SITUATION ANALYSIS AND CORPORATE STRATEGY

TOPICS TO COVER
1. Situation Analysis 5. Growth Strategies
2. SWOT Analysis 6. Evolution of Corporate Strategies
3. Portfolio Analysis 7. Steps in Charge Process
4. Review Mission and Objectives

THE NATURE OF THE ENVIRONMENT

The major problem Strategic Management face is coping with uncertainty in the business
environment. The environmental situations are so unpredictable and always changing.
However, we can classify the nature of environments as follows:
a. SIMPLE STATIC ENVIRONMENT
Here, the environment is relatively straight forward to understand and not undergoing
significant changes. Technical processes are fairly simple and competition and markets
are fixed over time, and there may be few of them. In such circumstances, if a change
occurs, it is likely to be predictable, so it make sense to analyze the environment
extensively on a historical basis, perhaps as a means of trying to forecast likely future
conditions. The simple – static environment corresponds to Emery and Trist’s placid –
randomized environment.
b. DYNAMIC ENVIRONMENT
Here, the environment is largely unpredictable. This manager needs to consider the
environment of the future, not just of the past. This can be done intuitively or by
employing more structured ways of making a sense of the future such as scenario
planning. This corresponds to Emery and Trists (1995) disturbed – reactive
environments.
c. COMPLEX ENVIRONMENT
This is an environment that is difficult to comprehend and at the highest level of
uncertainty. Complexity is difficult to handle by analysis. Complex environments
correspond to Emery and Trist’s turbulent fields. Complexity arising from diversity, size
and environmental dynamism can be dealt with by ensuring that the different parts of the
organization responsible for different aspects of diversity are separate and given the
resources and authority to handle their own part of the environments.

ENVIRONMENT SCANNING
A Major step in Strategic Management is the scanning of the environment. Environmental
scanning is the process of gathering information about events and their relationships within an
organization’s internal and external environments. Environmental scanning involves gathering,
reviewing and evaluating whatever information about internal and external environments that
can be obtained from several sources on a regular basis and interpreting them in the light of the
organization’s business sensing the pulse of environmental threats and opportunities is a
normal and continuous process in Strategic Management. Through scanning, firms identify early
signals of potential changes in the general environment and detect changes that are already
under way. There are three types of scanning systems. These are
a. IRREGULAR SCANNING SYSTEM
This consists largely of adhoc environmental studies. They emphasize short-run reaction
to environmental crisis with little attention to future environmental events.
b. REGULAR SCANNING SYSTEM
These systems revolve around a regular review environmental components. The focus of
this scanning system is primarily retrospective but some thought is given to future
conditions assumed to be evolving within environment.
c. CONTINUOUS SCANNING SYSTEMS
Here, the components of the organizational environment are constantly monitored. Here
scanning is an ongoing activity for the organization. Continuous scanning tends to be
more proactive or future oriented than either irregular or regular systems. The use of a
continuous scanning system reflects a serious and sustained commitment to
environmental analysis. In most organizations, environmental analysis evolves from an
irregular system into a regular and then into a continuous scanning system.

PROCEDURE FOR ANALYZING THE ENVIRONMENT

How does one analyze the environment? We have six basic steps of analyzing the external and
internal environment to identify the firm’s strategic position or standing. The steps are as
follows:
1. Consider the nature of the organization’s environment in terms of how uncertain it is. Is it
a. Static / simple?
b. Dynamic? or
c. Complex? Does it show signs of change and in what way?
2. Undertake a general audit of environmental influences. The aim is to identify which of the
many different general environmental factors have influenced the past performance and
development of the organization along with some consideration as to which will in the
future. This will suggest the extent to which strategies might need to change.
3. Undertake a structural analysis to identify the key forces operating in the immediate
competitive environment of the firm. The five forces analysis to be discussed later helps
 to identify the key force at work in the immediate or competitive environment and why
they are important .
4. Analyse and identify the organization’s position relative to its competitors i.e. from the
organization stands in relation to other organizations who are competing for the sane
resources or customers, as itself. The four ways of doing this are:
I. Strategic group analysis, which maps organizations in terms of similarities and
dissimilarities in the strategies they follow.
II. The analysis of market segments, which seeks to establish the segments of
markets which might be most attractive.
III. Competitor analysis which seeks to obtain information about the strengths and
weakness of competitors by market segments.
IV. Attractiveness analysis which maps the organization’s competitive position in
relation to the attractiveness of the market(s) in which it operates.
5. Analysis the internal environment of the firm with the aim of identifying its strengths and
weaknesses.
6. Undertake SWOT (Strengths, Weakness, Opportunities and Threats) analysis where the
understanding of the external environments (steps 1 – 4) is specifically related to the
organization and its internal environment (step 5). This is intended to identify
opportunities and threats facing the organization and suggesting how well positioned it is
to meet these challenges.

ANALYZING THE FIRMS INDUSTRY AND MACRO ENVIRONMENTS

There are two pats into which a company’s external environment can be divided. They are: The
industry or micro environment in which the company competes, and The macro environment
which affects all industries and companies in the.
I. THE INDUSTRY OR MICRO ENVIRONMENT
This consists of competitors, suppliers, customers and all other forces that directly affect
or have a direct potential affect or have company’s operation. These are the set of factors
in a particular industry – the threat new entrants, suppliers, buyers, product substitutes
and the intensity of rivalry among competitors – that directly influences a firm and its
competitive actions and responses.

II. THE MACRO OR GENERAL ENVIRONMENT

This consists of the general political, economic, social, demographic, legal, technological
and ecological frame work within which the industry and the company operate. They are
the broader society that can influence an industry and the firms within it. The figure below
 presents the factors in the macro and industry or micro environment and the inter-
relationships between them.
Macro Environment

Global Technology Demographic

Environment

INDUSTRY ENVIRONMENT COMPETITORS

(threats of new entrants
intensity of rivalry)

Customers The Organization Suppliers

(power buyers) (its strategy & Structure) (power suppliers)

Product
Socio Substitutes Macro
Cultural Economic
Forces Environment
Labour Environment Political, Governmental and Legal Influences

The figure above shows that the macro-environment affects the micro industry which in
turn affects the organization. Therefore, a company that wants to succeed must develop
a clear understand of the trends in the macro and industry environments and the force
that shape competition there in. This understanding enables a company to choose the
appropriate strategy or strategies that fit the trends and opportunities in the external
environment.

ANALYZING THE INDUSTRY ENVIRONMENT {MICRO ENVIRONMENT}

An industry is defined as a group of companies offering product or services that are close
substitutes for each other. Close substitutes are products or services that satisfy the same basic
consumer needs. For instance, plastic chairs are substitutes for iron chairs. Despite the
differences in the production technologies and raw materials that are used, the makers of iron
chairs are in the same industry and market as companies that are making plastic chairs
because they are serving the same consumer need. There are two areas of focus in analyzing
the industry environment. They are:
1. ANALYZING THE INDUSTRY SITUATION
The overriding purpose of “industry situation analysis” is to probe the long term profit
potential of the industry and discover the factors that make the industry more or less
attractive. The analysis of the industry environment is generally aimed at determining the
following:
a. How the industry is structured i.e. the size of the market, the number if sellers and
their relative sizes, the existence or non-existence of market leaders and who are,
the channel of distribution from manufacturer to final buyer, the ease of entry and
exit, the degree of vertical (backward and forward) integration within the industry,
the rate of product innovation and technological change within the industry, e.t.c.
b. The driving forces that are causing the industry to change and how strategically
important or relevant the changes will be. The driving force that have the power to
produce strategically relevant changes in an industry include changes in the long-
term growth rate, changes in who buys the product and how they use it, entry or
exit of major firms, changes in cost and efficiency. To illustrate, the entry of a large,
well established firm from another industry into a market increases the number of
key players, the level of competition and introduces new rules for competing. The
exit of a major firm changes industry structure by reducing the number of market
leaders and possibly increasing the dominance of the leaders who remain and
causing a rush to capture the former customers of the existing firm.
c. The economic factors and business characteristics that have the most influence
on the requirements for competitive success in the industry that is what firms in
the industry have to do well or the specific kind of skills and competencies to make
money and to succeed competitively and financially. In the soft drink industry for
instance, the key success factors (KSFs) are large bottling capacity utilization, an
extensive distribution network and a strong advertising and promotion
effectiveness.
d. The strategic issues and problems that face the industry and which my make it
become more or less attractive such as expected changes in costs, supply
conditions, competitive pressures, technology, the entry of new firms e.t.c.

An industry situation analysis that covers the above strategic issues enable the
Strategic manager to understand the factors that are causing changes in an
industry, to make predictions about where the industry is headed and why, to
judge what the industry’s future structure will be like, and to conclude whether the
industry’s relative attractiveness and profit potentials are bright or dim & why. The
relative attractiveness of the overall industry environment will depend upon the
following:
I. Overall market size and stage in the industry’s life cycle.
II. Animal market growth rate or growth potential.
 III. Whether the industry will be favourably or unfavourably impacted by the
prevailing driving.
IV. Historical profit margin.
V. The competitive structure of the industry.
VI. The ease and potential of entry b new firms and the profitability / potential of
exit of major firms. (low barriers to entry reduce attractiveness to existing
firms; the exit of a major firm or several weak firms increases attractiveness
to remaining firms because it opens up more rooms for them).
VII. The favourableness or unfavourableness of the industry’s price – cost – profit
economics.
VIII. Intensity of competition.
IX. Energy requirements.
X. The degree of risk and uncertainty facing the industry and its overall
prospects for prosperity and profitability.
XI. Work force availability.
XII. Social issues.
XIII. Regulation.
XIV. Industry profitability.
XV. Environmental issues and compliance requirements.
XVI. Inflationary vulnerability.
XVII. Political and legal issues.
XVIII. The cyclicality or stability, continuity and reliability of demand as affected by
seasonality, the emerging in-roads from substitute products, changes in
business cycle e.t.c. The more stable and continuous the demand, the more
attractive is the industry.

IDENTIFYING A COMPANY’S KEY COMPETITORS AND COMPETITIVE POSITION

THE CONCEPT OF STRATEGIC GROUPS: One of the most powerful techniques for
understanding industry and competitive environment is the concept called “strategic
group analysis” (Porter, 1980). Strategic group analysis is about analysing differences
between organizations which are potential or actual competitors. It aims to identify
organizations with similar strategic characteristics, following similar strategies or
competing on similar bases. A strategic group consists of rival firms with competitively
similar market approaches. Companies in the same strategic group resemble one
another in many ways: they offer comparable product line breadth, sell their products
through similar cannels of distribution, are vertically integrated as much as the same
degree; offer buyers similar services and technical assistance; appeal to similar customer
groups; appeal to buyer needs with the same product features; make use of similar form
of advertising; depend on identical technology, sell in the same quality range; use similar
pricing policy; have the same extent of product (or service) diversity, the same extent of
geographical coverage. They also utilize similar distribution and transportation equipment
and facilities and operate in many other similar ways e.t.c.
Good examples include Lever Brothers Nigeria PLC, PZ Nigeria PLC and Doyin
Investments Company Ltd are in the same strategic group in the detergent and toiletries
industries. Nigerian Breweries PLC and Guinness Nigeria PLC are in the same strategic
group in the beer industry. Texaco Nigeria PLC, Total Nigeria PLC, Agip, Mobil National
Oil and AP PLC are all in the same strategic group in the petroleum industry.

IMPLICATION OF THE GROUP CONCEPT OF STRATEGIC GROUP: Strategic group

analysis provides a deeper and useful understanding on an industry and competitive
environment because it diverts the attention of the strategic manager to the following:
i. It shows that industry trends affect different strategic groups differently, how the
companies in each strategic group will be affected by the trend and their probable
response to it, whether the trend is reducing the viability of one or more strategic
group and if so where competitors in the affected groups may try to shift.
ii. It raises the question of hoe likely or possible it is for an organization o move from
one strategic group to another.
iii. it shows that greater number of strategic groups generally increase competitive
rivalry in an industry because of the possibility for both intra group and inter group
competition. A company may find it better to move into an industry where there are
not many strategic groups.
iv. It helps in identifying who the most direct competitors are, on what basis
competitive rivalry is likely to take place within strategic groups, and how this is
different from that within other groups.
v. Strategic group mapping might be used to identify strategic opportunities to tap
such as vacant spaces in an industry which could provide opportunities for new
strategies and new strategic groups.
vi. Strategic group mapping can help identifying significant strategic problems such
as when a product occupies an insecure position in its strategic group.

Strategic group analysis is beneficial because it helps in the selection and

understanding of an industry’s structural characteristics, competitive dynamics,
evolution, and strategies that historically have allowed companies to be successfully
within an industry (Grant, 1995).
 2. ANALYSIS OF THE COMPETITIVE SITUATION
Here, the focus of the analysis is on competitive forces and hey competitors in the
industry. The task of the strategic manager, in doing this, is to identify the opportunities
and threats that face the company. The analysis of the competitive situation seeks to
determine the following:
a. The competitive forces that exist and their strengths.
b. The relative cost positions of rival firms in the industry.
c. The competitive positions and relative strengths of key rivals – their strategies,
how well they are working, why some rival companies are doing better than
others, the firm that has a competitive advantage and where the edge lies.
d. The competitive moves that key rivals can be expected to make.

THE STRUCTURAL ANALYSIS OF INDUSTRIES: THE FIVE FORCES MODEL

In a landmark book published in 1980, Michael E. Porter developed a frame work that can be
used to analyse a firm’s competitive environment. Known as the FIVE FORCES MODEL,
Porter’s frame work is based on the premise that competition in the market is a function of five
competitive forces. It is these competitive forces that shape competition within an industry.
These forces include:
1. The threat of new entrants or potential competitors.
2. The economic leverage and bargaining power of buyers.
3. The economic leverage and bargaining power of suppliers.
4. The bargaining power of substitute products.
5. The degree of rivalry amongst existing companies i.e. jockeying for position among rival
firms.

Porter’s argument is that the stronger each of these forces is, the more are established
companies limited in their ability to raise process and earn profits. A strong competitive force is
a threat because it lowers profit. A weak competitive force is n opportunity because it allow a
company to earn greater profits. His model shows that it is important to look beyond one’s
immediate competitors as there are other determinants of profitability. All the five forces
determine the intensity of competition and profitability. A firm that wants to succeed in achieving
its objectives must try to understand the nature of its competitive environment so that it can
formulate appropriate strategies to take advantage of the opportunities and fend off the threats.
The identification of the strongest force(s) is critical in strategy formulation. A company that fully
understands the nature if the five forces and is able to appreciate the one that is most important,
will be in a stronger position to defend itself against any threats and to influence the force with
its strategy.
1. THE THREAT OF NEW ENTRANTS OR POTENTIAL COMPETITORS
Potential competitors are companies that currently are not competing in the industry but
have the capability to do so if they choose. Their capability may rest in their technology,
sales force and capital base to manufacture and sell the same product being made and
sold be an existing firm. The more companies that enter an industry, the more difficult it
becomes for existing firms to maintain their share of the market and to generate profit.
Some industries are easier to enter than others. The lower the entry barriers the higher
the threat or risk of entry by potential competitors. A high risk of entry by potential
competitors (arising from low entry barriers) represents a threat or risk of entry by
potential competitors. A lower likelihood of entry by potential competitors (arising from
entry barriers) represents an opportunity for existing firms to rise prices and earn greater
returns.
THE MAIN FACTORS THAT CAN CREATE ENTRY BARRIERS ARE:
a. Economies of Scale: These refer to the cost advantages associated with large
company size i.e. requirement for operators in an industry to operate on a large
scale before they can survive profitably. This can discourage and deter new
entrants. Scale – related barriers may be encountered in the volume of production
required to operated profitable as well as in the purchase of raw materials and
component parts, after sales services to customers, financing, marketing and
distribution R & D, advertising e.t.c.
b. Product Differentiation: Creates a barrier to entry by forcing new entrants to
incure expenditure on advertising and sales promotion to overcome existing
customer loyalties and build its own clientele. This can involve substantial
resources of time and money. Brand loyalty reduces the threat of entry by potential
competitors.
c. Absolute Cost Advantages Independent of Size: Where established companies
have an absolute cost advantage, the threat of entry is significantly reduced.
Lower absolute costs give established companies an edge that is difficult for new
entrants to match regardless of the new entrant size. Absolute cost advantages
can arise from:
I. Access to the best and cheapest raw materials.
II. Possession of patents and proprietary technology or secrete processes and
methods.
III. Superior production techniques as a result of the benefits of past
experience (or learning curve effects).
 IV. Access to cheap funds because existing companies pose less risk than
new entrants especially if they can show strong income statement and
balance sheet.
V. Acquisition of fixed assets at pre-inflation rates.
VI. Favourable locations e.t.c.
d. Capital Requirements: Capital requirements may create a barrier to new entrants
if there is a need to invest substantial resources in order to enter a market. The
larger the total naira investment required to enter the market successfully, the
lower the threats of new entrants. The most obvious capital investments are on
plant and capital equipment, R & D, introductory advertising and sales promotion
to build a clientele.
e. Access To Distribution Channels: Access to distribution channels can be a
barrier to entry when a product is distributed through market channels where there
are agreement between manufacturers and the key distributors. Some
manufacturers may be vertically integrated and own or control their distributors.
Other distributors may have established strong and a successful working
relationship with particular manufacturers that they are unwilling to carry the
products of another manufacturer no matter the incentives offered them. Where
this happens, a new entrant may face the barrier of gaining adequate distribution
access. To overcome this barrier, a new entrant may provide better margins,
provide extra promotional incentives, advertising allowances to dealers. As a
result of these, the profits of the new entrants may be reduced considerably.
f. Switching Costs: These are costs incurred by the existing customers and not by
companies wishing to enter the market. If a buyer were to change his source of
supplies from an established manufactured to a new comer, costs may be incurred
such as the costs of new ancillary equipment, product and process redesign,
employee retaining, cost of spare parts, stock holding, e.t.c. Buyers may not be
willing to change their suppliers because of these costs thereby making it very
difficult for a new entrant to enter the market.
g. The Existence of Learning and Experience Curve Effect: These refer to the
cumulative experience in providing and marketing a product by existing firms.
Such experience enables long-established firms to reduce their per – unit costs
below those of new comer may not be able to match the know how of the
established firms.
2. ECONOMIC LEVERAGE AND BARGAINING POWER OF BUYERS
 The second of Porter’s competitive forces is the economic leverage and bargaining
power of customers. Buyers can be viewed as a competitive threat when they are so
powerful that they can influence or force down prices or demand higher quality and better
service which increases operating costs. On the other hand weak buyers give a company
the opportunity to raise prices and earn greater profit and earn greater profit. Whether
buyers are able to make demands on a company depends on their power relative to that
of the company. According to Porter, the leverage and bargaining power of customers
tends to be relatively greater in the following:
I. When the supplying company is composed of many relatively small sellers and the
buyers are few in number and are large. In this situation, a few big buyers will be
able to dominate the smaller supplying companies.
II. When the customers buy in large quantities. In such a situation, buyers can use
their large volume buying power as leverage to bargain for and obtain price
reductions and other favourable concessions, terms and conditions of scale.
III. When customers’ purchases represents a sizeable percentage of the selling
industry’s total sales, that is, when the supply industry depends on the customers
for a large percentage of its total orders.
IV. When the items being purchased is sufficiently standardized among sellers that
customers can find alternative sellers or switch suppliers at a low virtually zero cost
thereby playing off companies against each other to force down prices.
V. When sellers pose little threat of backward integration into the product market of
their customers.
VI. When customers (buyers) pose a credible threat of backward integration; that is,
when customers can use the threat to supply their own needs through vertical
integration to force down prices.
VII. When it is economically feasible for customers to purchase their inputs from several
companies rather than one.
VIII. When the item being purchased by customers is not an important input to him.
IX. When the product or service being bought does not save the customer money
3. THE BARGAINING POWER OF SUPPLIERS
Suppliers can be very powerful and exert much power over firm in an industry by rising
prices or reducing the quality of purchased goods and services this reducing profitability.
In other words, suppliers can be viewed as a threat when they are able to force up the
price a company must pay for their input or reduce the quality of goods supplied thereby
squeezing and depressing the company’s profitability. The ability of suppliers to make
demands on a company depends upon their power relative to the company. According to
 Porter, the potential bargaining power of suppliers tends to be high in the following
circumstances:
I. When the products of the suppliers makes up a sizeable proportion of total inputs.
II. When the product of he suppliers is crucial to the buyer’s production process or
significantly affects the quality of the industry’s product.
III. When the product of the supplier has few substitutes and it is important to the
company.
IV. When the supplier industry is dominated by a few large producers who enjoy
reasonably secure market positions and who are facing intense competition.

In this situation, the industry is concentrated and buyers have little opportunity for
bargaining on prices and deliveries as suppliers recognize that their opportunities
for switching suppliers are limited.
V. When the buyer-companies are not important customers of the suppliers. In this
case, the survival and prosperity of the suppliers does not depend on the buyer
company’s industry. Thus suppliers have little incentive to reduce prices or improve
quality to protect the buyer.
VI. When the respective products of the suppliers are differentiated to the extent that it
is difficult or costly for buyers to switch from one supplier to another. In such
situations, the buyer company is dependent on its suppliers and unable to play them
off against each other.
VII. When suppliers can integrate vertical forward into the business of the buyer firm and
compete directly with the buyer company.
VIII. When the buying companies are unable to use the threat of or do not display any
inclination towards backward integration t the suppliers’ business and supplying
their own needs as a device for reducing input prices and controlling the source and
stability of raw materials.
4. THE BARGAINING POWER OF SUBSTITUTE PRODUCTS
Firms in one industry are often in close competition with firm in other industries offering
substitute products or services. Substitute products are the products of firms in industries
serving similar consumer needs to a company’s industry. Producers of plastic containers
are in competition with the makers of glass bottles and jars. The bottlers of soft drinks are
in competition with the makers of fruit juices and similar drinks. The existence, availability
and prices of close and acceptable substitutes constitutes a strong competitive threat,
limiting the price a company can change and thus its profitability. For instance, the prices
tat manufacturers of tin and aluminium cans and plates can charge are limited by the
existence of acceptable substitutes such as plastic container and plates. If the prices
 rises too much relative to that of plastic containers and plates, then buyers of tin and
aluminium cans and plates will start to switch from these products to the substitutes.
However, if a company’s products have few close substitutes, then other things being
equal, the company has the opportunity to raise prices and earn additional profits.
5. RIVALRY AMONG EXISTING FIRMS
The last of Porter’s five forces is the extent of rivalry among established companies
within industry. It refers to the competition in which firms try to take customers from one
another. This rivalry among existing competitors is referred by Porter as “Jockeying for
position”. Rivalry or competition may take many forms – price competition, new products
and increased levels of customer services during and after sales, promotion, or
innovation. If the competitive force is strong, significant price competition, including price
ways, may result from the intense rivalry among firms, but if the competitive have the
opportunity to raise price and earn greater profits. Price competition limits profitability
because it reduces the margins that can be earned on sales. Thus, rivalry among existing
firms constitutes a strong threat to profitability.

RISK ENTRY BY POTENTIAL

COMPETITORS

Competitive force and constraining

pressures arising from the threat of entry

Competitive Competitive
forces arising
RIVALRY AMONG forces arising
BARGAINING from ESTABLISHED FIRMS (the from
POWER OF suppliers centre ring of competition) customers
BARGAINING
SUPPLIERS exercise of exercise of POWER OF
bargaining Competitive forces created by bargaining CUSTOMERS
power and strategic moves and counter power and
economic moves of rival firms in an effort economic
leverage to Jockey for position leverage

Competitive forces arising from the capability of good

substitutes which are competitively price

THREAT OF SUBSTITUTE
PRODUCTS

Figure showing Porters Five Forces Model of Competition