How To Apply Strategic Analysis To Find Weaknesses Or Opportunities In Your Business
Essentially, Strategic analysis requires you to address three fundamental questions: - Where do we want to go?
- What resource constraints do we have internally?
- What are the key threats from the external environment?
This page has a detailed blue print of the key factors underlying each of the three questions you have to ask your self during strategic analysis of a business case scenario. Qn. Where do we want to go? The answer to this question is influenced by many factors. Key influencer's are often you the owners of the business who may have a particular expectation for your Company. However, you also need to take into account other stakeholder influences which could include the government, employees and the general underlying culture of your Company. These views during strategic analysis are very often consolidated into a corporate vision or mission statement. Qn. What resource constraints do we have Internally? The most important business resources in this regard include finance, plant and machinery and human resources. Typical questions are as follows: Money - How much of our own money do we have to invest?
- What is the current cost of our capital? This is an average measure of the cost of borrowing from the bank and expected return to the owners of the business.
- Is the company excessively geared(liabilities exceeding assets) or are there any opportunities for us to raise additional finance?
Machinery This refers to machinery in the broadest sense of the word and the typical questions to ask your self during strategic analysis would include: - How technically up-to-date is our machinery?
- Are they in any danger of obsolescence?
- Have they been poorly maintained over the years?
Manpower - How expensive is our workforce?
- How efficient are our employees?
- Is our business overstaffed?
- Is our business understaffed?
- What is our staff turnover rate?
- What is the staff absence rate?
- Do we have good structures to allow management succession?
Markets There is a danger of overlapping with the external environment at this stage of strategic analysis so try to keep to such questions as: - Is our current market declining/growing?
- Where are new markets emerging?
- How strong is our brand in the current market?
Materials - How expensive are our raw materials compared to our competitors?
- Do our suppliers have excessive control of the raw materials?
- Do we have favorable access to other sources of raw materials?
- Are our raw materials becoming exhausted?
Qn.what are the key threats from the external environment? Once you have established constraints on your internal resources, strategic analysis requires you to assess the threat posed by the external environment. The American management writer Professor Michael Porter describes the main external competitive threats to be summarized by his five forces model. Essentially this model determines the level of competition your organization is facing by helping you to assess the extent to which the five forces are relevant to strategic analysis. The five forces are summarized as follows: - The threat of new entrants entering the market.
- The bargaining power of customers.
- The bargaining power of material suppliers.
- The threat from substitute products coming to the market.
- The extent of competitive rivalry for new or existing customers.
The threat from new entrants This is a problem because if competitors can easily enter your business sector they will be able to put a ceiling on your profits. The same should apply if you are strategizing for a new market. Therefore the greater the threat from new entrants entering the sector the higher the levels of competition.
The ease by which new entrants can enter the business segment is largely determined by the extent of the barriers to entry. The following summarises the main barriers to entry. - Capital cost of entry.The higher the capital cost the greater the deterrent to someone entering the business
- Economies of scale. This applies if substantial investment is needed by the new entrant to achieve cost parity.
- Differentiation. Differentiation is said to occur if consumers perceive a product or service to have properties which make it unique or distinct from its rivals.
Therefore if new entrants are to be successful in entering the market they will need to spend a lot of money on developing the image of the product, therefore they are likely to be put off. - Switching costs. If existing customers will incur new expenses by changing to a new supplier they may not wish to change. For example, when the compact disc was invented consumers had to incur a cost of a CD player, as the new compact discs would not work on a conventional record player.
- Legislation. There might be patent protection for a product or the government might only license certain companies to operate in certain segments.
- Access to distribution channels. Existing relationships between manufacturers/suppliers and their key distributors/agents may make it difficult for anyone else to enter the market.
When thinking about the barriers to entry go through the above list in your strategic analysis to see which of them apply to your business case. The bargaining power of Customers Do your customers have the power to depress your product prices? If the answer to this question is yes it is likely you will be faced with increased competition. Customers are said to have power when: - they are concentrated and can exert pressure on the seller;
- the buyer has a choice of alternative sources of supply.
The bargaining power of suppliers The extent of the power of the suppliers will be affected by: - the concentration of suppliers: if only a few suppliers, the buyers will have less opportunity to shop around;
- the degree to which products can be substituted by the various suppliers;
- the level of importance attached to the buyer by the supplier. The switching costs of moving to another supplier.
The threat from substitute products If there are similar products that can be used as substitute then the demand for the product will increase or decrease as it moves upwards or downwards in price relative to substitutes. The extent of competitive rivalry The most competitive markets will always be affected by the previously discussed four forces. However they will also be affected by: - the number of competitors and the degree of concentration;
- the rate of growth of the industry;
- the cost structures if high – fixed costs prices are often cut to generate volume;
- the exit costs. If they are high, firms may be willing to accept low margins so as to stay in the industry.
In addition to Porters model, strategic analysis takes view of other factors affecting our business environment under a synonym called LePEST. Outlined as follows: - Legal Environment; How your countries legal frame affects business .namely Contract Law, employment laws, Performance Disclosure requirements, environmental laws.
- Political Environment; Political influence will include legislation on trading, pricing, dividends, tax, employment, as well as health and safety.
- Economic Environment; The current state of the economy can affect how your company performs. Determinants include Taxation levels, Inflation rate, Exchange rate, Interest rates, Tariffs, Unemployment rates, Literacy levels etc.
- Social Environment; Your company’s performance might also be influenced by changes in the nature, habits, attitudes of society and demographic factors etc
- Technological developments. This is an area in which change takes place very rapidly and your company needs to be constantly aware of what is going on.
Again all of these factors will not necessarily apply but will provide a useful checklist of a comprehensive strategic analysis report. Therefore when surveying the external environment think through Porter’s five forces and PEST factors and you will have a fully comprehensive framework with which you can assess your case. The above discussion on strategic analysis is a composition of models that could help produce a detailed and complex diagnostic report highlighting the strength, weaknesses opportunities and threats underlying the future of your company. You may ask your CPA to review your case for a comprehensive analysis, or
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