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PAN African e-Network Project

Diploma in Business Management


Strategic Management
Session - 4

Vivek Singh Tomar

Module-3 (Strategic Analysis) Part-2

Industry Analysis
Strategic Advantage Profile (SAP)
Competitor Analysis
Market Analysis
Scenario Analysis
SWOT Analysis

Industry
Industry Analysis:
Analysis: The
The Fundamentals
Fundamentals
The objectives of industry analysis
From environmental analysis to industry analysis
Porters Five Forces Framework
Applying industry analysis
Industry & market boundaries
Identifying Key Success Factors

Objectives of Industry Analysis


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

From
From Environmental
Environmental Analysis
Analysis
to
to Industry
IndustryAnalysis
Analysis
The national/
international
economy

Technology

Government
& Politics

The natural
environment

THE INDUSTRY
ENVIRONMENT
Suppliers
Competitors
Customers

Demographic
structure

Social structure

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
Profitabilityof
of US
USIndustries
Industries
Median return on equity (%), 1999-2002
Pharmaceuticals
Tobacco
Household & Personal Products
Food Consumer Products
Medical Products & Equipment
Beverages
Scientific & Photographic Equipt.
Commercial Banks
16.0
Publishing, Printing
Petroleum Refining
Apparel
Computer Software
Electronics, Electrical Equipment
Furniture
Chemicals
Computers, Office Equipment
Health Care

26.8
Gas & Electric Utilities
10.5
22.0
Food and Drug Stores
10.3
20.5
Motor Vehicles & Parts
9.8
20.3
Home Equipment
9.5
18.8
Railroads
9.0
18.8
Hotels, Casinos, Resorts
8.0
16.5
Insurance: Life and Health
7.6
Building Materials, Glass
7.0
14.3
Metals
6.0
14.3
Semiconductors &
14. 3
Electronic Components
5.8
13.5
Insurance: Property & Casualty 5.3
13.3
Food Production
5.3
13.3
Telecommunications
3.5
12.8
Forest and Paper Products
3.5
11.8
Communications Equipment
(4.0)
11.5
Airlines
(34.8)

The
The Determinants
Determinants of
of Industry
Industry
Profitability
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
The Spectrum
Spectrum of
of Industry
Industry Structures
Structures
Perfect
Competition

Oligopoly

Duopoly

Monopoly

Concentration

Many firms

A few firms

Two firms

One firm

Entry and Exit


Barriers

No barriers

Product
Differentiation

Homogeneous
Product

Potential for product differentiation

Perfect
Information flow

Imperfect availability of information

Information

Significant barriers

High barriers

Porters
Porters Five
Five Forces
Forces of
of
Competition
Competition Framework
Framework
SUPPLIERS
Bargaining power of suppliers
INDUSTRY
COMPETITORS
POTENTIAL Threat of
ENTRANTS
new
entrants

Threat of
Rivalry among
existing firms

SUBSTITUTES
substitutes

Bargaining power of buyers

BUYERS

The
The Structural
Structural Determinants
Determinants of
of Competition
Competition
BUYER POWER
Buyers price sensitivity
Relative bargaining
power

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

INDUSTRY RIVALRY

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

BUYER POWER
Buyers price sensitivity
Relative bargaining
power

SUBSTITUTE
COMPETITION
Buyers propensity
to substitute
Relative prices &
performance of
substitutes

Threat
Threat of
of Substitutes
Substitutes
Extent of competitive pressure from producers of
substitutes depends upon:
Buyers propensity to substitute
The price-performance characteristics of
substitutes.

The
The Threat
Threat of
of Entry
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

Bargaining
Bargaining Power
Power of
of Buyers
Buyers

Buyers price sensitivity

Relative bargaining power

Cost of purchases as %
of buyers 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.
Buyers information .
Ability to backward
integrate.

Note: analysis of supplier


power is symmetric

Rivalry
Rivalry Between
Between Established
Established
Competitors
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
Profitability and
and Market
Market Growth
Growth
ROI (%)
30

25

20

15

10

0
Return
sales
Return
onon
sales

Return
investment
Return
onon
investment

Cash
flow/Investment
Cash
flow/
Investment

-5
0 to 5%
5% toto
10%
> 10% Over 10%
Less than -5% < -5%-5% to 0-5% to 00 to 5%
5%
10%
ANNUAL RATE OF GROWTH OF MARKET DEMAND

The
The Impact
Impact of
of Unionization
Unionization on
on Profitability
Profitability

None

Percentage of employees unionized


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 Investment


ROS = Return on Sales

Applying
Applying Five
Five -- Forces
Forces Analysis
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
Drawing Industry
Industry Boundaries
Boundaries :: Identifying
Identifying
the
the Relevant
Relevant Market
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

Identifying
Identifying Key
Key Success
Success Factors
Factors
Pre-requisites
forsuccess
success
Pre-requisites for
What do
customers want?

Analysis of demand
Who are our
customers?
What do they want?

How does the firm


survive competition
Analysis of competition
What drives competition?
What are
drives
What
the competition?
main
dimensions
What are the
of main
competition?
dimensions of competition?
How
Howintense
intenseis
iscompetition?
competition?
Howcan
canwe
weobtain
obtainaasuperior
How
superior competitive
competitive
position? position?

KEY SUCCESS FACTORS

Identifying
Identifying Key
Key Success
Success Factors
Factors
Through
Through Modeling
Modeling Profitability:
Profitability: The
The
Airline
Airline Industry
Industry
Profitability
Income
ASMs

Yield

Revenue
RPMs

Strength of
competition on
routes.
Responsiveness to chaanging market
conditions
% business travelers.

x Load factor - Unit Cost

RPMs
ASMs

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

Achieving differentiation advantage


ASM = Available Seat Miles

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

RPM = Revenue Passenger Miles

Identifying
Identifying Key
KeySuccess
SuccessFactors
Factors
by
byAnalyzing
Analyzing Profit
ProfitDrivers:
Drivers: Retailing
Retailing
Sales mix of products

Return on Sales

Avoiding markdowns through


tight inventory control
Max. buying power to minimize
cost of goods purchased

ROCE

Max. sales/sq. foot through:


*location
*product mix
*customer service *quality control
Sales/Capital
Employed

Max. inventory turnover through


electronic data interchange, close
vendor relationships, fast delivery
Minimize capital deployment
through outsourcing & leasing

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

OCP

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?

VRIO Steps
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 -firms resources& capability
relative to external opportunity
Identify resource gaps and invest in upgrading
weaknesses

Strategic Advantage Profile (SAP) - Steps


1)

2)

3)

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

Strategic Advantage Profile (SAP)

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 fo
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
Finance
Marketing
Operational
Personnel
General

Competitive strengths / Weakness


High cost of capital, reserves & surplus
Fierce competition, company position secure
Excellent -parts & components available
Quality of management & personnel par with competition
High Quality experienced top management -take proactive stance

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. Walls
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

Concerns 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).

Concerns of an Org.s competitive analysis (3)


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.

Concerns of an Org.s competitive analysis (4)

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.

Concerns of an Org.s competitive analysis (5)

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).

Competitor Analysis
Future Objectives
How do our goals compare
to our competitors goals?
Where will emphasis be
placed in the future?
What is the attitude toward
risk?

What drives the competitor?

Competitor Analysis
Future Objectives
How do our goals
compare to our
Where
will emphasis
be
competitors
goals?Strategy
Current
placed inHow
the future?
are they currently
What is the
attitude
competing?
toward risk?
Does this strategy
support changes in the
competitive structure?

What is the competitor doing?


What can the competitor do?

Competitor Analysis
Future Objectives

What does the competitor believe


about itself and the industry?

How do our goals


compare to our
competitors
Where
will emphasis
goals? Strategy
be
Current
placed in the future?
How are we currently
What is the
attitude
competing?
Assumptions
toward risk?
Does thisDo
strategy
we assume the future
support changes
in the
will be volatile?
competition
structure?
What
assumptions do our

competitors hold about the


industry and themselves?
Are we assuming stable
competitive conditions?

Competitor Analysis
Future Objectives

What are the competitors


capabilities?

How do our goals


compare to our
competitors
Where
will emphasis
goals? Strategy
be
Current
placed in the future?
How are we currently
What is the
attitude
competing?
Assumptions
toward risk?
Does this
Dostrategy
we assume the future
supportwill
changes
in the
be volatile?
competition
Whatstructure?
assumptions do our
competitors
hold about the
Capabilities
industry and themselves?
What are my competitors
Are we operating under
strengths and weaknesses?
a status quo?
How do our capabilities
compare to our
competitors?

Dynamic Head-to-Head Rivalry


Response

Future Objectives
How do our goals
compare to our
competitors
Where
will emphasis
goals? Strategy
be
Current
placed in the future?
How are we currently
What is the
attitude
competing?
Assumptions
toward risk?
Does this
Dostrategy
we assume the future
supportwill
changes
in the
be volatile?
competition
Whatstructure?
assumptions do our
competitors
Capabilities
hold about the
industry and themselves?
What are my competitors
Are we operating
strengths under
and weaknesses?
a status quo?
How do our capabilities
compare to our
competitors?

What will our competitors


do in the future?
Where do we have a
competitive advantage?
How will this change our
relationship with our
competition?

Market Analysis
The 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 Rate


A 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, Porters
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 Channel
The 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 industrydependent, 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.

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

Scenario planning is the combination of scenario analysis for strategic


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

The 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

Crude Oil Rigs in US, (Prediction)

Crude 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.

SRi

History

The Number of Scenarios to Generate

Consensus is that three scenario are best.


Although two tend to classified as goodand-bad, while more than three become
unmanageable in the hands of users.

Arraying 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.

Scenario projects could be used for different purposes and with


different focuses

Characteristic of traditional planning compared with the


scenario planning approach

Thank You
Please forward your query
To: vstomar@amity.edu