Business Objectives and Strategy (Edexcel A-Level Business): Revision Notes
Gathering Information
When developing business strategy, gathering accurate and comprehensive information is essential. Businesses need to understand both their internal capabilities and the external environment they operate in. This information gathering process typically involves two main types of audit: internal and external.
The quality of strategic decisions depends heavily on the quality of information gathered. Without thorough audits, businesses risk making decisions based on incomplete or inaccurate understanding of their situation.
Internal audit
An internal audit examines the business's own operations and performance from within. The purpose is to identify the strengths and weaknesses of how the business functions. This analysis is crucial because it reveals what the business does well and where improvements are needed.
Internal audits focus on factors within the business's control. These are the areas where management can make direct changes and improvements to enhance performance.
Areas covered by internal audits
Internal audits typically examine five key operational areas:
Products: The audit reviews product costs, quality standards and development processes. This helps identify whether products are competitive, profitable and meet customer needs.
Finance: Financial performance is assessed, including profitability levels, asset values and cash flow management. Strong financial health indicates business strengths, while cash flow problems or declining profits signal weaknesses.
Production: Production systems are examined, covering capacity utilization, quality standards, operational efficiency and inventory control. This reveals whether the business is operating at optimal levels.
Internal organisation: The audit examines organizational structures, including how divisions and departments are arranged and managed. Effective structures are a strength, while unclear reporting lines or poor communication represent weaknesses.
Human resources: Staff capabilities are reviewed, including skill levels, training provision and recruitment effectiveness. A skilled, well-trained workforce is a major strength, while recruitment difficulties or skills gaps are weaknesses.
Worked Example: Internal Audit Findings
A manufacturing business conducts an internal audit and discovers:
Strengths identified:
- High product quality with defect rate below 1%
- Strong cash reserves of $2 million
- Skilled workforce with 90% trained to advanced level
Weaknesses identified:
- Production capacity only 60% utilized
- Outdated organizational structure causing communication delays
- Product development cycle taking 18 months vs industry average of 12 months
These findings help the business prioritize strategic improvements.
Using management consultants
In larger organizations, internal audits may be conducted by external management consultants rather than internal staff. This approach can produce more objective, independent analysis. External consultants are less likely to be influenced by internal politics or biases and can provide fresh perspectives on the business's operations.
While internal staff understand the business well, external consultants bring industry expertise and can benchmark performance against competitors without fear or favor.
External audit
An external audit examines the environment in which the business operates. Importantly, these are factors over which the business has little or no control. The external audit helps identify potential opportunities the business could exploit and threats it needs to prepare for.
External audits typically focus on three key areas: the market, the competition, and wider environmental factors (PESTLE).
Remember: External factors are largely outside the business's control. The key is to understand these factors and adapt strategy accordingly, not to try to control them.
Market analysis
The audit must review the markets where the business competes. A thorough market analysis examines:
Market size and growth: Understanding current market value and growth trends helps businesses assess opportunities. Growing markets present expansion opportunities, while declining markets pose threats.
Customer characteristics: Analyzing who the customers are, their needs, preferences and buying behavior helps businesses understand their target market better.
Products available: Reviewing what products are currently offered in the market helps identify gaps or areas of saturation.
Pricing structures: Understanding typical price points and pricing strategies used in the market informs pricing decisions.
Distribution methods: Examining how products reach customers reveals the most effective channels to use.
Promotion approaches: Analyzing how products are marketed shows what promotional strategies work in the market.
Industry practices: Understanding whether trade associations exist or whether government regulation applies helps businesses operate within industry norms and legal requirements.
Market analysis reveals not just the current state of the market, but trends that indicate future opportunities and threats. Pay special attention to growth rates and changing customer preferences.
Competition analysis
Analyzing competitors is vital for strategy development. The nature and strength of competition significantly influences strategic choices. Competition analysis covers:
Industry structure: This includes the number and size of competitors operating in the market, their production capacity and marketing approaches. The audit should also assess the likelihood of new businesses entering the market or existing ones leaving, as this affects competitive intensity.
Competitor finance: Understanding competitors' profitability, investment programs, cost structures, revenue levels, cash positions and asset bases helps businesses benchmark their own performance and anticipate competitor moves.
Worked Example: Competition Analysis
A retail business analyzes its competition:
Industry structure findings:
- 5 major competitors controlling 70% market share
- 20+ smaller independent retailers
- High barriers to entry due to capital requirements
- Low exit likelihood as all competitors are profitable
Competitor finance findings:
- Main competitor has 15% profit margin vs our 12%
- Competitor investing $5 million in new technology
- Average competitor revenue growth: 8% per year
This analysis reveals the business needs to improve margins and consider technology investment to remain competitive.
PESTLE analysis
PESTLE analysis examines the political (P), economic (E), social (S), technological (T), legal (L) and environmental (E) factors relevant to the business. These macro-environmental factors can present both opportunities and threats. PESTLE analysis is covered in more detail in other units of this specification.
PESTLE factors operate at the macro level and affect all businesses in an industry, not just your business. Understanding these factors helps anticipate industry-wide changes and prepare strategic responses.
Key Points to Remember:
- Internal audits examine the business's own operations to identify strengths and weaknesses across products, finance, production, organization and human resources
- External audits analyze the environment outside the business, focusing on market conditions, competitive forces and PESTLE factors
- Internal audits reveal what the business controls; external audits reveal what it doesn't control
- Management consultants can provide more objective, independent internal audits in larger organizations
- Thorough information gathering through both audit types is essential for developing effective business strategy
- Think: "Internal looks IN, External looks OUT"