UNIT -1

BUSINESS POLICY, CORPORATE STRATEGY, BASIC CONCEPT OF

STRATEGIC MANAGEMENT

Overview
The greatest challenge for a successful organization is change. This threatening change
may either be internal or external to the enterprise.

The concept of strategy

The concept of strategy in business has been borrowed from military science and sports
where it implies out- maneuvering the opponent. The term strategy began to be used in
business with increase in competition and complexity of business operations.
A strategy is an administrative course of action designed to achieve success in the face of
difficulties. It is a plan for meeting challenges posed by the activities of competitors and
environmental forces. Strategy is the complex plan for bringing the organization from a
given state to a desired position in a future period of time. For example, if management
anticipates price-cut by competitors, it may decide upon a strategy of launching an
advertising campaign to educate the customers and to convince them of the superiority of
its products.

Nature of strategy
 Strategy is a contingent plan as it is designed to meet the demands of
a difficult situation.
 Strategy provides direction in which human and physical resources will be
deployed for achieving organizational goals in the face of environmental
pressure and constraints.
 Strategy relates an organization to its external environment. Strategic decisions are
primarily concerned with expected trends in the market, changes in government
policy, technological developments etc.

 Strategy is an interpretative plan formulated to give meaning to other plans in the

light of specific situations.
 Strategy determines the direction in which the organization is going in relation to
its environment. It is the process of defining intentions and allocating or matching
resources to opportunities and needs, thus achieving a strategic fit between them.
Business strategy is concerned with achieving competitive advantage.
 The effective development and implementation of strategy depends on the
strategic capability of the organization, which will include the ability not only
to formulate strategic goals but also to develop and implement strategic plans
through the process of strategic management.
 A strategy gives direction to diverse activities, even though the conditions under
 which the activities are carried out are rapidly changing.
 The strategy describes the way that the organization will pursue its goals, given
the changing environment and the resource capabilities of the organization.
 It provides an understanding of how the organization plans to compete.
 It is the determination and evaluation of alternatives available to an organization in
achieving its objectives and mission and the selection of appropriate alternatives to
be pursued.
 It is the fundamental pattern of present and planned objectives, resource
deployments, and interactions of a firm with markets, competitors and other
environmental factors.

A good strategy should specify;

 What is to be accomplished
 Where, i.e., which product/markets it will focus on

 How i.e., which resources and activities will be allocated to each product/market
to meet environmental opportunities and threats and to gain a competitive
advantage

Components of strategy
1. Scope; refers to the breadth of a firm’s strategic domain i.e., the number and types
of industries, product lines, and markets it competes in competes in or plans to
enter.
2. Goals and objectives; these specify desires such as volume growth,
profit contribution or return on investment over a specified period.
3. Resource deployment; strategy should specify how resources are to be
obtained and allocated across businesses, product/markets, financial
departments, and activities..
4. Identification of a sustainable competitive advantage; it refers to examining the
market opportunities in each business and product-market and the firm’s
distinctive competencies or strengths relative to competitors.
5. Synergy; this exists when the firm’s businesses, products, markets, resource
deployments and competencies complement one another i.e., the whole becomes
greater than the sum of its parts( 2+2=5)
Strategies can be classified into corporate, business-unit and functional
strategies.
Definition; Strategic management is the process by which top management
determines the long-term direction of the organization by ensuring that careful
formulation, implementation and continuous evaluation of strategy take place.

The strategic management process

The process can be broken down into four phases;

 Strategic Intent
  Strategy formulation

 Strategy implementation
 Strategy control

Strategic Intent involves;

 Defining the organization’s guiding philosophy & purpose or mission.

Strategy formulation involves;

 Establishing long-term objectives in order to achieve the mission.
 Selecting the strategy to achieve the objectives.
 Deciding plan of action,

Strategy implementation involves;

 Establishing short-range objectives, budgets and functional strategies to

achieve the strategy.

Strategy control involves the following;

 Establishing standards of performance.

 Monitoring progress in executing the strategy.
 Initiating corrective actions to ensure commitment to the
implementation of the strategy.

Strategic business units (SBUs)

A large organization’s activities can be segmented as business units. A business unit is
an operating unit in an organization that sells a distinct set of products to a distinct
market in competition with a well defined set of competitors. It is normally referred to
as an SBU. An organizational SBU often has the following characteristics;
 It has its own set of customers.
 It should have a clear set of competitors, which it is trying to surpass.
 It should have its own strategic planning manager responsible for its success.
 Its performance must be measurable in terms of profit and loss,

i.e. it must be a true profit centre.

e.g. K.B.C.’s SBUs include; K.B.C Kiswahili, K.B.C. English, Metro FM,
K.B.C. T.V, Metro TV etc.
Benefits of strategic management
 It provides the organization with consistency of action i.e. helps ensure that all
organizational units are working toward the same objectives (direction).
 The process forces managers to be more proactive and conscious of
their environments i.e. to be future oriented.
 It provides opportunity to involve different levels of management,
encourage the commitment of participating managers and reducing
resistance to proposed change.

DIFFERENCES BETWEEN STRATEGY AND POLICY

1. Policies are guidelines or paths of action to reach the goals, while strategies are
major courses of action or patterns of successful action to achieve the objectives.
They are intended to meet and fight against a certain competition, much larger and
apparently more powerful than the enterprise itself by using its resources in the best
possible manner.

2. A policy embraces both thought and action, while strategy concentrates mostly on
action, i.e.,it is most action-oriented.

3. A policy usually spells out a certain course of action/approach to reach the set
objectives, the strategy outlines one’s approach to meet competitive situations,
uncertainties, risk and insecurity likely to arise in the future.

4. Business policy lays emphasis mainly on long-term growth, through a set path of
action for achieving the goal; whereas strategy’s main concentration is on meeting a
competitive situation; and therefore, they have a short or medium-term
target before them.

5. Business policy is an overall guide/path of action that sets the limits and the direction
of managerial action; while a strategy is deployed to mobilize the available resources
in a marketing campaign to explore new markets or to consolidate the existing one in
the face of free competition through a vigorous dvertising campaign.

6. In business policy, some of the implementation part of the process can be delegated to
the subordinates, such delegation is not possible in business strategy, nor even
desirable.

7. Finally, whereas a policy is concerned with the estimation, availability, application,

conservation, and improvement of resources of a firm to utilize them to the optimum
benefit of all, a strategy is only concerned with the mobilization of available resources
and their deployment on different aspects of competition.

Thus, it should be noted that a strategy is:

 a. An action plan of the firm, and action decisions in specific directions;
b. A long-term design chartered to fight competition in marketing campaigns;
c. An application of available resources for effectively meeting a competitor in the
market;
d. The result of policies; and
e. A broad line of action to meet uncertainty, risk and insecurity that may arise in future
so that these can be met effectively.

Policies cover the broad aspects and strategies are specific oriented.
 MISSION, VISION, OBJECTIVES

STRATEGIC INTENT

The foundation for the strategic management is laid by the hierarchy of strategic intent. The
concept of strategic intent makes clear WHAT AN ORGANISATION STANDS FOR
HARVARD Business Review, 1989 described the concept in its infancy HAMED AND
PRAHALAD coined the term strategic intent. A few aspects about strategic intent are as
follows:

· It is an obsession with an organization.

· This obsession may even be out of proportion to their resources and capabilities.

· It envisions a derived leadership position and establishes the criterion; the

organization will use to chart its progress.

· It involves the following:

 Creating and Communicating a vision

 Designing a mission statement
 Defining the business
 Setting objectives

Vision serves the purpose of stating what an organization wishes to achieve in the long run.

Mission relates an organization to society.

Business explains the business of an organization in terms of customer needs, customer

groups and alternative technologies.

Objectives state what is to be achieved in a given time period.

· The strategic intent concept also encompasses an active management process that
includes focusing the organization’s attention on the essence of winning.

· The concept of stretch and leverage is relevant in this context.

Imp: Stretch is a misfit between resources and aspirations.

Leverage concentrates, accumulates, conserves and recovers resources so that a meager

resource base can be stretched.

Leverage reduces the stretch and focuses mainly on efficient utilization of resources.
 · The strategic fit matches organizational resources and environment. This positions
the firm by assessing organizational capabilities and environmental opportunities.

· Under fit, the strategic intent would seem to be more realistic.

· It is hierarchy of intentions ranging from a board vision through mission and

purpose down to specific objectives.

VISION

It is at the top in the hierarchy of strategic intent. It is what the firm would ultimately like to
become. A few definitions are as follows:

KOTTER description of something (an organization, corporate culture, a business, a

technology, an activity) in the future. The definition itself is comprehensive and states clearly
the futuristic position.

MILLER and DESS defined vision as the “category of intentions that are broad, all
inclusive and forward thinking”

The definition lays stress on the following:

(1) broad and all inclusion intentions

(2) vision is forward thinking process.

A few important aspects regarding vision are as follows:

 It is more of a dream than articulated idea

 It is an aspiration of organization. Organization has to strive and exhert to achieve
it.
 It is powerful motivator to action.
 Vision articulates the position of an organization which it may attain in distant
future.

Envisioning

This is the process of creating vision. It is a difficult and complex task. A well conceived
vision must have

 Core Ideology
 Envisioned Future
Advantages of Having a Vision

A few benefits accruing to an organization having a vision are as follows;

 They foster experimentation.

 Vision promotes long term thinking
 Visions foster risk taking.
 They can be used for the benefit of people.
 They make organizations competitive, original and unique.
 Good vision represent integrity.
 They are inspiring and motivating to people working in organization.

MISSION

The mission statements stage the role that organization plays in society. It is one of the
popular philosophical issue which is being looked into business mangers since last two
decades.

Definition

HYNGER and Wheelen “ purpose or reason for the organization’s existence.

Thompson states mission as the “ essential purpose of the organization, concerning

particularly why it is in existence, the nature of the business it is in, and the customers it
seeks to serve and satisfy.

The above definition reveals the following:

1. It is the essential purpose of organization

2. It answers “ why the organization is in existence”.
3. It is the basis of awareness of a sense of purpose.
4. It fits its capabilities and the opportunities which government offers.

Nature

A few points regarding nature of mission statement are as follows.

· It gives social reasoning. It specifies the role which the organization plays in
society. It is the basic reason for existence.
 · It is philosophical and visionary. It relates to top management values. It has long
term perspective.

· It legitimises societal existence.

· It is stylistic objectives. It reflects corporate philosophy, identify, character and

image of organization.

Characteristics

In order to be effective, a mission statement should posses the following characteristics.

(i) A mission statement should be realistic and achievable. Impossible statements

do not motivate people. Aims should be developed in such a way so that may become
feasible.

(ii) It should neither be too broad not be too narrow. If it is broad, it will become
meaningless. A narrower mission statement restricts the activities of organization.
The mission statement should be precise.

(iii) A mission statement should not be ambiguous. It must be clear for action.
Highly philosophical statements do not give clarity.

(iv) A mission statement should be distinct. If it is not distinct, it will not have any
impact. Copied mission statements do not create any impression.

(v) It should have societal linkage. Linking the organization to society will build
long term perspective in a better way.

(vi) It should not be static. To cope up with ever changing

environment, dynamic aspects be looked into.

(vii) It should be motivating for members of the organization and of society. The
employees of the organization may enthuse themselves with mission statement.

(viii) The mission statement should indicate the process of accomplishing objectives.
The clues to achieve the mission will be guiding force.

Examples of Mission Statement

A few examples of mission statement ( academically not accepted) are as follows:

India Today “ The complete new magazine”

Bajaj Auto, “Value for Money for Years”

HCL, “ To be a world class Competitor”

HMT, “Timekeepers of the Nation”

Some experts argue that these are the publicity slogans. They are not mission statements. A
few other examples are as follows:

Ranbaxy Industries “ To become a research based international Pharmaceuticals Company”.

Eicher Consultancy “ To make India an economic power in the lifetime, about 10 to 15

years, of its founding senior managers.”

BUSINESS DEFINITION

It explains the business of an organization in terms of customer needs, customer groups and
alternative technologies.

Oerik Abell suggests defining business along the three dimension of customer groups.
Customer functions and alternative technologies. They are developed as follows:

1. Customer groups are created according to the identity of the customers.

2. Customer functions are based on provision of goods/services to customers.
3. Alternative Technologies describe the manner in which a particular function can be
performed for a customer.

For a watch making business, these dimensions may be outlined as follows:

 Customer groups are individual customers, commercial organizations, sports

organization, educational institutions etc.
 Customer functions are record time, finding time, alarm service etc. It may be a
gift item also.
 Alternative technologies are manual, mechanical and automatic.

OBJECTIVES AND GOALS

Objectives refer to the ultimate end results which are to be accomplished by the overall plan
over a specified period of time. The vision, mission and business definition determine the
business philosophy to be adopted in the long run. The goals and objectives are set to achieve
them.

Meaning
Objectives are openended attributes denoting a future state or out come and are stated in
general terms.

When the objectives are stated in specific terms, they become goals to be attained.

In strategic management, sometimes, a different viewpoint is taken.

Goals denote a broad category of financial and non-financial issues that a firm sets for it self.

Objectives are the ends that state specifically how the goals shall be achieved.

It is to be noted that objectives are the manifestation of goals whether specifically stated or
not.

Difference between objectives and goals.

The points of difference between the two are as follows:

 The goals are broad while objectives are specific.

 The goals are set for a relatively longer period of time.
 Goals are more influenced by external environment.
 Goals are not quantified while objectives are quantified.

Broadly, it is more convenient to use one term rather than both. The difference between the
two is simply a matter of degree and it may vary widely.

Need for Establishing Objectives

The following points specifically emphasize the need for establishing objectives:

· Objectives provide yardstick to measure performance of a department or SBU or

organization.

· Objectives serve as a motivating force. All people work to achieve the objectives.

· Objectives help the organization to pursue its vision and mission. Long term
perspective is translated in short-term goals.

· Objectives define the relationship of organization with internal and

external environment.

· Objectives provide a basis for decision-making. All decisions taken at all levels of
management are oriented towords accomplishment of objectives.

Characteristics of Objectives
The following are the characteristic of corporate objectives:

1. They form a hierarchy. It begins with broad statement of vision and mission and ends
with key specific goals. These objectives are made achievable at the lower level.
2. It is impossible to identify even one major objective that could cover all possible
relationships and needs. Organizational problems and relationship cover a multiplicity
of variables and cannot be integrated into one objectives. They may be economic
objectives, social objectives, political objectives etc. Hence, multiplicity of
objectives forces the strategists to balance those diverse interests.
3. A specific time horizon must be laid for effective objectives. This timeframe helps
the strategists to fix targets.
4. Objectives must be within reach and is also challenging for the employees. If
objectives set are beyond the reach of managers, they will adopt a defeatist
attitude. Attainable objectives act as a motivator in the organization.
5. Objectives should be understandable. Clarity and simple language should be the
hallmarks Vague and ambiguous objectives may lead to wrong course of action.
6. Objectives must be concrete. For that they need to be quantified. Measurable
objectives helps the strategists to monitor the performance in a better way.
7. There are many constrants internal as well as external which have to be considered in
objective setting. As different objectives compete for scarce resources, objectives
should be set within constraints.

Organizational objectives may be in the following areas;

1. Profitability 2. Service to customers 3. Employee wellbeing and welfare
4. Social responsibility.
 IMPACT OF GLOBALIZATION

(To be given as assignment)

 STRATEGIC DECISION MAKING

Strategic decision making is a critical skill for effective leadership. The outcome of a leader’s
choices significantly impacts employees, customers, the market, and ultimately the success of the
company. Developing such a skill requires a combination of knowledge, experience and
intuition. It also requires a process to help define the problem and select the right course of
action. Here is a method to help you successfully navigate the decision making process.

Making Strategic Decisions - 5 Steps for Success

1. Define the Problem - Consider these questions:

 What is the problem? Can it be solved? Is this the real problem or a symptom of a larger
one?
 Does it need immediate attention or can it wait? Is it likely to go away by itself? Can I
risk ignoring it?
 What is my objective? What’s to be accomplished by the decision?

2. Gather Information - Seek information on how and why the problem occurred:

 Stakeholders: Talk to individuals or groups affected by the problem

 Facts and data: research, benchmarking studies, interviews with credible sources,
observed events
 Constraints: Lack of funding, resources, cultural barriers
 Ask: What am I not seeing? What have I missed?

3. Develop and Evaluate Options - Generate a wide range of options:

 Choose options that show promise, need more information, can be combined or
eliminated, or will be challenged.
 Weigh advantages/disadvantages of each. Consider cost to the business, potential loss of
morale/teamwork, time to implement the change, whether it meets standards, and how
practical the solution is.
 Predict the consequences of each option. (“If/Then” or “What if?”)
 Ask: What is the worst solution?
4. Choose the Best Action - Select the option that best meets the decision objective:

 Consider factual data, your intuition, and your emotional intelligence when deciding a
course of action.
 Accept that the solution may be less than perfect.
 Consider the middle ground. Compromising on competing solutions may yield the best
decision.

5. Implement and Monitor the Decision - Develop a plan to implement and monitor progress
on the decision:

 Step-by-step process or actions for solving the problem

 Communications strategy for notifying stakeholders
 Resource identification/allocation
 Timeline for implementation
 Measurements/benchmarks to gauge progress

In business (and in life), decisions can fail because the issue has not been clearly defined and
alternatives have not been carefully considered. Rather than delay the decision or make one
based on faulty information, this model ensures that the right problem gets solved at the right
time and in the right way.
 MINTZBERG’S 5PS OF STRATEGY

Mintzberg first wrote about the 5 Ps of Strategy in 1987. Each of the 5 Ps is a different approach
to strategy. Mintzberg developed his 5 Ps of Strategy as five different definitions of (or
approaches to) developing strategyEach of the 5 Ps is a different approach to strategy. They are:

1. Plan.

2. Ploy.

3. Pattern.

4. Position.

5. Perspective.

By understanding each P, you can develop a robust business strategy that takes full advantage
of your organization's strengths and capabilities.

Explaining the 5 Strategy Ps

 Plan - the default, automatic approach that we adopt brainstorming options and planning
how to deliver them.
 Ploy - Mintzberg says that getting the better of competitors, by plotting to disrupt,
dissuade, discourage, or otherwise influence them, can be part of a strategy. This is where
strategy can be a ploy, as well as a plan. Here, techniques and tools such as the Futures
Wheel, Impact Analysis, and Scenario Analysis can help you explore the possible future
scenarios in which competition will occur. Our article on Game Theorythen gives you
powerful tools for mapping out how the competitive "game" is likely to unfold, so that
you can set yourself up to win it.
 Pattern - Strategic plans and ploys are both deliberate exercises. Sometimes, however,
strategy emerges from past organizational behavior. Rather than being an intentional
choice, a consistent and successful way of doing business can develop into a strategy.
 Position - "Position" is another way to define strategy that is, how you decide to position
yourself in the marketplace. In this way, strategy helps you explore the fit between your
organization and your environment, and it helps you develop a sustainable competitive
advantage .
 Perspective - The choices an organization makes about its strategy rely heavily on its
culture just as patterns of behavior can emerge as strategy, patterns of thinking will shape
an organization's perspective and the things that it is able to do well. To get an insight
 into your organization's perspective, use cultural analysis tools like the Cultural Web ,
Deal and Kennedy's Cultural Model , and the Congruence Model .

Instead of trying to use the 5 Ps as a process to follow while developing strategy, think of them
as a variety of viewpoints that you should consider while developing a robust and successful
strategy.

Use the 5 Ps
 When you're gathering information and conducting the analysis needed for strategy
development, as a way of ensuring that you've considered everything relevant.
 When you've come up with initial ideas, as a way of testing that they're realistic,
practical, and robust.
 As a final check on the strategy that you've developed, to flush out inconsistencies and
things that may not have been fully considered.
 MCKINSEY 7-S FRAMEWORK
(Making Every Part of Your Organization Work in Harmony)

Do you know how well your organization is positioned to achieve its goals? Or what elements
influence its ability to implement change successfully?

Models of organizational effectiveness go in and out of fashion, but the McKinsey 7-S
framework has stood the test of time.

The model was developed in the late 1970s by Tom Peters and Robert Waterman, former
consultants at McKinsey & Company. They identified seven internal elements of an organization
that need to align for it to be successful.

When to Use the McKinsey 7-S Model

You can use the 7-S model in a wide variety of situations where it's useful to examine how the
various parts of your organization work together.

For example, it can help you to improve the performance of your organization, or to determine
the best way to implement a proposed strategy.

The framework can be used to examine the likely effects of future changes in the organization, or
to align departments and processes during a merger or acquisition. You can also apply the
McKinsey 7-S model to elements of a team or a project.

The Seven Elements of the McKinsey 7-S Framework

The model categorizes the seven elements as either "hard" or "soft":

The three "hard" elements are strategy, structures (such as organization charts and reporting
lines), and systems (such as formal processes and IT systems.) These are relatively easy to
identify, and management can influence them directly.

The four "soft" elements, on the other hand, can be harder to describe, less tangible, and more
influenced by your company culture. But they're just as important as the hard elements if the
organization is going to be successful.

Figure 1, below, shows how the elements depend on each other, and how a change in one affects
all the others.

Figure 1: The McKinsey 7-S Model

Figure reproduced with permission from McKinsey & Company, www.mckinsey.com.
Copyright © 2016. All rights reserved.

Let's look at each of the elements individually:

 Strategy: this is your organization's plan for building and maintaining a competitive
advantage over its competitors.
 Structure: this how your company is organized (that is, how departments and teams are
structured, including who reports to whom).
 Systems: the daily activities and procedures that staff use to get the job done.
 Shared values: these are the core values of the organization, as shown in its corporate culture
and general work ethic. They were called "superordinate goals" when the model was first
developed.
 Style: the style of leadership adopted.
 Staff: the employees and their general capabilities.
 Skills: the actual skills and competencies of the organization's employees.

Placing shared values in the center of the model emphasizes that these values are central to the
development of all the other critical elements. The model states that the seven elements need to
balance and reinforce each other for an organization to perform well.
Using the McKinsey 7-S Model

You can use it to identify which elements you need to realign to improve performance, or to
maintain alignment and performance during other changes. These changes could include
restructuring, new processes, an organizational merger, new systems, and change of leadership.

Follow these steps:

1. Start with your shared values: are they consistent with your structure, strategy, and systems?
If not, what needs to change?

2. Then look at the hard elements. How well does each one support the others? Identify where
changes need to be made.

3. Next, look at the soft elements. Do they support the desired hard elements? Do they support
one another? If not, what needs to change?

4. As you adjust and align the elements, you'll need to use an iterative (and often time-
consuming) process of making adjustments, and then re-analyzing how that impacts other
elements and their alignment. The end result of better performance will be worth it.

Checklist Questions for the McKinsey 7-S Framework

The following questions are a starting point for exploring your situation in terms of the 7-S
framework. Use them to analyze your current (Point A) situation first, and then repeat the
exercise for your proposed situation (Point B).

Strategy:

 What is our strategy?

 How do we intend to achieve our objectives?

 How do we deal with competitive pressure?

 How are changes in customer demands dealt with?

 How is strategy adjusted for environmental issues?

Structure:

 How is the company/team divided?

 What is the hierarchy?

 How do the various departments coordinate activities?

 How do the team members organize and align themselves?

 Is decision making and controlling centralized or decentralized? Is this as it should be, given
what we're doing?

 Where are the lines of communication? Explicit and implicit?

Systems:

 What are the main systems that run the organization? Consider financial and HR systems as
well as communications and document storage.

 Where are the controls and how are they monitored and evaluated?

 What internal rules and processes does the team use to keep on track?
Shared Values:

 What are the core values?

 What is the corporate/team culture?

 How strong are the values?

 What are the fundamental values that the company/team was built on?
Style:

 How participative is the management/leadership style?

 How effective is that leadership?

 Do employees/team members tend to be competitive or cooperative?

 Are there real teams functioning within the organization or are they just nominal groups?
Staff:

 What positions or specializations are represented within the team?

 What positions need to be filled?

 Are there gaps in required competencies?

Skills:

 What are the strongest skills represented within the company/team?

 Are there any skills gaps?

 What is the company/team known for doing well?

 Do the current employees/team members have the ability to do the job?

 How are skills monitored and assessed?

 ENVIRONMENTAL ANALYSIS
Definition: Environmental Analysis is described as the process which examines all the
components, internal or external, that has an influence on the performance of the organization.
The internal components indicate the strengths and weakness of the business entity whereas the
external components represent the opportunities and threats outside the organization.

To perform environmental analysis, a constant stream of relevant information is required to find

out the best course of action. Strategic Planners use the information gathered from the
environmental analysis for forecasting trends for future in advance. The information can also be
used to assess operating environment and set up organizational goals.

It ascertains whether the goals defined by the organization are achievable or not, with the present
strategies. If is not possible to reach those goals with the existing strategies, then new strategies
are devised or old ones are modified accordingly.

Advantages of Environmental Analysis

The internal insights provided by the environmental analysis are used to assess employee’s
performance, customer satisfaction, maintenance cost, etc. to take corrective action wherever
required. Further, the external metrics help in responding to the environment in a positive
manner and also aligning the strategies according to the objectives of the organization.

Environmental analysis helps in the detection of threats at an early stage, that assist the
organization in developing strategies for its survival. Add to that, it identifies opportunities, such
as prospective customers, new product, segment and technology, to occupy a maximum share of
the market than its competitors.

Steps Involved in Environmental Analysis

1. Identifying: First of all, the factors which influence the business entity are to be identified, to
improve its position in the market. The identification is performed at various levels, i.e. company
level, market level, national level and global level.
2. Scanning: Scanning implies the process of critically examining the factors that highly influence
the business, as all the factors identified in the previous step effects the entity with the same
intensity. Once the important factors are identified, strategies can be made for its improvement.
3. Analysing: In this step, a careful analysis of all the environmental factors is made to determine
their effect on different business levels and on the business as a whole. Different tools available
for the analysis include benchmarking, Delphi technique and scenario building.
4. Forecasting: After identification, examination and analysis, lastly the impact of the variables is
to be forecasted.
Environmental analysis is an ongoing process and follows a holistic approach, that continuously
scans the forces effecting the business environment and covers 360 degrees of the horizon, rather
than a specific segment.

ENVIRONMENTAL SCANNING
Businesses are mainly affected by social, economic, legal, technological and international
factors. Environmental analysis is a study of these various influencing factors. Environmental
scanning refers to collecting and utilizing the information about prominent trends, patterns,
occasions and relationships that can adversely impact the business to determine future
opportunities or threats.

Definition

According to William.F.Glueck, “Environmental Scanning consists of identifying and analyzing

environmental influences individually and collectively to determine their potential effects on an
organization and the consequent problems and threats.”

Characteristics of Environmental Scanning

1. Continuous Process- The analysis of the environment is a continuous process rather than
being sporadic. The rapidly changing environment has to be captured continuously to be
on track.

2. Exploratory Process- Scanning is an exploratory process that keeps monitoring the

environment to bring out the possibilities and unknown dimensions of the future. It
stresses the fact that “What could happen” and not ”What will happen”.

3. Dynamic Process- Environmental scanning is not static. It is a dynamic process and

depends on changing situations.

4. Holistic View- Environmental Scanning focuses on the complete view of the

environment rather than viewing it partially.

Components of Environmental Scanning

1. Internal Environmental Components- The components that lie within the organization
are internal components and changes in these affect the general performance of the
organization. Human resources, capital resources and technological resources are some of
the internal environmental components.

2. External Environmental Components: The components that fall outside the business
organization are called external environmental components. Although the components lie
outside the organization, they still affect the organizational activities. The external
components can be divided into microenvironmental components and macro
environmental components.
 Microenvironmental components include competitors, consumers, markets, suppliers,
organizations, etc. Macro environmental components include political, legal, economical,
cultural, demographic and technological factors.

Factors of Environmental Scanning: There are four factors of environmental scanning. They
are:

 Events: These are some of the incidences that take place in different sectors and
environments of the organization. This determines the functioning of the business.
 Trends: Trends can determine the frequency of events that take place in an organization.
With the observation of trends, an organization can implement the required change in a
particular area.
 Issues: The concerns that arise with events and trends in an organization is known as an
issue.
 Expectations: A few groups associated with the organization have some demands known
as expectations based on the trends and issues. These expectations arise reflecting the
concerns over an issue.

Techniques of Environmental Scanning

1. SWOT Analysis- SWOT analysis is an acronym for Strengths, Weaknesses,

opportunities and threats analysis of the environment. Strengths and weaknesses are
considered as internal factors whereas opportunities and threats are external factors.
These factors determine the course of action to ensure the growth of the business.

2. PEST Analysis- PEST stands for Political, economic, social and technological analysis
of the environment. It deals with the external macro-environment.

3. ETOP- ETOP stands for the Environmental Threat Opportunity profile. It helps an
organization to analyze the impact of the environment based on threats and opportunities.

4. QUEST- QUEST stands for the Quick Environmental Scanning technique. This
technique is designed to analyze the environment quickly and inexpensively so that
businesses can focus on critical issues that have to be addressed in a short span.

And many other techniques are there.

Importance of Environmental Scanning

 Goal Accomplishment: The objectives of an organization cannot be fulfilled unless it

adapts itself to the environmental changes. One has to adjust the strategies to fit in the
changing demands of the environment.
  Threats and Weakness Identification: For an organization to grow, it must minimize its
threats and identify the weaknesses. This is made possible with the help of environmental
scanning with which better strategies can be developed.

 Future Forecast: Environmental changes are often unpredictable. An organization

cannot anticipate all the future events but based on the analysis, it can make better
strategic decisions in the future. Hence, environmental analysis helps to forecast the
prospects of the business.

 Market Knowledge: Every organization must be aware of the ongoing changes in the
market. If it fails to incorporate strategic changes due to changing demands, it will not be
able to achieve its objectives.

 Focus on the Customer: Environmental scanning and analysis make an organization

sensitive towards the changing needs and expectations of the customer.

 Opportunities Identification: With the analysis of the current environment an

organization will be able to identify the possible opportunities and take necessary steps.

Limitations of Environmental Scanning

 Overloading of information may sometimes result in indecision. Hence it is not

completely reliable.

 It does not forecast the future or eliminate uncertainties. Organizations may face
unexpected events. However environmental scanning should aim at minimizing such
threats to the business.

 It often makes an organization cautious and thereby delayed decision making. It is better
to have a strategic approach to analyze the environment and take decisions or actions on
time.

 When the organizations rely completely on the analyzed information without data
verification and accuracy, it may lead to deviation in the desired outcomes.

INDUSTRY ANALYSIS
Industry analysis is defined as an assessment tool designed to offer business entity a
comprehensive idea about the complex nature of a specific industry. It includes reviewing
 the market, political, and economic factors that have a direct impact on the development of an
industry. Industry analysis is conducted by the business entity or specifically an entrepreneur to
identify the factors which are influencing the sector that they have already or thinking about
investing in. The potential new entrants, condition of the competitors, and both the buyer and
suppliers have a direct influence on the working of an industry. It is the industry analysis concept
that gives the business entity the necessary information so that they can make plans to tackle
them effectively.

Remember, it is vital to gain a definite perspective about the forces at work in the overall scheme
of things if you want to conduct comprehensive strategic planning. The industry analysis helps
the owner to know about the various opportunities as well as threats that face the business so that
they can take steps to combat them and gain competitive advantage. Understanding
the environment surrounding the industry and the factors that are influencing them helps to
anticipate future trends and gives you the weapon to take the required direction with confidence.

How to do an industry analysis?

There’re many frameworks we can use to do industry analysis. But what’s more important is to
follow a few steps and get to the point where one can use the frameworks to assess the correct
picture of the industry.

First, we will have a look at the steps you can follow, and then we will talk about the frameworks
economists/equity research analysts can use to analyze the market/ industry.

 Review the available information: If you dive in, you would be able to find many available
reports, white papers, analysis, research reports, and presentations. If you don’t have any idea
about the industry you’re trying to analyze, first use these materials to get to know the industry.
Read everything you need to know and identify the key factors that can help you write the report
after analysis. These reports and information can’t fully help you, but they will give you some
idea about what to look for while analyzing the industry.
 Get an idea about the right industry: It may happen that you’re searching for the real estate
industry. But real estate is a huge industry, and there’re many sub-industries like household
complexes, commercial properties, hotels, amusement industry, etc. You need to get an idea
about the right industry. If there’s no relevance in the industry you’re searching for, you’ll lose
focus, and the analysis will not be able to pinpoint accurate data.
 Are you able to forecast future demand and supply? This is the key thing in any industry.
Why? Because everything depends on the demand and supply of the industry. Here’s what you
should do. Make a list of the competitors in the industry. Find out the financial health of each
competitor. Take account of the growth rate and the products they’re selling in the last 5 years.
Then do a comparative analysis with your business. You’ll get an idea of what to work upon and
 what to leave alone. In simple terms, you’ll be able to recognize the key factors that are
responsible for future demand and supply in the market.
 Competition: This is the most important thing to consider. There’re three common frameworks
a business can use to understand the micro and macro factors of a business.

Benefits of industry analysis

The benefits of using an industry analysis are described below-

1. The industry analysis report is beneficial as it helps to assess the profitability of a

particular industry
2. It is generally able to forecast the potential behavior of the competitors
3. Helps to recognize and identify strategies that will prove its worth
4. Industry analysis is a tool to develop a competitive strategy that will act as the
best defense against competitive forces
5. Helps to highlight the strength and weakness of an organization with its analysis
6. Industry analysis pinpoints the area where strategic changes will yield best payoffs
7. It emphasizes on the area where the industry trend shows threats or even opportunities.
8. Industry analysis helps the entrepreneur to know about the position of his company
relative to the competitors in the industry.
9. Can easily forecast demand and supply and consequently about the financial gains
10. Industry analysis helps to discover untapped opportunities in the industry.

COMPETITIVE ANALYSIS
A competitive analysis can help you learn the ins and outs of how your competition works, and
identify potential opportunities where you can out-perform them. It also enables you to stay atop
of industry trends and ensure your product is consistently meeting — and exceeding — industry
standards.

Organizations must operate within a competitive industry environment. They do not exist in
vacuum. Analyzing organization’s competitors helps an organization to discover its weaknesses,
to identify opportunities for and threats to the organization from the industrial environment.
While formulating an organization’s strategy, managers must consider the strategies of
organization’s competitors. Competitor analysis is a driver of an organization’s strategy and
effects on how firms act or react in their sectors. The organization does a competitor analysis to
measure / assess its standing amongst the competitors.

Competitor analysis begins with identifying present as well as potential competitors. It

portrays an essential appendage to conduct an industry analysis. An industry analysis gives
information regarding probable sources of competition (including all the possible strategic
actions and reactions and effects on profitability for all the organizations competing in the
industry). However, a well-thought competitor analysis permits an organization to concentrate on
those organizations with which it will be in direct competition, and it is especially important
when an organization faces a few potential competitors.

Michael Porter in Porter’s Five Forces Model has assumed that the competitive environment
within an industry depends on five forces- Threat of new potential entrants, Threat of substitute
product/services, bargaining power of suppliers, bargaining power of buyers, Rivalry among
current competitors. These five forces should be used as a conceptual background for identifying
an organization’s competitive strengths and weaknesses and threats to and opportunities for the
organization from it’s competitive environment.

The main objectives of doing competitor analysis can be summarized as follows:

 To study the market;

 To predict and forecast organization’s demand and supply;
 To formulate strategy;
 To increase the market share;
 To study the market trend and pattern;
 To develop strategy for organizational growth;
 When the organization is planning for the diversification and expansion plan;
 To study forthcoming trends in the industry;
 Understanding the current strategy strengths and weaknesses of a competitor can suggest
opportunities and threats that will merit a response;
 Insight into future competitor strategies may help in predicting upcoming threats and
opportunities.
Competitors should be analyzed along various dimensions such as their size, growth and
profitability, reputation, objectives, culture, cost structure, strengths and weaknesses, business
strategies, exit barriers, etc.

Porter's Five Forces Model

Porter's Five Forces is a model that identifies and analyzes five competitive forces that shape
every industry and helps determine an industry's weaknesses and strengths. Five Forces analysis
is frequently used to identify an industry's structure to determine corporate strategy. Porter's
model can be applied to any segment of the economy to understand the level of competition
within the industry and enhance a company's long-term profitability. The Five Forces model is
named after Harvard Business School professor, Michael E. Porter.

Understanding Porter's Five Forces

Porter's Five Forces is a business analysis model that helps to explain why various industries are
able to sustain different levels of profitability. The model was published in Michael E. Porter's
book, "Competitive Strategy: Techniques for Analyzing Industries and Competitors" in 1980.1 
The Five Forces model is widely used to analyze the industry structure of a company as well as
its corporate strategy. Porter identified five undeniable forces that play a part in shaping every
market and industry in the world, with some caveats. The five forces are frequently used to
measure competition intensity, attractiveness, and profitability of an industry or market.

1. Competition in the industry

2. Potential of new entrants into the industry
3. Power of suppliers
4. Power of customers
5. Threat of substitute products

Competition in the Industry

The first of the five forces refers to the number of competitors and their ability to undercut a
company. The larger the number of competitors, along with the number of equivalent products
and services they offer, the lesser the power of a company. Suppliers and buyers seek out a
company's competition if they are able to offer a better deal or lower prices. Conversely, when
competitive rivalry is low, a company has greater power to charge higher prices and set the terms
of deals to achieve higher sales and profits.

Potential of New Entrants Into an Industry

A company's power is also affected by the force of new entrants into its market. The less time
and money it costs for a competitor to enter a company's market and be an effective competitor,
the more an established company's position could be significantly weakened. An industry with
strong barriers to entry is ideal for existing companies within that industry since the company
would be able to charge higher prices and negotiate better terms.

Power of Suppliers
The next factor in the five forces model addresses how easily suppliers can drive up the cost of
inputs. It is affected by the number of suppliers of key inputs of a good or service, how unique
these inputs are, and how much it would cost a company to switch to another supplier. The fewer
suppliers to an industry, the more a company would depend on a supplier. As a result, the
supplier has more power and can drive up input costs and push for other advantages in trade. On
the other hand, when there are many suppliers or low switching costs between rival suppliers, a
company can keep its input costs lower and enhance its profits.

Power of Customers
The ability that customers have to drive prices lower or their level of power is one of the five
forces. It is affected by how many buyers or customers a company has, how significant each
customer is, and how much it would cost a company to find new customers or markets for its
output. A smaller and more powerful client base means that each customer has more power to
negotiate for lower prices and better deals. A company that has many, smaller, independent
customers will have an easier time charging higher prices to increase profitability.

Threat of Substitutes
The last of the five forces focuses on substitutes. Substitute goods or services that can be used in
place of a company's products or services pose a threat. Companies that produce goods or
services for which there are no close substitutes will have more power to increase prices and lock
in favorable terms. When close substitutes are available, customers will have the option to forgo
buying a company's product, and a company's power can be weakened.

Understanding Porter's Five Forces and how they apply to an industry, can enable a company to
adjust its business strategy to better use its resources to generate higher earnings for its investors.
 ETOP (Environment Threat Opportunity Profile)
Environmental scanning is the monitoring, evaluating, and disseminating of information from the
external and internal environment to key people within the corporation or organization. Business
environment analysis is a regular business feature. It results in a quantity of information related
to forces in the environment. It usually relates to events, trends, issues, natural calamities and
expectations. ETOP analysis (environmental threat and opportunity profile) is the process of
gathering information about events and their relationships within an organization’s internal and
external environments.
The basic purpose of environmental scanning is to help management determine the future
direction of the organization. Structuring of environmental issues is necessary to make
them meaning full for strategy formulation.
An organization’s internal environment consists of the elements within the organization,
including current employees, management, the organization’s culture which is defined by
operating procedures and employee behavior. Though some elements affect the organization as a
whole, others affect only the management. A manager’s philosophical or leadership style directly
impacts employees. Traditional managers give explicit instructions to employees, while
progressive managers empower employees to make many of their own decisions. Changes in
philosophy and leadership style are under the control of the manager. Unlike the external
environment of a business, the internal environment can be controlled. It is important to
recognize potential opportunities and threats outside company operations. However, managing
the strengths of internal operations is the key to business success. Leadership matters a lot in
controlling the internal environment.

The external environment of an organization are those factors outside the company that affect
the company’s ability to function. Some external elements can be manipulated by company
marketing, while others require the organization to make adjustments. Organizations need to
monitor the basic components of a firm’s external environment, and keep a close watch on it at
all times. The external environment consists of customers, government, economy and
competition.
 OCP (ORGANIZATIONAL CAPABILITY PROFILE)

Just as environmental appraisal is structured through an environmental threat and opportunity

profile (ETOP), organizational appraisal can also be structured through various techniques. For
instance, Glueck proposes a preparation of the strategic advantage profile (SAP) where the
results of organizational appraisal are presented in a summarized form. Another approach,
suggested by Rowe et al., is to prepare a organizational capability profile (OCP) as a means for
assessing a company’s strengths arid weakness in dealing with the opportunities and threats in
the external environment.The organizational capability profile (OCP) is drawn in the form of a
chart as depicted in table which shows a summarized OCP. The strategists are required to
systematically assess the various functional areas and subjectively assign values to the different
functional capability factors and sub factors along a scale ranging from the values of -5 to +5. A
detailed OCP may run into several pages where each of the sub factors constituting the different
functional capability factors can be assessed. In this manner, a summarized OCP, as shown in
table, may be prepared.

Capability Factor Weakness (-5) Normal (0) Strength (+5)

1. Financial capability factors

(a) Sources of funds
(b) Usage of funds
(c) Management of funds
2. Marketing capability factors
(a) Product-related
(b) Price-related
(c) Promotion-related
(d) Integrative and systematic
3. Operations capability factors
(a) Production system
(b) Operations and control system
(c) R & D system
4. Personnel capability factors
(a) Personnel system
(b) Organizational and employee
characteristics
(c) Industrial relations
5. Information management capability factors
(a) Acquisition and retention of information
(b) Retrieval and usage of information
(c) Processing and usage of information
(d) Transmission and dissemination of
information
(e) Integrative, systemic, and supportive
6. General management capability factors
(a) General management systems
(b) External relations
(c) Organizational climate

After the completion of the chart, the strategists are in a position to assess the relative strengths
and weaknesses of an Organisation in each of the six functional areas and identify the gaps that
need to be filled or the opportunities that could be used. The preparation of an OCP provides a
convenient method to determine the relative priorities of an Organisation viaa-via its
competitors, its vulnerability to outside influences, the factors that support or pose a threat to its
existence, and its overall capability to compete in a given industry.
 SAP SCANNING
Based on the detailed information presented in the OCP, it is possible to prepare a concise chart
of a strategic advantage profile. A SAP provides a picture of the more critical areas, which can
have a relationship to the strategic posture of the firm in the future. In table we provide an
illustration of an SAP drawn for a hypothetical company in the bicycle industry. The main
business of the company is in the sports cycle manufacturing for domestic and exports markets.
This example relates to a hypothetical company but the illustration is realistic.

Capability Factor Competitive strengths or weaknesses

1. Finance High cost of capital; reserves and position

unsatisfactory

2. Marketing Fierce competition in industry; company’s

position secure at present.
3. Operations Plant and machinery in excellent condition;
captive sources for parts and components
available
4. Personnel Quality of managers and workers comparable
with that in competitor companies.
5. Information Computerized management information system
in the process of development; traditional
functions such as payroll and accounting
computerized.
6. General management High quality and experienced top management;
generally adopts a proactive stance with regard
to decision-making.

The SAP presented in table clearly shows the strengths and weaknesses in different functional
areas. For instance, the company has to use its strengths in the area of operations and in general
management areas. A gap is also indicated in the finance area which has to be overcome if the
company has to survive and prosper in a competitive industry like bicycle manufacturing. In
marketing, though the competitive position is secure at present, it cannot be said that it will
remain so in the future. The SAP indicates that strategists can initiate action to cover the gaps
and use the company’s strengths in the light of environmental threats and opportunities. The
probable line of action to be adopted for covering the gaps and using the company’s strengths in
the light of environmental threats and opportunities is found through considering strategic
alternatives at the corporate-level and the business level and exercising a strategic choice.
 INTERNAL CORPORATE ANALYSIS
An internal analysis examines an organization’s internal environment to assess its resources,
assets, characteristics, competencies, capabilities, and competitive advantages. In short, it allows
you to identify your organization's strengths and weaknesses, which can help management
during the decision-making, strategy formulation, and execution processes. Every internal
analysis should be accompanied by an external analysis, which evaluates the external
environment and external factors that influence the organization. The combination of both an
internal & external scan is key in gaining a holistic picture of the organization's environment and
developing a strategy that will allow your organization to succeed.

The internal operations of a firm determine the strengths and weaknesses of a firm. Strengths
allow the firm to take advantage of opportunities available in the environment, while weaknesses
represent potential threats to the organization and limit the strategies available to the firm. The
internal factors are generally regarded as controllable factors, because the company generally has
control over these factors; it can alter or modify such factors as its personnel, physical facilities.

Number of tools and techniques are available for internal analysis of the firms;

 Gap Analysis
 Strategy Evaluation
 SWOT Analysis
 VRIO Analysis
 OCAT
 McKinsey 7S Framework
 Core Competencies Analysis

GAP Analysis GAP analysis is an internal evaluation tool that allows organizations to
identify performance deficiencies. A GAP analysis helps you compare your current state to
your desired future state, identify and understand the gaps that exist between the two states,
and then create a series of actions that will bridge those gaps. This is important because it
helps management identify if their organization is performing to its potential, and if not, why.
In addition, this helps to pinpoint flaws in resource allocation, planning, production, etc.

Strategy Evaluation A strategy evaluation analyses the results of a strategic plan's

implementation. It's useful to undertake a strategy evaluation at regular intervals during your
strategic implementations. For example, you might opt to conduct an evaluation every six
months, every year, or at the conclusion of your implementation. The strategy evaluation
process involves looking back at the goals in your strategic plan and assessing how well your
strategic management initiatives fared in achieving them.
 SWOT Analysis The SWOT analysis is one of the most well-known and most common business
analysis tools around. It gained popularity thanks to its simplicity (it covers both an internal and
external analysis), but it's also known for its efficacy. The name SWOT is derived from the
factors in its grid (strengths, weaknesses, opportunities, and threats), which form the SWOT
matrix.

VRIO Analysis The VRIO framework is a great tool for assessing an organization's internal
environment. It looks at an organization's internal resources and categorizes each based on the
overall value it contributes to the organization. VRIO is a framework that allows organizations to
identify their competitive advantages and promotes the development of consistency to turn them
into sustainable competitive advantages.

OCAT The Organizational Capacity Assessment Tool was designed for non-profit organizations
looking to assess their internal environments. OCAT assesses how well your organization
performs across 10 internal dimensions, including:

 Aspirations
 Strategy
 Leadership, Board & Staff
 Funding
 Marketing & Communications
 Advocacy
 Business Processes
 Infrastructure & Organizational Structure
 Culture and shared values
 Innovation and adaptation

McKinsey 7S Framework

Another popular and battle-tested tool is the McKinsey 7S Framework. McKinsey 7S is ideal for
organizations looking to improve alignment between departments and processes. The model can
be used to assess an organization's current state in comparison to a proposed future state and
evaluate the gaps and inconsistencies between them.
 RESOURCE BASED APPROACH
The resource-based view or RBV is a strategy formulated by organizations to understand the
elements of the business for a long-term competitive advantage. This theory emerged during the
1980s-1990s from the major works of B Wernerfelt, Hamel, Prahalad, and others.
They stated that- ‘to have an edge over the competition, the organization should look into the
potential of the company’s internal resource pool rather than seeking the external competitive
environment’.
The RBV model explains that it is significant to accept and fulfill external or new opportunities
using existing resources innovatively by acquiring new niche skills. As a result, the internal
analysis of resources should be empowered to achieve higher organization prowess in the RBV
framework.

Importance of Resource-based View Strategy

The resource-based view strategy aims to gain a sustainable competitive advantage. But how
can an organization achieve this advantage?
It is through extensive resource analysis, resource allocation, and cross-functional usage of
resources. Only when a firm unleashes its workforce’s true potential can they innovate better
and out-stand in the industry.
Here is how an RBV strategy helps them achieve the same,

o Visibility for efficient resource allocation

The comprehensive view of all the resource pools facilitates managers to gain insight into
resource skills and competencies. This, in turn, allows managers to allocate resources as per the
scope and demand of the project. Real-time information helps them make data-driven decisions,
leverage talent to the maximum potential, and maximize profitability.
o Maintains the competitive advantage
The rise in market volatility propels extensive ad hoc project demands, which often becomes the
deciding factor for your company’s growth and success. In these situations, resource managers
can utilize both their primary and secondary workforce skills to execute critical multi-faceted
projects. A Resource-based view strategy on a centralized platform enables demand fulfillment
to sustain their competitive advantage.
o Cross-functional usage of resources
In a matrix organization, the resource-based strategy model facilitates enterprise-wide
visibility of the workforce and its expertise. It helps in allocating appropriate resources from
different departments and form a cross-functional team to execute the project. It reduces hiring
cycle costs and also helps to leverage the diversified workforce. Besides, employees are also
given multi-faceted projects to work on enhancing their professional portfolio.
The Major Concepts of RBV Analysis
RBV is a strategic theory beneficial for understanding why companies outperform other
competitors. It is a commonly adopted analytical method used to determine the strengths and
limitations of an organization and evaluate the firm’s workforce.

With the understanding of resource-based strategy or RBV model, let’s emphasize details of its
different types of assets.

o The Assets of RBV Model

There are two types of assets in the RBV model: tangible and intangible assets.

Tangible Assets The tangible assets are the physical resources of the firm that are quantifiable. It
includes products, machinery, equipment, capital, infrastructure, etc. They can be easily acquired
by competitors in identical assets and offer a less competitive advantage in the long run.

Intangible Assets Intangible assets are resources that are owned by respective organizations and
which do not have a physical presence. It includes brand presence, intellectual property,
goodwill, trademarks, etc. Unlike tangible assets, intangible assets are built over a long time
and cannot be replicated by competitors.
Invariably, intangible resources remain within a business and are the primary source of
sustainable competitive advantage.

o The Critical Assumptions of RBV

The fundamental principle of the RBV model explains competitive heterogeneity between
companies. To transform a short-run competitive advantage into a sustainable one, the two
critical assumptions of RBV are that the resources must be heterogeneous and immobile. Let’s
discuss this in detail here:

Heterogeneous The primary heterogeneous assumption is that organizations must significantly

differ in terms of resources and core competencies. If companies have the same mix of the
resource pool, they would not be able to employ different business strategies to outperform each
other. On the other hand, companies with a heterogeneous workforce when exposed to the same
competitive market can outrank each other by implementing different strategies.
For instance, the technology giants- Apple Inc. and Samsung Electronics operate in the same
industry (Smartphone & Tablet market) and therefore are subject to the same competitive
market. However, they possess disparity in organizational performance due to the difference in
resources and their expertise (heterogeneous resources).

Immobile The second assumption of RBV states that the resources are immobile and thus do not
move freely from one company to another (employee movement), at least in the short-run. Due
to this immobility, competing firms could not replicate their resources’ expertise and implement
an appropriate strategy.
Immobile resources include all the intangible assets of a company, such as brand equity,
intellectual property, etc., and some of the tangible assets.

The VRIO Framework:

Adding on to the assumptions, a renowned professor of strategic management, Jay B Barney, in
1991 has introduced a VRIN structure that was later altered by other leading thinkers. The
new VRIO Framework is an improvement of the VRIN model and was adapted from
Rothaermal’s ‘strategic management’ (2013). The VRIO analysis categorizes the resources based
on their Value, Rarity, Imitability, and Organizational system. Let’s understand each of these
attributes in detail:

Value: It states that the resources are only valuable to organizations if they contribute to their
goal in terms of products or services. Besides transforming inputs to outputs, value-addition also
occurs when your resources successfully exploit profitable ventures or bring down external costs.

Rarity: The tangible and intangible resources that very few organizations can only acquire are
rare resources. A firm with these rare skill sets in its closet can reap the competitive benefits and
stand out in the market. In contrast, companies that possess the same set of resources and
skills face competitive parity.

Imitability: The key to competitive sustainability is the decrease in the rare or valuable
resources’ imitability rate for the long-term. It can only be achieved when the compensation is
higher than the cost offered by other companies to mimic these resources and capabilities.

Organization: For a resource to exhibit competitive advantage, the organization, its processes,
and systems must be designed in a way that supports a resource for maximum productivity. It
includes having the right resource management system to ensure all the critical resource
KPIs are optimized and balanced.

Develop a Full-Proof RBV Strategy?

The scope of strategy integration in the current business functions results in a competitive
advantage. Managers should develop a plan in the RBV-centered organization to leverage
internal resources to external opportunities and competition.

Here are the different steps to develop a strategy when utilizing a resource-based view of the
organization:
o Identify key resources and competencies
Identifying essential resources and skillset is the first step towards forming an effective RBV
strategy for the organization. The multidimensional resource scheduler facilitates the 360-degree
visibility of all resource profiles across the enterprise. It helps managers to deploy potential
resources based on the demand of the project.
o Allocate competent workforce to projects
After analyzing different resource attributes (skill sets, cost rate, location, available capacity,
etc.), the next step is resource scheduling. Thus, strategic resource allocation is an essential step
that facilitates deploying the right resources with the desired skill set to suitable projects.

o Leverage resources to multiple projects

As mentioned earlier, deploying resources to varied projects facilitates the shared service
model in a matrix organization. It encourages the utilization of resources across multiple projects
instead of one high-priority project. It will empower the overall resource utilization against
their available capacity and enhance its profitability and reduce resourcing costs.

o Implement succession planning for niche skills

The resource managers must ensure that the sudden resignation of critical or niche resources
does not jeopardize a project delivery. Therefore, an appropriate succession
planning and backup strategy should be in place to replicate competent resources. It can be
done in advance by providing proper training and development opportunities such as shadowing
or knowledge transfer techniques to create its niche skill set.

o Conduct regular training to upskill the resource pool

It is worthwhile to invest in multi-skill building practices (Individual Development Plans or
IDP) like training, workshops, and certifications. Such initiatives help the resources to diversify
their professional spectrum, giving you a competitive advantage, especially against new entrants
who are building upon their skills and expertise.
 VALUE-CHAIN APPROACH

Why do some companies’ profit margins exceed their competitors? How does one company
garner a competitive advantage against its peers? The answers to these questions may be
found in value chain analysis.

Value chain analysis is the process of looking at the activities that go into changing the inputs for
a product or service into an output that is valued by the customer. Companies conduct value-
chain analysis by looking at every production step required to create a product and identifying
ways to increase the efficiency of the chain.

Porter's Value Chain Analysis

Back in 1985, Michael Porter, a Harvard Business School professor, introduced a basic value
chain model in his book The Competitive Advantage: Creating and Sustaining Superior
Performance. He identified several key steps common among all value chain analyses and
determined that there are primary and supporting activities that when performed at the most
optimal levels will create value for their customers, such that the value offered to the customer
exceeds the cost of creating that value, resulting in higher profit. Porter’s framework groups
activities into primary and support categories.1 2 

The primary activities focus on taking the inputs, converting them into outputs, and delivering
the output to the customer. The support activities play an auxiliary role in primary
activities. When a company is efficient in combining these activities to provide a superior
product or service, then the customer is willing to pay more for the product than the cost to make
and deliver the product which results in a higher profit margin.

Let’s work through an example of an asset management firm. The goal of the client is to achieve
the highest possible return on investment within the guidelines and restrictions set forth by the
client.

The firm’s primary activities include:

 Investment team (portfolio managers, analysts) – tasked with making the investment
decisions.
 Operations and traders – tasked with ensuring the investments are in line with the
guidelines set forth by the client, and the trades are at the best execution price.
 Marketing and sales – responsible for procuring clients.
 Service (client relationship management) – responsible for providing all the touch
points to the client.

Support activities include:

  Technology – designs a trading and client module that is efficient and effectively allows
the team to provide the highest level of service and make the best investment decisions.
 Human Resources – finds and retains the highest level of talent at the firm.
 Infrastructure – includes the lawyers and risk managers whose oversight is crucial to
ensuring the client’s guidelines are followed, the investment risk is controlled, and the
firm is operating within the regulations established by the SEC.

How to Improve the Value Chain

When a firm takes into account its value chain, it needs to consider its value proposition, or what
sets it apart from its competitors. Value chain analysis is designed to improve profits by creating
a product or service that is so superior that customers are willing to pay more than the cost to
develop it.

But improving a value chain for the sake of improvement should not be the end goal. Instead, a
company should decide why it wants to improve its value chain in the context of its competitive
advantage to differentiate itself among its peers.

Two common competitive advantage strategies include low cost provider or

specialization/differentiation of product or service.

 Low-cost provider – value chain analysis focuses on costs and how a company can
reduce those costs.
 Specialization – value chain analysis focuses on the activities that create a unique
product or differentiation in service.
 Scanning Functional Resources: Strategic Budget and Audit
A strategic audit is an examination and evaluation of areas affected by the operation of a
strategic management process within an organization. A strategy audit may be needed under the
following conditions:
Performance indicators show that a strategy is not working or is producing negative side effects.
High-priority items in the strategic plan are not being accomplished.
A shift or change occurs in the external environment.
Management wishes:
(1) to fine-tune a successful strategy and
(2) to ensure that a strategy that has worked in the past continues to be in tune with subtle
internal or external changes that may have occurred.
To aid in control, firms will occasionally perform audits to ensure that certain aspects of their
operations are in order. Such audit may include operational audits (assessing the firm's operating
health) and strategic audits (assessing the firm's strategic health).
Measures or indicators of a firm's current operating and strategic health are shown in Table 6-5
and 6-6. As the tables show, to assess a firm's current operating health, short-term financial,
market, technological, and production position are used, while current strategic health is based
on strategic market position, technological position, production capabilities, and financial health.
There are several generally accepted methods for measuring organizational performance. One
way for categorizing these methods divides into the distinct types: qualitative and quantitative.
However, a few methods do not fall neatly into one or other of these categories but rather are a
combination of both types.
There is no universally endorsed list of critical questions designed to reflect important facets of
organizational operations. However, several that might be useful to the practicing managers are
presented below.
Sample Questions to be asked for Qualitative Organizational Measurement

 Are the financial policies with respect to investment… dividends and financing consistent
with opportunities likely to be available?
 Has the company defined the market segments in which it intends to operate sufficiently
specifically with respect to both product lines and market segments? Has it clearly
defined the key capabilities needed for success?
 Does the company have a viable plan for developing a significant and defensible
superiority over competition with respect to these capabilities?
 Will the business segments in which the company operates provide adequate
opportunities for achieving corporate objectives? Do they appear as attractive as to make
it likely that an excessive amount of investment will be drawn to the market from other
 companies? Is adequate provision being made to develop attractive new investment
opportunities?
 Are the management, financial, technical and other resources of the company really
adequate to justify an expectation of maintaining superiority over competition in the key
areas of capability?
 Does the company have operations in which it is not reasonable to expect to be more
capable than competition? If so, can the board expect them to generate adequate returns
on invested capital? Is there any justification for investing further in such operations,
even just to maintain them?
 Has the company selected business that can reinforce each other by contributing jointly to
the development of key capabilities? Or are there competitors that have combinations of
operations which provide them with an opportunity to gain superiority in the key resource
areas? Can the company's scope of operations be revised so as to improve its position vis-
à-vis competition?
 To the extent that operations are diversified, has the company recognized and provided
for the special management and control systems required?
Each organization has its own approach to evaluation. There are not absolute answers as to the
proper evaluation standards. However, there are three basic questions to ask in strategy
evaluation:

 Is the existing strategy any good?

 Will the existing strategy be good in the future?
 Is there a need to change a strategy?
The first question may need additional detailing to indicate whether the current strategy is useful
and beneficial to the organization.
Seymour Tilles has written a classic article on the qualitative assessment of organizational
performance. This article serves several particular questions to be asked for evaluation. These
questions are:

 Is the strategy internally consistent? Internal consistency refers to the cumulative impact
of various strategies on the organizations. According to Tilles, a strategy must be judged
not only in relationships to other strategies.
 Is organizations strategy consistent with its environment? An important test of strategy is
whether the chosen strategy in consistent with environment (constituent demands,
competition, economy, product / industry life cycle, suppliers, customers) - whether the
really make sense with respect to what is going on outside.
 Is the strategy appropriate in view of available resources? Resources are those things that
company is or has and that help it to achieve its corporate objectives. Included are
money, competence, facilities and other. Without appropriate resources, organization
simply cannot make strategic work.
 Does the strategy involve an acceptable degree of risk? Strategy and resources, taken
together, determine the degree of risk which the company is undertaken. Each company
must determine the amount of risk it wishes to incur. This is a critical managerial choice.
In attempting to assess the degree of risk associated with a particular strategy,
management must assess such issues as the total amount of resources a strategy requires,
the proportion of the organization's resources that a strategy will consume, and the
 amount of time that must be committed.
 Does the strategy have an appropriate time horizon? A significant part of every strategy is
the time horizon on which it is based. For example, a new product developed, a plant put
on stream, a degree of market penetration, become significant strategic objectives only if
accomplished by a certain time. Management must ensure that the time necessary to
implement the strategy is consistent. Inconsistency between these two variables can make
it impossible to reach goals in a satisfactory way.
 Is the strategy workable?
E. P. Learned and others, building on the Tilles model, suggest that the following are also proper
evaluative questions:

 Is the strategy identifiable? Has it been clearly and consistently identified and are people
aware of it?
 Is the strategy appropriate to the personal values and aspirations of key managers?
 Does strategy constitute a clear stimulus to organizational effort and commitment?
 Is the strategy socially responsible?
 Are there early indications of the responsiveness of markets and market segments to the
strategy?

J. Argenti adds:

 Does the strategy rely on weakness or do anything to reduce them?

 Does the strategy exploit major opportunities?
 Does it avoid, reduce, or mitigate the major threats? If not, are there adequate
contingency plans?

All these questions can by applied as the strategy progresses through its various stages, including
implementation. The answers can provide guidelines as to how the strategy should be altered or
changed.
The second basic question "Will the existing strategy be good in the future?" seeks to ascertain if
the strategy would continue to satisfy the firm's objective in the future. The answer to this is
based upon unforeseeable changes in the organization's environment or resources, or changes in
its mission, goals, or objectives.
The answer to the third question "Is there a need to change the strategy?" will provide direction
toward a strategy formation task.
Qualitative measurements methods can be very useful, but their application involves
significant amounts of human judgment. Thus, conclusions based on such methods must be
drawn carefully.
Quantitative measurements provide information and insight as to how well an organization is
accomplishing its goods and objectives. In attempting to evaluate the effectiveness of corporate
strategy quantitatively, we can see how the firm has done compared wit its own history, or
compared with its competitors.
Many quantitative measures may be developed to determine performance results. These
standards expressed in quantitative terms include:
1. Sales (growth of sales)
2. Net profit
3. Dividend returns
4. Return on equity
5. Return on investment
6. Return on capital
7. Marker share
8. Earnings per share

The list is long and many other factors could be included. The objective of all of these endeavors
is financial control.
But financial control is only part of the total strategic management control process. Much of the
activity affects financial performance in non financial nature. This include consideration of labor
efficiency and productivity; production quantity turnover, and tardiness; on a very limited basis,
human resources accounting and personnel satisfaction measures; more commonly, management
by objectives systems; social analysis; operational audits of any functional, divisional, or staff
component, distribution cost and efficiency; management audits modeling; and so forth.

The list is almost endless and there is no time to discuss each item here.
Which factors should be used? Establishing the standards and tolerance limit is not as easy as
we might expect. Managers need to first define the critical success factors - the factors which are
most important to the strategy and being successful in the business. Most of these measures are
internal. But objective assessments can also be made by comparing the firm's results of similar
firms (see sectionBenchmarking)
Below we present a set of worthwhile guidelines that managers might follow in designing and
implementing more comprehensive strategic audits.
A strategic audit is conducted in three phases: diagnosis to identify how, where, and in what
priority in-depth analyses need to be made; focused analysis; and generation and testing
recommendation. Objectivity and the ability to ask critical, probing questions are key
requirements for conducting a strategic audit.

Phase one: Diagnosis- The diagnostic phase includes the flowing tasks:
1) Review key document such as:

 Strategic plan
 Business or operational plans
 Organizational arrangements
  Major policies governing matters such as resource allocation and performance
measurement.
2) Review financial, market, and operational performance against benchmarks and industry
norms to identify jet variances and emerging trends.
3) Gain an understanding of:

 Principal roles, responsibilities, and reporting relationships.

 Decision - making processes and major decisions made.
 Resources, including physical facilities, capital, management, technology.
 Interrelationships between functional staffs and business or operating units.
4) Identify strategic implications of strategy for organization structure, behavior patterns,
systems, and processes.

 Define interrelationships and linkages to strategy.

5) Determine internal and external perspectives.

 Survey the attitudes and perceptions of senior and middle managers and other key
employees to assess the extent to which these are consistent with the strategic direction of
the firm. One way to accomplish this task is through carefully focused interviews and / or
questionnaires, wherein employees are asked to identify and make trade-offs among the
objectives and variables they consider most important.
 Interview a carefully selected sample of customers and prospective customers and other
key external sources to gain understanding of how the company is viewed.
6) Identify aspects of the strategy that are working well. Formulate hypotheses regarding
problems and opportunities for improvement based on the findings above. Define how and in
what order each should be pursued.

Phase two: Focused analysis-

1) Test the hypotheses concerning problems and opportunities for improvement through analysis
of specific issues.

 Identify interrelationships and dependencies among components of the strategic system.

2) Formulate conclusions as to weaknesses in strategy formulation, implementation deficiencies,

or interactions between the two.

Phase three: Recommendations-

1) Develop alternative solutions to problems and ways of capitalizing on opportunities.

 Test [these alternatives] in light of their resource requirements, risk, rewards, priorities,
and other applicable measures.
2) Develop specific recommendations.
 Develop an integrated, measurable, and time - phased action plan to improve strategic
results.
References:
1. https://sba.thehartford.com/business-management/what-is-strategic-
planning/#:~:text=Strategic%20planning%20is%20the%20process,ll%20use%20to%20reach
%20them.
2. https://corporatefinanceinstitute.com/resources/knowledge/strategy/strategic-planning/
3. https://www.mindtools.com/pages/article/newSTR_91.htm
4. https://sites.google.com/site/tribhuvansite/sm/sm102
5. https://thebusinessprofessor.com/en_US/business-management-amp-operations-strategy-
entrepreneurship-amp-innovation/mintzbergs-5ps-of-strategy
6. https://businessjargons.com/environmental-analysis.html
7. https://blog.corpedgroup.com/blog/five-steps-to-making-strategic-decisions
8. https://hbr.org/2013/11/what-makes-strategic-decisions-different
9. https://www.vedantu.com/commerce/environmental-scanning
10. https://www.marketing91.com/industry-analysis/
11. https://www.wallstreetmojo.com/industry-analysis-guide/
12. https://blog.hubspot.com/marketing/competitive-analysis-kit
13. https://www.managementstudyguide.com/competitor-analysis.htm
14. https://bbamantra.com/etop-environmental-threat-and-opportunity-profile/
15. https://www.cascade.app/blog/internal-analysis
16. https://www.saviom.com/blog/using-the-resource-based-view-strategy-for-competitive-
advantage/
17. https://www.investopedia.com/articles/investing/111014/basics-value-chain-analysis.asp
18. https://sites.google.com/site/tribhuvansite/sm/sm204