Semester – IV

Sub: STRATEGIC MANAGEMENT (LB 229)

Unit- 2 Environmental Analysis & Analysis of Internal Resources

Need, Characteristics and Categorization of Environmental Factors

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

To perform environmental analysis, a constant stream of relevant information is required to find out the best
course of action. Strategic Planners use the information gathered from the environmental analysis for
forecasting trends for future in advance. The information can also be used to assess operating environment and
set up organizational goals.

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

Advantages of Environmental Analysis

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

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

Steps Involved in Environmental Analysis

1. Identifying: First of all, the factors which influence the business entity are to be identified, to improve
its position in the market. The identification is performed at various levels, i.e. company level, market
level, national level and global level.

2. Scanning: Scanning implies the process of critically examining the factors that highly influence the
business, as all the factors identified in the previous step effects the entity with the same intensity. Once
the important factors are identified, strategies can be made for its improvement.

3. Analyzing: In this step, a careful analysis of all the environmental factors is made to determine their
effect on different business levels and on the business as a whole. Different tools available for the
analysis include benchmarking, Delphi technique and scenario building.

4. Forecasting: After identification, examination and analysis, lastly the impact of the variables is to be
forecasted.
Environmental analysis is an ongoing process and follows a holistic approach, that continuously scans the
forces effecting the business environment and covers 360 degrees of the horizon, rather than a specific segment.

Internal Environment:

Survival of a business depends upon its strengths and adaptability to the environment. The internal strengths
represent its internal environment. It consists of financial, physical, human and technological resources.
Financial resources represent financial strength of the company. Funds are allocated over activities that
maximize output at minimum cost, that is, optimum allocation of financial resources.

Physical resources represent physical assets such as plant, machinery, building etc. that convert inputs into
outputs. Human resources represent the manpower with specialized knowledge that performs the business
activities. The operative and managerial decisions are taken by the human resources. Technological resources
represent the technical know-how used to manufacture goods and services. Internal environment consists of
controllable factors that can be modified according to needs of the external environment.

External Environment:

The external environment consists of legal, political, socio-cultural, demographic factors etc. These are
uncontrollable factors and firms adapt to this environment. They adjust internal environment with the external
environment to take advantage of the environmental opportunities and strive against environmental threats.
Business decisions are affected by both internal and external environment.

1) INTERNAL ENVIRONMENTAL FACTORS

The internal environment is the environment that has a direct impact on the business. The internal factors are
generally controllable because the company has control over these factors. It can alter or modify these factors.
The internal environmental factors are resources, capabilities and culture.

i) Resources:

A good starting point to identify company resources is to look at tangible, intangible and human resources.
Tangible resources are the easiest to identify and evaluate: financial resources and physical assets are identifies
and valued in the firm’s financial statements.

Intangible resources are largely invisible, but over time become more important to the firm than tangible assets
because they can be a main source for a competitive advantage. Such intangible recourses include reputational
assets (brands, image, etc.) and technological assets (proprietary technology and know-how).

Human resources or human capital are the productive services human beings offer the firm in terms of their
skills, knowledge, reasoning, and decision-making abilities.

ii) Capabilities:

Resources are not productive on their own. The most productive tasks require that resources collaborate closely
together within teams. The term organizational capabilities are used to refer to a firm’s capacity for undertaking
a particular productive activity. Our interest is not in capabilities per se, but in capabilities relative to other
firms. To identify the firm’s capabilities we will use the functional classification approach. A functional
classification identifies organizational capabilities in relation to each of the principal functional areas.
 iii) Culture:

It is the specific collection of values and norms that are shared by people and groups in an organization and that
helps in achieving the organizational goals.

2) EXTERNAL ENVIRONMENT FACTORS

It refers to the environment that has an indirect influence on the business. The factors are uncontrollable by the
business. The two types of external environment are micro environment and macro environment.

a) MICRO ENVIRONMENTAL FACTORS

These are external factors close to the company that have a direct impact on the organizations process. These
factors include:

i) Shareholders

Any person or company that owns at least one share (a percentage of ownership) in a company is known as
shareholder. A shareholder may also be referred to as a "stockholder". As organization requires greater inward
investment for growth they face increasing pressure to move from private ownership to public. However this
movement unleashes the forces of shareholder pressure on the strategy of organizations.

ii) Suppliers

An individual or an organization involved in the process of making a product or service available for use or
consumption by a consumer or business user is known as supplier. Increase in raw material prices will have a
knock on affect on the marketing mix strategy of an organization. Prices may be forced up as a result. A closer
supplier relationship is one way of ensuring competitive and quality products for an organization.

iii) Distributors

Entity that buys non-competing products or product-lines, warehouses them, and resells them to retailers or
direct to the end users or customers is known as distributor. Most distributors provide strong manpower and
cash support to the supplier or manufacturer's promotional efforts. They usually also provide a range of services
(such as product information, estimates, technical support, after-sales services, credit) to their customers. Often
getting products to the end customers can be a major issue for firms. The distributors used will determine the
final price of the product and how it is presented to the end customer. When selling via retailers, for example,
the retailer has control over where the products are displayed, how they are priced and how much they are
promoted in-store. You can also gain a competitive advantage by using changing distribution channels.

iv) Customers

A person, company, or other entity which buys goods and services produced by another person, company, or
other entity is known as customer. Organizations survive on the basis of meeting the needs, wants and providing
benefits for their customers. Failure to do so will result in a failed business strategy.

v) Competitors

A company in the same industry or a similar industry which offers a similar product or service is known as
competitor. The presence of one or more competitors can reduce the prices of goods and services as the
companies attempt to gain a larger market share. Competition also requires companies to become more efficient
in order to reduce costs. Fast-food restaurants McDonald's and Burger King are competitors, as are Coca-Cola
and Pepsi, and Wal-Mart and Target.

vi) Media

Positive or adverse media attention on an organizations product or service can in some cases make or break an
organization. Consumer programmes with a wider and more direct audience can also have a very powerful and
positive impact, forcing organizations to change their tactics.

b) MACRO ENVIRONMENTAL FACTORS

An organization's macro environment consists of nonspecific aspects in the organization's surroundings that
have the potential to affect the organization's strategies. When compared to a firm's task environment, the
impact of macro environmental variables is less direct and the organization has a more limited impact on these
elements of the environment.

The macro environment consists of forces that originate outside of an organization and generally cannot be
altered by actions of the organization. In other words, a firm may be influenced by changes within this element
of its environment, but cannot itself influence the environment. The curved lines in Figure 1 indicate the
indirect influence of the environment on the organization.

Macro environment includes political, economic, social and technological factors. A firm considers these as part
of its environmental scanning to better understand the threats and opportunities created by the variables and
how strategic plans need to be adjusted so the firm can obtain and retain competitive advantage.

i) Political Factors

Political factors include government regulations and legal issues and define both formal and informal rules
under which the firm must operate. Some examples include:

 tax policy
 employment laws
 environmental regulations
 trade restrictions and tariffs
 political stability
ii) Economic Factors

Economic factors affect the purchasing power of potential customers and the firm's cost of capital. The
following are examples of factors in the macro-economy:

 economic growth
 interest rates
 exchange rates
 inflation rate
iii) Social Factors

Social factors include the demographic and cultural aspects of the external macro environment. These factors
affect customer needs and the size of potential markets. Some social factors include:
  health consciousness
 population growth rate
 age distribution
 career attitudes
 emphasis on safety
iv) Technological Factors

Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence
outsourcing decisions. Some technological factors include:

 R&D activity
 automation
 technology incentives
 rate of technological change

Approaches and Techniques Used for Environmental Scanning

The external environment in which an organization exists consists of a bewildering variety of factors. These
factors are events, trends, issues and expectations of different interested groups. Events are important and
specific occurrences taking place in different environmental sectors.

Trends are the general tendencies or the courses of action along which events take place. Issues are the current
concerns that arise in response to events and trends. 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 eve trends, issues and expectations on its strategic management process. Similarly any organization-
facing environment as a complex the scanning is absolutely essential, and strategists have to deal cautiously
with process environmental scanning.

The effort has to be to deal with it is such a manner that unnecessary time and effort is not expended, while
important facts are not ignored. For this to take place, it is important to devise an approach or a combination of
different approaches, to environmental scanning.

Approaches to Environmental Scanning Process

The experts have suggested three approaches, which could be adopted for, sort out information for
environmental scanning.

1. Systematic Approach:

Under this approach, information for environmental scanning is collected systematically. Information related to
markets and customers, changes in legislation and regulations that have a direct impact on an organization’s
activities, government policy statements pertaining the organization’s business and industry, etc, could be
collected continuous updating such information is necessary not only for strategic management but also for
operational activities.
2. Ad hoc Approach:

Using this approach, an organization may conduct special surveys and studies to deal with specific
environmental issues from time to time. Such studies may be conducted, for instance, when organization has to
undertake special projects, evaluate existing strategy or devise new strategies. Changes and unforeseen
developments may be investigated with regard to their impact on the organization.

3. Processed-form Approach:

For adopting this approach, the organization uses information in a processed form available from different
sources both inside and outside the organization. When an organization uses information supplied by
government agencies or private institutions, it uses secondary sources of data and the information is available in
processed form.

Sources of Information:

A company can obtain information from different sources, but it should be ensured that the information is
correct. The correct source should be tapped for specific information for more accuracy. Information received
form secondary sources may sometimes even misguide strategy managers.

Hence it is important that information should be verified for correctness before it is processed and decisions are
taken based on it.

The various sources from where information can be gathered include:

1. An internal document viz, files, records, management information system, employees, standards, drawings,
charts, etc.

2. Trade directories, journals, magazines, newspapers, books, newsletters, government publications, annual
reports of companies, case studies, etc.

3. Internet, television, radio news etc.

4. External agencies like customers, suppliers, inspection agencies, marketing intermediaries, dealers,
advertisers, associations, unions, government agencies, share holders, competitors, etc.

5. Market research reports, consultants, educational institutions, testing laboratories etc.

6. Spying considered as a powerful way of extracting information from other companies.

It is found that chronological order of information is also quite important for strategy managers. Usually
information received from government agencies is quite complex since processing takes more time. The
information received from competitors is quite expensive but it is usually fresh and is quite useful.

Techniques Used for Environmental Scanning:

The techniques used for environmental scanning may be either very systematic to intuitive. Selection of a
technique depends on data required, source of data, timelines of information, relevance, cost of information,
quantity, quality and availability of information, etc.
Some of the methods widely used can be categorized as follows: Scenario Writing, Simulation, Single Variable
Extrapolation, Morphological Analysis, Cross Impact Analysis, Field Force Analysis, Game Theory, etc. The
techniques are either statistical or mathematical in nature. However, judgmental and institutive techniques are
also widely used.

The entire process consists of following steps:

1. Major events and trends in environment are studied.

2. A cause and effect relationship established with regard to events and trends for long and short term. This is
done through brain storming in a group.
3. Diagrams showing interrelationships amongst various factors are prepared and an attempt is made to
quantify the results.
4. The study is reviewed by a group of experts who deliberate on each aspect and on the possible strategies
that may be decided.

Structural Analysis of Competitive Environment

A company must remain competitive by being more innovative, having more to offer, and exceeding customer
expectations than its direct competitors. It is crucial to keep one's head rotating throughout this process. It is the
primary purpose of competitive analysis to discover precisely what your competitors are doing. A competitive
environment also has a positive effect on customers. Businesses often offer high-quality goods at an affordable
price to win the attention of consumers. Besides, companies have to bring out their products through
innovations. However, competition can sometimes complicate the existence of a business. Let's take two
companies within one location, for example. If one of them sets low prices and discounts, it will be difficult for
the second company to compete.

Types of Competitive Environment

It's essential to understand what types of competitive environments there are to assess the economic
environment in business. You should know how companies and markets function so that you can analyze
industry and market news, policy changes, and legislation in the future. Let's distinguish the main types of
competitive environments and review each of them in detail.

 Pure competition. In a perfectly competitive environment, many small companies produce similar
products, and many consumers buy them. These manufacturers are small, and thus they can't influence
the price, defined by supply and product demand. For example, when a farmer brings dairy products to
the local market, this person can't change the market price and agrees with the going one.

 Monopolistic competition. In this environment, many manufacturers produce different products,

although they might serve the same purpose. Customers can distinguish the products because of the
differences in quality, features, etc. Businesses actively use advertising to promote their products and
convince consumers that they are not like other products and have better quality. Companies in
monopolistic competition are price makers, which mean that they can influence the product price.
However, to justify the price increase of their products, they should offer something exclusive to be
unlike other businesses, for example, improve the quality of their goods.
  Oligopoly. In this market model, there's a small number of businesses, usually two or more. It's
considered stable as companies don't compete but collude to obtain high market returns. Firms set and
keep prices high together or under the leadership of one particular company. In an oligopoly, profit
margins are higher than in a more competitive environment. However, the main problem of this market
structure is that businesses often face a prisoner's dilemma, an incentive to cheat and act in their interests
at the expense of other companies.

 Monopoly. There's one company that produces a unique product. This manufacturer doesn't face any
competition, and the product doesn't have any substitutes. Also, a monopolist decides on the product's
price and sets barriers for new companies to enter the market.

Perfect competition, monopolistic competition, oligopoly, and monopoly are the four main market structures
you should be aware of when entering the market. Now it's time to move to the competitive environment
analysis.

Competitive Environment Analysis

To develop a great marketing strategy, you need to understand your competitors and their tactics. At this point,
you need a competitive analysis framework to reach your business opponents. Let's discuss several most
popular frameworks.

 SWOT Analysis. You can assess the external and internal factors that influence your company. This
framework helps you identify competitive advantages, compare your opponents' strong and weak sides
on different marketing channels, and define your further marketing steps.

 Strategic Group Analysis. This framework characterizes the strategies of all strong competitors in
various strategic dimensions. It allows you to identify your competitors' positions in the competitive
environment and the factors that bring your business a profit. It also enables you to identify the key
aspects of success and assess your position among competitors.

 Porter's Five Forces. The basis of this framework lies in exploring the competitive market forces in the
industry and helping define the industry's strengths and weaknesses. It involves five elements: new
entrants, buyers, suppliers, substitutes, and competitive rivalry. These five influence the level of
competition in your industry.

 Growth-Share Matrix. By using this framework, you can decide which products are worth investing in
according to their competitiveness and attractiveness within the market. It's particularly useful for large
companies since it helps them define their product portfolios and decide which products are worth
continuing to invest in and which are no longer worth it.

 Perceptual Mapping. This framework allows you to see the position of your product against the
alternatives of your competitors. It enables you to understand how your customers perceive your product
compared to competitors' and whether your positioning strategy matches your target audience. It can
also help you find the gaps you need to resolve.

Undoubtedly one of the major contributions in recent years to our understanding of the ways in which the
competitive environment influences strategy has been provided by Porter. Porter’s works is based on the idea
that competition in an industry is rooted in its underlying economics, and competitive forces that go well
beyond the established combatants in a particular industry. Porter has also emphasized that the first determinant
of a firm’s profitability is the attractiveness of the industry in which it operates.

Take the example of India’s booming retailing industry. Organized retailing m India occupies only 3 per cent of
the total market volume (which is estimated to be around Rs. 8 lakh crores annually). Organized retailing is
currently growing at 30 per cent per annum.

The second determinant is competition: here the average shopper spends 45 per cent of his/her monthly budget
on food and grocery items and no national brands are operating except Food-world and Spencer that too in a
fistful of places like Bangalore, Hyderabad, Chennai, Kolkata and Mumbai. In this scenario a company like
Reliance considered its market position and ventured into retailing as part of its diversification strategy.

The second central question in competitive strategy is a firm’s relative position within its industry. Positioning
determines whether a firm’s profitability is above or below the industry average Here Reliance Fresh should
take Fab mall, Big Bazaar, Subhiksha, Apna Bazaar, Monday to Sunday, Daily Fresh (family mart), Kovai
Fresh, Namdhari Fresh, Food-world and Spencer’s into consideration while framing its positioning strategy in
the south. The basis of above average performance by Reliance Fresh is the sustainable competitive advantages
gained through contract farming and backward integration with suppliers by providing stable bulk business.

This is what led Porter to suggest that the nature and intensity of competition within any industry is
determined by the interaction of five key forces:

1. The threat of new entrants

2. The power of buyers

3. The threat of substitutes

4. The extent of competitive rivalry and

5. The power of suppliers

Competition at various levels:

It is possible to see competition operating at four levels:

1. Competition consists only of those companies offering a similar product or service to the target market,
utilizing a similar technology, and exhibiting similar degrees of vertical integration, e. g Reebok, Adidas and
Nike (in sportswear and shoes).

2. Competition consists of all companies operating in the same product or service category Malls like Garuda
and Forum in Bangalore; PVR Cinema and Innox in theatres, banks like HDFC, ICICI and SBI with their retail,
corporate and investment banking service; and insurance companies like HDFC Life, SBI Life, ICICI Prudential
and ICICI Lombard.

3. Competition consists of all companies manufacturing or supplying products which deliver the same service
(Nokia, Motorola and Sony Ericsson in the GSM handset market).

4. Competition consists of all companies for cornering the same spending power of the target group (Visa and
MasterCard) while making electronic payment either through credit or debit card. This may be for various
purpose like travel ticket, hotel and utility bills and so on.
It should be apparent from above that marketing strategies need not only identify those competitors who reflect
the same general approach to the market, but also consider those who ‘interact’ the with company suppliers in
each market, who possibly approach it from a different perspective, and who ultimately might pose either a
direct or an indirect threat.

As part of this, one need also to identify potential new entrants to the market and, where it appears necessary,
develop contingency plans to neutralize their competitive effect. Taking all facts into consideration, this leads to
two distinct viewpoints on competition: the industry point of view and the market point of view.

ETOP a diagnosis tool

The Environmental factors are quite complex and it may be difficult for strategy managers to classify them into
neat categories to interpret them as opportunities and threats. A matrix of comparison is drawn where one item
or factor is compared with other items after which the scores arrived at are added and ranked for each factor and
total weight age score calculated for prioritizing each of the factors. This is achieved by brainstorming. And
finally the strategy manger uses his judgment to place various environmental issues in clear perspective to
create the environmental threat and opportunity profile.

Although the technique of dividing various environmental factors into specific sectors and evaluating them as
opportunities and threats is suggested by some authors, it must be carefully noted that each sector is not
exclusive of the other. Each of the major factors pertaining to a particular sector of environment may be divided
into sub-sectors and their effects studied. The field force analysis goes hand in glove with ETOP, as here also
the contribution with regard to opportunities and threats posed by the environment is also a necessary part of
study.

ETOP Preparation:

The preparation of ETOP involves dividing the environment into different sectors and then analyzing the impact
of each sector on the organization. A comprehensive ETOP requires subdividing each environmental sector into
sub factors and then the impact of each sub factor on the organization is described in the form of a statement.

Though the market environment would still be favourable, much would depend on the extent to which the
company is able to ensure the supply of raw materials and components, and have access to the latest technology
and have the facilities to use it. The preparation of an ETOP provides a clear picture for organization to
formulate strategies to take advantage of the opportunities and counter the threats in its environment.

The strategic managers should keep focus on the following dimensions,

1. Issue Selection:

Focus on issues, which have been selected, should not be missed since there is a likelihood of arriving at
incorrect priorities. Some of the impotent issues may be those related to market share, competitive pricing,
customer preferences, technological changes, economic policies, competitive trends, etc.

2. Accuracy of Data:
Data should be collected from good sources otherwise the entire process of environmental scanning may go
waste. The relevance, importance, manageability, variability and low cost of data are some of the important
factors, which must be kept in focus.

3. Impact Studies:

Impact studies should be conducted focusing on the various opportunities and threats and the critical issues
selected. It may include study of probable effects on the company’s strengths and weaknesses, operating and
remote environment, competitive position, accomplishment of mission and vision etc. Efforts should be taken to
make assessments more objective wherever possible.

4. Flexibility in Operations:

There are number of uncertainties existing in a business situation and so a company can be greatly benefited by
devising proactive and flexible strategies in their plans, structures, strategy etc. The optimum level of flexibility
should be maintained.

SWOT Analysis

It is the most renowned tool for audit and analysis of the overall strategic position of the business and its
environment. Its key purpose is to identify the strategies that will create a firm specific business model that will
best align an organization’s resources and capabilities to the requirements of the environment in which the firm
operates.

In other words, it is the foundation for evaluating the internal potential and limitations and the probable/likely
opportunities and threats from the external environment. It views all positive and negative factors inside and
outside the firm that affect the success. A consistent study of the environment in which the firm operates helps
in forecasting/predicting the changing trends and also helps in including them in the decision-making process of
the organization.

An overview of the four factors (Strengths, Weaknesses, Opportunities and Threats) is given below-

1. Strengths - Strengths are the qualities that enable us to accomplish the organization’s mission. These
are the basis on which continued success can be made and continued/sustained.

Strengths can be either tangible or intangible. These are what you are well-versed in or what you have expertise
in, the traits and qualities your employees possess (individually and as a team) and the distinct features that give
your organization its consistency.

Strengths are the beneficial aspects of the organization or the capabilities of an organization, which includes
human competencies, process capabilities, financial resources, products and services, customer goodwill and
brand loyalty. Examples of organizational strengths are huge financial resources, broad product line, no debt,
committed employees, etc.

2. Weaknesses - Weaknesses are the qualities that prevent us from accomplishing our mission and
achieving our full potential. These weaknesses deteriorate influences on the organizational success and
growth. Weaknesses are the factors which do not meet the standards we feel they should meet.
Weaknesses in an organization may be depreciating machinery, insufficient research and development facilities,
narrow product range, poor decision-making, etc. Weaknesses are controllable. They must be minimized and
eliminated. For instance - to overcome obsolete machinery, new machinery can be purchased. Other examples
of organizational weaknesses are huge debts, high employee turnover, complex decision making process,
narrow product range, large wastage of raw materials, etc.

3. Opportunities - Opportunities are presented by the environment within which our organization
operates. These arise when an organization can take benefit of conditions in its environment to plan and
execute strategies that enable it to become more profitable. Organizations can gain competitive
advantage by making use of opportunities.

Organization should be careful and recognize the opportunities and grasp them whenever they arise. Selecting
the targets that will best serve the clients while getting desired results is a difficult task. Opportunities may arise
from market, competition, industry/government and technology. Increasing demand for telecommunications
accompanied by deregulation is a great opportunity for new firms to enter telecom sector and compete with
existing firms for revenue.

4. Threats - Threats arise when conditions in external environment jeopardize the reliability and
profitability of the organization’s business. They compound the vulnerability when they relate to the
weaknesses. Threats are uncontrollable. When a threat comes, the stability and survival can be at stake.
Examples of threats are - unrest among employees; ever changing technology; increasing competition
leading to excess capacity, price wars and reducing industry profits; etc.

Key Distinction—Internal and External Issues:

Strengths and weaknesses are internal factors. For example strength could be your specialist marketing
expertise. A weakness could be the lack of consumer expectation. Opportunities and threats are external factors.
For example, an opportunity could be a developing distribution channel such as the internet, or changing
consumer lifestyles that potentially increase demand for a company’s products. A threat could be a new
competitor in an important existing market or a technological change that makes existing products potentially
obsolete.

It is worth pointing out that SWOT analysis can be very subjective—two people rarely come-up with the same
version of a SWOT analysis even when given the same information about the same business and its
environment. Accordingly, SWOT analysis is best used as a guide and not a prescription. Adding and weighing
criteria to each factor increases the validity of the analysis.

Areas to Consider:

Some of the key areas to be considered when identifying and evaluating strengths, weaknesses, opportunities
and threats are listed in the example SWOT analysis below:

Positive Negative

Strengths Weaknesses

i. Technological skills i. Absence of important

skills
ii. Leading Brands ii. Weak brands

iii. Distribution channels iii. Poor access to

distribution

iv. Customer Loyalty/Relationship iv. Low customer

retention

v. Production quality v. Unreliable

product/service

vi. Scale vi. Sub-scale

vii. Management vii. Management

Opportunities Threats

i. Changing customer tastes i. Changing customer

tastes

ii. Liberalization of geographic ii. Closing of geographic

markets markets

iii. Technological advances iii. Technological

advances

iv. Changes in government politics iv. Changes in

government politics

v. Lower personal taxes v. Tax increases

vi. Change in population age- vi. Change in population

structure age-structure

vii. New distribution channels vii. New distribution

channels.

Matching strengths and weaknesses with opportunities and threats requires that a firm should direct its strengths
towards exploiting opportunities and blocking threats while minimizing exposure of its weaknesses at the same
time.

Resource Audit

Audit conducted to understand the strengths or weaknesses of the resource base of a firm is called a resource
Audit. In other words, the quality of resources available to implement the strategy can be known though
resource audit. Strategic capability can be better understood through resource audit.

Types of Resource Audit

The resource base includes

 1. Physical resources,

2. Human resources,

3. Financial resources and

4. Intangibles.

1. Audit of Physical Resources

The audit of the physical resources includes listing of physical resources like machines, building, equipment etc,
their age, condition of work, life span, capabilities, location etc.

2. Audit of Human Resources

Human resource audit includes assessing, verifying and listing out the number of employers, their skill
inventory, age inventory, qualification-wise inventory, knowledge wise inventory and capability-wise
inventory.

3. Audit of Financial Resource

Financial resource audit includes analysis and listing out sources and uses of financial resources, capital
structure, working capital, accounts receivables, control of debtors and creditors, relationship among
shareholders, bankers, debenture holders etc.

4. Audit of Intangibles

The resource audit exercise should not forget the intangibles. Intangibles have value like goodwill. Goodwill
plays vital role in service-oriented organizations, retail organizations etc. Good will is represented by the brand
image, customer loyalty, congenial contacts and relations, public image about the firm, quality and reliable
service etc.

General Guidelines on Resource Audit

1. The Resource audit should take into considerations all resources necessary for the implementation of the
strategy.

2. The audit should not restrict to the legally recognized assets.

3. The Resource audit should also consider the resources/assets outside the organization. These assets include
networks, contacts with the customers, dealers, suppliers etc.

4. The Resource audit should also point out the organization’s distinctive capabilities in addition to the
resources necessary for strategy implementation.

Strategic Advantage Analysis

Strategic advantage analysis looks at positive points that differentiate our business from competitors. This
may be brand, a particular blue-chip supplier locked into long-term contract with us, geographic location,
intellectual property and so on.
Strategic advantage analysis would look what unique strengths the company has, and whether these strength
are likely to be sustainable, that is long-term.

For example, ownership of more sophisticated equipment than competitors have is not a STRATEGIC
advantage, because competitors can buy this equipment tomorrow.

Whereas unique brand message or a patented technology is something that is difficult to replicate and therefore
constitutes not only short-term, but also strategic competitive advantage.

Strategic analysis is about looking at what is happening outside your organization now and in the future. It asks
two questions:

 How might what’s happening affect you?

 What would be your response to likely changes?

It’s called strategic because it’s high level, about the longer term, and about your whole organization.

It’s called analysis because it’s about breaking something that’s big and complex down into more manageable
chunks.

The focus is external because factors outside your organization have a powerful influence on it. Increasingly
organizations appreciate that they can learn to manage their response to those influences, rather than assume
there is nothing they can do.

It’s part of the overarching process of strategic planning. Strategic analysis boosts organizational effectiveness.
Strategic analysis helps to:

 Anticipate what might happen

 Evaluate how likely it is to happen

 Prepare for it happening

Strategic analysis will lead to clearer more relevant goals, better quality decisions, and a more secure future as
you are better prepared for what will happen.

Otherwise known as “external environmental analysis” it is a key step in strategic planning. It is the link
between getting your overall direction right and making the right decisions. You will make better decisions if
you understand the influences from the outside world to which you might have to respond in the future.

Many funders are reassured by strategic analysis because they know that organizations that are well prepared
for their future are more likely to use grants, donations and loans to greatest advantage and to maximize the
difference their organization makes.

The cost of not doing at least a small amount of strategic analysis means missed opportunities (some call this
‘opportunity cost’ – the cost of not doing something). If you don’t do strategic analysis you risk being left
behind, missing opportunities for beneficiaries.
Value Chain Analysis

The value chain is a conceptual model that represents business activities to manufacture new products and
depict strategies to succeed in the market. It involves everything starting from initial production, marketing,
final delivery to after-sales customer services. Value chain analysis determines the success of any business
product. It gives details about every process related to the creation of a new product or service.

Every small and large transaction must create some value if you want a profitable business. The value can either
be the customer's trust in the company or satisfaction from using new products, or the profit made by the
business. Value chain evaluates your business value and profit. It shows you the good strategies for your
business and creates new ideas to get more sales by keeping customers' trust.

Value chain analysis is important if you are trying to create a new product for your business. It helps you cover
every little detail. It even gives you information about the raw materials you are going to use for your product. It
enables you to turn your business ideas into reality. With its help, your business can profit from products by
keeping the cost at a minimum.

Value chain analysis is a process of dividing various activities of the business in primary and support activities
and analyzing them, keeping in mind, their contribution towards value creation to the final product. And to do
so, inputs consumed by the activity and outputs generated are studied, so as to decrease costs and increase
differentiation.

Value chain analysis is used as a tool for identifying activities, within and around the firm and relating these
activities to an assessment of competitive strength.

Value chain analysis is a strategy tool used to analyze internal firm activities. Its goal is to recognize, which
activities are the most valuable (i.e. are the source of cost or differentiation advantage) to the firm and which
ones could be improved to provide competitive advantage. In other words, by looking into internal activities,
the analysis reveals where a firm’s competitive advantages or disadvantages are. The firm that competes
through differentiation advantage will try to perform its activities better than competitors would do. If it
competes through cost advantage, it will try to perform internal activities at lower costs than competitors would
do. When a company is capable of producing goods at lower costs than the market price or to provide superior
products, it earns profits.

M. Porter introduced the generic value chain model in 1985. Value chain represents all the internal activities a
firm engages in to produce goods and services. VC is formed of primary activities that add value to the final
product directly and support activities that add value indirectly.

Value Chain Analysis is grouped into primary or line activities, and support activities discussed as under:

1. Primary Activities: The functions which are directly concerned with the conversion of input into output
and distribution activities are called primary activities. It includes:

o Inbound Logistics: It includes a range of activities like receiving, storing, distributing, etc.
which make available goods and services for operational processes. Some of those activities are
material handling, transportation, stock control, etc.

o Operations: The activity of transforming input raw material to final product ready for sale, is
termed as operation. Machining, assembling, packaging are the activities covered under
operations.

o Outbound Logistics: As the name suggests, the activities that help in collecting, storage and
delivering the product to the customer is outbound logistics.

o Marketing and Sales: All the activities like advertising, promotion, sales, marketing research,
public relations, etc. performed to make the customer aware of the product or service and create
demand for it, comes under marketing.

o Service: Service means service provided to the customer so as to improve or maintain the value
of the product. It includes financing service, after-sales service and so on.

2. Support Activities: Those activities which assist primary activities in accomplishment, are support
activities. These are:

o Procurement: This activity serves the organization, by supplying all the necessary inputs like
material, machinery or other consumable items, that required by the organization for performing
primary activities.

o Technology Development: At present, technology development requires heavy investment,

which takes years for research and development. However, its benefits can be enjoyed for several
years and by a multitude of users in the organization.

o Human Resource Management: It is the most common plus important activity which excel all
primary activities of the organization. It encompasses overseeing the selection, retention,
promotion, transfer, appraisal and dismissal of staff.

o Infrastructure: This is the management system, which provides, its services to the whole
organization and includes planning, finance, information management, quality control, legal,
government affairs, etc.
In the fast paced world, the main focus of the organization is customer satisfaction, and value chain analysis is
the technique that helps to attain that level. Under this, each business activity is considered as essential, which
contributes value and is constantly analyzed, to increase value as regards the cost incurred.

Benefits of Value Chain Analysis

Value chain analysis is often called the value chain management since it encompasses the monitoring and
control of all the underlying activities to create a competitive advantage. As such, we can gain lots of benefits
from it. Some of the benefits of effective value chain management are:

 Better product-planning, research & development by creating cross-platform teams;

 Standardization of processes by measuring the metrics of the business;

 Reduction in cost by optimizing the value chain components or activities;

 Improved flow of materials and products through accurate forecasting of sales as well as demands;

 Improvement in after-sales services and customer support through coordinated operations.

Methods of Analysis and diagnosing Corporate Capabilities

Resources have been a strategic important in organizational analysis. They can be;

Available resources: They are developed resources into various functions of the organization. They are
physical, human, financial and intellectual resources.

Threshold resources: They are needed to stay in business. Their need tends to rise with time.

Unique resources: They are valuable, rare, no-substitutable and costly to imitate.

Resources development assessment is used to judge:

 Need to change current resources to reach threshold level for staying in business.

 Requirements of unique resources to sustain strategic resources.

 Combination of unique resources and core competencies. It is used to again strategic advantage. This is
the desired combination.

 Combination of unique resources and threshold competencies. Unique resources are freed up to invest in
functional activities that provide core competencies.

 Combination of threshold resources and core competitors. More resources are deployed in functional
activities that provide core competitors.

 Combination of threshold resources and threshold competencies. Environmental changes have made the
resources base redundant. Such resources are disposed of. This is the worst scenario.

The principal purpose of analysis for strategic planning is to identify the major opportunities and threats a
business unit faces in the future and to identify the skills around which it can develop a strategic intelligence
plan to exploit the opportunities and negotiate around the threats. Hofer and Schendel felt that the major
weakness with the General Electric business screen was that it didn’t effectively depict the positions of new
businesses that are just starting to grow in new industries. They suggested in 1975 that changes in basic
competitive positions are easier to accomplish at certain stages in the evolution of an industry than others. The
Boston Consulting Group also alluded to this with their assumption that market growth was related to life cycle
and was used as the one axis on their matrix. The competitive position / market evolution matrix was developed
in the late 1970s by Charles W. Hofer and Dan Schendel.

This method takes into account the key factors affecting organizational functioning. Information regarding the
key factors is generally collected after a series of meetings discussions and surveys. Answers in each functional
area are being closely examined with a view to rate the key factors. The relative impact of each
factor (favorable or unfavorable) on a particular result is also examined using mathematical models.

Hofer and Schendel have developed this technique to make a comparative analysis of a firm’s own resources
deployment position and focus of efforts with those of competitors. First the technique requires the preparation
of a matrix of functional areas with common features. For e.g. focus of financial outlay, physical resources,
organizational systems and technological capability.

Second a matrix is prepared showing deployment of resources and focus of effort over a period of time. This
profile shows how key functional areas stand in relation to each other and as compared to the competitors with
regard to deployment of resources and the focus of efforts in each functional area.

The matrix can be shown thus: The matrix gives data pertaining to resources deployment in various functional
areas over a period of time. It also shows how the focus of efforts has changed within a time frame. Strategies
can draw their own conclusions based on past experience, current trends and future expectations. They can find
out whether the firm is able to strengthen the areas of advantage or dissipate its energies over a period of time.
While drawing comparisons it is advisable to compare firms, which are in the same phrase of product life cycle.