Business Policy and Strategic Analysis Unit 3

SWOT ANALYSIS

Introduction:

SWOT analysis is a very popular strategic planning technique which evolved during 1960’s
at Stanford Research institute. It is having application in many areas including management.
Organizations perform SWOT analysis to understand their internal and external
environments. Acronym of SWOT is strengths, weaknesses, opportunities and threats. It is
also known as WOTS-UP or TOWS analysis. Through this analysis the strengths and
weaknesses existing within an organization can be matched with the opportunities and threats
operating in the environment so that an effective strategy can be formulated. An effective
organizational strategy, therefore, is one that capitalizes on the opportunities through the use
of strengths and neutralizes the threats by minimizing the impact of weaknesses, to achieve
predetermined objectives.

Steps in SWOT analysis:-

A simple application of the SWOT analysis technique involves four steps. They are

1. Setting the objectives of the organization or its unit.

2. Identify its strengths, weaknesses, opportunities and threats.
3. Asking four questions.
a) How do we maximize our strengths?
b) How do we minimize our weaknesses?
c) How do we capitalize on the opportunities in our external environment?
d) How do we protect ourselves from threats in our external environment?
4. Recommending Strategies that will optimize the answers from the four questions.

The SWOT analysis is usually done with the help of a four cell matrix, each cell of the matrix
representing the strengths, weaknesses, opportunities and threats. The analysis for preparing
SWOT matrix could be done by a group of managers in a workshop session. The session
could use the brainstorming technique for generating ideas about the SWOT factors. A
typical SWOT analysis matrix for a imaginary organization is shown in the below matrix.

A typical SWOT matrix

STRENGTHS WEAKNESSES
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 Favourable Location  Uncertain cash flow

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 Excellent distribution network  Weak management information system

 Established R&D centre  Absence of strong USP for major product
 Good management reputation lines
 ISO 9000 quality certification  Low worker commitment

OPPORTUNITIES THREATS
 Favourable industry trends  Unfavourable political environment
 Low technology options available  Obstacles in licensing new business
 Possibility of niche target market  Uncertain competitor intentions
 Availability of reliable business partner  Lack of sustainable financial backing

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sBenefits of SWOT analysis:

1. Simple to use.
2. Low cost.
3. Flexible ad can be adapted to varying situations.
4. Leads to clarification of issues.
5. Development of goal oriented alternatives.
6. Useful as a starting point for strategic analysis.

Pitfalls of SWOT analysis:

1. Simplicity of use may turn to be simplistic by being unconcerned about the reality that
may be more complex than what is represented in SWOT matrices.
2. May result in just compiling lists rather than think about what is really important for
achieving objectives.
3. Usually reflects an evaluator’s position and view point that can be misinterpreted to
justify their previously decided course of action, rather than be used as a means to
open new possibilities.
4. Chances exist where strengths may be confused with the opportunities or weaknesses
with threats.
5. May encourage organization to take lazy course of action of looking for strengths that
match opportunities rather than developing new strengths that could match emerging
opportunities.
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COMPETITOR ANALYSIS

Introduction:

It is carried out by firms, competing in an industry, with just a few firms possessing relatively
equal capabilities. Competitor analysis tries to help firm by providing information about four
issues. i.e.

 What drives the competitor? (Future objectives)

 What the competitor is doing and can do? (Current strategy)
 What the competitor believes about itself and the industry? (Assumption)
 What the competitor’s capabilities are? (Capabilities)

Information about these four issues helps the firm prepare an anticipated response profile for
each competitor. This information obtained through competitor analysis often helps affirm,
understand, interpret, and predict its competitor’s action and initiatives.

How this analysis will be conducted and its various components can be seen in the below
diagram.

Components in Competitor analysis:

Future objectives
 How do our goals look when compared with our
competitor’s goals?
 What is the attitude towards risk?
 Where will emphasis be placed in the future?

Response
Current Strategy
 What will our
 How are our strategies with respect to our
competitor do in
competitor’s strategy?
future?
 How are we currently competing?
 Where do we hold an
 Does this strategy support changes in the
advantage over or
competitive structure?
competitors?
 How will this change
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our relationship with

Assumptions
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our competitors?
 What assumptions do our competitors hold about
the industry and themselves?
 Do we assume the future will be unstable?
 Are we operating under status quo?

Capabilities
 What is our competitor’s strengths and weakness?
 What are our strengths and weaknesses?
 How do we rate compare to our competitors?

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INDUSTRY ANALYSIS

Introduction:

Industry are open systems, a number of environmental factors influence them. It is up to

mangers to ensure that these influences are harnessed in a positive way, leading to
organizational success. The chief problem here is that given that vast number and range of
influences, how manger can monitor, analyze, and respond to environmental conditions. One
useful way is to focus on the most important ones impacting the crucial constituencies of an
industry. i.e. Suppliers, Competitors and Buyers. The logic is quite simple. For the firm to
make profit, it must create value for the customers or buyers. Hence, they need to understand
its customers. Second, while creating value, the firm has to obtain goods and services from
supplier. So, it must value its suppliers and form enduring business relationship with them.
Third, while creating value for its buyers, the firm must closely look at the rivals who are
there in the arena competing for the same ‘space’. Hence, the firm must understand
competition. Thus, buyers, suppliers and competitors form the firm’s industry environment.
Industry analysis helps a firm to find answers to two questions basically from its industrial
environment. They are
 What characteristics of the industry are important? And
 How can a manger enhance performance in those given characteristics?
An answer to the first quest traces industry characteristics that affect incumbent firms and
contribute to average profitability. Answer to second question can be obtained when
managers are able to pursue a strategy that exploits opportunities that industry characteristics
pose and reduce the negative impacts; the firm performs better than its rivals in the industry

Meaning:

Industry analysis means analyzing the profit potential and attractiveness of a particular
industry.

Important characteristics that could impact Firm’s Performance:

1. The number of firms in the industry.

2. The level and pattern of promotional expenditures.
3. The rate and nature of technological competition.
4. The relative size of firms.
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5. Consumer preferences for the product and for related products.

6. The rate of demand growth.
7. The extent of product differentiation.
8. The price behavior of the leading firms.
9. The minimum efficient scale of production.
10. Buyers switching costs.
11. Demand side economies of scale.
12. Specificity of plant and equipment to industry.

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Steps in framework of Industry Analysis:

There are seven steps in Industrial analysis framework. They are

1. Basic features of the Industry:

This step provides a brief overview of the current status of the industry. In this
category factors such current size of the industry, product offerings, their relative
volumes, and the performance of the industry in recent time are included.
2. Industry Environment:
The second step in industry analysis highlights the industry environment in which the
firm in question operates. According to Michael Porter, industries may be classified
into five categories based on their environment.
a) Fragmented Industries: Where companies face many opportunities for
differentiation but each opportunity is small. E.g.: Restaurants.
b) Emerging Industries: Those in the introductory and growth phases of their
life cycle. E.g.: Formula 1
c) Mature Industries: Those in mature and saturation phases of their life. E.g.:
Telecommunications.
d) Declining Industries: Where the transition from maturity and saturation to
decline is happening as a result of technological substitution. E.g: In the case
of type writer by computers.
e) Global industries: These are with manufacturing bases and marketing
operations in several nations.

Industrial environment can be understood easily by categorize an industry into any

one of the above said category

3. Industry Structure:
Industry structure deals with several structural features such as total market size,
number of players, relative shares of the players, nature of competition, barriers to the
industry, cost structure, strategies pursued by each player and entry barriers etc.
4. Industry attractiveness:
Industry attractiveness is dependent on the following factors. They are Profit
potential, Growth prospects, Future trends in the industry, Forces impacting
competition within the industry and Barriers in the industry.
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5. Industry Performance:
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This requires an examination of data relating to – Production, sales, Profitability and

Technological advancements etc.
6. Industry practices:
How the players operate in order to strengthen their position? What practices do they
adopt to increase their reach? In short, this step deals with issues relating to – Product
policy, Pricing strategies, Promotion policy, Distribution policy, R&D efforts, and
Competitive Policy.

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7. Future Scenario:
The future Scenario of an industry may be examined keeping the following things in
mind – Changes in consumer preferences, Product innovation, Entry and Exit of
firms, Rate of growth, Changes in regulatory framework, and The product life cycle
of the industry etc.

Benefits of Industry analysis:

The basic purpose of industry analysis is to highlight the structural realities of a particular
industry and the extent of competition within that industry. So, Industry analysis helps firms
in two ways.

1. Industry Attractiveness:
Industry analysis helps to find out
a. The growth potential of industry.
b. The profitability of the industry.
c. The relative abilities of players in that industry.
Where the growth prospects are good and profit potential is great, the firm can
safely conclude that the field is attractive and offers enough room for others to enter
and exploit the field.
2. Competitive Position:
Where does the firm stand in comparison to others in a particular industry. Finding
answers to such a question is important for various reasons. First, it helps the firm to
find its own advantageous/ disadvantageous places. Second, it enables the firm to
know whether it is able to deliver value for money when compared to others in the
industry. Third, it can think of effecting improvements in its product and services
offerings in an attempt to defend and improve its standing in the market place.
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Porters five force model

Introduction:

An industry id defined as a group of companies offering products or services that are close
substitutes of each other. Close substitutes are those products or services that satisfy the same
basic customer needs. Michael E Porter has made immense contribution in the development
of the ideas of industry and competitor’s analysis and their relevance to the formulation of
competitive strategies. He advocates that a structural analysis of industries be made so that a
firm is in a better position to identify its strengths and weaknesses. A model has been
proposed consisting of five competitive forces. They are

1. Threat of new entrant.

2. Rivalry among competitors
3. Bargaining power of suppliers
4. bargaining power of buyers and
5. Threat of substitute products.

Forces driving industry competition:

1. New Entrant

2. Suppliers 5. Industry Competitors 3. Buyers

4. Substitutes
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1. Threat of new entrant:

Any industry that is perceived as being profitable tends to attract new entrants. These
new entrants are firms that are interested in investing in the industry to share the
growth prospects. Such new entrants augment the existing production capacity and
often possess a desire to make large investments and secure substantial market share.
The existing firms have either to share a growing market place with large number of
competitors or part with some of their own market share to the new entrants. Either

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way, new entrant may cause comparatively lesser sales volume and revenue and lower
the returns for all the firms in the industry.

The chance that new entrant will enter into an industry depends on two factors

I. The entry barriers to an industry

II. Expected retaliation from existing firms.

i. The entry barriers to an industry

Of these two, entry barriers are significant de motivators for new entrants. The
concept of entry barriers implies that there are substantial costs involved in entering
into a new industry. The higher the entry barriers in an industry, the less likely are the
new entrants to enter that industry. So, higher entry barriers serve to keep out
potential entrants into industry.

The entry barriers may arise as a consequence of several factors such as those given
below.

1. Economies of scale:
Economies of scale in production and sale of products leading to lower cost
for existing firm may act as entry barrier for new entrant.
2. Capital requirement:
Capital requirement being very high may prevent new entrants from making
investment.
3. Switching costs:
Switching costs from the existing products or services to a new one may
discourage customers from making new commitments owing to the cost
incurred in buying new ancillary equipment, retraining employees or
establishing a new network of relationships.
4. Product differentiation:
Product differentiation by existing firm based on perceived distinctiveness by
the customers based on effective advertising, reputation as a service provider
or some such other factor may act as a barrier for new entrant.
5. Access to distribution channels:
Access to distribution channels can be monopolized by the existing firms on
the basis of their long term relationship with the distributor. It acts as a barrier
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for new entrant to enter that industry.

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6. Cost disadvantage independent of scale:

Cost disadvantages independent of scale may rise from proprietary products,
technology, and exclusive access to raw materials, favorable location and
benefit of governmental subsidies
7. Government policies:
Government policies through licensing and other means can prevent the entry
of new firm to an industry.

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ii. Expected retaliation from existing firms.

Besides the entry barriers, the expected retaliation to the new entrant from the existing
firm may be potential threat to entry. i.e. An existing firm with substantial resources
may attempt to alter the basis of competition so that the new entrant is discouraged
from making a attack.

Despite the formidable hurdles posed by existing firms, do enter industries if they find
them to be promising. The popular strategy for doing so is finding market niche not
served by existing firms and to gradually build up a presence in the industry.

2. Bargaining power of suppliers:

Suppliers have a level of bargaining power. The bargaining power of suppliers
constitutes their ability, individually or collectively, to force an increase in price of
the product or service or make the buyer accept a lower quality of product or level of
service. A high supplier bargaining power constitutes a positive feature for the
existing firms or new entrants of an industry. A low supplier bargaining power
prevents a firm from passing on its cost increases to the buyers or to make the buyers
accept a lower quality of product and services at a higher price.

The bargaining power of suppliers is high under these conditions

 When the suppliers are few and the buyers are many.
 When the products and services are unique and are not commonly
available.
 When the substitutes of the products or services supplied are not freely
available.
 When the switching costs of a supplier from one buyer to the other is
low.
 When the supplier is not critically dependent on the products or
services supplied.
 When the buyers buy in small quantities and, therefore, are not
important to the supplier.
 When the supplier have the ability to integrate forward and use their
own supplies for production of the end product or service.

3. Bargaining power of Buyers:

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The bargaining power of buyers constitute the ability of the buyers, individually or
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collectively, to force a reduction in price of products or services, demand a higher

quality or better service or to seek more value for their purchases in any way. A high
buyer bargaining power constitutes negative features for existing firms or new
entrants of an industry. A low bargaining power enables a firm to pass on the cost
escalations to buyers or to make the buyers accept a lower quality of product and
service at a higher price.

The bargaining power of buyers is high under these conditions:

 When the buyers are few in number.

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 When the few buyer place large orders individually.

 When alternative suppliers are present, willing to supply at a lower
price or on favorable selling conditions.
 When the switching costs of buyers from one supplier to another is
low.
 When buyer itself charges a low price for its products and is sensitive
to price increase.
 When the purchased product constitutes a high percentage of buyers
costs, making it look around for lower priced supplies.
 When the buyer itself has the ability to integrate backwards and
create its own captive supply source.

4. Threat of substitute product:

Substitute products or services are those that apparently are different, but satisfy the
same set of customer needs. The availability of close substitutes continues a negative
competitive force in an industry. In other words, those industries which have no close
substitutes are more attractive than those that have one or more of such substitutes.
For industries where close substitutes are available, the level of price of products
chargeable is restricted by the price of substitute available. Thus, firms have to
formulate their business strategies keeping in view the intensity of competitive forces
arising out of the presence or absence of the threat of substitute.

5. Rivalry among competitors:

Competition is a game in which normally, one player loses at the expense of the other.
A move on the part of a player may cause other players to countermoves or initiate
efforts to protect themselves from the danger posed by the initial move. In this
manner, firms within an industry are mutually dependent. When the rivalry is weak,
there is likely to be lesser competition; when such rivalry is high, the level of
competition is higher.

The dimensions of rivalry among competitors are several. Some of the major ones are
described below.

a) Competitive structure:
Competitive structure refers to the number of competitors, their size and their
diversity. Different types of competitive structures have different implications
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for the existing firms and for the new entrants. Structures could either be
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fragmented or consolidated. A fragmented structure means that there are a

large number of small or medium sized companies, none of them in a position
to dominate the industry. This structure is characterized by low entry barriers
and less or no differentiation, leading to products becoming commodities.
Competition is intense and the industry faces booms and busts, leading to
frequent changes in structure. A consolidated structure consists of a few large
companies or just one large firm. Such a structure has a closely knit group of
companies whose actions and reactions are matched. The actions of one lead
to reactions from others. Competitive actions of the competitors are under

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close watch by the others as they effect the distribution of market share. The
intensity of competition may range from being tolerance to fierce rivalry

b) Demand conditions:
Demand conditions refer to the nature of the customer demand existing in an
industry. A high demand or a growing demand tends to moderate competition
as each firm has enough for it and need not grab it from others. Stagnant
demand may lead to competitive strategies designed to snatch market share
from others. Declining demand may cause companies to maintain their market
share. Existing firms or new entrants need to take the demand conditions in the
industry into account for the purpose of formulating business strategies.

c) Exit barriers:
Exit barriers restrict the firm in an industry and prevent them from leaving,
even though the returns might be low or might even be sometimes negative.
i.e. Exit Barriers are obstacles in the path of a firm which wants to leave a
given market or industrial sector. These obstacles often cost the firm
financially to leave the market and may prohibit it doing so. If the barriers of
exit are significant; a firm may be forced to continue competing in a market,
as the costs of leaving may be higher than those incurred if they continue
competing in the market
The factors that may form a barrier to exit include:
1. Economic factors:
Economic factors could be high investments committed to plan and equipment
that have no alternative usage and high fixed costs of exit, such as high
retrenchment costs or high severance pay owing to labor agreements.
2. Strategic factors:
Strategic factors could be inter linkage between the different businesses of
accompany such as affirm being its own supplier or buyer or different
businesses sharing a common pool of resources.
3. Emotional factors:
Emotional factors could be sentimental attachment to a business, it being
ancestral business or one founded by the entrepreneur himself, or
unwillingness to part with a business owing to loyalty to employees and
distributors.
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Business Policy and Strategic Analysis Unit 3

SCP ANALYSIS
Introduction:

The transfer of theory from one discipline to another may lead to inappropriate or costly
generalizations and predictions. This occurs because a theory may be dependent on the tenets
of a particular discipline or, more specifically, the theory may be contingent on a specified set
of parameters, boundaries and/or system states that are unavailable in the existing theory of
another discipline. The purpose of this paper is to investigate the possibility of a relatively
uncritical transfer of theory from IO economics to Strategic Management and to assess
whether this transfer of theory has led to inappropriate or costly generalizations.

Specifically, it is suggested that the structure-conduct-performance (S-C-P) paradigm of

traditional IO economics has been transferred to and accepted in the strategic management
discipline, and that the transfer has been pervasive and with little consideration of competing
paradigms in the economics discipline. Further, it is proposed that the resulting emphasis on
industry structure may be costly to strategy researchers and practitioners.

For the strategy researcher the focus on industry structure, particularly entry and mobility
barriers, may result in research that deflects interest from more central issues in strategic
management research, such as measuring performance, recognizing and exploiting core
competencies, restructuring, entrepreneurship, globalization, and strategic intent. For the
practitioner, the focus on industry structure rather than competitive process may result in
suboptimal investments which divert resources from strategies designed to develop unique
firm resources to strategies designed to identify or create optimal industry structure.

Because of the costs associated with basing Strategic Management research and practice on
the S-C-P paradigm, we offer an alternative paradigm, referred to as the efficiency paradigm,
and explain the implications of substituting this paradigm for the S-C-P paradigm. This
efficiency paradigm retains the basic economic logic of substitution at the margin, but has
implications which are more appropriate for Strategic Management than those of S-C-P.

Structure-Conduct-Performance and Strategic Management

The basic tenet of the S-C-P paradigm is that the economic performance of an industry is a
function of the conduct of buyers and sellers which, in turn, is a function of the industry's
structure. Economic performance is measured in terms of welfare maximization (resources
employed where they yield the highest valued output). Conduct refers to the activities of the
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industry's buyers and sellers. Sellers' activities include installation and utilization of capacity,
promotional and pricing policies, research and development, and inter firm competition or
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cooperation. Industry structure (the determinant of conduct) includes such variables as the
number and size of buyers and sellers, technology, the degree of product differentiation, the
extent of vertical integration, and the level of barriers to entry.

The relationship between industry structure and performance in this paradigm is derived from
the microeconomic model of perfectly competitive markets. Because this is a static model,
competition is viewed in terms of an equilibrium condition. In long run equilibrium, perfectly
competitive markets will result in the optimal (welfare maximizing) allocation of resources in
an economy. All other allocations of resources are judged relative to the allocation that
obtains under perfect competition.

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As indicated earlier, an industry's structure includes several important elements. Some of

these elements, including buyer and/or seller concentration, product differentiation, and the
elasticity of demand for the product have obvious effects on structure. Another element,
barriers to entry, has what may be a less obvious effect on an industry's structure and the
subsequent structure-conduct-performance relationship.

The concept of entry barriers in the S-C-P paradigm was popularized by Bain who
defined entry barriers as:

"The advantage of established sellers in an industry over potential entrant sellers, these
advantages being reflected in the extent to which established sellers can persistently raise
their prices above a competitive level without attracting new firms to enter the industry" and
who identified such barriers as: economies of scale, absolute cost advantages (independent of
scale), product differentiation, and capital requirements.

Entry barriers are essential to the link between industry structure and performance in this
model because, absent entry barriers, above normal (monopoly) profits cannot exist in long
run equilibrium. All such profits are eliminated by the entry of new firms as the industry
moves toward long run equilibrium. Because entry barriers must be present in an industry for
above normal profits to persist, structure determines potential performance. Of course,
appropriate conduct is necessary to realize the potential.

Caves and Porter extended the theory of entry barriers to include mobility barriers.
Essentially, mobility barriers represent the same conceptual features as entry barriers but
refer to existing firms rather than to potential entrants. Mobility barriers prevent firms from
moving from one strategic group within an industry to another, and therefore, provide an
explanation of intra industry performance differences. In summary, the S-C-P paradigm
implies that the structural characteristics of an industry, particularly the level of concentration
of firms and the height of entry barriers, have a significant influence on the ability of firms
within an industry to price above the competitive price. Consequently, these structural
characteristics can be expected to determine the performance potential of individual firms.

Applications of the S-C-P Paradigm in Strategic Management

Although important differences between the frames of reference, units of analysis,

assumptions, and objectives of Strategic Management and the S-C-P paradigm have been
recognized, the S-C-P paradigm has been integrated into strategic management theory with
little modification. Furthermore, the S-C-P paradigm has become a dominant tool in the
normative and theoretical aspects of the field. Specifically, evidence of the influence of the S-
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C-P paradigm is apparent in research and prescriptions pertaining to generic strategies and
business typologies, strategic groups, diversification, mergers and acquisitions, and strategic
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planning.

The concept of industry structure from the S-C-P paradigm has clearly been employed in the
development of generic strategies and business typologies. Porter states unequivocally "In the
long run, the rate of return available from competing in an industry is a function of its
underlying structure." Further, Porter lists ease of entry as the first of five determinants of
industry attractiveness, and White suggests that the most popular business strategies or
typologies are based on assessing and identifying the attractiveness of an industry. Others

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indicate that a firm's ability to earn superior profits is dependent upon strategies that make
industry structure more attractive.

In the language of the S-C-P paradigm, the development of generic business strategies
appears to be a function of specific industry structure characteristics. That is, the success of
any given strategy relates to the ability of the involved firms to engage in activities that lead
to barriers to entry and increased concentration. The height of the barriers determines the
extent to which superior profits can be earned.

This logic has been extended to strategic groups. Strategic group theory relies on the concept
of mobility barriers developed by IO economists Caves and Porter. Use mobility barriers to
explain the heterogeneity of groups of firms within an industry. It has even been suggested
that the concept of group definition should be driven by mobility barriers rather than by
strategies. The influence of the S-C-P paradigm is also apparent in empirical studies of
strategic groups. For example, mobility barriers are used to explain the difference in
performance between groups of firms in the same industry.

It is clear that aspects of the S-C-P paradigm have been integrated into the normative
dimension of Strategic Management as well. Industry structure and its affect on performance
is a theme that permeates the strategic planning literature.

Limitations of the S-C-P Paradigm

While widely applied in strategy formulation research, the S-C-P model has major
weaknesses that limit its application. These weaknesses include: (1) the wrong level of
analysis, (2) the use of static analysis, and (3) a reliance on barriers to entry as the
determinant of profitability. These limitations can be costly (in predictable ways) for both
researchers and practitioners.

The wrong level of analysis:

As a basis for theory development, the integration of the S-C-P paradigm has resulted in
strategy researchers using the wrong level of analysis. The S-C-P paradigm was developed to
explain and predict industry level phenomenon and makes the assumption that all the firms
within an industry are homogeneous. Strategic Management theory was developed to explain
and predict firm level phenomenon and historically made the assumption that all firms within
an industry are heterogeneous. Even though the S-C-P paradigm has been modified to
accommodate groups within industries, the level of analysis is still inappropriate because of
the assumption that groups are composed of homogeneous firms. Using the wrong level of
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analysis is problematic because it will not lead to useful predictions/prescriptions of

individual firm performance.
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Additionally, this inappropriate level of analysis may cause resources to be diverted from
areas of research that deal with firm level concepts such as measuring performance, assessing
risk, recognizing and exploiting core competencies, restructuring, globalization, and strategic
intent to areas of research that deal with industry or group level concepts such as entry and
mobility barriers.

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Static Analysis

Predictions and prescriptions also suffer because the S-C-P paradigm employs static analysis.
Static analysis of the relationship between structure and performance implies both the
existence of optimal conditions and, also, that these optimal conditions can be sustained over
time. This has led to an abundance of empirical research that relies on cross sectional data to
test the relationship between structure and performance.

However, most business environments are not in a state of equilibrium. Rather, they are
characterized by some degree of change. In changing environments, Strategic Management
requires dynamic analysis to understand and predict the relative ability of firms to sustain
competitive advantages. Little has been done in Strategic Management to develop
longitudinal techniques or build data sets that are useful for explaining or testing sustained
competitive advantage in dynamic environments. This lack of longitudinal analysis is costly
because it prevents empirical testing of sustained advantage and reinforces the misdirection
of research.

Similarly, static analysis and the related assumption of equilibrium conditions are costly for
managers. In an equilibrium or static market, it should be possible to determine the total
demand for an industry's output. When demand is known, a firm competes with its rivals for
a share of the market. Consequently, managers focus on either taking or protecting their
market share from other firms in the industry. However, in a changing market, it is unlikely
that a competitive advantage can be sustained when a firm's resources are directed toward
satisfying an existing and known demand rather than in anticipating and attempting to create
new demand.

Reliance on Entry Barriers

For managers the emphasis on entry barriers as a determinant of performance can lead to
costly errors. For example, assume that the managers of a firm recognize that current industry
entry barriers are of insufficient height to preclude entry by potential competitors. The
managers decide to increase the height of the barriers by making barrier-heightening
investments.

These investments cannot be expected to result in a competitive advantage because barriers

are subject to a free rider problem. The free-rider problem occurs because entry barriers are
an industry level phenomenon. Barriers necessarily provide entry protection to all firms
within an industry. For example, if one firm erects a barrier, all other firms are protected
without having to pay any of the cost of erecting the barrier. That is, all other firms in the
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industry will free ride on the investment of the barrier erecting firm. Thus, firms may be
desirous of entry barriers, but the free-rider problem should eliminate any incentive for an
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individual firm to erect entry barriers.

This analysis suggests that two outcomes are associated with firms engaging in industry
specific entry barrier investments. Either a firm's competitive position will remain unchanged
or it will be worsened. The outcome depends on the firm's success in creating or increasing
the size of a barrier.

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Business Policy and Strategic Analysis Unit 3

ENVIRONMENT

Introduction:

Environment means the surroundings, external objects, influences or circumstances under

which someone or something exists. The environment of any organization is ‘the aggregate of
all conditions, events and influences that surround and affect it.’ Since the environment
influences an organization in innumerable ways, its understanding is of crucial importance.
The concept of environment can be understood by looking at some of its characteristics.

Characteristics:

1. Environment is Complex:
The environment consists of number of factors, events, conditions and influences
arising from different sources. All these do not exist in isolation, but interact with
each other to create an entirely new set of influences. It is difficult to understand at
once what factors constitute a given environment. All in all, environment is a complex
phenomenon, relatively easier to understand in parts but difficult to grasp in its
totality.
2. Environment is Dynamic:
The environment is constantly changing in nature. Due to the many and varied
influence operating, there is dynamism in the environment causing it to continuously
change its shape and character.
3. Environment is Multi-faceted:
What shape and character an environment assumes depends on the perception of the
observer. A particular change in environment or new development may be viewed
different by different observers. This is frequently seen when the same development is
welcomed as an opportunity by one company while other company sees it as threat.
4. Environment has a Far reaching Impact:
The environment has a far reaching impact on the organizations. The growth and
profitability of an organization depends crucially on the environment in which it
exists. Any environmental changes have an impact on the organization in several
ways.

Classification of Environment:
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To reduce the complexity in understanding environment we can divide environment into

Internal and External environment.
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1. Internal Environment:
It refers to all factors within an organization that impact strengths or cause
weaknesses of a strategic nature.
I.e. Through Internal analysis a firm can uncover two influences – Strengths and
Weaknesses
 Strength:

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Business Policy and Strategic Analysis Unit 3

It is an inherent capacity which an organization can use to gain strategic

advantage.
E.g.:-
Good reputation among customers, Resources, Experience, Knowledge, Data
and Capabilities.
 Weakness:
It is an inherent limitation or constraint which creates strategic disadvantage.
E.g.:-
Gaps in capabilities, Financial deadlines, Low morale and over dependence on
a single product line.
2. External Environment:
It includes all the factors outside the organization which provide opportunities or pose
threats to the organization.
I.e. Through external environment analysis a firm can uncover two influences –
Opportunities and Threats.
 Opportunity:
It is a favorable condition in the organization’s environment which enables it
to combine and strengthen its position.
E.g.:-
Economic boom, Favorable demographic shifts, arrival of new technologies,
loosening of regulations, Favorable global influences and unfulfilled customer
needs.
 Threat:
It is an unfavorable condition in the organization’s environment which creates
a risk for, or cause damage to, the organization.
E.g.:-
Economic down turn, Demographic shifts, New competitors, Unexpected
shifts in consumer tastes, Demanding new regulations, Unfavorable political
or legislation, New technology and Loss of key staff.

For the convenience of understanding environment to greater extent again

external environment is classified into two. They are

I. General environment:
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It consists of all the factors which provide opportunities or pose threat to an

organization. In a wider sense it includes all environmental sectors and this
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wider perception of the environment is called as General environment. All

organizations, in some way or other, are concerned about the General
environment.
II. Relevant environment:
The immediate concerns of any organization are confined to just part of the
general environment which is of high strategic relevance to the organization.
This part of the environment could be termed as the immediately relevant
environment or simply, the relevant environment. A conscious identification

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Business Policy and Strategic Analysis Unit 3

of the relevant environment enables the organizations to focus its attention on

those factors which are intimately related to its mission, purpose, objectives
and strategies.

External environment sectors:

MATERIAL is yet to be completed 2 more topic environment and hyper competition

are to be added for this material
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Vision Institute of Management :: Bapatla