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Key Questions in Situation AnalysisKey Questions in Situation Analysis

Question 1: How well is the company’s strategy working?

Question 2: What are the company’s resource strengths and weaknesses and its external opportunities and threats?

Question 3: Are the company’s prices and costs competitive?

Question 4: Is the company competitively stronger or weaker than key rivals?

Question 5: What strategic issues and problems merit front-burner managerial attention?

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Situation Analysis Question 1: How Situation Analysis Question 1: How Well is the Company’s Strategy Well is the Company’s Strategy Working?Working?

1. Is the company achieving its financial and strategic objectives?

2. Is the company an above-average industry performer?

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Performance IndicatorsPerformance Indicators

Trends in sales and earnings growth Trends in the company’s stock price The company’s overall financial strength The rate at which new customers are acquired Image and reputation with customers Evidence of improvement in internal processes

such as defect rate, order fulfillment, and days of inventory

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Situation Analysis Question 2: The Situation Analysis Question 2: The Company’s Strengths, Weaknesses, Company’s Strengths, Weaknesses, Opportunities and ThreatsOpportunities and Threats

S W O T represents the first letter inStrengths

Weaknesses

Opportunities

Threats

For a company’s strategy to be well-conceived, it must be Matched to its resource strengths and

weaknesses Aimed at capturing its best market opportunities

and defending against external threats to its well-being

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Identifying Resource StrengthsIdentifying Resource Strengthsand Competitive Capabilitiesand Competitive Capabilities

Common types of resource strengths includeSkills or specialized expertise in a

competitively important capabilityValuable physical assetsValuable human assets or intellectual capitalValuable organizational assetsValuable intangible assetsCompetitively valuable alliances or

cooperative ventures

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Identifying Resource WeaknessesIdentifying Resource Weaknessesand Competitive Deficienciesand Competitive Deficiencies

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

Resource weaknesses relate to Inferior or unproven skills,

expertise, or intellectual capital

Deficiencies in competitively important physical, organizational, or intangible assets

Missing or competitive inferior capabilities in key areas

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Identifying a Company’sIdentifying a Company’sMarket OpportunitiesMarket Opportunities

Opportunities most relevant to a company are those offering

Good match with its financial andorganizational resource capabilities

Best prospects for growth and profitability

Most potential for competitive advantage

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Identifying External Threats to Identifying External Threats to Profitability and CompetitivenessProfitability and Competitiveness

Entry of lower-cost foreign competitors Burdensome regulations Rise in interest rates Potential of a hostile takeover Unfavorable demographic shifts Adverse shifts in foreign exchange rates

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SWOT Analysis SWOT Analysis

Potential Potential Resource Resource Strengths Strengths

Resource Resource WeaknesseWeaknesse

ss

Company Company OpportunitieOpportunitie

ss

Potential Potential External External ThreatsThreats• Powerful strategyPowerful strategy

• Strong financial Strong financial conditioncondition

• Strong brand name Strong brand name image/reputationimage/reputation

• Widely recognized Widely recognized market leadermarket leader

• Proprietary Proprietary technologytechnology

• Cost advantagesCost advantages

• Strong advertisingStrong advertising

• Product innovation Product innovation skillsskills

• Good customer Good customer serviceservice

• Better product Better product qualityquality

• Alliances or JVsAlliances or JVs

• No clear strategic No clear strategic directiondirection

• Obsolete facilitiesObsolete facilities

• Weak balance sheet; Weak balance sheet; excess debtexcess debt

• Higher overall costs Higher overall costs than rivalsthan rivals

• Missing some key Missing some key skills/skills/competenciescompetencies

• Subpar profits Subpar profits

• Internal operating Internal operating problems . . .problems . . .

• Falling behind in Falling behind in R&DR&D

• Too narrow product Too narrow product lineline

• Weak marketing Weak marketing skillsskills

• Serving additional Serving additional customer groupscustomer groups

• Expanding to new Expanding to new geographic areasgeographic areas

• Expanding product Expanding product lineline

• Transferring skills to Transferring skills to new productsnew products

• Vertical integrationVertical integration

• Take market share Take market share from rivalsfrom rivals

• Acquisition of rivalsAcquisition of rivals

• Alliances or JVs to Alliances or JVs to expand coverageexpand coverage

• Openings to exploit Openings to exploit new technologiesnew technologies

• Openings to extend Openings to extend brand name/imagebrand name/image

• Entry of potent new Entry of potent new competitorscompetitors

• Loss of sales to Loss of sales to substitutessubstitutes

• Slowing market Slowing market growthgrowth

• Adverse shifts in Adverse shifts in exchange rates & exchange rates & trade policiestrade policies

• Costly new Costly new regulationsregulations

• Vulnerability to Vulnerability to business cyclebusiness cycle

• Growing leverage of Growing leverage of customers or customers or supplierssuppliers

• Reduced buyer Reduced buyer needs for productneeds for product

• Demographic Demographic changeschanges

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Situation Analysis Question 3: How Situation Analysis Question 3: How Competitive Are the Company’s Competitive Are the Company’s Prices and Costs?Prices and Costs?

Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company situation analysis

Key analytical tools

Value chain analysis

Benchmarking

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Company Value ChainCompany Value Chain

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Developing Data to Measure a Developing Data to Measure a Company’s Cost CompetitivenessCompany’s Cost Competitiveness

After identifying key value chain activities, the next step involves determining costs of value chain activities using activity-based costing

Appropriate degree of disaggregationDepends on the number of broad categories

of primary and support activities

Requires finer classifications if problematic cost disadvantages exist

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Activity-Based CostingActivity-Based Costing

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Benchmarking Costs ofBenchmarking Costs ofKey Value Chain ActivitiesKey Value Chain Activities

Focuses on cross-company comparisons of how certain activities are performed and costs associated with these activities

Purchase of materialsPayment of suppliersGetting new products to marketPerformance of quality controlFilling and shipping of customer orders

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Industry Value ChainIndustry Value Chain

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Vertical Integration: Operating Vertical Integration: Operating Across More Industry Value Chain Across More Industry Value Chain SegmentsSegments

Extend a firm’s competitive scope within the same industry

Backward into sources of supply

Forward toward end-users of final product

Can aim at either full or partial integration

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Advantages of a Vertical Integration Advantages of a Vertical Integration StrategyStrategy

Strengthen the firm’s competitive position

Boost profitability

Must achieve same scale economies as outside suppliers

Match or beat suppliers’ production efficiency with no drop-off in quality

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Integrating Forward to Enhance Integrating Forward to Enhance CompetitivenessCompetitiveness

Gain better access to end users

Improve market visibility

Include the purchasing experience as a differentiating feature

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Disadvantages of a Vertical Disadvantages of a Vertical Integration StrategyIntegration Strategy

Boosts capital investment in the industry

Increases business risk if industry growth and profits sour

May slow technological advances if the vertically integrated company is saddled with older technology

Poses all types of capacity-matching problems

May require radically different skills and business capabilities

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The Case for OutsourcingThe Case for Outsourcing

Activity can be performed better ormore cheaply by outside specialists

Activity is not crucial to achieve asustainable competitive advantage

It improves firm’s ability to innovate

Firm can concentrate on core value chain activities and leverage its resource strengths

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Building a Competitively Superior Building a Competitively Superior Value ChainValue Chain

There are three main areas of a company’s overall value chain where cost differences occur

1. Activities performed by suppliers

2. A company’s own internal activities

3. Activities performed by forward channel allies

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Correcting Internal Cost Correcting Internal Cost DisadvantagesDisadvantages

Implement best practices throughout the company

Try to eliminate some cost-producing activities altogether by revamping value chain

Relocate high-cost activities to lower-cost geographic areas

See if high-cost activities can be outsourced

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Correcting Internal Cost Correcting Internal Cost DisadvantagesDisadvantages

Invest in productivity enhancing, cost-saving technology

Find ways to detour around activities or items where costs are high

Redesign the product or its components to reduce manufacturing costs

Make up difference by achieving savings in backward or forward portions of value chain system

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Correcting Supplier-Related Cost Correcting Supplier-Related Cost DisadvantagesDisadvantages

Pressure suppliers for lower prices

Switch to lower-priced substitutes

Collaborate closely with suppliers to identify mutual cost-saving opportunities

Integrate backward into business of high-cost suppliers

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Correcting Cost Disadvantages Correcting Cost Disadvantages Associated With Forward Channel Associated With Forward Channel AlliesAllies

Pressure dealer-distributors to reduce their costs

Work closely with forward channel allies to identify win-win opportunities to reduce costs

Change to a more economical distribution strategy

Switch to cheaper distribution channels

Integrate forward into company-owned retail outlets

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Developing a Best Cost AdvantageDeveloping a Best Cost Advantage

Companies that do a first rate job of managing value chain activities relative to competitors can achieve a Best Cost Advantage

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Developing a Best Cost AdvantageDeveloping a Best Cost Advantage

Best Cost Provider Strategies yield unique industry positioning by exceeding buyers’ expectations for differentiating features and low prices

Contingent on

A superior value chain configuration

Unmatched efficiency in managing value chain activities

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Situation Analysis Question 4: What Situation Analysis Question 4: What Is the Company’s Competitive Is the Company’s Competitive Strength?Strength?

Overall competitive position involve answering two questions

How does a company rank relativeto competitors on each industry key success factor?

Does a company have a netcompetitive advantage or disadvantagevis-à-vis major competitors?

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Competitive Strength AssessmentsCompetitive Strength Assessments

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Interpreting the Competitive Interpreting the Competitive Strength AssessmentsStrength Assessments

Shows how firm stacks up against rivals, measure-by-measure

Indicates whether firm is at a competitive advantage or disadvantage against each rival

Identifies possible offensive strategies that can be waged against rivals’ weaknesses

Identifies the need for defensive actions to correct competitive weaknesses

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Situation Analysis Question 5: What Situation Analysis Question 5: What Strategic Issues Must be Strategic Issues Must be Addressed by Management?Addressed by Management?

Final and most important analytical step in assessing “Where are we now?”

Based on results of both industry and competitive analysis

Pinpointing the precise things that should be on management’s “worry list”?