Sample Assignment - Strategic Management Assignment

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EXECUTIVE

SUMMARY

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forthcoming future, gathered from an extensive analysis of the external environment will assist the management formulating strategy to grab new strategic opportunities and defend upcoming threats leading the organisation to its desired success.

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Acknowledgement

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CONTENTS

Brief Description of the Topic iv

Key Factors to Be Discussed iv

Approaches & Sources of Data v

Learning Aids v

Introduction 1

Identical Layers in Business Environment 2

The External Environment 3

Significance of External Environmental Analysis in Successful Business

Operation 4

Levels of External Environmental Analysis 4

Suitable Analytical Tools & Frameworks to Support Different Levels of

External Environmental Analysis 5

Tools for Analysing the Remote Environment 6

Significance of Analysing the Remote Environment 11

Tools for Analysing the Company Specific Industry 15

Significance of Analysing the Industry Environment 20

Tools for Analysing the Operating Environment 22

Significance of Analysing the Operating Environment 29

Analysing the Overall External Environment 35

Other External Considerations in Strategy Development 38

Observations & Recommendations 40

Conclusion 41

Appendices 42

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NTENTS

BRIEF DESCRIPTION OF THE TOPIC

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‘Strategic Position (Strategic Analysis)’ phase of strategic planning

process. Under the strategic analysis there are three key factors: (a) The environment within and surrounding the organization (b) Strategic Resources, competencies and capabilities (c) Expectations and Purposes of the organisation. The coursework requires detailed study of the significance of external environmental analysis, identification of suitable tools and frameworks for environmental analysis, observation of key external issues affecting the success of organisations and examine the factors unavoidable in strategy development process.

KEY FACTORS TO BE DISCUSSED

This paper attempts discuss the following issues:

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APPROACHES & SOURCES OF DATA

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LEARNING AIDS

• Understanding the importance of different layers in environment; • Learning about the factors that constitute external environment; • Gathering knowledge about successful corporate strategies;

• Importance of different levels in external business environment and

how does they affect decision making;

• Exploring the available tools and frameworks for external analysis; • Understand which tools and frameworks can be utilized in various

situations;

• Understanding the role of government and economy in business; • Learning about socio‐cultural and technological impact on business; • Gather knowledge about industry competitive factors;

• Learning about skills and capabilities required to compete in an

industry;

• Learning about how to identify competitor’s weakness and grab

opportunity;

• Understanding the factors that affect the relationship between

organisations and its customers;

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The purpose of this coursework is to examine the

multidimensional impact of forces external to business environment and demonstrate their importance as an analytical issue while formulating an effective organisational strategy.

This brief report defines the layers of business environment and looks at the constituents of external environment. Different levels of the external business environment are identified followed by a widespread study of suitable tools and frameworks for environmental analysis. The importance of each level in external environment is described with a relevant reference to the corporate affairs.

Finally, the pathway to identifying opportunities and threats in the external environment, exploiting strategic gap in the industry or market and postulating possible future scenarios is advised. Some other external considerations in strategy development are also explained.

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According to Johnson, Scholes and Whittington (2005), Hitt (2002) and Marketing Teacher (2000) there are three identical layers in the business environment (See Appendix2):

Figure: Layers in Business Environment by Michael A. Hitt (2002) Source: Hitt, Michael A. (2002), Creating Value, Blackwell Publishing, Canada

ƒ The Macro Environment: This consists of political structure and ideology of the host government, economic dimensions of the market, socio‐ cultural environment, demographic extent, technological infrastructure, legislative boundaries, national objectives, ecological factors and the natural environment.

ƒ The Micro Environment: This layer basically consists of the industry or sector, the market (buyers or customers) and the competitors. However, this also includes suppliers, intermediaries, distributors, retailers, financial institutions, advertisers, tangible and intangible service providers, etc. ƒ Infra Firm Environment: Infra firm consists of different departments

within the organisation, their activities related to the creation and delivery of product or services, resources, competencies and capabilities of the

The Macro Environment

The Micro Environment

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firm. Men, money, machinery and materials are generally attributed as components of this environment.

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The external environment comprises of macro and micro environment. Every business is affected by the actions of other players within the external environment who does not hold a direct control on business but plays vital role in formulating a successful business strategy (Scott, 2005). Organisations are influenced by forces in these two layers of business environment. All businesses run in a changing world. However, the changes in external environment are beyond the control of management and are subject to forces of macro and micro environmental forces (Parrish, 2003). Changes in these environments may affect the company or even the total industry in a large scale (Scholte J. A., 2005). The key drivers of change in the environment differ from sector to sector, country to country. Therefore they cause different impact on one organization to another (Johnson, Scholes and Whittington, 2005).

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Jack Welch, Former CEO of General Electric Company, believes, “When the rate of Change inside the company is exceeded by the rate of change outside the company, the end is near” (Wilson and Gilligan, 2005). An effective business strategy formulation requires an extensive study of external environment of the enterprise. All corporate strategists regard the environment as uncertain (Lynch, 2003). The development of any universal strategy applicable to all ventures or industries is impossible though specified framework can be devised followed by a widespread study, reaction and response to the changes in external environments (Sadlar, 2002). The purpose of the external analysis is to identify what may affect the future of the enterprise as a whole from outside itself (Macmillan and Tampoe, 2000).

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A theory of Lynch (2003) suggests that ‘Although there are no absolute rules, it is usually the case that the customer comes first, the immediate competition second and the broader environment surrounding the organisation then follows behind this. Macmillan and Tampoe (2000), Johnson, Scholes and Whittington (2005) and Global Management Consulting (2007) consider external analysis at three levels:

ƒ The Remote Environment: General changes in macro‐environment; ƒ Company Specific Industry: Changes within the industry;

ƒ The Operating Environment: Activities of immediate competitors, market expectations, actions of strategic groups and other specific changes within the firm’s immediate external environment.

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The range of analytical tools, techniques and frameworks available to support external analysis is very large. The choice of appropriate tools depends on the requirements of the context and the data available (Raisel and Friga,2001). It may also depend to some extent on preferences for the schools of strategic thought (Macmillan and Tampoe, 2000). Each of the schools of thought suggests a different set of questions for strategic analysis to answer. Some of the most commonly used tools for analysing the external environment are:

ƒ For Analysing the Macro Environment: PESTEL Analysis, Porter’s Diamond, The Four Links Model, E‐S‐P Paradigm, etc.

ƒ For Analysing the Company Specific Industry: Porter’s Five Forces, Industry Life Stage Analysis, Porter’s Model of Industry/ Market Evolution, Industry Success Factors Analysis, etc.

ƒ For Analysing the Operating Environment: Competitor Analysis, General Electric’s Multifactor Portfolio, BCG Matrix, Positioning Analysis, Market Intelligence Model, Market Commitment Model, etc.

ƒ To Evaluate the Overall External Environment: Opportunity & Threat Analysis, Strategic Gap Analysis, Scenario Planning Model, etc.

Strategic tools and frameworks should be effective at answering some particular types of questions (Global Management Consulting, 2007):

ƒ Is there a market for our products?

ƒ How many competitors will we face? Who are they? ƒ Is this industry growing? Declining?

ƒ Which are the most important industry trends? Best practices? ƒ Which are the key strategic factors for success in this industry? ƒ Is the economic and political system stable?

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PESTEL Analysis

The PESTEL Framework is a commonly used and immensely valuable technique for analysing the external environment (Gregory, 2000). It is particularly important to look at the future impact of environmental factors, which may be different from their past impact (Lynch, 2003). It categorises macro environmental influences into six major types and covers just about everything that can affect the organisation from outside.

1. Political Factors ° International Trade Regulations

° Government Stability ° Foreign Trade Regulations ° Social Welfare Policies ° Taxation Policy

° Pressure Groups (E.G. Chamber Of Commerce) ° Special Interest Groups (E.G. Anti Smoking Society) ° Control Over Managerial & Marketing Autonomy

2. Economic Factors ° Economic Growth (GDP)

° Savings and Investment Availability ° GNP Trends

° Interest Rates ° Inflation

° Per Capita Income ° Business Cycles ° Disposable Income ° Taxation ° Exchange Rates ° Labor Cost ° Employment Levels ° Monetary Policies

° Growth Rates of Specific Industry ° Government Spending,

3. Social & Demographic

Factors

° Population Demographics ° Income Distribution ° Social Mobility ° Lifestyle Changes

° Attitude Towards Work and Leisure ° Consumerism

° Societal Values ° Norms

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° Institutional Network

° Social Organization & Structure ° Levels of Education

° Population Growth ° Population Age Mix ° Ethnic & Racial Makeup ° Educational Groups ° Household Patterns

° Geographical Shifts in Population

4. Technological ° Government Spending on Research

° Government And Industry Focus on Technological Effort ° Rates of Obsolence

° Industry Focuses on Technological Efforts ° New Inventions & Developments

° Access to Internet

° Rate of Technology Transfer ° Changes in IT

° Access to Cell Phones

° Adoption of New Technology.

5. Environmental ° Environmental Protection Laws

° Waste Disposal ° Energy Cost

° Availability Of Raw Materials ° Cost of Energy

° Anti Population Pressures & Green Movement

6. Legal ° Competition Law

° Employment Law ° Health and Safety

° Product Safety Regulations & Standards ° Company Law

° Import Barrier ° Consumer Protection ° Labor Law

° Taxation Law

Figure: A Combination of PESTEL Frameworks by Brooksbank (2002), Johnson, Scholes and Whittington (2005) and Kotler and Armstrong (1996)

Source: (1) Brooksbank, R. (2002), Hot Marketing, McGraw‐Hill Professional, USA (2) Johnson, G., and Scholes K. and Whittington R. (2005). Exploring Corporate Strategy, 7th edn, Financial Times Prentice Hall, London. (3) Kotler, P. and Armstrong, G. (1996), Principles of Marketing, 7th edn, Prentice Hall, N.J., U.S.A.

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Porter’s Diamond

Porter’s Diamond is another framework developed by Michael Porter to understand the impact of macro environmental factors on the competitive environment (Johnson, Scholes and Whittington, 2005). Michael Porter (1998) suggests that there are inherent reasons why some nations are more competitive than others and why some industries within nations are more competitive than others.

Figure: Porter’s Diamond Source: Porter, Michael E. (1998), On Competition, Harvard Business School Press , USA

For Example, Korea has a national advantage in Information and Telecommunication Technology. Current IT landscape in Korea indicated various factors that can enhance Korea's competitive advantages. (National IT Strengths & Weaknesses, 2002) The briefanalysis below is based on the Porter’s Diamond Framework for determining national advantage.

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Formal co‐operative links

Government links and networks

Complementors

Figure: The Four Links Modelsource: Lynch, R. (2003). Corporate Strategy, 3rd edn, Financial Times Prentice Hall, England.

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The Four Links Model

Lynch (2003) claims, ‘As well as competing with rivals, most organisations also co‐operate with others, e.g. through informal supply relationships or through formal and legally binding joint ventures. Until recently, such links were rarely analysed in strategy development’. The four links model analyse the informal co‐operative links and networks, formal co‐operative links, complementors, government links and networks. The objective of such an analysis is to establish the strength and nature of the co‐operation that exists between the organisation and its environment.

Figure: Korea’s national advantage in Information and Telecommunication Technology

source: National IT Strengths & Weaknesses (2002) [online] (cited 13 December, 2007 at 3:46 pm) <http://www.american.edu/initeb/hp256 6a/National%20IT%20Strengths%20&%20 Weaknesses>

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E‐S‐P Paradigm

Koopman and Montias (1971) recommended a diagram named E‐S‐P Paradigm which analyse the environment of the nation, its system of government and its policies. Government can stimulate national economies, encourage new research projects, impose new taxes and introduce many other initiatives that affect the organisation and its ability to develop corporate strategy; in order to analyse the effect E‐S‐P diagram can be used. (Lynch, 2003)

COMPONENTS OUTCOMES

Figure: E‐S‐P Paradigm by Koopman and Montias (1971) Source: Adapted from Koopman, K and Montias, J.M. (1971) ‘On the description and comparison of economic systems’ in Lynch, R. (2003). Corporate Strategy, 3rd edn, Financial Times Prentice Hall, England.

Environment (E)

Background Characteristics of a country

Systems (S)

The country’s system of government

Policies (P)

The main Government Policies

° Human Resources ° Natural Resources ° Stage of Economic

Development

° Culture and History

° Level and structure of output: agriculture, industry, service ° Attitudes to work, wealth, etc. ° Structure of decision taking

° Role of free market in allocating resources ° Desire for international

commerce ° Nationalisation Policy ° Capitalist: laissez‐ faire ° Socialist: dirigiste ° Mixed ° Macroeconomic ° Microeconomic ° Education, Health, Social

° FDI and Competition

° Extent and type of government intervention ° Controls exerted ° Performance expected

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ƒ To Understand Political Structure & Ideology: A firm’s functional decisions need to be altered following the developments in political and legal environment of the country. For example, the Chinese governments decision to shift new investments away from overheated economic areas specially Hong Kong and to limit foreign participation in the stock market during 1997 affected the businesses those had a huge investment in China. (Graham, 1997).

ƒ To Learn about Economic Dimensions of Market: Economic factors provide stratigists with the knowledge of overall economic scenario of the market and formulate their pricing strategy, consumer market segmentation, take financial decisions and forecasting revenue. For example, the UK government’s recent proposal (BBC ONE News, 2007, November 25) of increasing capital gain tax from current 10% to 18% will affect the small business and entrepreneurs if the new regime is taken into action. According to a report (Duncan, 2007) the rising mortgages and falling house prices in UK caused fall in number of people shopping for Christmas in the capital and sales edged forward at their slowest rate more than previous years. It had prompted chains such as Debenhams, Oasis and Top‐shop to cut prices. Many other stores were sending out thousands of online vouchers, with discounts up to 60% to win back shoppers.

ƒ Assessing the Financial Policy of the Capital Market: In 1999 and the early part of 2000 the world stock markets were driven higher and higher with the investors love‐affair with the technology stocks. But, by early 2003 the stock market lost some 50 % of their value and technology stocks lost far more. The internet and telecommunications companies were the biggest

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victim many of which lost 90% of their market valuation which forced them scale down their development plans and many smaller companies went bankrupt (Johnson, Scholes and Whittington, 2005)

ƒ Gathering Knowledge about Socio‐cultural Background: Changes in people’s tastes and preferences can influence purchasing power towards certain goods and services. A survey of the Consumer Price Index has looked at changes in peoples tastes over the last 30 years. Shopping baskets today contains more fat‐free foods than in 1960s when housewives were filling their baskets with fatty butter, sponge cakes and high‐fat milk. (The Mirror, 2001)

ƒ Analysing Pace of Change in Technological Infrastructure: Technology is the foundation of today’s fastest growing companies providing growth in every major industrialized nation. (Couillard, 2006) Companies continue to turn towards technology as they seek a competitive edge by becoming more flexible and efficient. The role of technology is quite visible in many service organisations where machines and technology have changed the nature of work. A relevant example can be the introduction of Automatic Teller Machines (ATMs) has replaced low skilled jobs and placed more emphasis on high skilled jobs. (Khosrowpour, 1994)

ƒ To Consider the Legislative Boundaries & National Objectives: Some legislative boundaries and the national economic goal affect the operation of business. For example, the legal restriction on smoking in the public places caused drop of sales of tobacco in UK (Financial Times, 2007).

ƒ To Study the Demographic Environment: ‘People make up markets’. So, a potential marketer should look at the following demographic factors to be successful in identifying needs and wants and satisfy them. These variables are population growth, population age mix, ethnic & racial makeup, educational groups, household patterns, geographical shifts in population,

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etc. For example, McDonald’s use age and life‐cycle segmentation

strategy to target children, teen, adult and seniors with different ads and

media. Its ads for teens feature dance‐beat music, adventure and fast‐ paced cutting from scene to scene; ads for senior are softer and more sentimental (Kotler and Armstrong, 1996).

ƒ Identifying the Influences of Major Regulators: Organisations must have strategy to encounter a lot of regulatory agencies and commissions set up to enforce trade policies and regulations like trade commission, financial regulatory agencies, Environmental Protection Agency, Consumer Affairs, etc. For instance, TESCO, Britain’s biggest supermarket, sold alcohol below cost price all the time. On the month of November, TESCO, Sainsbury’s and ASDA offered lager at just 22p a can. Because of the health hazard of alcohol consumption, the deep discounting promotions strategy of these supermarkets were threatened by the British health minister Ben Bradshaw who warned of imposing law to stop the supermarkets selling alcohol below cost price (Blunden, 2007).

ƒ Understanding the Activities of Lobby Groups and their Impacts: The activities of lobby groups are able to influence the values of customers and thus change the ground rules within which an enterprise operates. For instance, Following a declaration of The Global Islamic Community Forum on February 12, 2007 that “McDonalds French fries are ‘HARAM’ (Prohibited by Islam) as they are fried in pig’s lard before they are brought to McDonalds”, many Muslim customers of McDonalds in USA began to avoid McDonalds fries. However, after some months McDonalds could ascertain that there was no involvement of pig’s lard in their food preparation process. (GICM, 2007). Since the loyalty of Muslim Customers’ towards French fries once lost, it is difficult for McDonalds in USA to regain the lost popularity among Muslims.

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ƒ Environmental and R&D Policy of the Host Government & Pressure

Groups: Host government and environmental pressure groups sometimes

become threat to a company or industry concerning the damage of environment caused by the factory or R&D. For instance, Ship breaking industry in India and Bangladesh had undergone a red alert by Greenpeace in 2005 for emission of deadly chemicals or due to the common explosions caused by the torching of residual fuels from uncleaned vessels. (Greenpeace, 2005)

ƒ Seeking the Environmental Resources and Support Required by the

Enterprise: Every company should evaluate the availability and cost of

natural resources required by it before starting a venture in any specific geographic location.

ƒ Analyzing Home Demand Conditions: Home demand conditions provide the basis upon which the competitive advantages of an organisation are figured. For example, the Japanese customers’ high expectations of electrical and electronic equipment have provided an impetus for those industries in Japan leading to global dominance of those sectors. (Johnson, Scholes and Whittington, 2005)

ƒ Labour Policy and Industrial Relations: Governments set the framework for labor relations through legislation and regulation. Usually, employment law would cover issues such as minimum wages and wrongful dismissal. For example, in UK the government upholds labour rights through Industrial Relations Act 1971.

ƒ To Identify Related and Supporting Industries: The presence of related and supporting industries is advantegeous for the growth of a particular industry (Inkpen and Ramaswamy, 2006). For example, In Germany, the chemical industry, synthetic dyes industry, textile industry and textile

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machinery industry underpin them, benefit from one another. (Murmann, 2003)

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Porter’s Five Forces

A number of years ago, the renowned business strategist and one of the world’s best academic’s Michael E. Porter identified five competitive forces that influence planning strategies in a model called ‘Porter’s Five Forces’ (Kurtz and Boone, 2005). ‘Porter’s framework remains useful tool for getting an analytical grasp on the state of competition and the underlying economics within an industry. It also encourages the strategists to look outside the small circle of current competing rivals to other actors and influences that determine potential profitability and growth (Harvard Business School, 2005)

Figure: Porter’s Five Forces by Michael E. Porter (Illustration) Source:http://www.usdoj.gov/atr/public/hearings/single_firm/docs/219395_8.gif

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Industry Life Cycle Analysis

Macmillan and Tampoe (2000) claims ‘Analysis of life stages may give useful insights in those industries where there is a discernible and predictable life cycle pattern. Life cycle may form a useful basis for analysis if, for instance, competition is based on the introduction of new products or if an industry as a whole is moving from maturity towards decline.’ An industry undergoes the following phases of life‐cycle (Wells, 1998)

° Development – Birth of the industry;

° Growth – The rate of sales growth is high all over the industry;

° Stakeout – Growth rate slows and firms fall under competitive pressure; ° Maturity – Minor growth but there are plenty of profitable opportunities,

so firms battle over share of a relative stable customer base;

° Saturation – Growth and Sales come from only demographic changes. Companies are well established;

° Decline – Demand drops off. Cost control is critical. There are no real attempts to make changes;

° Extinction – Most companies have left the industry. Some sales still remain.

Figure: Industry Life Cycle Source:http://www.enotes.com/small‐business‐ encyclopedia/industry‐life‐cycle

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Competitive Life Stage

Position Development Growth Maturity Decline/Aging

Dominant o Grow Fast o Grow fast o Attain Cost Leadership o Defend position o Attain cost leadership o Review o Defend position o Renew o Grow with industry Strong o Differentiate o Grow Fast o Grow Fast o Catch up o Differentiate o Reduce Cost o Differentiate o Grow with industry

o Find and hold niche o Grow with industry o Harvest profit Satisfactory o Differentiate o Focus o Grow Fast o Differentiate o Focus o Grow with industry o Harvest profit o Find niche o Grow with industry o Consolidate o Cut costs Weak o Focus o Grow with industry o Harvest, catchup o Find and hold

niche o Turnaround o Harvest profit o Turnaround o Find niche o Consolidate o Divest

Very Weak o Find niche o Grow with industry o Turnaround o Consolidate o Withdraw o Divest o Withdraw

Figure: The A.D. Little Competitive Position/Industry Maturity Index Source: Macmillan, H., and Tampoe, M. (2000). Strategic Management, Oxford University Press, New York.

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Porter’s Model of Industry / Market Evolution

Required Strategies at Different Stages of Evolution of an Industry

Michael Porter suggests three main stages in the evolution of an industry market (Lancaster, Massingham and Ashford, 2002):

° Emerging Industry ° Transition to Maturity ° Decline

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According to Porter each of these stages has its own particular characteristics, some of the more important of which are listed for each stage:

° Emerging Industry

a. Uncertainity among buyers over: ‐ Product Performance

‐ Potential Application ‐ Likelihood of obsolence b. Uncertainity among buyers over:

‐ Customer needs ‐ Demand Levels

‐ Technological Developments ° Transition to Maturity

a. Falling industry profits b. Slow‐down in growth

c. Customers knowledgeable about products and competitive offerings d. Less product innovation

e. Competition in non‐product aspects ° Decline

a. Competition from substitutes b. Changing customer needs

c. Demographic and other macro‐environmental forces and factors affecting markets

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Porter then uses the characteristics of each stage to suggest the following strategies as being appropriate to each:

Growth Maturity Decline

Leader ‐ Keep ahead of the field ‐ Cost Leadership ‐ Raise Barriers ‐ Deter Competitors ‐ Refine Scope ‐ Direct Peripherals ‐ Encourage Departures

Follower ‐ Imitation at lower cost ‐ joint ventures

‐ Differentiation ‐ Focus

‐ Differentiation ‐ New opportunities

Figure: Industry Life Cycle and Strategic Positioning Source:Lancaster, G., Massingham L.,and Ashford R. (2002) Essentials of Marketing, 4th edn, McGraw‐Hill, Berkshire.

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Industry Success factors Analysis

Success in the Industry

Key factors for success (KFS) are those resources, skills and attributes of the organisation in the industry that are essential to deliver success in the market place (Lynch, 2003). When undertaking an strategic analysis of external environment, the identification of KFS for an industry may provide a useful starting pont.

For example, in the steel industry ‘labour cost’ is a important factor whereas in cosmetics and perfume industry it might be a less important factor than other areas. Therefore, ‘low labour cost’ would be key a KSF for steel industry. So, the steel KSF in the industry would require the following environmental analysis (Lynch, 2003):

° General wage level in the country;

° Government Regulations and Attitudes to worker redundancy, because high wage cost could be reduced by sacking labours

° Trade Union Strength

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ƒ To Forecast New Entrants in the Industry and Create Barriers: When the barriers to entry are low and the demand is high, the industry should expect many new entrants (Alkhafaji, 2003) For example, Philips has got a huge market share in all over the world and because of it mass production it can achieve economies of scale which creates barrier for other companies to enter in the lighting industry (Electro Pages, 2007).

ƒ To Evaluate Substitutes from Different Industry: Products can not only be substitutes, but complements as well. For example, the introduction of multimedia cell phoned had massively replaced the demand for Mp3 players. (Christensen and Maskell, 2003)

ƒ Analyzing the Rate of Industry Growth: If a firm maintains a growth rate lower than the industry growth rate, it loses its market share. For example, in a industry growing 5% a year, a firm starting with a 10% market share, would need to raise its market to 13% share over a five year period to maintain a 10% growth rate.( McDonald, 1979)

ƒ Understanding the Impact of Brand Image to cope up with Buyers’

Bargaining Power: In a highly competitive clothing industry ‘The House of

Gucci’, better known as simply ‘Gucci’ is an iconic fashion and leather goods label based at Florence in Italy. with a luxury branding strategy ‘Gucci’ brand is considered one of the most famous, prestigious, and easily recognizable fashion brands in the world (Adamson, 2007)

ƒ Identify the Stage of Industry Life Cycle: Most products, services and the industries supplying them have a life cycle from birth, through growth, then to maturity and eventual decline (Macmillan and Tampoe, 2000). A simple example of these dynamics comes from the “typewriter” industry (See Appendix 7). The advent of the manual typewriter was a true

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breakthrough. Then came IBM with a gigantic innovation strategy from outside the industry displacing the manual technology and creating a new ‘electronic typewriter’ industry. The word processor followed, driving IBM’s business into obsolescence. And then of course the computer, Microsoft’s Word and desktop printing. (Kalpan, 2007)

ƒ Availability of Suppliers and their Bargaining Power: Sometimes companies from different industry pose threat to the enterprise. For example, steel is one of the secondary key inputs in the oil industry. In terms of purchasing steel from the available suppliers, Venture Production, one of the North Sea oil producers competes not only with other regions in the oil industry, they have to compete with Toyota, the Chinese, the aviation industry and the shipbuilding industry. Possible steel crisis at the time of peak activity would severely dent the project timetables and balance sheets of the sector. (Akilade, 2007 )

ƒ Evaluating Access to Distribution Channels: Access to low cost and well‐ organized distribution channels is one of the components of efficient market characteristics. A study showed that 42% of the joint ventures entered by the foreigners in US over 1971/83 period were for access to suitable marketing and distribution channels and close to 60% of US joint ventures in Japan were for marketing and distribution channels (Julian, 2005)

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How is the firm competing?

OBJECTIVES

What are competitor’s current goals? Is performance meeting these goals? How are its goals likely to change?

ASSUMPTIONS

What assumptions does the company hold about the industry and itself?

RESOURCES & CAPABILITIES

What are the competitor’s key strength and weaknesses?

PREDICTIONS

What strategy changes will the competitor initate?

How will the competitor respond to our strategic initiatives?

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Competitor Analysis: Competitor Intelligence

Analysing the Competitors

Competitor Intelligence (Grant, 2005) involves the systemic collection and analysis of public information about rivals for informing decision making. It has three main purposes:

° To forecast competitors’ future strategies and decisions

° To predict competitors’ likely reactions to a firm’s strategic initiatives. ° To determine how competitors’ behavior can be influenced to make it

more favourable.

Figure: Competitor Intillegence ‐ A Framework for Competitor Analysis Source:Grant, Robert M. (2002), Contemporary Strategy Analysis, 6th edn, Blackwell Publishing, Boston, USA

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McKinsey / General Electric’s Multifactor Portfolio Matrix

Analysing and Evaluating Strategic Business Units

Working in conjunction with McKinsey & Co., General Electric (GE), USA has developed this popular multiple factor screening method (Lancaster, Massingham and Ashford, 2002). In the GE matrix, strategic business units are evaluated using the two dimensions of market attractiveness and competitive position.

In order to use this technique, the strategic marketing planner must first determine the various factors contributing to market attractiveness and business position.

GE’s Competitive Position Factors:

° Market Share ° Share Growth Rate ° Product Quality ° Brand Reputation ° Distribution Network ° Promotional Effectiveness ° Productive Capacity ° Productive Efficiency ° Unit Costs ° R&D Performance ° Managerial Personnel

GE’s Product / Market Attractiveness Factors:

° Size

° Growth Rates

° Competitive Diversity and Structure ° Historical Profit Margin

° Technological Requirements ° Social Impacts

° Environmental Impacts ° Legal Impacts

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1. Identify strategic business units;

2. Determine factors contributing to market attractiveness; 3. Determine factors contributing to business position;

4. Establish ways of measuring market attractiveness and business position 5. Rank each strategic business unit according to whether it is high, medium

or low on business strength and again on market attractiveness. HIGH

SBU 1

SBU 3

SBU 2

SBU 4

STRONG MEDIUM WEAK

Figure: Illustrative Presentation of a GE Matrix Source: Lancaster, G., Massingham L.,and Ashford R. (2002) Essentials of Marketing, 4th edn, McGraw‐Hill, Berkshire.

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Boston Consulting Group’s Growth Share Matrix

Need for Financing in Diversified Corporations.

‘The usefulness of BCG Matrix lay in using it to plot the relative positions of business units within a portfolio. This made it possible to identify winners (market leaders) and to determine whether a balance existed between units in the four quadrants. The theory is that business units in fast growing industries need a constant input of capital to enable them to expand their capacity. Business units in slow growing industries on the other hand, are expected to generate a positive cash flow’ (Karlof, 1993).

Competitive Position Score

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BCG matrix is used to assess the need for financing in diversed corporations. The growth rate of a business unit’s market is plotted on one axis (usually the vertical one) against the business unit’s share of that market on the other axis. According to which cell of the matrix the products or businesses are calculated to lie, they are classified as being ‘Dogs’ , ‘Cash Cows’, ‘Problem Children/ Question Mark (?)’ or ‘Stars’:

Figure: BCG’s Growth Share Matrix Source: http://www.netmba.com/strategy/matrix/bcg/

° Business units with a large market share in growth sectors are called ‘Stars’

° Units with a high market share in well established industries are called ‘Cash Cows’

° Units with small market shares in fast‐growing industries are called ‘Question Marks (?)’

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Positioning Analysis

Other Marketing Mix elements to Fit a Particular Segment

A positioning analysis is done to identify how important is price, service, the technical features, etc are, to be successful in the market‐place (Karlof, 1993). The first is to try to identify the demands that the customer make on company’s product or services and ask customers to rank them in order of importance. Next, the customers are asked about the company’s performance to meet their demand. Companies need to identify their strong points as well as competitors’ weak points.

D A

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Figure: Four Quadrants of Positioning Analysis Source:Karlof, Bengt (1993), Key Business Concepts: A Concise Guide, Thomson Learning, London

° Quadrant A: Things which customers regard as important and which the

company does well are plotted in this quadrant‐those characteristics that have established the company’s position and must be maintained.

° Quadrant B: Things that the company is good at, but which are not so

important are plotted in this quadrant. If the competition is just as good in quadrant A and the company is better on some point in quadrant B, that point may tip the scale in the customer’s choice of the product.

° Quadrant C: Things which the company does not do well but which do not

matter so much to customers.

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Choosing the Enemy

The Four Main Attack Strategies

The Most Influential in Strategy Development, But Also the Most

Uncertain

Attack or Defend

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Market Intelligence Model

Undertaken by Competitors

Market intelligence model helps to determine if any competitive new products are ready for launch, what extent a competitor can hold out against heavy discounting, if the competitor has the capability to roll out its products on a national launch (Paley, 1999). Assessing reliable market intelligence helps a company in the following ways:

° Developing defensive strategies to counter competitive moves, or

° Designing offensive ( a competitive attack ) strategies that move the company into new market segments by feeding information to product developers (R&D) or marketers about customer trends and problems.

Figure: Market Intelligence Model Source: Lynch, R. (2003). Corporate Strategy, 3rd edn, Financial Times Prentice Hall, England.

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Market Commitment Model

to the Market Place as a Competitive Advantage

Market Commitment Model developed by Michael De Kare ‐Silver focuses on competitive advantage in performance, service, emotional connection with customers, and price. It instructs companies on how to develop a long term vision along with the necessary commitment to see it through, and demonstrates the link between a company's ability to connect with its customers and its ability to anticipate new opportunities (Kare ‐Silver, 1998)

At the centre of the model is the long term commitment to the marketplace in which the company competes. Surrounding the central commitment are the four ‘prime axes’ of competitive advantage: price, emotion, service hustle and performance (Macmillan and Tampoe, 2000)

Figure: The Market Commitment Modelsource: Kare‐Silver, Michael De (1998), Strategy in Crisis, New York University Press, New York, USA

Commitment Emotion Performance Price Service Hustle Low Value Premium Shared Recognition Design Innovative Political Comprehensive Available Personalized Symbiotic Functionality Realiability Speed Convenience

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ƒ For Immediate Response to Changing Needs of Customers: An example of Toyota, the ever successful automaker in the world can illustrate this point. Toyota realized success lies not in managing inventory but in eliminating it. It started thinking about pulling inventory based on immediate customer demand rather than pushing inventory system that anticipates customer demand. So Toyota introduced Just‐in‐Time

manufacturing system that gives its customers the right to choose what

they want, how and when they want it. This revolutionary system enabled the company cutting its inventory cost at a nominal level and thus proving Toyota‐ an operational excellence as a strategic weapon (Liker, 2004). ƒ To Assess the Relative Competence of the Enterprise Against its

Competitors: A theory of Kay (1993) claims that organisational success

derives from competitive advantage of the firm which is based on distinctive capabilities most often derived from the unique character of a firm’s relationships with its suppliers, customers, or employees, and which is precisely identified and applied to the relevant market. For example, in 1981 Honda and Yamaha both had 60 models of motorbikes. Honda held a prestigious brand image for its superior quality. Suddenly, Yamaha declared that it would be the world’s largest motorcycle manufacturer. Honda counterattacked Yamaha using TQM as a competitive weapon. Over the next 18 months Honda introduced 118 models of motorbikes. On the other hand, Yamaha could mange only 37 changes to its productline. Thus, implementing a product development and benchmarking strategy Honda successfully captured two third of the market share (Zairi, 1998).

ƒ Grab a Large Share of the Market with a First Mover Advantage: The idea of First Mover Strategy is that the initial occupant of a strategic

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position or niche gains access to resources and capabilities that a follower has to work hard to gain. For example, the online auction site eBay was a first mover that has proven to be successful with a first mover strategy (Kurtz and Boone, 2005). Another example is First Direct motor insurance company that grabbed the opportunity of motor insurance industry and came out with successful market share. (Macmillan and Tampoe, 2000). ƒ Saving Time and Money as an Efficient First Follower: Late starters can

avoid the mistakes of the leaders saving both time and money with efficient launch. (Macmillan and Tampoe, 2000). For example, Apple which had adopted the first mover strategy in personal computer failed terribly in its Newton handheld computer project. Firm such as Microsoft thrive on a second mover strategy, observing closely the innovations of first movers and then improving on them to gain advantage in the (Kurtz and Boone, 2005)

ƒ Understanding the Leading‐edge Applications of Technology in the

Enterprise as well as in the Industry: Successful Firms all over the world

now invest a large amount in developing and implementing state of the art technologies in their enterprise. They move toward real‐time technological infrastructures so that they can adapt quickly to changing market conditions and serve their customers better. For example, Shell has officially launched the start of a new construction phase at the Shell Eastern Petrochemicals Complex (SEPC) which is the largest‐ever chemical investment in Singapore where the company has signed a deal with Yokogawa Electric Corp. to provide the company with automation systems for the project. By implementing a automation system Shell plans to reduce construction cost and time through implementing an effective

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ƒ Adopting Best Practice Analysing the Competitors’ Strategy: In a highly

competitive industry, the key characteristics of a company’s external environment are determined by the behavior of a few rivals possibly a single firm. For example, in household detergents, Unilever’s strategies are determined by the strategies of Procter & Gamble. The same happens to Coke and Pepsi. (Grant, 2002)

ƒ Minimizing Product or Service Price Compared to the Market: Keeping price lower at beginning to acquire market share is a common but most effective strategy which is called penetration pricing strategy. After developing portable compact disk player in 1980 Sony estimated that the estimated cost per unit would be $500 per unit. But the company took a

penetration pricing strategy to introduce the product to the market

selling it at $250 per unit only. (Schlegelmilch, Keegan and Stoettinger, 2001)

ƒ Choosing the Best Alternative to Reduce Operation Cost: A firm could be the lowest cost producer, yet not offer the lowest price product or services. That firm would enjoy profitability above the average in the industry. (Macmillan and Tampoe, 2000). For example, Implementing a

cost leadership strategy, Ford Motor Company launched “Model‐T” in

1918 as a standardized car and become market leader in USA. (Adcock, Halborg and Ross, 2001)

ƒ To Attract the Market through Unique Offering: The value added by the uniqueness of a product may allow the firm to charge a unique price for it (Quick MBA, 2007). For example, after the successful launch of “Model‐T”, General Motors Corporation counterattacked Ford in 1927 by introducing the new model “La Salle” which was completely different from “Model‐T”. There was a good response from the market and the company was able to

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beat Ford in sales with its successful differentiation strategy. (Adcock, Halborg and Ross, 2001)

ƒ To Identify Quality & Cost Effective Suppliers: Good quality and cost effective supply can reduce production cost. A long term relationship with suppliers can help companies get raw materials at lower price and thus achieve cost leadership. A better negotiation and control over the suppliers can be formed. For example, Wal‐Mart can achieve cost efficiency because of its long term relationship with suppliers and control over them. (Wal‐Mart’s Cost Leadership Strategy, 2004)

ƒ Analysing Life Cycle of a Product to Introduce Innovation at the Right

Time: Life cycle can be a good foundation for analysis if competition is

based on innovation of product. A typical example can be Apple’s

innovation and design strategy that breaks the industry norm. Apple has

stayed ahead in the MP3‐player market since October 2001 by giving customers more functionality and additional storage capacity at ever lower prices. That has made it tough for competitors like Sony, Dell and Creative to gain the holds. (D’Aveni, 2007)

ƒ Understanding Customer Perceived Value of Products or Services: The ability of a company to provide superior value to its customers is regarded as a successful competitive strategy. By adding more value to products and services through either quality improvements or support services, companies should improve customer satisfaction in order to strengthen relationship and build customer loyalty (McIvor, 2005)

ƒ Anticipating Future Needs: Companies should try to figure out why customers move from being happy to unhappy. They should try to predict future needs of customers and bring appropriate changes in products and services wherever needed. (Shiba and Walden, 2001)