There’s no time like the present for a strategic audit. Successful companies rarely rely on stable strategies and the best organizations adapt continuously to evolving market conditions. Indeed, companies rarely rely on existing endowments for sustained success. We are living through the End of Competitive Advantage.
Consequently, organizations of every kind would do well to periodically audit their strategies and competitive positioning. Organizations that reserve strategic reviews to the traditional three or five year intervals may find that the market has already passed them by when sincere analyses are conducted.
Here is a framework that allows for a simple, yet powerful audit of any organization’s strategy. Although the questions themselves are simple, the answers are infinitely complex. One can decide how extensive a review is needed for any of these inquiries. Nevertheless, anchor an analysis on these important pillars and one will be able to make a valuable summary of strategic positioning:
- Where are we now? The purpose of answering this question is to make an objective assessment of how well the organization is performing relative to the general economy, its industry (or industries), the competition, customer expectations, or company history and goals. This evaluation can take many forms depending on how an organization defines success (e.g., market share, same store sales, return on assets, etc.). One approach is to consider Return on Equity (ROE), but to do so by separately analyzing its three parts (i.e., conduct a DuPont analysis). Return on Equity is a function of a) Profit Margin (Profit/Sales), b) Total Asset Turnover (Sales/Assets), and c) Financial Leverage (Assets/Equity). These and other similar financial metrics help to estimate an organization’s profitability, efficiency, and risk: excellent starting points in a worthy audit.
- Profit Margin measures how much of every dollar of sales a company actually keeps in earnings, and is especially useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors.
- Asset Turnover is a measure of a firm’s efficiency at using its assets in generating revenue – the higher the number the better.
- Financial Leverage is a measure of the assets a company holds relative to its equity. A high financial leverage ratio means that the company is using debt and other liabilities to finance its assets — and, all else equal, is riskier than a company with lower leverage.
- What is the nature of the environment we’re in? Answers to this question comprise the classic environmental analysis where one evaluates the various contextual concerns that drive demand, influence customer choice, shape competitive dynamics, and determine an industry’s level of profitability. There are several frameworks to organize this analysis including Michael Porter’s Five Forces Model, the PEST Analysis, or Joel Urbany’s Definition of Context. Understanding the environment allows an organization to know how sensitive existing advantages might be to market fluctuations. More so, this analysis will help an organization estimate “external fit”, the extent to which products and services fit with the demands and preferences of consumers.
- What is the unique value that is created by our product or service? All models of strategy and competitive positioning rest on customer choices, which are influenced by the emotional and psychosocial sources of value that customers place on an organization’s product or service. Once again, this is a simple question with a complex answer. Value as perceived by customers does not rest solely on product attributes or features (e.g., our product has faster processor, or a touch screen, or an aluminum case). Rather, choices tend to be shaped by the emotional or psychosocial value that customers place on those features (e.g., speed allows me to respond more quickly adding to my perceived level of responsiveness). Identifying and understanding value is no easy task but essential in estimating one’s potential for success.
- Is our organization aligned to support that value? Given that advantages associated with existing technologies or processes tend to be short-lived, execution and alignment are the primary sources of sustainable performance. Indeed, effective execution is primarily about the alignment of resources with the organization’s source of value in the eyes of customers. For example, Southwest Airlines so highly regards customer service in its differentiation strategy, that “service” is first in the company’s mission statement. Southwest achieves alignment by insuring that it’s hiring practices, employee evaluation systems, compensation plans, and training programs are each focused on the source of the company’s unique value in the eyes of customer: superior service. Answers to this question provide an estimate of “internal fit”, or the extent to which internal programs and processes support – and not undermine – value in the eyes of customers.
In conclusion, there’s no time like the present to evaluate your organization’s strategy and competitive position. While this could seem like a daunting task, answers to four straightforward questions will provide a valuable framework to guide choices about how to deliver value in the eyes of your stakeholders.