Business Policy & Strategic Management Module 4

Competitive Analysis & Choice of strategies

N.R.Govinda Sharma August 2010

BPSM: Module 4

Battle for Parkway: Strategic Considerations

Fortis quits Parkway race as Khazana ups offer
Source: BL, 27 July 2010

Fortis abandons its S$3.5 billion offer As Khazana ups its offer to S$ 3.95 per share, topping S$ 3.8 offer by Fortis

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Parkway fail is dealmakers win!

Fortis will divest its 25.3% stake in Parkway for about Rs 3800 crores Fortis had paid Rs 3400 crores to buy 25.3% stake (in two stages) With this divestment, Fortis will make a profit of about Rs 400 crore Malvinder Singh brothers not seen as too emotional, had earlier withdrawn from race for Betapharm, a German firm, stating they are not willing to pay any price for the acquisition
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What does Fortis lose?

Pride slightly bruised Fortis plan of becoming pan-Asian player suffers a setback Have to look for new opportunities Moves back to being second largest hospital company in India behind Apollo hospital (in terms of hospital beds)
Source ET, 27 July 2010
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Strategy Analysis and Choice

Strategy analysis & choice involves making subjective decisions based on objective information Decisions are based economics and behavioural factors such as
Politics Culture Ethics Social responsibility
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Strategy Formulation Analytical Framework

Strategy Formulation Analytical Framework
Stage I: The Input stage
CPM: identifies and evaluates the competitors IFE: Internal Factor Evaluation: Assess the strengths & weaknesses EFE: assess the external factor & responsiveness of company to the factors

Stage II: The Matching stage

Choosing a grand strategy (Aggressive, Defensive, Conservative or Competitive)) SPACE matrix SWOT matrix BCG matrix Internal External (IE) matrix Grand strategy matrix

Stage III: The Decision stage

QSPM: A tool for objective assessment of feasible alternatives
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Strategy formulation framework

Stage 1: The input stage
Summerises the basic input required for strategy formulation
Tool: Competitive profile Matrix

Stage 2: The matching stage

Focuses on generating feasible alternatives by aligning key external & internal factors
Tool: Strategic Position ACtion Evaluation matrix (SPACE matrix)

Stage 3: The decision stage

Evaluation of relative attractiveness of alternative strategies and help choose the best alternatives
Tool: Quantitative Strategic Planning Matrix (QSPM)
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Stage 1:

Competitive Profile Matrix (CPM)

Industry: Retail Company: WalMart Competitors: K Mart, J C Penny Remember the concept of Strategic Groups
Marks & Spencer is considered up-market & will not fall in the strategic group of WalMart
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Competitive Profile Matrix

Company: WalMart
Identify firms major competitors
K Mart & JC Penny

Strengths & weaknesses in relation to company under consideration (WalMart)

You are a giant in a Land of pygmies and a dwarf in the land giants

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Competitive Profile Matrix

Listed Critical Success Factors (CSF) For retail CSFs are,
Price Competiveness Market Share Quality Customer Loyalty

Assign weights against each CSF

Very important nearing 1.0 Not important nearing 0.0
Be honest & objective in assigning the weights

Sum of all the weights should be equal to 1.0

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Competitive Profile Matrix

Ratings are given for each company against each CSF depending degree of strength or weakness
Major strength = 4
Example: Price is a major strength for WalMart. Assign a Rating of 4

Minor strength = 3 Minor weakness = 2

Example: Quality is a minor Weakness for WalMart as compared to JC Penny. Assign a Rating of 2 for WalMart & 3 for JC penny

Major weakness = 1
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Competitive Profile Matrix

As an improvement to this approach, rating can be on a continuous scale between 1 & 4 That is, for example, rating can be 3.4 if one feels that the company rating falls between minor and major strength Multiply the weights with the rating to arrive at the weighted scores

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Competitive Profile Matrix

In the case of retail, let us assume
Highest weight of 30% for Price Competitiveness Lowest weight of 10% for Financial

Weights depend upon the industry

For example, in Banking industry, Financials can be given higher weight High end Information technology industry may not operate on price competitiveness but technical capability

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Competitive Profile Matrix

Ratings depend upon the relative strength of the firm in the industry For Wal-Mart, price is a major strength, hence the rating against price is 4 It pays the company to have major strength in a Critical Success Factor (CSF) which has the highest weight
Again, dont assign highest weight to your strength, if it is not true Be objective and honest

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Competitive Profile Matrix

Critical Success Factors Weight Wal-Mart K-Mart J C Penny
Rating Weighted Score Rating Weighted Score Rating Weighted Score

Market Share

0.2

0.60

0.40

0.40

Price competitiv eness

Financial Position

0.3

1.20

0.60

0.30

0.1

0.40

0.20

0.20

Product Quality
Consumer Loyalty Total

0.2
0.2 1.0

2
2

0.40
0.40 3.00
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2

0.40
0.40 2.00

3
2

0.60
0.40 1.90

Competitive Profile Matrix

From the above CPM, following observations are made
Wal-Mart is relatively better placed (weighted score of 3.0) than K-Mart (2.0) or JC Penny (1.9) But remember numbers represent a relative strength but their implied precision could be an illusion
See page 95 & 191 Strategic Management By Fred David
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Stage 2: How are strategies decided?

Depending on the Internal and External Dimensions, Competitive Positions or Strategies are decided

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Strategy depends on dimensions

Internal Dimensions
Competitive Advantage (CA) and Financial Strength (FS)
Comparison is wrt other players in the industry
Cognizant outshines peers: net zooms 22% to $172 m
Source: ET, 4 August 2010

Cognizant:Q1, 2010: Net profit Rs 792 crores TCS: Q1 net profit slips 4.5% to Rs 1906 crores Infosys: Q1, 2010, Net profit dips to Rs 1488 crores Cognizant growth attributed to strength of Business Model and operational strategy Key Management and workforce located in US which facilitates capturing clients who consider Cognizant as a local American firm See also The scale-up begins

External Dimensions
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Strategy depends on dimensions

External dimensions
Industry Strength (IS) and Environmental Stability (ES)
Comparison is with respect to other industries
How is IT industry fairing wrt pharmaceuticals?

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Examples of variables defining Internal & External Dimensions

Examples of the variables that define the Internal & External Dimensions are given in the slides to follow:
Remember that it is indicative and not an exhaustive list You need to choose / add factors as appropriate to the industry and the organisation

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Examples of variables that make up Internal & External Dimensions

Internal Strategic Dimensions External Strategic Dimensions

Financial Strength (FS)

Return on investment Leverage Liquidity Working Capital Cash Flow

Environmental Stability (ES)

Technological Changes Rate of inflation Demand variability Price range of competing products Barriers to entry into market
Reliance 27mtpa, Jamnagar, Gujarat

Competitive Pressures Ease of exit from market Price elasticity of demand Risk involved in business
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Examples of variables that make-up Internal & External Dimensions

Internal Strategic Dimensions Competitive Advantage (CA)
Market Share Product quality Product life cycle
Recollect the presentation on Product Life Cycle and corresponding strategies

External Strategic Dimensions Industry Strength (IS)

Growth potential Profit potential Technological know-how (At industry level) Resource utilization Ease of entry into market Productivity, capacity utilization

Customer loyalty Competitions capacity utilisation Technological know-how (Note that this figures as Industry Strength also but the context vary!) Control over suppliers & BPSM: Module 4 distributors

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Types of strategic positions

An organization can take any of the following Strategic Positions (Adopt various Strategies)
Aggressive
Backward & forward integration, acquisition

Competitive
Horizontal integration, joint ventures

Defensive
Retrenchment (reduction of assets), liquidation

Conservative
Staying close to basic competencies & not risking Market development, product development

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Examples of Aggressive Strategy

Acquirer Tata Steel Hindalco Videocon Dr Reddys Labs Suzlon Energy HPCL Ranbanxy Tata Steel Videocon VSNL Target Company Corus Group Novelis Daewoo Electronics Betapharma Hansen Group Kenya Petroleum Terapia SA Natsteel Thompson Teleglobe Country targeted UK Canada Korea Germany Belgium Kenya Romania Singapore France Canada
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Deal Value ($ Million) 12,000 5,982 729 597 565 500 324 293 290 239

Industry Steel Aluminium Electronics Pharma Energy Oil & Gas Pharma Steel Electronics Telecom
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Examples of strategies
Competitive Strategies
Horizontal integration, when funds (resources) are available
Seeking ownership or increased control over its competitors
Vodafone taking over Essar Hutchison

Related diversification
Adding new but related products
SBI entering into Life Insurance

Unrelated diversification
Adding new, unrelated product
WIPRO, Western India Palmolive Refinery Organisation foraying into IT
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Examples of strategies
Defensive Strategies
Retrenchment
Regrouping through cost & asset reduction to reverse declining sales & profits Binny Mills selling off a part of its lands in Bangalore

Divestiture
Selling a division or part of an organisation
Eli-Lilly

Liquidation
The process by which a company is brought to an end, and the assets and property of the company redistributed. Sometimes referred to as winding-up or dissolution
Golden Forest India Liquidated
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Examples of Strategies
Examples Conservative Strategies
Staying close to basic competencies & not risking

Market development
Introducing present products in a new geographic area
AT&T, Verizon bidding for 3G (Third Generation) mobile services in India See page 119 & page 109, Strategic Management by Hill & Jones, Case Verizon Wireless

Product development
Seeking increased sales by improving present product or introducing a new product
Handset majors like Nokia will now introduce new highended sets to suit 3G mobile service like high speed internet, gaming, instant downloading of movies
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A tool for choosing the strategy

SPACE Matrix Strategic Position and ACtion Evaluation (SPACE) matrix is a four-quadrant framework facilitating choice of an appropriate strategy, namely,
Aggressive Competitive Defensive Conservative
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SPACE Matrix
Financial strength (FS) FS Conservative Aggressive

CA Competitive advantage (CA) Defensive

IS Industry strength (IS) Competitive

ES Environmenta l stability (ES) BPSM: Module 4

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How to develop SPACE Matrix?

Select a set of variables to define
Internal dimensions
Financial Strength (FS) Competitive Advantage (CA)
Conservative CA Competitive advantage (CA) Defensive Financial strength (FS) FS Aggressive

IS Industry strength (IS) Competitive

And External Dimensions

Environmental Stability (ES) Industry Strength (IS)

ES Environmenta l stability (ES)

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How to develop SPACE Matrix?

Assign a numerical value
Financial Strength (FS) & Industry Strength (IS)
Ranging from + 1 (worst) to + 6 (Best) to each of the factors that make up the FS and IS dimensions,
Conservative CA Competitive advantage (CA) Defensive Financial strength (FS) FS Aggressive

IS Industry strength (IS) Competitive

Environmental Stability & Competitive Advantage

Ranging from - 1 (Best) to - 6 (worst) to each of the factors that make up the ES and CA dimensions
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ES Environmenta l stability (ES)

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How to develop SPACE Matrix?

On FS & CA axes, make comparison to competitors in the industry On IS & ES axes, make comparison to other industries
Financial strength (FS) FS Conservative Aggressive

CA Competitive advantage (CA) Defensive

IS Industry strength (IS) Competitive

ES Environmenta l stability (ES)

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How to develop SPACE Matrix?

Compute the average score FS, CA, IS & ES by summing the values given to the variables of each dimension and dividing by the number of variables included in the respective dimension
Financial strength (FS) FS Conservative Aggressive

CA Competitive advantage (CA) Defensive

IS Industry strength (IS) Competitive

ES Environmenta l stability (ES)

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How to develop SPACE Matrix?

Add the two scores on the X - axis
( X coordinate)
Financial strength (FS)

Add the two scores on the Y-axis

(Y Coordinate)

Conservative

FS

Aggressive

Plot the ( X,Y) coordinate point Draw a Directional vector from the origin of the SPACE Matrix through the ( X,Y) coordinate
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Competitiv e advantage (CA)

CA

IS Industry strength (IS)

Defensive

ES

Competitive

Environmental stability (ES)

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How to develop SPACE Matrix?

The vector reveals the strategies recommended for the organization
Aggressive (Upper-right quadrant) Competitive (Lower-right quadrant) Defensive ((Lower-left quadrant) Conservative (Upper-left quadrant)
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Financial strength (FS) FS Conservative Aggressive

CA Competitive advantage (CA) Defensive

IS Industry strength (IS) Competitive

ES Environmenta l stability (ES)

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Implications of the strategies

When the organisationals directional vector is in the aggressive quadrant (Upper-right quadrant), an organisation is in an excellent position to use its internal strengths to
Take advantage of external opportunities Overcome internal weakness Avoid external threats
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Implications of the strategies

When the organisationals directional vector is in the Conservative Quadrant The organisation chooses to stay close to its basic competencies and will not take excessive risks Avoid
Diversification Integration backward or forward

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SPACE Matrix for WalMart

Financial Strength (FS)*
The return on assets is 7.7%, compared to industry average of 4.0% WalMarts net income was $11 billion, up by 10% WalMarts revenue increased 11% to $ 408 billion ( in 2009) Total
(Ratings considered in this example are hypothetical)

Rating*
6.0 5.0 4.0 15.0

*Ratings are based on comparison with competitors in the industry

E.g., Return on asset of 7.7% compared to industry average of 4% A value of + 6 has been assigned as Financial Strength is considered Best
Numerical value ranging from + 1 (worst) to + 6 (Best)

Three factors are considered and the total rating is 15.0 Therefore, FS average = 15.0 / 3 = 5.0
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SPACE Matrix for WalMart

Industry Strength (IS)* Rating*

Deregulation provides geographic & product freedom Asian markets opening up Rising consumerism Total
*Ratings are assigned in comparison to other industries

6.0
6.0

6.0 18.0

E.g., Deregulation provides greater industry strength to retail in FMCG as compared to say, industrial goods
A value of + 6 has been assigned as Industry Strength is considered Best
Numerical value ranging from + 1 (worst) to + 6 (Best)

IS average = 18.0 / 3 = 6.0

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SPACE Matrix for WalMart

Environmental Stability (ES) Less developed countries facing high inflation & political instability Too many players Regulation in OTC drug retailing Total
Rating in comparison to other industry
Best environmental stability: -1.0 Worst environmental stability: -6.0

Rating -2.0 -2.0 -2.0 -6.0

ES average = -6.0 / 3 = -2.0

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SPACE Matrix for WalMart

Competitive Advantage (CA)
WalMart has more than 2300 supercentres but does not have representation in India WalMart is the worlds largest retailer

Rating
-3.0 -2.0

The prices offered by WalMart are unbeatable Total Ratings are wrt competitors in the retail industry
Best competitive advantage: -1.0 Worst competitive advantage : -6.0

-1.0
-6.0

CA average = -6.0 / 3 = -2.0

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SPACE Matrix for WalMart

Directional vector coordinates:
X-axis: CA rating+ IS rating = -2.0 + 6.0 = 4.0 Y-axis: FS rating + ES rating = 5.0 + (-)2.0 = 3.0 Draw a directional vector from the origin to intersection point x,y (4.0, 3.0)

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SPACE Matrix for Wal-Mart

Internal strategic position Financial strength +5 (+1 best to +6 worst) Environmental stability -2 (-6 worst to 1 best) Y axis: 5 + (-2) = 3 External strategic position Competitive advantage -2 (-6 unstable to 1 stable) Industry strength +6 (+1 best to +6 worst) X axis: 6 + (-2) = 4 Conservative FS Aggressive

CA

IS

Defensive

ES
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Competitive
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SPACE Matrix for Wal-Mart

The directional vectors falls in the Aggressive quadrant (upper-right quadrant) WalMart is in an excellent position to use its internal strength to
Take advantage of external opportunities Overcome internal weakness Avoid external threats
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Alternatives for WalMart

WalMart can choose to grow aggressively by:
Build additionally Super Centres nationwide and worldwide Improve SAMs Club operations

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Stage 3: The decision stage

Intuition & analysis results in various strategic alternatives for a given situation Now, how does one choose an alternative?
By determining the relative attractiveness of feasible alternatives

Quantitative Strategic Planning Matrix (QSPM) is a tool that helps in evaluating the alternatives
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Quantitative Strategic Planning Matrix [QSPM]

Basic format of QSPM Left column of QSPM consists of key internal & external factors, with corresponding weights against the factors Top row consists of feasible alternatives from Stage II

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Quantitative Strategic Planning Matrix [QSPM]

Relative Attractiveness Scores (AS) are assigned for each alternative & each factor
Not attractive Some what attractive Reasonably attractive Highly attractive =1 =2 =3 =4

If a factor is not relevant to the alternatives do not assign any Attractiveness Score Do not assign same AS to various alternatives Multiply the weights with AS to get Total Attractive Score (TAS)
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Quantitative Strategic Planning Matrix (QSPM) Strategic Alternatives Key Internal Factors Weight Build additional Improve Sam's Club Supercentres nationwide operations & worldwide AS TAS AS TAS Strength 0.20 Consumer oriented Sam's club consumers buy in bulk 0.20 1.00 0.20 4.00 0.80 0.05 Customer goodwill Good relation with local buyers 0.15 0.05 2.00 0.10 3.00 0.15 Leads industry in IT Ongoing development of its 0.10 2.00 0.20 1.00 0.10 employees Weakness Business only with Sam's club 0.15 1.00 0.15 2.00 0.30 members Keep poor performing employees 0.05 1.00 0.05 2.00 0.10 on hand Few women & minorities in top management 0.05 1.00 0.05 2.00 0.10 1.00 0.75 1.55 Subtotal

Quantitative Strategic Planning Matrix (QSPM) (Contd.) Strategic Alternatives Weight Key External Factors Build additional Improve Sam's Club operations Supercentres nationwide & worldwide

Opportunities Consumer want ease of shopping Internet shopping growing Dollar value increasing

AS

TAS

AS

TAS

0.15 0.20 0.05 0.15 0.15

4.00 3.00 3.00 4.00 4.00

0.60 0.60 0.15 0.60 0.60

2.00 4.00 2.00 3.00 2.00

0.30 0.80 0.10 0.45 0.30

Similar shopping patterns worldwide Asian market literally untapped

Threats Regulation of WalMart pharmacies Small towns do not want entry of WalMart Subtotal Grand Total Attractiveness Score

0.10 0.20 1.00

2.00 3.00

0.20 0.60 3.35 4.10

1.00 1.00

0.10 0.20 2.25 3.80

QSPM Concluded
Choose that alternative which has the highest TAS In this case, the alternative, Building additional Supercentres nationwide and worldwide has a higher score of 4.1 (>3.8)
The magnitude of difference between the Grand Total Attractiveness Score indicates the relative desirability of one alternative over another
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Summary of the module

Three stages in strategy formulation are Input stage
Tool: Competitive profile Matrix (CPM)

Matching Stage
Tool: Strategic Position ACtion Evaluation Matrix (SPACE)

Decision Stage
Quantitative Strategic Planning Matrix (QSPM)
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Summary of module
Strategic depends upon the Internal and External Dimensions Internal Dimensions
Competitive Advantage Financial Strength

External Dimension
Industry Strength Environmental Stability
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Summary of module
Decision is based is assigning Attractive scores to each of the variables under SWOT and finding the Total Attractive Score The alternative with the highest TAS is the strategy of choice But these choices are tempered by cultural and political consideration After all, strategy is taking subjective decisions based on objective information
End of module
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