ACCA P3 Business Analysis - 2010 - Study text - Emile Woolf Publishing
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Chapter 1: The purpose of strategic and business analysis
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any one lens might be appropriate in a particular situation. Management should
therefore be prepared to use all three lenses.
Looking at strategy through just one lens can be risky, because aspects of strategy
that are seen and understood using one lens might not be seen if the other lenses are
used.
3.7 Mintzberg: 5Ps for strategy
Mintzberg has provided a multiple definition of ‘strategy’, which also provides a
useful analysis of how strategy develops. He suggested that the term ‘strategy’ is
used in different ways and that there are five differing definitions. These are his
‘5Ps’ for strategy. Strategy can be used to mean any of the following:
plan
ploy
pattern
position
perspective.
Strategy as a plan. In this definition, strategy is an intended course of action or an
intended strategic direction for the entity direction to take. A strategy is made in
advance of its implementation and it is consciously developed and implemented. In
this meaning, strategy means ‘deliberate strategy’. In practice, however, the term
‘strategy’ is also used in other ways, and not as a conscious and intended plan.
Strategy as a ploy. In a second meaning, a strategy is a manoeuvre that is taken to
get the better of a competitor, by taking advantage of an opportunity that arises. It is
unplanned and opportunistic. For example, if a competitor raised the prices of its
products, a counter-strategy might be to announce a temporary price cut. This
might be a temporary ploy to create a distinction in the mind of competitors
between the rival’s price-raising and the company’s own concern for customer
interests.
Strategy as a pattern. Mintzberg suggested that it is not sufficient to define
strategies as plans or ploys. Strategy must also be considered in terms of strategic
outcomes. Strategies might be planned and opportunities taken, but the result might
not be what was planned. The outcome of strategic development is a combination of
deliberate strategies and emergent strategies. It might be possible to look back at
what has happened, and describe a company’s strategy in terms of a pattern that
has emerged.
Strategy as position. This definition of strategy refers to locating or positioning an
entity in its environment, and deciding the position within its environment (e.g. the
position within its markets) that the entity should be. For example, an airline
company might have a low-cost ‘no frills’ strategy for providing air travel. It would
be positioning itself in the low-cost end of the market for air travel.
Strategy as perspective. Mintzberg also suggested that strategy can be defined in
terms of the corporate personality and culture of the entity and its members (e.g.
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management and employees). Strategy is a collective way of looking at an entity
that is shared by all its members. For example, the teaching staff in a private school
might share the view that the strategy of the school should be to offer a broad-
ranging and high-quality academic education to pupils and to be one of the top
schools in the country for examination results.
3.8 Strategic planning frameworks
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:
sees the purpose of strategy as the achievement of clearly-established objectives
considers strategic planning to be a formal process, led by senior management
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 though each of these elements in the following sequence.
Comment
Mission
The entity exists for a purpose, which may be
expressed formally in a mission statement.
Objectives
The entity should also have clear objectives, such as
the maximisation 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.
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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.
Identifying objectives and setting targets: Where do we want to be?
Establishing the current position. Where are we now?
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.
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Filling the gap requires:
an analysis of environmental threats and opportunities, and the internal
strengths and weaknesses of the entity
identifying the competitive advantage that the entity enjoys.
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 gap
identifying alternative strategies, evaluating them and selecting strategies to fill
the strategic gap
implementing the selected strategies.
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Paper P3
Business analysis
CHAPTER
2
Strategic position and
the business environment
Contents
1 Models for environmental analysis
2 PESTEL analysis
3 Porter’s diamond
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Models for environmental analysis
The nature of environmental analysis
The purpose of environmental analysis
Two models for environmental analysis
1 Models for environmental analysis
1.1 The nature of environmental analysis
A business entity cannot exist in isolation from its environment. It inter-relates with
its environment, and its survival and strategic success depend on how well it
responds to the threats and opportunities that the environment provides.
An entity’s environment is anything that is not a part of the entity itself. For a
business organisation, the environment includes customers, potential customers,
markets, competitors, suppliers, governments and potential sources of new
employees. It also includes the social, political and economic environment in which
the entity exists and operates.
The term ‘macro-environment’ is used to mean general factors in the business
environment of an entity, rather than specific customers, suppliers and competitors.
Environmental influences on an organisation vary with the size of the organisation,
and the industry and the countries in which it operates.
The importance of environmental factors for strategic management arises because:
organisations operate within their environment and interact with it
changes in the environment can be large and significant – and continually
happening
future changes can be very difficult to predict.
1.2 The purpose of environmental analysis
Environmental analysis is a part of the process of assessing strategic position. In
order to make strategic choices about the future, the management of an entity need
to understand:
the factors in the environment that have a significant effect on the entity and
what it does
the key drivers of change: these are the factors in the environment that will have
the greatest effect on the entity, and force the entity to change its strategies in
order to survive and succeed
the difference in impact that key drivers of change in the environment will have
on different industries or different markets, or how changes in the environment
might affect one particular entity more or less than other entities.
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It is also important to consider the future impact of factors in the environment. The
future impact might be different from the impact that they have had in the past.
Some factors might grow in significance; others might become less significant.
Environmental analysis is the process of:
studying the environment in which an entity operates
identifying significant factors in the environment, particularly those that will be
significant in the future.
The purpose of the analysis is to assess the environment, to analyse the position of
an entity in relation to its environment and to judge how the entity’s strategies
should be developed to take advantage of opportunities and the deal with any
potential threats. It is a first step towards formulating a business strategy.
1.3 Two models for environmental analysis
In your examination, you may be required to carry out an environmental analysis.
You might be required to use any ‘model’ of your choice. Alternatively you might
be asked specifically to use PESTEL analysis or Porter’s Diamond.
The PESTEL model is used to identify significant factors in the macro-
environment of an entity.
Porter’s Diamond model is used to analyse reasons why entities in particular
countries, or regions within a country, appear to have a significant competitive
advantage over similar entities in the same industry, but operating in other
countries or other regions.
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PESTEL analysis
The nature of PESTEL analysis
Social and cultural environment
Legal environment
Economic environment
Political environment
Technological environment
Ecological influences
Limitations of PESTEL analysis
PESTEL analysis examples
2 PESTEL analysis
2.1 The nature of PESTEL analysis
PESTEL analysis is a structured approach to analysing the external environment of
an entity. The influences (current influences and possible future influences) of the
environment on the entity are grouped into categories. For each category of
environmental influence, the main influences are identified.
There are six categories of environmental influence:
P – Political environment
E – Economic environment
S – Social and cultural environment
T – Technological environment
E – Ecological influences
L – Legal environment
The purpose of dividing environmental influences into categories is simply to make
it easier to organise the environmental analysis and ensure that some key influences
are not over-looked. It provides a useful framework for analysis.
You might also see reference to SLEPT analysis and PEST analysis. These are similar
to PESTEL analysis in concept, but use a smaller number of environmental
categories.
SLEPT analysis uses the same categories of environmental influence as PESTEL
analysis, without ‘Ecological influences’.
PEST analysis is the same as SLEPT analysis, but includes ‘Political influences’
and ‘Legal environment’ in the same category.
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2.2 Social and cultural environment
An entity is affected by social and cultural influences in the countries or regions in
which it operates, and by social customs and attitudes. Some influences are more
significant than others.
Factors in the social and cultural environment include the following:
The values, attitudes and beliefs of customers, employees and the general public.
Patterns of work and leisure, such as the length of the working week and
popular views about what to do during leisure time
The ethnic structure of society
The influence of religion and religious attitudes in society
The relative proportions of different age groups in society.
Example
In many countries of Western Europe, the average age of the population is rising. A
large number of individuals are reaching retirement age, and (as a proportion of the
total population) the number of people in work is declining.
This demographic change will have consequences for many companies in the
countries affected. It could be much more difficult in the future to attract and retain
employees. In addition, a large part of the population will be older and in
retirement from work. This could affect the demand for various goods and services,
such as holidays and health products.
Among people of retirement age, two distinct social groupings might emerge: those
who have retired because they have a sufficiently large pension, and those who
cannot afford to retire because their pension would be inadequate for a reasonable
living. An increase in the number of older people continuing to work past normal
retirement age will have an impact on human resources planning for employers.
Example
In some countries there has been a growth in the awareness of ‘healthy living’ and
‘healthy eating’. This has affected companies in industries such as health and leisure
(the demand for fitness clubs), clothing (the demand for sportswear and running
shoes) and food manufacture (the demand for organic food).
As a result, a large number of consumers have been prepared to pay more to obtain
goods and services that offer healthier living and healthier foods.
Companies might need to consider whether the trend towards healthy living will
continue, and if so, how they should respond to the continuing change in society.
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2.3 Legal environment
The legal environment consists of the laws and regulations affecting an entity, and
the possibility of major new laws or regulations in the future.
Laws and regulations vary between different countries, although international
regulation is accepted in certain areas of commercial activity, such as banking.
Strategic decisions by an entity might be affected by legal considerations. For
example:
an international company might locate some operations, for tax reasons, in a
country with a favourable tax system
decisions to relocate operations from one country to another could be affected by
the differences in employment law in the two countries, or by new employment
legislation
in many industries, companies are faced with environmental legislation or
health and safety legislation, affecting the ways in which they operate, as well as
the design of the products they make and sell.
2.4 Economic environment
The economic environment consists of the economic influences on an entity and the
effect of possible changes in economic factors on future business prospects. Factors
in the economic environment include:
the rate of growth in the economy
the rate of inflation
the level of interest rates, and whether interest rates may go up or fall
foreign exchange rates, and whether particular currencies are likely to get
weaker or stronger
unemployment levels and the availability of skilled or unskilled workers
government tax rates and government subsidies to industry
the existence or non-existence of free trade between countries, and whether trade
barriers may be removed
the existence of trading blocs of countries, such as the European Community.
Economic factors could affect a decision by a company about where to invest. Tax
incentives, the availability of skilled labour, a good transport infrastructure, a stable
currency and other factors can all influence strategic choices.
2.5 Political environment
The political environment consists of political factors that can have a strong
influence on business entities and other organisations.
Investment decisions by companies will be influenced by factors such as:
the stability of the political system in particular countries