Performance Evaluation System

A Situation Analysis A situation analysis identifies strategic options and opportunities A situation analysis involves – External factors: Macroenvironment (industry and competitive conditions) – Internal factors: Microenvironment (organization’s internal situation and competitive position) External factors – Industry’s dominant economic traits – Competitive forces – Competitive moves of rivals – Key success factors – Attractiveness of the industry

SWOT Internal Factors StrengthsWeaknesses E x F Opportunities t a e c r t Threats a o l r s

Five Forces Model Rivalry among sellers Substitute Products Buyers Potential Entrants Suppliers

Analysis of Competitive Forces The analysis is designed to identify the main sources of competitive forces and the strength of the pressure Sources of competitive pressures are defined by – Rivalry among competitors – Substitute products – Potential entry – Bargaining power of suppliers – Bargaining power of buyers Rate the strength of each competitive force Explain how each competitive force works and its role in the overall competitive picture

Environmental Scanning A way to monitor and interpret social, political, economic, ecological and technological events in an effort to spot trends and conditions that could eventually impact the industry and the organization. The purpose of environmental scanning is to raise the consciousness of managers about potential developments that could have an important impact on industry conditions and pose new opportunities and threats

Assessing Competitive Positions: Strategic Groups A Strategic Group consists of those rival firms with similar competitive approaches and positions in an industry A Strategic Group displays different competitive positions that rival firms occupy Organizations in the same strategic group have one or more competitive characteristics in common – Sell in the same price/quality range – Cover same geographic areas – Be vertically integrated to same degree – Emphasize same types of distribution channels – Offer buyers similar services – Use identical technological approaches

Competitor Analysis An organization’s strategy is affected by – Current strategies of competitors – Actions competitors are likely to take Profile of key competitors involves studying – Current position in the industry of each competitor – Strategic objectives and recent business plans of each competitor – Basic competitive approach of each competitor Successful strategies take into account – Understanding competitor strategies – Evaluating their vulnerability to driving forces and competitive pressures – Sizing strengths and weaknesses of each competitor – Anticipating each competitor’s next move

Key Industry Success Factors Key success factors spell the difference between – Profit and loss – Competitive success or failure A key success factor can be – A specific skill or talent – Competitive capability – Something an organization must do to satisfy customers Being distinctively better than competitors on one or more key success factors produces a competitive advantage Key success factors consist of 3-5 major determinants of financial and competitive success in an industry

Competitive Strategy

A competitive strategy consists of moves to – Attract customers – Withstand competitive pressures – Strengthen an organization’s market position The objective of a competitive strategy is to generate a competitive advantage, increase the loyalty of customers and beat competitors A competitive strategy is narrower in scope than a business strategy Five competitive strategies are – Overall low-cost leadership strategy – Best cost provider strategy – Broad differentiation strategy – Focused low-cost strategy – Focused differentiation strategy

Overall Low-Cost Leadership Strategy Strive to be the overall low-cost provider in an industry How to achieve overall low-cost leadership – Scrutinize each cost activity – Manage each cost lower year after year – Reengineer cost activities to reduce overall costs – Cut some cost activities out of the value chain Competitive strengths of a overall low-cost strategy – Organization in a better position to compete offensively on price – Organization is better able to negotiate with large customers – Organization is able to use price as a defense against substitutes – Low cost is a significant barrier to entry – Organization is more insulated from the power of suppliers

Overall Low-Cost Leadership Strategy Carrier3Q 2008 (cents)Carrier3Q 2008 (cents) Northwest15.65Frontier11.92 United14.64Delta11.82 US Airways14.21Jet Blue10.06 Continental12.74Southwest9.74 American12.69AirTran9.66

When Does an Overall Low-Cost Strategy Work the Best When price competition is a dominant competitive force The product is a “commodity” There are few ways to differentiate the product Most customers have similar needs/requirements Customers incur low switching costs changing sellers Customers are large and have significant bargaining power

When Doesn’t a Overall Low-Cost Strategy Work When technological breakthroughs open cost reductions for competitors, negating a low-cost provider’s efficiency advantage Competitors find it relatively easy and inexpensive to imitate the leader’s low cost methods Low-cost leader focuses so much on cost reduction that the organization fails to respond to – Changes in customer requirements for quality and service – New product developments – Reduced customer sensitivity to price