COMPANY

SITUATION

ANALYSIS

MODULE 4

MODULE OUTLINE

Determining How Well Present Strategy is Working

SWOT Analysis

Strengths & Weaknesses of Firm

Opportunities & Threats Facing Firm

Strategic Cost Analysis & Value Chains

Assessing Firm’s Competitive Position

Identifying Strategic Issues

KEY QUESTIONS IN COMPANYSITUATION ANALYSIS

How well is firm’s present strategy working?What are firm’s strengths, weaknesses, opportunities,& threats?Are firm’s prices & costs competitive?How strong is firm’s competitive position?What strategic issues does firm face?

WHAT IS COMPANY’S STRATEGY?

Identify competitive approach Low-cost leadershipDifferentiationFocus

Determine competitive scopeStages of industry’s production/distribution chainGeographic coverageCustomer

Identify functional strategies Examine recent strategic moves

HOW WELL IS PRESENT STRATEGY WORKING?

Key indicates of strategic & financial performance Trends in profit margins Trends in profit margins Trends in net profits & return on investment Credit ranking Leadership role(s), I.e. technology, quality, etc. Competitive advantages or disadvantages

Is competitive position getting stronger/weaker?

HOW WELL IS PRESENT STRATEGY WORKING?

The stronger a company’s recentStrategic and fi0nancial

Performance, the more likely it hasA well-conceived, well-executed strategy.

Weak strategic and financial performance is usually a sign of weak strategy or

Weak execution or both!

SWOT analysis

SWOT analysis involves sizing-up firm’s INTERNAL strengths & weaknesses and

EXTERNAL opportunities & threats

SWOT represents the first letter inStrengthsWeaknesses Opportunities Threats

IDENTIFYING INTERNAL STRENGTHS & WEAKNESSESA STRENGTH is something firm is good at or characteristic giving it an important capability

Useful skillImportant know-howCompetitive capabilityAchievement giving firm a market advantage

A WEAKNESS is something firm lacks, does poorly, or condition placing it at a disadvantage

IDENTIFYING INTERNAL STRENGTHS & WEAKNESSES

Basic Concept

A company’s internal strengths usually represent COMPETITIVE ASSETS; its internal weaknessesUsually represent COMPETITIVE LIABILITIES.The desired condition is for the assets to OUTWEIGH the liabilities by a hefty margin!

SIGNIFICANCE OF A COMPANY’S STRENGTHS & WEAKNESSES

strengths are significant to strategy-making because they can

Serve as cornerstones of strategyHelp build COMPETITIVE ADVANTAGE

A good strategy aims at correcting firm’s WEAKNESSES which can Make it vulnerable

Prevent it from pursuing attractiveopportunities Put it at a competitive disadvantage

STRATEGIC MANAGEMENT PRINCIPLE

Successful strategists seek to EXPLOIT what a company does best:

ExpertiseStrengthsCore competenciesStrongest competitive capabilities

Strategists shun strategies placing heavy demands on Areas Where company is weakest or has

unproven ability!

BUILDING A CORE COMPETENCE

Definition

A CORE COMPETENCE issomething a company Does ESPECIAALY WELL in comparison to itsCompetitors!

TYPE OF CORE COMPETENCIES

Superior skills in producing high quality product Superior system for delivering customer ordersAccurately & swiftlyBetter after-sale service capabilityMore skill in achieving low operating costsUnique formula for selecting good retail locationsUnusual innovativeness in developing new productsBetter merchandising & product display skillsSuperior mastery of an important technologyUnusually effective sales force

SIGNIFICANCE OF A CORE COMPETENCE

A CORE COMPETENCE is important because of Added capability it gives firmCompetitive edge it can yield Potential for it being a cornerstone of

strategy COMPETITIVE ADVANTAGE is easier to build when

Firm has a CORE COMPETENCE Rival firms do not have offsetting

competencies It’s costly & time-consuming for rivals to

match competency

STRATEGIC MANAGEMENT PRINCIPLE

CORE COMPETENCIESEmpower a company to build

Competitive advantage!

IDENTIFYING EXTERNAL OPPORTUNITIES

OPPORTUNITIES most relevant to a firm are factors in EXTERNAL environment offering

Some kind of competitive advantage

Important avenues for growth

IDENTIFYING EXTERNAL THREATS

EXTERNAL FACTORS posing a danger to firm Emergence of cheaper technologies Introduction of new/better products by rivalsEntry of low-cost foreign competitorsNew regulation Vulnerability to rise interest ratesPotential of hostile takeoverUnfavorable demographic shiftsAdverse shifts in foreign exchange ratesPolitical upheaval in a country

SIGNIFICANCE OF A COMPANY’S OPPORTUNITIES & THREATS

Affect attractiveness of firm’s situation

Point to need for strategic action

STRATEGIC MANAGEMENT PRINCIPLE

A good strategy is always aimed at capturing A company’s best growth opportunities and

Creating defenses against threat to its competitivePosition and future performance. Otherwise, it

Doesn’t fit the company’s situation!

ROLE OF SWOT ANALYSIS IN CRAFTING A BETTER STRATEGY

SWOT analysis helps answer key questions

Does firm have internal strengths an attractive strategy can be built on ?

Which weaknesses does strategy need to correct?

Do firm’s weaknesses disqualify it from pursuing certain opportunities?

Which opportunities does firm have resources to pursue with

a chance of success?

What threats should firm worry most about?

WHAT IS STRATEGIC COST ANALYSIS?

Definition

Comparing a firm’s cost position RELATIVE to key Competitors ACTIVITY by ACTIVITIY

From raw materials purchase to Price paid ultimate customers

Assessing if firm’s costs are competitive with those ofRivals is a crucial part of company situation analysis.

WHAT IS STRATEGIC COST ANALYSIS?

Cost disparities among rivals can stem from differences in

Prices paid for raw materials, component parts, energy, & other supplier resourcesbasic technology & age of plant & equipment economies

of scale & experience curve effects wage rates & productivity levelsChanges in inflation & foreign exchange ratesMarketing & distribution costs Inbound & outbound shipping costs

PRINCIPLE OF COMPETITIVE MARKETS

The higher a company’s costsAre above those of close rivals,

The more competitivelyVulnerable it becomes!

THE VALUE CHAIN CONCEPT

Definition

A VALUE CHAIN identifies :Actives, functions, & business processes that have to be performed in designing, production, marketing, delivering, & supporting a product or service

THE VALUE CHAIN CONCEPT

A VALUE CHAIN consists of two major types of activities :

PRIMARY ACTIVITIES that createvalue for customers

RELATED SUPPORT ACTIVITIES

Representative Company Value ChainPrimary Activities and Costs

InboundLogistics

OperationsoutboundLogistics

Sales andMarketing Service

Profit Margin

Product R&D, Technology, Systems Development

Human Resources Management

General Administration

SupportActivitiesAnd Costs

what determines costs of value Chain Activities?

Costs of performing each value chain activity can beDRIVEN UP or DOWN by two types of factors

STRUCTURAL COST DRIVERS

EXECUTIONAL COST DRIVERS

STRUCTURAL COST DRIVERS

Scale economies Experience curve effectsTechnology requirementsCapital intensityComplexity of product line

EXECUTIONAL COST DRIVERS

Commitment of work force to continuous improvement Attitudes & capabilities regarding quality Cycle time in getting new products to market Utilization of existing capacity Whether internet business processes are efficiently designed & executedHow efficiently firm works with suppliers and/or customers to costs

KEYS TO UNDERSTANDING A COMPAM\NY’S COST STRUCURE

Whether firm is trying to achieve a competitive advantageBased on

Lower costs orDifferentiation

How costs in one value chain activity spill over to affect Costs of othersWhether linkages among activities in value chain present opportunities for cost reduction

THE VALUE CHAIN SYSTEM

Upstream Value Chains

CompanyValue Chains

Downstream Value Chains

Activities, Costs,&

Margins of Suppliers

Activities, Costs, &

Margins of Forward Channel

Allies

Internally Performed Activities,

Costs, & Margins

Buyer/User Value

Chains

THE VALUE CHAIN SYSTEM

Cost COMPETITIVENESS DEPENDS ON Costs of internally performed activitiesCosts in value chains of suppliers & forwardChannel allies

Assessing firm’s COMPETITIVENESS requires Knowledge of value chain system

Firm’s own value chain Value chains of suppliers Value chains of forward channel allies

THE VALUE CHAIN SYSTEM

SUPPLIERS’ value chains matter Suppliers incur costs in creating & delivering inputs used in firm’s value chainCost & quality of inputs influence firm’s cost and/or differentiation capabilities

FORWARD CHANNEL value chains matterCosts & margins of downstream firms are part of paid by ultimate end-userActivities channel allies perform affect satisfaction of end-user

EXAMPLE : KEY VALUE CHAIN ACTIVITIES

Pulp & paper industry

Timber farming Logging

Pulp millsPapermaking

Printing & publishing

EXAMPLE: KEY VALUE CHAIN ACTIVITIES

HOME APPLIANCE INDUSTRY

Parts & components manufacture Assembly

Wholesale distribution Retail sales

EXAMPLE : KEY VALUE CHAIN ACTIVITIES

Soft drink industry

Processing of basic ingredients Syrup manufacture Bottling & can filling

Wholesale distributionRetailing

EXAMPLE: KEY VALUE CHAIN ACTIVITIES

COMPUTER SOFTWARE INDUSTRY

Programming Disk Loading

MarketingDistribution

DEVELOPING DATA FOR STRATEGIC COST ANALYSISData requirements are formidable Requires breaking department costaccounting data out into cost of performingSPECIFIC ACTIVITIEACTIVITY-BASED COSTING

New cost accounting mythology aimed at assigning costs to

Specific tasks and Value chain activities

Traditional Cost Accounting Vs.Activity-Based Costing

Traditional Cost Accounting Categories in Department BudgetWages & SalariesEmployee BenefitsSuppliesTravelDepreciation ChargesMiscellaneousOperating Expenses

$ 350,000115,000

6,5002,400

17,000124,00025,520

$ 640,150

Departmental ActivitiesUsing Activity-BasedCost Accounting

Evaluate SuppliersProcessExpedite DeliveriesExpedite Internal ProcessCheck Item QualityCheck Deliveries AgainstPurchase OrdersResolve ProblemsInternal Administration

$ 135,75082,10023,50015,84094,30048,450

110,000130,210

$ 640,150

BENCHMARKING COSTS OF KEY ACTIVITIES

Concept

Benchmarking performance of a firm’s activities Against rivals & best practice firms provides Evidence of firm’s cost competitiveness Benchmarking is an excellent tool to determine

If costs are in line with competitors Which business processes need to be scrutinized for improvement Which firms perform a given activity best

BENCHMARKING COSTSOF KEY ACTIVITIES

Focuses on CROSS-COMPANY comparisons of how well activities are performed

Purchase of materialsPayment of suppliersManagement of inventoriesTraining of employeesProcessing of payrollsGetting new products to marketPerformance of quality controlFilling & shipping of customer orders

BENCHMARKING & ETHICSBENCHMARKING involves discussions of competitively sensitive dataETHICAL guidelines

Avoid talk pricing or compressivelySensitive costsDon’t ask rivals for sensitive dataDon’t share proprietary data without clearance Have impartial third party assemble & present

competitive data without names attached Don’t disparage a rival’s business to outsiders based on data obtained

ACHIEVEING COST COMPETITIVENESS

Key Point

A firm’s COMPETITIVENESS depends on how wellIt manages its VALUE CHAIN relative to competitorsExamining a firm’s value chain & comparing it to key rivals indicates

Who has how much of a cost advantage or disadvantage Which cost components are responsible

ACHIEVING COSTCOMPETITIVENESS

Three areas in firm’s value chain contributes to cost differences compared to rivals

1- SUPPLIERS’ activities2- Firm’s INTERNAL activities3- FORWARD channel activities

Strategic actions to eliminate a cost disadvantage need to be Linked to where cost differences originate!

OPTIONS : CORRECTING SUPPLIER- RELATED COST DISADVANTAGES

Negotiate more favorable prices with suppliers work with suppliers to help them achieve lower costsIntegrate backwardUse lower –prices substitute inputsDo a better job of managing linkages between suppliers’ value chains & firm’s own chainTry to make up difference by initiating cost savings in other area of value chain

OPTIONS: CORRECTING FORWARD CHANNEL COST DISADVANTAGES

Push for more favorable terms with distributors & other forward channel alliesWork closely with forward channel allies & customers to identify win-win opportunities to reduce costsChange to a more economical distribution strategy Try to make up difference by initiating cost saving earlier in value chain

OPTIONS: CORRECTING INTERNAL COST DISADVANTAGES

Initiate internal budget reductionsRe-engineer business processes to do better job ofmanaging exceptional cost driversTry to eliminate some cost-producing activities by Relocate high-cost activities to lower-cost geographic areasSee if certain activities can be outsourced or performed cheaper by contractors

OPTIONS: CORRECTING INTERNAL COST DISADVANTAGES

Invest in cost-saving technological improvements

Innovate around troublesome cost components

Simplify product design to achieve cost reduction

Try to make up difference by achieving saving in

Others areas of value chain system

VALUE CHAIN ANALYSIS &COMPETITIVE ADVANTAGE

Value chain analysis is a powerful managerial

too for identifying which activities have

COMPETITIVE ADVANTAGE potential

A firm’s competitive edge is based on its ability to

Perform competitively crucial activities along

value chain better than rivals

VALUE CHAIN ANALYSIS &COMPETITIVE ADVANTAGE

Diagnosing competitive capabilities involvesConstruct a value chain of firm’s activities Examine linkages among internally performed activities & linkage with suppliers’ &customers’ chainsIdentify activities & competencies critical to customer

satisfaction & market successMake appropriate internal & external benchmarking

comparisons to determineHow well firm performs activitiesHow cost structure compares with rivals

VALUE CHAIN ANALYSIS & COMPETITIVE ADVANTAGE

The strategy-making lesson of value chain analysis is that increased company

competitiveness Entails concentrating resources on those activities where the company can gain

dominating expertise to serve its target customers!

EVALUATION A COMPANY’SCOMPETITIVE POSITION

Factors to examine How strongly firm holds present

competitive position whether firm’s position can be expectedTo improve or deteriorate if present strategy is

continued How firm ranks RELATIVE TO KEY RIVALS on

each important measure of competitive strength/industry/KSFWhether firm has a sustainable competitive advantage or is a disadvantage

PROCETURE : ASSESSING A COMPANY’S COMPETITIVE STRENGTH

List success factors & other relevantMeasures of competitive strengthRate firm & key rivals on each factor usingrating scales of 1-10 (1=weak; 10= strong)Decide whether to use a WEIGHTED or

UNWEIGHTED rating systemSun individual ratings to get overall measureof competitive strength for each rivalEvaluate firm’s overall competitive strength relative to rivals

WHY DO A COMPETITIVE

STRENGTH ASSESSMENT?Reveals strength of firm’s competitive position

Shows how firm stacks up against rivals indicates

whether firm is at a competitive

advantage /disadvantage against each rival

Provides insight into how can build its strategy

on its competitive strengths

Provides insight into how can make strategic moves

to alleviate its competitive weaknesses

STRATEGIC MANAGEMENT PRINCIPLE

Competitive strengths and Competitive advantages

Empower a company to improve Its long-term market position!

DETERMINING STRATEGIC ISSUES TO BE ADDRESSED

Final analytical task that puts firm’s overall

situation into perspective

Issues come from thinking strategically about

Industry & competitive situation firm’s situation

A “ good” strategy must include actions to respond to firm’s strategic issues & problems

STRATEGIC MANAGEMENT PRINCIPLE

Having through understanding of the strategic issues a company faces is precondition for Effective strategy-making. Until strategists have a clear fix on the issues, they are NOT

Ready to craft a strategy!

DECIDING WHAT THE STRATEGIC ISSUES ARE

Is present strategy adequate in light of driving

forces in industry & geared to industry’s FUTURE

key success factors?

How good a defense does present strategy offer

against the five competitive forces?

Does present strategy adequately protect firm against external threats & internal weaknesses?

Is firm vulnerable to competitive attack by rivals?

Does firm have a competitive advantage or must it work

to offset competitive disadvantage ?

Where are strong/weak spots in present strategy?