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
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);
(2) Support Activities, which whilst they
not directly involved in production, may increase effectiveness or efficiency
(e.g. human resource management). It is rare for a business to undertake
primary and support activities.
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
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
(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:
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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