module 4 - company situation analysis

7/28/2019 Module 4 - Company Situation Analysis

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Module 4

Company Situation Analysis


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Module Outline

Determining How Well Present Strategy is

Working

SWOT Analysis

Strengths and Weaknesses of Firm Opportunities and Threats Facing Firm

Strategic Cost Analysis and Value Chain

Assessing Firms Competitive Position

Identifying Strategic Issues


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Key Questions in Company Situation

Analysis

How well is firms present strategy working?

What are firms strengths, weaknesses,

opportunities, and threats?

Are firms prices and costs competitive? How strong is firms competitive position?

What strategic issues does firm face?


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What Is Companys Strategy?

Identify competitive approach

Low-cost leadership

Differentiation

Focus

Determine competitive scope Stages of industrys production / distribution chain

Geographic coverage

Customer base

Identify functional strategies

Examine recent strategic moves


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How Well Is Present Strategy Working?

Key indicators of strategic and financial

performance Trends in market share Trends in profit margins

Trends in net profits and return on investment Trends in sales growth / decline

Credit ranking

Image and reputation with customers Leadership role (s), i.e. technology, quality, etc.

Competitive advantages or disadvantages

Is competitive position getting stronger / weaker?


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How Well Is Present Strategy Working?

The stronger a companys recent strategic

and financial performance, the more likely ithas a well-conceived, well-executed strategy.

Weak strategic and financial performance is

usually a sign of weak strategy or weak

execution or both!


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SWOT Analysis

SWOT represents the first letter in

S trengths

W eaknesses

O pportunities T hreats

SWOT analysis involves sizing-up firms

Internal strengths and weaknesses, and

External opportunities and threats


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Identifying Internal Strengths and

Weaknesses

A strength is something firm is good at or

characteristic giving it an important capability Useful skill

Important know-how

Valuable organizational resources or competitive

capability

Achievement giving firm a market advantage A weakness is something firm lacks, does

poorly, or condition placing it at a

disadvantage


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Significance of a Companys Strengths

and Weaknesses

Strengths are significant to strategy-making

because they can Serve as cornerstones of strategy

Help build competitive advantage

A good strategy aims at correcting firms

weaknesses which can

Make it vulnerable Prevent it from pursuing attractive opportunities

Put it at a competitive disadvantage


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Strategic Management Principle

Successful strategies seek to exploit what a

company does best: Expertise

Strengths

Core competencies Strongest competitive capabilities

Strategists shun strategies placing heavydemands on areas where company isweakest or has unproven ability!


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Building a Core Competence

Definition

A core competence is something acompany does especially well in

comparison to its competitors!


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Types of Core Competencies

Superior skills in producing high quality product

Superior system for delivering customer ordersaccurately and swiftly

Better after-sale service capability

More skill in achieving low operating costs Unique formula for selecting good retail locations

Unusual innovativeness in developing new

products Better merchandising and product display skills

Superior mastery of an important technology

Unusual effective sales force


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Significance of a Core Competence

A core competence is important because of

Added capability it gives firm Competitive edge it can yield

Potential for it being a cornerstone of strategy

Competitive advantage is easier to buildwhen

Firm has a core competence

Rival firms do not have offsetting competencies

Its costly and time-consuming for rivals to match

competency


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Core competence empower a company to

build competitive advantage!


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Identifying External Opportunities

Opportunities most relevant to a firm are

factors in external environment offering Some kind of competitive advantage

Important avenues for growth


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Identifying External Threats

External factors posing a danger to firm

Emergence of cheaper technologies Introduction of new / better products by rivals

Entry of low-cost foreign competitors

New regulations

Vulnerability to rise in interest rates

Potential of hostile takeover

Unfavorable demographic shift

Adverse shifts in foreign exchange rates

Political upheaval in a country


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Significance of a Companys

Opportunities and Threats

Affect attractiveness of firms situation

Point to need for strategic action


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A good strategy is always aimed at

capturing a companys best growthopportunities and creating defenses against

threats to its competitive position and future

performance. Otherwise, it doesnt fit the

companys situation!


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Role of SWOT Analysis in Crafting a

Better Strategy

SWOT Analysis helps answer key questions

Does firm have internal strengths an attractivestrategy can be built on?

Which weaknesses does strategy need to

correct?

Do firms weaknesses disqualify it from pursuing

certain opportunities?

Which opportunities does firm have resources to

pursue with chance of success?

What threats should firm worry most about?


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What Is Strategic Cost Analysis?

Definition

Comparing a firms cost position relative tokey competitors activity by activity

From raw materials purchase to Price paid by ultimate customers

Assessing if firms costs are competitive

with those of rivals is a crucial part ofcompany situation analysis


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What Is Strategic Cost Analysis?

Cost disparities among rivals can stem from

differences in Prices paid for raw materials, component parts,

energy, and other supplier resources

Basic technology and age of plant andequipment

Economies of scale and experience curve effects

Wage rates and productivity levels Changes in inflation and foreign exchange rates

Marketing and distribution costs

Inbound and outbound shipping costs


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Principle of Competitive Markets

The higher the companys costs are above

those of close rivals, the more competitivelyvulnerable it becomes!


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The Value Chain Concept

Definition

A value chain identifies:

Activities, functions, and business processes

that have to be performed in

Designing, producing, marketing, delivering,

and supporting a product service


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The Value Chain Concept

A Value Chain consists of two major types

of activities Primary activities that create value for

customers

Related support activities


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Representative Company Value Chain

InboundLogistics

OperationOutboundLogistics

Sales andMarketing

ServiceProfit

Margin

Product R&D, Technology, Systems Development

Human Resource Management

General Administration

Primary Activities and Costs

SupportActivitiesand Costs


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What Determines Costs of Value Chain

Activities?

Costs of performing each value chain activity

can be driven up ordown by 2 types offactors

Structural Cost Drivers

Executional Costs Drivers


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Structural Costs Drivers

Scale economies

Experience curve effects

Technology requirements

Capital intensity Complexity of product line


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Executional Cost Drivers

Commitment of work force to continuous

improvement Attitudes and capabilities regarding quality

Cycle time in getting new products to market Utilization of existing capacity

Whether internal business processes are

efficiently designed and executed

How efficiently firm works with suppliers and

/ or customers to reduce costs


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Keys to Understanding a Companys

Cost Structure

Whether firm is trying to achieve a

competitive advantage based on Lower costs, or

Differentiation

How costs in one value chain activity spill

over to affect costs of others

Whether linkages among activities in valuechain present opportunities for cost reduction


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The Value Chain System

Activities,Costs, andMargins ofSuppliers

InternallyPerformedActivities,Costs, and

Margins

Activities,Costs,

Margins ofForwardChannel

Allies

Buyer /User Value

Chain

Upstream

Value Chains

Company

Value Chains

Downstream

Value Chains


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Cost competitiveness depends on

Costs of internally performed activities

Costs in value chains of suppliers and forward

channel allies

Assessing firms competitiveness requiresknowledge of value chain system

Firms own value chain

Value chain of suppliers

Value chain of forward channel allies


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Suppliers value chains matter

Supplier incur costs in creating and deliveringinputs used in firms value chain

Cost and quality of inputs influence firms cost

and / or differentiation capabilities

Forward Channel value chains matter

Costs and margins of downstream firms are partof price paid by ultimate end-user

Activities channel allies perform affect

satisfaction of end-user


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Example: Key Value Chain Activities

Pulp and Timber Industry

Timber farming

Logging

Pulp millsPapermaking

Printing and publishing


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Home Appliance Industry

Parts and components manufacture

Assembly

Wholesale distributionRetail sales


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Soft Drink Industry

Processing of basic ingredients

Syrup manufacture

Bottling and can fillingWholesale distribution

Retailing


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Computer Software Industry

Programming

Disk loading

MarketingDistribution

Developing Data for Strategic Cost


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Developing Data for Strategic Cost

Analysis

Data requirement are formidable

Requires breaking department costaccounting data out into cost of performing

Specific Activities

Activity-Based Costing

New cost accounting methodology aimed at

assigning costs to Specific tasks, and

Value chain activities

Traditional Cost Accounting Vs


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Traditional Cost Accounting Vs.

Activity-Based Accounting

$640,150$640,150

$135,750

82,100

23,50015,840

94,300

48,450

110,000

130,210

Department Activities UsingActivity-Based CostAccounting

Evaluate Suppliers

Process Purchase Orders

Expedite DeliveriesExpedite Internal Process

Check Item Quality

Check Deliveries Against

Purchase Orders

Resolve Problems

Internal Administration

$350,000

115,000

6,5002,400

17,000

124,000

25,520

Traditional Cost AccountingCategories in DepartmentBudgeting

Wage and Salaries

Employee Benefits

SuppliesTravel

Depreciation

Other Fixed Charges

Miscellaneous

Operating Expense


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Benchmarking Costs of Key Activities

Concept

Benchmarking performance of a firmsactivities against rival and best practice firmsprovide evidence of firms cost

competitiveness Benchmarking is an excellent tool todetermine

If costs are in line with competitors Which business processes need to be

scrutinized for improvement

Which firms perform a given activity best


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Benchmarking Costs of Key Activities

Focuses on Cross-Company comparisons

ofhow well activities are performed Purchase of materials

Payments of supplies

Management of inventories Training of employees

Processing of payrolls

Getting new products to market

Performance of quality control

Filling and shipping of customer orders


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Benchmarking and Ethics

Benchmarking involves discussions of

competitively sensitive data Ethical guidelines

Avoid talk about pricing or competitively sensitive

costs Dont ask rivals for sensitive data

Dont share proprietary data without clearance

Have impartial third party assemble and presentcompetitive data without names attached

Dont disparage a rivals business to outsiders

based on data obtained


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Achieving Cost Competitiveness

Key Point

A firms competitiveness depends on howwell it manages its value chain relative tocompetitors

Examining a firms value chain and

comparing it to key rivals indicates

Who has how much of a cost advantage ordisadvantage

Which cost components are responsible


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Achieving Cost Competitiveness

3 areas in firms value chain contributes to

cost differences compared to rivals1. Suppliers activities

2. Firms internal activities

3. Forward channel activities

Strategic actions to eliminate a costdisadvantage need to be liked to where

cost differences originate!

Options: Correcting Supplier-Related


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Options: Correcting Supplier Related

Cost Disadvantages Negotiate more favorable prices with

suppliers Work with supplier to help them achieve

lower costs

Integrate backward Use lower-priced substitute inputs

Do a better job managing linkages betweensuppliers value chain and firms own chain

Try to make up difference by initiating cost

savings in other areas of value chain

Options: Correcting Forward Channel


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Options: Correcting Forward Channel

Cost Disadvantages

Push for more favorable terms with

distributors and other forward channel allies Work closely with forward channel allies and

customers to identify win-win opportunities to

reduce costs

Change to a more economical distribution

strategy Try to make up difference by initiating cost

saving earlier in value chain

Options: Correcting Internal Cost


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Disadvantages

Initiate internal budget reductions

Re-engineer business processes to do betterjob managing executional cost drivers

Try to eliminate some cost-producing

activities by revamping value chain system

Relocate high-cost activities to lower-cost

geographic areas See if certain activities can be outsourced or

performed cheaper by contractors



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Disadvantages

Invest in cost-saving technological

improvements Innovate around troublesome cost

components

Simplify product design to achieve cost

reduction

Try to make up difference by achievingsavings in other areas of value chain system

Value Chain Analysis and Competitive


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Advantage

Value chain analysis is a powerful

managerial tool for identifying whichactivities have

Competitive advantage potential

A firms competitive advantage is based on

its ability to

Perform competitively crucial activities alongvalue chain better than rivals



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y p

Advantage Diagnosing competitive capabilities involves

Construct a value chain of firms activities

Examine linkages among internally performed

activities and linkages with suppliers and

customers chain

Identify activities and competencies critical to

customer satisfaction and market success

Make appropriate internal and externalbenchmarking comparisons to determine

How well firm performs activities

How cost structure compares with rivals



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y p

Advantage

The strategy-making lesson of value chain

analysis is that increased companycompetitiveness entails concentrating

resources on those activities where the

company can gain dominating expertise toserve its target customers!

Evaluating a Companys Competitive


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g p y p

Position Factors to examine

How strongly firm holds present competitive

position

Whether firms position can be expected to

improve or deteriorated of present strategy is

continued

How firm ranks relative to key rivals on eachimportant measure of competitive strength /

industry KSF

Whether firm has a sustainable competitive

advantage or is at a disadvantage

Procedure: Assessing a Companys


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g p y

Competitive Strength

Sum individual ratings to get overall measure

of competitive strength for each rival

Step 4:

Evaluate firms overall competitive strength

relative to rivalsStep 5:

Decide whether to use weighted orun-weighted rating system

Step 3:

Rate firm and key rivals on each factors

using rating scale of 1 10

(1=weak; 10=strong)

Step 2:

List key success factors and other relevant

measures of competitive strengthStep 1:

Why Do a Competitive Strength


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y p g

Assessment? Reveals strength of firms competitive

position Show how firm stacks up against rivals

Indicates whether firm is at a competitive

advantage / disadvantage against each rival

Provides insight into how firm can make

strategic moves to alleviate its competitiveweaknesses



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Competitive strengths and competitive

advantages empower a company to improveits long-term market position!

Determining Strategic Issues to be


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Addressed Final analytical task that puts firm overall

situation into perspective Issues come from thinking strategically about

Industry and competitive situation

firms situation

A good strategy must include actions to

respond to firms strategic issues andproblems



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Having through understanding of the

strategic issues a company faces is aprecondition for effective strategy-making.

Until strategists have a clear fix on the

issues, they are not ready to craft a strategy!

Deciding What The Strategic Issues


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Are Is present strategy adequate in light of driving

forces in industry and geared to industrys future

key success factors? How good a defense does present strategy offer

against the 5 competitive forces?

Does present strategy adequately protect firmagainst external threats and internal weaknesses?

Is firm vulnerable to competitive attack by rivals?

Does firm have a competitive advantage or must it

work to offset competitive disadvantage?

Where are strong / weak spots in present strategy?


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End of Module 4

module 4 - company situation analysis

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