Strategic analysis internal external
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- 3. Long term focus Sustainable Competitive Advantage Relevant, accurate, timely market information is the key Analysis of Self, Customers, Competitors, other interest groups 19/07/09
- 4. Product Portfolio Analysis BCG Matrix GE 9 Cell Matrix External Environment Analysis Porter’s Five Forces Strategic Mapping Industry Spectrum Internal Analysis of Company SWOT Value Chain Analysis
- 5. BOSTON CONSULTING GROUP (BCG) MATRIX Developed by BRUCE HENDERSON in the early 1970’s. According to this technique, businesses or products are classified as low or high performers depending upon their market growth rate (cash usages) relative market share (cash generation) 19/07/09
- 6. Market share is the percentage of the total market that is being serviced by your company, measured either in revenue terms or unit volume terms. RELATIVE MARKET SHARE (RMS) RMS = Business unit sales this year Leading rival sales this year 19/07/09
- 7. Market growth rate is used as a measure of a market’s attractiveness. MGR = Individual sales - individual sales this year last year Individual sales last year Markets experiencing high growth are ones where the total market share available is expanding, and there’s plenty of opportunity for everyone to make money. 19/07/09
- 8. BCG matrix is a product portfolio planning tool in which a company’s business units/ products can be classified in to four categories: Stars Question marks Cash cows Dogs 19/07/09
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- 10. Stars are leaders in business. It leads to large amount of cash generation. They also require heavy investment, to maintain its large market share. 19/07/09
- 11. CASH COWS Low growth High market share They are foundation of the company and the stars of yesterday. They generate more cash than required. They extract the profits by investing as little cash as possible They are located in an industry that is mature, not growing or declining. 19/07/09
- 12. DOGS Low growth, Low market share Dogs are the cash traps. Dogs do not have potential to bring in much cash. Number of dogs in the company should be minimized. Business is situated at a declining stage. 19/07/09
- 13. QUESTION MARKS High growth , Low market share Most businesses start of as question marks. They will absorb great amounts of cash if the market share remains unchanged, (ie. low). Why question marks? Question marks have potential to become star and eventually cash cow but can also become a dog. Investments should be high for question marks. 19/07/09
- 14. To assess : The CASH FLOW The development cycles of products Resource allocation and divestment decisions 19/07/09
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- 17. Stars •Hotels •Packaging. •FMCG- Sunfeast •Agri business. ? •FMCG- Others Cows •FMCG-Cigarettes Dogs •Maybe ITC Infotech. 19/07/09
- 18. BCG MATRIX uses only two dimensions, Relative market share and market growth rate. High market share does not mean profits all the time. Business with low market share can be profitable too. Problems of getting data on market share and market growth. 19/07/09
- 19. Developed by GE, USA Overcomes key limitation of BCG matrix Also called Industry Attractiveness- Competitive Strength Matrix 19/07/09
- 20. Competititve strength: market share, brand value, profit margins, cost structure, loyal customer base Inc attractiveness: growth rate, nature of competition, entry barrier, market size, substitution, govt regulations 19/07/09
- 21. Industry Attractiveness-Competitive Strength Matrix Low High Medium AverageStrong Weak 6.7 3.3 10.0 1.0 1.03.36.7 High priority for investment Medium priority for investment Low priority for investment Competitive Strength 19/07/09
- 22. Internal cash flows are inadequate to fully fund needs for working capital and new capital investment Parent company has to continually pump in capital to “feed the hog” Strategic options Aggressively invest in attractive cash hogs Divest cash hogs lacking long-term potential 19/07/09
- 23. Generate cash surpluses over and above what is needed to sustain present market position Such businesses are valuable because surplus cash can be used to Pay corporate dividends Finance new acquisitions Invest in promising cash hogs Strategic objectives Fortify and defend present market position Keep the business healthy 19/07/09
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- 25. Given by – Michael Porter Understand how industry structure drives competition and level of industry profitability Evaluate industry attractiveness Identify opportunities to change industry structure 19/07/09
- 26. Porter’s Five Forces Model Suppliers Substitutes Buyers Potential Entrants Firm Rivalry 19/07/09
- 27. Threat of Entry & Entry Barriers Economies of Scale Product Differentiation Cost Advantage Independent of Scale Contrived Deterrence Government Regulation 19/07/09
- 28. Economies of Scale Cost-volume relationship Ex. Steel 19/07/09
- 29. Product Differentiation Brand identification Customer loyalty Trade off between Cost of differentiation & potential return 19/07/09
- 30. Cost Advantages Independent of Scale Proprietary Technology Know-how & competence Favourable access to RM Favourable geo. locations Learning or Exp. curve 19/07/09
- 31. Contrived Deterrence Investments by the incumbents with the sole objective to deter entry Sending signals 19/07/09
- 32. Government Policy Regulation - FERA, MRTP, Licensing Direct & Indirect Policy Interventions 19/07/09
- 33. Other Barriers to Entry Capital requirements Size of investment & risks Switching cost of buyers Access to existing distribution channels Entrant’s expectation abt. retaliation 19/07/09
- 34. Exit Barriers Economic Specialised assets - high transfer cost Fixed costs of exit Strategic inter-relationships & importance - commitment Emotional barriers Government and/or social restrictions 19/07/09
- 35. Threat of Substitute Products that can serve the same utility - satisfy same customer needs Substitutes can replace an industry’s products Potentially dangerous substitutes are those that are: improving price-performance trade off produced by more profitable industries 19/07/09
- 36. Bargaining Power of Suppliers A supplier group is more powerful if - Dominated by a few firms & more concentrated than the industry it sells to Highly differentiated products No threat of substitute supplies Industry is not an important customer Buying firms face major switching costs It poses a credible threat of forward integration 19/07/09
- 37. Bargaining Power of Buyers Relative volume purchased by a given buyer Cost of purchases as a fraction of tot. purchases Importance of the product to buyer Availability of substitutes Whether product is standard & undifferentiated or not Switching costs faced by both buyers and sellers Whether buyer poses a credible threat of backward integration Information available to buyer 19/07/09
- 38. Intensity of Rivalry Many equally balanced firms Slow industry growth High fixed costs, high storage cost Low product differentiation Productive capacity added in large increments High strategic stake for some firms High exit barriers 19/07/09
- 39. Strategic Implications of the Five Competitive Forces Competitive environment is unattractive from the standpoint of earning good profits when: Rivalry is strong Entry barriers are low and entry is likely Competition from substitutes is strong Suppliers and customers have considerable bargaining power 19/07/09
- 40. Main Issue: How key structural features determine rel. strength of diff. comp. Forces Inter-industry variations in rel. strength of five forces Short-run factors affecting competition & profitability Diff. betn. established competitors & sub., betn. Existing firms & potential entrants - extended rivalry 19/07/09
- 41. Concentration Many firms A few firms Two firms One firm Entry and Exit Barriers Product Differentiation Information No barriers Significant barriers High barriers Homogeneous Product Potential for product differentiation Perfect Information flow Imperfect availability of information Perfect Competition Oligopoly Duopoly Monopoly
- 42. Basic Industry Economics Industry structure Concentration ratio Degree to which industry sales are dispersed over the leading firms 19/07/09
- 43. One technique for revealing the different competitive positions of industry rivals. Which Companies are in Strongest / Weakest Positions? A strategic group consists of those rivals with similar competitive approaches in an industry 19/07/09
- 44. Firms in same strategic group have two or more competitive characteristics in common Sell in same price/quality range Cover same geographic areas Be vertically integrated to same degree Have comparable product line breadth Emphasize same types of distribution channels Offer buyers similar services Use identical technological approaches 19/07/09
- 45. Procedure for Constructing a Strategic Group Map STEP 1: Identify competitive characteristics that differentiate firms in an industry from one another STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics STEP 3: Assign firms that fall in about the same strategy space to same strategic group STEP 4: Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales 19/07/09
- 46. Guidelines: Strategic Group Maps Variables selected as axes should not be highly correlated Variables chosen as axes should expose big differences in how rivals compete Variables do not have to be either quantitative or continuous Drawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relative sizes of each strategic group If more than two good competitive variables can be used, several maps can be drawn 19/07/09
- 47. Interpreting Strategic Group Maps Driving forces and competitive pressures often favor some strategic groups and hurt others Profit potential of different strategic groups varies due to strengths and weaknesses in each group’s market position The closer strategic groups are on map, the stronger the competitive rivalry among member firms tends to be 19/07/09
- 48. Strategic Groups And Rivalry Among Firms The presence of several strategic groups will generally increase rivalry Firms will have differing preferences about risk taking, time horizon, price levels, quality levels, and so on and will thus increase the likelihood of repeated outbreaks of warfare. The industry with a complicated map of strategic groups will tend to be more competitive as a whole than one with few groups. 19/07/09
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- 50. SWOT Analysis Resource Based View Value Chain Analysis 19/07/09
- 51. Strength Weakness Opportunities Threats 19/07/09
- 52. What to look for in SWOT Strengths – - A powerful Strategy - Core competencies in…. - Strong Financial Condition - product innovation capabilities - strong advertising and promotion - wide geographic coverage - superior intellectual capital and many more…. 19/07/09
- 53. SWOT cont… Weaknesses – - No clear strategic direction - resources that are not well matched with industry - too narrow product line - weak balance sheet - lack of innovation – product or process - In the wrong strategic group - underutilization of capacities 19/07/09
- 54. SWOT cont… Opportunities - openings to win market share - sharp rising buyer demand - Entering into alliances, JV’s - Integration- forward and backward - Emerging technologies 19/07/09
- 55. SWOT Cont… Threats – - Increasing intensity of rivalry - slowdown in market growth - new potential entrant - shift in buyer needs - restrictive trade practices 19/07/09
- 56. Systematic approach to examining the development of competitive advantage. M. E. Porter in his book, Competitive Advantage (1980). A series of activities that create and build value. They culminate in the total value delivered by an organization. 19/07/09
- 58. Primary Activities Support Activities •Inbound Logistics •Operations •Outbound Logistics •Mktg and Sales •Service •Procurement •Technology Development •Human Resource Management (HRM) •Firm Infrastructure 19/07/09
- 59. Value Chain of Firm •The combined costs of all the various activities in a company’s Value Chain define company’s internal cost structure •The objective of value chain analysis is to develop data for comparing a company’s cost activity by activity against cost’s of key rival’s •Identify and remove the sources of cost disadvantage and explore the sources of cost advantage 19/07/09
- 60. Value Chain of Rivals differs Difference in strategy Difference in evolution and expertise Difference in process or technology Difference in level of integration 19/07/09
- 61. Value chain for industry Activities, Costs & margins of suppliers Supplier Related Value Chains Internally performed activities, costs and margins Activities, costs and Margins Of forward channels A company’s own Value chain Buyer or end user value chain Forward Channel's value chain A company’s cost competitiveness depends not only on internally performed activities, costs and margins but also on costs in the value chains of its suppliers and forward channel allies. 19/07/09
- 62. Reliance Model Petro chemical Polyester Fabric Readymade 19/07/09
- 63. So, What next? Translating performance of VC activities into Competitive Advantage Company Performs activities in its Value chain Competencies & Capabilities Gradually Emerge in Certain important VC activities Company Proficiency in Performing 1 or 2 VC activities Rises to level of core competence Company proficiency in Performing a Core Competence Continues to Build & evolves Company Gains a basis For ‘Sustainable Competitive Advantage’ 19/07/09