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UNIT-2
Environment literally means the surroundings external objects, influences or
overall circumstances under which someone or something exists.
In Business the environment in which an organization exists could be broadly
divided into two parts:
A) The Internal environment (Related the factors such as its personnel, physical
facilities, organization and functional means, which are generally controllable.
B) The External environment (Related the factors such as economic, socio
cultural, Government and legal, demographic, geo – physical – by and large
beyond the control
The External environment includes all the factors outside the organization,
which provide opportunities or pose threats to the organization.
The internal environment refers to all the factors within an organization which
imparts strengths or cause weaknesses of a strategic nature. The environment in
which an organization exists can, therefore, be described in terms of the
opportunities and threats operating in the external environment apart from the
strength and weaknesses existing in the internal environment.
INTERNAL ENVIRONMENT:
There are a number of internal factors which influence the strategy and other
decisions. An outline of the important internal factors is given below:
Value system: The value system of the founders and those at the helm of affairs
has important bearing on the choice of business, the mission and objectives of
the organization, business policies and practices. It is a widely acknowledges
fact that the extent to which the value system is shared by all in the organization
is an important factor contributing to success.
Mission and Objectives: The business domain of the company, priorities,
direction of development, business philosophy, business policy etc. is guided by
the mission and objectives of the company.
Management Structure and Nature: the organizational structure, the
composition of the bard of directors, extent of professionalisation of
management etc. are important factors influencing business decisions.
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Internal Power Relationship: Factors like the amount of support the top
management enjoys from lower levels and workers, share holders and board of
directors have important influence on the decisions and their implementation.
The relationship between the members of the Board of directors is also a critical
factor.
Human Resources: The characteristics of the human resources like skill,
quality, morale, commitment, attitudes, etc. could contribute to the strength or
weakness of an organization. Sometimes, organizations find it difficulties to
carry out restructuring or modernization because of resistance by employees
whereas they are smoothly one in some others.
The involvement, initiative etc. of people at different levels may vary from
organization to organization. The organizational culture and overall
environment have bearing on them. John Towers, MD, Rover group, observes
that a Japanese company of 30,000 employees is 30,000 process improvers. In a
western company, it is 2,000 process improvers and 28,000 workers. And in an
Indian company ………….?
Company Image and Brand Equity: The image of the company matters while
raising finance, forming joint ventures or other alliances, soliciting marketing
intermediaries, entering purchase or sale contracts, launching new products etc.
Brand equity is also relevant in several of these cases.
However, there are a number of other internal factors which contribute to
business success/ failure or influences the decision making. These are: •
Physical Assets and facilities like the production Capacity, technology, and
efficiency of the productive apparatus, logistics etc. are among the factors
which influence the competitiveness • R & D and technological capabilities,
among other things, determine the ability to innovate and compete. • Marketing
resources like the organization for marketing, quality of the marketing men,
brand equity; distribution network etc. has direct bearing on the marketing
efficiency. They are important also for brand extension, new product
introduction etc.
• Financial Factors like financial policies, financial position, and capital
structure are also important internal environment affecting business
performance, strategies and decisions.
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EXTERNAL ENVIRONMENT: The external environment consists of two
types of environment, viz micro environment and macro environment. Recently
the International environment comes under mega environment.
Micro Environment:
The Micro environment consists of the actors in the company’s immediate
environment, hat affect the performance of the company. These include – •
Suppliers – those who supply the inputs like raw materials • Marketing
intermediaries – which are ‘firms that aid the company in promoting, selling
and distributing its goods to final buyers’ • Competitors – not only other firms
of similar products but also all those who compete for the discretionary income
of the consumers. • Customers – Business is a create of customer; therefore
monitoring the customer sensitivity is a prerequisite for the business success. •
Publics – is any group that has an actual or potential interest in or impact on an
organization’s ability to achieve its interests. Media publics, citizen’s action
publics and local publics are some examples.
Macro Environment:
The Macro environment consists of the larger societal forces that affect all the
actors in the company’s micro environment – namely:
• Demographic – population growth rate, age composition, sex composition,
education level, caste and creed, religion etc. All factors which relevant to
business.
• Economic- economic condition, economic policies and the economic system
are the important external factors that constitute the economic environment of a
business
• Natural – geographical, and ecological factors, such as natural resources
endowments, weather and climatic conditions, topographic factors, location
aspects in the global context, ort facilities, etc. , are all relevant to business
• Technological – the fast changing technologies also create problems for
enterprises as they render plants and products obsolete quickly. Product –
market – matrix generally has a much shorter life today than in the past. It is
particularly so in the international marketing context. • Political – Political and
Government environment has close relationship with the economic system and
economic policy. For example, the communist countries had a centrally planed
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economic system. In most countries, apart from those laws that control
investment and related matters, there are a number of laws which regulate the
conduct of business. These laws cover such maters as standards of product,
packaging, promotions etc.
• Socio – Cultural: socio – cultural fabric is an important environment factor
that should be analyzed while formulating the business strategies. The cost of
ignoring the customs, traditions, taboos, tastes and preferences etc. of a people
could be very high. The buying and consumption habits of the people, their
languages, beliefs, and values, customs and traditions, tastes and performances,
education are all factors that affect business. The micro environment is also
known as task environment and operating environment.
Mega Environment:
Mega environment mainly consist of International Environment which is very
important from the point of certain categories of business. A. Import and export
dependency: • Industries directly depends on Imports or exports • Import –
competing Industries. • A boom in the export market or a relaxation of the
protectionist policies may help the export oriented industries.
• A liberalization of imports may help some industries which use imported
items, but may adversely affect important – competing industries.
B. World trade linkage: • Oil price hikes have seriously affected a number of
economics. These hikes have increased the cost of production and the prices of
certain
products like fertilizers, synthetic fabrics, etc. The high oil price has led to an
increase in the demand for automobile models that economies energy
consumption. • The oil crisis led to a reorientation of the government of India’s
energy policy. Such development affects the demand, consumption and
investment pattern.
Environmental Scanning – factors and approaches
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Before start the strategy formulation, in any organization, it must to do the scan
the external environment to identify the possible opportunities and threats and
its internal environment for strength and weaknesses.
In his book, “ Essential of strategic management “, J.David Hunger pointed out
that Environmental scanning is the monitoring, evaluating and disseminating of
information from the external and internal environments to key people within
the corporation. It is a tool that a corporation uses to avoid strategic surprise and
to ensure long – term health.
Azhar Kazmi, quoted in his book – “ Business Policy and strategic management
that – the process by which organizations monitor their relevant environment to
identify opportunities and threats defecting their business is known as
environmental scanning.
Factors to be consider for environmental scanning:
1. Events are important and specific occurrences taking place in different
environmental sectors.
2. Trends are the general tendencies or the courses of action along which events
take place. 3. Issues are the current concerns that arise in response to events and
treats. 4. Expectations are the demands made by interested groups in the light
of their concern for issues.
By monitoring the environment through environmental scanning, an
organization can consider the impact of the different events, trends, issues, and
expectations on its strategic management process. Since the environment facing
any organization is complex and its scanning is absolutely essential, strategists (
who, as individuals or in groups – internal or external; are concerned with and
play a role in strategic management) have to deal cautiously with the process of
environmental scanning.
Objectives:
• To make efforts to deal with it in such a manner that unnecessary time and
effort is not expended, while important factors are not ignored. • To enable this
it is important to devise an approach, or a combination of approaches to
environmental scanning.
Approaches to environmental scanning:
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Kubr has suggested three approaches, which could be adopted for sorting out
information for environmental scanning
1. Systematic approach: Gathering information for environmental scanning
which have a direct impact on organizations activities, Govt. policy statements
pertaining to an organization’s business and industry to monitor changes and
take the relevant factors into account. Continuously updating such information
is necessary not only for strategic management but also for operational
activities.
2. Ad Hoc approach: Using this approach, an organization when undertake
special projects, evaluate existing strategies, or devise new strategies; may
conduct special survey and studies to deal with specific environmental issues
periodically.
3. Processed – form approach: when an organization uses information supplied
by Govt. or private agencies, it uses secondary sources of data and the
information gathered in a processed form.
Since environmental scanning is absolutely necessary for strategy formulation
of any organization, what ever approaches is adapted, DATA Collection and
Processing systematically is ultimate for Strategic Management Process.
Sources of information:
Strategists use different information sources depending on their needs for
environmental scanning.
1. External (like publications – newspaper, magazines, journals, books, trade
and Industry association newsletter, Govt. Publications, annual reports of
competitions etc. mass media such as Radio, Television and the Internet:
External Agencies: like customers, marketing intermediaries, suppliers, trade
associations, Govt. agencies and so on.
2. Internal – (company files and documents, MIS, databases, company
employees. Formal studies conducted by employees, market research agencies,
consultants and educational institutions on hire.
Methods and Techniques used for Environmental Scanning (ES):
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There are wide range of methods and techniques available for ES. Strategists
may choose one which suit their needs in terms of the – • Quantity • Quality •
Availability • Time lines • Relevance • Cost of environmental information
1st Stage : Factors Affecting Environmental Appraisal
Following are the main factors affecting environmental appraisal
a) Factors relating to environment
We can not evaluate equally two organisation in same environment. we have to
study every organisation's complexity and flexibility.
b) Factors relating to Organisation
Age of organisation will affect our environmental appraisal. We also see the
organisation's size for doing business and its market type. What are the services
and products, it is providing?
c) Factors Relating to Strategies
Policy makers play important role in appraisal. Age, education and experience
of policy maker will affect the environmental appraisal.
2nd Stage : Identification of Environmental Factors
In second stage we have to identification of environmental factors on the basis
of following issue
a) Critical Issues
b) High Priority Issues
c) Low Priority Issues
3rd Stage : Structuring the Environmental Appraisal
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This is the third stage of environmental appraisal. In this stage, we create the
structure of environmental appraisal. One side of structure will be
our strengths and other side will be our weaknesses. By comparing both, we
estimate our surviving power in the environment of business.
Tools for Environmental Scanning:
The complete information positive and negative, internal and external are very
important for every strategist so that they can combat the possible threats and
exploit the opportunities in the right moment by preparing the right strategies.
Keeping in view them generally using the following tools for environmental
scanning:
The SWOT Analysis through SWOT Matrix:
SWOT, is an instrumental framework in value based management and strategy
formulation to give in-depth information to strength, weakness, opportunity and
threats for a particular company / organization. Strength and Weaknesses (SW)
– Internal value – creating or destroying factor like assets, skill, resources etc.
which can measured by using internal assessment or by external benchmarking.
Opportunity and Threats (OT) – External value – creating or destroying factors
and a company can not control, but emerge from either the competitive
dynamistic of the Industry / market or from demographic, political, technical,
social, and legal or cultural factors
The relationships in a SWOT analysis are generally’ represented by a 2x2
matrix. The ‘Strength’ and ‘Opportunities’ are both positive considerations.
‘Weakness’ and Threats are both negative considerations. The final results of an
analysis could be listed in the matrix in given below
Conclusion:
Business environment is dynamic. Many elements in the environment undergo
changes. Technological changes are frequent. Tastes and the preferences of the
people change. The competitive situation changes. • Demographic factors,
including population size, change. • Attitude and value systems also undergo
changes. • Economic factors like income, change continuously. • Government
policies and regulations also change to cope with the changing environment. •
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All these factors indicate that a business policy should be dynamic enough to be
successfully adaptable to the changing environment.
Therefore, the success of a business today, depends on its ability to foresee the
environmental changes and to modify its strategies appropriately with internal
and external environmental changes
PEST analysis
PESTLE is a mnemonic which in its expanded form denotes P for Political, E
for Economic, S for Social, T for Technological, L for Legal and E for
Environmental. It gives a bird’s eye view of the whole environment from many
different anglesthat one wantsto check and keep a track of while contemplating
on a certain idea/plan.
PEST analysis is a scan of the external macro-environment in which an
organisation exists. It is a useful tool for understanding the political, economic,
socio-cultural and technological environment that an organisation operates in. It
can be used for evaluating market growth or decline, and as such the position,
potential and direction for a business.
PEST analysis (political, economic, social and technological) describes a
framework of macro-environmental factors used in the environmental scanning
component of strategic management. It is part of an external analysis when
conducting a strategic analysis or doing market research, and gives an overview
of the different macro-environmental factors to be taken into consideration. It is
a strategic tool for understanding market growth or decline, business position,
potential and direction for operations.
Variants that build on the PEST framework include:
 PESTEL or PESTLE, which adds legal and environmental factors.
Popular in the United Kingdom.[1]
 SLEPT adding legal factors.
 STEEPLE and STEEPLED, adding ethics and demographic factors.
 DESTEP, adding demographic and ecological factors.
 SPELIT, adding legal and intercultural factors. Popular in the United
States since the mid-2000s.
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Political factors. These include government regulations such as employment
laws, environmental regulations and tax policy. Other political factors are trade
restrictions and political stability.
Economic factors. These affect the cost of capital and purchasing power of an
organisation. Economic factors include economic growth, interest rates,
inflation and currency exchange rates.
Social factors. These impact on the consumer’s need and the potential market
size for an organisation’s goods and services. Social factors include population
growth, age demographics and attitudes towards health.
Technologicalfactors. These influence barriers to entry, make or buy decisions
and investment in innovation, such as automation, investment incentives and the
rate of technological change.
PEST factors can be classified as opportunities or threats in a SWOT analysis. It
is often useful to complete a PEST analysis before completing a SWOT
analysis.
It is also worth noting that the four paradigms of PEST vary in significance
depending on the type of business. For example, social factors are more
obviously relevant to consumer businesses or a B2B business near the consumer
end of the supply chain. Conversely, political factors are more obviously
relevant to a defence contractor or aerospace manufacturer.
Expanding the analysis to PESTLE or PESTEL adds:
 Legal factors include discrimination law, consumer law, antitrust law,
employment law, and health and safety law. These factors can affect how
a company operates, its costs, and the demand for its products.
 Environmental factors include ecological and environmental aspects such
as weather, climate, and climate change, which may especially affect
industries such as tourism, farming, and insurance. Furthermore, growing
awareness of the potential impacts of climate change is affecting how
companies operate and the products they offer, both creating new markets
and diminishing or destroying existing ones.
Other factors for the various offshoots include:
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 Demographic factors include gender, age, ethnicity, knowledge of
languages, disabilities, mobility, home ownership, employment status,
religious belief or practice, culture and tradition, living standards and
income level.
 Regulatory factors include acts of parliament and associated regulations,
international and national standards, local government by-laws, and
mechanisms to monitor and ensure compliance with these.
More factors discussed in the SPELIT Power Matrix include:
 Inter-cultural factors considers collaboration in a global setting.
 Other specialized factors discussed in chapter 10 of the SPELIT Power
Matrix include the Ethical, Educational, Physical, Religious, and Security
environments. The security environment may include either personal,
company, or national security.
 Other business-related factors that might be considered in an
environmental analysis include Competition, Demographics, Ecological,
Geographical, Historical, Organizational, and Temporal (schedule)
Benefits of PEST analysis
 Provides a simple and easy-to-use framework for your analysis.
 Spot business opportunities with advance warning of potential threats.
 Adopt practices
 Question existing assumptions
 Involves cross-functional skills and expertise.
 Helps to reduce the impact and effects of potential threats to your
organization.
 Aids and encourages the development of strategic thinking within your
organization.
 Provides a mechanism that enables your organization to identify and
exploit new opportunities.
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 Enables you to assess implications of entering new markets both nationally
and globally.
Organizational appraisal
Organizational appraisal is the process of monitoring an organization’s internal
environment to identify strengths and weaknesses that may influence the firm’s
ability to achieve goals. Identifying Strengths and Weaknesses Distinctive/Core
Competencies Identifying Opportunities and Threats Strategic Cost Analysis
Porter’s value chain
Michael Porter introduced the value chain analysis concept in his 1985 book ‘
The Competitive Advantage’ . Porter suggested that activities within an
organisation add value to the service and products that the organisation
produces, and all these activities should be run at optimum level if the
organisation is to gain any real competitive advantage. If they are run efficiently
the value obtained should exceed the costs of running them i.e. customers
should return to the organisation and transact freely and willingly. Michael
Porter suggested that the organisation is split into ‘primary activities’ and
‘support activities’.
The term ‘Value Chain’ was used by Michael Porter in his book "Competitive
Advantage: Creating and Sustaining superior Performance" (1985). The value
chain analysis describes the activities the organization performs and links them
to the organizations competitive position.
Value chain analysis describes the activities within and around an organization,
and relates them to an analysis of the competitive strength of the organization.
Therefore, it evaluates which value each particular activity adds to the
organizations products or services. This idea was built upon the insight that an
organization is more than a random compilation of machinery, equipment,
people and money. Only if these things are arranged into systems and
systematic activates it will become possible to produce something for which
customers are willing to pay a price. Porter argues that the ability to perform
particular activities and to manage the linkages between these activities is a
source of competitive advantage.
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Porter distinguishes between primary activities and support activities. Primary
activities are directly concerned with the creation or delivery of a product or
service. They can be grouped into five main areas: inbound logistics, operations,
outbound logistics, marketing and sales, and service. Each of these primary
activities is linked to support activities which help to improve their
effectiveness or efficiency. There are four main areas of support activities:
procurement, technology development (including R&D), human resource
management, and infrastructure (systems for planning, finance, quality,
information management etc.).
The term ‚Margin’ implies that organizations realize a profit margin that
depends on their ability to manage the linkages between all activities in the
value chain. In other words, the organization is able to deliver a product /
service for which the customer is willing to pay more than the sum of the costs
of all activities in the value chain.
Primary Activities
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Primary activities relate directly to the physical creation, sale, maintenance and
support of a product or service. They consist of the following:
 Inbound logistics – These are all the processes related to receiving,
storing, and distributing inputs internally. Your supplier relationships are
a key factor in creating value here.
 Operations – These are the transformation activities that change inputs
into outputs that are sold to customers. Here, your operational systems
create value.
 Outbound logistics – These activities deliver your product or service to
your customer. These are things like collection, storage, and distribution
systems, and they may be internal or external to your organization.
 Marketing and sales – These are the processes you use to persuade
clients to purchase from you instead of your competitors. The benefits
you offer, and how well you communicate them, are sources of value
here.
 Service – These are the activities related to maintaining the value of your
product or service to your customers, once it's been purchased.
Support Activities
These activities support the primary functions above. In our diagram, the dotted
lines show that each support, or secondary, activity can play a role in each
primary activity. For example, procurement supports operations with certain
activities, but it also supports marketing and sales with other activities.
 Procurement (purchasing) – This is what the organization does to get
the resources it needs to operate. This includes finding vendors and
negotiating best prices.
 Human resource management – This is how well a company recruits,
hires, trains, motivates, rewards, and retains its workers. People are a
significant source of value, so businesses can create a clear advantage
with good HR practices.
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 Technological development – These activities relate to managing and
processing information, as well as protecting a company's knowledge
base. Minimizing information technology costs, staying current with
technological advances, and maintaining technical excellence are sources
of value creation.
 Infrastructure – These are a company's support systems, and the
functions that allow it to maintain daily operations. Accounting, legal,
administrative, and general management are examples of necessary
infrastructure that businesses can use to their advantage.
Porter's Value Chain is a useful strategic management tool.It works by breaking
an organization's activities down into strategically relevant pieces, so that you
can see a fuller picture of the cost drivers and sources of differentiation, and
then make changes appropriately.
SWOT ANALYSIS
For business it is important to know your surrounding environment from
internal and external point of view. Therefore it is important to evaluate
environment opportunities in relation to the strengths and weaknesses of the
organization's resources, and in relation to the organizational culture.
SWOT analysis is a dynamic part of an organization’s business and
management development process. It entails the collection of information
pertaining to external and internal factors which may have an impact on the
organization’s evolution. The SWOT analysis definition takes into
consideration the weaknesses and strengths of the organization along with the
threats and opportunities it faces in the external environment. Based on these
factors, the company determines its future course of action, combining its
strengths with imminent opportunities while trying to overcome weaknesses and
combat threats.
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The SWOT analysis is a useful technique for understanding all sorts of
situations in business and organizations. SWOT is acronym for STRENGTHS,
WEAKNESSES, OPPORTUNITIES and THREATS.
SWOT analysis is one very effective tool for the analysis of environmental data
and information – for both, internal (strengths, weakness) and external
(opportunities, threats) factors. It helps to minimize the effect of weaknesses in
your business, while maximizing your strengths. SWOT analysis can help you
gain insights into the past and think of possible solutions to existing or potential
problems — either for an existing business or new venture.
INTERNAL FACTORS:
STRENGHTS
Strengths determine the organization’s strong points. This are tangible and
intagible attributes (internal to an organization). This should be from both: an
internal perspective and external customers. It is a distinctive competence when
it gives the firm a comparative advantage in the marketplace.
Weaknesses
In which areas might the organization improve? It is important to look at this
from both internal and external perspective. You should include customer’s
opinion and opinion from other clue market players. You should not forget what
competitors are doing better than we do.
EXTERNAL FACTORS:
Opportunities An opportunity is a major situation in a company’s environment
and represents the reason for firm to exist and develop. Useful opportunities can
come from: changes in competitive or regulatory circumstances, changes in
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government policy related to your field technological changes, etc. When you
look at opportunities is also good to look at your strengths and also weakness
and try to find relation between them.
Threats are external factors on which the company doesn’t have control. No one
likes to think about threats, but we still have to face them: the entrance of new
competitors, slow market growth, increased bargaining power of key buyers or
suppliers, technological changes, etc.
A successfully conducted SWOT analysis involves identifying the following:
to
grow and increase its profits (opportunities) or may make its position weaker
(threats).
Guideline for Performing an Effective SWOT Analysis
The key to performing an effective SWOT analysis is that it clearly
distinguishes where the organization is today and where it is likely to be in the
future. Moreover, it is also important to be realistic about the organization’s
strengths and weaknesses and to keep the outcome subjective, simple and short.
It will give you a framework for determining if the scope of a strategic initiative
is correct by identifying three types of strategy (see the graphic), and indicating
how the definition of the business model can affect the scope of the strategic
initiative. You need to understand business models:
 When you are leading a strategic initiative for executing a corporate-level
strategy, you are creating a new business model
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 When you are leading a strategic initiative for executing a business-level
strategy, you are improving several or all of the nine elements of a
business model
 When you are leading a strategic initiative for executing a functional level
strategy, you are optimizing one or more of the nine elements of a
business model.
The word strategy is ambiguous in many ways, not the least which is the
distinction of corporate-level strategy, contrasted to business-level strategy, and
functional strategy
Corporate-Level Strategy
Corporate level strategy occupies the highest level of strategic decision-making
and covers actions dealing with the objective of the firm, acquisition and
allocation of resources and coordination of strategies of various SBUs for
optimal performance. Top management of the organization makes such
decisions. The nature of strategic decisions tends to be value-oriented,
conceptual and less concrete than decisions at the business or functional level.
This kind of strategy is concerned with market definition: what businesses and
markets do we want to be in? A strategic initiative might be launched to
answer that question, or more likely to realize the strategic intent of a new
chosen business or market.
The Red-Ocean-Blue-Ocean metaphor has been popular over the last few
years. A red ocean is a market where competitors bloody each other up fighting
for market share. A blue ocean is an emerging, growing business arena;
potential competitors have not yet identified it and the opportunity for success is
large.
An example of corporate-level strategy: The February 2011 announcement
an alliance between Microsoft and Nokia Corp. The alliance involve Nokia will
produce phones running Windows Phone 7, a recognition that Nokia’s
investment in its own operating system has failed. The alliance gives Microsoft
access to the world’s largest phone maker and its huge mindshare—in many
developing nations a mobile phone is known as a Nokia. The deal with
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Microsoft gives both Nokia and Microsoft a route to the future in the smart-
phone market.
Business-Level Strategy
Business-level strategy is – applicable in those organizations, which have
different businesses-and each business is treated as strategic business unit
(SBU). The fundamental concept in SBU is to identify the discrete independent
product/market segments served by an organization. Since each product/market
segment has a distinct environment, a SBU is created for each such segment.
For example, Reliance Industries Limited operates in textile fabrics, yarns,
fibers, and a variety of petrochemical products. For each product group, the
nature of market in terms of customers, competition, and marketing channel
differs.
This kind of strategy is concerned with succeeding in chosen markets.
An example of a business-level strategy was Domino’s Pizza Turnaround which
required all areas of the organization to pull together to achieve a simple
understandable business goal: have a clear win against competitor in a taste test.
Functional-Level Strategy
Functional strategy, as is suggested by the title, relates to a single functional
operation and the activities involved therein. Decisions at this level within the
organization are often described as tactical. Such decisions are guided and
constrained by some overall strategic considerations. Functional strategy deals
with relatively restricted plan providing objectives for specific function,
allocation of resources among different operations within that functional area
and coordi-nation between them for optimal contribution to the achievement of
the SBU and corporate-level objectives. Below the functional-level strategy,
there may be operations level strategies as each function may be dividend into
several sub functions. For example, marketing strategy, a functional strategy,
can be subdivided into promotion, sales, distribution, pricing strategies with
each sub function strategy contributing to functional strategyThis kind of
strategy is concerned with making improvements to business functions that
support business and corporate strategy.
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Functional strategy include IT strategy, marketing strategy, IT strategy, human
resources strategy, and operations. Typically, documents portraying functional
strategy will list estimates and plans for operating expenses, headcount, and
continuous improvement.
As implied by the graphic, functional-level strategy is the foundation that
supports both corporate-level strategy and business strategy. Many strategic
initiatives are simply the implementation of functional strategies, but often a
strategic initiative straddles numerous functions and businesses.
An example of functional-level strategy: In 2008, Swiss Life Group, a Zurich-
based insurance company (ranked #373 on the Fortune Global 500 list)
announced a change in its Information Technology functional strategy priorities.
The implications of this was a decision to considerably scale back the number
of IT projects in order to reduce costs through re-prioritization. This was
successful as shown in this November 2010 announcement,
BCG matrix
(or growth-share matrix) is a corporate planning tool, which is used to
portray firm’s brand portfolio or SBUs on a quadrant along relative
market share axis (horizontal axis) and speed of market growth (vertical
axis) axis.
Growth-share matrix
is a business tool, which uses relative market share and industry growth
rate factors to evaluate the potential of business brand portfolio and
suggest further investment strategies.
Since 1968, the BCG matrix, also known as the Boston or growth-share matrix,
has helped companies answer that question by providing them a way to analyze
product lines in search of growth opportunities. Named for its creator, the
Boston Consulting Group, the BCG matrix aims to identify high-growth
prospects by categorizing the company's products according to growth rate and
market share. By optimizing positive cash flows in high-potential products, a
company can capitalize on market-share growth opportunities. Reeves Martin,
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senior partner and managing director of Boston Consulting Group, said that
nearly 50 years after its inception, the BCG matrix remains a valuable tool for
helping companies understand their potential. "The concept of BCG's growth-
share matrix, central nowadays to business schools' curriculum on strategy ...
provided companies with a disciplined and systematic tool for portfolio
management," Martin told Business News Daily. "Recently, Harvard Business
Review named BCG's matrix one of five 'frameworks that changed the world.
Relative market share. One of the dimensions used to evaluate business
portfolio is relative market share. Higher corporate’s market share results in
higher cash returns. This is because a firm that produces more, benefits from
higher economies of scale and experience curve, which results in higher profits.
Nonetheless, it is worth to note that some firms may experience the same
benefits with lower production outputs and lower market share.
Market growth rate. High market growth rate means higher earnings and
sometimes profits but it also consumes lots of cash, which is used as investment
to stimulate further growth. Therefore, business units that operate in rapid
growth industries are cash users and are worth investing in only when they are
expected to grow or maintain market share in the future.
There are four quadrants into which firms brands are classified:
Dogs. Dogs hold low market share compared to competitors and operate in a
slowly growing market. In general, they are not worth investing in because they
generate low or negative cash returns. But this is not always the truth. Some
dogs may be profitable for long period of time, they may provide synergies for
other brands or SBUs or simple act as a defense to counter competitors moves.
Therefore, it is always important to perform deeper analysis of each brand or
SBU to make sure they are not worth investing in or have to be divested.
Strategic choices: Retrenchment, divestiture, liquidation
Cashcows. Cashcows are the most profitable brands and should be “milked” to
provide as much cash as possible. The cash gained from “cows” should be
invested into stars to support their further growth. According to growth-share
matrix, corporates should not invest into cashcows to induce growth but only to
support them so they can maintain their current market share. Again, this is not
22
always the truth. Cash cows are usually large corporations or SBUs that are
capable of innovating new products or processes, which may become new stars.
If there would be no support for cash cows, they would not be capable of such
innovations.
Strategic choices: Product development, diversification, divestiture,
retrenchment
Stars. Stars operate in high growth industries and maintain high market share.
Stars are both cash generators and cash users. They are the primary units in
which the company should invest its money, because stars are expected to
become cash cows and generate positive cash flows. Yet, not all stars become
cash flows. This is especially true in rapidly changing industries, where new
innovative products can soon be outcompeted by new technological
advancements, so a star instead of becoming a cash cow, becomes a dog.
Strategic choices: Vertical integration, horizontal integration, market
penetration, market development, product development
Question marks. Question marks are the brands that require much closer
consideration. They hold low market share in fast growing markets consuming
large amount of cash and incurring losses. It has potential to gain market share
and become a star, which would later become cash cow. Question marks do not
always succeed and even after large amount of investments they struggle to gain
market share and eventually become dogs. Therefore, they require very close
consideration to decide if they are worth investing in or not.
Strategic choices: Market penetration, market development, product
development, divestiture
Using the tool
Although BCG analysis has lost its importance due to many limitations, it can
still be a useful tool if performed by following these steps:
 Step 1. Choose the unit
 Step 2. Define the market
 Step 3. Calculate relative market share
 Step 4. Find out market growth rate
 Step 5. Draw the circles on a matrix
Limitations of BCG Matrix
23
The BCG Matrix produces a framework for allocating resources among
different business units and makes it possible to compare many business units at
a glance. But BCG Matrix is not free from limitations, such as-
1. BCG matrix classifies businesses as low and high, but generally
businesses can be medium also. Thus, the true nature of business may not
be reflected.
2. Market is not clearly defined in this model.
3. High market share does not always leads to high profits. There are high
costs also involved with high market share.
4. Growth rate and relative market share are not the only indicators of
profitability. This model ignores and overlooks other indicators of
profitability.
5. At times, dogs may help other businesses in gaining competitive
advantage. They can earn even more than cash cows sometimes.
6. This four-celled approach is considered as to be too simplistic.
Another popular “Corporate Portfolio Analysis” technique is the result of
pioneering effort of General Electric Company along with McKinsey
Consultants which is known as the GE NINE CELL MATRIX.
GE nine-box matrix isa strategy tool that offers a systematic approach for the
multi business enterprises to prioritize their investments among the various
business units. It is a framework that evaluates business portfolio
and provides further strategic implications.
In the 1970s, General Electric (GE) commissioned McKinsey & Company to
develop a portfolio analysis matrix for screening its business units.
The GE McKinsey matrix is a variant of the Boston Consulting Group (BCG)
portfolio analysis.
The GE McKinsey matrix has also many points in common with the MABA
analysis.
24
MABA is an acronym that stands for Market, Attractiveness, Business position
and Assessment. The GE McKinsey matrix also compares product groups with
respect to market attractiveness and competitive power.
Another name for this type of analysis is Portfolio analysis.
The portfolios of businesses consist of all combinations of products and/or
services that are offered to the market/ target groups.
Originally, the GE McKinsey matrix made an analysis of the composition of the
portfolio of GE business units. Later, the GE McKinsey matrix proved to be
very useful in other companies as well.
The GE McKinsey matrix
The GE McKinsey matrix comprises two axes. The attractiveness of the market
is represented on the y-axis and the competitiveness and competence of the
business unit are plotted on the x-axis.
Both axes are divided into three categories (high, medium, low) thus creating
nine cells.
25
The business unit is placed within the matrix using circles. The size of the circle
represents the volume of the turnover. The percentage of the market share is
entered in the circle. An arrow represents the future course for the business unit.
In 1970s, General Electric was managing a huge and complex portfolio of
unrelated products and was unsatisfied about the returns from its investments in
the products. At the time, companies usually relied on projections of future cash
flows, future market growth or some other future projections to make
investment decisions, which was an unreliable method to allocate the resources.
Therefore, GE consulted the McKinsey & Company and as a result the nine-box
framework was designed. The nine-box matrix plots the BUs on its 9 cells that
indicate whether the company should invest in a product, harvest/divest it or do
a further research on the product and invest in it if there’re still some resources
left. The BUs are evaluated on two axes: industry attractiveness and a
competitive strength of a unit.
Industry Attractiveness
Industry attractiveness indicates how hard or easy it will be for a company to
compete in the market and earn profits. The more profitable the industry is the
more attractive it becomes. When evaluating the industry attractiveness,
analysts should look how an industry will change in the long run rather than in
the near future, because the investments needed for the product usually require
long lasting commitment.
Industry attractiveness consists of many factors that collectively determine the
competition level in it. There’s no definite list of which factors should be
included to determine industry attractiveness, but the following are the most
common: [1]
•Long run growth rate
26
•Industry size
•Industry profitability: entry barriers, exit barriers, supplier power, buyer power,
threat of substitutes and available complements (use Porter’s Five Forces
analysis to determine this)
•Industry structure (use Structure-Conduct-Performance framework to
determine this)
•Product life cycle changes
•Changes in demand
•Trend of prices
•Macro environment factors (use PEST or PESTEL for this)
•Seasonality
•Availability of labor
•Market segmentation
Competitive strength of a business unit or a product
Along the X axis, the matrix measures how strong, in terms of competition, a
particular business unit is against its rivals. In other words, managers try to
determine whether a business unit has a sustainable competitive advantage (or
at least temporary competitive advantage) or not. If the company has a
sustainable competitive advantage, the next question is: “For how long it will be
sustained?”
27
The following factors determine the competitive strength of a business unit:
•Total market share
•Market share growth compared to rivals
•Brand strength (use brand value for this)
•Profitability of the company
•Customer loyalty
•VRIO resources or capabilities (use VRIO framework to determine this)
•Your business unit strength in meeting industry’s critical success factors (use
Competitive Profile Matrix to determine this)
•Strength of a value chain (use Value Chain Analysis and Benchmarking to
determine this)
•Level of product differentiation
•Production flexibility
Advantages
•Helps to prioritize the limited resources in order to achieve the best returns.
•Managers become more aware of how their products or business units perform.
28
•It’s more sophisticated business portfolio framework than the BCG matrix.
•Identifies the strategic steps the company needs to make to improve the
performance of its business portfolio.
Disadvantages
•Requires a consultant or a highly experienced person to determine industry’s
attractiveness and business unit strength as accurately as possible.
•It is costly to conduct.
•It doesn’t take into account the synergies that could exist between two or more
business units.
29
Life-cycle assessment (LCA, also known as life-cycle analysis, ecobalance,
and cradle-to-grave analysis)[1] is a technique to assess environmental impacts
associated with all the stages of a product's life from raw material extraction
through materials processing, manufacture, distribution, use, repair and
maintenance, and disposal or recycling. Designers use this process to help
critique their products. LCAs can help avoid a narrow outlook on environmental
concerns by:
 Compiling an inventory of relevant energy and material inputs and
environmental releases;
30
 Evaluating the potential impacts associated with identified inputs and
releases;
 Interpreting the results to help make a more informed decision.[2]
 Taking as an example the case of a manufactured product, an LCA
involves making detailed measurements during the manufacture of the
product, from the mining of the raw materials used in its production and
distribution, through to its use, possible re-use or recycling, and its
eventual disposal.
 LCAs enable a manufacturer to quantify how much energy and raw
materials are used, and how much solid, liquid and gaseous waste is
generated, at each stage of the product's life.
 Such a study would normally ignore second generation impacts, such as
the energy required to fire the bricks used to build the kilns used to
manufacture the raw material.
 However, deciding which is the 'cradle' and which the 'grave' for such
studies has been one of the points of contention in the relatively new
science of LCAs, and in order for LCAs to have value there must be
standardisation of methodologies, and consensus as to where to set the
limits. Much of the focus worldwide to date has been on agreeing the
methods and boundaries to be used when making such analyses, and it
seems that agreement may have now been reached.
 While carrying out an LCA is a lengthy and very detailed exercise, the
data collection stage is - in theory at least - relatively uncomplicated,
provided the boundary of the study has been clearly defined, the
methodology is rigorously applied, and reliable, high-quality data is
available. Those of course are fairly large provisos.
The first stage of a life cycle analysis is called an “inventory analysis.” In an
inventory analysis, the goal is to examine all the inputs and outputs in a
product’s life cycle, beginning with what product is composed of, where those
materials came from, where they go, and the inputs and outputs related to those
component materials during their lifetime. It is also necessary to include the
inputs and outputs during the product’s use, such as whether or not the product
uses electricity. The purpose of the inventory analysis is to quantify what comes
in and what goes out, including the energy and material associated with
materials extraction, product manufacture and assembly, distribution, use and
disposal and the environmental emissions that result.
31
The next stage of a life cycle analysis is the impact analysis, in which the
environmental impacts identified in the previous stage are enumerated, such as
the environmental impacts of generating energy for the processes and the
hazardous wastes emitted in the manufacturing process. Once the environmental
impacts of all the inputs and outputs of a product’s lifecycle are analyzed, the
life cycle analysis generates a number that represents how much the
environment is affected.
However, the major purpose of the analysis is to evaluate, once the inputs and
outputs are quantified, how the product affects the environment throughout its
lifecycle. Once its general environmental impact is calculated, the next step is to
conduct an improvement analysis to see how impact of the product on the
environment. For example, conservation of energy or water in the
manufacturing process will reduce the environmental impacts of that process.
Substituting a less hazardous chemical in place of a more toxic one would also
reduce the impact. The change is then made in the inventory analysis to
recalculate its total environmental impact.
Porter's five forces analysis is a framework for analyzing the level of
competition within an industry and business strategy development. It draws
upon industrial organization (IO) economics to derive five forces that determine
the competitive intensity and therefore the attractiveness of an industry.
Attractiveness in this context refers to the overall industry profitability. An
"unattractive" industry is one in which the combination of these five forces acts
32
to drive down overall profitability. A very unattractive industry would be one
approaching "pure competition", in which available profits for all firms are
driven to normal profit. This analysis is associated with its principal innovator
Michael E. Porter of Harvard University.
Porter refers to these forces as the micro environment, to contrast it with the
more general term macro environment. They consist of those forces close to a
company that affect its ability to serve its customers and make a profit. A
change in any of the forces normally requires a business unit to re-assess the
marketplace given the overall change in industry information. The overall
industry attractiveness does not imply that every firm in the industry will return
the same profitability. Firms are able to apply their core competencies, business
model or network to achieve a profit above the industry average. A clear
example of this is the airline industry. As an industry, profitability is low and
yet individual companies, by applying unique business models, have been able
to make a return in excess of the industry average.
What are 'Porter's 5 Forces'
Porter's Five Forces model, named after Michael E. Porter, identifies and
analyzes five competitive forces that shape every industry, and helps determine
an industry's weaknesses and strengths. These forces are:
1. Competition in the industry;
2. Potential of new entrants into the industry;
3. Power of suppliers;
4. Power of customers;
5. Threat of substitute products.
Frequently used to identify an industry's structure to determine corporate
strategy, Porter's model can be applied to any segment of the economy to search
for profitability and attractiveness.
33
BREAKING DOWN 'Porter's 5 Forces'
Porter's Five Forces is a model of analysis that helps to explain why different
industries are able to sustain different levels of profitability. This model was
originally published in Porter's book, "Competitive Strategy: Techniques for
Analyzing Industries and Competitors" in 1980. The model is widely used,
worldwide, to analyze the industry structure of a company as well as its
corporate strategy. Porter identified five undeniable forces that play a part in
shaping every market and industry in the world. The forces are frequently used
to measure competition intensity, attractiveness and profitability of an industry
or market.
Porter regarded understanding both the competitive forces and the overall
industry structure as crucial for effective strategic decision-making. In Porter's
model, the five forces that shape industry competition are:
Competitive rivalry. This force examines how intense the competition
currently is in the marketplace, which is determined by the number of existing
competitors and what each is capable of doing. Rivalry competition is high
when there are just a few businesses equally selling a product or service, when
the industry is growing and when consumers can easily switch to a competitors
offering for little cost. When rivalry competition is high, advertising and price
wars can ensue, which can hurt a business's bottom line. Rivalry is
quantitatively measured by the Concentration Ratio (CR), which is the
percentage of market share owned by the four largest firms in an industry.
Bargaining power of suppliers. This force analyzes how much power a
business's supplier has and how much control it has over the potential to raise its
prices, which, in turn, would lower a business's profitability. In addition, it
looks at the number of suppliers available: The fewer there are, the more power
they have. Businesses are in a better position when there are a multitude of
suppliers. Sources of supplier power also include the switching costs of firms in
the industry, the presence of available substitutes, and the supply purchase cost
relative to substitutes.
Bargaining power of customers. This force looks at the power of the
consumer to affect pricing and quality. Consumers have power when there aren't
many of them, but lots of sellers, as well as when it is easy to switch from one
business's products or services to another. Buying power is low when
34
consumers purchase products in small amounts and the seller's product is very
different from any of its competitors.
Threat of new entrants. This force examines how easy or difficult it is for
competitors to join the marketplace in the industry being examined. The easier
it is for a competitor to join the marketplace, the greater the risk of a business's
market share being depleted. Barriers to entry include absolute cost advantages,
access to inputs, economies of scale and well-recognized brands.
Threat of substitute products or services. This force studies how easy it is for
consumers to switch from a business's productor service to that of a competitor.
It looks at how many competitors there are, how their prices and quality
compare to the business being examined and how much of a profit those
competitors are earning, which would determine if they have the ability to lower
their costs even more. The threat of substitutes are informed by switching costs,
both immediate and long-term, as well as a buyer's inclination to change.
Example of Porter's Five Forces
There are several examples of how Porter's Five Forces can be applied to
various industries online. As an example, stock analysis firm Trefis looked at
how Under Armour fits into the athletic footwear and apparel industry.
Competitive rivalry
 Under Armour faces intense competition from Nike, Adidasand newer
players.
 Nike and Adidas, which have considerably larger resources at their
disposal, are making a play within the performance apparel market to
gain market share in this up-and-coming product category.
 Under Armour does not hold any fabric or process patents, and hence its
product portfolio could be copied in the future.
Bargaining power of suppliers
 A diverse supplier base limits bargaining power.
 In 2012, Under Armour's products were produced by 27 manufacturers
located across 14 countries. Of these, the top 10 accounted for 49 percent
of the products manufactured.
35
Bargaining power of customers
 Under Armour'scustomers include both wholesale customers as well as
end customers.
 Wholesale customers, like Dick's Sporting Goods and the Sports
Authority, hold a certain degree of bargaining leverage, as they could
substitute Under Armour's products with other competitors' to gain higher
margins.
 Bargaining power of end customers is lower as Under Armour enjoys
strong brand recognition.
Threat of new entrants
 Large capital costs are required for branding, advertising and creating
product demand, and hence this limits the entry of newer players in the
sports apparel market.
 However, existing companies in the sports apparel industry could enter
the performance apparel market in the future.
Threat of substitute products
 The demand for performance apparel, sports footwear and accessories is
expected to continue, and hence we think this force does not threaten
Under Armour in the foreseeable future.
Trefis has also completed Porter's Five Forces analyses of companies, including
Facebook, Nike, Coach and Ralph Lauren.
Strategies for success
Once your analysis is complete, it is time to implement a strategy to expand
your competitive advantage. To that end, Porter identified three "generic
strategies"that can be implemented in any industry, and in companies of any
size:
Cost leadership: In this strategy, your goal is to increase profits by reducing
costs while charging industry-standard prices, or to increase market share by
reducing the sales price while retaining profits.
36
Differentiation: This strategy aims to make the company's products
significantly different from the competition, improving their competitiveness
and value to the public. This strategy requires both good research and
development and effective sales and marketing teams.

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Strategic Management

  • 1. 1 UNIT-2 Environment literally means the surroundings external objects, influences or overall circumstances under which someone or something exists. In Business the environment in which an organization exists could be broadly divided into two parts: A) The Internal environment (Related the factors such as its personnel, physical facilities, organization and functional means, which are generally controllable. B) The External environment (Related the factors such as economic, socio cultural, Government and legal, demographic, geo – physical – by and large beyond the control The External environment includes all the factors outside the organization, which provide opportunities or pose threats to the organization. The internal environment refers to all the factors within an organization which imparts strengths or cause weaknesses of a strategic nature. The environment in which an organization exists can, therefore, be described in terms of the opportunities and threats operating in the external environment apart from the strength and weaknesses existing in the internal environment. INTERNAL ENVIRONMENT: There are a number of internal factors which influence the strategy and other decisions. An outline of the important internal factors is given below: Value system: The value system of the founders and those at the helm of affairs has important bearing on the choice of business, the mission and objectives of the organization, business policies and practices. It is a widely acknowledges fact that the extent to which the value system is shared by all in the organization is an important factor contributing to success. Mission and Objectives: The business domain of the company, priorities, direction of development, business philosophy, business policy etc. is guided by the mission and objectives of the company. Management Structure and Nature: the organizational structure, the composition of the bard of directors, extent of professionalisation of management etc. are important factors influencing business decisions.
  • 2. 2 Internal Power Relationship: Factors like the amount of support the top management enjoys from lower levels and workers, share holders and board of directors have important influence on the decisions and their implementation. The relationship between the members of the Board of directors is also a critical factor. Human Resources: The characteristics of the human resources like skill, quality, morale, commitment, attitudes, etc. could contribute to the strength or weakness of an organization. Sometimes, organizations find it difficulties to carry out restructuring or modernization because of resistance by employees whereas they are smoothly one in some others. The involvement, initiative etc. of people at different levels may vary from organization to organization. The organizational culture and overall environment have bearing on them. John Towers, MD, Rover group, observes that a Japanese company of 30,000 employees is 30,000 process improvers. In a western company, it is 2,000 process improvers and 28,000 workers. And in an Indian company ………….? Company Image and Brand Equity: The image of the company matters while raising finance, forming joint ventures or other alliances, soliciting marketing intermediaries, entering purchase or sale contracts, launching new products etc. Brand equity is also relevant in several of these cases. However, there are a number of other internal factors which contribute to business success/ failure or influences the decision making. These are: • Physical Assets and facilities like the production Capacity, technology, and efficiency of the productive apparatus, logistics etc. are among the factors which influence the competitiveness • R & D and technological capabilities, among other things, determine the ability to innovate and compete. • Marketing resources like the organization for marketing, quality of the marketing men, brand equity; distribution network etc. has direct bearing on the marketing efficiency. They are important also for brand extension, new product introduction etc. • Financial Factors like financial policies, financial position, and capital structure are also important internal environment affecting business performance, strategies and decisions.
  • 3. 3 EXTERNAL ENVIRONMENT: The external environment consists of two types of environment, viz micro environment and macro environment. Recently the International environment comes under mega environment. Micro Environment: The Micro environment consists of the actors in the company’s immediate environment, hat affect the performance of the company. These include – • Suppliers – those who supply the inputs like raw materials • Marketing intermediaries – which are ‘firms that aid the company in promoting, selling and distributing its goods to final buyers’ • Competitors – not only other firms of similar products but also all those who compete for the discretionary income of the consumers. • Customers – Business is a create of customer; therefore monitoring the customer sensitivity is a prerequisite for the business success. • Publics – is any group that has an actual or potential interest in or impact on an organization’s ability to achieve its interests. Media publics, citizen’s action publics and local publics are some examples. Macro Environment: The Macro environment consists of the larger societal forces that affect all the actors in the company’s micro environment – namely: • Demographic – population growth rate, age composition, sex composition, education level, caste and creed, religion etc. All factors which relevant to business. • Economic- economic condition, economic policies and the economic system are the important external factors that constitute the economic environment of a business • Natural – geographical, and ecological factors, such as natural resources endowments, weather and climatic conditions, topographic factors, location aspects in the global context, ort facilities, etc. , are all relevant to business • Technological – the fast changing technologies also create problems for enterprises as they render plants and products obsolete quickly. Product – market – matrix generally has a much shorter life today than in the past. It is particularly so in the international marketing context. • Political – Political and Government environment has close relationship with the economic system and economic policy. For example, the communist countries had a centrally planed
  • 4. 4 economic system. In most countries, apart from those laws that control investment and related matters, there are a number of laws which regulate the conduct of business. These laws cover such maters as standards of product, packaging, promotions etc. • Socio – Cultural: socio – cultural fabric is an important environment factor that should be analyzed while formulating the business strategies. The cost of ignoring the customs, traditions, taboos, tastes and preferences etc. of a people could be very high. The buying and consumption habits of the people, their languages, beliefs, and values, customs and traditions, tastes and performances, education are all factors that affect business. The micro environment is also known as task environment and operating environment. Mega Environment: Mega environment mainly consist of International Environment which is very important from the point of certain categories of business. A. Import and export dependency: • Industries directly depends on Imports or exports • Import – competing Industries. • A boom in the export market or a relaxation of the protectionist policies may help the export oriented industries. • A liberalization of imports may help some industries which use imported items, but may adversely affect important – competing industries. B. World trade linkage: • Oil price hikes have seriously affected a number of economics. These hikes have increased the cost of production and the prices of certain products like fertilizers, synthetic fabrics, etc. The high oil price has led to an increase in the demand for automobile models that economies energy consumption. • The oil crisis led to a reorientation of the government of India’s energy policy. Such development affects the demand, consumption and investment pattern. Environmental Scanning – factors and approaches
  • 5. 5 Before start the strategy formulation, in any organization, it must to do the scan the external environment to identify the possible opportunities and threats and its internal environment for strength and weaknesses. In his book, “ Essential of strategic management “, J.David Hunger pointed out that Environmental scanning is the monitoring, evaluating and disseminating of information from the external and internal environments to key people within the corporation. It is a tool that a corporation uses to avoid strategic surprise and to ensure long – term health. Azhar Kazmi, quoted in his book – “ Business Policy and strategic management that – the process by which organizations monitor their relevant environment to identify opportunities and threats defecting their business is known as environmental scanning. Factors to be consider for environmental scanning: 1. Events are important and specific occurrences taking place in different environmental sectors. 2. Trends are the general tendencies or the courses of action along which events take place. 3. Issues are the current concerns that arise in response to events and treats. 4. Expectations are the demands made by interested groups in the light of their concern for issues. By monitoring the environment through environmental scanning, an organization can consider the impact of the different events, trends, issues, and expectations on its strategic management process. Since the environment facing any organization is complex and its scanning is absolutely essential, strategists ( who, as individuals or in groups – internal or external; are concerned with and play a role in strategic management) have to deal cautiously with the process of environmental scanning. Objectives: • To make efforts to deal with it in such a manner that unnecessary time and effort is not expended, while important factors are not ignored. • To enable this it is important to devise an approach, or a combination of approaches to environmental scanning. Approaches to environmental scanning:
  • 6. 6 Kubr has suggested three approaches, which could be adopted for sorting out information for environmental scanning 1. Systematic approach: Gathering information for environmental scanning which have a direct impact on organizations activities, Govt. policy statements pertaining to an organization’s business and industry to monitor changes and take the relevant factors into account. Continuously updating such information is necessary not only for strategic management but also for operational activities. 2. Ad Hoc approach: Using this approach, an organization when undertake special projects, evaluate existing strategies, or devise new strategies; may conduct special survey and studies to deal with specific environmental issues periodically. 3. Processed – form approach: when an organization uses information supplied by Govt. or private agencies, it uses secondary sources of data and the information gathered in a processed form. Since environmental scanning is absolutely necessary for strategy formulation of any organization, what ever approaches is adapted, DATA Collection and Processing systematically is ultimate for Strategic Management Process. Sources of information: Strategists use different information sources depending on their needs for environmental scanning. 1. External (like publications – newspaper, magazines, journals, books, trade and Industry association newsletter, Govt. Publications, annual reports of competitions etc. mass media such as Radio, Television and the Internet: External Agencies: like customers, marketing intermediaries, suppliers, trade associations, Govt. agencies and so on. 2. Internal – (company files and documents, MIS, databases, company employees. Formal studies conducted by employees, market research agencies, consultants and educational institutions on hire. Methods and Techniques used for Environmental Scanning (ES):
  • 7. 7 There are wide range of methods and techniques available for ES. Strategists may choose one which suit their needs in terms of the – • Quantity • Quality • Availability • Time lines • Relevance • Cost of environmental information 1st Stage : Factors Affecting Environmental Appraisal Following are the main factors affecting environmental appraisal a) Factors relating to environment We can not evaluate equally two organisation in same environment. we have to study every organisation's complexity and flexibility. b) Factors relating to Organisation Age of organisation will affect our environmental appraisal. We also see the organisation's size for doing business and its market type. What are the services and products, it is providing? c) Factors Relating to Strategies Policy makers play important role in appraisal. Age, education and experience of policy maker will affect the environmental appraisal. 2nd Stage : Identification of Environmental Factors In second stage we have to identification of environmental factors on the basis of following issue a) Critical Issues b) High Priority Issues c) Low Priority Issues 3rd Stage : Structuring the Environmental Appraisal
  • 8. 8 This is the third stage of environmental appraisal. In this stage, we create the structure of environmental appraisal. One side of structure will be our strengths and other side will be our weaknesses. By comparing both, we estimate our surviving power in the environment of business. Tools for Environmental Scanning: The complete information positive and negative, internal and external are very important for every strategist so that they can combat the possible threats and exploit the opportunities in the right moment by preparing the right strategies. Keeping in view them generally using the following tools for environmental scanning: The SWOT Analysis through SWOT Matrix: SWOT, is an instrumental framework in value based management and strategy formulation to give in-depth information to strength, weakness, opportunity and threats for a particular company / organization. Strength and Weaknesses (SW) – Internal value – creating or destroying factor like assets, skill, resources etc. which can measured by using internal assessment or by external benchmarking. Opportunity and Threats (OT) – External value – creating or destroying factors and a company can not control, but emerge from either the competitive dynamistic of the Industry / market or from demographic, political, technical, social, and legal or cultural factors The relationships in a SWOT analysis are generally’ represented by a 2x2 matrix. The ‘Strength’ and ‘Opportunities’ are both positive considerations. ‘Weakness’ and Threats are both negative considerations. The final results of an analysis could be listed in the matrix in given below Conclusion: Business environment is dynamic. Many elements in the environment undergo changes. Technological changes are frequent. Tastes and the preferences of the people change. The competitive situation changes. • Demographic factors, including population size, change. • Attitude and value systems also undergo changes. • Economic factors like income, change continuously. • Government policies and regulations also change to cope with the changing environment. •
  • 9. 9 All these factors indicate that a business policy should be dynamic enough to be successfully adaptable to the changing environment. Therefore, the success of a business today, depends on its ability to foresee the environmental changes and to modify its strategies appropriately with internal and external environmental changes PEST analysis PESTLE is a mnemonic which in its expanded form denotes P for Political, E for Economic, S for Social, T for Technological, L for Legal and E for Environmental. It gives a bird’s eye view of the whole environment from many different anglesthat one wantsto check and keep a track of while contemplating on a certain idea/plan. PEST analysis is a scan of the external macro-environment in which an organisation exists. It is a useful tool for understanding the political, economic, socio-cultural and technological environment that an organisation operates in. It can be used for evaluating market growth or decline, and as such the position, potential and direction for a business. PEST analysis (political, economic, social and technological) describes a framework of macro-environmental factors used in the environmental scanning component of strategic management. It is part of an external analysis when conducting a strategic analysis or doing market research, and gives an overview of the different macro-environmental factors to be taken into consideration. It is a strategic tool for understanding market growth or decline, business position, potential and direction for operations. Variants that build on the PEST framework include:  PESTEL or PESTLE, which adds legal and environmental factors. Popular in the United Kingdom.[1]  SLEPT adding legal factors.  STEEPLE and STEEPLED, adding ethics and demographic factors.  DESTEP, adding demographic and ecological factors.  SPELIT, adding legal and intercultural factors. Popular in the United States since the mid-2000s.
  • 10. 10 Political factors. These include government regulations such as employment laws, environmental regulations and tax policy. Other political factors are trade restrictions and political stability. Economic factors. These affect the cost of capital and purchasing power of an organisation. Economic factors include economic growth, interest rates, inflation and currency exchange rates. Social factors. These impact on the consumer’s need and the potential market size for an organisation’s goods and services. Social factors include population growth, age demographics and attitudes towards health. Technologicalfactors. These influence barriers to entry, make or buy decisions and investment in innovation, such as automation, investment incentives and the rate of technological change. PEST factors can be classified as opportunities or threats in a SWOT analysis. It is often useful to complete a PEST analysis before completing a SWOT analysis. It is also worth noting that the four paradigms of PEST vary in significance depending on the type of business. For example, social factors are more obviously relevant to consumer businesses or a B2B business near the consumer end of the supply chain. Conversely, political factors are more obviously relevant to a defence contractor or aerospace manufacturer. Expanding the analysis to PESTLE or PESTEL adds:  Legal factors include discrimination law, consumer law, antitrust law, employment law, and health and safety law. These factors can affect how a company operates, its costs, and the demand for its products.  Environmental factors include ecological and environmental aspects such as weather, climate, and climate change, which may especially affect industries such as tourism, farming, and insurance. Furthermore, growing awareness of the potential impacts of climate change is affecting how companies operate and the products they offer, both creating new markets and diminishing or destroying existing ones. Other factors for the various offshoots include:
  • 11. 11  Demographic factors include gender, age, ethnicity, knowledge of languages, disabilities, mobility, home ownership, employment status, religious belief or practice, culture and tradition, living standards and income level.  Regulatory factors include acts of parliament and associated regulations, international and national standards, local government by-laws, and mechanisms to monitor and ensure compliance with these. More factors discussed in the SPELIT Power Matrix include:  Inter-cultural factors considers collaboration in a global setting.  Other specialized factors discussed in chapter 10 of the SPELIT Power Matrix include the Ethical, Educational, Physical, Religious, and Security environments. The security environment may include either personal, company, or national security.  Other business-related factors that might be considered in an environmental analysis include Competition, Demographics, Ecological, Geographical, Historical, Organizational, and Temporal (schedule) Benefits of PEST analysis  Provides a simple and easy-to-use framework for your analysis.  Spot business opportunities with advance warning of potential threats.  Adopt practices  Question existing assumptions  Involves cross-functional skills and expertise.  Helps to reduce the impact and effects of potential threats to your organization.  Aids and encourages the development of strategic thinking within your organization.  Provides a mechanism that enables your organization to identify and exploit new opportunities.
  • 12. 12  Enables you to assess implications of entering new markets both nationally and globally. Organizational appraisal Organizational appraisal is the process of monitoring an organization’s internal environment to identify strengths and weaknesses that may influence the firm’s ability to achieve goals. Identifying Strengths and Weaknesses Distinctive/Core Competencies Identifying Opportunities and Threats Strategic Cost Analysis Porter’s value chain Michael Porter introduced the value chain analysis concept in his 1985 book ‘ The Competitive Advantage’ . Porter suggested that activities within an organisation add value to the service and products that the organisation produces, and all these activities should be run at optimum level if the organisation is to gain any real competitive advantage. If they are run efficiently the value obtained should exceed the costs of running them i.e. customers should return to the organisation and transact freely and willingly. Michael Porter suggested that the organisation is split into ‘primary activities’ and ‘support activities’. The term ‘Value Chain’ was used by Michael Porter in his book "Competitive Advantage: Creating and Sustaining superior Performance" (1985). The value chain analysis describes the activities the organization performs and links them to the organizations competitive position. Value chain analysis describes the activities within and around an organization, and relates them to an analysis of the competitive strength of the organization. Therefore, it evaluates which value each particular activity adds to the organizations products or services. This idea was built upon the insight that an organization is more than a random compilation of machinery, equipment, people and money. Only if these things are arranged into systems and systematic activates it will become possible to produce something for which customers are willing to pay a price. Porter argues that the ability to perform particular activities and to manage the linkages between these activities is a source of competitive advantage.
  • 13. 13 Porter distinguishes between primary activities and support activities. Primary activities are directly concerned with the creation or delivery of a product or service. They can be grouped into five main areas: inbound logistics, operations, outbound logistics, marketing and sales, and service. Each of these primary activities is linked to support activities which help to improve their effectiveness or efficiency. There are four main areas of support activities: procurement, technology development (including R&D), human resource management, and infrastructure (systems for planning, finance, quality, information management etc.). The term ‚Margin’ implies that organizations realize a profit margin that depends on their ability to manage the linkages between all activities in the value chain. In other words, the organization is able to deliver a product / service for which the customer is willing to pay more than the sum of the costs of all activities in the value chain. Primary Activities
  • 14. 14 Primary activities relate directly to the physical creation, sale, maintenance and support of a product or service. They consist of the following:  Inbound logistics – These are all the processes related to receiving, storing, and distributing inputs internally. Your supplier relationships are a key factor in creating value here.  Operations – These are the transformation activities that change inputs into outputs that are sold to customers. Here, your operational systems create value.  Outbound logistics – These activities deliver your product or service to your customer. These are things like collection, storage, and distribution systems, and they may be internal or external to your organization.  Marketing and sales – These are the processes you use to persuade clients to purchase from you instead of your competitors. The benefits you offer, and how well you communicate them, are sources of value here.  Service – These are the activities related to maintaining the value of your product or service to your customers, once it's been purchased. Support Activities These activities support the primary functions above. In our diagram, the dotted lines show that each support, or secondary, activity can play a role in each primary activity. For example, procurement supports operations with certain activities, but it also supports marketing and sales with other activities.  Procurement (purchasing) – This is what the organization does to get the resources it needs to operate. This includes finding vendors and negotiating best prices.  Human resource management – This is how well a company recruits, hires, trains, motivates, rewards, and retains its workers. People are a significant source of value, so businesses can create a clear advantage with good HR practices.
  • 15. 15  Technological development – These activities relate to managing and processing information, as well as protecting a company's knowledge base. Minimizing information technology costs, staying current with technological advances, and maintaining technical excellence are sources of value creation.  Infrastructure – These are a company's support systems, and the functions that allow it to maintain daily operations. Accounting, legal, administrative, and general management are examples of necessary infrastructure that businesses can use to their advantage. Porter's Value Chain is a useful strategic management tool.It works by breaking an organization's activities down into strategically relevant pieces, so that you can see a fuller picture of the cost drivers and sources of differentiation, and then make changes appropriately. SWOT ANALYSIS For business it is important to know your surrounding environment from internal and external point of view. Therefore it is important to evaluate environment opportunities in relation to the strengths and weaknesses of the organization's resources, and in relation to the organizational culture. SWOT analysis is a dynamic part of an organization’s business and management development process. It entails the collection of information pertaining to external and internal factors which may have an impact on the organization’s evolution. The SWOT analysis definition takes into consideration the weaknesses and strengths of the organization along with the threats and opportunities it faces in the external environment. Based on these factors, the company determines its future course of action, combining its strengths with imminent opportunities while trying to overcome weaknesses and combat threats.
  • 16. 16 The SWOT analysis is a useful technique for understanding all sorts of situations in business and organizations. SWOT is acronym for STRENGTHS, WEAKNESSES, OPPORTUNITIES and THREATS. SWOT analysis is one very effective tool for the analysis of environmental data and information – for both, internal (strengths, weakness) and external (opportunities, threats) factors. It helps to minimize the effect of weaknesses in your business, while maximizing your strengths. SWOT analysis can help you gain insights into the past and think of possible solutions to existing or potential problems — either for an existing business or new venture. INTERNAL FACTORS: STRENGHTS Strengths determine the organization’s strong points. This are tangible and intagible attributes (internal to an organization). This should be from both: an internal perspective and external customers. It is a distinctive competence when it gives the firm a comparative advantage in the marketplace. Weaknesses In which areas might the organization improve? It is important to look at this from both internal and external perspective. You should include customer’s opinion and opinion from other clue market players. You should not forget what competitors are doing better than we do. EXTERNAL FACTORS: Opportunities An opportunity is a major situation in a company’s environment and represents the reason for firm to exist and develop. Useful opportunities can come from: changes in competitive or regulatory circumstances, changes in
  • 17. 17 government policy related to your field technological changes, etc. When you look at opportunities is also good to look at your strengths and also weakness and try to find relation between them. Threats are external factors on which the company doesn’t have control. No one likes to think about threats, but we still have to face them: the entrance of new competitors, slow market growth, increased bargaining power of key buyers or suppliers, technological changes, etc. A successfully conducted SWOT analysis involves identifying the following: to grow and increase its profits (opportunities) or may make its position weaker (threats). Guideline for Performing an Effective SWOT Analysis The key to performing an effective SWOT analysis is that it clearly distinguishes where the organization is today and where it is likely to be in the future. Moreover, it is also important to be realistic about the organization’s strengths and weaknesses and to keep the outcome subjective, simple and short. It will give you a framework for determining if the scope of a strategic initiative is correct by identifying three types of strategy (see the graphic), and indicating how the definition of the business model can affect the scope of the strategic initiative. You need to understand business models:  When you are leading a strategic initiative for executing a corporate-level strategy, you are creating a new business model
  • 18. 18  When you are leading a strategic initiative for executing a business-level strategy, you are improving several or all of the nine elements of a business model  When you are leading a strategic initiative for executing a functional level strategy, you are optimizing one or more of the nine elements of a business model. The word strategy is ambiguous in many ways, not the least which is the distinction of corporate-level strategy, contrasted to business-level strategy, and functional strategy Corporate-Level Strategy Corporate level strategy occupies the highest level of strategic decision-making and covers actions dealing with the objective of the firm, acquisition and allocation of resources and coordination of strategies of various SBUs for optimal performance. Top management of the organization makes such decisions. The nature of strategic decisions tends to be value-oriented, conceptual and less concrete than decisions at the business or functional level. This kind of strategy is concerned with market definition: what businesses and markets do we want to be in? A strategic initiative might be launched to answer that question, or more likely to realize the strategic intent of a new chosen business or market. The Red-Ocean-Blue-Ocean metaphor has been popular over the last few years. A red ocean is a market where competitors bloody each other up fighting for market share. A blue ocean is an emerging, growing business arena; potential competitors have not yet identified it and the opportunity for success is large. An example of corporate-level strategy: The February 2011 announcement an alliance between Microsoft and Nokia Corp. The alliance involve Nokia will produce phones running Windows Phone 7, a recognition that Nokia’s investment in its own operating system has failed. The alliance gives Microsoft access to the world’s largest phone maker and its huge mindshare—in many developing nations a mobile phone is known as a Nokia. The deal with
  • 19. 19 Microsoft gives both Nokia and Microsoft a route to the future in the smart- phone market. Business-Level Strategy Business-level strategy is – applicable in those organizations, which have different businesses-and each business is treated as strategic business unit (SBU). The fundamental concept in SBU is to identify the discrete independent product/market segments served by an organization. Since each product/market segment has a distinct environment, a SBU is created for each such segment. For example, Reliance Industries Limited operates in textile fabrics, yarns, fibers, and a variety of petrochemical products. For each product group, the nature of market in terms of customers, competition, and marketing channel differs. This kind of strategy is concerned with succeeding in chosen markets. An example of a business-level strategy was Domino’s Pizza Turnaround which required all areas of the organization to pull together to achieve a simple understandable business goal: have a clear win against competitor in a taste test. Functional-Level Strategy Functional strategy, as is suggested by the title, relates to a single functional operation and the activities involved therein. Decisions at this level within the organization are often described as tactical. Such decisions are guided and constrained by some overall strategic considerations. Functional strategy deals with relatively restricted plan providing objectives for specific function, allocation of resources among different operations within that functional area and coordi-nation between them for optimal contribution to the achievement of the SBU and corporate-level objectives. Below the functional-level strategy, there may be operations level strategies as each function may be dividend into several sub functions. For example, marketing strategy, a functional strategy, can be subdivided into promotion, sales, distribution, pricing strategies with each sub function strategy contributing to functional strategyThis kind of strategy is concerned with making improvements to business functions that support business and corporate strategy.
  • 20. 20 Functional strategy include IT strategy, marketing strategy, IT strategy, human resources strategy, and operations. Typically, documents portraying functional strategy will list estimates and plans for operating expenses, headcount, and continuous improvement. As implied by the graphic, functional-level strategy is the foundation that supports both corporate-level strategy and business strategy. Many strategic initiatives are simply the implementation of functional strategies, but often a strategic initiative straddles numerous functions and businesses. An example of functional-level strategy: In 2008, Swiss Life Group, a Zurich- based insurance company (ranked #373 on the Fortune Global 500 list) announced a change in its Information Technology functional strategy priorities. The implications of this was a decision to considerably scale back the number of IT projects in order to reduce costs through re-prioritization. This was successful as shown in this November 2010 announcement, BCG matrix (or growth-share matrix) is a corporate planning tool, which is used to portray firm’s brand portfolio or SBUs on a quadrant along relative market share axis (horizontal axis) and speed of market growth (vertical axis) axis. Growth-share matrix is a business tool, which uses relative market share and industry growth rate factors to evaluate the potential of business brand portfolio and suggest further investment strategies. Since 1968, the BCG matrix, also known as the Boston or growth-share matrix, has helped companies answer that question by providing them a way to analyze product lines in search of growth opportunities. Named for its creator, the Boston Consulting Group, the BCG matrix aims to identify high-growth prospects by categorizing the company's products according to growth rate and market share. By optimizing positive cash flows in high-potential products, a company can capitalize on market-share growth opportunities. Reeves Martin,
  • 21. 21 senior partner and managing director of Boston Consulting Group, said that nearly 50 years after its inception, the BCG matrix remains a valuable tool for helping companies understand their potential. "The concept of BCG's growth- share matrix, central nowadays to business schools' curriculum on strategy ... provided companies with a disciplined and systematic tool for portfolio management," Martin told Business News Daily. "Recently, Harvard Business Review named BCG's matrix one of five 'frameworks that changed the world. Relative market share. One of the dimensions used to evaluate business portfolio is relative market share. Higher corporate’s market share results in higher cash returns. This is because a firm that produces more, benefits from higher economies of scale and experience curve, which results in higher profits. Nonetheless, it is worth to note that some firms may experience the same benefits with lower production outputs and lower market share. Market growth rate. High market growth rate means higher earnings and sometimes profits but it also consumes lots of cash, which is used as investment to stimulate further growth. Therefore, business units that operate in rapid growth industries are cash users and are worth investing in only when they are expected to grow or maintain market share in the future. There are four quadrants into which firms brands are classified: Dogs. Dogs hold low market share compared to competitors and operate in a slowly growing market. In general, they are not worth investing in because they generate low or negative cash returns. But this is not always the truth. Some dogs may be profitable for long period of time, they may provide synergies for other brands or SBUs or simple act as a defense to counter competitors moves. Therefore, it is always important to perform deeper analysis of each brand or SBU to make sure they are not worth investing in or have to be divested. Strategic choices: Retrenchment, divestiture, liquidation Cashcows. Cashcows are the most profitable brands and should be “milked” to provide as much cash as possible. The cash gained from “cows” should be invested into stars to support their further growth. According to growth-share matrix, corporates should not invest into cashcows to induce growth but only to support them so they can maintain their current market share. Again, this is not
  • 22. 22 always the truth. Cash cows are usually large corporations or SBUs that are capable of innovating new products or processes, which may become new stars. If there would be no support for cash cows, they would not be capable of such innovations. Strategic choices: Product development, diversification, divestiture, retrenchment Stars. Stars operate in high growth industries and maintain high market share. Stars are both cash generators and cash users. They are the primary units in which the company should invest its money, because stars are expected to become cash cows and generate positive cash flows. Yet, not all stars become cash flows. This is especially true in rapidly changing industries, where new innovative products can soon be outcompeted by new technological advancements, so a star instead of becoming a cash cow, becomes a dog. Strategic choices: Vertical integration, horizontal integration, market penetration, market development, product development Question marks. Question marks are the brands that require much closer consideration. They hold low market share in fast growing markets consuming large amount of cash and incurring losses. It has potential to gain market share and become a star, which would later become cash cow. Question marks do not always succeed and even after large amount of investments they struggle to gain market share and eventually become dogs. Therefore, they require very close consideration to decide if they are worth investing in or not. Strategic choices: Market penetration, market development, product development, divestiture Using the tool Although BCG analysis has lost its importance due to many limitations, it can still be a useful tool if performed by following these steps:  Step 1. Choose the unit  Step 2. Define the market  Step 3. Calculate relative market share  Step 4. Find out market growth rate  Step 5. Draw the circles on a matrix Limitations of BCG Matrix
  • 23. 23 The BCG Matrix produces a framework for allocating resources among different business units and makes it possible to compare many business units at a glance. But BCG Matrix is not free from limitations, such as- 1. BCG matrix classifies businesses as low and high, but generally businesses can be medium also. Thus, the true nature of business may not be reflected. 2. Market is not clearly defined in this model. 3. High market share does not always leads to high profits. There are high costs also involved with high market share. 4. Growth rate and relative market share are not the only indicators of profitability. This model ignores and overlooks other indicators of profitability. 5. At times, dogs may help other businesses in gaining competitive advantage. They can earn even more than cash cows sometimes. 6. This four-celled approach is considered as to be too simplistic. Another popular “Corporate Portfolio Analysis” technique is the result of pioneering effort of General Electric Company along with McKinsey Consultants which is known as the GE NINE CELL MATRIX. GE nine-box matrix isa strategy tool that offers a systematic approach for the multi business enterprises to prioritize their investments among the various business units. It is a framework that evaluates business portfolio and provides further strategic implications. In the 1970s, General Electric (GE) commissioned McKinsey & Company to develop a portfolio analysis matrix for screening its business units. The GE McKinsey matrix is a variant of the Boston Consulting Group (BCG) portfolio analysis. The GE McKinsey matrix has also many points in common with the MABA analysis.
  • 24. 24 MABA is an acronym that stands for Market, Attractiveness, Business position and Assessment. The GE McKinsey matrix also compares product groups with respect to market attractiveness and competitive power. Another name for this type of analysis is Portfolio analysis. The portfolios of businesses consist of all combinations of products and/or services that are offered to the market/ target groups. Originally, the GE McKinsey matrix made an analysis of the composition of the portfolio of GE business units. Later, the GE McKinsey matrix proved to be very useful in other companies as well. The GE McKinsey matrix The GE McKinsey matrix comprises two axes. The attractiveness of the market is represented on the y-axis and the competitiveness and competence of the business unit are plotted on the x-axis. Both axes are divided into three categories (high, medium, low) thus creating nine cells.
  • 25. 25 The business unit is placed within the matrix using circles. The size of the circle represents the volume of the turnover. The percentage of the market share is entered in the circle. An arrow represents the future course for the business unit. In 1970s, General Electric was managing a huge and complex portfolio of unrelated products and was unsatisfied about the returns from its investments in the products. At the time, companies usually relied on projections of future cash flows, future market growth or some other future projections to make investment decisions, which was an unreliable method to allocate the resources. Therefore, GE consulted the McKinsey & Company and as a result the nine-box framework was designed. The nine-box matrix plots the BUs on its 9 cells that indicate whether the company should invest in a product, harvest/divest it or do a further research on the product and invest in it if there’re still some resources left. The BUs are evaluated on two axes: industry attractiveness and a competitive strength of a unit. Industry Attractiveness Industry attractiveness indicates how hard or easy it will be for a company to compete in the market and earn profits. The more profitable the industry is the more attractive it becomes. When evaluating the industry attractiveness, analysts should look how an industry will change in the long run rather than in the near future, because the investments needed for the product usually require long lasting commitment. Industry attractiveness consists of many factors that collectively determine the competition level in it. There’s no definite list of which factors should be included to determine industry attractiveness, but the following are the most common: [1] •Long run growth rate
  • 26. 26 •Industry size •Industry profitability: entry barriers, exit barriers, supplier power, buyer power, threat of substitutes and available complements (use Porter’s Five Forces analysis to determine this) •Industry structure (use Structure-Conduct-Performance framework to determine this) •Product life cycle changes •Changes in demand •Trend of prices •Macro environment factors (use PEST or PESTEL for this) •Seasonality •Availability of labor •Market segmentation Competitive strength of a business unit or a product Along the X axis, the matrix measures how strong, in terms of competition, a particular business unit is against its rivals. In other words, managers try to determine whether a business unit has a sustainable competitive advantage (or at least temporary competitive advantage) or not. If the company has a sustainable competitive advantage, the next question is: “For how long it will be sustained?”
  • 27. 27 The following factors determine the competitive strength of a business unit: •Total market share •Market share growth compared to rivals •Brand strength (use brand value for this) •Profitability of the company •Customer loyalty •VRIO resources or capabilities (use VRIO framework to determine this) •Your business unit strength in meeting industry’s critical success factors (use Competitive Profile Matrix to determine this) •Strength of a value chain (use Value Chain Analysis and Benchmarking to determine this) •Level of product differentiation •Production flexibility Advantages •Helps to prioritize the limited resources in order to achieve the best returns. •Managers become more aware of how their products or business units perform.
  • 28. 28 •It’s more sophisticated business portfolio framework than the BCG matrix. •Identifies the strategic steps the company needs to make to improve the performance of its business portfolio. Disadvantages •Requires a consultant or a highly experienced person to determine industry’s attractiveness and business unit strength as accurately as possible. •It is costly to conduct. •It doesn’t take into account the synergies that could exist between two or more business units.
  • 29. 29 Life-cycle assessment (LCA, also known as life-cycle analysis, ecobalance, and cradle-to-grave analysis)[1] is a technique to assess environmental impacts associated with all the stages of a product's life from raw material extraction through materials processing, manufacture, distribution, use, repair and maintenance, and disposal or recycling. Designers use this process to help critique their products. LCAs can help avoid a narrow outlook on environmental concerns by:  Compiling an inventory of relevant energy and material inputs and environmental releases;
  • 30. 30  Evaluating the potential impacts associated with identified inputs and releases;  Interpreting the results to help make a more informed decision.[2]  Taking as an example the case of a manufactured product, an LCA involves making detailed measurements during the manufacture of the product, from the mining of the raw materials used in its production and distribution, through to its use, possible re-use or recycling, and its eventual disposal.  LCAs enable a manufacturer to quantify how much energy and raw materials are used, and how much solid, liquid and gaseous waste is generated, at each stage of the product's life.  Such a study would normally ignore second generation impacts, such as the energy required to fire the bricks used to build the kilns used to manufacture the raw material.  However, deciding which is the 'cradle' and which the 'grave' for such studies has been one of the points of contention in the relatively new science of LCAs, and in order for LCAs to have value there must be standardisation of methodologies, and consensus as to where to set the limits. Much of the focus worldwide to date has been on agreeing the methods and boundaries to be used when making such analyses, and it seems that agreement may have now been reached.  While carrying out an LCA is a lengthy and very detailed exercise, the data collection stage is - in theory at least - relatively uncomplicated, provided the boundary of the study has been clearly defined, the methodology is rigorously applied, and reliable, high-quality data is available. Those of course are fairly large provisos. The first stage of a life cycle analysis is called an “inventory analysis.” In an inventory analysis, the goal is to examine all the inputs and outputs in a product’s life cycle, beginning with what product is composed of, where those materials came from, where they go, and the inputs and outputs related to those component materials during their lifetime. It is also necessary to include the inputs and outputs during the product’s use, such as whether or not the product uses electricity. The purpose of the inventory analysis is to quantify what comes in and what goes out, including the energy and material associated with materials extraction, product manufacture and assembly, distribution, use and disposal and the environmental emissions that result.
  • 31. 31 The next stage of a life cycle analysis is the impact analysis, in which the environmental impacts identified in the previous stage are enumerated, such as the environmental impacts of generating energy for the processes and the hazardous wastes emitted in the manufacturing process. Once the environmental impacts of all the inputs and outputs of a product’s lifecycle are analyzed, the life cycle analysis generates a number that represents how much the environment is affected. However, the major purpose of the analysis is to evaluate, once the inputs and outputs are quantified, how the product affects the environment throughout its lifecycle. Once its general environmental impact is calculated, the next step is to conduct an improvement analysis to see how impact of the product on the environment. For example, conservation of energy or water in the manufacturing process will reduce the environmental impacts of that process. Substituting a less hazardous chemical in place of a more toxic one would also reduce the impact. The change is then made in the inventory analysis to recalculate its total environmental impact. Porter's five forces analysis is a framework for analyzing the level of competition within an industry and business strategy development. It draws upon industrial organization (IO) economics to derive five forces that determine the competitive intensity and therefore the attractiveness of an industry. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one in which the combination of these five forces acts
  • 32. 32 to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit. This analysis is associated with its principal innovator Michael E. Porter of Harvard University. Porter refers to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a business unit to re-assess the marketplace given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models, have been able to make a return in excess of the industry average. What are 'Porter's 5 Forces' Porter's Five Forces model, named after Michael E. Porter, identifies and analyzes five competitive forces that shape every industry, and helps determine an industry's weaknesses and strengths. These forces are: 1. Competition in the industry; 2. Potential of new entrants into the industry; 3. Power of suppliers; 4. Power of customers; 5. Threat of substitute products. Frequently used to identify an industry's structure to determine corporate strategy, Porter's model can be applied to any segment of the economy to search for profitability and attractiveness.
  • 33. 33 BREAKING DOWN 'Porter's 5 Forces' Porter's Five Forces is a model of analysis that helps to explain why different industries are able to sustain different levels of profitability. This model was originally published in Porter's book, "Competitive Strategy: Techniques for Analyzing Industries and Competitors" in 1980. The model is widely used, worldwide, to analyze the industry structure of a company as well as its corporate strategy. Porter identified five undeniable forces that play a part in shaping every market and industry in the world. The forces are frequently used to measure competition intensity, attractiveness and profitability of an industry or market. Porter regarded understanding both the competitive forces and the overall industry structure as crucial for effective strategic decision-making. In Porter's model, the five forces that shape industry competition are: Competitive rivalry. This force examines how intense the competition currently is in the marketplace, which is determined by the number of existing competitors and what each is capable of doing. Rivalry competition is high when there are just a few businesses equally selling a product or service, when the industry is growing and when consumers can easily switch to a competitors offering for little cost. When rivalry competition is high, advertising and price wars can ensue, which can hurt a business's bottom line. Rivalry is quantitatively measured by the Concentration Ratio (CR), which is the percentage of market share owned by the four largest firms in an industry. Bargaining power of suppliers. This force analyzes how much power a business's supplier has and how much control it has over the potential to raise its prices, which, in turn, would lower a business's profitability. In addition, it looks at the number of suppliers available: The fewer there are, the more power they have. Businesses are in a better position when there are a multitude of suppliers. Sources of supplier power also include the switching costs of firms in the industry, the presence of available substitutes, and the supply purchase cost relative to substitutes. Bargaining power of customers. This force looks at the power of the consumer to affect pricing and quality. Consumers have power when there aren't many of them, but lots of sellers, as well as when it is easy to switch from one business's products or services to another. Buying power is low when
  • 34. 34 consumers purchase products in small amounts and the seller's product is very different from any of its competitors. Threat of new entrants. This force examines how easy or difficult it is for competitors to join the marketplace in the industry being examined. The easier it is for a competitor to join the marketplace, the greater the risk of a business's market share being depleted. Barriers to entry include absolute cost advantages, access to inputs, economies of scale and well-recognized brands. Threat of substitute products or services. This force studies how easy it is for consumers to switch from a business's productor service to that of a competitor. It looks at how many competitors there are, how their prices and quality compare to the business being examined and how much of a profit those competitors are earning, which would determine if they have the ability to lower their costs even more. The threat of substitutes are informed by switching costs, both immediate and long-term, as well as a buyer's inclination to change. Example of Porter's Five Forces There are several examples of how Porter's Five Forces can be applied to various industries online. As an example, stock analysis firm Trefis looked at how Under Armour fits into the athletic footwear and apparel industry. Competitive rivalry  Under Armour faces intense competition from Nike, Adidasand newer players.  Nike and Adidas, which have considerably larger resources at their disposal, are making a play within the performance apparel market to gain market share in this up-and-coming product category.  Under Armour does not hold any fabric or process patents, and hence its product portfolio could be copied in the future. Bargaining power of suppliers  A diverse supplier base limits bargaining power.  In 2012, Under Armour's products were produced by 27 manufacturers located across 14 countries. Of these, the top 10 accounted for 49 percent of the products manufactured.
  • 35. 35 Bargaining power of customers  Under Armour'scustomers include both wholesale customers as well as end customers.  Wholesale customers, like Dick's Sporting Goods and the Sports Authority, hold a certain degree of bargaining leverage, as they could substitute Under Armour's products with other competitors' to gain higher margins.  Bargaining power of end customers is lower as Under Armour enjoys strong brand recognition. Threat of new entrants  Large capital costs are required for branding, advertising and creating product demand, and hence this limits the entry of newer players in the sports apparel market.  However, existing companies in the sports apparel industry could enter the performance apparel market in the future. Threat of substitute products  The demand for performance apparel, sports footwear and accessories is expected to continue, and hence we think this force does not threaten Under Armour in the foreseeable future. Trefis has also completed Porter's Five Forces analyses of companies, including Facebook, Nike, Coach and Ralph Lauren. Strategies for success Once your analysis is complete, it is time to implement a strategy to expand your competitive advantage. To that end, Porter identified three "generic strategies"that can be implemented in any industry, and in companies of any size: Cost leadership: In this strategy, your goal is to increase profits by reducing costs while charging industry-standard prices, or to increase market share by reducing the sales price while retaining profits.
  • 36. 36 Differentiation: This strategy aims to make the company's products significantly different from the competition, improving their competitiveness and value to the public. This strategy requires both good research and development and effective sales and marketing teams.