1. Copyright © 2002 by Harcourt, Inc. All rights reserved. Topic 2 : Business Analysis Models LECTURE NOTES: weeks 3&4 Lecturer: Kwame Fosu Boateng, Danaa Nantogmah, Charles Barnor

2. Copyright © 2002 by Harcourt, Inc. All rights reserved.  Key learning goals: This topic will introduce two well-known business analysis models, SWOT and PESTEL, which are commonly used as tools to analyze and develop business strategies. 1. Define what strategy is 2. Discuss the three level of strategy 3. Identify and describe at least ten different corporate level, business level, functional strategies 4. State the 4 areas of SWOT analysis and tell which are internal and which are external by giving some examples. 5. State the 4 areas of PESTEL analysis and give at least some examples for each. 6. Do a case study. LEARNING GOALS

3. Copyright © 2002 by Harcourt, Inc. All rights reserved. What is a strategy Levels of strategy Types of strategies Forward Integration Backward Integration Horizontal integration Market penetration Market development Product development Diversification(related and unrelated) Liquidation Retrenchment Divestiture

4. Copyright © 2002 by Harcourt, Inc. All rights reserved. Alternative Strategies STRATEGYExplanation Forward IntegrationGaining ownership or increased control over distributor or retailor Backward IntegrationSeeking ownership or increased control of a firms suppliers Horizontal integrationSeeking ownership or increased control over competitors Market PenetrationSeeking to increase market share for present products or services in present markets through greater marketing efforts Market DevelopmentIntroducing present products or services to a new geographic area Product DevelopmentSeeking to increased sales by improving existing product or service or developing a new product. Related DiversificationAdding new but related products or services Unrelated DiversificationAdding new unrelated products or services RetrenchmentsRegrouping through cost and assets reduction to reverse declining sales and product DivestitureSelling a division or part of an organization LiquidationSelling all a company’s assets, in parts, for their tangible worth

5. Copyright © 2002 by Harcourt, Inc. All rights reserved. A strategy of an organisation is a comprehensive master plan stating how corporation will achieve its mission and its objectives. It maximizes competitive advantage and minimizes competitive disadvantage. The typical business firm usually considers three types of strategy: corporate, business and functional

6. Copyright © 2002 by Harcourt, Inc. All rights reserved. The Strategy-Making Pyramid for Diversified Enterprises The Strategy-Making Pyramid for Diversified Enterprises Corporate Level Managers Corporate Strategy Business Level General Managers Business Strategies Heads of major Functional Areas Functional Strategies Plant managers Lower Level Supervisors Operating Strategies

7. Copyright © 2002 by Harcourt, Inc. All rights reserved. Corporate-Level Strategy Corporate-Level Strategy is concerned with the overall purpose and scope of an organisation and how to add value to business units. Corporate strategies are the overall game plan for a diversified company and it consists of moves to establish business positions in different industries approaches to managing group of businesses the enterprise has diversified into. To succeed corporate strategies should add value to the corporation. To add value, a corporate strategy should enable a company or more of its business units to perform one or more of the value creation activities at a lower cost, or perform one or more of the value creation activities in a way that allows for differentiation and premium price

8. Copyright © 2002 by Harcourt, Inc. All rights reserved. Business level strategy- Competitive Strategy Business-Level Strategy is concerned with the way a business seeks to compete successfully in its particular market. Issues involve pricing, innovation or differentiation strategy. It therefore involves Forming responses to changes in the industry, economy, regulatory and political arena Crafting competitive moves that lead to sustainable competitive advantage Uniting strategic initiatives of functional areas (Manufacturing, Marketing, HR, R&D, Finance, etc). Addressing strategic issues related to the firm’s competitive position and internal situation. Whereas corporate-level strategy involves decisions about the organization as a whole, strategic decisions relate to particular strategic business units within the overall organization. A strategic business unit (SBU) is a part of an organization for which there is a distinct external market for goods or services that is different from another SBU

9. Copyright © 2002 by Harcourt, Inc. All rights reserved. Functional Strategies Functional strategies are the game plan for running a particular function within a business. It adds detail to business strategy and governs how key activities will be managed. A business needs as many functional strategies as it has major functional activities. The role of functional strategies is to Provide support for overall business strategy Specify how functional managers plan to achieve functional area performance objectives

10. Copyright © 2002 by Harcourt, Inc. All rights reserved. Operational Strategies – how component parts of the organization Operational Level Strategy is concerned with how different parts of the organisation deliver the strategy in terms of managing resources, processes and people. Operational Strategies concerns even narrower strategic approaches for managing key operational units. It is designed to achieve strategy-critical performance targets of operating-level units and adds detail to overall business plan and functional strategies but are of lesser scope. Eg. Plant or Product line

11. Copyright © 2002 by Harcourt, Inc. All rights reserved. EXTERNAL ENVIRONMENTAL ANALYSIS The external environment consists of all elements outside the domain of an organization which has/can have an influence of the competitive position of an organization The essence of conducting an external environmental analysis/audit is to develop a finite list of opportunities that could be of benefit and threats that should be avoided Thus it is not aimed at developing an exhaustive list of every factor that could influence a business rather it is aimed at identifying key variables that offer actionable responses (offensive or defensive) in strategy formulation.

12. Copyright © 2002 by Harcourt, Inc. All rights reserved. Components of the External Environment The organization The industry (Immediate external environment) The remote external Environment

13. Copyright © 2002 by Harcourt, Inc. All rights reserved. Tools for conducting External Environmental Analysis Immediate External Environment (Industry) To conduct analysis in this environment, the Porters Five Forces is used The Remote External Environment To conduct analysis in this environment the PESTEL is used.

14. Copyright © 2002 by Harcourt, Inc. All rights reserved. PORTERS FIVE FORCES [INDUSTRY ANALYSIS] Rivalry among competing firms Potential development of substitutes Bargaining power of Consumers Potential entry of new competitors Bargaining Power of suppliers

15. Copyright © 2002 by Harcourt, Inc. All rights reserved. Porters Five Forces cont’d Industry competitors: Rivalry among existing competitors takes many familiar forms, including price discounting, new product introductions, advertising campaigns, and service improvements. High rivalry limits the profitability of an industry. The degree to which rivalry drives down an industry's profit potential depends, first, on the intensity with which companies compete and, second, on the basis on which they compete. New Entrants: New entrants to an industry bring new capacity and a desire to gain market share that puts pressure on prices, costs, and the rate of investment necessary to compete. Particularly when new entrants are diversifying from other markets, they can leverage existing capabilities and cash flows to shake up competition, as Pepsi did when it entered the bottled water industry, Microsoft did when it began to offer internet browsers. Substitute: A substitute performs the same or a similar function as an industry's product by a different means. Videoconferencing is a substitute for travel. Plastic is a substitute for aluminium. E-mail is a substitute for express mail. When the threat of substitutes is high, industry profitability suffers. Substitute products or services limit an industry's profit potential by placing a ceiling on prices. If an industry does not distance itself from substitutes through product performance, marketing, or other means, it will suffer in terms of profitability - and often growth potential.

16. Copyright © 2002 by Harcourt, Inc. All rights reserved. Porters Five Forces cont’d Buyers: Powerful customers - the flip side of powerful suppliers can capture more value by forcing down prices, demanding better quality or more service (thereby driving up costs), and generally playing industry participants off against one another, all at the expense of industry profitability. Buyers are powerful if they have negotiating leverage relative to industry participants, especially if they are price sensitive, using their clout primarily to pressure price reductions. Suppliers: Powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants. Powerful suppliers, including suppliers of labour, can squeeze profitability out of an industry that is unable to pass on cost increases in its own prices. Microsoft, for instance, has contributed to the erosion of profitability among personal computer makers by raising prices on operating systems. PC makers, competing fiercely for customers who can easily switch among them, have limited freedom to raise their prices accordingly.

17. Copyright © 2002 by Harcourt, Inc. All rights reserved.  What is PEST analysis? PEST analysis is an analysis model examining the external environment and the global factors that may affect a business. It can provide a quick understanding of the external pressures facing a business and their possible constraints on its strategy. It is usually divided into four external influences on a business – political, economic, social and technological. Business Analysis Models -PEST Analysis

18. Copyright © 2002 by Harcourt, Inc. All rights reserved.  Purposes: To find how political development, locally, nationally, internationally affect the strategy of a business.  Areas to be considered: 1. Consumer laws and regulation 2. Political pressures, 3. Government views of certain business activities, including local, national or international government political issues affecting a business 4. … Political © PhotoDisc Business Analysis Models -Illustrations for PEST Analysis Models

19. Copyright © 2002 by Harcourt, Inc. All rights reserved.  Purposes: To find how economic factors may affect on the business.  Areas to be considered: 1. Consumer activities, such as spending patterns 2. Economic conditions, such as inflation, unemployment, growth, etc. 3. Government policies, such as fiscal, monetary, exchange rates, etc. 4. The changes in production and labor market … Political Economic © PhotoDisc Business Analysis Models -Illustrations for PEST Analysis Models

20. Copyright © 2002 by Harcourt, Inc. All rights reserved.  Purposes: To find what competitive advantage a business may gain by social changes.  Areas to be considered: 1. Aging population trend, which may increase services for old people 2. Birth rate increase, which may affect baby product markets 3. Security condition, e.g. increase in crime may cause a business to increase insurance costs 4. Pressure groups, such as environmental groups, local community groups, etc. which may prevent a business from polluting a river… Political Economic © PhotoDisc Business Analysis Models -Illustrations for PEST Analysis Models Social

21. Copyright © 2002 by Harcourt, Inc. All rights reserved.  Purposes: To find how new technologies might affect the business activities.  Areas to be considered: 1. The rate of technological change 2. The development of IT 3. The wide use of Internet 4. The creation of new materials for production …  Impacts: All these technological changes will lead to some effects on the business, such as the product of the business may be replaced by new products or its production methods may have become out of date. Political Economic Social Technological © PhotoDisc Business Analysis Models -Illustrations for PEST Analysis Models

22. Copyright © 2002 by Harcourt, Inc. All rights reserved. Question for your critical thinking: Please try to tell what the key difference is between SWOT and PEST models. Business Analysis Models -SWOT and PEST

23. Copyright © 2002 by Harcourt, Inc. All rights reserved. PESTEL [Remote Environmental Analysis] PESTEL stands for Political, Economic, Socio-cultural, Technological, Environmental, (or ecological and Legal Political: Political factors include change in governments may be limited to home country but other, international bodies such as ECOWAS, and EU with corresponding changes in policies and priorities may have an impact the organization and how it operates. Economic: Economic factors may also be limited to the home country, but as global trade continues to grow, economic difficulties in one nation tend to have broader impact. For instance the 2008 financial crisis was as a result of USA mortgage crisis but it ended up affecting many nations including Ghana. Socio-cultural: These are factors that arise as a result of demographic change or changes in consumer behaviour patterns, cultural norms and even religious considerations

24. Copyright © 2002 by Harcourt, Inc. All rights reserved. PESTEL Cont’d Technological: this is a result of the development of technology. There are two types of technological change, which are developments in IT and developments in technology specific to an industry or market. The identification of technology that provide opportunity for the growth of the organization is very critical if an organization is able to recognize the potential that earlier. Legal: It is vital to consider factors arising from changes to the law. Some legal issues may originate from the national government but others, may operate across a broader spectrum. One issue when considering the legal element of the PESTLE analysis is to recognise laws that have an impact upon the organization even though the originated from countries other than that in which the organization is based. Recent examples are the changes to international financial compliance regulations, such as the Sarbanes -Oxley Act in the USA and the Basel II Accord. Environmental (or ecological): Is about the concerns with regard to the 'green issues'. There are increasing concerns about packaging and the increase of pollution.

25. Copyright © 2002 by Harcourt, Inc. All rights reserved. What is SWOT analysis? What is SWOT analysis? SWOT analysis involves looking at the internal strengths and weaknesses of a business and external opportunities and threats. SWOT analysis involves looking at the internal strengths and weaknesses of a business and external opportunities and threats. In other word, it is used to analyze the possible internal advantages and problems that a business has, and to determines the external factors of the business which may affect its strategy. In other word, it is used to analyze the possible internal advantages and problems that a business has, and to determines the external factors of the business which may affect its strategy. The purpose of a SWOT analysis is to conduct a general and quick examination of a business’s current position so that it can help the business to develop or plan a direction of development or a proper strategy in future. The purpose of a SWOT analysis is to conduct a general and quick examination of a business’s current position so that it can help the business to develop or plan a direction of development or a proper strategy in future. Business Analysis Models -SWOT Analysis

26. Copyright © 2002 by Harcourt, Inc. All rights reserved. Figure 6-1 Elements of SWOT Analysis

27. Copyright © 2002 by Harcourt, Inc. All rights reserved.  Uses of SWOT analysis: SWOT analysis is an effective way of gathering and classifying information, illustrating particular matters, and generating strategic planning ideas for a business. The result of the analysis may provide a basis on which a more detailed analysis can be conducted. SWOT analysis is, therefore, often used as a method by which a business or its marketing department can plan its marketing strategy. Some examples of SWOT analysis are given in the following table: Business Analysis Models -SWOT Analysis

28. Copyright © 2002 by Harcourt, Inc. All rights reserved. Good brand image Well-known name Good reputation Cost advantage in production High market share Confidence in the market Customer loyalty or repeat business More advanced technology and R & D … Strengths © PhotoDisc Business Analysis Models -Examples or Illustrations for SWOT Analysis Models

29. Copyright © 2002 by Harcourt, Inc. All rights reserved. Ineffective in production Falling profit Falling sales of the product Declining age of the life cycle of a product Poor reputation Lack of innovation and change Lack of adequate capital or having some financial problems Customers’ losing confidence or increasing complaints on the business Poor management or inefficient organizational structure …. Strengths Weaknesses © PhotoDisc Business Analysis Models -Examples or Illustrations for SWOT Analysis Models

30. Copyright © 2002 by Harcourt, Inc. All rights reserved. Possible development of new products Expansion into new markets Development of a global brand Joint –development with other companies Possible growing demand for a product in the market Possible government policies encouraging the growth of the business and its certain products New sources of profit or income …. Strengths Weaknesses © PhotoDisc Business Analysis Models -Examples or Illustrations for SWOT Analysis Models Opportunities

31. Copyright © 2002 by Harcourt, Inc. All rights reserved. Changes in law or regulation which may prohibit or affect the production of a business Growing competition from local companies Increasing competition from foreign competitors New products developed by other companies which may replace the product of the business Marketing activities or strategies which will be implemented by competitors ….. Strengths Weaknesses Opportunities Threats © PhotoDisc Business Analysis Models -Examples or Illustrations for SWOT Analysis Models

32. Copyright © 2002 by Harcourt, Inc. All rights reserved. Question for your critical thinking: Please briefly make a SWOT analysis on yourself based on the analysis model we have discussed in the class within 10 minutes. Business Analysis Models -SWOT Analysis