Situation Analysis & Value Chain

IISWBM
August, 2016
 Situation AnalysisContd

Critical Success Factors [CSF]

SWOT
Core Competencies
PEST
Value Chain Analysis
 Critical Success Factors [CSF]

CSF represents those parameters that are most likely to affect

an incumbent firms ability to prosper in the industry.

Examples:
Particular Strategy Elements
Product Attributes
Resources
Competencies

CSFs are actually differentiating factors between profit & loss,

and in the long run, between competitive success and failure
and, in the very long run, between survival and death

CSFs are the MUSTS for success within the industry

 Critical Success Factors [CSF] Contd.

For the Beer Industry, CSFs are:

Full utilization of brewing capacity [to get benefit of the
economies of scale]
a wide distribution channel [to gain access to as many
customers as possible] to neutralise the seasonal factor
clever advertising [to induce the customers to buy a pint of
beer in lieu of soft-drinks and hard-drinks]

For the Aluminium Utensils Industry , CSFs are:

Nearness to the customer [as shipping costs are high]
Purchase of low cost aluminium and keep the manufacturing
cost at the minimum level [as price is the key difference with
steel utensils]
 Generic Types of CSF

Industry Specific CSF Parameters and standards, peculiar

to an industry, which all incumbent firms should adhere to for
remaining in the industry [Examples Quality as per Global
Standards, Full Capacity Utilization, R&D, etc.]

Firm Specific CSF Given the peculiar character of the firm,

the areas where it should excel to perform better than the
competitors [Examples JIT Supplies, Brand Building, Quality
Customer Care, Product Design for Wider Applications]

Environment Specific CSF Given the location of the firm

and its environment, the areas on which it should focus to
remain successfully in the business [Examples: Adherence to
Laws and Regulations, etc.]
 CSF Types

Technology Related CSF

Manufacturing Related CSF
Logistics Related CSF
Distribution Related CSF
Marketing Related CSF
HR Related CSF
Information Related CSF
Finance Related CSF

CSFs vary across industries and, most importantly,

across time within the same industry as competitive
conditions and environment change.

At a given point in time, an industry has 3-4 CSF, with

1-2 being absolutely important
 SWOT

Developed by Igor Ansoff, it is one of the most popular tools

for analysing competitive positioning of a firm and arriving at
the strategic imperatives that face the firm. It also indicates
the urgency of the corrective strategies.

Strength & Weakness Relates to the Firm

Take a hard and dispassionate look at the business process,
product profile, financials and management of the firm. Study
its history and current function. Probe deep into its outlook
and plans. Compare it with rivals

Opportunities & Threats Relates to the Industry as a

whole and the Firm
Study the economy and the industry. Take a hard look at the
environment surrounding the firm/industry and changes
taking place
 Strength

Strength refers to the Resource Strengths and Competitive

Capabilities.
Examples:
Strong Financial Condition
Strong Brand Image/ Reputation
Attractive Customer Base
Ability to take advantage of the economies of scale
Proprietary Technology/ Know-how/ important patents
Superior Intellectual Capital
Cost Advantages
Strong Advertising & Promotion
Superior Skills in SCM, CRM, etc.
Better Product Quality
Alliances/ Joint Ventures,
etc.etcetc..
Strengths are the Internal Assets of the Firm
 Weakness

Weakness is something that the firm lacks or does poorly or a

condition placing it at a disadvantage vis--vis its rivals.
Examples:
Poor Financial Performance
Absence of Brand Recall/ Brand Equity
Limited Customer Base
Lack of Intellectual Capital
Cost Disadvantage
Inferior Skills in SCM, CRM, etc.
etc.etcetc..

Weaknesses are the Internal Liabilities of the Firm

 Opportunities

External Factors FAVOURABLE to the firm

Examples:
Possibility of serving additional customer groups/ geographic
markets
Expansion of Product Line
Use of Internet and e-commerce technologies to cut costs and/or
pursue new growth opportunities
Vertical Integration
Falling Trade Barriers in Foreign Markets
Openings to take away market share from Rivals
Acquisition of rival firms with attractive technological expertise
Openings to exploit emerging technologies
Opportunities created due to change in Government Policies
Openings created due to the emergence of possible user-groups
etc.etc..etc..
Opportunities are the Avenues of Growth
 Threats

External Factors posing a DANGER to the firm

Examples:
Likely entry of Potential Competitors
Likely entry of substitutes
Technological Changes and Product Innovation that are likely to
undermine the demand for the firms product
Slowdowns in market growth
Adverse shifts in foreign exchange rates and trade policies
Emergence of Costly Regulatory Requirements
Adverse shift in the buyers needs
Adverse demographic changes
etcetcetc..

Threats Aid to DECELERATION

 Core Competencies

The concept of Core Competency was developed by C.K.

Prahalad & Gary Hamel in 1990

Core Competence: An internal activity that a Company

performs better than the other internal activities. Core
Competence is central to a Companys competitiveness and
profitability.

Examples: Expertise in building networks and systems that

enable e-commerce, Product innovation, After Sales Service, A
Cost Effective Logistics System, etc.
Core Competence helps in developing Competitive
Capability
Core Competence resides in the human/ intellectual
assets of the Company and NOT in its physical assets
 Distinctive Competencies

Distinctive Competence: An activity that a particular

Company does well relative to the other companies in the
industry. A Core Competence becomes a source of
Competitive Advantage when its is a Distinctive Competence.

Sharp Corporation Liquid Crystal Display [LCD]

Toyota Low Cost
Intel Corp Developing New Generation Semi
Conductors
Motorola Defect Free Products [6 Sigma]
 Significance of SWOT & Core
Competence

Strengths & Opportunities are the cornerstones of a Good

Strategy

A Good Strategy aims at CORRECTING the weaknesses of

the firm and IMMUNIZE it from the Threats

A successful strategy seeks to exploit the Strengths,

Expertise and Core Competencies of a Firm

A good strategy NEVER places demand on the areas where

the firm has weakness or unproven ability
 PEST

Political, Economic, Social & Technological Factors

PEST is a Tool Adopted for Environmental Scanning

PEST leads us to an understanding the dynamism of the

MACRO Environment surrounding the firm

Analysis of PEST Factors indicate to the Opportunities

& Threats facing the firm

A Good Strategy aims to capitalise on the favourable

PEST Factors and neutralize the unfavourable ones.
 Competitive Principle

Accounting Principle

Price = Cost + Profit

Competitive Principle

Profit = Price - Cost

Competition takes away ones control on Price

Near Monopoly Situation is a Myth
Customers will pay higher price, if and only if, the
Company is able to create superior value
Price is the Money for Value
 Key to Competitive Advantage

Delivering superior value advantage to the target

customers relative to the competitors, without
losing the price competitiveness

OR

Delivering equivalent customer value to ones

target customer relative to the competitors, but at
a lower cost
 Strategic Cost Analysis

A Company is engaged into various activities Designing,

Purchasing, Production, Marketing, Distribution, After-sales-
service, etc.
Each activity is costly
The combined cost of all these activities define the
Companys Cost Structure
In other words, each activity defines whether the
Companys Cost Structure is favourable or unfavourable vis-
-vis that of its rivals
Strategic Cost Analysis: Comparison of a Companys
Cost, activity by activity, against the costs incurred by
key rivals and learning which internal activities are a
source of cost advantage or cost disadvantage.
 Activity Based Costing [ABC]

Example: Costs Related to the Purchasing Department

Traditional Cost Accounting Activity Based Costing

Wages & Salaries - Rs. Evaluation of Suppliers - Rs.
340,000 100,300
Employee Benefit Rs. Order Processing Rs.
95,000 82,100
Stores - Rs. 21,500 Collaboration for JIT - Rs.
Travel - Rs. 140,200
12,400 Data Sharing - Rs.
Depreciation - Rs. 59,400
19,000 Quality Check - Rs.
Rent - Rs. 94,100
112,000 Quantity Check - Rs.
Miscellaneous Rs. 48,450
40,250 Dispute Resolution - Rs.
15,250
 Sources of Cost Disparities Between
Rivals

Cost Disparities among Rivals can stem from:

Prices paid for Raw Materials, Component Parts, Energy and Other
Supplier Resources
Basic Technology
Age of Plant & Equipment [leading to higher Cycle Time]
Economies of Scale
Experience Curve Effects
Wage Rates and Productivity Levels
Change in Inflation and FOREX Rates
Marketing & Distribution Costs
Inbound and Outbound Logistics
etcetc..etc

The higher a Companys Cost than those of the

Close Rivals, more competitively vulnerable it
 Company Value Chain

A Value Chain identifies the separate activities, functions,

and business processes that are performed in designing,
producing, marketing, delivering and supporting a product
or a service.

A Companys Value Chain shows the linked set of activities

and functions it performs internally

The value chain includes a profit margin because a mark-up

over the cost of performing the firms value creating
activities is customarily part of the the price borne by the
buyers.

Profit is represented by creating a value that exceeds the

cost of doing so
 Value Chain Contd.

Firm Infrastructure

Support Human
Human Resource
Resource Management
Management
Activitie Margin
s Technology
Technology Development
Development

Procurement
Procurement

Primary Inbound Marketing Margin

Inbound
Outbound Marketing &
& Service
Activitie Logistics
Logistics Operations
Operations
Outbound
Logistics
Sales
Sales
Service
Logistics
s

Mode of Transportation Vehicle Material Handling Warehousing Inventory Returns
Scheduling Management Handling
 Primary Activities

Inbound Logistics: Activities, costs and assets associated

with receiving, storing and disseminating inputs to the
products.
Examples: vehicle scheduling, material handling,
warehousing, inventory management, inspection and
returns to the suppliers.

Operations: Activities, costs and assets associated with

transforming inputs into the final product. Examples:
machining, packaging, assembly, equipment
maintenance, testing, etc.

Outbound Logistics: Activities, costs and assets

associated with collecting, storing and physically distributing
the product to buyers. Examples: order processing,
 Primary Activities Contd

Marketing & Sales: Activities, costs and assets associated

with providing a means by which buyers can purchase the
product and inducing them to do so. Example:
advertising, promotion, sales force management,
quotation systems, channel relations and pricing

Service: Activities, costs and assets associated with

providing service to enhance or maintain the value of the
product. Examples: installation, repair, training, parts
supply and product adjustment
 Support Activities Contd.

Procurement: Refers to the function of purchasing inputs

used in the firms value chain and NOT to the purchased
inputs. It is the technology of purchasing and consists of
procedures for dealing with the vendors, qualification rules
and information systems.

The technology of procurement not only relates to the

primary activities but also the support activities.

Technology Development: A wide array of technology

used in the firm from technology used in preparing
documents, to transporting goods, to technologies embodied
in the product itself.
 Support Activities Contd.

Human Resource Management: Consists of recruiting,

selecting, training, development and compensation of all
types of personnel. HRM supports both Primary & Support
Activities

HRM affects Competitive Advantage in any firm through its

role in determining the skill and motivation of employees and
cost of hiring and training.

Firm Infrastructure: FI consists of a number of activities

including general management, planning, finance,
accounting, legal, governmental affairs, and quality
management. Infrastructure, unlike other activities, supports
the entire chain and not individual activities
 Value Chain Contd.

Firm
Infrastructur
e
Human
Resource
Mgmt
Technology
Developmen

Margin
t
Procurement

Inboun Operation Outbound Marketing Service

S d s Logistics & Sales
A Logisti
cs
PA
 What Determines the Cost?

The Costs of Performing each activity in the Value Chain can

be DRIVEN UP or DOWN by two types of Cost Drivers:

Structural Cost Drivers [Eg. Scale Economies, Experience

Curve Effects, Complexity of the Product Line, Technology
Requirements, Capital Intensity]

Executional Cost Drivers [Eg. Commitment of Workforce to

continuous Improvement, Attitude & Capabilities regarding
Quality, Lead Time to Introduce New Products, Capacity
Utilization, Efficiency of the Internal Business Processes,
Efficiency of Partnership with the Suppliers/Customers, etc]
 Value System

Internally Activities,
Activities, Costs and Buyer/
Performed
Costs & Margin of User
Activities,
Margins of Forward Value
Suppliers Costs and Channel Chains
Margins Partners
 Understanding the Firms Cost
Structure

Question 1: Whether the firm is trying to attain competitive

advantage by adopting a Cost Leadership or Differentiation?
Which are the important activities?

Question 2: How the cost in one activity spilling over to affect

the cost of other activities?

Question 3: How the Cost in One Value Chain Spills over to

affect the Cost of Next Value Chain?

Question 4: Which costly activities in the value chain can be

discarded to reduce costs without jeopardizing the
competitive philosophy of the firm addressed in Question No.
1?
Question 5: Whether Linkages among activities in the value
chain offer opportunities for Cost Reduction?
 Cost of the Value System

Cost Competitiveness of a Firm Depends on:

Costs of the Internally Performed Activities

Costs of the Suppliers Value Chains
Costs of the Forward Channel Partners Value Chains

The Final Product is delivered to the Customer through a Value

System

The Costs Competitiveness of the Value System is Crucial

Strategic Actions to eliminate a Cost Disadvantage need to be

linked to the Source, ie. The activity which is responsible

Activity Based Costing [ABC] is a powerful tool for Analyzing

 Benchmarking

Benchmarking the performances and costs of the activities of

a Firm against those of the Rivals and Best Practice Firms
provides evidences of a Firms Cost Competitiveness

Benchmarking Involves Cross-Company Comparisons

Benchmarks are to be visited continuously

Continuous Monitoring of the Firms Performance against the

Benchmarks is an ABSOLUTE MUST