TOPIC 1: THE PURPOSE OF STRATEGIC AND BUSINESS ANALYSIS

LEARNING OBJECTIVES

At the end of this lesson, you will be able to:

a. Identify the fundamental nature and terminology of strategy and strategic decisions and strategic business analysis;b. Discuss how
strategy may be formulated at the corporate, business and operations level of an organization.c. Study and investigate the Johnson,
Scholes and Whittington model for defining the strategic position, strategic choices and strategy into action.d. Relate the three
different strategy lenses (JS&W) for viewing and understanding strategy and strategic management.e. Discover the scope of business
analysis and its relationship to strategy and strategic management in the context of the relational diagram of this syllabus.f. Advise
on how organizations can communicate their core values and mission.

STRATEGY AND STRATEGIC BUSINESS ANALYSIS DEFINED

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. 1.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. 2. 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.3. Change is therefore essential for long-term
survival.4.The strategic plan should also provide for the resources required to achieve the 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. 5. A decision must be made about how many resources (including money) should be invested
in each business activity. 6.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? 7.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.

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.a. 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.

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.
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.

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 position2. Strategic choices3. Strategic into action

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.

2. Strategic Choice Three elements1. 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. Strategy into action/implementationThese 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?1. 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.2. Managing change – Most strategic
planning and implementation will involve change, so managing change, in particular employees’ fears and resistance, is
crucial.Example A full-price airline is considering setting up a no-frills, low-fare subsidiary. The strategic planning process would
include the following eelements 1 Strategic position – competitor action, oil price forecasts, passenger volume forecasts, availability
of cheap landing rights, public concern for environmental damage, effect on the main brand.2.Strategic choices – which routes to
launch? Set up a service from scratch or buy an existing cheap airline? Which planes to use, what on-board services to offer?
3.Strategic implementation – how autonomous should the new airline be? How to recruit and train staff? Implementation of the
internet booking system. Acquisition of aircraft. Obtaining landing slots.

THE PROCESS OF STRATEGY DEVELOPMENT

Deliberate strategy, emergent strategy and incremental strategy

Deliberate strategy Deliberate strategy is a top down approach to strategic planning that emphasize intention. This is built based on
the vision and mission of the organization and is focused on achieving the purpose of doing business. Michael Porter introduced the
concept of deliberate strategy and said that “Strategy is about making choice, trade-offs; it’s about deliberately choosing to be
different.” He emphasized that businesses should strive to achieve one of the following positions in order to achieve a competitive
advantage. These strategies are named as ‘generic competitive strategies’.1 Cost leadership strategy – achieving the lowest cost of
operation in an industry2 Differentiation strategy – offering a unique product that does not have a close substitute3 Focus strategy –
achieving a cost leadership of differentiation status in a niche market.

Deliberate strategy attempts to minimize outside influence acting on business operations. However, the external environments can
change drastically while such changes are difficult to predict in advance. Thus, the company must undertake a proper assessment of
the political, economic, social and technological environment in order to understand the possible challenges they may face in

realizing the business objectives. On the other hand, favorable market conditions alone will not help the company achieve a
competitive advantage, internal capacity and capability are equally important. The commitment of the top management is essential
to implement a deliberate strategy and the initiative should be taken by them. Goal congruence should be achieved where all the
employees should work towards realizing the strategy. This can be done by properly communicating the business goals to them and
motivating them. Employees must think through and discuss all actions in the interest of matching company goals.1. Emergent
strategy Emergent strategy is the process of identifying unforeseen outcomes from the execution of strategy and then learning to
incorporate those unexpected outcomes into future corporate plans by taking a bottom up approach to management. Emergent
strategy is also referred to as ‘realized strategy’. Henry Mintzberg introduced the concept of emergent strategy since he did not
agree with the concept of deliberate strategy put forward by Michael Porter. His argument was that the business environment is
constantly changing and businesses need to be flexible in order to benefit from various opportunities.Rigidness in plans emphasize
that companies must continue to proceed with the planned (deliberate) strategy irrespective of the changes in the environment.
However, political changes, technological advancements and many other factors affect businesses in various degrees. These changes
sometimes will make the deliberate strategy implementation impossible. Therefore, most business theorists and practitioners prefer
emergent strategy over deliberate strategy for its flexibility. In general, they view emergent strategy as a method of learning while in
operation.

Figure 2: Relationship between deliberate and emergent strategy

Incremental strategy This strategy is developed slowly over time, by making small changes to existing strategy. Changes to strategy
are not large or far-reaching, because the management of the entity cannot see the need for any substantial changes.When the
entity’s business environment is changing, small changes to existing strategies are unlikely to be sufficient to ensure the survival of
the entity, and incremental change might be associated with aimlessness and a lack of strategic direction Incremental strategy is
only safe when an entity operates in a very stable environment, where changes over time are small and Gradual.

Strategy lenses

Johnson and Scholes have suggested a slightly different approach to understanding strategy development. They have suggested that
there are three different ways of looking at strategy development and, depending on circumstances, each approach might be
appropriate.They use the term strategy lenses to describe these three ways of looking at strategy development. Strategy
development can be seen:1. as design2. as experience3. as ideas Strategy as design: the design lens Strategy can be seen as the
result of a design process. Strategy development is logical, analytical and planned. The characteristics of seeing strategy
development as a design process are as follows:1. Strategy development is a formal and deliberate process.2. Thinking about
strategy, and making strategic choices as an outcome from this thinking process, precedes the implementation of strategy.3.
Strategies are logical and clear. 4. Strategic choices are made by senior management. Senior managers are the strategic decision
makers.This type of strategic development is well-suited to an entity with a hierarchical management structure, where employees
are accustomed to receiving directions from their senior managers. It is similar to deliberate strategy.

Strategy as experience This is the view that future strategies are based on experience gained from past strategies. There is strong
influence from the received wisdom and culture within an organization about how things should be done.It is similar to incremental
strategy. The weakness with this form of strategic development is strategic drift.

Strategy as ideas Strategy as design and strategy as experience do not explain innovation. Formal strategic planning can help an
entity to deal with the problems of change in the business environment, but it is not particularly well-suited to innovation and
radical new ideas. The characteristics of seeing strategy as ideas as a design process are as follows:1. Strategic development should
rely on radical new ideas. These do not necessarily come from senior management. Other individuals within the entity might create
the new ideas.2. Innovation happens as a result of variety and diversity. A changing and diverse environment encourages major
innovation.3. Within an entity that encourages new ideas and innovative thinking, many different ideas compete for the support of
management.4. Innovative thinking is unlikely to happen within an organization with a traditional hierarchical management
structure and formal lines of authority and responsibility.

Using the three strategy lenses Johnson and Scholes suggested that there is no single correct approach to strategy development. All
three strategy lenses provide a different insight into strategy, and any one lens might be appropriate in a particular situation.
Management should therefore be prepared to use all three lenses.

Strategic planning framework Although strategic development in practice might be the outcome from deliberate strategies and
emergent strategies (and possibly also some incremental strategies), it is useful to study the subject of business analysis and
business strategy as if it were an organised process of planning and implementation. This helps to provide a framework for
understanding the issues in strategic management and business analysis.

Two strategic planning frameworks that are useful to bear in mind are the rational planning model and strategic gap analysis. The
rational planning model The ‘rational planning model’ is a strategic planning framework that:1. sees the purpose of strategy as the
achievement of clearly-established objectives2. considers strategic planning to be a formal process, led by senior management3.
sees strategic planning as a multi-layered process, with corporate strategy, business strategy and functional strategies.The rational
planning model consists of several elements, and the planning process goes through each of these elements in the following
sequence.

Comment Vision represents the overall aspiration for the future. Mission is concerned with the overriding purpose and core values
of a company based on the values and expectations of its stakeholders.Objectives The entity should also have clear objectives, such
as the examination of shareholder wealth. Within the planning processes, targets can be established for the achievement of
objectives within the planning period.Environmental analysis There are opportunities and threats within the business environment
of the entity. These must be identified, and suitable strategic responses should be developed to deal with anticipated change and
also unexpected change.Position audit The planning process should include an assessment of the resources, systems, management,
procedures and organisation of the entity. Strengths and weaknesses should be identified. Strategies should seek to make full use of
any strengths within the entity and to reduce or remove significant weaknesses. Corporate appraisal The mission statement and
objectives of the entity, together with the results from the environmental analysis and position audit, should lead on to a formal
appraisal of strategy and what the entity might be capable of achieving.Strategic choice Different strategic alternatives should be
identified and evaluated, and preferred strategies should be selected that will enable the entity to achieve its stated
objectives.Strategic implementation The selected strategies should then be implemented.Strategic control The implementation of
strategies should be monitored. Changes and adjustments should be made where these become necessary.This rational planning
process is repeated at regular intervals (typically annually).

Gap analysis as an approach to strategic development Gap analysis provides an alternative model for planning and developing
strategy in a formal way. This approach consists of the following stages.1. Identifying objectives and setting targets: Where do we
want to be?2. Establishing the current position. Where are we now?3. Measuring the difference between where we are and where
we want to be as a strategic gap.The gap might be expressed in a variety of ways. For example, at a corporate strategy level, a gap
might be expressed including total annual sales revenue and total profitability, or product-market areas that the company should be
operating in.The purpose of strategy development should be to choose and implement strategies that will fill this strategic gap (or
planning gap) so that the objectives can be achieved.Filling the gap requires:1. an analysis of environmental threats and
opportunities, and the internal strengths and weaknesses of the entity2. identifying the competitive advantage that the entity
enjoys. 3. if necessary, re-stating the business objectives as a result of this strategic appraisal, so that objectives remain realistic and
achievable: this will change the size of the strategic gap4. identifying alternative strategies, evaluating them and selecting strategies
to fill the strategic gap5. implementing the selected strategy.