Strategic analysis

15 August 2011 cprijal@gmail.com 9841312844 1
BUSINESS POLICY & STRATEGIC ANALYSIS
Teaching Notes on
Strategic Analysis
- Chandra P. Rijal, PhD

Framework of Strategic Analysis
1.External Analysis: consumer analysis, segmentation, consumer
motivations, and unmet needs analysis.
2. Competitor Analysis: identifying, evaluating and dealing with
competitors.
3. Market Analysis: mart size, market growth, market profitability, cost
structure, distribution system, market trends, key factors for success,
and risks in high growth markets.
4. Environmental Analysis: dimensions, forecasting environmental
trends and events, strategic uncertainty and impact analysis, and
scenario analysis.
5. Internal Analysis: shareholder value analysis, sales and profitability
analysis, strategic options, and business portfolio analysis.

Analysis of strategic thrusts
External Analysis
a. Customer Analysis
b. Competitor Analysis
c. Market Analysis
d. Environmental Analysis
Internal Analysis
a. Performance Analysis
b. Determinant of Strategic
Options
Opportunities, threats, trends
Strategic uncertainties
Strategic strengths, weaknesses
problems, constraints and
uncertainties
Strategy identification
and selection
Analysis of strategic thrusts

SWOT ANALYSIS
The Components of SWOT Analysis
SWOT
Analysis
Innovation
Financing
Access to
Capital
Marketing
Customer
Base
Management
Manufacturing

SWOT ANALYSIS
Innovation
Technical or product/service superiority
R&D
New product capabilities and new technologies
Patents
Manufacturing
Cost structure
Production flexibility and capacity
Equipment
Access to raw materials
Vertical integration
Workforce attitude and motivation

SWOT ANALYSIS
Finance
From operations
From net short-term assets
Ability to use debt and equity financing
Parent’s willingness to finance
Management
Top and middle management quality
Organizational culture, strategy, goals, plans, tactics
Knowledge, skill, capability
Employee motivation and turnover
Quality of strategic decision-making

SWOT ANALYSIS
Marketing
Product quality, brand image, differentiation
Customer focus, service and support
Quality of segmentation
Product line length, depth, width, and capability
Market networks and relationship
Sales force motivation and loyalty
Customer Base
Size or market share, loyalty
Growth of segments served

Porter’s Five Forces Analysis
Threats of Potential
New Entrants
Competition Among
Existing Firms
Bargaining
Power
of Suppliers
Bargaining
Power
of Customers
Threats of
Substitute
Products

Source: Adapted from M. E. Porter, Competitive Strategy, Free Press, 1980, p. 4. Copyright by The
Free Press, a division of Macmillan Publishing Co., Inc. Reproduced with permission.
Threat of
substitutes
products
Threat of
new entrants
Bargaining
power of
buyers
Bargaining
power of
suppliers
COMPETITIVE
RIVALRY
Five forces analysis

Five Forces Analysis: Key Questions and Implications
• What are the key forces at work in the competitive
environment?
• Are there underlying forces driving competitive
forces?
• Will competitive forces change?
• What are the strengths and weaknesses of
competitors in relation to the competitive forces?
• Can competitive strategy influence competitive
forces (eg by building barriers to entry or reducing
competitive rivalry)?

SWOT Analysis
• Strengths (internal)
• Weaknesses (internal)
• Opportunities (external)
• Threats (external)

PEST analysis
• Political factors
• Economic factors
• Socio-cultural factors
• Technological factors

Political/legal
• Monopolies legislation
• Environmental protection laws
• Taxation policy
• Employment laws
• Government policy
• Legislation
• Others?

Economic Factors
• Inflation
• Employment
• Disposable income
• Business cycles
• Energy availability and cost
• Others?

Socio-Cultural Factors
• Demographics
• Distribution of income
• Social mobility
• Lifestyle changes
• Consumerism
• Levels of education
• Others?

Technological Factors
• New discoveries and innovations
• Speed of technology transfer
• Rates of obsolescence
• Internet
• Information technology
• Others?

The 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

Buyer power is likely to be high when:
• There is a concentration of buyers
• There are many small operators in the
supplying industry
• There are alternative sources of supply
• Components or materials are a high percentage
of cost to the buyer leading to “shopping
around”
• Switching costs are low
• There is a threat of backward integration

Supplier 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 bargaining
power low

Threat of Substitutes
Substitutes take different for:
• Substitution of need
• Generic substitution
• Doing without

Competitive 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

SCENARIO ANALYSIS
Scenario Analysis can be divided into four elements:
• Identify Scenarios
• Develop Scenario Strategies
• Estimate Scenario Probabilities
• Perform Regret Analysis

Forecasting Environmental Trends and Events
• Asking the Right Questions
• Trend Extrapolation
• Asking Experts
• Decomposing the Task
• Cross-Impact Analysis

Strategic Uncertainty
¤ Strategic Uncertainty may result from a typical
external analysis or sometimes the strategic
uncertainty is represented by a future trend or event
that has inherent unpredictability.
¤ To deal with strategic uncertainty, impact analysis
and scenario analysis can be employed.

Impact Analysis
¤ The extent to which a strategic uncertainty should
be monitored and analyzed depends on its impact
and immediacy.
¤ The impact of a strategic uncertainty is related to:
* The extent to which it will impact existing or
potential SBUs (strategic business units)
* The importance of the involved SBUs
* The number of involved SBUs.

Impact Analysis contd . . .
• The immediacy of a strategic uncertainty is related
to
- The probability that the involved trends or
events will occur.
- The time frame of the trends or events.
- The reaction time likely to be available,
compared with the time required to develop
and implement appropriate strategy

Managing Strategic Uncertainties
If both the immediacy and impact are low, then a
low level of monitoring may be appropriate.
If the impact is thought to be low but the immediacy
is high, then monitoring and analysis may be
appropriate.
If the immediacy is low and the impact high, then
monitoring & analysis in more depth and contingent
strategies may be considered.
When both the immediacy and potential impact of
the underlying trends and events are high, then an
in-depth analysis will be appropriate, as will be the
development of reaction plans or strategies.

1. Identify Scenarios
It is important to reduce the number of scenarios by
identifying a small set that ideally includes those
that are plausible/credible and those that represent
departures from the present that are substantial
enough to affect strategy development.
2. Develop Scenario Strategies
After scenarios have been identified, the next step is
to relate them to strategies – both existing strategies
and new options.

3. Estimate Scenario Probabilities
¤ To evaluate alternative strategies it is useful to
determine the scenario probabilities.
¤ Experts could be asked to assess probabilities
directly.
4. Perform Regret Analysis
The final step is to compare the expected outcomes
of each strategy if the wrong scenario emerges.

Internal Analysis
Structuring Strategic Decisions
Organizational
strengths and
weaknesses
Environmental
opportunities and
threats
Market needs, attractiveness,
and key success factors
Strategic Decisions
* Strategic investment decisions
* Financial area strategies
* Sustainable competitive advantages

Internal Analysis
Performance Analysis
1. Shareholder Value Analysis
2. Financial Performance - Sales and Profitability
3. Performance Measurement - Beyond Profitability
4. Determinants of Strategic Options
5. From Analysis to Strategy
6. Business Portfolio Analysis

Why Do Companies Fail?
What went wrong?
– Inertia (resistant to change)
– Prior strategic commitments
– The icarus paradox
Avoiding failure and
sustaining competitive
advantage:
– Focus on the building blocks of
competitive advantage.
– Institute continuous improvement
and learning.
– Track best industrial practice and
use benchmarking.
– Overcome inertia.

Shareholder Value Analysis
How competent the firm is to create various values
to shareholders
Key values to the shareholder are:
1. Profit maximization, and
2. Increment of worth of the share per unit
Other important values to the shareholders may be
Business/product diversification
Goodwill
Brand recognition, and so on ….

Competitive Advantage: Value Creation, Low Cost,
and Differentiation
• Competitive advantage is a firm’s ability to
outperform its competitors (earn higher profits).
• The source of competitive advantage is value
creation for customers.
• Sustained competitive advantage comes from
maintaining higher profits than competitors over
long periods of time.
• Sustained competitive advantage leads to higher
shareholder value.

Value Creation

Financial Performance - Sales and Profitability
The Determinants
1. Sales and Market Share
2. Profitability
3. Good Performance
4. Economic Value Added

Return on Capital Employed for Selected U.S.
Department Stores, 1989-1998
Source: Data from Value Line Investment Survey

Performance Measurement - Beyond Profitability
Some Indicators
1. Customer satisfaction and brand loyalty
2. Product service quality
3. Brand and firm associations
4. Relative costs
5. New product activity
6. Manager/employee capability and performance

Performance Measurement Beyond Profitability
It is very important to develop performance indicators
that convincingly represent the long term prospect.
Customer satisfaction/brand loyalty are the keys
It indicates how customers really feel about the firm.

Guidelines for measuring satisfaction and loyalty
 problems and causes of dissatisfaction should be
identified
 exit interviews should be taken
 size and intensity of the customer group that truly likes a
brand should be known.
 measures should be tracked

Product 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 future
give competitive innovations?

performance 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 semi
variable costs are not carefully allocated but
instead are averaged over total production

performance measurement
• new product activity
• manager/employee capability and
performance
 human factor is very important as they are the
ones who implement the strategies
 does the human resource support the current and
future strategies?
 does new employees match the needs of the
organization?

Generic Building Blocks of Competitive Advantage

Generic Building Blocks of Competitive Advantage:
Efficiency
Efficiency = Outputs/Inputs
For many firms, EE productivity is key (output per
employee)
Increased efficiency requires strategy, structure and
controls (and a strong functional production or
operations program)
Efficiency is “critical” for cost leaders (eg. Wal-Mart)
but still very important for others

Competitive Advantage: Customer Responsiveness
• Superior Customer Responsiveness is a function
of:
Quality, and
Innovation in design, service, etc.
• Often measured by:
Response time, and
Adaptability

Competitive Advantage: Innovation
• Perhaps the most important building block of
competitive advantage: may drive greater innovation
leading to higher prices via differentiation or simply
better processes leading to lower costs.
• Companies can’t afford to sit still
• Innovation includes advances in products, processes,
management systems, organizational structure,
strategies, etc

Competitive Advantage: Quality
• Quality drives profits in two ways:
Increased reliability which leads to higher prices
due to perceived higher quality
Increased productivity due to lower re-work,
returns and rejection rates leading to lower costs
(zero defects)
• Higher prices plus lower costs means more profits

The Impact of Efficiency, Quality, Innovation, and
Customer Responsiveness on Unit Costs and Prices

Figure misses the role played by finance and accounting/Information systems
as support services
The Value Chain (Business Functions)

Distinctive Competencies, Resources, and Capabilities
The roots of competitive advantage

Strategy and Competitive Advantage
The relationship between strategies and resources and
capabilities:

Strategic Resources: Two Types
• Tangible
– Land
– Buildings
– Plant
– Equipment
• Intangible
– Brand names
– Reputation
– Patents
– Technological or
marketing know-how

Resources and Capabilities
Skills in effectively coordinating and managing
resources for productive use.
– Unique resources and capabilities, or, at a
minimum,
– Common resources and
unique capabilities
– Best if have both.

The Durability of Competitive Advantage
• Barriers to imitation (Slows the speed of imitation by
competitors 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 innovation
shortens product life cycles.

Durability of Competitive Advantage
• Durability is dependent upon:
- height of barriers to imitation
- capability of competitors to imitate innovation
- general level of industry dynamism

Analysis of Strategic Options
Determinants of Strategic Options
1. Past and current strategies
2. Strategic problems
3. Organizational capabilities and constraints
4. Financial capabilities and constraints
5. General strengths and weaknesses

Service Portfolio Analysis
The Components
1. The Market Attractiveness – Service Position
Matrix
a. Evaluate the abilities to compete
b. Evaluate the market attractiveness

service portfolio analysis
• it provides a structured way to evaluate service
units on two key dimensions
• attractiveness of the market involved and
• strength of the school’s position in that market
• the market attractiveness-service position
matrix
 it is a formal, structured way to match a school’s
strength and market opportunities.

Service 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.

Strategic analysis

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