Strategic Business Analysis Chapter 1 PDF

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STRATEGIC BUSINESS ANALYSISUNIT 1: STRATEGIC POSITIONThis unit begins with the assessment of strategic position and isconcerned with the impact of the external environment, itsinternal capabilities and expectations and how the organizationpositions itself. It examines how factors such as culture,lea...

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STRATEGIC BUSINESS ANALYSIS UNIT 1:

STRATEGIC POSITION This unit begins with the assessment of strategic position and is concerned with the impact of the external environment, its internal capabilities and expectations and how the organization positions itself. It examines how factors such as culture, leadership and stakeholder expectations shape organizational purpose.

CHAPTER 1:

THE PURPOSE OF STRATEGIC AND BUSINESS ANALYSIS

INTRODUCTION Strategic business analysis in modern day business is hard to separate from strategic management and planning where management have to battle with the ever changing business environment. Strategic business analysis depicts the role of strategy in business. In this topic we will be discussing about the purpose of strategic and business analysis. We will look deeper into the various terminologies used, explore on the Johnson, Scholes and Whittington model and so with the strategy lenses.

LEARNING OUTCOMES At the end of the topic, students will be able to: 1. Identify the fundamental nature and terminology of strategy and strategic decisions and strategic business analysis. 2. Discuss how strategy may be formulated at the corporate, business and operations level of an organization. 3. Study and investigate the Johnson, Scholes and Whittington model for defining the strategic position, strategic choices and strategy into action. 4. Relate the three different strategy lenses (JS&W) for viewing and understanding strategy and strategic management. 5. Discover the scope of business analysis and its relationship to strategy and strategic management in the context of the relational diagram of this syllabus. 6. Advise on how organizations can communicate their core values and mission.

ACTIVATING PRIOR LEARNING • Basing from the given drawing/illustration write a brief idea about what is the purpose of strategic and business analysis.

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PRESENTATION OF CONTENT P u rpo s e o f Stra t e gic and B u sin e s s A n a lys is

D e fin itio n o f Str a te g y

L e ve ls o f Str a te g y

E le m e nts o f Str a te g ic

R e la tio n a l D ia gra m

Management

C o r p o r a te

B u s in e s s

P ro c e s s of Str a te g y D e v e lo p m e n t

Str a te g ic

D e lib e r a te ,

Str a te g ic

Str a te g ic

P o s it io n

E m e r ge n t, I nc r e m e n ta l Str a te g y

Lens es

P la n n in g F ra m e w o r k

Str a te g ic C h o ic e s

A s D e s ign A s E x pe rie nc e A s Id e a s

F u n c t io n a l

Str a te g ic in to A c tio n

R a t io n a l P la n n in g Model Gap A n a ly s is

1. Definition of Strategy and Strategic Business Analysis 1.1

Strategy

Strategy can be defined in a number of different ways. We should be aware that every definition is likely to be engrained within the different outlooks adopted by its authors. For this reason a definition of strategy, which is accepted by everyone, is not as straightforward as might first appear. As individuals we all formulate strategies to help us achieve certain goals or objectives. According to Peter Drucker, a strategy is a pattern of activities that seek to achieve the objectives of the organization and adapt its scope, resources and operations to environmental changes in the long term. Drucker recognized that any company’s strategy had to incorporate the answers to four questions. 1. What opportunities it wants to pursue and what risks it is willing and able to accept. 2. The scope and structure of its strategy, including the right balance among such aspects specialization, diversification, and integration. 3. Acceptable trade-offs between time and money and between in-house execution versus using a merger, acquisition, or joint venture or some external means to reach its objectives and attain its goals. 4. The organizational structure appropriate to its economic realities, the opportunities, and it performance expectations. 5. A recognition that strategy had to be based on these four questions led to a methodology which Drucker adopted which was more inferred than spelled out as a “by the numbers” process.

Drucker also emphasized that a strategy contains several elements: 1. A strategy consists of organized activities. 2. The purpose of these activities (the strategy) is to achieve an objective. 3. Strategy is long-term. Formal strategic planning by large companies, for example, might cover five years or ten years into the future, and for some companies even longer. 4. The strategic choices that an enterprise makes are strongly influenced by the environment in which the enterprise exists. 5. The environment is continually changing, which means that strategies cannot be rigid and unchanging. 6. Strategies involve an enterprise in doing different things with different resources over time, as it is forced to adapt to changes in its environment. Johnson, Scholes and Whittington defined strategy as “the direction and scope of an organization over the long term, which achieves advantage in a changing environment through its configuration of resources and competencies with the aim of fulfilling stakeholder expectations.” They have also identified the range or scope of strategic decisions as follows: 1. Deciding the scope of the entity’s activities. What businesses should we be in? 2. Relating the activities of the entity to the environment in which it operates. 3. Ensuring that the entity has the resource capacity to operate in its selected areas of activity. This means making sure that the entity has enough employees with the right skills, access to sufficient raw materials and other supplies, enough equipment, suitable IT systems, and so on. 4. Allocating resources to the different business activities. 5. Providing a high-level (strategic) framework for more detailed decision-making at an operational level. 6. Reflecting the values and expectations of the individuals in positions of power within the entity. 7. Deciding the long-term direction that the entity should take. 8. In many cases, implementing change within the entity so that it adapts successfully to its changing environment. Example A company that extracts and supplies oil and natural gas is considering its future business direction over the next 10 years. It is aware that these resources are in limited supply, and that there is growing public and political concern about the environment. The company’s board of directors might agree on the following broad strategy.  The company will continue to extract oil and natural gas, but it will also invest heavily in production of energy from renewable energy sources, such as wind and sea.  The move into energy from renewable sources recognises the probability that public and political pressure will grow for restrictions on the use of nonrenewable energy sources and for protection of the global environment.  Change is therefore essential for long-term survival.  The strategic plan should also provide for the resources required to achieve the

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1.2

company’s goals. Important resources for the chosen plan will include exploration rights, access to pipelines and other methods of transporting energy to users, and expertise in wind and wave power technology. A decision must be made about how many resources (including money) should be invested in each business activity. This will depend partly on the strategic vision of the board of directors, and the direction they think the company should be taking. What proportion if its total energy sources in ten years time will come from wind and wave power, and to what extent will the company still be relying on oil and natural gas? The strategic plan also reflects the values of the board of directors. In this example, the company has not included nuclear power in its strategic plan.

Strategic business analysis Strategic business analysis are those actions and decisions made by management while trying to understand the impact of strategic events like: introduction or development of new product line, setting up a factory in a new location, employing key staff, selecting organizational structure, investing in new technology, managing risks, complying with relevant laws and regulations, implementing changes, etc. Strategic business analysis look at things from both corporate perspective and longer term view. In modern day business, strategic business analysis is hard to separate from strategic management and planning where management have to battle with the ever changing business environment. Strategic business analysis depicts the role of strategy in business. The strategic business analysis have the following characteristics: 1. Long term in nature: for any business analysis to be strategic in nature, it must have a long term view. When designing a balanced scorecard for example, management should think of the impact that each target and objectives that is contained in the strategic map will do to the long run survival of the company. 2. Focus on external events and activities: senior managers spend about 60% of their time gathering and interpreting information from outside source which will significantly improve decision making process. They interact with people and organizations outside the entity in order to achieve this goal. 3. Place more emphasis on qualitative matters: in as much as financial indicators play vital role in shaping the fortune a business entity, attention should also be given to those qualitative factors that an establishment cannot afford to ignore, else, business failure will imminent. A qualitative emphasis means that detailed calculations and manipulation of figures are unnecessary. All that is needed is the big picture.

2. Levels of Strategy Strategy is at the heart of business. All businesses have competition, and it is strategy that allows one business to rise above the others to become successful. Even if you have a great idea for a business, and you have a great product, you are unlikely to go anywhere without strategy.

2.1

Corporate Strategy The first level of strategy in the business world is corporate strategy, which sits at the ‘top of the heap’. Corporate strategy is concerned with deciding which business or businesses an entity should be in, and setting targets for the achievement of the entity’s overall objectives.

It is easy to overlook this planning stage when getting started with a new business, but you will pay the price in the long run for skipping this step. It is crucially important that you have an overall corporate strategy in place, as that strategy is going to direct all of the smaller decisions that you make. For some companies, outlining a corporate strategy will be a quick and easy process. For example, smaller businesses who are only going to enter one or two specific markets with their products or services are going to have an easy time identifying what it is that makes up the overall corporate strategy. If you are running an organization that bake and sells cookies, for instance, you already know exactly what the corporate strategy is going to look like – you are going to sell as many cookies as possible. However, for a larger business, things quickly become more complicated. Carrying that example forward to a larger company, imagine you run an organization that is going to sell cookies but is also going to sell equipment that is used while making cookies. Entering into the kitchen equipment market is a completely different challenge from selling the cookies themselves, so the complexity of your corporate strategy will need to rapidly increase. Before you get any farther into the strategic planning of your business, be sure you have your corporate strategy clearly defined.

2.2

Business Strategy It is best to think of this level of strategy as a ‘step down’ from the corporate strategy level. In other words, the strategies that you outline at this level are slightly more specific and they usually relate to the smaller businesses within the larger organization. Business strategy, also called competitive strategy, is concerned with how each business activity within the entity contributes towards the achievement of the corporate strategy.

Carrying over our previous example, you would be outlining separate strategies for selling cookies and selling cookie-making equipment at this level. You may be going after convenience stores and grocery stores to sell your cookies, while you may be looking at department stores and the internet to sell your equipment. Those are dramatically different strategies, so they will be broken out at this level. Even in smaller businesses, it is a good idea to pay attention to the business strategy level so you can decide on how you are going to handle each various part of your operation. The strategy that you highlighted at the corporate level should be broad in scope, so now is the time to boil it down into smaller parts which will enable you to take action. 2.3

Functional Strategy This is the day-to-day strategy that is going to keep your organization moving in the right direction. Functional strategy is also called operational strategy. These decisions include product pricing, investment in plant, personnel policy, and so on. It is important that these strategies link to the strategic business unit strategies and through those strategies, in turn, to the corporate strategy, as the successful implementation of these is necessary for the fulfillment of both corporate and business objectives. Just as some businesses fail to plan from a top-level perspective, other businesses fail to plan at this bottom-level. This level of strategy is perhaps the most important of all, as without a daily plan you are going to be stuck in neutral while your competition continues to drive forward. As you work on putting together your functional strategies, remember to keep in mind your higher level goals so that everything is coordinated and working toward the same end.

3.

It is at this bottom-level of strategy where you should start to think about the various departments within your business and how they will work together to reach goals. Your marketing, finance, operations, IT and other departments will all have responsibilities to handle, and it is your job as an owner or manager to oversee them all to ensure satisfactory results in the end. Again, the success or failure of the entire organization will likely rest on the ability of your business to hit on its functional strategy goals regularly. As the saying goes, a journey of a million miles starts with a single step – take small steps in strategy on a daily basis and your overall corporate strategy will quickly become successful. Elements of Strategic Management and Business Analysis To study strategic management, it is useful to have a logical structure or model as a basis for analysis. Johnson, Scholes and Whittington state that strategic management consists of three elements: 1. Strategic position 2. Strategic choices 3. Strategic into action 3.1 Strategic position Strategic position means making an analysis or assessment of the strategic position of the entity. The senior management of a company, for example, need to understand the position of the company in its markets: 1. In what ways does the company perform better than its competitors? 2. In what ways are competitors more successful In other words, how do rival companies compare with each other in terms of competitive advantage? Management also need to understand the factors in the business environment that affect their company, and how the company will be affected by changes that are likely to happen in the environment in the future. For example, could the company be affected by changes in technology, or changes in the state of the economy, or new laws and will there be changes in what customers want to buy, because of changes in society or life styles? If so, how might this affect what the company produces and sells? Management have to make a decision about what their company should be doing, and what the company is trying to achieve. Objectives need to be realistic, so management

need to understand where the company stands now in its markets, and where it should be trying to get to a few years in the future. Three aspects to strategic position (Johnson, Scholes and Whittington) 1. Environment – an analysis of the business environment involves an analysis of the threats and opportunities that seem to exist, and an assessment of their significance. 2. Strategic capability of the entity – the management of an entity should also make an assessment of the strategic capability of the entity. This means reaching an understanding of what the entity is capable of achieving. An assessment of strategic capability involves an analysis of the strengths and weaknesses of the entity. 3. Expectations and purposes – an analysis of strategic position also requires management to make decisions about the purpose of the entity and what it is trying to achieve.

3.2 Strategic Choice Three elements 1. Generation of strategic options, e.g. growth, acquisition, diversification or concentration. 2. Evaluation of the options to assess their relative merits and feasibility. 3. Selection of the strategy or option that the organization will pursue. Strategic choices need to be made of every level, though obviously choices made at any particular level can influence choices at other levels. 1. Corporate level – Decisions have to be made about what the entity should be doing. For companies, this means making decisions about which products or services it should be selling, and what markets it should be selling them in. 2. Business level – For companies, a major strategic choice is between a strategy of cost leadership and a strategy of differentiation. 3. Operational level – For example, whether an organization should outsource components or make them itself. 3.3

Strategy into action/implementation These means implementing the chosen strategies. There are three aspects to strategy implementation: 1. Organizing – An organization structure must be established that will help the entity to implement its strategies effectively in order to achieve its strategic targets. Organizing means putting into place a management structure and delegating authority. Individuals should be made responsible and accountable for

different aspects of the chosen strategies. Decision-making processes must be established. For example, should the organization be split into European, US and Asian divisions? How autonomous should divisions be? 2. Enabling – It means enabling the entity to achieve success through the effective use of its resources. For example, appropriate human resources and fixed assets need to be acquired. 3. Managing change – Most strategic planning and implementation will involve change, so managing change, in particular employees’ fears and resistance, is crucial. Example 3 A full-price airline is considering setting up a no-frills, low-fare subsidiary. The strategic planning process would include the following elements. Strategic position – competitor action, oil price forecasts, passenger volume forecasts, availability of cheap landing rights, public concern for environme...