Strategy: the Strategic Audit

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 in place. 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 summarized 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. (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); and (2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities. Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("outsourced"). (3) Core Competence Analysis: Core competencies are those capabilities that are critical to a business achieving competitive advantage. The starting point for analyzing core competencies is recognizing that competition between businesses is as much a race for competence mastery as it is for market position and market power. Senior management cannot focus on all activities of a business and the competencies required undertaking them. So the goal is for management to focus attention on competencies that really affect competitive advantage. (4) Performance Analysis 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 analysis" (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: - The Boston Consulting Group Portfolio Matrix (the "Boston Box"); - The McKinsey/General Electric Growth Share Matrix (6) SWOT 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.

Strategy: Resources of a business

Business resources can usefully be grouped under several categories: Financial Resources Financial resources concern the ability of the business to "finance" its chosen strategy. For example, a strategy that requires significant investment in new products, distribution channels, production capacity and working capital will place great strain on the business finances. Such a strategy needs to be very carefully managed from a finance point-ofview. An audit of financial resources would include assessment of the following factors: - Cash balances Existing finance funds - Bank overdraft - Bank and other loans - Shareholders' capital - Working capital (e.g. stocks, debtors) already invested in the business - Creditors (suppliers, government) Ability to raise - Strength and reputation of the management team and the overall business new funds - Strength of relationships with existing investors and lenders - Attractiveness of the market in which the business operates (i.e. is it a market that is attracting investment generally?) - Listing on a quoted Stock Exchange? If not, is this a realistic possibility? Human Resources The heart of the issue with Human Resources is the skills-base of the business. What skills does the business already possess? Are they sufficient to meet the needs of the chosen strategy? Could the skills-base be flexed / stretched to meet the new requirements? An audit of human resources would include assessment of the following factors: Existing staffing resources - Numbers of staff by function, location, grade, experience, qualification, remuneration - Existing rate of staff loss ("natural wastage") - Overall standard of training and specific training standards in key roles - Assessment of key "intangibles" - e.g. morale, business culture

Changes required resources

- What changes to the organization of the business are included in the to strategy (e.g. change of location, new locations, new products)? - What incremental human resources are required? - How should they be sourced? (Alternatives include employment, outsourcing, joint ventures etc.)

Physical Resources The category of physical resources covers wide range of operational resources concerned with the physical capability to deliver a strategy. These include: Production facilities - Location of existing production facilities; capacity; investment and maintenance requirements - Current production processes - quality; method & organization - Extent to which production requirements of the strategy can be delivered by existing facilities - Marketing management process - Distribution channels - IT systems - Integration with customers and suppliers Intangible Resources It is easy to ignore the intangible resources of a business when assessing how to deliver a strategy - but they can be crucial. Intangibles include: Goodwill The difference between the value of the tangible assets of the business and the actual value of the business (what someone would be prepared to pay for it) Does the business have a track record of delivering on its strategic objectives? If so, this could help gather the necessary support from employees and suppliers Strong brands are often the key factor in whether a growth strategy is a success or failure Key commercial rights protected by patents and trademarks may be an important factor in the strategy.

Marketing facilities Information technology

Reputation

Brands Intellectual Property

Strategy: 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); and (2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities. Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("out sourced"). Linking Value Chain Analysis to Competitive Advantage What activities a business undertakes is directly linked to achieving competitive advantage. For example, a business which wishes to outperform its competitors through differentiating itself through higher quality will have to perform its value chain activities better than the opposition. By contrast, a strategy based on seeking cost leadership will require a reduction in the costs associated with the value chain activities, or a reduction in the total amount of resources used. Primary Activities Primary value chain activities include: Primary Activity Inbound logistics Operations Description

All those activities concerned with receiving and storing externally sourced materials The manufacture of products and services - the way in which resource inputs (e.g. materials) are converted to outputs (e.g. products) All those activities associated with getting finished goods and services to Outbound buyers logistics Marketing and Essentially an information activity - informing buyers and consumers about products and services (benefits, use, price etc.) sales All those activities associated with maintaining product performance after Service the product has been sold

Support Activities Support activities include: Secondary Activity Procurement Description This concerns how resources are acquired for a business (e.g. sourcing and negotiating with materials suppliers) Those activities concerned with recruiting, developing, motivating and rewarding the workforce of a business

Human Resource Management Activities concerned with managing information processing and the Technology Development development and protection of "knowledge" in a business Infrastructure Concerned with a wide range of support systems and functions such as finance, planning, quality control and general senior management

Steps in Value Chain Analysis Value chain analysis can be broken down into a three sequential steps: (1) Break down a market/organization into its key activities under each of the major headings in the model; (2) Assess the potential for adding value via cost advantage or differentiation, or identify current activities where a business appears to be at a competitive disadvantage; (3) Determine strategies built around focusing on activities where competitive advantage can be sustained

Core Competences
Core competencies are those capabilities that are critical to a business achieving competitive advantage. The starting point for analyzing core competencies is recognizing that competition between businesses is as much a race for competence mastery as it is for market position and market power. Senior management cannot focus on all activities of a business and the competencies required undertaking them. So the goal is for management to focus attention on competencies that really affect competitive advantage. Core Competencies are not seen as being fixed. Core Competencies should change in response to changes in the company's environment. They are flexible and evolve over time. As a business evolves and adapts to new circumstances and opportunities, so its Core Competencies will have to adapt and change.