Strategic Analysis:

14 External Environment
CHAPTER

INTRODUCTION
‰ Organisations are distinguished based on their size, type of products,
markets, geographical coverage, legal status, and like because of vast
organisational diversity.
‰ Organisations do not operate in vacuum and in fact continuously act and
react to what happens outside their periphery. The factors that are outside
the business operations are typically referred to as organisational/business
environment which are shown below:

International
Political-legal, Socio- Domestic Political-legal,
cultural, Economic, Socio-cultural, Economic, Industry shaping
Demographic, Ecological Demographic, Ecological and competitive force
and Technological Technological Environment
Environment

Firm’s Firm’s Internal

stakeholders Environment

‰ The process of strategic formulation begins with a strategic analysis. Its objective is to compile
information about internal and external environments in order to assess possibilities while
formulating strategic objectives and contemplating strategic activities.

STRATEGIC ANALYSIS
‰ Strategy formulation is not a task in which managers can
get by with intuition, opinions, instincts, and creative thinking.
Judgements about what strategies to pursue need to flo
directl from anal sis of a firm s e ternal en ironment
and its internal resources and capabilities.
‰ A systematic approach to environmental assessment is
essential for managing risk and uncertainty.
‰ The strategic analysis is a component of business planning that has a methodical approach,
makes the right resource investments, and may assist business in achieving its objective. It
forces to think about the rivals and aids in the evaluation of business plans to stay ahead of the
competition.
The two important situational considerations are:
(1) Industry and competitive conditions, and
(2) An organisation’s own capabilities, resources, internal strengths, weaknesses, and market
position.

STRATEGIC ANALYSIS

aluation urrent ision ission oals trate ies

External Analysis Internal Analysis

Analysis

Identify Opportunity, Identify Strength,

Threats Weakness

‰ Accurate diagnosis of the business situation is necessary for managerial preparation to decide
on a sound long-term direction, setting appropriate objectives, and crafting a winning strategy.
‰ The strategic analysis is a continuous process which is not without limitations. There are two
major limitations of strategic analysis that we need to be aware of.
First, it gives a lot of innovative options but doesn’t tell which one to pick. The options can
be overlapping, confusing or difficult to implement.
Second, it can be time consuming at times, hurting overall organisational functioning and
also strain other efficient innovations such as developing a new product or a service.
Issues to consider for Strategic Analysis:
A current strategy is the result of several
little choices taken over a period of time.
(a) trate e ol es A management radically changes strategy
o er a eriod of when they try to speed up the organisational
time growth.
Strategy is influenced by experience, but it
has to be updated when the results become clear. It therefore, evolves
with time.

Strategic Analysis: External Environment 351

 Strategy formulation involves matching
internal strengths and weaknesses with
external opportunities and threats.
( ) Balance of e ternal E.g:- There may be pressures to enter a new
and internal factors market due to high growth potential while
there may be constraints like lack of funds.
In reality, perfect match between them is not possible. Hence, strategic
analysis uses workable balance.

The complexity and intermingling of variables

in the environment reduce the strategic
balance in the organisation.
An important aspect of strategic analysis
(c) Risk
is to identify potential imbalances or risks
and assess their consequences. A broad
classification of the strategic risk that requires
consideration in strategic analysis is given below:
Time
ternal Short time Long time
Errors in interpreting the environment Changes in the environment lead to
cause strategic failure. obsolescence of strategy.
Strategic Risks
Organizational capacity is unable to Inconsistencies with the strategy are
cope up with strategic demands. developed on account of changes in
Internal internal capacities and preferences.

External risk is on account of inconsistencies between strategies and the forces in the environment.
Internal risk occurs on account of forces that are either within the organization or are directly
interacting with the organization on a routine basis.

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 rame or of trate ic nal sis

Strategic Analysis

ternal nal sis Internal Analysis

ustomer nal sis Segments, Performance Analysis: Profitability,
motivations, unmet needs. sales, customer satisfaction, product
om etitor nal sis Strategic groups, qualify, relative cost, new products,
performance, objectives, strategies, human resources.
culture, cost structure. Determinants Analysis: Past and
ar et nal sis Size, growth, current strategies, strategic problems,
profitability, entry barriers. organizational Capabilities and
n ironmental nal sis Technological, constraints, financial resources, strengths,
government, economic, cultural, and weaknesses.
demographic.

Opportunities, threats, trends, and Strategic strengths, weaknesses,

problems, constraints, and
Strategic uncertainties uncertainties

trate Identification election

Identify strategic alternatives
Select strategy
Implement the operating plan
Review strategies

STRATEGY AND BUSINESS ENVIRONMENT

‰ Business strategist creates strategies and formulate policies considering both internal and
external factors.
‰ trate and n ironment

ana ement Strategy Resources

n ironment

‰ The business environment is hi hl d namic and continuousl e ol in Strategists provide

an interface between the organizational abilities and the opportunities and challenges it must
deal ithin the lar er en ironment.
Strategic Analysis: External Environment 353
‰ The term usiness en ironment refers to all external factors, influences, or situations that in
some way affect business decisions, plans, and operations. Organisational success is determined
by its business environment, and even more from its relationship with it.
‰ Strategic management is in ol ed with choosing a long-term direction in relation to these
resources and opportunities. There is a close and continuous interaction between a business
and its environment. This interaction helps in strengthening the business firm and using its
resources more effectively.
‰ It helps the business in the following ways:
Determine Find new needs and wants of the consumers, changes in laws, changes in
o ortunities social behaviours, and tells what new products the competitors are bringing in
threats the market to attract consumers.
i e direction The business is aware and understands the changes happening around, it can
for ro th plan and strategies to have successful business.
ontinuous The managers are motivated to continuously update their knowledge, under-
Learning standing and skills to meet the predicted changes in the realm of business.
Environmental understanding helps the business organizations to improve
their image by showing their sensitivity to the environment in which they op-
Image Building erate. Understanding the needs of the environment help to showcase that the
business is aware and responsive to the needs. It creates a positive image and
helps it to prosper and win over the competitors.
It helps the businesses to analyse the competitors’ strategies and formulate
eetin
their own strategies accordingly. The idea is to flourish and beat competition
om etition
for its products and services.
‰ The changes happening in the external environment challenge organisations to find novel and
unique strategies to remain in business and succeed.
‰ Strategic analysis covering internal and external environment is highly relevant and important
for the strategists in organisations in order to achieve competitive advantage, as well as ensure
high performance for survival and growth.
‰ Strategic decisions are significant aspects of business management and are essential for the
success and continued existence.
‰ Two crucial aspects for the success include are the function of top management and the method
of formulating strategic decisions. Improvement of strategic decisions is constant endeavour for
strategist.

MICRO AND MACRO ENVIRONMENT

‰ The environment in which an organization exists can be described in terms of the opportunities
and threats operating in the external environment apart from the strengths and weaknesses
existing in the internal environment.
‰ For making any strategic decision, they should be able to comprehend the facts available and
challenge the underlying assumptions.
‰ The e ternal en ironment can e cate orised in t o ma or t es as follows:
Micro environment
Macro environment

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Micro-environment
‰ Micro-environment is related to small area or immediate periphery of an organization. It
influences an organization regularly and directly.
‰ Micro environment consists of suppliers, consumers, marketing intermediaries, competitors,
etc. These are specific to the said business or firm and affect its working on a direct and regular
basis.
‰ Within the micro or the immediate environment in which a firm operates we need to address
the follo in issues
The employees of the firm, their characteristics and how they are organised.
The existing customer base on which the firm relies for business.
The ways in which the firm can raise its finance.
Who are the firm suppliers and how are the links between the two being developed
The local community within which the firm operates.
The direct competition and their comparative performance.
‰ The factors in micro environment often relate an organization to the macro issues influencing
the way a firm reacts in the market place.
Macro environment
‰ Macro environment is the portion of the outside world that significantly affects how an
organisation operates but is typically much beyond its direct control and influence.
‰ lements of acro n ironment
Macro environment has broader dimensions as it consists of economic, socio- cultural,
technological, political and legal factors.
The classification of the relevant environment into components or sectors helps an
organization to cope with its complexity, comprehend the different influences operating,
and relating the environmental changes to its strategic management process.
The environment includes factors outside the firm which can lead to opportunities for, or
threats to the firm. Although, there are many factors, the most important of the factors are
socio-economic, technological, supplier, competitors, and government.” - lue and auch

Demographical analysis considers factors such as race, age, income,

education, possession of assets, house ownership, job position, region,
and the degree of education. Data about these qualities across homes and
within a demographic variable are of importance to both businesses and
economists.
Considering demographics is of immense importance for any business.
Demographic Business Organizations need to study different demographic factors.
n ironment
Particularl the need to address follo in issues
What demographic trends will affect the market size of the industry
What demographic trends represent opportunities or threats
Identifying the implications of changing demographic characteristics or
population components for a future strategic competitiveness is often a
challenge for strategists.

Strategic Analysis: External Environment 355

 It represents a complex group of factors such as social traditions, values
and beliefs, level and standards of literacy, the ethical standards and state
of society, the extent of social stratification, conflict, cohesiveness and so
forth.
It differs from demographics in the sense that it is not the characteristics
of the population, but it is the behaviour and the belief system of that
ocio ultural population.
n ironment Socio-cultural environment consists of factors related to human
relationships and the impact of social attitudes and cultural values which
has bearing on the operations of the organization.
Businesses have to adjust to social norms and beliefs to operate successfully.
The social environment primarily affects the strategic management process
within the organization in the areas of mission and objective setting, and
decisions related to products and markets.
The economic environment refers to the overall economic situation around
the business and include conditions at the regional, national and global
levels.
Income distribution pattern determine the business possibilities. The
Economic
important point to consider is to find out the effect of economic prospect,
n ironment
growth and inflation on the operations of the business.
Higher interest rates are detrimental for the businesses with high debt. In
the real estate market, they reduce the capability of the prospective buyers
to avail loan and pay instalments, thus lower the demand.
Business is highly guided and controlled by government policies. Hence the
type of government running a country is a powerful influence on business.
A business has to consider the changes in the regulatory framework and
their impact on the business. Taxes and duties are other critical areas that
Political-Legal
may be levied and affect the business.
n ironment
Businesses prefer to operate in a country where there is a sound legal
system. Businesses must understand the relevant laws relating to
companies, competition, intellectual property, foreign exchange, labour
and so on.
Technology has changed the way people communicate and do things.
Technology has also changed the ways of how businesses operate now.
Technology and business are linked and are interdependent on one another.
Changes in technology have an effect on how a business runs its operations.
The technological advancements might require a business to drastically
Technological alter its operational, production and marketing strategies.
n ironment Technology can act as opportunity, when a business effectively adopts
technological innovations to their strategic advantage. However, at the
same time technology can act as a threat too.
Artificial intelligence, machine learning, robotic process automation is
some of the new technological tools that businesses are adopting and can
act as both opportunity and threat to a business.

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 PESTLE- A TOOL TO ANALYSE MACRO ENVIRONMENT
‰ The term PESTLE is often used to describe a framework for analysis of macro environmental
factors.
‰ PESTLE analysis involves identifying the political, economic, socio-cultural, technological,
legal and environmental influences on an organization and providing a way of scanning the
environmental influences that have affected or are likely to affect an organization or its policy.
‰ ‘PESTLE analysis is an increasingly used and recognized analytical tool, and it is an acronym for:

Environ- Political
mental
Factors Factors

Legal PESTLE Economic

Factors ANALYSIS Factors

Technological Social
Factors Factors

‰ The advantage of this tool is that it encourages management into proactive and structured
thinking in its decision making.
The Key Factors
Political factors are how and to what extent the government intervenes in the
economy and the activities of business firms.
Political factors Political factors may also influence goods and services which the government
wants to provide or be provided and those that the government does not want
to be provided.
Economic factors have major impacts on how businesses operate and take decisions.
E.g:- interest rates affect a firm’s cost of capital and therefore to what extent a
Economic
business grows and expands.
factors
Exchange rates affect the costs of exporting goods and the supply and price of
imported goods in an economy.
Social factors affect the demand for a company’s products and how that com-
Social factors
pany operates.
Technological factors can determine barriers to entry, minimum efficient pro-
Technological
duction level and influence outsourcing decisions. Furthermore, technological
factors
shifts can affect costs, quality, and lead to innovation.
Legal factors affect how a company operates, its costs, and the demand for its
Legal factors
products, ease of business.
Environmental factors affect industries such as tourism, farming, and insur-
n ironmental ance. Growing awareness to climate change is affecting how companies oper-
factors ate and the products they offer--it is both creating new markets and diminish-
ing or destroying existing ones.

Strategic Analysis: External Environment 357

 Summarize

Political stability
Political principles and ideologies
Current and future taxation policy
Political Regulatory bodies and processes
Government policies
Government term and change
Thrust areas of political leaders

Economy situation and trends

Market and trade cycles
Specific industry factors
Customer/end-user drivers
Economic
Interest and exchange rates
Inflation and unemployment
Strength of consumer spending

Lifestyle trends
Demographics
Consumer attitudes and opinions
Social Brand, company, technology image
Consumer buying patterns
Ethnic/religious factors
Media views and perception

Replacement technology/solutions
Maturity of technology
Manufacturing maturity and capacity
Technological Innovation potential
Technology access, licensing, patents,
property rights and copyrights

Business and Corporate Laws

Employment Law
Competition Law
Legal Health & Safety Law
International Treaty and Law
Regional Legislation

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 Ecological/environmental issues
Environmental hazards
Environmental legislation
n ironmental
Energy consumption
Waste disposal

INTERNATIONALIZATION OF BUSINESS
‰ Enables a business to enter ne mar ets in search of greater earnings and less expensive
resources.
‰ Additionally, expanding internationally enable a business to achieve greater economies of scale
and extend the lifespan of its products.
‰ A business can approach internationalisation systemically with the aid of international strategy
planning.
‰ haracteristics of a lo al usiness
To be specific, a global business has three characteristics:
It is a conglomerate of multiple units (located in different parts of the globe) but all linked
by common ownership.
Multiple units draw on a common pool of resources, such as money, credit, information,
patents, trade names and control systems.
The units respond to some common strategy. Besides, its managers and shareholders are
also based in different nations.
e elo in internationall
‰ International development is expensive and challenging. Moving on in a thorough and structured
manner is thus the ideal approach to adopt.
‰ The steps in international strategic planning are as follows:
Evaluate global opportunities and threats and rate them with the internal capabilities.
Describe the scope of the firm’s global commercial operations.
Create the firm’s global business ob ectives.
Develop distinct corporate strategies for the global business and whole organisation.
Why do businesses go global?
‰ Technological developments and evolving political views are t o im ortant factors in the rapid
rise of multinational organisations.
‰ Worldwide communication makes it easier to define and implement global strategy by linking
corporate headquarters with their abroad operations. There are several reasons why companies
go global.
‰ These are explained as follows:
The first and foremost reason is the need to grow. Often finding opportunities in the other
parts of the globe, organisations extend their businesses and globalise their operations.
There is rapid shrinking of time and distance across the globe, because of faster
communication, speedier transportation, growing financial flow of funds and rapid
technological changes.

Strategic Analysis: External Environment 359

 It is being realised that the domestic markets are no longer adequate. The competition
present domestically may not exist in some of the international markets.
There can be varied other reasons such as need for reliable or cheaper source of raw-
materials, cheap labour, etc.
Companies often set up overseas plants to reduce high transportation costs. It may be
cheaper to produce near the market to reduce the time and costs involved in transportation.
When exporting organisations find foreign markets to open up or grow big, they may
naturally look at overseas manufacturing plants and sales branches to generate higher sales
and better cash flow.
The rise of services to constitute the largest single sector in the world economy; and regional
economic integration, which has involved both the world’s largest economies as well as
certain developing economies.
The apparent and real collapse of international trade barriers redefines the roles of state
and industry. The trend is towards increased privatization of manufacturing and services
sectors, less government interference in business decisions and more dependence on the
value-added sector to gain marketplace competitiveness. The trade tariffs and custom
barriers are getting lowered, resulting in increased flow of business.
Globalization has made companies in different countries to form strategic alliances to ward
off economic and technological threats and leverage their respective comparative and
competitive advantages.

INTERNATIONAL ENVIRONMENT
‰ An assessment of the external environment is the first step toward internationalisation.
‰ Analysing international environment is important since it allows organisation to discover
opportunities in the global market and evaluate feasibilities of capitalising on these opportunities.
‰ Assessments of the international en ironment can e done at three le els multinational,
regional, and country.
Multinational environmental analysis in ol es identifying, anticipating, and
ultinational monitoring significant components of the global environment on a large scale.
en ironmental Understanding global developments covering economic and other macro
analysis elements is important. These characteristics are evaluated based on their
present and expected future impact.
Regional environmental analysis is a more in de th e aluation of the critical
Regional
factors in a specific geographical area. The emphasis would be on discovering
en ironmental
market opportunities for a goods, services, or innovations in the chosen
analysis
location.
ountr Country environmental analysis has to take a deeper look at the important
en ironmental environmental factors. The analysis must be customised for each of the
analysis countries to develop effective market entrance strategies.
‰ International environment has become an inherent part of strategic management for businesses
of all sizes with global interests. It becomes more important for the people at the decision-making
levels to focus on factors comprising the international environment.

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 UNDERSTANDING PRODUCT AND INDUSTRY
Business roducts ha e certain characteristics as follo s
1. Products are either tangible or intangible. A tangible product can be handled, seen, and
physically felt. Alternatively, an intangible product is not a physical good, such as telecom services,
banking, insurance, or repair services.
2. Product has a price. The dynamics of supply and demand influence the market price of an item
or service. The market price is the price at which quantity provided equals quantity desired. The
price that may be paid is determined by the market, the quality, the marketing, and the targeted
group. In the present competitive world price is often given by the market and businesses have
to work on costs to maintain profitability.
On account of competition, businesses are not able to fix market price by adding profit margin
on the costs. Rather, they work on reducing the costs given the prevailing market price.
3. Products have certain features that deli er satisfaction. Products should be able to provide value
satisfaction to the customers for whom they are meant. Features of the product will distinguish it
in terms of its function, design, quality and experience. A customer’s cumulative experience with
a product from its purchase to the end of its useful life is an important component of a product
feature.
4. Product is i otal for usiness. The product is at the centre of business around which all
strategic activities revolve. Product is the driving force behind business activities.
5. A product has a useful life. Every product has a usable life after which it must be replaced, as
well as a life cycle after which it is to be reinvented or may cease to exist.

PRODUCT LIFE CYCLE

‰ An important concept in strategic choice is that of product life cycle (PLC).
‰ PLC is an sha ed cur e which exhibits the relationship of sales with respect of time for a
product that passes through the four successive stages of introduction, growth, maturity and
decline.
First stage:- of PLC is the introduction stage with slo sales ro th, in which competition is almost
negligible, prices are relatively high, and markets are limited. The growth in sales is at a lower rate
because of lack of awareness on the part of customers.
Second phase:- of PLC is growth stage with rapid market acceptance. In the growth stage, the
demand expands rapidly, prices fall, competition increases, and market expands. The customer has
knowledge about the product and shows interest in purchasing it.
Third phase:- of PLC is maturity stage where there is slowdown in growth rate. In this stage, the
competition gets tough, and market gets stabilized. Profit comes down because of stiff competition.
At this stage, organisations have to work for maintaining stability.
Fourth stage:- of PLC is declines with sharp downward drift in sales. The sales and profits fall down
sharply due to some new product replaces the existing product.
So, a combination of strategies can be implemented to stay in the market either by diversification
or retrenchment.

Strategic Analysis: External Environment 361

 Sales

Introduction Growth Maturity Decline

Time

‰ The main ad anta e of P a roach is that it can be used to diagnose a portfolio of products
(or businesses) in order to establish the stage at which each of them exists.
‰ Particular attention is to be paid on the businesses that are in the declining stage.
‰ Depending on the diagnosis, appropriate strategic choice can be made. For instance, expansion
may be a feasible alternative for businesses in the introductory and growth stages.
‰ Mature businesses may be used as sources of cash for investment in other businesses which
need resources.
‰ A combination of strategies like selective harvesting, retrenchment, etc. may be adopted for
declining businesses.

VALUE CHAIN ANALYSIS

‰ Value chain analysis is a method used strate ists to rea do n each process that their
business employs.
‰ This analysis could be used to improve the sequence of operations, enhancing efficiency and
creating a competitive advantage.
‰ Value chain analysis is a method of examining each activity in value chain of a business in order
to identify areas for improvements. When you do a value chain analysis, you must analyse how
each stage in the process adds or subtracts value from the end product or service.
‰ Value chain analysis has been widely used as a means of describing the activities within and
around an organization and relating them to an assessment of the competitive strength of an
organization (or its ability to provide value-for-money products or services).
‰ The t o asic ste s of identif in separate activities and assessing the value added from each
were linked to an analysis of an organization’s competitive advantage by ichael Porter.
I IN U U

U N U N N
SUPPORT
I I I N P N
IN

P U N

INBOUND OUT IN I
OPERA BOUND
I I
IN

TIONS I I

P I I I I

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‰ One of the key aspects of value chain analysis is the recognition that organizations are much
more than a random collection of machines, material, money and people.
‰ These resources are of no value unless deployed into activities and organised into systems and
routines which ensure that products or services are produced which are valued by the final
consumer/user.
‰ Porter argued that an understanding of strategic capability must start with an identification of
these separate value activities.
‰ The primary activities of the organization are grouped into five main areas

Inbound Outbound ar etin

Operations er ice
logistics logistics Sales

The activities concerned with receiving, storing and distributing the inputs to
Inbound
the product/service. This includes materials handling, stock control, transport
logistics
etc. Like, transportation and warehousing.
Operations transform these inputs into the final product or service machining,
Operations
packaging, assembly, testing, etc. convert raw materials in finished goods.
Collect, store and distribute the product to customers. For tangible products
Outbound this would be warehousing, materials handling, transport, etc. In the case of
logistics services, it may be more concerned with arrangements for bringing customers
to the service, if it is a fixed location (e.g. sports events).
Provide the means whereby consumers/users are made aware of the product/
ar etin and service and are able to purchase it. This would include sales administration,
sales advertising, selling and so on. In public services, communication networks
which help users’ access a particular service are often important.
Service are all those activities, which enhance or maintain the value of a
er ice
product/service, such as installation, repair, training and spares.

Human resource Infrastructure

management

Technology
development

Procurement

‰ Each of these groups of primary activities are lin ed to su ort acti ities
‰ These can be divided into four areas;

Strategic Analysis: External Environment 363

 The processes for acquiring the various resource inputs to the primary
Procurement activities (not to the resources themselves). As such, it occurs in many parts
of the organization.
All value activities have a ‘technology’, even if it is simply know-how. The key
Technology technologies may be concerned directly with the product (e.g. R&D product
de elo ment design) or with processes (e.g. process development) or with a particular
resource (e.g. raw materials improvements).
A particularly important area which transcends all primary activities. It is
uman resource
concerned with those activities involved in recruiting, managing, training,
management
developing and rewarding people within the organization.
The systems of planning, finance, quality control, information management,
etc. are crucially important to an organization’s performance in its primary
Infrastructure
activities. Infrastructure also consists of the structures and routines of the
organization which sustain its culture.

INDUSTRY ENVIRONMENT ANALYSIS

‰ Industry analysis enable strategic understanding about the entire state of any industry and make
decisions about whether the industry is a lucrative or not.
‰ The goal of the industry environment analysis, which is typically an important step of strategic
analysis, is to estimate the amount of competitive pressures the business is presently facing and
is expected to face in the near future.
‰ Analysing these elements enhances knowledge of surrounding and serves as the foundation for
aligning strategy with changing industry circumstances and realities.

PORTER’S FIVE FORCES MODEL

‰ Every business operates in the competitive environment.
‰ Porter’s Five Forces analysis is a simple but efficient way for determining the key sources of
competition in business or industry.
‰ It is a powerful and widely used tool to systematically diagnose the significant competitive
pressures in a market and assess the strength and importance of each.
‰ Michael Porter believes that the basic unit of analysis for understanding is a group of competitors
producing goods or services that compete directly with each other.
‰ The model holds that the state of competition in an industry is a composite of competitive
pressures operating in fi e areas of the o erall mar et

Competitive pressures associated with the market manoeuvring and jockeying for buyer patronage
that goes on among rival sellers in the industry.

Competitive pressures associated with the threat of new entrants into the market.

Competitive pressures coming from the attempts of companies in other industries to win buyers
over to their own substitute products.

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 Competitive pressures stemming from supplier bargaining power and supplier-seller collaboration.

Competitive pressures stemming from buyer bargaining power and seller- buyer Collaboration.

he strate ists can use the fi e forces model to determine hat com etition is li e in a i en
industr underta in the follo in ste s

Step-2 Step-3
Step-1
Evaluate how strong the Determine whether the
Identify the specific
pressures comprising each collective strength of the
competitive pressures
of the five forces are (fierce, five competitive forces
associated with each of the
strong, moderate to normal, is conducive to earning
five forces.
or weak). attractive profits.

Ne ntrants

Threat of New
Entrants

Bargaining Power Bargaining Power

of Suppliers of Buyers

Suppliers Industry Buyers

om etitors

Threat of Substitute
Products or
Services
Substitutes

By applying Porter’s five forces model of industry attractiveness to their own industries, the manager
can gauge their own firm’s strengths, weaknesses, and future opportunities.
(I) The Threat of New Entrants
‰ New entrants can reduce industry profitability because they add new production capacity
leading to an increase supply of the product even at a lower price and can substantially erode
existing firm’s market share position.
‰ The new capacity and product range they bring in throw up new competitive pressure. And the
bigger the new entrant, the more severe the competitive effect.
‰ To discourage new entrants, existing firms can try to raise barriers to entry. Barriers to entry
represent economic forces (or hurdles’) that slow down or impede entry by other firms. These
are e lained as follo s

Strategic Analysis: External Environment 365

 When a large amount of capital is required to enter an industry, firms lacking
a ital
funds are effectively barred from the industry, thus enhancing the profitability
Requirements
of existing firms in the industry.
Economies of scale refer to the decline in the per-unit cost of production (or
Economies of other activity) as volume grows. A large firm that en oys economies of scale
Scale can produce high volumes of goods at successively lower costs. This tends to
discourage new entrants.
Product Product differentiation refers to the physical or perceptual differences, or
Differentiation enhancements, that make a product special or unique in the eyes of customers.
To make a switch, buyers may need to test a new firm’s product, negotiate
new purchase contracts, and train personnel to use the equipment, or modify
itchin osts facilities for product use. Buyers often incur substantial financial (and
psychological) costs in switching between firms. When such switching costs
are high, buyers are often reluctant to change.
Brand identity is particularly important for infrequently purchased products
that carry a high unit cost to the buyer. New entrants often encounter
Brand Identity
significant difficulties in building up the brand identity, because to do so they
must commit substantial resources over a long period.
Access to Despite the growing power of the internet, many firms may continue to rely
Distribution on their control of physical distribution channels to sustain a barrier to entry
hannels to rivals.
Sometimes the mere threat of aggressive retaliation by incumbents can deter
Possibility of entry by other firms into an existing industry.
ressi e
Retaliation E.g:- Introduction of products by a new firm may lead incumbents firms to
reduce their product prices and increase their advertising budgets.

(II) Bargaining Power of Buyers

‰ This force will become heavier depending on the possibilities of the buyers’ forming groups or
cartels.
‰ The bargaining power of the buyers influences not only the prices that the producer can charge
but also influences in many cases, costs and investments of the producer because powerful
buyers usually bargain for better services which involve costs and investment on the part of the
producer.
‰ Buyers of an industry’s products or services can sometimes exert considerable pressure on
existing firms to secure lower prices or better services.
‰ This leverage is particularly evident when:
Buyers have full knowledge of the sources of products and their substitutes.

They spend a lot of money on the industry’s products i.e. they are big buyers.

The industry’s product is not perceived as critical to the buyer’s needs and buyers are more
concentrated than firms supplying the product. They can easily switch to the substitutes available.

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(III) Bargaining Power of Suppliers
‰ The bargaining power of suppliers determines the cost of raw materials and other inputs of the
industry and, therefore, industry attractiveness and profitability.
‰ Suppliers can influence the profitability of an industry in a number of ways.
‰ Suppliers can command bargaining power over a firm when

Their products are

They are more
crucial to the buyer They can erect high
concentrated than their
and substitutes are not s itchin costs
buyers.
a aila le

(IV) The Nature of Rivalry in the Industry

‰ The intensity of rivalry in an industry is a significant determinant of industry attractiveness and
profitability.
‰ The intensity of rivalry can influence the costs of suppliers, distribution, and of attracting
customers and thus directly affect the profitability.
‰ The more intensive the rivalry, the less attractive is the industry.
‰ Rivalry among competitors tends to be cutthroat and industry profitability low under various
conditions explained as follows:
A strong industry leader can discourage price wars by disciplining initiators of
Industry Leader such activity. Because of its greater financial resources, a leader can generally
outlast smaller rivals in a price war.
Even when an industry leader exists, the leader’s ability to exert pricing
Number of
discipline diminishes with the increased number of rivals in the industry as
om etitors
communicating expectations to players becomes more difficult.
When rivals operate with high fixed costs, they feel strong motivation to utilize
i ed osts their capacity and therefore are inclined to cut prices when they have excess
capacity.
Rivalry among competitors declines if some competitors leave an industry. Exit
barriers come in many forms. Assets of a firm considering exit may be highly
specialized and therefore of little value to any other firm. Such a firm can thus
it Barriers find no buyer for its assets. This discourages exit. When barriers to exit are
powerful, competitors desiring exit may refrain from leaving. Their continued
presence in an industry exerts downward pressure on the profitability of all
competitors.
Firms can sometimes insulate themselves from price wars by differentiating
their products from those of rivals. As a consequence, profitability tends to
Product be higher in industries that offer opportunity for differentiation. Profitability
Differentiation tends to be lower in industries involving undifferentiated commodities.
E.g:- Memory chips, natural resources, processed metals and railroads.

Strategic Analysis: External Environment 367

 Industries whose growth is slowing down tend to face more intense rivalry. As
industry growth slows, rivals must often fight harder to grow or even to keep
lo ro th
their existing market share. The resulting intensive rivalry tends to reduce
profitability for all.

(V) Threat of Substitutes

‰ Substitute products are a latent source of competition in an industry.
‰ Substitute products offering a price advantage and/or performance improvement to the
consumer can drastically alter the competitive character of an industry. And they can bring it
about all of a sudden.
E.g:- Coir suffered at the hands of synthetic fibre.
A final force that can influence industry profitability is the availability of substitutes for an
industry’s product.
E.g:- Real estate, insurance, bonds and bank deposits for example are clear substitutes for common
stocks, because they represent alternate ways to invest funds.
The five forces together determine industry attractiveness/ profitability.
E.g:- Elements such as cost and investment needed for being a player in the industry decide industry
profitability, and all such elements are governed by these forces. The collective strength of these
five competitive forces determines the scope to earn attractive profits. The strength of the forces
may vary from industry to industry.

ATTRACTIVENESS OF INDUSTRY
‰ The industry analysis culminates into identification of various issues and draw conclusions about
the relative attractiveness or unattractiveness of the industry, both near-term and long-term.
‰ The important factors on which the management may base such conclusions include:
The industry’s growth potential, is it futuristically viable
Whether competition currently permits adequate profitability and whether competitive
forces will become stronger or weaker
Whether industry profitability will be favourably or unfavourably affected by the prevailing
driving forces
The competitive position of an organisation in the industry and whether its position is
likely to grow stronger or weaker. (Being a well-entrenched leader or strongly positioned
contender in an otherwise lackluster industry can still produce good profitability however,
having to fight an uphill battle against much stronger rivals can make an otherwise attractive
industry unattractive).
The potential to capitalize on the vulnerabilities of weaker rivals (perhaps converting an
unattractive industry situation into a potentially rewarding company opportunity).
Whether the company is able to defend against or counteract the factors that make the
industry unattractive
The degrees of risk and uncertainty in the industry’s future.
The severity of problems confronting the industry as a whole.
Whether continued participation in this industry adds importantly to the firm’s ability to be
successful in other industries in which it may have business interests

368 Strategic Management PW

 EXPERIENCE CURVE
‰ Experience curve a in to a learnin cur e which explains the efficiency increase gained by
workers through repetitive productive work.
‰ Experience curve is based on the commonly observed phenomenon that unit costs decline as a
firm accumulates experience in terms of a cumulative volume of production.
‰ It is based on the concept, e learn as e ro .
‰ Experience curve results from a variety of factors such as learning effects, economies of scale,
product redesign and technological improvements in production.
‰ Experience curve has follo in features:

As business organisation grow, they gain experience.

Experience may provide an advantage over the competition. Experience

is a key barrier to entry.

Large and successful organisation possess stronger “experience effect”.

‰ A typical experience curve may be depicted as follows:

‰ As a business grows, it understands the High
complexities and benefits from its experiences.
‰ The concept of experience curve is
Costs per unit

relevant for a number of areas in strategic

management.
‰ For instance, experience curve is
considered a barrier for new firms
contemplating entry in an industry.
‰ The likely strategic choice for competitors
can be a market niche approach or Low High
segmentation based on demography or Cumulative volume of production (Units)
geography.

VALUE CREATION
‰ The concept of value creation was introduced primarily for providing products and services to
the customers with more worth.
‰ The concept took more space in the business and organizations started discussing about the
value creation for stakeholders.

Strategic Analysis: External Environment 369

 Value to Customer
Customer’s
Surplus
Price

Profitable
Pricing Band

Firm’s
Margin

Firm’s Cost of value

Creation
0

‰ The value creation is an activity or performance by the firm to create value that increases the
worth of goods, services, business processes or even the whole business system.
‰ This concept gives business a competitive advantage in the industry and helps them earn above
average profits/returns.
‰ Competitive advantage leads to superior profitability.
‰ Profitable a company becomes depends on three factors:
(a) the value customers place on the company’s products;
(b) the price that a company charges for its products; and
(c) the costs of creating those products.
‰ The value customers place on a product reflects the utility they get from a product.
‰ Companies are ultimately aiming to achieve sustainable competitive advantage, which enables
them to succeed in the long run.
‰ Michael Porter argues that a company can generate competitive advantage in t o different
a s, either through differentiation or cost ad anta e.
According to Porter’s, differentiation means the capability to provide customers superior
and special value in the form of product’s special features and quality or in the form of
aftersales customer service.
As a result of differentiation, a company can demand higher price for its products or
services. A company will earn higher profits due to differentiation in case the expenses stay
comparable to the costs of competitors.
The differentiation and cost advantage will affect a company’s ability to achieve competitive
advantage, but there are many different organizational functions that will influence whether
a company can achieve cost advantage or differentiation advantage.
‰ Value chain analysis provides an excellent tool to examine the origin of competitive advantage.
It divides the organisations into two different strategically important group of activities, namely,
primary activities and supporting activities, which can help to comprehend the potential sources
for differentiation and to understand an organisation’s costs behaviour.

370 Strategic Management PW

Market And Customer
‰ A market is a place for interested parties, buyers and sellers, where items and services can be
exchanged for a price.
‰ The market might be physical, such as a departmental store where people engage in person.
‰ They may also be virtual, such as an online market where buyers and sellers do not meet in
person but tools of technology to strike a deal.
‰ Example: it might be used to describe the stock exchange, where securities are traded.
‰ The term “marketing” encompasses a wide range of operations, including research, designing,
pricing, promotion, transportation, and distribution.
‰ Often market activities are categorised and explained in terms of four Ps of marketing - product,
place, pricing, and promotion.
Customer
‰ A customer is a person or business that buys products or services from another organisation.
‰ The terms customer and consumer are practically synonymous and are frequently used
interchangeably. There is, a thin distinction.
‰ Individuals or businesses that consume or utilise products and services are referred to as
consumers. Customers are the purchasers of products and services in the economy, and they
might exist as consumers or only as customers.
Customer Analysis
‰ Customer analysis is an essential marketing component of any strategic business plan.
‰ It identifies target clients, determines their wants, and then defines how the product meets those
needs. Thus, it involves the examination and evaluation of consumer needs, desires, and wants.
‰ Customer analysis includes the administration of customer surveys, the study of consumer
data, the evaluation of market positioning strategies, development of customer profiles, and the
selection of the best market segmentation techniques.
Customer Behaviour
‰ Customer behaviour moves beyond the identification of customers to explain how they purchase
products.
‰ Understanding the behaviours of customers enables businesses to establish effective marketing
and advertising campaigns, provide products and services that meet their needs, and retain
customers for repeat sales.
‰ Consumer behaviour may be influenced by a number of things. These elements can be categorised
into the following three conceptual domains:
External influences, like advertisement, peer recommendations or social
norms. The focus of external effects is on the numerous elements that have an
ternal
impact on customers as they choose which needs to satisfy and which products
Influences
to use to do so. These aspects are divided into two groups - the company’s
marketing - efforts and the numerous environmental elements.
Internal processes are psychological factors internal to customer and affect
Internal
consumer decision making. Consumer behaviour is influenced by a combination
Influences
of internal and external influences, including motivation and attitudes.

Strategic Analysis: External Environment 371

 A rational consumer, as decision maker would seek information about potential
decisions and carefully integrate this with the existing knowledge about the
product.
The stages of decision-making process can be described as:
Problem recognition, i.e., identify an existing need or desire that is
ecision a in unfulfilled
Search for desirable alternative and list them
Seeking information on available alternatives and weighing their pros
and cons.
Make a final choice
This behaviour of making decisions happens very frequently.
After making a decision and purchasing a product, the final phase in the
Post-decision
decision-making process is evaluating the outcome. The consumer’s reaction
Processes
may vary depending upon the satisfaction.

External Factors
Market Stimuli Internal Decision Purchase & Post
Factors Making Purchase Actions
Environmental Factors

COMPETITIVE STRATEGY
‰ Competition is a fundamental attribute of economic systems and business, and it is frequently
connected with small and large organisations.
‰ The competitive strategy of a business is concerned with how to compete in the business areas
in which the organization operates.
‰ The competitive strategy of a firm within a certain business field is analysed using two criteria
the creation of com etiti e ad anta e and the rotection of com etiti e ad anta e
‰ An important component of industry and competitive analysis involves delving into the industry’s
competitive process to discover what the main sources of competitive pressure are and how
strong each competitive force is.
‰ This analytical step is essential because managers cannot devise a successful strategy without
in-depth understanding of the industry’s competitive character.
‰ Even though competitive pressures in various industries are never precisely the same, the
competitive process works similarly enough to use a common analytical framework in gauging
the nature and intensity of competitive forces.

COMPETITIVE LANDSCAPE
‰ Competitive landscape is a business analysis which identifies competitors, either direct or
indirect.
‰ Competitive landscape is about identifying and understanding the competitors and at the same
time, it permits the comprehension of their vision, mission, core values, niche market, strengths
and weaknesses.
‰ Understanding of competitive landscape requires an application of “competitive intelligence”.

372 Strategic Management PW

‰ Thus, understanding the competitive landscape is important to build upon a competitive
advantage.
‰ Steps to understand the Competitive Landscape
The firm’s industry and have actual data about their respective market share.
Identify the
competitorThis answers the question Who are the competitors and how big are they
The strategist can use market research report, internet, newspapers, social
Understand the media, industry reports, and various other sources to understand the products
competitors and services offered by them in different markets.
This answers the question What are their product and services
Determine This answers the questions What are their financial positions
the strengths What gives them cost and price advantage What are they likely to do next
of the How strong is their distribution network
competitors What are their human resource strengths
Determine the Identify the areas where the competitor is lacking or is weak. Weaknesses (and
ea nesses strengths) can be identified by going through consumer reports and reviews
of the appearing in various media. Financial strength and weakness can always be
competitors learnt from annual reports.
The strategist should put together all information about competitors and draw
Put all of the
inference about what they are not offering and what the firm can do to fill in the
information
gaps. The strategist can also know the areas which need to be strengthen by the
together
firm.

Key Factors For Competitive Success

‰ An industry’s Key Success Factors (KSFs) are those things that most affect industry members’
ability to prosper in the marketplace - the particular strategy elements, product attributes,
resources, competencies, competitive capabilities, and business outcomes that spell the difference
between profit and loss and, ultimately, between competitive success or failure.
‰ Key success factors are the prerequisites for industry success or, to put it another way, KSFs are
the factors that shape whether a company will be financially and competitively successful.
‰ The answers to three questions help identify an industry’s key success factors:
On what basis do customers choose between the competing brands of sellers What product
attributes are crucial to sales

What resources and competitive capabilities does a seller need to have to be competitively
successful, better human capital, quality of product or quantity of product, cost of service, etc.

What does it take for sellers to achieve a sustainable competitive advantage, something that can
be sustained for long term

E.g:- In apparel manufacturing, the KSFs are appealing designs and colour combinations (to create
buyer interest) and low-cost manufacturing efficiency (to permit attractive retail pricing and
ample profit margins).

Strategic Analysis: External Environment 373

 Key success factors vary from industry to industry and even from time to time within the same
industry as driving forces and competitive conditions change. Only rarely does an industry have
more than three or four key success factors at any one time.
The purpose of identifying KSFs is to make judgments about what things are more important to
competitive success and what things are less important.

TEST YOUR KNOWLEDGE – MCQS

1. KSFs stand for:
(a) Key strategic factors (b) Key supervisory factors
(c) Key success factors (d) Key sufficient factors
om etiti e landsca e requires the a lication of
(a) Competitive advantage (b) Competitive strategy
(c) Competitive acumen (d) Competitive intelligence

he term P anal sis is used to descri e a frame or for anal sin

(a) Macro environment (b) Micro environment
(c) Both Micro and Macro environment (d) None of the above
ttracti eness of firms hile conductin industr anal sis should e seen in
(a) Relative terms (b) Absolute terms
(c) Comparative terms (d) All of the above
hat is not one of ichael Porter s fi e com etiti e forces
(a) New entrants (b) Rivalry among existing firms
(c) Bargaining power of unions (d) Bargaining power of suppliers
hich of the follo in constitute emo ra hic n ironment
(a) Nature of economy i.e. capitalism, socialism, Mixed
(b) Size, composition, distribution of population, sex ratio
(c) Foreign trade policy of Government
(d) Economic policy i.e. fiscal and monetary policy of Government
ll are elements of acro en ironment e ce t
(a) Society (b) Government (c) Competitors (d) Technology
he em hasis on roduct desi n is er hi h the intensit of com etition is lo and the
mar et ro th rate is lo in the sta e of the industr life c cle
(a) Maturity (b) Introduction (c) Growth (d) Decline

ANSWER KEY
1. (c) 2. (d) 3. (a) 4. (a) 5. (c) 6. (b) 7. (c) 8. (b)

374 Strategic Management PW

 TEST YOUR KNOWLEDGE – CASE STUDIES
uresh in hania is the o ner of an a ri ased ri ate com an in an rur Pun a is
unit is roducin uree etchu s and sauces hile its roducts ha e si nificant mar et
share in the northern art of countr the sales are on decline in last cou le of ears e
see s hel of a mana ement e ert ho ad ises him to first understand the com etiti e
landscape.
lain the ste s to e follo ed uresh in hania to understand com etiti e landsca e
Ans. Steps to understand the competitive landscape:
(a) Identify the competitor: The first step to understand the competitive landscape is to
identify the competitors in the firm’s industry and have actual data about their respective
market share.
(b) Understand the competitors: Once the competitors have been identified, the strategist
can use market research report, internet, newspapers, social media, industry reports, and
various other sources to understand the products and services offered by them in different
markets.
(c) Determine the strengths of the competitors: What is the strength of the competitors
What do they do well Do they offer great products Do they utilize marketing in a way that
comparatively reaches out to more consumers Why do customers give them their business
(d) etermine the ea ness of the com etitors Weakness (and strengths) can be identified
by going through consumer reports and reviews appearing in various media. After all,
consumers are often willing to give their opinions, especially when the products or service
are either great or very poor.
(e) Put all of the information together: At this stage, the strategist should put together all
information about competitors and draw inference about what they are not offering and
what the firm can do to fill in the gaps. The strategist can also know the areas which need to
be strengthen by the firm.
2. Eco-carry bags Ltd., a recyclable plastic bags manufacturing, and trading company has
seen a otential in the e er ro in a areness around ha ards of lastics and the ositi e
outloo of the societ to ards rec clin and reusin lastics
ma or concern for co carr a s td are a er a s and old cloth a s en thou h
the are costlier than rec cla le lastic a s irres ecti e the are ein elcomed
ositi el the consumers
Identif and e lain that com etition from a er a s and old cloth a s fall under hich
cate or of Porter s i e orces odel for om etiti e nal sis
Ans. Eco-carry bags Ltd. faces competition from paper bags and old cloth bags and falls under Threat
of Substitutes force categories in Porter’s five Forces Model for Competitive Analysis. Paper and
cloth bags are substitutes of recyclable plastic bags as they perform the same function as plasctic
bags. Substitute products are a latent source of competition in an industry. In many cases, they
become a major constituent of competition. Substitute products offering a price advantage and/
or performance improvement to the consumer can drastically alter the competitive character of
an industry.
Ba urtle is a children s clothin rand that has een created a ne a e demand for
asha le dia ers he ma or enefit for the rand has een that not man com anies
ha e sho n interest in the roduct thin in it is not ia le ho e er customers ma orl
or in mothers are lo in their roduct he core material needed for roduction is also

Strategic Analysis: External Environment 375

 used in man other ater roofin roducts in arious industries Ba urtle sources this
material from a reno ned su lier at com arati el lo rices hich of the fi e forces
of com etiti e ressure ould Ba urtle e erience due to a o e setu and hat are
ma or factors that create such ressure for a roduct o ou thin Ba urtle has an
ad anta e in some a to fi ht off this ressure
Ans. Baby Turtle would experience, Bargaining Power of Suppliers, as a competitive pressure for their
washable diaper product. This is because the core material for production is sourced from a single
supplier, who is renowned and in a position to create pressure in terms of prices.
Further, other factors that lead to such pressure are:
(a) Their products are crucial to the buyer and substitutes to the material required for production
are not available
(b) Suppliers can manipulate switching cost as the brand is in inception stage and making
margins are important.
An advantage that Baby turtle has is even though the material required has no substitutes,
but it used to make many other products and thus there are many other suppliers who can
provide that material. It might affect operations in short term but will help to fight off the
pressure created by existing supplier.

TEST YOUR KNOWLEDGE – DESCRIPTIVE QUESTIONS

amine the si nificance of s( e uccess actors) for com etiti e success (No )
Ans. As industry’s Key Success Factors (KSFs) are those things that most affect industry members’
ability to prosper in the market place – the particular strategy elements, product attributes,
resources, competencies, competitive capabilities and business outcomes that spell the difference
between profit & loss and ultimately, between competitive success or failure. KSFs by their very
nature are so important that all firms in the industry must pay close attention to them. They are
the prerequisites for industry success, or, to put it in another way, KSFs are the rules that shape
whether a company will be financially and competitively successful.
Industr and com etiti e anal sis e in ith an o er ie of the industr s dominant
economic features lain and also narrate the factors to e considered in rofilin in
industr s economic features (No )
Ans. Industry is “a group of firms whose products have the same and similar attributes such that they
compete for the same buyers.” Industries differ significantly in their basic character and structure.
Industry and competitive analysis begins with an overview of the industry’s dominant economic
features.
he factors to e considered hile rofilin an industr s economic features are fairl
standard and are i en as under
Size and nature of market. Scope of competitive rivalry.
Market growth rate and position in the business life.
Number of rivals and their relative market share.
The number of buyers and their relative sizes.
The types of distribution channels used to access consumers.
The pace of technological change in both production process innovation and new product
introductions.

376 Strategic Management PW

 Whether the products and services of rival firms are highly differentiated, weakly
differentiated, or essentially identical
Whether organizations can realize economies of scale in purchasing, manufacturing,
transportation, marketing, or advertising.
Whether key industry participants are clustered in a location.
Whether certain industry activities are characterized by strong learning and experience
effects (“learning by doing”) such that unit costs decline as cumulative output grows.
Whether high rates of capacity utilization are crucial to achieve low-cost production
efficiency.
Capital requirements and the ease of entry and exit.
Whether industry profitability is above or below par
lain the trate ic lliance escri e the ad anta es of trate ic lliance (No )
Ans. A strategic alliance is a relationship between two or more businesses that enables each to achieve
certain strategic objectives which neither would be able to achieve on its own. The strategic
partners maintain their status as independent and separate entities, share the benefits and control
over the partnership, and continue to make contributions to the alliance until it is terminated.
Advantages of Strategic Alliance.
trate ic alliances usuall are onl formed if the ro ide an ad anta e to all the arties
in the alliance hese ad anta es can e roadl cate ori ed as follo s
(1) Organizational: Strategic alliance helps to learn necessary skills and obtain certain
capabilities from strategic partners. Strategic partners may also help to enhance productive
capacity, provide a distribution system, or extend the supply chain. Strategic partners may
provide a good or service that complements thereby creating a synergy. Having a strategic
partner who is well-known and respected also helps add legitimacy and credibility to a new
venture.
(2) Economic: There can be reduction in costs and risks by distributing them across the
members of the alliance. Greater economies of scale can be obtained in an alliance, as
production volume can increase, causing the cost per unit to decline. Finally, partners can
take advantage of co-specialization, creating additional value.
(3) Strategic: Rivals can join together to cooperate instead of compete. Vertical integration can
be created where partners are part of the supply chain. Strategic alliances may also be useful
to create a competitive advantage by the pooling of resources and skills. This may also help
with future business opportunities and the development of new products and technologies.
Strategic alliances may also be used to get access to new technologies or to pursue joint
research and development.
(4) Political: Sometimes strategic alliances are formed with a local foreign business to gain
entry into a foreign market either because of local prejudices or legal barriers to entry.
Forming strategic alliances with politically-influential partners may also help improve your
own influence and position.
h should com anies o lo al ention an fi e reasons (No )
Ans. There are several reasons why companies go global. These are discussed as follows:
One reason could be the rapid shrinking of time and distance across the globe - thanks
to faster communication, speedier transportation, growing financial flows and rapid
technological changes.

Strategic Analysis: External Environment 377

 It is being realized that the domestic markets are no longer adequate and rich. Companies
globalize to take advantage of opportunities available elsewhere.
A new product may gradually get acceptance and grow locally and then globally. This may
initially be in the form of exports and then later production facilities may begin in other
countries.
Organizations may go global to take advantage of cheaper raw material and labor costs.
Companies often set up overseas plants to reduce high transportation costs.
The motivation to go global in high-tech industries is slightly different. Companies in
electronics and telecommunications must spend large sums on research and development
for new products and thus may be compelled to seek ways to improve sales volume to
support high overhead expenses.
The companies may also go global to take advantage of local taxation laws.
To form strategic alliances to ward off economic and technological threats and leverage
their respective comparative and competitive advantages.
lain the conce t of erience ur e and hi hli ht its rele ance in strate ic mana ement
( )
Ans. Experience curve is similar to learning curve which explains the efficiency gained by workers
through repetitive productive work. Experience curve is based on the commonly observed
phenomenon that unit costs decline as a firm accumulates experience in terms of a cumulative
volume of production. It is represented diagrammatically as shown below:
High
Costs per unit

Low High
Cumulative volume of production (Units)
The implication is that larger firms in an industry would tend to have lower unit costs as compared
to those of smaller organizations, thereby gaining a competitive cost advantage. Experience curve
results from a variety of factors such as learning effects, economies of scale, product redesign and
technological improvements in production.
The concept of experience curve is relevant for a number of areas in strategic management.
For instance, experience curve is considered a barrier for new firms contemplating entry in an
industry. It is also used to build market share and discourage competition.
rite a short note on Product ife cle (P ) and its si nificance in ortfolio dia nosis
( )
Ans. Refer to notes mentioned above.
lain Porter s fi e forces model as to ho usinesses can deal ith the com etition ( )
Ans. Refer to notes mentioned above.

378 Strategic Management PW

 he ar ainin o er of su liers determines an industr s attracti eness and
rofita ilit iscuss ( a )
Ans. Quite often, suppliers too, exercise considerable bargaining power over purchasing companies.
The more specialized the offering from the supplier, greater may be its clout. Further, when the
suppliers are limited in number, they may openly exhibit their bargaining power. The bargaining
power of suppliers determines the cost of raw materials and other inputs of the industry, and
therefore, an industry’s attractiveness and profitability.
Suppliers can influence the profitability of an industry in a number of ways.
Suppliers can command bargaining power over a firm when;
(i) Their products are crucial to the buyer and substitutes are not available.
(ii) They can erect/ensure high switching costs.
(iii) They are more concentrated than their buyers. Less suppliers, more buyers.
Bu ers of an industr s roducts or ser ices can sometimes e ert considera le ressure
on the com an In the li ht of the fi e forces as ro a ated ichael Porter e lain this
force lso state as to hen this le era e is e ident ( a )
Ans. Bar ainin Po er of Bu ers This is another force that influences the competitive condition of
an industry. This force becomes heavier depending on the possibility of buyers forming groups or
cartels. Mostly, this is a phenomenon seen in industrial products. Quite often, users of industrial
products come together formally or even informally and exert pressure on the producer. The
bargaining power of the buyers influences not only the prices that the producer can charge but
also influences costs and investments of the producer. This is because powerful buyers usually
bargain for better services which involves more investment on the part of the producer.
Buyers of an industry’s products or services can sometimes exert considerable pressure on existing
firms to secure lower prices or better services.
This leverage is particularly evident when;
(i) Buyers have full knowledge of the source(s) of products and their substitutes. Thus,
challenging the price being charged by producers.
(ii) They spend a lot of money on the industry’s products i.e., they are big buyers. Thus, in a
position to demand favourable terms of contract.
(iii) The industry’s product is not perceived as critical to the buyer’s needs and buyers are more
concentrated than firms supplying the product. They can easily switch to the substitutes
available.

Strategic Analysis: External Environment 379