Strategic analysis: PEST, five forces, RBV and value chain
Strategic analysis scans the external environment (PEST, Porter's five forces) and the internal resources (RBV, VRIO, value chain) to find where advantage can come from.
PEST and its extensions
| Factor | Examples in India |
|---|---|
| Political | Government stability, trade policy, production-linked incentive (PLI) schemes, licensing |
| Economic | GDP growth, inflation, interest rates, exchange rates, disposable income |
| Social | Demographics, urbanisation, a young population, health awareness, lifestyles |
| Technological | UPI and digital payments, automation, e-commerce, AI |
| Environmental (PESTEL) | Climate, pollution norms, waste rules |
| Legal (PESTEL) | Companies Act 2013, consumer protection law, competition law |
Porter's five forces
| Force | Strong when | Indian illustration |
|---|---|---|
| Threat of new entrants | Entry barriers are low: little scale economy, low capital need, easy access to channels | Jio's 2016 entry reshaped Indian telecom |
| Bargaining power of suppliers | Few suppliers, unique inputs, high switching costs for the buyer | Chip makers supplying carmakers during a chip shortage |
| Bargaining power of buyers | Few buyers buying in bulk, standard products, low switching costs | Large modern-trade chains negotiating with FMCG makers |
| Threat of substitutes | Another product meets the same need at a better price-performance | UPI vs cash; OTT streaming vs cinema halls |
| Rivalry among existing firms | Many equal rivals, slow growth, high fixed costs, high exit barriers | Airlines and telecom price wars |
VRIO: Barney's resource test
| Valuable? | Rare? | Costly to imitate? | Organised to exploit? | Outcome |
|---|---|---|---|---|
| No | - | - | - | Competitive disadvantage |
| Yes | No | - | - | Competitive parity |
| Yes | Yes | No | - | Temporary competitive advantage |
| Yes | Yes | Yes | No | Advantage not fully realised: Barney treats 'O' as an adjustment factor (some texts call this 'unexploited' advantage) |
| Yes | Yes | Yes | Yes | Sustained competitive advantage |
Porter's value chain
| Type | Activity | Indian example |
|---|---|---|
| Primary | Inbound logistics | Amul collects milk twice a day at village cooperative societies |
| Primary | Operations | Processing milk into butter, cheese and powder at district union plants |
| Primary | Outbound logistics | Cold-chain delivery to distributors and retailers |
| Primary | Marketing and sales | Amul's topical hoardings under one umbrella brand |
| Primary | Service | Maruti's wide after-sales service network |
| Support | Firm infrastructure | Planning, finance, legal and quality systems |
| Support | Human resource management | Recruiting, training and rewarding staff |
| Support | Technology development | R&D, process and IT improvement |
| Support | Procurement | The purchasing function for all inputs |
Key ideas and traps
- RBV looks inside the firm: advantage comes from resources and capabilities that are heterogeneous and imperfectly mobile across firms.
- Barney's VRIN (1991): valuable, rare, inimitable, non-substitutable. VRIO replaces the last with organisation.
- Penrose (1959) is the intellectual root of RBV. Dynamic capabilities (Teece, Pisano and Shuen, 1997) extend it to fast-changing markets.
- Core competence (Prahalad and Hamel, 1990) passes three tests: access to many markets, a real contribution to customer benefit, and hard to imitate.
- Procurement is a support activity (the buying function); inbound logistics is primary (receiving, storing and handling inputs).
- The five forces explain industry profitability. Government acts through the forces; complementors are often called a sixth force (value net, Brandenburger and Nalebuff, 1996).
- ETOP (environmental threat and opportunity profile) records each environmental factor as a threat or an opportunity.
NET asks you to name the five forces (and spot an odd one out such as 'government'), classify value-chain activities as primary or support, and read VRIO outcomes. Expect author-model matching: Aguilar, Porter, Wernerfelt, Barney.
Typical MCQ: “Is 'procurement' a primary or a support activity in Porter's value chain?” Support. Trap: inbound logistics (receiving and storing inputs) is primary; procurement is the purchasing function that serves all activities.
Typical MCQ: “A resource is valuable and rare but easy to copy. What is the VRIO outcome?” Temporary competitive advantage. Trap: it is not sustained, because rivals can imitate it.
Typical MCQ: “Which is not one of Porter's five forces: government regulation, threat of substitutes, buyer power or rivalry?” Government regulation. Porter treats government as an influence acting through the five forces, not as a separate force.
Five forces: 'Every Supplier Buys Some Rice': Entrants, Suppliers, Buyers, Substitutes, Rivalry. Primary activities: 'In Our Office Make Sales': Inbound, Operations, Outbound, Marketing and sales, Service.