MODELS &

FRAMEWORKS OF
STRATEGIC ANALYSIS
National Competitiveness, Market Dynamics & Business Analysis
Mahesh Narayan
LEARNING OUTCOME

 Conduct analysis of industries & companies by analyzing the

advantages it gets from its Home Country
 Conduct analysis for understanding Market dynamics using SCP &
Internal-External Matrix
 Learn where & how to use these frameworks
COMPETITIVE ADVANTAGE & COMPETITIVENESS

Source: Professor Michael E. Porter, Harvard Business School, Advanced Management Program, April 15, 2009
CHANGING NATURE OF DOMESTIC & INTERNATIONAL COMPETITION

•Falling barriers to trade and investment

•Globalization of markets
•Globalization of capital investment
•Globalization of company value chains
•Rapidly increasing stock and diffusion of knowledge
•Increasing knowledge and skill intensity of competition
•Value is increasingly concentrated in service functions, not manufacturing activities themselves
•Shift from vertical integration to relying on outside suppliers, partners, and institutions
•Rising logistical costs due to costs of energy and emissions
•Costs in China and India are rising rapidly
•Competitive upgrading is occurring in many countries

Source: Professor Michael E. Porter, Harvard Business School, Advanced Management Program, April 15, 2009
WHAT IS COMPETITIVENESS

•Competitiveness depends on the productivity with which a nation uses its human, capital, and natural
resources.
• Productivity sets the sustainable standard of living(wages, returns on capital, returns on natural resources) that a
country can sustain
• It is not what industries a nation competes in that matters for prosperity, but how productively it
competes in those industries
• Productivity in a national economy arises from a combination of domestic and foreign firms
• The productivity of “local” or domestic industries is fundamental to competitiveness, not just that of
export industries

Source: Professor Michael E. Porter, Harvard Business School, Advanced Management Program, April 15, 2009
DETERMINANTS OF COMPETITIVENESS

• Macroeconomic
competitiveness creates the
potential for high
productivity, but is not
sufficient

• Productivity ultimately
depends on improving the
microeconomic capability of
the economy and the
sophistication of local
competition

Source: Professor Michael E. Porter, Harvard Business School, Advanced Management Program, April 15, 2009
QUALITY OF BUSINESS ENVIRONMENT
PORTER’S DIAMOND

Source: Professor Michael E. Porter, Harvard Business School, Advanced Management Program, April 15, 2009
FRAMEWORKS TO ANALYZE MACRO ENVIRONMENT
PORTER’S DIAMOND

• Factor Conditions
• Nation does not inherit but instead creates the most important factors of production
• Stock of factor less important than the rate & efficiency with which it creates, upgrades & deploys them in particular
industries
• Most important factors are those that involve sustained & heavy investment and are specialized to an industry’s
specific needs
• Factors which are scarce, more difficult for foreign competitors to imitate
• Competitive advantage results from the presence of world-class institutions that first create specialized factors & continually
work to upgrade them (Denmark has specialized institutions that research diabetes – Denmark is also world’s leading
exporter of Insulin, Holland – Flower etc)
FRAMEWORKS TO ANALYZE MACRO ENVIRONMENT
PORTER’S DIAMOND

• Demand Conditions
• Composition & Character of the home market effect how companies perceive, interpret & respond to global buyer
needs
• Companies gain competitive advantage where the home demand gives them clear understanding of emerging buyer
needs
• Demanding buyers, pressure companies to innovate faster & achieve more sophisticated competitive advantages than
their foreign rivals
• If domestic buyers are the world’s most sophisticated & demanding buyers
• Stringent needs arise from local values & circumstances
• Local buyers – help companies to anticipate global trends/needs (Denmark’s Environmentalism, US – Fast Food/Credit Card
• When the industry in home country is large – companies have a competitive advantage
• Demand conditions force companies to respond to tough challenges
FRAMEWORKS TO ANALYZE MACRO ENVIRONMENT
PORTER’S DIAMOND

•Related & Supporting Industries

• Presence of supporting /downstream industries which are internationally competitive
• Deliver most cost-effective inputs
• Provide innovation & upgrading (short lines of communication) – companies have the opportunity to influence their suppliers
(test sites for R&D accelerating the pace of innovation)
• Home based related industry results in embracing of new skills also brings in new ways of competing
FRAMEWORKS TO ANALYZE MACRO ENVIRONMENT
PORTER’S DIAMOND

•Firm Strategy, Structure & Rivalry

• How companies are created, organized & managed
• Small/medium sized – Privately owned & operated as extended families – good for companies which emphasizes focus,
customized products, niche marketing, rapid change & flexibility
• Hierarchical managers with technical backgrounds – good for companies which are technical/engineering oriented
 National capital markets & compensation practices for managers
• Germany/Switzerland – Banks comprise a substantial part of nation’s shareholders, shares held for long term appreciation –
Mature industries
• US – Risk capital, Widespread trading, Compensation based on individual results – new industries
 Competitive in activities that people admire or depend on (Switzerland – Banking, Isreal – Defense)
 Presence of strong rivals
• Local rivals push each other to lower costs, improve quality & service & create new products & services
• Geographic concentration
• Look for more sustainable competitive advantage
QUALITY OF BUSINESS ENVIRONMENT
STATE OF CLUSTER DEVELOPMENT

Source: Professor Michael E. Porter, Harvard Business School, Advanced Management Program, April 15, 2009
QUALITY OF BUSINESS ENVIRONMENT
STATE OF CLUSTER DEVELOPMENT

Source: Professor Michael E. Porter, Harvard Business School, Advanced Management Program, April 15, 2009
 FRAMEWORKS TO ANALYZE MACRO ENVIRONMENT
FLYING GEESE MODEL

The phase "flying geese pattern of development" was coined originally by Kaname Akamatsu in 1930s articles in Japanese, and presented to world
academia after the World War II in 1961 and 1962 articles in English.
The flying geese (FG) model intends to explain the catching-up process of industrialization of latecomer economies from the following three aspects:
• Intra-industry aspect: product development within a particular developing country, with a single industry growing over three time-series curves,
i.e., import (M), production (P), and export (E).
• Inter-industry aspect: sequential appearance and development of industries in a particular developing country, with industries being diversified and
upgraded from consumer goods to capital goods and/or from simple to more sophisticated products.
• International aspect: subsequent relocation process of industries from advanced to developing countries during the latter's catching-up process.
GEOGRAPHIC INFLUENCES ON COMPETITIVENESS
GEOGRAPHIC INFLUENCES ON COMPETITIVENESS
MODELS &
FRAMEWORKS OF
STRATEGIC ANALYSIS
Other Frameworks

Mahesh Narayan
 FRAMEWORKS TO ANALYZE ENVIRONMENT

• PESTEL FRAMEWORK
• DRIVERS OF GLOBALIZATION
• Market Globalization
• Political • Similar Customer needs
• Economic • Global Customers
• Socio-Cultural • Transferable Marketing
• Technological • Cost Globalization
• Environmental • Scale Economies
• Legal • Sourcing Efficiencies
• BUILDING SCENARIOS • Country specific costs
• High Product Development costs
I • Competition Globalization
m • Interdependence
p • High Exports/Imports
ac • Global Competitors
t • Global Policies
• Trade Policies
• Technical Standards
• Host Govt. Policies
Uncertainty
 Market maps show the size of market segments, market share and level
of fragmentation
Medical Device Market
Percent of 2001 WW revenues
Total =
$21.0B $12.2B $20.0B $36.4B $39.3B $9.4B$10.2B$148.5B
100%
Other
Other Agfa
Other Other

O th e r
Toshiba
80

O th e r
Dade
Behring Inc Phillips/ S&N
Tyco
Other
Beckman
Coulter
Marconi
S ie m e n s Philips Synthes-Stratec
Biomet
60
Zimmer
Bayer Gambro St. Jude
Corporation Alcon
Fresenius Olympus
J&J Stryker 3M
Baxter
Respironics
Sunrise

40 Becton
Dickinson
Abbott BSC Becton Dickinson Medical

Abbott Lab. Guidant Tyco J&J

Ivoclar
Lab. J&J 3M Baxter
20 J&J Sybron
GE Kimberly-
Baxter Cardinal Health
Patterson Clark

Roche Medtronic Dent- Inva-

(Allegiance) sply care
0 In-vitro Radiology Electro- Procedural Dental Other
Surgical appliances
diagnostics and medical instruments and supplies medical
imaging equipment and devices devices

Source: Medical and Healthcare Marketplace Guide; Analyst Reports (In-vitro: SG Cowen
VALUE CHAIN ANALYSIS

i Value chain analysis provides a systematic method for disaggregating a firm or industry
into its major discrete activities to understand sources of competitive advantage

Equipment Design Install Operate Service Monitor

Successively finer disaggregations of activities can expose differences important to

competitive advantage
 VALUE CHAIN SCOPE DEPENDS LARGELY ON THE PURPOSE FOR WHICH IT IS BEING USED
Sample Use
System or
industry Distribution Potential
Inputs Conversion Consumption 
value (Distributor/ supplier
(Supplier) (Manufacturer) (End-User)
chain: Retailer) identification

Purchas- Distribu-
Firm Manu- Marketing  Cost
Tech., ing/ tion/
value facturing/ & Service analysis
R&D Inbound Outbound
chain: Operations Sales
Logistics Logistics

Major  Process re-

activity Material Final Quality engineering
Conversion Packaging
value Preparation Assembly Assurance
 Cost analysis
chain:
PROFIT POOLS ARE THE TOTAL PROFITS EARNED IN AN INDUSTRY AT ALL POINTS ALONG THE VALUE CHAIN

U.S. Consumer Photographic

Industry Profit Pool
Operating Margin
40% Total profit =
$1.9B
30
Operating profit
20

10
C a m e ra
C a m era

0
r e t a il

m fg

Film Film Photofinishing Photofinishing

Photofinishin
g equipment

Enhanced
services
retail manu- retail wholesale
facturing

Share of Industry Revenue

Profit pools answer the question: “Where and how is money being
made?”
CONVERGENCE BLURS BUSINESS BOUNDARIES CREATING NEW OPPORTUNITIES

IT

Pharmacogenomics drug Disease management (e.g. Pfizer)

e.g Herceptin antibody therapy (e.g. Genentech)

Diagnostics Rx
Remote patient monitoring

Smart Drug Delivery

(e.g. Ortho Evra/J&J
(e.g Medtronic, Guidant

End-to-end diabetes solution

(e.g. Novo Nordisk)
Artificial Pancreas
e.g Medtronic, Roche

Alza)
Drug-eluting stent
(e.g. J&J Cordis)
Drug
Medical
Implantable drug pumps Delivery
Devices (e.g Medtronic, Amgen)
“HEAT MAP” CAN HELP IDENTIFY OPPORTUNITIES
Life P&C
Credit Mutual insur- insur- Under- Deriva- Corp. Foreign ex-
cards Mort-gagesfunds De-posits ance ance M&A writing tives lending change Opportunity
United assessment
States Hot
Ger-many
Cold
Japan

Italy

UK

Korea

Peru

Each cell represents a geographic product market and is

shaded according to its likely profitability and growth
KEY LEARNINGS FROM THE SESSION

• My actions
Key Learnings
… …
MODELS &
FRAMEWORKS OF
STRATEGIC ANALYSIS
Market Dymanics

Mahesh Narayan
MEASURING MARKET POWER OF THE FIRM

• How would you measure the market power of a firm or its exercise in a market
• How would you measure the impact of different factors on the market power of a firm
MODELS OF MARKET DYNAMICS
S-C-P MODEL

Basic Conditions: factors which shape the market of the

industry, e.g. demand, supply, political factors
Structure: attributes which give definition to the supply-
side of the market, e.g. economies of scale, barriers to entry,
industry concentration, product differentiation, vertical
integration.
Conduct: the behavior of firms in the market, e.g. pricing
behavior advertising, innovation.
Performance: a judgement about the results of market
behaviour, e.g. efficiency, profitability, fairness/income
distribution, economic growth.
MODELS OF MARKET DYNAMICS
S-C-P MODEL

Market Power is a measure of seller concentration in the industry & barriers to entry in the industry

Seller concentration:
• Number & Size of firms
• Coordinate their pricing behavior
• Collusion
• Conditions of Entry
• Extent of barriers to entry
• Economies of Scale
• Product Differentiation
• Absolute Cost Advantages
KEY LEARNINGS FROM THE SESSION

• My actions
Key Learnings
… …
INTERNAL-EXTERNAL MATRIX

• Used to analyze working conditions and strategic position of a business.

• I-E is based on an analysis of internal and external business factors
• The IE Matrix positions an organization’s various divisions in a nine-cell
EFE MATRIX
• used for assessment of current business conditions. The EFE matrix is a good tool to visualize and prioritize the opportunities
and threats that a business is facing.
• How do I create the EFE matrix?
• List factors: The first step is to gather a list of external factors. Divide factors into two groups: opportunities and threats.
• Assign weights: Assign a weight to each factor. The value of each weight should be between 0 and 1 (or alternatively between 10
and 100 if you use the 10 to 100 scale). Zero means the factor is not important. One or hundred means that the factor is the most
influential and critical one.  The total value of all weights together should equal 1 or 100.
• . Rate factors: Assign a rating to each factor. Rating should be between 1 and 4. Rating indicates how effective the firm’s current
strategies respond to the factor. 1 = the response is poor. 2 = the response is below average. 3 = above average. 4 = superior.
Weights are industry-specific. Ratings are company-specific
• Multiply weights by ratings: Multiply each factor weight with its rating. This will calculate the weighted score for each factor.
• Total all weighted scores: Add all weighted scores for each factor. This will calculate the total weighted score for the company.
EFE MATRIX
IFE MATRIX
• tool for auditing or evaluating major strengths and weaknesses in functional areas of a business
• The IFE matrix can be created using the following five steps:
• 1) Key internal factors - Conduct internal audit and identify both strengths and weaknesses in all your business areas. It is suggested you identify 10 to 20
internal factors, but the more you can provide for the IFE matrix, the better. The number of factors has no effect on the range of total weighted scores (discussed
below) because the weights always sum to 1.0, but it helps to diminish estimate errors resulting from subjective ratings. First, list strengths and then weaknesses.
It is wise to be as specific and objective as possible. You can for example use percentages, ratios, and comparative numbers.
• 2) Weights - Having identified strengths and weaknesses, the core of the IFE matrix, assign a weight that ranges from 0.00 to 1.00 to each factor. The weight
assigned to a given factor indicates the relative importance of the factor. Zero means not important. One indicates very important. If you work with more than 10
factors in your IFE matrix, it can be easier to assign weights using the 0 to 100 scale instead of 0.00 to 1.00. Regardless of whether a key factor is an internal
strength or weakness, factors with the greatest importance in your organizational performance should be assigned the highest weights. After you assign weight
to individual factors, make sure the sum of all weights equals 1.00 (or 100 if using the 0 to 100 scale weights). The weight assigned to a given factor indicates
the relative importance of the factor to being successful in the firm's industry. Weights are industry based.
• 3) Rating - Assign a 1 to X rating to each factor. Your rating scale can be per your preference. Practitioners usually use rating on the scale from 1 to 4. Rating
captures whether the factor represents a major weakness (rating = 1), a minor weakness (rating = 2), a minor strength (rating = 3), or a major strength (rating =
4). If you use the rating scale 1 to 4, then strengths must receive a 4 or 3 rating and weaknesses must receive a 1 or 2 rating. Note, the weights determined in the
previous step are industry based. Ratings are company based.
• 4) Multiply - Now we can get to the IFE matrix math. Multiply each factor's weight by its rating. This will give you a weighted score for each factor.
• 5) Sum - The last step in constructing the IFE matrix is to sum the weighted scores for each factor. This provides the total weighted score for your business.
IFE
IE MATRIX

• The IE matrix works in a way that you plot the total weighted score from the EFE matrix on the y
axis and draw a horizontal line across the plane. Then you take the score calculated in the IFE
matrix, plot it on the x axis, and draw a vertical line across the plane. The point where your
horizontal line meets your vertical line is the determinant of your strategy. This point shows the
strategy that your company should follow.
• On the x axis of the IE Matrix, an IFE total weighted score of 1.0 to 1.99 represents a weak internal
position. A score of 2.0 to 2.99 is considered average. A score of 3.0 to 4.0 is strong.
• On the y axis, an EFE total weighted score of 1.0 to 1.99 is considered low. A score of 2.0 to 2.99 is
medium. A score of 3.0 to 4.0 is high.
IE MATRIX
IE MATRIX

• The IE matrix can be divided into three major regions that have different strategy implications.

• Cells I, II, and III suggest the grow and build strategy. This means intensive and aggressive tactical
strategies. Your strategies should focus on market penetration, market development, and product
development. From the operational perspective, a backward integration, forward integration, and
horizontal integration should also be considered.

• Cells IV, V, and VI suggest the hold and maintain strategy. In this case, your tactical strategies should
focus on market penetration and product development.

• Cells VII, VIII, and IX are characterized with the harvest or exit strategy. If costs for rejuvenating the
business are low, then it should be attempted to revitalize the business. In other cases, aggressive cost
management is a way to play the end game.
IE MATRIX

Key Internal Factor Key External Factor Resultant Strategy

20% annual growth in the

Excess working capacity
+ cell phone industry = Acquire Cellfone, Inc.
(strength)
(opportunity)

Exit of two major foreign Pursue horizontal integration

Insufficient capacity
+ competitors form the = by buying competitor's
(weakness)
industry (opportunity) facilities

Decreasing numbers of Develop new products for

Strong R&D (strength) + =
young adults (threat) older adults

Poor employee morale Develop a new employee

+ Strong union activity =
(weakness) (threat) benefits package
KEY LEARNINGS FROM THE SESSION

• My actions
Key Learnings
… …