Porter five forces analysis

A graphical representation of Porter's Five Forces

'Porter's five forces analysis is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979. It draws upon industrial organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit. Three of Porter's five forces refer to competition from external sources. The remainder are internal threats. Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a business unit to re-assess the marketplace given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models, have been able to make a return in excess of the industry average. Porter's five forces include - three forces from 'horizontal' competition: threat of substitute products, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: the bargaining power of suppliers and the bargaining power of customers. This five forces analysis, is just one part of the complete Porter strategic models. The other elements are the value chain and the generic strategies.[citation needed] Porter developed his Five Forces analysis in reaction to the then-popular SWOT analysis, which he found unrigorous and ad hoc.[1] Porter's five forces is based on the Structure-Conduct-Performance paradigm in industrial organizational economics. It has been applied to a diverse range of problems, from helping businesses become more profitable to helping governments stabilize industries.[2]

[edit]Five

forces
of new competition

[edit]Threat

Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate will tend towards zero (perfect competition).

The existence of barriers to entry (patents, rights, etc.) The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily.

Economies of product differences Brand equity Switching costs or sunk costs Capital requirements Access to distribution Customer loyalty to established brands Absolute cost Industry profitability; the more profitable the industry the more attractive it will be to new competitors.

[edit]Threat

of substitute products or services

The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives. Note that this should not be confused with competitors' similar products but entirely different ones instead. For example, Pepsi is not considered a substitute for Coke but water, tea, coffee, and milk are.

Buyer propensity to substitute Relative price performance of substitute Buyer switching costs Perceived level of product differentiation Number of substitute products available in the market Ease of substitution. Information-based products are more prone to substitution, as online product can easily replace material product.

Substandard product Quality depreciation

[edit]Bargaining

power of customers (buyers)

The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes.

Buyer concentration to firm concentration ratio Degree of dependency upon existing channels of distribution Bargaining leverage, particularly in industries with high fixed costs Buyer volume Buyer switching costs relative to firm switching costs Buyer information availability

Availability of existing substitute products Buyer price sensitivity Differential advantage (uniqueness) of industry products RFM Analysis

[edit]Bargaining

power of suppliers

The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm, when there are few substitutes. Suppliers may refuse to work with the firm, or, e.g., charge excessively high prices for unique resources.

Supplier switching costs relative to firm switching costs Degree of differentiation of inputs Impact of inputs on cost or differentiation Presence of substitute inputs Strength of distribution channel Supplier concentration to firm concentration ratio Employee solidarity (e.g. labor unions) Supplier competition - ability to forward vertically integrate and cut out the BUYER

Ex.: If you are making biscuits and there is only one person who sells flour, you have no alternative but to buy it from him.

[edit]Intensity

of competitive rivalry

For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry.

Sustainable competitive advantage through innovation Competition between online and offline companies Level of advertising expense Powerful competitive strategy

[edit]Usage
Strategy consultants occasionally use Porter's five forces framework when making a qualitative evaluation of a firm's strategic position. However, for most consultants, the framework is only a starting point or "checklist." They might use " Value Chain" afterward. Like all general frameworks, an analysis that uses it to the exclusion of specifics about a particular situation is considered nave. According to Porter, the five forces model should be used at the line-of-business industry level; it is not designed to be used at the industry group or industry sector level. An industry is defined at a lower, more basic level: a market in which similar or closely related products and/or services are sold to buyers. (See industry information.) A firm that competes in a single industry should develop, at a minimum, one five forces analysis for its industry. Porter makes clear that for diversified companies, the first fundamental issue in corporate strategy is the selection of industries (lines of business) in which the company should compete; and each line of business should develop its own, industry-specific, five forces analysis. The average Global 1,000 company competes in approximately 52 industries (lines of business).

[edit]Criticisms
Porter's framework has been challenged by other academics and strategists such as Stewart Neill. Similarly, the likes of Kevin P. Coyne [1] and Somu Subramaniam have stated that three dubious assumptions underlie the five forces:

That buyers, competitors, and suppliers are unrelated and do not interact and collude. That the source of value is structural advantage (creating barriers to entry). That uncertainty is low, allowing participants in a market to plan for and respond to competitive behavior. [3]

An important extension to Porter was found in the work of Adam Brandenburger and Barry Nalebuff in the mid-1990s. Using game theory, they added the concept of complementors (also called "the 6th force"), helping to explain the reasoning behind strategic alliances. The idea that complementors are the sixth force has often been credited to Andrew Grove, former CEO of Intel Corporation. According to most references, the sixth force is government or the public. Martyn Richard Jones, whilst consulting at Groupe Bull, developed an augmented 5 forces model in Scotland in 1993. It is based on Porter's model and includes Government (national and regional) as well as Pressure Groups as the notional 6th force. This model was the result of work carried out as part of Groupe Bull's Knowledge Asset Management Organisation initiative. Porter indirectly rebutted the assertions of other forces, by referring to innovation, government, and complementary products and services as "factors" that affect the five forces.[4] It is also perhaps not feasible to evaluate the attractiveness of an industry independent of the resources a firm brings to that industry. It is thus argued[citation needed] that this theory be coupled with theResource-Based View (RBV) in order for the firm to develop a much more sound strategy.

SWOT analysis
For other uses, see SWOT.

SWOT analysis, with its four elements in a 2x2 matrix.

SWOT analysis (alternately SLOT analysis) is a strategic planning method used to evaluate the Strengths, Weaknesses/Limitations, Opportunities, andThreats involved in a project or in a business venture. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and

unfavorable to achieve that objective. The technique is credited to Albert Humphrey, who led a convention at Stanford University in the 1960s and 1970s using data from Fortune 500 companies. Setting the objective should be done after the SWOT analysis has been performed. This would allow achievable goals or objectives to be set for the organization.

Strengths: characteristics of the business, or project team that give it an advantage over others Weaknesses (or Limitations): are characteristics that place the team at a disadvantage relative to others Opportunities: external chances to improve performance (e.g. make greater profits) in the environment Threats: external elements in the environment that could cause trouble for the business or project

Identification of SWOTs is essential because subsequent steps in the process of planning for achievement of the selected objective may be derived from the SWOTs. First, the decision makers have to determine whether the objective is attainable, given the SWOTs. If the objective is NOT attainable a different objective must be selected and the process repeated.

[edit]Matching

and converting

One way of utilizing SWOT is matching and converting. Matching is used to find competitive advantages by matching the strengths to opportunities. Converting is to apply conversion strategies to convert weaknesses or threats into strengths or opportunities. An example of conversion strategy is to find new markets. If the threats or weaknesses cannot be converted a company should try tominimize or avoid them.[1]

[edit]Internal

and external factors

The aim of any SWOT analysis is to identify the key internal and external factors that are important to achieving the objective. These come from within the company's unique value chain. SWOT analysis groups key pieces of information into two main categories:

Internal factors The strengths and weaknesses internal to the organization. External factors The opportunities and threats presented by the external environment to the organization.

The internal factors may be viewed as strengths or weaknesses depending upon their impact on the organization's objectives. What may represent strengths with respect to one objective may be weaknesses for another objective. The factors may include all of the 4P's; as well as personnel, finance, manufacturing capabilities, and so on. The external factors may include macroeconomic matters, technological change, legislation, and socio-cultural changes, as well as changes in the marketplace or competitive position. The results are often presented in the form of a matrix. SWOT analysis is just one method of categorization and has its own weaknesses. For example, it may tend to persuade companies to compile lists rather than think about what is actually important in achieving objectives. It also presents the resulting lists uncritically and without clear prioritization so that, for example, weak opportunities may appear to balance strong threats. It is prudent not to eliminate too quickly any candidate SWOT entry. The importance of individual SWOTs will be revealed by the value of the strategies it generates. A SWOT item that produces valuable strategies is important. A SWOT item that generates no strategies is not important.

[edit]Use

of SWOT analysis

The usefulness of SWOT analysis is not limited to profit-seeking organizations. SWOT analysis may be used in any decision-making situation when a desired end-state (objective) has been defined. Examples include: non-profit organizations, governmental units, and individuals. SWOT analysis may also be used in pre-crisis planning and preventive crisis management. SWOT analysis may also be used in creating a recommendation during a viability study/survey.

[edit]Criticism

of SWOT

Some findings from Menon et al. (1999) [2] and Hill and Westbrook (1997) [3] have shown that SWOT may harm performance.

[edit]SWOT

- landscape analysis

The SWOT-landscape systematically deploys the relationships between overall objective and underlying SWOT-factors and provides an interactive, query-able 3D landscape.

The SWOT-landscape grabs different managerial situations by visualizing and foreseeing the dynamic performance of comparable objects according to findings by Brendan Kitts, Leif Edvinsson and Tord Beding (2000).[4] Changes in relative performance are continually identified. Projects (or other units of measurements) that could be potential risk or opportunity objects are highlighted. SWOT-landscape also indicates which underlying strength/weakness factors that have had or likely will have highest influence in the context of value in use (for ex. capital value fluctuations).

[edit]Corporate

planning

As part of the development of strategies and plans to enable the organization to achieve its objectives, then that organization will use a systematic/rigorous process known as corporate planning. SWOT alongside PEST/PESTLE can be used as a basis for the analysis of business and environmental factors. [5]

Set objectives defining what the organization is going to do Environmental scanning

Internal appraisals of the organization's SWOT, this needs to include an assessment of the present situation as well as a portfolio of products/services and an analysis of the product/service life cycle

Analysis of existing strategies, this should determine relevance from the results of an internal/external appraisal. This may include gap analysis which will look at environmental factors

Strategic Issues defined key factors in the development of a corporate plan which needs to be addressed by the organization

Develop new/revised strategies revised analysis of strategic issues may mean the objectives need to change Establish critical success factors the achievement of objectives and strategy implementation Preparation of operational, resource, projects plans for strategy implementation Monitoring results mapping against plans, taking corrective action which may mean amending objectives/strategies.[6]

[edit]Marketing
Main article: Marketing management In many competitor analyses, marketers build detailed profiles of each competitor in the market, focusing especially on their relative competitive strengths and weaknesses using SWOT analysis. Marketing managers will examine each competitor's cost structure, sources of profits, resources and competencies, competitive positioning and product differentiation, degree of vertical integration, historical responses to industry developments, and other factors. Marketing management often finds it necessary to invest in research to collect the data required to perform accurate marketing analysis. Accordingly, management often conducts market research (alternately marketing research) to obtain this information. Marketers employ a variety of techniques to conduct market research, but some of the more common include:

Qualitative marketing research, such as focus groups Quantitative marketing research, such as statistical surveys Experimental techniques such as test markets Observational techniques such as ethnographic (on-site) observation Marketing managers may also design and oversee various environmental scanning and competitive intelligence processes to help identify trends and inform the company's marketing analysis. Below is an example SWOT analysis of a market position of a small management consultancy with specialism in HRM.[6]

Strengths

Weaknesses

Opportunities

Threats

Reputation in marketplace

Shortage of consultants at operating level rather than partner level

Well established position with a well defined market niche

Large consultancies operating at a minor level

Expertise at partner level in HRM consultancy

Unable to deal with multidisciplinary assignments because of size or lack of ability

Identified market for consultancy in areas other than HRM

Other small consultancies looking to invade the marketplace

PEST analysis
From Wikipedia, the free encyclopedia

PEST analysis stands for "Political, Economic, Social, and Technological analysis" and describes a framework of macroenvironmental factors used in the environmental scanning component ofstrategic management. Some analysts added Legal and rearranged the mnemonic to SLEPT;[1] inserting Environmental factors expanded it to PESTEL or PESTLE, which is popular in the United Kingdom.[2] The model has recently been further extended to STEEPLE and STEEPLED, adding Ethics and demographic factors. It is a part of the external analysis when conducting a strategic analysis or doing market research, and gives an overview of the different macroenvironmental factors that the company has to take into consideration. It is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations. The growing importance of environmental or ecological factors in the first decade of the 21st century have given rise togreen business and encouraged widespread use of an updated version of the PEST framework. STEER analysis systematically considers Socio-cultural, Technological, Economic, Ecological, and Regulatory factors.

[edit]Composition

Political factors are how and to what degree a government intervenes in the economy. Specifically, political factors include areas such as tax policy, labour law, environmental law, trade restrictions, tariffs, and political stability. Political factors may also include goods and services which the government wants to provide or be provided (merit goods) and those that the government does not want to be provided (demerit goods or merit bads). Furthermore, governments have great influence on the health, education, and infrastructure of a nation

Economic factors include economic growth, interest rates, exchange rates and the inflation rate. These factors have major impacts on how businesses operate and make decisions. For example, interest rates affect a firm's cost of capital and therefore to what extent a business grows and expands. Exchange rates affect the costs of exporting goods and the supply and price of imported goods in an economy

Social factors include the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in social factors affect the demand for a company's products and how that company operates. For example, an aging population may imply a smaller and less-willing workforce (thus increasing the cost of labor). Furthermore, companies may change various management strategies to adapt to these social trends (such as recruiting older workers).

Technological factors include technological aspects such as R&D activity, automation, technology incentives and the rate of technological change. They can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead to innovation.

Environmental factors include ecological and environmental aspects such as weather, climate, and climate change, which may especially affect industries such as tourism, farming, and insurance. Furthermore, growing awareness of the potential impacts of climate change is affecting how companies operate and the products they offer, both creating new markets and diminishing or destroying existing ones.

Legal factors include discrimination law, consumer law, antitrust law, employment law, and health and safety law. These factors can affect how a company operates, its costs, and the demand for its products.

[edit]Applicability

of the Factors

The model's factors will vary in importance to a given company based on its industry and the goods it produces. For example, consumer and B2B companies tend to be more affected by the social factors, while a global defense contractor would tend to be more affected by political factors.[3] Additionally, factors that are more likely to change in the future or more relevant to a given company will carry greater importance. For example, a company which has borrowed heavily will need to focus more on the economic factors (especially interest rates).[4] Furthermore, conglomerate companies who produce a wide range of products (such as Sony, Disney, or BP) may find it more useful to analyze one department of its company at a time with the PESTEL model, thus focusing on the specific factors relevant to that one department. A company may also wish to divide factors into geographical relevance, such as local, national, and global (also known as LONGPESTEL).

[edit]Use

of PEST analysis with other models

The PEST factors, combined with external micro-environmental factors and internal drivers, can be classified as opportunities and threats in a SWOT analysis.

Growth-share matrix
The BCG matrix (aka B-Box, B.C.G. analysis, BCG-matrix, Boston Box, Boston Matrix, Boston Consulting Group analysis, portfolio diagram) is a chart that had been created by Bruce Henderson for the Boston Consulting Group in 1968 to help corporations with analyzing their business units or product lines. This helps the company allocate resources and is used as an analytical tool in brand marketing, product management, strategic management, and portfolio analysis.[1] Analysis of market performance by firms using its principles has called its usefulness into question, and it has been removed from some major marketing textbooks.
[2]

[edit]Chart

BCG Matrix

To use the chart, analysts plot a scatter graph to rank the business units (or products) on the basis of their relativemarket shares and growth rates.

Cash cows are units with high market share in a slow-growing industry. These units typically generate cash in excess of the amount of cash needed to maintain the business. They are regarded as staid and boring, in a "mature" market, and every corporation would be thrilled to own as many as possible. They are to be "milked" continuously with as little investment as possible, since such investment would be wasted in an industry with low growth.

Dogs, or more charitably called pets, are units with low market share in a mature, slow-growing industry. These units typically "break even", generating barely enough cash to maintain the business's market share. Though owning a break-even unit provides the social benefit of providing jobs and possible synergies that assist other business units, from an accounting point of

view such a unit is worthless, not generating cash for the company. They depress a profitable company's return on assets ratio, used by many investors to judge how well a company is being managed. Dogs, it is thought, should be sold off.

Question marks (also known as problem child) are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. The result is a large net cash consumption. A question mark has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines. Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share.

Stars are units with a high market share in a fast-growing industry. The hope is that stars become the next cash cows. Sustaining the business unit's market leadership may require extra cash, but this is worthwhile if that's what it takes for the unit to remain a leader. When growth slows, stars become cash cows if they have been able to maintain their category leadership, or they move from brief stardom to dogdom.[citation needed]

As a particular industry matures and its growth slows, all business units become either cash cows or dogs. The natural cycle for most business units is that they start as question marks, then turn into stars. Eventually the market stops growing thus the business unit becomes a cash cow. At the end of the cycle the cash cow turns into adog. The overall goal of this ranking was to help corporate analysts decide which of their business units to fund, and how much; and which units to sell. Managers were supposed to gain perspective from this analysis that allowed them to plan with confidence to use money generated by the cash cows to fund the stars and, possibly, the question marks. As the BCG stated in 1970: Only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its growth opportunities. The balanced portfolio has:

stars whose high share and high growth assure the future; cash cows that supply funds for that future growth; and question marks to be converted into stars with the added funds.

[edit]Practical

use of the BCG Matrix

For each product or service, the 'area' of the circle represents the value of its sales. The BCG Matrix thus offers a very useful 'map' of the organization's product (or service) strengths and weaknesses, at least in terms of current profitability, as well as the likely cashflows. The need which prompted this idea was, indeed, that of managing cash-flow. It was reasoned that one of the main indicators of cash generation was relative market share, and one which pointed to cash usage was that of market growth rate. Derivatives can also be used to create a 'product portfolio' analysis of services. So Information System services can be treated accordingly.[citation needed]

[edit]Relative

market share

This indicates likely cash generation, because the higher the share the more cash will be generated. As a result of 'economies of scale' (a basic assumption of the BCG Matrix), it is assumed that these earnings will grow faster the higher the share. The exact measure is the brand's share relative to its largest competitor. Thus, if the brand had a share of 20 percent, and the largest competitor had the same, the ratio would be 1:1. If the largest competitor had a share of 60 percent; however, the ratio would be

1:3, implying that the organization's brand was in a relatively weak position. If the largest competitor only had a share of 5 percent, the ratio would be 4:1, implying that the brand owned was in a relatively strong position, which might be reflected in profits and cash flows. If this technique is used in practice, this scale is logarithmic, not linear. On the other hand, exactly what is a high relative share is a matter of some debate. The best evidence is that the most stable position (at least in Fast Moving Consumer Goods FMCG markets) is for the brand leader to have a share double that of the second brand, and triple that of the third. Brand leaders in this position tend to be very stableand profitable; the Rule of 123.[3] The reason for choosing relative market share, rather than just profits, is that it carries more information than just cash flow. It shows where the brand is positioned against its main competitors, and indicates where it might be likely to go in the future. It can also show what type of marketing activities might be expected to be effective.[citation needed]

[edit]Market

growth rate

Rapidly growing in rapidly growing markets, are what organizations strive for; but, as we have seen, the penalty is that they are usually net cash users - they require investment. The reason for this is often because the growth is being 'bought' by the high investment, in the reasonable expectation that a high market share will eventually turn into a sound investment in future profits. The theory behind the matrix assumes, therefore, that a higher growth rate is indicative of accompanying demands on investment. The cut-off point is usually chosen as 10 per cent per annum. Determining this cut-off point, the rate above which the growth is deemed to be significant (and likely to lead to extra demands on cash) is a critical requirement of the technique; and one that, again, makes the use of the BCG Matrix problematical in some product areas. What is more, the evidence,[3] from FMCG markets at least, is that the most typical pattern is of very low growth, less than 1 per cent per annum. This is outside the range normally considered in BCG Matrix work, which may make application of this form of analysis unworkable in many markets. [citation needed] Where it can be applied, however, the market growth rate says more about the brand position than just its cash flow. It is a good indicator of that market's strength, of its future potential (of its 'maturity' in terms of the market life-cycle), and also of its attractiveness to future competitors. It can also be used in growth analysis.

[edit]Critical

evaluation

While theoretically useful, and widely used, several academic studies have called into question whether using the BCG matrix actually helps businesses succeed, and the model has since been removed from some major marketing textbooks. [4][5] One study (Slater and Zwirlein, 1992) which looked at 129 firms found that those who follow portfolio planning models like the BCG matrix had lower shareholder returns. The matrix ranks only market share and industry growth rate, and only implies actual profitability, the purpose of any business. (It is certainly possible that a particular dog can be profitable without cash infusions required, and therefore should be retained and not sold.) The matrix also overlooks other elements of industry. With this or any other such analytical tool, ranking business units has a subjective element involving guesswork about the future, particularly with respect to growth rates. Unless the rankings are approached with rigor and scepticism, optimistic evaluations can lead to a dot com mentality in which even the most dubious businesses are classified as "question marks" with good prospects; enthusiastic managers may claim that cash must be thrown at these businesses immediately in order to turn them into stars, before growth rates slow and it's too late. Poor definition of a business's market will lead to some dogs being misclassified as cash cows. As originally practiced by the Boston Consulting Group,[3] the matrix was undoubtedly a useful tool, in those few situations where it could be applied, for graphically illustrating cashflows. If used with this degree of sophistication its use would still be valid. However,

later practitioners have tended to over-simplify its messages. In particular, the later application of the names (problem children, stars, cash cows and dogs) has tended to overshadow all elseand is often what most students, and practitioners, remember. This is unfortunate, since such simplistic use contains at least two major problems: 'Minority applicability'. The cashflow techniques are only applicable to a very limited number of markets (where growth is relatively high, and a definite pattern of product life-cycles can be observed, such as that of ethical pharmaceuticals). In the majority of markets, use may give misleading results. 'Milking cash cows'. Perhaps the worst implication of the later developments is that the (brand leader) cash cows should be milked to fund new brands. This is not what research into the FMCG markets has shown to be the case. The brand leader's position is the one, above all, to be defended, not least since brands in this position will probably outperform any number of newly launched brands. Such brand leaders will, of course, generate large cash flows; but they should not be `milked' to such an extent that their position is jeopardized. In any case, the chance of the new brands achieving similar brand leadership may be slimcertainly far less than the popular perception of the Boston Matrix would imply. Perhaps the most important danger[3] is, however, that the apparent implication of its four-quadrant form is that there should be balance of products or services across all four quadrants; and that is, indeed, the main message that it is intended to convey. Thus, money must be diverted from `cash cows' to fund the `stars' of the future, since `cash cows' will inevitably decline to become `dogs'. There is an almost mesmeric inevitability about the whole process. It focuses attention, and funding, on to the `stars'. It presumes, and almost demands, that `cash cows' will turn into `dogs'. The reality is that it is only the `cash cows' that are really importantall the other elements are supporting actors. It is a foolish vendor who diverts funds from a `cash cow' when these are needed to extend the life of that `product'. Although it is necessary to recognize a `dog' when it appears (at least before it bites you) it would be foolish in the extreme to create one in order to balance up the picture. The vendor, who has most of his (or her) products in the `cash cow' quadrant, should consider himself (or herself) fortunate indeed, and an excellent marketer, although he or she might also consider creating a few stars as an insurance policy against unexpected future developments and, perhaps, to add some extra growth. There is also a common misconception that 'dogs' are a waste of resources. In many markets 'dogs' can be considered loss-leaders that while not themselves profitable will lead to increased sales in other profitable areas.

[edit]Alternatives
As with most marketing techniques, there are a number of alternative offerings vying with the BCG Matrix although this appears to be the most widely used (or at least most widely taughtand then probably not used). The next most widely reported technique is that developed by McKinsey and General Electric, which is a three-cell by three-cell matrixusing the dimensions of `industry attractiveness' and `business strengths'. This approaches some of the same issues as the BCG Matrix but from a different direction and in a more complex way (which may be why it is used less, or is at least less widely taught). A more practical approach is that of the Boston Consulting Group's Advantage Matrix, which the consultancy reportedly used itself though it is little known amongst the wider population.

[edit]Other

uses

The initial intent of the growth-share matrix was to evaluate business units, but the same evaluation can be made for product lines or any other cash-generating entities. This should only be attempted for real lines that have a sufficient history to allow some

prediction; if the corporation has made only a few products and called them a product line, the sample variance will be too high for this sort of analysis to be meaningful.

Quality function deployment

From Wikipedia, the free encyclopedia

Quality function deployment (QFD) is a method to transform user demands into design quality, to deploy the functions forming quality, and to deploy methods for achieving the design quality into subsystems and component parts, and ultimately to specific elements of the manufacturing process.,[1] as described by Dr. Yoji Akao, who originally developed QFD in Japan in 1966, when the author combined his work in quality assurance and quality control points with function deployment used in value engineering. QFD is designed to help planners focus on characteristics of a new or existing product or service from the viewpoints of market segments, company, or technology-development needs. The technique yields graphs and matrices. QFD helps transform customer needs (the voice of the customer [VOC]) into engineering characteristics (and appropriate test methods) for a product or service, prioritizing each product or service characteristic while simultaneously setting development targets for product or service.

[edit]Areas

of application

QFD House of Quality for Enterprise Product Development Processes

QFD is applied in a wide variety of services, consumer products, military needs (such as the F-35 Joint Strike Fighter[2]), and emerging technologyproducts. The technique is also used to identify and document competitive marketing strategies and tactics (see example QFD House of Quality for Enterprise Product Development, at right). QFD is considered a key practice of Design for Six Sigma (DFSS - as seen in the referenced roadmap).[3] It is also implicated in the new ISO 9000:2000 standard which focuses on customer satisfaction. Results of QFD have been applied in Japan and elsewhere into deploying the high-impact controllable factors in Strategic planning and Strategic management (also known as Hoshin Kanri, Hoshin Planning,[4] Acquiring market needs by listening to the Voice of Customer (VOC), sorting the needs, and numerically prioritizing them (using techniques such as the Analytic Hierarchy

Process) are the early tasks in QFD. Traditionally, going to theGemba (the "real place" where value is created for the customer) is where these customer needs are evidenced and compiled. While many books and articles on "how to do QFD" are available, there is a relative paucity of example matrices available. QFD matrices become highly proprietary due to the high density of product or service information found therein.

[edit]Techniques [edit]House

and tools based on QFD

of Quality

House of Quality appeared in 1972 in the design of an oil tanker by Mitsubishi Heavy Industries.[5] Akao has reiterated numerous times that a House of Quality is not QFD, it is just an example of one tool.[6] A Flash tutorial exists showing the build process of the traditional QFD "House of Quality" (HOQ).[7] (Although this example may violate QFD principles, the basic sequence of HOQ building are illustrative.) There are also free QFD templates available that walk users through the process of creating aHouse of Quality.[8] Other tools extend the analysis beyond quality to cost[9], technology, reliability, function, parts, technology, manufacturing, and service deployments. In addition, the same technique can extend the method into the constituent product subsystems, configuration items, assemblies, and parts. From these detail level components, fabrication and assembly process QFD charts can be developed to support statistical process control techniques.

[edit]Pugh

concept selection

Pugh Concept Selection can be used in coordination with QFD to select a promising product or service configuration from among listed alternatives.

[edit]Modular

Function Deployment

Modular Function Deployment uses QFD to establish customer requirements and to identify important design requirements with a special emphasis on modularity.

[edit]Relationship

to other techniques

The QFD-associated Hoshin Kanri process somewhat resembles Management by objectives (MBO), but adds a significant element in the goal setting process, called "catchball". Use of these Hoshin techniques by U.S. companies such as Hewlett Packard have been successful in focusing and aligning company resources to follow stated strategic goals throughout an organizational hierarchy. Since the early introduction of QFD, the technique has been developed to shorten the time span and reduce the required group efforts.

Value chain
From Wikipedia, the free encyclopedia
(Redirected from Value chain analysis)

Popular Visualization

The value chain is a concept from business management that was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.[1]

[edit]Firm

Level

A value chain is a chain of activities for a firm operating in a specific industry. The business unit is the appropriate level for construction of a value chain, not the divisional level or corporate level. Products pass through all activities of the chain in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of the independent activities' values.[vague] It is important not to mix the concept of the value chain with the costs occurring throughout the activities. A diamond cutter, as a profession, can be used to illustrate the difference of cost and the value chain. The cutting activity may have a low cost, but the activity adds much of the value to the end product, since a rough diamond is significantly less valuable than a cut diamond. Typically, the described value chain and the documentation of processes, assessment and auditing of adherence to the process routines are at the core of the quality certification of the business, e.g. ISO 9001.[citation needed]

[edit]Activities
The value chain categorizes the generic value-adding activities of an organization. The "primary activities" include: inbound logistics, operations (production), outbound logistics, marketing and sales (demand), and services (maintenance). The "support activities" include: administrative infrastructure management, human resource management, technology (R&D), and procurement. The costs andvalue drivers are identified for each value activity.[vague][citation needed]

[edit]Industry

Level

An industry value chain is a physical representation of the various processes that are involved in producing goods (and services), starting with raw materials and ending with the delivered product (also known as the supply chain). It is based on the notion of value-added at the link (read: stage of production) level. The sum total of link-level value-added yields total value. The French Physiocrat'sTableau conomique is one of the earliest examples of a value chain. Wasilly Leontief's Input-Output tables, published in the 1950s, provide estimates of the relative importance of each individual link in industry-level value-chains for the U.S. economy.

[edit]Significance

The value chain framework quickly made its way to the forefront of management thought as a powerful analysis tool for strategic planning. The simpler concept of value streams, a cross-functional process which was developed over the next decade,[2] had some success in the early 1990s.[3] The value-chain concept has been extended beyond individual firms. It can apply to whole supply chains and distribution networks. The delivery of a mix of products and services to the end customer will mobilize different economic factors, each managing its own value chain. The industry wide synchronized interactions of those local value chains create an extended value chain, sometimes global in extent. Porter terms this larger interconnected system of value chains the "value system." A value system includes the value chains of a firm's supplier (and their suppliers all the way back), the firm itself, the firm distribution channels, and the firm's buyers (and presumably extended to the buyers of their products, and so on). Capturing the value generated along the chain is the new approach taken by many management strategists. For example, a manufacturer might require its parts suppliers to be located nearby its assembly plant to minimize the cost of transportation. By exploiting the upstream and downstream information flowing along the value chain, the firms may try to bypass the intermediaries creating newbusiness models, or in other ways create improvements in its value system. Value chain analysis has also been successfully used in large Petrochemical Plant Maintenance Organizations to show how Work Selection, Work Planning, Work Scheduling and finally Work Execution can (when considered as elements of chains) help drive Lean approaches to Maintenance. The Maintenance Value Chain approach is particularly successful when used as a tool for helping Change Management as it is seen as more user friendly than other business process tools. Value chain approach could also offer a meaningful alternative to valuate private or public companies when there is a lack of publically known data from direct competition, where the subject company is compared with, for example, a known downstream industry to have a good feel of its value by building useful correlations with its downstream companies. Value chain analysis has also been employed in the development sector as a means of identifying poverty reduction strategies by upgrading along the value chain.[4] Although commonly associated with export-oriented trade, development practitioners have begun to highlight the importance of developing national and intra-regional chains in addition to international ones.[5]

[edit]SCOR
The Supply-Chain Council, a global trade consortium in operation with over 700 member companies, governmental, academic, and consulting groups participating in the last 10 years, manages theSupply-Chain Operations Reference (SCOR), the de facto universal reference model for Supply Chain including Planning, Procurement, Manufacturing, Order Management, Logistics, Returns, and Retail; Product and Service Design including Design Planning, Research, Prototyping, Integration, Launch and Revision, and Sales including CRM, Service Support, Sales, and Contract Management which are congruent to the Porter framework. The SCOR framework has been adopted by hundreds of companies as well as national entities as a standard for business excellence, and the US DOD has adopted the newly-launched Design-Chain Operations Reference (DCOR) framework for product design as a standard to use for managing their development processes. In addition to process elements, these reference frameworks also maintain a vast database of standard process metrics aligned to the Porter model, as well as a large and constantly researched database of prescriptive universal best practices for process execution.

[edit]Value

Reference Model

VRM Quick Reference Guide V3R0

A Value Reference Model (VRM) developed by the trade consortium Value Chain Group offers an open source semantic dictionary for value chain management encompassing one unified reference framework representing the process domains of product development, customer relations and supply networks. The integrated process framework guides the modeling, design, and measurement of business performance by uniquely encompassing the plan, govern and execute requirements for the design, product, and customer aspects of business. The Value Chain Group claims VRM to be next generation Business Process Management that enables value reference modeling of all business processes and provides product excellence, operations excellence, and customer excellence. Six business functions of the Value Chain:

Research and Development Design of Products, Services, or Processes Production Marketing & Sales Distribution Customer Service

This guide to the right provides the levels 1-3 basic building blocks for value chain configurations. All Level 3 processes in VRM have input/output dependencies, metrics and practices. The VRM can be extended to levels 4-6 via the Extensible Reference Model schema.

Market Sizing & Forecasting

Knowing the size of the addressable market for both existing and new products and services, or even product concepts not yet under development, is a vital and basic first step in any business plan. Despite the best intentions, however, this is a task that we have often seen poorly executed. At the macro level, it is often very difficult for a company team to be completely objective about a product or concept that they are responsible for and intimately familiar with arguably too familiar with. While this problem sometimes results in an unfairly pessimistic forecast, it more often manifests itself as an unrealistically optimistic forecast. At the micro or tactical level, internal teams often lack the time and/or the end-user knowledge that is needed to develop an accurate and actionable sizing and forecast. End-user knowledge is especially an issue with clients who sell primarily through distribution channels, but clients who sell primarily direct often have weak

knowledge of their non-customers. Key issues that should be considered include: Identifying current and potential customers by company size and type Identifying competing offerings and how they may impact your own market Placing specific offerings at the appropriate place along their life cycle curve, and identifying the structure (i.e. how quickly do similar products ramp up? how long do they sustain high growth rates?) and time span of the curve Identifying specific obstacles to success (usually related to specific customer categories) that will or may limit the market potential Considering bandwidth or resource issues such as too few distributors or an insufficient number of salespeople

InfoTrends regularly assists clients with market sizing and forecasting. Our company has dedicated and experienced research staff to help you with these activities, either as a standalone project or as a key part of a larger activity such as assessing the prospects for a proposed new product. In many cases, a standalone market sizing and forecast can be performed very cost-effectively using our deep knowledge of reliable secondary data source, our own extensive database of non-proprietary primary research, sound technical approaches to statistical analysis and modeling, and the depth and breadth of our professional staffs experience in the key industries and product categories that our clients serve. In other cases, we may recommend primary research in the form of structured surveys and/or in-depth interviews. In either case, the result will usually include multiple scenarios with explanations of the factors that would favor one scenario over another, actionable recommendations on how to improve the projected results, and key potential problems to guard against.

Go to market
From Wikipedia, the free encyclopedia

In Marketing Management, the term Go-To-Market strategy refers to the channels a company will use to connect with its customers/business and the organizational processes it develops (such as high tech product development) to guide customer interactions from initial contact through fulfillment. A firm's Go-To-Market strategy is the mechanism by which they propose to deliver their unique value proposition to their target market. That value proposition is based on the choices the business has made to focus on and invest in markets and solutions that they believe will respond positively to the increased attention. Marketing Strategy involves WHO the firm will go after and WHAT it will offer them. Go-To-Market strategy is a component of the overall marketing strategy and is concerned with HOW the firm will make it happen. Go To Market is a strategy mainly used by marketers of goods that are not for the mass market. The main focus of this marketing exercise is to target the direct consumer or the one in authority who makes the buying decision.