Strategic Management – Concepts and Tools

(A Ready Reckoner)

Creating a Vision is an important first step in Strategic Management Process. We identified

these steps and guidelines to help you write an effective statement.

Step 1. Gather a team of managers, employees and shareholders. Vision is the statement
that must be understood by employees of all levels. As many people as possible should be
involved in the process because involvement leads to stronger commitment to company’s
vision. After choosing the people that will be involved you should also distribute several
articles to them about what is organization’s vision and ask everyone to read them as a
background.

Step 2. Ask everyone to write their own version of vision. The next step is to ask everyone
to write his or her own version of the statement and submit it to the responsible team. After
receiving the statements, the team should try to combine draft vision out of all the
submissions. This is also a great opportunity to resolve any conflicting views about firm’s
ultimate objective.

Step 3. Revise the statement and present the final version. The draft statement should be
distributed to the members again for their last revision. Upon receiving the feedback, the
final version of the vision should be created and presented to every employee.

Don’t forget that a vision should be a one sentence clear, inspirational and memorable
statement.

Vision statement examples

The best way to learn creating a vision is to look at the currently available good and bad
examples.

Good visions

Chevron: To be the global energy company most admired for its

people, partnership and performance.

Feeding America: A hunger-free America

Habitat for Humanity: A world where everyone has a decent

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place to live.

Microsoft: A computer on every desk and in every home

Save the Children: Our vision is a world in which every child

attains the right to survival, protection, development and
participation.

Bad visions

General Motors: To design, build and sell the world’s best

vehicles. (Best in what? GM should have specified their
objective)

IKEA: At IKEA our vision is to create a better everyday life for the
many people. (This is impossible to achieve)

Samsung: Inspire the World, Create the Future. (The statement

is too vague and doesn’t set any objectives)

Toyota: Toyota will lead the way to the future of mobility,

enriching lives around the world with the safest and most
responsible ways of moving people. Through our commitment
to quality, constant innovation and respect for the planet, we
aim to exceed expectations and be rewarded with a smile. We
will meet our challenging goals by engaging the talent and
passion of people, who believe there is always a better way. (It
is too long and sounds more like a mission than a true vision)

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Definition
Mission Statement is a description of what an organization actually does – what its business
is – and why it does it.

Understanding the tool

Often called the “credo”, “philosophy”, “core values” or “our aspirations”, organization’s
mission is the statement that defines its core purpose or reason for being. [2] It tells who a
company is and what it does. According to P. Drucker, often called the father of modern
management, a mission is the primary guidance in creating plans, strategies or making daily
decisions. It is an important communication tool that conveys information about
organization’s products, services, targeted customers, geographic markets, philosophies,
values and plans for future growth to all of its stakeholders. In other words, every major
reason why company exists must be reflected in its mission, so any employee, supplier,
customer or community would understand the driving force behind organization’s
operations.

There are two types of statements:

 Customer-oriented missions. Customer-oriented missions define organization’s

purpose in terms of meeting customer needs or providing solutions for them. They
provide more flexibility than product-oriented missions and can be easily adapted to
changing environment. For example, Nokia’s statement “connecting people” is
customer-oriented. It does not focus on mobile phones or smart phones only. It
provides a solution to customer needs and could easily have worked 50 years ago,
and will continue to work in the future. It also gives more strategic flexibility for the
company. In Nokia’s case, it may start providing VoIP software to allow calls to be
made over the internet and its mission would still be valid.
 Product-oriented missions. Product-oriented missions focus on what products or
services to serve rather than what solutions to provide for customers. These
statements provide less flexibility for the company because most products have
short life cycle and offer limited market expansion. The company that defines its
business as “providing best health insurance products” may struggle to grow to
other insurance product categories.

For a mission to be effective it must include the following 9 components:

1. Customers. Who are your customers? How do you benefit them?

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 2. Products or services. What are the main products or services that you offer? Their
uniqueness?
3. Markets. In which geographical markets do you operate?
4. Technology. What is the firm’s basic technology?
5. Concern for survival. Is the firm committed to growth and financial soundness?
6. Philosophy. What are the basic beliefs, values and philosophies that guide an
organization?
7. Self-concept. What are the firm’s strengths, competencies or competitive
advantages?
8. Concern for public image. Is the firm socially responsible and environmentally
friendly?
9. Concern for employees. How does a company treat its employees?

Why creating a mission is important?

Many studies have been conducted to find out if having and communicating mission
statement helps an organization to achieve higher performance. The results were mixed.
Some studies found positive relationship between written statements and higher
organizational performance, while other studies found none or even negative relationship.
One of the reasons might be that most of the companies create mission statement only
because it’s fashionable to do so and little effort is made to actually communicate that
mission to its stakeholders. David argues that if an organization constantly revises its
mission and treats it as a living document, it achieves higher performance than its
competitors. Nonetheless, all of the authors agree that mission brings the following
benefits:

 Informs organization’s stakeholders about its plans and goals;

 Unifies employees’ efforts in pursuing company goals;
 Serves as an effective public relations tool;
 Provides basis for allocating resources;
 Guides strategic or daily decision making;
 Shows that a company is proactive.

Writing a mission

Creating a mission statement is an important first step in clearly identifying your business’
reason for being. It’s hard to do it right. Therefore, we identified these steps and guidelines
to help you write an effective statement.

Step 1. Gather a team of managers, employees and shareholders. Mission is the statement
that must be understood by employees of all levels. Involving more people will let you find
out how each of them sees an organization and its core purpose. In addition, employees will
support organization’s mission more if they will be involved in the process of creating it.

Step 2. Answer all 9 questions for effective mission. Many practitioners and academics
agree that a comprehensive statement must include all 9 components. Only then creating a
mission can benefit a company. At this stage, try to honestly answer all the questions and
identify your customers, markets, values etc. It may take a lot of time but it’s worth it.

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Step 3. Find the best combination. Collect the answers from everyone and try to combine
one mission statement out of them. During this step, you can make sure that everyone
understands company’s reason for being and there are no conflicting views left.

Following guidelines (all taken from various studies) should also be helpful in writing an
effective mission statement:

 ‘Public image’, ‘concern for employees’, ‘philosophy’ and ‘customers’ are the most
important components of a mission;
 ‘Citizenship’, ‘teamwork’, ‘excellence’ and ‘integrity’ are the values used most often
by the companies with effective missions;
 Influential statements include words such as: ‘communities’, ‘customers’,
‘employees’, ‘ethics’, ‘global’ and ‘quality/value’;[4]
 Statement should be customer-oriented;
 Use less than 250 words;
 Be inspiring and enduring.

NOTE! Every mission must be communicated to organization’s stakeholders to have any

positive impact. It must be constantly revised and adjusted to meet any changing situation.

Mission statement examples

The best way to learn creating an influential mission is to look at

the existing examples. In the following table, we provide 3
mission statement examples and examine them using the
previous guidelines. For more mission statement examples a,
please look at our list. FedEx mission

"FedEx Corporation will produce superior financial returns for its

shareowners (5) by providing high value-added (7) logistics,
transportation and related information services (2) through
focused operating companies. Customer (1) requirements will
be met in the highest quality manner appropriate to each
market segment served (3). FedEx Corporation will strive to
develop mutually rewarding relationships with its employees
(9), partners and suppliers. Safety will be the first consideration
in all operations (9). Corporate activities will be conducted to
the highest ethical and professional standards.(6)"

FedEx mission lacks the answers about technologies (4) and

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social responsibilities (8), which is one of the key characteristics
that have to be in successful statement. It also lacks all the
values pointed out in the guidelines that are used by successful
companies in their statements. It is also product-oriented.

Intel mission

"Delight our customers (1), employees (9), and shareholders (5)

by relentlessly delivering the platform and technology (2, 4)
advancements that become essential to the way we work and
live."

Intel’s mission is poor because it lacks 4 components: markets

(3), philosophy (6), self-concept (7) and public image (8). It is
customer-oriented but does not use any of the top 4 values and
is too short.

Toyota mission

Toyota will lead the way to the future of mobility, enriching lives
around the world (3) with the safest and most responsible (6)
ways of moving people (1). Through our commitment to quality,
constant innovation (4, 7) and respect for the planet (8), we aim
to exceed expectations and be rewarded with a smile. We will
meet challenging goals (5) by engaging the talent and passion of
people (9), who believe there is always a better way.

Toyota has only missed to mention its products. Their mission is

customer-oriented, inspiring and enduring but it doesn’t clearly
mention its customers or social responsibilities.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Definition
Competitive advantage means superior performance relative to other competitors in the
same industry or superior performance relative to the industry average.

What is competitive advantage?

There is no one answer about what is competitive advantage or one way to measure it, and
for the right reason. Nearly everything can be considered as competitive edge, e.g. higher
profit margin, greater return on assets, valuable resource such as brand reputation or
unique competence in producing jet engines. Every company must have at least one
advantage to successfully compete in the market. If a company can’t identify one or just
doesn’t possess it, competitors soon outperform it and force the business to leave the
market.

There are many ways to achieve the advantage but only two basic types of it: cost or
differentiation advantage. A company that is able to achieve superiority in cost or
differentiation is able to offer consumers the products at lower costs or with higher degree
of differentiation and most importantly, is able to compete with its rivals.

An organization that is capable of outperforming its competitors over a long period of time
has sustainable competitive advantage.

The following diagram illustrates the basic competitive advantage model, which is explained
below in the article:

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

How a company can achieve it?

An organization can achieve an edge over its competitors in the following two ways:

 Through external changes. When PEST factors change, many opportunities can
appear that, if seized upon, could provide many benefits for an organization. A
company can also gain an upper hand over its competitors when it’s capable to
respond to external changes faster than other organizations.
 By developing them inside the company. A firm can achieve cost or differentiation
advantage when it develops VRIO resources, unique competences or through
innovative processes and products.

External Changes

Changes in PEST factors. PEST stands for political, economic, socio-cultural and
technological factors that affect firm’s external environment. When these factors change
many opportunities arise that can be exploited by an organization to achieve superiority
over its rivals. For example, new superior machinery, which is manufactured and sold only in
South Korea, would result in lower production costs for Korean companies and they would

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

gain cost advantage against competitors in a global environment. Changes in consumer
demand, such as trend for eating more healthy food, can be used to gain at least temporary
differentiation advantage if a company would opt to sell mainly healthy food products while
competitors wouldn’t. For example, Subway and KFC.

If opportunities appear due to changes in external environment why not all companies are
able to profit from that? It’s simple; companies have different resources, competences and
capabilities and are differently affected by industry or macro environment changes.

Company’s ability to respond fast to changes. The advantage can also be gained when a
company is the first one to exploit the external change. Otherwise, if a company is slow to
respond to changes it may never benefit from the arising opportunities.

Internal Environment

VRIO resources. A company that possesses VRIO (valuable, rare, hard to imitate and
organized) resources has an edge over its competitors due to superiority of such resources.
If one company has gained VRIO resource, no other company can acquire it (at least
temporarily). The following resources have VRIO attributes:

 Intellectual property (patents, copyrights, trademarks)

 Brand equity
 Culture
 Know-how
 Reputation

Unique competences. Competence is an ability to perform tasks successfully and is a cluster

of related skills, knowledge, capabilities and processes. A company that has developed a
competence in producing miniaturized electronics would get at least temporary advantage
as other companies would find it very hard to replicate the processes, skills, knowledge and
capabilities needed for that competence.

Innovative capabilities. Most often, a company gains superiority through innovation.

Innovative products, processes or new business models provide strong competitive edge
due to the first mover advantage. For example, Apple’s introduction of tablets or its
business model combining mp3 device and iTunes online music store.

Two basic types

M. Porter has identified 2 basic types of competitive advantage: cost and differentiation
advantage.

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Cost advantage. Porter argued that a company could achieve superior performance by
producing similar quality products or services but at lower costs. In this case, company sells
products at the same price as competitors but reaps higher profit margins because of lower
production costs. The company that tries to achieve cost advantage (like Amazon.com) is
pursuing cost leadership strategy. Higher profit margins lead to further price reductions,
more investments in process innovation and ultimately greater value for customers.

Differentiation advantage. Differentiation advantage is achieved by offering unique

products and services and charging premium price for that. Differentiation strategy is used
in this situation and company positions itself more on branding, advertising, design, quality
and new product development (like Apple Inc. or even Starbucks) rather than efficiency,
outsourcing or process innovation. Customers are willing to pay higher price only for unique
features and the best quality.

The cost leadership and differentiation strategies are not the only strategies used to gain
competitive advantage. Innovation strategy is used to develop new or better products,
processes or business models that grant competitive edge over competitors.

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Definition
The Resource-Based View (RBV)

Is a model that sees resources as key to superior firm performance? If a resource

exhibits VRIO attributes, the resource enables the firm to gain and sustain
competitive advantage.
[1]

What is a resource based view?

RBV is an approach to achieving competitive advantage that emerged in 1980s and 1990s,
after the major works published by Werner felt, B. (“The Resource-Based View of the Firm”),
Prahalad and Hamel (“The Core Competence of The Corporation”), Barney, J. (“Firm
resources and sustained competitive advantage”) and others. The supporters of this view
argue that organizations should look inside the company to find the sources of competitive
advantage instead of looking at competitive environment for it.

The following model explains RBV and emphasizes the key points of it.

According to RBV proponents, it is much more feasible to exploit external opportunities

using existing resources in a new way rather than trying to acquire new skills for each
different opportunity. In RBV model, resources are given the major role in helping
companies to achieve higher organizational performance. There are two types of resources:
tangible and intangible.

Tangible assets are physical things. Land, buildings, machinery, equipment and capital – all
these assets are tangible. Physical resources can easily be bought in the market so they

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confer little advantage to the companies in the long run because rivals can soon acquire the
identical assets.

Intangible assets are everything else that has no physical presence but can still be owned by
the company. Brand reputation, trademarks, intellectual property are all intangible assets.
Unlike physical resources, brand reputation is built over a long time and is something that
other companies cannot buy from the market. Intangible resources usually stay within a
company and are the main source of sustainable competitive advantage.

The two critical assumptions of RBV are that resources must also be heterogeneous and
immobile.

Heterogeneous. The first assumption is that skills, capabilities and other resources that
organizations possess differ from one company to another. If organizations would have the
same amount and mix of resources, they could not employ different strategies to
outcompete each other. What one company would do, the other could simply follow and no
competitive advantage could be achieved. This is the scenario of perfect competition, yet
real world markets are far from perfectly competitive and some companies, which are
exposed to the same external and competitive forces (same external conditions), are able to
implement different strategies and outperform each other. Therefore, RBV assumes that
companies achieve competitive advantage by using their different bundles of resources.

The competition between Apple Inc. and Samsung Electronics is a good example of how two
companies that operate in the same industry and thus, are exposed to the same external
forces, can achieve different organizational performance due to the difference in resources.
Apple competes with Samsung in tablets and smart phones markets, where Apple sells its
products at much higher prices and, as a result, reaps higher profit margins. Why Samsung
does not follow the same strategy? Simply because Samsung does not have the same brand
reputation or is capable to design user-friendly products like Apple does. (Heterogeneous
resources)

Immobile. The second assumption of RBV is that resources are not mobile and do not move
from company to company, at least in short-run. Due to this immobility, companies cannot
replicate rivals’ resources and implement the same strategies. Intangible resources, such as
brand equity, processes, knowledge or intellectual property are usually immobile.

VRIO framework

(Please visit our article on VRIO framework for more information.)

Although, having heterogeneous and immobile resources is critical in achieving competitive

advantage, it is not enough alone if the firm wants to sustain it. Barney (1991) has identified
VRIN framework that examines if resources are valuable, rare, costly to imitate and non-
substitutable. The resources and capabilities that answer yes to all the questions are the
sustained competitive advantages. The framework was later improved from VRIN to VRIO by
adding the following question: “Is a company organized to exploit these resources?”

VRIO framework adopted from Rothaermel’s (2013) ‘Strategic Management’, p.91

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Question of Value. Resources are valuable if they help organizations to increase the value
offered to the customers. This is done by increasing differentiation or/and decreasing the
costs of the production. The resources that cannot meet this condition, lead to competitive
disadvantage.

Question of Rarity. Resources that can only be acquired by one or few companies are
considered rare. When more than few companies have the same resource or capability, it
results in competitive parity.

Question of Imitability. A company that has valuable and rare resource can achieve at least
temporary competitive advantage. However, the resource must also be costly to imitate or
to substitute for a rival, if a company wants to achieve sustained competitive advantage.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Question of Organization. The resources itself do not confer any advantage for a company if
it’s not organized to capture the value from them. Only the firm that is capable to exploit
the valuable, rare and imitable resources can achieve sustained competitive advantage.

Difference between resource-based and industrial organization views

RBV holds that sustained competitive advantage can be achieved more easily by exploiting
internal rather than external factors as compared to industrial organization (I/O) view.
While this is correct to some degree, there isn’t definite answer to which approach
to strategic management is more important. The chart [1] below shows how industry, firm
and other effects explain firm’s performance. From ~30% to ~45% of superior organizational
performance can be explained by firm effects (resource based view) and ~20% by industry
effects (I/O view). This indicates that the best approach is to look into both external and
internal factors and combine both views to achieve and sustain competitive advantage.

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Definition
Benchmarking is a strategy tool used to compare the performance of the business
processes and products with the best performances of other companies inside and outside
the industry.

Benchmarking is the search for industry best practices that lead to superior performance.

Understanding the tool

Comparing your own business to a rival is essential when competing. Without it, you would
never know how successful your performance is in a market or whether you perform one or
another task better than your competitor does. For example, 85% customer satisfaction
might look great for you or even compared to your industry’s average, but what if some
other companies (not necessarily rivals) easily achieve 97% rate? In this situation, your 85%
satisfaction rate doesn’t look that brilliant. To better understand your situation and improve
company’s performance, the managers use benchmarking.

Some form of comparison in the companies was used, since 1800s, and mainly included
product’s quality and feature comparison. This type of comparison was scarcely used and
didn’t become a valuable management tool until late 1980s and 1990s, when Xerox
introduced the process benchmarking technique. [2] This type of comparison proved very
beneficial and Xerox, AT&T and other companies began comparing the performance of their
processes to the best standards in the industry. The following table shows how
benchmarking evolved into a modern strategy tool:

Benchmarking history

1950-1975 Reverse engineering

1976-1986 Competitive benchmarking

1982-1986 Process benchmarking

1988+ Strategic benchmarking

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1993+ Global benchmarking

Source: J. Blakeman, University of Wisconsin-Milwaukee[3]

According to Camp,[1] benchmarking is simply “Finding and implementing the best business
practices”. Managers use the tool to identify the best practices in other companies and
apply those practices to their own processes in order to improve the company’s
performance. Improving company’s performance is, without a doubt, the most important
goal of benchmarking.

It’s a very important tool in strategic management, because it often reveals how well your
organization performs compared to rivals.

Other uses of the tool:

 To reveal successful business processes. It is often unclear how successful

companies achieve superior performance. By observing and scrutinizing such
companies you can identify the processes, skills or competences that contribute to
organization’s success and then apply the same practices to your own company.
 To facilitate knowledge sharing. The knowledge acquired about other businesses
can be easily transferred to your own organization.
 To gain competitive advantage. The company can gain a competitive advantage if it
applies the best practices from other industries to its own industry. For example, a
small family owned farm selling its own agricultural products online could apply the
same social media strategies as internet blogs to attract attention and gain new
customers. This would be a new way to gain customers and may result in at least
temporary competitive advantage.

Popularity

The tool is one of the most recognized and widely used tools of all the business strategy
tools. The survey done by The Global Benchmarking Network[4] reveals that adaptation of
the tool in organizations vary from 68% for informal benchmarking to 49% and 39% for
performance and best practice benchmarking, respectively. In addition, annual surveys from
Bain & Company’s[5] indicate similar results.

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 Source: Bain
[5]
& Company

The graph shows that, although, the satisfaction of the tool is high, the usage of it has
declined since the heights in 1999. Still, benchmarking remained the 4th top used tool by
businesses in the world in 2013.[6]

Types

There are different types of benchmarking the managers can use. Tuominen [7] and Bogan &
English[8] identified these 3 major types:

 Strategic benchmarking. Managers use this type of benchmarking to identify the

best way to compete in the market. During the process, the companies identify the
winning strategies (usually outside their own industry) that successful companies use
and apply them to their own strategic process. It is also common to compare the
strategic goals in order to spot new strategic choices.
 Performance benchmarking. It is concerned with comparing your company’s
products and services. According to Bogan & English[8] the tool mainly focuses on
product and service quality, features, price, speed, reliability, design and customer
satisfaction, but it can measure anything that has the measurable metrics, including
processes. Performance benchmarking determines how strong our products and
services are compared to our competition.
 Process benchmarking. It requires to look at other companies that engage in similar
activities and to identify the best practices that can be applied to your own
processes in order to improve them. Process benchmarking is a separate type of
benchmarking, but it usually derives from performance benchmarking. This is
because companies first identify the weak competing points of their products or
services and then focus on the key processes to eliminate those weaknesses. For
example, an organization using performance comparison identifies that their product
‘X’ is superior in features, manufacturing quality and design, but pricier than
competitor’s product ‘Y’. Then the company determines, which processes add the
most to the cost of the product and seek how to improve them by looking at similar,
but less cost heavy processes in other companies.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Approaches

In addition to the types, there are four ways you can do benchmarking. It is important to
choose the optimal way because it reduces the costs of the activity and improves the
chances to find the ‘best standards’ you can rely on.

 Internal benchmarking. In large organizations, which operate in different geographic

locations or manage many products and services, same functions and processes are
usually performed by different teams, business units or divisions. This often results
in processes performed very well in one division but poorly in another. Internal
benchmarking is used to compare the work of separate teams, units or divisions to
identify the ones that are working better and share the knowledge throughout the
company to other teams to achieve higher performance. It is usually employed by
the companies that have recently expanded geographically, but haven’t yet created
proper knowledge sharing systems between divisions. If such systems are in place,
there’s no need to use internal benchmarking to look for best practices.
 External or competitive benchmarking. Some authors use these terms
interchangeably but there are a few differences between them. First, competitive
benchmarking refers to a process when a company compares itself with the
competitors inside its industry. Whereas external benchmarking looks both inside
and outside the industry to find the best practices, thus, including competitive
benchmarking.[9] Second, competitive benchmarking, in my opinion, will only be
used with performance benchmarking to compare your products and services.
Strategic or process benchmarking won’t be viable options, because it’ll be very hard
to find a competitor, who wants to share sensitive information with you and you’ll
never outcompete your rival if you’ll be using his strategy or processes. Besides,
external benchmarking is a more beneficial approach to use due to higher
possibilities of finding the best practices.
 Functional benchmarking. Managers of functional departments find it useful to
analyze how well their functional area performs compared to functional areas of
other companies. It is quite easy to identify the best marketing, finance, human
resource or operations departments, in other companies, that excel in what they do
and to apply their practices to your own functional area. This way the companies can
look at a wide range of organizations, even unrelated ones, and instead of improving
separate processes, they can improve the whole functional areas.
 Generic benchmarking. According to Kulmala,[9] it refers to comparisons, which
“focus on excellent work processes rather than on the business practices of a
particular organization”. For example, your company tries to improve its marketing
capabilities and benchmarks itself against company ‘A’. While observing company’s
‘A’ marketing processes you also notice how well their human resources are
managed using ‘big data’ analytics. This gives you an idea to implement the data
collecting and analysis team in your own company to significantly improve its overall
performance.
The other example of generic benchmarking would be to compare your processes
against generally accepted best standards. For example, every organization strives to
become a learning organization, because such an organization is better equipped to
overcome challenges and adapt to the market changes. By comparing your company

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 to some general standards, which would indicate that your company is a learning
organization, you would be using generic benchmarking.

The following diagram summarizes the types and approaches to benchmarking:

Advantages

 Easy to understand and use.

 If done properly, it’s a low cost activity that offers huge gains.
 Brings innovative ideas to the company.
 Provides you with insight of how other companies organize their operations and
processes.
 Increases the awareness of your costs and level of performance compared to your
rivals.
 Facilitates cooperation between teams, units and divisions.

Disadvantages

 You need to find a benchmarking partner.

 It is sometimes impossible to assign a metric to measure a process.
 You might need to hire a consultant.
 If your organization is not experienced at it, the initial costs could be huge.
 Managers often resist the changes that are required to improve the performance.
 Some of best practices won’t be applicable to your whole organization.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Using the tool

Benchmarking is used extensively by organizations, but no universal process of how to

conduct it is established. Each organization designs its own way of using the tool. Before
revealing some of the examples, we provide you with the guidelines[3] to make the process
easier.

Guidelines:

1. Only choose the products, services or processes, which perform poorly. Comparing
the processes you are good at will be a waste of time and money, and won’t bring
the desired results.
2. Define the specific metrics or processes to measure. Be careful not to choose too
broad processes that can’t be measured as you won’t be able to compare it properly.
3. Prepare your company for change. Your organization must overcome the resistance
to change to implement new best practices.
4. Choose the team that is qualified. Although benchmarking is easy to use, you
shouldn’t pick up just anybody to do it. Include the people that will be responsible
for implementing the changes and the people that are skilled at it.
5. Participate in benchmarking networks and use the appropriate software to facilitate
the process. There are various benchmarking networks, where participating
companies can find benchmarking partners or gather the data for the metrics they
need. Such participation facilitates the process significantly by reducing the costs
and time spent looking for the right data.
6. Look for the best standards and ideas even in unrelated areas. Many significant
discoveries will be made by observing the companies that are completely unrelated
to your organization.

Benchmarking Wheel

The benchmarking wheel model introduced in article “Benchmarking for Quality” is a 5

stage process that was created by observing more than 20 other models.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

It’s fairly simple and comprises of following stages:

1. Plan. Assemble a team. Clearly define what you want to compare and assign metrics
to it.
2. Find. Identify benchmarking partners or sources of information, where you’ll be able
to collect the information from.
3. Collect. Choose the methods to collect the information and gather the data for the
metrics you defined.
4. Analyze. Compare the metrics and identify the gap in performance between your
company and the organization observed. Provide the results and recommendations
on how to improve the performance.
5. Improve. Implement the changes to your products, services, processes or strategy.

Xerox Process

Xerox has popularized benchmarking and was one of the first companies to introduce the
process of doing it. This 5-phase and 12-step process was created by Camp, R. the manager
of Xerox responsible for benchmarking.[3]

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Most of the processes are similar to the examples above and can be applied to any company
or non-profit organization that strives to achieve superior performance using benchmarking.

Example

Company ‘A’ has used performance benchmarking to compare its product ‘X’ with the
competitor’s product ‘Y’ and found out that the product ‘X’ is priced slightly lower, but it
also has fewer features than product ‘Y’. The company recognized that in order to win a
larger market share and establish itself in the market, it has to increase the number of
features in its product while keeping the price at the same level or even decreasing it.

To achieve this, the company ’A’ has set up a team that investigated product ‘X’ value chain
analysis. The team identified that the activities adding the most to the cost are marketing
and purchasing parts in an open market. The team also identified that by buying standards

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

parts in the market, the company has little room to introduce new features as this would
require customized parts for its product ‘X’. The next step was to assign the proper metrics
to marketing and purchasing activities and gather the required data. The company joined
the benchmarking network and in a few weeks gathered enough data to compare the
performance of its processes.

The results indicated that the marketing activities could be improved significantly. The team
recognized that many businesses in the industry were able to attract new customers
profitably through heavy advertising online. Yet, further observations of the companies
outside the industry showed that the average returns on advertising weren’t so huge
compared to the returns when attracting customers through social media. Therefore, the
team decided to rely on social media rather than advertising to attract more customers,
while reducing its costs by 20%.

The next activity analyzed was the purchase of parts in the open market. While this was a
convenient way to conduct the business it was costing more and didn’t allow customizing
the product. The team identified that this activity could be improved by manufacturing the
parts inside the company or by establishing long term relationships with suppliers. The
collected data and the experience of other similar businesses showed that the best option
would be to establish long term relationships with suppliers. It would cost less than
manufacturing the parts inside the company or buying them in an open market. It would
also allow ordering customized parts that were needed for the new features.

By engaging in benchmarking activities, the team has identified the gaps in company’s
performance and introduced new ways to improve the current processes to achieve the
higher performance.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

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

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

Understanding the tool

Value chain analysis is a strategy tool used to analyze internal firm activities. Its goal is to
recognize, which activities are the most valuable (i.e. are the source of cost or
differentiation advantage) to the firm and which ones could be improved to
provide competitive advantage. In other words, by looking into internal activities, the
analysis reveals where a firm’s competitive advantages or disadvantages are. The firm that
competes through differentiation advantage will try to perform its activities better than
competitors would do. If it competes through cost advantage, it will try to perform internal
activities at lower costs than competitors would do. When a company is capable of
producing goods at lower costs than the market price or to provide superior products, it
earns profits.

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

Although, primary activities add value directly to the production process, they are not
necessarily more important than support activities. Nowadays, competitive advantage
mainly derives from technological improvements or innovations in business models or
processes. Therefore, such support activities as ‘information systems’, ‘R&D’ or ‘general
management’ are usually the most important source of differentiation advantage. On the
other hand, primary activities are usually the source of cost advantage, where costs can be
easily identified for each activity and properly managed.

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

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Using the tool

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

Competitive advantage types

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 Cost advantage Differentiation advantage

This approach is used when The firms that strive to create

organizations try to compete on superior products or services use
costs and want to understand differentiation advantage
the sources of their cost approach. (good
advantage or disadvantage and examples: Apple, Google, Samsung
what factors drive those Electronics, Starbucks)
costs.(good
examples: Amazon.com, Wal-
Mart, McDonald's, Ford, Toyota)

 Step 1. Identify the  Step 1. Identify the

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

Cost advantage

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

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

Step 2. Establish the relative importance of each activity in the total cost of the
product. The total costs of producing a product or service must be broken down and
assigned to each activity. Activity based costing is used to calculate costs for each process.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Activities that are the major sources of cost or done inefficiently (when benchmarked
against competitors) must be addressed first.

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

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

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

Differentiation advantage

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

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

Step 2. Evaluate the differentiation strategies for improving customer value. Managers can
use the following strategies to increase product differentiation and customer value:

 Add more product features;

 Focus on customer service and responsiveness;
 Increase customization;
 Offer complementary products.

Step 3. Identify the best sustainable differentiation. Usually, superior differentiation and
customer value will be the result of many interrelated activities and strategies used. The
best combination of them should be used to pursue sustainable differentiation advantage.

Example

This example is partially adopted from R. M. Grant’s book ‘Contemporary Strategy Analysis’
p.241. It illustrates the basic VCA for an automobile manufacturing company that competes

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 on cost advantage. This analysis doesn’t include support activities that are essential to any
firm’s value chain, thus the analysis itself is not complete.

Value Chain Analysis Example

Step 1 - Firm's primary activities

Design and Purchasing Assembly Testing and Sales and Distribution

engineering materials quality marketing and dealer
and control support
components

Step 2 - Total cost and importance

$164 M $410 M $524 M $10 M $384 M $230 M

less very very not important important less
important important important important

Step 3 - Cost drivers

 Nu 
Orde Scal Level Size Numb
mber and r size e of plants of quality of er of dealers
frequency  Aver Cap targets advertising Sales
of new age value of acity  Frequ budget per dealer
models purchases utilization ency 
of Stre Frequ
 Sale per supplier Loca defects ngth of ency of

s per model Loca tion of existing defects
tion of plants reputation requiring
suppliers  Sale repair recalls
s Volume

Step 4 - Links between activities

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

1. High-quality assembling process reduces defects and costs in quality control
and dealer support activities.
2. Locating plants near the cluster of suppliers or dealers reduces purchasing and
distribution costs.
3. Fewer model designs reduce assembling costs.
4. Higher order sizes increase warehousing costs.

Step 5 - Opportunities for reducing costs

1. Create just one model design for different regions to cut costs in designing and
engineering, to increase order sizes of the same materials, to simplify assembling and
quality control processes and to lower marketing costs.
2. Manufacture components inside the company to eliminate transaction costs of
buying them in the market and to optimize plant utilization. This would also lead to
greater economies of scale.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Definition
The Competitive Profile Matrix (CPM) is a tool that compares the firm and its rivals and
reveals their relative strengths and weaknesses.

Understanding the tool

In order to better understand the external environment and the competition in a particular
industry, firms often use CPM. The matrix identifies a firm’s key competitors and compares
them using industry’s critical success factors. The analysis also reveals company’s relative
strengths and weaknesses against its competitors, so a company would know, which areas it
should improve and, which areas to protect. An example of a matrix is demonstrated below.

CPM Table

Company A Company B Company C

Critical Weight Rating Score Rating Score Rating Score

Success
Factor

Brand 0.13 2 0.26 3 0.39 1 0.13

reputation

Level of 0.08 4 0.32 3 0.24 1 0.08

product
integration

Range of 0.05 3 0.15 1 0.05 2 0.10

products

Successful 0.04 3 0.12 3 0.12 3 0.12

new
introductions

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 Market 0.14 2 0.28 4 0.56 4 0.56
Share

Sales per 0.08 1 0.08 2 0.16 3 0.24

employee

Low cost 0.05 1 0.05 3 0.15 4 0.20

structure

Variety of 0.07 4 0.28 2 0.14 2 0.14

distribution
channels

Customer 0.02 2 0.04 4 0.08 1 0.02

retention

Superior IT 0.11 3 0.33 4 0.44 4 0.44

capabilities

Strong online 0.15 3 0.45 3 0.45 4 0.60

presence

Successful 0.08 1 0.08 2 0.16 1 0.08

promotions

Total 1.00 - 2.44 - 2.94 - 2.71

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Critical Success Factors
Critical success factors (CSF) are the key areas, which must be performed at the highest
possible level of excellence if organizations want succeed in the particular industry. They
vary between different industries or even strategic groups and include both internal and
external factors. In our example, we have included 11 CSF, which is usually not enough. The
more critical success factors are included the more robust and accurate the analysis is. The
following list provides some of the general CSF, but the list is not definite and you should
include industry specific factors in your matrix:

Power over
Market Share Union relations
suppliers

Access to key
Product Quality Skilled workforce
suppliers

Clear strategic Efficient supply

Location of facilities
direction chain

Supply chain
Customer service Production capacity
integration

Added product
Customer loyalty On time delivery
features

Strong online
Brand reputation Price competitiveness
presence

Effective social
Customer
Low cost structure media
satisfaction
management

Financial position Variety of products Experience and

skills

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 in e-commerce

Management
Complementary
Cash reserves qualification
products
and experience

Innovation in
Level of product
Profit margin products and
integration
services

Successful product
Inventory turnover Innovative culture
promotions

Employee Superior marketing Efficient

retention capabilities production

Income per Superior advertising Lean production

employee capabilities system

Innovations per Superior IT Strong supplier

employee capabilities network

Strong
Size of advertising
Cost per employee distribution
budget
network

Effectiveness of sales
R&D spending Product design
distribution

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Strong patent Level of vertical
Employee satisfaction
portfolio integration

Effective
New patents per Effective planning and corporate social
year budgeting responsibility
programs

Revenue per new Variety of distribution

Sales per outlet
product channels

Successful new Power over Parent company

introductions distributors support

Weight
each critical success factor should be assigned a weight ranging from 0.0 (low importance)
to 1.0 (high importance). The number indicates how important the factor is in succeeding in
the industry. If there were no weights assigned, all factors would be equally important,
which is an impossible scenario in the real world. The sum of all the weights must equal 1.0.
Separate factors should not be given too much emphasis (assigning a weight of 0.3 or more)
because the success in an industry is rarely determined by one or few factors. In our first
example, the most significant factors are ‘strong online presence’ (0.15), ‘market share’
(0.14), ‘brand reputation’ (0.13).

Rating
the ratings in CPM refer to how well companies are doing in each area. They range from 4 to
1, where 4 means a major strength, 3 – minor strength, 2 – minor weakness and 1 – major
weakness. Ratings, as well as weights, are assigned subjectively to each company, but the
process can be done easier through benchmarking. Benchmarking reveals how well
companies are doing compared to each other or industry’s average. Just remember that
firms can be assigned equal ratings for the same factor. For example, if Company A,
Company B and Company C, have the market share of 25%, 27% & 28% accordingly, they
would all receive the rating of 4 rather than receiving ratings 2, 3 & 4.

Score & Total Score

the score is the result of weight multiplied by rating. Each company receives a score on each
factor. Total score is simply the sum of all individual score for the company. The firm that
receives the highest total score is relatively stronger than its competitors. In our example,
the strongest performer in the market should be Company B (2.94 points).

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Benefits of the CPM:

 The same factors are used to compare the firms. This makes the comparison more
accurate.
 The analysis displays the information on a matrix, which makes it easy to compare
the companies visually.
 The results of the matrix facilitate decision-making. Companies can easily decide
which areas they should strengthen, protect or what strategies they should pursue.

Using the tool

Step 1. Identify the critical success factors

To make it easier, use our list of CSF and include as many factors as possible. In addition,
following questions should be helpful identifying industry’s CSF:

 Why consumers prefer Company A over Company B or vice versa?

 What resources, capabilities and competences firms possess?
 What sustainable competitive advantages companies have in the industry?
 Why some companies succeed and others fail in the industry?

Step 2. Assign the weights and ratings

The best way to identify what weights should be assigned to each factor is to compare the
best and worst performing companies in the industry. Well performing companies will
usually undertake activities that are significant for success in the industry. They will put
most of their resources and energy into those activities as compared to low performing
organizations. Weights can also be determined in discussion with other top-level managers.
Ratings should be assigned using benchmarking or during team discussions.

Step 3. Compare the scores and take action

You should compare the scores on each factor to identify where company’s relative
strengths and weaknesses are. In our first example, Company A had relative strength in
‘level of product integration’, ‘product range’ and ‘variety of distribution channels’.
Therefore, Company A should protect these areas while trying to improve its weaknesses in
‘sales per employee’ and ‘market share’.
The company should also improve its strategy to become more successful in the industry.

Example

This is competitive profile matrix example of smart phones operating systems. The main
competitors: Google’s Android OS, Apple’s iOS and Microsoft’s Windows Phone operating
systems will be compared to each other to find out their relative strengths and weaknesses.

CPM Example

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 Android OS iOS Windows
Phone

Critical Weight Rating Score Rating Score Rating Score

Success
Factor

Market share 0.13 4 0.52 2 0.26 2 0.26

Number of 0.10 4 0.40 4 0.40 2 0.20

apps in store

Frequency of 0.06 3 0.18 4 0.24 2 0.12

updates

Design 0.07 3 0.21 3 0.21 3 0.21

Product brand 0.05 3 0.15 3 0.15 2 0.10

reputation

Distribution 0.11 4 0.44 2 0.22 3 0.33

channels

Usability 0.11 3 0.33 3 0.33 3 0.33

Customization 0.04 4 0.16 2 0.08 2 0.08

features

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 Marketing 0.04 2 0.08 4 0.16 2 0.08
capabilities

Company 0.10 4 0.40 4 0.40 3 0.30

brand
reputation

Openness 0.02 4 0.08 2 0.04 2 0.04

Cloud 0.12 4 0.48 2 0.24 2 0.24

integration

Rate of OS 0.08 1 0.08 4 0.32 3 0.24

crashes

Total 1.00 - 3.51 - 3.05 - 2.53

The CPM analysis reveals that Android is the strongest player in the industry with relative
strengths in market share, distribution channels, customization features, openness and
cloud integration. On the other hand, iOS prevails in frequency updates, marketing
capabilities and the rate of OS crashes. Windows Phone is the weakest of them all and
doesn’t have any relative strengths against its rivals. The companies should create their
strategies according to their strengths and weakness and improve their ratings in the most
significant industry’s areas.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Definition
PEST Analysis is an analysis of the political, economic, social and technological factors in the
external environment of an organization, which can affect its activities and performance.

PESTEL Model involves the collection and portrayal of information about external factors
which have, or may have, an impact on business.

Understanding the tool

PEST or PESTEL analysis is a simple and effective tool used in situation analysis to identify
the key external (macro environment level) forces that might affect an organization. These
forces can create both opportunities and threats for an organization. Therefore, the aim of
doing PEST is to:

 find out the current external factors affecting an organization;

 identify the external factors that may change in the future;
 To exploit the changes (opportunities) or defend against them (threats) better than
competitors would do.

The outcome of PEST is an understanding of the overall picture surrounding the company.

PEST analysis is also done to assess the potential of a new market. The general rule is that
the more negative forces are affecting that market the harder it is to do business in it. The
difficulties that will have to be dealt with significantly reduce profit potential and the firm
can simply decide not to engage in any activity in that market.

PEST variations

PEST analysis is the most general version of all PEST variations created. It is a very dynamic
tool as new components can be easily added to it in order to focus on one or another critical
force affecting an organization. Although following variations are more detailed analysis
than simple PEST, the additional components are just the extensions of the same PEST
factors. The analysis probably has more variations than any other strategy tool:

STEP = PEST in more positive approach.

PESTEL = PEST + Environmental + Legal
PESTELI = PESTEL + Industry analysis
STEEP = PEST + Ethical
SLEPT = PEST + Legal

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 STEEPLE = PEST + Environmental + Legal + Ethical
STEEPLED = STEEPLE + Demographic
PESTLIED = PEST + Legal + International + Environmental + Demographic
LONGPEST = Local + National + Global factors + PEST

Using the tool

The process of carrying out PEST analysis should involve as many managers as possible to
get the best results. It includes the following steps:

 Step 1. Gathering information about political, economic, social and technological

changes + any other factor(s).
 Step 2. Identifying which of the PEST factors represent opportunities or threats.

Gathering PEST, PESTEL and STEEPLED information

In order to perform PEST (or any other variation of it) managers have to gather as much
relevant information as possible about the firm’s external environment. Nowadays, most
information can be found on the internet relatively easy, fast and with little cost. When the
analysis is done for the first time the process may take a little longer and as a beginner you
may find yourself asking “What changes do I exactly look for in politics, economic, society
and technology?” The following templates might be useful when gathering information for
PEST, PESTEL and STEEPLED analysis.

NOTE: PEST covers all macro environment forces affecting an organization. Therefore, when
doing PESTEL or STEEPLED analysis, legal, environmental, ethical and demographic factors
may overlap with PEST factors.

PEST analysis template

Political factors Economic factors

 Government stability  Growth rates

and likely changes  Inflation rate
 Bureaucracy  Interest rates
 Corruption level  Exchange rates
 Tax policy (rates and  Unemployment trends
incentives)  Labour costs
 Freedom of press  Stage of business cycle
 Regulation/de-  Credit availability
regulation  Trade flows and
 Trade control patterns
 Import 
restrictions Level of consumers’
(quality and quantity) disposable income

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 Tariffs  Monetary policies
 Competition regulation Fiscal policies
 Government  Price fluctuations
involvement in trade unions  Stock market trends
and agreements  Weather
 Environmental Law  Climate change
 Education Law
 Anti-trust law
 Discrimination law
 Copyright, patents /
Intellectual property law
 Consumer protection
and e-commerce
 Employment law
 Health and safety law
 Data protection law
 Laws regulating
environment pollution

Socio-cultural factors Technological factors

 Health consciousness  Basic infrastructure

 Education level level
 Attitudes toward Rate of technological
imported goods and services change
 Attitudes toward work,  Spending on research &
leisure, career and retirement development
 Attitudes toward Technology incentives
product quality and customer  Legislation regarding
service technology
 Attitudes toward saving Technology level in
and investing your industry
 Emphasis on safety  Communication
 Lifestyles infrastructure
 Buying habits  Access to newest
 Religion and beliefs technology
 Attitudes toward Internet infrastructure
“green” or ecological products and penetration
 Attitudes toward and
support for renewable energy
 Population growth rate
 Immigration and
emigration rates
 Age distribution and
life expectancy rates

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 Sex distribution
 Average disposable
income level
 Social classes
 Family size and
structure
 Minorities

PESTEL analysis template

Political Economic

Socio-cultural Technological

Environmental (ecological) Legal

 Weather  Anti-trust law

 Climate change  Discrimination law
 Laws 
regulating Copyright, patents /
environment pollution Intellectual property law
 Air and water Consumer protection
pollution and e-commerce
 Recycling  Employment law
 Waste management  Health and safety law
 Attitudes toward Data Protection
“green” or ecological
products
 Endangered species
 Attitudes toward and
support for renewable energy

STEEPLED analysis template

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 Political Economic

Socio-cultural Technological

Environmental (ecological) Legal

Ethical Demographic

 
Ethical advertising and Population growth rate
sales practices  Immigration and
 Accepted accounting, emigration rates
management and marketing  Age distribution and life
standards expectancy rates
 Attitude towards Sex distribution
counterfeiting and breaking  Average disposable
patents income level
 Ethical 
recruiting Social classes
practices and employment  Family size and structure
standards (not using children  Minorities
to produce goods)

Identifying opportunities and threats

Gathering information is just a first important step in doing PEST analysis. Once it is done,
the information has to be evaluated. There are many factors changing in the external
environment but not all of them are affecting or might affect an organization. Therefore, it
is essential to identify which PEST factors represent the opportunities or threats for an
organization and list only those factors in PEST analysis. This allows focusing on the most
important changes that might have an impact on the company.

PEST analysis example

The following table shows PEST analysis example. It lists opportunities and threats that are
affecting a firm in its macro environment.

PEST analysis example

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 Political Economic

 Government 
has GDP will grow by 3% in
passed legislation which 2013
requires further reductions of  Availability of credit for
CO2, HC and NC emissions for businesses will slightly grow or
vehicles until 2015 remain unchanged in 2013.
 New political forces, The same applies for the cost
which are against tax of credit in the 1 half of the
reductions, may be elected in year
the next years’ elections  Unemployment is
 Import restrictions will expected to decrease to 7%
increase in 2013  Inflation will fall to 3%
 Government is or 2% in 2013
increasing its funding to  Corporate tax rate will
‘specific’ industry decrease by 2% next year to
 Government is easing 23%
regulations for employment  Dollar exchange rates
 Increasing tensions are expected to decrease
between our government and compared to euro
our major export partner’s  Disposable income
government level will decrease
 Metal and oil prices will
increase by 5% and 6%
respectively in 2013

Socio-cultural Technological

 Positive 
attitude New machinery that
towards “green” vehicles could reduce production costs
 Number of individuals by 20% is in development
and companies buying through  Country’s major
the Internet is 67% and 45% telecom company announced
respectively and is expected to its plans to expand its internet
grow infrastructure and install new
 Immigration is optic fiber cables
increasing  Driverless cars may be
 Increasing attitude introduced in the near future
toward jobs with shorter work  “New” type of table
hours will be introduced into the
 People tend to buy market next year
more domestic rather than
foreign products

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 People change their
eating habits and now tend to
eat healthier food

Definition
Porter’s Five Forces Model is an analysis tool that uses five industry forces to determine the
intensity of competition in an industry and its profitability level.

Understanding the tool

Five forces model was created by M. Porter in 1979 to understand how five key competitive
forces are affecting an industry. The five forces identified are:

These forces determine an industry structure and the level of competition in that industry.
The stronger competitive forces in the industry are the less profitable it is. An industry with
low barriers to enter, having few buyers and suppliers but many substitute products and
competitors will be seen as very competitive and thus, not so attractive due to its low
profitability.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

It is every strategist’s job to evaluate company’s competitive position in the industry and to
identify what strengths or weakness can be exploited to strengthen that position. The tool is
very useful in formulating firm’s strategy as it reveals how powerful each of the five key
forces is in a particular industry.

Threat of new entrants. This force determines how easy (or not) it is to enter a particular
industry. If an industry is profitable and there are few barriers to enter, rivalry soon
intensifies. When more organizations compete for the same market share, profits start to
fall. It is essential for existing organizations to create high barriers to enter to deter new
entrants. Threat of new entrants is high when:

 Low amount of capital is required to enter a market;

 Existing companies can do little to retaliate;
 Existing firms do not possess patents, trademarks or do not have established brand
reputation;
 There is no government regulation;
 Customer switching costs are low (it doesn’t cost a lot of money for a firm to switch
to other industries);
 There is low customer loyalty;
 Products are nearly identical;
 Economies of scale can be easily achieved.

Bargaining power of suppliers. Strong bargaining power allows suppliers to sell higher
priced or low quality raw materials to their buyers. This directly affects the buying firms’
profits because it has to pay more for materials. Suppliers have strong bargaining power
when:

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

  There are few suppliers but many buyers;
 Suppliers are large and threaten to forward integrate;
 Few substitute raw materials exist;
 Suppliers hold scarce resources;
 Cost of switching raw materials is especially high.

Bargaining power of buyers. Buyers have the power to demand lower price or higher
product quality from industry producers when their bargaining power is strong. Lower price
means lower revenues for the producer, while higher quality products usually raise
production costs. Both scenarios result in lower profits for producers. Buyers exert strong
bargaining power when:

 Buying in large quantities or control many access points to the final customer;
 Only few buyers exist;
 Switching costs to other supplier are low;
 They threaten to backward integrate;
 There are many substitutes;
 Buyers are price sensitive.

Threat of substitutes. This force is especially threatening when buyers can easily find
substitute products with attractive prices or better quality and when buyers can switch from
one product or service to another with little cost. For example, to switch from coffee to tea
doesn’t cost anything, unlike switching from car to bicycle.

Rivalry among existing competitors. This force is the major determinant on how
competitive and profitable an industry is. In competitive industry, firms have to compete
aggressively for a market share, which results in low profits. Rivalry among competitors is
intense when:

 There are many competitors;

 Exit barriers are high;
 Industry of growth is slow or negative;
 Products are not differentiated and can be easily substituted;
 Competitors are of equal size;
 Low customer loyalty.

Although, Porter originally introduced five forces affecting an industry, scholars have
suggested including the sixth force: complements. Complements increase the demand of
the primary product with which they are used, thus, increasing firm’s and industry’s profit
potential. For example, iTunes was created to complement iPod and added value for both
products. As a result, both iTunes and iPod sales increased, increasing Apple’s profits.

Using the tool

We now understand that Porter’s five forces framework is used to analyze industry’s
competitive forces and to shape organization’s strategy according to the results of the
analysis. But how to use this tool? We have identified the following steps:

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

  Step 1. Gather the information on each of the five forces
 Step 2. Analyze the results and display them on a diagram
 Step 3. Formulate strategies based on the conclusions

Step 1. Gather the information on each of the five forces. What managers should do during
this step is to gather information about their industry and to check it against each of the
factors (such as “number of competitors in the industry”) influencing the force. We have
already identified the most important factors in the table below.

Porter's Five Forces Factors

Threat of new entry

 Amount of capital required

 Retaliation by existing companies
 Legal barriers (patents, copyrights, etc.)
 Brand reputation
 Product differentiation
 Access to suppliers and distributors
 Economies of scale
 Sunk costs
 Government regulation

Supplier power

 Number of suppliers
 Suppliers’ size
 Ability to find substitute materials
 Materials scarcity
 Cost of switching to alternative materials
 Threat of integrating forward

Buyer power

 Number of buyers
 Size of buyers
 Size of each order
 Buyers’ cost of switching suppliers
 There are many substitutes
 Price sensitivity
 Threat of integrating backward

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 Threat of substitutes

 Number of substitutes
 Performance of substitutes
 Cost of changing

Rivalry among existing competitors

 Number of competitors
 Cost of leaving an industry
 Industry growth rate and size
 Product differentiation
 Competitors’ size
 Customer loyalty
 Threat of horizontal integration
 Level of advertising expense

Step 2. Analyze the results and display them on a diagram. After gathering all the
information, you should analyze it and determine how each force is affecting an industry.
For example, if there are many companies of equal size operating in the slow growth
industry, it means that rivalry between existing companies is strong. Remember that five
forces affect different industries differently so don’t use the same results of analysis for
even similar industries!

Step 3. Formulate strategies based on the conclusions. At this stage, managers should
formulate firm’s strategies using the results of the analysis For example, if it is hard to
achieve economies of scale in the market, the company should pursue cost leadership
strategy. Product development strategy should be used if the current market growth is slow
and the market is saturated.

Although, Porter’s five forces is a great tool to analyze industry’s structure and use the
results to formulate firm’s strategy, it has its limitations and requires further analysis to be
done, such as SWOT, PEST or Value Chain analysis.

Example

This is Porter’s five forces analysis example for an automotive industry.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 Porter's Five Forces Evaluation

Threat of new entry (very weak)

 Large amount of capital required

 High retaliation possible from existing companies, if new
entrants would bring innovative products and ideas to the
industry
 Few legal barriers protect existing companies from new
entrants
 All automotive companies have established brand image
and reputation
 Products are mainly differentiated by design and
engineering quality
 New entrant could easily access suppliers and
distributors
 A firm has to produce at least 5 million (by some
estimations) vehicles to be cost competitive, therefore it is very
hard to achieve economies of scale
 Governments often protect their home markets by
introducing high import taxes

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 Supplier power (weak)

 Large number of suppliers

 Some suppliers are large but the most of them are pretty
small
 Companies use another type of material (use one metal
instead of another) but only to some extent (plastic instead of
metal)
 Materials widely accessible
 Suppliers do not pose any threat of forward integration

Buyer power (strong)

 There are many buyers

 Most of the buyers are individuals that buy one car, but
Corporates or governments usually buy large fleets and can
bargain for lower prices
 It doesn’t cost much for buyers to switch to another
brand of vehicle or to start using other type of transportation
 Buyers can easily choose alternative car brand
 Buyers are price sensitive and their decision is often
based on how much does a vehicle cost
 Buyers do not threaten backward integration

Threat of substitutes (weak)

 There are many alternative types of transportation, such

as bicycles, motorcycles, trains, buses or planes
 Substitutes can rarely offer the same convenience
 Alternative types of transportation almost always cost
less and sometimes are more environment friendly

Competitive rivalry (very strong)

 Moderate number of competitors

 If a firm would decide to leave an industry it would incur
huge losses, so most of the time it either bankrupts or stays in
automotive industry for the lifetime
 Industry is very large but matured
 Size of competing firm’s vary but they usually compete
for different consumer segments
 Customers are loyal to their brands
 There is moderate threat of being acquired by a
competitor

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Definition
Swot Analysis involves the collection and portrayal of information about internal and
external factors which have, or may have, an impact on business.

SWOT is a framework that allows managers to synthesize insights obtained from an internal
analysis of the company’s strengths and weaknesses with those from an analysis of external
opportunities and threats.

Understanding the tool

What is SWOT analysis? The answer to the question is simple: it’s a tool used for situation
(business or personal) analysis! SWOT is an acronym which stands for:

Strengths: factors that give an edge for the company over its competitors.
Weaknesses: factors that can be harmful if used against the firm by its competitors.
Opportunities: favorable situations which can bring a competitive advantage.
Threats: unfavorable situations which can negatively affect the business.

Strengths and weaknesses are internal to the company and can be directly managed by it,
while the opportunities and threats are external and the company can only anticipate and
react to them. Often, swot is presented in a form of a matrix as in the illustration below:

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Swot is widely accepted tool due to its simplicity and value of focusing on the key issues
which affect the firm. The aim of swot is to identify the strengths and weaknesses that are
relevant in meeting opportunities and threats in particular situation. [4]

Benefits

Swot tool has 5 key benefits:

 Simple to do and practical to use;

 Clear to understand;
 Focuses on the key internal and external factors affecting the company;
 Helps to identify future goals;
 Initiates further analysis.

Limitations

Although there are clear benefits of doing the analysis, many managers and academics
heavily criticize or don’t even recognize it as a serious tool.[2] According to many, it is a ‘low-
grade’ analysis. Here are the main flaws identified by a research:[2][5]

 Excessive lists of strengths, weaknesses, opportunities and threats;

 No prioritization of factors;
 Factors are described too broadly;
 Factors are often opinions not facts;
 No recognized method to distinguish between strengths and weaknesses,
opportunities and threats.

How to perform the analysis?

Swot can be done by one person or a group of members that are directly responsible for the
situation assessment in the company. Basic swot analysis is done fairly easily and comprises
of only few steps:

Step 1. Listing the firm’s key strengths and weaknesses

Step 2. Identifying opportunities and threats

Strengths and Weaknesses

Strengths and weaknesses are the factors of the firm’s internal environment. When looking
for strengths, ask what do you do better or have more valuable than your competitors
have? In case of the weaknesses, ask what could you improve and at least catch up with
your competitors?

Where to look for them?

Some strengths or weaknesses can be recognized instantly without deeper studying of the
organization. But usually the process is harder and managers have to look into the firm’s:

 Resources: land, equipment, knowledge, brand equity, intellectual property, etc.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

  Core competencies
 Capabilities
 Functional areas: management, operations, marketing, finances, human resources
and R&D
 Organizational culture
 Value chain activities

Strength or a weakness?

Often, company’s internal factors are seen as both, strengths and weaknesses, at the same
time. It is also hard to tell if a characteristic is strength (weakness) or not. For example,
firm’s organizational structure can be strength, a weakness or neither! In such cases, you
should rely on:

Clear definition. Very often factors which are described too broadly may fit both strengths
and weaknesses. For example, “brand image” might be a weakness if the company has poor
brand image. However, it can also be strength if the company has the most valuable brand
in the market, valued at $100 billion. Therefore, it is easier to identify if a factor is strength
or a weakness when it’s defined precisely.

Benchmarking. The key emphasize in doing swot is to identify the factors that are the
strengths or weaknesses in comparison to the competitors. For example, 17% profit margin
would be an excellent margin for many firms in most industries and it would be considered
as strength. But what if the average profit margin of your competitors is 20%? Then
company’s 17% profit margin would be considered as a weakness.

VRIO framework. A resource can be seen as a strength if it exhibits VRIO (valuable, rare and
cannot be imitated) framework characteristics. Otherwise, it doesn’t provide any strategic
advantage for the company.

Opportunities and threats

Opportunities and threats are the external uncontrollable factors that usually appear or
arise due to the changes in the macro environment, industry or competitors’ actions.
Opportunities represent the external situations that bring a competitive advantage if seized
upon. Threats may damage your company so you would better avoid or defend against
them.

Where to look for them?

PESTEL. PEST or PESTEL analysis represents all the major external forces (political, economic,
social, technological, environmental and legal) affecting the company so it’s the best place
to look for the existing or new opportunities and threats.

Competition. Competitor’s react to your moves and external changes. They also change
their existing strategies or introduce new ones. Therefore, the company must always follow
the actions of its competitors as new opportunities and threats may open at any time.

Market changes. The most visible opportunities and threats appear during the market
changes. Markets converge, starting to satisfy other market segment needs with the same

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 product. New geographical markets open up allowing the firm to increase its export
volumes or start operations in a new country. Often niche markets become profitable due
to technological changes. As a result, changes in the market create new opportunities and
threats that must be seized upon or dealt with if the company wants to gain and
sustain competitive advantage.

Opportunity or threat?

Most external changes can represent both opportunities and threats. For example,
exchange rates may increase or reduce the profits gained from exports. This depends on the
exchange rate, which may raise (opportunity) or fall (threat) against the home country
currency. The organization can only guess the outcome of the change and count on analysts’
forecasts. In such cases, when organization cannot identify if the external factor will affect it
positively or negatively, it should gather unbiased and reliable information from the external
sources and make the best possible judgement.

Guidelines for successful SWOT

The following guidelines are very important in writing a successful swot analysis. They
eliminate most of swot limitations and improve its results significantly:

 Factors have to be identified relative to the competitors. It allows specifying whether

the factor is strength or a weakness.
 List between 3 – 5 items for each category. Prevents creating too short or endless
lists.
 Items must be clearly defined and as specific as possible. For example, firm’s
strength is: brand image (vague); strong brand image (more precise); brand image
valued at $10 billion, which is the most valued brand in the market (very good).
 Rely on facts not opinions. Find some external information or involve someone who
could provide an unbiased opinion.
 Factors should be action orientated. For example, “slow introduction of new
products” is action orientated weakness.

SWOT analysis example A

This is a basic example of the analysis:

SWOT analysis of Company "A"

Strengths Weaknesses

1. Second most valuable

1. Investments in R&D are
brand in the world valued at below the industry average
$76 billion 2. Very low or zero profit
2. Diversified income (5 margins
different brands earning more

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 than $4 billion each) 3. Poor customer services
3. Strong patents portfolio
4. High employee
(15,000 patents) turnover
4. Investments in R&D 5. High cost structure
reaching 4 billion a year. 6. Weak brand portfolio
5. Competent in mergers 7. Rigid (bureaucratic)
& acquisitions organizational culture
6. Have an access to impeding fast introduction of
cheap cash reserves new products
7. Effective corporate
8. High debt level ($3
social responsibility (CSR) billion)
projects 9. Brand dilution (the firm
8. Localized products has too many brands)
9. Highly skilled workforce
10. Poor presence in the
10. Economies of scale or world's largest markets
economies of scope

Opportunities Threats

1. Market growth for the 1. Corporate tax may

main firm's product increase from 20% to 22% in
2. Growing demand for 2013
renewable energy 2. Rising pay levels
3. New technology, that 3. Rising raw material
would drive production costs prices
by 20% is in development 4. Intense competition
4. Our country accession 5. Market is expected to
to EU grow by only 1% next year
5. Changing customer indicating market saturation
habits 6. Increasing fuel prices
6. Disposable income level7. Aging population
will increase 8. Stricter laws regulating
7. Government's environment pollution
incentives for 'specific' industry
9. Lawsuits against the
8. Economy is expected to company
grow by 4% next year 10. Currency fluctuations
9. Growing number of
people buying online
10. Interest rates falling to
1%

You can find an extensive list of strengths, weaknesses, opportunities and threats by looking
at our examples of swot analyses, which include Alphabet (Google) swot, Amazon.com

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

swot, Apple Inc. swot, The Coca Cola Company swot, Ford Motor Company
swot, McDonald's Corporation swot, PepsiCo Inc. swot, Samsung Electronics swot, Starbucks
Corporation swot, Wal-Mart Stores, Inc. swot and many more swot analyses.

Advanced SWOT

At the most, swot is considered to be only a reference to further analysis as it has too many
limitations and cannot be used alone in the situation analysis. The previous guidelines
identified in this article meet the most of swot limitations except one: “prioritization of
factors”. An advanced swot goes a step further and eliminates this important drawback.

In a simple swot, strengths and weaknesses or opportunities and threats are equal to each
other, therefore a minor weakness can balance a major strength. Without prioritization,
some factors might be given too much or too little emphasis and the most relevant factors
might simply be overlooked.

The aim of advanced swot is to identify the most significant factors of the analysis from all
the items listed on it. How to perform it?

Step 1. Identify strengths, weakness, opportunities and threats.

Step 2. Prioritize them.

(The first step was discussed earlier so please refer to it when doing advanced swot analysis.
See example B when reading further instructions.)

Prioritization

Strengths and weaknesses are evaluated on 3 categories:

 Importance. Importance shows how important strength or a weakness is for the

organization in its industry as some strengths (weaknesses) might be more
important than others. A number from 0.01 (not important) to 1.0 (very important)
should be assigned to each strength and weakness. The sum of all weights should
equal 1.0 (including strengths and weaknesses).
 Rating. A score from 1 to 3 is given to each factor to indicate whether it is a major (3)
or minor (1) strength for the company. The same rating should be assigned to the
weaknesses where 1 would mean a minor weakness and 3 a major weakness.
 Score. Score is a result of importance multiplied by rating. It allows prioritizing the
strengths and weaknesses. You should rely on your most important strengths and try
to convert or defend your weakest parts of the organization.

Opportunities and threats are prioritized slightly differently than strengths and weaknesses.
Their evaluation includes:

 Importance. It shows to what extent the external factor might impact the business.
Again, the numbers from 0.01 (no impact) to 1.0 (very high impact) should be
assigned to each item. The sum of all weights should equal 1.0 (including
opportunities and threats).

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

  Probability. Probability of occurrence is showing how likely the opportunity or threat
will have any impact on business. It should be rated from 1 (low probability) to 3
(high probability).
 Score. Importance multiplied by probability will give a score by which you’ll be able
to prioritize opportunities and threats. Pay attention to the factors having the
highest score and ignore the factors that will not likely affect your business.

SWOT analysis example B

This swot example is adopted from the previous example and additionally includes
prioritization. Highlighted cells point to the most significant factors affecting the
organization.

Advanced SWOT of Company 'A' (1/2)

Strengths Importance Rating Score

Second most valuable brand 0.03 1 0.03

in the world

Diversified income 0.01 2 0.02

Strong patents portfolio 0.15 3 0.45

(15,000 patents)

Investments in R&D reaching 0.10 2 0.20

4 billion a year

Competent in mergers & 0.05 3 0.15

acquisitions

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Advanced SWOT of Company 'A' (1/2)

Strengths Importance Rating Score

An access to cheap cash 0.02 1 0.02

reserves

Effective corporate social 0.03 1 0.03

responsibility (CSR) projects

Localized products 0.01 1 0.01

Highly skilled workforce 0.08 2 0.16

Economies of 0.02 3 0.06

scale/economies of scope

Weaknesses Importance Rating Score

Investments in R&D are below 0.03 2 0.06

the industry average

Very low or zero profit 0.08 2 0.24

margins

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Advanced SWOT of Company 'A' (1/2)

Strengths Importance Rating Score

Poor customer services 0.10 2 0.20

High employee turnover 0.05 2 0.10

High cost structure 0.03 3 0.09

Weak brand portfolio 0.02 1 0.02

Bureaucratic organizational 0.03 1 0.03

culture

High debt level ($3 billion) 0.03 1 0.03

Brand dilution (the firm has 0.01 1 0.01

too many brands)

Poor presence in the world's 0.12 2 0.24

largest markets

Advanced SWOT of Company 'A' (2/2)

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Opportunities Importance Probability Score

Market growth for the main 0.10 2 0.20

business product

Growing demand for 0.01 1 0.01

renewable energy

New technology is in 0.13 1 0.13

development

Our country accession to EU 0.05 3 0.15

Changing customer habits 0.05 1 0.05

Disposable income level will 0.02 3 0.06

increase

Government's incentives for 0.03 2 0.06

'specific' industry

Economy is expected to grow 0.01 2 0.02

by 4% next year

Growing number of people 0.08 3 0.24

buying online

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Advanced SWOT of Company 'A' (1/2)

Strengths Importance Rating Score

Interest rates falling to 1% 0.02 3 0.06

Threats Importance Probability Score

Corporate tax may increase 0.12 2 0.24

from 20% to 22% in 2013

Rising pay levels 0.03 2 0.06

Rising raw material prices 0.09 3 0.27

Intense competition 0.07 1 0.07

Market is expected to grow by 0.05 3 0.15

only 1% next year

Increasing fuel prices 0.01 3 0.03

Aging population 0.01 3 0.03

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Advanced SWOT of Company 'A' (1/2)

Strengths Importance Rating Score

Stricter laws regulating 0.01 1 0.01

environment pollution

Lawsuits against the company 0.02 1 0.02

Currency fluctuations 0.09 2 0.18

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Definition
VRIO Framework is the tool used to analyze firm’s internal resources and capabilities to find
out if they can be a source of sustained competitive advantage.

Understanding the tool

In order to understand the sources of competitive advantage firms are using many tools to
analyze their external (Porter’s 5 Forces, PEST analysis) and internal (Value Chain
analysis, BCG Matrix) environments. One of such tools that analyze firm’s internal resources
is VRIO analysis. The tool was originally developed by Barney, J. B. (1991) in his work ‘Firm
Resources and Sustained Competitive Advantage’, where the author identified four
attributes that firm’s resources must possess in order to become a source of
sustained competitive advantage. According to him, the resources must be valuable, rare,
imperfectly imitable and non-substitutable. His original framework was called VRIN. In 1995,
in his later work ‘Looking Inside for Competitive Advantage’ Barney has introduced VRIO
framework, which was the improvement of VRIN model. VRIO analysis stands for four
questions that ask if a resource is: valuable. Rare? Costly to imitate? And is a firm organized
to capture the value of the resources? A resource or capability that meets all four
requirements can bring sustained competitive advantage for the company.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Adopted from Rothaermel’s (2013) ‘Strategic Management’, p.91

Valuable
the first question of the framework asks if a resource adds value by enabling a firm to
exploit opportunities or defend against threats. If the answer is yes, then a resource is
considered valuable. Resources are also valuable if they help organizations to increase the
perceived customer value. This is done by increasing differentiation or/and decreasing the
price of the product. The resources that cannot meet this condition, lead to competitive
disadvantage. It is important to continually review the value of the resources because
constantly changing internal or external conditions can make them less valuable or useless
at all.

Rare
Resources that can only be acquired by one or very few companies are considered rare.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Rare and valuable resources grant temporary competitive advantage. On the other hand,
the situation when more than few companies have the same resource or uses the capability
in the similar way, leads to competitive parity. This is because firms can use identical
resources to implement the same strategies and no organization can achieve superior
performance.

Even though competitive parity is not the desired position, a firm should not neglect the
resources that are valuable but common. Losing valuable resources and capabilities would
hurt an organization because they are essential for staying in the market.

Costly to imitate
a resource is costly to imitate if other organizations that doesn’t have it can’t imitate, buy or
substitute it at a reasonable price. Imitation can occur in two ways: by directly imitating
(duplicating) the resource or providing the comparable product/service (substituting).

A firm that has valuable, rare and costly to imitate resources can (but not necessarily will)
achieve sustained competitive advantage. Barney has identified three reasons why
resources can be hard to imitate:

 Historical conditions. Resources that were developed due to historical events or over
a long period usually are costly to imitate.
 Causal ambiguity. Companies can’t identify the particular resources that are the
cause of competitive advantage.
 Social Complexity. The resources and capabilities that are based on company’s
culture or interpersonal relationships.

Organized to Capture Value

the resources itself do not confer any advantage for a company if it’s not organized to
capture the value from them. A firm must organize its management systems, processes,
policies, organizational structure and culture to be able to fully realize the potential of its
valuable, rare and costly to imitate resources and capabilities. Only then the companies can
achieve sustained competitive advantage.

Using the tool

Step 1. Identify valuable, rare and costly to imitate resources

There are two types of resources: tangible and intangible. Tangible assets are physical things
like land, buildings and machinery. Companies can easily by them in the market so tangible
assets are rarely the source of competitive advantage. On the other hand, intangible assets,
such as brand reputation, trademarks, intellectual property, unique training system or
unique way of performing tasks, can’t be acquired so easily and offer the benefits of
sustained competitive advantage. Therefore, to find valuable, rare and costly to imitate
resources, you should first look at company’s intangible assets.

Finding valuable resources:

An easy way to identify such resources is to look at the value chain and SWOT analyses.
Value chain analysis identifies the most valuable activities, which are the source of cost or

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

differentiation advantage. By looking into the analysis, you can easily find the valuable
resources or capabilities. In addition, SWOT analysis recognizes the strengths of the
company that are used to exploit opportunities or defend against threats (which is exactly
what a valuable resource does). If you still struggle finding valuable resources, you can
identify them by asking the following questions:

 Which activities lower the cost of production without decreasing perceived customer
value?
 Which activities increase product or service differentiation and perceived customer
value?
 Have your company won an award or been recognized as the best in something?
(most innovative, best employer, highest customer retention or best exporter)
 Do you have an access to scarce raw materials or hard to get in distribution
channels?
 Do you have special relationship with your suppliers? Such as tightly integrated order
and distribution system powered by unique software?
 Do you have employees with unique skills and capabilities?
 Do you have brand reputation for quality, innovation, customer service?
 Do you do perform any tasks better than your competitors do? (Benchmarking is
useful here)
 Does your company hold any other strength compared to rivals?

Finding rare resources:

 How many other companies own a resource or can perform capability in the same
way in your industry?
 Can a resource be easily bought in the market by rivals?
 Can competitors obtain the resource or capability in the near future?

Finding costly to imitate resources:

 Do other companies can easily duplicate a resource?

 Can competitors easily develop a substitute resource?
 Do patents protect it?
 Is a resource or capability socially complex?
 Is it hard to identify the particular processes, tasks, or other factors that form the
resource?

Step 2. Find out if your company is organized to exploit these resources

Following questions might be helpful:

 Does your company have an effective strategic management process in

organization?
 Are there effective motivation and reward systems in place?
 Does your company’s culture reward innovative ideas?
 Is an organizational structure designed to use a resource?
 Are there excellent management and control systems?

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Step 3. Protect the resources

When you identified a resource or capability that has all 4 VRIO attributes, you should
protect it using all possible means. After all, it is the source of your sustained competitive
advantage. The first thing you should do is to make the top management aware of such
resource and suggest how it can be used to lower the costs or to differentiate the products
and services. Then you should think of ideas how to make it more costly to imitate. If other
companies won’t be able to imitate a resource at reasonable prices, it will stay rare for
much longer.

Step 4. Constantly review VRIO resources and capabilities

The value of the resources changes over time and they must be reviewed constantly to find
out if they are as valuable as they once were. Competitors are also keen to achieve the
same competitive advantages so they’ll be keen to replicate the resource, which means that
they will no longer be rare. Often, new VRIO resources or capabilities are developed inside
an organization and by identifying them you can protect you sources of competitive
advantage more easily.

VRIO example

Google’s capability evaluated using VRIO framework

Google's VRIO capability

Excellent employee management

Valuable? Rare? Costly to Is a company organized to

Imitate? exploit it?

Yes Yes Yes Yes

Result: sustained competitive advantage

Google’s ability to manage their people effectively is a source of both differentiation and
cost advantages. Unlike other companies, which rely on trust and relationship in people
management, Google uses data about its employees to manage them. This capability allows
making correct (data based) decisions about which people to hire and the best way to use

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

their skills. As a result, Google is able to hire innovative employees that are also very
productive ($1 million in revenue per employee). Besides being valuable, it is also a rare
capability because no other company uses data based employee management so
extensively. Is it costly to imitate? It is costly to imitate, at least, in the near future. First,
companies should build the highly sophisticated software, which is both costly and hard to
do. Second, HR managers should be trained to make data based decisions and forget their
old management methods. Is Google organized to capture value from this capability?
Certainly, it has trained HR managers that know how to use the data and manage people
accordingly. It also has the needed IT skills to collect and manage the data about its
employees.

There are many more businesses that have VRIO resources or capabilities, including many of
the companies we analyzed using swot analysis.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Definition
Internal Factor Evaluation (IFE) Matrix is a strategy tool used to evaluate firm’s internal
environment and to reveal its strengths as well as weaknesses.

External Factor Evaluation (EFE) Matrix is a strategy tool used to examine company’s
external environment and to identify the available opportunities and threats.

Understanding the tool

The internal and external factor evaluation matrices have been introduced by Fred R.
David in his book ‘Strategic Management’[1] (at least I found them there and couldn’t trace
their origins anywhere else). According to the author, both tools are used to summarize the
information gained from company’s external and internal environment analyses. The
summarized information is evaluated and used for further purposes, such as, to build SWOT
analysis or IE matrix. Even though, the tools are quite simplistic, they do the best job
possible in identifying and evaluating the key affecting factors. Both tools are nearly
identical so we’ll only show an example of an EFE matrix right now.

External Factor Evaluation Matrix

Key External Factors Weight Rating Weighted

Score

Opportunities

1. New trade agreement that lifts 0.11 3 0.33

the ban of imported food is
signed with a neighbouring
country.

2. Signing a contract with a new 0.09 1 0.09

supplier.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

External Factor Evaluation Matrix

Key External Factors Weight Rating Weighted

Score

3. Processed food market 0.24 2 0.48

growing by 15% next year in our
largest market.

4. Incorporating a new company 0.10 1 0.10

in neighbouring country, where
the tax rate is decreasing by 3%
next year.

Threats

5. The contract with the main 0.17 4 0.68

customer expires in 2 months.

6. Extreme cases of natural 0.03 2 0.06

disasters occurring next year.

7. New law, requiring decreasing 0.14 3 0.42

the amount of sugar in the food
by 20%, could be passed next
year.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

External Factor Evaluation Matrix

Key External Factors Weight Rating Weighted

Score

8. Competitors opening 3 new 0.12 2 0.24

stores in the town.

Total 1.00 - 2.40

Key External and Internal Factors

EFE Matrix. When using the EFE matrix we identify the key external opportunities and
threats that are affecting or might affect a company. Where do we get these factors from?
Simply by analysing the external environment with the tools like PEST analysis, Porter’s Five
Forces or Competitive Profile Matrix.

IFE Matrix. Strengths and weaknesses are used as the key internal factors in the evaluation.
When looking for the strengths, ask what do you do better or have more valuable than your
competitors have? In case of the weaknesses, ask which areas of your company you could
improve and at least catch up with your competitors?

The general rule is to identify 10-20 key external factors and additional 10-20 key internal
factors, but you should identify as many factors as possible.

Weights

Each key factor should be assigned a weight ranging from 0.0 (low importance) to 1.0 (high
importance). The number indicates how important the factor is if a company wants to
succeed in an industry. If there were no weights assigned, all the factors would be equally
important, which is an impossible scenario in the real world. The sum of all the weights
must equal 1.0. Separate factors should not be given too much emphasis (assigning a weight
of 0.30 or more) because the success in an industry is rarely determined by one or few
factors.

Weights have the same meaning in both matrices.

In our first example, the most significant factors are ‘Processed food market growing by 15%
next year in our largest market.’ (0.24 points), ‘The contract with the main customer expires

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

in 2 months.’ (0.17 points) and ‘New law, requiring decreasing the amount of sugar in the
food by 20%, could be passed next year.’ (0.14 points).

Ratings

The meaning of ratings is different in each matrix, so we’ll explain them separately.

EFE Matrix. The ratings in external matrix refer to how effectively company’s current
strategy responds to the opportunities and threats. The numbers range from 4 to 1, where 4
means a superior response, 3 – above average response, 2 – average response and 1 – poor
response. Ratings, as well as weights, are assigned subjectively to each factor. In our
example, we can see that the company’s response to the opportunities is rather poor,
because only one opportunity has received a rating of 3, while the rest have received the
rating of 1. The company is better prepared to meet the threats, especially the first threat.

IFE Matrix. The ratings in internal matrix refer to how strong or weak each factor is in a firm.
The numbers range from 4 to 1, where 4 means a major strength, 3 – minor strength, 2 –
minor weakness and 1 – major weakness. Strengths can only receive ratings 3 & 4,
weaknesses – 2 & 1. The process of assigning ratings in IFE matrix can be done easier using
benchmarking tool.

Weighted Scores & Total Weighted Score

The score is the result of weight multiplied by rating. Each key factor must receive a score.
Total weighted score is simply the sum of all individual weighted scores. The firm can
receive the same total score from 1 to 4 in both matrices. The total score of 2.5 is an
average score. In external evaluation a low total score indicates that company’s strategies
aren’t well designed to meet the opportunities and defend against threats. In internal
evaluation a low score indicates that the company is weak against its competitors.

In our example, the company has received total score 2.40, which indicates that company’s
strategies are neither effective nor ineffective in exploiting opportunities or defending
against threats. The company should improve its strategy and focus more on how takes
advantage of the opportunities.

Benefits

Both matrices have the following benefits:

 Easy to understand. The input factors have a clear meaning to everyone inside or
outside the company. There’s no confusion over the terms used or the implications
of the matrices.
 Easy to use. The matrices do not require extensive expertise, many personnel or lots
of time to build.
 Focuses on the key internal and external factors. Unlike some other analyses (e.g.
value chain analysis, which identifies all the activities in the company’s value chain,
despite their importance), the IFE and EFE only highlight the key factors that are
affecting a company or its strategy.
 Multi-purpose. The tools can be used to build SWOT analysis, IE matrix, GE-McKinsey
matrix or for benchmarking.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Limitations

 Easily replaced. IFE and EFE matrices can be replaced almost completely by PEST
analysis, SWOT analysis, competitive profile matrix and partly some other analysis.
 Doesn’t directly help in strategy formation. Both analyses only identify and evaluate
the factors but do not help the company directly in determining the next strategic
move or the best strategy. Other strategy tools have to be used for that.
 Too broad factors. SWOT matrix has the same limitation and it means that some
factors that are not specific enough can be confused with each other. Some strength
can be weaknesses as well, e.g. brand reputation, which can be a strong and valuable
brand reputation or a poor brand reputation. The same situation is with
opportunities and threats. Therefore, each factor has to be as specific as possible to
avoid confusion over where the factor should be assigned.

Using the tool

Step 1. Identify the key external/internal factors

EFE matrix. Do the PEST analysis first. The information from the PEST analysis reveals which
factors currently affect or may affect the company in the future. At this point, the factors
can be either opportunities or threats and your next task is to sort them into one or the
other category. Try to look at which factors could benefit the company and which ones
would harm it.

You should also analyze your competitors’ actions and their strategies. This way you would
know what competitors are doing right and what their strategies lack.

IFE matrix. In case you have done a SWOT analysis already, you can gather some of the
factors from there. The SWOT analysis will usually have no more than 10 strengths and
weaknesses, so you’ll have to do additional analysis to identify more key internal factors for
the matrix.

Look again into the company’s resources, capabilities, organizational structure, culture,
functional areas and value chain analysis and recognize the strong and weak points of the
organization.

Step 2. Assign the weights and ratings

Weights and ratings are assigned subjectively. Therefore, it is a more difficult process than
identifying the key factors. We assign weights based on industry analysts’ opinions. Find out
what the analysts say about the industry’s success factors and then use their opinion or
analysis to assign the appropriate weights. The same process is with ratings. Although, this
time you or the members of your group will have to decide what ratings should be assigned.
Ratings from 1-4 can be assigned to each opportunity and threat, but only the ratings from
1-2 can be assigned to each weakness and 3-4 to each strength.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Step 3. Use the results

IFE or EFE matrices have little value on their own. You should do both analyses and combine
their results to discuss new strategies or for further analysis. They are especially useful
when building advanced SWOT analysis, SWOT matrix for strategies or IE matrix.

Examples

We provide only the general examples of both matrices.

EFE Matrix Example

Key External Factors Weight Rating Weighted

Score

Opportunities

1. New immigration laws abolish 0.02 1 0.02

the restrictions for immigrants to
live and work freely in the
country.

2. A government increases 0.17 4 0.68

budget spending for our
products.

3. New product market, worth $1 0.05 4 0.20

billion a year, could be introduced
for the consumers.

4. Consumers are 20 % more 0.12 4 0.48

likely to by the products that
share the same ecosystem.

5. We have patented the 0.03 3 0.09

technology that increases the
quality of our products and
lowers the amount of the

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

EFE Matrix Example

Key External Factors Weight Rating Weighted

Score

materials needed to produce it.

6. Our largest competitor is 0.14 2 0.28

selling their subsidiary in TV
market.

Threats

7. Tax rates will increase by 10% 0.06 2 0.12

for the polluting companies.

8. Due to the fast economic 0.04 4 0.16

growth credit availability will
tighten.

9. Credit rates are growing by 5%. 0.02 2 0.04

10. Natural disasters disrupt our 0.08 3 0.24

suppliers’ or our operations.

11. Rivalry in the market is 0.12 4 0.48

intensifying.

12. Competitor is pursuing 0.10 3 0.30

horizontal integration strategy.

13. Inflation has increased to 6%. 0.05 2 0.10

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

EFE Matrix Example

Key External Factors Weight Rating Weighted

Score

Total 1.00 - 3.19

IFE Matrix Example

Key Internal Factors Weight Rating Weighted

Score

Strengths

1. Diversified income (5 different 0.10 4 0.40

brands earning more than $4
billion each)

2. Brand reputation valued at $35 0.08 3 0.24

billion

3. Strong patents portfolio 0.07 4 0.28

(13,000 patents)

4. Excellent employee 0.02 3 0.06

management

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

EFE Matrix Example

Key External Factors Weight Rating Weighted

Score

5. Competency in mergers and 0.06 3 0.18

acquisitions

6. Extensive distribution channels 0.11 4 0.44

7. Strong product ecosystem 0.08 4 0.32

Weaknesses

8. High debt level ($3 billion) 0.10 1 0.10

9. Over-dependence on sales 0.13 2 0.26

from U.S.

10. Too low net profit margin 0.07 2 0.14

11. Competition based on prices 0.09 2 0.18

12. Rigid (bureaucratic) 0.04 1 0.04

organizational culture impeding
fast introduction of new products

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

EFE Matrix Example

Key External Factors Weight Rating Weighted

Score

13. Negative publicity 0.05 2 0.10

Total 1.00 - 2.74

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Definition
GE-McKinsey Nine-Cell Matrix is a strategy tool that offers a systematic approach for the
multi business corporation to prioritize its investments among its business units.

GE-McKinsey is a framework that evaluates business portfolio, provides further strategic

implications and helps to prioritize the investment needed for each business unit (BU).

Understanding the tool

In the business world, much like anywhere else, the problem of resource scarcity is affecting
the decisions the companies make. With limited resources, but many opportunities of using
them, the businesses need to choose how to use their cash best. The fight for investments
takes place in every level of the company: between teams, functional departments, divisions
or business units. The question of where and how much to invest is an ever going headache
for those who allocate the resources.

How does this affect the diversified businesses? Multi business companies manage complex
business portfolios, often, with as much as 50, 60 or 100 products and services. The
products or business units differ in what they do, how well they perform or in their future
prospects. This makes it very hard to make a decision in which products the company should
invest. At least, it was hard until the BCG matrix and its improved version GE-McKinsey
matrix came to help. These tools solved the problem by comparing the business units and
assigning them to the groups that are worth investing in or the groups that should be
harvested or divested.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

In 1970s, General Electric was managing a huge and complex portfolio of unrelated products
and was unsatisfied about the returns from its investments in the products. At the time,
companies usually relied on projections of future cash flows, future market growth or some
other future projections to make investment decisions, which was an unreliable method to
allocate the resources. Therefore, GE consulted the McKinsey & Company and as a result
the nine-box framework was designed. The nine-box matrix plots the BUs on its 9 cells that
indicate whether the company should invest in a product, harvest/divest it or do a further
research on the product and invest in it if there’re still some resources left. The BUs is
evaluated on two axes: industry attractiveness and a competitive strength of a unit.

Industry Attractiveness

Industry attractiveness indicates how hard or easy it will be for a company to compete in
the market and earn profits. The more profitable the industry is the more attractive it
becomes. When evaluating the industry attractiveness, analysts should look how an industry
will change in the long run rather than in the near future, because the investments needed
for the product usually require long lasting commitment.

Industry attractiveness consists of many factors that collectively determine the competition
level in it. There’s no definite list of which factors should be included to determine industry
attractiveness, but the following are the most common: [1]

 Long run growth rate

 Industry size

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

  Industry profitability: entry barriers, exit barriers, supplier power, buyer power,
threat of substitutes and available complements (use Porter’s Five Forces analysis to
determine this)
 Industry structure (use Structure-Conduct-Performance framework to determine
this)
 Product life cycle changes
 Changes in demand
 Trend of prices
 Macro environment factors (use PEST or PESTEL for this)
 Seasonality
 Availability of labour
 Market segmentation

Competitive strength of a business unit or a product

Along the X axis, the matrix measures how strong, in terms of competition, a particular
business unit is against its rivals. In other words, managers try to determine whether a
business unit has a sustainable competitive advantage (or at least temporary competitive
advantage) or not. If the company has a sustainable competitive advantage, the next
question is: “For how long it will be sustained?”

The following factors determine the competitive strength of a business unit:

 Total market share

 Market share growth compared to rivals
 Brand strength (use brand value for this)
 Profitability of the company
 Customer loyalty
 VRIO resources or capabilities (use VRIO framework to determine this)
 Your business unit strength in meeting industry’s critical success factors
(use Competitive Profile Matrix to determine this)
 Strength of a value chain (use Value Chain Analysis and Benchmarking to determine
this)
 Level of product differentiation
 Production flexibility

Advantages

 Helps to prioritize the limited resources in order to achieve the best returns.
 Managers become more aware of how their products or business units perform.
 It’s more sophisticated business portfolio framework than the BCG matrix.
 Identifies the strategic steps the company needs to make to improve the
performance of its business portfolio.

Disadvantages

 Requires a consultant or a highly experienced person to determine industry’s

attractiveness and business unit strength as accurately as possible.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

  It is costly to conduct.
 It doesn’t take into account the synergies that could exist between two or more
business units.

Difference between GE McKinsey and BCG matrices

GE McKinsey matrix is a very similar portfolio evaluation framework to BCG matrix. Both
matrices are used to analyze company’s product or business unit portfolio and facilitate the
investment decisions.

The main differences:

 Visual difference. BCG is only a four cell matrix, while GE McKinsey is a nine cell
matrix. Nine cells provide better visual portrait of where business units stand in the
matrix. It also separates the invest/grow cells from harvest/divest cells that are
much closer to each other in the BCG matrix and may confuse others of what

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 investment decisions to

make.
 Comprehensiveness. The reason why the GE McKinsey framework was developed is
that BCG portfolio tool wasn’t sophisticated enough for the guys from General
Electric. In BCG matrix, competitive strength of a business unit is equal to relative
market share, which assumes that the larger the market share a business has the
better it is positioned to compete in the market. This is true, but it’s too simplistic to
assume that it’s the only factor affecting the competition in the market. The same is
with industry attractiveness that is measured only as the market growth rate in BCG.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 It comes to no surprise that GE with its complex business portfolio needed
something more comprehensive than that.

Using the tool

There are no established processes or models that managers could use when performing
the analysis. Therefore, we designed the following steps to facilitate the process:

Step 1. Determine industry attractiveness of each business unit

 Make a list of factors. The first thing you’ll need to do is to identify, which factors to
include when measuring industry attractiveness. We’ve provided the list of the most
common factors, but you should include the factors that are the most appropriate to
your industries.
 Assign weights. Weights indicate how important a factor is to industry’s
attractiveness. A number from 0.01 (not important) to 1.0 (very important) should
be assigned to each factor. The sum of all weights should equal to 1.0.
 Rate the factors. The next thing you need to do is to rate each factor for each of your
product or business unit. Choose the values between ‘1-5’ or ‘1-10’, where ‘1’
indicates the low industry attractiveness and ‘5’ or ‘10’ high industry attractiveness.
 Calculate the total scores. Total score is the sum of all weighted scores for each
business unit. Weighted scores are calculated by multiplying weights and ratings.
Total scores allow comparing industry attractiveness for each business unit.

Industry
Attractiveness
(1/2)

Business Unit 1 Business Unit 2

Factor Weight Rating Weighted Rating Weighted

Score Score

Industry 0.25 3 0.75 4 1

growth rate

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 Industry size 0.22 3 0.66 3 0.66

Industry 0.18 5 0.90 1 0.18

profitability

Industry 0.17 4 0.68 4 0.68

structure

Trend of 0.09 3 0.27 3 0.27

prices

Market 0.09 1 0.09 3 0.27

segmentation

Total score 1.00 - 3.35 - 3.06

Industry
Attractiveness
(2/2)

Business Unit 3 Business Unit 4

Factor Weight Rating Weighted Rating Weighted

Score Score

Industry 0.25 3 0.75 2 0.50

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 growth rate

Industry size 0.22 2 0.44 5 1.10

Industry 0.18 1 0.18 5 0.90

profitability

Industry 0.17 2 0.34 4 0.68

structure

Trend of 0.09 2 0.18 3 0.27

prices

Market 0.09 2 0.18 3 0.27

segmentation

Total score 1.00 - 2.07 - 3.72

This is a tough task and one that usually requires involving a consultant who is an expert of
the industries in question. The consultant will help you to determine the weights and to rate
them properly so the analysis is as accurate as possible.

Step 2. Determine the competitive strength of each business unit

‘Step 2’ is the same as ‘Step 1’ only this time, instead of industry attractiveness, the
competitive strength of a business unit is evaluated.

 Make a list of factors. Choose the competitive strength factors from our list or add
your own factors.
 Assign weights. Weights indicate how important a factor is in achieving sustainable
competitive advantage. A number from 0.01 (not important) to 1.0 (very important)
should be assigned to each factor. The sum of all weights should equal to 1.0.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

  Rate the factors. Rate each factor for each of your product or business unit. Choose
the values between ‘1-5’ or ‘1-10’, where ‘1’ indicates the weak strength and ‘5’ or
‘10’ powerful strength.
 Calculate the total scores. See ‘Step 1’.

Competitive
Strength (1/2)

Business Unit 1 Business Unit 2

Factor Weight Rating Weighted Rating Weighted

Score Score

Market 0.22 2 0.44 2 0.44

share

Relative 0.18 3 0.48 2 0.38

growth rate

Company’s 0.14 3 0.42 1 0.14

profitability

Brand value 0.10 1 0.10 2 0.20

VRIO 0.20 1 0.20 4 0.80

resources

CPM Score 0.16 2 0.32 5 0.80

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 Total score 1.00 - 1.96 - 2.74

Competitive
Strength (2/2)

Business Unit 3 Business Unit 4

Factor Weight Rating Weighted Rating Weighted

Score Score

Market 0.22 4 0.88 4 0.88

share

Relative 0.18 4 0.64 2 0.36

growth rate

Company’s 0.14 3 0.42 3 0.42

profitability

Brand value 0.10 3 0.30 3 0.30

VRIO 0.20 4 0.80 4 0.80

resources

CPM Score 0.16 5 0.80 5 0.80

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 Total score 1.00 - 3.92 - 3.56

Step 3. Plot the business units on a matrix

With all the evaluations and scores in place, we can plot the business units on the matrix.
Each business unit is represented as a circle. The size of the circle should correspond to the
proportion of the business revenue generated by that business unit. For example, ‘Business
unit 1’ generates 20% revenue and ‘Business unit 2’ generates 40% revenue for the
company. The size of a circle for ‘Business unit 1’ will be half the size of a circle for ‘Business
unit 2’.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Step 4. Analyze the information

There are different investment implications you should follow, depending on which boxes
your business units have been plotted. There are 3 groups of boxes: investment/grow,
selectivity/earnings and harvest/divest boxes. Each group of boxes indicates what you
should do with your investments.

Investment implications

Box Invest/Grow Selectivity/Earnings Harvest/Divest

Invest Definitely Invest if there’s Invest just

or invest money left and the enough to keep
not? situation of business the business unit
unit could be operating or

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Investment implications

Box Invest/Grow Selectivity/Earnings Harvest/Divest

improved divest

Invest/Grow box. Companies should invest into the business units that fall into these boxes
as they promise the highest returns in the future. These business units will require a lot of
cash because they’ll be operating in growing industries and will have to maintain or grow
their market share. It is essential to provide as much resources as possible for BUs so there
would be no constraints for them to grow. The investments should be provided for R&D,
advertising, acquisitions and to increase the production capacity to meet the demand in the
future.

Selectivity/Earnings box. You should invest into this BUs only if you have the money left
over the investments in invest/grow business units group and if you believe that BUs will
generate cash in the future. These business units are often considered last as there’s a lot of
uncertainty with them. The general rule should be to invest in business units which operate
in huge markets and there are not many dominant players in the market, so the investments
would help to easily win larger market share.

Harvest/Divest box. The business units that are operating in unattractive industries, don’t
have sustainable competitive advantages or are incapable of achieving it and are performing
relatively poorly fall into harvest/divest boxes. What should companies do with these
business units?

First, if the business unit generates surplus cash, companies should treat them the same as
the business units that fall into ‘cash cows’ box in the BCG matrix. This means that the
companies should invest into these business units just enough to keep them operating and
collect all the cash generated by it. In other words, its worth to invest into such business as
long as investments into it don’t exceed the cash generated from it.

Second, the business units that only make losses should be divested. If that’s impossible and
there’s no way to turn the losses into profits, the company should liquidate the business
unit.

Step 5. Identify the future direction of each business unit

The GE McKinsey matrix only provides the current picture of industry attractiveness and the
competitive strength of a business unit and doesn’t consider how they may change in the
future. Further analysis may reveal that investments into some of the business units can
considerably improve their competitive positions or that the industry may experience major

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

growth in the future. This affects the decisions we make about our investments into one or
another business unit.

For example, our previous evaluations show that the ‘Business Unit 1’ belongs to
invest/grow box, but further analysis of an industry reveals that it’s going to shrink
substantially in the near future. Therefore, in the near future, the business unit will be in
harvest/divest group rather than invest/grow box. Would you still invest as much in
‘Business Unit 1’ as you would have invested initially? The answer is no and the matrix
should take that into consideration.

How to do that? Well, the company should consult with the industry analysts to determine
whether the industry attractiveness will grow, stay the same or decrease in the future. You
should also discuss with your managers whether your business unit competitive strength
will likely increase or decrease in the near future. When all the information is collected you
should include it to your existing matrix, by adding the arrows to the circles. The arrows
should point to the future position of a business unit.

The following table shows how industry attractiveness and business unit competitive
strength will change in 2 years.

Business Business Business Business

Unit 1 Unit 2 Unit 3 Unit 4

Industry Decrease Stay the Stay the Increase

attractiveness same same

Business unit Decrease Increase Increase Decrease

competitive
strength

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Step 6. Prioritize your investments

The last step is to decide where and how to invest the company’s money. While the matrix
makes it easier by evaluating the business units and identifying the best ones to invest in, it
still doesn’t answer some very important questions:

 Is it really worth investing into some business units?

 How much exactly to invest in?
 Where to invest into business units (more to R&D, marketing, value chain?) to
improve their performance?

Doing the GE McKinsey matrix and answering all the questions takes time, effort and
money, but it’s still one of the most important product portfolio management tools that
significantly facilitate investment decisions.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Definition
BCG Matrix (or growth-share matrix) is a corporate planning tool, which is used to portray
firm’s brand portfolio or SBUs on a quadrant along relative market share axis (horizontal
axis) and speed of market growth (vertical axis) axis.

Growth-Share Matrix is a business tool, which uses relative market share and industry
growth rate factors to evaluate the potential of business brand portfolio and suggest further
investment strategies.

Understanding the tool

BCG matrix is a framework created by Boston Consulting Group to evaluate the strategic
position of the business brand portfolio and it’s potential. It classifies business portfolio into
four categories based on industry attractiveness (growth rate of that industry)
and competitive position (relative market share). These two dimensions reveal likely
profitability of the business portfolio in terms of cash needed to support that unit and cash
generated by it. The general purpose of the analysis is to help understand, which brands the
firm should invest in and which ones should be divested.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities
Relative market share. One of the dimensions used to evaluate business portfolio is relative
market share. Higher Corporates market share results in higher cash returns. This is because
a firm that produces more, benefits from higher economies of scale and experience curve,
which results in higher profits. Nonetheless, it is worth to note that some firms may
experience the same benefits with lower production outputs and lower market share.

Market growth rate. High market growth rate means higher earnings and sometimes profits
but it also consumes lots of cash, which is used as investment to stimulate further growth.
Therefore, business units that operate in rapid growth industries are cash users and are
worth investing in only when they are expected to grow or maintain market share in the
future.

There are four quadrants into which firms brands are classified:

Dogs. Dogs hold low market share compared to competitors and operate in a slowly
growing market. In general, they are not worth investing in because they generate low or
negative cash returns. But this is not always the truth. Some dogs may be profitable for long
period of time, they may provide synergies for other brands or SBUs or simple act as a
defence to counter competitors moves. Therefore, it is always important to perform deeper
analysis of each brand or SBU to make sure they are not worth investing in or have to be
divested.
Strategic choices: Retrenchment, divestiture, liquidation

Cash cows. Cash cows are the most profitable brands and should be “milked” to provide as
much cash as possible. The cash gained from “cows” should be invested into stars to
support their further growth. According to growth-share matrix, Corporates should not
invest into cash cows to induce growth but only to support them so they can maintain their
current market share. Again, this is not always the truth. Cash cows are usually large
corporations or SBUs that are capable of innovating new products or processes, which may
become new stars. If there would be no support for cash cows, they would not be capable
of such innovations.
Strategic choices: Product development, diversification, divestiture, retrenchment

Stars. Stars operate in high growth industries and maintain high market share. Stars are
both cash generators and cash users. They are the primary units in which the company
should invest its money, because stars are expected to become cash cows and generate
positive cash flows. Yet, not all stars become cash flows. This is especially true in rapidly
changing industries, where new innovative products can soon be outcompeted by new
technological advancements, so a star instead of becoming a cash cow, becomes a dog.
Strategic choices: Vertical integration, horizontal integration, market penetration, market
development, product development

Question marks. Question marks are the brands that require much closer consideration.
They hold low market share in fast growing markets consuming large amount of cash and
incurring losses. It has potential to gain market share and become a star, which would later
become cash cow. Question marks do not always succeed and even after large amount of
investments they struggle to gain market share and eventually become dogs. Therefore,
they require very close consideration to decide if they are worth investing in or not.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Strategic choices: Market penetration, market development, product development,
divestiture

BCG matrix quadrants are simplified versions of the reality and cannot be applied blindly.
They can help as general investment guidelines but should not change strategic thinking.
Business should rely on management judgement, business unit strengths and
weaknesses and external environment factors to make more reasonable investment
decisions.

Advantages and disadvantages

Benefits of the matrix:

 Easy to perform;
 Helps to understand the strategic positions of business portfolio;
 It’s a good starting point for further more thorough analysis.

Growth-share analysis has been heavily criticized for its oversimplification and lack of useful
application. Following are the main limitations of the analysis:

 Business can only be classified to four quadrants. It can be confusing to classify an

SBU that falls right in the middle.
 It does not define what ‘market’ is. Businesses can be classified as cash cows, while
they are actually dogs, or vice versa.
 Does not include other external factors that may change the situation completely.
 Market share and industry growth are not the only factors of profitability. Besides,
high market share does not necessarily mean high profits.
 It denies that synergies between different units exist. Dogs can be as important as
cash cows to businesses if it helps to achieve competitive advantage for the rest of
the company.

Using the tool

Although BCG analysis has lost its importance due to many limitations, it can still be a useful
tool if performed by following these steps:

 Step 1. Choose the unit

 Step 2. Define the market
 Step 3. Calculate relative market share
 Step 4. Find out market growth rate
 Step 5. Draw the circles on a matrix

Step 1. Choose the unit. BCG matrix can be used to analyze SBUs, separate brands, products
or a firm as a unit itself. Which unit will be chosen will have an impact on the whole analysis.
Therefore, it is essential to define the unit for which you’ll do the analysis.

Step 2. Define the market. Defining the market is one of the most important things to do in
this analysis. This is because incorrectly defined market may lead to poor classification. For

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

example, if we would do the analysis for the Daimler’s Mercedes-Benz car brand in the
passenger vehicle market it would end up as a dog (it holds less than 20% relative market
share), but it would be a cash cow in the luxury car market. It is important to clearly define
the market to better understand firm’s portfolio position.

Step 3. Calculate relative market share. Relative market share can be calculated in terms of
revenues or market share. It is calculated by dividing your own brand’s market share
(revenues) by the market share (or revenues) of your largest competitor in that industry. For
example, if your competitor’s market share in refrigerator’s industry was 25% and your
firm’s brand market share was 10% in the same year, your relative market share would be
only 0.4. Relative market share is given on x-axis. Its top left corner is set at 1, midpoint at
0.5 and top right corner at 0 (see the example below for this).

Step 4. Find out market growth rate. The industry growth rate can be found in industry
reports, which are usually available online for free. It can also be calculated by looking at
average revenue growth of the leading industry firms. Market growth rate is measured in
percentage terms. The midpoint of the y-axis is usually set at 10% growth rate, but this can
vary. Some industries grow for years but at average rate of 1 or 2% per year. Therefore,
when doing the analysis you should find out what growth rate is seen as significant
(midpoint) to separate cash cows from stars and question marks from dogs.

Step 5. Draw the circles on a matrix. After calculating all the measures, you should be able
to plot your brands on the matrix. You should do this by drawing a circle for each brand. The
size of the circle should correspond to the proportion of business revenue generated by that
brand.

Examples

Corporate ‘A’ BCG matrix

Brand Revenues % of Largest Your Relative Market

corporate rival’s brand’s market growth
revenues market market share rate
share share

Brand $500,000 54% 25% 25% 1 3%

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Corporate ‘A’ BCG matrix

Brand Revenues % of Largest Your Relative Market

corporate rival’s brand’s market growth
revenues market market share rate
share share

Brand $350,000 38% 30% 5% 0.17 12%

2

Brand $50,000 6% 45% 30% 0.67 13%

3

Brand $20,000 2% 10% 1% 0.1 15%

4

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

This example was created to show how to deal with a relative market share higher than
100% and with negative market growth.

Corporate ‘B’ BCG matrix

Brand Revenues % of Largest Your Relative Market

corporate rival’s brand’s market growth
revenues market market share rate
share share

Brand $500,000 55% 15% 60% 1 3%

1

Brand $350,000 31% 30% 5% 0.17 -15%

2

Brand $50,000 10% 45% 30% 0.67 -4%

3

Brand $20,000 4% 10% 1% 0.1 8%

4

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Definition
McKinsey 7s Model is a tool that analyzes firm’s organizational design by looking at 7 key
internal elements: strategy, structure, systems, shared values, style, staff and skills, in order
to identify if they are effectively aligned and allow organization to achieve its objectives.

Understanding the tool

McKinsey 7s model was developed in 1980s by McKinsey consultants Tom Peters, Robert
Waterman and Julien Philips with a help from Richard Pascale and Anthony G. Athos. Since
the introduction, the model has been widely used by academics and practitioners and
remains one of the most popular strategic planning tools. It sought to present an emphasis
on human resources (Soft S), rather than the traditional mass production tangibles of
capital, infrastructure and equipment, as a key to higher organizational performance. The
goal of the model was to show how 7 elements of the company: Structure, Strategy, Skills,
Staff, Style, Systems, and Shared values, can be aligned together to achieve effectiveness in
a company. The key point of the model is that all the seven areas are interconnected and a
change in one area requires change in the rest of a firm for it to function effectively.

Below you can find the McKinsey model, which represents the connections between seven
areas and divides them into ‘Soft Ss’ and ‘Hard Ss’. The shape of the model emphasizes
interconnectedness of the elements.

The model can be applied to many situations and is a valuable tool when organizational
design is at question. The most common uses of the framework are:

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

  To facilitate organizational change.
 To help implement new strategy.
 To identify how each area may change in a future.
 To facilitate the merger of organizations.

7s factors

In McKinsey model, the seven areas of organization are divided into the ‘soft’ and ‘hard’
areas. Strategy, structure and systems are hard elements that are much easier to identify
and manage when compared to soft elements. On the other hand, soft areas, although
harder to manage, are the foundation of the organization and are more likely to create the
sustained competitive advantage.

7s factors

Hard S Soft S

Strategy Style

Structure Staff

Systems Skills

Shared Values

Strategy is a plan developed by a firm to achieve sustained competitive advantage and

successfully compete in the market. What does a well-aligned strategy mean in 7s McKinsey
model? In general, a sound strategy is the one that’s clearly articulated, is long-term, helps
to achieve competitive advantage and is reinforced by strong vision, mission and values. But
it’s hard to tell if such strategy is well-aligned with other elements when analyzed alone. So
the key in 7s model is not to look at your company to find the great strategy, structure,
systems and etc. but to look if its aligned with other elements. For example, short-term
strategy is usually a poor choice for a company but if it’s aligned with other 6 elements, then
it may provide strong results.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Structure represents the way business divisions and units are organized and include the
information of who is accountable to whom. In other words, structure is the organizational
chart of the firm. It is also one of the most visible and easy to change elements of the
framework.

Systems are the processes and procedures of the company, which reveal business’ daily
activities and how decisions are made. Systems are the area of the firm that determines
how business is done and it should be the main focus for managers during organizational
change.

Skills are the abilities that firm’s employees perform very well. They also include capabilities
and competences. During organizational change, the question often arises of what skills the
company will really need to reinforce its new strategy or new structure.

Staff element is concerned with what type and how many employees and organization will
need and how they will be recruited, trained, motivated and rewarded.

Style represents the way the company is managed by top-level managers, how they
interact, what actions do they take and their symbolic value. In other words, it is the
management style of company’s leaders.

Shared Values are at the core of McKinsey 7s model. They are the norms and standards that
guide employee behavior and company actions and thus, are the foundation of every
organization.

The authors of the framework emphasize that all elements must be given equal importance
to achieve the best results.

Using the tool

As we pointed out earlier, the McKinsey 7s framework is often used when organizational
design and effectiveness are at question. It is easy to understand the model but much
harder to apply it for your organization due to a common misunderstanding of what should
a well-aligned elements be like.

We provide the following steps that should help you to apply this tool:

Step 1. Identify the areas that are not effectively aligned

During the first step, your aim is to look at the 7S elements and identify if they are
effectively aligned with each other. Normally, you should already be aware of how 7
elements are aligned in your company, but if you don’t you can use the checklist
from WhittBlog to do that. After you’ve answered the questions outlined there you should
look for the gaps, inconsistencies and weaknesses between the relationships of the
elements. For example, you designed the strategy that relies on quick product introduction
but the matrix structure with conflicting relationships hinders that so there’s a conflict that
requires the change in strategy or structure.

Step 2. Determine the optimal organization design

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

With the help from top management, your second step is to find out what effective
organizational design you want to achieve. By knowing the desired alignment you can set
your goals and make the action plans much easier. This step is not as straightforward as
identifying how seven areas are currently aligned in your organization for a few reasons.
First, you need to find the best optimal alignment, which is not known to you at the
moment, so it requires more than answering the questions or collecting data. Second, there
are no templates or predetermined organizational designs that you could use and you’ll
have to do a lot of research or benchmarking to find out how other similar organizations
coped with organizational change or what organizational designs they are using.

Step 3. Decide where and what changes should be made

This is basically your action plan, which will detail the areas you want to realign and how
would you like to do that. If you find that your firm’s structure and management style are
not aligned with company’s values, you should decide how to reorganize the reporting
relationships and which top managers should the company let go or how to influence them
to change their management style so the company could work more effectively.

Step 4. Make the necessary changes

The implementation is the most important stage in any process, change or analysis and only
the well-implemented changes have positive effects. Therefore, you should find the people
in your company or hire consultants that are the best suited to implement the changes.

Step 5. Continuously review the 7s

The seven elements: strategy, structure, systems, skills, staff, style and values are dynamic
and change constantly. A change in one element always has effects on the other elements
and requires implementing new organizational design. Thus, continuous review of each area
is very important.

Example

We’ll use a simplified example to show how the model should be applied to an existing
organization.

Current position #1

We’ll start with a small start-up, which offers services online. The company’s main strategy
is to grow its share in the market. The company is new, so its structure is simple and made
of a very few managers and bottom level workers, who undertake specific tasks. There are a
very few formal systems, mainly because the company doesn’t need many at this time.

Alignment

So far the 7 factors are aligned properly. The company is small and there’s no need for
complex matrix structure and comprehensive business systems, which are very expensive to
develop.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

McKinsey 7s Example (1/3)

Aligned?

Strategy Market penetration Yes

Structure Simple structure Yes

Systems Few formal systems. The systems are Yes

mainly concerned with customer
support and order processing. There
are no or few strategic planning,
personnel management and new
business generation systems.

Skills Few specialized skills and the rest of Yes

jobs are undertaken by the
management (the founders).

Staff Few employees are needed for an Yes

organization. They are motivated by
successful business growth and
rewarded with business shares, of
which market value is rising.

Style Democratic but often chaotic Yes

management style.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Shared Values The staffs are adventurous, values Yes
teamwork and trust each other.

Current position #2

The start-up has grown to become large business with 500+ employees and now maintains
50% market share in a domestic market. Its structure has changed and is now a well-oiled
bureaucratic machine. The business expanded its staff, introduced new motivation, reward
and control systems. Shared values evolved and now the company values enthusiasm and
excellence. Trust and teamwork has disappeared due to so many new employees.

Alignment

The company expanded and a few problems came with it. First, the company’s strategy is no
longer viable. The business has a large market share in its domestic market, so the best way
for it to grow is either to start introducing new products to the market or to expand to other
geographical markets. Therefore, its strategy is not aligned with the rest of company or its
goals. The company should have seen this but it lacks strategic planning systems and
analytical skills.

Business management style is still chaotic and it is a problem of top managers lacking
management skills. The top management is mainly comprised of founders, who don’t have
the appropriate skills. New skills should be introduced to the company.

McKinsey 7s Example (2/3)

Aligned?

Strategy Market penetration No

Structure Bureaucratic machine Yes

Systems Order processing and control, No

customer support and personnel
management systems.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Skills Skills related to service offering and No
business support, but few managerial
and analytical skills.

Staff Many employees and appropriate Yes

motivation and reward systems.

Style Democratic but often chaotic No

management style.

Shared Values Enthusiasm and excellence No

Current position #3

The company realizes that it needs to expand to other regions, so it changes its strategy
from market penetration to market development. The company opens new offices in Asia,
North and South Americas. Company introduced new strategic planning systems hired new
management, which brought new analytical, strategic planning and most importantly
managerial skills. Organization’s structure and shared values haven’t changed.

Alignment

Strategy, systems, skills and style have changed and are now properly aligned with the rest
of the company. Other elements like shared values, staff and organizational structure are
misaligned. First, company’s structure should have changed from well-oiled bureaucratic
machine to division structure. The division structure is designed to facilitate the operations
in new geographic regions. This hasn’t been done and the company will struggle to work
effectively. Second, new shared values should evolve or be introduced in an organization,
because many people from new cultures come to the company and they all bring their own
values, often, very different than the current ones. This may hinder teamwork performance
and communication between different regions. Motivation and reward systems also have to
be adapted to cultural differences.

McKinsey 7s Example (3/3)

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 Aligned?

Strategy Market development Yes

Structure Bureaucratic machine No

Systems Order processing and control, Yes

customer support, personnel
management and strategic planning
systems.

Skills Skills aligned with company’s Yes

operations.

Staff Employees form many cultures, who No

expect different motivation and
reward systems.

Style Democratic style Yes

Shared Values Enthusiasm and excellence No

We’ve showed the simplified example of how the Mckinsey 7s model should be applied. It is
important to understand that the seven elements are much more complex in reality and
you’ll have to gather a lot of information on each of them to make any appropriate decision.

The model is simple, but it’s worth the effort to do one for your business to gather some
insight and find out if your current organization is working effectively.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Definition
Horizontal Integration is the process of acquiring or merging with competitors, leading to
industry consolidation.

Horizontal Integration is a strategy where a company acquires, mergers or takes over

another company in the same industry value chain.

What is Horizontal Integration?

It is a type of integration strategies pursued by a company in order to strengthen its position

in the industry. A corporate that implements this type of strategy usually mergers or
acquires another company that is in the same production stage. For example, Disney
merging with Pixar (movie production), Exxon with Mobile (oil production, refining and
distribution) or the infamous Daimler Benz and Chrysler merger (car developing,
manufacturing and retailing).

The purpose of horizontal integration (HI) is to grow the company in size, increase product
differentiation, achieve economies of scale, reduce competition or access new markets.
When many firms pursue this strategy in the same industry, it leads to industry
consolidation (oligopoly or even monopoly).

HI can occur in a form of mergers, acquisitions or hostile takeovers. Merger is the joining of
two similar sizes, independent companies to make one joint entity. Acquisition is the
purchase of another company. Hostile takeover is the acquisition of the company, which
does not want to be acquired.

HI may be an effective strategy when:

 Organization competes in a growing industry.

 Competitors lack of some capabilities, competencies, skills or resources that the
company already possesses.
 HI would lead to a monopoly that is allowed by a government.
 Economies of scale would have significant effect.
 The organization has sufficient resources to manage M&A.

The following diagram illustrates HI in manufacturing industry:

Difference between horizontal and vertical integrations

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

HI is different from vertical integration, where a firm usually expands into another
production stage rather than merging or acquiring the company in the same production
stage. For example, a company is vertically integrating if it expands from manufacturing
industry to retailing industry, while HI would mean buying other firms in the same
manufacturing industry.

Horizontal integration examples

Companies using horizontal integration

Acquiring company Acquired company

Amazon.com Whole Foods

Porsche Volkswagen

Daimler Benz Chrysler

Kraft Foods Cadbury

Quaker Oats Snapple

PepsiCo Quaker Oats

Pfizer Wyeth

Pfizer Pharmacia Corporation

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Companies using horizontal integration

Acquiring company Acquired company

Glaxo Wellcome SmithKline Beecham

AT&T T-Mobile

AT&T Bell South

Mittal Steel Arcelor

HP Compaq

Oracle PeopleSoft

Delta Northwest Airlines

United Airlines Continental

JPMorgan Chase Bank One

Microsoft Taleo

Microsoft Yahoo!

Apple AuthenTec

BP Amoco
Source: Strategic Management Insight

Advantages of horizontal integration

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

  Lower costs. The result of HI is one larger company, which produces more services
and products. The higher output leads to greater economies of scale and higher
efficiency.
 Increased differentiation. The combined company can offer more product or service
features.
 Increased market power. The larger company has more power over its suppliers and
distributors/customers.
 Reduced competition. The result of industry consolidation is fewer companies
operating in the industry and less intense competition.
 Access to new markets. New markets and distribution channels can be accessed by
integrating with a company that produces the same goods but operates in a different
region or serves different market segment.

Disadvantages of the strategy

 Destroyed value. M&A rarely add value to the companies. More often M&A fail and
destroy the value of the companies involved in it because expected synergies never
materialize.
 Legal repercussions. HI can lead to a monopoly, which is highly discouraged by many
governments due to lack of competition. Therefore, governments usually have to
approve any larger M&A before they can happen.
 Reduced flexibility. Large organizations are harder to manage and they are less
flexible in introducing innovations to the market.

Definition
Vertical Integration is a strategy used by a company to gain control over its suppliers or
distributors in order to increase the firm’s power in the marketplace, reduce transaction
costs and secure supplies or distribution channels.

Forward Integration is a strategy where a firm gains ownership or increased control over its
previous customers (distributors or retailers).

Backward Integration is a strategy where a firm gains ownership or increased control over
its previous suppliers.

What is vertical integration?

Vertical integration (VI) is a strategy that many companies use to gain control over their
industry’s value chain. This strategy is one of the major considerations when developing
corporate level strategy. The important question in corporate strategy is, whether the
company should participate in one activity (one industry) or many activities (many
industries) along the industry value chain. For example, the company has to decide if it only
manufactures its products or would engage in retailing and after-sales services as well. Two
issues have to be considered before integration:

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

  Costs. An organization should vertically integrate when costs of making the product
inside the company are lower than the costs of buying that product in the market.
 Scope of the firm. A firm should consider whether moving into new industries would
not dilute its current competencies. New activities in a company are also harder to
manage and control. The answers to previous questions determine if a company will
pursue none, partial or full VI.

The example below illustrates a general industry value chain and none, partial or full VI of a
corporate operating in that industry.

Difference between vertical and horizontal integrations

VI is different from horizontal integration, where a corporate usually acquires or mergers

with a competitor in a same industry. An example of horizontal integration would be a
company competing in raw materials industry and buying another company in the same
industry rather than trying to expand to intermediate goods industry. Horizontal integration
examples: Kraft Foods taking over Cadbury, HP acquiring Compaq or Lenovo buying personal
computer division from IBM.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Types of vertical integration

Firms can pursue forward, backward or balanced VI strategies.

Forward integration

If the manufacturing company engages in sales or after-sales industries it pursues forward

integration strategy. This strategy is implemented when the company wants to achieve
higher economies of scale and larger market share. Forward integration strategy became
very popular with increasing internet appearance. Many manufacturing companies have
built their online stores and started selling their products directly to consumers, bypassing
retailers. Forward integration strategy is effective when:

 Few quality distributors are available in the industry.

 Distributors or retailers have high profit margins.
 Distributors are very expensive, unreliable or unable to meet firm’s distribution
needs.
 The industry is expected to grow significantly.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

  There are benefits of stable production and distribution.
 The company has enough resources and capabilities to manage the new business.

Backward integration

When the same manufacturing company starts making intermediate goods for itself or takes
over its previous suppliers, it pursues backward integration strategy. Firms implement
backward integration strategy in order to secure stable input of resources and become more
efficient. Backward integration strategy is most beneficial when:

 Firm’s current suppliers are unreliable, expensive or cannot supply the required
inputs.
 There are only few small suppliers but many competitors in the industry.
 The industry is expanding rapidly.
 The prices of inputs are unstable.
 Suppliers earn high profit margins.
 A company has necessary resources and capabilities to manage the new business.

Balanced integration strategy is simply a combination of forward and backward integrations.

Vertical integration examples

Smartphones Industry

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Automotive Industry

Oil Industry

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Media Industry

Many businesses around the world use vertical integration to gain competitive advantage.
Some of the examples include: Apple Inc., Samsung Electronics, The Coca Cola
Company, Alphabet (Google) Inc., Ford Motor Company, Toyota Motor
Corporation and many other businesses.

Advantages

Advantages of the strategy:

 Lower costs due to eliminated market transaction costs;

 Improved quality of supplies;
 Critical resources can be acquired through VI;
 Improved coordination in supply chain;
 Greater market share;
 Secured distribution channels;
 Facilitates investment in specialized assets (site, physical-assets and human-assets);
 New competencies.

Disadvantages

Disadvantages of VI:

 Higher costs if the company is incapable of managing new activities efficiently;

 The ownership of supply and distribution channels may lead to lower quality
products and reduced efficiency because of the lack of competition;
 Increased bureaucracy and higher investments leads to reduced flexibility;
 Higher potential for legal repercussion due to size (An organization may become a
monopoly);
 New competencies may clash with old ones and lead to competitive disadvantage.

Alternatives to VI

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

This strategy may not always be the best choice for an organization due to a lack of
sufficient resources that are needed to venture into a new industry. Sometimes the
alternatives to VI offer more benefits. The available choices differ in the amount of
investments required and the integration level. For example, short-term contracts require
little integration and much less investments than joint ventures.

Vertical Integration Alternatives

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Definition
Strategic Management Process is a method by which managers conceive of and implement
a strategy that can lead to a sustainable competitive advantage.

Strategic Planning Process is a systematic or emerged way of performing strategic planning

in the organization through initial assessment, thorough analysis, strategy formulation, its
implementation and evaluation.

What is that Strategic Planning Process?

The process of Strategic Management lists what steps the managers should take to create a
complete strategy and how to implement that strategy successfully in the company. It might
comprise from 7 to nearly 30 steps and tends to be more formal in well-established
organizations.

The ways that strategies are created and realized differ. Thus, there are many different
models of the process. The models vary between companies depending upon:

 Organization’s culture.
 Leadership style.
 The experience the firm has in creating successful strategies.

All the examples of the process in this article represent top-down approach and belong to
the ‘design school’.

Components of strategic planning process

There are many components of the process which are spread throughout strategic planning
stages. Most often, the strategic planning process has 4 common phases: strategic analysis,
strategy formulation, implementation and monitoring (David[5], Johnson, Scholes &
Whittington[6], Rothaermel[1], Thompson and Martin[2]). For clearer understanding, this
article represents 5 stages of strategic planning process:

 Initial Assessment
 Situation Analysis
 Strategy Formulation
 Strategy Implementation
 Strategy Monitoring

Initial Assessment

Components: Vision statement & Mission statement

Tools used: Creating a Vision and Mission statements.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

The starting point of the process is initial assessment of the firm. At this phase managers
must clearly identify the company’s vision and mission statements.

Business' vision answers the question: What does an organization want to become? Without
visualizing the company’s future, managers wouldn’t know where they want to go and what
they have to achieve. Vision is the ultimate goal for the firm and the direction for its
employees.

In addition, mission describes company’s business. It informs organization’s stakeholders

about the products, customers, markets, values, concern for public image and employees of
the organization (David, p. 93)[5]. Thorough mission statement acts as guidance for
managers in making appropriate (Rothaermel, p. 34)[1] daily decisions.

Situation Analysis

Components: Internal environment analysis, External environment analysis and Competitor

analysis
Tools used: PEST, SWOT, Core Competencies, Critical Success Factors, Unique Selling
Proposition, Porter's 5 Forces, Competitor Profile Matrix, External Factor Evaluation Matrix,
Internal Factor Evaluation Matrix, Benchmarking, Financial Ratios, Scenarios Forecasting,
Market Segmentation, Value Chain Analysis, VRIO Framework

When the company identifies its vision and mission it must assess its current situation in the
market. This includes evaluating an organization’s external and internal environments and
analyzing its competitors.

During an external environment analysis managers look into the key external forces: macro
& micro environments and competition. PEST or PESTEL frameworks represent all the macro
environment factors that influence the organization in the global environment. Micro
environment affects the company in its industry. It is analyzed using Porter’s 5 Forces
Framework.

Competition is another uncontrollable external force that influences the company. A good
example of this was when Apple released its IPod and shook the mp3 players industry,
including its leading performer Sony. Firms assess their competitors using competitors
profile matrix and benchmarking to evaluate their strengths, weaknesses and level of
performance.

Internal analysis includes the assessment of the company’s resources, core competencies
and activities. An organization holds both tangible resources: capital, land, equipment, and
intangible resources: culture, brand equity, knowledge, patents, copyrights and trademarks
(Rothaermel, p. 90)[1]. A firm’s core competencies may be superior skills in customer
relationship or efficient supply chain management. When analyzing the company’s activities
managers look into the value chain and the whole production process.

As a result, situation analysis identifies strengths, weaknesses, opportunities and threats for
the organization and reveals a clear picture of company’s situation in the market.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Strategy Formulation

Components: Objectives, Business level, Corporate level and Global Strategy Selection
Tools used: Scenario Planning, SPACE Matrix, Boston Consulting Group Matrix, GE-McKinsey
Matrix, Porter’s Generic Strategies, Bowman’s Strategy Clock, Porter’s Diamond, Game
Theory, QSP Matrix.

Successful situation analysis is followed by creation of long-term objectives. Long-term

objectives indicate goals that could improve the company’s competitive position in the long
run. They act as directions for specific strategy selection. In an organization, strategies are
chosen at 3 different levels:

 Business level strategy. This type of strategy is used when strategic business units
(SBU), divisions or small and medium enterprises select strategies for only one
product that is sold in only one market. The example of business level strategy is well
illustrated by Royal Enfield firms. They sell their Bullet motorcycle (one product) in
United Kingdom and India (different markets) but focus on different market
segments and sell at very different prices (different strategies). Firms may select
between Porter’s 3 generic strategies: cost leadership, differentiation and focus
strategies. Alternatively strategies from Bowman’s strategy clock may be chosen
(Johnson, Scholes, & Whittington, p. 224[6]).
 Corporate level strategy. At this level, executives at top parent companies choose
which products to sell, which market to enter and whether to acquire a competitor
or merge with it. They select between integration, intensive, diversification and
defensive strategies.
 Global/International strategy. The main questions to answer: Which new markets to
develop and how to enter them? How far to diversify? (Thompson and Martin, p.
557[2], Johnson, Scholes, & Whittington, p. 294[6])

Managers may choose between many strategic alternatives. That depends on a company’s
objectives, results of situation analysis and the level for which the strategy is selected.

Strategy Implementation

Components: Annual Objectives, Policies, Resource Allocation, Change Management,

Organizational chart, Linking Performance and Reward
Tools used: Policies, Motivation, Resistance management, Leadership, Stakeholder Impact
Analysis, Changing organizational structure, Performance management

Even the best strategic plans must be implemented and only well executed strategies
create competitive advantage for a company.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

At this stage managerial skills are more important than using analysis. Communication in
strategy implementation is essential as new strategies must get support all over
organization for effective implementation. The example of the strategy implementation that
is used here is taken from David’s book, chapter 7 on implementation [5]. It consists of the
following 6 steps:

 Setting annual objectives;

 Revising policies to meet the objectives;
 Allocating resources to strategically important areas;
 Changing organizational structure to meet new strategy;
 Managing resistance to change;
 Introducing new reward system for performance results if needed.

The first point in strategy implementation is setting annual objectives for the company’s
functional areas. These smaller objectives are specifically designed to achieve financial,
marketing, operations, human resources and other functional goals. To meet these goals
managers revise existing policies and introduce new ones which act as the directions for
successful objectives implementation.

The other very important part of strategy implementation is changing an organizational

chart. For example, a product diversification strategy may require new SBU to be
incorporated into the existing organizational chart. Or market development strategy may
require an additional division to be added to the company. Every new strategy changes the
organizational structure and requires reallocation of resources. It also redistributes
responsibilities and powers between managers. Managers may be moved from one
functional area to another or asked to manage a new team. This creates resistance to
change, which has to be managed in an appropriate way or it could ruin excellent strategy
implementation.

Strategy Monitoring

Components: Internal and External Factors Review, Measuring Company’s Performance

Tools used: Strategy Evaluation Framework, Balanced Scorecard, Benchmarking

Implementation must be monitored to be successful. Due to constantly changing external

and internal conditions managers must continuously review both environments as new
strengths, weaknesses, opportunities and threats may arise. If new circumstances affect the
company, managers must take corrective actions as soon as possible.

Usually, tactics rather than strategies are changed to meet the new conditions, unless firms
are faced with such severe external changes as the 2007 credit crunch.

Measuring performance is another important activity in strategy monitoring. Performance

has to be measurable and comparable. Managers have to compare their actual results with
estimated results and see if they are successful in achieving their objectives. If objectives are
not met managers should:

 Change the reward system.

 Introduce new or revise existing policies.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

The key element in strategy monitoring is to get the relevant and timely information on
changing environment and the company’s performance and if necessary take corrective
actions.

Different models of the process

There is no universal model of the strategic management process. The one, which was
described in this article, is just one more version of so many models that are established by
other authors. In this section we will illustrate and comment on 3 more well-known
frameworks presented by recognized scholars in the strategic management field. More
about these models can be found in the authors’ books.

Figure 1. David’s Model of the Strategic Management’s Process

Source: David (p. 46)

Stages

 Strategy Formulation
 Strategy Implementation
 Strategy Evaluation

Steps

1. Develop vision and mission

2. External environment analysis
3. Internal environment analysis
4. Establish long-term objectives
5. Generate, evaluate and choose strategies
6. Implement strategies
7. Measure and evaluate performance

Benefits

 Indicates all the major steps that have to be met during the process.
 Illustrates that the process is a continuous activity.
 Arrows show the two way process. This means that companies may sometimes go a
step or two back in the process rather than having to complete the process and start
it all over from the beginning. For example, if in the implementation stage the
company finds out that the strategy it chose is not viable, it can simply go back to the
strategy selection point instead of continuing to the monitoring stage and starting
the process from the beginning.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Drawbacks

 Represents only strategy formulation stage and does separate situation analysis
from strategy selection stages.
 Confuses strategy evaluation with strategy monitoring stage.

Figure 2. Rothaermel’s The Analysis-Formulation-Implementation (AFI) Strategy Framework

Stages

 Analysis
 Formulation
 Implementation

Steps

1. Initial analysis
2. External and internal analysis
3. Business or corporate strategy formulation
4. Implementation

Benefits

 Shows that the process is a continuous activity.

 Separates initial analysis (in this articles it’s called initial assessment) from
internal/external analysis.
 Emphasizes the main focus of strategic management: “Gain and sustain competitive
advantage”.

Drawbacks

 Does not include strategy monitoring stage.

 Arrows indicate only one way process. For example, after the strategy formulation
the process continues to the implementation stage while this is not always the truth.
Companies may go back and reassess their environments if some conditions had
changed.

Figure 3. Thompson’s and Martin’s Strategic Management Framework

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Stages

 Where are we?

 Where are we going?
 How are we getting there?
 How are we doing?

Steps

1. Situation appraisal: review of corporate objectives

2. Situation assessment
3. Clarification of objectives
4. Corporate and competitive strategies
5. Strategic decisions
6. Implementation
7. Monitor progress

Benefits

 Indicates all the major steps that have to be met during the process.
 Shows that the process is a continuous activity.
 The model is supplemented by 4 fundamental strategic management questions.

Drawbacks

 Arrows indicate only one way process.

Limitations

It is rare that the company will be able to follow the process from the first to the last step.
Producing a quality strategic plan requires time, during which many external and even
internal conditions may change. These results in the flawed strategic plan which has to be
revised, hence requiring even more time to finish.

On the other hand, when implementing the strategic plan, the actual results do not meet
the requirements of the strategic plan so the plan has to be altered or better methods for
the implementation have to be discovered. This means that some parts of strategic
management process have to be done simultaneously, which makes the whole process
more complex.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Porter Diamond Model

The Porter Diamond, properly referred to as the Porter Diamond Theory of National
Advantage, is a model that is designed to help understand the Competitive Advantage that
nations or groups possess due to certain factors available to them, and to explain how
governments can act as catalysts to improve a country's position in a globally competitive
economic environment. The model was created by Michael Porter, a recognized authority
on corporate strategy and economic competition, and founder of the Institute for Strategy
and Competitiveness at the Harvard Business School. It is a proactive economic theory,
rather than one that simply quantifies competitive advantages that a country or region may
have. The Porter Diamond is also referred to as "Porter's Diamond" or the "Diamond
Model."

KEY TAKEAWAYS

 Porter's Diamond model explains the factors that can drive competitive advantage
for one national market or economy over another.
 It can be used both to describe the sources of a nation's competitive advantage and
the path to obtaining such an advantage.
 The model can also be used by businesses to help guide and shape strategy
regarding how to approach investing and operating in different national markets.
Understanding the Porter Diamond
The Porter Diamond suggests that countries can create new factor advantages for
themselves, such as a strong technology industry, skilled labour, and government support of
a country's economy. Most traditional theories of global economics differ by mentioning
elements, or factors, that a country or region inherently possesses, such as land,
location, natural resources, labour, and population size as the primary determinants in a
country's competitive economic advantage. Another application of the Porter Diamond is in
corporate strategy, to use as a framework to analyze the relative merits of investing and
operating in various national markets.

The Importance of Factor Conditions

The Porter Diamond is visually represented by a diagram that resembles the four points of a
diamond. The four points represent four interrelated determinants that Porter theorizes as
the deciding factors of national comparative economic advantage. These four factors are
firm strategy, structure and rivalry; related supporting industries; demand conditions; and
factor conditions. These can in some ways also be thought of as analogous to the
eponymous forces of Porter's Five Forces model of business strategy.

Firm strategy, structure, and rivalry refer to the basic fact that competition leads to
businesses finding ways to increase production and to the development of technological
innovations. The concentration of market power, degree of competition, and ability of rival
firms to enter a nation's market are influential here. This point is related to the forces of
competitors and barriers to new market entrants in the Five Forces model.

Related supporting industries refer to upstream and downstream industries that facilitate
innovation through exchanging ideas. These can spur innovation depending on the degree

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

of transparency and knowledge transfer. Related supporting industries in the Diamond
model correspond to the suppliers and customers who can represent either threats or
opportunities in the Five Forces model.

Demand conditions refer to the size and nature of the customer base for products, which
also drives innovation and product improvement. Larger, more dynamic consumer markets
will demand and stimulate a need to differentiate and innovate, as well as simply greater
market scale for businesses.

The final determinant, and the most important one according to Porter's theory, is that of
factor conditions. Factor conditions are those elements that Porter believes a
country's economy can create for itself, such as a large pool of skilled labour, technological
innovation, infrastructure, and capital.

For example, Japan has developed a competitive global economic presence beyond the
country's inherent resources, in part by producing a very high number of engineers that
have helped drive technological innovation by Japanese industries.

Porter argues that the elements of factor conditions are more important in determining a
country's competitive advantage than naturally inherited factors such as land and natural
resources. He further suggests that a primary role of government in driving a nation's
economy is to encourage and challenge businesses within the country to focus on the
creation and development of the elements of factor conditions. One way for the
government to accomplish that goal is to stimulate competition between domestic
companies by establishing and enforcing anti-trust laws.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

Balanced Scorecard

KEY TAKEAWAYS

 A balanced scorecard is a performance metric used to identify, improve, and control

a business's various functions and resulting outcomes.
 It was first introduced in 1992 by David Norton and Robert Kaplan, who took
previous metric performance measures and adapted them to include nonfinancial
information.
 The balanced scorecard involves measuring four main aspects of a business: learning
and growth, business processes, customers, and finance.
Understanding Balanced Scorecards
Accounting academic Dr. Robert Kaplan and business executive and theorist Dr. David
Norton first introduced the balanced scorecard. The Harvard Business Review first published
it in the 1992 article "The Balanced Scorecard—Measures That Drive Performance." Both
Kaplan and Norton took previous metric performance measures and adapted them to
include nonfinancial information.

Companies can easily identify factors hindering business performance and outline strategic
changes tracked by future scorecards.

The balanced scorecard model reinforces good behavior in an organization by isolating four
separate areas that need to be analyzed. These four areas, also called legs, involve learning
and growth, business processes, customers, and finance.

The balanced scorecard is used to attain objectives, measurements, initiatives, and goals
that result from these four primary functions of a business. Companies can easily identify
factors hindering business performance and outline strategic changes tracked by future
scorecards.

The balanced scorecard can provide information about the company as a whole when
viewing company objectives. An organization may use the balanced scorecard model to
implement strategy mapping to see where value is added within an organization. A
company also uses a balanced scorecard to develop strategic initiatives and strategic
objectives.

Characteristics of the Balanced Scorecard Model

Information is collected and analyzed from four aspects of a business:

1. Learning and growth are analyzed through the investigation of training and
knowledge resources. This first leg handles how well information is captured and
how effectively employees use the information to convert it to a competitive
advantage over the industry.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities

 2. Business processes are evaluated by investigating how well products are
manufactured. Operational management is analyzed to track any gaps, delays,
bottlenecks, shortages, or waste.
3. Customer perspectives are collected to gauge customer satisfaction with quality,
price, and availability of products or services. Customers provide feedback about
their satisfaction with current products.
4. Financial data, such as sales, expenditures, and income are used to understand
financial performance. These financial metrics may include dollar amounts, financial
ratios, budget variances, or income targets.

These four legs encompass the vision and strategy of an organization and require active
management to analyze the data collected. The balanced scorecard is thus often referred to
as a management tool rather than a measurement tool.

Dr(Prof) M Ambashankar – Corporate Strategies and New Realities