Strategic Analysis explained

Every company has a strategy because every company operates within a set of structural constraints. Some of these conditions it chooses (whether or not to own its distribution network, for example), some are imposed by the environment (a new technology appears, or exchange-rate risk management is key to results).

The operative word is “structural”: what is strategic can be changed neither quickly nor cheaply.

Note that strategy is not more important than operational performance. Both an appropriate strategic position and efficient operations are good for returns. Poor operations or a poor strategy can impact a company’s financial standing equally.

To explain what strategy analysis is, look to how a strategy analyst would go about understanding a card game: by observing the players at length, he would hope to discover the rules. How many cards are dealt? Which combination of cards wins? Etc. In this manner, he will be in a position to describe the rules of a game he first knew nothing about. It helps of course if he can ask questions of one of the players. (This process lends substance to the joke about the consultant who asks for a client’s wristwatch, only to give him the time of day.)

In business, this means immersing oneself in an industry: who are the competitors, the suppliers, the customers? How do they behave? What assets do they own and run? What are the physical productivities? What activities do competitors contract out? Which competitor has the best financial returns over time? What physical factors explain a superior performance?

The aim of strategy analysis is to discover and quantify the levers which drive the financial results of a business over the long run. Often, it is simply by comparing the “best in breed” with the others that one finds these levers and how best to play them. (Though helpful, imagination and creativity are not necessary to the process at this stage.)

In sugar and ethanol for example, competition is on cost and the main levers are feedstock price (delivered), mill size (throughput: daily crushing capacity and campaign length), logistics, and regulations (agricultural and trade policies). Thus, main structural factors are geographic in nature.

Most often of course, a management team knows these structural factors. It is the way they interact and can be played to improve results which may be insufficiently understood. The value a strategy consultant brings is in revealing the relative impact of each structural element so as to make a company’s resource allocation decisions more effective.

Nonetheless, good business strategic analysis derives not only from the mechanistic application of game rules. The determination of the competitive environment of a business (“segmentation” in strategy parlance) is rarely straightforward. It requires an understanding of the physical and psychological forces which underpin the accumulation of wealth. In short, it requires business acumen.