How to Do a Strategic Analysis Dr. Stan Abraham 2009-10

How to Do a Strategic Analysis

Dr. Stan Abraham2009-10

What Is Strategic Analysis?

One person’s or one group’s attempt at arriving at a strategy and key strategic decisions for a company– For example, vision statement, objectives,

and key programs– An essential precursor to strategic

planning

Why Do It?

To gain strategic-planning skills To integrate functional business

courses you have taken to-date To be able to help companies or

organizations decide their future To do a better job of running your own

business one day

The Essential Questions

1. What’s the current situation?

2. Where do we want to go?

3. How can we get there?

1. What’s the Current Situation? What’s changing in our industry, markets,

competitors, the economy, and other areas that may affect us?

Where are the opportunities? How have we been performing and what

financial condition are we in? What strengths, resources, weaknesses, and

competitive advantages do we have, or lack?

2. Where Do We Want to Go?This involves strategic thinking

What are all the possible and feasible directions we could take?– Which opportunities could we pursue?– What alternative business models make

sense? Which is the best alternative?

– Why is it the best one?

3. How can we get there?And how fast should we get there?

What vision and strategy should we pursue?

What objectives should we set?– For the next year and three years’ hence?

What programs should we implement? What contingencies can we devise in

case things go wrong?

What Is Strategy?

Strategy is how a company actually competes

The best strategy is embedded in a business model that both provides customer value and gives the organization a sustainable competitive advantage

[Know what these terms mean?]

Strategic Planning vs. Strategic Management

Strategic-planning process Operational planning

ImplementationEvaluation & control

Strategic management

Strategic thinking drives the process

Strategic analysis informs the process

Book Figure 1.1

A Strategic Analysis Model – that works! (SAMtw)

Alternatives Analysis

Strategic Issues

Identifying Strategic Alternatives

Arguing For and Choosing a

Preferred Strategy

Recommendations

Short-Term Plans Goals & Objectives

Strategic IntentPrograms

Contingencies

Long-Term Plans Goals & Objectives

Strategic Intent Programs

Contingencies

Situation Analysis

External Review Industry Analysis

Competitive Analysis Market Analysis Environmental

Analysis

Internal Review Financial Analysis

Strengths & Weaknesses

Opportunities & Threats

1. What is thecurrent situation?

2. Where do wewant to go?

3. How can weget there?

Industry and Competitive Analysis

Dominant economic characteristics

Industry driving forcesSources of competitive threat

Porter’s 5-forces modelCompetitive positioning of major rivalsCritical success factorsCompetitive strength analysis Industry attractiveness

Situation Analysis External

Dominant Economic Characteristics Example: Industry for a chemical commodity

Industry Size $500 million sales; 4 million tons total volume

Scope of Competitive Rivalry Primarily regional; producers rarely sell outside a 250-mile radius of plant

due to high cost of shipping long distances

Industry Growth Rate 2-3 percent annually

Stage in Lifecycle Mature

Number of Competitors About 30 companies with 110 plant locations and capacity of 4.5 million

tons. Market shares range from 3-21 percent

Customers About 2,000 buyers; most are industrial chemical firms


Dominant Economic Characteristics (2)

Degree of Vertical Integration Mixed. Five of the ten largest firms are integrated backward into mining

operations and also forward in that sister industrial chemical divisions buy over 50% of their plant output; all other firms are engaged solely in manufacturing

Ease of Entry/Exit Moderate entry barriers exist: it costs $10 million to construct a new plant

of minimum efficient size and a new entrant must build a customer base within 250 miles from the plant

Technology/Innovation Production technology is standard and slow to change. Biggest changes

are occurring in products--about 1-2 newly formulated specialty chemical products introduced annually, accounting for nearly all the industry growth


Dominant Economic Characteristics (3)

Product Characteristics Highly standardized and commodity-like

Scale Economies Moderate. All firms have virtually equal manufacturing costs, but scale

economies exist in shipping in multiple carloads to the same customer and in purchasing large quantities of raw materials

Capacity Utilization Efficiency is highest when producing between 90-100% of rated plant

capacity. Unit costs rise appreciably when utilization drops below 90%

Industry Profitability Subpar to average. The commodity nature of the product results in

intense price-cutting when demand slackens, but prices firm up during periods of strong demand. Profits thus track the strength of demand for the industry’s products


Industry Driving Forces

Changes in the industry growth rate

Changes in who buys the product and how they use it

Product or marketing innovation

Technological change

Entry or exit of major firms

Diffusion of technical know-how

Increasing globalization of the industry

Changes in cost and efficiency

Emerging buyer preferences for differentiation

Regulatory influences and government policy changes

Changing societal concerns, attitudes, lifestyles


Industry Lifecycle Curve

TotalIndustry Sales

Shake-out

Emerging Growth Maturity Decline

Time


Industry Lifecycle Curve (2)

Shake-out Stage

Supply = Demand Competitors leave the(max. slope) arena or are acquired

(Supply > Demand)

Competitors enter the arena(Supply < Demand)


Concentrated vs. Fragmented Industries Concentrated – when most of the industry’s

sales are accounted for by only a few firms The “Big Four” accounting firms audit 96% of

public companies in the U.S. Only three firms make jet engines for the world’s

commercial aircraft; only two make the aircraft Fragmented – when no company has more than a

one-percent share of the market Beauty salons Bookkeepers Plumbers Cement-mixing companies


The Value ChainExample – Wool Suits


Vertical IntegrationBackwards Forwards

Breeding Raw Cloth Cloth Sheep on Wool Mill Wholesaler Tailor Retailer Farm Wholesaler

Dyer Final Customer

Potential New Entrants

Barriers to Entry

Suppliers Rivals Buyers

Substitutes

Sources of CompetitionPorter’s 5-Forces Model of Competitive Threats


Intensity of Rivalry?

Bargaining Power(a) of buyers?

(b) of suppliers?

Barriers to Entry?

Threat of Substitutes?

Strategic Group Map

Breadth ofproduct line

Geographic scope

Very broad

narrow

domestic international

•A two-dimensionaldiagram with axesthat separate out rivalsin an industry•Plot competitors onthe diagram•Group ones that are“close” to each other onthe map – they are saidto belong to similarstrategic groups•Often, circles around thegroups represent combinedsales of companies in them


Critical-Success-Factor Analysis

A critical success factor (CSF) is something a company must do well in order to succeed in the industry.Example: XYZ Industry

Competitors Critical Success Factor Co. A B C D E Engine technology 8 9 9 7 6 10 Styling and features 9 8 9 8 7 9 Brand reputation 10 8 9 7 6 9 Strong distribution/dealer network 7 8 9 6 7 10 Efficient manufacturing 6 8 8 7 8 9 Effective marketing 9 8 9 8 7 9


Assessing Industry Attractiveness

Example: XYZ industry

Industry Factor Weight Rating Product Sales growth rate 25 0.3 7.5 Market size 20 0.6 12.0 Industry profitability 18 0.8 14.4 Intensity of competition 15 0.7 10.5 Barriers to entry 12 0.9 10.8 Degree regulated 10 1.0 10.0

----- ---- ------TOTALS 100 65.2


Assessing Competitive Strength

Example: Your Company Under Analysis

Competitive Factor Weight Rating Product

Technological innovativeness 22 0.6 13.2

Marketing/distribution 20 0.9 18.0

Caliber of management 18 0.9 16.2

Relative cost position 17 0.6 10.2

Brand reputation 12 1.0 12.0

Financial strength 11 0.7 7.7 ----- ------

TOTALS 100 77.3


G. E. Matrix

High

Medium

Low

Weak Avg. Strong

Divest

Invest

Competitive Strength

IndustryAttractiveness

Your Company


Market and Customer Analysis Covered in your Marketing course . . .

Identify the target market/segment Identify customer needs (present and future) Identify principal market segments How does the customer buy (channels)? What are the channel markups? Extent to which customer responds to advertising and

promotion, and which media How price-sensitive is the customer?


Environmental Analysis Categories to Scan Continually

Demographic changes -- regional population shifts, birth rates, age cohorts, etc.Impending regulatory/legislative changes -- healthcare reform, tax bills, etc.Political changes (esp. at election time) -- tax changes, party platforms, etc.Lifestyle/attitude trends -- fitness, disease prevention, seeking adventure, etc.Sociocultural trends -- consumer activism, greater tolerance of diversity, etc.Economic climate and trends -- extended recession, devaluation, etc.Technological advances -- industry & federal spending on R&D, new patents, etc.

All the above, for each foreign country in which the company does business.

Ask, “What changes/trends affect my company either negatively or positively?” The larger the potential impact, the

more specific data are needed about the trend/change.


Phase Coverage in Class


Strategic Issues

Identifying Strategic Alternatives

Arguing For and Choosing a

Preferred Strategy

Recommendations

Short-Term Plans Goals & Objectives

Strategic IntentPrograms

Contingencies

Long-Term Plans Goals & Objectives

Strategic Intent Programs

Contingencies

Situation Analysis

External Review Industry Analysis

Competitive Analysis Market Analysis Environmental

Analysis

Internal Review Financial Analysis

Strengths & Weaknesses

Opportunities & Threats

1. What is thecurrent situation?

2. Where do wewant to go?

3. How can weget there?

I

IIIII

Scope of Phase 1

The group that does Phase 1 on a particular case goes only as far as this point

Phase 1 involves an external analysis of the industry, competition, market, and environment

Includes four tools– Porter’s Five-Forces Model

– G.E. Matrix (including Industry Attractiveness vs. Competitive Strength)

– CSF Analysis

– Strategic Group Map (if applicable)


Financial Analysis

SAM does all the work for you after you have inputted income-statement and balance-sheet data for the given years

You have to select which kinds of financial data to present in order to give a reasonable and complete picture of the company’s recent performance and current financial condition

You end the presentation with a ‘financial conclusion’ slide– Use data from the previous charts shown to support

your conclusion

Situation Analysis Internal

Financial Charts

Begin with revenues and NIAT Show breakdowns of revenues or profits (by product line

or geographical region), if available Should include current or quick ratio (not both), D/E or

D/A ratio (not both), and Z- or Z2-Score (not both) In addition, especially for a smaller company

– Does it have enough cash?– Are its receivables climbing?– Does it have too much invested in inventory?– Where D/A ratio > 100%, show that equity is negative– Any other aspect that is worth pointing out


Altman’s Z- and Z2-Scores

Safe Zone

Gray Area

Bankrupt ZoneManufacturingCompanies

Non-ManufacturingCompanies

2.99

1.81

2.59

1.11

Z-Score Z2-Score


Z-score = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5

Z2-score = 6.5X1 + 3.26X2 + 6.72X3 + 1.05X4a

X1 = WC/Total assets X2 = RE/Total assetsX3 = EBIT/Total assets X4 = Equity/Total debtX5 = Sales/Total assets

Financial Conclusion

The last sheet of the financial analysis part in SAMtw asks you to draw one of the following five conclusions about the company

Has been well managed and performing well, and is in good financial condition

Same as above except for one major bad thing . . . Has had mixed results, indeterminate Same as below except for one major good thing . . . Has been poorly managed, is performing poorly, may be in

serious trouble, should be bankrupt, etc.

And support your conclusions with numbers!


Financial Conclusion Example: Harley-Davidson (1988)

H-D has been performing very well and is financially in good condition

Motorcycle revenues grew an average 23.5%/yr from 1986-88 in a declining industry

NIAT grew 12.7% in 1988 NPM almost doubled from 1.7% in 1986 to 3.2% in 1988 D/E ratio declined 54.5% from 5.5 in 1987 to 2.3 in 1988 It has $52.3M in cash in 1988 Z-Score improved to 3.07 (safe zone) in 1988


Set off the conclusion in a different font and color to stand out. Summarize thesupporting data in the order you showed the charts. Cite statistics.

Company Strengths

Core competencies Cost advantagesfinancial strengths Better advertising campaignsReputation with buyers Product innovation skillsWell-conceived programs Proven managementAccess to economies of scale Ahead on the experience curveProtected from competition Efficient manufacturingProprietary technology Superior technology skills

Financial analysis of recent company performance and condition is also a key component of Internal Company Analysis, and may reveal some strengths and weaknesses.

Don’t use generic strengths (as above), but be specific.Market leadership or increasing market share are never strengths.


Company Weaknesses

No clear strategic direction Falling behind in R&D

Obsolete facilities Product line too narrow

Sub-par profitability because . . . Weak market image

Little or no managerial depth/talent Weak distribution network

Missing key skills/competencies Weak marketing skills

Poor implementation record Unable to finance strategies

Internal operating problems High relative costs

Poor product quality Worsening customer service

Deteriorating union relations Slow development of newproducts


Same notes as for ‘Strengths’ slide

Core Competence and Competitive Advantage Criteria for Core Competence Is the Is the Is the Is thecapability capability capability capabilityvaluable? Rare? costly to nonsubsti- Competitive Performance

imitate? tutable? Consequences Implications

No No No No Competitive Below-averagedisadvantage returns

Yes No No Yes/No Competitive Averageparity returns

Yes Yes No Yes/No Temporary Average +advantage returns

Yes Yes Yes Yes Sustainable Above-averageadvantage returns


Remember to add acolumn for capabilitiesat left-hand side.

Opportunities(Concentration strategies)

Existing

Expanded

New

Existing Improved New

Only Product/Market Issues are Opportunities

Products

Market Development

Product Development

Markets


Threats

Entry of low-cost foreign competitors Adverse shifts in foreign exchange rates and trade

policies Slower market growth Adverse demographic changes Costly regulatory requirements Impending economic downturn Growing bargaining power of buyers and suppliers Changing buyer needs and tastes Rising sales of substitute products Legislation with adverse impact


TOWS Matrix

Strengths Weaknesses

OpportunitiesUse strengths to

exploit opportunities

Seek opportunities that overcome/mitigate

weaknesses

ThreatsUse strengths to avoid/mitigate

threats

Minimize weaknesses or avoid/mitigate threats (hard)


Scope of Phase 2

The group that does Phase 2 on a particular case goes only as far as this point

Phase 2 involves an internal analysis of the company, including financial-analysis charts, a financial conclusion, and a SWOT analysis

Includes four tools– Core-Competence Analysis– The TOWS Matrix– Value Analysis (not shown here) (if applicable)– SPACE Analysis (not shown here) (if applicable)


Key Strategic Issues

A key strategic issue is a…Future event or trend that may have a significant impact on the

firm (e.g., deregulation of an industry, fate of the NAFTA trade agreement) and that should be closely monitored

Decision the firm is considering making that will have a strategic and dramatic impact on it (e.g., merging with another company, changing its strategy, focusing on international operations)

Any strategic plan must address these strategic issues for the simple reason that they constitute

the most important problems and issues the company faces


Sources of Strategic Issues

Most critical external issues * Competition * Industry trends * Market trends * Other trends and threats

Most salient internal issues Strategic * Financial problems Issues * Weaknesses

Opportunities worth considering


Menu of Possible Strategies

Staying in the same business Concentration – Product or market development

Vertical Integration – Forward or backward

Acquisition of or merger with a competitor

Harvest or be acquired

Retrenchment and Turnaround (including Bankruptcy Chapters 11, 13)

Low-cost leadership, differentiation, or focus

Strategic alliances, including joint ventures

Exiting the business Liquidation (including Bankruptcy Chapter 7)

Entering another business Diversification through acquisition – related or unrelated business

Internal diversification


Porter’s Generic Competitive Strategies

Cost Leadership

Differen-tiation

Cost FocusFocused Differen-

tiation

Competitive Advantage

CompetitiveScope

Broad Target

Narrow Target

Source: Michael E. Porter, Competitive Advantage, Free Press, 1985

Lower Cost Differentiation


Low-Cost Leadership and Differentiation – How They Work

Low-Cost Leadership Differentiation

P

P P

C C

C

Internal emphasis External emphasis

Focus on cost drivers Focus on customer needs

Don’t lower prices Don’t let costs rise


Coming up with Strategic Alternatives

The most difficult part of strategic planning– Requires a lot of thought and creativity

The challenge is to devise 2-4 alternatives (bundles)– The minimum is two

– More than four is practically impossible

Must meet four criteria– Mutually exclusive (i.e., doing one means not being able to do

the others)

– Feasible (i.e., doable and internally consistent)

– Lead to success (as defined by the company)

– Address all strategic issues (or delete the ones not addressed)


#1—Expand #2—Broaden #3—Expand the Market the Product Line into Europe

Focus on older males Introduce three new Expand into Europe & women modelsDesign models to Acquire Buell and Trade shows and

appeal to this market offer sport bike 100 roving bikersTrain dealers to Develop technolog. Create dealer networksell to this market advanced engine from scratchInvest in and grow Maintain HR but Maintain HR butHR sales improve its sales improve its salesHeavy advertising Heavy advertising Heavy advertising & promo campaign & promo campaign & promo campaignIncr. prod. capacity & Incr. prod. capacity & Incr. prod. capacity & maintain high quality maintain high quality maintain high qualityIncrease market share Increase market share Maintain U.S. shareFinance thru debt & cash Finance thru debt & cash Finance thru debt & cash

Strategic Alternative Bundles Example: Harley-Davidson (1988)


Choose the Best Alternative

Argue for which one is better or best– hard to do when all are equally good

The choice depends on how each alternative stacks up against selected criteria

Managers that will implement the strategy must be involved in deciding which alternative to pursue


Criteria for Choosing a Successful Strategy

Shareholder Value—Often used as the measure of the effectiveness of strategic planning

Revenues—Particularly appropriate when the firm wants to increase market share

Profitability—Important when earnings or cash flow have been flat or negative, or when the firm is highly leveraged

Investment Required—Does the firm have, or can it acquire, the resources it needs? Does it make sense to be acquired?

Degree of Risk—How certain is the firm to succeed if it undertakes this alternative? Is it risk-averse?


Criteria for Choosing a Successful Strategy (cont.)

Return on investment—ROI is another profitability measure Breakeven point—The sooner the investment is recouped the

better Match with existing company culture—While it may be better

to choose an alternative that does not require changing the culture, the culture may have to change to take advantage of a better alternative

Attainment of a core competence or competitive advantage— This is the secret of being competitive and attaining above-industry-average profits


Criteria for Choosing a Successful Strategy (cont.)

Timing—Is the timing right to implement a particular alternative? Is it better to implement now or later?

Strengthening its value proposition—the key to developing a revenue stream and loyal customers

Strengthening bargaining power—increasing bargaining power with either buyers or suppliers will likely increase profits


Two Types of Criterion

Positively Correlated Revenues Profits Return on investment Shareholder value Gaining or extending a

competitive advantage Strengthening its value

proposition Strengthening bargaining

power

Negatively Correlated Investment required Time to breakeven Competitive retaliation Culture change required Riskiness

(Rate from 0 to +10) (Rate from 0 to –10)


Criteria MatrixExample for Harley-Davidson (1988)


Criteria

Expand the

Market

Broaden Product

Line

Expand into

Europe Revenue Growth P 9 6 5 Profitability P 8 6 6 Investment Required N -5 -8 -6 Degree of Risk N -4 -4 -5 Culture Change N -3 0 -1

Comp. Advantage P 7 6 4 TOTAL 12 6 3

Recommendations Format for Short- and Long-Term Plans

Should include:

Specific measurable objectives to be achieved next year and in three years’ time

– At least Revenues and NIAT

– Perhaps one other that is important (optional)

Strategic Intent Major programs to implement that will achieve the set

objectives and implement the strategy Trigger and contingency pairs -- what could go wrong

(trigger) and what would the firm do differently if that happened (contingency)?

Triggers and ContingenciesCriteria to meet…

Triggers… Must be quantitatively expressed The cause should be externalContingencies… Must address (alleviate) the trigger Cannot renege on the chosen strategy Must be something different from what the

company is currently doing Must be operational and implementable

quickly (perhaps within 1-3 months)

Scope of Phase 3

Phase 3 ends at this point The group will continually work at improving its list of

strategic issues and bundles in class as Phases 1 and 2 are unfolding

It will then present its strategic issues and bundles for class discussion

We all understand it’s a “work in process” Strive for understanding, not perfection

Include a criteria matrix showing your choice of a preferred bundle (the class may disagree)

Include short- and long-term recommendations


The Vision StatementWhat Do We Aspire to Be?

Typically created for five or ten years out Can include numbers (objectives) or not Typically created by the organization’s

leader (sometimes by the top team) Must be sold to the rest of the organization

Must be realistic (possible to attain) and hence worth striving for

Must know when it has been achieved

The Mission Statement How Should We Do Business? Our “Raison D'être”

Should encompass the company’s current business and future strategy

Should include its value proposition (products or services offered to which target market)

Should include what makes the company special

How it creates value in order to win and keep its customers’ business

Creating Vision/Mission Statements One of the most challenging tasks leaders/managers

undertake Most don’t do it well—they consider it time wasted Many are unable to think clearly enough and get too frustrated If you cannot do it, you don’t know your business well enough

Leaders must get the commitment of the whole organization to the vision/mission statements

Key people should participate in its preparation Should not be revised for several years, or until it no longer fits

what the company is doing

When to Create Them?

After doing a strategic analysis Because the strategy and direction of the company

may change Because you have been able to check whether the

existing vision and mission statements need changing

Otherwise, the vision and mission statements essentially govern what the company does (or doesn’t do) next

That’s it, folks!

The whole process will come to life as you start to do the strategic analyses yourselves…

Documents

How to Do a Strategic Analysis Dr. Stan Abraham 2009-10