CHAPTER 3: STRATEGIC ANALYSIS:

Internal Analysis
CHAPTER 3: STRATEGIC ANALYSIS: INTERNAL ENVIRONMENT

3.1 INTRODUCTION

3.2 UNDERSTANDING KEY STAKEHOLDERS

Who are Stakeholders and how do we identify them?

Stakeholders can be defined as any person/group of individuals,

internal or external, that has an interest in, or impact on the business or
corporate strategy of the organisation. They have the power to
influence the strategy or performance of that organisation.

3.2.1 Mendelow’s Matrix

CHAPTER 3: STRATEGIC ANALYSIS: INTERNAL ENVIRONMENT (REVISED

SECTION 3.2.1)

3.2.1 Mendelow’s Matrix

The Mendelow Stakeholder matrix (also known as the Stakeholder

Analysis matrix and the Power-Interest matrix) is a simple framework to
help manage key stakeholders.

Mendelow’s Matrix can be used effectively to analyse and manage

stakeholders through a structured, grid-based approach by following
these steps: ★ ★ ★ ★ ★

1. Identify Stakeholders: Begin by identifying all relevant

stakeholders such as government bodies, investors, suppliers,
environmental groups and local communities who may influence
or be affected by the project.

2. Assess Power and Interest: Evaluate each stakeholder’s power

(ability to influence project outcomes) and interest (level of
 concern or involvement). Power may stem from authority,
resources or expertise, while interest relates to the stakeholder's
stake in the project’s success.

3. Plot Stakeholders on the Grid: Create a grid with Power on one

axis and Interest on the other. Plot stakeholders accordingly:

o High Power–High Interest: Key Players

o High Power–Low Interest: Keep Satisfied

o Low Power–High Interest: Keep Informed

o Low Power–Low Interest: Low Priority

4. Develop Strategies for Each Quadrant:

o Keep Satisfied: Engage closely with these stakeholders,

involve them in decision-making and keep them informed
as their support is vital for project success. Manage Closely,
involve in decision making, and engage regularly and build
strong relationship. For example, banks, government,
customers, etc.

o Key Players: Provide periodic updates and address

concerns to maintain their satisfaction and prevent
potential opposition. Consult often and increase their
interest. For example, Shareholders, CEO, Board of Directors,
etc.

o Keep Informed: Communicate regularly and share progress

updates to sustain their interest and gain valuable
feedback. Utilise the high interest by engaging in decisions
and consult in their areas of expertise and interest. For
example, employees, vendors, suppliers, legal experts, etc.

o Low Priority: Monitor occasionally for changes in their power

or interest but allocate minimal resources to manage them.
monitor only, no engagement and provide general
occasional communication. For example, business
magazines, media houses, etc.
 5. Monitor and Adapt: Continuously review stakeholder power and
interest, as these may change over time. Adjust engagement
strategies accordingly to ensure ongoing alignment with project
goals.

An important thing that strategists should be aware of is the

importance of remembering that the environment is highly dynamic
and certain things might happen that can cause stakeholders to
suddenly move between quadrants.

3.3 STRATEGIC DRIVERS

Key Strategic Drivers of an Organization

Strategic drivers are essential elements that influence an organization’s

ability to differentiate itself from its competitors and achieve
competitive advantage. These drivers assess the current performance of
the business and provide insights into areas that need focus.

The key strategic drivers include: ★ ★ ★ ★ ★ ★ ★ ★ ★ ★

1. Industry and Markets:

o Understanding the industry and markets is crucial for

identifying the organization’s relative position.
o Industries group similar companies based on their primary
products, while markets are defined by the buyers and
sellers of these products.
o Analysing industry and market dynamics, often through
tools like strategic group mapping, helps organizations
evaluate competition and refine strategies.

2. Customers:

o Identifying and understanding customers is a critical driver.

o Customers are segmented based on their needs and
spending capacity, which guides product development
and marketing strategies.
 o Differentiating between customers (buyers) and consumers
(users) is vital to tailoring pricing, design, and usability
strategies effectively.

3. Products and Services:

o Products and services are central to defining the business.

o Organizations must assess their offerings, classify products,
and devise strategies for differentiation, branding, and
pricing.
o Product innovation and marketing are key to maintaining
competitiveness.

4. Channels:

o The channels through which products and services are

delivered impact on accessibility and customer satisfaction.
o Strategies related to direct, digital, or relationship-based
marketing ensure the efficient distribution of offerings to
target customers.

By aligning these drivers with organizational goals, businesses can

achieve sustained growth and maintain a competitive edge.

3.3.1 Industry and Markets

[Link] Analysing Industry and Markets

Industry and market analysis is extremely important to identify one’s

position as compared to the competitors, who can be of equal size
and value, or bigger in size and value or even smaller and newer. A
tool used for this is called - Strategic Group Mapping.

A strategic group consists of those rival firms which have similar

competitive approaches and positions in the market.

The procedure for constructing a strategic group mapping and

deciding which firms belong in which strategic group is as follows:
★★★★★★★★★★
 1. Identify the competitive characteristics that differentiate firms in
the industry typical variables that are price/quality range (high,
medium, low); geographic coverage (local, regional, national,
global); degree of vertical integration (none, partial, full);
product-line breadth (wide, narrow); use of distribution channels
(one, some, all); and degree of service offered (no-frills, limited,
full).

2. Plot the firms on a two-variable map using pairs of these

differentiating characteristics.

3. Assign firms that fall in about the same strategy space to the
same strategic group.

4. Draw circles around each strategic group making the circles

proportional to the size of the group's respective share of total
industry sales revenues.

Strategic group mapping helps in identifying the market positions of

rival companies by grouping them into like positions.

3.3.2 Customers

3.3.3 Products and Services

Products can also be differentiated on the basis of size, shape, colour,

packaging, brand names, after-sales service and so on. Organizations
seek to hammer into customers' minds that their products are different
from others. It does not matter whether the differentiation is real or
imaginary. Quite often the differentiation is psychological rather than
physical.

For a new product, pricing strategies for entering a market need to be

designed and for that matter at least three objectives must be kept in
mind:

 Have a customer-centric approach while making a product.

 Produce sufficient returns through a reasonable margin over cost.

  Increasing market share.

In line with the objective of providing better products and services, the
following marketing strategies are employed:

 Augmented Marketing: This type of marketing includes additional

customer services and benefits that a product can offer besides
the core and actual product that is being offered. It can be in
the form of the introduction of hi-tech services like movies on
demand, online computer repair services, secretarial services,
etc. Such innovative offerings provide a set of benefits that
promise to elevate customer service to unprecedented levels.

 Relationship Marketing: The process of creating, maintaining, and

enhancing strong, value-laden relationships with customers and
other stakeholders. For example, Airlines offer special lounges at
major airports for frequent flyers. Thus, providing special benefits
to select customers to strengthen bonds. It can go a long way in
building relationships.

 Person Marketing: People can also be marketed. Person

marketing consists of activities undertaken to create, maintain or
change attitudes and behaviour towards particular person.

 Differential Marketing: It is a market-coverage strategy in which a

firm decides to target several market segments and designs
separate offers for each.

 Synchro-marketing: When the demand for a product is irregular

due to season, some parts of the day, or on hour basis, causing
idle capacity or overworked capacities, synchro-marketing can
be used to find ways to alter the pattern of demand through
flexible pricing, promotion, and other incentives.

 Demarketing: It includes marketing strategies to reduce demand

temporarily or permanently. The aim is not to destroy demand,
but only to reduce or shift it. This happens when there is overfull
demand. Here demarketing can be applied to regulate demand.
  Enlightened Marketing: It is a marketing philosophy holding that a
company’s marketing should support the best long-run
performance of the marketing system that is beyond the
prevailing mindset; its five principles include customer-oriented
marketing, innovative marketing, value marketing, sense-of-
mission marketing, and societal marketing.

3.3.4 Channels ★ ★ ★ ★ ★

Channels represent the distribution system through which organizations

distribute their products or provide services to customers. They play a
pivotal role in reaching target markets, maximizing sales, and
establishing competitive advantages.

There are typically three channels that should be considered: sales

channel, product channel and service channel.

 The sales channel –

o These are the intermediaries involved in selling the product

through each channel and ultimately to the end user.
o The key question is: Who needs to sell to whom for your
product to be sold to your end user?
o For example, many fashion designers use agencies to sell
their products to retail organisations, so that consumers can
access them.

 The product channel –

o The product channel focuses on the series of intermediaries

who physically handle the product on its path from its
producer to the end user.
o This is true of Australia Post, who delivers and distributes
many online purchases between the seller and purchaser
when using eBay and other online stores.

 The service channel –

o The service channel refers to the entities that provide

necessary services to support the product, as it moves
 through the sales channel and after purchase by the end
user.
o The service channel is an important consideration for
products that are complex in terms of installation or
customer assistance.

3.4 ROLE OF RESOURCES AND CAPABILITIES: BUILDING CORE

COMPETENCY

A core competence is a unique strength of an organization which may

not be shared by others. Core competencies are those capabilities that
are critical to a business achieving competitive advantage. In order to
qualify as a core competence, the competency should differentiate
the business from any other similar businesses.

According to C.K. Prahalad and Gary Hamel, major core

competencies are identified in three areas:

i. Competitor differentiation:
o The company can consider having a core competence if
the competence is unique and it is difficult for competitors
to imitate.
o This can provide a company with an edge compared to
competitors.
o It allows the company to provide better products or services
to market with no fear that competitors can copy it.

ii. Customer value:

o When purchasing a product or service it has to deliver a
fundamental benefit for the end customer in order to be a
core competence. It will include all the skills needed to
provide fundamental benefits.
o The service or the product has to have a real impact on the
customer as the reason to choose to purchase them.
o If customer has chosen the company without this impact,
then competence is not a core competence.

iii. Application of competencies to other markets:

 o Core competence must be applicable to the whole
organization; it cannot be only one particular skill or
specified area of expertise.
o Therefore, although some special capability would be
essential or crucial for the success of business activity, it will
not be considered as core competence, if it is not
fundamental from the whole organization’s point of view.
o Thus, a core competence is a unique set of skills and
expertise, which will be used throughout the organisation to
open up potential markets to be exploited.

3.4.1 Criteria for building a Core Competencies (CC)?

Four specific criteria of sustainable competitive advantage that firms

can use to determine those capabilities that are core competencies.
Capabilities that are valuable, rare, costly to imitate, and non-
substitutable are core competencies.

i. Valuable:
o Valuable capabilities are the ones that allow the firm to
exploit opportunities or avert the threats in its external
environment.
o A firm created value for customers by effectively using
capabilities to exploit opportunities.
ii. Rare:
o Core competencies are very rare capabilities and very few
of the competitors possess these.
o Capabilities possessed by many rivals are unlikely to be
sources of competitive advantage for any one of them.
o Competitive advantage results only when firms develop
and exploit valuable capabilities that differ from those
shared with competitors.
iii. Costly to Imitate: Costly to imitate means such capabilities that
competing firms are unable to develop easily.
iv. Non-substitutable:
 o Capabilities that do not have strategic equivalents are
called non-substitutable capabilities.
o This final criterion for a capability to be a source of
competitive advantage is that there must be no
strategically equivalent valuable resources that are
themselves either not rare or imitable.

3.5 COMBINING EXTERNAL AND INTERNAL ANALYSIS (SWOT ANALYSIS)

3.5.1 Components of SWOT ★ ★ ★

SWOT stands for Strengths, Weaknesses, Opportunities and Threats.

 Strength: Strength is an inherent capability of the organization

which it can use to gain strategic advantage over its competitor.
Internal analysis is more focused on understanding the existing
structure and competencies of the business, thus highlighting the
Strengths.

 Weakness: A weakness is an inherent limitation or constraint of

the organization which creates strategic disadvantage to it. Like
strengths, Weaknesses are identified in the internal Analysis.

 Opportunity: An opportunity is a favourable condition in the

external environment which enables it to strengthen its position.
External Analysis is about identifying and preparing for
uncontrollable factors which can be Opportunities.

 Threat: A threat is an unfavourable condition in the external

environment which causes a risk for, or damage to, the
organization’s position.

3.5.2 Primary Objective and Why Conduct a SWOT Analysis? ★ ★ ★

The primary objective of SWOT analysis is to help organizations develop

a full awareness of all the factors (internal as well as external) involved
in making a business decision. Consequently, it is necessary to conduct
a SWOT analysis before strategy formulation for the following reasons:
  Identification of Factors: SWOT analysis identifies the Strengths and
Weaknesses (internal factors) and Opportunities and Threats
(external factors). This ensures that management considers all
aspects before deciding on a strategic move.

 Strategy Discovery: It helps in discovering recommendations and

strategies with a focus on leveraging strengths and opportunities
while working to overcome weaknesses and threats. This lays the
base for realistic and practical strategies.

 Resource Alignment: SWOT highlights both – the areas where the

business is performing well and the areas which need
improvement. This helps organizations to align resources
efficiently to achieve objectives.

 Maintaining Relevance: Periodic SWOT analysis helps

organizations to check the current landscape of their business
and to make necessary improvements in operations, thus
keeping strategies relevant to changing circumstances.

 Logical Framework: It places complex internal and external issues

into a simple framework, making it easier for managers to identify
challenges, opportunities, and competitive factors before
finalizing a strategy.

3.5.3 SWOT Analysis Examples

Example 1: A Law Firm

STRENGTH WEAKNESS

Multiple Partners with varied Run by old methods

expertise

Long Term contractual service No automation of work and

agreements documentation

70 years of brand value Not very employee friendly

culture
OPPORTUNITY THREAT

Automation driven advancement Online players entering market

Startups can be supported with AI based solutions and

experienced partners applications

Investment in technology can Price point of online being very

multiply returns competitive

Example 2: GreenGardens (Sustainable Growth Planning)

Strengths Weaknesses

High-quality, pesticide-free produce Limited distribution channels

Strong brand reputation for organic Small scale of operations

products

Opportunities Threats

Rising demand for organic products Unpredictable weather

conditions

Potential to expand into new Intense competition from

markets larger farms

3.6 COMPETITIVE ADVANTAGE: USING MICHAEL PORTER’S GENERIC

STRATEGIES

In other words, an organization is said to have competitive advantage

if its profitability is higher than the average profitability for all companies
in its industry.

3.6.1 Sustainability of Competitive Advantage

The sustainability of competitive advantage and a firm’s ability to earn

profits from it depends, to a great extent, upon four major
characteristics of resources and capabilities:
Major Characteristics for Sustainability

1. Durability:
o This refers to the period over which a competitive
advantage is sustained, which depends in part on the rate
at which a firm’s resources and capabilities deteriorate.
o In industries with fast product innovation, patents can
quickly become obsolete.
o Similarly, capabilities tied to the management expertise of a
CEO are vulnerable to their retirement or departure,
whereas consumer brand names often have a highly
durable appeal.

2. Transferability:

o Even if resources are durable, a competitive advantage

can be eroded if rivals can attack that position by gaining
access to the necessary resources and capabilities.
o The easier it is to transfer resources between companies,
the less sustainable the competitive advantage based on
them will be.

3. Imitability:

o If resources and capabilities cannot be purchased by a

would-be imitator, then they must be built from scratch.
o How easily and quickly can the competitors build the
resources and capabilities on which a firm’s competitive
advantage is based?
o Where capabilities require networks of organizational
routines, whose effectiveness depends on the corporate
culture, imitation is difficult.

4. Appropriability:

o This refers to the ability of the firm's owners to appropriate

the returns on its resource base.
o Even with a sustainable advantage, there is an issue
regarding who actually receives the returns—whether they
 are directed to where the funds were invested or if there is
no actual reward to the people who invested the capital.

3.6.2 Michael Porter’s Generic Strategies

According to Porter, strategies allow organizations to gain competitive

advantage from three different bases: cost leadership, differentiation,
and focus. Porter called these base generic strategies. These strategies
have been termed generic, because they can be pursued by any type
or size of business firm and even by not-for-profit organisations.

 Cost leadership emphasizes producing standardized products at

a very low per-unit cost for consumers who are price-sensitive.

 Differentiation is a strategy aimed at producing products and

services considered unique industry-wide and directed at
consumers who are relatively price-insensitive.

 Focus means producing products and services that fulfil the

needs of small groups of consumers with very specific taste.

[Link] Cost Leadership Strategy

It is a low-cost competitive strategy that aims at broad mass market. It

requires vigorous pursuit of cost reduction in the areas of procurement,
production, storage and distribution of product or service and also
economies in overhead costs. Because of its lower costs, the cost
leader is able to charge a lower price for its products than most of its
competitors and still earn satisfactory profits.

Cost leadership emphasizes producing standardised products at a very

low per unit cost for consumers who are price sensitive.

Striving to be a low-cost producer in an industry can especially be

effective:

 when the market is composed of many price-sensitive buyers

and
  when there are few ways to achieve product differentiation.
 when buyers do not care much about differences from brand
to brand.
 when there are a large number of buyers with significant
bargaining power.

The basic idea is to underprice competitors and thereby gain market

share driving some of the competitors out of the market.

Advantages of Cost Leadership Strategy: Michael Porter’s five force

1. Rivalry – Competitors are likely to avoid a price war, since the

low-cost firm will continue to earn profits even after competitors
compete away their profits.

2. Buyers – Powerful buyers/customers would not be able to exploit

the cost leader firm and will continue to buy its product.

3. Suppliers – Cost leaders are able to absorb greater price

increases from suppliers before they need to raise prices for
customers.

4. Entrants – Low-cost leaders create barriers to market entry

through their continuous focus on efficiency and cost reduction.

5. Substitutes – Low-cost leaders are more likely to lower the costs to

induce existing customers to stay with their products, invest in
developing substitutes, and even purchase patents.

Disadvantages of Cost Leadership Strategy:

1. Cost advantage may not last long as competitors may imitate

cost reduction techniques.

2. Cost leadership can succeed only if the firm can achieve higher
sales volume.

3. Cost leaders tend to keep their costs low by minimizing cost of

advertising, market research, and research and development,
but this approach can prove to be expensive in the long run.

4. Technological advancement areas a great threat to cost leaders.

The cost advantage it can created will allowed the org to price the
goods lower than competitors. The core competency is derived from
the company’s ability to generate large sales volume, allowing the
company to remain profitable with low profit margin.

[Link] Differentiation Strategy

This strategy is aimed at a broad mass market and involves the creation
of a product or service that is perceived by the customers as unique.
The uniqueness can be associated with product design, brand image,
features, technology, dealer network or customer service. Because of
differentiation, the business can charge a premium for its product.

Differentiation is aimed at producing products and services considered

unique industry wide and directed at consumers who are relatively
price insensitive.

Basis of Differentiation: There are several bases of differentiation, major

being: Product, Pricing and Organization(PPO). ★★★

 Product:

o Innovative products that meet customer needs can be an

area where a company has an advantage over
competitors.
o However, the pursuit of a new product offering can be
costly – research and development, as well as production
and marketing costs can all add to the cost of production
and distribution.
o The payoff, however, can be great as customer’s flock to
be among the first to have the new product.

 Pricing:

o It fluctuates based on its supply and demand and may also

be influenced by the customer’s ideal value for a product.
 o Companies that differentiate based on product price can
either determine to offer the lowest price or can attempt to
establish superiority through higher prices.

 Organisation:

o Organisational differentiation is yet another form of

differentiation.
o Maximizing the power of a brand or using the specific
advantages that an organization possesses can be
instrumental to a company’s success.
o Location advantage, name recognition and customer
loyalty can all provide additional ways for a company
differentiate itself from the competition.

Achieving Differentiation Strategy: To achieve differentiation, following

strategies could be adopted by an organisation: ★★

1. Offer utility to the customers and match products with their tastes
and preferences.

2. Elevate/Improve performance of the product.

3. Offer the high-quality product/service for buyer satisfaction.

4. Rapid product innovation to keep up with dynamic environment.

5. Taking steps for enhancing brand image and brand value.

6. Fixing product prices based on the unique features of product

and buying capacity of the customer.

Advantages of Differentiation Strategy: A differentiation strategy may

help an organisation to remain profitable even with rivalry, new
entrants, suppliers’ power, substitute products, and buyers’ power.

1. Rivalry – Brand loyalty acts as a safeguard against competitors. It

means that customers will be less sensitive to price increases, as
long as the firm can satisfy the needs of its customers.

2. Buyers – They do not negotiate for price as they get special

features and they have fewer options in the market.
 3. Suppliers – Because differentiators charge a premium price, they
can afford to absorb higher costs of supplies as the customers are
willing to pay extra too.

4. New entrants: Innovative features are expensive to copy. So, new

entrants generally avoid these features because it is tough for
them to provide the same product with special features at a
comparable price.

5. Substitutes – Substitute products can’t replace differentiated

products which have high brand value and enjoy customer
loyalty.

Disadvantages of Differentiation Strategy:

1. In the long term, uniqueness is difficult to sustain.

2. Charging too high a price for differentiated features may cause

the customer to switch-off to another alternative. As we see a
shift of iPhone users to other android flagship smart phones.

3. Differentiation fails to work if its basis is something that is not

valued by the customers. Home delivery of packed snacks in 30
minutes would not even be a differentiator as the consumer
wouldn’t value such an offer.

[Link] Focus Strategies

A successful focus strategy depends on an industry segment that is

 of sufficient size,
 has good growth potential, and
 is not crucial to the success of other major competitors.

Focus strategies are most effective when consumers have distinctive

preferences or requirements, and when the rival firms are not
attempting to specialize in the same target segment.

 Focused cost leadership:

- A focused cost leadership strategy requires competing

based on price to target a narrow market.
 - A firm that follows this strategy does not necessarily charge
the lowest prices in the industry.
- Instead, it charges low prices relative to other firms that
compete within the target market. Firms that compete
based on price and target a narrow market follow a
focused cost leadership strategy.

 Focused differentiation:

- A focused differentiation strategy involves offering

distinctive features that cater to a specific market segment.
- Companies employing this strategy may target a specific
customer demographic, geographic region, or sales
channel.
- Firms that compete based on uniqueness and focus on a
specialized market segment follow a focused differentiation
strategy.

Achieving Focused Strategy: To achieve focused cost

leadership/differentiation, following strategies could be adopted by an
organization:

1. Selecting specific niches which are not covered by cost leaders

and differentiators.

2. Creating superior skills for catering such niche markets.

3. Generating high efficiencies for serving such niche markets.

4. Developing innovative ways in managing the value chain.

Advantages of Focused Differentiation:

 Strong Customer Loyalty: By catering to a niche market, StarTech

can build strong relationships with customers, increasing loyalty
and retention.
 Higher Profit Margins: Serving a niche market enables StarTech to
charge higher prices for specialized products or services.
 Reduced Competition: Focusing on a niche market reduces
competition and helps org establish itself as a leader.
  Better Resource Allocation: Concentrating on a specific market
segment allows efficient resource use and better returns on
investment.

Disadvantages of Focused Differentiation:

 Limited Market Size: The niche market may be small, restricting

growth potential.
 Risk of Market Changes: Shifts in customer preferences or market
conditions could reduce demand for StarTech’s specialized
offerings.
 Higher Costs: Specialized markets require more resources and
expertise, increasing operational costs.
 Imitation by Competitors: Competitors may copy StarTech’s
strategy, eroding its competitive advantage.

Advantages of Focused Strategy:

1. Premium prices can be charged by the organisations for their

focused product/services.

2. Due to the tremendous expertise in the goods and services that

the organisations following focus strategy offer, rivals and new
entrants may find it difficult to compete.

Disadvantages/Risks of Focused Strategy:

1. The firms lacking in distinctive competencies may not be able to

pursue focus strategy.

2. The possibility of numerous competitors recognizing the successful

focus strategy and imitating it

3. Due to the limited demand of product/services, costs are high,

which can cause problems.

4. In the long run, the niche could disappear as the consumer

preferences may drift towards the product attributes desired by
the market as a whole
[Link] Best-Cost Provider Strategy

The new model of Best-Cost Provider Strategy is a further development

of the above three generic strategies.

It is directed towards giving customers more value for their money by

emphasizing both low cost and premium features. The objective is to
keep costs and prices lower than those of other sellers of “comparable
products” while offering better quality and superior features.

Best-cost provider strategy involves providing customers more value for

the money by emphasizing on lower cost and better-quality
differences.

It can be done through:

(a) offering products at lower price than what is being offered by rivals
for products with comparable quality and features OR

(b) charging similar price as by the rivals for products with much higher
quality and better features.