STRATEGIC MANAGEMENT

UNIT-2
STRATEGIC POSITION
Components Of External Environment
Here are the nine types of external environment factors that affect businesses:

1. Technological factors
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 they can confront these challenges by developing new products. Other
companies, such as health care 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, they may consider lowering the price to increase sales and positively affect their
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.

Porter’s Diamond Model: Factors, Examples & Strategy

The Porter’s Diamond Model helps countries and businesses to analyze the competitive
environment. It attempts to explain why certain groups, countries, or regions are more
successful.
Michael E. Porter, a Harvard Business School professor, developed Porter’s Diamond Model.
In this blog post, we will discuss Porter’s Diamond Model in detail and provide examples of
how it can be used to improve business competitiveness.
The 4 Factors of Porter’s Diamond Model Strategy
Porter’s Diamond Model is a framework that helps businesses understand the factors that
influence their ability to compete in global markets. The model can assess a country’s
strengths, weaknesses and develop strategies to succeed.
Porter’s Diamond Model considers four factors:
1. Factor Conditions
2. Demand Conditions
3. Related and Supporting Industries
4. Firm Strategy, Structure, and Rivalry.
Factor Conditions
Factor conditions are the basic factors of production that a country has access to. This
includes land, labor, capital, and infrastructure. Factor conditions can be a competitive
advantage if they are superior to other countries.
These factors can be grouped into three categories: Natural resources, human resources, and
infrastructure.
Natural resources include oil, gas, minerals, forests, and fisheries. A country with natural
resources can use them for economic gain. For example, Saudi Arabia is a wealthy country
because of its oil resources.
Human resources are the workforce. A country with an educated and skilled workforce will
produce high-quality goods and services. Countries like Germany and Japan have highly
skilled workers and are known for their high-quality products.
Infrastructure includes roads, railways, ports, telecommunications, etc. A country with a well-
developed infrastructure can transport goods and services more efficiently. China is the
world’s number two economy because of its high quality and accessible infrastructure.
Demand Conditions
Demand conditions refer to the domestic demand for a good or service. A country with a
large and growing market is a better destination than countries with a small or stagnant
market.
Apart from the size of the domestic market, the level of demand also matters. A country with
high demand for its products will be more successful than one with low demand levels.
Demand conditions can be influenced by income levels, tastes, and preferences. If a product
or service has a high demand, it is a competitive advantage.
Related and Supporting Industries
Related and supporting industries are the businesses that supply inputs or purchase
businesses’ outputs.
For example, an organization that manufactures cars would have steel, plastic, and other
materials suppliers. It would also have customers who buy its cars. These related and
supporting industries can be a source of competitive advantage.
Businesses need suppliers and customers to be successful.
A country with related and supporting industries is more successful than one with fewer
related and supporting industries.
Firm Strategy, Structure, and Rivalry
Firm strategy, structure, and rivalry refer to how a company is organized and competes. Well-
organized countries with a competitive environment are more successful than poorly
organized countries with no competition.
The reason for this is that well-organized firms can develop and implement strategies
effectively and respond quickly to market changes. Additionally, aggressive competition
drives down prices and encourages innovation.
This factor can be influenced by the level of competition, the firm’s financial position,
government regulations, etc. If these conditions are favorable, they can be a competitive
advantage. The government can play a role in promoting competitiveness by enacting
policies that encourage firms to compete.
Why Is Porter’s Diamond Model Important?
Porter’s Diamond Model is important because it helps businesses and countries understand
the sources of competitive advantage. It helps them identify the most critical factors to their
success.
By understanding the factors that contribute to competitive advantage, countries can make
policies that will enable them to compete more effectively in the global marketplace. This
also allows policymakers to see the areas for improvement.
Additionally, the model can help companies understand the factors influencing their
competitiveness and make the necessary changes to stay ahead of the competition. These
factors can be internal, external, static, or dynamic.
Porter’s Diamond Model is also important because it can be used to benchmark a company’s
performance. Benchmarking allows companies to see where they stand relative to their
competitors and take steps to improve.
Porter’s Diamond Model is a valuable tool for businesses and policymakers. It provides a
framework for understanding competitiveness and can be used to make improvements.
A Case Study – Germany’s Luxury Car Manufacturing Industry
The German luxury car manufacturing industry is a good example of Porter’s Diamond
Model.
The following are some factors contributing to the success of this industry:
 Germany has a large and well-developed automotive industry. This provides a pool of
skilled workers and suppliers and gives firms access to capital and technology.
 The industry is highly competitive. This drives down prices and encourages
innovation. The competition ensures that only the best product survives.
 The government has enacted policies that are favorable to the automotive industry.
These policies have helped to make Germany a leading producer of luxury cars. The
government provides subsidies and tax breaks to firms in the industry.
 Firms in the industry are well-organized and compete aggressively. This allows them
to develop and implement strategies effectively.
 The industry is supported by many related and supporting industries. This provides
firms with resources and strengthens the industry’s competitive position.
The German luxury car manufacturing industry is an excellent example of how Porter’s
Diamond Model can be used to understand and explain competitiveness. By understanding
the factors that contribute to their success, firms in this industry can improve their
performance.
Porter’s Diamond Model Examples
Example 1
Let’s look at Porter’s Diamond Model in the steel industry.
The factors that contribute to competitive advantage in the steel industry are:
 Access to raw materials
 Location
 Skilled workforce
 Good infrastructure
 Strong competition
Each of these factors can be a source of competitive advantage for steel companies. For
example, if a steel company has access to raw materials, it can produce more steel at less
expense than its competitors. If it is in a good location, it can ship its products more cheaply.
If it has a skilled workforce, it can produce steel more efficiently.
Porter’s Diamond Model can help policymakers and businesses to understand these factors
and how they contribute to competitive advantage. The information obtained from this model
can be used to make necessary policy changes.
Example 2
Let’s look at Porter’s Diamond Model in the airline industry. The model shows why some
airlines are more successful.
The four factors contributing to competitive advantage in this industry are firm strategy,
structure, and rivalry; related and supporting industries; factor conditions; and demand
conditions.
Firm strategy, structure, and rivalry refer to how an airline is organized and competes in the
market. A well-organized airline will be more successful than a poorly organized one.
Additionally, aggressive competition drives down prices and encourages innovation.
Related and supporting industries are essential because they provide an airline’s inputs to
operate. These industries include aircraft manufacturers, airport operators, and fuel suppliers.
A country with a strong aerospace industry will be more successful than one without a strong
aerospace industry.
Factor conditions are the resources and capabilities that an airline has. Human resources,
technology, and capital are all critical factor conditions. Airlines with resources are more
successful than those lacking these resources.
Demand conditions are the needs and want of consumers. Airlines will be more successful if
there is a strong demand for air travel.
By understanding these factors, airlines can identify the sources of their competitive
advantage and take steps to improve them.
Criticisms of Porter’s Diamond Model
Porter’s Diamond Model has been criticized for several reasons.
 First, the model does not consider the role of government policy. Government policy
can be a significant factor in determining competitiveness. For example, countries
with protectionist policies are difficult places for businesses to compete.
 Second, the model does not take into account the role of culture. Culture can play a
significant role in determining competitiveness. For example, countries with
collectivist cultures make it difficult for organizations to compete.
 Third, the model does not take into account the role of entrepreneurship.
Entrepreneurship can play a significant role in determining competitiveness. For
example, a company with a creative and innovative CEO will be more successful.
 Finally, the model is static and does not consider changes in the environment.
Environmental factors, such as technology and globalization, can significantly impact
competitiveness.
Key Takeaways
 The four factors contributing to competitive advantage in an industry are firm
strategy, structure, and rivalry; related and supporting industries; factor conditions;
and demand conditions.
 Germany’s luxury car manufacturing industry is a good example of Porter’s Diamond
Model in action.
 The model has been criticized for many reasons, including the fact that it does not
consider the role of government policy, culture, entrepreneurship, or changes in the
environment.
 Understanding the factors contributing to competitive advantage and its limitations
can help one utilize Porter’s Diamond Model effectively.
Conclusion
Porter’s Diamond Model is an important tool for business owners to improve their operations
and create a competitive edge. By understanding the unique factors that affect their industry
and country, businesses can develop targeted strategies to give them a leg up on the
competition.
Porter’s Diamond Model is not a stand-alone tool and is used with other frameworks. It is
essential to use the model to understand a specific industry and country.

Porter’s Five Forces Model of Competition

Michael Porter (Harvard Business School Management Researcher) designed various vital
frameworks for developing an organization’s strategy. One of the most renowned among
managers making strategic decisions is the five competitive forces model that determines
industry structure. According to Porter, the nature of competition in any industry is
personified in the following five forces:
i. Threat of new potential entrants
ii. Threat of substitute product/services
iii. Bargaining power of suppliers
iv. Bargaining power of buyers
v. Rivalry among current competitors
FIGURE: Porter’s Five Forces model

The five forces mentioned above are very significant from point of view of strategy
formulation. The potential of these forces differs from industry to industry. These forces
jointly determine the profitability of industry because they shape the prices which can be
charged, the costs which can be borne, and the investment required to compete in the
industry. Before making strategic decisions, the managers should use the five forces
framework to determine the competitive structure of industry.
Let’s discuss the five factors of Porter’s model in detail:
1. Risk of entry by potential competitors: Potential competitors refer to the firms
which are not currently competing in the industry but have the potential to do so if
given a choice. Entry of new players increases the industry capacity, begins a
competition for market share and lowers the current costs. The threat of entry by
potential competitors is partially a function of extent of barriers to entry. The various
barriers to entry are-
 Economies of scale
 Brand loyalty
 Government Regulation
 Customer Switching Costs
 Absolute Cost Advantage
 Ease in distribution
 Strong Capital base
2. Rivalry among current competitors: Rivalry refers to the competitive struggle for
market share between firms in an industry. Extreme rivalry among established firms
poses a strong threat to profitability. The strength of rivalry among established firms
within an industry is a function of following factors:
  Extent of exit barriers
 Amount of fixed cost
 Competitive structure of industry
 Presence of global customers
 Absence of switching costs
 Growth Rate of industry
 Demand conditions
3. Bargaining Power of Buyers: Buyers refer to the customers who finally consume the
product or the firms who distribute the industry’s product to the final consumers.
Bargaining power of buyers refer to the potential of buyers to bargain down the prices
charged by the firms in the industry or to increase the firms cost in the industry by
demanding better quality and service of product. Strong buyers can extract profits out
of an industry by lowering the prices and increasing the costs. They purchase in large
quantities. They have full information about the product and the market. They
emphasize upon quality products. They pose credible threat of backward integration.
In this way, they are regarded as a threat.
4. Bargaining Power of Suppliers: Suppliers refer to the firms that provide inputs to
the industry. Bargaining power of the suppliers refer to the potential of the suppliers
to increase the prices of inputs( labour, raw materials, services, etc) or the costs of
industry in other ways. Strong suppliers can extract profits out of an industry by
increasing costs of firms in the industry. Suppliers products have a few substitutes.
Strong suppliers’ products are unique. They have high switching cost. Their product is
an important input to buyer’s product. They pose credible threat of forward
integration. Buyers are not significant to strong suppliers. In this way, they are
regarded as a threat.
5. Threat of Substitute products: Substitute products refer to the products having
ability of satisfying customers needs effectively. Substitutes pose a ceiling (upper
limit) on the potential returns of an industry by putting a setting a limit on the price
that firms can charge for their product in an industry. Lesser the number of close
substitutes a product has, greater is the opportunity for the firms in industry to raise
their product prices and earn greater profits (other things being equal).
The power of Porter’s five forces varies from industry to industry. Whatever be the industry,
these five forces influence the profitability as they affect the prices, the costs, and the capital
investment essential for survival and competition in industry. This five forces model also help
in making strategic decisions as it is used by the managers to determine industry’s
competitive structure.
Porter ignored, however, a sixth significant factor- complementaries. This term refers to the
reliance that develops between the companies whose products work is in combination with
each other. Strong complementors might have a strong positive effect on the industry. Also,
the five forces model overlooks the role of innovation as well as the significance of
individual firm differences. It presents a stagnant view of competition.
UNIT-1