What are Strategic Analysis Tools?

  • Kanan Arora
  • Oct 07, 2021
  • Financial Analytics
What are Strategic Analysis Tools? title banner

Strategic analysis is a process that involves researching an organization’s business environment within which it operates in order to formulate strategic plans for decision making and smooth working of the organization. Strategic analysis provides a path for the organization to realize its goals and objectives.

 

Strategic analysis is done in all firms periodically in an attempt to determine the areas that need improvement and areas that provide an edge to the firm. All leading firms that are well known for their achievements have done years of continuous and comprehensive strategic analysis. 

 

In order to understand how such firms analyze their strategies in order to make adequate changes towards the betterment, this blog explores a few of the commonly used strategic analysis tools. 

 

 

Strategic Analysis Tools

 

1. SWOT Analysis: 

 

SWOT Analysis is a widely used tool that helps in understanding the strengths, weaknesses, opportunities and threats involved in a business activity. It is one of the simple yet effective analysis tools.

It begins by establishing the project or business activity goal and then identifying the internal and external elements that are critical to accomplishing that goal. The organization’s strengths and weaknesses are usually internal and the opportunities and threats are external.

 

  1. Strengths: Strengths take into consideration the following type of aspects:

    1. What does your organisation do better than others?

    2.  What are your unique selling points? 

    3. What do your competitors and customers in your market perceive as your strengths? 

    4.  What is your organisation's competitive edge?

 

  1. Weaknesses: Weaknesses take into consideration the following type of aspects:

    1.  What do other organisations do better than you? 

    2. What elements of your business add little or no value? 

    3. What do competitors and customers in your market perceive as your weakness? 

 

  1. Opportunities: Opportunities take into consideration the following type of aspects:

    1. What political, economic, social-cultural, or technology (PEST) changes are taking place that could be favourable to you? 

    2. Where are there currently gaps in the market or unfulfilled demand? 

    3. What new innovation could your organisation bring to the market? 

 

  1. Threats: Threats take into consideration the following type of aspects:

    1. What political, economic, social-cultural, or technology (PEST) changes are taking place that could be unfavourable to you? 

    2. What restraints do you face? 

    3. What is your competition doing that could negatively impact you?

 

(Related reading: Reliance Jio SWOT analysis)

 

2. PEST/ PESTEL Analysis: 

 

The PEST analysis is an evaluation of an organization's external macro-environment. It is a useful tool for comprehending an organization's political, economic, socio-cultural, and technological context. 

 

The PESTEL analysis includes the environmental and legal factors as well. It can be used to assess market growth or decrease, as well as a company's position, potential, and direction. The PESTEL analysis takes into consideration the following factors:

 

  1. Political factors: This includes government policy, political stability, corruption, foreign trade policy, tax policy, labour law, trade restrictions, etc.

 

  1. Economic factors: These include economic growth, exchange rates, interest rates, inflation rates, disposable income, unemployment rates, etc.

 

  1. Social factors: These include population growth rate, age distribution, career attitudes, safety emphasis, health consciousness, lifestyle attitudes, cultural barriers, etc.

 

  1. Technology factors: These include technology initiatives, level  of innovation, automation, R&D activity, technological change, technological awareness, etc.

 

  1. Environmental factors: These include weather, climate, environmental policies, climate change, pressure from NGOs, etc.

 

  1. Legal factors: These include laws such as discriminaion laws, antitrust laws, employment laws, consumer protection laws, copyright and patent laws, health and safety laws, etc.

 

(Also read: What is PESTLE analysis?)

 

3. Porter’s five force analysis:

 

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

 

Porter's five forces assists a firm in figuring out who has the most power in a business issue. This is valuable for determining the strength of an organization's present competitive position as well as the strength of a position that an organisation might want to pursue.

 

Strategic analysts often use Porter’s five forces to understand whether new products or services are potentially profitable. By understanding where power lies, the theory can also be used to identify areas of strength, to improve weaknesses and to avoid mistakes. 

 

The five forces are:

 

  1. Bargaining Power of Buyers: This includes an evaluation of how easy it is for buyers to drive prices down. This is driven by the number of buyers in the market, the importance of each individual buyer to the organization and the cost to the buyer of switching from one supplier to another.

 

  1. Bargaining Power of Suppliers: This includes an evaluation of how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each essential input, the uniqueness of their product or service, the relative size and strength of the supplier and the cost of switching from one supplier to another. 

 

  1. Rivalry Among Existing Firms: This includes an evaluation of the competitiveness of the various firms existing in a particular market. This is dependent on the pace of industry growth, concentration and balance of competition, differentiation of products by the various firms, switching costs, economies of scale, fixed variable costs, exit barriers, etc.

 

  1. Threats of New Entrants: Markets that are profitable attract new entrants, eroding profitability. Profitability will decrease to a competitive rate unless incumbents have strong and long-lasting barriers to entry, such as patents, economies of scale, capital requirements, or government laws. 

 

  1. Threats of Substitutes: Where close substitute products exist in a market, it increases the likelihood of customers switching to alternatives in response to price increases. This reduces both the power of suppliers and the attractiveness of the market. 

 

(Must check: Factor Analysis: Types & Applications)

 

4. Value Chain Analysis: 

 

The term value chain refers to the various business activities and processes involved in creating a product or performing a service. Taking inventory of the operations that make up a company's value chain will give the company a better understanding of what goes into each transaction. Thereby, positioning it to share more value with customers while capturing a larger share by optimising the value provided at each step in the chain.

 

Value chain analysis enables a firm to evaluate each of the activities in a company’s value chain in order to find opportunities for improvement. In order to conduct value chain analysis, the first step is to separate a company’s operations into primary and secondary activities:

 

  1. Primary Activities: In general, the primary activities include the following activities:

    1. Inbound logistics: Activities related to receiving, warehousing, and inventory management of source materials and components 

    2. Operations: Activities related to turning raw materials and components into a finished product

    3. Outbound logistics: Activities related to distribution, including packaging, sorting, and shipping

    4. Marketing and sales: Activities related to the marketing and sale of a product or service, including promotion, advertising, and pricing strategy

    5. After-sales services: Activities that take place after a sale has been finalized, including installation, training, quality assurance, repair, and customer service.

 

  1. Secondary activities: For a firm, the secondary activities include the following activities:

    1. Procurement: Activities related to the sourcing of raw materials, components, equipment, and services 

    2. Technological development: Activities related to research and development, including product design, market research, and process development

    3. Human resources management: Activities related to the recruitment, hiring, training, development, retention, and compensation of employees.

    4. Infrastructure: Activities related to the company’s overhead and management, including financing and planning

 

Usually,  increasing the performance of one of the four secondary activities can benefit at least one of the primary activities.

 

Once the primary and secondary activities involved in the creation of the product/ service are analysed, the next steps are to determine the value that each activity adds to the process along with the costs involved and to analyse the costs and value in order to achieve competitive advantage in either the cost reduction or the product differentiation metrics. 

 

(Similar reading: Economic Analysis: An Overview)

 

5. Porter’s Generic Strategies:  

 

These strategies are referred to as generic because these strategies can be applied to products/services in all industries and to organizations of all sizes. The generic strategy concept was founded by Michael Porter in 1985 in his book, “Competitive advantage: Creating and Sustaining Superior Performance”.

 

In his book, Porter described the following three generic strategies:

 

  1. Cost leadership: Pertaining to the minimization of cost to the organization of delivering products and services. 

 

  1. Differentiation: Pertaining to the creation of uniquely desirable products and services.

 

  1. Focus: Pertaining to the provision of a niche market with a unique product/ service. Focus is further divided into the two categories of cost focus and differentiation focus. 

 

A firm may use either the cost leadership strategy, the differentiation strategy or the focus strategy in order to analyse its competitive positioning in a market. 

 

 

Conclusion

 

This blog discusses 5 simple commonly-used strategic analysis tools. The purpose of such analytic techniques is to help a firm in choosing an industry, determining its competitive positioning and formulating a corporate strategy. 

 

(Recommended blog: What is spatial analysis?)

 

Several other tools including the BCG matrix, blind spot analysis, SPACE analysis, four corner’s analysis, etc. are also widely-used used for the purpose of strategic analysis. 

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