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 Strategic Analysis: Internal environment – May 24

C HAPTER 3

S TRATEGIC A NALYSIS : I NTERNAL E NVIRONMENT

1. I N T R O D U C T I O N

▪ Strategic Analysis is equally important when it comes to internal environment assessment.

▪ Internal environment refers to the sum total of
➢ People - individuals and groups, stakeholders,
➢ Processes - input-throughput-output,
➢ Physical infrastructure - space, equipment and
➢ Physical conditions of work - lines of authority & power, responsibility, accountability and
➢ organizational culture - intangible aspects of working-relationships, philosophy, values, ethics
that shape an organization’s identity.
▪ Internal environment is specific to each organization and is very important to understand for strategic
analysis.

2. U N D E R S T A N D I N G K E Y S T A K E H O L D E R S

Stakeholders refer to any person/group of individuals, internal or external, that has an

➢ interest in the business or corporate strategy of the organization or can impact it.
They may be the management, employees, shareholders, investors, suppliers, customers, regulators and so on.
A firm may be viewed as a coalition of stakeholders.
Identification of Key Stakeholder: It is important to identify key stakeholders as each stakeholder exerts a
different level of influence and can have differing levels of interest in the organisation.
For example, an organisation involved in healthcare innovation needs to have a long-term perspective about
its return on investment (ROI) as there may be a long time between investment into research timelines and
a commercial outcome.
Example of Key Stakeholders and their requirements for an OTT Platform
CEO & Board of Major Vendors Consumers
Shareholders Employees
Directors (Production House) (Viewers)
▪ Innovation & continuous ▪ Prestige ▪ Growth ▪ New content - ▪ Wages &
creative content Innovation benefits
▪ Market share ▪ Stability of
▪ Total shareholder return ordering ▪ Better deals - ▪ Stability of
▪ Revenue & profit
(RoI) Pricing employment
growth ▪ Stable margins
▪ Corporate social ▪ Value for ▪ Pride of
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responsibility ▪ Market rankings money working for a
reputed
▪ Highest market share ▪ Continuous
organisation
supply

2.1. M E N D E L O W ’ S M A T R I X

The Mendelow Stakeholder matrix (also known as the Stakeholder Analysis matrix and the Power-Interest
matrix) is a simple framework to help manage key stakeholders.
In order to manage a project, it is very critical to manage the competing interests of various stakeholders.
Mendelow suggests that one should analyse stakeholder groups based on
a) Power (the ability to influence organisation strategy or resources); and
b) Interest (how interested they are in the organisation succeeding).
Some stakeholders will hold more Power than others, & some stakeholders will have more Interest than others.
For example, a big shareholder is likely to have high power and high interest in the organisation, whereas a
big competitor would have high power to impact strategy, but potentially less Interest in success of rival
organisation.

Developing a Grid of Stakeholders

Mendelow’s Matrix is based on Power & Interest. It suggests to identify which stakeholders are incredibly
important.
Management needs to
➢ closely manage those stakeholders who have High Power and High Interest and need to invest lot of time
and effort in them while
➢ rarely monitor those stakeholders with low power and low interest like research institutes seeking an
organisation data and minimum effort expended on them in terms of time and money.
For example, the CEO is likely to have more Power to influence the work and also high interest in it being
successful. Keeping them informed almost daily should be a priority.

Categorization of stakeholders into four groups by Mendelow’s:

1. KEEP SATISFIED High power, less interested people –
Stakeholders: Organisation should put in enough work with these people to keep them satisfied by
providing them their intended information on a regular basis.

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For example, banks, government, customers, etc.
2. KEY PLAYERS High power, highly interested people –
Stakeholders: Organisation’s aim should be to fully engage this group of stakeholders, making the
greatest efforts to satisfy them, take their advice, build actions and keep them
informed with all information on a regular basis.
For example, Shareholders, CEO, Board of Directors, etc.
3. LOW PRIORITY Low power, less interested people –
Stakeholders: Organisation should only monitor them with no actions to satisfy their
expectations. Strategically, minimal efforts should be spent on this group of
stakeholders while keeping an eye to check if their levels of interest or power
change.
For example, business magazines, media houses, etc.
4. KEEP INFORMED Low power, highly interested people –
Stakeholders: Organisation should adequately inform this group of people and communicate with
them to ensure that no major issues arise. This audiences can also help with real
time feedbacks and areas of improvement for an organisation.
For example, employees, vendors, suppliers, legal experts, etc.
Since environment is highly dynamic and uncertain, things might happen that can cause stakeholders to
suddenly move between quadrants.
For example, an organisation might inadvertently contravene a regulation, say GST compliance which would
cause the regulatory body i.e. the Indirect Taxes Department to move from High Power, Low Interest to High
Power, High Interest.
This would then require a different way of managing and communicating with this stakeholder.
Equally, the media houses would also move from Low Power, Low interest, to Low Power, High Interest.
So, it’s always worth re-analysing the Mendelow’s grid for one’s organisation in the event of a change in
the environment.

Activity: Identify and group the below stakeholders in the 4 groups as suggested by Mendelow for an
Ecommerce startup.
Ms. Suhasini (CEO), Mango Partners & TRIK Group (Investors), MSME Ministry, Customers from North-East
India, Sellers from Rajasthan, Jandhan Bank (Lender), & Kumar S and Sharma T (Sr. Managers in the Co.)

3. S T R A T E G I C D R I V E R S

Strategic Drivers involves analysis of the

➢ key markets in which the organisation operates, as well as its key customers,
➢ the products and services it provides,
➢ the channels in which the products or services are delivered, and
➢ the organisation’s competitive advantage.
Strategic drivers consider what differentiates an organisation from its competitors.
key strategic drivers of an organisation include:
a) industry and markets b) customers c) products/services d) Channels

3.1. I N D U S T R Y A N D M A R K E T S

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In terms of the internal environment, it is very important for an organisation to understand it’s relative
position in the industry and in the market in which it operates.
Similar companies are grouped together into industries. Basically, industry grouping is based on the primary
product that a company makes or sells.
For example, Maruti, Mahindra, Tata Motors, TVS, Bajaj Auto, are all selling automotives as their primary
product and thus categorised into Automotive Industry.
Similarly, Zara, H&M, Marks & Spencer, Pantaloons, Westside, Uniqlo, are all selling apparels and accessories
for the youth, and thus categorised under apparels industry.
A market is defined as the sum total of all the buyers and sellers in the area or region under consideration.
The market may be a physical entity or may be virtual like e-commerce websites and applications.
It may further be local or global, depending on which all countries the business sells its products in.
The value, cost and price of items traded are as per forces of supply and demand in a market.
Is market the same for all businesses?
No. Each business has its own set of customers i.e. market and more so, each product within a business
has its own market.
For example, for a FMCG brand selling Shampoos, Dairy Products, Flours, Washing Powder, etc. - each product
line will have a separate market to cater to and therefore build strategies specific to the market of concern.

3.1.1. A N A L Y S I N G I N D U S T R Y A N D M A R K E T S

Industry and market analysis is extremely important to identify one’s position as compared to the
competitors, who can be of equal size and value, or bigger in size and value or even smaller and newer.
A tool used for this is called Strategic Group Mapping. It reveals the competitive positions of industry
participants.
Identifying the strongest & weakest companies help understand what techniques can be implemented and
which ones are to be avoided.
Also, when an industry has so many competitors that it is not practical to examine each one in-depth,
grouping them into categories based on various parameters can be really insightful and time saving.
For example, Smart Phone industry has numerous options to select from.
Strategic group consists of those rivals who have similar competitive approach and position in market
(comparable product, price, quality etc.)
An industry contains only one strategic group when all sellers pursue essentially identical strategies and
have comparable market positions.
At the other extreme, there are as many strategic groups as there are competitors when each rival pursues a
distinctively different competitive approach and occupies a substantially different competitive position in
the marketplace.
Procedure for constructing strategic group:
a) Identify competitive characteristics that differentiate Firms in the industry.
➢ Price/ Quality (High, Medium, Low)
➢ Geographic coverage (Local, National, Global)
➢ Degree of services offered (No-frills, Limited, full)
b) Plot Firms on 2 variable map using pairs of differentiating characteristics.
c) Assign firms that fall in about same strategy space to same strategic group
Draw circle around each group where each group represents their relative market share.

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A simple glance of the mapping chart shows us that even though ABC has few models, but it has great
reputation in the market.
Similarly, GHI has a good range of products and is the most reputed company in laptops.
Another view is that XYZ and GHI have the same number of models as both are on the same place on X-
Axis, but GHI has much greater reputation than XYZ, as it has a bigger bubble and is higher on the Y-Axis.

3.1.2. C U S T O M E R S

Different customers may have different needs and require different sales models or distribution channels.
Since, customers are often responsible for the generation of profits obtained by an organisation, it is very
important to understand different types of customers to whom the organisation’s products/services are
sold or provided .
Example: In case of a headphones brand - the customers can be grouped under high value buyers, medium
value buyers and low value buyers based on the amount they are willing to spend on a product, thus
helping the business understand their key customers and focus areas of improvement.
Customer versus Consumer
Consumers are the ones who finally use a product/service, while customers are the buyers of that product.
A customer can be a consumer and vice versa.
From a pricing perspective, customer is of more importance and from value creation and design/usability,
consumer needs to be the kept at the center of decision making.
For example, baby diapers are bought by parents (customers) who are willing to pay higher price for
higher quality, while the real consumers are the babies, who are more concerned about the comfort and
easiness of the diaper. If babies do not accept the product i.e. if consumers aren’t satisfied, it is difficult
to retain the buyer i.e. customers as well.

3.1.3. P R O D U C T / S E R V I C E S

Product stands for the combination of “goods-and-services” that the company offers to the target
market. Strategies are needed for managing existing product over time, adding new ones and dropping
failed products.
The products can also be classified on the basis of industrial or consumer products, essentials or luxury

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products, durables or perishables.
Products can also be differentiated on the basis of size, shape, colour, packaging, brand names, after-
sales service and so on.
Quite often the differentiation is psychological rather than physical. It is enough if customers are
persuaded to believe that the marketer’s product is different from others.
For example, Shampoos with different branding namely Head & Shoulders, Olay, Old Spice, Pantene are all
produced by the same company P&G.
It answer the general question: What business are we in and what should be done to win over competition
in each product/service we serve.

Pricing strategies for entering a market

For new product, pricing objective should be
a) to make product acceptable to customer i.e. customer centric approach,
b) produce reasonable margin over cost and
c) develop market share.
Two common pricing strategies are:
Price skimming Price penetration
Prices are set at very high level initially for new Prices are kept quite low for new product which
product. itself is it’s selling point.
Product is directed towards customers who are This enables a large no of potential customers to
afford and buy new product.
➢ insensitive to price and
➢ sensitive to brand and loyalty.
Examples: Call rates of mobile telephones were set very Examples: Jio launching cheap data plans and set
high initially. top box
Apple launching air pods

Products and services need heavy investment in reaching out to customers. Types of Marketing Strategies
5. Social marketing It refers to design, implementation and control of programs which aims to increase
acceptability of a social idea, cause or practice among target market/society.
E.g. Campaign for No smoking, No dowry, No tax evasion.
6. Augmented It means providing additional benefits to a customer along with the core product.
marketing E.g: Extra warranty, 24x7 online tech support, movies on demand etc.
7. Direct marketing It involves using advertisement medium that interacts directly with customers.
E.g. Email, SMS, catalogue marketing, electronic marketing, Tele calling etc.
8. Person marketing People are also marketed. It involves activities to create, maintain or change
attitude and behavior of target audience towards a particular person.
E.g. Politicians, sports stars, film stars, etc. market themselves to get votes, or to
promote their careers.
9. Organization It involves activities to create, maintain or change attitude and behavior towards a
marketing particular Organization.
Both profit and non-profit organizations practice Organization marketing.

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10. Place marketing It involves activities to create, maintain or change attitude or behavior towards a
particular place. E.g. Tourism marketing
11. Relationship It involves creating, maintaining and enhancing strong relationship with customers
marketing and other stakeholders.
E.g: Airlines Loyalty programs or Airlines offering special lounges at major airports
for frequent flyers.
12. Service marketing It involves applying concepts of marketing to service sector.
13. Differential It is a market-coverage strategy and involves activities to target several market
marketing segments and design separate offer for each segment.
E.g: HUL has Lux in popular segment and Pears in premium segment.
14. Concentrated In this, Firm goes after large share of a target market. It can also take the form of
Marketing Niche marketing.
15. Synchro When demand for a product is irregular due to season or during certain part of day,
marketing it causes overworked capacity or idle capacity.
Synchro marketing is used to find ways to alter the demand pattern through
flexible pricing and other incentives.
E.g: Movie tickets sold at lower rate during weekdays, Happy Hours in Restaurants.
16. Demarketing It involves activities to reduce demand temporarily or permanently.
It does not aim to destroy demand but only reduce it or shift it. It is pursued when
there is overflow of demand.
For example, buses are overloaded in the morning and evening, roads are busy for
most of times, zoological parks are over-crowded on Saturdays, Sundays and
holidays. Here demarketing can be applied to regulate demand.
17. Enlightened It is a marketing philosophy that Company’s marketing should support long term
marketing performance of an Organization and marketing.
Five principles are :
a) Value marketing
b) Innovative marketing
c) Customer oriented marketing
d) Societal marketing
e) Sense of mission marketing

3.1.4. C H A N N E L S

Channels are the distribution system by which an organisation distributes its product or provides its
service.
Few examples of how the following companies distribute their products and services:
i) Lakme - sells its products via retail stores, intermediary stores (like Nykaa, Westside, Reliance Trends),
as well as online mode like Amazon, Flipkart, Nykaa online and its own website.
ii) Boat Headphones - only online via e-commerce platforms like Flipkart and Amazon and its own website.
iii) Coca Cola - retail shops across the nation, in each district, each town as well as online mode via
Dunzo, Blinkit, etc.
Wider and stronger channel helps the business
a) to fight and win over competition and

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b) help keep new players away from entering the industry, thus acting as barriers to entry.

Types of channels:
The sales channel The product channel The service channel
These are the intermediaries The product channel focuses The service channel refers to the
involved in selling the product on the series of intermediaries entities that provide necessary services
through each channel and who physically handle the to support the product, as it moves
ultimately to the end user. product on its path from its through the sales channel and after
The key question is: Who needs producer to the end user. purchase by the end user.
to sell to whom for your product For example, Australia Post, The service channel is an important
to be sold to your end user? who delivers and distributes consideration for products that are
For example, many fashion many online purchases complex in terms of installation or
designers use agencies to sell between the seller and customer assistance.
their products to retail purchaser when using eBay For example, a Bosch dishwasher may
organisations, so that consumers and other online stores. be sold in a Bosch showroom, and then
can access them. once sold it is installed by a Bosch
contracted plumber.

Importance of Channel Analysis:

It helps business to scale up and expand beyond the current geographies and markets.
When a business plans to grow to newer markets, they need to develop or leverage existing channels to get
to new customers.
Examples:
a) If a healthcare brand wants to reach out to elderly customers, they need to be more focused on offline
mode of business where agents reach out physically to the elderly as most of their potential customers
(i.e. the old aged) are not active on smartphones.
b) If a new drink brand wants to acquire customers, they need to place their products via every channel
possible to get more attraction from customers like placing their drinks in stores, and shops alike,
offering competitive campaigns to create awareness via online modes (social media).
c) Bottled water and cold drinks are available at hill stations. This is possible because of strong channels
of distribution.
Some of the most renowned brands who have created competitive advantage in channels are Coca Cola,
HUL, Patanjali, Asian Paints, Ola, to name a few.

4. R O L E O F R E S O U R C E S A N D C A P A B I L I T I E S : B U I L D I N G C O R E C O M PE TE N C Y

▪ C.K. Prahalad & Gary Hamel advocated concept of core competency & is widely used in management.
▪ Competency refers to combination of skills and techniques.
▪ Core competencies are the knowledge, skills, and facilities necessary to design and produce core products.
It is created by superior integration of technological, physical and human resources.
▪ It is a source of competitive advantage. It simply means whatever a Firm does best.
Example: Marketing and Sales is a core competence of Hindustan Unilever Limited while low operating
costs is core competence of Wal-Mart.
▪ Core competency involves utilization of several individual skills and techniques like technological and
managerial know-how, human resource, wisdom and experience.
▪ Therefore, core competencies can’t be built on one capability or single know-how technique. Instead, it

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has to be integration of many resources.
▪ Optimal way to define core competence is to consider it as sum of 5 to 15 developed expertise.
▪

4.1. 3 A R E A S W H E R E M A J O R C O R E C O M P E T EN C I ES A R E I D EN TI F I E D – AS PER CK PRAHLAD & GARY HAMEL

Competitor Differentiation Customer Value Application to other markets

A company is said to have core It includes all the skills needed Core competency must be
competency if its’s competency is to provide fundamental benefits applicable to whole organization
unique & difficult for others to copy. to the end customer. and not only to a particular
Company should keep on improving In order to be core competency, area.
those skills to sustain competitive the Service or product has to A skill is considered core
position. have real impact on customers competency only if it is
Unique skills & resources doesn’t as the reason to purchase them. fundamental to whole
mean that it has to be possessed by If the customer chooses the organization.
one company only. product without this, the Core competency should be used
If many companies have similar competence is not core throughout organization to open
skills and one company is able to competency. up potential new markets.
perform it significantly better, that
Co. has core competency.
For example, it is quite difficult to
imitate patented innovation, like
Tesla has been winning over
competition in electric vehicles.
If above three conditions are met, the Company can regard a competence as core competence.

4.2. W H Y T O I D E N T I F Y A N D D E V E L O P C O R E C O M PE TE N C Y

Core competencies distinguish a company competitively and reflect its personality.

It is important to identify core competencies because it is difficult to retain those competencies in a price
war and cost-cutting environment.
Failing to identify core competencies is a kind of opportunity loss for a company.
Examples
Small retail shops have CC in a) Personal service to customers b) Extended working hours
the areas of
c) Easy credit d) Free home deliveries
e) Amicable style of the owner f) Proximity
Big retail stores & super a) Merchandising b) Securing supplies at lower cost
markets have CC in areas of
c) In-house management d) Computerized stock ordering
e) Billing systems f) own brand labels
Supermarkets compete with a) Locational advantage b) Quality assurance
one another with CC as to
c) Customer convenience in shopping

4.3. C R I T E R I A F O R B U I L D I N G C O R E C O M P E T E N C I E S ?

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Four specific criteria of sustainable competitive advantage that firms can use to determine those
capabilities that are core competencies.
Valuable Rare Costly to Imitate Non-substitutable
Valuable capabilities are Core competencies are It means such capabilities It means there must not
those which allow Firms rare capabilities which is not easy to copy be strategic equivalent
to exploit opportunities possessed by very few or develop. which is easily available
or tackle threats. competitors. or imitable.
When a capability is ‘valuable NCR’, it is core competency & a source of sustainable competitive advantage.
Example: Airtel has its marketing campaign that talks about Zero Customer Complaints. This is about creating
a core competency of great customer service.

5. C O M B I N I N G E X T E R N A L A N D I N T E R N A L A N A L Y S I S (S W O T A N A L Y S I S )

SWOT analysis is the analysis of a business’s strengths, weaknesses, opportunities and threats.
It is implemented before all company actions, whether it is exploring new initiatives, revamping internal
policies, considering opportunities to grow or alter a plan midway.
It is a tool which is used for both Internal and External Analysis and helps in growth.
Strength (+) Weakness (-) Opportunity (+) Threat (-)
Inherent capabilities of Inherent limitations/ Favourable condition in Unfavourable condition
an Organization used to constraints which creates organization’s in organization’s
gain strategic advantage. strategic disadvantage. environment to environment which
strengthen its position. causes risk or damage to
organization’s position.
▪ Financial condition ▪ Obsolete/ outdated ▪ New product/ market ▪ Large New entrant
products or facilities launch
▪ Superior skills/ cost or ▪ substitute products
tech. advantages ▪ High inventory/ debtors ▪ New tender/
▪ Increasing competition
contracts
▪ Better product quality ▪ No strategy
▪ Market slowdown
▪ Opening of market/
▪ Strong Distribution N/w ▪ Underutilized capacity
Lower trade barrier ▪ Scandals & New Laws
▪ Multiple Partners with ▪ No automation of work
▪ Internet & e- ▪ Online players entering
varied expertise and documentation
commerce

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▪ Long Term contractual ▪ Low employee morale ▪ Automation driven market

service agreements advancement ▪ AI based solutions and
▪ 70 years of brand value ▪ Startups can be applications.
supported with ▪ Price point of online
▪ Services spread across
experienced partners being very competitive
20 states of India
▪ Investment in ▪ Speed of work
▪ 400+ employee strength
technology can becoming faster by the
to deliver work
multiply returns. day.
▪ Well diversified business

5.1. P U R P O S E / O B J E C T I V E O F SWOT A N A L Y S I S

It enables management to
➢ create a firm’s specific business model which
➢ best aligns/ fits/ matches an organization’s capabilities
➢ with demand of market/ environment.
It shows areas where an organization is performing well, as well as areas that need improvement.
SWOT Analysis provides competitive advantage to an organization.

5.2. K E Y R E A S O N S / S I G N I F I C A N C E O F SWOT A N A L Y S I S

Guide Strategists in strategy

Logical Framework of Analysis Comparative Account
identification
It provides ~ to management to It provides ~ of internal & external It ~ in case there is any
identify all issues which may environment to managers to difficulty in selection of
impact Org. in long or short term. compare O&T with S&W of an Org. appropriate strategy.

Criticism of SWOT Analysis: It does not generally provide for evaluation of strengths, weaknesses,
opportunities and threats in the competitive context.

6. C O M P E T I T I V E A D V A N T A G E : U S I N G M I C H A E L P O R TE R ’ S G E N E R I C S TR A TE G I E S

▪ Competitive Advantage is a set of unique features of a Company and its products

➢ that are perceived by target market and customers
➢ as significant and superior to competition.
▪ Competitive advantage provides edge over rivals.
An organization is said to have competitive advantage if its profitability is higher than average profitability
of Industry.
▪ “If you don’t have a competitive advantage, don’t compete”- Jack Welch
▪ Competitive advantage is said to be achieved if other Firm’s efforts to imitate it has failed.
Resources Capabilities
It includes It exists when resources are purposefully integrated
a. Tangible resources that can be seen and quantified. / used to achieve a specific task or set of tasks.
E.g. plant & machinery, factory Examples:
b. Intangible resources like goodwill, capacity for

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innovation, HR skills, Knowledge, trust between a) Effective customer service,
managers and employees, patents, copyrights etc. b) Effective and efficient control of inventories,
It is developed over a period of time & difficult to c) Product & design quality,
imitate.
d) Digital technology.
If a firm possesses resources and capabilities which are superior to those of competitors, then as long as the
firm adopts a strategy that utilizes these resources and capabilities effectively, it should be possible for it
to establish a competitive advantage.

6.1. S U S T A I N A B I L I T Y O F C O M P E T I T I V E A D V A N T A G E

All competitive advantages have a limited life. The question of duplication is not if it will happen, but when.
Sustainability of competitive advantage depends on 4 major characteristics of resource and capability:
Durability Transferability Imitability Appropriability
Period over which Competitive advantage If resources and capabilities Refers to ability of
competitive adv. is also depends on ability can’t be purchased, rivals Firm’s owner to
sustained depends on the of rivals to gain access need to build it from scratch. appropriate the
rate a Firm’s resources & to necessary resources If competitor is able to build return on its resource
capabilities deteriorate. and capabilities. resource and capabilities base.
If rate of product innovation easier it is to transfer easily, competitive If resources and
is fast, patents/ tech. are resources and advantage is not sustainable. capabilities provide
more likely to get obsolete. capabilities between For example, In financial competitive
On the other hand, companies, the less services, innovations lack advantage, there is
consumer brand names sustainable will be the legal protection and are issue of who is
have a highly durable competitive advantage easily copied. receiving return on
appeal. such resource &
capabilities.

7. MICHAEL PORTER’S GENERIC STRATEGIES

According to Porter, strategies allow organizations to gain competitive advantage from three different bases:
cost leadership, differentiation, and focus. Porter called these base generic strategies.
These strategies have been termed generic, because they can be pursued by any type or size of business firm
and even by not-for-profit organizations.
Cost leadership strategies Differentiation strategies Focus strategies
This strategy emphasizes on This strategy aimed at producing This strategy is aimed at producing
producing standardized products at products and services considered products and services that fulfil
a very low per-unit cost for unique industry-wide and directed the needs of small groups of
consumers who are price-sensitive. at consumers who are relatively consumers with very specific taste.
price-insensitive.
Larger firms with greater access to resources typically compete on a cost leadership and/or differentiation
basis, whereas smaller firms often compete on a focus basis.

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7.1. C O S T L E A D E R S H I P S T R A T E G Y

Cost leadership strategy is low-cost competitive strategy that aims at broad mass market.
It involves producing
➢ standard products
➢ at very low cost per unit
➢ for price sensitive market.
It involves efforts to reduce cost in area of Procurement; Production; Storage and Distribution of goods.
Also, economies of scale and reduction in overhead is done due to large volume of sale.
Because of lower cost, cost leader is able to charge lower price than its competitors and still make
satisfactory profit
A primary reason for pursuing forward, backward, and horizontal integration strategies is to gain cost
leadership benefits.
But cost leadership strategy must be pursued along with differentiation.
Examples:
a) McDonald’s fast-food restaurants have successfully followed low-cost leadership strategy.
b) Walmart has also successfully followed low-cost leadership strategy.
c) Decathlon Group’s mega sports stores have been following low-cost leadership strategy to gain
international recognition and also beat competition.

When is cost leadership strategy effective? How to achieve cost leadership?

a) Market has many price sensitive customers. a) Prompt forecasting of demand of product/ service
b) Buyers do not care much about differentiation b) Optimum utilization of resources
or brand. c) Achieving economies of scale to reduce cost per unit
c) There is little scope of differentiation.
d) Standardization of product for mass production
d) There are large no. of buyers with bargaining
e) Invest in cost saving techniques for smart working
power.
f) Resistance to differentiation till it becomes essential

ADVANTAGES OF COST LEADERSHIP STRATEGY

Cost leadership strategy enables a Firm to be profitable even with 5 forces of Porter’s Five Forces Model:
Rivalry Buyer Supplier New Entrants Substitute

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Competitors try to Powerful buyers Since cost leader Cost leader creates Cost leader is able
avoid price wars, will not be able has lowest cost in entry barriers for to lower cost to
since low-cost to exploit cost Industry, it is able new entrants due ensure that buyer
Firm will continue leader as its cost to absorb greater to low cost. continues with their
to earn profit even is already lowest. price increase by its product.
if they reduce Hence, buyer will suppliers before it is They can also
their price. continue to buy compelled to invest to develop
from it. increase the price. substitutes.

DISADVANTAGES OF COST LEADERSHIP STRATEGY

a) Cost advantage may not be for long period as competitors may follow cost reduction techniques as well.
b) This strategy can be successful only if Firm can achieve higher sales volume.
c) In this strategy, expenses on advertisement, marketing, research & development etc. is minimal which
may be counter-productive in long run.
d) Technological changes are great threat to cost leader.

7.2 . D I F F E R E N T I A T I O N S T R A T E G Y

This strategy is aimed at broad mass market and involves creating and producing
➢ unique products and service
➢ directed at customers who are relatively price insensitive.
Because of differentiation, businesses can charge premium for its products and also gain customer loyalty
as customer gets strongly attached to differentiating features.
Differentiation/ uniqueness can be in
➢ Product design; Brand; Features; Quality; Customer service etc.
For example, Domino’s Pizza has been offering home delivery within 30 minutes or the order is free, is a unique
selling point that differentiates if from its rivals.
Note: All Firms essentially follow differentiation strategy because only one Firm can be cost leader.

Basis/ Forms/ Types of Differentiation

Product Differentiation Price Differentiation Organizational Differentiation
It means innovative products which It means company can It involves maximizing power of a brand
give Org. an edge over competitors either offer lowest price or or using specific advantage of
New product involves higher cost can charge highest price Organization to differentiate its
due to R&D, marketing but return in the Industry. products.
may be higher if it is valued by E.g.: Brand image, customer loyalty,
customers. locational advantage, R&D capability.
For example, Apple iPhone, has For example, Apple iPhone For example, Apple has been building
invested huge amounts of money in dominates the smart customer loyalty since years and has a
R&D, and the customers’ value that. phone segment by fanbase of consumers that are called
They want to be among the first charging higher prices for “Apple Fanboys/Fangirls”
ones to try the new offerings from its products.
the company.

Achieving Differentiation Strategy

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a) Offer utility to customers and match the product with their taste and preference.
b) Improve/Elevate performance of product
c) Offer high-quality product/service for buyer satisfaction.
d) Rapid product innovation by investing in R&D.
e) Take steps for enhancing the brand image and brand value.
f) Fixing product prices based on the unique features of product & buying capacity of customer.
Differentiate → Charge premium → customer loyalty

ADVANTAGES OF DIFFERENTIATION STRATEGY

Differentiation strategy enables a Firm to be profitable even with 5 forces of Porter’s Five Forces Model:
Rivalry Buyer Supplier Entrants Substitute
Brand loyalty gives They do not Since Since, innovative Substitutes can’t
an Organization negotiate for differentiation products are replace
competitive price as they get allows Org. to expensive to make differentiated
advantage over special features & charge higher price, & offer, it acts as product due to
rivals as customers they have fewer they can absorb a barrier for new high brand value &
will be less sensitive options in the increase in price of entrants. customer loyalty.
to changes in price. market. raw material.

D I S A D V A N T A G E S O F D I F F E R E N T I A T I O N S T R A TE G Y

a) It does not guarantee competitive advantage if standard product sufficiently meets customer needs.
b) If differentiation is not valued by customer, this strategy fails. In such cases, C.L. strategy is preferred.
E.g. Home delivery of packed snacks in 30 minutes would not even be a differentiator as the consumer
wouldn’t value such an offer.
c) In long run, uniqueness is difficult to sustain as competitors may copy differentiating uniqueness.
Firms must find durable sources of uniqueness that cannot be imitated quickly or cheaply by rival firms.
E.g. Amazon Prime offers deliver within two hours. This is quite difficult to imitate by its rivals, and thus
this differentiating factor helps it to lead the market.
d) Charging too high price for differentiated product may cause customers to switch to different product.
E.g. As we see a shift of iPhone users to other android flagship smart phones.

7.3. F O C U S S T R A T E G Y

It means an organization concentrates on

➢ particular group of customers, geographic market or product line
➢ in order to serve well defined but narrow market
➢ better than competitors who serve broader market.
Focus strategy is successful when
a) Industry segment is of sufficient size,
b) Has good growth potential, and
c) Not crucial to success of other major competitors.
For example, Ferrari sports cars.

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Strategies such as market penetration and market development offer substantial focusing advantages.
Focus strategies are most effective when consumers have distinctive preferences or requirements, and when
the rival firms are not attempting to specialize in the same target segment.
Focus strategy can be pursued along with cost leadership strategy or differentiation strategy.

Focused C.L. strategy Focused Differentiation strategy

In this, Firm competes with its competitors on price to It requires offering unique products that fulfill
charge in target narrow market. demand of a narrow market.
It does not mean that the Firm charges lowest price Some Firms using F.D. strategy concentrate their
in industry. efforts on
Rather, it charges low price as compared to its ➢ Particular sale channel likes selling over
competitors in target market. Internet, or
➢ A particular demographic group.
For example, Rolls-Royce sells limited number of
high-end, custom-built cars.

Achieving Focus Strategy Advantage Disadvantage

a) Selecting specific niches not a) Premium price can be a) Due to limited demand of
covered by CL or differentiator. charged for such specialised product, sales may be limited
b) Creating superior skills for product/ service. & cost may not be recovered.
catering to such niche market. b) Rivals & new entrants find b) Niche could disappear or be
c) Generating higher efficiency for
it difficult to compete due taken over by competitors by
catering to such niche market. to enhanced expertise in acquiring same competencies.
target market. c) Firms lacking distinctive
d) Developing Innovative ways for
catering to such niche market. competencies may not pursue
this strategy.

7.4. B E S T C O S T P R O V I D E R S T R A T E G Y

It is further development of 3 generic strategies.

It aims to provide more value to customer by emphasizing on both, lower cost & better-quality upscale
differentiated products.
It can be done in following two ways: [Sub strategies]
a) By offering products at a lower price than what is being offered by rivals for same / similar quality; or
b) Charging similar price as rivals for better quality product as compared to rivals.

For example, android flagship phones from OnePlus, Xiaomi, Oppo, Vivo, etc., are all rooting for giving better
quality at lowest prices to the customers. They are following the best-cost provider strategy to penetrate
market.

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A C T I V I T Y F O R M I C H A E L P O R T E R ’ S G E N E R I C S T R A TE G I E S

Business Idea Michael Porter’s Generic Strategy

Building the best-in-class headphones with noise cancellation and
premium quality ear cushions
Providing maximum value features in a phone which is within the
spendable limits of the middle class of India
Being in a position to dominate the glass manufacturing units across
the country and thus using economies of scale to beat competition
Targeting the below poverty line individuals and providing them
nutritious meals

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