CHAPTER - 3

STRATEGIC ANALYSIS: INTERNAL

ENVIRONMENT
• The internal environment includes an organization's people, stakeholders, processes,
physical infrastructure, administrative structure, and organizational culture.
Covers:
• Tangible elements: individuals, groups, stakeholders, administrative structure, and physical
work conditions (space, equipment).
• Intangible elements: relationships, philosophy, values, and ethics — which together shape
the organization's identity.
 UNDERSTANDING KEY STAKEHOLDERS
• Who are Stakeholders and how do we identify them?
• A firm may be viewed as a coalition of stakeholders- all those individuals and
entities that have a stake in its success and can impact it as well. They may be the
employees, shareholders, investors, suppliers, customers, regulators and so on. This
view of the firm is in contrast to the earlier view of the firm that was considered to
be an extension of the owners and shareholders alone.
• They have the power to influence the strategy or performance of that organisation.
• It is important to first identify the key stakeholders.
• Each stakeholder exerts a different level of influence and can have differing
levels of interest in the organisation.
Example of Key Stakeholders and their requirements for an OTT Platform

Stakeholders Requirements

Shareholders ♦ Innovation and continuous creative

content
♦ Total shareholder return (RoI)
♦ Corporate social responsibility
♦ Top rankings of the organisation
♦ Highest market share
CEO and Board of Directors ♦ Prestige
♦ Market share
♦ Revenue and profit growth
♦ Market rankings
Major Vendors (Production Houses) ♦ Growth
♦ Stability of ordering
♦ Stable margins
Consumers (Viewers) ♦ New content - Innovation
♦ Better deals - Pricing Benefits
♦ Value for money
♦ Continuous supply
Employees ♦ Wages and benefits
♦ Stability of employment
♦ Pride of working for a reputed
organisation
 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.

• Managing stakeholders is critical to the success of a project. This is where a

stakeholder analysis matrix i.e. Mendelow’s Matrix can help.

• Mendelow suggests that one should analyse stakeholder groups based on Power (the
ability to influence organisation strategy or resources) and Interest (how interested they
are in the organisation succeeding).
• It's important to recognize that stakeholders vary in both their power and their level
of interest in an organization. While some stakeholders may have significant power
and high interest, others may have less power or interest.

For example, a big shareholder usually has a lot of say and cares a lot about
how well the organization does.

• On the other hand, a competitor might have the power to affect strategy but might
not care much about the success of another organization. Knowing how much
power and interest each stakeholder has helps organizations figure out who to
focus on when they're communicating and engaging with others.
 Developing a Grid of Stakeholders

• Mendelow’s Matrix is based on Power and Interest. It suggests to identify which stakeholders are
incredibly important. For example, the CEO is likely to have more Power to influence the work
and also high interest in it being successful. Keeping them informed almost daily should be a
priority.
High
• In the above figure, we see categorization of stakeholders into four groups by
Mendelow’s;

• KEEP SATISFIED Stakeholders: High power, less interested people - Organisation

should put in enough work with these people to keep them satisfied with their
intended information on a regular basis. For example, banks, government,
customers, etc.

• KEY PLAYERS Stakeholders: High power, highly interested people -

Organisation’s aim should be to fully engage this group of stakeholders, making the
greatest efforts to satisfy them, take their advice, build actions and keep them
informed with all information on a regular basis. For example, Shareholders, CEO,
Board of Directors, etc.
• LOW PRIORITY Stakeholders: Low power, less interested people - Organisation
should only monitor them with no actions to satisfy their expectations. Strategically,
minimal efforts should be spent on this group of stakeholders while keeping an eye
to check if their levels of interest or power change. For example, business
magazines, media houses, etc.

• KEEP INFORMED Stakeholders: Low power, highly interested people -

Organisation should adequately inform this group of people and communicate with
them to ensure that no major issues arise. This audiences can also help with real
time feedbacks and areas of improvement for an organisation. For example,
employees, vendors, suppliers, legal experts, etc.
• Changes in the world around an organization can change how much influence and
interest different stakeholders have. For example, if a company accidentally breaks a
rule, the government might suddenly care a lot more about what the company does.

• Similarly, if the company's actions become a big deal in the news, the media might
start paying closer attention. It's important for organizations to regularly check how
much power and interest their stakeholders have, especially when things change.
 Industry and markets
• In terms of the internal environment, it is very important for an organisation to understand it’s relative
position in the industry and in the market in which it operates. There are many ways to do this but
require analysis and understanding of the environment.

• A market is where buyers and sellers come together to exchange goods or services. Prices are
determined by supply and demand. Markets can be physical, like a store, or virtual, like online shopping
platforms. They can also be local or global, depending on where the business sells its products.
 Analyzing Industry and Markets

• Industry and market analysis helps a firm identify its position relative to competitors, who may be equal,
larger, or smaller in size and value. A key tool for this is Strategic Group Mapping

• A strategic group is a cluster of rival firms that follow similar competitive strategies and hold similar
positions in the market.
The procedure for constructing a strategic group map and deciding which firms belong
in which strategic group is straightforward: ( IPAD )

• Identify the variables that make firms different from each other — such as price/quality,
geographic coverage, vertical integration, product range, distribution channels, and service
level
• Plot firms on a map using two of these variables at a time
• Assign firms with similar strategies to the same group
• Draw circles around each group — bigger circle means bigger share of industry sales
 Customer vs Consumer

A customer is the one who buys a product or service, while a consumer is the one who
actually uses it. For example, a parent buying stationery for their kids is the customer, but the
kids who use it are the consumers. Marketers need to understand both.
• From a pricing perspective, the customer matters more
• From a value creation and design/usability perspective, the consumer must be kept at the
center of decision-making
Customer versus Consumer

A simple bifurcation yet extremely important for strategy build up. Consumers are
the ones who finally use a product/service, while customers are the buyers of that
product. A customer can be a consumer and vice versa. But for strategy teams
especially marketing teams it is important to understand the customer and
consumer separately. For example, baby diapers are bought by parents (customers)
who are willing to pay higher price for higher quality, while the real consumers are
the babies, who are more concerned about the comfort and easiness of the diaper.
If babies do not accept the product i.e. if consumers aren’t satisfied, it is difficult to
retain the buyer i.e. customers as well.
 Product/Services
• Product refers to the combination of goods-and-services a company offers to its target market.
Products can be differentiated in several ways — size, shape, colour, packaging, brand name,
and after-sales service, among others. For example, Shampoos with different branding namely
Head & Shoulders, Olay, Old Spice, Pantene are all produced by the same company P&G.

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 customer-centric approach while making a product.

• Produce sufficient returns through a reasonable margin over cost.
• Increasing market share
 Products and services need heavy investment in reaching out to customers. Over the
years, a number of marketing strategies have been evolved, which are given to handle
marketing strategically and fight the competition in the market.

• Social Marketing: Promotes social ideas or causes to bring about change (e.g., anti-
smoking campaigns educating people on health risks and smoking-permitted zones)

• Augmented Marketing: Goes beyond the core product to offer extra services and
benefits, enhancing customer satisfaction (e.g., on-demand movies, online tech
support)
• Direct Marketing: Uses advertising media that directly engage consumers and
prompt a response (e.g., e-mail, catalogue selling, TV shopping)

• Relationship Marketing: Builds and strengthens long-term, value-based

relationships with customers (e.g., airlines offering special lounges to frequent flyers
to build stronger bonds)

• Services Marketing: Applying marketing concepts to services, which are intangible

activities or benefits one party offers another
• Person Marketing: Marketing individuals to shape attitudes toward them (e.g.,
politicians or film stars promoting themselves for votes or career growth)

• Organization Marketing: Shaping attitudes toward an organization, practiced by

both profit and non-profit bodies

• Enlightened Marketing: Focuses on long-term success of the whole marketing

system, based on five principles: customer-oriented, innovative, value, sense-of-
mission, and societal marketing

• Differential Marketing: Targeting several market segments with a separate offer for
each (e.g., HUL's Lifebuoy/Lux for the popular segment, Dove/Pears for premium)
• Place Marketing: Shaping attitudes toward places, such as business sites or tourist
destinations

• Synchro-marketing: Used when demand is irregular (by season, time of day, etc.),
aiming to smooth demand through flexible pricing or promotions (e.g., cheaper movie
tickets on weekdays)

• Concentrated Marketing: Targeting a large share of one or a few sub-markets, often

through niche marketing

• Demarketing: Reducing or shifting (not destroying) excess demand, used when

demand outpaces capacity (e.g., managing overcrowding at zoos on weekends)
 Channels

• Channels are the distribution system by which an organisation distributes its product
or provides its service.

• Lakme - sells its products via retail stores, intermediary stores (like Nykaa, Westside,
Reliance Trends), as well as online mode like amazon, flipkart, nykaa online and its own
website.

• Boat Headphones - only online via e-commerce platforms like flipkart and amazon

• Coca Cola - retail shops across the nation, in each district, each town as well as online
mode via dunzo, blinkit, etc.
There are typically three channels that should be considered: sales channel, product
channel and service channel.

• The sales channel - Intermediaries involved in selling the product to the end user. Key
question: who needs to sell to whom for the product to reach the end user? (e.g.,
fashion designers using agencies to sell to retailers)

• The product channel - The intermediaries who physically handle the product from
producer to end user (e.g., Delhivery, Bluedart etc)

• The service channel - The entities providing support services as the product moves
through the sales channel and after purchase, important for products needing
installation or assistance (e.g., a Bosch dishwasher installed by a Bosch-contracted
plumber after purchase)
 ROLE OF RESOURCES AND CAPABILITIES:BUILDING CORE COMPETENCY

• C.K. Prahalad and Gary Hamel introduced the concept of core competency, now widely used in
management theory.

• Core competency is an organization's combination of technological and managerial know-how,

wisdom, and experience — a complex set of capabilities and resources that gives it a
competitive advantage over rivals.

• It is defined as a combination of skills and techniques, not a single skill or separate technique.
 Case Study: Amul – Core Competency in Dairy Industry
Core Competency Analysis:
• Efficient Supply Chain: Amul’s cooperative model sources milk from millions of
farmers, ensuring low costs and high quality.
• Brand Loyalty: Decades of trust, iconic advertising, and affordability make Amul
the top dairy choice in India.
• Product Innovation: Continuous expansion into cheese, chocolates, and
beverages strengthens its market hold.
• Scalability: Strong distribution channels ensure Amul products reach urban and
rural markets alike.
• Core competencies cannot be built on one capability or single technological know-
how, instead, it has to be the integration of many resources. The optimal way to define
core competence is to consider it as sum of 5- 15 areas of developed expertise.
According to C.K. Prahalad and Gary Hamel, major core competencies are identified in
three areas -
• competitor differentiation,
• customer value, and
• application to other markets
Prahalad and Hamel identified three conditions for a core competency:
• Competitor differentiation — the competence must be unique and hard for rivals to imitate,
letting the company offer better products without fear of being copied (e.g., Tesla's patented
EV innovations)

• Customer value — the competence must deliver a real, meaningful benefit that customers
actually value; without this, the differentiation is meaningless

• Application to other markets — the competence must apply across the whole organization,
not just one area, so it can be leveraged to open up new markets
• If a competence meets all three conditions, it qualifies as a core competency.

• Core competencies often show up as organizational functions — for example, Marketing and
Sales is a core competence of Hindustan Unilever Limited (HUL), giving it superior marketing
capabilities compared to competitors.

• A firm's core competency is simply whatever it does best. For example, Wal-Mart focuses
on lowering operating costs, giving it a cost advantage that lets it price goods lower than
most competitors.
 CRITERIA FOR BUILDING A CORE COMPETENCY
• Valuable: Capabilities that help a company seize opportunities or counter threats (e.g., financial expertise in
finance companies, backed by the right talent)

• Rare: Unique abilities not widely shared among competitors; if many rivals have the same capability, it gives
no one an edge

• Costly to imitate: Hard for competitors to replicate (e.g., Intel's fast R&D cycles let it launch SRAM, DRAM,
and microprocessors ahead of rivals — competitors could copy the products, but not the R&D speed)

• Non-substitutable: No equivalent resource can replace it (e.g., Tata's low-cost strategy, built on its unique
culture and talent, is difficult to replicate)
 COMBINING EXTERNAL AND INTERNAL ANALYSIS (SWOT ANALYSIS)

• SWOT analysis is the analysis of a business’s strengths, weaknesses, opportunities

and threats. The primary objective of a SWOT analysis is to help organizations
develop a full awareness of all the factors (external as well as internal), involved in
making a business decision.
• Let us understand with an example of a law firm - what could its SWOT analysis help understand about
its business.
STRENGTH WEAKNESS
Multiple Partners with varied expertise Run by old methods
Long Term contractual service agreements No automation of work and
70 years of brand value documentation
Services spread across 20 states of India Not very employee friendly culture
400+ employee strength to deliver work
OPPORTUNITY THREAT
Automation driven advancement. Online players entering market.
Startups can be supported with AI based solutions and applications.
experienced partners. Price point of online being very
Investment in technology can multiply competitive
returns. Speed of work becoming faster by the
day.

SWOT Analysis for Internal or External Environment?

SWOT stands for Strengths, Weaknesses, Opportunities and Threats. Internal

analysis is more focused on understanding the existing structure and competencies
of the business, thus highlighting the Strengths and Weaknesses, while External
Analysis is about identifying and preparing for uncontrollable which can either be
Opportunities or threats.
Therefore, SWOT Analysis is a tool which is used for both Internal and External
Analysis.
 COMPETITIVE ADVANTAGE:
USING MICHAEL PORTER’S GENERIC
STRATEGIES

“If you don’t have a competitive advantage, don’t compete” - Jack Welch
 Sustainability of Competitive advantage
The sustainability of competitive advantage depends upon four major characteristics of
resources and capabilities: (AuDIT)

• Appropriability — Whether the firm's owners can capture the returns from its resources and
capabilities, so rewards go back to those who invested in creating the advantage

• Durability — How long an advantage lasts depends on how fast resources and capabilities
deteriorate ([Link] tied to a CEO's expertise disappearing when they leave)

• Imitability — How easily competitors can build similar resources and capabilities from scratch
if they can't buy them (e.g., in financial services, new ideas are copied quickly since they lack
legal protection)

• Transferability — How easily resources and capabilities can move between companies; the
easier the transfer, the less sustainable the advantage built on them
 MICHAEL PORTER’S GENERIC STRATEGIES
According to Porter, organizations can gain competitive advantage from three bases, called
generic strategies since they apply to businesses of any type or size, including not-for-profits:

• Cost leadership — Producing standardized products at a very low per-unit cost for price-
sensitive consumers
• Differentiation — Producing products or services seen as unique industry-wide, aimed at
price-insensitive consumers
• Focus — Producing products or services that meet the specific needs of a small, particular
consumer group
 Cost Leadership Strategy

Cost leadership is a low-cost strategy aimed at the broad mass market. It requires
vigorously cutting costs in procurement, production, storage, and distribution, along with
savings on overhead. Because of its lower costs, the cost leader can price its products
below most competitors while still earning satisfactory profits.

• For example, McDonald’s fast-food restaurants have successfully followed low-cost

leadership strategy.

It works especially well when:

• The market has many price-sensitive buyers
• There are few ways to differentiate the product
Case Study: DMart – Cost Leadership in Indian Retail
Cost Leadership Strategy:
• Low Operating Costs: Owns most of its stores, reducing rental expenses.
• Bulk Purchasing: Negotiates better deals with suppliers to offer lower prices.
• Lean Operations: Minimal store decoration and self-service model lower overhead costs.
 Some risks of pursuing cost leadership are;

• that competitors may imitate the strategy, therefore driving overall industry
profits down;

• that technological breakthroughs in the industry may make the strategy

ineffective; or that buyer interests may swing to other differentiating features
besides price.
 Achieving Cost Leadership Strategy

• To achieve cost leadership, following actions could be taken: (FOCAS)

1. Prompt forecasting of demand of a product or service.

2. Optimum utilization of the resources to achieve cost advantages.
3. Invest in cost saving technologies and using advance technology for smart efficient
working.
4. Achieving economies of scale; thus, lower per unit cost of product/service.
5. Standardization of products for mass production to yield lower cost per
unit.(Example of McDonald’s)
6. Resistance to differentiation till it becomes essential.
 Advantages of Cost Leadership Strategy

• 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.
• Buyers – Powerful buyers/customers would not be able to exploit the cost leader firm
and will continue to buy its product.
• Suppliers – Cost leaders are able to absorb greater price increases from suppliers
before they need to raise prices for customers.
• Entrants – Low-cost leaders create barriers to market entry through their continuous
focus on efficiency and cost reduction.
• 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

• Cost advantage may not last long as competitors may imitate cost
reduction techniques.

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

• 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.

• Technological advancement areas a great threat to cost leaders.

 Differentiation Strategy

• Differentiation targets the broad mass market by creating a product or service seen as unique
— through design, brand image, features, technology, dealer network, or customer service.
This uniqueness lets the business charge a premium (e.g., Domino's Pizza's 30-minute delivery
guarantee).

• Successful differentiation can bring greater flexibility, compatibility, service, convenience, or

features, along with lower costs and less maintenance. Product development is one strategy
that delivers these differentiation advantages.
Case Study: Titan – Differentiation Strategy in Indian Watch & Jewelry Market
• Brand Segmentation: Created distinct brands – Fastrack (youth), Raga (women), and Tanishq
(premium jewelry).
• Design & Innovation: Introduced stylish, tech-driven watches and handcrafted jewelry
collections.
• Customer Experience: Tanishq revolutionized jewelry shopping with transparent pricing and
trust-based policies.
• Quality Assurance: Focus on precision engineering and craftsmanship ensures superior
product value.
 Basis of Differentiation
• Product — Innovation that meets customer needs, though costly to develop through R&D,
production, and marketing (e.g., Apple's heavy R&D investment in the iPhone, which
customers value)

• Pricing — Can go either way — offering the lowest price, or charging a premium to signal
superiority (e.g., Apple dominating the smartphone segment with higher prices)

• Organisation — Using brand power or organizational strengths like location, name

recognition, and customer loyalty (e.g., Apple's loyal fanbase, known as "Apple
Fanboys/Fangirls")
 Achieving Differentiation Strategy

• To achieve differentiation, following strategies could be adopted by an

organisation:

I. Offer utility to the customers and match products with their tastes and
preferences.
II. Elevate/Improve performance of the product.
III. Offer the high-quality product/service for buyer satisfaction.
IV. Rapid product innovation to keep up with dynamic environment.
V. Taking steps for enhancing brand image and brand value.
VI. Fixing product prices based on the unique features of product and buying
capacity of the customer.
 Advantages of Differentiation Strategy

• 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.
• Buyers – They do not negotiate for price as they get special features and they have
fewer options in the market.
• 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.
• Entrants – Innovative features are an expensive offer. 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.
• Substitutes – Substitute products can’t replace differentiated products which have
high brand value and enjoy customer loyalty.
 Some risks of pursuing differentiation are;
• The unique product may not be valued highly enough by customers to justify the premium
price — if so, a cost leadership strategy can easily win out

• Competitors may quickly copy the differentiating features, so firms must find durable
sources of uniqueness that can't be imitated cheaply or fast
 Disadvantages of Differentiation Strategy

• Uniqueness is hard to sustain long-term

• Charging too high a price can push customers to switch to alternatives (e.g., iPhone users
shifting to Android flagships)

• Differentiation fails if it's based on something customers don't value (e.g., 30-minute
delivery of packaged snacks wouldn't matter to consumers)
 Focus Strategies
Focus strategies work best when customers have distinctive needs and rivals aren't targeting the
same narrow segment. A firm using focus concentrates on a specific customer group,
geographic market, or product-line segment, serving it better than competitors who target a
broader market

• Focused Cost Leadership — Competing on price within a narrow market, though not
necessarily the lowest price in the whole industry — just lower than rivals targeting the
same segment (e.g., Nirma detergent focused on price-sensitive, rural and semi-urban
consumers, offering a low-cost product tailored to this narrow segment rather than
competing broadly like HUL's premium brands.)

• Focused Differentiation — Offering unique features tailored to a narrow market,

sometimes defined by a specific sales channel (e.g., internet-only sales) or demographic
group (e.g., Rolls-Royce selling limited, custom-built luxury cars)
 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 Strategy

1. Organizations can charge premium prices for their focused products/services

2. Deep expertise in the niche makes it difficult for rivals and new entrants to compete
Disadvantages of Focused Strategy

1. Firms lacking distinctive competencies may not be able to pursue this strategy

2. Limited demand for the product/service can drive up costs

3. The niche could shrink or be taken over by larger competitors who acquire similar
competencies over time
 Best-Cost Provider Strategy
The new model of best cost provider strategy is a further development of above three generic
strategies. It is directed towards giving customers more value for the money by emphasizing on both,
low cost and upscale differences. The objective is to keep costs and prices lower than those of other
sellers of “comparable products"

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