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7/28/2019 Module 4 - Company Situation Analysis
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Module 4
Company Situation Analysis
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Module Outline
Determining How Well Present Strategy is
Working
SWOT Analysis
Strengths and Weaknesses of Firm Opportunities and Threats Facing Firm
Strategic Cost Analysis and Value Chain
Assessing Firms Competitive Position
Identifying Strategic Issues
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Key Questions in Company Situation
Analysis
How well is firms present strategy working?
What are firms strengths, weaknesses,
opportunities, and threats?
Are firms prices and costs competitive? How strong is firms competitive position?
What strategic issues does firm face?
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What Is Companys Strategy?
Identify competitive approach
Low-cost leadership
Differentiation
Focus
Determine competitive scope Stages of industrys production / distribution chain
Geographic coverage
Customer base
Identify functional strategies
Examine recent strategic moves
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How Well Is Present Strategy Working?
Key indicators of strategic and financial
performance Trends in market share Trends in profit margins
Trends in net profits and return on investment Trends in sales growth / decline
Credit ranking
Image and reputation with customers Leadership role (s), i.e. technology, quality, etc.
Competitive advantages or disadvantages
Is competitive position getting stronger / weaker?
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How Well Is Present Strategy Working?
The stronger a companys recent strategic
and financial performance, the more likely ithas a well-conceived, well-executed strategy.
Weak strategic and financial performance is
usually a sign of weak strategy or weak
execution or both!
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SWOT Analysis
SWOT represents the first letter in
S trengths
W eaknesses
O pportunities T hreats
SWOT analysis involves sizing-up firms
Internal strengths and weaknesses, and
External opportunities and threats
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Identifying Internal Strengths and
Weaknesses
A strength is something firm is good at or
characteristic giving it an important capability Useful skill
Important know-how
Valuable organizational resources or competitive
capability
Achievement giving firm a market advantage A weakness is something firm lacks, does
poorly, or condition placing it at a
disadvantage
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Significance of a Companys Strengths
and 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 firms
weaknesses which can
Make it vulnerable Prevent it from pursuing attractive opportunities
Put it at a competitive disadvantage
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Strategic Management Principle
Successful strategies seek to exploit what a
company does best: Expertise
Strengths
Core competencies Strongest competitive capabilities
Strategists shun strategies placing heavydemands on areas where company isweakest or has unproven ability!
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Building a Core Competence
Definition
A core competence is something acompany does especially well in
comparison to its competitors!
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Types of Core Competencies
Superior skills in producing high quality product
Superior system for delivering customer ordersaccurately and 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 and product display skills
Superior mastery of an important technology
Unusual effective sales force
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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 buildwhen
Firm has a core competence
Rival firms do not have offsetting competencies
Its costly and time-consuming for rivals to match
competency
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Strategic Management Principle
Core competence empower a company to
build competitive advantage!
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Identifying External Opportunities
Opportunities most relevant to a firm are
factors in external environment offering Some kind of competitive advantage
Important avenues for growth
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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 regulations
Vulnerability to rise in interest rates
Potential of hostile takeover
Unfavorable demographic shift
Adverse shifts in foreign exchange rates
Political upheaval in a country
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Significance of a Companys
Opportunities and Threats
Affect attractiveness of firms situation
Point to need for strategic action
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Strategic Management Principle
A good strategy is always aimed at
capturing a companys best growthopportunities and creating defenses against
threats to its competitive position and future
performance. Otherwise, it doesnt fit the
companys situation!
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Role of SWOT Analysis in Crafting a
Better Strategy
SWOT Analysis helps answer key questions
Does firm have internal strengths an attractivestrategy can be built on?
Which weaknesses does strategy need to
correct?
Do firms weaknesses disqualify it from pursuing
certain opportunities?
Which opportunities does firm have resources to
pursue with chance of success?
What threats should firm worry most about?
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What Is Strategic Cost Analysis?
Definition
Comparing a firms cost position relative tokey competitors activity by activity
From raw materials purchase to Price paid by ultimate customers
Assessing if firms costs are competitive
with those of rivals is a crucial part ofcompany situation analysis
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What Is Strategic Cost Analysis?
Cost disparities among rivals can stem from
differences in Prices paid for raw materials, component parts,
energy, and other supplier resources
Basic technology and age of plant andequipment
Economies of scale and experience curve effects
Wage rates and productivity levels Changes in inflation and foreign exchange rates
Marketing and distribution costs
Inbound and outbound shipping costs
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Principle of Competitive Markets
The higher the companys costs are above
those of close rivals, the more competitivelyvulnerable it becomes!
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The Value Chain Concept
Definition
A value chain identifies:
Activities, functions, and business processes
that have to be performed in
Designing, producing, marketing, delivering,
and supporting a product service
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The Value Chain Concept
A Value Chain consists of two major types
of activities Primary activities that create value for
customers
Related support activities
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Representative Company Value Chain
InboundLogistics
OperationOutboundLogistics
Sales andMarketing
ServiceProfit
Margin
Product R&D, Technology, Systems Development
Human Resource Management
General Administration
Primary Activities and Costs
SupportActivitiesand Costs
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What Determines Costs of Value Chain
Activities?
Costs of performing each value chain activity
can be driven up ordown by 2 types offactors
Structural Cost Drivers
Executional Costs Drivers
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Structural Costs Drivers
Scale economies
Experience curve effects
Technology requirements
Capital intensity Complexity of product line
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Executional Cost Drivers
Commitment of work force to continuous
improvement Attitudes and capabilities regarding quality
Cycle time in getting new products to market Utilization of existing capacity
Whether internal business processes are
efficiently designed and executed
How efficiently firm works with suppliers and
/ or customers to reduce costs
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Keys to Understanding a Companys
Cost Structure
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 valuechain present opportunities for cost reduction
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The Value Chain System
Activities,Costs, andMargins ofSuppliers
InternallyPerformedActivities,Costs, and
Margins
Activities,Costs,
Margins ofForwardChannel
Allies
Buyer /User Value
Chain
Upstream
Value Chains
Company
Value Chains
Downstream
Value Chains
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The Value Chain System
Cost competitiveness depends on
Costs of internally performed activities
Costs in value chains of suppliers and forward
channel allies
Assessing firms competitiveness requiresknowledge of value chain system
Firms own value chain
Value chain of suppliers
Value chain of forward channel allies
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The Value Chain System
Suppliers value chains matter
Supplier incur costs in creating and deliveringinputs used in firms value chain
Cost and quality of inputs influence firms cost
and / or differentiation capabilities
Forward Channel value chains matter
Costs and margins of downstream firms are partof price paid by ultimate end-user
Activities channel allies perform affect
satisfaction of end-user
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Example: Key Value Chain Activities
Pulp and Timber Industry
Timber farming
Logging
Pulp millsPapermaking
Printing and publishing
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Example: Key Value Chain Activities
Home Appliance Industry
Parts and components manufacture
Assembly
Wholesale distributionRetail sales
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Example: Key Value Chain Activities
Soft Drink Industry
Processing of basic ingredients
Syrup manufacture
Bottling and can fillingWholesale distribution
Retailing
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Example: Key Value Chain Activities
Computer Software Industry
Programming
Disk loading
MarketingDistribution
Developing Data for Strategic Cost
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Developing Data for Strategic Cost
Analysis
Data requirement are formidable
Requires breaking department costaccounting data out into cost of performing
Specific Activities
Activity-Based Costing
New cost accounting methodology aimed at
assigning costs to Specific tasks, and
Value chain activities
Traditional Cost Accounting Vs
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Traditional Cost Accounting Vs.
Activity-Based Accounting
$640,150$640,150
$135,750
82,100
23,50015,840
94,300
48,450
110,000
130,210
Department Activities UsingActivity-Based CostAccounting
Evaluate Suppliers
Process Purchase Orders
Expedite DeliveriesExpedite Internal Process
Check Item Quality
Check Deliveries Against
Purchase Orders
Resolve Problems
Internal Administration
$350,000
115,000
6,5002,400
17,000
124,000
25,520
Traditional Cost AccountingCategories in DepartmentBudgeting
Wage and Salaries
Employee Benefits
SuppliesTravel
Depreciation
Other Fixed Charges
Miscellaneous
Operating Expense
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Benchmarking Costs of Key Activities
Concept
Benchmarking performance of a firmsactivities against rival and best practice firmsprovide evidence of firms cost
competitiveness Benchmarking is an excellent tool todetermine
If costs are in line with competitors Which business processes need to be
scrutinized for improvement
Which firms perform a given activity best
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Benchmarking Costs of Key Activities
Focuses on Cross-Company comparisons
ofhow well activities are performed Purchase of materials
Payments of supplies
Management of inventories Training of employees
Processing of payrolls
Getting new products to market
Performance of quality control
Filling and shipping of customer orders
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Benchmarking and Ethics
Benchmarking involves discussions of
competitively sensitive data Ethical guidelines
Avoid talk about pricing or competitively sensitive
costs Dont ask rivals for sensitive data
Dont share proprietary data without clearance
Have impartial third party assemble and presentcompetitive data without names attached
Dont disparage a rivals business to outsiders
based on data obtained
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Achieving Cost Competitiveness
Key Point
A firms competitiveness depends on howwell it manages its value chain relative tocompetitors
Examining a firms value chain and
comparing it to key rivals indicates
Who has how much of a cost advantage ordisadvantage
Which cost components are responsible
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Achieving Cost Competitiveness
3 areas in firms value chain contributes to
cost differences compared to rivals1. Suppliers activities
2. Firms internal activities
3. Forward channel activities
Strategic actions to eliminate a costdisadvantage need to be liked to where
cost differences originate!
Options: Correcting Supplier-Related
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Options: Correcting Supplier Related
Cost Disadvantages Negotiate more favorable prices with
suppliers Work with supplier to help them achieve
lower costs
Integrate backward Use lower-priced substitute inputs
Do a better job managing linkages betweensuppliers value chain and firms own chain
Try to make up difference by initiating cost
savings in other areas of value chain
Options: Correcting Forward Channel
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Options: Correcting Forward Channel
Cost Disadvantages
Push for more favorable terms with
distributors and other forward channel allies Work closely with forward channel allies and
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
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Options: Correcting Internal Cost
Disadvantages
Initiate internal budget reductions
Re-engineer business processes to do betterjob managing executional cost drivers
Try to eliminate some cost-producing
activities by revamping value chain system
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
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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 achievingsavings in other areas of value chain system
Value Chain Analysis and Competitive
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Value Chain Analysis and Competitive
Advantage
Value chain analysis is a powerful
managerial tool for identifying whichactivities have
Competitive advantage potential
A firms competitive advantage is based on
its ability to
Perform competitively crucial activities alongvalue chain better than rivals
Value Chain Analysis and Competitive
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y p
Advantage Diagnosing competitive capabilities involves
Construct a value chain of firms activities
Examine linkages among internally performed
activities and linkages with suppliers and
customers chain
Identify activities and competencies critical to
customer satisfaction and market success
Make appropriate internal and externalbenchmarking comparisons to determine
How well firm performs activities
How cost structure compares with rivals
Value Chain Analysis and Competitive
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y p
Advantage
The strategy-making lesson of value chain
analysis is that increased companycompetitiveness entails concentrating
resources on those activities where the
company can gain dominating expertise toserve its target customers!
Evaluating a Companys Competitive
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g p y p
Position Factors to examine
How strongly firm holds present competitive
position
Whether firms position can be expected to
improve or deteriorated of present strategy is
continued
How firm ranks relative to key rivals on eachimportant measure of competitive strength /
industry KSF
Whether firm has a sustainable competitive
advantage or is at a disadvantage
Procedure: Assessing a Companys
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g p y
Competitive Strength
Sum individual ratings to get overall measure
of competitive strength for each rival
Step 4:
Evaluate firms overall competitive strength
relative to rivalsStep 5:
Decide whether to use weighted orun-weighted rating system
Step 3:
Rate firm and key rivals on each factors
using rating scale of 1 10
(1=weak; 10=strong)
Step 2:
List key success factors and other relevant
measures of competitive strengthStep 1:
Why Do a Competitive Strength
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y p g
Assessment? Reveals strength of firms competitive
position Show how firm stacks up against rivals
Indicates whether firm is at a competitive
advantage / disadvantage against each rival
Provides insight into how firm can make
strategic moves to alleviate its competitiveweaknesses
Strategic Management Principle
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Strategic Management Principle
Competitive strengths and competitive
advantages empower a company to improveits long-term market position!
Determining Strategic Issues to be
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Addressed Final analytical task that puts firm overall
situation into perspective Issues come from thinking strategically about
Industry and competitive situation
firms situation
A good strategy must include actions to
respond to firms strategic issues andproblems
Strategic Management Principle
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Strategic Management Principle
Having through understanding of the
strategic issues a company faces is aprecondition 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
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Are Is present strategy adequate in light of driving
forces in industry and geared to industrys future
key success factors? How good a defense does present strategy offer
against the 5 competitive forces?
Does present strategy adequately protect firmagainst external threats and 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?
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End of Module 4