Strategic Analysis

A process of conducting that entails performing research on the business environment

Strategic analysis is a process of conducting that entails performing research on the business environment in which an organization operates. 

Strategic analysis is required to develop strategic plans for decision-making and the smooth operation of an organization. The organization's objectives or goals can be met with the help of strategic planning.

Strategic analysis is required if a company has a goal and a vision that it wants to achieve. Leading organizations, for instance, have carried out years of strategic planning at various stages, resulting in well-known successes.

Strategic planning is a long-term task involving continuous and systematic planning and resource investment.

Organizations must conduct it to determine what areas need improvement and which areas are already performing well. It is critical to consider how improvements can be implemented for an organization to function.

Why is strategic analysis important?

Organizations must conduct strategic analysis to understand their competitors and define a strategy that will help them become unbeatable players in that market. 

One of the most important functions of strategic planning is predicting future events and developing alternative strategies if a particular plan does not work out as anticipated. 

What are the five stages of the strategic management process?

1. Clarify your vision

The primary objective of goal-setting is to clarify your company's vision. This stage entails identifying three key aspects: 

  • Establish both short and long-term goals. 

  • Determine how you intend to achieve your goal.

  • Personalize the process for your team members by assigning each person a task that he or she can complete successfully.

2. Information gathering and analysis

When the initial goals that comprise the strategic framework have been agreed upon, it is time to assess your company's ability to achieve the desired result. The analysis is important because the information gathered here will shape the next two stages. 

  • Gather as much information and data as possible about your vision at this stage. 

  • The analysis should focus on understanding the business's needs as a sustainable entity, its strategic direction, and identifying initiatives that will assist your business to grow.  

Investigate any external or internal issues that may have an impact on your goals and objectives. Make a list of your organization's strengths and weaknesses, as well as any threats and opportunities that may arise along the way.

Conduct a quick SWOT analysis for all of your goals to account for internal and external factors.

3. Formulate a Strategy

Environmental scanning provides the company's management with alternatives and risks. 

These should be thoroughly evaluated by top management, and a feasibility study of the alternatives is required before making any firm decisions on the strategies.

The first step in developing a strategy is to go over the information gathered from the analysis stage. Managers' analysis provides a more filtered list of goals and the path to achieving them.

 A list of the risks involved is also created. This provides the final strategies to be implemented.

  • Specify what resources the business currently has that can assist in meeting the defined goals and objectives.

  • Identify any areas where the company needs to seek outside help.

The issues confronting the company should be prioritized based on their significance to your success.

Begin developing the strategy once the priorities have been determined. Because business and economic conditions are constantly changing, it is critical to develop alternative approaches that target each step of the plan at this stage.

4. Implement your strategy

The successful implementation of a strategy is critical to the success of a business venture. This is the strategic management process's action stage. If the overall strategy does not work with the current structure of the business, a new structure should be installed at the start of this stage. 

Everyone in the organization must understand their roles and responsibilities and how they contribute to the overall goal. At this point, any resources or funding for the venture must also be secured.

Execute the plan once the funding is in place and the employees are ready.

5. Evaluate and control

Performance measurements, a consistent review of internal and external issues, and corrective actions are all part of strategy evaluation and control actions. Any successful strategy evaluation begins with defining the parameters to be measured.

These parameters should correspond to the objectives established in Stage 1. Determine your progress by comparing actual results to the plan.

Monitoring internal and external issues allows you to respond to any significant change in your business environment. Take corrective actions if you determine that the strategy is not moving the company forward. 

If those actions are not successful, the strategic management process must be repeated. Because internal and external issues are constantly changing, any data obtained during this stage is very useful.

What are the main components of strategic analysis?

  • Understand the strategy level for which the analysis is being performed.

  • Carry out an internal analysis.

  • Carry out an External Analysis.

  • Share Significant Findings. 

1. Strategy level     

The strategy has different levels depending on where you are in an organization and the size of your organization.

You could be developing a strategy for an entire organization with multiple businesses, or you could be developing a strategy for your marketing team. 

As a result, because each level has different objectives and needs, the process will differ. The three levels of strategy are as follows:

  • Corporate strategy: Defines the overall direction of the organization as well as high-level ideas for how to get there. These plans are typically developed by a select strategy group, including the CEO and top management.

  • Business strategy: The strategy hierarchy's second tier.

The business strategy, which is part of the corporate strategy, is a means of achieving the goals of a specific business unit within the organization.

  • Functional strategy: This is the level of an organization's operations.

Employee decisions are frequently referred to as tactical decisions at the functional level of strategy. They are concerned with how an organization's various functions contribute to the other strategy levels.

Marketing, finance, manufacturing, human resources, and other functions may be included.

2. Internal strategy

An internal growth strategy refers to the growth within the organization by using internal resources. 

Internal growth strategies focus on developing new products, increasing efficiency, hiring the right people, better marketing, etc. An internal growth strategy can take place either through expansion, diversification, or modernization.

The steps for completing an internal analysis

  • The first step is deciding on the tool or framework you will use to conduct the analysis.

  • The second step is you will start researching and collecting data.

  • The third step is following the data research and collection stage, and you must begin analyzing the data and information you have gathered.

  • The fourth step is sharing your conclusions.

After the internal analysis is completed, the organization should clearly understand where they are excelling, where they are doing well, and where their current deficits and gaps are.

The analysis will provide management with the information they need to capitalize on their strengths and opportunities. It also enables management to devise strategies to counteract potential threats and compensate for identified weaknesses.

Starting the strategy formulation process, This analysis will ensure that your strategic plan has been developed to capitalize on strengths and opportunities while mitigating or improving weaknesses and threats.

3. External strategy:

An external analysis examines an organization's environment and how those factors influence or could influence the organization.

The organization has little to no control over external components, which is a key distinction between external and internal factors.

On the one hand, the organization has complete control and influence over internal factors. On the other hand, they simply scan and react to their surroundings, rarely influencing them.

External factors of the organization include the industry in which it competes, the political and legal landscape in which it operates and the rules it must follow, and the communities in which it operates.

Types of the external analysis

  • First is integration because it involves bringing two or more businesses together to some extent. Mergers, acquisitions, and takeovers are all examples of company amalgamations that necessitate a permanent change in ownership.

  • Second, external growth can take the form of Joint Ventures (JV) and Strategic Alliances (SA), which are more equivalent to business partnerships with other firms and do not necessitate a permanent change of ownership.

What are strategic analysis tools?

Analytical methods and tools are critical to ensuring consistency and reliability.

The analysis is conducted with sufficient rigor. 

When using this type of analysis, there are a few important things to keep in mind.

Tools for analysis

1. The tool must assist in answering the question posed by the organization.

2. The expected benefit of using the tool must be defined and, documented, actionable. The more clearly defined the tool, the more likely the analysis will be a success.

3. Many tools benefit from collaboration and input from other people, functions, or even organizations. There should be enough time for collaboration and communication. A heads-up is given so that people can prepare for the analysis.

4. Appropriate use of analytical tools may take time. It is critical that key stakeholders, such as the board, senior directors, and company departments, are aware of this. 

Otherwise, they may be unable to provide the commitment required to complete the analysis.

Furthermore, the tools are widely used for strategic decision-making in many organizations. It is thus advantageous to develop good strategic analytical skills early on.

The analytical tool's goal is to focus the analysis and ensure a methodical, balanced approach.

All analytical tools rely on historical, backward-looking data to extrapolate future assumptions. When interpreting strategic analysis results, it is critical to exercise caution. 

Otherwise, the analysis may be unduly influenced by organizational preconceptions or pressures seeking to validate a specific strategic assumption.

1. Four Corners Analysis (FCA)

Michael Porter's Four Corners Analysis is a model that can help company strategists assess a competitor's intent and objectives and the strengths they are using to achieve them. 

It is a useful technique for evaluating competitors, generating insights about likely competitor strategy changes, and determining competitor reactions to environmental changes and industry shifts. 

The FCA assists analysts in answering four key questions by examining a competitor's current strategy, future goals, market assumptions, and core capabilities.

a) Drivers

  • Financial goals and external constraints.

  • Corporate culture and business principles.

  • Organizational structure.

  • Leadership team background.

b) Current strategy

  • How business creates value.

  • Where the business is choosing to invest.

  • Relationships and networks the business has developed.

c) Capabilities

  • Marketing skills.

  • Ability to service channels.

  • Skills and training of the workforce.

  • Patents and copyrights.

  • Financial strength.

  • Leadership qualities of CEO

d) Management assumptions

  • Company's perceptions of its strengths and weaknesses.

  • Cultural traits.

  • Organizational value.

  • Perceived industry forces.

  • Belief about competitor's goals.

2. Strategy evaluation 

Strategic evaluation is the last stage of strategic management and is regarded as one of the most important steps in the process.

Strategy evaluation is the process by which management assesses how well a chosen strategy has been implemented and whether or not the strategy is successful.

Simply put, strategy evaluation is the process of reviewing and evaluating the strategy implementation process as well as measuring organizational performance.

If the strategy is not being implemented as planned, for example, because of limitations in the strategy that are impeding the achievement of organizational goals, necessary corrective actions should be identified and implemented.

At the conclusion of the evaluation, you will have gathered enough information to either reformulate the strategy or plan and develop new ones.

Evaluating the strategy helps to improve it, distinguish between what works and what doesn't, and contributes to the strategy's ongoing development and adaptation to changing industry conditions and complexities.

There are two levels of strategy evaluation: strategic and operational. The focus is on the strategy's consistency with the environment at the strategic level and how well the organization is pursuing the strategy at the operational level.

Strategists can ensure this through the strategy evaluation process.

  • The assumptions made during strategy development are correct.

  • A strategy directs an organization's efforts toward achieving its goals.

  • Managers are carrying out their responsibilities to effectively implement the strategy.

The organization is doing well; schedules are being met, and resources are being used effectively. Whether it is necessary to reformulate or change the strategy depends on the results of the evaluation process. 

3. Porter's 5 Forces 

Michael E. Porter of Harvard Business School developed Porter's five forces of competitive position analysis in 1979 as a simple framework for assessing and evaluating a business organization's competitive strength and position.

This theory is based on the idea that there are five forces that determine a market's competitive intensity and attractiveness. Porter's five forces model aids in determining where power lies in a business situation. 

This is useful for determining the strength of an organization's current competitive position as well as the strength of a position that an organization may wish to pursue.

Strategic analysts frequently employ Porter's five forces to determine whether new products or services have the potential to be profitable.

The theory can also be used to identify areas of strength, improve weaknesses, and avoid mistakes by understanding where power lies.

An unappealing industry is one in which the combined effect of these five forces reduces overall profitability. 

The most unappealing industry would be one that approaches pure competition and drives all firms' available profits to normal profit levels. The originator of the five-forces viewpoint is well known.

The Porter's Five Forces Model

Porter identifies five forces as the primary sources of competitive pressure within an industry. They are as follows:

a) Competitive Rivalry 

b) Supplier power.

a) Buyer power.

c) Threat of Substitution.

d) Threat of New Entry.

He emphasized the importance of not conflating these five forces with more transient factors like industry growth rates, government interventions, and technological innovations. According to Porter, the latter are examples of temporary factors, while the Five Forces are permanent parts of an industry's structure.

a) Competitive rivalry

The force of competitive rivalry is frequently the most important determinant of an appealing industry. Rivals will compete on price, quality, service, marketing spending, and so on to gain market share.

In a competitive industry, companies attract customers by aggressively lowering prices and launching high-impact marketing campaigns. 

However, if suppliers and buyers believe they are not getting a good deal from you, this can make it easy for them to go elsewhere.

On the other hand, if there is little competitive rivalry and no one else is doing what you do, you will most likely have tremendous competitor power as well as healthy profits.

What questions must you answer when using competition rivalry?

  • How many companies compete in your industry?

  • What distinguishes your product or service from the competition?

  • Is there anything preventing your customers from switching providers? If so, what exactly are they?

  • Is your industry contracting or expanding?

b) Supplier power:

Suppliers provide the necessary inputs for your industry to function (e.g., components, materials, and services). 

When your suppliers' bargaining power is strong, there's a good chance they'll raise prices or reduce quality without retaliation.

The more suppliers you have to choose from, the easier it will be to switch to a less expensive option. Conversely, the fewer the suppliers and the more you rely on them for assistance, the stronger their position and ability to charge you more. 

This can affect your profitability, for example, if you are forced to enter into expensive contracts.

What questions must you answer when using supplier power?

  • Who are your primary vendors?

  • How many qualified suppliers does your business have to choose from?

  • How difficult or costly would it be to switch suppliers?

c) Buyer power

Buyers have clout when there are few of them and many sellers to choose from. Furthermore, if a large portion of a seller's revenue is determined by a small number of buyers, those buyers will have more clout.

Switching costs should also be considered when determining the bargaining power of the buyers.

What questions must you answer when using buyers' power?

  • What is the ratio of potential buyers to sellers in your industry?

  • Is the majority of your revenue generated by a small number of buyers?

  • How simple would switching from one seller to another be for your buyer?

d) Threat of substitution

All firms in an industry compete with other industries that produce similar goods or services. If buyers can meet their needs with a different product or service from a different industry, it limits how high your industry can set its price.

The more appealing the substitute, the tighter the grip on industry profits. If numerous substitutes can perform the same function as your product or service, the threat of substitutes is high.

The threat is low if few substitutes perform the same function as your product or service.

What questions must you answer when using the threat of substitution?

  • In your industry, how many substitute products/services exist?

  • In terms of functionality, how similar are those products/services? 

  • Are those products/services reasonably priced?

  • What sets your products/services apart from the competition?

d) Threat of new entry:

People's ability to enter your market can have an impact on your position. 

Competitors can quickly enter your market and weaken your position if it costs little money and effort to enter your market and compete effectively or if your core technologies are not adequately protected.

However, if you have strong and long-lasting barriers to entry, you can maintain a favorable position and take full advantage of it.

What questions must you answer when using the threat of new entry?

  • How much would it cost, and how long would it take to reach the economies of scale required to compete in your industry?

  • Is there a high level of customer loyalty in your industry? Is it difficult for newcomers to entice customers away from your products or services?

  • Is there anything else a new entrant might face (e.g., regulation, intellectual property, access to distribution channels, etc.)?

4. PESTEL Analysis 

A PESTEL analysis is a strategic framework that is commonly used to evaluate a company's business environment. 

Traditionally, the framework was known as a PEST analysis, which stood for Political, Economic, Social, and Technological factors. However, in more recent history, the framework was expanded to include environmental and legal factors as well.

Management teams and boards use this framework in strategic and enterprise risk management planning. 

PESTEL analysis is also a popular tool among management consultants to assist their clients in developing innovative product and market initiatives and by financial analysts to identify factors that may influence model assumptions and financing decisions.

PESTEL analysis key points can be incorporated into other industry and firm-level frameworks such as Ansoff's Matrix, Porter's Five Forces, and SWOT Analysis.

It investigates the external environment's political, economic, social, technological, environmental, and legal factors. It is used to identify threats and weaknesses in the company.

What are the six factors in PESTEL?

a) Political factors: include government policies; leadership; change; foreign trade policies; internal political issues and trends; tax policy regulation; and de-regulation trends.

b) Economic factors: include current and projected economic growth, inflation and interest rates, job growth and unemployment, labor costs, the impact of globalization, consumer and disposable business income, and likely changes in the economic environment.

C) Social factors: include demographics (age, gender, race, and family size), consumer attitudes, opinions, purchasing patterns, population growth rate and employment patterns, socio-cultural changes, ethnic and religious trends, and living standards.

d) Technological factors: have an impact on marketing in three ways: 

(1) new methods of producing goods and services.

(2) new methods of distributing goods and services.

(3) new methods of communicating with target markets.

e) Environmental factors: are important because raw materials are becoming increasingly scarce; pollution targets; conducting business ethically and sustainably, and carbon footprint targets.

F) Legal factors: Health and safety; equal opportunities; advertising standards; consumer rights and laws; product labeling and product safety.

Essentially, the analysis scans each of the elements listed above to understand their current status and how they may impact your industry and, thus, your organization.

It draws attention to specific elements that may have a broad impact. PESTEL provides an overview of the entire environment.

5. SWOT Analysis

A SWOT analysis looks at both internal and external factors, or what's going on inside and outside your company. Some of these factors will be under your control, while others will not. 

A SWOT analysis is a simple but widely used tool for determining the strengths, weaknesses, opportunities, and threats associated with a project or business activity.

It begins by defining the project's or business activity goal and then identifies the internal and external factors that are critical to achieving that goal.

Internal organizational strengths and weaknesses are more common than external opportunities and threats. These are frequently plotted on a simple 2x2 matrix.

In either case, the best course of action will become clearer once you've discovered, recorded, and analyzed as many factors as possible. 

SWOT analysis is a tool that can assist you in analyzing what your company does best now and developing a successful future strategy. 

SWOT analysis can also reveal areas of the business that are holding you back or that your competitors may exploit if you do not protect yourself.

SWOT analysis elements

SWOT analysis is a technique for assessing these four aspects of your business. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.

a) Strengths

Strengths are things your organization does exceptionally well or in a way that sets it apart from competitors. Consider the advantages your organization has over competitors. 

These could include employee motivation, access to specific materials, or a strong set of manufacturing processes. Understanding your strengths is essential for deciding which opportunities to pursue in the future.

How to recognize your strengths as part of your SWOT analysis:

  • What is your company well-known for?

  • What characteristics distinguish you or your products from competitors?

  • What tangible assets do you have that could put you ahead of the competition?

  • What kind of intellectual property do you have?

  • What internal resources (such as employees) are you particularly proud of?

b) Weaknesses

In a SWOT analysis, W stands for weaknesses, which are the characteristics of a business that puts it at a disadvantage in comparison to others. Weaknesses are any activities that you do poorly.

SWOT flaws can keep you from meeting company goals and objectives. Weaknesses are negative and internal factors that affect the success of your organization. 

Examples of organizational weaknesses include an irrelevant target population, a poor factory location, poor financial performance, ineffective systems, and inexperienced leadership.

How to recognize your weaknesses as part of your SWOT analysis

  • What major setbacks have you experienced in the last 12 months, and why?

  • What are your physical resources?

  • What are your internal/skill-based resources?

  • What do your rivals do better than you?

  • How would your customers rate your products? What issues would they bring up?

  • What is the state of your cash flow?

C) Opportunities

Opportunities are openings or chances for something positive to happen, but you must seize them. They typically arise from situations outside of your organization, and it necessitates anticipating what may occur in the future. 

They may arise as a result of changes in the market you serve or the technology you use. The ability to identify and capitalize on opportunities can make a significant difference. It makes a difference in your organization's ability to compete and lead in your market.

Understanding the opportunities that exist for you is now useful because you have a sense of your strengths and weaknesses, making it easier to assess those opportunities.

How to recognize your opportunities as part of your SWOT analysis?

  • Are you passing up opportunities to increase revenue from existing leads or customers?

  • Are there any countries or markets that you could easily enter with your existing products?

  • Are there any markets where you could take advantage of a weak competitor?

  • Are there any emerging trends you could capitalize on?

  • What new product concepts do you have in mind?

  • Are there any merger or acquisition opportunities that should be pursued?

d) Threats

Threats include anything that can harm your business from the outside, such as supply-chain issues, market shifts, or a shortage of recruits. It is critical to anticipate threats and respond to them before you become a victim and your growth stalls.

Consider the challenges you'll face in bringing your product to market and selling it. You may notice that the quality standards or specifications for your products are changing, and you will need to change those products if you want to stay ahead. 

Technology is both a threat and an opportunity that is constantly evolving!

Always think about what your competitors are doing and whether you should shift your organization's focus to meet the challenge.

6. Value Chain Analysis (VCA)

Before making a strategic decision, it is critical to understand how the organization's activities create value for customers. A value chain analysis is one method for accomplishing this.

The principle underlying VCA is that organizations exist to create value for their customers. The analysis divides the organization's activities into separate sets of activities that add value. 

By identifying and analyzing each of these activities, the organization can more effectively evaluate its internal capabilities. Each activity that adds value is regarded as a source of competitive advantage.

A value chain analysis consists of three steps:

1. Divide the organization's operations into primary and secondary functions

Primary activities include those that physically create a product, market it, deliver it to the customer, and provide after-sales support. 

2. Assign a cost to each activity

Activity cost information provides managers with valuable insight into an organization's internal capabilities.

3. Determine which activities are essential to customer satisfaction and market success

When assessing the role of each activity in the value chain, three factors must be considered.

• The company's mission-This influences the activities that an organization undertakes.

• Industry classification-The relative importance of activities is influenced by the nature of the industry.

• The value system-This includes an organization's upstream and downstream partners' value chains in providing products to end customers.

VCA is a comprehensive technique for determining a company's source of competitive advantage.

7. VRIO Analysis

The VRIO Analysis is an internal analysis tool that organizations use to categorize their resources based on whether they possess certain characteristics outlined in the framework. 

This classification then enables organizations to identify the company resources that provide competitive advantages.

The VRIO Model

  • Valuable

  • Rare

  • Inimitable

  • Organized

In a moment, we'll go over each of the dimensions in greater depth. To begin, we'd like to explain why VRIO analysis is such a popular tool. In 1991, Jay B Barney developed the VRIO analysis.

Although Barney originally conceived of the framework as VRIN, the last dimension in the framework was refined over time, and the N in VRIN became an O.

The framework is simple to grasp and apply and can provide enormous value to organizations looking to stay ahead of the competition. As a result, the tool has become an obvious choice for many businesses looking to analyze their internal environment.

The premise of determining a firm's resources as a competitive advantage is whether they pass through the framework's dimensions.

Valuable

When a resource is valuable, it provides some benefit to the organization. A valuable resource that does not fit into any of the other dimensions of the framework, on the other hand, is not a competitive advantage. 

An organization can only achieve competitive parity with a valuable resource that is neither rare nor difficult to imitate.

Rare

A rare resource is uncommon and not held by the majority of organizations. When a resource is both valuable and rare, it provides you with a competitive advantage.

However, the competitive advantage gained from a valuable and scarce resource is usually fleeting. Competitors will quickly recognize and copy the resource. As a result, it's only a brief competitive advantage.

Inimitable

Resources are difficult to imitate if they are prohibitively expensive for another organization to obtain. A resource may also be difficult to imitate if it is legally protected by patents or trademarks.

If resources are valuable, rare, and difficult to imitate, they are considered a competitive advantage. However, organizations that are not organized to fully utilize the resource may indicate that the resource is an unused competitive advantage.

Organized

An organization's resources are only organized to capture value if they are supported by the company's processes, structure, and culture. A valuable, rare, and difficult to imitate resource that is organized to capture value is a long-term competitive advantage.

A resource cannot provide an advantage to a company unless it is organized to capture the value. Only a company that can exploit valuable, rare, and imitable resources can achieve a long-term competitive advantage.

8. GAP Analysis

A gap analysis is a method of evaluating a business unit's performance to determine whether or not business requirements or objectives are being met and, if not, what steps should be taken to meet them.

A gap analysis is also known as a needs analysis and a needs assessment or a need-gap analysis.

In the gap analysis process, the "gap" refers to the space between "where we are" as a business (the current state) and "where we want to be" (the target state or desired state).

The first step in conducting a gap analysis is to identify specific target objectives by reviewing the mission statement, strategic business goals, and improvement objectives of the company.

The following step is to analyze current processes by gathering relevant data on performance levels and how current resources are allocated to these processes. 

Depending on what is being analyzed, this data can be gathered from a variety of sources. 

Examining documentation, measuring key performance indicators (KPIs) or other success metrics, conducting stakeholder interviews, brainstorming, and observing project activities are some examples.

A comprehensive plan can be developed after a company compares its target goals to its current state. A plan of this type outlines a step-by-step process for closing the gap between its current and future states and achieving its goals.

How to select the best strategic analysis tool?

There are as many strategies as there are organizations. As a result, not every tool is suitable for every organization. 

Choose the tools that best suit your strategy-making approach. Don't limit yourself to a single tool if it doesn't make sense, and stick to each framework as long as it makes sense again.

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Key takeaways:

  • Strategic analysis is required to develop strategic plans for decision-making and the smooth operation of an organization.

  • Strategic analysis is the process of researching an organization and its working environment in order to develop a strategy. There are numerous other definitions of strategic analysis from various perspectives. However, they all have a lot in common.

  • Reviewing and following up on your business will highlight its strengths and weaknesses, allowing you to keep doing what works and eliminate what is impeding its growth.

 Researched and authored by Ranad RashwanLinkedIn

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