Strategic Management (Module 1)

Definition: The term ‘strategic management’ is used to denote a branch of management that is
concerned with the development of strategic vision, setting out objectives, formulating and
implementing strategies and introducing corrective measures for the deviations (if any) to reach
the organization’s strategic intent. It has two-fold objectives:

▪​ To gain competitive advantage, with an aim of outperforming the competitors, to achieve

dominance over the market.

▪​ To act as a guide to the organization to help in surviving the changes in the business
environment.

Here, changes refer to changes in the internal environment, i.e. within the organization,
introduced by the managers such as the change in business policies, procedures etc. and changes
in the external environment as in changes in the government rules that can affect business,
competitors move, change in customer’s tastes and preferences and so forth.

Strategic Management Process

1.​ Defining the levels of strategic intent of the business:

▪​ Establishing vision

▪​ Designing mission
▪​ Setting objectives

​ Formulation of strategy

▪​ Performing environmental and organizational appraisal

▪​ Considering strategies

▪​ Carrying out strategic analysis

▪​ Making strategies

▪​ Preparing strategic plan

​ Implementation of strategy

▪​ Putting strategies into practice

▪​ Developing structures and systems

▪​ Managing behavioral and functional implementation

​ Strategic Evaluation and Control

▪​ Performing evaluation

▪​ Exercising control

▪​ Recreating strategies

Strategic Management is all about specifying organization’s vision, mission and objectives,
environment scanning, crafting strategies, evaluation and control.
Importance of Strategic Management
▪​ It guides the company to move in a specific direction. It defines organization’s goals and
fixes realistic objectives, which are in alignment with the company’s vision.

▪​ It assists the firm in becoming proactive, rather than reactive, to make it analyse the actions
of the competitors and take necessary steps to compete in the market, instead of becoming
spectators.

▪​ It acts as a foundation for all key decisions of the firm.

▪​ It attempts to prepare the organization for future challenges and play the role of pioneer in
exploring opportunities and also helps in identifying ways to reach those opportunities.

▪​ It ensures the long-term survival of the firm while coping with competition and surviving the
dynamic environment.

▪​ It assists in the development of core competencies and competitive advantage, that helps in
the business survival and growth.

The basic purpose of strategic management is to gain sustained-strategic competitiveness of the

firm. It is possible by developing and implementing such strategies that create value for the
company. It focuses on assessing the opportunities and threats, keeping in mind firm’s strengths
and weaknesses and developing strategies for its survival, growth and expansion.
 ​

Stakeholders in business
A stakeholder is a person who has an interest in the company, IT service or its projects. They can
be the employees of the company, suppliers, vendors or any partner. They all have an interest in
the organization. Stakeholders can also be an investor in the company and their actions determine
the outcome of the company. Such stakeholder plays an important role in defining the future of
the company as well as its day-to-day workings.

Types of Stakeholders
●​ Internal Stakeholders: They are a part of the management of the company and have voting
powers. They are the major investors in the company and a part of the board of directors.
Therefore they have all the powers that other higher-level management have and can change the
direction of the company.
●​ External Stakeholders: Unlike internal stakeholders, their major role is to invest or disinvest in
the company. They hardly can bring any change in the company’s direction. They do not take
part in any internal operations or decision making of the company.

Roles of Stakeholders
●​ Direct the Management: The stakeholders can be a part of the board of directors and therefore
help in taking actions. They can take over certain departments like service, human resources or
research and development and manage them for ensuring success.
●​ They Bring in Money: Stakeholders are the large investors of the company and they can
anytime bring in or take out money from the company. Their decision shall depend upon the
company’s financial performance. Therefore they can pressurize the management for financial
reports and change tactics if necessary. Some stakeholders can even increase or decrease the
 investment to change the share price in the market and thus make the conditions favorable for
them.
●​ Help in Decision Making: Major stakeholders are part of the board of directors. Therefore they
also take decisions along with other board members. They have the power to disrupt the
decisions as well. They and bring n more ideas a threaten the management to obey them. The
stakeholders also have all the powers to appoint senior-level management. Therefore, they are
there in all the major decision-making areas. They also take decisions regarding liquidations and
also acquisitions.
●​ Corporate Conscience: Large stakeholders are the major stakeholders of the company and have
monitored over all the major activities of the company. They can make the company abide by
human rights and environmental laws. They also monitor the outsourcing activities and may vote
against any business decision if it harms the long term goals of the company.
●​ Other Responsibilities: Apart from the above four major roles they also have some other roles
to play in the company. They can identify new areas for market penetration and increased sales.
They can bring in more marketing ideas. They also attract other investors like honeybees in the
company. They can be a part of a selection board or a representative for the company. Moreover,
they can take all the major social and environmental decisions.

Steps in Identifying Stakeholders

Identifying all of a firm’s stakeholders can be a daunting task. In fact, as we will note again
shortly, a list of stakeholders that is too long actually may reduce the effectiveness of this
important tool by overwhelming decision makers with too much information. To simplify the
process, we suggest that you start by identifying groups that fall into one of four
categories: organizational, capital market, product market, and social. Let’s take a closer look at
this step.

Step 1: Determining Influences on Mission, Vision, and Strategy Formulation. One way to
analyze the importance and roles of the individuals who compose a stakeholder group is to
identify the people and teams who should be consulted as strategy is developed or who will play
some part in its eventual implementation. These are organizational stakeholders, and they
include both high-level managers and frontline workers. Capital-market stakeholders are groups
that affect the availability or cost of capital—shareholders, venture capitalists, banks, and other
financial intermediaries. Product-market stakeholders include parties with whom the firm shares
its industry, including suppliers and customers. Social stakeholders consist broadly of external
groups and organizations that may be affected by or exercise influence over firm strategy and
performance, such as unions, governments, and activist groups. The next two steps are to
determine how various stakeholders are affected by the firm’s strategic decisions and the degree
of power that various stakeholders wield over the firm’s ability to choose a course of action.

Step 2: Determining the Effects of Key Decisions on the Stakeholder. Step 2 in stakeholder
analysis is to determine the nature of the effect of the firm’s strategic decisions on the list of
relevant stakeholders. Not all stakeholders are affected equally by strategic decisions. Some
effects may be rather mild, and any positive or negative effects may be secondary and of minimal
impact. At the other end of the spectrum, some stakeholders bear the brunt of firm decisions,
good or bad.

In performing step 1, companies often develop overly broad and unwieldy lists of stakeholders.
At this stage, it’s critical to determine the stakeholders who are most important based on how the
firm’s strategy affects the stakeholders. You must determine which of the groups still on your list
have direct or indirect material claims on firm performance or which are potentially adversely
affected. For instance, it is easy to see how shareholders are affected by firm strategies—their
wealth either increases or decreases in correspondence with the firm’s actions. Other parties have
economic interests in the firm as well, such as parties the firm interacts with in the marketplace,
including suppliers and customers. The effects on other parties may be much more indirect. For
instance, governments have an economic interest in firms doing well—they collect tax revenue
from them. However, in cities that are well diversified with many employers, a single firm has
minimal economic impact on what the government collects. Alternatively, in other areas,
individual firms represent a significant contribution to local employment and tax revenue. In
those situations, the effect of firm actions on the government would be much greater.

Step 3: Determining Stakeholders’ Power and Influence over Decisions. The third step of a
stakeholder analysis is to determine the degree to which a stakeholder group can exercise power
 and influence over the decisions the firm makes. Does the group have direct control over what is
decided, veto power over decisions, nuisance influence, or no influence? Recognize that
although the degree to which a stakeholder is affected by firm decisions (i.e., step 2) is
sometimes highly correlated with their power and influence over the decision, this is often not
the case. For instance, in some companies, frontline employees may be directly affected by firm
decisions but have no say in what those decisions are. Power can take the form of formal voting
power (boards of directors and owners), economic power (suppliers, financial institutions, and
unions), or political power (dissident stockholders, political action groups, and governmental
bodies). Sometimes the parties that exercise significant power over firm decisions don’t register
as having a significant stake in the firm (step 2). In recent years, for example, Wal-Mart has
encountered significant resistance in some communities by well-organized groups who oppose
the entry of the mega-retailer. Wal-Mart executives now have to anticipate whether a vocal and
politically powerful community group will oppose its new stores or aim to reduce their size,
which decreases Wal-Mart’s per store profitability. Indeed, in many markets, such groups have
been effective at blocking new stores, reducing their size, or changing building specifications.

Once you’ve determined who has a stake in the outcomes of the firm’s decisions as well as who
has power over these decisions, you’ll have a basis on which to allocate prominence in the
strategy-formulation and strategy-implementation processes. The framework in the figure will
also help you categorize stakeholders according to their influence in determining strategy versus
their importance to strategy execution. For one thing, this distinction may help you identify
major omissions in strategy formulation and implementation.

Having identified stakeholder groups and differentiated them by how they are affected by firm
decisions and the power they have to influence decisions, you’ll want to ask yourself some
additional questions:

●​ Have I identified any vulnerable points in either the strategy or its potential implementation?

●​ Which groups are mobilized and active in promoting their interests?

●​ Have I identified supporters and opponents of the strategy?

●​ Which groups will benefit from successful execution of the strategy and which may be adversely
affected?

●​ Where are various groups located? Who belongs to them? Who represents them?

The stakeholder-analysis framework summarized in the figure is a good starting point.

Ultimately, because mission and vision are necessarily long term in orientation, identifying
important stakeholder groups will help you to understand which constituencies stand to gain or to
lose the most if they’re realized.

The IO model
From the 1960s through the 1980s, the external environment was thought to be the primary
determinant of strategies that firms selected to be [Link] industrial organization (I/O)
model of above-average returns explains the external environment’s dominant influence on a
firm’s strategic actions. The model specifies that the industry in which a company chooses to
compete has a stronger influence on performance than do the choices managers make inside their
organizations. The firm’s performance is believed to be determined primarily by a range of
industry properties, including economies of scale, barriers to market entry, diversification,
product differentiation, and the degree of concentration of firms in the industry.

Grounded in economics, the I/O model has four underlying assumptions. First, the external
environment is assumed to impose pressures and constraints that determine the strategies that
would result in above-average returns. Second, most firms competing within an industry or
within a certain segment of that industry are assumed to control similar strategically relevant
resources and to pursue similar strategies in light of those resources. Third, resources used to
implement strategies are assumed to be highly mobile across firms, so any resource differences

that might develop between firms will be short-lived. Fourth, organizational decision makers are
assumed to be rational and committed to acting in the firm’s best interests, as shown by their
profit-maximizing behaviors. The I/O model challenges firms to locate the most attractive
industry in which to compete. Because most firms are assumed to have similar valuable
resources that are mobile across companies, their performance generally can be increased only
when they operate in the industry with the highest profit potential and learn how to use their
resources to implement the strategy required by the industry’s structural characteristics.

The five forces model of competition is an analytical tool used to help firms with this task. The
model (explained in Chapter 2) encompasses several variables and tries to capture the
complexity of competition. The five forces model suggests that an industry’s profitability (i.e., its
rate of return on invested capital relative to its cost of capital) is a function of interactions among
five forces: suppliers, buyers, competitive rivalry among firms currently in the industry, product
substitutes, and potential entrants to the industry.74 Firms can use this tool to understand an
industry’s profit potential and the strategy necessary to establish a defensible competitive
position, given the industry’s structural characteristics. Typically, the model suggests that firms
can earn above-average returns by manufacturing standardized products or producing
standardized services at costs below those of competitors (a cost leadership strategy) or by
manufacturing differentiated products for which customers are willing to pay a price premium (a
differentiation strategy).

The I/O Model of Above - Average Returns.

In the mid-twentieth century the ideal strategy for a company was the industrial organization
model of above-average returns. This model describes the external environment as
a primary determinant for a strategy of firms to use for successfulness. The strategy was used
because the firms used to think that the industry in which you compete must be essential to-do a
better work than change the way of administration in the company. Some examples of external
environment can be economies of scale, barriers to market entry, diversification, product
differentiation, the degree of concentration of firms in the industry, and market
Frictions.
The I/O Model of Above - Average Returns.
In the mid-twentieth century the ideal strategy for a company was the industrial organization
model of above-average returns. This model describes the external environment as
a primary determinant for a strategy of firms to use for successfulness. The strategy was used
because the firms used to think that the industry in which you compete must be essential to
do a better work than change the way of administration in the company. Some examples of​
external environment can be economies of scale, barriers to market entry, diversification,
product differentiation, the degree of concentration of firms in the industry, and
market frictions.
The I/O Model of Above - Average Returns.
In the mid-twentieth century the ideal strategy for a company was the industrial organization
model of above-average returns. This model describes the external environment as
a primary determinant for a strategy of firms to use for successfulness. The strategy was used
because the firms used to think that the industry in which you compete must be essential to
do a better work than change the way of administration in the company. Some examples of
external environment can be economies of scale, barriers to market entry, diversification,
product differentiation, the degree of concentration of firms in the industry, and
market frictions
The I/O model tells us that we must analyze and deeply understand the external
Environment for a company to succeed, for this managers must be able to locate the industry
with the highest potential but also find the correct management strategy. This
strategy cannot focus solely on eliminating or joining the competition (ex. joint ventures), it also
has to innovate and add value to their products. For the company to accomplish its vision it must
be prepared internally and understand what’s happening externally and so be ready to manage
the variables and uncertainties of venturing the market.

The I/O model is based on the following

assumptions:

●​ The external environment-the general, industry and competitive environments imposes

pressures and constraints on companies and determines strategies that will result in
superior returns.
 ●​ In other words, the external environment pressures the company to adopt strategies to
meet that pressure while simultaneously constraining or limiting the scope of strategies
that might be appropriate and eventually successful.

●​ Most companies competing in an industry or in an industry segment control similar sets

of strategically relevant resources and thus pursue similar strategies.
This assumption presumes that, given a similar availability of resources, the majority of
companies competing in a specific industry-or in a segment of the industry-have similar
capabilities and thus follow strategies that are similar. In other words, there are few significant
differences among companies in an industry.

●​ Resources used to implement strategies are highly mobile across firms. Significant
differences in strategically relevant resources among companies in an industry tend to
disappear because of resource mobility. Thus, any resource differences soon disappear as
they are observed and acquired or learned by other companies in the industry.

The I/O model was a dominant paradigm from the 1960s through the 1980s. According to this
model companies must pay careful attention to the characteristics of the industry in which they
choose to compete, searching for one that is the most attractive to the firm, given the company's
strategically relevant resources. Then the company must be able to successfully implement
strategies required by the industry's characteristics to be able to increase their level of
competitiveness. The five forces model is an analytical tool used to address and describe these
industry characteristics.
Figure: Five step Process of the I/O Model

Based on its underlying assumptions, the I/O model prescribes a five-step process for companies
to achieve above-average returns as shown in the figure above:
1. Study the external environment-general, industry and competitive-to determine
the characteristics of the external environment that will both determine and constrain
the company's strategic alternatives.
2. Select an industry (or industries) with a high potential for returns based on the
structural characteristics of the industry.
3. Based on the characteristics of the industry, in which the company chooses to
compete, strategies that are linked with above-average returns should be selected. A
model or framework that can be used to assess the requirements and risks of these
strategies, the Generic Strategies (cost leadership and differentiation), will be
discussed in detail later.
4. Acquire or develop the critical resources-skills and assets-needed to successfully
implement the strategy that has been selected.
 5. The I/O model indicates that above-average returns will accrue to companies
that successfully implement relevant strategic actions that enable the company to
leverage its strengths (skills and resources) to meet the demands or pressures and
constraints of the industry in which they have elected to compete.

The I/O model has been supported by research indicating 20% of company profitability can be
explained by industry characteristics and 36% of company profitability can be attributed to
company characteristics and the actions taken by the company. Overall, this indicates a
reciprocal relationship-or even an interrelationship-between industry characteristics
(attractiveness) and company strategies that result in company performance.
​

The Resource-Based model adopts an internal perspective to explain how a company's unique
bundle or collection of internal resources and capabilities represent the foundation upon which
value-creating strategies should be built.

Resources are inputs into a company's production process, such as capital equipment, individual
employee's skills, patents, brand names, finance and talented managers. These resources can be
tangible or intangible. Capabilities are the capacity for a set of resources to integratively-or in
combination-perform a task or activity.

Thus, according to the Resource-Based model, a company's resources and capabilities are more
critical to determining the appropriateness of strategic actions than are the conditions and
characteristics of the external environment. Thus, strategies should be selected that enable the
company to best exploit its core competencies, relative to opportunities in the external
environment.
Figure: Five steps of the Resource-Based Model

The Resource-Based model of above-average returns is grounded in the uniqueness of a

company's internal resources and capabilities. The five-step model describes the linkages
between resource identification and strategy selection that will lead to above-average returns as
shown in the figure above.

▪​ Companies should identify their internal resources and assess their strengths and weaknesses.
The strengths and weaknesses of company resources should be assessed relative to
competitors.
▪​ Companies should identify the set of resources that provide the company with capabilities
that are unique to the firm, relative to its competitors. The company should identify those
capabilities that enable the company to perform a task or activity better than its competitors.
▪​ Companies should assess or determine the potential for their unique sets of resources and
capabilities to outperform its competitors in terms of returns. Determine how a company's
resources and capabilities can be used to gain competitive advantage.
▪​ Locate and compete in an attractive industry. Determine the industry that provides the best fit
between the characteristics of the industry and the company's resources and capabilities.
▪​ To attain a sustainable competitive advantage and earn above-average returns, companies
should formulate and implement strategies that enable them to better exploit their resources
and capabilities to take advantage of opportunities in the external environment than can their
competitors.

However, taking advantage of or exploiting resources and capabilities in the new competitive
landscape may not always result in a company achieving a sustainable competitive advantage
and above-average returns. The potential to achieve a sustainable competitive advantage will be
realised when company resources and capabilities are:

Valuable, allowing the company to exploit opportunities or neutralise threats in the external
environment

Rare or possessed by few, if any, current and potential competitors

Costly to imitate such that other companies will be able to obtain them only at a cost
disadvantage relative to companies that already have them

Non-substitutable as there are no strategic equivalents

Core competencies are resources and capabilities that serve as a source of competitive advantage
over a company's rivals and represent the dominant influences on the appropriateness of a
company's strategic actions.

One strategy that may enable a company to transform or develop its resources and capabilities
into core competencies is to organise itself to take advantage of them through firm-specific
patterns of combinations of its human resources. Using these resources companies may be able
to better utilise their managerial competencies to better organise and manage diverse, complex
operations, develop and communicate a strategic intent and mission or to reengineer products to
better meet changing customer expectations.
Components of a Strategy Statement
The strategy statement of a firm sets the firm’s long-term strategic direction and broad policy
directions. It gives the firm a clear sense of direction and a blueprint for the firm’s activities for
the upcoming years. The main constituents of a strategic statement are as follows:

1.​ Strategic Intent

An organization’s strategic intent is the purpose that it exists and why it will continue to
exist, providing it maintains a competitive advantage. Strategic intent gives a picture
about what an organization must get into immediately in order to achieve the company’s
vision. It motivates the people. It clarifies the vision of the vision of the company.

Strategic intent helps management to emphasize and concentrate on the priorities.

Strategic intent is, nothing but, the influencing of an organization’s resource potential and
core competencies to achieve what at first may seem to be unachievable goals in the
competitive environment. A well expressed strategic intent should guide/steer the
 development of strategic intent or the setting of goals and objectives that require that all
of organization’s competencies be controlled to maximum value.

Strategic intent includes directing organization’s attention on the need of winning;

inspiring people by telling them that the targets are valuable; encouraging individual and
team participation as well as contribution; and utilizing intent to direct allocation of
resources.

Strategic intent differs from strategic fit in a way that while strategic fit deals with
harmonizing available resources and potentials to the external environment, strategic
intent emphasizes on building new resources and potentials so as to create and exploit
future opportunities.

2.​ Mission Statement

Mission statement is the statement of the role by which an organization intends to serve
it’s stakeholders. It describes why an organization is operating and thus provides a
framework within which strategies are formulated. It describes what the organization
does (i.e., present capabilities), who all it serves (i.e., stakeholders) and what makes an
organization unique (i.e., reason for existence).

A mission statement differentiates an organization from others by explaining its broad

scope of activities, its products, and technologies it uses to achieve its goals and
objectives. It talks about an organization’s present (i.e., “about where we are”). For
instance, Microsoft’s mission is to help people and businesses throughout the world to
realize their full potential. Wal-Mart’s mission is “To give ordinary folk the chance to
buy the same thing as rich people.” Mission statements always exist at top level of an
organization, but may also be made for various organizational levels. Chief executive
plays a significant role in formulation of mission statement. Once the mission statement
is formulated, it serves the organization in long run, but it may become ambiguous with
organizational growth and innovations.
 In today’s dynamic and competitive environment, mission may need to be redefined.
However, care must be taken that the redefined mission statement should have original
fundamentals/components. Mission statement has three main components-a statement of
mission or vision of the company, a statement of the core values that shape the acts and
behaviour of the employees, and a statement of the goals and objectives.

Features of a Mission

a.​ Mission must be feasible and attainable. It should be possible to achieve it.
b.​ Mission should be clear enough so that any action can be taken.
c.​ It should be inspiring for the management, staff and society at large.
d.​ It should be precise enough, i.e., it should be neither too broad nor too narrow.
e.​ It should be unique and distinctive to leave an impact in everyone’s mind.
f.​ It should be analytical,i.e., it should analyze the key components of the strategy.
g.​ It should be credible, i.e., all stakeholders should be able to believe it.
3.​ Vision

A vision statement identifies where the organization wants or intends to be in future or

where it should be to best meet the needs of the stakeholders. It describes dreams and
aspirations for future. For instance, Microsoft’s vision is “to empower people through
great software, any time, any place, or any device.” Wal-Mart’s vision is to become
worldwide leader in retailing.

A vision is the potential to view things ahead of themselves. It answers the question
“where we want to be”. It gives us a reminder about what we attempt to develop. A
vision statement is for the organization and it’s members, unlike the mission statement
which is for the customers/clients. It contributes in effective decision making as well as
effective business planning. It incorporates a shared understanding about the nature and
aim of the organization and utilizes this understanding to direct and guide the
organization towards a better purpose. It describes that on achieving the mission, how the
organizational future would appear to be.

An effective vision statement must have following features-

 a.​ It must be unambiguous.
b.​ It must be clear.
c.​ It must harmonize with organization’s culture and values.
d.​ The dreams and aspirations must be rational/realistic.
e.​ Vision statements should be shorter so that they are easier to memorize.

In order to realize the vision, it must be deeply instilled in the organization, being owned
and shared by everyone involved in the organization.

4.​ Goals and Objectives

A goal is a desired future state or objective that an organization tries to achieve. Goals
specify in particular what must be done if an organization is to attain mission or vision.
Goals make mission more prominent and concrete. They co-ordinate and integrate
various functional and departmental areas in an organization. Well made goals have
following features-

a.​ These are precise and measurable.

b.​ These look after critical and significant issues.
c.​ These are realistic and challenging.
d.​ These must be achieved within a specific time frame.
e.​ These include both financial as well as non-financial components.

Objectives are defined as goals that organization wants to achieve over a period of time.
These are the foundation of planning. Policies are developed in an organization so as to
achieve these objectives. Formulation of objectives is the task of top level management.
Effective objectives have following features-

f.​ These are not single for an organization, but multiple.

g.​ Objectives should be both short-term as well as long-term.
h.​ Objectives must respond and react to changes in environment, i.e., they must
be flexible.
i.​ These must be feasible, realistic and operational.
Emergent strategy

A set of certain consistent actions that form an unintended pattern that was not initially
anticipated or intended in the initial planning phase. For example, although unintended,
adopting an emergent strategy might help a business adapt more flexibly to the
practicalities of changing market conditions.​
​
Business Strategy

The term "business strategy" describes the methods a business uses achieve its mission and
objectives. A business' mission encompasses its overall purpose, core values and long-term
goals. A grocery store might have the mission of making profit while providing the best food to
customers, minimizing its impact on the environment and promoting strength in the local
economy. The company's strategy might involve buying products from local food producers,
encouraging customers to

bring their own grocery bags, advertising in local newspapers and buying recycled product
packaging materials. A business’ strategy includes how it deals with the opportunities and threats
it faces.

Business Model

A company's business model describes the basic means by which it creates value, delivers value
to consumers and collects revenue from customers to make a profit. Business models can vary
greatly from one company to another. A local grocery store's business model might involve
buying food at wholesale prices and selling it to end consumers at a higher price to make profit.
A website might have a business model based on providing video content to customers and
generating revenue through advertisements placed on the site.
How They Are Related

A company's business model is a part of its business' overall strategy: It is the nuts and bolts
behind how the company plans to achieve its goals, such as making a profit. A company can
change its business model over time as a part of its profit-making strategy. For example, if
website does not make enough revenue from advertisements to make profit, managers might
decide implement a new business model, such as selling T-shirts and other goods though an
online store, as a strategy to boost profit.

Business Plan

Determining a company's mission, objectives, strategy and business model are all important
steps in the process of creating new business and can help managers form a business plan. A
business plan is a document that acts as a blueprint for how the business plans to operate and
achieve profitability.

Environmental Analysis
Definition: Environmental Analysis is described as the process which examines all the
components, internal or external, that has an influence on the performance of the organization.
The internal components indicate the strengths and weakness of the business entity whereas the
external components represent the opportunities and threats outside the organization.

Environmental analysis is a strategic tool. It is a process to identify all the external and internal
elements, which can affect the organization’s performance. The analysis entails assessing the
level of threat or opportunity the factors might present. These evaluations are later translated into
the decision-making process. The analysis helps align strategies with the firm’s environment.
Our market is facing changes every day. Many new things develop over time and the whole
scenario can alter in only a few seconds. There are some factors that are beyond your control.
But, you can control a lot of these things.
 To perform environmental analysis, a constant stream of relevant information is required to find
out the best course of action. Strategic Planners use the information gathered from the
environmental analysis for forecasting trends for future in advance. The information can also be
used to assess operating environment and set up organizational goals.

It ascertains whether the goals defined by the organization are achievable or not, with the present
strategies. If is not possible to reach those goals with the existing strategies, then new strategies
are devised or old ones are modified accordingly.

Advantages of Environmental Analysis

The internal insights provided by the environmental analysis are used to assess employee’s
performance, customer satisfaction, maintenance cost, etc. to take corrective action wherever
required. Further, the external metrics help in responding to the environment in a positive
manner and also aligning the strategies according to the objectives of the organization.

Environmental analysis helps in the detection of threats at an early stage, that assist the
organization in developing strategies for its survival. Add to that, it identifies opportunities, such
as prospective customers, new product, segment and technology, to occupy a maximum share of
the market than its competitors.

Steps Involved in Environmental Analysis

1.​ Identifying: First of all, the factors which influence the business entity are to be identified, to
improve its position in the market. The identification is performed at various levels, i.e. company
level, market level, national level and global level.
2.​ Scanning: Scanning implies the process of critically examining the factors that highly influence
the business, as all the factors identified in the previous step effects the entity with the same
intensity. Once the important factors are identified, strategies can be made for its improvement.
3.​ Analyzing: In this step, a careful analysis of all the environmental factors is made to determine
their effect on different business levels and on the business as a whole. Different tools available
for the analysis include benchmarking, Delphi technique and scenario building.
4.​ Forecasting: After identification, examination and analysis, lastly the impact of the variables is
to be forecasted.

Environmental analysis is an ongoing process and follows a holistic approach, that continuously
scans the forces effecting the business environment and covers 360 degrees of the horizon, rather
than a specific segment.

PESTLE analysis consists of various factors that affect the business environment. Each letter in
the acronym signifies a set of factors. These factors can affect every industry directly or
indirectly.

The letters in PESTLE, also called PESTEL, denote the following things:

▪​ Political factors

▪​ Economic factors

▪​ Social factors

▪​ Technological factors

▪​ Legal factors

▪​ Environmental factor

Often, managers choose to learn about political, economic, social and technological factors only.
In that case, they conduct the PEST analysis. PEST is also an environmental analysis. It is a
shorter version of PESTLE analysis. STEP, STEEP, STEEPLE, STEEPLED, STEPJE and
LEPEST: All of these are acronyms for the same set of factors. Some of them gauge additional
factors like ethical and demographical factors.
I will discuss the 6 most commonly assessed factors in environmental analysis.
P for Political factors
The political factors take the country’s current political situation. It also reads the global political
condition’s effect on the country and business. When conducting this step, ask questions like
“What kind of government leadership is impacting decisions of the firm?”

Some political factors that you can study are:

▪​ Government policies

▪​ Taxes laws and tariff

▪​ Stability of government

▪​ Entry mode regulations

E for Economic factors

Economic factors involve all the determinants of the economy and its state. These are factors that
can conclude the direction in which the economy might move. So, businesses analyze this factor
based on the environment. It helps to set up strategies in line with changes.

I have listed some determinants you can assess to know how economic factors are affecting your
business below:

▪​ The inflation rate

▪​ The interest rate

▪​ Disposable income of buyers

▪​ Credit accessibility
 ▪​ Unemployment rates

▪​ The monetary or fiscal policies

▪​ The foreign exchange rate

S for Social factors

Countries vary from each other. Every country has a distinctive mindset. These attitudes have an
impact on the businesses. The social factors might ultimately affect the sales of products and
services.

Some of the social factors you should study are:

▪​ The cultural implications

▪​ The gender and connected demographics

▪​ The social lifestyles

▪​ The domestic structures

▪​ Educational levels

▪​ Distribution of Wealth

T for Technological factors

Technology is advancing continuously. The advancement is greatly influencing businesses.
Performing environmental analysis on these factors will help you stay up to date with the
changes. Technology alters every minute. This is why companies must stay connected all the
time. Firms should integrate when needed. Technological factors will help you know how the
consumers react to various trends.

Firms can use these factors for their benefit:

 ▪​ New discoveries

▪​ Rate of technological obsolescence

▪​ Rate of technological advances

▪​ Innovative technological platforms

L for Legal factors

Legislative changes take place from time to time. Many of these changes affect the business
environment. If a regulatory body sets up a regulation for industries, for example, that law would
impact industries and business in that economy. So, businesses should also analyze the legal
developments in respective environments.

I have mentioned some legal factors you need to be aware of:

▪​ Product regulations

▪​ Employment regulations

▪​ Competitive regulations

▪​ Patent infringements

▪​ Health and safety regulations

E for Environmental factors

The location influences business trades. Changes in climatic changes can affect the trade. The
consumer reactions to particular offering can also be an issue. This most often affects
agri-businesses.

Some environmental factors you can study are:

 ▪​ Geographical location

▪​ The climate and weather

▪​ Waste disposal laws

▪​ Energy consumption regulation

▪​ People’s attitude towards the environment

There are many external factors other than the ones mentioned above. None of these factors are
independent. They rely on each other.

If you are wondering how you can conduct environmental analysis, here are 5 simple steps you
could follow:

1.​ Understand all the environmental factors before moving to the next step.
2.​ Collect all the relevant information.
3.​ Identify the opportunities for your organization.
4.​ Recognize the threats your company faces.
5.​ The final step is to take action.
It is true that industry factors have an impact on the company performance. Environmental
analysis is essential to determine what role certain factors play in your business. PEST or
PESTLE analysis allows businesses to take a look at the external factors. Many organizations use
these tools to project the growth of their company effectively.

The analyses provide a good look at factors like revenue, profitability, and corporate success. If
you want to take the right decisions for your firm, employ environmental analysis. The analysis
you should conduct depends on the nature of your company.
Porter's Five Forces

Porter’s five forces model Understanding the tool

Five forces model was created by M. Porter in 1979 to understand how five key competitive
forces are affecting an industry. The five forces identified are:

Porter’s Five Forces Model

The five forces that influence a company’s performance in an industry or business

situations are:

1.​ The bargaining power of buyers

2.​ The bargaining power of suppliers

3.​ The competitive rivalry among the competitors in the industry

4.​ The threat of substitute products

5.​ The threat of new entrants, or barriers to entry into the industry
These forces determine an industry structure and the level of competition in that industry. The
stronger competitive forces in the industry are the less profitable it is. An industry with low
barriers to enter, having few buyers and suppliers but many substitute products and competitors
will be seen as very competitive and thus, not so attractive due to its low profitability.

is an analysis tool that uses five industry forces to determine the intensity of competition in an
industry and its profitability level

It is every strategist’s job to evaluate company’s competitive position in the industry and to
identify what strengths or weakness can be exploited to strengthen that position. The tool is very
useful in formulating firm’s strategy as it reveals how powerful each of the five key forces is in a
particular industry.

Threat of new entrants. This force determines how easy (or not) it is to enter a particular
industry. If an industry is profitable and there are few barriers to enter, rivalry soon intensifies.
When more organizations compete for the same market share, profits start to fall. It is essential
for existing organizations to create high barriers to enter to deter new entrants. Threat of new
entrants is high when:

●​ Low amount of capital is required to enter a market;

●​ Existing companies can do little to retaliate;
●​ Existing firms do not possess patents, trademarks or do not have established brand
reputation;
●​ There is no government regulation;
●​ Customer switching costs are low (it doesn’t cost a lot of money for a firm to switch to
other industries);
●​ There is low customer loyalty;
●​ Products are nearly identical;
●​ Economies of scale can be easily achieved.

Bargaining power of suppliers. Strong bargaining power allows suppliers to sell higher priced
or low quality raw materials to their buyers. This directly affects the buying firms’ profits
because it has to pay more for materials. Suppliers have strong bargaining power when:

●​ There are few suppliers but many buyers;

●​ Suppliers are large and threaten to forward integrate;
●​ Few substitute raw materials exist;
●​ Suppliers hold scarce resources;
●​ Cost of switching raw materials is especially high.

Bargaining power of buyers. Buyers have the power to demand lower price or higher product
quality from industry producers when their bargaining power is strong. Lower price means lower
revenues for the producer, while higher quality products usually raise production costs. Both
scenarios result in lower profits for producers. Buyers exert strong bargaining power when:

●​ Buying in large quantities or control many access points to the final customer;
●​ Only few buyers exist;
●​ Switching costs to other supplier are low;
●​ They threaten to backward integrate;
●​ There are many substitutes;
●​ Buyers are price sensitive.

Threat of substitutes. This force is especially threatening when buyers can easily find substitute
products with attractive prices or better quality and when buyers can switch from one product or
service to another with little cost. For example, to switch from coffee to tea doesn’t cost
anything, unlike switching from car to bicycle.

Rivalry among existing competitors. This force is the major determinant on how competitive
and profitable an industry is. In competitive industry, firms have to compete aggressively for a
market share, which results in low profits. Rivalry among competitors is intense when:

●​ There are many competitors;

●​ Exit barriers are high;
●​ Industry of growth is slow or negative;
●​ Products are not differentiated and can be easily substituted;
●​ Competitors are of equal size;
●​ Low customer loyalty.

Although, Porter originally introduced five forces affecting an industry, scholars have suggested
including the sixth force: complements. Complements increase the demand of the primary
product with which they are used, thus, increasing firm’s and industry’s profit potential. For
example, iTunes was created to complement iPod and added value for both products. As a result,
both iTunes and iPod sales increased, increasing Apple’s profits.
 Porter's Five Forces Factors

Threat of new entry

Amount of capital required

Retaliation by existing companies
Legal barriers (patents, copyrights, etc.)
Brand reputation
Product differentiation
Access to suppliers and distributors
Economies of scale
Sunk costs
Government regulation

Supplier power

Number of suppliers
Suppliers’ size
Ability to find substitute materials
Materials scarcity
Cost of switching to alternative materials
Threat of integrating forward

Buyer power
Number of buyers
Size of buyers
Size of each order
Buyers’ cost of switching suppliers
There are many substitutes
Price sensitivity
Threat of integrating backward

Threat of substitutes

Number of substitutes
Performance of substitutes
Cost of changing

Rivalry among existing competitors

Number of competitors
Cost of leaving an industry
Industry growth rate and size
Product differentiation
Competitors’ size
Customer loyalty
Threat of horizontal integration
Level of advertising expense

Example
 This is Porter’s five forces analysis example for an automotive industry.

Porter's Five Forces Evaluation

Threat of new entry (very weak)

Large amount of capital required

High retaliation possible from existing companies, if new entrants would bring innovative
products and ideas to the industry
Few legal barriers protect existing companies from new entrants
All automotive companies have established brand image and reputation
Products are mainly differentiated by design and engineering quality
New entrant could easily access suppliers and distributors
A firm has to produce at least 5 million (by some estimations) vehicles to be cost competitive,
therefore it is very hard to achieve economies of scale
Governments often protect their home markets by introducing high import taxes

Supplier power (weak)

Large number of suppliers

Some suppliers are large but the most of them are pretty small
Companies use another type of material (use one metal instead of another) but only to some
extent (plastic instead of metal)
Materials widely accessible
Suppliers do not pose any threat of forward integration

Buyer power (strong)

There are many buyers

Most of the buyers are individuals that buy one car, but corporates or governments usually buy
large fleets and can bargain for lower prices
It doesn’t cost much for buyers to switch to another brand of vehicle or to start using other type
of transportation
Buyers can easily choose alternative car brand
Buyers are price sensitive and their decision is often based on how much does a vehicle cost
Buyers do not threaten backward integration

Threat of substitutes (weak)

There are many alternative types of transportation, such as bicycles, motorcycles, trains, buses or
planes
Substitutes can rarely offer the same convenience
Alternative types of transportation almost always cost less and sometimes are more environment
friendly

Competitive rivalry (very strong)

Moderate number of competitors

If a firm would decide to leave an industry it would incur huge losses, so most of the time it
either bankrupts or stays in automotive industry for the lifetime
Industry is very large but matured
Size of competing firm’s vary but they usually compete for different consumer segments
Customers are loyal to their brands
There is moderate threat of being acquired by a competitor

First, here are the 5 Key Success Factors:

▪​ Strategic Focus (Leadership, Management, Planning)
▪​ People (Personnel, Staff, Learning, Development)
▪​ Operations (Processes, Work)
▪​ Marketing (Customer Relations, Sales, Responsiveness)
▪​ Finances (Assets, Facilities, Equipment)

Strategic group
​ A strategic group is a name given to the group of companies in a particular industry that
uses a similar business model or a set of strategies. These strategic groups provide services of a
specific segment of the industry. Each strategic group is segmented based on their
operating environment, threats, and opportunities of the industry.
Because of this, all the companies that provide services in a particular segment of the industry
are referred to as members of one strategic group. For example, in the restaurant industry, there
are different strategic groups formed based on different variables such as presentation,
preparation time, and pricing of the food, etc. The various strategic groups in the restaurant
industry are fast food, fine dining, etc.

The term “Strategic group” is introduced by Micheal S. Hunt, a Harward professor in 1972, in
his doctoral thesis report. While studying the appliances industry, he learned that the companies
that are part of subgroups have high competition among them.

Later the concept of “Strategic groups” was developed by Micheal Porter, and he applied the
idea of the strategic group in his strategic analysis. He used the concept of “strategic group” to
define the term mobility barrier. The notion of mobility barrier is applied to the company that
becomes part of a specific strategic group.

The strategic group causes the industry to have more innovation, lower profitability, decreased
prices, and better quality of products and services. Let us understand the concept of strategic
groups with the help of examples.

The strategic groups are identified based on the similar characteristics followed by the
companies. The following are the characteristics based on which the strategic group of the
industry is formed

1. The pricing policy

The pricing policy is one of the main features based on which the strategic groups are formed.
For example, the companies that sell products at low prices are direct competitors to one another.
The giant retailers like Walmart and Target are direct competitors to each other as both follow the
low pricing policy.
2. The extent of products or services diversity

The companies that provide different products and services are part of one strategic group. For
example, ITC and Hindustan Unilever companies are part of one strategic group as both
companies offer different products and services.

3. The extent of branding

Companies whose products and services are recognized by people based on theirbrand’s name
and not based on the quality of the products or services are part of one strategic group. For
example, cosmetic brand companies like Lakme, Bobby Brown, andLoreal companies are part of
one strategic group.

4. Distribution Channel used

Companies that use similar distribution channels are part of one strategic group. etc let us take
the example of the aviation industry. In the aviation industry, there are different segments, such
as luxury class, business class, and economy class. The aviation companies that provide luxury
class services are part of one strategic group. Similarly, the aviation companies that offer
business-class services are part of one strategic group.