Teaching guide: Analysing the strategic position of a business (A-level only) (podcast)

These podcast teaching guides cover topics from our AS and A-level Business specifications. You can download them below.

Podcast 7: Analysing the strategic position of a business (A-level only)

This podcast covers the specifications' seventh subject area and corresponds to section 3.7 of the specification, ‘Strategic Planning and Strategic Decisions’. It includes: Corporate objectives and strategy; Analysing strengths and weaknesses; Analysing the external and internal environment; and analysing strategic options.

Transcript

Hello and welcome to the AQA A-level Business podcast, supporting your teaching of our specification.

This podcast is the seventh in our series – and it’s the first looking at subject areas specific to the A-level Business qualification, usually taught in the second year of the course.

In our first series of podcasts, we covered the initial six subject areas of our AS and A-level Business specifications.

The content of these subject areas was built around a decision making model, where we considered the objectives of different businesses and analysed decision making in the different functional areas. We looked at: functional objectives, how to analyse the existing situation and we weighed up the various actions that might be taken in order to make a decision.

We’ll continue to reference the decision making model in the remaining subject areas but the emphasis is now on strategic decisions. We’re now thinking about how the business as a whole might want to move forward.

In this podcast we‘ll look specifically at section 3.7 of the specification. We’ll talk about Strategic Planning and Strategic Decisions, covering: corporate objectives and strategy, analysing strengths and weaknesses, analysing the external and internal environment and analysing strategic options.

There is quite a lot of material to cover in this section, so we’ve broken it down into parts to help you navigate the podcast.

Part 1: Strategic Decisions

Strategic decisions are big, high risk, major investment decisions that are difficult to reverse. They are the “bet the company” type decisions. For example: to enter a new market, to restructure the business model, to rethink how best to compete. Before taking a decision like this, managers are likely to assess the existing position of the business. In this case they are analysing the overall situation of the business so this analysis will draw together all of our earlier topics.

Managers will want to analyse both the internal and external business environment. They will then consider their strategic options, select their positioning and choose a strategic direction. As with the first six subject areas of the specification, we consider what we want to achieve, where we are at the moment and where we could go next. The difference is that we are now thinking strategically in terms of the business as a whole rather than considering a specific functional area.

However, our analysis will, of course, build on our earlier work - as any strategic change will have implications for each of the functions.

This takes us back to the first six subject areas and helps you to incorporate earlier work into the second year of teaching and learning. For example, a strategy of innovation might affect the:

product portfolio, the approach to recruitment and rewards, the nature of operations and of course cash flow. Similarly a strategy of growth will affect finances, human resource flow, the target market, and operational processes.

This is an ideal time to be using case studies and relating students’ understanding to the business world around them. Not because they need to learn ‘stories’ about businesses but because a real life example of business strategy can help them understand how to apply their understanding and illustrate how different aspects of businesses are interlinked. By studying a range of cases, students can appreciate that so much depends on the context - there’s rarely one right answer in business.

Students need to be flexible in their thinking, to apply their understanding to a range of scenarios, and to be able to analyse them and make judgements. In studying any case study they should consider what have they learnt about: this type of business, this particular industry, the culture of this business, the way the business is managed and what has been successful and what hasn’t worked.

Remind your students that they should avoid being descriptive when studying business cases and focus on analysing the issues, and using the knowledge, models and frameworks that they have been studying. You should also focus throughout on developing students’ evaluative skills. Pose questions like: What are the key issues? What are the priorities? What are the most significant factors? In your questioning and in the nature of the tasks you set make sure you encourage students to make judgements.

Throughout their learning, students need to consider the importance of context, and the significance of differences in the business environment. For example competing in the soft drinks business is very different from the hairdressing industry. The influences on objectives and decisions will also be different - such as the degree of risk and the resource requirements. Don’t forget the ethical issues that run through all decision making and the significance of different stakeholder groups and their impact on business activity. You should also consider how technology is transforming so much of what businesses do and how they do it.

This a subject where we are surrounded by fascinating examples of what we are studying and where there are real life successes and failures every month. It’s a dynamic subject where the winners of today could be forgotten in a few years’ time and today’s start up could become a billion pound business in a matter of years. This is what makes this subject interesting for students and makes it engaging to teach and to learn. In subject areas 7 to 11 students should be growing in confidence as they bring more of their understanding together and consider the bigger business issues that they can see around them.

Part 2: Strategic Planning

A good starting point for strategic planning is to consider the mission and objectives of the organisation. Questions might include: Why does it exist? What is valued within the business?

Which stakeholders are regarded as most important? What do those within the organisation regard as the reason for its existence?

Your students could try finding mission statements from different organisations and compare and contrast them: why do they differ? what influences them?

You could compare a state owned business with a mutual, a sole trader starting up with a public limited company - and we can see that they might be aiming for different things. How does this affect the way they operate and their strategic and functional decisions?

The mission needs to be turned into objectives- (an area that students will have studied in year 1). The overall purpose needs to be expressed in terms of quantifiable targets. Again, it is interesting to consider the influences on these objectives. These may be internal (for example the ambitions of the managers) or external (for example the state of the market).

One important factor affecting the mission and objectives of a business is the ownership of the organisation. For example, in the UK, there have been complaints that some investors are only interested in the short term. Pension funds and other investors may focus on immediate rewards and not be willing to allow managers to invest for the long term if this damages their short term profits.

We’ll now take a look at SWOT and PEST analysis.

Setting objectives is one thing but deciding how best to achieve them is another. Managers have to decide on what strategy they want to adopt and this is where SWOT analysis comes in. By analysing the internal and external environment, a plan of what to do next may emerge. The internal analysis highlights the strengths and weaknesses of the business while the external analysis highlights the potential opportunities and threats.

One tool we can use to analyse the external environment is the PEST framework. This provides headings under which we can organise our analysis to identify some of the Opportunities and Threats that external change may create in the future. PEST analysis focuses on the macro (or big) factors in the external environment, namely Political, Economic, Social and Technological factors. One element of this PEST analysis is a study of the Political environment; which also includes legal factors.

Students need to be aware that laws can impact on various aspects of business decision making, such as: the way they compete, the way they treat employees and the impact their actions are allowed to have on the environment. Students don’t need to have a detailed knowledge of specific laws. What matters is that they are aware that there is a legal environment and that this can affect factors such as the costs of, and demand for, the products of the business.

Students should also consider issues such as why there is a need for the government to regulate some industries and some aspects of business behaviour, as well as how and why governments might affect international trade. They should consider the potential advantages and disadvantages for businesses of having laws. For example, competition policy might limit the expansion of a business; at the same time it might protect it from anti-competitive practices by other firms.

Students must also consider economic factors in the external environment. They need to be able to assess the potential impact of changes to a range of economic factors such as GDP, taxation, exchange rates, inflation as well as government fiscal, monetary and trade policies. How could the strategy a business adopts be affected by changes in any of these factors - will it change the market it targets or the way it positions itself?

Economic change will have an impact on strategy and therefore on functional areas – for example, the economic environment may affect plans for growth, the product portfolio mix, the human resource flow and profitability.

The most important economic factors for a business will depend on its current position and objectives. Demand for some businesses may be very sensitive to income changes, some may operate internationally and be vulnerable to exchange rate changes whilst others may be more concerned about interest rate changes as consumers borrow to buy their products.

As part of economic change students need to be aware of the increasing globalisation in business. Ask questions such as: ‘Why is this occurring?’, ‘What opportunities is this creating?’, ‘What are the threats?’. When considering these issues, students should also assess the opportunities and threats of emerging economies. As ever, the key is for them to be aware that the answer to these questions depends on context. For example, which emerging economy are we considering and which business? For some businesses globalisation provides access to many new markets; for others, lower priced imports threaten their position in the domestic market.

Social changes can also be significant in terms of their impact on business strategy. The study of social change should include demographic change and major trends such as urbanisation, migration and the growth of online business. These are powerful global forces that are shifting market conditions considerably.

Social change should also include an understanding of Corporate Social Responsibility. What determines the extent to which businesses accept their social responsibilities? What determines the responsibilities that might be accepted? What are the benefits and costs of CSR? What is the difference between the stakeholder and shareholder concept?

There is no right approach - it depends on many factors such as the social environment in a particular region, at that particular time, as well as the mission and objectives of a given organisation.

Students should understand the different approaches to social responsibility as shown on Carroll’s CSR pyramid

The last element of the PEST framework is the technological environment. Students need to consider how changes in technology can create opportunities and threats –for example, through e-commerce or mass customisation.

Technological change will affect functional areas through its impact on: what is produced, how it is produced, the skills employees need, the costs of operating and the way products can be promoted through social media. Students need to consider the nature of the change, the speed of change and readiness of the business for such change. And, consider how technological change might affect strategic planning - what determines the winners and the losers.

When undertaking PEST analysis the key is to identify the factors which are most relevant and more significant for the given business. Which factors in the external environment are most likely to change in the future? Which are most likely to create opportunities or threats for this business?

PEST analysis is a planning tool which enables managers to weigh up the factors, prioritise and consider the impact on strategy. PEST analysis is forward looking and should help managers analyse a situation to decide what to do next.

PEST analysis focuses on the macro aspects of the external environment. These macro factors are very important and usually have a relatively one way relationship with a business, which means they affect an organisation but it is difficult for the business to influence them. For example, one business cannot easily change the law or the political policies adopted in a country. One organisation alone does not determine the state of the economy. However we must also analyse the competitive environment- this includes suppliers, competitors, and distributors.

The relationship between a business and factors in the competitive environment are more two way; the competitive environment is made up of factors that a business can influence through its behaviour – like the way it responds to its rivals and how it treats its suppliers and distributors.

The competitive environment can be analysed using Porter’s five forces model. This examines buyer power, supplier power, rivalry, the threat of entry and the threat of substitutes. These forces impact on the profits of firms in the industry. For instance, if there is: A high degree of rivalry,

a high buyer and supplier power, a high degree of substitution and a large entry threat this would tend to lead to low profitability in the industry.

Of course, businesses can try to change these forces, their strategies might focus on reducing rivalry through mergers, or reducing supplier power by vertically integrating.

Students should consider the relative importance of the five forces in a particular industry, what influences them, what the impact of them is on profitability, and on the strategy adopted by a business.

There is an excellent video Michael Porter discussing the Five Forces that Shape Competitive Strategy on YouTube that is well worth watching.

Now we’ll look at Internal analysis

External analysis obviously shows what is happening outside of the business in the external environment. But managers also need to look internally to plan ahead. They need to be aware of the current position of their organisation and the strengths and weaknesses that may exist - then analyse the different functions to assess what they might be good at and not so good at compared with their rivals. This will influence which strategy to choose.

The internal analysis will include an assessment of the financial position of the business. This, in turn, involves a study of a firm’s balance sheet and income statement and the use of ratio analysis.

Students will need to be able to calculate and interpret profitability, liquidity, gearing and efficiency ratios.

It is particularly important that students can understand the significance of the financial data they are examining and can think about their findings in context. Don’t assume a low gearing is good if the cost of borrowing is low and the potential returns from using these funds are high. Don’t assume being very liquid is desirable if the funds could be earning much higher returns used elsewhere. Is a return on capital employed of 10% acceptable? It depends on what the owners want, what they were promised, and what the business environment is like.

With the ratios, students need to know not just how to calculate them but also what they show. The numbers tell a story and students need to be able to make sense of this.

As well as financial data, information from the other functions needs to be analysed to assess the strengths and weaknesses of the business. This involves assessing the measures of performance considered in the first subject areas of the specification, such as labour turnover, market share and productivity. This is a useful opportunity to revisit and build on this material.

From this internal analysis managers will consider what it is that the organisation is actually good at, what are its competences? How might these influence strategic planning?

For example, Is its strength branding? Innovation? Efficiency?

Where a business has its competences should influence the strategy it chooses.

This internal analysis will involve a consideration of what the business is trying to achieve and the key indicators of performance. This comes back to its mission and the objectives it has set.

Elkington’s work highlights that profit may be one measure of performance but businesses may also be interested in other measures, such as the impact of their actions on the planet, the environmental impact of their activities and the satisfaction of their people.

Kaplan and Norton’s scorecard also highlights that finance alone might be a narrow measure of performance and that managers might want to consider a range of factors such as: Does the business have new products in the pipeline? Are customers satisfied? Are employees trained and motivated?

These are all the kinds of question anyone would ask if they really wanted to understand a business. The financial statements and financial ratios provide some insight into a business but managers should probably analyse a much wider range of indicators.

A high profit today does not guarantee future profits, so if you want to look ahead you need to look at more than this year’s revenues and costs. A business may be profitable now but have many underlying problems with employee relations, legal issues, a lack of innovation and growing customer dissatisfaction. Equally, today’s profits may be relatively low but there may be a blockbuster product in the pipe line.

Let’s quickly summarise what we have discussed within this strategic planning before moving on.

By considering its strengths, weaknesses, opportunities and threats a business may be able to develop an appropriate strategy. It may build on its strengths to exploit the opportunities it faces, or it may decide to defend itself against its threats by trying to remove its weaknesses. As external and internal conditions change, the strategy needs to change as well. One thing to remember - businesses rarely stand still.

Part 3: Analysing Strategic options

Once a manager has assessed the strategic position of their business they must evaluate the strategic options. One aspect of this analysis involves considering the financial implications of any strategy. When making decisions, investment managers will consider factors such as the size and funding of the initial investment, the likely returns and the potential risk involved. Students need to be able to analyse and interpret the payback, the average rate of return and the net present value of any investment. At any moment there may be several potential projects and managers will have to weigh these up to make a choice.

Investment is, of course, focusing on possible future returns and so is based on expectations of what might happen. This means managers will probably assess a range of possible scenarios using sensitivity analysis – this could mean changing some of the assumptions to see what would happen to the results. For example, What if costs change by 5%? What if revenues fell by 20%? Would this change our choice of project?

When analysing any investment, remember that one option is to do nothing or to do something else. Any given project may not be financially attractive enough to take the risk or there may be other projects that are more appealing.

Given that strategic decisions are ‘non routine decisions’ and will not usually be dealing with familiar situations, the need for sensitivity analysis and assessing risk becomes particularly important.

Summary

To wrap up, subject area 7 of the specification focuses on assessing the internal and external environments of a business. This is an essential element of strategic planning. Remember that when evaluating the internal and external environment it is important to weigh up the Strengths, Weaknesses, Opportunities and Threats and to be thinking of the future more than the past.

The aim is not to produce an endless list of possible factors but to assess the key issues to consider for this business when planning ahead. Although it can be quite difficult to do in practice, prioritising the key factors is essential!

In the coming subject areas we will examine the strategic positioning and strategic methods that a business may choose.

Thank you for listening we hope you have found this podcast useful. For more helpful AQA resources, visit the AS and A-level Business pages of our website at aqa.org.uk/business