Following on from our previous post - Setting the Organisation’s Strategic Direction - once the Board has determined the overall strategic direction for the company, the Strategic Planning Team is able to define the strategic objectives.

Based on experience, we strongly recommend that these be limited to a maximum of six (6) objectives, and that the set of objectives defined is both mutually exclusive and collectively exhaustive.

The Team should carefully consider the intelligence and the strategic direction determined in forming a suite of objectives. It is also important to keep these at a high level as they form the link between the overall strategic direction and the strategies.

For example, following the steps we have outlined over the past few weeks, the strategic plan will now start to take shape and look somewhat similar to the following:

• Beneficiaries:
  • The Shareholders.
• Benefit Required:
  • Increase in the value of their shareholding over the long term (5 years plus), but without too much additional risk.
• Strategic Direction:
  • Protect and expand our core business in our local market while undertaking controlled expansion into new markets.
• Strategic Objectives:
  • Protect core business, maintaining 12% growth year on year.
  • Expand core business to deliver an additional 6m in gross revenue by the end of Year Five.
  • Improve operational efficiency and reduce administrative costs to 30% of turnover by Year Three.

As illustrated above, the strategic objectives identified are essentially an interpretation of the strategic direction incorporating specific targets (metrics and time). This begins a common theme whereby, as we cascade down from the overall strategic direction to tactical plans, at each new level the component of the plan becomes more specific and ultimately more measurable.

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Ultimately, it is the role of the Board to set strategic direction. With careful consideration of the benefit required by the beneficiaries of the organisation (discussed here), the Board must review the intelligence gathered and decide the overall strategic direction for the organisation.

It is worth noting here that the emphasis is on succinct identification. A good strategic direction might be, for example, ’Protect and expand our core business in our local market while undertaking controlled expansion into new markets’.

For the purposes of illustration, let us say that the beneficiaries are the company shareholders and their desired benefit is an increase in the value of their shareholding over the long term (5 years plus) but without too much additional risk.

Accordingly the Board decides that protecting and growing its core business in addition to investing shareholder funds in controlled expansion will meet the needs of the beneficiaries.

With the strategic direction now set, the Strategic Planning Team is now able to really start thinking about strategy because it has a clear understanding of what is required.

It is worth noting that it is often difficult to reach consensus on the strategic direction however, and this is yet another area where the services of a skilled facilitator can add real value. Also, there is nothing stopping the Strategic Planning Team from considering the direction and making a recommendation to the Board, however it should be clearly understood that the Board MUST approve the direction before the Strategic Planning Team progresses any further.

Setting your Organisation’s Strategic Direction is covered in depth as part of our Planning, Implementing and Managing an Effective Strategy programme.

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This free webinar, scheduled to run during March and April 2013, shows participants how to correctly conduct a simple SWOT analysis, and then how to supercharge the SWOT analysis by using some of the more complex tools of strategic intelligence gathering including Porter’s Five Forces, PESTEL analysis and so on.

A MUST for anyone who wants to understand how to do a SWOT analysis effectively, Ironclad Strategy’s free webinar Simple to Supercharged SWOT Analysis is scheduled to run on the following dates and times:

21 March 2013 – 12.30pm to 1pm GMT

28 March 2013 - 12.30pm to 1pm GMT

4 April 2013 - 12.30pm to 1pm GMT

11 April 2013 - 12.30pm to 1pm GMT

18 April 2013 - 12.30pm to 1pm GMT

Please click here to register your interest in attending this free webinar.

More in-depth training in conducting an effective SWOT analysis is included in our Tools and Techniques of Strategic Analysis course.

Ironclad Strategy runs free webinars on topics relating to strategy.

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Organisational capability (or competence) is a firm’s capacity to deploy resources for a desired end result - our interest as strategists is that these organisational capabilities can provide a basis for competitive advantage. A firm’s core capabilities have been described as those that:

• make a disproportionate contribution to ultimate customer value, or to the efficiency with which that value is delivered, and
• provide a basis for entering new markets.

In order to identify a company’s core competencies, it is helpful to first consider the full range of organisational capabilities by using both a functional analysis and a value chain analysis to classify and disaggregate its activities.

A functional analysis identifies capabilities in relation to the functional areas of the firm, for example:

• Corporate functions
  • Financial control
  • Management development
  • Strategic innovation
• Management information
  • Management information systems linked to decision-making
• Research and development
  • Research
  • Product development
• Operations
  • Continuous improvements
  • Flexibility and speed of response
• Marketing
  • Brand management
  • Responsiveness to market trends
• Sales and distribution
  • Speed of distribution
  • Customer service

A value chain analysis separates the activities of a company into a sequential chain, perhaps distinguished (as suggested by leading strategy author Michael E. Porter) into primary activities (those involved with the transformation of inputs and interface with the customer, for example inbound logistics, operations, outbound logistics, marketing and sales, service) and support activities (such as infrastructure, HR management, technology development, procurement etc.)

As discussed in our post of analysing resources, drawing up an inventory of a company’s resources is fairly straightforward. Capabilities pose greater problems – they are much more elusive. Apple’s distinctive competency is in the design of aesthetically-pleasing products with a superior user interface, but where within Apple is this capability located?

To understand capabilities it is important to note that they require the efforts of various individuals to be integrated with each other and with other resources such as equipment, technology and so on. This often occurs through a sequence of coordinated actions referred to as an organisational process, and can be mapped using a flowchart.

A key feature of most processes is that they are routine – and becoming routine is an essential step in translating operating practices etc. into capabilities. Only by becoming routine do processes become efficient and reliable.

The post The Tools of Strategic Analysis – Analysing Organisational Capabilities appeared first on Ironclad Strategy.

Strategy, in its simplest form, involves the use of an organisation’s resources and capabilities to take advantage of opportunities that exist in the external environment. It is therefore important to understand what resources and capabilities exist, and how they may be leveraged.

Also, some strategists believe that it is more useful to base a company’s strategy around its resources and capabilities rather than around its external market. This is because they believe that, given the volatility caused by the competitive forces at play in any market, resources and capabilities provide a more secure, stable base for formulating strategy. This is known as the resource-based view of the firm.

An example often cited is that of Honda. Honda Motor Company is the world’s biggest motorcycle manufacturer and a leading supplier of automobiles, but it has never defined itself as either a motorcycle company or a motor vehicle company. Since its founding in 1948, its strategy has been built around its expertise in the development and manufacture of engines; this capability has successfully carried it from motorcycles to a wide range of gasoline-engined products.

It is important to distinguish between the resources and capabilities of the firm; resources are the assets owned by the firm; capabilities are what a firm can do. Individual resources do not give competitive advantage; they must work together to create organisational capability. It is capability that is the source of superior performance.

In order to identify a firm’s capabilities however, one must first identify its resources. In order to do this successfully, it is useful to view a company from a wide perspective by considering the three principal types of resource:

• Tangible resources – for example, financial resources and physical assets etc.
• Intangible resources – for example, brand names and intellectual property etc.
• Human resources – the expertise and effort offered by employees.

Once the resources have been identified, an organisation is then equipped to identify and classify its organisational capabilities.

Resource and capability analysis are covered in depth in our ‘Tools and Techniques of Strategy Analysis‘ and ‘Company and Industry Analysis for Investment Professionals‘ courses.

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This argument has now been supported by the team at Booz and Company in their recently published “How Leaders Mistake Execution for Strategy (and Why That Damages Both)” article.

Booz and Company argue that leaders often mistake execution for strategy

In this article, Booz and Company’s Ken Favaro (senior partner with Booz & Company based in New York and global head of the firm’s enterprise strategy practice) argues that, “When discussing strategy, executives often invoke some version of a vision, a mission, a purpose, a plan, or a set of goals. I call these ‘the corporate five’. Each is important in driving execution, no doubt, but none should be mistaken for a strategy. The corporate five may help bring your strategy to life, but they do not give you a strategy to begin with.

“Nevertheless, they are often mistaken for strategy—and when that happens, real damage can ensue. If the corporate five are the cart and strategy is the horse, leaders who put the cart first often end up with no horse at all.”

It’s an interesting article, and one well worth reading as it supports our view that a) it is vitally important to get the ‘Strategic Five’ right (as follows), and b) that the development of Missions, Visions and Values are not about strategy, they are about supporting implementation and execution.

Managers need to ensure that they are not confused because, as Ken says, real damage can ensue.

The Strategic Five

1. What business or businesses should you be in?
2. How do you add value to your businesses?
3. Who are the target customers for your businesses?
4. What are your value propositions to those target customers?
5. What capabilities are essential to adding value to your businesses and differentiating their value propositions?

We consider the importance of setting the right strategic objectives, and the distinction between planning and execution, in our Planning, Implementing and Managing an Effective Strategy course.

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Porter’s Five Forces is an analysis framework used to gain an understanding of the industry context within which a firm operates. It is used by strategists to determine the attractiveness of an industry sector by considering the 5 competitive forces proposed by Michael E. Porter.

This approach, when combined with PESTEL analysis, provides the analyst with a detailed perspective of the competitive market a firm operates, or wishes to operate, within. The analyst is then able to determine how attractive an industry sector may be, and to develop insightful strategies that will allow it to compete effectively.

How does this analysis work?

Porter’s 5 Forces identifies 5 key factors that determine the relative strength of competitive power within an industry. These forces are:

• Supplier power
• Buyer power
• Threat of substitution
• Threat of new entry
• Competitive rivalry

Supplier Power

Any production industry requires access of raw materials such manufacturing components, labour supply and so on. This creates a relationship between the buyer and the firm that provides the essential raw materials to manufacture the products (the supplier). If the supplier is a leader in its market, or perhaps supplies a unique product that is required by the buyer, they have a significant influence over the supply chain and can dictate to a certain extent how the production industry operates.

When assessing the competitive market, an organisation needs to understand how easy it may be for suppliers to push up prices – supplier power can be measured by the number of suppliers available for each core input the firm needs. The fewer the suppliers and the more dependent the firm is on those inputs, the more power the supplier has, and vice versa.

Buyer Power

This refers to the impact consumers have on the industry. In extreme cases, if consumer power is strong it can create an economic market known as a monopsony – a market where suppliers are many but there is only one buyer of the product. In such market conditions, the buyer will often set the price, though such cases are rare.

This means that a business needs to assess the ease with which buyers can drive prices down in the market – how many buyers are in the market, how important they are to the business and what is the cost of them switching from your product to buy products from a rival firm?

Threat of Substitution

A threat of substitution occurs where the product in demand is affected by the price change of a substitute product. In economic terms, the price elasticity of a product can be affected by substitutes – the demand for a particular product may become elastic if consumers perceive other new substitutes to be as good.

For an organisation, it is helpful to establish whether you have product power or not. If your clients can easily switch to a substitute product, or the substitute has a price decrease, then you are limited in terms of implementing price increases, and at significant risk from substitutes.

Threat of New Entry

If it costs little time or money for a rival company to enter your market, then your chances of monopolistic power are greatly reduced. This also applies if the firm has less control over the core technologies used and doesn’t enjoy economies of scale. An organisation can only exercise monopolistic power in a market if it can create legitimate barriers to entry in the market.

Beware of anti-competitive behaviour however. This is an area fraught with peril for the firm that gets on the wrong side of the competition watchdogs!

Competitive Rivalry

If the market contain several competitors offering similar products, achieving competitive advantage is necessary to maintain relevance in the market. The Concentration Ratio is a useful tool that is used to measure the number of competitors in a given industry – a high concentration ratio means the industry is crowded, while a low ratio indicates fewer competitors. A disciplined industry is one where rivalry is low and it is possible to create competitive advantage.

Firms can carry out a number of strategies to help establish competitive advantage, for example:

• Raise or lower prices to gain a partial advantage
• Product differentiation – improve product features, applying innovations in the manufacturing procedure
• Creating channels of distribution that are reliable
• Exploiting buyer-supplier relationships

Porter’s Five Forces Analysis is covered in detail during our Tools and Techniques of Strategy Analysis course.

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PESTEL analysis, often PEST or STEEP analysis (and sometimes PESTLE, PESTLIED, SLEPT or STEEPLE) is a simple but important tool for understanding the environment within which an organisation operates. By considering the following factors, strategic analysts can use PESTEL analysis to identify opportunities for and threats to the organisation from its environment, and can use this strategic intelligence to enhance the quality, and value, of the SWOT analysis.

Political

Political factors affecting an organisation are concerned with to what degree the government intervenes in the economy. Specifically, political factors can include areas such as tax policy, labour law, environmental law, trade restrictions, tariffs, and political stability. Political factors may also include goods and services which the government wants to provide or be provided (merit goods) and those that the government does not want to be provided (demerit goods). Furthermore, governments have great influence on the health, education, and infrastructure of a nation.

Economic

Economic factors can include economic growth, interest rates, exchange rates and the inflation rate. These factors have major impacts on how businesses operate and make decisions. For example, interest rates affect a firm’s cost of capital and therefore to what extent a business grows and expands. Exchange rates affect the costs of exporting goods and the supply and price of imported goods in an economy.

Sociological

Sociological factors can include cultural aspects, for example health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in social factors affect the demand for a company’s products and how that company operates. For example, an aging population may imply a smaller and less-willing workforce (thus increasing the cost of labour).

Technological

Technological factors can include technological aspects such as R&D activity, automation, technology incentives and the rate of technological change. They can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead to innovation.

Environmental

Environmental factors can include ecological and environmental aspects such as weather, climate, and climate change, which may especially affect industries such as tourism, farming, and insurance. Furthermore, growing awareness of the potential impacts of climate change is affecting how companies operate and the products they offer, both creating new markets and diminishing or destroying existing ones.

Legal

Legal factors can include discrimination law, consumer law, employment law, and health and safety law. These factors can affect how a company operates, its costs, and the demand for its products.

Organisations that use PESTEL analysis effectively can avoid committing resources to strategies that are bound to fail due to forces beyond the organisation’s control. They can strategise to reduce the impact of expected negative changes in the environment. And they can identify and take advantage of opportunities that may emerge due to such changes.

Other Versions

As mentioned earlier, there are a number of similar mnemonics, or variants, other than PESTEL analysis for environmental analysis, as follows. It doesn’t really matter which you choose to use.

• PESTEL / PESTLE: Political, Economic, Sociological, Technological, Legal, Environmental
• PESTLIED: Political, Economic, Social, Technological, Legal, International, Environmental, Demographic
• STEEPLE: Social/Demographic, Technological, Economic, Environmental, Political, Legal, Ethical
• SLEPT: Social, Legal, Economic, Political, Technological.

PESTEL analysis is explored in detail during our Tools and Techniques of Strategy Analysis course. Please follow the link for further information or contact us.

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SWOT analysis is the most commonly used tool of strategic analysis, but unfortunately also one of the most misunderstood and misapplied. In this article we will look at the use and value of SWOT analysis, consider some of the ways it is often misused by organisations, and suggest some best practice tips that will immediately improve the quality of your SWOT analysis.

SWOT analysis was originally developed by Albert S. Humphrey in the 1960s, and is a technique for considering both internal factors – Strengths and Weaknesses of the organisation – and external – Opportunities and Threats. When undertaking SWOT analysis, a team (or sometimes individual) will brainstorm the answers to the following questions, among others:

Strengths

• What advantages does your company have?
• What do you do better than anyone else?
• What unique or low-cost resources can you draw upon that others can’t?
• What do other people in your market (stakeholders) see as your strengths?
• Why do customers choose your products or services?

Weaknesses

• What could/should you improve?
• Where are you weaker than your competitors?
• What are other people in your market (stakeholders) likely to see as weaknesses?
• What causes you to lose sales?

Opportunities

• What opportunities exist for you to capitalise upon?
• What trends are happening in your industry/sector?
• What weaknesses do your competitors have? Do these provide an opportunity?

Threats

• What threats to your core business exist?
• What are your competitors doing, and how does this affect you?
• Are technological changes threatening your business?
• Could any of your weaknesses be an opportunity for any of your competitors?

Common Problems with SWOT Analysis

Because of its simplicity, SWOT analysis is the most commonly-used tool of strategic analysis. Unfortunately, however, the majority of organisations don’t fully understand its benefits and limitations, and this significantly reduces its value and, in many cases, poses a real and tangible risk to the business. In our experience, it is the third most common reason for the failure of a strategy to achieve its objectives (behind the failure to accurately identify the organisation’s key beneficiary, and a failure to implement the strategic plan effectively).

By far the most common issue with SWOT analysis is that teams brainstorm all of their perceived strengths, weaknesses, opportunities and threats, but make little effort to critically assess and confirm these. When reviewing a client’s strategy, we have often been presented with a SWOT analysis that is many pages long, and that includes all of the factors the organisation believes impact upon its strategic success – unfortunately this simply serves to confuse rather than to enlighten and empower.

We recommend that an organisation start their SWOT analysis by brainstorming all of their strengths, weaknesses, opportunities and threats. But, we recommend that they then must follow a process of critically assessing these with the objective of whittling them down to the top (up to) 6 most powerful or important factors under each category. This provides a focus on only the most critical internal and external factors that must be addressed.

This approach does however lead directly to the second-most common issue with SWOT analysis however. An inability on the part of the organisation to accurately identify its true and most significant strengths, weaknesses, opportunities and threats.

As an example, I have never failed to see ‘People’, ‘Our Staff’, or ‘Our Team’ immediately identified as one of top 6 most powerful strengths identified by an organisation during its SWOT analysis. But due to this very fact, it is generally an incorrect identification.

If every organisation has good people (they generally do by the way), how can this be a top strength of your organisation, and one that will provide you with a means by which to compete more effectively? Of course it is right to recognise the contribution of your staff to the success of your strategy, but unless they provide you with a real, tangible advantage that is not available to your competitors, this should not be one of your top 6 strengths. Sometimes, of course, it is right that ‘People’ appear as a Top 6 strength – if they have unique skills that enhance your organisation’s capability for example – but unless they give you a real, tangible advantage over your competitors, they should not be considered a key strength.

Regardless of these issues however, the biggest problem with a SWOT analysis is that it is generally believed ‘sufficient’ by most organisations. It is staggering how many organisations bring a team together for, perhaps, half a day (with little to no preparation) to brainstorm their strengths, weaknesses, opportunities and threats, and then proceed to develop a strategy and commit resources based upon the ‘insights’ that their ‘strategic analysis’ has given them.

A SWOT analysis is either a good starting point – a way to kick off discussions and debate – or a good way of representing the factors at play. But to be effective, and indeed accurate and defensible, it must be backed up with, or prepared for by, much more rigorous environmental and company analysis including Porter’s 5 Forces, PESTEL etc (which will be explored in a later article). And, it must be approached honestly. There is no value, and significant risk, in identifying incorrect strengths, weaknesses, opportunities and threats. Senior management teams should tread with extreme caution, and make sure they see the more detailed environmental and company analysis before committing resources, or to a strategy, based on a simple SWOT analysis.

How can a SWOT analysis be improved?

There are a number of ways in which a SWOT analysis can be improved.

Firstly, a SWOT analysis should follow extensive environmental and company analysis using such tools as Porter’s 5 Forces and PESTEL analysis, among many others. These techniques will be explored in more detail in a later article and through our free Strategy Masterclass Series.

Secondly, the strengths, weaknesses, opportunities and threats identified during initial brainstorming should be refined and challenged until only the (up to) 6 most powerful and important of them remain. This ensures a focus only on those things of significance and importance.

Thirdly, the SWOT analysis should be honest. There is little value in identifying factors because they are ‘popular’ or ‘uncontroversial’ .

Effective SWOT analysis, and strategic analysis in general, is covered in great detail during our Planning, Implementing and Managing an Effective Strategy, and The Tools and Techniques of Strategy Analysis courses.

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