B6: Management, Governance and Ethics Topic: Strategic Management Sub-Topic: Strategic Analysis

STRATEGIC ANALYSIS

Strategic analysis refers to the process of conducting research on a company and its operating
environment to formulate a strategy. The process involves several common factors:
1. Identifying and evaluating data relevant to the company’s strategy
2. Defining the internal and external environments to be analysed
3. Using several analytic methods such as Porter’s five forces analysis, SWOT analysis,
and PESTEL

Types of Strategic Analysis

Internal strategic analysis: Through this analysis organizations look inwards or within the organization
and identify the positive and negative points, and establish the set of resources that can be used to improve
the company’s image within the market.

SWOT analysis is one of the most reputed techniques for internal strategic analysis. There is no better
way to benefit from a strategically performed analysis than to use it to detect the strengths, opportunities,
weaknesses, and threats that your organisation may suffer.

It is essential for an organization to take into account the SWOT principle in order to be able to plan
efficiently.

1. Strengths of a company: There are several attributes within the company that are positive, that
you can control in order to obtain better results, they are your strengths, which makes you stand
out from others. Surely there are certain resources or strategies that have led to your
organization’s process year on year. Knowing these resources or strategies are also considered as
strengths. Knowing this type of information is very important because these are the elements that
give you an advantage over your competition.
2. Business weakness: It is practically impossible for an organization or a company to have only
strengths and not have weaknesses. Therefore, there are certain characteristics of an organization
that they need to be improved in order to be able to perform better and compete in the market.
These are called business weaknesses. Most of the factors are foreseeable and an organization
needs to identify them well in advance and approach the problems with a corrective measure.
3. Threats to an organization: There are going to negative factors that will affect the growth of the
organization and these factors can be analysed too. These factors need to detected and a risk
management strategy needs to be put in place so that threats like stronger brand value of the
competitors, better relationship of competitors with retailers etc. don’t have an adverse effect on
the company’s growth. Also, threats like multiple players in the market with the same products,
downturn in economy, better advertising of the same product by competitors are some threats that
have to be dealt with carefully so that competitors don’t take advantage of the situation.
4. Opportunities for the company: Detect the opportunities you have to grow. Knowing the path
organizations must follow is a great step towards success. Take advantage of all those external
factors that are positive for the organization. Identify all the opportunities and take advantage of
them.

External strategic analysis: Once the organization has successfully completed its internal analysis, the
organization needs to know about external factors that can be a hindrance in their growth. To do so, they
need to know how the market functions and how consumers react or behave to certain products or
services.

PESTEL analysis is one of the most widely used external analysis techniques. PESTEL analysis
(Political, Economic, Social, Technological, Environmental and Legal) describes a framework of macro-
environmental factors used in the environmental scanning component of external strategic analysis.

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B6: Management, Governance and Ethics Topic: Strategic Management Sub-Topic: Strategic Analysis
The PESTEL method classified those variables within the following framework:-
(i) Political
(ii) Economic
(iii) Social
(iv) Technological
(v) Environmental
(vi) Legal

1. Political
Political factors are caused by the role that the government plays in shaping the environment within which
the organization operates. They represent the nature and type of external environment within which the
organization must operate.

Political factors affecting an organization

(i) Government policies
(ii) Stability and tenure of government
(iii) Pressure groups
(iv) Government’s planned strategy

Questions for assessment (questions that an organization needs to ask itself)

(a) How does a change in the political situation affect an organization?
(b) Who will the next election?
(c) What are the political views of that party?

2. Economic
Economic factors refer to the macroeconomic factors that will shape the broader economic environment
within which the firm operates.
(a) Economic factors affecting an organization
(i) GDP
(ii) Taxes
(iii) Exchange rates
(iv) Unemployment
(v) Trade factors and tariffs
(vi) Monopolistic practices
(b) Questions for assessment (questions that an organization needs to ask itself)
(i) Is the economy towards a recession or boom?
(ii) How are the current economic conditions affecting the organization?
(iii) Are there any changes expected in the economic condition and will they have an impact on the
organization?

3. Social
Social factors refer to factors such as changing demographic pattern, changing consumer tastes and
preference and overall societal trends. They represent the tastes and demands of the external environment
within which the organization must operate.
Social factors affecting an organization
(i) Population growth
(ii) Population profile and education levels
(iii) Age and heath of the population
(iv) Disposable income levels
(v) Social trends

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Question for assessment (questions that an organization needs to ask itself)
(i) What socio-cultural factors are affecting the organization?
(ii) Will change in these factors have an impact on the organization?

4. Technological
Technological factors take into account the effect that technology has on the way an organization makes
and deliver its goods and services.
Technical factors affecting an organization
(i) Rate of change and new developments in technology
(ii) Patents granted
(iii) Diffusion of technology

Questions for assessment (questions that an organization needs to ask itself)

(i) How is technology changing?
(ii) Has the technology we are using become obsolete?
(iii) How have changes in technology affected market conditions and marketplaces?

5. Environmental
Consumers are becoming increasingly concerned with the protection on the environment in which they
live.
Environmental factors affecting an organization
(i) Trends
(ii) Penalties for abuse
(iii) Competitive advantage

Questions for assessment (questions that an organization needs to ask itself)

(i) What are the current rules and regulations affecting the organization?
(ii) What are the environmental standards published by the government?

6. Legal
Legal factors represent the legislative framework within which the organization must operate.
Legal factors affecting an organization include
(i) Employment law
(ii) Business, health and safety law, company law
(iii) Marketing laws
(iv) Monopolies/restraint of law
(v) National versus international laws

Assessment questions (question that an organization needs to ask itself)

(i) What expected or possible changes might there be in laws and regulations?
(ii) What impact could such changes have on the organization?

Porter’s Diamond
 Michael Porter, a famous Harvard business professor, made a detailed study of ten nations to learn
what leads to success and in the process, identified the determinants of national competitive
advantage.
 Competition refers to force which motivates organizations to achieve dominance or attain a reward or
goal.
 According to Porter, a nation attains a competitive advantage only when its firms are competitive.
 Porter argues that a country achieves a sustainable competitive advantage when its
companies/industries achieve a sustainable competitive advantage on a global scale.

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 There are four factors which constitute Porter’s Diamond. These factors suggest that there are
inherent reasons why some nations are more competitive than others and why some industries within
nations are more competitive than others.

These factors are as follow:

 Firm strategy, structure and rivalry
 Demand conditions
 Related and supporting industries
 Factor conditions

Overview of Porter’s five forces

 Michael Porter of Harvard University and the author of “Competitive Strategy (1980) developed the
strategic management model known as the five forces of competition which explains the five key
factors which must be analyzed when evaluating a business’s profitability in future.

 By applying the five forces model, the market factors can be analyzed so that an organization can
make a strategic assessment of its competitive position in a particular market.

An ideal industry would be one where:-

 There is little or no possibility of new organization entering because of significant barriers to entry
 Buyers will pay whatever prices the organization sets
 Suppliers will sell at whatever prices the organization sets
 There are no substitute products
 There is no competition from any other organization i.e. a monopoly exists

Sources of competition using Porter’s five forces framework

There are five main factors that influence the level of competitiveness in an industry or sector. These
factors or forces have been identified by Michael Porter in his famous “five forces” model as the:

1. Threat of potential entrants

2. Existence of substitutes
3. Bargaining power of buyers
4. Bargaining power of suppliers
5. Intensity of rivalry among existing firms.

Porter’s five forces model

1. Threat of new entrants
One of the biggest worrier for the organizations of any industry is the possibility that other firms will enter
their industry. The more firms that enter an industry, the more competitive the industry is likely to
become.

Examples of barriers to entry include:-

i. Whether existing organizations have achieved economies of scale
ii. Whether there are high capital/start-up costs.
iii. Limited access to supply/distribution channels
iv. Patent agreements
v. Access to specialized and unique skills or capabilities.

2. Threat of substitutes
The threat of substitutes depends upon the ease at which a customer can switch to an alternative product.

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What is a substitute?
A substitute is a product from one industry that can perform the same function required in another
industry. Examples include butter and margarine and ferries and low cost airlines. It is important to note
that there are different forms of substitution. These include:-
(a) Product for product substitution; It occurs because of two reasons –convergence and availability of
complementary products
(b) Substitution of need; in this instance a new product renders an existing one obsolete.
(c) Generic substitution; this occur with products/services that compete for a small portion of a
customer’s disposable income. The consumers may also decide to do without the particular product.

3. Bargaining power of buyers

If buyers have high bargaining power then an organization will be restricted in the price that it can charge
for its goods or services.

High bargaining power of buyer puts restriction

on price charged by organization

Concentration of buyers

Large volume of purchases

Low cost of switching to an

Bargaining power of buyers alternative supplier & little risk

Buyer has ability to buy from

another organization
Is likely to be high when
Buyer has the ability to produce
same product/service “in-house”

Buyers have better information

level

Buyers are aware of degree of

product differentiation in market

Buyers are aware of quality of

product of supplier & supplier’s
competitors.

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4. Bargaining power of suppliers

High bargaining power of

supplier lead to high cost of Concentration of suppliers &
inputs for organization large number of buyers

Cost of switching to an
Bargaining power of alternative supplier is
suppliers high/impractical

Is likely to be high when foward integration

5. Competitive rivalry

Competitors are in balance

The more competitive the

Competitors are opening in a
rivalry the lower the level of
mature market
profit
High fixed costs
Competitive rivalry

Many exit barriers

Is likely to be intense when
Variety of product

Competitor’s responses are

aggressive

Lifecycle mode
This model is tool to analyze the effects of an industry’s growth on competitive forces. An industry’s
evolution consists of five phases. The stages of the lifecycle model have a significant impact upon
business strategy and performance.

Phases and performance

1. Development
2. Growth
3. Shakeout
4. Maturity
5. Decline

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Development stage; there is only a few perhaps even only one organization in operation. Naturally
competition is very low or non-existent. There is little customer loyalty.

Growth stage; at this stage, competition has built up as more organizations have entered the industry.
The level of competitive behavior is not intense as the overall market is growing. Organizations do not
need to steal customers from each other to achieve growth.

Shakeout stage; at this stage, the size of the market has peaked and many more firms are now operating
in the industry. Competition intensifies are the “strong” or efficient organizations strive to drive out the
“weak” or inefficient firms.

Maturity stage; the intensity of competition remains as the market size looks set to decline. The only
way for organization remaining in the industry to increase sales in stealing market share from competing
firms. Customer loyalty is high.

Decline stage; the intensity of competition decline as more organizations decide to exit the industry given
the declining market size.

Costs involved at different stages of product life cycle

Introduction & development Cost of product design & capital equipment

stage
Stages of product life
cycle Growth & maturity stage Manufacturing marketing & selling cost

Decline stage Expert services & costs of abandonment/disposal cost

Cycle of competition
This model shows the relationship between an established firm and a new entrant. The nature of
competition that prevails in an industry is uncontrollable and each competitor will have its own influence
in the industry.

How does cycle of competition operate?

Refer in text book Pg. 37

Effects of attack by new entrant or the counter attack by existing firm

 When the new entrant or the existing firm attacks it requires a huge amount of cash and skill
 When the entrant makes an entry in a new geographical area, it involves high risk and huge costs.

Hyper competition
This concept relates to the speed of the competition cycle. If the cycle moves slowly, the competition in
an industry settles down many times in a well-established manner. On the other hand if the speed of
competition cycle is high it is called hyper-competition. This result in frequent competitive change.

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Strategic group
Strategic group can be defined as:
“Organization within an industry with similar strategic characteristics, following similar strategies or
competing on similar bases’’.
Therefore, strategic groups are the subgroups within an industry that reduce the number of competitors in
each market. Normally, each strategic group will have a similar marketing and strategic approach.

The aim of strategic group analysis (SGA) is to identify organizations with similar strategic
characteristics, following similar strategies or competing on similar bases.

These groups can be identified on the basis of the following characteristics.

i. Extent of product (or service) diversity
ii. Geographic coverage
iii. Distribution channels
iv. Extent of branding
v. Number of market segments served
vi. Marketing effort
vii. Product (or service) quality
viii. Pricing policy

Uses of strategic groups

 Members have common interests and so possess negotiating power
 Members can recognize future opportunities and threats to their organization
 Members can identify any competitive rivalry.
 Within strategic groups, it becomes possible for organizations to move from one strategic group to
another strategic group.

The mobility of an organization depends upon the entry barriers between one group and another.
Identifying the specific strategic group to which it belongs is a beneficial exercise for an organization. It
helps an organization to identify:-

 Which firms are its closest or most direct competition

 What the mobility barriers for entering a different strategic group are

 Mobility barriers are the entry barriers that have to be overcome if an organization wishes to shift
strategic position from one strategic group to another.

Market segmentation
A market segment is a group of customers who have similar needs that are different from customer needs
in other parts of the market.

(a) Need for market segmentation

(i) Understanding customers and satisfying their needs better
(ii) Identifying viable segments for example those segments where his competition is not strong
(iii) By target marketing, once a viable segment has been identified, specific marketing plans can be set
in train to meet the precise customer needs.
(iv) When the needs of customers are common, there is opportunity for adequate and clear
communication between the customers and organizations.
(v) When the market is segmented, if any need of the customer is not fulfilled then an organization can
take measures to satisfy this need by applying new methods.
(vi) When the market provides whatever is needed by the consumer, the consumer is turn is ready to pay
even a high price for it which results in a rise in the profits of the organization.

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(b) Bases of market segmentation
The consumer market is often segmented on the basis of the following characteristics:-
(i) Geographic
Market is divided on the basis of:
 Geographical region such as country, state or continent
 Type of population such as rural, urban or suburban
(ii) Behaviouralistic
It is based on the consumer behavior regarding the products. It involves x-stics such as
 User status, as whether is a first time user or a prospective user
 Customer’s readiness to buy the product
(iii) Demographic
It is made on the basis of the following
 Sex/gender
 Age group
 Income
(iv) Psychographic
Here, the segmentation is made on the basis of the consumer’s lifestyle.
 Interests
 Opinions
 Attitudes

Segmentation of industrial markets

Industrial customers purchase their requirements in large quantities. The decision to purchase the industrial products
is taken by a large group of people. Many of the variables of consumer markets also apply to industrial markets. The
other variables of segmentation are as follows:-
(i) Type of organization, whether the organization is a manufacturing or a service organization
(ii) Product or service grouping/type
(iii) Location of the organization, when the needs of particular firms is an industry are common, they come together
in a particular area.
(iv) Behavioral features, consumers in an industrial market have different patterns of purchasing companies to
consumers in a consumer market.

Analyze the current position of a business with a chosen strategy in the context of its environment based on an
assessment of its resources, processes, people, IT, products core capabilities and competences, giving
straightforward advice.

Resources and product competences

 Every organization has resources. How well an organization uses those resources help define how successful
the company will be. If the resources are deployed effectively, used innovatively and to the maximum of their
ability, a business would achieve success.
 The strategic capability of an organization is determined by its resources and competences.
 Resources represent the assets of an organization or what it owns. They can be tangible in nature such as the
physical assets of an organization such as plant, property and equipment.
 Organization also often command intangible resources that represent its non-physical assets such as brand
name, patents, staff capabilities or reputation in the marketplace.
 Competences represent what the entire organization can do. They represent all the various activities and /or
processes an organization carries out to produce its end goods and /or services.

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Therefore, there is a difference between resources and competence levels.

S/N Resources Competences

1. Resources represent the assets of an organization Competences represent what the entire
or what it owns organization can do, i.e. its skills
2. Resources may be the tangible or intangible assets Competence is necessarily intangible
which an organization has
3. Resources are assets which have to be utilized Competences are skills inherent in the activities
effectively and processes through which an organization
effectively deploys its resources.

 Threshold resources therefore are the resources that an organization needs and uses to meet the threshold
requirements of its customers.
 Threshold competences are the minimum levels of competence that an organization must possess so that it can
meet the threshold requirements of their customers.
 Core competences represent the skills and abilities an organization possesses to “get ahead of the game”. They
represent an organization’s ability to conduct business and deploy resources more efficiently and effectively
than their competitors.

Processes
 Processes represent the way an organization wants its employees to carry out the necessary work/activities to
produce its targeted goods/services.

There are six main or generic processes organizations can implement.

These are:-
1. Direct supervision - Strategy is decided by top management & employees
“Micro managed”
2. Planning processes - Strategy is determine by and reproduced in a plan/budged for
employees to follow.
3. Self-control & motivation - Employees empowered
4. Cultural processes - Work controlled by culture of organization
5. Performance targeting processes - Employees/divisions set targets for their output
6. Market processes - Relationships between individuals business units controlled by market forces

Information Technology
Strategic importance of Information technology
1. Increasingly complex nature of business
2. Monitoring business performance
3. Maintaining customer loyalty
People
‘People’ refers to the human resources, whose knowledge, abilities and skills are effectively utilized by organisations
to produce goods and services.

The following assess the human factor in organisations:-

1. Desired skill base and headcount – desired skill base and number of people to be employed would depend upon
the degree of complexity of operations and processes of an organisation.
2. Learning and growth - An organisation’s ability to innovate and create value depends upon how well its
employees are able to initiate action, learn and improve.
3. Human capital in service and knowledge - the entire operation of service and knowledge based industries is
dependent upon the skill and intellectual levels of their individual employees.
4. Structure of workforce - a right balance needs to be attained between utilizing human resources and machinery/
equipment.

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Draft an overall analysis drawing conclusions, giving advice based on given financial and non-financial data
and information from a variety of sources in a given scenario

Internal sources of information,

Internal sources refer to those sources which are within the organization e.g. various departments of the organization
such as
 Finance/account department
 Marketing/sales department
 Administration department
 Production department
 Purchase department
 Stores department
 Cost and management accounting department

External sources of information

An organization cannot work in isolation. It has to take into consideration the external environment (PESTEL)
which has a bearing on its strategies and performance. Following are the external sources of information of an
organization.

 Government (statistic given by government in various reports, journals etc.)

 International agencies e.g. World Bank, IMF etc. (global information is provided)
 National and international institution such as Chambers of Commerce.
 Securities exchange
 Market research and focus group
 Newspapers, television and other media
 Suppliers price list and other media
 Customers feedback/consumers association
 Encyclopedia/the internet
 Trade association
 Other stakeholders such as banks/financial institutes)

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