Strategic analysis. Activity 35.1 (page 619): Strategic analysis of LVM Ltd

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1 35 Strategic analysis A Activity 35.1 (page 619): Strategic analysis of LVM Ltd 1 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 Opportunities: Asian market when trade barriers lifted high growth potential depreciation of exchange rate changing pattern of demand toward laptop computers relocation Weaknesses: limited factory capacity cash-flow concerns doesn t sell computers under own brand name insufficient training of labour Threats: shortages of skilled labour increase in interest rates inflation new mobile-phone technology 2 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 Selling under own brand name Analysis and evaluation 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) 1

2 A Strategic option Analysis and evaluation Develop mobile-phone technology Relocation to area of high unemployment Develop Asian market 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? 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. 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. Investigation into supermarkets brought no significant changes. Minimum wage is currently in force. 2

3 A Economic There was an economic recession in Interest rates were low (2009) base rate 0.5%. Inflation was low and stable, but there was a threat of deflation in 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 Government debt was increasing rapidly in Social The population is ageing. Society is multicultural with significant ethnic and non- British influence on food consumption. Until recession, green issues were becoming increasingly important. Marks & Spencer has made a commitment to becoming carbon neutral by High levels of part-time employmment offer flexibility to employees. Educational standards are relatively high; skilled workforce available. Technological 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. Wal- Mart 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 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 3

4 A 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. 4

5 A 2 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 Product differentiation Analysis and evaluation 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. (Continued) 5

6 A Strategy Analysis and evaluation Buying out competitors Competition policy in some countries takeover activity 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. Focus on lesscompetitive market Size of the market segments if demand is very low, then the segment will be of less interest to other firms. However, the segments 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. Collude with rivals 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. 6

7 A 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. 7

8 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. 8

9 A 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: case-study--swot-analysis-action php 9