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Strategic management mod 2/unit 2

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Strategic management mod 2/unit 2

  1. 1. 1 UNIT II: Environmental Scanning - External and internal analysis – SWOT – industry analysis- resource based view and value chain analysis - core competency and competitive advantage - VRIO model. MEANING OF BUSINESS ENVIRONMENT Business Environment consists of all those forces both internal and external that affect the working of a business. It refers to the conditions, forces, events and situations within which business enterprises have to operate. Business and its environment are closely related and the effectiveness of interaction of the two determines the success or failure of a business. COMPONENTS OF BUSINESS ENVIRONMENT The business environment can be broadly divided into two groups A. Internal Environment B. External Environment 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
  2. 2. 2 v) Competitors vi) Media 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. Macro environment includes political, economic, social and technological factors. i) Political Factors ii) Economic Factors iii) Social Factors iv) Technological Factors A. Internal Environment 1. Management Philosophy The management philosophy greatly influences the working of business firm. The management may adopt a traditional philosophy or a professional philosophy. Nowadays business firms need to adopt professional approach. A proper analysis of internal environment will reveal the weaknesses of the traditional approach and force the management to adopt a professional approach. 2. Mission and Objectives It is always advisable to frame a mission statement and then to list out the various objectives. An analysis of internal environment will enable the firm to find out whether the objectives are in line with the mission statement and whether the objectives are accomplished or not. 3. Human Resources The survival and success of the firm largely depends on the quality of human resources. An analysis of internal environment in respect of human resources would reveal the shortcomings of human resources and as such measures can be taken to correct such weaknesses. 4. Physical Resources Physical resources include machines, equipments, building, furniture etc. A firm needs adequate and quality physical resources. An analysis of the internal environment may reveal the weaknesses of the physical resources and company can take appropriate measures to correct such weaknesses. 5. Financial Resources A firm needs adequate working capital as well a fixed capital. There is a need to have proper management of working capital and fixed capital. An analysis of the internal environment will help to make optimum use of available funds as well as to raise additional funds.
  3. 3. 3 6. Corporate Image A firm should develop, maintain and enhance a good image in the minds of the employees, investors, customers and others. Poor corporate image is a weakness. An analysis of the internal environment enables the firm to build good public image. 7. Research and Development facilities If the organization has adequate research and development facilities, it is in a position to innovate, introduce new products and services continuously. This enable the firm to remain ahead of the competition 8. Internal Relationship There should be a proper flow of vertical and horizontal communication i.e. between superiors and subordinates and between colleagues at the same level. A free flow of ideas enables a healthy relationship between colleagues. B. External Environment External environment includes all those factors and forces which are external to the business organization. These include factors such as economic, socio-cultural, legal, demographic etc. These factors are beyond the control the company. 1. Demographic Environment Demographic environment studies human population with reference to its size, density, literacy rate, sex-ratio, age composition etc. These factors affect the demand for good and services, quantity and quality of production, distribution etc. e.g. a rapidly growing population indicates growing demand for many products. 2. Natural Environment Business firms use natural resources like water, land, iron, crude oil etc. All business units are directly or indirectly dependent upon natural environment. Business firms are responsible for ecological imbalance. So they should take necessary measures to control pollution. Business operations have caused considerable changes in ecological balance and natural environment of the country. The applications of modern technology in industry leads to rapid economic growth at a huge social cost a measured by the deterioration of physical environment i.e. air pollution, water pollution, noise pollution etc. So a business enterprise has to calculate net social cost of its venture. 3. Economic Environment A business firm closely interact with its economic environment. Economic environment is generally related to those external forces, which have direct economic effect upon business. Economic environment is a sum total of a. Economic conditions in the market b. Economic policies of the government c. Economic system of the country. a. Economic conditions
  4. 4. 4 It includes nature of economy, the stage in economic development, national income, per capita income etc. These operate in the market and influence the demand and supply of goods and services. b. Economic policies Economic policies mean policies formulated by the government to shape the economy of the country. These include monetary and fiscal policies, export-import policy, industrial policy, licensing policy, budgetary policy etc. The economic policies of the government affect the business. This impact may be positive or negative e.g. liberation of the economy has adversely affected the small scale industry in India. c. Economic systems Economic systems mean the classification of economies on the basis of role of the government in the functioning of the economy. Economic system can be classified as  Capitalist Economy– There exists least government control in regulating the working of a market. E.g. U.S.A.  Socialist Economy– The government has major control over all activities e.g. China.  Mixed Economy– It combines the features of both capitalist and socialist economy where both private and public sector play an equally important role e.g. India. 4. Legal Environment / Regulatory Environment Legal environment includes laws, which define and protect the fundamental rights individuals and organizations. It creates a framework of rules and regulations within which business units have to operate. Business firm must have up to date and complete knowledge of the laws governing production and distribution of goods and services. Some of the important laws are Indian Companies Act, 1956 The Consumer Protection Act, 1986 The MRTP Act, 1969. 5. Political Environment It refers to the influence exerted by 3 political institutions namely the legislature, the executive and the judiciary in developing and controlling business activities. Business decisions are greatly influenced by the developments in the political environment. A change in the government brings about a change in attitude, preference, objectives etc. Business firms need to keep a track of all political events, anticipate changes in government policies and frame production and marketing strategies accordingly. 6. Cultural Environment Every society has a culture of its own. Culture includes knowledge, belief, art, morals, laws, customs and other capabilities and habits acquired by an individual as a member of society. Cultural values are passed on from one generation to another. Culture thus determines the types of goods and services a business should produce. Business should realize the cultural differences and bring out products accordingly. 7. Technological Environment
  5. 5. 5 Technology is the systematic application of scientific or other organized knowledge to practical tasks. Technological advancement makes it possible to improve the quality of products, increase the output and decrease the cost of product. Technological changes are rapid and to keep pace with it, businessmen need to be alert and flexible in order to quickly incorporate them in their business organization so as to survive and succeed in the competitive business world. 8. International Environment The international environment is an outcome of political and economic conditions in the international market. Business firms engaged in the foreign trade are more affected by the changes in the international environment factors like war, civil disturbances, political instability, changes in trade policies in other countries with which India has trading links do affect Indian exporters and importers. Therefore, business firms, which cater to foreign trade must constantly monitor implications of international environment on their business. The components of international environment are o Import and Export policy of a country. o Rules and regulations laid down by International Institutions like IMF, World Bank etc. o The policies of trading blocks like SAARC, EEC, ASEAN etc. o Foreign exchange regulations like tariffs, quotas. o Trade cycle like boom, recession at world level ENVIRONMENT ANALYSIS Environmental Analysis is the process by which corporate planners monitor the economic, governmental, supplier technological and market settings to determine the opportunities for and threats to their enterprise. The importance of Environmental Analysis lies in its usefulness for evaluating the present strategy, setting strategic objectives and formulating strategies. Environmental Analysis gives the strategic manager time to anticipate opportunities and to plan alternative responses to those opportunities. It also helps them to develop an early warning system to present threats or develop strategies, which can turn a threat to the organizations advantage Scanning of environment is necessary before the planning exercise is carried out. Also the behavior of the environment has to be understood as the response depends upon these behavior situations. Environmental scanning is understood in simple words by an example where a boy has to cross a busy road in a metro city in reaching a goal and he tries to have a visual scan, looks for an opportunity, which he may be able to use or not, analysis possible threats due to police, traffic speed or the risk situation in the middle of the road and only then makes a strategy to cross. An environmental analysis plays an essential role in business management by providing possible opportunities or threats outside the company in its external environment. The purpose of an environmental analysis is to help to develop a plan by keeping decision-makers within an organization. The changes can be including exchanging of executive parties, increasing
  6. 6. 6 guidelines to decrease pollution, technological developments, and fluctuating demographics. An environment analysis helps the industries to improve the outline of their environment to find more opportunities or threats. ENVIRONMENTAL SCANNING Business environmental factors are broadly divided into external environment factors and internal environmental factors. Environmental scanning can be defined as ―the process by which organizations monitor their relevant environment to identify opportunities and threats affecting their business for the purpose of taking strategic decisions.‖ It is the monitoring, evaluating and disseminating of information from the external and internal environments to key people within the corporation. The external environment consists of variables that one outside the organization these are the opportunities and threats. The internal environment consists of variables that are within the organization itself. These are the strengths and weaknesses of organization. Variables affecting choice of factors 1. Type of business 2. Size and power of organisation 3. Age of organisation 4. Geographic dimension of organisation 5. Nature of environment 6. Philosophy of the strategist Techniques 1. Survey methods 2. Historical method 3. Business barometers 4. Analysis of the time series 5. Extrapolation method 6. Regression analysis 7. Delphi techniques 8. Input –Output Analysis
  7. 7. 7 Environmental Variables Socio-cultural Forces Economic Forces Political-legal forces Technological forces Government Shareholders Suppliers Special Employees/ Interest L Labour - Group unions Customers Competitors Creditors Trade Associations Communities Communic Structure, Culture, Resources Societal Environment Task Environment (industry) Internal Environment Natural Physical Environment Physical Resources Wildlife Climate
  8. 8. 8 It also involves knowing beforehand the risks and uncertainties as well as threats to the business unit. As business environment is dynamic in nature, it is always changing; environmental scanning has to be quick and regular. It should not be one time act to scan the environment. It is the constant telescoping of external environment and micro scoping of internal environment. Environmental Scanning provides broader prospective to corporate planners in formulating plans and strategies. In short, the process by which organizations monitor their relevant environment to identify opportunities and threats affecting their business is known as environmental scanning.  Identifying the External Environmental Variables 1. The natural environment includes physical resources, wildlife and climate that are inherent part of earth. These factors form the ecological system of interrelated life. 2. The Societal environment is mankind‘s social system that includes general forces  Economic forces that regulate the exchange of materials, money, energy and information  Technological forces that generate problem-solving inventions  Political-legal forces that allocate power and provide making and protecting laws and regulations  Socio-cultural forces that regulate the values, ethnicity and customs of society. 2. The task environment includes those elements or groups that directly affect a company and in turn, are affected by it. These are governments, local communities, suppliers, competitors, customers, creditors, employee/labour union, special-interest groups and trade associations. A company‘s task environment is typically within which the firm operates. Industry analysis refers to an in-depth examination of key factors within a company‘s task environment. The natural, societal and task environments must be monitored to detect the strategic factors that are likely in the future to have a strong impact on corporate success or failure. Changes in natural environment usually affect a business first through its impact on the societal environment in terms of resource availability and costs and then upon the task environment in terms of growth or decline of particular industries. E.g.: Companies incur high cost while trying to reduce carbon emissions. Industry analysis (popularized by Michael Porter) refers to an in-depth examination of key factors within a corporation‘s task environment. Scanning the Natural Environment The natural environment includes physical resources, wildlife and climate that are an inherent part of existence on Earth. Earlier companies viewed the natural resources as something to exploit and not conserve. Once they were controlled by a person or entity, these resources were considered assets and thus valued as part of the general economic system – a resource to be bought, sold or sometimes shared. Side effects, such as pollution, were considered to be externalities, costs not included in a business firm‘s accounting system, but felt by others.
  9. 9. 9 Eventually these externalities were identified by governments, which passed regulations to force business firms to deal with the side effects of their activities. The concept of sustainability argues that a firm‘s ability to continuously renew itself for long term success and survival is dependent not only upon the greater economic and social system of which it is a part, but also upon the natural ecosystem in which the firm is embedded. A business firm must thus scan the natural environment for factors that might previously have been taken for granted, such as the availability of fresh water and clean air. Global warming means that aspects of the natural environment, such as sea level, weather and climate are becoming increasingly uncertain and difficult to predict. Management must therefore scan not only the natural environment for possible strategic factors, but also include in its strategic decision-making processes the impact of its activities upon the natural environment. In a world concerned with global warming, a company should measure its carbon emissions and invest into alternatives to reduce its carbon foot print – the amount of greenhouse gases it is emitting into the air. Fig Scanning External Environment Analysis of Natural Environment Analysis of Societal Environment Economic, Sociocultural, Technological, Political-Legal Factors Market Analysis Competitor Analysis Supplier Analysis Government Analysis Community Analysis Interest Group Analysis Selection of Strategic Factors *Opportunities *Threats
  10. 10. 10 Scanning the Societal Environment: STEEP Analysis The number of possible strategic factors in the societal environment is very high. The number becomes enormous when we realize that, generally speaking, each country in the world can be represented by its own unique set of societal forces – some are very similar to those of neighboring countries and some of which are very different. Example: Even though Korea and China share Asia‘s Pacific Rim area with Thailand, Taiwan, and Hong Kong (sharing similar cultural values), they have different views about the role of business in society. It is generally believed that for Korea and China the role of business is primarily to contribute to national development: however Hong Kong, Taiwan and Thailand, the role is primarily to make profits for the shareholders. Such differences may translate into different trade regulations and varying difficulty in the repatriation of profits (the transfer of profits from a foreign subsidiary to a company‘s headquarters) from one group of Pacific Rim countries to another. Large companies categorize the societal environment in any one geographic region into four areas and focus their scanning in each area on trends that have corporate wide relevance. By including trends from the natural environment, this scanning can be called STEEP Analysis, the scanning of Socio-cultural, Technological, Economic, Ecological and Political-legal environmental forces (it may also called PESTEL Analysis for Political, Economic, Socio- cultural, Technological, Ecological and Legal forces). Scanning the Task Environment A corporation‘s scanning of the environment includes analyses of all the relevant elements in the task environment. These analyses take form of individual reports written by various people in different parts of the firm. At Procter & Gamble (P&G), for example, people from each of the brand management teams work with key people from the sales and market research departments to research and write a ―competitive activity report‖ each quarter on each of the product categories in which P&G competes. People in purchasing also write similar reports concerning new developments in the industries that supply P&G. All reports are summarized and transmitted up the corporate hierarchy for top management to use in strategic decision making. If a new development is reported regarding a particular product category, top management may send memos asking people throughout the organization to watch for and report on developments in related product areas. The many reports resulting from these scanning efforts, when boiled down to their essentials act as a detailed list of external strategic factors.  Factors to be considered for Environmental Scanning 1. Events: - are important and specific occurrences taking place in different environmental sectors 2. Trends: - are general tendencies or the course of action along with events take place 3. Issues: - are current concerns that arise in response to events and trends
  11. 11. 11 4. Expectations:- are the demands made by interested groups in the light of their concern of issues Example: - The gas leakage accident that took place in December 1984, at the Union Carbide Factory, Bhopal. The accident and the resulting disaster was an event. The trend that has arisen is a general tendency on the part of the regulatory authorities to be conscious about safety from hazardous exposure to chemicals. The issue is of raising concern about environmental pollution. The expectation of the general public from the government is of legislating changes in rules and regulations pertaining safety. 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.  NEED FOR ENVIRONMENTAL SCANNING Environmental Scanning is essential because of following reasons: 1) Prime Influence – Environment is a prime influence on the effectiveness of business strategies. If strategic planning is done without considering environment, it is likely to be defective. Besides, the success of the implementation of the strategy depends on the environmental factors. 2) A tool to anticipate Changes – Environmental scanning is a very useful tool not only to understand business surroundings, but also as a good instrument to anticipate the changes and be prepared to face the challenges of such changes. 3) Time for adjustment – A business unit cannot change the business activities overnight. It needs time to adjust with the changing environment. If it has to face the changed environment suddenly, it may be possible to make immediate changes according to the demand of the changed environment. Environmental scanning gives time to the company to get adjust to the changed environment. 4) Early Warning system - Environmental Scanning gives advance warning or danger signals of the adverse changes in environment. It helps the company to design defense mechanism to avoid future adverse effects of environment on the business activities e.g. with the changing marketing environment, many companies are adopting on-line marketing to survive in this competitive environment.  Forces Influencing Environmental scanning 1. Nature of business 2. Age of organisation 3. Size of organisation 4. Influence of organisation 5. Geographical dimensions 6. Volatility of environment 7. Managerial attitude 8. Managerial culture Principles of scanning
  12. 12. 12 1. Principles of linkage 2. Principle of purpose 3. Principle of culture 4. Principle of support Environmental diagnosis 1. Identification of strategic internal factors 2. Historical analysis 3. Evolution analysis 4. Competitive analysis 5. Development of company profile EXTERNAL ANALYSIS Benefits of external analysis include • Increasing managerial awareness of environmental changes • Increasing understanding of the context in which industries and markets function • Increasing understanding of multinational settings • Improving resource allocation decisions • Facilitating risk management • Focusing attention on the primary influences on strategic change • Acting as an early warning system. How to use the analysis tools: • Scan the macro-environment for actual or potential changes in the PEST factors • Assess the importance of the changes for the market, industry and business • Analyse each of the relevant changes in detail and the relationships between them • Assess the potential impact of the changes on the market, industry and business.  Approaches to Environmental Scanning 1. Systematic Approach:- Under this approach, information for environmental scanning is collected systematically. Information related to markets, customers, changes in legislation…etc. 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 may conduct special surveys and studies to deal with specific environmental issues from time to time. 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. A highly systematic and formal procedure may be used for this. Systematic and ad hoc approaches can be used for the relevant environment of the organization while Processed-form approach could be used to appraise both relevant as well as general environment.
  13. 13. 13  Sources of Information for Environmental Scanning The various sources of information tapped for collecting data for environmental scanning. 1. Documentary or secondary sources – these could be newspapers, magazines, journals, books...etc 2. Mass media- such as radio, TV and internet 3. Internal Sources: - like company files and documents …etc 4. External agencies: - like customers, marketing intermediaries, suppliers, trade associations.Etc 5. Formal studies:-done by employees, market research agencies, consultants…etc 5. Spying and surveillance- through ex-employees of competitors, industrial spying agencies..Etc Strategist use different information sources depending in their needs for environmental scanning  METHODS/TECHNIQUES /APPROACHES OF ENVIRONMENTAL SCANNING Environmental Scanning can be effectively done following different techniques or approaches as follows : 1) Seeking and getting opinion – Opinions of experts or knowledge people can be got by talking to them. Depending upon the nature of industry, and type of markets, these experts would differ, but they would be the people who are good at reading the current trends as well as future trends e.g. a businessman who wishes to establish a holiday resort may talk to an expert in Tourism or expert person in the hotel business in order to know the prospects of the resort. Opinions can be sought even from non-experts or laymen who are involved in the relevant business. This can be done through surveys or informal chats or meetings with the concerned people. The opinions of experts and non-experts should be integrated to have a clear picture of environment and future trends. 2) Extrapolating – To extrapolate means to calculate or estimate unknown factors or future trends by inference or logic after knowing the facts or present trends. It involves estimating or forecasting unknown, present trends. It helps businessmen to read future with the help of the present. It is not guesswork. It is a calculation that peeps into the future or in the unknown with the help of proper reading of the present. 3) Estimate – An estimate is a technique of designing the worst case scenario and the best case scenario. It estimates the best opportunities and the worst threats that are likely to emerge from the analysis of the environment. It thereafter weights the possibilities and probabilities of the opportunities and threats and preparing a balanced, realistic environment. 4) Mapping – It is an analytical tool that tries to read the process of transformation of factors in environment. The whole of the environment does not change suddenly, certain factors change, while others remain the same over a period of time. Mapping is techniques that tries to track the environmental factors to find out how many of them, and which of them are changing. It tries also to find out the direction and the speed of the change. It locates and plots the changes, their routes and their magnitude or extent.
  14. 14. 14 5) Modeling - There are many types of modeling that can be used to scan the environment. E.g. Regression analysis or probability tables are also used in more complex types of modeling. 6) Industrial espionage – It is used for 2 purposes a. To gather vital information from government department b. To collect clues from the competitors A spy can be a government employee or an employee of a competitor, a competitors supplier or customer. E.g. Japanese visitors to American factories, plants and facilities gather information. Research students working in laboratories may take up vacation jobs with companies as a part of spying assignments. It also includes methods such as: 1. Expert Opinion: - knowledgeable people are selected and asked 2. Trend Extrapolation: - researchers fit curves through past time series as a basis for extrapolation 3. Trend Correlation: - researchers correlate various time series in the hope of identifying, leading and lagging relationships 4. Dynamic modeling: -researchers build sets of equations to try to describe the underlying system. Eg: Econometric models of more than 300 equations 5. Cross-Impact Analysis:- researchers identify a set of key trends and ask 6. Multiple scenarios: -researchers build picture of alternative futures, each internally consistent and with a certain probability of happening 7. Demand / hazard forecasting: researches identify major events that would greatly affect the firm Owing to the increasing complexity of the external environment- utilize the emerging information technologies in environmental scanning. While many of the environmental techniques are based on statistical methods- using sophisticated software in computer assisted environmental scanning.  Importance of Environmental Scanning : Following are the points suggest importance of scanning of business environment. i) Identification of strengths : The analysis of internal environment helps to identify the strength of the firm and every organization put its all efforts to maintain and improve its strengths.
  15. 15. 15 For example every business will see that how we maintain competent & dedicated employees. What will be ways with which we can pursue good HRP & HRD and what will be the methods with which we may have good & improved & latest technology etc. ii) Identification of weaknesses : The business analysis give idea about business weakness. The weaknesses are barriers in the process of development. There for every organization try to point out its drawback and will try to improve it. Then the weakness may be in terms of its technology, HR, lack of finance or in any other areas. iii) Identification of opportunities : Opportunities generally resides outside the business. Therefore external environment analysis helps to point out and use for business benefits. Business also undertake all those efforts to grab that opportunities. For example if govt. gives concession or subsidies. Then business may cut its products prices and may gain large sell advantage of products. iv) Identification of threat : The business may have threats from its competitions or rivals and others. Therefore environmental analysis helps to identify those threats and helps to defuse them before it affects on business or its functioning. v) Effective planning : Environmental scanning help to business in the preparation of effective plan. The planning is the guide of the business or so it is to be prepared defect free. Environmental analysis does that and helps business. vi) Survival and growth of business : Survival and growth are two basic objectives of any business. Without attainment of these two, there is no meaning to the existence of business. So analysis of environment ensures the existence of these two objectives and according business unit. vii)Facilitates organizing of Resources : Business units needs different resources, it includes natural, physical, Human resources etc. There resources are limited in number. Therefore it should be used in very conscious way. The analysis of environment enables business to organize all these resources in required and logical manner. viii) Flexibility in operations: A study of environment enables a firm to adjust its activities depending upon the changing situation. ix) Corporate image: Corporate image means create mental picture of the firm in the minds of customer. Due to the analysis of environment, there is overall improvement in the performance of the business, and its effect is there is good image of the business among all i.e. customer dealer, suppliers etc. x) Motivation to employees : Because of environmental analysis there are good decisions, improved performances, and introduction of new HR policies, employees in the organization are motivated. SWOT ANALYSIS In order to survive and grow in this competitive environment, it is essential for every business organization to undertake SWOT analysis. The process by which the enterprises monitor their relevant environment to identify their business opportunities and threats affecting their business
  16. 16. 16 is known as environment analysis or SWOT analysis. In other words analyzing the surrounding environment before framing policies and taking business decisions is called as SWOT analysis. Strengths Weaknesses Opportunities Threats SW stands for strengths and weaknesses OT stands for opportunities and threats Strength is something a company is good at doing or a characteristic that gives it an important capability. Possible strengths are:  Name recognition  Proprietary technology  Cost advantages  Skilled employees  Loyal customers etc. Strengths and weaknesses are derived from internal environment. Opportunities and threats arise from external environment. SWOT analysis helps the business unit to know its positive points as well as negative points. Strength is an inherent capacity which an organization can use to gain strategic advantage over its competitors e.g. Marketing of Hindustan Leaver Limited, they have around 15 lakhs retail outlets for distributing their various products in India. A Weakness is something a company lacks or does poorly (in comparison to others) or a condition that places it at a disadvantage. Possible weaknesses are :  Poor market image  Obsolete facilities  Internal operating problems  Poor marketing skills etc. Weaknesses are an inherent limitation, which creates a strategic disadvantage for the organization e.g. limited finance. Opportunities – An opportunity is a favorable condition in the organization‘s environment which enables it to strengthen its position. Some examples of such opportunities include: • An unfulfilled customer need • Arrival of new technologies • loosening of regulations • Removal of international trade barriers Threats – A threat is an unfavorable condition in the organization‘s environment that creates a rise for or cause damage to the organization. Some examples of such threats include: • Shifts in consumer tastes away from the firm's products
  17. 17. 17 • Emergence of substitute products • New regulations • increased trade barriers  The SWOT Matrix A firm should not necessarily pursue the more lucrative opportunities. Rather, it may have a better chance at developing a competitive advantage by identifying a fit between the firm's strengths and upcoming opportunities. In some cases, the firm can overcome a weakness in order to prepare itself to pursue a compelling opportunity. To develop strategies that take into account the SWOT profile, a matrix of these factors can be constructed. The SWOT matrix is also known as a TOWS Matrix. •S-O strategies pursue opportunities that are a good fit to the company's strengths. • W-O strategies overcome weaknesses to pursue opportunities. • S-T strategies identify ways that the firm can use its strengths to reduce its vulnerability to external threats. • W-T strategies establish a defensive plan to prevent the firm's weaknesses from making it highly susceptible to external threats. Fig: SWOT process Internal strength & External opportunities & Weakness threats Identification of Key strategic issues Evolution of options & Selection of strategy Implementation & Management of the chosen strategy  ROLE AND IMPORTANCE OF SWOT ANALYSIS 1. Identify strengths – The analysis of the internal environment help to identify the strengths of the firm. The internal environment refers to plans and policies of the firm, its resources-physical, financial and human resources e.g. If company has good relations with workers, the strength of the company can be identified through the workers loyalty and dedication on the part of workers. INTERNAL ANALYSIS EXTERNAL ANALYSIS Continualfeedback
  18. 18. 18 2. Identify weaknesses – A firm may be strong in certain areas, whereas it may be weak in some other areas. The firm should identify such weaknesses through SWOT analysis so as to correct them as early as possible e.g. Lack of capital may be a weakness of the company, but company should try to raise additional funds to correct the weaknesses. 3. Identify Opportunities – An analysis of the external environment helps the business firms to identify the opportunities in the market. The business firm should make every possible effort to grab the opportunities, as and when they come. 4. Identify threats – Business may be subject to threats from competitors and others. Identification of threats at an earlier date is always beneficial to the firm as it helps to defuse the same. For instance, a competitor may come up with innovative product. This not only affects the firm‘s business but also endanger its survival, so business firm should take necessary steps to counter the strategy of the competitors. 5. Effective Planning – A proper study of environment helps a business firm to plan its activities properly. Before planning, it is very much necessary to analysis the internal as well as external environment. After SWOT analysis, the firm can list out well-defined and time-bound objectives, which in turn help to frame proper plans. 6. Facilitates Organizing Resources – Environment analysis not only helps in organizing the resources of right type and quantity. A proper analysis of environment enables a firm to know the demand potential in the market. Accordingly, the firm can plan and organize the right amount of resources to handle the activities of the organization. 7. Face Competition – A study of business environment enable a firm to analyze the competitor's strengths and weaknesses. This would enable the firm to incorporate the competitor‘s strengths in its working. The firm may also try to exploit the competitors weaknesses in its favor. 8. Flexibility in Operations – The environmental factors are uncontrollable and a business firm finds it difficult to influence the surrounding of its choice. A study of environment will enable a firm to adjust its operations depending upon the changing environmental situation.  ETOP (Environmental Threat Opportunity Profile) Lawrence R.Jauch and William F.Glueck suggest the ETOP. This technique conveniently summarizes the diagnoses of all the various factors of the environment which is important to the strategic gaps facing the firm. The ETOP presents the impact of each environmental factors like economic, political and social on the organization.
  19. 19. 19 Pitfalls (Drawbacks) in Environmental Scanning 1. Sometimes, strategic planners may focus excessively on the influence in the relevant environment that they miss out on the trend and issues in the general environment 2. The environmental scanning can create such an overload of information that it may prevent timely action. 3. The purpose of environmental scanning is to uncover influences that matter for the future of the organizational strategic decision-making. This purpose should not be lost and environmental scanning should not be used of purpose other than this. 4. The environmental scanning function should not be integrated too closely with operational and functional activities of the organization. 5. Similarly, environmental scanning should not be too far from the realities of the organization. PESTLE framework Industry Analysis and Competition Analysis Industry and Competitive analysis aims at developing insight into several issues like industry traits, intensity of competition, drivers of industry change, market position, and strategy of rival companies, industry profit outlook etc. It is thus thinking strategically about investing into some company. The issues to look into are: – Dominant Economic Features of Industry – Nature and Strength of Competition – Triggers of Change – Identify the Companies that are in Strongest / Weakest Positions – Likely Strategic Moves of Rivals National competitive advantage Firm strategy,structure and rivalry Demand conditions Related and supporting industries Factor conditions
  20. 20. 20 – Key factors of Competitive Success – Prospects and Financial Attractiveness of Industry  INDUSTRY ANALYSIS :ANALYZING THE TASK ENVIRONMENT An industry is a group of firms that produces a similar product or service. By ―similar products‖ we mean products that customers perceive to be substitutable for one another. A market is a group of customers for specific products or services that are essentially the same (e.g. a particular geographical market). An industry analysis is a business function completed by business owners and other individuals to assess the current business environment. A market assessment tool designed to provide a business with an idea of the complexity of a particular industry. Industry analysis involves reviewing the economic, political and market factors that influence the way the industry develops. Major factors can include the power wielded by suppliers and buyers, the condition of competitors, and the likelihood of new market entrants.  The features of industry analysis An industry is a collection of firms that offer similar products or services.  Industry setting  Industry structure  Industry attractiveness  Industry performance  Industry practices The problems in defining industry boundaries are: 1. The evolution of industries overtime creates new opportunities & threats 2. Industrial evolution creates industries within industries 3. Industries are becoming global in scope Competition analysis  Porter’s Approach to Industry Analysis/competitive analysis: Porter’s Five-Forces Model (Porter’s dominant economic features –Competitive Environment Analysis) Michael Porter, an authority on competitive strategy, contends that a corporation is most concerned with the intensity of competition within the industry. The level if this intensity is determined by basic competitive forces. The collective strength of these forces, ― he contends, ―determines the ultimate profit potential in the industry, where profit potential is measured in terms of long-run return on invested capital.‖ Porter‘s Five-Forces Model of competitive analysis is a widely used approach for developing strategies in many industries. A corporation must assess the importance to its success of six forces 1. Threat of new entrance.
  21. 21. 21 2. Rivalry among existing firms 3. Threat of substitute products/ services 4. Bargaining power of buyers 5. Bargaining power of suppliers 6. Relative power of other stakeholders. (eg: government regulations and human rights concerns are growing). Based on current trends in each of these competitive forces, the industry‘s level of competitive intensity will continue to be high – meaning that sales increases and profit margins should continue to be modest for the industry as a whole. Forces Driving Industry Competition
  22. 22. 22 a. Threat of New Entrance New entrants to an industry typically bring to it new capacity, a desire to gain market share and substantial resources. They are, therefore, threats to an established corporation. The threat of entry depends on the presence of entry barriers and the reaction that can be expected from existing competitors. An entry barrier is an obstruction that makes it difficult for a company to enter an industry. Some of possible entry barriers are: a) Economies of sales :- significant cost advantage over any new rival b) Product differentiation c) Capital requirements d) Switching costs e) Access to distribution channels f) Cost advantages g) Government policy 1. Economies of Scale: Scale economies in the production and sale of microprocessors, for example, gave INTEL a significant advantage over any new arrival. 2. Product differentiation: Companies such as Procter & Gamble and General Mills, which manufacture products such as Tide and Cheerios, create high entry barriers through their levels of advertising and promotion. 3. Capital Requirements: The need to invest huge financial resources in manufacturing facilities in order to produce large commercial airplanes creates a significant barrier to entry to any competitor for Boeing and Airbus. 4. Switching costs: Once a software program such as ORACLE established, the end users are very reluctant to switch to a new program like SAS because of high training costs. 5. Access to distribution channels: Small entrepreneurs often have difficulty obtaining supermarket shelf space for their goods because large retailers charge for space on their shelves and give priority to the established companies who can pay for the advertising required to generate high customer demand. 6. Cost disadvantages independent of size: Once a new product earns sufficient market share to be accepted as the standard for that type of product, the maker has a key advantage. Microsoft‘s development of the first adopted operating system (MS DOS) for the IBM-type personal computer gave it a significant competitive advantage over potential competitors. Its introduction of Windows helped to cement that advantage so that Microsoft operating system is now on more than 90% of the personal computers worldwide. 7. Government Policy: Governments can limit entry into an industry through licensing requirements by restricting access to raw materials, such as oil-drilling sites in protected areas. Barriers to Entry Barriers to entering an industry are present when entry is difficult or when it is too costly and places potential entrants at a competitive disadvantage (relative to companies already competing in the industry). There are seven factors that represent potentially significant entry barriers that can emerge as an industry
  23. 23. 23 evolves or might be explicitly ―erected‖ by current participants in the industry to protect profitability by deterring new competitors from entry. i Economies of Scale: refer to the relationship between quantity produced and unit cost. As the quantity of a product produced during a given time period increases, the cost of manufacturing each unit declines. Economies of scale can serve as an entry barrier when existing companies in the industry have achieved these scale economies and a potential new entrant is only able to enter the industry on a small scale (and produce at a higher cost per unit). For example, entry for a new company in the FMCG sector at a big scale is difficult because of presence of the multiple players who have already achieved the economies of scale. Companies that produce multiple customized products or that enter an industry on a large enough scale can sometimes overcome economies of scale as a potential entry barrier. ii. Product Differentiation: Customers may perceive that products offered by existing companies in the industry are unique as a result of service offered, effective advertising campaigns, or being first to offer a product or service to the market. If customers perceive a product or service as unique, they generally are loyal to that brand. Thus, new entrants may be required to spend a great deal of money over a long period of time to overcome customer loyalty to existing products. For example, Titan‘s offering of quartz watches in a market, which was dominated by NMI, enabled it to become the dominant player in a short span of time. While new entrants may be able to overcome perceived uniqueness and brand loyalty, the costs generally will be high because the new entrants will need to offer lower prices, add additional features, or allocate significant funds to a major advertising and promotion campaign. In the short run, new entrants that try to overcome uniqueness and brand loyalty may suffer lower profits or may be forced to operate at a loss. iii. Capital Requirements: Companies choosing to enter any industry must commit resources for facilities, to purchase inventory, to pay salaries and benefits, etc. While entry may seem attractive (because there are no apparent barriers to entry), a potential new entrant may not have sufficient capital to enter the industry. For example, entry into the ‗petrochemical industry is characterized by huge capital investments. iv. Switching Costs: are the onetime costs customers will incur when buying from a different supplier. These can include such explicit costs as retraining of employees or retooling of equipment as well as the psychological cost of changing relationships. Incumbent companies in the industry generally try to establish switching costs to offset new entrants that try to win customers with substantially lower prices or an improved (or, to some extent, different) product. For example, switching costs have to be borne by companies for switching from Microsoft‘s Windows to other operating systems creating entry barriers in the market for operating systems. v. Access to Distribution Channels: As existing companies in an industry generally have developed effective channels for distributing products, these same channels may not be available to new companies entering an industry. Thus, access (or lack thereof) may serve as an effective barrier to entry. This may be particularly true for consumer nondurable goods because of the limited amount of shelf (or selling) space available in retail stores. In the case of some durable goods or industrial products, to overcome the barrier, new entrants must again incur costs in excess of those paid by existing companies, either through lower prices or price breaks, costly promotion campaigns, or advertising allowances. New entrants may have to incur significant costs to establish a proprietary distribution channel. As in the case of product differentiation or uniqueness barriers, new entrants may suffer lower profits or operate at a loss as they battle to gain access to distribution channels.
  24. 24. 24 vi. Cost Disadvantages Independent of Scale: Existing companies in an industry often are able to achieve cost advantages that cannot be costless duplicated by new entrants (other than those related to economies of scale and access to distribution channels). These can include proprietary process (or product) technology, more favorable access to or control of raw materials, the best locations, or favorable government subsidies. For example could be of pharmaceuticals where new products discovered are under patent protection for a period of time. Potential entrants must find ways to overcome these disadvantages to be able to effectively compete in the industry. This may mean successfully adapting technologies from other industries and/or noncompeting products for use in the target industry, developing new sources of raw materials, making product (or service) enhancements to overcome location related disadvantages, or selling at a lower price to attract customers. vii. Government Policy: Governments (at all levels) are able to control entry into an industry through licensing and permit requirements. For example, at the company level, entry into the banking industry is regulated at the central levels, while liquor sales are regulated at the state and local levels. On the other end is the monopolistic nature (on a market by market basis) of the public utility industry including local telephone service, water, electric power, etc. Even if a company concludes that it can successfully overcome all of the entry barriers, it still must take into account or anticipate reactions that might be expected from existing companies. b. Rivalry among Existing Firms In most industries, companies are mutually dependent. A competitive move by one can be expected to have a noticeable effect on its competitors and thus may cause retaliation. i.e. Actions of a firm affects the other firms of the same industry directly and the firms of some of the other industries indirectly. Thus, rivalry takes place even across the industries. Eg: The tariff reduction by domestic airlines in India affected the Indian railways. According to Porter, intense rivalry is related to the presence of several factors including:- 1. Number of competitors: When competitors are few and roughly equal in size, such as in the auto and major home appliance industries, they watch each other carefully to make sure that they match any move by another firm with an equal countermove. 2. Rate of industry growth: Any slow slowing in passenger traffic tends to set off price wars in the airline industry because the only path to growth is to take sales away from a competitor. 3. Product or service characteristics: A product can be very unique, with many qualities differentiating it from others of its kind or it may be commodity, a product whose characteristics are the same, regardless of who sells it. For example, most people choose a gas station based on location and pricing because they view gasoline as a commodity. 4. Amount of fixed costs: Because airlines must fly their planes on a schedule, regardless of the number of paying passengers for any one flight, they offer standby fares whenever a plane has empty seats. 5. Capacity: If the only way a manufacturer can increase capacity is in a large increment by building a new plant (as in the paper industry), it will run that new plant at full capacity to keep
  25. 25. 25 its unit costs as low as possible – thus producing so much that the selling price falls throughout the industry. 6. Height of exit barriers: Exit barriers keep a company from leaving an industry. The brewing industry, for example, has a low percentage of companies that voluntarily leave the industry because breweries are specialized assets with few uses except for making beer. 7. Diversity of rivals: Rivals that have very different ideas of how to compete are likely to cross paths often and unknowingly challenge each other‘s position. This happens often in the retail clothing industry when a number of retailers open outlets in the same location – thus taking sales away from each other. This is also likely in some countries or regions when multinational corporations compete in an increasingly global economy. c. Threat of Substitute Product or Services A substitute product is a product that appears to be different but can satisfy the same need as another product. Eg:- e-mail is a substitute for the fax To extent that switching costs are low, substitute may have a strong effect on an industry. Tea can be considered as a substitute of coffee. If the price of coffee goes up, coffee drinkers will slowly begin switching to tea. A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. This category also relates to complementary products. Similarly to the threat of new entrants, the treat of substitutes is determined by factors like Brand loyalty of customers Close customer relationships Switching costs for customers The relative price for performance of substitutes Current trends. d. Bargaining Power of Buyers Buyers affect an industry through their ability to force down the prices. Bargain for higher quality or more services. A buyer or a group of buyers is powerful if some of the factors hold true. 1. A buyer purchases a large proportion of the seller‘s product or service (for example: oil filters purchased by a major auto maker) 2. A buyer has the potential to integrate backward by producing the product itself (for example, a newspaper chain could make its own paper). 3. Alternative suppliers are plentiful because the product is standard or undifferentiated (example, motorists can choose among many gas stations).
  26. 26. 26 4. Changing suppliers costs very little (for example, office supplies are easy to find). 5. A buyer earns low profits and is thus very sensitive to costs and service differences (for example, grocery stores have very small margins). 6. The purchased product is unimportant to the final quality or price of a buyer‘s product or services and thus can be easily substituted without affecting the final product adversely (for example, electric wire used inside a table lamp). Consumers gain increasing bargaining power under the following circumstances: 1. If they can inexpensively switch to competing brands or substitutes 2. If they are particularly important to the seller 3. If sellers are struggling in the face of falling consumer demand 4. If they are informed about sellers‘ products, prices, and costs 5. If they have discretion in whether and when they purchase the product e. Bargaining Power of Suppliers Suppliers can affect an industry through their ability to raise prices or reduce the quality of purchased goods and services. Eg: The bargaining power of OPEC is significant A supplier or supplier group is powerful if some of the following factors apply  The supplier industry is dominated by a few companies, but it sells many ( Eg: Petroleum Industry)  Its product or service is unique and/or it has built up switching costs (Eg: software)  Substitute are not readily available ( Eg: Electricity)  Suppliers are able to integrate forward and compete directly  When the supply of the product/service is less than the demand for it. f. Relative Power of Other Stakeholders Other stakeholders include political parties and non-government organizations. This is an additional factor for the Porter‘s model Eg: The products of Coca Cola and Pepsi Cola have been challenged by the Bhartiya Janata Party activists on the ground that natural fruits, tender coconut and juice are far better than the cola product, in terms of health issues and price A sixth force should be added to Porter‘s list to include a variety of stakeholders groups from the task environment. Some of these groups are governments (if not explicitly included elsewhere), local communities, creditors (if not included with suppliers), trade associations, special-interest groups, unions (if not included with suppliers), shareholders and complementors. According to Andy Grove, Chairman and past CEO of Intel, a complementor is a company (eg. Microsoft) or an industry whose product works well with a firm‘s (e.g. Intel‘s) product and without which the product would lose much of its value. An example is the tire and automobile industry. The importance of these stakeholders varies by industry.
  27. 27. 27 Apart from the above – Development of Second Market – is also creating threats. Development of second/used products market poses a wide threat in some industry particularly in publishing and automobile industry. Eg: www.amazon.com facilitates second market for a wide range of used books posing a threat to the publishing industry. Industry types The five forces framework builds on theories in economics10 and it helps to identify main types of industry structure. Three basic types are: ●Monopoly industries. A monopoly is formally an industry with just one firm with a unique product or service and therefore no competitive rivalry. Because of the lack of choice between rivals and few entrants, there is potentially very great power over buyers and suppliers. This can be very profitable. Firms can still have monopoly power where they are simply the dominant competitor: for example, Google‘s 65 per cent share of the American search market gives it price-setting power in the internet advertising market. Some industries are monopolistic because of economies of scale: water utility companies are often monopolies in a particular area because it is uneconomic for smaller players to compete. For this reason, the government sometimes gives one firm the right to be the only supplier of a product or service. ●Oligopoly industries. An oligopoly is where just a few often large firms dominate an industry, with the potential for limited rivalry and threat of entrants and great power over buyers and suppliers. With only a few competitors the actions of any one firm are likely highly influential on the others: therefore all firms must carefully consider the actions of all others. The iron ore market is an oligopoly, dominated by Vale, Rio Tinto and BHP Billiton. In theory, oligopoly can be highly profitable, but much depends on the extent of rivalries behavior, the threat of entry and substitutes and the growth of final demand in key markets. Oligopolistic firms have a strong interest in minimizing rivalry between each other so as to maintain a common front against buyers and suppliers. Where there are just two oligopolistic rivals, as for Airbus and Boeing in the civil airline industry, the situation is a duopoly. ● Perfectly competitive industries. Perfect competition exists where barriers to entry are low, there are countless equal rivals each with close to identical products or services, and information about prices, products and competitors is perfectly available. Competition focuses heavily on price, because products are so similar and competitors typically cannot fund major innovations or marketing initiatives to make them dissimilar. Under these conditions, firms are unable to earn more profit than the bare minimum required surviving. Agriculture often comes close to perfect competition (e.g. potatoes, apples, onions, etc.) and so do street food vendors in major cities. Few markets, however, are absolutely perfectly competitive. Markets are more commonly slightly imperfect so that products can be differentiated to a certain degree and with information not completely available for everyone. A number of small firm service industries have this character, like restaurants, pubs, hairdressers, shoe repairs, but also the shampoo, cereal and tooth paste markets.
  28. 28. 28 It has also been argued that there are ‗hypercompetitive industries’. Hyper-competition occurs where the frequency, boldness and aggression of competitor interactions accelerate to create a condition of constant disequilibrium and change. Under hyper-competition, rivals tend to invest heavily in de-stabilizing innovation, expensive marketing initiatives and aggressive price cuts, with negative impacts on profits. Hyper-competition often breaks out in otherwise oligopolistic industries. Industry types Industry structure Characteristics Competitive five forces threats Monopoly – One firm Very low – Often unique product or service – Very high entry barriers Oligopoly – Few competitors Varies – Product and service differences vary – High entry barriers Perfect competition – Many competitors Very high – Very similar products or services – Low entry barriers Competitor Analysis Studying the actions and behavior of close competitors is essential. Therefore, successful strategist takes great pains in investigating competitors –  Understanding their strategies:- strategists can get a profile of key competitors by studying where they are in industry, their strategic objectives and their basic competitive approaches  watching their strategies,  watching their actions,  sizing up their strengths and weaknesses and  trying to anticipate what moves they will make next  Drawing conclusions about overall industry attractiveness  Pinpoint the key factors for competitive success  Type of KSF ( Key Success Factors) :- o Technology-related KSFs :- scientific research expertise, innovation capacity, technology expertise o Manufacturing-related KSFs :-low cost production ,quality of product, skilled labour, high labour productivity, low cost product design, flexibility to manufacture o Distribution-related KSFs :- Strong net work, gaining retailers interest, having company owned outlets, low distribution cost, fast delivery
  29. 29. 29 o Marketing-related KSFs :- well trained effective sales force, technical assistance, available and dependable services, breadth of product lines, merchandising skills, attractive styling and packing, customer guarantee and warrantees o Skill-related KSFs:- superior talent, quality control know-how, design experts, expertise in particular technology, ability of clear and catchy advertisement, o Organizational Capacity:- superior information systems, ability to respond quickly, more experience and managerial know-how o Other types of KSFs :- Favourable image/reputation , overall low coist, convenient locations..etc Internal Analysis In order to develop successful strategies to exploit such opportunities or control the threats, analysis of an organization‘s internal capabilities is important for strategy making which aims at producing a good fit between a country‘s resource capability and its external situation. Internal analysis helps us understand the organizational capability which influences the evolution of successful strategies. Many of the issues of strategic development are concerned with changing strategic capability better to fit a changing environment. Scanning and analyzing the external environment for opportunities and threats is not enough to provide an organization a competitive advantage. Analysts must also look within the corporation itself to identify internal strategic factors—critical strengths and weaknesses that are likely to determine whether a firm will be able to take advantage of opportunities while avoiding threats. This internal scanning, often referred to as organizational analysis, is concerned with identifying and developing an organization‘s resources and competencies RESOURCE BASED VIEW AND VALUE CHAIN ANALYSIS  Resource Based View Of The Firm There are three types of resources – assets, capabilities and competencies, which have been identified under Resource Based View of the firm (RBV). Strategic thinkers explaining the RBV suggest that the organizations are collections of tangible and intangible assets combined with capabilities to use those assets. These help organizations develop understanding these three types of resources and help us to know how a firm‘s internal strength and weaknesses affect its ability to compete. The resource-based view (RBV) approach to competitive advantage contends that internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage. RBV theory asserts that resources are actually what help a firm exploit opportunities and neutralize threats. The basic premise of the RBV is that the mix, type, amount, and nature of a firm‘s internal resources should be considered first and foremost in devising strategies that can lead to
  30. 30. 30 sustainable competitive advantage. Managing strategically according to the RBV involves developing and exploiting a firm‘s unique resources and capabilities, and continually maintaining and strengthening those resources. The theory asserts that it is advantageous for a firm to pursue a strategy that is not currently being implemented by any competing firm. When other firms are unable to duplicate a particular strategy, then the focal firm has a sustainable competitive advantage, according to RBV theorists. For a resource to be valuable, it must be either (a) rare, (b) hard to imitate, or (c) not easily substitutable. Often called empirical indicators, these three characteristics of resources enable a firm to implement strategies that improve its efficiency and effectiveness and lead to a sustainable competitive advantage. The more a resource(s) is rare, non imitable, and non substitutable, the stronger a firm‘s competitive advantage will be and the longer it will last. Rare resources are resources that other competing firms do not possess. If many firms have the same resource, then those firms will likely implement similar strategies, thus giving no one firm a sustainable competitive advantage. This is not to say that resources that are common are not valuable; they do indeed aid the firm in its chance for economic prosperity. However, to sustain a competitive advantage, it is more advantageous if the resource(s) is also rare. it is also important that these same resources be difficult to imitate. If firms cannot easily gain the resources, say RBV theorists, and then those resources will lead to a competitive advantage more so than resources easily imitable. Even if a firm employs resources that are rare, a sustainable competitive advantage may be achieved only if other firms cannot easily obtain these resources. The third empirical indicator that can make resources a source of competitive advantage is substitutability. Borrowing from Porter‘s Five-Forces Model, to the degree that there are no viable substitutes, a firm will be able to sustain its competitive advantage. However, even if a competing firm cannot perfectly imitate a firm‘s resource, it can still obtain a sustainable competitive advantage of its own by obtaining resource substitutes. RBV has continued to grow in popularity and continues to seek a better understanding of the relationship between resources and sustained competitive advantage in strategic management.
  31. 31. 31  Value Chain Analysis A value chain is a linked set of value creating activities that begin with basic raw materials coming from suppliers, moving on to a series of value-added activities involved in producing and marketing a product or service and ending with distributors getting the final goods into the hands of the ultimate consumer. The focus of value-chain analysis is to examine the company in the context of the overall chain of value-creating activities, of which the company may be only a small part. i.e. To better understand the activities through which a firm develops a competitive advantage and creates shareholder value, it is useful to separate the business system into a series of value generating activities referred to as the value chain. The term value chain describes a way of looking at a business as a chain of activities that transform inputs into outputs that customer‘s value, Value chain analysis (VCA) attempts to understand how a business creates customer value by examining the contributions of different activities within the business to that value. Value chain analysis (VCA) refers to the process whereby a firm determines the costs associated with organizational activities from purchasing raw materials to manufacturing product(s) to marketing those products. VCA aims to identify where low-cost advantages or disadvantages exist anywhere along the value chain from raw material to customer service activities. VCA can enable a firm to better identify its own strengths and weaknesses, especially as compared to competitors‘ value chain analyses and their own data examined over time. Industry Value-Chain Analysis The value chains of most industries can be split into two segments, upstream and downstream segments. In the petroleum industry, for example, upstream refers to oil exploration, drilling and
  32. 32. 32 moving of the crude oil to the refinery and downstream refers to refining the oil plus transporting and marketing gasoline and refined oil to distributors and gas station retailers. Amoco, for example, had strong expertise downstream in marketing and retailing. British Petroleum, in contrast, was more dominant in upstream activities like exploration. An industry can be analyzed in terms of the profit margin available at any point along the value chain. For example, auto industry‘s revenues and profits are divided among many value chain activities, including manufacturing, new and used car sales, gasoline retailing, insurance, after-sales service and parts, and lease financing. In analyzing the complete value chain of a product, note that even if a firm operates up and down the entire industry chain, it usually has an area of expertise where its primary activities lie. A company‘s centre of gravity is the part of the chain that is most important to the company and the point where its greatest expertise and capabilities lay – its core competencies. According to Galbraith, a company‘s center of gravity is usually the point at which the company started. After a firm successfully establishes itself at this point by obtaining a competitive advantage, one of its first strategic moves is to move forward or backward along the value chain in order to reduce costs, guarantee access to key raw materials, or to guarantee distribution. This process called vertical integration. Corporate Value-Chain Analysis Each company has its own internal value chain of activities. The goal of these activities is to offer the customer a level of value that exceeds the cost of the activities, thereby resulting in a profit margin. Porter proposes that a manufacturing firm‘s primary activities usually begin with inbound logistics (raw materials handling and warehousing), go through an operations process in which a product is manufactured, and continue on to outbound logistics (warehousing and distribution), to marketing and sales and finally to service (installation, repair, and sale of parts). The primary value chain activities are:  Inbound Logistics: the receiving and warehousing of raw materials and their distribution to manufacturing as they are required.
  33. 33. 33  Operations: the processes of transforming inputs into finished products and services.  Outbound Logistics: the warehousing and distribution of finished goods.  Marketing & Sales: the identification of customer needs and the generation of sales.  Service: the support of customers after the products and services are sold to them. Several support activities, such as procurement (purchasing), technology development (R&D), human resource management, and firm infrastructure (accounting, finance, strategic planning), ensure that the primary value chain activities operate effectively and efficiently. These primary activities are supported by:  The infrastructure of the firm: organizational structure, control systems, company culture, etc.  Human resource management: employee recruiting, hiring, training, development, and compensation.  Technology development: technologies to support value-creating activities.  Procurement: purchasing inputs such as materials, supplies, and equipment. Each of a company‘s product lines has its own distinctive value chain. Because most companies make several different products or services, an internal analysis of the firm involves analyzing a series of different value chains. The systematic examination of individual value activities can lead to a better understanding of a company‘s strengths and weaknesses. According to Porter, ―Differences among competitor value chains are a key source of competitive advantage.‖ Corporate value chain analysis involves the following three steps: 1. Examine each product line’s value chain in terms of the various activities involved in producing that product or service: Which activities can be considered strengths (core competences) or weaknesses (core deficiencies)? Do any of the strengths provide competitive advantage and can they thus be labeled distinctive competencies? 2. Examine the “linkages” within each product line’s value chain? Linkages are the connections between the way one value activity (for example, marketing) is performed and the cost of performance of another activity (for example, quality control). 3. Examine the potential synergies among the value chains of different product lines or business units: Each value element, such as advertising or manufacturing, has an inherent economy of scale in which activities are conducted at their lowest possible cost per unit of output. If a particular product is not being produced at a high enough level to reach economies of scale in distribution, another product could be used to share the same distribution channel. This is an example of economies of scope, which result when the value chains of two separate products or services share activities, such as the same marketing channels or manufacturing facilities. The cost of joint production of multiple products can be lower than the cost of separate production. The value chain model is a useful analysis tool for defining a firm's core competencies and the activities in which it can pursue a competitive advantage as follows: Cost advantage: by better understanding costs and squeezing them out of the value-adding activities. Differentiation: by focusing on those activities associated with core competencies and capabilities in order to perform them better than do competitors
  34. 34. 34  Scanning Functional Resources and Capabilities The simplest way to begin an analysis of a company‘s value chain is by carefully examining its traditional functional areas for potential strengths and weaknesses. Functional resources and capabilities include not only the financial, physical and human assets in each area but also the ability of the people in each area to formulate and implement the necessary functional objectives, strategies, and policies. These resources and capabilities include the knowledge of analytical concepts and procedural techniques common to each area as well as the ability of the people in each area to use them effectively. If used properly, these resources and capabilities serve as strengths to carry out value-added activities and support strategic decisions. In addition, to the usual business functions of marketing, finance, R&D, operations, human resources, and information systems/technology structure and culture are also key parts of a business firm‘s value chain.  Benchmarking Benchmarking is an analytical tool used to determine whether a firm‘s VCA are competitive compared to rivals and thus conducive to winning in the marketplace. Benchmarking entails measuring costs of value chain activities across an industry to determine ―best practices‖ among competing firms for the purpose of duplicating or improving on those best practices. Benchmarking enables a firm to take action to improve its competitiveness by identifying (and improving on) value chain activities where rival firms have comparative advantages in cost, service, reputation, or operation. The hardest part of benchmarking can be gaining access to other firms‘ value chain activities with associated costs. Typical sources of benchmarking information include published reports, trade publications, suppliers, distributors, customers, partners, creditors, shareholders, lobbyists, and willing rival firms The Benchmarking Process Benchmarking involves looking outward (outside a particular business, organisation, industry, region or country) to examine how others achieve their performance levels and to understand the processes they use. In this way benchmarking helps explain the processes behind excellent performance. When the lessons learnt from a benchmarking exercise are applied appropriately, they facilitate improved performance in critical functions within an organisation or in key areas of the business environment. Application of benchmarking involves four key steps: (1) Understand in detail existing business processes (2) Analyze the business processes of others (3) Compare own business performance with that of others analyzed (4) Implement the steps necessary to close the performance gap Benefits of Benchmarking It ensures best practices will be identified, which in turn assures appropriate improvement. It provides a deeper understanding of the organization‘s process. It stimulates the company to try something different. Identify new technology
  35. 35. 35 CORE COMPETENCY AND COMPETITIVE ADVANTAGE CAPABILITIES AND COMPETENCIES Capability represents the identity of your firm as perceived by both your employees and your customers. It is your ability to perform better than competitors using a distinctive and difficult to replicate set of business attributes. Capability is a capacity for a set of resources to integrative performs a stretch task. Capabilities represent: the firm‘s capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm‘s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm‘s employees. Core Technologies and Competencies is the set of internal capabilities. A competency is a cross-functional integration and coordination of capabilities.  core competency The Core Competence is a term coined by C.K. Prahalad and Gary Hamel. Defined as collective learning and coordination skills behind the firm's product lines (the collective learning in the organization especially how to co ordinate diverse production skills and integrate multiple streams of technologies) They made the case that core competencies are the source of competitive advantage and enable the firm to introduce an array of new products and services. E.g.: Honda‘s core competence is its depth of expertise in small engine development. For Sony its expertise is electronic technology A core competency is a collection of competencies that crosses divisional boundaries, is widespread within the corporation, and is something that the corporation can do exceedingly well. Thus, new product development is a core competency if it goes beyond one division. When core competencies are superior to those of the competition, they are called distinctive competencies. For example, General Electric is well known for its distinctive competency in management development According to Prahalad and Hamel, core competencies lead to the development of core products. Core products are not directly sold to end users; rather, they are used to build a larger number of end-user products. For example, motors are a core product that can be used in wide array of end products. The business units of the corporation each tap into the relatively few core products to develop a larger number of end user products based on the core product technology. The intersection of market opportunities with core competencies forms the basis for launching new businesses. By combining a set of core competencies in different ways and matching them to market opportunities, a corporation can launch a vast array of businesses. Without core competencies, a
  36. 36. 36 large corporation is just a collection of different businesses. Core competencies serve as the glue that bonds the business units together into a coherent portfolio. For Reliance Group size, scale and project management skills form the basis of core competence. Core Competencies Core competencies arise from the integration of multiple technologies and the coordination of diverse production skills. Some examples include Philip's expertise in optical media, Sony's ability to miniaturize electronics and Airtel‘s ability to provide cheapest services in telecom with maximum customer satisfaction. A core competence should: 1. Provide access to a wide variety of markets, and 2. Contribute significantly to the end-product benefits, and 3. be difficult for competitors to imitate. 4. Should be developed by the organization Core competencies tend to be rooted in the ability to integrate and coordinate various groups in the organization. While a company may be able to hire a team of brilliant scientists in a particular technology, in doing so it does not automatically gain a core competence in that technology. It is the effective coordination among all the groups involved in bringing a product to market that result in a core competence. It is not necessarily an expensive undertaking to develop core competencies. The missing pieces of a core competency often can be acquired at a low cost through alliances and licensing agreements. In many cases an organizational design that facilitates sharing of competencies can result in much more effective utilization of those competencies for little or no additional cost. Core Products Core competencies manifest themselves in core products that serve as a link between the competencies and end products. Core products enable value creation in the end products. Examples of firms and some of their core products include: • 3M - substrates, coatings, and adhesives • UAE motors in any grinding machine in India • Canon - laser printer subsystems • Honda - gasoline powered engines • Intel Processors The core products are used to launch a variety of end products. For example, Honda uses its engines in automobiles, motorcycles, lawn mowers, and portable generators. Because firms may sell their core products to other firms that use them as the basis for end user products, traditional measures of market share are insufficient for evaluating the success of core competencies. A core competency is something that a corporation can do exceedingly well. It is a key strength. It should have the following characteristics; 1. It should have been developed by the organization 2. It cannot be easily copied by others 3. It should give access to the wider market. If all the conditions are satisfied then it is known as core competency.
  37. 37. 37  COMPETITIVE ADVANTAGE Strategic management is all about gaining and maintaining competitive advantage. This term can be defined as ―anything that a firm does especially well compare to rival firms.‖ When a firm can do something that rival firms cannot do, or owns something that rival firm‘s desire, that can represent a competitive advantage. For example, in a global economic recession, simply having ample cash on the firm‘s balance sheet can provide a major competitive advantage. Some cash-rich firms are buying distressed rivals. For example, Alibaba, the world‘s largest e commerce company, is seeking to buy rival firms in many parts of the world. Lenovo also desires to expand its portfolio by acquiring distressed rival companies. A competitive advantage enables the firm to create superior value for its customers and superior profits for itself. Cost and differentiation advantages are known as positional advantages since they describe the firm‘s position in the industry as a leader in either cost or differentiation. Resources and Capabilities A resource-based view emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage that ultimately results in superior value creation. According to the resource-based view, in order to develop a competitive advantage the firm must have resources and capabilities that are superior to those of its competitors. Without this superiority, the competitors simply could replicate what the firm was doing and any advantage quickly would disappear. Resources are the firm-specific assets useful for creating a cost or differentiation advantage and that few competitors can acquire easily. The following are some examples of such resources:  Patents and trademarks  Proprietary know-how  Installed customer base  Reputation of the firm  Brand equity Capabilities refer to the firm‘s ability to utilize its resources effectively. An example of a capability is the ability to bring a product to market faster than competitors. Such capabilities are embedded in the routines of the organization and are not easily documented as procedures and thus are difficult for competitors to replicate. The firm‘s resources and capabilities together form its distinctive competencies. These competencies enable innovation, efficiency, quality, and customer responsiveness, all of which can be leveraged to create a cost advantage or a differentiation advantage. Cost Advantage and Differentiation Advantage Competitive advantage is created by using resources and capabilities to achieve either a lower cost structure or a differentiated product. A firm positions itself in its industry through its choice of low cost or differentiation. This decision is a central component of the firm‘s competitive
  38. 38. 38 strategy. Another important decision is how broad or narrow a market segment to target. Porter formed a matrix using cost advantage, differentiation advantage, and a broad or narrow focus to identify a set of generic strategies that the firm can pursue to create and sustain a competitive advantage. Value Creation The firm creates value by performing a series of activities that Porter identified as the value chain. In addition to the firm‘s own value-creating activities, the firm operates in a value system of vertical activities including those of upstream suppliers and downstream channel members. Competitive advantage leads to superior profitability. At the most basic level, how profitable a company becomes depends on three factors: 1. The amount of value customers place on the company‘s product. 2. The price that a company charges for its products. 3. The cost of creating that value. Value is something that customers assign to a product. It is a function of the attributes of the product, such as its performance, design, quality, & point – of – scale & after sale service. A company that strengthens the value of its product in the products in the eyes of customers gives it more pricing options. It can raise prices to reflect that value or hold prices lower, which induces more customers to purchase its product & expand unit sales volume. A) RESOURCES: Resources are the capital or financial, physical, social or human, technological and organizational factor endowments that allow a company to create value for its customers.  Types of Resources Tangible Resources Relatively easy to identify, and include physical and financial assets used to create value for customers Financial resources Firm‘s cash accounts Firm‘s capacity to raise equity Firm‘s borrowing capacity Physical resources Modern plant and facilities Favorable manufacturing locations State-of-the-art machinery and equipment Technological resources Trade secrets Innovative production processes Patents, copyrights, trademarks Organizational resources Effective strategic planning processes Excellent evaluation and control systems
  39. 39. 39 Intangible Resources Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time. Are non-physical entities that are the creation of the company and its employees, such as brand names, the reputation of the company, the knowledge that employees have gained through experience and the intellectual property of the company including patents, copyrights & trademarks. Human Experience and capabilities of employees Trust Managerial skills Firm-specific practices and procedures Innovation and creativity Technical and scientific skills Innovation capacities Reputation Effective strategic planning processes Excellent evaluation and control systems Organizational Capabilities Competencies or skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and intangible resources to attain desired end Outstanding customer service Excellent product development capabilities Innovativeness of products and services Ability to hire, motivate, and retain human capital B) CAPABILITIES: -Refers to a company‘s skills at coordinating its resources & putting them to productive use. These skills reside in an organization‘s rules, routines and producers. C) COMPETENCIES: Competencies are firm – specific strengths that allow a company to differentiate its products and for achieve substantially lower cost than its rivals and thus gain a competitive advantage. Types of competency i) Core competency: It is an activity central to a firm's profitability and competitiveness that is performed well by the firm. Core competencies create and sustain firm's ability to meet the critical success factors of particular customer groups. ii) Distinctive competency: It is a competitively valuable activity that a firm performs better than its competitors. These provide the basis for competitive advantage. These are cornerstone of strategy. They provide sustainable competitive advantage because these are hard to copy.
  40. 40. 40  Generic Building Blocks Of Competitive Advantage Organizations today confront new markets, new competition and increasing customer expectations. Thus today's organizations have to constantly re-engineer their business practices and procedures to be more and more responsive to customers and competition. In the 1990's Information technology and Business Process reengineering, used in conjunction with each other, have emerged as important tools which give organizations the leading edge. The efficiency of an enterprise depends on the quick flow of information across the complete supply chain i.e. from the customer to manufacturers to supplier. The generic building blocks of a firm to gain competitive advantage are- Quality, Efficiency, Innovation and Customer responsiveness. A) EFFICIENCY – In a business organization, inputs such as land, capital, raw material managerial know-how and technological know-how are transformed into outputs such as products and services. Efficiency of operations enables a company to lower the cost of inputs to produce given output and to attain competitive advantage. Employee productivity is measured in terms of output per employee. For ex: Japan‘s auto giants have cost – based competitive advantage over their near rivals in U.S. B) QUALITY – Quality of goods and services indicates the reliability of doing the job, which the product is intended for. High quality products create a reputation and brand name, which in turn permits the company to charge higher price for the products. Higher product quality means employee‘s time is not wasted on rework, defective work or substandard work.
  41. 41. 41 For ex: In consumer durable industries such as mixers, grinders, gas stoves and water heaters, ISO mark is a basic imperative for survival. C) INNOVATION – Innovation means new way of doing things. Innovation results in new knowledge, new product development structures and strategies in a company. It offers something unique, which the competitors may not have, and allows the company to charge high price. For ex: Photocopiers developed by Xerox. D) CUSTOMER RESPONSIVENESS – Companies are expected to provide customers what they are exactly in need of by understanding customer needs and desires. Customer Responsiveness is determined by customization of products, quick delivery time, quality, design and prompt after sales service. For ex: The popularity of courier service over Indian postal service is due to the fastness of service. DISTINCTIVE COMPETENCIES Distinctive competence is a unique strength that allows a company to achieve superior efficiency, quality, innovation and customer responsiveness. It allows the firm to charge premium price and achieve low costs compared to rivals, which results in a profit rate above the industry average. Ex: Toyota with world class manufacturing process. In order to call anything a distinctive competency it should satisfy 3 conditions, namely: · Value – disproportionate contribution to customer perceived value; · Unique – unique compared to competitors; · Extendibility – capable of developing new products. Distinctive Competencies are built around all functional areas, namely: · Technology related · Manufacturing related · Distribution related · Marketing related · Skills related · Organizational capability · Other types. Distinctive Competencies arise from two sources namely, Resources Capabilities
  42. 42. 42 VRIO Framework The VRIO model is a strategic analysis framework applied during the internal analysis of strategic planning. The framework is based on the evaluation of resources and capabilities of an organization. It is the tool used to analyze firm‘s internal resources and capabilities to find out if they can be a source of sustained competitive advantage. Barney has evolved VRIO framework of analysis to evaluate the firm‘s key resource, say · Value – does it provide competitive advantage? · Rareness – do other competitors possess it? · Imitability – is it costly for others to imitate? · Organization – does the firm exploit the resource? If the answer to each of the above questions is yes, for a particular competency, it is considered to be strength and thus a distinctive competency. This should give the company a competitive advantage and lead to higher performance  Understanding the tool In order to understand the sources of competitive advantage firms are using many tools to analyze their external (Porter‘s 5 Forces, PEST analysis) and internal (Value Chain analysis, BCG Matrix) environments. One of such tools that analyze firm‘s internal resources is VRIO analysis. The tool was originally developed by Barney, J. B. According to him, the resources must be valuable, rare, imperfectly imitable and non- substitutable. His original framework was called VRIN. In 1995, in his later work ‗Looking Inside for Competitive Advantage‘ Barney has introduced VRIO framework, which was the improvement of VRIN model. VRIO analysis stands for four questions that ask if a resource is: valuable? rare? costly to imitate? And is a firm organized to capture the value of the resources? A resource or capability that meets all four requirements can bring sustained competitive advantage for the company.