Analyzing the Business

Environment
(The Strategic Position**)
Prof Ashish K Mitra

Analyzing Environment
Awareness of the environment is not a special
project to be undertaken only when warning of
change becomes deafening
Kenneth R Andrews

Analysis is the critical starting point of strategic

thinking
Kenichi Ohmae

It is not the strongest of the species that

survive, nor the most intelligent, but the one
most responsive to change
Charles Darwin

STRATEGIC MANAGEMENT PROCESS

Company Mission
^

v
External Environment
Operating
Industry
Remote
^

? Possible
<

Company Profile
(Resources & capabilities)

? Desired

Strategic Analysis and Choice

Long-term Objectives
Annual Plans &
Short term Objectives

Feed Back

Generic & Grand Strategies

Functional / Operating
Strategies/ tactics

Policies that empower

action

Institutionalization of Strategy
Strategic Control & continuous improvement

Feed Back

Analyzing Business Environment

Business Environment encompasses
External Environment
Macro external environment - Political, Economic,
Social and Technological (PEST) ( some call them
as PESTEL)
Micro external environment immediate Industry
and competitive environment

Internal Environment
Resources
Competencies

Layers of the External Business Environment**

The Macro-environment
Industry ( or Sector )
Strategic Group
The
Organization
Markets
Organizational Field

The Firms External Environment

Remote
Environment
Political
Economical
Social
Technological
Ecological
Legal

Industry Environment
Competitive Rivalry
Threat of new entrants/
entry barriers
Supplier Power
Buyer Power
Threat of substitute

Operating
Environment
Competitors
Creditors
Customers
Labor
Suppliers

The
FIRM

 The most general (outer) layer is often referred to as

the macro-environment. Broad factors that impact to a
greater and lesser extent on almost all organizations.
It is important to identify these issues and particularly
those that are likely to have a differentially large impact
on a specific organization
Any specific PESTEL factor will affect some
organizations more than others Also it will affect some
organizations favorably , whilst posing a threat to others.
If the future is likely to be very different from the past it is
helpful to construct pictures or scenarios of possible
futures. This helps managers consider different ways in
which strategies might need to change depending upon
how the business environment might unfold.

 Next layer would be called industry. This is a group of

organizations producing the same products or services.
However, we need to recognize that previously separate
industries might converge.
The Five forces framework (and the concept of hyper competition) can be
useful in understanding how the competitive dynamics
within and around an industry are changing
Within most industries or sectors, there will be many
different organizations with different characteristics and
competing on different bases. This intermediate layer
between the industry and the individual organization is
called strategic group. These are organizations within
an industry that have similar characteristics to each other
but are quite different from those in other strategic
groups.

External Environment
The external environment of a business play a principal
role in determining the opportunities, threats and
constraints a firm faces
Macro-external ( remote) environment : Variables
originating beyond and irrespective of any single firms
operating situation ( political, economic, social,
technological , Environmental and Legal forces ) form the
remote or macro-external environment .
Micro-external environments :Variables influencing a
firms immediate competitive situation ( competitive
position, customer profiles, suppliers and creditors, and
accessible labor market) constitute the operating
environment
MNCs must evaluate several External environments
simultaneously

ELEMENTS OF AN EXTERNAL ANALYSIS

Macro external
Environment

An
Organization
s
External
Environment

Technological

Substitute
Products

Political

Economic

Micro external
environment
Industry-Competitors

Organization

Bargaining
Power of
Suppliers Bargaining
Power of
Buyers

Current
Rivalry

Potential
Entrants
Social

Political environment
Political forces influence
Legislations & government rules/
regulations under which the firm operates :
Anti-trust laws, patent laws, de-regulation of
industries, openness to FDI), employment
laws (eg; minimum wages) , social welfare
laws, fair trade practices, taxation, pollution
laws, pricing policies in certain industries,
actions aimed at protecting consumers,
local industries and local environment,
foreign travel laws
Strength & independence of Judicial
system. Enforceability of contracts.

 Government plays a very significant role in several

industries as a supplier, customer or competitor,
subsidies/ grants for research
Political / geo-political stability is a very significant
impact on the general economic environment (for
growth ), particularly in the globalization context
Firms analyze governments strategies and develop
complementary plans, to exploit opportunities
Institutions like media, social, religious, pressure
groups & lobbies are part of political environment,
impacting Industry

 Impact of geo-political situation on IT majors in 2002

Indian Govt not allowing ONGC to form JV in Nigeria in
2005, despite winning the bid for a large Nigerian oil
reserve
Collapse of Soviet Russia on Indian Pharmaceutical
companies
OPEC oil price changes impact
Interplay between political & legal forces on one hand and
industry & firms on the other hand eg. Noise against
outsourcing in US (more closer to every presidential
election)

Economic environment
Economic forces affect general health of a nation
or regional economy , which affect companies &
industries ability to earn adequate rate of return.
Economic environment : is a vital component from
the standpoint of strategic planning
Consumption patterns are affected by the relative
affluence of various segments of the market .
Firms must understand crucial macro-economic trends
in the segments that affects its industry. These include
GDP growth, prime interest rates, inflation rates,
exchange rates, sector-wise growth rates,
behavior of capital market, Capital market reforms, FDI
regulations
general availability of credit, currency convertibility
level of disposable income & propensity to spend,
availability of skills

 National as well as international economic

forces like OPEC, EEC ( now EU) ,WTO, tarifffree trade agreements ( like NAFTA) etc
affects Industry / firms
Natural environment covering ecology, climate
and endowment of natural resources

Social Environment
The Social environment is an important factor as
changes in the values, beliefs, attitudes,
opinions and lifestyle in society create potential
opportunities ( threats for some). The cultural,
demographic, religious, educational and ethnic
conditioning of individuals in society affects the
social environment.
Social environment being dynamic, for a
company to grow, must take advantages of
societal changes

Social Environment
A large number of women have stated working outside
home created wide range of products and services
convenience food, microwave ovens, day-care centers.
Composition of work force, capabilities, hiring /
compensation policies
% of women in workforce increased from 44 to 60 in US
issues of equality of pay, sexual harassment at work
Demographic Change , birth control, shift in national age
distribution, growing senior citizen population shift in
demand for products and services, shift in long range
marketing strategies , product research by companies.
Accelerated interest in quality-of-life issues, leisure
Emergence of alternate labor market
Signification of family as an institution children as
influencer in purchase of goods

Technological environment
Technological advancement and its rate of
change has very significant influence on
Industry & an individual firm. Technological
change is both creative and destructive.
Technological change can affect the
barriers to entry & therefore radically
reshape the industry structure & increase
the intensity of rivalry, lowering price &
profits.

 The cost of technology is a significant item in

technology-intensive businesses. Firms have to
fight obsolescence, keep on constantly adapting
new technologies to provide innovative products
and services in the market place , market them
innovatively in order to survive & grow.
Technological innovations can have a sudden
and dramatic effect on the environment of a firm.
A breakthrough may spawn new markets and
products or significantly, shorten the anticipated
life of an existing manufacturing facility.

 Internet (a major disruptive technology) has lowered the

barriers to entry into several industries & changed
competitive structure of many industries
Remington Rand Corporation ( supreme king of the typewriter industry) failed to see the technology trend well in
time
Perfection in transistor technology changed the nature of
Radio industry
Advancement in Xerography spelt doom for carbon paper
manufacturers
Nucor from nowhere became the most profitable steel
company in US in 1970s, due to mini steel plant
technology.
.

 Forces in external environment are so

dynamic and interactive that impact of one
element can not be disassociated from
impact of other elements.

Macro environmental influences-the PESTEL Framework

1. What factors are affecting the Organization?
2. Which of these are most important at present? In the next few years?

Political

Government stability
Taxation Policy
Foreign Trade regulations
Social Welfare policies

Economic factors

Business cycles
GNP trends
Interest rates
Money Supply
Inflation
Unemployment
Disposable income

 Socio-cultural factors

Population Demographics
Income distribution
Social mobility
Lifestyle changes
Attitude to Work and leisure
Consumerism
Levels of Education

Technological

Government spending on research

Government and industry focus on technological effort
New discoveries, rate of obsolescence
Speed of technology transfer

 Environmental
Environmental protection laws
Waste disposal
Energy consumption

Legal
Anti-trust / Monopolies legislation
Employment law
Health and safety
Product safety, Product Stewardship

 It is important that PESTEL is used to look

at the future impact of environment
factors, which may be different from the
past. Scenarios may help with this.

Scenarios
Scenarios are especially useful in circumstances where it
is important to take a long term view of strategy, probably
a minimum of 5-10 years; where there are a limited
number of key factors influencing the success of that
strategy; but there is a high level of uncertainty about such
influences
A scenario is a detailed & plausible view of the business
environment of an organization might develop in the
future based on groupings of key environmental influences
and drivers of change about which there is a high level of
uncertainty.
Oil industry raw material ( oil field discovery) availability,
price, demand ( alternate sources of energy) are of crucial
importance. The scenarios are not just based on hunch;
they are logically consistent but different from each other.

 Sharing & debating these scenarios improves

organizational learning by making managers more
perceptive about forces in the environment.
Scenarios have three ingredients: First, building of
scenarios around key drivers;Second,the
development of strategies ( or contingency plans) for
each scenario;Third, the monitoring of the
environment to see how it is unfolding, and
adjusting strategies & plans accordingly
Key drivers are essential to process of building
scenarios.Should be few, complexity increases if their
numbers are more.. Focus on factors which have high
potential impact & are uncertain
Optimistic, pessimistic, most likely scenario

Industry Level Analysis

Industry is a group of organizations producing the same
products or services
Industries differ widely in their economic characteristics,
competitive situations, and future profit prospects
When an industry with a reputation for difficult
economics meets a manager with a reputation for
excellence, it is usually the industry that keeps the
reputation in tact Warren Buffet
Economic characteristics of an industry vary with factors
like overall size & market growth rate, the pace of
technological change, numbers & size of buyers and
sellers, whether sellers products are vertically integrated
or differentiated, economies of scale, distribution
channels used.

 Competitive forces can be moderate in one

industry and fierce, even cut throat in another.
Competition focuses in some industries is on
who has the best price, while in some industries
competition is centered around quality and
reliability ( eg Catalysts) or quick service and
convenience or brand reputation.
An industrys economic traits and competitive
conditions, and how they are going to change ,
determine whether profit prospects are poor,
average or excellent. Leading companies in
unattractive industries find it hard to earn
respectable profits

 Exhibit depicts the extent to which the average

profitability differs across lines of business or
industries or industry groups over long periods of
time
Estimated cost of equity has been subtracted
from the reported profit to determine the true
profit in the exhibit
It is clear that businesses in some industry
groups (e.g.; Pharmaceuticals) have generally
operated on high plateaus, whereas businesses
in others (e.g.;Steel) have mostly stuck in deep
troughs.

Average Economic Profit of US Industry Groups, 1978-1996

(sources: Compustat, Valueline, and Marakon Associates)
S No Industry Group

ROI

Avg invested
Equity

Toiletries/Cosmetics/Pharma

16-17%

< $50b

Soft drink

16%

< $50b

Tobacco

12%

<$50b

Food processing

8.5%

<$100b

Household products

6.5%

<$150b

Electrical equipment

5.5%

<$200b

Financial services

5%

<$250b

Specialty Chemicals

4.5%

<275b

News Paper

2.5%

<300b

10

Banks

2%

<450b

11

Integrated Petroleum

1.5%

<650b

Average Economic Profit of US Industry Groups, 1978-1996

(sources: Compustat, Valueline, and Marakon Associates)-contd
S No Industry Group

ROI

Avg invested
Equity

12

Telecom

0.75%

$700b

13

Electric Utility

0.5%

$800b

14

Tire & Rubber

-0.25%

$900b

15

Medical Services

-0.25%

16

Machinery

-0.5%

17

Auto & truck

-0.5%

18

Computer & peripherals

-1.0%

19

Paper & Forest

-2.0%

$1100b

20

Air Transport

-4.0%

$1200b

21

Steel

-10%

$1250b

Supply Demand Analysis

Supply demand analysis : Interplay of
supply and demand determines a natural
price.
Supply-demand analysis was incorporated
relatively quickly into economics and
marketing courses at business schools.
Researchers found structure of Industry
affected performance of businesses
operating in them

 While general forces in environment (PESTEL) might

influence success or failure of an organizations strategy ,
most organizations are hugely impacted by competition
or forces within their industry or sectors.
From strategic management perspective understanding
the competitive forces acting on and between
organizations in the same industry or sector and the
level of competition is very important since level of profit
/ attractiveness of industry depends to a large extent
upon the level of competition.
Convergence also do take place between previously
separate industries like computing, telecom,
entertainment.
Boundaries of industries might also be destroyed by
forces in macro-environment, creating new business
models..

 Competition in an industry is determined not

only by existing competitors, but also by
other market forces such as customers,
suppliers, potential entrants and the
existence of substitute products
Understanding of sources of competition can
help the firm to gauge its strengths and
weaknesses, and to perceive the trends in
industry so that it can position it optimally &
choose the way to compete.
Some important aspects about competitive
forces
Sources of competition** using the 5 forces
framework
The dynamics of competition & hypercompetition**.
Strategic groups within an industry or sector**
Organizational fields**

Sources of Competition **
Michael Porter in 1980, in his book , Competitive
Strategy, has developed a Five Forces Model
framework to help managers identify the sources of
competition in an industry or sector & analyze the
business environment

When using this framework bear in mind

It must be used at the level of SBUs or Businesses
and not at the level of the whole organization
It is important not just to describe these forces at
present but understand how they are shaping in future
& can be countered and overcome in future
These forces not only steadily change with time but
can be impacted abruptly by changes in macroenvironment. Technological changes can destroy
many competitive advantages & current barriers
The 5 forces are not independent of each other. Pressure from
one can trigger off changes in another in a dynamic process of
shifting source of competition.

Forces Driving Industry Competition

Potential Entrants
Threat of New Entrants

Porters
Five
Forces
Model

Bargaining
Power
of Suppliers

Industry
Competitors

Suppliers
Rivalry Among
Existing Firms
Threat of Substitute Products
or Services
Substitutes

Bargaining
Power
of Buyers
Buyers

Degree of Competitive Rivalry among

existing Competitors
The intensity of rivalry is the most obvious
of the five forces on which strategists
have focused historically. It determine the
extent to which the value created by an

industry will be dissipated through

head-to-head competition. Rivalry
occurs when one or more firms make an
effort to increase their market share.

 Structural determinants of the degree of rivalry are

numerous:
Equally balanced competitors: When competitors are
roughly equal size, there is danger of intense
competition, as one tries to get dominance over other
Number and relative size of competitors: more
concentrated the industry(i.e., fewer firms), the
competitors will recognize their mutual interdependence
and will restrain their rivalry. Larger is the number of
players, more is the competition & tendency to undercut
on pricing.
Presence of one dominant competitor rather than a
set of equally balanced competitors may lessen rivalry.
The dominant player may be able to set industry prices
and discipline defectors, while equally sized players try
to out do one another

 In high capital-intensive industries ( high fixed

costs) , the level of capacity utilization directly
influences firms incentive to engage in price
competition to fill their plants. More generally,
high fixed costs, excess capacity, slow growth,
and lack of product differentiation all increase
the degree of rivalry ( e.g.; US Steel industry)
As opposed to Steel industry, Pharmaceutical industry
has low fixed manufacturing cost as % of value
added, high gross margin ( as high as 90% for some
blockbusters, double digit growth rates, differentiation
among products, brand identity, and switching cost.

 Lack of differentiation : in commodity / undifferentiated

markets higher is the rivalry
High exit barriers / Strategic stakes of competitors and
if competitors are diverse ( eg; foreign competitors in US
steel market shattered domestic oligopolistic
consensus), the degree of rivalry will be higher.
Exit barriers could be
Economical : high investment in non transferable assets, high
redundancy cost, high closure cost
Strategic : linkage to other business of an organization
Emotional

Life Cycle of the industry : move towards maturity stage

increases rivalry between the industry players
Why Cos go for M&As?

Forces Driving Industry Competition

Evaluating the Five Forces

Current Rivalry among Existing Firms

Threat
Numerous competitors
Equally balanced competitors
Industry sales growth slowing
High fixed or inventory storage costs
No differentiation or no switching costs
Large capacity increments required
Diverse competitors
High strategic stakes, Loyalty
High exit barriers

Opportunity

Few competitors
One or a few strong competitors
Industry sales growth strong
Low fixed or inventory storage costs
Significant differentiation or switching costs
Minimal capacity increments required
Similar competitors
Low strategic stakes
Minimal exit barriers

Threat of new entrants

New entrants to an industry bring in new
capacities and capture market share from the
existing players. This often lead to price wars and
falling return for all ( thats why new entrants to an
industry often take the acquisition route).
The willingness and ability of firms to enter a particular
industry ie Threat of entry depends on the extent to which
there are barriers to entry. Entry barrier exists when it is
difficult or not economically feasible for an outsider to
replicate the incumbents position. Barriers to entry are
factors that need to be overcome by new entrants if they
are to compete successfully.
They should be seen providing delays to entry and not as
permanent barriers.

Some of the major entry barriers are (next page):

Threat of new Entrants

..role of entry barriers

Economies of scale: acts as a barrier against firms

considering entering an industry with a small capacity.
Economies of scale also create barriers in distribution,
utilization of sales force etc.
Product differentiation: By establishing brand
identification and customer loyalty through advertising,
customer service, product differences , or first mover
advantage etc firms create product differentiation.
New entrants are forced to spend huge amounts to get a foot
hold & overcome the advantages of existing players. E.g.; Soft
drink, OTC drugs, FMCG , Breweries.

Access to distribution channels :FMCG, Breweries etc

employ differentiation along with economies of scale in
distribution , production, and marketing to create barriers.

Threat of new entrantsentry barriers

Capital requirements: Capital not only required for
production facilities but also R&D, advertisement, customer
credit, inventories etc. Huge Capital requirement limit the
number of players who can enter. Xerox created a major
capital barrier to entry in copiers when it chose to rent out
copiers rather than sell outright. This move greatly
increased the working capital for all others including
entrants
Cost disadvantages independent of size: An existing
firm may enjoy competitive advantages on account of
learning curve, experience curve, proprietary technology,
access to best source of inputs, low priced historical
assets, government subsidies, strategic location.( e.g.;
Steel plant near iron ore mines). Reputation of quality
takes years to build and can not be bought through
marketing campaigns
Expected Retaliation
Government Policies

Threat of new entrants

Study of Pharmaceutical vs Steel industry in U.S.
Research based Pharmaceutical companies vs
manufacturers of generic drugs - High entry barrier
through patent protection, high drug development process
cost / time, carefully cultivated brand identity
Integrated US Steel makers (that uses iron ore as the raw
material) were protected initially by huge economic size &
cost ( no such new company was built in the last 40
years). But since1960s, mini steel mills technology ( that
makes steel from scrap rather than iron ore) has put
intense pressure on the integrated steel industry. Mini
steel mills has essentially reduced the scale required for
efficient operation by a factor of 10 or more and
investment per ton capacity by another factor of 10
leading , a hundred fold reduction in barriers to entry. As a
result , profitability has collapsed in the segments of steel
industry that mini mills have penetrated.

Evaluating the Five Forces

Potential Entrants
Threat
No or low economies of scale
No other potential cost disadvantages
Weak product differentiation
Minimal capital requirements
Minimal switching costs
Open access to distribution channels
No government policy protection

Opportunity

Significant economies of scale

Cost disadvantages from other aspects
Strong product differentiation
Huge capital requirements
Significant switching costs
Controlled access to distribution channels
Government policy protection

Bargaining power of buyers ( customers)

The impact of this force becomes heavier with buyers
forming groups or cartels. This phenomenon is seen in
industrial and commercial buyers / products .
Bulk buyers like supermarkets have greater bargaining
power than single customers or small retailer for reducing
price or increasing services. Retailers in some industries
get significant bargaining power since they influence
consumers purchase decisions. E.g.; home appliances,
jewelry etc.
Porter says buyers are powerful in the following
circumstances:
Suppliers are many but buyers are few
Buyers purchase in large quantities
Buyers can switch between suppliers at low cost ( playing
companies off against one another)
Feasible for the buyer to purchase inputs from several firms at a
time
Threat of vertical integration as a device for forcing down prices

Bargaining power of buyers ( customers ).

Buyers of auto components like GM, Ford & Chrysler are
powerful due to size and concentration, with numerous
suppliers of auto-components. Similarly these companies
squeeze out the tyre industry
Auto-makers historically enjoyed leverage in dealing with
steel makers. They were well informed about cost steel
makers costs and credibility of threat of backward
integration into steel making ( Ford once used this strategy).
In contrast, none of these sources of buyer power,
historically were evident in the pharmaceutical industry.
Steel represents a major slice of costs of many of the end
products , from cans to cars. Purchasing decisions focus on
large cost items . Hence it is always under pressure.
However some specialty steel makers enjoy better return
than integrated steel makers because of differentiated
products. In Pharma industry no substitute was available for
many patented drug.

Bargaining power of buyers ( customers ).

US government is a big buyer of pharmaceuticals
through its medicaid and
medicare programs .
Historically however it has not exercised potential power.
Risk of failure, high personal cost of any substitutes
failure keep high priced branded drug share in the
market.
The interests and incentives of all players involved in the
purchasing decision affects the price sensitivity of the
decision. Many doctors and patients traditionally lacked
incentives to hold down prices of drug. Because a third
party i.e; insurance company footed the bill

Evaluating the Five Forces

Bargaining Power of Buyers

Threat
Buyer purchases large volumes
Purchases are significant part
Purchases standard or undifferentiated
Buyer faces few switching costs
Buyer's profits are low
Buyer can manufacture products
Industry's products aren't important
to quality of buyer's products
Buyers have full information

Opportunity

Buyer purchases small volumes

Purchases aren't significant part of buyer's costs
Purchases highly differentiated and unique
Buyer faces significant switching costs
Buyer's profits are strong
Buyer cant manufacture products
Industry's products are important
to quality of buyer's products
Buyers have limited information

The bargaining power of suppliers

Supplier power is the mirror image of buyer power.

As a result, the analysis of supplier power

typically focuses first on the relative size and
concentration of the suppliers and
Second on the degree of differentiation in
inputs supplied. The ability to charge customers
different prices in line with differences in the value
created for each of those buyers, usually
indicates high supplier power.
For Pharma industries inputs are usually from several
commodity chemical companies. US Steel industry, in
contrast, has been ravaged by highly unionized US Steel
workers ( a major supplier!).

 Relationship with buyers and suppliers have

important cooperative as well as competitive
elements.
Japanese car makers committed themselves to
long-run supplier relationships that paid off in
terms of higher quality and faster new product
development. ( In contrast US car manufacturers
pushed their part suppliers to the wall by playing
them against one another)
Requirement of net-worked economy
partnership with suppliers

Evaluating the Five Forces

Bargaining Power of Suppliers

Threat
Supplying industry has few companies
and is more concentrated
Supplier's products dont have substitutes
Industry isnt an important customer
Supplier's product is an important input
Supplier's products are differentiated
Significant switching costs
Supplier has ability to do
what buying industry does

Opportunity
Supplying industry has many companies
and is fragmented
Supplier's products do have substitutes
Industry is an important customer
Supplier's product isnt an important input
Supplier's products aren't differentiated
Minimal switching costs in supplier's products
Supplier doesn't have ability to do
what buying industry does

The threat of substitute products

A close substitute is a potential threat to companys
product. The existence of a substitute limits the price
which can be charged for a product.
Threat to profitability depends on the relative price-toperformance ratios of different types of products or
services to which customer can turn to satisfy the same
basic need.
Threat of substitution is also affected by switching costs
like retooling, redesigning, retraining etc
Substitution process often follows a S-shaped
curve. In many cases it starts slowly as a few
trendsetters risk experimenting with the substitute, picks
up steam if other customers follow suit, and finally levels
off when nearly all of the economical substitution
possibilities have been exhausted

The threat of substitute products.

Substitute materials that are putting
pressure on the Steel industry include
plastics, aluminum, and ceramics ( car,
can industry).
Pharmaceuticals represents a more costeffective form of health care, in many
cases, than hospitalization
Product for Product substitution
Substitution of need

Concept of Value Net

Post 1980, Additional variables were incorporated in
Porters five forces framework
In 1990, Adam Brandenbueger and Barry Nalebuff (in their book
Co-opetition) highlighted the critical role that complementors
can play in influencing business success or failure.
Stated the value-net framework for analyzing industry
environment, very similar to Porters but introducing
complementor and lumping together of industry rivals,
potential entrants and threat of substitutes as competitors.
Complementors are defined as Firms from which
customers buy complementary products or services, or to
which suppliers sell complementary resources.
On the demand side, they increase buyers willingness to
pay for the products; on supply side they decrease the price
that suppliers require for their inputs.

Concept of Value Net..

Microsoft Windows 95 Operating systems introduction
needed more processing power. Hence Intels Pentium
chip was more in demand. But Microsofts Windows 95
will not appear in conventional Porters framework screen
when analysing Intel Corporation! Intel should recognize
Microsoft as a complementor in its competitive
landscape.
In Pharmaceutical Industry , Doctors greatly influence the
success of drugs by prescribing them, thus acting as
complementors who increase buyers willingness to pay
for particular product.
In Paints industry, Architects have strong influencing role
for institutional segment.

The Value Net

Customers

Competitors

Company

Suppliers

Complementors

 Complementors add a cooperative

dimension to the competitive forces
approach. Findings ways to make the
pie bigger rather than fighting with
competitors over a fixed pie.
Think about how to expand the pie by
developing new complements or making
the existing complements more affordable .
Need to manage relationship with suppliers of
complements. But how is the value shared
between the producers of complements?

Concept of Value Net..

Cooperation with complementors to expand the size of
the pie must be supplemented with some considerations
of competition with them if the firm is to claim slices of
that pie.
Relative concentration : when complementors are more likely to
have power to pursue their own agenda?
Relative buyer or supplier switching cost
Ease of unbundling
Rate of growth of pie
Difference in pull through: As complementors play a greater role
in pulling through demand, their power is likely to expand. ( In
entertainment sector , the role of content provider)
Assymetric integration threat

Alliances are becoming important with complementors in

several cases

Examples concept of complementarity

Industries producing Computer Hardware and Computer
Software are the most apparent examples of
complementarity ( eg.; demand of Intel processor and
increasing the demand of MS Windows).
Car industry and Auto loan industry
VCR and Video Cassette recorder industry.
TV Shows and TV guides
Fax Machine and Phone lines
Catalogue Sale vs overnight delivery service
Video Game consoles and Game developers
Mobile service providers & Cell Phone industry
TV Channels vs Content Production Houses

Players in analyzing competitive landscape

Supply Demand analysis : focused attention
on exchange relationship between suppliers and
buyers.
Five forces framework extends the analysis to
supplier->Competitor -> buyer and to consider
explicitly possibilities of substitution and new
entrants.
Value net draws complementary relationships
into the picture and accounts for the
complication that complimentor can also
become a competitor
Ghemawat says even more types of players
needed to be added, depending on the context

Re-cap of analyzing business environment

Porters Five forces model of competition
for Industry analysis
Strategic Groups within Industries
Industry life cycle analysis
Embryonic stage
Growth stage
Shakeout stage
Mature stage
Declining stage

Strategic Groups Within Industries

The concept of strategic groups
Within an industry, a competitor grouping using similar
strategic characteristics, that differ from other groups
within the same industry or sector.
There may be different characteristics which
distinguish between strategic groups. E.g; Size,
geographic coverage, breadth of product range, quality
or service level, R &D spending etc
Companies in same strategic group follow largely
similar strategies or compete on similar bases in the
markets

 Implications of strategic groups

The closest industry competitors are those in the
same strategic group.
The various industry groups are differentially and
competitively advantaged and positioned.
Mobility barriers inhibit the movement of competitors
from one strategic group to another. Mobility barriers
between different strategic groups vary from industry
to industry. Could be related to capabilities ,
resources of the companies in different strategic
groups.

Strategic Groups in the Pharmaceutical

Industry

 The concept of Organizational Fields is a way of

understanding this wider network of influences and
relationships in business environment.
Participants of organizational field interact more
frequently with one another than with those outside the
field. These relationships often constraint, guide or even
dictate economic decisions and priorities such as
resource deployment.
Organizational field of justice has lawyers, police, courts,
prisons, and probation services. Although their roles are
different they are all committed to deliver good justice. In
case of say telecom company other than value chain
partners, it will be regulators, professional associations
etc.

 Various members of an organizational field

are tied together in the ways beyond
economic dependency. They share a
common set of purposes ( at least at the
generic level) and more crucially they are
likely to share a set of taken-for-granted
beliefs and assumptions. This may be
deeply embedded and hard to surface and
concern the legitimacy of an organization
within an organizational field.

The Industry Life Cycle Model

Stages in the industry life
cycle:

 The five forces, strategic groups, and life cycle

models provide useful ways of thinking about and
analyzing the nature of competition within an industry to
identify opportunities and threats. However each has its
limitations & managers need to be aware of the same.
In many industries competition can be viewed as a
process driven by innovation. Innovation often causes
changes in the industry life cycle. (several shakeouts in
Telecom industry).

Innovations frequently lower the fixed costs of

Production, thereby reducing barriers to entry. A five
forces model applied to steel industry in US in 1970
would look very different from that applied today.

 Porter in his recent work says innovations unfreeze &

re-shape industry structure.
He argues that after a period of turbulence triggered by
innovation, the structure of an industry once more settles
down to a fairly stable pattern , and the five forces and
strategic group concepts can once more be applied.
Because the five forces and strategic group models
present a static picture of competition, they can not
adequately capture what occurs during period of rapid
changes in the industry environment when value is
migrating.
Many industries are tending to become hypercompetitive,
meaning that they are characterized by permanent and
ongoing innovation. The structure of such industries are
constantly being revolutionized with few periods of
equilibrium. Competitive advantages are quickly eroded
A company would not be profitable just because it is
based in an attractive industry or strategic group.

Punctuat
ed
Equilibriu
m
and
Competiti
ve
Structure
FIGURE 3.4

 Entrepreneurship & innovation are fundamental

features of competition and driving force behind
industry evolution. Innovation represents a
perennial gale of creative destruction through
which favorable industry structures monopoly
in particular contain the seeds of their own
destruction.
Hyper competition
Competition in the new industry ( digital
technology)

 What are the key forces at work in the competitive

environment? These will differ by type of industry.
What are the underlying forces in the microenvironment that are driving competitive forces? Eg;
lower cost & high availability of software skills in India is
an opportunity & a threat to Us & Eurpean companies
Is it likely to change, if so, how? For eg; government
action in reducing health care costs & promotion of
generics would increase pressure on branded drugs in
US.
How do competitors stand in relation to competitive
forces? Their weaknesses & strengths.

What can managers do to influence the competitive

forces affecting an SBU? Can they build entry
barriers, power over suppliers or diminish rivalry?

 Competitive advantage erodes over time due to

forces discussed above and / or competitors will
overcome adverse forces.
The process of erosion of is getting speeded up
by changes in macro-environment such as new
technologies, globalization or deregulation.
Though time scale differs, Competitive
advantages is mostly becoming temporary.
Organizations respond to erosion of their
competitive position by creating cycles of
competition various moves & counter moves
on the basis of cost / quality thus shifting the
basis of competition.

 Organizations are increasingly operating in

situation where the speed of the cycles of
competition is very fast this has been called
hyper competition.
Hyper competition occurs where the frequency,
boldness and aggressiveness of dynamic
movements by competitors accelerate to create
a condition of constant disequilibrium and
change.
Whereas competition in slower-moving
environments is primarily concerned with
building and sustaining competitive advantages
that are difficult to imitate, hypercompetitive
environments advantages will be temporary.

 Competition is about disrupting the

status quo so that no one is able to
sustain long-term advantage on any
given basis.
So long term advantage is gained through
a sequence of short lived moves.

 Market Segments : A market segment is a group of

customers who have similar needs that are different from
customer needs in other parts of the market. Theoretically
different factors could be used to identify market
segments.. Demography age, sex, race, income, family
size, life cycle stage, Lifestyle, Size of purchase, purpose
of use, purchasing behaviour. Industrial markets
classification could be based on classification of buyers
like domestic industry vs foreign buyers.
Identifying strategic customer : Strategic customer is the
person(s) who have the most influence over the goods or
services that are purchased. Hence strategy must
address them. In many markets the strategic customer
acts as a gatekeeper to the end user.

 Manufacturers have two customers the shops and the

shops customers. So there has to be an understanding
of what is valued by that strategic customer as a starting
point of the strategy. However the requirement of the
other customer has also to be met.
In many consumer goods, the retail outlet is the strategic
customer as the way it displays, promotes & supports
products in store is hugely influential on the final
consumer preferences.
But internet shopping may change this pattern, putting
the final consumer back as the strategic customer.

Understanding what customer Values..

Understanding customer needs and how they differ

between segments is crucial to developing appropriate
strategic capability in an organization.
However, value is multi-dimensional & it should be
seen through the eyes of the customers. Value of
product or services is often wrongly conceived of internally
( eg; designers, engineers, teachers or lawyers) and not
tested out with customers or clients.
Threshold requirements( product features) are expected
from any provider in a given market segment
Critical Success Factors (CSFs) are those product
features that are particularly valued by a group of
customers and, therefore, where the organization must
excel to outperform competition. Understanding of the
CSFs of a group of customers ( market segment is very
important.

Strategic Gaps
The framework of PESTEL ( macro environment factors),
Five Forces (Industry environment factors) and others
like strategic groups, customer value help managers
identify and / or create new market space to gain
competitive advantages.
Kim & Mauborgne in Blue Ocean Strategy have argued
that if organizations concentrate on competing head to
head, the environment will get very tough. They have
encouraged managers to seek opportunities in business
environment which they call strategic gaps.
A strategic Gap is an opportunity in the competitive
environment that is not being fully exploited by
competitors. There may be different opportunities to do
this:

 Looking across substitute industries : direct rivals tend to

trigger a stronger response than potential substitutes.
Software companies bringing electronic books & atlases
as substitute to paper versions.
Looking across strategic groups: particularly if changes
in micro environment make new market spaces
economically viable.
Looking across chain of buyers: adjusting marketing
strategy to most profitable buyer or influencer.
Looking across complementary products & service
offering: like providing wholesome book buying
experience instead of just stocking the right books.
Looking for new market segment: like no frills segment
Looking across / ahead in time

Strategies to Alter Industry Structure

Opportunity to change industry structure in

order to alleviate competitive pressure ?

 In North America & Europe Petroleum refining

earning below cost of capital
Reason - many competitors, excess capacity &
commodity products
Consolidation to increase concentration, capacity
rationalization; BP acquired Amoco, then Arco; Exxon
merged with Mobil; In Europe Total, Fina & Elf merged.
US Airlines - mergers & alliances to reduce competition.
In Chemical industry BASF, Dow, ICI & Bayer- capacity
swapping & rationalization
Mittal & Arcelor merger consolidation of fragmented
global steel industry

The Rise of strategy consultants

BCG, founded in 1963, had a major impact by applying
quantitative research to problems of business and
corporate strategy. Its founder, Bruce Henderson
believed that good strategy must be based primarily on
logic, not .. On experience derived from intuition.

Economic theory will eventually lead to the

development of a set of universal rules for strategy,
rather than strategy being largely intuitive and based
upon traditional patterns of behavior which have been
successful in past. ( business of selling - powerful over
simplifications)
BCG came out with the concept of experience curve
in 1965-66 to explain price and competitive behavior
in extremely fast growing segments of industries for
its clients like Texas Instruments, Black and Decker.

Experience curve
BCG , based on close study of fast growing industries
propounded that as the total accumulated experience of a
firm in the industry increases, it incurs less cost of
producing a product.
BCG claimed that for each cumulative doubling of
experience ( accumulated production over time ) , total
costs would decline roughly by 20%-30% because of
economies of scale, organizational learning and
technological innovation.
According to BCGs explanation of its strategic implications,
the producer who has made the most units should have
the lowest costs and the highest profits. Bruce Henderson
claimed that with experience curve, the stability of
competitive relationships should be predictable, the value of
market share change should be calculable, the effects of
growth rate should also be calculable

Eperience curve
Volume effect is not only the one to help
reduce cost & increase efficiency , the
learning from experience plays a vital role
in achieving this.
Over time, companies can identify
inefficient, ineffective procedures. They reengineer processes, improve material and
resource management, strengthen
supplier relationships etc.

The Experience Curve

Strategic Analysis
Strategic Analysis is done at
Corporate level
Business level

In a multi-business corporation at Corporate

level the major strategic decisions are about
What Businesses should the we be in?
How should we allocate resources between them?
Other important decisions relate to
How do we organize the corporation ? How much decision
making should we allow at the level of individual business unit?
What activities would benefit from being organized centrally?
How do we exploit the potential links between different but
related, business units?
How do we develop and reward business unit managers?

Two Levels of Strategy

A diversified company has two levels of strategy
1. Corporate-Level Strategy (Company-wide Strategy)
How to create value for the corporation as a whole

2. Business-Level Strategy (Competitive Strategy)

How to create competitive advantage in each
business in which the company competes

Key Questions in
Corporate Strategy
1. What businesses should the corporation be in?
2. How should the corporate office manage the
array of business units?
Corporate Strategy is
what makes the
corporate whole add up
to more than the sum of
its business unit parts

Portfolio analysis
Corporate level : tools like BCG Growth-Share Matrix,
and GE Nine-Cell planning Grid are used to examine
each business as a separate entity and as a contributor to
the organizations total business portfolio.
The above analysis provides a neutral basis for
resource allocation at the corporate level,
encourages framing of good strategies at the business
unit level and
leads to better implementation of strategy because of
intensified focus and objectives all across the
corporation.

Business units are classified into invest, hold ,

divest and harvest categories based on the
analysis

BCG Growth- Share Matrix

By early 1970s, the experience curve had led to BCGs GrowthMarketshare matrix concept, which represented the first use of
portfolio analysis. This approach is widely used in Corporate
strategic analysis for managing a portfolio of different business
units ( or major product lines). It helps in analyzing likely
generators and optimum users of corporate resources.
The matrix takes into consideration, the growth rate of the
market and relative market share of the business unit
In fast growing industries / market provide opportunity for high
profits and rapid growth of turnover.
High market share gives benefits of economies of scale and
better bargaining power in relations to the suppliers and
customers for the organization
BCG matrix displays position of each business in the two
dimensional matrix

BCG Growth Share Matrix

Market Share
High

STARS

Low

QUESTION MARKS

High

Market
Growth

Low

Cash Cows

Dogs

BCG Growth- Share Matrix.

Business units after due considerations, get classified
into one of the four quadrants ( categories), viz; Cash
cow, Stars, Question Marks, and Dogs.
Cash Cows
These business units hold large market share in a
mature & slow growing industry
Have strong business position & negligible investment
requirements. Hence returns from these businesses
far outstrips their investment requirements
Cash cows are tapped for drawing out resources
required elsewhere in the organization.

BCG Growth- Share Matrix.

Stars
These businesses have large market share in growing
industries
Since industry is growing, to maintain/ grow the
market share, firm needs to invest
Often investment requirements of Stars are greater
than revenues
Once the industry reaches the stage of maturity, the
stars hardly needs any investment and become major
revenue generators

BCG Growth- Share Matrix.

Question Marks
These businesses have a small market share in a
high growth market.
They demand significant investment because their
cash needs are high, a norm in growing industries
However, acquiring market share is easier in high
growth industry than in a mature market
However the chances of success has lot of
uncertainties
Only a few question marks are finally able to grow
into stars

BCG Growth- Share Matrix.

Dogs
These businesses have low market share in an intensely
competitive mature industry
Characterized by low profits
A dog does not need much capital investment, but it ties up
capital that could be invested in industries with better returns
Firms concentrate on recovering as much as possible from
these and undertake ruthless cost cutting
Unless there is an over riding larger purpose, an organization
should divest dogs
Well managed dogs( eg; those having strong control over
costs, focus on niches) can be reliable revenue generator.
Yet the possibility of being transformed into a cash cow
does not exist.

BCG Growth- Share Matrix.

BCGs basic strategy recommendation was to maintain a
balance between cash cows ( ie; mature businesses) and
stars, while allocating some resources to feed question
marks ( that is, potential stars). Dogs are to be sold off.
Since the producer with the largest stable market share
eventually has the lowest costs and greater profits, it is
becoming vital to have a dominant share in as many
products as possible.
Market share in slow growing market can be gained only by
reducing the share of competitors, who are likely to fight
back.
.

BCG Growth- Share Matrix.

If a market is growing rapidly, a company can gain
share by securing most of the growth. Thus , while
competitors grow, the company can grow even faster
and emerge with a dominant share when growth
eventually slows

Shortcomings of BCG matrix

BCG Matrix is based on the basic logic that relative
market share is linked directly to cash generation and
profitability. The firm with the largest cumulative volume
gains the benefits of the experience of the experience
curve first, so market share is critical.
BCG Matrix has been criticized for over-simplification.
Firstly it uses just two performance measures. Secondly,
direct & inevitable relation between market share and
profitability is questioned by some.
Besides, relative market share & industry growth rates,
there are wide range of other variables. This matrix takes
no account of differentiation or focus strategies; it
seems to relate best to cost based strategies where
price competition is severe and experience curve
effects are significant.
Companies in focused niches can also have low operating
costs.

 There can be practical difficulties in deciding

whats exactly high and low ( growth and
Share) can mean in a particular situation.
In many organizations besides cash, the
innovative capacity is a critical resource, which
consists of time & creative energy of the
organizations managers & designers. Stars &
Question marks are very demanding on the
types of resources.
Sometimes dogs are retained to complete
product range and a credible presence in the
market. They may also be held for defensive
reason to keep competitor out.
Synergy of the SBU combination?
Behavioral implication creation / management of
balanced portfolio?

Developments at GE
In1968, CEO of GE asked McKinsey to examine
GEs corporate structure.
At that time GE consisted of 200 profit centers
and 145 departments arranged around 10
groups. Boundaries of these units had been
defined around financial control aspects.
McKinsey study recommended a formal
strategic planning system, which will divide the
company into natural business units, later
renamed strategic business units ( or SBUs)

GE Nine-Cell Planning Grid

(also called GEMckinsey nine-block matrix)

This is an adaptation of BCG approach. In 1971, GE asked

Mckinsey to evaluate strategic plans for its SBUs. GE
had already considered using BCG matrix to decide on the
fate of its SBUs but its top management had decided that
they could not set priorities on the basis of just two
performance measures. After studying the problem for 3
months, a Mckinsey team produced what cam to be known
as nine-cell matrix.
The nine-cell approach used approximately one dozen
measures to screen for Industry attractiveness and
another set of measures to screen for Business strength
or competitive position, although the weights attached to
those measures were not specified.
This nine-cell grids thus makes an effort to overcome some
of the limitations of BCG matrix.

GE Nine-Cell Planning Grid

For assessing industry attractiveness, it
considers following factors
Market size and growth rate, industry profit
margins, competitive intensity, seasonality & cyclical
qualities, Barriers to entry, Economies of scale,
technology, social, environmental, legal, political and
human impacts.

For assessing business strength or competitive

position, following factors were used
Relative market share, profit margin, customer &
market knowledge ,ability to compete on price or
quality, technological capability, image, competitive
strengths and weaknesses, caliber of management

Process for deploying Nine-Cell

grid analysis
First identify factors contributing to the
industry attractiveness.
Next assign weights to each attractiveness
factor based on its perceived importance
relative to other attractiveness factors.
Favorable to unfavorable future conditions are
forecasted and rated based on a 0 to 1 scale
Obtain a weighted composite score for a
businesss over all industry attractiveness

Industry Attractiveness Factors

Industry attractiveness factor

Weight

Ratings

Score

Market size

20

0.5

10.0

Projected market growth

35

1.0

35.0

Technological requirements

15

0.5

7.5

Concentration ( a few large

competitors)

30

Political and regulatory factors

Must be
nonrestricti
ve

Total

100

52.5

GE Nine-Cell Planning Grid

A similar procedure is followed in assessing the
Business strength
Once the comprehensive score has been
calculated, the scores are classified into
categories such as high, medium or low in terms
of projected attractiveness of the industry and
projected strength of business.
Then business units are classified into three
categories:
First : Invest / grow
Second: Invest selectively and manage for
earnings
Third : Harvest or divest for resources

 Businesses are classified as Invest / grow given

same preference as Stars in BCG matrix.
Harvest / divest category is managed like dogs in
BCG matrix.
Businesses classified in the selectivity/earnings
category are treated either as cash cows or as
question marks
Each Business of the firm is represented by a
Circle in the nine-cell grid. The Size ( area) of the
circle represents the SIZE of The Industry & the
shaded area indicate the market share of the
firm in the industry.

Business Strength Factors

Business Strength factor

Weight

Ratings

Score

Relative Market share

25

0.5

12.5

Profit Margin

25

0.8

20.0

Customer & Mkt knowledge

15

0.7

10.5

Technological capability

20

0.6

12.0

Image

15

0.75

11.25

Total

100

66.25

Industry ( product market) Attractiveness

Average
Weak

Business Strength

Strong

High

Medium

Low

Grow
selectively/
mange earning

Invest /Grow

Invest/Grow

Invest/Grow

Grow
selectively/
mange earning

Harvest/
divest

Harvest /
divest

Harvest /
divest

Grow
selectively/
manage for
earning

GE / McKinsey Nine Cell Planning Grid

More sophisticated but more difficult to

interpret

As the axes in the GE-Mckinsey matrix

become more complex & multidimensional, the advantage of clarity of
simple BCG matrix is somewhat lost
Although it looks more sophisticated
model, it is not easy to plot businesses on
the matrix and to interpret what each
position means.

Different perspectives
Strategic implications of Industry
environments differ most strongly along a
number of key dimensions:
Industry concentration
State of maturity of the Industry
Exposure to international competition

The Industry Life Cycle Model

Stages in the industry life
cycle:

Arthur D. Little Life Cycle Approach

This approach to Portfolio Management
takes into consideration the business
environment in terms of stage of life cycle
the business is currently in.

Arthur D. Little Life Cycle Approach

Life cycle
stage
Position
Dominant
Strong
Favorable
Tenable
Weak

Embryonic

Growth

Mature

Aging

The Life Cycle-Competitive

Strength Matrix

Competitive Strength

Stage of Market Life Cycle

High
In

y
: ivel
h
s
s
Pu gre
Ag
t
s
ve
n: vely
o
i
ut ecti
a
C el
S
st
e
Inv

Low

Introduction

Growth

Maturity

er:
g
n st
Da arve
H

Decline

Description of
Dimensions
Stage of Market Life
Cycle:
Competitive
Strength: Overall
subjective rating,
based on a wide
range of factors
regarding the
likelihood of gaining
and maintaining a
competitive
advantage

Directional Policy Matrix developed by Shell (UK)

Here the two axes of the matrix are
Business Sector Prospects
Companys competitive abilities

A number of factors such as market growth,

market quality, market supply and so on , are
used to rate the business sector prospects as
unattractive , average, or attractive. Similarly,
companys abilities are judged as weak,
average, or strong
The 3x3 matrix forms the basis for classify
businesses / major product group.

Different Roles of the Corporate Parent

Portfolio Manager
Restructurers
Synergy Managers
Parental developers

Strategic Analysisat Business level..

Business level Analysis : once business units are
classified into invest, hold, divest and harvest categories,
SWOT analysis is employed to identify grand strategy
options at the business level
A SWOT analysis summarises the key issues from the
business environment (using Pestel & Industry analysis) &
and the strategic capabilities of an organization that are
most likely to impact on strategy development. ( strategic
capability is about the ability to provide products with features that are valued by
customers, provide competitive advantage if it can do better than competitors)

Understanding What customers value or might value in

future is important . This includes customers threshold
requirements. It also include critical success factors
those factors that customers particularly value and,
therefore, where an organization must excel to outperform
competition.
What customer values will change with time. However,
there may be opportunities to exploit core competencies in
new markets or arenas

SWOT Analysis
SWOT analysis is grounded in the basic principle that
strategy-making efforts must aim at producing a good fit
between a companys resource, capability ( as reflected
by its balance of resource strengths and weakness) and
its external situation .
SWOT analysis forces managers to better understand and
respond to those environmental factors ( that may be
either inside or outside the organization) have the greatest
importance for the firms performance. These are strategic
issues.
Strategic issues rarely arrive on a top managers desk
neatly labeled. Instead data from SWOT analysis identify
new technologies, market trends, new competitors, and
employee morale trends etc. They require interpretation
and translation before they are labeled strategic.

SWOT Analysis Diagram

Numerous environmental
opportunities

Critical internal
weaknesses

Cell 3: Supports a
turnaroundoriented / eliminate
weakness strategy

Cell 4: Supports a
defensive strategy

Cell 1: Supports
an aggressive
strategy

Cell 2: Supports a
diversification /
use current
strength to build
long term adv
strategy

Major environmental threats

Substantial
internal
strengths

STRATEGIC CAPABILITY**
External environment influences an organizations
Strategic development by creating both opportunities &
threats.
However, success of strategy is heavily dependent on
the organization having or developing the strategic
capability to perform at the level that is required for
success.
Strategic Capability is the adequacy and suitability of the
resources and competences of an organisation for it to
survive & prosper.
Many of the issues of strategy development are
concerned with changing strategic capability better to
fit a changing environment
1990s adjustment to strategic capability through
adoption of new technologies in mfg industries to
increase labor productivity; in 2000s adoption of IT by
service industry to stay in the business .

 In fast moving ( hypercompetitive) world

the only really enduring capability is the
ability to change strategy as the basis of
competition moves through different
phases of the cycle of competition. Indeed
stretching IT capabilities and
hypercompetitive behavior have been the
basis of dot.com companies.

The Roots of strategic Capability

Strategic Capability is about providing products or services that are valued by customers or might be valued in the future. The ability to perform at the level required for success. It is underpinned by the resources and
competencies of the organization.
What customers value is the starting point for understanding strategic capability
First are the threshold product features that all potential providers must be able to offer to stay in a particular market or segment. Even these are changing and becoming more demanding over time.

 The second are the Critical Success Factors,

which are the features that are particularly valued
( form the basis of selection ) by a group of
customers and, therefore, where the organization
must excel to outperform the competition.
Since different Customer groups value different
product features, organizations will need to
compete on different bases, and through different
resources & competencies.
Supermarkets follow strategies which providelower prices and one-stop shopping through
their resources (store location, scale , product
range) and competencies ( knowledge of
merchandising, skill of low cost sourcing &
computerized supply chain systems)

 Corner shop grocery store gains Competitive

Advantage over supermarkets by concentrating
on those customers whose CSFs are different
aspects of service- like, personalized service,
extended opening hours, informal credit, home
deliveries etc.
This strategy may be underpinned by unique
resources ( such as shop location, the market
knowledge of owner) and core competence ( the
personal style and customer relationships
sustained by the owner)

Key Success Factors

An industrys KSFs ( or CSFs) are those that most affect
industry members ability to prosper in the market place.
KSFs by their nature are important to all firms in that
industry or segment of the industry.
Determining the industrys KSF, given prevailing and
anticipated industry and competitive conditions, is a toppriority analytical consideration
A sound strategy incorporates efforts to be competent
on all industry KSFs and to excel on at least one
factor
KSF for an industry at any point of time should not be
more than 3-5 in numbers

Identifying KSFs
Pre-requisites for success

What do customers Want?

How does the firm

Survive competition?

Analysis of demand

Analysis of competition

Who are our customers?

What do they Want?
What do they Value most?

What drives competition?

What are the main dimension
of competition?
How intense is competition?
How can we obtain superior
competitive position?

Key Success Factors

Identifying KSF for Supermarkets

What do customer want? ( analysis of
demand)
Low prices
Convenient location
Product range adapted to local customer
preferences
Freshness of produce
Cleanliness, service and ambience

 How does a firm survive competition

(Analysis of competition)
Customer price sensitivity encourages
vigorous price competition
Excise of bargaining power an important
influence on input cost
Scale economies in operation and
advertisement
Markets localized & concentration high

Identifying KSFs for supermarkets

Key Success factors
Low cost operation requires :
Operational efficiency
Scale-efficient stores
Large aggregate purchases to maximize buying
power
Low wage costs

Differentiation requires
Large stores ( to allow wide range of products
Convenient location
Easy parking

Common types of KSFs

Technology related KSFs
Scientific research expertise ( important in Pharmaceuticals, Hi-tech
industries, Telecommunication industry etc)
Technical capability to make production process innovation
Product innovation capability
Expertise in a given technology
Manufacturing-related KSFs
Low cost production efficiency ( achieve scale of economies, capture
experience curve effects)
Quality of manufacture ( fewer defects, less need for repairs)
High utilization of fixed assets ( important in capital intensive industries
/ high fixed cost industries)
Low cost Plant locations
Ability to deliver products customized to buyer specifications
( flexibility in manufacturing system)
Low cost product design and engineering capability( reduces
manufacturing cost)

Common types of KSFs

Access to adequate supply of skilled employees
High labor productivity
Distribution related KSFs
A strong distribution network of wholesalers/ dealers
Gaining ample space on the retailers shelves
Low distribution cost
Accurate filling of customer orders
Short delivery times
Having company owned outlets
Integrated distribution information system
Marketing related KSFs
Courteous customer service
Fast accurate technical assistance
Breadth of product line and product selection
Attractive styling or packaging
Clever advertising
Accurate filling of buyer orders ( few back orders or mistakes)
Merchandising skills

Common types of KSFs

Skills-related KSFs
Superior workforce talent ( important in professional services like
Accounting and investment banking)
Quality control know how
Design expertise ( important in fashion and apparel industry , often one of
the keys to low cost manufacture)
Expertise in a particular technology
An ability to develop innovate products and product improvements
Organizational Capability
Superior Information System ( vitally important in airline, car rental, credit
card, Hotel & financial sector industries)
Ability to respond quickly to shifting market ( stream lined decision, short
lead time to bring new products)
Managerial experience
Superior ability to deploy e-commerce technologies

Common types of KSFs

Other types of KSFs
Favorable image or reputation with buyers
Covenient locations ( important in many retailing
businesses)
Overall low cost operations( not just in manufacturing)
Access to financial capital
Patent protection
Pleasant, courteous employees in all customer contact
position
KSFs vary from industry to industry and even from time to
time within the same industry as driving forces and
competitive conditions change.

SF Examples

In the real estate development industry, acquiring land

and maintaining liquidity are the two key success factors.
If every other factor concerning the business of the
development company is just average, but the land is
well located and the firm maintains adequate liquidity,
the company will do well. Not that the developer
shouldn't attempt to deliver a well-constructed product
with good financing. He should. But nothing is a greater
determinant of success than having, or not having, the
right piece of land, and remaining in a liquid position.

Knowing the importance of land acquisition to his company's

success, the Chairman of one of leading real estate developer
instructed his managers, "Before you commit to the purchase of any
piece of land, I want to walk on it."

KSF Examples
Beer/Brewing Industry
Utilization of brewing capacity - to keep manufacturing
costs low
Developing a strong network of wholesale distributors to gain access to retail outlets
Clever advertising - to induce beer drinkers to buy a
particular brand

Resources , competencies
Experience shows that resources and
competencies tend to be easy to imitate in the
medium term. Consequently, Competitive
Advantage needs to be secured by continually
shifting the ground of competition.
So a core competence could be the process of
innovation which requires the ability to link
together many separate areas of knowledge
such as brand development, marketing and
financial services.

 Has an Organization the resources and competencies to

provide products / services that meet the customer
requirements? Organization capability starts with
resources :
Available resources to an organization, from both
within and those that can be accessed ( network of
partners, contacts) , to support its strategies
Threshold resources resources needed to stay in the
business, otherwise unable to serve particular markets.
Threshold standards rise with time.
Unique resources to meet critical success factors of
a particular segment and create competitive
advantages. These are difficult to imitate.
Inadequate resources Resources that do not
adequately underpin the meeting of threshold product
features. They may be adequate for other segments.
Redundant resources these are no longer necessary
or valued

 Competence is created when resources are

deployed into activities and into processes
through which these activities are linked
together. Usually, the key to good or poor
performance is found here than in the resources
per se.
Although an organization will need to reach a
threshold level of competence in all activities
that it undertakes, only some of these activities
are core competences.
Core competences are those competences
that underpin the organizations ability to
outperform competitors by meeting the CSFs
better than competitors.

 Core Competencies might also provide basis on

which strategies might be built to exploit
opportunities in other markets where the same
or similar critical success factors are valued.
Core competencies might also be the basis for
creating opportunities in new arenas where the
same CSFs would be valued above those that
currently prevail. In other words, to change the
rules of the game in those new arenas.
What customers value will change with time, so
core competences will be eroded. However, there
may be opportunities to exploit core
competencies in new markets or new arenas.

Same as competitors
or
Easy to imitate

Better than competitors

and
Difficult to imitate

Resources

Threshold
resources

Unique
resources

Competencies

Threshold
Competencies

Core
Competencies

 Difference in performance between organizations

in the same market is rarely explained by
differences in their resource base since resource
can usually be imitated or traded. Superior
performance will be determined by the way in
which resources are deployed to create
competences in the organizations activities.
For example, knowledge of an individual will not
improve an organizations performance unless he
is assigned ( or allowed) to work on particular
tasks which exploits that knowledge, or more
importantly, is able to share that knowledge with
others who can build on it.

 Performance is also affected by the process of

linking separate areas of knowledge & activities
together both inside and outside the
organization.
Although an organization will need to achieve a
threshold level of competence in all of the
activities & processes that support the product &
service, only some will be core competence.
Core competence are activities or processes
that critically underpin an organizations
competitive advantage. They create & sustain
the ability to meet CSF of particular customer
group better than other providers that are difficult
to imitate.

 Core competencies must fulfill the following

criteria
The competence must relate to an activity or
process that fundamentally underpins the value
in the product or services features as seen
through the eyes of the customer
The competence leads to levels of performance
significantly better than competitors.
( Benchmarking may help in understanding
performance)
The competence must be robust i.e; difficult to
imitate. Robustness will be greater where
competences are embedded to the extent that
managers themselves have difficulty in fully
explaining what underpins success.

 CSFs ( product features that are particularly

valued by customers) like good services ,
reliable delivery are easy to understand. But
core competences are about the activities that
underpin the ability to meet these critical
success factors, not the factors themselves.
Core competence may be embedded deep in an
organization at an operation level in the work
routines of the organization.
They are hidden to the extent that the managers
themselves may not explicitly understand them.

How Resources and Capabilities Provide

Competitive Advantage
Valuable Allow the firm to exploit opportunities
or neutralize threats in its external
environment

Rare Possessed by few, if any, current and

potential competitors

Costly to When other firms cannot obtain them

imitate or must obtain them at a much higher
Nonsubstituta
ble

cost
The firm is organized appropriately to
obtain the full benefits of the resources
in order to realize a competitive
advantage

Resources and Capabilities, Core Competencies,

and Outcomes
Valuable

Core
Competencies

Rare

Competitive
Advantage

Costly to
Imitate

Value Creation

Nonsubstitutabl
e

Above Average
Returns

 Importance of Linkages
Value Chain
Value System : The Value System is the set of
inter-organizational links & relationships which
are necessary to create a product or service.

Internal Analysis of the Firm

Before a firm can start tapping the opportunities provided
by the external environment, it has to know its own
capabilities, strengths and weaknesses. Internal
appraisal has three distinct parts:
Assessment of the strengths & weaknesses of the firm , in
different functional areas
Appraisal of the status / health of the individual businesses of
the firm
Identification and assessment of the firms competitive
advantage and core competence.

Internal analysis is also the starting point for developing

the core competencies (and competitive advantages)
required for survival and growth of the firm

SWOT Analysis Diagram

Numerous environmental
opportunities

Critical internal
weaknesses

Cell 3: Supports a
turnaroundoriented / eliminate
weakness strategy

Cell 4: Supports a
defensive strategy

Cell 1: Supports
an aggressive
strategy

Cell 2: Supports a
diversification /
use current
strength to build
long term adv
strategy

Major environmental threats

Substantial
internal
strengths

 SWOT Analysis is a traditional approach that has been

in use for decades to help in internal analysis. It offers a
generalized effort to examine internal capabilities in
light of external factors, most notably key opportunities
and threats. Though still used by many, SWOT analysis
has limitations linked to the rigor and depth of
analysis and the risk of overlooking key
considerations.
A SWOT analysis can overemphasize internal strengths and
downplay external threats
A SWOT analysis can overemphasize a single strength or
element of strategy
A strength is not necessarily a source of competitive
advantage
A SWOT analysis can be static and can risk ignoring
changing circumstances

 Two techniques have emerged that can help

overcome some limitations of SWOT analysis by
offering more comprehensive approach to identify &
assess firms internal resources & capabilities in a
more systematic , objective & measurable manner.
Value Chain analysis
Resource-based View (RBV) is based on the premise
that firms build competitive advantage based on unique
resources, skills, and capabilities they control or develop,
which can become the basis for unique, sustainable
competitive advantages that allow them to craft
successful competitive strategies

Value Chain Analysis

G
IN
IN

Primary Activities

R
G

Service

Outbound
Logistics
Marketing and Sales

Operations

Procurement
Inbound Logistics

Technological Development

AR

Primary
and
Support
Activitie
s
in the
Value
Chain

Human Resource Management

Support
Activities

Firm Infrastructure

Value Chain Analysis

A Business is seen as a chain of activities ( primary and
support activities) that transforms inputs into outputs,
that customers value.
Value chain analysis analyzes to understand how a
business creates customer value by examining the
contributions of different activities within the business to
the total value. Proponents of VCA believe it allows
managers to better identify their firms competitive
advantages by looking at the business as a process a
chain of activities.
Costs / resources incurred in each activity , identify
activities or elements within that which differentiate the
company, as well as where company has weakness vis-vis the competitors. Spot areas of improvement.

What is the Resource-based View

of the Firm?
Firms differ in fundamental ways
because each firm possesses a
unique bundle of resources
tangible and intangible assets and
organizational capabilities to make
use of those assets

Resource Based View (RBV)

Three basic resources : Tangible Assets,
Intangible Assets, and Organizational
Capabilities.
RBV method of analyzing and identifying a firms
strategic advantages based on examining its distinct
combination of assets, skills & capabilities and
intangibles.

Organizational capabilities are not specific

inputs like tangible or intangible assets, rather
they are the skills the ability and ways of
combining assets, people, and processes that a
company uses to transform inputs into outputs.

 What makes a resource valuable?

1. Are critical to meet a customers need better than
other alternatives
2. Are Scare few others, if any, possesses that
resource or skill to the degree your firm has
3. Drive a key portion of overall profits, in a manner
controlled by your firm
4. Are relatively more durable or sustainable over time

Wal- Marts Resource Based Competitive Advantage

Resources

Tangible

Industry Avg cost WalMart cost

( % of sale)
0.3 ( store rental space)

Store Locations

Intangible

Brand reputation
Employee Loyalty

1.2
1.1
0.7

( advertising expenses)
(payroll expenses)
( Shrinkage expense)

Capabilities

Inbound Logistic s

1.2 ( distribution expenses)

Total Advantage = 4.5%

Internal Analysis: Making

Meaningful Comparisons
1. Comparison with past
performance

2. Stages of
industry evolution

Perspectives
to use

3. Benchmarking
comparison with competitors

4. Comparison with
Key Success Factors
in industry

Benchmarking
Benchmarking has revolutionized the culture of business
world over
Benchmarking is based on premise that in all processes
including procurement, production, sales and services,
one or other organization has achieved world class
competitiveness.
Bmarking is a process for improving performance by
constantly, identifying understanding and adapting best
practices and processes followed inside and outside the
company and implementing these adapted practices.
Emphasis is on exploiting best practices that lead to
best performance, and not merely measuring best
performance.
It is a continuous process of learning, feedback,
reflection and analysis of what works( or does not work)
and why

What is Benchmarking?
What is Benchmarking?
"Benchmarking is a tool to help you improve your
business processes. Any business process can be
benchmarked."
"Benchmarking is the process of identifying,
understanding, and adapting outstanding practices
from organizations anywhere in the world to help your
organization improve its performance."
"Benchmarking is a highly respected practice in the
business world. It is an activity that looks outward to
find best practice and high performance and then
measures actual business operations against those
goals."

 A Company can compare its total organization or part of it with others

and adopt one or more of the following types of benchmarking
Strategic Benchmarking studying strategies & long term
approaches that helped the best practice companies to succeed.
Examine the core competencies, product development and
innovation strategies of such companies
Competitive or performance benchmarking compare their
position with respect to the performance characteristics of key
products & services , involving companies from SAME SECTOR
Process benchmarking to improve specific key processes and
operations with the help of best practices organizations involved in
similar work or offering services
Functional ( generic) Bmarking- improve their process by
comparing with companies from DIFFERENT business sectors
involved in similar functions or work processes. ( eg Safety practices)
Internal Benchmarking against own units, easy to get data
External bmarking help of high end performers/ successful Cos
International bmarking

 Many business processes are common throughout

industry. For example; NASA has the same fundamental
Human Resources requirements for hiring and
developing employees as does American Express.
British Telecom has the same Customer Satisfaction
Survey process as Brooklyn Union Gas. These
processes, albeit from different industries, are all
common and can be benchmarked very effectively. It's
called "getting out of the box".
By early 1990s, many Fortune 500 were implementing
benchmarking. Benchmarking also became a key
criterion for Malcolm Balridge Quality award. Xerox, ford,
GE, AT&T, Motorola, citicorp early users

Innovation
The act of creating new products or
processes
Product innovation
Creates products that customers perceive
as more valuable, increasing the
companys pricing options

Process innovation
Creates value by lowering production costs

Perhaps the most important building

block of competitive advantage

The Generic Building Blocks of

Competitive Advantage

Resources and Capabilities, Core Competencies,

and Outcomes
Valuable

Core
Competencies

Rare

Competitive
Advantage

Costly to
Imitate

Value Creation

Nonsubstitutabl
e

Above Average
Returns

Aspects to be covered in StrengthWeakness analysis

The strengths and weaknesses of the firm have to be assessed in each
of the main functions / areas

Marketing
Overall growth of the market
Market standing / market share
Innovation in marketing
Customer satisfaction level
Customer service level
New product capability
Pricing / margins
Channel position / distribution network
Marketing communication on the whole advertising, sales promotion,
personal selling
Market Research Capability
Marketing costs , Marketing organisation
Products mix and product lines

 Product-wise position with respect to

Profitability
Stage of product life cycle
Product design / technological strength
Differentiation
Positioning
Brand power

Finance
Assets, liquidity, leverage, gearing, cash flow, cost of capital,
profitability, quality of financial management, tax planning

Manufacturing / Operations
Capacity / scale of production, locational advantages, post
production facilities, Capacity utilization, cost of production, break
even position, productivity, inventory management, flexibilty in
manufacturing, automation, availability of trained skills.

 R&D

Nature and depth of R&D capability

Resource allocated to R&D
Quality, expertise and experience of R&D personnel
Speed of R&D, capability of engineering products based on R&D
Record of patents generated
Comparison of R&D investment vs new product launched

Human Resources
Morale & motivation of employees, personnel turnover, quality /
expertise of personnel

Corporate / overall resources

Company image , size, quality of top management, corporate
performance, innovation record, organization culture ,
organizational structure, use of information technology, CEO,
Board of directors, Overall adequacy of resources etc

Strategic Development Processes in

Organizations**
Strategic Planning Systems**: Often Strategy
development is equated with Strategic planning
system. This is manifestation of Design
approach to managing strategy. This takes form
of highly systemized step by step, chronological
procedures involving many different parts of the
organization.
Formalized Planning provide a structured means
of analysis and thinking about complex strategic
problems, providing opportunity to managers to
question and challenge the received wisdom
they take for granted.

 It encourages a longer term view of strategy than

might otherwise occur. Planning horizons vary . In
FMCG, 3-5 years may be appropriate. In
companies, which have to take very long-term
views on capital investment, such as oil industry,
planning horizons can be as long as 14 years ( in
Exxon) or 20 years ( in Shell).
It can be a useful means of co-ordination and help
communicate intended strategy and create
ownership of the strategy by involving large
number of people in development process.
Planning systems provide a sense of security and
feel of exercising control over the destiny of the
organization.

 Viewed through Experience lens, Planning may

help in drawing together experiences of people
and ensure effective communication.
Viewed from Ideas lens, Planning systems
provide a selection mechanism by which new
ideas can be evaluated. New ideas and
innovations compete or prove their worth.
There are some pit falls also in the formalization
of strategic Planning process:
Line managers, due to their pre-occupation with day
to day work, may actually cede responsibility for
strategic issues to specialist. This may result in
strategic planning becoming an intellectual exercise
removed from the reality of operations.

 The process of Strategic planning may be so

cumbersome that individuals or groups in the firm might
contribute to only part of it not understand the whole.
Planners may overlook the cultural & political dimensions
of the organization , and also importance of experiences
of those in the organization.
Very formal system of planning, especially with tight
mechanism of control, can stifle ideas and have
dampening effect on innovative capacity.
Planning can become obsessed with search for a
definitively right strategy.

 Logical incrementalism**: In a study of major

multinational businesses, Quinn concluded that
the strategic management process could be best
described as logical incrementalism.
Managers have a view of where they want the
organization to be in years to come and try to
move towards this position incrementally.
They do this by attempting to ensure the
success & development of a strong , secure but
flexible core business while using the experience
gained to develop business and perhaps
experiment with side bets. Encourage ideas to
emerge from lower levels as well.

The Learning Organization : The concept of the learning

organization, and strategy development as a learning process,
became popularized in the 1990s . In many respects it corresponds
to the aspects of logical incrementalism, especially the argument that
the uncertainty & complexity of the world can not be understood
purely analytically.

The Learning organization is capable of continual

regeneration from variety of knowledge, experience and
skills within organization which encourages questioning
and challenge around a shared purpose.

Characteristics of the experience and ideas lens more closely match

those of learning organization.
Experimentation is the norm. Informality and network of working
relationships ( rather than hierarchies) help the process.
Organizations can be seen as social networks.
Political process of bargaining and negotiation is inherent , so
conflicts and disagreements will occur due to diversity & variety in the
organization. This should not be seen as negative in the process of
strategy development.

Strategic Leadership**
Strategic Development may also be strongly associated
with an individual.
A strategic Leader is an individual upon whom strategy
development and change are seen to be dependent.
Others in the organization willingly giving him the
position. In some organization the individual may be
owner or founder, often in case of small businesses. In
some cases it could be an individual chief executive who
has turned around a business in difficult time.
The design lens suggests the individual carries out the
analysis & evaluation. These could be using his own
logic or using techniques associated with strategic
planning & analysis.

 The experience lens suggests that strategy

advanced by individual is formed on basis of the
individuals experience, perhaps within the
organization or perhaps from some other
organization where he previously worked. The
strategy advanced by a chief executive new to
an organization may be based on a successful
strategy followed in previous organization.
The strategy of an organization may be more
symbolically with an individual, for example
founder in a family controlled business.

 Viewed from Ideas lens, Evolutionary

theorists emphasize the way in which the
strategies develop from competing ideas,
so tend to diminish the role of so called
strategic leader. However, a strategic
leader can provide the vision with
sufficient clarity within which the discretion
of others in the organization can be
exercised.

 Organizational Politics**: The political

view of strategy development is that
strategies develop as the outcome of
process of bargaining and negotiation
among powerful internal or external
interest groups ( or stakeholders). This is
the world of boardroom battles portrayed in
films & TV dramas.
The design lens sees it as inevitable but
negative influence on strategy
development.

 Experience lens helps to explain the likelihood of political

activity. People in organizations are rooted in their
experience & therefore in approaching major problems,
seek to be protective of their views preserving or
enhancing the power of their positions.
Political activity may then seen as one explanation of
incremental, adaptive strategy development. Very
significant change to strategy may be very threatening to
the power of certain managers.
The experience lens also suggests that the analytical
processes that go into planning may not be entirely
based on objective and neutral facts.
Powerful individuals and groups may also strongly
influence the identification of key issues and indeed the
strategies eventually selected. Planning thus has a
political dimension. Political activity has to be taken
seriously as an influence on strategy development.

 The ideas lens also suggests that

organizational politics can be seen as
manifestation of the sort of conflict that
results from innovation and new ideas. The
variety and diversity that exists in
organizations takes form in new ideas
supported or opposed by different
champions.

 Imposed Strategy : Imposition of strategy by

agencies or forces external to the organization.
Government may dictate a particular direction eg:
in public sector or when it chooses to privatise a
PSU.
MNCs are subjected to regulations in different
countries. An operating business within a multidivisional organization might see overall
corporate strategic direction as an imposition on
it.
It might be argued that imposed strategy is a way
of overcoming the sort of strategic inertia that had
arisen as a result of strategies developing
incrementally based on history, experience or
compromises resulting from bargaining &
negotiations of powerful groups.

Multiple Processes of Strategy Development**:

First, there is no one right way. The way in which

strategies develop in a fast changing environment is not
likely to be same in an environment where little
changes.
Second, it is very likely that the way the strategies are
developed will be seen differently by different people.
Senior executives tend to see strategies more in terms of
design, where as middle management tend to see them
as a result of cultural political processes.
Managers who work for government organizations tend
to see strategy as more imposed than those in the
private sector.
There will be multiple processes at work. Even in a
predominantly Planning system, some level of political
activity and certain elements of imposed strategy is likely
to be there.

Implications for Strategy Development

Intended and realized Strategies
Strategic Drift
Strategic Management in Uncertain and
complex conditions

Strategic Drift
Historical studies of organizations have shown
prevalence of processes leading to emergent
strategy.
There are long periods of relative continuity
during which established strategy remains
largely unchanged or changes incrementally,
there are also periods of flux in which strategies
change but in no very clear direction.
Transformational change, when there is a
fundamental change in strategic direction, does
take place but is infrequent.
The above pattern is known as punctuated
equilibrium.

 There are strong forces at work which are likely to push

organizations towards this pattern. Incremental strategic
change is a natural outcome of the influence of
experience.
The influence of the paradigm and the way we do things
around here is likely to mean that faced with changes in
environment, managers try to look for solutions with which
they are familiar and therefore minimize the extent to
which they face ambiguity and uncertainty.
There is a danger that incremental strategic changes are
not enough to keep pace with environmental changes,
and more fundamental or transformational change is
needed.
Indeed, often Transformational change tends to occur at
times when performance has declined significantly. There
is a danger that Organizations under such pressure may
be acting reactively to the environment.

 Some times strategic action required is outside

the scope of current paradigm and existing
culture, the core assumptions of managers.
Managers are more likely to attempt solutions by
searching for solutions within the existing
paradigm & as last resort look for a new one as
shown in exhibit 2.12
Strategic drift occurs when over a period, the
organizations strategy gradually moves away
from relevance, with respect to the forces in its
environment. Even most successful companies
may drift in this way.
Indeed, there is a tendency which has become
known as the Icarus Paradox for businesses
to become victims of the very success of their
past.

 See Exhibit 2.13 for phases of Strategic drift.

Organizations that seek to innovate could also
sometimes face problems by developing
products or services much ahead of its
environment ( market demand)
All these goes to emphasize the delicate
balance required while developing strategy.
Internal cultural pressures tend to constrain
strategy development and at the same tome the
organizations need to cope with environmental
forces.

Strategic Management in Uncertain & complex

conditions
Different organizations face environments which differ in
form & complexity. Since one of the main problems of
strategic management is coping with uncertainty , the
above aspect is very important.
In simple / static conditions, the environment is easy to
understand & does not undergo significant change. Raw
material suppliers & some mass manufacturing
companies are examples. Technical processes may be
fairly simple and competition & markets change very little.
If environmental changes does occur, analysing past
historical patterns / forecasting helps predict them .
In situations of relatively low complexity, it may also be
possible to identify some predictors of environmental
influences. For example birth rates is a good indicator to
determine provision for schooling.
So in simple / static conditions strategy development
in design terms may make sense.

 In Dynamic conditions, managers need to

consider the environment of future, not just the
past. They may employ structured ways of
making sense of the future , such as scenario
planning, or they may rely more on encouraging
active sensing of environmental changes low
down in the organization and the sort of diversity
and variety seen as through the ideas lens.
The emphasis should be on creating
organizational conditions which encourage
individuals & groups to be intuitive and
challenging in their thinking about possible
futures through the sort of learning organisation.

 Organizations in Complex situations face an

environment difficult to comprehend. They may
face dynamic conditions too, and therefore
combination of complexity & uncertainty. A
multinational firm or a government authority with
many services, may also be in a complex
condition because of diversity, while different
operating companies within it face varying
degrees of complexity & dynamism
Difficult to handle complexity by relying only on
analysis & planning. So organizational design
is important. Decentralization with different parts
of the organization made responsible for
different aspects & given the resources and
authority to handle their own parts.

 Organizations have to learn to cope with

complexity in different ways. Top
management has to recognize that
specialist down the line know more
about the environment know more than
they do. This strategic competence based
on experience may provide competitive
advantage . Taken-for-granted has to be
challenged

ENVIRONMENTAL
CONDITIONS

Strategy development in environmental contexts

Simple

Complex

Static
Decentralization of
Organization
Historical Analysis
Forecasting

Experience &
Learning

Dynamic

Scenario
Planning

Identifying Key Success Factors

Competition between industry participants is
ultimately a battle for competitive advantage
in which firms rival one another to attract
customers & maneuver for positional advantage.
We need to explicitly look at the sources of
competitive advantage within an industry
identify those factors within firms market
environment that determine its ability to survive
and prosper- its Key Success Factors (KSFs)

 How does a firm survive competition

(Analysis of competition)
Customer price sensitivity encourages
vigorous price competition
Excise of bargaining power an important
influence on input cost
Scale economies in operation and
advertisement
Markets localized & concentration high

Formulation of long term strategies

Grand Strategies provide basic directions or
options available for a company for strategic
actions. Grand Strategies are long term
strategies to achieve companys long term
objectives ( also called master strategies or business
strategies)

They can be broadly classified into 3 categories

stability strategy / Consolidation

Growth strategies
Retrenchment strategies
Or a combination of the above

Ansoffs Product Market Matrix for Growth

Present Product
Present
Market

New
Markets

Market Penetration

Market development

New Products

Product Development

Diversification

Grand Strategies..

Concentration
Market development
Product development
Horizontal Integration acquiring similar
businesses, same stage of Production Marketing chain
Vertical Integration forward , backward
Tapered Integration
Quasi Integration
Diversification
Concentric diversification- synergy
Conglomerate diversification

JVs
Strategic Alliances
Consortia
Turnaround
Divestures
Liquidation

 Quasi Integration Quasi integration refers to

the establishment of a relationship / alliance
between vertically related businesses (partners).
some of the common forms of quasi integration
are:

Minority equity investment

Loan or loan guarantees
Pre-purchase credits
Exclusive dealing arrangement
Specialized logistic facilities
Co-operative R&D

Benefits of Quasi Integration?

Turnaround Strategy
A turnaround strategy is done
through

Cost reduction

Asset reduction

Behavioral considerations affecting strategic

choice
Strategic analysis rarely identifies one specific
superior strategy. Different alternatives with
different or similar looking payoffs emerge.
Under such circumstances, various factors
influence the choice. Some of the factors:
Role of past strategies : inclination towards
continuity of past strategy. Thats why Firms
sometimes replace key executives when
performance of the firm is in adequate over extended
period. On the other hand, more successful the
strategy becomes, harder is to replace it even under
changed circumstances
Perception of KSFs & Distinctive competencies

 Attitude towards Risk: Range & diversity of strategic

choices vary with the risk taking ability of organizations.
Another factor influencing managerial propensity towards
risk is industry volatility. In highly volatile industries, top
managers absorb, and operate with, greater amount of risk
than their counterparts in other industries. Firms in early
stages of product / market evolution has to cope with
higher risks
Competitive Reaction: Capacity of competitor to react
has to be considered, especially if choosing aggressive
strategy. Probable impact of such reaction on the chosen
strategy
Degree of Firms external dependence on suppliers,
customers, Government, competitors, unions etc
Values & preferences and actual control of owners /
senior managers.