22

Strategic Managerment
(M.M.S. Sem.
Chapter
3 PESTEL & SWOT as Tools for Strategic Formulation

3.1 PESTLE ANALYSIS

...M.U. Nov. 2017) (5 marksl

....M.U. Nov. 2018) (5 marksl
A PESTEL study is a
..(M.U. Nov. 2019) (5 marks]
strategic framework that is frequently
operating environment of a company. PEST employed to evaluate the
and technological factors, was the analysis, which stands for political, economic, social.
been broadened to original name for the framework. In more recent times, it has
incoporate environmental and legal concerns as well. PESTEL research is
ikewise a well-liked instrument in the
model asSumptions and funding community of financial analysts,
where elements may affect
choices, and among management
Companies in creating inventive product and market consultants who assist their
1. efforts.
Political Factors - The following points of
factors discussion should be included in Political
Political stability of the government.
Single party government
Corruption level in the country.
Freedom of press
Political Processes and Party funding.
Government's policy on Economy eg: Five-year plans for various
sectors
Detense Budget of a country (higher defense budget is a
government) sign of political stability of the
Import-Export regulations
Policies related to the public sector, small scale
industries, etc.
2. Economnic Factors - incoporates the criteria listed below
Interest rates.
Level of Inflation.
GDP.

Disposable Income.
 PESTEL and SWOT as Tools for Strategic Formulation 23

Unemployment trends in a country.

Stock market trends are an indication of growing economy.
Price fluctuations of the curency
Economic structure adopted in a country like Capitalistic, Socialistic and Mixed
systems.

3. Socio-Cultural Factors - includes the following points

Dominant religion in a country and peaceful co-existence with religions in minority.
Attitude towards foreign products and services
Birth rate of population
Life expectancy of population
Number of marriages in a country leads to more population which leads to an increase
in consumption as the family size increases.
Number of Divorces leads to lesser consumption
consumption of
Age distribution of People - Population between ages 25-45 will aid
age of 55
goods like Fast food, Automobiles, etc. whereas the population above the
will lead to consumption of more Adult diapers.
Atitude towards saving
Attitude towards investing

4. Technological Factors - includes the following points

Level of technology usage in a sector.
Penetration of the Internet.

Penetration of mobile phone technology

technologies
Change in distribution due to adoption of new
Total Government spending on R&D
Industry spending on R&D
Technology incentives provided by the government
below
5. Environmental Factors - incorporates the criteria listed
Environmental regulations.
Ecological factors.
Air pollution.
Water pollution.
Carbon footprint
physical and transition risks
Climate change impacts, including
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Srategic Management (M.M.S.Sem m
Increased incidences of extreme weather events
Recycling of Plastics
Attitude towards green products.
6. Legal Factors - incudes the
following points
Cunent Legislation
International Legislation
Regulatory Bodies and processes
Industry regulation
Licenses and permits required to operate
Employment and consumer protection laws
Protection of IP (Intellectual Property)
Health and Safety Regulations
PESTLE Analysis Uses
A PESTLE study may
identify and analyze broad, long-term
external environment. This can help in a variety of business planning
patterns by auditing the
1.
Business strategy planning circumstances, including:
A PESTLE study gives
positioning, growth objectives, andcontextual infomation about the company's strategy, brand
productivity threats (such the possibility of another
It may be used to
goods and services.
define new product
development and assess the viability of alreadypandemic).
available
2
Workforce preparation
The future employment
company models, which mayenvironment may be
be detected usingsignificantly impacted by disruptive changes to
shortages, brand-new job roles, job the PESTLE analysis. It can reveal talent
3 eliminations, or work displacements.
Marketing strategy & planning
In the scenario
analysis stage of the
the "climate" component. It can assist inmarketing planning process, a PESTLE study supplies
prioritizing corporate efforts to achieve
marketing goals within a predetermined time frame.
4.
particular
Product creation
APESTLEstudy may
or exit a market, and assist in identifying whether to
whether a product or service still launch a new product,
fills a demand in the whether enter
to
keeping track of external activities. marketplace by
 25
Formulation
PESTEL and SWOT as Tools for Strategic
5. Organizational change
assess opportunities and challenges
When used in conjunction with a SWOT analysis to
workforce capabilities, a PESTLE study
around labor changes, such as skills shortages or present
ajds in understanding the context for change.
Benefits of PESTLE Analysis:
It has a basic structure.
It makes it easier to comprehend the larger business environment.
It promotes the growth of analytical and strategic thinking.
and take precautions to
It can help a company foresee potential business hazards
lessen or eliminate their effects.
advantage of commercial
An organization may be able to recognise and take full
possibilities thanks to it.
Drawbacks of PESTLE Analysis:
It's simple to utilize inadequate data when doing PESTLE analysis, and some users
oversimplify the information used to mke judgments.
The danger of gathering more data might result in "paralysis by analysis."
The statistics may have been derived using presumptions that afterwards turned out to
be incoect.
It is getting harder and harder to predict future changes that can have an impact on an
organization due to the speed of change.
Theprocedure must be done frequently to be effective.

3.2 SWOT ANALYSIS

......M.U. Nov. 2017) (5 marks]

....M.U. Nov. 2018) [5 marks]
.....M.U. Nov. 2019) (5 marks]
SWOT Analysis evolved in 1960 by Stanford Research Institute. SWOT is also known as
TOWS or WOTS-Up Analysis. SWOT analysis (strengths, weaknesses, opportunities, and
threats) is aframework for assessing a company's competitive position and developing strategic
plans. Internal and external elements, as well as existing and future possibilities, are all evaluated
in a SWOT analysis. SWOT analysis is a strategic planning method that gives you tools to
examine your situation.

Finding key strengths, weaknesses, opportunities, and dangers leads to fact-based analusis
newviews, and innovative approaches.
 26 Strategic Management (M.M.S. Serm. ID)
SWOT analysis is used for internal analysis, i.e., company level analysis. SWOT analysis is a
tool that can assist you in identifying the current strengths of your business and developing a
winning future strategy. SWOT can also reveal business issues that are hindering you or that. if
undefended, your competitors could use against you. In other words, whats happening inside and
outside of your firm is examined in a SWOT analysis together with internal and external issues, As
a result, while some of these elements will be in your control, others wont. In either instance, once
you've identifed, noted, and considered as many variables as you can, the best course of action
will become more obvious.

Strengths - It is an inherent capacity which the organization can use to gain strategic
advantage
Weaknesses - It is an inherent limitation which creates strategic disadvantage.
Opportunities - These are favorable conditions in the environment that allow a business
to strengthen its position.
Threats -Threats are adverse conditions in the environment of the organization that
increase risk or harm the organization.

SWOT analysis technique : involves following steps

1. Setting the objectives of the organization
2 ldentifying its strength, weakness, opportunity and threat.
3 Four questions to be answered- Maximize strength, minimize weakness, Capitalize on
opportunities, Protect from threats.
4. Recommending strategies.
Format of SWOT

STRENGTHS WEAKNESSES
" Favorable location " Uncertain cash flow
" Excellent distribution network " Absence of strong USP
Quality certification " Low worker commitment
" R&D facility " Lack of marketing expertise.
" Good reputation " Undifferentiated products or services
Your specialist marketing expertise.
" A new, innovative product or service.
" Location of your business.
 PESTEL and SWOT as Tools for Strategic Formulation 27

OPPORTUNITIES THREATS
" Favorable industry trends " Unfavorable political environment
" Low technology options available Obstacles in licensing
Possibility of niche target market " Uncertain competitor's interventions
" Availability of reliable business partners. " Lack of sustainable financial backing
" Anew intemational market. " Anew competitor in your home market.
" A
market vacated by an ineffective competitor. " Price wars with competitors.

SWOT ANALYSIS OF STARBUCKS

A. STRENGTH

Brand value

In its 2021 listing, Brand Finance's Restaurants ranked Starbucks as the most valuable
restaurant brand.Starbucks has been able to claim this honour for five years in a row, with a
brand worth of US$38.4 billion.One of the best loyalty progammes in the world is offered by
Starbucks.
Loyalty Program
Over 19.3 million members were enrolled in the Starbucks Rewards programme as of
October 2020, which generated close to 50% of revenue. Starbucks has been able to analyse
client data with the assistance of Microsoft Azure Technology and provide customized items via
email, mobile app, and push alerts.
Company-owned Stores account for Major Revenues
Starbucks total revenue for the year 2020 stood at US$ 23.5 bn out of which revenue from
company-operated stores stood at US$ 19.1 bn - a share of around 81%.
Packaging - The Famous White Disposable Paper Cup
Starbucks renowned white di_posable cup has been among the company's most distinctive
trademarks. Customers can be seen holding the cup while walking in the evening or while going
to work in the morning all over the world. The green siren (mascot) is displayed quite strongly on
the white cup,which increases brand recognition and recall.
Supplier Relationship
Starbucks has contributed more than $100 million to support coffee-growing regions.
Projects, activities, and initiatives that work in concert with farmers, such as the Coffee and
Farmer Equty (C.A.F.E) Practices, forest carbon projects, famer mortgages, and farmer
assistance centres. Starbucks took part in the above mentioned initiatives to improve farmers'
conditions of living. Additionally, the programmes made sure that the industry had access to high
quality coffee for a very long time.
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Strategic Management (M.M.S. Sem, Il
B. Weakness

Overdependence on Americas Segment

Starbucks is highly dependent on the performance of its Americas operating segment. The
Americas Segment comprised approximately 70% of consolidated total net revenues in the
2020. year
Premium Pricing
For many lower and middle tiers consumers. Starbucks' offerings are more premium than its
Competitors and local coffee shops. Its high prices are a major deterrent for many consumers.
C. Opportunities
Expansion in Developing Markets
Close to 56% of the total stores of Starbucks are in the Americas region. This indicates that
the lower penetration rate of Starbucks in international markets.
A reliable market to tap into are emerging economies like China, India, and nations in
Africa.
Starbucks Pick Up
Customers who want to order ahead through Starbucks' mobile app, pay for it in advance.
then pick it up at the location can do so with Starbucks Pickup.
Additionaly, it is for consumers who preter to have their food delivered by Uber Eats. Even
before the Covid-19 outbreak, Starbucks estimates that 80% of orders placed in its US outlets
were "on-the-go" orders.
Tie up with Nestle
In 2018, Starbucks and Nestlé formed the Global Coffee Aliance together. Starbucks
restaurant items and consumer packaged goods willbe distributed, sold, and advertised by Nestlé
through authorized channels. Starbucks received a nearly $7 billion upfront payment that included
the payment of prepaid royalties.
D. Threats

Rising Prices of Raw Materials Raw Coffee Beans

The price of raw coffee beans has significantly increased due to issues with the supply chain
and accessibility.
Starbucks' profitability suffers with every increase in the cost of coffee beans.
Cybersecurity and Data Privacy lssues
There is a significant chance that financial, personal, or other confidential information of
Starbucks employees or customers will be lost, stolen, used, or accessed without permission.
Due to this, the brand's reputation may be damaged, putting it at risk of income loss and
other liabilities.
 PESTEL and SWOT as Tools for Strategic Formulation 29

Competition
Starbucks has several direct and indirect competitors across countries it operates in. The
chains competitors can be grouped in the following manner:
Competition from Specialty Coffee Shops
Competition from Fast Food Joints | QSRs
Competition from Restaurants
Competition from local home grown coffee shops in different countries
Competition from ready-to drink cofee beverage market offered by standalone playrs
and large retailers

B.3 MICHAEL PORTER'S FIVE FORCES ANALYSIS

....M.U. Nov. 2018) [6 marks]

...M.U. Nov. 2019) [7 marks]
Michael Porter's Five Forces isa framework for examining the competitive environment of a
firm. A company's profitability is influenced by the quantity and power of its cormpetitive
competitors, posible new market entrants, suppliers, consumers, and replacement goods. To gain
a competitive edge, aFive Forces analysis may be utilized to influence corporate strategy. From
the perspective of developing a strategy, the five forces stated above are quite important.
Depending on the industry, these factors have varying possibilities. Because they influence the
prices that can be charged, the costs that can be bome, and the investment necessary to compete
in the market, these forces together determine the profitability of an industry. Before making
strategic decisions, managers should use the five forces framework to examine the competitive
structure of an industry.
The idea was first developed in 1980 by Michael E. Porter in his book "Competitive
Strategy: Techniques for Analyzing Industries and Competitors.". Porter's Five Forces Analysis is
used to
Understand Industry Structure.
Understand Industry Profitability.
Understand Average Rate of return.
Understand the Industry Analysis.
 30 Strategic Management (M.MS. Serm IM

Bargaining
Power of
Suppliers

Threat of New Threat of New

Entrants Industry
Substitutes
Rivalry

Bargaining
Power of
Buyers

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1. Threat of Substitutes -
Substitutes are products from different industries.
Examples - Newspapers v/s Internet, Sugar v/s Sugar-free v/s Jaggery, Tea v/s coffee,
In certain sectors like the
pharmaceutical sector, the threat of substitutes is really low or
negligible. This is because customers generally do not go in for
and life-saving drugs. substitutes to allopathic medicines
When the person is sick, he or she typically does not
of medicines. quibble about the price
Conversely in the entertainment sector, the threat of substitutes is very
figure out other options if the desired option is not high. People can
available.
Threat of substitutes depends on
a.
Availability of substitutes.
b. Quality of substitutes
C.
Pricing of substitutes
d. Switching cost to the
Buyers. (switching costs include the time and
psychological cost, any kind of effort on behalf of the buyer) inconvenience,
e.
Urgency or need of the hour.
When is the competition from the substitutes stronger?
1) The performance of substitutes is better.
2) Substitutes are attractively priced.
3) The performance and quality of
substitutes is higher.
4) End-users become more comfortable using
substitutes.
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PESTEL and SWOT as Tools for Stategic Formulation
2 Threat of New Entrants -
If there are barriers to entry in an industry, this makes sure that any company does not find
an easy waytoenter into that industry. The following are the barriers due to which the companies
are unable to enter in an industry.
a. Economies of scale, - As production increases, the fixed cost increases marginalliy
and the variable cost increases proportionately. Due to this, the cost per unit decreases
with an increase in production. This is called as Economies of scale.
b. Product differentiation - Product differentiation is the USP (Unique Selling
Proposition) of the product, or the reason why the company's product is distinct from
that of its rivals.
C. Capital Requirements - The need for large amount of capital is the biggest barrier
for industries like Infrastructure, Airlines and Telecom.
d. Cost advantages independent of sizes The existing industries may have
purchased land and equipment in the past when the cost was very less. It is today very
difficult for a new entrant to enter in that industry which is characterized by cost

advantages.
e.
Access to distribution channels -For FMCG companies, the distribution channels
which have been established are very difficult to break since they have been in the
country for a very long duration.
f. Government and Legal Barriers - Software patents, Trademarks and Copyrights
make entry into an industry very difficult.
3. Competitive Rivalry in the Industry
a. Increase in Number of competitors :When the number of competitors are more,
market share of existing competitors decreases as they start losing customers This
results in Price wars
b. Degree of difference between the products.: If the products across companies are
similar or identical, and there is no difference between the products then it results in
more price cutting and increased rivalry among the firms.
C. Growth in the industry : The competition among the firms in slow growth rate
industries is stronger than those in fast-growth industries.
Example - In the telecom sector, the growth rate of an industry is very slow as
majority of the customers have single or multiple connections whereas an industry. In
E-commerce industries, the growth rate is relatively higher as there is still a lot of
untapped market.
Typical weapons for competing -
Low price.
Better product performance.
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Strategic Mariagernert (MAMS.
Higher quality.
Strong Brand image.
Higher levels of advertising.
Low interest rate financing.
Bigger and better dealer network.
Better customer service.
Stronger product innovation capabilities.
4.
Bargaining power of Suppliers - Suppliers can suppress industry profitability by raising
prices and reducing the quality of components which they supply. When a supplier raises the
price of their products or raw materials, the cost of the final
pay more.
product goes up and consurners

Bargaining power of Suppliers depends on the following factors:

a) Supplier Concentration - If there are only few
suppliers in the market, they control
the price and the market.
b) Threat of Forward Integration - If the supplier (raw material
forward in the value-chain and manufactures laptops (finished manufacturer) goes
goods), this is called as
forward integration.
Example: Forward integration can be shown in a corporation that used to
clothing to department stores for retail sales but now operates its sell its
own retail locations.
When is the bargaining power of the supplier
stronger?
Extremely monopolistic market and very less competition.
The company has a high brand value.
Substifutes are not easily available.
The sellers supply superior or good quality
products.
The quality of the product is most important to the end
customers.
Sorne suppliers threaten to integrate forward.
5. Bargaining power of Buyers- Buyers can suppress profitability of the
which they purchase, by dernanding price industries from
concessions.
products to the buyer at a reduced rate, making very
Thus the suppliers have to sell the
suppliers unfavorable conditions for the
 PESTEL and SWOT as Tools for Strategic Formulation 33

Bargaining power of buyers depends on the following factors:

a.
Buyer group concentration - If there are lesser the number of buyers operating in
an industry, more will be their bargaining power
b. Threat of backward integration - fa finished goods manufacturer goes back in the
value chain and manufactures raw materials, it is called as threat of backward
integration. The power of the buyer is enhanced if there is a credible threat that the
buyer may enter the supplier's industry.
Example: Backward integration may entail a clothing manufacturer purchasing a
textile business that makes the fabric for their clothing.

When is the bargaining power of the supplier stronger?

If there are large number of suppliers in the market.
majority of the supply
The buyer's bargaining power will improve if they purchase the
from the supplier.
the good being sold is
When there are numerous providers on the market and
standardized

when buyers' switching costs are low

Industry members threaten to integrate backward.
Conclusion -
-
Competitive environment is Unattractive when
Rivalry is Rigorous.
Entry and Exit Bariers are Low.
Competition from substitutes is Strong.
Suppliers and Customers have considerable bargaining power.
Competitive environment is Ideal when -
Rivalry is Moderate.
Entry and Exit Bariers are high.
Good substitutes do not exist.

Suppliers and Customers have Weak bargaining power.

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Strategic Management (M.M.S. Sem
EXAMPLE OF MICHAEL PORTER'S 5 FORCES- STARBUCKS
Threat of Substitutes

Starbucks' most basic offering to customers is a beverage. There are several

alternatives that
provide customers with the exact same thing. It might be a glass of fresh
orange juice, aCoca.
Cola, or a bottle of water. There are so many
possibilities.
With thousands of alternatives available to
consumers, there is a general threat of
substitution, which puts Starbucks under a lot of pressure to set prices that are
competitive. The
beverages industry is always expanding with new flavours and product varieties, especially in the
health sector. Starbucks could want to take this into account and possibly
broaden its product
selection.
Threat of New Entrants

New competitors on the market pose only a minor danger. Few

businesses will be able to
enter the market and challenge the reputation of Starbucks. At the same time, the market is
already very crowded. Most customers, especially those who live in built-up regions, are not
very
far from a coffee shop.
Even while some may still try, the sheer number of coffee shops in existence is enough fo
deter newcomers. However, most new competitors won't have the same degree of economies of
scale as Starbucks, so they will ind it difficult to compete financially.
Competitive Rivalry in the Industry
Dunkin Donuts, Costa Coffee, Tim Hortons, and thousands of other tiny independent
outlets are among the fierce rivals of Starbucks. These small businesses provide fierce local rivalry
and give clients options. Because there are so many businesses for customers to choose from, the
competition is a powerful force for Starbucks. Starbucks is under pressure from this rivalry to
provide high-quality cofee at a reasonable price.
It indicates the requirements as there are numerous options for customers, minimal switching
costs, and a range of product offers from rivals.
Bargaining power of Suppliers
Starbucks obtains a variety of ingredients, including coffee machines and beans. It has a
strong position with suppliers because it purchases large amounts in bulk. While Starbucks has
thousands of different suppliers to choose from, it is a significant consumer for the majority of
them.

Suppliers are in a bad negotiation position because of the disparity in options and
purchasing power. Thousands of other coffee shops exist, but none have Starbucks level of
purchasingpower. Therefore, a supplier may get business elsewhere, but they will not receive the
same volume of orders, which will put pressure on their fixed and unit costs.
PESTEL and SWOT as Tools for Strategic Formulation 35

Bargaining power of Buyers

The buyer (customer) has negotiating leverage due of the abundance of coffee shops. There
isn't much you can do to differentiate cofee because there are so many rivals and the products
are so standard. Customers can visit rival businesses confident that the coffee willbe roughly the
same quality wherever they go.
The elasticity of demand is another factor that aives purchasers a lot of leverage. Or, how do
changes in pricing impact consumer demand? With regards to Starbucks, its coffee is elastic
meaning a change in price will significantly affect demand. One of the reasons is because there
are many other opions, but there is also no essential requirement for coffee. If coffee prices rise
too high, consumers will simply stop buying it or manufacture their own at home.

REVIEW QUESTIONS
Q1. Write short notes on
a) SWOT Analysis
b PESTLE Analysis
Q2. Michael Porter's Five Forces is a framework for examining the competitive environment of a
firm. Explain the statement.

Q3. Explain the concept of Forward Integration &Backward Integration.