2. Strategic Analysis

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Unit 2: Strategic Analysis

Meaning of Strategic Analysis: Strategic analysis is concerned with understanding the strategic position of the organization in terms of the environment and the effects of the organization and

its activities. Strategic analysis is very crucial phase during the formulation of strategy. It helps

to develop the various strategic alternatives so that the best alternative can be chosen. The studyof strategic analysis is important because all types of organization have to face changing

situations in the environment. In such case, strategic analysis helps to reduce the uncertainty by

coping with changing situations. The aim of strategic analysis is to form a view of the maininfluences on the present and the future wellbeing of the organization. This will obviously affect

the strategy choice. Essentially a business will address the following questions. Where do we want to go

What constraints e!ist on our resources

What are the "ey threats from the e!ternal environment

Together a consideration of the environment, resources, the e!pectations and theob#ectives within the cultural and political framewor" of the organization provides the basis of

strategic analysis for the organization.

Importance of Strategic Analysis: The strategy formulation process involves environmentalanalysis, organizational analysis development of strategic alternatives and the analysis and

selecting the more appropriate strategy from the alternatives developed. Therefore, strategic

management is not only concerned with ta"ing decision about ma#or issues facing theorganization. It is also concerned with ensuring that the strategy is put into action. Strategic

management can be defined as the function of strategic analysis, choice and implementation.

Thus, it is relevant to study strategic analysis before developing choice or alternatives.Strategic analysis is very crucial phase during the formulation of strategy. It helps to

develop the various strategic alternatives so that the best alternative can be chosen. When

business managers e!amine and understand a business strategy that allows their business tomaintain or create a sustainable competitive advantage. $usinesses become successful because

they analyze and possessed some advantages relative to their competitors.

The study of strategic analysis is important because all types of organization have to face

changing situations in the environment. In such case, strategic analysis helps to reduce theuncertainty by coping with changing situations. $y analyzing the situations, managers study

relevant variables and can decide about what to do and how to do. When managers analyze the

strategic management process, they can better cope with the uncertain environments.

Environment: It refers to all forces which have a bearing on the development, performance and

outcomes of an organization. Such force influences its ability to achieve ob#ectives. %rganization

must be ready to redefine reposition and rethin" with the environment. Environmental forcesinfluence strategic management. Environment creates surprises.

Environment Analysis: Environment analysis is the process of monitoring the organizationalenvironment to identify both present and features threats and opportunities that may influence

the firm&s ability to reach its goals. The organizational environment is the set of all factors both

outside and inside the organization that can affect its progress toward its attainment those goals.'inally, the environmental analysis is awareness of the organizations to the success.


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The future moves with increasing rate of change in all aspects of organizational

environment. $ecause future organizations will be more dependent on their environments

performing environmental analysis will almost certainly be even more important to managers of the future than it is to managers today.

Environmental Analysis Process-2: The nature of the environment can be comple!, dynamic,multi(faceted, far(reaching impact) influencing power etc. the environmental analysis process

involves the analysis of two types of environments. They are internal environment and e!ternal

environment.

I. Internal analysis-2:- Internal analysis is generally easy to study and the managers can alter or

modify the factors. Therefore, it is also called controllable factors. Internal factors are resources

of the organization, competencies of human resources, organizational culture, and sta"eholders&

e!pectations.

a) Performance analysis* all organizations have strengths and wea"nesses in the functional areas

of business. +o enterprise is equally strong or wea" in all areas. 'or e!ample, aytag is "nown

for e!cellent production and product design, whereas -rocter and amble is "nown for superb

mar"eting. Strategies are established with the intention of capitalizing upon internal strengthsand overcoming wea"nesses. anagers and employees from throughout the firm need to be

involved in determining a firm&s strengths and wea"nesses./ey internal factors for potential strengths and wea"nesses for performance are

mar"eting, finance and accounting, production0operations0technical, personnel and organization

of general management. The competitive strengths and future performance of the firm should beanalyzed carefully. 'or this, it requires to gather and understand information about the firm&s

management, mar"eting, finance0accounting, production, research and development, and

management information system. /ey factors should be prioritized and firm&s most important

strengths and wea"nesses can be determined collectively.

b) Analysis of strategic options* Strategic options refer to identify the strategic alternative that

organization might pursue, it serves at the basis for ma"ing the choices of direction that a firm

adopts in order to achieve its ob#ectives and provides basic future direction to the organization.They enhance managers to identify strategic option. 'or the strategic option the business should

analyse strength and wea"ness and threats and opportunities. 1t the same time organization

economic, personnel, administration, products mar"et and pricing policies should be analysed.%rganization should develop the strategic alternatives to lin" between organization&s

strength and wea"ness with environmental opportunity and threat. 1nalysis of strategic options

see"s to determine the alternative courses of action that could best enable the firm to achieve its

mission and ob#ectives.

Types of Strategic ptions:

2 Stability strategies* Stability grand strategy is strategy that an organization pursues when it

continuous to serve the public in the same product or serve, mar"et, and functional sectors asdefined in its business definitions. If the e!isting product or mar"et condition is satisfactory

then, this type of strategy is selected. They do not want to go over a new activity. This strategy

highlights the non acceptance of new strategy. The e!isting strategic options are continued. 1tthis time the environment is also seem stable, no movement, and no new opportunities. So,

they don&t want to change their strategy. Sometimes, it may be very dangerous for organization.

3 E!pansion strategy* +ew products, mar"et and functions are added. The pace of activities

increases. The product is in the growth stage of product lifecycle. E!pansion is through


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increased mar"et share and production capacity. This aim is high growth through

diversification integration, cooperation and globalization. E!pansion strategy is followed,

when an organization substantially broadened the scope of its customer, group customer functions and alternative technologies.

4 5etrenchment strategy* This strategy is persuading in threatening environment. -roducts,

mar"ets and functions are reduced. The pace of activities decreases. The product is in thedecline stage of product lifecycle. The cash flow is negative. 5etrenchment is aimed through

reduced mar"et share, dropping the product lines and mar"ets and investment. The aim is

contraction of activities through turn around, sale of portion of business, liquidation andincreasing cash flows. enerally it is not preferred because of managers capabilities may be

questioned.

6. 7ombination strategy* 7ombination grand strategy is followed when an organization adopts a

mi!ture of stability, e!pansion and retrenchment, either at the same time, in its different businessor at the different time in the same business with the aim of improving it performances. The

organization has several strategy business units 8S$9:. It simultaneously uses combinations of

stability, e!pansion and retrenchment strategies to different parts of the organization. %ld

products, mar"ets and functions are continued, dropped and e!panded. -roduct lifecycles are indifferent stages. The aim is to improve performance. The combination can be simultaneous

sequential or both.

II. E!ternal analysis-": e!ternal environmental analysis is the process by which strategists monitor

the environmental sectors to determine opportunities for and threats are challenges posed by anunfavorable trend whereas environmental opportunity for a firm is an attractive area in which the

firm would en#oy competitive advantages. There are many factors in the environment to study

and analyze in order to enable the firm in a competitive position. ;ere we analyze the following

e!ternal factors for our study.a: #$stomer analysis* The customer analysis involves the e!amination and evaluation of customer

need, desires and wants. It also leads to administering customers& survey, analyzing consumer

information, evaluating mar"et positioning strategies, developing customer profiles anddetermining optimal mar"et segmentation strategists. The information generate by customer

analysis can be essential in developing and effective mission statement. 7ustomer profiles can

reveal the demographic characteristics of an organization&s customers. $uyers, sellers,distributors, sales people, managers, wholesalers, retailers, suppliers and creditors can all

participate in gathering information to identify customers& needs and wants successfully.

Successful organizations continually monitor present and potential customers buying patterns.

b: #ompetitor analysis* 7ompetitors& analysis refers to the understanding of the position of

competitors competing in an industry possessing relatively equal capabilities. The final outcomeof competitive analysis is that it helps to understand, interpret and predict its competitors& actions

and initiatives. $esides loo"ing at primary demand and supply sectors strategists e!amine the

state of competition the firm must face for this, too determines whether a firm will remain in itscurrent business and what strategies it will follow in pursuing its business. 7ompetitor analysis is

important for two reasons*

a ood strategy cannot be formulated in a competitive vacuum, without perceptive understandingof rival&s strategies, they would be strategists is


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Three factors need to be e!amining regarding competition analysis*

• Entry and e!it of ma#or competitors* %ne of the 2st questions a strategist as"s about the

competitive environment is, how has the competition changed 1re there new competitorsentering our business ;ow old rivals leaving it If competitors leave, many times the

probability of achieving corporate ob#ectives increases.

• 1vailability of substitutes* ;ow profitability and successfully a firm operates depends in part onthe availability of quality and less costly substitutes for the firm&s products and services, andhow competitive the substitute industry is well determined how viable the substitute is

Successful strategists also scan the environment for the loss or potential loss of business to

substitute.

• a#or strategic changes of current competitor* While strategists are concern with the previous

two factors, they probably watch more carefully when ma#or competitors change their

strategies in significant ways. 1mong rivalry firms in an industry the greater one leads to muchmore competition on the basis of price, quality, service and other factors which can affect

whether ob#ectives are reached or not. 9nbranded products is also measure challenges and

needs a new loo" at the mar"et place.

c: Mar%et analysis* mar"et consists of all potential customers having wants and desires, they posses ability and willingness to engage in e!change to satisfy their wants. ar"ets can be

consumer, industrial and institutional. ar"et analysis can be viewed from profit and mar"et

share approach and resource approach. -rofit and mar"et share are 3 main goals for many businesses.

Tec&ni'$es of Mar%et Analysis*

a Mar%et po(er: it is the capacity of the organization to influence the behaviour of competitors inthe mar"et. Such organizations tend to be the leaders in their chosen mar"et segments. ar"et

power is based on mar"et share and mar"et growth in chosen segments.

b Mar%et s&are: mar"et share of a specific organization is the share in total sales of a product

during a given period of time in a specific mar"et. It can refer to industry, segment or area. The

mar"et share and mar"et power means, organization&s elaboration of their influence. ar"etshare e!tends their mar"et power. There is positive correlation.

c Mar%et gro(t&: it is an indication of mar"et power. ar"et growth refers to all round annualgrowth rate in sales, mar"et share and profits. It should be analyzed in a relation to "ey

competitors. %pportunity in the e!ternal environment and internal resource strength. -rovide

potential for mar"et growth on organization must have high rate of mar"et growth to maintainand improved its mar"et power.

d: Environmental analysis* It is the process by which strategists monitor the environmental

sectors to determine opportunities for and threats to their firm. The environment includes factorsoutside the firm which can lead to opportunities for or threats to the firm. 1lthough there are

many factors, the most important sectors are socio >economic, technological supplier,competitor, and government. 1nalysis is the tracing of an opportunity or threat to a source. It alsoinvolves brea"ing a whole into its parts to find its nature, function, and relationship. Strategic

management requires searching for opportunities and threats and determining where they come

from and which ones are coming.

Environmental analysis process: 1ccording to iller analysis of the e!ternal environment can

be bro"en down into 4 parts as a process*


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a oc$sing yo$r analysis on strategic gro$p: Strategic groups are conceptually defined clusters

of competitors that share similar strategies and therefore compete more directly with each other

than with other firms in the same industry. They are conceptual clusters in the sense that theyare grouped together for purposes of improving analysis and understanding competition within

their industry >they do not necessarily belong to any formal group such as industry, trade

association or a strategy alliance, and they do not necessarily differ in their average profitability. The industries may be homogeneous or heterogeneous.

b Environmental scanning concern gat&ering intelligence* 7ompetitive intelligence is

information relevant to strategy formulation regarding the environmental conte!t within whicha firm competitors. Such information is used to guide strategy formulation, to challenge the

environment, to forecast to identify competitive wea"nesses, to determine when a strategy is no

longer viable and how0when to ad#ust strategies.

c Scenario planning *organi+ation information): Scenarios are stories about what the futureenvironment might hold and how a firm might respond to this future. Scenarios are useful

planning aids because they address two challenges facing those analyzing the environment to

improve strategic formulation process.

The scenario is based on the assumption. 1 scenario is based on the assumption.1 scenario for a play does not merely reveal the play&s ending) it also e!plains the

developments leading up to the endings.

Environment Analysis Process or Appraisal of Environmental orces: Environment analysisis managerial decision ma"ing process which is based on the assessment of opportunities and

treats in the environment the environment analysis process can be e!plained as*

i) Environmental scanning: it involves information gathering for assessing the nature of the

environment in terms of uncertainty, comple!ity and dynamism. The is concerned the followingevents

•

It identifies early signs of future environmental changes. They are indicated by trends andevents

• It detects changes already on trac". They are happening.

ii) Monitoring* It involves trac"ing environmental trends and events it is auditing of

environment. The li"ely impact of environmental influences on business performance are

identified this step provides( Specific description of environmental trends and events

( Identification of trends and events for further monitoring

( Identification of areas for forecasting

iii) orecasting: This step forecast what is li"ely to happen. It lays out of path for anticipatedchanges this step provides*

( /ey forces at wor" in the environment they can be political(legal, economic, cultural andtechnological.( 9nderstanding of the nature of "ey influences and drivers of change

( -ro#ection of future alternative path available.

iv) Assessment: This step identifies "ey opportunities and treats. The competitive position of business is analyzed in terms of how the organization stands in relation to other organization

competing for same resources or customers.

( %pportunity is a favorable condition which strength organizational competitive position


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( Treat is an unfavorable condition which period&s ris"s and wea"ens the competitive position of

the organization.

Environmental analysis identifies competitive position of a business organization. It isalso "nown as strategic position. It indicates the standing of an organization in relation to other

organizations competing for the same resources or customers.

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2. Strategic Analysis