Strategic Analysis and Formulation
Strategy
Strategic Analysis and Formulation
Syllabus tag: KASNEB CPA | Advanced Level | CA31 Leadership and Management | Topic 1 Strategic Analysis and Formulation
Lesson objectives
By the end of this topic, you will be able to:
- Distinguish the levels of strategy
- Apply PESTEL and Porter's five forces to an external environment
- Apply resource-based analysis to internal capability
- Construct and use a SWOT analysis properly
- Compare the rational and emergent views of strategy
Why this matters
Strategy questions are marked on application. A candidate who lists the PESTEL headings earns almost nothing; one who identifies the two or three factors that actually threaten the company in the scenario earns the marks.
Levels of strategy
| Level | Question |
|---|---|
| Corporate | What businesses should we be in? |
| Business | How do we compete in each? |
| Functional | How does each function support that? |
Confusing the levels produces incoherent answers. Deciding to enter a new market is corporate; deciding to compete on service within it is business level; deciding the staffing needed is functional.
The external environment
PESTEL — political, economic, social, technological, environmental, legal.
Used well, it identifies which factors matter and how much. For a Kenyan manufacturer, exchange rates, fuel costs and the Finance Act are likely material; demographic change is real but slow. Ranking by impact and likelihood is what turns a list into analysis.
Porter's five forces assess industry attractiveness:
| Force | High when |
|---|---|
| Threat of entry | Low capital needs, no brand loyalty, easy distribution |
| Bargaining power of buyers | Few large buyers, undifferentiated product, easy switching |
| Bargaining power of suppliers | Few suppliers, unique input, high switching cost |
| Threat of substitutes | Alternatives meet the same need more cheaply |
| Competitive rivalry | Many similar competitors, slow growth, high exit barriers |
The purpose is to find where the profit in the industry is captured. Where buyers are powerful and rivalry intense, margins go to customers regardless of how well any one firm is run.
High exit barriers deserve attention: specialised assets and redundancy costs keep failing firms in the industry, sustaining overcapacity and depressing prices for everyone.
Internal analysis
Resources are what the organisation has; competences are what it does well. Neither is a source of advantage on its own.
The VRIO test asks whether a resource is:
- Valuable — does it exploit an opportunity or neutralise a threat?
- Rare — do few competitors have it?
- Inimitable — is it costly to copy?
- Organised — is the firm arranged to capture the value?
Only a resource passing all four supports sustained competitive advantage. Cash, standard equipment and off-the-shelf software are valuable and neither rare nor inimitable, which is why they never confer advantage.
Core competences are the few things an organisation does distinctly better, which give access to multiple markets, contribute to customer benefit, and are hard to imitate.
SWOT
The tool most often misused. Two rules make it analytical rather than decorative:
- Strengths and weaknesses are internal; opportunities and threats are external. "Poor economy" is not a weakness; it is a threat
- Items must be specific and evidenced. "Good staff" is an assertion; "the only firm in the region with three certified specialists" is a strength
The value lies in the conversion: how a strength can be used against a threat, and which weakness makes a threat dangerous. A four-box list with no conclusions drawn from it answers nothing.
:::checkpoint A candidate lists "rising interest rates" as a weakness and "hard-working staff" as a strength. Correct both entries and explain what each error reveals about their understanding. :::
Rational and emergent strategy
The rational model proceeds through analysis, choice and implementation in sequence. Its strengths are rigour, coordination and a basis for control. Its weakness is that it assumes a predictable environment and a plan that survives contact with reality.
Emergent strategy holds that strategy forms over time through decisions taken as circumstances unfold, and that the realised strategy usually differs from the intended one. It suits fast-moving conditions and risks becoming a justification for having no direction at all.
The practical position is that most organisations need both: a deliberate direction, and the capacity to adapt within it. An examiner asking "should the company plan?" wants that balance, not an argument for either extreme.
Strategic direction
Ansoff's matrix gives four options in ascending order of risk:
| Existing product | New product | |
|---|---|---|
| Existing market | Market penetration | Product development |
| New market | Market development | Diversification |
Diversification is riskiest because both the product and the market are unfamiliar. Related diversification, where some competence carries across, is safer than unrelated.
:::checkpoint A profitable Kenyan bakery is considering opening restaurants in Tanzania. Classify the move on Ansoff's matrix, state why it carries the risk it does, and name one competence that might or might not transfer. :::