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Flashcards in Business Strategy and Market Analysis (Part of International Economics) Deck (39):
1

Introduction to Business Strategy and Market Analysis: Planning Process

Planning Process: The nature of the econmic system and the economic market structure, whether domestic or foreign, define the broadest context of the environment withing which an entity operates

 

To be successful, entity must:

  • Understand that environment 
  • Develop and execute a strategic plan to succeed in than environment

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What is "Strategic Planning"?

Strategic Planning: The sequence of interrelated procedures for determining an entity's long-term goals and objectives and identifying the best approaches for achieving those goals and objectives. 

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Business Strategy: What are the general steps in the Strategic Planning Process?

  1. Establishing the entity's mission, values, and objectives
  2. Assess the internal and external environment
  3. Establish objectives
  4. Formulate Strategies 
  5. Implement Strategies
  6. Evaluate and control activities

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Strategy Planning Process Step 1: Establish Mission, Values, and Goals

  • Mission Statement: an expression of the purpose and range if activitities of the entity.
  • Entity Values: the underlying beliefs that govern the operations of an entity and the conduct of its relationship with other entities
  • Objectives/Goals: the desired, measurable results the entity seeks to achieve related to such factors as profitablity, growth, market share, innovation, etc.

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Strategy Planning Process Step 2: Assess Internal and External Analysis

  1. Analyze the external macro-environment in which it operates.
    • A variation of the PEST analysis provides a framework for this environmental analysis
  2. Analize the industry in which it operates:
    • The Five Forces framework developed by Michael Porter for determining the nature, operating attractiveness and likely long-run profitability of a competitive indusrty may be used for this analysis.
  3. Analyzing the internal strengths and weaknesses of the entity, the external opportunities, threats present in its operating environment, and relationship between the chanracters of the entity and its environment. 
    • SWOT analysis may be used to develop a profile on entity's strengths, weaknesses, opportunitites and threats.

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Strategy Planning Process Step 3: Establish Objectives/Goals

Establish Objectives/Goals: State the desired measurable results to be achieved, typically including:

  • Profitablity
  • Growth
  • Market Share
  • Innovation

Goals should be established so that they meet tje SMART test; they musy be:

  1. Specific
  2. Measurable
  3. Attainable
  4. Relevant
  5. Time-bound

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Strategy Planning Process Step 4: Formulate Strategy:

Formulating Strategies: guidelines for achieving a competitive advantage in the market.

  • Generic Strategies (from Michael Porter):
    1. Cost leadership
    2. Differentiation
    3. Focus

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Strategy Planning Process Step 5: Implement Strategy

Implementing Strategies: by initiating the programs and activities that apply the entity's resources to carry out its strategies so as to achieve its objectives and goals. 

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Strategy Planning Process Step 6: Evaluate and Control Strategic Activities

Evaluating and Controlling Strategic Activities:

  1. Determine performance characteristics to evaluate and measure
  2. Establish target values for performance charact.
  3. Measure performance charact.
  4. Compare measured charact with target values
  5. Implement changes in activities as needed.

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Business Strategy: Question: Which of the following identifies a framework for gauging the attractiveness of the competitive environment of an industry?

 

  • Five Forces

The five forces framework developed by Michael Porter is used for determining the nature, operating attractiveness, and probable long-run profitability of a competitive industry.

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Macro-Environmental Analysis: Overview

Entity operates within:

  • Economic system
  • Industry Economic Market Structure

Entity needs to assess and understand that over-all operating environment.

PEST Analysis = A macro-assessment of:

  • Political, 
  • Economic,
  • Social, and
  • Technological elements of an environment

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What's a "PEST analysis"?

PEST analysis is an assessment of the Political, Economic, Social, and Technological elements of a macro-environment.

  • Its purpose is provide an understanding of those elements of an environment , typically a country or region, in which a firm operates or is considerating operating. 

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PEST Analysis Factors: Political

Political factors: are concerned w the nature of the political environment, and the ways and extent in which a gov't intervenes in its economy, and would include such things as:

  • Political stability
  • Labor laws
  • Environmental laws
  • Tax Policy
  • Trade restrictions, tariffs, and import quotas

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PEST Analysis Factors: Economic

Economic factors: concerned with the economic characteristics of the operating environment, including:

  • Economic growth rate;
  • Interest rate;
  • Inflation rate;
  • Currency exchange rates

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PEST Analysis Factors: Social

Social factors: concerned with the culture and values of the operating environment, including such considerations as:

  • Population growth rate;
  • Age distribution
  • Education attainment and career attitudes
  • Emphasis on health and safety

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PEST Analysis Factors: Technological

Technological Factors: concerned with the nature and level of technology in the operating environment, including such considerations as:

  • Level of reasearch and development activity
  • State of automation capability
  • Level of technology savvy
  • Rate of technology change

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What other variations of the basic PEST(EL) considers other macro-environment factors?

 

PEST EL adds two additional elements:

  • E = Environmental factors:
    • Weather
    • Climate and climate change
    • Water and air quality
  • L = Legal factors:
    • Discrimination law
    • Consumer law
    • Employment law
    • Anti-trust law
    • Health and safetly law

STEER, another variation, which identified the same kinds of factors as other macro-environmental models - Social-cultural, Technological, Economic, Ecological, and Regulator factors.

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Importance of macro-environmental factors:

  1. The importance of the factors assessed in PEST analysis (or a variation thereof) will be unique to each analysis;
  2. PEST, or comparable analysis, is particularly important in considering the establishment of operations in a new foreign location;
  3. The outcome of a PEST-type analysis can provide inputs for SWOT analysis

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Macro-environmental Analysis: Question: "PEST analysis can be used when considering?

  • domestic locations    
  • foreign locations  

Answer: Both domestic and foreign locations

 

PEST analysis, which is concerned with the political, economic, social, and technical characteristics of a nation or region, can be used when considering either a domestic location or a foreign location.

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Industry Analysis: Overview

Industry defined: An industry may be defined as the group of entities that produce goods or provide services which are close substitutes and which compete for the same customers.

Industry Analysis - Within the context of an economic system and an economic market structure, and with an understanding of the characteristics of the macro-environment in which an entity operates or may operate, an entity must assess the nature of the competition it faces (or would face) in its industry - that is, from its most direct competition.

  • Michael Porter's five forces model provides a means of carrying out such a micro-environmental analysis.  

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Factors of Five Forces Analysis (by Michael Porter): 

The Five Forces models identifies factors that determine the operating attractiveness and likely long-run profitability of an industry. 

Those five forces are:

  1. Threat of entry into the market by new competitors
  2. Threat of substitute goods or services
  3. Bargaining power of customers of the good or service
  4. Bargaining power of suppliers of inputs used by the industry
  5. Intensity of rivalry withing the industry

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Factors of Five Forces: THREAT OF ENTRY INTO THE MARKET BY NEW COMPETITORS

Threat of entry into the market by new competition  --  New entrants into an industry increase the level of competition, and thereby, reduce the attractiveness of the operating environment for that industry.

The likelihood of new entrants mostly depends on the barriers to entry into the industry, including:

  1. Capital investment required;
  2. Access to raw materials, technology and/or suppliers;
  3. Economies of scale;
  4. Customer loyalty and their cost of switching providers;
  5. Access to distribution channels;
  6. Regulatory or other governmental impediments to entry;
  7. Potential retaliation by existing firms in the industry. 

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Factors of Five Forces: THREAT OF SUBSTITUTE GOODS/SERVICES

Threat of substitute goods or services  --  The presence of substitute goods or services, or the possibility of the development of new substitutes, reduces an entity's ability to raise prices, and therefore, may affect its profitability.

The level of threat posed by substitutes depends on such factors as:

  1. Availability of substitutes;
  2. Relative price and performance of substitutes;
  3. Ease of substitution;
  4. Buyer's brand loyalty;
  5. Cost to buyers of switching to substitutes.

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Factors of Five Forces: BARGAINING POWER OF CUSTOMERS OF THE GOOD/SERVICE

Bargaining power of buyers (customers) of the industry good or service  --  The bargaining power of buyers influences the ability of a provider to determine product or service characteristics and the price it can charge.

Bargaining power of customers is greatest when, among other things:

  1. Products are standardized;
  2. There are a large number of suppliers;
  3. There are a few dominant buyers that account for a large part of sales;
  4. Information about goods or services as provided by multiple suppliers is widely available;
  5. Cost of buyers switching to other suppliers is low.

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Factors of Five Forces: BARGAINING POWER OF SUPPLIERS OF INPUTS USED BY THE INDUSTRY

Bargaining power of suppliers of the inputs used in the industry  --  The bargaining power of suppliers influences the availability and cost of inputs used in the industry, and therefore, can affect operations and profitability.

Bargaining power of suppliers is greatest when, among other things:

  1. There are few substitute inputs;
  2. There are many users and few suppliers;
  3. Suppliers are in a position to move downstream in the distribution channel;
  4. Employees are unionized.  

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Factors of Five Forces: INTENSITY OF RIVALRY

Intensity of rivalry  --  The intensity of rivalry within the industry affects various operating factors (e.g., marketing/advertising, research and development, etc.) and pricing strategy.

The level of rivalry depends on such factors as:

  1. Structure of competition  --  The relative size of competitors in the industry.
    • Many small or equal-size entities tend to engender more intense rivalry;
    • The presence of a market leader in the industry tends to lessen rivalry.
  2. Degree of product differentiation  --  Markets with undifferentiated products or services (e.g., commodities) tend to have greater rivalry than markets with differentiated products.
  3. Industry cost structure  --  Industries with high fixed costs tend to have greater price rivalry as entities seek to operate at full capacity by cutting prices.
  4. Entities' strategic objectives  --  When entities in an industry pursue aggressive growth strategies, rivalry is more intense than when the entities operate in a mature industry.
  5. Customer switching costs  --  When customers incur a high cost of switching to an alternate supplier, less rivalry tends to exist than when there is little or no cost of make the change.
  6. Exit barriers  --  When leaving an industry is difficult and/or costly (e.g., when there are affiliated entities to consider or a high shut-down cost), greater rivalry tends to exist than when there are few impediments to exiting the industry, since owners seek to avoid the legal, financial and other costs associated with ceasing operations.  

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Industry Analysis: Question: 

Which one of the following sets of characteristics should have the highest intensity of rivalry within an industry?

 Industry Fixed Cost Structure Degree of Product Differentiation 

 Industry Fixed Cost Structure             Degree of Product Differentiation 

               High                                           Low

The highest intensity of rivalry should be in an industry with a high fixed cost structure, in which producers seek to operate at full capacity, and a low degree of product differentiation, which results in products having many substitutes.

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Entity/Environment Relationship Analysis: Assessment

Entity/Environment Relationship Analysis: 

  • Assessment of the relationship between the external environment and firm's internal environment.

SWOT analysis can be used:

  • SWOT analysis develops profile of internal strengths and weaknesses and external opportunities and threats. 
  • Facilitates matching entity's strengths to competitive environment.

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SWOT - Internal Environment (Strengths and Weaknesses):

SWOT - Internal Environment:

  • Strengths: Resources and capabilties that provide relative competitive advantage in the market.
    • Examples: 
      1. Favorable reputations w customers and prospective customers.
      2. Patents, copyrights, etc.
      3. Cost advantages provided by proprietary process.
      4. Exclusive access to natural resources/commodities.
      5. Highly desirable location.

 

  • Weaknesses: Shortcomings that place entity at relative competitive disadvantage in the market. They may be viewed as the absence of strengths.
    • Examples:
      1. Poor location
      2. Unfavorable reputation
      3. Lack of propietary processes, etc. 

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SWOT - External Environment (Opportunities and Threats): 

SWOT - External Environment:

  • Opportunities: Chances to benefit from new or unmet demand in the market.
    • Examples:
      1. Unmet market needs (demand)
      2. Development or employment of new technology or processes.
      3. Reduction in regulations or other leagl constraints.
      4. Reduction in int't quotas, tariffs or other barriers to trade.

 

  • Threats: Chances of adverse consecuence as a result of external forces.
    • Examples:
      1. Development of new susbtitute products/services.
      2. Changes in customer preferences.
      3. Increases in regulation or other legal constraints
      4. Increases in int't quotas, tariffs or other barriers to trade.

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SWOT Matrix Strategy Approach:

SWOT Matrix:

                               STRENGTHS          WEAKNESSES

OPPORTUNITIES   S/O Strategies        W/O Strategies

THREATS                S/T Strategies         W/T Strategies

 

  • S/O Strategies: Utilize strengths to take advantage of opportunities in the market.
  • W/O Strategies: Pursue opportunities to overcome weaknesses.
  • S/T Strategies: Utilize strengths to reduce susceptibility to external threats.
  • W/T Strategies: Pursue ways to prevent weaknesses from being overcome by threats. (This poses the greatest risk to an entity because its weaknesses are in the area as the threats). 

 

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Generic Strategies (Michael Porter): Introduction

Basic Strategy Purpose: Leverage strengths to achieve objectives and goals. 

Specific Strategy: Unique to entity.

Porter identified 3 Generic Strategies:

  • Identified at high level
  • Independent of industry
  • Independent of entity

The 3 Generic Strategies are:

  1. Cost leadership
  2. Differentiation
  3. Focus: Cost leadership or differentiation applied to narrow market segment. 

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Generic Strategies: Cost Leadership Strategy:

Cost Leadership Strategy:

  1. En entity seeks to be the low cost provider in an industry.
  2. Possible alternative objectives:
    • Sell goods or serv at average market price and earn profits higher than competitors
    • Sell goods or serv below average market price and gain market share. 
  3. Entities acquire or maintain cost advantages by:
    • ​​Identifying and avoiding unnecessary costs;
    • Improving process efficiency;
    • Gaining exclusive access to lower cost inputs;
    • Using outsourcing in an optimal manner;
    • Pursing vertical integration - moving up or down the supply chain. 
  4. Characteristics of Cost Leadership entities:
    • ​​Significant capital to invest in production and logistical assets to keep cost low;
    • High levels of expertise in manufacturing process;
    • High levels of skill in designing products for efficient manufacturing;
    • Efficient channels for the distribution of products. 
  5. Risks to Cost Leadership Strategy:
    • That other entities will be successful in adopting cost leadership strategy;
    • Improved technology enables other entities to produce and deliver at equally low cost, or lower cost;
    • Multiple entities will focus on segments of industry and separately achieve lower cost in those segments. 

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Generic Strategies: Differentiation Strategy: 

Differentiation Strategy:

  1. An entity will seek to develop a product or service that offers quality or uniqueness valued by customers. 
  2. Value added by quality or uniqueness permits a premium price that more than covers extra cost of goods or services. (Ex. Apple). 
  3. Characteristics (Strengths) of Differentiation Strategy:
    • Highly creative and skilled product/serv development personnel;
    • Have leading-edge scientific and market research capabilities;
    • Strong and dedicated marketing and sales personnel capable of conveying the strengths of the prod/service. 
    • A reputation for innovation, quality, and service.
  4. Risks to Differentiation Strategy:
    • Changes in customer preference or economic status;
    • Imitation by competitors, including threat of "knock-offs";
    • Multiple firms will focus on segments of market and separately achieve greater differentiation in those markets. 

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Generic Strategies: Focus Strategy:

Focus Strategy:

  1. En entity focuses on a narrow segment of industry (a niche), and within that segment, seek to achieve either a cost advantage or differentiation.
  2. Entity seeks to identify a distinct group within an industry and focuses on providing goods/serv that meet the distinctive needs of that subgroup.
  3. Characteristics of Focus Strategy:
    • Have outstanding market research and understanding of target group;
    • Have ability to tailor strengths in prod or serv development to target group;
    • Have a high degree of customer satisfaction and loyalty.
  4. Focus Strategy Risks:
    • Typically, smaller in size with lower volume = little bargaining power w suppliers;
    • Imitation by competitors ("knock-offs")
    • Changes in targeted customers' preferences or economic status;
    • Industry cost leader will adapt products or serv to compete in focus market;
    • Other entities will carve out subgroups of target focus group. 

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Question: Generic Strategies: 

Targeting a niche market always involves which of the following strategies, if either? 

  • Cost Leadership
  • ​Focus

Cost leadership: NO

Focus: YES

Targeting a niche market always involves following a focus strategy, but not always a cost leadership strategy. A niche or focus strategy attempts to serve a narrow segment of an industry, which may be targeted through seeking either cost advantage or differentiation.

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Summary and Extensions: Strategy Planning Process:

See image attached. 

Requirements:

  1. Mission, values, and objectives
  2. Environment scanning: 
    • External Analysis:
      • PEST= a methodoly for assessing and understanding the political, economic, social, and technical elements of the macro-environment.
      • Five Forces Analyis= provides a framework for assessing and understanding the industry of interest. 
      • These elements are particularly useful in considering "where" an entity should locate:
        • Economic system
        • Economic market structure
        • Industry Analysis
    • Internal Analysis:
      • SWOT analysis can be used for strengths and weaknesses.
      • The results of SWOT provide insight into the generic strategy - cost leadership, differentiation, and focus for the entity. 
      • These considerations provide insight into "how" an entity should operate. (SWOT)
  3. Setting Goals: They have to be "SMART":
    • Specific
    • Measurable
    • Attainable
    • Relevant
    • Time-bound
  4. Strategy Formulation: linkage between what an entity wants to achieve and how it seeks to accomplish its goals.
  5. Strategy Implementation: entity would develop the programs and activities to carry out its strategy.
  6. Evaluation and Control: the entity would would establish a feedback process to provide evaluation and control, including:
    • Determining the operating charact be evaluated and measured;
    • Determining acceptable values for measurable charact;
    • Measuring the targeted charact;
    • Comparing measured charact w acceptable values and determine variances;
    • Implementing changes to activities needed to correct variances.

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Extensions: Resources-Based Model:

Resources-Based Model:

  • Alternative strategic planning model
  • Assesses resources and capabilities of entity.
  • Bases strategy on collection of resources and capabilities to take advantage of opportunities in market.

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Extensions: Specific Strategy Caveat:

Specific Strategy Caveat:

  1. Forms of analysis described do not provide comprehensive methodology for strategy formulation; they illustrate an approach;
  2. Actual strategy formulated would consider the particular charact of the operating environment and of the entity;
  3. Actual strategy would address "operating level" issues - financing, organization, production, marketing, etc.