Post on 05-Dec-2014
description
transcript
by Lawrence (Laurie) Phillips
STRATEGIC
CHARACTERISATION
MATRIX
How to apply Porter’s Five Forces thinking to determine
which of the Five Strategic Objectives (Divest, Harvest,
Maintain, Grow, Enter) should be implemented by a
business with a...
The use of any information provided is at the sole
discretion of the user, no warranties and/or
guarantees whether expressed or implied given.
Users accepts all risks for their application of the
information provided and no responsibility is
accepted by the writer for the information contained
within and how it is applied.
Disclaimer
1. Porter’s Five Forces
2. Five Strategic Objectives
3. Strategic Characterisation Matrix (SCM)
4. SCM Tool – How to Download
5. References and Contact Details
Contents
A framework for industry analysis and
business strategy development formed by
Michael E. Porter of Harvard Business School
in 1979.
1. Porter’s Five Forces
What is Porter’s Five Forces
The five forces that are derived determine the
competitive intensity and therefore “attractiveness”
of a market.
Attractiveness in this context refers to the overall
industry profitability. An "unattractive" industry is
one in which the combination of these five forces
acts to drive down overall profitability. A very
unattractive industry would be one approaching
"pure competition", in which available profits for
all organisations are driven down to zero.
Three of Porter's five forces refer to competition
from external sources. The remainder are internal
threats.
The threat of entry of new competitors
Profitable markets that yield high returns will attract new organisations. This results in many new entrants, which
eventually will decrease profitability for all organisations in the industry. Unless the entry of new organisations can
be blocked by incumbents, the abnormal profit rate will tend towards zero (perfect competition).
The existence of barriers to entry (patents, rights, etc.)
The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new organisations
can enter and non-performing organisations can exit easily.
Economies of product differences
Brand equity
Switching costs or sunk costs
Capital requirements
Access to distribution
Customer loyalty to established brands
Absolute cost
Industry profitability; the more profitable the industry the more attractive it will be to new competitors
The threat of substitute products or services
The existence of products outside of the realm of the common product boundaries increases the propensity of
customers to switch to alternatives
Buyer propensity to substitute
Relative price performance of substitute
Buyer switching costs
Perceived level of product differentiation
Number of substitute products available in the market
Ease of substitution
Substandard product
Quality depreciation
The bargaining power of customers (buyers)
The bargaining power of customers is also described as the market of outputs: the ability of customers to put the organisation under pressure, which also affects the customer's sensitivity to price changes.
Buyer concentration to organisation’s concentration ratio
Degree of dependency upon existing channels of distribution
Bargaining leverage, particularly in industries with high fixed costs
Buyer volume
Buyer switching costs relative to organisation’s switching costs
Buyer information availability
Ability to backward integrate
Availability of existing substitute products
Buyer price sensitivity
Differential advantage (uniqueness) of industry products
Recency, Frequency, Monetary (RFM) Analysis
The bargaining power of suppliers
The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components,
labour, and services (such as expertise) to the organisation can be a source of power over them, when there are few
substitutes
Suppliers may refuse to work with the organisation, or charge excessively high prices for unique resources
Supplier switching costs relative to organisation’s switching costs
Degree of differentiation of inputs
Impact of inputs on cost or differentiation
Presence of substitute inputs
Strength of distribution channel
Supplier concentration to organisation’s concentration ratio
Employee solidarity (e.g. labour unions)
Supplier competition - ability to forward vertically integrate and cut out the BUYER
The intensity of competitive rivalry
For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry.
Sustainable competitive advantage through innovation
Competition between online and offline companies
Level of advertising expense
Powerful competitive strategy
The visibility of proprietary items on the Web used by a company which can intensify competitive pressures on their
rivals.
Divest, Harvest, Maintain, Grow or Enter
2. Five Strategic Objectives
Divest
Divestment is a strategy that is considered when a
business is not making suitable profits or when
another organisations values the business higher
than the current organisation’s owner
It involves exiting the markets or market segments
that do not offer potential for profit growth, cutting
costs and shifting resources to more economic
activities
A business may be able to significantly increase
their value by divesting from products and
customers that do not produce profits for the
business
Image: Maggie Smith / FreeDigitalPhotos.net
Harvest
A harvesting strategy maximises the cash flow of
the business from its existing assets and is typically
an appropriate strategy when the net divestment
value of the business is below its optimal
restructured value
It is typically applied when the competitive
advantage of the business is in decline with
reducing sales volumes or where market conditions
are deteriorating
Harvesting strategies that increase operating
margin include: raising margins, focus on premium
niche markets and cutting variable and fixed costs
Harvesting strategies that reduce investment
include: reduction in inventory, tight control on
debtors, extending creditors and reducing fixed
assets
Image: dan / FreeDigitalPhotos.net
Maintain
In a maintain strategy it is not expected that the
market share of the business will erode or increase
over time
Key objectives of a maintenance strategy is to
avoid price competition as this will negatively
impact on the value of the business, maintain the
barriers to entry and keep a focus on innovation
The conditions in which a maintain strategy should
exist are:
Significant barriers to entry
Market is dominated by a small numbers of players
No decline in the market is expected
Business has a well established competitive position and is
earning healthy economic profits with marginal
investments able to earn a return that exceeds the current
cost of capital
Image: FreeDigitalPhotos.net
Grow
Grow strategic objectives are about the business
investing to earn a return that exceeds its cost of
capital
Growth opportunities therefore depend on the
business having a differential advantage
The market should also have a high degree of
attractiveness
Image: criminalatt / FreeDigitalPhotos.net
Enter
New products
New processes
New markets
New marketing strategies
An enter strategic objective should apply where
there is a combination of both high market
attractiveness and an advantaged differential
position
The business must have the ability to create a
sustainable differential advantage
Image: vichie81 / FreeDigitalPhotos.net
How to apply Porter’s Five Forces thinking to determine which of the Five Strategic Objectives should be implemented by the business
3. Strategic Characterisation Matrix
Strategic Characterisation Matrix
Uses Porter’s Five Forces plus other factors to
determine the overall Market Attractiveness:
Size of the market
Growth of the market
Competitive structure of the market (one of Porter’s Five
Forces)
Supplier power (one of Porter’s Five Forces)
Threat of substitutes (one of Porter’s Five Forces)
Buyer power (one of Porter’s Five Forces)
Threat of new entry (one of Porter’s Five Forces)
The cyclicality of the market
Market risks
Plus analyses the Differential Position of the
business:
Low cost
Differentiation
Market Attractiveness
• Porter’s Five Forces
• Size of the Market
• Growth of the Market
• The Cyclicality of the Market
• Market Risks
Differential Position
• Low Cost
• Differentiation
Strategic Objectives
• Divest
• Harvest
• Maintain
• Grow
• Enter
SCM Tool - Inputs
In a given market or market segment by rating all the relevant factors that influence Market Attractiveness and the
Differential Position of the business, guides us in determining the appropriate Strategic Objective/s to be
implemented
By analysing this over several time scales such as Current, Short and Long Term provides an additional guide to the
likely changes that could occur and the evolution of the chosen Strategic Objective/s
SCM Tool - Outputs
Provides a guide to which of the Five Strategic
Objectives could be implemented
Divest
Harvest
Maintain
Grow
Enter
Current
Short Term
Long Term
SCM Tool - Example
One of the business units that is operated by Company X is a supplier and installer of residential solar panels in
Australia. The Australia government provides financial subsidies to customers installing residential solar panels,
however there is no certainity on the continuation of this subsidy which has just recently been reduced. Company X is
preparing to analysis the strategic objectives of this business unit for the next 5 years.
SCM Tool - Example
One of the business units that is operated by Company X is a supplier and installer of residential solar panels in
Australia. The Australia government provides financial subsidies to customers installing residential solar panels,
however there is no certainity on the continuation of this subsidy which has just recently been reduced. Company X is
preparing to analysis the strategic objectives of this business unit for the next 5 years.
Enter Rating for each item and timescale
with:
1 = Unattractive to the business
7 = Attractive to the business
SCM Tool - Example
One of the business units that is operated by Company X is a supplier and installer of residential solar panels in
Australia. The Australia government provides financial subsidies to customers installing residential solar panels,
however there is no certainity on the continuation of this subsidy which has just recently been reduced. Company X is
preparing to analysis the strategic objectives of this business unit for the next 5 years.
Enter Rating for each item and timescale
with:
1 = Unattractive to the business
7 = Attractive to the business
Enter Rating for each item and timescale with:
1 = Disadvantaged (Business unable to implement )
7 = Advantaged (Business able to implement)
SCM Tool - Example
One of the business units that is operated by Company X is a supplier and installer of residential solar panels in
Australia. The Australia government provides financial subsidies to customers installing residential solar panels,
however there is no certainity on the continuation of this subsidy which has just recently been reduced. Company X is
preparing to analysis the strategic objectives of this business unit for the next 5 years.
SCM Tool automatically calculates Scores
SCM Tool - Example
The SCM tool automatically transposes the scores and plots the results onto three SCM charts for each of the chosen
time scales periods, indicating as a guide the best likely Strategic Objective/s
4. SCM Tool – How to Download
SCM Tool – How to Download
For a FREE copy of the SCM Tool in Microsoft Excel format, just go to www.businessmeccanica.blogspot.com and go
to the downloads section or go to http://businessmeccanica.blogspot.com/p/downloads.html
SCM Tool – Notes to Users
The SCM Tool has been developed as a guide only
Do not rely on the results, only use them to help guide you in determining the best Strategic Objectives for the business
Ensure that you have all the relevant facts and figures required prior to using the SCM tool, such as the size of the market, growth of the market, competitors etc.
The SCM Tools is a protected (no password required) Excel Worksheet
It can be unprotected so that you can analyse the scoring mechanisms which have been established
Adjust the scoring mechanisms to suit your individual requirements as required
The SCM Tool can be applied at the organisational, business unit or individual product/service level
Always use a professional marketing expert (such as a CPM) to analyse your results
The use of any information provided it is at the sole discretion of the user, no warranties and/or guarantees whether expressed or implied are given.
Users accepts all risks for their application of the information provided and no responsibility is accepted by the writer for the information contained within and how it is applied
References and Contact Details
http://en.wikipedia.org/wiki/Porter_five_forces_a
nalysis
http://hbr.org/2008/01/the-five-competitive-
forces-that-shape-strategy/ar/1
Marketing Management: A Strategic, Value-based
Approach. Whitwell/Lukas/Doyle, John Wiley
2003
Lawrence (Laurie) Phillips MBA-Mktg CPM AMAMI
MAIE
+61 400 767 087
lawrence.phillipsMBA@gmail.com
References Contact Details