mod2

By Prof Srikanth Venkataswamy 1

PESTLE Analysis

Module-2


PESTLE Analysis is a tool that can aid Organizations making Strategies by helping them understand the external environment in which they operate now and will operate in Future

PESTLE analysis aims to identify and summarise environmental influences on an organisation or policy.

What is PESTLE analysis?


What is PESTLE analysis?


The firm’s External Environments

External / RemotePestle Analysis

Global & DomesticIndustry Environments

Global & DomesticOperating Environment

( Global & Domestic)THE FIRM

SWOT Analysis


Political , Government and legal Variables

• Political system• Political ideology• Government stability• Taxation policy• Tax laws• Governmental regulation or

deregulations• Level of defense expenditure• Govt employment policy• Special local ,State and

federal policy

• Fiscal & monetary policy• Foreign policy• Govt attitude towards foreign firms


Economic Variables:• GDP trend• Inflation rates• Money market rates• Consumption patterns• Level of economic

development• Level of disposal incomes• Availability of credit• Unemployment trends• Level of disposable income• Demand shifts of various products• Price fluctuations• Tax rates • Wage & Salary levels

• Stock market trends• Trade Investment trends• Work productivity trends• Currency convertibility• Interest rates


Social , Culture, Demographic Variables

• Per captia Income• Social security programs• Life expectancy rates • Child bearing rates• Child mortality rates• Education• Health trends• Racial equality• Ethical concerns • Sex ratios

• Trust in governments• Lifestyles• Attitude towards business• Population Changes By Race,

age, sex and level of affluence ,city, country,

• Regional changes in taste and preferences

• Social programs• Insurance• Attitudes towards retirement


Environmental Variables:

• Air pollution • Water pollution• Waste management• Pollution control• Recycling• Energy conservation• Ozone depletion• Endangered species


ETOP (Environmental Threat and Opportunity Profile)

• Environment analysis results in a mass of information related to forces in the environment.

• They deal with events, trends, issues, and expectations.

• Structuring of environmental issues is necessary to make them meaning full for strategy formulation.ETOP (Environmental Threat and Opportunity Profile) is a technique to structure environmental issues in relation to the organization.


ETOP Involves

• Dividing the environment into different sectors. Each sectors can be subdivided into sub sectors.

• Analyzing the impact of each sector and subsector on the organization.

• Describe the impact in the form of a statement.


Using Different Methods, Techniques, and Tools

Some of the major methods of analysis can be1. Scenario Building, 2. Benchmarking, and 3. Network methods. Scenario presents overall picture of its total system with

affecting factors. Benchmarking is to find the best standard in an industry

and to compare the one’s strengths and weakness with the standard.

Network method is to assess organizational systems and its outside environment to find the strength and weakness, opportunity and threats of an organization.


Advantage of ETOP• It provides a clear of which sector and sub

sectors have favorable impact on the organization.

• It helps interpret the result of environment analysis.

• The organization can assess its competitive position.

• Appropriate strategies can be formulated to take advantage of opportunities and counter the threat.


Forecasting Environmental Factors:

• Collecting relevant information from the selected areas and to identify the variables in such areas are the basics of analysis.

• Analyzing the past information to predict the future is the main objective of this step.

• Use of different methods, techniques, and tools comes under the analysis process.

It is, therefore, a comprehensive process that analyzes collected information using different tools and techniques.


Designing Profiles: ETOP

• After analyzing the environmental factors they are recorded into the profiles.

• Such profiles record each component or variables into left side and their positive, negative, or neutral indicators including their statement in the right side.

• Internal areas are recorded in Strategic Advantages Profile (SAP) and

• external areas are recorded in Environmental Threat and Opportunity Profile (ETOP).

• Strength, Weakness, Opportunity, and Threat (SWOT) profile can be designed combining both of these two profiles into one.


Value Chain


Value Chain Analysis:• Value Chain Analysis describes the activities that take place in

a business and relates them to an analysis of the competitive strength of the business.

• Influential work by Michael Porter suggested that the activities of a business could be grouped under two headings:

(1) Primary Activities - those that are directly concerned with creating and delivering a product (e.g. component assembly); and

(2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities.

• Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("out sourced").


Linking Value Chain Analysis to Competitive Advantage

What activities a business undertakes is directly linked to achieving competitive advantage.

For example, a business which wishes to outperform its competitors through differentiating itself through higher quality will have to perform its value chain activities better than the opposition.

By contrast, a strategy based on seeking cost leadership will require a reduction in the costs associated with the value chain activities, or a reduction in the total amount of resources used.


Primary Activities:Primary value chain activities include:Primary ActivityDescription:1. Inbound logistics :All those activities concerned with

receiving and storing externally sourced materials2. Operations :The manufacture of products and services -

the way in which resource inputs (e.g. materials) are converted to outputs (e.g. products)

3. Outbound logistics: All those activities associated with getting finished goods and services to buyers

4. Marketing and sales :Essentially an information activity - informing buyers and consumers about products and services (benefits, use, price etc.)

5. Service : All those activities associated with maintaining product performance after the product has been sold


Support ActivitiesSupport activities include:Secondary Activity Description1. Procurement :This concerns how resources are acquired for

a business (e.g. sourcing and negotiating with materials suppliers)

2. Human Resource Management :Those activities concerned with recruiting, developing, motivating and rewarding the workforce of a business

3. Technology Development :Activities concerned with managing information processing and the development and protection of "knowledge" in a business

4. Infrastructure :Concerned with a wide range of support systems and functions such as finance, planning, quality control and general senior management


Steps in Value Chain AnalysisValue chain analysis can be broken down into a three

sequential steps:1. Break down a market/ organisation into its key activities

under each of the major headings in the model;2. Assess the potential for adding value via cost advantage

or differentiation, or identify current activities where a business appears to be at a competitive disadvantage;

3. Determine strategies built around focusing on activities where competitive advantage can be sustained


Resource Based View of the Firm-VRIO Framework


What is the Resource-based View/RBV of the Firm?

Firms differ in fundamental ways because each firm possesses a unique “bundle” of resources

– tangible and intangible assets and organizational capabilities to make use of

those assets


Resource Based View/RBV

• Differential performance of firms in the same industry • Firm profitability driven by structure of assets within the

firm Heterogenous and immobile assets • Exploiting firm differences

Dynamic capabilities viewInternal view, external view


The Resource-Based View Resources and Capabilities Resources: • tangible and intangible assets of a firm tangible: factories, products intangible: reputation • four general categories (Financial, Physical, Human, and Organization used to conceive of and implement strategies

Capabilities: a subset of resources that enable a firm to take full advantage of other resources marketing skill,

cooperative relationships


Examples of Different Resources (selected)

Tangible Assets Intangible Assets Organizational Capabilities

Hampton Inn’s reservation system

Budweiser’s brand name

Dell Computer’s customer service

Ford Motor’s cash reserves

Dell Computer’s reputation

Wal-mart’s purchasing and inbound logistics

3M’s patents Nike’s advertising with LeBron James

Sony’s product development process

Georgia Pacific’s land holdings

Katie Couric as NBC’s “Today” host

Coke’s global distribution coordination


VRIO Framework:

VRIO, the VRIO framework, is an internal tool of analysis in the context of Business management .

VRIO is an acronym for the four question framework you ask about a resource or capability to determine its competitive potential:

1. The question of Value, 2. The question of Rarity,3. The question of Imitability (Ease/Difficulty to Imitate),

and 4. The question of Organization (ability to exploit the

resource or capability).


Applying theVRIO Framework

The Question of Imitability • The temporary competitive advantage of valuable

and rare resources can be sustained only ifcompetitors face a cost disadvantage in imitating the resource

intangible resources are usually morecostly to imitate than tangible resourcesand bundles of resources are more costly thansingle resources

(Harley-Davidson’s styles may be easily imitated, but its reputation cannot)


Resource Inimitability(Adapted)

• Easy to imitate• Cash, commodities

• Can be imitated (but may not be)• Capacity preemption, economies of scale

• Difficult to imitate• Brand loyalty, employee satisfaction, reputation

for fairness• Cannot be imitated

• Patents, unique locations, unique assets


Costs of Imitation :• Unique Historical Conditions • First mover advantages • Path dependence • Causal Ambiguity • Causal links between resources and

competitive advantage may not be


Applying theVRIO Framework

If a firm’s resources are: The firm can expect: 1. NotValuable 2. Competitive Disadvantage 3. Valuable, but Not Rare 4. Competitive Parity 5. Valuable and Rare 6. Competitive Advantage (at least temporarily)


SWOT Analysis:


SWOT Analysis:

Based on assumption an effective strategy derives from a sound “fit” between a firm’s internal resources and its external situation

OpportunitiesA major favorable situation in a firm’s environment

ThreatsA major unfavorable situation in a firm’s environment

StrengthsA resource advantage relative to competitors and the needs of markets firm serves

WeaknessesA limitation or deficiency in one or more resources or competencies relative to competitors


Sources of Distinctive Competence at Different Stages

Functional Area

Introduction Growth Maturity Decline

Marketing Resources/skills to create widespread awareness andfind acceptance from customers ;advantageous access to distribution

Ability to establish brand recognition,find niche, reduce price,solidify strong distribution relations, anddevelop new channels

Skills in aggressively promoting products to new markets and holding existing markets; pricing flexibility; skills in differentiating products andholding customer loyalty

Cost effective means of efficient access to selected channels and markets; strong customer loyalty or dependence; strong company image


Sources of Distinctive Competence at Different Stages(contd.)

Functional Area

Introduction

Growth Maturity Decline

Production operations

Ability to expand capacity effectively, limit number of designs, develop standards

Ability to add product variants,centralize production, orotherwise lower costs;ability to improve product quality; seasonal subcontracting capacity

Ability to improve product and reduce costs; ability to share or reduce capacity;advantageous supplier relationshipssubcontracting

Ability to prune product line;cost advantage in production, location or distribution;simplified inventory control;subcontracting or long production runs



Functional Area

Introduction Growth Maturity Decline

Finance Resources to support high net cash overflow and initial losses;ability to use leverage effectively

Ability to finance rapid expansion, to have net cash outflows but increasing profits;resources to support product improvements

Ability to generate and redistribute increasing net cash inflows;effective cost control systems

Ability to reuse or liquidate unneeded equipment;advantage in cost of facilities;control system accuracy;streamlined management control



Functional Area

Introduction


Personnel Flexibility in staffing and training new management;existence of employees with key skills in new products or markets

Existence of an ability to add skilled personnel;motivated and loyal workforce

Ability to cost effectively,reduce workforce,increase efficiency

Capacity to reduce andreallocate personnel



Functional Area

Introduction


Engineering and R&D

Ability to make engineering changes, have technical bugs in product and process resolved

Skill in quality and new feature development;ability to start developing successor product

Ability to reduce costs,develop variants,differentiate products

Ability to support other grown areas orto apply product to unique customer needs

Key functional area and strategy focus

Engineering: market penetration

Sales:consumer loyalty; market share

Production efficiency: successor products

Finance: maximum investment recovery


Formulating Long-Term Objectives


Types of Long-Term Objectives:

• Profitability• Productivity• Competitive position• Employee development• Employee relations• Technological leadership• Public responsibility


Qualities of Long-Term Objectives

Criteria used in preparing objectives

Acceptable

Flexible

MeasurableMotivating

Suitable

Understandable

Achievable


What is the Balanced Scorecard?

The Balanced Scorecard is a set of measures that are directly linked to the company’s strategy. It directs a company to link its own long-term strategy with tangible goals and actions.


The Four Perspectives in a Balanced Scorecard

1. Financial performance2. Customer knowledge3. Internal business processes4. Learning and growth


The Balanced Scorecard

Vision and

Strategy

Financial‘To succeed financially, how should we appear to our shareholders?”

Customer“To achieve our vision, how should we appear to our customers?”

Internal Business Process

“To satisfy our shareholders and customers, what business processes must we excel at?”

Learning and Growth‘To achieve our vision, how will we sustain our ability to change and improve?”


Environmental analysis:Market Analysis


Market Analysis:• A market analysis studies the attractiveness and the dynamics of a special

Market within a special industry. It is part of the industry analysis and this in turn of the global environmental analysis.

• Through all these analyses the chances, strengths, weaknesses and risks of a company can be identified.

• Finally, with the help of a SWOT Analysis , adequate business strategies of a company will be defined.

The market analysis is also known as a documented investigation of a market that is used to inform a firm's planning activities, particularly around decisions of inventory , purchase, work force expansion/contraction, facility expansion, purchases of capital equipment, promotional activities, and many other aspects of a company


Implementing Analysis:• Implementing an environmental analysis for marketing takes careful

consideration of many factors. The very nature of environmental analysis changes with technology, government and economics. It allows organizations to create opportunities or predict and evaluate possible threats.

• The impact of analysis involves assessing the impact and immediacy of trends and events that underlie strategic uncertainty .

• It depends on the impact on small business units to organization. Sales, profits and/or costs may not reflect the true value of a firm but are evaluated in environmental analysis to determine their importance and priorities.

• Finally, market analysis is an aspect of environmental analysis that should be conducted to explore assumptions about the future in order to create a stronger marketing strategy.


Scenario Analysis : David Aaker • It is appropriate to do a scenario analysis as a part of the

environmental analysis stage of strategic marketing analysis.

• Scenario analysis assists in creating new models of business with the ever-changing environment in mind.

• David Aaker (2001) suggests that, “Scenarios proved a way to deal with complex environments in which many relevant trends and events interact with and affect one another. When a set of micro trends and events are aggregated into one, two, or three total scenarios of the future environment, the analysis is more manageable ”

• Aaker tells that scenarios are an excellent way for strategists to deal with uncertainty.


Scenario analysis includes four parts

1. Identification of the scenarios is the first step. This first step is useful in determine priorities for addressing uncertainties.

2. Development of the scenario strategy is the second part of scenario analysis. This stage assists in creating a stronger position in the market.

3. Estimating scenario probabilities is the third part of scenario analysis. Estimating scenario probabilities, according to Aaker (2001) give a deeper understanding and assists in determining underlying factors.

4. The final step is to perform “regret analysis.” Regret analysis compares expected outcomes of each strategy. The formula for regret analysis is conducted by multiplying each scenario outcome by its probability and then adding up the results.


Dimensions of market analysis David A. Aaker

Dimensions of market analysis David A. Aaker outlined the following dimensions of a market analysis:

• Market size (current and future) • Market growth rate • Market profitability • Industry cost structure • Distribution channels • Market trends • Key success factors


Market Size:

• The market size is defined through the market volume and the market potential.

• The market volume exhibits the totality of all realized sales volume of a special market. The volume is therefore dependant on the quantity of consumers and their ordinary demand.

• Furthermore, the market volume is either measured in quantities or qualities.


Market Growth Rate

• A simple means of forecasting the market growth rate is to extrapolate historical data into the future. While this method may provide a first-order estimate, it does not predict important turning points. A better method is to study market trends and sales growth in complementary products. Such drivers serve as leading indicators that are more accurate than simply extrapolating historical data.

• Important inflection points in the market growth rate sometimes can be predicted by constructing a product diffusion curve. The shape of the curve can be estimated by studying the characteristics of the adoption rate of a similar product in the past.

• Ultimately, many markets mature and decline. Some leading indicators of a market's decline include market saturation, the emergence of substitute products, and/or the absence of growth drivers


Market Profitability:

• While different organizations in a market will have different levels of profitability, they are all similar to different market conditions. Michael Porter devised a useful framework for evaluating the attractiveness of an industry or market.

• This framework, known as Porter's five forces, identifies five factors that influence the market profitability


Industry cost structure :

• The cost structure is important for identifying key factors for success. To this end, Porter's value chain model is useful for determining where value is added and for isolating the costs.

• The cost structure also is helpful for formulating strategies to develop a competitive advantage. For example, in some environments the experience curve effect can be used to develop a cost advantage over competitors.


Distribution channels

Examining the following aspects of the distribution system may help with a market analysis:

1. Existing distribution channels - can be described by how direct they are to the customer.

2. Trends and emerging channels - new channels can offer the opportunity to develop a competitive advantage.

3. Channel power structure - for example, in the case of a product having little brand equity, retailers have negotiating power over manufacturers and can capture more margin.


Success factors

The key success factors are those elements that are necessary in order for the firm to achieve its marketing objectives. A few examples of such factors include:

1. Access to essential unique resources2. Ability to achieve economies of scale3. Access to distribution channels4. Technological progress

It is important to consider that key success factors may change over time, especially as the product progresses through its life cycle.


Market Trends

• Changes in the market are important because they often are the source of new opportunities and threats. Moreover, they have the potential to dramatically affect the market size.

• Examples include changes in economic, social, regulatory, legal, and political conditions and in available technology, price sensitivity, demand for variety, and level of emphasis on service and support.


SWOT Analysis


SWOT Analysis:The SWOT Analysis can be used as matching tool development strategies.

They can be :

1.So strategies :Internal strengths are used to take advantage of external opportunities. This is the strategy desired by all organization.

2.Wo strategic :Internal weakness are overcome by taking advantage of external opportunities .

3.St strategic :Internal strategic are used to avoid external threats.

4.Wt strategic :Internal weakness are minimized and external threats are avoided for severally.


Advantages : SWOT Analysis1. An opportunities has no value unless resources are

available to take advantage of it.SWOT analysis facilities the finding strategic fit between external opportunities and internal resources.

2. It can be used to invest in weakness to make them competitive. Threats can also be avoided.

3. It is the essence of strategy formulation. Alternative strategies can also be formulated .

4. It can be used for finding a niche to take advantage of market opportunities.

5. IT helps organizations to adapt to environmental changes.


Disadvantages : SWOT Analysis

1. It generates lengthily list of opportunities, threats, strengths and weakness.

2. It does not indicate priorities. 3. The same factors can be placed in two

categorizes, for example, student number is both a strength and weakness for University.

4. It has no link to strategy implementation


Strategic implications of Company Decisions

This strategy bridges the literatures on competitor analysis and strategic decision making by

(1) introducing the notion of competitive decision making into the strategic decision-making literature and

(2) embedding this notion into a framework of industry and competitor analysis.

The strategy shows that decision makers typically have specific "blind spots" when they consider the contingent decisions of competitors.

The strategy identifies these blind spots and discusses how they may explain persistent, commonly observed phenomena such as industry overcapacity, new business entry failures, and acquisition premiums


3. Focus on expensive resources to monitor evaluate & control.

4. Emphasize resources whose consumption varies significantly by product and product type,- look for diversity.

5. Focus on resources whose demand patterns are uncorrelated with traditional allocation measures like direct labor, processing time, and materials.


Types of Business Decisions

1. Programmed Decisions These are standard decisions which always follow the same routine. As such, they can be written down into a series of fixed steps which anyone can follow. They could even be written as computer program

2. Non-Programmed Decisions. These are non-standard and non-routine. Each decision is not quite the same as any previous decision.

3. Strategic Decisions. These affect the long-term direction of the business eg whether to take over Company A or Company B

4. Tactical Decisions. These are medium-term decisions about how to implement strategy eg what kind of marketing to have, or how many extra staff to recruit

5. Operational Decisions. These are short-term decisions (also called administrative decisions) about how to implement the tactics eg which firm to use to make deliveries.

By Prof Srikanth Venkataswamy 71The Decision-Making Process


GLOBAL MEGA TRENDSq Economic considerations transcending political

considerationsq The movement of world wide – wide free tradeq The power full drive of telecommunicationsq The relative abundance of natural resourcesq Competition for reduced taxesq The Asian consumer boomq The advancement of democracy and the spread of free q enterpriseq Inflation and interest containmentq The triumph of individual


ASIAN MEGA TRENDS

From To

1. Nation States Network2. Export led Consumer driven3. Western influence The Asian way4. Govt. Controlled Market

driven5. Villages Super cities6. Labor intensive High

technology7. Male domination Emergence of

woman8. West East


Globalisation

Liberalisation

Market ChangesTechnological

Changes

Changing environment of organisations: Principal Constituents


Portfolio Related Strategic Response• Mergers, Acquisition & Takeovers• Demergers• Diversification• Share Buyback• Divestiture/Disinvestments• Joint Venture• Strategic Alliances/collaborations

GlobalisationMarket changesLiberalisation

Technological Changes

Environment

Organisation

Structure Related strategic Response

• Strategic Business Units• Matrix Structure• Delayering/ Flat Organisation Structure

Process Related Strategic Responses

• Quality Strategies• International Quality• Certification Programmes• Just-in-time (JIT) Inventory• Benchmarking• Building Core Competence• Setting Vision & Mission• Cost & Asset Utilisation • Strategies• Technological Upgradation & Indigenisation• Information Technology• Research & Development• Marketing Strategies• Project Management

Environmental Changes and Strategic response of organisation


Porter’s Five Force Model Analysis


Porter’s Five Force model

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