Introduction to Business Policy and Strategic Management (Unit 1) ([Link].

in) 11

UNIT 1

Introduction to Business Policy and

Strategic Management

1.1. BUSINESS POLICY

1.1.1. Introduction
Policies are defined as a set of management decisions which are directed towards sustaining and improving the
competitive advantage of the firm. It is based on the system of internal and external values. The scope or the
area within which decisions can be taken by the subordinates in an organisation is referred to as policies. It
allows the lower-level management to take decisions in regard with the organisational issues and disputes
without approaching the top-level management.

Business policies refer to the guidelines set by an organisation in order to manage and direct its actions. They
also outline the boundaries of decision-making. Broadly, it is the study of all the roles and responsibilities
carried out by the top-level management, the various decisions influencing the organisation in long-term and the
major problems affecting the organisational success. For the attainment of organisational goals, business
policies also deal with the procurement of resources.

According to Koontz and O’Donnell, “Policies delimit an area within which a decision is to be made and
assure that the decision will be consistent with and contribution to objectives.”

According to Miller, “A policy is a statement or a commonly accepted understanding of decision-making

criteria or formulae, prepared or evolved to achieve economy in operations by making decision relatively
routine on frequently occurring problems and, consequently, facilitating the delegation of such decision to
lower managerial levels”.

Business policies are the long term plans which are also termed as strategic management and long-range
planning. These are man-made policies or pre-defined set of actions which are framed to direct and assess the
work performance of an organisation towards the organisational objectives.

1.1.2. Nature of Business Policy

The nature of business policy is as follows:
1) Future-oriented Decision-making: In general, business policy refers to the formulation of decisions in
relation to the future prospects of the existing business.
2) Implicit Guide: A business policy acts as an implicit guide which outlines the general limits and directs the
actions of managers for the firm.
3) Top Management Activity: These decisions are taken by the top level authorities after analysing the
strengths and weaknesses of the firm in terms of product price, quality, leadership position, resources, etc.,
which are associated with its environment.
4) Defines Business Objectives: A business policy states the main purpose, the organisational character, the
description of what is to be achieved and the utilisation of resources for achieving the business objectives.
5) Proper Allocation of Scarce Resources: It focuses extensively on the allocation of scarce resources.
Theoretically, strategy is the method of allocating resources while planning is to set the boundaries of
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6) Represents the Best Thinking: The business policy denotes the best outlook of the firm to achieve its
business objectives in the present social and economic situation.
7) Analyses the Nature and Procedure of Choice: A business policy studies the nature and procedure of
choice with reference to the future prospects of independent firms. This study is carried out by the person
who is responsible for taking and executing decisions.
8) Longevity: Usually, all business policies are long-term. These are formulated after a comprehensive
assessment of several internal and external factors which influence the market position of the firm.

1.1.3. Process of Formulating Business Policy

The most significant aspect of business planning is the formulation of
business policy. It is vital to frame sound policies so as to ensure smooth Defining the Policy Area
functioning of an organisation. If an organisation is not following any
policies then this may lead to disorder and dictatorship. Therefore, a Recognising the Policy Alternatives
careful planning is mandatory for the formulation of business policies.
Following are the different steps involved in this procedure:
1) Defining the Policy Area: In the first step, the policy area for which Assessing the Alternatives
a policy is framed must be defined. While stating the policy area, the
need and objectives of an organisation should be kept in mind. The Choosing the Alternative Business Policy
policy area should not overlook the market expectations and major
areas that are essential to the firm.
Executing the Business Policy
2) Recognising the Policy Alternatives: After defining the policy
area, the firm must identify the policy alternatives. These
alternatives are chosen on the basis of internal and external Monitor
environmental analysis. Where, internal environment states the Figure 1.1: Process of
strengths and weaknesses of an organisation, the external Formulating Business Policy
environment helps in identifying the opportunities available and the
level of competition.
3) Assessing the Alternatives: From all the possible alternatives, the best policy alternative must be
considered. This action involves a proper assessment of all available alternatives. There must a mutual
consent over the selection of an alternative, which is crucial for the business as a whole. Along with this,
the factors like price, advantages, resources, market tactics, etc. should also be evaluated.
4) Choosing the Alternative Business Policy: Once a proper assessment of all alternatives is done, the most
suitable alternative should be selected. The choice of an alternative is the long-term decision therefore it
should be first applied on a trial basis. Any sort of carelessness should be avoided in order to attain the pre-
defined goals and targets of the firm.
5) Executing the Business Policy: During the trial run, there may be suggestions regarding the improvement
of business policy. If the policy is found to be accurate then it can be executed. The explanation of the
policy must be given to those who are going to execute the policy.
6) Monitor: An intensive discussion should be carried out regarding the execution and influence of different
clauses or provisions in the policy. This largely helps the firm in the implementation of policy.

1.1.4. Importance of Business Policy

The importance of business policy is as follows:
1) Coordination: Business policies help in coordinating the organisational activities towards the business
objectives. This fosters uniformity of action within the entire firm. These policies not only encourage
cooperation but also stimulate initiative.
2) Quick Decision-making: Policies facilitate the lower-level management to take immediate actions and
quick decisions. It also defines the limits within which the decisions have to be taken. This enables the
subordinates to take decisions confidently without approaching their superiors. Each policy carries few
guidelines on the basis of which a particular activity or situation can be tackled. A lot of time is saved by
forecasting the recurring issues and suggesting solutions for the same.
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3) Effective Control: A logical basis of evaluation for the performance of a firm is provided by the business
policies. They also ensure that there is coordination between the organisational objectives and activities.
They eliminate any kind of divergence in the actions planned by the firm. If the policies are not well-
defined then this may lead to deviations. These deviations influence the efficiency of the firm at large.
Hence, policies are referred as derived objectives and provide guidelines for various procedures.
4) Decentralisation: Business policies clearly define the roles and responsibilities of the executives which
help in decentralisation of activities. The delegation of authority is given to the executives so that they can
efficiently follow the business policies. The work procedure for managers can also be obtained from the
business policies. These policies provide guidelines to the executives in order to find out suitable actions
having certain limitations.
5) Internal Controls: Policies also act as the internal control mechanism of the firm. This helps in controlling
the behaviour of few employees and not all of them. A firm may have a policy that while counting the
money, two employees must be present and they must also sign the record where the calculated money is
noted down. This policy must be obligated under the auditing procedure or else this may prove as a
weakling to the internal control.
6) Reduces Costs: There is a need to minimise the cost of firm. This can be achieved by finding out the best
price for the firm‟s requirements like cheap suppliers with good quality material. It can also be done by
minimising the financial losses such as financial errors, employee frauds, etc. When a business frames
policies which state the possible risk factors and wants its employees to know them, then this may create a
need for risk management. Therefore, it is necessary to ensure that the employees must abide by the
business policies which are directed towards risk minimisation.
7) Maintain Compliance: Business policies also look after the company‟s internal and external stakeholders
so as to maintain a degree of accountability. For this purpose, the company is responsible to handle the staff
or appoint a person to do the same job. The employees must also keep proper records and follow-by defined
policies and processes.
8) Develop a Learning Culture: Business policies encourage the employees to keep learning and enhancing
their job knowledge. The employees must find out and read the business policies and update the policies
annually by developing a procedure.

1.1.5. Limitations of Business Policy

Limitations of business policy are as follows:
1) Inadequate Coverage: Business policies are unable to cover certain issues and this might lead to
unpredictable situations which are difficult to handle. Therefore, at times, policies prove to be pointless.
2) Limited Zone: There is no immediate solution to every problem when following business policies. The
policies have certain limitations which restrict the management to take decisions.
3) Rigidness: In a dynamic world, there is no place for rigidness. But once the policies are framed, they are
followed year after year. This compels the managers to abide by the policies and take decisions accordingly.
4) Consistency in Policies: Policies of consistent nature may not be profitable in the ever-changing
environment. It might also be possible that the present situation is totally different from the one according
which the business policies were framed as the social, economic, political and technological factors of the
environment keep on changing. In such situations, policies are of no importance.
5) Policies are Not an End: Policies only provide certain rules and guidelines for the smooth functioning of
the business. But, they do not determine the end point of the business.
6) Policies Provide Set Rules: Policies provide a framework under which all the employees are expected to
work as per the set guidelines. Since there is no freedom to speech or act, therefore, the employee is not
able to show his own ability.

1.1.6. Current Trends in Business Policy

The current trends in business policy are as follows:
1) Top management Prerogative: A lot of importance is given to the functions and responsibilities of top
management by the business policies. These functions and responsibilities include defining goals and
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objectives, determining the course of action, regulating and directing the different activities which are
being performed within the organisation, addressing and maintaining the balance between the external
and internal group‟s interests and making sure that the organisation becomes successful in accomplishing
its objectives.
2) General Management Bias: The main focus of business policies remains on the overall managerial view
rather than specific functional elements. While analysing the performances, the policy makers examine all
important issues with a broader perspective rather than going into specific details, i.e., determining the
effect of any business decisions on the overall performance of the organisation. For this purpose, it is
essential to select the correct way, while putting in background the organisational capabilities and
environmental pressures.
3) Resource Focus: The main focus of business policies remains on the proper allocation and mobilisation of
resources so that the objectives of the organisation can be accomplished in the most effective manner and it
can compete even within the intense competition or unfavourable business situations.
4) Externally Tuned: Business policies help in outlining the significance of environmental influence on
organisational performance. It also highlights the requirement of top management to make the suitable
wayout. In the given situation, while determining the organisational effectiveness, the most important factor
is considered is the organisational capability to adapt to changing environmental challenges.
5) Covers a Large Territory: At present, vast business dimensions are covered by the business policies and
strategic management. This is why they are readily accepted by different types of organisations whether
public sector, non-business, or small firms.

1.2. STRATEGY

1.2.1. Concept of Strategy

The word “strategy” is derived from a Greek word “strategia”, which means “generalship”. The term strategy
entered the business world from military services where it was originally used. Strategy works as a blueprint of
an organisation that defines its vision, mission, and also helps in determining the future course of action.
Strategy helps an organisation to minimise the strengths of competitors by maximising its own strengths.
Strategy is formulated to achieve current goals of an enterprise by optimum allocation and utilisation of internal
resources and by collaborating different organisational pursuits.
Strategy tries to achieve synergy and balance between objectives, resources and concepts to maximise the
possibility of success and fruitful results. In wider terms, strategy refers to determining the fundamental long-
term organisational goals and at the same time developing plans, acquiring, allocating and deploying resources
in order to achieve those goals. The purpose of formulating strategy is to bring consistency and alignment in the
activities of an organisation, which can be accomplished by various endeavours, methods and resources.
According to George A. Steiner, “Strategy means deciding the basic mission of a company, the objectives
which it seeks to achieve and the policies governing the use of resources at the disposal of the firm to achieve
its objectives”.
According to Alfred D. Chandler, “Strategy is the determination of the basic long-term purpose and
objectives of an enterprise and the adoption of courses of action and allocation of resources necessary for
carrying out these goals”.
According to William F. Glueck, “Strategy is a unified, comprehensive and integrated plan designed to assure
that the basic objectives of the enterprise are achieved”.
According to Igor Ansoff, “Strategy is the common thread among the organisation‟s activities and product
markets that defines the essential nature of business that the organisation was or planned to be in future”.
Strategy is not as simple as it seems to be. However, a logical understanding of its theory helps to grasp it and
work with more ease. Theories help in understanding various concepts related to strategy such as definitions,
terms, assumptions and their explanations, propositions and related hypotheses, and the techniques used to test
and modify them.
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1.2.2. Nature of Strategy

The nature of strategy can be understood by following points:
1) Provides Structure: Strategy strives to establish and communicate the image of the organisation with the
help of its various goals and objectives. Strategy develops a fundamental roadmap for providing guidance to
the enterprise for making rational decisions and achieving organisational goals.
2) Integrated Approach: A good strategy follows an integrative approach for allocating internal resources
and using them for the benefit of the entire organisation. It directs and supports the enterprise in taking
necessary decisions for maximising the strengths and facing the environmental threats with confidence.
3) Relates an Organisation with the Environment: With the help of strategy an organisation can interact
with the factors of external environment so that the management can take necessary steps to achieve the
organisational goals. Hence, formulating strategy is an important activity by which the enterprise can relate
to its environment.
4) Set of Actions: Strategy is an arrangement of different actions that are taken in varying situations to
achieve certain objectives, or to solve some problems.
5) Future Oriented: Strategies are formulated to solve problems that are new and have not been previously
handled by the organisation. Hence, it can be said that it is future-oriented.
6) Combination of Internal and External Factors: Strategy tries to match the internal strengths to meet
external opportunities and threats. Therefore it is a combination of internal and external factors of the
environment.
7) System-Oriented: To work efficiently, strategy operates under a certain system that consists of rules and
standards, followed in the organisation.
8) Involves Contradictory Actions: As strategic actions are influenced by environmental factors, at times
certain decisions taken on the basis of the strategy may be contradictory in nature. These actions may occur
simultaneously or consecutively.

1.2.3. Scope of Strategy

The scope of strategy stipulates the market position as desired by the firm. Precisely, it gives the details about
the market or the industry in which the organisation is desirous to explore, that is to say, the extent of the
markets which the organisation will compete in future. The scope of strategy includes the following:
1) Analysing Current Position: The following things should be kept in mind while analysing current market
position:
i) Where does the company stands?
ii) How does the firm and the brand match with the group in which it is placed?
iii) Who are the target audiences?
iv) What are the perceptions and misperceptions about the brand at present?
v) What types of marketing communications are adopted? Whether they are effective or not.
2) Changes Made: The scope of strategy is associated with analysing the following:
i) What are current trends within the industry?
ii) What changes are taking place?
iii) What factors are affecting the choice of the target audience?
iv) What are the effects of the economic and technological changes?
v) What are the various regional, national or international events that may influence the organisation?
What is the role of competition?
vi) What are the various external forces which may influence the company and the manner in which trade
is conducted?
3) Future Forecast: The scope of strategy includes the analysis of previous policies and framing of future
policies by contemplating on the following aspects:
i) Where does the organisation want to see itself in the future?
ii) What are the short-term and long-term objectives of the organisation?
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iii) Are company „secret strategies‟ are still working?

iv) What are the plans of the company for growth?
v) How good are the staff members?
vi) Where does the brand will reach in coming years?
Scope of a strategy includes recognising three kinds of strategies and showing how the scope of strategy can be
affected by the description of the business model. Following are the three different business models:
1) Strategist is making a new business model when he is leading to a strategic initiative for implementing a
corporate-level strategy.
2) Strategist is enhancing various or each part of a business model if he is leading to a strategic initiative for
implementing a business-level strategy.
3) Strategist is optimising one or several elements of a business model if he is leading to a strategic initiative
for implementing a functional level strategy.
The term strategy is vague in several ways, not only in the way of distinguishing the corporate-level strategy,
from the business-level and the functional strategy.

1.2.4. Levels at which a Strategy Operates

It is worth stressing that strategy exists at different levels in the organisation. Once managers have determined
“what is our business, what will it be and what should it be?” Then they have a basis for setting challenging and
achievable performance objectives for formulating strategies to achieve them. The desired outcome is the
creation of a hierarchy of objectives spanning the organisation from top to bottom and the formation of a
corresponding hierarchy of strategies to achieve the objectives at each level in the organisation. There are three
levels of strategy as shown in figure 1.2:

Corporate Strategy 1) Values

1) Business and
Culture
2) Mission
2) Goals
Business Unit Strategy

Functional strategy

Information Finance Research and Marketing Manufacturing Human

Systems Development Resources

Figure 1.2: Levels of Strategy

1) Corporate Strategy: Corporate level strategies or corporate strategies are the plans of top management
developed for supervising the overall functioning of the enterprise and achieving the expected level of
performance. These strategies outline the organisational activities and objectives in various areas of an
organisation like divisions, product lines, technologies, consumers and their needs, etc. Corporate strategies
guide an organisation to become what it wants to be in order to maximise the performance levels. For
example, since the effort of Nokia to launch its own operating system failed, in the year 2011 Microsoft
and Nokia formed an alliance in which Nokia agreed to produce smartphones with the Windows operating
system. With this alliance, Microsoft was able to access the market of one of the largest cell-phone
manufacturer. Nokia was able to retain its market share with the help of this merger.
2) Business Strategy: Business level strategies are also called as business strategies or Strategic Business Unit
(SBU) level strategies. A Strategic Business Unit (SBU) is based on the idea of recognising the separate
market segments catered by the company. Business strategies are formulated differently for each segment
due to the differences in their environmental conditions. The business level strategies are formulated to
satisfy the needs of the customers of different segments and also to provide value to them. Hence fulfilling
the demands of customers belonging to different segments helps the organisation in increasing and
sustaining its competitive advantage. For example, Domino’s Pizza owes its success to Turnaround
strategy that had positive effects due to the organisation-wide efforts of achieving a simple and clear goal
that was, “have a clear win against competitor in a taste test”.
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3) Functional Strategy: Functional level denotes the operating division levels and departments in an
organisation such as marketing, finance, human resources, R&D, etc. Various strategic decisions at
functional levels are associated with business practices and value chain. The functional level strategies are
focused on expanding and synchronising the resources for implementing the business level strategies in an
efficient manner. Functional level of an organisation provides input to the higher level strategies such as
business level and corporate level strategies and converts them into action plans for various departments.
These plans are needed to be carried-out for the strategy to be successful. Higher level strategies depend on
the functional level for information regarding resources and capabilities on the basis of which strategies at
business and corporate level are formulated. For example, marketing strategy can be broken into various
functional level strategies such as pricing strategies, distribution strategies, promotion strategies, sales
strategies, etc.

1.2.5. Approaches to Strategy Making

Various approaches to frame the strategy are as follows:
1) Autocratic Approach: In this approach, a leader has the complete authority to formulate the strategy and
making decisions. The strategic leader has the responsibility to define the objectives, formulate the
strategies, and select the alternative course of action as well. This approach is centralised in nature, as the
command is in the hands of top level management.
2) Transformational Approach: In transformational approach, the strategic leader inspires the employees to
achieve the organisational goals using motivating vision and mission statements. He encourages the
organisational members so that they take interest in achieving the common goal with the help of various
situations and metaphors. Creation of shared objectives and encouraging vision statement aligns the
corporate activities.
3) Rational Approach: The rational approach of strategy making emphasises on analysing the pros and cons
of every alternative strategy and then selecting the best alternative.
4) Learning Approach: The learning approach focuses on adaptability and flexibility of the organisational
processes. Since the business environment is highly dynamic, the learning approach puts great emphasis on
continuous learning and synchronising it with market demands.
5) Political Approach: In this approach, the strategic leaders formulate the strategies based on the ideas of
new products and the techniques are adopted on the basis of employees‟ preferences. The selection of
strategy is done by analysing the interaction between the internal environment and the political environment
of the organisation. The self-regulating behaviour of employees decides the way in which the strategy has
to be implemented.

1.2.6. Importance of Strategy

Following points highlight the importance of strategy:
1) Provides Direction: Strategies direct an organisation to achieve its goals. Organisations lose their purpose
in absence of proper guiding strategies.
2) Facilitates Decision-Making: Strategy facilitates decision-making as strategy and strategic initiatives act
as point of reference for any action.
3) Ensures Proper Allocation of Resources: A good strategy helps the organisation in allocating the
resources in an efficient manner. While formulating a strategy, the strategists have to keep in mind the
information that they have access to, and appraise all possible outcomes before selecting a particular
alternative.
4) Synchronises Activities: Organisations can also be benefited by developing a master strategy that
encompasses the entire organisation. This comprehensive strategy helps the organisation in synchronising
the strategic initiatives taken at different levels. A companywide strategy also ensures that there are no
variations, and all the departments are working towards achieving a single goal with minimum conflicts,
overlaps, and contradictions in the organisation.
5) Improves Communication and Commitment: Strategy helps in configuring companywide actions,
communication and level of commitment between different departments of the organisation by giving a
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6) Enables Comparison of Alternative Actions: Strategies help in analysing the records of previously
adopted strategic initiative and allow the top level management to compare the alternative actions and select
the best option among them for different business units. This ensures that the valuable resources are
allocated optimally.
7) Helps Accomplishing Goals: Strategies enable a company to achieve its goals and create a market position
by allocating resources, providing proper training to employees, enhancing the capacity of production, etc.

1.2.7. Linking Strategies and Policies

Policies represent the boundary which acts as limitations for the subordinates while taking decisions. The
management is responsible for taking decisions regarding business policies. While taking these decisions, they
give a detailed thought to the organisational values. Facilitating the competitive advantage to the organisation is
the main aim behind policies formation in order to deal with the prevailing market competition.

The combination of management decisions which are directed towards improving and enhancing the firm‟s
competitive advantage are called policies and they are dependent on both intrinsic and extrinsic organisational
values. On the other hand, strategy acts as an organisation‟s blueprint which describes its mission, vision and
helps in identifying future business activities. By boosting the strengths of the organisations, strategies help in
minimising the competitors‟ strengths.

Formulation of a business strategy is directed towards the accomplishment of present objectives by ensuring
optimal utilisation of organisational resources after analysing and integrating every organisational objective.
The gap between the policies and tactics is minimised with the help of strategies. Broadly, strategy can be seen
as the act of determining the long-term goals and future plans of the organisation alongwith the acquisition,
allocation and consumption of resources which are vital for achieving organisational objectives.

1.2.8. Difference between Strategy and Policy

Alongwith some of the similarities, there are some basic differences between a strategy and a policy, which are
discussed table 1.1:
Table 1.1: Difference between Strategy and Policy
Basis of Difference Strategy Policy
1) Meaning A strategy provides a direction in which the A policy provides guidelines to the employees
organisation needs to go for achieving the for smooth operations and decision making.
organisational goals by employing various
resources.
2) Nature With the help of strategy the formulated A policy just instructs in work but is not
policies are applied practically within a associated with any time frame.
stipulated time-frame.
3) Features Strategies are formulated for those situations Policies are formulated for the activities which
which have yet not occurred and hence the are repetitive in nature.
organisation has no formal response.
4) Orientation Strategy is formulated for critical issues and Policies are formulated by the top
requires constant attention from the top management for day-to-day activities. After
management. the policies are formulated it becomes the
responsibility of subordinates to implement
those without the involvement of top
management.
5) Scope Strategies are formulated on the basis of Policies are formulated on the basis of
actions. thoughts.
6) Implementation at Strategy is implemented at every level in the Policies are implemented by the middle and
Level of Organisation organisation. lower level employees.
7) Focus/Objectives Strategies are the ways to achieve the Policies are the instructions to achieve the
organisational objectives. objectives.
8) Overall Goal Strategies are formulated to utilise the available Policies are formulated to direct the operations
resources to achieve the organisational goals and activities of the organisation.
efficiently.
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1.3. STRATEGIC MANAGEMENT

1.3.1. Meaning and Definition of Strategic Management
The words “strategy” and “management” combine to form “strategic management”. Strategic management is
concerned with the formulation of vision, objectives, strategy formulation, strategic implementation and making
changes in the strategic intent according to the changing requirements of the organisation.
Strategic management begins with the formulation of mission statement and setting of objectives for the
organisation. Then a portfolio of business or business model is prepared, and ends at conducting functional
activities to achieve the pre-established objectives and goals.

According to Ansoffs, “Strategic management is a systematic approach to a major and increasingly important
responsibility of general management to position and relate the firm to its environment in a way which will
assure its continued success and make it secure from surprises”.

According to Glueck, “Strategic management is a stream of decisions and actions, which leads to the
development of an effective strategy or strategies to help achieve corporate objectives”.

According to Lloyd L. Byars, “Strategic management is concerned with making decisions about organisations‟
future direction and implementing those decisions”.
The concepts of strategic management have developed over the years. Strategic management is not a one-time
process but is re-evaluated and implemented periodically. It is a holistic approach that ensures that there is
harmony between the organisation and its environment. Hence, strategic management is concerned with
different organisation-wide activities such as analysing the environment, providing direction, developing and
implementing strategies, and applying strategic control measures.

1.3.2. Characteristics of Strategic Management

Strategic management is a decision-making process that is depicted by the following features:
1) Long-term Issues: The issues which strategic management handles are usually of long-term in nature.
These issues not necessarily affect the organisation immediately but will benefit the organisation in the
future. For example, if a company spends in the education of its employees, it may not witness increase in
productivity in the short-run, but in due course, highly educated employees will deliver better results and
will also help in increasing the returns.
2) Competitive Advantage: Strategic management assists the managers in looking for fresh avenues for
achieving sustainable competitive advantage. When strategic management principles are applied regularly
in the proceedings of the organisation, managers can increase the number of satisfied customers, provide
goods and services at economical prices, and can develop a highly satisfied workforce.
3) Impact on Operations: An effective strategic management process affects operational issues positively.
For example, if increase in salary and performance are correlated then this would increase the operational
productivity, as the employees will be motivated to put more efforts in their work. Operations decisions are
the ones that involve topics like deciding the best way to handle sales with particular segment of customers
or making decision regarding selling products on credit. Decisions concerned with operational issues are
made by lower level managers.
4) Uncertain and Future-Oriented: Strategic management makes decisions regarding situations that would
occur in the future and are not a part of the day-to-day activities. Managers are ignorant about the after
effects of their decisions because of the dynamic and uncertain business environment.
5) Complex: Since strategic management is uncertain, it becomes complex as well. Managers come across
situations related to the business environment that are not easy to understand. There is a need for analysing
internal and external environment.
6) Organisation-Wide: The implementation of strategic management affects the entire organisation and not
merely the operation on which strategic management principles are applied. It entails strategic choices and
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7) Long-Term Implications: The implications of strategic management are long-term and do not affect the
routine operations of the organisations. The concepts of strategic management are concerned with mission,
vision and objectives of the organisation.
8) Facilitates Strategy Implementation: Strategic management makes sure that strategies are effectively
executed and implemented with the help of action-oriented plans.

1.1.1. Objectives of Strategic Management

Strategic objectives and financial objectives are the two types of objectives in strategic management. Moreover,
objectives may be of short-term or long-term. It is required to keep objectives in mind and know the difference
between these objectives while making strategy for an organisation.
1) Strategic Objectives: The objective which deals with the position of the company within the model is
defined as the strategic objective. For example, by positioning the company comparative to the external
factors like new entrants and substitute‟s threat, customers and supplier‟s bargaining power, and
competition within the industry which may affect the company, marketers can make strategic objectives.
Changing market position of the company, expanding market share or under-cutting costs of a competitor
are included in the strategic objectives.
2) Financial Objectives: Organisations can measure strategic performance with the help of financial
objectives. For example, organsiation‟s financial objective must be to increase return on capital or asset if
increasing efficiency is its financial objective.
3) Short run Objectives: Objectives which are made to deal with the immediate future is defined as the short-
term objectives. Both financial and strategic objectives can be of short-term or long-term. Usually, they rely
on concrete results that can be realised in a limited period by management. For example, increasing
company‟s monthly sales.
4) Long run Objectives: Objectives which are made to target the long-term position of the company is
defined as the long-run objectives. Since, increasing monthly or annual sales are the short-run objectives of
the company, long-term objectives focuses on company‟s growth over many years. For example, a long
run objective can be an objective of attaining a sustainable growth or becoming a market leader.

1.3.3. Scope of Strategic Management

The decisions and activities which define the future perspective of an organisation by outlining its activities and
structure, is called strategic management. These activities and structure determine the scope of the strategic
management, which are described below:
1) Economics: Strategic management involves analysing and studying the market for formulating the
strategies according to the market conditions. It is the field that is concerned with monitoring the patterns of
competitors to scrutinise their competitive strategies, their production process, their costing strategy, etc., so
that counter strategies can be formulated. It tries to understand the degree of competition in market.
Strategic management also facilitates in analysing the environmental factors and their relations with the
organisations as well as their relative influences on organisational operations.
2) Sociology: An organisation operates in an environment and in a specified market. Strategic management is
a study of this environment and market. It includes providing a direction to the organisational activities. It
strives to achieve the organisational objectives by establishing a relation between the strategic alternatives
and employee performance outcomes. It correlates the employee performance with the organisational
activities, and the ways in which performances can be improved. Moreover, a business has some
responsibilities towards the society in which it operates, as an organisation is a social entity.
3) Marketing: Strategic management involves studying the market structure, competitor analysis, strategic
positioning of the firm‟s products, etc., so that effective strategies can be formulated for becoming a market
leader. It emphasises on conducting researches on market structure and studying the influence of market-
oriented factors and strategic alternatives that in turn helps in strategic planning. It is an interrelated field of
study that requires concentrating on the factors that influence the business and planning so that they are
handled effectively.
4) Management: Strategic management strives to achieve the organisational goals by continuously
encouraging internal capabilities and utilising the resources in an optimum way so that the needs of
**
shareholders can be satisfied. It deals with analysing the decisions made by the top management for the **
Introduction to Business Policy and Strategic Management (Unit 1) ([Link]) 21

sustainable development of the organisation. It is the responsibility of the management to identify the
environmental factors that influence the organisation, recognise the opportunities and threats existing in the
environment, and formulate the strategies accordingly to deal with them.

1.3.4. An Overview of Strategic Management Process

The process of strategic management focuses on developing the strategy of the organisation. It is distinct
process, which the management uses to select strategies that will help the organisation in improving its
performance. It is a never-ending process that evaluates the companies and industries that are associated with
the organisation and its opponents. Strategic management also enables the organisation to set realistic goals so
that it is able to compete with existing and potential competitors. Process of strategic management is shown in
figure 1.3:
Environmental Strategy Strategy Evaluation and
Scanning Formulation Implementation Control

Figure 1.3: Process of Strategic Management

1) Environmental Scanning: Environmental scanning is the monitoring, evaluating, and disseminating of
information from the external and internal environments to key people within the corporation. Its purpose is
to identify strategic factors  those external and internal elements that will determine the future of the
corporation. The simplest way to conduct environmental scanning is through SWOT analysis. SWOT is an
acronym used to describe those particular Strengths, Weaknesses, Opportunities, and Threats that are
strategic factors for a specific company.
i) External Environment: External environment consists of variables (Opportunities and Threats) that
are outside the organisation and not typically within the short-run control of top management. These
variables form the context within which the corporation exists.
ii) Internal Environment: Internal environment of a corporation consists of variables (Strengths and
Weaknesses) that are within the organisation itself and are not usually within the short-run control of
top management. These variables form the context in which work is done. They include the
corporation‟s structure, culture, and resources. Key strengths form a set of core competencies that the
corporation can use to gain competitive advantage.
2) Strategy Formulation: Strategy formulation means formulation of long-term organisational plans that
would assist in carrying-out organisational activities in the best possible way. Strategy formulation is
essential for optimum functioning of the organisation. In this stage, strategies are framed by envisioning the
future of the organisation in the long-run. Once the current and the future situations of the organisation have
been determined by the strategists, SWOT analysis is used to identify the core competencies and strategic
capabilities and also to set objectives, in the order in which they have to be achieved. These objectives are
further used in developing the strategy. Strategies define the course of action an organisation would choose
to reach its goals. An organisation‟s strategy should be formulated in a way that the analysis of the
environment can be studied, vision of the organisation can be accomplished, and the set objectives can be
attained. Strategy formulation involves administering the external opportunities and threats effectively
while keeping in mind the strengths and weaknesses of the organisation by formulating long-term plans.
This involves developing the corporate vision, identifying corporate mission, setting realistic objectives,
formulating strategies and establishing policy guidelines, which are as follows:
i) Vision of the Organisation: An organisation‟s vision statement can be explained as a position that the
organisation aspires to achieve in the future. A vision statement is developed by the top management
which may include CEO, President, Managing Director, Chairman, etc. A vision statement conveys the
future state of being with respect to objectives, scope and competitive leadership to the individuals that
are in some way or the other associated with organisation. It creates an outline for facilitating the
growth of mutual relationships between the organisation and its stakeholders, i.e., its investors,
employees, suppliers, customers and other entities, directly or indirectly associated with the
organisation. It helps in formulating general objectives relating to performance of the organisation and
**
its expansion in different industries essential for the development of the organisation. **
22 MBA Third Semester (Strategic Management) MDU

The basic idea behind formulating a vision statement is to provide a concentrated view of the
organisation. It is a combining statement and also a challenging task for the entire organisation and all
the diverse sectors that work on achieving their respective objectives. This statement provides
employees with a common goal and stimulates them for conducting their routine operations efficiently.
It encourages the employees to perform ethically and morally in line with the organisation‟s
expectations.
ii) Mission of the Organisation: A mission statement describes the reason for existence of the
organisation. It specifies the organisational culture and values and also sets the guiding points for
carrying-out the activities of the business organisation. Strategy of the organisation is formulated on the
basis of the mission statement. A mission is a unique statement that defines the products, markets and
geographical scope of the business, market price, etc. At the business level, this statement becomes
exclusive and focuses solely on the details. The facets of the mission statement denote the vision of the
organisation towards strategy formulation, aim of the organisation and the perfection required in order
to attain market leadership.
iii) Objectives: Organisational plans are usually long-term and they craft long-term objectives. These
objectives envelop areas like organisation‟s profitability, competitive position, public image, return on
investment, productivity, growth of employees, etc. These objectives should not be vague, and should
be clearly defined and in quantifiable terms. The objectives of the organisation should be challenging
yet realistic. Objectives are the results that one expects out of the business activities. The objectives of
an organisation symbolise that the management is committed towards achieving the desired results
under a specific time period. They also help in setting performance standards on the basis of which the
performance is evaluated. These objectives help in developing strategies by creating harmony between
the decisions and decision-makers.
iv) Strategies: A strategy of an organisation is a detailed plan which helps the organisation in realising its
mission and objectives. Strategies are formulated for achieving competitive advantage and minimising the
factors that result in lowering the position of the organisation. For example, when Tata Group of Companies
comprehended that it is not able to meet its objectives with its current strategy to diversify, it sold its
subsidiary companies like Tomco, Lakme, etc., to Hindustan Lever Limited. It decided to carry on with its
more basic businesses like automobiles and steel where it had better prospects for growth and development.
v) Policies: Policies are a set of comprehensive instructions that are used for making decisions and for
relating strategy formulation with strategic implementation. Policies are formulated by companies so
that an organisation‟s mission, objectives and strategies are kept in mind while making decisions.
Policies also focus on achieving corporate goals by ensuring optimum allocation of resources. A
business policy is related to duties and responsibilities of corporate level managers, long-term strategic
decisions and factors influencing the success of the organisation.
3) Strategy Implementation: Once strategies are formulated and a sound strategic plan has been developed,
the next step in the process of strategic management is to ensure effective implementation of formulated
strategies. Strategists need to take into account various facets of implementation as the selected strategy
must be effectively put into action for realising corporate objectives of the organisation. Without successful
implementation, a well devised strategy is of no use. Thus in short, strategic implementation is the process
that facilitates in successful execution of the selected strategy. Strategies are implemented with the help of
programmes, budgets and procedures. This process may also result in modifying organisation‟s culture,
structure or management system. The process of strategy implementation is generally conducted by the
middle or lower management after being assessed by the top management. Following plans help in
successful implementation of the strategy:
i) Programmes: The actions or steps needed to implement a single-use plan is called programme.
Programmes help in putting the strategies into action. Activities like corporate restructuring, changing
organisational culture or initiating a new research project, etc., are a few examples of programmes.
ii) Budgets: The declaration of organisation‟s programme in monetary terms is called a budget. A budget
represents in detail the cost entailed in each programme. Budgets are generally used in the purpose of
planning and control. A budget along with providing a comprehensive plan of the selected strategy to
be implemented also illustrates the anticipated impact on the organisation‟s financial future with the
help of financial statements.
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Introduction to Business Policy and Strategic Management (Unit 1) ([Link]) 23

iii) Procedures: Also known as Standard Operating Procedures or SOP, a procedure is a step-by-step
explanation of the order in which a task is to be carried-out. Procedures generally provide an
explanation regarding number of operations that are necessary for completion of programmes.
4) Evaluation and Control: After a strategy is implemented successfully, it is important that it is evaluated
on a regular basis. Evaluation must be incorporated in the process of strategic management as an essential
element of strategy implementation, as it helps in monitoring the whole procedure. Strategic objectives and
performance measures are used as a base for evaluating the effectiveness of the implemented strategy. It is
an important step for attaining an impartial assessment between expected and actual results. It is the
manager‟s duty to monitor the expected responses from the different organisational sectors and business
units where the strategies are put into action. Analysing the market response is also a significant part of
strategic evaluation and control.
Various factors such as size of the organisation, business activities, number of business segments,
organisational structure, etc., determine the extent to which strategic control is necessary. Control should be
imposed in a manner that it produces the intended remedial action. The amount of control that needs to be
imposed is based on the difference between expected and actual results.
Performance is the final outcome of all the activities involved in the process of strategic management.
Strategic management process has become widely accepted as it enhances the performance of the
organisations. Managers need comprehensible, timely and impartial information from their subordinates in
order to successfully carry-out the activities related to strategic evaluation and control. This information
enables the managers to compare the actual outcome with the expected results laid down while formulating
the strategy.
Successful evaluation of strategy is based on suitable and prompt feedback. The effectiveness of strategy
evaluation depends on the information provided by the subordinates. It plays a significant role in
monitoring the soundness of the chosen strategy. If evaluation is done continuously, it would provide a
regular feedback on the performance of the strategy that was initially formulated. The process of strategic
management also has a feedback activity, which enables the management to attain feedback essential for
evaluation of results and for taking the required remedial actions. When an organisation devises strategies,
programmes etc., it should analyse its decisions and take corrective actions regarding any wrong decision
made in the past. For example, performance below the desired level shows that either strategy formulation
or implementation is at fault. It is also possible that an important factor like new competitor was overlooked
at the time of environmental scanning and analysis.

1.3.5. Significance of Strategic Management

The importance of strategic management can be explained with the help of the following points:
1) Fulfilling the Responsibilities of the Board Members: One of the most important reasons for
implementing the process of strategic management in an organisation is that it relieves the board members
from their duties.
2) Helps in Assessing the Objectives: Strategic management relieves the board and senior management from
their daily tasks to some extent so that they can focus on securing the future of the organisation. Disciplines
of strategic management help the organisations to gain a wider perspective instead of putting all their efforts
in meeting short-term challenges.
3) Develops a Decision-Making Framework: With the help of an appropriate strategy, employees are able to
make routine decisions within a framework while ensuring that those decisions are contributing to the
progress of the organisation in one direction. Strategy helps in setting the vision, checks reason for
existence and values of the organisation, defines its objectives, differentiates between threats and
opportunities, identifies techniques to enhance organisation‟s strengths and minimise the weaknesses. Thus,
it defines an outline and specifies the limits within which decisions are made.
4) Helps in Measuring the Progress: By implementing the process of strategic management, the organisation is
forced to establish objectives and set measures of organisational success. In order to establish success
measures it is important that the organisation analyses the factors that are crucial to its current success. Then
the organisation needs to revise, re-evaluate or update, and then implement its objectives. It is also important
that the board members and corporate level managers are also aware of these performance measures.
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24 MBA Third Semester (Strategic Management) MDU

5) Provides an Organisational Viewpoint: While handing the operational issues, managers generally tend to
overlook the interdepartmental issues or the issues related to the organisation as a whole. Strategic
management considers the organisation‟s viewpoint and also lays stress on the interrelated sectors so that a
strategy that is beneficial for the entire organisation is developed.
6) Improves Stability: There are certain strategies that provide strength to the organisation by opening more
avenues of growth. For example, if a business deals with only a couple of clients, then in order to survive,
it is not in the position to lose any one of them. Strategic management aims at helping the organisations in
acquiring more customers so that the business is no longer dependent on only few clients. By implementing
strategic management, an organisation can enhance its stability by executing strategies like – developing a
new product line, acquiring a new company, catering a new customer segment, etc.
7) Strong Labour Supply: Strategic management helps in conducting hands-on staffing practices so that
quality and quantity of labour can be improved. A strong workforce can be developed by – preparing
organisational charts, providing employees with comprehensive job description, refining recruitment
policies, conducting yearly appraisals, organising training sessions, taking measures to lower employee
turnover rate, preparing succession plans, developing competitive compensation plans and abiding by the
laws and regulations related to central and state government.
8) Strengthens Brand Management: A company‟s brand image can be damaged by introducing a new
product in the product line or by acquiring a company that does not match with the market image of the
organisation. Strategic management keeps in mind the objectives of brand management while making
organisational decisions.
9) Identifies SWOT: Strategic management scans the organisation‟s environment for identifying the
strengths, weaknesses, opportunities and threats that are faced by the organisation as a whole, as well as by
its separate departments. Once these are identified, it becomes easy to find out the issues related to the
product line, marketing channels, pricing methods, marketing practices, staffing practices, e-commerce
activities, etc.

1.3.6. Limitations of Strategic Management

Several drawbacks of strategic management are as follows:
1) Time-Consuming: Strategic management process is extremely time-consuming. An organisation has to put
immense efforts and resources for implementing the process of strategic management.
2) Challenging Process: Implementing the process of strategic management is quite difficult. It takes a highly
skilled and specialised workforce to craft and execute a strategy. A Master‟s or Doctorate degree in the
same discipline is needed to become a strategist. Appointing these strategists or working with an
organisation providing strategic assistance is generally quite expensive for an organisation.
3) Absence of Short-Term Benefits: Although the investors are interested in achieving quick returns, the
rewards for applying strategic management principles can be realised only in the long-run. At times,
strategic management causes short-term losses for the organisation in order to deliver long-term benefits.
These short-term losses can diminish the value of the organisation that may cause it to shut down.
4) Unexpected Outcomes: Many concepts of strategic management are related to making future predictions.
But practically future cannot always be foretold. Any significant political or financial change in the
environment may lead to results that would be totally different from those that were projected while
formulating a strategy. It is very challenging to predict future business outcomes due to the dynamic nature
of the environment. Hence, in such circumstances, strategic management can prove to be a bane for the
organisation.
5) Poor Adaptability: Strategic management may create inflexibility and bureaucracy in an organisation and
takes away the ability of the organisation to react to the changes in the environment. As a result, the
organisation is not able to exploit the environmental opportunities and steer clear of the threats.
6) Limited to Set of Rules: An organisation cannot apply the process of strategic management according to
some prescribed norms, programmes and schedules. It is based on a theory that deals with every situation in
prescribed manner. This makes strategic management a belief or dogma of business and management rather
that a practical approach. This becomes a hindrance in strategy formulation.
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48 MBA Third Semester (Strategic Management) MDU

UNIT 2

Environment Appraisal & Strategies

2.1. BUSINESS ENVIRONMENT

2.1.1. Concept of Business Environment

Business environment may be considered as a set of factors that influence the functioning and effectiveness of a
business. Interacting and transacting with the environment is the basic need of every business organisation.
Thus, there is a mutual interdependence between business and the environment.

According to Keith Davis, “Business environment is the aggregate of all conditions, events and influence that
surrounds and affect it”.

According to Andrews, “The environment of a company as the pattern of all external influences that affect its
life and development”.

According to W.F. Glueck and Lawrence R. Jauch, “The environment includes factors outside the firm,
which can lead to opportunities or threats to the firm. Although there are many factors, the most important of
these factors are socio-economic, technological, supplier, competitors and government”.

The nature of business environment is ever changing and unstable. The future of any business enterprise is
dependent and determined by the relevant risks and opportunities. The risks and opportunities are those factors
which lie beyond the control of a company‟s management system. The customers, competitors, stakeholders,
brokers, business trends, policies, government activities, social and economic factors, and technological
advancements are all the components of an organisation which combine to form the business environment.

2.1.2. Nature of Business Environment

The nature of business environment is discussed in the following points:
1) Environment is Inseparable from Business: The most essential element of any business is the
„environment‟. No business can function without its environment - legal, political, social, cultural and
economic environment. There is a mutual relationship between the business and environment. Therefore,
the success and failure of business is influenced by the changes in the environment. The enterprise
comprises of an interactive process which collects the inputs like raw materials, capital, manpower, energy,
etc., from the environment, converts them into finished goods and returns them back to the environment.
2) Environment is Dynamic: It is difficult for any business environment to remain constant for a long period of
time. Thus, environment is considered dynamic in nature. The environmental factors undergo changes according
to the tastes and preferences of the customer, amendments made in the government policies, up-gradation in
technology, etc. All these factors affect the business in their decision-making process. Hence, the ability of
adapting to the changes and implementing them into action leads to success and growth of the business.
3) Business Lacks Control Over Environment: Business environment keeps on changing continuously.
Business can influence the internal environment not the external environment. Therefore, it may be
considered that internal environment is controllable and external environment is uncontrollable.
4) Internal and External Factors: There are internal and external factors which influence the business
environment. The factors such as business objectives, policies, staff members, etc., combine to form the
internal environment. Whereas, the external environment comprise of micro and macro factors. The micro
factors involve consumers, competitors, suppliers, society, etc. Macro factors include economic, legal,
political, cultural, technological and other external factors.
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Environment Appraisal & Strategies (Unit 2) 49

5) Environment is Complex: There are several difficult situations in business environment which the
enterprise must be aware of, and must make the best use of them. In comparison with the traditional form,
the modern business is much more complex and unstable in nature.
The scope and size of modern business is as wide as its environment. The changes like increasing
government interference and social awareness unfavourably affect the business enterprise.
6) Environment is Multifaceted: There is always a positive and negative outcome to the changes made in the
environment. Different people perceive differently upon the changes. For instance, the changes may prove
to be an opportunity to some while threat to others.
7) Opportunities and Obstacles: The business environment is flexible in nature. Therefore, the business may
act as an opportunity or an obstacle to organisation depending on the situation. Opportunity provides scope
for expansion whereas obstacle curbs growth of the organisation.
8) Regulates the Scope of Business: Business organisation functions within a environmental framework. This
can be in form of social, political, economic, and legal structures, within which all business activities are
carried out. For the growth and survival of the business organisation, the changing structure should be
analysed effectively and adapted efficiently.
9) Long Lasting Impact: Business can be affected by the environment either positively or negatively. This
can bring in a long lasting impact on the conduct of business activities. Therefore, business analysis help to
diagnose the strength and opportunities and formulate strategies and policies to avoid risks and threats of
the environment.
10) Uncertainty: There is always a possibility of frequent changes in the business environment. These changes
are highly uncertain. Thus, it becomes difficult for the business to forecast its future events. The business
must constantly keep a check on the environmental changes in order to improve not just the present but its
future performance as well.

2.1.3. Environmental Sectors: Components of Business Environment

An understanding of environment and changes related to it is very essential for business enterprises. Those
business enterprises which scan their environment and are always prepared to adapt changes, may achieve
success. Contrary to this, enterprises which fail to adjust as per their environment are unable to survive in the
long term.

Business environment can be broadly classified into:

1) Internal Environment, and
2) External Environment.
Components of Business Environment

Internal Environment External Environment

1) Financial Resources
2) Physical and Human Resources
Micro/Operating Macro/General
3) Objectives of Business Environment Environment
4) Managerial Policies
5) Morale and Commitment of Human
Resources 1) Suppliers 1) Economic
2) Customers 2) Political
6) Work Environment
3) Market Intermediaries 3) Socio-cultural
7) Brand and Corporate Image 4) Technological
4) Competitors
8) Labour Management Relationship 5) Natural
5) Public
9) Technological and R&D Capabilities 6) Demographic
10) Promoters‟ Vision 7) International/ Global
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50 MBA Third Semester (Strategic Management) MDU

[Link]. External Environment

External environment are those factors which exists outside the business firm. The external factors of a
company are also known as uncontrollable factors like economic factors, socio-cultural factors, demographic
factors, legal factors, technological factors, etc.

The external factors are beyond the control of business enterprise. Therefore, success of a firm is highly
dependent on the capability to appropriately adjust and design the internal factors. This helps to make most of
the opportunities and overcome threats in the environment. Usually, the business environment is considered as
the external environment of the business. But every business enterprise comprises of two types of environment
i.e. internal and external environment.

The external environment consists of two vital elements:

1) Micro Environment, and
2) Macro Environment.

1) Micro Environment: Micro environment refers to the factors which directly influence the performance of
the company. In other words, these factors are the most immediate environment of the company. The micro
factors include suppliers, competitors, marketing intermediaries, consumers, and public. These factors are
affected by the macro elements of the business environment.
The micro environmental factors are more closely related to the company in contrast to the macro factors.
The micro factors affect different industries in different ways. Thus, a firm may apply the micro factors
which are applicable for a particular business activity. For example, the micro environment of a restaurant
can be its customers, other restaurants, suppliers of raw material, human resources, etc.
The success or failure of a firm depends on how effectively it deals with its micro elements such as:
i) Customers: Customer is the most important element of the business enterprise. The main aim of any
business is to attract and retain its customers. This helps the business to attain long term survival and
profitability.
Therefore, to increase the level of loyal customers, business enterprise should carefully observe the
needs and wants of the customers and fulfil them effectively. The business enterprises must also
analyse the changing tastes and preferences of the customers and make changes in its product and
services accordingly. No business can neglect the customer‟s interest, as this may adversely affect the
company. Hence, “customer is the central focus of the business environment”.
ii) Suppliers: Suppliers are those who supply raw materials, components and machines to the business
enterprises. The suppliers are an important micro factor in the business environment. They should be
trustworthy and cordial with business enterprise. This will help the enterprise to attain the customer
expectations and companies will become free from the burden of keeping heavy stocks.
iii) Marketing Intermediaries: Intermediaries are those who act as a mediator between the manufacturer
and final consumer. The number of marketing intermediaries varies according to the size and type of
distribution network. Marketing intermediaries are beneficial to the organisation only when there is a
proper coordination between channels without any hurdle.
iv) Competitors: The organisations which manufacture similar products and try to conquer over the
market share are termed as competitors. To earn more profit and stay competitive, the company needs
to monitor the competitor‟s activities and then prepare its future plan. This helps the company to remain
beyond its competitors in the long run.
v) General Public: The general public is also an indispensable part of business environment. The positive
and negative responses of the public directly influence company‟s image. This can also affect the sales
and revenue of the company. The activities such as noise pollution, air pollution, no waste disposal,
etc., may create adverse effect on the company‟s image.
2) Macro Environment: Macro environment prevails outside the business enterprise. These are the external
factors which are uncontrollable and affect the business operations. Depending on macro factors, many
changes need to be made in the areas like production, marketing, management, etc.
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Environment Appraisal & Strategies (Unit 2) 51

The key macro environmental factors are listed as follows:

i) Political Environment: The factors such as state, government, political institutions, policies and
legislations, public and private stakeholders influence the business environment. The stability and
success of the business depends on the prevailing political environment. Sometimes, the changes made
in the government policies (e.g. tax policies, government contracts, etc.) and regulations (e.g. safety
regulations) affect the smooth functioning of the business.
ii) Economic Environment: The economic conditions of a country may affect the business decisions and
plans of an organisation. The factors such as economic growth rate, unemployment ratio, foreign
exchange rates, and inflation and deflation conditions can help or create problems in the management of
the business environment.
iii) Social Environment: Social environment comprises of the customs and values of the society from
where the business originates. The business enterprises, at large are influenced by the factors such as
the changing tastes and preferences of customers, standard of living and educational level. For
example, the advertisement slogan “Come Alive” was used by the Pepsi Cola Company to promote its
product. This advertisement was misunderstood by people of a particular region. They perceived
“Come Alive” as “Coming out of Graves”. As a result, there was no sale of the product in that region.
Consequently, the company changed its slogan as it is impossible to survive in the market by
overlooking societal values.
iv) Technological Environment: It refers to the changes in the business operations such as use of modern
equipment, upgraded technologies, improved production techniques, etc. These changes must be
monitored by the organisation to remain competitive in the market. The technological changes help the
business enterprise to provide standardised and quality products to the customers.
v) Physical Environment: In the short and long term, concerns related to the environmental changes are
crucial for business. The environmental changes like natural disasters can affect the overall business
operations like production and supply, damage of company‟s assets, etc. To handle such situations
environmental risk assessment techniques are used by the companies.
vi) Legal Environment: Any business transaction has to follow certain laws and legislations. An
organisation cannot ignore the legal factors, as this may change the way it operates. A proper legal
environment is essential for all business organisations. Some of the major legislations which affect the
business are Essential Commodity Act, Weights and Measures Act, Trade Mark Act, etc.
vii) Demographic Environment: The demographic changes have a huge impact on the business decisions.
The demographics differ from place to place. These changes can be in the size of population, age,
composition, ethnicity, income levels etc. Before formulating any strategy for present and future, the
business must consider these demographic factors.
viii) Global Environment: Global business environment is composed of various legal and political
systems, economic policies, accounting standards, environmental standards, labour policies, language
and cultural differences, export and import regulations, tariffs, foreign exchange policies, trade
agreements, etc. All these elements may undergo significant variations from one country to another.
Objectives of a business enterprise and methods to achieve them are the governing factors for its
business operations in an international business environment.

[Link]. Internal Environment

Environment that has a direct influence on the business is termed as internal environment. The internal factors which
influence the business environment are controllable in nature. Hence, the factors like physical facilities, and
organisation and functional means can be revised and transformed as per the requirements of the environment. The
strategy and decisions of internal organisation is determined by the following key internal factors:
1) Value system: The selection of business, its mission, vision, and objectives, business policies and practices
are all elements of value system in an organisation. The founders and management team of a business
enterprise play an important role in the decision making of the value system.
2) Mission and Vision and Objectives: Vision is a broader view to define the future prospects of the
business. Vision aids in meeting the objectives of the business organisation. Mission is the short term action
through which objectives are attained.
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52 MBA Third Semester (Strategic Management) MDU

3) Management Structure and Nature: Generally, business decisions are persuaded by the organisational
structure. This structure comprises of board of directors, managers, executives, etc. The number of
members in an organisational structure determines the duration of decision making.
4) Internal Power Relationships: The coordination between the levels of organisational structure is very
important. The three levels i.e. top, middle and bottom levels must have mutual relationship among them.
This helps the organisation to function smoothly.
5) Human Resource: Human resource is the key component of any organisation. They define the strength and
weakness of an organisation. The essential requirements of human resource include skills, quality,
commitment, sincerity, right attitude, etc. The level of employee‟s participation and initiative varies from
organisation to organisation and is determined by the organisational culture.
6) Company Image and Brand Equity: The internal environment of the enterprise is affected by the image
that it carries in the outside market. The image of the organisation helps in raising capital, mergers, and
other alliances etc. Likewise, brand equity also influences the organisation.
7) Miscellaneous Factors: Various other factors that determine the success or failure of a business are as
follows:
i) Physical Assets and Facilities: The availability of assets and facilities is very important for the smooth
functioning of the business. The facilities influencing the competitiveness of the firm include
technology, production, labour, etc.
ii) Research and Development: The capability to innovate and compete is determined by the R&D
department of an organisation. However, it is one of the external factors. It also influences the internal
environment of the business.
iii) Marketing Resources: Marketing effectiveness of an organisation is directly influenced by the
resources such as marketing department of the company, marketing personnel, distribution channel, and
brand equity.
iv) Financial Factors: Finance is the life blood of an organisation. Proper allocation of financial resources
affects the business performance, business policies and strategies. Some important factors influencing
the internal environment are financial policies, financial capital, etc.

2.1.4. Importance of Business Environment

Some of the direct benefits of understanding the business environment are given below:
Importance of Business Environment

First Mover Advantage

Early Warning Signal
Customer Focus
Strategy Formulation
Change Agent
Continuous Learning
Directing Growth
Image Building

1) First Mover Advantage: The study of business environment helps an enterprise to grab the early
opportunities in the market. This allows the enterprises to stay ahead from their competitors. For example,
Maruti Udyog took the first mover advantage and became the first manufacturer of small cars by identifying
the need of middle class people, keeping in mind the increasing rates of petrol.
2) Early Warning Signal: Environmental awareness helps the business enterprise to take cautious steps to
reduce the threats and issues. It acts as an early warning signal to the business enterprise against upcoming
threats. For example, Maruti Udyog proved itself against the new entrants of middle class segment car
manufacturers by tripling the level of production for Esteem, to provide quick customer delivery. As a
consequence, a major portion of market share was occupied by Maruti.
3) Customer Focus: Business environment facilitates the company to cater the changing tastes and preferences of
the customers. For example, Hindustan Unilever introduced shampoo in small sachets for lower class segment,
**
recognising the interests of customers. This resulted in high sales volume and customer loyalty. realise **
Environment Appraisal & Strategies (Unit 2) 53

4) Strategy Formulation: The environmental analysis provides relevant information regarding the business
environment. The strategists utilise this information in formulating market strategies and future plans.
For example, the study of business environment enabled ITC to recognise wide scope in travel and
tourism. This encouraged ITC to open new hotels in India and abroad as well.
5) Change Agent: To survive in the market, business enterprises need to adapt necessary changes occurring
due to various environmental factors. Business environment helps the managers to determine the nature and
direction of these changes by using different measures of environmental analysis. Therefore, there is an
organisational need to encourage staff participation in decision making process to make prompt and correct
decisions.
6) Continuous Learning: Business executives need to be aware of the environmental changes. This helps the
executives to understand the environment and apply the appropriate changes in an efficient manner.
Environment analysis is used to guide managers and executives in dealing with the business challenges easily.
7) Directing Growth: The study of environment directs the company to expand its boundaries for starting
new ventures. This enhances growth and development of business firms.
8) Image Building: Environmental understanding by the management builds company‟s positive image in the
minds of the people. They feel that the company is sensitive and responsive to their needs and problems.
For example, Big Bazaar responds to the changing customer needs and environmental factors by selling
goods and services at reasonable prices.

2.2. ENVIRONMENTAL APPRAISAL: EXTERNAL ANALYSIS

2.2.1. Introduction
There are numerous factors that affect the organisation and its operations. These factors can influence the
organisation in both positive as well as negative ways. Identifying the issues and challenges existing in the
external environment is extremely important for an organisation.

In order to identify the factors in external environment, an appraisal process of the industry‟s environment is
necessary. Environmental appraisal facilitates the managers with the ability to study the competitive structure
and competitive position of the organisation along with the position of its competitors.

By analysing and appraising the external environment, the existing opportunities and threats can be identified. It
is the responsibility of the managers to avoid the threats and to reap the benefits from the opportunities in the
market.

Environmental appraisal also helps the managers in analysing the effects of globalisation on the level of
competition within a particular industry.

It is well-known that business environment never remains stable rather keeps on changing rapidly. As the
businesses grows and expands, the changes in external environment compels the organisations to make efficient
strategies to deal with the contingency situations.

Environmental appraisal also allows an organisation to study the steps taken by competitors in the market. By
appraising the external environment the companies can improve their internal capabilities and strengths for
adapting to the changes in the external environment.

According to Abell, “Environmental appraisal is the identification, measurement, and assessment of

environmental impacts”.

2.2.2. Levels of External Environment Analysis

By analysing the external environment of a business the marketers are able to identify and highlight the
opportunities from the threats and strengths from the weaknesses. The factors which are not dependent on the
organisation and their existence is not based on the activities of the organisation are called as external factors.
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54 MBA Third Semester (Strategic Management) MDU

While strengths and weaknesses are internal, opportunities and threats are external and are not in control of the
organisation. Opportunities are those situations that the organisations can use to their advantage. While threats
are those negative situations that if not tackled promptly can harm the well-being of the organisation. Analysing
the external environment requires analysing following areas:
1) Environmental Scanning: In environmental scanning the broad environmental factors are analysed and
studied. These factors are not a part of the organisation‟s internal environment and hence are uncontrollable
in nature. These factors influence the businesses in a significant manner. These factors are a part of the
macro environment or the general environment. The common macro environmental factors are economic,
political, legal, technological, social, etc.
2) Industry Analysis: Industry analysis is a tool which is used to assess the degree of competition and
complexity within a particular industry. With the help of industry analysis, the marketers study and
scrutinise the macro environmental factors that influence a particular industry. Industrial analysis helps the
strategic leaders formulate various strategies to neutralise the threats and reap the benefits from the
opportunities. Various environmental forces to be studied in the industry analysis are the bargaining power
of buyers and suppliers, position of business and competitors, and threats of new entrants as well as the
substitutes within the industry.
3) Competitive Analysis: While appraising the external environment, it is very important to analyse the
strengths and weaknesses of the existing and probable competitors. It helps the organisation to formulate
the strategies required to survive and succeed in the highly competitive environment. It also outlines the
strategies adopted by the competitors. The influence of competition is directly proportional to the degree of
concentration in the industry, i.e., if the concentration of the industry is high, the influence of competition is
high, and vice versa. Competitive analysis helps the organisations in identifying threat sand opportunities
by providing defensive and offensive strategic moves.

2.2.3. Environmental Scanning

The term scanning means to „scrutinise‟ or „look into‟. In business, „Environmental Scanning‟ means careful
monitoring of internal and external business environment to identify risks and opportunities associated with it.
It is a constant process in which the environment is frequently analysed and diagnosed. In other words, scanning
refers to short term forecasting. This process involves activities like future studies, future research, insight
activities, projecting, screening, etc. The external information is gathered in an organised way to avoid the
haphazard flow of information and alerts the managers regarding the changing external environment before its
occurrence.

According to B.W. Denning, “The advocates of systematic corporate planning (strategic management process)
base their case on the view that the determination of the future can be improved by a systematic analytical
approach which reviews the business as a whole in relation to its environment”.

It is essential for a business firm to adapt environmental scanning to adjust with the changes in the business
environment. This helps the business firm to find out its strengths, weaknesses, opportunities and threats.
SWOT analysis is one of the major techniques for environment scanning.

Significance of Environmental Scanning

1) Identification of Strength: Strength refers to the ability of a business firm to gain benefits over its
competitors. The scanning of internal environment determines the strength of an organisation. This helps
the organisation to upgrade its prevailing plans and policies.
2) Identification of Weakness: The drawbacks of the firm are referred to as its weakness. Assessment of
internal environment not only recognises the strengths of the firm but also its weaknesses. Therefore,
weakness of a firm must be identified to control and overcome it for advanced growth and success.
3) Identification of Opportunities: The opportunities available in the market can be identified by carrying
out environmental analysis. The enterprise must make an attempt to take hold of every possible opportunity.
4) Identification of Threats: Competitors and other external factors act as a threat to the business firm. The
external environment must be scanned to identify the threats. This helps to take preventive measures against
the threats and overcoming few of them.
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Environment Appraisal & Strategies (Unit 2) 55

5) Optimum Use of Resources: Utilisation of scarce resources like natural, human and capital can be made
by properly analysing the environment. The existing resources can be optimally utilised if environmental
analysis is done in an organised manner. This cannot be done without having appropriate knowledge of
internal and external environment resources.
6) Survival and Growth: Environmental analysis facilitates the business firm to survive and grow in the
competitive business environment. It assists in maximising the strength, minimising the weaknesses, seizing
opportunities and overcoming threats.
7) To Plan Long-Term Business Strategy: Environmental scanning is a crucial step in formulation of
business strategies. Through analysis plans and policies can be designed which helps the organisation in
achieving short-term and long-term objectives. Consequently, the success of the firm is initiated by
environmental scanning.
8) Helps in Decision-Making: Decision-making is the thought process of selecting a course of action among
several possible alternatives. Environmental analysis is considered as a major tool in decision making
process. Studying the environmental analysis helps in choosing the most appropriate option for the growth
and survival of business.

2.2.4. Procedure of External Environment Analysis

The process of environmental appraisal includes the following steps:
Understand Nature of Environment

Analyse the Past Influences of

Environmental Factors

Identify Critical Competitive Forces

Analyse the Strategic Position

Identify the Opportunities and Threats

Figure 2.1: Procedure of External Analysis

1) Understand Nature of Environment: Before starting the environmental appraisal, the strategists must
understand the nature, i.e., the volatility of external environment. The volatility here implies to the changes
in the environment. To understand the nature of environment, the strategic leaders need to answer following
questions:
i) Is the environment stable or dynamic?
ii) In which ways does the environment change?
iii) Are the changes identifiable?
Answering these questions would help in deciding the future course of actions.
2) Analyse the Past Influences of Environmental Factors: Once, the nature of external environment is
identified, the next step is to identify the factors that have influenced the performance of organisation
in the past. Analysing these factors will help in planning and formulating strategies to handle future
scenarios.
3) Identify Critical Competitive Forces: The next step is to identify the key competitive forces existing
within the industry with the help of structural analysis. This step helps to analyse the organisation‟s current
position, the bargaining power of buyers and suppliers, the new entrants in the industry, and the existing
competitors of the organisation.
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56 MBA Third Semester (Strategic Management) MDU

4) Analyse the Strategic Position: In this step, the managers analyse the strategic position of the organisation
in relation to its competitors in terms of resources, customers, etc. To identify and analyse the strategic
position of an organisation, following ways should be adopted:
i) Growth/share analysis;
ii) Attractiveness analysis;
iii) Strategic group analysis;
iv) Study of market segments and market power; and
v) Competitor analysis.
5) Identify the Opportunities and Threats: Identify the opportunities and threats prevailing in the
environment. Formulate efficient strategies to reap the benefits from the opportunities so that the threats can
be neutralised. The selection of strategy and effective utilisation of selected resources in an effective
manner is crucial for this stage.

2.2.5. Factors Affecting External Environment Analysis

Various factors affecting the process of environmental appraisal are as follows:
1) Customer Environment: Different factors that are necessary to analyse customer environment are as
follows:
i) Tracing the feedbacks of customers,
ii) Needs and requirements of customers,
iii) Assessment of return rates, and
iv) Need of quality improvement and maintenance.
v) Assessing the level of competition from present and possible substitutes on the basis of consumer
feedback.
2) Competitive Environment: Following factors should be analysed in the competitive environment:
i) Market segments,
ii) Competitor analysis,
iii) Past researches and developments,
iv) Arrival of new competitors,
v) Patterns of market shares, and
vi) Threat of new entrants and substitutes.
3) Industry Environment: Monitoring and analysing the industry environment includes:
i) Different strategies adopted by the industry,
ii) Industry structure,
iii) Changes in product or service offerings,
iv) Modifications in government regulations,
v) Sources of finance in the industry, and
vi) Past trends of the market.
4) Macro Environment: Scrutinising the macro environment requires analysing following factors:
i) Socio-economic factors,
ii) Political factors,
iii) Technological factors, and
iv) Demographic factors.

2.2.6. Significance of External Environment Analysis

Environmental appraisal has following benefits:
1) Predicts the Opportunities and Threats: Environmental appraisal allows the organisations to predict the
potential opportunities and threats which in turn helps in strategic planning.
2) Warns against Threats: Analysing and studying the environmental factors highlights the existing and
potential threats and warn the organisation prior to their occurrence, which help them in developing
effective strategies for minimising the effects of threats and to transform them into opportunities.
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Environment Appraisal & Strategies (Unit 2) 57

3) Recognises Environmental Risks: While analysing the environment the strategists are able to anticipate
the risks involved in exploiting the opportunities, so that preventive measurements can be taken for
minimising the risks and maximising the benefits.
4) Identifies Opportunities: With the help of environment appraisal, the organisations can effectively
identify the opportunities. This in turn allows the organisation to ensure that the organisational resources are
efficiently utilised and predetermined objectives are realised.
5) Provides More Time for Routine Activities: Analysing environmental factors beforehand provides the
managers adequate time for other day-to-day activities, with the help of environmental analysis they can
make predictions about the future environmental conditions. This lessens the burden of time as the
managers are able to anticipate the future scenarios in advance.
6) Identifies New Growth Avenues: Appraising the environment closely facilitates the organisation to
identify new growth avenues for business. This helps the organisation to succeed and face the competition
effectively.
7) Continuous Learning: Environment appraisal helps the managers to learn from the continuously changing
market. It allows the strategists to upgrade their knowledge and improve their skills to stay competitive
among the competitors.
8) Builds the Image of Organisation: Interacting and having a deep insight about the external environment
builds the image of an organisation. It reflects the concern of an organisation towards its environment. For
example, Captive Power Plants (CPP) have been installed by numerous organisations to ensure continuous
power supply.
9) Analyses the Competitors: Environment analysis allows an organisation to study the strategies adopted by
the competitors. This helps the strategic leaders to formulate effective strategies to stay competitive in the
market.

2.2.7. Methods and Techniques used for External Environment Analysis

Major techniques of environmental scanning are as follows:
Techniques of External Environment Analysis

ETOP Analysis
QUEST Analysis
SWOT Analysis
PESTEL Analysis

[Link]. ETOP Study

Environmental Threats and Opportunities Profile (ETOP) is a technique used to structure the issues of
environment. This technique was given by W.F. Glueck. The ETOP categorises different environmental issues
in various sectors which in turn helps the management to focus their attention towards specific areas. It helps in
identifying the potential factors that influence the organisation. Diagnosing the external environment closely is
very essential as it points out the opportunities and threats. While some of the factors create suitable
circumstances, other factors impose threats. ETOP facilitates an in-depth analysis of environmental factors that
allows the organisations to identify the potential opportunities and threats. This results in more efficient
strategic planning.
An opportunity can be defined as a favourable situation that provides prospects for a business to grow, expand
and make profits as well. For example, an untapped market, an unaddressed potential need of customers, new
technology, etc. Constraints are those factors that limit the ability to grow and reduce sales and profit potential.
A threat can be defined as an unfavourable situation that restraints the growth and profits of an organisation.
For example, new entrants, availability of substitutes at low cost, etc.

ETOP Preparation
To prepare ETOP of an organisation, the strategists need to classify the environmental factors in specified
categories, after which the impacts of those factors can be analysed. This categorisation simplifies the overall
analysis process.
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58 MBA Third Semester (Strategic Management) MDU

The table 2.1 provides an example of an ETOP prepared for TATA DoCoMo Company, which is in the
telecommunication industry. Here, upward arrow indicates favourable impact, downward arrow indicates
unfavourable impact, and horizontal arrow indicates neutral impact.
Table 2.1: ETOP Preparation
Sector Analysis Favourability to Strategic Implication
TATA DoCoMo
1) Economic Growth of Indian economy along The company is providing value-added
with the expanding population of () services for youth along with core
youth and increasing GDP rates. benefits to the traditional customers
(messaging and talk-time services). The
focus of the company is on internet
facilities.
2) Social Existing telecommunication Customers can be retained and increased
facilities are fairly adopted by the () with the help of mobile apps, 3G/4G
society. However, the demand for based services, value added services,
more enhanced technologies is still plug-play devices, and Wi-Fi portability.
there.
3) Political Allocation of spectrum depends on The firm should try to gain more spectrums
the government rules and regulations () for providing the support to new
as well as the image of firm. subscriptions by providing more payment.
4) Regulatory Telecom Regulatory Authority of It may become difficult for the company
India (TRAI) is establishing its image () to deal with the increased tariffs. The
by making new regulations so that company may need to increase the prices
spectrums can be allocated to cover the tariffs. By providing new
effectively. Formulation of new and beneficial services, this loss can be
regulations may lead to hike in tariffs. covered up.
5) Market The market has many big players Since, the competition is quite high,
like Bharti Airtel, Vodafone, Idea, () hence, there is a chance to earn profit
Reliance, Aircel, etc., which are from it. The firm needs to grow its
doing quite well and have achieved customer base through which rate of
success in this market. But recent subscriptions along with the profits
trend tells that market is saturated would be increased.
now, and there is a downfall in the
rate of net subscriptions.
6) International To overcome the problem of Collaborating with the international
downfall in subscription rate, the () firms like NTT DoCoMo & Navteq may
firm can tie-up with the provide the leverage of latest
international telecom companies so technologies. Some of the technologies
that better services can be provided. are SMS, Smart Pilot, Route Finder and
push-based E-mail service of Tata
DoCoMo, etc.
7) Supplier Improvement in infrastructure is After collaborating with firms like
needed to provide better networking () Huwaei and ZTE+
facility and value added services. enhance the 3G networks and better
services, such as 3G network, low cost
dongles, Data Cards, etc., DoCoMo is at
a good market position.
8) Technology Latest technologies are being The company is the first private firm to
launched every day which enhances () launch 3G in the market. It is on its way
the service by allowing customers to launch 4G soon. It has also
to use various applications. successfully launched i-Mode, which is a
Technology is an important factor mobile based internet platform.
in tempting the customers.

TATA DoCoMo is in the business of telecommunication in Indian market. As per the ETOP profile, the
position of the company is stable and the firm is growing even in intense competition. The company can take
the advantage of competition by providing value added services. New government regulations may impose
some tariff barriers which may be recovered by launching new and beneficial services.
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Environment Appraisal & Strategies (Unit 2) 59

Since, there is fierce competition in the market, hence for the proper allocation of spectrums the firm needs to
pay more. Since, there is a lack of infrastructure in the country; hence collaboration would help the firm to
spread its coverage. On the other hand, collaborations with international firms may lead to implementation of
latest technologies. The firm is quite ahead by many steps than its rivals in the field of 3G as it was first private
firm to introduce it. It is trying to introduce 4G in the market, which would give great market leverage.
Hence, it can be seen that ETOP highlights the position of a company in various areas and also shows different
environmental factors affecting its operations.

[Link]. QUEST Analysis

The QUEST or “Quick Environmental Scanning Technique” is a technique that facilitates estimation of wide-
ranging environmental factors and assesses their influences on the organisation. It tries to scrutinise the
environmental forces on the basis of events and trends occurring in the market. Some of the assumptions made
for analysing the environment using this technique are:
1) The strategic executives have views about the dynamic environmental forces.
2) These views about the environment collectively signify the understanding of the environment by the
organisation.
Hence, it can be said that having knowledge about the environmental forces can be useful only when there is a
mechanism to interpret and analyse them. In the absence of a specific technique, it is possible that all the future
expectations and plans go wasted, as these cannot be shared with the executives. QUEST analysis allows the
executives to understand and analyse the different perceptions, interpretations and points of mistakes regarding
the environment.
This technique helps the executives in voicing their perceptions and analysing the points at which their
individual views differ from each other. Once the points at which the executives disagree are identified, it is
possible for the management to negotiate with them so that a consensus can be achieved. The information
generated by different views would lead to better decision-making for the achievement of organisational goals.
This also allows the organisations to make combined decisions rather than independent and individual ones.
According to Nanus, “QUEST is a future research process designed to permit executives and planners in an
organisation to share their views about trends and events in future external environments that have critical
implications for the organisation‟s strategies and polices. It is a systematic, intensive, and relatively inexpensive
way to develop a shared understanding of high priority issues and to focus management‟s attention quickly on
strategic areas for which more detailed planning and analysis would be beneficial”.
Various tools can be used to perform QUEST, such as questionnaires, stakeholder analysis, Delphi technique,
structural analysis, etc.
Process of QUEST
1) Preparation for QUEST: The first step of QUEST analysis is to make preliminary preparations. These
preliminary tasks are as follows:
i) Define the environmental issues,
ii) Select the members for the analysis (12 to 15),
iii) Document the complete information about the past trends of environment relevant for the organisation,
iv) Decide the location to carry-out the analysis.
2) Analyse the Environment: As soon as the preparations have been completed, the environment in which
the organisational activities are performed is analysed. This step starts with identifying the vision, mission,
and objectives of the organisation. Following the discussions about organisational goals, the past trends and
environmental patterns that may influence the operations of the organisation, are discussed. It should be
noted that the cross-impact of these forces are also analysed to estimate the capability and strength of the
organisation. Strategic leaders should devote considerable time to analyse the environment.
3) Document the Discussions in a Report: Once, the business environment is analysed, all the outcomes are
combined and presented in form of a brief report. This report has two sections, where the first part
illustrates about the organisation‟s strategic content, the second part elaborates about the future possibilities
to be faced by the organisation.
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60 MBA Third Semester (Strategic Management) MDU

4) Discuss the Report: At last the strategic leaders should discuss the documented report in a meeting, and
analyse the alternative courses of actions available to the organisation. These alternative courses of actions
should also be evaluated according to the desired future position of the organisation keeping in mind the
resources and strengths of the organisation. QUEST does not suggest the strategies to be made; it highlights
the issues and challenges to be considered while formulating the strategy.

[Link]. SWOT Analysis as a Tool for Assessing Organisational Capabilities and Environment
Opportunities
“SWOT” is the acronym for “Strength Weakness Opportunity Threat”, which outlines the current position of an
organisation. It identifies that whether a company is in a good or bad market position. While the strengths and
weaknesses are internal factors, the opportunities and threats are external to the organisation. Analysing all
these give a complete perspective to the managers regarding the external factors that influence the organisation
or may influence in future. With the help of this technique, the managers can also identify the internal
capabilities and resources which can be used to deal with them. This analysis also indicates the faults in the
organisation that are to be corrected. Hence, SWOT analysis plays a vital role in formulating suitable strategies
for the organisation.
Components of SWOT Analysis
SWOT analysis has two major components:
1) Internal Factors: The first two letters in the acronym S (strength) and W (weaknesses) refers to internal
factors that are the resources available in the organisation. The internal environment refers to all the factors
within the control of, and inside the organisation. These factors may impart strengths which can be utilised
to exploit the opportunities or become a cause of weaknesses of a strategic nature for the organisation.
Helpful Harmful
To achieving the objective To achieving the objective
(Attributes of the
Internal origin

organisation)

S W

Strength Weaknesses
s
(Attributes of the
External origin

environment)

O T

Opportunitie Threats
s

Figure 2.2: SWOT Analysis

i) Strengths: These are the factors that provide competitive advantage to the organisation. These factors
collectively may allow an organisation to bring change in an organisation. These factors can be
different for different organisations. These can be resources, skills, etc.
For example,
a) Efficient customer support services for responding promptly and efficiently to the customer
requirements.
b) Presence in global market and collaboration with reputed international firms.
c) Better facilities for research and development activities as well as innovation of new technologies
and tools for organisational operations.
d) Tie-ups with internationally reputed manufacturers & exporters.
e) Experience in tooling selectivity and metal cutting
f) Manufacturers certified with ISO 9001 certification.
ii) Weaknesses: Weaknesses are the factors that limit the growth of company or restrict the company from
moving in a desired direction. These factors also hinder the organisation from achieving success
through the internal capabilities. These factors vary as per the organisation. A weakness can be
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anything such as lack of resource, lack of market understanding, lack of fund, etc. **
Environment Appraisal & Strategies (Unit 2) 61

For example,
a) Inconsistencies in cashflow system.
b) Unutilised stock in inventory and high maintenance cost.
c) Lack of research facilities and use of out-dated research data.
d) Lack of latest technologies and no web presence.
e) New firm and hence lack of goodwill.
It should always be remembered that strengths and weaknesses are related to each other. While at some
point of time a factor may act as strength, for another situation it may occur as weakness. For example,
having fixed assets may act as strength for an organisation, but excessive fixed assets may also act as a
weakness as these assets cannot be converted into liquid money as and when required immediately.
2) External Factors: External factors reside outside the organisation. These are of two types:
i) Opportunities: An opportunity is a major favourable situation in the firm‟s environment. The industry
should build its production capacity to meet the upward moving demand, both for domestic and
international markets.
Opportunities are those factors which act as the favourable situations for the organisation. These situations
encourage the organisation to grow more and earn more profits. In these situations, organisations make
strategies to reap the benefits, such as spreading market share in domestic and international markets,
increasing the production capacity, launching new products, increasing prices, etc.
For example,
a) Loyal customers in market,
b) High demand of certain products in a particular season,
c) Poor substitutes available in the market,
d) Change in government policies due to which businesses are going to have leverage, and
e) Obsolete technologies of the competitors.
ii) Threat: Threats are the external unfavourable conditions. They act as barrier for the organisation in
achieving its desired market position. These factors also differ as per the organisation and the areas in
which it operates.

For example,
a) Too many competitors of the similar product,
b) Introduction of taxes or increase in tax rates,
c) Recession in economy, and
d) Latest technology used by competitors.

Need, Importance and Applications of SWOT Analysis

SWOT is applied by business for different purposes. Some of them are as follows:
1) Allows Discussing the Current Position of Business: SWOT analysis allows the organisations to discuss
the current position of business in a more systematic and structured way. It helps the strategic leaders in
selecting the best suitable course of action among the various alternatives and also in formulating
appropriate strategies.
2) Compares the Internal and External Factors: Analysing the internal and external factors allows the
managers to compare the relative impact on the organisation. This facilitates the organisation in achieving
clear perspective regarding future course of action.
3) Facilitates Planning and Decision-Making: SWOT analysis is widely used in planning and decision-
making by the managers. It provides an opportunity for brainstorming during decision-making and planning
processes so that a clear outcome can be obtained. SWOT analysis is quite useful if conducted with clear
and definite objectives.
4) Enhancing Strengths of a Business: Analysing the internal factors provides a deep insight about the
strengths and critical success factors of the organisation. It helps the managers in building and enhancing
the strengths of the organisation.
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62 MBA Third Semester (Strategic Management) MDU

5) Helps in Exploiting Opportunities: SWOT analysis clearly highlights the opportunities that exist in the
external environment or may arise in future. Hence, analysing these factors help the strategists to exploit the
opportunities. Since, SWOT analysis also outlines the internal factors; the available data can be used to
exploit the existing opportunities.
6) Helps in Reducing Weaknesses: Highlighting the weaknesses allows the organisations to focus on
reducing or eliminating them. However, it should always be remembered that while reducing the
weaknesses the strategists should be realistic and practical so as to carry-out the business functions
smoothly.
7) Helps in Stabilising the Threats: A deep analysis of external factors allows the managers to understand
and highlight the threats that may hinder in exploiting the opportunities. It also allows the managers to
formulate effective strategies to deal with these obstacles and to modify their strategies to neutralise the
present and potential threats.

[Link]. PESTEL/ PEST Analysis

PESTEL analysis or commonly known as PEST analysis is a tool normally used by the organisations to monitor
the kind of environment in which they are working or are preparing to start a new business initiative or to
introduce a new service or product.

PESTEL is an acronym for Political, Economic, Social, Technological, Environmental, and Legal. It provides a
binocular vision of the complete business environment from various perspectives that are needed to be traced or
assessed while implementing a business plan or idea.

Each feature of PESTEL technique is vital for each and every business or trade. Besides helping in knowing the
nature of the market, this technique provides a basic structure which not only specifies what a firm should do,
but also helps in determining the future goals of the organisation and the strategies involved in attaining them.

Various factors that are analysed in PESTEL analysis are as follows:

1) Political Factors: Political factors are the laws, orders, and interventions made by the government in order
to regulate the businesses. These regulations influence the operations of business in a significant way.
Government introduces new rules, taxes, and tariffs on the industries which affect the costing strategy.
Government set standards as per which the organisations produce goods or services and also controls the
type of goods and services to be produced.
2) Economic Factors: Economic factors are the current and past patterns that exist in the country. These
factors encompass the rate of economic growth, inflation, exchange rates, average income, etc., which
heavily influence the money circulation and hence regulate the business activities.
3) Social Factors: Social factors include all those factors that are related to the general public. These factors
are closely knitted with the consumption by public, which influences the gross demand of products and
services. These factors involve the rate of population growth, literacy rate, employment, public safety, etc.
4) Technological Factors: Technological factors are one of the prime factors that affect the business
operations in the dynamic business environment. These factors involve arrival of new technology in market,
automation of business processes, research and development projects, etc.
5) Environmental Factors: The environmental factors comprise of all the factors that affect or are determined
by the surrounding environment. Analysing environmental factors is vital for some sectors especially for
tourism, agriculture, farming, etc. Though the business environment is not confined to climate, weather,
physical position, global changes in weather, yet it involves all of them.
6) Legal Factors: These factors are related to the lawful aspects of business. They can be both extrinsic and
intrinsic. There are some laws that are framed by the government of a country. Such laws influence the
business environment of the organisation and thus are extrinsic in nature. While some policies are framed
by the organisation to safeguard its interest and for ensuring its smooth functioning. Both these perspectives
are given due weightage in the legal analysis, based on which new strategies are planned out. For example,
before planning out any business endeavour, the consumer laws, safety measures, labour laws are duly
**
contemplated. **
92 MBA Third Semester (Strategic Management) MDU

2) Allocating Responsibilities: Functional strategies help in successful allocation of resources and in

assignment of tasks to the employees as per their interest levels and expertise. With the help of functional
level strategy an employee with excellent convincing skills is allocated in the marketing department rather
than in human resource department. The purpose of functional strategy is to see the resources and employee
as an end in themselves and not as a tool for achieving the overall organisational goals.
3) Facilitates Integration of Activities: Functional strategies help in integrating the operations of different
departments, e.g., procurement, shipping of products, coordinating advertising activities, conducting
marketing research, allocating funds in functional areas, etc.
4) Outlines Action Plan: As the functional strategies are formulated by specialists, they help in outlining
action plans for achieving departmental objectives which ultimately leads to the fulfilment of corporate
strategy objectives.
5) Provides Information: Functional strategies provide information regarding the capabilities and resources
of various functional areas of the organisation. This information helps in the formulation of business and
corporate level strategies. The information generated by functional strategies is also significant in achieving
coordination among the functional areas for successful design, production, delivery of different products
and services in the business portfolio.
6) Implementation of Corporate Plans: Functional strategy facilitates the successful implantation of the
corporate level plans. This ultimately leads to the overall development and progress of the company.

2.10.4. Limitations of Functional Strategy

There are many benefits of having functional strategies for evaluating the distinct value of the organisational
resources, but there are some limitations which should be studied before formulating functional level strategies.
These limitations are as follows:
1) Lack of Staff: Functional strategies are not practical if there is a shortage of staff in various functional
areas. Generally it is observed that business activities related to marketing, finance HR, etc., are performed
by few employees due to lack of staff and resources. This situation limits the effectiveness of functional
strategies.
2) Complex Operations: Sometimes use of functional strategies complicates the business level operations.
Functional strategies sometimes appear clear and simple in theory but may lead to complex situations in
practical application.
3) Not Practical for Small and New Business: Functional departments are generally not clearly defined in
new firms or small business houses. Hence, functional strategies are not suitable for small and new firms.
4) Negligence to the Overall Business Strategy: Functional strategies may also result in negligence of the
business strategy. This negligence may arise due to separate strategic goals of each functional area.
5) Focus on Quantitative Aspect: Functional strategies measure value of all the resources and assets in
numeric terms and tend to neglect the qualitative aspect of the assets.

2.11. STRATEGIC ANALYSIS AND CHOICE (SAC)

2.11.1. Introduction
The implementation stage of strategic management plan involves two important elements, i.e., strategic analysis
and choice. These two elements are considered as key linkages in the strategic management implementation
process. The procedure of strategic analysis comprises of several steps.

The main aim of Strategic Analysis and Choice (SAC) is to choose the best course of action from various
alternatives that would help in accomplishing the firm‟s mission and objectives. The firm‟s existing objectives,
policies and strategies along with the information gathered from the internal and external environment provide
the sources for evaluating the viable alternative strategies.

Usually, SAC considers objective information for making subjective choices and decisions. Conglomerates are
regarded very significant in strategic analysis, as they provide a wide range of diversified products.
** **
Environment Appraisal & Strategies (Unit 2) 93

While conducting the strategic analysis and choice, long-term goals of the firm are fixed and selection of
appropriate strategy is done to achieve the mission and objectives of the firm which are applicable under
various conditions. Moreover, the process of SAC also includes several tools and techniques. When the firm
becomes successful in selecting the most suitable business strategy then it is able to create a competitive
advantage over its competitors.

SAC attempts to answer these three basic questions:

1) How effective is the firm‟s current strategy?
2) Will that strategy be applicable in future?
3) What will be the effectiveness of selected alternative strategies in future?

2.11.2. Strategic Analysis

Strategic analysis enables the firm to recognise its strategic position in the internal and external corporate
environment. It also involves the analysis of stakeholder‟s demands and expectations. The environment in
which the company operates plays an important role in making of strategic choices. The basic purpose of
strategic analysis is to generate strategic alternatives for the organisation to gain competitive advantage by
formulating and offering superior value to its stakeholders.

In strategic management, the industries keep on changing constantly because of which it fails to reach at an
equilibrium point. The companies working under these industries are also affected by the constant changes. For
this, strategic analysis allows the organisation to understand, forecast, analyse, and formulate various strategies
in order to face the challenges. It is also necessary for an organisation to identify the dynamic nature of the
environment in which it operates. There are innumerable factors which influence the environment therefore it
becomes difficult for the organisation to recognise all these factors simultaneously. The organisations need to
have an understanding of these factors and identify them partially if not in totality.

While formulating the strategy, a firm must have sufficient knowledge of the following aspects:
1) Customers: This area comprises of existing customers, prospective customers and several market
segments. Here, the firm needs to answer the questions regarding: What are their needs? How can their
needs be fulfilled? Which categories of customers are most profitable?
2) Competencies: Competencies can be in the form of skills, knowledge and relationships. What is one‟s area
of expertise? What are one‟s capabilities? What liabilities does one have? What are the avenues of making
money?
3) Competition: It covers all the areas of competition from regulation to real life. What is the basis of
competition? From where the threats can arise? Which market segments are under pressure and where is the
company better placed?
These three aspects of strategic analysis are interconnected with each other. The type of target customers chosen
by a company determines the competencies required and the competition level that it is likely to face. All this
will directly influence the target customers.

[Link]. Process of Strategic Analysis

Strategic analysis involves the following steps:
1) Industry Analysis: The analysis of industry is based on the following
steps: Industry analysis
i) Define the Business: There are four elements which are considered
as a basis for identifying and evaluating the industry. The scope of
industry analysis states boundaries of the business, i.e., the products Business strategy analysis
and markets. Once the business segment is analysed, the next
element is to recognize the competencies that are required to operate Strategy evaluation and
in the segment and also the competitors that are capable enough to recommendations
target the same business segment.
Figure 2.8: Process of Strategic
ii) Describe the Industry Structure: The „five-forces of competition‟ Analysis
will describe the industry structure for each business segment.
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94 MBA Third Semester (Strategic Management) MDU

They are:
a) The first force of industry structure is the customers which form the entire marketplace. The size
and significance of the customers determines their negotiating power to fix the product‟s prices.
This crucially affects the profitability of the industry.
b) The second force represents competitors and their strategies which they employ to gain the market
share. The competitors tend to offer a set of products and services that provides superior value to
the product-market segments they choose to serve.
c) The third force in the industry structure is the industry suppliers. The ability of suppliers to
negotiate and control the supply of material inputs largely impacts the viability and profitability of
a firm.
d) The fourth force is the barriers to change that include the entry of new competitors in the market
and exit of current competitors in the industry.
e) The fifth and the last force is substitution of products and services. There are numerous alternatives
of products and services which act as a substitute to satisfy the customer‟s needs.
iii) Identify Key Success Factors: Another important intention of industry analysis is to identify the
market trends and requirements that will help to define the key success factors for the business. These
factors include:
a) The necessities of customers,
b) The competitive factors to be confronted,
c) The industry standards and regulations to be followed,
d) The essential resources that are needed to compete in the industry, and
e) The technical advancements to create a competitive position.
2) Business Strategy Analysis: Business strategy analysis involves the following :
i) Identify Strategic Goals: The strategic goals of a firm determine the business strategy and list the key
success factors of the industry. Many times, the strategic goals also encompass the mission and vision
statement of the firm.
ii) Define Business Strategy: The business strategy can be explained by analysing six areas. The first
area is the product-market strategy. The competencies that are required in formulating a product-market
strategy include technology, processes and the market reach which the firm possesses.
iii) Identify Internal Capabilities and Skills: The implementation of firm‟s business strategy is based on
the firm‟s internal functions and processes that support the strategy.
iv) Strategic Performance: The strategic performance of a firm can be determined by the success or
failure of business strategy. If a firm has a powerful business strategy then it will define the key success
factors and also govern its performance.
3) Strategy Evaluation and Recommendations: The strategic analysis is applied to evaluate the
effectiveness of firm‟s business strategy which is used to serve the market requirements. Once the
evaluation of industry and business strategy is done, the firm can pursue different ways to improve its
strategic performance.

[Link]. Benefits of Strategic Analysis

The various benefits of strategic analysis are as follows:
1) Sustainability: If the organisation wants to survive for a long time in the marketplace then it needs to have
a long-term plan.
2) Funding: The strategic analysis process establishes the company‟s feasibility, significance and also helps in
increasing the credibility of the company. Therefore, the funds applied in the company have high
probability of making profits.
3) Whole Organisation Approach: By analysing the external environment, the organisation is able to
develop a holistic perspective. It also ascertains the environmental factors which will favourably affect the
organisation and its strategies.
** **
Environment Appraisal & Strategies (Unit 2) 95

4) Sound Goals: It is a difficult task to set right goals of an organisation. The strategic analysis process assists
the organisations to make right decisions which prove to be beneficial for them.
5) External Focus: Along with the internal focus, it is essential for the organisation to focus on the external
factors. This enables the organisation to grab the opportunities and abandon threats.
6) Clear Expectations: All the shareholders of the organisation ensure that strategy is appropriate and is
implemented successfully.
7) Effectiveness: The strategic analysis process allows the strategic marketer to meet out the organisational
goals in an effective manner. It a dynamic process that has wide scope to improve and renew.

[Link]. Tools and Techniques of Strategic Analysis

Clear mission and defined goals are the most essential part of starting and managing a business. Deciding upon
a mission, defining objectives and formulating strategies to achieve those missions and objectives is called
strategic planning. Management utilises many tools and techniques for strategic planning. Some of them are:
1) ETOP Analysis: In the ETOP analysis, the external environment of the organisation is scanned for threats
and opportunities. This is done by fragmenting the environment into segments. Once the environment is
divided, their effect on each aspect of organisation and its future is assessed.
2) SWOT Analysis: SWOT stands for strengths, weaknesses, opportunities and threats., The SWOT analysis
is used extensively in marketing and is used to identify the positive and negative elements which impact the
success of a business or a new initiative.
3) McKinsey’s 7S Framework: The 7S framework has been proposed by the US based consultancy firm
McKinsey in 1970s. According to this framework, there are multiple factors which impact the organisation
and its capacity to change. The seven factors as identified by McKinsey consist of interdependent factors.
McKinsey has categorised these factors into hard and soft factors. The hard components like strategy,
structure and system can be directly impacted by the management. The softer elements are shared value,
style, skills and staff. These are influenced by organisational culture.
4) BCG Product-Portfolio Matrix: The BCG growth share matrix has been given by the Boston Consulting
Group. It classifies the various business units of the company into four groups based on various
combinations of two variables-market growth and market share as compared to the biggest competitor. This
matrix classifies the businesses into stars, cash cows, question marks and dogs depending on where the
businesses lie with respect to these two variables.
5) GE 9 Cell: The GE 9 cell or GE Business Screen technique looks at the parameters of industry
attractiveness and competitive position. Though it is also represented through a matrix, it tries to overcome
some of the limitations of the BCG matrix by looking beyond the growth-share combinations.
6) Experience Curve: Increased profitability is ensured in competitive markets through managing the cost of
manufactured goods effectively. Delivering the products at a cost lower than the competitors‟ is the pillar
on which an organisation‟s strength lies. The cost is thus not only a summation of the direct, indirect and
overhead cost components. It is also a reflection on how effective the firm has been in utilising its resources
to deliver superior value at lower rates than its competition.
7) Market Life Cycle Model: Markets also evolve like products. It is possible that market conditions may
transform from one form to another, i.e., from a monopoly to a duopoly or monopolistic competition. These
intense changes in the nature of the market are an important part of sequences. The market life cycle model
makes a difference between the various stages of market development like launch, growth, maturity and
degradation. The companies go through development analysis if these stages are an outcome of market
volume development, and sequential analysis if an outcome of predominant strategies of competing.
8) Balanced Scorecard: The balanced score card method holds a wider approach towards evaluating the
performance of organisation. It incorporates both financial and non-financial measures. It has brought the
attention of managers in the direction of many other facets of measuring the effectiveness of activities
which create value for the customer. Also, it provides a fresh perspective by combining the financial
measures with operational measures.
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96 MBA Third Semester (Strategic Management) MDU

2.11.3. Corporate Level Strategy Analysis

Corporate and business levels are the two levels for doing strategic analysis. The analysis which focuses on
techniques used for analysing the business under the same corporate umbrella is defined as the corporate-level
strategic analysis. Whereas, the analysis focusing on the individual businesses from industry perspective under
the corporate umbrella to each of those firms belong on the particular competitive conditions they face in their
respective industries is defined as the business level strategies.

Strategic analysis at the corporate level treats a corporate organisation under a corporate umbrella as
constituting a portfolio of businesses. The study centres on the issue of what can be accomplished by a business
organisation with the many businesses in its portfolio. Generally, here stability, retrenchment, expansion and
combination corporate strategies are the alternative strategies. Firms should remember that only in the cases of a
diversified corporation having many businesses, corporate level strategic analysis is significant.

[Link]. BCG Matrix

The BCG matrix is a model used for analysing the portfolio of companies. It is also known as Business
Portfolio Matrix. This model was developed during the early 1970s by Bruce Henderson of the Boston
Consulting Group. According to this model, the business units of an organisation can be classified into four
different categories based on the market growth and market share as compared to the leader in that sector.
Therefore, this method is also called as “growth-share matrix”. The growth-share matrix measures the
positions of various business units along these two dimensions.

The BCG matrix seeks to establish a relationship between the products or business units that are highly
profitable (cash-generating) and highly unprofitable (cash-eaters). The market growth symbolises the
attractiveness of a particular industry. It should also be kept in mind that the market growth here denotes the
growth of overall industry that also includes the returns and profits of competitors.

Boston Consulting Group (BCG) Matrix is a technique for estimating a company‟s position on the basis of its
product range. This technique helps an organisation to analyse its products and services so that various
important decisions can be made about the ones it should invest in and the ones it should divest its money from.

As per BCG matrix, the business units can be classified as high or low on the basis of Relative market share and
the Market growth rate. These are described below:
1) Relative Market Share: According to this model, the more is the relative market share of a firm, more
is the return. It says that the firm that produces more, enjoys higher economies of scale due to which
the experience curve is higher for them, hence these firms exploit the benefits of higher market share.
However, sometimes, higher profit is also achieved by those firms that have low production market
share.
2) Market Growth Rate: If market growth rate is high, then there are opportunities for higher returns.
However, it also takes more capital to be invested for future growth. Thus, it can be said that those business
firms that operate in industries that have a higher growth rate, invest their capital when there are
opportunities to grow further.

Four Cells of BCG Matrix

On the basis of the above classification, the firms in an industry can be classified into four types:
1) Stars: In this block those businesses are placed which enjoy high growth rate as well as higher market
share. These businesses are most likely to be in the growth stage of the product life cycle (PLC). These
firms pursue an aggressive strategy to expand the market and gain maximum penetration in consumer
segments. For example, In India sectors like telecommunications, fast foods, retail, petrochemicals, etc.,
are some of the businesses which are having a very high growth.
2) Cash Cows: Cash cows are those business units which generate a lot of cash, but the growth rate of these
business units is less. These businesses correspond to the maturation stage of the product life cycle, which
enjoy the benefits of its high experience curve. The capital needed to reinvest in the business is quite less
than the profit returns. To sustain in this position, the firm needs to implement stability strategies. In this
**
stage, the firms focus on beneficial long-term opportunities and limited expansion. **
Environment Appraisal & Strategies (Unit 2) 97

Since, these are pretty mature firms, hence they gradually lose their market share as well as their growth
rate decline. Due to this, the profitability also decreases. At this point, retrenchment strategies are
appropriate for these firms. The profit generated from cash cows can be reinvested into „star‟ firms and
„question mark‟ firms, both of which require high resource investment. Some examples of cash cows in
India are Scooters for Bajaj Auto, toothpaste for Colgate, etc.

High Select a
Few ? Remainder
Divested

Market
Invest
Growth
Rate

Liquidate
Low

High Low

Relative Market Share

Figure 2.9: BCG Product-Portfolio Matrix

3) Question Marks (Problem Child or Wild Cat): These are the business units which have a low relative
market share even when the industry growth is high. These firms require huge amount of capital to sustain
that market share. These are generally those firms that introduce new products or services in the market
with high growth opportunities. According to the concept of experience curve, the firm that gains early
profits can achieve the cost advantages as well as market leadership. This will create entry barriers for other
firms in the industry. In this phase, the firms need to decide their future plans. If they feel that they can gain
market share, they need to adopt expansion strategies. Retrenchment strategies would also be appropriate in
this phase. If sufficient investment is made in the growth of these firms, then these may convert into „star‟
firms, or else can also become „dog‟ firms if sufficient attention is not provided. In India industries like e-
commerce can be called as question marks. These are growing at a very fast rate, but for the majority of
players the relative market share is very less. Another example is holiday resorts.
4) Dogs: These are the firms which have slow growth and have relatively less market share. These neither earn
profits, nor require investments. If correlating with the stages of PLC, these firms remain at the stage of late
maturity or decline.

Merits of BCG Matrix

BCG matrix provides the following benefits:
1) The BCG matrix adds value to portfolio analysis.
2) The BCG matrix can be applied to large conglomerates that are interested in benefits from experience
effects and volume.
3) The BCG model can be easily understood and put into practice.
4) It helps in management decision-making.
5) The model helps in comparing the growth of different businesses on the basis of industry average. It also
helps in checking the portfolio for financial evaluation of the same.
6) The ideas behind the model are truthful and easily applicable at business and corporate levels.
7) The use of the experience curve helps the company to manufacture products that are priced low enough to
get market leadership. On becoming a „star‟ firm (as per the BCG matrix) the company certainly becomes
profitable.
8) It is a good and useful guide to allocate the resources of the company for the company or competitors.
9) The BCG matrix simplifies business analysis by limiting to just two factors – market growth and relative
market share from the variety of factors possible.
10) The BCG matrix helps to evaluate the firm‟s product portfolio in the four categories and helps in framing
strategies for the same.
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98 MBA Third Semester (Strategic Management) MDU

Demerits of BCG Matrix

BCG matrix suffers from the following demerits:
1) The BCG matrix over simplifies by categorising businesses into high and low. However, businesses can
vary in various degrees in between these two extreme measures. The two dimensional nature of the model
thus does not capture all aspects of the business.
2) This matrix does not consider many other important aspects for portfolio analysis, such as competitive
advantages, capital requirement, size of market, etc.
3) Some aspects of BCG matrix do not represent real situation. For example, the new firms that have low
market share or growth are categorised as „dog‟ firms. However, the real picture is entirely different.
Sometimes, these new firms show a great potential for growth and capture the market.

[Link]. GE 9 Cell
The GE-9 cell model or GE business screen is a portfolio analysis technique, which was developed by General
Electric Company (GEC) along with McKinsey & Co. of the USA in order to overcome the loopholes of the
BCG matrix. Instead of considering market growth and relative market share as the basis for portfolio analysis,
this model considers industry attractiveness and business strength as the basis for classifying the firms. These
two factors are further split into three categories, making it a nine cell grid. These cells classify business firms
as winners, losers, question marks, average businesses, and profit producers.

Zone Strategic Signal

High
Industry Attractiveness

Green Invest/Expand
Medium

Yellow Select/Earn

Red Harvest/Divest
Low

Strong Average Weak

Business Strength

Figure 2.10: GE 9 Cell Matrix

This model is shown in figure 2.10. The strategies for all the kinds of firms are different, such as, the
organisations should invest its resources in winners and question marks, since the industry attractiveness and
business strength both are in favour.

Organisations should also maintain the market position of average businesses and profit businesses though their
industry attractiveness and business strengths are average. Moreover, the business units that are at loss should
be sold-out as the industry attractiveness and business strength both are not favourable. For example, Mahindra
and Mahindra hived off its M-Seal brand of adhesives to Pidilite industries (makers of Fevicol) as M-Seal was
not part of the product strategy of the Mahindra.

The two basic factors considered in analysing the business units are:
1) Business Strength: Various factors that are jointly analysed under the basic factors are profit margin of the
products, market share of the business unit, management skills, technology deployed, etc. the quantification
of these factors can be done based on the estimation of the strength and importance of other factors for
achieving success. The strategists can rate the strength and importance as per their personal experience.
2) Industry Attractiveness: Many factors are needed to be studied for analysing the industry attractiveness,
such as, industry growth rate, profit margin of the industry, seasonal and cyclical trends of the industry,
economies of scale, entry and exit barriers, technological development, legal and social factors, etc. These
factors can also be quantified in a similar manner in which the business strength factors have been
**
estimated. **
Environment Appraisal & Strategies (Unit 2) 99

There are two basic differences between GE 9 cell and BCG matrix:
1) The GE model considers two basic factors, i.e., industry attractiveness and competitive position, which are
further divided into three factors, instead of only two factors in BCG matrix, i.e., market growth and market
share, making it a simple model.
2) The GE model analyses the variables at three levels, i.e., high, medium, and low, whereas the BCG model
considers only two levels, i.e., high and low.

Zones of GE-9 Cell Model

The nine cells of the GE matrix are divided into three zones and represented by the colours green, yellow and
red, which are similar to the traffic signals. Hence, these colours are interpreted in the similar ways, i.e., green
represents „go‟, yellow represents „wait‟, and red represents „stop‟. Due to this similarity, GE model is also
called as the “spot-light strategy matrix”. Each of these zones suggests a particular strategy to be followed by
the organisations, which are as follows:
1) Invest/Expand: This is the first zone, which is represented by green colour, and hence called as “green
zone”. In this zone, firms have both the industry attractiveness and business strength in different degrees.
This is the favourable situation for business units, but the business units do not remain in this situation for a
long time as other firms get attracted to the industry. But this can be maintained by creating some entry
barriers. An example of this is the fast food business. Earlier few fast food corners were there in India, such
as McDonalds, Dominos, etc. But, gradually, numerous players have entered in the market such as KFC,
Pizza Hut, Bikanervala, etc., making this industry less attractive these days.
The important strategy for the firms in this zone is to invest and expand their businesses. It is clear from the
figure that in the upper left corner, both the industry attractiveness and business strengths are high, which is
an ideal position. However, the other two cells represent realistic business situations. The middle cell of the
top row indicates high industry attractiveness and average business strength. The firms which belong to this
cell would grow in the long-term. Though, if the firm does not improve its strength, then the situation may
prove to be unfavourable in future. For example, many players have entered the e-commerce market in
India looking at the attractiveness of the industry. However, most of the players have average business
strengths. Another situation, where the business strength is relatively higher and industry attractiveness is
average represents the most realistic scenario. Since, the firms that belong to this cell have strength;
therefore these firms can develop a competitive advantage, which in turn may act as an entry barrier in the
industry. This explains the rise of companies like Reliance in the polyester and polymer businesses which
were not very attractive, but Reliance was able to get a good market share due to its competitive strength.
2) Select/Earn: This situation represents the middle or mixed situation for the company. Not much growth
opportunity exists, but the organisation has the opportunity to do selective earning. This happens because
either one of two parameters of business strength and industry attractiveness are at high or middle level.
The two situations of average strength and medium attractiveness and strong strength and low attractiveness
indicate a strategy of hold i.e., to earn the profits at existing capacity with no additional investment. In the
situation of high industry attractiveness the company has a flexible option. High industry attractiveness, low
strength indicates an opportunity for the organisation. However, if the organisation is not able to build its
business strength, then it makes sense to leave the business as the business is likely to turn into a „question
mark‟. Similarly, in case of strong strength and low industry attractiveness, the company can opt for
backward or forward integration. A company can also diversify into other industries where it is able to
utilise its business strengths.
3) Harvest/Divest: This is the third zone also called “red zone”. The cells, which come under the zone have
average strength and low attractiveness, or average attractiveness and weak business strength. For these
firms, harvesting is the appropriate business strategy. In harvesting, the company quits the business but
withdraws gradually.
In this situation, the initial emphasis is on reducing the costs by stopping those activities that have long-
term business influence, such as research and development, advertising, etc. The entire thrust of the
organisation in these cases is to earn short term profits as the business does not have a long-term horizon.
One thing that should be kept in mind that the business units with low strength and low industry
attractiveness should immediately be stopped and the company should divest its capital.
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100 MBA Third Semester (Strategic Management) MDU

Merits of GE-9 Cell Model

GE-9 cell matrix has following merits:
1) GE-9 cell model offers a classification into medium and average ratings which the BCG matrix does not
with the rather simplistic classification of high and low.
2) It also considers many factors like market share, industry size, etc.
3) It is also a very powerful strategic technique that channelises corporate resources to businesses and
categorises them as per medium to high attractiveness and the medium to high business strength.
4) It also utilises many factors while framing the two variables of industry attractiveness and business strength.
Demerits of GE-9 Cell Model
Besides various advantages, GE-9 cell matrix has the following disadvantages:
1) It can become quite complex with increase in size of the business.
2) Industry attractiveness and business strengths are subjective variables and differ from person to person.
3) New business units in a developing industry cannot be analysed through this model appropriately.
4) It rather than specifying the business policies provides strategic prescriptions.

2.11.4. Business Level Strategy Analysis

Business level strategic analysis should be relevant for the firms having single business entity. Competition is
the central theme in business-level strategic analysis. Thus, the industries and markets where the firm competes
is the area for analysis. Here, the emphasis is on what the firm should take with respect to the business it does.
Thus, cost leadership, differentiation and focus strategies are the alternative strategies.

[Link]. Life Cycle Analysis: Life Cycle Matrix

Arthur D. Little, a consulting company, recognised the concept of Life-Cycle matrix in the late 1970s. There
are many similarities between BCG Matrix and Arthur D. Little Matrix. Like BCG Market share and industry
maturity, it is a 5×4 matrix which can be used to determine the competitive positioning of a firm by depending
upon on the location of the firm in the matrix as in the case of BCG industry growth rate.
The concept of product life cycle is used in ADL matrix from Arthur D. Little which can be treated as a
portfolio management method. Different elements of environmental assessment and business strength
assessment are used in ADL portfolio management approach. The determination of the life cycle of an industry
is done on the basis of the environmental measure. Assigning the SBU of the firm into one of the five
competitive positions, i.e., dominant, strong, favourable, tenable, weak (and non-viable) can be done on the
basis of business strengths. Thus, a 5 x 4 matrix (5 competitive positions and 4 lifecycle stages) is obtained.
Under ADL approach, the product or organisational units do not specifically define the line of the business or
SBU. In order to determine the various different businesses, the strategist will be able to determine the
similarities between the products and the business lines with the help of various methods such as prices,
customers, divestment or liquidation, rivals, substitutability.
Components of Life-Cycle or Arthur D. Little Matrix
Arthur D. Little (ADL) Matrix can be used effectively to get some relevant information despite having number
of other methods. With the help of this matrix, a firm can select appropriate strategy depending upon the
following:
1) Industry Maturity (Position of Industry in Lifecycle): Industry maturity can be of the following four
types, which is also known as industry life cycle:
i) Embryonic: This is the introduction stage having features of high market growth, new technologies,
high investment, high prices and low competition.
ii) Growth: This stage is characterised by strong market, improved sales, low competition and benefits
received by the firm due to new product development.
iii) Mature: In this stage, there is stability in the market, the customer base increases, stability in market
share, increased competition and attempts are made to be different from other firms.
iv) Aging: At this stage, there will be a decrease in demand, many firms will exit the market, a lot of
money has to be spent by the remaining firms in the industry to capture greater share in the market; and
till the end of the market, firms will either leave or consolidate.
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Environment Appraisal & Strategies (Unit 2) 101

2) Competitive Position (How Strongly the Firm is Strategically Positioned): The various categories of
competitive position are stated below:
i) Dominant: A dominant position represents a strong market hold. Under this, the firm has all the market
powers and new entrants are rare. However, this type of position is usually short-termed. For example,
Microsoft.
ii) Strong: Under this position, there will be a strong and stable market share irrespective of the activities
of the competitors.
iii) Favourable: Under this position, competitive advantages are gained by the business line in some
particular market. There will be many competitors with similar strengths and a lot of attempts will be
made to gain benefits.
iv) Tenable: Under this position, there will be relatively smaller position in the overall market and a niche
will exist in the market share due to product differentiation or a strong geographic location. A major
part of the market share is captured by strong competitors due to their products and distinct competitive
advantages.
v) Weak: Under this position, there will be depletion of market share and business line. Also, it will not
remain profitable to run the business.

For different cells, the suitable strategies are depicted in Figure 2.11.
Industry Maturity
Embryonic Growing Mature Aging
Competitive Position

Dominant Invest Hold

Strong Improve
Selective Harvest
Favourable
Niche
Tenable
Abandon Divest
Weak
Figure 2.11: Arthur D. Little Portfolio Matrix

As in most of the countries, the involvement of the government is quite low as it is very difficult to observe
Dominant competitive position. For example, the competitive advantages are lost by public sector oil giants
like IOC, BPCL, HPCL, etc., and Videsh Sanchar Nigam Ltd. in International Long Distance Science.

The companies can prepare their special strategies with slight recognitions to competitive actions, when the
companies are in a strong competitive position. For example, Colgate‟s dominant position in dental products
or Maruti Udyog Ltd. in car industry for a fairly long time.

When there is no clear advantage to any of the firm/competitor, despite having better positions of the market
leaders (such as HDFC Bank, ICICI Bank, Citi Bank, etc., in banking industry), it is termed as Favourable
competitive position. Other firms can be benefited during their strategy formulation from analysing the product
portfolio of these firms. When with the help of focus or specialization, a firm maintains its market share, it will
be termed as tenable competitive position. Unless the weak firms have a strong hold on the niche and emerge
as a major player in that field, it will be very difficult for these firms to survive.

BCG‟s wildcat, star, cash cow, and dog, can be seen as equivalent to ADL strategies of abandon and selective,
invest, hold, and divest respectively. There will be a very close relation between the BCG‟s wildcat/star
boundary and “improve” ADL strategy, while BCG‟s cash cow/dog boundary is related to niche ADL strategy.

Benefits of Life-Cycle or Arthur D. Little Matrix

The various benefits of ADL matrix are stated as below:
1) Appropriate for All Conditions: As the ADL matrix can be implemented in almost all competitive
situations which are being observed in the industry, it has a greater acceptability.
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102 MBA Third Semester (Strategic Management) MDU

2) Applicable to Fragmented Industries: Despite having a low competitive advantage, ADL matrix is
applicable to fragmented industries as it provides numerous ways of differentiation thereby helping the
industries to achieve edge over competitors.
3) High Degree of Adaptability: A very high level of adaptability can be obtained from the ADL matrix
under qualitative situations.

Limitations of Life-Cycle or Arthur D. Little Matrix

The ADL matrix encounters the following limitations:
1) Varied Lifecycle Duration: Different industries have different duration of lifecycle and one cannot
precisely determine the existing stage in an industry at a certain time.
2) Inconsistent Industry Behaviour: The well behaved S-shaped pattern in not always obtained from the
industry maturity. In fact, there can be situations in which the industry revives after facing a period of
decline. In some cases, some stages can be skipped in some industries specially in case of passing fads.
Even the real developmental stage related to a certain industry will be unclear by the various economic
conditions such as depression.
3) Inconsistent Lifecycle: The shape of lifecycle curve is affected by the firm mainly due to product
innovation and re-positioning.
4) Variable Competition: Different industries have different nature of competition according to the dynamic
stages of industry lifecycle.

[Link]. Porter’s Five Forces of Industry Analysis

For analysing an industry efficiently, it is essential to consider various competitive forces and how they interact
with each other to create pressure on one another. These factors decide the nature of competition in the industry.
The study of these competitive forces is necessary because without scrutinising them, an industry cannot be
analysed thoroughly.

Michael Porter developed a model which explains that the industry of a firm is affected by five forces. The
strategic business manager can use Porter‟s model to analyse an industry on these five forces and then judge the
strengths and weaknesses of his firm based on his industry analysis.

The industry analysis will basically enable the manager to review how strong each force is in a particular
industry. This model thus helps the firm to gain an edge over its rivals in the industry. An industry can be very
loosely defined as a group of firms who are all producing similar products and services – so that the customer
can substitute one for the other.

This five forces model is a widely used technique for analysing the industry. It also illustrates the nature and
level of competition existing in the industry along with the forces that shape a business and its functions. An
industry consists of number of firms that produce and sell similar products or services to the consumers.

Therefore the five force model is quite significant in understanding the complex and diverse characteristics of
the competition in different industry areas. The competition faced by a firm is actually much broader as it
includes both current and potential competitors. A company can face negative consequences by emergence of
new technologies and new competitors as well as the existing competitors.

Before analysing the nature and scope of competition in an industry, it makes sense to define its boundaries.
This helps in the following ways:
1) Define Arena: It helps in defining the arena (or playing field) of the firm.

2) Focus on the Competitors: Setting the industry boundaries helps the firm to get an idea of its competitors
and the firms that are manufacturing substitute products.

3) Identify Key Factors for Success: This helps in allocating and deploying the key success factors in the
industry.
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Environment Appraisal & Strategies (Unit 2) 103

Components of Porter’s Five Forces Model

The five forces of the Michael Porter Model are as follows:
Bargaining Power of Supplier
1) Supplier concentration
2) Importance of volume to supplier
3) Differentiation of inputs
4) Impact of inputs on cost or differentiation
5) Switching costs of firms in the industry
6) Presence of substitute inputs
7) Threat of forward integration
8) Cost relative to total purchases in industry

Threat of New Entrants

1) Absolute cost advantages
Rivalry inside the Industry
2) Proprietary learning curve Threat of Substitutes
1) Exit barriers
3) Access to inputs 1) Switching costs
2) Industry concentration
4) Government policy 2) Buyer inclination to
3) Fixed costs/Value added
5) Economies of scale substitute
4) Industry growth
6) Capital requirements 3) Price-performance trade-
5) Intermittent over-capacity
7) Brand identity off of substitutes
6) Product differences
8) Switching costs
7) Switching costs
9) Access to distribution
8) Brand identity
10) Expected retaliation
9) Diversity of rivals
11) Proprietary products
10) Corporate stakes

Bargaining Power of Buyer

1) Bargaining leverage
2) Buyer volume
3) Buyer information
4) Brand identity
5) Price sensitivity
6) Threat of backward integration
7) Product differentiation
8) Buyer concentration versus industry
9) Substitutes available
10) Buyer‟s incentives

Figure 2.12: Components of Porter’s Five Forces Model

1) Rivalry inside Industry: According to perfect competition model, no firm can enjoy super normal profits,
and in the long run the competition drives the excess profits to zero. In the real market, the competition is
not perfect and the firms are not just the entities interested in charging money from the consumers, they
actually attempt to seek a competitive advantage over their rivals. The level of rivalry in an industry is of
great importance to economists and strategic analysts. One such ratio which gives an idea of the prevalent
state of competition in an industry is the concentration ration (CR).
A high industry concentration ratio means that a very few firms command a very high market share in that
industry. For example, the petrochemical industry in India is dominated by Reliance Industries and has a
very high concentration ratio. If the concentration ratio is low, then the industry is considered to be a
disciplined one. This discipline might be a result of a code of conduct or mutual amenability among the
firms. This discipline results from the history of competition in the industry, the presence of a great leading
firm, an informal or tactical understanding between the players to not to break rules. However even in a
disciplined industry a rebel firm can cause havoc with its business activities.
2) Threat of Substitutes: The substitutes can be defined as the products of other industries that have the
ability to satisfy similar needs. For example, coffee can be a substitute for tea, as it can also be used as a
caffeine drink in the morning.
When the price of a substitute product changes the demand of a related product also gets affected. When the
number of substitute products increases, the competition also increases as the customers have more
alternatives to select from. This forces the companies to raise or lower down the prices. Therefore, it can be
concluded that the competition created by the substitute firms is price competition. The presence of a
number of substitutes impacts the ability of the company to increase the price of its products as increasing
the price will make the substitutes more attractive for the target market. Since, the substitute products serve
the same or similar purposes; therefore a close substitute may act as a negative competitive force in the
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104 MBA Third Semester (Strategic Management) MDU

market. Hence, the industries which have no close substitutes are more attractive for various firms as they
can charge higher prices when required. For example, when Coca-Cola came out with a pricing of Rs5 for
its 200ml bottles it was able to acquire customers from substitute products like – coconut water, mango and
fresh juice etc.
3) Buyer Power: The bargaining power of buyers also has a very important effect on the manufacturing
industry. When there are many producers and there is a single customer in a market, then that situation is
termed as a “monopsony”. In these markets, the position of buyer is very strong and he sets the price. In
reality, only a few monopsony markets exist.
The buyers‟ power or bargaining power of buyers compels the firms to reduce the prices. They may also
demand a product or service of higher quality at low price or may demand added value in exchange of their
money.
The buyers have more power in following conditions:
i) When the number of buyers is relatively less.
ii) When buyers purchase in bulk.
iii) Availability of alternate suppliers who can provide the same product or service at a competitive price.
iv) When the cost of switching from one producer to the other is quite low.
v) When the buyers, i.e., wholesaler, retailer, etc., charge low price from the consumers and are unlikely to
pay high prices.
vi) When the buyers pay the maximum share in the total cost of product. This may lead the organisations to
search for cheaper alternatives.
vii) If the buyer is capable of starting new alliance by integrating backwards with other firms making itself
a powerful supplier.
4) Supplier Power: Since the company needs raw material for producing, therefore the producers have to
build relationship with its suppliers. When suppliers have the power in their hands, they can exert influence
on the producing firms by selling them raw materials at higher prices. For example, Walmart as an
organisation thrives on the basis of its relationship with its suppliers.
Bargaining power of the suppliers is their ability to influence and industry either through individual or
group interaction with the company. The suppliers have a bargaining power with which they can raise the
prices of products or services or force the customers to purchase a low quality product or service. This
empowers the position of suppliers in the industry.
5) Threat of New Entrants: The market is full of competition. Not only the existing firms pose threat to the
business, but the arrival of new entrants is also a challenge. As per the ideal scenario, the market is always
open for entry and exits, resulting in comparable profits to all the firms. But, this is not applicable in the
real picture market. In reality, all industries have some traits that protect their high profits and help them in
warding off potential new entrants by erecting barriers.
Various factors that hinder the entry of new firms in the industry are called as “barriers to entry”. These
barriers prevent the new firms from entering into the industry. This helps in maintaining profit levels for the
existing firms. These barriers can either be developed or fully utilised to improve the performance of
organisation. These entry barriers can be a source of competitive advantage for the firms.

2.11.5. Strategic Choice

The crux of effective strategic choice is to make good choices and to identify the key issues that affect the
organisation‟s performance. For this, it also takes several steps to tackle the prevailing issues. Thus, the
strategic choice process enables the organisation to make appropriate and viable strategic decisions.
Strategic choice is the procedure of selecting the most suitable strategy or strategies that supports the
organisation in accomplishing its objectives. In order to make strategic choices, the strategists of an
organisation assess the strengths and weaknesses of the internal environment and opportunities and threats of
the external environment. After this assessment, several potential alternatives are found out and from these
alternatives the strategic choices are made. In simple words, strategic choices identify the strategic direction of
the organisation which it has to follow. A process that a firm follows to position its resources in the right
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Environment Appraisal & Strategies (Unit 2) 105

direction is also defined as strategic choice. It involves various strategic decisions like what type of products
and services to sell, where to sell them, how to sell them and what target markets to sell them to. If a firm‟s
objective is to gain the market share, then the strategic choice will be to acquire a competitor. Another method
adopted by the firm can be to emphasis on trade shows for selling its product and services instead of using
advertising techniques.

According to Pearce and Robinson, “Strategic choice is a decision which determines the future strategy of the
firm”.
According to Glueck and Jauch, “Strategic choice is the decision which selects from among the alternative
grand strategies which will best meet the enterprise objectives. The choice involves consideration of selection
factors, evaluation of the alternatives against these criteria, and the actual choice”.
According to Professor Azhar Kazmi, “The decision to select from among the grand strategies considered the
strategy which will best meet the enterprise‟s objective. The decision involves focusing on a few alternatives
considering the selection factors, evaluating the alternatives against these criteria and making the actual
choice”.
A strategy should be such that it is able to achieve the best fit between the external threats and opportunities and
the internal strengths and weaknesses of an organisation. However, there are a number of subjective factors
which impact the final choice of strategy. Consequently, there may be a situation where various choice factors
stand in opposition to other organisations. For that, the organisation has to modify the strategy so that the best
possible strategy can be chosen.

[Link]. Criteria for Strategic Choice

There are several factors which influence the choice of strategy in an organisation. Some of these factors
narrow the strategist‟s range of alternatives and could act as restrictions. The significant factors are explained as
follows:
1) Societal, Political, Regulatory, and Citizenship Considerations: Organisations have to operate within the
defined boundaries of the society and legislations. Their strategies and actions must not be against the
society‟s welfare. The adoption of strategy by an organisation is impacted greatly by government
regulations, ethics, legality, responsible citizenship and expectations of society.
2) Competitive Conditions and Overall Industry Attractiveness: The strategy of an organisation is also
determined by the competitive scenario and the attractiveness of the industry in which it operates. The
organisation‟s strategy should be customised according to the dynamics of competitive aspects like price,
quality, product performance, service, etc. In the phases of highly intense competition, the organisation has
to make suitable changes to its strategy and implement them to survive and maintain its place in the
industry.
3) Company’s Market Opportunities and External Threats: Choosing a strategy is also affected by the
opportunities in the market and the possible threats. The company‟s strategic choice should be adjusted in
such a manner that it not only takes maximum advantage of available opportunities, enhances profitability,
and gains long term competitive edge, but also counters the threats which can pose danger to company‟s
overall performance.
4) Company Resource Strengths, Competencies, and Competitive Capabilities: The current and potential
resources, strengths, capabilities, and competencies of an organisation required for successfully
implementing a strategy are other internal factors affecting the strategic choice. These factors are the main
basis of an organisation‟s strategy. Also, they can help in making the most of an opportunity and attaining
sustainable competitive advantage in the industry.
5) Personal Ambitions, Business Philosophies, and Ethical Beliefs of Managers: While choosing the
correct strategic path, there is no half-hearted effort by the managers. They undertake strategic decisions on
the basis of their perception regarding the best way to compete, effective positioning, and the desired image
of the company. Few factors which influence the strategic decisions of the managers have come up during
detailed as well as casual observations. Some of them are values, ideologies, attitude towards risk, personal
ethics and goals.
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6) Influence of Shared Values and Company Culture on Strategy: The unique culture of an organisation is
an outcome of its policies, actions, beliefs, traditions and philosophies. The strategic decisions of the
organisation are greatly influenced and controlled by a robust culture. The reason behind this strong
influence is the presence of cultural values in deep roots of management‟s approach towards strategy
formulation.

[Link]. Subjective Factor of Strategic Choice

There are several behavioural or subjective factors enter the strategic choices. For example, according to
Christensen et ol, the managers responsible for firm destinies do no solely look at what firm might do or can do.
Perhaps, in the apparent ignorance of the second of these factors, they appear strongly motivated by what they
want to do individually. Therefore, the importance of objectives factors in strategic choices has been reduced
due to these personal and subjective factors. The key strategist‟s value system, personal preferences, willingness
to risk, reaction of competitor‟s new organisational strategy and internal political consideration are the major
subjective factors.

These factors can be explained as follows:

1) Personal Preferences of key Strategists: The type of strategies would be performed by the company
concerned is affected by the key strategist‟s personal preferences. Simply, it can be said that the firm
becomes a way to meet the promoter‟s personal desires and aspirations, who typically play the role of
critical decision makers. Thus the organisational objectives and strategies, which will be chosen for
attaining these objectives, represent these personal needs and ambitions.
2) Value System of Key Strategists: A personal philosophy framework that governs and influences the
reactions and responses of an individual in any condition is refers to as the value system. Therefore, the
form of strategies pursued by the firm is affected by the key strategist‟s value system. Terminal values and
instrumental values are the two forms of values. The strategy of the firm is shaped by the terminal values
while the way to implement these strategies is indicated by the instrumental values.
3) Willingness of Key Strategists to Take Risk: There may some risk associated with every type of strategy.
Therefore, whether a risky strategy will be selected or not is directly affected by the willingness of key
strategists to take risk. As it may not be possible to get the best of all worlds, thus, strategic choice is the
trade-off between risk and opportunity which is not always based on logic. In final analysis, on willingness
to take risk by the key strategists, the decision depends.
4) Internal Political Considerations: The formulation of strategy becomes a political process in many
organisations as the process of strategic decision-making is affected by the lot of infernal political factors.
Political factors are not only restricted to the political organsiations as these factors as mentioned as the
universal factors.
Each organisation is a combination of many people and their groups, and based on the internal power
arrangement, each of them positions some sort of pulls and pushes. And the choice of strategy is affected by
these pulls and pushes.
5) Competitor’s Reactions to New Strategy: Organisation frequently employs the likely moves of key
competitors to many strategic options in strategic choice. Organisations may pursue an aggressive counter-
strategy, especially if the competitors believe in aggressiveness, in many situations, when the initiating firm
goes for an aggressive strategy that influences the key competitors directly. Thus, to that extent, the
strategic choice of initiating organisation is affected.

[Link]. Process of Strategic Choice

Choosing the correct strategy requires effective decision-making consisting of steps shown in figure 2.13:
1) Focusing on Alternatives: In the first step, all the available alternatives are listed. The deviation between
the standard performance and the actual performance is studied by the strategists, called the gap analysis.
This deviation or gap between the two becomes the basis for various strategic alternatives that the
organisation can consider. If the organisation does not deploy an effective strategy in the initial stages, the
gap between what is to be achieved and actual performance may increase, making the organisational
position worse.
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Environment Appraisal & Strategies (Unit 2) 107

Objective
Factors

Focusing on Evaluating Strategy

Considering
strategic strategic choice
decision factors
alternatives alternatives

Subjective
factors

Figure 2.13: Process of Strategic Choice

2) Evaluation of Strategic Alternatives: Once the alternatives are identified, the strategist analyses these on
the basis of their merits and demerits. This assessment is also based on several selection factors. Methods
like corporate parenting, GE business screen, portfolio analysis, etc., are useful in this regard.
3) Considering Selection Factors: The organisation must consider both “objective” as well as “subjective”
factors while evaluating the alternatives. These factors are explained as follows:
i) Objective Factors: Objective factors are a result of detailed analysis, information, vital facts and
critical techniques. They can be of the following types :
a) Environmental factors
 Instability of environment
 Input supply from environment
 Influential stakeholders
b) Organisational factors
 Mission of the organisation
 Strategic intent
 Business definition
 Strengths and weaknesses
ii) Subjective Factors: Subjective factors are judgmental and descriptive. The judgements can be either
individual or collective. Some of these factors are:
a) The strategies which have been employed earlier;
b) The personal views of the decision-makers;
c) Management‟s perception of risk;
d) Stakeholder‟s influence.
4) Making the Strategic Choice: The last step in the process is selecting the most feasible strategy. The
strategist can select multiple strategies as well. In addition, a framework should be developed defining the
strategy and the premise of its functioning. Creating and maintaining a structured and sequential process in the
selection and implementation of the appropriate strategy is the main objective of the strategic choice making.

[Link]. Selection of Strategies

The making of strategic choice facilitates an organised and intensive process development for strategic
decisions formulation and implementation. Strategic choice and evaluation recommends the assessment of
alternatives suitability under separate situations. Therefore, the last step is the selection of strategies. One or
more strategies are needed for implementation. In addition, a blueprint defining the different techniques and the
basic needs for their activities is required to be created. This blueprint is defined as the strategic plan. Moreover,
it is also required to define the some contingency strategies alongwith the strategies which are chosen.
Implementing a strategy is more difficult and challenging than that of defining the strategy. Choices that are
tough are often not taken at all, and sometimes choices that seem to have been taken fall apart before they are
ever put into effect. Barriers to successful implementation of strategy can be recognised by developing
alternative strategies regarding “where to play and how to win” with the help of making strategic choices.
The critical questions that inform the organisation‟s strategy development can be answered with the help of
following thoughtful process by the decision makers. Participant commit to their choices of where and how they
will concentrate on their efforts in the market and succeed by testing the possible scenarios against real-world
data generated by groups.
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