module 2

Amity Business School

Amity Business SchoolMBA (M&S) Class of 2011, Semester III

Strategic Management

Module-II (Strategic Analysis)

Vivek Singh Tomar

[email protected]


• Understanding the hierarchical structure of Strategic Intent• Describe the forces in the macro environment organization

using ETOP and PESTLE framework• Understanding advantages and disadvantages to a firm

through SAP• Develop Scenarios and explain their implications• Use Five forces framework to identify the sources of

competition for a SBU• Define strategic groups, market segments and CSFs and

explain how these concepts help in understanding competition

• Explain the different type of strategic gap that might present opportunities or threats to organizations

• Understanding SWOT Analysis

Module Outcome


• Mission• Vision • Business Definition• Environmental Threat and Opportunity Profile (ETOP) • Industry Analysis • Strategic Advantage Profile (SAP)• Competitor Analysis • Market Analysis • Environmental Analysis and Dealing with Uncertainty • Scenario Analysis • SWOT Analysis

Module Content


Vision, Mission and Business Definition

Whether you are starting a new company or improving an existing one, you should define its purpose for existence. Then it is important to have a mission, plans and a vision for your company or business enterprise.

Questions you may have include:• What factors are in the purpose of a business? • How do you define a mission? • What about a business concept?


Vision/Mission Statements• Statements that explain who we are

– Type of organization– Products/services– Needs we fill

• Statements that explain our direction, our purpose, our reason for being– What difference do we make?

• Statements that explain what makes us unique– Values– People– Combination of products and services


Major Components of theStrategic Plan / Down to Action

Mission

Vision

Goals

Objectives

Measures

Why we existWhy we exist

What we want to beWhat we want to be

Indicators and Indicators and Monitors of successMonitors of success

Desired level of Desired level of performance and performance and timelinestimelines

Planned Actions to Planned Actions to Achieve Objectives Achieve Objectives

O1 O2

AI1 AI2 AI3

M1 M2 M3

T1 T1 T1

Specific outcomes expressed in Specific outcomes expressed in measurable terms (NOT measurable terms (NOT activities)activities)

Strategic Plan

Action Plans

Evaluate Progress

Targets

Initiatives

What we must achieve to be successfulWhat we must achieve to be successful


VISION : Desired future state; the aspiration of the Organization

What are our Dreams and Aspirations?

What do we want to look like in 5, 10, 15 years?

Where do we want to go?


• How the organization wants to be perceived in the future – what success looks like • An expression of the desired end state • Challenges everyone to reach for something significant – inspires a compelling future• Provides a long-term focus for the entire organization • A guiding philosophy• Consistent with organizational value• Influenced by the strengths and weaknesses of the

business


Components of a Vision Statement• Core ideology

– Core Values - timeless guiding principles– Core Purpose - reason for being

• Envisioned future– Big Hairy Audacious Goals (BHAG) - clearly articulated goals – Vivid description - a graphic description of what success and the future

will be like

• Recognition of service to stakeholders– Owners/creditors– Employees– Customers


Essentials of good Business Vision Statement

• A statement that clearly defines the firm’s “reason” for being in business– Should significantly stretch the resources and

capabilities of the farm– Should inspire people in the organization to

achieve things they never thought possible– Should unite people in the organization

toward the pursuit of one common goal


VISION STATEMENTS• McDonald’s• To give each customer, every time, an experience that

sets new standards in value, service, friendliness, and quality.

• NASDAQ• To build the world’s first truly global securities market . . . A

worldwide market of markets built on a worldwide network of networks . . . linking pools of liquidity and connecting investors from all over the world . . . assuring the best possible price for securities at the lowest possible cost.

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• Petsmart

• To be the premier organization in nurturing and enriching the bond between people and animals.

• Wachovia

• Wachovia’s vision is to be the best, most trusted and admired financial services company.

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MISSION :It is the unique purpose or reason for organization’s existence.

Overriding purpose in line with the values or expectations of the stakeholders

Who are we? What business are we in?


eBayWe help people trade anything on earth.

We will continue to enhance the online

trading experiences of all – collectors,

dealers, small businesses, unique item

seekers, bargain hunters, opportunity

sellers, and browsers.”


• The mission statement of an organization is normally short, to the point, and contains the following elements:– Provides a concise statement of why the

organization exists, and what it is to achieve;– States the purpose and identity of the

organization;– Defines the institution's values and philosophy;

and– Describes how the organization will serve those

affected by its work.


Good Mission StatementsFocus on limited number of goalsStress major policies and valuesDefine major competitive spheres within which

the company will operate by defining the: Industry.Products and applications.Competence. Market-segmentGeographical Vertical limit


Examples – Good and BadMission Statements

To Make People Happy

To Explore the Universe and Search for Life and to Inspire the Next Generation of Explorers

NASA

Walt Disney

Does a good job of expressing the core values of the organization. Also conveys unique qualities about the organization.

Too vague and and unclear. Need more descriptive information about what makes the organization special.


• MISSION STATEMENTS• Bristol-Myers Squibb• Our mission is to extend and enhance human

life by providing the highest-quality pharmaceuticals and health care products.

• GlaxoSmithKline• GSK’s mission is to improve the quality of

human life by enabling people to do more, feel better and live longer.

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• Merck• The mission of Merck is to provide society with

superior products and services by developing innovations and solutions that improve the quality of life and satisfy customer needs, and to provide employees with meaningful work and advancement opportunities, and investors with a superior rate of return.

• Wipro• The mission is to be a full-service, global outsourcing

company.

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Mission Elements

CustomersMarkets

Employees

PublicImage

Self-Concept Philosophy

SurvivalGrowthProfit

ProductsServices

Technology

Amity Business SchoolImportance of Mission

MissionResource Allocation

Unanimity of Purpose

Organizational Climate

Focal point for work structure

Benefits from a strong mission


Mission Statement Evaluation Matrix

Organization Name Customers

Products Services Markets

Concern for Survival, Growth,

Profitability Technology

Organization 1

Organization 2


Mission Statement Evaluation Matrix

Organization Name Philosophy

Self-Concept

Concern for Public Image

Concern for Employees

Organization 1

Organization 2


Vision vs. Mission

• The vision is more broad and future oriented – the goal on the horizon

• The mission is more focused – how you will get to the horizon


GOAL: General statement of Aim or Purpose.

It is an open ended statement of what one wishes to accomplish with no quantification and no time frame for completion.


• Describes a future end-state – desired outcome that is supportive of the mission and vision.• Shapes the way ahead in actionable terms.• Best applied where there are clear choices about the future.• Puts strategic focus into the organization – specific ownership of the goal should be assigned to someone within the organization. • May not work well where things are changing fast – goals tend to be long-term for environments that have limited choices about the future.


Developing Goals• Cascade from the top of the Strategic Plan – Mission, Vision, Guiding Principles.• Look at your strategic analysis – SWOT, Environmental Scan, Past Performance, Gaps . . • Limit to a critical few – such as five to eight goals.• Broad participation in the development of goals: Consensus from above – buy-in at the execution level.• Should drive higher levels of performance and close a critical performance gap.


Reorganize the entire organization for better responsiveness to customersReorganize the entire organization for better responsiveness to customers

We will partner with other businesses, industry leaders, and government agencies in order to better meet the needs of stakeholders across the entire value stream.

We will partner with other businesses, industry leaders, and government agencies in order to better meet the needs of stakeholders across the entire value stream.

Manage our resources with fiscal responsibility and efficiency through a single comprehensive process that is aligned to our strategic plan.

Manage our resources with fiscal responsibility and efficiency through a single comprehensive process that is aligned to our strategic plan.

Improve the quality and accuracy of service support information provided to our internal customers.

Improve the quality and accuracy of service support information provided to our internal customers.

Establish a means by which our decision making process is market and customer focus.

Establish a means by which our decision making process is market and customer focus.

Maintain and enhance the physical conditions of our public facilities.Maintain and enhance the physical conditions of our public facilities.


OBJECTIVE : Quantification or more precise statement of objective

Definable: It should defined to compare the performance

Quantifiable: It should be expressed in terms of “Value Or Market share”

( Avoid Vague terms such as “increase, improve or maximize”)

Achievable:

e.g. To increase sales of product globally by 30% in real terms within 5yrs. To increase market share for the product in the India from 10%-15%

over 2yrs


• Relevant - directly supports the goal• Compels the organization into action• Specific enough so we can quantify and

measure the results• Simple and easy to understand• Realistic and attainable• Conveys responsibility and ownership• Acceptable to those who must execute• May need several objectives to meet a goal


GOALS OBJECTIVES

Very short statement, few words

Longer statement, more descriptive

Broad in scope Narrow in scope

Directly relates to the Mission Statement

Indirectly relates to the Mission Statement

Covers long time period (such as 10 years)

Covers short time period (such 1 year budget cycle)


GOAL OBJECTIVE STRATEGY

To be No. 1in the market

Increase market share by 15% in three years

i) Increase product promotion

ii) Design product pricing

iii) Penetration

iv) New market development

v) Product-Service mix

vi) Quality improvement


Business Definition


• A Business Definition is a clear statement of the business the firm is engaged in or is planning to enter.

What is our Business in precise way:• “We are in the beauty enriching Business”

(Helen and Curtis)• “ We are in the Business of Computing

Technology” (Intel)• “We are Watch makers of the nation” (HMT)• “We are in the transportation business”

(TELCO)


Business DefinitionAbell’s Framework

http://www.12manage.com/methods_abell_three_dimensional_business_definition.html


• Business Definition Statements• Define the ‘space’ that the business wants to

create for itself in competitive terrain• Broadly specifies the opportunities that the

business may exploit within the space and the threats it may encounter from rival firms in course of time

• Must be defined in broad ways, keeping changing customer tastes and aspirations in mind


Product Oriented V/S market Oriented

Company Product Definition Market Definition

Railways We run railways We are a people and Goods mover

Oil Company We Sell Gasoline We supply energy

Film Producing Company

We make movies We make entertainment

Air conditioning company

We make air conditioners

We provide climate control in the home

Publishing Company We produce and sell books

We distribute information

Copying Company We make copying equipments

We help improve office productivity


• Questions to be examined before defining nature and scope of operations

1) Who is the customer? Where is the customer located, how to reach the customer, how does the customer buy etc.

2) What does the customer buy?

3) What does the customer consider value?


CORE : Resources, Processes, Skills COMPETENCE and Experience, which

provide superior Competitive Advantage

STRATEGY : Long Term Direction

STRATEGIC : Combination of Resources, ARCHITECTURE Processes and Competencies

to put strategy in action


CONTROL : Monitoring of Action Stepsto :

(a) Assess effectiveness of Strategies & Action

(b) Modify Strategies & Action as necessary


VALUES

What do we prize?

What drives our business?

What are our criteria for making ethical decisions?


Guiding Principles and Values• Every organization should be guided by a set of values and beliefs• Provides an underlying framework for making decisions – part of the organization’s culture• Values are often rooted in ethical themes, such as honesty, trust, integrity, respect, fairness, . . . .• Values should be applicable across the entire organization• Values may be appropriate for certain best management practices – best in terms of quality, exceptional customer service, etc.


Examples of Guiding Principles and Values

We obey the law and do not compromise moral or ethical principles – ever! We expect to be measured by what we do, as well as what we say.

We obey the law and do not compromise moral or ethical principles – ever! We expect to be measured by what we do, as well as what we say.

We treat everyone with respect and appreciate individual differences. We carefully consider the impact of business decisions on our people and we recognize exceptional contributions.

We treat everyone with respect and appreciate individual differences. We carefully consider the impact of business decisions on our people and we recognize exceptional contributions.

We are strategically entrepreneurial in the pursuit of excellence, encouraging original thought and its application, and willing to take risks based on sound business judgment.

We are strategically entrepreneurial in the pursuit of excellence, encouraging original thought and its application, and willing to take risks based on sound business judgment.

We are committed to forging public and private partnerships that combine diverse strengths, skills and resources.

We are committed to forging public and private partnerships that combine diverse strengths, skills and resources.


MARKETS

Which markets should we be in?

Which markets do we need to create?

What should be our basic Customer Orientation?


CORE COMPETENCIES

What are we good at?

What do we need to be good at?

How can we leverage our competencies into products and services for market we serve?


PRODUCTS & SERVICES

What kinds of products and services should we provide for the markets we serve?

How do we use these products to carve out a market niche?


BUSINESS ENVIRONMENT

What Threats and Opportunities do we face from Environmental Factors?

How do we track Key Environmental Activities and Trends?


STAKEHOLDERS

Which group of individuals are affected by the way we do business?

How do we establish win-win relationship with our stakeholders?


Stakeholders

• individuals and groups who have an interest in a firm’s performance and an ability to influence its actions

• Interest in performance coupled with ability to influence the firm through their decision to support the firm or not – companies have important relationships with their stakeholders.

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Strategic Leaders• Individuals who practice strategic

leadership – making sure that decisions are made that will ensure their firm’s success.– Example: Steve Jobs & Apple– The CEO– The Board of Directors– Both are responsible for setting the

organizational culture. 52


Strategic Leaders

though many different people may be involved, the final responsibility for effective use of the strategic management process rests with the firm’s top-level strategic leaders (i.e., the chief executive officer and the top management team). In addition, it is important to note that the best strategic leaders as well as all others throughout the firm also act ethically.

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CRITICAL RESOURCES

Which are the Critical Resources do we need to do business?

What should we do to ensure a steady supply of these Resources?


ENVIRONMENTALTHREAT

AND OPPORTUNITY PROFILE


ETOP ANALYSIS

PEST ANALYSIS

SWOT ANALYSIS


WHY ETOP??

o Helps organization to identify O-T

o To consolidate and strengthen organization’s position

o Provides the strategists of which sectors have a favourable impact on the organization.

o Organization knows where its stands with respect to its environment.

o Helps in formulating appropriate strategy


ETOP ANALYSIS

Economic factors: Technological factors:

• General economic condition.

• Rate of inflation.

• Interest rate/Exchange rate.

• Source of technology.

• Technological development.

• Impact of technology.


Socio cultural factors :Environmental factors:

o Demographic characteristics.

o Social attitudes.

o Education level , awareness, and consciousness of rights.

o Weather change

o Climatic change.

o Demand related factors.

o Suppliers related factors.

ETOP ANALYSIS


ETOP ANALYSIS

Political factors : Legal factors :

o Political system.

o Political structure , its goals and stability.

o Government policies , degree of intervention

o Policies related to licensing , monopolies.

o Policies related to export and import.

o Policies related to distribution and pricing.


FACTORS COULD INCLUDE

Political international trade, taxation policy

Economic interest rates, exchange rates, national income, inflation, unemployment, Stock Market

Social ageing population, attitudes to work, income distribution

Technological innovation, new product development, rate of technological obsolescence

Environmental global warming, environmental issues

Legal competition law, health and safety, employment law


THREAT MATRIX

Major

Threats Moderate

Threats

Moderate

Threats Minor

Threats

HIGH

HIGH

LOW

LOW

ATTRACTIVENESS

PROBABILITY OF OCCURENCE


OPPURINITY MATRIX

Very

attractive

Moderately

Attractive

Moderately

Attractive Less

Attractive

HIGH

HIGH

LOW

LOW

ATTRACTIVENESS

PROBABILITY OF OCCURENCE


PREPARING ETOP

o Dividing the environment in different sector.

o Analyzing the impact of each sector on the organization.

o Subdividing each environmental sector into sub factor.

o Impact of each sub sector on organization in form of a statement.


ETOP: Pros and Cons

Pros Cons

o Help to determine the key factor of threats and opportunities.

o Good tool to qualify the factors related to company’s strategy.

o Can consider many factors for each special case.

o It doesn’t show the interaction between the factors.

o It can’t reflect the dynamic environment.

o It’s a subjective analysis tool.


Case study : MILLIPORE


About Millipore

Millipore is a multinational, high technology bioscience company that

provides technologies, tools and services for the development and

production of new therapeutic drugs. The company, headquartered in

Bedford, Mass., serves the worldwide life science research, biotechnology

and pharmaceutical industries.

Mission and Vision

Millipore exists to provide technology, tools and services for the

development and production of new therapies and drugs that will enable

people to live longer, healthier lives. Our vision is to become the partner of

choice for critical tools, technology and services used in the discovery,

development and manufacture of new therapeutic compounds.


MILLIPORE PRODUCT LINE

1. Life science.

2. Drug discovery.

3. Sample preparations.

4. Lab water.

5. Process development.

6. Bio production.

7. Process monitoring.


Factors Impact of each Sector

Economic

Technological

Political

Legal

Socio cultural

•Fluctuation in exchange rate•Increasing rate of inflation•Worsening economic conditions

Strong R&D program•Market Leaders•Better solution providers•New “ Intergral”-2008

No significant change.

Following FCPA (Foreign corrupt practices act).•Strict IPR laws - No poaching

•No significance change.

ETOP

OF

MILLIPORE


Factors Impact of each sector

Competitive

Demand related

Governmental policies

Competition particularly from low priced products .

Downfall in demand due to low priced products . Containment of rising health-

care cost.

No excise duty only vat for product manufactured in India.

ETOP

OF

MILLIPORE


OPPORTUNITY MATRIX

• EB and CB

•Market leaders – brand value and brand

awareness.

•Special offers with OEM’s.(Agilent).

• Provide customized protocol support.

• Dedicated service team.(Toll Free numbers).

• Large installation base.

• New low budget product lines.

• Saturation point of market is far away

• New markets are opening


THREAT MATRIX

• Competition particularly from low priced

products.

•Concentration majorly on big Fishes.

• IPR laws are not so strong in INDIA.

• Switching over form process patent to product

patent

• Patent law not well defined

• Expensive products.

• Bad rapport with customers (unsatisfied

customer).

• Lack of geographical division (remote areas).

• Poor dealer network.

• Low investment in marketing.


Industry Analysis: The FundamentalsIndustry Analysis: The Fundamentals

• The objectives of industry analysis

• From environmental analysis to industry analysis

• Porter’s Five Forces Framework

• Applying industry analysis

• Industry & market boundaries

• Identifying Key Success Factors


• To understand how industry structure drives competition, which determines the level of industry profitability.

• To assess industry attractiveness

• To use evidence on changes in industry structure to forecast future profitability

• To formulate strategies to change industry structure to improve industry profitability

• To identify Key Success Factors

Objectives of Industry Analysis


THE INDUSTRYENVIRONMENT

• Suppliers• Competitors• Customers

Social structure

The national/ The national/ international international

economyeconomy

TechnologyTechnology

GovernmentGovernment& Politics& Politics

The natural The natural environmentenvironment

Demographic Demographic structurestructure

Social structureSocial structure

From Environmental Analysis to Industry Analysis

From Environmental Analysis to Industry Analysis

•The Industry Environment lies at the core of the Macro Environment.

•The Macro Environment impacts the firm through its effect on the Industry Environment.


Profitability of US IndustriesProfitability of US Industries

Pharmaceuticals 26.8 Gas & Electric Utilities 10.5Tobacco 22.0 Food and Drug Stores 10.3Household & Personal Products 20.5 Motor Vehicles & Parts 9.8Food Consumer Products 20.3 Home Equipment 9.5Medical Products & Equipment 18.8 Railroads 9.0Beverages 18.8 Hotels, Casinos, Resorts 8.0Scientific & Photographic Equipt. 16.5 Insurance: Life and Health 7.6Commercial Banks 16.0 Building Materials, Glass 7.0Publishing, Printing 14.3 Metals 6.0Petroleum Refining 14.3 Semiconductors &Apparel 14. 3 Electronic Components 5.8Computer Software 13.5 Insurance: Property & Casualty 5.3Electronics, Electrical Equipment 13.3 Food Production 5.3Furniture 13.3 Telecommunications 3.5Chemicals 12.8 Forest and Paper Products 3.5Computers, Office Equipment 11.8 Communications Equipment (4.0)Health Care 11.5 Airlines (34.8)

Median return on equity (%), 1999-2002


The Determinants of Industry Profitability

The Determinants of Industry Profitability

3 key influences:

• The value of the product to customers

• The intensity of competition

• Relative bargaining power at different levels within the value chain.


The Spectrum of Industry StructuresThe Spectrum of Industry Structures

Concentration

Entry and ExitBarriers

ProductDifferentiation

Information

Perfect Competition

Oligopoly Duopoly Monopoly

Many firms A few firms Two firms One firm

No barriers Significant barriers High barriers

HomogeneousProduct

Potential for product differentiation

PerfectInformation flow

Imperfect availability of information

Amity Business SchoolPorter’s Five Forces of Competition FrameworkPorter’s Five Forces of

Competition Framework

SUPPLIERS

POTENTIALENTRANTS SUBSTITUTES

BUYERS

INDUSTRYCOMPETITORS

Rivalry amongexisting firms

Bargaining power of suppliers

Bargaining power of buyers

Threat of

new entrants

Threat of

substitutes


THREAT OF ENTRY•Capital requirements•Economies of scale•Absolute cost advantage•Product differentiation•Access to distribution channels•Legal/ regulatory barriers•Retaliation

SUBSTITUTECOMPETITION

• Buyers’ propensity to substitute• Relative prices & performance of substitutes

BUYER POWER• Buyers’ price sensitivity • Relative bargaining power

INDUSTRY RIVALRY•Concentration•Diversity of competitors•Product differentiation•Excess capacity & exit barriers•Cost conditions

BUYER POWER• Buyers’ price sensitivity • Relative bargaining power

The Structural Determinants of CompetitionThe Structural Determinants of Competition


Threat of SubstitutesThreat of Substitutes

Extent of competitive pressure from producers of

substitutes depends upon:

• Buyers’ propensity to substitute

• The price-performance characteristics of substitutes.


The Threat of EntryThe Threat of Entry

Entrants’ threat to industry profitability depends upon the height of barriers to entry. The principal sources of barriers to entry are:

• Capital requirements

• Economies of scale

• Absolute cost advantage

• Product differentiation

• Access to channels of distribution

• Legal and regulatory barriers

• Retaliation

Amity Business SchoolBargaining Power of BuyersBargaining Power of Buyers

Buyer’s price sensitivity Relative bargaining power

• Cost of purchases as % of buyer’s total costs. • How differentiated is the purchased item? • How intense is competition between buyers? • How important is the item to quality of the buyers’ own output?

• Size and concentration of buyers relative to sellers. • Buyer’s information . • Ability to backward integrate.

Note: analysis of supplierpower is symmetric


Rivalry Between Established Competitors

Rivalry Between Established Competitors

The extent to which industry profitability is depressed by aggressive price competition depends upon:

• Concentration (number and size distribution of firms)

• Diversity of competitors (differences in goals, cost structure, etc.)

• Product differentiation• Excess capacity and exit barriers• Cost conditions

– Extent of scale economies– Ratio of fixed to variable costs


Profitability and Market GrowthProfitability and Market Growth

-5

0

5

10

15

20

25

30

Return on sales Return on investment Cash flow/Investment

< -5% -5% to 0 0 to 5% 5% to 10% > 10% Less than -5% -5% to 0 0 to 5% 5% to 10% Over 10%

Return on sales Cash flow/ InvestmentReturn on investment

ANNUAL RATE OF GROWTH OF MARKET DEMAND

ROI (%)


The Impact of Unionization on ProfitabilityThe Impact of Unionization on Profitability

Percentage of employees unionizedNone 1%-35% 35%-60% 60-75% >75%

ROI (%) 25 24 23 18 19

ROS (%) 10.8 9.0 9.0 7.9 7.9

ROI = Return on InvestmentROS = Return on Sales


Applying Five - Forces AnalysisApplying Five - Forces Analysis

Forecasting Industry Profitability• Past profitability a poor indicator of future

profitability.

• If we can forecast changes in industry structure we can predict likely impact on competition and profitability.

Strategies to Improve Industry Profitability• What structural variables are depressing

profitability

• Which can be changed by individual or collective strategies?


Drawing Industry Boundaries : Identifying the Relevant Market

Drawing Industry Boundaries : Identifying the Relevant Market

• What industry is BMW in:– World Auto industry

– European Auto industry

– World luxury car industry?

• Key criterion: SUBSTITUTABILITY– On the demand side : are buyers willing to substitute between

types of cars and across countries

– On the supply side : are manufacturers able to switch production between types of cars and across countries

• May need to analyze industry at different levels for different types of decision


Pre-requisites for success

• What drives competition? • What are the main dimensions of competition? • How intense is competition? • How can we obtain a superior competitive position?

Analysis of demand

• Who are our customers?

• What do they want?

KEY SUCCESS FACTORS

Analysis of competitionAnalysis of competition

• What drives competition?What drives competition?

• What are the main What are the main dimensions of competition?dimensions of competition?

•How intense is competition?How intense is competition?

•How can we obtain a superior How can we obtain a superior competitive position?competitive position?

What do What do customers want?customers want?

How does the firm How does the firm survive competitionsurvive competition

Pre-requisites for success

Identifying Key Success FactorsIdentifying Key Success Factors

Amity Business SchoolIdentifying Key Success Factors Through Modeling Profitability: The

Airline Industry

Identifying Key Success Factors Through Modeling Profitability: The

Airline Industry

Profitability = Yield x Load factor - Unit Cost Income Revenue RPMs Expenses ASMs RPMs ASMs ASMs

= x -

• Price competitiveness. • Efficiency of route planning.• Flexibility and responsiveness.• Customer loyalty.• Meeting customer requirements.

• Wage rates.• Fuel efficiency of planes.• Employee productivity.• Load factors.• Administrative overhead.

• Strength of competition on routes.

• Responsiveness to cha- anging market conditions

• % business travelers.

• Achieving differentiation advantage ASM = Available Seat Miles RPM = Revenue Passenger Miles


ROCE

Return on Sales

Sales/Capital Employed

Sales mix of products

Avoiding markdowns throughtight inventory control

Max. buying power to minimizecost of goods purchased

Max. sales/sq. foot through:*location *product mix*customer service *quality control

Max. inventory turnover through electronic data interchange, closevendor relationships, fast delivery

Minimize capital deploymentthrough outsourcing & leasing

Identifying Key Success Factors by Analyzing Profit Drivers: Retailing

Identifying Key Success Factors by Analyzing Profit Drivers: Retailing


SUMMARY: What Have We Learned?SUMMARY: What Have We Learned?

Forecasting Industry Profitability• Past profitability a poor indicator of future profitability.• If we can forecast changes in industry structure we can predict likely

impact on competition and profitability.

Strategies to Improve Industry Profitability• What structural variables are depressing profitability?• Which can be changed by individual or collective strategies?

Defining Industry Boundaries• Key criterion: substitution• The need to analyze market competition at different levels of aggregation

(depending on the issues being considered)

Key Success Factors• Starting point for the analysis of competitive advantage


Strategic Advantage Profile (SAP)

Amity Business SchoolOCP


VRIO FRAMEWORK

• Resource-asset, competency, skill,knowledge

e.g. patents, brand name, • Value: Does it provide competitive advantage?• Rarity: Do other competitors possess it?• Imitability: Is it costly for others to imitate?• Organisation: Is the firm organised to exploit

the resource?


• Identify firms resources-S&W• Combine firms strength into specific capabilities• Appraise-profit potential, sustainable competitive

advantage, ability to convert it to a profitable proposition

• Select strategy -firm’s resources& capability relative to external opportunity

• Identify resource gaps and invest in upgrading weaknesses

VRIO Steps


Strategic Advantage Profile (SAP) - Steps

1) The organization should identify the factors which are relevant for determining success in the industry concerned.

2) At the next level, the organization should measure its performance on these factors in comparison to its competitors. Based on the comparison, the organization can find out whether it has advantage or disadvantage in terms of various factors. An advantage is the situation which helps the organization to do better than its competitors. A disadvantage is the situation which affects the competitive position of the organization adversely. Further, advantages/disadvantages should be measured in terms of degree because all advantages/disadvantages may not be equal.

3) After identifying advantages, the next step is to measure their sustainability because any advantage may turn into disadvantage due to change in environmental factors. For example, many companies had competitive advantage in pre-liberalized era which turned into disadvantage because of entry of new competitors in post-liberalized era.


SAP is a summary statement, which provides an overview of the advantages and disadvantages in key areas likely to affect future operations of the firm. It is a tool for making a systematic evaluation of the strategic advantage factors, which are significant for the company in its environment. The following is an example of the SAP analysis of a hypothetical company

Capability Factor Competitive strengths / Weakness

•Finance High cost of capital, reserves & surplus

•Marketing Fierce competition, company position secure

•Operational Excellent -parts & components available

•Personnel Quality of management & personnel par with competition

•General High Quality experienced top management -take proactive stance

Strategic Advantage Profile (SAP)


Competitor Analysis


Concerns of an Org.’s competitive analysis

1. Who are our competitors?

2. How can our competitors be grouped meaningfully?

3. What are our competitors’ strengths and weaknesses?

4. What are our competitors’ objectives and strategies?

5. How are our competitors likely to react to changes in

the marketing environment?


Concerns of an Org.’s competitive analysis (1)

Competitor identification

1. Who are our competitors?

Similar specific-same product, technology and target market

Similar general-same product area, but different segments

e.g. Haagen daze vs. Wall’s

Different specific-same need satisfied by different means

e.g. Eurostar vs. British airway

Different general-competing for discretionary spend

e.g. holiday vs. new car

Amity Business SchoolConcerns of an Org.’s competitive analysis (2)

2. How can our competitors be grouped meaningfully?Different characteristics for identifying Strategic groupings

Source: Adapted from Wilson et al. (1992).



3. What are competitive strengths and weaknesses

• Requires use of various information sources.

• Consider in terms of critical success factors:

e.g. manufacturing, technical and financial strength, relationships with supplier and customer, its market and segment, product range, its volume, cash and profits etc.

• Information can be used to plan and launch attack.



4. What are our competitors’ objectives and strategies?

Objectives – related to cash generation, market share,

technological leadership, quality recognition

etc.

Find clues in product portfolio.

Strategy - related to its positioning, marketing mix etc.



5. How are our competitors likely to react to changes in the

marketing environment?

Learn by experience

Not easy to predict its reaction due to: its cost structures,

relative market positions, product life cycle,

industrial position etc.


Useful information about competitors

Source: Wilson et al. (1992).


Future ObjectivesFuture ObjectivesHow do our goals compare to our competitors’ goals?How do our goals compare to our competitors’ goals?Where will emphasis be placed in the future?Where will emphasis be placed in the future?

What is the attitude toward risk?What is the attitude toward risk?

Competitor AnalysisCompetitor Analysis

What drives the competitor?What drives the competitor?



What is the competitor doing?What is the competitor doing?

What can the competitor do?What can the competitor do?

Future ObjectivesFuture ObjectivesHow do our goals compare to our competitors’ goals?

How do our goals compare to our competitors’ goals?Where will emphasis be placed in the future?Where will emphasis be placed in the future?


Current StrategyCurrent StrategyHow are they currently competing?How are they currently competing?

Does this strategy support changes in the competitive structure?

Does this strategy support changes in the competitive structure?



What does the competitor believe about itself and the industry?What does the competitor believe about itself and the industry?




Current StrategyCurrent StrategyHow are we currently competing?How are we currently competing?

Does this strategy support changes in the competition structure?


Do we assume the future will be volatile?Do we assume the future will be volatile?

Are we assuming stable competitive conditions?Are we assuming stable competitive conditions?

What assumptions do our competitors hold about the industry and themselves?


AssumptionsAssumptions



What are the competitorWhat are the competitor’’s s capabilities?capabilities?What are the competitorWhat are the competitor’’s s capabilities?capabilities?








Are we operating under a status quo?Are we operating under a status quo?




What are my competitors’ strengths and weaknesses?What are my competitors’ strengths and weaknesses?

How do our capabilities compare to our competitors?

How do our capabilities compare to our competitors?

CapabilitiesCapabilities








Dynamic Head-to-Head RivalryDynamic Head-to-Head Rivalry


Are we operating under a status quo?Are we operating under a status quo?




ResponseResponseResponseResponseWhat will our competitors What will our competitors do in the future?do in the future?What will our competitors What will our competitors do in the future?do in the future?

Where do we have a Where do we have a competitive advantage?competitive advantage?Where do we have a Where do we have a competitive advantage?competitive advantage?

How will this change our How will this change our relationship with our relationship with our competition?competition?

How will this change our How will this change our relationship with our relationship with our competition?competition?

CapabilitiesCapabilitiesCapabilitiesCapabilities

What are my competitorsWhat are my competitors’’ strengths and weaknesses?strengths and weaknesses?What are my competitorsWhat are my competitors’’ strengths and weaknesses?strengths and weaknesses?

How do our capabilities How do our capabilities compare to our compare to our competitors?competitors?

How do our capabilities How do our capabilities compare to our compare to our competitors?competitors?


Market AnalysisThe role of market analysis is to determine

the attractiveness of market and to understand its evolving opportunities and threats as they relate to internal strength and weakness of the firm


Dimensions of Market Analysis (David A. Aaker)

• Market size (current and future)• Market growth rate• Market profitability• Industry cost structure• Distribution channel• Market trends• Key success factors


Market Size

The size of the market can be evaluated based on:

• Present sales• Potential sales (if expanded)

Some information sources for determining market size:

• Government data• Trade associations• Financial data from major players• Customer survey


Market Growth RateA simple means of forecasting the market growth rate is to extrapolate (infer or estimate) historical data into the future. While this method may provide a first-order estimate, it does not predict important turning points. A better method is to study growth drivers such as demographic information and sales growth in complementary products.


Ultimately, the maturity and decline stages of the product life cycle will be reached. Some leading indicators of the decline phase include:

• Price pressure caused by competition• Decrease in brand loyalty• Emergence of substitute products• Market saturation• Lack of growth drivers


Market Profitability

While different firms in the market will have different levels of profitability, the average profit potential for a market can be used as a guideline for knowing how difficult it is to make money in the market.


Industry Cost Structure

The cost structure is important for identifying key factors for success. To this end, Porter’s value chain model is useful for determining where value is added and for isolating the costs.

The cost structure also is helpful for formulating strategies to develop a competitive advantage. For example, in some environments the experience curve effect can be used to develop a cost advantage over competitors.


Experience Curve Diagram


Distribution ChannelThe following aspects of the distribution system are useful in a market analysis:

• Existing distribution channel– can be described by how direct they are to the customer.

• Trends and emerging channels– new channels can offer the opportunity to develop a competitive

advantage.

• Channel power structure– for example, in the case of a product having little brand equity,

retailers have negotiating power over manufacturers and can capture more margin.


Market Trends

Changes in the market are important because they often are the source of new opportunities and threats. The relevant trends are industry-dependent, but some examples include changes in price sensitivity, demand for variety, and level of emphasis on service and support. Regional trends also may be relevant.


Key Success Factors– Elements that are necessary in order for the firm

to achieve its marketing objectives.

few examples are:– Access to essential unique resources– Ability to achieve economies of scale– Access to distribution channels– Technological progress

It is important to consider that key success factors may change over time, especially as the product progresses

through its life cycle.


Analysis of the External

Environment


The External Environment


General Environment• Dimensions in the broader society that influence

an industry and the firms within it:

– Demographic

– Economic

– Political/legal

– Sociocultural

– Technological

– Global


The General Environment: Segments and Elements


Analysis of the External Environments

• General environment

– Focused on the future

• Industry environment

– Focused on factors and conditions influencing a firm’s profitability within an industry

• Competitor environment

– Focused on predicting the dynamics of competitors’ actions, responses and intentions


Analysis of the Internal

Environment


Competitive Advantage• Firms achieve strategic competitiveness

and earn above-average returns when their core competencies are effectively:– Acquired.– Bundled.– Leveraged.

• Over time, the benefits of any value-creating strategy can be duplicated by competitors.


Competitive Advantage (cont’d)• Sustainability of a competitive advantage

is a function of:

– The rate of core competence obsolescence due to environmental changes.

– The availability of substitutes for the core competence.

– The difficulty competitors have in duplicating or imitating the core competence.


Internal Analyses’ Outcomes

By studying the internal environment, firms identify what they can do

Unique resources, Unique resources, capabilities, and capabilities, and competenciescompetencies((required forrequired for sustainable sustainable competitive competitive advantageadvantage))


The Context of Internal Analysis

• Global Economy– Traditional sources of advantages can be overcome

by competitors’ international strategies and by the flow of resources throughout the global economy.

• Global Mind-Set– The ability to study an internal environment in ways

that are not dependent on the assumptions of a single country, culture, or context.

• Analysis Outcome– Understanding how to leverage the firm’s bundle of

heterogeneous resources and capabilities.


Components of Internal Analysis Leading to Competitive Advantage and Strategic Competitiveness


Creating Value

• By exploiting their core competencies or competitive advantages, firms create value.

• Value is measured by:

– Product performance characteristics

– Product attributes for which customers are willing to pay

• Firms create value by innovatively bundling and leveraging their resources and capabilities.

• Superior value Above-average returns


Creating Competitive Advantage

• Core competencies, in combination with product-market positions, are the firm’s most important sources of competitive advantage.

• Core competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should drive its selection of strategies.


The Challenge of Internal Analysis

• Strategic decisions in terms of the firm’s resources, capabilities, and core competencies:

– Are non-routine.

– Have ethical implications.

– Significantly influence the firm’s ability to earn above-average returns.


The Challenge of Internal Analysis (cont’d)

• To develop and use core competencies, managers must have:

– Courage

– Self-confidence

– Integrity

– The capacity to deal with uncertainty and complexity

– A willingness to hold people (and themselves) accountable for their work


Conditions Affecting Managerial Decisions about Resources, Capabilities, and Core Competencies

Source: Adapted from R. Amit & P. J. H. Schoemaker, 1993, Strategic assets and organizational rent, Strategic Management Journal, 14: 33.


Resources, Capabilities and Core Competencies

• Resources– Are the source of a firm’s

capabilities.

– Are broad in scope.

– Cover a spectrum of individual, social and organizational phenomena.

– Alone, do not yield a competitive advantage.

Discovering CoreDiscovering CoreCompetenciesCompetencies

ResourcesResources•TangibleTangible•IntangibleIntangible


CoreCoreCompetenciesCompetencies


Resources

• Resources– Are a firm’s assets,

including people and the value of its brand name.

– Represent inputs into a firm’s production process, such as:

• Capital equipment

• Skills of employees

• Brand names

• Financial resources

• Talented managers

• Types of Resources– Tangible resources

• Financial resources

• Physical resources

• Technological resources

• Organizational resources

– Intangible resources• Human resources

• Innovation resources

• Reputation resources


Tangible Resources

Financial Resources • The firm’s borrowing capacity

• The firm’s ability to generate internal funds

Organizational Resources • The firm’s formal reporting structure and its formal planning, controlling, and coordinating systems

Physical Resources •Sophistication and location of a firm’s plant and equipment

• Access to raw materials

Technological Resources • Stock of technology, such as patents, trademarks, copyrights, and trade secrets

Sources: Adapted from J. B. Barney, 1991, Firm resources and sustained competitive advantage, Journal of Management, 17: 101; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 100–102.


Intangible ResourcesHuman Resources • Knowledge

• Trust• Managerial capabilities•Organizational routines

Innovation Resources • Ideas• Scientific capabilities• Capacity to innovate

Reputational Resources • Reputation with customers• Brand name• Perceptions of product quality, durability, and reliability• Reputation with suppliers• For efficient, effective, supportive, and mutually beneficial interactions and relationships

Sources: Adapted from R. Hall, 1992, The strategic analysis of intangible resources, Strategic Management Journal, 13: 136–139; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 101–104.



• Capabilities– Represent the capacity to deploy

resources that have been purposely integrated to achieve a desired end state

– Emerge over time through complex interactions among tangible and intangible resources

– Often are based on developing, carrying and exchanging information and knowledge through the firm’s human capital







• Capabilities (cont’d)– The foundation of many capabilities

lies in:• The unique skills and knowledge of a

firm’s employees• The functional expertise of those

employees

– Capabilities are often developed in specific functional areas or as part of a functional area.






Examples of Firms’ CapabilitiesFunctional Areas Capabilities

Distribution Effective use of logistics management techniques

Human resources Motivating, empowering, and retaining employees

Management Effective and efficient control of inventories through

information systems point-of-purchase data collection methods

Marketing Effective promotion of brand-name products

Effective customer service

Innovative merchandising

Management Ability to envision the future of clothing

Effective organizational structure

Manufacturing Design and production skills yielding reliable products

Product and design quality

Miniaturization of components and products

Research & Innovative technology

development Development of sophisticated elevator control solutions

Rapid transformation of technology into new products and processes

Digital technology



• Four criteria for determining strategic capabilities:

– Value

– Rarity

– Costly-to-imitate

– Nonsubstitutability







• Core Competencies

– Resources and capabilities that are the sources of a firm’s competitive advantage:

• Distinguish a company competitively and reflect its personality.

• Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities.







• Core Competencies

– Activities that a firm performs especially well compared to competitors.

– Activities through which the firm adds unique value to its goods or services over a long period of time.






Building Core Competencies

• Four Criteria of Sustainable Competitive Advantage

– Valuable capabilities

– Rare capabilities

– Costly to imitate

– Nonsubstituable


• ValuableValuable• RareRare• Costly to imitateCostly to imitate• NonsubstitutableNonsubstitutable

Four Criteria of Four Criteria of Sustainable Sustainable AdvantagesAdvantages


The Four Criteria of Sustainable Competitive Advantage

Valuable Capabilities •Help a firm neutralize threats or exploit opportunities

Rare Capabilities •Are not possessed by many others

Costly-to-Imitate Capabilities •Historical: A unique and a valuable organizational culture or brand name

•Ambiguous cause: The causes and uses of a competence are unclear

•Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers

Nonsubstitutable Capabilities • No strategic equivalent


Building Sustainable Competitive Advantage

• Valuable capabilities– Help a firm neutralize threats or

exploit opportunities.

• Rare capabilities– Are not possessed by many

others.






• Costly-to-Imitate Capabilities

– Historical• A unique and a valuable

organizational culture or brand name

– Ambiguous cause• The causes and uses of a

competence are unclear

– Social complexity• Interpersonal relationships, trust, and

friendship among managers, suppliers, and customers


• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable




• Nonsubstitutable Capabilities– No strategic equivalent

• Firm-specific knowledge

• Organizational culture

• Superior execution of the chosen business model





Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage


Scenario Analysis


What is Scenario?

-Engage in systematic conjecture

-Human beings are constantly writing scenarios, interpreting signals in the environment and reframing them into meaningful images and trajectories in to the

future.


Introduction • For Many years, it was believed obtaining accurate forecasts

lay in the development of complex, quantitative models.• With just a little more time, a few more equations and a lot

more dollars, these models would be able to provide forecast.• Many users have become disillusioned with forecasting

models, attempt to predict the future from fancy mathematical manipulations of historical data.


Feedback and feed-forward

Amity Business SchoolScenario planning is the combination of scenario

analysis for strategic purposes and strategic planning based on the outcome of the scenario phase

Amity Business SchoolThe relations between possible, probable

and desired future


What is not Scenario?

• Scenario is not a forecast, neither a vision

• It does not seek numerical precision. It usually provides a more qualitative and

contextual description of how the present will

evolve in to the future.

• It is not assured. Scenario analysis usually tries to identify a set of

possible future, each of whose occurrence is plausible


Definition of Scenario• Vocabulary: Scenario is an outline of a natural or expected course of events.• Kahn and Weiner: A hypothetical sequence of events constructed for the purpose of

focusing attention.• Porter An internally consistent view of what the future might turn out to be• Ringland: That part of strategic planning which relates to the tools and

technologies for managing the uncertainties of the future • Schnaars: Identify plausible future environments that the firm might face.


Forecasting and Uncertainty

Amity Business SchoolCrude Oil Rigs in US, (Prediction)

Amity Business SchoolCrude Oil Rigs in US, (Reality)


Future is not continuation of the past necessarily


Scenario in Business

• 22% of “Fortune 1000”, were using scenario analysis in the 1970s

• 75% of these firms adopted the approach after the oil embargo in 1973

• It is essential to keep the number of factors that are considered to a minimum.


Time Horizon• Scenario analysis has been used primarily in

long-term forecasting.• Most firms that used scenario analysis employed

5-year horizon.• But in Xerox 15-year Shell, 15-year at least.• The content of scenario becomes progressively

more vague as the time horizon lengthens.• The ideal time horizon of scenario analysis is

specific to the industry, product or market under consideration.


Historical Background

• Herman Kahn: was writing scenarios as far back as the 1950s.

• “Thinking the Unthinkable”

• Shell in 1970s.

• SRI (Stanford Research Institute): Future of American Society until 2000.

Amity Business SchoolSRi

Amity Business SchoolHistory


The Number of Scenarios to Generate

• Consensus is that three scenario are best. Although two tend to classified as “good-and-bad”, while more than three become unmanageable in the hands of users.

Amity Business SchoolArraying Scenarios

• Scenarios are inevitably arrayed over some back-ground themes.

• Four background themes: 1-Favorability to the Sponsor: Selecting an optimistic and then an pessimistic. “Surprise-free” or ‘baseline” scenario 2-Probability of Occurrence One of the scenarios is labeled as “most likely”. Scenarios are possibilities, not probabilities. 3-Single, Dominant Issue Sometimes there is a single dominant factor whose outcome is central to the item being forecast. Like economy, government policy. 4-Themes In most business applications there is more than a single unknown.

There are many issues which compete, combine and interact with one another to characterize the future. Three scenarios as: Economic expansion, Environmental concern, and Technological domination.

Amity Business SchoolScenario projects could be used for different

purposes and with different focuses

Amity Business SchoolCharacteristic of traditional planning compared

with the scenario planning approach

Amity Business SchoolScenario planning is well suited to the task of dealing with paradigmatic, non-linear change


Methods of Constructing Scenarios

1-Highly Qualitative Procedures

2-Practical Procedures

3-Cross-Impact Analysis


1-Highly Qualitative Procedures• Kahn: -A simplistic intuition or an expression of bias rather than a careful synthesis and balancing of the analysis with more subtle qualitative considerations. -“Surprise-free” scenario• Godet: -”Exploratory Prospective Analysis” -Holistic and integrative analysis • Durand: -Intuitive analysis

Critic: They rely so heavily on intuitive and subjective analysis that they are difficult to implement.


2-Practical Procedures

• More practical means of generating scenarios in business environment:

-Identifying factors are expected to affect forecasting situation at hand.

-Postulating a set of plausible future values for each of these factors.

-Selecting a few plausible scenarios from a large number of possible combinations of the values of these factors.

• Two Approaches on selecting strategies: -Deductive -Inductive


3-Cross-Impact Analysis• Emerged from early work on the Delphi Technique• It’s Basic philosophy of Cross-Impact is that no

development occurs in isolation. Rather, it is rendered more or likely by the occurrence of other events.

• Cross-Impact attempts to capture these ‘cross-impacts’ from the judgmental estimates of experts.

• Data from experts are then input into a computer simulation or mathematical program.

Critic: Judgmental estimates are surely not amenable to any mathematical machinations.


Few Comments on Scenarios1. The most important part of scenario analysis is to think

about the problem.2. The most difficult in scenario analysis is how to reduce

a large number of potential future outcomes to a few plausible scenarios. The number of possible scenarios grows quickly as the number of factors increases.

3. Two methods: -Inductive: If the number of factors is small (<5),

examine every possible scenarios from this set. -Deductive: When many factors are considered, rather

than examining every possible combination, set the tone of scenarios. It means to decide whether the scenarios will represent an optimistic and pessimistic views of the future, or characterize some dominant themes.


Advantages of Scenario• Scenario writing is a planning instrument.• It is also an effective learning tool. Thinking in scenarios helps us understand the logic of

developments, clarify driving forces, key factors, key players and our potential to exert an influence.

• It proceeds more from the gut than from the computer. Although it may incorporate the results of quantitative models.

• It shows a slight accuracy comparing with other models of forecasting. Specially when uncertainty is high.


Scenario as powerful instrument • Brain-compatible format: Scenario thinking matches the way

the brain function. Narrative format (images and stories) makes them easily memorable.

• Opening-up of divergent thinking: By forcing your mind to think about qualitatively different directions, you train your capability to think the unthinkable.

• Complexity-reducing format: Complex business or general environments can be reduced to a manageable amount of uncertainty.

• Communicative format: Scenarios are easy to communicate and to discuss.


Weaknesses of ScenarioIf scenarios are powerful, why haven’t they been If scenarios are powerful, why haven’t they been

more widely used?more widely used?• Uncertainty in conclusions: It does not give one single answer

about the future. Therefore it does not provide the security that is often required in decision making.

• Counterintuitive to managerial simplicity: It does not accord with the managerial simplicity that says that there is one right answer to every question. Scenario planning is a more holistic or systemic approach to planning than traditional methods.

• Soft methods and soft answers: Scenario techniques are usually qualitative, the results are often presented in qualitative terms that fir poorly with traditional numbers-oriented cultures.

• Time consuming: Workshop-based methods are time consuming in terms of the number of hours and days the participants need to spend to get thorough results.

• Secrecy: Most of Scenarios adopted in the companies are arcane and impractical


Scenario Analysis at Shell

• Shell makes use of a strategic planning process in which a series of “what if “ scenarios are created

• The management at all levels is made to think strategically about the company’s business environment

Strategy

Shell’s scenario analysis

Testimonial

In early 1986, the price of oil fell to USD 10 per barrel and Shell’s scenario analysis proved successful as it was in a better position than its competitors to face the situation

• Shell has deployed processes and systems to anticipate future scenarios by analyzing the interplay of environmental factors and its impact on Shell’s business

• Scenario analysis presents complex interactions of future in a simplified, easy to understandable form

• By picking the more probable scenarios, the company can brace or prepare itself for exploiting future opportunities and challenges

• It helps the company in formulating strategy and decide the trade-offs required

Identify trends and their drivers

Develop contingent strategies to tackle each scenario

Develop the what, why and how of different scenarios

Identify parameters to monitor the environment


SWOT Analysis


SWOT Analysis

Identifying

internal strengths (S)

and weaknesses (W)

and also examining

external opportunities (O) and

threats (T)


©South-Western College Publishing

SS

WW

OO

TT

Things the company does well.Things the company does well.

Things the company does not do well.Things the company does not do well.

Conditions in the external environment that favor strengths.Conditions in the external environment that favor strengths.

Conditions in the external environment that do not relate to existing strengths or favor areas of current weakness.

Conditions in the external environment that do not relate to existing strengths or favor areas of current weakness.

InternalInternal

ExternalExternal


Production Costs Marketing Skills Employee Capabilities Financial Resources Available Technology Company/Brand Image

Strengths and WeaknessesStrengths and WeaknessesINTERNALINTERNAL

Strengths and WeaknessesStrengths and WeaknessesINTERNALINTERNAL


Wal- Mart SWOT Analysis

• Wal-Mart is powerful retail brand.

• Wal-Mart has grown substantially over recent years and has experienced global expansion.

• Wal-Mart has a core competence involving its use of IT to support its international logistics system.

• A focused strategy is in place for HRM and development.

Strengths



• Wal- Mart is the World’s largest grocery retailer and control of its empire, despite its IT advantages, could leave it week in some areas due to the huge span of control

• Since Wal-Mart sell products across many sectors, it may not have the flexibility of some of its more focused competitors.

• The company is global, but has a presence in relatively few countries Worldwide.

Weaknesses


Opportunities and ThreatsOpportunities and ThreatsEXTERNALEXTERNAL

Opportunities and ThreatsOpportunities and ThreatsEXTERNALEXTERNAL

Social

Demographic

Economic

Technological

Political/Legal

Competitive



• To take over, merge with, or form strategic alliances with other global retailers.

• There are tremendous opportunities for future business expansion.

• New locations and store types offer Wal-Mart opportunities.

• Opportunities exist for Wal-Mart to continue with its current strategy of large, super centres.

Opportunities



• Being number one means that Wal-Mart is the target of competition, locally and globally.

• Being a global retailer means that Wal-Mart is exposed to political problems in the countries where it has operations.

• Intense price competition.

Threats


TOWS Matrix


Four Types of Strategies

WT Strategies

ST Strategies

WO Strategies

SO Strategies

ThreatsOpportunitiesWeaknesses

Strengths(TOWS)


SO Strategies

SO Strategies

Use a firm’s internal

strengths to take

advantage of external

opportunities


Strengths(TOWS)


WO Strategies

WO Strategies

Improving internal

weaknesses by taking

advantage of external

opportunities


Strengths(TOWS)


ST Strategies

ST Strategies

Using firm’s strengths to

avoid or reduce the impact of external threats.


Strengths(TOWS)


WT Strategies

WT Strategies

Defensive tactics aimed at reducing

internal weaknesses and avoiding

environmental threats.


Strengths(TOWS)


Strategy Analysis & Choice

The TOWS Matrix

• List the firm’s key external opportunities• List the firm’s key external threats• List the firm’s key internal strengths• List the firm’s key internal weaknesses


Strategy Analysis & Choice

The TOWS Matrix

• Match internal strengths with external opportunities and record the resultant SO Strategies

• Match internal weaknesses with external opportunities and record the resultant WO Strategies

• Match internal strengths with external threats and record the resultant ST Strategies

• Match internal weaknesses with external threats and record the resultant WT Strategies

Amity Business SchoolTOWS Matrix

WT Strategies

Minimize weaknesses and

avoid threats

ST Strategies

Use strengths to avoid threats

Threats-T

List Threats

WO Strategies

Overcome weaknesses by

taking advantage of opportunities

SO Strategies

Use strengths to take advantage of opportunities

Opportunities-O

List Opportunities

Weaknesses-W

List Weaknesses

Strengths-S

List Strengths

Leave Blank

module 2

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