Conducting Business Health Check

Conducting Business Health Check
By: Tony Grundy

ALTHOUGH financial audits are well established, the idea of scrutinising your business strategy in a similar way is less common. But some form of strategic audit may prove essential to make sure that your company continues to generate value and that any governance issues are addressed.

Companies often run into trouble because the quality of their strategy has deteriorated. A strategic audit can help you spot the weaknesses before they become critical. It helps to address governance problems by forcing managers to consider whether they are running the business to generate long-term shareholders value, or trying to maximise short-term performance to increase their bonus payments.

In effect, a strategy audit is a business health check. It can be defined as a structured and comprehensive review of strategy and strategic processes to identify weaknesses, blind spots, reasons why profits are failing to reach predicted levels, and new areas where potentially more value can be added.

A strategy audit can take many forms, but may focus on three areas of competitive positioning: competitors, customers and cost base. This could involve asking some variation on these generic questions tailored to suit the context of your company.

In terms of competitors:

>Who are your rivals? What resources do they have?

>Do you understand how customers perceive your competitors’ value-added potential, and how does this compare with their perception of what your value-added services mean to them?

>Do you know your rivals’ cost advantages or disadvantages relative to yours?

>Which competitors pose the most serious threats to you, and why?

In terms of customers:

>Do you know how customers perceive the value you add and the characteristics of your products and services that distract from this? Can you break this information down by segment?

>Do you have a clear idea of what is most important to them?

>To what level do you understand the buying process of your customers, and what influence this?

>How well do you understand your customers’ competitive positions and strategic options?

In the case of customer benchmarking, it is important to check your beliefs using some objective market or customer research.

In terms of cost base:

>Do you have a clear idea of the main drivers of your cost base (cost drivers), and how best can you manage them?

>Have you targeted your unit costs in the medium and longer terms (one to five years), rather than the traditional one-year? To what degree are these supported by viable strategies?

Managers should then rate the importance of these questions on a scale of one to five and compile scores for each section of the audit. These can either be weighted of left unweighted and then be added up to give a total score, which ideally should be equivalent to over 70 per cent.

It is also essential to challenge the scores so you can achieve a detailed and objective set of views. This can be done by asking such questions:

>Why do we say this?

>What evidence do we have to support this?

>If we were customers or rivals, how would we rate these scores?

And it may be worth conducting some external research as well.

Another approach is to create matrices to assess overall strategic positioning, for example, by scoring existing strategies as if they were new options. You could base this on five criteria: strategic attractiveness, financial attractiveness, implementation difficulty, uncertainly and risk, and stakeholder acceptability. You can score these using three points for “highly attractive”, two for “moderately attractive”’ and one for “not very attractive”.

Each score should be supported by tailored, detailed questionnaire diagnostics. Again, it is wise to seek empirical justification for your judgements, rather than relying purely on subjective opinion.

A strategy audit can be implemented in a variety of ways. You may want to conduct it:

>Across the entire business or simply focus on a particular area;

>For all existing strategies or simply for evolving ones;

>As an individual accountant, as a finance team, with the chief executive, with the top management team, rolled out to all managers, using external consultants of financial backers;

>Quickly, to give a rough idea, or over a longer period with more rigour;

>With or without quantifying the potential costs of making identified changes; or

>With varying levels of empirical research.

A well-conducted strategy audit can add considerable economic value.
This might emerge from:

>Identifying areas for strategic development;

>Cutting unnecessary bureaucracy or inappropriate emphasis in strategic business planning and control processes;

>Reducing risks by highlighting blind spots and producing solutions for them;

>Focusing the top team on broad strategic issues, rather than narrowly functional ones;

>Making the top team more confident and helping it to proceed rapidly and decisively with a robust strategy; and

>Combating unhelpful politics.


Source: New Straits Times, Saturday, September 2007
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