Global Institute of Management, Strategic Management (SEM - III)

7-Sep-12

Module 1
From : Arthur A Thompson External Analysis: Analysis: 1. Economic Traits 2. Key Success Factors 3. Driving Forces Internal Analysis: Analysis: 1. Concept of Value Chain 2. SWOT Analysis
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Dominant Economic Traits

Industries differ significantly hence it becomes necessary to identify an industries' dominant economic features and forming a picture of what the industry landscape is like. like. By understanding an industrys distinguished economic features not only sets the stage for the analysis to come but also promotes understanding of the kind of strategic moves that industry members are likely to employ. employ. Eg - Mobile phones & Games Product innovation must invest in R&D
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Industrys Dominant Economic Traits

Market size and growth rate Number of rivals Scope of competitive rivalry Buyer needs and requirements Degree of product differentiation Product innovation Supply/demand conditions Pace of technological change Vertical integration Economies of scale Learning and experience curve effects
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Learning/Experience Effects
Learning/experience effects exist when a companys unit costs decline as its cumulative production volume increases because of Accumulating production know-how knowGrowing mastery of the technology The bigger the learning or experience curve effect, the bigger the cost advantage of the firm with the largest cumulative production volume
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Driving Forces

All industries are characterized by trends and new developments that gradually or speedily produce changes important enough to require a strategic response from participating firms. firms. There are more causes of industry change than an industrys normal progression through the life-cycle lifethese need to be identified and their impacts must be understood. understood. It is important to track where an industry is in the life cycle but there is more analytical value in identifying the other factors that may be even stronger drivers of industry & competitive change. change.
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Industry & competitive environment change because forces are enticing or pressuring certain industry participants (competitors, customers, suppliers) to alter their actions in important ways. ways. The most powerful of the changing agents are called driving forces because they have the biggest influence in reshaping the industry landscape and altering competitive conditions. conditions.

Analyzing the Driving forces:

1. Identifying what the driving forces are; are; 2. Assessing whether the drivers of change are, on whole acting to make the industry more or less attractive; attractive; 3. Determining what strategy changes are needed to prepare for the impacts of driving forces. forces.

Where do driving forces originate?

Outer ring of macroenvironment Inner ring of macroenvironment
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Identifying an Industrys Driving Forces

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Emerging new Internet capabilities and applications Increasing globalization of industry Changes in long-term industry growth rate longChanges in who buys the product and how they use it Product innovation Technological change/process innovation Marketing innovation Entry or exit of major firms Diffusion of technical knowledge Changes in cost and efficiency Consumer preferences shift from standardized differentiated products (or vice versa)

Identifying an Industrys Driving Forces

12. Changes in degree of uncertainty and risk 13. Regulatory policies / government legislation 14. Changing societal concerns, attitudes, and lifestyles

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Many forces of change may be at work in a given industry ; no more than three or four are likely to be true driving forces powerful enough to qualify as the major determinants of why and how the industry is changing. changing. The analytical task is to evaluate the forces of industry and competitive change carefully enough to separate major factors from minor ones. ones.
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Assessing the impact of Driving

The second step in driving force analysis is to determine whether the prevailing driving forces are on the whole, acting to make the industry environment more or less attractive: attractive: Driving forces cause the demand for the industry products to increase or decrease Driving forces make the competition more or less intense Combine impacts of driving forces leads to higher or lower industry profitability

Determine what strategy changes are needed to prepare for impacts of driving forces
Manager has to draw conclusion about what strategic adjustments needs to be taken to deal with the impacts of the driving forces. forces. Driving forces analysis when done properly, pushes company mangers to think about whats around the corner & what the company needs to be doing to get ready for it. it.

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Key Success Factors

KSFs are those competitive factors most affecting every industry members ability to prosper KSFs concern

Key Success Factors

Specific strategy elements Product attributes Resources Competencies Competitive capabilities

that a company needs to be competitively successful KSFs are attributes that spell the difference between
Profit and loss Competitive success or failure
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Identifying Industry Key Success Factors

Pinpointing KSFs involves determining

On what basis do customers between competing brands of sellers? sellers?

choose

What resources and competitive capabilities does a seller need to have to be competitively successful? successful? What does it take for sellers to achieve a sustainable competitive advantage?
KSFs consist of the major determinants for success

Rarely are there more than 5 - 6 factors that are truly key to the future financial and competitive success of industry members
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Global Institute of Management, Strategic Management (SEM - III)

7-Sep-12

Example: KSFs for Beer Industry

Full utilization of brewing capacity to keep manufacturing costs low

Example: KSFs for Apparel Manufacturing Industry

Appealing designs and color combinations to create buyer appeal

Strong network of wholesale distributors to gain access to retail outlets Low-cost manufacturing Lowefficiency to keep selling prices competitive
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Clever advertising to induce beer drinkers to buy a particular brand

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Example: KSFs for Tin and Aluminum Can Industry

Locating plants close to end-use customers endto keep costs of shipping empty cans low

Ability to market plant output within economical shipping distances

The purpose of identifying the KSF is to determine which factors are most important to future competitive success. success. Correctly diagnosing an industry's KSF raises a strategy. companies chances of crafting sound strategy. The goal of the strategist should be to design a strategy aimed at stacking up well on all the industries future KSFs and trying to be distinctively better than rivals on one of the KSFs. KSFs. Companies that stand out or excel on a particular KSF are likely to enjoy a stronger market position. position.
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Strengths, Strengths, Weaknesses, Opportunities & Threats

S W O T represents the first letter in S trengths S W W eaknesses O pportunities O T T hreats SWOT analysis provides a good overview of whether the companies overall situation is fundamentally healthy or unhealthy. unhealthy. For a companys strategy to be well-conceived, it must wellbe Matched to its resource strengths and weaknesses Aimed at capturing its best market opportunities and erecting defenses against external threats to its wellwellbeing
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SWOT ANALYSIS

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Identifying Resource Strengths & Competitive Capabilities

A strength is something a firm does well or an attribute that enhances its competitiveness
Valuable skills, competencies, or capabilities Valuable physical assets Valuable human assets Valuable organizational assets Valuable intangible assets Important competitive capabilities An attribute placing a company in a position of market advantage Alliances or cooperative ventures with partners

A companys resources strength represents its endowment of competitive assets. assets. The caliber of a firms resources strengths is the big determinant of its competitiveness whether it has the ability to be stronger competitor in the marketplace or whether its capabilities and

competitive strengths are modest thus relegating it to trailing position in the industry. industry.

Resource strengths and competitive capabilities are competitive assets!

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Identifying Resource Weaknesses & Competitive Deficiencies

A weakness is something a firm lacks, does poorly, or a condition placing it at a disadvantage Resource weaknesses relate to Inferior or unproven skills, expertise, or intellectual expertise, capital Lack of important physical, organizational, or organizational, intangible assets Missing capabilities in key areas
Resource weaknesses and deficiencies are competitive liabilities!
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Sizing up a companies complement of resources capabilities & deficiencies is akin to constructing a strategic balance sheet, where resources strength sheet, represents competitive assets & resources weakness represents competitive liabilities. liabilities. The ideal condition is for the companys competitive assets to outweigh its competitive liabilities. liabilities.

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Identifying a Companys Market Opportunities

Opportunities most relevant to a company are those offering Good match with its financial and organizational resource capabilities Best prospects for profitable longlong-term growth Potential for competitive advantage
Depending on the prevailing circumstances a companies opportunities can be plentiful or scarce, fleeting or lasting, attractive or unsuitable. unsuitable. Companies opportunities are more limited when the market is volatile and thus unpredictable. unpredictable. In mature markets unusually attractive market opportunities emerge sporadically. sporadically.
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Both in volatile & stable markets the rise of a golden opportunity is almost never under the control of a single company or manufactured by company executives rather it springs from the simultaneous alignment of several external factors. factors. In evaluating a companys market opportunity & ranking their attractiveness managers have to guard against viewing every industry opportunity as companies opportunity. opportunity. Not every company is equipped with resources to successfully pursue each opportunity. opportunity.
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Identifying External Threats

Certain factors in a companys external environment pose threats to its profitability & competitive wellwellbeing. being. External threats may possess no more than a moderate degree of adversity or they may be imposing as to make a companys situation & outlook quite tenuous. tenuous. It is managements' job to identify the threats to the companys future prospects and to evaluate what strategic actions can be taken to neutralize or lessen their impact. impact.

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Emergence of cheaper/better technologies Introduction of better products by rivals Entry of lower-cost foreign competitors lower Onerous regulations Rise in interest rates Potential of a hostile takeover Unfavorable demographic shifts Adverse shifts in foreign exchange rates Political upheaval in a country
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Role of SWOT Analysis in Crafting a Better Strategy

S W O T analysis involves more than just developing the 4 lists of strengths, weaknesses, opportunities, and threats The most important part of S W O T analysis is
Using the 4 lists to about a companys overall situation Acting on the conclusions to Better match a companys strategy resource strengths and market opportunities Correct the important weaknesses Defend against external threats
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Fig. 4.2: The Three Steps of SWOT Analysis

draw

conclusions

to

its

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Competitiveness of Companys Prices & Costs

Assessing whether a firms costs are competitive with those of rivals is a crucial part of company situation

Value Chain Analysis & Benchmarking

Tool useful in determining whether a companys prices & cost are competitive

analysis. analysis. For a company to compete successfully its cost must be in line with those of close rivals. rivals. Key analytical tools Value chain analysis Benchmarking

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Concept: Company Value Chain

A companys business consists of all activities undertaken in designing, producing, marketing, delivering, and supporting its product or service All these activities that a company performs internally combine to form a value chainso-called because the underlying intent of a chainsocompanys activities is to do things that ultimately create value for buyers. buyers. A companys value chain also contains profit because a customary part of price borne by buyer. buyer. The value chain contains two types of activities
Primary activities (where most of the value for customers is created) Support activities that facilitate performance of the primary activities
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Global Institute of Management, Strategic Management (SEM - III)

7-Sep-12

Example: Value Chain Activities for a Bakery Goods Maker Primary Activities
Supply chain management Recipe development and testing Mixing and baking Packaging Sales and marketing Distribution

Example: Value Chain Activities for a Department Store Retailer

Primary Activities
Merchandise selection and purchasing Store layout and product display Advertising Customer service

Support Activities
Quality control Human resource management Administration

Support Activities
Site selection Hiring and training Store maintenance Administrative activities

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Example: Value Chain Activities for a Hotel Chain

Characteristics of Value Chain Analysis

Combined costs of all activities in a companys value chain define the companys internal cost structure Compares a firms costs activity

Primary Activities
Site selection and construction Reservations Operation of hotel properties Managing lineup of hotel locations

Support Activities
Accounting Hiring and training Advertising Building a brand and reputation General administration

by activity against costs of key rivals From raw materials purchase to Price paid by ultimate customer Pinpoints which internal activities are a

Thus what constitutes a primary & secondary activities varies according to the specific nature of companys business
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source of cost advantage or disadvantage

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Segregating a companies operations into different types of primary & support activities is the first step in understanding its cost structure. structure. Each activity in the value chain gives rise to cost & ties up assets. assets. The combined costs of all the various activities in a companys value chain define the companys internal cost structure. structure. The cost of each activity contributes to whether the companies overall cost positions relative to rivals is favorable or unfavorable. unfavorable. The task of value chain & benchmarking are to develop the data for comparing a companys activity-by-activity activity-byagainst that of rivals. rivals.
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Why Do Value Chains of Rivals Differ?

Several factors give rise in value chains of rival companies Different strategies Different operating practices Different technologies Different degrees of vertical integration Some companies may perform particular activities internally while others outsource them Differences among the value chains of competing companies complicate task of assessing rivals relative cost positions
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Fig. 4.4: Representative Value Chain for an Entire Industry

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The Value Chain System for an Entire Industry Assessing a companys cost competitiveness involves comparing costs all along the industrys value chain Suppliers value chains are relevant because Costs, performance features, and quality of inputs provided by suppliers influence a firms own costs and product performance Value chains of distributors and retailers are relevant because Their costs and profit margins represent value added and are part of the price paid by ultimate end-user endThe activities they perform affect end-user endsatisfaction
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Example: Value Chain Activities

Pulp & Paper Industry

Example: Value Chain Activities

Soft Drink Industry

Timber farming Logging Pulp mills Papermaking Distribution

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Processing of basic ingredients Syrup manufacture Bottling and can filling Wholesale distribution Advertising Retailing
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Example: Value Chain Activities

Computer Software Industry

Developing Data to Measure a Companys Cost Competitiveness

After identifying key value chain activities, the next step involves determining costs of performing specific value chain activities using activity-based costing activity Appropriate degree of disaggregation depends on
Economics of activities Value of comparing versus broadly defined activities narrowly defined

Programming Disk loading Marketing Distribution

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Guideline Develop estimates for activities

separate

cost

Representing a significant or growing proportion of costs

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Global Institute of Management, Strategic Management (SEM - III)

7-Sep-12

ActivityActivity-Based Costing: A Key Tool in Analyzing Costs Determining whether a companys costs are in line with those of rivals requires Measuring how a companys costs compare with those of rivals activity-by-activity activity-by Requires having accounting data to measure cost of each value chain activity Activity-based costing entails ActivityDefining expense categories to specific activities performed and Assigning costs to the responsible for creating the cost
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according activity
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Benchmarking Costs of Key Value Chain Activities

Focuses on cross-company comparisons of how crosscertain activities are performed and costs associated with these activities Purchase of materials Payment of suppliers Management of inventories Getting new products to market Performance of quality control Filling and shipping of customer orders Training of employees Processing of payrolls

Objectives of Benchmarking
Identify best and most efficient means of performing various value chain activities Learn what is the best way to perform a particular activity from those companies who have demonstrated that they are best-in-industry or best-in-world at best-inbest-inperforming the activity Learn what other an activity at lower cost firms do to perform

Figure out what actions to take to improve a companys own cost competitiveness
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Ethical Principles in Benchmarking

Avoid actions implying an interest in
Restraint of trade Market and/or customer allocation schemes Price fixing Bribery

The tough part of benchmarking is not whether to do it but rather how to gain access to information about other companies practices & cost. cost. Data can be collected from published reports, trade groups, & industry research firms, customers, suppliers & knowledgeable industry analyst. analyst. Further more comparing one companys cost to anothers cost may be difficult if two companies employ different cost accounting principles to calculate the cost of particular activities. activities.
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Refrain from acquiring trade secrets by any means viewed as improper Be willing to provide same type of information to a benchmarking partner Communicate early to clarify expectations and avoid misunderstandings Be honest and complete
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Treat benchmarking interchange as confidential Use information obtained only for stated purposes Respect corporate culture of partner companies Use benchmarking contacts designated by partner company Be fully prepared for each exchange Provide partners with agenda and questionnaire prior to exchange Follow through with commitments to partner in a timely manner Understand how partner wants information provided used
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Global Institute of Management, Strategic Management (SEM - III)

7-Sep-12

Questions Last years paper

Explain brief various components of external environment of business Explain in detail of five forces of Michael Porter with suitable examples Explain the Value Chain Analysis and its application in a large Retail business like Big Bazaar, Wall Mart, D-Mart etc. etc. SWOT Analysis is equally vital for Owners, Directors and Managers. Explain in detail giving an example of a Managers. company or your choice. choice.
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