Strategy Formulation

1. Environmental Appraisal

2.  Environment of any organization is ‘the aggregate of
all conditions, events and influences that surround
and affect it’.
 Trends in India - from recent past
 Acquiring Scale
 Spread of connectivity and awareness
 Growth of Middle class
 Growing problems of Growth
 Increasing openness to the world
 Dominance of youth

3.  Complex
 Dynamic
 Multi - faceted
 Far - reaching
Impact
 General vs.
Relevant
Environment

4.  Understanding is crucial for existence, growth and
profitability of organization
 Internal Environment
 Strengths : inherent capacity which an organization can
use to gain strategic advantage
 Weakness : inherent limitation or constraint which creates
strategic disadvantages
 External Environment
 Opportunities : favorable condition in the organization’s
environment which enables it to consolidate and
strengthen its position
 Threats : unfavorable condition in the organization’s
environment which creates a risk for, or causes damage to,
the organization

5.  Steps
 Setting the objectives of the organization
 Identifying its strengths, weaknesses, opportunities and
threats
 Asking 4 questions
 How do we maximize our strengths?
 How do we minimize our weaknesses?
 How do we capitalize on the opportunities in our external
environment?
 How do we protect ourselves from threats in our external
environment?
 Recommending strategies that will optimize the answers
for the 4 questions

6.  Economic Environment
 International Environment
 Market Environment
 Political Environment
 Regulatory Environment
 Socio-Cultural Environment
 Supplier Environment
 Technological Environment

7.  Economic Environment
 Economic stage of the country
 Policies, NITI Aayog (2015)
 Economic Indices like National Income, GDP, per capita,
etc
 Infra structure : Financial Institutions, Modes of
Transportation, Communication, etc
 LPG
 International Environment
 Globalization, economic forces, financial system, trade &
commerce, alliances, strategic interests of nations, human
resources, information system, technological and quality
systems, markets, legal system, etc.

8.  Market Environment
 Customer factors
 Product factors
 Marketing factors
 Competitor factors
 Political Environment
 Political system
 Political structure, goals, stability
 Political processes
 Political philosophy and Government’s role in business

9.  Regulatory Environment
 Constitutional framework
 Policies relating to licensing, monopolies, foreign
investment and financing
 Policies relating to distribution and pricing & control,
Exports & Imports
 Policies relating to public sector, small-scale industries,
sick industries, development of backward areas, control
of pollution
 Consumer protection
 Employment conditions

10.  Socio-Cultural Environment
 Demographic characteristics, population, income
 Environmental pollution, consumerism, corruption,
media, role of business in society, customs, beliefs,
practices, changing lifestyle patterns, work ethics
 Family structure, Role & position of men, women,
children, adolescents and aged in family & society
 Supplier Environment
 Cost, availability and continuity of supply of raw
materials, parts & components
 Reliability, Infrastructural support, bargaining power of
suppliers

11.  Technological Environment
 Sources of Technology
 Cost of technology acquisition & collaboration
 Technological development, change and rate of change
 Research and Development
 Impact of technology on humans, man-machine system,
environmental effects
 Communication and Infrastructural technology in
management

12.  The process by which organizations monitor their
relevant environment to identify opportunities and
threats affecting their business for the purpose of
taking strategic decisions.
 Factors to be considered for Environmental Scanning
 Events : important and specific occurrences
 Trends : general tendencies or courses of action along
which events take place
 Issues : current concerns that arise in response to events
& trends
 Expectations : demands made by interested groups in
the light of their concern for issues

13.  Systematic Approach : info collected systematically,
continuously updating info
 Ad hoc Approach : special surveys and studies; done
when special projects are undertaken / evaluating
existing projects / devising new strategies
 Processed-form Approach : secondary data; info from
different sources both inside and outside the
organization
 Organizations use different practical combinations or
approaches to monitor their relevant environments

14.  Documentary or Secondary Sources
 Mass Media (Periodicals and Newspapers)
 Internal Sources
 External Agencies
 Formal Studies
 Spying and Surveillance (Ethics : Doubtful)
 International Publications, Government Publications,
Institutional Publications
 World Wide Web

15.  To have clear picture of what opportunities and threats
faced by organization
 Factors affecting Environmental Appraisal
 Strategist - related factors
 Organization - related factors
 Environment - related factors

16.  Environmental Threat and Opportunity Profile

17.  Resources, Behavior, Strengths and Weaknesses,
Synergic effects and competencies of an Organization
- Nature of Internal Environment
 Resources : All tangible and intangible assets,
capabilities, organizational processes, information,
knowledge, etc.

18.  Classified as physical, human and organizational
 Physical : Technology, Plant & Equipment, Geographic
location, Access to raw materials
 Human Resources : Training, Experience, Judgment,
Intelligence, Relationships, etc.
 Organizational : formal systems and structures as well as
informal relations among groups
 Can be of strategic advantage if they are
 Valuable
 Rare
 Costly to imitate
 Non-substitutable

19.  Synergic Effects : whole is greater or lesser than the
sum of its parts
 Competencies : special qualities possessed by an
organization that make them withstand the pressures
of competition in the market place
 Specific ability possessed by a particular organization
exclusively or relatively in large measure : Distinctive
competence
 Distinctive competencies helps to develop a sustained
strategic advantage through building up of
organizational capability

20.  Outcomes of Organizational Capabilities
 Results of organizational activities leading to rewards
 Measurable in absolute terms using parameters in
which they are expressed
 Competitive Advantage : Comparison with one or
more identified rivals against whom the rewards or
penalties could be measured
 Strategic disadvantages are penalties in the form of
financial loss or damage to market share

21.  Inherent capacity or potential of an organization to
use its strengths and overcome its weaknesses in order
to exploit the opportunities and face the threats in its
external environment.
 Organizational Capability Factors
 Financial Capability
 Marketing Capability
 Operations Capability
 Personnel Capability
 Information Capability
 General Management Capability

22.  Access to financial resources
 Amicable relationship with financial institutions
 High level of credit-worthiness
 Efficient capital budgeting system
 Low cost of capital as compared to competitors
 High level of shareholder confidence
 Effective management control system
 Tax benefits due to various government policies

23.  Wide variety of products
 Better quality of products
 Sharply - focused positioning
 Low prices as compared to those of similar products in the
market
 Price protection due to government policy
 High quality customer service
 Effective distribution system
 Effective sales promotion
 High profile advertising
 Favorable company and product image
 Effective Marketing MIS

24.  High level of capacity utilization
 Favorable plant location
 High degree of vertical integration
 Reliable sources of supply
 Effective control of operational costs
 Existence of good inventory control system
 Availability of high calibre R&D personnel
 Technical collaboration with reputed firms abroad

25.  Genuine concern for HRM & HRD
 Efficient and Effective Personnel systems
 Fair and Model employer - Perception
 Excellent training opportunities and facilities
 Congenial working environment
 Highly satisfied and motivated workforce
 High level of organizational loyalty
 Low level of absenteeism
 Safe and salutary working conditions

26.  Ease and convenience of access to information sources
 Widespread use of computerized information system
 Availability and operability of high-tech equipment
 Positive attitude to sharing and disseminating
information
 Wide coverage and networking of computer systems
 Presence of foolproof information security systems
 Presence of buyers and suppliers conversant with IT
applications
 Top management understanding of, and support to, IT
and its application within organization.

27.  Effective system for corporate planning
 Control, reward and incentive system for top managers
geared to the achievement of objectives
 Entrepreneurial orientation and high propensity for risk-
taking
 Good rapport with government and bureaucracy
 Favorable corporate image
 Commonly being perceived as a good organization to work
for
 Development-oriented organizational culture
 Political processes used for consensus-building in
organizational interest
 Effective management of organizational change

28.  Range from Highly Systematic to Ad hoc
 Highly Systematic is proactive and Ad hoc is reactive

29.  Internal Analysis
 VRIO framework
 Value Chain Analysis
 Quantitative Analysis (Financial & Non-financial analysis)
 Qualitative Analysis
 Comparative Analysis
 Historical analysis
 Industry norms
 Benchmarking
 Comprehensive Analysis
 Key factor rating
 Business intelligence systems
 Balance scorecard

31.  A Value Chain is a set of interlinked value-creating
activities performed by an organization
 Analysis
 Identify activities that make up the organization’s value
chain and classify them into primary and support activities
 Identify the things done in those activities that provide
value for the customer
 Identify how the value contribution can be increased so
that it costs less and increase profit margin to the org.
 Identify how value configuration can be improved by
innovatively reconfiguring or recombining activities

33.  Financial Analysis
 Ratio Analysis
 Economic Value Added Analysis (EVA)
 Activity Based Cost Accounting (ABC)
 Non-financial Analysis
 Employee turnover
 Absenteeism
 Market ranking
 Rate of advertising recall
 Total cycle time of production
 Inventory units per period
 Service call rate
 Number of patents registered per period, etc

34.  Based on informed opinion, judgment, intuition or
hunch
 Considered soft analysis
 Looks into
 Culture
 Climate
 Ability to absorb or assimilate knowledge
 Morale

35.  Balance sheet & Profit and Loss Accounts in Annual
Reports
 Areas which show good performance are an indicator
of strengths and Areas which show repeated bad
performance may be an indicator of weaknesses
 Shows improvements with regard to one’s own
performance only

36.  Most obvious choice for comparison
 Rather than comparing with all firms, consider the
firms that follow similar strategies (strategic groups)
 Provides a good idea to firms regarding the areas in
which they excel or need improvements

37.  Strategic Groups are clusters of competitors that share
similar strategies and compete more directly with one
another than with other firms in the same industry
 For example, the restaurant industry can be divided
into several strategic groups including fast-food and
fine-dining based on variables such as preparation
time, pricing, and presentation. The number of groups
within an industry and their composition depends on
the dimensions used to define the groups.

38.  They are identified on the basis of a set of strategic
dimensions such as technological leadership, degree of
product quality, pricing policies, the choice of distribution
channels and the degree and type of customer service
 The theory of strategic groups argues that within an
industry, firms with similar asset configurations will pursue
similar competitive strategies with similar performance
results.
 A research study classifies Indian pharmaceuticals
companies into five strategic groups : Exploiters (eg.
Neuland Labs), Explorers (Cipla), Outsourcers (eg.
Dishman Pharma), Emerging Globals (eg. Dr. Reddy’s),
Globals (eg. Ranbaxy)

39.  Reference point for taking measures against
 Process of finding best practices within and outside the
industry
 Assess strengths and weakness and determine its
capability
 Tough, time consuming, expensive, requires high level
of commitment
 Needs to be done on continuous basis for effective
results
 Financial statements may not be really useful as the
basis for benchmarking.

40.  Types (what is to be compared)
 Performance Benchmarking
 Process Benchmarking
 Strategic Benchmarking
 Types (against whom organization should compare)
 Internal Benchmarking (between units or departments)
 Competitive Benchmarking (best competitors)
 Functional Benchmarking (non-competitive firms
within the same sector or technological area)
 Generic Benchmarking (anywhere, any type of
organization)

41.  Used in association with financial analysis
 Key factors are based on the factors discussed under
capability factors and raising questions on those
factors
 Requires variety of information, slow and inefficient
method
 Subjective
 Dovetailed (joined together or interlock) with audit
processes otherwise unnecessary duplication would
result

42.  Broad category of applications and technologies for
gathering, storing, analyzing and providing access to
date to help enterprise users make better business
decisions
 BI helps an organization in strategic and operational
decision-making
 Strategic use of BI :
 Corporate Performance Management
 Optimizing customer relations, monitoring business
activity and traditional decision support
 Packaged stand-alone BI applications for specific
operations or strategies
 Management reporting of business intelligence

43.  Assessment of strengths and weakness in organization
 Four key performance measures
 Customer Perspective (how customer see us?)
 Internal Business Perspective (what we must excel at?)
 Innovation and Learning Perspective (can we continue
to improve and create value?)
 Financial Perspective (how do we look at shareholders?)
 One perspective shouldn’t outweigh others; balanced
approach

44.  Systematically assess the various functional areas
 Subjectively assign values to different functional
capability factors and sub-factors, along a scale
ranging from -5 to 5

46.  Based on information presented in OCP
 Picture of more critical areas which can have a
relationship with the strategic posture of the firm in
the future
 Helps in initiating line of action
 For covering gaps
 Using company’s strengths in the light of environmental
threats and opportunities
 Consider strategic alternatives at the corporate-level and
the business-level
 Exercising a strategic choice