This article was first published in the May 2012 International edition of Accounting and Business magazine.

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This article focuses on the need to explore the nature of the business you are in. It also considers the uses and abuses of positioning tools such as SWOT and gap analysis, and PEST and Porter environmental analysis. Customer value, competitor positioning and intent, competitive advantage and the ‘competitive onion’ are all explored. And the article ends with an explanation of how it all links to financial returns, using the Bikram yoga system to illustrate the concepts.

In strategy, you need a clear notion of what business it is that you are in. Pursuing an answer may uncover that you aren’t just in one business, but in many. The curse of this is that separate strategies/cunning plans will be required for each one.

The best way of identifying the businesses you are in is to look at different types of customers, needs and ways of meeting those needs.

These elements can be mapped out on charts - for example, customer types against types of need - as a matrix. Doing this can lead to the discovery of new possible businesses. You may also find that your organisation has many businesses, that some are marginal, and that some might be divested.

Strategy tools are typically matrixes, boxes or other models rendered as pictures to give a better and shared understanding of the complexity of strategy. They are essential, but without sufficient empirical evidence, reflective thought and challenge they can also be highly dangerous. The risks will be highlighted here.

Positioning tools

Now take the businesses you are in, one at a time, and look at positioning using SWOT and gap analysis.

SWOT analysis typically divides a box into four quarters to separate out a business’s strengths, weaknesses, opportunities and threats.

The advantages of SWOT analysis are that it is easy to use, familiar to most managers, puts issues into categories, is evaluative (strengths and opportunities are positive, weaknesses and threats are negative), and offers a powerful visualisation.

However, SWOT is often superficial (especially when used in isolation), can be dangerously incomplete and biased, may lack sufficient evidence, does not prioritise, fails to extract the ‘so what's?’, and is seldom explicitly used to develop options.

To get more out of SWOT, it should incorporate priorities - eg by asterisking the most important elements. Also, the implications (the ‘so what's?’) of SWOT need addressing:

  • What patterns are there in the SWOT/broad themes? For example, has the company lost its way competitively? Is it too slow and unresponsive? Is it unbalanced in some way, or is there a fault line in its leadership, culture and mindset?
  • Are some of the threats areas of major weakness, increasing the company’s vulnerability?
  • Are there specific opportunities where it is particularly strong and which might be candidates for offensive strategies?

Gap analysis is the difference between where you want to be and where you are likely to be given the business’s current strategies. It is an essential way of framing the degree of stretch the organisation wishes to set itself, before conducting any strategic option evaluation. It is typically framed in terms of performance metrics - typically, sales or profit, although the metric can be market share, unit costs or gaps with competitors.

Gap analysis is a way of assessing either the difference between where you are and where you want to be (snapshot), or the difference between where you are likely to be on current plans and where you want to be (future gap) based on the business’s projected future performance.

Gap analysis is probably more important than SWOT analysis, as you need to keep constant track of the value of your strategic options and their contribution to the assumed shifts in strategic performance if you are to meet strategic goals.

Obviously, it is important that the strategic objectives set are not competitively unrealistic. But top managers frequently set an artificial stretch on these objectives for the managerial tiers below without giving them the support and coaching to come up with strategies that will actually bridge the gap.

The result is that the business always delivers less than expected. This increases top-down pressure to deliver, reinforcing the negative cycle of behaviours. In short, if gap analysis is used in this way by the business it can be counterproductive.

PEST analysis

In strategy the external environment is very significant. What business hasn’t been hit by the recession and now the euro crisis/government debt? Here, PEST analysis is helpful in picturing macro changes. The P stands for political (and regulatory) changes, E for economic, S for social (and demographic) and T for technological. As with SWOT, PEST analysis is often represented in a quartered box.

PEST factors may be very big (the credit crunch is an obvious one) or slow-burners revealed through trends that are weak but which can still gather momentum - such trends need to be monitored and reflected on.

It’s time now to home in on the more immediate industry/market you are in. Here, Porter’s five competitive forces (namely, buyer power, entry barriers, competitive barriers, substitutes, supplier power) have a huge influence on profitability. The accountant needs to know and differentiate them for each and every market the business is in, especially when planning and supporting key strategic decisions.

Five forces and a funeral

Consider, for example, the funerals market in the light of Porter’s five competitive forces: customers haven’t got the time to shop around, the purchase is very emotional (low buyer power), there are psychological barriers to entry, there are no real substitutes, and rivalry is gentlemanly. The result? Superior returns!

And if a funerals business had real competitive advantage, it would be an accountant’s dream. The definition of competitive advantage is: delivering better value to customers than your competitors can, or equivalent value at a lower cost.

This definition is economic as well as financial. Strategy is also about customer value, cost and competitors. Understanding and focusing on latent customer value - which you satisfy but your competitors don’t or can’t - can also help spark ideas for ‘cunning plans’ and strategic options. By understanding your positioning relative to your rivals in terms of customer value added and cost, you can generate some exciting new strategies.

For example, in the late 1990s Tesco looked at some simple future-looking strategies for convenience formats (Express and Metro), home shopping and non-food (CDs, books, clothes, etc). By imagining it was travelling to the future (see last month’s article), Tesco saw the potential of these strategies and rolled them all out. Successful strategies are often simple but incorporate cunning - here it lay in the combination of these strategies and in Tesco’s drive and agility.

Now Tesco is a target for others and it should be thinking about their intent. Sainsbury, for example, positions itself as delivering superior service, while Tesco seems to have focused on range/price and relentless productivity gains. Is Tesco vulnerable on service if the squeeze on incomes in the UK eases up? Markets change, and strategies may have to adapt with them.

The strategy onion diagram on the next page brings all these models together with PEST factors and life-cycle effects. These all affect market growth, which in turn impacts the competitive forces toward the middle.

Within the business itself consideration should also be given to the sustainability and renewal of competitive advantage: these have a huge impact on economic returns, including the way you continue to deliver superior customer value, and stay way ahead of competitors.

Finally competitive advantage and change can be illustrated with a case study on ‘hot yoga’. Years ago Bikram Choudhury, an Indian yogi, formulated a series of yoga postures that take place in rooms heated to 105ºF. I became addicted to Bikram yoga in 2002 when there were four studios in London and few more in the UK; now there are over 20 in the capital and more than 500 worldwide in a franchised global brand.

Bikram yoga is psychologically and physically challenging. It is also an attention-grabber, appealing to young, inner city professionals seeking a wonder body. Classes are packed out. Last Saturday there were 70 in mine, with water and towels generating perhaps £1,000 in a 90-minute session.

It’s a competitively attractive market where Bikram has real advantage.
But recently several hot yoga studios have opened up in London, which threaten Bikram yoga’s future growth, margins and returns. The Bikram formula has not changed substantially in 10 years: is now a  good time for the business to seize the strategic initiative again with a strategy review?

Dr Tony Grundy is an independent consultant and trainer and lectures at Henley Business School in the UK