Sub: Financial Accounting Topic:
Framework for Strategy Analysis
Firms establish business strategies to differentiate themselves from competitors, but an industry’s
economic characteristics affect the flexibility that firms have in designing these strategies. In somecas
es, firms can create sustainable competitive advantages. PepsiCo’s size, brand name, and access
to distribution channels give it sustainable competitive advantages over smaller, less well-knownbeverage companies. Coca-Cola enjoys similar advantages. The reputation for quality familyentertainment provides Disney with a sustainable advantage. A reputation for low prices generatesadvantages in high customer traffic and high sales volume for Wal-Mart. The set of strategic choicesconfronting a particular firm varies across industries. The following framework dealing with productand firm characteristics helps the analyst identify and structure the set of trade-offs and choices afirm must face.1.
Nature of Product or Service.
Is a firm attempting to create unique products or services forparticular market niches, thereby achieving relatively high profit margins (referred to as aproduct differentiation strategy)? Or is it offering non-differentiated products at low prices,accepting a lower profit margin in return for a higher sales volume and market share (referredto as a low-cost leadership strategy)? Is a firm attempting to achieve both objectives bydifferentiating (perhaps by creating brand loyalty or technological innovation) and being pricecompetitive by maintaining tight control over costs?2.
Degree of Integration in Value Chain.
Is the firm pursuing a vertical integration strategy,participating in all phases of the value chain, or selecting just certain phases in the chain?With respect to manufacturing, is the firm conducting all manufacturing operations itself (asusually occurs in steel manufacturing), outsourcing all manufacturing (common in athleticshoes), or outsourcing the manufacturing of components but conducting the assemblyoperation in-house (common in automobile and computer hardware manufacturing)? With