MBA03-SM014: BUSINESS POLICY AND STRATEGIC ANALYSIS

Notes

What is a Value Chain Analysis?

If you are searching for a way to gain an edge on your competition, consider one of the business
world's most valuable tools: the value chain analysis. 

Value chain analysis relies on the basic economic principle of advantage — companies are best
served by operating in sectors where they have a relative productive advantage compared to their
competitors. Simultaneously, companies should ask themselves where they can deliver the best
value to their customers. 

To conduct a value chain analysis, the company begins by identifying each part of its production
process and identifying where steps can be eliminated or improvements can be made. These
improvements can result in either cost savings or improved productive capacity. The end result is
that customers derive the most benefit from the product for the cheapest cost, which improves
the company's bottom line in the long run.

What is a value chain?

To understand how to conduct a value chain analysis, a business must first know what its value
chain is. A value chain is the full range of activities — including design, production, marketing
and distribution — businesses go through to bring a product or service from conception to
delivery. For companies that produce goods, the value chain starts with the raw materials used to
make their products, and consists of everything that is added to it before it is sold to consumers.

The process of actually organizing all of these activities so they can be properly analyzed is
called value chain management. The goal of value chain management is to ensure that those in
charge of each stage of the value chain are communicating with one another, to help make sure
the product is getting in the hands of customers as seamlessly and as quickly as possible.

Porter's value chain

Harvard Business School's Michael E. Porter was the first to introduce the concept of a value
chain. Porter, who also developed the Five Forces Model that many businesses and companies
use to figure out how well they can compete in the current marketplace, first discussed the value
chain concept in his book "Competitive Advantage: Creating and Sustaining Superior
Performance" (Free Press, 1985).

"Competitive advantage cannot be understood by looking at a firm as a whole," Porter wrote. "It
stems from the many discrete activities a firm performs in designing, producing, marketing,
delivering and supporting its product. Each of these activities can contribute to a firm's relative
cost position and create a basis for differentiation"
According to LearnMarketing, Porter suggests that activities within an organization add value to
the service and products that the company produces, and that all of these activities should be run
at optimum level if the organization is to gain any real competitive advantage. If they are run
efficiently, the value obtained should exceed the costs of running them — for example,
customers should return to the company and transact freely and willingly.

In his book, Porter said a business's activities could be split into two categories: primary
activities and support activities. Primary activities include the following:

 Inbound logistics: This refers to everything involved in receiving, storing and

distributing the raw materials used in the production process.
 Operations: This is the stage where raw products are turned into the final product.
 Outbound logistics: This is the distribution of the final product to consumers.
 Marketing and sales: This stage involves activities like advertising, promotions, sales-
force organization, selecting distribution channels, pricing, and managing customer
relationships of the final product to ensure it is targeted to the correct consumer groups.
 Service: This refers to the activities that are needed to maintain the product's
performance after it has been produced. This stage includes things like installation,
training, maintenance, repair, warranty and after-sales services.

The support activities help the primary functions and comprise the following:

 Procurement: This is how the raw materials for the product are obtained.
 Technology development: Technology can be used across the board in the development
of a product, including in the research and development stage, in how new products are
developed and designed, and process automation.
 Human resource management: These are the activities involved in hiring and retaining
the proper employees to help design, build and market the product.
 Firm infrastructure: This refers to an organization's structure and its management,
planning, accounting, finance and quality-control mechanisms.

Goals and outcomes

Ideally, your value chain analysis will help your company identify areas that can be optimized
for maximum efficiency and profitability. 

Ruth Campbell, senior vice president of technical learning and application at economic
development nonprofit ACDI/VOCA told Business News Daily that the best result of a value
chain analysis should be the identification of the following components:

 Key short- and medium-term end-market opportunities in the target value chains.
 Factors constraining the maximization of these opportunities (for small-scale producers,
women, youth, etc.).
 Upgrading strategies to address these constraints and maximize opportunities.
  Private-sector, public-sector and civil society entities to partner with to achieve these
upgrading strategies.
 Recommendations of how to support these value chain upgrading strategies in a way that
is gender equitable, promotes improved nutrition (where relevant), and is inclusive of the
poor and other marginalized group.

At the other end of the spectrum, it's critical to properly understand and implement suggestions
that arise as a result of a value chain analysis. 

"One common misconception is that every constraint identified in a value chain analysis must be
addressed," Campbell said. "Value chain analysis should be used to prioritize the most binding
constraints — the ones that, if addressed, will produce the most beneficial impact — and/or those
constraints that can be addressed relatively quickly and easily to produce momentum for change
among value chain actors."

Campbell also cautioned that if an analyst constructs your value chain analysis, it is up to you as
the business owner or manager to make the most of his or her suggestions. 

"Social norms exert a huge influence in many contexts over what strategies are considered
possible or acceptable," Campbell said. "A vision for VC development cannot be imposed by the
analyst onto the local actors. Market actors have to embrace the vision if they are to invest their
resources and change the way they do business."

While value chain analysis is a tested and proven tool, other standards for analysis aim to
embrace a business model that is not strictly business-to-consumer. Specifically, the Leveraging
Economic Opportunities (LEO) Market Systems Framework aims to help companies that rapidly
respond to changing market conditions and interface more broadly with household and
communities than the traditional business assumed by value chain analysis. More information on
this strategic analysis tool is available from USAID.
Competitive Advantage

DEFINITION of 'Competitive Advantage'

An advantage that a firm has over its competitors, allowing it to generate greater sales or margins
and/or retain more customers than its competition. There can be many types of competitive advantages
including the firm's cost structure, product offerings, distribution network and customer support.

INVESTOPEDIA EXPLAINS 'Competitive Advantage'

Competitive advantages give a company an edge over its rivals and an ability to generate greater value
for the firm and its shareholders. The more sustainable the competitive advantage, the more difficult it
is for competitors to neutralize the advantage.

There are two main types of competitive advantages: comparative advantage and differential
advantage. Comparative advantage, or cost advantage, is a firm's ability to produce a good or service at
a lower cost than its competitors, which gives the firm the ability sell its goods or services at a lower
price than its competition or to generate a larger margin on sales. A differential advantage is created
when a firm's products or services differ from its competitors and are seen as better than a competitor's
products by customers.

Environmental Business Analysis

Environmental business analysis is a catchall term given to the systematic process by which
environmental factors in a business are identified, their impact is assessed and a strategy is
developed to mitigate and/or take advantage of them. While frameworks do exist to aid in
environmental analysis, it is important to understand that they are simply frameworks to orient
the user toward a more precise understanding of the business environment; they are by no means
necessary. Rather, it is important to understand the business environment, the universal processes
used in analysis and how analysis is converted into strategy.
Analysis Process

Any business manager should be able to analyze the environment in which the company does
business. The general process used to analyze the business environment has four basic steps.
First, the environment is scanned for environmental factors. Next, the relevant factors are culled
and monitored. Then, those factors are analyzed for impact. Lastly, scenarios are forecast based
upon the environmental factors identified and strategies developed accordingly. Further, as
strategies are implemented, the business environment is monitored so that any unforeseen
changes can be accounted for.

Identifying Environmental Factors

Identifying environmental factors is most commonly done by brainstorming. All environmental

factors are not always obvious to everyone and the more people included, especially in this initial
brainstorming, the more accurate the environmental profile developed will be. Common
environmental factors include new tax laws, tariff limits, export laws, consumer trends,
developing technology, new replacement products (i.e., the iPod to the CD player), laws
concerning emissions, or a new competitor.

SWOT Analysis: Examples, Templates & Definition

When examining the potential for a new business or product, a SWOT analysis can help
determine the likely risks and rewards. SWOT, which stands for Strengths, Weaknesses,
Opportunities and Threats, is an analytical framework that can help your company face its
greatest challenges and find its most promising new markets.

SWOT analysis was created in the 1960s by business gurus Edmund P. Learned, C. Roland
Christensen, Kenneth Andrews and William D. Book in their book "Business Policy, Text and
Cases" (R.D. Irwin, 1969). While the tool was originally intended for business use, it has since
been adopted to aid personal development.

Dwain Schenck, author of "Reset: How to Beat the Job Loss Blues and Get Ready for your Next
Act" (De Capo Lifelong Books, 2013), and Kim Giangrande, principal at Intuitive HR, say
SWOT analysis gives businesses a unique way of re-evaluating their positions. "The ideal
outcome of a SWOT is accurate data that can be utilized to create a solid action plan for
addressing a weakness and threats, and highlighting or positively exploiting your strengths and
opportunities," Schenck and Giangrande told Business News Daily.

"This analysis leads to business awareness and is the cornerstone of any successful strategic
plan," said Bonnie Taylor, vice president of strategic marketing at CCS Innovations. "It is
impossible to accurately map out a small business's future without first evaluating it from all
angles, which includes an exhaustive look at all internal and external resources and threats. A
SWOT accomplishes this in four straight-forward steps that even rookie business owners can
understand and embrace."

Niki Pfeiffer, founder of Niki Pfeiffer Designs, noted that many small business owners don't
know how to properly use a SWOT analysis to guide their businesses.

"It is about leveraging your strengths, outsourcing and partnering where you are weak, focusing
on opportunities, and being aware of threats," she said.

The purpose of a SWOT analysis

In a business context, the SWOT analysis enables organizations to identify both internal and
external influences. Outside of business, other organizations have found much use in the
method's guiding principles. Community health and development, education, and other groups
have used the analysis. SWOT's primary objective is to help organizations develop a full
awareness of all the factors, positive and negative, that may affect strategic planning
and decision-making. This goal can be applied to almost any aspect of industry.

Though SWOT is meant to act primarily as an assessment technique, its lengthy record of
success makes it an invaluable tool in project management.

"A good SWOT analysis serves as a dashboard to your product or services, and when done
correctly, can help you to navigate and implement a sound strategy for your business regardless
of company size or sector," said Vipe Desai, founder and CEO of HDX Hydration Mix. "We
continue to revisit ours every year to keep it updated due to constant shifts in market trends. It's a
crisp and simple way to communicate the most important aspects of our brand."

When to use SWOT

SWOT is meant to be used during the proposal stage of strategic planning. It acts as a precursor
to any sort of company action, which makes it appropriate for the following moments:

 Exploring avenues for new initiatives

 Making decisions about execution strategies for a new policy
 Identifying possible areas for change in a program
 Refining and redirecting efforts midplan

The SWOT analysis is an excellent tool for organizing information, presenting solutions,
identifying roadblocks and emphasizing opportunities.

"Performing a SWOT analysis is a great way to improve business operations and decision-
making," said Andrew Schrage, founder and CEO of Money Crashers. "It allowed me to identify
the key areas where my organization was performing at a high level, as well as areas that needed
work. Some small business owners make the mistake of thinking about these sorts of things
informally, but by taking the time to put together a formalized SWOT analysis, you can come up
with ways to better capitalize on your company's strengths and improve or eliminate
weaknesses."

While the business owner should certainly be involved in creating a SWOT analysis, it could be
much more helpful to include other team members in the process.

"Our management team does a SWOT analysis quarterly," said Shawn Walsh, president and
CEO of Paradigm Computer Consulting. "The collective knowledge removes blind spots that, if
left undiscovered, could be detrimental to our business or our relationship with our clients."

Brandon Dudley, director of marketing and operations at The BusBank, said that collaborative
SWOT analyses also give employees a greater sense of understanding and involvement in the
company.

Businesses should not consider the SWOT analysis a cure-all however. "Like any self-analysis
tool, it can be used incorrectly if we allow our ego or insecurities to drive the content. It is
imperative to be as honest with yourself [as possible] and be prepared to provide input that truly
reflects your competencies, accomplishments and abilities," Schenck and Giangrande said.

The elements of a SWOT analysis

A SWOT analysis focuses entirely on the four elements included in the acronym, allowing
companies to identify the forces influencing a strategy, action or initiative. Knowing these
positive and negative elements can help companies more effectively communicate what parts of
a plan need to be recognized.

When drafting a SWOT analysis, individuals typically create a table split up into four columns to
list each impacting element side-by-side for comparison. Strengths and weaknesses won't
typically match listed opportunities and threats, though they should correlate somewhat since
they're tied together in some way.

Royce Leather Gifts Marketing Director Billy Bauer noted that pairing external threats with
internal weaknesses can highlight the most serious issues faced by a company.

"Once you've identified your risks, you can then decide whether it is most appropriate to
eliminate the internal weakness by assigning company resources to fix the problems, or reduce
the external threat by abandoning the threatened area of business and meeting it after
strengthening your business," Bauer said.

Internal factors

The first two letters in the acronym, S (Strengths) and W (Weaknesses), refer to internal factors,
which means the resources and experience readily available to you. Examples of areas typically
considered include:

 Financial resources, such as funding, sources of income and investment opportunities

  Physical resources, such as your company's location, facilities and equipment
 Human resources, such as employees, volunteers and target audiences
 Access to natural resources, trademarks, patents and copyrights
 Current processes, such as employee programs, department hierarchies and software
systems

Businesses should also consider "softer" elements such as company culture and image,
operational efficiency and potential, and the role of key staff.

When listing strengths and weaknesses, individuals shouldn't try to sugarcoat or glaze over
inherent weaknesses or strengths. Identifying factors both good and bad is important in creating a
thorough SWOT analysis.

"Using the SWOT analysis has, more than once, saved me from myself, keeping me from taking
on projects that would likely have been too much for my small company," said Tom Atkins,
founder of Quarry House.

Mitchell Weiss, business professor at the University of Hartford, recommended fully analyzing
your strengths and weaknesses first.

"Companies can't hope to take advantage of or control the external factors until the internals have
been objectively assessed," he said.

External factors

External forces influence and affect every company, organization and individual. Whether these
factors are connected directly or indirectly to an opportunity or threat, it is important to take note
of and document each one. External factors typically reference things you or your company do
not control, such as:

 Market trends, like new products and technology or shifts in audience needs
 Economic trends, such as local, national and international financial trends
 Funding, such as donations, legislature and other sources
 Demographics, such as a target audience's age, race, gender and culture
 Relationships with suppliers and partners
 Political, environmental and economic regulations

Using SWOT to identify external factors benefited Supreme Graphics, a commercial print
manufacturer, which was struggling to compete with the digital industry in retaining larger
advertising and marketing clients.

"We used a SWOT analysis to identify a new market opportunity in small manufacturers that
needed ink-on-paper projects," said Michael Frishberg, Supreme Graphics' vice president of sales
and marketing. "This provided organic, nondisruptive growth."
On the other hand, Lynn Sheehan, co-founder and CEO of CPAreviewforFREE, noted that a
SWOT analysis helped her company fully analyze its pricing structure, which would have been a
threat to the company's success if left unchanged.

SWOT analysis template

Here is a SWOT Analysis template with some examples filled in:

Strengths
 Political support
 Funding available
 Market experience
 Strong leadership
Weaknesses
 Project is very complex
 Likely to be costly
 May have environmental impact
 Staff resources are already
stretched

Opportunities Threats
 Project may improve local
economy  Environmental constraints
 Will improve safety  Time delays
 Project will boost company's  Opposition to change
public image

The SWOT analysis is a simple, albeit comprehensive strategy for identifying not only the
weaknesses and threats of a plan, but also the strengths and opportunities it makes possible.
While an excellent brainstorming tool, the four-cornered analysis also prompts entities to
examine and execute strategies in a more balanced way. However, it is not the only factor in
developing a good business strategy.

"A SWOT analysis is helpful in broadly addressing questions to develop a business plan, but it
doesn't go far enough," said Worthworm and SkyMall co-founder Alan Lobock. "The exercise
alone won't identify your key value drivers of your business. Planning without first knowing
your goals and the metrics by which you will measure your progress toward achieving those
goals is inefficient and misguided."

Similarly, Sempurna Restoration Clinic founder Cleighton DePetro noted that a SWOT analysis
is just one tool in the strategy toolbox.

"When SWOT is used in conjunction with other analysis models, these frameworks for strategic
thinking are well worth your time and should guide your decision making," DePetro said.

Additional analytic tools to consider include PEST (Political, Economic, Social and
Technological), MOST (Mission, Objective, Strategies and Tactics), or SCRS (Strategy, Current
state, Requirements and Solution) analyses.
Schenck and Giangrande added that undertaking additional individual analysis in conjunction
with a tool like SWOT may also help business leaders identify how they can improve their
personal responses. "I am an advocate of service-assessment tools, specifically the Mayer-
Salovey-Caruso Emotional Intelligence Test (MSCEIT), which measures a respondent's abilities
related to the four branches of emotional intelligence: perceiving emotions, facilitating thought,
understanding emotions and managing emotions. DISC assessments are also valuable in that they
provide further insight into your work styles, specifically around Dominance, Influence,
Steadiness and Conscientiousness," Giangrande said.

"This information helps to determine what your motivators and triggers are, and how you handle
those. By knowing these things about yourself, you can work toward an action plan of self-
improvement or minimally ensure you select jobs, organizations and leaders that are an
appropriate fit for you to improve your chances for success," Schenck said.

More information

The following online resources can help you conduct a thorough SWOT analysis of your own
business:

 MindTools SWOT Analysis

 What Is a SWOT Analysis
 NetMBA SWOT Analysis
 Marketing Teacher
 QuickMBA SWOT Analysis

What Is a BCG Matrix?

If you're the owner of an established company, you may wonder how best to deploy resources to
enhance your prospects. Since 1968, the BCG matrix, also known as the Boston or growth-share
matrix, has helped companies answer that question by providing them a way to analyze product
lines in search of growth opportunities.

Named for its creator, the Boston Consulting Group, the BCG matrix aims to identify high-
growth prospects by categorizing the company's products according to growth rate and market
share. By optimizing positive cash flows in high-potential products, a company can capitalize on
market-share growth opportunities.

Reeves Martin, senior partner and managing director of Boston Consulting Group, said that
nearly 50 years after its inception, the BCG matrix remains a valuable tool for helping companies
understand their potential.

"The concept of BCG's growth-share matrix, central nowadays to business schools' curriculum
on strategy ... provided companies with a disciplined and systematic tool for portfolio
management," Martin told Business News Daily. "Recently, Harvard Business Review named
BCG's matrix one of five 'frameworks that changed the world.'"

Understanding the matrix

To create a BCG matrix, businesses gather market-share and growth-rate data on their business
units or products. One large square is drawn and is divided into four equal quadrants. Along the
top of the box, a market share or cash generation is written, and a growth rate or cash use is
written down the left side. On the top left is high market share, and low market share is on the
left. On the left-hand side, high cash use is at the top and low cash use or growth rate is at the
bottom.

Within the diagram, "stars" go in the upper-left quadrant, and "question marks" are put in the
upper-right square. At the bottom, "cash cows" go on the left, and "dogs" are placed on the right.
The diagram visually shows that stars have high market share and a high growth rate, while
question marks have low market share and a high growth rate. On the bottom, cash cows have a
low growth rate but a high market share, and dogs have a low market share and a low growth
rate.

The following ideas apply to each quadrant of the matrix:

Stars: The business units or products that have the best market share and generate the most cash
are considered stars. Monopolies and first-to-market products are frequently termed stars.
However, because of their high growth rate, stars also consume large amounts of cash. This
generally results in the same amount of money coming in that is going out. Stars can eventually
become cash cows if they sustain their success until a time when the market growth rate
declines. Companies are advised to invest in stars.
Cash cows: Cash cows are the leaders in the marketplace and generate more cash than they
consume. These are business units or products that have a high market share, but low growth
prospects. According to NetMBA, cash cows provide the cash required to turn question marks
into market leaders, to cover the administrative costs of the company, to fund research and
development, to service the corporate debt, and to pay dividends to shareholders. Companies are
advised to invest in cash cows to maintain the current level of productivity, or to "milk" the gains
passively.

Dogs: Also known as pets, dogs are units or products that have both a low market share and a
low growth rate.They frequently break even, neither earning nor consuming a great deal of cash.
Dogs are generally considered cash traps because businesses have money tied up in them, even
though they are bringing back basically nothing in return. These business units are prime
candidates for divestiture.

Question marks: These parts of a business have high growth prospects but a low market share.
They are consuming a lot of cash but are bringing little in return. In the end, question marks, also
known as problem children, lose money. However, since these business units are growing
rapidly, they do have the potential to turn into stars. Companies are advised to invest in question
marks if the product has potential for growth, or to sell if it does not.

As BCG founder Bruce Henderson wrote in 1968, "all products eventually become either cash
cows or pets [dogs]. The value of a product is completely dependent upon obtaining a leading
share of its market before the growth slows."

Once a company plots out its matrix, it can begin to further analyze its products'potential.

Understanding cash flow

To understand the elements of the Boston matrix, companies should be mindful of the sources of
cash flow. Henderson wrote that four rules are responsible for product cash flow:

 Margins and cash generated are a function of market share. High margins and high
market share go together.
 Growth requires cash input to finance added assets. The added cash required to hold
share is a function of growth rates.
 High market share must be earned or bought. Buying market share requires an additional
increment or investment.
 No product market can grow indefinitely. The payoff from growth must come when the
growth slows, or it never will. The payoff is cash that cannot be reinvested in that
product.

Alternatives and next steps

While the traditional Boston matrix is a powerful and popular tool, it has been criticized for
implying that every company will identify products in each quadrant, and that there is or should
be steady movement of products among the quadrants as they progress in their life cycles.
For that reason, some consultants advocate the use of the GE/McKinsey Matrix instead. The
GE/McKinsey Matrix offers more categorization options and measures products according to
business-unit strength and industry attractiveness rather than market share, the complexity of
which may be outside the control of an individual company.

BCG has acknowledged that the business world is changing, and in 2014, the company issued a
revision to the matrix that focuses on different drivers of competitive advantage, such as how
quickly a company can adapt to changing circumstances. The updated version can be found on
BCG's website.

"With a few tweaks, the matrix can be adapted to help companies drive the strategic
experimentation required for success, even in unpredictable markets," Martin said. "The matrix
needs to be applied with accelerated speed, while balancing the investments between exploration
in new segments and exploitation of established segments. In addition, the investments and
divestments need to be managed rigorously, while carefully measuring and monitoring the
portfolio economics of experimentation."

Other analysis models include Porter's Five Forces, SWOT and SPACE.

Once your products have been categorized using any of these tools, your company will need to
decide on a strategy for exploiting their strengths and correcting their weaknesses. The
Quantitative Strategic Planning Matrix (QSPM) can help you sort through alternatives and settle
on the right approach.

Templates and examples

Additional templates and guidelines can be found here:

 Strategic Management Insight

 Smart Insights
 SlideShare