Environmental Analysis

Before strategy can be formulated, management must thoroughly understand the environment in which the organisation operates. This is called environmental scanning or situational analysis.

2.1 External Environment — PESTLE Analysis

PESTLE is an acronym for six dimensions of the macro-environment:

Dimension	What to Analyse	Indian Example
Political	Government policies, political stability, trade regulations	Production-Linked Incentive (PLI) scheme, FDI policies
Economic	GDP growth, inflation, interest rates, unemployment	India GDP growth ~7% (2023-24); RBI repo rate 6.5% (2024)
Social	Demographics, cultural trends, education, income distribution	India's median age 28.4 years (2024); rising middle class
Technological	R&D, innovation, automation, AI, digital infrastructure	Digital India: 950M+ internet users (2024); UPI 14B+ txns/month
Legal	Laws, regulations, compliance requirements	Companies Act 2013, Competition Act 2002, DPDP Act 2023
Environmental	Climate change, sustainability, carbon regulations	Net Zero target 2070; Carbon Credit Trading Scheme 2022

2.2 Industry Analysis — Porter's Five Forces (1979)

Michael Porter developed this framework at Harvard Business School to assess industry attractiveness and competitive intensity:

Force	What it Examines
Threat of New Entrants	Entry barriers such as capital requirements, patents, and economies of scale
Buyer Power	Bargaining power of customers, especially when a few large buyers dominate the market
Supplier Power	Bargaining power of suppliers when alternatives are limited or switching costs are high
Threat of Substitutes	Availability of alternative products or solutions that satisfy the same need
Competitive Rivalry	Intensity of competition based on the number, size, and aggressiveness of rivals

Application to Indian industries:

• Telecom (2016 after Jio entry): High rivalry, very high new-entrant threat (Jio), high buyer power (consumers switched easily), low switching costs → forced consolidation from 12 operators to 3 major ones (Reliance Jio, Airtel, Vi/Vodafone Idea) by 2023
• Pharmaceutical: High buyer power (bulk purchasers: government, hospitals), moderate rivalry, significant generic competition (India supplies 20% of global generic drugs)
• Aviation: High capital requirements (entry barrier), high fuel price risk (supplier power), high rivalry (IndiGo 60%+ market share in 2024), growing substitute threat from Indian Railways' Vande Bharat semi-high speed trains

2.3 Internal Environment Analysis

Resource-Based View (RBV) — Jay Barney (1991): Competitive advantage comes from firm-specific resources that are Valuable, Rare, Inimitable, Non-substitutable (VRIN criteria). Examples of VRIN resources: Reliance's logistics infrastructure, TCS's 600,000-strong talent base, Amul's cooperative network, ISRO's indigenous space technology.

Value Chain Analysis — Michael Porter (1985): Disaggregates firm activities into Primary activities (inbound logistics, operations, outbound logistics, marketing & sales, service) and Support activities (firm infrastructure, HR management, technology development, procurement) to identify where value is created and costs accrue.

Financial analysis: Ratio analysis (liquidity, solvency, profitability, efficiency ratios) to assess financial strengths and weaknesses.

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