Strategy analysis models

What, then, is strategy? The most basic and commonly known definition might be the sentence that identifies the strategy as “the direction and scope of an organisation over the long term, which achieves advantages in changing environment through its configuration of resources and competences with the aim of fulfilling the stakeholder expectations” [1]. Strategy is the result of the search performed by the organisation for the best fit with the business environment in order to build competences in the industry sector and achieve advantages over other organisations competing in the market.

During strategic planning process it is important to have wide view on business environment, organisation’s business model and culture. Long term planning performed to exploit opportunities and avoid threats, which may emerge as unpredictable events, required understanding how local rules and people influence organisation effectiveness. Having different complementary perspectives on strategy, how it could be understood, developed and implemented in an organisation may help the organisation to choose best strategic options to achieve required goals.


Strategy perspectives

Richard Whittington in his book entitled “What is strategy – and does it matter?” presents four generic approaches to strategy formulation, development and implementation in organisation. These perspectives on strategy are [2]:

  • The Classical approach – the oldest and still most influential view on strategy relying on rational and careful planning to maximise organisation profit. Classicists theorist assumes that business environment and organisation behaviour are predictable, planning are essential to predict future market changes and to prepare strategic plan to adopt to the changes. Rational analysis and objective decisions allows achieving long-run successes and avoid failures.
  • The Evolutionary approach – more fatalistic approach, seeing the business environment as a jungle in which the main aim of an organisation is to survive by being efficient. Business processes and competition between organisations are compared to the biological evolution processes. Rational long-term planning is irrelevant due to unpredictable business environment. Only these organisations which are capable of fitting efficiently to the environment changes may have a chance to maximise theirs profit.
  • The Processual approach – seeing the rational long-term planning as a futile processes, due to unforeseeable behaviour of people and unpredictable business environment. Strategy emerges as a result of pragmatic processes of forecasting and learning. The optimal strategy is not known.
  • The Systemic approach – believing that rational planning is useful, however it is embedded in social system. This strategy perceptive believes that people and theirs behaviour are foreseeable and can prepare the rational plan of action. However, the strategy objectives and practices are depended on the social system in which the strategy is carried out.
The above generic perspectives of strategy differ fundamentally according to:
  • the outcomes of strategy,
  • the processes by which the strategy is made.

To illustrate them graphically, these two fundamental differences between four strategy perspectives may be depicted by intersection of two axes (see Fig 1). The vertical axis measures the degree to which the strategy is profit maximisation oriented or allows other more pluralistic strategy goals. The horizontal axis considers how formal is the processes of strategy formulation and development. That is how much the strategy is a result of deliberate planning or whether it emerges accidentally to fall behind with business environment changes.

 

Fig. 1.Strategy perspectives

Source: R. Whittington: What is strategy – and does it matter?, Thomson Learning, London, 2001, p. 9

The Classical and Evolutionary approaches believe that profit maximisation is the natural outcome of the strategy making. The strategy perspectives represented by Systemic and Processual theorists are more pluralistic. They see other possible outcomes of the strategy process. They believe that profit is not as much important, as there are other possible outcomes. These two pairs are completely different according to processes. The Evolutionary and Processual approaches see strategy as emerging from the situations that arise. To be efficient the organisation should fit to the present business environment, exploit opportunities and harness strengths to avoid threats. From Classical and Systemic perspectives strategy is seen as a rational and deliberate process of careful long term planning. However, systemic theorists believe that strategy is strongly embedded in particular social system, and the organisation objectives may be seen trough the objectives of the locally dominant group of peoples.

Other but similar concept of strategy perspectives is presented by Johnson and others in the book “Exploring Corporate Strategy”. They define three “strategy lenses” through which an organisation’s strategy may be viewed [1] (see Fig. 2).

  • Strategy as design – understood as a logical and deliberate process of planning through implementing analytic and evaluative techniques to design best strategic directions for an organisation development.
  • Strategy as experience – the strategy development is seen as a process based less on deliberate and rational analytical planning but rather on bargaining and negotiating within an organisation to adapt the strategies implemented in the past, taking into consideration the organisation’s experience and knowledge learned from what has gone before, as well as, its culture.
  • Strategy as ideas – the strategy is seen as emergent not from rational planning processes but from all an organisation’s efforts to cope with uncertain and fast changing business environment in which rational planning is unrealistic and irrelevant. As a result of diversity and uncertainty within and around the organisation new ideas emerge, and may be used to form the future strategy and (or) create innovations.
 

Fig. 2 Strategy lenses

Source: G. Johnson, K. Scholes, R. Whittingon: Exploring Corporate Strategy, FT Prentice Hall, Essex, 2006, p. 56

The strategy perspectives discussed above help viewing the strategy development process in a number of complementary ways. However, viewing the strategy through only one of perspectives discussed above may lead to failures in strategy design process due to partial and biased understanding of the issue. To obtain the full picture of the business environment and complete picture of the options of solutions which may be chosen by an organisation, viewing the issue from different perspectives is required by the managers developing strategy.


Strategy development process

 The strategy development process, in general, may be seen as all efforts undertaken by a company to establish vision and mission statement, identify strategic goals and objectives as well as to prepare strategic plan in order to achieve these goals. The strategic plan should provide the evaluation and assessment of both internal and external business environment, be aimed at future needs of an organisation and be consistent with fundamental organisational priorities.

Investigations of the relationship between productivity growth and corporate activities show that high productive companies use long-term strategic planning [3]. High performing organisations prepare strategic plans up to four or six yeas ahead.  Strategic planning is even more important for R&D organisations because of the future orientation of the enterprise.

Basic steps for preparing strategic plan for an R&D organisation may be listed as follows [3]:

  • Vision and mission statement adoption – including corporate philosophy and crucial strategic issues.
  • Trends scan – including information about future trends in the market or industry sector from business environment evaluation.
  • Opportunities and threats recognition – finding major opportunities and threats basing on the results from business environment evaluation.
  • Strengths and weaknesses identification – finding core competencies and emerging deficiencies.
  • Elements of successful strategy identification – identification of all organisational elements which are crucial for the organisation effectiveness
  • Goals and objectives approval – establishing specific goals which organisation would like to reach in the certain time horizon.
  • Specific actions – establishing specific actions which organisation should undertake to reach in the certain time horizon all approved goals.
  • Resource allocation – including resource allocation, monitoring and metrics for strategy implementation control.

Understanding organisation’s behaviour in dynamic business environment surrounding the organization is the key issue for coping with changes, defeating adversities and exploiting opportunities. The business environment surrounding the organisation may be seen as layers [1] (see Fig. 3). The changes occurred in the business environment may emerge only in one or in all layers and may have different impact on the organization’s behaviour and strategic decisions. 


Fig. 3. Layers of the business environment

Source: Adapted from G. Johnson., K. Scholes, R. Whittingon: Exploring corporate strategy, FT Prentice Hall, Essex, 2006, p. 64

There are many methods that may be used to identify factors influencing organization at present and in the future, and to analyse organization current situation, as well as, generating strategic alternatives. In the macro-environment layer the PESTEL framework is commonly used to identify “key drivers of the change” [1]. The Porter’s Five Forces is applied in industry (or sector) layer to help finding sources of competition and understanding their changes. Both methods are useful for identifying potential opportunities and threats facing the organisation. The key issues from the business environment analysis can be used in SWOT analysis, which evaluates environmental influences (opportunities and threats) in relation to organization strategic capability (strengths and weaknesses). These three frameworks are discussed in more detail in the next three sections.

The strategy development process may be illustrated by the graph shown in the Fig. 4. The results derived from the three strategy analysis frameworks are used for strategic options generation. Then, the options are tested and evaluated under criteria of suitability (does the strategy address the identified key issues), acceptability (are the expected outcomes acceptable for stakeholders) and feasibility (can the strategy be made to work in practice due to resource limitations). During tests, different scenarios are used to simulate forces of change influencing an organisation.

 

Fig. 4. Strategy development process

Source: P.Whittaker: General and strategy management, Workshop development book, GFKM MBA16, Gdańsk, 1st - 2nd  December 2006


Business environment analysis

The PESTEL model is the tool for analyzing how external environment can influence organization’s performance and effectiveness in the future. The influencing factors are categorized as political, economical, social, technological, environmental and legal [1]. These factors are not independent. In the PESTEL analysis each factor should be considered in connection to the others. However, if one or more factors are identified as not influencing on particular organization then can be removed from the PESTEL checklist. Then the analysis is limited only to the relevant factors.

Some of the main issues which can be considered in PESTEL analysis framework are shown in Fig 5.

Fig. 5. The PESTEL analysis framework

Source: Adapted from G. Johnson., K. Scholes, R. Whittingon: Exploring corporate strategy, FT Prentice Hall, Essex, 2006, p. 68. 

The PESTEL analysis is quite straightforward and easy to understand. It helps to recognize the current and the future business environment. It provides hints on how the industry may need to change to take advantages of potential opportunities and to defeat or minimize threats to grow in the future. However, sometimes it may be difficult to forecast future environment and trends with an acceptable accuracy. This is because at times it is hard to capture valuable and reliable data to describe external factors well.


Industrial sector analysis tool

In 1980 M.E. Porter defined five forces, which influence an organizations’ behaviour in competitive business environment [1]. The five forces framework is presented in Fig. 6.

 

Fig. 6. The five forces framework

Source: Adapted from G. Johnson., K. Scholes, R. Whittingon: Exploring corporate strategy, FT Prentice Hall, Essex, 2006, p. 80. 

The competitive rivalry force, placed at the centre of the graph, represents the rivalry among firms offering similar products or services for the same customer group. Remaining four forces impact on competitive rivalry. The threat of entry treats barriers which should be overcome by new competitors to achieve success. At the opposite side of the graph the threat of substitutes is placed. It represents new products or services to which customers can switch as satisfying alternatives. The last two forces are the buyer power and its mirror image the supplier power. They influence organisations’ strategic freedom and industry profitability [1]. The five forces are not independent. They interact with each other. Changes in one of the forces direction can trigger off changes in another one.

Five forces model assumes classic market with simple market structure where industries development is stable and predictable. For complex industries with multiple relations within the sector analysis of all five forces could be difficult.

The model dos not take into consideration possibilities of strategic alliances between organisations. It is based on the assumption that organisation tries to achieve competitive advantages over other organisations in the same industry sector, as well as, over their customers and suppliers. It is focused on threats rather then on opportunities that may affect organisation. However, the model provides meaningful advices and input data for further analysis using other modelling frameworks for support strategic decision making process.


Evaluation of organisation

The SWOT analysis is a common method for generating strategic alternatives from an organization’s current situation analysis. It is used for evaluation of organization’s internal factors as strengths and weakness in relation to external environmental factors classified as opportunities and threats [4].

The strengths are positive attributes of an organisation, which can be used to exploit opportunities. The organisation’s advantages should be used also to overcome threats. Negative aspects of an organisation that limit its effectiveness are described by weaknesses. The organisation should make an effort to minimize negative effects of their weaknesses which can appear due to external threats or lost opportunities. The threats and opportunities are the external conditions, which arise from the changes of organisation’s business environment. The organisation should be responsive to the external environment changes and built its strategy according to the business condition (according to opportunities and threats).

The SWOT analysis is relatively simple and useful tool for evaluation of organisation position in the business environment. It helps to create the TOWS matrix [1] (Fig. 7) which juxtaposes the specific organisation’s internal factors with external environment factors. The TOWS matrix is useful for generating strategic options.

 

Fig. 7. The TOWS matrix

Source: Adapted from G. Johnson., K. Scholes, R. Whittingon: Exploring corporate strategy, FT Prentice Hall, Essex, 2006, p. 346

However, the SWOT analysis is sensitive to mistakes in identification of internal and external factors which is subjective. What one manager classifies as strengths the other one may classify as weaknesses. Likewise, opportunities and threats can be interpreted differently. These uncertainties may lead to oversimplified analysis and misleading results.


Super-system map

A business processes may be defined [5] as the collection of activities across time and place, having beginning and end, designed to transform clearly defined inputs into a specific output for a particular customer or market. Rummler and Brache presented [6] a comprehensive and systematic approach for organising companies around processes, managing, measuring and redefining processes. They describe a business as a processing system, which transforms customer needs into valued products or services via a value chain of core processes and producing value for both: its customers and investors. The business is shown here as an adaptive system, which must accommodate all changes in customer and capital marketplace, competition, resources and supply chain, and among others, in economy, society and government policy. The survival and success of the business depends on how fast and how effectively it can adapt to the changes in external environment. It must “Adapt or Die” [6].

The system view of an organisation is the starting point for designing and managing the organisation. The Super-System Map is proposed to show the organisation as an adaptive processing system (see Fig. 8). In general, the Super System Map aims at preparing a view of two aspects of a business [7]:

  • the external influences existing outside of the business, which are not controlled by the business but  affect its activities,
  • the business model explaining how it interacts with the market, provides values to the market and makes money.

Fig. 8. The Super-System Map of an enterprise

Source: Adapted from G.A. Rummler, A.P. Brache: Podnoszenie efektywności organizacji, Polskie Wydawnictwo Ekonomiczne, Warszawa 2006, p. 30

This organisation diagram represents the picture of a company’s business model and focuses on its key external influences, how an organisation’s structure and processes deliver value to the market, and how the company may differ from the competitors. The diagram helps to visualise and realise how the organisation interacts with its markets, customers, shareholders, resources, competitors and environmental influences. The Super-System Map may be used to develop enterprise architecture, to formulate an organisation’s strategy and to improve key company’s processes to help increase an organisation’s efficiency.

The first stage of developing a Super-System Map is to evaluate the external business environment in which the organisation exists and which must be monitored by the organisation for all sources of threats and opportunities. To identify the potential changes in the organisation environment the PESTEL and Five Forces strategy analysis framework may be used. Having identified the major external influences and their trends, it is important now to look across these influences in order to identify so called key drivers of change (KDC) [1], which are forces likely to affect the strategic position of the firm in the near future. When analysing the impact of different influences shaping KDC, each influence should be evaluated with respect to the perceived impact on the strategic position of the organisation. 

Using the results from the analysis of KDC, so called critical business issues (CBI) may be identified, which are the problems or opportunities critical to the overall success of the organisation [8]. In order to identify CBIs the following areas were examined: the actual or potential gaps between the company’s business performance and its customers’ future expectations, its competitor’s performance and its opportunities to make improvements or implement changes in the business.

Having indicated CBIs it is possible to identify processes within organization directly influencing CBIs, which includes processes already existing in the company and those, ought to be initiated.  CBIs connected with the company are linked to the Critical Process Issues (gaps between desired and present results regarding a key processes outputs), which are related next to the Critical Job Issues (gaps between desired and present results regarding a jobs outputs).

The internal view on the organization’s processes, value chain and job outputs, by which it designs, produces, sells and delivers its products or services and deliver value to the customers, helps depicting the company’s organizational design including business units or divisions. This knowledge about CBIs and organization’s inside can be used to revise existing processes through careful analysis of their value chains and jobs outputs, to make improvements or design the new processes and link them to the particular jobs.

(TR, 2007)

References


[1] G. Johnson., K. Scholes, R. Whittingon: Exploring corporate strategy, FT Prentice Hall, Essex, 2006

[2] R. Whittington: What is strategy – and does it matter?, Thomson Learning, London, 2001

[3] J. Triandis: Management of research and development organizations, John Wiley & Sons, New York, 1997

[4] L.J. Mullins: Essentials of organisational behaviour, FT Prentice Hall, Essex, 2006

[5] http://www.sparxsystems.com.au/downloads/whitepapers/The_Business_Process_Model.pdf [2007-04-18]

[6] G.A. Rummler, A.P. Brache,: Podnoszenie efektywności organizacji, Polskie Wydawnictwo Ekonomiczne, Warszawa, 2006

[7] A.J. Ramias: Where it begins: the super-system view, Performance Design Lab., http://www.bpminstitute.org /articles/article/article/where-it-begins-the-super-system-view.html [2007-04-18]

[8] G.A. Rummler, Want results? Link your projects to a CBI!, htpp://www.performancedesignlab.com [28.04.2007]