ACCA P3 Business Analysis - 2010 - Study text

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Chapter 1: The purpose of strategic and business analysis

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.

All these factors must be considered in the analysis of strategic position. Johnson,

Scholes and Whittington suggest that there are three aspects to strategic position:

 The environment

 Strategic capability of the entity

 Expectations and purposes.

Environment (threats and opportunities)

An analysis of the business environment involves an analysis of the threats and

opportunities that seem to exist, and an assessment of their significance.

 Threats are developments in the environment that could threaten the ability of

the entity to achieve its objectives.

 Opportunities are developments that might be exploited, to improve the ability

of the entity to achieve its objectives.

Environmental analysis is described more fully in a later chapter.

Strategic capability of the entity (strengths and weaknesses)

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.

 What is the entity good at doing? Why? What can be done to improve these

strengths?

 What is the entity bad at doing that its rivals can do better? Why? What can be

done to reduce or eliminate these weaknesses?

An analysis of internal resources and competences is described in a later chapter.

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.

 Some entities make a formal statement of their purpose and reason for existence

in the form of a mission statement. For example, a university might have a

mission statement that its purpose is to provide a centre for academic and

scientific research and first-class tuition for undergraduate and postgraduate

students.

 A company might consider that its purpose is to provide returns to its owners,

the shareholders. It might therefore state its purpose in terms of maximising

shareholder wealth, or increasing shareholder wealth.

 A company might consider that its purpose is to increase shareholder wealth but

that it also has a significant responsibility to other stakeholder groups, such as

employees and customers. A company might recognise its ethical duty as a

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‘corporate citizen’ in society, and see a part of its purpose as the requirement to

protect the environment and achieve a ‘sustainable business’.

The purpose of an entity is linked to the expectations that managers, owners and

other stakeholders have about it. Management need to understand how successful

the entity has been in meeting the expectations of its owners and other stakeholder

groups. They also need to make decisions about what the entity should be doing in

the future to meet stakeholder expectations more successfully than in the past.

Expectations about what an entity should do are also linked to cultural and ethical

influences.

Corporate mission and corporate culture are considered in more detail in a later

chapter.

2.3 Strategic choices

The second element in the Johnson, Scholes and Whittington model is strategic

choices. This involves identifying different possible strategies that the entity might

adopt, and making a choice of the preferred strategies from the different alternatives

that are available. There are three aspects to identifying alternative strategies and

making strategic choices:

 Corporate level and international

 Business level strategies

 Development directions and methods

Corporate level and international

Strategic choices have to be made at the corporate strategy level. In particular,

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.

There could also be an international aspect to strategic choices at this level. A

company needs to decide whether it will operate internationally, and if so in what

countries.

Business level strategies

Choices must also be made at the business strategy level. For companies, a major

strategic choice is between a strategy of cost leadership and a strategy of

differentiation.

If a company chooses a strategy of differentiation, it has to decide how it intends to

make its products or services different from those of its competitors, so that the

company will have a competitive advantage over rival companies and can succeed

with its chosen strategy.

Chapter 1: The purpose of strategic and business analysis

Development directions and methods

A choice must be made about the direction or directions in which the business

should be directed.

 If a company’s management decide on a strategy of growth, and making the

business bigger, decisions have to be made about how the company will grow.

Will it have a strategy of internal growth, and developing the business gradually

using the company’s own internal resources? Or will it seek to grow by making

acquisitions of other companies? Or will it seek to grow by making strategic

alliances with other companies, so that all the companies in the alliance help

each other to grow their businesses?

 Senior management must also make strategic choices about its products and

markets. One method of analysis (by Ansoff) is that companies can seek to grow

in any of four ways:

- market penetration: this is a strategy of trying to increase market share, by

selling more of the company’s existing products in its existing markets

- market development: this is a strategy of growth by selling the company’s

existing products to new markets, such as markets in other countries

- product development: this is a growth strategy that involves developing

new products or services to sell to the company’s existing markets

- diversification: this is a higher risk strategy, which involves selling new

products or services to new markets.

Ansoff’s strategic analysis is explained in more detail in a later chapter.

The nature of strategic choices

Making a strategic choice is often a fairly simple decision, in the sense that the

choices are clear. The problem with making strategic choices, however, is that it is

easy to make the wrong choice and select unsuitable strategies.

Here are some of the choices that have to be made, and why management might

make a wrong decision.

 What is the best way to make the entity succeed in achieving its objectives?

- Should strategic decisions be based on the significant changes that are

happening in the environment? Or is success achieved by focusing on the

strengths of the entity, and stick to doing what it does best?

- Should the entity choose a cost leadership strategy and sell its products at

the lowest prices possible? Or should it seek to add value for the customer

by differentiating its products, and charging higher prices?

- Should the entity specialise in one type of product or one market? Or

should it diversify and sell a range of products and in a number of

different markets?

 What is the best way to manage the entity, in order to get the best out of its

resources? Should the organisation structure be centralised or decentralised?

What management style is appropriate? (Management style is explained in a

later chapter.)

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2.4 Strategy into action

The third element in the Johnson, Scholes and Whittington model of strategic

management is ‘strategy into action’. This means implementing the chosen

strategies. There are three aspects to strategy implementation:

 Organising

 Enabling

 Managing change.

Organising

An organisation structure must be established that will help the entity to implement

its strategies effectively in order to achieve its strategic targets. ‘Organising’ 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.

Enabling

‘Enabling’ means enabling the entity to achieve success through the effective use of

its resources.

 Each resource must be used to support the achievement of strategic objectives.

This calls for efficient management of resources such as people (and labour

skills), information, finance and technology.

 Strategies should be based on making full use of the resource strengths of the

entity, to achieve competitive advantage.

Managing change

Most entities exist in a rapidly-changing environment and they need to adapt and

change in order to survive and succeed.

Implementing strategy always means having to make changes. Managing change

successfully is therefore an important aspect of strategic management.

2.5 The scope of business analysis

Strategy is implemented through normal day-to-day work processes and through

co-ordinating the efforts of many different individuals and groups. Work processes

and relationships need to be managed efficiently, so that the entity is able to achieve

its strategic objectives.

 Improvements in business processes are often a significant aspect of strategy

implementation. Changing processes can be necessary to improve operational

effectiveness.

 Strategies might be implemented as new projects and investments. Project

management is therefore another aspect of successful strategy implementation.

Chapter 1: The purpose of strategic and business analysis

 For some companies, the management of quality could be a key aspect of

successful strategy implantation, through the implementation of initiatives such

as Total Quality Management and Six Sigma.

 Successful strategic management also requires the support of management

information systems. The information systems that management require are

provided by information technology (IT) systems.

 An important part of management information systems for strategic planning

and implementation is financial analysis. Relevant financial analysis is an

essential part of strategic management.

The Business Analysis examination syllabus emphasises the relationship between

strategic management and supporting business processes. This relationship is

shown simply in the following diagram (which also indicates that the management

of individuals is also a key to strategic success).

The examination syllabus deals with each of the elements in this diagram in some

detail.

Business

Analysis

Business

Process

Change

(D)

Information

Technology

(E)

Quality

Issues

(F)

Project

Management

(G)

Financial

Analysis

(H)

People (I)

Business

Analysis

Strategic Position (A) Strategic Choices (B) Strategic Action (C)

Business Analysis

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The process of strategy development

 Deliberate strategy, emergent strategy and incremental strategy

 Strategy lenses

 Strategy as design: the design lens

 Strategy as experience

 Strategy as ideas

 Using the three strategy lenses

 Mintzberg: 5 Ps for strategy

 Strategic planning frameworks

3 The process of strategy development

3.1 Deliberate strategy, emergent strategy and incremental strategy

Strategies can be developed in different ways. One way of explaining how strategies

are developed is to make a distinction between deliberate strategy, emergent

strategy and incremental strategy.

Deliberate strategy

Deliberate strategy is also called prescriptive strategy and rationally-planned

strategy. It is the outcome from a formal strategic planning process, in which

management:

 carry out a strategic position analysis

 identify and evaluates the strategic alternatives

 make strategic choices, and

 implement the chosen strategies, which are set out in a formal business plan or

strategic plan.

The business plan is reviewed regularly, and amended if necessary. For example, if

a company produces a formal five-year business plan, it might review the plan

every year and amend it if necessary. It might also add another year to the end of

the plan so that a rolling five-year plan is produced on an annual basis.

Formal strategic planning also involves the use of management aids and planning

techniques, such as SWOT analysis and the use of models such as Porter’s diamond

and Porter’s Five Forces model.

Example

For some companies, formal strategic planning and the implementation of deliberate

strategy is essential.

Chapter 1: The purpose of strategic and business analysis

In 2007, the UK government announced a new transport policy for the railways,

with a strategic objective of increasing the capacity of the UK rail network but

without increasing the number of train services.

Implementing this strategy would require the purchase of extra trains by train

operating companies.

In addition, the company responsible for managing and maintaining the rail

network, Network Rail, undertook to ensure that railway stations would be able to

cater for longer trains, with 50% more carriages. To do this would require extending

the length of some station platforms, which would involve substantial construction

work.

This transport policy, involving the provision of longer trains, could not be

implemented without formal (and co-ordinated) strategic planning by the train

operating companies and Network Rail.

Emergent strategy

An emergent strategy is a strategy that is not formally planned, but which emerges

in response to unforeseen developments and opportunities. Ideas for an emergent

strategy might come from employees or fairly junior managers, rather than senior

management.

However, once a new strategy has emerged, the entity applies the strategy

consistently.

A company might develop both deliberate strategies and emergent strategies. These

two methods of strategic development are not inconsistent with each other. There

might be a formal business plan, containing deliberate strategies, but the company’s

management might be willing to develop new strategies whenever unexpected

opportunities arise, even though they are not in the formal plan.

A strategy that begins as an emergent strategy might be included in a future formal

business plan, so it eventually becomes a part of deliberate strategy.

Incremental strategy

Incremental strategy is strategy that 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 (‘strategic drift’).

Incremental strategy is only ‘safe’ when an entity operates in a very stable

environment, where changes over time are small and gradual.

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Example

An example of either incremental strategy or emergent strategy might be the case of

international banking group Citigroup. In 2004, Citigroup suffered severe damage to

its reputation, and some loss of business, from two sets of incidents.

 In Japan, repeated breaches of regulations by Citigroup staff resulted in the

Japanese authorities forcing the bank to shut down its private banking operation

in that country.

 In London, a trading strategy by some of its bond traders, who saw an

opportunity to make a quick profit at the expense of other bond dealers,

disrupted the market for European government bonds, and angered the

European governments affected.

In response to the loss of customer goodwill and adverse publicity, Citigroup

developed a new strategy aimed at preventing further incidents and damage to

reputation and business. The strategy was designed to change the culture and

attitudes of employees, based on programmes of training and changes in systems of

performance reviews and rewards.

The new strategy emerged out of events, and was not a part of a regular strategic

planning process. It was therefore an emergent strategy. It was also an incremental

strategy because, in the words of the chief executive of the company, it did not call

for a ‘sea change’ in culture.

3.2 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:

 as design

 as experience

 as ideas.

3.3 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.

 Strategy development is a formal and deliberate process.

 Thinking about strategy, and making strategic choices as an outcome from this

thinking process, precedes the implementation of strategy.

Chapter 1: The purpose of strategic and business analysis

 Strategies are logical and clear.

 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.

This approach to strategy development is based on several assumptions and beliefs.

 The quality of strategic decision-making is improved by carefully-planned and

systematic thinking, when the business environment is complex and the future is

uncertain.

 Strategic development needs formal planning and control.

 The quality of strategic planning is improved by analytical tools and techniques,

and business modelling.

‘Strategy as design’ is similar to deliberate strategy.

3.4 Strategy as experience

When strategic development is seen as the result of experience, future strategies:

 are developed by adapting and changing current strategies, and

 will be fairly small changes from current strategy.

Strategic thinking and strategic choices are strongly influenced by:

 the culture of the entity and the attitudes and beliefs of the people who work in

it and

 history.

The ‘old ways’ have worked in the past, and there is no need to make significant

changes to something that has proved itself successful.

The characteristics of seeing strategy development as a design process are as

follows.

 the strategic direction of the entity will be strongly influenced by bargaining and

negotiation between managers: strategic development is often the outcome of

compromises

 strategies will develop incrementally.

‘Strategy as experience’ is similar to incremental strategy. The weakness with this

form of strategic development, as indicated earlier, is strategic drift.

Strategic drift

Many entities go through periods of relative continuity, when their strategies are

largely unchanged or change incrementally. This situation can go on for a long time

– many years.

There is a risk of strategic drift in this type of situation, when strategies are

increasingly inappropriate for dealing with the strategic position of the entity. There

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are no changes or only minor changes in strategy, when changes in the business

environment, even though they are not dramatic, mean that different strategies

would now be more suitable. Gradually, the performance of the entity deteriorates.

3.5 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. Incremental strategic development is also inappropriate for encouraging

innovation.

If important new strategic ideas do not come from formal planning or an

incremental approach, where do they come from?

Johnson and Scholes suggested that innovation is likely to come from the third

perspective on strategy; strategy as ideas.

The characteristics of seeing strategy development as a design process are as

follows.

 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.

 Innovation happens as a result of variety and diversity. A changing and diverse

environment encourages major innovation.

 Within an entity that encourages new ideas and innovative thinking, many

different ideas compete for the support of management.

 Innovative thinking is unlikely to happen within an organisation with a

traditional hierarchical management structure and formal lines of authority and

responsibility.

This approach to strategy development is based on several assumptions and beliefs.

 Management must create suitable conditions for the encouragement and

development of innovative ideas. There should not be too much management

control; neither should there be too little control.

 Top managers are not the creators of new ideas and new strategies. Their role is

to create a working environment where innovation is encouraged and to give

support and guidance to their staff.

 When strategies are developed from ideas in this way, the entity has to recognise

that new ideas will not be perfect. A part of the strategic development process is

to make improvements to the weaknesses that are found in new strategies.

‘Strategy as ideas’ is similar to emergent strategy.

3.6 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

ACCA P3 Business Analysis - 2010 - Study text - Emile Woolf Publishing

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