MSc in Management International Strategic Management: External Analysis Part 2

Tutor: Dr Scott Lichtenstein

Return on Total Assets

Operating Profit Total Assets

Op Profit Margin Operating profit Sales revenue

Asset turnover Sales revenue Total assets

Corporate Strategy and Financial Analysis, Ellis and Williams, 1993

Operating Profit
Turnover (sales revenue) Operating costs Operating profit Operating Profit Margin Operating profit Sales revenue

Competitive Positioning
Source of advantage
Low cost Broad Market scope Broad low cost player Differentiation Broad differentiator

Narrow

Stuck in the middle Focused Focused differentiator low cost player

, Adapted from M E Porter (1980) Competitive Strategy

Industry Attractiveness: Five Forces

Industry attractiveness is a function of five competitive forces:
Threat of new entrants

Bargaining power of suppliers

The industry's rivalry among existing firms

Bargaining power of buyers

Threat of substitute products or services

Which one or two forces are key drivers? Future financial performance of the industry? How attractive is the industry as a whole?

The Threat of Entry

Threat of Entry is dependent on barriers to entry such as:

Capital requirements Economies of scale Knowledge, limited skill labour Access to distribution channels Escalation of competition Government intervention or incentives Brand loyalty
Porter, 1980

The Bargaining Power of Buyers

Buyer Power is high when:

There is a concentration of buyers There are many small suppliers in the industry There are alternative sources of supply High costs encourage the buyers to shop around Switching costs are low There is a threat of backward integration
Porter, 1980

The Bargaining Power of Suppliers

Supplier Power is high when:

There is a concentration of suppliers Switching costs are high The supplier brand is powerful Forward integration by the supplier is possible Customers are fragmented and bargaining power low

Porter, 1980

The Threat of Substitutes

Substitutes can take different forms:

Product substitution Substitution of need Doing without

Porter, 1980

The Industry Lifecycle

At what stage in the life cycle is the industry? The companys product/market segments?
Development Growth Shakeout Maturity Decline

S a l e s

Total sales Profit Time

Users/ buyers

Trial by innovators

Early adopters trial products/service increasing market penetration Entry of competitors

Early majority Growing selectivity of purchase Shake-out of weakest Failures, mergers/acquisiti on Excess capacity

Replacement purchase Fight to maintain market share Price competition Gaining/taking market share at expense of competitors

Laggards dropoff

Competitive conditions

Few competitors

Exit of some competitors Price wars Emphasis on efficiency/low cost

What are the implications for sales growth rate and profit? How fast is the LC moving to the next stage? What are the competitive and strategic implications?

Five Forces Analysis: Key Questions and Implications

Define the industry and any key sub-segments that could include: market size, growth rates, stage in lifecycle. Positioning relative to the competition How many competitors exist and how strong are they? Identify changes in the trading environment, the forces now and the future.

Attractiveness (profitability) of the industry now and in the future, Evidence? Can the forces be pushed back?
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Competitor Analysis

MOST - objectives, strategies and tactics e.g...aggressive Competitive Scope - segments and products focused on

Past & Current Performance - trends & financial & nonfinancial

Strengths, Distinctive Capabilities & unique resources

Weaknesses, Vulnerabilities, and Disadvantages

Overall Future Strategic Position - Strong, tenable or weak?

12 Likely

Future Strategy & Direction

Competitor Analysis
Competitor A VMOST Competitor B

Competitive scope
Unique assets and resources Distinctive capabilities Weaknesses and vulnerabilities Past and current performance Overall strategic position Strong, tenable, weak? Likely future direction
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Same behavior, different reasons

I own a 4 wheel drive ... ... because I want to be safe ...because I want to explore the countryside and go off road ...because its trendy, I feel more successful

Customer Segmentation
Geographic: country, region, density, and climate

Behavioural: Demographic: Psychographic:

benefits sought, purchase occasion, usage rate, loyalty status age, gender, social class lifestyle and personality

Customer needs and expectations

Examples: Price Consistency / Reliability Product or Service Quality Frequency, Speed of service, Delivery Flexibility Image / Status Simplicity / Ease of purchase Security / Assurance Responsiveness / Problem solving Relationships / Empathy

The key challenge is to identify profitable market segments with unfulfilled needs and wants which match our distinctive capabilities

Customer Expectations Evaluation and Satisfaction

Customer Expectations High High Low Low Customers Evaluation Poor Good Good Poor Result

Dissatisfied customer Satisfied customer Very satisfied Unsurprised Customer

Who is likely to repeat purchase?

The Service Profit Chain

Operating strategy and service delivery system
Employee retention Internal service quality Employee satisfaction Employee productivity
Service concept: Results for customers

Revenue growth External Customer Customer service satisfaction loyalty value Profitability
retention repeat business referral service designed & delivered to meet target customers needs

Workplace design job design employee selection & development employee rewards & recognition tools for serving customers

Source: Heskett et al, Putting the Service-Profit Chain to Work, Harvard Business Review, March - April, 1994

The Employee-Customer-Profit Chain at Sears

The Revised Model *
A COMPELLING PLACE TO WORK A COMPELLING PLACE TO SHOP
Customer recommendations Service Helpfulness Return on assets Employee behavior Customer impression Operating margin Revenue growth

A COMPELLING PLACE TO INVEST

Attitude about the job

Attitude about the company Employee retention

Merchandise Value Customer retention

5 UNIT INCREASE IN EMPLOYEE ATTITUDE

DRIVES

1.3 UNIT INCREASE IN CUSTOMER IMPRESSION

DRIVES

0.5% INCREASE IN REVENUE GROWTH

* The rectangles represent survey information, the ovals, hard data. The measurements in blue are collected and distributed as performance indicators.
Source: Rucci et al., (1998)The Employee-Customer-Profit Chain at Sears, HBR, Jan-Feb

Exercise 1 Competitive positioning

Who are Bestjets main competitors? How is BestJet positioned relative to its competitors? What are the implications? Use Porters (1985) strategic positioning matrix to identify BestJets position and that of its rivals. Whats the message to the boss about the potential opportunities or threats BestJet need to be aware of based on your analysis?

Exercise 2 - Lifecycle and 5 Forces Analysis

At what stage of the lifecycle is the European budget airline for the date of the case and what are the implications of this for the industry? What do you think about the overall attractiveness of the European budget airline industry in 2006? Assess the strength of each force as high, medium or low. Which of these forces are likely to change in the next few years and what impact will this have?

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Exercise 3 - Customers
Identify the main market segments in the airline industry, along with their customer expectations How successful is BestJet in winning and retaining customers? What is key challenge regarding customer focus in the future?

Needs and Market Segments

Customer ranking Seat available on demand High frequency of service Ability to cancel / change reservation Stop-over en route In-flight standards and comfort Quick check-in check-out Low fare Very essential 5

Not essential 1

KEY:

Holidaymaker two-week holiday Weekend holiday

Routine business Emergency business

Source: Doganis, 1985