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External Factor Analysis Summary (EFAS): Electric Appliances Industry

Strategy Formulation External Factors

Opportunities
1
Weigh
t 2
Rating
3
Weighted
Scorer 4
Comments

 Economic Integration of European Community 0.20 4 0.80 Acquisition of Hoover

 Demographics favor quality appliances 0.10 5 0.50 Maytag quality

• Strategic Planning – Development of 


Economic development of Asia
Opening of Eastern Europe
0.05
0.10
1
2
0.05
0.10
Low Maytag presence
Will take time
 Trend to “Super Stores” 0.10 2 0.20 Maytag weak in this channel
organizations, mission, objectives, strategies Threats
 Increasing government regulations 0.10 4 0.40 Well positioned
and policies. 

Strong US competition
Whirlpool and Electrolux strong globally
0.10
0.15
4
3
0.40
0.45
Well positioned
Hoover weak globally
 New product advances 0.05 1 0.05 Questionable
• Starting Point – SWOT Analysis  Japanese appliance companies
Total Score
0.10
1.00
2 0.20
3.15
Only Asian presence in
Australia

• Strategic factors analysis summary – Notes:

1. List opportunities and threats (5-10 each) in column 1

Combination of EFAS and IFAS 2. Weight each factor from 1.0 (most important) to 0.0 (not important) in column 2 based on that factor’s probable
impact on the company’s strategic position. The total weights must sum to 1.00
3. Rate each factor from 5 (outstanding) to 1 (poor) in column 3 based on the company’s response to that factor.
4. Multiply each factor’s weight times its rating to obtain each factors weighted score in Column 4.
5. Use Column 5 (comments) for rationale used for each factor.
6. Add the weighted scores to obtain the total weighted score for the company in Column 4. this tell how well the
company is responding to the strategic factors in its external environment.
Source: T.L. Wheelen and J.D. Hunger, “External Strategic Factors Analysis Summary (EFAS)”, Copyright © 1991 by
Wheelen and Hunger Associates.

INTERNAL FACTORS ANALYSIS SUMMARY STRATEGIC FACTORS ANALYSIS SUMMARY

Weighted Key Strategic Weighted
Internal Factors Weight Rating Comments SWOT Weight Rating Duration Comments
Score Factors Score
STRENGTHS
World moving
Improve capacity utilization
Quality Culture 0.20 4 0.80 Important to success of Product O towards WTO 0.20 2 0.40 Long Term
for better market results
regime
Generally well versed with the local
Top Management 0.10 5 0.50 Formation of
conditions O 0.15 3 0.45 Intermediate Acquisition of a company
trading block
Lack of Innovative Thinking of
Process Engineering 0.05 1 0.05 Trend is to have
Engineers O 0.10 2 0.20 Short Term Quality
quality products
Has to improve it through constant
Employee Skills 0.05 2 0.10 High Quality of company’s
training programmes T Dumping 0.15 5 0.75 Short Term
products
Has to recruit multicultural skilled
Global Focus 0.10 2 0.20 Obsolescence of
workforce T 0.10 2 0.20 Short Term Has to improve
Product
WEAKNESS
Quality Culture of Important to success of the
R&D 0.10 4 0.40 Improve quality of its R&D workforce S 0.20 4 0.80 Long Term
Company product
Must improve negotiating skills with Experienced top Generally well versed with
Acquisition of Capital 0.10 4 0.40 S 0.10 5 0.50 Intermediate
Financial institutions Management local conditions
Retailing 0.15 3 0.45 Improve retailing infrastructure Company’s global Has to recruit multi cultural
S 0.10 2 0.20 Long Term
focus workforce
Advertising 0.05 1 0.05 Improve brand image
Improve retailing
Time to market 0.10 2 0.20 Improve speed of decision making W Retailing 0.15 3 0.45 Short Term
infrastructure
TOTAL 1.00 3.15 Improve the quality of its
W R&D 0.10 4 0.40 Long Term
R&D workforce

Risks of Generic Competitive Strategies

Risks of Cost Leadership Risks of Differentiation Risks of Focus

Business Strategy
Cost Leadership is not Differentiation is not sustained: The focus strategy is imitated:
•A company can make use of its business strategy to improve the sustained: The largest segment becomes
structurally unattractive:
competitive position of its business units and products/services •Competitors imitate •Competitors imitate
•Technology changes •Bases for differentiation •Structure erodes
within the specific market segment or industry
•Other bases for the cost become less important to •Demand disappears
leadership erode buyers

•The generic strategies suggested by Porter i.e., cost leadership, Proximity in differentiation is Cost proximity is lost Broadly targeted competitors
differentiation and focus, could help the company in drawing up lost overwhelm the segment:
the business strategy
•The segment’s differences
from other segments narrow
•The advantages of a broad line
increase
•Whereas the corporate strategy asks what industry/industries,
should the company be in, the business strategy asks how the
company should compete or co-operate in each industry
Cost focusers achieve even Differentiation focusers achieve New focusers sub-segment the
lower cost in segments even greater differentiation in industry
segments
Source: Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, The Free Press, p.21.

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Requirements for Generic Competitive Strategies

Generic Strategy Commonly Required Skills and
Resources
Common Organizational
Requirements Doom Loops
Overall Cost Sustained capital investment and access Tight cost control
Leadership to capital Frequent, detailed control reports Self reinforcing processes.
Process engineering skills Structured organization and
Intense supervision of labor responsibilities Drive an organization into cyclical situations from which an
Products designed for ease in Incentives based on meeting strict
manufacture quantitative targets
organization finds it difficult to extract itself.
Low-cost distribution system

Differentiation Product engineering Strong coordination among functions in

Creative flare R&D, product development, and To avoid getting into a doom loop, it is required to constantly
Strong capability in basic research marketing upgrade the products, services and efficiency of distribution
Corporatereputation for quality or Subjective measurement and incentives
technological leadership instead of quantitative measures channels.
Unique combination of skills Amenities to attract highly skilled labor,
Strong cooperation from channels scientists, or creative people
Strong marketing abilities
To get out of a doom loop – refocus on the small business
Focus Combination of above policies directed Combination of above policies directed units and a change has to be brought about in the firm’s culture.
at the particular strategic target at the particular strategic target

Doom loop - Example

Corporate Strategy
Competitors innovate
& develop better Pdt.
at lower cost.
The important issues involved in Corporate Strategy are:
 The company’s orientation towards growth, stability or retrenchment. This
Competitor matches Competitor gains mkt. is referred to as directional strategy.
price & yet is profitable. Share at firms expense.

 The markets in which the company competes through its products or

Firm cuts price to hold business units. This is referred to as Portfolio strategy.
onto the market share.

Activity co-ordination and transfer of resources for achieving capabilities

Employees become Firm has inadequate among product lines and business units. This is referred to As parenting
demoralized. margins to reinvest. strategy.

Quality of Pdt. &

services becomes poor.

Diversification Strategy Related Diversification

• Concentric Diversification (Related) • MRF – V Belts, Tyres, Tubes etc…
– Related • V Guard – Inverter, Stabilizer, Pumps, Cables
– Looks for synergy • Tata Motors – Passenger Car, Trucks
• Conglomerate (Unrelated) Diversification • Engg College – M Tech, B.Tech, MBA, Industrial
– Attractiveness Consultancy
– Risk reduction
• Bank – Insurance, Housing Finance

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Unrelated Diversification Other strategies

• MRF – Vapocure Paints, Funskool Toys • Exporting
• V Guard – Garments, Textiles • Licensing
• ITC – Paper, Hotel, Tobacco • Joint Ventures
• Engg College – BA, MA ,Agriculture • Acquisitions
• Bank – Engg College, Schools • Turnkey
• Turnaround

Relative Cost advantage & Competitive Strategy

Key Factors for Success
A key Success Factor is a competitive skill or asset that is particularly relevant to the Examples Modi Tyres - Initially entered largest product
industry. To “PLAY IN THE GAME” a competitor will usually need to have some minimum segment i.e., truck with latest
level of skill or asset with respect to each of the industry’s Key Success Factors. If a firm has technology & lower prices (good
strategic weakness in a Key Success Factor and it is not neutralized by a well conceived value for money). Subsequently
strategy, the firm’s ability to compete will be weak. Conversely sustainable competitive matched market leader’s price
advantages usually will be based on Key Success Factors. In general the successful firm will
and displaced him by capturing
have strengths in the Key Success Areas and unsuccessful competitor will lack one or more
higher market share
of them
Hero Cycles - Dropped irrelevant product
attributes; subcontracted
Key Success Factors production of parts
Raw-Material Procurement
Portfolio Analysis and Display Matrices
Raw-material Processing
Production Fabrication Portfolio Analysis - Corp. investments in different products or industries (SBUs)
Balancing - w.r.t. net cash flow
Assembly Stake of development
Design Risk
Distribution Display Matrices:
BCG Matrix
Marketing
McKinsey Matrix
Service Strategic Planning Institute’s Matrix (Profit impact of Market Strategy – PIMs)
Arthur D.Little Co’s Matrix
Hofer’s Product/Market evaluations Matrix

Portfolio Analysis Display Matrices

• Balancing the company’s investments in • BCG Growth Share Matrix
different products and business units • GE Business Screen
• Strategic Planning institute matrix
• Requires balancing of different subsidiaries • Arthur D’Little company’s matrix
– Net cash flow – growing and mature business • Hofer’s product/market evolution matrix
– State of Development – Life cycle of products
– Risk – reducing of financial setback

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The BCG Matrix The Boston Consulting Group’s

Boston Consulting Groups Growth Share Matrix Growth-Share Matrix
• The various activities of the company are classified into different business SBU Objectives:
segments or SBU’s Stars Build (For Question Marks)
Question Marks
• The growth rate of the market is determined and is plotted on linear scale 22% Hold (for strong Cash Cows)
• The assets employed by each of the business are compiled to determine the 20% 4
1 Harvest (for weak Cash Cows; can also be used
relative size of the business in relation to the company 18% with Question Marks and Dogs)

Market Growth Rate

3
• The relative market share for different market segments are estimated and plotted 14% 2
Divest (for Question Marks and Dogs which
on a log scale 12%
are a drag on company profits)
• The position of the each business unit is plotted on a matrix of business growth 10%
5

rate and relative market share. The size of the business represented by a circle Cash Cow Dogs
with a diameter corresponding to the assets invested in the business. Given by 8% Strategic Planning
• _____ 6%
6
Planning: Viable fit between
• Radius = √p.R2 4% 7 organization’s objectives and its
2% changing market opportunities
8
• Where R is the numeral proportional to the total sales of the company and p is the 0 Key: investment portfolio, future
sales of the business unit as a percentage of the total sales of the company. 10x 4x 2x 1.5x 1x 0.5x 0.4x 0.3x 0.2x 0.1x
profit potential, strategy
Relative Market Share

Source: B. Heldey, “Strategy and the Business Portfolio”, Long Range Planning, February 1977, p.12
Reprinted with permission from Long Range Planning, © 1977, Pergamon Press Ltd.

The New BCG Matrix

New BCG Matrix BCG Matrix (New)

• 1. Volume
In a Volume business, there are only a few ways to obtain an advantage but if
2*2 Matrix
obtained, high volume is generated because of the size of the advantage. In this
category, market share and profitability are closely associated.  Size of competitive advantage Vs. No. of approaches to
• 2. Stalemate competitive advantage.
There are a few ways to obtain advantage and the size of the advantage is small for
businesses in the Stalemate quadrant. Profitability in this quadrant is low for all Size of the comp. Adv.
competitors regardless of size. There is a small difference between the most
profitable and least profitable firms.
• 3. Fragmented
Businesses in this quadrant have many ways of achieving competitive advantage Many
but the advantage is minimal. The profitability of businesses in this sector is not Fragmented Specialization
correlated with market share. Poor performers can be large or small and good No. of
performers are also independent of size. They differ in the large number of ways
they choose to achieve a competitive advantage. approaches
to achieve
• 4. Speciality comp. Adv.
In this quadrant there are many ways to obtain an advantage and once it is
obtained, it is large. The largest profitability is enjoyed by small businesses able to
distinguish themselves among their competitors by following a focused strategy.
Stalemate Volume Few

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BCG Matrix (Contd.)

Fragmented Specialization
GE Business Screen (McKinsey matrix)
Small and Regionalized. Focused segments.
Profitability not related to size. Steep learning curves. • More data in its key factors
Advantage gained by focus. Ex. Cray research in field of • Industry attractiveness –
No premium on growth. Super computers. – Market growth rate
– Profitability
Ex. Specialty restaurants or
– Pricing Practices
designer labels.
• Business strength/Competitive position
Stalemate Volume – Market share
– Profitability
Where it is difficult to gain Where there are economies of scale
advantage.
– size
• Individual product lines plotted as circles.
CA often is the sheer sustaining Constrained by market – Area of circle proportional to industry sales
power. segmentation and differentiation. – Pie within circle represents market share
Ex. Kellogg's in India. Ex. The motor car industry.

Protect Position Invest to build Build selectively

•Invest to grow at maximum •Challenge for leadership •Specialize around limited
digestible rate •Build selectively on strengths strengths
•Concentrate effort on •Reinforce vulnerable areas •Seeks ways to overcome
High
maintaining strength weaknesses
MARKET ATTRACTIVENESS

•Withdraw if indications of
sustainable growth are
lacking
Build Selectively Selectivity/ manage for Limited expansion or
•Invest heavily in most attractive earnings harvest
segments •Protect existing program •Look for ways to expand
Medium •Build up ability to counter •Concentrate investments in without high risk;
competition segments where profitability is otherwise, minimize
good And risk is relatively low investment and rationalize
•Emphasize profitability by
raising productivity operations

Protect and refocus Manage for earnings Divest

•Manage for current earnings •Protect position in most •Sell at time that will
Low •Concentrate on attractive profitable segments maximize cash value
segments •Upgrade product line •Cut fixed costs and avoid
•Defend strengths •Minimize investment investment meanwhile

Strong Medium Weak

BUSINESS STRENGTH
(b) Strategies

Table 2-2
Factors underlying market attractiveness and competitive position in GE Multifactor
Portfolio Model: Hydraulic Pumps Industry
Weight Rating (1-5) Value
Market Attractiveness Overall market size 0.20 4.00 0.80
Annual market growth rate 0.20 5.00 1.00
Historical profit margin 0.15 4.00 0.60
Competitive intensity 0.15 2.00 0.30
Technological requirements 0.15 4.00 0.60
Inflationary vulnerability 0.05 3.00 0.15
Energy requirements 0.05 2.00 0.10
Environmental impact 0.05 3.00 0.15
Social/political/legal Must be acceptable .
1.00 3.70
Competitive Position Market share 0.10 4.00 0.40
Share growth 0.15 2.00 0.30
Product quality 0.10 4.00 0.40
Brand reputation 0.10 5.00 0.50
Distribution network 0.05 4.00 0.20
Promotional effectiveness 0.05 3.00 0.15
Productive effectiveness 0.05 3.00 0.15
Productive efficiency 0.05 2.00 0.10
Unit costs 0.15 3.00 0.45
Material supplies 0.05 5.00 0.25
R&D performance 0.10 3.00 0.30
Managerial personnel 0.05 4.00 0.20
1.00 3.40

Source: La Rue T. Hormer, Strategic Management, Englewood Cliffs, N.J.: Prentice Hall, 1982, p.310

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GE/McKinsey Matrix
Used for GE: Factors determining industry (Market) attractiveness (Indian context)
Weightage (typical)
1. Size of the market 10% SBUs rated on a scale of 1-10
2. Growth rate (sales) 15%
3. Nature of Competition 15%
4. Technology Requirements 10%
5. Entry conditions & Social factors 10%
6. Profitability 40%
100%

Factors Determining Competitive Position

Weightage Rating (1-10) Score
1. Market Share 20% 7 1.4
2. Growth rate 10% 7 0.7
3. Location & Distribution 10% 5 0.5
4. Mgt. Skills 15% 6 0.9
5. Work force harmony 20% 7 1.4
6. Technical excellence 20% 8 1.6
7. Company image 5% 8 0.4
100% 6.9

Shell Matrix : Similar to GE approach – identifies different strategies for each grid sector

PIMS Model: Profit impact of market strategy (PIMS) started at GE – used later by strategic
planning institute – develops industry CH/C, bus avg. profitability using cross-
sectional regrn. Of more than 2000 industries

Shell’s Directional Policy Matrix

Attractive Leader Try Harder Double or quit Corporate parenting

SECTORAL Leader Phased
Average Custodial withdrawal
PROSPECTS Growth
Unattractive Cash
Generation
Phased
Withdrawal
Disinvest • Views corporations in terms of resources and
Strong Average
UNIT’S COMPETITIVE POSITION
Weak
capabilities to build business unit value and
Strategy Business Competitive Recommended Strategy generate synergies across business units.
Prospects Capability
1. Leader Attractive Strong High priority with all necessary resources to hold high market position
• Help form a judgment on the business units fit
2. Try Harder Attractive Medium Allocate more resources to move to leader position

3. Double or Attractive Weak Pick products likely to be future high flyers for doubling and abandon
in the whole corporation.
Quit others
4. Growth Average Avg. strong May have some strong competition with no one company as leader.
Allocate enough resources to grow with market
• Emphasizes the fit of the business with the
5. Custodial Average Average May have many competitors, so maximise cash generation with
minimal new resources
parent
6. Phase Unattractive Average Slowly withdraw to recover most of investment
withdrawal
7. Cash Unattractive Strong Spend little cash for further expansion, and use this as a cash source for
generation faster growing businesses
8. Disinvest Unattractive Weak Assets should be liquidated as soon ass possible and invested elsewhere.

Low Corporate parenting

Heartland

Ballast • Heartland – Present opportunities for improvement by

Edge of
Heartland
parent, parent understands CSF, should have priority
• Edge of Heartland – May not have all characteristics, may
not understand units CSF, needs to know when to interfere,
other times remain away
• Ballast – units fit well with corporation, danger of
environmental changes moving to Alien territory, divest as
soon as possible
Alien
Value trap
• Alien – little opportunity to be improved by parent, misfit
Territory with parents CSF, divest the units.
High
• Value Trap – Fit well with parental opportunity, misfit with
parents understanding CSF, chance of parent making a
Low High mistake.
Fit between Parenting Opportunities and
Parenting characteristics

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Utility of Display Matrices:

Correlate industry growth or profitability with market share Functional Strategy
either as direct single variable or as an index based on multiple
•The approach followed by a functional area to achieve the objectives
variables set by the corporate and business strategy by maximising resource
productivity is called functional strategy
Facilitate graphic display of diversity of orgn; help raise critical
questions; not provide precise answer; not applicable where mkt.
•Concerned with the nurturing and development of distinctive
share is not critical or capital cannot be easily withdrawn; if value
competencies
added is low or cost can be decreased without experience, rapid
technology transfer, seasonal/cyclic business, patent restrictions.
Low economies of scale complicate their outcome •For a functional strategy to be successful, it should be built on a
Indian Situation: distinctive competency within a functional area. If the company does
- Industrial development much behind Japan or USA not have a distinctive competency in the area, it could consider
- Huge dom. Polt. Mkt still untapped
outsourcing
- Manager’s will & systematic approach with top management
support can help make use of these matrices for developing
competitive strength and corp. growth

Strategic Choice

•Strategic Choice represents the evaluation of

alternate strategies and selection of the best
alternative
•The best strategic alternative can help in
defining policies that can serve as broad
guidelines for decision making
•Change in strategy requires change in
policies also