Chapter - 2

STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

Strategic Strategy and Business Understanding Product Industry Environment

Analysis Environment and Industry Analysis

Market and Competitive

Customer Strategy

1. INTRODUCTION
⇢ Business activities occur within organizational settings, ranging from small local
businesses to multinational corporations.
⇢ Organizations are diverse in terms of size, products, markets, geographical
coverage, and legal status.
⇢ They operate within an external context known as the organizational or
business environment.
⇢ The business environment consists of all external factors that influence
managerial decision-making.
⇢ These factors include economic conditions, technological advancements, social
and cultural trends, political and legal regulations, and competitive forces.
⇢ Managers continuously interact with and respond to changes in the business
environment to adapt and thrive.
⇢ Strategic formulation initiates with strategic analysis, aiming to gather information about internal and external
environments.
⇢ Objective: Assess possibilities, formulate strategic objectives, and contemplate strategic activities.
⇢ Focus on external environment in this chapter for strategic analysis.
⇢ Understanding of identifying and addressing strategies to adapt within complex and turbulent external environment
emphasized.
2. STRATEGIC ANALYSIS
⇢ Strategy formulation requires more than intuition, opinions, instincts, and creativity.
⇢ Judgments about strategies must derive from analysis of external environment and internal resources.
⇢ Environmental scanning is a continuous activity for businesses, either informal or formal.
⇢ Importance of gathering information from various sources, including informal ones, emphasized.
⇢ Informal techniques may lead to missed opportunities and unexpected risks.
⇢ Systematic approach to environmental assessment crucial for managing risk and uncertainty.
⇢ Rapidly expanding organizations commonly employ strategic planning across their operations.
⇢ Strategic analysis within business planning is systematic, guides resource allocation, and supports goal achievement.
⇢ Encourages consideration of competitors and facilitates evaluation of business plans for competitive advantage.
⇢ Key situational considerations:
- Industry and competitive conditions
- Organization's capabilities, resources, internal strengths, weaknesses, and market position
⇢ Accurate diagnosis of business situation crucial for managerial preparation, setting long-term direction, objectives,
and crafting winning strategy.
⇢ Perceptive understanding of external and internal environments essential to avoid strategic plans that don't fit well,
lack competitive advantage, and fail to improve company performance.
⇢ Strategic analysis is a continuous process with limitations.
⇢ Major limitations:
- Provides innovative options but doesn't indicate which one to choose. Options may be overlapping, confusing,
or difficult to implement.
- Can be time-consuming, affecting overall organizational functioning and hindering other innovations.

➱ Issues to consider for Strategic Analysis

1. Strategy evolves over a period of time
∙ Strategy evolves over time, influenced by various factors and constrained by different challenges.
∙ Key element of strategic analysis is considering probable outcomes of everyday decisions.
 ∙ Current strategy is a result of numerous small choices made over an extended period.
∙ Management may radically change strategy to accelerate organizational growth.
∙ Strategy influenced by experience but requires updating based on clear results, evolving over time.
2. Balance of external and internal factors
∙ Strategic analysis requires balancing external and internal factors, considering opportunities, influences, and
constraints.
∙ Management must weigh factors driving decisions, such as entering new markets, against limiting constraints
like competition.
∙ Limiting constraints have implications on the type, degree, volume, and significance of impact, some within
control and others beyond existing capabilities.
3. Risk
∙ Principle of maintaining balance crucial in strategic analysis, yet
complexity and intermingling of variables in environment reduce
strategic balance.
∙ Various factors such as competitive markets, liberalization,
globalization, economic cycles, technological advancements, and
international relations influence businesses and pose varying
degrees of risk.
∙ Strategic analysis involves identifying potential imbalances or risks
and assessing their consequences.
∙ External risk arises from inconsistencies between strategies and
environmental forces.
∙ Internal risk stems from forces within or directly interacting with
the organization regularly.
∙ Analysis undertaken for strategic planning covers both external and internal aspects, identifying opportunities,
 ∙ Industries vary widely in economic characteristics,
competitive situations, and future profit prospects.
∙ Economic character influenced by factors like market size,
growth rate, technological change, market boundaries,
number and size of buyers and sellers, product
differentiation, economies of scale, distribution channels,
disposable income, and government support.
∙ Competitive forces range from moderate to cutthroat,
depending on industry.
∙ Competition may focus on price, quality, product features,
convenience, or brand reputation.
∙ Some industries require cooperation among companies,
suppliers, customers, and competitors to drive innovation
and market opportunities.
∙ Industry and competitive conditions determine profit
prospects, ranging from poor to excellent.
∙ Leading companies in unattractive industries may struggle to
earn profits, while weak companies in attractive industries
can perform well.

3. STRATEGY AND BUSINESS ENVIRONMENT

⇢
Business strategists create strategies and policies considering internal and external factors to achieve business goals.
⇢ Strategic management provides a framework for adapting to an unpredictable and uncertain business environment.
⇢ Business environment is dynamic and continuously evolving, presenting opportunities and challenges.
⇢ Strategists bridge organizational abilities with external opportunities and challenges.
⇢ The business environment encompasses all external factors affecting business decisions, plans, and operations.
⇢ Organizational success is influenced by its relationship with the business environment.
⇢ Strategic management involves selecting a long-term direction in alignment with resources and opportunities in the
environment.
⇢ There is a close and continuous interaction between a business and its environment. This interaction helps in
strengthening the business firm and using its resources more effectively.
⇢ It helps the business in the following ways:
i) Opportunities and Threats: iv) Image Building:
∙ Interaction with the environment reveals: ∙ Demonstrates sensitivity to the environment.
- New consumer needs and wants. ∙ Example: Setting up captive power plants to
- Changes in laws and social behaviors. address power shortage.
- Competitors' new products in the market. ∙ Creates positive image and competitive
advantage.
ii) Direction for Growth:
∙ Identifies areas for growth and expansion. v) Meeting Competition:
∙ Enables strategic planning for success. ∙ Analyzes competitors' strategies.
∙ Formulates own strategies for product and
iii) Continuous Learning: service superiority.
∙ Motivates managers to update knowledge and skills.
∙ Adapts to predicted changes in the business realm.
⇢ Business strategies align organizational resources with challenges and opportunities in the broader environment.
⇢ Changes in the external environment prompt organizations to develop novel strategies for success and survival.
⇢ Increasing competition and globalization heighten pressure on organizations to enhance competitiveness and
business development.
⇢ Strategic analysis of internal and external environments is crucial for achieving competitive advantage, high
performance, survival, and growth.
⇢ Business success relies on awareness, assessment, and response to opportunities and threats in the environment.
⇢ Continuous evaluation and adaptation of operations are necessary for business flourishing and expansion.
⇢ Strategic decisions, vital for business success and survival, rely on top management functions and strategic decision-
making methods.
⇢ Improvement of decision-making is ongoing due to dynamic and unpredictable contemporary environments,
requiring managers to overcome challenges in decision-making.

➱ Micro and Macro Environment

∙ Environment surrounding an organization includes opportunities and threats externally, strengths and weaknesses
internally.
∙ Business strategists must stay informed about company, industry, and broader business environment developments.
∙ Strategic decision-making requires comprehension of available facts and challenging underlying assumptions.
∙ External environment categorized into two major types:
- Micro environment
- Macro environment
∙ Micro-environment pertains to the immediate surroundings of an organization, directly influencing it regularly.
∙ Components of the micro environment include suppliers, consumers, marketing intermediaries, and competitors.
∙ Issues within the micro environment include:
◦ Characteristics and organization of employees.
◦ Existing customer base.
 ◦Methods for raising finance.
◦Supplier relationships and development.
◦Local community dynamics.
◦Direct competition and comparative performance.
∙ Micro environment factors often connect organization to macro issues, influencing its market reactions.
∙ Macro environment encompasses external factors significantly impacting organization's operations, typically
beyond direct control and influence.

➱ Elements of Macro Environment

∙ Macro environment encompasses economic, sociocultural, technological, political, and legal factors.
∙ Classification of relevant environment into components aids organization in coping with complexity, understanding
various influences, and relating environmental changes to strategic management process.
∙ External environment includes individuals, teams, organizations, agencies, and factors regularly interacted with
during business operations.
∙ Besides transactions, organization develops and implements plans and policies to address environmental changes.
∙ Organization negotiates its way into the future by navigating external factors.
∙ Gluek & Jauch : - “The environment includes factors outside the firm which can lead to opportunities for, or
threats to the firm. Although, there are many factors, the most important of the factors are socio-
economic, technological, supplier, competitors, and government.”

↦ Demographic Environment
➛ Demographics refer to population characteristics classified by criteria like age, gender, and income, helping
understand specific group features.
➛ Demographic analysis considers factors such as race, age, income, education, assets, homeownership, job position,
region, and education level.
➛ Data on demographics are vital for businesses and economists, aiding in market segmentation and strategic decision-
making.
➛ India has a relatively young population, attracting interest from multinational companies due to its size.
Considering demographics is crucial for businesses, addressing issues such as:
◦ Effect of demographic trends on industry market size.
◦ Identification of demographic trends as opportunities or threats.
➛ Population size, age distribution, geographic dispersion, ethnic mix, and income distribution are essential for
organizations.
➛ Identifying implications of changing demographic characteristics for future strategic competitiveness poses a
challenge for strategists.

↦ Demographic Environment
➛ Socio-cultural environment influences all enterprises similarly, comprising factors like social traditions, values,
literacy levels, ethical standards, social stratification, conflict, and cohesiveness.
➛ Differs from demographics as it focuses on behavior and belief systems rather than population characteristics.
Includes factors related to human relationships and impact of social attitudes and cultural values on organization
operations.
➛ Society's beliefs, values, and norms determine how individuals and organizations should interact, with core beliefs
being persistent and difficult to change.
➛ Businesses must adjust to social norms and beliefs for successful operation.
➛ Social environment primarily affects strategic management process within organization, especially in mission and
objective setting, and decisions related to products and markets.

↦ Economic Environment
➛ Economic conditions significantly impact business strategies.
➛ Economic environment encompasses regional, national, and global economic situations, affecting markets for
resources, input and output costs, dependability, quality, and availability.
➛ Determines market strength and size, influenced by factors such as purchasing power, income distribution,
economic prospects, growth, and inflation.
➛ Economic conditions of a nation include factors like gross domestic product, per capita income, markets for goods
and services, capital availability, foreign exchange reserves, foreign trade growth, capital market strength, interest
rates, disposable income, unemployment, and inflation.
➛ These factors indicate the state of the economy, whether performing well or poorly.
➛ E.g.: - Higher interest rates are detrimental for the businesses with high debt. In the real estate market, they reduce
the capability of the prospective buyers to avail loan and pay instalments, thus lower the demand.

↦ Political-Legal Environment
➛ Political-legal environment considers political development, politicization of business and economic issues, political
morality, law and order, political stability, ruling party ideology and practices, effectiveness of governmental
agencies, and government intervention in economy and industry.
➛ Influences both general and specific to individual enterprises.
➛ Government policies heavily guide and control business operations.
➛ Type of government in a country significantly influences business.
➛ Businesses must consider changes in regulatory framework and their impacts.
➛ Taxes and duties are critical areas affecting business.
➛ Businesses prefer countries with sound legal systems.
➛ Understanding major laws protecting consumers, competition, and organizations is essential.
➛ Businesses must comprehend relevant laws concerning companies, competition, intellectual property, foreign
exchange, and labor.

↦ Technological Environment
➛ Technology significantly impacts communication and business operations, leading to interdependence between
technology and business.
➛ Businesses contribute to societal access to technological advancements, raising standards of living.
➛ Businesses leverage technology to adapt and advance society.
➛ Technology enhances business efficiency by reducing paperwork, improving payment scheduling, and coordinating
inventories.
➛ This efficiency reduces costs, time, and distance, providing competitive advantages.
➛ Changes in technology may require businesses to alter operational, production, and marketing strategies.
➛ Technological advancements create new business opportunities while rendering existing products and services
obsolete.
➛ Effective adoption of technological innovations can present opportunities for businesses, but technology also poses
threats.
➛ New technological tools such as artificial intelligence, machine learning, and robotic process automation can serve as
both opportunities and threats to businesses.

➱ PESTLE– A tool to Analyse Macro Environment

∙ PESTLE analysis is a framework for analyzing macro environmental factors affecting a firm.
∙ Originally, it consisted of political, economic, social, and technological (PEST) factors, but later expanded to include
environmental and legal factors.
∙ PESTLE analysis identifies influences on an organization, aiding in scanning environmental impacts on policies.
∙ Acronym stands for:
↪ P - Political
↪ E - Economic
↪ S - Socio-cultural
↪ T - Technological
↪ L - Legal
↪ E - Environmental
∙ PESTLE analysis is simple to understand and implement, encouraging proactive and structured decision-making by
management.
∙ The Key Factors ;
Factors Description
⇀ Government intervention in economy and business activities - Influence on goods and
Political services provided
⇀ Impact on health, education, and infrastructure
⇀ Interest rates affecting cost of capital - Exchange rates affecting exporting/importing costs
Economic
⇀ Money supply, inflation, credit flow, per capita income, growth rates
Social ⇀ Influence on product demand and business operations
⇀ Barriers to entry, minimum efficient production level, outsourcing decisions
Technological
⇀ Cost and quality impact, innovation
Legal ⇀ Impact on operations, costs, product demand, ease of business
⇀ Impact on industries like tourism, farming, insurance
Environmental ⇀ Awareness of climate change affecting operations and products, creating new markets or
diminishing existing ones

∙ These factors serve as the main environmental influences driving change and should guide decision-making, as
illustrated in the table below ;
➱ Internationalization of Business (Globalisation)
∙ Internationalization is a dominant commercial trend enabling businesses to enter new markets for greater earnings
and cheaper resources.
∙ Expanding internationally allows businesses to achieve greater economies of scale and extend product lifespan.
∙ Strategic management process is similar for global and domestic firms, but international processes are more
complex due to additional variables and linkages.
∙ International strategy planning aids systematic approach to internationalization.
∙ Scanning external environment helps identify opportunities and threats in global markets.
∙ Internationalization facilitates development of effective strategies and formulation of global strategic objectives.
Characteristics of a global business:
1. Conglomeration of multiple units across the globe, all linked by common ownership.
2. Multiple units share a common pool of resources including money, credit, information, patents, trade names, and
control systems.
3. Units respond to a common strategy, with managers and shareholders based in different nations.
 Developing internationally
International development requires a thorough and structured approach. The steps for international strategic
planning are as follows:
1. Evaluate global opportunities and threats, and align them with internal capabilities.
2. Define the scope of the firm's global commercial operations.
3. Establish the firm's global business objectives.
4. Develop distinct corporate strategies for both the global business and the entire organization.

Why do businesses go global?

1. Need for growth: Organizations seek opportunities in other parts of the globe to expand and globalize their
operations, fulfilling the basic need for growth.
2. Shrinking time and distance: Rapid advancements in communication, transportation, financial flow, and technology
have accelerated globalization, making it easier to connect corporate headquarters with overseas operations.
3. Inadequacy of domestic markets: Domestic markets may not offer sufficient growth opportunities, leading
businesses to explore international markets where competition may be less intense.
4. Access to resources: Companies may seek reliable or cheaper sources of raw materials, labor, or talent available in
other countries.
5. Cost reduction: Establishing overseas plants can help reduce high transportation costs, allowing production closer
to the market and minimizing time and transportation expenses.
6. Market expansion: Exporting organizations may establish overseas manufacturing plants and sales branches to tap
into new markets, generate higher sales, and improve cash flow.
7. Rise of services sector: Services constitute the largest sector in the world economy, driving international expansion
and economic integration.
8. Lower trade barriers: Reduction in trade tariffs and custom barriers has facilitated increased flow of business across
borders, encouraging globalization.
9. Strategic alliances: Companies form strategic alliances across countries to mitigate economic and technological
threats, leveraging comparative and competitive advantages in a globalized economy.
 ➱ International Environment
∙ International organizations face a wide array of social, cultural, demographic, environmental, political,
governmental, legal, and technological factors.
∙ Complexity of these factors increases with the number of products and geographic areas served.
∙ Assessing the external environment is crucial for internationalization, allowing organizations to identify global
market opportunities and evaluate their feasibility.
∙ International environment analysis can be conducted at three levels: multinational, regional, and country.
1. Multinational analysis involves identifying and monitoring significant components of the global environment.
2. Regional analysis focuses on critical factors in specific geographical areas, emphasizing market opportunities.
3. Country analysis delves deeper into important environmental factors, including economic, legal, political, and
cultural dimensions.
∙ Customized analysis required for each country to develop effective market entrance strategies.
∙ International environment integral to strategic management for businesses with global interests, encompassing
political risks, cultural differences, exchange rate fluctuations, legal compliances, and taxation issues.
∙ Decision-makers must focus on factors comprising the international environment to navigate complexities
effectively.

4. UNDERSTANDING PRODUCT AND INDUSTRY

⇢ A product can be either a good or a service. It might be physical good or a service, an experience.
Characteristics Description
Tangibility ⁃ Tangible products can be physically handled, seen, and felt. <br> - Examples include cars,
books, pens (physical goods).
⁃ Intangible products are not physical goods (e.g., telecom services, banking).
Pricing ⁃ Prices influenced by supply, demand, quality, marketing, and target group.
⁃ Market price determined by supply-demand balance.
⁃ Competitive market often dictates prices.
 Features ⁃ Product features satisfy consumer needs, influence pricing and user experience.
⁃ Include function, design, quality, and overall experience.
Centrality in ⁃ Products drive strategic activities like production, quality, sales, marketing, and logistics.
Business
Useful Life ⁃ Products have a usable lifespan and undergo life cycles.
⁃ Examples: fixed line phones replaced by mobile phones.

✧ Product Life Cycle:

∙ The product life cycle (PLC) is a concept that guides strategic choice in
understanding the sales trajectory of a product over time.
∙ The PLC follows an S-shaped curve, encompassing four stages:
introduction, growth, maturity, and decline.
∙ Stages:
Introduction Growth Maturity Decline
∙ Negligible competition ∙ Increased competition ∙ Tough competition ∙ Strategic choices: diversification or
∙ High prices ∙ Falling prices ∙ Focus on stability retrenchment
∙ Limited markets ∙ Rapid market expansion ∙ Stabilized markets ∙ Replacement by new products
∙ Slow sales growth ∙ Rising sales ∙ Declining profits ∙ Sharp decline in sales and profits
∙ PLC approach advantage: Diagnose product/business portfolio and establish each stage.
∙ Focus on declining stage businesses.
∙ Strategic choices based on diagnosis:
⁃ Expansion for introductory and growth stage businesses.
⁃ Use mature businesses as cash sources for other investments.
⁃ Adopt strategies like selective harvesting, retrenchment for declining businesses.
∙ PLC concept enables building a balanced portfolio through strategic choices.
✧ Value Chain Analysis:
∙ Successful businesses produce value for consumers (satisfaction) and profits for themselves and shareholders.
∙ Value Chain:
⁃ Understanding an organization's value chain is critical for evaluating the value it generates.
⁃ Value chain analysis breaks down each process within a business.
⁃ Helps improve operations sequence, enhance efficiency, and gain competitive advantage.
∙ Applicability:
⁃ Useful for businesses of all sizes, from sole proprietorships to multinational corporations.
⁃ Each organization benefits from evaluating and optimizing its processes through value chain analysis.
∙ Methodology:
⁃ Value chain analysis examines each activity in the business's value chain to identify areas for improvement.
⁃ Analyzes how each stage adds or subtracts value from the end product or service.
∙ Purpose:
⁃ Describes activities within and around an organization.
⁃ Assesses competitive strength and ability to provide value-for-money products or services.
∙ Origins:
⁃ Originally introduced as an accounting analysis to determine value added in complex manufacturing
processes.
⁃ Developed by Michael Porter, linking separate activities and value added assessment to competitive
advantage analysis.
∙ Value chain analysis emphasizes that organizations are not just collections of resources but organized systems of
activities.
∙ Resources like machines, materials, money, and people are valuable only when deployed into activities that create
products or services valued by consumers.
∙ Competitive advantage comes from competencies in performing activities and managing linkages between them.
∙ Porter highlights the importance of identifying distinct value activities within an organization to understand its
strategic capabilities.
∙ Strategic capability assessment begins with identifying and analyzing these value activities.
∙ Primary Activities in Value Chain Analysis:
Inbound Logistics Operations Outbound Logistics Marketing & Sales Service
Receiving, storing, and Transforming inputs Collecting, storing and Making conusmers Enhancing or
distributing inputs to into the final product distributing the aware and facilitating maintaining the
the product/services. or services. product to customers. the purchases. value of the
product/services.
∙ Each of these groups of primary activities are linked to support activities. These can be divided into four areas;
1. Procurement:
‣ Processes for acquiring resource inputs to the primary activities.
‣ Occurs in various parts of the organization.
2. Technology Development:
‣ All value activities have a ◦technology◦ component, whether it's know-how, product design, process
development, or raw material improvements.
3. Human Resource Management:
‣ Transcends all primary activities.
‣ Involves recruiting, managing, training, developing, and rewarding people within the organization.
4. Infrastructure:
‣ Crucial systems and structures that support the organization's performance in primary activities.
‣ Includes planning, finance, quality control, information management, and sustaining the organization's
culture through structures and routines.
5. INDUSTRY ENVIRONMENT ANALYSIS
⇢ Industry analysis combines various ideas and methodologies to understand key industry traits, competition
intensity, drivers of industry change, rivals' market positions and tactics, competitive success, and profit forecasts.
⇢ It provides strategic insights into the overall state of an industry, helping businesses decide its attractiveness.
⇢ Industry environment analysis estimates current and future competitive pressures.
⇢ It places the firm within a broader framework to gain insights into internal and external elements.
⇢ Analyzing these elements enhances understanding of the business's surroundings and informs strategy alignment
with industry dynamics.

➱ Porter’s Five Forces Model

∙ Every business operates within a competitive environment, influencing its strategic development.
∙ Porter's Five Forces analysis is a simple yet effective tool for identifying key sources of competition in an industry.
∙ It systematically assesses competitive pressures and their strength and importance.
∙ Understanding industry variables helps adapt strategy, enhance profitability, and maintain a competitive edge.
∙ Competitive forces vary in character, mix, and intricacy across industries.
∙ The model holds that the state of competition in an industry is a composite of competitive pressures operating in
five areas of the

Companies in other industries offering Intense market maneuvering and jockeying

substitute products create competitive among industry rivals sellers.
pressures to win buyers.

Supplier bargaining power and supplier-seller

collaborations.
Threat of new entrants in the market

Buyer bargaining power and sellerbuyer

collaborations
 ∙ Strategists analyze industry competitiveness using the five-forces model, involving following three steps.
Steps Particular
1 Identify the specific competitive pressures
2 Evaluate the strength of pressure
3 Determine whether the collective strength is conducive to earn attractive profits

∙ Porter's Five Forces model assesses competitive

environment and industry structure.
∙ It includes threat of new entrants, bargaining power of
buyers, suppliers, threat of substitutes, and rivalry intensity.
∙ Each industry has a unique competitive environment due to
these forces.
∙ Managers use the model to evaluate their firm's strengths,
weaknesses, and opportunities.
∙ Understanding these forces helps in making informed
strategic decisions.

1) Threat of New Entrants : -

▸ New entrants can diminish industry profitability by introducing additional production capacity.
▸ Increased supply resulting from them may lead to lower prices, impacting the market share of existing firms.
▸ They are a significant source of competition, introducing new capacity and product offerings.
▸ The competitive pressure intensifies with the size and scale of the new entrant.
▸ They can impose limitations on prices and influence the profitability of existing players.
▸ This situation of intensified competition and price pressure is referred to as a ◦Price War.◦
▸ A firm’s profitability tends to be higher when new firms are blocked from entering the industry.
▸ Common Barriers to New Entrants : -

S P A C E - B P
i) Switching costs
ii) Product differentiation
iii) Access to distribution channels
iv) Capital requirements
v) Economies of scale
vi) Brand identity
vii) Possibility of aggressive retaliation by existing players

i) Switching costs :-
∙ High switching costs in an industry lead to customer reluctance as they face financial and psychological
burdens, such as testing, contract negotiations, personnel training, and facility modifications when
considering switching to new entrants' products.
∙ Convincing existing customers to switch becomes critical for new entrants' success.
ii) Product differentiation :-
∙ Product differentiation involves making a product distinctive or unique to customers, and companies in
personal care and cosmetics use it to enhance their products.
∙ This strategy creates barriers for new entrants due to the high costs associated with creating genuine product
differences.
iii) Access to distribution channels :-
∙ The lack of accessible distribution channels for new entrants acts as a prominent barrier to entry, as existing
firms can restrict their use and impede competition, relying on their control over physical distribution
channels.
 iv) Capital Requirements :-
∙ When a large amount of capital is required to enter an industry, firms lacking funds are effectively barred
from that industry, thus, enhancing the profitability of existing firms.
v) Economies of scale :-
∙ Economies of scale in industries result in lower per-unit production costs as volume increases, giving larger
firms a competitive advantage by producing goods at decreasing costs.
∙ This discourages new entrants with higher costs from entering the market during the expansion stage.
vi) Brand identity :-
∙ Brand identity hinders new entrants for infrequent high-cost products, requiring substantial resources and
time, while customer loyalty to existing brands prolongs the process.
∙ New entrants face challenges in building brand identity due to resource and time commitments, as customer
loyalty takes time to develop when they identify with existing brands.
vii) Possibility of Aggressive Retaliation :-
∙ Sometimes the mere threat of aggressive retaliation by incumbents/existing firms can deter entry of new
firms into an existing industry.

2) Bargaining Power of Buyers : -

▸ Buyers possibly forming groups or cartels.
▸ Buyers' power impacts producer prices, costs, and investments.
▸ This leverage is particularly evident when ;
⁃ Buyers have full knowledge of the source(s) of products and their substitutes.
⁃ Big Buyers who're in a position to demand favourable terms of contract.
⁃ Not perceived as critical to the buyer’s needs
⁃ Buyers are more concentrated than firms supplying the product.
⁃ Buyer concentration surpasses supplier concentration, allowing them to readily switch to available

substitutes.
3) Bargaining Power of Suppliers : -
▸ The more specialised the offering from the supplier, greater may be its clout.
▸ As suppliers are limited in number, they may openly exhibit their bargaining power.
▸ Suppliers determines the cost of raw materials & other inputs
▸ Suppliers can command bargaining power over a firm when ;
⁃ Products are crucial to the buyer & substitutes are not available
⁃ Erect high switching costs
⁃ Less suppliers, more buyers

4) Nature of Rivalry in the Industry :-

▸ Rivalry between existing players is quite obvious.
▸ The impact is noticeable at the functional level through factors such as pricing, aggressive advertising, and pressures
on costs and products.
▸ “The more intensive the rivalry, the less attractive is the industry”
▸ Rivalry among competitors tends to be cutthroat and an industry’s profitability is low when ;
i) An industry has no clear leader. Therefore, continuous war for leadership.
ii) Competitors in the industry are numerous.
iii) Competitors operate with high fixed costs. Thus, aiming for better Return on Investment with more fierce tactics.
iv) Competitors face high exit barriers, and therefore, continue to fight for market share.
v) Competitors have little opportunity to differentiate their offerings.
vi) The industry faces slow or diminished growth.

i) Industry Leader : -
◦ A strong industry leader, with its greater financial resources, can discourage price wars by disciplining
initiators and outlasting smaller rivals.
[E.g. :- Leader = Reliance Jio ; Smaller Rivals = Docomo, Uninor]
ii) Number of Competitors : -
◦ More rivals make it harder for industry leaders to enforce pricing discipline.
[E.g. :- Netflix v/s Amazon Prime v/s Disney+ Hotstar]

iii) Fixed Costs : -

◦ High fixed costs drive organizations to lower prices when they have excess capacity.
◦ Price reduction affects industry-wide profitability as firms must increase production to offset fixed costs,
irrespective of demand.
◦ As a result, industries with high fixed costs generally experience lower profitability.
[E.g. :- When seats are empty in a transporting vehicle, the price is 50% of actual cost]

iv) Exit Barriers : -

◦ Profitability tends to be higher in industries where there are very few exit barriers.
◦ When a firm's assets are highly specialized and of little value to other firms, finding a buyer becomes difficult,
discouraging exit.
◦ Powerful barriers to exit can prevent competitors from leaving, reducing profitability for all and intensifying
competition as organizations fight for survival.
[E.g. :- Microsoft v/s Apple and Google]

v) Product Differentiation :-
◦ Differentiating products insulates firms from price wars, leading to higher profitability in industries with
differentiation opportunities.
◦ Undifferentiated commodity industries have lower profitability.
[E.g. :- Gourmet food and Premium electronics are differentiated commodities with higher market
profitability.]
 vi) Slow Growth : -
◦ Declining industries face intense rivalry as rivals fight harder to grow or sustain market share, reducing
profitability.
[E.g. :- Paper & Khadi Industry]

5) Threat of Substitutes : -
▸ Substitute products pose latent competition within industries and can become significant competitors.
▸ They offer price advantages or performance improvements, altering industry competition suddenly.
▸ Examples include coir being replaced by synthetic fiber due to its benefits.
▸ Industries with substantial R&D investment are prone to substitute threats.
▸ Substitutes typically limit prices and profits in an industry.
▸ Availability of substitutes influences industry profitability.
▸ Firms must identify products performing similar functions to their own for profit prediction.
▸ Examples include real estate, insurance, bonds, and bank deposits as substitutes for common stocks.

➱ Attractiveness of Industry
∙ Industry analysis concludes by assessing the relative attractiveness of the industry in the short and long term.
∙ Strategists carefully evaluate industry outlook to determine if it presents favorable business opportunities.
∙ Factors for consideration include:
- Growth potential of the industry.
- Current and future profitability due to competition.
- Impact of driving forces on industry profitability.
- Competitive position and potential for growth within the industry.
- Potential to capitalize on weaker rivals.
- Ability to defend against industry challenges.
- Risk and uncertainty in the industry's future.
- Severity of industry-wide problems.
- Contribution of industry participation to overall business success.
 ∙ Companies should invest capital wisely by selecting attractive industries.
∙ Careful analysis helps in making informed decisions about industry participation.
∙ Industry attractiveness is relative and not absolute.
∙ An industry may be attractive to strong competitors but unattractive to weak ones.
∙ Profit prospects determine industry attractiveness, with above-average prospects indicating attractiveness and
below-average prospects indicating unattractiveness.
∙ Strong competitors in attractive industries invest in expanding sales efforts and infrastructure to strengthen their
long-term positions.
∙ In unattractive industries, successful firms may invest cautiously, protect their competitiveness, and consider
acquiring smaller firms.
∙ Strong companies in unattractive industries may diversify into more attractive businesses over the long term.
∙ Weak companies in unattractive industries may merge with rivals or seek diversification opportunities outside the
industry to bolster market share and profitability.

✧ Experience Curve:
∙ The experience curve explains cost efficiency gained through cumulative production experience.
∙ It is similar to the learning curve in terms of workers becoming more efficient.
∙ Unit costs decrease as firms gain experience and increase production volume.
∙ Larger firms have lower unit costs, leading to a cost advantage.
∙ Factors contributing to the experience curve include learning effects, economies of scale, product redesign, and
technological improvements.
∙ Features of the experience curve:
⁃ Growing organizations gain experience.
⁃ Experience provides a competitive advantage and acts as a barrier to entry.
⁃ Large and successful organizations benefit from a stronger "experience effect."
 ∙ Business growth brings understanding and benefits from experiences.
∙ The experience curve acts as a barrier to entry for new firms and can be used
to build market share and discourage competition.
∙ In the Indian automobile industry, Maruti Suzuki benefits from the experience
curve phenomenon.
∙ Competitors may opt for a market niche approach or segmentation based on
demography or geography as a strategic choice.

➱ Value Creation
∙ Value creation aims to provide products and services with increased worth to customers.
∙ Value is measured by product features, quality, availability, durability, performance, and associated services.
∙ The concept expanded to include value creation for stakeholders, beyond just customers.
∙ It involves activities or performance by the firm to enhance the value of goods, services, processes, or the entire
business system.
∙ Businesses focus on creating value for both customers and stakeholders to gain competitive advantage and earn
above-average profits.
∙ Competitive advantage leads to superior profitability, influenced by:
1. Value customers place on products.
2. Price charged for products.
3. Costs of creating those products.
∙ Customer value reflects the utility gained from a product, distinct from its price.
∙ Utility is derived from product attributes like performance, design, quality, and service.
∙ Sustainable competitive advantage is crucial for long-term success.
∙ Competitive advantage can be achieved through differentiation or cost advantage, according to Michael Porter.
∙ Differentiation involves providing superior value through product features, quality, or after-sales service, allowing
for higher prices and profits.
 ∙ Cost advantage is achieved when a company's costs remain comparable to competitors while providing
differentiated value.
∙ Organizational functions influence a company's ability to achieve differentiation or cost advantage.
∙ Value chain analysis, introduced by Porter, examines organizational functions and interactions to identify sources of
competitive advantage.
∙ It categorizes activities into primary and supporting activities to understand differentiation sources and cost
behavior.
∙ Value creation occurs when consumers value a product or service more than its actual cost, allowing for a premium
price.

6. MARKET AND CUSTOMER

⇢ A market facilitates the exchange of goods and services between buyers and sellers for a price.
⇢ Markets can be physical or virtual, encompassing various contexts like departmental stores, online platforms, stock
exchanges, and commodity markets.
⇢ Marketing involves a range of activities including research, design, pricing, promotion, transportation, and
distribution.
⇢ The four Ps of marketing—product, place, pricing, and promotion—help identify customer needs and deliver
satisfaction.
⇢ The main goals of marketing are to deliver the best customer experience and establish, maintain, and grow
customer relationships.
⇢ Product orientation emphasizes quality, performance, design, or features.
⇢ Production orientation focuses on offering low-priced products.
⇢ Sales orientation relies on advertising, sales, and promotion to persuade customers to buy.
⇢ Customer or market orientation prioritizes efforts on understanding and meeting customer needs.
⇢ Customer-centric businesses continuously learn from customers and market dynamics to create better value
propositions.
⇢ Success in modern business often relies on customer-centric approaches.
➱ Customer
∙ Customers are individuals or businesses that purchase products or services from organizations.
∙ They are essential for generating revenue, and organizations cannot exist without them.
∙ Businesses compete for customers through aggressive marketing or pricing strategies.
∙ The terms "customer" and "consumer" are often used interchangeably but have a subtle distinction.
∙ Consumers utilize products and services, while customers purchase them.
∙ Customers can be consumers or solely purchasers.
∙ Businesses conduct research on consumer characteristics to refine marketing strategies and adjust inventory.
∙ Customers are categorized based on demographics such as age, race, gender, ethnicity, economic level, and
geographic region to develop profiles for targeted marketing.

➱ Customer Analysis
∙ Customer analysis is a crucial component of strategic business planning.
∙ It identifies target clients, determines their wants, and evaluates how the product meets those needs.
∙ It involves examining and evaluating consumer needs, desires, and wants.
∙ Methods include customer surveys, consumer data analysis, market positioning evaluation, development of
customer profiles, and market segmentation techniques.
∙ Customer analysis provides factual insights for effective customer profiling.
∙ Customer profiles reveal demographic information about customers.
∙ Various parties like buyers, sellers, distributors, managers, wholesalers, retailers, suppliers, and creditors gather
information to assess consumer needs.
∙ Successful businesses continuously monitor the behavior of existing and prospective customers.
∙ Customer behavior goes beyond identification to understand how they purchase products, including shopping
frequency, preferences, and perceptions.
∙ This understanding helps businesses communicate effectively, establish marketing campaigns, provide suitable
products/services, and retain customers for repeat sales.
∙ Consumer behavior is influenced by various factors.
 ∙ These elements can be categorised into the following three conceptual domains:
↦ External Influences:
- Includes advertisements, peer recommendations, and social norms.
- Directly impact the psychological and internal processes influencing consumer decisions.
- Divided into company marketing efforts and environmental factors.
↦ Internal Influences:
- Psychological factors within the customer affecting decision making.
- Influenced by motivation and attitudes.
↦ Decision Making:
- Involves rational consumer seeking information and weighing options.
- Stages include problem recognition, alternative search, information gathering, and final choice.
- Common in significant purchases but less prevalent for minor ones like ice creams or soft drinks.
↦ Post-decision Processes:
- Occur after making a purchase, involving evaluation of outcomes.
- Customer reaction varies based on satisfaction level.
- Satisfied customers may make repeat purchases and recommend to others, while dissatisfied customers may not.
7. COMPETITIVE STRATEGY
⇢ Competition is integral to economic systems and businesses, involving both small and large organizations.
⇢ Businesses compete for resources and customers within an industry, aiming for higher quality services or superior
goods.
⇢ Competitive strategy defines how a firm expects to create and sustain a competitive advantage over competitors.
⇢ Having a competitive advantage means being more profitable in the long run.
⇢ Competitive strategy is analyzed based on creating and protecting competitive advantage.
⇢ Industry and competitive analysis involves understanding the competitive process and identifying main sources of
competitive pressure.
⇢ Porter's five forces model is a powerful tool for systematically diagnosing competitive pressures and assessing their
strength and importance.
⇢ It is widely used and relatively easy to understand and apply in competition analysis.

➱ COMPETITIVE LANDSCAPE
∙ Competitive landscape analysis identifies both direct and indirect competitors.
∙ Direct competitors are those that compete directly in the same market, while indirect competitors target different
markets but still compete for customers.
∙ Understanding the competitive landscape involves comprehending competitors' vision, mission, core values, niche
market, strengths, and weaknesses.
∙ Analyzing competitors allows a firm to assess their strengths and weaknesses in the marketplace.
∙ Effective strategies can be chosen and implemented based on this analysis to enhance the firm's competitive
advantage.
• Steps to understand the Competitive Landscape:
i. Identify the competitor:
◦ Determine the competitors in the industry.
◦ Obtain actual data on their market share and size.
 ii. Understand the competitors:
◦ Utilize market research reports, internet, newspapers, social media, and industry reports.
◦ Gather information about the products and services offered by competitors in different markets.

iii. Determine the strengths of the competitors:

◦ Identify what competitors do well and their strengths.
◦ Assess their financial positions, cost and price advantages, likely future actions, distribution networks, and
human resource strengths.
◦ Analyze why customers prefer their products or services.

iv. Determine the weaknesses of the competitors:

◦ Seek consumer reports and reviews from various media platforms.
◦ Pay attention to opinions shared by consumers regarding both positive and negative experiences.
◦ Look for weaknesses or areas where competitors are lacking.

v. Put all of the information together:

◦ Consolidate the gathered information on competitors.
◦ Identify gaps in their offerings and opportunities for the firm.
◦ Determine areas that need improvement within the firm.
◦ Develop strategies to exploit competitors' weaknesses and gain a competitive advantage.

➱ Key factors for competitive success (KSFs)

∙ Key Success Factors (KSFs) are elements that significantly impact industry members' ability to thrive in the
marketplace.
∙ They include strategy elements, product attributes, resources, competencies, competitive capabilities, and business
outcomes.
∙ KSFs determine the difference between profit and loss, and ultimately, competitive success or failure.
∙ All firms in the industry must pay close attention to KSFs as they are prerequisites for success.
∙ They shape a company's financial and competitive success.
∙ Three questions help identify KSFs:
1. Basis of customer brand choice and crucial product attributes
2. Required resources and competitive capabilites for sources
3. Factors leading to sustainable competitive advantage
∙ Determining the industry's Key Success Factors (KSFs) is a top-priority analytical consideration based on prevailing
and anticipated industry and competitive conditions.
∙ Managers need to understand which factors are crucial for competitive success and which are less important.
Misdiagnosing critical industry factors raises the risk of a misdirected strategy.
∙ Organizations with perceptive understanding of industry KSFs can gain sustainable competitive advantage by
excelling at one or more of these factors.
∙ Excelling at a particular KSF offers a golden opportunity for competitive advantage.
∙ Key success factors vary between industries and over time, typically numbering three or four, with one or two being
most important.
∙ Managers should resist including minor factors in their list of KSFs to focus attention on the truly critical factors for
long-term competitive success.
∙ The purpose of identifying KSFs is to concentrate management attention on factors essential for competitive
success.