SIMPLE
STRATEGIC ANALYSIS TOOLS AT SMES IN ECUADOR
MBA. Diego H. Álvarez Peralta
Universidad
de Palermo, UP, Argentina
E-mail:
dalvarezperalta77@gmail.com
Dr.
Leandro A. Viltard
Pontificia
Universidad Católica Argentina, Argentina
Universidad
de Palermo, Argentina
E-mail:
lviltard@yahoo.com.ar
Submission: 12/01/2015
Revision: 26/01/2015
Accept: 30/01/2015
ABSTRACT
This
article explores the possible applications of Strategic Analysis Tools (SAT) in
SMEs[1]
located in emerging countries such as Ecuador (where there are no formal
studies on the subject). It is intended to analyze if whether or not it is
feasible to effectively apply a set of proposed tools to guide mental map
decisions of executives when decisions on strategy have to be made. Through an in-depth
review of the state of the art in regards to SAT and interviews performed to
main participants such as chambers and executives of different firms, it is
shown the feasibility of their application. This analysis is complemented with
specialists´ interviews to deepen our insights and obtaining valid conclusions.
Our conclusion is that SMEs can smoothly develop and apply an appropriate set
of SAT when opting for very relevant choices. However, there are some
inconveniences to be solved which are connected with resources (such as
peoples’ abilities and technology) and behavioral (cultural factors and
methodological processes).Once these barriers are knocked down, it would be
more likely to enrich current approaches to make strategic decisions even more
effective. This is a qualitative investigation and and the research design is
not experimental (among them it is transversal as it relates to a specific
moment in time)..
Keywords: Strategic
analysis tools; SME; Formulation; Competitiveness; context assessment; value.
1. DESIGN: METHODOLOGY AND ANALYSIS
Our methodology is qualitative and
explores information gathered in a specific period of time (the last quarter of
2013 up to October 2014).
The analysis unit included the SMEs
established in Quito, Ecuador.
In this paper, we will concentrate
on state of the art theories about best suitable tools suggested for SMEs, the
results of interviews to key contributors and a brief analysis of a
representative SME located in Quito, Ecuador.
As a consequence we made three
interviews to local prestigious consultants and scholars who are based in
Quito, Ecuador. These interviews were held in order to compare the hypothesis
and objectives with the experience of the experts.
In order to obtain quality
assurance, a case analysis of Indulentes (a top SME publicly known and
acknowledged by specialized magazines) is presented. Being the minimum analysis unit, it
introduces favorable characteristics to contrast advantages and limitations of
using the SAT proposed by theorists with the reality of a business that
possesses the necessary resources to afford their application. In this way,
this SME would apply any tools from the elementary level to more complexes, and
by means of them exploiting the necessary wisdom to strengthening its
competitive position.
2. RESEARCH LIMITATIONS/CLARIFICATIONS
·
Although we are aware that it is unlikely to ascertain
that all relevant information has been included, we referred to worldwide
information obtained from relevant secondary sources.
·
The information provided by the principals of the
respective Chamber was the best we could access because of confidential
matters.
·
The interviews with key specialists and the Chamber´s
principals were held in their offices to minimize the impact on their environment,
and on the results as well. We used semi-structured interviews in order to
enrich, as much as possible, this investigation´s outcome.
·
In order to not undermine the content and the
investigation´s objective, the conclusions and contributions expressed were
strictly based on the information and first-hand collected data.
As a
qualitative research, results shown cannot be generalized. However, they are
useful for decision making purposes for a wide audience such as government,
non-government organizations, business managers, academics and consultants. Our
aim is to enhance comprehension on how to apply methodologically strategic
analysis tools to provide better insight and making optimal choices.
3. FINDINGS
By clearing cultural barriers and
leveraging the right´s executive´s mentality, the application of strategic
analysis tools is feasible in an emerging country such as Ecuador. The content
and scope of applying them can be continuously improved by defining appropriate
processes and paths that can lead to produce approaches to be upgraded from
time to time.
4. ORIGINALITY AND VALUE
Despite the fact that economic contribution of the
SMEs in the Ecuadorian economy has been researched, we realized that there are
not studies on the utilization or direct application of the strategic analysis
tools from a managerial perspective.
We
trust that this study can help in either designing or improving policies in
regard to improving the formulation of strategies in these firms. Implications
to this paper can refer to a wide basis, from the micro level -when executives
select choices- to the macro level, when government or non-government
organizations prepare plans to support these firms.
5. OBJECTIVE OF THIS INVESTIGATION
To
research the state of the art concerning strategic analysis tools applicable to
SMEs especially for firms of emerging markets such as Ecuador and make a value
added proposition of specific set of tools applicable when formulating strategy
at firm level.
6. INTRODUCTION
Despite
the large economic contribution of SMEs in emerging market countries, there is
little research on tools aimed at either measuring or improving their internal
competitiveness.
It
seems that governments in some circumstances have assigned resources to
researching on how to increase competitiveness in key sectors of the economy.
However, the positive outcome that may be obtained of those projects has been
barely visible. This phenomenon may be explained because of the lack of
connection between the political vision and strategic objectives that
respective SME’ executives may have formulated. At the firm level, managers
develop the strategic vision either sometimes in house or with any occasional
help of outsiders, and published it in their web pages. This situation has been
evidenced in some consulting works performed at some SMEs in Ecuador.
Besides,
we have seen that relevant decisions made by their executives such as acquiring
or enhancing plant’s capacity, merging business units or lunching marketing
campaigns are very closely tied to strategic decisions. These decisions were
specifically made to outperform competition, thus we can assume that directors
intentionally or at least intuitively targeted to improve their competitive
position. However, minimum effort or resources were utilized to ensure the
quality of their decision in strategic terms. In those cases, personal
experience and intuition guided their mental maps when designing to making
choices.
Although
there are many tools that the state of the Art suggests to apply when
formulating strategy at the beginning of the management cycle, we have
evidenced through the consulting experience that they firms rarely use them in
this segment.
Quiñonez
(2012) asserts that competitiveness and strategic management are key elements
for their continuity. In his research, the author spotlights the fact that in
Ecuador SMEs represent 95% of production units in the country. In this sense, a
study conducted by Deloitte & Touch in 2008 revealed that Ecuadorian
executives think that diminishing production costs and cheap labor are their
principal source of competitive advantage. This limited vision would reduce
other possibilities such as differentiation in products. In this regard, Porter
(2011) asserts that this option might be useful in industries in which rivalry
intensity is high. Thus, other available options may not be considered when
business owners formulate their strategic position. We may add that in the last
decade dollarization in this country has fueled purchasing power, especially
across the middle class, and then it is very likely that these populations are
tempted to consider not only costs advantages but also other factors such as
quality and hedonistic intrinsic value of products or services.
Considering
that a large portion of SMEs can have access to some of those tools, we can
presume that they may use those tools, which can be not only effective but also
simple and affordable. If we can list a set of simple tools that can be easily
managed, we can assume that those that seem to be friendly and effective should
be perfectly applicable.
This
paper intends to research the state of the art concerning strategic analysis
tools applicable to SMEs in emerging countries where competitiveness is a key
factor to reach development.
We
are interested not only in their application but also in the sequential order
of their utilization. In fact, we recommend a set of tools through establishing
the links between them by recognizing which elements can be used as connectors
as demonstrated in the Attachment 1; thus, SMEs may count on a systematic
process involving a possible suggested path.
In
order to prove applicability of those tools we reviewed them thoroughly and
then weighing them in terms of usefulness, we propose disadvantages and
limitations.
The
hypothesis that guides our research is that in the decision making process,
SMEs in Quito, Ecuador do not use systematically strategic analysis tools, and
then not only the assessment of the context in which they act , but also their
competitive position may be threatened.
7. THEORETICAL BACKGROUND
In
the following paragraphs, we are describing the contribution of some theorist
and scholars who have supported and criticized the strategic analysis tools.
Our research will be focused in not only the advantages or limitations of using
them, but also on the methodological resources that exist. In order to reach
this goal, we have considered some of the applications of those tools and the
experience applied by some researchers in different locations throughout the
world.
7.1.
Porter´s
five forces
An
initial recommendable path might be the industry analysis approached by Porter
(1985) in which the principal forces that determine profitability of a business
unit can be explained in terms of its competitive position. In fact, he asserts
that in those industries, which intensity is high, achieving profitability will
become more difficult despite the efforts of their executives. However, this
author reveals the real importance of the tool, which is recognizing the
ability of the firm to react and influence over those factors.
Thus,
the roots of strategy can be found in the way executives conceive them and
explore different options to obtain any competitive advantages. In this sense,
the author warns that value created can be captured by customers or suppliers
if for instance their negotiation power is high. Similarly, the presence of
substitutes or the intensity of rivalry can affect the willingness to pay for
the product.
Porter
(2011) suggests that this tool provides some strategic alternative options as
follows:
·
Firm´s competitive position can be seen as the
construction of entry barriers or finding a position where forces are weak.
·
Exploiting changes in the industry. This can be
visible at the appearance of new competitive positions.
·
Reconfiguration of the industry, as a firm finds new
ways to leading and directing it to new ways of competing that changing its
structure.
·
Acknowledgement of the main factors that affect
profitability of the firm and matching with internal resources.
Concerning
SMEs, Boian (2007) suggests that forces that negatively affect the competitive
position of SMEs come from a high negotiation power of suppliers. In addition,
other industries may be affected by the presence or introduction of substitute
products, which can be very threatening if investment in upgrading the
production system is minimal.
In
order to apply this tool, it is proposed an arithmetic approach in which
details factors and related sub-factors. For instance, concerning the
supplier´s negotiation power, the author includes price level, commercial terms
and product quality as sub-factors. Furthermore, it is suggested to weigh every
factor according to a previous assessment of its significance.
Then,
grades every sub-factor in a one to four scale according to the strength it
exerts over its competitive position. If pressure is favorable it will have
positive sign, otherwise, it will be negative. This grade is calculated as a
factor of its relative weight, which is added to obtain a total. A positive
result will show that there is a trend that competitive forces are
strengthening its competitive position, while the opposite weakens it. An
example of this approach is presented bellows:
Table 1: Example
of competitive position analysis
|
Factor |
Importance coefficient |
Sub-factors |
Sub-factor coefficient |
Sub-factor |
Observations |
|
Customer’s negotiation power |
0.2 |
·
Product´s
differentiation level ·
Customer´s
information level |
1 3 |
0.2 0.6 |
Luxury brand |
|
Supplier´s negotiation power |
0.4 |
·
Concentration level
offer |
-3 |
-1.2 |
|
|
Appearance of new competitors |
0.1 |
·
Capitalization level ·
Access to
distributors |
2 3 |
0.2 0.3 |
|
|
Direct competition |
0.3 |
·
Number of competitors ·
Product´s
differentiation grade |
-1 3 |
-0.3 0.9 |
Cutting-edge technology |
|
|
1.0 |
|
|
0.7 |
|
Source: Own
As
far as strategy concerns, the wider advantage acknowledged by Ormanidhi (2008)
is related to the model’s capacity to providing criteria and benchmarks to
analyze a cluster of business units. As any other well-structured model, the
smoothness of embracing complexity is another advantage worth to mention.
Among
the cons of using the model, Grant (1997) highlights the omission of
competitor´s reactions and its failure to guide when the speed of the
industry’s change is accelerated. This author insists that this model does not
consider the interaction of firms, in which its limitation has been partly
covered by the game theory. However, it seems that even this method has not
been very effective because instead of aiming at obtaining any competitive
advantage it focuses on explaining how to reach equilibrium.
Other
strategists who challenge the basic axioms of this model are Hamel &
Prahalad (1989), who in their perspective challenge the classical concepts of
Harvard Business School, asserting that it restricts the business capability to
innovate. Besides, insists in following a “Strategic intent” which consists in
an active process to allocate resources beyond the available ones.
To
sum up we can add that not all firms and especially SMEs born with neither the
goal of being global leaders nor the pace of change in the environment are so
vertiginous in the whole spectrum of sectors to make innovation an exclusive
model to adopt.
Table 2: Pros
and cons of Porter´s five forces analysis
|
Description |
Application |
Advantages |
Disadvantages |
|
The acknowledgement of factors in the external environment let the
firm taking a competitive position, defining scope and adopting its generic
strategy. |
To assessing the capability of the firm (SME) to create and hold
value: -
Higher supplier´s
negotiation power and threat of substitutes. -
The potential
entrance of new rivals. |
Its application let identifying the issues in the respective
industries to being sustainable and the ability of the firm to approach them. This provides competitive performance indicators to benchmarking with
current and potential rivals. |
The analysis may be misleading when the transformation speed of the
sector is much accelerated. |
Source: Own
7.2.
PEST
Analysis
In
the opinion of Ward (2005), this tool tries to explain some variables present
in the external environment that have an impact on businesses and their
competitiveness. Although firms rarely have the capability to manipulate them,
they could assess variables to explore either opportunities or hedge against
prominent threats. Its name stands an acronym for political, economic,
socio-cultural and technological evolution of the business environment.
The
assessment of these variables’ influence and their elements is sometimes vital
to distinguish the capacity to react of firms. For instance, political and
economic variables may reveal constraints for many of the actions that
executives might consider as alternatives. On the other hand, social and
technological variables may help discovering new markets or new ways to
assisting it or improving internal processes throughout the whole value chain.
In
this sense, Dess (2011) highlights that some variables specifically have some
impact in some sectors such as the economic ones, in which some industries may
be more sensitive to changes in main indicators such as interest rates,
unemployment level or savings. For instance, interest rates may negatively
affect the real State sector.
Lawrence
(2012) identified interest rates and credit access constraints as the most
relevant variables for SMEs in Jamaica. In his opinion, however,
businesspersons have not properly approached these elements.
Concerning
socio-demographic variables, lifestyles among certain population may stimulate
consumption of some products while jeopardizing others. For instance, the
decrease of poly-in saturated food in contrast to low-calories products.
The
application of the tool that Thompson (2012) suggests is to identify changes in
consumers´ behavior and new possible sourcing of raw materials.
Table 3: Pros
and cons of PEST analysis
|
Description |
Application |
Advantages |
Disadvantages |
|
The analysis of the business environment helps assessing its influence
in the SMSs industry and acting proactively to likely competitors’ actions. |
-
Changes in the
business environment can warn the presence of threats and preparing hedging
mechanisms. -
Political changes can
affect profitability and changes in trends and technology may mark new sales,
production and trading scenarios. |
It may become a source to define key variables of the environment to
be considered in SWOT Analysis. |
PEST analysis may be time consuming and requires researching skills to
gather and structure information. However, those resources are not part of
the SMEs characteristics. |
Source: Own
7.3.
SWOT
Analysis
This
is one of the most popular tools preferred very often by its apparent
simplicity. Isoherranen (2012) considers its characteristic as one of the
reasons that explains its popularity. Similarly, Kormaris (2010) also asserts
that this is a valuable tool because it can be jointly used with others such as
PEST and Porter´s five forces at either business unit level or product.
Helms
(2010) acknowledge this as a powerful tool that may fully capture the efforts
of a team´s brainstorming. However, other authors such as Hax (1991); Ormadhini
(2008) suggest that it gathers information provided by other tools such as PEST
and Porter´s five forces to analyze the environment and the value chain inside
a firm; otherwise, the brainstorming exercise would be highly biased.
Thompson
(2012) recognizes that SWOT analysis, assess the resources and competitive
capabilities of the firm to exploit the best opportunities in the market and
protect against threats. In addition, to distinguish an attribute as strength
suggests that must satisfy two conditions:
·
It should have competitive value, which means it
facilitates to exploit market´s opportunities and protect against threats.
·
It must be rare, meaning that only few firms own it.
Besides,
warns that analysts should not be limited to list variables. Instead, it should
facilitate arriving to conclusions that recognize the firm´s potential and it´s
positioning.
In
order to apply this tool, Thompson
(2008) suggests to list strengths in terms of key success factors in a limited
number. Furthermore, grade them in a one to ten scale. The latest would be the
highest score. This would let benchmark scores to main rivals and obtaining
totals to evaluate them. Highest scores would let identify strengths and
competitiveness. However, because related factors are different across
different industries, recommends weighing this assessment. This exercise would
let identify participants who have the strongest competitive positions, and who
are the ones that possess relevant competitive advantages. Hence, firms might
assess which offensive or defensive actions to include in their plans.
Such
as the one proposed by Zavadskas (2011), who introduced a mathematic algorithm,
developed other approaches in three phases. In the first, to identify
managerial capabilities uses SWOT as the starting point. In the second,
establishes parameters of the problem and defines an objective function to
apply either linear or integer programming. Finally, proposes a decision matrix
where simulates permutations of possible outcomes. This insight provides
conclusions that the managerial team may use.
Specifically
in regard to SMEs Houben (1999) proposed a prototype based on the system’s
field. A software was utilized at ten SMEs in Belgium and was qualified as
successful thanks to the inclusion of various disciplines such as Marketing,
Finance, Production, Human Resources and Environment.
Another
author who found this tool very applicable to SMEs was Helms (2010) and exemplified
the USA and India in which approaches included both this tool and Porter´s five
forces. She agrees with other authors such as Grand & Mills (2004) who
think that SWOT Analysis and Value chain analysis are part of the fundamentals
of strategic analysis.
Despite
its popularity, the author warns that using it involves some disadvantages as
follows:
·
If the analysts are devoted to only listing variables,
its usage might be confusing and lack coherence.
·
Threats may be confused with opportunities especially
when real issues are categorized as those.
·
Establishing hierarchy in elements required good
judgment and sometimes it may be biased.
·
It fails to perform a dynamic analysis, which may
reduce to a situational analysis without diagnosis capability.
Table 4: Pros
and cons of SWOT analysis
|
Description |
Application |
Advantages |
Disadvantages |
|
SWOT analysis lets firms assess its competitive position and then
utilize their strengths to take advantage of opportunities, mitigate threats
and correct weaknesses. |
Once the key information is gathered, it becomes the basis to
formulate strategies or to build models base on Mathematics or knowledge
management. |
·
It´s application can
provide the vision of every functional are of the firm. ·
Executives can focus
on key matters. |
·
Listing the factors
per se cannot lead to formulate or optimize strategic options. ·
The right
organization in a hierarchy depends on the analysts’ expertise. |
Source: Own
7.4.
BCG
Matrix
Decisions
on allocation of resources to a certain products’ portfolio are based on the
position of a 2 x 2 matrix. The position on this matrix would suggest generic
strategies to follow.
Hax
(1991) reminds us that the tool created by the Boston Consulting Group in the
1960’s considers two basic variables:
·
Growth rate in the market
·
Relative market share of the business unit or segment
These
are the dimensions that split the matrix in four quadrants that define the
typology of business units according to their positions. For instance, the
stars which are located in the first one require intensive investment to
respond to the growing demand. Similarly the question marks, which are located
in the second also require big investments. However, because of the low market
share, uncertainty is high and then a market research in depth becomes
necessary.
Moreover,
the milky cows located in the third quadrant that demonstrate high relative
market share need little investment to keep the pace. In the last one, the dogs
which show both low relative market share and growing, the typically
recommended strategy is diminishing the investments or divesting the respective
business unit.
He
suggests that the strategic target positioning is expressed in terms of market
share. Besides, asserts that reaches equilibrium and reduces risk when diversifying.
Similarly, other author Kraus (2009) finds this tool very attractive in
providing recommendations depending on the positioning in the matrix.
However, other authors warn that using it implies
serious disadvantages as follows:
·
Collis (1995) asserts that the model does not consider
how much value has created every business unit.
·
Lee (2007) tells that the definition of the market may
be too wide or reduced. Moreover, thinks that firms and especially SMEs might
find unclear or contradictory positions in the matrix if we consider different
geographic sectors. Finally, omitting
the cost of capital would not let obtain a financial assessment when using this
model.
Hence,
in the words of the latest authors mentioned, this tool may be very misleading
especially if we are conscious that market share benchmarks may not be
necessarily used as competitive strength indicators of firms.
Table 4: Pros
and cons of the BCG Matrix
|
Description |
Application |
Advantages |
Disadvantages |
|
Its analysis might be helpful to allocate resources
among products, brands, segments according to its growing potential and
relative market share. |
The position of product lines in the quadrants will
be determining to suggest generic strategies. |
It´s application let visualize the current options
that generate cash flow and its likely evolution in the future. |
·
Market share may not be an indicator of competitiveness for SMEs. ·
Market definition may not be objective. ·
The assessment of contribution is not measured in financial terms. |
Source:
Own
7.5.
Ansoff´s Matrix
Hoang
(2011) asserts that the tool created by Professor Igor Ansoff in 1957 prepares
the field for growing opportunities. The position in the Matrix would suggest
generic strategies depending on the position of the Matrix of two rows and two
columns. The matrix is typically plotted in rows representing markets (new and
existing) and columns for products (new and existing).
This
author recalls generic strategies according to the actual position and location
of the current portfolio of products:
·
The first contains existing products in current
markets and a likely strategy can be the market penetration. This one can be
executed through the offer of competitive prices or marketing activities
leading to increasing desirability. Although this one may be conservative,
rivals´ reaction may be aggressive provoking price wars.
·
The second includes the development of products in
existing markets, which includes the purpose of extending their products´ life
cycle.
·
The third, involves the development of new markets
using current products. To reach this goal it would be necessary to conquer new
geographies, segments or distribution channels. Complementary, promotion
activities may seduce audience or modifying pricing to attract different
segments.
·
The last one includes new products in new markets and
is named diversification. When firms have reached saturation levels searching
new growing opportunities might be an option.
Gianos
(2013) qualifies this tool as profit exploiting one and then improving the
competitive position. However, the typical usage of accounting information may
be misleading.
If
improving the financial performance is an objective, financial metrics and DCF[2]
models should be applied.
Mc
Donald (1991) finds this Matrix applicable if used with other such as Porter´s
five forces. In particular, recommends using this technique in the process of
analyzing the market structure and defining marketing goals. Similarly, Kraus
(2009) considers it applicable to SMEs even though they may be recently
established. The researcher finds it especially applicable to identifying new
strategies and allocating resources.
On
the contrary, Gunther (2011) thinks that conventional tools such as this one
are not applicable to SMEs because are not realistic. He especially finds the
characteristic advantage of SMEs of flexibility and flatter structure as a
better condition to approaching the market and focusing on their clients. Hoang
(2011) concluded that the tool does not contribute to correct any biases of executives
when they demonstrate extreme risk aversion.
Laszló
and Ulbert (2008) researched Hungarian SMEs strategies to reach growing through
the Ansoff´s Matrix. His findings reveal that firms with low growing rates
expectations use market penetration strategies. Conversely, high-rate growing
goals used diversification strategies. Only 3% of firms surveyed planned to
renew their product-portfolios. He adds that the process of strategy creation
is so inefficient that affects directly to its competitiveness. Finally, key
factors that drive the success of a diversification strategy, for instance,
include additional human and financial resources, collaboration, technology and
organizational change.
To
sum up, Ansoff´s Matrix may be very useful at SMEs whichever its state is
located in their life cycle. Its contribution suggest for generic marketing
strategies according to the position of its portfolio elements in the
Product/Market Matrix.
Table 5: Pros
and cons of the Ansoff´s Matrix
|
Description |
Application |
Advantages |
Disadvantages |
|
Its analysis can design strategies to grow according
to their current and potential markets and products. |
Growing objectives will determine marketing
strategies, and facilitate resource and planning activities. |
It is a simple tool to mapping the whole spectrum
products, groups, clients or business units. |
Actions suggested may not
necessarily fit in the proposed quadrants and biases is not eliminated |
Source:
Own
7.6.
The
Value Chain Analysis (VCA)
Hax
(1991) finds this tool very useful because this can detail tasks, which may
lead to create value in a business unit. Porter (1985) classified these
activities in two groups:
·
The primary ones involve physical movement of raw
materials, finished goods and production of goods and services, marketing,
sales and post - production services.
·
The supporting activities and their essential function
are not only being a base for the primary ones but also to their peers. As
stated below Procurement, for instance, is a regular activity that is spread across
the others.
Porter
says that it is necessary to decompose them in sub-activities, which vary in
line with their industry. Some aspects to take into account in every kind of
activity are as follows:
·
Procurement is usually spread across the firm, and its
technology is based on specific procedures to manage vendors, rules to qualify
them. Furthermore, it is complemented with appropriate information system.
·
Technology is next supporting activity; it embraces
simple activities such as documenting the development of the product itself.
Thus, it is related to the effort done to improve either the product or the
processes.
·
The third supporting activity is the human resources
management, and supports the whole value chain. They are always present in the
decision process trade-offs. For example, some firms may prefer not experienced
personnel to save wages. However, cost of recruiting and training may be lost
if the firm does not count on the necessary skills to keep them motivated.
·
The last supporting activity in the value chain is
infrastructure and includes General Management, Planning, Finance, Accounting,
legal and Quality management.
Porter
recommends classifying and sorting discrete activities according to the product
or process flow. The basic principle is to split activities according to these
criteria:
·
They must have different economic contribution
·
They must have an effect on differentiation
·
Their costs must be significant or show a growing
trend.
One
of the most important contributions of VCA is the continuous searching of links
across the value chain and especially about the way in which one affect the
others. It is exemplified a fast food value chain, in which the schedule of the
promotional campaign may influence the utilization of plant and signaled the
importance of its contribution to gain competitive advantage in two ways:
optimization and coordination. To help finding the links recommends to search
them in the next cause effect relationships:
·
Different ways in which a function can be performed.
·
The cost of direct activities can be diminished
through the effort made on executing indirect activities.
·
Activities performed inside the firm to reduce the
effort of demonstrate or explaining the product.
In
the words of Porter (1990), the basic application of this tool is the searching
of activities optimization. It can be achieved through finding the links
between those activities that let create trade-offs. For instance; inspection
across the production process may be expensive. However, costs of customer
services may be reduced.
Links
between activities demand that they are coordinated when executed. Coordination
may reduce timing and then cost of transactions. Besides, expensive activities
are replaced by other economic ones. Another source of improving the
competitive position is the chain reconfiguration through reallocation,
resorting, regrouping or suppression of activities.
Another
concept introduced by Porter was the value system that comprehends different
value chains: the supplier, the firm, distribution channels and customers. He
used the example of using the Japanese practice “Kanban” based on reducing lead
times and improving the frequency of the suppliers deliver. Consequently, the
benefits emerge when reducing both the transportation costs and the inventory
level.
Kaplinsky
(2001) suggested an alternative school called dynamic competence in which
applies only some of the tool’s concepts. This is based on economic growing and
faster implementation than competition, which is called “upgrading”.
He
finds VCA very applicable to SMEs and for new producers especially if they want
to introduce their products in global markets. He thinks its importance is
related with systemic competitiveness, efficiency in production and
comprehension of dynamic factors included in the whole value chain. In this
way, he asserts that in order to improve competitiveness, inventory reduction
is a key factor.
Consequently,
workers would continue working in a department only if next phase require
material in process. Otherwise, at next stage the production must stop.
Although productivity in that unit is sacrificed, the whole system will be
benefited because inventory levels would increase and then quality and capacity
to respond would be faster.
Romero
(2009) found another application to SMEs whose flexible technologies are better
positioned. This can be expressed through differentiation in terms of
intangibles such as technology and knowledge. However, those objectives can be
opposed to the ones of big corporations or multinationals, which usually
develop competences in specialized knowledge applicable to design and
marketing, and to sustained innovations.
On
the contrary, Senge (2000) finds that the value chain philosophy is leading to
take advantage of the value created according to market conditions, and
jeopardize free competition. It is evidenced when negotiation power is exerted
over other firms or entry barriers are created. Thus, according to the author,
innovation capability is inhibited.
Concerning
VCA, we conclude that the value chain analysis is an important technique that
can be applied in SMEs to assess its competitive power in both areas: costs or
differentiation. Its analysis let identify additional sources of competitive
advantage through improving coordination or reconfiguration.
Table 6: Pros
and cons of VCA
|
Description |
Application |
Advantages |
Disadvantages |
|
The analysis of activities and
sub-activities and the way in which they execute in comparison to competitors
can identify competitive advantages. |
Improving coordination or
reconfiguration of activities in the value chain are potential sources of
competitive advantages. If SMEs have access to flexible
technologies, they can become specialized vendors in their value system. |
·
VCA lets benchmark performance with competitors in terms of
efficiency. ·
VCA may identify the scope of entry-barriers and its exploitation. |
According to Senge, the VCA
philosophy blocks competition and inhibits the capability to innovate, which
affects the value to be created for communities. |
Source: Own
7.7.
The
Activity System Mapping (ASM)
Morris
et al., (2003) asserts that one of the requirements to achieve sustainability
concerning competitive advantages is if whether or not there is internal and
external fit. The first one states that consistency is a must in the
configuration of activities inside a firm, while the second refers to how
appropriate is that configuration with the external environment.
To
assess the first objective, mapping the activity system is an effective
analytical tool. The way in which firms perform their activities can be a
source of competitive advantage and remarks the importance of ASM. Then, as a
successful strategy embraces the whole activity system, “the competitive
advantage of a firm has its origin in the way their activities fit and how they
are reinforced with each other”. Porter
(2011, p. 20).
This
approach comprehends plotting basic competences, which show connections through
highlighted lines. Main activities which have direct relation with every basic
competence are also plotted along their side, and then connected through minor
lines. Besides, another element identified and connected to them is every
single important strategic option. As the business goes through different
stages, managers made choices that are part of the strategic craft in present
time. The ones, which are still present and relevant, are chosen to be
graphically represented.
One
of the reflections exposed by the author is that management typically is
focused on basic competences, critical resources and critical success factors
in a separate model. Instead, encourages looking the company integrally. In
this sense, gives the example of a production line, which contains a variety of
models; it produces greater value when it is combined with an inventory system
that minimizes of the shortages of raw material supplying.
In
addition, there are three types of fit in order of its complexity:
·
The first one is a simple fit between every activity
and the general strategy. This kind of fit ensures that competitive advantages
are aggregated and cannot be eliminated one to each other.
·
The second order of fit emerges when activities are
reinforced. An example of this is BIC Corporation, which uses a low-cost
strategy through a broad scope marketing approach. Fit between activities such
as product design, plant configuration at low costs, large-scale procurement
among others let the company reach unique competitive advantages.
·
The third order is named optimization of the effort.
The basic type of optimization is reached when coordination and information
exchange between activities let eliminate the repetition of work. Higher levels
of coordination include improvement in product designing to eliminate post sale
services or coordination with vendors and distribution channels in regard to
explicitly educate consumer in the chains instead of training the final user
about the product usage.
Morris
et al., (2003) asserts that SMEs at the initial stages can adopt random rules
and deviate from initial models introducing inconsistent elements with the
originally established. Because of the relative little experience in the
market, the vision of the owner may be the only resource available at that
stage.
At a
mature stage, the adoption of a formal model becomes necessary. However, when
firms reach their maturity when conceiving their strategy, their activity
system should be adjusted by taking different paths suggested by Siggelkow
(2002) such as increase, reinforcement or elimination of activities. In radical
environments, the system may not face a recalibration, and then it would be
necessary a reconfiguration of the system.
Table 7: Pros
and cons of ASM
|
Description |
Application |
Advantages |
Disadvantages |
|
ASM plots through circles basic
competences of the firm and then connect them through dotted lines. Connected
activities are represented as ellipses. Internal fit and capability to create
unique competences is assessed. |
ASM is oriented to assess if
whether or not there is fit among activities; specially second and third
order of activities. In fact, reinforcement, combination or their
optimization can provide sustainable competitive advantages. |
·
ASM lets recognize inconsistencies in the system that should been
corrected or modified to create sustainable competitive advantages. |
·
Its application can be limited at SMEs in their early stages as basic
competences are still not well defined. |
Source: Own
A
summary of the main applications of strategic analysis tools is introduced as
follows:
Table 8: Applications
of strategic analysis tools
|
Strategic Analysis tools |
Applications |
|
Porter´s five forces |
·
Identifying relevant factors in the industry that ease reach
profitability and those that limit it. ·
Benchmarking the competitive position with rivals |
|
PEST analysis |
·
Assessing political and legal variables to identifying opportunities,
costs and constraints in the business environment to make strategic choices. ·
Evaluating the correlation between economic variables and performance
of firms in their respective sector. ·
Taking advantage of socio-demographic to go in depth insights over
segmentation or micro-segmentation ·
Assessing the impact of technology through the value chain |
|
SWOT |
·
Applying methodology to measure competitiveness of the firm compared
with their competitors. |
|
Ansoff´s Matrix |
·
To outline generic actions to preserve, develop or conquer markets |
|
VCA |
·
Benchmarking the efficiency with competitors when using resources ·
Optimizing the execution of activities through scenarios of new
combination or suppression of them. |
|
ASM |
·
Assessing complementarities or inconsistencies of activities ·
Evaluating requirements to suppress, reinforce, patching or creating
new competencies and activities ·
Evaluating the capability of firms to respond to changes in the
environment´s configuration ·
Optimizing the activity system through simulation of its
reconfiguration |
Source: Own
8. INTERVIEWS AND INSIGHT
We
applied a semi-structured questionnaire, which was the based to obtain drivers
for obtaining a wider spectrum and acquiring the most valuable information to
provide additional insights on this matter.
We
interviewed three prestigious consultants based in town for life and two of
them agree that in general managers of SMEs in Quito do not apply strategic
analysis tools. A very limited analysis is usually related to SWOT analysis,
which according to their records do not surpass the 10% of their current
portfolio of customers. On the other hand, a scarce 3% of their portfolio
barely uses the value chain analysis, which is exclusively utilized in
manufacturing businesses.
To
confirm this statement, the director of the Chamber of SMEs in the province of
Pichincha, in which Quito is located, asserted that firms use very unfrequently
any kind of these tools. His latest management activity has been partly
dedicated to prepare low cost workshops on strategic planning with emphasis on
sales. Currently, this Chamber has distributed firms in sectors such as metal
mechanic, real state, chemical, textile, and graphics.
Despite
the fact that the Chamber has received the offer of some local colleges to
analyze matters of competitiveness, participation of its members has been very
limited. In the opinion of its principal, there are cultural factors that may
influence on this behavior, which are related to keep strategic decisions and
processes strictly confidential among the community of managers in these
geographies.
One
of the consultants advises that despite the very limited usage of these tools,
there is an intuitive analysis exerted by managers. Although it not systematic,
nor formal, embrace certain elements in its assessment of the environment to
making decisions in the short term. Among them, rivalry intensity about
competition and the presence of substitutes are often factors incorporated in
their mental maps when making this kind of choices. The interviewed consultant
asserted that this consideration is sometimes very helpful because although it
is non-optimal, they may lead to increasing profitability in the short term.
The
consultants agree in consensus that some of the lack of usage of strategic
analysis tools may be attributed to some factors, which appear as follows:
·
Bad managerial practices.
·
Lack of knowledge on the tools and methodology.
·
Vision shortage and its strengthening.
·
Inadequate ability of opportunity detection
·
Incongruence between long and short-term goals.
·
Excessive confidence on the owner´s intuition and very
little demand of help to either employees or external consultants.
·
Reluctance to hire external consulting for being considered
either expensive or non - profit -oriented in the short term.
As
specialists have mentioned, factors are structural and the shortage of tools’
usage are more evident among small companies. They focus on the daily operation
and seem to be obsessed with obtaining short-term results. Conversely, medium
size companies show more awareness of the usefulness of tools because they
perceive bigger opportunities to growing or transforming their markets.
9. CASE ANALYSIS: INDULENTES
Indulentes
was established in 1982, by sourcing capital of two partners. They took
advantage as optometrists and opened two locations by the north of the city.
Their
kindness attention and providing “free” optometric services helped to open
three new establishments by the mid-nineties.
At
the very beginning of the year 2000, executives put on the spot its key
strength and then decided hiring high-level certified optometrists no matter
their nationality. On the other hand, they decided being focused in haute-game
products then becoming the main dealers of brands produced by Luxotica, the
well renowned Italian factory. In this way, they could reach a high position
among prestigious brands such as Rayban (USA) and Prada (Italy).
In
2010, management decided to refresh their corporative image by crossing the
edge of being a visual health business to one in which esthetic is aimed at,
according to trends and global fashion. Other actions such as opening shops
located in some luxury malls located across the city, and acquiring five reflex-machines
were taken. The installation of such lab is focused on processes
of carving, bevel and especial treatment of glasses.
In
2012, they entered the corporative market by providing labor visual health
conferences and “free” visual tests in the locations of their potential
clients. As a complementary action, agreements with some insurance companies
were reached providing certain glasses coverage.
The
basic flow of company’s income comes from the business retail of glasses and
sun glasses. It represents the 80% of revenue, while other lines such as
optometric and ophthalmologic services conform the rest.
Currently,
the main vendors of the company as are follows:
|
Vendor |
% of revenue |
|
Luxotica |
52.3 |
|
Marcolin |
10.9 |
|
Viva |
9.0 |
|
BK Frames |
8.9 |
|
Marchon |
6.2 |
|
Morel |
5.2 |
The company has utilized the
framework proposed by Porter’s five competitive forces, which is summarized in
the next graphic and its five forces:
Graph 2:
Competitive forces intensity in the glass sector of Ecuador
Source: Indulentes
A brief
of the PEST Analysis performed by the firm´s executives is summarized as
follows:
Table 9: PEST
Analysis
|
POLITIC |
ECONOMIC |
|
-
Tax policy: Ad valorem rates static. -
Government attitude: Investment in networks at the Health Ministry
without priority in ophthalmic health. |
-
Economic growth. -
Fixed Exchange rate through dollarization and low inflation rate. -
Growing in house-hold consumption -
Salaries increase. -
High international prices of oil. |
|
SOCIAL |
TECHNOLOGYCAL |
|
-
Migrant remittances growth. -
Being partly followers of fashion trends and fully followers of
technology -
High concentration of teen agers and young adults in the population
pyramid. -
Concentration of high and medium class. |
-
High penetration rates of internet and cell phone. -
Technology evolution and shifts in raw material usage. -
Innovation oriented to glasses and sunglasses with higher protection
against UV rays. |
Source: Indulentes
Similarly,
a brief of the SWOT Analysis performed by the firm´s executives is summarized
as follows:
Table 10: SWOT
Analysis
|
STRENGHTS |
WEAKNESES |
|
-
Cutting-edge technology in producing high definition glasses. -
Selection of certified optometrists -
Wide assortment of brands |
-
Absence of micro-segmentation activities that let know the customer´s
perception of value. -
Information systems do not let calculate costs based on activities and
databases cannot identify trends in consumption. |
|
OPORTUNITIES |
THREATS |
|
-
Attention in the safety area of other sectors of the Economy. -
Leverage of high internet penetration-rates to advertise products and
improve the selling experience. -
Location of shops in malls next to elite university campuses to
sponsor events. |
-
Vertical integration of its main vendor Luxotica exposes to being
highly dependent and a likely hostile acquisition. -
Probability of increasing ad-valorem and then increasing the cost of
products. |
Source: Indulentes
And
last but not least, executives prepared their value chain analysis. Concerning
its external chain their European vendors such as Morel and Marcolin have
installed distribution centers in the USA, which is an interesting opportunity
to decrease freight costs in comparison to main competitors.
Concerning
their internal value chain, the firm has sorted three categories considering
the business activity sequence:
·
Design: Designing - processes.
·
Added value chain: Procurement, Inbound logistics,
Operations and Outbound logistics.
·
Service value chain: Installation, sales and post -
sale service.
In
regard to the first one, the firm will create a position of Organizational
Development to achieving efficiency in their main processes. Concerning the
second, the managerial team has initiated direct negotiations with vendors for
speeding order’s delivery. About marketing activities, executives acknowledge
that despite hiring ad campaigns in radio and television, the assessment of its
effectiveness in terms of coverage and image is under process.
In
brief, the firm used strategic analysis tools in a very limited way not only in
quantity but also in content and depth. The absence in prioritizing factors and
sub-factors in its Five-force analysis impeded focusing on the key ones for its
sustainability. For instance, the risk of further integration of its main
vendors is not appropriately assessed. In addition, there is recent legislation
on matter of communication and anti-trust in force, which may affect important
actions, that the company should both understand and apply some insight.
Concerning
the SWOT Analysis, executives have not considered opportunities that the
micro-segmentation can bring. For instance, there are endemic ophthalmologic
pathologies in some provinces that may be put on the spot through alliances
with specialized labs.
The
utilization of an Ansoffian Matrix would have let the firm exploit in terms of
profits the introduction of new brand and products, not to mention new business
sectors and opening of new sales channels through the social networks on the
Web.
In
the value chain analysis performed, the sub-activities and its dependence with
other in the chain were not established. Benchmarking the efficiency of
performing key activities with competition could not be done because of the
lack of metrics and an appropriate information system.
Finally,
the absence of an activity system analysis thwarted the firm in perceiving the
needs of introducing new core competences, strategic options and their likely
connected activities.
10. CONCLUSIONS
Our
study revealed that there are advantages and limitations when using the studied
tools, but they represent a methodological contribution that could help SMEs in
their assessment and implementation of strategic decisions. The main
conclusions of this investigation are described bellows:
·
Porter´s five forces may become the initial process of
the analysis and may be validated afterwards when other tools such as PEST and
the Ansoffian Matrix are applied. It may have a sequential connection to other
tools such as:
o
Congruence and validation of conclusions provided by
any product market analysis such as the Ansoffian Matrix.
o
Business capacity to reinforce the competitive
position through reconfiguration of its value chain or activity system.
·
The Systems field has contributed with some
mathematical algorithms to strategic analytical tools such as SWOT and Porter´s
five forces. In this sense, research has been focused on improving efficiency
by optimizing a specific objective.
·
Strategic analytical tools oriented to the internal
environment bring more opportunities to improve firm’s competitive position
because it is more likely that variables involved can be controlled or
monitored. Improvement in the value chain or advantages brought by better
coordination or optimization of their activity system could let them obtain
better positioning.
·
The majority of the tools are largely criticized in
consensus for not providing a methodology to apply them dynamically. However,
very few proposals to correct that limitation have been introduced. The
contribution of the game theory seems to be not very useful neither focusing in
strengthening the competitive position nor observing competitors game in real
time.
·
SWOT Analysis appears to be one of the most preferred
tools. However, using only criteria of some executives or staff as the basic
source of information can be highly biased.
·
The most important factors that may explain the
limited utilization of the described tools can be the illiteracy over their
application and lassitude on assessing opportunities if they are not clearly
visible.
·
The application of these tools demands that SMEs have
enough resource to capture the necessary information. Information systems,
which are usually focused on accounting objectives, do not contribute to this
kind of analysis.
·
In order to detect opportunities it is keen to act in
two fields. The analytical, in which these tools can help structuring
information in a systematic and coherent way, and the creative, to help
creating ideas coming from teams to face more complex problems.
·
Strategic analytical tools can be very useful to help
managers prioritizing objectives, defining options and lead decisions on main
activities in functional areas.
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ATTACHMENT I
PROCESS-PATH PROPOSAL
Applying SAT to Internal and External Fit analysis
In
order to present a possible path of applying SAT, we suggest the next
flow-diagram to be used as an example of the methodology to be applied in order
to obtain insight on Fit analysis.