Strategic Analysis

35 SREERAM ACADEMY (FORMERLY SREERAM COACHING POINT)

STRATEGIC ANALYSIS

The strategic management process, after deciding the vision, mission, goals and objectives of the organization

focuses on understanding the environment in which the organization functions. The organization has to scan

the environment, viz. internal environment and external environment. The external analysis is able to identify

the threats and opportunities to the organizations, while the internal analysis leads to the study of strength

and weakness of the organization.

Strategic Analysis

The two most important situation considerations are:-

Industry and competitive conditions

A companys own competitive capabilities, resources, internal strengths and weakness and market

position.

There are different forces that drive and constrain strategy and that must be balanced in strategic decisions.

An important aspect of strategy analysis is to consider the possible implications of routine decisions. Strategy is

a result of series of small decisions taken over an extended period of time.

Balance

There has to be a balance between the internal factors and external factors.

The process of strategy formulation is often described as one of the matching internal potential of the

organization with the environmental opportunities.

Strategic analysis involves a workable balance between diverse conflicting considerations. The

manager working on a strategic decision has to balance the opportunities influences and constraints.

There are pressures which drive towards a particular choice like entering into a new market.

Simultaneously there are constraints that limit the choice like existence of a big competitor or a new

costlier technology. In strategic analysis, the principle of maintain balance is important.

Risk

There are different types of risks involved in different level with different variables. Competitive

markets, liberalization, globalization, booms, recessions, technological advancements, inter- country

relationships, all these affect businesses and pose risk at varying degree.

The following matrix is able to show the link among all the above- mentioned factors:


Time ---- Risks External Internal

Short term Errors in interpreting the

environment cause strategic

failure.

Organizational capacity is

unable to cope up with the

strategic demands.

Long term Changes in the environment

lead to obsolescence of strategy

Inconsistencies with the

strategy are developed on

account of changes in internal

capacities and preferences.

Situational analysis

All companies Operate in a macro environment. A companys macro environment includes all relevant

factors and influences outside the companys boundaries.

There are the factors emanating from the economy at large, population demographics, social values

and life styles. Governmental legislation and regulation, technological factors etc.

The managers should focus on the external environments and watch for important environmental

forces, assess their impact and influence and adopt the companys direction and strategy as needed.

Choosing a strategy

Step1: Thinking strategically about companys external environment and companys internal environment.

Step 2: Form a strategic vision of where the company needs to head.

Step 3: Identifying strategic options for the company

Step 4: Select the best strategy and business model for the company.

The following factors are worth to be considered while carrying out strategic analysis:

Product situation- The current product, core product, primary and secondary or supporting

services, the core client needs.

Competitive situation Analyzing the main competitors, what are the competitive advantages.

Distribution situation- How the products are sent to market- is there requirement for

distributors and other intermediaries.

Environmental factors- Internal factors and external factors, economic and sociological factors

that impact on the performance.

Opportunity and issue analysis- Current opportunities available, the main threats to the

business, weakness that may affect the business performances.


Framework of Strategic Analysis

External Analysis

Customer analysis: Segments, Motivations,

unmet needs.

Competitor analysis: identity, strategic

groups, performance, image, objectives,

strategies, culture, cost structure, strengths,

weaknesses.

Market analysis: Size, projected growth,

profitability, entry barriers, cost structure,

strengths, and weaknesses

Environmental analysis: Technological,

government, economic, cultural

demographic, scenarios, information- need

areas.

Internal Analysis

Performance Analysis-

Profitability, sales, shareholder

value analysis, customer

satisfaction, product quality,

brand associations, relative cost,

new products, employee

capability and performance,

product portfolio analysis.

Determinates Analysis-Past and

current strategies, strategic

problems, organizational

capabilities and constraints,

Financial resources and

constraints, strengths and

weaknesses.

Strategy Identification & Selection

Identify Strategic alternatives: Product maker

investment strategies, functional area strategies,

assets & competencies& synergies

Select strategy

Implement the operating plan

Review strategies

Strategic strengths, weaknesses, problems,

constraints, financial resources and constraints,

strengths and weaknesses.

Opportunities, threats, trends and strategic,

uncertainties.


The methods of industry and competitive analysis

Competitive analysis can be done using a set of concepts and techniques to get the clear picture of the key

industry policies, competitors, drivers of the industry, etc. Industries differ significantly in their basic character

and structure. The competitive analysis begins with an over view of the dominant economic features. Industry

is a group of firms whose products have same and similar attributes such that they compete for the same

buyers.

Economic features of the Industry

Market size

Scope of competition

Market growth rate and position in the business life

Number of rivals and their relative sizes

Small companies and dominant companies

The number of buyers and their relative sizes

The type of distribution channels used to access consumers

The pace of technological changes

Whether products and services of rival firms are highly differentiated

Whether any participants are clustered in a particular location

Whether strong learning and experience effects characterize industry activities

Whether low cost production is possible

Capital requirements and the ease of entry and exit

Industry profitability compared to other companies

Nature and strength of competition.

One important component of competitive analysis involves getting into the industrys competitive process to

identify the main source of competitive pressure and how strong each competitive force is. The managers will

not be able to device successful strategy without in-depth understanding of the industrys competitive

character. The competitive process works similarly in a common manner, which makes easier to use a common

analytical framework. Porters five forces model discussed earlier is useful in understanding the competition.

This model is a powerful tool for systematically diagnosing the principle competitive pressures in market.


1. Triggers of Change

All industries are characterized by trends and new developments that gradually produce changes. These

changes may drive for new policies, objectives, etc. The popular hypothesis about industries going through a

life cycle explains industry change. However this is felt to be incomplete. The life cycle changes are strongly

keyed to changes in the overall industry growth rate.

2. Driving forces

It is very important to judge what growth stage an industry is in. There is more analytical value in identifying

specific factors causing fundamental industry and competitive conditions change because forces are in motion,

creating incentives or pressures for changes. The most dominant forces are called DRIVING FORCES.

Driving forces have the biggest influence on what kinds of changes will take place in the industrys structure

and competitive environment.

Analyzing driving forces involves two steps:

Analyzing what the driving forces are

Assessing the impact they will have on the industry

May events may affect the industries very powerfully and can be considered as driving forces. Some examples

are as follows:

E-commerce applications

Increasing Globalization

Changes in the long term industry growth rate

Product innovation

Marketing innovation

Entry or exit of major forms

Changes in technical know how

Changes in cost and efficiency

3. Identifying the companys position whether strong or weak

The industrys competitive structure is to study the market positions of rival companies. Strategic group

mapping technique is useful analytical tool what is widely used. This tool is for comparing the market

positions of each firm separately or grouping them into like positions. When an industry has so many

competitors it is not practical to examine each one in depth.A strategic group consists of those rival firms

with similar competitive approaches and positions in the market. Companies in the same strategic group

resemble one another in many aspects. They may be similar in sales volume, similar in product, similar in


technology, similar type of buyers, etc. The following procedures may be adopted in constructing a

strategic group, and it can be decided which firm belongs to which strategic group.

Identifying the competitive characteristics that differentiate firms in the industry, the variables which

can be considered are price/quality range, geographic coverage, degree of vertical integration product line

breadth, use of distribution channels and degree of vertical integration product line breadth, use of

distribution channels and degree of service offered.

Plotting the firms on a two variable map using pairs of these differentiating character

Assign firms that fall in about the same strategy space to the same strategy group

Draw circles around each strategic group making the circles proportional to the size of the groups

respective share of total industry sales revenues.

4. Key Success factors

An industrys key success factors (KSF) are those things that most affect industry members ability to

prosper in the market place. They key success factor is not only the price but it includes many factors.KSF s

are the rules that shape whether a company will be financially and competitively successful. The industrys

KSF can be identified with the answers of the following questions:

On what basis do customers choose between the competing brands of sellers?

What product attributes is crucial?

What resources and competitive capabilities does a seller need to have to be competitively

successful?

What does it take for sellers to achieve a sustainable competitive advantage?

All the factors relating to sales or the product may not be crucial. Only some factors are considered to be key

success factors. Managers should identify those factors and analyze in length to strengthen the companys

business further. KSF vary from industry to industry, sometimes from time to time. Once defined, KSFs may be

not suitable after sometime. Hence continuous monitoring on KSFs is required.

Identifying KSF is a top priority, analytical consideration. Strategy formulation should be made after

considering KSF of each organization. The company should try to gain sustainable competitive advantage by

excelling at one particular KSF. Very rarely company may have three or more KSFs. Among these KSFs the

company should identify the most important factor and also the least important factor. While compiling a list

of every factor that matters, even a bit of carelessness may lead to a wrong strategy.

Prospects and financial attractiveness of industry

The last step in industry and competitive analysis is to use the results of previous six issues and draw

conclusions about the relative attractiveness or unattractiveness of the industry both near term and long term.

Companys strategists should assess the industry outlook carefully to decide whether industry and competitive


conditions present an attractive business opportunity for the company or whether the companys growth and

profit prospects are dark. The conclusions in this step depend on the following points:

The industrys growth potential

Whether competition currently permits adequate profitability and whether competitive forces will

become stronger or weaker.

Whether the prevailing driving forces will favorably or unfavorably affect industrys profitability

The companys competitive position in the industry and whether its position is likely to grow stronger

or weaker

The companys potential to capitalize on the vulnerabilities of weaker rivals

The degrees of risk and uncertainty in the industrys future

The severity of the problems confronting the industry as a whole.

Whether continued participation in this industry adds to the firms ability to be successful in other

industries in which the company may have business interests.

After considering all the above factors if an industrys overall profit prospects are above average, the

industry can be considered attractive. If its profit prospects are below average, it is unattractive.

Attractiveness is relative, not absolute. Industry environment may be attractive to strong competitors and

unattractive to weak competitors.

When the industry is attractive then the company has to make strategies to strengthen long term

competitive positions in the business. This can be by investing more in technology, plant and machinery as

needed. If the industry is not attractive the participants in the industry should be careful and cautiously

decide on investments.

The industry can decide to buy smaller firms if the price is reasonable. Weak companies in unattractive

industry can pool their interest by merger and increase the market share or can look outside the industry

for diversification.

SWOT Analysis

SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats and the comparison of

these factors is referred to as the SWOT analysis.

Strength- is an inherent capability of the organization which it can use to gain strategic advantage over its

competitors.

Weakness- is an inherent limitation or constraint of the organization which creates strategic disadvantage

to it.


Opportunity- an opportunity is a favorable condition in the organizations environment which enables it to

strengthen its position.

Threats- a threat is an unfavorable condition in the organizations environment which causes a risk for, or

damage to, the organizations position.

Strategic managers compare and contrast the various alternatives against each other with respect to their

ability to achieve major goals and superior profitability.

There are different sets of strategies:-

Functional level strategy- This is directed at improving the effectiveness of the operations within the

company, such as marketing, production, etc.

Business level strategy- This encompasses the business overall competitive theme.

Global strategy- this addresses how to expand the operations outside the home country.

Corporate level strategy- This is what businesses should have to maximize the long run profitability of the

organization.

The following are the three factors which significantly influence the market place:

The organizations correct market position

The nature of environmental opportunities and threats

The organizations resource capability to capitalize the opportunities.

The significant points of SWOT analysis are as follows:

It provides a logical framework

It presents a comparative account.

It guides the strength in strategy identification.

SWOT analysis helps the managers to craft a business model that will allow the company to gain a competitive

advantage in its industry. Competitive advantage leads to increased profitability and maximizes the companys

chances of surviving in the fast- changing environment.

In constantly changing environment, each business unit needs to develop a marketing information system to

track the trends and developments, which can be categorized as an opportunity and threat.

Potential resource strengths and competitive capabilities

Valuable skills and experience in key areas

Strong financial position


Strong brand name, image, company reputation

A widely recognized market leader and attractive customer base

Proprietary technology, superior technological skills

Superior intellectual capital relative to key rivals

Strong advertising and promotion

Product innovation skills

Proven skills in improving product processes

Use of commerce technologies

Superior skills in supply management

A reputation for good customer service

Better product quality

Wide geographic coverage

Joint venture and collaboration with others.

Potential resource weakness and competitive deficiencies

No clear strategic direction

Obsolete facilities

A weak balance sheet with too much debt

Higher overall unit cost compared to the competitors

Missing some key skills, no cost control measures, no technology

Weak brand image and reputation

Lots of under- utilized plant capacity.

Not attracting new customers

Potential resource weakness and competitive deficiencies

No clear strategic direction

Obsolete facilities


A weak balance sheet with too much debt

Higher overall unit cost compared to the competitors

Mission some key skills, no cost control measures, no technology

Weak brand image and reputation

Lots of under- utilized plant capacity

Not attracting new customers

Potential Company opportunities

Serving additional customer groups, expanding new products, new markets.

Expanding the companys product line to meet broader range of customer needs

Using ecommerce applications dramatically

Opening to take the market share away from the rivals

Ability to grow rapidly according to market requirements.

Potential external threats to companys well being

Likely entry of potent new competitors

Loss of sales because of new substitute products

Technological changes or product innovations which make the companys product

inferior.

Slowdowns in market growth

Adverse shifts in foreign exchange rates

Adverse demographic changes which threaten to curtail demand for the firms

products

Vulnerability to industry driving forces

TOWS matrix

Heinz Weihrich has developed a matrix called TOWS matrix by comparing strengths and weaknesses

of the organization with those of the market. It is criticized that after conducting SWOT analysis

managers frequently fail to come to terms with strategic choices that the outcomes demand. In order

to overcome this, Piercy argues for the TOWS matrix which uses the same inputs (threats,


opportunities, weaknesses and strengths) recognizes them, and integrates them more fully into the

strategic planning processes.

SO strategiesuse a firms internal strengths to take advantage of external opportunities. WO strategiesare aimed at improving internal weaknesses by taking advantage of external

opportunities. ST strategiesuse a firms strengths to avoid or reduce the impact of external threats. WT strategiesare defensive tactics directed at reducing internal weaknesses and avoiding

external threats.

PORTFOLIO ANALYSIS

In order to analyze the current business portfolio, the company must conduct portfolio

analysis. A portfolio analysis is a tool by which the management identifies and evaluates the

various businesses that make up the company.

In portfolio analysis, top management views it product lines and business units as a series of

investments from which it expects returns.

A business portfolio is a collection of businesses and products that make up the company. The

best business portfolio is the one that best fits the companys strength and weaknesses to

opportunities in the environment.

Portfolio analysis can be defined as the set of techniques that help the strategies in taking

strategic decisions with regard to individual products or businesses in a firms portfolio.

This analysis is primarily used in the environment for competitive analysis and corporate

strategic planning in multi- product and multi- business firms. Portfolio analysis is carried out

to decide about the growth strategies for adding a new product or business to the portfolio.

There are three important concepts which are essential to understand different models of

portfolio analysis:-

SBU (Strategic Business units)

Experience Curve (EC)

Product life cycle (PLC)

Strategic Business units (Key Businesses) is a unit of the company that has a separate mission

and objectives and which can be planned independently from other businesses of the

company. The SBU can be a company division, a product line with a division, or even a single

product or brand.


SBUs are common in organizations that are dealing with different products and dealing with

different locations, in multiple countries with independent manufacturing and marketing set-

ups.

Characteristics of SBU

1. Single business or collection of related businesses that can be planned for

separately.

2. Has its own set of competitors

3. Has a manager who is responsible for strategic planning and profit.

4. The organization has to identify the problems of each SBU and make policies or

each SBU.

Experience Curve- Is one which explains the concept of applying a portfolio approach. This

considers the concept which is similar to the concept of learning curve. The concept is that

efficiency increases through a proper repetition of work (by learning).

Experience curve is commonly based on identifying the problems relating to the product and

improving the product upon. It is based on the commonly- observed phenomenon that unit

costs decline as a firm accumulates experience in terms of a cumulative volume of production.

Experience curve results from various factors such as learning effects, economies of scale,

product redesign and technological improvements in production, etc. Experience curve is

considered a barrier for a new firm. It is not suitable for the new firms entering into the

industry.

Product Life Cycle

Every product goes through 4 distinct phases in its life in the market.

1. Introductory/ Embryonic Phase:

Is the period during which the product struggles to establish itself in the market.

The increase in sales volume is sluggish. Cash inflows are little low but cash outflows

particularly on promotion are high.

The marketing department has to perform at its best to make the product acceptable

to the target market.

The main function of finance department is to source funds to meet the defects at low

cost and low risk but with high control and high flexibility.


The quantity of output is relatively low and is to be increased gradually to match the

demand.

Quality should be of highest feasible level. Price is generally kept at low levels, called

PENETRATION PRICE.

Cost is not an area of importance at all.

2. Growth Phase :

Once the market comes to know of the benefits from the product.

The sales volume increase rapidly.

Cash inflows are substantially high while cash outflows can be reduced with

lower level of promotion.

The department has to gear itself to meet the demand.

Major function of the service department is to service the debt and built up

reserve.

The quantity has to be increased rapidly, quality has to be sustained at highest

feasible level.

Cost control systems are developed and structured for application at later date.

Price is gradually increased based on market response.

3. Saturation/ Maturity Phase:

During the growth phase a number of competitors enter the market.

The saturation phase starts when all the competitors stabilize their market

share.

During this phase, the sales volume remains more or less static unless the

market size changes. The inflows and outflows are well balanced and target

contribution is achieved. All departments have to function optimally. The major

concern of finance department is to ensure optimum working capital management.

All efforts should be made to avoid interruptions in production and to maintain

steady level of output (maintenance department).


The quality can be scaled down to acceptable level, but should be maintained

at that level. Cost control systems are strictly implemented .

Pricing is generally market driven.

4. Obsolescence/ Decline Phase:

During some part of its life, every product faces the situation of losing favor in

the market either because of technological changes, environmental changes or

changes in tastes of the consumer.

The sales volume starts dropping rapidly.

The R&D department has to either improve the existing product or came up

with a new product well before the beginning of this phase.

The finance department has to judiciously allocate the available funds between

the revenue expenditure and R&D expenditure.

The quantity of output has to be systematically reduced, assets to be released

in a planned manner and fixed cost should be gradually reduced.

Zero cost or Zero budget should be the target. Price is what the market is

prepared to pay.

Quality is anything short of failure.

Boston Consulting Group (BCG) Growth Share Matrix

Boston Consulting Group, one of the largest management companies in the world are up with a

systematic approach to portfolio management in the case of organization with large number of

products. The two parameters chosen by them are:

a) Market Share

b) Industry growth rate

For both these parameters, they had two levels namely low and high. The four positions can be

represented diagrammatically as follows:


The four positions are:

1.Dogs represent low market share and low industry growth rate. These products are a drain on the

companys resources. The ideal course of action would be to discontinue the product, liberate the

amounts locked up and use the librated cash for applications with better value.

But in practice, owners of companies develop a loyalty to a product because of long association and

may not discontinue the product. Such an action would affect the future prospects of the company.

2.The cash cows have high market share, but industry is not growing, because of the high market

share, unit contributions are high. These products generate cash surpluses but do not require further

investment.

3.Question marks are products with a high market growth but enjoying low market shares. These

products have to be examined initially to identify the reasons for low market share so that remedial

action can be taken and the market potential can be exploited.

4. Stars are products which are in high growth market and enjoy high market share. These are the

future bread winners of the company.

But to maintain the market share, in a growing further investments will have to be made.

The optimum strategy would be:

a. Discontinue or drop dogs and liberate the assets.

b. Examine the reasons for low market shares of question marks.

c. Support stars with further investments without any reservation.


d. Use the surpluses from the cash cows and the liberated assets from the

dogs, first on stars and then on question marks.

Ansoffs growth Vector Matrix

Ansoff considered to be the pioneer in strategic thinking proposed that an organization has to

identify an appropriate combination of product and market as an essential beginning for significant

growth.

The 4 combinations identified by him are expressed in the following matrix form called ANSOFFS

GROWTH VECTOR MATRIX.

The 4 positions are:-

1.Trying to grow with the existing product in the existing market called MARKET PENETRATION.

Example- If the consumers are convinced to have a fruit with every meal as a measure of health, the

quantum of fruit, sold to a household can be increased. Companies manufacturing footwear, hair-oil,

toothpaste, etc have adopted this approach successfully.

2.Growing with new products in the existing market called PRODUCT DEVELOPMENT.

It is an approach in which a new product is introduced in the existing market with the intention of

cashing in the loyalty of existing market. This maximizes the risk of new product failure. Feedback

from market can also be obtained easily.

3.Growing with the existing product but in new markets called MARKET DEVELOPMENT. This

approach is adopted when the existing market is saturated, market penetration is impossible and

there is a necessity to achieve volume growth. Companys venturing into exports is typical examples.


4.Growing with new products in new markets called DIVERSIFICATION. This is the most risky approach

as new products are to be introduced in new markets. This approach is adopted under following

conditions:

a. Management is progressive, visionary and risk loving.

b. If the existing product is nearing its obsolescence stage.

c. Substantial growth is aimed at.

d. If opportunities exist only for a limited time.

ADL Matrix

This got the name from Arthur D. Little. This is a portfolio analysis method based on product life

cycle. This is a two- dimensional matrix based on the stage of industry maturity and the firms

competitive position, environmental assessment and business strength assessment. The stage of

industry maturity is an environmental measure which represents the position in industrys life cycle.

There are 5 competitive positions, viz. dominant, strong, favorable, tenable and weak.

Dominant- This is comparatively a rare position and in many cases is attributable either to a

monopoly or a strong and protected technological leadership.

Strong- Considerable degree of freedom, often able to act without its market position being unduly

threatened by its competitors.

Favorable- When the industry is fragmented, no competitor is strong enough and stands out clearly,

results in the market leaders, a reasonable degree of freedom.

Tenable- Although the firms within the category are able to perform satisfactorily and can justify

staying in the industry they are generally vulnerable in the face of increased competition from

stronger and more proactive companies in the market.

Weak- The performance of firms in this category is generally unsatisfactory although the opportunity

for improvement does exist.

Stage of Industry Maturity

Competitive

Position

Embryonic Growth Mature Ageing

Dominant Fast grow

Build Barriers

Act offensively

Fast grow

Attend cost

Leadership

Defend position

Attend cost

Leadership

Defend position

Renew

Focus


Renew

Defend position

Act offensively

Renews

Fast grow

Act offensively

Consider Withdrawal

Strong Differentiate

Fast grow

Differentiate

Lower cost

Attack small

Firms

Lower cost

Focus

Differentiate

Grow with industry

Find Niche

Hold niche

Harvest

Favorable Differentiate

Focus

Fast grow

Focus

Differentiate

Defend

Focus

Differentiate

Harvest

Find Niche

Hold Niche

Turnaround

Grow with industry

Hit smaller firms

Harvest

Turnaround

Tenable Grow with

industry focus

Hold niche

Turnaround

Focus

Grow with industry

Withdraw

Turnaround

Hold Niche

Retrench

Divest

Retrench

Weak Find niche

Catch- up

Grow with

industry

Turnaround

Retrench

Niche or Withdraw

Withdraw

Divest

Withdraw

The General Electric Model

This is similar to BCG matrix. However, there are some differences. This is developed by GE with the

assistance of the consulting firm Mc Kinsey and Co.

First, the market attractiveness replaces market growth as the dimension of the industry

attractiveness, and includes a broader range of factors other than just the market growth rate.


Secondly, the competitive strength replaces market share as the dimension by which the competitive

position of each SBU is assessed.

High Medium Low

Invest Invest Protect

Invest Protect Harvest

Protect Harvest Divest

Each of the above two factors are rated according to the criteria mentioned below:

Evaluating the ability to compete business position

Size

Growth

Share by segment

Customer loyalty

Margins

Distribution

Technology skills

Patents

Marketing, flexibility

Organization

Evaluating the market attractiveness

Size

Growth

Customer satisfaction level

Competition, quality types

Effectiveness

Commitment

Price levels

Profitability

Technology

Government regulations

Sensitivity to economic needs.

GE Matrix

Each SBU may have all criteria, but at different important level. Every organization has to make

decisions about how to use the limited resources most effectively. That is where the planning models

can help determine which SBU should be simulated for growth.

Documents

Strategic Analysis