Module 4

Company Situation Analysis

Module Outline
Determining How Well Present Strategy is Working SWOT Analysis
Strengths and Weaknesses of Firm Opportunities and Threats Facing Firm

Strategic Cost Analysis and Value Chain Assessing Firms Competitive Position Identifying Strategic Issues

Key Questions in Company Situation Analysis

How well is firms present strategy working? What are firms strengths, weaknesses, opportunities, and threats? Are firms prices and costs competitive? How strong is firms competitive position? What strategic issues does firm face?

What Is Companys Strategy?

Identify competitive approach
Low-cost leadership Differentiation Focus

Determine competitive scope

Stages of industrys production / distribution chain Geographic coverage Customer base

Identify functional strategies Examine recent strategic moves

How Well Is Present Strategy Working?

Key indicators of strategic and financial performance
Trends in market share Trends in profit margins Trends in net profits and return on investment Trends in sales growth / decline Credit ranking Image and reputation with customers Leadership role (s), i.e. technology, quality, etc. Competitive advantages or disadvantages Is competitive position getting stronger / weaker?

How Well Is Present Strategy Working?

The stronger a companys recent strategic and financial performance, the more likely it has a well-conceived, well-executed strategy. Weak strategic and financial performance is usually a sign of weak strategy or weak execution or both!

SWOT Analysis
SWOT represents the first letter in
S trengths W eaknesses O pportunities T hreats

SWOT analysis involves sizing-up firms

Internal strengths and weaknesses, and External opportunities and threats

Identifying Internal Strengths and Weaknesses

A strength is something firm is good at or characteristic giving it an important capability
Useful skill Important know-how Valuable organizational resources or competitive capability Achievement giving firm a market advantage

A weakness is something firm lacks, does poorly, or condition placing it at a disadvantage

Significance of a Companys Strengths and Weaknesses

Strengths are significant to strategy-making because they can
Serve as cornerstones of strategy Help build competitive advantage

A good strategy aims at correcting firms weaknesses which can

Make it vulnerable Prevent it from pursuing attractive opportunities Put it at a competitive disadvantage

Strategic Management Principle

Successful strategies seek to exploit what a company does best:
Expertise Strengths Core competencies Strongest competitive capabilities

Strategists shun strategies placing heavy demands on areas where company is weakest or has unproven ability!

Building a Core Competence

Definition A core competence is something a company does especially well in comparison to its competitors!

Types of Core Competencies

Superior skills in producing high quality product Superior system for delivering customer orders accurately and swiftly Better after-sale service capability More skill in achieving low operating costs Unique formula for selecting good retail locations Unusual innovativeness in developing new products Better merchandising and product display skills Superior mastery of an important technology Unusual effective sales force

Significance of a Core Competence

A core competence is important because of
Added capability it gives firm Competitive edge it can yield Potential for it being a cornerstone of strategy

Competitive advantage is easier to build when

Firm has a core competence Rival firms do not have offsetting competencies Its costly and time-consuming for rivals to match competency

Strategic Management Principle

Core competence empower a company to build competitive advantage!

Identifying External Opportunities

Opportunities most relevant to a firm are factors in external environment offering
Some kind of competitive advantage Important avenues for growth

Identifying External Threats

External factors posing a danger to firm
Emergence of cheaper technologies Introduction of new / better products by rivals Entry of low-cost foreign competitors New regulations Vulnerability to rise in interest rates Potential of hostile takeover Unfavorable demographic shift Adverse shifts in foreign exchange rates Political upheaval in a country

Significance of a Companys Opportunities and Threats

Affect attractiveness of firms situation Point to need for strategic action

Strategic Management Principle

A good strategy is always aimed at capturing a companys best growth opportunities and creating defenses against threats to its competitive position and future performance. Otherwise, it doesnt fit the companys situation!

Role of SWOT Analysis in Crafting a Better Strategy

SWOT Analysis helps answer key questions
Does firm have internal strengths an attractive strategy can be built on? Which weaknesses does strategy need to correct? Do firms weaknesses disqualify it from pursuing certain opportunities? Which opportunities does firm have resources to pursue with chance of success? What threats should firm worry most about?

What Is Strategic Cost Analysis?

Definition Comparing a firms cost position relative to key competitors activity by activity
From raw materials purchase to Price paid by ultimate customers

Assessing if firms costs are competitive with those of rivals is a crucial part of company situation analysis

What Is Strategic Cost Analysis?

Cost disparities among rivals can stem from differences in
Prices paid for raw materials, component parts, energy, and other supplier resources Basic technology and age of plant and equipment Economies of scale and experience curve effects Wage rates and productivity levels Changes in inflation and foreign exchange rates Marketing and distribution costs Inbound and outbound shipping costs

Principle of Competitive Markets

The higher the companys costs are above those of close rivals, the more competitively vulnerable it becomes!

The Value Chain Concept

Definition A value chain identifies:
Activities, functions, and business processes that have to be performed in Designing, producing, marketing, delivering, and supporting a product service

The Value Chain Concept

A Value Chain consists of two major types of activities
Primary activities that create value for customers Related support activities

Representative Company Value Chain

Primary Activities and Costs

Inbound Logistics

Operation

Outbound Logistics

Sales and Marketing

Service

Profit Margin

Product R&D, Technology, Systems Development Human Resource Management General Administration

Support Activities and Costs

What Determines Costs of Value Chain Activities?

Costs of performing each value chain activity can be driven up or down by 2 types of factors
Structural Cost Drivers Executional Costs Drivers

Structural Costs Drivers

Scale economies Experience curve effects Technology requirements Capital intensity Complexity of product line

Executional Cost Drivers

Commitment of work force to continuous improvement Attitudes and capabilities regarding quality Cycle time in getting new products to market Utilization of existing capacity Whether internal business processes are efficiently designed and executed How efficiently firm works with suppliers and / or customers to reduce costs

Keys to Understanding a Companys Cost Structure

Whether firm is trying to achieve a competitive advantage based on
Lower costs, or Differentiation

How costs in one value chain activity spill over to affect costs of others Whether linkages among activities in value chain present opportunities for cost reduction

The Value Chain System

Upstream Value Chains Company Value Chains Downstream Value Chains

Activities, Costs, and Margins of Suppliers

Internally Performed Activities, Costs, and Margins

Activities, Costs, Margins of Forward Channel Allies

Buyer / User Value Chain

The Value Chain System

Cost competitiveness depends on
Costs of internally performed activities Costs in value chains of suppliers and forward channel allies

Assessing firms competitiveness requires knowledge of value chain system

Firms own value chain Value chain of suppliers Value chain of forward channel allies

The Value Chain System

Suppliers value chains matter
Supplier incur costs in creating and delivering inputs used in firms value chain Cost and quality of inputs influence firms cost and / or differentiation capabilities

Forward Channel value chains matter

Costs and margins of downstream firms are part of price paid by ultimate end-user Activities channel allies perform affect satisfaction of end-user

Example: Key Value Chain Activities

Pulp and Timber Industry Timber farming Logging Pulp mills Papermaking Printing and publishing

Example: Key Value Chain Activities

Home Appliance Industry Parts and components manufacture Assembly Wholesale distribution Retail sales

Example: Key Value Chain Activities

Soft Drink Industry Processing of basic ingredients Syrup manufacture Bottling and can filling Wholesale distribution Retailing

Example: Key Value Chain Activities

Computer Software Industry Programming Disk loading Marketing Distribution

Developing Data for Strategic Cost Analysis

Data requirement are formidable Requires breaking department cost accounting data out into cost of performing Specific Activities Activity-Based Costing
New cost accounting methodology aimed at assigning costs to
Specific tasks, and Value chain activities

Traditional Cost Accounting Vs. Activity-Based Accounting

Traditional Cost Accounting Categories in Department Budgeting Department Activities Using Activity-Based Cost Accounting

Wage and Salaries Employee Benefits Supplies Travel Depreciation Other Fixed Charges Miscellaneous Operating Expense

$350,000 115,000 6,500 2,400 17,000 124,000 25,520

Evaluate Suppliers Process Purchase Orders Expedite Deliveries Expedite Internal Process Check Item Quality Check Deliveries Against Purchase Orders Resolve Problems Internal Administration

$135,750 82,100 23,500 15,840 94,300 48,450 110,000 130,210 $640,150

$640,150

Benchmarking Costs of Key Activities

Concept Benchmarking performance of a firms activities against rival and best practice firms provide evidence of firms cost competitiveness Benchmarking is an excellent tool to determine
If costs are in line with competitors Which business processes need to be scrutinized for improvement Which firms perform a given activity best

Benchmarking Costs of Key Activities

Focuses on Cross-Company comparisons of how well activities are performed
Purchase of materials Payments of supplies Management of inventories Training of employees Processing of payrolls Getting new products to market Performance of quality control Filling and shipping of customer orders

Benchmarking and Ethics

Benchmarking involves discussions of competitively sensitive data Ethical guidelines
Avoid talk about pricing or competitively sensitive costs Dont ask rivals for sensitive data Dont share proprietary data without clearance Have impartial third party assemble and present competitive data without names attached Dont disparage a rivals business to outsiders based on data obtained

Achieving Cost Competitiveness

Key Point A firms competitiveness depends on how well it manages its value chain relative to competitors Examining a firms value chain and comparing it to key rivals indicates
Who has how much of a cost advantage or disadvantage Which cost components are responsible

Achieving Cost Competitiveness

3 areas in firms value chain contributes to cost differences compared to rivals
1. Suppliers activities 2. Firms internal activities 3. Forward channel activities

Strategic actions to eliminate a cost disadvantage need to be liked to where cost differences originate!

Options: Correcting Supplier-Related Cost Disadvantages

Negotiate more favorable prices with suppliers Work with supplier to help them achieve lower costs Integrate backward Use lower-priced substitute inputs Do a better job managing linkages between suppliers value chain and firms own chain Try to make up difference by initiating cost savings in other areas of value chain

Options: Correcting Forward Channel Cost Disadvantages

Push for more favorable terms with distributors and other forward channel allies Work closely with forward channel allies and customers to identify win-win opportunities to reduce costs Change to a more economical distribution strategy Try to make up difference by initiating cost saving earlier in value chain

Options: Correcting Internal Cost Disadvantages

Initiate internal budget reductions Re-engineer business processes to do better job managing executional cost drivers Try to eliminate some cost-producing activities by revamping value chain system Relocate high-cost activities to lower-cost geographic areas See if certain activities can be outsourced or performed cheaper by contractors

Options: Correcting Internal Cost Disadvantages

Invest in cost-saving technological improvements Innovate around troublesome cost components Simplify product design to achieve cost reduction Try to make up difference by achieving savings in other areas of value chain system

Value Chain Analysis and Competitive Advantage

Value chain analysis is a powerful managerial tool for identifying which activities have
Competitive advantage potential

A firms competitive advantage is based on its ability to

Perform competitively crucial activities along value chain better than rivals

Value Chain Analysis and Competitive Advantage

Diagnosing competitive capabilities involves
Construct a value chain of firms activities Examine linkages among internally performed activities and linkages with suppliers and customers chain Identify activities and competencies critical to customer satisfaction and market success Make appropriate internal and external benchmarking comparisons to determine
How well firm performs activities How cost structure compares with rivals

Value Chain Analysis and Competitive Advantage

The strategy-making lesson of value chain analysis is that increased company competitiveness entails concentrating resources on those activities where the company can gain dominating expertise to serve its target customers!

Evaluating a Companys Competitive Position

Factors to examine
How strongly firm holds present competitive position Whether firms position can be expected to improve or deteriorated of present strategy is continued How firm ranks relative to key rivals on each important measure of competitive strength / industry KSF Whether firm has a sustainable competitive advantage or is at a disadvantage

Procedure: Assessing a Companys Competitive Strength

Step 1: Step 2:
List key success factors and other relevant measures of competitive strength Rate firm and key rivals on each factors using rating scale of 1 10 (1=weak; 10=strong) Decide whether to use weighted or unweighted rating system Sum individual ratings to get overall measure of competitive strength for each rival Evaluate firms overall competitive strength relative to rivals

Step 3: Step 4: Step 5:

Why Do a Competitive Strength Assessment?

Reveals strength of firms competitive position Show how firm stacks up against rivals Indicates whether firm is at a competitive advantage / disadvantage against each rival Provides insight into how firm can make strategic moves to alleviate its competitive weaknesses

Strategic Management Principle

Competitive strengths and competitive advantages empower a company to improve its long-term market position!

Determining Strategic Issues to be Addressed

Final analytical task that puts firm overall situation into perspective Issues come from thinking strategically about
Industry and competitive situation firms situation

A good strategy must include actions to respond to firms strategic issues and problems

Strategic Management Principle

Having through understanding of the strategic issues a company faces is a precondition for effective strategy-making. Until strategists have a clear fix on the issues, they are not ready to craft a strategy!

Deciding What The Strategic Issues Are

Is present strategy adequate in light of driving forces in industry and geared to industrys future key success factors? How good a defense does present strategy offer against the 5 competitive forces? Does present strategy adequately protect firm against external threats and internal weaknesses? Is firm vulnerable to competitive attack by rivals? Does firm have a competitive advantage or must it work to offset competitive disadvantage? Where are strong / weak spots in present strategy?

End of Module 4