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Strategic analysis
A Activity 35.1 (page 619): Strategic analysis of LVM Ltd
1
2
Prepare a SWOT analysis based on your assessment of the internal and external
factors that influence LVM’s success. [10]
Strengths:
• excellent staff relationships
• relationship with major brands
• R&D into faster computer models
• steady profits
Weaknesses:
• limited factory capacity
• cash-flow concerns
• doesn’t sell computers under own
brand name
• insufficient training of labour
Opportunities:
• Asian market when trade barriers lifted
• high growth potential
• depreciation of exchange rate
• changing pattern of demand toward
laptop computers
• relocation
Threats:
• shortages of skilled labour
• increase in interest rates
• inflation
• new mobile-phone technology
Identify and evaluate two potential strategic options available for LVM Ltd by using
the SWOT diagram prepared in 1. [12]
Having conducted a SWOT analysis, a business may wish to build on its strengths,
address weaknesses, take advantage of opportunities and prepare to deal with
threats. For LVM there are a number of strategic options suggested by the SWOT
analysis; these include:
Strategic option
Analysis and evaluation
Selling under
own brand name
• It could be difficult and expensive to break into the market as
•
•
•
•
•
•
a distinct brand.
There is competition from established brands, such as Dell.
Marketing expenditure to develop brand loyalty is required.
Operational issues include the capacity of existing factory.
Models currently under development could give competitive
advantage.
Channels of distribution need to be considered – direct to
consumer or via retailers?
There is a lack of experience in selling to retailers/consumers.
(Continued)
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Strategic option
Analysis and evaluation
Develop
mobile-phone
technology
• As this option was rejected two years ago, this would be a
risky option. Competitors have a significant head start in
developing the product – could LVM catch-up?
The cost of R&D is significant. Although profits are steady,
would LVM have the funds available for research?
•
Relocation to
area of high
unemployment
• Impact on existing workforce – ethical considerations are
important.
• The size of the government grant available will need to be
balanced against other location factors, such as availability of
labour.
Low cost of labour could give competitive advantage.
The need for finance will need to be considered in relation to
concern over rising interest rates.
•
•
Develop Asian
market
• This is dependent on reduction in trade barriers.
• If trade barriers remain, LVM would have to locate
production in Asia to compete.
• Market research is required into the market.
• Could LVM enter this market by directly selling its own
products to consumers or would it be through the major
brands they supply?
Evaluation may consider:
Cost and risk are likely to be important issues. Ansoff ’s matrix could be used to help
evaluate risk.
Activity 35.2 (page 621): PEST for a foreign retailer in your
country
A large retailing company, Tasco, is looking into opening a chain of stores in your country
for the first time. Tasco already has shops in several different countries as well as its own
domestic market where it holds a 33% market share in food and drink retailing.
1
Undertake a PEST analysis of the macro-economic environment for Tasco in your
own country. [12]
PEST analysis must reflect the external environment in the student’s own country.
A wide variety of issues should be researched and it is important that data are upto-date. A simple PEST analysis for the UK in 2009 is provided below.
Political and legal
• The political system is stable.
• There are not likely to be any changes in law affecting
supermarkets.
• Employment law gives strong protection of worker rights
broadly in line with rest of the EU.
• National and EU competition legislation regulates markets.
•
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Economic
• There was an economic recession in 2008–09.
• Interest rates were low (2009) – base rate 0.5%.
• Inflation was low and stable, but there was a threat of
•
•
•
•
•
deflation in 2009.
Unemployment is 7.2% − lower than EU average (2009).
Big four supermarkets in UK have over 70% market share.
The UK is a member of the EU.
There was significant depreciation of sterling in 2008 but
recovery against dollar in mid-2009.
Government debt was increasing rapidly in 2009−10.
• The population is ageing.
• Society is multicultural with significant ethnic and non-
Social
British influence on food consumption.
• Until recession, green issues were becoming increasingly
•
•
Technological
important. Marks & Spencer has made a commitment to
becoming carbon neutral by 2012.
High levels of part-time employmment offer flexibility to
employees.
Educational standards are relatively high; skilled workforce
available.
• High computer ownership and internet access offer
opportunities for selling online.
2
On the basis of this analysis, would you advise Tasco to go ahead with this expansion
in your country at this time? Justify your answer. [12]
The factors that would be most significant to Tasco need to be identified. For
example, in the case of the UK the dominant position of the current market leader
and the high market shares of three other supermarkets suggest that there is, at
best, limited room for new entrants. However, firms such as Netto and Aldi have
successfully entered the market as low-priced competitors to the big four. WalMart also entered the market when it took over Asda, the number 2 supermarket
in the UK. It should also be noted that despite the recession sales growth of the big
four supermarkets has remained robust.
Activity 35.3 (page 622): Researching mission statements
Use the internet site www.samples-help.org.uk/mission-statements to look up more
mission statements for well-known corporations. Evaluate the usefulness of any one of
these mission statements for planning of future strategies for this business.
Definition of a mission statement: a mission statement outlines a business’s core
purpose and focus.
Example:
FedEx mission statement
‘FedEx is committed to providing outstanding customer experience, to being a great place
to work, a thoughtful steward of the environment and a caring citizen in the communities
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where we live and work. At FedEx, we are passionate about sustainably connecting people
and places and improving the quality of life around the world.’
A mission statement provides a starting point for setting long-term objectives and the
strategies required to fulfil those objectives.
However, in considering the chosen mission statement the following questions would
need to be addressed:
• Is the statement too general to provide real direction for long-term planning?
• What is the purpose of the statement? In some cases it has no purpose other than to
gain publicity.
• Does the statement provide realistic corporate aims?
• Can mission statements for highly diversified businesses be anything other than
general?
• Do managers pay any attention to the mission statement?
Activity 35.4 (page 624): Applying the Boston Matrix
Undertake detailed research into the product portfolio, of one well-known business in
your country that sells range of different products. For example, this might be a chocolate
manufacturer, soft drinks producer, car manufacturer and so on. Try to discover the
market share of the different products sold and the rate of growth of the market segment
the products are sold in.
1
Analyse the firm’s product portfolio using the Boston Matrix. [12]
The Boston Matrix analyses a firm’s product portfolio according to market share
and market growth. Theoretically, most products pass through all four stages of the
matrix as they mature, starting out as question marks and ending up as dogs.
Pepsi:
• Problem child: Tropicana – the smoothie market is growing rapidly but
Innocent has the biggest market share and dominates the market. Pepsi
dropped PJ Smoothies from their product portfolio in 2008 to concentrate on
the Tropicana brand.
• Star: Pepsi Raw – premium cola is a fast-growing market and Pepsi Raw,
launched in 2008, has seen high growth of sales.
• Cash cow: Pepsi – the cola market is a mature market and Pepsi has long been
the number-two brand in the market behind Coca-cola.
• Dog: 7Up – this also competes in a mature market, but has seen its market share
falling.
Note: It is difficult to analyse a firm’s product portfolio because there is no clear
definition of what is meant by high market share or growth. What constitutes high
market share will vary from one market to another.
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Evaluate two strategies that the business could adopt for any one of its products. [12]
Traditional strategies will build on the following rules:
• Stars – invest in these since they could become dominant market leaders.
• Cash cows – milk these to provide the cash to invest in your stars and a few
question marks.
• Question marks – invest in the most promising of these as well — but not all of
them as they are cash hungry.
• Dogs – let some of these go as they barely break even.
Example: Problem child
Tropicana could be supported with increased levels of advertising. Pepsi may
need to offer incentives to encourage retailers to stock the product as Innocent
Smoothies may be preferred due to higher sales. Pepsi may wish to position
the product at a different price point from that of the market leader to give it a
competitive edge. Repackaging the drink to freshen its image could also be used.
Tropicana will need substantial amounts of cash to increase its market share.
The traditional view is that a problem child consumes resources, but should be
supported to try and transform it into a star. Without support, Tropicana will
become a dog in the long term. This had already happened to PJ Smoothies, which,
despite Pepsi’s efforts, was withdrawn from the market.
However, markets change rapidly. Therefore, there can be substantial shifts from
one product to another; for example, what if consumers shift from smoothies to
bottled water due to increasing concerns about tooth decay? If this happens, then
the marketing budget spent on supporting Tropicana may be wasted.
Just because a product is a dog does not mean it should be divested. With the right
marketing strategy, it is possible to revitalise many products. For example, Nike
bought troubled Converse in 2003 and over the next four years turned the brand
into a success again.
Activity 35.5 (page 626): Evaluating four strategies
Evaluate the four strategies referred to above and discuss the most important factors that
will influence their success. [20]
Strategy
Analysis and evaluation
Product
differentiation
• Demand will be less sensitive to price. Product differentiation
will enable a firm to charge higher prices for its product.
• Differentiation may be expensive to develop if genuine
differences are sought.
• The strategy may be more successful when a firm is
able to patent innovations that give rise to the product
differentiation, e.g. Dyson vacuum cleaners were
differentiated from competitors through developing and
patenting new technologies.
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Strategy
Analysis and evaluation
Buying out
competitors
• Competition policy – in some countries takeover activity
•
•
Focus on lesscompetitive market
segments
• Size of the market segments – if demand is very low, then the
•
•
Collude with rivals
is strictly controlled to prevent one firm gaining too much
influence within an industry. The regulatory authorities will
have the power to investigate proposed mergers and block
them if it is felt that they are not in the public interest.
The availability of finance will be crucial for the business to
raise the capital to launch a takeover bid.
Ownership of competitors – limited companies may be more
difficult to takeover because shares are concentrated in a few
hands.
segment will be of less interest to other firms. However, the
returns will also be low.
Consideration will need to be given to how easy it is for other
firms to enter the market segment.
The different needs of the market segment will have an
impact on the cost of developing products for the segment.
• This will be easier if just a few firms dominate the industry, as
•
the success of collusion depends on being able to act in unity.
The smaller the number of firms, the greater the chance of
firms adhering to agreements.
Legal restrictions and attitude of the government – collusion
is an anti-competitive practice and is, therefore, illegal in
many countries. How rigorously does the regulatory authority
enforce the law and what are the penalties for collusion? If
fines are relatively small in comparison to the gains, then
collusion is more likely.
Activity 35.6 (page 626): Which industry is more competitive?
Using Porter’s Five Forces model, the information above and any other information you
have researched, compare the likely competitive rivalry of these two industries. [20]
Fashion industry:
• Threat of new entrants is low due to the strength of the existing brands in the
market. It would be expensive to build brand awareness for new entrants. It is
difficult for new entrants to establish appropriate distribution chains as exclusive
shops often have agreements with fashion companies to be their exclusive outlets.
E-commerce may make a route to market possible for new fashion houses.
• Power of buyers – there are a limited number of large buyers; this increases their power
over the fashion companies and will increase competitive rivalry. However, there are a
large number of independent buyers, which would reduce competitive rivalry.
• Power of suppliers – suppliers are relatively weak as there are many suppliers of the
materials used in the industry.
World car industry:
• Threat of new entrants is relatively low due to worldwide overcapacity and the
substantial costs of capital equipment. Economies of scale are also significant in
the car industry and this led to merger activity in the 1980s and 1990s so that firms
could share components between models.
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•
•
•
•
Brand awareness is high and it would be expensive to build a new brand from
scratch.
Threat of substitute products – alternatives to the car are limited. Other forms of
transport, such as rail and coach, lack the flexibility offered by the car.
Power of buyers – manufacturers control many of the car showrooms directly or
indirectly. Large multinationals dominate the car industry.
Power of suppliers – car manufacturers, such as Toyota and Nissan, have tried hard
to build supply chains rather than use multiple suppliers. This enhances the power of
suppliers.
To gain sales, manufacturers have to take market share off each other as the growth
of the industry is low. Therefore, this increases competitive rivalry between firms.
Activity 35.7 (page 628): Core competencies in practice
Research into the range of products offered either by Honda or Black and Decker. Discuss
the benefits to either of these businesses of having the core competence outlined above. [16]
Answers should include a definition of a core competence.
Black and Decker is the world’s largest producer of power tools and accessories
including lawnmowers, garden vacs, drills, chainsaws, hedge trimmers, shredders, saws
and vacuum cleaners. Small electric motors are used in many of these products.
Benefits include:
• As the same electric motors are used in a range of products, Black and Decker will
be able to benefit from economies of scale including:
– Purchasing economies – buying components in bulk will lead to discounts and
give Black and Decker power over suppliers.
– Technical economies – e.g. division of labour.
Economies of scale will reduce the unit cost of production and give Black and
Decker a cost advantage in its various markets. Therefore, price will be competitive
and the firm will benefit from increased sales.
• The core competence will attract customers. The reputation of Black and Decker is
strong as a result of its expertise in developing small electric motors.
• Research and development can be focused on the core competence to maintain
competitive advantage.
• Black and Decker can sell its electric motors to other manufacturers as well as
produce consumer products.
Revision case study 1 − answer provided on Student’s CD-ROM.
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A Essay
1 a Assess the usefulness of SWOT analysis to the management of a business considering
a new strategy. [10]
Definition of SWOT analysis: SWOT analysis identifies internal strengths and
weaknesses and the external opportunities and threats that will influence the future
direction of the business. Examples drawn from a student’s own country would add
value to the answer.
SWOT analysis is one of a number of techniques that provide strategic analysis for
management and to aid strategic planning.
Benefits:
• It helps assess likely success of future strategies and the constraints on them.
• It helps to understand the present situation of the business and, therefore, to
make decisions.
• Analysing the external opportunities and threats allows a firm to identify how it
should target its marketing messages (see further reading below).
• It is a useful tool for strategic analysis.
Weaknesses:
• It is not a quantitative technique. It does not identify the relative cost of taking
advantage of opportunities or correcting weaknesses.
• It is subjective. The value of a SWOT analysis is dependent on whether the
internal audit has been carried out honestly. If the business is not compared
against the best, it will give a false picture of a business’s strengths and
weaknesses.
• Does the external audit draw on sufficient evidence about both the present and
future environment?
Evaluation may consider:
Effective strategic analysis will lead to improved strategic decisions and reduce risk.
However, it is only a starting point for choosing between and developing new strategies.
b
To what extent might a detailed PEST analysis contribute to the success of a strategy
to launch a new chain of fast-food restaurants in your country? [15]
Definition of PEST analysis: this is a form of strategic analysis of a firm’s external
environment, including political, economic, social and technological factors.
Answers should be developed in context of a specified country.
Benefits:
• A strategy to launch a new chain of fast-food restaurants in any country will
require an initial analysis of the external environment. This will shape how the
strategy is developed to take advantage of the opportunities within the country.
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•
Countries differ from each other and, therefore, strategies will need to be
adapted to suit national conditions. For example:
– How will economic conditions affect growth targets and pricing decisions?
– Does the food on offer need to be adapted to meet the lifestyle decisions of
society?
– How might legislation change in the future? This could affect tactical
decisions about packaging.
Weaknesses:
• The external environment is constantly changing. This means that a PEST
analysis is only valid for a short period of time. Is it worth the time and effort
of analysing the external environment if it will change within a short period of
time?
Evaluation may consider:
Strategic decisions require a detailed analysis of the external environment in order to
ensure that strategies are appropriate. If no analysis is conducted, then strategies are
less likely to fit the specific needs of a market. Launching a fast-food restaurant in a
new country requires the right marketing strategies to be adopted from product to
promotion. Therefore, it is essential to conduct a PEST analysis.
Further reading
Times 100; Skoda, SWOT analysis in action: http://www.thetimes100.co.uk/
case-study--swot-analysis-action--131-322-1.php
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