DIAGNOSISDIAGNOSIS

Purpose of DiagnosisPurpose of Diagnosis

To develop understanding plus a set of critical issues

– Usually problems or threats, sometimes opportunities

– Small number - to provide focus

– Issues that should be central and vital to top management

– Both short- and long-range considerations

– Framed as issues, rather than solutions

Diagnosis Overview

Current mission, strategic objectives, & strategies

Performance

Scan & analyze external environment

– Task (Competitive) environment

– Societal (General) environment

Scan & analyze internal environment– Need to break up into manageable pieces

– Two main ways:

Value chain analysis

Functional area analysis

Critical success factors

S.W.O.T. table

Set of “Critical Issues”

Scan & AnalyzeScan & Analyze External Environment External Environment

Have to be selective and smart in scanning

Competitive Environment– Porter’s 5-force model of the industry

competitive environment

General Environment– Technological

– Political-legal

– Economic

– Social-cultural

Stakeholders (within above and others)

"Awareness of the environment is not a "Awareness of the environment is not a

special project to be undertaken only special project to be undertaken only

when warning of change becomes when warning of change becomes

deafening.“deafening.“

(Kenneth R. Andrews) (Kenneth R. Andrews)

"It is not the strongest of the species "It is not the strongest of the species

that survive, nor the most intelligent, that survive, nor the most intelligent,

but the ones most responsive to but the ones most responsive to

change.“change.“

(Charles Darwin) (Charles Darwin)

The key point is that an organization needs to be in tune The key point is that an organization needs to be in tune with its often turbulent external environmentwith its often turbulent external environment

Since there is so much happening in the external Since there is so much happening in the external universe, we have to be selective and smart in scanning: universe, we have to be selective and smart in scanning:

• "Things are always different -- the art is figuring out "Things are always different -- the art is figuring out which differences matter." (Laszlo Birinyi) which differences matter." (Laszlo Birinyi)

• For a given industry (sometimes is country, industry, For a given industry (sometimes is country, industry, company-specific), certain aspects of the external company-specific), certain aspects of the external environment tend to be more important and should environment tend to be more important and should receive primary attentionreceive primary attention

• It helps to scan initially fairly quickly, then zoom in on It helps to scan initially fairly quickly, then zoom in on areas where something of importance seems to be areas where something of importance seems to be happeninghappening

Key Strategic QuestionsKey Strategic QuestionsWhat are the industry's dominant features, especially What are the industry's dominant features, especially economic ones? economic ones?

What is competition like and how strong are each of the What is competition like and how strong are each of the competitive forces? competitive forces?

What is causing the industry's competitive structure and What is causing the industry's competitive structure and business environment to change? business environment to change?

Who are the major competitors and what are their Who are the major competitors and what are their relative competitive strengths? relative competitive strengths?

What strategic moves are rivals likely to make next? What strategic moves are rivals likely to make next?

What are the key factors for competitive success? What are the key factors for competitive success?

Is the industry attractive and what are the prospects for Is the industry attractive and what are the prospects for above-average profitability? above-average profitability?

Porter’s 5-Force ModelPorter’s 5-Force Model

Rivalry Among Existing FirmsRivalry Among Existing Firms

Potential New EntrantsPotential New Entrants

Substitute Products or ServicesSubstitute Products or Services

Bargaining Power of SuppliersBargaining Power of Suppliers

Bargaining Power of BuyersBargaining Power of Buyers

General EnvironmentGeneral Environment

Although usually only a few factors and Although usually only a few factors and trends are important, it is important to trends are important, it is important to identify themidentify themIs useful to think of four main aspects of Is useful to think of four main aspects of the general environmentthe general environment– TechnologicalTechnological– Political-LegalPolitical-Legal– Economic Economic – Social-CulturalSocial-Cultural

Stakeholder AnalysisStakeholder Analysis

What is a stakeholder?

We need to be selective, consider MAJOR stakeholders:

– Power

– Interest

Identify topic (usually a change) for analysis

Identify major stakeholders

Determine their degree of support or opposition to the action or change

Assess the balance of support

If not sufficient, work on changing

– Decrease larger opposing forces

– Increase supporting forces

Ideas re how to do this?

Where We AreWhere We Are

Diagnosis overviewDiagnosis overview

Scan & analyze external environmentScan & analyze external environment

Scan & analyze internal ◄Scan & analyze internal ◄– Mission, objectives, strategies, performanceMission, objectives, strategies, performance

– Functional areas:Functional areas:FinancialFinancial

MarketingMarketing

Production/operationsProduction/operations

TechnologyTechnology

OrganizationalOrganizational

Mission, Objectives, StrategiesMission, Objectives, Strategies

Identify and evaluateIdentify and evaluate

– ConsistentConsistent

– CurrentCurrent

– AppropriateAppropriate

– Implemented wellImplemented well

– Effective (performance vs. objectives)Effective (performance vs. objectives)

Internal DiagnosisInternal DiagnosisIn either value chain or functional area analysis:

– Subdivide organization into several segments

– For each, identify what is being done, how well it is being done, strengths and weaknesses

– Examine linkages and potential synergies among various value chains & their segments, and/or among functional areas

– Look for opportunities to improve and create sustainable competitive advantages

Value chain and functional area analysis

differ primarily in the way of subdividing

the organization (to aid analysis)

Value Chain Functional AreasValue Chain Functional Areas

Inbound logisticsInbound logistics

OperationsOperations

Outbound logisticsOutbound logistics

Marketing & salesMarketing & sales

ServiceService

Production/operationsProduction/operations

MarketingMarketing

Human resource mgt.Human resource mgt.

InfrastructureInfrastructure

ProcurementProcurement

TechnologyTechnology

OrganizationalOrganizational

FinancialFinancial

TechnologyTechnology

FinancialFinancial

Financial DiagnosisFinancial Diagnosis

Do not need exotic skills for our purposes

Do need to do more than generate numbers and comment on trends ...need to

EVALUATE & DRAW CONCLUSIONS

Analyze HistoricalAnalyze Historical

Have initial data (balance sheets & income statements for several years)

Need to develop conclusions about financial health of organization

– Are there significant strengths or weaknesses?

– Implications for strategy formulation & implementation?

How can we get from data to conclusions?

Calculate some financial ratiosCalculate some financial ratios

Analyze trendsAnalyze trends

Compare with other companies or industryCompare with other companies or industry

Develop and state conclusionsDevelop and state conclusions

– Overall financial conditionOverall financial condition

– Specifics, especially problemsSpecifics, especially problems

Also Look at FutureAlso Look at Future

Primarily to estimate needs and potential sources of strategic funds

Can get perspective even from a simple forecast model

Could use Index of Sustainable Growth

What are major sources of additional financing?

Marketing Functional AreaMarketing Functional Area

Marketing DiagnosisMarketing Diagnosis

Four P’s:

– Product

– Price

– Place

– Promotion

Product portfolio analysis

Marketing Growth OptionsMarketing Growth Options

Market

Existing

Expanded

New

Existing

Expanded

Product

New

Positioning & Competitive StrategyPositioning & Competitive Strategy

Competitive Advantage

Lower cost

Differentiation

Broad Price leadership

Differentiation

Competitive Scope

Narrow Price focus

Differentiation Focus

Learning About a ModelLearning About a Model

A model is a tool, something to help you do some aspect of strategic management

WHAT does the model help you do?

What FACTORS or variables does it consider?

HOW do you use the model?

Limitations, etc.

Note that a picture of the model is less important

Product Life CycleProduct Life Cycle

Production/OperationsProduction/Operations

Production/OperationsProduction/Operations

Often neglected

Much of COGS here

Also large effects on competitive position

Key Strategic Decision VariablesKey Strategic Decision Variables

Locations & capacities of facilities

Planning of output (what, where, when, cycles, continuous/intermittent...?)

Flexibility (economies of scope)

Efficiency

Labor/capital intensity (operating leverage)

Inventory levels (raw, WIP, finished goods)

Quality

Experience CurveExperience Curve

Typical Price/Cost PatternTypical Price/Cost Pattern

TechnologyTechnology

Technology (R&D)Technology (R&D)

Tie to technology developments in external scan

Note successive S-curves (product performance vs. R&D expenditures)

Key to competitiveness is when to shift resources to different technology

Major Strategic VariablesMajor Strategic VariablesTechnology strategy

– Technology position

– How we obtained & maintain position

Buy or build

Funding levels

Basic/applied, product/process

Application

Technology transfer

Trends, threats, what competitors are doing

OrganizationalOrganizational

Key Organizational FactorsKey Organizational FactorsTop management resources

BOD situation

Employee (labor) relations

Structure (change needed?)

Reward systems

Culture

Information systems

Human resources systems...

Key Success FactorsKey Success Factors

In any In any industry industry there are certain key there are certain key variables that significantly affect variables that significantly affect competitive positionscompetitive positions

Vary by industryVary by industry

Vary with life cycle of an industryVary with life cycle of an industry

For example, technology early in PC For example, technology early in PC industry, now price (cost efficiency)industry, now price (cost efficiency)

Finish DiagnosisFinish Diagnosis

SWOT table (list)SWOT table (list)

Critical IssuesCritical Issues

– Central & vital, typically 2-4Central & vital, typically 2-4

– Usually problems or threats, sometimes opportunities

– Both short- and long-range considerations

– Framed as issues, rather than solutions