Guidance for a strategic analysis of the firm.
THIS IS NOT A SURVEY TO BE COMPLETED IT IS GUIDANCE FOR A REPORT!
David Bechtold
SECTION 1 – Guidance for a Strategic Analysis – External Analysis
Overview:
The external environment analyzes those factors outside of the company’s direct control that can impact its competitiveness. This analysis consists of an assessment of the broad environment (those general trends that may have an impact on the industry) and an assessment of the task environment (those factors that directly impact the company). Together the external analysis should give you a clear understanding of what is currently impacting the industry (through the task environment) and what may impact the industry in the future (through the broad environment). This analysis requires several tasks to adequately complete.
Definition of the industry(ies)
A clear definition of the industry(ies) that a company resides within is essential in order to conduct a meaningful external analysis. The products or services that the company provides to the marketplace will give an insight into the industry definition. The definition of the industry should be specific enough to the company being analyzed. Keep in mind that often that an industry may be nested in a broader industry (e.g.. a beer producer is a subset of the alcoholic beverage industry which is a sub-set of the beverage industry). Identifying both the industry sub-set that the company is nested in as well as the broader industries that make up the complete potential market is critical. Also you must be aware that the company may produce products in several industry subsets with each having distinct characteristics that must also be considered and prioritized (e.g. the beer producer that also makes spirits will have different external environmental exposures).
Once the industry subset and the larger industries are clearly defined the distinguishing characteristics of each industry must be established. This should include
What is the size of the market?
What is the general rate of growth of the market (e.g. you can use the industry life cycle as a guide)?
What is the general market strategy (developing niches or scale)?
What is the general product strategy (highly differentiated products, some differentiated products, or commodities)?
Are there significant initial or fixed costs associated with entering the industry?
You should consider these questions for all of the industry subsets that the company currently services as well as the broader industries. The financial websites (e.g. google finance as well as any information from publicly held competitors, such as annual reports or investor conference calls, can be useful resources for defining the industry(ies)).
The broad environment
The broad environment identifies general trends that may create future opportunities or threats for the company. These trends could be from any of the five basic environments (political/legal, economic, socio/cultural, technological, and environmental) but can basically be analyzed around two general concepts:
Will these factors influence demand?
Will these factors influence cost structures?
Some basic questions that you should consider include:
Economic trends (e.g. availability of credit, income level growth, etc.) that impact the ability of the industry to operate or expand.
Demographic trends.
Are their any current social issues impacting the industry? Are these fads or lasting issues?
What are the political trends impacting the industry?
Is changing technology going to enhance or diminish the industry?
Do strong brands or company image drive the industry?
When you make your broad analysis you should also consider whether these general trends have a more immediate impact (e.g. legislature that will go into effect sometime in the near future) or an impact sometime in the future (e.g. the introduction of new technology that would make production more efficient).
This broad environment analysis should influence your task environment analysis. You should be able to reference your analysis as you conduct your task environment analysis.
The task environment
Once you have clearly defined the industry(ies) that the company sells products within you should conduct an analysis of the factors that directly impact the companies activities. Tools such as Porter’s five forces can be extremely useful in identifying those factors that may impact your competitive advantages. A clear definition of the industry is essential in conducting a meaningful assessment of the task environment. You should also develop a clear definition of the product(s) or service(s) being sold to the market.
Some basic questions that should be answered with your product definition includes:
What is the product or service being offered?
What is the product’s function?
What makes it valuable for a customer?
How is it distributed to the customer (retail, wholesale, etc.)?
Which competitors sell similar products?
The Porter’s analysis should be inclusive of all five forces. You should be able to determine from your analysis whether the force has a high impact or a low impact to the firm. Forces that have a high impact to the firm will dilute a firm’s competitive advantage and may force the company to compete using more strategies related to pricing than strategies related to product differentiation.
Industry rivalry
Porter describes several factors that will help you determine whether this force has a high impact on the company or not. Some basic questions that should be answered include:
Who are the company’s primary competitors in this industry?
How does the company compare to these competitors (e.g.. what is the share of the market that each has)?
Is the company gaining or losing market share to competitors?
What is the basic strategy used by competitors (e.g. price, differentiation)?
Is this a global industry with global competitors?
Is this a global industry with only domestic competitors (i.e. there are no multi-national competitors only local ones for each country)? If so why and in what way?
Are their significant exit barriers that exist within this industry? If so what are they?
Are there general trends in the broad environment that could enhance or diminish the threat of this force?
These are some, but not all, of the questions that your analysis should consider. You should try to be as complete as possible in your analysis and be willing to describe those areas that you were unsuccessful in acquiring data on and why it was so difficult to do so.
Power of Buyers
Porter describes several factors that will help you determine whether this force has a high impact on the company or not. Some basic questions that should be answered include:
Is the buyer market consolidated or fragmented?
Who are the company’s primary buyers in this industry?
What product features are buyers most interested in (e.g. price, quality, etc.)?
Is it hard for buyer’s to switch to other companies? Why?
Are there general trends in the broad environment that could enhance or diminish the threat of this force?
These are some, but not all, of the questions that your analysis should consider. You should try to be as complete as possible in your analysis and be willing to describe those areas that you were unsuccessful in acquiring data on and why it was so difficult to do so.
Power of Suppliers
Porter describes several factors that will help you determine whether this force has a high impact on the company or not. Some basic questions that should be answered include:
What are the critical supplies need for the company to successfully conduct its business?
Is the supplier market for those supplies consolidated or fragmented?
Who are the company’s primary suppliers in this industry?
What features of the product or service provided are of most importance to the company (e.g. price, quality, etc.)?
Is it hard for buyer’s to switch to other suppliers?
Are there general trends in the broad environment that could enhance or diminish the threat of this force?
These are some, but not all, of the questions that your analysis should consider. You should try to be as complete as possible in your analysis and be willing to describe those areas that you were unsuccessful in acquiring data on and why it was so difficult to do so.
Barriers to entry
Porter describes several factors that will help you determine whether this force has a high impact on the company or not. Some basic questions that should be answered include:
Do significant barriers to entry into this industry exist? If yes, what are they?
Are these barriers financial, regulatory or legal?
Are these barriers designed to restrict global competition in the company’s current domestic markets?
Are these barriers designed to limit global growth?
Are there general trends in the broad environment that could enhance or diminish the threat of this force?
These are some, but not all, of the questions that your analysis should consider. You should try to be as complete as possible in your analysis and be willing to describe those areas that you were unsuccessful in acquiring data on and why it was so difficult to do so.
Threats of substitutions
Porter describes several factors that will help you determine whether this force has a high impact on the company or not. Some basic questions that should be answered include:
Are there close substitutes in the current industry subset that the company works within? If so what are they?
Are there close substitutes in the broader industry subset that the company works within? If so what are they?
Are there general trends in the broad environment that could enhance or diminish the threat of this force?
These are some, but not all, of the questions that your analysis should consider. You should try to be as complete as possible in your analysis and be willing to describe those areas that you were unsuccessful in acquiring data on and why it was so difficult to do so.
Remember you must conduct this analysis on all of the industries that you indentify that the company works within even if it makes the overall analysis more complex.
Opportunities and threats
Ultimately the external analysis should allow you to identify opportunities that the company has to be successful within the industry as well as corresponding threats. If your analysis has been adequately conducted you should be able to describe each of the opportunities and threats by a bullet point or a short sentence. You should also be able to prioritize these opportunities and threats in order of most important to the company.
THERE SHOULD BE NO OPPORTUNITY OR THREAT THAT IS LISTED THAT HAS NOT BEEN COVERED IN YOUR ANALYSIS.
Identifying key success factors facing the industry and the company
Based upon a thorough external analysis you should be able to make some general conclusions about the industry and the key factors that companies must address to be successful. Some basic questions should include:
What are the general forces driving the industry?
What are the key success factors that a company must have to be successful in the industry today (you should be able to list between three or five from your analysis)?
What are the key success factors that a company must have to be successful in the industry five years from now (you should be able to list between three or five from your analysis)?
What are the basic requirements that a firm must have in order to survive today?
What are the basic requirements that a firm must have in order to survive five years from now?
SECTION 2 – Guidance for a Strategic Analysis – Internal Environmental Analysis
COMPANY IS: ZYNEX MEDICAL (ZYXI)
https://www.zynex.com/
Overview
The internal environmental analysis analyzes those factors within the firm that can be considered operational strengths or weaknesses. This analysis is comprehensive and should consider all of the factors listed below even if the factor itself seems insignificant to the firm. The analysis should be detailed enough that strengths and weaknesses can be clearly identified and articulated with a single sentence. As with the external analysis the internal environmental analysis requires several tasks in order to complete.
Company/product definition
From the external analysis you identified generally what the company does and what industries it resides within. For the internal analysis you should reiterate what you stated in the external analysis and add the following information (some of this information will be described in more detail in the sub-sections):
1. Identify the year the company was founded and its growth history.
2. Describe the company’s organizational structure and provide an organization chart.
2. Identify who the primary customers are.
3. Identify the primary locations where they operate, the amount of revenue (preferably as a percentage of the total revenue of the company) that the location generates, as well as they regions where they primarily sell their goods or services (e.g. mid-west region, North America).
Describe the mission statement and assess its effectiveness.
You should be able to infer from your observations whether there are inconsistencies between what the company professes to be and what it actually is. As you conduct your internal analysis consider how each of the segments that you are analyzing support or fail to support the organizations stated culture (as described by the mission and the vision statements).
Review the mission statement of the firm (if one is available) and assess it using the eight points described in the lecture. Determine what areas (if any) in the mission statement that are deficient.
Review and assess the company’s vision statement (if one is available). Determine if the vision and the mission statements are consistent with one another and if they support each other.
Finally describe the corporate culture of the organization and how well it aligns with the company’s mission and vision statements.
Assessing the firm’s resources and capabilities
Devote a separate sub-section for each of the resource areas within the firm. These areas include, but are not limited to, human resources, operations, financial, research and development (intellectual property including patents, copyrights and trademarks), and marketing. The point of the analysis will be to identify what aspects of each resource that has the potential for developing a competitive advantage, what aspects of the resource already provide for a competitive advantage, and finally what aspects of the resource provides for a sustainable competitive resource. Remember it is insufficient to say that one of the broad resource areas (e.g. human resources) provides a competitive advantage you must be able to describe the particular element in the resource that provides the advantage (e.g. training) The use of the VRIO(N) analysis tool will help you to determine if a resource or capability has the potential for being a sustainable competitive strategy. Remember the VRIO stands for value, rarity, imitability, and organizations commitment to exploit the resource. The “N” is an addition to the tool and describes whether there are potentials for competitors to substitute a different resource to negate the advantage (a good example is champagne, which comes from a special region in France vs. sparkling white wine, which is really champagne, that comes from everywhere else). Another useful tool is to benchmark against any industry (or competitors) benchmarks that your research has identified. Some, but not all, things to consider for each of the sub-sections:
1. Human resources (if information is not available use industry averages if possible to establish a benchmark for the client to use later):
a. If one exists the experience, skills, and abilities of the BOD (be specific).
b. The experience, skills and abilities of top management (be specific).
c. The firm’s commitment to training.
d. Level of employee turnover by employee type (unskilled, skilled, management, etc.) if possible.
e. Pay rates relative to industry average.
f. Is the organization’s culture supportive of the mission/vision of the company.
f. Any other element that you have found in your external and competitor analysis that is relevant to this company.
2. Operational resources
a. Size, location and technical sophistication of plant and equipment.
b. Ease in scaling (up or down) production.
b. Whether the resources are owned or leased (e.g. sunk or long term variable costs).
c. Ease in acquiring new resources or retiring old resources.
d. Risk of loss of resources in a catastrophe (e.g. fire or hurricane).
e. Risk of business interruption should resources be lost.
f. Do current operations allow for experience curve benefits in production.
Financial resources
A complete financial analysis is necessary to determine the health of the firm as well as the potential of the firm to grow and improve. This analysis is not a regurgitation of numbers but rather a professional opinion of the financial condition of the business. Your analysis should include all of the accounting diagnostic tools (i.e. the use of ratios such as those described in most basic accounting books as well as relevant trend analysis). You should benchmark your results against the industry and, if possible, competitor performance measures. Again do not assume that simply giving the various ratios or trends is sufficient, it is not. REMEMBER, accounting data is numeric proxies of human activity. The strategic value of an analysis of financial resources is the identification of operational areas that are making or losing money for the company. This in turn will allow you to look into the particular operational area to determine the significance and the potential for benefit.
4. Research and development
a. Determine if the level of technology is appropriate for the business to perform efficiently.
b. Determine if the approach to the acquisition of new technology is appropriate for the business.
c. Determine if there is management support for innovation and internal entrepreneurs to suggest improvements in the business operation.
d. Does the organization use technology to improve company operations (i.e. – enhance productivity, marketing etc.)
5. Marketing
A complete market segmentation analysis.
What are the distinguishing attributes of each segment (i.e. demographic, income, etc.).
An analysis of the marketing mix.
Determine the reputation of the firm with customers, employees, and the community.
Determine how the brand of the company is associated with intrinsic values such as quality, integrity, honesty, etc..
What is the relationship that the company has with its customers, suppliers, and other stakeholders (a.g. cordial, confrontational, abusive, etc.).
Strengths and weaknesses
Ultimately the internal analysis should allow you to identify the strengths and the weaknesses of the company. If your analysis is adequate you should be able to list these strengths and weaknesses either in the form of short sentences or as bullet points. Remember that the listing needs to be specific enough that it would not need any additional explanation from you to describe what it means. You should also be able to prioritize these strengths and weaknesses in order importance to the company.
There should be no strength and weakness that is listed that has not been covered in your analysis.
Core competencies
The final task that needs to be done is a listing of the core competencies of the firm. These are attributes that give the company a unique competitive advantage. The VIRO is very well suited in helping you make these determinations.
SECTION 3 – Guidance for a Strategic Analysis – Recommendations
Overview: If you have completed a complete external and internal analysis then the recommendations section is extremely easy to write. Recommendations should be clearly derived from the SWOT/TOWS which is supported by the environmental analysis. However, simply stating what needs to be done is insufficient. There must be a clear implementation plan for the recommendations that you provide (or at least the three or four “critical recommendations”). This implementation plan should include a budget and a timeline as well as a designation of who within the organization (i.e. CFO, COO, Director of Marketing, etc.) is responsible for the recommendations execution.
Recommendations will be made in two generic areas. The first are broad recommendations to the company as determined by the general environmental analysis. The second area will be recommendations tied to specific requests from the client (i.e. “I want you to look closely at our supply chain”).
REMEMBER:
SWOT analysis – derived from your external/internal analysis
TOWS analysis – derived from SWOT, a logical combination of S/W with O/T.
General recommendations (outside of the special request areas the client wanted recommendations for).
Recommendations are clearly tied to SWOT/TOWS.
Recommendations are clear and specific.
Recommendations are cost effective (not “blue sky”).
A plan to implement the recommendation is concise and clear and includes a timeline for implementation and a proposed assignment of accountability (i.e HR Dept. or VP of MKT).
Recommendations include performance metrics that will be measured to determine success.
Recommendations for client special request areas.
Recommendations are clearly tied to SWOT/TOWS.
Recommendations are clear and specific.
Recommendations are cost effective (not “blue sky”).
A plan to implement the recommendation is concise and clear and includes a timeline for implementation and a proposed assignment of accountability (i.e HR Dept. or VP of MKT).
Recommendations include performance metrics that will be measured to determine success.