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Strategic Analysis We have looked at Strategic Management (and the need for a changing structure – Chandler), but now onto Analysis Tools used by Management
Strategic Analysis A Definition: “The process of conducting research into the business environment and into the organisation itself, to help form future strategies” SWOT (AS) PEST (AS) Boston Matrix Porters 5 forces
Strategic Analysis So, why carry out Strategic Analysis? 1. 2. 3. Where is the business now? How might we be affected by what is going to, or might, happen? How can we respond to these changes? Hopefully resulting in: n n More relevant business goals Better quality decision making Reduced risk for the future Allow better preparation for what might happen
Strategic Analysis - SWOT Recap on SWOT. . . SW – Internal OT – External A Business might need to overcome it’s weaknesses in order to achieve any opportunities (eg – Location will need to be changed to develop into new markets Damaged reputation will need to be fixed before a merger or joint venture)
Strategic Analysis - SWOT EVALUATION of SWOT It is limited by differing opinions – 2 managers will draw up a different SWOT based on their thoughts and ideas Not Quantitative – so the “cost” of a weakness cannot be compared with the potential “profit” from an opportunity The SWOT should be used as a future guide only – for clarification and mutual understanding by managers. It should not be used in isolation of other methods of Strategic Analysis!
Strategic Analysis - PEST Definition: “The strategic analysis of a firm’s macro-environment Political, Economic, Social and Technological factors” These are factors beyond a companies control Considered to be Opportunities or Threats from the SWOT A 2 Exam. . . So, if in an exam you are expected to consider the strategic tools available to a manager, LINK them by stating their similarities!
Strategic Analysis - PEST POLITICAL – Things to consider. . . n Government Stability n Changes in the law to particular industries n Environmental regulations n Employment Law n Competition regulations n Consumer Protection Laws n Political stance on free markets and business controls
Strategic Analysis - PEST ECONOMIC – Things to consider. . . n Rate of another countries economic growth (or recession) n Exchange Rate Stability n Membership of Free Trade Areas n Common currency schemes (Euro) n Tax Rates n Interest Rates n Inflation Rates n Stages of the Business cycle
Strategic Analysis - PEST SOCIAL – Things to consider. . . n Democratic changes n Dominant religion (impact on marketing) n Education standards – do they have skilled labour? n Roles of men and women in society n How many languages are spoken? n Are environmental issues a concern?
Strategic Analysis - PEST TECHNOLOGICAL – Things to consider. . . n Rapid growth in technology could result in cheaper production n Does government support in R&D exist? n Internet access/broadband speed n Speed of technological obsolescence n New product inventions
Strategic Analysis - PEST EVALUATION of PEST It cannot be a stand alone time task – it has to be ongoing and progressive Multinationals will need to do one for every country they operate in – each country will have a different outcome The PEST formalises the process of analysing the macro environment – providing focus and ongoing analysis of the external environment and uncontrollable factors
Strategic Analysis – BOSTON MATRIX Or. . . “Portfolio Analysis” Definition: “A method of analysing the product portfolio of a business in terms of market share and market growth’”
Strategic Analysis – BOSTON MATRIX A new product that has a high market share in a rapidly growing market is a "star" and should hopefully turn into a "cash cow" in the future when the market growth slows down. A product that has a low market share in a rapidly growing market is known as a "problem child" for obvious reasons and the firm will have to look at various marketing strategies to avoid it becoming a "dog" in the future. Total Revenue earned by each product
Strategic Analysis – BOSTON MATRIX Cash Cow High market share in a slow-growing industry. These units typically generate cash in excess of the amount of cash needed to maintain the business. They are regarded as staid and boring, in a "mature" market, and every corporation would be thrilled to own as many as possible. They are to be "milked" continuously with as little investment as possible, as any investment would be wasted in an industry with low growth.
Strategic Analysis – BOSTON MATRIX Stars High market share in a fast-growing industry. The hope is that stars become the next cash cows. Sustaining the business unit's market leadership may require extra cash, but this is worthwhile if that's what it takes for the unit to remain a leader. When growth slows, stars become cash cows if they have been able to maintain their category leadership, or they move from brief stardom to dogdom!
Strategic Analysis – BOSTON MATRIX Dogs Low market share in a mature, slow-growing industry. These units typically "break even", generating barely enough cash to maintain the business's market share. Though owning a break-even unit provides the social benefit of providing jobs and possible synergies that assist other business units, from an accounting point of view such a unit is worthless, not generating cash for the company. They depress a profitable company's return on assets ratio, used by many investors to judge how well a company is being managed. Dogs, it is thought, should be sold off.
Strategic Analysis – BOSTON MATRIX Problem Child Growing rapidly and thus consume large amounts of cash But because they have low market shares they do not generate much cash. The result is a large net cash consumption. A Problem C has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. Money is drawn away from the Cash Cows for funding! If the Problem C does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines. Problem C must be analyzed carefully in order to determine whether they are worth the investment required to grow market share.
Strategic Analysis – BOSTON MATRIX EVALUATION of Boston Matrix Good for use of current and existing product situation analysis Good for planning introduction of new products Difficult for predicting future trends of products Relies on marketing analysis by the marketing manager It needs continual market research You cannot predict what competitors will do in each “segment” of the matrix It is assumed that the higher rates of profit are related to high market share – this is not always the case (reducing prices and profit margins also increase sales!)
Strategic Analysis – PORTERS 5 FORCES Michael Porter’s 5 Force Analysis He said that it is a managers job to establish a competitive advantage of rivals, so the model helps to understand the industry in which the business operates SIMILAR TO PEST ANALYSIS, but focuses on a business “unit” rather than the product The elements that are covered by Porters 5 forces are: -
Strategic Analysis – PORTERS 5 FORCES
Strategic Analysis – PORTERS 5 FORCES COMPETITIVE RIVALRY The key part of the analysis It is in the centre of the model as it is based around the Other 4 factors Rivalry is likely to be greater when: n There a lot of firms with similar market share n Companies trying to obtain Economies of Scale (due to high fixed costs) n Low market growth forces companies to take a share from rivals to increase sales
Strategic Analysis – PORTERS 5 FORCES BARRIERS TO ENTRY How easy is it for competitors to join the industry? Threat of Entry is greater when: n Cheap technology to produce goods n Distribution channels are good – gap in the market for retailers to provide the goods n No legal of patent restrictions n Product differentiation is low – little advertising required
Strategic Analysis – PORTERS 5 FORCES THE POWER OF BUYERS How much power does a company have? (consider the supermarkets? High buyer power) There is more buyer power when: n There is a limited amount of suppliers (eg milk, chickens) n The cost of switching is low (better deals offered) n It is relatively easy to switch and buy from another supplier
Strategic Analysis – PORTERS 5 FORCES THE POWER OF SUPPLIERS Suppliers will have more power than the buyer when: n The cost of switching supplier is expensive (from a PC to a MAC!) n High Branding – sucked in by the image n Forward or Backward Merger or business development (cadbury’s opening a sweet shop / Nescafe opening a coffee shop) n Small customers are scattered around the country (eg petrol stations) and have little bargaining power with the supplier (not much clout!)
Strategic Analysis – PORTERS 5 FORCES THE THREAT OF SUBSTITUTES NOT similar products in the same industry! This refers to a substitute product in another industry! (eg – the demand for aluminium can be affected by the price of glass for bottles, and plastic for containers) Threats of substitutes exist when: n New technology makes alternatives available (satellite TV) n Price competition – if rail prices went up too much, you might take the bus instead n Consumer spending habits – young people might buy a new phone, so they will spend less on another product like clothes
Strategic Analysis – PORTERS 5 FORCES So, how can using P 5 F help with strategic decisions? n n n Shall we enter a new market or not? Is it better to enter a highly competitive market or not? Do we move out of a market if it is becoming too competitive? How can we reduce the level of rivalry to increase profits? Can we make ourselves more competitive to improve our position? (eg – Through product differentiation (Honda Hybrid) Takeovers (supermarkets) Niche market development (vegetarian foods) Be naughty! Discuss your position with rivals to come to an “agreement” – like price fixing (Airlines)
Strategic Analysis – PORTERS 5 FORCES EVALUATION n Provides logic and structure to your current competitive situation n BUT ¨ It is Static! Doesn’t keep up with a fast changing environment or markets ¨ Can be very complicated or confusing if a multi national with many “units” or product portfolios – they will have very different competitive forces to be analysed
Strategic Analysis – CORE COMPETENCIES HAMEL AND PRAHALAD They argue that if a business develops “core” competencies then it will gain a competitive advantage over other firms in the same industry This competency will allow a development of core products Eg – Honda building powerful and efficient engines – allowing a range of vehicles available to a huge market Black & Decker making quality small electric motors – allowing for the development of a variety of power tools (drills, food processors, lawnmowers etc) With the use of technologies and skills the business has to offer