Strategic Analysis and Choice (Integrated)

Strategic analysis begins with understanding the EXTERNAL ENVIRONMENT. The macro environment is broad context affecting all businesses; specific industry forces are narrower (Porter's Five Forces).

PESTEL framework:

How to use PESTEL effectively:

• Identify factors RELEVANT to the specific business (avoid generic lists)
• Assess IMPACT (high/medium/low) and TIMEFRAME (short/medium/long)
• Identify TRENDS not just current state
• Link to strategic implications: opportunities or threats?
• Consider INTERACTIONS between factors (e.g., environmental regulation + technology)

Avoiding the laundry list trap:

• WEAK: "Brexit affected the company" (generic)
• STRONG: "Brexit increased customs costs by ~5% on EU imports, particularly affecting margins on the company's perishable produce business — material adverse effect"
• Always SPECIFIC and TANGIBLE; SHOW MAGNITUDE where possible

Scenario planning:

Scenarios are PLAUSIBLE FUTURE STATES used to test strategic resilience under uncertainty.

Approach:

1. Identify KEY UNCERTAINTIES affecting the business (often 2 most material)
2. Develop scenarios at extremes (e.g., 2x2 matrix of uncertainty A and uncertainty B)
3. Build narrative for each scenario
4. Assess strategic implications for each
5. Identify ROBUST strategies (work across scenarios) vs CONTINGENT strategies

Example — energy company scenarios (climate + technology):

• Scenario A: Fast climate transition + tech breakthrough → renewables dominate; fossil fuel demand crashes
• Scenario B: Slow transition + incremental tech → fossil fuels persist; gradual shift
• Scenario C: Fast transition but tech disappoints → high carbon prices; energy expensive
• Scenario D: Slow transition + tech breakthrough → renewables compete on price; mixed market

Strategic implications differ across scenarios — flexibility valuable.

Climate scenario analysis (IFRS S2 requirement):

• Companies must disclose use of climate scenarios
• Common: 1.5°C scenario (Paris-aligned); 2°C; business-as-usual
• Test resilience of business model and strategy
• Communicate to investors

Michael Porter's Five Forces framework analyses the competitive forces shaping an industry — determining its long-run profitability potential.

The Five Forces:

1. RIVALRY among existing competitors:

• Intensity of competition between current players
• Drivers of HIGH rivalry:
  • Numerous, equally balanced competitors
  • Slow industry growth (fight for share)
  • High fixed costs (price wars to use capacity)
  • Low switching costs for customers
  • Lack of differentiation (commodity-like products)
  • High exit barriers (specialised assets, regulations)
  • Diverse competitors (different strategies)
• Effect: erodes profitability through price competition or increased costs

2. THREAT OF NEW ENTRANTS:

• How easy is it for new competitors to enter?
• Barriers to entry (HIGHER barriers = LOWER threat):
  • Economies of scale (incumbents' cost advantage)
  • Capital requirements (large initial investment)
  • Switching costs for customers
  • Access to distribution channels
  • Brand identity / customer loyalty
  • Government policy / licensing
  • Patents and proprietary technology
  • Cost advantages independent of scale (e.g., learning curve, location)
• Industries with low barriers (online retail, restaurants): high threat
• Industries with high barriers (pharmaceuticals, utilities): low threat

3. THREAT OF SUBSTITUTES:

• Products/services from OTHER industries that meet the same need
• Different from rivalry (rivalry is within industry; substitutes from elsewhere)
• Substitute examples:
  • Plant-based "meat" for traditional meat
  • Streaming for cinema
  • Electric vehicles for petrol vehicles
  • Plain water for sugary drinks
  • Video conferencing for business travel
• Substitutes constrain pricing; squeeze margins
• Strong substitutes when: better price-performance; customer willing to switch

4. BARGAINING POWER OF BUYERS:

• How much can customers push for lower prices, better quality, more service?
• Buyer power HIGH when:
  • Few large buyers (concentrated)
  • Product is undifferentiated/standardised
  • Low switching costs for buyers
  • Backward integration possible (buyer could make instead)
  • Buyers price-sensitive (low margins, low value-add product)
  • Product not critical to buyer's quality
• Examples: supermarkets vs food producers (high buyer power); luxury brands (low buyer power)

5. BARGAINING POWER OF SUPPLIERS:

• How much can suppliers push for higher prices, lower quality, less service?
• Supplier power HIGH when:
  • Few suppliers, many buyers
  • Product unique/differentiated
  • High switching costs for buyers
  • Supplier could forward integrate
  • Industry not important to suppliers (low share of supplier revenue)
  • Substitutes not available
• Examples: chip manufacturers (TSMC) over device makers (high supplier power); commodity components (low supplier power)

Industry profitability implications:

• STRONG forces (any combination) → low profitability
• WEAK forces → high profitability
• Different industries have different "structural" profitability
• Companies can sometimes shape forces (lobbying, acquisitions, alliances)

Worked example — UK supermarket industry:

Conclusion: industry has multiple strong forces — STRUCTURALLY LOW MARGINS (typical 2-5% net margin for major UK supermarkets, vs 10%+ in other retail).

Limitations of Five Forces:

• Snapshot in time — needs DYNAMIC update as industry evolves
• Industry boundaries blur (e.g., Amazon: retailer? cloud provider? media?)
• Doesn't capture COMPLEMENTORS (sometimes called "Sixth Force") — products that enhance demand for industry products (e.g., apps for smartphones)
• Doesn't address TIME and SPEED of change
• Strategic groups within industry may differ significantly
• Cooperation as well as competition (alliances, JVs)

Strategic groups analysis:

• Identify companies pursuing SIMILAR STRATEGIES within an industry
• Plot on dimensions (e.g., quality vs price; geographic scope vs product diversification)
• Each strategic group may face different competitive dynamics
• Mobility barriers between groups
• Example UK retail: high-end (Waitrose, M&S Food); mid-market (Sainsbury's, Tesco); discount (Aldi, Lidl); convenience (Sainsbury's Local, Tesco Express); online specialist (Ocado)

Internal analysis identifies a company's SOURCES OF COMPETITIVE ADVANTAGE — what it does well, what unique resources it has, what it could leverage.

Resource audit:

Categorise resources:

Often INTANGIBLE resources are most valuable (harder for competitors to copy).

Porter's Value Chain:

Disaggregates a firm into VALUE-CREATING ACTIVITIES. Identifies where value is added, where costs are incurred, where competitive advantage lies.

PRIMARY activities (5):

1. Inbound logistics: receiving, storing, distributing inputs
2. Operations: transforming inputs into outputs (manufacturing, service delivery)
3. Outbound logistics: collecting, storing, distributing outputs
4. Marketing & sales: enabling buyers to purchase; persuading them to do so
5. Service: maintaining/enhancing product value (installation, repair, training, parts)

SUPPORT activities (4):

1. Firm infrastructure: general management, planning, finance, accounting, legal
2. Human resource management: recruitment, training, development, compensation
3. Technology development: R&D, product/process improvement
4. Procurement: purchasing inputs (materials, services, equipment)

Value chain analysis applications:

• Identify activities where firm has competitive advantage
• Identify activities to improve (cost reduction, differentiation)
• Make/buy decisions (outsource non-core)
• Vertical integration assessment
• M&A targets (acquire complementary capabilities)
• Compare to competitors' value chains

Cross-industry comparison example — coffee shops:

• Starbucks: differentiation through marketing, store experience, quality coffee, loyalty programs
• Costa: similar but focus on coffee roasting capability
• Pret A Manger: differentiation through fresh food + coffee combination; sustainability
• Caffè Nero: lower price point; differentiation through Italian heritage
• Each firm's value chain emphasises DIFFERENT activities for differentiation

VRIO Framework (Barney):

Identifies whether a resource is a SOURCE OF SUSTAINABLE COMPETITIVE ADVANTAGE.

Outcomes:

• NOT VALUABLE → competitive disadvantage
• VALUABLE only → competitive parity
• VALUABLE + RARE → temporary competitive advantage
• VALUABLE + RARE + INIMITABLE → potential sustained competitive advantage
• VALUABLE + RARE + INIMITABLE + ORGANISATION → SUSTAINED competitive advantage

Sources of inimitability:

• UNIQUE HISTORICAL CONDITIONS (e.g., first mover; specific path)
• CAUSAL AMBIGUITY (link between resource and advantage unclear)
• SOCIAL COMPLEXITY (culture, relationships, trust — hard to replicate)
• PATENTS / IP protection

Examples of likely sustainable advantages:

• Apple: brand + ecosystem + design culture (socially complex)
• Coca-Cola: brand + distribution + secret formula (causal ambiguity + IP)
• LVMH: portfolio of luxury heritage brands (historical conditions + complex culture)
• TSMC: semiconductor manufacturing scale + decades of process knowledge (causal ambiguity)

Core competences (Prahalad & Hamel):

• BUNDLES OF SKILLS AND TECHNOLOGIES that:
  • Enable particular benefit to customers
  • Are difficult for competitors to imitate
  • Provide access to multiple markets
• Examples: Honda (engine technology — applied to cars, motorcycles, generators, lawn mowers); Sony (miniaturisation); 3M (adhesive technology)
• Strategic implications: leverage competences across business units; build new businesses around competences

Dynamic capabilities (Teece):

• FIRM'S ABILITY TO INTEGRATE, BUILD, AND RECONFIGURE internal and external competences to address rapidly changing environments
• Three components:
  1. SENSING: identifying opportunities and threats
  2. SEIZING: mobilising resources to address opportunity
  3. TRANSFORMING: continuously renewing the firm
• Important for industries facing rapid change (technology, healthcare, finance)

SWOT analysis integrates internal and external analysis into a strategic synthesis.

Components:

• Strengths (Internal): capabilities, resources providing advantage
• Weaknesses (Internal): limitations, gaps
• Opportunities (External): trends/changes that could be exploited
• Threats (External): trends/changes that could harm

SWOT done badly (common mistake):

• Generic lists with no specific evidence
• "Brand awareness" as strength without comparison or magnitude
• "Economic uncertainty" as threat without specifying which uncertainty and how it affects firm
• No prioritisation
• No link to strategy

SWOT done well:

• SPECIFIC items with evidence
• QUANTIFIED where possible (e.g., "20% market share, 2nd in market")
• RANKED by importance
• SO-WHAT analysis: what does each item mean for strategy?
• PRIORITISED to focus discussion

SWOT-driven strategy formulation (TOWS matrix):

Examples by quadrant:

• SO: leverage brand strength + sustainability trend → launch eco-product line
• WO: address weak digital capability + e-commerce growth → invest in online platform
• ST: use cash strength + recession threat → acquire weakened competitors
• WT: limited international experience + emerging market entry → defensive: focus on home market or partner

Strategic implications matrix:

For each significant SWOT item:

1. What is the implication?
2. What strategic responses are possible?
3. What does management need to do?
4. What are the risks if not addressed?

From analysis to strategy:

The whole point of strategic analysis is INFORMING STRATEGY:

• Identify GAP between current and desired position
• Generate strategic OPTIONS to close the gap
• EVALUATE options (suitability, acceptability, feasibility — see next section)
• SELECT preferred strategy
• IMPLEMENT

Common strategic options frameworks:

Ansoff Matrix:

Porter's Generic Strategies:

• Cost leadership: be the lowest-cost producer (e.g., Aldi, Ryanair)
• Differentiation: offer unique value (e.g., Apple, BMW)
• Focus: target a narrow segment (cost-focus or differentiation-focus)
• "Stuck in the middle": neither cost nor differentiation leader → poor performance
• Hybrid (sometimes possible): cost AND differentiation (e.g., Ikea, Tesla early)

Bowman's Strategy Clock:

• More nuanced than Porter — eight positions on price vs differentiation axes
• Includes: hybrid, differentiation, focused differentiation, low-price, no-frills
• Identifies strategies likely to fail (high price, low value)

Once strategic options are generated, they must be EVALUATED before selection. The Johnson, Scholes & Whittington framework uses three criteria:

1. SUITABILITY:

Does the option ADDRESS the strategic situation? Does it fit the analysis?

Suitability tests:

• Does it exploit an opportunity / capability?
• Does it address a weakness / threat?
• Is it consistent with strategy / vision?
• Does it reflect the company's competitive position?
• Does it use core competences?

Tools to assess suitability:

• SWOT analysis (does it address the matrix?)
• Strategy clock / generic strategies fit
• Life cycle position
• Portfolio matrix (BCG, Ashridge)
• Value chain analysis

2. ACCEPTABILITY:

Will it be accepted by stakeholders? Are returns acceptable to those affected?

Acceptability assessed across dimensions:

(a) RISK / RETURN profile:

• Financial: NPV, IRR, payback, ROI, breakeven analysis
• Sensitivity analysis (how robust to assumption changes?)
• Scenario analysis
• Real options perspective (flexibility value)

(b) STAKEHOLDER reactions:

• Shareholders: returns, growth, dividend
• Employees: jobs, conditions, careers
• Customers: quality, service, price
• Suppliers: continuity, terms
• Communities: local impact
• Government / regulators: compliance, policy alignment
• NGOs / activists: environmental, social impact

Mendelow's Matrix (stakeholder mapping):

Map stakeholders by POWER (ability to influence) and INTEREST (level of concern):

Strategic implications by quadrant:

• Key players (high power, high interest): MUST be aligned with strategy; consult; engage in decisions
• Keep satisfied (high power, low interest): inform of decisions; manage their interests; risk if interest rises
• Keep informed (low power, high interest): provide information; avoid coalitions forming; potential allies
• Minimal effort (low power, low interest): monitor only; respond if status changes

Example stakeholder mapping for a major restructuring:

• KEY PLAYERS: institutional shareholders; major lenders; CEO/board; key customers
• KEEP SATISFIED: employees overall; trade unions (depending on size); regulators
• KEEP INFORMED: local community where redundancies; activist groups; media
• MINIMAL EFFORT: small individual customers; minor suppliers

(c) Cultural and political acceptability:

• Does it fit the organisation's culture? (Handy's typology; Cultural Web — Johnson)
• Power dynamics — who supports/opposes?
• Resistance levels expected
• Change management implications

3. FEASIBILITY:

CAN the option be done? Resources, capabilities, market position?

Financial feasibility:

• Funding requirements (CAPEX + working capital + acquisition cost)
• Funding sources (retained earnings, debt, equity)
• Cash flow forecasting
• Impact on financial covenants
• Cost of capital implications
• Affordability under stress scenarios

Resource feasibility:

• People: do we have the right skills? Need to recruit?
• Operational capacity: production, distribution
• Technology: infrastructure, systems
• Time: realistic timeline?

Capability feasibility:

• Do we have the capabilities, or can we develop/acquire?
• Cultural compatibility
• Management bandwidth
• Track record in similar moves

Market feasibility:

• Can we win in the target market?
• Customer acceptance?
• Competitive response?
• Regulatory hurdles?

Worked SAF framework — example: UK retailer considering US market entry:

Suitability:

• UK home market saturated → need geographic expansion
• Brand has international recognition → fits opportunity
• SUITABLE

Acceptability:

• Financial: NPV £80m positive over 10 years; payback 6 years; IRR 12% vs WACC 9% — acceptable financially
• Stakeholders: institutional shareholders broadly supportive (US growth story); risks if execution poor
• Cultural: would require US-style operational model — moderate cultural shift
• ACCEPTABLE with caveats

Feasibility:

• Financial: requires £200m investment — within debt capacity
• Resources: US management hire required; supply chain partners available
• Capability: limited US experience — risk; partner via JV may mitigate
• Market: US retail highly competitive; specific niche needed
• FEASIBLE if JV structure used; pure organic risky

Conclusion: Suitable + acceptable; feasibility CONTINGENT on JV approach. Recommend proceed with JV; reject pure organic entry.

SBM exam questions typically require INTEGRATED analysis, not just framework application. Strategic analysis is a tool to inform JUDGEMENT, not an end in itself.

Common SBM exam scenario types:

1. Strategic options analysis (e.g., should company X enter market Y?)
2. Acquisition / divestment decisions
3. Competitive response (how should X respond to Y's move?)
4. Crisis response / turnaround
5. Restructuring / refinancing strategy
6. Sustainability strategy
7. International expansion

Approach to SBM strategic questions:

1. UNDERSTAND THE SCENARIO:

• What is the company? What does it do?
• What is the strategic context? Industry trends?
• What's the specific question / issue?
• Who are the stakeholders? Their interests?
• What's changed? Why is decision needed now?

2. ANALYSE EXTERNAL ENVIRONMENT:

• PESTEL relevant factors
• Industry analysis (Five Forces) — KEY if competitive question
• Strategic groups
• Competitor moves

3. ANALYSE INTERNAL POSITION:

• Resources and capabilities
• Value chain — where is value created?
• Core competences / VRIO sources of advantage
• Financial position (latest results)
• Strategic positioning

4. SYNTHESISE — SWOT:

• Specific items with evidence
• Implications for strategy
• Priorities

5. EVALUATE OPTIONS — SAF:

• For each option: suitability, acceptability (financial + stakeholder), feasibility
• Quantitative analysis where possible (NPV, IRR, sensitivity)
• Risk assessment

6. RECOMMEND AND JUSTIFY:

• Clear recommendation
• Justified by analysis
• Acknowledge risks/uncertainties
• Mitigation strategies
• Implementation considerations

Common pitfalls in SBM analysis:

1. Generic frameworks without context: applying PESTEL/Five Forces without specific evidence from the case
2. Listing without analysing: identifying factors but not linking to strategic implications
3. Quantitative isolation: showing financial calculations without strategic context
4. Strategic isolation: showing strategic analysis without financial validation
5. Single-source recommendation: relying on one framework or one analysis
6. Stakeholder blind spots: focusing only on shareholders
7. Implementation gaps: recommending strategy without considering "how"
8. Risk blind: not acknowledging risks or mitigation

Time management in SBM exam:

• Plan answer structure FIRST (5-10 minutes per question)
• Tied to mark allocation — bigger sections deserve more time
• Don't over-analyse simple parts; focus on integration
• Show working for quantitative parts
• Conclude clearly with recommendation

Demonstrating commercial awareness:

• Reference current events / industry developments where relevant
• Acknowledge real-world constraints (regulation, social acceptability)
• Quantify where possible
• Consider implementation reality, not just theory
• Show awareness of stakeholder interests
• Don't recommend obviously unethical or impractical options

Professional scepticism in advisory role:

• Challenge assumptions
• Consider alternative interpretations
• Check for biases (sunk cost, anchoring, optimism)
• Verify financial assumptions
• Consider downside scenarios
• Document reasoning for advice

Report writing for SBM:

• STRUCTURE: introduction → analysis → options → recommendation → implementation
• EXECUTIVE SUMMARY: key findings and recommendation upfront
• HEADINGS clearly signpost analysis
• EVIDENCE-BASED: link analysis to specific case facts
• BALANCED: acknowledge uncertainties, alternative views
• DECISIVE: clear recommendation with justification