BLOCK 2

ENVIRONMENTAL ANALYSIS
BLOCK 2 ENVIRONMENTAL ANALYSIS
This block aims at understanding the concept of environmental analysis. It is
necessary for any organization to identify the potential markets so that the goals
of the organization are achieved. Therefore, it becomes necessary for the
organization to assess its environment especially its current and potential
resources. This block discusses the external as well as internal environmental
which is important part of strategic analysis.
Unit 4: External Environmental Analysis helps understand the environmental
(external) factors in detail and the PESTLE analysis framework in analyzing
their impacts on strategic development.
Unit 5: Competitive Analysis focuses on the next immediate layer of the external
environment called as the competitive environment. This refers to the situation,
which an organization faces within its specific area of operations. The Porter’s
Five Forces model is the universally popular model to analyze the competitive
environment. The five forces model which focuses on forces beyond direct rivalry
is discussed here to broaden your understanding of how such forces shape up
strategies and affect performance in a competitive environment. Further within,
most industries or sectors we find many organizations with different characteristics
and the basis for their business or competition is found to be different. Analyzing
the forces in such cases is possible by using the concept of strategic groups
discussed in this unit. This will also help understand the layers, which may exist
between the industry and the individual organization.
Unit 6: Internal Environmental Analysis as the name suggests it explains
the internal analysis of an organization where focus is on analyzing and
understanding organizations’ resources and competencies, which help
managers match capabilities with opportunities or neutralize threats
effectively. Also this helps managers to explain potential uniqueness of the
organizations contributing to their superior performance.
Environmental Analysis

62
 External Environment
UNIT 4 EXTERNAL ENVIRONMENT
Objectives
After reading this unit, you should be able to:
 Understand the importance of environmental analysis;
 Acquaint yourself with the broad dimensions in a general environment;
 Know the relationship between the general environment and strategy;
 Understand the concept of Industrial Organization (I/O) model;
 Know the PESTLE framework for analysis and the implications of its factors.

Structure
4.1 Introduction
4.2 General Environment and Strategy
4.3 Process for analyzing the External Environment
4.4 External Environment
4.5 Industrial Organization Model
4.6 PESTLE Framework
4.7 External Factor Evaluation Matrix
4.8 Summary
4.9 Keywords
4.10 Self-Assessment Questions
4.11 References and Further Readings

4.1 INTRODUCTION
Strategic analysis is basically concerned with structuring the relationship
between a business and its environment. The environment in which a business
operates has a greater influence on their successes or failures. There is a strong
linkage between the changing environment, the strategic response of the business
to such changes and the performance. It is therefore important to understand the
forces of external environment the way they influence the linkage. The external
environment which is dynamic and changing holds both opportunities and threats
for the organizations. The organizations while attempting at strategic realignments,
try to capture these opportunities and avoid the emerging threats. At the same
time the changes in the environment affect the attractiveness or risk levels of
various investments of the organizations or the investors.
The first level of the external analysis i.e. understanding of the macro environment
has an influence on the success or failure of an organization’s strategies. The
impact of the changes of the macro environment is felt on the organization and
its strategies through their influences on the competitive forces of the competitive 63
Environmental Analysis environment. Assessing the external environment is also known as environmental
scanning or industry analysis. In this unit we will learn a practical approach to
assessing and analyzing the external information and understand the concept of
Industrial Organization (I/O) model.

4.2 GENERAL ENVIRONMENT AND STRATEGY

A manager needs to analyze the kind of impact the change may bring in their own
industry as the impact are never same for all industries. For example, the emerging
younger demographic profile of India will have very different consequences for
businesses say in health care or entertainment. While the former will face an adverse
effect, the latter will have a positive effect and these needs to be analyzed and
integrated into strategic decision making. In response to these assessments of
differential impacts, managers will be able to take advantages of the opportunities
or guard themselves of the threats. Exhibit 1 shows how in different ways various
industries get affected by the different environmental trends.
Responding to these various impacts with new strategic initiatives the managers
must take notice of the fact that if the changes are significant, it may have the
potential of changing the competitive rules of the game in the industry. For
example, in India the competitive rules of the game for sectors like telecom,
banking and insurance etc, in the post liberalization period changed specially in
last few years. With the pandemic crisis, the rules have changed all the more as
more stress is towards digitization. With the easing of FDI and participation of
major global players, norms have changed dramatically which is reflected in the
strategies of most of the organizations in the sector. These changes can be seen
in the area of technology and pricing, intensity of advertising and promotions,
their business alliances and network in the nation.
Managers need to be cautious of the fact that there may be developments, which
are not so easy to predict and therefore need further attention so that they can
be incorporated in their strategy. In the global context, the managers must see
the kind of impact any single change will have in different markets. It is
quite possible that they are very different both in degree and their nature.
Exhibit 1: Environmental trends and their probable impact on
different sectors
Environmental Probable positive Probable neutral Probable negative
trends effects effects effects
1. Aging population Medical services Minerals Colleges and
schools
2. Multiple income Fast food Machine tools Grocer’s supplies
families
3. Deregulation Shipping Financial sector
4. Increased Waste management Software Leather
environmental
legislation
5. Growing global Telecommunication/ Competition
small scale/
handicrafts
64
Structural Drivers to Change External Environment

The PESTLE analysis gives a number of factors and their likely influences.
However it is important to identify the specific factors which may influence an
industry and force them towards competitive adjustments. These factors are
termed as structural drivers of change which have the likely effect on the structure
of an industry or on the competitive environment.
As a first step based on PESTLE analysis, the key driving forces need to be
identified and then impact of the combined effect of these forces should also be
made. Increasing globalization of the industry and the E enabled era could make
such driving forces capable of affecting the structure of an industry or its
environment.

4.3 PROCESS FOR ANALYZING THE EXTERNAL

ENVIRONMENT
Let us now see the process for analyzing the external environment. This consists
of three steps which are as follows:
Step 1: Environmental scanning
Step 2: Assimilation
Step 3: Evaluation
The process of analyzing the external environment requires three steps to be
followed. In the first step the organization should gather all the information related
to political, economic, socio-cultural, technological, legal and environmental
(PESTLE) trends. This can be done using internet, magazines, newspapers etc.
A periodic scanning report of these factors can be submitted for performing the
external audit. The second step involves assimilation of all the information
gathered. This involves assessing the opportunities and threats available with
the organization. The last step in this process is evaluating. In this the key external
factors need to be identified and a list of the same is to be made. These key
factors should be important in helping long term objectives of the organization
and should be measurable in nature. Using these sources the environmental
analysis for any organization can be done.
Environmental scanning
The factors or the forces understood under PESTLE framework put together,
present a highly complex and uncertain environment which are difficult to predict
or foresee. From a long term view of strategy however, reaching somewhat closer
to such forces are important in understanding the key factors influencing the
success of such strategies.
Environmental scanning is one of the few ways to detect future driving forces
early and this involves studying and interpreting the developments of social,
political, economic, ecological and technical events that could become driving
forces. It attempts to figure out few radical happenings or path breaking
developments which may be catching on and see their possible implications 5 to
20 years into the future. The purpose of environmental scanning is to raise the
65
Environmental Analysis consciousness of managers about potential developments that could have an
impact on industry conditions resulting in new threats or opportunities.
Environmental scanning is normally accomplished by systematically monitoring
and studying current events, constructing scenarios and employing the Delphi
method (a technique for finding consensus among a group of knowledgeable
experts).
Constructing scenarios involves a detailed plausible view of how the business
environment of an organization might develop in the future based on the groupings
of key environmental influences and drivers of change about which there is high
level of uncertainty. For example in industries like energy, transportation, defence
equipment etc. there is a need for views of the business environment of more
than 10-15 years and factors like raw materials, substitutes, consumption patterns,
geo politics etc. would be of crucial importance. Foreseeing precisely for such a
longer duration may be very difficult but drawing up possible futures may be
viable. It is not unnatural to believe that several scenarios could unfold overtime
and these need to be understood. Scenario planning technique is briefly
discussed in Unit 5 under the competitive environment.

4.4 EXTERNAL ENVIRONMENT

The macro environment in which all organizations operate broadly consist of the
economic environment, the political and legal environment, the socio cultural
aspects and the environment related issues like pollution, sustainability etc. The
technological temper and its progress has been the key driver behind the major
changes witnessed in the external environment making it increasingly complex.
These factors often overlap and the developments in one area may influence
developments in other. For example, the opening up of economy integrated the
markets globally and increased the competition between private and public
organizations. This forced the Indian government to revisit its economic policies.
Under its new liberalization policy and economic reforms of 1991, regulations
like MRTP, which restricted the size of the business and therefore inhibited their
efficiency and competitive levels, were removed with a positive impact on the
indigenous industries. The current political developments are sure to have an
impact on the minds of business people regarding the future policy direction
in certain sectors. The social considerations in the context of a developing
nation like India also play a critical role in deciding the broad dynamics of the
business environment. The clash of ideologies between preserving the Indian
ethos and culture and giving a freedom of choice to people often create
problems and confusion for business.

4.5 INDUSTRIAL ORGANIZATON MODEL

Let us now discuss the Industrial Organization (IO) Model which forms the
basis to understand the concept of strategy leading to competitive
advantage. The Industrial Organization Model adopts an external perspective on
strategic decision- making. It begins with the idea that external factors have
major effects on organization’s strategic activities. In other words, this
model assumes that the features and conditions of the external environment
66
impact the formulation and implementation of strategies in order to generate External Environment
above-average returns and thereby gain competitive advantage. Under this
model, external environment forces the organization to develop strategies to
meet that demand at the same time limiting the spectrum of tactics that may be
suitable and ultimately effective. Further, the model assumes that all
organizations operating within an industry possess similar set of resources.
This implies that, due to the similarity among set of resources, majority of
organizations operating in a certain industry or a section of an industry has
comparable skills and consequently pursues similar tactics. The resources
required to put strategy into action are highly transferable among organizations.
Significant distinctions in strategically relevant resources across enterprises in
an industry tend to diminish due to high resource mobility.
The industrial organization model follows a process for achieving competitive
advantage as shown in figure 4.1. The steps involved are discussed as below:
 Examine the external environment which includes general, industrial,
and competitive environment to identify the external environment
attributes and both decide and limit the organization’s strategic solutions.
 Based on the structural parameters of the industry, industry (or industries)
is to be chosen with a high potential for returns.
 Strategies associated with above-average returns should be developed
based on the features of the industry in which the organization plans to
operate.
 Acquire or develop the key resources required for successful
implementation of the formulated strategies and plans.
 The model indicates that competitive advantage will be achieved if an
organization successfully implements the strategic actions which enable
an organization to utilize its resources for meeting the demands of
external environment.

67
Figure 4.1: Industrial Organization Model
Environmental Analysis This model is important for the organizations as it helps them assess the strategic
position of the organization.

4.6 PESTLE FRAMEWORK

The external forces can be classified into six broad categories: Political, Economic,
Social, Technological, Environmental and Legal Forces. Changes in these external
forces affect the changes in consumer demand for both industrial and consumer
products and services. These external forces affect the types of products produced,
the nature of positioning, market segmentation strategies, the types of services
offered, and choice of business. Therefore, it becomes important for the
organizations to identify and evaluate external opportunities and threats so as to
develop a clear mission, design strategies to achieve long-term objectives and
develop policies to achieve short term goals. Here, we will discuss all the six
forces individually and then try to come to the conclusion regarding environmental
analysis. A careful analysis of the above factors will help in identifying
major trends for different industries. Exhibit-2 shows the PESTLE framework
which is most popularly used for such analysis.
Few indicative points are listed to guide you to find the key factors in the general
environment. While PESTLE framework may be used to understand the most
important factors at the present time, it should be primarily used to look into the
future impact which may be different from their present or past impact.
Exhibit 2: PESTLE Framework

The PESTLE Framework- Marco-environmental influences. The framework

primarily involves the following two areas:
1. The environmental factors affecting the organization;
2. The important factors relevant in the present context and in the years
to come.
Political
1. Government stability
2. Political values and beliefs shaping policies
3. Regulations towards trade and global business
4. Taxation policies
5. Priorities in social sector
Economic Factors
1. GNP trends
2. Interest rates/ savings rate
3. Money supply inflation rate
4. Inflation rate
5. Unemployment
68
 External Environment
6. Disposable income
7. Business cycles
8. Trade deficit/surplus
Socio-cultural Factors
1. Population demographics
 Ethnic composition
 Aging of population
 Regional changes in population growth and decline
2. Social mobility
3. Lifestyle changes
4. Attitudes to work and leisure
5. Education-spread or erosion of educational standards
6. Health and fitness awareness
7. Multiple income families
Technological
1. Biotechnology
2. Process innovation
3. Digital revolution
4. Government spending on research
5. Government and industry focus on technological effort
6. New discoveries/development
7. Speed of technology transfer
8. Rates of obsolescence
Legal
1. Monopolies legislation/Antitrust regulation
2. Employment law
3. Health and safety
4. Product safety
Environmental
1. Carbon emissions
2. Pollution levels
3. Environmental sustainability
4. Global warming
5. Biodegradable material
69
Environmental Analysis Political factors
Politics has a serious impact on the economic environment of a nation. Political
ideology and political stability or instability strongly influence the pace and
direction of the economic growth. It also contributes to the economic environment
which is conducive for some businesses to grow or indifferent for some businesses
or at times be a hurdle. The governments at any levels be it central, state, local
and foreign, all have an impact on the businesses. These are the major regulators
or deregulators. The businesses all over depend largely on the contracts of
government, subsidies etc. which form a major part of external environment.
Any change in the laws, regulations, tax slabs etc. can affect the organization to
a large extent.
Looking back into the history due to certain ideological beliefs prevalent in some
section of politics, few of foreign organizations had to move out of India in the
late 70s. Entry barriers, protectionist policies, high tariffs, nationalist pursuits all
worked towards a closed economy which continued till the time liberalization
policies were introduced in 1991. This situation had a cumulative effect on making
the economy weak and the businesses were hardly competitive as compared to
the international standards. However in subsequent years, the political consensus
developed on issues such as labour reforms, power sector reforms, importance
of infrastructure etc. and these sectors are doing a lot good for business.
Activity 1
Identify few key active political forces. Discuss how they are shaping the overall
environment in the nation.
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Economic factors
Exhibit 3 gives you a view of broad indicators which give the economic picture
of the general environment and these should be carefully looked into while doing
the environmental analysis.
Exhibit 3: Common Economic Indicators

A. National Income B. Policy Initiatives

GNP Monetary policy
Personal disposable Income Fiscal policy
Personal consumption Labour and employment policy
C. Savings D. Foreign Sector
Personal savings Exchange rates
Corporate savings Exports/Imports
Balance of Payments
70
 External Environment
E. Industry F. Sectoral Growth
Industry Investment Agriculture
FDI flows Industry
Services
Infrastructure
G. Capital Market H. Prices, Wages, Productivity
Equity market Inflation
Bond market Labour productivity

Economic factors throw light on the nature and direction of the economy in
which an organization operates. The organizations must focus on economic trends
in segments that affect their industry. For example the trend of low interest rates
on personal savings may compel individuals to move towards equity and bond
markets leading to a boom in the capital market activity and the mutual fund
industry. Consumption patterns are usually governed by the relative affluence of
market segments and organizations must understand them through the level of
disposable income and the tendency of people to spend. Interest rates, inflation
rates, unemployment rates and trends in the gross national product, government
policies and sectoral growth rates are other economic influences it must consider.
The services sector’s contribution to national income is increasing year after
year and the family incomes are rising faster than individual incomes, job
opportunities are more diverse and therefore these speak for different types of
opportunities and challenges which are emerging before the business. With the
opening up of the economy, trends in the global market needs a careful look. The
above needs to be analyzed and incorporated in your inferences for the general
environment and its other forces and how all these together may influence
business.
Activity 2
Suppose the foreign exchange reserves in the nation gets depleted by half of
the present level because of few developments in the outside world. Discuss
the environmental effects it may lead to.
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Social factors
Socio-cultural factors have a major impact on the markets, products, services
and customers. Almost all the organizations face challenges arising from the
changes in demographic and cultural variables. Let us discuss these in brief.
Demographic Factors: Demographic characteristics such as population, age
distribution, literacy levels, inter-state migration, rural-urban mobility, income
distribution etc. are the key indicators for understanding the demographic impact
71
Environmental Analysis on environment. The shifts in age distribution caused by improved birth control
methods have created opportunities for youth centric products ranging from
clothes to entertainment to media. The growing number of senior citizens and
their livelihood needs have been highlighted and the government is paying more
attention in the form of social security benefits etc.
Considering literacy and the composition of literates in the nation creates
opportunities for particular type of industries and type of jobs. For example on
one hand, the presence of a large number of English speaking engineers
encouraged many software giants to set up shops in India and on the other, the
availability of cheap labour, India becomes a destination for labour intensive
projects. Moreover, large labour mobility across different occupations and regions,
in recent times, has cut down wage differentials greatly and this has an impact
for businesses which needs to be understood.
Cultural Factors: Social attitudes, values, customs, beliefs, rituals and practices
also influence business practices in a major way. Festivals in India offer great
business opportunity for certain industries like clothes and garments, jewellery,
gift items, sweetmeats and many others, the list could be endless.
Social values and beliefs are important as they affect our buying behaviour. For
example, a multinational fast food chain does not serve the beef burgers in India
because Indians do not have cow meat since the animal is considered holy and
sacred. A related example of an entertainment giant also brings out clearly, the
impact different cultures may bring to business. This organization which has
been so successful in the US market could not be so successful in European
nations because of the difference in the way in which people entertain themselves
there. Due to this they had to customize its offerings in order to be successful in
these markets. The spread of consumerism, the rise of the middle class with high
disposable income, the flashy lifestyles of people working in software, telecom,
media and multinational companies seem to have changed the socio-cultural
scenario and these needs to be understood deeply. The pandemic crisis bringing
the Work from Home (WFH) culture also has impacted the way the market is
perceived. Values in society also determine the work culture, approach towards
stakeholders and the various responsibilities the organization thinks of owing to
its stockholders and the society.
Activity 3
There has been a thrust on women literacy. Discuss the influences you see in the
social environment and their impact on business.
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................................................................................................................................

Technological factors
Technological factors represent major opportunities and threats which must be
taken into account while formulating strategies. Technological breakthroughs
can drastically influence the organization’s products, services markets, suppliers,
72
distributors, competitors, customers, manufacturing processes, marketing External Environment
practices and competitive position. Technological advancements can open up
new markets, change the relative position of industry and render existing
products and services obsolete. Technological changes can reduce or eliminate
cost barriers between businesses, create shorter production runs, create shortages
in technical skills and result in changing values and expectations of customers
and employees.
The impact of information technology (IT) which combines fruits of both
telecommunications and computers has been revolutionary in every field. Not
only has it opened up new vistas of business but also has changed the way the
businesses are done. IT has specifically brought in another dimension ‘Speed’
which organizations recognize as the additional source of competitive advantage
beyond low cost and differentiation. Manufacturers, bankers and retailers have
used IT to carry out their traditional tasks at lower costs and deliver higher
value added products and services. The pandemic situation has altogether
changed the way the organizations work. Artificial intelligence, robotics, cloud
computing, blockchain technology etc. have penetrated the business world to
a large extent.
Activity 4
Enumerate few of the technological advances in the field of agriculture and discuss
its role in tapping better opportunities in the overseas markets.
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................................................................................................................................

Legal factors

Licensing policies, quota restrictions, import duties, FOREX regulations, FDI

regulations, controls on distribution and pricing of commodities together made
business difficult before the liberalization. However, with economic reforms
things have changed and legal formalities have eased. Nevertheless with
globalization, the rules of competition, trade mark rights and patents, WTO rules
and implications, price controls and product quality laws and a number of other
legal issues in individual nations have become important and therefore they need
to be included while understanding the general environment.

Activity 5

Discuss the legislation on patents in India and its impact on the business.

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73
Environmental Analysis Environmental factors
Environment conservation and protection is an issue, which has gained
prominence because of deteriorating environmental balance which is threatening
the sustainability of life and nature. Largely, businesses are also held responsible
for such situations as emissions from industries polluting the air, excessive
chemical effluents drained out in water making it poisonous and unfit for use,
usage of bio non-degradable resources affecting the bio-chain adversely and
exposure of employees to hazardous radiations bring their life in danger. All
these have been taken very seriously by different stakeholders in the society
including the government and legislations and movements are creating pressure
for an environment friendly business. These have far reaching implications for
businesses ranging from the kind of business, the product being manufactured,
how it is manufactured and how friendly it is for mankind and nature. Many
multinationals that come under the purview of the society regarding the
environmental hazards have started using more sustainable methods to survive
in the business.The businesses all over are now concentrating more on preserving
the nature than harming it.
The competitive environment refers to the situation which organization’s face
within its specific area of operation, and this can be understood at an industry
level or with respect to smaller groups called Strategic groups. Generally
understood, an industry in the economy is recognized as a group of organizations
producing the same principal product or more broadly the group of organizations
producing products that are close substitutes for each other and in a given
industry different organizations have different intermediate basis of
understanding its relative position with respect to other organizations in the
industry.

Organizations within an industry with similar strategic characteristics, following

similar strategies or competing on similar bases are called strategic groups.
These characteristics for a particular group will be different from those in other
strategic groups in the same industry or sector. There may be many different
characteristics, which distinguish between strategic groups. For example size,
breadth of product range, geographical coverage, quality or service levels or
marketing spend. The concept of strategic groups when used helps in
understanding who is the direct competitor of any given organization and on
what basis competitive rivalry is likely to take place within each strategic group.
There are competitive forces beyond direct rivals which shape up the
competitive environment that can be better understood with the five forces
framework which we will discuss in unit 5.

Activity 6

List out five major industries which in your view, may pose danger to the
environment.Suggest measures as to how these industries may act in an
environment friendly nature.

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74
................................................................................................................................ External Environment

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4.7 EXTERNAL FACTOR EVALUATION MATRIX

The External Factor Evaluation Matrix (EFE) is a tool which helps strategists to
summarize and evaluate the PESTEL factors. This involves five steps which are
as follows:
1. List key external factors
2. Assign weight to each factor
3. Assign a rating to each factor
4. Determine a weighted score
5. Determine the total weighted score.
Let us see how each step is to be performed to find out the EFE. Exhibit 4 gives
an example of EFE.
1. List key external factors: Once the PESTEL is performed, key external
factors are identified. In this all the factors (10 or 20) are included which
determine the opportunities and threats for the organization. Then the listing
of all the opportunities and threats is done using percentages, ratios etc.
2. Assign weight to each factor: This is the second step where each factor is
assigned weight sranging from 0.0 (not so important) to 1.0 (very important).
These weights depict the relative importance to each factor. These weights
are determined by comparing successful competitors with unsuccessful ones
or through a group discussion in the organization. The sum of all weights
should be 1.0. These are industry based.
3. Assign rating to each factor: A rating of 1 to 4 factors is assigned. This is
done to show the effectiveness of the organization’s present strategic response
to the factor. The rating scale is depicted as below:
1 = Poor response
2 = Average response
3 = Above average response
4 = Superior response.
Ratings are organization based.
4. Determine a weighted score: This is the fourth step and it involves
multiplying weight of each factor by its rating.
5. Determine the total weight score: This is the last step to be performed and
in this step a score of the weighted score of each variable is considered and
this gives the total weighted score of the organization.
75
Environmental Analysis Exhibit 4: External Factor Evaluation (EFE) Matrix of X Inc.
Key External Factors Weight Rating Weighted score
(0.0 – 1.0) (1 - 4) (Weight X Rating)

Opportunities

1. Global markets untapped by 0.15 1 0.15

alcohol free beverages
2. Increased demand by ban on 0.05 3 0.15
use of alcoholic beverages
3. Growth of social media 0.05 1 0.05
advertising
4. Social pressure to reduce 0.15 4 0.65
use of alcoholic beverages
5. Y the leader in discounted 0.10 3 0.30
alcoholic beverage market
Threats
1. Limit against public use 0.10 2 0.20
of alcohol
2. Limit on production of 0.05 3 0.15
alcohol increases
competition
3. Alcohol free beverage market 0.05 2 0.10
concentration in another
region of the nation
4. Poor media exposure 0.10 2 0.20
5. Government regulation 0.20 1 0.20
Total 1.00 2.10

One thing is to be noted here is that despite number of opportunities or threats in

an EFE matrix the maximum possible weighted score for an organization is 4.0
and the minimum possible score is 1.0. This shows that if an organization
gets a weighted score of 4.0, then the response of the organization to the
opportunities and threats is excellent and vice-versa. The example shown in exhibit
shows the total weighted score of 1.0. This indicates the organization is not
able to tap the opportunities and avoid the threats. Therefore, it is important for
organizations to have a thorough understanding of the factors so as to maximize
the opportunities and minimize the threats.

4.8 SUMMARY
Understanding of the general environment in which an organization operates is
the foremost prerequisite towards strategy formulation. The six broad dimensions
which this PESTLE framework provides the environment-political, economic,
socio- cultural, technological, legal and environmental are capable of giving a
comprehensive overview of how things may be unfolding. The objective of the
76 analysis of this framework however should not only restrict to the present and
past but the real focus should be on projecting the trends into future in order to External Environment
get the real feel of the environment. This shall enable the organizations to
proactively strategize for future considering the general environment.EFE matrix
is used to assess these factors.
The immediate competitive environment influences an organization and therefore
has to be understood alongside the general environment. It is therefore a
challenging task for managers to imitate and formulate strategies which can
effectively neutralize the negative impact on the competitive structure of industry
generated by these forces.

4.9 KEYWORDS
PESTLE Framework : This framework categorizes environmental
influences into 6 main types — political,
economic, social, technological,
legal and environmental.
Structural Drivers of Change : The factors which have a likely effect on the
structure of an industry or on the
competitive environment.
Environmental Scanning : One of the few ways to detect future driving
forces.
Competitive Environment : It refers to the situation which an
organization faces within its specific arena
of operation.

4.10 SELF-ASSESSMENT QUESTIONS

1) Briefly summarize what you understand by the general environment and its
importance for business.
2) Explain what is external analysis and its relationship with
strategy formulation?
3) Briefly explain the PESTLE framework.
4) Identify an industry of your choice and do a PESTLE analysis.
5) Explain the Industrial Organization Model.

4.11 REFERENCES AND FURTHER READINGS

David, R. Fred. (2007). Strategic Management: Concepts and CasesPrentice
Hall International Inc.
Haberberg, A. & Rieple, A. (2010). Strategic Management (2010ed.). New
York: Oxford University Press.
Henry, A. E. (2018). Understanding Strategic Management (3rd ed.). Oxford,
United Kingdom: Oxford University Press.
77
Environmental Analysis Johnson, Gerrry & Scholes, Kevan. (2004). Exploring Corporate Strategy. Sixth
edition, Prentice-Hall of India, New Delhi.
Kazmi, A. (2008). Business Policy and Strategic Management (3rd ed.). Delhi:
Tata Mcgraw Hill Publishing Co, Ltd.
Kishor, R. M. (2016). Strategic Management (2015 ed.). Delhi: Taxmann
publication.
Miller, Alex. Strategic Management, Third edition. Irwin McGraw Hill.
Peters, Thomas J. and Robert, H. Waterman, Jr. (1982). In Search of Execllence
lessons from America’s Best- Run Companies, New York: Harper and Row.
Prasad, L.M. (2002). Business Policy: Strategic Management. Delhi: Sultan
Chand & Sons.
Shrivastava, R. M. (2017). Management Policy and Strategic Management(3rd
ed.). Mumbai: Himalaya Publication House.
Thompson, A. Arthur, Jr. and Strickland, A.J. III. (2003). Strategic Management,
Concepts and Cases, Thirteenth edition. Tata McGraw Hill Publishing, New
Delhi.

78
 External Environment
UNIT 5 COMPETITIVE ANALYSIS
Objectives

After reading this unit, you should be able to:

 Learn about competitive forces;
 Understand the concept of competitive analysis;
 Understand Porters five forces framework;
 Know the role of strategic groups in competitive analysis;
 Analyze the social media competitive analysis;
 Understand the Competitive Profile Matrix (CPM).

Structure
5.1 Introduction
5.2 Competitive forces
5.3 Porter’s five forces framework
5.4 Strategic Groups
5.5 Scenario Planning
5.6 Social media competitive analysis
5.7 Competitive Profile Matrix
5.8 Summary
5.9 Keywords
5.10 Self-Assessment Questions
5.11 References and Further readings

5.1 INTRODUCTION
In unit 4 we have learnt how the external environment is scanned. This unit
is in continuation to the external analysis. In this unit we will discuss the
importance of competitive analysis in the external environment scanning and
will learn different aspects of competitive analysis. We have seen that it is
very important to identify the competitors and determine their strengths,
weaknesses, opportunities and threats. This is the reason a proper competitive
analysis is required. The unit discusses how the analysis goes beyond the
scope of a single business unit and how strategic groups become important.
The unit focuses on Porter’s five forces model which describes the competitive
analysis in detail. The unit also explains the competitive profile matrix. Overall
the unit gives a detailed description of competitive analysis through various
modes.
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Environmental Analysis
5.2 COMPETITIVE FORCES
Any organization can only be successful if it has the ability to formulate an
effective strategy. This can be done by collecting all the relevant information
about competitors and evaluate them to formulate their own strategy. It has been
witnessed in many cases that identifying the competitors is quite difficult as
number of organizations have divisions which compete in different industries
which means that the businesses are diversified. Most of the organizations do
not make the sales and profit information pubic due to competitive reasons. In
present times internet has become a major source for obtaining the information
on the competitors.
Competition in any industry is usually intense. In the past many cases have been
witnessed whereby the organizations have capitalized on the weaknesses of its
competitors. Therefore it is very important to understand the forces which are
important for a competitive analysis. These are:

 Strengths of the competitors;

 Weaknesses of the competitors ;

 Objectives and strategies of the competitors;

 Response of the competitors towards PESTLE factors;

 Vulnerability of the competitors to alternative strategies of

other organization;

 Vulnerability of the organizations to their alternative strategies;

 Positioning of the products / services relative to major competitors;

 The status of entry and exit of new and old business

organizations respectively;

 The key factors resulting in the present competitive position in

the industry;

 Trends of the sales and profits ranking of major competitors in

the industry;

 Supplier and distributor relationships in the industry;

 Threat to the competitors due to the substitute products/ services.

This is not an exhaustive list. However this gives an idea about the competitive
forces which are important in conducting a competitive analysis.

5.3 PORTER’S FIVE FORCES FRAMEWORK

Competitive analysis is one of the most critical parts of an organization’s strategic
plan. This involves identifying the strategies of the competitors to assess their
strengths and weaknesses and thereby evaluating them. A proper evaluation of a
competitor’s strategy helps the organization in establishing the USP (Unique
Service Proposition) of its product or service. The evaluation of the competitors
80
can be done by placing them in strategic groups which we will discuss in section Competitive Analysis
5.4. Porter’s Five-Forces Model of competitive analysis is one of the most widely
used approaches to develop strategies as shown in figure 5.1.
The five forces framework developed by Michael Porter is the most widely known
tool for analyzing the competitive environment, which helps in explaining how
forces in the competitive environment shape strategies and affect performance.
The framework as shown in figure 5.1 suggests that there are competitive forces
other than direct rivals which shape up the competitive environment. These
competitive forces are as follows:
1) The rivalry among competitors in the industry
2) The potential entrants
3) The substitute products
4) The bargaining power of suppliers
5) The bargaining power of buyers
However, these five forces are not independent of each other. Pressures from
one direction can trigger off changes in another which is capable of shifting
sources of competition. In the following section each of these five forces are
discussed in detail so as to understand how each of these forces affect an
Industry’s environment so that one can identify the most appropriate strategic
position within the industry.

Figure 5.1: Porter’s five Forces Model of Competition

1) Threat of New Entrants
Entry of a business organization in and operating in a market is seen as a threat
to the established business organizations in that market. The competitive position
of the established business organizations is affected because the entrants may
add new production capacity or it may affect their market shares. They may also
bring additional resources with them which may force the existing business
81
Environmental Analysis organizations to invest more than what was not required before. Altogether the
situation becomes difficult for the existing business organizations if not
threatening always and therefore they resort to raising barriers to entry. These
barriers are intended to discourage new entrants and this may be done by
organizations, be in any one or more ways, as discussed below:
a) Economies of Scale: Business organizations which operate on a large
scale get benefits of lower cost of production because of the economies
of scale. Since the new business organization normally would start its
operation at a smaller scale and therefore will have a relatively higher
cost of production, its competitive position in the industry gets
adversely affected. This barrier created through large scale of operation
is not only applicable for production side but it can be extended to
advertising, marketing, distribution, financing, after sales customer
service, raw materials, purchasing and Research and Development as
well. For example, you would have noticed in durable industry the
kind of investments which players in the durables market do on
advertising and promotions normally and especially during events like
World Cup cricket match. This makes it nearly impossible for any new
third player to launch and sustain such intensive and investment driven
marketing attack.
b) Learning or Experience Effect: The theory explaining the experience
curve or the learning curve suggests that as business organizations
produce more they grow more efficient and this brings them cost benefits.
The efficiency levels achieved is an outcome of the experience, which
teaches the organization better ways of doing things. This again keeps
any new entrant at a disadvantage.
c) Cost Disadvantage Independent of Scale: New entrants may face
disadvantages which are independent of the operations. It may be on
account of the lack of proprietary product knowledge such as patents,
favourable access to raw material, favourable locations, existing plants
built and equipped years earlier at lower costs, lower borrowing costs
etc.
d) Brand benefits: Buyers are often attached to established brands.
Differences in physical or mere perceived value make existing products
unique and the new entrants have to really work hard to beat such brands
and change the mindset of the customers.
e) Capital Requirements: High investments required for a start up in any
business is another deterrent for new entrants bringing down the
possibility of increased competition.
f) Switching Costs: Switching costs, which is nothing but the expenses
(financial or psychological) which a customer incurs in switching from
one seller to another. Cases where such an expense is higher, new entrants
find it difficult to establish or survive. Such costs may be because of a
strong brand association or the comfort level a customer may be enjoying
or it may be on account of a particular technology like different operating
systems.
82
 g) Access to Distribution Channel: Any such critical activity like Competitive Analysis
distribution channel in the business can be a barrier for the entrants when
accessibility to them is found to be difficult. Most existing business
organizations in FMCG industry are found to have a strong favourable
distribution channels which is very difficult to penetrate.
h) Anticipated Growth: Incumbents in a rapidly growing market are less
likely to respond to a new entrant when the market’s growth offers enough
opportunities to share. But a new entrant position will be opposite in a
slowly growing market.
i) In addition to the above, few general entry barriers exist in each industry’s
case, for example, regulatory policies, tariffs and international trade
restrictions are few such additional factors.
Activity 1
Identify any industry of your choice and illustrate the possibility of new entrants
entering in that industry and why? Do you see any barriers being raised by the
existing players?
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2) Bargaining Power of Suppliers

Business organizations have a large dependency on suppliers and the latter
influence their profit potential significantly. Suppliers’ decisions on prices, quality
of goods and services and other terms and conditions of delivery and payments
have significant impact on the profit trends of an industry. However, suppliers’
ability to do all these depends on the bargaining power over buyers.
Suppliers’ bargaining power would normally depend on:
a) Importance of the Buyer to the Supplier Group: The size of the supplies
taken by a particular buyer is likely to put the buyers in a relatively
advantageous position. The same may be found true if the supplier tends
to get an image advantage by supplying to a particular business
organization. Consequently in dealing with such buyers, suppliers’
bargaining power is naturally reduced. Just opposite happens when buyer
is not so important to the supplier and the latter then is less likely to
offer favourable terms to win or retain the customer.
b) Importance of the Supplier’s Product to Buyers: Here the position may
just be opposite of the above situation where suppliers have a better
bargaining power coming from their sheer size or image.
c) Greater Concentration among Suppliers than among Buyers: An
industry, which is largely dominated by a few large business
organizations, is a highly concentrated industry. Such few business
83
Environmental Analysis organizations hold greater power with them as the proportion of the
industry’s total output is in hands of such large business organizations.
This gives such business organizations greater power over those who do
business with them. The converse is true when industry has low
concentration in suppliers. A higher concentrated supplier position may
be possible on account of the sources of raw materials available, R & D
or patent rights available with fewer business organizations.
d) High Switching Costs for Buyers: In this case buyers suffer because of
the suppliers’ advantageous position or by the nature of supplies itself,
the buyers have to face a higher switching cost.
e) Credible Threat of Forward Integration by Suppliers: Suppliers in a
given situation may see an opportunity in moving up the value chain
and may seriously think of getting into the business of what its buyers
have been doing till now. Any indication of that nature from supplier
side puts the buyers at the receiving end as they feel threatened because
of a new player in that market and of losing an assured source of supplies.
A recent example may be of an organization engaged in the petroleum
sector which has decided to move from exploration and refining of oil to
selling of oil through its own retail petrol pumps.
Activity 2
Identify any industry of your choice and study the suppliers for the industry.
Examine their strengths using the parameters discussed above as compared to
buyers.
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3) Bargaining Power of Customers

Customers with a stronger bargaining power relative to their suppliers may force
supply prices down or demand better quality for the same price and may demand
more favourable terms of business. For instance, there will always be a difference
in the bargaining power between an individual’s buying different construction
material like cement, steel or bricks and a real estate builder buying them for the
number of properties he may have been building over so many years.
Few of the following facts attach greater power to buyers:
a) Undifferentiated or Standard Supplies: A supplier, given the nature
of products it supplies, may have a very limited choice in providing
any differentiated products and this enables a customer to get the
deal at the most favourable terms. In perfectly competitive market
situations with large number of suppliers, prices automatically are at
their lowest.
84
 b) Customer’s Price Sensitivity: Customer’s buying behaviour varies with Competitive Analysis
respect to their sensitivity to prices. Depending on how important the
item is for the customer’s usage and proportion s/he may be spending
on the item concerned, buyers’ sensitivity to price varies. Any
customer with high price sensitivity gains advantage in its bargaining
power.
c) Accurate Information about the Cost Structure of Suppliers: A more
informed customer is capable of negotiating with suppliers. Whenever
such customers notice a decline in the supplier’s costs they would always
bargain for a proportional decrease in price. This aspect is more relevant
in today’s context of global markets where cost benefits can come from
anywhere in the world at any point in time for various reasons. There
may be a general decline in prices of a product in world market because
of a glut situation or somewhere some new discoveries may have pulled
the prices down.
d) Greater concentration in Buyer’s Industry than in Supplier’s
Industry and relatively large volume purchase: This means that buyers
are large and more powerful than suppliers. Government departments
like police department when negotiating for large orders of security
weapons or intelligence equipments will necessarily command a greater
hold than its supplier as there will be only few numbers of such institutions
buying them at a given point of time.
e) Credible threat of Backward Integration by Buyers: Different from
forward integration which suppliers tend to attempt at, buyers in order
to hold their position stronger in the market may integrate in backward
manner. This will mean that the buyer extends itself to the previous stage
of manufacturing or distribution for which it had been dependent on
suppliers till now. An example could be of an entertainment channel
which airs programmes outsourced from organizations producing them
outside, get into the business of producing its programmes in house.
4) Threat of Substitutes
Often business organizations in an industry face competition from outside industry
products, which may be close substitutes of each other. For example, with the
new technologies in place now the electronic publishing are the direct substitutes
of the texts published in print. Similarly, newspaper finds their closest substitutes
in their online version, though it may be a smart strategic move to position them
as complementary products.
However, the competitive pressure, which any industry may face, depends
primarily on three factors:
1) Whether the substitutes available are attractively priced;
2) Whether buyers view substitutes available as satisfactory in terms of
their quality and performance;
3) How easily buyers can switch to substitutes.
Generally it is observed that the availability and acceptability of substitutes
determine an upper price limit to a product. When relative prices of the product 85
Environmental Analysis in question raise above that of the substitute products, customers tend to switch
away from them.
Activity 3
Identify any industry of your choice and study the substitutes for the products of
the industry.

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5) Competitive Rivalry
The level of rivalry is lowest in a perfectly competitive market where there are
large number of buyers and sellers and the product is uniform with everyone.
Same is true for a monopoly market where there is only one player and the type
of product is also one. However in case of oligopoly or monopolistic competition,
where you will find few players and the market conditions allow them to
differentiate their products and services, competition if found to be fierce. Few
of the following factors explain the level of rivalry:
a) The Stability of Environment: An unstable environment is likely to call
for a hyper-competitive situation and of the several factors that affect
stability could be technological innovation, changes in government
regulations, customers’ profile and their needs. In an industry which
witnesses high movements in terms of entry or exit, the rules of the
game may change too frequently. One of such instances of fierce
competition could be noticed on account of the onslaught of new
technologies. The entry of new technology tends to intensify the
rivalry between the players.

b) The Life Expectancy of Competitive Advantage: There are industries

for example consumer electronics or white goods in which the fruits of
innovations do not last longer and hence the companies do not even
bother to patent them. This has an adverse implication for the stability
of the competitive environment leading to intense rivalry. Length of
innovation cycle, patent protection or switching costs between rivals
are some factors, which may impact the life expectancy of competitive
advantage.

c) Characteristics of the strategies pursued by competitors: This also has

or may have an impact on the general approach to rivalry. For example,
in a market segmented approach on part of the competitor leads to less
rivalry. Also the kind of goals, which competitors pursue has an impact
on the rivalry. Competitors pursuing the goal of increased market share
will lead to increased rivalry again.
Lastly, few implications can be picked up from the five forces framework itself.
86 Lower threats to entry or a higher possibility for substitutes have the potential of
increasing rivalry. A lower engagement between suppliers will result into a lesser Competitive Analysis

rivalry, so will be the effect when buyers face higher switching costs.

In an overall assessment, two critical observations regarding rivalry can be made

here. First a powerful competitive strategy employed by one rival can greatly
intensify the competitive pressure on other rivals. Second, the frequency and
rigor with which rivals use any or all competitive weapons at their disposal can
be a major determinant of whether the competitive pressures associated with
rivalry are cutthroat, fierce, strong, moderate or weak.

Activity 4
Identify two separate industries, which you may consider are relatively stable
and unstable respectively. Comment on the nature of rivalry, which may exist in
those industries.

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5.4 STRATEGIC GROUPS

They are conceptual clusters in the sense that they are grouped together for purpose
of improving analysis and understanding competition within their industry. They
do not necessarily belong to any formal group such as an industry, trade,
association or any strategic alliances and they do not necessarily differ in their
average profitability.
Research has shown that industries vary greatly in the similarity of their business
organizations in terms of strategies pursued and we need to analyze the two
types of industries differently. For industries, which are considered heterogeneous
comprising multiple strategic groups, it would be inappropriate and misleading
to combine different strategic groups in the same environmental analysis. For
example in a four-wheeler automobile industry, strategic groups can be thought
of Cars, Multi-utility Vehicles (MUVs) or Sports car vehicles.

Strategic groups are merely conceptual clusters in order to facilitate analysis and
therefore the categorizing of business organizations may be in a way beneficial
or insightful. Size of the business organizations may be one of the criterions
when analysis is to be understood how giants differ from smaller business
organizations. Geographic distribution, breadth of markets, products/ service
quality may be few others to determine strategic groups. Furthermore it often
makes sense to use different combinations of strategic dimensions to more
precisely identify groups.

In a homogeneous industry it is reasonable for all the competitors to be considered

as part of the same strategic group in a single industry-wise analysis. 87
Environmental Analysis Competitive Intelligence
It is the information which is relevant to strategy formulation regarding the
environmental context within which a business organization competes. Such
intelligence has several uses and these are:
a) Providing description of the competitive environment that inform
strategist and guide strategy formulation;
b) Challenge common assumption about the competitive environment;
c) Forecasting future development in the competitive environment;
d) Identifying and compensating for exposed competitive weaknesses;
e) Determining when a strategy is no longer viable or sustainable;
f) Indicating when and how strategy should be adjusted to changing
competitive environment.

5.5 SCENARIO PLANNING

Scenarios are tools for ordering one’s perceptions about alternative future
environments in which today’s decisions might be framed. In practice, scenarios
resemble a set of stories, written or spoken, built around carefully constructed
plots. These stories can express multiple perspectives on complex events;
scenarios give meaning to these events. Scenarios are powerful planning tools
precisely because the future is unpredictable. Unlike traditional forecasting or
market research, scenarios present alternative images instead of extrapolating
current trends from the present. Scenarios also embrace qualitative perspectives
and the potential for sharp discontinuities that econometric models exclude.
Consequently, creating scenarios requires decision-makers to question their
broadest assumptions about the way the world works so they can foresee decisions
that might be missed or denied.

Within an organization, scenarios provide a common vocabulary and an effective

basis for communicating complex – sometimes paradoxical – conditions and
options. Good scenarios are plausible and surprising, they have the power to
break old stereotypes, and their creators assume ownership and put them to work.
Using scenarios is rehearsing the future. By recognizing the warning signals, the
threats and opportunities that is unfolding, one can avoid surprises, adapt, and
act effectively.

Decisions which have been pre-tested against a range of what may offer are
more likely to stand the test of time, produce robust and resilient strategies, and
create distinct competitive advantage. Ultimately, the result of scenario planning
is not a more accurate picture of tomorrow but better thinking and an ongoing
strategic conversation about the future.
Example of Scenario planning in an Energy Producing Business organization
Understanding the business of an energy producing business organization and the
environment it faces, Scenario planning can be found useful in the following ways:
88
  Creating alignment between energy situation and business organization’s Competitive Analysis

vision and purpose. (“What is our 21st century business idea?”).

 Sparking innovation and new forms of value creation (“What new

products and services might replace the traditional one?”).

 It will involve many people with ability-to-perceive and/or ability-to-

act as effective participants in the process.

 It will provide space for multiple interpretations to make sense of what

is happening.

 By including people from a broad spectrum of backgrounds, scenario

planning will be capable of creating early breakthroughs in perception
and understanding, allowing the business organization to get grip of the
new environment it can’t escape from.

Implementation of Scenario Planning

A company-wide involvement in Scenario Planning leads to better result in a
business organization. A cross-functional team is instituted for the identification
and monitoring of issues.

Employees are encouraged to participate on an incentive based process. The

onus of refining and final implementation of the suggestions then lies on the
cross functional team. With the following steps indicated, you will be getting a
better understanding of the whole process:

STEP 1: Identification of the Issues

Understand the effects of external factors on business and these factors can
be:

 Technology driven (new product, IT based integration)

 Political (deregulation, instability)

 Economic (sudden downturns, boom)

 Competitive positioning (moves from competitors)

Participants need not limit themselves to above mentioned factors only; any factor
that may have an impact on the company is acceptable.

STEP 2: Classification of the Issues

 Support the issue identified with reports/propositions/any other method.

 Determine the uncertainty and kind of impact of the issue.

STEP 3: Analyzing and Problem Solving

Based on above classification a display board of the issues as per their
classification can be used to communicate the issue to all and the following
sequence can be taken for analysis and finding the solution to the problem. Figure
5.2 depicts the relationship between uncertainty and impact.
89
Environmental Analysis

Figure 5.2: A matrix between uncertainty and impact

D category: High impact-low uncertainty: These are highest priority issues
which need to be addressed immediately and more cautiously. All employees
must first focus on these issues.
B category: High risk issues: These issues need to be observed closely
and monitored strictly because of high uncertainty involved.
C category: Low impact-low uncertainty: These issues can be used for long
term planning.
A category: High uncertainty-low impact: Because of low impact to
the organization and high degree of uncertainty involve, these issues can be
altogether discarded.
The analysis and problem solution proposition part can be done on an individual
or team basis depending upon the interest of the participant(s). All ideas/reports
should then be submitted to the cross functional team for further analysis and
implementation.

5.6 SOCIAL MEDIA COMPETITIVE ANALYSIS

We now know the concept of competitive analysis. It is a kind of benchmark of
the organization’s performance against its competitors. In the present competitive
world, the organizations are straining hard to stay ahead of the competition. Social
media competitive analysis is one way to stay ahead of the competitors and gauge
new opportunities and potential threats.
Why is it necessary for organization to go for social media competitive analysis?
Social media competitive analysis helps in:
 Identifying competitors an social media;
 Knowing the social platforms the competitors are using;
 Knowing the ways they are using these platforms;
 Understanding the response towards the social strategy of the
competitors;
 Benchmarking the social results against the competition;
90
  Identifying social threats; Competitive Analysis

 Finding gaps of one’s own social media strategy.

This can be done using scenario planning techniques. The steps used in Social
Media Competitors Analysis are:
1. Determine the competitors
2. Information gathering
3. SWOT Analysis
4. Up-to date information
There are many tools which help the organization to develop their social media
visibility and perform the competitive analysis.

5.7 COMPETITIVE PROFILE MATRIX

Competitive Profile Matrix (CPM) is a strategic management tool used to compare
the organization with its competitors. It tries to highlight the strong and weak
points of the organization relative to its competitors. This tool is used to understand
the external environment in a better way. This involves four steps which are as
follows:

1. Identify critical success factors

2. Assign a weight to each critical success factor
3. Assign the ratings to each organization
4. Assign a score to each organization.
Let us discuss these steps in brief.

1. Identify Critical Success Factors (CSFs): CSFs as the name suggests are
the key focus areas which determine the success of an organization in a
particular industry. These areas can be internal as well as external in nature.
These factors vary among industries and also in the strategic groups. Since
these factors include internal as well as external issues, the ratings include
the strengths and weaknesses.
2. Assign a weight to each critical success factor: The weights are assigned
to each CSF from 0.0 (least important) to 1.0 (highly important). This indicates
the degree of importance to a particular factor.
3. Assign the ratings to each organization: The ratings as mentioned earlier
means the range from 4-1. The rating scale and its meaning is given below:

4= Major strength
3= Minor strength

2 = Minor weakness
1 = Major weakness
91
Environmental Analysis The ratings and weights should be assigned to each organization subjectively.
This can be done using benchmarking.
4. Assign a score to each organization: The last step in performing CPM is
assigning a score to each organization. This is done by multiplying the rating
with the assigned weights. i.e.
Score = Weights assigned X rating assigned
Then the total score of the organization is calculated. Total score is the sum
total of all the individual scores of organization. Then the scores of each
organization are compared and the one with the highest total score is perceived
to be stronger than its competitors. Table 5.1 shows a sample of the CPM.
CPM in general provides more internal strategic information and helps
the organization in design- making.
Table 5.1: A sample of Competitive Profile Matrix
Critical Competitor 1 Competitor 2 Competitor 3
Success Weight
Rating Score Rating Score Rating Score
Factors
Online advertising 0.12 3 0.36 3 0.36 4 0.48

Market share 0.12 2 0.24 4 0.48 4 0.48

Credibility 0.12 2 0.24 3 0.36 1 0.12

IT facilities 0.12 3 0.3 4 0.48 4 0.48

Innovation 0.1 4 0.4 3 0.3 1 0.1

Sales per employee 0.1 1 0.1 2 0.2 3 0.3

Advertising 0.08 1 0.08 2 0.16 1 0.08

Supply chain 0.08 4 0.32 2 0.16 2 0.16

Product range 0.05 3 0.15 1 0.05 2 0.1

Cost structure 0.05 1 0.05 3 0.15 4 0.2

New Product 0.05 3 0.15 3 0.15 3 0.15

Customer loyalty 0.01 2 0.02 4 0.04 1 0.01

Total 1.00 2.41 2.89 2.66

If we see the sample we will find that competitor 2 is having the highest score.
This means that the competitor 2 is stronger than its rivals in the industry.

5.8 SUMMARY
The competitive analysis in any organization is based on the assessment of its
external environment. In this unit we have discussed various aspects of
competitive analysis. The focus is on the five forces framework which helps
92
us in understanding any industry by identifying the strengths of each of the five Competitive Analysis
forces and the nature of competitive pressure that each force generates. It also
enables an understanding of the overall structure of competition. The competitive
structure of an industry sounds unattractive when rivalry among organizations
are strong, there exists low entry barriers and substitutes are more common
along with, when both suppliers and buyers command a higher bargaining
power. In case of reverse position the competitive structure is found to be
lucrative. The Competitive Profile Matrix has been discussed to understand as to
how the competitive analysis is performed.

5.9 KEYWORDS
Bargaining Power : It is decided by the relative strengths
or weaknesses between two players or
partners.
Learning or Experience Effect : It suggests that as organizations
increases their productivity, they grow
more efficient and this brings them
cost benefits.
Switching Costs : These are the expenses (financial or
psychological) which a customer
incurs in switching from one seller to
another.
Concentration in an Industry : An industry largely dominated by a
few large organizations is a highly
concentrated industry.

5.10 SELF-ASSESSMENT QUESTIONS

1) Explain the competitive environment for any industry and discuss external
analysis framework of that industry.
2) Explain briefly the five forces framework and use it for analyzing competitive
environment of any industry of your choice.
3) Write short notes on Strategic groups and Scenario Planning.
4) How does the nature of markets determine the competitive rivalry between
business organizations? Explain with suitable examples.

5.11 REFERENCES AND FURTHER READINGS

David, R. Fred. (2007). Strategic Management: Concepts and Cases Prentice
Hall International Inc.
Haberberg, A. &Rieple, A. (2010). Strategic Management (2010ed.). New York:
Oxford University Press.
Henry, A. E. (2018). Understanding Strategic Management(3rd ed.). Oxford,
United Kingdom: Oxford University Press. 93
Environmental Analysis Johnson, Gerrry & Scholes, Kevan. (2004). Exploring Corporate Strategy. Sixth
edition, Prentice-Hall of India, New Delhi.
Kazmi, A. (2008). Business Policy and Strategic Management (3rd ed.). Delhi:
Tata Mcgraw Hill Publishing Co, Ltd.
Kishor, R. M. (2016). Strategic Management (2015 ed.). Delhi: Taxmann
publication.
Miller, Alex. Strategic Management, Third edition. Irwin McGraw Hill.
Nag, A. (2011). Strategic Management (1st ed.). Delhi: Vikas publishing house.
Peters, Thomas J. and Robert, H. Waterman, Jr. (1982). In Search of Execllence
lessons from America’s Best- Run Companies, New York: Harper and Row.
Prasad, L.M. (2002). Business Policy: Strategic Management. Delhi: Sultan
Chand & Sons.
Shrivastava, R. M. (2017). Management Policy and Strategic Management (3rd
ed.). Mumbai: Himalaya Publication House.
Thompson, A. Arthur, Jr. & Strickland, A.J. III. (2003). Strategic Management,
Concepts and Cases, Thirteenth edition. Tata McGraw Hill Publishing, New
Delhi.

94
 Competitive Analysis
UNIT 6 INTERNAL ANALYSIS
Objectives
After reading the unit you should be able to:
 Understand the concept of internal analysis and its contribution to strategy
formulation;
 Understand concept of core competence and guidelines to assess what
resources and abilities constitute core competency of an organization;
 Examine type of resources which organizations possess and their strategic
importance;
 Understand the concept of value chain framework;
 Assess SWOT analysis.

Structure

6.1 Introduction
6.2 Resource Based View
6.3 The Critical Success Factor
6.4 The Value Chain Framework
6.5 Comparison Standards
6.6 SWOT Analysis
6.7 Internal factor evaluation Matrix
6.8 Summary
6.9 Keywords
6.10 Self-Assessment Questions
6.11 References and Further Readings

6.1 INTRODUCTION
In previous units in this block you have learnt how the ever changing nature of
external environment, both at macro and micro level affect an organization’s
business. The changes in the environment may create opportunities, which the
organizations try to exploit or may bring threats for the organizations, which the
latter tries to control or neutralize. However, in order to develop successful
strategies to exploit such opportunities or control the threats, analysis of an
organization’s capabilities is important for strategy making which aims at
producing a good fit between a nation’s resource capability and its external
situation. Internal analysis helps us understand the organizational capability which
influences the evolution of successful strategies.
95
Environmental Analysis Many of the issues of strategic development are concerned with changing strategic
capability better to fit a changing environment. However, looking at strategic
development from a different perspective i.e. stretching and exploiting the
organizations capability to create opportunities, it again becomes important to
understand these capabilities. The above two perspectives together are called
the Resource Based View (RBV) of strategy.
Professionals from different organizations suggest that an organization’s
overall strengths and weaknesses and its ability to execute are often found more
important to its performance than environmental factors. Internal capabilities
and process execution at times allow organizations to gain competitive edge over
competitors even with relatively lesser resources and lesser advantageous
position. In this unit we will also discuss the concept of value chain and have a
brief understanding of SWOT analysis.

6.2 RESOURCE BASED VIEW

Resource based view (RBV) model was proposed around the end of 20th
century. This model particularly focuses on the organizational resources.
Initially the model emphasize on the physical as well as human resources and
the organizational capabilities to use these resources to either develop unique
products and services or capture new markets. Subsequent developments of
this model highlight the significance on tacit knowledge which an organization
may possess. Tacit knowledge is the kind of knowledge which is usually hidden
among the members of the organization. In other words, it is a form of the
knowledge about which the members of the organizations are unaware or
unconscious. Tacit knowledge can be of immense importance to the organization
as it can be a resource which is unique and may be difficult to imitate by the
competitors.
RBV model is centred on the concept of resources as the key to superior
organizational performances. The managers are required to make strategic
decisions based on the resources and capabilities. RBV model adopts the internal
perception to explain how an organization’s unique internal resources and
capabilities serves as a basis for earning above average returns and thereby
gaining competitive advantage over their competitors. Therefore, the model
uses internal resources and capabilities to develop core competencies as a
response to external environment. Resources and capabilities are the driving
forces for strategies which are formulated as a measure to cope with the forces
of external environment.
As RBV model gives immense importance to resources, therefore, it is essential
to learn about resources and their essential features for a better understanding of
this model. A resource is something which an organization owns is accessible or
can be developed to formulate and execute strategies for improving effectiveness
and efficiency. Resource can include tangible assets, intangible assets, core
competencies, capabilities, organizational processes, technical know-how and
knowledge. Under RBV model, a resource should be heterogeneous and immobile.
Heterogeneity implies that the acquired resource should be different from what
other organizations have in the industry. On the other hand, immobility implies
96 that the resources are not easy to transfer to various organizations.
Types of Resources Internal Analysis

There are three types of resources – assets, capabilities and competencies, which
have been identified under Resource Based View of the organization (RBV).
Strategic thinkers explaining the RBV suggest that the organizations are
collections of tangible and intangible assets combined with capabilities to use
those assets. These help organizations develop understanding these three types
of resources and help us to know how an organization’s internal strength
and weaknesses affect its ability to compete.
Assets
The factors of production used by organizations in providing its customers with
valuable goods and services are called assets. These assets are of two types-
tangible assets and intangible assets. Any physical means an organization uses
to provide value to its customers are its tangible assets. Similarly, intangible
assets are equally valuable for organizations but their physical presence cannot
be felt or seen. For example, a brand name is a very important resource
for any organization even though it is intangible. Exhibit 1 gives some
examples of tangible and intangible assets.
Exhibit 1: Examples of tangible and intangible assets
Examples of tangible assets Examples of intangible assets
 Organization’s property and  Brand name, which is trusted
equipment
 Patents  Knowledgeable workforce
 Distribution network  Robust Organization structure
 IT network system  Organizational Culture

Capabilities
In order to take full advantage of its assets the organization needs to develop
skills, as experience suggests that with similar assets two different organizations
may add value of different amount for themselves. This difference can only be
explained by the differences in the capabilities in utilizing these assets. For
example, in a sector like management education, you will find institutions more
or less with similar resources and infrastructure; however, the quality of their
output in terms of new professionals for business may be starkly different for
different institutions. This is greatly reflected in the type of organizations that
pick them up for employment and the kind of job responsibilities they are offered.
This difference in output can be explained on account of the skills which these
institutions carry with themselves. This position has been found true in case of
many Indian organizations as well as the multinational corporations.
Competencies
Most simply put, it refers to the ability to perform. Experts from field of strategy,
using the term ‘distinctive competencies’ refer to the critical bundle of skills that
an organization can draw on to distinguish itself from competitors. However, in
order to have a better understanding of the concept, you need to understand first 97
Environmental Analysis the resources, which are available to an organization and how they differentiate
themselves as competencies or core competencies.
Strategic Importance of Resources
1) Available Resources: These are those resources that are basic to the capability
of any organization which can be listed broadly as:
Physical Resources: These can be buildings, machinery or operational
capacity. However, the specific condition and capability of each resource
determines their usefulness.
Human Resources: Traditionally or in today’s knowledge economy both,
people are considered as ‘the most valuable asset’ of an organization.
Knowledge and skill of people together prove to be a great asset.
Financial Resources: These can be capital, cash, debtors and creditors
and providers of money.
Intellectual capital: These are intangible resources which include the
knowledge that has been captured in patents, brands, business systems and
relationships with associates. In knowledge economy intellectual capital is
considered as a major asset of many organizations. Exhibit 2 shows a
relationship between the resources, competencies and the competitive
advantage.
Exhibit 2: Resources, competencies and competitive advantage
Same as Competitors’ Better than Competitors’
or or
Easy to imitate Difficult to imitate
Resources Threshold Resources Unique Resources
Competencies Threshold competencies Core competencies

2) Threshold Resources
Organizations need a set of threshold resources to perform in any market and
there is a continuous need to improve such resources to stay in business. This
becomes inevitable because of the competitors and sometimes the new entrants.
We can think of many industries in India like automobile, durable goods, telecom
etc. which with the foreign players had to acquire new sets of resources as
their threshold resources to survive.
3) Unique Resources
Unique resources as defined in strategy texts are those resources, which critically
underpin competitive advantage. Their ability to provide value in product is better
than competitor’s resources and is difficult to imitate. Just think of a big music
stores like M inc. or the ones from different group, the scale and range of collection
of music provides uniqueness to these stores as compared to any of the traditional
music shop. Some organizations have patented products or services that give
them advantage for some service organizations. Unique resources may be
particularly the people working in that organization.
98
4) Core Competencies Internal Analysis

We learnt that competencies refer to the ability to perform. The difference in

performance between organizations in the same market is rarely explainable by
differences in their resource base, since resources can usually be imitated or
traded. Superior performance is actually determined by the way in which resources
are deployed to create competences in the organization’s activities. An organization
needs to achieve a threshold level of competence in all of the activities and
processes.
Core competencies are activities or processes that critically underpin an
organization’s competitive advantage. They create and sustain ability to meet
the critical success factors of particular customer groups better than other
and provide ways that are difficult to imitate.
Now the question arises as to how to assess what constitutes a valuable asset
capability or competence. This can be done by testing for scarcity, inimitability,
durability and superiority.
Scarcity: This is a very basic test to understand its resource value. Just in
case any resource is widely available, then it is not likely to be a source of
competitive advantage.
Inimitability: A resource that is easy to imitate is of little competitive advantage
because it will be widely available from a variety of sources. e. g. services /
designs etc. Inimitability however does not last long and at some point of time
competition matches or even betters any offering. However, organizations should
make an effort which may temporarily limit imitation. Physical uniqueness, causal
ambiguity or scale deterrence are few ways how organizations attempt doing
this.
Durability: Hyper competitive market conditions have a tendency to make
competitive advantage less and less sustainable. Durability in such situations
becomes a more stringent test for valuing resources, capabilities and
competencies.
Superiority: Competencies are valuable only if they manifest themselves
as competitive advantages and this means that they are superior to those
held by rivals. Being good is not enough and an organization must be better
than its competitor.
The above points lead to determining how an organization uses internal
resources which might be linked to producing a competitive advantage and
the resources which actually fit in so as to produce a competitive advantage.
To be heterogeneous and immobile, a resource should have four traits, collectively
referred to as VRIO framework. These are:
 Valuable
 Rare
 Inimitable
 Organize
99
Environmental Analysis Now, let us discuss these in detail below.
a. Valuable: A resource is considered to be valuable if it either has a cost
advantage or provides any differential advantage. For instance, any
innovative process of producing a product reduces the overall cost of
production, and then such a process will be considered as a valuable
resource. Moreover if a technology is used to create a different and unique
feature in a product or service, then such a technology will also be
considered as a valuable resource.
b. Rare: A resource is considered to be rare if it is distinctive and unique in
nature. A resource which is owned by several other organizations in the
same industry will not be a rare strategic resource rather it will be
considered as a threshold resource. For a resource to be unique, it should
be exclusive to the organization. For example, an organization making
products based on a specific metal ore which are very scarce in the world
will be a rare resource.
c. Inimitable: A resource is considered to be inimitable if it is difficult for
other to imitate or acquire. This can be possible if the resource is
expensive to copy, requires specific knowledge to operate or has been
built or developed over a considerable time period. For example, a
production machine built by an organization by investing huge cost and
time will be considered to be an inimitable resource.
d. Organize: A valuable, inimitable or rare resource can only be useful for
the organization only if the organization knows how to exploit or utilize
it for its own advantage. Therefore, organizing a resource properly is
important for gaining strategic advantage. An organization cannot
acquire, use, or control its resources effectively unless it is properly
organized. This is true even for businesses with valuable, rare, and
imperfectly imitable resources. A resource cannot be used to build a
lasting competitive advantage if it lacks structure.

100 Figure 6.1: Resource Based View Model

The resource based view model indicates that competitive advantage will be Internal Analysis
achieved by ensuring that resources are developed as per VRIO framework and
used to develop strategic response to external environment demands as shown in
figure 6.1.
Activity 1
Identify an organization of your choice. Enumerate its threshold resources, unique
resources, threshold competencies, core competencies.
................................................................................................................................

................................................................................................................................

................................................................................................................................

................................................................................................................................

Frameworks for Identifying What to Assess

We will now discuss different frameworks to assess the strengths and weaknesses
of the organizations. Managers commonly use two frameworks to guide the
analysis of organization’s strengths and weaknesses – Critical success factors
(CSF) and The Value Chain Analysis.

6.3 THE CRITICAL SUCCESS FACTOR (CSF)

Critical success factors are those which contribute to organization’s success in a
competitive environment and therefore the organization needs to improve on
them since poor results may lead to declining performance. Organizations
depending on the environment they operate in and their own internal conditions
can identify relevant critical success factors. However, literature on strategy
suggests few general sources of critical success factors that have been identified
based on empirical research. They are as follows:
Industry Characteristics: Industry specific critical success factors are factors
critical for the performance of an industry. For example in hospitality industry
excellent and customized service, wide presence and an excellent booking and
reservation system is critical. Similarly for airline industry fuel efficiency, load
factors and an excellent reservation system are critical.
Competitive Position: Critical success factors for an organization may also
be determined by its relative position with respect to its competitors. In
some instances, industry is dominated by few large players and their actions
lead to determining the critical success factors for the industry which smaller
players have to ensure for their success. For example, for the pathological
laboratory centers earlier the CSF was authentic, hygienic and scientific
testing facilities until few big players added service features like door to door
sample collection or home delivery of reports. Very soon approachability
and ease became the additional CSFs for the players.
General environment viewed from any of the dimensions may determine the
CSFs. Most simply put in years of drought, availability of water is at premium
and having access to assured source of water can become the critical success
101
Environmental Analysis factor for many industries like tanneries etc. For the same industry considering
environmental norms, adhering to anti-pollution standards becomes critical
success factor. On many occasions’ developments within the organizations, force
internal considerations to become temporary critical success factors.

Activity 2
Using the following critical success factors identified for retail industry, pick
two large retail stores located in your locality and compare their performance:

Critical Success Factors Retail 1 Retail 2

1. Low sales and administrative expense ............ ............

2. Efficient distribution systems ............ ............

3. Reputation for value ............ ............
4. Organization culture ............ ............
5. Top management turnover ............ ............
6. Supplier relationships ............ ............

6.4 THE VALUE CHAIN FRAMEWORK

This is the other framework most commonly used to guide analysis of any
organization’s strengths and weaknesses. In this framework, any business is seen
as a number of linked activities, each producing value for the customer. By creating
additional value, the organization may charge more or is able to deliver same
value at a lower cost, either of this leading to a higher profit margin. This ultimately
adds to the organization’s financial performance.

The value chain framework as shown in figure 6.2 is a typical value chain within
an organization. Using this framework, it is possible to analyze the organization’s
contributions of individual activities in a business and how they add up to the
overall level of customer value, the organization produces.

102 Figure 6.2: Porter’s Value Chain Model

It is divided into two parts i.e. primary activities and support activities. The Internal Analysis
primary activities constitute of the following:
a) Inbound Logistics are activities concerned with receiving, storing and
distributing the inputs to the product or service. They include materials
handling, stock control, transport etc.
b) Operations transform various inputs into the final product or service
like manufacturing, packaging, assembly testing etc.
c) Outbound Logistics collect, store and distribute the product to
customers. For tangible products this would be warehousing, materials
handling, transportation etc. In the case of services they may be more
concerned with arrangements for bringing customers to the service if it
is a fixed location (e.g. entertainment show).
d) Marketing and Sales makes consumers/ users aware of the product or
service so that they are able to purchase it. This includes sales
administration, advertising, selling and so on.
e) A services activity helps improving the effectiveness or efficiency of
primary activities.
Each of the groups of primary activities is linked to support activities which are
as follows:
a) Procurement: This is a process for acquiring the various resource inputs
to the primary activities and this is present in many parts of the
organization.
b) Technology Development: There are key technologies attached to
different activities which may be directly linked with the product or
with processes or with resource inputs.
c) Human Resource Management: This is an area involved with
recruiting, managing, training, developing and rewarding people within
the organization. This categorization of the activities as primary or support
may be found true for organizations in general; however it is always
better to have one’s own judgment in identifying activities for particular
organizations in consideration.
Exhibit 3 shows some of the guiding points for evaluating primary activities.
Exhibit 3: Select guiding points for evaluating primary activities

a) Inbound Logistics
 Soundness of material and inventory control systems
 Efficiency of raw material warehousing activities
b) Operations
 Productivity of equipment compared to that of key competitors
 Appropriate automation of production processes
103
Environmental Analysis
 Effectiveness of control systems to improve quality and reduce cost
 Efficiency of plant layout and work flow design
c) Outbound Logistics
 Timeliness and efficiency of delivery of finished goods and services
 Efficiency of finished goods warehousing activities
d) Marketing and Sales
 Effectiveness of market research to identify customer segments and
needs
 Innovation in sales promotion and advertising
 Evaluation of alternate distribution channels
 Motivation and competence of sales force
 Development of an image of quality and a favourable reputation
 Extent of market dominance within the market segment or overall
market
e) Customer Service
 Means to solicit customer input for product improvements
 Promptness of attention to customer complaints
 Appropriateness of warranty and guarantee policies
 Ability to provide replacement parts and repair services

Exhibit 4 shows some guiding points for evaluating support activities.

Exhibit 4: Select guiding points for evaluating Support activities

Organization Infrastructure
 Coordination and integration
 Level of Information system
 Quality of planning system
 Timely and accurate information on environment
Human Resource Management
 Effectiveness of recruitment, training procedures
 Appropriateness of reward systems
 Relationship with trade unions
 Level of employee motivation and job satisfaction
Technology Development
 Success of R & D environment
104
 Internal Analysis
 Quality of laboratories and other facilities
 Ability of work environment
 Qualification and experience of technical hands
Procurement
 Sources of raw material – time, cost, quality
Procedures for procurements

 Relationships with reliable suppliers

With the indicative guiding points, you must have realized how with the Value
Chain Framework, organizations can use these indicators as a reference point in
order to improve its overall ability to create value. Miller suggests that the value
chain framework can also be useful in a broader sense while deciding in what
and where to specialize in the value activities from product design to the delivery
of the final product or service to the final consumer.
Activity 3
Suppose there is an organization which is into fast food business with home
delivery facility. Identify the critical success factors for this particular
organization’s success.
...............................................................................................................................
...............................................................................................................................
...............................................................................................................................
...............................................................................................................................
...............................................................................................................................

The Balance Scorecard

This concept offers a well-rounded evaluation that views the organization from
different complimentary perspectives as is shown below:
The four perspectives of the Balanced Scorecard are
Financial ———— E VA/Profitability/Growth
Customer ———— Differentiation / Cost / Quick Response
Operations ———— Product Development/ Demand Management/ Order
fulfilling
Organizational ———— Leadership/ Organizational Learning/ Ability to
change
Source : Adapted from Miller (1998)
Looking at the flow chart we can very well understand that performance as
assessed in one perspective supports performance in other areas and therefore
we need to consider all four perspectives in carrying out a complete internal analysis. 105
Environmental Analysis
6.5 COMPARISON STANDARDS
In order to arrive at some meaningful conclusion regarding strengths and
weaknesses, the above analysis should be supported by appropriate standards
for comparison, for example, Industry norms, Historical performance and
Benchmarks. These are three commonly accepted comparison standards which
are often found useful for internal analysis by the organizations.
Industry Norms
The industry norms compare the performance of an organization in the same
industry or sector against a set of agreed performance indicators. Data on industry
norms are widely available and can be found from several published sources.
Using such data and comparing an organization against others in its industry
helps the organization understand its true position. In case of the healthcare sector,
such indicators can be mortality index, doctors per 100 beds, nurses per 100
beds, waiting time per in- patient’s treatment, waiting time per outpatient
treatment, patient’s trust in doctors.
The danger of industry norms comparison is that the whole industry may be
performing badly and losing out competitively to other industries. Another
problem with such comparisons may also arise as the boundaries of industries
are coming down through competitive activity and industry convergence. For
example publishing houses are evolving into multiple media groups working
around the infotainment industry.
Moreover talking of industry norms, it is an average indictor and organizations
must endeavour in beating them rather meeting them. In order to understand
how they have been doing so it is always suggested that industry norm
comparisons are supplemented with analysis on organization’s own historical
performance.
Historical Comparisons
Historical comparisons look at the performance of an organization in relation to
previous years in order to identify significant changes. Organizations must
endeavour to improve their performance over time in order to remain competitive
and overpower the performance of competitors. It must try to beat its own best in
future, which would call for continuous improvement.
However in case of the historical comparison it also entails scope for complacency
since the organizations compare their rate of improvement over years with that
of competitors and it is possible that the latter may itself be operating at a relatively
lower average. Such historical trends can even be misleading when they entail
changes made on a very small base.
Benchmarking
Benchmarking compares an organization’s performance against ‘best in class’
performance wherever that is found. Managers seek out the best examples of a
particular practice in other organizations as part of an effort to improve the
corresponding practice in their own organization.
When the search for best practices is limited to competitors, the process is called
competitive benchmarking. Other times managers may seek out the best practices
106
regardless of what industry they are in, called functional benchmarking. Internal Analysis
Benchmarking provides the motivation and the means many organizations need
to seriously rethink how their organizations perform certain tasks.
A comprehensive internal analysis of an organization’s strengths and weaknesses
must however utilize all three types of comparison standards. For instance, an
organization can study industry norms to assess where it stands in terms of number
of complaints generated regarding defects during guarantee period of a product.
Then it could benchmark the organization that is best at controlling the defects.
Based on the benchmarking results it could implement major new programmes
and track improvements in these programmes over time using, historical
comparisons.

6.6 SWOT ANALYSIS

Strengths
SWOT stands for Strengths, Weaknesses, Opportunities and Threats. A SWOT
analysis summarizes the key issues from the external environment and the internal
capabilities of an organization those which become critical for strategy
development. The aim through this is to identify the extent to which the strengths
and weaknesses are relevant to and capable of dealing with changes in the business
environment. It also reflects whether there are opportunities to exploit further
the competencies of the organization.
Environment
Internal

S W

Strengths Weakness
Environment
External

O T

Opportunities Threats

Figure 6.3: SWOT Analysis

How to perform a SWOT Analysis in organizations?
We know that SWOT analysis is assessing the internal as well as external
environment of an organization. Let us see an example of X Corporation which
is into manufacturing software. Exhibit 5 shows the SWOT analysis of X
Corporation. 107
Environmental Analysis Exhibit 5: SWOT ANALYSIS FOR X CORPORATION
SWOT FOR X CORPORATION
STRENGTHS WEAKNESSES OPPORTUNITIES THREATS
 High quality  Into loss  Increase in the  Competitors
products making size of like Y
engineering corporations
 Good  Sales slowing division.
reputation down  Reports show
 Original work that some of
 Learning from  No sense of
its products
mistakes and direction  Increase in
promotional are fake,
producing
 Decrease in techniques decline in
better
productivity reputation
products  Trying to sell
 No proper high quality  Lacks proper
 Highly
collaboration products strategy
competitive
within the cheaper  Losing to
 Competitive functional
 May expand competitors
pricing departments
its operations due to the
 Low complexity
 Increase in of products
production
demand of
cost
products  Entry of new
substitutes in
 Overseas
market
demand
 Inflation in
 Favourable
raw material
government
cost
policies

6.7 INTERNAL FACTOR EVALUATION MATRIX

The Internal factor Evaluation Matrix (IFE) is used as a strategic tool to evaluate
the internal environment of the organizations. This tool evaluates the major
strengths and weaknesses of the organization in the functional areas of a business.
It also provides a basis for assessing the relationship among those areas. This
involves five steps which are as follows:
1. List key internal factors
2. Assign weight to each factor
3. Assign a rating to each factor
4. Determine a weighted score
5. Determine the total weighted score.
Let us see how each step is to be performed to find out the IFE. Table 6.1 gives
an example of IFE.
1. List key internal factors:Around 10 or 20 key internal factors are to be
identified which determine the strengths and weaknesses for the
108 organization. Then the listing of all the strengths and weaknesses is done.
 2. Assign weight to each factor: In this step each factor is assigned weights Internal Analysis
ranging from 0.0 (not so important) to 1.0 (very important). These weighs
depict the relative importance to each factor for being successful in the
industry. The weights are industry based and the sum of all weights should
be 1.0.
3. Assign rating to each factor: A rating in the scale of 1 to 4 is assigned
to each factor and these are organization based. The rating scale is as
follows:
1 = major weakness
2 = minor weakness
3 = minor strength
4 = major strength
4. Determine a weighted score: This step involves multiplying weight
of each factor by its rating.
5. Determine the total weight score: In this step a sum of the
weighted score of each variable is calculated.
In IFE matrix it is important to note that the total weighted score can be as low as
1.0 and as high as 4.0 and the average score should be 2.5. a score below 2.5
indicates a weak internal position and a score above 2.5 indicates a strong internal
position of the organization. Table 6.1 shows a sample of IFE Matrix.
Table 6.1: A sample of Internal Factor Evaluation Matrix

109
Environmental Analysis
6.7 SUMMARY
Understanding of the strengths and weaknesses of an organization comes through
the internal analysis. This is important for any organization in order to respond
effectively to its environment both micro and macro. Also understanding them
enables the organization to stretch its capabilities and create new opportunities
for themselves. However managers have to work hard in assessing the capabilities
using frameworks like Critical success factors and the Value chain analysis and
analyzing them through quantitative or qualitative analysis. The end result goes
as an important input for SWOT analysis.

6.8 KEYWORDS
Tangible Assets : Any physical means a organization uses to provide
value to its customers.
Intangible Assets : are equally valuable for organizations but their
physical presence cannot be felt or seen.
Competencies : refers to the ability of an organization to perform.
Core Competencies : are activities or processes that critically underpin
an organization’s competitive advantage.
Critical Success : are those which contribute to organization’s success
Factors in a competitive environment.
Financial Quantitative : traditionally financial analysis emphasizes on the
Analysis study of financial ratios which is commonly known
as ratio analysis.
Industry Norms : compare the performance of an organization in the
same industry or sector against a set of agreed
performance indicators.
Benchmarking : compares an organization’s performance against
‘best in class’ performance.
SWOT : stands for Strengths, Weaknesses, Opportunities and
Threats.

6.9 SELF-ASSESSMENT QUESTIONS

1) Explain and identify the type of resources which an organization may possess.
2) What do you understand by the term critical success factor and what is the
core competency of an organization?
3) Why is Resource Based View important for organizations? Discuss.
4) Briefly discuss the value chain framework.
5) Identify the difference of various comparison standards and explain how
they can be important for internal analysis?

110 6) Perform a SWOT analysis for an organization of your choice.

 Internal Analysis
6.10 REFERENCES AND FURTHER READINGS
Haberberg, A. & Rieple, A. (2010). Strategic Management (2010 ed.). New York:
Oxford University Press.
Henry, A. E. (2018). Understanding Strategic Management (3rd ed.). Oxford,
United Kingdom: Oxford University Press.
Johnson Gerry & Scholes Kevan. (2004), Exploring Corporate Strategy, Sixth
edition, Prentice-Hall of India, New Delhi.
Jr. Thomson A. Arthur, III Strickland A.J. (2003), Strategic Management, Concepts
and Cases, Thirteenth edition, Tata McGraw Hill Publishing, New Delhi.
Kazmi, A. (2008). Business Policy and Strategic Management (3rd ed.). Delhi:
Tata Mcgraw Hill Publishing Co, Ltd.
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