A FRAMEWORK FOR COMPREHENSIVE STRATEGIC ANALYSIS

ANTHONY E. BOARDMAN

Van Dusen Professor of Strategy

Faculty of Commerce

University of British Columbia

and

AIDAN R. VINING

CNABS Professor of Business & Government Relations

Faculty of Business Administration

Simon Fraser University

June 10, 2003

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INTRODUCTION: THE STRATEGIC ANALYSIS FRAMEWORK

This paper presents the basic framework for comprehensive strategic analysis. The basic purpose of

strategic analysis is to help analyze how the firm can generate returns in excess of the firm’s

opportunity costs (these are rents) by engaging in a more effective corporate strategy and, at the

business level, more effective competitive strategy (Porter, 1996).

The framework describes and briefly explains the major components of a strategic analysis,

and outlines the major components of strategic analysis and the order they should be covered in a

project write-up. It consists, therefore, of a coherent “skeleton” of a comprehensive strategic

analysis. Of course, it is only a generic guide. A project should be adapted to the specific needs (i.e.,

the project specification) of the client. Corporate-level analysis for firms with multiple business units

is more complex than an analysis of firms in a single line of business. Some projects are more

oriented to an industry analysis (a potential client for this type of analysis might be a firm

considering entering the industry). Other projects are essentially analysis of entry into a new market

or (new) business plans (see business plan power point slides).

The logic of a comprehensive strategic analysis is simple: describe and explain the

issue/problem, assess it, try to solve it. Of course, we actually analyze problems in a much more non-

linear manner than this in practice, but writing-up an analysis in this linear, “rational” mode is the

only way to make the analysis understandable to the client. Therefore, usually, a written

comprehensive strategic analysis contains three major parts, in the following order: analysis of the

current situation, assessment of the current situation (fulcrum) and solution analysis.

Analysis of the Current Situation

The purpose of the current situation analysis is to provide a “snapshot” of the issue/problem and of

the firm. Here some of the important questions normally addressed are: What is the issue/problem?

Who owns and/or controls the firm? What has been the recent history of the firm? What business, or

businesses, is the focal firm in? What are the focal firm’s products in each business? What are the

customer segments in each business? What is the structure and dynamics of each industry that the

firm competes and how competitive are they? What changes are taking place in the industry, or

industries, that will affect the focal firm specifically and/or industry profitability over the next few
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years? How does the firm compete at the product or business level? What are the firm’s internal

sources of competitive advantage/disadvantage? What is the focal firm’s current strategy? How well

is the firm performing from a financial perspective?

Assessment of Current Situation (the Fulcrum)

The purpose of the fulcrum is to synthesize the current situation analysis into an assessment of

current and future expected performance. It should also consider the broad direction of a new

strategic initiative, if the status quo is sub-optimal. The important questions here are: How well is the

focal firm performing from a broad strategic perspective? Is the current strategy highly successful,

successful, inadequate or disastrous? What is predicted to happen to overall performance if the

existing strategy continues? If the strategy is not successful, what is the source, or sources, of the

problem? In which broad strategic direction should the firm move? When dealing with these issues,

the analyst also needs to think ahead: what type of choice method will be used to evaluate the

strategic alternatives at the solution analysis stage?

Solution Analysis

If the assessment suggests a change in, or refinement of, strategy, solution analysis lays out the

strategic choices and a recommended strategy (and possibly an implementation analysis of the

recommended strategy). The important questions here are: What are the potentially superior

strategic alternatives? What should the firm’s strategic goals be? Are there goals apart from profit

maximization that should be used to evaluate the strategic alternatives? How are the strategic

alternatives projected to do in terms of firm goals? Which alternative is preferred? How sensitive is

the choice between the alternatives to different scenarios or “states of the world”?

Rationale for the Three-Part Strategic Analysis Framework

Why three parts? Doing the major parts of strategic analysis is somewhat like trying to walk along a

see-saw. Walking up one side of the see-saw is current situation analysis. Tipping the see-saw is

assessment analysis (the fulcrum: this is usually the point where one is most likely to fall off!).

Walking down the other side is solution analysis. (We do not mean to imply that it is easy because

it’s downhill.) This metaphor conveys the idea that fulcrum assessment analysis is often the most

difficult, and critical, part of strategic analysis. In practice, many analysts are often unwilling to pull
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everything together and succinctly tell clients what the real problem is. Student-analysts especially,

because they are not firm insiders, have a tendency to want to avoid answering this big, often

unpleasant, question. They are tempted to try and dodge the real issue by either presenting “laundry

lists” of problems or solutions, by presenting a mass of different undigested strategic planning

techniques, or by providing no comprehensible structure — the proverbial “dog’s dinner”.

The fulcrum requires a short statement of what will happen if the firm continues in its current

strategy, combined with a brief explanation about why. These statements may be no longer than a

few sentences, because the fulcrum mostly summarizes information that has already been analyzed in

the current situation analysis. (If the analyst ends up with a fulcrum assessment that is not “signaled”

in the current situation analysis, the current situation analysis needs revisiting and reworking.)

Each of the three parts can be divided into specific components. Figure 1 summarizes all of

the major components of strategic analysis as a flowchart as well as showing where these components

fit into the three major parts of the analysis. This paper expands on each of these components in

turn.

FIGURE 1 ABOUT HERE

The Logic of the Current Situation Analysis

A description of the issue/problem comes first (i.e., on the left side) because this material provides a

context for any strategic analysis and should be understood first. The basic descriptors of the focal

firm come next. Even though current managers of the focal firm will be familiar with this

information, future managers and employees may not be. Either industry analysis or internal

characteristics analysis can come next. This is followed by a description of current strategy and,

finally, financial performance. One might argue that financial performance analysis should be the

first component of current assessment analysis rather than the last component of current situation

analysis. We place it within current situation analysis because, at this point, the financial assessment is

primarily descriptive.

The position of the components of current analysis on this diagram and the lines between

them emphasizes that the major components of current situation analysis are jointly determined:

strategy affects structure and other internal characteristics (and vice versa), strategy can, in some
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circumstances, affect the industry structure and other aspects of the competitive environment (and

vice versa), strategy affects performance (and vice versa), etc. The focus here is on the main elements

of the current situation at the current time (“time t”). The causal relationships among the elements

come together in fulcrum assessment analysis and in solution analysis.

Because of the interdependencies just described, the order in which components are discussed

can be based simply on what works best in a particular situation. This varies somewhat. For a firm in

a single line of business, “tradition” suggests that one analyzes the industry first, followed by

analysis of internal characteristics of the firm, followed by current strategy, and then financial

performance assessment. This order works well for business-level strategy in industries with well-

defined boundaries. For corporate-level strategic analysis, it is sometimes better to at least describe

the overall corporate-level strategy first. If the focal firm is in a duopolistic or oligopolistic

competitive environment, then the industry analysis may merge with a discussion of the focal firm’s

competitive strategy. Sometimes, it makes sense to discuss strategy and the internal characteristics of

the firm in the same section. Competitor analysis is often difficult to position: usually it forms part

of the rivalry discussion in industry analysis (see below); but sometimes aspects can form part of

internal characteristics analysis (when discussing differences in value chain or key success factors);

other times it makes sense to discuss it in a separate section just before the fulcrum.

We now turn to each component in turn. These components are: a description of the strategic

issue/problem, a description of basic firm facts, industry (external) analysis, macro-environmental

analysis (may be included in industry analysis or excluded), internal characteristics analysis,

organizational analysis (may be excluded or included in internal characteristics analysis), current

strategy, financial performance analysis (all current situation analysis), an assessment of current

performance (broader than financial performance assessment, but including it), an assessment of

expected performance given current strategy, a statement of the rationale for strategic change or

refinement and a decision on choice method (all fulcrum analysis), generation of alternatives at

relevant levels, selection of goals and criteria, selection of scenarios (if useful), choice between the

strategic alternatives, recommendations and implementation analysis (if required) (all solution

analysis).
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A DESCRIPTION OF THE STRATEGIC ISSUE/PROBLEM

Usually, this consists of a brief description of the strategic issue or problem as perceived by the client

(warning: this may only be a description of symptoms). This issue statement should have a client-

oriented focus, whether to the CEO, Vice-President for Strategic Development, etc. Boards of

Directors’ also influence (and sometimes direct) strategy, so they may also be clients (Westphal &

Frederickson, 2001). But, sometimes the client of the analysis may be a non-management actor -- a

major shareholder, potential investor or investment analyst. Therefore, we make a conceptual

distinction between the client and the firm that is the focus of the analysis (the “focal firm”), even

though they frequently overlap.

Keep in mind that a strategic analysis is usually performed in response to some “cue to

action” -- a symptom or a constellation of symptoms. Sometimes the cue takes the form of a set of

problems the client perceives the focal firm is currently facing or will face in the near future. Often,

managers in the focal firm will go further and propose (or exhibit a preference for) a particular new

strategy, or even suggest several potential strategic alternatives. The analyst can give the project an

initial focus by describing the client’s perceived problems or the focal firm’s initial proposed

strategy at the time he or she was engaged. (It is unnecessary for analysts to restrict themselves to

exactly one key issue, but they should not muddle the analysis by listing every issue that comes to

mind.) Sometimes, with highly successful firms, the major focus of the analysis is exclusively on

strategic opportunities.

A DESCRIPTION OF BASIC FIRM FACTS (“BASIC DESCRIPTORS”)

This section often begins with a brief historical overview of the firm. This is useful because most

strategy is path-dependent: the firm’s strategic alternatives, at least in the short-run, are constrained

by its current resources, the industry, or industries, it is in and its current strategy. This may include a

concise explanation of how the company got to where it is now, including a chronology of the

different businesses the company is in. This is particularly useful for corporate-level analysis.

Next, provide some context about each business of the firm. This can include, for example,

its ownership, where the firm is located in the flow of goods from basic inputs to final consumers, the
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products or services, customer segments, and the products/services of other firms in the same business.

The specific elements that should be covered are: the ownership and control situation, a flow of goods

or supply chain, business-specific product-customer matrices,

The Ownership and Control Situation

Is the company privately-owned, state-owned, mixed (public and private ownership), owned by

members (a co-operative), or a not-for-profit? Who has control? Is the organization management-

controlled (share ownership widely dispersed), owner-controlled (concentrated share ownership) or

family-controlled? On some of the specific principal-agent problems in the latter, see Schulze,

Lubatkin & Dino (2002). The analyst does not need to write about these issues at great length (if at

all), but does need to understand the implications of these issues for strategy. The main issues are

usually: how serious are the principal-agent problems? What is causing these principal-agent

problems? (See strategy power points on this topic; also see Hansmann, 1996; Jensen, 1998.) The

catch is the analyst may be writing for the agent rather than the principal – raising tricky issues of

“speaking truth to power”.

A Flow of Goods Analysis (Supply Chain)

What industrial “ballpark” is the focal firm in? Sometimes it is useful to present a “flow of goods”

or “supply chain” diagram (warning: some people refer to this as the “value chain”; we reserve this

term for the intra-firm flow of goods). A flow of goods diagram may show the flow of materials

across industries, from the initial upstream activity, through intermediate product industries, to final

consumption goods. Benjamin and Wigand (1995) provide some good examples, focusing on how

electronic commerce is altering many supply chains. Johnson (2002) illustrates the reconfiguration

of the supply chain in the apparel industry. Remember, a multi-business firm is in multiple industries.

The firm may be vertically or horizontally integrated. The degree of vertical integration is easily

picked up in the supply chain, horizontal integration is not. The focal firm may also be involved in

related or unrelated diversification. These businesses may all require separate supply chains.

Because the supply chain identifies contiguous upstream and downstream industries, it identifies the

industries suppliers and buyers. Having a good supply chain understanding is the best insurance
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against analyzing the wrong industry -- the commonest error here is to analyze the customers’

industry as if it is the focal firm’s industry. It isn’t.

Construct Product-Customer Matrices for Each Business

The purpose of this component is to understand the focal firm’s products and customers, and the

interaction between them. For each business, develop appropriate “product-customer” matrices

(PCMs) and enter information about the client’s products or services in the appropriate cells. The

main purpose here is to discover which are the most important products or services, and the most

important customer segments (see Boardman & Vining, 1996 and strategy power points). For the use

of PCMs in nonprofits, see Boardman & Vining (2000). Figure 2 summarizes the steps in the

development of PCMs.

FIGURE 2 ABOUT HERE

Construct Industry Product-Customer Matrices

Add “competitors”, either defined in terms of industry (the traditional “similarity of production

technology” method), market (close substitutes that meet the same consumer need) or perhaps even

core competencies or capabilities, expanding the matrix as necessary. On the first round, this is likely

to be preliminary. The industry may well be adjusted later in industry analysis. What business is the

focal firm really in? What are the appropriate boundaries of the industry?

Develop Strategic Group Map

If useful, use PCMs to help construct a strategic group map. There is now a large literature on the

existence and importance of strategic groups (e.g., Daems & Thomas, 1994; Gordon & Milne, 1999;

Nair & Kotha, 2001). A strategic group is a group of firms that compete against each other more

intensely because their characteristics and, therefore, their strategies are more alike. Rivalry (see

below) is likely to be greater within, as against across, strategic groups. The analyst may make a

preliminary assessment of the key success factors for each segment or each strategic group.

INDUSTRY (EXTERNAL) ANALYSIS

First, decide on the analytic boundaries of the industry. These boundaries are never obvious. Thus,

industries are constructed, not found! Scheffman and Spiller (1987) summarize the industrial
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organization approach to industry definition. Another approach focuses on managers’ social

construction of markets (Auty & Easton, 1990). Generally, boundaries are easier to define in more

mature, and/or more technologically stable, industries (Pleatsikas & Teece, 2001). In less mature,

more dynamic settings it is useful to define industry quite broadly (Pleatsikas & Teece, 2001). As a

result, there may be little difference between entities that are defined as “competitors” and those

defined as “substitutes”. McKendrick and Carroll (2001) provide an informative example of some

of the issues related to boundary definition, using the market for disk arrays.

For each business, the purpose is to analyze the competitive environment and reach an

assessment about the attractiveness of the industry. The analyst should focus on the competitive

forces — positive and negative — that affect the focal firm’s ability to earn “rents”. There are a

number of different ways to analyze industries and their attractiveness. One framework for analyzing

an industry is shown in Figure 3. It has a strong focus on the focal firm.

FIGURE 3 ABOUT HERE

It may also make sense to an industry analysis approach that is dependent on the specific competitive

structure of the industry (a contingency approach). Furrer and Thomas (2000) adopt this kind of

approach. The rationale for a contingent approach is that industries with no (direct) competitors or a

small numbers of competitors involve more well defined strategic interactions. For example, an

industry with strong network externalities may only have one incumbent (for a lighthearted

exposition, see Farris & Pfeifer, 2001). Sometimes, these “small numbers” interactions can be

formally modeled (for example with game theory).

Where there are at least three or four competitors, Porter’s “Five Forces” model is the most

commonly used tool (Porter, 1980). Porter’s model is designed to focus on aggregate industry

impacts, rather than on a specific firm. However, it can be adapted to specific-firm analysis. Porter

groups competitive forces into five major categories: rivalry, buyer (customer) bargaining power,

supplier bargaining power, threat of entry and threat of competition from substitutes. Many analysts

sketch the forces for the industry first (an average) and then for the focal firm. Of course, if the focal

firm is typical, there is no difference. But, if the focal firm is considerably more or less successful

than the average firm, there will be significant differences in the impact of the forces.
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Competitor analysis may be performed in this section under rivalry, or performed separately.

If government policy-making actions are important to the industry (and they often are), they can be

added as a “Sixth Force”. The Five Forces plus the Sixth Force is summarized in Figure 4.

FIGURE 4 ABOUT HERE

If one is following Porter, the Five Forces are the nature of rivalry, buyer bargaining power,

supplier bargaining power, the threat of entry and competition from substitutes. We can also add,

where relevant, a sixth force: the role of government (if government appears in the role of supplier or

buyer it can be handled through the “regular” Five Forces).

Nature of Rivalry in the Industry

What is the overall competitive “state” of the industry or industries (for firms in multiple industries)?

What’s happening to overall sales, margins, profits and cash flow? What life-cycle stage is the

industry at? What is the structure of the industry (monopoly, duopoly, through to perfect

competition)? What is the state of industry (market) concentration at the international, national and

regional levels? Industries with more competitive structures are generally less profitable (Cubbin,

1988; Weiss, 1989; McGahan & Porter, 1999).

Are there significant economies of scale, economies of scope or learning curve economies

(also known as experience curves or “learning-by-doing”) present in the industry? A particular

form of economies of scale that relates to customers (or “demand-side” economies) is network

externalities or spillover benefits (Katz and Shapiro, 1994; Shapiro and Varian, 1999; for the

thumbnail version, see Hardin, 1999). Argote (1996) and Larnoreaux, Raff and Temin (1999)

provide applied reviews of learning curves. These are all versions of a cost-based stance. Often the

crucial question is whether the focal firm is at minimum efficient scale (MES). Christensen (2001)

provides a thumbnail sketch of these cost concepts together with some industry examples. A more

applied way of putting this question is: how important are cost drivers (both for the focal firm and

the industry) as “key success factors” for the focal strategic group or for the industry as a whole?

Remember, the potential sources of economies of scale are much broader than just in production

(Grant, 2002, 258-261). This also applies to learning curve economies (Moul, 2001). It is also

essential to be clear whether the scale or learning economy is plant or firm-based.

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Are differentiation drivers significant? What is the nature of these differentiation drivers

(again, key success factors)? A note of caution: “mass customization” is now providing firms with

the ability to combine economies of scale and differentiation advantage (Da Silveira, Borenstein &

Foglioatto, 2001; Zipkin, 2001). Is it valuable to categorize the strategic group or the industry by

specific differentiation drivers? Can firms be categorized into strategic groups? (These may be based

on analysis of industry PCMs.)

To truly understand the nature of rivalry, one needs to understand competitors. Competitor

analysis should focus on the effect of competitors, individually and collectively, on the focal firm’s

ability to earn rents. An in-depth comprehensive competitor analysis describes competitors’

strategies, internal characteristics and performance. Also, competitive analysis considers how

competitors are changing their strategies and their internal characteristics (Fahey, 1999). Sometimes

there is no need for a separate section on competitor analysis because so much of strategic analysis is

relative to the competition and the material is better covered elsewhere. Possibly repeat some or all of

this overview, or perform simultaneously for each product or product-customer segment (when

dealing with a single business). Consider, for example, whether there are any product-customer

segments that differ from the industry as a whole in terms of the product life-cycle. Bergen and

Peteraf (2002) provide useful advice on how to identify competitors and predict how intense their

rivalry will be (see also Chen, 1996).

Buyer Bargaining Power

Assess the bargaining power of buyers. This depends on buyers’ price sensitivity and relative

bargaining power. In turn, price sensitivity depends on: proportion of the cost of the client’s

product to the buyer’s total product cost; homogeneity of the client firm’s product; competitiveness

in the buyer’s industry (this essentially requires a “mini-analysis” of the competitive forces in the

buyer’s industry, but remember -- the customer’s industry is not the industry!); and importance of the

focal firm’s product to the buyer’s product quality. Relative bargaining power depends on: the size

and concentration of buyers relative to sellers; buyer’s information about seller’s quality, prices and

costs; the buyer’s switching costs; and the buyer’s ability to backward integrate. Usually, individual

buyers have must less bargaining power than intermediate (industrial) buyers.
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Supplier Bargaining Power

Supplier bargaining power can be analyzed in the same manner as buyer power. Typically, supplier

power is somewhat less important than buyer power in determining the distribution of rents along the

supply chain (Cool and Henderson, 1998). Firms that produce manufactured products often derive

supply from commodity producers or small-scale component producers that have relatively little

bargaining power.

Threat of Entry

Entry threat is driven by a number of factors, including: the amount of capital required to enter the

industry (but given the sophistication of capital markets, only very large capital requirements

represent a significant barrier to entry); the extent of economies of scale (and the extent of

“sunkness”); absolute cost (first-mover) advantages; extent of brand recognition and loyalty; access

to distribution channels; and ability and willingness of firms currently in the industry to retaliate

against entrants. The evidence suggests that absolute cost advantages are declining and that followers

are reacting more quickly (Agarwal & Gort, 2001). Both Robinson, Kalyanaran and Urban (1994)

and Lieberman and Montgomery (1998) provide overviews of the evidence on first-mover advantage.

It is important to analyze entry (and exit) because many industries exhibit surprisingly rapid entrance

and exit (Dunne, Roberts and Samuelson, 1988) and because new entrants, especially those with new

and superior competencies can quickly gain market share (Geroski, 1991).

Competition From Substitutes

This depends on the propensity of buyers to substitute the product of he substitute industry for those

of another industry that meets the same consumer need. Given that the substitute does not usually

meet the need in exactly the same way as products of the incumbent industry, the price and

performance (the price-performance characteristic) is crucial. The relationship may often be driven

by changes in the social and cultural environment — for example, the emergence of coffee bars as

substitutes for bars or the increase in cremation rather than burial.

Government: The Sixth Force

In many industries, government through its many policymaking roles has more influence on firm

profit than other competitive forces (Vining, Shapiro & Borges, 2003). If government is a supplier
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or buyer or the provider of a substitute, it should be analyzed under the relevant category. The force

of government is both asymmetric (that is, it can affect firms differently depending on their

characteristics) and endogenous (can be affected by firm political strategy). Figure 5 illustrates some

of the policy arenas wherein government can influence firm profitability. Strategies to influence

government (political strategy) must be analyzed separately from competitive and corporate-level

market strategies.

MACRO-ENVIRONMENT ANALYSIS

Sometimes it is useful to scan the broader Political, Economic, Social and Technological (PEST)

factors that affect the firm and the industry and how they are changing (Fahey & Narayanan, 1986).

Note that Figure 1 shows macro-environmental analysis as an input to external analysis; in other

words, it is useful to the extent that it illuminates either current industry analysis or expected changes

in industry structure and dynamics. The point of macro-environmental analysis is to predict future

trends and consider possible impacts of these changes on the focal firm’s and the industry. This

section may discuss important demographic and environmental (e.g. climate) changes and their

consequences for the firm. Decide what is potentially important; that is, those factors likely to enter

the industry environment in the near future and have an important impact in the medium-run. Do

not discuss categories simply for the sake of discussing them. Useful macro-environmental analysis

is difficult to do, and “more honor’d in the breach than in the observance”. If specific macro-

environmental factors are important for the analysis, these should resurface as scenarios in solution

analysis.

ANALYSIS OF INTERNAL CHARACTERISTICS

The purpose of internal analysis is to identify the specific existing and potential sources of rents and

impediments to rents that are internal to the firm. Many strategic theorists argue that understanding

the internal characteristics of the firm is the key to effective strategy (Wernerfelt, 1984) – the

resource-based theory of the firm. Many elements of the competitive (industry) environment are

essentially fixed (exogenous), while many elements of internal resources and organization can, at

least in theory, be changed with relative ease. There are a number of fundamental issues that internal
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analysis attempts to get at. That is, what are the client’s competitive advantages and disadvantages?

What resources or capabilities or competences form the basis of these advantages and disadvantages?

Duncan, Ginter and Swayne (1998) and King, Fowler and Zeithaml (2001) present useful applied

discussions of competencies, while Collis (1991), Bogner and Thomas (1994) and Iansiti and Clark

present specific industry applications. How sustainable are these advantages/competencies

(durability)? How firm-specific are they (scarcity)? Can others easily imitate these competencies

(inimitability)? Can they be replicated by the focal firm elsewhere (replicability)? Are they

complementary? For multibusiness firms or multiple “product-customer” segments firms, is there

synergy among the segments or businesses? If so, what is the source of the synergy?

There are essentially two ways to do internal analysis: a resource inventory or a value chain

analysis. These alternative (occasionally complementary) methods are summarized in Figure 5. The

two approaches are not necessarily mutually exclusive. A resources inventory is perhaps more useful

for getting a handle on (“core”) competencies or capabilities at the business or firm level, while

value chain analysis is more useful at understanding cost or differentiation advantage at the

product/service level or the business-level (where there are significant economies of scope).

FIGURE 5 ABOUT HERE

A Resources Inventory

Here one describes resources (and, in parlance that one doesn’t hear as much any more, “skills and

attributes”) by using a resource inventory. One inventory partitioning is as follows: financial (cash,

capital, borrowing capacity), fixed (physical: land, plant and equipment — quality and quantity),

human (labor skill and loyalty), intangible (reputation: brand names, financial reputation, strategic

reputation, corporate culture), technological (patents); long-term contracts (e.g., guaranteed source of

supply). These can be evaluated in terms of their “strengths” and “weaknesses” or on some scale.

A more aggregate scheme is simply by tangible and intangible resources. Alternatively, inventory

resources by functional area.

Value Chain Analysis

The alternative method is to use a value chain as the organizing mechanism. A value chain represents

the “flow of goods” within the firm. This flow (or chain) is most intuitively obvious when there is
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actually a physical flow through the firm. However, Porter (1985), who developed much of this

thinking, argues it is useful in all industries. Stabell and Fjeldstad (1998), in contrast, argue that in

many contexts the concepts of value “shops” and value “networks” are often more useful than the

idea of a value “chain”. Whatever works.

The great advantage of the value chain (we use the term here broadly to include shops and

networks) is that it is a very disaggregated way to analyze how the firm produces its goods or services

– at the level of activities that go to produce a specific good or service. Use of this tool helps find

specifically where value is added. The downside is that is a lot of work. Unless there are significant

economies of scope, it is useful to produce a value chain for each product or service. Duncan, Ginter

and Swayne (1998) present a very practical approach to value chain analysis (and competencies

generally). They recommend four steps: survey potential strengths and weaknesses for each element

of the value chain; categorizing these strengths and weaknesses in terms of resources or capabilities;

compare these resources and capabilities relative to their potential as a cost or differentiation driver;

focus on appropriate generic strategy.

It is often useful to construct multiple versions of the value chain: (1) a description of the

specific activities that make up the client firm’s value chain; (2) a description of the firm’s

competitive stance (cost vs. differentiation) at each stage of the value chain; (3) benchmarking and

evaluation of each activity (Simpson and Kondouli, 2000, present some examples). Evaluate

resources by benchmarking against competitors, if possible. If not, many activities on the value chain

can be benchmarked against “best-in-class” from other industries. Consider both resource-based

competencies and integrative-based competencies (managerial and organizational skills). For multi-

business firms, examine the links between the value chains of different businesses.

ORGANIZATIONAL ANALYSIS

Not all strategic analyses include a formal organizational analysis section. Sometimes, the focal firm

specifically excludes it. One reason for this exclusion is that the analytic skills required for doing

organizational analysis are thought to be different from those required for doing strategic analysis.

Sometimes, strategic analysis can be conducted “holding constant” organizational analysis. Of

course, if the issue description from the firm suggests that organizational problems are at the core of
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the strategic problem, they cannot be ignored (remember the Enron!) But even here, organizational

analysis can be treated as a part of internal characteristics analysis (for example, in various secondary

activities on the value chain).

Where required as a separate component, the purpose is to first describe the organizational

structure and second to attempt to explain how such organizational characteristics (especially

individual or group incentives) affect core competencies. This may lead to the development of

organizational alternatives in solution analysis. Even if separate organizational alternatives are not

developed, the understanding of organizational incentives is a central issue in strategy

implementation.

Describe the organizational structure or “architecture” of the firm (senior positions and

reporting relationships — the internal architecture and lines of authority); assignment/delegation of

responsibility, centralization and degree of autonomy (control) of businesses/divisions (“style”);

organizational systems: MIS, budgeting, strategic planning (control systems), and (formal) incentive

and reward systems.

The incentives of individuals and groups are often critical to understanding organizational

problems. Organizational and management theorists have many different models of these incentive

issues. One economics view of these issues is found in Brickley, Smith and Zimmerman (1996).

How will organizational issues and especially problems or pathologies drive expected financial and

overall performance if the existing strategy continues? One approach is to diagnose internal

organizational “failures” within a principal-agent framework (Vining, 2003). A critical requirement

when writing about organizational issues is to avoid “blaming” individuals or groups or

characterizing behavior as “irrational”. While the outcomes flowing from individual behavior may

be dysfunctional for the organization, individuals or groups are rarely subjectively irrational.

While incentives are vital, organizational capacity (especially to learning and knowledge

management) and resources are also important drivers of organizational effectiveness (this section

raises many of the same issue as strategy implementation: see implementation power points).
 16

DESCRIBE THE FIRM’S STRATEGY

Here the analyst briefly summarizes the features of the two main levels of current strategy:

corporate-level strategy and business (competitive) level strategy. Figure 6 summarizes the generic

steps necessary to describe each level of strategy.

FIGURE 6 ABOUT HERE

Corporate-Level Strategy

Corporate strategy concerns the scope of the firm, in other words, the portfolio of businesses that the

firm holds (Collis, 1996). Whatever else one can say about corporate strategy, there appears to be

one recurring empirical regularity: most gains from mergers and acquisitions growth go to

shareholders of selling firms and there are few, or no, gains to shareholders of acquiring firms

(Andrade, Mitchell & Stafford, 2001). Mascarenhas, Kumaraswamy, Day and Baveja (2002) provide

a good overview of the factors associated with successful internal growth. In order to understand the

focal firm’s corporate strategy, the analyst needs to consider a number of issues and questions.

*What business(es) is the firm in? Does the focal firm concentrate on a single line of business, is it

horizontally integrated, vertically integrated (across a supply chain), or diversified (basically,

anything else)? If diversified, are the businesses related in some way that indicates economies of

scope or spillover benefits on some important dimension or are they unrelated (a conglomerate)?

For background theory on the rationales for diversification, see Porter (1987) and Goold and Luchs

(1993). Hyland and Diltz (2002) and Graham, Lemmon and Wolf (2002) review the (inconclusive)

empirical evidence on diversification. This literature should, of course, also be useful when the

analyst returns to corporate-level alternatives in solution analysis. If the analysts can determine the

dimension, or dimensions, of relatedness what are they (Prahalad and Bettis, 1986)? How is the scope

of the firm changing? Which new business(es) is the firm moving into, which current businesses are

expanding, which are being withdrawn from? If it is growing, is this through internal development or

through acquisition? If withdrawing, by sale or walk away?

*For each business, amplify on the firm’s product-customer segments (see PCMs above). Is the

focal firm’s product-customer approach broad or focused? Is it entering new segments, expanding

existing segments or withdrawing from segments? Sometimes this is referred to as positioning

 17

strategy. *Complementor Stance. Does the focal firm employ sole ownership of each business or is

it involved in joint ventures or strategic alliances in some, or all, businesses? For an overview of

alliances, see Hennart (1988). The empirical evidence suggests that the failure rate of joint ventures is

high (e.g., Park & Russo, 1996). Many of the strategic issues relating to joint ventures are similar to

those for outsourcing (Vining & Globerman, 1999).

Competitive-Level Strategy

Competitive strategy concerns how each business (or each product-customer segment) competes, that

is, how it makes money. Here it is useful to describe the firm’s strategic stance and its value chains.

At the same time, consideration should also be given to the dynamic element of strategy, that is,

changes in strategy.

*Competitive Stance. Does the firm focus on pushing out the demand curve (differentiation

strategy) or on pushing down the cost curve (low-cost strategy)? Because it is organizationally

difficult to engage in both, most firms at least try to be internally consistent. But some firms

effectively engage in a combination strategy (Parnell, 2000; Proff, 2000). How does the focal firm

increase demand? Does it focus on adding quality (vertical differentiation) via advanced product

technology, process technology (e.g., JIT), superior inputs, speed and reliability of delivery, or

product reliability? Does it try to obtain low costs through economies of scale, economies of scope,

learning curve effects, product technology improvements, or process technology improvements? Are

there other ways it earns rents? Other questions to consider are: What type of firm is it? How has it

traditionally obtained a competitive advantage? Is it production-oriented or marketing-oriented?

Product or process oriented? Is it a technological leader or follower? Does it consistently compete

against competitors or cooperate on some dimensions? Does it commit resources to the future, for

example, to establish a good reputation? In this section, the idea is not to go into too much detail,

which can be done in the following section, but to describe the key strategic stance — how the firm

usually competes.

*Value Chain Strategy. Obviously, this flows directly out of internal characteristics analysis. What

(functional) activities does the firm perform individually, which in collaboration with other entities

(joint ventures) and which does it contract-out? (In essence, analyze the degree of “vertical
 18

integration” within the focal firm.) Conduct a preliminary assessment of which activities particularly

contribute to profits. What are the important functional strategies? The most important activities are

often those that receive the largest resource allocations. Which activities have recently received larger

“investments” or have obtained commitments of larger future resource allocations? For a multi-

business firm, describe how the value chain activities of one business relate to those of the other

business(es). Which specific activities generate synergistic benefits?

FINANCIAL PERFORMANCE ANALYSIS

The basic purpose of this component is to assess the financial performance of the firm. While

financial performance may not be the only goal of the firm, it cannot survive if it does not at least

cover the opportunity cost of the resources it uses. A broader assessment of performance forms the

first part of fulcrum analysis.

The first step is to perform current financial ratio analysis and may trends over time. Ratio

analysis should cover the four major categories of ratios: profitability, liquidity, leverage and activity

(operational efficiency) ratios. These provide basic accounting information. Useful “primers” on

ratios are Miller and Miller (1991) and Fridson and Alverez (2002). Useful sources that provide a

broader strategic framework on financial analysis are Capon, Farley and Hoenig (1990) and Banker,

Chang and Majumber (1996). Beyond survivability, the central question is: is the focal firm earning

rents? This requires financial analysis that includes the opportunity cost of the firm’s resources –

essentially the weighted average cost of capital. Traditional accounting measures do not do this. One

technique that does (a variant of discounted cash flow analysis) is economic value added (EVA) (Kay,

1993). See Myers (1996; 1997) for a practical discussion of some of the differences between the

various variants. Does the firm have the ability to finance future alternatives out of current cash flow

or must it rely on borrowing or other external sources? For a very practical overview of the criticality

of cash flow, see Strischek (2001).

This section is based primarily on historical data. Time-series data is useful as it provides

evidence on any directionality of change. Not-for-profit organizations must be judged by different

criteria (see Boardman & Vining, 2000).

 19

On the basis of the analysis of the current situation, the analyst should reach a conclusion

about whether the focal firm’s current strategy is appropriate for the future. The fulcrum should also

communicate the degree of seriousness of the situation, because this guides the degree of

incrementalism of the strategic alternatives. If strategic problems are identified as serious, the set of

strategic alternatives should be more radical (less incremental). As shown in Figure 1, there are three

main steps in fulcrum assessment: an assessment of current performance, an assessment of expected

performance given current strategy and an explicit rationale for changing the current strategy.

ASSESS CURRENT STRATEGY SITUATION

The first step in fulcrum analysis is to summarize and assess current performance and determine

whether the focal firm has a problem and, if so, what is the nature of the real problem, or problems.

Some questions to consider are: Is this an attractive industry for the focal firm? What are the key

industry (or strategic group) success factors? Does the focal firm have them? Does the strategy fit

the environment, or is it incongruent? Are the firm’s internal characteristics appropriate? Does the

client have a competitive advantage? Why, or why not, is it capturing rents? (In addressing this

question, remember that “to the scare resource, goes the rent”.

One possible initial step is a balanced scorecard (BSC) evaluation of the current situation

(Kaplan & Norton, 1996). An example of a BSC, drawn from Kaplan and Norton, is shown in Figure

7. Brewer (2000) presents an extended example using the BSC for a strategic evaluation of Dell.

FIGURE 7 ABOUT HERE

At a more aggregate summary level one can use “portfolio” matrices such as the Boston

Consulting Group’s (BCG) “Growth-Share Matrix” or the General Electric (GE) “Industry

Attractiveness/Business Strength Matrix” to diagrammatically represent the client’s current situation.

Grant (2002: 480-484) summarizes the advantages and disadvantages of these matrices. Hax and

Majluf (1984) describe the use of these matrices in detail. The GE matrix essentially places industry

on one axis (industry attractiveness) and internal characteristics analysis (business strength or

competitive position) on the other axis. The BCG matrix does the same thing somewhat more

crudely by using the industry growth rate as a proxy for industry attractiveness and the focal firm’s
 20

relative market share as a proxy for their competitiveness. As the focus is on performance of a

business (or group of businesses), the term “performance” matrix is more accurate than portfolio

matrix.

ASSESS EXPECTED PERFORMANCE GIVEN CURRENT STRATEGY

The second step is to summarize expected performance in the future (at “time t+1”) if the current

strategy (at time “t”) is maintained. Will the focal firm have problems and, if so, what are they

predicted to be? Based on the above analysis of the current situation, develop a “most likely”

scenario for the industry, i.e. perform a dynamic industry analysis. What changes will take place,

most likely, to the external environment? Then, considering also the client’s current characteristics

and currently proposed strategy, predict its future performance. Performance matrices (discussed

above, but not shown) are one way to summarize the expected change from the current situation (t) to

the predicted situation (t+1). Figure 8 shows a basic performance assessment model involving a

single business. It summarizes that the current strategy will not result in the desired strategic

outcome. Figure 9 simply expands this to the multiple business case (in this case, two businesses),

therefore, it examines the “portfolio” of businesses.

FIGURES 8 AND 9 ABOUT HERE

One can develop and show the industry and internal characteristics criteria that go into

determining the axes more explicitly. Figure 10 shows the GE “Industry Attractiveness/Business

Strength Matrix” with the relevant criteria and the general strategic direction or generic alternatives

that they suggest (such generic alternatives are considerably too broad, vague and abstract to be

considered actual firm strategic alternatives).

FIGURE 10 ABOUT HERE

Of course, other analytic tools can be used to predict expected future performance. Figure

11 shows how the industry life-cycle model can be explicitly linked to industry attractiveness (where

stage in the life-cycle is the proxy for attractiveness) and competitive position. Saloner, Shepard and

Podolny (2001: 277-287) provide a good overview of the industry life-cycle concept and also

emphasize that there is a parallel organizational structure life-cycle (287-294). Figure 12 illustrates
 21

how the results of a Porter’s Five Forces model analysis might be reworked into an industry

attractiveness/firm competitive position matrix and used to predict future performance, although t and

t+1 is not explicitly shown on the diagram.

FIGURES 11 AND 12 ABOUT HERE

This part of the fulcrum analysis should clearly demonstrate the rationale for action by

showing the existing or proposed strategy is inadequate for the future. Why/why not? Does the focal

firm have a sustainable competitive advantage? For how long? How long will it continue to earn

rents?

DECIDE SOLUTION METHOD (METACHOICE)

Third, given the above two steps, decide what broad strategic direction is suggested and decide what

will be the solution analysis method (this latter question is the choice of choice method, or

“metachoice”). Two factors drive evaluation method choice: goal breath and willingness to

monetize impacts. Based on these two factors, Vining and Meredith (2000) suggest four generic

evaluation methods: Discounted Cash Flow Analysis (profitability is the only goal and all impacts are

monetized); Profitability Analysis (profitability is the only goal, but not all dimensions of

profitability are monetized); Modified Discounted Flow Analysis (multiple goals including

profitability and at least all dimensions of profitability are monetized) and Multi-Goal Analysis

(multiple goals and not all impacts are monetized). These alternative methods are summarized in

Figure 13. It also shows performance criteria associated with each method.

FIGURE 13 ABOUT HERE

Vining and Meredith (2000) present simple examples of all four types. The multi-goal

approach is probably the commonest. Kaplan and Norton (2001) have extended the use of the BSC

to the evaluation of strategic alternatives. We recommend a matrix format – the generic approach is

summarized in Figure 14 and a simple example is given in Figure 15.

FIGURES 14 AND 15 ABOUT HERE

In summary, the fulcrum section serves as a bridge to solution analysis — where the analyst

generates and evaluates alternatives. We suggest a detailed analysis of the current situation and a
 22

fulcrum assessment analysis for three reasons. First, they enable the analyst to narrow the range of

reasonable alternatives. Ex ante, the range of potential alternatives is extremely large. Analysis of the

current situation provides a picture of how the industry is changing, what competitors are up to, and,

therefore, what strategic alternatives are reasonable, thereby eliminating inappropriate alternatives.

Second, analysis of the current situation helps enormously with scenario development and evaluation

of the proposed alternatives. Third, a separate fulcrum assessment analysis forces analysts to state

what is conceptually most important.

Something to keep in mind: Porter’s generic strategies are not strategic alternatives. They

can be used in fulcrum analysis to consider the broad strategic stance of the firm. Most strategic

alternatives are within a generic strategic type. Even if the current strategy looks great, one may want

to present a solution analysis for contingency planning purposes.

GENERATE ALTERNATIVES

Strategies are concrete sets of actions (warning: sometimes a new strategic alternative is now called a

“new business model”. For a focal firm that is in many businesses, the analyst needs to generate

both corporate-level alternatives and business-level alternatives and perhaps functional level strategies.

For strategic issues involving governments, the analysts may also need to develop political strategic

alternatives (see Figure 15). Make sure, however, when making comparisons among strategic

alternatives that they are all at the same level of analysis: don’t mix (and compare) corporate,

competitive, functional or political alternatives.

Propose a number (at least three, preferably four) of reasonable, mutually exclusive strategic

alternatives at each level. If the firm can engage in more than one of the strategies at the same time

obviously they are not mutually exclusive. More importantly, these actions are not strategies, they are

elements of a strategy. If there are “alternatives” that are not mutually exclusive, make

combinations of them that are mutually exclusive. The current strategy -- the status quo -- is usually

a reasonable alternative, except for a firm in serious trouble. This does not mean, “do nothing”; it

means the firm continues its current strategy: if the focal firm is investing, then the status quo means

continue to invest at roughly the same rate. Try to avoid “straw men” alternatives. As indicated
 23

above, a good analysis of the current situation should help to come up with some interesting and

appropriate alternatives.

SELECT AND DEVELOP SCENARIOS

Where industry analysis and macro-environmental analysis suggested key uncertainties in the

strategic future, it is useful to consider them explicitly in the solution analysis. Given the increasing

rapidity of technological change and other factors, there has been considerable recent interest in the

application of scenarios to strategic analysis (e.g., see, Schoemaker, 1995; Courtney, Kirkland &

Viguerie, 1997; Fahey & Randall, 1998). “Scenarios are descriptive narratives of plausible

alternative projections of a specific part of the future” (Fahey & Randall, 1998: 6). For some

analyses, consider at least a couple of possible scenarios for each business. Ideally, each scenario

should simultaneously consider all the key external competitive forces (Figure 4). At a minimum,

think through a “crash” scenario, a “most likely” scenario and an “optimistic” scenario. Attach

probabilities to the predicted state variables, if possible.

If the analysis is going to include an in-depth dynamic industry analysis with competitors’

possible responses to strategic alternatives, then this is the appropriate section. The analyst could

consider how competitors are likely to react under each alternative scenario and to each of the focal

firm’s strategic alternatives. In oligopolistic industries, the scenarios may become quite complicated,

involving exogenous shocks, strategic choices by one or more firms and subsequent strategic

responses by competitors.

SELECT GOALS AND EVALUATION CRITERIA

What are the goals of the focal firm? Are they broader or different from shareholder value

maximization? Tightly-held, private firms may not maximize profits to the exclusion of all other

goals. Profit maximization is normally a useful proxy for utility maximization, but not in all

circumstances (e.g., owner-managers). Again, see Vining and Meredith (2000). Not-for-profit firms

have cash flow-satisficing goals as well as distributional goals (Boardman & Vining, 2000).

Remember, if a BSC formulation was used earlier in the analysis in performance assessment, the goals

of this stage of the analysis should be consistent with those used earlier, unless the analyst explains
 24

why. If the analyst makes the case that the goals (or important criteria) should be altered or changed,

these goals are an important output of the analysis.

Even if profit maximization is the only goal, different firms have different views as to

appropriate useful proxies for profit maximization. How should the goals or goals be translated into

specific alternative evaluation criteria (or performance measures)? Ideally, the goal or goals should

be transformed into specific, measurable, operational criteria with a time frame. Common

performance measures related to profitability include relative or absolute expected profit, cash flow,

ROA or ROI, ROE, market share and sales growth (see Figure 13). Reducing both systematic risk and

total risk are likely to be important goals, so one might consider measures of “downside” risk

(minimum gain, maximum loss). When business-level decisions affect other parts of the firm, these

interdependencies should be considered in order to maximize global (i.e. corporate) objectives rather

than local (business-level) objectives. Synergy may also be an appropriate goal.

CHOICE: ANALYZE THE ALTERNATIVES IN TERMS OF THE GOALS

Evaluate the alternatives in light of the goal, or goals and for each scenario (if included). Once both

strategic alternatives and goals are selected, all choice evaluation methods involve two distinct steps

prediction (or forecasting) and valuation (Vining & Meredith, 2000). (Warning: if goals or

performance measures are significantly different from those used in performance assessment, the

differences need to be explained and justified.)

Predict Impacts

If the analyst is adopting a multi-goal approach, determine the expected impact of each strategic

alternative (columns) on each performance measure/goal (rows) and present the results in an impact

matrix -- see Figures 14 and 15. The cells in the matrix describe the impacts of each alternative in

qualitative or quantitative terms. The matrix format ensures that all alternatives are evaluated

according to all criteria. Not all impacts are necessarily positive. Do not intentionally suppress real

ambiguity: the analyst must point out all the nasty trade-offs. Repeat for the other scenarios, if

appropriate. If the analyst is interacting with managers in the focal firm on predicting impacts,

remember that there is considerable evidence that most managers suffer from optimism bias (Carlson
 25

& Dunkelberg, 1989; Anderson & Goldsmith, 1994). For analyses using a Discounted Cash Flow

Analysis method, the predicted impacts will be monetary “pro formas” on a spreadsheet.

Strategic alternatives may differ considerably in terms of their expected effects on some

performance measure that, initially, was not considered to be a relevant goal. If so, the impacts

should be noted so that the focal firm may add the new performance criteria to the set of goals.

Indeed, goals are often not clearly specified until after the impacts of the alternatives have been

examined — often the focal firm’s managers don’t really know what they want until they find out

what they can have.

Value Impacts

Evaluate the alternatives in light of the goals and state the preferred strategic alternative for each

scenario. First, transform the impact matrix into a valuation matrix by assigning a “value” to each

cell, depending on the magnitude of the impact in each cell. This may be done using quantitative or

qualitative methods. There are numerous ways to do this. An excellent explanation and source is

Easton (1973); see also Hammond, Keeney & Raiffa (1999).

Quantitative measures at the strategy level are usually relatively simple. For example, on a

scale of 1 through 5, an impact of “10,000 units sold” may be assigned the value of 1 and an impact

of “1,000,000 units sold” may be assigned the value of 5. In effect, the impact of each alternative

on each criterion (goal) is assigned a “z score”. Some clients prefer qualitative valuations, in which

case “10,000 units sold” may be assigned the value of “insignificant” and an impact of “1,000,000

units sold” may be assigned the value of “very high”. Valuation requires judgment on the part of

the analyst and usually benefits from advice from managers in the focal firm. Conceptually, however,

it is based on the client’s utility function and differences of opinion can be resolved by iteration.

Second, attach either qualitative or quantitative weights to the goals. Weights should be based

on the analyst’s perception of the focal firm’s goals: What goals does the firm really care about?

How much? What is the focal firm’s willingness to trade-off one goal against another? After the

analyst has “valued” the impact of each alternative on each goal and has weighted the goals, then the

most preferred strategic alternative “drops out” under each scenario.

 26

RECOMMENDATIONS

Since the recommendations “drop out” of the above analysis, this section is usually fairly short. The

analyst can summarize the recommendation(s) and provide supporting arguments to explain why one

prefers one alternative to another. It is always useful to assess the recommendation(s) in light of the

“common person’s” standards of reasonableness. Finally, check that the analysis has provided

solutions to the problems identified in the introduction as key issues. Alternatively, remind the focal

firm why those problems “disappeared”, and emphasize what the analysis of the current situation

reveals about the real problems.

IMPLEMENTATION ANALYSIS

The analyst may also be asked to address implementation issues (see power point implementation

slides).

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