Module 1.

Business Analysis Tools and Concepts

Overview

Risks nowadays come from different forms and sources. Companies must be
able to understand how to sustain their existence in the industry by analyzing the
available information of the company. This module discusses the importance of
business analysis to companies. In order to conduct theses analysis, tools are created
to facilitate and ensure that a holistic approach was observed, and all the facets of the
organization is revisited for continuous improvement.

Change is inevitable. Companies must continuously innovate to enable

themselves to cope with the impact of the changes in the market. This module will also
discuss tools that will be used in the conducting business analysis such as: balanced
scorecard, SWOT Analysis, PESTEL Analysis, Performance Evaluation, and Risk
Assessment. In the course of the assessment, responsibility accounting is a must to
determine which areas need more attention and improvement.

At the end of the module, discussion will focus on the development of business
feasibility study to formalize the solution which was thought of out of the issues and
gaps that were identified like supply shortage, competition, organizational issues etc.

Module Objectives

At the end of the module the students, particularly BSA and BSMAs, should:
 Discuss the areas related to strategic business analysis
 Develop a case problem on the current business trends and issues emerged
in business accounting
 Discuss the importance of business feasibility study
 Enumerate the parts and identify the information needed to be used to develop
each part

Course Materials

Business analysis is a process of determining improvements in the corporation or

industry as a whole through the introduction of changes in the company or veering away
from any risks that the organization might face given the trend the company is taking.
Business analysis is an inherent function of the organization where they visit and
review their existing processes based on the data, knowledge and information made
available to a group of strategic individuals that unearth any opportunities or threat in
the existing organizational model. This is used to enable the company the make
realization of the potential benefits or growth by improving on how they run the day
to day operations and creating the architecture suitable to their organization.
(International Institute of Business Analysis, 2020).

Business analysis must be holistic and must touch, as deep as possible to

support and ensure that the recommended solutions or improvement will be effective. In
the process the following tools are commonly used:

Balanced Scorecard

In strategic management, balanced scorecard is measuring tool used to

assess the performance of the company by identifying the internal variables that
affected the external results or outcomes. This also used as an organizational
feedback. It is critical in the process is to objectively collect the relevant
information and be able to quantify them for easier and more objective analysis
and come up with a reasonable conclusion and doable solution. (Tarver, 2020)

This tool was first introduced in early 1990s by David Norton and Robert
Kaplan. Kaplan is a senior fellow and professor in the Harvard Business School.
Norton is a founder and director of the Palladium Group. The model follows that
the assessment should be able to address the following:

 How do customers see us?

 What must we excel at?
 Can we continue to improve and create value?
 How do we look to shareholder?

The organizations must identify their goals and identify how these will be
measured by putting inconsideration the following:
  Customer Perspective
 Internal Business Perspective
 Innovation and Learning Perspective
 Financial Perspective

Going over each perspective, in customers perspective, it is noted that the

customers are vital in every business. The customers establish the demand for
the products or services of the companies. Hence, the goals must be directed to
the satisfaction of the needs of the customers. The goals must be measured
according to how the company will realize the benefits from the customers like
volume of sales, sales mix, customer satisfaction, and collections.

Another perspective is the consideration on the internal processes of the

organization in order to provide the products and services demanded from them.
Management must focus on the identifying the critical operations that would have
significant corporate contribution. The goals must be measured through
production efficiency, operational excellence etc.

Next perspective is seeing through what can be done and improve for the
future and would create more value for the company. Continuous improvement
will add flavor to the company values because it exceeds or outperform what was
expected of them.

Lastly is the perspective of the shareholders of the corporation. All

activities and its results must be realized financially by the owners or the people
who has great financial interest from the company. The goals may be measured
through net income level, financial ratios, debt covenants etc.

The benefit of having a balanced scorecard is to (1) consolidate the

various performance of the companies in the different areas in the organization
into a single report; (2) protect the company from coming up with inefficient
strategy; and (3) facilitate budgeting and long term financial forecasting. (Kaplan
& Norton, 1992).
 SWOT Analysis

One of the most popular business analysis tools used is the SWOT Analysis.
Probably it is due to the convenience and can be remembered easily. The objective of
this tools is to enable the companies or organization to have a oversight or awareness
on the factors that would affect their long term strategy. Through SWOT, the senior
management will be able to identify and understand what factors they should consider
improving further, reinforcing, exploit and mitigate. (Schooley, 2019)

The areas considered in the SWOT analysis are as follows:

 Strength

Strength are the factors or attributes of the company or

organization that enables them to realize positive results. These could be
competitive advantage, organizational design, intellectual property,
human capital, process improvements etc.

Once the company or organization understand what the strengths

are, this will enable the company to determine the areas where they
should improve further and by focusing to it will allow them to realize
better returns.

 Weakness

Weaknesses are the factors that slows down the company from
earning more. As business strategy, it is important for companies to
understand on what areas that they should focus on to avoid these “iron
ball” that prevents them from attaining their goals.

In order to address the weakness, elimination of the weakness is

not always the solution but converting it to become company’s strength.
The common weakness of the companies are lack of internal controls,
ability to gain goal congruence, negative branding etc. To resolve the
weakness is that the company should find ways on how to reinforce these
forces to become strength for example, a company that has issued on
 internal controls must be scrutinized further and possibly understaffing is
existent. In this scenario, the resolution is to review the organization’s full
time equivalent and review the segregation of responsibilities. Although,
most of the companies, find the exercise of reinforcing and converting the
weakness into strength more costly thereby they opt to just eliminate the
weakest link in the organization.

 Opportunities

In business there are a lot of venues and factors that would help
the company to grow further, these factors are classified as opportunities.
Opportunities are factors that will enhance the returns of the company.
This is not yet considered as strength since these are not yet part of the
company but a potential for the company. These make the form of new
technology, market expansion, new demand etc.

 Threats
Threats are negative results of the furtherance of other factors. Like
if the weaknesses were left out and not resolved either reinforced or
eliminated it may be dangerous or fatal to the company’s performance.
Also, strengths which are over focused may also result into threats.
Strategic managers often resolve threats by exploring how they can
capitalize this to become opportunities and later on company’s strength.

It may be noted that the factors under strength and weaknesses are those
internal to the organization while the opportunities and threats are more of external to
the company. In using the analysis the model is designed as a matrix of all factors to
enable the analyst going to the senior management to have an overview of the
variables that would affect the business performance.

PESTEL Analysis

Another popular way on conducting business analysis is identifying and

evaluating the factors that are driven by the political, environmental, social,
technological, environmental and legal, using the acronyms of these factors the analysis
is called PESTEL. This analysis is used for developing corporate strategy and laying
down the opportunities and challenges in meeting the corporate target. This approach
incorporates the SWOT Analysis, the 5 Market Forces of Michael Porter and other
relevant tools for developing corporate strategy. (Corporate Finance Institute)

Originally, the framework focuses on the first four acronyms i.e. PEST.
Eventually as business and industries progresses it also includes factors that affect
environmental and legal.

 Political. Political factors are those that are driven by government

rules and regulations that will impact the business as usual activities of
the company. These includes tax laws, tariff regulations, quotas etc.
 Economic. Economic factors account for the various drivers in the
industry like economic growth rate, inflation, foreign exchange rates,
competition etc. Normally these factors are regulated by the Bangko
Sentral ng Pilipinas for the Philippines.
 Social. Social Factors are those which are driven by demographic profile
and culture where the business operates, distributes or conducts its
business operations.
 Technological. Technological factors are those driven by the new
technologies, innovations and introduction of new tools that will be made
available or being used by the business in the conduct of their
operations.
 Environmental. Environmental factors are driven by the input or output
of the company that may contribute to the improvement or may harm the
environment. These could be calamities or natural disasters, temperature,
pollution, and favorable weather condition.
 Legal. Legal factors are focused on the legal or statutory requirements
of the company. These are normally linked with the political factors the
difference only is the focus. Legal factors are normally specific to a
company while political factors are industry or nationwide.
 In identifying these factors will also enable the company to identify the
elements that will aide them in developing strategies to mitigate potential risks
that these factors may bring.

Risk Assessment

Enterprise Risk Management or ERM is defined by COSO as a process, effected

by an entity’s governance body, management and other identified personnel, that
applied in strategic planning across the enterprise or the company. This is designed to
identify potential events that may affect the entity. (PricewaterhouseCoopers LLP, 2004)

The ERM must support the organization in achieving its objectives on:

 Strategic. These are high-level, normally long term goals aligned with
and supporting its mission statement.
 Operations. Operational objectives are geared through effective and
efficient use of its resources.
 Reporting. Enterprise must have a consistent and reliable reporting framework
 Compliance. The enterprise must all times ensure to adhere with the
relevant laws, rules and regulations.

ERM is covered by eight components which were derived on the manner

how enterprises were operated using the core management processes. The
components are:

1. Internal Environment. This describes the organization itself and sets the
boundaries on how the risk will be viewed and appreciated. This includes the
company’s structure, philosophy and appetite for risk, ethical standards and the
operating model of the company.
2. Objective Setting. This is a vital and important process wherein the
strategies, risk appetite and the company’s mission must be aligned.
3. Event Identification. This is the process where the Enterprise will assess all the
possible sources of risk and opportunities. Management tend to gear their
decision towards maximizing the opportunities and reducing the risk involved.
 4. Risk Assessment. This is the process of identifying the risk, its likelihood and
its impact to the Enterprise.
5. Risk Response. This process allows the management to identify how will
they respond to the identified risk. The mitigation of risk is not always
elimination because it is practically impossible. The responses could be
avoiding its occurrence, accepting the reality it is existing, reducing the risk to
a tolerable level or transferring it.
6. Control Activities. Processes and policies will be laid down and the enterprise
must identify points where controls must be instilled and how to ensure that its
installation will not hamper the operations.
7. Information and Communication. This is a vital process of engaging all
stakeholder. Risk can be mitigated easily if all the people involved especially
those who have stake in the Enterprise will be able to understand and respond
to the risk as they arise.
8. Monitoring. The effectiveness of any improvement and policy enhancement can
be done by continuous monitoring and assessment of the situation. With the
close monitoring and timely escalation of “red flags” will enable faster resolution
or improvements. (PricewaterhouseCoopers LLP, 2004)

Business Analysis were facilitated by identifying the entity responsible,

accountable, consulted and informed. Determining where the root cause will matter in
identifying which segment/s significantly affects the business.

Responsibility Accounting deals with the identification of the areas or business

segment, its objectives and performance. This is based on the information relative to the
inputs and outputs of the processes involved and how plans were materialized and how
each other relates to all areas.

In business analysis, companies must be able to identify the responsibility

centers. Responsibility centers are sub areas in the organization which focuses on
different output especially in decentralized environment.

The cost centers are centers that incurred costs to support the business
operations. The costs centers must be identified since they are main contributors to the
company’s middle line. By making these costs centers efficient the company can be
able to improve their returns. Another responsibility center is are the profit centers.
These are areas responsible for realizing returns these are business units that have a
control on both revenue and cost. Next are the investment centers which primarily
focused in ensuring that the portfolio is realizing the target returns. Normally, the metric
used in assessing the investment is the ROI.

In the course of analyzing the business and its operations, gaps and
opportunities were identified. The gaps can either be resolved with improvements on
products or services, new offerings, efficient way to manufacture or render the services.
Opportunities can be maximized by business expansion, tapping another market,
offering new products and services and even innovating processes. Companies before
doing their investment does their study first to ensure that all costs will be considered
over the potential returns of the initiative. Hence, the use of business feasibility
study is imperative before making substantial investment on a certain activity or
business proposition.

The business feasibility study is a holistic research on determining the

required investment and the potential returns. Holistic being that it will have to
understand, assess, and identify all areas of the business such as marketing,
production, administration and finance.

The Market Aspect is the portion on which the 4Ps or the product/service, price,
place and promotion were being established. This aspect also includes analysis of the
market and industry. This will include the analysis of demand and supply, pricing and
customers willingness to pay etc.

The Technical Aspect is the portion of the study that responds to the demand
established by the market aspect. Here, the technical requirements that are needed to
produce or to render the service including the required capital expenditures must be
properly laid down.

The Management and Legal Aspect provides for the organizational

structure appropriate for this kind of business. If the business feasibility study is
focused in
introducing innovation and change, this aspect shall focus more on the
compliance requirements and whether the initiative complies with the relevant
laws, rules and regulations and such are quantified to be considered as an input
in the financial implication of the study.

Financial and economic aspect deals on how all inputs translates to the
currency that the proponents must expect from the business opportunity or the gap
that this initiative is trying to address. Normal output of this aspect is a pro-forma
financial statement covering not less than 5 years for proper assessment and
determination of risk to be anticipated.

Risk Management Strategy is a new segment of the business feasibility study.

This is normally involving the exit strategies, risk mitigation and other
appropriate response on the risk indicators identified in each area.

Once all aspects of the study find its feasibility then the company can start
implementing the proposed change, new product or service or other matters that
would impact the returns of the company.

Read
 Books on Financial Management, Investment and Portfolio Management,
and Strategic Management
 News clipping and other authorized and generally acceptable media

Activities / Assessments
1. Case Analysis
o Select for a company and gather recent information about them based
on news clippings, news reports, articles, annual reports, audited
financial statements and other literatures relevant to the company.
o Answer the following questions:
a. What is the profile of the company?
b. What is the recent issue/s and challenge/s they are facing?
c. Conduct a PESTEL and SWOT Analysis on the issue/s raised
d. Make recommendation based on the analysis
o Answers must be written or encoded personally and submitted
within 1 week or as maybe prescribed by an instructor.
Essay. Enumerate and describe how each part of the Business Feasibility Study is
related to assess a business feasibility