Strategic Analysis Model
Strategic Analysis includes the following:
- Industry Analysis
- Strategy Description
- Strategy Evaluation
- Strategic Issues
- Strategic Recommendations
Understanding the Strategic Analysis Model
As shown in the following exhibits, strategic business analysis includes (1) industry analysis, (2) business strategy analysis, and (3) strategy evaluation and recommendations.
Industry analysis begins with a definition of products and markets, skills and competitors contained within the industry, followed by industry structural analysis, and concluded with the identification of the key success factors for the industry.
Business strategy analysis begins with a description of the strategic goals and business strategy of the firm. It’s implementation is then analyzed in terms of the firm’s functional and operational capabilities and the resulting financial and competitive performance.
Strategic evaluation or SWOT analysis encompasses the internal and external factors that affect the company’s business strategy. The business strategy is compared against the industry’s key success factors and competitive resource requirements and the firm’s internal capabilities and resources.
Critical issues & Recommendations seek to identify the critical issues that the company needs to address. The analysis concludes with recommendations that address the critical issues and result in changes of product-market strategy or functional implementation.
The course is based on the ability of students to define their business, conduct an effective industry analysis, and identify the “key success factory” for firms competing in the industry. Such industry analysis is based on:
- DEFINE THE BUSINESS. The boundary for industry analysis is the markets and products that describe the domain of the industry. Once you understand the business segment that is to be analyzed, identify the capabilities required to participate in that industry, and those competitors that are able to effectively target the same business segments. These four elements set the parameters for understanding and analyzing the industry. As industries like printers, copiers, scanners, and facsimile machines converge, business definitions become more difficult. In industries like computers, consumers are becoming more demanding for customized products and services.
- DESCRIBE THE INDUSTRY STRUCTURE. For each product-market segment, an industry analysis will describe the “five-forces” of competition.
- A primary force comes customer segments that make up the markets. The size and importance of customers provide the power to negotiate prices and deals that reduce the profitability of the industry. The size and growth of segments determine their potential influence on product development and level of competition.
- A second force comes from the competitors and their strategies for gaining market share. Each competitor offers a set of products and services that attempts to provide higher value to the product-market segments they address. Strategies can be to provide some combination of higher performance, more fashion and features, higher quality, or lower price. Increased rivalry often leads to price or service competition that can reduce the profitability of the business.
- A third force comes from the industry suppliers. Industry suppliers often control critical inputs that can affect a firms ability to compete. Access to critical equipment, materials, or components can determine what firms will lead the industry. For this reason, increased outsourcing often leads to lower entry barriers for new competition.
- The fourth force represents the barriers to change in industry structure, either from new competitors entering the industry or current competitors existing the industry. Barriers to entry often include heavy investment in capital, equipment, and market development. Barriers to exit often include outstanding warranty or service contracts that must be honored, and alternative use or potential sale of equipment and facilities. Once specialized facilities are established, they are seldom shut down, but are often sold to another industry participant.
- The fifth force represents the potential for change in product-market structure of the industry through the substitution of products or services with alternative approaches to satisfying the customer’s needs. This requires the identification of potential substitutes and the characteristics that would cause rapid substitution. Price often becomes a driver for substitutes, such as plastics for metals in cars and plumbing supplies. Today, the Internet is becoming a substitute for mail service and, eventually, telephone service.
- IDENTIFY KEY SUCCESS FACTORS. The primary purpose of industry analysis is to identify the requirements and trends that determine the key success factors for the business. These factors encompass (1) customer requirements, (2) competitive factors that must be met, (3) regulations/industry standards in the business, (4) the resource requirements to implement competitive strategy, and other (5) technical requirements to build a competitive position.
- Customers are looking for products that provide some level of value for the price they pay. Each buyer segment has different requirements that affect its key success factors. Requirements can include high performance, durability, special features or fashion, ease of use, or rapid availability.
- Competing firms often use similar product-market strategies. Competition is often based on price, quality, and delivery. Depending on their strategic focus, each firm must develop a set of skills (strategic weapons) that allow it to perform better than their competitors on each competitive dimension.
- Industry regulations or standards are often minimum requirements for participation in a competitive arena. Goverment regulations often affect safety issues for the environment or end users. Industry standards often determine technical compatibility, process performance, and interface issues for network or system products. Industry standards can be set by a special body, like the Industry Standards Organization (ISO), or become ad hoc standards set by leading competitiors, like Intel and Microsoft.
- Resource requirements are be coming increasingly critical as markets become global and economies of scale become critical for research and development, manufacturing, and marketing. Investments now excede $1 billion for facilities in semiconductors, paper making, and steel production. In high technology areas, like information technology, shortages of qualified personnel are forcing firms to outsource much of their capabilities.
- Technical requirements are also key to today’s competitive environment. Without access to, or internal technology, firms are not able to participate in many industries. This is especially important for suppliers, such as component suppliers for electronics or automobiles. As firms reduce their number of suppliers, suppliers must increasingly add research and development capabilities to stay in the game.
Business Strategies Analysis
Competitive product-market strategies are critical to business success. Business strategy analysis requires the following:
- IDENTIFY STRATEGIC GOALS. A firm’s strategic goals drive business strategy and address the key success factors of the industry. Strategic goals often include the vision or mission statement for the business. They should also set the direction and standard for financial and market results against which actual performance can be measured. The two most common stategic goals are:
- Competitive and market goals that define market share or market growth and penetration for the firm’s products or services.
- Financial performance in terms of key ratios, like return on investment and sales, and growth in revenues and/or profitability.
- DEFINE BUSINESS STRATEGY. The definition of business strategy includes six areas of analysis. The product-market focus is the first step. The underlying capabilities in implementing a product-market strategy include the technologies, processes and market access that a firm has. These address the business and its key success factors. Businesss strategy includes customer targeting, product lines and positions, technical capabilities, strategic processes, and market access.
- Describe the customer targeting strategy and its requirements. Without targeting a specific customer segment, it is impossible to develop effective products or services that meet specific customer needs and requirements. Each segment, by definition, has a different set of requirements. While differences may be minor at time, they affect the decision of the customer to purchase the product or service.
- Describe the product line and product positioning strategies for the market segment. The business unit must decide what it will offer and how those offerings will be positioned within the competitive environment. A firm can have one product or a product line that covers a range of prices with a variety of features. The price-quality-performance position is a relative determination compared with competitors’ prices, quality levels and features when comparing your products with alternative products in the marketplace.
- Identify the technologies required to implement the product-market strategy. Technologies provide the basic capabilities needed to develop products or services, as well as the associated processes used in developing or delivering them to the marketplace. Technology determines the range of products and speed with which they can be developed and delivered to the marketplace.
- Identify the strategic process(es) required to implement the product-market strategy. The core capabilities of a firm are embedded in the business processes and functions. Strategic processes can either improve the product or marketing capabilities of a firm. These processes and functions are the basis of a firms competitive strengths and weaknesses, and make up the core competencies of the firm. These skills and capabilites are described in section C below.
- Identify the market access strategy. The final element of strategy requires that a firm have access to its market or customers. Today, the Internet is considered the new channel for accessing markets. In the 1960s, 1-800 numbers were the new method of access. At the same time, discount superstores grew their market share in retail walk-in sales markets.
- IDENTIFY INTERNAL CAPABILITIES AND SKILLS. The ability of a firm to implement its strategy is dependent upon both the functions and business processes that supports its strategy. Depending on the nature of the organization, its functions and business process capabilities and skills are central to strategy implementation. These capabilities can be classified into product or service creation functions and processes, and product or service delivery and satisfaction functions and processes.
Product-related functions and processes are dependent upon a firm’s R&D and manufacturing/purchasing capabilities.
- The R&D function generates proprietary technologies that can be applied to the development and production of new products. In the electronics industry, access to basic components, like hard disk drives and floppy disk drives and high precision production equipment are fundamental to making smaller, lighter, higher quality products. Each generation of smaller products, like palm corders, stimulates market growth for the company that is first to the market. Each generation of smaller products also reduce packaging and shipping costs, reduce power consumption, extend battery life, and are more convenient to carry.
- The time-to-market process is required to integrate new technology into a firm’s products and services. Today, competitive advantage is often related to the speed with which a firm can introduce the next generation of technologies into the market through new product and process developments. Once the product is developed, production capacity often becomes the limiting factor of market growth.
- The manufacturing function transforms a set of purchased components and software into a firm’s products. Having acceptable products available in a timely manner for customers is central to making sales. The ability to provide the highest quality products in the most efficient allows companies to gain market share by offering competitive prices and ready availability. Experience curve effects from high volumes can lead to lower costs.
- The integrated-supply-chain process coordinates purchasing of components for assembly, product outsourcing, otherwise making sure products are available to meet customer order requirements. Outsourcing and alliances increase a firm’s ability to offer a wider range of products or to introduce new products more rapidly. Increased flexibility provides competitive advantage in responding to rapid market changes.
Market-related functions and processes are directed at serving the customer in the most effective manner possible. Distribution and marketing activities, including sales and service, are central to fulfilling customer demands and ensuring customer satisfaction.
- The distribution function is essential for a firm in gaining market access. The company that dominates the sales channels for a given market often controls the market. Market share is related to product availability, i.e. the number and type of locations that make the products and services available to your customer target. The Internet is providing the next generation of distribution and marketing system.
- The market-to-collection process is used to obtain customers and deliver products. The Internet is changing the role of sales from face-to-face communication to phone or computer communications. It is expected that many intermediary roles (such as distributors and agents) will change to that of infomediary. As product quality and durability improve, service becomes less important, and new channels can be developed.
- The marketing function provides the customer with information and education about a firm’s products and services. Product information and education is often needed to let customers know about product capabilities. Advertising is the part of marketing that helps pull the customer into the market-to-colletion process by creating recognition and image for the brand’s products and services. It helps pull the customer into the store and create brand image. Coca Cola, with the largest advertising budget, spends less money per bottle of soft drink sales than any other competitor. That gives them competitive advantage.
- The customer-service and satisfaction process is critical to sustain a company’s brand loyalty. It is much less expensive to keep an existing customer than to acquire a new customer. Once a customer relationship is established, it is important that appropriate customer service activities are established to maintain the relationship, and solve problems that might hurt the relationship. When after sales service is required, customers need a company contact. 1-800 numbers and the Internet are rapidly providing direct purchase opportunities and technical support capabilities. Dell Computers, for example, guarantees 48 hour repairs of their products (often next day service). Xerox provides 7-day, 24-hour repair service to their large system customers.
- STRATEGIC PERFORMANCE. Performance is an outcome of strategy. The success with which a firm’s business strategy effectively addresses its industry’s key success factors will determine its strategic performance. Strategic performance is measured in terms of both financial and market success.
- Financial performance is essential for continued business operations. Financial capabilities are critical in supporting functional strategies and making required infrastructure investments. For example, a company with adequate funding can expand or invest, or can provide customer financing.
- Market share demonstrates a firm’s ability to create and hold customers, which determines the long term success of a firm. The freshness of product lines and market positioning affect a firm’s ability to attract customers ahead of their competition.
Business Strategy Evaluation & Recommendations
Strategic analysis is based on assessing the effectiveness and efficiency with which a firm’s business strategy meets the requirements of its competitive marketplace. After defining the industry and business strategy, we can seek ways to improve the firm’s strategic performance. This is done by applying the traditional SWOT analysis to the firm’s strategy, and then determining the critical issues that need to be addressed. After ranking critical issues in order of importance, recommendations for action can be made.
- EVALUATE BUSINESS STRATEGY. The business strategy definition provides the basis for its evaluation. This process assesses issues that are both internal and external to the firm.
- Internal assessments are based on the firm’s functional and process capabilities and financial resources. The internal assessment leads to an understanding of the firm’s strengths and weaknesses.
- External assessments are based on the key success factor that have been identified. The external assessment leads to an understanding of the opportunities and threats facing the firm. This assessment is often referred to as a SWOT analysis.
- IDENTIFY CRITICAL ISSUES AND PRIORITIES. The SWOT analysis will lead to an understanding of the critical issues that face a firm in maintaining or improving its competitive and financial performance. The combination of strengths, weaknesses, opportunities, and threats must be ranked by priorities so that action can be planned in a manageable way. Since managers have limited time and resources, it is important that actions be taken in order of importance.
- MAKE RECOMMENDATIONS. Finally, recommendations must address the critical issues for management actions in the short and long term. We are seeking to improve the effectiveness of competitive strategies and the efficiency of their implementation.