Strategy Analysis Methods

Business strategy is an absolute necessity for all businesses. The need is bought about by the ever more unpredictable business environment and the removal of barriers to entry to many industries, bought about by technology.

Let’s examine that in a little detail, shall we? Think about the financial services industry, specifically banks 10 years ago. If a new bank popped up with no branches, no website, no paper statements and no means of accessing your bank details, except through your mobile phone, would you have signed up? Would you trust your money with that kind of establishment?

The answer is probably no and yet, with the rollout of Monzo Bank and Starling Bank in the UK, we do now trust an app-only bank. This, in my opinion, is a generational shift. The younger generation have grown up with online shopping, online banking and a number of financial aggregation tools (like Money Dashboard) – so, we trust that web-based applications are secure enough to deal with our most sensitive of data. We’ve also come to trust the fingerprint scanning; facial recognition and other security features on our smartphones.

Couple this trust in technology with the convenience that we’ve come to expect from all aspects of our life, it’s easy to see why we are moving towards a technology-driven convenience-culture bank, rather than the traditional high street banks.

Anyway, that was a long way to say that the business environment & the attitudes of customers are shifting relatively quickly. Looking at the Monzo Bank case study again, we can say that the barriers to entry in their industry is much lower. They don’t need to have a branch in every town of the UK; they don’t need staff in those branches and they don’t need to have all the big business management overhead and processes to deliver their service. The cost to entry is far lower.

What else is changing? Well, think about people’s attitude to work. We now expect to be able to work from home; we expect a decent work/life balance and we still expect to be paid top dollar to do it. Again, this is a shift driven by technology developments and new collaboration tools available.

So, when an organization is trying to develop a strategy, they should be trying to be flexible & responsive to their customer needs – if HSBC don’t have a huge technical overhaul on the cards; they need to reconsider their long term strategy as they will certainly not be delivering against their customer needs / desires.

Every strategy must have the following components:

  • Goal / Mission / Direction of the company
  • Time Frame)
  • Organization of resources (finance, skills, assets, technical competence) enabling the organization to compete
  • Environment and markets in which it will operate

There are different types of strategy too – no matter what type of strategy it is, the goal is to achieve advantage in a changing environment through an effective deployment & organization of resources.

  • Corporate strategy: defines the overall purpose and scope of the business
  • Business unit strategy: defines the choice of products, pricing strategies, customer satisfaction measures and how the business intends to achieve competitive advantage
  • Operational strategy: defines how we are going to deliver the corporate and business unit strategies through the effective use of resources, people & processes

There are a number of tools that we can use to develop a strategy. To develop an effective strategy, we must analyse both the internal and external environments.

EXTERNAL ANALYSIS TOOLS

In order to analyse the external environment, we can use a PESTLE analysis (also known as PEST). For this, we must analyse each of the factors below and assess both how they are now & how they could be in the future. Scenarios may be required to identify a multitude of different potential future impacts / outcomes. Think of it like a ‘what-if’ analysis of future PESTLE factors.

We can (and should) also use Porters 5 forces to assess profitability and attractiveness of the industry. We have discussed this at length, here.

INTERNAL ANALYSIS TOOLS

To understand the current business position we use the MOST technique

  • Mission: what the business is & what it wants to achieve
  • Objectives: Goals against which the achievements can be measured (must be SMART)
  • Strategy: medium-long term approach to achieve the objectives and mission
  • Tactics – how we will execute the strategy (detailed)

We then carry out a resource audit to ensure that the company can make competitive moves:

  • Physical resource audit: are the machines, buildings, land capable of delivering? Are machines old? Do they often have down time for repairs? Are they more costly than delivering new ones? Do they pose us any limitations? Can we compete?
  • Financial resource audit: determine the financial stability of the company, do we have capacity to invest in new resources? can we cope with fluctuations/changes in the market?
  • Human resource audit: training, expertise, adaptability
  • Intangible audit: do we have patents that protect us from direct competition? Are we trademarked? What data do we hold? Is there value to the data? Is it being used? Do we have brand recognition? What are we known for? Are we ‘old and crusty’ brand? Do we have loyalty from our customers?

This analysis will identify strengths & weaknesses in terms of competences and capabilities, which can feed into our SWOT analysis (discussed below).

We should analyse all businesses and products in a portfolio. To do this, we use the Boston Box. It’s a very simple model that helps us identify current / future potential of the business unit or product & hence enables us to identify the most important areas to invest.

If we look at the above, we consider that all dog products or business units probably shouldn’t be invested in – they have low market share in a marketplace that simply isn’t growing. The wild cat has potential, as there is a high market growth & the opportunity to cash in is there, but doing so may require a large investment. Cash cows are in a low growth market, so expansion may not be feasible, however, with a high market share in a slow changing market, it could be a profitable product in the long term. Finally, a star is where we have high market share and high market growth. So, we’re already leading the market & the opportunity is there to grow in-line with the market.

A successful product or business unit will start as a wild cat. It’ll progress through to be a star, become a cash cow and finally become a dog & be removed from the company portfolio or revitalised through significant investment.

Products within the wild cat and dog boxes are unprofitable business units. The star and cash cow products provide funding for the wild cat to grow and for the dog to be revived.

The next tool we have to further develop our understanding of the business is the SWOT analysis. SWOT stands for: Strengths, Weaknesses, Opportunities and Threats. We should use the SWOT analysis to pull together our external and internal analysis of the business – helping us conclude our strategic audit of the organization.

Internal (strengths and weaknesses) should be fed from the results of the internal resource analysis and the Boston matrix, as discussed above.

External (opportunities and threats) should be fed from the output of the PESTLE analysis and the 5 forces model.

More to follow….

 

Content based on study of the BCS Business Analysis course – Business Analysis 3rd Edition (Debra Paul, James Cadle and Donald Yeates).

Kieran Keene

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