STRATAGIC ANALYSIS

MBA (Aus), ACMA (UK), ACMA (SL), CGMA, B B Marketing (Kelaniya)

Priyanka Darshana

Strategic Approach to the Business

Source : Chartered Institute of Management Accountants (CIMA-UK)

What is the main responsibility of the firmmanagement ?

To create and increase organizational value

(wealth maximization)

- If a PLC, increased share price

- Increased earning potential

- Increased profitability

- Increased cash generation

- Firm’s size

Creating value

Successful strategy is creating value

1. Continuously creating customer value

2. Firm value

3. Shareholder value

Value Creation

Service

Marketing & Sales

Outbound Logistics

Operations

Inbound LogisticsFirm

Infr

astr

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ure

Hu

man

Res

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Mgm

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Tech

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logi

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Pro

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Primary Activities

Support

Activitie

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The BasicValue Chain

Value Chains are part of a Total Value System

Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain

Strategic analysis

• The basic frame work: Strategy as a link between the firm and its environment

The firm • Goals and values • Resources and

capabilities • Structure and system

Strategy Micro and Macro

environmental changes

Strategic fit Fundamental of strategy as the link between the firm and its external environment is thenotion of strategic fit. For a strategy to be successful it must be consistent with the firmexternal environment and with its internal firm goals, resources and capabilities and thestructure

What do you analyze ?

• Firm’s Competencies

• Firm’s Environment

Strategic analysis

Strategic analysis

Analysis of firmGoals, values and

performance , analyzing

capabilities and resources

Analysis of macro , industry and competitive environment

Internal analysis External analysis

INTERNAL RESOURCES, CAPABILITIES, AND CORE

COMPETENCES

THE FIRM

Goals and

Values

Resources and

Capabilities

Structure and

Systems

THE MACRO

INDUSTRY

ENVIRONMENT

•Competitors

•Customers

•Suppliers

STRATEGYSTRATEGY

The

Firm-Strategy

Interface

The

Environment-Strategy

Interface

Strategy Analysis

STRATEGY

INDUSTRY KEY

SUCCESS FACTORSCOMPETITIVE

ADVANTAGE

ORGANIZATIONAL

CAPABILITIES

RESOURCESTANGIBLE INTANGIBLE HUMAN

•Financial

•Physical•Technology

•Reputation

•Culture

•Skills/know-how

•Capacity for

communication

& collaboration

•Motivation

The Links between Resources, Capabilities and Competitive Advantage

Resource-based strategy

The resource-based view (RBV) of strategy

asserts that the competitive

advantage and superior performance of an organisation is

explained by the distinctiveness of its

capabilities.

Resources and competences

• Resources are the assets that organisations have or can call upon (e.g. from partners or suppliers),that is, ‘what we have’ .

• Competences are the ways those assets are used or deployed effectively, that is, what we do well’.

Components of strategic capabilities

Threshold and distinctive capabilities

• Threshold capabilities arethose needed for anorganisation to meet thenecessary requirements tocompete in a given market andachieve parity withcompetitors in that market –‘qualifiers’.

• Distinctive capabilities things

that an organization does

particularly well relative to

competitors. (Selznick)

• – ‘winners’.

Core competences

Core competences are the set ofskills, activities and resourcesthat drive the competitiveadvantage

• deliver customer value

• differentiate a business from itscompetitors

• potentially, can be extended anddeveloped as markets change ornew opportunities arise.

Appraising Resources

RESOURCE CHARACTERISTICS INDICATORS

Financial Borrowing capacity, Profitability Debt/ Equity ratio

Internal funds generation, Efficiency, Credit rating

Tangible Net cash flow

Resources Physical Plant and equipment: Market value of size, location, technology fixed assets.

flexibility. Scale of plants

Land and buildings. Alternative uses for

Raw materials. fixed assets

Technology Patents, copyrights, know how No. of patents owned

R&D facilities. Royalty income

Intangible Technical and scientific R&D expenditure

Resources employees R&D staff

Reputation Brands. Customer loyalty. Company Brand equity

reputation (with suppliers, customers, Customer retention

government) Supplier loyalty

Human Training, experience, adaptability, Employee qualifications,

Resources commitment and loyalty of employees pay rates, turnover.

Firm’s CapabilitiesManagement skills , routines, leadership that deploy,

share and generate value form firm’s resources

• Research & Development (R&D)

• Marketing & Sales

• Manufacturing

• Logistics

• Reach / Distribution

• Leadership

Identifying Organizational Capabilities:

A Functional Classification

FUNCTION CAPABILITY EXEMPLARS

Corporate Financial management GE

Management Strategic control IBM, Samsung

Coordinating business units BP, P&G

Managing acquisitions

MIS Speed and responsiveness through Wal-Mart, Dell

rapid information transfer

R&D Research capability IBM

Development of innovative new products Apple, 3M

Manufacturing Efficient volume manufacturing MASS , Toyota

Continuous Improvement

Flexibility

Design Design Capability Apple, IKEA

Marketing Brand Management P&G

Quality reputation Johnson & Johnson

Responsiveness to market trends

Sales, Distribution Sales Responsiveness PepsiCo,

& Service Efficiency and speed of distribution Dell

Customer Service Singapore Airlines

Caterpillar

Analysis of the firm resources and capabilities through Value Chain

Porter's Value ChainUnderstanding How Value Is Created Within Organizations -1980

The Value

Chain

Value Creation = Market value of the output – Cost of it’s input

HOW ?

** Analysis on product line and NOT on Headquarters

HOW ?

Value Chain (Internal Resources

/Barriers)

Primary activitiesThere are five primary activities and they include all the actions that go into the creation of a business' offering.

1 Inbound Logistics

This is how materials and resources are gained from suppliers before the final product or service can be developed.

1. Operations

Operations are how the materials and resources are produced, resulting in a final product or service.

3. Outbound LogisticsOnce a product or service is finished, it needs to be distributed. Outbound logistics describes this delivery process.

4. Marketing and Sales

This is how your product or service is presented and sold to your ideal target market.

5. ServicesThis is the support a business provides for the customer which can include support and training for the product, warranties, and guarantees.

Support Activities

Support activities help the

competitors, and they include:

primary activities in creating an advantage over

1. Firm Infrastructure

This entails all the management, financial, and legal systems a business has in place to

make business decisions and effectively manage resources.

2. Human Resource Management

Human resource management encompasses all the processes and systems involved in

managing employees and hiring new staff.

3. Technology Development

Technology development helps a business innovate, increase efficiency or decrease

production costs.

4. Procurement

This is how the resources and materials for a product are sourced and suppliers are

found. The goal is to find quality supplies that fit the business' budget.

Integrated Value Chain / Value system within the firm

CASE 06 & 07

Diagnosing the firm current strategy

Strategy formulation

Assess the current situation

Identify the current strategy of the firm and assess how well that strategy is doing in terms of financial performance

Identify the inadequacies of firm value drivers and reason for deviations-Internally driven or external driven

Strategic or operational level actions

Income statement for Ashanti plc for the year ending 31 March 2011

2010 2011

£m £m

Revenue (Note 2) 2,240 2,681

Cost of sales (Note 3) -1,745 -2,272

Gross profit 495 409

Operating expenses -252 -362

Operating profit 243 47

Interest payable -18 -32

Profit before taxation 225 15

Tax -60 -4

Profit for the year 165 11

Notes:

2. All sales and purchases are made on credit3. The cost of sales figure can be analyzed as follows:

2010 (£m) 2011 (£m)

Opening inventories 241 300

Purchases 1,804 2,378

2,045 2,678

Closing inventories -300 -406

Cost of sales 1,745 2,272

Balance sheet of Ashanti plc., as at 31 March 2011

2010 (£m) 2011 (£m)

Non-current assets

Property, plant and equipment (at cost less

depreciation)

Land and buildings 381 427

Fixtures and fittings 129 160

510 587

Current assets

Inventories at cost 300 406

Trade receivables 240 273

Cash at bank 4 -

544 679

Total assets 1,054 1,266

Equity

£0.50 ordinary shares (Note 1) 300 300

Retained earnings 263 234

563 534

Non-current liabilities

Borrowings - 9% loan notes (secured) 200 300

Current liabilities

Trade payables 261 354

Tax due 30 2

Short-term borrowings (all bank overdraft) - 76

291 432

Total equity and liabilities 1,054 1,266

Notes:1. The market value of the shares of the business at the end of the year was £2.50 for 2010, and £1.50 for 2011.4. A dividend of £40m had been paid to the shareholders in respect to each of the years.5. The business employed 13,995 at 31 March 2010 and 18,623 at 31 March 2011.6. The business expanded its capacity during 2010 by setting up a new warehouse and distribution center in the south of Wales

NOKIA Financial Performance :Reflection of strategic failure

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Slide 1.34

SWOT Analysis

• SWOT analysis is a process that identifies the strengths, weaknesses, opportunities and threats of an

organization. Specifically, SWOT is a basic, analytical framework that assesses what an organization can and

cannot do, as well as its potential opportunities and threats.

• A SWOT analysis takes information from an environmental analysis and separates it into internal

strengths and weaknesses, as well as its external opportunities and threats.

Internal

Capabilities & Resources Lack of Resources

Competencies Gaps in Capabilities

Value Creation Value Erosion

STRENGTHS WEAKNESSES

SWOT

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Slide 1.36

Turning firm SWOT analysis in to actionable

strategies -TOWS Analysis

• Extension of the SWOT analysis is TOWS and can be presented as TOWS matrix analysis to match the

internal factors with external factors of the business to define the strategic direction.

Sustainable Competitive Advantages

(SCAs)

A long-term competitive advantage that is not

easily duplicable or surpassable by competitors.

VRIN framework (Barny 1991)

V = Value

R = Rare

I = Costly to Imitate

N= Non substitutability