BUSINESS STRATEGY

- Strategic Management may be defined as set of

decisions and actions resulting in formulation and
implementation of strategies to achieve the objectives
of an organization.
- The word Strategy was derived from Greek word
Strategia which means a General or Military
Commander.
- Igor Ansoff pioneered the concept of Strategy. Later
Henry Mintzberg and Michael E. Porter enriched the
concepts of Strategic Management based on empirical
studies.
- Ansoffs strategic success paradigm brought out
conditions that optimizes profitability, key elements of
which are:
1)There is no universal success formula,
2)Environmental turbulence determines the strategy
options forb success,
3)The strategy choices should be aligned with
environmental changes to optimize results,
4)So is the management capabilities with such
changes for best results,
5)Internal
capability
variables
i.e.
cognitive,
psychological, political, other behavioral aspects all
determine organization success.
- Ansoff also brought out concepts like Gap Analysis &
Synergy still which is still practiced in many
organizations.
- Mintzberg added a new dimension by bringing personal
side of the manager. He advocated a more humane
approach to strategy formulation and implementation
and coined the terminology crafting strategy.

- Peter Drucker who is considered to be one of the

leading m
- Management Gurus, argued that management is not
passive, adaptive behavior, it means taking actions to
make the desired results come to pass. Pankaj
Ghemawat argued that Druckers observation that by
consciously using formal planning a company could
exert some control over market forces became the
rational for business strategy. It was Drucker who
introduced the concept of MBO i.e. instead of
managing through processes to goals and self-control.
- Michael Porter perhaps done major work on strategy
through concepts like focus, cost leadership, cost
differentiation to survive in competitive environment.
- Vision What is the future outlook of the organization?
- Mission Companys approach in doing business
reflecting values and priorities.
- Strategic analysis enables the organization to identify
possible attractive investment options which are
compatible with its vision and mission.
- Three
organizational
elements
viz.
structure,
leadership and culture assist organization to
institutionalize its strategy and control over it.
- Depending upon organizations structure strategy
choices (scenarios) should be at Corporate, Business
and Functional levels.
- Characteristics of Strategic Decisions:
1. Strategic management integrates various functions.
2. Strategic management should enthuse cross section
of stakeholders.
3. It involves multiple time horizons.
- Concerned with both efficiency and effectiveness.

Industry Analysis
Competition Analysis
Benchmarking your Company against Competitors
SWOT
Operating Environment
Strategic Positioning
Good Strategies promote alignment among diverse
groups within the Organization.
Various functions such as Marketing, Operation,
Finance, R&D etc. should have integrated approach
and Strategy should facilitate such process of
integration.
Goals of various Functions & Departments should be
coordinated.
Plan & Review Execution Strategy
Nothing is sacrosanct and so is Strategy
Strategy should assist innovation, new business
formation and economic growth
Today machines are making inroad in almost all areas
which now calls for creativity, dexterity and emotional
involvement
Present day Organization should leverage:
Knowledge
Operating Infrastructure
Entrepreneurship
R&D
Opportunities
Leadership & Management
Technology

Strategy

Objectives
I Systems &
Processes
Goals (Specific & Measurable) I
Action Plan
I Management by
Objectives (MBO) Execution (???)
I
Measuring Progress
I Balanced Score Card
Rewarding Performance
I
- Strategy execution consists of seizing opportunities
that support the strategy while coordinating with other
parts of the organization on an ongoing basis.
- Resource allocation process and how flexible is the
process under changed circumstances.
- Avoid investment in non-strategic projects.
- Often strategic objectives are disconnected or poorly
understood.
- When companies fail to translate strategy into results,
many managers point to weak performance culture as
the root cause.
- Agility, Teamwork, Ambition etc. should be rewarded
and imbibed into operating culture for better strategy
implementation.

Strategic Management Process

Environmental Scanning

Strategy Formulation

Strategy Implementation

Evaluation & Control

Environment Variables
-

Socio Cultural Forces

Economic Forces

Technological Forces

Geo-Political & Legal Forces

Strategic Decision Making

Entrepreneurial (Strategies are formed by Owner or
Powerful CEO)
Adaptive (Reactive or Fragmented strategy and
incremental benefit)
Planning (Systemic gathering of information based
on which most appropriate solution is selected)
Careful use of Strategic Management can assure better
returns for shareholders and would help in sustainability
and growth of the organization. But there are practical
limitations.
-

Holistic vs. Tactical

Analytical vs. Prescriptive

Non- Political

An organizations vision and mission act as guidelines for

strategy formulation which involves articulating a vision
for the organization, translating the vision into a mission
that defines the organizations purpose, converting the
mission into performance objectives and goals and
formulating tactics and strategies for implementation.

Organizational Direction
Determined by
Vision

Shareholders/Founder

Mission -

Top Management

Objectives Management
Plans stated objectives

Divisional Heads with Top

Unit Heads/ Divisional Heads within

Policies Framed for smooth and seamless

implementation of
plans - centrally and
unit wise by team of officers
Goals Set by Divisional Heads in consultation with
Unit Managers within overall objectives
Strategies & Tactics At various organizational levels
Mission Statement
The term mission is defined as the fundamental and
enduring purpose of an organization that distinguishes it
from its competitors.
The characteristics of a good mission statement are,
It differentiates the company from its competitors,
It defines the business (es) that the company wants
to be in,
It is inspiring,
Relevant to its stakeholders,
Ensure behavior of the organization while dealing
with its customers, suppliers, employees,
government, society, shareholders, etc.

 It seeks to clarify the very purpose of the

organization why it exists
Key Elements of a Mission Statement:
- View of the future
- Competitive arenas
- Source of competitive advantage
Fundamental intention of mission statement is that what
role the company intends to attain as a yardstick to
measure future success.
Company Goals:
-

To be precise and measurable

Should address important issues
Time frame for its implementation
Should be in both financial and non-financial
parameters
- Cross functional
- Stretched goals through trade-offs
Social Responsibility
Economic (must do), Legal (have to do), Ethical (should
do), Discretionary (might do).
Organization should strive for ethical business practices
in a socially responsible manner so as to create value to
the society at large.
A good strategy is generally based on business ethics.
Decision making process should be based on ethical
practices to benefit all stakeholders and not necessarily
for majority shareholders.

Analyzing the Business Environment

External
Political Environment
Economic Environment
Social Environment
Technological Environment
Industry Level Analysis:
Porters Five Forces Model driving Industry Competition:
The effective strategy formulation needs a clear
understanding of competition. Competition is determined
not only by existing competitors but also by other market
forces such as customers, suppliers, potential entrants,
and existence of substitute products. Goal of any strategy
should be to protect the organization from attacks of
competitors - existing or potential.
Micheal E. Porter, the revered Professor of Harvard
Business School developed a framework known as Five
Forces Model which illustrates how five forces viz. the
threat of new entrants, the bargaining power of buyers,
the bargaining power of suppliers, the rivalry among
existing players and the threat of substitute products or
services play a vital role in shaping companys future.
Threat of new entrants:

Economies of scale
Product Differentiation
Capital requirements
Cost advantage independent of size
Access to distribution channels
Government policy

 Intensity of rivalry among existing competitors

The bargaining power of buyers:
According to Porter buyers are powerful under following
circumstances
When suppliers are many and buyers are few and
large
When buyers purchase large quantity
When large percentage of suppliers business is
dependent on few buyers.
Where buyers can influence cost pattern of the
suppliers
Where buyer can procure supplies from multiple
sources
Buyer is in a position to source inputs through
vertical integration and influence market pricing
The bargaining power of suppliers:
Product or service is unique or there are few
suppliers
Multiple buyers are sourcing from a few suppliers
When products in the industry are so differentiated
that they are not easily substitutable and it is costly
to switch from one supplier to another
Supplier can leverage its controlling position to get
into manufacturing through vertical integration
thereby disturbing the market dynamics
Buyers are not in an immediate position to counter
above threat

The threat of substitute products or services

A close substitute is a potential threat to the
companys product or service
Game theory
Assessing another players likely behavior
Since 1980, new researchers added new variables to
fortify Five Forces model. Two strategists concerned with
game theory, Adam Brandenburger and Nalebuff argued
that the process of creating value in the market place
involve four type of players - customers, suppliers,
competitors and complimentors. Complimentors are other
firms from whom customers buy complimentary products
or services. According to them Complimentors often
result into strategic alliances or partnerships.
Value Net Graph of Brandenburger & Nalebuff:
Customers
Competitors
Complimentors

Company
Suppliers

Learning Curve & Experience Curve

Vulnerability Analysis
BCG Growth Share Matrix (Relative Competitive
Position):
Cash Cows (Low growth but, net suppliers of
resources)
Stars (Potential of high market growth & high market
share)

 Question Marks ( High market growth but low market

share)
Dogs (Low market growth & low market share harvested or liquidated)
GE Nine Cell Planning Grid based on Business strength
& Industry (product market) attractiveness whether
High Medium Low which determines decisions on
invest/grow, selectivity/earning, harvest/divest.
Arthur D. Little Life Cycle Approach: Takes into
consideration the business environment and business
strength. The life cycle consists of four stages: start
growth maturity aging and business strength
measures the competitive position i.e. dominant, strong,
favourable, tenable, weak or non-viable. Depending upon
such analysis strategies should opt for:
Natural Development strategies are appropriate when
SBU is in a mature industry and is competitive.
Selective Development strategies in those areas which
are attractive and have competitive advantage.
Prove Viability is transitional strategy which can not be
sustained.
Out is a strategy for withdrawal.
SWOT Analysis
In the 1960s, SWOT analysis contributed significantly on
competitive thinking on questions of strategy. But SWOT
analysis failed to define a companys distinctive
competence. Such distinction is crucial because the
strategic decision is concerned with the longterm
development of the organization for which understanding

of distinctive competence of the organization and level at

which it is placed is important. According to Ansoff
companys preparedness in getting into new market or
new product is crucial in long term strategy formulation.
Product/mission matrix of Ansoff (source: Pankaj
Ghemawat, Competition and Business Strategy in
Historical Perspective.
Present Product
New Product
Present Mission
Development
New Mission
Diversification

Market Penetration

Product

Market Development

Formulating Long Term Strategies:

Concentration
Market Development
Product Development
Horizontal Integration
Vertical Integration
Diversification

Behavioral aspects affecting strategic choice

Role of past strategy

Attitude towards risk
Competitive reaction
Degree of Companys external dependence

 Values and Preferences

Competitive Strategies:
Cost Leadership
Differentiation
Focus
Key aspects of Cost Leadership and Differentiation:
Aspect
Differentiation
Strategic Target
cross section of

Cost Leadership
Broad cross-section of the
market

Broad
the

market
Basis of compeLowest cost in the industry
product/service titive

Unique

Product line
Limited selection
variety,
d
differentiating features

Wide

Production emph. Lowest possible cost with

Innovative
and differen asis
high quality and
essential
tiating products
f
features
Maktng emphasis Low price
price and inno-v
vative, differentiating features

Premium

Risk of Cost Leadership:

Technological change that might erase past
investment and outdates past learning.
Risk of imitation by late entrants with low cost and
advanced technology.
Lack of attention to the needs & preferences of
customers due to too much focus on cost
minimization.
Unexpected inflation that reduces companys ability
to offset product differentiation through cost
leadership.
Risk of Differentiation:
Increased cost differentials between low cost
producers and the differentiating one might result
customer to switch to low cost product even at the
cost of additional features and image.
Imitation might narrow down the perceived
differences.
Risk of Focus:
Increasing cost differential may result in switch of
loyal customers.
Disappearance of perceived or actual differences
between & services.
Other competitors might enter into the focus
product market thereby challenging the advantage.
Competitive Strategies in Different Types of
Industries:

Fragmented Industries:

Low overall entry barriers

Absence of economies of scale or experience curve
High transportation costs
High inventory costs due to fluctuating sales
Advantage of scale in dealing with customers or
suppliers is minimal or economy is not favourable
Low overheads
Highly diverse product line
Diverse market needs
High product differentiation
Exit barriers
Local regulation

Strategy formulation in a fragmented industry require

detailed analysis of industry, competition, market
segments, causes for fragmentation, economies, pricing,
options for exit or staying ahead strategy or how to
counter adverse market dynamics.
Emerging Industries Characteristics:

Technological uncertainty
Strategic uncertainty
Plethora of start ups
First time buyers
Short time horizon
Subsidies

Formulating Strategies in an Emerging Industry

Shaping industry structure
External factors affecting industry development
Changing role of suppliers and channels

 Shifting mobility barriers

Maturing Industries:Characteritics

Competitive pressure slowing growth

Competition is concentrated on cost and service
Over capacity
The discovery of new products and services are
limited or cost increases significantly
Profitability of all industry stakeholders goes down
Strategies for Maturing Industries:
Sophisticated cost analysis to rationalize product mix
and pricing
Process innovation and design for manufacture
Asset rationalization/stripping of unproductive assets
Look for new markets
Technology Strategy:
Choice of technologies to develop technology
advancement, breakthrough technologies.
Technological leadership or followership
Technological Leadership
Technological Followership
Cost Advanor value

-Evolve lowest cost

tage
product design.
following leaders.

-Lower cost

-Be first firm down the

R&D costs through

-Avoid

learning curve.
limitation.
-Create low cost ways of
performing value activities.
-----------------------------------------------------------------------------------------Differentiation -Develop a unique product -Adopt a
product or
that increases buyer value.
system more

delivery

closely to buyer needs.

-Innovate in other activities
learning from the
To increase buyers value.
leaders experience.

by

A company should decide to be technology leader after

considering the following three factors:
- Sustainability of technological lead
- First mover advantage
- First mover disadvantage
Four factors determine the sustainability of
technological leadership.
- The source of technological change.
- Sustainable cost or differentiation advantage in
technology development.
- Relative technical skills.

- Rapidity of technology diffusion.

First Mover Advantages potential advantages are:
-

Reputation
Preempting a position
Cost of switching
Selection of channels
Advantage of learning curve
Favourable access to facilities, inputs, or other scarce
resources
- First mover can create or define technology standards
- Patents are the institutional barriers
- Early profits leveraging cash low
First Mover Disadvantage:
-

Initial costs
Demand uncertainty
Changing buyer needs
Early investments to a particular technology and can
not be modified for later generation technologies
- Technological discontinuities which occur when there
are major changes in technology
- Low cost imitation
Formulating a Technology Strategy:
-

Identify technologies
Explore outside technologies
Anticipate direction of technological change
Identify important technologies for competitive
advantage
- Assess strengths and weaknesses
- Select a technology strategy
- Reinforce business unit strategies at the corporate
level and vice versa.

Gaining and Sustaining Competitive Advantage:

Identifying value activities: In order to sustain competitive
advantage it is important to identify value creating
activities amongst Primary and Support activities.
Primary activities cover R & D, Production, Marketing &
Sales, other Core Services.
Support activities include Materials Management,
Finance, HR functions.
When we talk about value creating activities we need to
understand the value chain of business and buyer value.
Competitive Scope and Value Chain:
Competitive scope influences the competitive advantage
by shaping the structure and economics of the value
chain. It has different dimensions such as

Segment scope
Vertical scope
Geographic scope
Industry scope
Coalition and partnership
Industry structure and opportunities thereof
Intellectual property as competitive advantage

Sustaining a Competitive Advantage:

To sustain a competitive advantage is a challenge for
most of the organizations. A competitive advantage has

strategic relevance only when it satisfies the following

three conditions.
Customers must find differentiated value in
companys products vis--vis its competitors so as to
influence buying behavior.
The difference must reflect the capability gap
between the favored company and its competitors.
The difference in the product and capability gap must
be sustainable in the long run.
Principles of Strategy Implementation:
Strategy is implemented through appropriate
organizational structure and control system. A well
planned organizational structure helps in better
coordination and seamless flow of activities. It should also
be appreciated that in organizational life change is
inevitable due to changes in business environment.
Organizations must seek to build new competencies
through changes in strategies, structure and control
systems. Some important strategies for bringing about
change are:
Reengineering
Restructuring
Innovation
Managing successful change requires skills and resources,
monitoring to evaluate expected results under changed
scenario. One has to identify teams which would act as
change agents and also to identify sceptics and resisting
segments to prevent sabotage and implementation
pitfalls. Meticulous planning is required with focus and
clarity for successful implementation of strategic change.

In this context communication plays a leading role to

ensure participation and involvement of employees. It
should be ensured that management and control systems
complement the new strategy.
Establishing Strategic Controls:
Strategic control provides feedback about various steps
of strategic management. It answers questions like:
Are organizations internal strengths adequate?
What are weaknesses coming in the way of strategy
implementation?
What additional strengths or weaknesses are
observed?
Are there new opportunities?
Whether existing /new threats will hamper the
progress?
Are the decisions consistent with the organizational
policies?
Are resources sufficient to achieve strategic goals
and objectives?
Whether vision, mission and objectives are keeping
pace with changing environment?
It is imperative that for an efficient strategic control
process one has to scan environmental factors, industry
factors, review of implementation mile stones, and timely
feedback mechanism.
Operational Control System:
Set standard of performance
Measure actual performance

 Identify deviation from standards

Initiate corrective action
The key operational control systems are: budgets,
schedules and key success factors. Key success factors
generally measure employee morale, improved
product/service quality, increased earnings per share,
growth in market share, timely implementation of new
facilities. There should be appropriate reward systems for
positive contribution linked with strategy. Similarly crisis
management should be looked into to address risks and
uncertainties that often arise during the process of
implementation.
Operationalizing the Strategy:
Strategy formulation, analysis of alternative strategies
and strategic choice precedes implementation. A strategy
must have clear, measurable annual objectives
understood by all employees. Annual objectives must be
linked with long term objectives of the organization.
Functional strategy is a short term game plan for a key
functional area within a company. Systems and policies
have to be aligned with strategic contours to achieve
results.
Management tools in Strategy:

Benchmarking
Re-engineering
Reverse engineering
Balanced scorecard

Benchmarking is a process for improving performance by

identifying, understanding and adapting best practices
and processes followed inside and outside the company
and implementing adapted practices.
Re-engineering achieves performance improvement by
redesigning operational processes, maximizing the value
added content and minimizing all procedural related
costs.
Reverse engineering is basically aimed at discovery and
learning.
Balanced scorecard is a measure of the key elements of a
companys strategy. R. S. Kaplan and D. P. Norton
pioneered the concept of Balanced Scorecard a set of
measures consisting of financial measures, operational
measures, customer satisfaction, and the organizational
processes and improvement activities. Scorecard brings
together many elements of a companys strategy in a
single management report to provide support to customer
centric approach, shortening response time, improving
quality, emphasizing teamwork, reducing new product
launch time, and managing for long term. The scorecard
keeps strategy and vision at the center and helps in
reducing sub-optimization.
Corporate Restructuring:
Forms of restructuring:
Expansion
Sell Offs
Corporate Control

 Change in Ownership Structure

Expansion:
Mergers and Acquisitions (Horizontal Vertical
Conglomerate Merger)
Tender Offers (Ask shareholders of the target
company to submit or tender their shares to have
controlling stake)
Joint Venture (Incorporated or Unincorporated)
Sell Offs:
Spin Offs (Creation of a separate legal entity)
Split Offs (Some of the existing shareholders receive
shares in a subsidiary in exchange for the stocks of
the parent company)
Split Ups (Entire company is fragmented into a series
of spin offs)
Divestitures (Sale of the company or part thereof to a
third party)
Equity Curve-outs (Selling a part of the equity to a
third party)
Corporate Control:
Premium Buy Backs (Repurchase of existing shares at
a premium)
Standstill Agreements (A voluntary contract in which
the new stock holder agrees not to take over the
company in the future)
Anti-takeover Amendments (Regulatory arrangement
to prevent mergers or acquisitions)
Proxy Contests (An attempt to reduce the controlling
power of existing management or board of directors)

Changes in Ownership Structure:

Exchange Offers (Exchange of debt or preferred stock
into common stock and vice versa)
Share Repurchases (Buy back of some portion of
outstanding common stock)
Going Private
Leveraged Buy-Outs
Organizational Forms:
Vertical Structure: Structure with forward & backward
integration.
Horizontal Structure: Multidivisional form (M-Form)
organizations are more prevalent now a days for effective
allocation of resources, and ease of strategic planning,
monitoring and control. It also helps in decentralizes
operations with better decision making close to level of
activities.
Turnaround Management:
Turnaround is of considerable importance to strategic
management. A turnaround involves when a
threateningly decline phase is removed with improved
performance with a combination of strategies, systems,
skills and capabilities.
Joint Ventures and Strategic Alliances:
Joint Ventures: Joint ventures generally take place to
reduce investment outlaty and share risk. Major reasons
for joint ventures are To augment financial and technical ability to enter a
particular line of business.

 To share technological knowledge and management

skills.
To diversify the risk involved in the project.
To obtain distribution channels or raw materials
supply.
To gain economics of scale.
To extend business by sharing investments.
To take advantage of tax treatment or political
incentives.
According to various studies, 70% of joint ventures fail to
achieve desired results because of cultural differences,
lack of managerial commitment and focus, poor pre
planning, refusal by managers to share knowledge or
know how, inability to share control etc.
Strategic alliances: Agreement between potential or
actual competitors. Strategic alliances enable companies
to design new products, minimize costs, enter new
markets, block or preempt competitors, and to generate
higher revenues.
According to Bleeke and Ernst there are six types of
strategic alliances:
Alliance between two strong competing companies,
generally short lived, often result in acquisition by
one of the partners or merger.
Alliance result into sale by one partner to the other
due to inherent differences.
Alliances of complimentary equals generally remain
strong during the course of alliance.

 Disguised sale a short lived alliance between a

weak and a strong company, eventually acquired by
the stronger company.
Bootstrap alliance weaker partner uses the alliance
to improve its competencies, but eventually acquired
by the stronger partner.
Alliances of the weaks objective is to improve
position but often results into failures.
The success of an alliance depends on three factors
partner selection, alliance structure and the manner in
which the alliance is managed. The strategic alliance
helps in combining skills and assets that neither can
develop on their own.
PESTEL FRAMEWORK
A PESTEL analysis is a framework or tool used by
marketers to analyse and monitor the macroenvironmental (external marketing environment)
factors that have an impact on an organisation. The
result of which is used to identify threats and
weaknesses which is used in a SWOT analysis.
PESTEL stands for:
P Political
E Economic
S Social
T Technological

E Environmental
L Legal
Lets look at each of these macro-environmental factors
in turn.
PESTEL Factors
All the external environmental factors (PESTEL factors)
Political Factors
These are all about how and to what degree a
government intervenes in the economy. This can
include government policy, political stability or
instability in overseas markets, foreign trade policy, tax
policy, labour law, environmental law, trade restrictions
and so on.
It is clear from the list above that political factors often
have an impact on organisations and how they do
business. Organisations need to be able to respond to
the current and anticipated future legislation, and
adjust their marketing policy accordingly.
Economic Factors
Economic factors have a significant impact on how an
organisation does business and also how profitable
they are. Factors include economic growth, interest
rates, exchange rates, inflation, disposable income of
consumers and businesses and so on.

These factors can be further broken down into macroeconomical and micro-economical factors. Macroeconomical factors deal with the management of
demand in any given economy. Governments use
interest rate control, taxation policy and government
expenditure as their main mechanisms they use for
this.
Micro-economic factors are all about the way people
spend their incomes. This has a large impact on B2C
organisations in particular.
Social Factors
Also known as socio-cultural factors, are the areas that
involve the shared belief and attitudes of the
population. These factors include population growth,
age distribution, health consciousness, career attitudes
and so on. These factors are of particular interest as
they have a direct effect on how marketers understand
customers and what drives them.
Technological Factors
We all know how fast the technological landscape
changes and how this impacts the way we market our
products. Technological factors affect marketing and
the management thereof in three distinct ways:
New ways of producing goods and services
New ways of distributing goods and services
New ways of communicating with target markets

Environmental Factors
These factors have only really come to the forefront in
the last fifteen years or so. They have become
important due to the increasing scarcity of raw
materials, polution targets, doing business as an ethical
and sustainable company, carbon footprint targets set
by governments (this is a good example were one
factor could be classes as political and environmental
at the same time). These are just some of the issues
marketers are facing within this factor. More and more
consumers are demanding that the products they buy
are sourced ethically, and if possible from a sustainable
source.
Legal Factors
Legal factors include - health and safety, equal
opportunities, advertising standards, consumer rights
and laws, product labelling and product safety. It is
clear that companies need to know what is and what is
not legal in order to trade successfully. If an
organisation trades globally this becomes a very tricky
area to get right as each country has its own set of
rules and regulations.
After you have completed a PESTEL analysis you should
be able to use this to help you identify the strengths
and weaknesses for a SWOT analysis.

PHOTO: FLICKR PEST ANALYSISAn Overview of the

PESTEL Framework By Jim Makos | Feb 18, 2015
5SHARESSHARE TWEET SHARE SHARE 0 COMMENTS

A PESTEL analysis is a tool or framework for marketers.

You can use it if you are seeking to analyze and screen
the external marketing environment of you company. The
strategic management tool gauges the macro
environmental factors. The results make decision taking
much easier.
The different macro-environmental factors can affect
business strategies. So, it is vital to follow the PESTEL
framework. The aim is to assess how exactly the factors
influence business performance.
You can judge 6 types of environmental influences in the
PESTEL framework. They are political, economic, social,
technological, environmental and legal. You should not
see these factors as independent factors. They are all
interdependent. For example, technological advances can
affect the economy in different markets.
The 6 factors I mentioned above make up the acronym
PESTEL. Each letter represents one factor. It is often
called PESTLE. You may these factors using other tests
too. PEST, STEEP, and STEEPLE are similar analyses.
Some other variations are STEPJE, STEP, and LEPEST.

Managers can choose any based on the nature of the firm

and the factors they wish to study.
I have discussed some characteristics of these
environmental factors below. The article will help you find
which factors are more important to your companys
strategy. This might serve as a preliminary inspiration.
You will have to dig deeper into the details to take
accurate decisions.
POLITICAL FACTORS
Politics plays an important role in business. This is
because there is a balance between systems of control
and free markets. As global economics supersedes
domestic economies, companies must consider numerous
opportunities and threats before expanding into new
regions. It also applies to firms identifying optimal areas
for production or sales. Political factors may even help
determine the location of corporate headquarters.
Some of the political factors you need to watch are:
Tax policies
Stability of government
Entry mode regulations
Social policies (e.g. social welfare etc.)
Trade regulations (e.g. the EU & NAFTA)

ECONOMIC FACTORS
Economic factors are metrics that measure the health of
any economic region. The economic state will change a
lot of times during the firms lifetime. You have to
compare the current levels of inflation, unemployment,
economic growth, and international trade. This way, you
can carry out your strategic plan better.
Some examples of economic factors you can judge are:
Disposable income of buyers
Credit accessibility
Unemployment rates
Interest rates
Inflation
SOCIAL FACTORS
Social factors assess the mentality of the individuals or
consumers in a given market. These are also known as
demographic factors. Social indicators like exchange
rates, GDP and inflation are critical to management. They
can tell when it is a good time to borrow. These factors
help find out how an economy might react to certain
changes.
The following are some social factors to focus on:

Population demographics: (e.g. aging population)

Distribution of Wealth
Changes in lifestyles and trends
Educational levels
TECHNOLOGICAL FACTORS
This step entails recognizing the potential technologies
that are available. Technological advancements can
optimize internal efficiency and help a product or service
from becoming technologically obsolete. Role of
technology in business is increasing each year. This trend
will continue because R&D drives new innovations.

Recognizing evolving technologies to optimize internal

efficiency is a great asset in management. But, there are
few threats. Disruptive innovations such as Netflix affect
business for CD-players. The best strategy is to adapt
according to the changes. Your strategies should sidestep
threats and embrace opportunities.
This is a large challenge for management. Below is a list
of common technological factors:
New discoveries and innovations
Rate of technological advances and innovations
Rate of technological obsolescence

New technological platforms (e.g. VHS and DVD)

ENVIRONMENTAL FACTORS
Both consumers and governments penalize firms for
having adverse effect on the environment. Governments
levy huge fines upon companies for polluting. Companies
are also rewarded for having positive impact on the
environment. The consumers are willing to switch brands
if they find a business is ignoring its environmental
duties.
Impact on the environment is a rising concern. Note that
the environment benefits the company too. Running
water for a hydro-power plant is an example.
Few common environmental factors are:
Waste disposal laws
Environmental protection laws
Energy consumption regulation
Popular attitude towards the environment
LEGAL FACTORS
This step involves learning about the laws and regulations
in your region. It is critical for avoiding unnecessary legal
costs.

This is the last factor in PESTEL. These factors overview

the legal elements. Often, start-ups link these elements
to the political framework. Many legal issues can affect a
company that does not act responsibly. This step helps to
avoid legal pitfalls. You should always remain within the
confines of established regulations.
Common legal factors that companies focus on include:
Employment regulations
Competitive regulations
Health and safety regulations
Product regulations
Antitrust laws
Patent infringements
It is common to conduct a PESTEL analysis before serious
decisions. Managers might conduct it before any large
projects are undertaken. Understanding all the
influencing factors is the first step to addressing them.
Remember, there are many factors other than these
which can have an effect on business success. The
evaluation is a one-to-one process. Each company should
do it for themselves and find the key drivers of change.
You must identify the factors which have strategic and
competitive consequences.

Analyzing the total macro-environment is an extensive

task. Even though, it is complex, understanding the
framework of basic influences will allow you to maintain
an organized and strategic approach. These will isolate
each opportunity or threat.
After conducting a PESTEL analysis, company managers
can create strategies. The macro environmental factors
will shape the strategies. I am sure that the thinking
process will be as sensitive as current and future
environmental factors.
If you are planning to align strategies for your company, I
suggest you should conduct PESTEL analysis first. It is
always good to have more information about the
surrounding. The tool really helps take better decisions.

Strategy Gaps
Critical Success Factors
Experience Curve
Strategic Capability
Resource Strength
Core Competencies
Competition view of Strategy vs. RBV