3 Major Strategic Analysis Tools You Should Know

Strategic Analysis

Understanding and analysing the business environment is significant to develop a successful strategy and map the best feasible route to achieve goals. Strategic analysis helps to:

• Identify the organisation’s strategic position.
• Understand internal and external environment.
• Meet stakeholders’ expectations.
• Reduce the degree of uncertainty.
• Anticipate the future business needs and market trends.
• Recognize opportunities.
• Mitigate potential risks.
• Manage available resources effectively.
• Understand the trade-off between different options.
• Create sustainable competitive advantage.
• Supports the decision-making process.

The external and internal elements of the business environment have a significant role in supporting strategic decisions and approaching a new market successfully. The difference between an external and internal business environment is the degree of element control, where the external environment elements are not directly under organisational control. Porter’s Five Forces (PFF) and PESTEL models are well-known and widely used tools to analyse external business environment opportunities and risks. SWOT is an effective tool for identifying the organisation’s strengths and weaknesses and connecting the external and internal environment. The integration of these tools considers all internal and external aspects and provides a comprehensive and coherent strategic assessment. According to Grundy, the profound gap in the strategic analysis can be filled by PFF, PESTEL and SWOT. The framework covers:

1. PFF analyses the industry and market attractiveness.
2. PESTEL analyses the macro-environment.
3. SWOT analyses the internal influence factors linked to the external. 

Porter’s Five Forces (PFF)

The model was invented in 1980 by Michael Porter, a Harvard Business School professor based on the idea of competition. PFF is the cornerstone of studying business strategy owing to its ability to simplify the macro-economic environment into five dominant forces. 

Advantages:

• Every market in the world is subject to PFF.
• PFF model can boost an organisation’s competitive advantage.
• It is simple and comprehensive.
• It covers most issues that relate to business growth.
• It provides a better overview of your competition.
• Helps in identifying opportunities in the external environment.
• Gives critical information to shape business’s strategy.

Limitations:

• It analysing a specific company against a wide industry.
• Evaluating all forces equally which makes the comparison irrelevant sometimes.
• Overlooking blue ocean strategy.
• Neglecting the potential growth of new sectors and industry trends.
• Does not consider non-market forces e.g., technology and innovation.

PESTEL

PESTEL refers to Political, Economic, Social, Technological, Environmental and Legal factors. PESTEL is a strategic tool applied to analyse the external factors that could have a considerable impact on companies’ performance.

Advantages:

• Simple tool in terms of understanding and using.
• Drawing a comprehensive picture to manage future uncertainty.
• Identifying market opportunities.
• Identifying market challenges.
• Identifying areas of improvement.
• Motivating strategic ideas and facilitating innovation.

Limitations:

• PESTEL’s elements are numerous and not limited to what in the above figure.
• The process of determining the most influential elements differs from one to another.
• Possibility to overlook some data.

SWOT

SWOT is the most widely known strategic technique. SWOT refers to strengths, weaknesses, opportunities, and threats, of which the first two identify the internal factors and the last two identify the external factors.

 Advantages:

• Straightforward tool.
• Ability to link the interaction between the external and internal environment.
• It is customised to the external changes within an individual company’s context.
• Helps to avoid irrelevant change.

Limitations:

• No mechanism to rank factors’ priority.
• Focuses on general ideas rather than specific.

However, the main limitations of this integration lie in:

• Does not recommend any solutions.
• Provides only a snapshot analysis.
• Subjective analysis affected by individual bias.
• Requires continuous monitoring to update and readjust the strategy according to rapid changes.