JOMO KENYATTA UNIVERSITY OF AGRICULTURE AND

TECHNOLOGY

NAME:

REDEMPTA MUTHEU MUTUA

REG NO:

HD333-C002-3768/2015

NAME:

AGNES MUENI

REG NO:

HD333-C002-/2015

NAME:

ELIJAH MUSYIMI

REG NO:

HD333-C002-/2015

COURSE:

MASTERS OF BUSINESS ADMINISTRATION

UNIT CODE:
UNIT NAME:

STRATEGIC MANAGEMENT

INTRODUCTION TO STRATEGIC ANALYSIS

Strategy refers to the plans made and action taken to enable an organization to fulfill its indented
objectives.
Strategy is managements game plan for strengthening the organizations position, pleasing customers,
and achieving performance targets.
Analysis can be divided into two categories;
external
Internal analysis.
EXTERNAL ENVIRONMENT ANALYSIS
The analysis entails assessing the level of threat or opportunity the factors might present. These
evaluations are later translated into the decision-making process. The analysis helps align strategies with
the firms environment.
The external environment can be divided into;
1. Macro-environmental analysis
Macro level analysis deals with the external environment of the organization, global issues that affect the
business not only in this particular organization but the whole industry.
2. Micro-environmental analysis
The micro level examines the organizations own factors that influence its operation, customers and
competitors.
Our market is facing changes every day. Many new things develop over time and the whole scenario can
alter in only a few seconds. There are some factors that are beyond your control. But, you can control a
lot of these things.
Businesses are greatly influenced by their environment. All the situational factors which determine day to
day circumstances impact firms. So, businesses must constantly analyze the trade environment and the
market.
This is accomplished by scanning, monitoring, forecasting, and assessing. It helps ensure that genuinely
important opportunities and threats in the external environment are not overlooked. Internal analysis takes
place in successively detailed stages of surveying, categorizing, investigating, and evaluating.
Some of the frameworks applied in scanning the business environment are
PESTLE Analysis
Michael Porters five forces of competition

a) PESTLE Analysis

PESTLE analysis consists of various factors that affect the business environment. Each letter in the
acronym signifies a set of factors. These factors can affect every industry directly or indirectly.
The letters in PESTLE, also called PESTEL, denote the following things:

Political factors

Economic factors

Social factors

Technological factors

Legal factors

Environmental factor
It gives an overview of the different macro environmental factors that organization takes into
consideration. Managers should also examine how each factor impacts the organizations internal parts,
the markets and the industry in which the organization is competing. (Evans et al. 2003).
POLITICAL FACTORS
The political factors take the countrys current political situation. It also reads the global political
conditions effect on the country and business. When conducting this step, ask questions like What kind
of government leadership is impacting decisions of the firm?
Some political factors include;

Government policies
Taxes laws and tariff
Stability of government
Entry mode regulations

ECONOMICAL FACTORS
These factors have major impacts on how businesses operate and make decisions. They include economic
growth, interest rates, exchange rates and the inflation rate. Social-cultural factors; Trends in social
factors affect the demand for a company's products and how that company operates. This includes the
cultural aspects, health consciousness, population growth rate, age distribution, career attitudes and
emphasis on safety. For example, an aging population may imply a smaller and less-willing workforce
thus increasing the cost of labour). Furthermore, companies may change various management strategies to
adapt to these social trends (such as recruiting older workers).This economic factors include:

The inflation rate

The interest rate

Disposable income of buyers

Credit accessibility

Unemployment rates

The monetary or fiscal policies

The foreign exchange rate

TECHNOLOGICAL FACTORS
Technological factors can determine barriers to entry, minimum efficient production level and influence
outsourcing decisions. They include technological aspects such as R&D activity, automation, technology
incentives and the rate of technological change.
Furthermore, technological shifts can affect costs, quality, and lead to innovation.

b) Porters five forces of competition

Microenvironment usually consists of the influences within the organizations industry. It may have some
influence on it, depending on the level of the business. Mostly this environment consists of the customers,
competitors and suppliers. Michael Porter defined it as a group of businesses whose products are very
similar. The organization must be able to analyze its competitive environment so as to be able to make a
good strategy. This will help it know more about its customers, find new markets, identify possible threats
from known competitors but also discover new ones and know its resource markets.
Porters five forces of competition

1. Supplier power. An assessment of how easy it is for suppliers to drive up

prices. This is driven by:
the number of suppliers of each essential input

the uniqueness of their product or service

the relative size and strength of the supplier

the cost of switching from one supplier to another.

2. Buyer power. An assessment of how easy it is for buyers to drive prices

down. This is driven by:
the number of buyers in the market
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the importance of each individual buyer to the organization

the cost to the buyer of switching from one supplier to another.

If a business has just a few powerful buyers, they are often able to dictate terms.

3. Competitive rivalry. The key driver is the number and capability of

competitors in the market. Many competitors, offering undifferentiated
products and services, will reduce market attractiveness.
4. Threat of substitution. Where close substitute products exist in a market, it increases
the likelihood of customers switching to alternatives in response to price increases. This
reduces both the power of suppliers and the attractiveness of the market.
5. Threat of new entry. Profitable markets attract new entrants, which erodes
profitability. Unless incumbents have strong and durable barriers to entry, for
example, patents, economies of scale, capital requirements or government policies,
then profitability will decline to a competitive rate.
INTERNAL ENVIRONMENT ANALYSIS
Internal analysis is the systematic evaluation of the key internal features of an organization.
Four broad areas need to be considered for internal analysis
1. The organizations resources, capabilities
2. The way in which the organization configures and co-ordinates its key value-adding activities
3. The structure of the organization and the characteristics of its culture

The organizations resources, capabilities

There are three types of resources
1. Assets
2. Capabilities
3. Competencies,
Assets
The factors of production used by firms in providing its customers with valuable goods and services are
called assets. These assets are of two types-

a)tangible assets
Any physical means a firm uses to provide value to its customers its tangible assets.
b) Intangible assets.
Intangible assets are equally valuable for firms but their physical presence cannot be felt or seen. For
example, a brand name is a very important resource for any organization even though it is intangible.
Capabilities
In order to take full advantage of its assets the organization needs to develop skills, as experience suggests
that with similar assets two different firms may add value of different amount for themselves. This
difference can only be explained by the differences these organizations carry their capabilities in utilizing
these assets.
Competencies
Most simply put, it refers to the ability to perform. Experts from field of strategy, using the term
distinctive competencies refer to the critical bundle of skills that an organization can draw on to
distinguish itself from competitors. However, in order to have a better understanding of the concept, you
need to understand first the resources, which are available to an organization and how they differentiate
themselves as competencies or core competencies.

Strategic Importance of Resources

1. Available Resources:
These are those resources that are basic to the capability of any organization which can be listed broadly
as:
a)Physical Resources
Few examples may be buildings, machinery or operational capacity. However, the specific condition and
capability of each resource determines their usefulness.
b) Human Resources
Traditionally or in todays knowledge economy both, people are considered as the most valuable asset of
an organization. Knowledge and skill of people together prove to be a great asset.
c) Financial Resources
Financial Resources of an organization may lie in capital, cash, debtors and creditors and providers of
money. Intellectual capital: Intangible resources include the knowledge that has been captured in patents,
brands, business systems and relationships with associates. In knowledge economy intellectual capital is
considered as a major asset of many organizations.
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2) Threshold Resources
Organizations need a set of threshold resources to perform in any market and there is a continuous need to
improve such resources to stay in business. This becomes inevitable because of the competitors and
sometimes the new entrants. We can think of many industries in India like automobile, durable goods,
telecom etc. which with the foreign players had to acquire new sets of resources as their threshold
resources to survive.
3) Unique Resources
Unique resources as defined in strategy texts are those resources, which critically underpin competitive
advantage. Their ability to provide value in product is better than competitors resources and are difficult
to imitate. Just think of a big music stores like Planet M or the ones from RPG group, the scale and range
of collection of music provides uniqueness to these stores as compared to any of the traditional music
shop. Some organizations have patented products or services that give them advantage for some service
organizations, unique resources may be particularly the people working in that organization.
4) Core Competencies
Above, we learnt that competencies refer to the ability to perform. The difference in performance between
organizations in the same market is rarely explainable by differences in their resource base, since
resources can usually be imitated or traded. Superior performance is actually determined by the way in
which resources are to create competences in the organizations activities. An organization needs to
achieve a threshold level of competence in all of the activities and processes. Core competencies are
activities or processes that critically underpin an organizations competitive advantage
B) THE CRITICAL SUCCESS FACTOR (CSF)
Critical success factors are those which contribute to organizations success in a competitive environment
and therefore the organization needs to improve on them since poor results may lead to declining
performance. Organizations depending on the environment they operate in and their own internal
conditions can identify relevant .However, literature on strategy suggests few general sources of critical
success factors that have been identified based on empirical research. They are as follows:
a)Industry Characteristics
Industry specific critical success factors are factors critical for the performance of an industry. For
example in hospitality industry excellent and customized service, wide presence and an excellent booking
and reservation system is critical.
b)Competitive Position
Critical success factors for a firm may also be determined by its relative position with respect to its
competitors. In some instances, industry is dominated by few large players and their actions lead to
determining the critical success factors for the industry which smaller players have to ensure for their
success.
C) THE VALUE CHAIN
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The value chain is the chain of activities which results in the final value of a businesss products.
Value added, or margin is indicated by sales revenue minus costs. Porter divided internal parts of
organization into

1. primary activities
Primary activities are those that directly contribute to production of goods or services and organizations
provision to customer
2. support activities
Support activities are those that aid primary activities, but do not add value
The Firm as a Value Chain
The primary activities constitute of the following:
a) Inbound Logistic
These are activities concerned with receiving, storing and distributing the inputs to the product or service.
They include materials handling, stock control, transport etc.
b) Operations Transform
These are the various inputs into the final product or service machining, packaging, assembly testing
etc.
c) Outbound Logistics
Collect, store and distribute the product to customers. For tangible products this would be warehousing,
materials handling, transportation etc. In the case of services they may be more concerned with
arrangements for bringing customers to the service if it is a fixed location (e.g. entertainment show).
d) Marketing and Sales
Makes consumers/ users aware of the product or service so that they are able to purchase it. This includes
sales administration, advertising, selling and so on.
e) Services activities
It helps improving the effectiveness or efficiency of primary activities. Each of the groups of primary
activities is linked to support activities which are as follows:
1) Procurement

This is a process for acquiring the various resource inputs to the primary activities and this is present in
many parts of the organization.
2) Technology Development
There are key technologies attached to different activities which may be directly linked with the product
or with processes or with resource inputs.

3) Human Resource Management

This is an area involved with recruiting, managing, training, developing and rewarding people within the
organization. This categorization of the activities as primary or support may be found true for
organizations in general; however it is always better to have ones own judgment in identifying activities
for particular firms in consideration
Methods of assessing internal strengths and weaknesses
Quantitative and qualitative factors help in the internal assessment of any organization. However, since
every organizations creation of wealth is the primary goal, any assessment has to focus on measuring the
variety of means that contribute to the creation of wealth. The creation of wealth depends largely on
providing superior value for customers and this is possible when the organizations have efficient and
effective operations with necessary capabilities. The required capabilities depend on the employees, their
skills and motivation levels. Normally any quantitative analysis starts with financial analysis, yet in order
to have an in-depth assessment of a firms strengths and weaknesses, managers go deeper into the
information available on other areas as well which contribute to the firms financial performance. Some
of these require qualitative measurement while others may require qualitative assessment.
QUANTITATIVE ASSESSMENT
As mentioned above, financial data is only the most basic and universally accepted approach in assessing
a firm. However we must understand that such an analysis is only the beginning for a thorough internal
analysis. It is often found useful to go beyond the financial analysis to fully quantify organizations
strengths and weaknesses and therefore it is discussed in detail here. Financial Quantitative Analysis
Traditionally financial analysis emphasizes on the study of financial ratios which is commonly known as
ratio analysis.
i) Profitability ratios provide information regarding a firms overall economic performance.
ii) Liquidity ratios measure a firms capacity to meet its short term financial obligations
iii) Leverage ratios indicate a firms financial risk that is the relative proposition of its debt to its equity.
The first enables to assess the financial returns of a firm and the associated risk with it is assessed by its
financial liabilities or debt. The latter is measured by liquidity or leverage ratios.
iv) Activity ratios reflect a firms efficient or inefficient use of its resources. The operational part is
analyzed by the activity ratios. In spite of their wide acceptability, financial analysis does not provide
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insights into aspects like development time for new products or brand recall value which are also
important in understanding strengths and weaknesses from other perspectives. Few of such non-financial
quantitative measures can be listed as number of patents; quality assessment; new product development;
customer complaints; employees turnover, etc.
QUALITATIVE ASSESSMENT
Often it has been found that quantitative analysis alone is not sufficient to understand any organizations
strengths and weaknesses. Particularly the factors related to human resources, organizational culture and
its temperament towards creativity and innovation are few which can be understood only through
qualitative information. Qualitative information also supplements quantitative data in uderstanding basic
concepts of what customers value and how they feel about a given product. The exhibit provides you
with few relevant guiding points to assess a broad range of important qualitative factors.
COMPARISON STANDARDS
In order to arrive at some meaningful conclusion regarding strengths and weaknesses, the above analysis
should be supported by appropriate standards for comparison, for example, Industry norms, Historical
performance and Benchmarks. These are three commonly accepted comparison standards which are often
found useful for internal analysis by the organizations.
1. Industry Norms
The industry norms compare the performance of an organization in the same industry or sector against a
set of agreed performance indicators. Data on industry norms are widely available and can be found from
several published sources. Using such data and comparing an organization against others in its industry
helps the organization understand its true position. The danger of industry norms comparison is that the
whole industry may be performing badly and losing out competitively to other industries. Another
problem with such comparisons may also arise as the boundaries of industries are coming down through
competitive activity and industry convergence. For example publishing houses are evolving into multiple
media groups working around the infotainment industry. Moreover talking of industry norms, it is an
average indictor and organizations must endeavour in beating them rather meeting them. In order to
understand how they have been doing so it is always suggested that industry norm comparisons are
supplemented with analysis on organizations own historical performance.
2. Historical Comparisons
Historical comparisons look at the performance of an organization in relation to previous years in order to
identify significant changes. Organizations must endeavour to improve their performance over time in
order to remain competitive and overpower the performance of competitors. It must try to beat its own
best in future, which would call for continuous improvement. However in case of the historical
comparison it also entails scope for complacency since the organizations compare their rate of
improvement over years with that of competitors and it is possible that the latter may itself be operating at
a relatively lower average. Such historical trends can even be misleading when they entail changes made
on a very small base.
3. Benchmarking
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Benchmarking compares an organizations performance against best in class performance wherever that
is found. Managers seek out the best examples of a particular practice in other companies as part of an
effort to improve the corresponding practice in their own firm. When the search for best practices is
limited to competitors, the process is called competitive benchmarking. Other times managers may seek
out the best practices regardless of what industry they are in, called functional benchmarking.
Benchmarking provides the motivation annd the means many firms need to seriously rethink how their
organizations perform certain tasks. A comprehensive internal analysis of an organizations strengths and
weaknesses must however utilize all three types of comprison standards. For instance, an organization can
study industry norms to assess where it stands in terms of number of complaints generated regarding
defects during guarantee period of a product. Then it could benchmark the organization that is best at
controlling the defects. Based on the benchmarking results it could implement major new programmes
and track improvements in these programmes over time using, historical comparisons.
SWOT Analysis
SWOT stands for Strengths, Weaknesses, Opportunites and Threats. A SWOT analysis summarizes the
key issues from the external environment and the internal capabilities of an organization those which
become critical for strategy development. The aim through this is to identify the extent to which the
strengths and weaknesses are relevant to and capable of dealing with changes in the business
environment. It also reflects whether there are opportunities to exploit further the competencies of the
organization.
Opportunities
What
political,
economic,
social-cultural, or technology
(PEST) changes are taking
place that could be favourable
to you?
Where are there currently
gaps in the market or
unfulfilled demand?
What new innovation
Threats

Strengths
What does your organisation do better than
others?
What are your unique selling points?
What do you competitors and customers in
your market perceive as your strengths?
What is your organisations competitive edge?

Weakness

What political, economic, social- What do other organisations do better than

you?
cultural, or technology (PEST)
changes are taking place that What elements of your business add little
could be unfavourable to you?
or no value?
What restraints to you face?
What do competitors and customers in your
What is your competition
market perceive as your weakness?
doing that could negatively
impact you?

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When using SWOT analysis, it should be ensured that:

1. Only specific, verifiable statements are used.
2. Internal and external factors are prioritized so that time is spent concentrating
on the most significant factors. This should include a risk assessment to ensure that
high risk or high impact threats and opportunities are clearly identified and are
dealt with in priority order.
3. Issues identified are retained for later in the strategy formation process.
4. The analysis is pitched at the project or business activity level rather than at a total
company level, which may be less actionable.
5. It is not used in exclusivity. No one tool is likely to be completely
comprehensive, so a mixture of option-generating tools should be used.
Conclusion
Understanding of the strengths and weaknesses of an organization comes through the internal analysis.
This is important for any organization in order to respond effectively to its environment both micro and
macro. Also understanding them enables the organization to stretch its capabilities and create new
opportunies for themselves. However managers have to work hard in assessing the capabilities using
frameworks like Critical success factors and the Value chain analysis and analyzing them through
quantitative or qualitative analysis. The end result goes as an important input for SWOT analysis.

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