9/9/2011

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A quick, selected review of strategic management as taught 

at the undergraduate level

(I didn’t say a “short review”)

External Analysis of the Firm

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SWOT Analysis

• SWOT analysis (the acronym stands for…)

• Strengths

• Weaknesses

• Opportunities

• ThreatsIt’s a basic technique for analyzing the firm’s and the industry’s conditions – it starts profitable discussions

Why I’m not a fan of SWOT

• Leads to simplistic thinking 

• Shortcuts evaluation of own and other firms

• Mistakes are too frequent in applying SWOT

– Industries don’t have strengths or weaknesses (except in rare circumstances)

I don’t expect to see SWOT used in anything written by MBAs

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(firm’s remote & close environments)Technological

Legal / Political

Demographic

Economic

Socio-cultural

GlobalCompetitors

Customers

Labor SuppliersThe firm’sInternal

Environment

The General Environment

Changes in the economy, for example such as…

• Interest rates

• Unemployment

• Consumer Price index

• Trends in GDP

…can exert pressures for change on our most important target market segments, competitors, suppliers, 

etc.

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TechnologicalThe Competitive Environment

Legal / Political

Demographic

Economic

Sociocultural

Global Competitors

Customers

Labor SuppliersThe firm’sInternal

Environment

The Competitive Environment

• Forces for change in the competitive environment arise from:

– Competitors

– Customers

– Suppliers

– (Labor market)

• Sometimes called the task, competitive, or industry environment

• This leads us to Porter’s “five forces” model

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Porter’s Five Forces Model of Industry Competition

Using Porter’s 5‐forces model

• Porter’s Five Forces Model: BMW

– Threat of new entrants  ‐‐ Very low

– Threat of substitutes  ‐‐ Medium

–Power of suppliers  ‐‐ Medium

–Power of buyers  ‐‐ Medium

–Rivalry among existing firms  ‐‐ Very High

Source: Developed from www.bmw.com 

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The Threat of New Entrants

• Profits of established firms in the industry may be eroded by new competitors

• High entry barriers lessen threat of new entry– Economies of scale

– Product differentiation

– Capital requirements

– Switching costs

– Access to distribution channels

– Cost disadvantages independent of scale

The Bargaining Power of Buyers

Buyers  may organize or become powerful enough to threaten an industry to…

– Force down prices

– Bargain for higher quality or more services

– Play competitors against each other

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The Bargaining Power of Suppliers

Suppliers can exert power by threatening to raise prices or reduce the quality of 

purchased goods and services

The Threat of Substitute Products and Services

• Substitutes are NOT competitors’ products

– They are alternative ways of dealing with the need

– Water v. whiskey / Coke / coffee

• They limit the potential returns of an industry

– They act as a ceiling on the prices that firms in that industry can profitably charge

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The Intensity of Rivalry among Competitors in an Industry is signaled 

by…

• Jockeying for position

• Price competition

• Advertising battles

• Product introductions

• Increased customer service or warranties

The Value Net

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Strategic Groups within Industries

Two unassailable assumptions in industry analysis, that

– No two firms are totally different

– No two firms are exactly the same leads us to…

Strategic groups, which are…

• Clusters of firms that share similar strategic approaches

– Breadth of product and geographic scope

– Price/quality

– Degree of vertical integration

– Type of distribution system

Strategic  Group Map of US Retail  Jewelry  Industry

Pri

ce /

Qu

alit

y / I

mag

e

High

Low

Medium

Product Line / Merchandise Mix

Specialty Jewelers

Full-line Jewelers

Limited-category Retailers

Broad-category Retailers

Outlet Mall Retailers

National, Regional, & Local Guild -“Fine Jewelry”

Stores

National Jewelry Chains

Local Jewelers

Credit Jewelers Catalog

Showrooms

Off-Price Retailers

Small Independent

Guild Jewelers

Prestige Departmentalized Retailers

Upscale Department Stores

Chains

Discounters

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Strategic Groups within Industries

The value of strategic groups as an analytical tool is to…

– Identify barriers to mobility that protect a group from attacks by other groups

– Identify groups whose competitive position may be marginal or tenuous

– Chart the future direction of firms’ strategies

– Thinking through the implications of each industry trend for the strategic group as a whole 

Internal Analysis of the Firm

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Resource‐Based View of the Firm

•Two perspectives – so far we’ve been talking about…‐ An external analysis of the industry and its competitive environment

But we also need to look within, at the…

‐ The internal analysis of phenomena within a company

• In firms we combine three key types of resources‐ Tangible resources

‐ Intangible resources

‐ Organizational capabilities

To create value‐added in the form of goods and services

Work together for 2 minutes; come up with an example of how firms cited by your book’s author sought advantage by improving in a 

value chain area

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Tangible resources

Easiest to identify, sometimes easy to duplicate, they include…

Intangible resourcesDifficult for competitors (and the firm 

itself) to account for or imitate, typically embedded in unique 

routines and practices that have evolved over time

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Organizational capabilities

Skills that a firm uses to transform inputs to outputs, and capacity to combine tangible and intangible 

resources to add value

What is competitive advantage?

How would we see it in…

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Firm Resources & Capabilities build toward sustainable Competitive Advantage

Is the resource or capability…

Valuable……………………..

Rare…………………………

Difficult to imitate…………..

Difficult to substitute …...….

That may imply…

It can help neutralize threats and exploit opportunities

Not many firms possess it, or

it’s physically unique

Path dependency

Causal ambiguity, or

Social complexity

No equivalent strategic resources or capabilities

Moving toward Sustainable Competitive Advantage?

Talk together for 2 min. Come up with a standardized product commonly subject to price competition.

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Assessing the state of a firm’s internal resources and capabilities is 

part art and part science.

On a macro‐scale, we can evaluate “Firm Performance”

There are two approaches for evaluating firm performance‐ Financial ratio analysis

• Balance sheet

• Income statement

• Historical comparison

• Comparison with industry norms

• Comparison with key competitors

‐ Balanced scorecard (stakeholder perspective)

• Employees

• Customers

• Owners

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“Under the hood”‐ looking at processes ‐ we can use financial ratio 

analysis•Five types of financial ratios‐ Short‐term solvency or liquidity

‐ Long‐term solvency measures (aka leverage)

‐ Asset management (aka activity or turnover ratios)

‐ Profitability

‐ Market value

•Meaningful ratio analysis must include…‐ Analysis of how ratios change over time

‐ How ratios are interrelated

Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinStrategic Management: Text and Cases, 4e

5Business-Level (or

Competitive) Strategy

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Generic Competitive  Strategies

Mar

ket

Tar

get

Type of Advantage Sought

Overall Low-CostLeadership

Strategy

BroadDifferentiation

Strategy

FocusedLow-CostStrategy

FocusedDifferentiation

Strategy

Lower Cost Uniqueness

Broad Range of Buyers

Narrow Buyer

Segmentor Niche

Value‐Chain Activities: Cost Leadership

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Comparing Experience Curve Effects

Value‐Chain Activities: Differentiation

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Stages of the Industry Life 

Cycle

Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinStrategic Management: Text and Cases, 4e

6Corporate‐Level Strategy: 

Creating Value using Diversification

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Now, in corporate‐level strategy…

…the principle concern is to identify the industry or industries a company should participate in to maximize 

long‐run profitability

But, be aware, just as tactical actions at the business‐unit level may be confused with “strategy” when they’re not (competitive strategy, 

that is)……so too, at the corporate‐level there are actions taken under the name of 

strategy that are not.

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1st Strategy: Concentration on a single industry (a single line of business)

• Here a corporation chooses to focus its resources and capabilities on competing successfully within the confines of a particular product market

• Examples of companies that pursue concentration:

– McDonalds ‐‐ Starbuck’s

– Neiman Marcus

2nd Strategy: Horizontal Integration

• The process of acquiring or merging with industry competitors to achieve the competitive advantage that comes with large size– Merger‐ an agreement between two companies to pool their resources in a combined operation

– Acquisition ‐ Occurs when a company uses capital resources to purchase another company.

• An increase in  horizontal integration = an increased level of concentration in an industry

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3rd Strategy: Sharing Resources (Activities)

• Corporations can also create value by sharing tangible and value‐creating activities across their business units

– Common manufacturing facilities

– Distribution channels

– Sales forces

• Sharing activities provide two sources of value

– Cost savings

– Revenue enhancements

Sharing Resources at Procter & Gamble

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4th Strategy: Diversification into multiple lines of business

In order for the jointly owned lines of business to be worth more under one ownership the Corporation has to find 

ways to develop, deploy, or use distinctive competencies between 

subsidiaries

4th Strategy: Diversification (cont’d)

A diversification can help a company create value in 3 main ways:

1. Transferring competencies among businesses

2. Realizing economies of scope

3. Demanding superior internal governance (aka “parenting”)

A corporation’s diversification action is one of two types…

a. Related, or

b. Unrelated 

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4a: Related Diversification: 

Transferring Competencies

Related Diversification/Economies of scope: 

Market Power

• Two principal means to achieve synergy through market power

– Pooled negotiating power

– Vertical integration

• Government regulations may restrict this power

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Pooled Negotiating Power

• Similar businesses working together can have stronger bargaining position relative to

– Suppliers

– Customers

– Competitors

• Abuse of bargaining power may affect relationships with customers, suppliers and competitors

Related Diversification / Economies of scope / market power: 

Vertically integrating along the Value‐Added Chain 

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Related or Unrelated DiversificationStrategies

Unrelated diversification has little to gain from horizontal relationships – so they also use these “related” strategies (and tactics)

– “Parenting” 

– restructuring of businesses

– Capital Allocation of resources

– Appropriate human resources practices

– Financial controls (carrot and stick)

Corporate “Parenting” & Restructuring

• Corporate Parenting

– Parenting—creating value within business units; depends on…

• Experience of the corporate office to “teach” the sub how to compete better

• Support of the corporate office

• Corporate Restructuring

– Find poorly performing firms

• With unrealized potential

• On the threshold of significant positive change

– Focus effort into those with potential

– exiting business areas without potential

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A key part of restructuring the portfolio of the corporation’s subs is to understand 

their role & potential

Key

Each circle represents one of the firm’s business units

Size of circle represents the relative size of the business unit in terms of revenue

Life‐cycle‐related tactics to manage Diversification

While growing…• Acquisitions or mergers• Pooling resources of other 

companies with a firm’s own resource base through…– Joint ventures– Strategic alliances

• Internal development toward…– New products– New markets– New technology

While shrinking….

• Means of exit

– Divestiture

– Harvesting

– Liquidation

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Exit or “end‐game” Strategies(these are really tactics to manage 

Diversification)

• Three main “exit strategies” are…

– Divestment   ‐most favorable

– Harvesting ‐ only works under specific conditions

– Liquidation    ‐ least favorable

Divestment

…selling a business unit as a going concern to the highest bidder. 

Bidders might be…

Independent Investors

The subsidiary’s own managers

Other Companies – especially competitors

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Harvesting

• Halting investments in order to maximize short‐to‐medium‐term cash flow

• If employees catch on, morale can sink very quickly and the strategy may fail

Liquidation

• Shutting down the operation of a business or business unit

• Least attractive strategy because the company is required to write off its investments in the unit that is shutting down