UNIT-2 Strategy Formulation

Value chain analysis

Definition
Value chain analysis (VCA) is a process where a firm identifies its primary and support
activities that add value to its final product and then analyzes these activities to reduce costs
or increase differentiation.

Value chain represents the internal activities a firm engages in when transforming inputs into
outputs.

What is Value Chain Analysis

Value chain analysis is a strategy tool used to analyze internal firm activities. Its goal is to
recognize which activities are the most valuable (i.e., are the source of cost or differentiation
advantage) to the firm and which ones could be improved to provide competitive advantage.

In other words, by looking into internal activities, the analysis reveals where a firm’s
competitive advantages or disadvantages are. The firm that competes through differentiation
advantage will try to perform its activities better than competitors would do.

If it competes through cost advantage, it will try to perform internal activities at lower costs
than competitors would do. When a company is capable of producing goods at lower costs
than the market price or to provide superior products, it earns profits.

M. Porter introduced the generic value chain model in 1985. Value chain represents all the
internal activities a firm engages in to produce goods and services. VC is formed of primary
activities that add value to the final product directly and support activities that add value
indirectly.

Although primary activities add value directly to the production process, they are not
necessarily more important than support activities. Nowadays, competitive advantage mainly
derives from technological improvements or innovations in business models or processes.
Therefore, such support activities as ‘information systems’, ‘R&D’ or ‘general management’
are usually the most important source of differentiation advantage.

On the other hand, primary activities are usually the source of cost advantage, where costs
can be easily identified for each activity and properly managed.

A firm’s VC is a part of a larger industry’s VC. The more activities a company undertakes
compared to the industry’s VC, the more vertically integrated it is. Below, you can find an
industry’s value chain and its relation to a firm-level VC.

Primary activities are those that go directly into the creation of a product or the execution of a
service, including:

• Inbound logistics: Activities related to receiving, warehousing, and inventory

management of source materials and components
• Operations: Activities related to turning raw materials and components into a
finished product
• Outbound logistics: Activities related to distribution, including packaging,
sorting, and shipping
 • Marketing and sales: Activities related to the marketing and sale of a product or
service, including promotion, advertising, and pricing strategy
• After-sales services: Activities that take place after a sale has been finalized,
including installation, training, quality assurance, repair, and customer service
Secondary activities help primary activities become more efficient—effectively creating a
competitive advantage—and are broken down into:

• Procurement: Activities related to the sourcing of raw materials, components,

equipment, and services
• Technological development: Activities related to research and development,
including product design, market research, and process development
• Human resources management: Activities related to the recruitment, hiring,
training, development, retention, and compensation of employees
• Infrastructure: Activities related to the company’s overhead and management,
including financing and planning.

Approaches

There are two different approaches on how to perform the analysis, which depend on what
type of competitive advantage a company wants to create (cost or differentiation advantage).
The table below lists all the steps needed to achieve cost or differentiation advantage using
VCA.

Competitive advantage types

Cost advantage Differentiation advantage

This approach is used when organizations try to compete on costs The firms that strive to create superior products or services use a
and want to understand the sources of their cost advantage or differentiation advantage approach. (good
disadvantage and what factors drive those costs. (good examples: Apple, Google, Samsung Electronics, Starbucks)
examples: Amazon.com, Walmart, McDonald’s, Ford, Toyota)

Step 1. Identify the firm’s primary and support activities. Step 1. Identify the customers’ value-creating activities.
Step 2. Establish the relative importance of each activity in the total Step 2. Evaluate the differentiation strategies for improving
cost of the product. customer value.
Step 3. Identify cost drivers for each activity. Step 3. Identify the best sustainable differentiation.
Step 4. Identify links between activities.
Step 5. Identify opportunities for reducing costs.

Cost advantage

To gain a cost advantage, a firm has to go through 5 analysis steps:

Step 1. Identify the firm’s primary and support activities. All the activities (from
receiving and storing materials to marketing, selling and after-sales support) that are
undertaken to produce goods or services have to be clearly identified and separated from each
other. This requires an adequate knowledge of the company’s operations because value chain
activities are not organized in the same way as the company itself. The managers who
identify value chain activities have to look into how work is done to deliver customer value.

Step 2. Establish the relative importance of each activity in the total cost of the
product. The total costs of producing a product or service must be broken down and assigned
to each activity. Activity-based costing is used to calculate costs for each process. Activities
that are the major sources of cost or done inefficiently (when benchmarked against
competitors) must be addressed first.

Step 3. Identify cost drivers for each activity. Only by understanding what factors drive the
costs can managers focus on improving them. Costs for labor-intensive activities will be
driven by work hours, work speed, wage rate, etc. Different activities will have different cost
drivers.

Step 4. Identify links between activities. Reduction of costs in one activity may lead to
further cost reductions in subsequent activities. For example, fewer components in the
product design may lead to fewer faulty parts and lower service costs. Therefore identifying
the links between activities will lead to a better understanding of how cost improvements
would affect the whole value chain. Sometimes, cost reductions in one activity lead to higher
costs for other activities.

Step 5. Identify opportunities for reducing costs. When the company knows its inefficient
activities and cost drivers, it can plan on how to improve them. Too high wage rates can be
dealt with by increasing production speed, outsourcing jobs to low-wage countries or
installing more automated processes.

Differentiation advantage

VCA is done differently when a firm competes on differentiation rather than costs. This is
because the source of differentiation advantage comes from creating superior products,
adding more features and satisfying varying customer needs, which results in higher cost
structure.

Step 1. Identify the customers’ value-creating activities. After identifying all value chain
activities, managers have to focus on those activities that contribute the most to creating
customer value. For example, Apple products’ success mainly comes not from great product
features (other companies have high-quality offerings, too) but from successful marketing
activities.

Step 2. Evaluate the differentiation strategies for improving customer value. Managers
can use the following strategies to increase product differentiation and customer value:
 • Add more product features;
• Focus on customer service and responsiveness;
• Increase customization;
• Offer complementary products.
Step 3. Identify the best sustainable differentiation. Usually, superior differentiation and
customer value will be the result of many interrelated activities and strategies used. The best
combination of them should be used to pursue sustainable differentiation advantage.

GE/McKinsey Matrix
GE/McKinsey Matrix is the business portfolio framework developed by General
Electric with the help of McKinsey and Company, an American global management
consulting firm. GE Business Screen includes nine cells based on long-term industry
attractiveness and business strength/competitive position.

Factors that Affect Market Attractiveness:

There are several factors which can help determine attractiveness. These are listed below:

• Market Size
• Market growth
• Market profitability
• Pricing trends
• Competitive intensity / rivalry
• Overall risk of returns in the industry
• Opportunity to differentiate products and services
• Segmentation
• Distribution structure (e.g. retail, direct, wholesale)

Factors that Affect Competitive Strength:

There are several factors which can help determine the business unit strength. These are listed
below:

• Strength of assets and competencies

• Relative brand strength
• Market share
• Customer loyalty
• Relative cost position (cost structure compared with competitors)
• Distribution strength
• Record of technological or other innovation
• Access to financial and other investment resources
• The green zone indicates go ahead. It includes the strong SBU’s in which the company
should invest and grow. They go for Expansion Strategies.
• The yellow zone indicates wait and see. It includes SBS’s that are medium in overall
attractiveness. They should maintain their level of investments. They go for Stability
Strategies.
• The red zone indicates stop. It includes SBU’s that are low in overall attractiveness.
They go for Retrenchment Strategies (Divestment and Liquidation).

• Six-step approach for the implementation of the GE/McKinsey Matrix.

• Specify drivers of each dimension. The corporation must carefully determine those
factors that are important to its overall strategy.
• Determine the weight of each driver. The corporation must assign relative importance
weights to the drivers.
• Score the SBU’s on each driver.
• Multiply weights and scores for each SBU.
• View resulting graph and interpret it.
• Perform a review/sensitivity analysis. Make use of adjusted other weights and scores
(there may be no consensus).
BCG matrix

Boston Consulting Group (BCG) Matrix is a four celled matrix (a 2 * 2 matrix) developed
by BCG, USA. It is the most renowned corporate portfolio analysis tool. It provides a graphic
representation for an organization to examine different businesses in it’s portfolio on the
basis of their related market share and industry growth rates.

It is a two dimensional analysis on management of SBU’s (Strategic Business Units). In other

words, it is a comparative analysis of business potential and the evaluation of environment.

According to this matrix, business could be classified as high or low according to their
industry growth rate and relative market share.

Relative Market Share = SBU Sales this year leading competitors sales this year.

Market Growth Rate = Industry sales this year - Industry Sales last year.

Resources are allocated to the business units according to their situation on the grid.
The four cells of this matrix have been called as stars, cash cows, question marks and dogs.
Each of these cells represents a particular type of business.

The BCG growth matrix is divided into 4 categories:

1.Dogs- The products that have low market shares and are growing at a very low rate, come
under this category. This means that they generate little to no profits for the business and that
they should be made redundant.
Products that are in the declining stage of their product life cycle also come under this
category. Dogs are liquidated meaning their manufacturing is stopped and the ones in stock
are sold quickly, the resources used to make these products are then reallocated.

2.Cash Cows- These are the products that have a low rate of growth, but they are a huge
market share, so the business just takes whatever profit it can by delivering the products. The
products in the cash cows category are usually in their mature state in the product’s life cycle,
once that changes to decline, they will be a part of the dog’s category.

3.Stars- The products that are in the growth stage of the product life cycle come under this
category. If a product is in the stars category, then that means it has a significant market share
and that the investors should be interested in investing in the business or that particular
product.
Stars bring huge profits to the business, but their costs are also high, this is because the level
of competition is increasing, other businesses copy the star products and so the business
needs to develop the product and marketing strategies ever so often to be a star always.
Once a star has stopped growing and is still a holder of significant market share, it becomes a
cash cow for the business.

4.Question marks- A New business venture’s products are question marks, they have a low
market share but their market growth is high. After some time of continued high growth rate,
these question marks can turn into stars.
On the other hand, if a question mark’s growth starts reducing, then over time it will be
considered a dog, this is the reason why question marks are always thoroughly researched by
the investors, and if they succeed in the tests, only then they are compelled into investing in
the business/ product.

Balanced Scorecard (BSC)

he balance scorecard is used as a strategic planning and a management technique. This is

widely used in many organizations, regardless of their scale, to align the organization's
performance to its vision and objectives.

The scorecard is also used as a tool, which improves the communication and feedback
process between the employees and management and to monitor performance of the
organizational objectives.

As the name depicts, the balanced scorecard concept was developed not only to evaluate the
financial performance of a business organization, but also to address customer concerns,
business process optimization, and enhancement of learning tools and mechanisms.
the Basics of Balanced Scorecard
Following is the simplest illustration of the concept of balanced scorecard. The four
boxes represent the main areas of consideration under balanced scorecard. All four main areas
of consideration are bound by the business organization's vision and strategy.

The balanced scorecard is divided into four main areas and a successful organization
is one that finds the right balance between these areas.
Each area (perspective) represents a different aspect of the business organization in
order to operate at optimal capacity.
• Financial Perspective - This consists of costs or measurement involved, in terms of
rate of return on capital (ROI) employed and operating income of the organization.
• Customer Perspective - Measures the level of customer satisfaction, customer
retention and market share held by the organization.
• Business Process Perspective - This consists of measures such as cost and quality
related to the business processes.
• Learning and Growth Perspective - Consists of measures such as employee
satisfaction, employee retention and knowledge management.

The four perspectives are interrelated. Therefore, they do not function independently. In real-
world situations, organizations need one or more perspectives combined together to achieve
its business objectives.

For example, Customer Perspective is needed to determine the Financial Perspective, which
in turn can be used to improve the Learning and Growth Perspective.

Factors of Balanced Scorecard

From the above diagram, you will see that there are four perspectives on a balanced
scorecard. Each of these four perspectives should be considered with respect to the following
factors.

When it comes to defining and assessing the four perspectives, following factors are used:
 • Objectives(critical success factors) - This reflects the organization's objectives such
as profitability or market share.
• Measures( key performance indicator) - Based on the objectives, measures will be
put in place to gauge the progress of achieving objectives.
• Targets - This could be department based or overall as a company. There will be
specific targets that have been set to achieve the measures.
• Initiatives - These could be classified as actions that are taken to meet the objectives.

The Need for a Balanced Scorecard

Following are some of the points that describe the need for implementing a balanced
scorecard:

• Increases the focus on the business strategy and its outcomes.

• Leads to improvised organizational performance through measurements.
• Align the workforce to meet the organization's strategy on a day-to-day basis.
• Targeting the key determinants or drivers of future performance.
• Improves the level of communication in relation to the organization's strategy and
vision.
• Helps to prioritize projects according to the timeframe and other priority factors.

Types of strategy
Corporate Level Strategy

Corporate-level strategy occupies the highest level of strategic decision making and covers
actions dealing with the objective of the firm, acquisition, and allocation of resources, and
coordination of strategies of various SBUs for optimal performance.

The top management of the organization makes such decisions. The nature of strategic
decisions tends to be value-oriented, conceptual, and less concrete than decisions at the
business or functional level. Some of the types of corporate-level strategies are:

• Stability Strategy: This strategy involves maintaining the status quo, focusing
on doing what the company does well, and avoiding risky ventures. It is often
used in a steady, predictable market where radical changes are unnecessary.
• Expansion/Growth Strategy: As the name suggests, this strategy aims at the
growth and expansion of the company. It might involve exploring new markets,
introducing new products, or increasing production capacity to propel the
business forward.
• Retrenchment Strategy: This involves pulling back and consolidating
resources to survive difficult times. It might involve cost-cutting, restructuring,
or closing underperforming business units to streamline operations and improve
efficiency.
• Combination/Mixed Strategy: This involves using a mix of the above
strategies to address different parts of the business. For example, a company
might use a growth strategy for one business unit while employing a
retrenchment strategy for another.
2) Business-Level Strategy

Business-level strategy is applicable in those organizations, that have different businesses

each business is treated as a strategic business unit (SBU). The fundamental concept in SBU
is to identify the discrete independent product/market segments served by an organization.

Since each product/market segment has a distinct environment, an SBU is created for each
such segment. For example, Reliance Industries Limited operates in textile fabrics, yarns,
fibers, and a variety of petrochemical products. For each product group, the nature of the
market in terms of customers, competition, and marketing channels differs.

Therefore, it requires different strategies for its different product groups. Thus, where the
SBU concept is applied, each SBU sets its strategies to make the best use of its resources (its
strategic advantages) given the environment it faces. At such a level, strategy is a
comprehensive plan providing objectives for SBUs, allocation of resources among functional
areas, and coordination between them for making optimal contributions to the achievement of
corporate-level objectives.

Such strategies operate within the overall strategies of the organization. The corporate
strategy sets the long-term objectives of the firm and the broad constraints and policies within
which an SBU operates. The corporate level will help the SBU define its scope of operations
and also limit or enhance the SBU operations by the resources the corporate level assigns to
it. There is a difference between corporate-level and business-level strategies.

For example, Andrews says that in an organization of any size or diversity, corporate strategy
usually applies to the whole enterprise, while business unit strategy, less comprehensive,
defines the choice of product or service and market of individual business within the firm. In
other words, business strategy deals with ‘how’ and corporate strategy with ‘what’. Corporate
strategy defines the business in which a company will compete preferably in a way that
focuses resources to convert distinctive competence into competitive advantage.’

Corporate strategy is not the total of business strategies of the corporation but it deals with
different subject matter. While the corporation is concerned with and has an impact on
business strategy, the former is concerned with the shape and balancing of growth and
renewal rather than in-market execution. Some of the types of business-level strategies are:

• Cost Leadership Strategy/Cost Reduction Strategy: This strategy aims to

become the lowest-cost producer in the industry, allowing the company to
outperform competitors by offering products or services at more competitive
prices.
• Differentiation Strategy: Here, a company seeks to offer unique and superior
value compared to its competitors through product innovation, high quality,
extraordinary service, or other factors.
• Focus/Niche Strategy: This strategy involves a company targeting a specific,
often narrowly defined, market segment (niche) where it can meet the unique
needs of consumers better than larger competitors.

Functional Level Strategy

Functional strategy, as suggested by the title, relates to a single functional operation and the
activities involved therein. Decisions at this level within the organization are often described
as tactical for example human resource strategy. Such decisions are guided and constrained
by some overall strategic considerations.

Functional strategy deals with the relatively restricted plans providing objectives for specific
functions, allocation of resources among different operations within that functional area, and
coordination between them for optimal contribution to the achievement of the SBU and
corporate-level objectives.

Below the functional-level strategy, there may be operations-level strategies as each function
may be divided into several sub-functions. For example, marketing strategy, a functional
strategy, can be subdivided into promotion, sales, distribution, and pricing strategies with
each sub-function strategy contributing to the functional strategy.

Example Apple Inc.

Apple Inc. strategically operates at various levels of strategy to sustain its competitive
advantage. They implement a combination of corporate, business unit, and functional level
strategies to enhance their production strategy.

• At the corporate level, Apple focuses on innovation and delivering high-quality

products.
• In terms of strategic business units, Apple has various segments like
Mac, iPhone, iPad, Services, and Wearables.
• Their production strategy revolves around creating cutting-edge technology
with a seamless user interface.
• Apple leverages functional level strategies in marketing through
distinctive advertising and in supply chain management through efficient
logistics.
• All these strategies collectively pave the way for Apple to maintain
a sustainable competitive advantage in the market.

Environment and organisational appraisal

Environment literally means the circumstances or conditions that surround ones

surroundings. 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 many ways, its understanding is of crucial importance. The environment of any business
consists of the totality of all factors which are external to, and largely beyond the control of
individual business firm. There are also variables that management can control and variables
that management can influence or affect but not control, such as market share or credit rating.
In this sense, the variables that can be influenced appear to be in the relationship between a
firm and its environment (whether 58 Strategic Management external or internal). The
environment is often described as external to the firm, and generally this would be true. Yet
there are some other factors that may be within the firm but beyond the immediate control of
management. For instance, if attitudes and beliefs of employees are not easily changeable by
management, it can be said that those attitudes and beliefs are an environmental factor within
the firm and should be recognized by management in its policy and responsibilities.

What is Environmental Appraisal ?

There are numerous factors that affect the organisation and its operations. These factors can
influence the organisation in both positive as well as negative ways. Identifying the issues
and challenges. existing in the external environment is extremely important for an
organisation. In order to identify the factors in external environment, an appraisal process of
the industry's environment is necessary. Environmental appraisal facilitates the managers
with the ability to study the competitive structure and competitive position of the organisation
along with the position of its competitors.

By analyzing and appraising the external environment, the existing opportunities and threats
can be identified. It is the responsibility of the managers to avoid the threats and to reap the
benefits from the opportunities in the market. Environmental appraisal also helps the
managers in analyzing the effects of globalization on the level of competition within a
particular industry.
It is well-known that business environment never remains stable rather keeps on changing
rapidly. As the businesses grows and expands, the changes in external environment compels
the organizations to make efficient strategies to deal with the contingency
situations. Environmental appraisal also allows an organisation to study the steps taken by
competitors in the market. By appraising the external environment the companies can
improve their internal capabilities and strengths for adapting to the changes in the external.
environment.

Environmental appraisal is the process by which corporate planners monitor the economic,
governmental, supplier, technological and market settings to determine the opportunities for
and threats to their enterprise. In other words, it consists of identifying and analyzing
environmental influences individually and collectively to determine their potential effects on
an organization and the consequent problems and opportunities. Obviously in this scenario
analysis consists of tracing the source of any opportunity or threat, to break the whole into
parts so as to examine its nature and interrelationship. It is from such analysis that
management can make decisions on whether to react, to ignore or try to influence or
anticipate future opportunities or threats discovered

CHARACTERISTICS OF ENVIRONMENT
 a) Environment is Complex: The environment consists of a number of events, factors,
conditions, and influences arising from various sources. All these do not exist alone but
interact with each other to create entirely new set of influences. It is difficult to comprehend
at once what factors constitute a given environment. So environment is a complex
phenomenon relatively easier to understand in parts but difficult to grasp in its totality.
b) Environment is Dynamic: The environment is constantly changing in nature. Due to the
many and varied influences, there is dynamism in the environment, making it to change its
shape and character continuously.
c) Environment is Multi-Faceted: A particular change in the environment, or a new
development, may be viewed differently by different observers.
d) Environment has a Far-Reaching Impact: The growth and profitability of an organization
depends critically on the environment in which it exists. Any environmental change has an
impact on the organization in several different ways.

Process of environmental appraisal

1) Understand Nature of Environment :
Before starting the environmental appraisal, the strategists must understand the nature, i.e.,
the volatility of external environment. The volatility here implies to the changes in the
environment. To understand the nature of environment, the strategic leaders need to answer
following questions :
• Is the environment stable or dynamic?
• In which ways does the environment change?
• Are the changes identifiable?

2) Analyze the Past Influences of Environmental Factors :

Once, the nature of external environment is identified, the next step is to identify the factors
that have influenced the performance of organisation in the past. Analyzing these factors will
help in planning and formulating strategies to handle future scenarios.

3) Identify Critical Competitive Forces :

The next step is to identify the key competitive forces existing within the industry with the
help of structural analysis. This step helps to analyze the organization's current position, the
bargaining power of buyers and suppliers, the new entrants in the industry, and the existing
competitors of the organisation.
4) Analyze the Strategic Position :

In this step, the managers analyze the strategic position of the organisation in relation to its
competitors in terms of resources, customers, etc. To identify and analyze the strategic
position of an organisation, following ways should be adopted:
• Growth/Share analysis
• Attractiveness analysis
• Strategic group analysis
• Study of market segments and market power
• Competitor analysis

5) Identify the Opportunities and Threats :

Identify the opportunities and threats prevailing in the environment. Formulate efficient
strategies to reap the benefits from the opportunities so that the threats can be neutralized.
The selection of strategy and effective utilization of selected resources in an effective manner
is crucial for this stage.

Techniques of Environmental Appraisal

While analyzing the environment, the strategists should remember to select those techniques
only that match the needs of organisation from every aspect. There are many techniques for
analyzing the environment, among which some of the important environmental appraisal

techniques are as follows :

QUEST Analysis

The QUEST or "Quick Environmental Scanning Technique" is a technique that facilitates

estimation of wide-ranging environmental factors and assesses their influences on the
organisation. It tries to scrutinize the environmental forces on the basis of events and trends
occurring in the market. Some of the assumptions made for analyzing the environment using
this technique are :
• The strategic executives have views about the dynamic environmental forces.
• These views about the environment collectively signify the understanding of the
environment by the organisation.
Hence, it can be said that having knowledge about the environmental forces can be useful
only when there is a mechanism to interpret and analyze them. In the absence of a specific
technique, it is possible that all the future expectations and plans go wasted, as these cannot
be shared with the executives. QUEST analysis allows the executives to understand and
analyze the different perceptions, interpretations and points of mistakes regarding the
environment.

This technique helps the executives in voicing their perceptions and analyzing the points at
which their individual views differ from each other. Once the points at which the executives
disagree are identified, it is possible for the management to negotiate with them so that a
consensus can be achieved. The information generated by different views would lead to better
decision-making for the achievement of organizational goals. This also allows the
organizations to make combined decisions rather than independent and individual ones.

According to Nanus, "QUEST is a future research process designed to permit executives and
planners in an organisation to share their views about trends and events in future external
environments that have critical implications for the organization's strategies and polices. It is
a systematic, intensive, and relatively inexpensive way to develop a shared understanding of
high priority issues and to focus management's attention quickly on strategic areas for which
more detailed planning and analysis would be beneficial".
Various tools can be used to perform QUEST, such as questionnaires, stakeholder analysis,
Delphi technique, structural analysis, etc.

Process of QUEST

1) Preparation for QUEST :

The first step of QUEST analysis is to make preliminary preparations. These preliminary
tasks are as follows :
• Define the environmental issues
• Select the members for the analysis (12 to 15)
• Document the complete information about the past trends of environment relevant for
the organisation
• Decide the location to carry-out the analysis

2) Analyze the Environment :

As soon as the preparations have been completed, the environment in which the
organizational activities are performed is analyzed. This step Marts with identifying the
vision, mission, and objectives of the organisation. Following the discussions about
organizational goals, the past trends and environmental patterns that may influence the
operations of the organisation, are discussed. It should be noted that the cross impact of these
forces are also analyzed to estimate the capability and strength of the organisation Strategic
leaders should devote considerable time to analyze the environment.

3) Document the Discussions in a Report :

Once, the business environment is analyzed, all the outcomes are combined and presented in
form of a brief report. This report has two sections, where the first part illustrates about the
organization's strategic content, the second part elaborates about the future possibilities to he
faced by the organisation.
4) Discuss the Report :

At last the strategic leaders should discuss the documented report in a meeting, and analyze
the alternative courses of actions available to the organisation. These alternative courses of
actions should also be evaluated according to the desired future position of the organisation
keeping in mind the resources and strengths of the organisation. QUEST does not suggest the
strategies to be made; it highlights the issues and challenges to be considered while
formulating the strategy.

ETOP Analysis

Environmental Threats and Opportunities Profile (ETOP) is a technique used to structure

the issues of environment. This technique was given by W.F. Glueck. The ETOP categorizes
different environmental issues in various sectors which in turn helps the management to focus
their attention towards specific areas. It helps in identifying the potential factors that
influence the organisation.

Diagnosing the external environment closely is very essential as it points out the
opportunities and threats. While some of the factors create suitable circumstances, other
factors impose threats. ETOP facilitates an in depth analysis of environmental factors that
allows the organizations to identify the potential opportunities and threats. This results in
more efficient strategic planning. An opportunity can be defined as a favorable situation that
provides prospects for a business to grow, expand and make profits as well. For example, an
untapped market, an unaddressed potential need of customers, new technology, etc.
Constraints are those factors that limit the ability to grow and reduce sales and profit
potential. A threat can be defined as an unfavorable situation that restraints the growth and
profits of an organisation.

For example, new entrants, availability of substitutes at low cost, etc.

ETOP Preparation

To prepare ETOP of an organisation, the strategists need to classify the environmental factors
in specified categories, after which the impacts of those factors can be analyzed. This
categorization simplifies the overall analysis process.
PEST Analysis

"PEST" or "Political, Economic, Social and Technological" analysis is one of the

techniques of environment appraisal which provides a deep insight about the macro-
environmental factors that affect the operations of a business. The level of importance given
to these factors varies as per the industry in which a company works and the goods/services it
deals in.

Some strategists have increased the scope of this technique by adding two more factors into
it, i.e., environmental and legal factors. Hence, the extended version of this technique is
known as "PESTEL". This technique has another variant known as "LONGPESTEL" or
"Local, National, Global, Political, Economic, Social and Technological" analysis. This
technique is used when the organizations are categorized as per the geographical basis. When
these macro environmental factors are integrated with the external micro-environmental
factors, then the analysis carried-out is SWOT analysis.

Factors Analyzed in PEST Analysis

Various factors that are analyzed in PEST analysis are as follows :

1) Political Factors :

Political factors are the laws, orders, and interventions made by the government in order to
regulate the businesses. These regulations influence the operations of business in a significant
way.

2) Economic Factors :

Economic factors are the current and past patterns that exist in the country. These factors
encompass the rate of economic growth, inflation, exchange rates, average income, etc.,
which heavily influence the money circulation and hence regulate the business activities.

3) Social Factors :

Social factors include all those factors that are related to the general public. These factors are
closely knitted with the consumption by public, which influences the gross demand of
products and services. These factors, involve the rate of population growth. literacy rate,
employment, public safety, etc.
4) Technological Factors :

Technological factors. are one of the prime factors that affect the business operations in the
dynamic business. environment. These factors involve arrival of new technology in market,
automation of business processes, research and development. projects, etc.

SWOT Analysis

Another well-known technique for analyzing the internal and external environment of
business is "SWOT" or "Strengths, Weaknesses, Opportunities and Threat" analysis. It is
a simple tool that is helpful in studying the internal strength and weaknesses, and the external
threats and opportunities of a company. SWOT analysis involves identifying the business
objectives and defining the significant internal and external factors for achieving the
identified objectives.

The main aim of conducting a SWOT analysis is to help the business in protecting itself
against the threats and to exploit the potential business opportunities. This analysis is
essential for formulating strategies as is provides a base for strategy formulation. SWOT
analysis helps in studying the overall soundness of the business.

Components of SWOT Analysis

1) Internal Factors :

The first two letters in the acronym S (strength) and W (weaknesses) refers to internal factors
that are the resources available in the organisation. These factors may impart strengths which
can be utilized to exploit the opportunities or become a cause of weaknesses of a strategic
nature for the organisation.

i) Strengths :

These are the factors that provide competitive advantage to the organisation. These factors
collectively may allow an organisation to bring change in an organisation. These factors can
be different for different organizations. These can be resources, skills, etc. For example,
• Presence in global market & collaboration with reputed international firms,
• Tie-ups with internationally reputed manufacturers and exporters,
• Experience in tooling selectivity and metal cutting,
• Manufacturers certified with ISO 9001 certification.
ii) Weaknesses :

Weaknesses are the factors: that limit the growth of company or restrict the company from
moving in a desired direction. These factors also hinder the organisation from achieving
success through the internal capabilities. These factors vary as per the organisation. A
weakness can be anything such as lack of resource, lack of market understanding, lack of
fund, etc. For example,
• Inconsistencies in cash flow system,
• Lack of research facilities and use of out dated research data,
• Lack of latest technologies and no web presence,
• New firm and hence lack of goodwill.

2) External Factors :

External factors reside outside the organisation. These are of two types :

i) Opportunities :

An opportunity is a major favorably situation in the firm's environment. The industry should
build its production capacity to meet the upward moving demand, both for domestic and
international markets. Opportunities are those factors which act as the favorable situations for
the organisation. These situations encourage the organisation to grow more and earn more
profits. For example,
• Loyal customers in market,
• High demand of certain products in a particular season,
• Poor substitutes available in the market,
• Obsolete technologies of the competitors.

ii) Threat :

Threats are the external unfavorable conditions. They act as barrier for the organisation in
achieving its desired market position. These factors also differ as per the organisation and the
areas in which it operates. For example,
• Too many competitors of the similar product,
 • Introduction of taxes or increase in tax rates,
• Recession in economy,
• Latest technology used by competitors.

Organisational appraisal
In order to formulate a corporate strategy and pursue its objectives, every organization must
first understand itself in great detail. Understanding its own strengths & weaknesses and then
matching them against the external threats & opportunities can create organizational
capabilities, while safeguarding the organization from the onslaught of adverse situations.
This is also called “Corporate Introspection” and this is done through ‘Organizational
Appraisal’. Organizational Analysis is a process of systematically evaluating organizational
capabilities which can provide a competitive advantage in the market. The capabilities enable
the organization to achieve strategic advantage over its competitors for long-term success.
Organizational Analysis is also known as internal analysis, corporate appraisal, self approval,
company analysis etc.
In order to formulate a corporate strategy and pursue its objectives, every organization must
first understand itself in great detail. Understanding its own strengths & weaknesses and then
matching them against the external threats & opportunities can create organizational
capabilities, while safeguarding the organization from the onslaught of adverse situations.
This is also called “Corporate Introspection” and this is done through ‘Organizational
Appraisal’. Organizational Analysis is a process of systematically evaluating organizational
capabilities which can provide a competitive advantage in the market. The capabilities enable
the organization to achieve strategic advantage over its competitors for long-term success.
Organizational Analysis is also known as internal analysis, corporate appraisal, self approval,
company analysis etc.

Factors In Organizational Appraisal

Organizational analysis involves the identification of factors which indicate the
organizational capabilities. These factors are known as organizational capability factors,
competitive advantage factors or strategic factors. The following are the organizational
capability factors that exist within an organization and which are critical for the formulation
and implementation of strategy;
Finance
Financial capability factors are concerned with the availability, usage and management of
funds. Some of the important factors which influence an organization’s financial capability
are;

Sources of funds – Financing pattern (capital structure), cost of funds, financial leverage,
reserves & surplus, relationship with provider of funds, etc.
Usage of funds – Fixed assets, current assets, loans & advances, dividend distribution.
Management of funds – Accounting and budgeting systems, financial control system, tax
planning, return risk & management etc.
Marketing
The main factors that influence the marketing capability of an organization are as follows;
Product related factors – Product mix, branding, product positioning, differentiation,
packaging etc.
Price related factors – Pricing policies, price competitiveness, value for money pricing, price
changes etc.
Place related factors – Distribution network, transportation & logistics, relations with
intermediaries etc.
Promotion related factors – Promotional mix, promotion tools, customer relationship
management etc.
Integration and control related factors – Market standing, company image, marketing
information system, marketing organization, etc.
Operations
Operations capability factors relate to the production of goods and services. Major factor
influencing an organization’s operation capability are as under;

Production System : Factors related to production system are plant location, capacity & its
utilization, plant layout, product design, material supply system, degree of automation, extent
of vertical integration etc.
Operations and Control System: Factors related to operation & control system are production
planning, inventory management, cost & quality control, maintenance system & procedures,
etc.
Research and Development : Factors related to research & development are product
development , R & D staff, technical collaboration & support, patent rights, level of
technology used etc.
Human Resources
In any organization, human resources make use of non-human resources. Human resource
capabilities relate to the acquisition & use of human resources, skills, and all connected
aspects that influence strategy formulation and implementation. Some of the important
factors which determine human resource capability are given below.
Factors related to the human resource system – Human resource planning, recruitment and
selection, training and development, human resource mobility, appraisal and compensation
management, etc.
Factors related to employee retention – Company’s image as an employer, career
development opportunities for employees, working conditions, employee benefits, employee
motivation and morale etc.
Factors related to industrial relations – Union-Management relationship, collective
bargaining, grievance handling system, employee participation in management, etc.

Components of Organization Appraisal

The major components of organizational appraisal are as follows;

• Internal Analysis
• Comparative Analysis
• Comprehensive Analysis
Internal Analysis
The internal analysis of a firm focuses and evaluates the strengths that can be leveraged and
weaknesses that need to be worked upon. The techniques used in internal analysis are;

Value chain analysis – discussed already

Quantitative Analysis

In quantitative analysis, both financial and nonfinancial aspects are studied as follows;
• Financial Analysis – In order to judge the strength and weaknesses in different
functional areas, ratio analysis and economic value-added analysis are used.
• Non-Financial Analysis – There are several aspects of an organization which
cannot be measured in financial terms. Non-financial analysis is used to assess
these aspects. Employee absenteeism and turnover, advertising recall rate,
production cycle time, service call rates, number of patents registered per annum,
inventory turnover rate, etc. are such aspects.
Qualitative Analysis

Those aspects of an organization which cannot be expressed in quantitative terms are

assessed through qualitative analysis. Corporate image, corporate culture, learning ability,
employment morale, etc. are examples of these aspects. Qualitative analysis can be used to
support and strengthen quantitative analysis.
Comparative Analysis

Strengths and weaknesses provide a competitive advantage to the organization when these are
unique and exclusive. Therefore an organization should compare its capabilities with those of
its competitors. Comparative analysis can be over a time period, based on industry norms and
through bench marking.

Historical Analysis

In historical analysis an organizations strengths and weaknesses are compared over different
time periods. Its reveals whether the strengths are improving or declining. Areas which show
continuous improvement are durable strengths. Hofer and Schendel have developed a
functional-area profile and resource deployment matrix for historical analysis. Historical
analysis can even be a comparison between a company’s own performance over the years.

Industry Norms

Every industry has certain norms or standards for key parameters of performance. The
performance levels of a firm can be compared with the norms of the industry in which the
firm operated. For example, cost levels of Maruti Suzuki may be compared against cost
standards in the car industry. A more selective approach can be to compare with firms that
follow similar strategies. These firms are known as strategic group. According to Miller and
Dess, a strategic group is “a cluster of competitors that share similar strategies and, therefore,
compete more directly with one another than with other firms in the same industry.

Comprehensive Analysis
Each of the techniques has its own benefits but fails to offer a comprehensive representation
of organizational strengths and weaknesses. Comprehensive analysis is required to defeat this
limitation. The techniques used in comprehensive analysis are as follows;
Balanced Scorecard
Balanced scorecard is the most comprehensive method of analyzing an organization’s
strengths and weaknesses. It integrates different perspectives with vision and strategy to
present a comprehensive and balanced picture of organizational performance. The four key
performance actions identified in balanced scorecard are as under;
• Financial perspective
• Customer perspective
• Internal Business Processes Perspective
• Learning and innovative perspectives