The external environment in
which a business operates can create opportunities which a business can
exploit, as well as threats which could damage a business. However, to
be in a position to exploit opportunities or respond to threats, a business
needs to have the right resources and capabilities in place.
An important part of business
strategy is concerned with ensuring that these resources and competencies are
understood and evaluated - a process that is often known as a "Strategic
Audit".
The process of conducting a
strategic audit can be summarised into the following stages:
(1) Resource Audit:
The resource audit identifies the
resources available to a business. Some of these can be owned (e.g. plant and
machinery, trademarks, retail outlets) whereas other resources can be obtained
through partnerships, joint ventures or simply supplier arrangements with other
businesses. You can read more about resources here.
(2) Value Chain Analysis:
Value Chain Analysis describes the
activities that take place in a business and relates them to an analysis of the
competitive strength of the business. Influential work by Michael Porter
suggested that the activities of a business could be grouped under two
headings: (1) Primary Activities - those that are directly concerned with
creating and delivering a product (e.g. component assembly); and (2) Support
Activities, which whilst they are not directly involved in production, may
increase effectiveness or efficiency (e.g. human resource management). It is
rare for a business to undertake all primary and support activities. Value
Chain Analysis is one way of identifying which activities are best undertaken
by a business and which are best provided by others ("outsourced"). You can read more about Value Chain Analysis
here.
(3) Core Competence Analysis:
Core competencies are those
capabilities that are critical to a business achieving competitive advantage.
The starting point for analysing core competencies is recognising that
competition between businesses is as much a race for competence mastery as it
is for market position and market power. Senior management cannot focus on all
activities of a business and the competencies required to undertake them. So
the goal is for management to focus attention on competencies that really
affect competitive advantage. You can read more about the concept of Core
Competencies here.
(4) Performance Analysis
The resource audit, value chain
analysis and core competence analysis help to define the strategic capabilities
of a business. After completing such analysis, questions that can be asked that
evaluate the overall performance of the business. These questions include:
- How have the resources deployed in
the business changed over time; this is "historical analysis"
- How do the resources and capabilities of the business compare with others in the industry - "industry norm analysis"
- How do the resources and capabilities of the business compare with "best-in-class" - wherever that is to be found- "benchmarking"
- How has the financial performance of the business changed over time and how does it compare with key competitors and the industry as a whole? - "ratio analysis"
- How do the resources and capabilities of the business compare with others in the industry - "industry norm analysis"
- How do the resources and capabilities of the business compare with "best-in-class" - wherever that is to be found- "benchmarking"
- How has the financial performance of the business changed over time and how does it compare with key competitors and the industry as a whole? - "ratio analysis"
(5) Portfolio Analysis:
Portfolio Analysis analyses the
overall balance of the strategic business units of a business. Most
large businesses have operations in more than one market segment, and often in
different geographical markets. Larger, diversified groups often have several
divisions (each containing many business units) operating in quite distinct
industries.
An important objective of a
strategic audit is to ensure that the business portfolio is strong and that
business units requiring investment and management attention are highlighted.
This is important - a business should always consider which markets are most
attractive and which business units have the potential to achieve advantage in
the most attractive markets.
Traditionally, two analytical models
have been widely used to undertake portfolio analysis:
- The Boston Consulting Group Portfolio Matrix (the "Boston
Box");
- The McKinsey/General Electric Growth Share Matrix
(6) SWOT Analysis:
SWOT is an abbreviation for
Strengths, Weaknesses, Opportunities and Threats. SWOT analysis is an important
tool for auditing the overall strategic position of a business and its environment.
Read more about it here.
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