Strategic Management. Environmental scanning (Unit 2) 1.Environmental analysis 2.Industry and competitive analysis 3.EFE matrix 4.CPM matrix 5.Internal

Strategic Management

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Environmental scanning (Unit 2)

1. Environmental analysis2. Industry and competitive

analysis3. EFE matrix4. CPM matrix5. Internal analysis6. IFE matrix7. Porters five force8. SWOT9. VRIO framework

Pre read: The five competitive forces that shape strategy

Prentice Hall, Inc. © 2008 1-4

Basic Elements of the Strategic Management Process

What is business environment?

• Business environment consists of two parts. They are: External and Internal

• Environment is complex, dynamic, uncertain and turbulent. (Nuclear disaster in Japan, Turbulence in Middle East, Fall of the Euro, Debt in Europe, High inflation in India, Credit crunch, Downgrading of India…)

• Understanding your environment should be continuous, and holistic.

• Remember that while some may be of advantage to your firm (opportunities), some would trouble your firm…(threats)

External environmentIt is divided into:

1. Macro environment (PESTEL framework: Political, Economic, socio cultural, demographic, technological, ecological, legal) and of course global factors….

2. Operating environment (Suppliers, Customers, competitors, creditors, labour market, distributors and retailers, regulations)

3. Industry or micro environment

Exercise

• You own a retail chain. What are the external factors you should be worried about??

Measuring the external environment

• EFE matrix• CPM matrix

EFE MATRIX

Steps in developing the EFE matrix:

•Identify a list of KEY external factors (critical success factors; identify Opportunities and Threats).

•Assign a weight to each factor, ranging from 0 (not important) to 1.0 (very important).

•Assign a 1-4 rating to each critical success factor to indicate how effectively the firm’s current strategies respond to the factor. (1 = response is poor, 4 = response is extremely good)

•Multiply each factor’s weight by its rating to determine a weighted score.

•Sum the weighted scores. Highest score can be 4 and the lowest 1. A score of 4 means the response of the company to opportunities and threats is ‘OUTSTANDING’, while 1 means ‘poor’.

http://www.soopertutorials.com/wp-content/uploads/2008/10/efe-matrix.jpg

Exercise

STEP 1: You own a retail chain. What are the external factors you should be worried about??

STEP 2: Do an EFE matrix evaluation…

Competitive profile matrix (CPM)

• ‘The CPM identifies a firm’s major competitors and their particular strengths and weaknesses in relation to a sample firm’s strategic position’.

David 2001, p. 115

• Key success factors (KSFs)

– Technology related

– Distribution related

– Marketing related

– Skills related

– Organisational capability

– Other types of KSFs

Competitive profile matrix (CPM) (Cont)

Developing the CPM - Example

Key success factors

Advertising

Product quality

Customer loyalty

Financial position

Global expansion

Market share

Weight

0.1

0.3

0.2

0.2

0.1

0.1

Rating

3

4

3

3

2

3

Score

0.3

1.2

0.6

0.6

0.2

0.3

Total 1.00 3.2 2.1 3.1

Company A

Rating

3

2

2

2

2

2

Score

0.3

0.6

0.4

0.4

0.2

0.2

Company B

Rating

4

3

2

4

1

2

Score

0.4

1.2

0.4

0.8

0.1

0.2

Company C

Rating: 1=major weakness, 4=major strength

Internal environment

• Strategy is matching ‘external environment’ to strengths.• This is to find, where the strengths are, the weaknesses.• These are internal.• There are four criteria which is used for division into strengths or weakness. They are: historical, norm in the industry (capacity utilisation), competitive parity or CSF (advertising is critical for success). • There are various models to understand whether the various factors are strengths or weaknesses, like VRIO, 7S etc…

Measuring the internal environment

• IFE matrix

IFE Matrix

Ratings are thus company based, whereas the weights in Step 2 are industry based.

Steps to develop IFE Matrix

1. List key internal factors as identified in the internal audit process. Use a total of from ten to twenty internal factors, including both strengths and weaknesses. List strengths first and then weaknesses. Be as specific as possible, using percentages, ratios, and comparative numbers.

2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all important) to each factor. The weight assigned to a given factor indicates the relative importance of the factor to being successful in the firm’s industry. Regardless of whether a key factor is an internal strength or weakness, factors considered to have the greatest effect on organizational performance should be assigned the highest weights. The sum of all weights must equal 1.0.

3. Assign a 1 to 4 rating to each factor to indicate whether that factor represents a major weakness (rating = 1), a minor weakness (rating = 2), a minor strength (rating = 3), or a major strength (rating = 4). Note that strengths must receive a 4 or 3 rating and weaknesses must receive a 1 or 2 rating. Ratings are thus company based, whereas the weights in Step 2 are industry based.

4. Multiply each factor’s weight by its rating to determine a weighted score for each variable.5. Sum the weighted scores for each variable to determine the total weighted score for the

organization.

A score of 2.5 is weak and above it is strong….

Industry and Competitive Analysis

Industry Analysis

Industry Analysis covers two important parts:

1. Industry environment2. Competitive environment

Industry Analysis

1. Industry Features: Size, growth rate, geographical boundaries, size of competition, pace of technological change and product innovation

2. Industry Boundaries: Breadth of market, Product service quality, Geographical distribution, vertical integration, profit motives

3. Industry environment: Fragmented and consolidated. Can also be classified into: Emerging, mature, declining and global

4. Industry structure: Concentration(extent to which industry sales are dominated by only a few firms), Economies of scale, product differentiation and Barriers of entry

5. Industry attractiveness: Profit potential, growth prospects, competition and industry barriers

6. Industry performance: Production, sales, profitability and technological advancements.

7. Industry practices: Various policies on product, price, promo, distribution, R&D and competition

8. Industries future prospects…

Competitive environment

What is competition????

The purpose of Five-Forces Analysis

• The five forces are environmental forces that impact on a company’s ability to compete in a given market.

• The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.

Threat of New Entrants

Threat of New EntrantsThreat of New

EntrantsThreat of New

Entrants

Porter’s Five Forces Model of CompetitionPorter’s Five Forces

Model of Competition

Threat of New EntrantsThreat of New Entrants

Barriers to Entry

Barriers to Entry

Expected Retaliation

Government Policy

Economies of Scale

Product Differentiation

Capital Requirements

Switching Costs

Access to Distribution Channels

Cost Disadvantages Independent of Scale

Bargaining Power of Suppliers




Entrants



Bargaining Power of SuppliersBargaining Power of Suppliers

Suppliers exert power in the industry by:Suppliers exert power in the industry by:

* Threatening to raise* Threatening to raiseprices or to reduce qualityprices or to reduce quality

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Suppliers are likely to be powerful if:

Supplier industry is dominated by a few firms

Suppliers’ products have few substitutes

Buyer is not an important customer to supplier

Suppliers’ product is an important input to buyers’ product

Suppliers’ products are differentiated

Suppliers’ products have high switching costs

Supplier poses credible threat of forward integration

Bargaining Power of Buyers




Entrants





Bargaining Power of BuyersBargaining Power of Buyers

Buyers compete with the supplying industry by:

Buyers compete with the supplying industry by:

* Bargaining down prices* Bargaining down prices

* Forcing higher quality* Forcing higher quality

* Playing firms off of* Playing firms off ofeach

othereach

other

Buyer groups are likely to be powerful if:

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

Buyer has full information

Threat of Substitute Products




Entrants







Threat of Substitute ProductsThreat of Substitute Products

Products with similar function limit the prices firms can charge

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:

Electronic security systems in place of security guards

Fax machines in place of overnight mail delivery





Entrants

Rivalry Among Competing Firms in Industry

Rivalry Among Competing Firms in Industry







Porter’s Five Force’s Model

• 1. Rivalry Among Existing Competitors– Innovation; First to enter the market

• 2. Substitute Products– Competitors with similar products

• 3. Powerful Suppliers– Forward Integration

• 4. Powerful Buyers– Backward Integration

• 5. Threat of Entry– Advanced Knowledge – Capital Requirement

Porter Competitive ModelHeavyweight Motorcycle Manufacturing Industry


• Recreational Cyclist• Young Adults• Law Enforcement• Military Use• Racers

Potential New Entrant

Substitute Product or Service

Intra-Industry Rivalry

SBU: Harley-Davidson

Rivals: Honda, BMW, Suzuki, Yamaha

• Foreign Manufacturer

• Established Company Entering a New Market Segment• New Startup

• Parts Manufacturers• Electronic Components• Specialty Metal Suppliers• Machine Tool Vendors• Labor Unions• IT Vendors


• Automobiles• Public Transportation• Mopeds• Bicycles

Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:Jockeying for strategic position

Using price competition

Staging advertising battles

Making new product introductions

Increasing consumer warranties or service

Occurs when a firm is pressured or sees an opportunityPrice competition often leaves the entire industry worse off

Advertising battles may increase total industry demand, but may be costly to smaller competitors

Cutthroat competition is more likely to occur when:

Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

Numerous or equally balanced competitorsSlow growth industryHigh fixed costs

Lack of differentiation or switching costs

High storage costs

Capacity added in large increments

High strategic stakesHigh exit barriers

Diverse competitors

The overall attractiveness of the industry

If all the five forces are strong, industry profitability would be expected to be low regardless of the products/services being produced. Conversely, weak forces permit higher prices and above-average industry profitability.

Firms can influence the five forces through the strategies they pursue.

Some innovations can lead to a short-term advantage. But if every player in the industry is forced to follow suit, it can result in the whole industry being worse off.

For example, the first firm to advertise on television may gain an increase in market share. If everyone else imitates this strategy, it may result in a stalemate with the only winners being the advertising agencies and the television companies.

The crucial question, in determining profitability is whether firms in the industry can capture and retain the value they create for buyers, or whether this value is lost to others in fending off competition. Industry structure determines who captures the value :

New entrants can compete away value, passing it on to buyers through lower prices, or they dissipate the value created by raising the costs of competing.

Buyers who are powerful can retain most of the value created for themselves.

Substitutes place a ceiling on prices.

Suppliers that are powerful can appropriate the value created for buyers.

Rivalry, like entry, results either in value being passed on to buyers (in the form of lower prices) or it raises the costs of competing (e.g. greater investments in product development and marketing).

The Five Forces are Unique to Your Industry

• Five-Forces Analysis is a framework for analyzing a particular industry.– Yet, the five forces affect all the other

businesses in that industry.

EXERCISE

Presentation on an industry of choice and how the five forces act on one another

SWOT

Strengths:Margins are goodFlexibility of product mix: Tremendous. Availability of raw material: Abundant. Technical manpower: Professionally-trained, technical human resource pool, built over last 30 years.

Weaknesses:PerishabilityLack of control over yieldLogistics of procurementProblematic distributionCompetition

Opportunities:Value addition Export potential

Threats:Threat from the unorganized sector

SWOT

Indian Dairy Industry

The purpose of SWOT Analysis

• It is an easy-to-use tool for developing an overview of a company’s strategic situation– It forms a basis for matching your company’s

strategy to its situation

SWOT is the starting point

• It provides an overview of the strategic situation.

• It provides the “raw material” to do more extensive internal and external analysis.

Opportunities

• An OPPORTUNITY is a chance for firm growth or progress due to a favorable juncture of circumstances in the business environment.

• Possible Opportunities:– Emerging customer needs– Quality Improvements– Expanding global markets– Vertical Integration

Threats

• A THREAT is a factor in your company’s external environment that poses a danger to its well-being.

• Possible Threats:– New entry by competitors– Changing demographics/shifting demand– Emergence of cheaper technologies– Regulatory requirements

EXERCISE

Do a SWOT analysis of a company of your choice.

VRIO FRAMEWORK

Checking your companies internal capabilities and

resources

Creating Strategic Fit to Leverage Internal Strengths

What Does Internal Analysis Tell Us?

Internal analysis provides a comparative look at a firm’s capabilities

• what are the firm’s strengths?

• what are the firm’s weaknesses?

• how do these strengths & weaknesses compareto competitors?

Why Does Internal Analysis Matter?

• establish strategies that will exploit any sourcesof competitive advantage

• determine if its resources and capabilities arelikely sources of competitive advantage

Internal analysis helps a firm:

The Resource-Based View

Resources and Capabilities

Resources:

• tangible and intangible assets of a firm tangible: factories, products intangible: reputation

• used to conceive of and implement strategies

Capabilities:

• a subset of resources that enable a firm totake full advantage of other resources» marketing skill, cooperative relationships

The Resource-Based View

Four Categories of Resources

• Financial (cash, retained earnings)

• Physical (plant & equipment, geographic location)

• Human (skills & abilities of individuals)

• Organizational (reporting structures, relationships)

Tangible and Intangible Resources

54

Capabilities

• Organizational capabilities:

Routines and standard operating proceduresOutstanding customer serviceExcellent product development capabilitiesInnovativeness or products and servicesAbility to hire, motivate, and retain human capital

Resources and Capabilities

Firm Assets:

Machinery

Collective Product Design Skill

Recruiting Skill

Engineering Skill of Individuals

Mineral Deposits

Are these resourcesor capabilities?

?

?

?

?

?

Linking Resources and Capabilities to Firm Performance

EXHIBIT 4.3 Company Examples of Core Competencies & Applications

Precision Mechanics

FineOptics

Micro-Electronics

35mm SLR cameraCompact fashion cameraEOS autofocus camera

Digital cameraVideo still camera

Plain-paper copierColor copier

Color laser copier Laser copierBasic fax

Laser faxMask aligners

Excimer laser alignersStepper aligners

Inkjet printerLaser printer

Color video printerCalculator

Notebook computer

Canon: Products and Core Technical CapabilitiesCanon: Products and Core Technical Capabilities

The Internal Analysis Tool

The VRIO Framework

Four Important Questions:

• Value

• Rarity

• Imitability

• Organization

1–60

The Question of Value: "Is the firm able to exploit an opportunity or neutralize an external threat with the resource/capability?" The Question of Rarity: "Is control of the resource/capability in the hands of a relative few?" The Question of Imitability: "Is it difficult to imitate, and will there be significant cost disadvantage to a firm trying to obtain, develop, or duplicate the resource/capability?" The Question of Organization: "Is the firm organized, ready, and able to exploit the resource/capability?"

http://en.wikipedia.org/wiki/Value_(economics)

http://en.wikipedia.org/wiki/Imitation

http://en.wikipedia.org/wiki/Organization

The VRIO Framework

If a firm has resources that are:

• valuable,

• rare, and

• costly to imitate, and…

• the firm is organized to exploit these resources,

then the firm can expect to enjoy a sustainedcompetitive advantage.

The VRIO Framework

Valuable? Rare?Costly toImitate?

Exploited byOrganization?

CompetitiveImplications

No

Yes

Yes

Yes

Yes

Yes Yes Yes

No

No

No Disadvantage

Parity

TemporaryAdvantage

SustainedAdvantage

EconomicImplications

BelowNormal

Normal

AboveNormal

AboveNormal

EXHIBIT 4.5 Applying RBV: Decision Tree Competitive Implications

THANK YOU

Documents

Strategic Management. Environmental scanning (Unit 2) 1.Environmental analysis 2.Industry and competitive analysis 3.EFE matrix 4.CPM matrix 5.Internal