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STRATEGIC MANAGEMENT UNIT-2 STRATEGIC ANALYSIS

Kathmandu Don Bosco College

Strategic Analysis

Strategy analysis seeks to determine alternative courses of action that could best enable the firm to achieve its mission and objectives. The firms present strategies, objectives and mission coupled with the external and internal audit information provide a basis for generating and evaluating feasible alternative strategies.

Process of External Environment Analysis

Scanning (Step 1)
Changes

in macro environment Changes in market Nature of competition Customer needs Product offerings

Types of scanning
Concentrated
Comprehensive

Contd

Process of Environmental Scanning


Identify

relavent forces in the environment Determine sources of observation Select scanning methods Scan and respond to data

Monitoring (Step 2) Forecasting (Step 3) Assessment (step 4)

Process of Internal Environment Analysis

Define Mission, Goals and strategies Strength and weaknesses Analysis Identify Unique Resources Identify Core Competencies Locate Strategic Advantage
Unique

Resources Core Competencies Superior Efficiency Superior Quality

An Overview of Components of External Environment

External environment of strategic environment is of two types:


Operating
Suppliers
Competitors Government Financial

Environment

Customers

Institutions Labor Unions Pressure Groups Media

Contd

Remote

Environment

Political-legal

Political system Political institutions Political philosophies Laws Courts of law Law of administration

Economic

Economic system Economic policies Economic conditions Globalization

Contd

Socio-Cultural

Demographics Social institutions Pressure groups Social change and mobility Cultural environment (attitudes, values, beliefs, religion and language)
Level of technology Technological change Technology transfer Research and development budget

Technological

Components of Internal Environment

Organizational goals and policies Organizational structure Organizational resources Organizational culture

Unit 3 Strategic Alternatives

Strategic Alternatives

The firms present strategies, objectives, and mission, coupled with the external environment and internal audit information, provide basis for generating and evaluating feasible alternative strategies. Unless a desperate situation confronts the firm, alternative strategies will likely represent incremental steps that move the firm from its present position to a desired future position. Alternative strategies dont come out of nowhere, they are derived from the firms vision, mission, objectives, external audit, and internal audit; they are consistent with, or build on, past strategies

Strategy development tool: SWOT Analysis


Always leave blank Strengths-S List strengths Weaknesses-W List weaknesses

Opportunities-O List opportunities

SO strategies Use strengths to take advantage of opportunities

WO strategies Overcome weaknesses by taking advantage of opportunities

Threats-T List threats

ST strategies Use strengths to avoid threat

WT Strategies Minimize weaknesses and avoid threats

Contd

The strengths-weaknesses-opportunities-threats (SWOT) matrix is an important matching tool that helps managers develop four types of strategies: SO (strength-opportunities) strategies, WO (weaknessesopportunities) strategies, ST (strength-threats) strategies, and WT (weaknesses-threats) strategies. SO strategies use a firms internal strengths to take advantage of external opportunities. WO strategies aim at improving internal weaknesses by taking advantage of external opportunities. ST strategies use a firms strength to avoid or reduce the impact of external threats. WT strategies are defensive tactics directed at reducing internal weakness and avoiding external threats.

Contd

SWOT matrix is composed of nine cells. There are four key factor cells, four strategy cells and one cell that is always left blank (the upper left cell). The four strategy cells, labeled SO, WO, ST and WT are developed after completing four key factor cells labeled S, W, O and T. There are eight steps involved in constructing a SWOT matrix

List the firms key external opportunities. List the firms key external threats. List the firms key internal strengths. List the firms key internal weaknesses. Match internal strengths with external opportunities, and record the resultant SO strategies in the appropriate cells.

Contd

Match internal weaknesses with external opportunities, and record the resultant WO strategies. Match internal strength with external threats, and record the resultant ST strategies. Match internal weaknesses with external threats, and record the resultant WT strategies.

Pest Analysis

PEST is concerned with forces in the external environment. It looks at their future impact on the organization. PEST comprises the following forces: P= Political-Legal forces E= Economic forces S= Socio-cultural forces T= Technological forces

Pest analysis helps identifying future opportunities and threats to the organization.

Contd

Opportunity is a favorable condition in the environment. It enables an organization to consolidate and strengthen its strategic position. Threat is an unfavorable condition in the environment. It creates risks and causes damage to the organizations strategic position.

PEST analysis indicates what environmental forces are affecting the business and which of them are the most important one.

Five Forces Analysis


Potential development of substitute products Bargaining power of suppliers Rivalry among competing firms Potential entry of new competitors Bargaining power of consumers

Contd

Porters Five-Forces Model of competitive analysis is a widely used approach for developing strategies in many industries. The intensity of competition among firms varies widely across industries. Intensity of competition is highest in lower return industries. For e.g. in electrical and electronics industry, collective impact of competitive forces is so brutal that the industry is clearly unattractive from a profit-making standpoint. Rivalry among existing firms is severe, new rivals can enter the industry with relative ease, and both suppliers and customers can exercise considerable bargaining

Contd

Rivalry Among Competing Firms


Balance among competitors High exit barriers Low switching costs High fixed costs Slow market growth Economies of scale Capital requirements Product differentiation Access to distribution channel Customer loyalty Retaliation Experience Government actions

Potential Entry of New Competitors


Contd

Potential Development of Substitute Products

Product for product substitution Substitution of need Generic substitution


Concentration of suppliers High switching costs Powerful brand Fragmented buyers Few substitutes Forward integration

Bargaining Power of Suppliers


Contd

Bargaining Power of Consumers

Concentration of consumers Large number of small suppliers High material cost Low cost of substitution Backward integration

Selection of Strategic Alternatives

Grand Strategies

Stability Expansion Retrenchment Combination


Low Cost leadership Product Differentiation Market Focus

Market-oriented Strategies

Grand Strategies

Corporate strategy is overall strategy that provides longterm direction and scope to the organization. It defines products, markets and functions. It is also known as grand generic strategy. It is concerned with managing a portfolio of businesses and allocating resources to them. Grand Strategy can be:

Stability Growth (expansion) Retrenchment

Stability strategy

This strategy is pursued in relatively stable environment. The existing business definition is maintained. There is no change in products, markets and functions. The organization is the market leader. The product is at the maturity stage in product life cycle. Stability is aimed through

No change strategy: Current policies and operations are continued. Pause Strategy: Moving with caution. Profit Strategy: Profitability is sustained.

Growth Strategy

This strategy is pursued in highly competitive and changing environment. New products, markets and functions are added. The product is in the growth stage of product life cycle. Growth is through increased market share and production capacity. Growth strategy is achieved through:

Growth through concentration: Specialization in one activity. This example is fast food chains. Growth through integration: combining activities, vertical or horizontal

Contd

Vertical Integration: Backward or forward integration into adjacent activities of current business. Backward is related to inputs. Forward is related to outputs. One business feeds the other in the same industry. Horizontal Integration: Integration into activities which are competitive or complementary with present activities. It entails moving into more than one industry. Growth through diversification: Change in products, markets and functions. New business is started.

Diversification can be: Related Diversification (concentric Diversification): It is through acquisition of firms that are related in terms of technology, products and markets for the acquiring Firm. Unrelated Diversification (conglomerate Diversification): It is growth through acqusition of firms that are unrelated in terms of technology, products and markets for the acquiring firm.

Contd

Growth through cooperation: Cooperation among rival firms e.g. mergers, acquisitions, joint venture, strategic alliances.

Retrenchment Strategy

This strategy is pursued in threatening environment, products, markets and functions are reduced. The pace of activities decreases. The product is in decline stage of product life cycle. Cash flow is negative. Retrenchment is aimed through reduced market share, dropping product lines and markets, and divestment. The aim is contraction of activities through:

Turnaround strategy: reversing a negative trend to increase efficiency. Cost is reduced, unprofitable products are dropped, work force is reduced, distribution outlets are trimmed. Divesture strategy: sale of a portion of business to exit from market. It may be to get rid of losers or to finance new

Contd

Liquidation strategy: Closing down by selling assets.

Combination Strategy

This strategy is pursued in many and changing environments. The organizations has several Strategic Business Units (SBUs). It simultaneously uses combinations of stability, expansion and retrenchment strategies to different parts of the organization. Old products, markets and functions are continued, dropped or expanded. Product life cycle are in different stages. The aim is to improve performance. The combination can be:

Simultaneous combination: Applied same time in different

Market Oriented Strategies

Low Cost Leadership Strategy


The

focus of this strategy is on cost. Low cost leadership means low overall costs. Low cost means lower prices relative to competitors. It finds ways to reduce cost by reducing waste. This strategy appeals to price sensitive buyers. Ways of reducing cost:
Control

cost drivers: drive down the costs by doing a better job than competitors i.e. costs are reduced in each activity segment of value chain through:

Economies of scale Experience curve

Contd

Cost of key resources Resource sharing Outsourcing Capacity utilization First mover advantage Integration

Revamping Value chain: costs can be reduced by revamping value chain through:

Shifting to e-business Direct marketing Simplifying product design No-frills offers Bt pass high cost materials Relocate facilities Reengineering

Contd

Product differentiation strategy


This

strategy focuses on differentiation. Differentiation aims to establish uniqueness of a brand relative to competing brands in the minds of customers. It is making products different from competitors product. It incorporates differentiating product features. Customers perceive superior value in differentiation. Bases of differentiation:
Product

parameters: Size, shape, design, features,

Contd
Services back-up: delivery, installation, repair, trainings, availability of spare parts Personnel : better and experienced personnel to serve the customers Promotion: using differentiating claims in promotion appeals Image: projecting organization or brand image

Drivers of Differentiation

Unique product performance Unique product features New technologies Unique services Detailed information

Market focus

The focused strategies concentrate on niche of the market. Niche is a narrow piece of the total market. It is identified by dividing a market segment into sub segments. It consists of fairly small groups of customers whose needs have not been well served. The niche can be defined by:
Demographic

characteristics : customers based on age, income, occupation etc.

Contd
Geographical

uniqueness: Geographic market Specialized requirements Special product attributes

Focused strategies aim to serve buyers better than the competitors and can be of two types:
Focused

low cost Focused differentiation

Issues Governing the Selection of Strategic Alternative

Suitability
Ranking
Decision

Trees Scenarios

Acceptability
Return

Analysis Risk Analysis Stakeholder Reaction Analysis

Feasibility
Fund

Flow Analysis

Break-even

Analysis Resource Deployment Analysis

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