Chapter 2 - Strategic Analysis: External Environment

Chapter 2 - Strategic Analysis: External Environment

Introduction
Organisations differ in size, product types, markets, location, and legal status due to diversity.Organisations,
regardless of size or features, respond to external factors known as the business environment.

Strategy and Business Environment

● The business environment is highly dynamic and continuously evolving.
● The term "business environment" refers to all external factors, influences, or situations that in some way
affect business decisions, plans, and operations.
● Organizational success is determined by its business environment, and even more from its relationship with
it.

There is a close and continuous interaction between a business and its environment. It helps the business in the
following ways:
i. Determine opportunities and threats
● The interaction between the business and its environment would explain opportunities and threats to the
business.
● It helps to find new needs and wants of the consumers, changes in laws, changes in social behaviours, and
tells what new products the competitors are bringing in the market to attract consumers.
ii. Give direction for growth
● The interaction with the environment enables the business to identify the areas for growth and expansion of
their activities.
iii. Continuous Learning: The managers are motivated to continuously update their knowledge, understanding and
skills to meet the predicted changes in the realm of business.
iv. Image Building: Environmental understanding helps the business organizations to improve their image by
showing their sensitivity to the environment in which they operate.
v. Meeting Competition: It helps the businesses to analyse the competitors’ strategies and formulate their own
strategies accordingly. The idea is to flourish and beat competition for its products and services.

To flourish, a business must be aware of, assess, and respond to the many opportunities and threats present in its
environment. In order to succeed, the business must not only be aware of the numerous aspects of its surroundings
but also be able to handle and adapt to them. The business must continuously evaluate its environment and modify
its operations in order to thrive and expand.

Micro and Macro Environment

The external environment can be categorised in two major types as follows:
● Micro environment
● Macro environment

Micro Environment
● Micro-environment is related to a small area or immediate periphery of an organization.
● It influences an organization regularly and directly.
● Micro environment consists of suppliers, consumers, marketing intermediaries, competitors, etc.
● These are specific to the said business or firm.
● Within the micro or the immediate environment in which a firm operates we need to address the following
issues:
○ The employees of the firm, their characteristics and how they are organised.
○ The existing customer base on which the firm relies for business.
○ The ways in which the firm can raise its finance.
○ Who are the firm suppliers and how are the links between the two being developed?
○ The local community within which the firm operates.

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 Chapter 2 - Strategic Analysis: External Environment

○ The direct competition and their comparative performance.

● The factors in the micro environment often relate an organization to the macro issues influencing the way a
firm reacts in the marketplace.
Elements of Macro Environment
● Macro environment has broader dimensions as it consists of economic, sociocultural, technological,
political and legal factors.
● The environment includes factors outside the firm which can lead to opportunities for, or threats to the firm.

Demographic Environment
● Demographics are the characteristics of a population that have been classified and explained according to
certain criteria, such age, gender, and income, in order to understand the features of a specific group.
● Demographic analysis considers factors such as race, age, income, education, possession of assets, house
ownership, job position, region, and the degree of education.
● Data about these qualities across homes and within a demographic variable are of importance to both
businesses and economists.
● India has a relatively younger population as compared to many other countries.
● Many multinationals are interested in India considering its population size.
● Business Organizations need to study different demographic factors. Particularly, they need to address
following issues:
○ What demographic trends will affect the market size of the industry?
○ What demographic trends represent opportunities or threats?
● The size, age distribution, geographic dispersion, ethnic mix, and income distribution of a population are all
of great importance to the organisation.
● Identifying the implications of changing demographic characteristics or population components for a future
strategic competitiveness is often a challenge for strategists.

Socio-Cultural Environment
● Complex group of factors such as social traditions, values and beliefs, level and standards of literacy, the
ethical standards and state of society, the extent of social stratification, conflict, cohesiveness and so forth.
● It differs from demographics in the sense that it is not the characteristics of the population, but it is the
behaviour and the belief system of that population.
● The core beliefs of a particular society tend to be persistent.
● It is difficult for a business to change these core values
● This means, that businesses have to adjust to social norms and beliefs to operate successfully.
● The social environment primarily affects the strategic management process within the organization in the
areas of mission and objective setting, and decisions related to products and markets.

Economic Environment
● Economic conditions have a direct bearing over the business strategies.
● The economic environment refers to the overall economic situation around the business and include
conditions at the regional, national and global levels.
● It includes conditions in the markets for resources that have an effect on the supply of inputs and outputs of
the business, their costs, and the dependability, quality, and availability.
● Economic environment determines the strength and size of the market.
● The purchasing power in an economy depends on current income, prices, savings, circulation of money,
debt and credit availability.
● Income distribution patterns determine the business possibilities.
● The important point to consider is to find out the effect of economic prospect, growth and inflation on the
operations of the business.
● For example - Higher interest rates harm businesses with high debt and reduce real estate market demand
by limiting loan access.

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● Economic conditions, like GDP, per capita income, markets, capital, trade growth, and inflation, indicate a
nation's economic health.

Political-Legal Environment
● Political-legal environment takes into account elements like the
○ general level of political development,
○ the degree to which business and economic issues have been politicised,
○ the degree of political morality,
○ the state of law and order,
○ political stability,
○ the political ideology and practises of the ruling party,
○ the effectiveness and purposefulness of governmental agencies,
○ and the scope and type of governmental intervention in the economy and industry.
● It is partly general to all similar enterprises and partly specific to an individual enterprise.
● The type of government running a country is a powerful influence on business.
● Businesses must consider changes in regulations and the impact of taxes and duties on their operations.
● Businesses prefer to operate in a country where there is a sound legal system.
● Businesses need to understand laws protecting consumers, competition, and intellectual property, including
company and labor laws.

Technological Environment
● A highly important factor in the present times is technology.
● Technology has changed the way people communicate and do things, the ways of doing business
● Technology and business are linked and are interdependent on one another.
● Businesses use new discoveries to adapt themselves for the advancement of society.
● With the use of technology, many organisations are able to reduce paperwork, schedule payments more
efficiently, and coordinate inventories efficiently and effectively.
● This helps to reduce the costs of companies, and shrink time and distance, thus, capturing a competitive
advantage for the company.
● Technological changes affect business operations, often requiring significant alterations in operational and
marketing strategies.
● Technology is leading to many new business opportunities as well as making obsolete (act as a threat also)
most of the existing business products and services.
● Artificial intelligence, machine learning, robotic process automation is some of the new technological tools
that businesses are adopting and can act as both opportunity and threat to a business.

PESTLE– A tool to Analyse Macro Environment

● The term PESTLE is often used to describe a framework for analysis of macro environmental factors.
○ P - Political
○ E - Economic
○ S - Socio-cultural
○ T - Technological
○ L - Legal
○ E - Environmental
● Political, economic, social, and technological (PEST) analysis was the name given to the framework in the
past; however, later, the framework has been expanded to include environmental and legal factors as well.
● PESTLE analysis involves identifying the political, economic, socio-cultural, technological, legal and
environmental influences on an organization and providing a way of scanning the environmental influences
that have affected or are likely to affect an organization or its policy.
● The PESTLE analysis is simple to understand and quick to implement.
● The advantage of this tool is that it encourages management into proactive and structured thinking in its
decision making.

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We have already studied all other elements other than the Environmental factors
Environmental factors affect industries such as tourism, farming, and insurance. Growing awareness of climate
change is affecting how companies operate and the products they offer--it is both creating new markets and
diminishing or destroying existing ones.

Quick View of Elements of PESTLE Framework and related factors

Political Economic
● Political stability ● Economy situation and trends
● Political principles and ideologies ● Market and trade cycles
● Current and future taxation policy ● Specific industry factors
● Regulatory bodies and processes ● Customer/end-user drivers
● Government policies ● Interest and exchange rates
● Government term and change ● Inflation and unemployment
● Thrust areas of political leaders ● Strength of consumer spending
Social Technological
● Lifestyle trends ● Replacement technology/solutions
● Demographics ● Maturity of technology
● Consumer attitudes and opinions ● Manufacturing maturity and capacity
● Brand, company, technology image ● Innovation potential
● Consumer buying patterns ● Technology access, licensing, patents, property
● Ethnic/religious factors rights and copyrights
● Media views and perception
Legal Environmental
● Business and Corporate Laws ● Ecological/environmental issues
● Employment Law ● Environmental hazards
● Competition Law ● Environmental legislation
● Health & Safety Law ● Energy consumption
● International Treaty and Law ● Waste disposal
● Regional Legislation

Internationalization of Business
● Internationalization has emerged as the dominant commercial trend over the last couple of decades.
● It enables a business to enter new markets in search of greater earnings and less expensive resources.
● Additionally, expanding internationally enable a business to achieve greater economies of scale and extend
the lifespan of its products.
● The strategic-management process mirrors domestic firms in global firms but is more complex due to extra
variables.
● International strategy planning helps businesses systematically approach internationalization.
● Scanning the external environment aids in identifying global market opportunities and threats.

Characteristics of a global business

To be specific, a global business has three characteristics:
● It is a conglomerate of multiple units (located in different parts of the globe) but all linked by common
ownership.
● Multiple units draw on a common pool of resources, such as money, credit, information, patents, trade
names and control systems.
● The units respond to some common strategy. Besides, its managers and shareholders are also based in
different nations.

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Developing internationally
International development is expensive and challenging. Moving on in a thorough and structured manner is thus the
ideal approach to adopt. The steps in international strategic planning are as follows:
● Evaluate global opportunities and threats and rate them with the internal capabilities.
● Describe the scope of the firm's global commercial operations.
● Create the firm's global business objectives.
● Develop distinct corporate strategies for the global business and whole organisation.

Why do businesses go global?

● Technological developments and evolving political views are two important factors in the rapid rise of
multinational organisations.
● Because of technological advances, the process of internationalisation is now simpler than it was
previously.
● Worldwide communication makes it easier to define and implement global strategy by linking corporate
headquarters with their abroad operations.
● In addition, introduction of improved transportation has increased the mobility of money, people, raw
materials, and finished items. There are several reasons why companies go global. These are explained as
follows:
○ The first and foremost reason is the need to grow.Organizations globally expand their operations to
tap into opportunities worldwide, fulfilling a basic organizational need.
○ There is rapid shrinking of time and distance across the globe,
■ because of faster communication, speedier transportation, growing financial flow of funds
and rapid technological changes.
○ It is being realised that the domestic markets are no longer adequate.
○ The competition present domestically may not exist in some of the international markets.
○ There can be varied other reasons such as need for reliable or cheaper source of raw-materials,
cheap labour, etc.
○ Companies often set up overseas plants to reduce high transportation costs.
○ The rise of services to constitute the largest single sector in the world economy.
○ The apparent and real collapse of international trade barriers redefines the roles of state and
industry.
○ Globalization enables firms worldwide to form strategic alliances, countering economic and
technological threats and capitalizing on their unique advantages.

International Environment
Assessments of the international environment can be done at three levels: multinational, regional, and country.

Multinational environmental analysis

● identifying, anticipating, and monitoring significant components of the global environment on a large scale.
● Understanding global developments covering economic and other macro elements is important.
● Governments may have free or interventionist tendencies in economies that needs to be carefully
considered.
● These characteristics are evaluated based on their present and expected future impact.

Regional environmental analysis

● Regional environmental analysis is a more in-depth evaluation of the critical factors in a specific
geographical area.
● The emphasis would be on discovering market opportunities for goods, services, or innovations in the
chosen location.

Country environmental analysis

● Country environmental analysis has to take a deeper look at the important environmental factors.

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 Chapter 2 - Strategic Analysis: External Environment

● Study of economic, legal, political, and cultural dimensions is required in order for planning to be successful.

Why companies should go global? Mention any five reasons.

(SA, Nov 2020, 5 Marks)

Industry Environment Analysis

Porter’s Five Forces Model
● To understand the competitive environment of the company the managers need to focus only on the
important tasks rather than gathering bulk of unimportant information.
● The task of focusing only on important task can be done with the help of some well-defined concepts and
analytical tools.
● A powerful and widely used tool for systematically diagnosing the significant competitive pressures in a
market and assessing the strength and importance of each is the five-force model of competition.
● This model holds that, the state of competition in an industry is a composite of competitive pressures
operating in five major areas of the market.

How to use it ?
The strategists can use the five-forces model to determine what competition is like in a given industry by
undertaking the following steps:
● Step 1: Identify the specific competitive pressures associated with each of the five forces.
● Step 2: Evaluate how strong the pressures comprising each of the five forces are (fierce, strong, moderate to
normal, or weak).
● Step 3: Determine whether the collective strength of the five competitive forces is conducive to earn
attractive profits.

Threat of New Entrants

● Profitability tends to be higher when other firms are blocked from entering the industry.
● New entrants can reduce industry profitability because
○ they add new production capacity
■ leading to increase supply of the product
■ even at a lower price
○ and can substantially erode existing firm’s market share position.
● To discourage new entrants, existing firms can try to raise barriers to entry.
● Barriers to entry represent economic forces (or ‘hurdles’) that slow down or impede entry by other firms.
● Barriers to entry can be as follows

(i) Capital Requirements: When a large amount of capital is required to enter an industry, firms lacking funds are
effectively barred from the industry, thus enhancing the profitability of existing firms in the industry.
(ii) Economies of Scale:Economies of scale decrease per-unit cost as production volume increases, discouraging
new industry entrants.
(iii) Product Differentiation: Product differentiation creates unique product features, reinforcing entry barriers by
escalating new entrants' costs.

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 Chapter 2 - Strategic Analysis: External Environment

(iv) Switching Costs - High switching costs, involving testing, negotiation, and training, often make buyers
reluctant to switch firms.
(v) Brand Identity - Strong brand identity, especially for high-cost, infrequent purchases, poses significant entry
barriers for new entrants.
(vi) Access to Distribution Channels - The control of physical distribution channels by existing firms impedes new
entrants' access, despite the internet's growth.
(vii) Possibility of Aggressive Retaliation - The threat of incumbents' retaliatory actions, like price cuts and
heightened advertising, can deter new firms from entering an industry.

Bargaining Power of Buyers

● The bargaining power of the buyers influences not only the prices that the producer can charge but also
influences costs and investments of the producer.
● This is because powerful buyers usually bargain for better services which involves more investment on the
part of the producer.
● Buyers of an industry’s products or services can sometimes exert considerable pressure on existing firms to
secure lower prices or better services. This leverage is particularly evident when
○ Buyers have full knowledge of the sources of products and their substitutes
○ They spend a lot of money on the industry’s products i.e. they are big buyers.
○ The industry’s product is not perceived as critical to the buyer’s needs and buyers are more
concentrated than firms supplying the product. They can easily switch to the substitutes available.

Bargaining Power of Suppliers

The more specialized the offering from the supplier, greater may be its clout.
Suppliers can influence the profitability of an industry in a number of ways. Suppliers can command bargaining
power over a firm when
● Their products are crucial to the buyer and substitutes are not available.
● They can lead to high switching costs.
● They are more concentrated than their buyers.

The Nature of Rivalry in the Industry

● The intensity of rivalry in an industry is a significant determinant of industry attractiveness and profitability.
● The competitors influence strategic decisions at different strategic levels.
● The impact is more evident at functional level, like in the prices being charged, more aggressive advertising,
and building pressures on costs, product and so on.
● The intensity of rivalry can influence the costs of suppliers, distribution, and of attracting customers and
thus directly affect the profitability.
● The more intensive the rivalry, the less attractive is the industry.
● Rivalry among competitors tends to be cutthroat and industry profitability low when
○ An industry has no clear leader.
○ Competitors in the industry are numerous.
○ Competitors operate with high fixed costs.
○ Competitors face high exit barriers.
○ Competitors have little opportunity to differentiate their offerings.
○ The industry faces slow or diminished growth.

Industry Leader: A dominant industry leader can deter price wars and outlast smaller rivals due to superior financial
resources, preventing contests, as seen in India's domestic air travel industry.

Number of Competitors: An industry leader's pricing control weakens with more rivals, as seen in sectors like
handicrafts, where numerous producers intensify internal rivalry.
Fixed Costs: Organizations with high fixed costs often reduce prices to utilize excess capacity, leading to lower
industry profitability, as seen in sectors like airlines and telecommunications.

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Exit Barriers - Profitability increases when competitors with few exit barriers leave the industry, as firms with
specialized assets often can't easily exit, intensifying competition.

Product Differentiation:Industries allowing product differentiation, unlike sectors with undifferentiated

commodities like memory chips or natural resources, often see higher profitability due to reduced price wars.

Slow Growth - Declining industry growth leads to intensified rivalry as firms struggle to maintain or grow their
market share, reducing overall profitability.

Threat of Substitutes
● To predict profit pressure from this source, firms must search for products that perform the same, or nearly
the same, function as their existing products.
● Real estate, insurance, bonds and bank deposits for example are clear substitutes for common stocks,
because they represent alternate ways to invest funds.
● The threat of substitutes is great in many high tech industries as well.
● For example
○ introduction of digital filmless cameras virtually replace the film cameras and threatened the
existence of Eastman Kodak and Fuji Film.
○ Further, the introduction of smartphones has replaced cameras to a great extent.

Industry attractiveness and profitability are shaped by the five forces, which govern key elements like cost and
investment, thus determining the potential for attractive profits.

Explain Porter’s five forces model as to how businesses can deal with the competition.
(MTP2, May 2018, 6 Marks) (RTP, Nov 2018, NA) (MTP2, Nov 2018, 6 Marks) (MTP1, May 2019, 5 Marks) (ICAI Study Material)
OR
Competitive pressures operate as a composite in five areas of the overall market. Elaborate.
(RTP, May 2021, NA)
OR
Explain briefly the competitive forces in any industry as identified by Michael Porter.
(SA, May 2018, 5 Marks)
OR
What are the five competitive forces in an industry as identified by Michael Porter?
(RTP, May 2022, NA)

What are the common barriers that are faced by new entrants when an existing firm earns higher profits?
(RTP, May 2018, NA) (RTP, May 2023, NA)
OR
Rahul Sharma is Managing Director of a company which is manufacturing trucks. He is worried about the entry of new businesses. What
kind of barriers will help Rahul against such a threat?
(RTP, May 2019, NA)

Buyers can exert considerable pressure on business. Do you agree? Discuss.

(RTP, Nov 2019, NA)
OR
Buyers of an industry's products or services can sometimes exert considerable pressure on the company. In the light of the five forces as
propagated by Michael Porter explain this force. Also state as to when this leverage is evident.
(SA, May 2023, 5 Marks)

Baby Turtle is a children’s clothing brand that has been created a new age demand for washable diapers. The major benefit for the brand
has been that not many companies have shown interest in the product, thinking it is not viable, however customers majorly working
mothers are loving their product. The core material needed for production is also used in many other water proofing products in various
industries. Baby Turtle sources this material from a renowned supplier at comparatively low prices. Which of the five forces of
competitive pressure would Baby Turtle experience due to above setup and what are major factors that create such pressure for a
product? Do you think Baby Turtle has an advantage in some way to fight off this pressure?
(ICAI Study Material)

Discuss in what conditions rivalry among competitors tends to be cut-throat and profitability of the industry goes down.

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 Chapter 2 - Strategic Analysis: External Environment

(SA, Nov 2019, 5 Marks)

OR
What are the factors which determine the nature of rivalry in an industry?
(SA, Nov 2021, 5 Marks)

Eco-carry bags Ltd., a recyclable plastic bags manufacturing and trading company has seen a potential in the ever-growing awareness
around hazards of plastics and the positive outlook of the society towards recycling and reusing plastics.
A major concern for Eco-carry bags Ltd. are paper bags and old cloth bags. Even though they are costlier than recyclable plastic bags,
irrespective, they are being welcomed positively by the consumers.
Identify and explain that competition from paper bags and old cloth bags fall under which category of Porter’s Five Forces Model for
Competitive Analysis?
(RTP, May 2020, NA) (ICAI Study Material)

"The bargaining power of suppliers determines an industry's attractiveness and profitability." Discuss.
(SA, May 2022, 5 Marks)

There are many companies in the market offering COVID vaccine. Analyse the product in terms of threat of new entrants.
(SA, May 2021, 5 Marks)

Easy Access is a marketing services company providing consultancy to a range of business clients. Easy Access and its rivals have
managed to persuade the Government to require all marketing services companies to complete a time-consuming and bureaucratic
registration process and to comply with an industry code of conduct. Do you think that by doing this Easy Access and its rivals has an
advantage in some way to fight off competitors? Explain.
(RTP, Nov 2021, NA) (RTP, Nov 2023, NA)

Rajiv Arya is owner of an electrical appliance company that specializes in manufacturing of domestic vacuum cleaners. There are four
other manufacturers with similar products and sales volume. Current rival firms also own a number of patents related to the product. The
supplier base for procurement of raw material is also very large as there are multiple suppliers.
Identify Porter’s Five Forces that may be classified as significant for the company? Explain
(RTP, Nov 2022, NA) (MTP2, Nov 2023, 5 Marks)

A startup company is thinking of launching of a low cost detergent powder in the market. The market of the said product is already
dominated by a big FMCG player.
You are advised to put forward your suggestions to the management of the company to deal with the problems of 'Entry 'Barrier' while
launching the low cost detergent powder.
(RTP, Nov 2022, NA)

Pulkit was very confident about cloud kitchen business model, and he bought three real estate spaces in very hideous localities. Later due
to government and court orders the cloud kitchens had to be only operated in a well-ventilated space, which made his investment
redundant. What aspect of industry competition Pulkit currently faced as a result of this situation?
(MTP2, May 2023, 5 Marks) (MTP2, Nov 2023, 5 Marks)

Understanding Product and Industry

Product
● Businesses sell products. A product can be either a good or a service. It might be physical good or a service,
an experience. Business products have certain characteristics as follows:
● Products are either tangible or intangible.
● Product has a price. Businesses determine the cost of their products and charge a price for them.
○ The price that may be paid is determined by the market, the quality, the marketing, and the targeted
group.
○ On account of competition, businesses are not able to fix market price by adding profit margin on the
costs. Rather, they work on reducing the costs given the prevailing market price.
● Products have certain features that deliver satisfaction.
○ A customer's cumulative experience with a product from its purchase to the end of its useful
life is an important component of a product feature.
● Product is pivotal for business.
○ The product is at the centre of business around which all strategic activities revolve. The
product enables production, quality, sales, marketing, logistics and other business processes.
Product is the driving force behind business activities.

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● A product has a useful life.

○ Every product has a usable life after which it must be replaced, as well as a life cycle after
which it is to be reinvented or may cease to exist.
Product Life Cycle
● An important concept in strategic choice is that of product life cycle (PLC).
● It is a useful concept for guiding strategic choice.
● Essentially, PLC is an S-shaped curve which exhibits the relationship of sales with respect to time for a
product that passes through the four successive stages of introduction, growth, maturity and decline.
● This concept can also be used for businesses as well.

The first stage of PLC is the introduction stage

● with slow sales growth,
● in which competition is almost negligible,
● prices are relatively high, and markets are limited.
● The growth in sales is at a lower rate because of lack of awareness on the part of customers.

The second phase of PLC is growth stage

● Rapid market acceptance.
● In the growth stage, the demand expands rapidly, prices fall, competition increases, and market expands.
● The customer has knowledge about the product and shows interest in purchasing it.

The third phase of PLC is the maturity stage

● There is a slowdown in the growth rate.
● The competition gets tough, and the market stabilizes.
● Profit comes down because of stiff competition.
● At this stage, organizations have to work to maintain stability.

In the fourth stage of PLC sales declines with sharp downward drift in sales.
● The sales and profits fall down sharply due to some new product replaces the existing product.
● So, a combination of strategies can be implemented to stay in the market either by diversification or
retrenchment.

Advantage of the PLC

● The main advantage of the PLC approach is that it can be used to diagnose a portfolio of products (or
businesses) in order to establish the stage at which each of them exists.
● Particular attention is to be paid on the businesses that are in the declining stage. Depending on the
diagnosis, appropriate strategic choice can be made.
● For instance, expansion may be a feasible alternative for businesses in the introductory and growth stages.
● Mature businesses may be used as sources of cash for investment in other businesses which need
resources.

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● A combination of strategies like selective harvesting, retrenchment, etc. may be adopted for declining
businesses. In this way, a balanced portfolio of businesses may be built up by exercising a strategic choice
based on the PLC concept.

Value Chain Analysis

● Value chain analysis is a method of examining each activity in value chain of a business in order to identify
areas for improvements.
● This analysis could be used to improve the sequence of operations, enhancing efficiency and creating a
competitive advantage. Value chain analysis can be used by businesses of all sizes, from sole
proprietorships to multinational organisations.
● The two basic steps are involved
○ identifying separate activities and
○ assessing the value added from each.

The primary activities of the organization are grouped into five main areas: inbound logistics, operations, outbound
logistics, marketing and sales, and service.
● Inbound logistics are the activities concerned with receiving, storing and distributing the inputs to the
product/service. This includes materials handling, stock control, transport etc. Like, transportation and
warehousing.
● Operations transform these inputs into the final product or service: machining, packaging, assembly,
testing, etc. convert raw materials in finished goods.
● Outbound logistics collect, store and distribute the product to customers. For tangible products this would
be warehousing, materials handling, transport, etc. In the case of services, it may be more concerned with
arrangements for bringing customers to the service, if it is a fixed location (e.g. sports events).
● Marketing and sales provide the means whereby consumers/users are made aware of the product/service
and are able to purchase it. This would include sales administration, advertising, selling and so on. In public
services, communication networks which help users’ access a particular service are often important.
● Service are all those activities, which enhance or maintain the value of a product/service, such as
installation, repair, training and spares.

Each of these groups of primary activities are linked to support activities. These can be divided into four areas;
● Procurement: This refers to the processes for acquiring the various resource inputs to the primary activities
(not to the resources themselves). As such, it occurs in many parts of the organization.
● Technology development: All value activities have a ‘technology’, even if it is simply know-how. The key
technologies may be concerned directly with the product (e.g. R&D product design) or with processes (e.g.
process development) or with a particular resource (e.g. raw materials improvements).
● Human resource management: This is a particularly important area which transcends all primary activities.
It is concerned with those activities involved in recruiting, managing, training, developing and rewarding
people within the organization.

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● Infrastructure: The systems of planning, finance, quality control, information management, etc. are crucially
important to an organization’s performance in its primary activities. Infrastructure also consists of the
structures and routines of the organization which sustain its culture.

Attractiveness of Industry
Industry analysis helps identify issues and determine the industry's attractiveness, guiding strategists on whether it
presents a good opportunity or has poor prospects, crucial for capital investment decisions The important factors
on which the management may base such conclusions include:
● The industry’s growth potential, is it futuristically viable?
● Whether competition currently permits adequate profitability and whether competitive forces will become
stronger or weaker?
● Whether industry profitability will be favorably or favorably affected by the prevailing driving forces?
● An organization's competitive position and its potential to strengthen or weaken impact its profitability, even
in a lackluster industry, while strong rivals can make an attractive industry unappealing.
● The potential to capitalize on the vulnerabilities of weaker rivals (perhaps converting an unattractive
industry situation into a potentially rewarding company opportunity).
● Whether the company is able to defend against or counteract the factors that make the industry
unattractive?
● The degrees of risk and uncertainty in the industry’s future.
● The severity of problems confronting the industry as a whole.
● Whether continued participation in this industry adds importantly to the firm’s ability to be successful in
other industries in which it may have business interests?

As a general proposition, if an industry’s overall profit prospects are above average, the industry can be considered
attractive; if its profit prospects are below average, it is unattractive. Attractiveness is relative, not absolute.
Industry environments unattractive to weak competitors may be attractive to strong competitors.

Experience Curve
● Experience curve akin to a learning curve which explains the efficiency increase gained by workers through
repetitive productive work.
● Experience curve is based on the commonly observed phenomenon that unit costs decline as a firm
accumulates experience in terms of a cumulative volume of production.
● It is based on the concept, “we learn as we grow”.
● The implication is that larger firms in an industry would tend to have lower unit costs as compared to those
for smaller companies, thereby gaining a competitive cost advantage.
● Experience curve results from a variety of factors such as learning effects, economies of scale, product
redesign and technological improvements in production.

Experience curve has following features:

● As business organizations grow, they gain experience.
● Experience may provide an advantage over the competition. Experience is a key barrier to entry.
● Large and successful organizations possess stronger “experience effects”.

A typical experience curve may be depicted as follows:

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As a business grows, it understands the complexities and benefits from its experiences.

The concept of experience curve is relevant for a number of areas in strategic management.
● For instance, the experience curve is considered a barrier for new firms contemplating entry in an industry.
● It is also used to build market share and discourage competition.

Value Creation
● Value creation is an activity or performance by the firm to create value that increases the worth of goods,
services, business processes or even the whole business system.
● Ultimately, this concept gives business a competitive advantage in the industry and helps them earn above
average profits/returns.
● Competitive advantage leads to superior profitability. At the most basic level, how profitable a company
becomes depends on three factors:
○ the value customers place on the company’s products;
■ The value customers place on a product reflects the utility they get from a product—the
happiness or satisfaction gained from consuming or owning the product.
■ Utility is something that customers get from a product. It is a function of the attributes of the
product, such as its performance, design, quality, and point-of-sale and after-sale service.
○ the price that a company charges for its products; and
○ the costs of creating those products.
● It is basically the value the consumer wants to pay, over and above the price that the business wants to
charge from the consumer. This excess amount is called value creation, wherein the consumers value the
product or service more than it actually costs them.

Competitive advantage in two different ways

Michael Porter argues that a company can generate competitive advantage in two different ways, either through
differentiation or cost advantage.
● Differentiation means the capability to provide customers superior and special value in the form of product’s
special features and quality or in the form of aftersales customer service.
● As a result of differentiation, a company can demand higher price for its products or services.
● A company will earn higher profits due to differentiation in case the expenses stay comparable to the costs
of competitors.

Value chain a tool to analyse origin of competitive advantage

Value chain analysis provides an excellent tool to examine the origin of competitive advantage. It divides the
organisations into two different strategically important group of activities, namely, primary activities and supporting
activities, which can help to comprehend the potential sources for differentiation and to understand an
organisation’s costs behaviour.

ABC Ltd. manufactures and sells air purifier ‘Fresh Breath’. The ‘Fresh Breath’ has seen sales growth of around 1% for the last two years,
after strong growth in the previous five years. This is due to new products entering the market in competition with the ‘Fresh Breath’. ABC

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Ltd. is therefore considering cutting its prices to be in line with its major rivals with a hope to maintain the market share. Market research
indicates that this will now cause a significant increase in the level of sales, even though in previous years price cuts have had little effect
on demand. ABC ltd. is also planning to launch a promotional campaign to highlight the benefits of the ‘Fresh Breath’ against its rival
products.
Identify and explain the stage of the product life cycle in which ‘Fresh Breath’ falls.
(RTP, May 2021, NA)

Write short note on "Phases and significance of Product Life Cycle".

(MTP2, May 2022, 5 Marks)
OR
Write a short note on Product Life Cycle (PLC) and its significance in portfolio diagnosis.
(ICAI Study Material)
OR
The CEO of ABC Enterprises, Mr. Rasik Mehta, had the idea of creating a fitness shake called Robust, which prompted the company to
conduct research and development. The company conducted a market survey and feasibility study, which indicated that the idea was
feasible and had potential for profitability. Consequently, the product was manufactured, marketed, and launched, which led to its success.
As a result, the production of Robust grew, and it became widely available. However, with time, the demand for the product decreased,
leading to its obsolescence. Identify and explain the concept highlighted in the above case?
(MTP2, May 2023, 5 Marks)

A company has recently launched a new product in the market. Initially, it faced slow sales growth, limited markets, and high prices.
However, over time, the demand for the product expanded rapidly, prices fell, and competition increased. Identify the stages of the product
life cycle (PLC) that the company went through.
(RTP, Nov 2023, NA)

Explain briefly the primary activities that are grouped into five main activities under Value chain analysis.
(MTP2, May 2023, 5 Marks)

Explain the concept of the experience curve and highlight its relevance in strategic management.
(RTP, May 2018, NA) (MTP2, Nov 2018, 5 Marks) (MTP1, Nov 2020, 5 marks) (ICAI Study Material)
OR
Write a short note on relevance of experience curve.
(MTP2, May 2018, 4 Marks)

Market and Customer

● A market is a place for interested parties, buyers and sellers, where items and services can be exchanged
for a price.
● The market might be physical, such as a departmental store where people engage in person. They may also
be virtual, such as an online market where buyers and sellers do not meet in person but tools of technology
to strike a deal.
● In addition to this broad definition, the term market can apply to a wide range of contexts. For example, it
might be used to describe the stock exchange, where securities are traded. It may also refer to a group of
individuals trying to buy a specific commodity or service in a specific place, such as grain or vegetable
market where farmers come to sell their produce.
● It may also be used to define a business or industry, such as the global oil market.

Marketing
● The term "marketing" encompasses a wide range of operations, including research, designing, pricing,
promotion, transportation, and distribution.
● Often market activities are categorised and explained in terms of four Ps of marketing – product, place,
pricing, and promotion.
● These four kinds of marketing activities help marketers identify customer needs so they may meet their
demands and deliver satisfaction.
● Delivering the best customer experience and establishing, maintaining, and growing relationships with
customers are the main goals of marketing.

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Customer
● A customer is a person or business that buys products or services from another organisation.
● Customers are important because they provide revenue and organisations cannot exist without them.
● Businesses compete for customers by either marketing their products aggressively or reducing prices to
expand their customer base.
● The terms customer and consumer are practically synonymous and are frequently used interchangeably.
● There is, however, a thin distinction. Individuals or businesses that consume or utilise products and services
are referred to as consumers.
● Customers are the purchasers of products and services in the economy, and they might exist as consumers
or only as customers.
● Businesses routinely research the characteristics of their consumers in order to finetune their marketing
strategies and adjust their inventory to attract the most customers.
● Customers are frequently categorised based on demographics like as age, race, gender, ethnicity, economic
level, and geographic region, which may all assist businesses in developing a profile of a perfect customer.

Customer Analysis
● Customer analysis is an essential marketing component of any strategic business plan.
● It identifies target clients, determines their wants, and then defines how the product meets those needs.
● Customer analysis includes
○ the administration of customer surveys,
○ the study of consumer data,
○ the evaluation of market positioning strategies,
○ development of customer profiles, and
○ the selection of the best market segmentation techniques.
● A number of parties, including buyers, sellers, distributors, salespeople, managers, wholesalers, retailers,
suppliers, and creditors, can assist in gathering information to effectively assess the needs and desires of
consumers.

Customer Behaviour
● Customer behaviour explains how they purchase products.
● It examines elements like shopping frequency, product preferences, and the perception of your marketing,
sales, and service offerings.
● Understanding these details allows businesses to communicate with customers in an effective manner.
● Understanding the behaviours of customers enables businesses to establish effective marketing and
advertising campaigns, provide products and services that meet their needs, and retain customers for
repeat sales.
Consumer behavior may be influenced by a number of things. These elements can be categorized into the following
three conceptual domains:
● External Influences - External influences, like advertisement, peer recommendations or social norms, have a
direct impact on the psychological and internal processes that influence various consumer decisions. These
aspects are divided into two groups – the company's marketing efforts and the numerous environmental
elements.
● Internal Influences - Internal processes are psychological factors internal to customer and affect consumer
decision making. Consumer behaviour is influenced by a combination of internal and external influences,
including motivation and attitudes.
● Decision Making - A rational consumer gathers information, weighs pros and cons, and integrates this with
prior knowledge to make an informed decision The stages of decision making process can be described as:
➢ Problem recognition, i.e., identify an existing need or desire that is unfulfilled
➢ Search for desirable alternative and list them
➢ Seeking information on available alternatives and weighing their pros and cons.
➢ Make a final choice

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This decision-making process is common for significant purchases like cars or appliances, contrasting with
more casual choices like buying ice creams or soft drinks.
● Post-decision Processes - Post-purchase, consumers evaluate their satisfaction, with happy customers
likely to repurchase and recommend, while dissatisfied ones won't repeat or endorse the product.

Competitive Strategy
● Competition is a fundamental attribute of economic systems and business.
● Businesses compete with each other for the same set of resources and customers.
● Competition within an industry often aims to enhance the quality of services or improve the goods produced
by firms.
● Competitive strategy defines how a firm expects to create and sustain a competitive advantage over
competitors.
● Having a competitive advantage over competitors means being more profitable in the long run.
● The competitive strategy of a firm within a certain business field is analysed using two criteria
○ the creation of competitive advantage and
○ the protection of competitive advantage.

Competitive Landscape
- Competitive landscape is about identifying and understanding the competitors
- Understanding of competitive landscape requires an application of “competitive intelligence”
- Helps in assessing the competitor’s strengths and weaknesses.
- Helps in choosing the strategy.
- Ultimately helps in building the competitive advantage.

Steps to understand Competitive Landscape

1. Identify the competitor
2. Understand the competitors
3. Determine the strengths of the competitors
4. Determine the weaknesses of the competitors
5. Put all of the information together

Identify the competitor

● First step is to identify
● Actual data about their respective market share
● Answers the question “Who are the Competitors”

Understand the competitors

● Understand the products and services
● Answers”What are their product and Service”
● How - Reports, Internet, Newspaper, Industry reports etc.

Determine the strengths of the competitors

● Many Questions
○ Financial Position
○ Cost & Price Advantage
○ Next Move
○ Distribution Network
○ Human Resource Strength

Determine the weaknesses of the competitors

● Consumer reports
● Media Reports

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● Answers “Where are they lacking”

Put all the information together

● Draw inferences
○ Not offered by Competitor
○ Fill the gap
○ Areas to be strengthen
● Answers the questions
○ What will the business do with this information?
○ What improvements does the firm need to make?
○ How can the firm exploit the weaknesses of competitors?

Key factors for competitive success

● An industry’s Key Success Factors (KSFs) are those things that most affect industry members’ ability to
prosper in the marketplace -
○ the particular strategy elements, product attributes, resources, competencies, competitive
capabilities, that spell the difference between profit and loss and,
■ ultimately, between competitive success or failure.
○ KSFs by their very nature are so important that all firms in the industry must pay close attention to
them.
○ Misdiagnosing the industry factors critical to long-term competitive success greatly raises the risk of
a misdirected strategy.
○ Hence, using the industry’s KSFs as cornerstones for the company’s strategy and trying to gain
sustainable competitive advantage by excelling at one particular KSF is a fruitful competitive
strategy approach.
○ Key success factors vary from industry to industry and even from time to time within the same
industry as driving forces and competitive conditions change. Only rarely does an industry have
more than three or four key success factors at any one time. And even among these three or four,
one or two usually outrank the others in importance.

Identifying Key Success Factors

The answers to three questions help identify an industry’s key success factors:
● On what basis do customers choose between the competing brands of sellers? What product attributes are
crucial to sales?
● What resources and competitive capabilities does a seller need to have to be competitively successful,
better human capital, quality of product or quantity of product, cost of service, etc.?
● What does it take for sellers to achieve a sustainable competitive advantage, something that can be
sustained for long term?

Suresh Singhania is the owner of an agri-based private company in Sangrur, Punjab. His unit is producing puree, ketchups and sauces. While
its products have significant market share in the northern part of country, the sales are on decline in last couple of years. He seeks help of a
management expert who advises him to first understand the competitive landscape.
Explain the steps to be followed by Suresh Singhania to understand competitive landscape.
(RTP, May 2018, NA) (ICAI Study Material)
OR
Explain the steps to understand the competitive landscape?
(MTP2, May 2018, 5 Marks)
OR
Dinesh Yadav is the owner of a beverage-based private company in Sonipat, Haryana. His unit is producing fruit juices, cold drinks, soda and
lime. While its products have significant market share in the northern part of country, the sales are on decline in last couple of years. He
seeks help of a management expert who advises him to first understand the competitive landscape. Explain the steps to be followed by
Dinesh Yadav to understand competitive landscape.
(MTP1, May 2019, 5 Marks)
OR

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 Chapter 2 - Strategic Analysis: External Environment

What do you understand by ‘Competitive Landscape’? What are the steps to understand the competitive landscape?
(SA, May 2019, 5 Marks) (MTP1, Nov 2022, 5 Marks)
OR
"Understanding the competitive landscape is important to build upon a competitive advantage". Explain.
(SA, July 2021, 5 Marks)

Define key success factors (KSFs).

(RTP, Nov 2018, NA)

Examine the significance of KSFs (Key Success Factors) for competitive success.
(SA, Nov 2018, 3 Marks) (MTP1, May 2021, 5 Marks)

STRATEGIC ANALYSIS
Meaning
● For strategy formulation analysis of a firm's external environment and its internal resources and capabilities
is required.
● The analysis of a co.’s external & internal situation is called strategic analysis keeping in mind the 2
important situational considerations:
● Industry & competitive conditions
● Company’s own competitive capabilities, resources, internal strengths & weaknesses & market
position

Without a perceptive understanding of the strategic aspects of a company’s external and internal environments, the
chances are greatly increased that managers will finalise a strategic game plan that doesn’t fit the situation well, that
holds little prospect for building competitive advantage, and that is unlikely to boost company performance.

Issues to be considered for strategic analysis

Strategy evolves over a period of time.
- Strategy evolves over a period of time. Strategy is a result of a series of small decisions taken over an
extended period of time.
- Strategy evolves from experience and needs constant review and revision as the results start showing up.

Balance
- The process of strategy formulation is often described as one of matching the internal potential of the
organisation with the external environmental opportunities.
- There should be a workable (& not perfect as in reality the perfect match isn’t feasible) match of the internal
potential of org. with environmental opportunities. Managers responsible for strategic decisions must
balance opportunities, influences & constraints.

Risks
An important aspect of strategic analysis is to identify potential imbalances or risks and assess their consequences.
Potential imbalances are created because of internal and external factors.

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● External risks- occur due to inconsistencies between strategies & forces in the environment
○ Short-Time - Errors in interpreting the environment cause strategic failure
○ Long-Time - Changes in the environment lead to obsolescence of strategy.
● Internal risks- occur because of forces within the firm or are directly interacting with org.
○ Short Time - Organizational capacity is unable to cope up with strategic demands.
○ Long - Time - Inconsistencies with the strategy are developed on account of changes in internal
capacities and preferences.

Strategy Identification & Selection

After Undertaking the above mentioned analysis, following steps are taken
● Identify strategic alternatives
● Select strategy
● Implement the operating plan
● Review strategies

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