UNIT: 1 - INTRODUCTION

What is Business Policy?

The term "Business Policy" comprises of two words, Business and Policy.

Business: "Business means exchange of commodities and services for increasing utilities."

Policy: Policies may be defined as "the mode of thought and the principles underlying the activities of an organization
or an institution." Policies are plans in they are general statements of principles which guide the thinking, decision
making and action in an organization.

Business policy as a principle or a group of related principles, along with their consequent rule (s) of action that
provide for the successful achievement of specific organization / business objectives. Accordingly, a policy contains
both a "principle" and a "rule of action." Both should be there for the maximum effectiveness of a policy.

What do you understand by evolution of business policy?

Due to the increasing environmental changes in the 1930s and 40s in the US, planned policy formulation
replaced ad hoc policy-making. Based on this second paradigm, the emphasis shifted to the integration of functional
areas in a rapidly changing environment. Increasing complexity and accelerating changes in the environment made the
planned policy paradigm irrelevant since the needs of a business could no longer be served by policy-making and
functional-area integration only. By the 1960s, there was a demand for a critical look at the basic concept of business
and its relationship to the environment. The concept of strategy satisfied this requirement and the third phase, based
on & strategy paradigm, emerged in the early sixties. The current thinking- which emerged in the eighties- is based on
the fourth paradigm of strategic management. The initial focus of strategic management was on the intersection of
two broad fields of enquiry: the processes of business firms and the responsibilities of general management.

Q.3 Differentiate between business policy & strategic management?

Difference between Strategic Management and Business Policy

S.No. Strategic Management Business Policy

Deals with strategic decisions that decide the long-
term health of an enterprise. It is a comprehensive It offers guidelines for managers to take appropriate
1
plan of action designed to meet certain specific decisions.
goals.
It is a means of putting a policy into effect within It is a general course of action with no defined time
2
certain time limits. limits.
Deals with those decisions which have not been
encountered before in quite the same form, for
which no predetermined and explicit set or ordered
3 It is a guide to action in areas of repetitive activity.
responses exist in the organization and which are
important in terms of the resources committed or
the precedents set.
It deals with crucial decisions, whose Once policy decisions are formulated, these can be
4 implementation requires constant attention of topdelegated and implemented by others
management. independently.
Strategies are specific actions suggested to achieve
Policies are statements or a commonly accepted
5
the objectives. understanding of decision making.
6 Strategies are action oriented. Policies are thought oriented.
Power is delegated to the subordinates for
7 Everyone is empowered to implement the strategy.
implementation.
8 Strategies are means to an end. Policies are guidelines.
 Strategy is concerned with uncertainties,
Policy is in general concerned with the course of
9 competitive situations, and risks etc that are likely
action to fulfill the set objectives.
to take place at a future date.
Strategy is deployed to mobilize the available Policy is an overall guide that governs and controls
10
resources the best interest of the company. the managerial action.

Strategic management is a set of managerial decisions and actions that determines the long run performance
of a corporation. It includes environmental scanning (both external and internal), strategy formulation (strategic or
long-range planning), strategy implementation, and evaluation and control. The study of strategic management,
therefore, emphasizes the monitoring and evaluating of external opportunities and threats in light of a corporation’s
strengths and weaknesses. Originally called business policy, strategic management incorporates such topics as strategic
planning, environmental scanning, and industry analysis.

Evolution of strategic management:

Many of the concepts and techniques that deal with strategic management have been developed and used successfully
by business corporations such as General Electric and the Boston Consulting Group. Over time, business practitioners
and academic researchers have expanded and refined these concepts. Initially, strategic management was of most use
to large corporations operating in multiple industries. Increasing risks of error, costly mistakes, and even economic ruin
are causing today’s professional managers in all organizations to take strategic management seriously in order to keep
their companies competitive in an increasingly volatile environment. As managers attempt to better deal with their
changing world, a firm generally evolves through the following four phases of strategic management:

Phase 1 — Basic financial planning:

Managers initiate serious planning when they are requested to propose the following year’s budget. Projects
are proposed on the basis of very little analysis, with most information coming from within the firm. The sales force
usually provides the small amount of environmental information. Such simplistic operational planning only pretends to
be strategic management, yet it is quite time consuming. Normal company activities are often suspended for weeks
while managers try to cram ideas into the proposed budget. The time horizon is usually one year.

Phase 2—Forecast-based planning:

As annual budgets become less useful at stimulating long term planning, managers attempt to propose five-
year plans. At this point they consider projects that may take more than one year. In addition to internal information,
managers gather any available environmental data—usually on an ad hoc basis—and extrapolate current trends five
years into the future. This phase is also time consuming, often involving a full month of managerial activity to make
sure all the proposed budgets fit together. The process gets very political as managers compete for larger shares of
funds. Endless meetings take place to evaluate proposals and justify assumptions. The time horizon is usually three to
five years.

Phase 3 — Externally oriented (strategic) planning:

Frustrated with highly political yet ineffectual five-year plans, top management takes control of the planning
process by initiating strategic planning. The company seeks to increase its responsiveness to changing markets and
competition by thinking strategically. Planning is taken out of the hands of lower-level managers and concentrated in
a planning staff whose task is to develop strategic plans for the corporation. Consultants often provide the sophisticated
and innovative techniques that the planning staff uses to gather information and forecast future trends. Ex-military
experts develop competitive intelligence units. Upper-level managers meet once a year at a resort “retreat” led by key
members of the planning staff to evaluate and update the current strategic plan. Such top-down planning emphasizes
formal strategy formulation and leaves the implementation issues to lower management levels. Top management
typically develops five-year plans with help from consultants but minimal input from lower levels. 6 PART 1 Introduction
to Strategic Management and Business Policy.
 Phase 4—Strategic management:
Realizing that even the best strategic plans are worthless without the input and commitment of lower-level
managers, top management forms planning groups of managers and key employees at many levels, from various
departments and workgroups. They develop and integrate a series of strategic plans aimed at achieving the company’s
primary objectives. Strategic plans at this point detail the implementation, evaluation, and control issues. Rather than
attempting to perfectly forecast the future, the plans emphasize probable scenarios and contingency strategies. The
sophisticated annual five-year strategic plan is replaced with strategic thinking at all levels of the organization
throughout the year. Strategic information, previously available only centrally to top management, is available via local
area networks and intranets to people throughout the organization. Instead of a large centralized planning staff,
internal and external planning consultants are available to help guide group strategy discussions. Although top
management may still initiate the strategic planning process, the resulting strategies may come from anywhere in the
organization. Planning is typically interactive across levels and is no longer top down. People at all levels are now
involved.
General Electric, one of the pioneers of strategic planning, led the transition from strategic planning to strategic
management during the 1980s.8 By the 1990s, most other corporations around the world had also begun the
conversion to strategic management.

Conceptual Introduction to strategy:

The concept of strategy has been borrowed from the military and adapted for use in business. A review of
what noted writers about business strategy have to say suggests that adopting the concept was easy because the
adaptation required has been modest. In business, as in the military, strategy bridges the gap between policy and
tactics. Together, strategy and tactics bridge the gap between ends and means.
Strategy is a term that comes from the Greek "strategia" meaning "generalship." In the military, strategy often
refers to maneuvering troops into position before the enemy is actually engaged. In this sense, strategy refers to the
deployment of troops. Once the enemy has been engaged, attention shifts to tactics. Here, the employment of troops
is central. Substitute "resources" for troops and the transfer of the concept to the business world begins to take form.
Strategy is a high level plan to achieve one or more goals under conditions of uncertainty. In the sense of the
"art of the general", which included several subsets of skills including "tactics", siegecraft, logistics etc., the term came
into use in the 6th century C.E. in East Roman terminology, and was translated into Western vernacular languages only
in the 18th century. From then until the 20th century, the word "strategy" came to denote "a comprehensive way to
try to pursue political ends, including the threat or actual use of force, in a dialectic of wills" in a military conflict, in
which both adversaries interact.
Strategy is important because the resources available to achieve these goals are usually limited. Strategy
generally involves setting goals, determining actions to achieve the goals, and mobilizing resources to execute the
actions. A strategy describes how the ends (goals) will be achieved by the means (resources). This is generally tasked
with determining strategy. Strategy can be intended or can emerge as a pattern of activity as the organization adapts
to its environment or competes. It involves activities such as strategic planning and strategic thinking.
Henry Mintzberg from McGill University defined strategy as "a pattern in a stream of decisions" to contrast
with a view of strategy as planning,[4] while Max McKeown (2011) argues that "strategy is about shaping the future"
and is the human attempt to get to "desirable ends with available means". Dr. Vladimir Kvint defines strategy as "a
system of finding, formulating, and developing a doctrine that will ensure long-term success if followed faithfully."
Level of strategy:
Inside an organization, strategies can exist at three main levels.
● Corporate-level strategy
It is concerned with the overall scope of an organization and how value is added to the constituent businesses
of the organizational whole. Corporate-level strategy issues include geographical scope, diversity of products or
services, acquisitions of new businesses, and how resources are allocated between the different elements of the
organization. For News Corporation, diversifying from print journalism into television and social networking are
corporate-level strategies. Being clear about corporate-level strategy is important: determining the range of businesses
to include is the basis of other strategic decisions.

● Business-level strategy
It is about how the individual businesses should compete in their particular markets (for this reason, business-
level strategy is often called ‘competitive strategy’). These individual businesses might be stand-alone businesses, for
instance entrepreneurial start-ups, or ‘business units’ within a larger corporation. Business-level strategy typically
concerns issues such as innovation, appropriate scale and response to competitors’ moves. In the public sector, the
equivalent of business-level strategy is decisions about how units (such as individual hospitals or schools) should
provide best-value services. Where the businesses are units within a larger organization, business-level strategies
should clearly fi t with corporate-level strategy.

● Operational strategies
They are concerned with how the components of an organization deliver effectively the corporate- and
business-level strategies in terms of resources, processes and people. In most businesses, successful business strategies
depend to a large extent on decisions that are taken, or activities that occur, at the operational level. Operational
decisions need, therefore, to be closely linked to business-level strategy. They are vital to successful strategy
implementation. This need to link the corporate, business and operational levels underlines the importance of
integration in strategy. Each level needs to be aligned with the others.

Model of strategic management process:

 Strategic intent captures the essence of winning, is stable over time, and sets goals that require personal
commitment. Strategic intent envisions a desired leadership position and establishes the criterion organizations will
use to chart its progress (Smith 1994). Strategic intent is an ambitious and compelling attempt that provides emotional
and intellectual energy for the future. Strategic intent should not be confused with two other words used in strategic
management namely vison and goal. Whereas goal is futuristic it differs from strategic intent in that strategic intent is
independent of the strategic plan and is not precise in its nature.

Intent is a psychological concept and is held by a conscious subject (individual) capable of forming intentional
states. These mental states should be connected and realized within an external reality such as a business. The desire
for leaders to provide direction gives rise to strategic intent which is driven by the need to set long term goals, strategies
for the organization and keeping ahead of competition thus providing long term direction to the managers. The
intention is to go beyond strategic planning to understand the future oriented agency giving room for interpretation
and improvisation in determining how that intent is realized. Strategic intent goes beyond the mere interest of
developing a strategic plan, working on the organizational mission, vison and goal. It is to envision a desired leadership
position and setting the criterion the organization will use to chart its progress. The desire to win and be stable over
time motivates the leaders to engage in strategic intent, making them go beyond the imaginable or thinking the
unthinkable to create commitment to the organization’s future, setting competitive priorities for the organization, and
helping in shaping the firm’s core competencies to compete in that desired future.

Hamel and Prahalad (1994) developed a strategic intent model that links the various components of strategy
to the desired future. In their model, Hamel and Prahalad discuss four strategic components that together provide
stepping stones to the desired future. These are foresight, strategic architecture, and strategic intent and core
competencies (Figure 1.1). According to this model, the duo envisions leaders developing the future of their industry,
new markets, new values, from their stand point. This challenges the status quo or improving present products or
markets. They state “first of all, having a good ‘Foresight,’ secondly, designing a ‘Strategic architecture’; and finally
creating ‘Strategic intent’ and rebuilding ‘Core competencies’, which will pull a corporation to the future”

Foresight is the prescience about the shape of tomorrow’s opportunities defined by the manager such as the
type of customer benefit, and new ways of delivering customer benefit. This is explained forgetting the current market
situation and having the future in mind. The fact that the manager temporarily forgets about the current situation helps
him to develop a structure that Hamel and Prahalad called strategic Architecture. They define Strategic Architecture as
the real future from the foresight. They argue that instead of organizations engaging in strategic planning the
organization benefits greatly by crafting a strategic Architecture which new benefits or functionalities (not present
products) will be offered for the future. The strategic architecture fits into the strategic intent which is defined as
something ambitious and compelling, comparing the strategic architecture to the head and the strategic intent to the
heart of a body. Strategic intent defines without precision the future of the organization.

This gives way for the organization to develop core competencies that will lead to the future. Prahalad and
Hamel, (1990) state that, “core competencies are the collective learning in the organization, especially how to
coordinate diverse production skills and integrate multiple streams of technologies.” They emphasize that core
competence should provide potential access to a wide variety of markets, make a significant contribution to the
perceived customer benefits of the end product, and be difficult for competitors to imitate.

The success of companies’ strategic intent depends on the Chief Executive Officer and top management who
must appreciate the managerial responsibility to initiate the “future” thinking process and designs the architecture
that inspires the organizations members to higher levels of achievement.

Goals:
The planned objectives that an organization strives to achieve. Most senior managers will take the time to
develop and articulate appropriate strategic goals for their business in order to demonstrate to subordinate employees
what their plans and vision for the company are. Such strategic goals should be achievable and should reflect a realistic
assessment of the current and projected business environment.
 UNIT: 2 – ENVIRONMENT & ANALYSIS
Environmental Analysis:
Environmental analysis is a strategic tool. It is a process to identify all the external and internal elements, which
can affect the organization’s performance. The analysis entails assessing the level of threat or opportunity the factors
might present. These evaluations are later translated into the decision-making process. The analysis helps align
strategies with the firm’s environment.
Our market is facing changes every day. Many new things develop over time and the whole scenario can alter
in only a few seconds. There are some factors that are beyond your control. But, you can control a lot of these things.
Businesses are greatly influenced by their environment. All the situational factors which determine day to day
circumstances impact firms. So, businesses must constantly analyze the trade environment and the market.
Component of External Environment:
The component of external environment are as under:
Suppliers and Partners:
Suppliers provide a company with needed resources. Some companies have deep alliances with their suppliers,
increasing supply reliability, but also increasing a company's dependence. Partners are those organizations a business
teams up with to accomplish some mutually beneficial goal. Naturally, forces affecting suppliers and partners may end
up also impacting the companies working with them. For instance, a scarcity of resources will impact the supplier and,
therefore, the company, perhaps in the form of price increases or supply availability.
Competitors:
A business occupying the same marketplace as another company that provides similar products or services has
a competitor. A rival company may vie for the same customers through some mix of service, product features, quality,
convenience, selection and price. To enhance customer service, the competition may choose to provide delivery
options, good warranties and generous financing. To compensate for this external force, a company must keep abreast
of the means the competition uses to lure customers, and objectively analyze the competitor's strengths and
weaknesses. An existing business must also know when new competition enters their market.
Customers:
Customers buy products or use services. They may be individuals, but also may be manufacturers, wholesalers
or corporate clients. To compete, a business must deeply understand its customer's needs and desires. Analyzing this
environmental component allows a business to make sound strategic decisions that affect operations. Customer-
oriented changes such as extra services, new products, or expanded hours of operations might sharpen a company's
competitive edge.
Resources:
Labor as a factor of the external environment refers to the people a company hires to fill its positions. A
company rises and falls on the competence and expertise of its workforce, so finding qualified candidates in the
community is crucial. In assessing the labor environment, companies should look to characteristics that include the
average educational level of the community, training programs available, technical know-how, and diversity, which is
increasingly necessary in a globally connected world. Changing population patterns such as changes in the community's
average age should also be assessed.

Technology:
Due to rapid change in the level of technology it is important to plan according the pace of change in the
technology. It is a matter of concern that with the changes in other factor are due to the change in the technology. It
plays a vital role in stimulating other environment as therefore, it is necessary to adapt changes with the changes in
the environment.
Owners:
For a business run by hired managers, the owners of the business become a part of the company's external
rather than internal environment. Owners might not only be those who started the business, but may also include
stockholders. Owners expect returns on their investment, and management must pay attention to their concerns, since
from owners comes a manager's formal authority.
Models of External Environment Analysis:
PESTLE analysis consists of various factors that affect the business environment. Each letter in the acronym
signifies a set of factors. These factors can affect every industry directly or indirectly.
The letters in PESTLE, also called PESTEL, denote the following things:
 Political factors
 Economic factors
 Social factors
 Technological factors
 Legal factors
 Environmental factor

Political factors:
The political factors take the country’s current political situation. It also reads the global political condition’s
effect on the country and business. When conducting this step, ask questions like “What kind of government leadership
is impacting decisions of the firm?”
Some political factors that we can study are:
 Government policies
 Taxes laws and tariff
 Stability of government
 Entry mode regulations

Economic factors:
Economic factors involve all the determinants of the economy and its state. These are factors that can conclude the
direction in which the economy might move. So, businesses analyze this factor based on the environment. It helps to
set up strategies in line with changes.
Here are some determinants we can assess to know how economic factors are affecting business below:
 The inflation rate
 The interest rate
 Disposable income of buyers
 Credit accessibility
 Unemployment rates
 The monetary or fiscal policies
 The foreign exchange rate

Social factors:
Countries vary from each other. Every country has a distinctive mindset. These attitudes have an impact on the
businesses. The social factors might ultimately affect the sales of products and services.
Some of the social factors we should study are:
 The cultural implications
 The gender and connected demographics
 The social lifestyles
 The domestic structures
 Educational levels
 Distribution of Wealth

Technological factors:
Technology is advancing continuously. The advancement is greatly influencing businesses. Performing environmental
analysis on these factors will help you stay up to date with the changes. Technology alters every minute. This is why
companies must stay connected all the time. Firms should integrate when needed. Technological factors will help you
know how the consumers react to various trends.
Firms can use these factors for their benefit:
 New discoveries
 Rate of technological obsolescence
  Rate of technological advances
 Innovative technological platforms

Legal factors:
Legislative changes take place from time to time. Many of these changes affect the business environment. If a
regulatory body sets up a regulation for industries, for example, that law would impact industries and business in that
economy. So, businesses should also analyze the legal developments in respective environments.
I have mentioned some legal factors we need to be aware of:
 Product regulations
 Employment regulations
 Competitive regulations
 Patent infringements
 Health and safety regulations

Environmental factors:
The location influences business trade. Changes in climatic changes can affect the trade. The consumer reactions to
particular offering can also be an issue. This most often affects agri-businesses.
Some environmental factors we can study are:
 Geographical location
 The climate and weather
 Waste disposal laws
 Energy consumption regulation
 People’s attitude towards the environment

There are many external factors other than the ones mentioned above. None of these factors are independent. They
rely on each other. It is true that industry factors have an impact on the company performance. Environmental analysis
is essential to determine what role certain factors play in your business. PESTLE analysis allows businesses to take a
look at the external factors. Many organizations use these tools to project the growth of their company effectively. The
analyses provide a good look at factors like revenue, profitability, and corporate success.
SWOT ANALYSIS:
A scan of the internal and external environment is an important part of the strategic planning process.
Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those
external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment
is referred to as a SWOT analysis.
The SWOT analysis provides information that is helpful in matching the firm's resources and capabilities to the
competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection. The
following diagram shows how a SWOT analysis fits into an environmental scan:

SWOT Analysis Framework

Environmental Scan
/ \
Internal Analysis External Analysis
/\ /\
Strengths Weaknesses Opportunities Threats
|
SWOT Matrix
Strengths:
A firm's strengths are its resources and capabilities that can be used as a basis for developing a competitive
advantage. Examples of such strengths include:
 patents
 strong brand names
 good reputation among customers
 cost advantages from proprietary know-how
 exclusive access to high grade natural resources
 favorable access to distribution networks
Weaknesses:
The absence of certain strengths may be viewed as a weakness. For example, each of the following may be
considered weaknesses:
 lack of patent protection
 a weak brand name
 poor reputation among customers
 high cost structure
 lack of access to the best natural resources
 lack of access to key distribution channels

In some cases, a weakness may be the flip side of a strength. Take the case in which a firm has a large amount of
manufacturing capacity. While this capacity may be considered a strength that competitors do not share, it also may
be a considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly
to changes in the strategic environment.
Opportunities:
The external environmental analysis may reveal certain new opportunities for profit and growth. Some examples
of such opportunities include:
 an unfulfilled customer need
 arrival of new technologies
 loosening of regulations
 removal of international trade barriers
Threats:
Changes in the external environmental also may present threats to the firm. Some examples of such threats
include:
 shifts in consumer tastes away from the firm's products
 emergence of substitute products
 new regulations
 increased trade barriers
The SWOT Matrix:
A firm should not necessarily pursue the more lucrative opportunities. Rather, it may have a better chance at
developing a competitive advantage by identifying a fit between the firm's strengths and upcoming opportunities. In
some cases, the firm can overcome a weakness in order to prepare itself to pursue a compelling opportunity.
To develop strategies that take into account the SWOT profile, a matrix of these factors can be constructed.
The SWOT matrix (also known as a TOWS Matrix) is shown below:

SWOT Matrix
Strengths Weaknesses

Opportunities S-O strategies W-O strategies

Threats S-T strategies W-T strategies

 S-O strategies pursue opportunities that are a good fit to the company's strengths.
 W-O strategies overcome weaknesses to pursue opportunities.
  S-T strategies identify ways that the firm can use its strengths to reduce its vulnerability to external threats.
 W-T strategies establish a defensive plan to prevent the firm's weaknesses from making it highly susceptible
to external threats.
Environmental Threat and Opportunity Profile (ЕТОР):
The Environmental factors are quite complex and it may be difficult for strategy managers to classify them into
neat categories to interpret them as opportunities and threats. A matrix of comparison is drawn where one item or
factor is compared with other items after which the scores arrived at are added and ranked for each factor and total
weight age score calculated for prioritizing each of the factors.
This is achieved by brainstorming. And finally the strategy manger uses his judgment to place various
environmental issues in clear perspective to create the environmental threat and opportunity profile.
Although the technique of dividing various environmental factors into specific sectors and evaluating them as
opportunities and threats is suggested by some authors, it must be carefully noted that each sector is not exclusive of
the other.
Each of the major factors pertaining to a particular sector of environment may be divided into sub-sectors and
their effects studied. The field force analysis goes hand in glove with ETOP, as here also the contribution with regard
to opportunities and threats posed by the environment is also a necessary part of study.
ETOP Preparation:
The preparation of ETOP involves dividing the environment into different sectors and then analyzing the impact
of each sector on the organization. A comprehensive ETOP requires subdividing each environmental sector into sub
factors and then the impact of each sub factor on the organization is described in the form of a statement.
A summary ETOP may only show the major factors for the sake of simplicity. The table 1 provides an example
of an ETOP prepared for an established company.

The strategic managers should keep focus on the following dimensions

1. Issue Selection:
Focus on issues, which have been selected, should not be missed since there is a likelihood of arriving
at incorrect priorities. Some of the impotent issues may be those related to market share, competitive pricing,
customer preferences, technological changes, economic policies, competitive trends, etc.
2. Accuracy of Data:
Data should be collected from good sources otherwise the entire process of environmental scanning
may go waste. The relevance, importance, manageability, variability and low cost of data are some of the
important factors, which must be kept in focus.
3. Impact Studies:
Impact studies should be conducted focusing on the various opportunities and threats and the critical
issues selected. It may include study of probable effects on the company’s strengths and weaknesses, operating
and remote environment, competitive position, accomplishment of mission and vision etc. Efforts should be
taken to make assessments more objective wherever possible.
4. Flexibility in Operations:
There are number of uncertainties exist in a business situation and so a company can be greatly benefited buy
devising proactive and flexible strategies in their plans, structures, strategy etc. The optimum level of flexibility
should be maintained.
Pitfalls in Environmental Scanning:
Definition:
Environmental scanning is a process that systematically surveys and interprets relevant data to identify
external opportunities and threats. An organization gathers information about the external world, its competitors and
itself. Environmental scanning can be defined as ‘the study and interpretation of
the political, economic, social and technological events and trends which influence a business, an industry or even
a total market’. The factors which need to be considered for environmental scanning are events, trends, issues and
expectations of the different interest groups. Issues are often forerunners of trend breaks. A trend break could be a
value shift in society, a technological innovation that might be permanent or a paradigm change. Issues are less deep-
seated and can be 'a temporary short-lived reaction to a social phenomenon'. A trend can be defined as an
‘environmental phenomenon that has adopted a structural character.
Environmental Scanning is an ongoing process and organizations are always refining the way their particular
company or business goes through the process. Environmental scanning reinforces productive strategic plans and
policies that can be implemented to make the organization get the maximum use of the business environment they
are in. Environmental scanning not only helps the business find its strengths in its current environment but it also finds
the weakness of competitors, identifies new markets, potential customers and up and coming technological platforms
and devices that can be best used to sell/market the product or service. Environmental Scanning helps a business
improve their decision-making process in times of risk to the external and internal environments the business is in.
Pitfalls:
Successful management depends upon the ability of the senior leaders to adapt to rapidly changing external
environment. Unfortunately, the lead time once enjoyed by decision makers to analyze and respond to these and other
changes is decreasing. Traditional long-range planning models, with their inward focus and reliance on historical data,
do not encourage decision makers to anticipate environmental changes and assess their impact on the organization
(Cope, 1981). The underlying assumption of such models is that any future change is a continuation of the direction
and rate of present trends among a limited number of social, technological, economic, and political variables. Thus, the
future for the institution is assumed to reflect the past and present or, in essence, to be "surprise-free." However, we
know that this is not true, and the further we plan into the future, the less it will be true.
What is needed is a method that enables decision makers both to understand the external environment and
the interconnections of its various sectors and to translate this understanding into the institution's planning and
decision making processes.

Industry Analysis:
Industry analysis is a tool that facilitates a company's understanding of its position relative to other companies
that produce similar products or services. Understanding the forces at work in the overall industry is an important
component of effective strategic planning.

Industry Features:
Identification of industry’s features is very important for analyzing a company’s industry’s and competitive
environment. It also provides an overview of the overall landscape of industry. So basically it helps the organization to
know the different kind of strategic moves that industry members are likely to employ. Some of the important
industry’s dominant economic features are given below.
1. Market size and growth rate
Market size refers to the total number of firms operating in the industry. It is also important to know
whether the industry is growing, static or declining. It depends upon the position of industry in the business life
cycle i.e. early development, rapid growth, early maturity, maturity, stagnation and decline.
2. Number of rivals
Organizations should also know whether the industry contains too many small rivals or is it dominated by
a few large firms. Similarly they should also know about the various development in the industry such as mergers
and acquisitions etc.
 3. Scope of competitive rivalry
Scope of competitive rivalry is an important factor for the organizations to know about the level of
competition. Industry members must know about the nature of future competition. For example if a company
realizes that its future success depends upon diversification, product development and market expansion, then it
must start planning from the very first day.
4. Buyer needs and requirements
Industry members must take into consideration the need and taste of final buyers as well as the
middlemen. So, basically organizations have to do a lot of periodic research in order to know the major shifts in
buyer's needs and requirements. They should also know the about the various factors affecting consumer behavior.
5. Degree of product differentiation
Product differentiation is another important factor for analyzing the overall industry situation. If all the
products of industry are not fully differentiated then it will increase competition among the members of industry.
In such case prices of the products will be low and the new entrants will find it difficult to compete with the existing
firms.
6. Product innovation
Product innovation can be used as a measure to know the dominant industry features. If the industry is
characterized by rapid product innovation and short product life cycle then the research and development is very
important for the success of an organization. In such cases, members of the industry must come up with new
products to compete effectively.
7. Pace of technological change
If the industry is characterized by rapid pace of technological change then the art of the state technology
is imperative for the success of organizations. For example Industry of mobile phones requires rapid changes in the
technology in order to meet the changing consumer demands.
8. Vertical integration
It is important to know whether the competitors in the industry are partially or fully integrated. Similarly
the competitive advantages and disadvantages of fully, partially and non-integrated firms should be taken into
consideration. Vertical integration can cause potential cost of production differences.
9. Economies of scale
Organizations must also know about the different economies of scale in purchasing, manufacturing, and
other activities. They should analyze whether the companies with high scale operations has any cost advantage or
not. Any reduction in the cost of production leads to higher competitiveness which ultimately results higher profits.

Industry Boundaries:
An industry is a collection of firms that offer similar products or services. By “similar products,” we mean
products that customers perceive to be substitutable for one another. Why is a definition of industry boundaries
important? First, it helps executives determine the arena in which their firm is competing. Second, a definition of
industry boundaries focuses attention on the firm’s competitors. Defining industry boundaries enables the firm to
identify its competitors and producers of substitute products. Third, a definition of industry boundaries helps
executives determine key factors for success. Finally, a definition of industry boundaries gives executives another basis
on which to evaluate their firm’s goals.

Defining industry boundaries is a very difficult task. The difficulty stems from three sources:
1. The evolution of industries over time creates new opportunities and threats.
2. Industrial evolution creates industries within industries.
3. Industries are becoming global in scope.

To realistically define their industry, executives need to examine five issues:

1. Which part of the industry corresponds to our firm’s goals?
2. What are the key ingredients of success in that part of the industry?
3. Does our firm have the skills needed to compete in that part of the industry? If not, can we build those skills?
4. Will the skills enable us to seize emerging opportunities and deal with future threats?
5. Is our definition of the industry flexible enough to allow necessary adjustments to our business concept as the
industry grows?
Industry Structure:
Defining an industry’s boundaries is incomplete without an understanding of its structural attributes. Structural
attributes are the enduring characteristics that give an industry its distinctive character. To explain variations among
industries, firms must examine the four variables that industry.
1. Concentration – Extent to which industry sales are dominated by only a few firms.
2. Economies of Scale – Savings firms within an industry achieve due to increased volume.
3. Product Differentiation – Extent to which customers perceive products of firms in industry as different.
4. Barriers to Entry – Obstacles a firm must overcome to enter an industry.
Industry Attractiveness:
Magnitude and ease of making profit, in comparison with the risks involved, that an industrial sector offers. It
is based on the number of competitors, their relative strength, width of margins, and rate of growth in demand for its
goods or services. It is the (relative) future profit potential of a market. In general it can be determined using the Five-
Forces Framework as described by Michael Porter in his books Competitive Strategy and Competitive Advantage.
Industry attractiveness is the presence or absence of threats exhibited by each of the industry forces," Cook
explained. "The greater the threat posed by an industry force, the less attractive the industry becomes." Small
businesses, in particular, should attempt to seek out markets in which the threats are low and the attractiveness is
high. Understanding what industry forces are at work enables small business owners to develop strategies to deal with
them. These strategies, in turn, can help small businesses to find unique ways to satisfy their customers in order to
develop a competitive advantage over industry rivals.
Competitive Analysis:
Identifying a competitors and evaluating their strategies to determine their strengths and weaknesses relative
to those of our own product or service. A competitive analysis is a critical part of a company marketing plan. With this
evaluation, we can establish what makes a product or service unique--and therefore what attributes you play up in
order to attract your target market. Evaluate competitors by placing them in strategic groups according to how directly
they compete for a share of the customer's dollar. For each competitor or strategic group, list their product or service,
its profitability, growth pattern, marketing objectives and assumptions, current and past strategies, organizational and
cost structure, strengths and weaknesses, and size (in sales) of the competitor's business.
Role of Competitive Forces in Shaping Strategy:
Harvard professor Michael E. Porter propelled the concept of industry environment into the foreground of
strategic thought and business planning. The cornerstone of Porter’s work first appeared in the Harvard Business
Review, in which he explains the five forces that shape competition in an industry. Porter’s well-defined analytic
framework helps strategic managers to link remote factors to their effects on a firm’s operating environment. The
essence of strategy formulation is coping with competition. The state of competition in an industry depends on five
basic forces (commonly called Porter's Five Forces Model). The strongest competitive force or forces determine the
profitability of an industry and so are of greatest importance in strategy formulation. Different forces take on
prominence, of course, in shaping competition in each industry. Every industry has an underlying structure, or a set
of fundamental economic and technical characteristics, that gives rise to these competitive forces.

Porter's Five Forces Model:

The strongest competitive force or forces determine the profitability of an industry and so are of greatest
importance in strategy formulation. Different forces take on prominence, of course, in shaping competition in each
industry. Every industry has an underlying structure, or a set of fundamental economic and technical characteristics,
that gives rise to these competitive forces. Attractiveness in this context refers to the overall industry profitability. An
"unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. A
very unattractive industry would be one approaching "pure competition", in which available profits for all firms are
driven to normal profit. This analysis is associated with its principal innovator Michael E. Porter of Harvard University.
Porter's five forces include – three forces from 'horizontal' competition: the threat of substitute products or
services, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition:
the bargaining power of suppliers and the bargaining power of customers.
Threat of new entrants:
Profitable markets that yield high returns will attract new firms. This results in many new entrants, which
eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked
by incumbents (which in business refers to the largest company in a certain industry, for instance, in
telecommunications, the traditional phone company, typically called the "incumbent operator"), the abnormal profit
rate will trend towards zero (perfect competition).
The following factors can have an effect on how much of a threat new entrants may pose:
 The existence of barriers to entry (patents, rights, etc.). The most attractive segment is one in which entry barriers
are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily.
 Government policy
 Capital requirements
 Absolute cost
 Cost disadvantages independent of size
 Economies of scale
 Economies of product differences
 Product differentiation
 Brand equity
 Switching costs or sunk costs
 Expected retaliation
 Access to distribution
 Customer loyalty to established brands
 Industry profitability (the more profitable the industry the more attractive it will be to new competitors)
 Network effect

Threat of substitutes:
The existence of products outside of the realm of the common product boundaries increases the propensity of
customers to switch to alternatives. For example, tap water might be considered a substitute for Coke, whereas Pepsi
is a competitor's similar product. Increased marketing for drinking tap water might "shrink the pie" for both Coke and
Pepsi, whereas increased Pepsi advertising would likely "grow the pie" (increase consumption of all soft drinks), albeit
while giving Pepsi a larger slice at Coke's expense. Another example is the substitute of a landline phone with a cellular
phone.
Potential factors:
 Buyer propensity to substitute
 Relative price performance of substitute
 Buyer switching costs
 Perceived level of product differentiation
 Number of substitute products available in the market
 Ease of substitution
 Substandard product
 Quality depreciation
 Availability of close substitute
Bargaining power of buyers:
The bargaining power of customers is also described as the market of outputs: the ability of customers to put
the firm under pressure, which also affects the customer's sensitivity to price changes. Firms can take measures to
reduce buyer power, such as implementing a loyalty program. The buyer power is high if the buyer has many
alternatives. The buyer power is low if they act independently e.g. If a large number of customers will act with each
other and ask to make prices low the company will have no other choice because of large number of customers
pressure.
Potential factors:
 Buyer concentration to firm concentration ratio
 Degree of dependency upon existing channels of distribution
 Bargaining leverage, particularly in industries with high fixed costs
 Buyer switching costs relative to firm switching costs
 Buyer information availability
 Force down prices
 Availability of existing substitute products
 Buyer price sensitivity
 Differential advantage (uniqueness) of industry products
 RFM (customer value) Analysis
 The total amount of trading

Bargaining power of suppliers:

The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials,
components, labor, and services (such as expertise) to the firm can be a source of power over the firm when there are
few substitutes. If you are making biscuits and there is only one person who sells flour, you have no alternative but to
buy it from them. Suppliers may refuse to work with the firm or charge excessively high prices for unique resources.
Potential factors are:
 Supplier switching costs relative to firm switching costs
 Degree of differentiation of inputs
 Impact of inputs on cost or differentiation
 Presence of substitute inputs
 Strength of distribution channel
 Supplier concentration to firm concentration ratio
 Employee solidarity (e.g. labor unions)
 Supplier competition: the ability to forward vertically integrate and cut out the buyer.

Industry rivalry:
For most industries the intensity of competitive rivalry is the major determinant of the competitiveness of the industry.
Potential factors:
 Sustainable competitive advantage through innovation
 Competition between online and offline companies
 Level of advertising expense
 Powerful competitive strategy
 Firm concentration ratio
 Degree of transparency
Competitor analysis:
Competitor analysis in strategic management is an assessment of the strengths and weaknesses of current and
potential competitors. This analysis provides both an offensive and defensive strategic context to identify opportunities
and threats. Profiling coalesces all of the relevant sources of competitor analysis into one framework in the support of
efficient and effective strategy formulation, implementation, monitoring and adjustment.
Competitor analysis is an essential component of corporate strategy. It is argued that most firms do not
conduct this type of analysis systematically enough. Instead, many enterprises operate on what is called "informal
impressions, conjectures, and intuition gained through the tidbits of information about competitors every manager
continually receives." As a result, traditional environmental scanning places many firms at risk of dangerous
competitive blind spots due to a lack of robust competitor analysis.

Understanding competitors and their activities can provide several benefits. First, an understanding of the
current strategy, strengths, and weaknesses of a competitor can suggest opportunities and threats that will merit a
response. Second, insights into future competitor strategies may allow the prediction of emerging threats and
opportunities. Third, a decision about strategic alternatives might easily hinge on the ability to forecast the likely
reaction of key competitors. Finally, competitor analysis may result in the identification of some strategic uncertainties
that will be worth monitoring closely over time. A strategic uncertainty might be, for example, “Will Competitor A
decide to move into the western U.S. market?”
As Figure 3.2 indicates, competitor actions are influenced by eight elements. The first of these reflects financial
performance, as measured by size, growth, and profitability.

Competitive Performance
Customer performance implies the profitable creation and delivery of competitive advantage. Evidence of this
achievement is reflected in superior organizational profitability relative to one's industry or other benchmark. History
has demonstrated that maintaining this competitive position over a period of five to ten years is an achievement that
few organizations have attained. There have been many pundits who have tried to formalize the attributes of
successful companies; however, time has demonstrated that today's best companies can fall victim to the dynamics of
the market. These experiences reflect that formula prescriptions do not predict success for the long run; there are
however here a number of concepts that can help organizations get on track and stay on track:
1. Leadership
The Leadership must be accessible and requires being on the field as opposed to being on side lines.

2. Value Delivery to Constituencies

Stockholders, SUPPLIERS, employees, distributors, and customers all represent constituencies that have value needs
and contribute to the effectiveness of short and long term competitive performance. Failure to integrate these
perspectives into one's strategy will dilute performance.

3. Frame of Reference
Strategy creation that is based on an inward focus is a recipe for competitive disaster. Competitive innovation is based
on a unique understanding of one's business model and how it can be configured to achieve a competitive advantage.

4. Organizational Alignment
Most senior managers recognize that organizational structure and behavior is often its own worst enemy. Solutions
such as the Balanced Score Card offer a framework to better understand performance and alignment; however, these
solutions are often based on strategies that are driven by financial metrics that may be internally consistent but drive
behavior that dilutes competitive value.

5. Value Articulation and Delivery

Most organizations cannot articulate a clear definition of their value-add nor do they validate that customers recognize
said value as a competitive advantage. The result is confused or mixed message to market and worse yet, conflicting
behavior within the organization.

There are few companies that do not demonstrate a level of disconnect with some if not all of these issues. Often
these issues are so intertwined with the culture that it is difficult to separate cause and effect. To move the
organization to a new level of competitive performance requires a change in framework. Providing this type of context
is the thrust of the services of GSP & Associates.

Competitor's Strategy:
It is defined as the long term plan of a particular company in order to gain competitive advantage over its
competitors in the industry. It is aimed at creating defensive position in an industry and generating a superior Return
on investment. Such type of strategies play a very important role when industry is very competitive and consumers are
provided with almost similar products. One can take example of mobile phone market.
1. Cost Leadership
Here, the objective of the firm is to become the lowest cost producer in the industry and is achieved by
producing in large scale which enables the firm to attain economies of scale. High capacity utilization, good bargaining
power, high technology implementation are some of factors necessary to achieve cost leadership.
E.g. Micromax mobile phones

2. Differentiation leadership
Under this strategy, firm maintains unique features of its products in the market thus creating a differentiating
factor. With this differentiation leadership, firms target to achieve market leadership. And firms charge a premium
price for the products (due to high value added features) Superior brand and quality, major distribution channels,
consistent promotional support etc. are the attributes of such products.
E.g. BMW, Apple

3. Cost focus
Under this strategy, firm concentrates on specific market segments and keeps its products low priced in those
segments. Such strategy helps firm to satisfy sufficient consumers and gain popularity.
E.g. Sonata watches concentrates on lower segment customers by providing

4. Differentiation focus
Under this strategy, firm aims to differentiate itself from one or two competitors, again in specific segments
only. This type of differentiation is made to meet demands of border customers who refrain from purchasing
competitors’ products only due to missing of small features. It is a clear niche marketing strategy.
E.g. Titan watches concentrates on premium segment which includes jewels in its watches. Without following anyone
of above mentioned competitive strategies, it becomes very difficult for firms to sustain in competitive industry.

Competitor's strength & Weakness:

What Are the Relevant Assets and Competencies?
Competitor strengths and weaknesses are based on the existence or absence of assets or competencies. Thus,
an asset such as a well-known name or a prime location could represent a strength, as could a competency such as the
ability to develop a strong promotional program. Conversely, the absence of an asset or competency can represent a
weakness.
To analyze competitor strengths and weaknesses, it is thus necessary to identify the assets and competencies
that are relevant to the industry. As Figure 3.3 suggests, four sets of questions can be helpful.

1. What businesses have been successful over time? What assets or competencies have contributed to their success?
What businesses have had chronically low performance? Why? What assets or competencies do they lack?
 By definition, assets and competencies that provide SCAs should affect performance over time. Thus,
businesses that differ with respect to performance over time should also differ with respect to their assets and
competencies. Analysis of the causes of the performance usually suggests sets of relevant competencies and assets.
Typically, the superior performers have developed and maintained key assets and competencies that have been the
basis for their performance. Conversely, weakness in several assets and competencies relevant to the industry and its
strategy should visibly contribute to the inferior performance of the weak competitors over time.
For example, in the CT scanner industry the best performer, General Electric, has superior product technology and R&D,
scale economies, an established systems capability, a strong sales and service organization (Owing, in part, to its X-ray
product line), and an installed base.
2. What are the key customer motivations? What is needed to be preferred? What is needed to be considered?
Customer motivations usually drive buying decisions and thus can dictate what assets or competencies
potentially create meaningful advantages. In the heavy-equipment industry, customers value service and parts backup.
Caterpillar’s promise of “24-hour parts service anywhere in the world” has been a key asset because it is important to
customers. Apple has focused on the motivation of designers for user-friendly design platforms. There are motivations
that lead to a brand being excluded from consideration. An offering characteristic may not determine winners but a
deficiency will eliminate it from being considered. Hyundai, for example, needs to be perceived as having adequate
quality. A series of “best car” awards in 2009 did not necessarily vault the brand to a superior position, but for many it
did get rid of the “inadequate” perception.
3. What assets and competencies represent industry mobility (entry and exit) barriers?
Strategic groups are characterized by structural stability even when one group is much more profitable than
the others. The reason is mobility barriers, which can be both entry barriers and exit barriers. Some groups have assets
and competencies that will be difficult and sometimes impossible to duplicate by those seeking to enter. International
deep water oil-well drilling firms, for example, have technology, equipment, and people that domestic, on-shore firms
cannot duplicate. These assets also represent exit barriers because there is no other use to which they could be put.
4. What are the significant value added components in the value chain?
A firm that can excel on a critical value added component can have a sustainable advantage. The component
can be critical because of its cost such as package handling for FedEx or the call center at Dell. Or it can be critical
because of the customer benefit it generates or affects such as the ordering system at Amazon or the ingredients of a
P&G detergent. In examining the value chain, it is helpful to start with suppliers and end with the customer use
experience while charting all the components in between. The components can be found throughout the organization
and that of its partners. For eBay, for example, operations, customer support, auction services, plus the operations of
those selling goods are all potential candidates.

Competitor’s Retaliation:
Refers to the response existing competitors may take to the emergence of a new competitor. Types of retaliation
include dropping prices, offering increased incentives to buy, offering additional service for the same price. The greater
the profitability of an industry the more likely retaliatory action will be.