Contents

1. Lesson Introduction................................................................................................................2
2. The External Environment of the Firm....................................................................................2
3. The PESTEL Framework...........................................................................................................2
4. PESTEL Analysis: Tesla Motors Case Exercise..........................................................................4
5. The Structure-Conduct-Performance Model..........................................................................5
6. Introduction to the Porter Five Forces Model........................................................................7
7. Porter Five Forces Model- Part 1............................................................................................8
8. Porter Five Forces Model- Part 2............................................................................................9
9. Porter Five Forces Model- Part 3..........................................................................................11
10. Porter Five Forces Model- Tesla Motors Case Exercise.....................................................12
11. Looking Inside the Firm for Competitive Advantage.........................................................12
12. The Resource-Based View of Competitive Advantage......................................................13
13. VRIO Analysis....................................................................................................................14
14. The Value Chain Framework.............................................................................................16
15. Ratio Analysis and Benchmarking.....................................................................................17
16. SWOT Analysis..................................................................................................................19
1. Lesson Introduction
 Porter, more so than Mintzberg, suggests that strategy be formulated on a foundation
of analysis.
 Both the traditional model strategy development and the scenario based model stressed
this and are consistent with Porter's thinking.
 Strategists' plan emergence is aligned with Mintzberg's thinking.
 Analysis consists of developing a better understanding and gaining insights into both the
firm's external and internal environments.
 In strategy development, the purpose of studying the external environment is to identify
future opportunities for business growth, as well as potential threats that must be
mitigated.
 The purpose of studying the internal environment is to assess organizational strengths
and weaknesses relative to the opportunities and threats that were identified in
external analysis.

2. The External Environment of the Firm

 The term external environment refers to the factors, forces, situations, and advance
outside the organization that effects its performance.

3. The PESTEL Framework

 PESTEL is simply an acronym for political, economic, societal, technological, ecological,
and legal.
 The PESTEL analysis is a simple and effective tool, used in an external analysis to identify
the key macro environmental forces that have the potential to either affect the industry
or the firm.
 The objectives of performing a PESTEL analysis are to identify the external factors that
most directly impact the firm.
 A PESTEL analysis will give managers a much better understanding of the industry. And
the overall outlook for the future at the industry and the firm's performance within the
industries.
 Political:
 Political is one of the few areas that a PESTEL analysis that can be influenced by
individual firm action.
 Examples include, lobbying efforts intended to influence legislation. Supporting
specific political candidates. Or litigating against policies and legislations that
run counter to the firm's best interests.
 Political actions can be driven from federal state and municipal levels that tend
to impact the firm, in terms of favorable or unfavorable tax policy, subsidies and
grants, tariffs, inactions, restricting access to markets for imports and other
foreign markets for exports.
 Economic:
 Economic factors tend to impact spending to both the consumer and the
business levels.
 Economic factors can also influence the types of products purchased.
 For example, during business contractions, firms tend to buy products that
reduce operating cost. During expansions, individual consumers have more
disposable income, and this will typically spur on demand for consumer
products.
 Economic forces can also directly impact the cost of doing business. A good
example of this are fluctuations in commodity prices.
 The cost of capital is an economic factor, as well which is also influenced by
governmental monetary policy. As you know, higher cost to capital leads to
lower amounts of capital investment, and higher hurdle rates for new project
approvals.
 Socio-Cultural:
 Demographic of social cultural trends can significantly impact market sizes and
the types of products that customer's buy.
 Demographics deals with populations. Some important trends in the US include
the aging of the Baby Boomer population, the immigration driven diversification
of markets, and the increasing purchasing power and size of the Hispanic
population in the US. Demographic trends portend growth are shrinkage and
consumer markets. Also, as people advanced with their natural life cycle, they
buy age appropriate products. Similarly, different minority groups have different
product preferences.
  Sociocultural deals with values and beliefs. Examples include more positive
attitudes toward green vehicles. A trend that positively impacts, Tesla, for
example.
 It's interesting to note how the same cultural or demographic factor can be a
boom to one industry, while being a threat that they drag on another.
 Technology:
 Technology can impact business processes, products, and buying behaviors.
 Technologies can also have a significant effect on firms and industries. Internet
technologies have resulted in restructuring and diminished a traditional media
providers, such as newspaper publishers and broadcast cable companies.
 Ecological:
 More intention and importance is being given to the role of the firm and the
firm's impact on its physical environment.
 In growing importance is the impact of the ecological factors on a firm's
reputation and the firm's attractiveness to potential customers and employees.
 Legal/Ethical:
 There are legal factors which include legislation, regulation and court actions.
 Legal factors can impact both a firms external and internal environments.
Factors include employment and labor laws and regulations, consumer and
privacy laws, health and safety in the workplace, packaging and labeling, and
interstate international trade regulation.

 A PESTEL analysis helps management identify the external forces that could impact their
market and analyze how they could directly impact their business.

4. PESTEL Analysis: Tesla Motors Case Exercise

 One way to develop insights from a PESTEL analysis is to construct a simple framework
like the 3x3 matrix
5. The Structure-Conduct-Performance Model
 The Structure-Conduct-Performance Model of strategy assumes that industry structure
determines firm conduct. Which in turn drops firm performance.
 The term structure refers to industry structure, measured by the following factors. The
number of competitors in the industry, the heterogeneity of products. The extent of
vertical integration, demand structure and the cost of entry and exit.
 Conduct refers to specific firm actions in an industry, including price setting, product
differentiation, branding. Capacity investments, innovation and the exploitation of
market power. Conduct also includes negative behaviors such as collusion.
 Performance in the SCP model has two meanings. The performance of the individual
firms and performance of the industry as a whole. Performance includes financial
metrics such as economic profits, value creation, and total shareholder returns.
 Perfect competition:
 Industries are perfectly competitive when there are large numbers of
competing firms. When products being sold are homogeneous in respect to
cost and product attributes. And when entry and exit costs are very low.
 Firms operating in perfectly competitive industries can act only as price takers.
A firm is a price taker when it responds to changes in the industry supply and
demand, by adjusting prices. Rather than attempting to influence the level of
supply and demand.
 Price taking firms can expect to gain only competitive parity. There exists no
effective way to create differentiation nor can a firm create a competitive
advantage.
 From a performance perspective, these markets leave little room for firm
profits.
 Monopolistically competitive:
 In these industries, firms carve out market niches within which they act as quasi
monopolist. And they do this mainly through differentiation.
 In monopolistically competitive industries, there are large numbers of
competing firms and low cost entry exit into and out of the industry.
 But unlike the case of perfect competition, products of these industries are not
homogeneous with respect to cost, or product attributes. Rather the firms in
this type of industry are successfully implementing product differentiation
strategies.
 Examples of monopolistic competitive industries include universities,
automobile dealerships, residential construction firms. Supermarket chains,
management consulting and fine dining restaurants.
 Firms as such industries have a variety of conduct options that they can use to
gain competitive advantage. Conduct options include pricing, innovation,
service. Branding and extensive advertising, enhanced customer experience,
customer convenience. Investing and capacity and attracting best talent among
the other tactics.
 Oligopolies:
 Oligopolies are characterized by a small number of competing firms. Either
homogeneous or heterogeneous products and costly entry and exit.
 
Examples of oligopolistic industries include soft drink manufactures, aircraft
manufactures, overnight mail delivery. Chip fabricators, medical devices and
pharmaceutical, and smartphone makers.
 Firms in these industries have interdependent marketing strategies. That is,
these firms recognize that marketing actions of one firm would typically provoke
a similar response from their direct competitors.
 In these industries, non-priced related competition is favored. Since price wars
would only serve to lower the overall industry gross margins.
 Monopolistic:
 Monopolies consist of only a single firm, entry into this type of industry is very
costly.
 There are few examples of purely monopolistic industries. However, one
industry that comes close to being a monopoly is a personal computer OS
industry. An industry almost completely dominated by Microsoft.
 One of the critical conduct options facing firms in this type of industry is that the
use of market power to set prices that can generate significant economic value.

6. Introduction to the Porter Five Forces Model

 In developing the model, Michael Porter leveraged a structured conduct performance
model, and identified five forces which he suggested determined the competitive
intensity, and therefore the attractiveness of an industry.
 Attractiveness in this context refers to the overall industry profitability, and also reflects
upon the profitability of the firms under analysis.
 An unattractive industry is one where the combination of forces acts to drive down
overall profitability.
 In the SCP model, profitability is a result of firm conduct or competitive actions, which in
turn are significant impact by the industry structure.
 In a Porter model, five forces provide industry structure in which the various firms
compete.
 Collectively the five forces affect prices, necessary investment for competitiveness,
market value, potential profits and profit margins, and industry volumes.
 The five forces in the Porter model are:
 Bargaining power of suppliers, which is an assessment of how easy it is
for suppliers to drive up prices for the suppliers products.
 Bargaining power of customers, which is an assessment of how easy it is
for buyers to drop prices down.
 Competitive rivalry, which is the main driver, which the main driver is
the number and the capability of the competitors in the market.
 Strength of substitutes, where close substitute products exist in a
market, it increases the likelihood of a customer switching to
alternatives in response to price increases.
 Threat of new entrants. If a market is highly profitable, it will attract
new entrants which erode profitability. Existing firms attempt to create
barriers to entry.
7. Porter Five Forces Model- Part 1
 Concepts that'll be useful in explaining how to perform a Porter Five Forces Analysis.
These concepts include industry concentration, switching costs, and forward and
backward integration.
 Concentration:
 A concentration ratio is the ratio of the combined market shares of a given
number of firms to the whole market size. It is commonest to consider the 4
firm ratio.
 Concentration ratios are used to assess the extent to which a given market is
oligopolistic.
 Concentration ratios can fall anywhere between 0 and 100%. Between these
two extremes, concentration ratios can be classified into low, medium, and high
 A concentration ratio of 0 to 50% is commonly interpreted as an industry with
low concentration.
 Monopolistic competition falls in the mid to upper portion of this range. With
pure competition falling at the lower end of the range.
 A rule of thumb is that an oligopoly exists when the top five firms in the market
account for more than 60% of total market sales.
 Higher concentration ratios usually result in higher bargaining power.

 Switching Cost:
 Switching costs are the costs that a consumer incurs as a result of changing
brands, suppliers or products. Although most prevalent switching costs are
monetary in nature, there are also psychological, effort- and time-based
switching costs.
 Switching costs can be embedded in products to discourage a customer from
switching to a different product or service provider by having that customer
incur an opportunity cost.

 Forward and Backward integration:

 Backward integration occurs when a firm purchases or becomes its own supplier
or raw material provider. Often this is done to eliminate inefficiencies, to create
cost savings, or to capture profits taken by the supplier.
 forward integration is when a firm purchases or builds its own distribution or
retail capabilities. Here again the motive is to exert greater control over the
industry value chain and capture additional profits.
  If a firm has the capital and capabilities to forward or backward integrate the
threat of integration increases the bargaining power of the firm.

8. Porter Five Forces Model- Part 2

 Bargaining Power of Suppliers:
 Strong bargaining power allows suppliers to sell higher-priced or lower-quality
raw materials, parts, or components to their buyers, who in a Porter Five Forces
model are the actual competitors (or the producers) in the industry being
analyzed.
 Suppliers have strong bargaining power when:
 there are few suppliers but many buyers.
 when the competitors buy from suppliers in small or insignificant
quantities.
 when suppliers hold scarce resources or when the cost of switching raw
materials for the producers is especially high.
 when suppliers can forward integrate and become a competitor in the
industry.

 Bargaining power of buyer:

 These are the customers of the industry competitors.
 Buyers have the power to demand lower prices or higher product quality from
industry competitors when their bargaining power is strong.
 Buyers, that is customers, exert strong power when:
 buying in large quantities, or when only few buyers exist.
 when buyer Switching Costs to other competitors or substitutes are low.
 When competitors’ products are undifferentiated
 when buyers threaten to backward integrate.
 when there are many substitutes for buyers to choose from
 when buyers are price sensitive.

 Strength of substitutes:
 A substitute is an alternative product that serves a similar purpose.
 A few examples:
 Email is a substitute for express mail;
 Plastic is a substitute for glass;
 Coffee is a substitute for tea;
 bio-fuel is a substitute for gasoline;
 used cars are substitutes for new cars; and
  The more substitutes a product has and the greater propensity for a buyer to
substitute, the more elastic the demand curve will be for a competitors
product.
 Elasticity is just a measure of the sensitivity of a product’s demand to that
products price. The relationship is inverse and the higher the price the lower the
demand.

 Threat of New Entrants:

 This force determines how difficult or costly it is to enter a particular industry. If
an industry is profitable and there are few barriers to entry, rivalry will soon
intensify.
 The threat of new entrants is high when:
 low amounts of capital are required to enter a market.
 existing companies can do little to retaliate or stop new entrants
 existing firms do not possess patents, trademarks, or do not have
established brand reputations.
 there's no governmental regulations restricting entry
 customer switching costs are low
 customer loyalty is low
 the industry’s products are nearly identical and have little to
differentiate them
 existing distribution channels are opened to new entrants, and
 economies of scale can be easily achieved or are not important

 Rivalry Among Existing Competitors:

 Often the most dominant force in determining industry structure.
 The basis of industry competition can be thought of as on a continuum. At one
end is civilized, constructive competition, where the focus is on innovation and
meeting customer needs more effectively than the competitor. At the other end
of the continuum is pure price competition. Competition here is fierce and
destructive.
 When firms compete aggressively for market share based on pricing strategies,
industry-wide pressure will ultimately lower industry gross margins, making
industries increasingly unattractive.
 The more the basis of competition is orientated toward innovation and meeting
customer needs, the more attractive the industry. The point of innovation is to
create differentiation.
 Rivalry among competitors is intense when:
 the competition is highly fragmented
 exit barriers are high
 industry growth is slow,
 products are not differentiated and can be easily substituted
 buyer switching costs are low
 customer loyalty is low
  economies of scale are very significant and production volumes need to
be kept high

9. Porter Five Forces Model- Part 3

 Complements are other products that directly impact demand for the industry’s
products; a force not addressed by Porter or the SCP model; but also important in
understanding overall industry attractiveness.
 One result of a Porter Five Forces analysis is that management can develop an
understanding of the fundamental structure and the dynamics of an industry and
ultimately stake out a position that the firm believes creates the best opportunity for
profits. However, it’s also important to understand that industry structure can and does
change over time – so when markets shift, management must be prepared to respond.
 So, a Porter analysis is developed as of a point in time; and must be revisited and
modified to reflect industry changes.
 Few ways industries are dynamic and the implications for strategy:
 The threat of new entrants: Changes to barriers to entry can increase or
decrease the cost of entering an industry; making entry more or less difficult.
 Increases, decreases in supplier power can result from supplier industry
consolidation, reducing supplier alternatives for the industry producers. Also as
companies vertically integrate, supplier power diminishes.
 Substitution threats can shift. The most common reason that substitutes
become more or less threatening over time is that advances in technology
create new substitutes or shift price performance comparisons.
 Competitive rivalry often naturally intensifies over time. As industries mature
and products begin to over satisfy customer needs, differentiation gives way to
price competition until the weaker players are driven out of the market and the
remaining players consolidate and stabilization returns.
 Buyer buying preferences can change either as a result of changes in socio-
cultural factors, demographic, technology, the economic business cycle, and
greater customer appreciation for environmental issues.

 Many strategists have started using a sixth force in developing a Porter Model. The
sixth force identifies products that complement the products the industry competitors
sell.
 Complements are products or services that stimulate demand for an industry's product.
 For example, video games made by EA Sports, such as Madden NFL Football, or first
person shooter games, like Battlefield or Call of Duty, can stimulate demand for gaming
consoles made by Sony and Microsoft.
 A company is complementary to your company if your customers value your firm's
product more when they are able to combine it with the other company's product.
 A complement becomes a competitor if your firm chooses to also develop the
complementary products itself.
 The stronger the force in the Porter model, the more likely the downward pressure on
industry margins will be high; for complements the effect is exactly the opposite. The
 more complements for an industry’s product, typically the greater the demand and the
higher the profits.
 Using the sixth force, we can construct a slightly different model of firm structure. In this
model there are three distinct pairs of forces:
 entry/exit barriers
 supplier and buyer power
 substitutes and compliments
 Some ways companies can mitigate structural impediment to firm profitability”
 Increase product differentiation
 Diversify product lines
 Introduce or strengthen switching costs
 Continually innovate to increase product value
 Alter bargaining relationships between the industry competitors and buyers and
suppliers
 Build barriers to entry to keep new competition out
 Develop complements or build strategic partnerships with complement
providers

10.Porter Five Forces Model- Tesla Motors Case Exercise

11.Looking Inside the Firm for Competitive Advantage

 The purpose of Internal Analysis is to analyze and assess the internal capabilities and
resources of the organization and to evaluate the firm’s ability to leverage its strengths
or mitigate its weaknesses when pursuing external opportunities or protecting the firm
against external threats.
 There are a number of tools and frameworks that can be helpful in internal analysis,
including:
 VRIO Analysis
 Value Chain Analysis
 Ratio Analysis, and
 Benchmarking
 To formulate and implement strategy that enhances firm performance, a firm must
possess internal capabilities that can be leveraged to pursue opportunities and protect
against threats found in the external environment. These capabilities are part of the
firm's business model.
 The internal aspects of the firm are identified as resources, capabilities, core
competencies and activities. Sources of Competitive Advantage are:
 Core Competencies – unique strengths that drive competitive advantage
 Resources – tangible and intangible assets of the firm.
 Capabilities – organizational and managerial skills, things the organization does.
 Activities – transform inputs into outputs.
 Internal analysis is where the strategist focuses on identifying and assessing
organizational strengths in capabilities, resources, and activities critical to delivering the
 firm's competitive advantage. Internal analysis will also identify organizational
weaknesses that may make the firm vulnerable to an external threat.

12.The Resource-Based View of Competitive Advantage

 The resource-based view is an approach that stresses the asset base of the firm as the
source for creating competitive advantage in the marketplace.
 It is much more feasible to exploit external opportunities using resources in a new way,
rather than trying to acquire new capabilities for each new opportunity.

 Resources can be tangible: land, equipment, technology, and other physical assets, or
intangible.
 Tangible resources can easily be bought in the market, they confer little advantage to
companies in the long run, because rivals can just as easily acquire identical assets.
 Intangible assets are everything else that can still be owned by the company. Brand
reputation, trademarks, intellectual property are all intangible assets.
 To stress that point again, intangible assets are much more likely to create a sustainable
competitive advantage than are tangible assets.
 The two critical assumptions of the resource-based view are that resources must also be
heterogeneous and immobile.
 The first assumption is that skills, capabilities, and other resources that
organizations' possess differ from one firm to another. If organizations had the
same quantity, quality, and mix of resources, they could not employ different
strategies to out-compete each other.
 Resources are also considered to be immobile or “sticky”: at least in the short
run, resources do not move from company to company. Due to this immobility,
companies cannot replicate rivals’ resources and implement the same
strategies.
  The resource-based view assumes that companies achieve competitive advantage by
using their specific bundles of resources effectively in creating either a differentiation or
cost advantage in the marketplace.
 For a resource to be at the basis of a competitive advantage, it must be valuable, rare,
costly to imitate and organize to capture value. The acronym VRIO.

13.VRIO Analysis
 VRIO is an acronym for Valuable, Rare, Costly to Imitate, and Organized to Capture
Value.
 This framework assumes that a firm can only gain a sustained competitive advantage if it
has the resources and capabilities that satisfy VRIO requirements.
 For a resource to be the basis of a competitive advantage it must be valuable, rare,
costly to imitate, and the firm must be organized to capture value.

 Valuable:
 Resources are also considered valuable if they help a firm increase the
perceived value of the firm's products.
 For instance, does the resource in some way lead to an increase in product
differentiation or decrease the cost of the product?
 The resources that cannot meet this condition, that is, help increase
differentiation or reduce cost, lead either to competitive parity or a competitive
disadvantage.
 Rare:
 Resources that can only be acquired by one or very few firms are considered
rare.
 Rare and valuable resources grant at least a temporary competitive advantage.
 The situation when more than one company has the same resource, or uses the
same capability in a similar way, results in competitive parity.
 Even though competitive parity is not a desired position, a firm should not
neglect the resources that are valuable but common.
 Costly to imitate
 If firms that don't have the resource can't imitate it, buy, or substitute for it at a
reasonable price.
 There are three key reasons why resources can be hard to imitate.
  Historical condition. Resources that were developed over a long period
of time are often costly to imitate. Brand reputation is the best
illustration of this condition.
 Causal ambiguity. In some cases, competitors may not be able to
identify the particular resource or resources that are the cause for a
competitors’ competitive advantage.
 Social complexity. Resources and capabilities are interwoven into the
fabric of the firm's culture and interpersonal relationships. Two or more
social and business systems interact or combine, creating many and
complex possibilities.
 Organized to capture value:
 The O in the VRIO is referring to how the firm is organized to exploit the full
competitive potential of its resources and its capabilities.
 A firm that has valuable, rare, and costly to imitate resources can, but not
necessarily will, achieve sustained competitive advantage. The resources
themselves do not confer any advantage for a company if the firm is not
organized to capture the value from them.
 In order to fully realize competitive advantage, the organization needs to have
appropriate organization structure, management controls, and compensation
policies.

 VRIO analysis
 If the resources are not valuable the firm should consider eliminating or
outsourcing them. In these cases the focus should be on becoming more cost-
efficient.
 If the resource or resources are valuable, but not rare, the firm is in a
competitive conformity. This means that the firm is not worse than its
competitors, but it's not better either.
 If the resource is valuable and rare but it is not expensive to imitate, the firm
will have a temporary competitive advantage. When competitors imitate it, the
competitive advantage will be lost. If possible, firms can use trade-secret type
protections here to prolong the competitive advantage.
 If the resource is valuable, rare, and is expensive to imitate it, but the firm itself
is not organized to take advantage of it, the resource may become an
unnecessary cost. Institutional changes will be required to exploit the potential
advantage.
 If a resource is valuable, rare, expensive, or difficult to imitate, and organized to
capture value, the firm can expect to enjoy a sustained competitive advantage.

 VRIO can be applied to capabilities as well as to specific assets. Some firms are able to
achieve competitive advantage by developing unique capabilities to manage relatively
common, tangible assets.
14.The Value Chain Framework
 Value chain analysis helps strategists understand how a firm creates value for its
customers.
 A value chain is the full range of activities a firm performs to bring a product from
conception to delivery. A value chain may include design, production, operations,
marketing and distribution, as well as other activities.

 Business activities are put into two categories: primary activities that create value, and
support activities, that help enable the primary activities.
 Primary activities generally include the following:
 In-Bound Logistics. In-Bound Logistics can either be narrowly defined as simply
transportation or more broadly defined as supply chain management. For many
firms these activities are outsourced to service providers like Federal Express
and UPS. BTW any activity that is outsourced cannot be a source for competitive
advantage since the activity and the capability supported will not be VRIO – the
activity is not rare.
 Manufacturing and assembly, this is the stage where raw materials and other
inputs are turned into final product. For industrial and consumer products
companies, this would be manufacturing. For service-related organizations'
operations here are the processes that directly support the creation of the firms'
value proposition.
 Distribution or outbound logistics, this is the distribution of the final product to
customers.
 Marketing and sales, this stage involves activities such as advertising,
promotion, sales force organization, selecting distribution channels, pricing and
managing customer relationships.
 Post-sales support, this refers to the activities that are needed to maintain the
product's performance after it has been produced and sold.
  The indirect or support activities enable and support the primary activities. Several key
support activities are as follows:
 Research and Development. R&D involves researching the firm’s market and
customer needs and developing new and improved products and services to fit
these needs.
 Information Systems. Technology can be used across the board in the
development of a product; including in the research stage; in product design,
and in production automation. Technology also includes the design and
development of firm’s networks, network security, databases, and database
security. Finally, information technology systems are designed and developed to
facilitate managerial decision making and the efficient running of the
administrative processes of the enterprise.
 Human Resource Management, these are the activities involved in hiring and
retaining employees; and ensuring that employees are placed in the right jobs.
 Firm infrastructure refers mainly to the management of the firm’s physical
infrastructure including the assets of the firm.
 Accounting, Finance, and Planning are administrative functions that support
many of the planning and control functions of the organization.
 Planning is the primary function of management and essential to the
performance of a business.
 Accounting provides controls for financial aspects of the business as
well as reporting for management other stakeholders of the firm.
 Finance activities include the management of the firms cash flow and
cash positions, as well as obtaining the capital necessary for running the
organization.

 To generate a competitive advantage, each distinct activity, primary or support, needs

to add incremental value to the product or service offering. Or it needs to result in
lowering the relative cost of that product offering.
 A real benefit of using the Value Chain framework is that management can view
activities and processes end to end; rather than just within a particular department.
Focusing on processes within the 4 walls of a particular department will likely sub
optimize any improvement and distort the bigger picture of how the process add value.

15.Ratio Analysis and Benchmarking

 Senior Management routinely uses ratio analysis to understand how effectively a firm is
operating and to evaluate the performance of lower level managers and employees.
 Since ratios can be used to assess performance, ratios are important in identifying
operational areas they are excelling as well as those operational areas that need to be
improved.
 Ratios are particularly effective in making comparisons over time to identify trends as
well as making comparisons to other entities to recognize performance relative to other
firms.
 Ratios can also be classified as liquidity ratios; capital adequacy ratios; and earnings and
profitability ratios.

 Process benchmarking - Compares processes and performance with internal and

external benchmarks. Companies then identify and incorporate best practices to meet
improvement targets.
 Process benchmarking focuses on those activities that will provide the most significant
impact on overall firm performance.
 A few specific types of process benchmarking includes:
 the comparisons of efficiency and effectiveness of production processes
 decision-making processes
 business processes
 Process benchmarking helps identify strengths and weaknesses in current capabilities.
 Process benchmarking is just one form of benchmarking used by management to assess
firm capabilities and performance.
  Product benchmarking is often done by marketing and is a form of external analysis.
Usually in product benchmarking, the firm is comparing the functions, features, quality,
and performance of its products to that of its strategic group.
 Functional benchmarking may be done to determine the feasibility of outsourcing
entire sets capabilities such as service center operations to lower operating costs in
non-strategic areas.
 Financial benchmarking is routinely done by management to assess overall firm
competitiveness and financial performance.

16.SWOT Analysis
 A SWOT is essentially a two by two matrix that forms a set of quadrants.
 The x-axis of a SWOT represents a positive assessment at one end and a
negative assessment at the other.
 The y-axis is usually labeled Internal at one end and External at the other.
 The four quadrants are labeled:
 STRENGTHS, which are positive internals
 WEAKNESSES, which are negative internals
 OPPORTUNITIES, which are positive externals
 THREATS, which are negative externals

 In preparing a SWOT analysis, internal factors focus on resources, capabilities, and

activities. External factors are determined by external analysis, including a PESTEL, a
Porter Five Forces Analysis, Product Benchmarking, and collecting and analyzing
competitor intelligence.