STRATEGIC MANAGEMENT

UNIT – II

Environmental Analysis of a Firm

Competition Analysis – Porter’s Five Force Model

Internal Analysis of a firm

- SWOT Matrix

- Value Chain Analysis

Core Competence

Critical Success Factors (CSF)

Scenario Planning

ENVIRONMENTAL ANALYSIS OF A FIRM

COMPETITORS

OWNERS

INTERNAL ENVT

TOP MANAGERS

EMPLOYEES

FIRM

IMMEDIATE EXTERNAL ENVT

SUPPLIERS

GOVT. AGENCIES

CUSTOMERS

REMOTE EXTERNAL ENVT

SOCIAL

CHANGE

POLITICAL FACTORS

TECHNOLOGY

DEVELOPMENT

PoliticalEnvironment

InternationalEnvironment

Socio – CulturalEnvironment

TechnologicalEnvironment

EconomicEnvironment

EnvironmentalFactors

ECONOMIC ENVIRONMENT

GENERAL ECONOMIC CONDITIONS

1. Economic system

2. National Income & its distribution

3. Monetary policy

4. Fiscal policy

FACTOR MARKET OR SUPPLIER COMPONENT

1. Natural resources

2. Infrastructure facilities

3. Raw material & supplies

4. Plant & equipment supplies

5. Financial facilities

6. Manpower & productivity

POLITICAL – LEGAL ENVIRONMENT

Political system, political parties and their ideologies, stability etc

Defence and foreign policies, maintenance of external relationships with other countries etc

Legal rules, their formulation, implementation, efficiency and effectiveness

POLITICAL ENVIRONMENT

PROMOTINGENVIRONMENT

REGULATINGENVIRONMENT

Stimulation of business through the provision of various facilities, incentives, etc

Puts certain restrictions on the operations of business organization

TECHNOLOGICAL ENVIRONMENT

It includes inventions & techniques which affect the ways of doing things

It can create new markets & new business segments

It can change relative competitive cost position of the organization

SOCIO – CULTURAL ENVIRONMENT Consists of attitudes, beliefs, desires, expectations, education and

customs of the society at a given point of time

Expectations of the society from the business

Attitudes of society towards business

Views towards achievement of work

Views towards customs, tradition

Level of education

INTERNATIONAL ENVIRONMENT

Economic liberalization

Competition from MNCs

Opening operations abroad

COMPETITION ANALYSIS – PORTER’S FIVE FORCE MODEL

Developed by Michael Porter

Competitive forces determine profitability

RIVALRY AMONGEXISTING

FIRMS

POTENTIAL ENTRANTS

SUBSTITUTES

SUPPLIERS BUYERS

PORTER’S FIVE FORCE MODEL

Threats of entry

Bargaining power of buyers

Threat of substitute products

Bargaining power of suppliers

THREAT OF NEW ENTRANTS

New entrants bring new capacity, the desire to gain market share and have substantial resources

The extent to which there are high ‘entry barriers’ is an indication of strategic strength

Barriers to entry

1. Economies of scale

2. Product differentiation

3. Capital reqiurements

4. Access to distribution channels

5. Govt. policy

BARGAINING POWER OF BUYERS If there is a powerful buyer group, there will be buyer’s market and the producer’s

profits will suffer

Powerful buyer market exists when

1. If it is concentrated or it purchases in large volume

2. If the products of the industry are standard or undifferentiated. Eg: Industrial products

3. If the products sold by the industry form a component of its product and represents a significant proportion of its costs. Eg: TV picture tubes, automobile components

4. If buyers earn low profit, they are more price sensitive

5. If quality is un-important to buyers

6. If buyers pose a problem of backward integration. Eg: Textiles, automobiles

BARGAINING POWER OF SUPPLIERS

Can exert bargaining power by raising prices of goods and services

A supplier group is powerful when

1. Few suppliers in the market

2. Product of suppliers are unique or differentiated

3. Switching cost is high

4. No substitutes

5. Threat of forward integration by suppliers

6. If the target buyer group’s dd for product is insignificant

SUBSTITUTE PRODUCTS

Amount of competition depends on the substitutability of products Cheaper and better quality substitutes

RIVALRY AMONG EXISTING FIRMS

Competition among different players is the most crucial factor

It is increasing market share at the cost of competitors

Numerous competitors in the industry and all try to increase sales and market share

Industry growth is slower

Lack of product differentiation

Urgency to sell to avoid product obsolescence

Exit barrier is high if investment is locked up.

INTERNAL ANALYSIS OF FIRM

ENVIRONMENT SCANNING

INTERNAL ANALYSIS EXTERNAL ANALYSIS

STRENGTH WEAKNESS OPPORTUNITIES THREATS

SWOT MATRIX Popular tool for analysis of the overall strategic position of a business.

Simple tool

Relationship in SWOT analysis is represented by a 2x2 matrix

The matrix identifies the Strength, Weakness, Opportunities and Threat of a firm

S & W – Positive considerations

W & T – Negative considerations

S

POSITIVE NEGATIVEI

N

T

E

R

N

A

L

E

X

T

E

R

N

A

L

Patents

Strong brand name

Good reputation

Cost advantage

Exclusive access to high grade natural resources

Favourable access to distribution networks

Lack of patent protection

Weak brand name

Poor reputation

High cost structure

Lack of access to best natural resources

Lack of access to key distribution channels

An unfulfilled customer need

Arrival of new technologies

Loosening of regulations

Removal of international trade barriers

Shifts in consumer tastes

Emergence of substitute products

New regulations

Increased trade barriers

S W

O T

SWOT MATRIX SO strategies pursue opportunities that are a good fit ti the co’s

strengths

WO strategies overcome weakness to pursue opportunities

ST strategies identify ways that the firm can use its strength to reduce its vulnerability to external threats

WT strategies establish a defensive plan to prevent the firm’s weaknesses from making it highly susceptible to external threats

ASSESSING INTERNAL ENVIRONMENT THROUGH FUNCTIONAL APPROACH AND VALUE CHAIN

Value chain analysis describes the activities the organization performs and links them to the orgn’s competitive position

It evaluates which value each activity adds to the orgn’s product/service

Activities classified into primary and support activities.

VALUE CHAIN ANALYSIS

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

PROCUREMENT

INBOUND

LOGISTICSOPERATIONS OUTBOUND

LOGISTICS

MARKETING

& SALES

MARGIN

MARGIN

PRIMARY ACTIVITIES

S

U

P

P

O

R

T

A

C

T

I

V

I

T

I

E

S

SERVICE

VALUE CHAIN ANALYSIS

Primary ActivitiesInvolved in creation of product / service

Core activities

Support ActivitiesProvide support to effective performance of primary activities

VALUE CHAIN ANALYSIS

PrimaryActivities

Inbound LogisticsTransportation

Material HandlingWarehousing

Inventory Management

OperationsManufacturing

AssemblingTesting

Packaging

Outbound LogisticsStoring

Physical Distribution

Marketing & SalesAdvertising

Sales promotionChannel selection

Pricing

ServiceInstallation

After sales serviceSupply of parts

Training to customers

VALUE CHAIN ANALYSIS

SupportActivities

Firm InfrastructureGeneral Management

AccountingFinance

LegalSecretarial

HRMHR PlanningRecruitment

SelectionDevelopment

Technology DevelopmentInnovation

Development

ProcurementObtaining Inputs,Raw materials,

Machinery

CORE COMPETENCE Strength that is unique to the firm

Set of unique internal skills, processes or systems

Inimitable by competitors

Differentiates the business from other similar businesses

Adds value to customer’s products

Mainly Technology based

Present at grass root level of product

Eg : TATA & HUL

EXAMPLES OF CORE COMPETENCE

Sony – miniaturisation

Honda – engines for cars, motor cycles, lawn movers, generators

Canon – optics, imaging, microprocessor controls

CRITICAL SUCCESS FACTORS

Feature of a firm that becomes critical to success

Areas where the firm must excel to outperform competitors

Areas that must receive continuous management attention

CSF differs from industry to industry

AREAS OF CSF Industry characteristics

Petroleum – CapitalFMCG – Sales promotion, distribution

Competitive strategy & industry position

Environmental factorsBSNL – De-regulation & Customer service

Temporal factors

Managerial position

CRITICAL SUCCESS FACTORS - Examples

Improved productivity

High employee morale

Improved product / service quality

Increased earnings per share

Growth in market share

Completion of new facilities

CSF in different industries

Tooth paste industry

Food processing industry

Shoe industry

Automobile industry

Courier service

Form

Flavor

Foam

Freshness

Distribution network

Promotion

Brand loyalty

Quality

Packaging

Distribution network

Sales promotion

Quality

Cost efficiency

Sophisticated retailing

Product image

Product mix

Styling

Strong dealer network

Manufacturing cost control

Meeting envt standards

Speedy dispatch

Reliability

Price

SCENARIO PLANNING Future trends can be forecasted to a certain extent but cannot be

defined accurately

Strategists should develop alternate scenarios

Scenarios consist of sensing, interpreting, organising and bringing diverse info about the future

Scenario Development Process

Verify potentialFuture events

Select CriticalIndicators

Forecast eachindicator

Write Scenarios

Prepare Background

Establish past Behavior for each indicator