In strategic management, industries keep on constantly changing, and because of this, it fails to reach an equilibrium point. The companies working in these industries are also affected by the constant changes. For this, strategic analysis allows the organization to understand, forecast, analyze, and formulate various strategies to face the challenges.
The strategic analysis enables the firm to recognize its position in the internal and external corporate environment. It also involves the analysis of stakeholders’ demands and expectations. The company’s environment plays an important role in making strategic choices. The basic purpose of strategic analysis is to generate strategic alternatives for the organization to gain a competitive advantage by formulating and offering superior value to its stakeholders.
It is also necessary for an organization to identify the dynamic nature of the environment in which it operates. Innumerable factors influence the environment; therefore, it becomes difficult for the organization to recognize all these factors simultaneously. Organizations need to understand these factors and identify them partially, if not in totality.
Crucial 3 Factors Affecting Strategic Analysis
While formulating the strategy, a firm must have sufficient knowledge of the following aspects:
This area comprises existing customers, prospective customers, and several market segments. Here, the firm needs to answer the questions: What are their needs? How can their needs be fulfilled? Which categories of customers are most profitable?
Competencies can be in the form of skills, knowledge, and relationships. What is one’s area of expertise? What are one’s capabilities? What liabilities does one have? What are the avenues for making money?
It covers all the areas of competition, from regulation to real life. What is the basis of competition? From where can the threats arise? Which market segments are under pressure, and where is the company better placed? These three aspects of strategic analysis are interconnected with each other. The type of target customers a company chooses determines the competencies required and the competition level it is likely to face. All this will directly influence the target customers.
Complete Process of Strategic Analysis
The strategic analysis involves the following steps:
1) Industry Analysis
The analysis of the industry is based on the following steps:
i) Define the Business
Four elements are considered as a basis for identifying and evaluating the industry. The scope of industry analysis states the boundaries of the business, i.e., the products and markets. Once the business segment is analyzed, the next element is to recognize the competencies required to operate in the segment and the competitors capable enough to target the same business segment.
ii) Describe the Industry Structure
The ‘five-forces of competition will describe the industry structure for each business segment. They are:
- a) The first force of industry structure is the customers, which form the entire marketplace. The size and significance of the customers determine their negotiating power to fix the product’s prices. It crucially affects the profitability of the industry.
- b) The second force represents competitors and their strategies to gain market share. Competitors tend to offer products and services that provide superior value to the product-market segments they choose to serve.
- c) The third force in the industry structure is the industry suppliers. The ability of suppliers to negotiate and control the supply of material inputs largely impacts the viability and profitability of a firm.
- d) The fourth force is the barriers to change, which include the entry of new competitors in the market and the exit of current competitors in the industry.
- e) The fifth and last force is substituting products and services. Numerous alternatives of products and services act as a substitute to satisfy the customer’s needs.
iii) Identify Key Success Factors
Another important intention of industry analysis is to identify the market trends and requirements that will help define the business’s key success factors. These factors include:
- The necessities of customers.
- Competitive factors to be confronted.
- The industry standards and regulations to be followed.
- Essential resources that are needed to compete in the industry.
- Technical advancements to create a competitive position.
2) Business Strategy Analysis
Business strategy analysis involves the following:
i) Identify Strategic Goals
A firm’s strategic goals determine the business strategy and list the industry’s key success factors. Many times, the strategic goals also encompass the mission and vision statement of the firm.
ii) Define Business Strategy
The business strategy can be explained by analyzing six areas. The first area is the product-market strategy. The competencies that are required in formulating a product-market strategy include technology, processes, and the market reach that the firm possesses.
iii) Identify Internal Capabilities and Skills
Implementing a business strategy is based on the firm’s internal functions and processes that support the strategy.
iv) Strategic Performance
The success or failure of a business strategy can determine the strategic performance of a firm. If a firm has a powerful business strategy, it will define the key success factors and govern its performance.
3) Strategy Evaluation and Recommendations
The strategic analysis is applied to evaluate the effectiveness of a firm’s business strategy, which is used to serve the market requirements. Once the industry and business strategy is evaluated, the firm can pursue different ways to improve its strategic performance.
Top 7 Benefits of Strategic Analysis
The various benefits of strategic analysis are as follows:
If the organization wants to survive in the marketplace for a long time, it needs to have a long-term plan.
The strategic analysis process establishes the company’s feasibility and significance and also helps in increasing the credibility of the company. Therefore, the funds applied to the company have a high probability of making profits.
3) Whole Organisation Approach
By analyzing the external environment, the organization can develop a holistic perspective. It also ascertains the environmental factors which will favorably affect the organization and its strategies.
4) Sound Goals
It is a difficult task to set the right goals for an organization. The strategic analysis process assists organizations in making the right decisions that prove beneficial.
5) External Focus
Along with the internal focus, the organization must focus on external factors. It enables the organization to grab opportunities and abandon threats.
6) Clear Expectations
All the organization’s shareholders ensure that the strategy is appropriate and implemented successfully.
The strategic analysis process allows the strategic marketer to effectively meet organizational goals. It is a dynamic process that has wide scope to improve and renew.
Important 8 Tools and Techniques of Strategic Analysis
A clear mission and defined goals are essential to starting and managing a business. Strategic planning is called deciding upon a mission, defining objectives, and formulating strategies to achieve those missions and objectives. Management utilizes many tools and techniques for strategic planning. Some of them are:
1) ETOP Analysis
In the ETOP analysis, the organization’s external environment is scanned for threats and opportunities. It is done by fragmenting the environment into segments. Once the environment is divided, its effect on each aspect of the organization and its future is assessed.
2) SWOT Analysis
SWOT stands for strengths, weaknesses, opportunities, and threats. The SWOT analysis is used extensively in marketing to identify the positive and negative elements that impact the success of a business or a new initiative.
3) McKinsey’s 7S Framework
The 7S Framework was proposed by the US-based consultancy firm McKinsey in the 1970s. According to this Framework, multiple factors impact the organization and its capacity to change. The seven factors, as identified by McKinsey, consist of interdependent factors. McKinsey has categorized these factors into hard and soft factors. The management can directly impact the hard components like strategy, structure, and system. The softer elements are shared value, style, skills, and staff. These are influenced by organizational culture.
4) BCG Product-Portfolio Matrix
The Boston Consulting Group has given the BCG growth-share matrix. It classifies the company’s various business units into four groups based on various combinations of two variables- market growth and market share as compared to the biggest competitor. This matrix classifies the businesses into stars, cash cows, question marks, and dogs, depending on where the businesses lie concerning these two variables.
5) GE 9 Cell
The GE 9 cell or GE Business Screen technique looks at industry attractiveness and competitive position parameters. Though it is also represented through a matrix, it tries to overcome some of the limitations of the BCG matrix by looking beyond the growth-share combinations.
6) Experience Curve
Increased profitability is ensured in competitive markets by managing the cost of manufactured goods effectively. Delivering the products at a cost lower than the competitors’ is the pillar of an organization’s strength. The cost is thus not only a summation of the direct, indirect, and overhead cost components. It also reflects on how effectively the firm has utilized its resources to deliver superior value at lower rates than its competition.
7) Market Life Cycle Model
Markets also evolve like products. Market conditions may transform from one form to another, i.e., from a monopoly to a duopoly or monopolistic competition. These intense changes, like the market, are an important part of sequences. The market life cycle model differentiates between the various stages of market development, like launch, growth, maturity, and degradation. The companies go through development analysis if these stages are an outcome of market volume development, and sequential analysis if an outcome of predominant strategies of competing.
8) Balanced Scorecard
The balanced scorecard method holds a wider approach to evaluating the performance of an organization. It incorporates both financial and non-financial measures. It has brought managers’ attention to many other facets of measuring the effectiveness of activities that create value for the customer. Also, it provides a fresh perspective by combining financial and operational measures.