introduction to strategic management 6june2011 (1)

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Analyzing the BusinessEnvironment

(The Strategic Position**)Prof Ashish K Mitra



Analyzing Environment

• “ Awareness of the environment is not a specialproject to be undertaken only when warning of change becomes deafening”

» Kenneth R Andrews

• “ Analysis is the critical starting point of strategicthinking”

» Kenichi Ohmae

• “It is not the strongest of the species that

survive, nor the most intelligent, but the onemost responsive to change”

» Charles Darwin



Analyzing Business Environment

• Business Environment encompasses

– External Environment

• Macro external environment - Political, Economic,

Social and Technological (PEST ) ( some call themas PESTEL)

• Micro external environment – immediate Industryand competitive environment

– Internal Environment• Resources

• Competencies



TheOrganization

Layers of the External Business Environment**

Strategic Group

Markets

Industry ( or Sector )

Organizational Field

The Macro-environment



• The most general „layer‟ is often referred to as the

macro-environment. Broad factors that impact to agreater and lesser extent on almost all organizations.

• It is important to identify these issues and particularlythose that are likely to have a differentially large impact on a specific organization

• Any specific PESTEL factor will affect someorganizations more than others Also it will affect some organizations favorably , whilst posing a threat to others.

• If the future is likely to be very different from the past it is

helpful to construct pictures – or scenarios – of possiblefutures. This helps managers consider different ways inwhich strategies might need to change depending uponhow the business environment might unfold.



• Next „layer„ would be called industry. This is a group of organizations producing the same products or services.

However, we need to recognize that previously separateindustries might converge.• The „Five forces‟ framework (and the concept of hyper

competition) can be useful in understanding how thecompetitive dynamics within and around an industry are

changing• Within most industries or sectors, there will be manydifferent organizations with different characteristics andcompeting on different bases. This intermediate layer between the industry and the individual organization is

called „strategic group‟. These are organizations withinan industry that have similar characteristics to each other but are quite different from those in other strategicgroups.



External Environment

• The external environment of a business play a principalrole in determining the opportunities, threats andconstraints a firm faces

• Macro-external ( remote) environment : Variablesoriginating beyond and irrespective of any single firm‟soperating situation ( political, economic, social,technological , Environmental and Legal forces ) form theremote or macro-external environment .

• Micro-external environments :Variables influencing afirm‟s immediate competitive situation ( competitive position , customer profiles, suppliers and creditors , and

accessible labor market) constitute the operatingenvironment

• MNCs must evaluate several External environmentssimultaneously



ELEMENTS OF AN EXTERNAL ANALYSIS

An

Organization‟

s

External

Environment Organization

Micro externalenvironment

Industry-CompetitorsSubstituteProducts

BargainingPower of Suppliers Bargaining

Power of Buyers

PotentialEntrants

CurrentRivalry

Macro externalEnvironment

Technological

Political Social

Economic



Political environment

• Political forces influence

– Legislations & government rules/ regulationsunder which the firm operates : Anti-trust laws , patent laws, de-regulation of

industries , employment laws (eg; minimumwages) , social welfare laws, fair tradepractices, taxation, pollution laws, pricingpolicies in certain industries, actions aimed

at protecting consumers, local industries andlocal environment, foreign travel laws

– Strength & independence of Judicial

system. Enforceability of contracts.



– Government plays a very significant role in several

industries as a supplier, customer or competitor,subsidies/ grants for research

– Political / geo-political stability is a very significantimpact on the general economic environment (for

growth ), particularly in the globalization context – Firms analyze government‟s strategies and develop

complementary plans, to exploit opportunities

– Institutions like media, social, religious, pressure

groups & lobbies are part of political environment,impacting Industry



• Impact of geo-political situation on IT majors in 2002• Indian Govt not allowing ONGC to form JV in Nigeria in

2005, despite winning the bid for a large Nigerian oilreserve

• Collapse of Soviet Russia on Indian Pharmaceutical

companies• OPEC –oil price changes impact

• Interplay between political & legal forces on one hand andindustry & firms on the other hand eg. 30% tariff on import

of steel in US (2002)

E i i



Economic environment

• Economic forces affect general health of a nationor regional economy , which affect companies‟ &

industries‟ ability to earn adequate rate of return.• Economic environment : is a vital componentfrom the standpoint of strategic planning – Consumption patterns are affected by the relative

affluence of various segments of the market .

– Firms must understand crucial macro-economic trends in the segments that affects its industry. These include

GDP growth, prime interest rates, inflation rates,exchange rates, sector-wise growth rates,

– behavior of capital market, Capital market reforms, FDI

regulations – general availability of credit, currency convertibility – level of disposable income & propensity to spend,

availability of skills



– National as well as international economic

forces like OPEC, EEC ( now EU) ,WTO, tariff-free trade agreements ( like NAFTA) etcaffects Industry / firms

– Natural environment covering ecology, climate

and endowment of natural resources



Social Environment

• The Social environment is an important factor aschanges in the values, beliefs, attitudes,opinions and lifestyle in society create potential

opportunities ( threats for some). The cultural,demographic, religious, educational and ethnic conditioning of individuals in society affects thesocial environment.

• Social environment being dynamic, for acompany to grow, must take advantages of societal changes



Social Environment ………………………… • A large number of women have stated working outside

home – created wide range of products and services –

convenience food, microwave ovens, day-care centers.Composition of work force, capabilities, hiring /compensation policies

• % of women in workforce increased from 44 to 60 in US – issues of equality of pay, sexual harassment at work

• Demographic Change , birth control, shift in national agedistribution, growing senior citizen population – shift indemand for products and services, shift in long rangemarketing strategies , product research by companies.

• Accelerated interest in quality-of-life issues, leisure

• Emergence of alternate labor market• Signification of family as an institution – children as

influencer in purchase of goods



Technological environment

• Technological advancement and its rate of change has very significant influence onIndustry & an individual firm. Technologicalchange is both creative and destructive .

• Technological change can affect thebarriers to entry & therefore radically reshape the industry structure & increase

the intensity of rivalry, lowering price &profits.



• The cost of technology is a significant item in

technology-intensive businesses. Firms have to fight obsolescence , keep on constantly adaptingnew technologies to provide innovative productsand services in the market place , market them

innovatively in order to survive & grow.• Technological innovations can have a sudden

and dramatic effect on the environment of a firm. A breakthrough may spawn new markets andproducts or significantly, shorten the anticipatedlife of an existing manufacturing facility.



• Internet (a major disruptive technology) has lowered thebarriers to entry into several industries & changed

competitive structure of many industries• Remington Rand Corporation ( supreme king of the type-

writer industry) – failed to see the technology trend well intime

• Perfection in transistor technology changed the nature of Radio industry

• Advancement in Xerography spelt doom for carbon paper manufacturers

• Nucor from nowhere became the most profitable steelcompany in US in 1970s, due to mini steel planttechnology.

.



• Forces in external environment are sodynamic and interactive that impact of oneelement can not be disassociated from

impact of other elements.



Macro –environmental influences-the PESTEL Framework1. What factors are affecting the Organization? 2. Which of these are most important at present? In the next few years?

• Political – Government stability – Taxation Policy – Foreign Trade regulations – Social Welfare policies

• Economic factors – Business cycles – GNP trends – Interest rates

– Money Supply – Inflation – Unemployment – Disposable income



• Socio-cultural factors – Population Demographics

– Income distribution

– Social mobility

– Lifestyle changes

– Attitude to Work and leisure

– Consumerism

– Levels of Education

• Technological

– Government spending on research – Government and industry focus on technological effort

– New discoveries, rate of obsolescence

– Speed of technology transfer



• Environmental

– Environmental protection laws

– Waste disposal

– Energy consumption

• Legal – Anti-trust / Monopolies legislation

– Employment law

– Health and safety – Product safety, Product Stewardship



• It is important that PESTEL is used to look

at the future impact of environmentfactors, which may be different from thepast. Scenarios may help with this.



Scenarios

• Scenarios are especially useful in circumstances whereit is important to take a long term view of strategy,

probably a minimum of 5-10 years; where there are a limited number of key factors influencing the success of that strategy ; but there is a high level of uncertainty about such influences

• A scenario is a detailed & plausible view of the businessenvironment of an organization might develop in thefuture based on groupings of key environmental influences and drivers of change about which there is ahigh level of uncertainty.

• Oil industry – raw material ( oil field discovery)availability, price, demand ( alternate sources of energy)are of crucial importance. The scenario‟s are not just

based on hunch; they are logically consistent but different from each other.



• Sharing & debating these scenario‟s improves

organizational learning by making managersmore perceptive about forces in the environment.

• Scenarios have three ingredients: First, buildingof scenarios around key drivers ;Second,the

development of strategies ( or contingencyplans) for each scenario;Third, the monitoring of the environment to see how it is unfolding, andadjusting strategies & plans accordingly

• Key drivers are essential to process of buildingscenarios.Should be few, complexity increases if their numbers are more.. Focus on factors which have highpotential impact & are uncertain

• Optimistic, pessimistic, most likely scenario

I d t L l A l i



Industry Level Analysis

• Industry is a group of organizations producing the same

products or services• Industries differ widely in their economic characteristics ,competitive situations, and future profit prospects

– “When an industry with a reputation for difficult economics meets a manager with a reputation for

excellence, it is usually the industry that keeps the reputation in tact” –Warren Buffet

• Economic characteristics of an industry vary with factorslike overall size & market growth rate , the pace of

technological change, numbers & size of buyers and sellers , whether sellers products are vertically integratedor differentiated, economies of scale, distributionchannels used.



• Competitive forces can be moderate in oneindustry and fierce, even cut throat in another.Competition focuses in some industries is on„who has the best price‟, while in some industriescompetition is centered around quality and reliability ( eg Catalysts) or quick service andconvenience or brand reputation.

• An industry‟s economic traits and competitiveconditions, and how they are going to change ,determine whether profit prospects are poor,average or excellent. Leading companies inunattractive industries find it hard to earnrespectable profits



• Exhibit depicts the extent to which the average

profitability differs across lines of business or industries or industry groups over long periods of time

• Estimated cost of equity has been subtracted

from the reported profit to determine the trueprofit in the exhibit

• It is clear that businesses in some industrygroups (e.g.; Pharmaceuticals) have generally

operated on high plateaus, whereas businessesin others (e.g.;Steel) have mostly stuck in deeptroughs.



Average Economic Profit of US Industry Groups, 1978-1996(sources: Compustat, Valueline, and Marakon Associates)

S No Industry Group ROI Avg investedEquity

1 Toiletries/Cosmetics/Pharma 16-17% < $50b

2 Soft drink 16% < $50b

3 Tobacco 12% <$50b4 Food processing 8.5% <$100b

5 Household products 6.5% <$150b

6 Electrical equipment 5.5% <$200b

7 Financial services 5% <$250b8 Specialty Chemicals 4.5% <275b

9 News Paper 2.5% <300b

10 Banks 2% <450b

11 Integrated Petroleum 1.5% <650b



Average Economic Profit of US Industry Groups, 1978-1996(sources: Compustat, Valueline, and Marakon Associates)-contd

S No Industry Group ROI Avg investedEquity

12 Telecom 0.75% $700b

13 Electric Utility 0.5% $800b

14 Tire & Rubber -0.25% $900b15 Medical Services -0.25%

16 Machinery -0.5%

17 Auto & truck -0.5%

18 Computer & peripherals -1.0%19 Paper & Forest -2.0% $1100b

20 Air Transport -4.0% $1200b

21 Steel -10% $1250b

22



Supply – Demand Analysis

• Supply – demand analysis : Interplay of supply and demand determines a natural price.

• Supply-demand analysis was incorporatedrelatively quickly into economics andmarketing courses at business schools.

• Researchers found structure of Industry affected performance of businesses operating in them



• While general forces in environment (PESTEL) mightinfluence success or failure of an organization‟s strategy ,most organizations are hugely impacted by competition or forces within their industry or sectors.

• From strategic management perspective understandingthe competitive forces acting on and betweenorganizations in the same industry or sector and the

level of competition is very important since level of profit / attractiveness of industry depends to a large extent upon the level of competition.

• Convergence also do take place between previouslyseparate industries like computing, telecom,

entertainment.• Boundaries of industries might also be destroyed by

forces in macro-environment, creating new businessmodels..



• Competition in an industry is determined notonly by existing competitors , but also byother market forces such as customers,

suppliers, potential entrants and the existence of substitute products • Understanding of sources of competition can

help the firm to gauge its strengths andweaknesses, and to perceive the trends inindustry so that it can position it optimally &choose the way to compete.

• Some important aspects about competitiveforces

– Sources of competition** – using the 5 forcesframework

– The dynamics of competition & hypercompetition**. – Strategic groups within an industry or sector** – Organizational fields**

S f C titi **



Sources of Competition **

• Michael Porter in 1980, in his book , Competitive Strategy , has developed a “Five Forces Model”

framework to help managers identify the sources ofcompetition in an industry or sector & analyze the business environment

• When using this framework bear in mind – It must be used at the level of SBUs or Businesses

and not at the level of the whole organization – It is important not just to describe these forces at

present but understand how they are shaping infuture & can be countered and overcome in future

– These forces not only steadily change with time but

can be impacted abruptly by changes in macro-environment. Technological changes can destroy many competitive advantages & current barriers

– The 5 forces are not independent of each other. Pressure fromone can trigger off changes in another in a dynamic process of shifting source of competition.

F D i i I d t C titi



Forces Driving Industry Competition

Porter‟s

Five

ForcesModel

IndustryCompetitors

Rivalry Among

Existing Firms

Suppliers

Bargaining

Power

of Suppliers

Potential Entrants

Threat of New Entrants

Buyers

Bargaining

Power

of Buyers

Substitutes

Threat of Substitute Products

or Services

Degree of Competitive Rivalry among



Degree of Competitive Rivalry among existing Competitors

• The intensity of rivalry is the most obvious of the five forces on which strategistshave focused historically. It determine the

extent to which the value created by anindustry will be dissipated throughhead-to-head competition. Rivalry

occurs when one or more firms make aneffort to increase their market share.



• Structural determinants of the degree of rivalry are

numerous: – Equally balanced competitors: When competitorsare roughly equal size, there is danger of intensecompetition, as one tries to get dominance over other

– Number and relative size of competitors: more

concentrated the industry(i.e., fewer firms), thecompetitors will recognize their mutual interdependence and will restrain their rivalry

– Presence of one dominant competitor rather than aset of equally balanced competitors may lessenrivalry. The dominant player may be able to setindustry prices and discipline defectors, while equallysized players try to out do one another



• In high capital-intensive industries ( high fixedcosts) , the level of capacity utilization directly

influences firms incentive to engage in price competition to fill their plants. More generally,high fixed costs, excess capacity, slow growth,and lack of product differentiation all increase

the degree of rivalry ( e.g.; US Steel industry)

– As opposed to Steel industry, Pharmaceuticalindustry has low fixed manufacturing cost as % of value added, high gross margin ( as high as 90% for

some blockbusters, double digit growth rates,differentiation among products, brand identity, andswitching cost.



• Lack of differentiation : in commodity / undifferentiatedmarkets higher is the rivalry

• High exit barriers / Strategic stakes of competitors andif competitors are diverse ( eg; foreign competitors in USsteel market shattered domestic oligopolisticconsensus), the degree of rivalry will be higher.

• Exit barriers could be – Economical : high investment in non transferable assets, high

redundancy cost, high closure cost

– Strategic : linkage to other business of an organization

– Emotional

• Life Cycle of the industry : move towards maturity stageincreases rivalry between the industry players

• Why Co‟s go for M&As?





Evaluating the Five Forces

Current Rivalry among Existing Firms Threat Opportunity

––

–– ––

––

––

––

––

––

––

Numerous competitors Few competitors

Equally balanced competitors One or a few strong competitors

Industry sales growth slowing Industry sales growth strong

High fixed or inventory storage costs Low fixed or inventory storage costs

No differentiation or no switching costs Significant differentiation or switching costs

Large capacity increments required Minimal capacity increments required

Diverse competitors Similar competitors

High strategic stakes, Loyalty Low strategic stakes

High exit barriers Minimal exit barriers



Threat of new entrants

• New entrants to an industry bring in new

capacities and capture market share from theexisting players. This often lead to price warsand falling return for all ( that‟s why new entrantsto an industry often take the “acquisition” route).

• The willingness and ability of firms to enter a particular industry ie Threat of entry depends on the extent to which there are barriers to entry . Entry barrier existswhen it is difficult or not economically feasible for anoutsider to replicate the incumbent‟s position. Barriers to

entry are factors that need to be overcome by newentrants if they are to compete successfully.

• They should be seen providing delays to entry and notas permanent barriers.

• Some of the major entry barriers are (next page):



Threat of new Entrants ..role of entry barriers

• Economies of scale: acts as a barrier against firms

considering entering an industry with a small capacity.Economies of scale also create barriers in distribution,utilization of sales force etc.

• Product differentiation: By establishing brandidentification and customer loyalty through advertising,customer service, product differences , or first mover advantage etc firms create product differentiation. – New entrants are forced to spend huge amounts to get a foot

hold & overcome the advantages of existing players. E.g.; Softdrink, OTC drugs, FMCG , Breweries.

• Access to distribution channels :FMCG, Breweries etcemploy differentiation along with economies of scale indistribution , production, and marketing to create barriers.



Threat of new entrants…entry barriers • Capital requirements: Capital not only required for

production facilities but also R&D, advertisement, customer credit, inventories etc. Huge Capital requirement limit thenumber of players who can enter. Xerox created a major capital barrier to entry in copiers when it chose to rent outcopiers rather than sell outright. This move greatlyincreased the working capital for all others including

entrants• Cost disadvantages independent of size: An existingfirm may enjoy competitive advantages on account of learning curve, experience curve, proprietary technology,access to best source of inputs, low priced historical

assets, government subsidies, strategic location.( e.g.;Steel plant near iron ore mines). Reputation of qualitytakes years to build and can not be bought throughmarketing campaigns

• Expected Retaliation

• Government Policies

Threat of new entrants



Threat of new entrants……………………

Study of Pharmaceutical vs Steel industry in U.S.• Research based Pharmaceutical companies vs

manufacturers of generic drugs - High entry barrier through patent protection, high drug development processcost / time, carefully cultivated brand identity

• Integrated US Steel makers (that uses iron ore as the rawmaterial) were protected initially by huge economic size &

cost ( no such new company was built in the last 40years). But since1960s, mini steel mills technology ( thatmakes steel from scrap rather than iron ore) has putintense pressure on the integrated steel industry. Ministeel mills has essentially reduced the scale required for

efficient operation by a factor of 10 or more andinvestment per ton capacity by another factor of 10 – leading , a hundred fold reduction in barriers to entry. As aresult , profitability has collapsed in the segments of steelindustry that mini mills have penetrated.




Potential Entrants

Threat Opportunity

––

–– ––

––

––

––

––

No or low economies of scale Significant economies of scale

No other potential cost disadvantages Cost disadvantages from other aspects

Weak product differentiation Strong product differentiation

Minimal capital requirements Huge capital requirements

Minimal switching costs Significant switching costs

Open access to distribution channels Controlled access to distribution channels

No government policy protection Government policy protection

)



Bargaining power of buyers ( customers)• The impact of this force becomes heavier with buyers

forming groups or cartels . This phenomenon is seen in

industrial and commercial buyers / products.

• Bulk buyers like supermarkets have greater bargainingpower than single customers or small retailer for reducingprice or increasing services. Retailers in some industriesget significant bargaining power since they influence

consumer‟s purchase decisions. E.g.; home appliances, jewelry etc.• Porter says buyers are powerful in the following

circumstances: – Suppliers are many but buyers are few

– Buyers purchase in large quantities – Buyers can switch between suppliers at low cost ( playing

companies off against one another – Feasible for the buyer to purchase inputs from several firms at a

time – Threat of vertical integration as a device for forcing down prices

B i i f b ( t )



Bargaining power of buyers ( customers)…. • Buyers of auto components like GM, Ford & Chrysler are

powerful due to size and concentration, with numerous

suppliers of auto-components. Similarly these companiessqueeze out the tire industry• Auto-makers historically enjoyed leverage in dealing with

steel makers. They were well informed about cost steelmakers costs and credibility of threat of backward

integration into steel making ( Ford once used thisstrategy). In contrast, none of these sources of buyer power, historically were evident in the pharmaceuticalindustry.

• Steel represents a major slice of costs of many of theend products , from cans to cars. Purchasing decisionsfocus on large cost items . Hence it is always under pressure. However some specialty steel makers enjoybetter return than integrated steel makers because of differentiated products. In Pharma industry no substitutewas available for many patented drug.



Bargaining power of buyers ( customers)….

• US government is a big buyer of pharmaceuticalsthrough its medicaid and medicare programs .Historically however it has not exercised potential power.Risk of failure, high personal cost of any substitute„s

failure keep high priced branded drug share in themarket.

• The interests and incentives of all players involved in thepurchasing decision affects the price sensitivity of the

decision. Many doctors and patients traditionally lackedincentives to hold down prices of drug. Because a thirdparty i.e; insurance company footed the bill




Bargaining Power of Buyers

Threat Opportunity

––

–– ––

––

––

––

––

––

Buyer purchases large volumes Buyer purchases small volumes

Purchases are significant part Purchases aren't significant part of buyer's costs

Purchases standard or undifferentiated Purchases highly differentiated and unique

Buyer faces few switching costs Buyer faces significant switching costs

Buyer's profits are low Buyer's profits are strong

Buyer can manufacture products Buyer can’t manufacture products

Industry's products aren't important Industry's products are important

to quality of buyer's products to quality of buyer's products

Buyers have full information Buyers have limited information



The bargaining power of suppliers

• Supplier power is the mirror image of buyer power .

• As a result, the analysis of supplier power typically focuses first on the relative size and concentration of the suppliers and

• Second on the degree of differentiation in

inputs supplied. The ability to charge customersdifferent prices in line with differences in thevalue created for each of those buyers, usuallyindicates high supplier power.

• For Pharma industries inputs are usually from severalcommodity chemical companies. US Steel industry, incontrast, has been ravaged by highly unionized US Steelworkers ( a major supplier!).



• Relationship with buyers and suppliers have

important cooperative as well as competitive elements.

• Japanese car makers committed themselves to

long-run supplier relationships that paid off interms of higher quality and faster new productdevelopment. ( In contrast US car manufacturerspushed their part suppliers to the wall by playing

them against one another)• Requirement of net-worked economy…

partnership with suppliers




Bargaining Power of Suppliers

Threat Opportunity

––

––

––

––

––

––

––

Supplying industry has few companies Supplying industry has many companies

and is more concentrated and is fragmentedSupplier's products don’t have substitutes Supplier's products do have substitutes

Industry isn’t an important customer Industry is an important customer

Supplier's product is an important input Supplier's product isn’t an important input

Supplier's products are differentiated Supplier's products aren't differentiated

Significant switching costs Minimal switching costs in supplier's products

Supplier has ability to do Supplier doesn't have ability to do

what buying industry does what buying industry does



The threat of substitute products

• A close substitute is a potential threat to company‟sproduct. The existence of a substitute limits the price which can be charged for a product.

• Threat to profitability depends on the relative price-to-performance ratios of different types of products or services to which customer can turn to satisfy the samebasic need.

• Threat of substitution is also affected by switching costslike retooling, redesigning, retraining etc

• Substitution process often follows a S-shaped curve . In many cases it starts slowly as a fewtrendsetters risk experimenting with the substitute, picks

up steam if other customers follow suit, and finally levelsoff when nearly all of the economical substitutionpossibilities have been exhausted



The threat of substitute products……….

• Substitute materials that are puttingpressure on the Steel industry includeplastics, aluminum, and ceramics ( car,can industry).

• Pharmaceuticals represents a more cost-effective form of health care, in manycases, than hospitalization

• Product for Product substitution

• Substitution of need



Concept of Value Net…………………..

• Microsoft Windows 95 Operating system‟s introductionneeded more processing power . Hence Intel‟s Pentiumchip was more in demand. But Microsoft‟s Windows 95will not appear in conventional Porter‟s frameworkscreen when analysing Intel Corporation! Intel shouldrecognize Microsoft as a complementor in its competitivelandscape.

• In Pharmaceutical Industry , Doctors greatly influencethe success of drugs by prescribing them, thus acting as

complementors who increase buyers willingness to payfor particular product.

• In Paints industry, Architects have strong influencing rolefor institutional segment.



The Value Net

CompanyCompetitors Complementors

Customers

Suppliers



• Complementors add a cooperative

dimension to the “competitive forces”approach. – “Findings ways to make thepie bigger rather than fighting withcompetitors over a fixed pie”.

• Think about how to expand the pie bydeveloping new complements or makingthe existing complements more affordable.

• Need to manage relationship with suppliers of complements . But how is the value sharedbetween the producers of complements?



Concept of Value Net…………………..

• Cooperation with complementors to expand the size of the pie must be supplemented with some considerationsof competition with them if the firm is to claim slices of that pie. – Relative concentration : when complementors are more likely to

have power to pursue their own agenda? – Relative buyer or supplier switching cost – Ease of unbundling – Rate of growth of pie – Difference in pull through: As complementors play a greater role

in pulling through demand, their power is likely to expand. ( In

entertainment sector , the role of content provider) – Assymetric integration threat

• Alliances are becoming important with complementorsin several cases



Examples – concept of complementarity

• Industries producing Computer Hardware and Computer Software are the most apparent examples of complementarity ( eg.; demand of Intel processor andincreasing the demand of MS Windows).

• Car industry and Auto loan industry

• VCR and Video Cassette recorder industry.• TV Shows and TV guides• Fax Machine and Phone lines• Catalogue Sale vs overnight delivery service

• Video Game consoles and Game developers• Mobile service providers & Cell Phone industry• TV Channels vs Content Production Houses

Pl i l i i i l d



Players in analyzing competitive landscape………

• Supply – Demand analysis : focused attention

on exchange relationship between suppliers andbuyers.

• Five forces framework extends the analysis tosupplier->Competitor -> buyer and to consider

explicitly possibilities of substitution and newentrants.• Value net draws complementary relationships

into the picture and accounts for thecomplication that complimentor can also

become a competitor • Ghemawat says “even more types of players

needed to be added, depending on the context”



Re-cap of analyzing business environment

• Porter‟s Five forces model of competitionfor Industry analysis

• Strategic Groups within Industries

• Industry life cycle analysis – Embryonic stage

– Growth stage

– Shakeout stage – Mature stage

– Declining stage

Strategic Groups Within Industries



Strategic Groups Within Industries

•The concept of strategic groups

– Within an industry, a competitor grouping using similar strategic characteristics, that differ from other groupswithin the same industry or sector.

– There may be different characteristics whichdistinguish between strategic groups. E.g; Size,geographic coverage, breadth of product range, qualityor service level, R &D spending etc

– Companies in same strategic group follow largelysimilar strategies or compete on similar bases in the

markets



• Implications of strategic groups

– The closest industry competitors are those in thesame strategic group.

– The various industry groups are differentially and

competitively advantaged and positioned.

– Mobility barriers inhibit the movement of competitors from one strategic group to another. Mobility barriersbetween different strategic groups vary from industry

to industry. Could be related to capabilities ,resources of the companies in different strategicgroups.

Strategic Groups in the Pharmaceutical



Strategic Groups in the PharmaceuticalIndustry



• The concept of „Organizational Fields‟ is a way of understanding this wider network of influences andrelationships in business environment.

• Participants of organizational field interact morefrequently with one another than with those outside thefield. These relationships often constraint, guide or even

dictate economic decisions and priorities – such asresource deployment.

• Organizational field of „justice‟ has lawyers, police,courts, prisons, and probation services. Although their roles are different they are all committed to deliver good

justice. In case of say telecom company other than valuechain partners, it will be regulators, professionalassociations etc.



• Various members of an organizational field

are tied together in the ways beyondeconomic dependency. They share acommon set of purposes ( at least at thegeneric level) and more crucially they arelikely to share a set of taken-for-grantedbeliefs and assumptions. This may bedeeply embedded and hard to surface and

concern the „legitimacy‟ of an organizationwithin an organizational field.

Th I d t Lif C l M d l



The Industry Life Cycle Model

• Stages in the industry lifecycle:



• The five forces, strategic groups , and life cycle models provide useful ways of thinking about and

analyzing the nature of competition within an industry toidentify opportunities and threats. However each has itslimitations & managers need to be aware of the same.

• In many industries competition can be viewed as a

process driven by innovation. Innovation often causeschanges in the industry life cycle. (several shakeouts in

Telecom industry).

• Innovations frequently lower the fixed costs of

Production, thereby reducing barriers to entry . A fiveforces model applied to steel industry in US in 1970would look very different from that applied today.

• Porter in his recent work says – innovations “unfreeze” &



y“re-shape” industry structure.

• He argues that after a period of turbulence triggered byinnovation, the structure of an industry once more settles

down to a fairly stable pattern , and the five forces andstrategic group concepts can once more be applied.• Because the five forces and strategic group models

present a static picture of competition, they can notadequately capture what occurs during period of rapid

changes in the industry environment when value ismigrating.• Many industries are tending to become hypercompetitive,

meaning that they are characterized by permanent andongoing innovation. The structure of such industries are

constantly being revolutionized with few periods of equilibrium. Competitive advantages are quickly eroded• A company would not be profitable just because it is

based in an attractive industry or strategic group.



FIGURE 3.4

Punctuated

Equilibrium

andCompetiti

ve

Structure



• Entrepreneurship & innovation are fundamentalfeatures of competition and driving force behindindustry evolution. Innovation represents a“perennial gale of creative destruction” through

which favorable industry structures – monopolyin particular – contain the seeds of their owndestruction.

• Hyper competition

• Competition in the new industry ( digitaltechnology)



• What are the key forces at work in the competitiveenvironment? These will differ by type of industry.

• What are the underlying forces in the micro- environment that are driving competitive forces ? Eg;lower cost & high availability of software skills in India isan opportunity & a threat to Us & Eurpean companies

• Is it likely to change, if so, how ? For eg; governmentaction in reducing health care costs & promotion of

generics would increase pressure on branded drugs inUS.

• How do competitors stand in relation to competitiveforces? Their weaknesses & strengths.

• What can managers do to influence the competitive forces affecting an SBU? Can they build entry barriers , power over suppliers or diminish rivalry?



• Competitive advantage erodes over time due toforces discussed above and / or competitors willovercome adverse forces.

• The process of erosion of is getting speeded up by changes in macro-environment such as newtechnologies, globalization or deregulation.

• Though time scale differs, Competitive advantages is mostly becoming temporary.

• Organizations respond to erosion of their competitive position by creating cycles of

competition – various moves & counter moveson the basis of cost / quality – thus shifting thebasis of competition.



• Organizations are increasingly operating insituation where the speed of the „cycles of

competition‟ is very fast – this has been calledhyper competition.

• Hyper competition occurs where the frequency,boldness and aggressiveness of dynamic

movements by competitors accelerate to createa condition of constant disequilibrium andchange.

• Whereas competition in slower-moving environments is primarily concerned with building and sustaining competitive advantages that are difficult to imitate , hypercompetitive environments advantages will be temporary .



• Competition is about disrupting the

status quo so that no one is able to sustain long-term advantage on any given basis .

• So long term advantage is gained through a sequence of short lived moves .



• Market Segments : A market segment is a group of customers who have similar needs that are different fromcu8stomer needs in other parts of the market.

Theoretically different factors could be used to identifymarket segments.. Demography – age, sex, race,income, family size, life cycle stage, Lifestyle, Size of purchase, purpose of use, purchasing behaviour.

Industrial markets classification could be based onclassification of buyers like domestic industry vs foreignbuyers.

• Identifying strategic customer : Strategic customer is the

person(s) who have the most influence over the goods or services that are purchased. Hence strategy mustaddress them. In many markets the strategic customer acts as a „gatekeeper‟ to the end user.



• Manufacturers have two „customers‟ – the shops and theshops‟ customers. So there has to be an understanding

of what is valued by that strategic customer as a startingpoint of the strategy. However the requirement of theother customer has also to be met.

• In many consumer goods, the retail outlet is the strategiccustomer as the way it displays, promotes & supportsproducts in store is hugely influential on the finalconsumer preferences.

• But internet shopping may change this pattern, puttingthe final consumer back as the strategic customer.

Understanding what customer Values..



• Understanding customer needs and how they differ between segments is crucial to developing appropriatestrategic capability in an organization.

• However, value is multi-dimensional & it should be seen through the eyes of the customers . Value of product or services is often wrongly conceived of internally ( eg; designers, engineers, teachers or lawyers) and not tested out with customers or clients.

• Threshold requirements ( product features) are expectedfrom any provider in a given market segment

• Critical Success Factors (CSFs) are those productfeatures that are particularly valued by a group of

customers and, therefore, where the organization mustexcel to outperform competition. Understanding of theCSFs of a group of customers ( market segment is veryimportant.

Strategic Gaps



g p• The framework of PESTEL ( macro environment factors),

Five Forces (Industry environment factors) and others

like strategic groups, customer value help managersidentify and / or create „new market space‟ to gaincompetitive advantages.

• Kim & Mauborgne in „ Blue Ocean Strategy‟ have arguedthat if organizations concentrate on competing head to

head, the environment will get very tough. They haveencouraged managers to seek opportunities in businessenvironment which they call strategic gaps.

• A strategic Gap is an opportunity in the competitive

environment that is not being fully exploited by competitors . There may be different opportunities to dothis:



• Looking across substitute industries : direct rivals tend totrigger a stronger response than potential substitutes.

Software companies bringing electronic books & atlasesas substitute to paper versions.

• Looking across strategic groups: particularly if changesin micro environment make new market spaceseconomically viable.

• Looking across chain of buyers: adjusting marketingstrategy to „most profitable „ buyer or influencer.

• Looking across complementary products & serviceoffering: like „providing wholesome book buying

experience‟ instead of just stocking the right books. • Looking for new market segment: like no frills segment

• Looking across / ahead in time

Strategies to Alter Industry Structure



g y

• Opportunity to change industry structure in

order to alleviate competitive pressure ?



• In North America & Europe – Petroleum refining – earning below cost of capital

• Reason - many competitors, excess capacity &commodity products

• Consolidation to increase concentration, capacityrationalization; BP acquired Amoco, then Arco; Exxonmerged with Mobil; In Europe Total, Fina & Elf merged.

• US Airlines - mergers & alliances to reduce competition.

• In Chemical industry – BASF, Dow, ICI & Bayer-

capacity swapping & rationalization• Mittal & Arcelor merger – consolidation of fragmented

global steel industry

The Rise of strategy consultants



The Rise of strategy consultants• BCG, founded in 1963, had a major impact by applying

quantitative research to problems of business and

corporate strategy. Its founder, Bruce Hendersonbelieved that “good strategy must be based primarily on logic, not ….. On experience derived from intuition” .

• „Economic theory will eventually lead to thedevelopment of a set of universal rules for strategy,

rather than strategy being largely intuitive and basedupon traditional patterns of behavior which have beensuccessful in past. (“ business of selling - powerful over simplifications”)

• BCG came out with the concept of “experience curve ”

in 1965-66 to explain price and competitive behavior in extremely fast growing segments of industries for its clients like Texas Instruments, Black and Decker.

Experience curve



Experience curve • BCG , based on close study of fast growing industries

propounded that as the total accumulated experience of a

firm in the industry increases , it incurs less cost of producing a product.

• BCG claimed that for each cumulative doubling of experience ( accumulated production over time ) , totalcosts would decline roughly by 20%-30% because of

economies of scale, organizational learning andtechnological innovation .• According to BCG‟s explanation of its strategic

implications, “ the producer … who has made the mostunits should have the lowest costs and the highest

profits”. Bruce Henderson claimed that with experiencecurve, “the stability of competitive relationships should bepredictable, the value of market share change should becalculable, the effects of growth rate should also becalculable”

E i



Eperience curve

• Volume effect is not only the one to helpreduce cost & increase efficiency , thelearning from experience plays a vital role

in achieving this.• Over time, companies can identifyinefficient, ineffective procedures. They re-engineer processes, improve material and

resource management, strengthensupplier relationships etc.

The Experience Curve



The Experience Curve

Strategic Analysis



St ateg c a ys s• Strategic Analysis is done at

– Corporate level

– Business level

• In a multi-business corporation at Corporate level the major strategic decisions are about

– What Businesses should the we be in?

– How should we allocate resources between them?

– Other important decisions relate to• How do we organize the corporation ? How much decision

making should we allow at the level of individual business unit?

What activities would benefit from being organized centrally?

• How do we exploit the potential links between different butrelated, business units?

• How do we develop and reward business unit managers?

T L l f St t



Two Levels of Strategy

A diversified company has two levels of strategy

2. Business-Level Strategy (Competitive Strategy)

How to create competitive advantage in each

business in which the company competes

1. Corporate-Level Strategy (Company-wide Strategy)

How to create value for the corporation as a whole

Key Questions in



Key Questions inCorporate Strategy

1. What businesses should the corporation be in?

2. How should the corporate office manage thearray of business units?

Corporate Strategy iswhat makes the

corporate whole add upto more than the sum of its business unit parts

P tf li l i



Portfolio analysis

• Corporate level : tools like BCG Growth-Share Matrix,and GE Nine-Cell planning Grid are used to examineeach business as a separate entity and as a contributor tothe organization‟s total business portfolio. – The above analysis provides a neutral basis for

resource allocation at the corporate level, – encourages framing of good strategies at the businessunit level and

– leads to better implementation of strategy because of intensified focus and objectives all across the

corporation.• Business units are classified into invest, hold ,

divest and harvest categories based on theanalysis

BCG Growth- Share Matrix



• By early 1970s, the experience curve had led to BCG‟s Growth- Market share matrix concept, which

represented the first use of portfolio analysis. Thisapproach is widely used in Corporate strategic analysisfor managing a portfolio of different business units ( or major product lines). It helps in analyzing likely„generators” and optimum “users” of corporateresources.

• The matrix takes into consideration, the growth rate of the market and relative market share of the business unit

• In fast growing industries / market provide opportunity for high profits and rapid growth of turnover.

• High market share gives benefits of economies of scale and better bargaining power in relations to the suppliers and customers for the organization

• BCG matrix displays position of each business in the twodimensional matrix

BCG Growth – Share Matrix



?

$

High Low

Market Share

M

a r k e t

G

r o w t h

High

Low

STARS QUESTION MARKS

Cash Cows Dogs

BCG Growth Share Matrix



BCG Growth- Share Matrix……………….

• Business units after due considerations, get classifiedinto one of the four quadrants ( categories), viz; Cashcow, Stars, Question Marks, and Dogs.

• Cash Cows

– These business units hold large market share in amature & slow growing industry

– Have strong business position & negligible investment requirements. Hence returns from these businesses

far outstrips their investment requirements – „Cash cows‟ are tapped for drawing out resources

required elsewhere in the organization.





• Stars – These businesses have large market share in

growing industries

– Since industry is growing, to maintain/ grow the

market share, firm needs to invest

– Often investment requirements of Stars are greater than revenues

– Once the industry reaches the stage of maturity, the

stars hardly needs any investment and become major revenue generators





• Question Marks – These businesses have a small market share in a

high growth market .

– They demand significant investment because their

cash needs are high, a norm in growing industries – However, acquiring market share is easier in high

growth industry than in a mature market

– However the chances of success has lot of uncertainties

– Only a few question marks are finally able to growinto stars





• Dogs – These businesses have low market share in an intensely

competitive mature industry

– Characterized by low profits

– A dog does not need much capital investment, but it ties up

capital that could be invested in industries with better returns – Firms concentrate on recovering as much as possible from these

and undertake ruthless cost cutting

– Unless there is an over riding larger purpose, an organizationshould divest dogs

– Well managed dogs( eg; those having strong control overcosts, focus on niches) can be reliable revenue generator.Yet the possibility of being transformed into a cash cow does not exist .





• BCG‟s basic strategy recommendation was to maintain abalance between “cash cows” ( ie; mature businesses)and “stars”, while allocating some resources to feed“question marks” ( that is, potential stars). Dogs are to besold off.

• Since the producer with the largest stable market share eventually has the lowest costs and greater profits , it isbecoming vital to have a dominant share in as manyproducts as possible.

• Market share in slow growing market can be gained onlyby reducing the share of competitors, who are likely tofight back.

.





• If a market is growing rapidly, “a company can gainshare by securing most of the growth. Thus , whilecompetitors grow, the company can grow even faster and emerge with a dominant share when growth

eventually slows”

Shortcomings of BCG matrix



• BCG Matrix is based on the basic logic that relative market share is linked directly to cash generation and profitability . The firm with the largest cumulativevolume gains the benefits of the experience of theexperience curve first, so market share is critical.

• BCG Matrix has been criticized for “over-simplification ”. Firstly it uses just two performance measures . Secondly,direct & inevitable relation between market share and

profitability is questioned by some.• Besides, relative market share & industry growth rates,

there are wide range of other variables. This matrix takes no account of differentiation or focus strategies ; it seems to relate best to cost based

strategies where price competition is severe and experience curve effects are significant .• Companies in focused niches can also have low

operating costs.

• There can be practical difficulties in decidingwhat‟s exactly „high‟ and „low‟ ( growth and



what s exactly high and low ( growth andShare) can mean in a particular situation.

• In many organizations besides cash, theinnovative capacity is a critical resource, whichconsists of time & creative energy of theorganization‟s managers & designers. Stars &Question marks are very demanding on the

types of resources.• Sometimes dogs are retained to complete

product range and a credible presence in themarket. They may also be held for defensive

reason to keep competitor out.• Synergy of the SBU combination?• Behavioral implication creation / management of

balanced portfolio?

Development‟s at GE



Development s at GE

• In1968, CEO of GE asked McKinsey to examineGE‟s corporate structure.

• At that time GE consisted of 200 profit centersand 145 departments arranged around 10

groups. Boundaries of these units had beendefined around financial control aspects.

• McKinsey study recommended a formal strategicplanning system, which will divide the company

into “natural business units”, later renamed“strategic business units‟ ( or SBU‟s)

GE Nine-Cell Planning Grid (also called GE-



g (

Mckinsey nine-block matrix)

• This is an adaptation of BCG approach. In 1971, GEasked Mckinsey to evaluate strategic plans for its SBUs.GE had already considered using BCG matrix to decideon the fate of its SBUs but its top management haddecided that they could not set priorities on the basis of

just two performance measures. After studying theproblem for 3 months, a Mckinsey team produced whatcam to be known as nine-cell matrix.

• The nine-cell approach used approximately one dozenmeasures to screen for industry attractiveness andanother set of measures to screen for business

strength or competitive position, although the weightsattached to those measures were not specified.

• This nine-cell grids thus makes an effort to overcomesome of the limitations of BCG matrix.

GE Nine-Cell Planning Grid



GE Nine-Cell Planning Grid……………

• For assessing business strength or competitiveposition, following factors were used – Relative market share, profit margin , customer &

market knowledge ,ability to compete on price or quality, technological capability, image, competitive

strengths and weaknesses, caliber of management• For assessing industry attractiveness, it

considers following factors – Market size and growth rate, industry profit

margins , competitive intensity, seasonality & cyclicalqualities, Barriers to entry, Economies of scale,technology, social, environmental, legal, political andhuman impacts.

Process for deploying Nine-Cell



grid analysis

• First identify factors contributing to theindustry attractiveness.

• Next assign weights to each attractiveness

factor based on its perceived importancerelative to other attractiveness factors.

• Favorable to unfavorable future conditions areforecasted and rated based on a “0 to 1” scale

• Obtain a weighted composite score for abusiness‟s over all industry attractiveness

Industry Attractiveness Factors



Industry Attractiveness Factors

Industry attractiveness factor Weight Ratings Score

Market size 20 0.5 10.0

Projected market growth 35 1.0 35.0

Technological requirements 15 0.5 7.5

Concentration ( a few largecompetitors)

30 0 0

Political and regulatory factors Must benonrestrictive

Total 100 52.5

GE Nine-Cell Planning Grid



GE Nine-Cell Planning Grid……………

• A similar procedure is followed in assessing theBusiness strength• Once the comprehensive score has been calculated, the

scores are classified into categories such as high,medium or low in terms of projected attractiveness of the

industry and projected strength of business.• Then business units are classified into three categories: – First : Invest / grow – Second : Invest selectively and manage for earnings – Third : Harvest or divest for resources

• Businesses classified as Invest / grow given same preference as Stars in BCG matrix . Harvest / divestcategory is managed like dogs in BCG matrix .Businesses classified in the selectivity/earnings category are treated either as cash cows or as question marks

Business Strength Factors



Business Strength Factors

Business Strength factor Weight Ratings Score

Relative Market share 25 0.5 12.5

Profit Margin 25 0.8 20.0

Customer & Mkt knowledge 15 0.7 10.5

Technological capability 20 0.6 12.0

Image 15 0.75 11.25

Total 100 66.25

Industry ( product – market) Attractiveness



Invest /Grow Invest/Grow

Grow

selectively/mange earning

Invest/Grow

Growselectively/mange earning

Harvest/ divest

Grow

selectively/manage forearning

Harvest /

divest Harvest / divest

High Medium Low

B u s i n e s s

S t r e n g t h

W e a k

A v e r a g e

S t r o n g

GE / McKinsey Nine – Cell Planning Grid

More sophisticated but more difficult to interpret



More sophisticated but more difficult to interpret

• As the axes in the GE-Mckinsey matrixbecome more complex & multi-dimensional, the advantage of clarity of

simple BCG matrix is somewhat lost• Although it looks more sophisticated

model, it is not easy to plot businesses on

the matrix and to interpret what eachposition means.

Different perspectives



Different perspectives……………………

• Strategic implications of Industryenvironments differ most strongly along anumber of key dimensions:

– Industry concentration – State of maturity

– Exposure to international competition

The Industry Life Cycle Model



y y

• Stages in the industry lifecycle:

Arthur D. Little Life Cycle Approach




• This approach to Portfolio Managementtakes into consideration the businessenvironment in terms of stage of life cycle

the business is currently in.





Life cycle

stage

Position

Embryonic Growth Mature Aging

Dominant

Strong

Favorable

Tenable

Weak

The Life Cycle-Competitive



Strength Matrix

Stage of Market Life Cycle

Introduction Growth Maturit y Decline

High

Low

Description of

Dimensions

Stage of Market Life

Cycle:

CompetitiveStrength: Overall

subjective rating,

based on a wide

range of factors

regarding the

likelihood of gaining

and maintaining a

competitive

advantage

Directional Policy Matrix developed by Shell (UK)



• Here the two axes of the matrix are

– Business Sector Prospects – Company‟s competitive abilities

• A number of factors such as market growth,market quality, market supply and so on , are

used to rate the business sector prospects asunattractive , average, or attractive. Similarly,company‟s abilities are judged as weak,

average, or strong• The 3x3 matrix forms the basis for classify

businesses / major product group.

Different Roles of the Corporate Parent



e e o es o e Co po a e a e

• Portfolio Manager • Restructurers

• Synergy Managers

• Parental developers

Strategic Analysis…at Business level..• Business level Analysis : once business units are



• Business level Analysis : once business units areclassified into invest, hold, divest and harvest categories,SWOT analysis is employed to identify grand strategy

options at the business level• A SWOT analysis summarises the key issues from the

business environment and the strategic capabilities of anorganization that are most likely to impact on strategydevelopment. ( strategic capability is about the ability to provide products

with features that are valued by customers, competitive advantage if it can dobetter than competitors)

• Understanding What customers value or might value infuture – is important . This includes customers‟ thresholdrequirements. It also include critical success factors – those factors that customers particularly value and,

therefore, where an organization must excel to outperformcompetition.What customer values will change with time . However,there may be opportunities to exploit core competencies in new markets or arenas

SWOT Analysis



• SWOT analysis is grounded in the basic principle thatstrategy-making efforts must aim at producing a good fit

between a company‟s resource capability ( as reflectedby its balance of resource strengths and weakness) andits external situation .

• SWOT analysis forces managers to better understandand respond to those environmental factors ( that may beeither inside or outside the organization) have thegreatest importance for the firm‟s performance. Theseare strategic issues.

• Strategic issues rarely arrive on a top manager‟s desk

neatly labeled. Instead data from SWOT analysis identifynew technologies, market trends, new competitors, andemployee morale trends. They require interpretation andtranslation before they are labeled strategic.

SWOT Analysis Diagram



SWOT Analysis Diagram

Numerous environmentalopportunities

Major environmental threats

Critical internal

weaknesses

Substantial

internal

strengths

Cell 3: Supports a

turnaround-oriented

/ eliminate weaknessstrategy

Cell 4: Supports a

defensive strategy

Cell 1: Supports

an aggressive

strategy

Cell 2: Supports a

diversification /

use current

strength to build

long term adv

strategy

STRATEGIC CAPABILITY**• External environment influences an organization‟s

St t i d l t b ti b th i i &



Strategic development by creating both opportunities &threats.

• However, success of strategy is heavily dependent onthe organization having or developing the strategic capability to perform at the level that is required for success.

• Strategic Capability is the adequacy ans suitability of theresources and competences of an organisation for it tosurvive & prosper.

• Many of the issues of strategy development areconcerned with changing strategic capability better

to fit a changing environment• 1990s – adjustment to strategic capability through

adoption of new technologies in mfg industries toincrease labor productivity; in 2000s adoption of IT by service industry to stay in the business .



• In fast moving ( hypercompetitive ) world

the only really enduring capability is theability to change strategy as the basis of competition moves through different

phases of the cycle of competition . Indeedstretching IT capabilities andhypercompetitive behavior have been thebasis of dot.com companies.

The Roots of strategic Capability

• Strategic Capability is about providing products or



• Strategic Capability is about providing products or services that are valued by customers or might be

valued in the future.The ability to perform at the level required for success. It is underpinned by the resources and competencies of the organization .

• What customers value is the starting point for understanding strategic capability

• First are the threshold product features that allpotential providers must be able to offer to stay in aparticular market or segment. Even these are changingand becoming more demanding over time.

• The second are the Critical Success Factors , whichare the features that are particularly valued ( basis of selection ) by a group of customers and, therefore,where the organization must excel to outperform the competition.

• Since different Customer groups value different productfeatures, organizations will need to compete on different



, g pbases, and through different resources & competencies.

• Supermarkets – follow strategies which provide- lower

prices and „one-stop shopping through their resources (store location, scale , product range) and competencies ( knowledge of merchandising, low cost sourcing &computerized supply chain systems)

• „Corner shop‟ grocery store gains CA over

supermarkets by concentrating on those customers whose CSFs are different aspects of service- like,personalized service, extended opening hours, informal credit, home deliveries etc. This strategy may beunderpinned by unique resources ( such as shoplocation, the market knowledge of owner) and corecompetence ( the personal style and customer relationships sustained by the owner)

E i h th t d



• Experience shows that resources andcompetencies tend to be easy to imitate inthe medium term. Consequently, CAneeds to be secured by continuallyshifting the ground of competition.

• So a core competence could be theprocess of innovation – which requires theknowledge to link together many separateareas of knowledge such as branddevelopment, marketing and financialservices.

• Has an Organization the resources and competencies to



Has an Organization the resources and competencies toprovide products / services that meet the customer requirements? – Organization capability starts with

resources :• Available resources – to an organization, from both

within and those that can be accessed ( network of partners, contacts) , to support its strategies

• Threshold resources – resources needed to stay in the

business, otherwise unable to serve particular markets.Threshold „standards‟ rise with time.

• Unique resources – to meet critical success factors of a particular segment and create competitive advantages .Difficult to imitate.

• Inadequate resources – Resources that do notadequately underpin the meeting of threshold productfeatures. They may be adequate for other segments.

• Redundant resources

• Competence is created when resources are „



„deployed‟ into activities and into processes through which these activities are linkedtogether. Usually, the key to good or poor performance is found here than in the resourcesper se.

• Although an organization will need to reach athreshold level of competence in all activities that it undertakes, only some of these activities are core competences.

• Core competences are those competencesthat underpin the organization‟s ability tooutperform competitors by meeting the CSFsbetter than competitors.

• Core Competencies might also provide basis on



• Core Competencies might also provide basis onwhich strategies might be built to exploit

opportunities in other markets where the same or similar critical success factors are valued .

• Core competencies might also be the basis for creating opportunities in new arenas where the

same CSFs would be valued above those that currently prevail . In other words, to change therules of the game in those new arenas.

• What customers value will change with time, so

core competences will be eroded . However,there may be opportunities to exploit corecompetencies in new markets or new arenas.

Same as competitors Better than competitors



Same as competitorsor

Easy to imitate

Better than competitorsand

Difficult to imitate

Resources

Competencies

Thresholdresources

Uniqueresources

ThresholdCompetencies

CoreCompetencies

• Difference in performance between organizations



• Difference in performance between organizationsin the same market is rarely explained by

differences in their resource base sinceresource can usually be imitated or traded .Superior performance will be determined by theway in which resources are deployed to create

competences in the organization‟s activities. • For example, knowledge of an individual will not

improve an organizations performance unless heis „assigned‟ ( or allowed) to work on particular

tasks which exploits that knowledge , or moreimportantly, is able to share that knowledge with others who can build on it .

• Performance is also affected by the process of



y plinking separate areas of knowledge & activitiestogether both inside and outside the organization .

• Although an organization will need to achieve athreshold level of competence in all of theactivities & processes that support the product &

service, only some will be core competence .• Core competence are activities or processes

that critically underpin an organization‟scompetitive advantage . They create & sustainthe ability to meet CSF of particular customer group better than other providers that are difficultto imitate.

• Core competencies must fulfill the following‟criteria‟



• The competence must relate to an activity or

process that fundamentally underpins the valuein the product or services features – as seen through the eyes of the customer

• The competence leads to levels of performancesignificantly better than competitors. (

Benchmarking may help in understandingperformance)

• The competence must be robust i.e; difficult toimitate. Robustness will be greater where

competences are embedded – to the extent thatmanagers themselves have difficulty in fullyexplaining what underpins success.

• CSFs ( product features that are particularly



CSFs ( product features that are particularlyvalued by customers) like „good services‟ ,

„reliable delivery‟ are easy to understand. Butcore competences are about the activities that underpin the ability to meet these critical success factors, not the factors themselves .

• Core competence may be embedded deep in anorganization at an operation level in the workroutines of the organization.

• They are hidden to the extent that the managersthemselves may not explicitly understand them.

How Resources and Capabilities ProvideC



Competitive Advantage

The firm is organized appropriately to obtainthe full benefits of the resources in order torealize a competitive advantage

Valuable Allow the firm to exploit opportunities orneutralize threats in its external environment

Rare Possessed by few, if any, current andpotential competitors

Costly to imitate When other firms cannot obtain them ormust obtain them at a much higher cost

Nonsubstitutable

Resources and Capabilities, Core Competencies,and Outcomes



and Outcomes

CoreCompetencies

Competitive

Advantage

Value Creation

Above AverageReturns

Valuable

Rare

Costly to Imitate

Nonsubstitutable

• Importance of Linkages



• Importance of Linkages

– Value Chain

– Value System : The Value System is the setof inter-organizational links & relationshipswhich are necessary to create a product or

service.

Internal Analysis of the Firm



• Before a firm can start tapping the opportunities providedby the external environment, it has to know its owncapabilities, strengths and weaknesses. Internalappraisal has three distinct parts: – Assessment of the strengths & weaknesses of the firm , in

different functional areas – Appraisal of the status / health of the individual businesses of the

firm

– Identification and assessment of the firm‟s competitiveadvantage and core competence.

• Internal analysis is also the starting point for developingthe competitive advantages and core competenciesrequired for survival and growth of the firm

Internal Analysis: MakingM i f l C i



Meaningful Comparisons

Perspectives

to use

1. Comparison with past

performance

2. Stages of

industry evolution

3. Benchmarking –

comparison with competitors

4. Comparison withKey Success Factors

in industry

Benchmarking • Benchmarking has revolutionized the culture of business



gworld over

• Benchmarking is based on premise that in all processesincluding procurement, production, sales and services,one or other organization has achieved world classcompetitiveness.

• B‟marking is a process for improving performance byconstantly, identifying understanding and adapting bestpractices and processes followed inside and outside thecompany and implementing these adapted practices.

• Emphasis is on exploiting „best practices‟ that lead tobest performance, and not merely measuring bestperformance.

• It is a continuous process of learning, feedback,reflection and analysis of what works( or does not work)and why

What is Benchmarking?



• What is Benchmarking?

• " Benchmarking is a tool to help you improve your business processes. Any business process can be benchmarked."

• " Benchmarking is the process of identifying,understanding, and adapting outstanding practices

from organizations anywhere in the world to help your organization improve its performance."

• " Benchmarking is a highly respected practice in the business world. It is an activity that looks outward to find best practice and high performance and then measures actual business operations against those goals ."

• A Company can compare its total organization or part of it withothers and adopt one or more of the following types of benchmarking



benchmarking

• Strategic Benchmarking – studying strategies & long term

approaches that helped the „best practice‟ companies to succeed.Examine the core competencies, product development andinnovation strategies of such companies

• Competitive or performance benchmarking – compare their position with respect to the performance characteristics of keyproducts & services , involving companies from SAME SECTOR

• Process benchmarking – to improve specific key processes andoperations with the help of best practices organizations involved insimilar work or offering services

• Functional ( generic) B‟marking- improve their process bycomparing with companies from DIFFERENT business sectors

involved in similar functions or work processes. ( eg Safetypractices)

• Internal Benchmarking – against own units, easy to get data

• External b‟marking – help of high end performers/ successful Cos

• International b‟marking

• Many business processes are common throughout



y p gindustry. For example; NASA has the same fundamental

Human Resources requirements for hiring anddeveloping employees as does American Express.British Telecom has the same Customer SatisfactionSurvey process as Brooklyn Union Gas. Theseprocesses, albeit from different industries, are allcommon and can be benchmarked very effectively. It'scalled "getting out of the box".

• By early 1990s, many Fortune 500 were implementingbenchmarking. Benchmarking also became a key

criterion for Malcolm Balridge Quality award. Xerox, ford,GE, AT&T, Motorola, citicorp early users

Profit Impact of Market Strategies ( PIMS)

• A more quantitative approach to portfolio planning was



q pp p p gdeveloped at roughly the same time ( as GE nine cell)

under “PIMS” program. • By 1970s, PIMS contained data on 620 SBU‟s drawn

from 57 diversified corporations.

• The data were originally used to explore thedeterminants of ROI by regressing historical returns

on several dozen variables including market share,product quality, investment intensity, R&D expenditureetc.

• The regression established what were supposed to be

benchmarks for the potential performance of SBUs with particular characteristics against which their actual performance might be compared.

What is the Resource-based Viewf th Fi ?



of the Firm?

Firms differ in fundamental ways

because each firm possesses a

unique “bundle” of resources – tangible and intangible assets and

organizational capabilities to make

use of those assets

Distinctive Competencies & Competitive advantages

• A company has competitive advantage over its rivals



A company has competitive advantage over its rivalswhen its profitability is greater than average profitability in

the industry.• Distinctive competencies are firm-specific strengths that allow a company to differentiate its products and /or achieve substantial lower costs than its rivals and thusgain competitive advantage .

• Toyota, in global automobile industry has distinctivecompetency in manufacturing processes, known as „leanproduction system‟. Toyota pioneered a whole range of techniques, such as JIT inventory systems, self-managing teams, reduced setup times for complexequipment. Helped it attain superior efficiency and

product quality• Distinctive competencies arise from two

complementary sources: resources and capabilities

Strategy, Resources, Capabilities,and Competencies



p

• Resources – Tangible resources : physical like plants, equipment, inventory,

l d fi



land, finance – Intangible resources : non-physical entities that are creation of

the company and its employees, such as brand names, thereputation of the company, knowledge that employees havegained through experience, and intellectual property of thecompany, including patents, copyrights, and trademarks.

• The more firm specific and difficult to imitate is aresource, the more likely a company is to have adistinctive competency. For example, Polaroid‟sdistinctive competency in instant photography was basedon a firm-specific intangible resource: technologicalknow-how in instant film processing that was protectedfrom imitation by patents.

• Another important quality of a resource that leads to adistinctive competency is that it is valuable; in some way,helps create strong demand for company‟s products

• Capabilities refer to a company‟s skills at coordinatingits resources and putting them to productive use. Theseskills reside in an organization‟s rules procedures



skills reside in an organization s rules, procedures ,styles or manner through which it makes decisions and

manage internal processes.• More generally, Capabilities are result of a firm‟s

organizational structure, processes, and control systems.Kind of behaviors that are rewarded, process of decision making, cultural norms and values

• Capabilities are intangible. They reside not so much inindividuals, as in the way individuals interact, cooperate,and make decisions within the context of anorganization.

• A company may have firm specific and valuable

resources, but unless it has the capability to use thoseresources effectively, it may not create distinctivecompetency.

A Critical Distinction



• If a firm has firm-specific andvaluable resources it must also have the capability to use them effectively to create distinctive

competency

• A firm can create distinctivecompetency without firm-specific and

valuable resources if it has uniquecapabilities

The Roots of CompetitiveAdvantage



Advantage

Innovation



• The act of creating new products or processes

– Product innovation

• Creates products that customers perceive

as more valuable, increasing thecompany‟s pricing options

– Process innovation

• Creates value by lowering production costs

• Perhaps the most important buildingblock of competitive advantage

Responsiveness toCustomers



Customers

• Doing a better job than competitorsof identifying and satisfyingcustomers‟ needs

– Superior quality and innovation areintegral to superior responsiveness tocustomers

– Customizing goods and services to the

unique demands of individualcustomers or customer groups

Responsiveness toCustomers (cont‟d)



Cus o e s (co d)

• Sources of enhanced customer responsiveness

– Customer response time, design,service, after-sales service and support

• Differentiates a company/itsproducts; leads to brand loyalty and

premium pricing

The Generic Building Blocks of Competitive Advantage



How Resources and Capabilities ProvideCompetitive Advantage



Competitive Advantage

The firm is organized appropriately to obtainthe full benefits of the resources in order torealize a competitive advantage

Valuable Allow the firm to exploit opportunities orneutralize threats in its external environment

Rare Possessed by few, if any, current andpotential competitors

Costly to imitate When other firms cannot obtain them ormust obtain them at a much higher cost

Nonsubstitutable

Resources and Capabilities, Core Competencies,and Outcomes



a d Outco es

CoreCompetencies

Competitive

Advantage

Value Creation

Above AverageReturns

Valuable

Rare

Costly to Imitate

Nonsubstitutable

Aspects to be covered in Strength-Weakness analysis



yThe strengths and weaknesses of the firm have to be assessed in each

of the main functions / areas• Marketing

– Overall growth of the market – Market standing / market share – Innovation in marketing – Customer satisfaction level

– Customer service level – New product capability – Pricing / margins – Channel position / distribution network – Marketing communication on the whole – advertising, sales promotion,

personal selling

– Market Research Capability – Marketing costs , Marketing organisation – Products –mix and product lines

• Product-wise position with respect to



Product wise position with respect to – Profitability

– Stage of product life cycle – Product design / technological strength – Differentiation – Positioning – Brand power

• Finance – Assets, liquidity, leverage, gearing, cash flow, cost of capital,

profitability, quality of financial management, tax planning

• Manufacturing / Operations – Capacity / scale of production, locational advantages, post

production facilities, Capacity utilization, cost of production, breakeven position, productivity, inventory management, flexibilty inmanufacturing, automation, availability of trained skills.

• R&D



R&D – Nature and depth of R&D capability

– Resource allocated to R&D – Quality, expertise and experience of R&D personnel – Speed of R&D, capability of engineering products based on R&D – Record of patents generated – Comparison of R&D investment vs new product launched

• Human Resources – Morale & motivation of employees, personnel turnover, quality /

expertise of personnel

• Corporate / overall resources – Company image , size, quality of top management, corporate

performance, innovation record, organization culture ,organizational structure, use of information technology, CEO,Board of directors, Overall adequacy of resources etc

Identifying Key Success Factors



• Competition between industry participants isultimately a battle for competitive advantage in which firms rival one another to attractcustomers & maneuver for positional advantage.

• We need to explicitly look at the sources of competitive advantage within an industry – identify those factors within firm‟s market

environment that determine its ability to surviveand prosper- its Key Success Factors (KSFs)

Key Success Factors



• An industry‟s KSFs are those that most affect industrymembers‟ ability to prosper in the market place.

• KSFs by their nature are important to all firms in that industry

• Determining the industry‟s KSF, given prevailing and

anticipated industry and competitive conditions, is a top-priority analytical consideration

• A sound strategy incorporates efforts to be competent on all industry KSFs and to excel on at least one

factor • KSF for an industry at any point of time should not bemore than 3-5 in numbers

Identifying KSFs

Pre-requisites for success



What do customers Want?

Analysis of demand

Who are our customers?What do they Want?What do they Value most?

How does the firmSurvive competition?

Analysis of competition

What drives competition?What are the main dimension of competition?

How intense is competition?How can we obtain superior

competitive position?

Key Success Factors

Identifying KSF for Supermarkets



• What do customer want? ( analysis of demand)

– Low prices

– Convenient location – Product range adapted to local customer

preferences

– Freshness of produce

– Cleanliness, service and ambience



• How does a firm survive competition(Analysis of competition)

– Customer price sensitivity encourages

vigorous price competition – Excise of bargaining power an important

influence on input cost

– Scale economies in operation and

advertisement

– Markets localized & concentration high

Identifying KSFs for supermarkets

• Key Success factors



Key Success factors

– Low cost operation requires :• Operational efficiency

• Scale-efficient stores

• Large aggregate purchases to maximize buying

power

• Low wage costs

– Differentiation requires

• Large stores ( to allow wide range of products• Convenient location

• Easy parking

Common types of KSFsTechnology related KSFs



Technology –related KSFs

• Scientific research expertise ( important in Pharmaceuticals, Hi-techindustries, Telecommunication industry etc)

• Technical capability to make production process innovation

• Product innovation capability

• Expertise in a given technology

Manufacturing-related KSFs• Low cost production efficiency ( achieve scale of economies, captureexperience curve effects)

• Quality of manufacture ( fewer defects, less need for repairs)

• High utilization of fixed assets ( important in capital intensiveindustries / high fixed cost industries)

• Low cost Plant locations

• Ability to deliver products customized to buyer specifications (flexibility in manufacturing system)

• Low cost product design and engineering ( reduces manufacturingcost)

Common types of KSFs• Access to adequate supply of skilled employees

• High labor productivity



Distribution related KSFs

• A strong distribution network of wholesalers/ dealers• Gaining ample space on the retailers shelves

• Low distribution cost

• Accurate filling of customer orders

• Short delivery times

• Having company owned outlets

• Integrated distribution information system

Marketing –related KSFs

• Courteous customer service

• Fast accurate technical assistance

• Breadth of product line and product selection

• Attractive styling or packaging• Clever advertising

• Accurate filling of buyer orders ( few back orders or mistakes)

• Merchandising skills

Common types of KSFs……………

Skills-related KSFs



• Superior workforce talent ( important in professional services like

Accounting and investment banking)• Quality control know how

• Design expertise ( important in fashion and apparel industry , oftenone of the keys to low cost manufacture)

• Expertise in a particular technology

• An ability to develop innovate products and product improvementsOrganizational Capability

• Superior Information System ( vitally important in airline, car rental,credit card, Hotel & financial sector industries)

• Ability to respond quickly to shifting market ( stream lined decision,

short lead time to bring new products)• Managerial experience

• Superior ability to deploy e-commerce technologies

Common types of KSFs……………

Other types of KSFs



Other types of KSFs

• Favorable image or reputation with buyers• Covenient locations ( important in many retailing

businesses)

• Overall low cost operations( not just in manufacturing)

• Access to financial capital• Patent protection

• Pleasant, courteous employees in all customer contactposition

KSFs vary from industry to industry and even from time to

time within the same industry as driving forces and

competitive conditions change.

SF Examples

• In the real estate development industry, acquiring land

K



p y q gand maintaining liquidity are the two key success factors.

If every other factor concerning the business of thedevelopment company is just average, but the land iswell located and the firm maintains adequate liquidity,the company will do well. Not that the developer

shouldn't attempt to deliver a well-constructed productwith good financing. He should. But nothing is a greater determinant of success than having, or not having, theright piece of land, and remaining in a liquid position.

• Knowing the importance of land acquisition to his company'ssuccess, the Chairman of one of leading real estate developer instructed his managers, "Before you commit to the purchase of anypiece of land, I want to walk on it."

KSF Examples……………………



Beer/Brewing Industry • Utilization of brewing capacity - to keep manufacturing

costs low

• Developing a strong network of wholesale distributors -

to gain access to retail outlets• Clever advertising - to induce beer drinkers to buy a

particular brand

Formulation of long term strategies



• Grand Strategies provide basic directions or options available for a company for strategicactions. Grand Strategies are long termstrategies to achieve company‟s long term

objectives( also called master strategies or business

strategies)

• They can be broadly classified into 3 categories – stability strategy / Consolidation

– Growth strategies – Retrenchment strategies

– Or a combination of the above

Ansoff‟s Product Market Matrix for Growth



Present Product New Products

PresentMarket

New

Markets

Market Penetration Product Development

Market development Diversification

Grand Strategies………………..



• Concentration• Market development• Product development• Horizontal Integration – acquiring similar

businesses, same stage of Production – Marketing chain• Vertical Integration – forward , backward• Tapered Integration• Quasi Integration

• Diversification – Concentric diversification- synergy – Conglomerate diversification



• JVs• Strategic Alliances

• Consortia

• Turnaround• Divestures

• Liquidation

• Quasi Integration – Quasi integration refers to



• Quasi Integration – Quasi integration refers to

the establishment of a relationship / alliancebetween vertically related businesses (partners).some of the common forms of quasi integrationare: – Minority equity investment

– Loan or loan guarantees – Pre-purchase credits – Exclusive dealing arrangement – Specialized logistic facilities

– Co-operative R&D• Benefits of Quasi Integration?

Turnaround Strategy



A turnaround strategy is done

through

Cost reduction Asset reduction

Behavioral considerations affecting strategicchoice• Strategic analysis rarely identifies one specific



Strategic analysis rarely identifies one specific

superior strategy . Different alternatives withdifferent or similar looking payoffs emerge.Under such circumstances, various factorsinfluence the choice. Some of the factors:

– Role of past strategies : inclination towardscontinuity of past strategy. That‟s why Firmssometimes replace key executives whenperformance of the firm is in adequate over extendedperiod. On the other hand, more successful the

strategy becomes, harder is to replace it even under changed circumstances

– Perception of KSFs & Distinctive competencies

• Attitude towards Risk: Range & diversity of strategicchoices vary with the risk taking ability of organizations.A th f t i fl i i l it t d



Another factor influencing managerial propensity towards

risk is industry volatility. In highly volatile industries, topmanagers absorb, and operate with, greater amount of risk than their counterparts in other industries. Firm‟s inearly stages of product / market evolution has to cope withhigher risks

• Competitive Reaction: Capacity of competitor to reacthas to be considered, especially if choosing aggressivestrategy. Probable impact of such reaction on the chosenstrategy

• Degree of Firm‟s external dependence on supplierst G t tit i t

introduction to strategic management 6june2011 (1)

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