As with all such models, the details in this framework are provided to stimulate thinking, not all points or questions will be relevant in all situations. Use the models (called out in bullets at the top of each section) if appropriate and the questions in the section content themselves as a start only. Your situation will dictate the “right” questions to ask and the “right” models to use for analysis.
Step 1. Current Company Situation
- BLS Analysis
- BCG Matrix
- BEP Analysis
Analyze the industry’s history, development, and growth. A useful way to investigate how an industry has evolved is to chart the critical incidents in its history – that is, those events that were the most unusual, pivotal, or essential for development of the industry into what it is now. Some of the events have to do with geographical variations, which business-level strategies dominated at various times, whether broad or focused strategies worked better, decisions relating to marketing choices, and what apparent functional or operational competencies were necessary for success. Shifts in industry leadership are also important considerations. It may be useful to create an industry timeline — using a monthly, quarterly, or annual timeframe to organize such critical events.
Analyze business-level strategy (BLS). Next, identify the company’s BLS – is it differentiation or low-cost leader, broad or focused or integrated? Given its relative competitive position, how well has the company invested its resources? Has the company used different BLS in its various regions? For example, it may offer a low-cost product in one region and differentiated products in others. Be sure to give a full account of a company’s BLS to show how it competes.
Once completed, this first step will provide a broad picture of how the company is operating and puts you in a position to evaluate the profit potential of its strategy. Thus, you can make conclusions about the past or make recommendations concerning future actions. However, first consider the company’s strategic context, or the environment within which the company is competing to achieve its strategy.
Break-Even Point (BEP) Analysis
A break-even point is that volume of sales in which the contribution from each unit sold covers the firm’s fixed costs and its incremental variable costs. To calculate the BEP, first calculate contribution margin, CM = P – VC, where contribution margin is the unit price less a single unit variable cost. Then, BEP = FC / CM, where breakeven point is the firm’s fixed cost divided by the contribution margin per unit.
An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even analysis calculates what is known as a margin of safety, the amount that revenues exceed the break-even point. This is the amount that revenues can fall while still staying above the break-even point.
Step 2. External Environment
- PESTEL Analysis
- Porter’s Five Forces
- Stages of Lifecycle
- SWOT Analysis (emphasis added)
Analyze the external environment. This includes the competitor (i.e., competitive groups), industry (supplier, buyer, substitute, new entrant, rivalry), and general (physical, sociocultural, global, technological, political/legal, demographic, economic) environment. To identify environmental opportunities and threats that exist, consider all the concepts of competitive groups, industry, and macro-environments. Of particular importance at the industry level are Porter’s Five Forces model and the Stages of Lifecycle model (birth, growth, maturity, revitalization, death). Importantly, when conducting a Porter’s Five Forces analysis, be sure to identify the attractiveness of the industry as determined by the overall ability of an existing firm in the industry to make a profit.
The first part of the SWOT (Strengths and Weaknesses) analysis will provide the information on the company’s functional competencies. It requires to investigate all aspects of the firm’s operations including supply chain, marketing, research and development, and finance to further to gain a picture of where the company is going. For example, successfully pursuing a low-cost leader or a differentiation strategy requires very different sets of competencies. What are their competencies? Has the company demonstrated evidence of developing the right ones? If it has, how can it exploit them further? Can it pursue both a low-cost leader and a differentiation strategy simultaneously?
A SWOT analysis is especially important at this point in the industry analysis, particularly if Porter’s model has revealed threats to the company from the environment. How can the company deal with these threats? How should it change its BLS to counter them?
Example 8.1 SWOT Analysis
A SWOT analysis of Barrick Gold demonstrates the application of the model. Strengths identified the coronavirus outbreak as contributing to the advancement in the firm’s gold sales while Weaknesses identified the slow ramping of production of platinum mining. Meanwhile, the Russan government is creating an Opportunity for Barrick Gold by funding a project to become the top platinum producer in the world and Threats from the coronavirus is hurting the demand for jewelry causing potential weakening of Barrick’s precious metals markets.
Source: KITCO, Swot analysis: Barrick raises its dividend 40 percent, 2020Wi
Not sure what an industry analysis should look like? See your school library’s copy of S&P’s NetAdvantage Industry Reports.
Step 3. Internal Capabilities
- VRIO Analysis
- Balanced Scorecard
- Governance Mechanisms
- Organization Structure Characteristics
- Value Chain Analysis
- SWOT Analysis (emphasis added)
Value Chain and SWOT Analysis. As you consider the second part of your SWOT (Opportunities and Threats) analysis you are considering the company’s internal strengths and weaknesses relative to environmental threats and opportunities. Use the incidents you charted for the industry in a timeline to develop an account of the company’s strengths and weaknesses as they emerged over time. Examine each of the value creation functions (i.e., value chain) of the company and identify the activities in which the company is currently strong and weak. For example, a company might be weak in marketing and strong in research and development. Whenever possible, use data to support your observations. Make lists of these strengths and weaknesses. To get ideas about what you might consider in this analysis, see the Business Writing Style Guide for a SWOT checklist.
Consider what your findings mean – balance strengths and weaknesses against opportunities and threats. Is the company in an overall strong competitive position? Can the firm continue to pursue its current BLS profitably? What can the company do to turn weaknesses into strengths and threats into opportunities? Can it develop new functional, business, or corporate strategies to accomplish this change? Never merely generate the SWOT analysis and then put it aside. Because it provides a succinct summary of the company’s condition, a good SWOT analysis can serve as a launching point for all analyses that follow.
Analyze structure and control systems. What structure and control systems are the company using to implement its strategy and to evaluate whether that structure is the appropriate one? How effectively does the management team operate? Are employees being appropriately rewarded and recognized for their efforts? Are the right rewards in place for encouraging cooperation among divisions without generating unhealthy internal competition? Does the client use a balanced scorecard approach to assess their performance to key financial and strategic (customer, business process, and people) controls?
If you have access to the executives who ran this company, what can you learn about their decision making culture and the degree of organization around making decisions? Gear the analysis toward its most salient issues. For example, organizational conflict, power, and politics will be important issues for some companies. Try to analyze why problems in these areas are occurring. Do they occur because of bad strategy formulation or bad strategy implementation? As part of your analysis, suggest an action plan that the company could use to achieve its goals. For example, you might create a list of logical steps they need to follow in order to alter their BLS from a focused to a broad one.
Step 4. Identify Key Problems and Opportunities
- Price – Cost = Profit
- SWOT Analysis
- Organization Controls
- Type 1, 2, 3 Rivalry
- Strategy Diamond
- Action Checklist: Understanding and Managing Competition Over Time
Identifying the focus of the report is critical at this point. You should already have a good understanding of the opportunities and threats that exist in the external environment and be well aware of the strengths and weaknesses of the firm’s capabilities. Now you need to summarize and prioritize all of what you know. Decide among these options, which are most salient? Regardless of their success, no firm has unlimited resources nor do they operate without opportunity for improvement; they can’t do everything and there is always something that can improve. Limit the focus of your analysis to those things that will make a difference; prioritize your findings so that your most important one is first.
The models identified in the bulleted list above for this step should help you organize and prioritize your efforts for the next step.
Step 5. Make Actionable Recommendations
- Rules of Analysis
The quality of your recommendations is a direct result of the thoroughness with which you prepared the analysis. Recommendations are directed at solving whatever strategic problems the company is facing and increasing its future profitability. Your recommendations should be in line with your analysis; that is, they should follow logically from the observations and data you provide in the report. Making your recommendations actionable means that you provide specific, measurable, and detailed instructions that are likely to produce positive results for the client.
Actionable recommendations convey credibility because they are specific, measurable, and contain enough detail to facilitate implementation. Provided they are in line with your analysis, there should be a clear line-of-sight between cause and corrective action. Your recommendations should direct the action of your reader in such a way they know precisely what is required, when it is needed, for how long, and who will be held accountable.
A set of recommendations will be specific to each subject of analysis. Such recommendations might include an increase in spending on specific research and development projects or the divesting of a region. Make sure your recommendations are mutually consistent and written in an actionable format – who does what by when? Ask yourself, will my client be able to implement these proposed recommendations or will they just scratch their heads – how and how much? Make your proposal as complete as possible given the time and information constraints. Your plan of action might contain a prioritized timetable that sequences the actions in chronological order and flows from the business to the functional level.
For additional information, see Actionable Recommendations in the Business Writing Style Guide.
Rules of Analysis. To check your final list of recommendations, consider the following five rules of analysis. Given, these five questions may have more relevance in an academic setting, they can still be useful in an application setting as well.
- Understand the Question – Go back to the original assignment and connect the question(s), or what you were asked to produce, with the course subject. If you were given an assignment while studying Chapter 5, is there a model in Chapter 5 that, if applied, would yield a logical result? In a business setting, this question would translate into checking your client’s request to be sure you are understanding what they are paying you to do.
- Essential Vocabulary – In academia, courses introduce students to specialized vocabulary. Often, as is the case here, the course textbook includes a listing of essential vocabulary and their meaning. Use terminology and concepts emphasized by the course or its instructor accurately and appropriately to demonstrate mastery. Similarly, in a business environment, pay attention to the language your client uses so that you sound better informed about their specific environment and circumstance.
- Use Evidence – Usually if you have done your job well, the recommendations you make to your client will be critical of what they did and could be potentially confrontive. By using the specific evidence you uncovered or created in your analysis, you can be both critical and palatable at the same time. Using data to support your conclusions and your recommendations will favorably impress your professor (in academia) and will be more acceptable to your client or boss (in business).
- Be Complete – An executive summary is the first section of a business report, typically one or two paragraphs but rarely more than one page. It is not background or an introduction; it provides a quick overview of what is contained in the report. Sometimes, the executive summary is the only thing a busy executive (or professor) reads. On the occasions they dive deeper, however, they’ll be looking for your calculations and reference citations. Know and report your assumptions.
- Be Precise – Just like Mark Twain famously said, “It usually takes me more than three weeks to prepare an impromptu speech”, you will need time and editing to be precise. Neither your university professor nor your future boss will be impressed if what you write wanders around without getting to the point. Answer the research question fully but omit everything that is unnecessary. Once you think you are done, reread what you wrote and ask yourself “Did I answer the question?”
- Investopedia, Break-Even Analysis, accessed November 2018. ↵