Strategic Management

Unit - II
Business Environment
Definition of Business Environment is sum or collection of all internal and external
factors such as employees, customers needs and expectations, supply and demand,
management, clients, suppliers, owners, activities by government, innovation in
technology, social trends, market trends, economic changes, etc. These factors affect the
function of the company and how a company works directly or indirectly. Sum of these
factors influences the companies or business organisations environment and situation.

Business environment helps in identifying business opportunities, tapping useful

resources, assists in planning, and improves the overall performance, growth, and
profitability of the business. There are various types of Business Environment like Micro
Environment and Macro Environment.

Features or Nature of Business Environment:

(A) The totality of External Forces
 Business environment includes everything which is outside the organisation.
 If we add all these forces, they will form a business environment.

Example: When Pepsi and Coca-Cola got permission to set up their business in India,
it was an opportunity for them and threat for local manufacturers like gold spot,
camp-cola etc.

(B) Specific and General Forces

 Specific forces are those forces which directly affect the operational activities
of the business enterprise.
 Example: Suppliers, Customers, Investors, Competitors, Financers etc.
 General forces are those forces which indirectly affect the functioning of
business enterprises.

Example: Economic, Social, Political, Legal and Technological conditions.

(C) Inter-relatedness
 Different forces of business environment are interrelated to each other.
 One component of the business environment affects the functioning of other
components.

Example: The increased life expectancy of people and awareness of health

consciousness has increased the demand for many health products like diet coke, olive
oil, and so many health products.

(D) Dynamic Nature

The business environment is dynamic in nature and keeps on changing in terms of :

(a) Technological improvement,

(b) Shifts in consumer preferences,

(c) The entry of new competition in the market.

Example: Many established companies in FMCG (Fast Moving Consumer goods)

sector are focusing on producing the goods with natural ingredients with the entry of
‘Patanjali Products’.

(E) Uncertainty
 The changes in the business environment cannot be predicted accurately
because of future uncertainties.
 It is very difficult to predict the changes in the economic and social
environment.

Example: There has been a sharp decline in the prices of Android smartphones due to
the entry of many new companies.

(F) Complexity
 All forces of the Business environment are interrelated and dynamic, which
makes it difficult to understand.
 Complex nature of Business environment can be understood if we study it in
parts.
 Example: Increase in goods and service tax to 15 % would increase the
revenue of the government (economic), which would help the government to
improve social being of people (social) and reduce the personal disposable
income of rich people and thereby controlling inflation.

(G) Relativity
 Business Environment differs from place to place, region to region and
country to country.

Example: In China, the electricity to the industry is provided at cheaper rates as the
consumption increases and hence, it leads to mass production whereas, in India, it is
otherwise, higher consumption of electricity leads to costly electricity which results in
lower production & higher cost of production.

Dimensions of Business Environment

The dimension of the business environment refers to the sum of all factors,
enterprises, and forces that constitute direct or indirect influence over business
activities. Such five key elements are listed below.

1. Social Environment
It implies the tradition, culture, customs, and values of a society in which the business
exists.
Tradition: In India, festivals like Diwali, Christmas, and Holi provide a financial
opportunity for several market segments like sweet manufacturers, gifting products
suppliers, etc.
Value: A company that follows long-held values like social justice, freedom, equal
opportunities, gender equality, etc. excels in that given society.
Recurrent Trends: It refers to development or general changes in a society like
consumption habits, fitness awareness, literacy rate, etc. which influence a business.
For example, the demand for organic vegetables and gluten-free food is increasing;
therefore, companies that manufacture food items keep this in mind to attract more
crowds.
2. Legal Environment
It includes the laws, rules, regulations, and acts passed by the government. A
company has to operate by abiding by the rules and regulations of laws like the
Consumer Protection Act 1986, Companies Act 1956, etc. A proper understanding of
these laws assists in the smooth operations of a company.
Example: A cigarette-selling company compulsorily has to put the slogan “smoking
is injurious to health” on every packaging.

3. Economic Environment
It involves market conditions, consumer needs, interest rate, inflation rate, economic
policies, etc.
Interest Rate - For example, interest rates of fixed-income instruments prevalent in
an economic environment impact the interest rate it will offer on its debentures.
Inflation Rate - A rise in the inflation rate leads to a price hike; hence, it limits
businesses.
Customer’s Income - If the income of customers increases, the demand for goods
and services will rise too.
Economic Policies - Policies like corporate tax rate, export duty, and import duty
influence a business.
4. Political Environment
It consists of forces like the government's attitudes towards businesses, ease-of-doing-
business policies, the stability of the governing body, and peace within the country.
All of these factors are extremely crucial for a company to sustain itself. If the central
and local government sanctions, policies, or acts are in favour of businesses, the
nation's overall economy strengthens due to increasing employment, productivity, and
import and export of various products.
Example - A pro-business government will make foreign investments more attractive
in that country.

5. Technological Environment
It comprises the knowledge of the latest technological advancements and scientific
innovations to improve the quality and relevance of goods and services.
A company that regularly keeps track of these news can mould its business strategies
accordingly.
Example: A Watch Company that sells smartwatches and traditional watches will
prosper as smartwatches are trendy recently.

Components Of Business Environment

The business environment can be categorised into two types based on the factors
within the control or outside the control of a business.
Internal Environment
The internal business environment constitutes several internal forces or elements
within the control of a business that influences its operations. These include:

 Value System: It is the ethical belief that guides the business towards
achieving its mission and objective. The value system includes all components
that form a business’s regulatory framework – organisational culture, climate,
work processes, management practices and organisational norms.
 Vision, Mission, and Objectives: The vision, mission, and objective of a
business relate to what it wants to achieve or accomplish in future. It is the
reason why the business exists.
 Organisational Structure: It outlines how the activities are directed within the
organisation to achieve its goals. It includes the rules, roles, and
responsibilities, along with how tasks are delegated and how the information
flows among the organisation’s levels.
 Corporate Culture: It is a powerful system of shared norms and attitudes that
works as a homogenising factor for an organisation’s employees and gets
appropriated by them.
 Human Resources: Human resources form all the employees and other
personnel associated with the business. It forms the most valuable asset of the
organisation as success or failure depends on it.
 Physical Resources and Technological Capabilities: It includes tangible
assets and the technical know-how that play an essential role in ascertaining the
business’s competitive capability and future growth prospects.

External Environment
External components are those factors that a business cannot control. These exist
beyond a business’ jurisdiction and supervision limit. External components
influencing a business environment are further classified into two categories:

 Micro Environment
 Macro Environment

Micro Environment
Micro environment is the business’s immediate external environment that influences
its performance as it has a direct bearing on the firm’s regular business operations.
It includes factors outside of the business’s control but can be analysed and worked
upon by managing the business to prevent any business losses.

Micro factors include:

Customers comprise the target group of the business.
Competitors are other market players who target a similar target group and provide
similar offerings.
Media is the channel the business use to market its offering to the customer.
Suppliers include all the parties that provide the business with the resources it needs
to perform its operations.
Intermediaries comprise the parties involved in delivering the offering to the final
customers.
Partners are all external entities like advertising agencies, market research
organisations, consultants, etc., who conduct business with the organisation and
satisfy customer needs.
Public includes any group with actual or potential interest in the business’s operations
or a group that affects its ability to serve its customers.

Macro Environment: PESTLE

The macro environment includes remote environmental factors that influence an
organisation. The extent of influence a macro element can have on a business is
significant as they usually affect the industry as a whole.

These factors are classified under PESTLE:

P – Political
E – Environmental
S – Social
T – Technological
L – Legal
E – Economical.

Political Factors comprise government policies, political stability, corruption in the

system, tax policies, labour laws, and trade restrictions that affect the business or the
industry.

Economical Factors relate to the economy of the country. They include economic
growth, exchange rate, interest and inflation rates, etc.

Social Factors comprise the demographics of the country. They include population
growth rate, age distribution, career attitudes, health consciousness, etc.

Technological Factors pertain to innovation in technology that affects the operations

of the business. This refers to automation, research and development activities,
technological awareness, etc.

Legal Factors are laws that affect business operations. They include business-
specific, industry-specific, and even state-specific laws.

Environmental Factors comprise of all those that influence or are determined by the
environment a business operates in. It includes the weather, climate, environmental
policies, and even pressure from NGOs to care for the environment.

External Analysis
External analysis means examining the industry environment of a company, including
factors such as competitive structure, competitive position, dynamics, and history. On
a macro scale, external analysis includes macroeconomic, global, political, social,
demographic, and technological analysis.
The primary purpose of external analysis is to determine the opportunities and threats
in an industry or any segment that will drive profitability, growth, and volatility.

Process for Analyzing the External Environment

The process for analyzing the external environment involves the following steps:
1. Identify Key External Factors
The first step in analyzing the external environment is to identify the key external
factors that impact the organization. These factors can be identified through a
PESTLE analysis, which stands for Political, Economic, Sociocultural, Technological,
Legal, and Environmental factors.
2. Analyze the General Environment
The next step is to analyze the general environment factors that impact all
organizations in the market. This can be done using frameworks such as the PESTLE
framework and the External Factor Evaluation (EFE) matrix.
3. Analyze the Industry-Specific Environment
The third step is to analyze the industry-specific environment factors that impact the
organization. This can be done using frameworks such as Porter’s Five Forces and the
Competitive Profile Matrix (CPM).
4. Identify Opportunities and Threats
After conducting the external environment analysis, organizations should identify
opportunities and threats in the market. Opportunities are external factors that can
benefit the organization, while threats are external factors that can negatively impact
the organization.
5. Develop Strategies
Finally, organizations should develop strategies that align with the external
environment. This can involve developing strategies to capitalize on opportunities and
mitigate threats.

Analyzing the external environment is crucial for strategic planning as it helps

organizations identify opportunities and threats in the market. By following the
process for analyzing the external environment, organizations can develop strategies
that align with the external environment and achieve long-term success.
External Environment Factors
1. Technological Factor
As technology continues to advance, companies can benefit from these breakthroughs
or face challenges in competing with them. For example, a company that
manufactures GPS devices for personal cars may experience a decline in business
because of the integration of GPS on mobile devices, but it can confront these
challenges by developing new products. Other companies, such as healthcare
providers, can use modernized methods to collect information from their patients,
keep patient records and streamline patient care.

2. Economic factors
The state of the economy plays an important role in every aspect of daily life from the
well-being of personnel to the ability of a company to thrive. When the economy
trends downward and unemployment rises, businesses may have to work harder to
keep their staff and change their processes to continue earning revenue. If the
company produces products for retail sale, for instance, it may consider lowering the
price to increase sales and positively affect its revenue

3. Political and legal factors

As political officials leave office and new ones replace them, the policies they
implement often affect businesses in relevant industries. Because of the inconsistent
nature of politics, businesses monitor legislative bills closely to prepare for potential
changes. Policies that can have long-term effects on companies include:
 Taxation
 Tariffs
 Employment law
 Competition regulation
 Import restrictions
 Intellectual property law
Companies affected by political decisions must modify their processes to comply with
new legislation and regulations but doing so can keep them in business.

4. Demographic factors
Companies with successful products and services evaluate the demographics of their
target market to ensure they meet the needs of those who benefit from their offerings.
They also perform tests to measure how well they serve their customers. This helps
them understand if their target market has changed and how they can develop better
ways to serve their loyal customers and earn new ones. Demographics that affect
business decisions and processes include:
 Age
 Gender
 Race
 Nationality
 Belief system
 Marital status
 Occupation
 Income
 Level of education
For example, when mobile phone companies emerged in the 1990s, their marketing
efforts focused on young, successful professionals. Now, people of all ages use
mobile devices daily. Telecommunications companies have adapted to this change by
modifying the features of their products and taking different approaches to advertising
methods.

5. Social factors
Where people live, their personal values and their socioeconomic status affect what,
where and why people make purchases. Businesses take social factors into
consideration when developing and marketing products, and many use current events,
movements and social issues to appeal to their customers. For example, a company
that supports a women's organization may earn the trust and loyalty of customers who
identify as female. Catering to the specific preferences and expectations of
underrepresented groups, who have more influence on the market today than in past
years, can also contribute to customer satisfaction and business growth.

6. Competitive factors
Businesses can increase their market share and stay relevant to their customers by
keeping track of their competitors. They can identify and evaluate successes and
challenges, thus learning what to incorporate into their own processes and how to
prevent revenue loss. They can also use the information they gather to develop ideas
for product changes, product relaunches and new product development.

7. Global factors
Executives have a duty to keep track of both domestic and global issues, especially if
they conduct business internationally. By learning about social issues that affect those
in other countries and their cultural norms, consumer trends and economic status,
company leaders can provide their teams with relevant training. This enables them to
develop products or offer services that meet the needs of international customers by
providing solutions to challenges they face as consumers.

8. Ethical factors
Because each individual has a distinct concept of ethics and morality, some
companies may find it challenging to balance the personal lives of staff members with
their expectations in the workplace. Employees' leisure activities, such as social media
accounts, can reflect on their employer. As representatives of the company, they have
a responsibility to avoid behavior that could negatively affect the business. Managers
can address issues such as sharing classified information or the harassment of a
colleague outside of work by establishing guidelines and taking disciplinary action
when necessary.

9. Natural factors
As environmental awareness continues to grow, more consumers have realized the
effects of business processes on the planet. Some consumers have used their
purchases to support companies that develop ecologically friendly practices, such as
using compostable packaging and solar energy. By paying attention to these external
concerns and changing their operations, businesses can make changes that help them
protect the environment, retain customers and increase revenue.

Levels of External Analysis

The three levels of external analysis are:
1. Macro-environmental level: Examines broad trends in society, economics,
politics, and technology
2. Industry level: Focuses on the industry where the organization operates,
analyzing factors like market growth, barriers to entry, and supplier power
3. Competitive level: Analyzes the organization's direct competitors and their
strategies

Benefits of external analysis

Conducting an external analysis can provide many benefits to a business. Here are a
few common benefits:
1. Encourages business growth into new areas
External analyses can benefit businesses by encouraging them to be proactive in how
they operate their company. For example, if a retail company sees a trend in free trade
clothing among the public, this might help them decide to expand their business
model to include the sale of free trade products.
2. Helps anticipate and adapt to change
External analysis helps businesses adjust to potential changes within their industry
that could save their business. For example, a catering company changes the way they
store their food products to comply with new FDA regulations. This helps them
maintain their status as a catering service.
3. Creates opportunities to rise above the competition
Conducting an external analysis can help businesses identify operational elements that
they could change or improve to set them apart from their industry competitors. For
example, a staffing solutions firm identifies that they provide the same staffing
solutions as their competitors: marketing, business administration and IT.However,
they could surpass their competitors in clientele by expanding their business to
include staffing for the trade professions and healthcare facilities.

Techniques of Environmental Analysis

1. SWOT Analysis
A SWOT analysis focuses on the four elements of the acronym, allowing companies
to identify the forces influencing a strategy, action or initiative. Knowing these
positive and negative elements can help companies more effectively communicate
what parts of a plan need to be recognized.
When drafting a SWOT analysis, individuals typically create a table split into four
columns to list each impacting element side by side for comparison. Strengths and
weaknesses won’t typically match listed opportunities and threats verbatim, although
they should correlate, since they are tied together.
Billy Bauer, owner of ROYCE New York, noted that pairing external threats with
internal weaknesses can highlight the most serious issues a company faces.
Internal factors
Strengths (S) and weaknesses (W) refer to internal factors, which are the resources
and experience readily available
These are some common internal factors:
 Financial resources (funding, sources of income and investment opportunities)
 Physical resources (location, facilities and equipment)
 Human resources (employees, volunteers and target audiences)
 Access to natural resources, trademarks, patents and copyrights
 Current processes (employee programs, department hierarchies and software
systems)

External factors
External forces influence and affect every company, organization and individual.
Whether these factors are connected directly or indirectly to opportunities (O) or
threats (T), it is important to note and document each one. External factors are
typically things of the company do not control, such as the following:
 Market trends (new products, technology advancements and shifts in audience
needs)
 Economic trends (local, national and international financial trends)
 Funding (donations, legislature and other sources)
 Demographics
 Relationships with suppliers and partners
 Political, environmental and economic regulations
2. ETOP Analysis
ENVIRONMENTAL THREAT AND OPPORTUNITY PROFILE [ETOP]
There are many techniques available for environmental appraisal (assessment), one
such technique suggested by Glueck is ETOP the preparation of ETOP involves
dividing the environment into different sectors & then analyzing the impact of each
sector on the organization.
The preparation of an ETOP provides a clear picture to the strategists about which
sectors & the different factors in each sector have a favorable impact on the
organization. By the means of an ETOP, the organization knows where it E stands
with respect to its environment. Obviously, such an understanding can be of a great
help to an organizations in formulating strategies to take advantage of the
opportunities & counter the threats in its environment.

Meaning of ETOP
ETOP is a device that considers environmental information & determines the relative
impact of threats & opportunities for the systematic evaluation of environmental
scanning.
ETOP is an environmental analysis results in a mass of information expectations.
Structuring of environmental issues is necessary to make them meaning full of
strategy related to forces in the environment.
They deal with events, trends, issues & formulation. In short, it is a technique to
structure environmental issues. It is the process by which organizations monitor their
relevant environment to identify opportunities & threats affecting their business for
the purpose of taking strategic decision.

✓ Helps organization to identify O-T

WHY ETOP?

✓ To consolidate and strengthen organization’s position

✓ Provides the strategists of which sectors have a favorable impact on the

✓ Helps organization knows where its stands with respect to its environment.
organization.

✓ Helps in formulating appropriate strategy.

✓ Helps in formulating SWOT analysis.

✓ Dividing the environment in different sector.

PREPARING ETOP

✓ Analyzing the impact of each sector on the organization.

✓ Subdividing each environmental sector into sub factor.
✓ Impact of each sub sector on organization in form of a statement.

ETOP, PROFILE INVOLVES

The profile is a technique of environment analysis was organizations make of profile
of their external environment. ETOP analysis provides information about environment
threats & opportunities & their impact on strategic opportunities for the company. The
profile contains mainly 3 issues, they are
1] Forecasting:- Forecasting means predicting the future events & analyzing their
impact on present plans business organizations analyze the environment but applying
various techniques to forecast government is used to formulate business plans &
strategies.
2] Verbal Written information:- Verbal information is collected but hearing &
written information is collected by reading articles, journals, newspaper, newsletters
etc.., common sources of information are radio, television, workforce, outsiders. It
informs changes in the environment & prepares business organization to incorporate
than in their business plans & strategies.
3] Management Information System [MIS]:- It is a formal method of making
available to management to management the accurate & timely information necessary
to facilitate the decision making proceeds & enable the organization planning, control
& operational functions to be carried out effectively. It helps in making decisions
based on future environment.

S.No Factors Nature of Impact of each sector

Impact
1 Economic •Fluctuation in exchange rate
↑ •Increasing rate of inflation
•Worsening economic conditions
2 Technological •Market Leaders Strong R&D program
↑ •Better solution providers
•New “ Intergral”-2008
3 Political No significant change
→
4 Legal Following FCPA (Foreign corrupt
↓ practices act).
Strict IPR laws – No poaching
5 Socio cultural No significance change
→
6 Competitive Competition particularly from low
↓ priced products.
7 Demand related Downfall in demand due to low priced
↓ products.
Containment of rising healthcare cost.
8 Governmental No excise duty, only vat for product
policies → manufactured in India

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

Conducting QUEST Analysis: A Step-by-Step Guide

Preparation
1. Observing trends and events to understand the current market situation.
2. Identifying problems and challenges facing the organization.
3. Selecting research participants, including 12-15 managers and strategists.

Analyzing the Business Environment

Collect information through:
1. Management discussions.
2. Surveys and interviews with consumers, suppliers, and staff.
3. Academic publications and articles.
4. Competitor analysis.

Creating a Report
Summarize the collected information in a report, including:

1. Description of the current strategy.

2. 3-5 scenarios for the company's development, addressing issues raised during
discussions.

Drawing Conclusions
Present the report to participants and:
1. Analyze possible solutions together.
2. Identify issues requiring corrective action.
3. Develop a new management strategy, if necessary.

Benefits of QUEST Analysis

Conducting a QUEST analysis provides numerous benefits, including:
1. Identifying strengths, weaknesses, opportunities, and threats.
2. Informing strategic decisions.
3. Gaining insight into competitors' strategies.
4. Understanding consumer needs and expectations.
5. Revealing internal environmental factors affecting resource allocation.

PEST Analysis
What is a PEST analysis?
Originally developed in 1967 by Harvard professor Francis Aguilar, PEST analysis is
a strategic planning tool that helps organizations identify and evaluate threats and
opportunities for the business. PEST is an acronym describing four primary external
factors that influence the business environment: political, economic, socio-cultural,
and technological. There are a few variations of this analysis including the PESTLE
analysis, which also considers legal and environmental factors.
Goals of a PEST analysis
The main purpose of PEST analysis is to understand what external forces may affect
your organization and how those factors could create opportunities or threats to your
business.

Benefits of PEST Analysis

1. Understand current external influences on the business so you can work on facts
rather than assumptions.
2. Identify what factors could change in the future.
Mitigate risks and take advantage of opportunities to remain competitive.
3. Develop a better long-term strategy.
PEST is particularly useful for understanding the overall market environment. The
more threats or risk factors in the market, the more difficult it is to do business. By
analyzing the market forces at play, the more strategic you can be in your planning
and decision-making.

Industry analysis: Analyzing the task environment

Michael Porter’s approach to industry analysis
Michael Porter, an authority on competitive strategy, contends that a corporation is
most concerned with the intensity of competition within its industry. Basic
competitive forces determine the intensity level. The stronger each of these forces is,
the more companies are limited in their ability to raise prices and earned greater
profits.

Threat of new entrants

New entrants are newcomers to an existing industry. They typically bring new
capacity, a desire to gain market share and substantial resources. Therefore they are
threats to an established corporation. Some of the possible barriers to entry are the
following.
1. Economies of scale
2. Product differentiation
3. Capital requirements
4. Switching costs
5. Access to distribution channels
6. Cost disadvantages independent of size
7. Government policy

Rivalry among existing firms

Rivalry is the amount of direct competition in an industry. In most industries
corporations are mutually dependent. A competitive move by one firm can be
expected to have a noticeable effect on its competitors and thus make us retaliation or
counter efforts. According to Porter, intense rivalry is related to the presence of the
following factors.
1. Number of competitors
2. Rate of industry growth
3. Product or service characteristics
4. Amount of fixed costs
5. Capacity
6. Height of exit barriers
7. Diversity of rivals

Treat of substitute product or services

Substitute products are those products that appear to be different but can satisfy the
same need as another product. According to Porter, ―Substitute limit the potential
returns of an industry by placing a ceiling on the prices firms in the industry can
profitably charge.‖ To the extent that switching costs are low, substitutes may have a
strong effect on the industry.

Bargaining power of buyers

Buyers affect the industry through their ability to force down prices, bargain for
higher quality or more services, and play competitors against each other.

Bargaining power of supplier

Suppliers can affect the industry through their ability to raise prices or reduce the
quality of purchased goods and services.
Industry Life Cycle Phases

Introduction Phase
The introduction, or startup, phase involves the development and early marketing of
a new product or service. Innovators often create new businesses to enable the
production and proliferation of the new offering. Information about the products and
industry participants is often limited, so demand tends to be unclear. During this
stage, consumers of the goods and services need to learn more about them, while the
new providers are still developing and honing the offering. The industry or business
tends to be highly fragmented in the introduction stage. Participants tend to be
unprofitable because expenses are incurred to develop and market the offering while
revenues are still low.
Growth Phase
In this second phase, consumers have come to understand the value of the new
offering, business, or industry. Demand grows rapidly. A handful of important
players usually becomes apparent, and they compete to establish a share of the new
market. Immediate profits usually are not a top priority as companies spend on
research and development or marketing. Business processes are improved, and
geographical expansion is common. Once the new product has demonstrated
viability, larger companies in adjacent industries tend to enter the market through
acquisitions or internal development.
Maturity Phase
The maturity phase begins with a shakeout period, during which sales growth slows,
focus shifts toward expense reduction, and consolidation occurs (as companies begin
to merge or acquire each other). Some firms attain economies of scale, hampering the
sustainability of smaller competitors. As maturity is achieved, barriers to entry
become higher, and the competitive landscape becomes more clear.

Market share, cash flow, and profitability become the primary goals of the remaining
companies now that growth is relatively less important. Price competition becomes
much more relevant as product differentiation declines with consolidation.
Businesses may prolong the maturity phase by repositioning their offerings, investing
in new markets and technology, and spurring new growth.
Decline Phase
The decline phase marks the end of an industry's or business' ability to support
growth. Obsolescence and evolving end markets (end users) negatively impact
demand, leading to declining revenues. This creates margin pressure, forcing weaker
competitors out of the industry. Further consolidation is common as participants seek
synergies and further gains from scale. The decline phase often signals the end of
viability for the incumbent business model, pushing industry participants into
adjacent markets. As with the maturity phase, the decline phase can be delayed with
large-scale product improvements or repurposing. However, these tend simply to
prolong the decline and ultimate market exit.
Industry’s Dominant Economic Features
 Market size
 Scope of rivalry
 Growth rate, state of the life cycle is the industry in
 Number of rivals and their relative size
 Prevalence of forward/backwards integration
 Channels of distribution
 Pace of process and product technology change
 Product differentiation
 Economies of scale in purchasing, distribution, advertising, manufacturing,
etc.
 Historical levels of profitability
 Segments within the industry and their effect on competition and profitability

Porter’s Five Forces model

Porter’s Five Forces model is a competitive analysis method that’s considered a
macro tool in business analytics. It looks at the industry’s economy as a whole; in
contrast, a SWOT analysis is a microanalytical tool that focuses on a specific
company’s data and analysis.
“Understanding the competitive forces, and their underlying causes, reveals the roots
of an industry’s current profitability while providing a framework for anticipating and
influencing competition (and profitability) over time,” Porter wrote in a 2008 Harvard
Business Review article. “A healthy industry structure should be as much a
competitive concern to strategists as their company’s own position.” Porter theorized
that understanding the competitive forces at play and the overall industry structure is
crucial for effective, strategic decision-making and the development of a compelling
competitive strategy for the future.
Here are the five forces in Porter’s model:
1. Competitive rivalry
This force examines marketplace competition intensity. It considers the number of
existing competitors and what each one can do. Rivalry competition is high when
these conditions are met:
 Only a few businesses sell a product or service.
 The industry is growing.
 Consumers can easily switch to a competitor’s offering for little cost.
When rivalry competition is high, advertising and price wars ensue, which can hurt a
business’s bottom line.
2. The bargaining power of suppliers
This force analyzes a supplier’s power and control over price increases. When a B2B
vendor has extensive control over pricing, their client business’s profit margins can
suffer. This force also assesses the available number of suppliers of raw materials and
other resources. The fewer suppliers in the supply chain there are, the more power
they have. Businesses are in a better position when there are many suppliers.
3. The bargaining power of customers
This force examines consumer power and its effect on pricing and quality. Consumers
have power when there are fewer sellers because they can easily switch to another
seller. Conversely, buying power is low when consumers depend heavily on a single
seller. When a business has more customers, the buying power of each individual
customer is low.
4. The threat of new entrants
This force considers how easy or difficult it is for competitors to join the marketplace.
The easier it is for a new competitor to gain entry, the greater the risk that an
established business’s market share will be depleted. Barriers to entry include
absolute cost advantages, access to inputs, economies of scale, and strong brand
identity.
5. The threat of substitute products or services
This force studies how easy it is for consumers to switch from a business’s product or
service to a competitor’s offering. It examines the number of competitors, how their
prices and quality compare with the business being examined, and how much of a
profit those competitors are earning — which, in turn, would determine if they can
lower their costs even more. The threat of substitutes is informed by switching costs,
both immediately and in the long term, as well as consumers’ inclination to change.
What is the Industry Life Cycle?
Industries, like products and businesses, emerge and eventually decline at specific
points in history; the time period between inception and eventual extinction (if
applicable) is the industry’s life cycle. Understanding where an industry is in its life
cycle is important for financial analysts, entrepreneurs, and other stakeholders when
seeking to assess the competitive landscape and a company’s ability to grow, generate
profits, and produce free cash flow.
The industry life cycle begins with a launch stage and ends with decline
Stages of the Industry Life Cycle
While different versions of the framework have different components, the life cycle
can be broadly divided into five main stages. These are:
Launch
The launch stage is when an industry is just starting; perhaps a new technology has
been developed or a new service offering has been created. During the launch stage,
players may still be exploring what the unit economics will look like while
concurrently seeking a broader product market fit. It’s primarily a pre-revenue stage
and capital that’s invested goes towards R&D early, then into marketing and sales a
little later.
Regulation tends to be low during the launch phase; it’s common for governments and
regulators to not yet understand the landscape and therefore not really understand how
to regulate it.
Growth
Once an industry hits its growth phase, a product-market fit has been established and
there’s viable commercial potential for this new product, service, or technology. Some
versions of the framework, including the one we’ve presented here, break the growth
stage into distinct “sub phases.”
Early growth and growth are best characterized by the size of the market and the slope
of the revenue trajectory. There is often considerable competition during the growth
stage, as many new entrants jump into the mix to try and secure a small slice of the
growing pie.
Shake-out
Shake-out is where the breakneck growth slows considerably. It tends to be that
regulation starts to catch up around the shake out phase, as people understand the
industry more and regulators can wrap their heads around what’s going on. Between
increased regulation and the fact that the winners have effectively differentiated
themselves by now, Everyone else “shakes out” of the market, either by failing
outright or by merging with competitors.
Maturity
During the maturity stage total revenue flattens out and may even start to
decline. Businesses operating in mature industries tend to have stable margins and
growing cash flow (since management teams aren’t aggressively re-investing in
growth). Industry concentration tends to increase during the maturity phase.
Competition whittles away at margins but the surplus cash flow means that
management teams can look at optimizing capital structure and returning capital to
shareholders via dividends or stock buybacks.
Decline
As the name suggests, total industry revenue starts to really decline in this stage. As a
result, the main engine for growth is merger and acquisition activity, which creates
even higher levels of industry revenue concentration.
Management teams of firms in declining industries are usually faced with two choices
— reinvent the business or enjoy what’s left of the ride. In the latter case, the
principal motivation becomes returning as much capital to shareholders as possible.
Firms in declining industries tend to have high dividend yields and low earnings
growth. In fact, any EPS growth that does occur usually comes from accretive
acquisitions or financial engineering (like reducing share count).

Globalization and Industry Structure: 5 Propositions

David Yoffie (1993) proposes five propositions to explain how industry structure
evolves in response to globalization and competitive dynamics.
Proposition 1: Fragmented Industries
In fragmented industries, national environments shape international advantage and
trade patterns. Country advantages play a dominant role in determining global
competitive advantage.
Proposition 2: Oligopolistic Global Industry Structures
In globally concentrated industries with high barriers to entry, global oligopolistic
rivalry drives strategic decisions. Location, activity concentration, export, and other
strategic decisions are influenced by the nature of global competition.
Proposition 3: Organizational and Strategic Attributes
In global oligopolies, firm characteristics (ownership structure, strategies, and
organizational factors) affect strategic posture, trade patterns, and national
competitiveness.

Proposition 4: Government Intervention

Extensive government intervention in global oligopolistic industries can alter the
relative balance between firms and affect trade decisions. Government influence
varies by industry and can create a strategic environment where anticipating
government actions drives global strategy.

Proposition 5: Corporate Inertia

In industries with long-term commitments, corporate adjustments and trade patterns
tend to be "sticky." Choices made by multinational companies and governments have
an enduring impact on the industry environment.
These propositions define two dimensions for classifying globalizing industries:
1. Degree of global concentration
2. Extent of government intervention
Industries with low concentration and little government intervention are driven by
classical economic laws of comparative advantage, where factor costs determine
global competitiveness. In contrast, industries with high concentration and
government intervention require a strategic focus on commitments to countries that
will act as best platforms for a broad array of activities over time.

Competitor Analysis
What is a competitor analysis?
A competitor analysis, also referred to as a competitive analysis, is the process of
identifying competitors in your industry and researching their different marketing
strategies.

Conducting a Competitor Analysis: A Step-by-Step Guide

I. Identify Competitors
- Review business plans and notes to identify existing brands that target similar
customers
- Gather information on:
- High-volume keywords and search queries
- URLs appearing at the top of search engine results pages (SERPs)
- Social media accounts appearing in searches for relevant hashtags or keywords
- Create a list of 5-10 brands with similar offerings and target customers
II. Describe Competitors' Business Structures
- Examine company size, years in operation, and job openings to gauge growth
potential and market share
- Review websites, social media profiles, and publicly available information

III. Evaluate Competitors' Value Propositions

- Identify benefits, outcomes, and pain points addressed by competitors' products
- Analyze site copy, taglines, and slogans to understand value propositions
- Answer questions on problems solved, desires fulfilled, and benefits explicitly stated

IV. Evaluate Competitors' Marketing Efforts

- Assess social media influencer partnerships, affiliate marketing programs, and paid
advertising presence
- Analyze marketing channels, content types, and customer engagement

V. Audit Competitors' Brand Identities

- Describe brand personalities, tone, and style
- Identify values communicated through messaging and visual elements
- Analyze emotional resonance and customer experiences

VI. Follow Competitors' Customer Journeys

- Experience customer journeys firsthand through social media, email subscriptions,
and purchases
- Gather information on touchpoints, calls to action, and content

VII. Examine Audience Engagement

- Scour customer reviews, reactions, and comments on social media posts and
mentions
- Analyze public sentiment, employee experiences, and reputation

VIII. Conduct a SWOT Analysis of Competitors

- Identify strengths, weaknesses, opportunities, and threats across competitors
- Consolidate findings into a succinct story about competitive position

National Context and Competitive Advantage : Porter’s Diamond

Model

Michael Porter’s Diamond Model (also known as the Theory of National Competitive
Advantage of Industries) is a diamond-shaped framework that focuses on
explaining why certain industries within a particular nation are competitive
internationally, whereas others might not. And why is it that certain companies in
certain countries are capable of consistent innovation, whereas others might not?
Porter argues that any company’s ability to compete in the international arena is based
mainly on an interrelated set of location advantages that certain industries in different
nations posses, namely: Firm Strategy, Structure and Rivalry; Factor
Conditions; Demand Conditions; and Related and Supporting Industries. If these
conditions are favorable, it forces domestic companies to continiously innovate and
upgrade.

The competitiveness that will result from this, is helpful and even necessary when
going internationally and battling the world’s largest competitors. This article will
explain the four main components and include two components that are often included
in this model: the role of the Government and Chance. Together they form
the national environment in which companies are born and learn how to compete.
1 Firm Strategy, Structure and Rivalry
The national context in which companies operate largely determines how companies
are created, organized and managed: it affects their strategy and how they structure
themselves. Moreover, domestic rivalry is instrumental to international
competitiveness, since it forces companies to develop unique and sustainable
strenghts and capabilities.
The more intense domestic rivalry is, the more companies are being pushed to
innovate and improve in order to maintain their competitive advantage. In the end,
this will only help companies when entering the international arena. A good example
for this is the Japanese automobile industry with intense rivalry between players such
as Nissan, Honda, Toyota, Suzuki, Mitsubishi and Subaru. Because of their own
fierce domestic competition, they have become able to more easily compete in foreign
markets as well.
2 Factor Conditions
Factor conditions in a certain country refer to the natural, capital and human resources
available. Some countries are for example very rich in natural resources such as oil
for example (Saudi Arabia). This explains why Saudi Arabia is one of the largest
exporters of oil worldwide. With human resources, we mean created factor
conditions such as a skilled labor force, good infrastructure and a scientific
knowlegde base. Porter argues that especially these ‘created’ factor conditions are
important opposed to ‘natural’ factor conditions that are already present. It is
important that these created factor conditions are continiously upgraded through the
development of skills and the creation of new knowledge. Competitive advantage
results from the presence of world-class institutions that first create specialized
factors and then continually work to upgrade them. Nations thus succeed in
industries where they are particularly good at factor creation.
3 Demand Conditions
The home demand largely affects how favorable industries within a certain nation are.
A larger market means more challenges, but also creates opportunities to grow and
become better as a company. The presence of sophisticated demand conditions
from local customers also pushes companies to grow, innovate and improve
quality. Striving to satisfy a demanding domestic market propels companies to scale
new heights and possibly gain early insights into the future needs of customers across
borders. Nations thus gain competitive advantage in industries where the local
customers give companies a clearer or earlier picture of emerging buyer needs, and
where demanding customers pressure companies to innovate faster and achieve more
sustainable competitive advantages than their foreign rivals.
4 Related and Supporting Industries
The presence of related and supporting industries provides the foundation on which
the focal industry can excel. As we have seen with the Value Net, companies are often
dependent on alliances and partnerships with other companies in order to create
additional value for customers and become more competitive. Especially suppliers
are crucial to enhancing innovation through more efficient and higher-quality
inputs, timely feedback and short lines of communication. A nation’s companies
benefit most when these suppliers themselves are, in fact, global competitors. It can
often take years (or even decades) of hard work and investments to create strong
related and supporting industries that assist domestic companies to become globally
competitive. However, once these factors are in place, the entire region or nation can
often benefit from its presence. We can for example see this in Silicon Valley, where
all kinds of tech-giants and tech-start-ups are clustered in order to share ideas and
stimulate innovation.
5 Government
The role of the government in Porter’s Diamond Model is described as both ‘a
catalyst and challenger‘. Porter doesn’t believe in a free market where the
government leaves everything in the economy up to ‘the invisible hand’. However,
Porter doesn’t see the government as an essential helper and supporter of industries
either. Governments cannot create competitive industries; only companies can do that.
Rather, governments should encourage and push companies to raise their
aspirations and move to even higher levels of competitiveness. This can be done by
stimulating early demand for advanced products (demand factors); focusing on
specialized factor creations such as infrastructure, the education system and the health
sector (factor conditions); promoting domestic rivalry by enforcing anti-trust laws;
and encouraging change. The government can thus assist the development of the four
aforementioned factors in the way that should benefit the industries in a certain
country.
6 Chance
Even though Porter originally didn’t write anything about chance or luck in his
papers, the role of chance is often included in the Diamond Model as the likelihood
that external events such as war and natural disasters can negatively affect or benefit a
country or industry. However, it also includes random events such as where and when
fundamental scientific breakthroughs occur. These events are beyond the control of
the government or individual companies. For instance, the heightened border security,
resulting from the September 11 terrorist attacks on the US undermined import traffic
volumes from Mexico, which has had a large impact on Mexican exporters. The
discontinuities created by chance may lead to advantages for some and
disadvantages for other companies. Some firms may gain competitive positions,
while others may lose. While these factors cannot be changed, they should at least be
monitored so you can make decisions as necessary to adapt to changing market
conditions.

Porter Diamond Model In Sum

Porter’s Diamond Model of National Advantage explains why some industries in
some countries are so much more developed and competitive compared to industries
elsewhere on the planet. It basically sums up the location advantages that Dunning is
referring to in his Eclectic paradigm (also known as OLI framework).

The Diamond Model could therefore be used when analyzing foreign markets for
potential entry or when making Foreign Direct Investment decisions. It is advised to
also conduct a macro-environment analysis and an industry analysis by
using PESTEL Analysis and Porter’s Five Forces respectively.

Strategic Group
A strategic group is a name given to the group of companies in a particular industry
that uses a similar business model or a set of strategies. These strategic groups
provide services of a specific segment of the industry. Each strategic group is
segmented based on their operating environment, threats, and opportunities of the
industry.

Because of this, all the companies that provide services in a particular segment of the
industry are referred to as members of one strategic group. For example, in the
restaurant industry, there are different strategic groups formed based on different
variables such as presentation, preparation time, and pricing of the food, etc. The
various strategic groups in the restaurant industry are fast food, fine dining, etc.
The composition of the strategic group depends on the way the strategic group is
defined. A strategic group differentiates the direct rival of a company from its indirect
rivals. The direct competitors of strategic group members are those who are part of
the strategic group, and an indirect opponent of a strategic group is the one which is
part of the industry but not a member of the strategic group.

Example Burger King and Mcdonalds are direct rivals to each other, whereas any fine
dining restaurant will be an indirect rival to both Burger King and Mcdonalds.

The term “Strategic group” is introduced by Micheal S. Hunt, a Harward professor in

1972, in his doctoral thesis report. While studying the appliances industry, he learned
that the companies that are part of subgroups have high competition among them.

Characteristics based on Strategic Group

The strategic groups are identified based on the similar characteristics followed by the
companies. The following are the characteristics based on which the strategic group
of the industry is formed

1. The pricing policy

The pricing policy is one of the main features based on which the strategic groups are
formed. For example, the companies that sell products at low prices are direct
competitors to one another. The giant retailers like Walmart and Target are direct
competitors to each other as both follow the low pricing policy.

2. The extent of products or services diversity

The companies that provide different products and services are part of one strategic
group. For example, ITC and Hindustan Unilever companies are part of one strategic
group as both companies offer different products and services.

3. The extent of branding

Companies whose products and services are recognized by people based on
their brand’s name and not based on the quality of the products or services are part of
one strategic group. For example, cosmetic brand companies like Lakme, Bobby
Brown, and Loreal companies are part of one strategic group.

4. Distribution Channel used

Companies that use similar distribution channels are part of one strategic group. Let
us take the example of the aviation industry. In the aviation industry, there are
different segments, such as luxury class, business class, and economy class. The
aviation companies that provide luxury class services are part of one strategic group.
Similarly, the aviation companies that offer business-class services are part of one
strategic group.

Characteristics of Strategic Groups

The following are the characteristics of Strategic Groups:
 1. Homogeneous within: Companies within a Strategic Group share similar
strategic attributes.
2. Heterogeneous between: Different Strategic Groups have distinct strategic
attributes.
3. Boundaries: There are boundaries between Strategic Groups, and it’s difficult
for companies to move from one group to another.
4. Stable: Strategic Groups are relatively stable over time, and changes occur
gradually.

Importance of Strategic Groups

Strategic Groups are essential for understanding the competitive dynamics of an
industry. The following are the importance of Strategic Groups:
1. Competitive Analysis: Strategic Groups help us identify competitors that are
similar to our company and understand their strategies. This analysis helps us
identify potential competitive threats and opportunities.
2. Strategy Formulation: Strategic Groups help us formulate effective strategies by
providing insights into the different strategic approaches adopted by companies in
the same industry.
3. Industry Analysis: Strategic Groups provide a framework for industry analysis,
helping us understand the competitive landscape and identify opportunities for
growth and profitability.
What Is Strategic Analysis?
Strategic analysis is the process of researching and analyzing an organization along
with the business environment in which it operates to formulate an effective
strategy. This process of strategy analysis usually includes defining the internal and
external environments, evaluating identified data, and utilizing strategic analysis
tools.
Internal appraisal
Internal appraisal helps the organisation to develop core competencies to gain their
competitive advantage.
Core competencies involve a firm’s resources and capabilities that give it a distinct
advantage over its competitors. Developing the core competencies will create ‘value’
for their customers. Core competencies are actually a value-creating system through
which a company tries to achieve strategic competitiveness and positions itself above
competition.

An Internal audit provides important information about an organisation’s specific

assets, skills, work activities and work relationships in order to determine as to what is
good about them and what is lacking.

Prior to internal analysis of the company’s strengths and weakness can be made, it is
important to identify some of the weakness that leads the company to fail.

Techniques for Internal Appraisal

1. Value Chain Analysis
Value Chain Analysis (VCA) is the method that allows an organization to recognize
its primary and supporting functions that make the product more valuable. It also
assists in evaluating these processes to decrease costs or increase differentiation as
techniques for organizational appraisal. VCA is a tool for strategic analysis helpful for
the companies to analyse their internal processes.

2. Quantitative Analysis
One of the most popular methods used for the analysis of the effectiveness of a firm is
through numbers. Financial figures are the techniques for organizational appraisal that
are typically helpful for the assessment of performance as well as to determine
strengths and weaknesses. However, there are other ways to assess since many other
numbers are reliable. The financial analysis, followed by the nonfinancial quantitative
analysis, will be explained below.

i) Financial Analysis
Financial analysis is an internal techniques for organizational
analysis. Executives and entrepreneurs, financiers, shareholders and
shareholders typically use it. Who’s primary concern is making
decisions concerning the investment. It is typically helpful with the
aim to assess the financial health of the company. The main
drawback is that it obscures the financial situation of various
company areas. Still, it helps reveal the overall picture of the
company’s financial situation. Despite its shortcomings, it is an
effective method since it allows the management to make the
necessary modifications. It is a part of techniques for organizational
appraisal. Also, it ensures that accounting standards provide the
respect they deserve. The three principal analysis techniques include
ratio analysis, value-added economic analysis, and activities-based
cost accounting.
ii) Non-Financial Analysis
The objective of using the quantitative analysis of non-financial
resources, techniques for organizational appraisal, is to aid in
assessing the organization. Financials are not able to explain every
business activity. While a business could quantify non-material
aspects such as the goodwill of the company and the morale of
employees, it is not a good idea to measure the same in terms of
finance.

3. Qualitative Analysis
Although the assessment of an organization is through quantitative
analysis because it is possible to measure and compare based on
financial figures and numbers, there are a lot of issues with
quantification, as the majority of strategists understand. The
qualitative assessment must complement qualitative analysis,
conducted by analysing the viewpoint of and judgement or an
assumption. Qualitative analysis, techniques for organizational
appraisal, is generally less invasive than quantitative analysis based
on figures. But that doesn’t mean that qualitative research is
unreliable or based on emotions and imagination. On the contrary, it
is practiced by involving various aspects of the mental faculties
rather than the initial quote of figures, as in the case of qualitative
analysis.

4. Benchmarking
Benchmarking aims to recognize “the most effective practices” for
the products and procedures that govern the development and
delivery of goods. The reason at heart of benchmarking is to identify
and assess the current state of a company or organization in terms of
“best practices” within the field and to recognize areas and strategies
to enhance performance. It is the techniques for organizational
appraisal. The search for “best practices” may occur within an
industry but can helpful in other sectors.

5. The Balanced Scorecard

At the beginning of the 19 century, balance score cards were intr ″
oduced in the early 19th century by Robert Kaplan and David
Norton as a method of evaluation of performance. It evaluates the
organization’s performance by examining it from different
perspectives. These views can attribute to the fact that leaders must
consider other aspects of the organization’s performance to assess
their contribution to the organization. The current balance scorecard
is a brand-new method of evaluation. According to this model, it’s an
extensive method of evaluating performance that provides an even
balance between unconventional operations and financial techniques.
It is one of the important techniques for organizational appraisal.

6. Mckinsey’s 7 S Framework
The McKinsey 7S Framework is a management system developed by
well-known consultants to business Robert H. Waterman, Jr. And
Tom Peters in the 1980s. The seven S’s are strategies, structure style,
skills of employees, shared values, and staff. It is techniques for
organizational appraisal, typically helpful as an analysis tool for
organizations to evaluate and monitor changes to the internal
conditions of an organization.

Resources

Resources
Tangible resources are resources that can be readily seen, touched, and quantified.
Physical assets such as a firm’s property, plant, and equipment are considered to be
tangible resources, as is cash.
Intangible resources are quite difficult to see, touch, or quantify. Intangible resources
include, for example, the knowledge and skills of employees, a firm’s reputation, and
a firm’s culture. In a nod to Southwest Airlines’ outstanding reputation, the firm
ranks eighth in Fortune magazine’s 2018 list of the “World’s Most Admired
Companies.”
Capabilities
A dynamic capability exists when a firm is skilled at continually updating its array of
capabilities to keep pace with changes in its environment. Coca-Cola, for example,
has an uncanny knack for building new brands and products as the soft drink market
evolves. Not surprisingly, this firm ranks among the top twelve in Fortune’s “World’s
Most Admired Companies” for 2020.

Types of Resources
The tangibility of a firm’s resources is an important consideration within resource-
based theory.
Tangible resources are resources that can be readily seen, touched, and quantified.
Physical assets such as a firm’s property, plant, and equipment, as well as cash, are
considered to be tangible resources. In contrast, intangible resources are quite
difficult to see, to touch, or to quantify.
Intangible resources include, for example, the knowledge and skills of employees, a
firm’s reputation, brand name, exclusive rights to intellectual property, leadership
traits of executives, and a firm’s culture. In comparing the two types of resources,
intangible resources are more likely to meet the criteria for strategic resources (i.e.,
valuable, rare, difficult-to-imitate, and organized to capture value) than are tangible
resources. Executives who wish to achieve long-term competitive advantages should
therefore place a premium on trying to nurture and develop their firms’ intangible
resources.

Capabilities are another key concept within resource-based theory. An effective way
to distinguish resources and capabilities is this: resources refer to what an
organization owns, capabilities refer to what the organization can do. Capabilities
tend to arise over time as a firm takes actions that build on its strategic resources.
Southwest Airlines, for example, has developed the capability of providing excellent
customer service by building on its strong organizational culture. Capabilities are
important in part because they are how organizations capture the potential value that
resources offer. Customers do not simply send money to an organization because it
owns strategic resources. Instead, capabilities are needed to bundle, to manage, and
otherwise to exploit resources in a manner that provides value added to customers and
creates advantages over competitors.

VRIO: Four Characteristics of Strategic Resources

Resource-based theory can be confusing because the term resources is used in many
different ways within everyday common language. It is important to
distinguish strategic resources from other resources. To most individuals, cash is an
important resource. Tangible goods such as one’s car and home are also vital
resources. When analyzing organizations, however, common resources such as cash
and vehicles are not considered to be strategic resources. Resources such as cash and
vehicles are valuable, of course, but an organization’s competitors can readily acquire
them. Thus an organization cannot hope to create an enduring competitive advantage
around common resources.

Southwest Airlines provides an illustration of resource-based theory in action.

Resource-based theory contends that the possession of strategic resources provides an
organization with a golden opportunity to develop competitive advantages over its
rivals. These competitive advantages in turn can help the organization enjoy strong
profits (Barney, 1991; Wernerfelt, 1981).

A strategic resource is an asset that is valuable, rare, difficult to imitate, and organized
to capture value (Barney, 1991; Chi, 1994). A resource is valuable to the extent that it
helps a firm create strategies that capitalize on opportunities and ward off threats.
Southwest Airlines’ culture fits this standard well. Most airlines struggle to be
profitable, but Southwest makes money virtually every year. One key reason is a
legendary organizational culture that inspires employees to do their very best. This
culture is also rare in that strikes, layoffs, and poor morale are common within the
airline industry. Southwest embraces a culture of fun for both its customers and
employees. Most other airlines do not have this philosophy.

Competitors have a hard time duplicating resources that are difficult to imitate. Some
difficult to imitate resources are protected by various legal means, including
trademarks, patents, and copyrights. Other resources are hard to copy because they
evolve over time and they reflect unique aspects of the firm. Southwest’s culture arose
from its very humble beginnings. The airline had so little money that at times it had to
temporarily “borrow” luggage carts from other airlines and put magnets with the
Southwest logo on top of the rivals’ logo. Southwest is a “rags to riches” story that
has evolved across several decades. Other airlines could not replicate Southwest’s
culture, regardless of how hard they might try, because of Southwest’s unusual
history.

A resource is organized to capture value when the firm has organizational systems,
processes, and structure in place to capitalize on the resource for a competitive
advantage. This may provide bargaining power for the firm in the marketplace. A key
benefit of Southwest’s culture is that it leads employees to treat customers well, which
in turn creates loyalty to Southwest among passengers. This customer loyalty is why
many passengers choose Southwest over other airlines.

The key to using the Resource Based View is to evaluate a firm’s resources and
capabilities using the VRIO framework decision tree.

Organisation’s Capabilities
Organisational capabilities are the abilities of an enterprise to operate its day-to-day
business as well as to grow, adapt, and seek competitive advantage in the
marketplace. In other words, capabilities are how the business does what it does – and
does what it wants to do. In a growing Irish economy many firms are reviewing their
strategies as they seek to leverage opportunities at home and overseas – this strategic
review should include an assessment of capabilities required to deliver on the
strategy.

An organisation’s capabilities are multidimensional, made up of its people, processes

and technologies, but also its insights, its mission, and integrated decision making.
There are three types of capabilities – strategic, core and foundational. Sustainable
competitive advantage cannot be obtained by focusing on foundational or core
capabilities. Strategic capabilities are where the key is, the basis for strategic
advantage. These are the things that the organisation does well that sets it apart in a
meaningful way.

When strategy changes, this often needs new levels of performance or a different type
of performance. To achieve this, the organisation needs the capability – in all its
forms – to deliver this. Strategic change requires capability change, and without it
success becomes more difficult. To effect this change however, a company needs to
know what it has – and what it wants.

With this in mind, just as one should “know thyself” so too an organisation must
know its capabilities. Thin or standard definitions of capabilities may work for
foundational capabilities, but when it comes to the sources of strategic advantage, a
company needs more. Loose definitions mean loose results. Striving toward an
objective of achieving a capability of “world-class innovation”, for example, can
mean a hundred things to a hundred people. A capability blueprint, explained in this
article, is a way of properly understanding what a capability is and what it takes to
develop it. Four questions lie at its heart:
What does “good” look like?
How good do we need to be?
How would we know if we were getting better?
What would have to change in the way we operate?

Once these capabilities have been defined, building them requires a systematic
approach. Investments in people, processes, assets and systems may be needed, and
the company may well require an integrated approach to change management. From
our experience with our clients, we’ve found that defining the goals of the change,
and the strategic capabilities required, makes this process considerably easier to
manage. By focussing on capabilities, companies can reinsert the missing link
between strategy and impact.

Types of organisation capabilities

Here are some types of capabilities:
Market-based capabilities
Some organisations focus on their marketing and distribution and capitalise on that
aspect of their business. While they might produce goods of adequate quality, they
market these products or services so well that consumers perceive them to be of a
higher quality than their competitors' products.
For example, consider a company that specialises in cakes and pastries. While its
products might be of lower quality than another company's pastries, it can market
itself in such a way that its sales and revenue are higher because it attracts a greater
amount of customers and keeps them coming back.

Strategic capabilities
Strategic capabilities relate to a company's ability to bring an idea to reality and use
its resources to devise strategies that set it apart from its competition. Most companies
with strong strategic capabilities use strong execution to bring ideas to the market. For
example, when a company readies itself to launch a new product line to the market, it
first analyses whether the resources and manufacturing processes are in place to carry
out the launch smoothly.

Operational capabilities
These capabilities focus on a company's ability to synchronise different business
functions to operate in accordance with industry standards. Every organisation has
different operational capabilities that become clearer and more defined over time. As
the company refines them to meet its business needs, they become harder to replicate.
Therefore, each company aims to develop unique operational capabilities.
For example, when a person embarks on a career in finance, the systems they use and
processes they follow while learning from a superior are usually standard across most
organisations. The method and depth of training for each skill area vary between
organisations, giving those with strong operational capabilities a competitive
advantage.

Dynamic capabilities
Dynamic capabilities focus on a company's ability to readily adapt to change over
time. Some situations demand that organisations implement changes due to evolving
trends, stakeholder concerns, market necessities and requirements for innovation. For
example, when a company has dynamic capabilities and processes in place, it can
analyse the market and predict future trends. This capability may enable it to deliver a
product ahead of its competitors in the market.

Competition-based capabilities
An organisation determines its competition-based capabilities depending on the
competitiveness of its industry and how it chooses to compete in the market. Then, it
decides which aspect to focus more on developing based on this capability. For
example, a marketing agency focusing on producing video content for clients requires
a high investment in videography tools, whereas a marketing agency focusing on
increasing client sales requires a highly skilled sales team.

Relationship between Resources and Capability

Competitive Advantage
A competitive advantage is anything that gives a company an edge over its
competitors, helping it attract more customers and grow its market share.
A competitive advantage can take three primary forms:
Cost advantage –producing a product or providing a service at a lower cost than
competitors
Offer advantage –differentiating a product by adding features that are highly valued
by customers
Niche advantage –serving a specific segment of the market better than anyone else

What are Some Examples of Competitive Advantage?

Competitive advantages come in many shapes and sizes. They include, but are not
limited to, some of the following:
 Access to natural resources not available to competitors
 Highly skilled labor
 Strong brand awareness
 Access to new or proprietary technology
 Price leadership

Components of Competitive Advantage

For a competitive advantage to be established, it is important to know the following:
1. Value proposition: A company must clearly identify the features or services
that make it attractive to customers. It must offer real value in order to generate
interest.
2. Target market: A company must establish its target market to further engrain
best practices that will maintain competitiveness.
3. Competitors: A company must define competitors in the marketplace, and
research the value they offer; this includes both traditional as well as non-
traditional, emerging competition.

To build a competitive advantage, a company must be able to identify its value

proposition that will be sought after by the target market, which cannot be replicated
by competitors.
Building a Competitive Advantage
Michael Porter, the famous Harvard Business School professor, identified three
strategies for establishing a competitive advantage: cost leadership, differentiation,
and focus (which includes both cost focus and differentiation focus)
1. Cost leadership
The goal of a cost leadership strategy is to become the lowest cost manufacturer or
provider of a good or service. This is achieved by producing goods that are of
standard quality for consumers, at a price that is lower and more competitive than
other comparable product(s).
Firms employing this strategy will combine low profit margins per unit with large
sales volumes to maximize profit. Companies will seek the best alternatives in
manufacturing a good or offering a service and advertise this value proposition to
make it impossible for competitors to replicate.
2. Differentiation
A differentiation strategy is one that involves developing unique goods or services
that are significantly different from competitors. Companies that employ this strategy
must consistently invest in R&D to maintain or improve the key product or service
features.
By offering a unique product with a totally unique value proposition, businesses can
often convince consumers to pay a higher price which results in higher margins.
3. Focus
A focus strategy uses an approach to identifying the needs of a niche market and then
developing products to align to the specific need area. The focus strategy has two
variants:
 Cost focus: Lowest-cost producer in a concentrated market segment
 Differentiation focus: Customized or specific value-add products in a
narrow-targeted market segment

Competitive Advantage in the Marketplace

Three notable examples are:
1. Walmart: Walmart excels in a cost leadership strategy. The company offers
“Always Low Prices” through economies of scale and the best available prices
of a good.
2. Apple: Apple uses a differentiation strategy to appeal to its consumer base. It
provides iconic designs, innovative technologies, and, therefore, highly
sought-after products; this ensures that consumers are willing to pay a
premium for Apple devices.
3. Whole Foods Market: Whole Foods Market’s advantage relies on a
differentiation focus strategy. The company is a leader in the premium grocery
market and charges more premium prices because its products are unique. This
is appealing to a niche market with higher disposable income.

What is the Importance of Competitive Advantage?

A competitive advantage is what sets a business apart from its competitors. It is
essential in order for a business to succeed, whether it’s by ensuring higher margins,
attracting more customers, or achieving greater brand loyalty among existing
customers.
Higher margins, a better growth profile, and lower customer churn tend to also be
very popular among both investors and creditors — making capital more readily
available (and cheaper) for firms that are able to maintain a strong competitive
advantage among their peers.

Strategic Competency
A strategic competency must be a skill, process, or knowledge that the
organization possesses. It drives the way the organization produces its product or
service offering. It is not a piece of equipment, but it could be the knowledge to
develop specialized equipment or to use equipment in a specific way.

A strategic competency must develop value for the customer. As stated above, there
could be many competencies in an organization but only the ones that develop value
for the customer have the potential to be strategic competencies. A manufacturing
facility that is skilled in its ability to be clean and organized has a competency, but it
is unlikely to be strategic. A culture that values teamwork and collaboration in and of
itself is not a strategic competency but could support a competency such as speed of
 development. A strategic competency enables the organization to better meet
particular needs of customers.

A strategic competency must be difficult for competitors to duplicate. If an

organization is just one of many companies that possesses a particular skill, it is not a
strategic competency. If the skill or knowledge can be quickly reproduced by others,
it is not a strategic competency. It must be unique or fairly unique to be a strategic
competency.

Strategic competencies are the skills or knowledge that underlie or produce a

competitive advantage. Competitive advantage is the ability of an organization to
provide a greater value in meeting the needs of customers. In a way, strategic
competencies and competitive advantage can be thought of as opposite sides of the
same coin. Strategic competencies are the abilities of the organization to produce
higher value for the customer; competitive advantage is the perception on the part of
the customer of the higher value provided.

One of the key purposes of strategic planning is to identify the most important
strategic competency (or competencies) and then to identify and allocate the resources
and actions that will further develop them. By doing so, the organization builds the
capability to deliver value to the customer and a competitive advantage over other
potential suppliers.

What Are the Different Types of Core Competencies?

Core competencies can be categorised into three main types:

1. Organisational
These are competencies that define the overarching strengths and capabilities of the
entire organisation. They are typically aligned with the organisation’s mission, vision,
and strategic objectives.
For example:

 Innovation
 Customer focus
 Agility
 Sustainability

2. Functional
These are competencies specific to individual functions or departments within the
organisation. They represent the specialised skills and knowledge required to perform
tasks or roles effectively within a particular functional area.
For example:

 Financial analysis for finance professionals

 Marketing strategy for marketing specialists
 Project management for project managers

3. Behavioural Competencies
Also known as interpersonal or soft skills, behavioural competencies are related to
 how individuals interact with others and conduct themselves in the workplace.
For example:

 Leadership
 Teamwork
 Communication
 Problem-solving
 Adaptability
 Emotional intelligence

Why is it Important to Use Core Competencies?

Here are some key benefits of incorporating core competencies in HR practices:

1. Recruitment

By identifying and prioritising the most important skills and behaviours needed,
companies can improve the quality of their hires, making sure they align with the
company’s goals and culture. Core competencies help you create more precise job
descriptions and criteria for evaluating candidates.

2. Performance Management

Having clear core competencies with defined proficiency levels helps companies set
specific performance goals. This makes performance reviews better and helps find
areas where employees can improve.

3. Training and Development

Core competencies serve as a roadmap for employee development. HR can design

targeted training programs that help employees develop the specific skills and
knowledge that are critical to the organisation’s success.

4. Career Pathing and Succession Planning

Core competencies provide a clear framework for what is needed at each level and
role in the company. This helps employees know how to move up in their careers and
helps HR identify potential candidates for succession planning.

5. Strategic Alignment

Core competencies make sure that everyone in the company is working towards the
same big goals. When HR uses these competencies in different areas like hiring,
training, and managing performance, it keeps everyone focused on the company’s
main vision and mission.

6. Cultural Cohesion

Core competencies define the behaviours and skills that reflect the company’s values
and culture. This strengthens the company culture and gives everyone a common
understanding of what’s important, helping all employees feel united and focused on
shared goals.