Strategic Analysis

This Chapter covers the following:

1. Introduction
2. PESTEL
3. Porter’s five force model
4. Scenario planning
5. Porter’s diamond model
6. Environmental opportunities and threats
7. Strategic capabilities, resources and competencies
8. Value chain analysis
9. SWOT analysis
1. Introduction
• This chapter explores tools that can help to
analyse an organisation's environment and its
position within that environment.
• To avoid strategic drift and to ensure a proper
fit with in environment, strategic planners to
understand the environment.
• Internal and external analysis tools
– Key external analysis tools
• PESTEL
• Porter's 5 forces
• Porter's diamond
– Key internal analysis tools are:
•  Porter's value chain
• Strategic capabilities 
• SWOT
• The PESTEL model - This model looks at the
macro environment level taxation policy,
• Political. This includes government stability
and foreign trade
regulations
• Economic. This includes
interest rates, inflation,
business cycles,
unemployment,
disposable income and energy
• Social. This includes availability & costs

population demographics,
social mobility,
income distribution,
lifestyle changes,
attitudes to work and leisure,
levels of education and
consumerism
• Technological. research, new discoveries and
development, government and
– It is influenced industry focus of technological
effort, speed of technological
by government transfer and rates of
obsolescence.
spending on
• Ecological/environmental.
– It considers raw materials, components and
energy sources used , substitute
materials, product waste,
recycling , process,
• Legal.
– It covers influences such as
taxation, employment law,
monopoly legislation and
environmental protection laws
3. Porter’s five forces model
– Porter looked at the structure of industries,
interested in assessing industry attractiveness, and
how easy it would be to make above average
profits
Porters’ 5 Force Potential impact on attractiveness

1. Buyer power Powerful buyers can demand discounted prices and extra
services (which add costs to the organisation)
2. Supplier power Powerful suppliers can demand higher prices for their product(s)
3. Competitive High levels of competition can lead to price wars and high
rivalry expenditure on marketing and innovation
4. New entrants New entrants can increase the cost of resources as well as
increasing the power of other forces
5. Substitutes If an organisation has a lot of substitutes it will have to keep its
prices low to deter customers to move to substitutes
• Major sources of barriers are
– Economies of scale
– Product differentiation
– Capital requirements
– Switching costs
– Access to distribution channels
– Cost advantages of existing producers
– Know-how
– Regulation
4. Scenario planning
– PESTEL and 5 Forces analysis often focuses on the
'most likely’ potential future market state.
Scenario planning is often employed to force
managers to think about other potential future
market positions
– In scenario planning the key environmental factors
are identified and the firm then considers how
these might change in the future.
– Plans are then considered for each of these
eventualities.
• Three potential future scenarios most common
approach to scenario planning are
– The most likely scenario – this reflects the majority of
managements’ expectations of the future possibilities
for the market
– The best case scenario – this reflects a position where
the key environmental factors move in a favourable
direction for the organisation
– The worst case scenario – this reflects a position
where the environment turns against the organisation
• Plans should be put in place for all potential
scenarios
• Benefits and problems of scenario planning
– The key benefit of scenario planning is that it
makes managers aware of what the key
environmental factors for the organisation are
– But scenario planning is time consuming and
expensive to carry out.
– these scenarios are not forecasts and these plans
should not be seen as a replacement for
budgeting and control systems.
– The aim is to force management to consider and
prepare for different scenarios
5. Porter’s diamond
• Porter tried to answer the following questions:
– Why does a nation become the home base for
successful international competitors in an industry?. 
– Why are firms based in a particular nation able to
create and sustain competitive advantage against the
world’s best competitors in a particular field?
– Why is one country often the home of so many of an
industry’s world leaders?
• Porter said the answers are the determinants of
national competitive advantage and there are four
determinants which determine the national
competitive advantage
• Factor conditions:
– physical resources such as land, minerals and
weather
– capital
– human resources such as skills, motivation, price
and industrial relations
– knowledge that can be used effectively 
– infrastructure.
• Demand conditions: there must be a strong
home market demand for the product or
service. This determines how industries
perceive and respond to buyer needs and
creates the pressure to innovate.
• Relating and supporting industries: the
success of an industry can be due to its
suppliers and related industries
• Firm strategy, structure and rivalry:
organisational goals can be determined by
ownership structure
6. Environmental opportunities and threats
– Number of tools /models used help to sense the
environment and the results of these analyses can
be classified as either an:
• opportunity or a threat.
– then decide how to:
• grab the best opportunities 
• defend against the most serious threats.
– Opportunities are favourable conditions that
usually arise from the nature of changes in the
external environment
– Threats are the opposite of opportunities and also
arise from external developments
7. Strategic capabilities, resources and competences
– Strategic capability is the adequacy and suitability of the resources
and competences an organisation needs if it is to survive and prosper.
– Capability
• Threshold capabilities these are necessary for any organisation to exist and
compete in an industry they are likely to be common to most rivals and easily
copied
• Strategic Capabilities these are particular to an individual business they will be
hard to copy
– Resources
• Threshold resources are the minimum resources required to survive in
the business
• Unique resources are the resources exist to that business only
– Competencies
• Threshold competencies are the minimum competencies to survive in
the business
• Unique competencies are the competencies that are unique to business
 
• Strategic capability can also be divided into threshold
capabilities and capabilities for competitive advantage.
– Threshold capabilities. These are the minimum capabilities
needed for the organisation to be able to compete in a given
market.
– Capabilities for competitive advantage. The capabilities that
allow an organisation to beat its competitors.
• Unique resources are those resources that
create competitive advantage and that others
cannot imitate or obtain
• Core competences are the activities, processes
and methods through which an organisation
uses its resources effectively, in ways that
others cannot imitate or obtain.
• Critical success factors
– An important strength for any organisation will be the
achievement of critical success factors
– This should allow the organisation to cope better than
rivals with any changes in its competitive environment.
• What are critical success factors?
– These are the essential areas of the business that must
be performed well to succeed in business
– These are performance requirements that are
fundamental to an organisation’s success
– These are product features that are particularly valued
by customers
• CSFs and competences are different
– CSFs are what an organisation needs to be good at,
– Competences focus on what an organisation is good at.
– Strategies need to focus on maximising the correlation
between the two
• Organisational knowledge as a strategic capability
– An organisation’s knowledge of its environment can
make it stand out from rivals
– Johnson, Scholes and Whittington define organisational
knowledge as:  
• ‘the collective experience accumulated through systems,
routines and activities of sharing across the organisation.’
– Resources can be purchased but capabilities must
be developed and grown
– It will be built up over time from past experience
and actions
– successful development of organisational
knowledge can be a critical success factor
– A key part of this can be knowledge management.
This includes
• capturing knowledge
• sharing knowledge 
• distributing knowledge 
• levering knowledge 
• maintaining knowledge.
• The growing importance of knowledge
management
– It has become an important part of gaining and
maintaining competitive advantage
8. Value chain analysis
– competitive advantage means that an organisation
can beat its rivals by either offering goods and
services at a lower cost, or by being different and
by charging a premium for this difference
– The best way to assess whether an organisation
has achieved a competitive advantage is by
examining its value chain.
• Porter developed the value chain to identify
which activities within the firm contribute to a
competitive advantage and which were not.
• breaking down the firm activiteis into five
‘primary’ and four ‘support’ activities, and find
any cost advantage or quality advantage.
• Primary activities: 
– Inbound logistics – receiving, storing and handling
raw material inputs.
– Operations – transformation of the raw materials
into finished goods and services.  
– Outbound logistics – storing, distributing and
delivering finished goods to customers.  
– Marketing and sales – for example, sponsorship of
a sports celebrity could enhance the image of the
product. 
– Service – all activities that occur after the point of
sale, such as installation, training and repair, e.g.
• Secondary activities:
– Firm infrastructure – how the firm is organised.
– Technology development – how the firm uses
technology.
– Human resources development – how people contribute
to competitive advantage.
– Procurement – purchasing, but not just limited to
materials.
• It is vital that the linkages between the different
elements of a value chain are considered.
– Firstly this is to ensure consistency .
– Secondly it may be that through linking separate
activities more effectively than competitors, a firm can
gain a competitive advantage.
• Apply the value chain in a scenario 
– To gain a competitive advantage over its rivals a
company must either:
• perform value creation functions at a lower cost than
its rivals, or
• perform them in a way that leads to differentiation and
a premium price.
Nature of Competitive Low cost, low selling price High end (differentiator)

Inbound logistics Standardised Premium materials

Operations Bulk production Flexible production

Outbound logistics
Few outlets used Use of premium distributors and retailers

Marketing and sales Minimal levels of marketing High levels of promotion Lots of market
research
• Supporting activities
HRM Use low skilled staff Use higher skilled staff
TD Use e-procurement to Less use of technology in
  reduce costs of Operations
Procurement Seek out cheapest and Seek premium suppliers
  most efficient supplies  
Infrastructure Functional structure Flexible structures

• Value chain analysis looks at each of the processes

that make up the chain of activity and:
– rates how important it is in a given company’s production
or service activity 
– rates how the company compares to its competitors
– helps to decide how individual activities might be changed
to reduce costs of operation 
– helps to improve the value of the organisation’s offerings.
• Value networks

9. SWOT analysis
– Strengths, weaknesses, opportunities and threats
• Strengths and weaknesses relate to resources and
capabilities:
– what is the organisation good at? What is it poor at? Where
are resources in short supply? Where are resources
excellent?
– Ultimately, strengths and weaknesses determine an
organisation's ability to cope with the expected changes
( opportunities and threats)
• Using a SWOT analysis
– The first step is to rank in order of importance the findings of
the SWOT analysis. 
– Strengths that match no opportunity are of little use without
an opportunity.
– A distinctive competence is a strength that can be exploited
• Strategies can be developed which:  
– neutralise weaknesses or convert them into
strengths convert threats into opportunities
– match strengths with opportunities.