15 Chapter II Literature Review The second chapter of this thesis is the literature review of the final project. This chapter will provide a theoretical foundation and conceptual framework. This chapter will enclose literature that is relevant to the objectives of this research. The conceptual framework provides a structured flow of this research. II. 1 Theoretical Foundation Theoretical foundation in this thesis will refer to established theories that the author will use in order to formulate the business strategy. This theoretical foundation consists of external analysis that includes PESTEL analysis, Porter’s Five Forces, and Consumer Behavior. The following will also involve the internal analysis that includes Marketing Mix 7Ps and VRIO matrix. After the environment analysis, then the formulation of the strategy will use the SWOT analysis, Ansoff matrix, and TOWS matrix. II. 2 External Analysis External analysis is crucial in order to recognize opportunities and threats in the firm’s external environment. The management needs to have perceptual acuity, which is the ability to sense what is coming before it becomes clear. Management should take advantage of the opportunities identified and mitigate threats. Through environmental monitoring, management wil able to track the evolution of environmental trends, sequences of events, or streams of activities (Wheelan et al., 2017). External analysis will analyze the general environment using PESTEL analysis, industry environment using Porter’s Five Forces, and consumer behavior analysis. 16 II.2. 1 PESTEL Analysis PESTEL analysis consists of political, economic, socio-cultural, technological, environment, and legal. PESTEL analysis serves precondition analysis about the macro environment of the business (Wheelan et al., 2017). This analysis is utilized to determine to what extent macro environmental conditions may impact the company’s goals. In order to analyze the macro business environment as the external factors of the business (Rothaermel, 2014), this research adopts six PESTEL aspects as a guidance for the literature review. The aspects of PESTEL analysis consist of six environmental factors as follows: 1. Political: Analyzing how the current government policies will impact the firm decisions such as exercise of power (Dess et al., 2020). 2. Economic: Analyzing the characteristics of the economy, including national income and monetary conditions (Dess et al., 2020). 3. Socio-cultural: Analyzing the influence of values, beliefs and lifestyles of a society (Dess et al., 2020). 4. Technological: Analyzing the developments in technology lead to new products and services and the improvements made for the end users (Dess et al., 2020). 5. Environmental: Analyzing the factors that have broad impact on the environment (Rothaermel, 2014). 6. Legal: Analyzing government’s rules such as laws and taxation policies (Dess et al., 2020). II.2. 2 Porter’s Five Forces Michael E. Porter, the originator of Porter's Five Forces analysis, has extensively written and spoken about the framework. In his book "Competitive Strategy: Techniques for Analyzing Industries and Competitors," Porter explains the concept of the Five Forces framework and its significance in understanding industry dynamics and competitive strategy (Porter, 1980). 17 The Five Forces model provides a comprehensive framework for evaluating the competitive forces at work within an industry. These forces determine the attractiveness and profitability of an industry, so it is essential to comprehend them. With this framework, Porter intends to assist organizations in identifying sources of competitive advantage and developing strategies for navigating industry dynamics (Porter, 1980). A general overview of the most frequently discussed elements of Porter's Five Forces analysis is: 1. Threat of New Entrants: Assessing barriers to entry, economies of scale, capital requirements, and government regulations that affect the ease or difficulty of new competitors entering the industry. 2. Bargaining Power of Suppliers: Evaluating the power held by suppliers over the industry in terms of their ability to influence prices, terms, and supply availability. 3. Bargaining Power of Buyers: Analyzing the power of buyers to influence industry dynamics, considering factors such as buyer concentration, price sensitivity, and switching costs. 4. Threat of Substitutes: Examining the availability and attractiveness of substitute products or services that can fulfill the same customer needs or provide alternatives to the industry's offerings. 5. Competitive Rivalry: Assessing the intensity of competition among existing industry players, considering factors such as the number and size of competitors, industry growth rate, and product differentiation. It is widely acknowledged that Porter's Five Forces analysis is a valuable instrument for understanding competitive dynamics and formulating effective strategies across numerous industries.