CA Sunil Keswani 1

Chapter – 3
Strategic Analysis: Internal Environment

Internal Environment

► 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, administrative
apparatus- 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.

► It is based on its structure and business model and include all stakeholders.

Understanding Key Stakeholders

► Stakeholders can be defined as any person/group of individuals, internal or

external, that has an interest in, or impact on the business or corporate strategy
of the organisation e.g. shareholders, CEO, BOD, consumers, employees etc.

►They have the power to influence the strategy or performance of that

organisation.
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Mendelow's Matrix or Stakeholder Analysis Matrix or

Power-Interest Matrix
►It is a simple framework to help manage key stakeholders.

►Managing a project is extremely complicated as it involves managing the

competing interests of various stakeholders.

►Mendelow suggests that one should analyse stakeholder groups based on Power
(the ability to influence organisation strategy or resources) and Interest (how
interested they are in the organisation succeeding).
►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

Keep Satisfied Key Player
High

Consult often Manage Closely

Increase their interest Involve in decision making
Engage regularly and build
Power / Influence

Can be hindrance to new

ideas or strategic choices strong relationship

Low Priority Keep Informed

Monitor only, no Utilise the high interest by
engagement engaging in decisions
General occasional Consult in their areas of
communication expertise and interest

Low Interest in the Organisation High

Keep Satisfied - High power, less interested people

Stakeholders - Aim to keep them satisfied with their intended information on a
regular basis.
- Example, banks, government, customers, etc.
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Key Players - High power, highly interested people

Stakeholders - Aim to make the greatest efforts to satisfy them, take their
advice, build actions and keep them informed with all information
on a regular basis.
- Example, Shareholders, CEO, Board of Directors, etc.

Keep Informed - Low power, highly interested people

Stakeholders - Aim to adequately inform this group of people and communicate
with them to ensure that no major issues arise.
- They can also help with real time feedbacks and areas of
improvement.
- Example, employees, vendors, suppliers, legal experts, etc.

Low Priority - Low power, less interested people

Stakeholders - Aim to only monitor them with no actions to satisfy their
expectations.
- Strategically, minimal efforts should be spent while keeping an
eye to check if their levels of interest or power change.
- Example, business magazines, media houses, etc.

An important thing that strategists should be aware of, is the importance to

remember that environment is highly dynamic and certain things might happen that
can cause stakeholders to suddenly move between quadrants.

Strategic Drivers

►An important aspect of internal analysis is assessing the current performance

of the business. And in assessing current performance, the strategic drivers
consider what differentiates an organisation from its competitors.

►The key strategic drivers of an organisation include:

ü Industry and markets
ü Customers
ü Products/services
ü Channels
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Industry And Markets

›» Similar companies based on their primary products are grouped together into
industries.
›»Example, Maruti, Mahindra, Tata Motors, TVS, Bajaj Auto, are all selling
automotives as their primary product and thus categorised into Automotive
Industry.
›»Market refers to all the buyers and sellers of a particular product/service.

›»Is market the same for all businesses?

›»Market is not same for all businesses.
›»Market may be physical entity or may be virtual like e-commerce websites and
applications.
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.

Analysing Industry And Markets

›»A tool used for analysing industry and market is – Strategic Group Mapping.
›»A strategic group consists of those rival firms which have similar competitive
approaches and positions in the market.

›»The procedure for constructing a strategic group map and deciding which firms
belong in which strategic group is straightforward:
ü Identify the competitive characteristics that differentiate firms in the
industry typical variables are price/quality range (high, medium, low);
geographic coverage (local, regional, national, global); use of distribution
channels (one, some, all); and degree of service offered (no-frills, limited,
full)
ü Plot the firms on a two-variable map using pairs of these differentiating
characteristics.
ü Assign firms that fall in about the same strategy space to the same
strategic group.
ü Draw circles around each strategic group making the circles proportional
to the size of the group’s respective share of total industry sales revenues.
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Strategic Group Mapping

AB
GHI
C

DEF
PQR

XY
Z

Few Ranges of products Many

Customers
›»Different customers may have different needs and require different sales
models or distribution channels.

›» Customer vs Consumer
A customer is the one buys a product/service,
The consumer is the one who finally uses/consumes the bought product or service.
›»Example: A parent buying stationery products for their kids might be the
customers, but consumers of stationery are the kids who would actually use it.

›»Thus, understanding both is important for the marketers.

›»From a pricing perspective - the customer is of more importance and

›»From value creation and design/usability, consumer needs to be the kept at the
center of decision making.

Product/Services
›»Product stands for the combination of "goods and services" that the company
offers to the target market.
›»Products can be distinguished based on consumer, luxury, durables or
perishables etc.
›»Strategies are needed for managing existing product over time, adding new
ones and dropping failed products.
›»Strategic decisions must also be made regarding branding, packaging and other
product features such as warranties.
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›»For a new product of pricing strategies at least three objectives must be kept
in mind:
ü Have customer-centric approach while making a product.
ü Produce sufficient returns through a reasonable margin over cost.
ü Increasing market share.
›»Products and services need heavy investment in reaching out to customers.

›»Marketing strategies to handle marketing strategically and fight the

competition in the market.

Social It refers to the design, implementation, and control of programs

Marketing seeking to increase the acceptability of a social ideas, cause, or
practice among a target group to bring in a social change.

Augmented This type of marketing includes additional customer services and

Marketing benefits that a product can offer besides the core and actual product
that is being offered.

Direct Marketing through various advertising media that interact directly

Marketing with consumers, generally calling for the consumer to make a direct
response. Direct marketing includes catalogue selling, e-mail,
telecomputing. electronic marketing, shopping, and TV shopping.

Relationship The process of creating, maintaining, and enhancing strong, value-

Marketing laden relationships with customers and other stakeholders.

Services - Services is any activity or benefit that one party can offer to
Marketing another that is essentially intangible.
- This marketing requires different marketing strategies since it has
peculiar characteristics of its own such as inseparability, variability
etc.

Person - People can also be marketed.

Marketing - Person marketing consists of activities undertaken to create,
maintain or change attitudes and behaviour towards particular person.
- For example, politicians, sports stars, film stars, etc. Le., market
themselves to get votes, or to promote their careers.
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Organization - It consists of activities undertaken to create, maintain, or change

Marketing attitudes and behaviour of target audiences towards an organization.
- Both profit and non-profit organizations practice organization
marketing.

Place - Place marketing involves activities undertaken to create, maintain,

Marketing or change attitudes and behaviour towards particular places say,
marketing of business sites, tourism marketing.

Enlightened - It is a marketing philosophy holding that a company's marketing

Marketing should support the best long-run performance of the marketing
system that is beyond the prevailing mindset.
- Its five principles include
(A) customer-oriented marketing,
(B) innovative marketing,
(C) value marketing,
(D) sense-of-mission marketing, and
(E) societal marketing.

Differential - It is a market-coverage strategy in which a firm decides to target

Marketing several market segments and designs separate offer for each.
- For example, HUL has Lifebuoy, Lux and Rexona in popular segment
and Dove and Pears in premium segment.

Synchro- - When the demand for a product is irregular due to season, some
marketing parts of the day, or on hour basis, causing idle capacity or overworked
capacities, synchro-marketing can be used to find ways to alter the
pattern of demand through flexible pricing, promotion, and other
incentives.

Concentrated - It is a market-coverage strategy in which a firm goes after a large

Marketing share of one or few sub-markets. It can also take the form of Niche
marketing.
- Luxury cars, toddlers products

Demarketing It includes marketing strategies to reduce demand temporarily or

permanently. The aim is not to destroy demand, but only to reduce or
shift it. This happens when there is overfull demand.
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Channels
›»Channels are the distribution system by which an organisation distributes its
product or provides its service.
›»Examples of some companies;
• 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.
• Boat Headphones - only online via e-commerce platforms like flipkart and
amazon
›»There are typically three channels:
The sales - These are the intermediaries involved in selling the product
channel through each channel and ultimately to the end user.
- The key question is: Who needs to sell to whom for your product
to be sold to your end user?

The - It focuses on the series of intermediaries who physically handle

product the product on its path from its producer to the end user.
channel
The - It refers to the entities that provide necessary services to
service support the product, as it moves through the sales channel and
channel after purchase by the end user.
- It is an important consideration for products that are complex in
terms of installation or customer assistance.

Role Of Resources And Capabilities

Building Core Competency
›»C.K. Prahalad and Gary Hamel have advocated a concept of core competency.
›»Competency is defined as a combination of skills and techniques rather than
individual skill or separate technique.
›»A core competency for a firm is whatever it does best.
›»Core competency is defined as the collective learning in the organization,
especially coordinating diverse production skills and integrating multiple streams
of technologies that can lead to competitive advantage.

›»Core competencies are created by superior integration of technological,

physical and human resources.
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›»Core competencies cannot be built on one capability or single technological

know-how, instead, it has to be the integration of many resources say a sum of 5
– 15 areas.
›»According to C.K. Prahalad and Gary Hamel, major core competencies are
identified in three areas -
Competitor ►Competence should be unique and difficult for competitors to
Differentiation imitate.
►It allows the company to provide better products or services
►Company has to keep on improving these skills in order to sustain its
competitive position.
►Competence does not necessarily have to exist within one company in
order to define as core competence.
►Example, it is quite difficult to imitate patented innovation, like
Tesla has been winning over competition in electric vehicles.

Customer value ►When purchasing a product or service it has to deliver a fundamental

benefit for the end customer in order to be a core competence.
►The essence is that the consumer should value the differentiation
offered. Without it, the core competency does not make sense.

Application to ►Core competence must be applicable to the whole organization; it

other markets cannot be only one particular skill or specified area of expertise.
►Although some special capability would be essential or crucial for the
success of business activity, it will not be considered as core
competence if it is not fundamental from the whole organization's
point of view.

›»Ifthe three above-mentioned conditions are met, then the company can regard it
competence as core competency.
›»Core competencies are often visible in the form of organizational functions. E.g. HUL

Criteria For Building A Core Competencies (CC)

Valuable - These are the ones that allow the firm to exploit opportunities or
avert the threats in its external environment.
- Finance companies build a valuable competence in financial
services.
- Human capital is important in creating value for customers.
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Rare - Core competencies are very rare capabilities and very few of the
competitors possess this.
- Competitive advantage results only when firms develop and exploit
valuable capabilities that differ from those shared with
competitors.

Costly to - It means such capabilities that competing firms are unable to

imitate easily.

Non- - Capabilities that do not have strategic equivalents are called non-
substitutable substitutable capabilities.
- Strategic value of capabilities increases as they become more
difficult to substitute.
For example, Competitors are deeply aware about Apple's operating
system's (iOS) successful model. However, to date, no competitor
has been able to imitate Apple's capabilities.

Combining External And Internal Analysis (SWOT Analysis)

►SWOT analysis is the analysis of a business's strengths, weaknesses,
opportunities and threats.
►The primary objective of a SWOT analysis is to help organizations develop a
full awareness of all the factors (external as well as internal), involved in making
a business decision.
►SWOT analysis shall be implemented before all company actions.
►SWOT analysis can show areas where an organization is performing well, as well
as areas that need improvement.
►SWOT analysis can maximize opportunities by using strengths and minimize
threats by reducing weakness.

Strength – Inherent capability of organization

Weakness – Inherent weakness of organization
Opportunities – Favourable external environment
Threats – Unfavourable external environment
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SWOT Analysis

Helpful Harmful
to achieving the objective to achieving the objective
(attributes to the

S W
Internal origin

organization

Strengths Weaknesses

O T
(attributes to the
External origin

Opportunities Threats
environment

Competitive Michael Porter's Generic Strategies

► If a company’s strategies results in superior performance, it is said to have a
competitive advantage.
► It is a set of unique features of a company and its products that are perceived
by the target market as significant and superior to the competition.
►"If you don't have a competitive advantage, don't compete"- Jack Welch
►The competitive advantage is the achieved advantage over rivals when a
company's profitability is greater than the average profitability of firms in its
industry.
►It is achieved when the firm successfully formulates and implements the value
creation strategy and other firms are unable to duplicate it or find it too costly
to imitate.

Sustainability of Competitive Advantage

It depends upon four major characteristics of resources and capabilities:
1. Durability
• The period over which a competitive advantage is sustained depends in part on
the rate at which a firm's resources and capabilities deteriorate.
• The rate of product innovation is fast, product patents are quite likely to
become obsolete.
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2. Transferability
• Easier it is to transfer resources and capabilities between companies, the less
sustainable will be the competitive advantage

3. Imitability
• If resources and capabilities cannot be purchased by a would-be imitator, then
they must be built from scratch and would remain competitive advantage.

4. Appropriability
• It refers to the ability of the firm's owners to appropriate returns on its
resource base.
• No return will be considered as no competitive advantage

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 organisations.

Broad Target

Cost Differentia
Leadership tion
Competitive Scope

Focussed Focussed
Narrow Target Cost Differentia
Leadership tion

Low-Cost Differentiated
products/ products/
services services
Competitive Advantage
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Cost Leadership
• It emphasizes on producing standardized products at a very low per-unit cost
for consumers who are price-sensitive. E.g. milk, bread etc.

Differentiation Strategy
• It is a strategy aimed at producing products and services considered unique
industry-wide and directed at consumers who are relatively price-insensitive.
E.g. cement can withstand earthquake etc.

Focus Strategy
• Focus means producing products and services that fulfil the needs of small
groups of consumers with very specific taste. E.g. Luxury cars

►Large companies follow broad market and small companies follow narrow market
or focus.
►Porter stresses the need for strategists to perform cost-benefit analysis to
evaluate “sharing opportunities” and “transfer” among the firm’s existing and
potential business units to gain competitive advantage.

Cost Leadership Strategy

›»It is a low-cost competitive strategy that aims at broad mass market.
›»It requires vigorous pursuit of cost reduction in the areas of
ü Procurement,
ü Production,
ü Storage & distribution of product or service and
ü Also, economies in overhead costs.
›»Because of its lower costs, the firm is able to charge a lower price for its
products than most of its competitors and still earn satisfactory profits.
›»Example, McDonald’s, Decathlon,
›»Generally, cost leadership must be pursued in conjunction with differentiation.
›»Internal strategy of sharing resources to build a competitive advantage is
called synergy benefit.
›»Striving to be a low-cost producer in an industry can especially be effective,
• when the market is price-sensitive and
• when there are few ways to achieve product differentiation.
›»It is done to reduce competitor and thereby gain market share and driving some
competitors out of the market.
›»Some risks of pursuing cost leadership are;
• that competitors may imitate the strategy, therefore driving overall
industry profits down;
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• that technological breakthroughs in the industry may make the strategy

ineffective; or
• that buyer interests may swing to other differentiating features besides
price.

Achieving Cost Leadership Strategy

1. Prompt forecasting of demand of a product or service.
2. Optimum utilization of the resources to achieve cost advantages.
3. Achieving economies of scale; thus, lower per unit cost of product/service.
4. Standardisation of products for mass production to yield lower cost per unit.
5. Invest in cost saving technologies and using advance technology for smart
efficient working.
6. Resistance to differentiation till it becomes essential.

Advantages of Cost Leadership Strategy

1. Rivalry – Competitors are likely to avoid a price war, since the low-cost firm
will continue to earn profits even after competitors compete away their profits.

2. Buyers – Powerful buyers/customers would not be able to exploit the cost

leader firm and will continue to buy its product.

3. Suppliers – Cost leaders are able to absorb greater price increases from
suppliers before they need to raise prices for customers.

4. Entrants – Low-cost leaders create barriers to market entry through their

continuous focus on efficiency and cost reduction.

5. Substitutes – Low-cost leaders are more likely to lower the costs to induce
existing customers to stay with their products, invest in developing substitutes,
and even purchase patents.

Disadvantages of Cost Leadership Strategy

1. Cost advantage may not last long as competitors may imitate cost reduction
techniques.

2. Cost leadership can succeed only if the firm can achieve higher sales volume.

3. Cost leaders tend to keep their costs low by minimizing cost of advertising,
market research, and research and development, but this approach can prove to
be expensive in the long run.

4. Technological advancement areas a great threat to cost leaders.

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Differentiation Strategy
›»This strategy is aimed at broad mass market and involves the creation of a
product or service that is perceived by the customers as unique.
›»Uniqueness can be associated with design, brand image, features, technology,
customer service etc.
›»Example, Domino’s Pizza has been offering home delivery within 30 minutes or
the order is free,
›»Differentiation allows a firm to charge higher price for its product.
›»Successful differentiation can mean greater product flexibility,
greater
compatibility, lower costs, improved service, less maintenance, greater
convenience, or more features.
›»A risk associated with pursuing a differentiation strategy is that the unique
product may not be valued high enough by customers to justify the higher price.
›»Another risk is that it can be copied by competitors quickly.

Basis of Differentiation
Product • Innovative products that meet customer needs can be an area
• However, the pursuit of a new product offering can be costly-research
and development, as well as production and marketing costs can all add
to the cost of production and distribution.
• Example, Apple iPhone, Tesla, etc.

Pricing • Companies that differentiate based on product price can either

determine to offer the lowest price or can attempt to establish
superiority through higher prices.
• Example, Apple iPhone, Jio phone

Organisation • It can be in form of location advantage, name recognition, customer

loyalty etc.
• Example - Apple, Tata

Achieving Differentiation Strategy

1. Offer utility to the customers and match products with their tastes and
preferences.
2. Elevate/Improve performance of the product.
3. Offer the high-quality product/service for buyer satisfaction.
4. Rapid product innovation to keep up with dynamic environment.
5. Taking steps for enhancing brand image and brand value.
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6. Fixing product prices based on the unique features of product and buying
capacity of the customer.

Advantages of Differentiation Strategy

1. Rivalry- It means that customers will be less sensitive to price increases, as
long as the firm can satisfy the needs of its customers.

2. Buyers - They do not negotiate for price as they get special features and they
have fewer options in the market.

3.Suppliers - Because differentiators charge a premium price, they can afford

to absorb higher costs of supplies as the customers are willing to pay extra too.

4.Entrants-Innovative features are an expensive offer. So, new entrants

generally, avoid these features.

5.Substitutes- They can't replace differentiated products which have high

brand value and enjoy customer loyalty.

Disadvantage of Differentiation Strategy

1. In the long term, uniqueness is difficult to sustain

2. Charging too high a price for differentiated features may cause the customer
to switch-off to another alternative.

3. IT fails to work if its basis is something that is not valued by the customers.

Focus Strategies
›»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.
›»An organization using a focus strategy may concentrate on a particular group
of customers, geographic markets, or on particular product-line segments in order
to serve a well-defined but narrow market better than competitors who serve a
broader market. Example, Ferrari sports cars.
›»Risks of pursuing a focus strategy include the possibility of numerous
competitors recognizing the successful focus strategy and imitating it or that
consumer preferences may drift towards the product attributes desired by the
market as a whole.
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Focus Cost Leadership

• A focused cost leadership strategy requires competing based on price to target
a narrow market.
• A firm that follows this strategy does not necessarily charge the lowest prices
in the industry.
• Instead, it charges low prices relative to other firms that compete within the
target market.

Focus Differentiation
• A focused differentiation strategy requires offering unique features that fulfil
the demands of a narrow market.
• Some firms using a focused differentiation strategy concentrate their efforts
on a particular sales channel, such as selling over the internet only.
• Others target particular demographic groups.
• Example, Rolls-Royce sells limited number of high-end, custom-built cars.

Achieving Focused Strategy

1. Selecting specific niches which are not covered by cost leaders and
differentiators.
2.Creating superior skills for catering such niche markets.
3. Generating high efficiencies for serving such niche markets.
4. Developing innovative ways in managing the value chain.

Advantages of Focused Strategy

1. Premium prices can be charged by the organisations for their focused
product/services.

2. Due to the tremendous expertise in the goods and services that the
organisations following focus strategy offer, rivals and new entrants may find it
difficult to compete.

Disadvantages of Focused Strategy

1. The firms lacking in distinctive competencies may not be able to pursue focus
strategy.

2. Due to the limited demand of product/services, costs are high, which can cause
problems

3.In the long run, the niche could disappear or be taken over by larger competitors
by acquiring the same distinctive competencies.
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Best-Cost Provider Strategy

›»It is a further development of above three generic strategies.
›»It is directed towards giving customers more value for the money by
emphasizing on both, low cost and upscale differences.
›»The objective is to keep costs and prices lower than those of other sellers of
“comparable products".
Lower Cost Differentiation

A Broad Cross- Overall Low Cost

Broad Differentiation
Section of Buyers Leadership Strategy
Market Target

Strategy

Best-Cost
Provider
A Narrower Buyer Strategy
Segment (or Focused Low cost
Strategy Focused Differentiation
Market Niche)
Strategy Company’s

›»It can be done through:

(a) offering products at lower price than what is being offered by rivals for
products with comparable quality and features
Or
(b) charging similar price as by the rivals for products with much higher quality
and better features.
›»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.