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

• Strategy formulation is not a task in which managers can get by with intuition,
opinions and instincts.

• 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.
 Issues to consider for Strategic Analysis

Strategy evolves over a period of time

• A key element of strategic analysis is the probable outcomes of everyday

decisions. A current strategy is the result of several little choices taken over
a protracted period of time

• Strategy is influenced by experience, but it has to be updated when the

results become clear. It therefore evolves with time.
 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.

• Continuous Learning : The managers are motivated to continuously

update their knowledge, understanding and skills to meet the
predicted changes in the realm of 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.
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
 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.
Political Economic Social

Political stability Economy situation and trends Lifestyle trends

Political principles and ideologies Market and trade cycles Demographics
Current and future taxation policy Specific industry factors Consumer attitudes and opinions
Regulatory bodies and processes Customer/end-user drivers Brand, company, technology image
Government policies Interest and exchange rates Consumer buying patterns
Government term and change Inflation and unemployment Ethnic/religious factors
Thrust areas of political leaders Strength of consumer spending Media views and perception

Technological Legal Environmental

Replacement technology/solutions Business and Corporate Laws Ecological/environmental issues

Maturity of technology Employment Law Environmental hazards
Manufacturing maturity and Competition Law Environmental legislation
capacity Health & Safety Law Energy consumption
Innovation potential International Treaty and Law Waste disposal
Technology access, licensing, patents, Regional Legislation
property rights and copyrights
 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.
 GLOBALIZATION

• 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.
 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.
 Why do businesses go global?

• Technological developments and evolving political views are two

important factors in the rapid rise of multinational organizations.
Introduction of improved transportation has increased the mobility of
money, people, raw materials, and finished items.
 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.

• The service sector is now the largest single sector in the global
economy. Additionally, regional economic integration has
involved major world economies and certain developing nations.
 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 declines with sharp downward drift in sales. The sales and
profits fall down sharply due to some new product replaces the existing product. So, a
combination of strategies can be implemented to stay in the market either by
diversification or retrenchment.
• 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.
• One of the key aspects of value chain analysis is the recognition that
organizations are much more than a random collection of machines,
material, money and people.

• These resources are of no value unless deployed into activities and

organized into systems and routines which ensure that products or
services are produced which are valued by the final consumer/user.
 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.
 INDUSTRY ENVIRONMENT ANALYSIS

The goal of the industry environment analysis, which is typically an

important step of strategic analysis, is to estimate the amount of
competitive pressures the business is presently facing and is expected to
face in the near future.
Porter’s Five Forces Model
•
 Porter’s Five Forces Model

• Every business operates in the competitive environment. Competitive state

of an industry applies a strong influence on how firms develop their
strategies. Porter's Five Forces analysis is a simple but efficient way for
determining the key sources of competition in business or industry.

• Understanding the variables that affect industry helps to adapt strategy,

boost profitability, and stay ahead of the competition. Strategist may use a
strong position to organizational advantage or reinforce a weak one to
avoid making mistakes in the future.
 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.

• The collective strength of these five competitive forces determines

the scope to earn attractive profits. The strength of the forces may
vary from industry to industry.
 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.
• Experience curve has following features:
• As business organisation grow, they gain experience.
• Experience may provide an advantage over the competition.
Experience is a key barrier to entry.
• Large and successful organisation possess stronger “experience effect”.
 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 makes decisions by seeking
information about potential choices and integrating it with existing
knowledge about the product. They weigh the advantages and
disadvantages of each option before making a decision. The stages of
this decision-making process include:

1. Problem 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”.
 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
 The answers to three questions help identify an industry’s key success
factors:

• On what basis do customers choose between the competing brands of

sellers? What product attributes are crucial to sales?

• What resources and competitive capabilities does a seller need to

have to be competitively successful, better human capital, quality of
product or quantity of product, cost of service, etc.?

• What does it take for sellers to achieve a sustainable competitive

advantage, something that can be sustained for long term?
• Managers need to know what kind of resources are competitively valuable.

• Using the industry’s KSFs as cornerstones for the company’s strategy and trying
to gain sustainable competitive advantage by excelling at one particular KSF is a
fruitful competitive strategy approach.
• 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. Only rarely does an industry have more than three
or four key success factors at any one time.

• Managers, therefore, have to resist the temptation to include factors

that have only minor importance on their list of key success factors.
The purpose of identifying KSFs is to make judgments about what
things are more important to competitive success and what things are
less important.