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 for ensuring 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. You are likely to struggle if this happens, no matter how much effort you put into improving short-term financial performance. A strategic audit can help you to spot 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 shareholder value or trying to maximise its short-term performance in order to increase their bonus payments.

In effect, a strategy audit is a business health check. It could be defined as a systematic, 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 far more value can be added. It can be done at a variety of levels, including:

• Corporate strategy
• Business strategy
• Financial strategy
• Cross-functional strategy
• Supporting processes/skills

A strategy audit can take many forms, but could focus on, for example, three areas of competitive positioning:

• Competitors
• Customers
• Cost base

This could involve asking some variation on the following generic questions, tailored to suit the context of your company.

Competitors

• Who are your rivals? How big are they? 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/disadvantages relative to yours?
• Which competitors pose the most serious threats to you and why?

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 criteria and process of your customers (and who influences this) and appreciate their buying psychology?
• 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/customer research.

Cost base

• Do you have a clear idea of the main drivers of your cost base (cost drivers) and how you can best manage them?
• Have you targeted your unit costs in the medium and longer term (one to five years), rather than just 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 or left unweighted and can then be added up to give a total score – which ideally should be equivalent to more than 70 per cent.

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

• Why do we say this?
• What evidence do we have to support this?
• If we were customers or competitors, how would we rate these scores?
• How would junior staff or people who have recently joined rate us?

Lastly, 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 the following five criteria: strategic attractiveness, financial attractiveness, implementation difficulty, uncertainty 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, you would be wise to seek empirical justification for your judgements, rather than relying purely on subjective opinion. For example, do you have (or can you obtain) any evidence that your customers believe that you are strong at something, or is this merely your personal 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 CEO, with the top management team, rolled out to all managers, using external consultants or 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.
• With varying levels of empirical research. Ideally, the audit should be phased. You could start with discussions with the CEO, perhaps focusing on a specific area, before extending it to involve the top team. Later stages could include other senior managers and, eventually, the whole organisation.

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

• Identifying areas for strategic development.
• Cutting out unnecessary bureaucracy/inappropriate emphasis in strategic business planning and control processes.
• Reducing risk by highlighting blind-spots and producing solutions for these.
• 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.
• Combating unhelpful politics.

This last point is important, since strategic decisions are invariably political. Some individuals are likely to want to retain current business activities even if they don’t fit the strategy, provide a competitive advantage or add real shareholder value. The strategy audit creates a forum in which you can challenge assumptions about the organisation, freeing discussions from personal and political agendas.

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This article is contributed by CIMA (The Chartered Institute of Management Accountants) and it first appeared in Financial Management, CIMA's monthly magazine for its members.