Business Strategy BBA-VIII (A&B)

Fall 2021

Case Questions /Answers Key

1. Pastel Analysis and any identify key factors. Text Book Chapter 2 :Page 37-39
(figure 2-1, Table 2-1, Table 2-2)
Pastel Define Identify/Reasons Strategies Actions/responses
SEE BELOW
P
E
S
T
E
L

2. Pastel Analysis and any identify key factors

Pestel define Identify/ Actions/ Strategies
Reasons
Political Government stability Censorship
and likely changes
Bureaucracy
Corruption level
Tax policy (rates and
incentives)
Freedom of press
Regulation/de-regulation
Trade control
Import restrictions
(quality and quantity)
Tariffs
Competition regulation
Government
involvement in trade
unions and agreements
Environmental Law
Education Law
Anti-trust law
Discrimination law
Copyright, patents /
Intellectual property law
Consumer protection
and e-commerce
Employment law
Health and safety law
Data protection law
 Laws regulating
environment pollution
Economic Growth rates Foreign
Inflation rate currency
fluctuation in
Interest rates
various
Exchange rates countries
Unemployment trends
Labor costs
Stage of business cycle
Credit availability
Trade flows and patterns
Level of consumers’
disposable income
Monetary policies
Fiscal policies
Price fluctuations
Stock market trends
Weather Climate change

Social Health consciousness

Education level
Attitudes toward
imported goods and
services
Attitudes toward work,
leisure, career and
retirement
Attitudes toward product
quality and customer
service
Attitudes toward saving
and investing
Emphasis on safety
Lifestyles
Buying habits
Religion and beliefs
Attitudes toward “green”
or ecological products
Attitudes toward and
support for renewable
energy
Demographic
Population growth rate
Immigration and
emigration rates
Age distribution and life
expectancy rates
Sex distribution
Average disposable
income level
Social classes
Family size and structure
Minorities
Technology Basic infrastructure level Internet
Rate of technological
change Web
Spending on research & based
development
Technology incentives
technology
Legislation regarding
technology
Technology level in your
industry
 Communication
infrastructure
Access to newest
technology
Internet infrastructure
and penetration
Environment Weather
Climate change
Laws regulating
environment pollution
Air and water pollution
Recycling
Waste management
Attitudes toward
“green” or ecological
products
Endangered species
Attitudes toward and
support for renewable
energy
Legal Business to business
agreements,
Franchisee agreements,
Covenants not to
compete, distributions
agreements, Anti-trust
law
Discrimination law
Copyright, patents /
Intellectual property law
Consumer protection
and e-commerce
Employment law
Health and safety law
Data Protection

3. Analyze the changing industry structure in which Company is operating by using Porter’s
Five Forces Model. How did Company counter the changes and challenges of the industry
competitive forces in which Company is operating by using Porter’s Five Forces Model?

Text Book Chapter 2 :Page 52-59 (figure 2-2, Figure 2-3) Chapter 4
page 115)

Five Define Identify/Reasons Level: High Moderate or Actions/ Strategies

Forces Low
SEE
BELOW
 4. Analyze the changing industry structure in which The Company is operating by using
Porter’s Five Forces Model. How did Company counter the changes and challenges of the
industry competitive forces in which Company is operating by using Porter’s Five Forces
Model?
Answer
This force determines how easy (or not) it is to enter a particular industry. If an industry is profitable and there are
few barriers to enter, rivalry soon intensifies. When more organizations compete for the same market share,
profits start to fall. It is essential for existing organizations to create high barriers to enter to deter new entrants.
Threat of new entrants is high when:
Five Forces Define Identify/ Reasons Lev Actions Strategies
Are el
Threat of Low amount of capital is
required to enter a market;
new Existing companies can do
entrants. little to retaliate;
Existing firms do not
possess patents,
trademarks or do not have
established brand
reputation;
There is no government
regulation;
Customer switching costs
are low (it doesn’t cost a lot
of money for a firm to
switch to other industries);
There is low customer
loyalty;
Products are nearly
identical;
Economies of scale can be
easily achieved.

Supplier Number of suppliers

Suppliers’ size
power Ability to find substitute
materials
Materials scarcity
Cost of switching to
alternative materials
Threat of integrating
forward

Buyer Number of buyers

Size of buyers
power Size of each order
Buyers’ cost of switching
suppliers
There are many substitutes
Price sensitivity
Threat of integrating
 backward
Threat of Number of substitutes
substitutes Performance of
substitutes
Cost of changing
Rivalry There are many
competitors;
among Exit barriers are high;
existing Industry of growth is slow
or negative;
competitors Products are not
differentiated and can be
easily substituted;
Competitors are of equal
size;
Low customer loyalty.

5. You are also advised to conduct a strength, weaknesses, opportunities and threats (SWOT)
analysis for the Company and provide strategic suggestions based on analysis.
Identify Actions\Strategies
Opportunities:
1…5…xx
Threats:
1…5..xx
Strength:
1..5..xx
Weakness:
1…5..xx

6. What are the Four Criteria of Sustainable Competitive Advantage which the company uses
its resources and capabilities to get competitive advantage and why is it so successful in it?
( Pages 89- 93 Table 3-5)

The Four Criteria of Sustainable Competitive Advantage

Valuable Capabilities • Help a firm neutralize threats or exploit opportunities
Rare Capabilities • Are not possessed by many others
Costly-to-Imitate Capabilities • Historical: A unique and a valuable organizational culture or brand
name
Non substitutable Capabilities • No strategic equivalent

7. Define the purpose and identify the activities of company’s value chain?

Page 93 Chapter 3 figure 3.5, 3.6 3.7

 Primary activities are involved with a product’s physical creation, its sale and distribution to buyers,
and its service after the sale.

Support activities provide the assistance necessary for the primary activities to take place.

Inbound Logistics Activities,

such as materials handling, warehousing, and inventory control, used to receive, store, and
disseminate inputs to a product.
Operations Activities
Necessary to convert the inputs provided by inbound logistics into final product form. Machining,
packaging, assembly, and equipment maintenance are examples of operations activities.
Outbound Logistics
Activities involved with collecting, storing, and physically distributing the fi nal product to
customers. Examples of these activities include fi nished-goods warehousing, materials handling, and
order processing.
Marketing and Sales Activities
Completed to provide means through which customers can purchase products and to induce them to
do so. To effectively market and sell products, fi rms develop advertising and promotional campaigns,
select appropriate distribution channels, and select, develop, and support their sales force.
Service Activities
Designed to enhance or maintain a product’s value. Firms engage in a range of service-related
activities, including installation, repair, training, and adjustment. Each activity should be examined
relative to competitors’ abilities. Accordingly, fi rms rate each activity as superior, equivalent, or
inferior.

To be a source of competitive advantage, a resource or capability must allow the firm (1) to perform
an activity in a manner that provides value superior to that provided by competitors, or (2) to perform
a value-creating activity that competitors cannot perform.

8. Describe Company’s Business strategic positioning and key business strategies (01 Points)

Business-Level Strategies
Firms choose from among five business-level strategies to establish and defend their desired strategic
position against competitors: cost leadership, differentiation, focused cost leadership, focused
differentiation, and integrated cost leadership/differentiation
(See Figure 4.2). Each business-level strategy helps the firm to establish and exploit a particular
competitive advantage within a particular competitive scope.

A strategy of differentiating its products and geographic locations, and forged a competitive position with
excellent results.

Cost Uniqueness/Differentiated
 Broad Cost Differentiation
Leadership

Narrow Focused Cost Focused

Leadership Differentiation

9. Competitive Advantage (CA) foundation includes, what type of Resources when bundled to create
organizational capabilities Chapter 3.pages 78-80, table 3-1 table 3-2
Resources, capabilities, and core competencies are the foundation of competitive advantage.
Resources are bundled to create organizational capabilities. In turn, capabilities are the source of a firm’s core
competencies, which are the basis of competitive advantages.

Tangible resources
Are assets that can be observed and quantified
The four types of tangible resources are financial, organizational, physical, and technological

Table 3.1 Tangible Resources

Financial Resources • the firm’s borrowing capacity • The firm’s ability to generate internal funds

Organizational Resources • the firm’s formal reporting structure and its formal planning, controlling, and coordinating systems

Physical Resources • Sophistication and location of a firm’s plant and equipment • Access to raw materials

Technological Resources • Stock of technology, such as patents, trademarks, copyrights, and trade secrets

Intangible resources
Include assets that are rooted deeply in the firm’s history, accumulate over time, and are relatively difficult for
competitors to analyze and imitate.
The three types of intangible resources are human, innovation, and reputational (see Table 3.2).
Table 3.2 Intangible Resources

Human Resources • Knowledge • Trust • Managerial capabilities • Organizational routines

Innovation Resources • Ideas • Scientific capabilities • Capacity to innovate

Reputational Resources • Reputation with customers • Brand name • Perceptions of product quality, durability, and reliability
• Reputation with suppliers • For efficient, effective, supportive, and mutually beneficial interactions and relationships

Compared to tangible resources, intangible resources are a superior source of core competencies. 65 In fact, in the
global economy, “the success of a corporation lies more in its intellectual and systems capabilities than in its
physical assets. [Moreover], the capacity to manage human intellect—and to convert it into useful products and
services—is fast becoming the critical executive skill of the age.66
Because intangible resources are less visible and more difficult for competitors to understand, purchase, imitate, or
substitute for, firms prefer to rely on them rather than on tangible resources as the foundation for their capabilities
and core competencies.
In fact, the more unobservable (i.e., intangible) a resource is, the more sustainable will be the competitive advantage
that is based on it.67 Another benefit of intangible resources is that, unlike most tangible resources, their use can be
leveraged. For instance, sharing knowledge among employees does not diminish its value for any one person.
10. Describe company’s Business strategy Chapter 4. pages 107 108 Figure 4-2

The Purpose of a Business-Level Strategy

The purpose of a business-level strategy is to create differences between the firm’s position and those of its
competitors.51 To position itself differently from competitors, a firm must decide whether it intends to perform
activities differently or to perform different activities.
Types of Business-Level Strategies
Firms choose from among five business-level strategies to establish and defend their desired strategic
position against competitors: cost leadership, differentiation, focused cost leadership, focused
differentiation, and integrated cost leadership/differentiation
(see
Figure 4.2). Each business-level strategy helps the firm to establish and exploit a particular competitive advantage
within a particular competitive scope.
L Competitive Scope used
Target
Broad
Narrow

Competitive Advantage n
Cost
Uniqueness

Source: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from
Competitive Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 12. Copyright © 1985,
1998 by Michael E. Porter.

Cost Uniqueness/Differentiated
Cost Leadership Differentiation
Focused Cost Leadership Focused
Differentiation

11. How does competitive rivalry, competitive behavior, and competitive dynamics
effect Company? Chapter 5. pages 130-138,144,149 figure 5-1 Figure
5-2, figure 5-3
Competitors are firms operating in the same market, offering similar products, and targeting similar customers.

Competitive rivalry is the ongoing set of competitive actions and competitive responses that occur among firms as they maneuver for an
advantageous market position.

Competitive behavior is the set of competitive actions and competitive responses the firm takes to build or defend its competitive advantages
and to improve its market position.
Competitive dynamics refer to all competitive behaviors—that is, the total set of actions and responses taken by all firms competing within a
market.

Market commonality is concerned with the number of markets with which the firm and a competitor are jointly involved and the degree of
importance of the individual markets to each.

Resource similarity is the extent to which the firm’s tangible and intangible resources are comparable to a competitor’s in terms of both type and
amount.

A competitive action is a strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position.

A competitive response is a strategic or tactical action the firm takes to counter the effects of a competitor’s competitive action.

A strategic action or a strategic response is a market-based move that involves a significant commitment of organizational resources and is
difficult to implement and reverse.

A tactical action or a tactical response is a market-based move that is taken to fi ne-tune a strategy; it involves fewer resources and is relatively
easy to implement and reverse.
In response to shrinking market share, executives at Guess, Inc. made the decision to take the brand upscale rather than cut prices and
potentially see their brand equity decline

Figure 5.1 From Competitors to Competitive Dynamics (Page 131)

Figure 5.2 A Model of Competitive Rivalry (Page 132)

12. Define the purpose and identify the activities of company’s value chain? Chapter
3.pages 85-87, table 3-6 figure 3-3

13. How is the Company using its resources and capabilities to get competitive advantage and
why is it so successful in it? Chapter 3.pages 82-83,85 table 3-4 table 3-5
Table 3.4 The Four Criteria of Sustainable Competitive Advantage
Valuable Capabilities • Help a firm neutralize threats or exploit opportunities
Rare Capabilities • Are not possessed by many others
Costly-to-Imitate Capabilities • Historical: A unique and a valuable organizational culture or brand name
• Ambiguous cause: The causes and uses of a competence are unclear
• Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers

Nonsubstitutable Capabilities • No strategic equivalent

Four Criteria of Sustainable Competitive Advantage

As shown in Table 3.4, capabilities that are valuable, rare, costly to imitate, and non-substitutable
are core competencies. In turn, core competencies are sources of competitive advantage for the firm over its rivals.
Capabilities failing to satisfy the four criteria of sustainable competitive advantage are not core competencies,
meaning that although every core competence is a capability, not every capability is a core competence. In slightly
different words, for a capability to be a core competence, it must be valuable and unique from a customer’s point of
view. For a competitive advantage to be sustainable, the core competence must be inimitable and non-substitutable
by competitors

Is the Resource
or Capability
Valuable?
Is the Resource
or Capability
Rare?
Is the Resource
or Capability
Costly to
Imitate?
Is the Resource
or Capability
Nonsubstitutable? Insert table 3-4 table 3-5
Competitive
Consequences
Performance
Implications
No No No No Competitive
disadvantage
Below-average
returns
Yes No No Yes/no Competitive parity Average returns
Yes Yes No Yes/no Temporary
competitive
advantage
Average returns
to above- average
returns
Yes Yes Yes Yes/no Sustainable
competitive
advantage
Above-average
returns

14. You are also advised to conduct a strength, weaknesses, opportunities and
threats (SWOT) analysis for Company and provide strategic suggestions based
on analysis. (Southwest case analysis)
15. What External Factor Evaluation (EFE) Matrix are the Key success factors External
PESTEL/porters/(Southwest case analysis)
16. CPM – Competitive Profile Matrix (Southwest case analysis)

17. Internal Factor Evaluation (IFE) Matrix ( Resources, Value creations, core competences
Competitive advantage ) (Southwest case analysis)

18. What would you recommend and why QSPM(Southwest case analysis)

The Quantitative Strategic Planning Matrix is a strategic tool which is used to

evaluate alternative set of strategies. The QSPM incorporate earlier stage
details in an organize way to calculate the score of multiple strategies in order
to find the best match strategy for the organization
Southwest Airline Case

CPM – Competitive Profile Matrix

SouthWest American United

Critical Success Factors Weight Rating Weighte Rating Weighted Rating Weighted
d Score Score Score

Market Share 0.13 2 0.26 4 0.52 3 0.39

Price competitiveness 0.10 4 0.40 2 0.20 2 0.20

Financial Position 0.12 3 0.36 1 0.12 1 0.12

Consumer Loyalty 0.10 4 0.40 2 0.20 2 0.20

Advertising 0.15 4 0.60 4 0.60 2 0.30

Management 0.10 4 0.40 3 0.30 2 0.20

Security Precautions 0.09 3 0.27 3 0.27 3 0.27

Organizational Structure 0.06 3 0.18 3 0.18 2 0.12

Customer Service 0.15 4 0.60 3 0.45 1 0.15

Total 1.00 3.47 2.84 1.95

External Factor Evaluation (EFE) Matrix

Key External Factors Weight Rating Weighted Score

Opportunities

1. There is an increased demand for 0.10 1 0.10

international travel.
2. There is a decline of 11 percent in airline
companies with funding leading to used
planes being able to be purchased. 0.01 1 0.01

3. Increased demand for cities that are

currently without SW airline flights (Atlanta,
New York, etc.) 0.10 1 0.10
4. Each year airline companies (Delta and
Northwest in 2006) are declaring
bankruptcy leaving more cities existing 0.05 1 0.05
allowing more airlines to fly to.
5. Increase popularity of internet leads to an
expected rise of 22 percent from 2006 in
flights booked online. 0.03 4 0.12

6. Increase popularity with Visa check card 0.01 1 0.01

purchases with reward points.
7. With an increase of nearly 3 million people
in the US there is an expansion of
developing cities across the United States. 0.01 2 0.02

8. Technology is increasing making older 0.03 2 0.06

planes outdated.
9. Increased amount of upper level business
travelers has led to greater demand for
better seats. 0.01 1 0.01

10. Stock market has increased leading to more

money to being spent on vacations or
business affairs. 0.05 1 0.05

11. Decline of 11 percent in airline companies

with funding leading to experienced
workers being laid off. 0.03 3 0.09

Threats

1. Specialization expertise of Jet Blue using

one plane model allows them to provide
less expensive mechanics to maintain 0.09 4 0.36
planes.
2. Jet Blue is the only airline to carry satellite 0.04 1 0.04
televisions on planes.
3. Higher ticket taxes. 0.04 1 0.04

4. Increase in airport security due to possible 0.10 4 0.40

terrorism.
5. Many companies such as AirTran Airways 0.05 1 0.05
are offering a business class in their B717
jet.
6. Competing airlines offer satellite radio in 0.03 1 0.03
their passenger jets.
7. High cost of fuel leads to increase in ticket 0.10 3 0.30
prices.
8. Studies in 2000 report that obese 0.03 1 0.03
 passengers cost airlines an extra $275
million in fuel costs.
9. Other airline companies offer in-flight 0.03 3 0.09
meals adding luxury.
10. SW competitors are flying newer and more 0.06 1 0.06
technologically advanced jets with luxury
items.
TOTAL 1.00 2.02

E. Internal Audit

Strengths

1. SW has a larger market capital compared to others with $11.3 billion.

2. SW has all flights going to cities within the United States.
3. Use point-to-point flight system with no hubs one way.
4. Ability to determine cost/prices within the organization.
5. Leader in market capitalization.
6. Largest in US by the number of passengers carried yearly and 3rd in the world.
7. One of the world’s most profitable and highest posted profits for 34 consecutive
years.
8. In 2006 70 percent of flight bookings and 73 percent of revenue came from bookings
on Southwest’s website.
9. Low prices and relaxed atmosphere made it an icon.
10. First airline to have a webpage in 1995.
11. SW has 481 Boeing 737s jets.
12. Financially they purchase fuel options to hedge cost years in advance to smooth
market fluctuations.

Weaknesses

1. SW has highest percentage of full-time employees leading to increased overhead.

2. SW only flies one plane, the Boeing 737.
3. They will not fly outside the continental United States, 63 cities and 32 states.
4. Difficult to convince customers SW offers benefits other airlines do not.
5. Flying only 737s could lead to negative press if problems with that plane arise.
6. Does not accommodate for severely handicapped.
7. Large cities (Atlanta, Charlotte, etc) are without SW service.
8. Does not provide a first class for passengers.
 9. Do not provide assigned seating.
10. Only some 737s carry televisions.
11. SW does not offer any type of in-flight meals

Internal Factor Evaluation (IFE) Matrix

Key Internal Factors Weight Rating Weighted

Score

Strengths

1. SW has a larger market capital compared to others 0.04 3 0.12

with $11.3 billion.
2. SW has all flights going to cities within the United 0.02 3 0.06
States.
3. Use point-to-point flight system with no hubs one 0.06 4 0.24
way.
4. Ability to determine cost/prices within the 0.06 4 0.24
organization.
5. Leader in market capitalization. 0.03 4 0.12

6. Largest in US by the number of passengers carried 0.02 3 0.06

yearly and 3rd in the world.
7. One of the world’s most profitable and highest 0.05 3 0.15
posted profits for 34 consecutive years.
8. In 2006 70 percent of flight bookings and 73 0.10 4 0.40
percent of revenue came from bookings on
Southwest’s website.
9. Low prices and relaxed atmosphere made it an 0.01 3 0.03
icon.
10. First airline to have a webpage in 1995. 0.01 3 0.03

11. SW has 481 Boeing 737s jets. 0.10 4 0.40

12. Financially they purchase fuel options to hedge 0.15 4 0.60

cost years in advance to smooth market
fluctuations.
Weaknesses

1. SW has highest percentage of full-time employees 0.06 2 0.12

leading to increased overhead.
2. SW only flies one plane, the Boeing 737. 0.01 1 0.01

3. They will not fly outside the continental United 0.10 1 0.10
States, 63 cities and 32 states.
4. Difficult to convince customers SW offers benefits 0.01 2 0.02
other airlines do not.
 5. Flying only 737s could lead to negative press if 0.01 1 0.01
problems with that plane arise.
6. Does not accommodate for severely handicapped. 0.02 1 0.02

7. Large cities (Atlanta, Charlotte, etc) are without 0.10 1 0.10

SW service.
8. Does not provide a first class for passengers. 0.01 1 0.01

9. Do not provide assigned seating. 0.01 1 0.01

10. Only some 737s carry televisions. 0.01 2 0.02

11. SW does not offer any type of in-flight meals. 0.01 2 0.02

TOTAL 1.00 2.89

F. SWOT Strategies

SO Strategies

1. Through increased advertising online SW can increase flight bookings (S8, O5).
2. Using a point-to-point system SW can increase flights with business travelers who
need timely flights (S3, O9).
3. Use incentives to purchase flights using credit cards to increase profits (S7, O6).
4. Less expensive flights, due to cutting fuel costs by $155M, leave market
capitalization available on areas where airline companies no longer fly due to
bankruptcy (S12, O4).
5. Cut ticket cost by $2.00, but add a charge of $2.00 to each extra bag (one allowed)
(S4, O10).

WO Strategies

1. Hire more part time workers (W1, O11).

2. Add new technology to older planes in order to become up-to-date and
accommodate the handicapped (W6, O8).
3. With airline companies selling planes SW can purchase models similar to the 737,
which could lead to better press if a problem with the 737 arises (W5, O2).
4. Offer in flight meals for those who meet appropriate requirements based on points
received from Visa card usage (W11, O6).
 5. Install televisions and satellite radio in planes for enhanced customer service (W10,
O7).
6. Provide higher quality and luxuries (first class) in some jets for customers willing to
pay extra (W8, O9).

ST Strategies

1. Upgrade our fleet by adding 12 of the similar Boeing 717 jets in order to
accommodate to the travelers desiring the luxury of a business class. These jets will
be flown in the larger cities with more travel demand with an approximate cost of
$700 M.
2. Expand the rapid rewards program to offer one reward point for every three
purchases made on the Southwest website at least one month in advance. This will
help Southwest in the booking processes so that there will be less complications and
delays associated with last minute purchases.
3. In order to compete with the luxury airlines offering in flight meals, Southwest will
now offer in flight drinks (soda, water, juices, and limited alcohol items) and small
snack foods available to the passengers by cash or charge.
4. Make all flights with in the 48 states point-to-point flights with strict time lines given
to the employees in order to alleviate delays. We predict this will increase our
percent of on-time flights from 83.96% to approximately 90.00%. Then create a
marketing program through television and magazines advertising the new policies.

WT Strategies

1. Using the code share with ATA airlines begin offering flight to select areas outside
the US including (Cozumel Mexico, Select Canada locations, Paris, London, etc.)
2. Shorten the flight life span of the B737’s in order maintain planes that are
consistently up to date with technology. This will allow us to hedge any risk of
negative problems arising with the 737’s. Maintaining new equipment allows us to
easily liquidate the assets when new items are needed to be purchased.
3. Add new cities not flown to by Southwest such as Atlanta, Charlotte, Chicago, and
New York.

G. SPACE Matrix
 FS
Conservative Aggressive
6

CA IS
-6 -5 -4 -3 -2 -1 1 2 3 4 5 6
-1

-2

-3

-4

-5

-6
Defensive Competitive
ES

Financial Strength (FS) Environmental Stability (ES)

Net Income 3 Rate of Inflation -2
Leverage 1 Technological Changes -1
ROA 3 Price Elasticity of Demand -2
Inventor Turnover 3 Competitive Pressure -6
Income/Employee 2 Barriers to Entry into Market -4

Financial Strength (FS) Average 2.4 Environmental Stability (ES) Average -3.0

Competitive Advantage (CA) Industry Strength (IS)

Market Share -3 Growth Potential 5
Product Quality -2 Financial Stability 4
Customer Loyalty -1 Ease of Entry into Market 3
Technological know-how -2 Resource Utilization 5
Control over Suppliers and Distributors -2 Profit Potential 5

Competitive Advantage (CA) Average -2.0 Industry Strength (IS) Average 4.4

x-axis: -2.0 + 4.4 = 2.4

y-axis: 2.4 + -3.0 = - 0.6
H. Grand Strategy Matrix

Rapid Market Growth

Quadrant II Quadrant I

Weak Strong
Competitive Competitive
Position Position

Quadrant III Quadrant IV

Slow Market Growth

I. The Internal-External (IE) Matrix

The IFE Total Weighted Score

Strong Average Weak

3.0 to 4.0 2.0 to 2.99 1.0 to 1.99

High I II III

3.0 to 3.99

Medium IV V VI

The EFE Total 2.0 to 2.99

Weighted
Score
Southwest

Low VII VIII IX

1.0 to 1.99

Hold and Maintain

J. QSPM

Strategic Alternatives

Add 12 B17s to Shorten Life of

Fleet Current Planes in
Use
Key Internal Factors Weight

Strengths Rank (1-4) Total Rank (1-4) Total

Weigh Weig
tage htage

1. SW has a larger market capital compared to 0.04 2 0.08 3 0.12

others with $11.3 billion.
2. SW has all flights going to cities within the 0.02 2 0.04 3 0.06
United States.
3. Use point-to-point flight system with no hubs 0.06 3 0.18 2 0.12
one way.
4. Ability to determine cost/prices within the 0.06 --- --- --- ---
organization.
5. Leader in market capitalization. 0.03 2 0.06 3 0.09

6. Largest in US by the number of passengers 0.02 3 0.06 2 0.04

carried yearly and 3rd in the world.
7. One of the world’s most profitable and 0.05 3 0.15 2 0.10
highest posted profits for 34 consecutive
years.
8. In 2006 70 percent of flight bookings and 73
percent of revenue came from bookings on
Southwest’s website. 0.10 --- --- --- ---

9. Low prices and relaxed atmosphere made it 0.01 --- --- --- ---
an icon.
10. First airline to have a webpage in 1995. 0.01 --- --- --- ---

11. SW has 481 Boeing 737s jets. 0.10 2 0.20 3 0.30

12. Financially they purchase fuel options to

hedge cost years in advance to smooth
market fluctuations. 0.15 --- --- --- ---

Weaknesses

1. SW has highest percentage of full-time 0.06 --- --- --- ---

employees leading to increased overhead.
2. SW only flies one plane, the Boeing 737. 0.01 3 0.03 4 0.04

3. They will not fly outside the continental 0.10 3 0.30 2 0.20
 United States, 63 cities and 32 states.

4. Difficult to convince customers SW offers 0.01 2 0.02 3 0.03

benefits other airlines do not.
5. Flying only 737s could lead to negative press 0.01 4 0.04 3 0.03
if problems with that plane arise.
6. Does not accommodate for severely 0.02 2 0.04 3 0.06
handicapped.
7. Large cities (Atlanta, Charlotte, etc) are 0.10 2 0.20 1 0.10
without SW service.
8. Does not provide a first class for passengers. 0.01 4 0.04 2 0.02

9. Do not provide assigned seating. 0.01 3 0.03 1 0.01

10. Only some 737s carry televisions. 0.01 3 0.03 4 0.04

11. SW does not offer any type of in-flight meals. 0.01 --- --- --- ---

SUBTOTAL 1.00 1.50 1.36

Add 12 B17s to Shorten Life of

Fleet Current Planes in
Use
Key External Factors Weight

Opportunities Rank (1- Total Rank (1- Total

4) 4)
Weight Weight
age age

1. There is an increased demand for international 0.10 --- --- --- ---
travel.
2. There is a decline of 11 percent in airline
companies with funding leading to used planes
being able to be purchased. 0.01 4 0.04 1 0.01

3. Increased demand for cities that are currently 0.10 --- --- --- ---
without SW airline flights (Atlanta, New York,
etc.)
4. Each year airline companies (Delta and
Northwest in 2006) are declaring bankruptcy
leaving more cities existing allowing more 0.05 2 0.10 1 0.10
airlines to fly to.
5. Increase popularity of internet leads to an 0.03 --- --- --- ---
expected rise of 22 percent from 2006 in flights
booked online.
6. Increase popularity with Visa check card 0.01 --- --- --- ---
purchases with reward points.
 7. With an increase of nearly 3 million people in --- --- --- ---
the US there is an expansion of developing
cities across the United States. 0.01

8. Technology is increasing making older planes 0.03 3 0.09 4 0.12

outdated.
9. Increased amount of upper level business 0.01 4 0.04 2 0.02
travelers has led to greater demand for better
seats.
10. Stock market has increased leading to more 0.05 --- --- --- ---
money being spent on vacations or business
affairs.
11. Decline of 11 percent in airline companies with
funding leading to experienced workers being
laid off. 0.03 2 0.06 1 0.03

Threats

1. Specialization expertise of Jet Blue using one

plane model allows them to provide less
expensive mechanics to maintain planes. 0.09 1 0.09 3 0.27

2. Jet Blue is the only airline to carry satellite 0.04 3 0.12 2 0.08
televisions on planes.
3. Higher ticket taxes. 0.04 --- --- --- ---

4. Increase in airport security due to possible 0.10 --- --- --- ---
terrorism.
5. Many companies such as AirTran Airways are 0.05 4 0.20 1 0.05
offering a business class in their B717 jet.
6. Competing airlines offer satellite radio in their 0.03 3 0.09 4 0.12
passenger jets.
7. High cost of fuel leads to increase in ticket 0.10 --- --- --- ---
prices.
8. Studies in 2000 report that obese passengers 0.03 --- --- --- ---
cost airlines an extra $275 million in fuel costs.
9. Other airline companies offer in-flight meals 0.03 --- --- --- ---
adding luxury.
10. SW competitors are flying newer and more 0.06 3 0.18 4 0.24
technologically advanced jets with luxury items.
SUBTOTAL 1.01 1.04

SUM TOTAL ATTRACTIVENESS SCORE 2.51 2.40

K. Recommendations
 The QSPM strategies assessed adding 12 new planes to the fleet or retiring older planes.
It is recommended Southwest add 12 new plans at a total cost of $500 million.

Using the tool

The process of carrying out PEST analysis should involve as many managers as possible to get
the best results. It includes the following steps:

 Step 1. Gathering information about political, economic, social and technological

changes + any other factor(s).
 Step 2. Identifying which of the PEST factors represent opportunities or threats.

Gathering PEST, PESTEL and STEEPLED information

In order to perform PEST (or any other variation of it) managers have to gather as much relevant
information as possible about the firm’s external environment. Nowadays, most information can
be found on the internet relatively easy, fast and with little cost. When the analysis is done for
the first time the process may take a little longer and as a beginner you may find yourself asking
“What changes do I exactly look for in politics, economic, society and technology?” The
following templates might be useful when gathering information for PEST, PESTEL and
STEEPLED analysis.

NOTE: PEST covers all macro environment forces affecting an organization. Therefore, when
doing PESTEL or STEEPLED analysis, legal, environmental, ethical and demographic factors
may overlap with PEST factors.

PEST analysis template

Political factors Economic factors

 Government stability and likely changes  Growth rates
 Bureaucracy  Inflation rate
 Corruption level  Interest rates
 Tax policy (rates and incentives)  Exchange rates
 Freedom of press  Unemployment trends
 Regulation/de-regulation  Labor costs
 Trade control  Stage of business cycle
 Import restrictions (quality and quantity)  Credit availability
 Tariffs  Trade flows and patterns
 Competition regulation  Level of consumers’ disposable income
 Government involvement in trade unions and  Monetary policies
agreements  Fiscal policies
 Environmental Law  Price fluctuations
 Education Law  Stock market trends
 Anti-trust law  Weather
 Discrimination law  Climate change
 Copyright, patents / Intellectual property law
 Consumer protection and e-commerce
 Employment law
 Health and safety law
 Data protection law
 Laws regulating environment pollution

Socio-cultural factors Technological factors

 Health consciousness  Basic infrastructure level

 Education level  Rate of technological change
 Attitudes toward imported goods and services  Spending on research & development
 Attitudes toward work, leisure, career and  Technology incentives
retirement  Legislation regarding technology
 Attitudes toward product quality and customer  Technology level in your industry
service  Communication infrastructure
 Attitudes toward saving and investing  Access to newest technology
 Emphasis on safety  Internet infrastructure and penetration
 Lifestyles
 Buying habits
 Religion and beliefs
 Attitudes toward “green” or ecological
 products
 Attitudes toward and support for renewable
energy
 Demographic
 Population growth rate
 Immigration and emigration rates
 Age distribution and life expectancy rates
 Sex distribution
 Average disposable income level
 Social classes
 Family size and structure
 Minorities

Environmental (ecological) Legal

 Weather  Anti-trust law

 Climate change  Discrimination law
 Laws regulating environment pollution  Copyright, patents / Intellectual property law
 Air and water pollution  Consumer protection and e-commerce
 Recycling  Employment law
 Waste management  Health and safety law
 Attitudes toward “green” or ecological  Data Protection
products
 Endangered species
 Attitudes toward and support for renewable
energy

Identifying opportunities and threats

Gathering information is just a first important step in doing PEST analysis. Once it is done, the
information has to be evaluated. There are many factors changing in the external environment
but not all of them are affecting or might affect an organization. Therefore, it is essential to
identify which PEST factors represent the opportunities or threats for an organization and list
only those factors in PEST analysis. This allows focusing on the most important changes that
might have an impact on the company.

Sources
 1. Thompson, J. and Martin, F. (2010). Strategic Management: Awareness & Change. 6th
ed. Cengage Learning EMEA, p. 86-88, 816
2. Rothaermel, F. T. (2012). Strategic Management: Concepts and Cases.
McGraw-Hill/Irwin, p. 56-61
3. David, F.R. (2009). Strategic Management: Concepts and Cases. 12th ed. FT Prentice
Hall, p. 104-114
4. Johnson, G, Scholes, K. Whittington, R. (2008). Exploring Corporate Strategy. 8th ed. FT
Prentice Hall, p. 55-57
5. Wikipedia (2013). PEST analysis. Available
at: http://en.wikipedia.org/wiki/PEST_analysis

Porter's Five Forces

Ovidijus Jurevicius | May 27, 2013 Print

Five external industry forces affecting an organization.

Definition
Porter’s five forces model

is an analysis tool that uses five industry forces to determine the intensity of competition
in an industry and its profitability level.
[1]

Understanding the tool

Five forces model was created by M. Porter in 1979 to understand how five key competitive
forces are affecting an industry. The five forces identified are:
These forces determine an industry structure and the level of competition in that industry. The
stronger competitive forces in the industry are the less profitable it is. An industry with low
barriers to enter, having few buyers and suppliers but many substitute products and competitors
will be seen as very competitive and thus, not so attractive due to its low profitability.
 It is every strategist’s job to evaluate company’s competitive position in the industry and to
identify what strengths or weakness can be exploited to strengthen that position. The tool is very
useful in formulating firm’s strategy as it reveals how powerful each of the five key forces is in a

Using the tool

We now understand that Porter’s five forces framework is used to analyze industry’s competitive
forces and to shape organization’s strategy according to the results of the analysis. But how to
use this tool? We have identified the following steps:

 Step 1. Gather the information on each of the five forces

 Step 2. Analyze the results and display them on a diagram
 Step 3. Formulate strategies based on the conclusions

Step 1. Gather the information on each of the five forces. What managers should do during
this step is to gather information about their industry and to check it against each of the factors
(such as “number of competitors in the industry”) influencing the force. We have already
identified the most important factors in the table below.

Porter's Five Forces Factors

Threat of new entry

 Amount of capital required

 Retaliation by existing companies
 Legal barriers (patents, copyrights, etc.)
 Brand reputation
 Product differentiation
 Access to suppliers and distributors
 Economies of scale
 Sunk costs
 Government regulation

Threat of new entrants. This force determines how easy (or not) it is to
enter a particular industry. If an industry is profitable and there are few
 barriers to enter, rivalry soon intensifies. When more organizations
compete for the same market share, profits start to fall. It is essential for
existing organizations to create high barriers to enter to deter new entrants.
Threat of new entrants is high when:

 Low amount of capital is required to enter a market;

 Existing companies can do little to retaliate;
 Existing firms do not possess patents, trademarks or do not have
established brand reputation;
 There is no government regulation;
 Customer switching costs are low (it doesn’t cost a lot of money
for a firm to switch to other industries);
 There is low customer loyalty;
 Products are nearly identical;
 Economies of scale can be easily achieved.


Supplier power

 Number of suppliers
 Suppliers’ size
 Ability to find substitute materials
 Materials scarcity
 Cost of switching to alternative materials
 Threat of integrating forward

Bargaining power of suppliers. Strong bargaining power allows

suppliers to sell higher priced or low quality raw materials to their buyers.
This directly affects the buying firms’ profits because it has to pay more
for materials. Suppliers have strong bargaining power when:

 There are few suppliers but many buyers;

 Suppliers are large and threaten to forward integrate;
 Few substitute raw materials exist;
 Suppliers hold scarce resources;
 Cost of switching raw materials is especially high.

Buyer power

 Number of buyers
 Size of buyers
 Size of each order
 Buyers’ cost of switching suppliers
 There are many substitutes
 Price sensitivity
 Threat of integrating backward

Bargaining power of buyers. Buyers have the power to demand lower

price or higher product quality from industry producers when their
bargaining power is strong. Lower price means lower revenues for the
producer, while higher quality products usually raise production costs.
Both scenarios result in lower profits for producers. Buyers exert strong
bargaining power when:

 Buying in large quantities or control many access points to the

final customer;
 Only few buyers exist;
 Switching costs to other supplier are low;
 They threaten to backward integrate;
 There are many substitutes;
 Buyers are price sensitive.

Threat of substitutes

 Number of substitutes
 Performance of substitutes
 Cost of changing

Threat of substitutes. This force is especially threatening when buyers

can easily find substitute products with attractive prices or better quality
and when buyers can switch from one product or service to another with
little cost. For example, to switch from coffee to tea doesn’t cost anything,
unlike switching from car to bicycle.

Rivalry among existing competitors

 Number of competitors
 Cost of leaving an industry
 Industry growth rate and size
 Product differentiation
 Competitors’ size
 Customer loyalty
 Threat of horizontal integration
 Level of advertising expense

Rivalry among existing competitors. This force is the major determinant

on how competitive and profitable an industry is. In competitive industry,
firms have to compete aggressively for a market share, which results in
low profits. Rivalry among competitors is intense when:

 There are many competitors;

 Exit barriers are high;
 Industry of growth is slow or negative;
 Products are not differentiated and can be easily substituted;
 Competitors are of equal size;
 Low customer loyalty.

Although, Porter originally introduced five forces affecting an industry,

scholars have suggested including the sixth force: complements.
Complements increase the demand of the primary product with which they
are used, thus, increasing firm’s and industry’s profit potential. For
example, iTunes was created to complement iPod and added value for
both products. As a result, both iTunes and iPod sales increased,
increasing Apple’s profits.

Step 2. Analyze the results and display them on a diagram. After gathering all the
information, you should analyze it and determine how each force is affecting an industry. For
example, if there are many companies of equal size operating in the slow growth industry, it
means that rivalry between existing companies is strong. Remember that five forces affect
different industries differently so don’t use the same results of analysis for even similar
industries!

Step 3. Formulate strategies based on the conclusions. At this stage, managers should
formulate firm’s strategies using the results of the analysis For example, if it is hard to achieve
economies of scale in the market, the company should pursue cost leadership strategy. Product
development strategy should be used if the current market growth is slow and the market is
saturated.

Although, Porter’s five forces is a great tool to analyze industry’s structure and use the results to
formulate firm’s strategy, it has its limitations and requires further analysis to be done, such
as SWOT, PEST or Value Chain analysis.