The Diamond-E framework is the focal point of a more comprehensive process of strate-gic analysis as described in Figure 3.4. This is a full stratestrate-gic review that works from an assessment of the current performance and strategy of the business, through creation and assessment of strategic options, to decision and execution. Such full and formal analyses are appropriate (1) on a periodic basis, such as once a year, as determined by senior man-agement; (2) in light of current or anticipated poor performance; (3) when the business confronts a suddenly perceived opportunity or threat; or (4) to fully assess a spontaneous proposal originating within the organization.
Formal strategic reviews are very important, but there is an equivalently significant contribution to be gained from employing this same process informally on an ongoing basis. If this analytic process also becomes an informal and continuous part of the way managers think about the future of their business, there will be big dividends in the time-liness of recognizing new possibilities and in the flexibility to address them. There is no need here for numbers and surveys and presentations; rather, you try on an ongoing basis to put everyday events and experience together in a format that pushes you to think about long-term implications. Then, as circumstances unfold, you are ready for timely action or
Activities Step 1: Base Case
Analysis
Assess the strategic position of the business and the urgency for action.
1. Assess past performance.
2. Identify and evaluate current strategy using the Diamond-E analysis.
3. Forecast future performance under current strategy.
4. Decide on the need, nature, and urgency of change.
Step 2: Strategy
1. Work from the environment and capabilities to generate new proposals.
2. Use the Diamond-E framework to shape and short-list proposals.
3. Prepare performance forecasts for short-listed proposals.
Step 3: Decision and Execution
Commit, implement, and review.
1. Decide on proposal(s) to implement.
2. Move to build commitment and develop required capabilities.
3. Implement.
Figure 3.4 The Process of Strategic Analysis
55 T h e P r o c e s s o f S t r a t e g i c A n a l y s i s
perhaps to initiate a more formal review. In this sense the process of strategic analysis, or strategic thinking, becomes an integral part of the everyday agenda of management.
Whatever the initiating conditions, and at whatever point you enter the strategic review process, there are three steps or stages of work that need to be completed. In logi-cal sequence, which you should understand may not reflect your entry point, these are (1) base case analysis; (2) strategy formulation and testing; and (3) decision and execu-tion. As illustrated in Figure 3.4, the Diamond-E is central to Steps 1 and 2 of this process.
The following sections describe each of these steps.
Step 1: Base Case Analysis
The objective of this step of analysis is to establish what will happen if you simply con-tinue to employ the current strategy, or modest variations of it, and from this determine the urgency for strategic action.
Assess Performance A careful analysis of the performance of your business is a fun-damental first step in base case analysis. Unless you are on the brink of a dramatic change in the environment, performance trends that are on target suggest that you have the strategy about right. Performance difficulties, on the other hand, mean that your business strategy does not suit competitive conditions, or that your capabilities are inadequate, or both. Diagnosis will always require detective work, and a sensitive analysis of performance factors will provide essential clues to the location and the extent of strategic problems.
First, test the performance of your business against internal goals and external pres-sures using the meapres-sures of operating performance and organizational health that we sug-gested in Chapter 1. Pay particular attention to your most important strategic goals. If the generation of new products is a critical goal, how are you doing? If you need to gain market share at the expense of a certain competitor in a particular segment, ensure that you have the data you need to monitor progress. Bear in mind that these measures of per-formance relative to your own goals are important, but not conclusive. You will still have to evaluate, as part of your subsequent Diamond-E analysis, whether the goals, as set, are appropriate and realistic.
Second, you need to measure the firm’s performance against external reference stan-dards and benchmarks. How well is the business doing relative to the current expectations of shareholders, bankers, customers, labour markets, suppliers, government agencies, and so on? These judgments will identify the areas in which the firm is well positioned as well as those in which it is vulnerable.
The results of the performance assessment will help to set the agenda for the rest of your analysis. If the business is having difficulties, your approach should be one of diagnos-ing the problems and developdiagnos-ing remedies. On the other hand, if the business is perform-ing well, your approach should be to check vulnerabilities and build strategies to take advantage of new opportunities. The steps of subsequent analysis will be the same as those illustrated in Figure 3.4, but the focus will be on different issues.
Identify the Strategy To move forward from the performance assessment you need a clear understanding of your current business strategy. This is the platform for looking outward at the environment on one hand, and inward to the company on the other hand, and for deciding what forces and circumstances should be given priority atten-tion. Sometimes your strategy will be well formed and consistent, sometimes not. But recall that your business will always have a strategy, albeit in some circumstances implicit, incomplete, or confused. Your job here is to identify the priorities that are driving the business, whatever they are.
Evaluate the Strategy Using your organization’s current strategy as a point of depar-ture, assess the consistency of the relationships in the Diamond-E framework. What you are aiming for in this application of the Diamond-E is a forecast of the future performance of the business, assuming that it continues to employ the current strategy. This forecast, in effect, summarizes the impact of the consistent and inconsistent relationships that you have identified in your analysis.
Decide on the Nature and Urgency of Required Changes The base case Diamond-E analysis and performance forecast will provide you with the grounds for judgments about the prospects of continuing with your present strategy. If the forecast looks good, how long can you expect it to continue? How can you make it even better? In some situations you will decide that minor changes in strategy, or in the elements of the Diamond-E supporting strategy, are all that is required, and that their urgency is low. In other cases the forecast will look dire and you will have to move very quickly to implement some radical changes in strategy and operations.
Sometimes the outlook will be satisfactory but could be improved with relatively modest strategic action.
Step 2: Strategy Formulation and Testing
As you move to create new strategic proposals, you can rely heavily on your earlier work to dictate the issues that take priority, the time frame that you have to work in, and the rough scale of action that makes sense.
Generate Strategic Proposals Unless you have begun the process of strategic analysis with some concrete strategic proposals in mind, you are likely to find that your primary source of new ideas is the analysis that you have just completed. As you evalu-ated your current performance and strategy and worked through the Diamond-E, you were undoubtedly struck by some new insights. Now is the time to review these, to develop a list of new opportunities and problems, and to assemble proposals that address the most attractive possibilities or the most urgent challenges. Fresh ideas may also arise spontane-ously, of course, and these should be added to the inventory. In general, the more thor-ough the preparatory work, the better the set of options you will have to consider, and the easier it will be to create new strategic proposals.
57 S u m m a r y
Evaluate Strategic Proposals The most promising strategic proposals should be assessed by means of the Diamond-E analysis. The workload will not be quite as high this time because you can rely on much of the analysis that you have already done in evaluat-ing the current strategy. To make sure that the door stays open for other proposals and for new ideas, your first applications of the Diamond-E should be fast and provisional. There is no need at this point for you to make detailed, formal performance forecasts. Work with consistency and inconsistency and be pretty quick to disqualify proposals encumbered by inconsistencies. The aim at the outset is to sort the proposals quickly and to assemble a short list of the promising possibilities. Then you will need to apply the full rigour of the Diamond-E, culminating with performance forecasts.
The performance forecasts for the most attractive strategic proposals will need to be carefully reviewed. You will have to make crucial judgments about whether the per-formance estimates will actually be met. Are the forecasts credible? Do they reflect an acceptable balance of risk and opportunity? All things considered, which of the proposals looks the best? Finally, do you have an answer yet or do you have to recycle in search of a strategy that is more promising and convincing than those uncovered to this point?
Step 3: Decision and Execution
At this stage, you may be in the happy position of having a number of new strategic proposals to choose from, all of which you find attractive. More often, managers find that they are torn between adopting one of several imperfect proposals. Whatever the situa-tion, the time has come to make a choice. Doing the analysis that we have suggested is important, but it should not be converted into an excuse for endless delay, with calls for more and more information, or more and more analysis.
When your choice is made, it is time to plan for execution. If your choice represents a significant change to your firm, you will want to look at Chapters 10 and 11, which deal with the implementation of strategic change. Furthermore, your analysis of implementa-tion should inform the formulaimplementa-tion of strategy. As you consider what it will take to imple-ment the strategy, you will likely need to revisit your underlying assumptions about the strategy to ensure they are still valid.
SUMMARY
This chapter has presented a general framework for strategic analysis. The Diamond-E framework identifies the basic building blocks and relationships to consider in dealing with strategy problems. The Diamond-E analysis provides a systematic way to evaluate strategies in light of the critical linkages defined in the model. It serves as a crucial phase of a broader process of strategic analysis, which encompasses a sequence of steps leading from base case analysis to strategic choice. It is important to note that there are many approaches to strategic analysis, but all approaches stem from the basic building blocks
that are inherent in the Diamond E framework. Take, for example, Zook’s seven steps to a new core business in which he suggests the following:
1. Define the core of your business. Reach consensus on the true state of the core.
2. Assess the core’s full potential and the durability of its key differentiation.
3. Develop a point of view about the future, and define the status quo.
4. Identify the full range of options for redefining the core from the inside and from the outside.
5. Identify your hidden assets, and ask whether they create new options or enable others.
6. Use key criteria (leadership, profit pool, repeatability, chances of implementation) in deciding which assets to employ in redefining your core.
7. Set up a program office to help initiate, track, and manage course corrections.5 Although Zook is vague in his discussion of what the “core” means, the four ele-ments of strategy provide good definition around its eleele-ments: goals, product market focus, value proposition and core activities. Differentiation typically refers to how well differentiated the value proposition is, but it could also refer to differentiation in the other strategy elements. Identifying hidden assets involves looking both inside to capabilities and resources and outside to customer needs that may be unmet by competitors. As we move through subsequent chapters, the importance of implementation will become para-mount since many strategies sound good on paper but fail because of poor execution and implementation.
The emphasis in the chapter has been on basic tools and logic. Subsequent chapters will go into the substance and detail required to apply the framework and process to spe-cific strategic problems.
Notes
1. Zook, Chris. “Finding Your Next CORE Business.” Harvard Business Review 85.4 (2007):
66–75. Business Source Complete, EBSCO. Web. 15 Aug. 2011..
2. Zook, Chris. “Finding Your Next CORE Business.” Harvard Business Review 85.4 (2007):
66–75. Business Source Complete, EBSCO. Web. 15 Aug. 2011.
3. Zook, Chris. “Finding Your Next CORE Business.” Harvard Business Review 85.4 (2007):
66–75. Business Source Complete, EBSCO. Web. 15 Aug. 2011.
4. For a further discussion of the idea of stretch, see Hamel, Gary, and C. K. Prahalad.
“Strategy as Stretch and Leverage,” Harvard Business Review 71 (March–April 1993):
75–84. Print.
5. Zook, Chris. “Finding Your Next CORE Business.” Harvard Business Review 85.4 (2007):
66–75. Business Source Complete, EBSCO. Web. 15 Aug. 2011.
In market economies businesses must compete for survival and prosperity. They succeed if their strategies address customer needs and create competitive advantages. They fail if their strategies are inconsistent with market forces. The catch, of course, is that you have to evaluate strategy in terms of the future, not the past, and these cut-and-dried realities are much easier to see in retrospect than they are in prospect.
Environment analysis, or industry analysis as it is often called, has two significant implications for the overall strategic analysis. The first is that not all industries are equally attractive. Although studies have varied in their estimates, it is generally accepted that, on average, 10 to 20 percent of a firm’s profitability can be attributed to the industry within which it operates. Therefore, the decision to make initial or further investment in an industry depends on the industry attractiveness. However, it is important to note that the relationship between strategy and the environment, or what is often termed the industry structure, is a two-way street. Structure shapes strategy but strategy shapes struc-ture as well. The notion that strategy shapes strucstruc-ture is the basis for approaches such as the Blue Ocean Strategy that we will discuss later in this chapter.1
Second, regardless of the industry attractiveness, we need to assess the industry eco-nomics, drivers of profitability, and the key success factors (KSFs) to understand what it takes to win in the industry. There are many models of industry analysis that provide dif-ferent perspectives and approaches. We begin this chapter by reviewing some of the more salient models. We then compare and contrast the models and address how they can be used in conducting industry analysis. The following models are examined:
■ Porter’s Five Forces Model
■ Industry Value Chain
■ Cooperation and Competition: Game Theory
■ PEST
■ Scenario Planning
■ New Economy Models
■ Blue Ocean Strategy
■ Global Industry Models
■ Stakeholder Analysis.
Later, in Chapter 5, we attempt to reconcile the complexity of the environment analysis tools presented in this chapter with a general and practical approach to conduct-ing environment analysis.