Strategic Analysis

Tools for strategic analysis 1. SWOT Analysis2. TOWS (Threats-Opportunities-Weaknesses-Strengths) Matrix3. SPACE (Strategic Position and Action Evaluation) Matrix4. Environmental Threat and Opportunity Profile (ETOP)5. BCG Growth-Share Matrix6. GE Nine Cell Planning Grid7. Profit Impact of Market Strategies (PIMS)8. Vulnerability Analysis

SWOT Analysis

Management should identify and analyze various factors to identify strengths, weaknesses, opportunities and threats.

This analysis will help the company to position itself to take the advantage of the opportunities provided by the environment and to minimize the threats by the environment.

Matching environmental information with the knowledge of the organization’s capabilities enables management to formulate efficient and realistic strategies for attaining organizational goals.

SWOT analysis

TOWS (Threats-Opportunities-Weaknesses-Strength) Matrix

Strengths - S

Weaknesses - W

0pportunities - O SO: Strategies

Use strengths to take advantage of opportunities

WO: Strategies

Overcome weaknesses by taking advantage of

opportunities

Threats - T

ST: Strategies

Use strengths to avoid threats

WT: Strategies

Minimize weaknesses and avoid threats.

TOWS Matrix

TOWS matrix helps to match the internal and external factors.TOWS Matrix tool results in the develop of four types of strategies (SO, WO,

ST, WT)

Steps involved in TOWS Matrix: List the company’s key strengths. List the company’s key weaknesses. List the company’s key opportunities. List the company’s key threats. Match the strengths with opportunities and record the resultant SO

strategies in the appropriate cell. Match the weaknesses with opportunities and record the resultant WO

strategies. Match the strengths with threats and record the resultant ST strategies. Match weaknesses with threats and record the resultant WT strategies.

SPACE Matrix - (Strategic Position and Action Evaluation)

Aggressive

Defensive

Financial Strength

competitive advantage

Conservative

Competitive

industry strength

Environmental stability

+1 +2 +3 +4 +5-1-2-3-4-5

+1

+2

+3

+4

+5

-1

-2

-3

-4

-5

•Concentric Diversification•Vertical Integration

•Concentric Merger•Conglomerate •Turnaround

•Divestment•Liquidation•Retrenchment •Merger

•Stability•Conglomerate Diversification

BCG Growth-Share Matrix

Stars Question Marks or Problem children

DogsCash Cows

LOWHIGH

HIGH

LOW

RELATIVE MARKET SHARE POSITION

INDUSTRY GROWTH RATE

X-axis represents (Relative Market Share Position)

Relative Market Share is defined by the ration of one’s own market share held by the largest rival firm.

Y-axis represents the industry growth rate.

Question Marks Divisions in the quadrant I (High growth/low market share)Market DevelopmentMarket PenetrationProduct PenetrationForward Integration (Availability of Huge resources)Backward Integration (Availability of Huge resources)Horizontal Integration (Availability of Huge resources)Concentric diversification (To reduce narrow product line)

Stars Divisions in Quadrant II (High growth/ High market share)Market DevelopmentMarket PenetrationHorizontal IntegrationDivestureLiquidation

Cash Cows Divisions in Quadrant III (Low growth/High Market Share)RetrenchmentConcentric diversificationHorizontal diversificationConglomerate diversificationDivestureLiquidation

Dogs Divisions in Quadrant IV (Low growth/Low Market Share)Concentric diversificationHorizontal diversificationConglomerate diversificationJoint venture

GE Nine-Cell Planning Grid

• Both axes are divided into three segments, yielding nine cells. The nine cells are grouped into three zones

• The Black Zone The Black Zone consists of the three cells in the upper left corner If the SBU falls in this zone, it’s in a favorable position with relatively attractive

growth opportunities This position indicates a "green light" to invest and grow this SBU

GE Nine-Cell Planning Grid

• The Grey Zone– The Grey Zone consists of the three diagonal cells from the lower left to the upper

right– A position in the yellow zone is viewed as having medium attractiveness– Management must therefore exercise caution when making additional

investments in this SBU– The suggested strategy is to protect or allocate resources on a selective basis

rather than growing or reducing share.

GE Nine-Cell Planning Grid

• The Red Zone– The Red Zone consists of the three cells in the lower right corner– A harvest strategy should be used in the two cells just below the three-cell

diagonal– These SBUs shouldn’t receive substantial new resources– The SBUs in the lower right cell shouldn’t receive any resources and should

probably be divested or eliminated from a firm’s portfolio

Directional Policy Matrix (Developed by Royal Dutch Shell)

Divestment

Phased Withdrawal/

Merger

Maintenance of position / market

penetration

Diversification / Cash generation

Growth / market segmentation

Market leadership Innovation

Expansion / Product

differentiation

Phased withdrawal / cash

generation

Imitation / Phased

withdrawal

Unattractive Average AttractiveWeak

Average

Strong

COM

PETI

TIVE

AB

ILIT

IESBUSINESS SECTOR PROSPECTUS

Hofer’s Life Cycle Matrix

Strong Average Weak

EarlyDevelopment

Industry Takeoff

Rapid Growth

CompetitiveShake-out

Maturity

Market Saturation

Stagnation/ Industry Decline

Business Units Competitive Position

Indu

stry

’s S

tage

in th

e Ev

oluti

onar

y Li

fe-C

ycle

A

B C

D

E F

GH

Hofer’s Life Cycle Matrix

Industry’s stage in the evolutionary life cycle represents the vertical axis.Business unit’s competitive position represents the horizontal axis.Circles in the matrix represent the sizes of the industries involved and pie wedges denote the business’s market share.

Business A could be labeled as “Developing winner”Business C could be labeled as “Potential loser”Business E could be labeled as “established winner”Business F could be labeled as “Cash Cow”Business G could be labeled as “loser/Dog”

Porter’s Industry Analysis: Five Forces Model

1. Threat of new entrants New entrants to an industry

• Brings new capacity• Capture market share from existing players• More competition• Price wars• Falling returns - decline in profitability• ‘Acquisition’ - the preferred way to enter into a new market

Barriers to entry into a new market• Economies of scale• Product differentiation• Capital requirements• Cost disadvantages independent of size• Access to distribution channels• Government policy

Five Forces Model

2. Intensity of rivalry among existing competitors Lead to Price wars, Advertising battles, Launches of new products and

increased services and Warranties. Intensity of rivalry depends on

• Number of competitors• Slowdown in industrial growth• Lack of differentiation among products• Absence of switching cost• Under-pricing to avoid spoilage of goods• Price-cut - supply-demand balance

Five Forces Model

3. The Bargaining Power of BuyersBuyers are powerful when

• The suppliers are many and the buyers are a few and large• The buyers purchase in large quantities• The supplier’s industry depends on the buyers for a large percentage of its

total orders• The buyers can switch orders between supply companies at a low cost• Its is economically feasible for the buyers to purchase the input from

several companies at a time• The buyers can use the threat to provide for their own needs through

vertical integration as a device for forcing down price

Five Forces Model

4. The Bargaining Power of Suppliers

Suppliers are powerful when• The product as few substitute and is important to the purchasing company• No single industry is a major customer• Products are too much differentiated and switching cost is higher for a

buyer• Supplier can use the threat of vertically integrating forward into the industry

and competing directly with the buying company• Buyers cannot use the threat of vertically integrating backward and

supplying their own needs

Five Forces Model

5. Threat of Substitute Products• Substitute products can match the needs of the customer in the same way as

the original product• A close substitute is a potential threat to the company’s product• It limits the price charged by a company

GRAND STRATEGY MATRIX

Quadrant I

1. Market Development2. Market penetration3. Product Development4. Forward integration5. Backward integration6. Horizontal integration7. Concentric diversification

1. Market Development2. Market penetration3. Product Development4. Horizontal integration5. Divestiture6. Liquidation

Quadrant IIRapid Market Growth

Slow Market Growth

StrongCompetitive

Position

WorkCompetitive

Position

1. Retrenchment2. Concentric diversification3. Horizontal diversification4. Conglomerate diversification5. Divestiture6. Liquidation

Quadrant III1. Concentratic diversification2. Horizontal diversification3. Conglomerate diversification4. Joint ventures

Quadrant IV

Businesses / companies in the Quadrant I:Firms in this quadrant go for backward, forward or horizontal integration when they have excessive resources.Firms may also go for concentratic diversification strategy in order to reduce the risks of narrow product line.Firms can also adopt aggressive strategies and exploit the opportunities provided by the external environment.

Businesses / companies in the Quadrant II:Firms in this quadrant rapid market growth and weak competitive positions, firms can employ the strategy of horizontal integration.As a last resort, the strategies of divestment and liquidation may also be considered.Alternative businesses may be developed from the funds generated by divesting the existing business.

Businesses / companies in the Quadrant III:Firms in this quadrant slow market growth and weak competitive positions, must make drastic and quick changes to avoid further loss and extinction.These firms may reduce costs and assets.Firms may shift resources away from the existing businesses to new business.

Businesses / companies in the Quadrant IV:Firms in this quadrant slow market growth and strong competitive positions, have strength to launch diversified programs into more promising growth areas.Firms can successfully pursue concentric, horizontal or conglomerate diversification.Strategic option available for these firms is “Joint Venture”.

Learning Curve

A graphical representation of the "average" rate of learning for an activity or tool

It can represent at a glance the initial difficulty of learning something and, to an extent, how much there is to learn after initial familiarity

More times a task has been performed, the less time will be required on each subsequent iteration

It encompasses only time factor

Learning Curve

Experience Curve

More often a task is performed the lower will be the cost of doing it, the task can be the production of any good or service

Each time cumulative volume doubles, value added costs (including administration, marketing, distribution, and manufacturing) fall by a constant and predictable percentage

Under ideal conditions, the profitability of each firm should be a function of its accumulated experience in producing a particular product

Experience effect = Volume effect + Learning effect Volume effect

When a firm increases production, its fixed costs do not change but an increase in production brings down the cost per unit

Experience Curve

Experience Curve

Experience effect depends on following factors other than time factor: Labor efficiency Standardization, specialization, and methods improvements Technology-driven learning Better use of equipment Changes in the resource mix Product redesign Value chain effects Network-building and use-cost reductions Shared experience effects

Strategic Analysis

Analysis of strategies can be done at Company (Corporate) Level Product Level Industry (Business) Level

Product Market Matrix of Ansoff

Planning New Businesses and Downsizing Existing Businesses

A tremendous gap between actual and projected sales The firm then has to devise strategies to fill this gap or rather increase the sales

Intensive growth The organization can focus on identifying opportunities to increase the

market share of existing businesses

Integrative growth it can focus on identifying business opportunities in the related business

areas

Diversification growth it can identify opportunities that have a vast potential but are unrelated to

the present business activity

Product Market Matrix of Ansoff

Intensive Growth

Product Market Matrix of Ansoff

Integrative growth

1. Forward integration If Britannia start its own distribution network

2. Backward integration It produce its own raw materials by starting a dairy farm for milk and

producing wheat etc.

3. Horizontal integration It may acquire the business of one of its competitors

Product Market Matrix of Ansoff

Diversification Growth: When there are vast growth opportunities in a specific industry and the company has the necessary resources to tap that potential.

1. Concentric Diversification Strategy A company tries to diversify by serving a new customer base with

products that are related to the existing product category If Britannia is trying to diversify into producing wheat flour

2. Horizontal Diversification Strategy If the company tries to attract current customers with new products even

if the company has to acquire a new manufacturing capability If Britannia wants to enter the ice-cream industry

3. Conglomerate Diversification Strategy The company tries to perform unrelated business activities If Britannia ventures into the manufacturing of bicycles or wristwatches

Product Market Matrix of Ansoff

Downsizing Older Businesses: Removing old and sick businesses that are not adding any value to the

company. It clears the way for the management to allocate the resources employed in

these older businesses to new and lucrative business activities. Layoffs

Laying off the employees - cost cutting measure Repeated layoffs are an indication of poor management of the organization Inefficiency in the form of decreased loyalty, insecurity and decline in

employee morale, decreased employee motivation

Formulating Long-term Strategies

Concentration Market Development Product Development Horizontal Integration Vertical Integration Tapered Integration Quasi Integration Diversification

Behavioral Considerations Affecting Strategic Choice

Role of Past Strategy Attitude Towards Risk Competitive Reaction Degree of Firm’s Dependence Values and Preferences