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Chapter – 9
STRATEGIC ANALYSIS AND PLANNING
SITUATIONAL ANALYSIS
Enterprises and businesses worldwide carry out analyses to assess conditions and environment for strategic
planning. Every company consists of certain frameworks that permit them to understand the market and
analyze their products. Companies carry out market research by conducting surveys to evaluate market
requirements and trends. SWOT & PEST analyses are two methods through which companies plan ahead by
conducting research.

PEST analysis refers to political, economical, social, and technological factors which manipulate the business
environment. SWOT analysis refers to strengths, Weaknesses, opportunity and threats. These factors are
prime determinants of strategic planning. Without SWOT and PEST analysis companies might fail to achieve
desired goals.

PEST analysis looks at external factors and is primarily used for market research. It is used as an alternative to
SWOT analysis:
(i) Political – These are the external factors that influence the business environment. Government decisions
and policies affect a firm’s position and structure, Tax laws, monetary and fiscal policies as well as reforms of
labor and workforce, all influence companies in future. These factors are important and need to be managed in
order to overcome uncertainty.
(ii) Economical – Economical factors are the most important since it impacts business in the long run.
Inflation, interest rates, economic growth and demand/supply trends are to be considered and analyzed
effectively before planning and implementing. Economic factors affect both consumers and enterprises.
(iii) Social – Social factors involve the trends of population, domestic markets, cultural trends and
demographics. These factors help businesses assess the market and improve their products/service
accordingly.
(iv) Technological – This analyses the technology trends and advancements in business environment,
innovations and advancements lowers barriers to entry plus decreased production levels as it results in
unemployment. This includes research and development activity, automation and incentives.

SWOT Analysis:
SWOT analysis defines understanding and managing the environment in which an organisation operates.
SWOT analysis attempts to assess the internal strengths and weaknesses of an organisation and the
opportunities and threats. SWOT seeks to identify the major issues facing an organisation through careful
analysis of each of these four elements. Managers can then formulate strategies to address key issues.

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The purpose of the analysis is to express, qualitatively or quantitatively, which areas of the business have
strengths to exploit, and which areas have weaknesses which must be improved. Although every area of the
business should be investigated, only the areas of significant strength or weakness should warrant further
attention.

 Strengths – It describe what an organization excels at and what separates it from the competition: a
strong brand, loyal customer base, a strong balance sheet, unique technology, and so on.
 Weaknesses – It stop an organization from performing at its optimum level. They are areas where the
business needs to improve to remain competitive: a weak brand, average turnover, high levels of debt,
an inadequate supply chain, or lack of capital.
 Opportunities - It refer to favorable external factors that could give an organization a competitive
advantage. For example, if a country reduces taxes, a car manufacturer can export its cars into a new
market, increasing sales and market share.
 Threats – It refer to factors that have the potential to harm an organization. For example, a drought is a
threat to a wheat-producing company, as it may destroy or reduce the crop yield. Other common threats
include things like rising costs for materials, increasing competition, tight labor supply and so on.
Benefits of SWOT
The following are the benefits of the SWOT analysis:
 Capitalise on opportunities
 Address weaknesses
 Understand your business better
 Detect threats
 Develop business goals and strategies for achieving them
 Take advantage of your strengths

Limitations of SWOT
The following are the limitations of the SWOT analysis:
 Doesn’t provide solutions or offer alternative decisions
 Doesn’t prioritize issues
 Can produce a lot of information, but not all of it is useful
 Can generate too many ideas but not help you choose which one is the best

PORTFOLIO ANALYSIS
Portfolio analysis is a term used in describing methods of analysing a product market portfolio with the
following aims -

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(i) To identify the current strengths and weaknesses of an organisation’s products in its markets,
and the state of growth or decline in each of these markets.
(ii) To identify what strategy is needed to maintain a strong position or improve a weak one.

Factors influencing Portfolio Strategy:

1. Mission/Vision: The mission of the company is one of the most important factors which influence, the
portfolio strategy because the mission defines the scope and purpose of the company.
2. Competitive environment: The competitive environment too has its influence on the portfolio strategy of
many companies. When competition is absent or limited even firms which are inefficient may be able to
thrive. The protection itself may prompt firms to enter such business.
3. Company resources: the resources and strengths of the company, undoubtedly, are important factors
influencing the ‘portfolio strategy’.
4. Portfolio Strategy of Parent Company: The portfolio strategy of subsidiaries may be influenced by the
portfolio strategy of the parent company.
5. Business environment: The business environment, in general, is an influencer of the portfolio strategy
and, quite obviously, significant changes in business environment have important implications for portfolio
strategy.
6. Future of Current Business: The future prospects of the current business are a very important factor
influencing the portfolio strategy. If a current business does not have a profitable future, company should
divest or diversify into growing business. In case of ITC, after feeling that the future of the tobacco business
of ITC would be very low, the ITC diversified into speciality paper, packaging and printing, hotels,
agribusiness, financial services and international business etc. and today the non-tobacco businesses
contribute a considerable share of the total turnover of ITC.

BCG MTRICES
Boston Matrix: the Boston consulting group (BCG)’s matrix analyses ‘products and businesses by market
share and market growth.’
High
STAR QUESTION MARK

Market Growth
CASH COWS DOG

Low

High Market Share Low

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This growth/share matrix for the classification of products into cash cows, dogs, rising stars and question
marks is known as the Boston classification for product-market strategy.
(i) Stars are products with a high share of a high growth market. In the short term, these require capital
expenditure, in excess of the cash they generate, in order to maintain their market position, but promise high
returns in the future.
(ii) In due course, however, stars will become cash cows, with a high share of a low-growth market. Cash
cows need very little capital expenditure and generate high levels of cash income. The important strategic
feature of cash cows is that they are already generating high cash returns, which can be used to finance the
stars.
(iii) Question marks are products in a high-growth market, but where they have a low market share. a
decision needs to be taken about whether the products justify considerable capital expenditure in the hope of
increasing their market share, or whether they should be allowed to ‘die’ quietly as they are squeezed out of
the expanding market by rival products. Because considerable expenditure would be needed to turn a question
mark into a star by building up market share, question marks will usually be poor cash generators and show a
negative cash flow.
(iv) Dogs are products with a low share of a low growth market. They may be ex-cash cows that have now
fallen on hard times. Dogs should be allowed to die, or should be killed off. Although they will show only a
modest net cash outflow or even modest net cash inflow.

Product Life Cycle

There are 4 stages in a product's life cycle in respect to the Product Life Cycle Theory:
 Introduction
 Growth
 Maturity
 Decline

Stage 1: Introduction
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This is where the new product is introduced to the market, the customers are unaware about the product. To
create demand, producers promote the new product to stimulate sales. At this stage, profits are low but starts
increasing and there are few competitors. As more units of the product sell, it enters the next stage
automatically.
Stage 2: Growth
In this stage, demand for the product increases sales. As a result, production costs decrease and profits are
high. The product becomes widely known and competitors enter the market with their own version of the
product. To attract as many consumers as possible, the company that developed the original product increases
promotional spending. When many potential new customers have bought the product, it enters the next stage
Stage 3: Maturity
In the maturity stage of the Product life cycle, the product is widely known and many consumers own it. In the
maturity phase of the product life cycle, demand levels off and sales volume increases at a slower rate. There
are several competitors by this stage and the original supplier may reduce prices to maintain market share and
support sales. Profit margins decrease, but the business remains attractive because volume is high and costs,
such as for development and promotion, are also lower. In addition, foreign demand for the product grows,
but it is associated particularly with other developed countries, since the product is catering to high-income
demands.
Stage 4: Decline
This occurs when the product peaks in the maturity stage and then begins a downward slide in sales.
Eventually, revenues drop to the point where it is no longer economically feasible to continue making the
product. Investment is minimized. The product can simply be discontinued, or it can be sold to another
company.

The Ansoff Matrix:

Ansoff (1965) demonstrates the choices of strategic direction open to a firm in the form of a matrix (Figure).

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Market Penetration Strategy

Firm increases its sales in its present line of business. This can be accomplished by:
(i) price reductions;
(ii) increases in promotional and distribution support;
(iii) acquisition of a rival in the same market;
(iv) modest product refinements.
These strategies involve increasing the firm’s investment in a product/market and so are generally only used
in markets which are growing.
Product Development Strategy:
This involves extending the product range available to the firm’s existing markets. These products may be
obtained by:
(i) investment in the research and development of additional products;
(ii) acquisition of rights to produce someone else’s product;
(iii) buying-in the product;
(iv) joint development with owners of another product who need access to the firm’s distribution
channels or brands.
Market Development Strategies:
Here the firm develops through finding another group of buyers for its products.
This strategy is more likely to be successful where:

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(i) the firm has a unique product technology it can leverage in the new market;
(ii) it benefits from economies of scale if it increases output;
(iii) the new market is not too different from the one it has experience of;
(iv) the buyers in the market are intrinsically profitable.

Diversification Strategies:
Here the firm is becoming involved in an entirely new industry, or a different stage in the value chain of its
present industry. Ansoff distinguishes several forms of diversification:
1. Related Diversification:
Here there is some relationship, and therefore potential synergy, between the firms exists business –
(a) Concentric diversification means that there is a technological similarity between the industries
which means that the firm is able to leverage its technical know-how to gain some advantage.
(b) Vertical integration means that the firm is moving along the value system of its existing
industry towards its customers (forward vertical integration) or towards its suppliers (backward
vertical integration). The benefits of this are assumed to be:
• taking over the profit margin presently enjoyed by suppliers or distributors;
• securing a demand for the product or a supply of key inputs;
2. Unrelated Diversification:
This is otherwise termed conglomerate growth because the resulting corporation is a conglomerate, i.e. a
collection of businesses without any relationship to one another. The strategic justifications are –
• take advantage of poorly managed companies which can then be turned around and either run at
a gain to the shareholders or sold-on at a profit;
• spread the risks of the firm across a wide range of industries;

ARTHUR D. LITTLE PORTFOLIO MATRIX

The ADL portfolio matrix suggested by Arthur D. Little (ADL) consists of 20 cells, identified by competitive
position and industry maturity. The competitive position is categorized into five classes viz., dominant, strong,
favourable, tenable and weak. The purpose of the matrix is to establish the appropriateness of a particular
strategy in relation to these two dimensions.
The position within the life cycle of the company is determined in relation to eight external factors of the
evolutionary stage of the industry. These are:
(a) market growth rate
(b) growth potential
(c) details of product line
(d) number of competitors
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(e) spread of market share among the competitors

(f) customer loyalty
(g) entry barriers
(h) technology

The competitive position of a company’s SBU or product line can be classified as:
Dominant - It is comparatively a rare situation where the SBU enjoys monopoly position or very strong
market ability of its products. This may be due to high level of entry barriers or protected technology
leadership.
Strong - When an SBU enjoys strong competitive position, it can afford to chalk out its own strategies
without too much concern for the competitors.
Favourable - In this competitive position, no firm will enjoy dominant market share and the competition will
be intense. The strategy formulation much depends on the competitors moves. The market leader will have a
reasonable degree of freedom. Analysis of their product portfolio and learning from them would help others
while framing their own strategies.
Tenable - The tenable competitive position implies that a firm can survive through specialization and focus.
These firms are vulnerable to stiff competition in the market. They can withstand with cost focus and
differentiation focus strategies.
Weak - The weak firms will generally show poor performance. They can withstand with niche strategy and
can become strong players in their area. The consistent weak performance may need to divest or withdraw
from the product line.

STAGES IN STRATEGIC PLANNING

The stages in strategic planning are given below:
Stage I: Strategic Option Generations
At this stage, a variety of alternatives are considered, relating to the firm’s product and markets, its
competitors and so forth. Examples of strategic options might be:
(a) increase market share
(b) penetration into international market
(c) concentration on core competencies
(d) acquisition or expansion etc.

Stage II - Strategic Options evaluation

Each option is then examined on its merits -
(a) does it increase existing strengths ?

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(b) does it reduce existing weaknesses ?

(c) is it suitable for the firm’s existing position ?
(d) is it acceptable to stakeholders ?

Stage III - Strategic Selection

It involves choosing between the alternative strategies. This process is strongly influenced by the values of the
managers in selecting the strategies.

Steps in Strategic Planning

A systematic approach to formalizing strategic plans consists of the following steps:
(i) An internal analysis of company strengths and weaknesses, financial performance, people, operational
limitations, corporate culture, current positioning in the market(s), the overall characterization of the condition
of the company and critical issues facing by the organization.
(ii) An external analysis on analyzing competitors, assessing market opportunities and threats, evaluating
changing technology that could impact the organization, analyzing regulatory or legislative concerns, changes
and trends in the market(s) the company operates in and other potential outside influences on the organization.
(iii) Summarizing the current situation based on the information gathered and evaluated in steps one and
two above.
(iv) Development of a mission, vision or purpose statement. This step is important because of the process
that the team will go through to develop it. In this step, the team is starting the process of focusing the
organization and its people on what the organization is all about and what is important to the organization.
(v) Goal setting. Every organization needs goals. Again, focus is a critical element in the success of any
business. This step may be the most important of all of the strategic planning steps because it establishes the
framework and basis for the development of the other key elements of the plan.
(vi) Defining objectives that support the goals. Objectives are more specific in nature and are supportive of
the goal. They bring into even greater focus to the goals of the organization.
(vii) Development of strategies. Strategies begin defining how the goals and objectives are going to be
achieved.

Approaches in Strategic Planning

It is important to operate a planning process which will not only produce realistic and potentially rewarding
plans but will also secure the support of all those involved in implementing them. There are three approaches
that can be adopted to strategic planning:
(i) A top-down process, in which managers are given targets to achieve which they pass on down the line.

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(ii) A bottom-up process, in which functional and line managers in cooperation with their staff submit plans,
targets and budgets for approval by higher authority.
(iii) An iterative process, which involves both the top-down and bottom-up setting of targets. There is a to-
and-from movement between different levels. However, this agreement will have to be consistent with the
overall mission, objectives and priorities and will have to be made within the context of the financial
resources available to the organization. The iterative approach, which involves the maximum number of
people, is the one most likely to deliver worthwhile and acceptable strategic plans.

Strategic Management and Strategic Planning : distinction

Strategic Management Strategic Planning
1.it is focused on producing strategic results; new 1. it is focused on making optimal strategic
markets, new products; new technologies etc. decisions.
2. It is based on past result. 2. it is based on plans.
3. It is based on organisational action process. 3. it is based on analytical process.
4. It broadens focus to include psychological, 4. it is focused on business, economic and
sociological, political variables. technological variables.
5. it is about choosing things to do and also about 5. it is about choosing things to do.
the people who will do them.

Corporate Planning and long-range Planning

Corporate Planning - It is concerned with determination of objectives treating the company as a whole. It
develops means to achieve the company’s overall objectives. The corporate plans may relate to achieve
corporate objectives for short-run and/or long-run. It is an integrated systems approach considering different
functions, divisions and units of the organization. Such corporate plans are framed at the corporate level by
the top management.
Long-range Planning - It is a systematic and formalized process concerned with directing and controlling
future operations of an enterprise towards desired objectives for periods spreading generally over 5 or more
years. It provides an opportunity to management to anticipate future problems and have got more flexibility in
framing the long-range plans.
Corporate planning is not synonymous with long range planning. Corporate planning is concerned with both
short periods as well as long periods. The time span depends on how far ahead a company wants to forecast,
depends on nature of business and depends on commitment of resources required for it. Corporate planning in
an engineering firm will involve long-term considerations but it will have short-term consideration in case of

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textile firm. Long range planning necessarily connotes planning with a long time horizon, generally five years
or more.
Strategic Planning and long-range Planning
The basic divergence between strategic planning and long-range planning lies in the difference in the
assumption regarding the future environment of an organisation. In case of long-range planning current
knowledge about future conditions is known with certainty that can be relied upon by executives.
Accordingly, the course of action for achievement of organisational goals is drawn on the basis of this
knowledge.

On the contrary, strategic planning assumes that an organisation must be ready to respond to a dynamic
environment and future environmental conditions are not known with perfect certainty. Thus, there is a need
to emphasise and understand how the environment assumed is charging. Accordingly, the issue of developing
courses of action in response to these changes will have to be taken up. Here, a number of alternatives are
generated for several situations for the future. In case of strategic planning, the firm tries to identify
opportunities, threats and trends based on which the future prospects are analysed.

ALTERNATIVES IN STRATEGIC PLANNING

A basic premise of good strategic management is that firms plan ways to deal with unfavorable and favorable
events before they occur. Too many organizations prepare contingency plans just for unfavorable events; this
is a mistake, because both minimizing threats and capitalizing on opportunities can improve a firm’s
competitive position.

Regardless of how carefully strategies are formulated, implemented, and evaluated, unforeseen events, such as
strikes, boycotts, natural disasters, arrival of foreign competitors, and government actions, can make a strategy
obsolete. To minimize the impact of potential threats, organizations should develop contingency plans as part
of their strategy-evaluation process. Contingency plans can be defined as alternative plans that can be put into
effect if certain key events do not occur as expected. Only high-priority areas require the insurance of
contingency plans. Strategists cannot and should not try to cover all bases by planning for all possible
contingencies. But in any case, contingency plans should be as simple as possible.

Some contingency plans commonly established by firms include the following:

1. if a major competitor withdraws from particular markets as intelligence reports indicate, what actions
should our firm take?
2. If our sales objectives are not reached, what actions should our firm take to avoid profit losses?
3. If demand for our new product exceeds plans, what actions should our firm take to meet the higher
demand?

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4. if certain disasters occur—such as loss of computer capabilities; a hostile takeover attempt; loss of patent
protection; or destruction of manufacturing facilities because of earthquakes, tornadoes, or hurricanes — what
actions should our firm take?
5. if a new technological advancement makes our new product obsolete sooner than expected, what actions
should our firm take?

Steps in Contingency Planning

Robert Linnemam and rajan chandran have suggested that a seven step process as follows:
Step 1 - Identify the beneficial and unfavourable events that could possibly derail the strategy or strategies.
Step 2 - specify trigger points. calculate about when contingent events are likely to occur.
Step 3 - Assess the impact of each contingent event. Estimate the potential benefit or harm of each contingent
event.
Step 4 - Develop contingency plans. Be sure that contingency plans are compatible with current strategy and
are economically feasible.
Step 5 - assess the counter impact of each contingency plan. that is, estimate how much each contingency
plan will capitalize on or cancel out its associated contingent event. Doing this will quantify the potential
value of each contingency plan.
Step 6 - Determine early warning signals for key contingency event. monitor the early warning signals.
Step 7 - For contingent event with reliable early warning signals, develop advance action plans to take
advantage of the available lead time.

Benefits of Contingency Planning

(i) it will make the future through their proactive planning and advanced preparation.
(ii) It will introduce original action by removing present difficulties.
(iii) it enables to anticipate future problems.
(iv) it will change the goals to suit internal and external changes.
(v) it experiments with creative ideas and take initiative.

The PESTEL framework

The PESTEL framework shows some of the macro-environmental influence which might affect organisations.
It focuses on the six principal components of strategic significance in the macro-environment namely,
political, economic, social, technology, environmental and legal forces.
• Political factors
These factors include political policies and processes, including the extent to which a government intervenes
in the economy. They include matters as political structure, its goals, government stability, taxation policy,

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foreign trade regulation, social welfare policies, political philosophy, ideological forces, political parties,
centres of power, etc. Some political factors such as bailouts, are industry specific. Others, such as energy
policy, affect certain types of industries (energy producers and heavy users of energy) more than others.
• Economic Factors
Economic conditions include the general economic climate and specific factors such as business cycles,
interest rates, money supply, inflation, unemployment, disposable income, etc. Economic factors also include
conditions in the market for stocks and bonds, which can affect consumer confidence and discretionary
income.
• Socio-cultural factors
Socio-cultural forces include the societal values, attitudes, cultural factors, population demographics, income
distribution, social mobility, lifestyle changes, attitudes to work and leisure, consumerism, levels of education,
etc. Socio-cultural forces vary by locale and change over time. The socio-cultural forces primarily affects the
strategic management process within the organisation in the areas of mission and objective setting and
decisions related to products and markets.
• Technological factors
These relate to knowledge applied and the material and machines used in the production of goods and services
that have an impact on the business of an organisation. Technological factors include government spending on
research, government and industry focus on technological effort, new discoveries/development, transfer, rates
of obsolescence, and the pace of technological change and technical developments that have the potential for
wide-ranging effects on society, such as genetic engineering and nanotechnology.
• Environmental factors
They include protection laws, waste disposal, energy consumption, weather, climate, climate change and
associated factors like water shortages. These factors can directly impact industries such as insurance,
farming, energy production, and tourism. They may have an indirect but substantial effect on other industries
such as transportation and utilities.
• Legal
They include monopolies legislation, licensing, foreign investment, financing of industries, employment law,
health and safety, product safety, consumer laws, antitrust laws, policies related to imports and exports, etc.
Some factors such as banking regulation are industry specific. Others, such as minimum wage legislation,
affect certain types of industries (low wage, labour intensive industries) more than others.

PORTER’s 5 Forces Model

The five forces framework helps to identify the sources of competition in an industry or sector. When using
this framework to understand competitive forces it is essential to keep in mind the following:

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(i) It must be used at the level of strategic business units and not at the level of whole organisation. This is
because organisations are diverse in their operations and markets.
(ii) The framework must not be used just to give a snapshot in time. It is important not just to describe these
forces but also to understand how they can be countered and overcome in the future.
(iii) These competitive forces will not only be subject to steady changes into the future but, more importantly,
the discontinuities caused by changes in the macro-environment.
(iv) The five forces are independent of each other. Pressures form one direction can trigger off changes in
another in a dynamic process of shifting sources of competition.
(v) Competitive behaviour may be concerned with disrupting these forces and not simply accommodating
them.

The threat of entry

Threat of entry will depend on the extent to which there are barriers to entry. Barriers to entry are factors that
need to be overcome by new entrants if they are to compete successfully. These should be seen as providing
delays to entry and not as permanent barriers. The typical barriers are:
(i) Economies of Scale
Economies of scale arise when unit costs fall as a firm expands its output. Sources of scale economies include
cost reductions gained through mass producing a standardised commodity, discounts on bulk purchases of raw
material inputs and component parts, the advantages gained by spreading fixed production costs over a large
production volume and the cost savings associated with spreading marketing and advertising costs over a
large volume of output. If theses cost advantages are significant then a new company that enters the industry
and produces on a small scale suffers a significant cost disadvantage relative to established companies.
(ii) Brand Loyalty
Brand loyalty exists when consumers have a preference for the products of established companies. A
company can create a brand loyalty through continuous advertising of its brand-name products and company
name, patent protection of products, product innovation achieved through company research and development
programs, an emphasis on high product quality and good after sales service.
(iii) Absolute cost advantages
Absolute cost advantages arise from three sources namely -
(a) superior production operations and processes due to accumulated experience, patents, or secret
processes,
(b) control of particular inputs required for production, such as labour, materials, equipment, or
management skills, that are limited in their supply; and

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(c) access to cheaper funds because existing companies represent lower risks than new entrants. If
established companies have absolute cost advantages, the threat of entry as a component of five
forces is weaker.
(iv) Customer Switching Costs
Switching costs arise when it cost a customer time, energy, and money to switch from the products offered by
one established company to the products offered by a new entrant. When switching costs are high, customers
can be locked in the product offerings of established companies, even if new entrants offer better products.
(v) Government Regulation
Legal restraints on competition vary from patent protection, to regulation of markets, through to direct
government action. Of course, managers in the hitherto protected environments might face the pressures of
competition for the first time if governments remove such protection. Historically, government regulation has
constituted a major barrier into many industries.

Competitive Rivalry
Competitive rivals are organisations with similar products and services aimed at the same customer group.
The competitive struggle can be fought using price, product, design, advertising and promotion spending,
direct selling efforts, and after-sales service and support.
The intensity of rivalry among established companies within an industry is largely a function of the factors
such as:
(i) The extent to which the competitors are in balance. Where the competitors are roughly equal in size, there
is a danger of intense competitions as one competitor attempts to gain dominance over another. Conversely,
the less competitive markets tend to be those with dominant organisations within them and the similar players
have accommodated themselves in this situation.
(ii) The level of industry demand is a second determinant of the intensity of rivalry among established
companies. Growing demand from new customers or additional purchases by existing customers tend to
moderate competition by providing greater scope for companies to compete for customers.
(iii) In industries where fixed costs are high, profitability tends to be highly leveraged to sales volume and the
desire to grow volume can spark intense rivalry. As capacity fill becomes a prerogative, price wars and very
low margin operations are observed.
(iv) If the addition of extra capacity is in large increments, the competitor making such an addition is likely to
create at least short-term overcapacity and increased competition.
(v) The level of differentiation plays an important role. In a commodity market, where products or services are
undifferentiated, there is little to stop customers switching between competitors.

The Bargaining Power of the Buyers

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The bargaining power of the buyers refers to the ability of buyers to bargain down prices charged by
companies in the industry or to raise the costs of companies in the industry by demanding better quality
products and services. Buyer power is likely to be high when some of the following conditions prevail
(i) The product or service that the industry supplies comprise a large number of small operators.
(ii) There is a concentration of buyers, particularly if the volume purchases of the buyers are high.
(iii) When the supply industry depends on the buyers for a large percentage of its total orders.
(iv) There are alternative sources of supply, perhaps because the product or service requires is undifferentiated
between suppliers or when the deregulation in the markets spawns new competitors.
(v) When switching costs are low so that the buyers can play off the supplying companies against each other
to force down process.

The Bargaining Power of the Suppliers

The bargaining power of the suppliers refers to the ability of suppliers to raise input prices or to raise the costs
of the industry in other ways. Supplier power is likely to be high when some of the following conditions
prevail
(i) The product that the suppliers sell has few substitutes and is vital to the companies in the industry.
(ii) There is a concentration of suppliers rather than a fragmented source of supply.
(iii) The brand of the supplier is powerful.
(iv) The supplier’s customers are highly fragmented.
(v) Supplier’s can threaten to enter their customer’s industry and use their inputs to produce products that
would compete directly with those of companies already in the industry.

The Threat of Substitutes

Substitute products refer to the products of different businesses or industries that can satisfy similar customer
needs. Substitution reduces demand for a particular class of products as customers watch to the alternatives.
Substitution may take several forms:
(i) There could be product for product substitution for e.g., email substitution for a postal service.
(ii) There may be substitution of need by a new product or service, rendering an existing product or service
redundant.
(iii) Generic substitution occurs where products or services compete for disposable income.

Diversification strategy
It is a process of entering new industries, distinct from a company’s core or original industry, to make new
kinds of products that can be sold profitably to customers in these new industries. It takes the organisation

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 Disha Commerce Academy, Mansarovar, Jaipur CMA Inter - SM

away from its current markets or products or competences. Diversification strategy can be broadly classified
into related (concentric) diversification and unrelated (conglomerate) diversification.
(a) Related (concentric) diversification is a corporate level strategy that is based on development beyond
current products and markets, but within the value system or ‘industry’ in which it operates. The multi
business model of related diversification is based on taking advantage of strong technological, manufacturing,
marketing and sales commonalities between new and existing business units that can be suitably adjusted or
modified to increase the competitive advantage of one or more business units. For e.g. Johnson and Johnson
engaged in research and development, manufacture and sale of various products in the health care field
worldwide.
(b) Unrelated (conglomerate) diversification is a corporate level strategy based on multi business model
whose goal is to increase profitability through the use of generic organisational competences to increase
performance of all the company’s business units. In other words when an organisation moves beyond its
current value system or industry it is called unrelated (conglomerate) diversification. For e.g. the ITC Group is
in agribusiness, FMCG, hotels, paperboards, packaging and IT.

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