such as age, interests, dislikes, location, income level and needs.

Then look for

segments within the market to which you can pinpoint your marketing messages.
For instance, if you own a salon, advertising messages that appeal to young adults
in their 20’s need to sound different than the messages you create to attract senior
citizens who want their hair set and dried every week.

There are many strategic analysis tools that a firm can use, but some are more
common. The most used detailed analysis of the environment is the PESTLE
analysis. This is a bird’s eye view of the business conduct. Managers and strategy
builders use this analysis to find where their market currently. It also helps
foresee where the organisation will be in the future.
PESTLE analysis consists of various factors that affect the business environment.
Each letter in the acronym signifies a set of factors. These factors can affect every
industry directly or indirectly.
The letters in PESTLE, also called PESTEL, denote the following things:
▪ Political factors
▪ Economic factors
▪ Social factors
▪ Technological factors
▪ Legal factors
▪ Environmental factor
Often, managers choose to learn about political, economic, social and
technological factors only. In that case, they conduct the PEST analysis. PEST
is also an environmental analysis. It is a shorter version of PESTLE analysis.
STEP, STEEP, STEEPLE, STEEPLED, STEPJE and LEPEST: All of these are
acronyms for the same set of factors. Some of them gauge additional factors like
ethical and demographical factors.
Six most commonly assessed factors in environmental analysis are discussed
below:
P for Political factors
The political factors take the country’s current political situation. It also reads the
global political condition’s effect on the country and business. When conducting
this step, ask questions like “What kind of government leadership is impacting
decisions of the firm?”
Some political factors that you can study are:
▪ Government policies
▪ Taxes laws and tariff
▪ Stability of government
▪ Entry mode regulations
E for Economic factors
Economic factors involve all the determinants of the economy and its state. These
are factors that can conclude the direction in which the economy might move. So,
businesses analyze this factor based on the environment. It helps to set up
strategies in line with changes.
I have listed some determinants you can assess to know how economic factors
are affecting your business below:
▪ The inflation rate
▪ The interest rate
▪ Disposable income of buyers
▪ Credit accessibility
▪ Unemployment rates
▪ The monetary or fiscal policies
▪ The foreign exchange rate
S for Social factors
Countries vary from each other. Every country has a distinctive mindset. These
attitudes have an impact on the businesses. The social factors might ultimately
affect the sales of products and services.
Some of the social factors you should study are:
▪ The cultural implications
▪ The gender and connected demographics
▪ The social lifestyles
▪ The domestic structures
▪ Educational levels
▪ Distribution of Wealth
T for Technological factors
Technology is advancing continuously. The advancement is greatly influencing
businesses. Performing environmental analysis on these factors will help you stay
up to date with the changes. Technology alters every minute. This is why
companies must stay connected all the time. Firms should integrate when needed.
Technological factors will help you know how the consumers react to various
trends.
Firms can use these factors for their benefit:
▪ New discoveries
▪ Rate of technological obsolescence
▪ Rate of technological advances
▪ Innovative technological platforms
L for Legal factors
Legislative changes take place from time to time. Many of these changes affect
the business environment. If a regulatory body sets up a regulation for industries,
for example, that law would impact industries and business in that economy. So,
businesses should also analyze the legal developments in respective
environments.
I have mentioned some legal factors you need to be aware of:
▪ Product regulations
▪ Employment regulations
▪ Competitive regulations
▪ Patent infringements
▪ Health and safety regulations
E for Environmental factors
The location influences business trades. Changes in climatic changes can affect
the trade. The consumer reactions to particular offering can also be an issue. This
most often affects agri-businesses.
Some environmental factors you can study are:
▪ Geographical location
▪ The climate and weather
▪ Waste disposal laws
▪ Energy consumption regulation
▪ People’s attitude towards the environment
There are many external factors other than the ones mentioned above. None of
these factors are independent. They rely on each other.
If you are wondering how you can conduct environmental analysis, here are 5
simple steps you could follow:
1. Understand all the environmental factors before moving to the next step.
2. Collect all the relevant information.
3. Identify the opportunities for your organisation.
4. Recognize the threats your company faces.
5. The final step is to take action.
It is true that industry factors have an impact on the company performance.
Environmental analysis is essential to determine what role certain factors play in
your business. PEST or PESTLE analysis allows businesses to take a look at the
external factors. Many organisations use these tools to project the growth of their
company effectively.
The analyses provide a good look at factors like revenue, profitability, and
corporate success. If you want to take the right decisions for your firm, employ
environmental analysis. The analysis you should conduct depends on the nature
of your company.

Environmental impact on the policy and strategy of an organisation

Every organisation has to work within a framework of certain environmental

forces and there is a continuous interaction between the organisation and
its environment. The impact of environment on organisation is manifold. The
interaction suggests a relationship between the two. This relationship can be
analyzed in three ways.

First, the organisation can be thought of as an input-output system. It takes

various inputs-human, capital, technical-from the environment. These inputs are
transformed to produce outputs-goods, services, profits-which are given back to
the environment. Thus, the organisation merely performs the function of input-
output mediator. In this process, the environment in its interaction with the
internal factors of the organisation will determine what kind of inputs should be
taken or outputs given.

Second, the organisation can be taken as the central focus for realising the
contributions of many groups, both within and outside the organisation. When
these groups contribute to the well being of the organisation, they must have a
legitimate share in organisational outputs. These groups may be employees,
consumers, suppliers, shareholders, movement, and the society in general. Thus,
the organisational functioning will be affected by the expectations of these groups
and the organisation has to take these factors into account.

Third, the organisation can be treated as operating in environment presenting

opportunities and threats to it. Thus, how an organisation can make the best use
of the oppm.lunities provided or threats imposed is a matter of prime concern for
it. Any single approach by itself is insufficient to explain the complex relationship
between the organisation and its environ-ment-Moreover, these approaches are
not inconsistent to each other; they are complementary. Thus, an organisation will
be affected by the environment in which it works.

The environment-organisation interaction has a number of implications

from strategic management point of view.

1.The environmental forces may affect different parts of the organisation in

different ways because different parts interact with their relevant external
environment. For example, the technological environment may affect the
organisation’s R & D department. Further, these forces of the environment may
have direct effect on some parts but indirect effect on others. For example, any
change in the fiscal policy of government may affect the finance department
directly but it may affect production and marketing indirectly because their
program may be recasted in the light of new situation, though not necessarily.

2. The environmental influence process is quite complex because most things

influence all other things. For example, many of the environmental forces may be
interacting among themselves and making the impact on the organisation quite
complex. Moreover, the impact of these forces on the organisation may not be
quite deterministic because of interaction of several forces. For example, the
organisation structure will be determined on the basis of management philosophy
and employee attitudes. But the organisation structure becomes the source for
determining the employee attitudes. Thus, there cannot be direct and simple
cause-effect relationship rather much complexity is expected.

3. The organisational response to the environmental forces may not be quite

obvious and identical for different organisations but these are subject to different
internal forces. Thus, there is not only the different perception of the
environmental forces but also their impact on the organisation. Key factors
determining responses to environmental impact may be managerial
philosophy, life cycle of the organisation, profitability, etc.

4. The impact of environmental forces on the organisations is not unilateral but

the organisations may also affect the environment. However, since
the individual organisations may not be able to put pressure on the environment,
they often put the pressure collectively. Various associations of the organisations
are generally formed to protect the interest of their members. The protection of
interest certainly signifies the way to overcome unilateral impact of the
environment on the organisations. The nature of organisation-environment
interaction is such that organisations, like human species or animals, must either
adjust to the environment or perish.

Examples of Environmental Factors Affecting Business

Environmental Policies. Environmental policies are considered the major
external factor that can impact the strategy of a business. Environmental policy
is the commitment of a business to the regulations, laws as well as other policy
mechanisms that are concerned with environmental issues. Environmental policy
impacts businesses because the law implies organisations to change their
operational procedures and equipment so as to meet those standards which can
cost businesses some good amount of money.
Climate Change. Climate change became an insidious threat to businesses as its
pace can be recognised only when it is taken into consideration on the basis of
decade-after-decade. Increasing issue of global warming and adverse weather
conditions in the recent few years, it is difficult for companies and organisations
to operate equally in every type of weather condition. Businesses that are directly
dependent upon adequate water supply e.g., field sports or agriculture will be
affected adversely if climatic changes resulted in reduced rainfalls. Even
consumers are becoming aware and keen about this factor and are prone towards
those brands which are saving the environment or supporting this cause.
Green Agenda. Business-related activities impact the environment; however, the
environment also has an effect on businesses and the market environment. Now
enterprises have realized that in order to achieve business goals, there is a need
to draft environmental-friendly policies. Green agenda is a plan where enterprises
manage their operations in such a way so that there is minimal negative impact
on the local or global environment. In order to be environmentally responsible,
corporations need to devise plans and procedures in their operations and activities
which is beneficial not only company but, for the overall environment as well.
Pollution. Pollution can also have an impact over business strategies. Pollution
may cause some major environmental events which can result in the disruption
of supply chains or an increase in the cost of raw material. Organisations need to
monitor such events and develop contingency plans so as to deal with them.
Availability of natural resources. Amongst external environment factors, this
factor refers to the physical environment of a business. Natural resources are very
important for most businesses and many corporations have natural resources as
their major raw material. Lack of natural resources can hinder an organisation’s
producing ability and hence its output.
Recycling. Recycling is another aspect of a greener environment. The cost of
dumping waste in landfills is increasing and is resulting in not only shortage of
wastages but, it also provides harm to the environment. Recycled materials not
only results in making the production process cost-effective but, it also helps the
business to save some money and helping the environment.
Waste Disposal. Although, there has been a positive trend towards recycling of
waste materials, still there is several businesses which dump wastage in
landfills. This not only increases their cost of dumping waste but, is also harmful
to the environment in which the business operates. Businesses, in order to meet
their bottom line, should first look at producing less waste and use fewer
resources which will reduce their production cost along with making the
corporation sustainable.

Organisation’s Dependence on its Environment

A business is an integral part of the society. Being detached from the society, a
business cannot survive because a business has to depend upon the different
environmental factors for running its business smoothly. Practically there is a
mutual dependence between a business organisation and its environment.
Every organisation has an internal and external environment. In order for the
organisation to be successful, it is important that it scans its environment regularly
to assess its developments and understand factors that can contribute to its success.
Environmental scanning is a process used by organisations to monitor their external
and internal environments.

Environmental Scanning

The purpose of the scan is the identification of opportunities and threats affecting
the business for making strategic business decisions. As a part of the environmental
scanning process, the organisation collects information regarding its environment
and analyzes it to forecast the impact of changes in the environment. This eventually
helps the management team to make informed decisions.

As seen from the figure above, environmental scanning should primarily identify
opportunities and threats in the organisation’s environment. Once these are
identified, the organisation can create a strategy which helps in maximizing the
opportunities and minimizing the threats. Before looking at the important factors
for environmental scanning, let’s take a quick peek at the components of an
organisation’s environment.

Components of a Business Environment

As you can see above, the internal environment of an organisation consists of
various elements like the value system, mission/objectives of the organisation,
structure, culture, quality of employees, labor unions, technological capabilities,
etc. These elements lie within the organisation and any changes to them can affect
the overall success of the business.

On the other hand, an organisation cannot operate in a vacuum. Also, there are many
factors outside the walls of an organisation which affects the functions of the
business. These factors constitute the external environment of an organisation.

An organisation is mainly dependent on the environment in which it operates for

the reasons as discussed below.

Exchanging Information
An organisation and its environment exchange information between themselves.
Organisations need information about the external environment for planning,
decision-making and control purposes. Hence, they analyze the environment’s
variables along with studying their behavior and changes.

Further, the information generated by this analysis helps the organisation handle the
problems of uncertainty and complexity of the business environment. Therefore,
firms try to gather information pertaining to market conditions, economic activity,
technological developments, demographic factors, socio-political changes,
competition activities, etc.

Also, the organisation also transmits information to external agencies. It does so,
either voluntarily or inadvertently. Therefore, the exchange of information is an
important interaction between an organisation and its environment forming the
basis of their relationship.

Exchanging Resources
Apart from exchanging information, an organisation and its environment also
exchange resources. A firm needs inputs like finance, manpower, equipment, etc.
from its environment. Typically, the resources required by an organisation are
categorized into 5 M’s:

• Men or Manpower
• Money
• Method
• Machine
• Material

An organisation uses these inputs to produce goods or services or both. Acquisition

of these inputs usually requires an interaction between the firm and the markets.
This interaction can be in the form of competition or collaboration. Nevertheless,
the purpose is to ensure a constant supply of inputs.

On the other hand, the organisation depends on its environment for the sale of its
goods and services. This process also requires interaction between the firm and its
environment. Further, the firm must

• Perceive the needs of the environment and develop products or services to

meet those needs.
• Satisfy the demands and expectations of the clientele groups. These groups
are:
• Consumers
• Employees
• Shareholders
• Creditors
• Suppliers
• Local Community
• The general public, etc.
Exchanging Influence and Power
The third important interaction between an organisation and its environment is the
exchange of influence and power. By now, we understand that the external
environment holds considerable power over a firm due to the following reasons:

• The business environment is inclusive

• It has a command over the resources, information, etc. which the firm
requires
• It offers opportunities for growth on one hand and threats and constraints
on the other
Hence, the environment can impose its will on the organisation. On the other hand,
there are times and scenarios when an organisation holds a position wherein it can
wield considerable power and influence over some aspects of the external
environment. This usually happens when the firm has command over resources and
information.

An organisation with a higher degree of power over its environment has more
autonomy and freedom of action. Also, the firm can dictate terms to its environment
and mold them to its will.

An Organisation’s Response to its Environment

In order for an organisation to respond well to its environment, it must be able to

monitor and make sense of its environment and have an internal capacity to develop
effective responses. An organisation’s response to its environment can be of the
following three types:

1. Administrative: These are either proactive or reactive responses to specific

environments leading to forming or redefining the organisation’s purpose and
key tasks.
2. Competitive: A change in the competitive environment can force an
organisation to respond with actions that can help it gain a competitive
advantage over its rivals.
3. Collective: Many organisations cope with environmental dependence
problems through strategic collective responses including methods like co-
opting, bargaining, alliances, etc.

Specific Environment is the part of the external environment of an organisation

with which it interfaces in the course of conducting its business. It is also called:
Task Environment.
The institutions, stakeholders and forces belonging to this group are directly
relevant to the achievement of the organisational goals because they have direct
and immediate impact on the decisions and actions of its management. The
specific environment of each organisation is unique and changes with conditions.
Typical constituents of the task environment are: customers, suppliers,
competitors, and pressure groups. Employees are not considered part of the
specific environment, because they are inside the organisation.

Analysis of Remote environment

The Remote Environment : A company 's success is greatly influenced by

factors that relate to its external environment. In order to increase financial
success, an organisation needs to understand the factors they may face, as well as
adopting strategies to work with them. Success also lies in the ability to forecast
change, while also understanding a company 'scurrent existing factors. External
factors that play a part in a business 's success or downfall are economic factors,
social changes, political factors, technology, and ecological factors. Once all of
these aspects are understood, a business can make the most of the factors they
will encounter, to help them adapt to the ever growing global market.
The Remote Environment comprises factors that originate beyond, and usually
irrespective of, any single firm's operating
situation:(1)economic(2)social(3)political(4)technological, and(5)ecological
factors. That environment presents firms with opportunities, threats, and
constraints, but rarely does a single firm exert any meaningful reciprocal
influence. For example, when the economy slows and construction starts to
decrease, an individual contractor is likely to suffer a decline in business, but that
contractor’s efforts in stimulating local construction activities would be unable to
reverse the overall decrease in construction starts.
Changes in the Remote/External Environment of US Business Economic.
Economic factors include all of the aspects concerning the economy and its
condition. Some of these factors include: interest rates, availability of credit,
policies regarding fiscal gain or loss, and foreign exchange rates ("The External
Environment," n.d.). These aspects influence the direction of the economy, and
how businesses can adapt to these changes. For example, the economic climate
determines how consumers, suppliers, and stakeholders will behave within
society. As a result, a growing economy will have low unemployment, higher
spending and greater business confidence with stakeholders.

Political factors

Stability of political factor is very important for manager to consider during

strategy making process. It helps the manager to make strategies by fulfilling the
legal and regulation requirement. From the case, Federal Reserve has issued new
regulation that use to restrict companies from offering deferred interest financing
to customers. It had affect the future revenue of all the companies included Best
Buy. It had prohibit Best Buy to extent the credit line which can affect Best Buy’s
revenue.

Economic factors discuss about the influence of economic that will affect the
profitability of companies. From the case, the economic downturn had affected
Best Buy’s profit. During economic recessions, consumers have less disposable
income. Therefore, their purchasing power is lower. Their consumption pattern
will change and prefer to buy necessities goods than discretionary goods. So, it
will become a problem for Best Buy that sell discretionary products.

Social factors

Social factors is discussing about belief, value, lifestyle of persons. Cultural is an

important element to analyze in social factors. From the case, Best Buy had used
customer centricity model to conduct their business. They had study the customer
needs and behaviors. Best Buy had focused on certain customer groups such as
affluent suburban families and trend-setting urban dwellers. Nowadays, internet
purchasing had become a trend and lifestyle among consumers. They intent to
spend their time shop around the internet than visit the retail store.

Technological factors

Technological factors discuss how technology change will influence the business.
From the case, technology improved will shorten the product life cycles and
decrease the prices. As shown as the case, when shorter product life cycle,
training cost will increase.

Technological factor also pose a threat to the Best Buy. Online marketplace had
become a threat for retail industry. Consumer can buy goods from internet rather
than visiting retail store like Best Buy. Furthermore, the consumers are able to
compare the product price, quality and getting more information by using the
internet.

Ecological factors

Ecological factor always discuss about the relationship between business and the
ecology. Best Buy had encourage their customers to recycling their appliances
and electronics by launch a recycling program. It is used to reduce waste and
reduce the pollution to the ecology. Furthermore, Best Buy also had earn the
LEED certification because their store’s design is green and achieved LEED
standard (Cheeseman 2009).

Michael Porter 5 Forces Model

Porter 5 Forces is used to identify the competitive level of the market by

analyzing the entry, supplier power, substitution, rivalry and buyer power.

Threat of entry

It is very difficult to enter the market because the industry was dominated by large
company. It also requires a large capital resources to enter the market. However,
globalization and internet had weakened the barrier by reducing the capital
requirement. More and more companies entering the market using internet. By
using internet to penetrate the market, customer loyalty had become a barrier
which can prevent companies to enter the market. Although the industry was
dominated by certain large company, but internet had reduced the barriers. Hence,
it is an opportunity for Best Buy to enter the market.

Supplier power

Best Buy had gain competitive advantage through the weak supplier power. Best
Buy had gain the bargaining power over their supplier because they always
purchase in large quantity which lead them to achieve economy of scale. Hence,
it is an opportunity for Best Buy to gain cheaper resources and gain competitive
advantage over their competitors.

Substitution
Best Buy also faced strong substitution level due to their competitors such as
Walmart. Walmart had expanded their market share in consumer electronic
industry. They cooperate with several company and offer wider and higher range
of electronic products. Their product also very similar to Best Buy’s product and
can be substitution for Best Buy’s product. Hence, substitution had posed a threat
for Best Buy because Best Buy’s product is more expansive due to their trained
workforce and consumers may choose to buy the substitution products.

Buyer Power

According to the case, there are economic downturn which had reduced the buyer
power. During recession, consumers disposable income had reduced. Their
purchasing power decrease and not willing to consume discretionary item like
what Best Buy has sell. So, a weak purchasing power will affect Best Buy
profitability. Hence, it also posed a threat to Best Buy because reduce in
purchasing power will affect their sales and profitability.

Rivalry

Best Buy is competing in a high competitive level environment. They had many
strong rival such as Walmart stores Inc., GameStop Corp. which had dominant
the market. Those competitors had hold large market share in the market and they
are sharing the same group of customers with Best Buy. Therefore, it had posed
a threats to Best Buy because the market is too competitive which may lead to
lesser profit.

Overall

The PESTE analysis has shown that the environment is bad because of the
economy condition is poor, the consumers demand are elastic, the change rate of
the technology is fast which may cause a lot problem.

Michael Porter 5 forces has shown that the market is highly competitive because
of the position of the rival is too strong. The analysis show that Best Buy will be
very difficult to compete in the market although they have their competitive
advantage.

Long term objectives

Profitability
As stated in the case, Best Buy’s objective is sustained growth and earnings.
Hence, Best Buy put an effort on offering wide range of product and highly
trained workforces to increase customers satisfaction. Thus, with satisfy the
customers, they will more willing to buy Best Buy’s products and it can ensure
the profitability of Best Buy. Best Buy also change from discounted retailer to
service-oriented firm to avoid competition that can reduce their profits.

Employee development

Based on the case, Best Buy’s long term objectives are focused on employee
development. According to the case, Best Buy had put effort on training their
employees. They set employee development as their objectives because they are
using differentiation strategy. Since most of their competitors are using low cost
strategy, Best Buy had making decision to use differentiate approach to avoid a
price war and reduce competition level. They focused on training their
workforces to provide better services to their customers. Employee development
approach had enabled Best Buy to have a highly trained sales associates.
However, this approach also increase the products price due to their training cost
and better services.

We are a very passion-driven industry that is motivated by causes; our purpose in

the world and

in the marketplace tends to define us. Hopefully, I’ve helped you with some
thoughts about organizing that part of your world, but I am sure that for quite a
few of you, that part of things was fully in place.

The research part of Strategic Management is a challenge for many. It is hard. It

involves going beyond the “I know this stuff – I’ve been doing it all my life” and
gets into some looking under stones to find out what is really going on.

The first area of research is of the “external environment.” I liken this to an onion
as it has many layers. I like to define the external environment as the things that
are (1) outside our organisation, that (2) we cannot control, and that (3) do affect
us.

You can see the importance of these things and the need to invest time in
researching them by looking at these points in reverse order. If it affects me, it is
important! If it affects me and I can’t control it as it is outside my organisation, I
need to spend time learning about it.

Our goal in learning is not for the sake of knowledge alone, but to put us in a
place where we can benefit from elements in the environment that are in harmony
with our practices and to help us changes what we are doing to avoid problems
from elements in the environment that are contrary to our practices.

Organisational Capabilities
Organisational capabilities are something that people, organisation and
technology together brings into plate while working together to drive business
results. Organisational capabilities include collaboration, talent management
which binds all the part of the business together. Organisational capability-based
strategy focuses on planning, designing and delivering business capabilities to the
firm.
Capability management deals with the establishing goals based on value. These
organisational capabilities help organisation to become adaptable to the speed of
change, to make collaboration across boundaries, to learn and to establish a very
good company’s culture, visibility of the firm. The execution of these processes
requires better coordination across business verticals. Capability based planning
is helpful in coordinating IT with business and helps in continuous business value
creation.

Importance of Organisational Capabilities

Organisational capabilities are of utmost important for both the organisation as
well as the individual to deliver best business results. For a company, resources
and capabilities are important. The process of building strategies out of their
capabilities into action is the quality of a business leadership. The capabilities like
skills, attitude, behavior helps in gaining competitive advantage against its
competitors and in turn helps in increasing the value of a firm. Strategic
capabilities focus on the firm’s assets and its market position and determine how
the firm can be able to employ strategies in future. Organisational capabilities are
known as intangible assets which include financial services, solution, software
development skills, people engagement, process excellence which an
organisation can leverage upon while building its business strategy. Nowadays
organisations are very much concerned with the re-skilling their employees to
sustain competitive advantage which is treated as a resource which is valuable,
non-substitutable and rare. Organisational capabilities always focus on providing
service and satisfaction to its customers. It is important for an organisation to
choose and decide the most impactful capabilities and its feasibility to implement
it. It is important to monitor the quality training received by the top leaders of the
company to develop required organisational capabilities which are needed to
make business decisions.
Difference Between Organisational Capabilities and Competency
Most of the time, competency and capability are used interchangeably but these
two have differences. Competencies are used to describe about individuals
whereas capabilities are used in the context of organisation. Organisational
capabilities refers to the ability to collaborate, managing talent and accountability
whereas individual competencies includes the skill sets, analytical ability,
behavior and attitude that they posses.

Example of Organisational Capabilities

Business capabilities can be seen in banking sector where a bank is responsible
for managing risks; its credit department is responsible for credit risks. It can also
be seen in IT department where its role is to manage Information security. For a
FMCG company, organisational capabilities are needed in order to set prices for
the products, when the company launches and develop some new innovative
product, in providing customer service. In aircraft industry, the customer queries
and claims are handled by the airline operation department. Similarly, the meal
services are being provided by the crew members to the customers.

Competitive Advantage

A competitive advantage is what makes an entity's goods or services superior to

all of a customer's other choices. The term is commonly used for businesses. The
strategies work for any organisation, country, or individual in a competitive
environment.

To create a competitive advantage, you've got to be clear about these

three determinants.

1. Benefit. What is the real benefit your product provides? It must be

something that your customers truly need. it must also offer real value.
You must know your product's features, its advantages, and how they
benefit your customers. You must stay up to date on the new trends that
 affect your product. This includes new technology. For example,
newspapers were slow to respond to the availability of free news on the
internet. They thought people were willing to pay for news delivered on a
piece of paper once a day.
2. Target market. Who are your customers? What are their needs? You've got
to know exactly who buys from you and how you can make their life better.
That’s how you create demand, the driver of all economic growth.
Newspapers' target market shrank to those older people who
weren't comfortable getting their news online.
3. Competition. Have you identified your real competitors? They aren't just
similar companies or products. They also include anything else your
customer could do to meet the need you can fulfill. Newspapers thought
their competition was other newspapers until they realized it was the
internet. They didn't know how to compete with a news provider that was
instant and free.

To be successful, you need to be able to articulate the benefit you provide to

your targetmarket that's better than the competition. That's your competitive
advantage.

You must reinforce that message in every communication to your customers. That
includes advertising, public relations, and sales aids. It even includes your
storefront and employees.

Michael Porter and Sustainable Competitive Advantage

In 1985, Harvard Business School professor Michael Porter wrote "Competitive

Advantage." It's the definitive business school textbook on the topic. He wrote it
to help companies to create a sustainable competitive advantage. Just because a
company is the market leader now, doesn't mean it will be forever. A company
must create clear goals, strategies, and operations to build sustainable competitive
advantage. The corporate culture and values of the employees must be in
alignment with those goals.

It's difficult to do all those things well. It's especially difficult to do them year in
and year out.

Porter outlined the three primary ways companies achieve a sustainable

advantage. They are cost leadership, differentiation, and focus. Porter identified
these strategies by researching hundreds of companies.
Cost leadership means companies provide reasonable value at a lower price.
Firms do this by continuously improving operational efficiency. That usually
means paying their workers less. Some compensate for lower wages by offering
intangible benefits such as stock options, benefits, or promotional opportunities.
Others take advantage of unskilled labor surpluses. As these businesses grow,
they can benefit from economies of scale and buy in bulk. Walmart and Costco
are good examples of cost leadership. But sometimes they pay their workers less
than the cost of living. Higher minimum wage laws threaten their advantage.

Differentiation means companies deliver better benefits than anyone else. A firm
can achieve differentiation by providing a unique or high-quality product.
Another method is to deliver it faster. A third is to market in a way that reaches
customers better.

A company with a differentiation strategy can charge a premium price. That

means it usually has a higher profit margin.

Companies typically achieve differentiation with innovation, quality,

or customer service. Innovation means they meet the same needs in a new way.
An excellent example of this is Apple. The iPod was innovative because it
allowed users to play whatever music they wanted, in any order. Quality means
the firm provides the best product or service. Tiffany's can charge more because
patrons see it as far superior to other jewelry stores. Customer service means
going out of the way to delight shoppers. Nordstrom's was the first to allow
returns with no questions asked.

Focus means the company's leaders understand and service their target market
better than anyone else. Their either use cost leadership or differentiation to do
that. The key to a successful focus strategy is to choose a very specific target
market. Often it's a tiny niche that larger companies don't serve. For
example, community banks use a focus strategy to gain sustainable competitive
advantage. They target local small businesses or high net worth individuals.
Their target audience enjoys the personal touch that big banks may not be able to
give. Customers are willing to pay a little more in fees for this service. These
banks are using a differentiation form of the focus strategy.

What is Core Competence?

Core competence is a unique skill or technology that creates distinct customer

value. For instance, core competency of Federal express (Fed Ex) is logistics
management. The organisational unique capabilities are mainly personified in the
collective knowledge of people as well as the organisational system that
influences the way the employees interact. As an organisation grows, develops
and adjusts to the new environment, so do its core competencies also adjust and
change. Thus, core competencies are flexible and developing with time. They do
not remain rigid and fixed. The organisation can make maximum utilization of
the given resources and relate them to new opportunities thrown by the
environment.
Resources and capabilities are the building blocks upon which an organisation
create and execute value-adding strategy so that an organisation can earn
reasonable returns and achieve strategic competitiveness.

Figure: Core Competence Decision

Resources are inputs to a firm in the production process. These can be human,
financial, technological, physical or organisational. The more unique, valuable
and firm specialized the resources are, the more possibly the firm will have core
competency. Resources should be used to build on the strengths and remove the
firm’s weaknesses. Capabilities refer to organisational skills at integrating its
team of resources so that they can be used more efficiently and effectively.
Organisational capabilities are generally a result of organisational system,
processes and control mechanisms. These are intangible in nature. It might be that
a firm has unique and valuable resources, but if it lacks the capability to utilize
those resources productively and effectively, then the firm cannot create core
competency. The organisational strategies may develop new resources and
capabilities or it might make stronger the existing resources and capabilities,
hence building the core competencies of the organisation.
Core competencies help an organisation to distinguish its products from it’s rivals
as well as to reduce its costs than its competitors and thereby attain a competitive
advantage. It helps in creating customer value. Also, core competencies help in
creating and developing new goods and services. Core competencies decide the
future of the organisation. These decide the features and structure of global
competitive organisation. Core competencies give way to innovations. Using core
competencies, new technologies can be developed. They ensure delivery of
quality products and services to the clients.
What is a Value Chain Analysis?

The value chain also known as Porter’s Value Chain Analysis is a business
management concept that was developed by Michael Porter. In his
book Competitive Advantage (1985), Michael Porter explains Value Chain
Analysis; that a value chain is a collection of activities that are performed by a
company to create value for its customers. Value Creation creates added value
which leads to competitive advantage. Ultimately, added value also creates a
higher profitability for an organisation.

What is the Porter’s Value Chain Analysis Model?

The strength of the Porter’s Value Chain Analysis is its approach. The Porter’s
Value Chain Analysis focuses on the systems and activities with customers as the
central principle rather than on departments and accounting expense categories.
This system links systems and activities to each other and demonstrates what
effect this has on costs and profit. Consequently, it (Value Chain Analysis) makes
clear where the sources of value and loss amounts can be found in the
organisation.

The Value Chain activities

Porter’s Value Chain Analysis consists of a number of activities, namely primary
activities and support activities. Primary activities have an immediate effect on
the production, maintenance, sales and support of the products or services to be
supplied. These activities consist of the following elements:

Inbound Logistics

These are all processes that are involved in the receiving, storing, and internal
distribution of the raw materials or basic ingredients of a product or service. The
relationship with the suppliers is essential to the creation of value in this matter.

Production

These are all the activities (for example production floor or production line) that
convert inputs of products or services into semi-finished or finished products.
Operational systems are the guiding principle for the creation of value.

Outbound logistics

These are all activities that are related to delivering the products and services to
the customer. These include, for instance, storage, distribution (systems) and
transport.
Marketing and Sales

These are all processes related to putting the products and services in the markets
including managing and generating customer relationships. The guiding
principles are setting oneself apart from the competition and creating advantages
for the customer.

Service

This includes all activities that maintain the value of the products or service to
customers as soon as a relationship has developed based on the procurement of
services and products. The Service Profit Chain Model is an alternative model,
specific designed for service management and organisational growth.

Support activities of the Value Chain Analysis

Support activities within the Porter’s Value Chain Analysis assist the primary
activities and they form the basis of any organisation. In the figure dotted lines
represent linkages between a support activity and a primary activity. A support
activity such as human resource management for example is of importance within
the primary activity operation but also supports other activities such as service
and outbound logistics.

Firm infrastructure

This concerns the support activities within the organisation that enable the
organisation to maintain its daily operations. Line management, administrative
handling, financial management are examples of activities that create value for
the organisation.

Human resource management

This includes the support activities in which the development of the workforce
within an organisation is the key element. Examples of activities are recruiting
staff, training and coaching of staff and compensating and retaining staff.

Technology development

These activities relate to the development of the products and services of the
organisation, both internally and externally. Examples are IT, technological
innovations and improvements and the development of new products based on
new technologies. These activities create value using innovation and
optimization.
Procurement

These are all the support activities related to procurement to service the customer
from the organisation. Examples of activities are entering into and managing
relationships with suppliers, negotiating to arrive at the best prices, making
product purchase agreements with suppliers and outsourcing agreements.
Organisations use primary and support activities as building blocks to create
valuable products, services and distinctiveness.

Using the Porter’s Value Chain Analysis

Porter’s Value Chain Analysis: There are four basic steps that have to be followed
if you wish to use the Value Chain as an analysis model. By following these basic
steps the organisation can be analyzed using the Value Chain.

Step 1: identify sub activities for each primary activity

For each primary activity, sub-activities can be determined that create a specific
value for an organisation.

There are three categories of sub activities, namely:

• Direct activities (for instance online sales from Marketing& sales)

• Indirect activities (for instance keeping the CRM up-to-date from
Marketing& sales or organizing a golf tournament for customers)
• Quality assurance (Proofreading and editing advertisements from
Marketing& sales)

Step 2: identify sub activities for each support activity

Here it concerns the idea how value support activities such as firm infrastructure,
human resource management, technology development and procurement can
create value within the primary activities. Use the same distinction as in step 1
for direct and indirect activities and quality assurance. For example, consider how
human resource management can create value to Inbound logistics, marketing &
sales and service. This will also have to be done for the other support activities.

Step 3: identify links

This is a crucial and time-consuming step because this is about finding the links
between the added value you have identified. This part is of importance for an
organisation when it concerns increasing competitive advantage from the value
chain. For example, a development within a CRM solution can have a link with
increasing production and sales volumes through certain investments. Another
example is the link between the complaints that have been recorded within the
primary activity and the increase of unfilled vacancies (human resource
management) within the primary activity outbound logistics.

Step 4: look for opportunities/ solutions to optimize and create value

After you have completed the value chain analysis it is important to determine
what activities are to be optimized in order to create added value. This is about
quantitative and qualitative investments that can eventually contribute to
increasing your customer base, competitive advantage and profitability.
Creating business cases will help you give priority and return on investment
(ROI) to the possibly required added value creation of a primary or support
activity.

How to Make a Value Chain Analysis Chart

See how easy it is to create a value chain analysis chart in just a few simple
steps.
(1)Inbound logistics. The first step in value chain analysis is to examine inbound
logistical items. Start with a column labeled "Inbound Logistics" and list and
describe all of the systems and processes related to inbound logistics, such as
purchasing systems, transportation, and other production and employee related
activities that may be involved.
(2)Operations. The second step is to analyze operations. Create a new column to
the right of Logistics and label it "Operations." List and describe the various
operational processes and systems from product development to the finished
state. Items to consider may include raw materials and inventory, including how
they are moved and handled.
(3)Outbound logistics. Next, focus on outbound logistics. Begin a new column to
the right and label it "Outbound Logistics." Consider the processes and systems
involved in how the finished product ends up in the hands of customers and
clients.
(4)Sales and Marketing. Consider marketing activities and sales processes. Begin
a new column, adjacent to the third with the label "Sales and Marketing." Record
your analysis of the customer-purchasing experience and the post-purchase
experience and activities.
(5)Service. Look at the service-related activities of your business. In the fifth and
final column, include analysis related to the various services provided by your
business.
(6)Underneath each of the columns you'll want to include the foundational
activities of your business layered upon each other. In separate rows, include
analysis that focuses on:
• Administration and Infrastructure
 • Human Resources
• Product
• Technology and Development
• Procurement
(7)Along the right side of the columns and rows, include a delta or triangle shape
that focused on profit: "Value Added - Cost = Margin".