6.2. Strategic analysis

Question 1

Define strategic analysis

Answer 1

the process of conducting research into the business environment within which an organisation operates, and into the organisation itself, to help form future strategies

Strategic analysis tries to answer 3 key questions:

1. Where is the business now?
2. How might the business be affected by what is happening or likely to happen?
3. How could the business repsond to these likely changes?

Question 2

Define SWOT analysis

Answer 2

a form of strategic analysis that identifies and analyses the main internal strengths and weaknesses and external opportunities and threats that will influence the future direction and success of a business

Question 3

Strengths/weaknesses

Answer 3

internal factors about a business that can help it gain/lose competitive advantage

• management
• workforce
• product range/USP
• location
• quality
• reputation
• any other aspect that adds/deducts value to product/service

Question 4

Opportunities

Answer 4

potential areas for expansion of the business and future profits

identified by an external audit of the market the firm operates in and its major competitors3

e.g. a new/developing market, mergers, joint ventures, strategic alliances, new market segment

Question 5

Threats

Answer 5

external factors gained frm external audit which analyses the business and economic environment, market conditions and strengths of competitors

e.g. new comp, globalisation driving prices down, changes in the law regarding sales of products, gov economic policy

Question 6

Advantages of SWOT analysis

Answer 6

• It is a source of information for strategic planning.
• Builds organization’s strengths.
• Reverse its weaknesses.
• Maximize its response to opportunities.
• Overcome organization’s threats.
• It helps in identifying core competencies of the firm.
• It helps in setting of objectives for strategic planning.
• It helps in knowing past, present and future so that by using past and current data, future plans can be chalked out.

Question 7

Disadvantages of SWOT analysis

Answer 7

• Subjectivity is a limitation as no 2 managers would necessarily arrive at the same assessment of the company they work for
• Not a quantitative form of assessment so the cost of correcting a weakness cannot be compared with the potential profit from pursuing an opportunity
• Used as a management guide for future strategies, not a prescription

Question 8

Define PEST analysis

Answer 8

the strategic analysis of a firm’s macroenvironment including political, economic, social and technolgical factors

Question 9

Political factors

Answer 9

• Stability of government
• Changes in the law that will particularly affect the industry
• Environmental regulations
• Employment law
• Competition regulations
• Consumer protection laws
• Gov attitude to free market or controls over the business

Question 10

Economic factors

Answer 10

• rate of economic growth/recession
• exchange rate stability
• country’s membership of free-trade areas
• tax rates
• interest rates
• inflation rates and stage of the business cycle

Question 11

Social factors

Answer 11

• demographic changes. e.g. ageing/youthful population
• dominant religion and impact this could have
• education standards. e.g. skilled workforce
• roles of men and women in society
• social and environmental issues could be increasing concern to the population
• labour and social mobility. e.g. urbanisation and migration
• languages

Question 12

Technological factors

Answer 12

• rapidly changing technology allowing products to be made more cheaply
• government support for R&D spending
• internet access, speed of broadband and its impact on marketing and other strategies
• renewable energies and the cost of these compared to fossil fuels
• new product inventions and importance of these to consumers
• changes in IT speed and range of applications

Question 13

Advantages of PEST analysis

Answer 13

• Provides a simple and easy-to-use framework for your analysis.
• Involves cross-functional skills and expertise.
• Helps to reduce the impact and effects of potential threats to your organization.
• Aids and encourages the development of strategic thinking within your organization.
• Provides a mechanism that enables your organization to identify and exploit new opportunities.
• Enables you to assess implications of entering new markets both nationally and globally

Question 14

Disadvantages of PEST analysis

Answer 14

• Must be constantly updated and reviewed, especially in rapidly changing environment
• Users can oversimplify the information that is used for making decisions
• Users’ access to quality external information is often restricted because of the cost and time needed to collate it.
• Assumptions often form the basis for most of the data used, making any decision made based on such data subjective.

Question 15

Define mission statement

Answer 15

a statement of the business’ core purpose and focus, phrased in a way to motivate employees and to stimulate interest by outside groups

Question 16

Define vision statement

Answer 16

a statement of what the organisation would like to achieve or accomplish in the long term

Question 17

Differences between mission and vision statement

Answer 17

vision statement is what the organisation wants to become but a mission statement concerns what an organisation is all about

Question 18

Link between vision, mission statement and strategy

Answer 18

Give a sense of purpose and direction that can prevent businesses from drifting between the tides and currents of powerful events

Question 19

Evaluation of vision and mission statement

Answer 19

too general and ill defined that they could prove to be of little direct benefit to directors of the organisation when making strategic decisions

for window dressing, marketing purposes

Question 20

Define Boston matrix

Answer 20

a method of analysing the product portfolio of a business in terms of market share and market growth

Question 21

Cash cow

Answer 21

• low market growth
• high market share
• a well established product in a mature market
• creates high positive cash flow and is profitable
• sales are high relative to market and promotional costs are likely to be low
• high consumer awareness
• profits are used to reinvest/other products within the portfolio

Question 22

Star

Answer 22

• high market growth
• high market share
• strong product in fast growing market
• requires high marketing spending
• needs to invest for sustainable growth

Question 23

Problem child

Answer 23

• high market growth
• low market share
• consumes resourcces but generates little returns
• if it is a newly launched product, it is going to need heavy promotion costs to help become established
• future is uncertain
• have potential
• try to build competitive advanatage. e.g. market segmentation and niche marketing
• build selectivity

Question 24

Dog

Answer 24

• low market growth
• low market share
• product reaches the end of product life cycle
• no real potential
• not worth investing
• sell out

Question 25

Advantages of Boston matrix

Answer 25

• Building - supporting problem child products with additional advertising or further distribution outlets. Finance could be obtained from cash cows
• Holding - continuing support for star products so they can maintain their good market position, sales growth can be sustained through marketing spending
• Milking - taking the positive cash flow from established products and investing in other products in the portfolio
• Divesting - identifying the dogs and stopping the production and supply of these

Question 26

Disadvantages of Boston Matrix

Answer 26

• on its own, cannot tell a manager what will happen next with any product. detailed and continuous market research is needed which can be time consuming and expensive
• does not take into account the effects of competitior’s decisions, technological changes and the fluctuating economic environment
• only a planning tooll and has been criticised as simplifying a complex set of factors determining product success
• assumption is made that higher profits are directly related to high market shares. correlation is not causation especially when sales are being gained by reducing prices

Question 27

Define Porter’s 5 forces analysis

Answer 27

a framework for the industry analysis and business strategy development developed by Michael E. Porter. It derives five forces which determine the competitive intensity and therefore attractiveness of a market.

Question 28

3 horizontal forces

Answer 28

• threat of substitute products
• the threat of established rivals
• threat of new entrants

Question 29

2 vertical forces

Answer 29

• the bargaining power of suppliers
• the bargaining power of customers

Question 30

Barriers to entry/ Threats of new entrants

Answer 30

is greatest when:

• economies of scale is low in the industry
• technology needed to enter is cheap
• distribution channels are easy to access
• no legal/patent restriction on entry
• importance of product differentiation is low so extensive advertising is not required

Question 31

Threat of subtitutes

Answer 31

exist when:

• new tech makes other option available such as satellite TV instead of traditional antenna
• price competition forces customers to consider alternatives
• any significant new product leads to consumer spending that results in less being spent on other goods. e.g. buy phones instead of clothes

Question 32

Competitive rivalry

Answer 32

high where:

• cheap and easy for new firms to enter an industry
• there is a threat from subsitute products
• suppliers have much power
• buyers have much power
• larger number of firms with similar market share
• high fixed costs force firms to try to obtain economies of scale
• there is slow market growth that forces firms to take a share from rivals if they wish to increase sales

Question 33

Power of buyers

Answer 33

increased when:

• there are many undifferentiated small supplying firm
• the cost of switching supliers is low
• buyers can realistically and easily buy from other suppliers
• key words: bargaining leverage, buyer volume, buyer information, brand identity, price sensitivity, product differentiation

Question 34

Power of suppliers

Answer 34

high when:

• the cost of switching is high
• when brand being sold is powerful and well known
• suppliers could threaten to open their own forward integration operations. e.g. coffee suppliers open their own cafes
• customers have little bargaining power as they are small firms and fragmented. e.g. dispersed around the country
• key words: supplier concentration, importance of volume to supplier, differentiation of inputs, impact of inputs on cost/differentiaton, presence of substitute inputs, threat of forward integration, cost relative to total purchase in industry

Question 35

Advantages of Porter’s 5 forces analysis

Answer 35

• helps firms to decde whether to enter/not. It provides an insight into the potential profitability of markets
• by analysing existing markets, decisions may be taken about how to reduce level of competitiveness or should the business stay in the market at all
• business can improve their own competitive position by:
  
  • product differentiation
  • buying out some competitors
  • focus on different segments that might be less competitive
  • communicate and collude with rivals to reduce competition

Question 36

Disadvantages of Porter’s 5 forces analysis

Answer 36

• analyses the industry at just one moment in time - static analysis - and many industries are changing rapidly due to globalisation and technological changes
• model can become very complex when trying to use it to analyse many modern industries with joint ventures, multiple product groups and different market segments within the same industry - which have their own competitive forces

Question 37

Define core competence

Answer 37

an important business capability that gives a firm competitive advantage. It should:

• provide a set of unifying principles for the organization and they are pervasive in all strategies.
• provide access to a variety of markets.
• be critical in producing end products.
• be rare or difficult to imitate.

Question 38

Define core product

Answer 38

product based on business’ core competences, but not necessarily for final consumer or end user

Question 39

How do companies develop Core competences?

Answer 39

1. First step is to realise that a business might be good at certain activities but might not have competence in these activities - core competence needs to satisfy the minimum standards (e.g. quality) and set business different from other firms within the industry
2. Second step is for managers to integrate and coordinate designers, production specialists, IT experts into a team to develop new and different competence, resolve their differences and reach a compromise.

Question 40

Analysis the link between Core competences and strategies?

Answer 40

• The business units are the divisions of a business that will use the core products.
• They can be “consumer products business” or “industrial products business”.
• By building up new products for new markets in this way, business is able to gain greater opportunities for economies of scale in the manufacture of the core product

Question 41

Difference between core competence and product differentiation

Answer 41

Core competence is more of a strategy and does not necessarily concern product alone but rather the whole of production process or method of working. Product differentiation can easily be seen by consumers in the market but core competence/product is not. Sometimes, however, core product and product differentiation can overlap

e.g. Honda’s core competency is manufacturing capabilities and culture of innovation, this in turn gives rise to the core product which are lightweight, reliable engines

Question 42

Benefits of core competence

Answer 42

1. Better human resource planning. Instead of trying to fit the person to the organization, work from the organization and ask, “What do we need? What would we like?”
2. More effective training programs. Training programs designed to meet future needs are effective.
3. A list of critical technological capabilities. Besides knowing which are our critical capabilities we also know which are not; resources can be spent wisely.
4. An opportunity for a strength-weakening analysis. Answering questions about what we do well and knowing what threats and opportunities we face is critical to planning.
5. Help with outsourcing options. Since organizational functions interact, there may be unintended consequences to outsourcing components of core competencies. For example, outsourcing bookkeeping may be sensible or it may be depriving us of valuable information about our purchased materials.
6. Guidance for development or change. Once a system of core competencies is functioning, it provides a roadmap for development. Having a list of critical skills allows us to see how we might improve them to our advantage.
7. Vision of the whole organization. The global perspective of core competencies allows us to study what we’re really good at. Knowing where we excel allows us to better exploit our advantages.
8. Innovation is required for survival. Core competencies help to identify specific behaviors in the organization that are appropriate to strategy design.