strategic analysis
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BUSINESS STRATEGYBUSINESS STRATEGY MKT3002 / 51110 MKT3002 / 51110
LECTURE THREE:
• Topic 3: Strategic analysis
Module 3Module 3Strategic analysis – Analysing Strategic analysis – Analysing
the environmentthe environment Learning outcomes
– Describe the components of the external environment within which an organisation operates
– Carry out a full PEST analysis– Appropriately conduct a Porter’s ‘5 forces’ analysis to
assess industry attractiveness– Explain the significance of segmentation in strategic
planning– Undertake a competitor analysis; and– Undertake a directional policy matrix to consider the
portfolio of a business
Key words and conceptsKey words and concepts
Environmental uncertainty PEST analysis Environmental drivers of change Porter’s diamond Scenario planning Five forces analysis Life-cycle model Exit barriers
Key words and conceptsKey words and concepts
Strategic group analysis Market segmentation analysis Perceived value Market attractiveness Directional policy matrix
IntroductionIntroduction
The external analysis may be viewed as a process which:– Identifies trends and future events, opportunities and
threats and strategic uncertainties;– Analyses the impacts of these on organisations; and– Ultimately suggests ways or strategies to cope with
such impacts.
Aaker 1999
Steps in the Steps in the environmental analysisenvironmental analysis
Assess the nature of the environment
Audit environmental influences
Identify key competitive forces
Identify competitive position
Identify key opportunities and threats
Strategic position
Differences between external & Differences between external & internal environmentsinternal environments
• External environment:– The management has no control over most of
its components.– React to the changes in the environment.
• Internal environment:– The management has varying degree of
influence of its components.– Seeks to change the environmental influence
itself.
Understanding the nature of Understanding the nature of the environmentthe environment
Environmental uncertainty increases the more that environmental conditions are dynamic or the more they are complex.
Environmental conditions:– Simple / static conditions– Dynamic conditions– Complex situations
Auditing environmental Auditing environmental influencesinfluences
• The importance of environmental forces differ from organisation to organisation.
• Three auditing technique:
– PEST analysis
– Porter’s diamond
– Scenario Planning
PEST analysisPEST analysis• It involves identifying factors that influence the
organisation. These factors include:
– Political / legal
(eg. Taxation policy, foreign trade regulations, government stability)
– Economic
(eg. unemployment, disposable income)
– Sociocultural
(eg. Lifestyle change, levels of education)
– Technological
(eg. Government spending on research, speed of technology transfer)
Porter’s diamondPorter’s diamond
Porter’s Diamond: suggests that there are inherent reasons why some nations are more competitive than others and why some industries
within nations are more competitive than others.
Firm strategy, structure and rivalry
Factor conditions
Demand conditions
Related and supporting industries
Environmental drivers of changeEnvironmental drivers of changeGlobal market convergence
Global competition
Govtinfluence Cost
advantages
• Trade policies• Technical standards• Host government policies
• Scale economies• Sourcing efficiencies• Country-specific costs• High product development costs
• Similar customer needs• Global customers• Transferable marketing
• Interdependence• Competitors global• High exports / imports
Global strategies
Drivers of globalisation
Scenario planningScenario planning ‘build’s plausible views of different possible
futures for an organisation based on grouping
of key environmental influences and drivers of change about which there is a high level of uncertainty’.
• Limited number of logically consistent.• Examine strategic options against the
scenarios.• Implications of scenarios.
External factor evaluation matrix External factor evaluation matrix (EFE)(EFE)
• ‘The EFE matrix allows strategies to summarise and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information’.
David 2001, p. 113
External factor evaluation matrix External factor evaluation matrix (EFE) (Cont)(EFE) (Cont)
Steps in developing the EFE matrix:– Identify a list of KEY external factors (critical success
factors).– 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.– Average total weighted score is 2.5.
External factor evaluation matrix External factor evaluation matrix (EFE) (Cont)(EFE) (Cont)
Key external factors
Opportunities1. Global markets are
practically untapped by quality wool.
2. Increased demand caused by a raised in wool products.
Threats1. Legislation against the
wool industry.2. Increased competition.
Weight
0.35
0.2
0.3
0.15
Rating
4
2
1
2
WeightedScore
1.4
0.4
0.3
0.3
Developing the EFE matrix - Example
Total 1.00 2.4
Competitive profile matrix (CPM)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) Competitive profile matrix (CPM) (Cont)(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
The competitive environment: The competitive environment: Five forces analysisFive forces analysis
‘Five forces analysis is a means of identifying the forces which affect the level of competition in an industry’.
Johnson & Scholes 1999, p.115.
Porter’s Five forces industry analysisPorter’s Five forces industry analysis
Potential entrants
BuyerSupplier
Substitutes
Competitive rivalry
Threat of substitutes
Bargaining power
Bargaining power
Threat of entrants
Adapted from M. E. Porter, Competitive Strategy
Competitive rivalryCompetitive rivalry
Development Growth Shakeout Maturity Decline
Few: trial of early adopters
Users/buyers
Competitive conditions
Few: competitors
Growing adopters:trial of product/service
Entry of competitors
Attempt to achieve trial
Fight for share
Undifferentiated products/services
Growing selectivityof purchase
May be many
Likely price cutting of Volume
Shakeout of weakest competitors
Saturation of Users
Repeat purchase reliance
Fight to maintain Share
Difficulties in gaining/taking share
Emphasis on efficiency/low cost
Drop-offIn usage
Exit of some competitors
Selective distribution
The life cycle model
Competitive rivalry (Cont)Competitive rivalry (Cont)
Other forces that affect competitive rivalry:– Competitors balance;– Market growth rates;– Global customers;– High fixed costs;– Extra capacity;– Differentiation;– Acquisition of weaker companies; and– High exit barriers.
Identifying the organisation’s Identifying the organisation’s competitive positioncompetitive position
1. Strategic group analysis
2. Market segmentation
3. Perceived value (customer )
4. Boston consulting group matrix (BCG)
5. Market attractiveness & business strength
6. Competitor analysis
1. Strategic group analysis1. Strategic group analysis
‘aims to identify organisations with similar strategic characteristics, following similar strategies or competing on similar bases’.
David 2001, p. 127
• The strategic group analysis is useful in the following ways:– Identify direct competitors.– Identify the possibility for an organisation to move
from one strategic group to another.– Identify opportunities.– Identify significant strategic problems.
2. Market segmentation2. Market segmentation
• ‘seeks to identify similarities and differences between groups of customers or users’.
David 2001, p. 129
3. Analysing perceived value 3. Analysing perceived value by customersby customers
• The development of competitive strategy needs to be based on a good understanding of dimensions of strategy valued most by customers. This can be achieved through:
– Identify the relevant market segments.– Identify the characteristics of the product/service that
customers value most.– Rate the importance of these dimensions.– Identify the relative strengths of competitors.– Review organisation’s competitive strategy.
4. The BCG4. The BCG
?Sales
growth
Market share
5. Market attractiveness and 5. Market attractiveness and business strengthbusiness strength
• Directional policy matrix– It seeks to position SBUs according to:
(a) how attractive is the relevant market in which they are operating, and
(b) the competitive strength of the SBU in that market.
6. Competitor analysis6. Competitor analysis
• Obtain information about competitors.• Identification of appropriate criteria.
– Eg. Goals and objectives, culture, financial, target market, and etc.
Environmental analysis in Environmental analysis in practicepractice
• Simplify the complexity.
• Selective attention.
• Prototypes.
• Contribute to collective know-how.
• Threats rather than opportunities.
• Difficulty in building up an overall strategic view of
the environment.
Lecture 3 reviewLecture 3 review
• Strategic analysis– Understanding the nature of the
environment– Audit environmental influences– Identify key competitive forces– Identify competitive position– Identify key opportunities and threats– Environmental analysis in practice
Next weekNext week lecture lecture
Module 4:
Resources, competencies,
strategic capability.
(Study book: Module 4 - Text
Chapter 4)
Next week’s tutorialNext week’s tutorial
• Prepare by going over the case
questions at end of module
• Read article from BRW 23/07/99
“Grooving in a new Mood” p 84 –7
• Do a porters five forces analysis
• Will environmental changes affect the way the retail music stores look like in the future?
• If you were to invest money in a business, would you consider a music retailer?
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