Business Strategy and Governance
Business Strategy and Governance tests how organisations choose where to compete and how they are directed and controlled. Expect competitive analysis, strategy formulation and evaluation, governance structures, board effectiveness, risk oversight and ethical decision-making.
Competitive analysis
Porter's five forces - rivalry, buyer power, supplier power, threat of new entrants and threat of substitutes - explain industry profitability and the scope for returns above the cost of capital. Generic strategies are cost leadership, differentiation and focus; being stuck in the middle usually means neither the lowest cost nor a defensible premium. The value chain separates primary from support activities and helps locate where margin is created or lost.
Strategy in practice
SWOT is an input, not a strategy: pair strengths with opportunities or threats to generate options. Evaluate options against suitability, acceptability and feasibility. Growth can come organically, by acquisition or by alliance, each with different integration and control risks. The BCG matrix classifies businesses by market growth and relative share into stars, cash cows, question marks and dogs, suggesting different cash priorities.
Governance
Agency theory frames the conflict between principals (shareholders) and agents (managers); monitoring, incentives and transparency are the controls. Board effectiveness depends on independence, competence, diversity and a clear split between chair and chief executive. Independent directors should be free of material relationships with the company. Audit, remuneration and nomination committees should be composed of independent directors, with the audit committee overseeing external audit and internal control. Risk appetite is the amount of risk the board is willing to accept; risk capacity is the maximum it can bear.
Worked example
A board has nine directors, three of them independent, and the chief executive also chairs the board. Supplier concentration is high, buyer switching costs are low and capital intensity deters entrants. The governance structure is weak: the combined chair/CEO role concentrates power, and three of nine directors cannot form an independent majority on committees. The industry analysis suggests margin pressure from powerful suppliers and price-sensitive buyers, so a differentiation strategy needs evidence of willingness to pay.
Traps
Presenting a SWOT list as a strategy. Confusing risk appetite with risk capacity. Counting a former executive as independent too soon after leaving. Ignoring principal–principal conflicts where a controlling shareholder dominates. Treating a code of conduct as sufficient evidence of ethical culture.