The global company’s challenge

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Global Enterprise and Competition
66.511-081, 082, 201 and 202
Class Notes Week 3 –Competitive Strategy – Situation Analysis
Table of Content
What we did last week ………………………………………………………………………………………….. 1
What we will do this week …………………………………………………………………………………….. 2
Assignments for this week …………………………………………………………………………………….. 2
Reading …………………………………………………………………………………………………………… 2
Discussion Board ……………………………………………………………………………………………… 2
Chat ………………………………………………………………………………………………………………… 2
Individual assignments………………………………………………………………………………………. 2
Research: markets and countries …………………………………………………………………………….. 3
The Process …………………………………………………………………………………………………………. 3
Macro Trends ………………………………………………………………………………………………………. 5
Industry Environment Analysis ……………………………………………………………………………… 6
Industry Size/Concentration……………………………………………………………………………….. 7
Competitive Analysis and Forces ……………………………………………………………………….. 7
Porter’s Model …………………………………………………………………………………………………. 8
Industry Attractiveness ……………………………………………………………………………………… 9
Strategic Groups……………………………………………………………………………………………… 10
Critical Success Factors …………………………………………………………………………………… 11
Competitive Positioning…………………………………………………………………………………… 11
GE Matrix ……………………………………………………………………………………………………… 12
Industry Driving Forces …………………………………………………………………………………… 13
Global Environment and Analysis ………………………………………………………………………… 13
Country Attractiveness…………………………………………………………………………………….. 14
Internal Analysis ………………………………………………………………………………………………… 15
Resource View ……………………………………………………………………………………………….. 16
Competency determination ………………………………………………………………………………. 17
Value Chain …………………………………………………………………………………………………… 17
Organization …………………………………………………………………………………………………… 19
Culture…………………………………………………………………………………………………………… 20
Functional Areas Assessment …………………………………………………………………………… 20
Company’s Financial Performance ……………………………………………………………………. 21
SWOT Factors …………………………………………………………………………………………………… 21
SWOT Analysis ……………………………………………………………………………………………… 21
What we did last week
Last week we discussed in some detail importance of international trade and investments.
In that context we discussed various market entry modes, investments Vs exports (and
both are interrelated), FDI and competitive index to assist in market selection. We also
reviewed socio-cultural forces, which are the most critical as a firm considers
international expansion.
What we will do this week
This week we will begin our discussion on competitive strategy and specifically,
international strategies. Our focus this week will be on understanding and evaluating
uncontrollable and controllable factors. We will also review an overall planning process.
Assignments for this week
Reading
Read Class Notes 3
Read Chapter 4
Competitive Forces Model: http://www.quickmba.com/strategy/porter.shtml
Value Chain Analysis: http://www.quickmba.com/strategy/value-chain/
(http://www.quickmba.com/strategy/ gives information on other related topics)
Strategy: An Executive’s Definition
http://www.strategy-business.com/article/cs00002
Discussion Board
Question
Review ” The global company’s Challenge,
McKinsey Reports, 2012 (in Blackboard under
Supplemental Reading)e Class Notes) and
•
•
•
Assigned to
ALL
Briefly summarize the article
Offer your opinions and comments
Discuss relevance to this week’s topics
Also, comment on at least one classmate’s post
Post any questions you may have on Discussion
Board
Chat
See Blackboard for Chat schedules
Individual assignments
Assignment 1 (Aircraft Industry) is due Sunday
ALL
Class notes begin
************************************************************************
Research: markets and countries
All companies need data to help them formulate their strategies and plans, be it product
or market. As shown in the text book, www.globaledge.msu.edu, is an excellent website
to gather such data. Once you go to their main page, click on Reference Desk and then on
Global Resource Directory or Online
course modules. You will; these
resources quite helpful.
In the accompanying Week 3 Slides, you
will find a Research Task to find out
which countries lead in export and
import of insurance services.
Also, in regards to Cultural Differences,
Online Course Modules provide wealth
of information on “Doing Business in”,
culture, etc. Do use this site for any additional research required in the assignments.
The Process
At the outset, we need to understand that the strategy making and executing is a process,
a management process, and further, it is a continuous process. As shown below, typically,
all levels of management in a firm are engaged in some planning and executing activities.
However, for reasons of managing the business, this process needs to be operationalized
in terms of longer term plan (typically called strategic plans) and annual plans (or
operational plans). Based on these plans management decisions are made to establish
objectives, strategies and allocate resources. These plans (strategic and operational) are in
some sense snap shots of the business at a given point in time.
Strategy making and executing is an on-going Process
Exec Management, Board, Staff Planners, Op Mgmt,
Consultants, etc.
Strategy Analysis, Thinking, Planning, execution
SBU’s, Divisions, Functional org’ns
Reviews
Decisions
Strategic Planning
Q1
Operating
departments
Q2
Q3
Operational Planning
Q4
Implement
Time
To better manage, understand and facilitate the process, top management as well as the
operating management of a firm need to ensure that the process is not about churning out
numbers; it is about understanding the environment that the firm is operating in, crafting
a proper and effective strategy to operate in this environment, allocating resources to
execute the strategy and to constantly monitor and evaluate the performance against the
strategy. A firm must understand strategy related specific actions or programs, which in
turn translate to what levels and types of resources required. More often, strategy making
process is boiled down to generating 5-year plans full of pro forma financial statements
without much understanding of ‘what’ and ‘why’.
Macro Trends
External Environment consists of numerous forces and trends that affect how a firm will
operate in its environment at large, and in its industry in specific. These trends include:
Political/Legal (taxation, regulation, trades, etc.). Most often these forces
create negative effect (leading to adding costs to its operations), but at
times they can be favorable such as certain tax incentives
Socio-Cultural ( life style, etc.). These trends affect customer and
consumers future buying patterns and behaviors
Demographics (shifts in demographics, aging population)
Technological (new solutions to problems). These trends can affect a
company in their products & services they offer to their customers as
well as their internal processes (such as IT helping a company become
more competitive and efficient).
Economic trends include such factors as unemployment, interests, GDP
trends, etc.
Global factors and trends include foreign governmental stability,
taxations, trade policies, etc.


Globalization forces consist of three (3) interacting evolutionary
components: Political Globalization, Economic Globalization and
Technological Globalization.
Regional trading blocs such as NAFTA, ASEAN, etc, create challenging
and critical platforms for economic globalization
Any size business today is faced with the challenge of how to compete in
this “globalized market”; it creates both opportunities (significantly
expanded markets, vast resources availability) and threats (new,
unknown competition, cultural differences, etc.)


Demographic Change of younger populations in developing countries Vs
aging population in developed countries create, again, challenges and
issues such as Over-50 markets (travels, financial services, etc.) for
businesses; immigration, health care, etc.
Technologies (such as Internet) have significant impact on quality of
life; that is instant connection to the World, “24X7 working”, privacy,
etc. Businesses have challenges in how to tap into these technologies
beneficially (e.g. development centers around the Globe, Extranet
connecting customers and suppliers)
Some or all of these macro trends affect a firm’s environment in long run, either
positively (offering opportunities) or negatively (i.e. pose threats). Situation analysis of
these trends require firms to identify a few very critical (strategic) factors which will
influence their thought processes as they craft strategies.
Industry Environment Analysis
While analyzing the Industry, these key areas are emphasized:
Size/concentration: How big is an industry? How fast is it growing? Is it
concentrated (i.e. a few firms have significant market share)? Fragmented (no one
vendor or top vendors have significant market share)?
Segments/Strategic Groups: What are different segments in the industry (pricebased, features-based, etc.)? A strategic group consists of vendors with similar
resources pursuing same market segments (e.g. fast foods restaurants).
Competitive Forces: Porter’s paper describes competitive forces well. Intent in
this analysis is to understand how intense these forces are, which, along with
other factors (like size, profitability, etc.) determine how attractive is the industry.
Industry Evolution stage: Each industry has a life cycle consisting of different
stages: emerging, growing, maturity and decline.
A firm’s strategy will be different depending on where the industry is. For
example, during emerging phase, a firm focuses on niche markets emphasizing a
differentiation strategy. As the industry grows, more vendors are attracted,
competition grows. A firm during this stage expands its market coverage and/or
products/services portfolio, through either cost or differentiation strategies. In
maturity stage, industry starts consolidation cycle; mergers and acquisition
increases and weaker firms may leave the industry all together.
Industry Attractiveness: Based on the above analysis, one needs to look at the
entire picture and determine how attractive if the industry now and in future. Such
an analysis enables a firm to craft its strategy and determine how resources will be
allocated..
Industry Size/Concentration
Industry size can be determined based on total output (shipments, revenues, sales, etc.).
Most industry trade groups and research firms will be tracking such data. Certain
Governmental agencies also provide some of this data. To look at future prospects in the
industry, one needs to look at its projected growth rates. Another factor important in
assessing industry status is its profitability. Typically, profitability is determined by
looking at top vendors’ (~10 vendors) profits.
Industry analysis is also concerned with whether the industry is concentrated or
fragmented:
•
•
Concentrated – when most of the industry’s sales are accounted for by only a
few firms. These firms are typically national and International and have
economics of scale resulting in low cost. Some examples are:
• US Appliance industry has 4 vendors controlling 90+% of the
market.
• Only three firms make jet engines for the world’s commercial
aircraft; only two make the aircraft
Fragmented – when no company has more than a one-percent share of the
market. These industries are typically local/regional and are small/mid size; such
as
• Beauty salons
Bookkeepers
• Plumbers
Cement-mixing companies
Competitive Analysis and Forces
A firm needs to understand its competition so it can anticipate their moves/counter
moves. To that end, it needs to analyze competitors’
Resources and capabilities
Size and Market power
Strategies
Past defensives/offensive moves
Porter’s Model
To better understand the impact of competition (present and future), Porter proposes to
assess these six forces —
•
Threat of new entrants: Competitive threat of outsiders entering
a market is stronger when entry barriers are low, incumbent firms
do not vigorously fight newcomer and new comer can expect to
earn attractive profits. Entry barriers are affected by: cost
advantages; proprietary learning curve; access to inputs;
economies of scale; capital requirements; brand identity; switching
costs; access to distribution; etc.
•
Rivalry among existing firms: Usually the most powerful of the
competitive forces. Degree of rivalry among competitors depend
on: exit barriers; industry concentration; industry growth; product
differences; brand identity; etc. Typical weapons of competitive
rivalry: Price; Quality; Performance features offered; Customer
service; Warranties and guarantees; Advertising & special
promotions; Dealer networks; Product innovation
•
Threat of substitute products: Competitive threat of substitute
products is strong when prices of substitutes are viewed attractive
by buyers; buyers’ costs of switching to substitutes are low; and,
buyers view substitutes as having equal or better performance
features
•
Bargaining power of buyers: Buyer is powerful when they buy
purchases large proportion of seller’s products or many suppliers
(options) are available
•
Bargaining power of suppliers: Whether suppliers are a strong or
weak competitive force depends on if they have bargaining power
to put rivals at a competitive disadvantage based on: Prices they
can command; Quality & performance of items supplied;
Reliability of deliveries; and, Other terms & conditions of supply
•
Relative power of other stakeholders: Other stakeholders
include: Government; Communities; Trade Associations; Unions;
Complementors (e.g. Intel and Microsoft)
These competitive Forces matter because: To be successful, strategy must be designed to
cope effectively with competitive pressures – objective must be to build a strong, market
position based on competitive advantage! Competitive environment is unattractive when:
Rivalry is very strong; Entry barriers are low; Competition from substitutes is strong;
Suppliers & customers have considerable bargaining power. Competitive environment is
ideal when: Rivalry is only moderate; Entry barriers are relatively high; There are no
good substitutes; Suppliers & customers are in a weak bargaining position. The weaker
the competitive forces, the GREATER an industry’s PROFITS! Objective is to craft a
strategy that will Insulate company from competitive forces; Influence industry’s
competitive rules in company’s favor; Provide a strong position from which “to play the
game” of competition; Help create sustainable competitive advantage.
I suggest that you view this video to get more information:

For more information, go to this link:
http://www.quickmba.com/strategy/porter.shtml
Industry Attractiveness
There are several factors that affect how attractive is an industry, such as:
Industry size
Profitability
Growth rate
Intensity of competition
Barriers
Regulations
Some of these factors affect the industry attractiveness in positive manner (such as size,
profitability and growth rate) whereas, others affect negatively. So, if the industry is
growing, is of a good size and has profitability, the industry is attractive. On the other
side, if the intensity of competition is high, or the barriers are too low 9so other
competitors can easily enter the industry), or regulations impact margins or processes,
then the industry is not very attractive.
One can use the following analytical tool to determine an overall attractiveness index:
Factor
Weight
(W)
Rating
(R)
WxR
Industry Size
Industry Growth
Industry profitability
Competitive forces
Entry barriers
Regulations
Total
100
Each of the factors is weighted from 0 to 100 (all add up to 100) in terms of its
importance. So, if regulations are very important in the industry (such as the case in
refineries, pharmaceuticals, etc.), the weighting would be relatively high. Then each
factor is rated from a scale of 0 (being lowest) to 10 (highest). This rating is done from
the firm’s viewpoint; that is how a firm views the impact of each factor on its business.
Last column is the multiplication of weight and rate and the sum gives an overall index.
Strategic Groups
For more detailed understanding of a firm’s competitors’, their resources, strategies, etc.,
strategic groups within an industry are determined. These groups are made up of
competitors pursuing similar markets, with comparable resources and strategies.
Typically, strategic group maps are created, plotting competitors considering 2 key
attributes (such as price and quality; geographic scope Vs product scope; process Vs
product scope; etc.).
Strategic Groups
Co. A
Co B
Etc.
Quality
Co X
Co Y
Etc.
Price
Critical Success Factors
Another aspect of industry analysis is the determination of its Critical Success factors
(CSF’s). each industry has a few key factors that establish its “Rules of the Game”.
Identifying KSFs is top priority as they are good cornerstones of a firm’s strategy.
Winning COMPETITIVE ADVANTAGE often hinges on being distinctively better than
rivals at one or more of the KSFs. KSFs consist of the 3 – 5 really major determinants of
financial & competitive success in industry
A few examples:
In Beer/Brewing, CSF’s are:
Utilization of brewing capacity – to keep manufacturing costs low
Developing a strong network of wholesale distributors – to gain access to
retail outlets
Clever advertising – to induce beer drinkers to buy a particular brand
In Apparel manufacturing, CSF’s are:
Fashion design – to create buyer appeal
Low-cost manufacturing efficiency to keep selling prices

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