Module 2

Module 2
Strategic Analysis
MGT 131
STRATEGIC MANAGEMENT
RONALD REAGAN T. ALONZO
Assistant Professor II
LEARNING MODULE
MGT 131: Strategic Management // RRTA 1

Module 2
Strategic Analysis
MODULE 2
STRATEGIC ANALYSIS
Introduction
The foundation for successful strategy is the clear understanding of where the
firm is now, its current position in its environment (most particularly the
competitive environment) encapsulating its strengths and weaknesses, fully
recognizing the opportunities and threats that face it. This module will look at how
managers can analyze the uncertain and increasingly complex world around
them by considering various layers of influence from macro-environmental issues
to specific forces affecting the competitive position.
Upon completion of this module you will be able to:
 Define what constitutes the general environment

 Evaluate Porters five forces framework as a tool of competitor analysis
 Undertake and discuss a SWOT and Value Chain analysis
 Explain the role of resources, competencies and capabilities in helping an
organization achieve a sustainable competitive advantage.
 Evaluate shareholder and stakeholder perspectives for an organization.
 Evaluate the balanced scorecard approach to an organization’s
performance.

Module 2: Strategic Analysis
STRATEGIC ANALYSIS
Managers responsible for the success of the organization are concerned about the
effect the factors in the external environment have upon it. They cannot control the
external environment but they need to identify, evaluate and react to these forces
outside the organization which may affect them.
The General Environment (Macro-environment)
General environment, also known as societal, remote, macro or indirect-action

environment consists of those factors, which affect the business of a country, and,
therefore, they have homogenizing effect. This environment consists of both a general
and competitive environment. The competitive environment consists of the markets and
the industry in which an organization competes. The changes that occur here have an
effect that transcends firms and specific industries.
The figure 2.1 below shows the relationship between the general environment, the
competitive environment, and the organization. Henry (2008) suggests that, other things
being equal the competitive environment has the most direct and immediate impact on
the organization.
Figure 2.1: The External Environment
Source: Hubbard (2008)
In the general environment, we can include natural and ecological factors at the first
level. Natural factors are important to the economic activities of a country because’

either they provide opportunities or threats to the economic system. For example,
agriculture depends on nature (rainfall, climatic conditions, etc.); manufacturing
depends on physical inputs; mining and drilling depend on natural deposits;
transportation and communication depend on geographical factors; and so on. In the
same way, ecological factors like environmental pollution, wildlife, greenery, and other
factors are matters of concern for all organizations. At the second level, comparatively,
more influential factors come in the form of economic, political-legal, technological, and
social-cultural factors. Taken together, they set forth the framework for organizations’
operations and determine the inputs which organizations can take from the
environment, process these inputs in the form of outputs, and export these outputs back
to the environment. Various characteristics of such factors may be favorable or
unfavorable to the growth of organizations. Besides these factors, which exist within a
country, international factors also become important because of globalization of
economy of a country.
Scenario Planning
According to Schoemaker (1995), scenario planning is a disciplined method for imaging

possible futures. It is an internally consistent view of what the future might turn out be
(Porter 1985). Scenarios are a tool of analysis to help improve the decision-making
process set against the background of a number of possible future environments.
Scenario planning is relevant to almost any situation in which a decision maker needs to
understand how the future of his or her industry or strategic business unit might
develop. To do this our knowledge is divided into two areas:
 Things we think we know something about, and
 Things we consider uncertain or unknowable.
The first one is based on the past and continuity like making assumptions about the
direction of the country’s demographic profile. The uncertainty elements include such
things like future demand for the product, interest rates, foreign exchange rates, tax
rate, outcomes of political elections etc.
Process for developing scenarios
1. Define the scope. This involves setting the time frame and the scope (products,
markets and geographical change) of analysis. The time frame can be
determined by factors such as product life cycles and rate of technology.

2. Identify the major stakeholders. These are people who can affect and are
affected by the organization’s decisions. The company needs to know their
current levels of interests and power and how these have changed overtime.
3. Identify basic trends which environmental factor(s) will have the most impact on
issues in step 1. This will look at the impact on the current strategy.
4. Identify key uncertainties. Which events that have an uncertain outcome will
most affect the issues the organization is concerned with?
5. Construct initial scenario themes. Once trends and uncertainties are
developed; the organization has the basic building blocks for scenario planning. It
can then identify extreme world views by putting all positive elements in one
scenario and the negative elements in another broad scenario.
6. Check for consistency and plausibility. Check to see if the trends identified
are compatible with the chosen time frame. If they are not, then remove all the
trends that do not fit the time frame.
7. Develop learning scenarios the role is to develop relevant themes for the
organization around which possible outcomes and trends can be organized. The
scenarios can be given a name or title to reflect that they tell a story.
8. Identify research needs. At this stage, further research (i.e. changes in
technology) may be required to understand uncertainties and trends more fully.
9. Develop quantitative models. Once further research has been gained, the
organization may wish to revisit the internal consistency of the scenario and
decide whether it might benefit from formalizing some interactions in a
quantitative model.
10. Evolve towards decision scenarios. The ultimate aim is to this process is to
move towards scenarios that can be used to test its strategy formulation and help
it generate new ideas.
The diagram below shows the summary of scenario planning process

Figure 2.2 Scenario Planning Process
According to Henry (2008), if the scenarios are useful to the organization, they have the
following characteristics:
 They address the concerns of individuals in the organization;

 The scenarios are internally consistent;
 They describe fundamentally different futures as opposed to being variations on
a particular theme;
 Each scenario describes an equilibrium state that can exist for a considerable
period of time as opposed to being merely short-lived.
Finally, Schoemaker (1995) described scenario planning as an attempt to capture the

richness and range of possibilities, stimulating decision makers to consider changes
they would otherwise ignore or organize into narratives that are easy to grasp and use
than great volumes. Scenarios are aimed at challenging the prevailing mind-set.
PEST Analysis
This is a useful tool when scanning the general environment. It refers to political,
economical, social and technological factors. Some commentators include legal and
environmental factors separately, preferring to extend the acronym to PESTLE. It is not
important whether we use PEST (or STEP) or PESTLE, but to understand how this
framework can be used and to be aware of its limitations.
PEST analysis helps an organization to detect and monitor those weak signals in the
hope of recognizing the discontinuities or fractures shaping the environment. It can also
be used to detect the trend in the external environment that will ultimately find their way

into the competitive environment. Therefore, the managers should identify their relevant
environment so that they can analyze the various elements in order to relate their
organizations with the environment. An analytical classification of various environmental
factors may be:
 Economic environment,
 Political-legal environment,
 Technological environment,
 Socio-cultural environment, and
 International environment.
Political- Legal factors
Political-legal environment is an important factor particularly in a mixed economy, and

affects the working of business organizations significantly. Political-legal environment of
a country includes the following elements:
 Government stability
 Taxation policy
 Government regulation
 Defense and foreign policies etc.
Stability of government in Western countries is not a major issue. However, where

Multinational corporations (MTC) operate across international borders, the stability of
governments and political systems in these countries needs to be taken into
consideration. These MTC needs to be assured that their investment will be safe
including their personnel operating in these countries. Also the government policy of
deregulation or privatization has the effect of opening up the markets to completion.
Because of competition local organizations are forced to innovate and cut costs to
remain competitive. This is because new entrants will enter the market with lower cost
curves and more innovative products and services due to better technology and clear
understanding of customer needs. To avoid being surprised managers need to be
scanning their environment for signs of change in government policy.
Government regulation needs to be something for company to fear. Environmental

regulations, such as reducing pollution, may act to spur competitive companies on to
innovate and reduce costs to counter the increased costs of regulation.
Defense and foreign policies like defense expenditure, maintenance of external

relationships with other countries, defining most favored countries from business point

of view, etc.; and Legal rules of the game of business-their formulation, implementation,
efficiency, and effectiveness.
Economic Factors
Economic factors of a country determine the extent to which various organizations find
the economic forces favorable or unfavorable. They include indicators like interest
rates, disposable income, unemployment rate, retail price index or inflation, GDP
and exchange rates. Economic indicators cannot provide a true picture of the changes
in the macro environment but provides a snapshot and simplification of what is
happening. This makes scanning and monitoring the general environment for signs of
economic changes which may impact on the organization difficult.
Organizations involved in exporting products to other countries will be scanning the

environment for the possible signs of the exchange rates fluctuation. If the exchange
rates appreciates, the effect of which will be to make it harder for these organizations to
sell goods abroad but relatively easier for importers to sell their goods in the domestic
market. The way forward is to make efficiency gains and innovate so that they can
offset the unfavorable exchange rate with a reduction in price or increase in quality.
Social Factors
Social and cultural environment is quite comprehensive because it may include the total
social factors within which an organization operates and that is why it is referred to as
social-cultural factors. In fact, the political and legal environment is closely intertwined
with social and cultural environment because laws are passed as a result of social
pressures and problems. The socio-cultural environment of business can be defined as
follows: Social and cultural environment consists of attitudes, beliefs, desires,
expectations; education and customs of the society at a given point of time. Thus, social
and cultural environment, in its broad sense, includes many - aspects of society and its
various -constituents. From business organization’s point of view, it may include:
 expectations of the society from the business;

 attitudes of society towards business and its management;
 Views towards achievement of work;
 views towards authority structure, responsibility and organizational positions,
 views towards customs, traditions, and conventions;
 class structure and labour mobility; and
 Level of education.

The various elements of social and cultural environment affect the working of the
organizations mainly in three ways: organizational objective setting, organizational
processes and the products to be offered by the organisation. Through these, they
affect the total functioning of the organisation. The social and cultural factors affect the
basic objectives of the organization by prescribing the norms within which the
organizational objectives are formulated. For example, to what extent, social
responsibility will be an organizational objective is determined by the various social
factors in which organisation functions. Similarly organizational processes are also
designed keeping in view the various social and cultural factors otherwise they will not
work. For example, the various control and decision processes in our social
organizations are based on the basic values of joint family system and caste system.
Similar is the case with other organizational processes. Social and cultural factors also
affect the goods and services that can be offered by the organisation. Since the
organisation works as mediator for converting inputs into outputs, and these outputs are
given to the society, it can produce only those things, which are accepted by the
society. Often the managers in formulating or implementing their strategies do not
consider the social and cultural factors adequately. The result is that their sound
strategies in all other aspects may fail.
Technological Factors
Technological factors include the rate of obsolescence, i.e. the speed with which new
technological discoveries supersede established technology. The rate of change in
technology and innovation has the effect causing new industries to emerge and
changes the way organization compete. Techno local advances include the following:
 the use of sophisticated software

 genetic engineering and
 Nano technology.
The rapid change of technology has changed the dynamics of industries such as
banking, financial services and insurance. This has allowed new entrants to enter the
market at a lower cost base than incumbents, there by offering more competitively
priced products and services and gaining market share in the process (Henry, 2008).
International Factors
Today’s economies have globalized the ways in which geographical boundaries of a

country have only political relevance; the economic relevance has extended beyond

these Today, market classification does not take into account only national parameters
but global parameters. In this globalization, many multinationals like Exxon, Mobil Oil,
Coca-Cola, etc. derive more than half of their revenues from their overseas operations.
Therefore, there is a need for scanning international environment. From strategic

management point of view, the analysis is required from two angles: to open operations
abroad and to understand the implications of entry of multinational corporations in the
country and the freedom of importing products and services from abroad. For operation
abroad, the analysis of the following factors is important:
The Competitive Analysis (Porters five forces Frame work)
Given the real difficulties of undertaking a comprehensive analysis of the organisation’s

strengths and weaknesses in relation to an enormously complex environment, the focus
of the classical perspective has settled on the position of the organisation in its
competitive environment.
One of the most extensive writers of this approach, Michael Porter, has modelled the
key features of the competitive environment (Porter, 1980). This is a tool of analysis to
assess the attractiveness of an industry based on the strength of five competitive
forces. It is under taken from the perspective of an incumbent organization, i.e. an
organization already operating in the industry. The analysis is best used at the level of
an organisation’s strategic business unit (SBU). Although each organization in the
industry is unique, the forces within the industry which affect performance, and hence its
profitability, will be common to all organisations in the industry. An organization thinking
of entering an industry will need to that it can compete successfully with incumbents in
the industry. This will require it to adopt a distinctive positioning. For example i-conect
effectively entered the internet providers market by unitizing the internet to create I-
spots which providing a sustainable competitive advantage.
The five forces framework enables an organization to determine the attractiveness or

profit potential of a particular industry by examining the interaction of five competitive
forces shown in the diagram below.

Threat of
New Entrants
Rivalry Among
Bargaining Power Bargaining Power
Existing
of Suppliers of Customers
Competitors
Threat of
Substitutes
Figure 2.3 Porter’s Five Forcer Model
Threats of New Entrants
New entrants to an industry are important because, with new competitors, the intensity
of competitive rivalry in an industry generally increases. This is because new
competitors may bring substantial resources into the industry and may be interested in
capturing a significant market share. If a new competitor brings additional capacity to
the industry when product demand is not increasing, prices that can be charged to
consumers generally will fall. One result may be a decline in sales revenues and lower
returns for many companies in the industry. The seriousness or extent of the threat of
new entrants is affected by two factors:
 Barriers to entry and

 Expected reactions from or the potential for retaliation by, incumbent companies
in the industry.
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 evolves or might be explicitly
“erected” by current participants in the industry to protect profitability by deterring new
competitors from entry.
1. Economies of Scale According to Henry (2008) 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
banking or mining sector in Zambia 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. However, because large scale entry may greatly increase
industry capacity it may risk a strong reaction from established companies.
2. Capital Requirements if organizations need to invest substantial financial
resources to compete in an industry, this creates a barrier to entry. For example,
organizations wishing to enter the oil industry would face huge capital costs
involved in exploration and in specialist plant and machinery. This barrier in
further strengthened because oil companies are vertically integrated. They
compete in different stages of production and distribution
3. Product differentiation where an organizations product are already established in
an industry, providing it with high brand awareness and generating customer
loyalty, new entrants must offer a product that is greatly improved or comes at a
lower cost if the buyer is to witch.
4. 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.
5. Access to Distribution Channels. A new entrant will need to have access to
distribution for its product in order to compete successfully in the industry. Some

big companies may prevent new entrants from accessing distribution channels by
having sole agreements with them. For example retailers (Shoprite, Spar and
Game) are reticent to provide shelf space to new products from small producers
who may lack the resources to advertise their products effectively.
6. Cost Advantages Independent of Size 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 favourable access to or control of raw materials, the best
locations, or favourable government subsidies. For example 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.
The Bargaining Power of Buyers
While companies competing in an industry seek to maximize their return on invested

capital and earn above average returns), buyers are interested in purchasing products
at the lowest possible price (the price at which sellers will earn the lowest acceptable
return). To reduce cost or maximize value, customers bargain for higher quality or
greater levels of service at the lowest possible price by encouraging competition among
companies in the industry. Buyer groups are powerful relative to companies competing
in the industry when:
 There is a concentration of buyers and buying volumes are high.

 The products its purchases are standard or undifferentiated because they can
find an alternative supplier
 Buyers are able to switch to another supplier’s product at little, if any, cost
 Buyers represent a credible threat to integrate backwards into the suppliers’
industry because of resources or expertise.
 The buyer earns low profit which will motivate him or her to lower purchasing
costs charged by the supplier in an effort to secure his or her margin.
 The buyer has full information on demand and cost they will be in a stronger
position.
The Bargaining power of Suppliers

Suppliers can put pressure on organizations in an industry by raising the price or

lowering the quality or quantity of purchased goods and services. Suppliers are powerful
when company profitability is reduced by suppliers’ actions. Suppliers are powerful
under the following circumstances.
 The suppliers’ industry is dominated by few companies and is more concentrated

than the industry it sells to. The larger the supplier and the more dominant it is,
the more pressure it can place on firms in the industry it sell to.
 Satisfactory substitute products are not available to buyers;
 Buyers are not a significant customer group for the supplier group;
 Suppliers’ goods are critical to buyers’ marketplace success;
 Effectiveness of suppliers’ products has created high switching costs for buyers;
 Suppliers represent a credible threat to integrate forward into the buyers’
industry, especially when suppliers have substantial resources and provide highly
differentiated products.
Threats of Substitute Products and Services
All companies must recognize that they compete against companies producing
substitute products and services, those products and services that are capable of
satisfying similar customer needs but come from outside the industry and thus have
different characteristics. For example bottled water (Manzi) has developed as a
substitute for carbonated drinks. Another example is that of the fax machines and
emails for document delivery. In effect, prices charged for substitute products represent
the upper limit on the prices that suppliers can charge for their products.
The Threat of Substitute Products is Greatest when
 Buyers or customers face few, if any switching costs;

 Prices of the substitute products are lower;
 Quality and performance capabilities of substitutes are equal to or greater than
those of the industry’s products.
Companies can offset the attractiveness of substitute products by differentiating their

products in ways that are perceived by customers as relevant. Viable strategies might
include price, product quality, product features, location, or service level.
Rivalry among Existing Competitors
The intensity of rivalry in an industry depends upon the extent to which companies in an
industry compete with one another to achieve strategic competitiveness and earn above

average returns because success is measured relative to other companies in the

industry Competition can be based on price, quality, or innovation. Because of the
interrelated nature of company’s actions, action taken by one company generally will
result in retaliation by competitors (also known as competitive actions and reactions).
The following factors affect competitive rivalry:
 Numerous or Equally Balanced Competitors Industries with a high number of

companies can be characterized by intense rivalry when companies feel that they
can make competitive moves that will go unnoticed by other companies in the
industry. However, other companies will generally notice these moves and offer
countermoves of their own in response. Patterns of frequent actions and
reactions often result in intense rivalry, such as in local restaurant, retailing, or
dry cleaning industries. Rivalry also will be intense in an industry that has only a
few companies of equivalent resources and power. Battles for market share in
beverages between Coca Cola and Pepsi is just one of the examples of intense
rivalry between relatively equivalent competitors.
 Slow Industry Growth When a market is growing at a level where there seem to
be “enough customers for everyone,” competition generally centres around
effective use of resources so that a company can effectively serve a larger,
growing customer base
 High Fixed Costs or High Storage Costs When an industry is characterized by
high fixed costs relative to total costs, companies produce in quantities that are
sufficient to use a large percentage; if not all of their production capacity so that
fixed costs can be spread over the maximum volume of output. While this may
lower per unit costs, it also can result in excess supply if market growth is not
sufficient to absorb the excess inventory. The intensity of competitive rivalry
increases as companies utilize price reductions, rebates, and other discounts or
special terms to reduce inventory. High storage costs, especially those related to
perishable or time sensitive products (such as fruits and vegetables) also can
result in high levels of competitive intensity as such products rapidly lose their
value if not sold within a given time period. Pricing strategies often are used to
sell such products.
 Lack of Differentiation or Low Switching Costs Where products are
undifferentiated competition will be more intense, driven by customer choice
based on price and service. Switching costs implies that competitors are unable
to prevent customers from going to their rivals.
 High exit barriers. The existence of high exist barriers may hinder firms needing
to exit the industry. For example, some plants are so specialists that they cannot
easily be used to produce alternative goods and services. As demand conditions

deteriorate, this creates excess capacity in the industry and act to reduce
profitability within the industry.
THE INTERNAL ENVIRONMENT (SWOT & VALUE CHAIN)
SWOT Analysis
SWOT analysis means analyzing strengths, weaknesses, opportunities and it is a useful

strategic planning tool and is based on the assumption that if managers carefully review
internal strengths and weaknesses and external threat and opportunities, a useful
strategy for ensuring organizational success can be formulated (Andrew 1971). It is a
simple technique for getting a quick overview of a strategic situation so that such
strategies can be formulated as to produce a good between the company’s internal
competencies (strength and weaknesses) and environment (opportunities and threats).
It allows an organization to determine the extent of the strategic fit between its
capabilities and the needs of its external environment.
Strengths
Strengths are areas where the organization excels in comparison with its competitor or
strength” is a positive characteristic that gives a company an important capability. It is
an important organisational resource which enhances a company, competitive position.
Some of the internal strengths of an organisation are:
 Distinctive competence in key areas

 Manufacturing efficiency
 Skilled workforce, adequate financial resources Superior image and reputation
 Economies of scale
 Superior technological skills
 Insulation from strong competitive pressures
 Product or service differentiation
 Proprietary technology.
Weaknesses
A “weakness” is a condition or a characteristic, which puts the company at

disadvantage. Weaknesses make the organization vulnerable to competitive pressures.
Henry (2008) described the weaknesses as areas where the organization may be at a
comparative disadvantage. The weaknesses are competitive liabilities and strategic
managers must evaluate their impact on the organization’s strategic position when

formulating strategic policies and plans. Weaknesses require a close scrutiny because
some of them can prove to be fatal. Some of the weaknesses to be reviewed are:
 No clear strategic direction

 Outdated facilities
 Lack of innovation is Complacency
 Poor research and developmental programs
 Lack of management vision, depth and skills
 Inability to raise capital
 Weaker distribution network
 Obsolete technology
 Low employee morale
 Poor track record in implementing strategy
 Too narrow a product line
 Poor market image
 Higher overall unit costs relative to competition.
Opportunities and Threats
Opportunities and threats refer to the organisation’s external environment, over which
the organization has much less control. An “opportunity” is considered as a favourable
circumstance, which can be utilized for beneficial purposes. It is offered by outside
environment and the management can decide as to how to make the best use of it.
Such an opportunity may be the result of a favourable change in any one or more of the
elements that constitute the external environment. It may also be created by a proactive
approach by the management in moulding the environment to its own benefit. Some of
the opportunities are:
 Strong economy
 Possible new markets
 Emerging new technologies
 Complacency among competing organizations
 Vertical or horizontal integration
 Expansion of product line to meet broader range of customer needs
 Falling trade barriers in attractive foreign markets
A “threat” is a characteristic of the external environment, which is hostile to the

organisation. Management should anticipate such possible threats and prepare its

strategies in such a manner that any such threat is neutralized. Some of the elements
that can pose a threat are:
 Entry of lower cost foreign competitors cheaper technology adopted by rivals

 Rising sales of substitute products
 Shortages of resources
 Changing buyer needs and preferences
 Recession in economy
 Adverse shifts in trade policies of foreign governments
 Adverse demographic changes
SWOT analysis involves evaluating a company’s internal environment in terms Of

strengths and weaknesses and the external environment in terms of opportunities and
threats and formulating strategies that take advantage of all these factors. Such
analysis is an essential component of thinking strategically about a company’s situation.
VALUE CHAIN Analysis
The second framework that companies can use to identify and evaluate the ways in
which their resources and capabilities can add value is value chain analysis.
Capabilities are processes, systems or organisational routines which the organisation
uses to coordinate its resources for productive use. A value chain describes the
activities within an organisation that go to make a product or service. Therefore the
value chain analysis allows an organisation to ascertain the costs and value that
emanate from each of its value activities.
Value or margin is the difference between the total value received by the firm from the
customer for its product or service and the total cost of creating the product or service.
The value chain system refers to the relationship between the value chain activities of
the organisation and its suppliers, distributors and customers. Figure 2.4 below show
the value chain.
The figure below illustrates how the value creating activities performed by the company
can be separated into primary and secondary activities. Primary activities, shown
vertically, represent traditional line activities such as inbound logistics, operations,
outbound logistics, marketing and sales, and service. These are activities which are
directly involved in the creation of a product or a service (Henry, 2008). While the
support activities, shown horizontally, are represented by a company’s staff activities
and include its financial infrastructure, human resource management practices,
technological development, and procurement activities. They are activities which ensure
that the primary activities are carried out efficiently and effectively.

Figure 2.4 Value Chain Model
Source: Henry (2008)
The first step in value chain analysis is to carefully examine each of the company’s
primary activities to determine the potential for creating or adding value.
Primary Activities
 Inbound Logistics: These are value chain activities that cover receiving, storing,
and distributing inputs to the product. It includes material handling, warehousing,
inventory control, vehicle scheduling and returns to suppliers.
 Operations: These activities deal with transforming an organization’s inputs into
final products such as machining, packaging, assembly, testing, printing and
facility operations.
 Outbound Logistics: These activities are associated with collecting, storing and
distributing the product or service to buyers. Outbound logistics include
warehousing, material handling, delivery, order processing and scheduling.
 Marketing and Sales: This includes activities that make a product available for
buyers to purchase and induces them to buy. It includes advertising, promotion,
sales force, quoting, channel selection, channel relations and pricing.

 Service: These activities enhance or maintain the value of products, such as

installation, repair, training, parts supply, and product adjustment.
Depending on the industry within which the organizations compete, each of these
primary activities can have an impact on its competitive advantage. For example a
manufacturing company like San Miguel Corp will clearly be more concerned about its
operations- how the inputs are being transformed into beers and soft drinks and
packaging of these products.
Support Activities
 Procurement: This value chain activity deals with the process of purchasing
resource inputs to support any of the primary activities. Inputs to the
organisation’s productive process include such thing as raw materials, office
supplies, and buildings.
 Technology development: This activity covers an organisation’s know-how, its
procedures and any use of its technology that has an impact upon product,
process and resource development.
 Human Resource Management: These activities include selection, recruitment,
training, development and remuneration of employees. They may support
individual primary and support activities, as occurs when an organization hires
particular individuals such as economics. They also support the entire value
chain, as occurs when an organisation’s infrastructure is usually used to support
the entire value chain.
 Company infrastructure: These activities support the activities performed in the
company’s value chain, including general management practices, planning,
finance, accounting, legal, and government relations. By performing its
infrastructure related activities, a company identifies external opportunities and
threats, and internal strengths and weaknesses related to company resources
and capabilities, and supports or nurture its core competencies
Each category of primary and support activities includes a further three activities which
impact on competitive advantage. These are direct and indirect activities and quality
assurance. Direct activities involve creating value for the buyer, for example through
product design. Indirect activities allow direct activities to take place, such as regular
maintenance. Quality assurance ensures that the appropriate quality of the other
activities is maintained, for example through monitoring and testing.
Using the value chain framework enables managers to study the company’s resources
and capabilities in relationship to the primary and support activities performed to design,

manufacture, and distribute products, and to assess them relative to competitors’

capabilities. For these activities to be sources of competitive advantage, a company
must be able to perform primary or support activities in a manner that is superior to the
ways that competitors perform them. Also perform a primary or support activity that no
competitor is able to perform to create superior value for customers and achieve a
competitive advantage. This implies that, given that individual companies are comprised
of unique or heterogeneous bundles of activities, reconfiguring the value chain, or
rebundling resources and capabilities, may enable a company to develop unique value
creating activities. The managerial challenge is that the value creation process is
difficult and there is no one best way to assess a company’s primary and support
activities or to evaluate the value creating potential of those activities either within the
company or relative to competitors, because of incomplete or ambiguous data.
However, by being objective, managers may be able to use the value chain framework
to identify new, unique ways to combine resources and capabilities to create value that
are difficult for competitors to recognize, understand, or imitate. The longer a company
is able to keep competitors “in the dark,” as to how resources and capabilities have
been combined to create value, the longer a company will be able to sustain a
competitive advantage. Companies can use outsourcing as an alternative to identify
primary or support activities for which its resources and capabilities are not core
competencies and do not enable the company to add superior value and achieve
competitive advantage.
Outsourcing
Outsourcing describes a company’s decision to purchase a value creating activity from

an external supplier. Outsourcing has become important, and may become more
important in the future, for two reasons:
 First, there are limits to the abilities of companies to possess all of the bundles of
resources and capabilities that are required to achieve superior performance
(relative to competitors) in its entire primary and support activities.
 Second, with limits to their resources and capabilities, companies can increase
their ability to develop resources and capabilities to develop core competencies
and achieve competitive advantage by nurturing only a few core competencies.
THE RESOURCE BASED VIEW OF STRATEGY

The resource based view of strategy deals with the competitive environment facing the
organization but takes an inside-out approach. It starts with an organization’s internal
environment.
Resource based view of strategy emphasizes the internal capabilities of the

organization in formulating strategy to achieve a sustainable competitive advantage in
its market and industries. The internal capabilities determines the strategic choices the
organization makes in competing in its internal environment and in some cases can
allow an organization to create new markets and add value for the customer such as
Apple’s I-Pod and Toyota hybrid cars. Where an organization’s capabilities are seen as
paramount in the creation of competitive advantage it will pay attention to the
configuration of its value chain activities. This is so because it will need to identify the
capabilities within its value chain activities (e.g. inbound, outbound operations etc)
which provide it with competitive advantage. Resource based view of completion or
strategy draws upon the resources and capabilities that reside within an organization, or
that an organization might want to develop in order to achieve a sustainable competitive
advantage
Resources
Resources can be thought of as inputs that enable an organization to carry out its
activities. They include tangible and intangible resources.
 Tangible resources refer to the physical assets that an organization possesses

and include plant and machinery, finance and human capital. To add value these
physical resources must be capable of responding flexibly to changes in the
market place. For example an organization of up to date technology and
processes which possess the knowledge to exploit their potential will be at an
advantage.
 Intangible resources may be embedded in routines and practices that have

developed overtime within the organization; they comprise intellectual/ technical
resources, organization’s reputation, its culture, its knowledge and its brand.
Technological resources include an organisation’s ability to innovate and the
speed with which innovation occurs, while intellectual resources include patents
and copy rights which themselves may drive from the organisation’s
technological resources. For example, an intangible resource of a manufacturer
maybe its creative innovation of its founder.
Competencies

Availability of resources in an organization does not offer any benefits but the efficient
configuration of resources provides an organization with the competencies. These are
attributes that a firm requires in order to be able to compete in the market place. It
maybe useful to think of competencies as deriving from the bundle of resources that a
firm has. For example, in order to compete in the automobile industry organizations
must possess knowledge about design and engine and body manufacture. Without this
knowledge the organization cannot compete effectively irrespectively of its resources.
Core Competencies
Resources and capabilities serve as the foundation upon which companies formulate
and implement value creating strategies so that the company can achieve strategic
competitiveness and earn above average returns. However, not all of a company’s
resources and capabilities represent strategic assets, assets that have competitive
value and the potential to serve as a source of competitive advantage. If the company
has a deficiency in some of its resources, it may not be able to achieve strategic
competitiveness. For example, insufficient financial resources may prevent the company
from implementing the processes or integrating the activities required to add superior
value by limiting the company’s ability to hire workers with the necessary skills or to
invest in the capital assets (facilities and equipment) that are needed. Thus, companies
not only are challenged to scan the external environment to identify opportunities that
can be exploited, but also to have an in depth understanding of company resources and
capabilities. This will enable the company not only to develop strategies that enable it to
exploit external opportunities but also to avoid competing in areas where the company’s
resources and capabilities are inadequate.
When the company’s resources and capabilities result in a core competence, the
company will be able to produce goods or services with features and characteristics that
are valued by customers. This implies that companies can implement value creating
strategies only when its capabilities and resources can be combined to form core
competencies.
Therefore core competence can be thought of as a cluster of attributes that an

organization possesses which in turn allows it to achieve competitive advantage. It may
simply be that an organization has configured its collection of resources in such a way
that allows it to compete more successfully. A core competence is enhanced as it is
applied and shared across the organization.

Distinctive Capabilities
Distinctive capabilities of an organization’s resources are important in providing it with

competitive advantage. Organizations capabilities are only distinctive when they
emanate from a characteristic which other firms do not have. Distinctive capabilities
need to persist over time (sustainable) and must benefit primarily the organization which
holds it rather than its employees, its customers, or its competitors (appropriable).
These in turn are linked to relationships between an organization and its stakeholders.
These distinctive capabilities must derive from the three areas:
 Architecture Systems of relational contracts which exist inside and outside the
organization.
 Reputation: As a source of experience is important in those markets where
consumers can only ascertain the quality of a product from their log-term
experience.
 And innovation: An organization’s ability to innovate successfully is also a
source of distinctive capability which is sustainable and appropriate. For
example, innovative products like Apple with I-Tunes and I-Pod.
Resource, Capabilities and Value Creation
Figure 2.5 Value Creation Model

Critical Success Factors Approach
In order to understand how critical success factors (CSFs) approach is applied to

generating competitive advantage and the concept of CSFs, let us take few examples.
A good academician can be successful in teaching and research and not necessarily,
he succeeds as a business man. A player having high competence in a particular game,
say lawn tennis, and is successful is unlikely to succeed in cricket. Even in the same
game, a player cannot succeed in all positions, for example, a good; wicket keeper
cannot be a good bowler too. The question is: why does this happen? The answer is:
each activity has unique requirement, and a single person cannot meet the requirement
of all activities. He can be successful only in that for which he has competence to meet
its requirement. (Success is defined in terms of objective achievement.) This social
phenomenon can be replicated in business situation where the question may be asked:
why does a successful business organisation in one industry fails in another industry?
The answer of this question lies in the opening part of this chapter: an organisation’s
core competence does not necessarily lead to competitive advantage because it may
not have any relevance to the industry in which the organisation fails. It appears, then,
that requirement of an industry differs from those of other industries. This requirement is
expressed in terms of critical success factors.
Concept of Critical Success Factors
Critical success factors, also referred to as strategic factors or key factors for success,
are those characteristics, conditions, or variables which when maintained and sustained
can have significant impact on the success of an organisation competing in a particular
industry. A CSF may be a characteristic such as product features, a condition such as
high capital investment, or any other variable. A basic nature of CSFs is that they differ
from Industry to industry: consumer goods versus industrial goods, differentiated versus
undifferentiated industries, local versus global industries so on.
Exhibit of Critical Success Factors in Different Industries
Toothpaste industry - Quality in terms of form, flavour, foam and freshness, wide area
distribution network, high level of promotion, and brand loyalty.
Food Processing Industry - High quality product, packaging, efficient distribution

network, and sales promotion.
Shoe Industry - High quality product, cost efficiency sophisticated retailing, flexible
product mix, and creation of product image.

Automobile Industry - Styling, strong dealer network, manufacturing cost control, and
ability to meet environmental standards.
Courier Service - Speedy dispatch, reliability, and price.
Managing these CSFs effectively generates competitive advantage. For example,

Ohame states that: “Key success factors (CSFs) in an industry and business need to be
identified to inject a concentration of resources into a particular area where the
company sees an opportunity to gain significant strategic advantage (competitive
advantage) over its competitors.
Identifying Industry CSFs
In order to generate competitive advantage along CSFs, it is necessary to identify

these. Based on a study related to identifying strategic factors, which are important to
different businesses, Steiner views that “there are indeed strategic factors needed for a
business and they can be identified. However, the question is: if CSFs differ from
industry to industry, how can these be identified? In order to find out the answer of this
question, managers can put another question: what do we need to do in order to be
successful in a particular business? It is just like an individual putting a question: what
does he/she need to do to be successful in studies, in career, etc. However, the answer
of the question ‘what needs to be done for success in a business’ is not as simple as it
prima facie appears. Therefore, managers need to generate as much information as
possible by going through following ways:
 CSFs can be identified based on logic, heuristics, or even a rule of thumb rather
than through any theoretical model. These are based on long years of
managerial experience which leads to the development of intuition, judgment,
and hunch.
 CSFs can also be identified internally in the organisation by using creative
techniques like brainstorming.
 CSFs can be deduced from other companies’ statements, expert opinions,
organisational success stories, etc.
Using CSF Approach
CSF approach can be used in a number of ways to generate competitive advantage.

Rockart has identified three steps in using CSF approach:
 generate the critical success factors,

 refine CSFs into objectives,

 and identify measures of performance.
While the first step is related to identification of CSFs, other two are related to using
these CSFs. A company can generate competitive advantage based on CSFs in the
following ways:
 The company can identify key result areas based on CSFs. A key result area is
an aspect of an organisation or its unit that must function effectively for the entire
organisation to succeed. If a key result area has been defined in terms of CSFs,
its focus is more relevant. A key result area may be any type, for example, after
sales service in automobile or equipment industry.
 The company can allocate its resources, both physical and human, on the basis
of CSFs. For example, in fast moving consumer goods, there are two critical
success factors: product innovation and efficient distribution system. Hindustan,
Lever has focused on both by deploying its critical resources in both these areas.
 A company can generate new CSFs, as these are not static but dynamic. Thus,
the new CSF may be more important than the existing ones. This is based on the
maxim of doing things differently. For example, when Reliance entered textile
fabrics, it introduced the concept of branding which was not a critical concept in
textile at that time. In order to promote its brand, it went for huge advertising.
With the result, Reliance became number one in textile business very soon.
On the basis of CSFs, a company can differentiate itself from others by doing the same
thing differently or by doing different thing. However, CSF approach is not free from
their limitations, which are in two forms. First, existing or potential competitors can
emulate the strategy through benchmarking and other tools and a company cannot
remain as competitive as it used to be. Second, if one company can generate a new
CSF, others can also do. In this case also, the company may not remain highly
competitive. Thus allocating huge resources based on CSFs runs a risk. However, the
risk is a prime element of any strategy. It does not mean that CSF approach is not
meaningful because of its limitations. In fact what an organisation needs to do is that it
takes continuous realigning of CSFs into its operations
Organizational Critical Success Factors
The above discussion of CSFs is externally focused in the sense that it concentrates on
what an organisation should do to be successful in a particular industry. Researchers,
both academicians and consultants, have made attempt to find out the answer of the
question: what are the characteristics of an organisation, which make it successful in
different industries or meeting the requirements of CSFs of these industries? Though

the answer of this question is not, precise because of interplay of different variables in
determining success of an organisation, some clues can be derived from various
prescriptions and research studies. McKinsey & Company, a US based consultant, has
prescribed seven factors which lead to success as shown in Figure 2.6 below
 Strategy. A means to achieve objectives.

 Structure. Basic framework to designate responsibilities and functions.
 Systems. Management tools for planning, decision making, communication, and
control.
 Staffs. Human resources of the organisation.
 Skills. Organizational and individual capabilities.
 Style. How managers lead and motivate.
 Shared values. Organisational values which govern behaviour of its members.
Figure 2.6 McKinsey 7S Framework
Based the McKinsey 7S framework, Peter and Waterman (1982) have identified eight
characteristics of successful companies (called as excellent companies): CSF‘s
diagram.
1. Bias for action

2. Close to customers
3. Autonomy and entrepreneurship
4. Productivity through people

5. Hands on, value driven

6. Stick to knitting
7. Simple form, lean staff, and
8. Simultaneous loose tight control.
However, these characteristics should not be taken on static basis for generating
competitive advantage.
ASSESSING ORGANIZATIONAL PERFORMANCE
There is an assumption that the main objective of an organization is profit maximization

to benefit shareholders. However, many people cast doubt on profit maximization
theories because of the principle-agent problem. Whether the overriding objective of
shareholders’ interest can be subordinated to a multiplicity of other interest is an on
going debate.
There are different models of assessing or measuring strategic performance or

organizational performance but for the purpose of this class we are going to focus on
four models: shareholder value, financial analysis, balanced scorecard and
benchmarking.
Maximizing Shareholder Value
There is an assumption that private and public companies are in business to create
value and that the profit they produce is distributed among shareholders. If the role of
organizations is to create value and distribute profit to their shareholders, this brings us
to how organizations performance will be measured. Returns to shareholders are the
only performance measure of strategy. This model uses the Net Present Value (NPV) or
the Economic Value Added (EVA) to measure the Return on Investment (ROI). The
EVA is an attempt for organisation to include a more realistic profit figure. It is worked
out by talking the difference between a company’s operating profit after tax and its
annual cost of capital, and discounting this to find out its present value. This model
provides a single, unambiguous measure of performance based on accounting
measures that are problematic in measuring strategic performance.

Figure 2.7 Simple Economic Value Added Model
Limitations
 not an effective measure for unlisted companies

 cannot be used for organisations without shareholders
 does past performance predict future performance
Financial Analysis
Measuring an organizational performance is necessary to understand whether the

strategies being implemented actually add value to the organization. If not, the question
is whether an alternative strategy would be more appropriate there for the use of
performance measurement act as a control on management to ensure that they fulfil
their fiduciary duty to shareholders. Some of the traditional financial measures used by
corporations are:
 listed companies
 shareholder return
 dividend and capital gain per share
 economic value added
 unlisted companies
 accounting measures of return
 return on equity
 sales growth

 profit margin
 debt to equity ratio
The Balanced Scorecard
The balance scorecard was developed by Kaplan and Norton (1992) as a means for
organization to measure their performance from a wider perspective than the traditional
financial measure. It provides managers with amore comprehensive assessment of the
state of their organization and enables managers to provide consistency between the
aims of the organization and the strategies undertaken to achieve those aims. Features
of the balanced scorecard
a. Involves the measurement of four critical perspectives of performance:

 Financial
 Customer
 internal, and
 innovation and learning
b. It takes into account the interests of more of the organisation’s stakeholders and
is not inconsistent with shareholder value.
c. It recognises that there must be customers for an organisation to survive and
grow
d. There may be conflict between the demands of customers and those of
shareholders
e. Is strategic in nature as it takes into account the need for learning and growth
f. Measures are focused on the long-term interests of the organization
g. Recognises the role of implementation of strategy.
Kaplan and Norton (1996) cited in Henry (2008) suggests that the balanced scorecard
approach looks at an organization from four perspectives.
 How de we look at shareholders?

 How do customers view us?
 What must we excel at?
 Can we continue to improve and create value?
Example of a balanced scorecard

This approach also takes account of the different expectations of stakeholders,

recognizing perhaps that maximizing shareholder value is not a prime motivator for
employees or customers. The model provides a bridge between the needs of
shareholders and the needs of stakeholders.
Benchmarking
Benchmarking is another tool, which can be used to generate competitive advantage. It

is a process of identifying in systematic way superior products, services, and processes
& practices that can be adopted in an organization to reduce costs; decrease operations
cycle time, and provide greater customer satisfaction. This is done by comparing with
those companies recognized as industry leaders.
Henry (2008) defined benchmarking as a process of measuring products, services and

business practices against those companies recognized as industry leaders.
Features of Benchmarking
 Benchmarking is based on the theme “see what others do and try to improve
upon that.” Therefore, this implies some kind of measurement, which can be
accomplished in two forms: internal and external. Both internal and external
practices are compared and a statement of significant differences is prepared to
identify the gap which should be filled.

 Benchmarking can be applied to all facets of a business; it includes products,

services, processes, and methods. It goes beyond the traditional competitor
analysis in the form of identifying strengths and weaknesses and includes clear
understanding of how the best practices are used.
 Benchmarking is not aimed solely at direct product competitors but those
organizations and businesses that are recognized as best or industry leaders.
 Benchmarking is a continuous process and not just one shot action. It is
continuous because industry practices constantly change and a continuous
monitoring of these practices is required to bring suitable change in the
organization compared with either close competitor or industry leader

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RONALD REAGAN T. ALONZO

MGT 131: Strategic Management // RRTA 1

Upon completion of this module you will be able to:

 Define what constitutes the general environment

MGT 131: Strategic Management // RRTA 2

The General Environment (Macro-environment)

General environment, also known as societal, remote, macro or indirect-action

Figure 2.1: The External Environment

Source: Hubbard (2008)

MGT 131: Strategic Management // RRTA 3

According to Schoemaker (1995), scenario planning is a disciplined method for imaging

 Things we think we know something about, and

 Things we consider uncertain or unknowable.

Process for developing scenarios

MGT 131: Strategic Management // RRTA 4

The diagram below shows the summary of scenario planning process

MGT 131: Strategic Management // RRTA 5

Figure 2.2 Scenario Planning Process

 They address the concerns of individuals in the organization;

Finally, Schoemaker (1995) described scenario planning as an attempt to capture the

MGT 131: Strategic Management // RRTA 6

Political- Legal factors

Political-legal environment is an important factor particularly in a mixed economy, and

Stability of government in Western countries is not a major issue. However, where

Government regulation needs to be something for company to fear. Environmental

Defense and foreign policies like defense expenditure, maintenance of external

MGT 131: Strategic Management // RRTA 7

Organizations involved in exporting products to other countries will be scanning the

 expectations of the society from the business;

MGT 131: Strategic Management // RRTA 8

 the use of sophisticated software

Today’s economies have globalized the ways in which geographical boundaries of a

MGT 131: Strategic Management // RRTA 9

Therefore, there is a need for scanning international environment. From strategic

The Competitive Analysis (Porters five forces Frame work)

Given the real difficulties of undertaking a comprehensive analysis of the organisation’s

The five forces framework enables an organization to determine the attractiveness or

MGT 131: Strategic Management // RRTA 10

Figure 2.3 Porter’s Five Forcer Model

Source: Hubbard (2008)

Threats of New Entrants

 Barriers to entry and

MGT 131: Strategic Management // RRTA 11

1. Economies of Scale According to Henry (2008) economies of scale refer to the

MGT 131: Strategic Management // RRTA 12

The Bargaining Power of Buyers

While companies competing in an industry seek to maximize their return on invested

 There is a concentration of buyers and buying volumes are high.

The Bargaining power of Suppliers

MGT 131: Strategic Management // RRTA 13

Suppliers can put pressure on organizations in an industry by raising the price or

 The suppliers’ industry is dominated by few companies and is more concentrated

Threats of Substitute Products and Services

The Threat of Substitute Products is Greatest when

 Buyers or customers face few, if any switching costs;

Companies can offset the attractiveness of substitute products by differentiating their

Rivalry among Existing Competitors

MGT 131: Strategic Management // RRTA 14

average returns because success is measured relative to other companies in the

 Numerous or Equally Balanced Competitors Industries with a high number of

MGT 131: Strategic Management // RRTA 15

THE INTERNAL ENVIRONMENT (SWOT & VALUE CHAIN)