its competitors.

• Value creation occurs when consumers perceive that the benefits they receive from
a product or service exceed the price they pay for it. This difference between
perceived value and price is what generates value for both the consumer and the
business.
 MARKET AND CUSTOMER

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

• The term "marketing" encompasses a wide range of operations, including

research, designing, pricing, promotion, transportation, and distribution.

• Often market activities are categorized and explained in terms of four Ps of

marketing – product, place, pricing, and promotion. These four kinds of
marketing activities help marketers identify customer needs so they may
meet their demands and deliver satisfaction.
• There are production- oriented businesses that believe that customers choose low
price products

• Sales- oriented businesses believe that if they spend enough money on

advertisement, sales and promotion, customers can be persuaded to make a
purchase.

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

customers. A customer- centric business is one that continuously learn from its
customers' needs and market dynamics. In the present times success, many business
lies in customer centric approaches.
 Customer

• A customer is a person or business that buys products or services from

another organisation. Customers are important because they provide
revenue and organisations cannot exist without them.

• Customers are frequently categorized based on demographics like as

age, race, gender, ethnicity, economic level, and geographic region, which
may all assist businesses in developing a profile of a perfect customer.
 Customer Analysis

• Customer analysis is an essential marketing component of any strategic

business plan. It identifies target clients, determines their wants, and
then defines how the product meets those needs. Thus, it involves the
examination and evaluation of consumer needs, desires, and wants.

• Using the facts generated by customer analysis, an effective profiling of

customers may be established.
 Customer Behaviour

• It examines elements like shopping frequency, product preferences, and

the perception of your marketing, sales, and service offerings.
Understanding these details allows businesses to communicate with
customers in an effective manner.

• Consumer behaviour may be influenced by a number of things. These

elements can be categorised into the following three conceptual
domains:
• External Influences: External influences such as advertisements, peer
recommendations, and social norms directly affect the psychological and internal
processes that shape consumer decisions.

• These external effects focus on the factors that influence customers as they decide
which needs to fulfill and which products to choose.

• They can be categorized into two groups: the company's marketing efforts and
various environmental factors.

• Internal Influences: Internal processes are psychological factors internal to customer

and affect consumer decision making. Consumer behaviour is influenced by a
combination of internal and external influences, including motivation and attitudes.
• Decision Making: A rational consumer weighs the advantages and disadvantages of
each option before making a decision. The stages of this decision-making process
include:
[Link] recognition: Identifying an existing need or desire that is unfulfilled.
2. Search for desirable alternatives: Exploring and listing potential options.
3. Seeking information on available alternatives: Gathering information about the
options and evaluating their pros and cons.
4. Making a final choice: Selecting the best option based on the information and
analysis.
• This decision-making behavior occurs more frequently when the purchase is
significant to the customer, such as when the product could impact their health or
self-image. It's highly relevant when buying items like cars, televisions, or
refrigerators, as opposed to purchases like ice cream or soft drinks.
• Post-decision Processes: After making a decision and purchasing a product, the final
phase in the decision-making process is evaluating the outcome. The consumer's
reaction may vary depending on their satisfaction. A happy customer may make
repeat purchases and recommend the product to others, while a dissatisfied customer
may avoid repurchasing the product and refrain from recommending it to others.
 COMPETITIVE STRATEGY

• Businesses compete with each other for the same set of resources and customers.
• The competitive strategy of a business is concerned with how to compete in the
business areas in which the organization operates.

• In other words, competitive strategy defines how a firm expects to create and sustain
a competitive advantage over competitors.
The competitive strategy of a firm within a certain business field is analyzed using two
criteria:

• the creation of competitive advantage and

• the protection of competitive advantage.

 COMPETITIVE LANDSCAPE
• Competitive landscape is about identifying and understanding the competitors and
at the same time, it permits the comprehension of their vision, mission, core values,
niche market, strengths and weaknesses. Understanding of competitive landscape
requires an application of “competitive intelligence”.
Case Study: BYJU’S vs. Traditional Education – Competitive Landscape
Competitive Landscape Analysis:
• Technology Disruption: AI-driven personalized learning gave BYJU’S an edge over
conventional coaching methods.
• Market Expansion: While offline coaching had regional dominance, BYJU’S scaled
rapidly with digital accessibility.
• Cost & Accessibility: Traditional coaching had high fees and location limits, while
BYJU’S offered flexible, subscription-based pricing.
• Brand Positioning: BYJU’S attracted investors and students by collaborating with
Disney, Aakash, and WhiteHat Jr.
 Steps to understand the Competitive Landscape

Identify the competitor: The first step to understand the competitive landscape is to
identify the competitors in the firm’s industry and have actual data about their
respective market share.

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

Determine the strengths of the competitors: What are the strengths of the
competitors? What do they do well? Do they offer great products? Why are consumers
liking their product/service? Do they utilize marketing in a way that comparatively
reaches out to more consumers? Why do customers give them their business?
Determine the weaknesses of the competitors: Identify the areas where
the competitor is lacking or is weak. Weaknesses (and strengths) can be
identified by going through consumer reports and reviews appearing in
various media. Financial strength and weakness can always be learnt from
annual reports.

Put all of the information together: At this stage, the strategist should
put together all information about competitors and draw inference about
what they are not offering and what the firm can do to fill in the gaps. The
strategist can also know the areas which need to be strengthen by the firm.
 Key factors for competitive success

• An industry’s Key Success Factors (KSFs) are those things that most affect industry
members’ ability to prosper in the marketplace
• Key success factors vary from industry to industry and even from time to time
within the same industry as driving forces and competitive conditions change.

• The purpose of identifying KSFs is to make judgments about what things are
more important to competitive success and what things are less important.