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Strategic Analysis

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Business Studies

Can you imagine making decisions without any background information? Maybe your answer is yes, but this decision may not be as effective as it could be. In the business world, the exact same principle exists. Therefore, prior to making decisions or forming strategies, it is crucial for a business to do its research and conduct analysis.

Strategic Analysis definition

The strategic analysis includes both Internal and external analysis. To get a better understanding let's define both of them.

The internal analysis

Internal analysis is aimed to assess the business's tangible and intangible resources and assets, to see the overall business health. A company's internal analysis involves performing both financial and non-financial analyses.

The external analysis

The external analysis is aimed to examine all the factors in the external environment that may have an impact on business operations.

Mission, objectives and strategy

Firstly, the mission is the statement communicating how the vision can be achieved. Objectives are more defined milestones with timeliness guiding the company of how its goal along with vision and mission can be achieved. Strategies are defined ways of how a business is going to achieve its vision, mission and objectives. Strategies are formed through detailed internal and external strategic analyses.

The vision statement is formed to identify the desired future positioning of the business.

Types of strategic analysis

Let's take a look at an overview of different types of strategic analyses.

Internal analysis

The internal analysis includes Financial ratio analysis, Kaplan and Norton’s balanced scorecard model and Elkington’s Triple Bottom Line model.

Financial ratio analysis

First, businesses need to analyse their strategic positioning financially to see how well the business is doing in terms of its profit and budgeting. The financial ratio analysis is an effective method for businesses to analyse their financial performance. Financial ratio analysis includes assessing key elements such as:

Liquidity- Analysis of how capable the company is to pay off immediate debts using its current assets.

Profitability - Analysis of the company’s capability of making a profit from its offered goods or services.

Gearing - is calculated by using the ratio of long-term liabilities to capital employed. This shows how much the company's capital is funded by long-term liabilities.

Efficiency ratios - This ratio measures companies ability to use its assets and to manage its debts effectively.

Additional tools to analyse a business's financial performance include a balance sheet, which describes the organisation's financial position at a designated period, and an Income Statement, which shows the organization's income and expenditure at the selected period.

Kaplan and Norton’s balanced scorecard model

This model is used to measure how aligned the business activities are to the company’s vision and strategy. This model can be used to analyse a business from financial and non-financial perspectives regarding the company’s vision and strategy.

The four perspectives of the model are:

Financial: organisation’s financial performance.

Customer: customers' satisfaction regarding business products, services and overall business.

Internal processes: measures how efficient the business is regarding its internal functions.

Learning and growth: how capable the company is to retain its efficient employees and encourage innovations.

Elkington’s Triple Bottom Line model

Elkington’s Triple Bottom Line model focuses on factors with which a business can measure its performance. The factors mainly focus on measuring a business’s non-financial performance.

These factors include:

Profit - This performance measure is done by looking at the firm’s financial statements.

Planet - This measures a business’s performance regarding the company’s impact on the environment, in terms of emissions and use of sustainable resources.

People - This factor analyses a business’s performance in terms of being socially responsible. This can include benefiting society, such as treating employees well, paying them fair wages and participating in charitable activities.

It may be hard to measure the business’s performance regarding the social aspect (People) as it may be difficult to measure exactly the extent to which business has benefited society and is socially responsible.

Internal and External analysis

This includes the SWOT analysis, the first two elements of which are strengths and weaknesses and belong to internal analysis and the next two elements including opportunities and threats are part of the external business analysis.

SWOT analysis

SWOT analysis is used by businesses to examine their internal and external influences in regards to their cooperative strategies. The first two elements, strengths and weaknesses, are used for internal analysis regarding current business positioning. The following two elements, opportunities and threats, are the possible external influences on a company that may occur due to the changing environment.

Strengths - These represent the current business situation in terms of what the company is good at.- These may include high brand recognition, good cash flow or a loyal customer base.Weaknesses- These are the current things business is not so good at and these require further improvement. - Weakness may include weakened brand image due to a product safety scandal or high production costs.
Opportunities- These include analysis of the changes in the external environment that may bring business new opportunities.- One of the examples of opportunities can be expanding internationally to countries that have lower costs of production.Threats- These include analysing how the changes in the external environment can have a negative impact on the organisation.- One of the examples are new competitors that increase the competitive environment in the market.

External Analysis

The external analysis includes a competitive analysis called Porter's 5 Forces and a PESTLE analysis of the external environment.

Porter's 5 Forces

This analysis will assist businesses in strategic planning in the competitive environment and determine the business’s competitive strategy.

The 5 forces are:

Rivalry among existing competitors - The first force refers to identifying the existing competitors in the market and their competitiveness.

Threats of new entrants - The company should consider how easy and costly it is for competitors to enter the market. If the barriers of entry are low, this can be a disadvantage for the company. However, if the barriers to entry are high, the company has already established brand loyalty and high switching costs.

Threats of substitutes - If there are quite a few substitutes available for a company’s goods and services, it may be a threat to the company. However, if there are no close substitutes businesses will have the power to set prices and establish a loyal customer base.

Bargaining power of buyers - The company must consider the number of customers it has and their price sensitivity and ability to find substitutes.

Bargaining power of suppliers - The power of suppliers depends on the number of suppliers available. The fewer suppliers mean that the company has less power and more dependency on suppliers, which gives them the power to set the terms and increase prices. On the other hand, if there is a lot of availability of suppliers, the company has the power to choose and bargain for lower prices.

PESTLE Analysis

This analysis is used to examine the external environment that may have an impact on a business's operations. The main elements included in PESTLE analysis (with examples) are:

  • Political - tax, financial stability, changes in legislation.

  • Economic - economic growth or rates of employment.

  • Social - demographic influences or lifestyle factors.

  • Technological - technology innovations.

  • Legal - tax policies or employment laws.

  • Environmental - laws in regards to regulations of pollution.

Strategic analysis process

The strategic analysis process's main aim is to form a strategy and make strategic decisions. There are key steps involved in this process. First, the company must conduct internal analysis and examine the external environment surrounding the organisation. In addition, the strategic analysis must be made taking into consideration the business's mission and objectives.

Strategic Analysis, Strategic Analysis Process, StudySmarterStrategic Analysis Process, StudySmarter

Inputs to the strategic planning process - As illustrated in the diagram above, the Strategic Analysis process starts with analysing a business's internal positioning using internal analyses such as financial ratio analysis and other non-financial analysis performance models. Additionally, the external environment is also a big part of the strategic analysis process.

Mission - Another component that must be involved in the business strategy analysis process is a mission statement. As mission defines reasons for business existence, business goals, values and culture.

For example, Apple’s mission statement is:

to bring the best personal computing products and support to students, educators, designers, scientists, engineers, businesspersons and consumers in over 140 countries around the world.”

This shows that Apple's ultimate goal is to create the best personal computers for people in 140 countries. Additionally, Apple's values are aimed towards equality and providing opportunities to people universally.

Objectives - Business objectives can differ between each other depending on their scale. For example, corporate objectives are set for the whole business usually by the top or senior-level management. These objectives do not focus on small details but rather look at the whole picture.

Value proposition and strategy formulation - A value proposition and strategic approach can be developed and business decisions can be made once the internal and external strategic analyses are complete and the company's mission and objectives are considered.

As part of a marketing strategy, the value proposition is the statement a business makes to the customer about the value they will receive when they purchase a product or service from them.

Strategic Analysis - Key takeaways

  • The strategic analysis includes both Internal and external analysis.
  • Internal analysis is aimed to assess the business's tangible and intangible resources and assets, to see the overall business health.
  • External analysis is aimed at examining all the factors in the external environment that may have an impact on business operations.
  • The key types of Internal business analysis are Financial ratio analysis, Kaplan and Norton’s balanced scorecard model and Elkington’s Triple Bottom Line model.
  • SWOT analysis includes elements to conduct both Internal and External analysis. Internal analysis elements are strengths and weaknesses. The external analysis includes examining opportunities and weaknesses.
  • The key types of external analysis include a competitive analysis called Porter's 5 Forces and a PESTLE analysis of the external environment.
  • The key elements included in the Strategic analysis process are Inputs to the strategic planning process, mission, objectives, value proposition and strategy formulation.

SOURCES

1. Christine Rowland, Apple Inc.’s Mission Statement and Vision Statement (An Analysis), 2020

Frequently Asked Questions about Strategic Analysis

The key types of Strategic analysis include:

  • Financial ratio analysis, 
  • Kaplan and Norton’s balanced scorecard model
  • Elkington’s Triple Bottom Line model
  • SWOT Analysis
  • Porter's 5 Forces
  • PESTLE Analysis

The main tools used for strategic analysis are: 

  • Financial ratio analysis, 
  • Kaplan and Norton’s balanced scorecard model
  • Elkington’s Triple Bottom Line model
  • SWOT Analysis
  • Porter's 5 Forces
  • PESTLE Analysis

Strategic analysis is important because it enables a business to be aware of both its internal positioning and its external environment. Overall, A strategic analysis will help businesses formulate their strategic direction and make strategic decisions. 

SWOT analysis includes elements to conduct both Internal and External strategic analysis. Internal analysis elements are strengths and weaknesses. External analyses are opportunities and weaknesses.

There are key steps that are involved in the Strategic analysis process. These are:

  • Finding the inputs to the strategic planning process, 
  • Mission, 
  • Objectives,
  • Value proposition and strategy formulation.

Final Strategic Analysis Quiz

Question

What is business performance?

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Answer

Business performance can be defined as the ability of a business to implement strategy to achieve organizational objectives

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Question

What does KPI stand for? 


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Answer

Key performance indicator.

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Question

What is an example of a KPI? 


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Answer

  • Net sales growth

  • Looking at how many new customers make repeat purchases

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Question

Leadership and ________ can have a _________ impact on business performance. 

  1. Management, negative 

  2. Competition, positive 

  3. Innovation, positive 

  4. Employees, negative

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Answer

C.

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Question

What is organizational culture? 


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Answer

Organizational culture includes the shared values ​​and beliefs of a business that impacts the daily work environment of employees of an organization.

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Question

Name two examples of poor organizational culture. 


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Answer

  • Corruption 

  • Using fear to motivate employees

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Question

Which of the following statements are correct? 


  1. Evaluating business performance should be an ongoing process. 

  2. There is only one way to truly evaluate business performance. 

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Answer

Only statement I. is correct.

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Question

Name two ways of evaluating business performance. 


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Answer

  • Measuring profitability 

  • Employee output

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Question

Why is measuring financial performance useful? 

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Answer

Measuring financial performance can be a useful tool to analyze overall business performance. Financial planning and budgeting can help businesses achieve their business goals and plan for improving certain areas of the business in the future.

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Question

Name an example of a factor we could consider when measuring profitability.


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Answer

Profit margins.

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Question

What is a cash flow statement?

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Answer

A cash flow statement gives us an overview of how much money is coming in and out of the business over a certain period.

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Question

What does a negative cash flow imply?


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Answer

Negative cash flow implies that more money is moving out of the business than coming in.

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Question

How can we ensure that we spot potential patterns and trends in our financial data? 

  1. By looking at cash flow statements. 

  2. By comparing financial statements over time. 

  3. By looking at profitability.

  4. By benchmarking. 

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Answer

B

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Question

What is benchmarking? 


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Answer

Benchmarking is conducted by comparing the performance of the business to other best practice firms.

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Question

What is a competitor analysis? 


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Answer

A competitor analysis compares the performance of the business to other competitors in the industry.

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Question

What is non-financial data?

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Answer

Non-financial data is the measurement of business performance using metrics that are not related to a business's finances.

Show question

Question

Which of the following factors is not part of the triple bottom line? 

  1. People

  2. profit

  3. planet

  4. performance

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Answer

D.

Show question

Question

What does the people aspect of the triple bottom line measure? 


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Answer

The people aspect of the model refers to the company's social performance and it measures the extent to which the business is socially responsible.

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Question

How would you measure the profit aspect of the triple bottom line? 


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Answer

By looking at the company's financial statements.

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Question

What does the planet aspect of the triple bottom line measure? 


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Answer

The planet aspect of the model refers to the company's environmental performance and it measures the extent to which the business is environmentally responsible or irresponsible. For example, you can measure the planet factor by looking at how much CO2 a company is emitting yearly.

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Question

Name an example of integrated reporting and explain how it could be used in a company. 


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Answer

Sustainability reporting is a form of integrated reporting, which gathers and combines financial and sustainability-related data into a cohesive report. This is important as it explains how a company can create and sustain value.

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Question

What are the four different perspectives of the balanced scorecard? 


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Answer

  • The financial perspective

  • The customer perspective

  • The internal business process perspective 

  • The learning and growth perspective 

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Question

Name an example of a KPI used to measure the customer perspective. 


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Answer

Customer satisfaction rate.

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Question

Name an example of a KPI used to measure the financial perspective.


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Answer

Return on investment.

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Question

Name an example of a KPI used to measure the internal business process perspective.


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Answer

Activities per function.

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Question

Name an example of a KPI used to measure the learning and growth perspective. 


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Answer

Training and development opportunities.

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Question

Name two advantages of using non-financial data. 


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Answer

Some of the advantages of using non-financial data are that it provides broader insight into business performance and it can strengthen relationships with stakeholders.

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Question

Name two disadvantages of using non-financial data. 


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Answer

Some of the disadvantages of using non-financial data are that it is sometimes hard to measure non-financial factors and it could be hard to balance financial and non-financial objectives.

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Question

What is a core competency?

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Answer

A core competency is a certain activity or characteristic of a business that makes them stand out from competitors.

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Question

Name two examples of a core competency. 


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Answer

  • Quick order fulfillment 

  • Good customer service

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Question

Which of the following is not a core competency? 

  1. Great customer service. 

  2. Large customer base.

  3. Rapid innovation. 

  4. A broad strategy.

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Answer

D.

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Question

What are the three main characteristics of core competencies?


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Answer

A core competency has three characteristics: it is a source of competitive advantage and contributes to perceived customer benefits; it is relevant in a variety of markets; and it is hard for competitors to imitate (Kotler & Keller, 2016).

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Question

What would a business have to do to realign itself and strengthen its core competencies?


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Answer

Redefine the business concept, reshape their scope and reposition their brand identity.

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Question

Name an example of a company and define two of its core competencies. 


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Answer

Example: Apple and its rapid innovation and the 'ecosystem of complementary products'.

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Question

Name one of Netflix's core competencies.


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Answer

Their platform or their large subscriber base.

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Question

Which framework would you use to analyze a business's core competencies?

  1. SWOT 

  2. PESTLE

  3. Ansoff matrix 

  4. None of the above. 

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Answer

A.

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Question

What does the 'S' stand for in SWOT analysis?

  1. Scope 

  2. Strengths 

  3. Strategy 

  4. Social factors

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Answer

B.

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Question

How would you use a SWOT analysis to explore a business's core competencies?


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Answer

A SWOT analysis is useful for analyzing the strengths, weaknesses, opportunities and threats of the business and its environment. SWOT analysis can help strengthen the core competencies of the business and help define objectives and strategies to help the business with its weaknesses.

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Question

Name an example of an external environmental factor?

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Answer

Political factors.

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Question

Name the two types of taxation. 


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Answer

Direct and indirect taxes.

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Question

Which of the following statements is true? 

  1. Income taxes are a form of indirect taxes. 

  2. VAT is a type of indirect tax. 

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Answer

Only statement II. Is correct.

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Question

Name two types of direct tax. 


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Answer

Income and corporate taxes.

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Question

If income tax rates increase: 

  1. Consumers will spend less on goods and services. 

  2. Consumers will spend more on goods and services. 

  3. businesses will have to give up more of their profits. 

  4. businesses will have to give up less of their profits.

Show answer

Answer

A.

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Question

What are the effects of an increase in VAT?

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Answer

If VAT increases consumers will decrease their spending, as goods and services are now more expensive. VAT can also impact international trade (making imports more expensive).

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Question

What happens when VAT decreases? 


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Answer

If VAT decreases consumers will increase their spending, as goods and services are now less expensive. This can be profitable for businesses.

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Question

What happens when corporate tax rates increase? 


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Answer

If corporate tax rates increase businesses will have to give up a larger percentage of their profits and possibly decrease their expenses in certain departments of the business. Higher corporate taxes may also make it less attractive for international businesses to enter new markets and for international investors to invest in the country's businesses.

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Question

What happens when corporate tax rates decrease? 


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Answer

If corporate tax rates decrease businesses will have to give up less of their profits in the form of taxes, meaning that they have more to invest in other areas of the business, increasing their competitiveness. Lower corporate tax rates can also make a country more attractive for foreign investors and foreign businesses to enter the local market.

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Question

What is competition policy?


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Answer

Competition policy decreases the risks of unfair or monopolistic competition.

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What is health and safety legislation? 


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Answer

Health and safety legislation is in place to protect workers from dangerous working conditions.

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What is environmental legislation? 


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Answer

Environmental legislation has been developed to prevent businesses from further damaging the environment.

Show question

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