MODULE 4 COMPANY SITUATION ANALYSIS

MODULE OUTLINE Determining How Well Present Strategy is Working SWOT Analysis Strengths & Weaknesses of Firm Opportunities & Threats Facing Firm Strategic Cost Analysis & Value Chains Assessing Firm’s Competitive Position Identifying Strategic Issues

KEY QUESTIONS IN COMPANY SITUATION ANALYSIS How well is firm’s present strategy working? What are firm’s strengths, weaknesses, opportunities,& threats? Are firm’s prices & costs competitive? How strong is firm’s competitive position? What strategic issues does firm face?

WHAT IS COMPANY’S STRATEGY? Identify competitive approach Low-cost leadership Differentiation Focus Determine competitive scope Stages of industry’s production/distribution chain Geographic coverage Customer Identify functional strategies Examine recent strategic moves

HOW WELL IS PRESENT STRATEGY WORKING? Key indicates of strategic & financial performance Trends in profit margins Trends in net profits & return on investment Credit ranking Leadership role(s), I.e. technology, quality, etc. Competitive advantages or disadvantages Is competitive position getting stronger/weaker?

HOW WELL IS PRESENT STRATEGY WORKING? The stronger a company’s recent Strategic and fi0nancial Performance, the more likely it has A well-conceived, well-executed strategy. Weak strategic and financial performance is usually a sign of weak strategy or Weak execution or both!

SWOT analysis SWOT represents the first letter in Strengths Weaknesses Opportunities Threats SWOT analysis involves sizing-up firm’s INTERNAL strengths & weaknesses and EXTERNAL opportunities & threats

IDENTIFYING INTERNAL STRENGTHS & WEAKNESSES A STRENGTH is something firm is good at or characteristic giving it an important capability Useful skill Important know-how Competitive capability Achievement giving firm a market advantage A WEAKNESS is something firm lacks, does poorly, or condition placing it at a disadvantage

IDENTIFYING INTERNAL STRENGTHS & WEAKNESSES Basic Concept A company’s internal strengths usually represent COMPETITIVE ASSETS; its internal weaknesses Usually represent COMPETITIVE LIABILITIES. The desired condition is for the assets to OUTWEIGH the liabilities by a hefty margin!

SIGNIFICANCE OF A COMPANY’S STRENGTHS & WEAKNESSES strengths are significant to strategy-making because they can Serve as cornerstones of strategy Help build COMPETITIVE ADVANTAGE A good strategy aims at correcting firm’s WEAKNESSES which can Make it vulnerable Prevent it from pursuing attractive opportunities Put it at a competitive disadvantage

STRATEGIC MANAGEMENT PRINCIPLE Successful strategists seek to EXPLOIT what a company does best: Expertise Strengths Core competencies Strongest competitive capabilities Strategists shun strategies placing heavy demands on Areas Where company is weakest or has unproven ability!

BUILDING A CORE COMPETENCE Definition A CORE COMPETENCE is something a company Does ESPECIAALY WELL in comparison to its Competitors!

TYPE OF CORE COMPETENCIES Superior skills in producing high quality product Superior system for delivering customer orders Accurately & swiftly Better after-sale service capability More skill in achieving low operating costs Unique formula for selecting good retail locations Unusual innovativeness in developing new products Better merchandising & product display skills Superior mastery of an important technology Unusually effective sales force

SIGNIFICANCE OF A CORE COMPETENCE A CORE COMPETENCE is important because of Added capability it gives firm Competitive edge it can yield Potential for it being a cornerstone of strategy COMPETITIVE ADVANTAGE is easier to build when Firm has a CORE COMPETENCE Rival firms do not have offsetting competencies It’s costly & time-consuming for rivals to match competency

STRATEGIC MANAGEMENT PRINCIPLE CORE COMPETENCIES Empower a company to build Competitive advantage!

IDENTIFYING EXTERNAL OPPORTUNITIES OPPORTUNITIES most relevant to a firm are factors in EXTERNAL environment offering Some kind of competitive advantage Important avenues for growth

IDENTIFYING EXTERNAL THREATS EXTERNAL FACTORS posing a danger to firm Emergence of cheaper technologies Introduction of new/better products by rivals Entry of low-cost foreign competitors New regulation Vulnerability to rise interest rates Potential of hostile takeover Unfavorable demographic shifts Adverse shifts in foreign exchange rates Political upheaval in a country

SIGNIFICANCE OF A COMPANY’S OPPORTUNITIES & THREATS Affect attractiveness of firm’s situation Point to need for strategic action

STRATEGIC MANAGEMENT PRINCIPLE A good strategy is always aimed at capturing A company’s best growth opportunities and Creating defenses against threat to its competitive Position and future performance. Otherwise, it Doesn’t fit the company’s situation!

ROLE OF SWOT ANALYSIS IN CRAFTING A BETTER STRATEGY SWOT analysis helps answer key questions Does firm have internal strengths an attractive strategy can be built on ? Which weaknesses does strategy need to correct? Do firm’s weaknesses disqualify it from pursuing certain opportunities? Which opportunities does firm have resources to pursue with a chance of success? What threats should firm worry most about?

WHAT IS STRATEGIC COST ANALYSIS? Definition Comparing a firm’s cost position RELATIVE to key Competitors ACTIVITY by ACTIVITIY From raw materials purchase to Price paid ultimate customers Assessing if firm’s costs are competitive with those of Rivals is a crucial part of company situation analysis.

WHAT IS STRATEGIC COST ANALYSIS? Cost disparities among rivals can stem from differences in Prices paid for raw materials, component parts, energy, & other supplier resources basic technology & age of plant & equipment economies of scale & experience curve effects wage rates & productivity levels Changes in inflation & foreign exchange rates Marketing & distribution costs Inbound & outbound shipping costs

PRINCIPLE OF COMPETITIVE MARKETS The higher a company’s costs Are above those of close rivals, The more competitively Vulnerable it becomes!

THE VALUE CHAIN CONCEPT Definition A VALUE CHAIN identifies : Actives, functions, & business processes that have to be performed in designing, production, marketing, delivering, & supporting a product or service

THE VALUE CHAIN CONCEPT A VALUE CHAIN consists of two major types of activities : PRIMARY ACTIVITIES that create value for customers RELATED SUPPORT ACTIVITIES

Representative Company Value Chain Primary Activities and Costs Profit Margin Sales and Marketing Service Inbound Logistics Operations outbound Logistics Product R&D, Technology, Systems Development Support Activities And Costs Human Resources Management General Administration

what determines costs of value Chain Activities? Costs of performing each value chain activity can be DRIVEN UP or DOWN by two types of factors STRUCTURAL COST DRIVERS EXECUTIONAL COST DRIVERS

STRUCTURAL COST DRIVERS Scale economies Experience curve effects Technology requirements Capital intensity Complexity of product line

EXECUTIONAL COST DRIVERS Commitment of work force to continuous improvement Attitudes & capabilities regarding quality Cycle time in getting new products to market Utilization of existing capacity Whether internet business processes are efficiently designed & executed How efficiently firm works with suppliers and/or customers to costs

KEYS TO UNDERSTANDING A COMPAM\NY’S COST STRUCURE Whether firm is trying to achieve a competitive advantage Based on Lower costs or Differentiation How costs in one value chain activity spill over to affect Costs of others Whether linkages among activities in value chain present opportunities for cost reduction

THE VALUE CHAIN SYSTEM Downstream Value Chains Upstream Value Chains Company Value Chains Activities, Costs,& Margins of Suppliers Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Forward Channel Allies Buyer/User Value Chains

THE VALUE CHAIN SYSTEM Cost COMPETITIVENESS DEPENDS ON Costs of internally performed activities Costs in value chains of suppliers & forward Channel allies Assessing firm’s COMPETITIVENESS requires Knowledge of value chain system Firm’s own value chain Value chains of suppliers Value chains of forward channel allies

THE VALUE CHAIN SYSTEM SUPPLIERS’ value chains matter Suppliers incur costs in creating & delivering inputs used in firm’s value chain Cost & quality of inputs influence firm’s cost and/or differentiation capabilities FORWARD CHANNEL value chains matter Costs & margins of downstream firms are part of paid by ultimate end-user Activities channel allies perform affect satisfaction of end-user

EXAMPLE : KEY VALUE CHAIN ACTIVITIES Pulp & paper industry Timber farming Logging Pulp mills Papermaking Printing & publishing

EXAMPLE: KEY VALUE CHAIN ACTIVITIES HOME APPLIANCE INDUSTRY Parts & components manufacture Assembly Wholesale distribution Retail sales

EXAMPLE : KEY VALUE CHAIN ACTIVITIES Soft drink industry Processing of basic ingredients Syrup manufacture Bottling & can filling Wholesale distribution Retailing

EXAMPLE: KEY VALUE CHAIN ACTIVITIES COMPUTER SOFTWARE INDUSTRY Programming Disk Loading Marketing Distribution

DEVELOPING DATA FOR STRATEGIC COST ANALYSIS Data requirements are formidable Requires breaking department cost accounting data out into cost of performing SPECIFIC ACTIVITIE ACTIVITY-BASED COSTING New cost accounting mythology aimed at assigning costs to Specific tasks and Value chain activities

Traditional Cost Accounting Vs. Activity-Based Costing Categories in Department Budget Wages & Salaries Employee Benefits Supplies Travel Depreciation Charges Miscellaneous Operating Expenses $ 350,000 115,000 6,500 2,400 17,000 124,000 25,520 $ 640,150 Departmental Activities Using Activity-Based Cost Accounting Evaluate Suppliers Process Expedite Deliveries Expedite Internal Process Check Item Quality Check Deliveries Against Purchase Orders Resolve Problems Internal Administration $ 135,750 82,100 23,500 15,840 94,300 48,450 110,000 130,210 $ 640,150

BENCHMARKING COSTS OF KEY ACTIVITIES Concept Benchmarking performance of a firm’s activities Against rivals & best practice firms provides Evidence of firm’s cost competitiveness Benchmarking is an excellent tool to determine If costs are in line with competitors Which business processes need to be scrutinized for improvement Which firms perform a given activity best

BENCHMARKING COSTS OF KEY ACTIVITIES Focuses on CROSS-COMPANY comparisons of how well activities are performed Purchase of materials Payment of suppliers Management of inventories Training of employees Processing of payrolls Getting new products to market Performance of quality control Filling & shipping of customer orders

BENCHMARKING & ETHICS BENCHMARKING involves discussions of competitively sensitive data ETHICAL guidelines Avoid talk pricing or compressively Sensitive costs Don’t ask rivals for sensitive data Don’t share proprietary data without clearance Have impartial third party assemble & present competitive data without names attached Don’t disparage a rival’s business to outsiders based on data obtained

ACHIEVEING COST COMPETITIVENESS Key Point A firm’s COMPETITIVENESS depends on how well It manages its VALUE CHAIN relative to competitors Examining a firm’s value chain & comparing it to key rivals indicates Who has how much of a cost advantage or disadvantage Which cost components are responsible

ACHIEVING COST COMPETITIVENESS Three areas in firm’s value chain contributes to cost differences compared to rivals 1- SUPPLIERS’ activities 2- Firm’s INTERNAL activities 3- FORWARD channel activities Strategic actions to eliminate a cost disadvantage need to be Linked to where cost differences originate!

OPTIONS : CORRECTING SUPPLIER- RELATED COST DISADVANTAGES Negotiate more favorable prices with suppliers work with suppliers to help them achieve lower costs Integrate backward Use lower –prices substitute inputs Do a better job of managing linkages between suppliers’ value chains & firm’s own chain Try to make up difference by initiating cost savings in other area of value chain

OPTIONS: CORRECTING FORWARD CHANNEL COST DISADVANTAGES Push for more favorable terms with distributors & other forward channel allies Work closely with forward channel allies & customers to identify win-win opportunities to reduce costs Change to a more economical distribution strategy Try to make up difference by initiating cost saving earlier in value chain

OPTIONS: CORRECTING INTERNAL COST DISADVANTAGES Initiate internal budget reductions Re-engineer business processes to do better job of managing exceptional cost drivers Try to eliminate some cost-producing activities by Relocate high-cost activities to lower-cost geographic areas See if certain activities can be outsourced or performed cheaper by contractors

OPTIONS: CORRECTING INTERNAL COST DISADVANTAGES Invest in cost-saving technological improvements Innovate around troublesome cost components Simplify product design to achieve cost reduction Try to make up difference by achieving saving in Others areas of value chain system

VALUE CHAIN ANALYSIS & COMPETITIVE ADVANTAGE Value chain analysis is a powerful managerial too for identifying which activities have COMPETITIVE ADVANTAGE potential A firm’s competitive edge is based on its ability to Perform competitively crucial activities along value chain better than rivals

VALUE CHAIN ANALYSIS & COMPETITIVE ADVANTAGE Diagnosing competitive capabilities involves Construct a value chain of firm’s activities Examine linkages among internally performed activities & linkage with suppliers’ & customers’ chains Identify activities & competencies critical to customer satisfaction & market success Make appropriate internal & external benchmarking comparisons to determine How well firm performs activities How cost structure compares with rivals

VALUE CHAIN ANALYSIS & COMPETITIVE ADVANTAGE The strategy-making lesson of value chain analysis is that increased company competitiveness Entails concentrating resources on those activities where the company can gain dominating expertise to serve its target customers!

EVALUATION A COMPANY’S COMPETITIVE POSITION Factors to examine How strongly firm holds present competitive position whether firm’s position can be expected To improve or deteriorate if present strategy is continued How firm ranks RELATIVE TO KEY RIVALS on each important measure of competitive strength/industry/KSF Whether firm has a sustainable competitive advantage or is a disadvantage

PROCETURE : ASSESSING A COMPANY’S COMPETITIVE STRENGTH List success factors & other relevant Measures of competitive strength Rate firm & key rivals on each factor using rating scales of 1-10 (1=weak; 10= strong) Decide whether to use a WEIGHTED or UNWEIGHTED rating system Sun individual ratings to get overall measure of competitive strength for each rival Evaluate firm’s overall competitive strength relative to rivals

WHY DO A COMPETITIVE STRENGTH ASSESSMENT? Reveals strength of firm’s competitive position Shows how firm stacks up against rivals indicates whether firm is at a competitive advantage /disadvantage against each rival Provides insight into how can build its strategy on its competitive strengths Provides insight into how can make strategic moves to alleviate its competitive weaknesses

STRATEGIC MANAGEMENT PRINCIPLE Competitive strengths and Competitive advantages Empower a company to improve Its long-term market position!

DETERMINING STRATEGIC ISSUES TO BE ADDRESSED Final analytical task that puts firm’s overall situation into perspective Issues come from thinking strategically about Industry & competitive situation firm’s situation A “ good” strategy must include actions to respond to firm’s strategic issues & problems

STRATEGIC MANAGEMENT PRINCIPLE Having through understanding of the strategic issues a company faces is precondition for Effective strategy-making. Until strategists have a clear fix on the issues, they are NOT Ready to craft a strategy!

DECIDING WHAT THE STRATEGIC ISSUES ARE Is present strategy adequate in light of driving forces in industry & geared to industry’s FUTURE key success factors? How good a defense does present strategy offer against the five competitive forces? Does present strategy adequately protect firm against external threats & internal weaknesses? Is firm vulnerable to competitive attack by rivals? Does firm have a competitive advantage or must it work to offset competitive disadvantage ? Where are strong/weak spots in present strategy?