Strategy Analyzing & Preparation (part2)

Outline of the Lecture Input stage with three methods IFE EFE CPM KuangChiu Huang

Strategy-Formulation Analytical Framework Input stage External Factor Evaluation (EFE) Internal Factor Evaluation (IFE) Competitive Profile Matrix (CPM) Matching stage SWOT BCG IEM SPACE GRAND Decision stage Quantitative Strategic Planning Matrix (QSPM) KuangChiu Huang

Basic input information for the matching & decision stage matrices Stage1: The Input Stage Basic input information for the matching & decision stage matrices Requires strategists to quantify subjectivity early in the process Good intuitive judgment always needed KuangChiu Huang

IF, EF and CF in Stage 1 Internal Factor Evaluation Matrix (IFE) Stage 1: The Input Stage External Factor Evaluation Matrix (EFE) Competitive Profile Matrix (CPM) KuangChiu Huang

Stage1: Internal Factor Evaluation What: a strategic management tool for auditing major strengths and weaknesses in functional areas of a business Why: subjective method but adding some numbers into the concept How: Five Steps KuangChiu Huang

Key internal factors: Weights: Rating: Multiply: Sum: IEF: How (Five Steps) Key internal factors: Weights: Rating: Multiply: Sum: KuangChiu Huang

IFE: Step1 Key Internal Factors Conduct internal audit Identify both strengths and weaknesses List 10~20 Key internal factors The more the better As objective as possible KuangChiu Huang

IFE: Internal Audit (1) The process of the internal audit provides a unique opportunity for the participants to more fully realize the importance of their work as well as that of their peers the executive team the opportunity to fully access the strengths and weaknesses within their organization KuangChiu Huang

IFE: Internal Audit (2) Core business The business culture Distinctive competencies Competitive advantages Financial situation Incentive & employee morale Staffing level & productivity per employee Products & service offering KuangChiu Huang

IFE: Step 2 Weights Assign a weight that ranges from 0.00 to 1.00 to each factor Indicates the relative importance of the factor factors with the greatest importance should be assigned the highest weights The sum of all weights is equal to 1.00 KuangChiu Huang

IFE: Step 3 Rating Assign 1 to 4 for each factor Rating = 1: major weakness Rating = 2: minor weakness Rating = 3: minor strength Rating = 4: major strength KuangChiu Huang

IFE: Step 4 Multiply & Step 5 Sum Multiply each factor's weight by its rating Provide a weighted score for each factor Step 5: sum the weighted scores for each factor provides the total weighted score  KuangChiu Huang

Example: IFE Matrix KuangChiu Huang

Stage1: External Factor Evaluation What: a strategic management tool for auditing major opportunities and threats in functional areas of a business Why: subjective method but adding some numbers into the concept How: Five Steps KuangChiu Huang

Key external factors: Weights: Rating: Multiply: Sum: EFE: How (Five Steps) Key external factors: Weights: Rating: Multiply: Sum: KuangChiu Huang

EFE: Step1 Key Internal Factors Conduct external audit Identify both strengths and weaknesses List 10~20 Key external factors The more the better As objective as possible KuangChiu Huang

EFE: External Audit Purpose: develop a finite list of opportunities could benefit a firm and threats should be avoided Five key external forces: Economics page 79 Social, cultural, demographic & environmental Page 84 Political, legal, governmental page 87 Technological page 90 Competitive Porter’s Five Forces KuangChiu Huang

EFE: External Audit Identify factors out of control from a single firm Purpose: develop a finite list of opportunities could benefit a firm and threats should be avoided Five key external forces Relationship between external forces & an organization Key factors: Varying over time Vary by industry KuangChiu Huang

Identify Factors Out of Control Increased foreign competition Population shifts Aging society Stock market volatility Technology standardization Politics stability KuangChiu Huang

Special Interest Groups Relationship between Key External Forces, Stakeholders and a Organization Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services Markets Natural Environment Key External Forces 1. Economics 2. Social, cultural, demographic, & environmental 3. Political, legal, governmental 4. Technologic 5. Competitive Opportunities & Threats KuangChiu Huang

Economic Forces KuangChiu Huang

Political, Legal, & Governmental Forces Regulation/deregulation Tax law changes Special tariff # of patents Change in patent laws & IPR Equal employment legislation Government subsidy Import/export regulations KuangChiu Huang

Technological Forces Internet development Next generation network installation Semiconductor progress Fiber communication Wireless communication E-Commerce Compression capabilities KuangChiu Huang

Competitive Forces: Porter’s Five Forces The Purpose of Porter’s Five Forces Analysis The five forces are environmental forces that impact on a company’s ability to compete in a given market To diagnose the principal competitive pressures in a market and assess how strong and important each one is KuangChiu Huang

The Purpose of Porter’s Five Forces Analysis The five forces are environmental forces that impact on a company’s ability to compete in a given market To diagnose the principal competitive pressures in a market and assess how strong and important each one is KuangChiu Huang

Bargaining Power of Suppliers Porter’s Five Forces Model of Competition Threat of New Entrants Threat of New Entrants Bargaining Power of Suppliers Rivalry Among Competing Firms in Industry Bargaining Power of Buyers Threat of Substitute Products KuangChiu Huang 23

Porter’s Five Forces Model of Competition Threat of New Entrants KuangChiu Huang 11

Threat of New Entrants Barriers to Entry Economies of Scale Product Differentiation Barriers to Entry Capital Requirements Switching Costs Access to Distribution Channels Cost Disadvantages Independent of Scale Government Policy Expected Retaliation KuangChiu Huang 12

Bargaining Power of Suppliers Porter’s Five Forces Model of Competition Threat of New Entrants Threat of New Entrants Bargaining Power of Suppliers KuangChiu Huang 14

Bargaining Power of Suppliers Suppliers are likely to be powerful if: Suppliers exert power in the industry by: Supplier industry is dominated by a few firms * Threatening to raise Suppliers’ products have few substitutes Buyer is not an important customer to supplier Suppliers’ product is an important input to buyers’ product prices or to reduce quality Suppliers’ products are differentiated Suppliers’ products have high switching costs Supplier poses credible threat of forward integration KuangChiu Huang 15

Bargaining Power of Buyers Porter’s Five Forces Model of Competition Threat of New Entrants Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers KuangChiu Huang 17

Bargaining Power of Buyers Buyer groups are likely to be powerful if: Buyers compete with the supplying industry by: * Bargaining down prices * Forcing higher quality * Playing firms off of each other Buyers are concentrated or purchases are large relative to seller’s sales Purchase accounts for a significant fraction of supplier’s sales Products are undifferentiated Buyers face few switching costs Buyers’ industry earns low profits Buyer presents a credible threat of backward integration Product unimportant to quality KuangChiu Huang Buyer has full information 18

Bargaining Power of Suppliers Bargaining Power of Buyers Porter’s Five Forces Model of Competition Threat of New Entrants Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products KuangChiu Huang 20

Threat of Substitute Products Products with similar function limit the prices firms can charge Keys to evaluate substitute products: Products with improving price/performance tradeoffs relative to present industry products Example: Cable modem/DSL, IPTV/cable TV VoIP/traditional voice 3G/WiMAX/LTE Fax machines can replace some part of overnight mail delivery KuangChiu Huang 21

Porter’s Five Forces Model of Competition Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Rivalry Among Competing Firms in Industry Threat of Substitute Products KuangChiu Huang 23

Rivalry Among Existing Competitors Intense rivalry often plays out in the following ways: Jockeying for strategic position Using price competition Staging advertising battles Increasing consumer warranties or service Making new product introductions KuangChiu Huang 25

Rivalry Among Existing Competitors Occurs when a firm is pressured or sees an opportunity Price competition often leaves the entire industry worse off Advertising battles may increase total industry demand, but may be costly to smaller competitors KuangChiu Huang 25

Rivalry Among Existing Competitors Cutthroat competition is more likely to occur when: Numerous or equally balanced competitors Slow growth industry High fixed costs High storage costs Lack of differentiation or switching costs Capacity added in large increments Diverse competitors High strategic stakes High exit barriers KuangChiu Huang 26

The Five Forces are Unique to Telecom Industry Five-Forces Analysis is a framework for analyzing a particular industry. How could we apply the Porter’s Five Forces Analysis to Taiwan Telecom mobile communications industry? KuangChiu Huang

EFE: Step 2 Weights Assign a weight that ranges from 0.00 to 1.00 to each factor Indicates the relative importance of the factor factors with the greatest importance should be assigned the highest weights Usually opportunities receives higher weights The sum of all weights is equal to 1.00 KuangChiu Huang

EFE: Step 3 Rating Assign 1 to 4 for each factor Rating = 1: response is poor Rating = 2: response is average Rating = 3: response is above average Rating = 4: response is superior KuangChiu Huang

IEF: Step 4 Multiply & Step 5 Sum Multiply each factor's weight by its rating Provide a weighted score for each factor Step 5: sum the weighted scores for each factor provides the total weighted score  KuangChiu Huang

Example: EFE Matrix Opportunities KuangChiu Huang

Example: EFE Matrix Threats KuangChiu Huang

Stage1: Competitive Profile Matrix Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions Assign 1 to 4 for each factor Rating = 1: major weakness Rating = 2: minor weakness Rating = 3: minor strength Rating = 4: major strength KuangChiu Huang

Stage1: Competitive Profile Matrix Weight, rating and score as same as IFE & EFE CSF: critical success factor KuangChiu Huang

Example: Competitive Profile Matrix 1 Gateway Apple Dell CSF’s Wt Rating Wt’d Score Market share 0.15 3 0.45 2 0.30 4 0.60 Inventory sys 0.08 0.16 0.32 Fin position 0.10 0.20 Prod. Quality 0.24 Cons. Loyalty 0.02 0.06 Sales Distr Global Exp. Org. Structure 0.05 KuangChiu Huang

Example: Competitive Profile Matrix 2 Gateway Apple Dell CSF’s (cont’d) Wt Rating Wt’d Score Prod. Capacity 0.04 3 0.12 E-commerce 0.10 0.30 Customer Serv 2 0.20 4 0.40 Price competitive 0.02 0.08 1 0.06 Mgt. experience 0.01 Total 1.00 2.83 2.47 3.49 KuangChiu Huang

Example: Competitive Profile Matrix 3 CHT TM FET A.P. Vibo CSF’s Wt Rating Wt’d Score Market Share/Maturity 15 4 0.6 3 0.45 2 0.3 Service Quality 10 0.40 0.43 1 0.1 Sales Distribution 7.5 0.225 Consumer Loyalty (Switching Cost) 0.2 Cooperation with Foreign Operator 0.15 Organization Structure 3.75 0.075 0.1125 0.0375 Finance 6 0.24 0.12 0.18 0.06 Network Coverage 0.4 Company Image (Culture) Price Competition Management Experience 0.16 Service Scope 2.25 0.0675 0.09 Training 7 0.21 0.28 0.07 Total 100 3.2425 3.1675 3.15 2.385 2.76 KuangChiu Huang

Example: Competitive Profile Matrix 4 Verizon AT&T CSF’s Wt(%) Rating Wt’d Score Market Share/Maturity 15 3 0.45 4 0.6 Service Quality 10 1 0.1125 Sales Distribution 7.5 0.225 Consumer Loyalty (Switching Cost) 0.3375 2 Cooperation (Foreign Operator) 0.15 0.3 Organization Structure 3.75 0.075 Financial strength 6 0.06 0.24 Network Coverage Company Image (Culture) Price Competition Management Experience 0.18 Service Scope 2.25 0.09 Training 7 Total 100 2.955 3.06 KuangChiu Huang

Thank You! My contact information: Email: kuangchi@mail.ncku.edu.tw Office: R62509 Telephone number: 06-2757575-53229 KuangChiu Huang