STRATEGIC MANAGEMENT (KMBN 302)

UNIT II

Environmental Scanning - Internal & External Analysis of

Environment

Organizational environment consists of both external and internal factors. Environment

must be scanned so as to determine development and forecasts of factors that will
influence organizational success. Environmental scanning refers to possession and
utilization of information about occasions, patterns, trends, and relationships within
an organization’s internal and external environment. It helps the managers to decide
the future path of the organization. Scanning must identify the threats and opportunities
existing in the environment. While strategy formulation, an organization must take
advantage of the opportunities and minimize the threats. A threat for one organization
may be an opportunity for another.
Internal analysis of the environment is the first step of environment scanning.
Organizations should observe the internal organizational environment. This includes
employee interaction with other employees, employee interaction with management,
manager interaction with other managers, and management interaction with shareholders,
access to natural resources, brand awareness, organizational structure, main staff,
operational potential, etc. Also, discussions, interviews, and surveys can be used to assess
the internal environment. Analysis of internal environment helps in identifying strengths
and weaknesses of an organization.
As business becomes more competitive, and there are rapid changes in the external
environment, information from external environment adds crucial elements to the
effectiveness of long-term plans. As environment is dynamic, it becomes essential to
identify competitors’ moves and actions. Organizations have also to update the core
competencies and internal environment as per external environment. Environmental
factors are infinite, hence, organization should be agile and vigile to accept and adjust to
the environmental changes. For instance - Monitoring might indicate that an original
forecast of the prices of the raw materials that are involved in the product are no more
credible, which could imply the requirement for more focused scanning, forecasting and
analysis to create a more trustworthy prediction about the input costs. In a similar
manner, there can be changes in factors such as competitor’s activities, technology,
market tastes and preferences.

While in external analysis, three correlated environment should be studied and analyzed

 immediate / industry environment

 national environment
 broader socio-economic environment / macro-environment

Examining the industry environment needs an appraisal of the competitive structure of

the organization’s industry, including the competitive position of a particular
organization and it’s main rivals. Also, an assessment of the nature, stage, dynamics and
history of the industry is essential. It also implies evaluating the effect of globalization on
competition within the industry. Analyzing the national environment needs an appraisal
of whether the national framework helps in achieving competitive advantage in the
globalized environment. Analysis of macro-environment includes exploring macro-
economic, social, government, legal, technological and international factors that may
influence the environment. The analysis of organization’s external environment reveals
opportunities and threats for an organization.

Strategic managers must not only recognize the present state of the environment and their
industry but also be able to predict its future positions.

SWOT ANALYSIS

SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. By

definition, Strengths (S) and Weaknesses (W) are considered to be internal factors over
which you have some measure of control. Also, by definition, Opportunities (O) and
Threats (T) are considered to be external factors over which you have essentially no
control.

SWOT Analysis is the most renowned tool for audit and analysis of the overall strategic
position of the business and its environment. Its key purpose is to identify the strategies
that will create a firm specific business model that will best align an organization’s
resources and capabilities to the requirements of the environment in which the firm
operates.

In other words, it is the foundation for evaluating the internal potential and limitations
and the probable/likely opportunities and threats from the external environment. It views
all positive and negative factors inside and outside the firm that affect the success. A
consistent study of the environment in which the firm operates helps in
forecasting/predicting the changing trends and also helps in including them in the
decision-making process of the organization.

An overview of the four factors (Strengths, Weaknesses, Opportunities and Threats) is

given below-

Strengths - Strengths are the qualities that enable us to accomplish the organization’s
mission. These are the basis on which continued success can be made and
continued/sustained.

Strengths can be either tangible or intangible. These are what you are well-versed in or
what you have expertise in, the traits and qualities your employees possess (individually
and as a team) and the distinct features that give your organization its consistency.

Strengths are the beneficial aspects of the organization or the capabilities of an

organization, which includes human competencies, process capabilities, financial
resources, products and services, customer goodwill and brand loyalty. Examples of
organizational strengths are huge financial resources, broad product line, no debt,
committed employees, etc.

Weaknesses - Weaknesses are the qualities that prevent us from accomplishing our
mission and achieving our full potential. These weaknesses deteriorate influences on the
organizational success and growth. Weaknesses are the factors which do not meet the
standards we feel they should meet.

Weaknesses in an organization may be depreciating machinery, insufficient research and

development facilities, narrow product range, poor decision-making, etc. Weaknesses are
controllable. They must be minimized and eliminated. For instance - to overcome
obsolete machinery, new machinery can be purchased. Other examples of organizational
weaknesses are huge debts, high employee turnover, complex decision making process,
narrow product range, large wastage of raw materials, etc.

Opportunities - Opportunities are presented by the environment within which our

organization operates. These arise when an organization can take benefit of conditions in
its environment to plan and execute strategies that enable it to become more profitable.
Organizations can gain competitive advantage by making use of opportunities.

Organization should be careful and recognize the opportunities and grasp them whenever
they arise. Selecting the targets that will best serve the clients while getting desired
results is a difficult task. Opportunities may arise from market, competition,
industry/government and technology. Increasing demand for telecommunications
accompanied by deregulation is a great opportunity for new firms to enter telecom sector
and compete with existing firms for revenue.

Threats - Threats arise when conditions in external environment jeopardize the reliability
and profitability of the organization’s business. They compound the vulnerability when
they relate to the weaknesses. Threats are uncontrollable. When a threat comes, the
stability and survival can be at stake. Examples of threats are - unrest among employees;
ever changing technology; increasing competition leading to excess capacity, price wars
and reducing industry profits; etc.

Advantages of SWOT Analysis

SWOT Analysis is instrumental in strategy formulation and selection. It is a strong tool,

but it involves a great subjective element. It is best when used as a guide, and not as a
prescription. Successful businesses build on their strengths, correct their weakness and
protect against internal weaknesses and external threats. They also keep a watch on their
overall business environment and recognize and exploit new opportunities faster than its
competitors.

SWOT Analysis helps in strategic planning in following manner-

a. It is a source of information for strategic planning.

b. Builds organization’s strengths.
c. Reverse its weaknesses.
d. Maximize its response to opportunities.
e. Overcome organization’s threats.
f. It helps in identifying core competencies of the firm.
g. It helps in setting of objectives for strategic planning.
h. It helps in knowing past, present and future so that by using past and current data,
future plans can be chalked out.

SWOT Analysis provide information that helps in synchronizing the firm’s resources and
capabilities with the competitive environment in which the firm operates.

SWOT ANALYSIS FRAMEWORK

Limitations of SWOT Analysis

SWOT Analysis is not free from its limitations. It may cause organizations to view
circumstances as very simple because of which the organizations might overlook certain
key strategic contact which may occur. Moreover, categorizing aspects as strengths,
weaknesses, opportunities and threats might be very subjective as there is great degree of
uncertainty in market. SWOT Analysis does stress upon the significance of these four
aspects, but it does not tell how an organization can identify these aspects for itself.

There are certain limitations of SWOT Analysis which are not in control of management.
These include-
a. Price increase;
b. Inputs/raw materials;
c. Government legislation;
d. Economic environment;
e. Searching a new market for the product which is not having overseas market due
to import restrictions; etc.

Internal limitations may include-

a. Insufficient research and development facilities;
b. Faulty products due to poor quality control;
c. Poor industrial relations;
d. Lack of skilled and efficient labour; etc

ROLE OF SWOT ANALYSIS

1. Identify strengths – The analysis of the internal environment help to identify the
strengths of the firm. The internal environment refers to plans and policies of the
firm, its resources-physical, financial and human resources e.g. If company has
good relations with workers, the strength of the company can be identified
through the workers loyalty and dedication on the part of workers.

2. Identify weaknesses – A firm may be strong in certain areas, whereas it may be

weak in some other areas. The firm should identify such weaknesses through
SWOT analysis so as to correct them as early as possible e.g. Lack of capital may
be a weakness of the company, but company should try to raise additional funds
to correct the weaknesses.

3. Identify Opportunities – An analysis of the external environment helps the

business firms to identify the opportunities in the market. The business firm
should make every possible effort to grab the opportunities, as and when they
come e.g.

4. Identify threats – Business may be subject to threats from competitors and

others. Identification of threats at an earlier date is always beneficial to the firm as
it helps to defuse the same. For instance, a competitor may come up with
innovative product. This not only affects the firm‟s business but also endanger its
survival, so business firm should take necessary steps to counter the strategy of
the competitors.

5. Effective Planning – A proper study of environment helps a business firm to plan

its activities properly. Before planning, it is very much necessary to analysis the
internal as well as external environment. After SWOT analysis, the firm can list
 out well-defined and time-bound objectives, which in turn help to frame proper
plans.

6. Facilitates Organising Resources – Environment analysis not only helps in

organizing the resources of right type and quantity. A proper analysis of
environment enables a firm to know the demand potential in the market.
Accordingly, the firm can plan and organize the right amount of resources to
handle the activities of the organization.

7. Face Competition – A study of business environment enable a firm to analyse

the competitor‟s strengths and weaknesses. This would enable the firm to
incorporate the competitor‟s strengths in its working. The firm may also try to
exploit the competitors weaknesses in its favour.

8. Flexibility in Operations – The environmental factors are uncontrollable and a

business firm finds it difficult to influence the surrounding of its choice. A study
of environment will enable a firm to adjust its operations depending upon the
changing environmental situation.
PESTEL

PEST analysis is an analysis of the political, economic, social and technological factors
in the external environment of an organization, which can affect its activities and
performance.

PESTEL model involves the collection and portrayal of information about external

factors which have, or may have, an impact on business.

STEP = PEST in more positive approach.

PESTEL = PEST + Environmental + Legal
PESTELI = PESTEL + Industry analysis
STEEP = PEST + Ethical
SLEPT = PEST + Legal
STEEPLE = PEST + Environmental + Legal + Ethical
STEEPLED = STEEPLE + Demographic
PESTLIED = PEST + Legal + International + Environmental + Demographic
LONGPEST = Local + National + Global factors + PEST

Understanding the tool

PEST or PESTEL analysis is a simple and effective tool used in situation analysis to
identify the key external (macro environment level) forces that might affect an
organization. These forces can create both opportunities and threats for an organization.
Therefore, the aim of doing PEST is to:
  find out the current external factors affecting an organization;
 identify the external factors that may change in the future;
 to exploit the changes (opportunities) or defend against them (threats) better than
competitors would do.

Political factors Economic factors

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

Socio-cultural factors Technological factors

 Health consciousness  Basic infrastructure level
 Education level  Rate of technological change
 Attitudes toward imported goods  Spending on research &
and services development
 Attitudes toward work, leisure,  Technology incentives
career and retirement  Legislation regarding technology
 Attitudes toward product quality  Technology level in your industry
and customer service  Communication infrastructure
 Attitudes toward saving and  Access to newest technology
investing  Internet infrastructure and
 Emphasis on safety
  Lifestyles penetration
 Buying habits
 Religion and beliefs
 Attitudes toward “green” or
ecological products
 Attitudes toward and support for
renewable energy

 Population growth rate

 Immigration and emigration
rates
 Age distribution and life
expectancy rates
 Sex distribution
 Average disposable income level
 Social classes
 Family size and structure
 Minorities

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

Identifying opportunities and threats

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

PORTER’S FIVE FORCES MODEL

It is every strategist’s job to evaluate company’s competitive position in the industry and
to identify what strengths or weakness can be exploited to strengthen that position. The
tool is very useful in formulating firm’s strategy as it reveals how powerful each of the
five key forces is in a particular industry.

Threat of new entrants. This force determines how easy (or not) it is to enter a
particular industry. If an industry is profitable and there are few barriers to enter, rivalry
soon intensifies. When more organizations compete for the same market share, profits
start to fall. It is essential for existing organizations to create high barriers to enter to
deter new entrants. Threat of new entrants is high when:
 Low amount of capital is required to enter a market;
 Existing companies can do little to retaliate;
 Existing firms do not possess patents, trademarks or do not have established brand
reputation;
 There is no government regulation;
 Customer switching costs are low (it doesn’t cost a lot of money for a firm to
switch to other industries);
 There is low customer loyalty;
 Products are nearly identical;
 Economies of scale can be easily achieved.

Bargaining power of suppliers. Strong bargaining power allows suppliers to sell higher

priced or low quality raw materials to their buyers. This directly affects the buying firms’
profits because it has to pay more for materials. Suppliers have strong bargaining power
when:
 There are few suppliers but many buyers;
 Suppliers are large and threaten to forward integrate;
 Few substitute raw materials exist;
 Suppliers hold scarce resources;
 Cost of switching raw materials is especially high.
Bargaining power of buyers. Buyers have the power to demand lower price or higher
product quality from industry producers when their bargaining power is strong. Lower
price means lower revenues for the producer, while higher quality products usually raise
production costs. Both scenarios result in lower profits for producers. Buyers exert strong
bargaining power when:

 Buying in large quantities or control many access points to the final customer;
 Only few buyers exist;
 Switching costs to other supplier are low;
 They threaten to backward integrate;
 There are many substitutes;
 Buyers are price sensitive.

Threat of substitutes. This force is especially threatening when buyers can easily find
substitute products with attractive prices or better quality and when buyers can switch
from one product or service to another with little cost. For example, to switch from coffee
to tea doesn’t cost anything, unlike switching from car to bicycle.

Rivalry among existing competitors. This force is the major determinant on how

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

 There are many competitors;

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

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

USING THE TOOL

We now understand that Porter’s five forces framework is used to analyze industry’s
competitive forces and to shape organization’s strategy according to the results of the
analysis. But how to use this tool? We have identified the following steps:
 Step 1. Gather the information on each of the five forces
 Step 2. Analyze the results and display them on a diagram
 Step 3. Formulate strategies based on the conclusions
Step 1. Gather the information on each of the five forces. What managers should do
during this step is to gather information about their industry and to check it against each
of the factors (such as “number of competitors in the industry”) influencing the force. We
have already identified the most important factors in the table below.

Porter's Five Forces Factors

Threat of new entry

 Amount of capital required

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

Supplier power

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

Buyer power

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

Threat of substitutes

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

Rivalry among existing competitors

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

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

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

ORGANISATIONAL CAPABILITY FACTORS

FINANCIAL CAPABILITY:
These factors relate to the availability, usage, and management of funds and all allied
aspects that have a bearing on an organization capacity and ability to implement its
strategies.

 Factors related to sources of funds: capital structure, procurement of capital,

controllership, financing pattern, working capital availability, borrowings, capital
and credit availability, reserves and surplus, and relationship with lenders, banks and
financial institutions.
 Factors related to usage of funds: capital investment, fixed asset acquisition,
current assets, loans and advances, dividend distribution, and relationship with
shareholders.
 Factors related to management of funds: financial, accounting and budgeting
systems, management control system, state of financial health, cash, inflation, credit,
return and risk management, cost reduction and control, and tax .

MARKETTING CAPABILITY:
These factors relate to the pricing, promotion, and distribution of products or services,
and all the allied aspects that have a bearing on an organization capacity and ability to
implement its strategies.
 Product related factors: variety, differentiation, mix quality, positioning,
packaging, etc.
 Price related factors: pricing objectives, policies, changes, protection, advantages,
etc.
 Place related factors: distribution, transportation and logistics, marketing channels,
marketing intermediaries, etc.
 Promotion related factors: promotional tools, sales promotion, advertising public
relations, etc.
 Integrative and systematic factors: marketing mix, market standing, company
image, marketing organization, marketing system, marketing management
information system, etc.

OPERATIONS CAPABILITY:
These factors related to the production of products or services, use of material resources,
and all allied aspects that have a bearing on an organization capacity and ability to
implement its strategies.

 Factors related the production system: capacity, location, layout, product or

service design, work system, degree of automation, extent of vertical integration, etc.
 Factors related to the operations and control system: aggregate production
planning, material supply; inventory, cost and quality control; maintenance systems
and procedures, etc.
 Factors related to the R&D system: personnel, facilities, product development,
patent rights, level of technology used, technical collaboration and support, etc.

PERSNNEL CAPABILITY
Personnel capability factors relates to the existence and use of human resources and skills
and all allied aspects that have a bearing on an organization capacity and ability to
implement its strategies.

 Factors related to the personnel system: system manpower planning, selection,

development, compensation, communication and appraisal, position of the personnel
department within the organization, procedures and standards etc.
 Factors related to organizational and employee characteristics: corporate image,
quality of managers, staff and workers perception about the image of the
organization as an employer, availability of development opportunities for
employers, working condition etc.
 Factors related to industrial relations: union management relationship, collective
bargaining, safety, welfare and security, employee satisfaction and morale etc.

INFORMATION MANAGEMENT CAPABILITY:

Information management capability factors relate to the design and management of the
flow of information from outside into, and within an organization for the purpose of
decision making and all allied aspects that have a bearing on an organization capability
and ability to implement its strategies.

 Factors related to the acquisition and retention of information: sources, quantity,

quality and timelines of information, retention capacity and security of information.
 Factors related to processing and synthesis of information: database
management, computer systems, software capability and ability to synthesis
information.
 Factors related to retrieval and usage of information: availability and
appropriateness of information formats and capacity to assimilate and use
information.
 Factors related to transmission and dissemination: speed scope width and depth
of coverage of information and a willing to accept information.
 Integrative systematic and supportive factors: availability of IT infrastructure, its
relevance and compatibility to organizational needs, upgrading of facilities,
willingness to invest in state of the art systems, availability of computer
professionals and top management support.

GENERAL MANAGEMENT CAPABILITY:

General management capability relates to the integration, coordination and direction of
the functional capabilities towards common goals and all allied aspects that have a
bearing on an organization capability and ability to implement its strategies.

 Factors related to general management system: strategic management system,

processes related to setting strategic intent, strategy formulation and implementation
machinery, strategy evaluation system, MIS corporate planning system, rewards and
incentives system for top managers etc.
 Factors related to general managers: orientation, risk-propensity, value, norms,
personal goals, competence, capacity for work, track record, balance of functional
experience etc.
 Factors related to external relationships: Influence on and rapport with the
government, regulatory agencies and financial; institutions, public relation, sense of
social responsibility, public image as corporate citizen etc
 Factors related to organizational climate: organizational culture, use of power,
political processes, balance of vested interests, introduction, acceptance and
management of change, nature of organizational structure and controls etc.

ORGANIZATIONAL APPRAISAL(Extra)

The purpose of organizational appraisal is to determine the organizational capability in

terms of strengths and weaknesses that lie in the different functional areas. This is
necessary since the strength and weaknesses have to be matched with the environmental
opportunities and threats for strategy formulation to take place.

METHODS AND TECHNIQUES USED FOR ORGANIZATIONAL APPRAISAL

Internal analysis
1. VRIO framework
2. Value chain analysis
3. Quantitative analysis
a. Financial analysis (Ratio Analysis )
b. Non financial analysis (Employee turnover, absenteeism, market ranking, service
call rate, no. of patents registered per period, etc.)
 4. Qualitative analysis

Comparative analysis
1. Historical analysis
2. Industry norms
3. Benchmarking

Comprehensive analysis
1. Key factor rating
2. Business intelligence system
3. Balance scorecard

RESOURCE BASED VIEW

RBV is an approach to achieving competitive advantage that emerged in 1980s and

1990s, after the major works published by Wernerfelt, B. , Prahalad and Hamel , Barney,
J. and others. The supporters of this view argue that organizations should look inside the
company to find the sources of competitive advantage instead of looking at competitive
environment for it.

According to RBV proponents, it is much more feasible to exploit external opportunities

using existing resources in a new way rather than trying to acquire new skills for each
different opportunity. In RBV model, resources are given the major role in helping
companies to achieve higher organizational performance. There are two types of
resources: tangible and intangible.
Tangible assets are physical things. Land, buildings, machinery, equipment and capital
all these assets are tangible. Physical resources can easily be bought in the market so they
confer little advantage to the companies in the long run because rivals can soon acquire
the identical assets.

Intangible assets are everything else that has no physical presence but can still be owned
by the company. Brand reputation, trademarks, intellectual property are all intangible
assets. Unlike physical resources, brand reputation is built over a long time and is
something that other companies cannot buy from the market. Intangible resources usually
stay within a company and are the main source of sustainable competitive advantage.

The two critical assumptions of RBV are that resources must also be heterogeneous and
immobile.

Heterogeneous. The first assumption is that skills, capabilities and other resources that
organizations possess differ from one company to another. If organizations would have
the same amount and mix of resources, they could not employ different strategies to out
compete each other. What one company would do, the other could simply follow and no
competitive advantage could be achieved. This is the scenario of perfect competition, yet
real world markets are far from perfectly competitive and some companies, which are
exposed to the same external and competitive forces (same external conditions), are able
to implement different strategies and outperform each other. Therefore, RBV assumes
that companies achieve competitive advantage by using their different bundles of
resources.

The competition between Apple Inc. and Samsung Electronics is a good example of how
two companies that operate in the same industry and thus, are exposed to the same
external forces, can achieve different organizational performance due to the difference in
resources. Apple competes with Samsung in tablets and smartphones markets, where
Apple sells its products at much higher prices and, as a result, reaps higher profit
margins. Why Samsung does not follow the same strategy? Simply because Samsung
does not have the same brand reputation or is capable to design user-friendly products
like Apple does. (Heterogeneous resources)

Immobile. The second assumption of RBV is that resources are not mobile and do not
move from company to company, at least in short-run. Due to this immobility, companies
cannot replicate rivals’ resources and implement the same strategies. Intangible
resources, such as brand equity, processes, knowledge or intellectual property are usually
immobile.

VRIO FRAMEWORK

The VRIO frame work is the contribution of Barney who is created with the enunciation
of the resource-based theory.
VALUABLE: The organizational capabilities possessed by the firm that help it to
generate revenues by the capitalizing on opportunities and /or to reduce costs by
neutralising threats. Examples of valuable capabilities are : the ability to generate
amicable relationship with government or to provide high quality after –sale service to
customer.

RARE: The organizational capabilities that are possessed by the firm exclusively or just
by a few other firms in the industry .Examples of rare capabilities are :capability derived
out of an exclusive location or the presence of highly satisfied and motivated workforce.

INIMITABLE: The organizational capabilities possessed by the firms that are

impossible, very difficult or not worthwhile to duplicate or substituted by the
competitors. Examples of Inimitable capabilities are a favorites corporate image or the
ability to acquire and integrate new businesses.

ORGANISED FOR USAGE: The organizational capabilities possessed by the firm that
could be used through appropriate organizational structure, business processes, control
systems and reward systems that are present in the firm .Examples of a firm organized for
usage are : the availability of competent R& D personnel and research laboratories to
innovate new and improved products continually or the availability of potential business
partners who are competent and willing to integrate their information systems with that of
the firm .

COMPETITIVE ADVANTAGE
“the superior performance of a particular company relative to other competitors in the
same industry or superior performance relative to the industry average.” “It can also be
defined as “anything that a particular company does better compare to its competitors in
the same industry.”

Different things can be considered as competitive edge for a company, for example

greater return on assets (ROI), higher profit margin, valuable resource such as brand
loyalty or reputation or unique competencies. Every company must have at least one or
two advantage to successfully compete in the rival market. If a company can’t identify
one competitive advantage or just doesn’t possess any, competitors soon surpass it and
force such company to leave the market.

There are many ways to achieve the competitive advantage but companies mainly focus
on only two basic types of it: differentiation advantage and cost advantage. A company
that is capable of achieving superiority in cost advantage or differentiation advantage is
able to offer consumers products at lower prices or with higher degree of differentiation
and therefore, it become able to compete with its rivals.
TWO TYPES OF COMPETITIVE ADVANTAGES

Cost Competitive Advantage

The first type of competitive advantage is cost competitive advantage, which means a
company is able to provides/offers products or services to its customers for less than
competitor’s price. A company only become in the position to do so when the company
has a lower cost of doing business.

One of the best-known companies that avail cost competitive advantage

is Walmart. Walmart’s customers/shoppers know that a Walmart store will always
provide them low-prices products. Maybe merchandise has not the highest quality or the
best selection, but a given product will be provided to the customers at the lowest price in
Walmart.

Differentiation Competitive Advantage

The second major type of competitive advantage is differentiation. Differentiation
competitive advantage can be achieved when a company providing products that
customers perceive in higher value than competitors’ products and such companies are
able to charge a premium or higher prices for those products.

BMW is the best example of differentiation competitive advantage. BMW sets itself apart
from other through innovative products. Company also builds a consistent theme through
the product line and through its marketing slogan (i.e. The Ultimate Driving Machine).
This differentiation competitive advantage enabled BMW to pass Mercedes in unit sales
and dollar sales in the United States, which was a very difficult task since Mercedes had
held a significant lead in both.

HOW A PARTICULAR COMPANY MAY ACHIEVE COMPETITIVE

ADVANTAGE?
A company may achieve Competitive Advantage by the help of two given ways:

By Means External Changes

External changes include PEST factors. When these factors change, many opportunities
can appear for a company, if seized upon, could provide many benefits for company. A
particular company which is capable to respond to external changes faster than other
rival, can also gains an upper hand over its competitors. So when there is a change in
PEST factors a successful company should have the ability to respond fast to changes.

By Developing them Inside the Company

 A company can achieve differentiation or cost advantage when it develops unique
competences, VRIO (valuable, rare, hard to imitate and organized) resources, or through
innovative processes and products. When a company possesses VRIO resources it always
has an edge over its competitors due to superiority of VRIO resources. The VRIO
resources have following attributes:

1. Intellectual property (patents, trademarks, copyrights,)

2. Brand equity
3. Culture
4. Know-how
5. Reputation
6. Unique competences
7. Innovative capabilities

Pulling it all together a company must understand its competitive advantage if it wants to
leverage it and as illustrated above BMW and Walmart understand the importance of
competitive advantage and increasing their share as well as profit rapidly.

VALUE CHAIN ANALYSIS

Value Chain Analysis (VCA) A value chain identifies and isolates the various economic
value-adding activities (such as differentiating a product, lowering the cost, and meeting
customer’s needs quickly) that occur in some way in every firm. It portrays activities
required to create value for customers of a given product or service. Value chain analysis,
thus, offers an excellent means by which managers can find the strengths and weaknesses
of each activity vis-à- vis the firm’s competitors.
Primary Activities

Primary activities relate directly to the physical creation, sale, maintenance and support
of a product or service. They consist of the following:

Inbound logistics – These are all the processes related to receiving, storing, and
distributing inputs internally. Your supplier relationships are a key factor in creating
value here.
Operations – These are the transformation activities that change inputs into outputs that
are sold to customers. Here, your operational systems create value.
Outbound logistics – These activities deliver your product or service to your customer.
These are things like collection, storage, and distribution systems, and they may be
internal or external to your organization.
Marketing and sales – These are the processes you use to persuade clients to purchase
from you instead of your competitors. The benefits you offer, and how well you
communicate them, are sources of value here.
Service – These are the activities related to maintaining the value of your product or
service to your customers, once it's been purchased.

Support Activities

These activities support the primary functions above. In our diagram, the dotted lines
show that each support, or secondary, activity can play a role in each primary activity.
For example, procurement supports operations with certain activities, but it also supports
marketing and sales with other activities.

Procurement (purchasing) – This is what the organization does to get the resources it
needs to operate. This includes finding vendors and negotiating best prices.
Human resource management – This is how well a company recruits, hires, trains,
motivates, rewards, and retains its workers. People are a significant source of value, so
businesses can create a clear advantage with good HR practices.
Technological development – These activities relate to managing and processing
information, as well as protecting a company's knowledge base. Minimizing information
technology costs, staying current with technological advances, and maintaining technical
excellence are sources of value creation.
Infrastructure – These are a company's support systems, and the functions that allow it
to maintain daily operations. Accounting, legal, administrative, and general management
are examples of necessary infrastructure that businesses can use to their advantage.
Companies use these primary and support activities as "building blocks" to create a
valuable product or service.
Conducting a Value Chain Analysis

Identify activities: VCA requires a firm to divide its operations into primary and support
activity categories. Within each category a firm may typically perform a number of
discrete activities that may reflect its key strengths or weaknesses. At this stage managers
should desegregate what actually goes into various activities in a detailed manner.

Allocate cost: VCA requires manager to assign costs and assets to each activity, which is
totally different from what one finds in traditional cost accounting method.

Identify activities that differentiate the firm: Here managers should try to identify
several sources of differentiation advantage relative to competitors. Alex Miller has listed
some of these advantages.

Examine the value chain: Once the value chain has been described, managers should list
the activities that are important to buyer satisfaction and market success. Keeping costs
under strict vigil, offering value added service at each stage, doing things better than
rivals are all part of this strategy.

VCA is most effective when managers try to draw comparisons with key competitors and
improve the internal processes with a view to offer ‘value for money’ kind of services to
customers.

IFE (INTERNAL FACTOR EVALUATION) MATRIX (Extra)

IFE (Internal factor evaluation) matrix is one of the best strategic tool to perform internal
audit of any firm. IFE is use for internal analysis of different functional areas of business
such as finance, marketing, IT, operations, accounts, Human Resources and others
depend upon the nature of business and its size.

INTERNAL FACTORS
Internal factors are the outcome of detailed internal audit of a firm. Every company have
some weak and strong points, therefore the internal factors are divided into two
categories namely strengths and weakness.

HOW WE CAN DIFFERENTIATE STRENGTH AND WEAKNESS IN IFE

MATRIX?
If this question comes into mind then don’t worry its a good question and I will be
the happy man to answer this one. The strengths and weaknesses are organized in
IFE matrix in different portions mean all strengths are listed first under internal
factors and then comes the internal weakness. In case if all the factors are listed
altogether then the rating will help you out to identify internal strength and
weakness.

RATING
Rating is common word I hope you are aware of it, in IFE rating is the way out to
differentiate internal strengths and weakness. Internal weakness are further divided
in two categories namely minor weakness and major weakness same goes of the
strengths (minor strength and major strength)
There are some important point related to rating in IFE matrix.
 Rating is applied to each factor.
 Major weakness is represented by 1.0
 Minor weakness is represented by 2.0
 Minor strength represented by 3.0
 Major Strength represented by 4.0

Major weakness needs company attention to change into minor weakness then
strength and finally major strength. As compared to major strength minor
weakness need little efforts of the company to change it into strength. The range of
rating start from minimum 1.0 which is worst and maximum 4.0 which is the best
factor of the company.

WEIGHT
Weight attribute in IFE matrix indicates the relative importance of factor to being
successful in the firm’s industry. The weight range from 0.0 means not important
and 1.0 means important, sum of all assigned weight to factors must be equal to 1.0
otherwise the calculation would not be consider correct.

WEIGHTED SCORE
Weighted score value is the result achieved after multiplying each factor rating with
the weight.

TOTAL WEIGHTED SCORE

The sum of all weighted score is equal to the total weighted score, final value of total
weighted score should be between range 1.0 (low) to 4.0(high). The average weighted
score for IFE matrix is 2.5 any company total weighted score fall below 2.5 consider
as weak. The company total weighted score higher then 2.5 is consider as strong in
position.

STEPS TO DEVELOP IFE MATRIX

1. List key internal factors as identified in the internal audit process. Use a total of
from ten to twenty internal factors, including both strengths and weaknesses. List
strengths first and then weaknesses. Be as specific as possible, using percentages,
ratios, and comparative numbers.

2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all important) to each
factor. The weight assigned to a given factor indicates the relative importance of the
factor to being successful in the firm’s industry. Regardless of whether a key factor
is an internal strength or weakness, factors considered to have the greatest effect on
organizational performance should be assigned the highest weights. The sum of all
weights must equal 1.0.

3. Assign a I to 4 rating to each factor to indicate whether that factor represents a

major weakness (rating = 1), a minor weakness (rating = 2), a minor strength
(rating = 3), or a major strength (rating = 4). Note that strengths must receive a 4 or
3 rating and weaknesses must receive a 1 or 2 rating. Ratings are thus company
based, whereas the weights in Step 2 are industry based.

4. Multiply each factor’s weight by its rating to determine a weighted score for each
variable.

5. Sum the weighted scores for each variable to determine the total weighted score
for the organization.

Here are some examples of IFE Matrix.

Amazon IFE Matrix

As you can see in this examples the total weighted score value is 2.80 which means
company internal position is better.

External Factor Evaluation (EFE) matrix (Extra)

External Factor Evaluation (EFE) matrix method is a strategic-management tool often

used for assessment of current business conditions. The EFE matrix is a good tool to
visualize and prioritize the opportunities and threats that a business is facing.

The EFE matrix is very similar to the IFE matrix. The major difference between the EFE
matrix and the IFE matrix is the type of factors that are included in the model. While
the IFE matrix deals with internal factors, the EFE matrix is concerned solely
with external factors.

External factors assessed in the EFE matrix are the ones that are subjected to the will of
social, economic, political, legal, and other external forces.

How do I create the EFE matrix?

Developing an EFE matrix is an intuitive process which works conceptually very much
the same way like creating the IFE matrix. The EFE matrix process uses the same five
steps as the IFE matrix.

List factors: The first step is to gather a list of external factors. Divide factors into two
groups: opportunities and threats.

Assign weights: Assign a weight to each factor. The value of each weight should be

between 0 and 1 (or alternatively between 10 and 100 if you use the 10 to 100 scale).
Zero means the factor is not important. One or hundred means that the factor is the most
influential and critical one.  The total value of all weights together should equal 1 or 100.

Rate factors: Assign a rating to each factor. Rating should be between 1 and 4. Rating
indicates how effective the firm’s current strategies respond to the factor. 1 = the
response is poor. 2 = the response is below average. 3 = above average. 4 = superior.
Weights are industry-specific. Ratings are company-specific.

Multiply weights by ratings: Multiply each factor weight with its rating. This
will calculate the weighted score for each factor.

Total all weighted scores: Add all weighted scores for each factor. This will calculate
the total weighted score for the company.

You can find more details about this approach as well as about possible values that the
EFE matrix can take on the IFE matrix page.

EFE matrix example

Total weighted score of 2.46 indicates that the business has slightly less than average
ability to respond to external factors.

Benefits

 Easy to understand. The input factors have a clear meaning to everyone inside or
outside the company. There’s no confusion over the terms used or the
implications of the matrices.
 Easy to use. The matrices do not require extensive expertise, many personnel or
lots of time to build.
 Focuses on the key internal and external factors. Unlike some other analyses (e.g.
value chain analysis, which identifies all the activities in the company’s value
chain, despite their importance), the IFE and EFE only highlight the key factors
that are affecting a company or its strategy.
 Multi-purpose. The tools can be used to build SWOT analysis, IE matrix, GE-
McKinsey matrix or for benchmarking.

Limitations

 Easily replaced. IFE and EFE matrices can be replaced almost completely by
PEST analysis, SWOT analysis, competitive profile matrix and partly some other
analysis.
 Doesn’t directly help in strategy formation. Both analyses only identify and
evaluate the factors but do not help the company directly in determining the next
strategic move or the best strategy. Other strategy tools have to be used for that.
 Too broad factors. SWOT matrix has the same limitation and it means that some
factors that are not specific enough can be confused with each other. Some
strength can be weaknesses as well, e.g. brand reputation, which can be a strong
and valuable brand reputation or a poor brand reputation. The same situation is
with opportunities and threats. Therefore, each factor has to be as specific as
possible to avoid confusion over where the factor should be assigned.

Summary of Using the tool

Step 1. Identify the key external/internal factors

EFE matrix. Do the PEST analysis first. The information from the PEST analysis
reveals which factors currently affect or may affect the company in the future. At this
point, the factors can be either opportunities or threats and your next task is to sort them
into one or the other category. Try to look at which factors could benefit the company
and which ones would harm it.

You should also analyze your competitors’ actions and their strategies. This way you
would know what competitors are doing right and what their strategies lack.

IFE matrix. In case you have done a SWOT analysis already, you can gather some of the
factors from there. The SWOT analysis will usually have no more than 10 strengths and
weaknesses, so you’ll have to do additional analysis to identify more key internal factors
for the matrix.

Look again into the company’s resources, capabilities, organizational structure, culture,
functional areas and value chain analysis and recognize the strong and weak points of the
organization.

Step 2. Assign the weights and ratings

Weights and ratings are assigned subjectively. Therefore, it is a more difficult process
than identifying the key factors. We assign weights based on industry analysts’ opinions.
Find out what the analysts say about the industry’s success factors and then use their
opinion or analysis to assign the appropriate weights. The same process is with ratings.
Although, this time you or the members of your group will have to decide what ratings
should be assigned. Ratings from 1-4 can be assigned to each opportunity and threat, but
only the ratings from 1-2 can be assigned to each weakness and 3-4 to each strength.

Step 3. Use the results

IFE or EFE matrices have little value on their own. You should do both analyses and
combine their results to discuss new strategies or for further analysis. They are especially
useful when building advanced SWOT analysis, SWOT matrix for strategies or IE
matrix.