Module - 2

MEANING OF BUSINESS ENVIRONMENT Business Environment consists of

all those forces both internal and external that affect the working of a business. It
refers to the conditions, forces, events and situations within which business
enterprises have to operate. Business and its environment are closely related and
the effectiveness of interaction of the two determines the success or failure of a
business.
DEFINITION According to Wheeler Business Environment is the total of all
things external to firms and individuals, which affect their organization and
operations .
Features of Environment
Complex: The environment comprises of multifarious events, factors, conditions
and influences arising from various sources. They interact with each other
constantly and often produce an entirely new set of influences. It is not easy to
state clearly as to what kind of forces constitutes a given environment.
Dynamic: The environment of an organisation is dynamic and constantly
changing. Changes in technology, government regulations, competitive forces etc.
compel organisations to shift gears and change direction quite often. At times, there
could be too many changes in too little time, leading to shocks and surprises in the
maker place.
Challenging: All firms are impacted by political, legal, economic, technological
and social systems and trends. Together, these elements comprise the macroenvironment of business firms. Because these forces are so dynamic their constant
change presents myriad opportunities and threats or constraints to strategic
managers.
COMPONENTS OF BUSINESS ENVIRONMENT The business environment
can be broadly divided into two groups A. Internal Environment B. External
Environment
A. Internal Environment
1. Management Philosophy
The management philosophy greatly influences the working of business firm. The
management may adopt a traditional philosophy or a professional philosophy.

Nowadays business firm need to adopt professional approach. A proper analysis of

internal environment will reveal the weaknesses of the traditional approach and
force the management to adopt a professional approach.
2. Mission and Objectives
It is always advisable to frame a mission statement and then to list out the various
objectives .An analysis of internal environment will enable the firm to find out
whether the objectives are in line with the mission statement and whether the
objectives are accomplished or not.
3. Human Resources
The survival and success of the firm largely depends on the quality of human
resources.An analysis of internal environment in respect of human resources would
reveal the shortcomings of human resources and as such measures can be taken to
correct such weaknesses.
4. Physical Resources
Physical resources include machines, equipments, building, furniture etc. A firm
needs adequate and quality physical resources.An analysis of the internal
environment may reveal the weaknesses of the physical resources and company
can take appropriate measures to correct such weaknesses.
5. Financial Resources
A firm needs adequate working capital as well a fixed capital. There is a need to
have proper management of working capital and fixed capital.An analysis of the
internal environment will help to make optimum use of available funds as well as
to raise additional funds.
6. Corporate Image
A firm should develop, maintain and enhance a good image in the minds of the
employees, investors, customers and others. Poor corporate image is a
weakness.An analysis of the internal environment enables the firm to build good
public image.
7. Research and Development facilities
If the organization has adequate research and development facilities, it is in a
position to innovate, introduce new products and services continuously. This
enable the firm to remain ahead of the competition

8. Internal Relationship
There should be a proper flow of vertical and horizontal communication i.e.
between superiors and subordinates and between colleagues at the same level. A
free flow of ideas enables a healthy relationship between colleagues.
B. External Environment
External environment includes all those factors and forces which are external to the
business organization. These include factors such as economic, socio-cultural,
legal, demographic etc. These factors are beyond the control the company.
1. Demographic Environment
Demographic environment studies human population with reference to its size,
density, literacy rate, sex-ratio, age composition etc. These factors affect the
demand for good and services, quantity and quality of production, distribution etc.
e.g. a rapidly growing population indicates growing demand for many products.
2. Natural Environment
Business firms use natural resources like water, land, iron, crude oil etc. All
business units are directly or indirectly dependent upon natural environment.
Business firms are responsible for ecological imbalance. So they should take
necessary measures to control pollution. Business operations have caused
considerable changes in ecological balance and natural environment of the country.
The applications of modern technology in industry leads to rapid economic growth
at a huge social cost a measured by the deterioration of physical environment i.e.
air pollution, water pollution, noise pollution etc. So business enterprises has to
calculate net social cost of its venture.
3. Economic Environment
A business firm closely interact with its economic environment. Economic
environment is generally related to those external forces, which have direct
economic effect upon business. Economic environment is a sum total of
a. Economic conditions in the market
b. Economic policies of the government
c. Economic system of the country.
a. Economic conditions

It includes nature of economy, the stage in economic development, national

income, per capita income etc. These operate in the market and influence the
demand and supply of goods and services.
b. Economic policies
Economic policies means policies formulated by the government to shape the
economy of the country. These include monetary and fiscal policies, export-import
policy, industrial policy, licensing policy, budgetary policy etc. The economic
policies of the government affect the business. This impact may be positive or
negative e.g. liberation of the economy has adversely affected the small scale
industry in India.
c. Economic systems
Economic systems means the classification of economies on the basis of role of the
government in the functioning of the economy . Economic system can be classified
as
Capitalist Economy There exists least government control in regulating the
working of a market. E.g. U.S.A.
Socialist Economy The government has major control over all activities e.g.
China.
Mixed Economy It combines the features of both capitalist and socialist
economy where both private and public sector play an equally important role e.g.
India.
4. Legal Environment / Regulatory Environment
Legal environment includes laws, which define and protect the fundamental rights
individuals and organizations. It creates a framework of rules and regulations
within which business units have to operate. Business firm must have up to date
and complete knowledge of the laws governing production and distribution of
goods and services. Some of the important laws are Indian Companies Act, 1956
The Consumer Protection Act, 1986 The MRTP Act, 1969. The Essential
commodities Act, 1955. etc.
5. Political Environment
It refers to the influence exerted by 3 political institutions namely the legislature,
the executive and the judiciary in developing and controlling business activities.

Business decisions are greatly influenced by the developments in the political

environment. A change in the government brings about a change in attitude,
preference, objectives etc. Business firms need to keep a track of all political
events, anticipate changes in government policies and frame production and
marketing strategies accordingly.
6. Cultural Environment
Every society has a culture of its own. Culture includes knowledge, belief, art,
morals, laws, customs and other capabilities and habits acquired by an individual
as a member of society. Cultural values are passed on from one generation to
another. Culture thus determines the types of goods and services a business should
produce. Business should realize the cultural differences and bring out products
accordingly.
7. Technological Environment
Technology is the systematic application of scientific or other organized
knowledge to practical tasks. Technological advancement make it possible to
improve the quality of products, increase the output and decrease the cost of
product. Technological changes are rapid and to keep pace with it, businessmen
need to be alert and flexible in order to quickly incorporate them in their business
organization so as to survive and succeed in the competitive business world.
8. International Environment
The international environment is an outcome of political and economic conditions
in the international market. Business firms engaged in the foreign trade are more
affected by the changes in the international environment factors like war, civil
disturbances, political instability, changes in trade policies in other countries with
which India has trading links do affect Indian exporters and importers. Therefore,
business firms, which cater to foreign trade must constantly monitor implications
of international environment on their business.
The components of international environment are
Import and Export policy of a country.
Rules and regulations laid down by International Institutions like IMF,
World Bank etc.
The policies of trading blocks like SAARC, EEC, ASEAN etc.
Foreign exchange regulations like tariffs, quotas.
Trade cycle like boom, recession at world level

ENVIRONMENTAL SCANNING
Environmental Scanning means an examination and study of the environment of a
business unit in order to identify its survival and prosperity chances. It means
observing the business environment both external and internal and understanding
its implications for business opportunities. It also involves knowing beforehand the
risks and uncertainties as well as threats to the business unit. As business
environment is dynamic in nature, it is always changing, environmental scanning
has to be quick and regular. It should not be one time act to scan the environment.
It is the constant telescoping of external environment and microscoping of internal
environment. Environmental Scanning provides a broader prospective to corporate
planners in formulating plans and strategies. In short , the process by which
organizations monitor their relevant environment to identify opportunities and
threats affecting their business is known as environmental scanning.
NEED FOR ENVIRONMENTAL SCANNING Environmental Scanning is
essential because of following reasons :
1) Prime Influence Environment is a prime influence on the effectiveness of
business strategies. If strategic planning is done without considering environment,
it is likely to be defective. Besides, the success of the implementation of the
strategy depends on the environmental factors.
2) A tool to anticipate Changes Environmental scanning is a very useful tool
not only to understand business surroundings, but also as a good instrument to
anticipate the changes and be prepared to face the challenges of such changes.
3) Time for adjustment A business unit cannot change the business activities
overnight. It needs time to adjust with the changing environment. If it has to face
the changed environment suddenly, it may be possible to make immediate changes
according to the demand of the changed environment. Environmental scanning
gives time to the company to get adjust to the changed environment.
4) Early Warning system - Environmental Scanning gives advance warning or
danger signals of the adverse changes in environment. It helps the company to
design defense mechanism to avoid future adverse effects of environment on the
business activities e.g. with the changing marketing environment, many companies
are adopting on-line marketing to survive in this competitive environment.

TECHNIQUES /APPROACHES OF ENVIRONMENTAL SCANNING

Environmental Scanning can be effectively done following different techniques or
approaches as follows :
1) Seeking and getting opinion Opinions of experts or knowledge people can be
got by talking to them. Depending upon the nature of industry, and type of markets,
these experts would differ, but they would be the people who are good at reading
the current trends as well as future trends e.g. a businessman who wishes to
establish a holiday resort may talk to an expert in Tourism or expert person in the
hotel business in order to know the prospects of the resort.
Opinions can be sought even from non-experts or laymen who are involved in the
relevant business. This can be done through surveys or informal chats or meetings
with the concerned people. The opinions of experts and non-experts should be
integrated to have a clear picture of environment and future trends.
2) Extrapolating To extrapolate means to calculate or estimate unknown factors
or future trends by inference or logic after knowing the facts or present trends. It
involves estimating or forecasting an unknown , present trends. It helps a
businessmen to read future with the help of the present. It is not guesswork. It is a
calculation that peeps into the future or in the unknown with the help of proper
reading of the present.
3) Estimate An estimate is a techniques of designing the worse case scenario and
the best case scenario. It estimates the best opportunities and the worst threats that
are likely to emerge from the analysis of the environment. It thereafter weights the
possibilities and probabilities of the opportunities and threats and preparing a
balanced, realistic environment.
4) Mapping It is an analytical tool that tries to read the process of transformation
of factors in environment. The whole of the environment does not change
suddendy, certain factors change, while others remain the same over a period of
time. Mapping is a techniques that tries to track the environmental factors to find
out how many of them, and which of them are changing. It tries also to find out the
direction and the speed of the change. It locates and plots the changes, their routes
and their magnitude or extent.
5) Modelling - There are many types of modeling that can be used to scan the
environment. E.g. Regression analysis or probability tables are also used in more
complex types of modeling.

6) Industrial espionage It is used for 2 purposes

* To gather vital information from government department
* To collect clues from the competitors
A spy can be a government employee or an employee of a competitor, a
competitors supplier or customer. E.g. Japanese visitors to American factories,
plants and facilities gather information. Research students working in laboratories
may take up vacation jobs with companies as a part of spying assignments.
SWOT ANALYSIS In order to survive and grow in this competitive environment,
it is essential for every business organization to undertake SWOT analysis. The
process by which the enterprises monitor their relevant environment to identify
their business opportunities and threats affecting their business is known as
environment analysis or SWOT analysis. In other words analyzing the surrounding
environment before framing policies and taking business decisions is called as
SWOT analysis.
Strengths Weaknesses Opportunities Threats SW stands for strengths and
weaknesses OT stands for opportunities and threats A Strength is something a
company is good at doing or a characteristic that gives it an important capability.
Possible strengths are :
Name recognition
Proprietary technology
Cost advantages
Skilled employees
Loyal customers etc.
Strengths and weaknesses are derived from internal environment . Opportunities
and threats arise from external environment. SWOT analysis help the business unit
to know its positive points as well as negative points.
Strength is an inherent capacity which an organization can use to gain strategic
advantage over its competitors e.g. Marketing of Hindustan Leaver Limited, they
have around 15 lakhs retail outlets for distributing their various products in India.
A Weakness is something a company lacks or does poorly (in comparison to
others) or a condition that places it at a disadvantage. Possible weaknesses are :
Poor market image

Obsolete facilities
Internal operating problems
Poor marketing skills etc.
Weaknesses is an inherent limitation, which creates a strategic disadvantage for the
organization e.g. limited finance.
Opportunities An opportunity is a favourable condition in the organizations
environment which enables it to strengthen its position.
Threats A threat is an unfavourable condition in the organizations environment
that creates a rise for or cause damage to the organization.
ROLE AND IMPORTANCE OF SWOT ANALYSIS
1. Identify strengths The analysis of the internal environment help to identify
the strengths of the firm. The internal environment refers to plans and policies of
the firm, its resources-physical, financial and human resources e.g. If company has
good relations with workers, the strength of the company can be identified through
the workers loyalty and dedication on the part of workers.
2. Identify weaknesses A firm may be strong in certain areas, whereas it may be
weak in some other areas. The firm should identify such weaknesses through
SWOT analysis so as to correct them as early as possible e.g. Lack of capital may
be a weakness of the company, but company should try to raise additional funds to
correct the weaknesses.
3. Identify Opportunities An analysis of the external environment helps the
business firms to identify the opportunities in the market. The business firm should
make every possible effort to grab the opportunities, as and when they come e.g.
4. Identify threats Business may be subject to threats from competitors and
others. Identification of threats at an earlier date is always beneficial to the firm as
it helps to defuse the same. For instance, a competitor may come up with
innovative product. This not only affects the firms business but also endanger its
survival, so business firm should take necessary steps to counter the strategy of the
competitors.
5. Effective Planning A proper study of environment helps a business firm to
plan its activities properly. Before planning, it is very much necessary to analysis
the internal as well as external environment. After SWOT analysis , the firm can

list out well-defined and time-bound objectives, which in turn help to frame proper
plans.
6. Facilitates Organising Resources Environment analysis not only helps in
organizing the resources of right type and quantity. A proper analysis of
environment enables a firm to know the demand potential in the market.
Accordingly, the firm can plan and organize the right amount of resources to
handle the activities of the organization.
7. Face Competition A study of business environment enable a firm to analyse
the competitors strengths and weaknesses. This would enable the firm to
incorporate the competitors strengths in its working. The firm may also try to
exploit the competitors weaknesses in its favour.
8. Flexibility in Operations The environmental factors are uncontrollable and a
business firm finds it difficult to influence the surrounding of its choice. A study of
environment will enable a firm to adjust its operations depending upon the
changing environmental situation.
Industry analysis helps a firm find answers to two questions basically:
Whatcharacteristics of the industry are important? And how can a manager
enhance performance given those characteristics?.
Industry characteristics that could impact a Firms Performance
The number of firms in the industry
The level and pattern of promotional expenditures
The rate and nature of technological competition
The relative size of firms
Consumer preferences for the product and for related products
The rate of demand growth

The extent of product differentiation

The price behaviors of the leading firms
The minimum efficient scale of production
Buyer switching costs
Demand-side economies of scale
Specificity of plant and equipment to industry etc.

Porters Five Forces Model

The Five Forces Model, developed by Michael Porter, provides the groundwork for
strategic action. Competitive forces determine profitability and are therefore of
foremost importance to the firm. Competition is not manifested only in the other
players.Competition is rooted in the underlying economic structure. Customers,
suppliers,

potential entrants and substitute products, all have the potential to impact the
market depending on the industry.

1) Threats of Entry: New entrants to an industry bring new capacity, the desire to
gain market share, and often substantial resources. Gaining entry is always not
easy as there are barriers to entry. (i) The economies of scale prohibit entry by
forcing the aspirant either to come in on a large scale or to accept a cost
disadvantage (ii) brand identification (product differentiation) creates a strong
barrier by forcing entrants to spend heavily to overcome customer loyalty
(remember lux, bournvita, vicks, good day) (iii) The need to invest large financial
resources in order to compete creates a barrier to entry (iv) Entrenched companies
many have cost advantages not available to potential rivals, no matter what their
size and attainable economies of scale. (vi) The government can limit or even
foreclose entry to industries, with such controls as license requirements, and limits
on access to raw material.
2) Powerful Supplier: This is a situation where suppliers can force buyers to pay
higher prices and thus affect their profitability. This would happen if the supplier
enjoys monopoly, where the switching cost of the buyer is substantially higher,
where the industry is not as important customer of the supplier group, where it sells
products having no substitutes etc.
3) Powerful buyers: Customers likewise can force down prices, demand higher
quality or more service and play competition against each other all at the expense
of industry profits. This can usually happen when buyers have choice of substitutes
or an alternative source of suppliers for the same product. Also, high buyer
concentration, threat of backward integration, and low switching costs add to the
power of buyers.
4) Substitute products: By placing a ceiling on the prices it can charge, substitute
products or services limit the potential of an industry. For example, Jute industry
suffered badly after facing competition from petro-chemical based packing
products. The demand for fibre glass suffered likewise when insulation substitutes
emerged in the form of cellulose rockwool and Styrofoam.
5) Intensity of Rivalry: There is competitive rivalry between firms on a continuing
basis, the various players in a particular sector or niche try to constantly jockey for
position and try new product and process innovation in order to develop a strategic
edge and hence a stronger position in the competitive space. Intense rivalry is
related to a number of factors; competitors are large in number and of comparable
sizes; industry growth is slow; the product or service has low switching costs; fixed
costs are high; the product is perishable; exist barriers are high etc.

Critical Success Factors (CSFs)

Strategic advantage profile (SAP) tries to find out organizational strengths and
weaknesses in relation to certain CSF ( advantage factors or competence factors)
within a particular industry. Many industries have relatively small but extremely
important sets of factors that are essential for successfully gaining and maintaining
competitive advantages. Known as critical success factors (CSFs), they have a
significant bearing on the overall growth of a firm within an industry. Research has
identified four major
Sources of CSFs in general:
Industry characteristics: CSFs are often industry-specific. CSFs supermarket
chains include inventory turnover, product-mix, sales promotion and pricing. In the
airline industry CSFs would be somewhat different, i.e. fuel efficiency, load
factors, excellent reservation system etc. No one set of CSFs applies to all
industries. As industries change, CSFs would also change.
Competitive positions: CSFs vary with a firms position relative to its rivals in
the field. Now-a-days old rivals Coke and Pepsi are discovering there is more
money in water than coloured water.
General environments: Changes in any of the dimensions of the general
environment i.e. political/legal, socio cultural, demographic, technological,
macroeconomic, global etc. can affect how CSFs emerge.
Organisational developments: Internal developments, too, take the centre stage
and give rise to new CSFs. For example if several key executives of an investment
banking arm quit to form a competing spin off firm, rebuilding the executive
team would become a key issue for the original firm.
Synergy and Dysergy
It is an important concept for mangers because it emphasizes the importance of
working together in a cooperative and coordinated fashion. To obtain special
benefits in the form of cost savings, better grip over the market, full exploitation of
scarce managerial talent, joint sharing of technology etc. firms are often ,
compelled to have good relations and strong alliances with suppliers, creditors and
customers.
Synergistic effects
Synergistic effects may be negative or positive, we can say it either synergy or
dysergy based on its effect. An idea that the whole is greater or lesser than that the
sum of its parts. It helps to develop competencies.

SYNERGY in Strategic Management

Synergy is also known as Positive Synergy. Origin of word synergy: Derived
from Greek word Sunergos. Meaning: Working Together or Joint Together
2+2=5 effect
Synergy Definition
Synergy can be defined as an idea that the whole is greater than that the sum of its
parts.
Meaning of Synergy
The concept of synergy can be simplified with the statement given below-2+2=5
(The two plus two is equal to five) In the above example each individual or
function produce only 2 units. By combining them together effectively, we can get
5 units of outputs.
We combine organizations strengths and weaknesses like resources and behavior
to get maximum output. Here sometime the two strong points can double the
strength.
Synergistic effect may occur in a number of ways within a functional area like a
marketing it may occur at the time of product, pricing, promotion aspects
which can result into a high level of marketing synergy.
Here we can give 1 more example to elaborate the concept of Synergy. Suppose
there are two persons in the company to carry some load. If each person carries 10
Kg of material easily from one place to another but unable to carry 15 kg of
material. If we combine these both persons working together and effectively, they
can carry more than 20 Kg of material from one place to another. This is the
synergistic effect where the sum of two is greater than the individuals.
Meaning of Synergy The working together of two things (muscles or drugs
for example) to produce an effect greater than the sum of their individual effects.
Features of Synergy Greater capability for organization by combining resources
properly (as compared to individual work).
Synergy can help organization to work in team to achieve goals effectively with
reduction in cost.
There will be an optimization of resources which can lead to increased
productivity.

Types or areas of Synergy

1. Marketing Synergy
2. Sales Synergy
3. Operations Synergy
4. R&D Synergy (Research & Development)
5. Financial Synergy/ Investment Synergy
6. General Management Synergy
Advantages of Synergy
Generally Synergy is created when the combination of Buyer and
Seller eliminates weaknesses and leverages strengths. The following benefits or
advantages can be observed from Synergy.
Functional Advantages
Economies of scale
Greater Outcomes
Financial Benefits (Cooperation by Mergers & Acquisitions or any other strategy)
Three financial benefits are
Cash slack
Debt capacity
Tax benefits
Increased Market Share
Political Stability
More Geographical Presence
Gain in Efficiency
Competitive Advantage to the firm
Encourages Creativity
Decision Making
Risk Reduction
Company Image building or enhancement in Companys image
Skills sharing
Disadvantages of Synergy
Easy theory, Practically difficult
Thinking Problems due to different groups
Some times cost may be high Lack of clarity of roles & responsibilities may lead to
ambiguity and conflicts
Increased numbers of persons or authorities, Longer decision time, increased work
Loss in Jobs ( Disadvantage for Workers)

DYSERGY in Strategic Management

These are the combined negative attitude or results. Also called Negative Synergy.
Can be observed or result in diversified groups. 2+2=3 Effect
Dysergy Definition
Dysergy can be defined as an idea that the whole is lesser than that the sum of its
parts.
Meaning of Dysergy
2+2=3 (Two plus two is equal to three) Dysergy is simply a negative
synergy.Where Dysergy occurs, a marketing inefficiency reduces production
efficiency, the overall impact being negative.
Organizational capability profile
An organizational capability profile describes the skills, knowledge and resources
that enable your company to provide quality products or services to customers. The
profile provides useful background information for your marketing and corporate
communications. You can also use it as part of a formal bid document to win
contracts. To draft the profile, first identify the capabilities that are important to
your customers and that differentiate you from competitors and then incorporate
them in a presentation or document.
Customer Focus
Your capability profile must incorporate the information customers and prospects
need when they are evaluating your company as a potential supplier or business
partner. Customers need to know about your current capability and your future
direction. They want to know that you have the technical expertise and market
understanding to supply quality products that meet their performance requirements.
The profile must also build confidence in customers and convince them that you
have the management capability and financial stability to continue meeting their
requirements over the long term.
People
The skills and knowledge of your people represent an important part of your
organizational capability. Describe the qualifications and experience of key staff,
together with any outstanding achievements such as awards for innovation,
involvement with industry associations or leadership in a particular discipline. The

skills of your business partners also contribute to your capability. Companies,

particularly in sectors such as information technology, describe their partnership
networks as an ecosystem that they can utilize to enhance and extend their own
capability.
Resources
Many other assets contribute to your organizational capability, including patents,
products, manufacturing facilities, information systems and distribution networks.
Those assets differentiate you from competitors, particularly if they are hard to
match. Customize the assets to your customers needs. A customer with sites in a
number of different countries, for example, would be looking for a supplier with an
international distribution network. Another customer with demanding delivery
requirements would be interested in a supplier with flexible manufacturing
capability.
Stability
Stability is an important aspect of organizational capability. You can build
confidence in your customers by demonstrating that you have a stable management
team capable of managing your business effectively. You should also show that
your organization is financially stable with a continuing record of growth and
profitability. Strong financial performance indicates that you can continue as a
reliable supplier with the ability to invest in facilities that will improve service to
customers even further.

McKinsey 7s model
McKinsey 7s model is a tool that analyzes firms organizational design by
looking at 7 key internal elements: strategy, structure, systems, shared values,
style, staff and skills, in order to identify if they are effectively aligned and allow
organization to achieve its objectives.
McKinsey 7s model was developed in 1980s by McKinsey consultants Tom Peters,
Robert Waterman and Julien Philips with a help from Richard Pascale and Anthony
G. Athos. Since the introduction, the model has been widely used by academics
and practitioners and remains one of the most popular strategic planning tools. It
sought to present an emphasis on human resources (Soft S), rather than the
traditional mass production tangibles of capital, infrastructure and equipment, as a
key to higher organizational performance. The goal of the model was to show how
7 elements of the company: Structure, Strategy, Skills, Staff, Style, Systems, and
Shared values, can be aligned together to achieve effectiveness in a company. The

key point of the model is that all the seven areas are interconnected and a change in
one area requires change in the rest of a firm for it to function effectively.
Below you can find the McKinsey model, which represents the connections
between seven areas and divides them into Soft Ss and Hard Ss. The shape of
the model emphasizes interconnectedness of the elements.

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

To facilitate organizational change.

To help implement new strategy.
To identify how each area may change in a future.
To facilitate the merger of organizations.
n McKinsey model, the seven areas of organization are divided into the
soft and hard areas. Strategy, structure and systems are hard elements that
are much easier to identify and manage when compared to soft elements. On
the other hand, soft areas, although harder to manage, are the foundation of
the organization and are more likely to create the sustained competitive
advantage.

Hard S Soft S
Strategy Style
Structure Staff
Systems Skills
Shared Values
Strategy is a plan developed by a firm to achieve sustained competitive advantage
and successfully compete in the market. What does a well-aligned strategy mean in
7s McKinsey model? In general, a sound strategy is the one thats clearly
articulated, is long-term, helps to achieve competitive advantage and is reinforced
by strong vision, mission and values. But its hard to tell if such strategy is wellaligned with other elements when analyzed alone. So the key in 7s model is not to
look at your company to find the great strategy, structure, systems and etc. but to
look if its aligned with other elements. For example, short-term strategy is usually
a poor choice for a company but if its aligned with other 6 elements, then it may
provide strong results.
Structure represents the way business divisions and units are organized and
includes the information of who is accountable to whom. In other words, structure
is the organizational chart of the firm. It is also one of the most visible and easy to
change elements of the framework.
Systems are the processes and procedures of the company, which reveal business
daily activities and how decisions are made. Systems are the area of the firm that
determines how business is done and it should be the main focus for managers
during organizational change.
Skills are the abilities that firms employees perform very well. They also include
capabilities and competences. During organizational change, the question often
arises of what skills the company will really need to reinforce its new strategy or
new structure.
Staff element is concerned with what type and how many employees an
organization will need and how they will be recruited, trained, motivated and
rewarded.
Style represents the way the company is managed by top-level managers, how they
interact, what actions do they take and their symbolic value. In other words, it is
the management style of companys leaders.

Shared Values are at the core of McKinsey 7s model. They are the norms and
standards that guide employee behavior and company actions and thus, are the
foundation of every organization.
SPACEAnalysis
SPACE Analysis is an analytical technique used in strategic
management and planning. SPACE is an acronym of Strategic
PositionandActionEvaluation.
SPACE Analysis is an analytical technique used in strategic
management and planning. SPACE is an acronym of Strategic
PositionandActionEvaluation.Theanalysisallowstocreateanidea
oftheappropriatebusinessstrategyfortheenterprise.Theanalysis
assessestheinternalandexternalenvironmentandallowstodesign
anappropriatestrategy.
Theanalysisdescribestheexternalenvironmentusingtwocriteria:
*EnvironmentalStability(ES)itisinfluencedbythefollowingsub
factors: technological change, inflation rate, demand volatility,
price range of competitive products, price elasticity of demand,
pressurefromthesubstitutes
*IndustryAttractiveness(IA)itisinfluencedbythefollowingsub
factors:growthpotential,profitpotential,financialstability,resource
utilization, complexity of entering the industry, labor productivity,
capacityutilization,bargainingpowerofmanufacturers
Theinsideenvironmentisalsodescribedbytwocriteria:
*Competitiveadvantage(CA)itisinfluencedbythefollowing
factors:marketshare,productquality,productlifecycle,innovation
cycle,customerloyalty,verticalintegration
*Financialstrength(FS)itisinfluencedbythefollowingindicators:
returnoninvestment,liquidity,debtratio,availableversusrequired
capital,cashflow,inventoryturnover
HowtousetheSPACEanalysisinpractice?

According to this model the SPACE analysis is used in strategic

management.ItconcernsofkeydecisionsthataremadebyCEO
andseniormanagementoftheorganization.
Toevaluate:
*Foreachsubfactorineachcriterionavalueof06isassigned
(forCAandESitis0to6)
*Foreachcriterion,thevalueofthetotalfactorisexpressedas
themeanoftheindividualfactors.
*Thevaluesoffactorsareputintotherelevantaxesofthematrix
(seefigure)
*Inthequadrant,wherethelargestpartofthesurfaceofthe
resultingquadrilateralis,thereisasuitablealternativeofthebusiness
behavior.

Spaceanalysismatrix
The strategic position of the company and alternatives of the
strategicbehaviorarefollowing:
*Aggressivepositionanattractiveandrelativelystableindustry,
thecompanyhasacompetitiveadvantageanditcanprotectit,a
critical factor is the possible entry of new competitors into the
industry, itmaybeconsiderednewacquisitions, increasingmarket
shareandfocusingoncompetitiveproducts

 * Competitive position attractive and relatively unstable

environment, the company has some competitive advantage, a
critical factor is the companys financial strength the company
shouldlookforwaysoftheirattachment,thesolutionisthepossibility
of joining another company, increasing production efficiency and
strengtheningcashflow
*Conservativepositionastableindustrywithlowgrowthrateand
financially stable company, a critical factor is in the product
competitiveness, company should protect its successful products
and develop new ones and think about the possibilities of the
penetrationintotheindustrymoreattractiveandreducecosts.
*Defensivepositionanunattractiveindustry,thecompanylacks
competitiveproductsandfinancialresources,acriticalfactoristhe
competitiveness, the company should reduce costs, reduce
investmentandconsiderleavingtheindustry.

ValueChainAnalysis(VCA)
Avalue chainidentifies andisolatesthevariouseconomicvalueadding activities(suchas
differentiatingaproduct,loweringthecost,andmeetingcustomersneedsquickly)thatoccurin
somewayineveryfirm.Itportraysactivitiesrequiredtocreatevalueforcustomersofagiven
productorservice.Valuechainanalysis,thus,offersanexcellentmeansbywhichmanagers
canfindthestrengthsandweaknessesofeachactivityvisvisthefirmscompetitors.

Primaryactivities:operation,outboundlogistic,marketingandsales,service.
Supportactivities:HRM,Technologicaldevelopment,procurementetc.

ConductingaValueChainAnalysis

Identifyactivities:VCArequiresafirmtodivideitsoperationsintoprimaryandsupport
activity categories. Within each category a firm may typically perform a number of discrete

activities that may reflect its key strengths or weaknesses. At this stage managers should
desegregatewhatactuallygoesintovariousactivitiesinadetailedmanner.

Allocatecost:VCArequiresmanagertoassigncostsandassetstoeachactivity,whichis
totallydifferentfromwhatonefindsintraditionalcostaccountingmethod.

Identifyactivitiesthatdifferentiatethefirm:Heremanagersshouldtrytoidentifyseveral
sourcesofdifferentiationadvantagerelativetocompetitors.AlexMillerhaslistedsomeofthese
advantages.

Examinethevaluechain:Oncethevaluechainhasbeendescribed,managersshouldlist
theactivitiesthatareimportanttobuyersatisfactionandmarketsuccess.Keepingcostsunder
strictvigil,offeringvalueaddedserviceateachstage,doingthingsbetterthanrivalsareallpart
ofthisstrategy.

VCA is most effective when managers try to draw comparisons with key competitors and
improve the internal processes with a view to offer value for money kind of services to
customers.

Benchmarking
It is a popular tool of business management in corporate attempts to gain and maintain
competitiveadvantage.Thecentralessenceofbenchmarkingisaboutlearninghowtoimprove
businessactivity,processesandmanagement.However,benchmarkingasatermhasbeen
usedwidelytorefertomanydifferentactivities.Thereisawidevariationindefinitionsusedto
describebenchmarking.Someofthedefinitionsaregivenbelow:
Acontinuous systematicprocessfor evaluating theproducts,servicesandworkof
organizations that are recognized as representing best practices for the purpose of
organizationalimprovementSpendolini,1992.
Acontinuoussearchfor,andapplicationof,significantlybetterpracticesthatlead to
superiorcompetitiveperformanceWatson,1993.
A disciplined process that begins with a thorough search to identify bestpractice
organizations, continues with the careful study of ones own practices and performance ,
progressesthroughsystematicsitevisitsandinterviews,andconcludeswithananalysisof
results,developmentofrecommendationsandimplementationGravin,1993.

Thecharacteristicstoemergefromthesedefinitionsarethatbenchmarkingis:
measurementviacomparison
continuousimprovement
systematicprocedureincarryingoutbenchmarkingactivity

Theprocess:
Benchmarkinginvolveslookingoutsideaparticularbusiness,organization,industry,regionor
countrytoexaminehowothersachieveperformancelevelsandtounderstandtheprocesses
theyuse.Inthiswaybenchmarkinghelpsexplaintheprocessesbehindexcellentperformance.
Whenthelessonslearntfromabenchmarkingexerciseareappliedappropriately,theyfacilitate
improvedperformanceincriticalfunctionswithinanorganizationorinkeyareasofthebusiness
environment.

Applicationofbenchmarkinginvolvesfourkeysteps:
i)Understandindetailexistingbusinessprocesses.
ii)Analyzethebusinessprocessesofothers
iii)Compareownbusinessperformancewiththatofothersanalyzed
iv)Implementthestepsnecessarytoclosetheperformancegap.

Benchmarkingshouldnotbeconsideredaoneoffexercise.Tobeeffective,itmustbecomean
ongoing,integralpartofanongoingimprovementprocesswiththegoalofkeepingabreastof
everimprovingbestpractice.

TypesofBenchmarking
(i) Strategic benchmarking: Where businesses need to improve overall performance by
examiningthelongtermstrategiesandgeneralapproachesthathaveenabledhighperformers
tosucceed.Itinvolvesconsideringhighlevelaspectssuchascorecompetencies,developing
newproductsandservicesandimprovingcapabilitiesfordealingwithchangesintheexternal
environment.Changesresultingfromthistypeofbenchmarkingmaybedifficulttocomplement
andtakealongtimetomaterialize.

(ii)Performanceorcompetitivebenchmarking:Businessesconsidertheirpositioninrelation
toperformancecharacteristicsofkeyproductsandservices.Benchmarkingpartnersaredrawn

fromthesamesector.Thistypeofanalysisisoftenundertakenthroughconsultantstoprotect
confidentiality.

(iii)Processbenchmarking:Focusesonimprovingspecificcriticalprocessesandoperations.
Benchmarkingpartnersaresoughtfrombestpracticeorganizationsthatperformsimilarworkor
deliversimilarservices.Processbenchmarkinginvariablyinvolvesproducingprocessmapsto
facilitatecomparisonandanalysis.Thistypeofbenchmarkinggenerallyresultsinshortterm
benefits.

(iv) Functional benchmarking: Businesses look to benchmark with partners drawn from
differentbusinesssectorsorareasofactivitytofindwaysofimprovingsimilarfunctionsorwork
processes.Thissortofbenchmarkingcanleadtoinnovationanddramaticimprovements.

(v)Internalbenchmarking: involvesbenchmarkingbusinessesoroperationsfromwithinthe
sameorganization.Theadvantageofinternalbenchmarkingisthataccesstosensitivedataand
informationiseasier;standardizeddataisoftenreadilyavailable;and,usuallylesstimeand
resourcesareneeded. Theremaybefewerbarrierstoimplementationaspracticesmaybe
relatively easy to transfer across the same organization. However, real innovation may be
lackingandbestinclassperformanceismorelikelytobefoundthroughexternalbenchmarking.

(vi)ExternalBenchmarking: Involvesanalyzingoutsideorganisationsthatareknowntobe
bestinclass.Externalbenchmarkingprovidesopportunitiesoflearningfromthosewhoareat
the leading edge. This type of benchmarking can take up significant time and resourceto
ensure the comparability of data and information the credibility of the findings and the
developmentofsoundrecommendations.

(vii) International benchmarking: Best practitioners are identified and

analyzed elsewhere in the world, perhaps because there are too few
benchmarkingpartnerswithinthesamecountrytoproducevalidresults.
Globalization and advances in information technology are increasing
opportunities for international projects. However, the results may need
carefulanalysisduetonationaldifferences.

ValueChainAnalysis(VCA)

Avalue chainidentifies andisolatesthevariouseconomicvalueadding activities(suchas

differentiatingaproduct,loweringthecost,andmeetingcustomersneedsquickly)thatoccurin
somewayineveryfirm.Itportraysactivitiesrequiredtocreatevalueforcustomersofagiven
productorservice.Valuechainanalysis,thus,offersanexcellentmeansbywhichmanagers
canfindthestrengthsandweaknessesofeachactivityvisvisthefirmscompetitors.

Primaryactivities:operation,outboundlogistic,marketingandsales,service.
Supportactivities:HRM,Technologicaldevelopment,procurementetc.

ConductingaValueChainAnalysis

Identifyactivities:VCArequiresafirmtodivideitsoperationsintoprimaryandsupport
activity categories. Within each category a firm may typically perform a number of discrete
activities that may reflect its key strengths or weaknesses. At this stage managers should
desegregatewhatactuallygoesintovariousactivitiesinadetailedmanner.

Allocatecost:VCArequiresmanagertoassigncostsandassetstoeachactivity,whichis
totallydifferentfromwhatonefindsintraditionalcostaccountingmethod.

Identifyactivitiesthatdifferentiatethefirm:Heremanagersshouldtrytoidentifyseveral
sourcesofdifferentiationadvantagerelativetocompetitors.AlexMillerhaslistedsomeofthese
advantages.

Examinethevaluechain:Oncethevaluechainhasbeendescribed,managersshouldlist
theactivitiesthatareimportanttobuyersatisfactionandmarketsuccess.Keepingcostsunder
strictvigil,offeringvalueaddedserviceateachstage,doingthingsbetterthanrivalsareallpart
ofthisstrategy.

VCA is most effective when managers try to draw comparisons with key competitors and
improve the internal processes with a view to offer value for money kind of services to
customers.

Benchmarking

It is a popular tool of business management in corporate attempts to gain and maintain

competitiveadvantage.Thecentralessenceofbenchmarkingisaboutlearninghowtoimprove
businessactivity,processesandmanagement.However,benchmarkingasatermhasbeen
usedwidelytorefertomanydifferentactivities.Thereisawidevariationindefinitionsusedto
describebenchmarking.Someofthedefinitionsaregivenbelow:
Acontinuous systematicprocessfor evaluating theproducts,servicesandworkof
organizations that are recognized as representing best practices for the purpose of
organizationalimprovementSpendolini,1992.
Acontinuoussearchfor,andapplicationof,significantlybetterpracticesthatlead to
superiorcompetitiveperformanceWatson,1993.
A disciplined process that begins with a thorough search to identify bestpractice
organizations, continues with the careful study of ones own practices and performance ,
progressesthroughsystematicsitevisitsandinterviews,andconcludeswithananalysisof
results,developmentofrecommendationsandimplementationGravin,1993.

Thecharacteristicstoemergefromthesedefinitionsarethatbenchmarkingis:
measurementviacomparison
continuousimprovement
systematicprocedureincarryingoutbenchmarkingactivity

Theprocess:
Benchmarkinginvolveslookingoutsideaparticularbusiness,organization,industry,regionor
countrytoexaminehowothersachieveperformancelevelsandtounderstandtheprocesses
theyuse.Inthiswaybenchmarkinghelpsexplaintheprocessesbehindexcellentperformance.
Whenthelessonslearntfromabenchmarkingexerciseareappliedappropriately,theyfacilitate
improvedperformanceincriticalfunctionswithinanorganizationorinkeyareasofthebusiness
environment.

Applicationofbenchmarkinginvolvesfourkeysteps:
i)Understandindetailexistingbusinessprocesses.
ii)Analyzethebusinessprocessesofothers
iii)Compareownbusinessperformancewiththatofothersanalyzed
iv)Implementthestepsnecessarytoclosetheperformancegap.

Benchmarkingshouldnotbeconsideredaoneoffexercise.Tobeeffective,itmustbecomean
ongoing,integralpartofanongoingimprovementprocesswiththegoalofkeepingabreastof
everimprovingbestpractice.

TypesofBenchmarking
(i) Strategic benchmarking: Where businesses need to improve overall performance by
examiningthelongtermstrategiesandgeneralapproachesthathaveenabledhighperformers
tosucceed.Itinvolvesconsideringhighlevelaspectssuchascorecompetencies,developing
newproductsandservicesandimprovingcapabilitiesfordealingwithchangesintheexternal
environment.Changesresultingfromthistypeofbenchmarkingmaybedifficulttocomplement
andtakealongtimetomaterialize.

(ii)Performanceorcompetitivebenchmarking:Businessesconsidertheirpositioninrelation
toperformancecharacteristicsofkeyproductsandservices.Benchmarkingpartnersaredrawn
fromthesamesector.Thistypeofanalysisisoftenundertakenthroughconsultantstoprotect
confidentiality.

(iii)Processbenchmarking:Focusesonimprovingspecificcriticalprocessesandoperations.
Benchmarkingpartnersaresoughtfrombestpracticeorganizationsthatperformsimilarworkor
deliversimilarservices.Processbenchmarkinginvariablyinvolvesproducingprocessmapsto
facilitatecomparisonandanalysis.Thistypeofbenchmarkinggenerallyresultsinshortterm
benefits.

(iv) Functional benchmarking: Businesses look to benchmark with partners drawn from
differentbusinesssectorsorareasofactivitytofindwaysofimprovingsimilarfunctionsorwork
processes.Thissortofbenchmarkingcanleadtoinnovationanddramaticimprovements.

(v)Internalbenchmarking: involvesbenchmarkingbusinessesoroperationsfromwithinthe
sameorganization.Theadvantageofinternalbenchmarkingisthataccesstosensitivedataand
informationiseasier;standardizeddataisoftenreadilyavailable;and,usuallylesstimeand
resourcesareneeded. Theremaybefewerbarrierstoimplementationaspracticesmaybe
relatively easy to transfer across the same organization. However, real innovation may be
lackingandbestinclassperformanceismorelikelytobefoundthroughexternalbenchmarking.

(vi)ExternalBenchmarking: Involvesanalyzingoutsideorganisationsthatareknowntobe
bestinclass.Externalbenchmarkingprovidesopportunitiesoflearningfromthosewhoareat
the leading edge. This type of benchmarking can take up significant time and resourceto

ensure the comparability of data and information the credibility of the findings and the
developmentofsoundrecommendations.

(vii) International benchmarking: Best practitioners are identified and

analyzed elsewhere in the world, perhaps because there are too few
benchmarkingpartnerswithinthesamecountrytoproducevalidresults.
Globalization and advances in information technology are increasing
opportunities for international projects. However, the results may need
careful analysis due to national differences. Value Chain Analysis

(VCA)
Avalue chainidentifies andisolatesthevariouseconomicvalueadding activities(suchas
differentiatingaproduct,loweringthecost,andmeetingcustomersneedsquickly)thatoccurin
somewayineveryfirm.Itportraysactivitiesrequiredtocreatevalueforcustomersofagiven
productorservice.Valuechainanalysis,thus,offersanexcellentmeansbywhichmanagers
canfindthestrengthsandweaknessesofeachactivityvisvisthefirmscompetitors.

Primaryactivities:operation,outboundlogistic,marketingandsales,service.
Supportactivities:HRM,Technologicaldevelopment,procurementetc.

ConductingaValueChainAnalysis

Identifyactivities:VCArequiresafirmtodivideitsoperationsintoprimaryandsupport
activity categories. Within each category a firm may typically perform a number of discrete
activities that may reflect its key strengths or weaknesses. At this stage managers should
desegregatewhatactuallygoesintovariousactivitiesinadetailedmanner.

Allocatecost:VCArequiresmanagertoassigncostsandassetstoeachactivity,whichis
totallydifferentfromwhatonefindsintraditionalcostaccountingmethod.

Identifyactivitiesthatdifferentiatethefirm:Heremanagersshouldtrytoidentifyseveral
sourcesofdifferentiationadvantagerelativetocompetitors.AlexMillerhaslistedsomeofthese
advantages.

Examinethevaluechain:Oncethevaluechainhasbeendescribed,managersshouldlist
theactivitiesthatareimportanttobuyersatisfactionandmarketsuccess.Keepingcostsunder
strictvigil,offeringvalueaddedserviceateachstage,doingthingsbetterthanrivalsareallpart
ofthisstrategy.

VCA is most effective when managers try to draw comparisons with key competitors and
improve the internal processes with a view to offer value for money kind of services to
customers.

Benchmarking
It is a popular tool of business management in corporate attempts to gain and maintain
competitiveadvantage.Thecentralessenceofbenchmarkingisaboutlearninghowtoimprove
businessactivity,processesandmanagement.However,benchmarkingasatermhasbeen
usedwidelytorefertomanydifferentactivities.Thereisawidevariationindefinitionsusedto
describebenchmarking.Someofthedefinitionsaregivenbelow:
Acontinuous systematicprocessfor evaluating theproducts,servicesandworkof
organizations that are recognized as representing best practices for the purpose of
organizationalimprovementSpendolini,1992.
Acontinuoussearchfor,andapplicationof,significantlybetterpracticesthatlead to
superiorcompetitiveperformanceWatson,1993.
A disciplined process that begins with a thorough search to identify bestpractice
organizations, continues with the careful study of ones own practices and performance ,
progressesthroughsystematicsitevisitsandinterviews,andconcludeswithananalysisof
results,developmentofrecommendationsandimplementationGravin,1993.

Thecharacteristicstoemergefromthesedefinitionsarethatbenchmarkingis:
measurementviacomparison
continuousimprovement
systematicprocedureincarryingoutbenchmarkingactivity

Theprocess:
Benchmarkinginvolveslookingoutsideaparticularbusiness,organization,industry,regionor
countrytoexaminehowothersachieveperformancelevelsandtounderstandtheprocesses
theyuse.Inthiswaybenchmarkinghelpsexplaintheprocessesbehindexcellentperformance.
Whenthelessonslearntfromabenchmarkingexerciseareappliedappropriately,theyfacilitate

improvedperformanceincriticalfunctionswithinanorganizationorinkeyareasofthebusiness
environment.

Applicationofbenchmarkinginvolvesfourkeysteps:
i)Understandindetailexistingbusinessprocesses.
ii)Analyzethebusinessprocessesofothers
iii)Compareownbusinessperformancewiththatofothersanalyzed
iv)Implementthestepsnecessarytoclosetheperformancegap.

Benchmarkingshouldnotbeconsideredaoneoffexercise.Tobeeffective,itmustbecomean
ongoing,integralpartofanongoingimprovementprocesswiththegoalofkeepingabreastof
everimprovingbestpractice.

TypesofBenchmarking
(i) Strategic benchmarking: Where businesses need to improve overall performance by
examiningthelongtermstrategiesandgeneralapproachesthathaveenabledhighperformers
tosucceed.Itinvolvesconsideringhighlevelaspectssuchascorecompetencies,developing
newproductsandservicesandimprovingcapabilitiesfordealingwithchangesintheexternal
environment.Changesresultingfromthistypeofbenchmarkingmaybedifficulttocomplement
andtakealongtimetomaterialize.

(ii)Performanceorcompetitivebenchmarking:Businessesconsidertheirpositioninrelation
toperformancecharacteristicsofkeyproductsandservices.Benchmarkingpartnersaredrawn
fromthesamesector.Thistypeofanalysisisoftenundertakenthroughconsultantstoprotect
confidentiality.

(iii)Processbenchmarking:Focusesonimprovingspecificcriticalprocessesandoperations.
Benchmarkingpartnersaresoughtfrombestpracticeorganizationsthatperformsimilarworkor
deliversimilarservices.Processbenchmarkinginvariablyinvolvesproducingprocessmapsto
facilitatecomparisonandanalysis.Thistypeofbenchmarkinggenerallyresultsinshortterm
benefits.

(iv) Functional benchmarking: Businesses look to benchmark with partners drawn from
differentbusinesssectorsorareasofactivitytofindwaysofimprovingsimilarfunctionsorwork
processes.Thissortofbenchmarkingcanleadtoinnovationanddramaticimprovements.

(v)Internalbenchmarking: involvesbenchmarkingbusinessesoroperationsfromwithinthe
sameorganization.Theadvantageofinternalbenchmarkingisthataccesstosensitivedataand
informationiseasier;standardizeddataisoftenreadilyavailable;and,usuallylesstimeand
resourcesareneeded. Theremaybefewerbarrierstoimplementationaspracticesmaybe
relatively easy to transfer across the same organization. However, real innovation may be
lackingandbestinclassperformanceismorelikelytobefoundthroughexternalbenchmarking.

(vi)ExternalBenchmarking: Involvesanalyzingoutsideorganisationsthatareknowntobe
bestinclass.Externalbenchmarkingprovidesopportunitiesoflearningfromthosewhoareat
the leading edge. This type of benchmarking can take up significant time and resourceto
ensure the comparability of data and information the credibility of the findings and the
developmentofsoundrecommendations.

(vii) International benchmarking: Best practitioners are identified and

analyzed elsewhere in the world, perhaps because there are too few
benchmarkingpartnerswithinthesamecountrytoproducevalidresults.
Globalization and advances in information technology are increasing
opportunities for international projects. However, the results may need
careful analysis due to national differences. Value Chain Analysis

(VCA)
Avalue chainidentifies andisolatesthevariouseconomicvalueadding activities(suchas
differentiatingaproduct,loweringthecost,andmeetingcustomersneedsquickly)thatoccurin
somewayineveryfirm.Itportraysactivitiesrequiredtocreatevalueforcustomersofagiven
productorservice.Valuechainanalysis,thus,offersanexcellentmeansbywhichmanagers
canfindthestrengthsandweaknessesofeachactivityvisvisthefirmscompetitors.

Primaryactivities:operation,outboundlogistic,marketingandsales,service.
Supportactivities:HRM,Technologicaldevelopment,procurementetc.

ConductingaValueChainAnalysis

Identifyactivities:VCArequiresafirmtodivideitsoperationsintoprimaryandsupport
activity categories. Within each category a firm may typically perform a number of discrete

activities that may reflect its key strengths or weaknesses. At this stage managers should
desegregatewhatactuallygoesintovariousactivitiesinadetailedmanner.

Allocatecost:VCArequiresmanagertoassigncostsandassetstoeachactivity,whichis
totallydifferentfromwhatonefindsintraditionalcostaccountingmethod.

Identifyactivitiesthatdifferentiatethefirm:Heremanagersshouldtrytoidentifyseveral
sourcesofdifferentiationadvantagerelativetocompetitors.AlexMillerhaslistedsomeofthese
advantages.

Examinethevaluechain:Oncethevaluechainhasbeendescribed,managersshouldlist
theactivitiesthatareimportanttobuyersatisfactionandmarketsuccess.Keepingcostsunder
strictvigil,offeringvalueaddedserviceateachstage,doingthingsbetterthanrivalsareallpart
ofthisstrategy.

VCA is most effective when managers try to draw comparisons with key competitors and
improve the internal processes with a view to offer value for money kind of services to
customers.

Benchmarking
It is a popular tool of business management in corporate attempts to gain and maintain
competitiveadvantage.Thecentralessenceofbenchmarkingisaboutlearninghowtoimprove
businessactivity,processesandmanagement.However,benchmarkingasatermhasbeen
usedwidelytorefertomanydifferentactivities.Thereisawidevariationindefinitionsusedto
describebenchmarking.Someofthedefinitionsaregivenbelow:
Acontinuous systematicprocessfor evaluating theproducts,servicesandworkof
organizations that are recognized as representing best practices for the purpose of
organizationalimprovementSpendolini,1992.
Acontinuoussearchfor,andapplicationof,significantlybetterpracticesthatlead to
superiorcompetitiveperformanceWatson,1993.
A disciplined process that begins with a thorough search to identify bestpractice
organizations, continues with the careful study of ones own practices and performance ,
progressesthroughsystematicsitevisitsandinterviews,andconcludeswithananalysisof
results,developmentofrecommendationsandimplementationGravin,1993.

Thecharacteristicstoemergefromthesedefinitionsarethatbenchmarkingis:
measurementviacomparison
continuousimprovement
systematicprocedureincarryingoutbenchmarkingactivity

Theprocess:
Benchmarkinginvolveslookingoutsideaparticularbusiness,organization,industry,regionor
countrytoexaminehowothersachieveperformancelevelsandtounderstandtheprocesses
theyuse.Inthiswaybenchmarkinghelpsexplaintheprocessesbehindexcellentperformance.
Whenthelessonslearntfromabenchmarkingexerciseareappliedappropriately,theyfacilitate
improvedperformanceincriticalfunctionswithinanorganizationorinkeyareasofthebusiness
environment.

Applicationofbenchmarkinginvolvesfourkeysteps:
i)Understandindetailexistingbusinessprocesses.
ii)Analyzethebusinessprocessesofothers
iii)Compareownbusinessperformancewiththatofothersanalyzed
iv)Implementthestepsnecessarytoclosetheperformancegap.

Benchmarkingshouldnotbeconsideredaoneoffexercise.Tobeeffective,itmustbecomean
ongoing,integralpartofanongoingimprovementprocesswiththegoalofkeepingabreastof
everimprovingbestpractice.

TypesofBenchmarking
(i) Strategic benchmarking: Where businesses need to improve overall performance by
examiningthelongtermstrategiesandgeneralapproachesthathaveenabledhighperformers
tosucceed.Itinvolvesconsideringhighlevelaspectssuchascorecompetencies,developing
newproductsandservicesandimprovingcapabilitiesfordealingwithchangesintheexternal
environment.Changesresultingfromthistypeofbenchmarkingmaybedifficulttocomplement
andtakealongtimetomaterialize.

(ii)Performanceorcompetitivebenchmarking:Businessesconsidertheirpositioninrelation
toperformancecharacteristicsofkeyproductsandservices.Benchmarkingpartnersaredrawn

fromthesamesector.Thistypeofanalysisisoftenundertakenthroughconsultantstoprotect
confidentiality.

(iii)Processbenchmarking:Focusesonimprovingspecificcriticalprocessesandoperations.
Benchmarkingpartnersaresoughtfrombestpracticeorganizationsthatperformsimilarworkor
deliversimilarservices.Processbenchmarkinginvariablyinvolvesproducingprocessmapsto
facilitatecomparisonandanalysis.Thistypeofbenchmarkinggenerallyresultsinshortterm
benefits.

(iv) Functional benchmarking: Businesses look to benchmark with partners drawn from
differentbusinesssectorsorareasofactivitytofindwaysofimprovingsimilarfunctionsorwork
processes.Thissortofbenchmarkingcanleadtoinnovationanddramaticimprovements.

(v)Internalbenchmarking: involvesbenchmarkingbusinessesoroperationsfromwithinthe
sameorganization.Theadvantageofinternalbenchmarkingisthataccesstosensitivedataand
informationiseasier;standardizeddataisoftenreadilyavailable;and,usuallylesstimeand
resourcesareneeded. Theremaybefewerbarrierstoimplementationaspracticesmaybe
relatively easy to transfer across the same organization. However, real innovation may be
lackingandbestinclassperformanceismorelikelytobefoundthroughexternalbenchmarking.

(vi)ExternalBenchmarking: Involvesanalyzingoutsideorganisationsthatareknowntobe
bestinclass.Externalbenchmarkingprovidesopportunitiesoflearningfromthosewhoareat
the leading edge. This type of benchmarking can take up significant time and resourceto
ensure the comparability of data and information the credibility of the findings and the
developmentofsoundrecommendations.

(vii) International benchmarking: Best practitioners are identified and

analyzed elsewhere in the world, perhaps because there are too few
benchmarkingpartnerswithinthesamecountrytoproducevalidresults.
Globalization and advances in information technology are increasing
opportunities for international projects. However, the results may need
carefulanalysisduetonationaldifferences.
TheBCGGrowthShareMatrix
The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce
Henderson of the Boston Consulting Group in the early 1970's. It is based on the

observation that a company's business units can be classified into four categories
based on combinations of market growth and market share relative to the largest
competitor, hence the name "growth-share". Market growth serves as a proxy for
industry attractiveness, and relative market share serves as a proxy for competitive
advantage. The growth-share matrix thus maps the business unit positions within
these two important determinants of profitability.

BCG Growth-Share Matrix

This framework assumes that an increase in relative market share will result in an
increase in the generation of cash. This assumption often is true because of the
experience curve; increased relative market share implies that the firm is moving
forward on the experience curve relative to its competitors, thus developing a cost
advantage. A second assumption is that a growing market requires investment in
assets to increase capacity and therefore results in the consumption of cash. Thus
the position of a business on the growth-share matrix provides an indication of its
cash generation and its cash consumption.
Henderson reasoned that the cash required by rapidly growing business units could
be obtained from the firm's other business units that were at a more mature stage
and generating significant cash. By investing to become the market share leader in
a rapidly growing market, the business unit could move along the experience curve
and develop a cost advantage. From this reasoning, the BCG Growth-Share Matrix
was born.
The four categories are:

Dogs - Dogs have low market share and a low growth rate and thus neither
generate nor consume a large amount of cash. However, dogs are cash traps
because of the money tied up in a business that has little potential. Such
businesses are candidates for divestiture.

Question marks - Question marks are growing rapidly and thus consume
large amounts of cash, but because they have low market shares they do not
generate much cash. The result is a large net cash comsumption. A question

mark (also known as a "problem child") has the potential to gain market share
and become a star, and eventually a cash cow when the market growth
slows. If the question mark does not succeed in becoming the market leader,
then after perhaps years of cash consumption it will degenerate into a dog
when the market growth declines. Question marks must be analyzed carefully
in order to determine whether they are worth the investment required to
grow market share.

Stars - Stars generate large amounts of cash because of their strong relative
market share, but also consume large amounts of cash because of their high
growth rate; therefore the cash in each direction approximately nets out. If a
star can maintain its large market share, it will become a cash cow when the
market growth rate declines. The portfolio of a diversified company always
should have stars that will become the next cash cows and ensure future
cash generation.

Cash cows - As leaders in a mature market, cash cows exhibit a return on

assets that is greater than the market growth rate, and thus generate more
cash than they consume. Such business units should be "milked", extracting
the profits and investing as little cash as possible. Cash cows provide the
cash required to turn question marks into market leaders, to cover the
administrative costs of the company, to fund research and development, to
service the corporate debt, and to pay dividends to shareholders. Because
the cash cow generates a relatively stable cash flow, its value can be
determined with reasonable accuracy by calculating the present value of its
cash stream using a discounted cash flow analysis.

Under the growth-share matrix model, as an industry matures and its growth rate
declines, a business unit will become either a cash cow or a dog, determined soley
by whether it had become the market leader during the period of high growth.
While originally developed as a model for resource allocation among the various
business units in a corporation, the growth-share matrix also can be used for
resource allocation among products within a single business unit. Its simplicity is its
strength - the relative positions of the firm's entire business portfolio can be
displayed in a single diagram.

Limitations
The growth-share matrix once was used widely, but has since faded from popularity
as more comprehensive models have been developed. Some of its weaknesses are:

Market growth rate is only one factor in industry attractiveness, and relative
market share is only one factor in competitive advantage. The growth-share
matrix overlooks many other factors in these two important determinants of
profitability.

The framework assumes that each business unit is independent of the others.
In some cases, a business unit that is a "dog" may be helping other business
units gain a competitive advantage.

The matrix depends heavily upon the breadth of the definition of the market.
A business unit may dominate its small niche, but have very low market share
in the overall industry. In such a case, the definition of the market can make
the difference between a dog and a cash cow.

While its importance has diminished, the BCG matrix still can serve as a simple tool
for viewing a corporation's business portfolio at a glance, and may serve as a
starting point for discussing resource allocation among strategic business units.

GE / McKinsey Matrix
In consulting engagements with General Electric in the 1970's, McKinsey & Company
developed a nine-cell portfolio matrix as a tool for screening GE's large portfolio of
strategic business units (SBU). This business screen became known as the
GE/McKinsey Matrix and is shown below:

GE / McKinsey Matrix
The GE / McKinsey matrix is similar to the BCG growth-share matrix in that it maps
strategic business units on a grid of the industry and the SBU's position in the industry.
The GE matrix however, attempts to improve upon the BCG matrix in the following two
ways:

The GE matrix generalizes the axes as "Industry Attractiveness" and "Business

Unit Strength" whereas the BCG matrix uses the market growth rate as a proxy
for industry attractiveness and relative market share as a proxy for the strength of
the business unit.

The GE matrix has nine cells vs. four cells in the BCG matrix.

Industry attractiveness and business unit strength are calculated by first identifying
criteria for each, determining the value of each parameter in the criteria, and multiplying
that value by a weighting factor. The result is a quantitative measure of industry
attractiveness and the business unit's relative performance in that industry.

Industry Attractiveness
The vertical axis of the GE / McKinsey matrix is industry attractiveness, which is
determined by factors such as the following:
The GE / McKinsey matrix is similar to the BCG growth-share matrix in that it maps
strategic business units on a grid of the industry and the SBU's position in the industry.
The GE matrix however, attempts to improve upon the BCG matrix in the following two
ways:
The GE matrix generalizes the axes as "Industry Attractiveness" and "Business
Unit Strength" whereas the BCG matrix uses the market growth rate as a proxy
for industry attractiveness and relative market share as a proxy for the strength of
the business unit.

The GE matrix has nine cells vs. four cells in the BCG matrix.

Industry attractiveness and business unit strength are calculated by first identifying
criteria for each, determining the value of each parameter in the criteria, and multiplying
that value by a weighting factor. The result is a quantitative measure of industry
attractiveness and the business unit's relative performance in that industry.

Industry Attractiveness
The vertical axis of the GE / McKinsey matrix is industry attractiveness, which is
determined by factors such as the following:

Market growth rate

Market size

Demand variability
Industry profitability
Industry rivalry
Global opportunities
Macroenvironmental factors (PEST)

Each factor is assigned a weighting that is appropriate for the industry. The industry
attractiveness then is calculated as follows:
Industry attractiveness

factor value1 x factor weighting1

+ factor value2 x factor weighting2

.
.
.
+ factor valueN x factor weightingN

Business Unit Strength

The horizontal axis of the GE / McKinsey matrix is the strength of the business unit.
Some factors that can be used to determine business unit strength include:

Market share
Growth in market share
Brand equity
Distribution channel access
Production capacity
Profit margins relative to competitors

The business unit strength index can be calculated by multiplying the estimated value of
each factor by the factor's weighting, as done for industry attractiveness.

Plotting the Information

Each business unit can be portrayed as a circle plotted on the matrix, with the
information conveyed as follows:

Market size is represented by the size of the circle.

Market share is shown by using the circle as a pie chart.
The expected future position of the circle is portrayed by means of an arrow.

The following is an example of such a representation:

The shading of the above circle indicates a 38% market share for the strategic business
unit. The arrow in the upward left direction indicates that the business unit is projected
to gain strength relative to competitors, and that the business unit is in an industry that
is projected to become more attractive. The tip of the arrow indicates the future position
of the center point of the circle.

Strategic Implications
Resource allocation recommendations can be made to grow, hold, or harvest a strategic
business unit based on its position on the matrix as follows:

Grow strong business units in attractive industries, average business units in

attractive industries, and strong business units in average industries.

Hold average businesses in average industries, strong businesses in weak

industries, and weak business in attractive industies.

Harvest weak business units in unattractive industries, average business units in

unattractive industries, and weak business units in average industries.

There are strategy variations within these three groups. For example, within the harvest
group the firm would be inclined to quickly divest itself of a weak business in an
unattractive industry, whereas it might perform a phased harvest of an average
business unit in the same industry.
While the GE business screen represents an improvement over the more simple BCG
growth-share matrix, it still presents a somewhat limited view by not considering
interactions among the business units and by neglecting to address the core
competencies leading to value creation. Rather than serving as the primary tool for
resource allocation, portfolio matrices are better suited to displaying a quick synopsis of
the strategic business units.