Business Policy and Strategic Management

Unit-II

MICHAEL PORTER’S FIVE FORCES MODEL

TECHNICAL
ENVIRONMENT
POLITICAL LEGAL
ENVIRONMENT

POTENTIAL
COMPETITORS

SUPPLIER’S RIVALRY AMONG BUYER’S

POWER FIRMS POWER
SOCIAL
ENVIRONMENT

THREAT OF SUBSTITUTES

MACRO
DEMOGRAPHIC ENVIRONMENT
ENVIRONMENT

Porters 5 forces model

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FIVE FORCES MODEL OF EXTERNAL

Environment (Threats)

The strongest competitive force or forces determines the profitability of an industry and
so are of greatest importance in strategy formulation.

A) THREAT OF ENTRY

New entrants to an industry bring new capacity, the desire to gain market share and
often-substantial resources. Companies diversifying through acquisition into the industry
from other markets often leverage their resources.
The seriousness of the threat of entry depends on the barriers present and on the
reaction from existing competitors that the entrant can expect.

Major Sources of Barriers to Entry

1. Economies of scale: -

These economies deter entry by forcing the aspirant either to come is on a large
scale or to accept a cost disadvantage. Economies of scale an also act as hurdles in
distribution, utilization of the sales forces, financing and nearly any other part of a
business.

2. Product Differentiation: -

Brand identification creates a barrier by forcing entrants to spend heavily to

overcome customer loyalty. It is perhaps the most important entry barrier in soft
drinks, over the counter drugs cosmetics.

3. Capital Requirements: -

Capital is necessary not only for fixed facilities but also for customer credit,
inventories and absorbing star up losses. The need to invest large financial
resources in order to compete creates a barrier to entry. Particularly if the capital is
required for activities. Like R&D

4. Cost Disadvantages Independent of Size: -

Entrenched companies may have cost advantages not available to potential rivals,
no matter what their size and attainable economies of scale. These advantages can
stem from the effects of the learning curve, proprietory technology, and access to
the best raw materials resources, govt subsidies or favorable locations.

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5. Access to Distribution Channels: -

A new food product, for example, must displace others from the supermarket shelf
via price breaks, promotions, intense selling efforts etc. The more limited the
wholesale or retail channels are and the more that existing competitors have these
tied up, obviously the tougher that entry into the industry will be.

6. Govt Policy: -

The govt can limit or even foreclose entry to industries with such controls as license
requirements and limits on access to raw materials.

B) Powerful Suppliers And Buyers: -

A supplier group is powerful if

1. If is dominated by a few companies and is more concentrated than the industry it

sells to.
2. Its product is unique or at least differentiated or if it has built up switching cost.
Switching costs are fixed costs buyers face in changing suppliers.
3. It poses a credible threat of integrating forward into the industry’s business.
4. The industry is not an important customer of the supplier group.

A buyer group is powerful if

1. If purchases in large volumes.

2. The products it purchases from the industry are standard or undifferentiated.
3. It earns low profits, which create great incentive to lower its purchasing costs.
4. The industry’s product is unimportant to the quality of the buyers products or
services e.g. can an aero plane industry afford to buy a low quality product.
5. The buyer poses a credible threat of integrating backward.

In the ready to wear clothing industry, as the buyers (Departmental stores) have
become more concentrated and control has passed to large chains the industry has
come under increasing pressure and suffered falling margins. The industry has been
unable to differentiate its product or increase switching cost that lock in its buyers
enough to neutralize these trends.

C) Threat of substitute Product: - The existence of close substitutes presents a strong

competitive threat, limiting the price a company can charge and thus its profitability. However, if
a company’s products have few close substitutes then, other things being equal, the company
has the opportunity to raise prices and earn additional

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profits. Consequently, its strategies should be designed to take advantage of this fact.

For example, companies in the coffee industry compete indirectly with those in the tea
and soft drink industry. The price that companies in the coffee industry can charge are
limited by the existence of substitutes such as tea and soft drinks

1. Rivalry among established companies: - If this competitive force is weak

companies have an opportunity to raise prices and earn greater profits. Price
competition limits profitability by reducing the margins that can be earned on
sale. The extent of rivalry among established companies within an industry is
largely a function of three factors.

1. Industry competitive structure

2. Demand conditions
3. The height of exit barriers in the industry

1.Industry Competitive Structure: -

This refers to the number and size distribution of companies in an industry. Structures
vary from fragmented to consolidated. A fragmented industry contains a large number of
small companies, none of which is in a position to dominate the industry. (Perfect
competition) .A consolidated industry is dominated by a small number of large
companies(oligopoly).Fragmented industry includes agriculture, health clubs, real estate
brokers etc. Consolidated industry includes aerospace, automobiles, pharmaceutical
etc.

Low entry barriers and commodity type products that are hard to differentiate
characterize fragmented industry. The combination of these traits tends to result in
boom and bust because of the ease of new entry and will be followed by price wars and
bankruptcies. Since differentiation is often difficult in these industries, the best strategy
for a company to pursue in such circumstances may be one of cost minimization. This
strategy allows a company to rack up high returns in a boom and survive any
subsequent bust.

Consolidated industries are interdependent. Competitive actions of one company

directly affects the profitability of others in the industry. Price wars constitute a major
threat. Companies reduce this threat by following the price lead set by a dominant
company in the industry. When price wars are a threat, companies compete on non-
price factors such as product quality and design features. This type of competition
constitutes an attempt to build brand loyalty.

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2. Demand Conditions. –
Growing demand tends to moderate competition by providing greater room for
expansion. Demand grows when the market as a whole is growing through the addition
of new consumers or when existing consumers are purchasing more of an industry’s
products. When demand is growing companies can increase revenues without taking
market share away from other companies.
Thus growing demand gives a company a major opportunity to expand
operations.
When demand is declining, a company can attain a growth only by taking market share
away from other companies.

3. Exit Barriers:-

Exit barriers are a serious competitive threat when industry demand is declining. Exit
barriers are economic, strategic and emotional factors that keep companies competing
in an industry even when returns are low. Common exit barriers include the following.

1. Investments in plan- equipment that have no alternative uses.

2. High fixed costs of exits such as compensation to employees.
3. Emotional attachments to an industry.
4. Strategic relationship between business units.

Threat in an international context

Non-domestic competition is an important consideration in five forces analysis of the

attractiveness of the industries.

Swiss mechanical watch industry underestimated the threat from U.S and Japanese
electronics firms who developed electronic time keeping devices. It took several years
for the Swiss watch industry to recover from this unanticipated threat.

U.S automobile industry also underestimated the threat posed by Japanese Car
manufactures.

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What Is Competitiveness

The ability to learn faster than your competitor may be the only sustainable competitive
advantage. Competitiveness is about relooking at your business every day. It is not
about leading today. It is about tomorrow. The unique combination of quality, service
and price (QSP) has to be continuously fine tuned to turn satisfied customers into
delighted customers.

How Competitive Is Your Business

1. Which customers are you serving today, how will your future customers be
different?
2. Who are your competitors today, who will they be tomorrow?
3. What is the basis of your competitiveness advantage today? What will that be in
future?
4. Where do your margins come from today? Where will they come from tomorrow?
5. What skills or capability make you unique today? What will make you unique
tomorrow?

Competitiveness is a basket with excellence in all fields – planning, manufacturing,

marketing and service. It means being truly world class at all points of time. This
includes efficiency, performance, productivity and growth.

COMPONENTS / PARTS OF BUSINESS

ENVIRONMENT

There are two major parts of or components of business

environment known as -
i) Internal Environment
ii) External environment

The external environment is divided into two parts known as

i) Micro component of environment and
ii) Macro component of environment

These all parts of the environment will be present in the following way

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EXTERNAL ENVIRONMENTAL ANALYSIS

The environment of any organisation is ’the aggregate of all conditions , events and
influences the surround and affect it’.

Characteristics of environment:

1. Complex: The environment consists of a number of factors, events, conditions

and influences arising from different sources. These forces interact with each
other and which makes it complex. The more complex the environment, the more
variables have to be taken into consideration and hence more difficult to make
effective decisions.
2. Dynamic: The environment is never static, it is constantly changing. Due to
change in environmental factors the organisation has to change its direction quite
often.
3. Uncertain: Environmental uncertainty means the degree of complexity plus the
degree of change existing in an organisation’s external environment.
On the one hand environmental uncertainty is a threat to strategic managers
while on the other hand environmental uncertainty provides opportunity.
4. Environment has a far reaching effect: The growth and profitability of an
organisation depends critically on the environment in which it exists. Any change
in environment has an impact on the organisation.

ENVIRONMENTAL ANALYSIS:

Environmental analysis is the process by which strategists monitor the environmental

sectors to determine opportunities for and threats to their firm.

Environmental diagnosis consists of managerial decisions made by assessing the

significance of the data (opportunities and threats) of the environment analysis.

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These decisions lead other decisions like whether to react, ignore, try to influence or
anticipate the opportunities or threats discovered. Thus, manager’s perception of the
environment may differ from its objective condition.

In effect, diagnosis is an opinion resulting from an analysis of the facts to determine the
nature of a problem with a view to act to take advantage of an opportunity to effectively
manage a threat.

NEED FOR ENVIRONMENTAL ANALYSIS:

1. To detect key trends and events in the environment

2. To develop forecasts the scenarios.
3. To identify opportunities and threats
4. To get information in the competitive environment
5. To set appropriate objectives
6. To avoid strategic surprise and to ensure long- term health.
7. To analyse and evaluate strategic alternatives.
8. To formulate winning strategies responsive to competitive forces.
9. To develop sustainable advantages.

GENERAL VS. RELEVANT ENVIRONMENT:

The wider perception of the environment is generally designated as general

environment. It consists of international, national and local economy, social change,
demographic variables, political systems, technology, and attitude towards business,
energy sources, raw materials and many other factors.

All organisation in some way or the other, are concerned about the general
environment. But the immediate concerns of any organisation are confined to just a part
of the general environment which is of high strategic relevance to the organisation. This
part of the environment could be termed as relevant environment.

The organisation identifies the relevant environment and systematically appraises and
incorporates its result into strategic planning.

ENVIRONMENTAL SECTORS:

The classification of general environment into sectors helps an organisaiton to cope with
its complexity; comprehend the different influences operating and relating the
environmental changes to its strategic management process.

The following are the important environmental sectors:

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1. Economic Environment: the state of the economy at present and in future can
affect the fortunes aand strategy of the firm. The specific economic factors that
many firms analyse and diagnose include:
i. The stages of business cycle: The economy can be classified as being in
a depression, recession, and recovery or boom stage.
ii. The inflationary or deflationary trend in the process of goods and services.
iii. Monetary policy, interest rates and devaluation or revaluation of the
currency in relation to other currency.
iv. Fiscal policies: Tax rates for firms and individuals.
v. Balance of payments: surplus or deficit in relation to foreign trade
vi. Unemployment rates and trends in the gross national product, sectoral
growth – rates of agriculture, industry , services etc.

Each of these facets of the economy can help or hinder the achievement of a firm’s
objectives and lead to success or failure for the strategy.

2. International Environment: The international or global environment consists of

all those factors that operate at the transnational, cross-cultural and across the
border level, having an impact on the business of an organisation.
Some of the important factors and influences operating in the international
environment are as follows:
 Globalisation
 Global economic forces
 Global trade and commerce
 Global financial systems
 Global demographic pattern
 Global information system
 Global technological system
 Global legal system etc.

The international environment is a special case of the general and industry

environments deserving special attention by strategists. That is all the other
factors like socio-economic, government, customer, competitor etc. all apply
here.

3. Market environment: The market environment consists of factors related to the

groups and other organisations that competes with and have impact on
organisation’s business.

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Some of the important factors and influences operating in market environment

are as follows:

 Consumer behavior related factors.

 Product related factors
 Marketing channel related factors
 Competition related factors etc.

Effect of marketing environment is largely depend on type of industry structure. In

monopolies and oligopolies the effect of market environment is lesser than what
it is under pure competition.

4. Political Environment: The political environment consists of factors related to

management of public affairs and their impact on the business of an
organisation. The factors that influence the political environment may be political
system, political parties, centre of power, elections, funding of elections,
legislations with respect to economic and industrial promotion and regulation etc.

Most government decisions related to business are based on political

considerations in line with the political philosophy followed by ruling party at the
centre and the state level.

5. Regulatory and legal environment: The regulatory environment consists of

factors related to planning, promotion and regulation of economic activities by the
government. Regulatory environment factor can be policies related to foreign
investment, licensing import and export etc.
The legal environment consists of the legal system, legislations, ordinances etc.
Factors affecting legal environment may be business related laws, industrial
laws, taxation laws etc.
6. Socio-cultural environment: The socio-cultural environment consists of factors
related to human relationships within the society, the development, forms and
functions of such a relationship and shared behavior of groups of human being
having impact on business organisation.

Socio-economic factors focuses on the values and attitudes, customs, beliefs,

rituals and practice of people (customers & employees) which can affect strategy.
These values translate into lifestyle changes which affect the demand for
products and services like dresses, books, leisure activities etc.

7. Supplier environment: The supplier environment consists of factors related to

the cost, reliability and availability of the factors of production or service that have
an impact on the business of an organisation.

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Factors influencing supplier environment are supply of raw a material , parts and
components , availability of finance and energy, availability of human resources,
bargaining power of suppliers and existence of substitutes.

8. Technical Environment: The technological environment consist of those factors

related to knowledge applied and the material and machines used in the
production of goods and services that have and impact on the business of an
organisation.
Technological factors may be source of technology, stage of technological
development, environmental effect of technology etc.
Strategists cannot ignore this because it is one of the dimension of business
definition.

APPROACHES TO ENVIRONMENTAL SCANNING:

There are three approaches for sorting out information for environmental scanning:

1. Systematic approach: Under this approach information for environmental

scanning is collected systematically. Information related to markets and
customers, changes in legislation and regulations that have a direct impact on an
organisation’s activities, government policy statement pertaining to the
organisation’s business and industry etc. could be collected continuously to
monitor changes and take the relevant factor into account.
2. Ad hoc approach: Using this approach an organisation may conduct special
surveys and studies to deal with specific environmental issues from time to time.
Such studies may be conducted, for instance, when an organisation has to
undertake special projects, evaluate existing strategies or devise new strategies.
3. Processed - form approach: In this approach the organisation uses information
in a processed form, available from different sources both inside and outside the
organisation. When an organisation uses information supplied by government
agencies or private institutions, it uses secondary sources of data and the
information is available in processed form.

Techniques for Environmental Analysis or Scanning:

Some of the techniques which area generally used for carrying out environmental
analysis are:

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1. PESTEL ANALYSIS
2. PEST ANALYSIS
3. STEEP ANALYSIS
4. SWOT ANALYSIS
5. TOWS ANALYSIS
6. QUEST
7. EFE MATRIX
8. CPM

Method 1, 2 and 3 are related with the factors or the environment that is political
environment, economic environment, socio-cultural environment, technological
environment, ecological environment and legal environment. Basically the information
related to the environment in real time situation is analysed with the help of these three
methods.

SWOT AND TOWS method of environment analysis takes into account not only
external environmental factors but also the internal environmental factors of the
organisation.

QUEST: Quick EnvironmentScanning Technique – QUEST is a four step process,

which uses scenario building for environmental analysis.

The four major steps are:

I. Managers make observations about major events and trends in the

environment.
II. They speculate on a wide range of issues that are likely to affect the future of
the business enterprise.
III. A report is prepared summarizing the issues and their implications to the firm
together with II and III scenarios.
IV. The report and scenarios are reviewed by strategists based on which they
identify feasible options.

Thus QUEST helps in generating feasible alternative strategies for consideration of

the management.

EFE Matrix: The External Factor Evaluation Matrix helps to summarise and evaluate
the various components of external environment. The EFE matrix can be developed in
five steps:

I. List 10 to 20 important factors.

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II. Assign a weight to each factor from 0.0(not important) to 1.0 (most
important) . The higher the weight, the more important is the factor to the
current and future success of the company.
III. Assign a rating to each factor 1 (poor), 2(average), 3(above average),
4(superior). The rating indicates how effectively the firm’s current strategies
respond to that particular factor.
IV. Multiply each factor’s weight by its rating to determine a weighted score.
V. Finally add the individual weighted scores for all the external factors to
determine the total weighted score for the organisation.

CPM: Competitive Profile Matrix: - This is a competitor analysis, which focuses on each
company against whom a firm competes directly. It helps to identify the strengths and
weaknesses of the major competitors of the firm, vis-à-vis, the firm. Generally in this
critical success factors (CSFs) are compared.

ETOP: Environmental Threat Opportunity Profile: ETOP gives a summarised picture of

environmental factors and their likely impact on the organisation. The preparation of
ETOP involved in dividing the environment into different sectors and then analyzing the
impact of each sector on the organisation. A comprehensive ETOP requires subdividing
each environmental sector into sub-factors and then the impact of each sub-factor on
the organisation is described in the form of a statement. A summary ETOP may only
show the major factors for the sake of simplicity.

Example of ETOP:

Environmental Factors Impact of each factor

Economic Factors (+)Rising income levels
(-) Price competition
Social factors (-) Change in life style
(-) Change in consumer tastes
Technological factors (+)Product becomes unique
(-) Acquisition of new technology is
expensive.
Customer (+) Loyalty is high
(+)Buyer preference for differentiated
products.
Supplier (-)High input costs
(+)Improved quality

From the example of ETOP we can see that a company can capitalize on rising income
levels , buyer’s loyalty to the firm’s products and buyer preference for differential
products even though the price is high. But this would depend on the firm’s acquisition
of latest technology, which is expensive.

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Thus, preparation of ETOP provides the strategists with a clear picture of which
environmental factors have a favourable impact on the firm and which have an
unfavourable or adverse effect. With the help of an ETOP, a firm can judge where it
stand s in respect of its environment and such an understanding is helpful in formulating
appropriate strategies.

INTERNAL ENVIRONMENT ANALYSIS

While environmental survey helps to identify areas of opportunities and threats in the
areas of interest, in order to tap these opportunities, it is necessary to find out whether
the firm has the requisite capabilities. For this an internal appraisal is undertaken.

Internal appraisal has three distinct parts:

– Assessment of the strengths and weaknesses of the firm in different functional areas;

– Appraisal of the health of individual businesses;

– Assessment of the firm’s competitive advantage and core competence.

The main task here is to decide the extent of business growth, the firm wants to
achieve. The firm examines the present level of performance, its achievable level over
the planning period, and its aspirational level.

Balancing the opportunities with the organization’s capabilities and ambitions, the firm
figures out its growth objective. Usually, firms set objectives in all key areas, like, sales,
profits, asset formation, productivity, market share, and corporate image. Objectives
have to be stated clear-cut in a measurable time-bound manner. In setting objectives,
the firm integrates its growth ambition with the findings it has made with its environment
survey and internal appraisal.

Product-market scope, growth vector, competitive advantage and synergy are the
constituents of corporate strategy. Findings from the environment survey/opportunity-
threat profile, the competitive advantages and synergies enjoyed, and the resources
available for growth, are the other major parameters in deciding the basket of
businesses and the product market posture. Corporate strategy has to specify through
which businesses and through what kind of product-market posture is the growth
objective going to be achieved. And it is from this statement that each business of the
corporation –existing and new ones – derives its growth targets, direction and priority.

Internal environmental factors are these, which resides within company premises and
are easily adjustable and controllable. Company as per its necessity & requirements,

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moulds it and take appropriate support from these factors, so that business activity can
run safety & smoothly.

i) Value System : The value system is helm (the position of control) of affairs of the
founders. Therefore it is widely acknowledge fact that the extent to which the value
system is shared by all in the organization is an important factor contributing to success.
If the founder has strong value, then he will never do any activity which is out of limit.
For example, Murugappa group had taken over the E.I.D. porry group, which is one of
the most profitable businesses. Its one of ailing business was liquor, which was sold off
by Murugappa, as it did not fit into its value system.

ii) Mission and Objectives: Mission is basic or fundamental cause because of what the
company came into existence. It is company’s domain, priorities, or ways of
development. Generally company is objectives are consistent with mission statements.
Therefore it is always advisable to the company to Frame a mission statement and then
to list out various objectives. The study analysis of internal environment enabled the
company to find out, whether the objectives are in line with mission statement or not.

iii) Plans & Policies : Plans & policies are nothing but deciding in advance, of a
particular activity i.e. what is to be done, how it is to be done, when it is to be done etc.
and according executing them to attain the success. Here business unit need to frame
there plans & policies with the consultation of business objectives and available
resources. Here internal environment analysis will help to the firm to know the
appropriateness of plans & policies.

iv) Human Resources : Human resources are most important resources among the
required all types of resources by the firm. There resources are very sensible; therefore
every business need to tackle them with carefulness and cautiousness, because the
survival and success of the firm is largely depends on the quality of human resources.
The internal environmental analysis in respect of human resources reveals the
shortcomings of human resources and measures need to be undertaken for its
creativeness.

v) Physical Resources : Physical resources consist of machines, equipments, buildings

furniture’s and fixtures. The analysis of these resources reveals the deficiencies of
these resources. The business may take corrective steps to remove these deficiencies.
vi) Financial resources: Finance is the back bone of each & every business. So every
business needs to have proper financial management, which includes the consideration
of financial sources. Financial policies, financial positions, capital structure,
management of working & fixed capital, build up adequate reserves for future etc. The
analysis of there resources reveals that the soundness of its financial position.
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vii) Labour management relations: It is stated that the business flourish to a greater
extent, if it is supported by labour / human resources well. Even if there are certain
shortcomings on the part of other physical, natural, resources, but there is good relation
between management and labour then there would not be a problem. To keep a good
relationship with labours a management needs to take care of all types of problems of
the labour. It includes salary, wages, facilities allowances, good working conditions,
their promotion transfer, etc. The analysis & internal environmental discloses the certain
short comings.

Internal Analysis

Tangible Resources – Assets that can be seen touched or quantified.

- Financial resources (borrowing capacity)

- Physical Resources (facilities, locations)

- Organizational structure (reporting structures)

- Technological (patents)

Intangible Resources

- Human resources (experience, training)

- Resources for innovation (technical employees, facilities)

- Reputation

Brand Equity

- Brand name

- maintaining brand equity (Mercedes example – value/performance and Japanese

automakers)

VRIO analysis

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VALUE CHAIN ANALYSIS

Introduction

For a company to survive in today’s highly flooded markets a company must, at least
temporarily, achieve a competitive advantage. There are many ways for a firm to
achieve this advantage and two generic ones are: price leadership and differentiation.
Price leadership is simply when a company keeps prices below those of his
competitors. Differentiation occurs when a company creates a distinctive position in the
market through product functionality, service, or quality.

If either of these two management strategies are chosen to be implemented by a

company, value chain analysis can help the firm focus its plan and thus achieve a
competitive advantage. There are two components of value chain analysis: the industry
value chain and the company’s internal value chain. The industry value chain includes
all of the value-creating activities within the whole industry, beginning with the basic raw
material and finishing with the delivery of the product. The internal value chain of a
company includes all the value creating activities within that specific firm.

Primary Activities

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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

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management are examples of necessary infrastructure that businesses can use to their
advantage.

Using Porter’s Value Chain

To identify and understand your company’s value chain, follow these steps.

Step 1 – Identify sub activities for each primary activity.

For each primary activity, determine which specific sub activities create value. There
are three different types of sub activities:

• Direct activities create value by themselves. For example, in a book publisher’s

marketing and sales activity, direct sub activities include making sales calls to
bookstores, advertising, and selling online.

• Indirect activities allow direct activities to run smoothly. For the book publisher’s sales
and marketing activity, indirect sub activities include managing the sales force and
keeping customer records.

• Quality assurance activities ensure that direct and indirect activities meet the
necessary standards. For the book publisher’s sales and marketing activity, this might
include proofreading and editing advertisements.

Step 2 – Identify sub activities for each support activity.

For each of the Human Resource Management, Technology Development and

Procurement support activities, determine the sub activities that create value within
each primary activity. For example, consider how human resource management adds
value to inbound logistics, operations, outbound logistics, and so on. As in Step 1, look
for direct, indirect, and quality assurance sub activities. Then identify the various value-
creating sub activities in your company’s infrastructure. These will generally be cross-
functional in nature, rather than specific to each primary activity. Again, look for direct,
indirect, and quality assurance activities.

Step 3 – Identify links.

Find the connections between all of the value activities you’ve identified. This will take
time, but the links are key to increasing competitive advantage from the value chain
framework. For example, there’s a link between developing the sales force (an HR

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investment) and sales volumes. There’s another link between order turnaround times,
and service phone calls from frustrated customers waiting for deliveries.

STRATEGIC ADVANTAGE PROFILE

Every firm has strategic advantages and disadvantages. For example, large firms have
financial strength but they tend to move slowly, compared to smaller firms, and often
cannot react to changes quickly. No firm is equally strong in all its functions. In other
words, every firm has strengths as well as weaknesses. Strategists must be aware of
the strategic advantages or strengths of the firm to be able to choose the best
opportunity for the firm. On the other hand they must regularly analyse their strategic
disadvantages or weaknesses in order to face environmental threats effectively. In this session,
we shall examine the strategic advantage factors that management analyses and diagnoses to
determine the internal strengths and weaknesses with which it must face the opportunities and
threats from the environment. In the discussion of these factors, it is not possible to consider in
detail, subject matter which are covered by courses on Marketing, Human Resources, and
Finance Management etc. Only a listing of these factors will be presented. Students should refer
to books and courses that they have attended for details. The order of discussion does not
indicate importance of the subjects. It is just a convenient ordering of line and staff factors.
These factors will be covered under the following broad headings:

4.2.1 Marketing and Distribution

4.2.2 R & D and Engineering
4.2.3 Production and Operations Management
4.2.4 Corporate Resources and Personnel
4.2.5 Finance and Accounting

Examples:
The Strategist should look to see if the firm is stronger in these factors than its competitors.
When a firm is strong in the market, it has a strategic advantage in launching new products or
services and increasing market share of present products and services.

Strategic Advantage Factors: Marketing and Distribution

1. Competitive structure and market share: To what extent has the firm established a strong mark
share in the total market or its key sub markets?

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2. Efficient and effective market research system.

3. The product-service mix: quality of products and services.
4. Product-service line: completeness of product-service line and product-service mix; phase of
life-cycle the main products and services are in.
5. Strong new product and new-service leadership.
6. Patent protection (or equivalent legal protection for services).
7. Positive feelings about the firm and its products and services on the part of the ultimate
consumer.
8. Efficient and effective packaging of products (or the equivalent for services).
9. Effective pricing strategy for products and services.
10. Efficient and effective sales force: close ties with key customers. How vulnerable are we in
terms of concentrating on sales to a few customers?
11. Effective advertising: Has it established the company's product or brand image to develop
loyal customers?
12. Efficient and effective marketing promotion activities other than advertising.
13. Efficient and effective service after purchase.
14. Efficient and effective channels of distribution and geographic coverage, including
internal efforts.

R & D (Research and Development) and Engineering function can be a strategic advantage
for two reasons:
1. It can lead to new or improved products for marketing
2. It can lead to the development of improved manufacturing or material processes to gain cost
advantages through efficiency.

Strategic Advantage Factors: R&D and Engineering

1. Basic research capabilities within the firm

2. Development capability for product engineering
3. Excellence in product design
4. Excellence in process design and improvements
5. Superior packaging developments being created
6. Improvements in the use of old or new materials
7. Ability to meet design goals and customer requirements
8. Well equipped laboratories and testing facilities
9. Trained and experienced technicians and scientists
10. Work environment suited to creativity and innovation
11. Managers who can explain goals to researchers and research results to higher managers
12. Ability of unit to perform effective technological forecasting.

DIFFERENT APPROACHES TO DEVELOP A COMPETITIVE ADVANTAGE:

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1. The first approach is to compete based on existing strengths. This approach is called KFS,
abbreviated from Key Success Factors. The firm can gain strategic advantage if it focuses
resources on one crucial point.

2. The second approach is still based on existing strengths but avoids head-on competition. The
firm must look at its own strengths which are different or superior to that of the competition and
exploit this relative superiority to the fullest. For example, the strategist either (a) make s use of
the technology, sales network, and so on, of those of its products which are not directly
competing with the products of competitors or (b) makes use of other differences in the
composition of assets. This avoids head-on competition.
3. The third approach is used for example to compete directly with a competitor in a well-
established, stagnant industry. Here an unconventional approach may be needed to upset the key
factors for success that the competitor has used to build an advantage. The starting point is to
challenge accepted assumptions about the way business is done and gain a novel advantage by
creating new success factors.
4. Finally, a competitive advantage may be obtained by means of innovations which open new
markets or result in new products. This approach avoids head-on competition but requires the
firm to find new and creative strengths. Innovation often involves market segmentation and
finding new ways of satisfying the customer's utility function.
5. In each of these approaches the principal point is to avoid doing the same thing as the
competition on the same battleground. So the analyst needs to decide which of these approaches
might be pursued to develop a sustainable distinctive competence.

STRATEGIC ADVANTAGE PROFILE

SAP tries to find out the org strengths and weaknesses with relation to some CSF

CRITICAL SUCCESS FACTOR ANALYSIS

Developed – John Rockart
• Satisfactory performance – required – for organization – achieve goals
• Identify – tasks & requirements – for success
• CSFs – means to achieve goals
• Sources of CSF - industry, environment & temporal factors

Characteristics of CSF Analysis

–Internal
–External
–Monitor
–Develop

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A Profile of strategic advantages (SAP) is a summary statement, which provides an

overview of the advantages and disadvantages in key areas likely to affect future
operations of the firm. It is a tool for making a systematic evaluation of the strategic
advantage factors, which are significant for the company in its environment. The
preparation of such a profile presupposes detailed analysis and diagnosis of the factors
in each of the functional areas (Marketing, Production, Finance and Accounting,
Personnel and Human Resources, R& D). The relevant data for the critical areas may
go as a supplement to the profile. The following Strategic Advantage Profile relates to a
food processing company in India.

Since the Strategic Advantage Profile is a summary statement of corporate capabilities,

in summarizing the functional competencies a comparative view needs to be taken in
the light of external conditions and the time horizon of projections. For example, while
comparing the level of inventory holding, one may find it to be relatively higher than that
of competing firms; as such it should be regarded as a weakness. But if the market
demand shows an increasing trend, apparent weakness should be considered strength.

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Functional – area profile and resource deployment matrix

Developed by Hofer and Schendel, this method requires the preparation of a matrix of
functional areas with characteristics common to each, e.g., focus of financial outlay,
physical resource position, organizational system, and technological capability. The
functional area profile of a manufacturing company is given by way of illustration.
Following this exercise, it is required that the resource outlay and focus of efforts over
time in the respective functional areas be presented also in the form of a matrix.

Models of Strategic Management:

BCG Matrix

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BCG Matrix is a corporate planning tool, which is used to portray firm’s brand portfolio
or SBUs on a quadrant along relative market share axis and speed of market growth
axis. BCG matrix is a framework created by Boston Consulting Group to evaluate the
strategic position of the business brand portfolio and its potential. It classifies business
portfolio into four categories based on growth rate of that industry and relative market
share. These two dimensions reveal likely profitability of the business portfolio in terms
of cash needed to support that unit and cash generated by it.

Relative market share. One of the dimensions used to evaluate business portfolio is
relative market share. Higher corporate’s market share results in higher cash returns.
This is because a firm that produces more, benefits from higher economies of scale and
experience curve, which results in higher profits. Nonetheless, it is worth to note that
some firms may experience the same benefits with lower production outputs and lower
market share.

Market growth rate. High market growth rate means higher earnings and sometimes
profits but it also consumes lots of cash, which is used as investment to stimulate
further growth. Therefore, business units that operate in rapid growth industries are
cash users and are worth investing in only when they are expected to grow or maintain
market share in the future.

There are four quadrants into which firm’s brands are classified:

• Dogs. Dogs hold low market share compared to competitors and operate in a slowly
growing market. In general, they are not worth investing in because they generate low
or negative cash returns. But this is not always the truth. Some dogs may be profitable
for long period of time, they may provide synergies for other brands or SBUs or simple
act as a defense to counter competitors moves. Therefore, it is always important to
perform deeper analysis of each brand or SBU to make sure they are not worth
investing in or must be divested. Strategic choices: Retrenchment, divestiture,
liquidation.

• Cash cows. Cash cows are the most profitable brands and should be “milked” to
provide as much cash as possible. The cash gained from “cows” should be invested into

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stars to support their further growth. According to growth-share matrix, corporates

should not invest into cash cows to induce growth but only to support them, so they can
maintain their current market share. Cash cows are usually large corporations or SBUs
that are capable of innovating new products or processes, which may become new
stars. If there would be no support for cash cows, they would not be capable of such
innovations. Strategic choices: Product development, diversification, divestiture,
retrenchment

 Stars. Stars operate in high growth industries and maintain high market share.
Stars are both cash generators and cash users. They are the primary units in
which the company should invest its money, because stars are expected to
become cash cows and generate positive cash flows. This is true in rapidly
changing industries, where new innovative products can soon be outcompeted
by new technological advancements, so a star instead of becoming a cash cow,
becomes a dog. Strategic choices: Vertical integration, horizontal integration,
market penetration, market development, product development.

• Question marks. Question marks are the brands that require much closer
consideration. They hold low market share in fast growing markets consuming large
amount of cash and incurring losses. It has potential to gain market share and become
a star, which would later become cash cow. Question marks do not always succeed and
even after large amount of investments they struggle to gain market share and
eventually become dogs. Therefore, they require close consideration to decide if they
are worth investing in or not. Strategic choices: Market penetration, market and product
development, divestiture.

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Benefits of BCG Matrix

• The BCG-Matrix is helpful for managers to evaluate balance in the company’s current
portfolio of Stars, Cash Cows, Question Marks and Dogs.

• BCG-Matrix is applicable to large companies that seek volume and experience effects.

• The model is simple and easy to understand.

• It provides a base for management to decide and prepare for future actions.

• If a company can use the experience curve to its advantage, it should be able to
manufacture and sell new products at a price that is low enough to get early market
share leadership.

Limitations of BCG Matrix

• It neglects the effects of synergies between business units.

• High market share is not the only success factor.

• Market growth is not the only indicator for attractiveness of a market.

• Sometimes Dogs can earn even more cash as Cash Cows.

• The problems of getting data on the market share and market growth.

• There is no clear definition of what constitutes a “market”

• A high market share does not necessarily lead to profitability all the time.

• The model uses only two dimensions – market share and growth rate. This may tempt
management to emphasize a product, or to divest prematurely.

• A business with a low market share can be profitable too.

 # What is the McKinsey 7S Model?

The McKinsey 7S Model refers to a tool that analyzes a company’s “organizational design.” The
goal of the model is to depict how effectiveness can be achieved in an organization through the

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interactions of seven key elements – Structure, Strategy, Skill, System, Shared Values, Style, and
Staff. The focus of the McKinsey 7s Model lies in the interconnectedness of the elements that are
categorized by “Soft Ss” and “Hard Ss” – implying that a domino effect exists when changing
one element in order to maintain an effective balance. Placing “Shared Values” as the “center”
reflects the crucial nature of the impact of changes in founder values on all other elements.

Structure of the McKinsey 7S Model

Structure, Strategy, and Systems collectively account for the “Hard Ss” elements, whereas the
remaining are considered “Soft Ss.”

1. Structure

Structure is the way in which a company is organized – chain of command and accountability
relationships that form its organizational chart.

2. Strategy

Strategy refers to a well-curated business plan that allows the company to formulate a plan of
action to achieve a sustainable competitive advantage, reinforced by the company’s mission and
values.

3. Systems

Systems entail the business and technical infrastructure of the company that establishes
workflows and the chain of decision-making.

4. Skills

Skills form the capabilities and competencies of a company that enables its employees to achieve
its objectives.

5. Style

The attitude of senior employees in a company establishes a code of conduct through their ways
of interactions and symbolic decision-making, which forms the management style of its leaders.

6. Staff

Staff involves talent management and all human resources related to company decisions, such as
training, recruiting, and rewards systems

7. Shared Values - The mission, objectives, and values form the foundation of every
organization and play an important role in aligning all key elements to maintain an effective
organizational design.

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Application of the McKinsey 7S Model

The subjectivity surrounding the concept of alignment concerning the seven key elements
contributes to why this model seems to have a complicated application. However, it is suggested
to follow a top-down approach – ranging from broad strategy and shared values to style and
staff.

Step 1: Identify the areas that are not effectively aligned

Is there consistency in the values, strategy, structure, and systems? Look for gaps and
inconsistencies in the relationship of elements. What needs to change?

Step 2: Determine the optimal organization design

It is important to consolidate the opinions of top management and create a generic optimal
organizational design that will allow the company to set realistic goals and achievable objectives.
The step requires a tremendous amount of research and analysis since there are no
“organizational industry templates” to follow.

Step 3: Decide where and what changes should be made

Once the outliers are identified, the plan of action can be created, which will involve making
concrete changes to the chain of hierarchy, the flow of communication, and reporting
relationships. It will allow the company to achieve an efficient organizational design.

Step 4: Make the necessary changes

Implementation of the decision strategy is a make-or-break situation for the company in

realistically achieving what they set out to do. Several hurdles in the process of implementation
arise, which are best dealt with a well-thought-out implementation plan.

Advantages of the Model

 It enables different parts of a company to act in a coherent and “synced” manner.

 It allows for the effective tracking of the impact of the changes in key elements.

 It is considered a longstanding theory, with numerous organizations adopting the model

over time.

Disadvantages of the Model

 It is considered a long-term model.

 With the changing nature of businesses, it remains to be seen how the model will adapt.

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 It seems to rely on internal factors and processes and may be disadvantageous in

situations where external circumstances influence an organization.

Practical Example

The McKinsey 7S model can be applied in circumstances where changes are being brought into
the organization that may affect one or more of the shared values. Suppose a company is
planning to undertake a merger. It will affect how the company is organized since new staff will
be coming in. It will also affect the structure of the company, along with strategic decision-
making, as new ideas flow in through synergy.

In such a case, the McKinsey 7s model can be used to first identify the inconsistent areas – here,
it would primarily be the structure, staff, and strategy. After identifying the relevant areas, the
company can make effective decisions to optimally re-organize and incorporate the changes in a
way that streamlines the merger process – after conducting extensive research and analysis of
the consequences that the changes bring to the company.

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