A great strategy, precise organizational structure and perfect systems, does not automatically get translated into organizational strength, what determines the organization’s strengths are the resources. In a highly competitive markets, even the resources are not unidimensional. There are multiple resources an organization needs to build.

Organizations do not operate in isolation. While company has its internal environment in terms of value system referring to choice of business, vision, mission, objectives, business policies and practices, management structure and nature, Internal power relationship, human resources, company image and brand equity, infrastructure, R&D, marketing resources, financial factors etc., the relevance of these factor depend on the external environment. Every organization is exposed to external environment.

The two types of external environments a firm is exposed to are Micro and Macro. Micro factors represent company’s immediate environment that affect the performance of company. Micro factors comprise of suppliers, marketing intermediaries, competitors, customers and publics. Company needs to manage its internal environment by staying relevant.

Company’s choice of business, R&D must look at satisfying new needs of the customers, dependable suppliers and market intermediaries, must address to emerging competition.

The Macro environment of the firm comprises of Economic, Political, Regulatory, Socio/cultural, Demographic, Technological, Natural, and Global environment. On one hand, the company addresses to internal environment, it must address the external environment simultaneously.

Some of the challenges that the firm faces while addressing the external environment are integrated global economies and regulatory factors, shifting socio-cultural factors, changing demographics, advancing technologies and global environmental issues.

When SWOC analysis of the firm is done, we realize that the Strengths and Weakness come from the internal environment. Firms ability to address the challenges from the external environment represents the strength while its inability to address the external environment is the weakness. The Opportunities as well as Challenges come from the external environment.

Michael E. Porter in 1980 developed Five Forces model. The framework is generally used for the analysis of industry and development of business strategy. It is mainly based on the premise that a corporate strategy should meet the opportunities and threats in the organization’s outer environment. Porter identified five competitive forces that, according to him, shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. According to this model, the objective of corporate strategy should be to manage these competitive forces in a way that improves the position of the organization.

Porter described these five forces as:
• The rivalry among firms in the industry
• The threat of new entrants
• The availability of substitute products
• The bargaining power of suppliers
• The bargaining power of buyers

If the firm has strengths it can leverage the opportunities presented by the external environment. However, if the firm has limitations then it has to face the challenges presented by the external environment! The challenges a firm face are from multiple factors, micro as well as macro.

Firm must develop strategies to overcome weaknesses and challenges and leverage strengths and opportunities. Primarily firm has to develop strengths. A strength is something firm can depend on for future. An opportunity is what opens up for the firm. Weakness is one that when removed improves firms position, and the challenge is negatives the firm will face in future.

Since the Strength and Weaknesses are internal environment of the firm, firm should concentrate on developing a relevant internal environment.

Resource Based View (RBV) starts with the assumption that the desired outcome of managerial effort within the firm is a sustainable competitive advantage (SCA). Achieving a SCA allows the firm to earn economic rents or above average returns. In turn, this focuses attention on how firms achieve and sustain advantages. The resource based view contends that the answer to this question lies in the possession of certain key resources, that is, resources that have characteristics such as value, barriers to duplication and appropriability. A sustainable competitive advantage can be obtained if the firm effectively deploys these resources in its product-markets. Therefore, the RBV emphasizes strategic choice, charging the firm’s management with the important tasks of identifying, developing and deploying key resources to maximize returns .

The resource based approach suggests that firms should position themselves strategically based on their valuable, rare, inimitable and non-substitutable resources and capabilities rather than the products and services derived from those resources and capabilities. In RBV, resources and capabilities are considered as a root, from which the firm derives various products for various markets. Thus, in resource based view, strategy is focused on leveraging resources and capabilities across many markets and products instead of targeting specific products for precise markets. Hence, we can say that RBV is an inward looking or Inside-Outside model .

Internal Analysis

Organizations do not operate in a stable environment. Macro as well as micro environment affect every organization. As discussed earlier, organization’s strengths and weaknesses are internal environment, and the external environment provides opportunities as well as threats. With internal strengths organizations attempt to overcome the weaknesses as well as challenges.

While formulating strategies, organization must address on two fronts, on first front overcome weakness and challenges and on second front leverage strengths and opportunities. Analysing organizations competencies, resources, the internal environment, helps in developing strategies to deal with external conditions.

Competencies	New	Premier plus ten: Build new core competencies to protect and extend current market position	Mega opportunities: Building new core competencies to create and compete in markets of the future
	Existing	Fill in the blanks: Leverage core competencies to improve current market position	White spaces: Redeploying and recombining core competencies to compete in market of the future
		Existing	New
		Market

Source: Core Competence Model, developed by Gary Hamel and C. K. Prahalad

 

 

However, in order to formulate successful strategies to make the most of the opportunities or control the challenges, exploration of the organisation’s capabilities is vital for strategy development which targets at fabricating a good fit between a company’s resource capability and its external environment. Internal analysis helps company understand the firm’s capability which influence the development of fruitful strategies.
Changing environment demands formulating strategies to better fit the environment by developing organizational capabilities. In order to stretch and exploit firm’s capabilities for creating opportunities, it is imperative to understand what the firm’s present capabilities are and what will be needed in future. The above two perspectives together are referred to as the Resource Based View (RBV) of strategy.

Firms gain competitive advantage over competitors more by virtue of its strengths, internal capabilities and process execution than environmental factors.

Types of Resources

Resource based view of the firm identifies three types of resources – assets, capabilities and competencies. RBV suggest that the organizations are collections of tangible and intangible assets combined with capabilities to use those assets. These help organizations develop understanding these three types of resources and help us to know how a firm’s internal strength and weaknesses affect its ability to compete.

Traditionally, resources of the firm are money, material, machine and manpower. With increasing interdependencies among the firms even relationships are a big resource.

Assets refer to the factors of production used by firms in providing its customers with valuable goods and services. These assets can be classified as – tangible assets and intangible assets. The tangible assets are physical means a firm uses to provide value to its customers, for instance firm’s property and equipment, patents, R & D, Distribution network, IT network system are firm’s tangible assets. Whereas, intangible assets are equally valuable for firms but their physical presence cannot be felt or seen. For example, a brand name, knowledgeable workforce, robust organization structure, organizational culture is very important resource for any organization even though it is intangible.

Capabilities

In order to leverage its assets, the organization needs to develop skills, since with similar assets two different firms may add value of different amount for themselves. This difference can only be explained by the differences these organizations carry their capabilities in utilizing the assets. For instance, in a sector like training, in a typical segment one may find institutions more or less with similar resources and infrastructure, however, the quality of their output in terms of transferring skills to participants may be starkly different for different institutions. This is greatly reflected in the type of service organizations that pick them up for employment and the kind of job responsibilities they are offered.

This difference in output can be explained on account of the skills which the institutions carry with themselves. Thus the resources and information plays a major role in determining the quality of output.

Input  Process  Output

Most organization will have same input, however, the process determines the quality of output. Thus the company should develop manpower for better results. The other resources being money, material and machine which are hard factors and easy to copy. This does not mean that there should be no attention to money, material and machine. As will be discussed later for quality output attention has to be payed to money, material and machine as well.
It is also imperative to develop good relationship with suppliers, employees and customers which in turn give feedback needed for improving the output.

In order to improve the capabilities organization has to invest in resources like, properties and equipment, employees and their training to improve skills. Higher capabilities also improve resource utilization of the organization.

	Resource: Capability
	Importance/Level of Impact
Element	High	Moderate	Low
Quality	ü
Quantity		ü
Quick	ü
Resources		ü
Relationships	ü

Competencies

Competency is the ability to perform. An organizations decisive bunch of skills that differentiate itself form competitors are referred to as ‘Distinctive Competencies.’ The distinctive competencies come from the resources, which are available to an organization and how they differentiate themselves as competencies or core competencies.

1) Available Resources: The resources that are essential to the capability of any organization are as follows:

Physical Resources: The fixed assets, may include buildings, machinery or functioning capacity. However, the specific condition and capability of each resource determines their usefulness.

Human Resources: Human resources are considered as ‘the most valuable asset’ of an organization. Knowledge about the market as well as customers and skill of people together prove to be a great asset, business strength.

Financial Resources of an organization may include capital, cash, debtors and creditors and suppliers of money.

Intellectual capital: Include the knowledge that has been converted into patents, brands, business systems and relationships with associates. In today’s knowledge economy intellectual capital is considered as a major asset of many organizations, intellectual properties.

	Same as Competitors or Easy to imitate	Better than Competitors or Difficult to imitate
Resources	Threshold Resources	Unique Resources
Competencies	Threshold Competencies	Core competencies

 

2. Threshold Resources
Threshold resources are those which are easy to imitate as there are no barriers to followership, either because of lack of patentability or entry barriers. Threshold resources are needed to perform in all markets and also to stay in business. Competitors or even new entrants force a company to look for threshold resources. We have seen large number of companies across sectors acquiring threshold resources with the entry of foreign players post liberalization.

3 Unique Resources
Unique resources reinforce organizations competitive advantage. They are difficult to imitate and add more value to product than the competitors. Many a times, scale of operations offer unique resource, as competitors find it difficult to match. In many cases a patent makes it difficult for the competitors to follow innovator, even if the innovation is easy to copy.

4 Core Competencies
Competencies refer to the ability to perform. The variance in performance between organisations in the same market is seldom understood by variances in their resource base, since resources can usually be imitated or traded.
Notable performance is essentially established by the way in which resources are used to create competences in the organisation’s undertakings. An organization needs to accomplish a threshold level of competence in all of the actions and practices.

Core competency is defined as “a harmonized combination of multiple resources and skills that distinguish a firm in the marketplace ” and therefore are the foundation of companies’ competitiveness. A core competency results from a specific set of skills or production techniques that deliver additional value to the customer. They form and withstand ability to meet the critical success factors of particular customer groups better than other provides ways that are difficult to imitate. Again, as put forward by the Resource Based View, a series of guidelines are discussed below, which you can use to assess what constitutes a valuable asset capability or competence.
Scarcity: If any resource is widely available, then it’s not likely to be a source of competitive advantage. This is a very basic test to understand its resource value.

Inimitability: A resource that lacks barrier to followership does not offer any competitive advantage because it will be widely available from a variety of sources. e. g. services / design etc. Inimitability is not sustainable as at some point competition matches or even betters any offering. However, firms should make an effort which may temporarily limit imitation. Physical uniqueness, causal ambiguity or scale deterrence are few ways how organizations attempt doing it.

Durability: Competitive advantage is getting less and less sustainable owing to highly competitive market environments. Resilience in such situations become a more severe test for appreciating resources, capabilities and competencies.

Superiority: Good is not primary and sufficient condition. Firm must be superior than its competitor. Competencies are cherished only if they demonstrate themselves as competitive advantages and this means that they are better to those held by rivals. These opinions lead to influencing how a firm’s internal resources might be linked to creating a competitive advantage and which resources truly fit in so as to yield a competitive advantage.
Investing in resources physical, human and intellectual improves organizations threshold resources as well as threshold competencies. The impact of improve competencies has following impact…

	Resource: Competence
	Importance/Level of Impact
Element	High	Moderate	Low
Quality	ü
Quantity		ü
Quick	ü
Resources		ü
Relationships	ü

The Critical Success Factor (CSF)

Critical success factors are those which impact organization’s success in a competitive environment and therefore the organization needs to improve on them since meagre results may lead to declining performance. Organizations depending on the environment they operate in and their own internal circumstances can recognize pertinent critical success factors. However, pioneering work on strategy suggests a few general sources of critical success factors that have been identified based on empirical research.

They are as follows:

Industry Characteristics: Macro factors affect the sector, where as micro factors affect the company.  Industry specific critical success factors are factors critical for the performance of an industry. For instance, in telecom industry upgradation and network penetration is critical. Similarly, for an automobile industry fuel efficiency, meeting environmental norms is critical.

Competitive Position: Competitive position of the firm with respect to its competitors also determine the critical success factors. Large and dominant players in an industry may set the rules of the game. Their dominance and activities define the critical success factors for new entrants. This is particularly true in case of commodity products or industry which are mature. For instance, free home delivery of consumer durables started by the authorized show rooms soon became a practice and stand-alone retailers selling multiple brands had to offer free home delivery.

General environment observed from any of the dimensions may determine the CSFs. Most simply put in years of drought, availability of water is at premium and having access to assured source of water can become the critical success factor for many industries like tanneries etc. For the same industry considering environmental norms, adhering to anti-pollution standards becomes critical success factor.

Organizational Developments – On many occasions developments within the organizations, force internal considerations to become temporary critical success factors.

Following table analyses the environmental factors and organizations SWOC. Organization needs to identify which resources would help it in overcoming the challenges and which resources organization must acquire to be competitive.

	Positive	Negative
Internal factors	Strengths Technological skills Leading brands Distribution channels Customer loyalty/relationship Production quality Scale Management	Weakness Absence of important skills Weak brands Peer access to distribution Low customer retention Unreliable product/service Sub-scale Management
External factors	Opportunities Changing customer tastes Liberalisation of geographic markets Technological advances Changes in government policies Lower personal taxes Change in population age structure New distribution channel	Challenges Changing customer tastes Closing of geographic markets Technological advances Changes in government policies Tax increases Change in population age structure New distribution channel

 

The purpose of the strategic analysis is to structure relationship between a business and its environment. Failure or success depends on the environment in which the business operates. Strategic choice that the organization makes while responding to the dynamic environment has direct impact on the performance of the business. Thus it is important to understand the various external environmental forces which influence the business outcome. It is the external environment which either offers opportunities or threats to the organization.
The strategic choice thus should aim at leveraging the opportunities and overcoming the threats that incipient from the external factors. At the same time the changes, in the environment affect the attractiveness or risk levels of various investments of the organizations or the investors.

Broad Dimensions of External Environment
The external environment in which the organization operates can be broadly classified as the Macro Environment and the Micro-Environment. The macro environment consists of the economic, political, regulatory (legal), socio-cultural and technological environment. These factors often interact with each other. For instance, changes in the political situation may alter the economic and regulatory policies in a market. If the technological factors are leading to concentration of wealth, regulatory environment may be altered to ensure equitable distribution of wealth. Frequently changing regulatory environment destabilizes business environment leading to frequent changes in strategy. Lack of consistency in business strategies make implementation of strategy difficult and may reduce profitability of the organization, or even sector. Frequent changes in government policies lead to complexities in business environment.

PESTEL Framework

Dynamic external environment also leads to changing consumer preference. Advanced technology renders many existing products obsolete as consumers prefer new products which offer better terminal benefit. The benefits are not necessarily in terms of better features, it could also be because of improved productivity, energy efficiency reduced cost etc. A meaningful analysis of external environment gives decision makers an insight into trends in consumption pattern. Thus it is important for the organizations to carry out the external factor evaluation and look at the organizations resources to overcome the external threats.

Organization in order to achieve long term objective must evaluate external environment on a regular basis for growth opportunities as well as sustainability. Organizations many times have to redefine their vision and mission statements, objectives and strategies to cater to new neds of the customer.
The constituents of the external factors may be listed as below…

Political,
Economic,
Socio-cultural,
Technological,
Legal

Political Factors:

Political factor is one of the most important constituents of the external factors that a firm must evaluate. Evaluation includes the stability of the government. An unstable government is generally indecisive and there are frequent policy changes. Governments have their own political values and beliefs. Government’s political values and beliefs shape the state policies, regulatory environment, taxation policies etc. different governments have different priorities and a change in the government changes its priorities in social sector. As has been pointed out earlier most economic policies are deeply influenced by the political ideology of the government. Though in the recent past we have seen some amount of policy stability post 1991. The liberalization policy has been carried forward by subsequent government despite different ideologies. Pace of liberalization may have been different among the governments but the policy was not rolled back by the central governments.

Stability of the Government
Political values and beliefs shaping policies of the state
Regulations towards trade and global business
Taxation policies
Priorities in social sector

The economic factors:
The economic indicators can be listed as national income, GNP, Personal disposable income, personal consumption patterns. The policy initiatives undertaken by the government get reflected in monetary policy, fiscal policy, labour and employment policy etc. The foreign sector may get reflected through the exchange rates, imports/exports. Industry situation can be analysed through investment in the industry, FDI flows, services, infrastructure. Sectoral growth should be analysed in agriculture, industry. Capital markets can be analysed through equity market, bond market etc. Prices, wages and productivity, inflation, labour productivity are other indicators. Economic factors significantly affect consumption pattern. Economic factors provide insight to the organization on the consumption pattern in the economy. Reduced lending rates may imply multiplier effect to the economy and reduced interest rates may indicate shift to capital markets and mutual funds.

A multiplier is also determined by the consumption and saving patterns in the economy. Thus for the better insight through economic factors, firm must closely watch the impact of Interest rates, inflation rates, unemployment rates and trends in the gross national product, government policies and sectoral growth rates.

In India contribution of service sector to national income is increasing every year. With more number of working mothers the family income too is rising. These socio cultural changes are opening new opportunities as well as creating challenges for the organizations.
GNP trends of the state
Interest rates/savings rate
Money supply
Inflation rate
Unemployment
Disposable income
Business cycles
Trade deficit/surplus
Socio-Cultural Factors

The social factors include demographics forces. The demographic forces include the population size, growth, density of population in various cities, regions and nations, age distribution, ethnic mix, educational levels, house hold patterns and regional characteristics and movements. Government also monitor the demographics for the economic policies. Increasing life expectancy in the country while creating an opportunity also poses a challenge of meeting health related expenses and offering of services. A large working population offers demographic dividend to countries but in time to come it may shift.

Countries develop competitive advantage based on the composition of literates in the country. India achieved a competitive advantage based on its geographical location and English speaking population for BPO. Large number of engineers opened up opportunity for the software companies to set up their operations in India. Labour intensive projects were started in India because of the availability of economical labour.

Another social factor which influences consumption patterns is cultural factor. There are two types of cultures. An inherited culture is the culture which consumer inherits from parents. And the acquired culture is one that consumer acquire while working with the institutions. Culture may be defined as the social attitudes, values, customs, beliefs, rituals and practices in the society. Cultural factors have a very deep impact on consumption.
Consumption of products is influenced by the cultural factors. For instance, food, jeweller, gift items clothes and garments buying is heavily influenced by the cultural factors. KFC has introduced many India specific products so has Pepsi and McDonald. Though the culture does shift, the impact of cultural factors is quite wide.

Culture has the widest and the deepest impact on the buying behaviour. Within the culture there are many sub-cultures which have impact on the consumption pattern of the society. Various socio cultural factors that have impact on the consumption are the population demographics, ethnic composition, aging population, regional variances in population growth, social mobility, lifestyle changes, attitudes to work and leisure, education – spread or erosion of educational standards, health and fitness awareness, multiple income families.

Culture keeps shifting across the world. When conservative societies are accepting the liberal attitude, many liberal societies are getting conservative. For instance, yoga is now being practices in the western countries; and India is adopting to many western cultures. Shifting of the demographics alters the consumption pattern. With a greater number of working mothers’ acceptance to ready to eat or ready cook products is increasing.

Nestle, as a marketer of convenience foods, faced a challenge that few others did. Pointed out Sangeeta Talwar, who was heading marketing department before moving to global headquarters in Switzerland, “The thing you change last is what you eat.” Chiefly a marketer of western products consumed by rich folk in India it was trying to stretch its influence into homes that had neither the income nor the inclination to adopt packaged foods . The company found itself up against a ritualized part of Indian tradition. Nestle’s principal target continued to be the educated urban housewife who didn’t see a convenience product as a compromise on looking after the family, company did not expect her palate to be any more western than the average. Attitudes change slowly.

Thus the socio-cultural factors play a major role in determining company’s strategies. Organizations thus need to customize their products to cater to market demand with due consideration to cultural factors.
Population demographics
Ethnic composition
Aging of population
Regional changes in population growth and decline
Social mobility
Lifestyle changes
Attitudes to work and leisure
Education – spread or erosion of educational standards
Health and fitness awareness
Multiple income families
Technological

Like the social, cultural and demographic factors even technological factors are not controlled by a single organization. Moreover, acceptance to the technology also depends on the economic conditions of the market. Advances in technology creates opportunity for the developer while it may pose threat to other organizations in the given industry. Thus, while formulating strategies lot of emphasis is put on the technological factors. Advances in technology tend to significantly influence the existing products, services, suppliers, distributors, competitors, customer preference, manufacturing processes, marketing practices and competitive position. While opening up new markets, technological advances can render existing products and services obsolete. While technological changes can eliminate or reduce cost barriers between businesses, lead to shorter production runs and shortage of technical skills.

Technological factors also help organizations in differentiating itself from competitors as well. For instance, in a photocopier market, Modi Xerox had wrapped up most of the corporate India’s ‘xeroxing’ work for itself. Ricoh was No. 2 in a marked shared by Bee Electronics Machines, Kilburn Reprographics and HCL Toshiba. Though the market was created by Xerox, Canon had cornered 18 per cent share of the market.

Canon’s core competency was in imaging technology . In its view, photocopying was mainly about imaging, not documentation, and it had built itself an enviable reputation for rigorous-use copiers that keep the nth reproduction on par with the first. It was the result of its patented ‘Toner Projection Development System’ and its ‘Organic Photo Conductor Technology’, which combined to deliver cleaner and sharper copies that what Xerox’s selenium-drum copiers could manage.

Advancing technologies can also alter the way companies do their business. Mobile penetration, very economical data packs and internet penetration supported by availability of sophisticated low priced handsets have revolutionized many sectors. For instance, banking. Today major banking transactions are done through handset. Reduced data tariff by telecoms, owing to high level of competition has complemented the digital transaction. Entry of Paytm, google pay and others have also helped the governments digital economy initiatives. The technological advances thus affect many sectors. It creates new opportunities and poses challenges for existing businesses.

Advancing technological factor affect business environment. Organizations need to accept the challenge of changing environment to cater to existing as well as emerging needs of the customers.
Biotechnology
Process innovation
Digital revolution
Government spending on research
Government and industry focus on technological effort
New discoveries/development
Speed of technology transfer
Rates of obsolescence
Legal

During the licence raj the legal environment included licensing policies, quota restrictions, import duties, Forex regulations, restrictions on FDI flows, controls on distribution and pricing of commodities together made the business environment difficult and complicated. Since liberalization policy of 1991 with economic reforms things have changed and legal formalities have eased. However, with globalization and the integration of economies across the world, due consideration has to be given to the general environment also apart from the competition rules, trade mark rights and patents, WTO rules and implications, pricing strategies, product quality laws and a large number of other legal issues in respective countries.

Monopolies legislation/Anti-trust regulation
Employment law
Health and safety
Product safety

Environment:
Deteriorating environmental balance has led to governments across the world come up with stringent environmental laws. Automobile industry is one of the largest affected sector because of stringent environmental laws. One of the factor driving recession in India is the poor performance of the automobile industry in the country owing to BSIV norms. The stricter emission norms affect most of the production units. Regulations regarding ZLD (zero liquid discharge) are altering the production processes across sectors. Apart from the government and legislations, other stakeholders are also keenly observing the production processes and the final output of the businesses. Production processes are monitored for the use of resources whether they are biodegradable or not, the emission from the industry, if it is polluting air, excessive chemical affluent drained out in water and its impact on water and nearby areas, usage of bio non-degradable resources affecting the bio-chain adversely and whether the employees are exposed to hazardous radiations bringing their life in danger. Thus the implications of the environmental factors are far reaching for the business raging from the kind of business, the production process and the product itself.

The general environment:
While formulating organization’s strategy, decision makers need to analyse the probable impact the changes may bring in their industry. The impacts are never identical for all the industries. For instance, socio cultural changes in India will have different consequences for businesses in media – entertainment and automobile. Media and entertainment industry will have to adapt the new emerging culture, whereas the automobile sector may not see similar impact on sales or may even see a drop in sales as the millennials are not very keen on asset acquisitions. These observations have to be integrated in the strategy. In response to these assessments of differential impacts, decision maker will be able to take advantages of the opportunities or guard themselves of the threats.

As has been pointed out earlier company can employ two approaches in responding to the changes. The company Approaches can be
Reactive/Follower
Or
Proactive/Leader
Depending upon the Future Market Conditions. If the market conditions are gradual, evolutionary change the company’s Reactive/Follower approach could be revising strategy in time to catch the waves of change. But if the changes are rapid revolutionary change then the reactive/follower strategy can be to keep from being swamped by the waves of change. Company can shift to proactive leader in gradual evolutionary change by anticipating change and initiating strategic actions to ride the crest of change. If the changes are rapid revolutionary and the organization contemplates going for proactive leader strategy it may do so by aggressively altering strategy to make waves and drive change.

The decision makers thus should make strategic initiatives by differentiating the future market conditions as gradual evolutionary or rapid revolutionary.

The competitive landscape in the market can undergo changes as a result of dynamic technological changes. The fragmented industries may start consolidating as a result of technological changes. As in case of telecom and banking sector in India.

Environmental Scanning
These macro factors, PESTEL framework are very difficult to understand because of their interaction with each other. Because they interact with each other they present a very complex and uncertain picture of future.
For a long term strategy development, it is important to identify key factors influencing the success of the strategies. It is important to identify factors driving the rapid and revolutionary changes that may swamp the organization. The objective of environmental scanning is to promote the consciousness of decision makers about prospective advances that could have an impact on industry conditions and bring in new opportunities or challenges.
Environmental scanning involves systematic monitoring and analysis of current trends and factors leading to current trends. What new trends are likely to emerge from the past events and current trends. It also involves identifying key drivers of change and grouping of environmental influences.

In order to address the high level of ambiguity about the future environment, organizations need to build scenario of how the business environment of the organization might be by grouping of key environmental influences and agents driving the change. For instance, in sectors like power, infrastructure, defence equipment etc. the need is not to address immediate environment but the scenario 10-15 years down the line with respect to consumption, manufacturing processes and availability of substitutes would be crucial. It is very difficult to predict the business environment for such a long term. Many new scenarios may come up over such a long period.

Michael Porter developed a framework to evaluate the competitive environment. The framework helps in examining the competitive environment.
The competitive environment over such a long period is shaped not only by the immediate rivals but other forces as well. These forces are…
1) The threat of entrants
2) The bargaining power of suppliers
3) The bargaining power of customers
4) Availability of substitute products
5) The rivalry among firms in the industry
As in case of other environmental forces, these forces are also integrated with each other. The intensity from one direction can prompt changes in another which is capable of shifting the sources of competition.

The Threat of New Entrant
A new entrant in a market can be a threat to existing players. The established player may face challenges of retaining market share, the new player adds to the production capacity of the industry, the new player may force existing players to alter their promotional strategies, investment strategy.
Though established players may not always immediately face threat, but may resort to developing entry barriers for new entrant. The purpose of the barriers is to discourage new entrant. Established players can create entry barriers by employing multiple strategies. The strategies that the organization needs to employ need resources. We discuss the strategies and the resources.

Economies of scale
Organizations with large production facilities benefit from economies of scale. Organization benefits from lower cost of production, if it decides to pass the benefit to customers then the organization enjoys price competitiveness. Normally, a new firm may not get benefited by economies of scale, as it starts on a smaller scale. The economies of scale are not restricted only to lower production cost but extends right from procurement of raw material, R & D, distribution, advertising, marketing, finance, customer service, financing etc.
Economies of scale are not restricted to a specific sector. For example, Coke & Pepsi enjoy economies of scale. With dominant market share, both companies enjoy economies of scale on all fronts like, production, distribution, promotion. A new entrant will always find it difficult even at regional level to enter the market. Similarly, consumer durable firms like LG & Samsung enjoy similar economies of scale and thus benefit in procurement, production, distribution and promotion. New entrants find it difficult to match price competitiveness of LG and Samsung in mass markets.

Resources required to develop economies of scale need production capabilities which may be capital intensive, organization also needs market to sell the products. This may warrant marketing efforts for developing new markets, distribution network which also needs investment and managerial competencies.

Type of Resource	Description for Economies of Scale
Physical Resources:	The fixed assets, buildings, machinery or functioning capacity. However, the specific condition and capability of each resource determines their usefulness. Technological skills.
Human Resources:	Knowledge about the market as well as customers and skill of people to market output of the organization.
Financial Resources	Capital, cash, debtors and creditors and suppliers of money.
Intellectual capital:	Patents, brands, business systems and relationships with associates, to leverage large production.
Threshold Resources	Needed to perform in all markets and also stay in business.
Unique Resources	Competitive advantage Difficult to imitate and add more value to product than the competitors. Scale of operations offer unique resource Patent
Core Competencies	Specific set of skills or production techniques that deliver additional value to the customer. Ability to meet the critical success factors of particular customer groups better than other provides ways that are difficult to imitate. Management.
Competitive Position:	Competitive position of the firm with respect to its competitors. Define the critical success factors for new entrants. Brand Image Distribution channels Customer loyalty/relationship Production quality

The Experience Curve

The experience curve theory suggests that as the firm’s production increases it gets more efficient resulting in cost benefits. The increased efficiency is result of experience, which enables organization better ways of doing things. If the industry operates in environment where experience curve delivers cost benefit the new entrant finds it difficult to match the competitive advantage gained by established players. For sector where the technology is in the embryonic stage experience curve is irrelevant.

Type of Resource	Description for Experience Curve
Physical Resources:	The fixed assets, buildings, machinery or functioning capacity. However, the specific condition and capability of each resource determines their usefulness. Technological skills.
Human Resources:	Knowledge of using the physical resources more productively. Knowledge about the market as well as customers and skill of people.
Unique Resources	Experienced workforce is a unique resource and offers competitive advantage. Difficult to imitate and add more value to product than the competitors. Scale of operations offer unique resource Patent
Core Competencies	Specific set of skills or production techniques that deliver additional value to the customer. Ability to meet the critical success factors of particular customer groups better than other provides ways that are difficult to imitate. Management.
Competitive Position:	Experience of dealing with customer offers a competitive position to the firm with respect to its competitors. Define the critical success factors for new entrants. Brand Image Distribution channels Customer loyalty/relationship Production quality

Cost advantage independent of scale

Established as well as new entrant can have a cost advantage independent of scale. It can be through the patent or a proprietary product knowledge. Sometimes the established players benefit from geographical location, a plant location closer to raw material or market, and infrastructure built when the interest rates were low or the technology was available at lower prices.

Type of Resource	Resource independent of scale
Intellectual capital:	Patents, brands, business systems and relationships with associates.
Unique Resources	Competitive advantage Difficult to imitate and add more value to product than the competitors. Scale of operations offer unique resource Patent
Core Competencies	Specific set of skills or production techniques that deliver additional value to the customer. Ability to meet the critical success factors of particular customer groups better than other provides ways that are difficult to imitate. Management.
Competitive Position:	Access to raw material Competitive position of the firm with respect to its competitors. Define the critical success factors for new entrants. Brand Image Distribution channels Customer loyalty/relationship Production quality

 

 

Perceived quality of the product
Established firms often have a brand which is well established in the market for its perceived quality. For established firms experience curve also enriches knowledge about customer as well as market. A new entrant faces challenges related to product quality as well knowledge about the market and customers.

Capital requirements
Capital intensive businesses create a barrier for new entrant by virtue of heavy investment thereby restricting new entrants.
Switching costs
Switching costs refer to the expenses (both financial as well as psychological) which a customer incurs in switching from one seller to another. If the switching costs are high new entrant finds it difficult to establish. With number portability in the telecom sector the switching cost from one service provider to another dropped significantly. Earlier the user had to inform all contacts about the new number when switched to another service provider. The financial costs were relatively low but the psychological cost, that the contacts will edit the number were very high.

Access to Distribution Channel
A favourable access to distribution channels provides strong competitive position. Particularly in FMCG sector distribution is a very important activity. The established players are found to have a strong and favourable distribution channels. Companies like ITC, HUL have deep market penetration through strong distribution channels.

Anticipated growth
When the market is growing it can accommodate new entrant and even the existing players are unlikely to respond to new entrant. However, when the market growth is slow, new entrant finds the market less attractive.
The other entry barriers are in the form of regulatory policies of the government, tariffs and international trade restrictions etc.

The bargaining power of suppliers
Business organizations have always had dependency on the suppliers. The interdependency of the firms has increased ever since the concept of core competency has found acceptance because of its obvious results on bottom line. A supplier decision on quality of goods and services, prices, delivery terms and conditions, payment terms & conditions have a significant impact on the profit trends of an industry. However, supplier’s decision making depends on the bargaining power of the customer.

Supplier’s bargaining power typically depends on following factors….
It is not obliged to contend with other substitute products for sales in the industry.
A supplier is powerful if it is not obliged to contend with other substitute products for sales in the industry. If the supplier does not face significant competition in the industry, it has no reason to have competitive pricing and thus is powerful.

The industry is not an important customer of the supplier group
A supplier is powerful if the customer is not an important customer for them. A customer may not be important to the supplier for variety of reasons such as, the purchase quantity or profitability in that buyer group is low, or even the potential growth of the customer is low, then the suppliers have to reason to cut prices and retains its higher bargaining power.

The supplier group is an important input to the buyer’s business
The supplier is powerful if the product is an important input to the buyer’s business. If the quality of the product depends on the performance of supplier’s product, then the bargaining power of the supplier is higher. For instance, the performance of electronic products heavily depends on the microprocessors, the bargaining power of microprocessor manufacturers is high.

The supplier group’s products are differentiated or it has built up switching costs
Differentiated products and products which have built switching costs always enjoys higher bargaining power. User friendliness, better quality or brand image allows suppliers to have better bargaining power. Similarly, if the change in supplier leads to higher switching costs for the buyers then the supplier has better bargaining power.
The supplier group poses a credible threat of forward integration

A situation in which the supplier can move up the value chain, opportunity to go for forward integration, suppliers have higher bargaining power. Opportunity to move forward also depends on multiple factors like entry barriers, profitability, level competition etc.

Threat of backward integration
If the buyers can easily opt for backward integration, then the supplier positions are not strong. If the industry is dominated by a few large organizations, then these companies exercise a higher control over suppliers.
Bargaining power of customers

If the customers bargaining power is higher then, they force the suppliers to reduce price or demand better quality for the same price and also demand more favourable business terms. The bargaining power of customers is linked to number of factors like…

If the products offered by seller are not differentiated, then the customers enjoy higher bargaining power. For instance, in a perfectly competitive market situation with large number of suppliers, prices are controlled automatically.

Price sensitivity
Buying behaviour of customers vary with respect to their sensitivity to prices. Buyer’s sensitivity depends on the importance of the product to the customer. Depending on how important the item is, customer’s usage and proportion he may be spending on the concerned item. A group of customers with high price sensitivity tend to bargain higher. However, if the products are differentiated then the bargaining power of the customer reduces. For instance, people buying baby care products tend to have less bargaining power, as the products are considered to be very important and differentiated.

Information about the cost structure of suppliers
Fine information about the cost structure of products being purchased increases the bargaining power. Informed buyers tend to bargain for proportionate reduction in the price from supplier the moment they know the decline in supplier’s cost. With integrated economies, a price reduction can come from any corner of the world. The cost reduction may come as result of production process, use of economical substitute, economies of scale or even general decline in prices.

Volume of purchase and concentration in Buyer’s Industry
The large buyers and relatively smaller suppliers means the buyers have more bargaining power. If the purchase quantity is high buyers tend to have higher bargaining power. If the buyer has a large subscriber base for its products, then they get better prices from supplier because of the bulk purchases. The large buyers tend to bargain not only on price but also on other terms like supply schedule, payments terms, credit period etc.

Threat of backward integration by buyers
Suppliers tend to attempt forward integration and buyers tend to go for backward integration. Both backward as well as forward integrations are the forms of vertical integration indicating successive stages of production. Forward integration refers to moving closer to customer, whereas back integration refers to moving closer to supplier’s business. It is also termed as dependency reduction strategy. For example, a manufacturer of air coolers starts manufacturing fans which till date they were buying from suppliers. For both the integration strategies the key aspect to pay attention is you cannot run two businesses at the margin of one. Both the businesses have to be profit centres for the organization. But if there is price increase by suppliers then the risk of buyers going for backward integration is very high.

Threat of Substitutes
Many a times, the competition is not from the direct rival but outside industry products which may be close substitutes. Technological advances have been creating many substitutes in large number of industries. Importing benefits from other product categories also creates substitutes. For instance, when Godrej added a full length mirror to its steel cupboard, it started competing with the dressing table for space in middle class families. A handset today has imported benefits from many product categories, particularly the smartphones. An app is a substitute for many physical products in the handset. An app of a calculator, alarm clock and many more.
However, there are broadly three factors which determine the competitive pressure from substitutes, these are…
Whether the substitutes offer the same functional benefit with respect to quality and performance

The price is attractive and lastly,
What are the possible switching costs.
Rivalry among the firms
In a perfectly competitive market the rivalry among the firms is minimum, as there are large number of buyers and sellers and the products are undifferentiated. However, in case of oligopoly or monopolistic competition, where there are a few players and the market conditions allow them to differentiate their offerings, competition turns into rivalry. The degree of rivalry depends on …

The stability of environment
Rivalry among the firms in an industry is a result of unstable environment. There are several factors that drive the unstable environment like technological innovation, frequent changes in government regulations, customer preferences, and their need and wants. The entry and exit barriers in the industry too change the rules of the game frequently. Currently the frequent changes in the regulations with respect to the ecommerce business resulted in intense rivalry among firms like Flipkart and Amazon. It also led to consolidation in the industry. Similarly, in banking sector, frequent technological advances and regulatory changes led to consolidation in the industry. With penetration of internet in India and the growth of the smartphone changed the way banking is done. With more online transactions the banking sector has experienced unstable environment and changing customer preference, resulting in rivalry among players.

Anticipated life of competitive advantage
In certain industries innovations have a very short life span, for instance, consumer electronics the technology life cycles are short, the innovations do last longer. This has negative impact on the stability of the competitive environment leading to rivalry. The shorter technologies and lack of patent and absence of switching costs are some of the factors leading to rivalry among the firms.

Slow growth in the industry coupled with large number of equally balanced competitors are also responsible for the rivalry. The entry costs, in terms of fixed costs and the capacity augmentation in large capacity are the other factors leading to rivalry among firms. Since the market growth is slow all the firms chase same target market further intensifying the rivalry.
The competitive strategies employed by one firm puts competitive pressure on the rivals and thus intensifying the rivalry. One of the missing links in the model is complementary products .

Process for Analysing the External environment
The process for analysing the external environment. This consists of three steps which are as follows:
Step 1: Identifying the firms – on industry as a whole or there may be sub focus groups called strategic groups.
Step 2: Intelligence gathering or environmental scanning on the general environment of the industry or strategic group.
Step 3: Organizational Environment Information-Scenario planning is a process suitable for the purpose and form the best inputs for the strategy formulation process.
The information can be gathered from the following sources:
i) Internal
ii) Newspaper/Magazine/Net
iii) Government
iv) Survey Secondary Database
v) Customer and Suppliers
vi) Competition
Using these sources, the environmental analysis for any organization can be done.

Thus the major resources the organization should focus on acquiring and consolidating in order to improve the 5 elements. As pointed out earlier, a few resources improve better utilization of other resources as well.

Type of Resource	Description
Physical Resources:	The fixed assets, buildings, machinery or functioning capacity. However, the specific condition and capability of each resource determines their usefulness. Technological skills.
Human Resources:	Knowledge about the market as well as customers and skill of people.
Financial Resources	Capital, cash, debtors and creditors and suppliers of money.
Intellectual capital:	Patents, brands, business systems and relationships with associates.
Threshold Resources	Needed to perform in all markets and also stay in business.
Unique Resources	Competitive advantage Difficult to imitate and add more value to product than the competitors. Scale of operations offer unique resource Patent
Core Competencies	Specific set of skills or production techniques that deliver additional value to the customer. Ability to meet the critical success factors of particular customer groups better than other provides ways that are difficult to imitate. Management.
Competitive Position:	Competitive position of the firm with respect to its competitors. Define the critical success factors for new entrants. Brand Image Distribution channels Customer loyalty/relationship Production quality

Every resource has a different impact on the 5 elements. The cumulative impact of resources on the 5 elements can be summarized as follows…

	Resource: Cumulative
	Importance/Level of Impact
Element	High	Moderate	Low
Quality	ü
Quantity	ü
Quick	ü
Resources		ü
Relationships	ü

Reference:

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Porter, M. (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press, New York.
Fahy, J. and Smithee, A. (1999), “Strategic Marketing and the Resource Based View of the Firm”, Academy of Marketing Science Review, Vol. 10, 1999.
Mohiuddin Asad, Five Forces Vs Resource based view – A comparison,: http://ssrn.com/abstract=1986725
Schilling, M. A. (2013). Strategic management of technological innovation, p.117 International Edition, McGraw-Hill Education.
Shirali, Aresh and Khandekar, Sreekant, The growth imperative, A&M 30 June 1996
Chakraborty, Alokananda; Cloning differently, A&M, 31 July 1999
Source: Adapted from Derek F. Abell, “Competing Today While Preparing for Tomorrow,” Sloan Management Review 40, No. 3 (Spring 1999), p. 75.
SEPTEMBER 2014, McKinsey Quarterly, What strategists need: A meeting of the minds