Module 1

STRATEGIC BUSINESS ANALYSIS

1.0 What is 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.

While traditional business analysis deal with individual items, strategic business analysis look at things from both
corporate perspective and longer term view. Strategic business analysis in modern day business 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 purpose of evaluating business investment decisions on a strategic basis is to meet the four most important goal of a
business. The four goals of a business are: (1) satisfying customer’s needs, (2) keeping employees happy at their job, (3)
complying with regulations, and (4) operating profitably.

A firm’s internal capabilities are analysed against external opportunities and threats with the aim of optimally aligning a
firm’s long term goal with short term decisions. In the word of Ansoff, strategic business analyses help to keep
organizations secure from surprises that characterises business environment. Businesses cannot afford
to analyse matters that are important to its long-term survival in silos and short-termism. By thinking of the effect of one
variable on the other and also on the future operation of the business activities, management would have an idea of what
is likely to happen in the future. The length of the term to be covered in the analysis depends on the nature and type of
the business. A technological company that specialise in fast-moving consumer goods (FMCG) will for example have a
planning and analysis time horizon of say 10 months while organizations that construct dams will have to analyse into
years in advance.

CHARACTERISTICS OF STRATEGIC BUSINESS ANALYSIS

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.
Every company wants to have a larger market share in any chosen industry, but care should be taken to ensure that
activities of managers now while trying to meet their target would not jeopardise the organizational long term goals.

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.

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. All that is needed is the big picture.
CHALLENGES FACED BY MANAGEMENT IN THE PROCESS OF STRATEGICALLY ANALYZING A BUSINESS
• Identifying organizational objectives and matching it with its environment
• Identifying the need for change and initiate both the incremental and transformational change
• Blending the conflicting needs of stakeholders in such a way that the knockoff effect on the business will not be felt
so much
• Striking a balance between short term and long term concerns

ADVANTAGES AND DISADVANTAGES OF STRATEGIC BUSINESS ANALYSIS

Advantages
• Monitor and control progress through management accounting controls
• Makes management think in advance
• Optimizes the use of scarce resources
• Ensures consistency in the pursuit of goals and objectives
• Seamlessly make organization fit into its environment
• Guides the path of the business

Disadvantages
• Could be expensive in terms of time and money
• Could lead to bottleneck and bureaucracy
• Not so useful in managing crisis
• Blindfold management from identifying and taking opportunities as they arise

2.0 Strategic Market Analysis

▪ Although strategic market analysis has no dictionary definition, it can be understood as any market analysis which
pertains to an individual business strategy or to business strategy as a whole.
▪ The goal of strategic market analysis is to help enterprises of all sizes make educated business decisions, especially
as related to strategy.

2. 1 Approaches to Strategic Market Analysis

▪ SWOT analysis
▪ PEST analysis
▪ Porter’s five forces analysis
▪ Four corner’s analysis
▪ Value Chain Analysis • Early Warning Scans
▪ War Gaming.

2.1.1 SWOT analysis

▪ A SWOT analysis is a simple but widely used tool that helps in understanding the strengths, weaknesses,
opportunities and threats involved in a project or business activity.
▪ It starts by defining the objective of the project or business activity and identifies the internal and external factors that
are important to achieving that objective. strengths and weaknesses are usually internal to the organisation, while
opportunities and threats are usually external.
 ▪ Often these are plotted on a simple 2x2 matrix.

SWOT ANALYSIS DIAGRAM

2.1.2 PEST analysis

▪ PEST analysis is a scan of the external macro-environment in which an organisation exists. It is a useful tool for
understanding the political, economic, socio-cultural and technological environment that an organisation operates in.
▪ It can be used for evaluating market growth or decline, and as such the position, potential and direction for a
business.
▪ PEST factors can be classified as opportunities or threats in a SWOT analysis. It is often useful to complete a PEST
analysis before completing a SWOT analysis.
▪ Political factors. These include government regulations such as employment laws, environmental regulations and tax
policy. Other political factors are trade restrictions and political stability. Economic factors. These affect the cost of
capital and purchasing power of an organisation.
▪ Economic factors include economic growth, interest rates, inflation and currency exchange rates.
▪ Social factors. These impact on the consumer’s need and the potential market size for an organisation’s goods and
services. Social factors include population growth, age demographics and attitudes towards health.
▪ Technological factors. These influence barriers to entry, make or buy decisions and investment in innovation, such as
automation, investment incentives and the rate of technological change.
2.1. 3 Porter’s Five Forces

▪ Porter's five forces of competitive position analysis was developed in 1979 by Michael E. Porter of Harvard Business
School as a simple framework for assessing and evaluating the competitive strength and position of a business
organisation.
▪ This theory is based on the concept that there are five forces which determine the competitive intensity and
attractiveness of a market. Porter’s five forces helps to identify where power lies in a business situation.
▪ This is useful both in understanding the strength of an organisation’s current competitive position, and the strength of
a position that an organisation may look to move into.
▪ Strategic analysts often use Porter’s five forces to understand whether new products or services are potentially
profitable. By understanding where power lies, the theory can also be used to identify areas of strength, to improve
weaknesses and to avoid mistakes.

The five forces are:

1. Supplier power.
▪ An assessment of how easy it is for suppliers to drive up prices. This is driven by:
▪ the number of suppliers of each essential input
▪ the uniqueness of their product or service
▪ the relative size and strength of the supplier
▪ the cost of switching from one supplier to another.

2. Buyer power.

An assessment of how easy it is for buyers to drive prices down. This is driven by:

▪ the number of buyers in the market

▪ the importance of each individual buyer to the organisation • the cost to the buyer of switching from one
supplier to another. If a business has just a few powerful buyers, they are often able to dictate terms.
▪ Competitive rivalry. The key driver is the number and capability of competitors in the market. Many competitors,
offering undifferentiated products and services, will reduce market attractiveness.
▪ Threat of substitution. Where close substitute products exist in a market, it increases the likelihood of customers
switching to alternatives in response to price increases. This reduces both the power of suppliers and the
attractiveness of the market.
▪ Threat of new entry. Profitable markets attract new entrants, which erodes profitability. Unless incumbents have
strong and durable barriers to entry, for example, patents, economies of scale, capital requirements or government
policies, then profitability will decline to a competitive rate.
PORTER’S FIVE FORCES DIAGRAM

2.1.4 Four corner’s analysis

Developed by Michael Porter, the four corner’s analysis is a useful tool for analyzing competitors. It emphasizes that the
objective of competitive analysis should always be on generating insights into the future. The model can be used to:
▪ develop a profile of the likely strategy changes a competitor might make and how successful they may be
▪ determine each competitor’s probable response to the range of feasible strategic moves other competitors might
make
▪ determine each competitor’s probable reaction to the range of industry shifts and environmental changes that may
occur.
▪ The ‘four corners’ refers to four diagnostic components that are essential to competitor analysis: future goals; current
strategy; assumptions; and capabilities.
Understanding the following four components can help predict how a competitor may respond to a given situation.
▪ Motivation – drivers. Analysing a competitor’s goals assists in understanding whether they are satisfied with their current
performance and market position. This helps predict how they might react to external forces and how likely it is that they will
change strategy.
▪ Motivation – management assumptions. The perceptions and assumptions that a competitor has about itself, the industry and
other companies will influence its strategic decisions. Analysing these assumptions can help identify the competitor’s biases
and blind spots.
▪ Actions – strategy. A company’s strategy determines how a competitor competes in the market. However, there can be a
difference between ‘intended strategy’ (the strategy as stated in annual reports, interviews and public statements) and the
‘realised strategy’ (the strategy that the company is following in practice, as evidenced by acquisitions, capital expenditure and
new product development). Where the current strategy is yielding satisfactory results, it is reasonable to assume that an
organisation will continue to compete in the same way as it currently does.
▪ Actions – capabilities. The drivers, assumptions and strategy of an organisation will determine the nature, likelihood and timing
of a competitor’s actions. However, an organisation’s capabilities will determine its ability to initiate or respond to external
forces.

2.1.5 Value Chain Analysis

▪ Value chain analysis is based on the principle that organisations exist to create value for their customers. In the analysis, the
organisation’s activities are divided into separate sets of activities that add value.
▪ The organisation can more effectively evaluate its internal capabilities by identifying and examining each of these activities.
Each value adding activity is considered to be a source of competitive advantage.
▪ Value chain analysis is a comprehensive technique for analysing an organisation’s source of competitive advantage.
▪ The three steps for conducting a value chain analysis are:

1. Separate the organisation’s operations into primary and support activities. Primary activities are those that physically create a
product, as well as market the product, deliver the product to the customer and provide after-sales support. Support activities
are those that facilitate the primary activities.

2. Allocate cost to each activity. Activity cost information provides managers with valuable insight into the internal capabilities of
an organisation.

3. Identify the activities that are critical to customer’s satisfaction and market success. There are three important considerations
in evaluating the role of each activity in the value chain.
a. Company mission. This influences the choice of activities an organisation undertakes.
b. Industry type. The nature of the industry influences the relative importance of activities.
c. Value system. This includes the value chains of an organisation’s upstream and downstream partners in providing
products to end customers.

2.1.6 Early Warning Systems

The purpose of strategic early warning systems is to detect or predict strategically important events as early as possible. They are often
used to identify the first scene of attack from a competitor or to assess the likelihood of a given scenario becoming reality. The seven
key components of an early warning system are:

1. Market definition. A clear definition of the scope of the arena to be scrutinized. For example, is the arena a particular
geographical region, brand or market?

2. Open systems. An ability to capture a wide range of information on relevant competitors.

3. Filtering. Information that has been collected on the arena needs to be filtered according to significance. Expert interpretation
is required in order to identify particular events that signify strategic moves or shifts.
4. Predictive intelligence. Using knowledge of the forces driving a competitor to predict which direction they are likely to take.
One technique is to build likely scenarios and actively seek the signals that confirm the scenario. The predictions need to be
assessed for their probability of occurring and potential impact.

5. Communicating intelligence. Ensuring that the right people in an organisation receive regular briefing on key signals.
 6. Contingency planning. Events that have a high potential impact or probability of occurring may merit contingency plans, for
example, a change of strategy or mitigating actions.
7. A cyclical process. The process of scrutinising information for new warning signals should never stop. While the emphasis is on
emerging threats and opportunities, the process should be flexible enough to tackle unexpected shorter term developments too.

2.1.7 War Gaming

• War games are a useful technique for identifying competitive vulnerabilities and misguided internal assumptions about competitors’
strategies.

• Simulations of competitive scenarios are used to explore the implications of changes in strategy in a ‘no risk’ environment. They
also encourage new ways of thinking about the competitive context. War games are often particularly useful for organisations facing
critical strategic decisions.

A typical business war game has the following characteristics:

• an off-site venue
• senior managers representing a cross-functional mix of participants
• two to three full days’ duration
• four or more teams of between four to eight people each. Each team represents either the sponsoring company or one of its
competitors

• preparation
weaknesses
time in which each team receives a dossier describing the company they are representing, and its strengths and

It also has the following characteristics.

• Atimestructure where games comprise several ‘moves’ or decision rounds. Each move consists of a fixed, predetermined amount of
ranging from a couple of months to several years. During each move, teams make and carry out strategic decisions. After
each move, teams assess their positions relative to other teams.

• Aalso‘control team’ of facilitators who serve as the board of directors. They ensure that strategic plans are acceptable and legal. They
facilitate the debrief, in which participants review the merit of each strategy.

3.0 STRATEGIC BUDGETING

• Strategic budgeting is the process of creating a long-range budget that spans a period of more than one year. The intent behind this
type of budgeting is to develop a plan that supports a long-range vision for the future position of an entity.
• This may, for example, involve the development of new geographic markets, the research and development needed to introduce a
new product line, converting to a new technology platform, and the restructuring of the organization. In these examples, it is not
possible to complete the required activities within the period spanned by a single annual budget.
• A strategic budget is less concerned with the detailed revenue and expense line items typically found in an annual budget. Instead,
these classifications are aggregated into a smaller number of line items.

The focus of strategic budgeting therefore shifts away from the minutiae of budget-building and into such matters as:

• Strategic direction
• Risk management
• Competitive threats
• Growth options
• Reallocations of resources to higher-growth areas
Examples of Strategic Budget
 • Product Development – This is the department that works on years of research and development to design a product and
finally launch the product. So having a long term budget in place helps the product team to allocate their resources wisely.
• Programs – As discussed earlier short-term programs and stepping stone to achieve the long term goals, a strategic budget
plays a vital role here for both. For instance, an aeronautics company takes ten years to develop a rocket. So in this long
tenure, this budget helps them to achieve their end goal.
• Infrastructure Budgets – These are the projects which can develop a nation, city, or any organization. If the projects are long
term and may take several years to complete, like railways or national highways, long term budget always helps to function.
• Productivity and Capability – Most of the organizational goals are long term. However, midway, if there are any process-
centric changes like an adaption of new technology, risk management, and many more, the strategic budget allocates for such
needs too.

Objectives Strategy Measures Target

Strategic Budgeting Process

There are four dimensions we need to look for when we are in the process of converting the goals into a budget. That is, Objectives, Strategies,
Measures, and Targets. Let us define these step by step, which helps in designing the strategic budget.

• Objectives – This defines what exactly we are trying to achieve, which are our goals.
• Strategy – The second step would be to develop a strategy to achieve a set goal.
• Measures – After implementing the strategy, we need to track and evaluate its performance using relevant standards.
• Target – Finally, the goal is the place where we aim to be by the end of the period.

In the whole process, we need to allocate funds to all the functional departments and help them achieve their objective to achieve the final target.
Significant steps in designing the budget would be as follows –

• Forecast the short-term cost and factorize them in the budget

• Allocate categorized funds depending on the activities
• Make multiple budgets for the short term, which align with the long term ones.