1. How to Do a Strategic Analysis
Dr. Stan Abraham

2. What Is Strategic Analysis?
One person’s or one group’s attempt at arriving at a strategy and key strategic decisions for a company
For example, vision statement, objectives, and key programs
An essential precursor to strategic planning

3. Why Do It? To gain strategic-planning skills
To integrate functional business courses you have taken to-date
To be able to help companies or organizations decide their future
To do a better job of running your own business one day

4. The Essential Questions
What’s the current situation?
Where do we want to go?
How can we get there?

5. 1. What’s the Current Situation?
What’s changing in our industry, markets, competitors, the economy, and other areas that may affect us?
Where are the opportunities?
How have we been performing and what financial condition are we in?
What strengths, resources, weaknesses, and competitive advantages do we have, or lack?

6. 2. Where Do We Want to Go? This involves strategic thinking
What are all the possible and feasible directions we could take?
Which opportunities could we pursue?
What alternative business models make sense?
Which is the best alternative?
Why is it the best one?

7. 3. How can we get there? And how fast should we get there?
What vision and strategy should we pursue?
What objectives should we set?
For the next year and three years’ hence?
What programs should we implement?
What contingencies can we devise in case things go wrong?

8. What Is Strategy? Strategy is how a company actually competes
The best strategy is embedded in a business model that both provides customer value and gives the organization a sustainable competitive advantage
[Know what these terms mean?]

9. Strategic Planning vs. Strategic Management
Strategic-planning process
Operational planning
Implementation
Evaluation & control
Strategic management
Strategic thinking drives the process
Strategic analysis informs the process
Book Figure 1.1

10. A Strategic Analysis Model – that works! (SAMtw)
Situation Analysis
Alternatives Analysis
Recommendations
External Review Industry Analysis Competitive Analysis Market Analysis Environmental Analysis
Short-Term Plans Goals & Objectives Strategic Intent Programs Contingencies
Strategic Issues
Identifying Strategic Alternatives
Internal Review Financial Analysis Strengths & Weaknesses Opportunities & Threats
Long-Term Plans Goals & Objectives Strategic Intent Programs Contingencies
Arguing For and Choosing a Preferred Strategy
1. What is the current situation?
2. Where do we want to go?
3. How can we get there?

11. Industry and Competitive Analysis
Dominant economic characteristics
Industry driving forces
Sources of competitive threat
Porter’s 5-forces model
Competitive positioning of major rivals
Critical success factors
Competitive strength analysis
Industry attractiveness
Situation Analysis
External

12. Dominant Economic Characteristics
Dominant Economic Characteristics Example: Industry for a chemical commodity
Industry Size
$500 million sales; 4 million tons total volume
Scope of Competitive Rivalry
Primarily regional; producers rarely sell outside a 250-mile radius of plant due to high cost of shipping long distances
Industry Growth Rate
2-3 percent annually
Stage in Lifecycle
Mature
Number of Competitors
About 30 companies with 110 plant locations and capacity of 4.5 million tons. Market shares range from 3-21 percent
Customers
About 2,000 buyers; most are industrial chemical firms
Situation Analysis
External

13. Dominant Economic Characteristics (2)
Degree of Vertical Integration
Mixed. Five of the ten largest firms are integrated backward into mining operations and also forward in that sister industrial chemical divisions buy over 50% of their plant output; all other firms are engaged solely in manufacturing
Ease of Entry/Exit
Moderate entry barriers exist: it costs $10 million to construct a new plant of minimum efficient size and a new entrant must build a customer base within 250 miles from the plant
Technology/Innovation
Production technology is standard and slow to change. Biggest changes are occurring in products--about 1-2 newly formulated specialty chemical products introduced annually, accounting for nearly all the industry growth
Situation Analysis
External

14. Dominant Economic Characteristics (3)
Product Characteristics
Highly standardized and commodity-like
Scale Economies
Moderate. All firms have virtually equal manufacturing costs, but scale economies exist in shipping in multiple carloads to the same customer and in purchasing large quantities of raw materials
Capacity Utilization
Efficiency is highest when producing between % of rated plant capacity. Unit costs rise appreciably when utilization drops below 90%
Industry Profitability
Subpar to average. The commodity nature of the product results in intense price-cutting when demand slackens, but prices firm up during periods of strong demand. Profits thus track the strength of demand for the industry’s products
Situation Analysis
External

15. Industry Driving Forces
Changes in the industry growth rate
Changes in who buys the product and how they use it
Product or marketing innovation
Technological change
Entry or exit of major firms
Diffusion of technical know-how
Increasing globalization of the industry
Changes in cost and efficiency
Emerging buyer preferences for differentiation
Regulatory influences and government policy changes
Changing societal concerns, attitudes, lifestyles
Situation Analysis
External

16. Industry Lifecycle Curve
Total Industry Sales
Shake-out
Emerging Growth Maturity Decline
Time
Situation Analysis
External

17. Industry Lifecycle Curve (2)
Shake-out Stage
Supply = Demand Competitors leave the (max. slope) arena or are acquired (Supply > Demand)
Competitors enter the arena (Supply < Demand)
Situation Analysis
External

18. Concentrated vs. Fragmented Industries
Concentrated – when most of the industry’s sales are accounted for by only a few firms
The “Big Four” accounting firms audit 96% of public companies in the U.S.
Only three firms make jet engines for the world’s commercial aircraft; only two make the aircraft
Fragmented – when no company has more than a one-percent share of the market
Beauty salons Bookkeepers
Plumbers Cement-mixing companies
Situation Analysis
External

19. The Value Chain Example – Wool Suits
Breeding Raw Cloth Cloth Sheep on Wool Mill Wholesaler Tailor Retailer Farm Wholesaler Dyer Final Customer
Vertical Integration
Backwards Forwards
Situation Analysis
External

20. Sources of Competition Porter’s 5-Forces Model of Competitive Threats
Potential New Entrants
Barriers to Entry
Suppliers Rivals Buyers Substitutes
Intensity of Rivalry ?
Barriers to Entry ?
Bargaining Power (a) of buyers? (b) of suppliers?
Threat of Substitutes ?
External
Situation Analysis

21. Strategic Group Map External Situation Analysis
A two-dimensional diagram with axes that separate out rivals in an industry
Plot competitors on the diagram
Group ones that are “close” to each other on the map – they are said to belong to similar strategic groups
Often, circles around the groups represent combined sales of companies in them
Very broad
Breadth of product line
narrow
domestic
international
Geographic scope
External
Situation Analysis

22. Critical-Success-Factor Analysis
A critical success factor (CSF) is something a company must do well in order to succeed in the industry.
Example: XYZ Industry
Competitors
Critical Success Factor Co A B C D E
Engine technology
Styling and features
Brand reputation
Strong distribution/dealer network
Efficient manufacturing
Effective marketing
External
Situation Analysis

23. Assessing Industry Attractiveness
Example: XYZ industry
Industry Factor Weight Rating Product
Sales growth rate
Market size
Industry profitability
Intensity of competition
Barriers to entry
Degree regulated TOTALS
External
Situation Analysis

24. Assessing Competitive Strength
Example: Your Company Under Analysis
Competitive Factor Weight Rating Product
Technological innovativeness
Marketing/distribution
Caliber of management
Relative cost position
Brand reputation
Financial strength TOTALS
Situation Analysis
External

25. G. E. Matrix Invest Divest Situation Analysis External High
Industry Attractiveness
Your Company
Invest
Medium
Divest
Low
Weak
Avg.
Strong
Competitive Strength
Situation Analysis
External

26. Market and Customer Analysis Covered in your Marketing course . . .
Identify the target market/segment
Identify customer needs (present and future)
Identify principal market segments
How does the customer buy (channels)?
What are the channel markups?
Extent to which customer responds to advertising and promotion, and which media
How price-sensitive is the customer?
External
Situation Analysis

27. Environmental Analysis Categories to Scan Continually
Demographic changes -- regional population shifts, birth rates, age cohorts, etc.
Impending regulatory/legislative changes -- healthcare reform, tax bills, etc.
Political changes (esp. at election time) -- tax changes, party platforms, etc.
Lifestyle/attitude trends -- fitness, disease prevention, seeking adventure, etc.
Sociocultural trends -- consumer activism, greater tolerance of diversity, etc.
Economic climate and trends -- extended recession, devaluation, etc.
Technological advances -- industry & federal spending on R&D, new patents, etc.
All the above, for each foreign country in which the company does business.
Ask, “What changes/trends affect my company either negatively or positively?” The larger the potential impact, the more specific data are needed about the trend/change.
Situation Analysis
External

28. Phase Coverage in Class
Situation Analysis
Alternatives Analysis
Recommendations I
External Review Industry Analysis Competitive Analysis Market Analysis Environmental Analysis
Short-Term Plans Goals & Objectives Strategic Intent Programs Contingencies
Strategic Issues
III
Identifying Strategic Alternatives
Internal Review Financial Analysis Strengths & Weaknesses Opportunities & Threats II
Long-Term Plans Goals & Objectives Strategic Intent Programs Contingencies
Arguing For and Choosing a Preferred Strategy
1. What is the current situation?
2. Where do we want to go?
3. How can we get there?

29. Scope of Phase 1
The group that does Phase 1 on a particular case goes only as far as this point
Phase 1 involves an external analysis of the industry, competition, market, and environment
Includes four tools
Porter’s Five-Forces Model
G.E. Matrix (including Industry Attractiveness vs. Competitive Strength)
CSF Analysis
Strategic Group Map (if applicable)
External
Situation Analysis

30. Financial Analysis
SAM does all the work for you after you have inputted income-statement and balance-sheet data for the given years
You have to select which kinds of financial data to present in order to give a reasonable and complete picture of the company’s recent performance and current financial condition
You end the presentation with a ‘financial conclusion’ slide
Use data from the previous charts shown to support your conclusion
Situation Analysis
Internal

31. Financial Charts Begin with revenues and NIAT
Show breakdowns of revenues or profits (by product line or geographical region), if available
Should include current or quick ratio (not both), D/E or D/A ratio (not both), and Z- or Z2-Score (not both)
In addition, especially for a smaller company
Does it have enough cash?
Are its receivables climbing?
Does it have too much invested in inventory?
Where D/A ratio > 100%, show that equity is negative
Any other aspect that is worth pointing out
Situation Analysis
Internal

32. Altman’s Z- and Z2-Scores
Z-score = 1.2X X X X X5
Z2-score = 6.5X X X X4a
X1 = WC/Total assets X2 = RE/Total assets
X3 = EBIT/Total assets X4 = Equity/Total debt
X5 = Sales/Total assets
Safe Zone
2.99
2.59
Gray Area
1.81
1.11
Manufacturing Companies
Bankrupt Zone
Non-Manufacturing Companies
Z-Score
Z2-Score
Internal
Situation Analysis

33. Financial Conclusion
The last sheet of the financial analysis part in SAMtw asks you to draw one of the following five conclusions about the company
Has been well managed and performing well, and is in good financial condition
Same as above except for one major bad thing . . .
Has had mixed results, indeterminate
Same as below except for one major good thing . . .
Has been poorly managed, is performing poorly, may be in serious trouble, should be bankrupt, etc.
And support your conclusions with numbers!
Internal
Situation Analysis

34. Financial Conclusion Example: Harley-Davidson (1988)
H-D has been performing very well and is financially in good condition
Motorcycle revenues grew an average 23.5%/yr from in a declining industry
NIAT grew 12.7% in 1988
NPM almost doubled from 1.7% in 1986 to 3.2% in 1988
D/E ratio declined 54.5% from 5.5 in 1987 to 2.3 in 1988
It has $52.3M in cash in 1988
Z-Score improved to 3.07 (safe zone) in 1988
Set off the conclusion in a different font and color to stand out. Summarize the supporting data in the order you showed the charts. Cite statistics.
Internal
Situation Analysis

35. Company Strengths Internal Situation Analysis
Core competencies Cost advantages
financial strengths Better advertising campaigns
Reputation with buyers Product innovation skills
Well-conceived programs Proven management
Access to economies of scale Ahead on the experience curve
Protected from competition Efficient manufacturing
Proprietary technology Superior technology skills
Financial analysis of recent company performance and condition is also a key component of Internal Company Analysis, and may reveal some strengths and weaknesses.
Don’t use generic strengths (as above), but be specific. Market leadership or increasing market share are never strengths.
Situation Analysis
Internal

36. Same notes as for ‘Strengths’ slide
Company Weaknesses
No clear strategic direction Falling behind in R&D
Obsolete facilities Product line too narrow
Sub-par profitability because Weak market image
Little or no managerial depth/talent Weak distribution network
Missing key skills/competencies Weak marketing skills
Poor implementation record Unable to finance strategies
Internal operating problems High relative costs
Poor product quality Worsening customer service
Deteriorating union relations Slow development of new products
Same notes as for ‘Strengths’ slide
Situation Analysis
Internal

37. Core Competence and Competitive Advantage
Remember to add a column for capabilities at left-hand side.
Criteria for Core Competence
Is the Is the Is the Is the capability capability capability capability valuable? Rare? costly to nonsubsti- Competitive Performance imitate? tutable? Consequences Implications
No No No No Competitive Below-average disadvantage returns
Yes No No Yes/No Competitive Average parity returns
Yes Yes No Yes/No Temporary Average advantage returns
Yes Yes Yes Yes Sustainable Above-average advantage returns
Internal
Situation Analysis

38. Opportunities (Concentration strategies)
Existing
Product Development
Markets
Only Product/Market Issues are Opportunities
Expanded
Market Development
New
Existing
Improved
New
Products
Internal
Situation Analysis

39. Threats Situation Analysis Internal
Entry of low-cost foreign competitors
Adverse shifts in foreign exchange rates and trade policies
Slower market growth
Adverse demographic changes
Costly regulatory requirements
Impending economic downturn
Growing bargaining power of buyers and suppliers
Changing buyer needs and tastes
Rising sales of substitute products
Legislation with adverse impact
Situation Analysis
Internal

40. TOWS Matrix Strengths Weaknesses Opportunities Threats
Use strengths to exploit opportunities
Seek opportunities that overcome/mitigate weaknesses
Threats
Use strengths to avoid/mitigate threats
Minimize weaknesses or avoid/mitigate threats (hard)
Situation Analysis
Internal

41. Scope of Phase 2
The group that does Phase 2 on a particular case goes only as far as this point
Phase 2 involves an internal analysis of the company, including financial-analysis charts, a financial conclusion, and a SWOT analysis
Includes four tools
Core-Competence Analysis
The TOWS Matrix
Value Analysis (not shown here) (if applicable)
SPACE Analysis (not shown here) (if applicable)
Situation Analysis
Internal

42. Key Strategic Issues A key strategic issue is a…
Future event or trend that may have a significant impact on the firm (e.g., deregulation of an industry, fate of the NAFTA trade agreement) and that should be closely monitored
Decision the firm is considering making that will have a strategic and dramatic impact on it (e.g., merging with another company, changing its strategy, focusing on international operations)
Any strategic plan must address these strategic issues for the simple reason that they constitute the most important problems and issues the company faces
Alternatives Analysis

43. Sources of Strategic Issues
Most critical external issues
* Competition
* Industry trends
* Market trends
* Other trends and threats
Most salient internal issues Strategic
* Financial problems Issues
* Weaknesses
Opportunities worth considering
Alternatives Analysis

44. Menu of Possible Strategies
Staying in the same business
Concentration – Product or market development
Vertical Integration – Forward or backward
Acquisition of or merger with a competitor
Harvest or be acquired
Retrenchment and Turnaround (including Bankruptcy Chapters 11, 13)
Low-cost leadership, differentiation, or focus
Strategic alliances, including joint ventures
Exiting the business
Liquidation (including Bankruptcy Chapter 7)
Entering another business
Diversification through acquisition – related or unrelated business
Internal diversification
Alternatives Analysis

45. Porter’s Generic Competitive Strategies
Competitive Advantage
Lower Cost Differentiation
Cost Leadership
Differen-tiation
Broad Target
Competitive
Scope
Cost Focus
Focused Differen-tiation
Narrow Target
Source: Michael E. Porter, Competitive Advantage, Free Press, 1985
Alternatives Analysis

46. Low-Cost Leadership and Differentiation – How They Work
Low-Cost Leadership Differentiation P
P P
C C C
Internal emphasis External emphasis
Focus on cost drivers Focus on customer needs
Don’t lower prices Don’t let costs rise
Alternatives Analysis

47. Coming up with Strategic Alternatives
The most difficult part of strategic planning
Requires a lot of thought and creativity
The challenge is to devise 2-4 alternatives (bundles)
The minimum is two
More than four is practically impossible
Must meet four criteria
Mutually exclusive (i.e., doing one means not being able to do the others)
Feasible (i.e., doable and internally consistent)
Lead to success (as defined by the company)
Address all strategic issues (or delete the ones not addressed)
Alternatives Analysis

48. Strategic Alternative Bundles Example: Harley-Davidson (1988)
#1—Expand #2—Broaden #3—Expand the Market the Product Line into Europe
Focus on older males Introduce three new Expand into Europe & women models
Design models to Acquire Buell and Trade shows and appeal to this market offer sport bike 100 roving bikers
Train dealers to Develop technolog. Create dealer network sell to this market advanced engine from scratch
Invest in and grow Maintain HR but Maintain HR but HR sales improve its sales improve its sales
Heavy advertising Heavy advertising Heavy advertising & promo campaign & promo campaign & promo campaign
Incr. prod. capacity & Incr. prod. capacity & Incr. prod. capacity & maintain high quality maintain high quality maintain high quality
Increase market share Increase market share Maintain U.S. share
Finance thru debt & cash Finance thru debt & cash Finance thru debt & cash
Alternatives Analysis

49. Choose the Best Alternative
Argue for which one is better or best
hard to do when all are equally good
The choice depends on how each alternative stacks up against selected criteria
Managers that will implement the strategy must be involved in deciding which alternative to pursue
Alternatives Analysis

50. Criteria for Choosing a Successful Strategy
Shareholder Value—Often used as the measure of the effectiveness of strategic planning
Revenues—Particularly appropriate when the firm wants to increase market share
Profitability—Important when earnings or cash flow have been flat or negative, or when the firm is highly leveraged
Investment Required—Does the firm have, or can it acquire, the resources it needs? Does it make sense to be acquired?
Degree of Risk—How certain is the firm to succeed if it undertakes this alternative? Is it risk-averse?
Alternatives Analysis

51. Criteria for Choosing a Successful Strategy (cont.)
Return on investment—ROI is another profitability measure
Breakeven point—The sooner the investment is recouped the better
Match with existing company culture—While it may be better to choose an alternative that does not require changing the culture, the culture may have to change to take advantage of a better alternative
Attainment of a core competence or competitive advantage— This is the secret of being competitive and attaining above-industry-average profits
Alternatives Analysis

52. Criteria for Choosing a Successful Strategy (cont.)
Timing—Is the timing right to implement a particular alternative? Is it better to implement now or later?
Strengthening its value proposition—the key to developing a revenue stream and loyal customers
Strengthening bargaining power—increasing bargaining power with either buyers or suppliers will likely increase profits
Alternatives Analysis

53. Positively Correlated
Two Types of Criterion
(Rate from 0 to +10)
(Rate from 0 to –10)
Positively Correlated
Revenues
Profits
Return on investment
Shareholder value
Gaining or extending a competitive advantage
Strengthening its value proposition
Strengthening bargaining power
Negatively Correlated
Investment required
Time to breakeven
Competitive retaliation
Culture change required
Riskiness
Alternatives Analysis

54. Criteria Matrix Example for Harley-Davidson (1988)
Alternatives Analysis

55. Recommendations Format for Short- and Long-Term Plans
Should include:
Specific measurable objectives to be achieved next year and in three years’ time
At least Revenues and NIAT
Perhaps one other that is important (optional)
Strategic Intent
Major programs to implement that will achieve the set objectives and implement the strategy
Trigger and contingency pairs -- what could go wrong (trigger) and what would the firm do differently if that happened (contingency)?

56. Triggers and Contingencies Criteria to meet…
Must be quantitatively expressed
The cause should be external
Contingencies…
Must address (alleviate) the trigger
Cannot renege on the chosen strategy
Must be something different from what the company is currently doing
Must be operational and implementable quickly (perhaps within 1-3 months)

57. Scope of Phase 3 Phase 3 ends at this point
The group will continually work at improving its list of strategic issues and bundles in class as Phases 1 and 2 are unfolding
It will then present its strategic issues and bundles for class discussion
We all understand it’s a “work in process”
Strive for understanding, not perfection
Include a criteria matrix showing your choice of a preferred bundle (the class may disagree)
Include short- and long-term recommendations
Alternatives Analysis

58. The Vision Statement What Do We Aspire to Be?
Typically created for five or ten years out
Can include numbers (objectives) or not
Typically created by the organization’s leader (sometimes by the top team)
Must be sold to the rest of the organization
Must be realistic (possible to attain) and hence worth striving for
Must know when it has been achieved

59. The Mission Statement How Should We Do Business? Our “Raison D'être”
Should encompass the company’s current business and future strategy
Should include its value proposition (products or services offered to which target market)
Should include what makes the company special
How it creates value in order to win and keep its customers’ business

60. Creating Vision/Mission Statements
One of the most challenging tasks leaders/managers undertake
Most don’t do it well—they consider it time wasted
Many are unable to think clearly enough and get too frustrated
If you cannot do it, you don’t know your business well enough
Leaders must get the commitment of the whole organization to the vision/mission statements
Key people should participate in its preparation
Should not be revised for several years, or until it no longer fits what the company is doing

61. When to Create Them?
After doing a strategic analysis
Because the strategy and direction of the company may change
Because you have been able to check whether the existing vision and mission statements need changing
Otherwise, the vision and mission statements essentially govern what the company does (or doesn’t do) next

62. That’s it, folks!
The whole process will come to life as you start to do the strategic analyses yourselves…