Transcript Investment Appraisal - AS

Strategic Analysis
We have looked at Strategic Management (and
the need for a changing structure – Chandler),
but now onto Analysis Tools used by
Management
Strategic Analysis
A Definition:
“The process of conducting research into the
business environment and into the organisation
itself, to help form future strategies”
SWOT (AS)
PEST (AS)
Boston Matrix
Porters 5 forces
Strategic Analysis
So, why carry out Strategic Analysis?
1.
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3.
Where is the business now?
How might we be affected by what is going to, or might, happen?
How can we respond to these changes?
Hopefully resulting in:
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More relevant business goals
Better quality decision making
Reduced risk for the future
Allow better preparation for what might happen
Strategic Analysis - SWOT
Recap on SWOT ...
SW – Internal
OT – External
A Business might need to overcome it’s weaknesses in
order to achieve any opportunities
(eg – Location will need to be changed to develop into
new markets
Damaged reputation will need to be fixed before a
merger or joint venture)
Strategic Analysis - SWOT
EVALUATION of SWOT
It is limited by differing opinions – 2 managers will draw up a different
SWOT based on their thoughts and ideas
Not Quantitative – so the “cost” of a weakness cannot be compared
with the potential “profit” from an opportunity
The SWOT should be used as a future guide only – for clarification and
mutual understanding by managers. It should not be used in
isolation of other methods of Strategic Analysis!
Strategic Analysis - PEST
Definition:
“The strategic analysis of a firm’s macro-environment
Political, Economic, Social and Technological factors”
These are factors beyond a companies control
Considered to be Opportunities or Threats from the SWOT
A2 Exam ...
So, if in an exam you are expected to consider the strategic
tools available to a manager, LINK them by stating their
similarities!
Strategic Analysis - PEST
POLITICAL – Things to consider ...
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Government Stability
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Changes in the law to particular industries
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Environmental regulations
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Employment Law
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Competition regulations
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Consumer Protection Laws
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Political stance on free markets and business controls
Strategic Analysis - PEST
ECONOMIC – Things to consider ...
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Rate of another countries economic growth (or recession)
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Exchange Rate Stability
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Membership of Free Trade Areas
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Common currency schemes (Euro)
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Tax Rates
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Interest Rates
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Inflation Rates
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Stages of the Business cycle
Strategic Analysis - PEST
SOCIAL – Things to consider ...
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Democratic changes
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Dominant religion (impact on marketing)
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Education standards – do they have skilled labour?
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Roles of men and women in society
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How many languages are spoken?
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Are environmental issues a concern?
Strategic Analysis - PEST
TECHNOLOGICAL – Things to consider ...
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Rapid growth in technology could result in cheaper production
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Does government support in R&D exist?
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Internet access/broadband speed
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Speed of technological obsolescence
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New product inventions
Strategic Analysis - PEST
EVALUATION of PEST
It cannot be a stand alone one time task – it has to be ongoing and
progressive
Multinationals will need to do one for every country they operate in –
each country will have a different outcome
The PEST formalises the process of analysing the macro environment
– providing focus and ongoing analysis of the external environment
and uncontrollable factors
Strategic Analysis – BOSTON MATRIX
Or ... “Portfolio Analysis”
Definition:
“A method of analysing the product portfolio of a business
in terms of market share and market growth’”
Strategic Analysis – BOSTON MATRIX
A new product that has a high
market share in a rapidly growing
market is a "star" and should
hopefully turn into a "cash cow" in
the future when the market growth
slows down.
A product that has a low market
share in a rapidly growing market is
known as a "problem child" for
obvious reasons and the firm will
have to look at various marketing
strategies to avoid it becoming a
"dog" in the future.
Total Revenue earned by each product
Strategic Analysis – BOSTON MATRIX
Cash Cow
High market share in a slow-growing industry.
These units typically generate cash in excess of the amount of cash
needed to maintain the business.
They are regarded as staid and boring, in a "mature" market, and every
corporation would be thrilled to own as many as possible.
They are to be "milked" continuously with as little investment as
possible, as any investment would be wasted in an industry with low
growth.
Strategic Analysis – BOSTON MATRIX
Stars
High market share in a fast-growing industry.
The hope is that stars become the next cash cows.
Sustaining the business unit's market leadership may require extra
cash, but this is worthwhile if that's what it takes for the unit to
remain a leader.
When growth slows, stars become cash cows if they have been able
to maintain their category leadership, or they move from brief
stardom to dogdom!
Strategic Analysis – BOSTON MATRIX
Dogs
Low market share in a mature, slow-growing industry.
These units typically "break even", generating barely enough cash to
maintain the business's market share.
Though owning a break-even unit provides the social benefit of
providing jobs and possible synergies that assist other business
units, from an accounting point of view such a unit is worthless, not
generating cash for the company.
They depress a profitable company's return on assets ratio, used by
many investors to judge how well a company is being managed.
Dogs, it is thought, should be sold off.
Strategic Analysis – BOSTON MATRIX
Problem Child
Growing rapidly and thus consume large amounts of cash
But because they have low market shares they do not generate much cash.
The result is a large net cash consumption.
A Problem C has the potential to gain market share and become a star, and
eventually a cash cow when the market growth slows. Money is drawn
away from the Cash Cows for funding!
If the Problem C does not succeed in becoming the market leader, then after
perhaps years of cash consumption it will degenerate into a dog when the
market growth declines.
Problem C must be analyzed carefully in order to
determine whether they are worth the investment
required to grow market share.
Strategic Analysis – BOSTON MATRIX
EVALUATION of Boston Matrix
 Good for use of current and existing product situation analysis
 Good for planning introduction of new products
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Difficult for predicting future trends of products
Relies on marketing analysis by the marketing manager
It needs continual market research
You cannot predict what competitors will do in each “segment” of the
matrix
It is assumed that the higher rates of profit are related to high market
share – this is not always the case (reducing prices and profit
margins also increase sales!)
Strategic Analysis – PORTERS 5 FORCES
Michael Porter’s 5 Force Analysis
He said that it is a managers job to establish a competitive
advantage of rivals, so the model helps to understand
the industry in which the business operates
SIMILAR TO PEST ANALYSIS, but focuses on a business
“unit” rather than the product
The elements that are covered by Porters 5 forces are:-
Strategic Analysis – PORTERS 5 FORCES
Strategic Analysis – PORTERS 5 FORCES
COMPETITIVE RIVALRY
The key part of the analysis
It is in the centre of the model as it is based around the
Other 4 factors
Rivalry is likely to be greater when:
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There are a lot of firms with similar market share
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Companies trying to obtain Economies of Scale (due to high fixed
costs)
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Low market growth forces companies to take a share from rivals to
increase sales
Strategic Analysis – PORTERS 5 FORCES
BARRIERS TO ENTRY
How easy is it for competitors to join the industry?
Threat of Entry is greater when:
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Cheap technology to produce goods
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Distribution channels are good – gap in the market for retailers to
provide the goods
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No legal of patent restrictions
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Product differentiation is low – little advertising required
Strategic Analysis – PORTERS 5 FORCES
THE POWER OF BUYERS
How much power does a company have?
(consider the supermarkets? High buyer power)
There is more buyer power when:
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There is a limited amount of suppliers (eg milk, chickens)
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The cost of switching is low (better deals offered)
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It is relatively easy to switch and buy from another supplier
Strategic Analysis – PORTERS 5 FORCES
THE POWER OF SUPPLIERS
Suppliers will have more power than the buyer when:
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The cost of switching supplier is expensive (from a PC to a MAC!)
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High Branding – sucked in by the image
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Forward or Backward Merger or business development (cadbury’s
opening a sweet shop / Nescafe opening a coffee shop)
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Small customers are scattered around the country (eg petrol
stations) and have little bargaining power with the supplier (not
much clout!)
Strategic Analysis – PORTERS 5 FORCES
THE THREAT OF SUBSTITUTES
NOT similar products in the same industry!
This refers to a substitute product in another industry!
(eg – the demand for aluminium can be affected by the price of glass
for bottles, and plastic for containers)
Threats of substitutes exist when:
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New technology makes alternatives available (satellite TV)
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Price competition – if rail prices went up too much, you might take
the bus instead
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Consumer spending habits – young people might buy a new phone,
so they will spend less on another product like clothes
Strategic Analysis – PORTERS 5 FORCES
So, how can using P5F help with strategic decisions?
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Shall we enter a new market or not?
Is it better to enter a highly competitive market or not?
Do we move out of a market if it is becoming too competitive?
How can we reduce the level of rivalry to increase profits?
Can we make ourselves more competitive to improve our position?
(eg –
Through product differentiation (Honda Hybrid)
Takeovers (supermarkets)
Niche market development (vegetarian foods)
Be naughty! Discuss your position with rivals to come
to an “agreement” – like price fixing (Airlines)
Strategic Analysis – PORTERS 5 FORCES
EVALUATION
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Provides logic and structure to your current competitive situation
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BUT 
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It is Static! Doesn’t keep up with a fast changing environment or
markets
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Can be very complicated or confusing if a multi national with many
“units” or product portfolios – they will have very different competitive
forces to be analysed
Strategic Analysis – CORE COMPETENCIES
HAMEL AND PRAHALAD
They argue that if a business develops “core” competencies then it will
gain a competitive advantage over other firms in the same industry
This competency will allow a development of core products
Eg –
Honda building powerful and efficient engines – allowing a
range of vehicles available to a huge market
Black & Decker making quality small electric motors – allowing
for the development of a variety of power tools (drills, food
processors, lawnmowers etc)
With the use of technologies and skills the business has to offer