Situation Analysis

Chapter II

Purpose of Situation Analysis

Creates a shared understanding of the company and the environment in which it operates, including:1. Industry structure2. Basic facts about competitors3. Basic facts about customers4. Assess Company’s core capabilities5. Forces shaping the industry

FOUNDATION for STRATEGY DEVELOPMENTFOUNDATION for STRATEGY DEVELOPMENT

1. Industry structure

The fundamental unit of strategic analysis is the industry

Industry Structure

Relative Position Within the

Industry

STRATEGY

Company economic

performance

Company economic

performance

Industry Structure – Porter’s five forces

BARGAININGPOWER OFSUPPLIERS

BARGAININGPOWER OFSUPPLIERS

BARGAININGPOWER OF

CUSTOMERS

BARGAININGPOWER OF

CUSTOMERS

THREAT OFSUBSTITUTESTHREAT OF

SUBSTITUTES

THREAT OFNEW ENTRANTS

THREAT OFNEW ENTRANTS

RIVALRY AMONG

EXISTINGCOMPETITORS

RIVALRY AMONG

EXISTINGCOMPETITORS

Industry Structure – Porter’s Six Forces

BARGAININGPOWER OFSUPPLIERS

BARGAININGPOWER OFSUPPLIERS

BARGAININGPOWER OF

CUSTOMERS

BARGAININGPOWER OF

CUSTOMERS

THREAT OFSUBSTITUTESTHREAT OF

SUBSTITUTES

AVAILABILITY OFCOMPLEMENTS

AVAILABILITY OFCOMPLEMENTS

RIVALRY AMONG

EXISTINGCOMPETITORS

RIVALRY AMONG

EXISTINGCOMPETITORS

THREAT OFNEW

ENTRANTS

THREAT OFNEW

ENTRANTS

Rivalry Determinants Industry growth Fixed costs/value added Intermittent overcapacity

Product differences Brand identity Switching costs

Concentration and balance Informational complexity Diversity of competitors

Corporate stakes Exit barriers

RIVALRY AMONG

EXISTINGCOMPETITORS

RIVALRY AMONG

EXISTINGCOMPETITORS

Entry Barriers

Economies of scale Proprietary product differences Brand identity

Switching costs Capital requirement Access to distribution

Absolute cost advantages Government policy Expected retaliation

THREAT OFNEW ENTRANTS

THREAT OFNEW ENTRANTS

Determinants of Supplier Power Differentiation of inputs Switching costs of suppliers and firms in the

industry Presence of substitute inputs

Supplier concentration Importance of volume to supplier Cost relative to total purchases in the industry

Impact of inputs on cost or differentiation Threat of forward integration relative to threat

of backward integration by firms in the industryBARGAINING

POWER OFSUPPLIERS

BARGAININGPOWER OFSUPPLIERS

Suppli

es

Determinants of Substitution Threat Relative price performance of substitutes

Switching costs

Buyer propensity to substitute

THREAT OFSUBSTITUTESTHREAT OF

SUBSTITUTES

Determinants of Buyer Power

Bargaining Leverage Buyer concentration

vs. firm concentration Buyer volume Buyer switching costs

relative to firm switching costs

Buyer information Ability to backward

integrate Substitute products Pull-through

Price sensitivity Price/total purchases Product differences Brand identity Impact on

quality/performance Buyer profits Decision makers’

incentives

BARGAININGPOWER OF

CUSTOMERS

BARGAININGPOWER OF

CUSTOMERS

A Sixth Force - Complements

…Crucial for a successful strategy is to establish:– Who are your complementors– What is your strategy with respect to them

…pay more for your two

products together than for your product alone plus the other firm’s product

alone

…pay more for your two

products together than for your product alone plus the other firm’s product

alone

Your Complementor

Your Complementor

…accept less to serve both of you together than they would if supplying you alone plus the other firm alone

…accept less to serve both of you together than they would if supplying you alone plus the other firm alone

With respect to clients

With respect to clients

With respect to suppliers

With respect to suppliers

2. Basic facts about Competitors Develop the competitors profile including:

– Economic performance– Current market position – such as share– Core capabilities– Strengths and weaknesses– Aspirations– Strategies going forward

Determine the relative value proposition of the client’s and competitors’ products and services as perceived by the customer

Basic facts about Competitors - Example

TVR 1

PRO TV

Antena 1

Acasa TV

Prima TV

Realitatea TV

Overall share

InvestmentsAwaren

ess

Strength of relation-

ships

Coverage

20%

16%

14%

8%

5%

3.4%

Strong

Weak

Growth(CAGR 2005-

2003)

15%

9%

7%

6%

5%

3%

Profitability (ROIC)

20%

13%

11%

14%

10%

8%

Strengths Weakness

Defining Value Proposition

… clear, simple statement of the perceived benefits a product or service will provide to its target customers and the perceived price (cost) of those benefits

What Customer

s?

What Customer

s?

Which Needs?Which Needs?

What Relative

Price

What Relative

Price

•Which products?

•Which features?

•Which services?

•What end users?

•What channels?

3. Basic facts about CustomersA. Understand customer behavior

– Focus Groups– Industry quantitative studies (e.g. SNA for

Media)

B. Segment the customer Base– Is important especially for your business

clients (advertisers)

C. Assess attractiveness of different segments

A. Understand Customer behavior

Personal spending on press in the last

month(000 persons)

% of total urban population

More than RON 50

324 3.6

20.1-50 RON 1164 12.9

10.1-20 RON 1912 21.1

6.1-10 RON 1974 21.8

2.1-6 RON 1560 17.3

0.1-2 RON 678 7.5

0 RON 1292 14.3

B. Segment the Customer Base

Segmentation

approaches

Segmentation

approaches

ConstraintsConstraints

PerceptionsPerceptions

NeedsNeeds

BehaviorsBehaviors

RelationshipRelationship

OccasionsOccasions FirmographicsFirmographics

ProfitabilityProfitabilityAttitudesAttitudes

How is the customer's organization characterized?

What does the customer do in the marketplace?

Which key aspects have defined the customer'slifecycle?

How financially sound is the relationship with the customer?

How does the customer respond to different situations?

Which limitations are impacting the customer's actions?

What does the customer believe about the marketplace?

What underlying beliefs are shaping the customer's mindset?

What value does the customer require or want?

Segmentation Techniques (1)Approach

Firmographics

Behaviors

Relationship

Profitability

•As a “first cut” to understand relative penetration across business categories

•During sales process

•As a first-level segmentation in business-to-business markets

•As a “quick proxy” to test range of customer needs

•As a test of marketing effectiveness

•To identify likely cross-selling targets

•As a broad tool for classifying opportunities with customers

•To anticipate needs across life-cycle

•To pinpoint retention problems across tenure groups

•As a key tool to target a more profitable mix of customers

•To upgrade the profitability of customer accounts

•To quantify the impact of marketing programs over time

When to use Key insights

•Data easy to obtain•Companies with similar

firmographics can have very different needs and relationship profitability

•One of the best methods for segmentation in business-to-business

•Do not place too much emphasis on internal client behavioral information

•Accurate data can be hard to find

•Key drivers of customer profitability are loyalty and retention

•Account relationship segmentation can yield quick insights that can boost sales force productivity

•Back-of-the-envelope profitability can be wrong or misleading

•Building solid customer economics takes time

•Data can be hard to find

Data source

•Third party databases

•Industry trade assoc.

•Customer information files

•Customer information files

•Custom market research

•Customer information files

•Custom market research

•Customer information files

•Custom market research

Segmentation Techniques (2)Approach

Needs

Attitudes

Perceptions

Constraints

Occasions

•As a primary input into the development of the value required or wanted

•As a supplement to needs-based segmentation

•As a means to uncover latent needs that the customer cannot articulate

•To identify customers who are at different satisfaction levels

•To generate key insights into brand strategy

•In combination with behavioral and needs-based segmentation approaches to fully understand factors which may be limiting a customer’s market actions

•When customers are likely to behave differently in different situations

•When the marketer is interested in creating multi-mode marketing programs

Key insights

•Must consider needs of multiple decision-makers and influencers

•Most useful when high emotional components are present (consulting)

•A customer’s perception is their reality

•Can provide useful insights into market opportunities, but should not provide the basis of segmentation

•Some constraints are more evident than others – defining constraints is a powerful tool for business expansion

•Popular in consumer marketing•Can surface insights for product

development/marketing communications

•Custom market research

•Custom market research

•Custom market research

•Custom market research

•Team brainstorming•Account rep

interviews

•Historical account data

•Custom market research

Data sourceWhen to use

C. Assess attractiveness of different segments

–Relative price points–ROICs per segment–Cost to serve

–Size of addressable customer base

–Volume usage–Price

–Customer demographics–Unit volume growth–Price trends

Segment attractiveness

Segment attractiveness

How large are the

segments?

How large are the

segments?

What are the growth

expectations?

What are the growth

expectations?

How profitable are

the segments?

How profitable are

the segments?

4. Assess Company’s Core Capabilities

Operational skills

Privileged assets

Growth-enabling skills

Special relationships

CORE CAPABILITI

ES

Operational Skills

STEP 1STEP 1Generate an initial list of specific skills and knowledge needed to drive the business system

STEP 2STEP 2

Validate each item against three measures:

• Drives value

• Superiority

• Sustainability

Privileged Assets - Examples Example

Distribution network

Brands and reputations

Customer information

Conferred advantage

•Increase sales of existing products and services

•Reduce the cost of new product launches

•Extend brand to launch products without threatening credibility of current business

•Maximize sales

Growth-enabling Skills

Example

Acquisition and post-merger management

Financing and risk management

Capital management

Peopledevelopment

Conferred advantage

•Save costs•Accelerate growth

•Advance along promising growth paths that are too costly or risky for competitors to follow

•Enables managers to make a commercial success of projects that other companies might reject because of poor returns

•Consistently develop managers who build new businesses

Special Relationships

Right to bid

Access

Right to match

Right to win

Efficiency

Influence/ power

Source of privilege

Deg

ree o

f p

rivi

leg

e

Stronger

advanta

ge

Stronger

advanta

ge

5. Forces Shaping the Industry

INDUSTRYINDUSTRY

DEM

AN

D

REGULATION

TEC

HN

OLO

GY

Demand

Demand

Latent demand

Existing demand

Future demand

TimeToday

Regulation

…be aware of your industry governmental regulation

State commissions set rates, approve investments, and affect number and size of competitors

Government licenses delivery channel and regulates content

Technology

…technological change implies INNOVATIONCosts

Total costs

Variable costs

Total costs

Variable costs

Time

New technologyOld technologyAbandonme

nt of old technology

Abandonment of old

technology

Likely time of

introduction

Likely time of

introduction

“Blitzkrieg” with new technology

“Blitzkrieg” with new technology

Earliest time of

introduction

Earliest time of

introduction