The Business Blog

This is about organising the various functions within an enterprise to achieve the same set of objectives, which have been identified as the directions in which the business wishes to develop. In that sense, this article is about strategy at work, since everything should relate to the general premise that a business must sell things repeatedly, over time, for more money than it spends in so doing. The strategic planning process for a firm is about deciding what these things will be, and to whom they will be sold; the consequent how, where, and so on, are the essence of good management. History has a big part to say in the answers to these questions, but that little bit extra which makes the difference – those few pence of earnings per share which the chairman has promised shareholders – comes from strategy.

Identifying the things and the customers at the same time introduces the product-market concept, something central – but often overlooked – in the ‘classical’ approach to strategy developed by H. Igor Ansoff. Any firm operates in an environment which is not static but dynamic, being in the broadest sense influenced by political, economic, social and technological factors, which need to be examined. This is the so-called PEST (or STEP) analysis. Within this environment, the firm operates in a number of product-markets, as do its various competitors. The concept of product-market is crucial, defining the firm’s activities not just by what it sells, but also to whom it sells the ‘what’. Statistical classification of industries usually involves one or the other, but both are needed. A manufacturer of animal foodstuffs is in the same productive arena as a major bread producer, but not the same market; it is in the same market as a tractor manufacturer, but not the same industry.

For each of its product-markets, the firm may compare itself with its competitors, in terms of its relative strengths and weaknesses. This can be difficult to do objectively, and has given rise to the concept of benchmarking – finding out what others achieve to make direct comparisons. At the same time, anticipated events and trends in the environment raise the prospect of opportunities for growth or new product-markets, and threats to existing business. The examination of strengths, weaknesses, opportunities and threats is known as SWOT analysis.

SWOT seeks to identify product-markets in which the firm has a comparative advantage over its competitors, and these are the key business activities in which the firm should concentrate. It should then endeavour to protect its superiority through the building and reinforcement of economic barriers to entry. The origins of comparative advantage can be explained in part by economic factors such as economies of scale in production, research and development, or frequently, marketing and distribution. It can derive from intangible but definite factors such as the ownership of intellectual property rights (patents, trade marks etc). It can also be because one firm is simply better at certain things than its competitors. This ‘being better’ is termed distinctive competence.

That this is the same root as the modern core competence should not come as a surprise, since specialisation is as old as firms themselves. When a firm forecasts that it will make a superior profit, the question should be: why? If this question can be answered satisfactorily and objectively (and it is not based on some innate belief such as ‘we have never failed yet’), then the particular procedure chosen for the analysis is unimportant.

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