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The following is based on a great explanation found here.

The Illustrations come from the Strategic Planning Toolbox I published in an earlier blog.

An important part of business strategy is concerned with ensuring that resources and competencies are understood and evaluated – a process that is often known as a “Strategic Audit”.

Outline of the Strategic Audit in a Business

The process of conducting a strategic audit is as follows:

(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.

Illustration of a Resource Audit

(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.

The Value Chain in a Business

Steps in a Value Chain Analysis.

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 analysing core competencies is recognising 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 to undertake them. So the goal is for management to focus attention on competencies that really affect competitive advantage.

Prahalad and Hamel suggest three factors to help identify core competencies in any business:

(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 BCG Matrix is used to Assess existing and development products in terms of their market potential, and assist in developing strategic action for products and services in each category.

  • The McKinsey/General Electric Growth Share MatrixThe McKinsey/GE Matrix overcomes a number of the disadvantages of the BCG Matrix. —Firstly, market attractiveness replaces market growth as the dimension of industry attractiveness, and includes a broader range of factors other than just the market growth rate. —Secondly, competitive strength replaces market share as the dimension by which the competitive position of each SBU is assessed.

(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.

More traditional SWOT diagram.

A more strategic view of the SWOT Process

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