UNIT II

advantage of the firm to the challenges of the environment and

TOPIC - 1

is designed to ensure that basic objectives of the enterprise are

INTRODUCTION TO STRATEGIC MANAGEMENT

MEANING OF STRATEGIC MANAGEMENT

Synopsis

achieved through implementation process"

Strategic management is a set of managerial decisions and

Meaning of strategy
Meaning of Strategic Management
Nature/Characteristics of SM
Benefits of strategic management
Functions of Strategic management
Phases of strategic management Process
Strategic Management process
Levels of strategy
Some Important terms or components of SM

actions that determines the long-run performance of a

corporation. It includes environmental scanning (both external
and internal), strategy formulation (strategic or long-range
planning), strategy implementation, and evaluation and control.
The study of strategic management, therefore, emphasizes the
monitoring and evaluating of external opportunities and threats
in light of a corporations strengths and weaknesses. Originally
called business policy, strategic management incorporates such

MEANING AND DEFINITION OF STRATEGY

The concept of strategy is central to understanding the process
of strategic management. According to Quinn and Rogers,
strategy comes from the Greek word, strategos meaning
generalship and which described the role of general in the
command of the army.
William Glueek defines the term strategy as "the unified,
comprehensive and integrated plan that relates the strategic

topics as strategic planning, environmental scanning, and

industry analysis.
Strategic Management can be defined as the art and science of
formulating, implementing and evaluating cross-functional
decisions that enable an organization to achieve its objective.
NATURE OR CHARACTERISTICS OF STRATEGIC
MANAGEMENT

Strategic Management is related mostly to external

environment.

BENEFITS OF STRATEGIC MANAGEMENT

Strategy formulation activities should enhance the

Strategic Management is being formulated at the higher

problem prevention capabilities of the firm. As a

level of management. At operational level, operational

consequence of encouraging and rewarding subordinate

strategies are also formulated.

attention to planning considerations, managers are

aided

Strategic Management integrates three distinct and

are

strategic

planning,

monitoring

and

forecasting

strategic planning.

strategic

implementation and strategic evaluation and control.

their

responsibilities by workers who are alerted to needs of

closely related activities in strategy making. The

activities

in

Group-based strategic decisions are most likely to

reflect the best available alternatives. Better decisions

Strategic Management is related to long term.

It requires systems and norms for its efficient adoption

First, generating alternative strategies is facilitated by

in any organization.

group interaction; second, screening of options is

It provides overall frame work for guiding enterprise

improved because group members offer forecasts based

thinking and action.

on their specialised perspectives.

It is concerned with a unified direction and efficient

allocation of organization resources.

Strategic Management provides an integrated approach

for the organization and aids in meeting the challenges
posed by environment

are probable outcomes of the process for two reasons.

Employee motivation should improve as employees

better appreciate the productivity-reward relationships
inherent in every strategic plan. When employees or
their

representatives

participate

in

the

strategy

formulation process, a better understanding of the

priorities and operations of the organisations reward

system is achieved, thus adding incentives for goal-

2. It focuses attention upon changes ill the organizational set

directed behaviour.

up, administration of organizational process affecting behavior

Gaps and overlaps in activities among diverse

as

3. It offers a technique to manage changes. The management is

participation in strategy formulation leads to a

totally prepared to anticipate, respond and influence to look at

clarification of role differentiations. The group meeting

changes. It also offers a different way of thinking.

format, which is characteristic of the delineations of

4. It furnishes the management with a perspective whereby, the

individual and subgroup responsibilities.

latter

Resistance to change should be reduced. The required

opportunities.

participation helps eliminate the uncertainty associated

5. It provides the management with a mechanism to cope with

with change, which is at the root of most resistance.

highly complex environment characterized by diversity of

While participants may no more be pleased with their

cultural, social, political and competitive forces.

individuals

and the development of effective leadership.

and

groups

should

be

reduced

own choices, than they would stick to authoritarian

decisions and their acceptance of new plans is more
likely if employees are aware of the parameters that
limit the available options.
FUNCTIONS OF STRATEGIC MANAGEMENT

gives

equal

importance

to

present

and

future

PHASES OF STRATEGIC MANAGEMENT

Phase 1 - Basic financial planning: Managers initiate serious
planning when they are requested to propose the following
years budget. Projects are proposed on the basis of very little
analysis, with most information coming from within the firm.

1. It provides a dual approach to problem solving. Firstly, it

The sales force usually provides the small amount of

exploits the most effective means to overcome difficulties and

environmental

face competition. Secondly, it assists ill the deployment of

planning only pretends to be strategic management, yet it is

scarce resources among critical activities.

quite time consuming. The time horizon is usually one year.

information.

Such

simplistic

operational

Phase 2 - Forecast-based planning: As annual budgets

year plans with help from consultants but minimal input from

become less useful at stimulating long-term planning,

lower levels.

managers attempt to propose five-year plans. At this point they

Phase 4Strategic management: Realizing that even the best

consider projects that may take more than one year. In addition

strategic plans are worthless without the input and commitment

to internal information, managers gather any available

of lower-level managers, top management forms planning

environmental data and extrapolate current trends five years

groups of managers and key employees at many levels, from

into the future. This phase is also time consuming, often

various departments and workgroups. They develop and

involving a full month of managerial activity to make sure all

integrate a series of strategic plans aimed at achieving the

the proposed budgets fit together. The time horizon is usually

companys primary objectives. Strategic plans at this point

three to five years.

detail the implementation, evaluation, and control issues. The

Phase 3 - Externally oriented (strategic) planning:

sophisticated annual five-year strategic plan is replaced with

Frustrated with highly political yet ineffectual five-year plans,

strategic thinking at all levels of the organization throughout

top management takes control of the planning process by

the year. Although top management may still initiate the

initiating strategic planning. The company seeks to increase its

strategic planning process, the resulting strategies may come

responsiveness to changing markets and competition by

from anywhere in the organization. Planning is typically

thinking strategically. Planning is taken out of the hands of

interactive across levels and is no longer top down. People at

lower-level managers and concentrated in a planning staff

all levels are now involved.

whose task is to develop strategic plans for the corporation.

PROCESS OF STRATEGIC MANAGEMENT

Such

top-down

planning

emphasizes

formal

strategy

formulation and leaves the implementation issues to lower

management levels. Top management typically develops five-

Strategic management consists of four basic elements.

1. Environmental scanning
2. Strategy formulation
3. Strategy implementation

4. Evaluation and control

organization itself and are not usually within the short-run

Figure 2. 1 shows simply how these elements interact. Figure

control of top management. These variables form the context in

2.2 expands each of these elements and serves as the model:

which work is done. They include the corporations structure,

1. Environmental scanning is the monitoring, evaluating, and

disseminating of information from the external and internal
environments to key people within the corporation. Its purpose

culture, and resources. Key strengths form a set of core

competencies that the corporation can use to gain competitive
advantage.

is to identify strategic factorsthose external and internal

2. Strategy formulation: is the development of long-range

elements that will determine the future of the corporation. The

plans for the effective management of environmental

simplest way to conduct environmental scanning is through

opportunities and threats, in light of corporate strengths and

SWOT analysis. SWOT is an acronym used to describe the

weaknesses. It includes defining the corporate mission,

particular Strengths, Weaknesses, Opportunities, and Threats

specifying achievable objectives, developing strategies and

that are strategic factors for a specific company. The external

setting policy guidelines.

environment consists of variables (Opportunities and Threats)

Strategy formulation includes developing a vision and mission,

that are outside the organization and not typically within the

identifying an organizations external opportunities and threats,

short-run control of top management. These variables form the

determining internal strengths and weaknesses, establishing

context within which the corporation exists. Figure 2.2 depicts

long-term objectives, generating alternative strategies, and

key environmental variables. They may be general forces and

choosing particular strategies to pursue. Strategy-formulation

trends within the natural or societal environments or specific

issues include deciding what new businesses to enter, what

factors that operate within an organizations specific task

businesses to abandon, how to allocate resources, whether to

environmentoften called its industry.

expand operations or diversify, whether to enter international

The internal environment of a corporation consists of

variables (Strengths and Weaknesses) that are within the

markets, whether to merge or form a joint venture, and how to

avoid a hostile takeover.

Because no organization has unlimited resources, strategists

must decide which alternative strategies will benefit the firm
most. Strategy-formulation decisions commit an organization
to specific products, markets, resources, and technologies over
an extended period of time. Strategies determine long-term
competitive advantages. For better or worse, strategic decisions
have major multifunctional consequences and enduring effects
on an organization. Top managers have the best perspective to
understand fully the ramifications of strategy-formulation
decisions; they have the authority to commit the resources
necessary for implementation.
3. Strategy Implementation: is the process by which
strategies and polices are put into action through the
development of programs, budgets and procedures. This
process might involve changes within the overall culture,
structure, and/or management system of the entire organization.
Most of the times strategy implementation is carried out by
middle and lower level managers with top managements
review. Sometimes referred to as operational planning, strategy
implementation often involves day-to-day decisions in resource
allocation. It includes programs, budgets and procedures.

Strategy implementation often is called the action stage of

strategic

management.

Implementing

strategy

means

mobilizing employees and managers to put formulated

strategies into action. Often considered to be the most difficult

clear, prompt, and unbiased information from the people below

stage in strategic management, strategy implementation

them in the corporations hierarchy. Using this information,

requires personal discipline, commitment, and sacrifice.

managers compare what is actually happening with what was

Successful strategy implementation hinges upon managers

originally planned in the formulation stage.

ability to motivate employees, which is more an art than a

LEVELS OF STRATEGY

science. Strategies formulated but not implemented serve no

useful purpose.
4. Evaluation and control is the process in which corporate
activities and performance results are monitored so that actual
performance can be compared with desired performance.

1. Corporate Strategy
This describes a companys overall direction towards growth
by managing business and product lines. These include
stability, growth and retrenchment.

Managers at all levels use the resulting information to take

For example, Coco cola, Inc., has followed the growth strategy

corrective action and resolve problems. Although evaluation

by acquisition. It has acquired local bottling units to emerge as

and control is the final major element of strategic management,

the market leader.

it also can pinpoint weaknesses in previously implemented

2. Business Strategy

strategic plans and thus stimulate the entire process to begin

again.

Usually occurs at business unit or product level emphasizing

the improvement of competitive position of a firms products

Performance is the end result of activities. It includes the

or services in an industry or market segment served by that

actual outcomes of the strategic management process. The

business unit. Business strategy falls in the in the realm of

practice of strategic management is justified in terms of its

corporate strategy.

ability to improve an organizations performance, typically

measured in terms of profits and return on investment. For
evaluation and control to be effective, managers must obtain

For example, Apple Computers uses a differentiation

These are concerned with how the component parts of an

competitive strategy that emphasizes innovative product with

organization deliver effectively the corporate, business and

creative design.

functional level strategies in terms of resources, processes and

people. They are at departmental level and set periodic shortterm targets for accomplishment.
SOME IMPORTANT TERMS OR COMPONENTS OF
STRATEGIC MANAGEMENT
1. MISSION
An organizations mission is the purpose or reason for the
organizations existence. It tells what the company is providing
to societyeither a service such as housecleaning or a product
such as automobiles. A well-conceived mission statement
defines the fundamental, unique purpose that sets a company

3. Functional Strategy
It is the approach taken by a functional area to achieve
corporate and business unit objectives and strategies by
maximizing resource productivity. It is concerned with
developing and nurturing a distinctive competence to provide
the firm with a competitive advantage.
4. Operating Strategy

apart from other firms of its type and identifies the scope or
domain of the companys operations in terms of products
(including services) offered and markets served. A mission
statement may also include the firms values and philosophy
about how it does business and treats its employees. It puts into
words not only what the company is now but what it wants to
becomemanagements strategic vision of the firms future.
The mission statement promotes a sense of shared expectations
in employees and communicates a public image to important

stakeholder groups in the companys task environment. In

Philosophy: What are the basic beliefs, values,

aspirations, and ethical priorities of the firm?

Self-concept: What is the firms distinctive competence

or major competitive advantage?

Concern for public image: Is the firm responsive to

social, community, and environmental concerns?

Concern for employees: Are employees a valuable

short, the mission describes the products, market and

technological areas of emphasis for the business in a way that
reflects the priorities of the strategic decision maker.
"A computer on every desk and in every home" Microsoft
(old)
Our mission is to empower every person and every

asset of the firm?

organization on the planet to achieve more," - Microsoft

2. VISION

To enhance the wealth generating capability of the enterprise

Some people like to consider vision and mission as two

in a globalising environment, delivering superior and

different concepts: Mission describes what the organization is

sustainable stakeholder value ITC

now; vision describes what the organization would like to

Components and corresponding questions that a mission

become. We prefer to combine these ideas into a single mission

statement should answer are given here.

statement. Some companies prefer to list their values and

philosophy of doing business in a separate publication called a

Customer: Who are the firms customers?

Products or services: What are the firms major

products or services?
Markets: Geographically, where does

the firm

accessible to everyone and that adapts to each person's needs.

compete?
Technology: Is the firm technologically current?
Concern for survival, growth, and profitability: Is

Accessible technology eliminates barriers for people with

Values statement.
"Our vision is to create innovative technology that is

the firm committed to growth and financial soundness?

disabilities and it enables individuals to take full advantage of

their capabilities.
Corporation.

- Bill Gates, Chairman, Microsoft

Sustain ITC's position as one of India's most valuable

polices should provide the key yardsticks or measurements for

corporations through world class performance, creating

the expected benefits the strategy intends to produce or yield,

growing value for the Indian economy and the Company's

so that the success or the failure of the policies can be readily

stakeholders - ITC

evaluated. Polices are therefore, rules that express the limits

3. STRATEGIES

within which action should occur. Policies also exist in

A strategy of a corporation forms a comprehensive master plan

that states how the corporation will achieve its mission and

hierarchy throughout an organisation just the way we have the

strategic goals.

objectives. It maximizes competitive advantage and minimizes

5. OBJECTIVES

competitive disadvantage.

The organisations objectives establish the intended nature of

4. POLICIES

the enterprise and the direction in which the organisation wants

Policies are guides to actions. Polices usually indicate how

resources are to be allocated. They equally indicate how tasks
assigned to the organisation can be accomplished. They enable
each manager at the functional level such as marketing,
accounting or finance, production and personnel execute the
organisations strategy properly. Strategy exists as a collective
umbrella for the policy component. Policy should give a broad
assessment of the organisations structure, business system and

to move. Objectives are those ends or results which the

organisation set out to achieve through not only its existence
but also its operations. A number of different objectives are
pursued by business organisations. Some examples include
survival, growth, continuity of profit, production at least cost,
good quality products or services, quick delivery, meeting
target dates, customer and employee satisfaction to mention
just a few.

the resources available to the selected strategies. Organisations

Every organisation has more than one objective at any given

policies provide a framework for the implementation of any

time. There are at least three major reasons why an

major changes needed to be made in that organisation. The

organisation establishes objectives and why these objectives

are important in strategic management. The reasons are as

productivity, physical and financial resources, risk, public

follows:

responsibility, manager performances and development.

Objectives help to define the organisation in the

UNIT II

environment because they enable the organisation to

TOPIC 2

justify its existence and help to attract people who

identify

with

the

objectives

to

work

for

the

organisation.
Objectives help to co-ordinate decision and decision
makers. This is because objectives help to direct
employees to the required standards of behaviour and
reduce conflicts in decision making since all employees

know the objectives of the organisation.

Objectives also help to provide standards for assessing
organisational performance. Without stated objectives it
would be difficult for an organisation to evaluate itself
or for anybody to evaluate the success or failure of the
organisation. Therefore, an organisations objectives are
very crucial to strategic management.

CORPORATE GOVERNANCE
INTRODUCTION
A corporation is a mechanism established to allow different
parties to contribute capital, expertise, and labor for their
mutual benefit. The investor/shareholder participates in the
profits of the enterprise without taking responsibility for the
operations. Management runs the company without being
responsible for personally providing the funds. To make this
possible, laws have been passed that give shareholders limited
liability and, correspondingly, limited involvement in a
corporations activities.
MEANING OF CORPORATE GOVERNANCE

Objective therefore, indicates managements intentions towards

The board of directors has an obligation to approve all

pursing and accomplishing its mission. Usually, objectives and

decisions that might affect the long-run performance of the

goals address all the areas of the operation of the company

corporation. This means that the corporation is fundamentally

including profitability, sales growth, market share, innovation,

governed by the

b) Retired executive directors, who used to work for the

Board of directors
Top management and
Shareholders

company, such as the past CEO who is partly responsible for

much of the corporations current strategy and who probably

The term corporate governance refers to the relationship among

these three groups in determining the direction and
performance of the corporation.

groomed the current CEO as his or her replacement.

c) Family directors, who are descendants of the founder and
own significant blocks of stock (with personal agendas based

1. BOARD OF DIRECTORS

on a family relationship with the current CEO).

The board of directors is the representatives of the investors or

Responsibilities of the board of Directors

shareholders who have authority and responsibilities to

establish corporate policies to achieve the company objectives.
The boards of most publicly owned corporations are
composed of both inside and outside directors. Inside
directors (sometimes called management directors) are
typically officers or executives employed by the corporation.
Outside

directors

(sometimes

called

non-management

directors) may be executives of other firms but are not

employees of the boards corporation. The outside directors
may be as follows:
a) Affiliated directors, who, though not really employed by
the corporation, handle the legal or insurance work for the
company.

Laws and standards defining the responsibilities of boards of

directors vary from country to country. The following five
board of director responsibilities, listed in order of
importance:

Setting corporate strategy, overall direction, mission, or

vision
Hiring and firing the CEO and top management
Controlling,
monitoring,
or
supervising

management
Reviewing and approving the use of resources
Caring for shareholder interests

top

Role of the Board of directors in Strategic Management

The role of the board of directors in strategic management is to
carry out three basic tasks:

a) Monitor: By acting through its committees, a board can

Responsibilities

keep abreast of developments inside and outside the

Management

corporation, bringing to managements attention developments

The CEO, with the support of the rest of the top management

it might have overlooked. A board should at the minimum carry

team, must successfully handle two primary responsibilities

out this task.

that are crucial to the effective strategic management of the

b)

Evaluate

and

influence:

A board

can

examine

of

Top

Management

in

Strategic

corporation such as:

managements proposals, decisions, and actions; agree or

(i) Provide executive leadership and a strategic vision:

disagree with them; give advice and offer suggestions; and

Executive leadership is the directing of activities toward the

outline alternatives. More active boards perform this task in

accomplishment of corporate objectives. Executive leadership

addition to monitoring.

is important because it sets the tone for the entire corporation.

c) Initiate and determine: A board can delineate a

A strategic vision is a description of what the company is

corporations mission and specify strategic options to its

capable of becoming. It is often communicated in the

management. Only the most active boards take on this task in

companys mission and vision statements.

addition to the two previous ones.

(ii) Managing the Strategic Planning Process: As business

2. TOP MANAGEMENT

corporations adopt more of the characteristics of the learning

Top-level managers include boards of directors, presidents,

organization, strategic planning initiatives can come from any

vice-presidents, CEOs, COOs, president, executive vice

part of an organization.

president, and vice presidents of divisions and functional areas.

supports the planning process, strategic management is not

Top-level managers are responsible for controlling and

overseeing the entire organization.

Top management encourages and

likely to result. In most corporations, top management must

initiate and manage the strategic planning process. Other
organizations engage in concurrent strategic planning in which
all the organizations units draft plans for themselves after they

have been provided with the organizations overall mission and

Milton Friedman and Archie Carroll offer two contrasting

objectives.

views of the responsibilities of business firms to society.

I. Friedmans Traditional View of Business Responsibility
UNIT II

Milton Friedman argues against the concept of social

TOPIC 3

responsibility. A business person who acts responsibly by

SOCIAL RESPONSIBILITIES OF BUSINESS

INTRODUCTION
The concept of social responsibility proposes that a private

cutting the price of the firms product to prevent

inflation,
by making expenditures to reduce pollution,
by hiring the hard-core unemployed,

corporation has responsibilities to society that extend beyond

Friedman referred to the social responsibility of business as a

making a profit. Strategic decisions often affect more than just

fundamentally subversive doctrine and stated that: There is

the corporation. A decision to retrench by closing some plants

one and only one social responsibility of businessto use its

and discontinuing product lines, for example, affects not only

resources and engage in activities designed to increase its

the firms workforce but also the communities where the plants

profits so long as it stays within the rules of the game, which is

are located and the customers with no other source for the

to say, engages in open and free competition without deception

discontinued product. Such situations raise questions of the

or fraud.

appropriateness of certain missions, objectives, and strategies

II. Carrolls Four Responsibilities of Business

of business corporations. Managers must be able to deal with

these conflicting interests in an ethical manner to formulate a
viable strategic plan.

Friedmans contention that the primary goal of business is

profit maximization is only one side of an ongoing debate
regarding corporate social responsibility (CSR). According to

RESPONSIBILITIES OF A BUSINESS FIRM

William J. Byron, Distinguished Professor of Ethics at

Georgetown

University and

past-President

of Catholic

4. Discretionary responsibilities are the purely voluntary

University of America, profits are merely a means to an end,

obligations a corporation assumes. Examples are philanthropic

not an end in itself. Just as a person needs food to survive and

contributions,

grow, so does a business corporation need profits to survive

providing day-care centers. The difference between ethical and

and grow. Maximizing profits is like maximizing food. Thus,

discretionary responsibilities is that few people expect an

contends Byron, maximization of profits cannot be the primary

organization to fulfill discretionary responsibilities, whereas

obligation of business. Archie Carroll proposes that the

many expect an organization to fulfill ethical ones.

training

managers of business organizations have four responsibilities:

the

hard-core

unemployed,

and

UNIT - II

economic, legal, ethical, and discretionary.

TOPIC 4

1. Economic responsibilities of a business organizations

ENVIRONMENTAL SCANNING

management are to produce goods and services of value to

society so that the firm may repay its creditors and

INTRODUCTION

shareholders.

Before an organization can begin strategy formulation, it must

2. Legal responsibilities are defined by governments in laws

scan the external environment to identify possible opportunities

that management is expected to obey.

and threats and its internal environment for strengths and

3. Ethical responsibilities of an organizations management are

weaknesses.

to follow the generally held beliefs about behavior in a society.

Environmental scanning is the monitoring, evaluation, and

For example, society generally expects firms to work with the

dissemination of information from the external and internal

employees and the community in planning for layoffs, even

environments to key people within the corporation. A

though no law may require this.

corporation uses this tool to avoid strategic surprise and to

ensure its long-term health. There are two components of
Environment such as:

I. External Environment

The natural environment includes physical resources, wildlife,

II. Internal Environment

and climate that are an inherent part of existence on Earth.

I. EXTERNAL ENVIRONMENT

The concept of sustainability argues that a firms ability to

continuously renew itself for long-term success and survival is

External environment includes all those factors and forces

dependent not only upon the greater economic and social

which are external to the business organization. External

system of which it is a part, but also upon the natural

environmental scanning is used to identify and gather

ecosystem in which the firm is embedded.

information about the opportunities and threats available in the

in the environment.

A business corporation must thus scan the natural

environment for factors that might previously have

The external environment includes many variables and these

been taken for granted, such as the availability of fresh

are grouped under three environments Such as

water and clean air.

Management must therefore scan not only the natural

1. Natural environment
2. Societal environment
3. Task environment

environment for possible strategic factors, but also

include in its strategic decision-making processes the

1. SCANNING THE NATURAL ENVIRONMENT

Geographical and ecological factors, such as natural resources
endowments, weather and climatic conditions, topographical
factors, location aspects in the global context, port facilities
etc., are all relevant to business. Differences in geographical
conditions between markets may sometimes call for changes in
the marketing mix. Geographical and ecological factors also
influence the location of certain industries.

impact of its activities upon the natural environment.

In a world concerned with global warming, a company
should measure and reduce its carbon footprint the
amount of greenhouse gases it is emitting into the air.
Research reveals that scanning the market for
environmental issues is positively related to firm
performance because it helps management identify
opportunities to fulfill future market demand based
upon environmentally friendly products or processes.

2.

SCANNING

THE

SOCIETAL

ENVIRONMENT:

environmental forces. (It may also be called PESTEL Analysis

STEEP ANALYSIS

for

Political,

Societal environment is mankinds social system that includes

Ecological, and Legal forces.)

general forces that do not directly touch on the short-run

i) Economic Forces or factors

activities of the organization that can, and often do, influence

Economic,

Sociocultural,

The economic factors such as

Technological,

GDP trends, Interest

its long-run decisions. These factors affect multiple industries

rates, Money supply, Inflation rates, Unemployment levels,

and are as follows:

Wage/price

controls,

Devaluation/revaluation,

Energy

Economic forces that regulate the exchange of

alternatives, Energy availability and cost, Disposable and

discretionary income, Currency markets and Global financial

materials, money, energy, and information.

Technological forces that generate problem-solving

inventions.
Politicallegal forces that allocate power and provide

making. Trends in the economic part of the societal

constraining and protecting laws and regulations.

Sociocultural forces that regulate the values, morals,

For example:-

and customs of society.

STEEP ANALYSIS:
Large corporations categorize the societal environment in any
one geographic region into four areas and focus their scanning
in each area on trends that have corporatewide relevance. By
including trends from the natural environment, this scanning
can be called STEEP Analysis, the scanning of Sociocultural,
Technological, Economic, Ecological, and Political-legal

system have greater impact in the firms strategic decision

environment can have an obvious impact on business activity.

An increase in interest rates means fewer sales of major

home appliances. Why? A rising interest rate tends to be
reflected in higher mortgage rates. Because higher
mortgage rates increase the cost of buying a house, the
demand for new and used houses tends to fall. Because
most major home appliances are sold when people
change houses, a reduction in house sales soon
translates into a decline in sales of refrigerators, stoves,

and dishwashers and reduced profits for everyone in the

appliance industry.
The rapid economic development of Brazil, Russia,

microprocessors have not only led to the widespread

use of personal computers but also to better automobile

India, and China (often called the BRIC countries) is

engine performance in terms of power and fuel

having a major impact on the rest of the world. By

economy through the use of microprocessors to monitor

2007, China had become the worlds second-largest

economy according to the World Bank. With India

Computer hacking activity Improvements in computer

fuel injection.
Digital technology allows movies and music to be

graduating more English-speaking scientists, engineers,

available instantly over the Internet or through cable

and technicians than all other nations combined, it has

service, but it also means falling fortunes for video

become the primary location for the outsourcing of

rental shops such as the Movie Gallery and CD stores

services, computer software, and telecommunications.

such as Tower Records.

Developing
biotechnology,

ii) Technological forces or factors

gene

manipulation techniques, is already providing new

Technology is knowledge to create new things. Mangers need

technology to design, produce, distribute and sell goods and

including

approaches to dealing with disease and agriculture.

Combining the computing power of the personal

services. Impact of technology is mixed. Positive benefits are

computer, the networking of the Internet used to make

seen in new products, new machines, new tools, new materials

phone calls, send e-mail, and transmit documents and

and services. Benefits include greater productivity, higher

other data.
The computerized management of crops to suit

living standards, more leisure time and greater variety of

products. Changes in the technological part of the societal

variations in land characteristics will make farming

environment can also have a great impact on multiple

more efficient and sustainable.

A convergence of biotechnology and agriculture is

industries. For Example:-

creating a new field of life sciences. Plant and animals

(including people) could be similarly modified for

desirable characteristics and to eliminate genetic

disabilities and diseases.

Robot development has been limited by a lack of

High levels of taxation and constraining labor laws in

Western European countries stimulate companies to
alter their competitive strategies or find better locations

sensory devices and sophisticated artificial intelligence

elsewhere.

systems. Improvements in these areas mean that robots

It is because Germany has some of the

highest labor and tax costs in Europe that German

will be created to perform more sophisticated factory

companies have been forced to compete at the top end

work, run errands, do household chores, and assist the

of the market with high-quality products or else move

disabled.

their manufacturing to lower-cost countries.

Make in India due to BJP Government.

Likewise, Legal environment It consists of judiciary and

iii) Political Legal forces or factors

legislation. These include antitrust regulations, environmental

protection laws, tax laws, special incentives, foreign trade

Trends in the politicallegal part of the societal environment

regulations, and attitudes towards foreign companies, laws on

have a significant impact not only on the level of competition

hiring and promoting, stability of government. There are

within an industry but also on which strategies might be

several legislation like the Company act 1956, the Payment of

successful. For example:-

wages Act, 1936 and Factories Act 1948.

In U.S., the laws directly affect corporate growth

strategy. As large companies find it more difficult to
acquire another firm in the same or a related industry,
they are typically driven to diversify into unrelated
industries.

iv) Socio -Cultural Environment

The socio cultural environment is one of the key elements of
macro environment. Demographics like literacy rates, sex
ratios, child birth rates, age distribution, educational levels life
style, geographic distribution, mobility of the pollution cultural
variables like beliefs, values, faiths, religion, customs and

traditions, environment folkways, etc., are part of the social

These

changes in society may be slow or fast but change is inevitable

competitors, customers, creditors, employees/labor unions,

in any business environment. Examples in the Indian business

special-interest groups, and trade associations.

environment include

A corporations task environment is typically the industry

Growing fast food culture

Women moving from kitchens to corporate
Burgeoning middle class
Increasing literacy levels
Declining birth rates and increasing senior citizens
Increasing health consciousness

are

governments,

local

communities,

suppliers,

within which the firm operates. Industry analysis refers to an

in-depth examination of key factors within a corporations task
environment. An examination of the important stakeholder
groups, such as suppliers and customers, in a particular
corporations task environment is a part of industry analysis.

Socio-cultural factors affect buying preferences, usage patterns

There are various approaches used to analyze the task

and life style adaptations. Firms, which ignore the socio

environment such as:

cultural environments, tend to loose. For Example:

McDonalds, the worlds fastest growing fast food

chains extended Indian market with beef and pork as
ingredients in its pizzas and burgers but failed to attract

customers.
Kelloggs entered India as a breakfast meal but not
sustain

3. SCANNING THE TASK ENVIRONMENT

The task environment includes those elements or groups that
directly affect a corporation and, in turn, are affected by it.

1. Michael E. Porter approach to industry analyze

2. Industry Matrix analysis and
3. Strategic group and Competitor analyses
1. Porters approach to industry analysis
Porter five forces analysis is a framework to analyze the level
of competition within an industry and business strategy
development. In carefully scanning its industry, a corporation
must assess the importance to its success of each of five forces
such as:

Threat of new entrants,

Rivalry among existing firms,

Threat of substitute products or services,

Bargaining power of buyers and
Bargaining power of suppliers,

a) Economies of scale: Scale economies in the production

gave a significant cost advantage over any new rival.
b) Product differentiation: Organisations must create high
entry

barriers

through

their

high

levels

of

product

differentiation, advertising and promotion.

c) Capital requirements: The need to invest huge financial
resources in manufacturing facilities creates a significant
barrier to entry to any competitor. Example: Boeing and
Airbus.
d) Switching costs: Customers are reluctant to change for new
products. Example: Excel or Word becomes established in an
office, office managers are very reluctant to switch to a new
i) Threat of New Entrants

program because of the high training costs.

New entrants to an industry typically bring to it new capacity, a

e) Access to distribution channels: Many retailer give priority

desire to gain market share, and substantial resources. They

to the established firms who can pay for the advertising needed

are, therefore, threats to an established corporation. The threat

to generate high customer demand.

of entry depends on the presence of entry barriers and the

f) Government policy: Governments can limit entry into an

reaction that can be expected from existing competitors. An

industry through licensing requirements by restricting access to

entry barrier is an obstruction that makes it difficult for a

raw materials, such as oil-drilling sites in protected areas.

company to enter an industry. Some of the possible barriers to

entry are:

ii) Rivalry among Existing Firms

In most industries, corporations are mutually dependent. A

passengers for any one flight, they offer cheap standby fares

competitive move by one firm can be expected to have a

whenever a plane has empty seats.

noticeable effect on its competitors and thus may cause

e) Capacity: If the only way a manufacturer can increase

retaliation. According to Porter, intense rivalry is related to the

capacity is in a large increment by building a new plant (as in

presence of several factors, including:

the paper industry), it will run that new plant at full capacity to

a) Number of competitors: When competitors are few and

keep its unit costs as low as possiblethus producing so much

roughly equal in size, such as in the auto and major home

that the selling price falls throughout the industry.

appliance industries, they watch each other carefully to make

g) Diversity of rivals: Rivals that have very different ideas of

sure that they match any move by another firm with an equal

how to compete are likely to cross paths often and

countermove.

unknowingly challenge each others position. This happens

b) Rate of industry growth: Any slowing in passenger traffic

often in the retail clothing industry when a number of retailers

tends to set off price wars in the airline industry because the

open outlets in the same locationthus taking sales away from

only path to growth is to take sales away from a competitor.

each other.

c) Product or service characteristics: A product can be very

iii) Threat of Substitute Products or Services

unique, with many qualities differentiating it from others of its

A substitute product is a product that appears to be different

kind or it may be a commodity, a product whose characteristics

but can satisfy the same need as another product. For example,

are the same, regardless of who sells it. For example, most

e-mail is a substitute for the fax; Nutrasweet is a substitute for

people choose a gas station based on location and pricing

sugar. To the extent that switching costs are low, substitutes

because they view gasoline as a commodity.

may have a strong effect on an industry. Tea can be considered

d) Amount of fixed costs: Because airlines must fly their

a substitute for coffee. If the price of coffee goes up high

planes on a schedule, regardless of the number of paying

enough, coffee drinkers will slowly begin switching to tea. The

A buyer earns low profits and is thus very sensitive to

price of tea thus puts a price ceiling on the price of coffee.

costs and service differences (for example, grocery

iv) Bargaining Power of Buyers

stores have very small margins).

The purchased product is unimportant to the final

Buyers affect an industry through their ability to force down

quality or price of a buyers products or services and

prices, bargain for higher quality or more services, and play

thus can be easily substituted without affecting the final

competitors against each other. A buyer or a group of buyers is

product adversely.

powerful if some of the following factors:

A buyer purchases a large proportion of the sellers

product or service
A buyer has the potential to integrate backward by

v) Bargaining Power of Suppliers

Suppliers can affect an industry through their ability to raise
prices or reduce the quality of purchased goods and services. A

producing the product itself (for example, a newspaper

supplier or supplier group is powerful if some of the following

factors apply:

chain could make its own paper).

Alternative suppliers are plentiful because the product

is standard or undifferentiated.
Changing suppliers costs very little (for example, office

supplies are easy to find).

The purchased product represents a high percentage of

but it sells too many (for example, the petroleum

purchased for resale by convenience stores makes up

half their total costs).

industry).
Its product or service is unique and/or it has built up
switching

a buyers costs, thus providing an incentive to shop

around for a lower price (for example, gasoline

The supplier industry is dominated by a few companies,

costs

(for

example,

word

processing

software).
Substitutes are not readily available (for example,
electricity).

Suppliers are able to integrate forward and compete

typically vary from industry to industry and are crucial to

directly with their present customers (for example, a

determining a companys ability to succeed within that

microprocessor producer such as Intel can make PCs).

A purchasing industry buys only a small portion of the

industry. They are usually determined by the economic and

supplier groups goods and services and is thus

competitive weapons on which the firms in the industry have

unimportant to the supplier (for example, sales of lawn

built their strategies.

mower tires are less important to the tire industry than

are sales of auto tires).

technological characteristics of the industry and by the

An industry matrix summarizes the key success factors within

a particular industry. The matrix gives a weight for each factor

2. Industry Matrix analyses

based on how important that factor is for success within the

The Industry may be a:

industry. The matrix also specifies how well various

Fragmented industrywhere no firm has large

market share, and each firm serves only a small piece of
the total market in competition with others (for

example, cleaning services).

Consolidated industrydominated by a few large
firms, each of which struggles to differentiate its
products from those of the competition.

Within any industry there are usually certain variableskey

success

factorsthat

companys

management

must

competitors in the industry are responding to each factor. To

generate an industry matrix using two industry competitors
(called A and B), complete the following steps for the industry
being analyzed:
a) In Column 1 (Key Success Factors), list the 8 to 10
factors that appear to determine success in the industry.
b) In Column 2 (Weight), assign a weight to each factor,
from 1.0 (Most Important) to 0.0 (Not Important) based
on that factors probable impact on the overall

understand in order to be successful. Key success factors are

industrys current and future success.

c) In Column 3 (Company A Rating), examine a particular

variables that can significantly affect the overall competitive

company within the industryfor example, Company

positions of companies within any particular industry. They

A. Assign a rating to each factor from 5 (Outstanding)

to 1 (Poor) based on Company As current response to

The industry matrix can be expanded to include all the major

that particular factor.

d) In Column 4 (Company A Weighted Score), multiply

competitors within an industry through the addition of two

the weight in Column 2 for each factor by its rating in

Column 3 to obtain that factors weighted score for

additional columns for each additional competitor.

3. Strategic Group and Competitor analyses

Company A.
e) In Column 5 (Company B Rating), examine a second

In analyzing the level of competitive intensity within a

company within the industry in this case, Company B.

the various competitors for predictive purposes. A strategic

Assign a rating to each key success factor from 5.0

type is a category of firms based on a common strategic

(Outstanding) to 1.0 (Poor), based on Company Bs

orientation and a combination of structure, culture, and

current response to each particular factor.

f) In Column 6 (Company B Weighted Score), multiply

processes consistent with that strategy. According to Miles and

the weight in Column 2 for each factor times its rating

in Column 5 to obtain that factors weighted score for
Company B.
g) Finally, add the weighted scores for all the factors in

particular industry or strategic group, it is useful to characterize

Snow, competing firms within a single industry can be

categorized into one of four basic types on the basis of their
general strategic orientation. These general types have the
following characteristics:

Columns 4 and 6 to determine the total weighted scores

a) Defenders are companies with a limited product line that

for companies A and B. The total weighted score

focus on improving the efficiency of their existing operations.

indicates how well each company is responding to

This cost orientation makes them unlikely to innovate in new

current and expected key success factors in the

areas.

industrys environment. (An average company should

have a total weighted score of 3.)

b) Prospectors are companies with fairly broad product lines

that focus on product innovation and market opportunities.

This sales orientation makes them somewhat inefficient. They

The primary activity of a competitive intelligence unit is to

tend to emphasize creativity over efficiency.

monitor competitorsorganizations that offer same, similar,

c) Analyzers are corporations that operate in at least two

or substitutable products or services in the business area in

different product-market areas, one stable and one variable. In

which a particular company operates.

the stable areas, efficiency is emphasized. In the variable areas,

innovation is emphasized. Multidivisional firms, such as
Procter & Gamble, which operate in multiple industries, tend to
be analyzers.
d) Reactors are corporations that lack a consistent strategystructure-culture

relationship.

Their

(often

ineffective)

responses to environmental pressures tend to be piecemeal

strategic changes.

II. INTERNAL ENVIRONMNET: ORGANISATIONAL

ANALYSIS
Internal analysis is the process of reviewing organizational
resources (resource audit), scanning organizational activities
and linking them with creation of value to the organization
(value chain analysis) and identifying the unique strengths and
capabilities (core competences). This internal scanning, often

Dividing the competition into these four categories enables the

referred to as organizational analysis, is concerned with

strategic manager not only to monitor the effectiveness of

identifying and developing an organizations resources and

certain strategic orientations, but also to develop scenarios of

competencies. Internal analysis

future industry developments.

components analysis:

Competitive intelligence is a formal program of gathering

information on a companys competitors. Often called business
intelligence, it is one of the fastest growing fields within
strategic management.

involves the following

1. Resource, capabilities and competencies analysis

2. Business model analysis
3. Value Chain Analysis
1. RESOURCE, CAPABILITIES AND COMPETENCIES
ANALYSIS

Resources are an organizations assets and are thus the basic

a) Core competency is a collection of competencies that

building blocks of the organization. They include tangible

crosses divisional boundaries, is widespread within the

assets, such as its plant, equipment, finances, and location,

corporation, and is something that the corporation can

human assets, in terms of the number of employees, their skills,

do exceedingly well. Thus, new product development is

and motivation, and intangible assets, such as its technology

a core competency if it goes beyond one division.

b) Distinctive competencies: When core competencies are

(patents and copyrights), culture, and reputation.

Capabilities refer to a corporations ability to exploit its
resources. They consist of business processes and routines that

superior to those of the competition, they are called

distinctive competencies.

manage the interaction among resources to turn inputs into

Barney, in his VRIO framework of analysis, proposes four

outputs. For example, a companys marketing capability can be

questions to evaluate a firms competencies:

based on the interaction among its marketing specialists,

1. Value: Does it provide customer value and competitive

distribution channels, and sales people. Thus, there are

advantage?

marketing capabilities, manufacturing capabilities, and human

2. Rareness: Do no other competitors possess it?

resource management capabilities.

3. Imitability: Is it costly for others to imitate?

and

4. Organization: Is the firm organized to exploit the resource?.

coordination of capabilities. For example, a competency in new

If the answer to each of these questions is yes for a particular

product development in one division of a corporation may be

competency, it is considered to be a strength and thus a

the consequence of integrating management of information

distinctive competence. This should give the company a

systems (MIS) capabilities, marketing capabilities, R&D

competitive advantage and lead to higher performance.

capabilities, and production capabilities within the division.

Just because a firm is able to use its resources, capabilities, and

Competency may be:

competencies to develop a competitive advantage does not

competency

is

cross-functional

integration

mean it will be able to sustain it. Two characteristics determine

the sustainability of a firms distinctive competency (ies):

A value chain is a linked set of value-creating activities that

durability and imitability.

begin with basic raw materials coming from suppliers, moving

a) Durability is the rate at which a firms underlying

on to a series of value-added activities involved in producing

resources, capabilities, or core competencies depreciate

and marketing a product or service, and ending with

or become obsolete. New technology can make a

distributors getting the final goods into the hands of the

companys core competency obsolete or irrelevant.

b) Imitability is the rate at which a firms underlying

ultimate consumer. The systematic examination of individual

resources, capabilities, or core competencies can be

duplicated by others.
A core competency can be easily imitated to the extent that it is
transparent, transferable, and replicable.
a) Transparency is the speed with which other firms can
understand the relationship of resources and capabilities
supporting a successful firms strategy.
b) Transferability is the ability of competitors to gather
the resources and capabilities necessary to support a
competitive challenge.
c) Replicability is the ability of competitors to use

value activities can lead to a better understanding of a

corporations strengths and weaknesses. The value chains of
most industries can be split into two segments such as upstream
and downstream segments.
In the petroleum industry, for example, upstream refers to oil
exploration, drilling, and moving of the crude oil to the
refinery, and downstream refers to refining the oil plus
transporting and marketing gasoline and refined oil to
distributors and gas station retailers.
The simplest way to begin an analysis of a corporations value
chain is by carefully examining its traditional functional areas

duplicated resources and capabilities to imitate the

for potential strengths and weaknesses. Functional resources

other firms success.

and capabilities include not only the financial, physical, and

human assets in each area but also the ability of the people in

2. VALUE CHAIN ANALYSIS

each area to formulate and implement the necessary functional

objectives, strategies, and policies. These resources and

capabilities include the knowledge of analytical concepts and

procedural techniques common to each area as well as the
ability of the people in each area to use them effectively. If
used properly, these resources and capabilities serve as
strengths to carry out value-added activities and support
strategic decisions. In addition to the usual business functions
of marketing, finance, R&D, operations, human resources, and
information systems/technology, we also discuss structure and
culture as key parts of a business corporations value chain.

Corporate value chain analysis involves the following three

steps:
1. Examine each product lines value chain in terms of the
various activities involved in producing that product or
service: Which activities can be considered strengths (core
competencies) or weaknesses (core deficiencies)? Do any of
the strengths provide competitive advantage and can they thus
be labeled distinctive competencies?

Porter proposes that corporate value chain activities consist of:a) Primary activities: usually begin with inbound
logistics (raw materials handling and warehousing), go
through an operations process in which a product is
manufactured, and continue on to outbound logistics
(warehousing and distribution), to marketing and sales,
and finally to service (installation, repair, and sale of
parts).
b) Support activities:- such as procurement (purchasing),

2. Examine the linkages within each product lines value

chain: Linkages are the connections between the way one
value activity (for example, marketing) is performed and the
cost of performance of another activity (for example, quality
control). In seeking ways for a corporation to gain competitive
advantage in the marketplace, the same function can be
performed in different ways with different results.
3. Examine the potential synergies among the value chains
of different product lines or business units: Each value

technology development (R&D), human resource

element, such as advertising or manufacturing, has an inherent

management, and firm infrastructure (accounting,

economy of scale in which activities are conducted at their

finance, strategic planning), ensure that the primary

lowest possible cost per unit of output. If a particular product is

value chain activities operate effectively and efficiently.

not being produced at a high enough level to reach economies

of scale in distribution, another product could be used to share

important to monitor in the external environment and their

the same distribution channel.

interpretations of what they perceive.

The willingness to reject unfamiliar as well as negative

EXTERNAL ENVIRONMNETAL SCANNING

external environment factors information is called strategic

TECHNIQUES

myopia. If a firm needs to change its strategy, it might not be

I. STRATEGIC AUDIT (CHECK LIST)

gathering the appropriate external information to change

One way of scanning the internal and external environment to

strategies successfully.

identify strength, weakness, opportunities and threats is by

One way to identify and analyze developments in the external

using the Strategic Audit. A strategic audit provides a

environment is to use the issues priority matrix:

checklist of questions, by area or issue that enables a

a) Identify a number of likely trends emerging in the

systematic analysis to be made of various corporate functions

natural, societal, and task environments. These are

and activities for internal analysis and examines the natural,

strategic environmental issuesthose important trends

societal, and task environments for external analysis. Strategic

that, if they occur, determine what the industry or the

audit can help determine why a certain area is creating

world will look like in the near future.

b) Assess the probability of these trends actually

problems for a corporation and help generate solutions to the

problem.
II. ISSUES PRIORITY MATRIX
No firm can successfully monitor all external factors. Choices
must be made regarding which factors are important and which
are not. Personal values and functional experiences of a
corporations managers as well as the success of current
strategies are likely to bias both their perception of what is

occurring, from low to medium to high.

c) Attempt to ascertain the likely impact (from low to
high) of each of these trends on the corporation being
examined.

for their particular corporation, they may want to refine their

analysis of these factors.

A corporations external strategic factors are the key

Using an EFAS (External Factors Analysis Summary) Table

environmental trends that are judged to have both a medium to

is one way to organize the external factors into the generally

high probability of occurrence and a medium to high

accepted categories of opportunities and threats as well as to

probability of impact on the corporation. The issues priority

analyze how well a particular companys management (rating)

matrix can then be used to help managers decide which

is responding to these specific factors in light of the perceived

environmental trends should be merely scanned (low priority)

importance (weight) of these factors to the company. To

and which should be monitored as strategic factors (high

generate an EFAS Table for the company being analyzed,

priority). Those environmental trends judged to be a

complete the following steps:

corporations strategic factors are then categorized as

i.

In Column 1 (External Factors), list the eight to ten

opportunities and threats and are included in strategy

most important opportunities and threats facing the

formulation.

company.
In Column 2 (Weight), assign a weight to each factor

III. EXTERNAL FACTORS ANALYSIS SUMMARY

EFAS

ii.

from 1.0 (Most Important) to 0.0 (Not Important) based

on that factors probable impact on a particular

After strategic managers have scanned the societal and task

companys current strategic position. The higher the

environments and identified a number of likely external factors

weight, the more important is this factor to the current

iii.

and future success of the company. (All weights must

profitability and market share. The total weighted score for an

sum to 1.0 regardless of the number of factors.)

In Column 3 (Rating), assign a rating to each factor

average firm in an industry is always 3.0.

from 5.0 (Outstanding) to 1.0 (Poor) based on that

particular companys specific response to that particular
factor. Each rating is a judgment regarding how well the
company is currently dealing with each specific
iv.

v.

vi.

external factor.
In Column 4 (Weighted Score), multiply the weight in

IV. INTERNAL FACTOR ANALYSIS SUMMARY (IFAS)

This IFAS (Internal Factor Analysis Summary) is one way
to organize the internal factors into the generally accepted
categories of strengths and weaknesses as well as to analyze
how well a particular companys management is responding to
these specific factors in light of the perceived importance of

Column 2 for each factor times its rating in Column 3

these factors to the company. Use the VRIO framework (Value,

to obtain that factors weighted score.

In Column 5 (Comments), note why a particular factor

Rareness, Imitability, & Organization) to assess the importance

was selected and how its weight and rating were

use the IFAS Table, complete the following steps:

estimated.
Finally, add the weighted scores for all the external

1. In Column 1 (Internal Factors), list the eight to ten most

factors in Column 4 to determine the total weighted

score for that particular company. The total weighted
score indicates how well a particular company is
responding to current and expected factors in its
external environment.
The score can be used to compare that firm to other firms in the
industry. Check to ensure that the total weighted score truly
reflects the companys current performance in terms of

of each of the factors that might be considered strengths. To

important strengths and weaknesses facing the company.

In Column 2 (Weight), assign a weight to each factor from 1.0
(Most Important) to 0.0 (Not Important) based on that factors
probable impact on a particular companys current strategic
position. The higher the weight, the more important is this
factor to the current and future success of the company. All
weights must sum to 1.0 regardless of the number of
factors.

3. In Column 3 (Rating), assign a rating to each factor from

Environmental scanning provides reasonably hard data on the

5.0 (Outstanding) to 1.0 (Poor) based on managements

present situation and current trends, but intuition and luck are

specific response to that particular factor. Each rating is a

needed to accurately predict whether these trends will continue.

judgment regarding how well the companys management is

The resulting forecasts are, however, usually based on a set of

currently dealing with each specific internal factor.

assumptions that may or may not be valid.

4. In Column 4 (Weighted Score), multiply the weight in

Column 2 for each factor times its rating in Column 3 to

Forecasting techniques

obtain that factors weighted score.

Various techniques are used to forecast future situations. They

5. In Column 5 (Comments), note why a particular factor was

do not tell the future; they merely

selected and/or how its weight and rating were estimated.

Trend extrapolation: extrapolation is the extension of

present trends into the future.

Time-series methods: are approaches of this type; they

6. Finally, add the weighted scores for all the internal factors in
Column 4 to determine the total weighted score for that
particular company. The total weighted score indicates how
well a particular company is responding to current and
expected factors in its internal environment.

attempt to carry a series of historical events forward

into the future.

Brainstorming: Brainstorming is a non-quantitative

The score can be used to compare that firm to other firms in its

approach that requires simply the presence of people

industry. Check to ensure that the total weighted score truly

with some knowledge of the situation to be predicted.

Expert opinion: is a non-quantitative technique in

reflects the companys current performance in terms of

which experts in a particular area attempt to forecast

profitability and market share. The total weighted score for

an average firm in an industry is always 3.0.

likely developments.
Delphi technique:

in

which

separated

experts

independently assess the likelihoods of specified

V. FORECASTING

events. These assessments are combined and sent back

to each expert for fine tuning until agreement is

Opportunities

reached.
Statistical modeling: is a quantitative technique that

An opportunity is a major favorable situation in the firms

attempts to discover causal or at least explanatory

environment. Key trends represent one source of opportunity.

factors that link two or more time series together.

Identification of a previously overlooked market segment,

Examples of statistical modeling are regression analysis

changes

and other econometric methods.

Prediction markets: is a recent forecasting technique

technological changes, and improved buyer or supplier

enabled by easy access to the Internet

in

competitive

or

regulatory

circumstances,

relationships could represent opportunities for the firm.

Threats

VI. SWOT ANALYSIS

A threat is a major unfavorable situation in the firms

SWOT is an acronym for the internal Strengths and

environment. It is a key impediment to the firms current and /

Weaknesses of a business and environmental Opportunities and

or desired future position. The entrance of a new competitor,

Threats facing that business. SWOT analysis is a systematic

slow market growth, increased bargaining power of key buyers

identification of these factors and the strategy that reflects the

or supplier, major technologies change, and changing

best match between them. It is based on the logic that an

regulations could represent major threats to a firms future

effective strategy maximizes a businesss strengths and

success.

opportunities but at the same time minimizes its weaknesses

The second fundamental focus in SWOT analysis is identifying

and threats.

key strengths and weakness based on examination of the

This simple assumption, if accurately applied, has powerful

company profile. Strengths and weaknesses can be defined as

implications for successfully choosing and designing an

follows:

effective strategy.

Strengths

Strength is a resource, skill, or other advantage relative to

A weakness is a limitation (or) deficiency in resources, skills,

competitors and the needs of markets a firm serves or

and capabilities that seriously impedes effective performance.

anticipates serving. a strength is a distinctive competence that

Facilities,

gives the firm a comparative advantage in the marketplace.

marketing skills, and brand image could be sources of

Financial resources, image, market leadership, and buyer /

weaknesses. Sheer size and level of customer acceptance

supplier relations are examples.

proved to be key strengths around which IBM built its

Weaknesses

financial

resources,

management

capabilities,

successful strategy in the personal computer market.

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