This section is about analysing the internal and external environment of your organisation. It includes a section on conducting research on your industry and your organisation’s current status, and how to conduct PEST and SWOT analyses. It also includes a section on how to ascertain your priority issues and manage cooperative venture partnerships.

Scenario: Analysing the environment

The strategic planning process requires you to understand the environment in which the organisation operates, in order to project the future of the organisation in light of any factors that may affect it. An organisation that wishes to establish itself as a leader within its industry must understand the industry. You must undertake a detailed analysis of the organisation’s internal operations to evaluate the internal environment. You must also assess the industry to identify trends, new innovations, changes in the market. You will need to know how the organisation is performing in relation to its competitors.

What skills will you need?

• Conduct research
• Analyse the external environment
• Analyse the internal environment
• Assess cooperative ventures
• Draft priority

Conducting research

The strategic planning process begins with research and analysis. You have to determine your organisation’s present condition, so that you know where to commence the process. In other words, it is asking ‘Where are we now?’ and ‘How well are we doing?’

Research analyses factors such as trends and forces – both external and internal to the organisation – and assess their future impact on the organisation. Trends describe a pattern of behaviour and occur over long periods of time. Forces describe abrupt or disruptive changes that tend to occur quickly.

Considering external and internal factors helps you to clarify the business world in which you currently operate, and enables you to better envision the future.

External trends and forces may include the following:

Market: Developments in the marketplace such as segmentation, customer needs and competitive advantage.

Technology: Electronic commerce and other developments.

Legislation: New laws, legislative control, regulations and government intervention.

Partnerships: Alliances with outside firms, vendors and business associates.

Culture: Varying workforce ethics for different people.

Internal trends and forces may include the following:

Core competencies: The status of the company’s assets, expertise, and skills needed to yield superior performance.

Core processes: The status of the processes needed to do business and deliver competitive advantage.

Key result areas: Performance history in areas such as innovation, customer satisfaction, employee retention, and operating results.

Management: How the company determines accountability, delegates decision making, uses teams, and rewards performance.

Organisational culture: The values, attitudes and shared beliefs of the organisations employees.

There are various ways of researching and analysing your organisation’s current status, both internally and externally. Some of these methods include:

• collecting and reviewing data
• interviewing key stakeholders
• seeking advice from experts
• surveying customers
• conducting external PEST analysis
• conducting internal SWOT analysis

Collecting data

Data and information is classified as either quantitative or qualitative.

Quantitative data is numerical information that can be displayed using charts, tables and diagrams. It can be easily measured and analysed to determine quantity or extent of factors being investigated.

Qualitative data is focused on words and observations, not numbers. This can include stories, interpretations, characteristics and descriptions that cannot be captured from quantitative data.

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Essential qualities of information

The aim of any data collection activity is always to help with decision making processes. The decisions that are made will only be as good as the data collected. It is essential then that data is ‘quality tested’ to ensure it will produce the desired results.

Accurate

• Information collected through research should be precise and a true reflection of the relevant business activities and operations of the organisation.

Relevant

• Data collected should be directly related to the intent and objectives of the strategic planning process.

Reliable

• Data must be verifiable and well supported by background information

There are two ways that data can be collected for analysis when conducting research – these two techniques are known as primary data collection and secondary data collection.

Primary data collection techniques

Primary data collection is when the researcher (the ‘user’ of the data) directly collects and collates data themselves. This data is collected specifically to address a research need for the organisation, and usually the data collected is not publicly available unless the organisation and the researcher choose to publish it.

Common primary data collection methods are described in the table below.

Interviews

Interviews are used to gauge people’s attitudes, preferences or motivation for behaviour. They can be conducted one-on-one with individuals or in groups.

Advantages

• Easy to arrange, particularly if one-on-one.
• Can be conducted in formal and informal
• Guaranteed response to all
• Interviewer can clarify questions as
• Interviewer can clarify responses or ask for further
• Interview can be
• Interviewee can be observed for non-verbal indicators (tone of voice, facial expressions, gestures, etc).
• Consistent approach can be achieved if using one interviewer.

Disadvantages

• Group interviews can be difficult to
• Not always time
• Suitable location must be
• Interview questions must be determined prior to
• Consistency and comprehensiveness of responses can be dependent on skill of
• Interviewee has opportunity to observe interviewer and provide responses to impress or to
• Personal or sensitive questions can be embarrassing.

Focus groups

A focus group is a group discussion which is generally conducted in an informal environment with a small number of participants. It is facilitated by a trained moderator who instigates and directs the discussion, ensuring that everyone participates and the topic stays the focus. Data and insight is gained by listening to the interaction and discussion amongst the group about the topic or issue of interest.

Advantages

• Allows participants to express feelings and emotions about an issue or topic.
• Flexible format.
• Inexpensive.
• Can be used to test and refine ideas, products and concepts.
• Useful for obtaining data from people with low levels of literacy.

Disadvantages

• Focus of discussion and data collected is dependent on skills of facilitator.
• Discussion can be dominated by a minority of participants.
• Can be time-consuming, and expensive (if relying on providing incentive to get participants).

Questionnaires

A questionnaire is a series of questions to be completed by respondents. It is a common technique for collecting data.

Advantages

• Can be conducted using written responses or as verbal/oral survey.
• Can be distributed by mail, email, fax or completed online.
• Can cover a large number of people or organisations simultaneously and quickly.
• Not limited by physical location.
• Relatively inexpensive.
• Not difficult to coordinate.
• Allows the respondent to remain anonymous.
• Personal/sensitive questions can be easily posed and comfortably answered.
• Responses cannot be affected by bias of interview.

Disadvantages

• Can be difficult to design and will often require multiple drafts before a final questionnaire is produced.
• Questions have to be simple and clearly stated.
• Can have low response rate.
• Printing costs can be expensive.
• Data entry of responses for analysis can be time consuming.
• Can be time consuming, particularly if waiting for distributed questionnaires to be completed and returned.
• Requires basic literacy skills to complete.
• No assistance or clarification can be provided to help respondent.
• Cannot guarantee a response to every question.
• Responses can be considered for the ‘right’ answer.
• Respondents can decide whether or not to complete the questionnaire based on length, perceived difficulty, etc.

Observations

Observation is the physical monitoring and recording of involves recording of behaviour to observe patterns and trends.

Advantages

• Multiple observation methods may be used.
• Can be conducted formally or informally.
• Can be conducted in natural or simulated environment.
• Behaviour can be recorded (video) for future analysis.

Disadvantages

• The behaviour being observed must be clearly defined and stated.
• Behaviour can be modified when participants are aware they’re being observed.
• Constructing an artificial or simulated environment can be difficult and expensive.
• Can be very time-consuming.

Diaries

A diary is used to gather information about the way individuals or groups use their time. They can capture both quantitative and qualitative data, and evidence patterns and activities.

Advantages

• Does not require the involvement of the researcher or a facilitator.
• Can collect information from multiple people or groups simultaneously.
• Can be used to collect information as a substitute for direct observation.

Disadvantages

• Participants need to know exactly what to record, and how the data will be used
• Requires reasonable literacy skills.
• Can be time-consuming for participant and cause frustration.
• Requires monitoring to be effective.
• May require high level of confidentiality.
• Will require a standardised approach to analysing responses.

Secondary data collection techniques

Secondary data collection is when the researcher accesses data collected by someone else, and then collates it for their own use. It can be sourced from census results, survey and questionnaire results, statistical research organisations, published studies and reports, organisational and government databases, case studies and published texts.

It is important to ensure that data is obtained from trusted sources, to ensure it is valid and reliable. There are questions you should consider when selecting existing data for use in the strategic planning process:

• What was the researcher’s objective in collecting the data?
• What data was collected and what is it supposed to measure?
• When was the data collected?
• What methods were used?
• How is the data organised?
• What information is known about the success of that data collection? How consistent is the data with data from other sources?

Trends analysis

Your research should include a trends analysis. This is an effective way for companies to determine future results in economic marketplaces. A business trend analysis is a study of a company’s financial performance over an extended period of time. Reviewing past information can provide you with information regarding current trends and where a market niche may be for a product.

Technology provides you with an incredible amount of information. However, raw data by itself does not provide much assistance when implementing a strategic plan. It is the conversion of this raw data into significant facts, relationships, trends and pattern that gives your organisation a competitive edge.

The ability to accurately gauge customer response to changes in your business strategy, and other environmental factors, gives you a powerful competitive advantage. It will assist your senior leaders in making analytical decisions about those business processes that could maximise your future profitability.

Trend analysis can also provide critical economic information about current business situations, by identifying current product trends, determining the strength of an industry or capitalising on emerging markets. Trend analysis also helps to eliminate uncertainties in business, such as slow sales, overstocking products and seasonal consumer demand.

What are the benefits of trend analysis?

1. Helps to predict the threat of new entrants and allows management to develop competitive strategies to maintain their market share, as well as the pursuit of leadership in your
2. It provides security of strategic investments and protection of
3. It provides information to assist with crucial decisions on mergers, acquisitions and cooperative venture
4. The data can be further used for various cost-benefit analyses and can be extremely valuable as an early warning indicator of probable issues with a product line.
5. It provides a long term view of strategies with respect to effective asset and investment allocation and can safeguard against costly mistakes.

What does trend analysis include?

• Changes and trends in customer needs and behaviour, and shifts in customer perception of
• Trend in price changes and cost drivers for your industry and/or specific segments.
• Change and evolution of the industry in terms of new entrants, and competition, threat of substitutes and relationship with buyers and suppliers.
• Upcoming business models and changing best practices of the industry and related emerging sectors.
• Information regarding long-term domestic and global economic cycles within your industry.
• Insight into services and product purchasing patterns.
• Analyses of common characteristics of a consumer base (segmentation).
• Identifying consumers who are most likely to discontinue that service or product.
• Predicting, in advance, the products or services a person is most likely to use based on past and present trends.

Types of trend analysis

Three types of trend analysis are commonly used for trend analysis: intuitive, temporal, and market segmentation.

1. Intuitive is the least accurate; information is gathered and analysed, then predictions on future outcomes are estimated.
2. Temporal involves looking at past information and assumes the same outcome based on the frequency of results.
3. Market segmentation is the preferred trend analysis technique; while time consuming and costly, it usually produces the best results. Market segmentation is the process of breaking down the marketplace into measurable items or groups. The process involves classifying individuals by age, sex and location; products by type, function and price; or geographical regions into states, regions or countries. This allows you to review the marketplace by specific demographics, creating trend analysis to determine the economic impact each group has on the organisation.

Engaging consultants

As already stated, the strategic planning process is not always easy. You may need additional assistance beyond what can be offered by your key stakeholders.

Consultants can provide your organisation with expertise, advice, data interpretation, case studies, unbiased opinion, competitor analysis, trend analysis, additional research, tools and templates and basically ‘a fresh set of eyes’ in your overall strategic planning process.

Consultants may be experts in your particular industry, marketing, finance, risk management, technology, or joint venture agreements. Select the consultant you need most in the planning process.

When reviewing a business, it is essential to cut through the symptoms of problems and reach the underlying causes. Questions can assist in revealing the real causes.

Consultants can help you discover the answers to questions like:

• Is your current vision being realised?
• How has your company’s mission and objectives changed over the past three years? Why have changes occurred or why have no changes occurred?
• Describe the actual strategies you have followed over the past few years in respect of products/services, operations, finance, marketing, technology, management
• How has your company been managed?
• How has your company been funded?
• How has your company sought to increase sales and market share?
• How has your productivity costs moved?
• What stopped the business from …?
• What was the cause of …?
• Why didn’t the business achieve a …% return?

Learning activity: Identifying consultants

List three types of consultants you could use to facilitate the role outlined for you in the scenario at the beginning of this chapter. Use the internet to find a provider for each of these services and note them below.

Analysing the external environment

The strategic process starts with analysing the environment. We regard the ‘environment’ as those factors outside the organisation that influence its strategy. This process can be difficult for some organisations because of the breadth and amount of analysis required, and the fact that most of these elements are beyond their control. Again, this is where your stakeholders and consultants can be extremely helpful.

When you are analysing the external environment you should be interested in answering two overriding questions:

1. What are the major trends affecting the growth of our industry in the future?
2. Will our industry grow faster or slower than average?

When you are implementing a strategic plan, your future industry growth rates are a critical factor. Your strategic plan will consist of timeframes and decide the direction of the company over the next three years.

Learning activity: Observing trends

Identify an industry that has ‘slowed down’ or been impacted negatively in recent years by the economy. Has the same industry suffered in previous economic downturns? Why do you believe this is? What trends are apparent?

Most organisations break this external environment analysis into two sections:

• macro environment
• micro environment or industry environment.

The macro environment includes those general influences that affect an industry. Macro environment issues tend to affect many industries but you should be concentrating on the factors that affect your organisation.

In the micro or industry environment, consider those factors within your particular industry that affect the profitability and the competitive position of organisations within it. Industry, in this sense, is defined as a group of organisations or businesses that produce similar products or provide similar services.

For example, a macro environment issue such as an increase in interest rates by the Reserve Bank is an economic factor beyond your control, and is a decision that will affect more than one industry. However, if you were in the building industry this macro environment factor would influence your decisions and therefore your strategic plan.

Another example would be the introduction of a new competitor in your industry that is producing a new innovative product that is selling well and occupying market share. This is an industry or micro environment issue which must be considered in your strategic planning over the next few years.

Learning activity: Identifying macro factors

Describe three other examples of macro environment factors that could influence the progress of an organisation.

Identifying macro environmental factors

When examining these factors, it is helpful to divide them into several categories. Below is an example of this – for your particular industry there may be more helpful headings and categories to use.

Demographic factors

• How will our business be affected by anticipated trends in population growth and distribution?

Economic factors

• What are our expectations of the business in regard to inflation, interest rates and unemployment?

Technological factors

• What major changes are occurring in product technology?
• What major changes are occurring in process technology?

Social factors

• What attitudes exist in the market toward our industry and toward our services?
• What changes are occurring in consumer lifestyle and behaviour that affect the sale of our products?

Political-legal factors

• What laws are being proposed that may affect our industry?
• What is happening in areas of legislation that may affect our industry such as environmental protection or product safety?

Identifying micro environmental factors

Industry or micro environment factors are more localised; they are not always global or national issues. In the analysis of your industry environment, you are considering factors that are affecting your profitability and include not only your competitors, but buyers and suppliers, potential new products and trends in your immediate geographical location.

Market

• What changes are occurring in market size, growth, distribution and profits in our industry and in our region?
• What are the major segments in the market? Which are high opportunity and which are low opportunity segments?

Customers

• How do current customers rate our business in regard to reputation, quality of product and service, and price?
• How do they rate our competitors?
• How do customers make their buying decisions?
• What needs are developing in the market?

Competitors

• Who are our major competitors?
• What are their objectives and strategies?
• What are their strengths and weaknesses?
• Are there innovations being developed?

Suppliers

• What is the expected future availability of the resources we require to produce our products?
• What trends are occurring in the selling patterns of our suppliers?

Distributors/Dea lers

• What are the main channels for bringing products to customers?
• What is the efficiency level, and potential for growth, in each trade channel?

Conducting a PEST analysis

The above outline of factors and issues will help you to consider your organisation’s environment; however, a more in-depth analysis is often required. A PEST analysis is an effective tool for investigating external environmental factors. PEST stands for:

A PEST analysis is a helpful tool when you are conducting an environmental analysis for your strategic plan. The analysis gives an overview of the big picture factors that the organisation should take into consideration. It provides a more comprehensive list of factors to consider, some of which are listed below:

Political factors

• current ecological/environmental legislation
• future legislation
• international legislation
• regulatory bodies and processes
• government policies
• trading policies
• funding, grants and initiatives
• home market pressure groups
• international pressure groups
• wars and conflicts
• government term and change

Economical factors

• home economy
• economy trends
• overseas economies
• general taxation
• taxation specific to product/services
• seasonality issues
• market/trade cycles
• specific industry factors
• market routes trends
• distribution trends
• customer/end-user drivers
• interest/exchange rates
• international trade and monetary issues.

Social factors

• lifestyle trends
• demographics
• consumer attitudes and opinions
• media views
• law changes affecting social factors
• brand, company, technology image
• consumer buying patterns
• fashion and role models
• major events and influences
• buying access and trends
• ethnic/religious factors
• advertising and publicity
• ethical issues.

Technological factors

• competing technology development
• research funding
• associated/dependent technologies
• replacement technology/solutions
• maturity of technology
• manufacturing maturity and capacity
• information and communications
• consumer buying mechanisms/technology
• technology legislation
• innovation potential
• technology access, licensing, patents
• intellectual property issues
• global communications.

Learning activity: PEST analysis

Consider your current workplace, or the training organisation you are currently enrolled with, and identify one item for each of the following in the PEST analysis that may affect them:

Political –

Economic –

Social –

Technological –

Briefly describe how a PEST analysis can assist an organisation.

Steps for conducting a PEST analysis

1. Select an individual to facilitate the PEST analysis. This person should be someone who has the respect of the key stakeholders and will be able to facilitate the brainstorming process. Usually it is a member of the senior leadership team.
2. Select the people who need to participate in the PEST analysis, based on their ability and willingness to contribute ideas and their knowledge of your industry. Consider whether or not you need assistance from a consultant.
3. Brainstorm the political and legal factors as listed. Solicit ideas and thoughts from all participants. Review any data that maybe helpful. Record all ideas on a whiteboard, flip chart, or similar mechanism, e.g. data projector, so that all participants can see the list. Avoid duplicate entries. Please note some ideas may appear in more than one list.
4. Consolidate ideas by asking the group which items can be combined under the same subject. Do not over-consolidate; let ideas stand on their own merit and avoid putting too many ideas under one broad subject.
5. Clarify ideas by re-examining the consolidated list and discuss any ideas that participants have concerns about. Reiterate the meaning of each item before discussing it. Refrain from discussing solutions at this stage and stay focused on identifying political and legal factors that are affecting your industry.
6. Identify the top three factors by asking the group to choose. Sometimes the choice is obvious but when it’s not, give the participants time to think through the issues and then cast their vote. If the list is about ten items long, give each person three votes; if the list is longer, five votes.
7. Summarise the political and legal factors and record them on a separate chart
8. Repeat the same process outlined in steps 3–7 for the economic factors. Use the list above to discuss the areas to be considered.
9. Repeat the same process outlined in steps 3–7 for social factors. Use the list above to discuss the areas to be considered.
10. Repeat the same process outlined in steps 3–7 for technological factors. Use the list above to discuss the areas to be considered.

Five forces analysis

Michael Porter developed the popular ‘Five forces analysis’ in 1985 to assist organisations with the formulation of their business strategy. This analysis will help your organisation to analyse the competitive environment. It is an important tool for assessing the potential for profitability in an industry and analyses in the following five areas:

• the threat of new entrants
• the bargaining power of buyers
• the bargaining power of suppliers
• the threat of substitute products
• competitive rivalry within an industry.

The threat of entry

• cost advantages
• technology
• barriers to entry.
• time and cost of entry
• specialist knowledge required
• economies of scale

The power of buyers

• number of customers
• size of orders
• differences between competitors
• price sensitivity
• ability to substitute products
• cost of changing products.

The power of suppliers

• number of suppliers
• size of suppliers
• uniqueness of service
• ability to substitute products
• cost of changing suppliers.

The threat of substitutes

• substitute performance
• cost of substitution.

Competitive rivalry

• number of competitors
• quality differences
• customer loyalty
• cost of switching
• cost of leaving market.

Learning activity: Five forces analysis

Consider your current workplace, or the training organisation you are currently enrolled with, and rate each of the five forces (high, medium or low) based on your understanding of the above. Include your reasons for holding this view.

• The threat of entry
• The power of buyers
• The power of suppliers
• The threat of substitutes
• Competitive rivalry

Analysing your competitors

There are many practical ways your organisation can gain information about its competitors. The following is a list of suggestions:

• Talk to customers and competitor’s customers – this can be done through consultants or directly by members in your organisation. Customers are usually willing to compare and tell you what they think about a product when asked. Obviously this process could be commissioned to market research consultant.
• Visit your competitor’s premises – enquire about their products and ask about pricing information and quotes. It’s a good opportunity to gauge their deals and value-add offers. Acquire copies of their advertising and product brochures for comparison.
• Purchase competitor products and services – this will provide you with insight into their processes, e.g. negotiating, ordering products, customer service, packaging, delivery, after-sales service and customer satisfaction feedback.
• Reverse engineering – involves purchasing a competitor’s product, disassembling it, analysing its components, understanding what it offers, and observing its faults and limitations. It will provide you with insight into design, manufacturing, packaging and marketing of competitor’s products.
• Talk to people employed in the industry – this is especially important at conferences, seminars and expos. Industry consultants may be willing to provide you with information about products, innovations and developments. Consider employing someone who has worked with your competitors and has an intimate understanding of their weaknesses and strengths.

Analysing the internal environment

The internal environment of an organisation must be examined to determine what changes need to occur. This requires you to assess what the business is doing well, and which areas need improvement.

A useful tool used by organisations to analyse their internal environment is a SWOT analysis. SWOT is an acronym for strengths, weaknesses, opportunities and threats. The goal is to help your company to identify opportunities it should take advantage of to reach its mission or vision in five to ten years. SWOT analyses are also important because they identify possible threats that may prevent your company from being successful.

Strengths: Are the capabilities that enable your company or department to perform well and have an advantage over competitors.

Weaknesses: Are characteristics that prohibit and limit your company or department from performing well and achieving objectives.

Opportunities: Are conditions of the environment in which the business operates which could benefit the organisation if acted upon; trends, forces, events and ideas that your company or department can capitalise on.

Threats: Are barriers that prevent the business from achieving its objectives; possible events or forces outside of your control that your company needs to plan for or decide how to mitigate.

In summary your organisation needs to:

• build on strengths
• resolve weaknesses
• exploit opportunities
• avoid threats.

SWOT factors to consider

Below is a comprehensive list of factors to consider when conducting a SWOT analysis on your organisation:

Strengths

• advantages of proposition
• capabilities
• competitive advantages
• unique selling points
• resources, assets, people
• experience, knowledge, data
• financial reserves, likely returns
• marketing – reach, distribution, awareness
• innovative aspects
• location and geographical
• price, value, quality
• accreditations, qualifications, certifications
• processes, systems, IT, communications
• cultural, attitudinal, behavioural
• management cover, succession
• philosophy and values.

Weaknesses

• disadvantages of proposition
• gaps in capabilities
• lack of competitive strength
• reputation, presence and reach
• financials
• own known vulnerabilities
• timescales, deadlines and pressures
• processes and systems
• cash flow
• continuity, supply chain robustness
• effects on core activities, distraction
• reliability of data, plan predictability
• morale, commitment, leadership
• accreditations
• management cover, succession.

Opportunities

• market developments
• competitors’ vulnerabilities
• industry or lifestyle trends
• technology development and innovation
• global influences
• new markets, vertical, horizontal
• niche target markets
• geographical, export, import
• new unique selling points
• tactics, e.g. surprise, major contracts
• business and product development
• information and research
• partnerships, agencies, distribution
• volumes, production, economies
• seasonal, weather, fashion influences.

Threats

• political effects
• legislative effects
• environmental effects
• IT developments
• competitor intentions – various
• market demand
• new technologies, services, ideas
• vital contracts and partners
• sustaining internal capabilities
• obstacles faced
• insurmountable weaknesses
• loss of key staff
• sustainable financial backing
• economy – home, abroad
• seasonality, weather effects.

Steps for conducting a SWOT analysis

1. Select an individual to facilitate the SWOT analysis. This person should be someone who has the respect of all key stakeholders and will be able to facilitate the brainstorming process.
2. Select the people who need to participate in the SWOT analysis based on their ability and willingness to contribute ideas and their knowledge of your organisation. Consider whether or not you need assistance from a consultant.
3. Brainstorm the organisation’s strengths. Solicit ideas and thoughts from all participants. Review any data that maybe helpful. Areas could include leadership ability, innovation, quality, customer service, decision making and the use of technology. Record all ideas on a whiteboard, flip chart, or similar mechanism, e.g. data projector, so that all participants can see the list. Avoid duplicate entries. Please note some ideas may appear in more than one list.
4. Consolidate ideas by asking the group which items can be combined under the same subject. Do not over-consolidate; let ideas stand on their own merit and avoid putting too many ideas under one broad subject.
5. Clarify ideas by re-examining the consolidated list and discuss any ideas that participants have concerns about. Reiterate the meaning of each item before discussing it. Refrain from discussing solutions at this stage and stay focused on identifying strengths.
6. Identify the top three strengths by asking the group to choose. Sometimes the choice is obvious but when it’s not, give participants time to think through the issues and then cast their vote. If the list is about ten items long, give each person three votes; if the list is longer, five votes.
7. Summarise the organisation’s strengths and record them on a separate chart.
8. Repeat the same process outlined in steps 3–7 for weaknesses. Areas to consider may be similar to those listed under the ‘strengths’ heading, e.g. leadership ability, innovation, quality, etc.
9. Repeat the same process outlined in steps 3–7 for opportunities. Areas for consideration may include emerging markets, new technologies, new products, cost reduction, etc.
10. Repeat the same process outlined in steps 3–7 for threats. Areas for consideration may include new competitors, a declining market, new regulations, etc.

As shown in the diagram above, an organisation should endeavour to match internal strengths with external opportunities to create the best competitive advantage. Action should be taken to turn internal weaknesses into strengths, or at least to minimise their effect on the business. Similarly, action should be taken to convert threats into opportunities or avoid them.

Learning activity: SWOT analysis

Consider your current workplace, or the training organisation you are currently enrolled with, and identify one item for each of the following in the SWOT analysis:

Strength –

Weakness –

Opportunity –

Threat –

Briefly describe how a SWOT analysis can help you to identify risks in an organisation.

Value chain analysis

A value chain analysis will help your organisation harness its strengths. The value chain, also known as value chain analysis, is a concept that was first described and popularised by Michael Porter in his 1985 best-seller, ‘Competitive advantage: Creating and sustaining superior performance’. A value chain is a series of interlinked value-adding activities that convert inputs into outputs which, in turn, add to the bottom line and help to create competitive advantage.

Products pass through all activities of the chain in order, and at each activity the product gains some value. The purpose of each stage in the value chain is to create value for the customers to pay a price that exceeds the cost of producing the product, and therefore generating a profit.

A value chain typically consists of the following core (primary) activities, which contribute directly to creating a product or service for the customer:

• inbound distribution or logistics
• manufacturing operations
• outbound distribution or logistics
• marketing and selling
• after-sales service

Then there are the support activities that underpin these primary activities:

• purchasing or procurement
• technology and research
• human resource development
• infrastructure and systems.

Conducting a value chain analysis

There are opportunities for your organisation to create a competitive advantage if you can manage any of these stages more effectively. For example, a hotel may do better if it directs more attention toward the customer service component of their value chain.

A value chain analysis is a three-step process:

Step 1 – Activity analysis. Break down the step-by-step activities you undertake to deliver your product or service.

Together with your key stakeholders, brainstorm the activities your organisation currently undertakes that contribute towards the customers’ experience.

At an organisational level, this will include the step-by-step business processes that you use to serve the customer. Each activity or process should fall under one of the primary (or support) activities listed above, and could include the marketing of your products/services; sales and order-taking; operational processes; delivery; support and any steps specific to your industry.

Develop a flow chart that lists all of the activities that add value to your organisation, including those at an individual or team level.

Step 2 – Value analysis. For each activity, determine what you could do to add the greatest value for your customer.

For each identified activity, list the ‘value factors’ – the aspects your customers value about each activity. Assess whether any activities contribute to a competitive advantage. Now highlight the ‘value add’ strategies of your competitors and consider how you might learn from that.

Summarise these value factors and write down what needs to be done or changed to provide greater value for each one.

Step 3 – Evaluate changes and plan for action. Evaluate the changes that need to occur to increase your competitive advantage. Consider the costs involved and then articulate a plan for action.

Together with your team, plenty of ideas should have been generated for increasing the value you deliver to customers. It is important that you prioritise and action the next steps.

Firstly, choose the ideas which are easy to implement and delegate to the appropriate people for action. These small improvements with recognisable results will improve team morale.

Secondly, identify the ideas which are not practical at this stage and remove them from the list. Be careful to file them for further consideration in the future.

Thirdly, review the ideas that are not as cost-efficient, and reconsider their value to your organisation at this time.

Finally, give priority time to those remaining ideas which are practical and cost-effective. These are the ideas that require a step-by-step action plan, a clear process, allocation of finances, team involvement and will ultimately bring a competitive advantage.5

Learning activity: Value chain analysis

Consider your current workplace, or the training organisation you are currently enrolled with, and conduct a value chain analysis using the steps outlined above. You may wish to complete this activity in pairs.

Strengths and capabilities

The SWOT analysis reveals, among other things, the organisation’s strengths. It is important to note that these strengths usually describe what the organisation does well – termed as capabilities. However, strengths do not always mean that your organisation has an advantage over your competitors. Your strength may be the same strength as many other organisations within your industry, e.g. customer service, 24-hour hotline, same day delivery or after-warranty repairs.

Your strengths may be different to the strategic capabilities required to implement the strategic plan. In this regard, strategic capabilities are describing the strengths you need for the future. Common strengths cannot be ignored but distinctive competencies hold the greatest promise of superior performance.

Consideration needs to be given to any gaps and deficiencies in your capabilities. What was once a strength and a competitive advantage has now become ‘par for course’ among organisations in your industry. These gaps may highlight the need for:

• specialised training
• up-skilling existing staff
• new staff with different skills
• greater knowledge of the industry
• more expertise in a particular aspect of the industry
• better technology
• joint venture

Assessing cooperative ventures

A cooperative venture is commonly known as a ‘joint venture’ and is defined as a contractual agreement, joining together two or more independent businesses for the purpose of executing a particular enterprise. All parties agree to share in the profits and losses of the enterprise. Each member contributes their resources, skills, knowledge and finance. These responsibilities and expectations are outlined in a ‘joint venture agreement’.

In short, a joint venture is a strategic alliance. As your business activities grow, projects get larger and management costs increase, the associated risks and the cost of failure become greater than your organisation could bear alone. Therefore, you may feel the need to enter into a joint venture arrangement with another company.

It is possible that your new strategic plan may necessitate the formation of a cooperative venture. If, however, your organisation already has some strategic partnerships in place, they need to be fully informed of the planning process.

Joint ventures have become a major feature of the international business landscape due to increased global competitiveness and technological innovation. In increasing numbers, organisations have been networking beyond their own country in an effort to identify new opportunities for growth, new markets, and new venture capital. Each foreign market offers unique opportunities and risks, and many companies naturally look to joint ventures with one or more partners for assistance in entering new markets.

Joint venture agreements

The formation of a joint venture can be a complex process. After you have identified and selected a compatible partner, together you must decide why you are partnering together. The specific goals of the enterprise must be defined, the structure of the joint venture must be negotiated, numerous legal issues must be recognised and resolved, and potential areas of conflict between you and the partner organisation must be identified and reconciled. A joint venture agreement will outline these items.

Elements of a joint venture

1. Contractual agreement

Joint ventures are established by contracts that consist of one or more agreements, involving two or more individuals or organisations, and that are entered into for a specific business purpose.

2. Specific limited purpose and duration

Joint ventures are formed for a specific business objective and can have a limited lifespan or they can be long-term. They are frequently established for a limited duration because:

1. the complementary activities involve a limited amount of assets
2. the complementary assets have only a limited service life
3. the complementary production activities will only be of limited efficacy.

3. Joint property interest

Each participant contributes property, cash, or other assets and organisational capital for the pursuit of a common and specific business purpose. A joint venture agreement is not merely a contractual relationship, but rather a newly-formed business enterprise, usually a corporation, limited liability company, or partnership. As such, the participants acquire a joint property interest.

4. Common financial goals and objectives

The participants share a common expectation regarding the nature and amount of the expected financial and intangible goals, and objectives of the joint venture.

The goals tend to be narrowly focused, recognising that the assets invested by each party represent only a portion of the overall resource base.

5. Shared profits, losses, management, and control

The joint venture participants share in the specific and identifiable financial profits and losses. As well as sharing in certain elements of the management and control of the joint venture.

Reasons for forming a joint venture

There are many motivations that lead to the formation of a joint venture. They include:

1. Risk sharing

Risk sharing is a common reason to form a joint venture, particularly in industries where product development is costly and the likelihood of product failure is also high.

2. Economies of scale

If an industry has high fixed costs, a joint venture with a larger company can provide the economies of scale necessary to compete globally and can be an effective way to pool resources and achieve critical mass.

3. Market access

For companies that lack a basic understanding of customers and lack the relationship or infrastructure to distribute their products to customers, a partnership with the right company can provide access to established and effective distribution channels and customer bases.

4. Geographical constraints

Where there is an attractive business opportunity in a foreign market, partnering with a local company can be an effective way of penetrating a foreign market.

5. Funding constraints

When a company is confronted with high upfront development costs, finding the right partner can provide the necessary financing and credibility with investors.

6. Acquisition barriers

When a company wants to acquire another but cannot due to cost, size, or geographical restrictions or legal barriers, teaming up with a joint venture partner is an attractive option.

Strategy and risk

Thinking strategically means thinking with risk always in mind. Risk is the product of the probability of an occurrence, and the impact or significance of that event upon the achievement of an organisation’s objectives. Therefore, risk is both positive and negative. Your consideration of risk is not just about protecting your organisation, but is much more about the relationship between opportunity and threat; between risk and return.

Every strategy that you propose needs to have its scope of risk assessed; not just for mitigation and compliance issues, but to determine how the risk can bring fresh ideas, innovation and productivity to your organisation.

Identifying risks

Any changes or alterations made to the direction of the organisation through the implementation of a revised strategic plan could affect any joint venture agreements that you have in place. Therefore, it is imperative that your joint venture partner is fully aware of the strategic planning process and the expected outcomes of its implementation. They need to be aware of the risks involved and the potential losses that could occur if the strategic plan fails to achieve its objectives.

The structure of the joint venture could be a partnership, corporation or limited liability company, depending on the geographical locations of the businesses, the tax liability and the liability for injury that each joint venture partner is willing to accept. Consulting a lawyer on these issues is usually a good idea.

Depending on the agreement, a joint venture could be managed by one of the partners or the management could be shared among the partners. Either way, the implementation of the strategic plan affects both parties.

‘Venture capital’ is the term used to identify the money invested in a new business which is expected to make a lot of profit but which also involves considerable risk. Both your organisation and your partner/s are bound by the contract and therefore you have ‘joint and several liability’.

In addition to all the partners being responsible together, each partner is also liable individually for the entire contract – so a creditor could recover a whole debt from you or any one of your partners individually, leaving you or that person to recover their shares from the rest of the partners. These are the types of risks involved.

Cost-benefit analysis

The strategic planning process is not aimed at making a loss or seeing your organisation become less effective. The need for financial viability and profitability is vital. All organisations need to be financially effective in what they do; otherwise they will cease to function. By treating return on investment as a vital requirement of planning, you will increase the likelihood that your plans will be viable and sustainable.

In a traditional profit-driven organisation, return on investment tends to be the main objective of any business strategic plan. In most traditional corporations, return on investment tends to be at the heart of all activities, since typically the organisation exists to maximise the yield (profit and growth effectively) of shareholder funds invested and the interests of its key stakeholders.

The strategic planning process must therefore consider the cost benefits, profit margins and the return on investment that is likely to occur as a result of the overall plan and the changes being suggested.

A cost-benefit analysis finds, quantifies, and adds together all the positive factors which are considered benefits. Then it identifies, quantifies, and subtracts all the negatives (costs). The difference between the two indicates whether the planned action is advisable. The process will not succeed unless your data and research is accurate.

Due diligence

Due diligence is a legal term which means, essentially, to make sure that all the facts regarding the company are available and have been independently verified. In some respects, it is similar to an audit. Due diligence sounds impressive but ultimately translates into basic commonsense success factors such as ‘thinking things through’ and ‘doing your homework’.

Strategic plans usually demand changes within the organisation, therefore a review of its operational procedures will be necessary. All of the associated documents, financial statements, research, analysis, survey results, stakeholder feedback etc, would need to be presented so that your joint venture partners can review them and consider their implications. In this case it is not uncommon for an auditor, lawyer or other qualified person to be contracted to assist with the review and analysis.

The amount of due diligence you conduct is based on many factors, including prior experiences, the size of the transaction, the likelihood of closing a transaction, tolerance for risk, time constraints, cost factors, and resource availability. It is impossible to learn everything about a business but it is important to learn enough such that you lower your risks to the appropriate level and make good, informed business decisions.

Your joint venture partner may want to review any of the following aspects of your organisation that may be affected by the implementation of the new strategic plan. In the same way, it is important that you are able to review the same documentation held by your partner. The changes may require them to review their policies, procedures and processes more than it affects you.

A due diligence review may cover any of the following elements within the organisation; legal, financial, technical, or marketing.

Legal details

• Full name and ownership of the firm.
• Business registration documents.
• Copies of licences granted to the company and legal approval.
• Copies of minutes from Directors and senior leadership meetings.
• Signatory rights backed by the appropriate decisions.
• The company’s charter and other incorporation documents.
• Details regarding lawsuits or other actions taken against the company that may influence the company’s future strategic plans.

Financial details

• Last three years’ income statements, balance sheets, cash flow, profit/loss statements.
• Audit reports and procedures.
• Cash flow projections with explanatory notes.
• Financial control.
• Accounting systems used.
• Pricing index and methodology.
• Payment terms, collections of debts and ageing of receivables.
• Introduction of international accounting standards.
• Monitoring of sales, orders, distribution, etc.
• Stock on hand.
• Systems for recordkeeping.
• Budgeting and budget monitoring.
• Lending history and loan repayments.

Technical details

• Human resources (skilled and unskilled).
• Infrastructure (power, water, etc.).
• Outline of manufacturing processes.
• Information technological audit report.
• Suppliers of equipment, software, services.
• Raw materials: sources, cost and quality.
• Relations with suppliers and support industries.
• Import restrictions or licensing.
• Transport and communications.
• Sites and technical specifications.
• Environmental issues and how they are addressed.
• Leases and other arrangements.
• Integration of new operations into existing ones.

Marketing details

• Recent performance history.
• A vision of the business in the future.
• Products and services.
• Competitor evaluation and comparison.
• An overview of the market, trends and market segmentation.
• Planned market research.
• Warranties, guarantees and after-sales service.
• Development of new products or services.
• Summary of customer feedback.
• The pricing strategy.
• Promotion of the sales of the products including a description of the sales, incentives, sales targets, training of the sales personnel, special offers, dealerships, telemarketing and sales support.
• Summary of the purchasing process.
• Marketing and advertising campaigns.
• Distribution of the products.
• Customer after-sales service.
• Customer loyalty program.

Too much due diligence can lead to ‘overkill’, to the point where you may be tempted to walk away from the venture. It can also result in ‘analysis paralysis’ that prevents you or your partner from completing the joint venture transaction. Accordingly, it is important that due diligence process is prioritised and executed and not allowed to drag on. The appropriate level of questioning and verification into the most important issues must be balanced by a sensible level of trust concerning the lesser issues.6

Drafting priority issues

In preparation for the writing of the strategic plan, it is important to summarise the findings from your research, including customer feedback, consultants reports, PEST analysis, SWOT analysis, value chain analysis, trends analysis, and competitor analysis. All of these analyses have provided you with a wealth of information about the current status of your organisation. The next step is to draft a list of the priority issues – the broad areas where department leaders and key stakeholders think you should focus your efforts.

Steps for defining priority issues:

1. Review the summary lists of results from the SWOT, PEST and other analyses and research data where possible.
2. Identify priority issues. Most priority issues generally meet the following criteria; they have long-term and major financial impact; they address a current window of opportunity; they are critical in correcting structural weaknesses.
3. Compile priority issues by asking those that participated in the SWOT and PEST analyses to identify the top priority issues for them – trying to narrow it down to just three.
4. Elicit discussion around each priority issue suggested, by questioning the reasoning for proposing it, the advantage of addressing it, and the disadvantage of not addressing it.
5. Address the list again and discuss issues that may have been overlooked by asking the participants to suggest any obvious omissions. These are issues that may be talked about regularly in the daily operations of the organisation, but for some reason not discussed in the SWOT and PEST analysis.
6. Ask participants to vote on the top issues and then document why they felt these were the most important issues.

Identifying gaps

Your priority issues are those that have the greatest positive impact on the long term direction of the organisation. Present your summary of these issues to the senior leadership of the organisation for discussion, feedback and comparison with the previously documented key issues.

The differences or gaps between current priorities and the newly defined list of priorities need to be highlighted and noted for discussion. These will become the catalyst for the strategic action plans. You need to encourage ongoing dialogue between senior leadership, departmental leaders and key stakeholders until agreement is reached on the importance of these issues.

Learning activity: Priority matrix

A priority matrix can be a helpful tool for establishing priorities. Make a list below of all the tasks you need to undertake in any given work day, then enter them on the grid below.

What do you notice about the weighting of your priorities?

Do you need to re-prioritise in any areas?

Section summary

You should now understand how to conduct research and other environmental analyses. You should also know how to pinpoint the priority issues emerging from this research, and how to maintain the organisation’s co-operative venture partners.

Further reading

• Hill, C. W. L., Jones, G. I. R., Galvin, P., and Haidar, A., 2007, Strategic management: An integrated approach, 2nd Australasian edn, John Wiley & Sons, Australia (Chapters 3 and 4).
• Wikipedia, 2010, ‘Due diligence’, viewed August 2015, <http://en.wikipedia.org/wiki/Due_diligence>.

• Davidson, P., Wood, S., and Griffin, R. W., 2009, Management, 4th Australasian edn, John Wiley & Sons, Australia (Chapters 3 and 5).

Section checklist

Before you proceed to the next section, make sure that you are able to:

• Conduct research
• Analyse the external environment
• Analyse the internal environment
• Assess co-operative ventures
• Draft priority