Par t 3 The Making of Strategy This Page Intentionally Left Blank CHAPTER 9 The corporate appraisal – assessing strengths and weaknesses The assessment of strengths and weaknesses is an early stage in strategic thinking, and one where it is very easy to end up with meaningless lists of so-called strengths and weaknesses. The chapter will explore five ways of looking at strengths and weaknesses: assessment by managers, often resulting in what many books call SWOT analysis; equilibrium analysis, which is one way of forcing managers to make a more careful consideration of strengths and weaknesses; a process to ‘audit’ the facts, drawing conclusions from a detailed analysis of the organisation; the critical success factor approach; and the core competency approach. For each method, the chapter deals both with the concept and ways of operationalising it in a real situation. So far this book has examined the broader aspects of strategic management and has looked at the process of planning in relation to a changing environment.
It is now time to concentrate on a very specific step in the process – the assessment of corporate strengths and weaknesses. Planning literature refers to this important stage under various headings: the corporate appraisal, the position audit, and assessing the present position1,2. The particular terminology used is not important: the action itself is vital. The corporate appraisal should be one of the first steps in the process of preparing strategic plans, and should provide both the platform from which the corporate objectives are established and the baseline of the strategic plan.
Attempting to plan without carrying out this fundamental step is rather like trying to reach the top floor of a building without using the stairs or lift: the ascent is possible, but is highly dangerous and calls for much more effort. Omission of the basic step may lead the company to adopt the wrong strategy, to take decisions which at best restrict its achievement of its highest potential, and at worst lead it on the road to ruin. 163 In many ways the corporate appraisal may be one of the most difficult stages top management has to face. It sometimes means striking at the established practices and business areas of the company.
It means facing up to unpleasant facts, an action which tends to destroy the wall of false security behind which it is so easy for even good managers to take complacent shelter. It can easily be considered as criticism by managers and accordingly resented. This is the area in which emotional responses may easily be roused. It is probably for these reasons that most companies which have a process of strategic planning – except when they have installed it with the aid of an outside management consultant – will confess to have either omitted this step entirely or glossed over it so brusquely that they pay only lip service to the concepts.
It is by no means unknown for a company to take stock of itself without practising any form of formal planning. Cost reduction areas and productivity increases are frequently sought by companies which are pointed much more to the present than to the future. General consultancy assignments are carried out in many companies by management consultants. It is perhaps because so many of the elements of the corporate appraisal are long-established management procedures that many books on planning do not dwell very much on the process of the corporate appraisal.
Nearly all stress the need to assess strengths and weaknesses, but few give any indication how to set about it. The word ‘strategy’ conjures up visions of daring action on the corporate battlefield: the driving off of competitors; the subjugation of another company through acquisition – perhaps it even becomes the prize for winning a duel with other competing bidders; the conquest of new markets; and the deployment of massive resources of men and finance in gigantic projects. These emotive phrases may describe where strategy will eventually evolve. They are certainly not the starting point.
And it is perfectly possible for a company to produce a sound strategy that is based almost entirely on opportunities uncovered during the corporate appraisal. I like to think of the corporate appraisal as a process of establishing the corporate identity. There is a direct comparison between the guidance offered by a career counsellor to an individual person, and the use of the corporate appraisal by a forward-thinking management. No good career counsellor would consider the job well done if he or she simply provided the applicant with a list of situations vacant.
What the counsellor tries to do is find out a great deal about the aspirations, ambitions, education, general intelligence, abilities, experience, and personality of the person being helped. Instead of a name he or she begins to deal with an identity; a real person who can be matched to a career which will complement his or her own individual and personal characteristics. So it is with the company. A superficial list of ‘opportunities’ can be produced in five minutes for any company.
And it will probably be worth less than the time spent thinking about it. Instead the corporate identity should be established, and this unique combination of skills and experience, faults and abilities, matched to opportun- ities which exploit the strong points and correct the weak ones. An appraisal should be conducted with the future in mind. Much of it will, of necessity, be equivalent to a photograph of the current position, but there will be many areas where it is possible to extend this static picture into the future.
The appraisal should be designed to help solve the problems of tomorrow and, 164 wherever possible, should be made dynamic rather than static. The fact that a particular product today contributes 80 per cent of profit is interesting: it becomes much more interesting when linked to information about competitive activity, and whether it is in a declining or growth market. Although at this stage in planning it may not be possible to be too specific about the future, the general indications should be given wherever the appraisal can identify them. Drucker3 stresses that it is as important to identify ‘tomorrow’s breadwinners’ as it is to identify today’s.
It is because of this future-oriented outlook that I believe the term ‘appraising the company’s present position’ to be a poor description of what should happen. No company in the world, however profitable, can afford to neglect opportunities for cost reduction and profit improvement. (It may deliberately opt not to implement them, but this is decision, not neglect.) Although the main purpose of the appraisal has to do with the future, the immediate profit potential which arises is a strong additional reason for not ignoring this step in the planning process. It is possible to argue that taking any cost-reduction opportunity is a positive way of removing a weakness and avoiding the perpetuation of an unsatisfactory situation, and any additional contribution to cash flow reinforces the company’s ability to exploit new opportunities.
There are several ways in which an organisation can set out to undertake a corporate appraisal, although none of them are mutually exclusive. Although the aim of this chapter is to focus on the internal elements of the analysis, in reality the strengths and weaknesses should not be completely separated from the opportunities available to and the threats facing the organisation. It is also true to say that strengths and weaknesses require to be matched against the needs of customers and the capabilities of competitors, so the next two chapters on industry and competitor analysis are also relevant to the final conclusions that should be drawn from a corporate appraisal. In this chapter it will be necessary to stray a little from a total focus on strengths and weaknesses, but as far as possible we will keep to the internal elements.
But remember that in the end it is the market which is important. The five ways of looking at strengths and weaknesses are: 䊉 Assessment by managers 䊉 Equilibrium analysis 䊉 An analytical method which assesses the key facts, from which strengths and weaknesses can be determined 䊉 The critical success factor concept 䊉 The core competency approach Assessment by managers The method which appears in almost every book on strategic management goes under a variety of names. It has been called SOFT (strength, fault, opportunity, threat), SWOT (strength, weakness, opportunity, threat), TWOS, TOWS, and WOTS 165 UP (the final letters standing for underlying planning). The end product is a list, frequently presented on one sheet of paper, under the headings in the order suggested by the acronym.
The S and W are the internal elements, and the O and T come from the external environment, including the competitors and the market. Such a list usually leads into either action plans or projects to put things right. Of course, a list of this nature may well be generated by the analytical approach which is discussed in some depth later in this chapter. The self- assessment method does not work this way.
Instead it asks managers, either alone, or in groups, to complete the list under the chosen headings. As these are really the same, and only the order changes to make the various acronyms, we can shorten this to SWOT analysis. They may be asked to assess the whole organisation, or just the part that they work within. There is some validity in the underlying belief that managers at various levels have knowledge of what the organisation is good or bad at, and that they can add a great deal to the understanding of the corporate situation.
Unfortunately, the self-assessment method often fails to release this knowledge, and can reinforce existing perceptions of the strategic situation at a time when they should be challenged. Typically managers find it hard to identify the real strengths of an organisation, and many SWOT charts produced at workshops of managers leave the observer wondering why the organisation has any business at all. Weaknesses are often a mixture of minor operational issues with a few strategic matters. What appears to be a weakness may in some circumstances be a strength.
For example, the fact that order-handling costs are higher than those of competitors may be a weakness: on the other hand, it could be a strength if the extra effort put in meant that customers received their orders much faster than they would from competitors, and that they valued this. If managers have no perception that the industry is changing, or that they should take action to change it, their perception of weaknesses will inevitably be related to the past rather than the future. There is also the problem that SWOT analysis tempts people to be superficial, and that sometimes what is said, and believed, has little relationship to reality. An example is work that I did with an organisation that made scaffold poles and cement-forming equipment.
Managers genuinely believed that they sold or hired their product to the major contractors, and that these were their key customers. They further believed that the company was the market leader in scaffold poles: in fact the name of the company was used on construction sites in place of the somewhat longer ‘scaffold pole’. So among their strengths was their relationships with these customers, and their dominant position in the market for scaffold poles (but not for cement-forming equipment). Among the threats was that recession had devastated the market.
Sales analysis, which they had never undertaken before, revealed a different story. Although they had major contractors as their customers for the forming equipment, in the past year they had had business with only one contractor for scaffold poles. The customer base for scaffolding was now almost completely small local builders (they had a chain of branches across the UK), and most transactions were of much smaller value than the managers believed.