How to Do a Strategic Analysis Dr. Stan Abraham Fall 2003

How to Do a Strategic Analysis

Dr. Stan AbrahamFall 2003

What Is Strategic Analysis?

One person’s or one group’s attempt at arriving at a strategy, objectives, and key programs for a company– Also refers to performing an intermediate

analytical task For example, calculating the effect on

shareholder value of a proposed strategy

– 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 corporations 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?

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

What are all the possible and feasible directions we could go?– 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 strategy or strategies 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

Strategic Planning vs. Strategic Management

Strategic-planning process Operational planning

ImplementationEvaluation & control

Strategic management

Strategic thinking drives the process

Strategic analysis informs the process

Figure 1.1 – page 20

A Strategic Analysis Model – that works!

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 model

Competitive 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 Five” 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?

Porter’s Five-Forces ModelExample: The U.S. Motorcycle Industry

Intense rivalry among manufacturers Getting stronger as the market declines and technological

competition heats up

Industry has bargaining power Because most manufacturers are differentiated

Barriers to entry are quite high Industry not very attractive, intense competition, takes time to

develop a brand image and dealer network, requires technical know-how, and substantial capital

Biggest substitute threat is the car Especially as people get older and have families


Competitive Intelligence Competitive Positioning of Major Rivals

Com- Geographic Strategic Competitive Strategic Competitive petitor Scope Intent Position Posture Strategy

A Local Be the leader Getting stronger Mostly offensive Low-cost B Regional Overtake leader Well entrenched Mostly defensive leadership C National Stay in top 5 Stuck in middle Combo (off./def.) Market niche: D Multicountry Go into top 10 Seeking different Aggressive - High end Etc. Global Climb 1-2 places market position risk-taker - Low end

Overtake a Losing ground Conservative - Specialist rival Retrenching to follower Differentiation Maintain a defensible - Quality position position - Service

- etc.


Critical-Success-Factor Analysis

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

Competitors Critical Success Factor H-D A B C D Honda 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: The motorcycle 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: Harley-Davidson, Inc.

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

H-D


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?

Situation AnalysisExternal

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.Current 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 IV

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 these four tools: Porter’s 5-Forces Model, G.E. Matrix (Industry Attractiveness vs. Competitive Strength), CSF Analysis, Strategic Group Map


Company Financial Analysis

The last sheet of the financial analysis part of SAMtw asks you to draw one of the following five conclusions that 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!

Situation Analysis Internal

Financial Summary for H-D

H-D is 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, and NROS almost doubled from 1986 (1.65% to 3.16%)

D/E ratio declined 54.5% from 5.5 in 1987 to 2.3 in 1988

Z-Score improved to 3.07 (safe) in 1988 It has $52.3M in cash in 1988


Financial Summary for H-D

Some areas of concern in 1988, but none of these are considered “major”

A/R increased by 37% and average collection period by 24%

Quick ratio is 0.83 (needs to be >1.0) Inventory may be too high at $100M

HR sales grew only 2.6%


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

Harley-Davidson’s Z-Score

3.0

1.8

1987 1988

2.68

3.19Safe

Gray

Bankrupt

1987 1988X1 0.169 0.197X2 0.054 0.117X3 0.147 0.174X4 0.198 0.383X5 1.800 1.989

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


Company Potential Strengths

Core competencies Cost advantagesAdequate financial resources 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 is also akey component of Internal Company Analysis, and may reveal some strengths and weaknesses


Strengths of H-D

High quality built into products Impressive sales growth in declining industry Strong brand image, strengthened through licensing

program Cult following and HOGs (loyal customers) Strong marketing and promotion programs High employee morale Good financial condition Strong management team


Company Potential 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


Weaknesses of H-D

Cost structure probably too high Innovation doesn’t seem to be a priority Narrow product line Vulnerable to attack in its one segment HR not growing fast enough Receivables and collection days increasing Inventory increasing


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


H-D Core Competence and Competitive Advantage Customer loyalty and brand image

– Valuable? Yes– Rare? Yes– Costly to imitate? Yes– Nonsubstitutable? Yes

A core competence and a sustainable competitive advantage Large-displacement motorcycles

– Valuable? Yes– Rare? Yes (for now)– Costly to imitate? No– Nonsubstitutable? Yes

Yields only a temporary competitive advantage


Potential Opportunities(Concentration strategies)

Existing

Expanded

New

Existing Improved New

Only Product/Market Issues are Opportunities

Products

Market Development

Product Development

Markets


Opportunities for H-D

Enter the smaller-displacement segments with new models

Introduce a sport bike Expand the market to include women and

older men (35+) Expand into Europe Introduce a new model with a more

technologically advanced engine


Potential External 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


External Threats for H-D

Stiffening noise and air-pollution regulations, enactment of the helmet law

Shrinking of the 15-24 yr old segment Upswing in currency-exchange rates Honda and others developing a more

advanced engine and other innovations Honda and others reentering the large-

displacement segment


Other Key Questions to Answer

Does the corporate culture support or hinder achieving the strategy?

How innovative is the company?

How quickly are new products produced?

How cost-competitive is the company?

Is the company flexible enough for these changing times?

Does the company have a sustainable competitive advantage?

Is the quality of the company’s products/services high enough?

Are managers well served by the M.I.S.?


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

Includes financial-analysis charts, a financial conclusion, and a SWOT analysis

Includes these three tools: Core-Competence Analysis, Value Analysis, and SPACE Analysis

Situation AnalysisInternal

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, signing 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 weaknesses Issues * Weaknesses, problems

Other options 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, p. 12

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


Strategic Issues for H-D

Will other competitors reenter the large-displacement segment?

Will Honda bring out a technologically advanced engine soon?

Will the helmet and noise- and emission-control laws be enacted soon?

Is the market declining in Europe too? Will the economy remain favorable?


Strategic Issues for H-D (cont.)

Should H-D: Broaden its product line and enter the smaller-

displacement segments? Expand its market to include women and older

men? Acquire Buell and offer a sport bike? Expand into Europe? Develop a technologically advanced engine? Invest in, maintain, or divest Holiday Rambler?


Coming up with Strategic AlternativesThis is the most difficult part of strategic planning

– Requires a lot of thought and creativity

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

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

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

– Lead to success (as defined by the company)

– Address all strategic issues


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

Do mkt. research Introduce 3 models Expand into EuropeDesign models to Acquire Buell and Trade shows and

appeal to this mkt. offer sport bike 100 roving bikersTrain dealers to Develop technolog. Create dealer networksell to this mkt. 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 campaignContinue producing Continue producing Continue producing w/ high quality w/ high quality w/ high qualityIncrease mkt. share Increase mkt. share Maintain U.S. share

Strategic Alternatives for H-D


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 certain criteria

Managers who must implement the strategy should 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

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


Two Types of Criterion

Positively Correlated Revenues Profits Return on investment Shareholder value Attainment or

improvement of a core competence or competitive advantage

Negatively Correlated

Investment required Time to breakeven Competitive retaliation Culture change req’d Riskiness

(0 to +10) (0 to –10)


Criteria

Expand the

Market

Broaden Product

Line

Expand into

Europe Revenues P 9 6 5 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 4 0 -3

Criteria Matrix for H-D


Scope of Phase 3

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

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

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 at the end with a preliminary assessment of the bundles


Recommendations Format for Short- and Long-Term Plans

Should include:

Strategic Intent and Goals Specific measurable objectives to be achieved next year

and in three years’ time

– At least revenues and NIAT

– 1-3 others that are important Specific programs to implement that will achieve the set

objectives (together with operational objectives, budgets, and schedules for each program)

Trigger and contingency pairs -- what could go wrong (trigger) and what would the firm do differently if that happened (contingency)?

Triggers and Contingencies

Triggers… Must be quantitatively expressed Stated one at a time (no “dual” triggers)Contingencies… 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

1989 Recommendationsfor H-D (using #1 bundle)

Strategic Intent To become #1 in the industry eventually, and to

become #4 in three years’ timeGoals To increase market share and broaden the appeal of

the brandObjectives Revenues: 13.0% growth NIAT: 13.5% growth D/E ratio: < 2.0

1989 Recommendationsfor H-D (cont.)Programs Do market research to discover what would appeal to

this expanded market Develop 1-2 new models for this target market Create new ad and promotion campaigns Retrain dealers to sell to this new market Continue to push its flagship motorcycleTrigger: If. .NIAT lags projections by 15%Contingency: . . . Then H-D should aggressively collect

its receivables and further tighten control of costs

Strategic Intent and Goals: Unchanged

Objectives:

Objective 1989 1990 1991

Revenues 13.0% 15.0% 17.0%

NIAT 13.5% 14.0% 15.0%

D/E ratio <2.0 <2.0 <2.0

1991 Recommendations for H-D

1991 Recommendations for H-D (cont.)

Programs Increase production capacity to meet expanded

demand Expand domestic dealer network Expand membership into HOGs Continue other short-term programsTrigger: If . . . revenues lag projections by 15%, Contingency: . . . then H-D should offer additional

incentives and discounts to customers

The Vision StatementWhat Do We Aspire to Be?

Typically created for a period of ten years Can include numbers (objectives) or not Typically created by the organization’s

leader Must be sold to the rest of the organization

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

The Mission Statement How Should We Do Business? What’s Our Raison D’Etre?

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 more 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 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– A good time 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 Fall 2003