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1.IntroductiontoStrategicAnalysis
i

Everyorganizationneedsastrategy.Beitanestablishedbusiness,anemergingentrepreneurial
venture, or a nonprofit organization, a strategy sets the direction of the enterprise, informs
prioritiesandtheallocationofscarceresources,andhelpsguidethemyriaddecisionsthatan
organizationmakeseveryday.

Butwhatexactlyisstrategy?KennethAndrewsprovidesthefollowingdefinition:

[S]trategyisthepatternofdecisionsinacompanythatdeterminesandrevealsits
objectives, purposes, or goals, produces the principal policies and plans for
achievingthosegoals,anddefinestherangeofbusinessthecompanyistopursue,
thekindofeconomicandhumanorganizationitisorintendstobe,andthenature
of the economic and noneconomic contribution it intends to make to its
shareholders,employees,customers,andcommunities.ii

Such a definition of strategy highlights its complex nature. Strategy encompasses several
different sets of considerations. An organizations strategic goals or objectives refer to the
organizations mission, its unique purpose and scope. The strategic plan, sometimes called
strategicintent,ishowtheorganizationtailorsitsofferingsanddevelopsandleveragesinternal
resources and capabilities to accomplish strategic goals. Strategic actions are those tangible
actionstakentooperationalizethestrategicplaninpursuitofthestrategicgoalsofthebusiness.

Together,thistriadofmission,intent,andactionsdefinesanorganizationsstrategy.Theyreveal
howanorganizationcreatesuniquevalueforitscustomersandotherstakeholders,andhowit
distinctivelypositionsitselfrelativetootherorganizationsinitsfield.

Understanding and assessing an organizations strategy is critically important to many

organizational constituents. One need not be the CEO, president, or a member of the top
managementteamtoengageinsuchanalysis.Consultants,investmentbankers,entrepreneurs,
andothersfrequentlymustassessthestrategyoffirms,whethertheyaretheirownbusinesses,
clients,orcompetitors.Managers,consultants,andanalystsarefrequentlyaskedtoidentifyand
assessthestrategyofabusinessoranorganization.Whetheritistoproperlyvalueabusinessor
acquisitiontarget,undertakeanewcorporateinitiative,orenteranewmarket,oneneedsan
understanding of an organizations strategy to formulate an informed and robust
recommendation.

Thepurposeofthisbookistoprovideanorganizedframeworkandasetoftoolstoaidthose
who wish to analyze the strategy of an organization, whether its their own or another
organizationtheyareinterestedin.Thisbookexplainsanumberofthebasictoolsnecessaryto
be an effective strategic analyst or strategist, an individual skilled in the art of assessing an
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organizationsstrategy.Strategicanalysisisapowerfultoolforanalyzingthecompetitivecontext
in which an organization operates. An effective strategist makes reasoned and reasonable
recommendations for how an organization should position itself relative to its peers and for
assessingwhatactionstheorganizationshouldtaketomaximizevaluecreationforitsvarious
stakeholders. While our bias is toward analysis of business organizations operating in market
environments(e.g.,corporations,smallandmediumsizebusinesses,entrepreneurialventures),
thetoolspresentedherecouldbeappliedtoorganizationsinthenonprofitandgovernmental
spheres(e.g.,schools,advocacygroups,communityorganizations,municipalgovernments).

TheStrategistsChallenge

Thestrategistschallengeistobalancetheintersectionbetweenthreecriticalfactors:values,
opportunities,andcapabilities(Figure11).

Figure11.Thestrategistschallenge.

Valuesrefertothemissionoftheorganization.Whatistheorganizationspurpose,its
reasonforexisting?Whatistheorganizationsscope;inwhatmarketsorarenasdoesthe
organization operate? What do the organizations various stakeholders expect of the
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organization?Whatdotheorganizationsleadersexpectoftheenterprise?Whatvalues
andbeliefsdoestheorganizationhold?Theanswerstothesequestionsarecriticalfor
understandingthestrategyofanorganizationandprovidethebaselineforanystrategic
analysis. Indeed, the most fundamental question a strategist must initially ask and
understandis:whataretheorganizationsvalues?Anunderstandingoffirmvaluesisthe
foundation that can give meaning and provide context to the strategic decisions an
organizationmakes.

Opportunities refer to the potential to create value for stakeholders. What does the
market demand? What needs may be identified? Who else in the market is satisfying
these needs? There are a variety of external forcescompetitive, economic, and
technologicalthatinfluenceanorganizationsopportunityset.Factorssuchastherapid
developmentofinformationandcommunicationtechnologies,theincreasedglobalreach
of businesses, the multinational distribution of labor pools and supply chains, and the
worldwide interest and influence of stakeholders of all types have all had a profound
impactontheopportunitiesfacingorganizations.Thestrategistrequiresclearthinking
abouttheeconomic,technological,andsocietalenvironmentinwhichtheorganization
operates as well as an acute consideration of the activities and capabilities of ones
competitors.

Capabilitiesrefertotheorganizationsexistingandpotentialstrengths.Toevaluatean
organizations strategy, one must have both a clear picture of what makes the
organizationdistinctiveandasenseoftheorganizationsabilitytomarshalresourcesand
leveragecapabilitiestowarddesiredorganizationalobjectives.Thisrequires,ofcourse,
clarityaboutorganizationalcapabilities:Whatcapabilitiesdowecurrentlypossess?Are
these capabilities unique and do they provide the basis for a competitive advantage?
Whatcapabilitiesdoweneedtopossessinthefuture?Howwillwedevelopthem?

Thechallengeforthestrategististobalancethesethreefactorsandidentifythespacewhere
they converge. It is at the intersection of values, opportunities, and capabilities that valuable
competitivepositionsthatcreateandsustainvalueforstakeholdersemerge.

Ultimately, strategic analysis is an integrative exercise. Whereas the functional areas of an

organizationfinance, marketing, accounting, operations, human resourcesoften bring
specificparadigmaticviewstobearonorganizationalproblemsandconsiderations,strategyis
abouthowalltheunderlyinginsightsofthesedisciplinesarebroughtbacktogether.Managers
donottypicallyencounterchallengesasisolated,atomisticproblemswithnarrowdisciplinary
implications;rather,theymustnavigateissuesencompassingawholerangeofcomplex,cross
disciplinaryconsiderations.

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Strategyisalsointegrativeinthesensethatitssuccessinvolvesvaluecreationforitsinvestors,
employees,customers,suppliers,andcommunities.Commonlyinvokedbusinessaxiomssuchas
maximizeshareholderreturnscanbeusefultotheextentthatsuchshorthandphrasesimply
value creation for investors by way of creating value for key stakeholderscreating goods
customers want, work environments that energize employee contributions, and so forth. But
shareholder profit maximization as an organizations formal objective provides little strategic
direction if it implies adherence to the nave notion that shareholder value is somehow
exogenous to creating value for customers or employees or communities. Strategy involves
putting these considerations together in an attempt to align stakeholder interests and create
valueinanintegrativeandsustainableway.

At the same time, tradeoffs must sometimes be made, and a strategist often faces difficult
choices. Tradeoffs between costs and quality and between various customer segments are
frequentlyconfrontedwhenconsideringstrategy.Themostdifficultstrategictradeoffsareoften
temporal, as between strategic longterm investments and shortterm performance. An
integrative,enterpriseperspectiveisnecessarytothinkclearlyandtoexercisesoundjudgment
abouthowtobestcreatelonglastingvalue.Individualanalyticalframeworksandtools,grounded
in both theory and practice, can help, although any device used to help analyze strategic
problemswillproveinsightfulinsomewaysbutbluntinothers.Thekeytostrategicanalysisisto
integratetheseframeworksandtoolstoformacomprehensiveunderstandingofthecompetitive
contextinwhichtheorganizationoperates.

TheArtofStrategicAnalysis

Strategic analysis can be a powerful tool when executed well. Effective analyses explore the
competitive situation, define key issues, recognize critical assumptions and tradeoffs, and
proposestrategicallysensiblerecommendations.Inanyanalysis,itisimportanttobeprepared
toarticulateyourmajorconclusionsandprovideevidenceandanalysisinsupportofthem.You
shouldbepreparedtonotonlypresentyourownanalysisandconclusionsbutalsotorespectively
challengeandextendtheviewpointsofothers.Thereisrarelyonewrongorrightanswertoa
strategic analysis, and yet, some answers are assuredly better than others. Thus, strategic
analysisrequiresthehoningofyourskillinlogicandargumentation,sothatyoucanadvance
your hypothesis or viewpoint and logically provide support through both qualitative and
quantitativeanalysis.

Eveninthemostambiguousscenarios,itisimportanttoexaminewhateverdataisavailableas
well as your key reasoning and assumptions that make some recommendations better than
others(seesidebar,GatheringStrategicIntelligence).Onceresearchisundertaken,oneofthe
challengesofstrategicanalysisistopullfromthediverseandoftenincompletedataavailableto
supportyourargumentsandconclusions.Strategicanalysesarefarmorefocused,productive,
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and persuasive when informed and supported by specific data and quantitative analysis.
Similarly, quantitative analysis, no matter how elegant, is far more reliable and robust when
critiquedwithinabroaderstrategiccontextthatinvolvesarangeofrelevantconsiderationsthat
aremoredifficulttoquantify.

Dataandquantitativeanalysesmaybeusedtofocusdiscussionbyidentifyingkeyissuesandto
back up arguments. Calculations should be conducted, therefore, in the context of specific
questionsorbeliefs.Forexample,decidingwhetherornottomakeaparticularacquisitionshould
be guided by such fundamental questions as, How will the combined enterprise be better
positioned to create value? and, How will we create that value? In turn, believing that an
acquisitionisveryimportantleadsustoask,Howmuchofaneffectwouldtheacquisitionhave
onthemarketvalueofthefirm?andperhaps,Howmuchwillmarketpricesfallifcompetitors
madetheacquisitioninstead?Ifthefocusofananalysisrevolvesaroundariskyinvestment,you
maywanttoquicklycalculatethenetpresentvalueoftheinvestmentanddoasensitivityanalysis
to identify a few key uncertainties for discussion. This might entail predicting the future
discounted cash flows that will result from a given strategic action. Alternatively, you might
calculate the breakeven for the investment or, recognizing that the risky investment can be
madeinstages,puttogetheradecisiontreethatshowsthepossibleoutcomesandvaluesateach
stage.

Ofcourse,anycalculationissimplyareorganizationofavailableinformation;assuch,calculations
arenotinsightfulontheirown.Butquantitativeanalysescansupportalargerstrategicanalysis
thatdoesshedlightonkeyissuesinaparticularsituation.Forinstance,asimpleratio(e.g.,return
onassets)maytransformsomerawnumbersaboutcompetitorsintoaclearpictureofwhich
firmsareoutperformingtheirrivalsandwhythosefirmsaredoingbetter.Alternatively,afew
calculationsmaytransformratiosandrawnumbers(e.g.,spendingperpersonandnumberof
consumersinthesegment)backintodatathatmaybemorerelevanttocertainkeydecisions
(e.g.,totalmarketsize).Becausesuchcalculationsareoftennecessarybutnotsufficientforgood
strategicanalysis,youshouldbepreparedtodiscussanyrelevantfinancialdata,butalsobeready
todiscusstherelevanceofthatdatatothekeystrategicissuesunderconsideration.

Attheendofthistoolkit,weprovidealistofcommonfinancialmeasuresandmathematicaltools
that may be useful when analyzing a firms strategy. The list is not intended to be a
comprehensive treatment of these tools; rather, it is intended to summarize, remind, and
encourageyoutoapplyyourexistingknowledgewhenconductingstrategyresearch.

AFrameworkforStrategicAnalysis

Attheveryleast,afullblownstrategicanalysisincludes(1)anidentificationoftheorganizations
current competitive positioning and an assessment of the strengths and weaknesses of that
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position,(2)aconsiderationoftheprosandconsofarelativelysmallsetofstrategicactionsto
helpimprovethatposition,and(3)theadvancementofasetofrecommendationsbasedonthis
analysis.Collectedinthistoolkitareanumberofcommonframeworksandtoolsthatareuseful
whenconductingsuchathreepartanalysis.Notethatnoneofthetoolspresentedissufficient,
inandofitself,forconductingastrategicanalysis.Thetoolsworktogethertopaintacomplete
pictureofthecompetitivecontextofanorganization.Thekeytoaneffectivestrategicanalysisis
theintegrationofthesetoolsintoacompellingargumentforactionmovingforward.Manyof
thetoolsincludedherearemostusefulasbackofficesupporttoyouranalysisratherthanas
anendproduct.Inotherwords,aclientorbossforwhomyouarepreparingastrategicanalysis
islessconcernedaboutseeingthatyouconductedafiveforcesanalysisorstakeholderanalysis
than the actual insights you gain from completing these analyses and how those insights
influence your recommendations. As such, you may only perform them in the back office to
advanceyourownthinkingandanalysis.

As a way to organize these tools, it may be useful to think of a classic strategic analysis
framework, the SWOT analysis. SWOT stands for strengths, weaknesses, opportunities, and
threats. Although perhaps the most basic of all strategic frameworks, SWOT emphasizes two
main components of any strategic analysis: consideration of the external competitive
environment(opportunitiesandthreats)andtheinternalstrengthsandweaknessesofthefocal
organizationunderscrutiny.Thisinterplaybetweenexternalandinternalisattheheartofany
goodstrategicanalysis.Sometools,suchascompetitoranalysis,environmentalanalysis,andfive
forcesanalysis,areusefulforunderstandingtheexternalcompetitiveenvironment.Others,such
as capabilities analysis and diversification matrices, are useful for understanding the internal
strengths and weaknesses of the firm. Still others, such as strategic maps and stakeholder
analysis, are useful in combining external and internal assessments and understanding the
positioningofanorganizationamongitspeersandcompetitors.Finallyothers,suchasscenario
analysis and payoff matrices, are useful to consider how the dynamics of competition effect
strategicpositioning.

Theremainderofthetoolkitisorganizedintothreeparts.Part1presentsacollectionoftools
thathelpwiththeanalysisoftheexternalcompetitiveenvironment,theopportunitiesportionof
thestrategistschallenge.Thesetoolswillhelpyouanswerquestionssuchas:Whatindustryis
theorganizationinandwhoaretheplayersinthisindustry?Isthisanattractiveindustry?Are
therebarrierstocompetition?Whatarethemajortrendsimpactingthisindustry?Howisthe
competitivestructureoftheindustrylikelytoevolve?Whatistheunderlyingcompetitivegame
beingplayed?

Part 2 presents a collection of tools that help with the analysis of competitive position
highlightingboththecapabilitiesportionofthestrategistschallengeandtheintegrationacross
values,opportunities,andcapabilities.Thesetoolswillhelpyouanswerquestionssuchas:Who
aretheorganizationsrelevantstakeholdersandwhatdotheyexpectoftheorganization?How
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does the organization create value for its stakeholders? What are the organizations unique
resourcesandcapabilities?Howsustainableisanyadvantagetheorganizationmayhavefrom
theseassets?Cantheorganizationleveragetheseassetsacrossmarketsinordertoimproveits
positionin amarket?Givenallthis,howshouldtheorganizationpositionitselfinthemarket
relativetoitsrivals?Howcantheorganizationsecureandsustainfavorablepositionsovertime?

Part3presentsacollectionoftools thataidintheanalysisofspecificstrategicdecisionsand
provide guidance on how to assess whether a potential action will improve an organizations
creationofvalue.Thesetoolswillhelpyouanswerquestionssuchas:Howcanwebestimprove
thepositionoftheorganizationinitscompetitiveenvironment?Howwillcompetitorsreactto
specificstrategicactions?Whatisthevalue ininvestingin various opportunitiesand building
certaincapabilities?Whatpotentialfuturesmaytheorganizationfaceandwhatisthevalueof
specific actions in each of those futures? Ultimately, these tools provide guidance for
recommendingspecificstrategicactions.

WeconcludewithChapter15,StrategicAnalysisinPractice,wherewereturntoourdiscussion
aboutintegrationanddiscussastepbystepprocesstoconductastrategicanalysisutilizingthe
varioustoolsinthetoolkit.

Ultimately,executingawelldonestrategicanalysisisaskillthatrequiresapplicationandwill
developovertimethroughrepetition.Anexpertstrategistcanconductacompellinganalysisin
anumberofsituations:themultiweekproject,therapidfollowuptoanurgentlatenightcall
fromtheclientlookingforquicksuggestions,oreventheelevatorridewiththebosswhoasks
forthoughtsonsomepressingstrategicissuefacingtheorganization.Thetoolsinthistoolkit
providethefoundationonwhichtoconductastrategicanalysisinallitsforms.Thekeyisto
integratetheseframeworksandtoolsintoacompellingargumentandanalysis.

One of the biggest challenges of any strategic analysis involve (1) gathering information, (2)
determiningwhichpiecesofthatinformation/dataareusefulandrelevant,and(3)employing
gatheredinformationaspartofafruitfulstrategicanalysis.Youareoftenchallengedwitheither
toomuchornotenoughinformation.Thebigquestionisoftenhowtofindandutilizetheright
data.Fortunately,therearemanyresourcesatyourdisposaltohelpgatherdataonparticular
organizationsandindustries.

Thereareanumberofplacesyoumightlookforinformationrelevanttoyouranalysisthatare
availabletoanyoneontheInternet.Forexample,anobviousplacetostartisanorganizations
own website and its most recent annual report. You might pay attention to recent media
coverageofacertainorganizationorindustryasyouregularlyreadbusinesspapers,publications,
andblogs,especiallypertainingtotheorganizationsstrategyandcompetitiveposition.Certain
hardcopy publications, such as the industry surveys of Standard & Poors, can be found in
research libraries. Industry surveys provide useful information on market share and sector
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specific issues and are updated up to several times a year. Value Lines looseleaf print
publicationsalsoprovidedetailedinformationon1,500stocksinroughly100industrygroups,
updated quarterly. Value Line updates industry sector reports weekly and can be found in
researchlibrariesorlargerpubliclibraries.Inadditiontosuchprintresources,thereareanumber
ofonlineresearchdatabasesandresourcesavailablethroughuniversitysubscriptionthatyou
mightalsofindhelpfulasyougatherrelevantinformation.

You should search in various publications for articles and news items that touch directly or
indirectlyontheindustryandcompanyyouhaveselected.Agoodplacetostartisbysearching
throughthelibraryindexesanddatabasesforyourindustryandcompany.Youshouldattempt
tolocatearticlesthatgobackseveralyears,ratherthanfocusexclusivelyuponthemostrecent
ones.Trytobeginwithmagazinearticlesthatmayprovidemoregeneralbackgroundinformation
beforeyouconsultnewspapersthatdealwithspecificrecentdevelopments.Businessortrade
publicationsandcompanydocumentsfiledwiththeSECwillprovideyouwithevenmoreuseful
information.TheInternetisavaluableresourceforcollectinginformationbutpleaseproceed
wisely.TheinformationthatispostedontheInternetvarieswidelyintermsofitsvalidityand
quality;paythemostattentiontoinformationpostedbythefirmsthemselves,establishednews
ormediafirms,anduniversities.Youshouldbeabletofindawealthofinformationevenifyou
limityourselftothesesources.Wesummarizeanumberofspecificresearchdatabasesthatmay
beusefulforconductingresearchinsupportofanalyzingafirmsstrategyattheendofthisbook.

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ThischapterwasadaptedfromJaredD.Harris,MichaelJ.Lenox,JeanneLiedtka,andScottSnell,Introductionto
Strategy, UVAS0183 (Charlottesville, VA: Darden Business Publishing, 2010), which was based on an earlier
technicalnote(UVAS0166)byMingJerChen,GregoryB.Fairchild,R.EdwardFreeman,JaredD.Harris,andS.
Venkataraman.
ii
KennethAndrews,TheConceptofCorporateStrategy(Homewood,IL:RichardD.Irwin,1971).

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