Strategic Analysis: Forecasting Models and Techniques

Strategic management is not a box of tricks or a bundle of techniques. It is analytical thinking and commitment of resources to action.
But quantification alone is not planning. Some of the most important issues in strategic management cannot be quantified at all.

Forecasting models are a set of tools that help in understanding problems and assist in decision-making. Modeling process includes
the scope of the problem, internal or external forces acting as part of the problem, and the dynamics of the situation.

 Static analysis Ex. Make or buy decisions

 Dynamic analysis Ex. Induction of capital at any point in time could be based on the capital market conditions and on the
confidence of fund providers
STRATEGIC MODELS

Quantitative models

 Mathematical modeling—defines functional relationships among variables (Linear or non-linear)

 Economic modeling—offers an overall forecast for variables such as gross national product (GNP).

Qualitative models

 Historic data modeling—develops trend analysis

 Delphi technique—collates opinions of a panel of experts in a particular area
 Nominal group technique—develops consensus to participative group process

Naive (time series) models

Averages—projects future trend using past data

Exponential smoothing—arrives at a future projection by applying weights to different parameters

Monetary and physical projections

 Demand forecast—identifies the relationship between quantities of a product/product group and the prices of the
product/product group
 Marketing projections—finds geographic as well as temporal projections of demand for a product or product group
 Economic projections—make macro-level projections for region, industry, etc.
 Historical demand projections—projects future using past data
  Financial models could be related to revenue, costs, and profitability, or to balance sheet items such as assets and liabilities
management
1. Break-even model: (price–volume–profit relationships ) = The break-even point (BEP) is the point at which costs or
expenses and revenues are equal
2. Budget model: Budgetary exercises include physical as well as financial parameters, with superimposed economic criteria
at the macro level.
3. Pro forma financial projections : Stand-alone projections of income and expenditure statements

Econometric Models

 Incomplete dynamic stochastic general equilibrium model - substantial theoretical base with minor statistical intervention.
 Explicit long-run equilibrium model = This model has inputs from economics and statistics that are, more or less, in equal
proportions.
 Vector auto-regressive model (VAR) = This model relies heavily on statistical inputs and computations with underlying
economic assumptions.
 Non-linear statistical model to develop projections for business cycles as part of econometrics

Simulation Models

Probabilistic simulation, where one or more independent variables are conceptualized as a probability distribution of values.

1. Discrete simulation, where it is important to know when an event exactly occurs.

2. Visual simulation, where computerized results are presented graphically.

3. Applications and limitations

4. Decision Support Models = Decision trees or multi-attribute utility analysis models : The multiple attributes can be different
probabilities for particular criteria and the responses

5. Analytical hierarchy process:

3.Influence diagrams :

These three different variables are related through a directional mode to indicate a specific direction of influence. Arrows designate
direction and can be used both ways.

4. Sensitivity Analysis:

Sensitivity analysis is often done by varying one sensitive factor at a time, while the other factors remain the same and thus, quantifies
the impact of one factor on the model, budget,
Porter’s five forces model

Porter's Five Forces is a model that identifies and analyzes five competitive forces that shape every industry and helps determine an
industry's weaknesses and strengths. Five Forces analysis is frequently used to identify an industry's structure to determine corporate
strategy. Porter's model can be applied to any segment of the economy to understand the level of competition within the industry and
enhance a company's long-term profitability.

Porter's five forces are:

1. Competition in the industry = The first of the five forces refers to the number of competitors and their ability to undercut a
company. The larger the number of competitors, along with the number of equivalent products and services they offer, the lesser the
power of a company. Suppliers and buyers seek out a company's competition if they are able to offer a better deal or lower prices. 

2. Potential of new entrants into the industry = A company's power is also affected by the force of new entrants into its market. The
less time and money it costs for a competitor to enter a company's market and be an effective competitor, the more an established
company's position could be significantly weakened. An industry with strong barriers to entry is ideal for existing companies within
that industry since the company would be able to charge higher prices and negotiate better terms.

3. Power of suppliers = The next factor in the five forces model addresses how easily suppliers can drive up the cost of inputs. It is
affected by the number of suppliers of key inputs of a good or service, how unique these inputs are, and how much it would cost a
company to switch to another supplier. The fewer suppliers to an industry, the more a company would depend on a supplier. As a
result, the supplier has more power and can drive up input costs and push for other advantages in trade.
4. Power of customers = The ability that customers have to drive prices lower or their level of power is one of the five forces. It is
affected by how many buyers or customers a company has, how significant each customer is, and how much it would cost a company
to find new customers or markets for its output. A smaller and more powerful client base means that each customer has more power to
negotiate for lower prices and better deals.

5. Threat of substitute products = Substitute goods or services that can be used in place of a company's products or services pose a
threat. Companies that produce goods or services for which there are no close substitutes will have more power to increase prices and
lock in favorable terms. When close substitutes are available, customers will have the option to forgo buying a company's product, and
a company's power can be weakened.

Determinants of competitiveness
Evaluating Current Product Portfolios

Product life cycle

The product life cycle is an important concept in marketing. It describes the stages a product goes through from when it was first
thought of until it finally is removed from the market. Not all products reach this final stage. Some continue to grow and others rise
and fall.

The main stages of the product life cycle are:

Research & development - researching and developing a product before it is made available for sale in the market

Introduction – launching the product into the market

Growth – when sales are increasing at their fastest rate

Maturity – sales are near their highest, but the rate of growth is slowing down, e.g. new competitors in market or saturation

Decline – final stage of the cycle, when sales begin to fall

Experience curves

Experience curve refers to a diagrammatic representation of the inverse relationship between the total value-added costs of a product
and the company experience in manufacturing and marketing it. The concept reviews the history of the term and explores the
relationship between production cost and cumulative production quantity.
A diagrammatic representation of the inverse relationship between the total value-added costs of a product and company experience in
manufacturing and marketing. For many products and services, unit costs decrease with increasing experience. The idealised pattern
describing this kind of technological progress in a regular fashion is referred to as a learning curve, progress curve, and experience
curve.

Product Portfolio Planning

BCG matrix (or growth-share matrix) is a corporate planning tool, which is used to portray firm’s brand portfolio or SBUs on a
quadrant along relative market share axis (horizontal axis) and speed of market growth (vertical axis) axis. Growth-share matrix is a
business tool, which uses relative market share and industry growth rate factors to evaluate the potential of business brand portfolio
and suggest further investment strategies. BCG matrix is a framework created by Boston Consulting Group to evaluate the strategic
position of the business brand portfolio and its potential. It classifies business portfolio into four categories based on industry
attractiveness (growth rate of that industry) and competitive position (relative market share). These two dimensions reveal likely
profitability of the business portfolio in terms of cash needed to support that unit and cash generated by it.

BCG matrix and its strategic focus

Life cycle portfolio matrix (Arthur D. Little)
McKINSEY’S 7S FRAMEWORK
STRATEGIC CHOICE

Competitive strategies: The strategies that an organization pursues to gain competitive advantage. These form the bases of
competition for a firm

Product-market strategies: These determine where the firm will compete and its direction of growth

Institutional strategies: These determine the method of a company’s growth path.

Competitive Strategies and Competitive Advantage

Porter’s model of generic strategy

Porter suggested four "generic" business strategies that could be adopted in order to gain competitive advantage. The strategies relate
to the extent to which the scope of a business' activities are narrow versus broad and the extent to which a business seeks to
differentiate its products. The key strategic challenge for most businesses is to find a way of achieving a sustainable competitive
advantage over the other competing products and firms in a market. A competitive advantage is an advantage over competitors
gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies
higher prices.

Cost Leadership

With this strategy, the objective is to become the lowest-cost producer in the industry.

The traditional method to achieve this objective is to produce on a large scale which enables the business to exploit economies of
scale.

Why is cost leadership potentially so important? Many (perhaps all) market segments in the industry are supplied with the emphasis
placed on minimising costs. If the achieved selling price can at least equal (or near) the average for the market, then the lowest-cost
producer will (in theory) enjoy the best profits.

This strategy is usually associated with large-scale businesses offering "standard" products with relatively little differentiation that
are readily acceptable to the majority of customers. Occasionally, a low-cost leader will also discount its product to maximise sales,
particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share.

A strategy of cost leadership requires close cooperation between all the functional areas of a business. To be the lowest-cost producer,
a firm is likely to achieve or use several of the following:

 High levels of productivity

  High capacity utilisation

 Use of bargaining power to negotiate the lowest prices for production inputs

 Lean production methods (e.g. JIT)

 Effective use of technology in the production process

Access to the most effective distribution channels

Cost Focus

Here a business seeks a lower-cost advantage in just one or a small number of market segments.

The product will be basic - perhaps a similar product to the higher-priced and featured market leader, but acceptable to sufficient
consumers. Such products are often called "me-too's".

Differentiation Focus

In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments.

The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from
competitors who may be targeting a broader group of customers.

The important issue for any business adopting this strategy is to ensure that customers really do have different needs and wants - in
other words that there is a valid basis for differentiation - and that existing competitor products are not meeting those needs and wants.
Differentiation focus is the classic niche marketing strategy. Many small businesses are able to establish themselves in a niche market
segment using this strategy, achieving higher prices than un-differentiated products through specialist expertise or other ways to add
value for customers.

There are many successful examples of differentiation focus. A good one is Tyrrells Crisps which focused on the smaller hand-fried,
premium segment of the crisps industry.

Differentiation Leadership

With differentiation leadership, the business targets much larger markets and aims to achieve competitive advantage through
differentiation across the whole of an industry.

This strategy involves selecting one or more criteria used by buyers in a market - and then positioning the business uniquely to meet
those criteria. This strategy is usually associated with charging a premium price for the product - often to reflect the higher
production costs and extra value-added features provided for the consumer.

Differentiation is about charging a premium price that more than covers the additional production costs, and about giving customers
clear reasons to prefer the product over other, less differentiated products.

There are several ways in which this can be achieved, though it is not easy and it requires substantial and sustained marketing
investment. The methods include:

 Superior product quality (features, benefits, durability, reliability)

 Branding (strong customer recognition & desire; brand loyalty)

 Industry-wide distribution across all major channels (i.e. the product or brand is an essential item to be stocked by retailers)
  Consistent promotional support – often dominated by advertising, sponsorship etc

Great examples of a differentiation leadership include global brands like Nike and Mercedes. These brands achieve significant
economies of scale, but they do not rely on a cost leadership strategy to compete. Their business and brands are built on persuading
customers to become brand loyal and paying a premium for their products.

The Profit Impact of Market Strategies (PIMS) is a comprehensive, long-term study of the performance of strategic business units
(SBUs) in thousands of companies in all major industries. The PIMS project began at General Electric in the mid-1960s. It was
continued at Harvard University in the early 1970s, then was taken over by the Strategic Planning Institute (SPI) in 1975. Since then,
SPI researchers and consultants have continued working on the development and application of PIMS data.

According to the SPI, the PIMS database is "a collection of statistically documented experiences drawn from thousands of businesses,
designed to help understand what kinds of strategies (e.g. quality, pricing, vertical integration, innovation, advertising) work best in
what kinds of business environments. The data constitute a key resource for such critical management tasks as evaluating business
performance, analyzing new business opportunities, evaluating and reality testing new strategies, and screening business portfolios."

The main function of PIMS is to highlight the relationship between a business's key strategic decisions and its results. Analyzed
correctly, the data can help managers gain a better understanding of their business environment, identify critical factors in improving
the position of their company, and develop strategies that will enable them to create a sustainable advantage.

PIMS provide information on business environment and the competitive position of each product, production processes, research and
development, sales and marketing activities, and financial performance

The significant elements are identified and the information is related back to the client for the following:

1. Evaluating business performance in relation to competitors

2. Establishing targets for return on investment and cash flow

Competitive warfare

Defensive warfare

Offensive warfare

1. Only the market leader should consider playing defense. 1. Identify the main strength of the leader.
2. Find a weakness in the leader’s armour and
2. The best defensive strategy is the courage to attack oneself.
mount an attack.
3. Strong competitive moves should always be blocked. 3. Launch the attack on as narrow a front as
possible.

Ex-sugar, pharmaceuticals, and textiles industries, where the prices

of raw materials and/or finished products come under government Ex: Deccan Herald penetration price strategy
surveillance

1. A flanking move needs to be made in an area

where the competition is weak.

Flanking warfare 2. A flanking plan should always have an

element of surprise.
3. The pursuit is just as important as the flanking itself.

Ex- Ayurvedic Dabur Red tooth paste Guerrilla warfare

1. Identify a small segment of market to

defend.

2. Take advantage of the local market but try

not to grow as a leader.

3. Be prepared for a hostile takeover at a very

short notice.

Ex: Kali Mark -aerated drinks, Pon Vandu

detergent cake
Ansoff Matrix

Ansoff’s product/market growth matrix suggests that a business’ attempts to grow depend on whether it markets new or existing
products in new or existing markets. The output from the Ansoff product/market matrix is a series of suggested growth strategies
which set the direction for the business strategy. These are described below:

Market penetration

Market penetration is the name given to a growth strategy where the business focuses on selling existing products into existing
markets. Market penetration seeks to achieve four main objectives: Maintain or increase the market share of current products – this
can be achieved by a combination of competitive pricing strategies, advertising, sales promotion and perhaps more resources
dedicated to personal selling Secure dominance of growth markets Restructure a mature market by driving out competitors; this would
require a much more aggressive promotional campaign, supported by a pricing strategy designed to make the market unattractive for
competitors Increase usage by existing customers – for example by introducing loyalty schemes A market penetration marketing
strategy is very much about “business as usual”. The business is focusing on markets and products it knows well. It is likely to have
good information on competitors and on customer needs. It is unlikely, therefore, that this strategy will require much investment in
new market research.

Market development
Market development is the name given to a growth strategy where the business seeks to sell its existing products into new markets.
There are many possible ways of approaching this strategy, including: New geographical markets; for example exporting the product
to a new country

New product dimensions or packaging: for example

New distribution channels (e.g. moving from selling via retail to selling using e-commerce and mail order)

Different pricing policies to attract different customers or create new market segments

Market development is a more risky strategy than market penetration because of the targeting of new markets.

Product development

Product development is the name given to a growth strategy where a business aims to introduce new products into existing markets.
This strategy may require the development of new competencies and requires the business to develop modified products which can
appeal to existing markets. A strategy of product development is particularly suitable for a business where the product needs to be
differentiated in order to remain competitive. A successful product development strategy places the marketing emphasis on:

Research & development and innovation

Detailed insights into customer needs (and how they change)

Being first to market

Diversification
Diversification is the name given to the growth strategy where a business markets new products in new markets. This is an inherently
more risk strategy because the business is moving into markets in which it has little or no experience. For a business to adopt a
diversification strategy, therefore, it must have a clear idea about what it expects to gain from the strategy and an honest assessment of
the risks. However, for the right balance between risk and reward, a marketing strategy of diversification can be highly rewarding.

Methods of growth

1. Develop organically = Organic growth is the growth a company achieves by increasing output and enhancing sales internally.
This does not include profits or growth attributable to mergers and acquisitions but rather an increase in sales and expansion through
the company's own resources. Organic growth stands in contrast to inorganic growth, which is growth related to activities outside a
business's own operations.

2. Develop inorganically = Inorganic growth arises from mergers or takeovers rather than an increase in the company's own
business activity. Firms that choose to grow inorganically can gain access to new markets through successful mergers and
acquisitions. Inorganic growth is considered a faster way for a company to grow compared to organic growth.

3. Develop cartels Influencing factors = A cartel is an organization created from a formal agreement between a group of
producers of a good or service to regulate supply in order to regulate or manipulate prices. In other words, a cartel is a collection of
otherwise independent businesses or countries that act together as if they were a single producer and thus can fix prices for the goods
they produce and the services they render, without competition.
Blue Ocean and Red Ocean Strategies

Red Ocean Strategies

A red ocean strategy involves competing in industries that are currently in existence. This often requires overcoming an intense level
of competition and can often involve the commoditization of the industry where companies are competing mainly on price. For this
strategy, the key goals are to beat the competition and exploit existing demand. One industry in which a red ocean strategy would be
necessary is the soft drink industry. This industry has been in existence for a long time, and there are many barriers to entry. There are
industry leaders in place such as Coke and Pepsi, and there are also many smaller companies also in competition for market share.
There’s also limited shelf space and vending spots, well-established brand recognition of popular, current brands, and many other
factors that affect new competition. This causes the soft drink industry to be very competitive to enter and succeed in.

Blue Ocean Strategies

A blue ocean strategy is based on creating demand that is not currently in existence, rather than fighting over it with other companies.
You must keep in mind that there is a deeper potential of the marketplace that hasn’t been explored yet. Most blue oceans are created
from within red oceans by expanding existing industry boundaries. The key to a successful blue ocean strategy is finding the right
market opportunity and making the competition irrelevant.
Regenerating Strategies

A firm’s influence and share of future profits is determined by its ability to do the following:

1. Build and manage coalitions

2. Build core competencies to create value in newly found areas

3. Reach and accumulate market and its global ‘share of mind’

4. Distribute the capacity that it possesses

Confrontation Strategies

The following considerations are relevant while introducing a new product in a new territory:

1. A company should introduce only a finished product and not a product that is under development.

2. Temporal and space issues are important and so entry into an unchartered territory should be done after identifying
the proper time and place.

3. The product should be introduced only at chosen places.

4. Efforts should be made for immediate success.

5. Good partners should be identified in the unchartered territory.

6. Any competitor in the unchartered territory should be pre-empted.

Strategic analysis tools and support areas