Chapter Two – The Three Strategy Making Tasks

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Chapter Two – The Three Strategy Making Tasks Powered By Docstoc
					Strategic Analysis




 Company Name




     Karl Knapp
     03/12/2000
Table of Contents
THE STRATEGIC MANAGEMENT PROCESS ....................................................................................................3
  THE FIVE TASKS OF STRATEGIC MANAGEMENT .........................................................................................................3
  THE FACTORS THAT SHAPE A COMPANY’S STRATEGY ...............................................................................................4
  TESTS OF A WINNING STRATEGY ................................................................................................................................4
INDUSTRY AND COMPETITIVE ANALYSIS ......................................................................................................5
  QUESTION 1: WHAT ARE THE INDUSTRY’S DOMINANT ECONOMIC FEATURES? .........................................................5
  QUESTION 2: WHAT IS COMPETITION LIKE AND HOW STRONG ARE EACH OF THE COMPETITIVE FORCES? ...............6
    Competitive Force .................................................................................................................................................6
    Analysis..................................................................................................................................................................6
  QUESTION 3: WHAT ARE THE DRIVERS OF CHANGE IN THE INDUSTRY AND WHAT IMPACT WILL THEY HAVE? .......8
    The Most Common Driving Forces .......................................................................................................................8
  QUESTION 4: WHICH COMPANIES ARE IN THE STRONGEST/WEAKEST POSITIONS? ....................................................9
  QUESTION 5: WHAT STRATEGIC MOVES ARE RIVALS LIKELY TO MAKE NEXT – OBJECTIVES AND STRATEGIES? ... 10
    Evaluating Who the Industry’s Major Players Are Going to Be ......................................................................... 10
    Predicting Competitors’ Next Moves ................................................................................................................... 10
  QUESTION 6: WHAT ARE THE KEY FACTORS FOR COMPETITIVE SUCCESS? ............................................................. 11
  QUESTION 7: IS THE INDUSTRY ATTRACTIVE AND WHAT ARE ITS PROSPECTS FOR ABOVE-AVERAGE
  PROFITABILITY? ....................................................................................................................................................... 12
EVALUATING COMPANY RESOURCES AND COMPETITIVE CAPABILITIES ...................................... 13
  QUESTION 1: HOW WELL IS THE PRESENT STRATEGY WORKING? ........................................................................... 13
  QUESTION 2: WHAT ARE THE COMPANY’S RESOURCE STRENGTHS AND WEAKNESSES AND ITS EXTERNAL
  OPPORTUNITIES AND THREATS? ............................................................................................................................... 14
    Identifying Company Competencies and Capabilities ......................................................................................... 16
  QUESTION 3: ARE THE COMPANY’S PRICES AND COSTS COMPETITIVE?................................................................... 17
    Strategic Cost Analysis and Value Chains........................................................................................................... 17
    Strategic Options for Achieving Cost Competitiveness ....................................................................................... 18
  QUESTION 4: HOW STRONG IS THE COMPANY’S COMPETITIVE POSITION? ............................................................... 19
    The Signs of Strength and Weakness in a Company’s Competitive Position ....................................................... 19
    Competitive Strength Assessments ....................................................................................................................... 19
  QUESTION 5: WHAT STRATEGIC ISSUES DOES THE COMPANY FACE? ...................................................................... 20
STRATEGY AND COMPETITIVE ADVANTAGE ............................................................................................. 21
  THE FIVE GENERIC COMPETITIVE STRENGTHS ......................................................................................................... 21
  DISTINCTIVE FEATURES OF GENERIC COMPETITIVE STRATEGIES ............................................................................. 22
EVALUATING THE STRATEGIES OF DIVERSIFIED COMPANIES............................................................ 23
  STEP 1: IDENTIFYING THE PRESENT CORPORATE STRATEGY .................................................................................... 23
  STEP 2: EVALUATING INDUSTRY ATTRACTIVENESS ................................................................................................. 23
  STEP 3: EVALUATING THE COMPETITIVE STRENGTH OF EACH OF THE COMPANY’S BUSINESS UNITS ...................... 23
  STEP 4: NINE CELL MATRIX TO SIMULTANEOUSLY PORTRAY INDUSTRY ATTRACTIVENESS & COMPETITIVE
  STRENGTH ................................................................................................................................................................ 24
  STETP 5: STRATEGIC FIT ANALYSIS: CHECKING FOR COMPETITIVE ADVANTAGE POTENTIAL ................................. 25
  STEP 6: RESOURCE FIT ANALYSIS: DETERMINING HOW WELL THE FIRM’S RESOURCES MATCH BUSINESS UNIT
  REQUIREMENTS ........................................................................................................................................................ 26
    Checking Financial Resource Fit: Cash Hog and Cash Cow Businesses ........................................................... 26
    Checking Competitive and Managerial Resource Fits ........................................................................................ 26
  STEP 7: RANKING THE BUSINESS UNITS ON THE BASIS OF PAST PERFORMANCE AND FUTURE PROSPECTS .............. 27
  STEP 8: DECIDING ON RESOURCE ALLOCATION PRIORITIES AND A GENERAL STRATEGIC DIRECTION FOR EACH
  BUSINESS UNIT......................................................................................................................................................... 27
  STEP 9: CRAFTING A CORPORATE STRATEGY ........................................................................................................... 27




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The Strategic Management Process
A company’s strategy is the “game plan” management has for positioning the company in its chosen market arena,
competing successfully, pleasing customers, and achieving good business performance.

The Five Tasks of Strategic Management
   1. Forming a strategic vision of what the company’s future business makeup will be and where the
       organization is headed – so as to provide long-term direction, delineate what kind of enterprise the
       company is trying to become, and infuse the organization with a sense of purposeful action.
   2. Setting objectives – converting the strategic vision into specific performance outcomes for the company to
       achieve.
   3. Crafting a strategy to achieve the desired outcomes.
   4. Implementing and executing the chosen strategy efficiently and effectively.
   5. Evaluating performance and initiating corrective adjustments in vision, long-term direction, objectives,
       strategy, or implementation in light of actual experience, changing conditions, new ideas, and new
       opportunities.

                                                                                                                Evaluating
                                                                                                               Performance
                    Developing                                                                                 , Monitoring
                                                                  Crafting a            Implement-
                    a Strategic                                                                                    New
                                            Setting              Strategy to              ing and
                    Vision and                                                                                 Developmen
                                           Objectives            Achieve the             Executing
                     Business                                                                                     ts and
                                                                 Objectives            the Strategy
                      Mission                                                                                    Initiating
                                                                                                                Corrective
                                                                                                               Adjustments




                                                                  Improve/              Improve/                Recycle to
                     Revise as              Revise as
                                                                 Change as             Change as               1,2,3 or 4 as
                      Needed                 Needed
                                                                   Needed                Needed                  Needed




                                                             BASIC COMPETITIVE
                                                             APPROACH
                                                             Ÿ Low cost/Low price
                                                                                             Moves made to respond
                                                             Ÿ Differentiation (what
                                                                                             to changing industry
                                                               kind?)
                                                                                             conditions and other
                                                             Ÿ Focus on a specific
                                                                                             emerging developments
                                  Collaborative                market niche
                                                                                             in the external
                                  partnerships and                                           environment
                                  strategic alliances with
                                  others

                                                                                                 Moves to secure a
                                                                                                 competitive advantage
                                                                    BUSINESS                     (accelerate R&D, improve
                                                                    STRATEGY                     product design, add new
                                                                 (The action plan                features, introduce new
                                                                  for managing a                 technologies, boost quality
                                                                   single line of                or service, outcompete rivals
                                                                     business.)                  on the basis of superior
                                      K UIL ES
                                       EY D O
                                        B R




                      Manufacturing                                                              resources and competitive
                                         FU CO UR AP




                                                                                                 capabilities)
                                           N M CE AB




                      & Operations
                                            C P S I
                                             TI E T L
                                               O TI R IT
                                                N TI E IE




                         Marketing,
                                                 A V N S
                                                  L E G
                                                   C




                         Promotion and
                                                    ST LY TH




                                                                                          Geographic market
                                                      R V S




                         Distribution
                                                       A A A




                                                                                          coverage and degree of
                                                        TE LU N




                                                                                          vertical integration (full,
                                                          G A D




                             R&D/Technology
                                                           IE B




                                                                                          partial)
                                                             S LE
                                                              TO




                                  Human Resources &
                                  Labor Relations

                                         Financial Approaches




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The Factors That Shape a Company’s Strategy

                           External Factors

                Societal,
                political,      Competitive
               regulatory,       conditions      Company
                    and         and overall      opportuni-
               community          industry        ties and
               citizenship       attractive-       threats
              consideratio          ness
                     ns
                                                                     Conclusions
                                                                       concerning
                                                                                      Identification    Crafting a
                                                                     how internal
                                                                                           and         strategy that
                 A mix of considerations that determine a            and external
                                                                                      evaluation of       fits the
                      company's strategic situation                  factors stack
                                                                                         strategy         overall
                                                                         up; their
                                                                                       alternatives      situation
                                                                      implications
                                                                       for strategy
                  Company
                                  Personal
                  resource
                                 ambitions,
                  strengths,
                                  business         Shared
                    weak-
                                philosophy       values and
                   nesses,
                                and ethical       company
                 competen-
                                principals of      culture
                   cies and
                                    key
                 competitive
                                 executives
                 capabilities


                           Internal Factors

Tests of a Winning Strategy
Three tests can be used to evaluate the merits of one strategy over another and to gauge how good a strategy is:
     1. The Goodness of Fit Test: A good strategy is tailored to fit the company’s internal and external situation –
          without tight situational fit, there’s real question whether a strategy appropriately matches the requirements
          for market success.
     2. The Competitive Advantage Test: A good strategy leads to sustainable competitive advantage. The bigger
          the competitive edge that a strategy helps build, the more powerful and effective it is.
     3. The Performance Test: A good strategy boosts company performance. Two kinds of performance
          improvements are the most telling fo a strategy’s caliber: gains in profitability and gains in the company’s
          competitive strength and long-term market position.
Strategic options that clearly come up short on one or more of these tests are candidates to be dropped from further
consideration. The strategic option that best meets all three tests can be regarded as the best or most attractive
strategic alternative.
There are of course some additional criteria for judging the merits of a particular strategy: completeness and
coverage of all the bases, internal consistency among all the pieces of strategy, clarity, the degree of risk involved,
and flexibility.




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Industry and Competitive Analysis
Question 1: What Are the Industry’s Dominant Economic Features?
As a working definition, we use the word industry to mean a group of firms whose products have so many of the same attributes that they
compete for the same buyers. The factors to consider in profiling an industry’s economic traits are:
Economic Feature                                                             Strategic Importance
Market size
Scope of competitive rivalry (local, regional, national, international, or
global)
Market growth rate and where the industry is in the growth cycle (early
development, rapid growth and takeoff, early maturity, mature,
saturated and stagnant, declining)
Number of rivals and their relative sizes – is the industry fragmented
with many small companies or concentrated and dominated by a few
large companies?
The number of buyers and their relative sizes
The prevalence of backward and forward integration
The types of distribution channels used to access buyers
The pace of technological change in both production process
innovation and new product introductions
Whether the product(s)/service(s) of rival firms are highly
differentiated, weakly differentiated, or essentially identical
Whether companies can realize economies of scale in purchasing,
manufacturing, transportation, marketing, or advertising
Whether certain industry activities are characterized by strong learning
and experience effects such that unit costs decline as cumulative output
(and thus the experience of “learning by doing”) grows
Whether high rates of capacity utilization are crucial to achieving low-
cost production efficiency
Resource requirements and the ease of entry and exit
Whether industry profitability is above/below par




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Question 2: What Is Competition Like and How Strong Are Each of the Competitive Forces?

Competitive Force                                                           Analysis
Rivalry Among Competing Sellers
The strongest of the five competitive forces is usually the jockeying
for position and buyer favor that goes on among rivals firms. The
intensity of rivalry among competing sellers is a function of how
vigorously they employ such tactics as lower prices, snazzier features,
expanded customer services, longer warranties, special promotions,
and new product introductions.
Competitive Force of Potential Entry
How serious the competitive threat of entry is in a particular market
depends on two classes of factors: barriers to entry and the expected
reaction of incumbent firms to new entry. The best test of whether
potential entry is a strong or weak competitive forces is to ask if the
industry’s growth and profit prospects are attractive enough to induce
additional entry. There are several types of entry barriers:
    Economies of scale
    Inability to gain access to technology and specialized know-how
    The existence of learning and experience curve effects
    Brand preferences and customer loyalty
    Resource requirements
    Cost disadvantages independent of size - These can include
     access to the best and cheapest raw materials, patents and
     proprietary technology, the benefits of learning and experience
     curve effects, existing plants built and equipped years earlier at
     lower costs, favorable locations, and lower borrowing costs.
    Access to distribution channels
    Regulatory policies
    Tariffs and international trade restrictions
Competitive Pressures from Substitute Products
Just how strong the competitive pressures are from substitute products
depends on three factors:
    Whether attractively priced substitutes are available
    How satisfactory the substitutes are in terms of quality,
     performance and other relevant attributes
    The ease with which buyers can switch to substitutes
Another determinant of the strength of competition from substitutes is
how difficult or costly it is for the industry’s customers to switch to a
substitute.
The Power of Suppliers
Depends on market conditions in the supplier industry and the
significance of the item they supply. Supplier-related competitive
pressures tend to be minimal whenever the items supplied are standard
commodities available on the open market from a large number of
suppliers with ample capability.
Suppliers also tend to have less leverage to bargain over price and
other terms of sale when the industry they are supplying is a major
customer. In such cases, the well-being of suppliers is closely tied to
the well-being of their major customers.
On the other hand, when the item accounts for a sizable fraction of the
costs of an industry’s product, is crucial to the industry’s production
process, and/or significantly affects the quality of the industry’s
product, suppliers have great influence on the competitive process.
Suppliers are also more powerful when they can supply a component
more cheaply than industry members can make it themselves. In such
situations, the bargaining position of suppliers is strong until the
volume of parts a user needs becomes large enough for the user to
justify backward integration into self-manufacture of the component.
There are a couple of other instances in which the relationship between
industry members and suppliers is a competitive force. One is when



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suppliers, for one reason or another, cannot provide items of high or
consistent quality. A second is when one or more industry members
form close working relationships with key suppliers in an attempt to
secure lower prices, better quality or more innovative components,
just-in-time deliveries, and reduced inventory and logistics costs; such
benefits can translate into competitive advantage for industry members
who do the best job of managing their relationships with key suppliers.
The Power of Buyers
Buyers have substantial bargaining leverage in a number of situations.
The most obvious is when buyers are large and purchase much of the
industry’s output. Typically, purchasing in large quantities gives a
buyer enough leverage to obtain price concessions and other favorable
terms. Retailers often have negotiating leverage in purchasing products
because of manufacturers’ need for broad retain exposure and
favorable shelf space. “Prestige” buyers have a degree of clout in
negotiating with sellers because a seller’s reputation is enhanced by
having prestige buyers on its customer list.
There are other circumstances where buyers may have some degree of
bargaining leverage:
    If buyers’ costs of switching to competing brands or substitutes
     are relatively low.
    If the number of buyers is small.
    If buyers are well informed about sellers’ products, prices and
     costs.
    If buyers pose a credible threat of backward integrating into the
     business of sellers.
    If buyers have discretion in whether they purchase the product.
One last point: all buyers of an industry’s product are not likely to
have equal degrees of bargaining power with sellers, and some may be
less sensitive than others to price, quality or service.




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Question 3: What Are the Drivers of Change in the Industry and What Impact Will They Have?
The most dominant forces are called driving forces because they have
the biggest influence on what kinds of changes will take place in the
industry’s structure and environment. Driving forces analysis has two
steps: identifying what the driving forces are and assessing the impact
they will have on the industry.

The Most Common Driving Forces
    Changes in the long-term industry growth rate
    Changes in who buys the product and how they use it
    Product innovation
    Technological change
    Marketing innovation
    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 differentiated products instead of
     a commodity product (or for a more standardized product instead
     of strongly differentiated products).
    Regulatory influences and government policy changes
    Changing societal concerns, attitudes and lifestyles
    Reductions in uncertainty and business risk
While many forces of change may be a work in a given industry, no
more than three or four are likely to qualify as driving forces in the
sense that they will act as the major determinants of why and how the
industry is changing. Thus, strategic analysts must resist the temptation
to label everything they see changing as driving forces; the analytical
task is to evaluate the forces of industry and competitive change
carefully enough to separate major factors from minor ones.




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Question 4: Which Companies Are in the Strongest/Weakest Positions?
A strategic group consists of those rival firms with similar competitive approaches and positions in the market. The procedure is straightforward:
1.   Identify the characteristics that differentiate firms in the industry – typical variables are price/quality range (high, medium, low), geographic
     coverage (local, regional, national, global), degree of vertical integration (none, partial, full), product line breadth (wide, narrow), use of
     distribution channels (none, some, all), and degree of service offered (no-frills, limited, full service).
2.   Plot the firms on a two-variable map using pairs of these differentiating characteristics.
3.   Assign firms that fall in about the same strategy space to the same strategic group.
4.   Draw circles around each strategic group, making the circles proportional to the size of the group’s respective share of total industry sales
     revenues.
Guidelines for mapping the positions of strategic groups:
    The two variables selected as axes for the map should not be highly correlated; if they are, the circles on the map will fall along a diagonal
     and strategy makers will learn nothing.
    The variables chosen as axes for the map should expose big differences in how rivals position themselves to compete. This means analysts
     must identify the characteristics that differentiate rival firms and use these differences as variables for the axes and as the basis for deciding
     which firm belongs in which strategic group.
    The variables used as axes don’t have to be either quantitative or continuos; rather, they can be discrete variables or defined in terms of
     distinct classes and combinations.
    Drawing the sizes of the circles on the map proportional to the combined sales of the firms in each strategic group allows the map to reflect
     the relative sizes of each strategic group.
    If more than two good competitive variables can be used as axes for the map, several maps can be drawn to give different exposures to the
     competitive positioning relationships present in the industry’s structure.

                                       High
                                                   Small        National, Regional,
                                                Independent      and Local Guild or         Prestige
                                                   Guild          "Fine Jewelery"             Dept
                                                  Jewelers             Stores                Stores
                                                                 (about 10,000 firms        Nordstro                   Upscale
                                                               including Tiffany's and        m's                        Dept
                                                                       Cartier)                                         Stores
                                                                                                                       Parisian
                Price/Quality/Image




                                                          National Jewelery
                                                               Chains
                                                            Carlyle & Co.
                                                               Gordon's
                                                                                                                       Chains
                                                           Local Jewelers
                                      Medium                (about 10,000
                                                                                                                      JC Penney
                                                                                                                        Sears
                                                                stores)         Credit
                                                                               Jewlers
                                                                                Kay's
                                                                               Busch's




                                                                                           Catalog                    Discou
                                                                                         Showrooms                     nters
                                                                                         Service Mrch                 Kmart
                                                                                          Off-Price
                                                                                          Retailers
                                                                                          Marshall's



                                       Low
                                               Specialty Jewelers Full-line Jewlers      Limited-category         Broad-category
                                                (gold, diamonds,  (gold, diamonds,         Merchandise             Merchandise
                                                    watches)      china and crystal,        Retailers                Retailers
                                                                   silver, watches,
                                                                         gifts)
                                                              Product Line/Merchandise Mix




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Question 5: What Strategic Moves Are Rivals Likely to Make Next – Objectives and Strategies?
Competitive    Strategic Intent Market Share     Competitive      Strategy        Competitive
Scope                           Objective        Position /       Posture         Strategy
                                                 Situation
   Local            Be the dominant       Aggressive            Getting stronger;       Mostly offensive    Striving for low
   Regional          leader                 expansion via           on the move            Mostly defensive     cost leadership
   National         Overtake the           both acquisition      Well-entrenched;        A combination of    Mostly focusing
   Multi-country     present industry       and internal            able to maintain        offense and          on a market niche
   Global            leader                 growth                  its present             defensive           High end
                     Be among the          Expansion via           position               Aggressive risk-    Low end
                      industry leaders       internal growth       Stuck in the             taker               Geographic
                      (top 5)                (boost market           middle of the          Conservative        Buyers with
                     Move into the top      share at the            pack                    follower             special needs
                      10                     expense of rival      Going after a                                Other
                     Move up a notch        firms)                  different market                            Pursuing
                      or two in the         Expansion via           position (trying to                          differentiation
                      industry rankings      acquisition             move from a                                  based on
                     Overtake a            Hold on to              weaker to a                                 Quality
                      particular rival       present share (by       stronger position)                          Service
                      (not necessarily       growing at a rate     Struggling; losing                           Technological
                      the leader)            equal to the            ground                                       superiority
                     Maintain position      industry average)     Retrenching to a                             Breadth of
                     Just survive          Give up share if        position that can                            product line
                                             necessary to            be defended                                 Image and
                                             achieve short-
                                                                                                                  reputation
                                             term profit
                                             objectives (stress                                                  Move value for
                                                                                                                  the money
                                             profitability, not
                                             volume)                                                             Other attributes




Evaluating Who the Industry’s Major Players Are Going to Be
Major players.

Predicting Competitors’ Next Moves
Next moves.




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Question 6: What Are the Key Factors for Competitive Success?
Key success factors concern what every industry member must be competent at
doing or concentrate on achieving in order to be competitively and financially
successful. The answers to three questions help identify an industry’s KSFs:
      On what basis do customers choose between the competing brands of
       sellers?
      What must a seller do to be competitively successful – what resources and
       competitive capabilities does it need?
      What does it take for sellers to achieve a sustainable competitive
       advantage?
Technology Related KSFs
      Scientific research expertise (important in such fields as pharmaceuticals,
       medicine, space exploration, other “high-tech” industries.
      Technical capability to make innovative improvements in production
       processes
      Product innovation capability
      Expertise in a given technology
      Capability to use the Internet to disseminate information, take orders,
       deliver products or services
Manufacturing Related KSFs
      Low-cost production efficiency (achieve scale economies, capture
       experience curve effects)
      Quality of manufacturer (fewer defects, less need for repairs)
      High utilization of fixed assets (important in capital intensive/high fixed-
       cost industries)
      Low-cost plant locations
      Access to adequate supplies of skilled labor
      High labor productivity (important for items with high labor content)
      Low-cost product design and engineering (reduces manufacturing costs)
      Flexibility to manufacture a range of models and sizes/take care of custom
       orders
Distribution Related KSFs
      A strong network of wholesale distributors/dealers (or electronic
       distribution capability via the Internet)
      Gaining ample space on retailer shelves
      Having company owned retail outlets
      Low distribution costs
      Fast delivery
Marketing Related KSFs
      Fast, accurate technical assistance
      Courteous customer service
      Accurate filling of buyer orders (few back orders or mistakes)
      Breadth of product line and product selection
      Merchandising skills
      Attractive styling/packaging
      Customer guarantees and warranties (important in mail-order retailing,
       big-ticket purchases, new product intros)
      Clever advertising
Skills Related KSFs
      Superior workforce talent (important in professional services like
       accounting and investment banking)
      Quality control know how
      Design expertise (important in fashion and apparel industries and often of
       the keys to low-cost manufacture)
      Expertise in a particular technology
      An ability to develop innovative products and product improvements
      An ability to get newly conceived products past the R&D phase and out
       into the market very quickly
Organizational Capability
      Superior information systems (important in airline travel, car rental, credit
       card and lodging industries)
      Ability to respond quickly to shifting market conditions (streamlined
       decision making, short lead times to bring new products to market)
      Superior ability to employ the Internet and other aspects of electronic
       commerce to conduct business
      More experience and managerial know how
Other Types of KSFs
      Favorable image/reputation with buyers
      Overall low cost (not just in manufacturing)
      Convenient locations (important in many retailing businesses)
      Pleasant, courteous employees in all customer contact positions
      Access to financial capital (important in newly emerging industries with
       high degrees of business risk and in capital-intensive industries)
     Patent protection




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Question 7: Is the Industry Attractive and What Are Its Prospects for Above-Average Profitability?
The final step of industry and competitive analysis is to use the
answers to the previous six questions to draw conclusions about the
relative attractiveness or unattractiveness of the industry, both near
term and long term. Important factors for company managers to
consider include:
    The industry’s growth potential
    Whether competition currently permits adequate profitability and
     whether competitive forces will become stronger or weaker
    Whether industry profitability will be favorably or unfavorably
     impacted by the prevailing driving forces
    The company’s competitive position in the industry and whether
     its position is likely to grow stronger or weaker
    The company’s potential to capitalize on the vulnerabilities of
     weaker rivals
    Whether the company is insulated from, or able to defend
     against, the factors that make the industry unattractive
    How well the company’s competitive capabilities match the
     industry’s key success factors
    The degrees of risk and uncertainty in the industry’s future
    The severity of problems/issues confronting the industry as a
     whole
    Whether continued participation in this industry adds to the
     firm’s ability to be successful in other industries in which it may
     have interests
As a general proposition, if an industry’s overall profit prospects are
above average, the industry can be considered attractive. However, it is
a mistake to think of industries as being attractive or unattractive to all
industry participants and all potential entrants. Attractiveness is
relative, not absolute, and conclusions one way or the other are in the
eye of the beholder – industry attractiveness always has to be appraised
from the standpoint of a particular company.
An assessment that the industry is fundamentally attractive suggests
that current industry participants employ strategies that strengthen their
long-term competitive positions in the business, expanding sales
efforts and investing in additional facilities and capabilities as needed.
If the industry and competitive situation is relatively unattractive, more
successful industry participants may choose to invest cautiously, look
for ways to protect their long-term competitiveness and profitability,
and perhaps acquire smaller firms if the price is right; over the longer
term, strong companies may consider diversification into more
attractive businesses. Weak companies in unattractive industries may
consider merging with a rival to bolster market share and profitability
or, look for diversification opportunities.




March 12, 2000                                   8c1e9cc8-0b9b-4c5a-b3dc-1074f834905e.doc   12 of 28
Evaluating Company Resources and Competitive Capabilities
Question 1: How Well Is the Present Strategy Working?
In evaluating how well a company’s present strategy is working, a
manager has to start with what the strategy is. The first thing to pin
down is the company’s competitive approach – whether it is (1)
striving to be a low-cost leader or stressing ways to differentiate its
product offering and (2) concentrating its efforts on serving a broad
spectrum of customers or a narrow market niche. Another strategy
defining consideration is the firm’s competitive scope within the
industry – how many stages of the industry’s production-distribution
chain it operates in (one, several, or all), what its geographic market
coverage is, and the size and makeup of its customer base. The
company’s functional strategies in production, marketing, finance,
human resources, information technology, new product innovation,
and so on further characterize company strategy.
The best quantitative evidence of how well a company’s strategy is
working comes from studying the company’s recent strategic and
financial performance and seeing what story the numbers tell about the
results the strategy is producing. The two best empirical indicators of
whether a company’s strategy is working well are (1) whether the
company is achieving its stated financial and strategic objectives and
(2) whether it is an above-average industry performer.
It is nearly always feasible to evaluate the performance of a company’s
strategy by looking at:
          Whether the firm’s market share ranking in the industry is
           rising, stable, or declining
          Whether the firm’s profit margins are increasing or
           decreasing and how large they are relative to rival firm’s
           margins
          Trends in the firm’s net profits, return on investment, and
           economic value added and how these compare to the same
           trends in profitability for other companies in the industry
          Whether the company’s overall financial strength and credit
           rating is improving or on the decline
          Trends in the company’s stock price and whether the
           company’s strategy is resulting in satisfactory gains in
           shareholder value (relative to the MVA gains of other
           companies in the industry)
          Whether the firm’s sales are growing faster or slower than
           the market as a whole
          The firm’s image and reputation with its customers
          Whether the company is regarded as a leader in technology,
           product innovation, product quality, customer service, or
           other relevant factor on which buyers base their choice of
           brands
The stronger a company’s current overall performance, the less likely
the need for radical changes in strategy. Weak performance is almost
always a sign of weak strategy or weak execution or both.




March 12, 2000                                   8c1e9cc8-0b9b-4c5a-b3dc-1074f834905e.doc   13 of 28
Question 2: What Are the Company’s Resource Strengths and Weaknesses and Its External
Opportunities and Threats?
Company Strengths & Resource Capabilities
A strength is something a company is good at doing or a characteristic
that gives it enhanced competitiveness. A strength can take any of
several forms:
    A skill or important expertise – low-cost manufacturing know-
     how, technological know-how, a proven track record in defect-
     free manufacture, expertise in providing consistently good
     customer service, skills in developing innovative products,
     excellent mass merchandising skills, or unique advertising and
     promotional know-how.
    Valuable physical assets – state of the art plants and equipment,
     attractive real estate locations, worldwide distribution facilities,
     natural resource deposits, or cash on hand.
    Valuable human assets – an experienced and capable workforce,
     talented employees in key areas, motivated employees,
     managerial know-how, or the collective learning and know-how
     embedded in the organization and built up over time.
    Valuable organizational assets – proven quality control systems,
     proprietary technology, key patents, mineral rights, a base of
     loyal customers, a strong balance sheet and credit rating, a
     company intranet for accessing and exchanging information both
     internally and with suppliers and key customers, computer-
     assisted design and manufacturing systems, systems for
     conducting business on the World Wide Web, or e-mail
     addresses for many or most of the company’s customers.
    Valuable intangible assets – brand name image, company
     reputation, buyer goodwill, a high degree of employee loyalty, or
     a positive work climate and organizational culture.
    Competitive capabilities – short development times in bringing
     new products to market, build to order manufacturing capability,
     a strong dealer network, strong partnerships with key suppliers,
     an R&D organization with the ability to keep the company’s
     pipeline full of innovative new products, organizational agility in
     responding to shifting market conditions and emerging
     opportunities, or state of the art systems for doing business via
     the Internet.
    A achievement or attribute that puts the company in a position
     of market advantage – low overall costs, market share
     leadership, having a better product, wider product selection,
     stronger name recognition, or better customer service.
    Alliances or cooperative ventures – partnerships with others
     having expertise or capabilities that enhance the company’s own
     competitiveness.
Company Weaknesses & Resource Deficiencies
A weakness is something a company lacks or does poorly (in
comparison to others) or a condition that puts it at a disadvantage. A
company’s internal weaknesses can relate to:
    No clear strategic direction
    Obsolete facilities
    A weak balance sheet; burdened with too much debt
    Higher overall unit costs relative to key competitors
    Missing some key skills or competencies/lack of management
     depth
    Subpar profitability because…
    Plagued with internal operating problems
    Falling behind in R&D
    Too narrow a product line relative to rivals
    Weak brand image or reputation
    Weaker dealer or distribution network than key rivals
    Subpar marketing skills relative to rivals
    Short on financial resources to fund promising initiatives
    Lots of underutilized plant capacity
    Behind on product quality



March 12, 2000                                  8c1e9cc8-0b9b-4c5a-b3dc-1074f834905e.doc   14 of 28
Identifying a Company’s Market Opportunities
Managers can’t properly tailor strategy to the company’s situation
without first identifying each company opportunity, appraising the
growth and profit potential each one holds, and crafting strategic
initiatives to capture the most promising of the company’s market
opportunities.
In appraising a company’s market opportunities and ranking their
attractiveness, managers have to guard against viewing every industry
opportunity as a company opportunity. Wise strategists are alert to
when a company’s resource strengths and weaknesses make it better
suited to pursuing some market opportunities than others. The market
opportunities most relevant to a company are those that offer important
avenues for profitable growth, those where a company has the most
potential for competitive advantage, and those that match up well with
the financial and organizational resource capabilities which the
company already possesses or can acquire.
    Serving additional customer groups or expanding into new
     geographic markets or product segments
    Expanding the company’s product line to meet a broader range of
     customer needs
    Transferring company skills or technological know how to new
     products or businesses
    Integrating backward or forward
    Falling trade barriers in attractive foreign markets
    Openings to take market share away from rival firms
    Ability to grow rapidly because of strong increases in market
     demand
    Acquisition of rival firms
    Alliances or joint ventures that expand the firm’s market
     coverage and competitive capability
    Openings to exploit emerging new technologies
    Market openings to extend the company’s brand name or
     reputation to new geographic areas
Threats to a Company’s Future Profitability
Management’s job is to identify the threats to the company’s future
well-being and evaluate what strategic actions can be taken to
neutralize or lessen their impact. Tailoring strategy to a company’s
situation entails (1) pursuing market opportunities well suited to the
company’s resource capabilities and (2) building a resource base that
helps defend against external threats to the company’s business.
STRATEGIC MANAGEMENT PRINCIPLE: Successful strategists
aim at capturing a company’s best growth opportunities and creating
defenses against external threats to its competitive position and future
performance.
    Likely entry of potent new competitors
    Loss of sales to substitute products
    Slowdowns in market growth
    Adverse shifts in foreign exchange rates and trade policies of
     foreign governments
    Costly new regulatory requirements
    Vulnerability to recession and business cycle
    Growing bargaining power of customers or suppliers
    A shift in buyer needs and tastes away from the industry’s
     product
    Adverse demographic changes
    Vulnerability to industry driving forces




March 12, 2000                                  8c1e9cc8-0b9b-4c5a-b3dc-1074f834905e.doc   15 of 28
Identifying Company Competencies and Capabilities
Core Competencies: A Valuable Company Resource
A competitively important internal activity that a company performs
better than other competitively important internal activities is termed a
core competence. What distinguishes a core competence from a
competence is that a core competence is central to a company’s
competitiveness and profitability rather than peripheral. Frequently a
core competence is the product of effective collaboration among
different parts of the organization, of individual resources teaming
together. Typically, core competencies reside in a company’s people,
not in its assets on the balance sheet. They tend to be grounded in
skills, knowledge and capabilities.
Plainly, a core competence gives a company competitive capability
and thus qualifies as a genuine company strength and resource.
Distinctive Competence: A Competitively Superior Company Resource
A distinctive competence is a competitively important activity that a
company performs well in comparison to its competitors.
Consequently, a core competence becomes a basis for competitive
advantage only when it is a distinctive competence.
The importance of a distinctive competence to strategy making rests
with (1) the competitively valuable capability it gives a company, (2)
its potential for being a cornerstone of strategy, and (3) the competitive
edge it can potentially product in the marketplace.
Determining the Competitive Value of a Company Resource
Differences in company resources are an important reason why some
companies are more profitable and more competitively successful than
others. For a particular company resource – whether it be a distinctive
competence, an asset (physical, human, organizational, intangible), an
achievement, or a competitive capability – to qualify as the basis for
sustainable competitive advantage, it must pass four tests of
competitive value:
     1.    Is the resource hard to copy?
     2.    How long does the resource last? The longer a resource
           lasts, the greater its value.
     3.    Is the resource really competitively superior?
     4.    Can the resource be trumped by the different
           resource/capabilities or rivals?
A company’s strategy should be tailored to fit its resource capabilities
– taking both strengths and weaknesses into account. As a rule,
managers should build their strategies around exploiting and
leveraging company capabilities – its most valuable resources – and
avoid strategies that place heavy demands on areas where the company
is weakest or has unproven ability.




March 12, 2000                                   8c1e9cc8-0b9b-4c5a-b3dc-1074f834905e.doc   16 of 28
Question 3: Are the Company’s Prices and Costs Competitive?
One of the most telling signs of whether a company’s business position is strong or precarious is whether its prices
and costs are competitive with industry rivals.

Strategic Cost Analysis and Value Chains
Strategic cost analysis focuses on a firm’s cost position relative to its rivals. The task of strategic cost analysis is to
compare a company’s costs activity by activity against the costs of key rivals and to learn which internal activities
are a source of cost advantage or disadvantage.
The Concept of a Value Chain
A company’s value chain shows the linked set of activities and functions it performs internally. The value chain
includes a profit margin because a markup over the cost of performing the firm’s value-creating activities is
customarily part of the price (or total cost) borne by buyers. Disaggregating a company’s operations into
strategically relevant activities and business processes exposes the major elements of the company’s cost structure.
           Purchased            Operations          Distribution          Sales and            Service               Profit Margin
           Supplies and                             and Outbound          Marketing
           Inbound                                  Logistics
           Logistics                                Dealing with          Related to sales     Providing
           Purchasing fuel,     Converting inputs physically              force efforts,       assistance to
           energy, raw          into final product  distributing the      advertising and      buyers, such as
           materials, parts     form (production, product to buyers       promotion, market    installation, spare
           components,          assembly,           (finished goods       research and         parts delivery,
           merchandise, and     packaging,          warehousing,          planning, and        maintenance and
           consumable items     equipment           order processing,     dealer/distributor   repair, technical
           from vendors;        maintenance,        order picking and     support.             assistance, buyer
           receiving, storing   facilities,         packing, shipping,                         inquiries, and
           and disseminating    operations, quality delivery vehicle                           complaints.
           inputs from          assurance,          operations,
           suppliers;           environmental       establishing and
           inspection; and      protection).        maintaining a
           inventory                                network of
           management                               dealers and
                                                    distributors.


           Product R&D, Technology, and Systems Development
           Product R&D, process R&D, process design improvement, equipment design, computer software development,
           telecommunications systems, computer-assisted design and engineering, new database capabilities, and
           development computerized support systems.

           Human Resources Management
           The recruitment, hiring, training, development and compensation of all types of personnel; labor relations activities;
           development of knowledge based skills and core competencies.

           General Administration
           General management, accounting and finance, legal and regulatory affairs, safety and security, management
           informaiton systems, forming strategic alliances and collaborating with strategic partners, and other "overhead"
           functions.

Accurately assessing a company’s competitiveness in end-use markets requires that company managers understand
the entire value chain system for delivering a product or service to end-users, not just the company’s own value
chain. Anything a company can do to reduce its suppliers’ costs or improve suppliers’ effectiveness can enhance its
own competitiveness – a powerful reason for working collaboratively with suppliers.
The Value Chain System
 Upstream Value                     Company Value                         Downstream Value                       Buyer/End User
 Chains                             Chain                                 Chains                                 Value Chains

 Activities, Costs and              Internally Performed                  Activities, Costs, and                 Buyers and End Users
 Margins of Suppliers               Activities, Costs, and                Margins of Forward
                                    Margins                               Channel Allies and
                                                                          Strategic Partners




March 12, 2000                                8c1e9cc8-0b9b-4c5a-b3dc-1074f834905e.doc                                               17 of 28
Strategic Options for Achieving Cost Competitiveness
When a firm’s cost disadvantage stems from the costs of items
purchased from suppliers (the upstream end of the industry chain),
company managers can take any of several strategic steps:
    Negotiate more favorable prices with suppliers
    Work with suppliers to help them achieve lower costs
    Integrate backward to gain control over the costs of purchased
     items
    Try to use lower-priced substitute inputs
    Do a better job of managing the linkages between suppliers’
     value chains and the company’s own chain
    Try to make up the difference by cutting costs elsewhere in the
     chain
A company’s strategic options for eliminating cost disadvantages in
the forward end of the value chain system include:
    Pushing distributors and other forward channel allies to reduce
     their markups
    Working closely with forward channel allies/customers to
     identify win-win opportunities to reduce costs.
    Changing to a more economical distribution strategy, including
     forward integration
    Trying to make up the difference by cutting costs earlier in the
     cost chain
When the source of a firm’s cost disadvantage is internal, managers
can use any of nine strategic approaches to restore cost parity:
    Streamline the operation of high cost activities
    Reengineer business processes and work practices
    Eliminate some cost producing activities altogether by revamping
     the value chain system
    Relocate high cost activities to geographic areas where they can
     be performed more cheaply
    See if certain activities can be outsourced from vendors or
     performed by contractors more cheaply than they can be done
     internally
    Invest in cost saving technological improvements
    Innovate around the troublesome cost components as new
     investments are made in plant and equipment
    Simplify the product design so that it can be manufactured more
     economically
    Make up the internal cost disadvantage though savings in the
     backward and forward portions of the value chain system




March 12, 2000                                 8c1e9cc8-0b9b-4c5a-b3dc-1074f834905e.doc   18 of 28
Question 4: How Strong Is the Company’s Competitive Position?

The Signs of Strength and Weakness in a Company’s Competitive Position
Signs of Competitive Strength                                            Signs of Competitive Weakness
    Important resource strengths, core competencies, and competitive         Confronted with competitive disadvantages
     capabilities                                                             Losing ground to rival firms
    A distinctive competence in a competitively important value              Below average growth in revenues
     chain activity                                                           Short on financial resources
    Strong market share                                                      A slipping reputation with customers
    A pace setting or distinctive strategy                                   Trailing in product development and product innovation
    Growing customer base and customer loyalty                                capability
    Above average market visibility                                          In a strategic group destined to lose ground
    In a favorably situated strategic group                                  Weak in areas where there is the most market potential
    Well positioned in attractive market segments                            A higher cost producer
    Strongly differentiated products                                         Too small to be a major factor in the marketplace
    Cost advantages                                                          Not in good position to deal with emerging threats
    Above average profit margins                                             Weak product quality
    Above average technological and innovational capability                  Lacking skills, resources, and competitive capabilities in key
    A creative, entrepreneurially alert management                            areas
    In position to capitalize on emerging market opportunities               Weaker distribution capability than rivals

Competitive Strength Assessments
Key Success Factor                                  Weight              Company               Rival 1              Rival 2              Rival 3
KSF 1                                                  30%                   Score              Score                Score                Score
KSF 1                                                  20%                   Score              Score                Score                Score
KSF 1                                                  10%                   Score              Score                Score                Score
KSF 1                                                  10%                   Score              Score                Score                Score
KSF 1                                                  10%                   Score              Score                Score                Score
KSF 1                                                  10%                   Score              Score                Score                Score
KSF 1                                                  10%                   Score              Score                Score                Score
Total                                                 100%                   Total              Total                Total                Total




March 12, 2000                               8c1e9cc8-0b9b-4c5a-b3dc-1074f834905e.doc                                                   19 of 28
Question 5: What Strategic Issues Does the Company Face?
The final analytical task is to zero in on the issues management needs
to address in forming an effective strategic action plan. Consider the
following:
    Does the present strategy offer attractive defenses against the five
     competitive forces – particularly those that are expected to
     intensify in strength?
    Should the present strategy be adjusted to better respond to the
     driving forces at work in the industry?
    Is the present strategy closely matched to the industry’s future
     key success factors?
    Does the present strategy adequately capitalize on the company’s
     resource strengths?
    Which of the company’s opportunities merit top priority? Which
     should be given lowest priority? Which are best suited to the
     company’s resource strengths and capabilities?
    What does the company need to do to correct its resource
     weaknesses and to protect against external threats?
    To what extent is the company vulnerable to the competitive
     efforts of one or more rivals and what can be done to reduce this
     vulnerability?
    Does the company possess competitive advantage or must it
     work to offset competitive disadvantage?
    Where are the strong spots and weak spots in the present
     strategy?




March 12, 2000                                  8c1e9cc8-0b9b-4c5a-b3dc-1074f834905e.doc   20 of 28
Strategy and Competitive Advantage
The Five Generic Competitive Strengths
When one strips away the details to get at the real substance the biggest and most important differences among
competitive strategies boil down to (1) whether a company’s market target is broad or narrow and (2) whether it is
pursuing a competitive advantage linked to low costs or product differentiation. Five distinct approaches stand out:
    1. A low-cost leadership strategy – Appealing to a broad spectrum of customers based on being the overall
        low cost provider of a product or service.
    2. A broad differentiation strategy – Seeking to differentiate the company’s product offering from rivals’ in
        ways that will appeal to a broad spectrum of buyers.
    3. A best-cost provider strategy – Giving customers more value for the money by combining an emphasis on
        low cost with an emphasis on upscale differentiation; the target is to have the best (lowest) costs and prices
        relative to producers of products with comparable quality and features.
    4. A focused or market niche strategy based on lower cost – Concentrating on a narrow buyer segment and
        outcompeting rivals by serving niche members at a lower cost than rivals.
    5. A focused or market niche strategy based on differentiation – Concentrating on a narrow buyer segment
        and outcompeting rivals by offering niche members a customized product or service that meets their tastes
        and requirements better than rivals’ offering.
                                             Type of Competitive Advantage Being Pursued

                                                    Lower Cost                   Differentiation
                                 Section of
                                  A Broad


                                  Buyers




                                                Overall Low-Cost           Broad
                                  Cross-




                                                  Leadership          Differentiation
                 Market Target




                                                    Strategy             Strategy
                                                             Best-Cost
                                                              Provider
                                                              Strategy
                                  A Narrow

                                  Segment




                                                                         Focused
                                   Buyer




                                                 Focused Low-
                                                                      Differentiation
                                                 Cost Strategy
                                                                         Strategy




March 12, 2000                                 8c1e9cc8-0b9b-4c5a-b3dc-1074f834905e.doc                        21 of 28
Distinctive Features of Generic Competitive Strategies
Type of Feature     Low-Cost                  Broad                      Best-Cost Provider         Focused Low-Cost
                    Leadership                Differentiation                                       and Focused
                                                                                                    Differentiation
Strategic Target    A broad cross             A broad cross             Value-conscious           A narrow market
                     section of the market      section of the market      buyers                     niche where buyer
                                                                                                      needs and
                                                                                                      preferences are
                                                                                                      distinctively
                                                                                                      different from the
                                                                                                      rest of the market
Basis of            Lower costs than          An ability to offer       Give customers more       Lower cost in
Competitive          competitors                buyers something           value for the money        serving the niche
Advantage                                       different from                                        (focused low cost) or
                                                competitors                                           an ability to offer
                                                                                                      nich buyers
                                                                                                      something
                                                                                                      customized to their
                                                                                                      requirements and
                                                                                                      tastes (focused
                                                                                                      differentiation)
Product Line        A good basic              Many product              Good to excellent         Customized to fit the
                     product with few           variations, wide           attributes, several to     specialized needs of
                     frills (acceptable         selection, strong          many upscale               the target segment
                     quality and limited        emphasis on the            features
                     selection)                 chosen
                                                differentiating
                                                features
Production          A continuous search       Invent ways to create     Incorporate upscale       Tailor-made for the
Emphasis             for cost reduction         values for buyers;         features and               niche
                     without sacrificing        strive for product         attributes at low cost
                     acceptable quality         superiority
                     and essential features
Marketing           Try to make a virtue      Build in whatever         Underprice rival          Communicate the
Emphasis             out of product             features buyers are        brands with                focuser’s unique
                     features that lead to      willing to pay for         comparable features        ability to satisfy the
                     low cost                  Charge a premium                                      buyer’s specialized
                                                price to cover the                                    requirements
                                                extra costs of
                                                differentiating
                                                features
Sustaining the      Economical                Communicate the           Unique expertise in       Remain totally
Strategy             prices/good value.         points of difference       managing costs             dedicated to serving
                    All elements of            in credible ways           down and                   the niche better than
                     strategy aim at           Stress consistent          product/service            other competitors;
                     contributing to a          improvement and            caliber up                 don’t blunt the
                     sustainable cost           innovation to stay         simultaneously             firm’s image and
                     advantage – the key        ahead of imitative                                    efforts by entering
                     is to manage costs         competitors                                           segments with
                     down, year after                                                                 substantially
                                               Concentrate on a few                                  different buyer
                     year, in every area of     key differentiating
                     the business                                                                     requirements or
                                                features; tout them to                                adding other product
                                                create a reputation                                   categories to widen
                                                and brand image                                       market appeal




March 12, 2000                     8c1e9cc8-0b9b-4c5a-b3dc-1074f834905e.doc                                          22 of 28
Evaluating the Strategies of Diversified Companies
Step 1: Identifying the Present Corporate Strategy
One can get a good handle on a diversified company’s corporate
strategy by looking at:
       The extent to which the firm is diversified (as measured by the
        proportion of total sales and operating profits contributed by each
        business unit and by whether the diversification base is broad or
        narrow).
       Whether the firm is pursuing related or unrelated diversification,
        or a mixture of both.
       Whether the scope of the company operations is mostly
        domestic, increasingly multinational, or global.
       Any moves to add new businesses to the portfolio and build
        positions in new industries.
       Any moves to divest weak or unattractive business units.
       Recent moves to boost performance of key business units and/or
        strengthen existing business positions.
       Management efforts to capture strategic fit benefits and use value
        chain relationships among its businesses to create competitive
        advantage.
       The percentage of total capital expenditures allocated to each
        business unit in prior years (a strong indicator of the company’s
        resource allocation priorities).

Step 2: Evaluating Industry Attractiveness

    Industry Attractiveness Factor                                                   Weight    Rating   Weighted Rating
    Market size and projected growth rate                                                .15       5               0.75
    Intensity of competition                                                             .30       8               2.40
    Emerging industry opportunities and threats                                          .05       2               0.10
    Resource requirements                                                                .10       6               0.60
    Strategic fit with other company businesses                                          .15       4               0.60
    Social, political, regulatory and environmental factors                              .05       7               0.35
    Industry Profitability                                                               .10       4               0.40
    Degree of Risk                                                                       .10       5               0.50
    Industry Attractiveness Rating                                                      1.00                       5.70




Step 3: Evaluating the Competitive Strength of Each of the Company’s Business Units

    Competitive Strength Factor                                                      Weight    Rating   Weighted Rating
    Relative market share (the ratio of its market share to the market share of          .15       5               0.75
    the largest rival in the industry, with market share measured in unit
    volume, not dollars)
    Costs relative to competitors                                                        .30       8               2.40
    Ability to match or beat rivals on key product attributes (quality/service)          .05       2               0.10
    Bargaining leverage with buyers/suppliers                                            .10       6               0.60
    Technology and innovation capabilities                                               .15       4               0.60
    How well resources are matched to industry key success factors                       .05       7               0.35
    Brand name reputation/image                                                          .10       4               0.40
    Profitability relative to competitors                                                .10       5               0.50
    Competitive Strength Rating                                                         1.00                       5.70




March 12, 2000                                     8c1e9cc8-0b9b-4c5a-b3dc-1074f834905e.doc                    23 of 28
Step 4: Nine cell Matrix to Simultaneously Portray Industry Attractiveness & Competitive Strength
                                                        Competitive Strength/
                                                         Business Position
                                                     Strong         Average             Weak




                                           High
                      Long-Term Industry
                        Attractiveness
                                           Medium
                                           Low




                                                         High investment priority
                                                         Medium investment priority
                                                         Low investment priority




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Stetp 5: Strategic Fit Analysis: Checking for Competitive Advantage Potential
One essential part of evaluating a diversified company’s strategy is to check its business portfolio for competitively valuable value chain
matchups among the company’s existing businesses:
     Which business units have value chain matchups that offer opportunities to combine the performance of related activities and thereby
      reduce costs?
     Which business units have value chain matchups that offer opportunities to transfer skills or technology from one business to another?
     Which business units offer opportunities to use a common brand name? To gain greater leverage with distributors/dealers in winning more
      favorable shelf space for the company’s products?
     Which business units have value chain matchups that offer opportunities to create valuable new competitive capabilities or to leverage
      existing resources?

                                                               Value Chain Activities
                        Purchased
                        Materials &
                         Inbound                                                        Sales and
                         Logistics           Technology           Operations            Marketing           Distribution            Service


    Business A


    Business B


    Business C


    Business D


    Business E



               Opportunities to combine purchasing activities and gain greater leverage with suppliers


               Opportunities to share technology, transfer technical skills, combine R&D


               Opportunities to combine/share sales and marketing activities, utilize common distribution channels,
               leverage use of a common brand name, and/or combine after sale service activities


               No strategic fit opportunities

A second aspect of strategic fit that bears checking out is whether any businesses in the portfolio do not fit in well with the company’s overall
long term direction and strategic vision. In such instances, the business probably needs to be considered for divestiture even though it may be
making a positive contribution to company profits and cash flows. The only reasons to retain such businesses are if they are unusually good
financial performers or offer superior growth opportunities – that is to say, if they are valuable financially even thought they are not valuable
strategically.




March 12, 2000                                  8c1e9cc8-0b9b-4c5a-b3dc-1074f834905e.doc                                                      25 of 28
Step 6: Resource Fit Analysis: Determining How Well the Firm’s Resources Match Business Unit
Requirements

Checking Financial Resource Fit: Cash Hog and Cash Cow Businesses
A “cash hog” business is one whose internal cash flows are inadequate to fully fund its needs for working capital and new capital investment.
A “cash cow” business is a valuable part of a diversified company’s business portfolio because it generates cash for financing new acquisitions,
funding the capital requirements of cash hog businesses, and paying dividends.
Viewing a diversified group of businesses as a collection of cash flows and cash requirements (present and future) is a major step forward in
understanding the financial aspects of corporate strategy. Assessing the cash requirements of different businesses in a company’s portfolio and
determining with are cash hogs and which are cash cows highlights opportunities for shifting corporate financial resources between business
subsidiaries to optimize the performance of the whole corporate portfolio, explains why priorities for corporate resource allocation can differ
from business to business, and provides good rationalizations for both invest-and-expand strategies and divestiture.
Aside from cash flow considerations, a business has good financial fit when it contributes to the achievement of corporate performance objectives
and when it enhances shareholder value. A business exhibits poor financial fit if it soaks up a disproportionate share of the company’s financial
resources, if it is a subpar or inconsistent bottom-line contributor, if it is unduly risky and failure would jeopardize the entire enterprise, of if it is
too small to make a material earnings contribution even though it performs well. In addition, a diversified company’s business portfolio lacks
financial fit if its financial resources are stretched too thinly across too many businesses.


Checking Competitive and Managerial Resource Fits
A diversified company’s strategy must aim at producing a good fit between its resource capability and the competitive and managerial
requirements of its businesses.
Checking a diversified company’s business portfolio for competitive and managerial resource fits involves the following: Determining whether:
    Determining whether the company’s resource strengths (skills, technological expertise, competitive capabilities) are well matched to the key
     success factors of the businesses it has diversified into.
    Determining whether the company has adequate managerial depth and expertise to cope with the assortment of managerial and operating
     problems posed by its present lineup of businesses (plus those it may be contemplating getting into).
    Determining whether competitive capabilities in one or more businesses can be transferred them to other businesses.
    Determining whether the company needs to invest in upgrading its resources or capabilities to stay ahead of (or at least abreast of) the effort
     of rivals to upgrade their resource base. Upgrading resources and competencies often means going beyond just strengthening what the
     company already is capable of doing – it may involve adding new resource capabilities, building competencies that allow the company to
     enter another attractive industry, or widening the company’s range of capabilities to match certain competitively valuable capabilities of
     rivals.
Many diversification strategies built around transferring resource capabilities to new businesses never live up to their promise because the
transfer process is not as easy as it might seem.
A second reason for the failure of a diversification move into a new business with seemingly good resource fit is that the causes of a firm’s
success in one business are sometimes quite entangled and the means of recreating them hard to replicate.
A third reason for diversification failure, despite apparent resource fit, is misjudging the difficulty of overcoming the resource strengths and
capabilities of rivals it will have to face in a new business.




March 12, 2000                                    8c1e9cc8-0b9b-4c5a-b3dc-1074f834905e.doc                                                       26 of 28
Step 7: Ranking the Business Units on the Basis of Past Performance and Future Prospects
Once a diversified company’s businesses have been rated on the basis
of industry attractiveness, competitive strength, strategic fit, and
resource fit, the next step is to evaluate which businesses have the best
performance prospects and which the worst. The most important
consideration are sales growth, profit growth, contribution to company
earnings, and the return on capital invested in the business. Sometimes
cash flow generation is a big consideration, especially for cash cow
businesses and businesses with potential for harvesting.


Step 8: Deciding on Resource Allocation Priorities and a General Strategic Direction for Each
Business Unit
Using the information and results of the preceding evaluation steps,
corporate strategists can decide what the priorities should be for
allocating resources to the various business units and settle on a
general strategic direction for each business unit. The task here is to
draw some conclusions about which business units should have top
priority for corporate resource support and new capital investment and
which should carry the lowest priority. In doing the ranking, special
attention needs to be given to whether and how corporate resources
and capabilities can be used to enhance the competitiveness of
particular business units.
Ranking the businesses from highest to lowest priority process should
also clarify management thinking about what the basic strategic
approach for each business unit should be – invest and grow
(aggressive expansion), fortify-and-defend (protect current position by
strengthening and adding resource capabilities in needed areas),
overhaul-and-reposition (make major competitive strategy changes to
move the business into a different and ultimately stronger industry
position), or harvest-divest.


Step 9: Crafting a Corporate Strategy
Key considerations here are:
    Does the company have enough businesses in very attractive
     industries?
    Is the proportion of mature or declining businesses so great that
     corporate growth will be sluggish?
    Are the company’s businesses overly vunerable to seasonal or
     recessionary influences?
    Is the firm burdened with too many businesses in average to
     weak competitive positions?
    Is there ample strategic fit among the company’s business units?
    Does the portfolio contain businesses that the company really
     doesn’t need to be in?
    Is there ample resource fit among the company’s business units?
    Does the firm have enough cash cows to finance cash hog
     businesses with potential to be star performers?
    Can the company’s principal or core businesses be counted on to
     generate dependable profits and/or cash flow?
    Does the makeup of the business portfolio put the company in
     good position for the future?




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The Performance Test
A good test of the strategic and financial attractiveness of a diversified
firm’s business portfolio is whether the company can attain its
performance objectives with its current lineup of businesses and
resource capabilities. If so, no major corporate strategy changes are
indicated. However, if a performance shortfall is probable, corporate
strategists can take any of several actions to close the gap:
1.   Alter the strategic plans for some (or all) of the businesses in the
     portfolio.
2.   Add new business units to the corporate portfolio.
3.   Divest weak performing or money losing businesses.
4.   Form strategic alliances and collaborative partnerships to try to
     alter conditions responsible for subpar performance potentials.
5.   Upgrade the company’s resource base.
6.   Lower corporate performance objectives.


Identifying Additional Diversification Opportunities
One of the major corporate strategy making concerns in a diversified
company is whether to diversify further and, if so, how to identify the
“right” kinds of industries and businesses to get into.
With a related diversification strategy, however, the search for new
industries to diversify into is aimed at identifying other businesses:
    Whose value chains have fits with the value chains of one or
     more businesses in the company’s business portfolio
    Whose resource requirements are well matched to the firm’s
     corporate resource capabilities.




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