EXTERNAL ENVIRONMENT ANALYSIS

3.1 EXTERNAL BUSINESS ENVIRONMENT

Understanding the environment within which the business has to operate is very important for running a
business unit successfully at any place. Because, the environmental factors influence almost every aspect
of business, be it its nature, its location, the prices of products, the distribution system, or the personnel
policies. Hence it is important to learn about the various components of the business environment, which
consists of the economic aspect, the socio-cultural aspects, the political framework, the legal aspects and
the technological aspects etc. In this chapter, we shall learn about the concept of business environment, its
nature and significance and the various components of the environment.

In addition, the concept of social responsibility of business and business ethics is essential.

MEANING OF BUSINESS ENVIRONMENT

As stated earlier, the success of every business depends on adapting itself to the environment within
which it functions. For example, when there is a change in the government policies,

The business has to make the necessary changes to adapt it to the new policies. Similarly, a change in the
technology may render the existing products obsolete, as we have seen that the introduction of computer
has replaced the typewriters; the color television has made the black and white television out of fashion.
Again a change in the fashion or customers’ taste may shift the demand in the market for a particular
product, e.g., the demand for jeans reduced the sale of other traditional wear. All these aspects are
external factors that are beyond the control of the business. So the business units must have to adapt
themselves to these changes in order to survive and succeed in business. Hence, it is very necessary to
have a clear understanding of the concept of business environment and the nature of its various
components.

The term ‘business environment’ connotes external forces, factors and institutions that are beyond the
control of the business and they affect the functioning of a business enterprise.

These include customers, competitors, suppliers, government, and the social, political, legal and
technological factors etc. While some of these factors or forces may have direct influence over the
business firm, others may operate indirectly. Thus, business environment may be defined as the total
surroundings, which have a direct or indirect bearing on the functioning of business. It may also be
defined as the set of external factors, such as economic factors, social factors, political and legal factors,
demographic factors, and technical factors etc., which are uncontrollable in nature and affects the
business decisions of a firm.

FEATURES OF BUSINESS ENVIRONMENT

On the basis of the above discussion the features of business environment can be summarized as follows.

1
(a) Business environment is the sum total of all factors external to the business firm and that greatly
influences their functioning.

(b) It covers factors and forces like customers, competitors, suppliers, government, and the social,
cultural, political, technological and legal conditions.

(c) The business environment is dynamic in nature, which means, it keeps on changing.

(d) The changes in business environment are unpredictable. It is very difficult to predict the exact nature
of future happenings and the changes in economic and social environment.

(e) Business Environment differs from place to place, region to region and country to country. Political
conditions in India differ from those in Pakistan. Taste and values cherished by people in India and China
vary considerably.

Importance of Business Environment

There is a close and continuous interaction between the business and its environment. This interaction
helps in strengthening the business firm and using its resources more effectively.

As stated above, the business environment is multifaceted, complex, and dynamic in nature and has a far-
reaching impact on the survival and growth of the business. To be more specific, proper understanding of
the social, political, legal and economic environment helps the business in the following ways:

(a) Determining Opportunities and Threats: The interaction between the business and its environment
would identify opportunities for and threats to the business. It helps the business enterprises for meeting
the challenges successfully.

(b) Giving Direction for Growth: The interaction with the environment leads to opening up new frontiers
of growth for the business firms. It enables the business to identify the areas for growth and expansion of
their activities.

(c) Continuous Learning: Environmental analysis makes the task of managers easier in dealing with
business challenges. The managers are motivated to continuously update their knowledge, understanding
and skills to meet the predicted changes in realm of business.

(d) Image Building: Environmental understanding helps the business organizations in improving their
image by showing their sensitivity to the environment within which they are working. For example, in
view of the shortage of power, many companies have set up Captive Power Plants (CPP) in their factories
to meet their own requirement of power.

(e) Meeting Competition: It helps the firms to analyze the competitors’ strategies and formulate their own
strategies accordingly.

(f) Identifying Firm’s Strength and Weakness: Business environment helps to identify the individual
strengths and weaknesses in view of the technological and global developments.

2
3.2 External Environmental Analysis

Most firms face external environments that are highly turbulent, complex and global conditions that make
interpreting them increasingly difficult .To cope with what are often ambiguous and incomplete
environmental data and to increase the understanding if the general environment, firms engage in a
process called external environment analysis .The continuous process includes four activities generally
referred to as the components of external environmental analysis. Including Scanning, Monitoring,
Forecasting and Assessing.

External Environmental analysis is a difficult yet significant activity.An important aspect in studying the
general environment is identifying opportunities and threats.

An opportunity is a condition in the general environment that if exploited, helps the company achieve
strategic competitiveness.

Threat is a condition in the general environment that may hinder a company’s efforts to achieve strategic
competitiveness.

Components of the external environmental analysis

scanning  Identifying early signals of environmental changesand trends

Monitoring  Detecting meaning through ongoing observations of environmental changes and

trends

Forecasting  Developing projections of anticipated outcomes based on monitored changes

and trends

Assessing  Determining the timing and importance of environmental changes and trends for
firm’s strategies for firms’ strategies and their management.

Scanning

Entails the study of all segments in the general environment .Through scanning firms identify early
signals of potential changes in the general environment and detect changes that are already under way.
When scanning, the firm often deals with ambiguous, incomplete, or unconnected data or information.
Environmental scanning is critically important for firms competing in highly volatile environments .in
addition scanning activities should be aligned with the organizations context; a scanning system designed
for a volatile environment is inappropriate for a firm in a stable environment.

Monitoring

When monitoring ,analysts observe environmental changes to see if an important trend is emerging from
among those spotted by scanning .Critical to successful monitoring is the firm’s ability to detect meaning
in different environmental events and trends. Effective monitoring requires the firm to identify important

3
stakeholders because the importance of different stakeholders may vary over a firms life cycle, careful
attention must be given to the firms needs and its stakeholder groups across time. Scanning and
monitoring is particularly important when a firm competes in an industry with high technological
uncertainty.

Forecasting

Scanning and monitoring are concerned with events and trends in the general environment at a point in
time. When forecasting, analysts develop feasible projections of what might happen, and how quickly, as
a result of the changes and trends detected through scanning and monitoring. For example analysts may
forecast the time that will be required for a new technology to reach the market place, the length of time
before different corporate training procedures are required to deal anticipated changes in the composition
of the workforce, or how much time will elapse before changes in government taxation policies affect
consumers purchasing patterns.

Assessing

The objective of assessing is to determine the timing and significance of the effects of environmental
changes and trends on the strategic management of the firm. Through scanning, monitoring and
forecasting, analysts are able to understand the general environment .Going a step further, the intent of
assessment is to specify the implications of that understanding for the organization. Without assessment,
the firm is left with data that may be interesting but are of unknown competitive relevance.

3.3 Segments of The General Environment

The general environment is composed of segments and their individual elements that are external
to the firm. Although the degree of impact varies, these environmental segments affect each
industry and its firms. The challenge to the firm is to scan, monitor, forecast, and assess these
elements in each segment that are of greatest impotence. Resulting from these efforts should be
recognition of environmental changes, trends, opportunities and trends. Opportunities are then
matched with the firm’s core competencies. These segments are highlighted in the table below:

Demographic  Population size  Ethnic mix

segment  Age structure  Income distribution
 Geographical distribution

Economic Segment  Inflation rates  Personal saving s rates

 Interest rates  Business savings rates
 Trade deficit or surpluses  Gross domestic product

4
 Political Segment  Antitrust laws  Labor training laws
 Taxation laws  Educational philosophies and
 Deregulation philosophies policies

Sociocultural  Women in the workforce  Concerns about the

Segment  Workforce diversity environment
 Attitudes about the quality  Shifts in the work and career
of work life preferences
 Shifts in preferences
regarding product and service
characteristics

Technological  Product innovations  Focus of private and

Segment  Applications of knowledge government supported R&D
expenditure
 New communication
technologies

Global Segment  Important political events  Newly industrialized

 Critical global markets countries
 Different cultural and
institutional attributes.

Demographic Segment

This refers to the size, density, distribution age structure, ethnic mix, income distribution and growth rate
of population. All these factors have a direct bearing on the demand for various goods and services. For
example a country where population rate is high and children constitute a large section of population, and
then there is more demand for baby products. Similarly the demand of the people of cities and towns are
different than the people of rural areas. The high rise of population indicates the easy availability of labor.
These encourage the business enterprises to use labor intensive techniques of production. Moreover,
availability of skill labor in certain areas motivates the firms to set up their units in such area. For
example, the business units from

America, Canada, Australia, Germany, UK, are going to India due to easy availability of skilled
manpower. Thus, a firm that keeps a watch on the changes on the demographic front and reads them
accurately will find opportunities knocking at its doorsteps.

Economic Environment

The survival and success of each and every business enterprise depend fully on its economic
environment. The main factors that affect the economic environment are:

(a) Economic Conditions: The economic conditions of a nation refer to a set of economic factors that have
great influence on business organizations and their operations. These include gross domestic product, per

5
capita income, markets for goods and services, availability of capital, foreign exchange reserve, growth of
foreign trade, strength of capital market, inflation rates, budget deficits or surpluses, trade deficits or
surpluses etc. All these help in improving the pace of economic growth.

(b) Economic Policies: All business activities and operations are directly influenced by the economic
policies framed by the government from time to time. Some of the important economic policies are:

(i) Industrial policy

(ii) Fiscal policy

(iii) Monetary policy

(iv)Foreign investment policy

(v) Export –Import policy (Exim policy)

The government keeps on changing these policies from time to time in view of the developments taking
place in the economic scenario, political expediency and the changing requirement. Every business firm
has to function strictly within the policy framework and respond to the changes therein. Important
Economic Policies

(i) Industrial policy: The Industrial policy of the government covers all those principles, policies, rules,
regulations and procedures, which direct and control the industrial enterprises of the country and shape
the pattern of industrial development.

(ii) Fiscal policy: It includes government policy in respect of public expenditure, taxation and public debt.

(iii) Monetary policy: It includes all those activities and interventions that aim at smooth supply of credit
to the business and a boost to trade and industry.

(iv) Foreign investment policy: This policy aims at regulating the inflow of foreign investment in various
sectors for speeding up industrial development and take advantage of the modern technology.

(v) Export–Import policy (Exim policy): It aims at increasing exports and bridges the gap between expert
and import. Through this policy, the government announces various duties/levies. The focus now days
lies on removing barriers and controls and lowering the custom duties.

(c) Economic System: The world economy is primarily governed by three types of economic systems,
viz., (i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed economy. India has adopted the
mixed economy system which implies co-existence of public sector and private sector.

Political Environment

This includes the political system, the government policies and attitude towards the business community
and the unionism. All these aspects have a bearing on the strategies adopted by the business firms. The
stability of the government also influences business and related activities to a great extent. It sends a

6
signal of strength, confidence to various interest groups and investors. Further, ideology of the political
party also influences the business organization and its operations. You may be aware that Coca-Cola, a
cold drink widely used even now, had to wind up operations in India in late seventies. Again the trade
union activities also influence the operation of business enterprises. Most of the labor unions in India are
affiliated to various political parties. Strikes, lockouts and labor disputes etc. also adversely affect the
business operations. However, with the competitive business environment, trade unions are now showing
great maturity and started contributing positively to the success of the business organization and its
operations through workers participation in management.

Legal Environment

This refers to set of laws, regulations, which influence the business organizations and their operations.
Every business organization has to obey, and work within the framework of the law. The important
legislations that concern the business enterprises include:

(i) Companies Act, 1956

(ii) Foreign Exchange Management Act, 1999

(iii) The Factories Act, 1948

(iv)Industrial Disputes Act, 1972

(v) Payment of Gratuity Act, 1972

(vi)Industries (Development and Regulation) Act, 1951

(vii) Prevention of Food Adulteration Act, 1954

(viii) Essential Commodities Act, 2002

(ix) The Standards of Weights and Measures Act, 1956

(x) Monopolies and Restrictive Trade Practices Act, 1969

(xi) Trade Marks Act, 1999

(xii) Bureau of Indian Standards Act, 1986

(xiii) Consumer Protection Act, 1986

(xiv) Environment Protection Act

(xv) Competition Act, 2002

Besides, the above legislations, the following are also form part of the legal environment of business.

(i) Provisions of the Constitution: The provisions of the Articles of the Indian

7
Constitution, particularly directive principles, rights and duties of citizens, legislative powers of the
central and state government also influence the operation of business enterprises.

(ii) Judicial Decisions: The judiciary has to ensure that the legislature and the government function in the
interest of the public and act within the boundaries of the constitution.

The various judgments given by the court in different matters relating to trade and industry also influence
the business activities.

Socialcultural Environment

The social environment of business includes social factors like customs, traditions, values, beliefs,
poverty, literacy, life expectancy rate etc. The social structure and the values that a society cherishes have
a considerable influence on the functioning of business firms. For example, during festive seasons there is
an increase in the demand for new clothes, sweets, fruits, flower, etc. Due to increase in literacy rate the
consumers are becoming more conscious of the quality of the products. Due to change in family
composition, more nuclear families with single child concepts have come up. This increases the demand
for the different types of household goods. It may be noted that the consumption patterns, the dressing
and living styles of people belonging to different social structures and culture vary significantly.

• Capitalist Economy: Emphasis on private ownership.

• Socialist Economy: Resources are owned and managed by the state.

• Mixed Economy: Co-existence of public and private sectors.

Technological Environment

Technological environment include the methods, techniques and approaches adopted for production of
goods and services and its distribution. The varying technological environments of different countries
affect the designing of products. For example, in USA and many other countries electrical appliances are
designed for 110 volts. But when these are made for India, they have to be of 220 volts. In the modern
competitive age, the pace of technological changes is very fast. Hence, in order to survive and grow in the
market, a business has to adopt the technological changes from time to time. It may be noted that
scientific research for improvement and innovation in products and services is a regular activity in most
of the big industrial organizations. Now days in fact, no firm can afford to persist with the outdated
technologies.

Global Segment

Include relevant new global markets, existing markets that are changing, important international
characteristics of global markets. Globalization of business markets creates both opportunities and
challenges for firms .many global markets are becoming borderless and integrated such as those in South
America.in addition to contemplating opportunities, firms should recognize potential competitive threats
in these markets. China for instance presents many opportunities and some threats to international firms

3.3 INDUSTRY ENVIRONMENT ANALYSIS

8
An industry is a group of firms producing products that are close substitutes.in the course of competition,
these firms influence one another. Typically, industries include a rich mix of competitive strategies that
companies use in pursuing strategic competitiveness and above average returns.in part these strategies are
chosen because of the influence of industries characteristics.

3.3.1 The porters’ five forces model

Michael Porter (Harvard Business School Management Researcher) designed various vital
frameworks for developing an organization’s strategy. One of the most renowned among
managers making strategic decisions is the five competitive forces model that determines
industry structure. According to Porter, is the nature of competition in any industry personified
in the following five forces:

i. Threat of new potential entrants

ii. Threat of substitute product/services
iii. Bargaining power of suppliers
iv. Bargaining power of buyers
v. Rivalry among current competitors

FIGURE: Porter’s Five Forces model

The five forces mentioned above are very significant from point of view of strategy formulation.
The potential of these forces differs from industry to industry. These forces jointly determine the
profitability of industry because they shape the prices which can be charged, the costs which can
be borne, and the investment required to compete in the industry. Before making strategic
decisions, the managers should use the five forces framework to determine the competitive
structure of industry.

Let’s discuss the five factors of Porter’s model in detail:

9
1. Risk of entry by potential competitors: Potential competitors refer to the firms which
are not currently competing in the industry but have the potential to do so if given a
choice. Entry of new players increases the industry capacity, begins a competition for
market share and lowers the current costs. The threat of entry by potential competitors is
partially a function of extent of barriers to entry. The various barriers to entry are-
 Economies of scale
 Brand loyalty
 Government Regulation
 Customer Switching Costs
 Absolute Cost Advantage
 Ease in distribution
 Strong Capital base
2. Rivalry among current competitors: Rivalry refers to the competitive struggle for
market share between firms in an industry. Extreme rivalry among established firms
poses a strong threat to profitability. The strength of rivalry among established firms
within an industry is a function of following factors:
 Extent of exit barriers
 Amount of fixed cost
 Competitive structure of industry
 Presence of global customers
 Absence of switching costs
 Growth Rate of industry
 Demand conditions
3. Bargaining Power of Buyers: Buyers refer to the customers who finally consume the
product or the firms who distribute the industry’s product to the final consumers.
Bargaining power of buyers refer to the potential of buyers to bargain down the prices
charged by the firms in the industry or to increase the firms cost in the industry by
demanding better quality and service of product. Strong buyers can extract profits out of
an industry by lowering the prices and increasing the costs. They purchase in large
quantities. They have full information about the product and the market. They emphasize
upon quality products. They pose credible threat of backward integration. In this way,
they are regarded as a threat.
4. Bargaining Power of Suppliers: Suppliers refer to the firms that provide inputs to the
industry. Bargaining power of the suppliers refer to the potential of the suppliers to
increase the prices of inputs( labor, raw materials, services, etc.) or the costs of industry
in other ways. Strong suppliers can extract profits out of an industry by increasing costs
of firms in the industry. Supplier’s products have a few substitutes. Strong suppliers’
products are unique. They have high switching cost. Their product is an important input
to buyer’s product. They pose credible threat of forward integration. Buyers are not
significant to strong suppliers. In this way, they are regarded as a threat.
5. Threat of Substitute products: Substitute products refer to the products having ability
of satisfying customers’ needs effectively. Substitutes pose a ceiling (upper limit) on the
potential returns of an industry by putting a setting a limit on the price that firms can
charge for their product in an industry. Lesser the number of close substitutes a product
has, greater is the opportunity for the firms in industry to raise their product prices and
earn greater profits (other things being equal).
10
The power of Porter’s five forces varies from industry to industry. Whatever be the industry,
these five forces influence the profitability as they affect the prices, the costs, and the capital
investment essential for survival and competition in industry. This five forces model also help in
making strategic decisions as it is used by the managers to determine industry’s competitive
structure.

Porter ignored, however, a sixth significant factor- complementaries. This term refers to the
reliance that develops between the companies whose products work is in combination with each
other. Strong complementors might have a strong positive effect on the industry. Also, the five
forces model overlooks the role of innovation as well as the significance of individual firm
differences. It presents a stagnant view of competition.

3.3.2 BCG Matrix

Boston Consulting Group (BCG) Matrix is a four celled matrix (a 2 * 2 matrix) developed by
BCG, USA. It is the most renowned corporate portfolio analysis tool. It provides a graphic
representation for an organization to examine different businesses in its portfolio on the basis of
their related market share and industry growth rates. It is a two dimensional analysis on
management of SBU’s (Strategic Business Units). In other words, it is a comparative analysis of
business potential and the evaluation of environment.

According to this matrix, business could be classified as high or low according to their industry
growth rate and relative market share.

Relative Market Share = SBU Sales this year -leading competitors sales this year.

Market Growth Rate = Industry sales this year - Industry Sales last year.

The analysis requires that both measures be calculated for each SBU. The dimension of business
strength, relative market share, will measure comparative advantage indicated by market
dominance. The key theory underlying this is existence of an experience curve and that market
share is achieved due to overall cost leadership.

BCG matrix has four cells, with the horizontal axis representing relative market share and the
vertical axis denoting market growth rate. The mid-point of relative market share is set at 1.0. if
all the SBU’s are in same industry, the average growth rate of the industry is used. While, if all
the SBU’s are located in different industries, then the mid-point is set at the growth rate for the
economy.

Resources are allocated to the business units according to their situation on the grid. The four
cells of this matrix have been called as stars, cash cows, question marks and dogs. Each of these
cells represents a particular type of business.

11
                 10 x                                  1 x                                  0.1 x
Figure: BCG Matrix

1. Stars- Stars represent business units having large market share in a fast growing industry.
They may generate cash but because of fast growing market, stars require huge
investments to maintain their lead. Net cash flow is usually modest. SBU’s located in this
cell are attractive as they are located in a robust industry and these business units are
highly competitive in the industry. If successful, a star will become a cash cow when the
industry matures.
2. Cash Cows- Cash Cows represents business units having a large market share in a
mature, slow growing industry. Cash cows require little investment and generate cash that
can be utilized for investment in other business units. These SBU’s are the corporation’s
key source of cash, and are specifically the core business. They are the base of an
organization. These businesses usually follow stability strategies. When cash cows loose
their appeal and move towards deterioration, then a retrenchment policy may be pursued.
3. Question Marks- Question marks represent business units having low relative market
share and located in a high growth industry. They require huge amount of cash to
maintain or gain market share. They require attention to determine if the venture can be
viable. Question marks are generally new goods and services which have a good
commercial prospective. There is no specific strategy which can be adopted. If the firm
thinks it has dominant market share, then it can adopt expansion strategy, else
retrenchment strategy can be adopted. Most businesses start as question marks as the
company tries to enter a high growth market in which there is already a market-share. If
ignored, then question marks may become dogs, while if huge investment is made, then
they have potential of becoming stars.
4. Dogs- Dogs represent businesses having weak market shares in low-growth markets.
They neither generate cash nor require huge amount of cash. Due to low market share,
these business units face cost disadvantages. Generally retrenchment strategies are
adopted because these firms can gain market share only at the expense of
competitor’s/rival firms. These business firms have weak market share because of high
costs, poor quality, ineffective marketing, etc. Unless a dog has some other strategic aim,
it should be liquidated if there is fewer prospects for it to gain market share. Number of
dogs should be avoided and minimized in an organization.

12
Limitations of BCG Matrix

The BCG Matrix produces a framework for allocating resources among different business units
and makes it possible to compare many business units at a glance. But BCG Matrix is not free
from limitations, such as-

1. BCG matrix classifies businesses as low and high, but generally businesses can be
medium also. Thus, the true nature of business may not be reflected.
2. Market is not clearly defined in this model.
3. High market share does not always leads to high profits. There are high costs also
involved with high market share.
4. Growth rate and relative market share are not the only indicators of profitability. This
model ignores and overlooks other indicators of profitability.
5. At times, dogs may help other businesses in gaining competitive advantage. They can
earn even more than cash cows sometimes.
6. This four-celled approach is considered as to be too simplistic.

3.3.3 SWOT Analysis 

SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. By
definition, Strengths (S) and Weaknesses (W) are considered to be internal factors over which
you have some measure of control. Also, by definition, Opportunities (O) and Threats (T) are
considered to be external factors over which you have essentially no control.

SWOT Analysis is the most renowned tool for audit and analysis of the overall strategic
position of the business and its environment. Its key purpose is to identify the strategies that
will create a firm specific business model that will best align an organization’s resources and
capabilities to the requirements of the environment in which the firm operates. In other words,
it is the foundation for evaluating the internal potential and limitations and the probable/likely
opportunities and threats from the external environment. It views all positive and negative
factors inside and outside the firm that affect the success. A consistent study of the
environment in which the firm operates helps in forecasting/predicting the changing trends and
also helps in including them in the decision-making process of the organization.

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

1. Strengths- Strengths are the qualities that enable us to accomplish the organization’s mission.
These are the basis on which continued success can be made and continued/sustained. Strengths
can be either tangible or intangible. These are what you are well-versed in or what you have
expertise in, the traits and qualities your employees possess (individually and as a team) and the
distinct features that give your organization its consistency. Strengths are the beneficial aspects of
the organization or the capabilities of an organization, which includes human competencies,
process capabilities, financial resources, products and services, customer goodwill and brand
loyalty. Examples of organizational strengths are huge financial resources, broad product line, no
debt, committed employees, etc.

13
 2. Weaknesses- Weaknesses are the qualities that prevent us from accomplishing our mission and
achieving our full potential. These weaknesses deteriorate influences on the organizational
success and growth. Weaknesses are the factors which do not meet the standards we feel they
should meet. Weaknesses in an organization may be depreciating machinery, insufficient research
and development facilities, narrow product range, poor decision-making, etc. Weaknesses are
controllable. They must be minimized and eliminated. For instance - to overcome obsolete
machinery, new machinery can be purchased. Other examples of organizational weaknesses are
huge debts, high employee turnover, complex decision making process, narrow product range,
large wastage of raw materials, etc.
3. Opportunities- Opportunities are presented by the environment within which our organization
operates. These arise when an organization can take benefit of conditions in its environment to
plan and execute strategies that enable it to become more profitable. Organizations can gain
competitive advantage by making use of opportunities. Organization should be careful and
recognize the opportunities and grasp them whenever they arise. Selecting the targets that will
best serve the clients while getting desired results is a difficult task. Opportunities may arise from
market, competition, industry/government and technology. Increasing demand for
telecommunications accompanied by deregulation is a great opportunity for new firms to enter
telecom sector and compete with existing firms for revenue.
4. Threats- Threats arise when conditions in external environment jeopardize the reliability and
profitability of the organization’s business. They compound the vulnerability when they relate to
the weaknesses. Threats are uncontrollable. When a threat comes, the stability and survival can be
at stake. Examples of threats are - unrest among employees; ever changing technology; increasing
competition leading to excess capacity, price wars and reducing industry profits; etc.

Advantages of SWOT Analysis

SWOT Analysis is instrumental in strategy formulation and selection. It is a strong tool, but it
involves a great subjective element. It is best when used as a guide, and not as a prescription.
Successful businesses build on their strengths, correct their weakness and protect against internal
weaknesses and external threats. They also keep a watch on their overall business environment
and recognize and exploit new opportunities faster than its competitors.

SWOT Analysis helps in strategic planning in following manner-

a. It is a source of information for strategic planning.

b. Builds organization’s strengths.
c. Reverse its weaknesses.
d. Maximize its response to opportunities.
e. Overcome organization’s threats.
f. It helps in identifying core competencies of the firm.
g. It helps in setting of objectives for strategic planning.
h. It helps in knowing past, present and future so that by using past and current data, future plans
can be chalked out.

SWOT Analysis provide information that helps in synchronizing the firm’s resources and
capabilities with the competitive environment in which the firm operates.

SWOT ANALYSIS FRAMEWORK

14
Limitations of SWOT Analysis

SWOT Analysis is not free from its limitations. It may cause organizations to view
circumstances as very simple because of which the organizations might overlook certain key
strategic contact which may occur. Moreover, categorizing aspects as strengths, weaknesses,
opportunities and threats might be very subjective as there is great degree of uncertainty in
market. SWOT Analysis does stress upon the significance of these four aspects, but it does not
tell how an organization can identify these aspects for itself.

There are certain limitations of SWOT Analysis which are not in control of management. These
include-

a. Price increase;
b. Inputs/raw materials;
c. Government legislation;
d. Economic environment;
e. Searching a new market for the product which is not having overseas market due to import
restrictions; etc.
Internal limitations may include-

a. Insufficient research and development facilities;

b. Faulty products due to poor quality control;
c. Poor industrial relations;
d. Lack of skilled and efficient labor; etc.

3.3.4 Mintzberg's 5 Ps of Strategy

15
Many of us brainstorm opportunities, and then plan how we'll take advantage of them.
Unfortunately, while this type of approach is important, we need to think about much more than
this if we want to be successful.

After all, there's no point in developing a strategy that ignores competitors' reactions, or doesn't
consider the culture and capabilities of your organization. And it would be wasteful not to make
full use of your company's strengths - whether these are obvious or not.

Management expert, Henry Mintzberg, argued that it's really hard to get strategy right. To help
us think about it in more depth, he developed his 5 Ps of Strategy – five different definitions of
(or approaches to) developing strategy.

About the 5 Ps

Mintzberg first wrote about the 5 Ps of Strategy in 1987. Each of the 5 Ps is a different approach
to strategy. They are:

1. Plan.
2. Ploy.
3. Pattern.
4. Position.
5. Perspective.

By understanding each P, you can develop a robust business strategy that takes full advantage of
your organization's strengths and capabilities.

In this article, we'll explore the 5 Ps in more detail, and we'll look at tools that you can use in
each area.

1. Strategy as a Plan

Planning is something that many managers are happy with, and it's something that comes
naturally to us. As such, this is the default, automatic approach that we adopt – brainstorming
options and planning how to deliver them.

This is fine, and planning is an essential part of the strategy formulation process.

Our articles on PEST Analysis, SWOT Analysis and Brainstorming help you think about and
identify opportunities; the article on practical business planning looks at the planning process in
more detail; and our sections on change management and project management teach the skills
you need to deliver the strategic plan in detail.

The problem with planning, however, is that it's not enough on its own. This is where the other
four Ps come into play.

2. Strategy as Ploy

16
Mintzberg says that getting the better of competitors, by plotting to disrupt, dissuade, discourage,
or otherwise influence them, can be part of a strategy. This is where strategy can be a ploy, as
well as a plan.

For example, a grocery chain might threaten to expand a store, so that a competitor doesn't move
into the same area; or a telecommunications company might buy up patents that a competitor
could potentially use to launch a rival product.

Here, techniques and tools such as the Futures Wheel, Impact Analysis and Scenario Analysis
can help you explore the possible future scenarios in which competition will occur. Our article
on Game Theory then gives you powerful tools for mapping out how the competitive "game" is
likely to unfold, so that you can set yourself up to win it.

3. Strategy as Pattern

Strategic plans and ploys are both deliberate exercises. Sometimes, however, strategy emerges
from past organizational behavior. Rather than being an intentional choice, a consistent and
successful way of doing business can develop into a strategy.

For instance, imagine a manager who makes decisions that further enhance an already highly
responsive customer support process. Despite not deliberately choosing to build a strategic
advantage, his pattern of actions nevertheless creates one.

To use this element of the 5 Ps, take note of the patterns you see in your team and organization.
Then, ask yourself whether these patterns have become an implicit part of your strategy; and
think about the impact these patterns should have on how you approach strategic planning.

Tools such as USP Analysis and Core Competence Analysis can help you with this. A related
tool, VRIO Analysis, can help you explore resources and assets (rather than patterns) that you
should focus on when thinking about strategy.

4. Strategy as Position

"Position" is another way to define strategy - that is, how you decide to position yourself in the
marketplace. In this way, strategy helps you explore the fit between your organization and your
environment, and it helps you develop a sustainable competitive advantage.

For example, your strategy might include developing a niche product to avoid competition, or
choosing to position yourself amongst a variety of competitors, while looking for ways to
differentiate your services.

When you think about your strategic position, it helps to understand your organization's "bigger
picture" in relation to external factors. To do this, use PEST Analysis, Porter's Diamond, and
Porter's Five Forces to analyze your environment - these tools will show where you have a strong
position, and where you may have issues.

17
As with "Strategy as a Pattern," Core Competence Analysis, USP Analysis, and VRIO Analysis
can help you craft a successful competitive position. You can also use SWOT Analysis to
identify what you do well, and to uncover opportunities.

Note:
There can be a lot of overlap between "Strategy as Position" and other elements of the 5 Ps. For
instance, you can also achieve a desired position through planning, and by using a ploy. Don't
worry about these overlaps - just get as much value as you can from the different approaches.

5. Strategy as Perspective

The choices an organization makes about its strategy rely heavily on its culture – just as patterns
of behavior can emerge as strategy, patterns of thinking will shape an organization's perspective,
and the things that it is able to do well.

For instance, an organization that encourages risk-taking and innovation from employees might
focus on coming up with innovative products as the main thrust behind its strategy. By contrast,
an organization that emphasizes the reliable processing of data may follow a strategy of offering
these services to other organizations under outsourcing arrangements.

To get an insight into your organization's perspective, use cultural analysis tools like the Cultural
Web, Deal and Kennedy's Cultural Model, and the Congruence Model.

Using the 5 Ps

Instead of trying to use the 5 Ps as a process to follow while developing strategy, think of them
as a variety of viewpoints that you should consider while developing a robust and successful
strategy.

As such, there are three points in the strategic planning process where it's particularly helpful to
use the 5 Ps:

1. When you're gathering information and conducting the analysis needed for strategy
development, as a way of ensuring that you've considered everything relevant.
2. When you've come up with initial ideas, as a way of testing that that they're realistic,
practical and robust.
3. As a final check on the strategy that you've developed, to flush out inconsistencies and
things that may not have been fully considered.

Using Mintzberg's 5 Ps at these points will highlight problems that would otherwise undermine
the implementation of your strategy.

After all, it's much better to identify these problems at the planning stage than it is to find out
about them after you've spent several years – and millions of dollars – implementing a plan that
was flawed from the start.

18
3.4 BARIERS OF ENTRY

Existing competitors try to develop barriers to entry. In contrast, potential entrants seek markets in which
the entry barriers are relatively insignificant .The absence of entry barriers increases the probability that a
new entrant can operate profitably .There are several kinds of potentially significant entry barriers.

Economies of scale

Economic of scale are “the marginal improvements in efficiency that a firm that experiences as it
incrementally increases it size. Therefore as the quantity of a product produced during given period
increases, the cost of manufacturing each unit declines. Economies of scale can be developed in most
business functions, such as marketing, manufacturing, research and development, and purchasing.
Increasing economies of scale enhances a farm’s flexibility. For example, a firm may choose to reduce its
price and capture a greater share of market .Alternatively; it may keep its price constant to increase
profits. In so doing it likely will increase its free cash flow, which is helpful in times of recession.

New entrants face a dilemma when confronting current competitors’ scale economies small scale entry
places them at competitive retaliation a cost disadvantage. Alternatively, large scale entry in which the
new entrant manufactures large volumes of a product to gain economies of scale, risks strong competitive
retaliation.

Product differentiation

Over time, customers may come to belief that a firm’s product is unique. This belief can result from the
firm’s service to the customer, effective advertising campaigns, or being the first to market a good or
service. Companies such as coca cola, Pepsi Co,and the world’s , automobile manufacturers spent a
great deal of money on advertising to convince potential customers of their products ‘distinctiveness .
Customers valuing a product’s uniqueness to tend to become a loyal to both the product and the
company producing it. Typically new entrants must allocate many resources to, overcome existing
customer loyalties. To combat the perception of uniqueness, new entrants frequently offer
products at lower prices. This decision however may result in lower profits and sometimes even losses.

Capital Requirements

Competing in a new industry requires a firm to have resources to invest. In addition to physical facilities,
capital is needed for inventories, marketing activities and other critical business functions. Even when
competing in a new industry is attractive, the capital required for successful market entry may not be
available to pursue an apparent market opportunity. For example entering a steel and defense industries
would be very difficult because of the substantial resource investments required to be competitive.

Switching costs

These are the one-time costs customers incur when they buy from a different supplier. The cost of buying
new ancillary equipment and of retraining employees, and even the psychic costs of ending a relationship,

19
may be incurred in switching to a new supplier.in some cases switching costs are low, such as when a
customer switches to different soft drink. Switching costs can vary as a function of time. For example in
terms of credit hours towards graduation the cost to a student to transfer from one university to another as
a freshman is much lower than when the student is entering a senior year. Occasionally, a decision made
by a manufacture to produce a new, innovative product creates high switching cost for final customer.
Customer loyalty programs such as airlines’ frequent flier miles, are intended are increase the customers
switching costs.

Access to distribution channels.

Over time industry participants typically develop effective means of distributing products. Once a
relationship with its distributor has been developed, a firm will nurture it to create switching costs for
distributors. Access to distribution channels can be a strong entry barrier for new entrants, particularly in
consumer non-durable goods industries and in international markets thus new entrants have to purchase
distributors to carry their products either in addition to or in place of those currently distributed.

Cost disadvantage independent of scale

Sometimes established competitors have cost advantages that new entrants cannot duplicate. Proprietary
product technology, favorable access to raw materials, desirable locations and government subsidies are
examples. Successful competition requires new entrants to reduce the strategic relevance of these factors.
Delivering purchases direct to the buyer can counter the advantage of desirable location: new food
establishments in an undesirable location often follow this practice.

Government Policy

Through licensing and permit requirements , governments can also control entry into an industry liquor
retailing, banking and tracking are examples of industries in which government decisions and actions
affect entry possibilities. Also governments often restrict entry into some industries because of the need to
provide quality service or the need to protect jobs.

20