Strategic analysis


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Strategic analysis

  1. 1. 15 August 2011 9841312844 1BUSINESS POLICY & STRATEGIC ANALYSISTeaching Notes onStrategic Analysis- Chandra P. Rijal, PhD
  2. 2. 15 August 2011 9841312844 2Framework of Strategic Analysis1.External Analysis: consumer analysis, segmentation, consumermotivations, and unmet needs analysis.2. Competitor Analysis: identifying, evaluating and dealing withcompetitors.3. Market Analysis: mart size, market growth, market profitability, coststructure, distribution system, market trends, key factors for success,and risks in high growth markets.4. Environmental Analysis: dimensions, forecasting environmentaltrends and events, strategic uncertainty and impact analysis, andscenario analysis.5. Internal Analysis: shareholder value analysis, sales and profitabilityanalysis, strategic options, and business portfolio analysis.
  3. 3. Analysis of strategic thrustsExternal Analysisa. Customer Analysisb. Competitor Analysisc. Market Analysisd. Environmental AnalysisInternal Analysisa. Performance Analysisb. Determinant of StrategicOptionsOpportunities, threats, trendsStrategic uncertaintiesStrategic strengths, weaknessesproblems, constraints anduncertaintiesStrategy identificationand selectionAnalysis of strategic thrusts
  4. 4. 15 August 2011 9841312844 4SWOT ANALYSISThe Components of SWOT AnalysisSWOTAnalysisInnovationFinancingAccess toCapitalMarketingCustomerBaseManagementManufacturing
  5. 5. 15 August 2011 9841312844 5SWOT ANALYSISInnovationTechnical or product/service superiorityR&DNew product capabilities and new technologiesPatentsManufacturingCost structureProduction flexibility and capacityEquipmentAccess to raw materialsVertical integrationWorkforce attitude and motivation
  6. 6. 15 August 2011 9841312844 6SWOT ANALYSISFinanceFrom operationsFrom net short-term assetsAbility to use debt and equity financingParent’s willingness to financeManagementTop and middle management qualityOrganizational culture, strategy, goals, plans, tacticsKnowledge, skill, capabilityEmployee motivation and turnoverQuality of strategic decision-making
  7. 7. 15 August 2011 9841312844 7SWOT ANALYSISMarketingProduct quality, brand image, differentiationCustomer focus, service and supportQuality of segmentationProduct line length, depth, width, and capabilityMarket networks and relationshipSales force motivation and loyaltyCustomer BaseSize or market share, loyaltyGrowth of segments served
  8. 8. 15 August 2011 9841312844 8Porter’s Five Forces AnalysisThreats of PotentialNew EntrantsCompetition AmongExisting FirmsBargainingPowerof SuppliersBargainingPowerof CustomersThreats ofSubstituteProducts
  9. 9. Source: Adapted from M. E. Porter, Competitive Strategy, Free Press, 1980, p. 4. Copyright by TheFree Press, a division of Macmillan Publishing Co., Inc. Reproduced with permission.Threat ofsubstitutesproductsThreat ofnew entrantsBargainingpower ofbuyersBargainingpower ofsuppliersCOMPETITIVERIVALRYFive forces analysis
  10. 10. 15 August 2011 9841312844 10Five Forces Analysis: Key Questions and Implications• What are the key forces at work in the competitiveenvironment?• Are there underlying forces driving competitiveforces?• Will competitive forces change?• What are the strengths and weaknesses ofcompetitors in relation to the competitive forces?• Can competitive strategy influence competitiveforces (eg by building barriers to entry or reducingcompetitive rivalry)?
  11. 11. 15 August 2011 9841312844 11SWOT Analysis• Strengths (internal)• Weaknesses (internal)• Opportunities (external)• Threats (external)
  12. 12. 15 August 2011 9841312844 12PEST analysis• Political factors• Economic factors• Socio-cultural factors• Technological factors
  13. 13. 15 August 2011 9841312844 13Political/legal• Monopolies legislation• Environmental protection laws• Taxation policy• Employment laws• Government policy• Legislation• Others?
  14. 14. 15 August 2011 9841312844 14Economic Factors• Inflation• Employment• Disposable income• Business cycles• Energy availability and cost• Others?
  15. 15. 15 August 2011 9841312844 15Socio-Cultural Factors• Demographics• Distribution of income• Social mobility• Lifestyle changes• Consumerism• Levels of education• Others?
  16. 16. 15 August 2011 9841312844 16Technological Factors• New discoveries and innovations• Speed of technology transfer• Rates of obsolescence• Internet• Information technology• Others?
  17. 17. 15 August 2011 9841312844 17The Threat of Entry ...Dependent on barriers to entry such as:• Economies of scale• Capital requirements of entry• Access to distribution channels• Cost advantages independent of size (eg the“experience curve”)• Expected retaliation• Legislation or government action• Differentiation
  18. 18. 15 August 2011 9841312844 18Buyer power is likely to be high when:• There is a concentration of buyers• There are many small operators in thesupplying industry• There are alternative sources of supply• Components or materials are a high percentageof cost to the buyer leading to “shoppingaround”• Switching costs are low• There is a threat of backward integration
  19. 19. 15 August 2011 9841312844 19Supplier power is high when:• There is a concentration of suppliers• Switching costs are high• The supplier brand is powerful• Integration forward by the supplier is possible• Customers are fragmented and bargainingpower low
  20. 20. 15 August 2011 9841312844 20Threat of SubstitutesSubstitutes take different for:• Substitution of need• Generic substitution• Doing without
  21. 21. 15 August 2011 9841312844 21Competitive rivalry is high when:• Entry is likely• Substitutes threaten• Buyers or suppliers exercise control• Competitors are in balance• There is slow market growth• Global customers increase competition• There are high fixed costs in an industry• Markets are undifferentiated• There are high exit barriers
  22. 22. 15 August 2011 9841312844 22SCENARIO ANALYSISScenario Analysis can be divided into four elements:• Identify Scenarios• Develop Scenario Strategies• Estimate Scenario Probabilities• Perform Regret Analysis
  23. 23. 15 August 2011 9841312844 23Forecasting Environmental Trends and Events• Asking the Right Questions• Trend Extrapolation• Asking Experts• Decomposing the Task• Cross-Impact Analysis
  24. 24. 15 August 2011 9841312844 24Strategic Uncertainty¤ Strategic Uncertainty may result from a typicalexternal analysis or sometimes the strategicuncertainty is represented by a future trend or eventthat has inherent unpredictability.¤ To deal with strategic uncertainty, impact analysisand scenario analysis can be employed.
  25. 25. 15 August 2011 9841312844 25Impact Analysis¤ The extent to which a strategic uncertainty shouldbe monitored and analyzed depends on its impactand immediacy.¤ The impact of a strategic uncertainty is related to:* The extent to which it will impact existing orpotential SBUs (strategic business units)* The importance of the involved SBUs* The number of involved SBUs.
  26. 26. 15 August 2011 9841312844 26Impact Analysis contd . . .• The immediacy of a strategic uncertainty is relatedto- The probability that the involved trends orevents will occur.- The time frame of the trends or events.- The reaction time likely to be available,compared with the time required to developand implement appropriate strategy
  27. 27. 15 August 2011 9841312844 27Managing Strategic UncertaintiesIf both the immediacy and impact are low, then alow level of monitoring may be appropriate.If the impact is thought to be low but the immediacyis high, then monitoring and analysis may beappropriate.If the immediacy is low and the impact high, thenmonitoring & analysis in more depth and contingentstrategies may be considered.When both the immediacy and potential impact ofthe underlying trends and events are high, then anin-depth analysis will be appropriate, as will be thedevelopment of reaction plans or strategies.
  28. 28. 15 August 2011 9841312844 281. Identify ScenariosIt is important to reduce the number of scenarios byidentifying a small set that ideally includes thosethat are plausible/credible and those that representdepartures from the present that are substantialenough to affect strategy development.2. Develop Scenario StrategiesAfter scenarios have been identified, the next step isto relate them to strategies – both existing strategiesand new options.
  29. 29. 15 August 2011 9841312844 293. Estimate Scenario Probabilities¤ To evaluate alternative strategies it is useful todetermine the scenario probabilities.¤ Experts could be asked to assess probabilitiesdirectly.4. Perform Regret AnalysisThe final step is to compare the expected outcomesof each strategy if the wrong scenario emerges.
  30. 30. 15 August 2011 9841312844 30Internal AnalysisStructuring Strategic DecisionsOrganizationalstrengths andweaknessesEnvironmentalopportunities andthreatsMarket needs, attractiveness,and key success factorsStrategic Decisions* Strategic investment decisions* Financial area strategies* Sustainable competitive advantages
  31. 31. 15 August 2011 9841312844 31Internal AnalysisPerformance Analysis1. Shareholder Value Analysis2. Financial Performance - Sales and Profitability3. Performance Measurement - Beyond Profitability4. Determinants of Strategic Options5. From Analysis to Strategy6. Business Portfolio Analysis
  32. 32. 15 August 2011 9841312844 32Why Do Companies Fail?What went wrong?– Inertia (resistant to change)– Prior strategic commitments– The icarus paradoxAvoiding failure andsustaining competitiveadvantage:– Focus on the building blocks ofcompetitive advantage.– Institute continuous improvementand learning.– Track best industrial practice anduse benchmarking.– Overcome inertia.
  33. 33. 15 August 2011 9841312844 33Shareholder Value AnalysisHow competent the firm is to create various valuesto shareholdersKey values to the shareholder are:1. Profit maximization, and2. Increment of worth of the share per unitOther important values to the shareholders may beBusiness/product diversificationGoodwillBrand recognition, and so on ….
  34. 34. 15 August 2011 9841312844 34Competitive Advantage: Value Creation, Low Cost,and Differentiation• Competitive advantage is a firm’s ability tooutperform its competitors (earn higher profits).• The source of competitive advantage is valuecreation for customers.• Sustained competitive advantage comes frommaintaining higher profits than competitors overlong periods of time.• Sustained competitive advantage leads to highershareholder value.
  35. 35. 15 August 2011 9841312844 35Value Creation
  36. 36. 15 August 2011 9841312844 36Financial Performance - Sales and ProfitabilityThe Determinants1. Sales and Market Share2. Profitability3. Good Performance4. Economic Value Added
  37. 37. 15 August 2011 9841312844 37Return on Capital Employed for Selected U.S.Department Stores, 1989-1998Source: Data from Value Line Investment Survey
  38. 38. 15 August 2011 9841312844 38Performance Measurement - Beyond ProfitabilitySome Indicators1. Customer satisfaction and brand loyalty2. Product service quality3. Brand and firm associations4. Relative costs5. New product activity6. Manager/employee capability and performance
  39. 39. 15 August 2011 9841312844 39Performance Measurement Beyond ProfitabilityIt is very important to develop performance indicatorsthat convincingly represent the long term prospect.Customer satisfaction/brand loyalty are the keysIt indicates how customers really feel about the firm.
  40. 40. 15 August 2011 9841312844 40Guidelines for measuring satisfaction and loyalty problems and causes of dissatisfaction should beidentified exit interviews should be taken size and intensity of the customer group that truly likes abrand should be known. measures should be trackedPerformance Measurement Beyond Profitability
  41. 41. 15 August 2011 9841312844 41Product and service quality how good a value it is? can it really deliver superior performance? how does it compare with competitor offerings? how will it compare with competitor offerings in the futuregive competitive innovations?Performance Measurement Beyond Profitability
  42. 42. 15 August 2011 9841312844 42performance measurement• brand/firm associations what are its associations? what is the perceived quality?• relative cost• average costing in average costing some elements of fixed or semivariable costs are not carefully allocated butinstead are averaged over total production
  43. 43. 15 August 2011 9841312844 43performance measurement• new product activity• manager/employee capability andperformance human factor is very important as they are theones who implement the strategies does the human resource support the current andfuture strategies? does new employees match the needs of theorganization?
  44. 44. 15 August 2011 9841312844 44Generic Building Blocks of Competitive Advantage
  45. 45. 15 August 2011 9841312844 45Generic Building Blocks of Competitive Advantage:EfficiencyEfficiency = Outputs/InputsFor many firms, EE productivity is key (output peremployee)Increased efficiency requires strategy, structure andcontrols (and a strong functional production oroperations program)Efficiency is “critical” for cost leaders (eg. Wal-Mart)but still very important for others
  46. 46. 15 August 2011 9841312844 46Competitive Advantage: Customer Responsiveness• Superior Customer Responsiveness is a functionof:Quality, andInnovation in design, service, etc.• Often measured by:Response time, andAdaptability
  47. 47. 15 August 2011 9841312844 47Competitive Advantage: Innovation• Perhaps the most important building block ofcompetitive advantage: may drive greater innovationleading to higher prices via differentiation or simplybetter processes leading to lower costs.• Companies can’t afford to sit still• Innovation includes advances in products, processes,management systems, organizational structure,strategies, etc
  48. 48. 15 August 2011 9841312844 48Competitive Advantage: Quality• Quality drives profits in two ways:Increased reliability which leads to higher pricesdue to perceived higher qualityIncreased productivity due to lower re-work,returns and rejection rates leading to lower costs(zero defects)• Higher prices plus lower costs means more profits
  49. 49. 15 August 2011 9841312844 49The Impact of Efficiency, Quality, Innovation, andCustomer Responsiveness on Unit Costs and Prices
  50. 50. 15 August 2011 9841312844 50Figure misses the role played by finance and accounting/Information systemsas support servicesThe Value Chain (Business Functions)
  51. 51. 15 August 2011 9841312844 51Distinctive Competencies, Resources, and CapabilitiesThe roots of competitive advantage
  52. 52. 15 August 2011 9841312844 52Strategy and Competitive AdvantageThe relationship between strategies and resources andcapabilities:
  53. 53. 15 August 2011 9841312844 53Strategic Resources: Two Types• Tangible– Land– Buildings– Plant– Equipment• Intangible– Brand names– Reputation– Patents– Technological ormarketing know-how
  54. 54. 15 August 2011 9841312844 54Resources and CapabilitiesSkills in effectively coordinating and managingresources for productive use.– Unique resources and capabilities, or, at aminimum,– Common resources andunique capabilities– Best if have both.
  55. 55. 15 August 2011 9841312844 55The Durability of Competitive Advantage• Barriers to imitation (Slows the speed of imitation bycompetitors in reducing advantage)– Imitation by acquiring similar resources– Imitation of capabilities (more difficult)• Limits on competitors– Prior strategic commitments– Absorptive capacity for change• Industry dynamism– The rapid innovationshortens product life cycles.
  56. 56. 15 August 2011 9841312844 56Durability of Competitive Advantage• Durability is dependent upon:- height of barriers to imitation- capability of competitors to imitate innovation- general level of industry dynamism
  57. 57. 15 August 2011 9841312844 57Analysis of Strategic OptionsDeterminants of Strategic Options1. Past and current strategies2. Strategic problems3. Organizational capabilities and constraints4. Financial capabilities and constraints5. General strengths and weaknesses
  58. 58. 15 August 2011 9841312844 58Service Portfolio AnalysisThe Components1. The Market Attractiveness – Service PositionMatrixa. Evaluate the abilities to competeb. Evaluate the market attractiveness
  59. 59. 15 August 2011 9841312844 59service portfolio analysis• it provides a structured way to evaluate serviceunits on two key dimensions• attractiveness of the market involved and• strength of the school’s position in that market• the market attractiveness-service positionmatrix it is a formal, structured way to match a school’sstrength and market opportunities.
  60. 60. 15 August 2011 9841312844 60Service portfolio analysis• Applying the matrix• Logical alternatives in structuring strategies invest to bold invest to penetrate invest to rebuild selective investment• The BCG Growth Share Matrix.