The success of a company is strongly influenced by its ability to identify and implement strategies which will help it in maintaining or enhancing its competitive position. The objective of this essay is two folds: to review the use of environment analysis in generating strategic options, and to measure the performance of a strategy. The business environment is changing rapidly, and companies need to change their strategies to adapt to changes in environment to prosper or just to survive (Wu, 2010). With external environment, and to some extent internal environment, of a firm changing quickly, it is important for a firm to review them when formulating and evaluating strategic options. The BCG matrix, Porter’s generic strategies and the Suitability, Feasibility and Acceptability framework are useful in generating strategies. The application of an environment analysis in generating strategies by using these three strategic management tools is reviewed in this essay.
The success of a strategy in achieving its objectives is also dependent upon the ability of a business to measure its performance so that corrective actions can be taken to improve performance. The two tools analysed in this essay for measuring the performance of a strategy are the benchmarking and the Balanced Scorecard.
Generating strategic options
“A strategy of a corporation forms a comprehensive master plan that states how the corporation will achieve its mission and objectives” (Wheelen and Hunger, 2006, p. 14). Strategies are developed to maintain or enhance the competitive advantage of a firm. According to Saloner et al. (2001), the two main groups of competitive advantage are based on the firm’s position and the firm’s capabilities. The firm’s position reflects its place in an external environment, and the firm’s capabilities corresponds to its internal environment. This implies that external and internal environmental analyses has a vital place in generating strategic options.
An analysis of external and internal environments helps in identifying the strategy that fits the firm most. Porter’s Five Forces and SWOT analysis show the information which can be collected from the external and internal environment analysis to be used for developing a strategy. The tools reviewed in this essay for generating strategic options after conducting an environment analysis are BCG matrix, Porter’s generic strategies and the Suitability, Feasibility and Acceptability framework.
Porter’s Five Forces
The external environment analysis is useful in understanding the factors which are influencing a firm, but are beyond its control. External environment analysis can be done with strategic tools, such as PESTEL (political, economic, social, technological, environmental and legal) and Porter’s Five Forces. The Porter’s Five Forces framework helps in understanding the position of a firm relative to customers, suppliers, competitors, new entrants and substitute products, and these are useful in generating strategic options.
The SWOT (strengths, weaknesses, opportunities and threats) analysis is useful to a firm wishing to follow the cost leadership strategy to understand whether it has the desired set of resources to do that. A review of resources and capabilities can show whether the firm has the cost leadership abilities, and which can be maintained in the future. The internal resources of a firm play a significant role in deciding the strategic option that a firm can use to grow its business (Becerra, 2009). The SWOT analysis can also help in identifying the internal weaknesses and external threats which should be factored in deciding which one of the Porter’s generic strategies should be adopted by a firm. The selection of generic strategies would be less effective if the firm does not know whether it has the desired set of resources to defend the strategy. The SWOT analysis is useful in deciding the strategic option to choose by making the best match of the abilities of a company with market opportunities (Spulber, 2004).
The BCG matrix is a useful tool for evaluating the relative performance of markets in which an organisation operates. The BCG matrix analyses each business segment in terms of a company’s market share and market growth (Figure 1) (Grant, 2013). The four categories are Star, Cow, Question mark and Dog. The BCG matrix can be used to identify the markets that the firm should focus on to improve its performance. This is based on the results of the external environment analysis which shows growth and relative positions of competitors in different market segments.