Strategic Management

1. Strategic Management

2. Environmental scanning (Unit 2) Environmental analysis Industry and competitive analysis EFE matrix CPM matrix Internal analysis IFE matrix Porters five force SWOT VRIO framework

3. Pre read: The five competitive forces that shape strategy

4. Basic Elements of the Strategic Management Process

5. 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)

6. External environment It is divided into: • Macro environment (PESTEL framework: Political, Economic, socio cultural, demographic, technological, ecological, legal) and of course global factors…. • Operating environment (Suppliers, Customers, competitors, creditors, labour market, distributors and retailers, regulations) • Industry or micro environment

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

8. Measuring the external environment • EFE matrix • CPM matrix

9. 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’.

10. 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…

11. 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

12. Competitive profile matrix (CPM) (Cont) Developing the CPM - Example Company A Company B Company C 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 Rating 3 2 2 2 2 2 Score 0.3 0.6 0.4 0.4 0.2 0.2 Rating 4 3 2 4 1 2 Score 0.4 1.2 0.4 0.8 0.1 0.2 Total 1.00 3.2 2.1 3.1 Rating: 1=major weakness, 4=major strength

13. 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…

14. Measuring the internal environment • IFE matrix

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

16. 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….

17. Industry and Competitive Analysis

18. Industry Analysis Industry Analysis covers two important parts: Industry environment Competitive environment

19. Industry Analysis Industry Features: Size, growth rate, geographical boundaries, size of competition, pace of technological change and product innovation Industry Boundaries: Breadth of market, Product service quality, Geographical distribution, vertical integration, profit motives Industry environment: Fragmented and consolidated. Can also be classified into: Emerging, mature, declining and global Industry structure: Concentration(extent to which industry sales are dominated by only a few firms), Economies of scale, product differentiation and Barriers of entry Industry attractiveness: Profit potential, growth prospects, competition and industry barriers Industry performance: Production, sales, profitability and technological advancements. Industry practices: Various policies on product, price, promo, distribution, R&D and competition Industries future prospects…

20. Competitive environment What is competition????

21. 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.

22. Porter’s Five Forces Model of Competition Threat of New Entrants Threat of New Entrants

23. Economies of Scale Product Differentiation Barriers to Entry Capital Requirements Switching Costs Access to Distribution Channels Cost Disadvantages Independent of Scale Government Policy Threat of New Entrants Expected Retaliation

24. Porter’s Five Forces Model of Competition Bargaining Power of Suppliers Threat of New Entrants Threat of New Entrants

25. Supplier industry is dominated by a few firms Suppliers exert power in the industry by: Suppliers’ products have few substitutes * Threatening to raise prices or to reduce quality Buyer is not an important customer to supplier Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases 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 Suppliers Suppliers are likely to be powerful if:

26. Porter’s Five Forces Model of Competition Bargaining Power of Buyers Threat of New Entrants Threat of New Entrants Bargaining Power of Suppliers

27. Buyers are concentrated or purchases are large relative to seller’s sales Buyers compete with the supplying industry by: Purchase accounts for a significant fraction of supplier’s sales Products are undifferentiated * Bargaining down prices * Forcing higher quality Buyers face few switching costs * Playing firms off of Buyers’ industry earns low profits each other Buyer presents a credible threat of backward integration Product unimportant to quality Buyer has full information Bargaining Power of Buyers Buyer groups are likely to be powerful if:

28. Porter’s Five Forces Model of Competition Threat of Substitute Products Threat of New Entrants Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers

29. Products with similar functionlimit the prices firms can charge 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 Threat of Substitute Products Keys to evaluate substitute products:

30. Porter’s Five Forces Model of Competition Rivalry Among Competing Firms in Industry Threat of New Entrants Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products

31. 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

32. Porter Competitive Model • Heavyweight Motorcycle Manufacturing Industry • Parts Manufacturers • Electronic Components • Specialty Metal Suppliers • Machine Tool Vendors • Labor Unions • IT Vendors • Foreign Manufacturer • Established Company • Entering a New Market • Segment • New Startup Potential New Entrant Intra-Industry Rivalry SBU: Harley-Davidson Rivals: Honda, BMW, Suzuki, Yamaha Bargaining Power of Suppliers Bargaining Power of Buyers • Recreational Cyclist • Young Adults • Law Enforcement • Military Use • Racers • Automobiles • Public Transportation • Mopeds • Bicycles Substitute Product or Service

33. Intense rivalry often plays out in the following ways: Jockeying for strategic position Using price competition Staging advertising battles Increasing consumer warranties or service Making new product introductions Occurs when a firm is pressured or sees an opportunity Price competition often leaves the entire industry worse off Advertising battles may increase total industry demand, but may be costly to smaller competitors Rivalry Among Existing Competitors

34. Numerous or equally balanced competitors Slow growth industry High fixed costs High storage costs Lack of differentiation or switching costs Capacity added in large increments Diverse competitors High strategic stakes High exit barriers Rivalry Among Existing Competitors Cutthroatcompetition is more likely to occur when:

35. 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.

36. 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.

37. 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).

38. 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.

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

40. SWOT

41. Indian Dairy Industry

42. 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

43. 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.

44. 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

45. 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

46. EXERCISE Do a SWOT analysis of a company of your choice.

47. VRIO FRAMEWORK Checking your companies internal capabilities and resources

48. Creating Strategic Fit to Leverage Internal Strengths

49. 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 compare to competitors?

50. Why Does Internal Analysis Matter? Internal analysis helps a firm: • determine if its resources and capabilities are likely sources of competitive advantage • establish strategies that will exploit any sources of competitive advantage