Why conduct a business strategy audit?
Nearly all the major initiatives undertaken by corporate executives today are called “strategic”. With everything having high strategic importance, it is becoming increasingly difficult to distinguish between the many priorities and imperatives that are initiated in organisations. When everything is clearly strategic, often nothing strategic is clear. When everything is designated as a high priority, there are, in reality, no priorities at all.
However, when the overall strategic direction is clearly understood by everyone in your organisation, the following benefits occur:
organisational capabilities will be aligned to support the achievement of your strategy
resources will be allocated to different business processes in priority order – according to the importance of that process and its contribution to competitive advantage
your company or organisation can excel in the market place or in its business/commercial sector.
The purpose of a strategy audit is to arm managers with the tools, information, and commitment to evaluate the degree of advantage and focus provided by their current strategies. An audit produces the data needed to determine whether a change in strategy is necessary and exactly what changes should be made.
Defining a Strategy Audit
A strategy audit involves assessing the actual direction of a business and comparing that course to the direction required to succeed in a changing environment. A company’s actual direction is the sum of what it does and does not do, how well the organisation is internally aligned to support the strategy, and how viable the strategy is when compared to external market, competitor and financial realities. These two categories, the internal assessment and the external or environmental assessment, make up the major elements of a strategy audit.
The outline that follows is derived from The Business Strategy Audit (see References). It’s intended to give you a clear idea of how to set about conducting a self-assessment audit in your own organisation, without the need for any additional training or external consultancy support. But note that this outline does not include the range of Questionnaires and Checklists and the detailed guidance to be found in the full, 124-page Audit.
Part 1 ~ The External Environmental Assessment
A conventional corporate mission is to provide distinct products and services to customers at a value superior to that offered by competitors. Without a strategy, valuable resources will be diluted, the work of employees will be unfocused, and distinctiveness will not be achieved. The external environment assessment provides any business with a critical external link between its competitors, customers, and the products/services it offers.
The fundamental reason for examining an organisation’s environment in the process of clarifying strategy can be summarised thus:
Ensure that the company is meeting the needs evident in the environment
Prevent others from meeting those needs in a better way
Create or identify ways to meet future or emerging needs.
The success or failure of a company often depends on its ability to monitor changes in the environment and meet the needs of its customers and prospective customers.
An organisation’s business environment is never static. What is viewed as uniqueness or distinctiveness today will be viewed as commonplace tomorrow as new competitors enter the industry or change the environment by modifying the rules by which companies compete. Consequently, an effective strategy will do more than help a company to stay in the game. It will help it to establish new rules for the game that favour that company. Successful companies do more than simply understand their environments. They also influence and shape the circumstances around them. Companies that fail to influence their environments automatically concede the opportunity to do so to their competitors.
Steps in conducting an environmental assessment:
Step 1: Understand the external environment at a macro level
The first step in the environmental assessment is to develop a basic understanding of the trends and issues that will significantly change, influence, and affect the industry. The overall industry understanding comes from looking at the elements that influence the environment.
These elements include:
Pressure from substitutes
Threat of new entrants
A useful framework to understand these issues comes from answering the following questions. They should be posed directly when used in an interview, and indirectly when analysing data:
What is the long-term viability of the industry as a whole, and how do capital markets react to new developments?
What trends could change the rules of the game?
Who are the industry leaders? What are they doing? Why?
What are the key success factors in the industry?
What developments could allow a company to change the rules of the game?
Five years from now, how will winners in the industry look and act?
What is the reward (and/or cost) of being a winner/loser within the industry?
Where has the industry come from?
Step 2: Understand the industry/sector components in detail
Industry/sector components are normally broken down as follows: competitors, customers and stakeholders. Questions that should normally be asked of each key competitor include:
What is the strategy of each competitor? Where do they appear to be heading?
What is their business emphasis?
Do they compete on quality, cost, speed or service?
Are they niche or global players?
What do they do better than anyone else?
Where are they weaker than others?
Where are they the same as others?
Who are their primary customers?
What types of business do they not do or say no to?
Who are their major partners? Why are they partnering? What do they gain from it?
What are they doing that is new or interesting?
Financial Strength – Internal:
How much cash does each competitor generate annually?
What are the drivers behind their financial success (from a cash perspective)?
How do they allocate resources (funds)?
How fast are they growing and in what areas?
Strength as Perceived by Capital Markets:
Are competitors resource constrained or do they have strong financial backing?
Is this perception consistent with the internal analysis? Why or why not?
How has the company performed in the financial markets? Why?
What constraints/opportunities do they have with respect to financial markets? Why?
Has management kept the company at the forefront of the industry? Why or why not?
Are the key players seen to be moving the company forward?
Is the company centralised or decentralised?
Does the corporate parent act as a holding company or as an active manager?
Is the organisation perceived as being lean and able to get things done?
How many people are employed? Is the company over-or under-staffed?
Are people managed to achieve mainly business objectives, human objectives or some of both? How does this affect the company?
What skills are emphasised during recruitment?
Is the culture results-oriented?
Similar lists of questions should be developed for customers and stakeholders (or see the full Audit for ready-made questionnaires).
Step 3: Integrate the components into an environmental picture
Once the findings of the stakeholder analysis, customer analysis and competitor analysis (above) have been collected, audit team members should step back and integrate the data. Integrating the different components will help the team to understand the overall environment in which the business operates.
This integration should take place at two levels: assessing where the industry is heading and the likely impact of that direction on the company, and combining the organisational assessment with the environmental assessment.
The Business Strategy Audit offers a detailed framework for analysing this data. In brief, it should highlight significant changes in the environment, and the impact of those changes on the company’s competitive position within the industry. It should address the fundamental question of how the company can influence its environment in the future, and what the business will need to look like if it is to thrive in the future.
In addition, the analysis should highlight the requirements and capabilities that are needed within the company to meet external demands. These requirements and needs should then be matched up with the current capabilities outlined in the organisation assessment. This will enable the team to determine the overall alignment of the company’s strategy to its environment.
Part 2 ~ The Organisational Assessment
Once the company’s environment has been examined and analyzed, managers should consider the qualities and characteristics of the organisation itself that influence what can be accomplished in terms of strategy. This section is about organisational assessment. The steps shown here will provide insights into the effectiveness of the company’s current strategy, and provide guidelines for increasing strategic effectiveness.