Slide 14
Strategic Management
present strategy working?
strengths and weaknesses and its
external opportunities and threats?
costs competitive?
or weaker than key rivals?
5. What strategic issues merit
front-burner managerial attention?
Company Situation Analysis:
The Key Questions
a Single-Business Company’s Strategy
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Present Strategy Working?
Identify competitive approach
Determine competitive scope
Broad or narrow geographic market coverage?
In how many stages of industry’s production/distribution chain does the company operate?
Examine recent strategic moves to improve its C.P.
Identify functional strategies
Is company achieving its financial and strategic objectives?
Is company an above-average industry performer?
Approaches to Assess how Well
the Present Strategy is Working
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Strategy is working
Whether a firm’s sale is growing faster, slower, or about the same pace as the market as a whole thus resulting in a rising, eroding or stable market share
Whether the company is acquiring new customers at an attractive rate as well retaining existing customers
Whether the firm’s profit margins are increasing or decreasing; how well its margins compare to the same trends for other companies in the industry
Trends in net profits and return on investment and how these compare to the same trends for other companies in the industry
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Strategy is Working
Whether the company’s overall profits and market and credit rating are improving or on the decline
Whether the company can demonstrate continuous improvements in such internal performance measures as days of inventory, employee productivity, unit cost etc.
How share holders view the company based on trends in the company’s stock price and share holders value
The firm’s image and reputation with its customers
How well the company stacks up against rivals on technology, product innovation, customer service, product quality, delivery, time, price, getting new products to market quickly, and other relevant factors on which buyers base their choice of brands
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S trengths
W eaknesses
O pportunities
T hreats
For a company’s strategy to be well-conceived, it must be
Matched to its resources/strengths and weaknesses
Aimed at capturing its best market opportunities and erecting defenses against external threats to its well-being
Question 2: What are the Company’s Strengths, Weaknesses, Opportunities and Threats ?
S
W
O
T
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A strength is something a firm does well or an attribute that enhances its competitiveness
A skill, specialized expertise or competitively important capabilities
Skills in low cost operations,
Technological expertise
Cutting edge supply chain management capabilities
Expertise in getting new products to the market quickly
Expertise in providing good customer service
Resource strengths and competitive
capabilities are competitive assets!
An experienced and capable workforce
Cutting edge knowledge in technology or other important business areas
Proven managerial knowledge
A strong network of distributors or retail dealers
Sizeable amounts of cash or marketable securities
A strong balance sheet
A reputation for technological leadership
Strong buyer loyalty and goodwill
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Identifying Resource Strengths
and Competitive Capabilities
An achievement or attribute that puts a company in a position of market advantage
Low overall cost relative to competitors
Market share leadership
A superior product
Wide geographic coverage
Fruitful partnership with supplier that reduces cost and enhances product quality and performance
Joint ventures that provide access to valuable technologies, specialized know-how and/or geographic markets
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Competencies vs. Core Competencies vs. Distinctive Competencies
A competency is the product of organizational learning and experience and represents proficiency in performing an internal activity
Some competencies relate to specific skills and expertise
They spring from proficiency in a single discipline or function and may be performed in single department or unit e.g.
Just in time inventory control
Low cost manufacturing efficiency
Other competencies are inherently multi-disciplinary and cross functional
They are a result of effective collaboration among people with different expertise working in different departments e.g.
Continuous product innovation comes from teaming the efforts of people or groups with expertise in market research, R&D, design, engineering, and market testing
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A core competency is the best-performed
internal activity central (not peripheral or incidental) to a company’s competitiveness
and profitability
More often a core competency is knowledge based residing in people and in a company’s intellectual capital and not in its assets on the balance sheet
A core competency is likely to be grounded in cross-department combination of knowledge and expertise rather than being a product of a single department
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Competencies vs. Core Competencies vs. Distinctive Competencies
A distinctive competency is a competitively valuable activity a company performs better than its rivals
Signifies greater proficiency than a core competency
A distinctive competency will ultimately translate into a Competitive Advantage
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Is the resource strength hard to copy?
Is the resource strength durable – does it have staying power?
Is the resource competitively superior?
Can the resource strength be trumped by different resource strengths and competitive capabilities of rivals?
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Identifying Resource Weaknesses
and 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 capital
Lack of important physical,
organizational, or intangible assets
Resource weaknesses and deficiencies
Internal Factors
Total Weighted Score
Notes: 1. List strengths and weaknesses (5–10 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factor’s probable impact on the company’s strategic position. The total weights must sum to 1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the company’s response to that factor. 4. Multiply each factor’s weight times its rating to obtain each factor’s weighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how well the company is responding to the strategic factors in its internal environment.
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company are those offering:
organizational resource capabilities
Entry of lower-cost foreign competitors
Onerous regulations
Unfavorable demographic shifts
Political upheaval in a country
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External
Total Weighted Score
Notes: 1. List opportunities and threats (5–10 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factor’s probable impact on the company’s strategic position. The total weights must sum to 1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the company’s response to that factor. 4. Multiply each factor’s weight times its rating to obtain each factor’s weighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how well the company is responding to the strategic factors in its external environment.
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Competitive Profile Matrix (CPM)
In the IFE matrix only internal factors are evaluated and in EFE matrix external factors are evaluated, but CPM includes both internal and external factors to evaluate overall position of the firm with respect to its major competitors.
Generally, critical or key success factors (KSF’s) are used to measure and compare the comparative performances of two or more than two rivals
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(CPM)
1
2
3
4
5
6
Total
1.00
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advantage of opportunities
threats here
TOWS Matrix
Source: Adapted from Long-Range Planning, April 1982, H. Weihrich, “The TOWS Matrix—A Tool for Situational Analysis” p. 60. Copyright 1982, with kind permission from H. Weihrich and Elsevier Science Ltd. The Boulevard, Langford Lane, Kidlington OX5 1GB, UK.
5.4 TOWS Matrix (Fig. 5.2)
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The Strategic Position and Action Evaluation Matrix (SPACE)
Select a set of variables to define Financial Strength (FS), Competitive Advantage (CA), Environmental Stability (ES), and Industry Strength (IS)
Assign numerical value ranging from +1( worst) to +6 (best) to reach variable that make up FS and IS dimension.
Assign numerical value ranging from -1 ( best) to -6 ( worst) for ES and CA
Compute the average score for FS, IS, CA, and ES
Plot the average for FS, IS, CA, and ES on the appropriate axis
Add the two scores on the x axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on Y. Plot the intersection of the new xy point
Draw a directional vector from the origin of the SPACE Matrix through the new intersection point. The vector reveals the type of strategies recommended for the organization: aggressive, competitive, defensive, or conservative
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Financial Strength (FS Return on Investment Leverage Liquidity Working capital Cash Flow Ease of Exit Risk involved in business
Industry Strength ( IS) Growth Potential Profit potential Financial stability Technological Know-how Resource utilization Capital intensity Ease of entry Productivity, capacity utilization
2. Environmental Stability (ES) Technological Changes Rate of Inflation Demand Variability Price range of competitive products Barriers to entry Competitive pressure Price elasticity of demand
Competitive Advantage (CA) Market Share Product Quality Product life cycle Customer loyalty Competition’s capacity utilization Technological know-how Control over suppliers and distributors
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Financial Strength (FS)
Risk Involved = + 4 Total Score = + 30 Average Score = 30/7 = 4.28
Environmental Stability ( ES)
Technological change = - 4
Barriers to entry = - 1
Total score = -23
Industry Strength ( IS)
Growth Potential = + 5
Profit Potential = +5
Technological Know how = -3
Control over suppliers and
CA
IS
FS
ES
x
x
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An aggressive profile suggests and Innovator Strategy; the company is in a position to invest further and introduce new market offerings; product development and market development are real options here.
A conservative profile is suggestive of an Analyzer Strategy; the company will staunchly defend its domain while cautiously looking for new opportunities of diversification
A Competitive Profile may augur well for a flanker’s role, as the company may not have the resource strengths to meet the competitors head-on
A Defensive Profile is self-explanatory where the company is only looking to doggedly defend its domain and innovates only on the periphery.
Interpreting the Profiles
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Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company situation analysis
Key analytical tools
Value chain analysis
Prices and Costs Competitive?
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A company’s 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 chain —so-called because the underlying intent of a company’s activities is to do things that ultimately create value for buyers
The value chain contains two types of activities
Primary activities (where most of
the value for customers is created)
Support activities that facilitate
Concept: Company Value Chain
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Wholesalers:
Department Store Retailer
(b) store layout and product display
(c) advertising and customer service
A Hotel Chain
(b) reservations
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Steps in Corporate Value Chain Analysis
Examine each product line’s value chain in terms of various activities involved in producing that product or service.
Which activities can be considered core competency or weakness
Can any core competency be labeled as distinctive competency
Examine the “linkages” within each product’s value chain
Linkages are the connections between the way one value activity is performed and the cost of performance of another activity
3. Examine the potential synergies among the value chain of different product lines/ businesses
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A company’s value chain depends on:
the manner in which it performs its own business and internal operations,
its strategy, the approaches it is using to execute this strategy,
underlying economics of the activities themselves
Because these activities differ from company to company the value chain of rival companies differ and thus their cost positions
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Competing companies may differ on the degree of vertical integration
Comparing the value chain of a fully integrated and partially integrated rivals require adjusting the differences in scope of activities
The costs of internally performed activities for a manufacturer will be greater than the cost of internally performed activities of producers who buy the needed parts and components from outside suppliers and only perform assembly line operations
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Why Value Chains of Rival Companies Often Differ?
b. There is legitimate reason to expect that value chain and cost differences between companies pursuing a low cost/ low price strategy and a rival that is positioned on high end of the market would be different
c. Cost and price differences among rival firms can have their origin in activities performed by suppliers and distributors or by distribution channel allies involved in getting these product to end users
- Suppliers or wholesale dealers may have excessively high cost or profit structures that jeopardize a company’s cost competitiveness even though its cost for internally performed activities are competitive
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The Value Chain System for Entire Industry
Accurately assessing a company’s competitiveness in end use markets require that managers must understand the entire value chain system for delivering a product or service to end users, not just company’s own value chain
At the very least it means considering the value chain of suppliers and forward channel allies
Suppliers’ value chains are relevant because:
Suppliers perform activities and incur costs in creating and delivering the purchased inputs used in company’s own value chain
The costs, performance features and quality of these inputs influence a company’s own cost and product differentiation capabilities
Any thing a company can do to help its suppliers take cost out of their value chain activities or improve the quality and performance of the item being supplied can enhance its own competitiveness
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Forward channel and customer value chain are relevant because:
The costs and margins of a company’s distribution allies are part of the price paid by end users
The activities that distribution allies perform affect end users’ satisfaction
For these reasons companies normally work closely with forward channel allies to perform these value chain activities in a mutually beneficial way
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Developing Data to Measure a Company’s Cost Competitiveness
After identifying key value chain activities, the next step involves determining costs of performing specific value chain activities using activity-based costing
Appropriate degree of disaggregation depends on
Economics of activities
versus broadly defined activities
Guideline – Develop separate cost
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Determining whether a company’s costs are in line with those of rivals requires:
Measuring how a company’s costs compare with those of rivals activity-by-activity
Requires having accounting data to measure cost
of each value chain activity
Activity-based costing entails:
Activity-Based Costing: A Key
Tool in Analyzing Costs
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Focuses on cross-company comparisons of how certain activities are performed and what costs are associated with these activities:
Purchase of materials
Payment of suppliers
Management of inventories
Performance of quality control
Training of employees
Processing of payrolls
Benchmarking Costs of
Strategic Options for Remedying a Cost Disadvantage
Company’s competitiveness on cost depends on how efficiently it manages the value chain activities relative to how well competitors manage theirs
There are three main areas in a company’s value chain where important differences in the cost of competing firms can occur
A company’s own activity segment
Supplier’s part of the industry value chain
The forward channel portion of the industry chain
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Remedying an Internal Cost Disadvantage
Implement the use of the best practices throughout the company particularly for high cost activities
Try to eliminate cost-producing activities altogether by revamping the value chain
- cutting out low value added activities
- bypassing the value chains and associated costs of distribution by marketing directly to end users
Relocate high cost manufacturing activities to other geographic areas
Whether certain internally performed activities can be outsourced more cheaply than they could be done in-house
Invest in productivity enhancing, cost saving technological improvements
Find ways to detour around the activities or items where costs are high
Redesign the product and/or some components to facilitate speedier and more economical manufacture or assembly
Try to make up the internal cost disadvantage by reducing the costs in supplier or forward channel portions of the industry value chain – usually the last resort
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Collaborating closely with suppliers to identify mutual cost saving opportunities
Just in time deliveries from supplier can lower:
- company’s inventory and logistic costs
- supplier can economize on their warehousing, shipping, and production scheduling costs
Companies may find it cheaper to integrate backward
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Remedying a Cost Disadvantage Associated with Activities Performed by Forward Channel Allies
Pressurize dealer distributors and other forward channel allies to reduce their costs and markups
Work closely with forward channel allies to identify win-win opportunities to reduce costs
Change to a more economical distribution strategy, including switching distribution channels or integrating forward into company-owned retail outlets
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to competitors on each important
factor that determines market success?
Does a company have a net
competitive advantage or disadvantage
or Weaker than Key Rivals?
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Based on results of both industry and competitive analysis and an evaluation of a company’s competitiveness, what items should be on a company’s “worry list”?
Requires thinking strategically about
and competitive situation
Company’s resource strengths and weaknesses and attractiveness of its competitive position
A “good” strategy must address “what to do”
about each and every strategic issue!
Question 5: What Strategic Issues
Merit Managerial Attention?