Corporate Strategy

SITUATION ANALYSIS AND CORPORATE STRATEGY TOPICS TO COVER 1. Situation Analysis

5. Growth Strategies

2. SWOT Analysis

6. Evolution of Corporate Strategies

3. Portfolio Analysis

7. Steps in Charge Process

4. Review Mission and Objectives

THE NATURE OF THE ENVIRONMENT The major problem Strategic Management face is coping with uncertainty in the business environment. The environmental situations are so unpredictable and always changing. However, we can classify the nature of environments as follows: a. SIMPLE STATIC ENVIRONMENT Here, the environment is relatively straight forward to understand and not undergoing significant changes. Technical processes are fairly simple and competition and markets are fixed over time, and there may be few of them. In such circumstances, if a change occurs, it is likely to be predictable, so it make sense to analyze the environment extensively on a historical basis, perhaps as a means of trying to forecast likely future conditions. The simple – static environment corresponds to Emery and Trist’s placid – randomized environment. b. DYNAMIC ENVIRONMENT Here, the environment is largely unpredictable. This manager needs to consider the environment of the future, not just of the past. This can be done intuitively or by employing more structured ways of making a sense of the future such as scenario planning. This corresponds to Emery and Trists (1995) disturbed – reactive environments. c. COMPLEX ENVIRONMENT This is an environment that is difficult to comprehend and at the highest level of uncertainty. Complexity is difficult to handle by analysis. Complex environments correspond to Emery and Trist’s turbulent fields. Complexity arising from diversity, size and environmental dynamism can be dealt with by ensuring that the different parts of the organization responsible for different aspects of diversity are separate and given the resources and authority to handle their own part of the environments.

ENVIRONMENT SCANNING A Major step in Strategic Management is the scanning of the environment. Environmental scanning is the process of gathering information about events and their relationships within an

organization’s internal and external environments. Environmental scanning involves gathering, reviewing and evaluating whatever information about internal and external environments that can be obtained from several sources on a regular basis and interpreting them in the light of the organization’s business sensing the pulse of environmental threats and opportunities is a normal and continuous process in Strategic Management. Through scanning, firms identify early signals of potential changes in the general environment and detect changes that are already under way. There are three types of scanning systems. These are a. IRREGULAR SCANNING SYSTEM This consists largely of adhoc environmental studies. They emphasize short-run reaction to environmental crisis with little attention to future environmental events. b. REGULAR SCANNING SYSTEM These systems revolve around a regular review environmental components. The focus of this scanning system is primarily retrospective but some thought is given to future conditions assumed to be evolving within environment. c. CONTINUOUS SCANNING SYSTEMS Here, the components of the organizational environment are constantly monitored. Here scanning is an ongoing activity for the organization. Continuous scanning tends to be more proactive or future oriented than either irregular or regular systems. The use of a continuous scanning system reflects a serious and sustained commitment to environmental analysis. In most organizations, environmental analysis evolves from an irregular system into a regular and then into a continuous scanning system.

PROCEDURE FOR ANALYZING THE ENVIRONMENT How does one analyze the environment? We have six basic steps of analyzing the external and internal environment to identify the firm’s strategic position or standing. The steps are as follows: 1. Consider the nature of the organization’s environment in terms of how uncertain it is. Is it a. Static / simple? b. Dynamic? or c. Complex? Does it show signs of change and in what way? 2. Undertake a general audit of environmental influences. The aim is to identify which of the many different general environmental factors have influenced the past performance and development of the organization along with some consideration as to which will in the future. This will suggest the extent to which strategies might need to change. 3. Undertake a structural analysis to identify the key forces operating in the immediate competitive environment of the firm. The five forces analysis to be discussed later helps

to identify the key force at work in the immediate or competitive environment and why they are important . 4. Analyse and identify the organization’s position relative to its competitors i.e. from the organization stands in relation to other organizations who are competing for the sane resources or customers, as itself. The four ways of doing this are: I. Strategic group analysis, which maps organizations in terms of similarities and dissimilarities in the strategies they follow. II. The analysis of market segments, which seeks to establish the segments of markets which might be most attractive. III. Competitor analysis which seeks to obtain information about the strengths and weakness of competitors by market segments. IV. Attractiveness analysis which maps the organization’s competitive position in relation to the attractiveness of the market(s) in which it operates. 5. Analysis the internal environment of the firm with the aim of identifying its strengths and weaknesses. 6. Undertake SWOT (Strengths, Weakness, Opportunities and Threats) analysis where the understanding of the external environments (steps 1 – 4) is specifically related to the organization and its internal environment (step 5). This is intended to identify opportunities and threats facing the organization and suggesting how well positioned it is to meet these challenges.

ANALYZING THE FIRMS INDUSTRY AND MACRO ENVIRONMENTS There are two pats into which a company’s external environment can be divided. They are: The industry or micro environment in which the company competes, and The macro environment which affects all industries and companies in the. I. THE INDUSTRY OR MICRO ENVIRONMENT This consists of competitors, suppliers, customers and all other forces that directly affect or have a direct potential affect or have company’s operation. These are the set of factors in a particular industry – the threat new entrants, suppliers, buyers, product substitutes and the intensity of rivalry among competitors – that directly influences a firm and its competitive actions and responses.

II. THE MACRO OR GENERAL ENVIRONMENT This consists of the general political, economic, social, demographic, legal, technological and ecological frame work within which the industry and the company operate. They are the broader society that can influence an industry and the firms within it. The figure below

presents the factors in the macro and industry or micro environment and the interrelationships between them. Macro Environment Global

Technology

Demographic Environment

INDUSTRY ENVIRONMENT COMPETITORS (threats of new entrants intensity of rivalry) Customers (power buyers)

The Organization (its strategy & Structure)

Suppliers (power suppliers)

Product Substitutes

Socio Cultural

Macro Economic

Forces

Environment

Labour Environment

Political, Governmental and Legal Influences

The figure above shows that the macro-environment affects the micro industry which in turn affects the organization. Therefore, a company that wants to succeed must develop a clear understand of the trends in the macro and industry environments and the force that shape competition there in. This understanding enables a company to choose the appropriate strategy or strategies that fit the trends and opportunities in the external environment.

ANALYZING THE INDUSTRY ENVIRONMENT {MICRO ENVIRONMENT} An industry is defined as a group of companies offering product or services that are close substitutes for each other. Close substitutes are products or services that satisfy the same basic consumer needs. For instance, plastic chairs are substitutes for iron chairs. Despite the differences in the production technologies and raw materials that are used, the makers of iron chairs are in the same industry and market as companies that are making plastic chairs because they are serving the same consumer need. There are two areas of focus in analyzing the industry environment. They are: 1. ANALYZING THE INDUSTRY SITUATION The overriding purpose of “industry situation analysis” is to probe the long term profit potential of the industry and discover the factors that make the industry more or less

attractive. The analysis of the industry environment is generally aimed at determining the following: a. How the industry is structured i.e. the size of the market, the number if sellers and their relative sizes, the existence or non-existence of market leaders and who are, the channel of distribution from manufacturer to final buyer, the ease of entry and exit, the degree of vertical (backward and forward) integration within the industry, the rate of product innovation and technological change within the industry, e.t.c. b. The driving forces that are causing the industry to change and how strategically important or relevant the changes will be. The driving force that have the power to produce strategically relevant changes in an industry include changes in the longterm growth rate, changes in who buys the product and how they use it, entry or exit of major firms, changes in cost and efficiency. To illustrate, the entry of a large, well established firm from another industry into a market increases the number of key players, the level of competition and introduces new rules for competing. The exit of a major firm changes industry structure by reducing the number of market leaders and possibly increasing the dominance of the leaders who remain and causing a rush to capture the former customers of the existing firm. c. The economic factors and business characteristics that have the most influence on the requirements for competitive success in the industry that is what firms in the industry have to do well or the specific kind of skills and competencies to make money and to succeed competitively and financially. In the soft drink industry for instance, the key success factors (KSFs) are large bottling capacity utilization, an extensive distribution

network

and

a

strong

advertising

and

promotion

effectiveness. d. The strategic issues and problems that face the industry and which my make it become more or less attractive such as expected changes in costs, supply conditions, competitive pressures, technology, the entry of new firms e.t.c. An industry situation analysis that covers the above strategic issues enable the Strategic manager to understand the factors that are causing changes in an industry, to make predictions about where the industry is headed and why, to judge what the industry’s future structure will be like, and to conclude whether the industry’s relative attractiveness and profit potentials are bright or dim & why. The relative attractiveness of the overall industry environment will depend upon the following: I. Overall market size and stage in the industry’s life cycle. II. Animal market growth rate or growth potential.

III. Whether the industry will be favourably or unfavourably impacted by the prevailing driving. IV. Historical profit margin. V. The competitive structure of the industry. VI. The ease and potential of entry b new firms and the profitability / potential of exit of major firms. (low barriers to entry reduce attractiveness to existing firms; the exit of a major firm or several weak firms increases attractiveness to remaining firms because it opens up more rooms for them). VII. The favourableness or unfavourableness of the industry’s price – cost – profit economics. VIII. Intensity of competition. IX. Energy requirements. X. The degree of risk and uncertainty facing the industry and its overall prospects for prosperity and profitability. XI. Work force availability. XII. Social issues. XIII. Regulation. XIV. Industry profitability. XV. Environmental issues and compliance requirements. XVI. Inflationary vulnerability. XVII. Political and legal issues. XVIII. The cyclicality or stability, continuity and reliability of demand as affected by seasonality, the emerging in-roads from substitute products, changes in business cycle e.t.c. The more stable and continuous the demand, the more attractive is the industry. IDENTIFYING A COMPANY’S KEY COMPETITORS AND COMPETITIVE POSITION THE CONCEPT OF STRATEGIC GROUPS: One of the most powerful techniques for understanding industry and competitive environment is the concept called “strategic group analysis” (Porter, 1980). Strategic group analysis is about analysing differences between organizations which are potential or actual competitors. It aims to identify organizations with similar strategic characteristics, following similar strategies or competing on similar bases. A strategic group consists of rival firms with competitively similar market approaches. Companies in the same strategic group resemble one another in many ways: they offer comparable product line breadth, sell their products through similar cannels of distribution, are vertically integrated as much as the same

degree; offer buyers similar services and technical assistance; appeal to similar customer groups; appeal to buyer needs with the same product features; make use of similar form of advertising; depend on identical technology, sell in the same quality range; use similar pricing policy; have the same extent of product (or service) diversity, the same extent of geographical coverage. They also utilize similar distribution and transportation equipment and facilities and operate in many other similar ways e.t.c. Good examples include Lever Brothers Nigeria PLC, PZ Nigeria PLC and Doyin Investments Company Ltd are in the same strategic group in the detergent and toiletries industries. Nigerian Breweries PLC and Guinness Nigeria PLC are in the same strategic group in the beer industry. Texaco Nigeria PLC, Total Nigeria PLC, Agip, Mobil National Oil and AP PLC are all in the same strategic group in the petroleum industry. IMPLICATION OF THE GROUP CONCEPT OF STRATEGIC GROUP: Strategic group analysis provides a deeper and useful understanding on an industry and competitive environment because it diverts the attention of the strategic manager to the following: i.

It shows that industry trends affect different strategic groups differently, how the companies in each strategic group will be affected by the trend and their probable response to it, whether the trend is reducing the viability of one or more strategic group and if so where competitors in the affected groups may try to shift.

ii.

It raises the question of hoe likely or possible it is for an organization o move from one strategic group to another.

iii.

it shows that greater number of strategic groups generally increase competitive rivalry in an industry because of the possibility for both intra group and inter group competition. A company may find it better to move into an industry where there are not many strategic groups.

iv.

It helps in identifying who the most direct competitors are, on what basis competitive rivalry is likely to take place within strategic groups, and how this is different from that within other groups.

v.

Strategic group mapping might be used to identify strategic opportunities to tap such as vacant spaces in an industry which could provide opportunities for new strategies and new strategic groups.

vi.

Strategic group mapping can help identifying significant strategic problems such as when a product occupies an insecure position in its strategic group. Strategic group analysis is beneficial because it helps in the selection and understanding of an industry’s structural characteristics, competitive dynamics, evolution, and strategies that historically have allowed companies to be successfully within an industry (Grant, 1995).

2. ANALYSIS OF THE COMPETITIVE SITUATION Here, the focus of the analysis is on competitive forces and hey competitors in the industry. The task of the strategic manager, in doing this, is to identify the opportunities and threats that face the company. The analysis of the competitive situation seeks to determine the following: a. The competitive forces that exist and their strengths. b. The relative cost positions of rival firms in the industry. c. The competitive positions and relative strengths of key rivals – their strategies, how well they are working, why some rival companies are doing better than others, the firm that has a competitive advantage and where the edge lies. d. The competitive moves that key rivals can be expected to make.

THE STRUCTURAL ANALYSIS OF INDUSTRIES: THE FIVE FORCES MODEL In a landmark book published in 1980, Michael E. Porter developed a frame work that can be used to analyse a firm’s competitive environment. Known as the FIVE FORCES MODEL, Porter’s frame work is based on the premise that competition in the market is a function of five competitive forces. It is these competitive forces that shape competition within an industry. These forces include: 1. The threat of new entrants or potential competitors. 2. The economic leverage and bargaining power of buyers. 3. The economic leverage and bargaining power of suppliers. 4. The bargaining power of substitute products. 5. The degree of rivalry amongst existing companies i.e. jockeying for position among rival firms. Porter’s argument is that the stronger each of these forces is, the more are established companies limited in their ability to raise process and earn profits. A strong competitive force is a threat because it lowers profit. A weak competitive force is n opportunity because it allow a company to earn greater profits. His model shows that it is important to look beyond one’s immediate competitors as there are other determinants of profitability. All the five forces determine the intensity of competition and profitability. A firm that wants to succeed in achieving its objectives must try to understand the nature of its competitive environment so that it can formulate appropriate strategies to take advantage of the opportunities and fend off the threats. The identification of the strongest force(s) is critical in strategy formulation. A company that fully understands the nature if the five forces and is able to appreciate the one that is most important, will be in a stronger position to defend itself against any threats and to influence the force with its strategy.

1. THE THREAT OF NEW ENTRANTS OR POTENTIAL COMPETITORS Potential competitors are companies that currently are not competing in the industry but have the capability to do so if they choose. Their capability may rest in their technology, sales force and capital base to manufacture and sell the same product being made and sold be an existing firm. The more companies that enter an industry, the more difficult it becomes for existing firms to maintain their share of the market and to generate profit. Some industries are easier to enter than others. The lower the entry barriers the higher the threat or risk of entry by potential competitors. A high risk of entry by potential competitors (arising from low entry barriers) represents a threat or risk of entry by potential competitors. A lower likelihood of entry by potential competitors (arising from entry barriers) represents an opportunity for existing firms to rise prices and earn greater returns. THE MAIN FACTORS THAT CAN CREATE ENTRY BARRIERS ARE: a. Economies of Scale: These refer to the cost advantages associated with large company size i.e. requirement for operators in an industry to operate on a large scale before they can survive profitably. This can discourage and deter new entrants. Scale – related barriers may be encountered in the volume of production required to operated profitable as well as in the purchase of raw materials and component parts, after sales services to customers, financing, marketing and distribution R & D, advertising e.t.c. b. Product Differentiation: Creates a barrier to entry by forcing new entrants to incure expenditure on advertising and sales promotion to overcome existing customer loyalties and build its own clientele. This can involve substantial resources of time and money. Brand loyalty reduces the threat of entry by potential competitors. c. Absolute Cost Advantages Independent of Size: Where established companies have an absolute cost advantage, the threat of entry is significantly reduced. Lower absolute costs give established companies an edge that is difficult for new entrants to match regardless of the new entrant size. Absolute cost advantages can arise from: I. Access to the best and cheapest raw materials. II. Possession of patents and proprietary technology or secrete processes and methods. III. Superior production techniques as a result of the benefits of past experience (or learning curve effects).

IV. Access to cheap funds because existing companies pose less risk than new entrants especially if they can show strong income statement and balance sheet. V. Acquisition of fixed assets at pre-inflation rates. VI. Favourable locations e.t.c. d. Capital Requirements: Capital requirements may create a barrier to new entrants if there is a need to invest substantial resources in order to enter a market. The larger the total naira investment required to enter the market successfully, the lower the threats of new entrants. The most obvious capital investments are on plant and capital equipment, R & D, introductory advertising and sales promotion to build a clientele. e. Access To Distribution Channels: Access to distribution channels can be a barrier to entry when a product is distributed through market channels where there are agreement between manufacturers and the key distributors. Some manufacturers may be vertically integrated and own or control their distributors. Other distributors may have established strong and a successful working relationship with particular manufacturers that they are unwilling to carry the products of another manufacturer no matter the incentives offered them. Where this happens, a new entrant may face the barrier of gaining adequate distribution access. To overcome this barrier, a new entrant may provide better margins, provide extra promotional incentives, advertising allowances to dealers. As a result of these, the profits of the new entrants may be reduced considerably. f. Switching Costs: These are costs incurred by the existing customers and not by companies wishing to enter the market. If a buyer were to change his source of supplies from an established manufactured to a new comer, costs may be incurred such as the costs of new ancillary equipment, product and process redesign, employee retaining, cost of spare parts, stock holding, e.t.c. Buyers may not be willing to change their suppliers because of these costs thereby making it very difficult for a new entrant to enter the market. g. The Existence of Learning and Experience Curve Effect: These refer to the cumulative experience in providing and marketing a product by existing firms. Such experience enables long-established firms to reduce their per – unit costs below those of new comer may not be able to match the know how of the established firms. 2. ECONOMIC LEVERAGE AND BARGAINING POWER OF BUYERS

The second of Porter’s competitive forces is the economic leverage and bargaining power of customers. Buyers can be viewed as a competitive threat when they are so powerful that they can influence or force down prices or demand higher quality and better service which increases operating costs. On the other hand weak buyers give a company the opportunity to raise prices and earn greater profit and earn greater profit. Whether buyers are able to make demands on a company depends on their power relative to that of the company. According to Porter, the leverage and bargaining power of customers tends to be relatively greater in the following: I. When the supplying company is composed of many relatively small sellers and the buyers are few in number and are large. In this situation, a few big buyers will be able to dominate the smaller supplying companies. II. When the customers buy in large quantities. In such a situation, buyers can use their large volume buying power as leverage to bargain for and obtain price reductions and other favourable concessions, terms and conditions of scale. III. When customers’ purchases represents a sizeable percentage of the selling industry’s total sales, that is, when the supply industry depends on the customers for a large percentage of its total orders. IV. When the items being purchased is sufficiently standardized among sellers that customers can find alternative sellers or switch suppliers at a low virtually zero cost thereby playing off companies against each other to force down prices. V. When sellers pose little threat of backward integration into the product market of their customers. VI. When customers (buyers) pose a credible threat of backward integration; that is, when customers can use the threat to supply their own needs through vertical integration to force down prices. VII. When it is economically feasible for customers to purchase their inputs from several companies rather than one. VIII. When the item being purchased by customers is not an important input to him. IX. When the product or service being bought does not save the customer money 3. THE BARGAINING POWER OF SUPPLIERS Suppliers can be very powerful and exert much power over firm in an industry by rising prices or reducing the quality of purchased goods and services this reducing profitability. In other words, suppliers can be viewed as a threat when they are able to force up the price a company must pay for their input or reduce the quality of goods supplied thereby squeezing and depressing the company’s profitability. The ability of suppliers to make demands on a company depends upon their power relative to the company. According to

Porter, the potential bargaining power of suppliers tends to be high in the following circumstances: I. When the products of the suppliers makes up a sizeable proportion of total inputs. II. When the product of he suppliers is crucial to the buyer’s production process or significantly affects the quality of the industry’s product. III. When the product of the supplier has few substitutes and it is important to the company. IV. When the supplier industry is dominated by a few large producers who enjoy reasonably secure market positions and who are facing intense competition. In this situation, the industry is concentrated and buyers have little opportunity for bargaining on prices and deliveries as suppliers recognize that their opportunities for switching suppliers are limited. V. When the buyer-companies are not important customers of the suppliers. In this case, the survival and prosperity of the suppliers does not depend on the buyer company’s industry. Thus suppliers have little incentive to reduce prices or improve quality to protect the buyer. VI. When the respective products of the suppliers are differentiated to the extent that it is difficult or costly for buyers to switch from one supplier to another. In such situations, the buyer company is dependent on its suppliers and unable to play them off against each other. VII. When suppliers can integrate vertical forward into the business of the buyer firm and compete directly with the buyer company. VIII. When the buying companies are unable to use the threat of or do not display any inclination towards backward integration t the suppliers’ business and supplying their own needs as a device for reducing input prices and controlling the source and stability of raw materials. 4. THE BARGAINING POWER OF SUBSTITUTE PRODUCTS Firms in one industry are often in close competition with firm in other industries offering substitute products or services. Substitute products are the products of firms in industries serving similar consumer needs to a company’s industry. Producers of plastic containers are in competition with the makers of glass bottles and jars. The bottlers of soft drinks are in competition with the makers of fruit juices and similar drinks. The existence, availability and prices of close and acceptable substitutes constitutes a strong competitive threat, limiting the price a company can change and thus its profitability. For instance, the prices tat manufacturers of tin and aluminium cans and plates can charge are limited by the existence of acceptable substitutes such as plastic container and plates. If the prices

rises too much relative to that of plastic containers and plates, then buyers of tin and aluminium cans and plates will start to switch from these products to the substitutes. However, if a company’s products have few close substitutes, then other things being equal, the company has the opportunity to raise prices and earn additional profits. 5. RIVALRY AMONG EXISTING FIRMS The last of Porter’s five forces is the extent of rivalry among established companies within industry. It refers to the competition in which firms try to take customers from one another. This rivalry among existing competitors is referred by Porter as “Jockeying for position”. Rivalry or competition may take many forms – price competition, new products and increased levels of customer services during and after sales, promotion, or innovation. If the competitive force is strong, significant price competition, including price ways, may result from the intense rivalry among firms, but if the competitive have the opportunity to raise price and earn greater profits. Price competition limits profitability because it reduces the margins that can be earned on sales. Thus, rivalry among existing firms constitutes a strong threat to profitability. RISK ENTRY BY POTENTIAL COMPETITORS Competitive force and constraining pressures arising from the threat of entry

BARGAINING POWER OF SUPPLIERS

Competitive forces arising from suppliers exercise of bargaining power and economic leverage

RIVALRY AMONG ESTABLISHED FIRMS (the centre ring of competition) Competitive forces created by strategic moves and counter moves of rival firms in an effort to Jockey for position

Competitive forces arising from customers exercise of bargaining power and economic leverage

Competitive forces arising from the capability of good substitutes which are competitively price THREAT OF SUBSTITUTE PRODUCTS Figure showing Porters Five Forces Model of Competition

BARGAINING POWER OF CUSTOMERS