(b) Strategic Management Process

It is a proper to treat strategic management as a process as discussed in the previous chapter.

The logic of a process is that its particular elements are undertaken in sequence through time.
Strategic management as a process involves a number of elements. However, strategic
management, being a continuous and dynamic process there are two problems in identifying
and sequencing these elements which are as follows:

1. Various authors, and even practitioners, are not unanimous about these elements and the
way they interact among themselves. Thus, there is a lack of precision so far as these
elements are concerned though various elements can be identified for further progression.

2. Even if various elements of strategic management are identified, another problem comes in
the form of prescribing their sequential arrangement. In the case of a precise process, such
as assembly line production process, identification of sequential arrangement does not
pose any problem because technologically it is defined. In the case of strategic
management which is a continuous and dynamic process without an apparent beginning
and end, the sequential arrangement is hard to prescribe. For example, organizational
mission which is, generally, considered to be the starting point followed by environmental
analysis and organisation's internal analysis cannot really be considered as a beginning
point unless the strategists who are responsible for setting organisational mission are
aware about the environment in which the mission will operate.

The above hvo problems are real which show the complexity of strategic management
process. Inspite of these problems, the modeljs for strategic management can be
prescribed. Figures 3.1 and 3.2 present models of strategic management. The strategic
management process shown in Figure 3.1 is applicable to a single strategic business unit
(SBD) firm. For a multiple SBDs firm, the process given in Figure 3.1 has to be adjusted so
that the process is conducted at corporate level as well as at SBD levels as these firms
insert SBD strategy between corporate strategy and functional strategy as discussed in the
previous chapter. Such firms adopt strategic management process as shown in Figure 3.2.

Figures 3.1 and 3.2 present strategic management and its various elements
alongwith the way they interact among themselves. Accordingly, various elements of
strategic management process are organisational mission (this may also include long-
term enduring objectives like survival and growth, etc. and exclude long-term objectives
set in quantitative terms to be achieved during strategic plan period), environmental
analysis, organisational analysis, identification and evaluation of altemative strategies,
choice of strategy,

implementation of strategy, and strategy evaluation and control. Feedback is

provided in the light of this strategy evaluation and control to take additional actions
wherever required so that objectives are achieved. A brief description of these elements
is presented here and their details will be presented in different chapters.
1. Organisational Mission and Objectives. Since organisations are deliberate creations,
they have some specific mission towards which all efforts are directed. ~ E1~sion of an
organisation is the fundamental ~!lique purp,ose that sets it apart trom ot~r organisations and
id~ntITies the scope ot Its operation in' product and market ter~ The mission is a -general,
enduring sfatement 'cif organisation's inten ~iIt emqodies the strategic Qecision maker's
business philosophV/It implies Lflle image which the organisation seeks to project. ~isatfon's
mission becomes the co~e fi.or strategic management: and aro:rnd it all functions revolv~
anisation;:Jl ohjectives are other factors which determine the.strategy.

In fact, the choice~of the objectives forari organisation is a strategic decision pecause by
choOSil}g'its ob]eGti'ves, the orgahisatlon commits itself for these. Objectives are different
fro'in:' mission in the sense that the latter prescribes the basic philosophy· of the orgarl.isation
itself which may be used I in determining the objectives. ~bjectives are generally the e,nd
re~3Ultsl which the organisation makes an attempt to achiev;7This aspect will be discussed in
Chapter 4. ~

2. environmental Analysis. second important aspect of strategic management process is

the environmental analysis, Since an organisation is a social system, it operates within the
environment which consists of many factors, such as, society, competitors, technology, legal
framework, politic framework, psyshological and cultural framework. All organisation has to
interact continuously with these factors, in this interaction process, the organisation has to relate
itself with the environment. Various factors of the environment have dual effect in interaction
process with the organisation:

they affect the working of the organisation and are also affected by its working. ~wever, the
effect of environment is more on the organisation rather than otherwise. t!].e Interaction process
provides 0PRortunities or threats to an organisation depending on the situation

3. Organisational Analysis. What opportunities or threats are posed by the environment and
how the organization can take advantages will depend greatly on the organisation's strengths
and weaknesses, Organisationai analysis brings these strengths and weaknesses. Through
organization analysis, the organisation evaluates its strengths and weaknesses so it can relate
itself by emphasis strengths and overcoming its weaknesses. Organisatonal strengths and
weaknesses also help in identifying the relevant environmental factors taken for detailed'
analysis. Thus, strategic opportunities and threats are determined on the 'basis of both
environmental analysis as well organisational analysis

4. Identification of Strategic Alternatives. interaction of organisation with its environment

in the light of its strengths and weaknesses will result into various strategic alternatives. This
process may result into large number of alternatives through which an organisation can relate
itself to the environment. However, 511 alternatives cannot be chosen even if all of them
produce the same results. Obviously, managers may ‘like to limit themselves to the Serious
consideration of some of strategic alternatives so that they are saved from unnecessary
exercise. Therefore; the strategic alternatives should be identified in the light of strategic
opportunities and threats generated through environmental analysis, organizational analysis,
and organisational mission and objectives
5. Choice of Strategy. The identification of varios strategic alternatives leads to the level
where managers can consider some alternatives seriously and may choose one of the most
acceptable. This is the stage of strategic decision process and all factors relevant for decision
making are relevant here. Since the' particular strategy attempts to affect the organisational
operation in some predetermined manner, the choice process systematically considers how
each alternative strategy affects the various critical factors of the organisational functioning.
Furthere, the chosen alternative should be acceptable in the light of organisation “Thus, it is not
necessary that the chosen alternative is the best one. In the choice process, apart from the
various organisational and environmental factors, personal factors play considerable role
because strategy reflects the personal values and aspirations of a strategist. This will be
discussed in Chapter 12.

6. Implementation of Strategy. Once the creative and analytical aspect of strategy

formulation as been settled, the organization tries to convert the strategy into something
operationally effective. To bring the result, the strategy should be put to action because mere
choice of even the soundest strategy will not affect organizational 'activities and achievement of
its objectives. In strategy implementation, various activities involved are design of organization
structure to suit the chosen strategy, effective leadership, development of functional policies
development and allocation of resources, development of effective information system, etc. This
will be discuss evaluation and Control. Evaluation and control may be treated as the I st stage of
strategic management process. However, this is an ongoing m-0cess an evaluation and control
should be taken as the process for future course of action. For effective implementation and
consequently achievement of organisational objectives, it is necessary that there is continuous
monitoring of the impiementation of the strategy so that suitable action is taken whenever
something goes wrong.
 (c) Strategic intent
VISION & MISSION

At this stage, it would be worthwhile to discuss about vision and visionary organisation
because, sometimes, vision and mission are used interchangeably with the result, proper
emphasis is not put on organisational vision. Vision represents the imagination of future events
and prepares the organisation for the same. Thus, vision represents the challenging portrait of
the organisation would be in future. It implies that the organisation should create projections
about where it should go and what major challenges lie ahead. On the basis of six-year study by
Collins, and Porras, they have concluded that companies may be grouped into two categories
judged on the basis of success of long-lasting high performance. These are visionary
companies and comparison companies. A visionary company is characterised by the following
features:

1. A visionary company holds a distinctive set of values from which it does not deviate.

2. The company expresses its core purpose in enlighted terms which provides challenges for
actions. This core purpose should not be confused with company's business purpose or
strategy and should not be simply a description of the company's product lines.

3. The company develops a visionary scenario of its future, decides actions accordingly and
implement these.5 Collins and Porras have provided guidelines to develop a visionary company
which proceed according to following steps:

1. Push with relentless honesty to define what values are truly central.

2. If you come with five or six, start over. Chances are you are confusing core values (which
do not change) with operational practices, business strategies, and cultural norms (all open
to change).

3. After you have drafted a preliminary list of core values, ask this question about each one:
"If the circumstances changed and penalised us for holding this core value, would we still
keep it?" 4. If you can't honestly answer yes to the question, then this value is not a core
value and should be dropped. Mter all, if markets change, companies should not change
values to match markets, Rather, they should change markets.6
ROLE OF MISSION IN STRATEGY FORMULATION

Organisational mission, when clearly defined, helps strategists formulating their strategies in the
following ways:

1. It helps in deciding the direction in which it proceeds. There strategic actions can easily
be geared in that direction.

2. It helps the organisation to clarify its aspirations and those of various stakeholders. The
strategic actions can be aligned to these aspirations

3. It serves as a reference point in dealing with various stakeholders within and outside the
organisation.

4. It helps in integrating the organisation with its relevant environment by taking suitable
actions the way these have been specified in the mission

5. It helps in integrating the various subsystems of the organisation as these subsystems

look at their objectives and operations in the light of organisational mission.

6. It conveys clear message about the organisation to those outsiders who come in
contact with it. They develop positive attitudes towards organisation if they are well aware
about its mission.

Mission and Purpose

Mission and purpose are, often, used either together or interchangeably to denote a particular
phenomenon of end results of organizational actions though there is a difference between the
two at least at the conceptual level. Before we go into operational sing these two terms as used
in strategic management, let us go through the dictionary meaning of both these terms.
According to dictionary meaning, mission, defined in a broad way, relates to that aspect for
which an individual has been or seems to have been sent into the world. In a narrow sense as is
used in political science, mission relates to sending out a person or group of persons on a
political or diplomatic errand. Thus, both these meanings have different focuses on the activities
involved. Purpose means the idea or aim kept in mind as the end of effort. Thus, both these
terms-mission and purpose-have different orientations. These descriptions of mission and
purpose are related to any entity-an individual, group of individuals, or the society as a whole.
Here, we are more concerned about organisations and that too in the context of strategic
management. In management literature, however, such a fine distinction is difficult to make
because of lack of conceptual clarity. Nevertheless, some operational definitions are required to
make clear what we are talking about. Peter Drucker who emphasised the need for defining
organisational mission specifically for undertaking strategic planning ha viewed that in
operational form, there is no difference between missions and, purpose and he has used both
these terms together. He has defined mission or purpose as follows;
 "The purpose or mission of an organisation is a general enduring statement of the
organization the intent of which embodies the decision maker's philosophy: it implies the
image which the organisation seeks to project.”

According to this definition, following conclusions about mission and purpose emerge:

1. Operationally, mission and purpose may be used together.

2. Mission is enduring feature of an organisation.

3. It states the image which the organisation wishes to project.

4. It provides guidelines to decision makers on continuous basis.

As compared to the above definition, Pearce and Robbinson have defined organisational
mission as follows:

"The company mission is defined as the fundamental unique purpose that sets a
business apart from other firms of its type and identifies the scope of its operations in
product and market terms."

This definition is more oriented towards describing mission in the context of business on the
basis of which an organisation differentiates itself from others. It implies that in the case of two
organisations having same business content-wise as well as context-wise, their mission remains
the same and meaningful differentiation does not exist. In the light of the above discussion, we
may define organjsational mission as follows though it may not be well prescriptive because of
the varying opinions about the components of a mission statement:

Mission is an enduring long-term concept of an organisation which provides

guidelines for managerial decisions.

Though this detinition is highly conceptual but provides guidelines to managerial decisions
particularly those having long-term impact on the organisation. At this level, it may be possible
to make difference between mission and purpose. Before we go for differentiating mjssion and
purpose, at least on conceptual basis, let us consider the mission and purpose as defined by
Hindustan Lever Limited for guiding its courses of

FORMULATING ORGANISATIONAL MISSION

Every organisation develops some kind of mission, either explicitly or implicitly; either written or
unwritten. However, for a large organization where face-to-face interaction is not possible
among organisational member or outsiders related to it, it is better to have mission explicitly
expressed and in written form. In formulating such a mission, two factors are important which
must be taken into consideration: components of mission and mission statement.

Components of Mission. The first basic factors in mission formulation is the determination of
its various components. Though this issue will be discussed later owing to divergent opinions
about these components, here, it suffices to say that mission should include the beliefs,
assumptions, and desires of the following types:

1. Entrepreneur’s self-concept of the business can be communicated and adopted by

employees and stakeholders.

2. The organisation will be able to satisfy the entrepreneur's needs and aspirations which
he seeks to satisfy through the organisation.

3. The organisation will create favourable public image which will result in contributions
from environment.

4. The organisation can grow and be profitable than just survive in the long run with the
support of various constituents.

5. The product and service offered by the organisation can provide benefits at least
equal to its price.

6. The product or service can satisfy the needs of the customers not adequately served
by others presently.

7. Technology used in producing product or service will be cost and quality competitive.

At the initial stage of an organisation, the above assumptions form the part of mission in
a definite way. As the organisation grows or is forced by environmental factors to change some
parts of its mission, Q1ere may be need for redefinition of these parts. However, the revised
mission will reflect the same core factors like growth perspective, image of the organisation,
needs and aspirations of entrepreneur.

Mission Statement. Mission statement is the description of organisational mission. Explicit

mission statement is desirable as it serves the purpose of communicating to the organisation's
members about the corporate philosophy, character and image of the organisation which govern
their behavior in the organisation. Further, section of the society dealing with the organisation
knows well in advance as how to interact with the organisation. Therefore, while framing the
mission statement, following points should be taken into consideration so that it serves the
purpose for which it is prepared.

1. Mission should be clear, both in terms of intentions and words used.

2. It should be feasible, neither too high to be unachievable nor too low to demotivate the
people for work.

3. It should be precise but explanatory, neither too narrow so as to restrict the

organisation's activities, nor too broad to make itself meaningless.

4. It should be distinctive, both in terms of the organisation's contributions to the society

and how these contributions can be made.
COMPONENTS OF MISSION

Identifying various components of a mission, even in the case of business

organisations, is quite a difficult task because of the differences in opinions about the exact
scope of a mission statement and, consequently, the various elements which should be
included in it. These differences exist at the conceptual as well as practice levels. We shall see
some mission statements

of companies to find out such differences. A perusal of mission statements of 21 companies,

both Indian and foreign, by this author suggests that differences among these statements exist
on following lines:

1. Differences exist on the components of mission; most of the companies include

organisation's self-concept; organisation philosophy that is used in dealing with various
stakeholders, and public image that they want to project. Few companies include long-term
organisational objectives in terms of growth, survival, and profitability. Still fewer companies
include nature of their business in terms of products/services offered or to be offered, type of
market segment to be served, and type of technology used.

2. Differences also exist in terms of the type of detail that is provided in mission statements.
Some companies define their mission in quite elaborated form running into two pages; others
prefer to keep it quite brief covering half a page or even lesser.

Though this finding cannot be termed as comprehensive, this reflects the situation that prevails.
In the light of these differences, let us go through the various elements which are to be included
in a mission statement and the implications of including these elements. These elements are as
follows;

1. Organisation's self-concept,

2. Organisational philosophy,

3. Organisational image,

4. Long-term objectives, and

5. Nature of business.
 Organisation's Self-concept

Before defining organisation's self-concept, let us see its implications in the context of an
individual Self-concept of an individual deals with his explanation of "who I am." Defining of this
self-concept gives him meaning about his personality and through this, the type of behavior he
should engage in. This self-concept develops in him through interaction in the society and
defines his identity. This identity differentiates him from other individuals.

Like an individual, an organisation also has self-concept as' it is a collectivity of individuals.

Organisation's self-concept is not developed in the way it is developed in an individual through
interaction with others.

Theoretically speaking, organisation's self-concept must reflect the aggregation of self-concept

of all individuals who create and sustain it.

However, in practice, it is developed by the key decision makers, may be promoters (mostly)
and other key decision makers. Thus, in essence, it reflects the self-concept of these decision
makers. In defining the self-concept of an organisation, the pertinent questions are:

1. What is organisation's role in industry? Does it play the role of leadership along some
dimensions or will it be a follower?

2. Does it act as a catalyst or follow industry conventions?

Both these questions taken together decide the strategic position of the organisation in industry
or in the economic system of a country. For example, self-concept of Reliance Industries
Limited says, "growth is the way of life at Reliance." Kelley has summarised the role of self-
concept as follows:

1. Organisation's self-concept is based on management perception of the way others (society)

will respond to the organisation.

2. Self-concept will function to direct the behavior of people employed by the organisation.

3. The actual response to the organisation will in part determine its self-concept.

4. Self-concept is incorporated in the organisational mission statement to be explicitly

communicated to individuals inside and outside the organisation that is to be actualized.
 2. environmental analysis

Industry Analysis
An industry is defined as a group of organizations that offers a similar product or class of
products that are close substitute of each other. The industry can be defined at broad level or
segment level. For example, when we talk of automobile industry, we include all types of
products. At the second level, we can define automobile industry in terms of products that
perform different functions; for example, commercial vehicles, passenger cars, and two
wheelers. If we take two-wheeler segment, it can be classified as motorcycles, scooters, and
mopeds (with their different variants). Here, these three different product groups have close
substitutes as they perform similar function. that is personal transport. Though car segment may
also perform the function of personal transport (some cars may be used as taxies also), these
cannot be termed as close substitute of two wheelers because of different customer segment
based on price. In analysing the industry, therefore, this aspect must be defined. Industry
analysis can be undertaken by analysing the following factors which determine the
comprehensive nature of an industry:

1. Industry setting,

2. Industry structure,

3. Industry attractiveness,

4. Industry performance.

5. Industry practices

INDUSTRY SETTING
Industry setting deals with the pattern of industries in terms of their stage of evolution and
maturation as well as geographical dimension. On the basis of these, Porter has classified the
various industries into five categories:

1. Fragmented industries,

2. Emerging industries,

3. Industries undergoing a transition to maturity,

4. Declining industries.

5. Global industries.
1. Fragmented Industry. A fragmented industry is one which is scattered at numerous places
with each place serving the local markets. There may be number of players in the industry.
However, since the production technology is mostly non-mechanised, expansion of the industry
beyond certain geographical area poses problems. Non-mechanised farm equipments, pottery,
etc., fall in this category. Since industry players cater to a small area, their competitive
advantage has narrow potential to reap large amount of benefits.

2. Emerging Industry. An emerging industry is one where market for productjs exists in latent
form and it materialises later. In fact, most of the industries at one point of time, have been
emerging ones. For example, computer industry, at one point of time, was emerging industry in
the form of various means of calculation such as abacuses, slide rules, and large adding
machines. Necessities of all these have led to the emergence of computers for faster
manipulation of data. In emerging industry, buyer preferences scatter evenly and a company
may have three options to design a product for differentiation and competitive advantage. First,
the new product can be designed to meet the preferences of one part of the market.

Second, two or more products can be launched simultaneously for two or more parts of the
market. Third, the new product can be designed for the middle of the market.

3. Maturing Industry. Growth occurs in an industry over the period of time which ultimately
leads to its maturity. When growth occurs in the industry, it attracts many competitors and,
eventually, they cover the entire market segments. In fact, they go further and invade others'
segments.

Since growth rate of the industry does not match the growth rate of competitors, they focus on
cutting the market shares of each other through various tools of differentiaton and competitive
advantages. For example, in India, growth rate of oral care product is much lower than the size
of expansion of different competitors. With the result, each competitor has concentrated on
cutting the market shares of other and, in this process, has cut the profitability of all.

4. Declining Industry. After the maturity of an industry, it may start showing declining trend in
its total market size. This may happen either because of decline of society's needs for the
product or availability of substitute product or both. For example, while cloth washing need of
the society has remained the same, demand for oil-based laundary soaps has diminished fast
because of their replacement by synthetic-based washin system. When a new product emerges
as a substitute to an old product, a fresh cycle begins. In a declining industry, competitors do
not go for any additional differentiation and competitive advantages as they see no opportunity
in these. Many of them prefer either to leave the market or come out with emerging products.

5. Global Industry. A global industry is one in which the strategic positions of competitors in
major geographic or national markets are fundamentally affected by their overall global
positions. A global firm (often called multinational or transnational) operates in more than one
country offering similar products and enjoy certain competitive advantages over domestic
competitors because of differentiation based on cost, quality product features, brand image, or
other features. With the liberalisation 0f world economy, more and more industries are
becoming global.
 INDUSTRY STRUCTURE
Industry structure essentially means the underlying economic and technical forces operating in
an industry. It consists of the nature of competition based on number of competitors and their
roles and product differentiation as shown in Figure

When number of sellers and type of product differentiation are combined together, there are five
types of industry structure:

1. Pure monopoly,

2. Pure oligopoly,

3. Pure competition,

4. Differentiated oligopoly, and

5. Monopolistic competition.

Each type of industry provides different types of opportunities and threats and
requires different types of strategic approaches. Let us see how these take place.

Pure Monopoly. Pure monopoly is characterised by the situation in which there is only one
seller in the market. Therefore, he decides the marketing conditions including its performance.
For an organisation to continue as a monopoly in the long run, there must be factors which
prevent the entry of other organisations in the field. Since there is only one seller, product
differentiation is not required. Usually, such organisations exist in public sector engaged in
utilities. Indian Railways at the central level and State Electricity Boards at state levels are
examples of such organisations.

Pure Oligopoly. The term oligopoly comes from the Greek words oUgos and polis and literally
means few sellers. There are few sellers in pure oligopoly and there is no product differentiation
by these sellers. However. there is no precise limit on the number of sellers that an industry can
have to be characterised as pure oligopoly. The key issue is not the number of sellers but the
reaction of sellers to one another. Since the product is not differentiated, any price change by
one sellers affects other sellers because demand is price elastic apart from other determinants
of demand. Pure oligopoly exists in some industries, for example. in heavy commercial vehicle
industry in India, there are two players-TELCO and Ashok Leyland.Therefore, both these
compete on price and location basis.

Pure Competition. Pure competition, also known as perfect competition, is characterised by

the existence of large number of sellers offering the same product. Since product differentiation
is not possible, product price plays a significant role in the industry. Further, since determination
of the product price is not within the control of a single seller, the higher profit emerges due to
better operational efficiency rather than strategic focus. Most of the commodity industries like
sugar, steel, loose tea, etc. fall in this category.

Differentiated Oligopoly. A differentiated oligopoly exists where number of sellers in the

industry is limited but they offer product which can be differentiated from others. Such
differentiation can be made on the basis of additional product features, styling, quality, delivery,
after-sales service, price, etc. depending on the nature of the industry concerned. Passenger
car industry is a kind of oligopoly in which number of competitors is very limited and each
competitor positions its cars on some unique selling propositions though most of the cars falling
in a price band have same functionality. Similar is the case with many other consumer durables
like white goods or mechanised farm equipment. Even some companies operating in
undifferentiated oligopoly try to move through product differentiation to a limited extent. For
example, TISCO has extended its production process to have more value-added products and it
differentiates these based on the value addition.

Monopolistic Competition. Monopolistic competition is characterised by the existence of a

large number of sellers in a product group with each seller differentiating its product on some
basis from that of others. Monopolistic competition has a combination of both monopoly and
pure competition. It has the elements of monopoly because the product is differentiated in such
a way that it has very high customer loyalty and the company concerned can operate on the
basis of monopoly. It has the elements of pure competition as there are numerous sellers which
operate in the same product group. The basic focus for competing in a monopolistic competition
industry is to put emphasis on product differentiation which ultimately determines the profit
performance of a company. Most of the consumer industries with branded products fall in this
category.

INDUSTRY ATTRACTIVENESS
Industry attractiveness consists of factors prevailing in the industry concerned which
affect the profitability of an organisation favourably or unfavourably. An industry is considered
attractive that offers scope for earning profit if the relevant conditions imposed by it are met to a
reasonable degree. Industry attractiveness is determined by the following factors:

1. Nature of demand,

2. Industry potential,
 3. Profit potential,and

4. Entry and exit barriers.

Nature of Demand. The analysis of demand in terms of total market size in which the
organisation is presently operating or plans to' enter gives the scope of its present and future
business. If the industry demand is increasing because of certain factors like increase in
population, increase in income, change in tastes, etc. the industry becomes attractive. On the
other hand, if the demand is decreasing either because of industry being at declining life-cycle
stage, or because of substitute products, it is not attractive. In demand analysis, pattern of
demand is another important factor. Demand may be affected by seasonal and cyclical
phenomena. To the extent, industry demand is affected by seasonal and cyclical phenomena, it
becomes less attractive.

Industry Potential. While nature of demand in an industry deals with existing pattern, industry
potential deals with the scope of business that it offers at present and in future. In turn, this
depends on the total industry ~sale potential. A high-volume industry has much more potentia~~
low-volume industry because the former can accommodate large number of players and
capturing a large market share pushes the sale at high level. For example, in the oral care
industry, toothpaste can be considered as high volume industry but that is not the case with
toothpowder segment.

Profit Potential. Profit potential is related to the existence of possibility of earning targeted
volume of profit. Though profit volume is related to sales 'olume and both move together, it is
the rate of profitability that matters.Generally, knowledge-based industries like consultancy,
information technology, etc., offer higher profitability; industries where product :lifferentiation
exists offer higher profitability as compared to commodity industries.

Entry and Exit Barriers. Every industry has some entry barriers to new entrants and exit
barriers to the existing players. As we shall see later in llis chapter, there may be numerous
entry barriers such as economy of scale of operation, investment requirement, degree of
product tifferentiation, cost disadvantages, government policy, etc. depending on the :J.ature of
an industry, these factors act as entry barriers in different forms. In the same way, there may be
exit barriers also for the existing companies. for example, if a company exits from industry, it
has to pay some cost hich will depend on the desirability of putting the existing production/
operating facilities to the alternative uses; If this feasibility is low, cost of exit will be high.
 INDUSTRY PERFORMANCE
idustry performance is related to the current and future factors which . termine the performance
of an industry vis-a-vis other industries.performance of an industry is measured, generally, in
terms of the following factors:

1. Profitability,

2. Operational efficiency,

3. Innovation, and

4. Technological advancement.

Profitability. Industry performance is generally measured in terms of profitability either related

to sales or investment. Though both these may move in the same direction in an industry. these
may give contrasting conclusions if two or more industries are compared. For example. a highly
capital-intensive industry may show high profitability in relation to· sales as compared to a low
capital-intensive industry. But this situation may change if profitability is related to total
investment. Therefore. both the parameters, of profitability should be taken into consideration.

Operational Efficiency. Operational efficiency describes input-outpu' relationship. that is. what
amount of output is achieved by using a given amount of input. Operational efficiency depends
on man-machine ratio manpower productivity. level of technology. infrastructure specific t
industry concerned. raw material quality and availability. and so on. In India, operational
efficiency in automated technology industries is higher acompared to semi-automated or manual
technology.

Innovation. Innovation refers to any product or idea that is perceived someone as new. The
idea may have a long history but it is an innovation' the person who sees it as new. An
innovation takes time to spread in social system through the process of innovation diffusion.
Through th process. the new idea spreZids from its source of invention to its ultimausers or
adopters. In some industries. rate of innovation is higher compared to others. Such an
innovation may be in the form of adding m features in a product to make it more valuable (like
frost-free refrigerator introduction of different marketing channel (teleshopping). and so
Industries having innovation provide opportunities for differentiation.

Technological Advancement. Technological advancement is concerned with the rate of

development of new technologies and their adoptio creating products and services. High rate of
technological development in industry creates entry barriers. It also affects the existing compe
equilibrium in the industry as a company with new technology enormous competitive advantage
in the form of cost and product feat For example. introduction of four-stroke engines in two
wheelers created several advantages over two-stoke engines.
 INDUSTRY PRACTICES
Industry practices refer to what a majority of indutry players do with regard to pricing,
distribution. promotion. and research and development.factors may vary from industry to
industry depending on the natur example, pharmaceutical industry spends more money on R&D
as compared to fast-moving consumer goods industry. Thus, to analyse particular industry,
practices relating to the following aspects sho analysed:

1. Pricing

2. Distribution.

3. Promotion,

4. Research and development.

Pricing. Practices relating to price fixation and various benefits offered which, consequently,
result Into reduction of effective price of a product are significant factors in detern:ining
competitiveness. For example, in FMCG industry, discount rate in different forms is very
significant. Such discounts are not in the form of price discount but in the form of offering extra
product like 'buy one-get one free', '25 per cent extra product at the same price', 'buy one basic
product get supplementary product free', and so on. In certain consumer durable industries,
price discount has become a regular feature, for example, luggage industry. In certain
industries, price discounts are offered on certain festivals like Diwali, Holi, PongaI. etc. These
practices are not adopted just to beat the impact of slowdown in industry but to satisfY the
consumers' bargaining instinct.

Distribution. Distribution system specifies the channel through which a producer reaches its
ultimate customer. There may be direct marketing or it may be through a number of
intermediaries-carrying and forwarding agents (C&F agents), wholesalers, retailers, and
customers. For example, in textile industry, the latter system of marketing prevails though some
companies have opened their own retail stores like Reliance and Raymond. In many consumer
durables and consumer capital-goods industries, many companies adopt the practice of billing
customers directly in order to avoid the incidence of local taxes in the form of salex tax, octroi,
and other taxes. This practice takes place in those cases where the incidence of local taxes is
very high, for example, passenger car, air conditioner, etc.

Promotion. Promotion includes the various. activities which a company undertakes to make its
product accessible and available to target customers. There are variety of ways through which a
company promotes its product like advertising. personal contacts, shop fairs, and so on. The
pertinent issue in this context is the analysis of practices followed by industry leader and
followers so that a suitable promotion mix can be adopted.
Research and Development. Research and development (R&D) consists of activities through
which either a new product can be developed or an existing product can be improved so that it
becomes more useful. R&D can also be undertaken to absorb a new technology. R&D activities
and, consequently, R&D expenditure, vary along industries, for example, R&D expenditure is
much higher in pharmaceutical industry as compared to commodity industries. However, within
the same industry, R&D expenditure varies along companies, for example. Ranbaxy, Cipla, Dr.
Reddy, and similar other companies in pharmaceutical industry spend more than five per cent of
their revenues on R&D. This percentage is quite low in the case of formulators within the same
industry.

Competition Analysis
Alongwith analysing industry, competition analysis should also be taken to understand the exact
nature of opportunities and threats that the particular industry offers. In analysing competition,
two types of analysis are required.
These are:
1. Forces shaping competition and
2. Competitor analysis.

FORCES SHAPING COMPETITION

Often competing organisations talk about the nature of competition in terms of their
existing competitors. To some extent, this may be true. However, competition is not manifested
only in other players; it is rooted in its underlying economics, and competitive forces exist that
go well beyond the established players in a particular industry. Customers, suppliers, potential
entrants, and substitute product all are competitors in the sense that they may be more or less
prominent or active depending on the nature of industry. Porter has identified five forces that
shape competition in an industry as shown in Figure 6.2
Thus, five forces shaping competition are:

1. Threats of entry,
2. Bargaining power of buyers,
3. Bargaining power of suppliers,
4. Substitute products, and
5. Rivalry among competitors.

1.Threats of Entry
It is a famous saying that,No business remains more attractive than others over the
long run. This happens because if the industry is very profitable. There will be entry of many
organisations in the field and position will become normal like any other industry. New entrants
to an industry bring new capacity, the desire to gain market share, and have substantial
resources. However, there are different kinds of barrier for newcomers in a field. If these
barriers to the entry are high and a 'newcomer can expect sharp retaliation from the entrenched
competitors, obviously he will not pose a serious ,threat of entry. There are six sources of
barriers to entIy.

1. Economies of Scale. The economies of scale deter entry by forcing the aspirant either to
come on a large scale or to accept a cost disadvantage. Such economies of scale may be in
the area of production, research, marketing and distribution, financing and other part of the
business.

2. Product Differentiation. Brand identification creates a barrier by forcing entrants to spend

heavily to overcome customer loyalty. Advertising, customer service, being the first in the
industry and product differences are among the factors fostering brand identification. Product
differentiation may act as powerful barrier where brand loyalty is quite high such as toilet
soaps, soft drinks, cosmetics and other personal products.
 3. Capital Requirements. The need to invest large financial resources in order to compete
creates a barrier to entry. particularly if the capital requirement is high for projects~ with long
gestation period. Capital is required not only for fixed assets but also for customer credit,
inventories and absorbing start-up losses. For example, the minimum size of urea fertiliser
plant requires a capital outlay of more than Rs. 1000 crores with a minimum gestation period
of 7-8 years. Naturally many organisations cannot cope with these requirements.

4. Cost Disadvantages Independent of Size. The existing organisations may have cost
advantages not available to potential rivals. no matter what their size and attainable
economies of scale are. These advantages can stem from the effects of the learning curve.
proprietary technology. access to the best raw material sources, assets purchased at pre-
inflation prices, etc. The experience or learning curve can work as a powerful entry barrier.
According to this concept, unit costs in many manufacturing and service organisations
decline with experience. The causes of the decline in units costs are a combination of various
elements. including economies of scale, the learning curve for labour. and capital-labour
substitution. The cost decline creates a barrier to entry because new competitors with no
experience face higher costs than established ones. particularly the producer with the largest
market share.

5. Access to Distribution Channels. The new entrants may not have access to distribution
channels enjoyed by the established organisations. The new entrants may enioy all these
only at higher costs. Therefore, they may not remain competitive. The more limited the
wholesale and retail channels are and more the existing competitors have these tied up,
tougher the entry into the industry will be. Sometimes, these barriers are so high that a new
entrant has to create its own distribution channels, as has been done by Reliance Industries
Limited.

6. Government Policy. Government policy plays a major role as entry barrier. The
government can limit or even foreclose entry to industries with such control as licensing
policy of the government is to ban entry when it feels that there is balanced demand and
supply of a particular product. The government can also play a major role by effecting
barriers through controls such as raw materials supply, price regulation, air and water
pollution standards and safety regulations. Besides these entry barriers, the existing
organisations' past reactions to the new entrants may be taken as clue for this purpose.

Experience Curve as Entry Barrier.

Besides the above factors which act as entry barriers,Boston consulting group has suggested
the use of experience curve as entry barrier. Experience curve is also termed, sometimes, as
learning curve though both differ in terms of their scope. While learning curve has a limited
scope and refers to the efficiency achieved over a period of time by workers through performing
repetitive work, experience curve is a broader concept and encompasses many factors besides
labour efficiency. The basic theme of experience curve is that there are significant performance
rewards over time as an organisation grows in size and experience, This is based on the
assumption that total cost per unit declines with additional production;value-added net
production costs decline by 25-30 per cent each time,the total production is doubled as shown
in Figure 9.2.

With accumulated production, cost per unit declines because of the following factors:
1. Economies of scale of production,
2. Labor efficiency,
3. Improved processes and methods,
4. Product redesign, and
5. Product standardization.

Experience curve cost, then, can be used by the existing competitors as entry barrier
against new entrants. Adherents to experience curve concept stress the importance of
achieving market leadership to maximize this entry barrier and take action such as price cutting
in anticipation of falling costs in order to build volume leaving little scope for new entrants. To
some extent, this is true.

For example, Bajaj Auto has created substantial entry barrier in scooter segment on the
cost basis -alone; it is considered to be the least cost producer in World in scooter segment.
With the result, many companies entered scooter segment but could not succeed and exited;
notable among them-being Scooters India, Andhra Scooters, Gujarat Scooters, and Punjab
Scooters. There are two more competitors in this segment: Kinetic Honda with different product
features-auto start and auto gear change, LML with almost similar product features. Both these
companies are not doing well as compared to Bajaj-Auto.

However, experience curve as entry barrier has several limitations and, therefore, it
cannot be used in all situations.

Limitations of Experience Curve. Experience curve as entry barrier has certain inherent
limitations. Those who take this view contend that "if first mover's advantage was to last far
ever, no new firm would appear in the list of major players in any industry." First let us test the
validity of this statement based on experiences. At the second level, we shall see the limitations
of experience curve on conceptual basis. Experiences show that many new entrants have
outperformed their old and more established counterparts. Hero Cycles have outperformed the
old entrants in bicycle industry like HIND CYCLES, TI CYCLES, SEN RALEIGH, Atlas Cycles,
and Avon Cycles by a big margin. In motorcycle sector, Hero Honda outperformed the earliest
entrants-Escorts with RAJDOOT and Enfield India with Bullet and Royal Enfield. In car segment,
MARUTI UDYOG has undone two early rivals-Premier Automobiles with Fiat and Hindustan
Motors with Ambassador. Reliance Industries, considered as pigmy by then competitors
ORKAY, SHAKTI, SUBHASH, etc. has shown them the way for painful exit. Business scene is
full of such experiences which show that experience curve does not act as entry barrier. If this is
so, it must have logic. From logical and conceptual point of view, experience curve has following
limitations as entry barrier: -

1.Experience curve cost is based on operational efficiency and not on any strategic positioning.
Operational efficiency can easily be emulated by a new entrant through benchmarking and other
tool. Therefore, the Ihnd of operational advantage enjoyed by early entrant does not remain
advantageous.

2.As an organization becomes older, there is tendency to develop resistance and old practices
are hard to change even if necessitated by environmental changes. For example, Bajaj Auto
has experienced the resistant behaviour of its workers at PUNE plant and shifted its plant meant
for capacity expansion to a new site which was originally planned to be commissioned at PUNE.
On this phenomenon, MADHUR BAJAJ, Managing Director of the company commented, "the
Pune plant is fully saturated. We wanted a new culture. We saw resistance to change at the
existing plant. We shall take new workers at the new place,

3.The experience curve advantages can be nullify by a new entrant through better technology
and processes not available to old rival which bases its strategy on experience curve. Then,
these new technology and processes create a new experience curve. For example, Hero Honda
has created advantages over others based on technology. Hero Cycles has created advantages
in terms of cost reduction by procuring various components manufactured by its allies and
manufacturers to whom it provided technical and financial support.

4. There is one inherent disadvantage of basing strategy on experience curve. If more than one
strong company is building its strategy on experience curve, the ultimate industry growth will
hamper. Because each company competes on the same basis, weaker ones will find it difficult
to survive and leave the field. Therefore, market development activities are restricted and
growth prospect is hampered.

2. Bargaining Power of Buyers

Bargaining power of buyers exerts an influence over the organisations to shape their
prices, quality of products and services offered, distribution channels used, etc. If there is a
powerful buyer group, there will be buyers market and the producers' profits will suffer. Buyer
group is powerful in the following circumstances:
 i. It is concentrated or it purchases in large volume. Large-volume buyers are
particularly potent forces if heavy fixed costs characterize the industry.
ii. If the products it purchases from the industry are standard or undifferentiated.
The buyers, when they are sure that they can find alternative suppliers, may play
one organisation against another. This may happen with industrial products.
iii. If the products it purchases from the industry form a component of its product
and represent a significant proportion of its costs, the buyers are likely to shop for
a favourable price and purchase selectively, for example TV. picture tubes or
automobile components. However, if the product sold by the industry is a small
fraction of buyers' costs, they are usually much less price-sensitive, for example,
nuts and bolts for light engineering industry.
iv. If buyers earn low profit, they will be more price-sensitive. In case of their high
profit, they will be less price-sensitive.
v. Where industry's product is unimportant to the quality of buyers' product, they will
be more price-sensitive.
vi. If the buyers pose a problem of backward integration, they will dominate in
dealing with the industry in such a case. Such possibility is more in the case of
textiles, automobiles, etc. However, sometimes the industry itself may pose
problem of forward integration and may become more powerful in dealing with its
customers.

3 .Bargaining Power of Suppliers

Suppliers can exert bargaining power on participants in an industry by raising prices of

goods and services, thereby they can affect the profitability of the incumbents of the industry.
The bargaining position of supplier group depends on a number of characteristics of its market
situation and on the relative importance of sales to the industry as compared with overall
business. A supplier group is powerful in the following situations:

a. If supplier group is dominated by few organizations and is more concentrated

than the industry it sells to,its bargaining position is better. For example, in case
of polyster yarn industry, supplier group is dominated by Reliance Industries
while buyer group is more fragmented in the form of numerous power loom
organizations; the company enjoys better power to fix its product price and other
terms and conditions.

b. If product of supplier group is unique or differentiated. It can exert greater

pressure. For example,in the field of lamitube packaging. Essel Packaging enjoys
considerable bargaining power because its product is highly differentiated on
quality basis.

c. If supplier group has in-built switching cost. it .has considerable bargaining

power. Switching costs are fixed costs that buyers face in switching from one
 supplier to another. These arise because a buyer's product specifIcations tie it to
a particular supplier or limited number of suppliers. For example Munjal Showa
(Hero-group company) manufactures shock absobers for new generation four-
wheelers and two-wheelers; many auto companies have tied their requirements
with it.

d. If supplier group supplies a product which does not have any substitute. It enjoys
considerable bargaining power. For example. Most of the State Electricity Boards
fall in this category.

e. If supplier group poses a threat of forward integration. it has considerable

bargaining power. For example. a TV picture tube manufacturer can pose the
threat of forward integration by extending its production chain to include
manufacturing of TV.

f. If the industry to which a supplier group supplies is not important to the former. it
can exert pressure. This may happen if the target buyer group's demand for
product is insignificant.

4. Substitute Products

The amount of competition in an industry depends on the substitutability of products of

the industry. By placing a ceiling on prices it can charge. Substitute products or services limit
the potential of an industry. A very classic example can be taken of jute industry which has been
outstripped by petrochemical-based products as packing materials. There are numerous such
examples where product substitutes have affected the growth of industry. Substitute products
that deserve the most attention strategically are as follows:

Products that are subject to improving their price-performance trade off with the industry
product pose significant problem to the industry concerned. For example. in packaging.
polysack industry has inflicted loss on jute bag industry because of its price-performance trade
off; it offers bags with better functionality at about the same price.

If the product is being produced by an industry earning high profit. Threat for substitute
product is high. Higher threat is generated because more attention is paid to find out the
substitute of the product earning high profit.

5. Rivalry for Position

Various factors, discussed above, are mostly external form of competition and operate
as homogenizing factors for all the competitors in an industry. Competition from within that is
among different players is the most crucial factor which every strategist should take into
account. Rivalry among existing competitors takes the familiar form of jockeying for position,
that is, increasing market share at the cost of competitors. Intense rivalry is related to a number
of factors in an industry which are as follows:
 1. There are numerous competitors in an industry and all of them are trying for the. same
end-result, that is, increasing their sales and capturing higher market share.
2. Often industry growth is slower as compared to the rate of growth in product supply
offered by numerous competitors. With the result, rivalry becomes keen among competitors.
3. The product may lack differentiation and buyers are likely to switch over from one
brand to another based on price-performance relationship.
4. In the case of perishable products, there is urgency to sell as quickely as possible in
order to avoid product obsolescence. This brings intense rivalry among competitors.
5. When exit barrier is high because of investment locked up in specialised assets, the
companies have to keep their operation on even if they are incurring losses. In order to reduce
these losses, companies may go for intense marketing.
6. Different competitors use different strategies based on pricing. product innovation,
promotion, and other forms of differentiation. Each of them has different idea about how to do
business, how to compete. and how to r n head-on into each other.

COMPETITOR ANALYSIS

Analysis of forces shaping competition in an industry is basically industry approach of analyzing

competition. This must be supplemented b." competitor analysis because the outcome of fight
for market share L ultimately determined by competitors' behavior. In an industry competitors
are. those companies that satisfy the same customer need, foe ample, all companies in soft
drink industry attempt at satisfying the same customer need though their product positioning
may differ. In analyzing competitors, a company faces two types of issue:
1. Identification of competitors and
2. Competitors' approach
Identification of Competitors
In an industry, there may be several types of competitors depending on the industry
structure. Porter has grouped various competitors into three classes based on three
dimensions: strong or weak, close or distant, and good or bad. A strong competitor is one which
holds substantial strategic advantages and substantial market share in an industry. For
example. ITC in cigarette or Bajaj Auto in scooter. A weak competitor is one which does not
have any specific strategic advantage and acts as a follower. A close competitor is one which
resembles with another company. For example, Coca-Cola and Pepsi in soft drink. Most of the
companys focus on close competitors. A distant competitor is one which operates in the same
industry group but differentiates its product offerings. For example, Hindustan Motor in car
industry. A good competitor is one which. Adheres to industry norms and rules; it is not involved
in unreasonable price cutting or similar other tactics to gain market share. A bad competitor is
one which tries to buy market share rather than to earn it; it takes large risk by creating
overcapacity to upset industry equilibrium. Such a competitor may be called as aggressive one.
It is not desirable to name companies in these two categories because of ideological
connotation but there are many such companies.

Competitors' Approach
After identifying the companies, their approach in competing in the industry should be
analyzed. For analyzing competitors' approach, Wall and Shin have identified the various-
factors on the basis of which a competitor may be analyzed. These factors are: pricing,
expansion plans, competitive plans, promotional strategy, cost data. Sale statistics. Research
and development, product styling, manufacturing processes, patents and infringements,
financing and executive compensation.
1) Thus, to analyze competitors in the industry concerned. Strategists should
search the answers of the following questions:
2) What are the strategic strengths and weaknesses of their competitors in the
areas of marketing, financing and managerial practices?
3) What are the prices charged by the competitors and what price does their
organization charge?

4) To what extent are products from different competitors being differentiated on

various factors, such as price, product positioning,distribution channels, etc.?

5) What are the cost and other advantages/disadvantages of their competitors?

6) What are the areas uncovered by the competitors, both in respect of

geographical location and customers served?

7) What is the product positioning of the competitors?

Organizational appraisal

Concept of Organisational Analysis

Organisational analysis, also known as corporate appraisal. Appraisal of lnternal factoes,audit of

organisational competence or appraising organisational competence and resources, is the
systematic evaluation of organisation's strengths and weaknesses. In a more formal way
organisational analysis may be defined as follows:
 “organisational analysis is the process through which strategists and managers analyse
the various factors of their organisation to evaluate their relative strengths and
weaknesses so as to meet the opportunities and threats of environment”

Managers take various organisational factors such as production/operations, marketing, finance,

human resources, practices, etc. to identifY its strengths and weaknesses competitors, and to
match environmental requirements.

ROLE OF ORGANISATIONAL ANALYSIS

organiSatiOnal analysis can be considered as the beginning of the strategicmanagement

in the sense that organisation tries to relate itself to its environment by emphasising its strengths
and overcoming its wesknesses. Thus, the organisation will appraise only those environmental
factors which are relevant in the context of its strengths,thereby limiting the scope of
environmental variables for analysis. Thus, the organisational strengths may decide the
business which it should undertake. For example. If any organisation is quite strong in
marketing, it may concentrate on marketing activities rather than going for manufacturing and
marketing both. There are several such companies which are following this practice, examples
being Indian Sewing Machines Limited selling various sewing and knitting machines under its
brand name but produced by others; Voltas limited whose major revenues are from the
marketing of the products from other companies. Similar marketing activities have been
undertaken by various companies. This suggests that the companies can take advantages of
their strategic strengths.

Organisational analysis also enables the managers to overcome thier weaknesses.

Overcoming a weakness starts with the identification of the weakness, whether of persons or
organisations. The analysis pinpoints the weak areas of the organisation and the organisation
can take various actions to overcome it. It can adopt two methods. First, it can make its
weakness as a strong point by rearranging and reallocating its recources However, since the
resources at the option of the organisation arelimited, it cannot go for strengthening all factors
but only critical ones. second,if the first approach is not possible, the organisation can try the
alternative methods in which it may withdraw itself from the areas which are its weak points as
suggested above. Thus, the organisation can take the advantages of limited resourcev
However, what will be the combination of both these ways of overcoming weakness depends on
organisational philosophy and managerial personnel involved. Role of organisational analysis in
long-term planning has been described by Hussey as follows:

"The corporate appraisal should be one of the first steps in the process of preparing
long-term plans, and should provide both the platform from which the corporate
objectives are established and the baselines for the strategic plan. Attempting to plan
without carrying out this fundamental step is rather like trying to reach the top floor of
building without using the stairs or lift: the ascent is possible, but highly dangerous and
calls for much more effort. Omission of the basic step may lead the company to adopt
 the wrong strategy, to take decisions which at best restrict achievement of its highest
potential, and at worst lead on the road to ruin.”

THE PROCESS ORGANISATIONAL ANALYSIS

The process of organisational analysis goes through certain sequence of activities. This
process is undertaken so that the organisation reaches at a point at which it can
undertake strategic actions in the light of its strengths and weaknesses. For this
purpose, the relevant information is collected both from intemal as well as external
sources,Generally, the organisation's strengths and weaknesses are measured in terms
of its environment; otherwise, it is very difficult to suggest the degree to which a factor
can be considered as strength or weakness. For adopting criteria in respect of these, the
external information is quite helpful. For example, an organisation cannot say that its
financial position is strong unless it is aware, about its direct or other competitors'
financial position.
Thus, process of organisational analysis will proceed through a sequence of
activities as shown in Figure 8.1
1. Identification of Key Factors. Organisational analysis process starts with the
identification of key factors that can be evaluated for determining strengths and
weaknesses. The analysis should cover all aspects of the organisation. However, what
factors should be taken for consider-atioh is a question, the answer of which may not be
rigid and static. The answer will vary among organisations, and although a generalised list
can be given, a real situation would call for critical selection. These factors may be in the
area of organisation structure and management pattern, personnel, finance and accounting,
marketing, manufacturing, research and development, etc.

2. Identification of Importance of Factors. All the factors identified for the purpose of
analysis may not have equal strategic importance; some are more important, some are less
important. The relative importance of the factors depends on the nature of organisation and
its environment. Their relative importance can be determined by finding out the contributions
of each factor in the achievement of certain key results. The key result areas for the
organisation can be defined on the basis of organisational objectives towards which total
efforts are directed. Another method through which the relative importance of factors can be
measured is to relate them with critica such factors (CSFs). which are crucial for
organizational success.

3. Assessing Strengths and Weaknesses on Key Factors. Identification of key strategic

factors may lead to the assessment of organizational strengths and weaknesses in respect
of these factors. Organizational strength on any factor can be defined as the contribution
made by the factor towards the achievement of the organizational objectives. Since
 objectives have hierarchy-a lower level objective contributes to higher level objective, a
factor may not necessarily contribute directly to the achievement of overall objectives but
may contribute indirectly by achieving a lower level objective. An organizational weakness
on a factor can be defined as the negative contribution of the factor in achieving the
organizational objectives. Another way for assessing strengths and weaknesses is to make
a comparative analysis of these factors with those of the competitors. For the assessment of
organizational strengths and weaknesses, some techniques-financial analysis, key factor
rating, and functional area profile and resource-development matrix have been developed

4. Preparing Organizational Capability Profile. On the basis of the assessment of

organizational strengths and weaknesses, organizational capability profile is prepared which
shows the various strong areas of the organization. This profile can show the strengths or
weaknesses in terms of degree, either in quantity like 1 to 5 for various factors or definition
like very strong to average. However, when both strengths and weaknesses are taken in the
same profile, the positive numbers can be used for strength and negative numbers can be
used for weakness if quantitative measurement is used.

5. Relating Organizational Capability to Strategy. Technically speaking, this is not the

part of the organizational analysis; however, organizational analysis is meaningless unless it
provides a way to relating strengths to its strategy. In relating organizational strengths to
strategy, the managers can proceed in two ways. First, they undertake activities which are
consistent with their strategic strengths. Thus, rather than taking the various activities, they
can concentrate on the’ limited number of activities. In fact, that organization is more
effective whose strategy fits its environment considering---its strategic strengths than those
who do otherwise. Second, managers can undertake activities which convert their weakness
into strength. Such an action may provide synergistic advantages reducing thereby many
disadvantages. Thus, many strategic actions can be taken to. Crease organizational
strengths. The result is that over the long run, the strategy of the organization fits its
environment taking into account the strategic strengths.

Strategic Factors in Organizational Analysis

Organizational analysis starts with the identification of factors which are relevant
to pinpoint organizational strengths and weaknesses. Generally not all organizations are
strong in respect of all factors. In the same way, not all organizations, even the dying
ones, are weak on all factors. Therefore, it can be deduced that organizational strengths
and weaknesses rest upon the various factors which are important for achieving
organizational objectives. However, since the objectives of the various organizations
differ, the types of factors contributing to the achievement of the objectives may also
differ.
The basis of identification of strategic factors for organizational analysis follows
the identification of various activities necessary to achieve organizational objectives. All
activities which an organization undertakes, contribute to the achievement of
organizational objectives provided that there are no unnecessary activities. It is a different
matter that all these activities may not make equal contributions to the achievement of
 objectives. On the basis of various activities which an organization undertakes, two
approaches for identifying the strategic factors may be adopted:

1. Value chain approach.

2. Functional approach.

VALUE CHAIN APPROACH

Every organisation performs a chain of activities. These activities are nterrelated

and each activity creates a value important to the whole chain. Based on this, value chain
as a tool for idetifyig ways to create more customer value. Accordingly, every
orgariisation is a collection of activities that are performed to design, produce, market,
deliver, and support its product. The value chain identifies nine strategically relevant
activities that create value and cost in a business. These nine value-creating activities
consist of five primary activities and four support activities as depicted in Figure 8.2.2

Primary activities

Primary activities are those that are involved in creation of product or service.
IdentifYing primary value activities requires the isolation of activities that are technologically or
strategically distinct. Porter has classified these primary activities into five groups: inbound
logistics. operations. outbound logistics. marketing and sales. and service. Let us see how the
management and control of these activities resurt into efficiency thereby saving cost and adding
value.

1. Inbound Logistics. Logistic involve physical movement of any thing from one place to
anothar. Inbound logistics involve such activities as receiving. storing. and disseminating
various inputs with a purpose to transform them into outputs. Activities related to inbound
logistics are transportation. material handling. warehousing. inventory management. etc.
2. Operations. Operations include all those activities through which inputs are transformed into
outputs which an organisation sells. The activities in operations include manufacturing.
assembling. testing. packaging. etc.
3. Outbound Logistics. Outbound logistics are related to finished outputs which are in saleable
form. Various activities related to outbound logistics are collecting. storing. preparing delivery
schedules. physical distribution.
4. Marketing and Sales. Marketing and sales involve inducing buyers to buy products and
converting their intention to buy into actual sale. Various activities involved in this category are
advertising and sales promotion. channel selection. creating sales force. fixing price, etc.
5. Service. Activities related to service aim at creating value to customers and may include
various facilities related to product such as installation, after-sales service. supply of parts.
training to customers, and so on.

These primary activities are core to any organisation for creating value though they may
differ from industry to industry in terms of their importance. For example. in a service industry
like banking. these activities may differ in their relative importance as compared to a
manufacturing industry. The way these activities are performed decides the cost saving to the
organisation and value creation to its customers. For example, Japanese companies have
developed the concept of just-in-time system so far as inbound and outbound logistics are
concerned. The basic theme of this system is to have no inventory. Raw materials are bought
more frequently to be used just-in-time; finished products are produced and delivered just-in-
time. This system saves lot of costs.

Support activities
Support activities are those,that provide support to effective performance of primary
activities in value chain. These support activities are relevant to all primary activities; further, a
support activity facilitates the performance of other support activities. The support activities are
identified by isolating technologically or strategically distinct activities. In an organisation. these
activities are firm infrastructure, human resource management. tecqnology development. and
procurement.

1. Firm Infrastructure. Firm infrastructure involves such activities as general managment.

accounting. finance. legal. Secretarial. strategic planning. and all others decoupled from specific
primary or support activities but essential to the entire value chain's operations.
2. Human Resource Management. In today's competitive world. human resources are being
used as competitive differentiators. Therefore. most of the organisations have emphasised on
their human resource management which includes human resource planning. recruitment and
selection.
development and deployment of human resources: and retaining of human resources in the
organisation. Activities involved in human resource management cut across the entire value
chain-both primary and support activities.
3. Technology development. Technology development is not related merely to production
process but covers the ways of creating and improving various activities in the entire value
chain. Technology is a particular type of knowledge and relates to problem solving. Thus. every
activity that an organisation performs involves a technolofy or set of technologies and the
organisation has to take the stock of know-how for performing each activity. The level of
technology development determines an organisation's efficiency.
4. Procurement. Procurement involves obtaining purchased inputs, whether raw materials,
services, machinery, etc. Procurement activities stretch across the entire value chain because
these support every activity as every activity uses purchased inputs of some kind. Procurement
activities may be centralised in an organisation or may be grolJped on the basis of simiarity of
purchased inputs and performed by different personnel.

Using Value Chain in Organisational Analysis

In the present competitive environment, when every organisation is trying to move up in

the value chain, this approach provides the important tool for analysing value chain of the
organisation as well as of its competitors. In using value chain, the oreganisation should
concentrate on two aspects. First, it must take stock of how various activities, both primary and
support, are being performed so that contribution of each activity to achievement of
organisational objectives is measured. If a particular activity is not contributing satisfactorily, the
required changes can be initiated. Second, it is not sufficient just to evaluate the performance of
various activities individually but analysis should be made how these activities are coordinated.
The coordinative aspect of various activities is important because mere performance of a
particular activity, even though most efficiently, in isolation of other activities is not meaningful.
Many companies perform various activities efficiently but in the absence of coordinating
mechanism, their overall effectiveness is not high. The solution to this problem is to place
emphasis on integrated value chain. ln fact, many companies are reengineering their
organisational processes for performing various activities in their value chain in an integrated
way.3 How value chain is useful in generating efficiency and effectiveness in an organisation
can be seen by taking the example of Hero Cycles Limited, a Ludhiana-based Hero-Group
company. The company was the most prominent one in the Group before the formation of much
fancied Hero Honda Motors Limited.

FUNCTIONAL APPROACH

As against value chain approach, functional approach of Organisational analysis takes

into account various functional areas and evaluates these for identifying strengths and
weaknesses. The major functional areas are production/ operations, marketing, finance and
accounting, and human resources. Each of these major areas is divided into subareas, for
example marketing is divided into sales promotion, physical distribution, sales volume and so
on. Similar is the case with other functional areas. Besides these functional areas,
organisation's general management factors are also taken int consideration. Thus, in functional
approach of organisational analysis following factors are evaluated to identify strengths and
weaknesses:

1. Production/operations,
 2. Marketing,

3. Finance,

4. Human resources, and

5. General management.

In the discussion that follows, various features of these factors indicating strengths and
weaknesses have been presented. While using these features in respect of various factors, two
points should be taken into consideration:

1. These features provide a normative & suggestive list in actul practice, these factors may
vary depending on the nature of organisations.

2. Since organisational analysis is meant to relate strategy to environment, it is always

future oriented. Therefore, these factors should not be evaluated on static basis but on
dynamic basis in the context of environment. In fact, in many cases, the present
strengths may turn to be weaknesses because of environmental changes. Various
factors have been presented, here, in a sequence for the sake of convenience in
analysis and not in order of their importance.

1. Production/ Operations
Production/operations processes are the mediating factors for converting raw
materials into finished products. There are various factors which affect the internal
operations of the organisation and these factors should be taken into account while
appraising the organisation's capabilities in these areas.

1. Allocation and Use of Resources. The degree of an organisation's success or failure

depends on the degree of effective allocation and use of resources. Resources do not
mean only money, building, and plant but also the scarce resources of management
talent, capability, and technical skills. An organisation making well-balanced allocation
and use of its resources is in a better position to face challenges from the environment.
The allocation and use of resources can be balanced by taking into account the need for
various activities contributing to the objectives, their criticality, and resource
requirements.

2. Rationalisation of Resources. Another important aspect of using resources is their

rationalisation. This problem is more important in the context of multi-unit organisations.
For example, a multi-unit organisation may have many plants and offices with duplication
 of various efforts. The extent to which the duplication is avoided, the company becomes
strong as cost of duplication is a burden on the organisation.

3. Locational Pattern. Though locational pattern is affected by a large number of factors,

both economic and non-economic, it affects the operational efficiency of the
organisation. Such locational pattern can be analysed both for plants as well as for
administrative offices. The extent to which organisation's plants and offices are located
at favourable places, it stands to benefits and that is a strength for it. For example,
opening of plants in backward areas may offer various advantages because of
incentives from the government, but opening of administrative offices may not offer the
similar advantages. This is the reason why many companies go for backward areas for
establishing production facilities but open offices in well-developed areas, for example,
Fort area in Mumbai or Chowranghee area in Kolkata.

4. Production Capacity and its Use. The use of production capacity affects the
profitability of the organisation. High use of production capacity is strength but a low use
of this is a weakness because the organisation's cost of production in this case may be
very high.

5. Cost Structure. The cost structure of the product affects the organisation's profitability.
If the cost of product is high, it is a weakness. Moreover, the extent to which cost cannot
be controlled is also weakness of the organisation. Thus, low cost with high level of
controllability is a strength and high cost with low level of controllability is weakness.

6. Cost-Volume-Profit Relationship. While cost structure gives the general idea of high or
low cost, cost-volume-profit relationship suggests the profitability of the organisation at
various levels of production. If the relationship is such that it gives break even at high
level of production with low margin of safety, it is weakness for the organisation, On the
other hand, if break even point is low with high margin of safety, it is strength for the
organisation.

7. Operation Procedures. Efficient and effective operation procedures like production

design, scheduling, output, and quality control affect the internal efficiency of the
organisation. As such, these are the strengths for the organisation, and opposite of
these will be weakness because these will affect organisational efficiency adversely.

8. Raw Materials Availability. The extent to which the raw materials are critical and
scarce and are supplied from a very limited sources, the organisational functioning is
adversely affected. In such a case, the organisation does not have any control or has
very limited control over the supply of raw materials. Hence, its dependence on the
limited sources of supply of raw materials is a weakness. If the company is procuring it
materials from well-diversified sources and the materials are easily available
indigenously, its dependence is less which is a strength for it.

9. Inventory Control System. An efficient inventory control system which pinpoints on the
various aspects of materials provides strength to the organisation because it can control
and regulate the procurement of materials in such a way that its cost is minimum and
 there is no unnecessary hindrance in the production. A defective and non-existent
inventory control system is a weakness.

10. Research and Development. Research and development is an Important area

where management should concentrate because of two reasons. First, technical
collaboration with any foreign organisation lasts u to five years with an extension of three
years in exceptional cases. The government stipulates that local organisations should
develop its R&D during this period. Second, there are special tax benefits on the
expenditure of R&D and products developed out of the organisation's R&D efforts. I ,
order to take the advantages, the organisation must take R&D activities and must
evaluate as how these are contributing to the organisational produc development. R&D
activities can be evaluated in terms of amount spent OD them, number of products
developed, or number of patents registered by ~inSide R&D. A high score on these
items is strength of the organisation.

11. Patent Rights. Organisations holding certain patent rights under which they can
use some well-established brand names have certaiD advantages because they have
not to incur any extra expenditure for , promoting the brand.

2. Marketing
marketing factors are of prime importance for a business organisation as it lates
itself to its environment through marketing functions. The managers - ould appraise the
organisation in the light of various marketing factors ing into account how these factors
are contributing or not contributing to ·:Ie achievement of organisational objectives and
how long they will continue do so if the same position continues. Prominent marketing
factors taken r evaluation are as follows.

1. Competitive Competence. Business organisations have to operate in a

mpetitive field, except in the case of protective markets where markets are t defined by
individual company or market factors but by non-market ctors. The organisation's
competitive competence can be appraised on the basis of trends in market shares for
which the information can be made avialable from various outside sources as well as
through the organisation's :n marketing research department. Apart from market shares,
many other ctors also go in determining the competitive competence as described
below.

2. Product Mix. Product mix decides the various sources of revenue to the
-ganisation. This is true not only for a diversified organisation but even for ingle class. If
the revenue is coming from a single product or from very limited number of prod~cts for
a diversified company, this may be its weakness.
 3. Product Life Cycle. Product life cycle is an attempt to recognise distinct
\..Atages in the sales history of the product. Corresponding to these stages are the
various marketing opportunities and threats. Normally every product and brand has to
pass through a life cycle: introduction stage, growth stage, maturity stage, and declining
stage. Products at declining stage are the weak point for the organisation and adequate
precaution must be taken.

4. Marketing Research. Marketing research offers the information for taking

various marketing decisions in the light of the environme:qtal demand. The efficient and
effective marketing research system is a strength for the organisation because it will
enable to relate the organisation with its environment through suitable strategy.

5. Channel of Distribution. An effective channel of distribution is a strength of the

organisation because it not only distributes the products at the points where these
are needed but also provides the feedback regarding the changes in the market
forces. However, a centralised distribution channel may be a weak point because it
may weaken the organisation's position at the time of emergency.

6. Sales Force. An effective and efficient sales force closed with key customers is a
strength for the organisation because it may withstand any threat posed by the
environment. However, sales force concentrating sales efforts to a few customers may
be weakness.

7. Pricing. Pricing is a factor which affects both sales as well as revenue to the
organisation, particularly in price-sensitive markets. Though there can be different
pricing strategies in different markets and at different product life stages, these must
match with the product and market.

8. Promotional Efforts. Various promotional efforts affect the positioning of the

products in the market. They also affect the brand images as well as the general image
of the organisation. Effective promotional efforts are a strength for the organisation and
their absence a weakness.

3. Finance
Finance area deals primarily with raising. administering. and distributing financial
resources to various activities so that a proper balance is maintained and the
organisation achieves its objectives. Since the objective achievement is often expressed
in monetary terms. the areas of finance and accounting have assumed added
importance. The extent to which the organisation has effective financial I]1anagement
and accounting system. it is strong. The strengths and weaknesses in the areas of
finance and accounting can be ascertained in the following ways.

1. capital Cost. The various sources through which the organisation raises its financial
funds determine the capital cost. A proper balancing of various sources of financing
 ensures that the overall cost of capital for the organisation is low. While determining the
sources for funds. various factors can be taken into account. such as debt/ equity norm.
capital market position. profitability of organisation, and various conditions attached with
funds. A low capital cost is a strength and high capital cost is weakness.

2. Capital Structure. Capital structure of an organisation determines the scope for

flexibility in raising additional capital needed. maintaining financial leverage. and
maintaining minimum capital cost. An effective capital structure is strength which
provides for greater flexibility for raising funds and appropriating various sources of
funds so as to take advantages of trading on equity.

3. Financial Planning. Financial planning is the determination. in advance. of the quantum

of capital requirement and its forms. Thus. it determines what types of assets will be
required to run the business and how much capital will be required for this. time when
the capital is required. and from where the necessary capital will be available. If the
organisation plans all these things well in advance. it stands to benefit and thus. it is its
strength.

4. Tax Benefits. Tax benefits are partly the result of efficient flnancial planning and partly
the result of environmental variables. particlllarly government policy. If the organisation is
planning its investment pattern properly. it takes the advantages of tax benefits under
the provisions of Sections 32A, 80-1. 80- HH, 35 (2-ia), and 35(28-a). Advantages under
these provisions may reduce the tax liability of the organisation to a very low level or
even zero level. consequently improving its liquidity. Similar advantages may accrue in
indirect taxes also.

5. Pattern of Shareholding. The pattern of shareholding decides the type of threats the
organisation may face regarding its take over by another company or group. If the
shareholding is widely distributed. the company and its present management can run
things smoothly and can think in long-term perspective. Thus. wider shareholding
provides strength to the organisation but concentration of shareholding even in the
hands 0 financial institutions may be a weakness.

6. Relationship with Shareholders and Financiers. The type of relationship between the
company and its shareholders and financiers determines the type of risk that the
company can take. If such relationship is cordial. the company can go for smooth
working even in case of adversity and can undertake major policy changes. The role of
shareholders and financiers L quite important in formulating and implementing these
policies because such actions can be taken only after their approval.

7. Accounting Procedures. Efficient accounting procedures and systems for costing,

budgeting. profit planning. and auditing not only determine thathere is no
misappropriation of funds but also provide feedback for further course of action. They
provide information at the points where it is neede and the time when it is needed.
Absence of such systems provides inefficiency in the organisation and it cannot know
the way in which it is progressing.
 4. Human Resources
In organisationaI analysis, often, human resources are not given adequaimportance
because of the perception that these resources do not contributo organisational success.
This perception was valid in pre-liberalised era when most of the organisations were
operating in protected markets. However, post-liberalisation, the competitive scenario has
changed from sellers' market to buyers' market in which organisations are using human
resources as a means for developing competitive advantage. In this context, Ghoshal has
observed as follows:

"A growing number of managers in India and abroad have begun to recognise that
the fundemantal· basis of competition has begun to change. The scarce resource, and the
primary source of competitive advantage, is no longer physical or financial capital, but
human capital. As large asset-based companies like TISCO see the market value of·
pygmies like Infosys soar past theirs, the notion of competing through people has been
transformed from a fashionable and politically correct statement to a serious cause for
concern”

Similar view has been expressed by leading organisations of the country. For
example, Y.C. Deveshwar, Chairman of ITC Limited has viewed that "the secret of creating
a winning corporation lies in the appreciation of potential value of human capital and in the
ability of the distributed leadership within the company to nurture and mobilise such talent."5
In fact, one billionaire of Silicon Valley, USA has commented that "my employees are my
most imp~rtant assets. When they go home-in the evening, my networth drops to zero. "The
importance of analysing human resources is as follows:

1. Human resources handle all physical and financial resources in an organisation. Without
their efforts, these non-human resources remain idle. In this context, Likert observes that "all
the activities of any enterprise are initiated and determined by the persons who make up
that institution; plants, offices, computers, automated equipments, and all else that a modern
firm uses are unproductive except the human efforts.

2. Human resources are the source of creative energy. In today's dynamic world, creativity is
vital to every organisation. Creative thinking is the process of bringing a problem before
one's mind clearly by imagining, visualising, supposing, musing, contemplating, or the like,
and then originating an idea, concept, realisation, or picture along new or unconventional
lines. People in the organisation are the only source of such creativity. They can produce
unlimited ideas. There is no apparent limit to what people can accomplish when they are
motivated to use their potential to create new and better ideas. No other resource in the
organisation can do that.

3. Human resources can be used as a means for developing competitive advantage which
may be in the form of lower cost of production, development of products for special needs,
unique means for marketing the products, developing means for raising funds at lower cost,
etc. Since all these are done by human resources, they can be geared to achieve all these.

In analysing human resources, following factors are taken into consideration:

1. Quality of Personnel. Quality of personnel employed by an organisation is a key

determinant of its success. The quality of personnel includes their knowledge,
skills, attitudes, and motivation to work. If all these characteristics are favourable,
these are strengths as these can be used as a means for translating physical and
fmanciaI resources into outputs in a better way.

2. Personnel Turnover and Absenteeism. Personnel turnover, particularly at

managerial and technical levels, is a big problem for organisations in today's
context. In knowledge-based industries like information technology, consultancy,
etc., this problem is even more acute. Since organisations build their strategies
around the personnel available at present or available in future, retention of
personnel is a significant issue. To the extent, an organisation is able to retain its
key personnel. it has strength. Coupled with personnel turnover is personnel
absenteeism. Those organisations which are able to manage personnel turnover
and absenteeism have strengths.

3. Industrial Relations. Industrial relations is a basic element for the success of

the organisation paIjicularly in the age of frequent industrial relations problems.
Better industrial relations is strength for the organisation. The state of industrial
relations can be measured taking into account the breakdown in work because of
employee agitation or non-~ooperation, number of industrial disputes, number of
grievances from the employees, employee absenteeism and turnover, and their
willingness to accept change in the organisation.

5. General Management
Various factors discussed above are, no doubt, important but they cann work well
without the support of suitable leadership and variou management practices. These are the
integrating force of an organisatio. Therefore, strategists should analyse these factors to
identifY strengths an weaknesses. Following factors are relevant in this category:

1. Leadership. Leadership is the process of winning enthusiastic support of personnel in

an organisation. It is one of the major determinants of organisational success. Most of the
organisations which have achieved high success are characterised by good leadership,
and they place emphasis on transformational leadership as against transactional
leadership. A transformational leader inspires his followers through high vision and energy.
A transactional leader determines what subordinates need to do to achieve objectives,
classifies those requirements, and helps the subordinates become confident that they can
reach objectives.

2.Top Management Constitution and Philosophy. Top management contributes the life-
blood for the total organisation. Its constitution and philosophy are strong determinants of
organisational success. Organisation characterised by age-old and traditional
management is less likely to succeed in the environment of growing competition.
Enterprising approach of top management is also an important factor determining the
growth of the organisation. Thus, future-oriented top management having enterprising
professional approach is strength of the organisation.

3. OniSatiOna1 Image and Prestige. Organisational image and prestige affect the
organisational working by providing it various facilities and constraints-better image and
prestige providing facilities and low image and prestige providing constraints. The
measurement of corporate image and prestige, however,. is quite difficult because of the
absence of any quantitative criteria. For this purpose, various indicators can be taken into
account, such as appraisal of organisational working by third parties, willingness of
financial institutions to advance loans, customers' loyalty towards the products offered by
the company, level of satisfaction to suppliers and creditors of the company, importance
attached to the statements by the company, etc. A favourable reaction on these factors is
an indicator of better company image and prestige which is a strength for the comany.

4.Organisational Climate. Organisational climate is the internal set of attributes specific

to an organisation that may be induced from the way tl;1e organisation deals with its
members. Thus, organisation-members relationship is built upon the basis of how the
former treats the latter. Organisational climate can be measured by taking into account
how its members react to various actions, how willingly they co-operate with it in achieving
its objectives, and how satisfied they are with the organisation. A soun organisational
climate based on mutual trust and confidence and hu an consideration is a strength for the
organisation.

5. Management Practices. The extent to which the organisation follows various

management practices affects its success. High scores on managerial practices in respect
to strategic planning, objective control and evaluation system, management information
system, and manpower pI ring and succession plan are strengths of the organisation.

6. Organisation Structure. Organisation structure is network of internal relationship

through which individuals interact among themselves in the context of organisational
matters. A suitable organisation structure is sytength for the organisation. The suitability of
organisation structure is not universal phenomenon but is determined by the organisation’s
environment, technology, size, and pepole. Thus,a sutaible organitaion structure is one
which meets the demands of all these factors.

7. Organisational External Relationships. As discussed earlier, the organisation has to

work in environment where large number of factors exist. These factors affect the
 organisational operations by offering facilities and constraints to it. The extent to which the
organisation builds relationships with the factors offering such facilities and constraints
including government and other regulatory bodies, its success or failure is determined. If
its relationship with the various external forces is good, it stands to affect these forces
favourably making use of most facilities and avoiding constraints, hence strength for the
organisation.

CORE COMPETENCE

During late 1980s. C.K. Prahalad and Gary Hamel started working on the features of enduring
organisational strengths and coined the concept of core competence. According to them, core
competence is an enduring strength which has three characteristics as follows:

1. It is a source of competitive advantage in that9it makes a significant contribution to perceived

customer benefits.

2. It has a potential breadth of application to a wide variety of markets.

3. It is difficult for competitors to Lmitate.

Core competence is generally defined' in terms of special technical or product expertise.

For example, Ronda Motors of Japan has core competence in auto engines; Sony Corporation
of Japan has core competence in miniaturisation and can make any product tiny; DuPont of
USA has core competence in chemical processing; and so on. There are several such
examples. Since technologies of these companies cannot be imitated by their competitors, they
enjoy long-lasting advantages.

Apart from generating competitive advantage and refrainin competitors to imitate core
competence of another, it has the potential of being applicable in a variety of markets. Many
companies have demostrated this. For example, Honda Motors, having core competence in
auto engines, has produced cars, motorcycles, scooters, generators, etc. of the world class.
Similarly, Sony Corporation, having core competence in miniaturisation, has produced miniature
card calculqtors, pocket ..,TYs, digital watches, tape recorders and walkmans.

Acquiring core competence bi new entrant in the field is a difficult pro~owever, it does
not mean that the kind of core competence that is available to an organisation cannot be
acquired by another organisation. It can be done through heavy emphasis on research and
development or through technological tie up willi research institutes combined with developing
capacity to integrate multiple streams of technologies and the expertise to harness diverse
production skills.

DISTINCTIVE COMPETENCE
 However, core competence, defined in technological term as a tool of creating
competitive advantage, should be seen as a relative and dynamic concept rather absolute and
static one. Therefore, it generates advantage for specific period because new competitors may
come with still superior technology in future. Further, apart from technology, there are other
ways of creating competitive advantag. For example, Hamel and Prahalad have viewed in a
later publication that:

"We have to look at the organisation as a portfolio of competencies, of underlying strengths, and
not just a portfolio and business unit ..... We must also identify those core competencies that
would allow us to create new products; and we must ask ourselves what we can leverage as we
move into the future, and what we can do that other companies might find difficult,

This brings us to the concept of distinctive competence or distinctive capability.

Distinctive competence is based on the assumption that there are many ways through which
competitive advantage can be generated. Whereas core competence en s to refer to areas of
special technical and production expertise, distinctive competence tends to describe excellence
in broader business processes. Thus, it is inclusive of core competence. Thompson and
Strickland have defined distinctive competence as follows:

"Distinctive competence is the unique capability I that helps an organisation in capitalising upon
a particular o,f>portunity: the competitive edge it may give a firm in the market place."

Thus, distinctive competence is the unique feature of an organisation which cannot be

shared by its competitors. Such features may be in the form of lowering down the cost of
production, developing prodUcts for special needs, special means of marketing the products,
developing means for special sources of funds, etc. Such features may form the distinctive
competence so long as the competitors are not able to duplicate these into their efforts. To the
extent an organisation can build and nurture an astutely conceived competence in its chosen
business domains, it creates better opportunity for achieving a better competitive advantage,
resulting into better performance.

Distinctive competence helps the organisation to determine the line of action around
which efforts are directed. Thus, it helps both in strategy formulation and its implementation. At
the level of strategy formulation, distinctive competence will provide the clue for choosing the
strategy because the organisation would like to evolve its strategy around the distinctive
competence which it has built up or can build up very shortly. This way, the organisation can
focus very sharply on the strengths which are unique for it. At the level of strategy
implementation, distinctive competence helps in resource allocation. Since resources are limited
at the disposal of every organisation, identification of distinctive competence can pinpoint where
the resources will find their better user For example. Reliance Industries has built its distinctive
competent terms of conceiving, implementing, and managing large-scale projects and
mobilizing requisite resources for that. While speaking at a seminar, its Vice Chairman and
Managing Director, Mukesh Ambani has echoed, "We do not believe in core competence; we
believe in building competence around people and processes to create value."
Concept of Competitive Advantage

Competitive advantage, also known as strategic advantage. is essentially a position of

superiority on the part of an organisation in relation to it competitors. This superiority exists
because the organization has developed some competencies which meet the environmental
requirements in a better way as compared to its competitors. A more formal definition of
competitive advantage is as follows:

"Competitive advantage exists when there is a match between the distinctive

competencies of a firm and the factors critical for success within its industry that permits
the firm to outperform competitors."

It concludes, then, that competitive advantage is externally focuseced while

organisational competence is internally focused. Therefore, an organisation's competence does
not automatically lead to competitive advantage. This phenomenon can be explained by two
situations:

1. The core competence of the organisation may not be of any importance to the industry in
which the organisation is operating. There are numerous examples of this phenomenon;
organisations diversifying into non-core competence areas, failing therein and divesting such
business. For example, L&T having core competence in engineering and cement diversified in
shipping (non-core competence area), sustained losses and divested it. Metal Box, having core
competence in packaging materials, diversified into bearing and had to divest it, and so on.

2. Even if core competence has relevance in the industry segment, other competitors may have
the same strength and the particular organisation may not have any competitive advantage.
What becomes, then, important for the organisation is to have relatively greater strength in that
important factor than its competitor, For example, two competitors may enjoy low manufacturing
costs; but one with the lower manufacturing costs has a competitive advantage.

In the present-day globalised economy, an organisation's competitive advantage

should not be looked at merely in the context of internal competition but at the global level
because if an organisation has competitive advantage against domestic competitors, it cannot
be put in safe territory as it has to generate that advantage against global players in the industry
concerned. However, at the global level. the competitive advantage of an organisation is largely
determined by the national competitive advantage. Therefore, before focusing on individual
organisations competitive advantage, let us have a brief look at the dynamics of national
competitive advantage.

TYPES OF COMPETITIVE ADVANTAGE

There are different types of competitive advantage based on the nature of industry and
position of an orgaIlisation in that industry. Boston Consulting Group (BCG) has identified
different types of competitive advantage based on the number of available competitive
advantage and their size as shown in Figure 9.2.

Volume. Volume of competitive advantage exists when an organisation has very few
advantages but these are quite large in volume. The nature of industry is such that various
organisations can adopt a particular approach for developing competitive advantage. The
profitability is linked to the size of market share. An organisation can generate competitive
advantage either on cost basis or differentiation basis or not on both. For example, in luxury car
segment, product differentiation in terms of style, comfort, design, etc. is used for generating
competitive advantage and cost becomes secondary. Rolls-Royce and Mercedes-Benz
compete on this basis.

Specialised. Specialised competitive advantage exists when an organisation has the

opportunity to adopt many approaches together to generate competitive advantage. Each of
these approaches may have high payoff. For example, organisations manufacturing specialised
machinery for selected market segment can combine both approaches-low cost and product
differentiation-to be competitive.

Stalemated. Stalemated competitive advantage exists when an organisation operates in

an industry in which meaningful product differentiation is not possible and industry's cost
structure is quite rigid. For example, in the case of sugar industry, product differentiation does
not exist. On the cost front, cost of sugarcane, the most significant part of total production cost,
cannot be manoeuvred because price of sugarcane is fixed by government. Therefore, some
insignificant competitive advantage can be generated by better management of finished-product
inventory. In such an industry, profitability is not related to market share.

Fragmented. Fragmented competitive advantage exists when an organisation has many

opportunities but each opportunity has limited payoff. For example, in restaurant business, each
of the restaurants can differentiate itself in many ways but cannot have high market share. Both
large and small restaurants can be profitable or unprofitable.

Milind Lele has observed that companies differ in their potential maneuverability along
five dimensions: traget market, product, place, promotion, and price. A company's freedom of
manoeuvres is affected by the industry structure and the company's position in the industry.
Those manoeuvres that promise the highest return define the company's strategic leverage.

Approaches for Competitive Advantage

There are many approaches which an organisation can adopt to generate competitive
advantage against its competitors. These approaches are as follows:

1. Generic competitive strategy,

2. Strategic intent,

3. Benchmarking,

4. Synergistic approach, and

5. Critical success factors approach.

These approaches are not mutually exclusive or exist on either or basis but may be
adopted in combination of two or more. For example, benchmarking can be combined with any
of these approaches.

1. generic competitive strategy

A generic competitive strategy is a basic one which can be combined with other strategies.
For example, overall cost leadership strategy may be followed for a single business, vertically
integrated business, or diversifies business. A generic competitive strategy is based on the
principle that the achievement of competitive advantage is at the core of a superior marketing
strategy. It considers two dimensions: competitive base and competitive scope. By combining
both these dimensions, Porter has identified four competitive strategies as shown in figure 9.3
(His earlier model included three strategies: cost, focus, and differentiation. 6)
 Thus, there are following four generic competitive strategies:

1. Overall cost leadership.

2. Cost focus.

3. Differentiation. And

4. Focused differentiation.

1) Overall cost leadership.

Overall cost leadership strategy is based on a company's position as the industry's least
cost producer in broadly defined markets or a wide mix of products. There are two essential
features of overall cost leadership:

1. The company pursuing overall cost leadership must aggressively pursue a position of cost
leadership by constructing the most efficient scale facilities and must be good in engineering.
manufacturing, and physical distribution.

2. The company has a large market share so that it’s per unit cost is the Lowest

Overall cost leadership generates competitive advantage in the form of offering products
to customers at lower prices which helps in achieving large market share. For example,
Reliance Industries has created huge capacity in polyester, polymers. And fiber intermediaries
and in all these segments, it is the lowest cost producer thereby capturing the largest market
share. In fact, in the present competitive environment. Most companies adopt cost as the basis
of competition. Though many of them may be low cost producing companies, but everyone may
not enjoy cost leadership. Those with the least cost enjoy cost leadership. For example. In
detergent and toilet soap. Hindustan Lever and Nirma. Both emphasise on low cost but Nirma
enjoys the cost leadership position. While Nirma competes on price basis due to low cost.
Hindustan Lever competes on product differentiation basis coupled with cost.

A basic question in adopting overall cost leadership strategy without some kind of
differentiation is: is it a sustainable source of competitive advantage? It can be sustained only if
barriers exist that prevents competitors from achieving the same low cost. However, in an era of
technological development. Manufacturers constantly leapfrog over one other in pursuit of lower
cost. With decreasing national and international barriers to entry, sustaining overall cost
leadership strategy requires continuous efforts for being cost effective.

2) Cost Focus.
 In the cost focus strategy. an organisation focuses on a narrow segment of the market and
offers product at lower price than its competitors on the basis of its low cost. According to
Porter. Those companies pursuing the same strategy directed to the same target market
constitute a strategic group. The company which has clear strategy on cost dimension performs
better than others. For example. Hero Cycles concentrates on functionally useful bicycles and
offers these at the lowest price because of being least cost producer and is more successful
than other competitors. This strategy has the same risk so far as its sustainability is concerned
as overall cost leadership strategy has.

3) Differentiation.

Apart from cost, generic strategies may be developed on the basis of differentiation. Kotler
has defined differentiation as "the act of designing a set of meaningful differences to distinguish
the company's offerings from competitors' offerings.7 Thus. The product offered by a company
is perceived by customers as being different from other companies offering the similar product.
The product, being perceived as distinct, may attract higher price which results into higher
profitability. For example. Shaving blades offered by Gillette India Limited command much
higher prices as compared to its competitors' blades. In differentiation. Perception of customers
about a product being unique is important and not the officer’s perception. A product can be
differentiated on several bases: product characteristics form, features, performance quality.
Conformance quality, durability, reliability, reparability, style, designs; services-ordering ease,
delivery, installation, customer training, customer consulting. Maintenance and repair, etc.;
personnel-competence, courtesy. Credibility, reliability, responsiveness and communication;
channel-coverage, expertise, and performance; image-symbols. media, atmosphere, and
events.8 Since there are several bases of differentiation, the question arises: which differences
should be pronounced? The answer lies in the competitors' analysis which will reveal their
competitive differentiation. A company can differentiate those areas which are weak points of
the competitors. Particularly the nearest one or the areas which have been left by them. For
example, in the toothpaste market. Balsara Hygiene emphasized on clove oil as one of the
major ingredients of its Promise toothpaste. Clove oil is antiseptic (prevention of tooth decay),
anesthetic (relief of pain), and astringent (cleaning) and it is used by Indian homes through
ages.

Differentiation strategy is comparatively more sustainable as compared to overall cost

leadership. However. It requires constant analysis of competitors and their likely moves for
differentiation.

4) Focused Differentiation.

While differentiation of general nature has width. Focused differentiation is undertaken to

achieve advantage in a narrowly defined market/ customer segment. This strategy generates
advantage based on the ability to create more customer value for a narrowly targeted segment
and results from a better understanding of customer needs. For example. Various types of
hotels adopt focused differentiation strategies as each class of hotels has different customer
segments. Further. depending on the class of hotels. Each of them emphasises on some
specific but few bases of differentiation. Unlike toothpaste market or other personal products,
Customer segmentation for hotel industry is narrowly focused.

BENCHMARKING

Benchmarking is another tool which can be used to generate competitive advantage. It is

a process of identifying in a systematic way superior products, services, processes, and
practices that can be adopted in an organization to reduce costs, decrease operations cycle
time, and provide greater customer satisfaction. The concept of benchmarking has been derived
from land surveying in which it indicates a reference point called benchmark as “a survey’s
mark; previously determined position used as a reference point; standard by which something
can be measured and judged.” Sarah cook has defined benchmarking as follows:

“Benchmarking is a process of indentifying, understanding, and adapting outstanding

practices from within the same origination or from other businesses to help improve
performance.”

Process of Benchmarking

Benchmarking is a process which involves a series of steps with each step consisting
of several activities. Figure 9.5 presents benchmarking process as developed by Robert Camp.

Planning r-I Analysis r-Ilntegration H Action I-I Maturity

FIGURE 9.5: Process of benchmarking

Planning. The first step in benchmarking is its planning which involves the determination of
three elements: what is to be benchmarked? To whom will be compared? And how will data be
collected? Determination of content of benchmarking comes first and a careful analysis of what
is to be compared should be made. It may be noted that everything can be benchmarked but
that requires comparable cost. In terms of production and marketing functions, generally, the
factors included are: manufacturing process. Inventory control, warehousing and delivery
services, quality systems, product development process, marketing techniques. Understanding
of customer needs, and so on. The second issue in planning for benchmarking is the
determination of whom to compare. There may be several companies both within an industry
and outside it which can be selected depending on the size and capability of the organisation
undertaking benchmarking. The third issue in planning for benchmarking is the determination of
who will collect data and how these will be collected; is it through company's own team or
consultants? Data can be collected through various sources-primary data through opinion
.surveys, examination and dismantling, trial purchasing, customers and suppliers of
benchmarked company, or even through direct contact with the company concerned; secondary
data through various publications.
Analysis. After collection of data, an analysis is made to determine current performance gap
and projected future performance level. Present performance gap indicates the difference
between desired state of affairs and actual state of affairs. This gap provides the present status.
However, since processes go on changing, future projected performance level should also be
measured. In order to 'the take the latter, benchmarking has to be taken on continuous basis, so
that performance is constantly recalibrated to ensure superiority.

Integration. Integration is the process of using benchmarking findings to set operational targets
for change. It involves careful planning to incorporate new practices and implementing those
practices, however, incorporating required changes is not easy task to implement because there
are chances that new moves will be resisted specially when there is a departure between
current and new practices and the organisation is not innovative one.Therefore, whole change
programme must be communicated, rationality for change explained, and commitment of people
for change obtained. Meter this process is over, the benchmarked practices should be
introduced within the time frame scheduled for the purpose.

Action. Action step of benchmarking involves implementation of a specific action and

monitoring its results followed by recalibration of benchmarks. Implementation of an action
required under benchmarking may not produce the intended result immediately because of
learning period required for a new method. Therefore, result evaluation should be performed on
continuous basis. When an action is completed and produces intended result, recalibration of
benchmarks is required which involves the updating of performance in the light of new data.

Maturity. Maturity would be reached when desired best practices are incorporated in all
business processes and, thus, superiority is ensured Impact of benchmarking should be
evaluated in terms of final objective achievement such as cost reduction, customer satisfaction,
etc. However these are relative measurements and there is a need for continuous improvement
in the light of relevant environmental changes.

Competitive Advantage through Benchmarking

The above discussion shows that benchmarking is a good tool for generating superior
performance in an organisation. However; for generating competitive advantage, the
organisation has to define the factors on the basis of which it competes in the market place
because it is not possible for an organisation to excel in all areas and all geographical locations
because of resource constraints, both physical and human. Therefore, it has to define its
competitive postures in terms of product features, customer segment, and technology used-the
three elements of a business definition These three elements taken together will specify where
benchmark is required.

However, benchmarking as a means for competitive advantage has its own

limitations. Some of the more common limitations are as follows:
 1. Organisations differ in terms of their culture and values around which all
organisational processes revolve. Therefore, a particular process may work well
in an organisation but may not be suitable for another organisation. If a
benchmarked process is adopted in the latter organisation, it is likely to create
more chaos rather than efficiency. However, this limitation can be overcome, to
some extent, by making benchmarking as a gradual process in which the
organisation learns to adapt.

2. There are some operational problems in implementing benchmarked practices in

the form of lack of focus, lack of leadership, lack of perseverance, etc., though
these operational problems can be taken care off.

3. A more serious and inherent limitation of benchmarking is that a benchmarking

organisation will always remain follower of benchmarked organisation. With
geographical barriers operating, benchmarking organisation may become leader
in a limited area if it had adopted global benchmarking. But in the present era of
globalization of business, geographical barriers are losing their relevance. Where
fierce battle is on for capturing global market share, an organisation looking for
global competitive advantage cannot achieve its objectives unless it improves
upon benchmarked practices. This is the concept of present-day strategy.
Winners do the same thing differently or do different things.

Various limitations of benchmarking do not suggest that it has no relevance in

developing competitive advantage; it has but above limitations should be taken care of. At this
stage, it will be appropriate to have a look at benchmarking practices that have been adopted by
Indian companies.