Strategic Analysis is the process of collecting data about an organization and its operating environment then analyzing it in order to come up with a strategy to achieve optimal utilization of resources and thereby improve business efficiency. The analysis may be done in order to address specific issues of the organization or to improve business process.
Strategic Analysis involves the following tasks:
- Defining the boundaries of the business environment (internal and external)
- Collecting data about the environment
- Applying analytical methods and tools on the data to obtain relevant information to formulate a strategy
Below are some commonly used Strategic Analysis Tools:
SWOT (Strengths, Weaknesses, Opportunities and Threats) Analysis
This tool identifies 4 factors affecting an organization. The strengths and weaknesses of an organization form the internal environment and these are controlled by the management. The threats and opportunities form its external environment and are generally out of the business management’s control. Opportunities and Strengths are positive factors while the other 2 are negative. The SWOT matrix is drawn as an X and Y axes with 4 quadrants. Weaknesses, Strengths, Opportunities and Threats are represented in the 1st, 2nd, 3rd and 4th quadrants respectively. A list is prepared for each of these 4 factors, and this becomes a starting point for the analysis.
Organizations often use a SWOT Analysis Template or SWOT Analysis Sample to ensure accuracy and consistency in their analysis.
McKinsey’s 7-S and BCG Matrix are portfolio matrix tools for strategic analysis.
This is a framework which analyses the following 7 characteristics of an enterprise.
- Strategy – Analysis of the vision and mission of the company and the alignment of individual employee goals with organizational goals.
- Structure – Analysis of company policies, resource allocation (time, money, machines and man power) and organization hierarchy.
- Systems – Analysis of the Decision Support Systems across the organization.
- Skills – Analysis of employee skill set, training, knowledge management practices and the company’s adoption of latest techniques
- Staff – Analysis of the company’s staff selection process, staff retention policy and how the company motivates its staff (rewards / recognition / employee benefits)
- Style – Analysis of the organization culture and the behavior of leaders / management towards subordinates / workers
- Shared Values – Analysis of the guiding values that the employees are encouraged to follow during crucial decision making.
BCG (Boston Controlling Group) Matrix
Identify the sources that provide positive or negative value addition to the organization and determine the contribution of each source to business development. The results of analysis are drawn as 4 quadrants –
- 1st Quadrant – Stars – Factors that give excellent value addition. Continue investment on Star factors.
- 2nd Quadrant – Cash Cows – Factors that give significant monetary benefits to the organization. Strive to make these Cash Cow factors efficient.
- 3rd Quadrant – Dogs – Factors that diminish organization’s value. These must be identified and removed.
- 4th Quadrant – Question Marks – Factors that need to be re-visited to make a decision whether to continue to finance / encourage them.
PEST or PESTLE (Political Economic Social Technological Legal Environmental) Analysis
This tool analyses the influence of external factors on an organization. It is arrived at by preparing questionnaires and finding answers to how each factor affects the organization. It tells us the following:
- To what extent a government’s tax policy, labor law, trade regulations and ruling stability affect / empower business
- How interest rates and labor cost interfere with business
- Impact of culture
- Resource allocation for R&D, extent of automation, adaptation of latest technology
- How the laws implemented in the country / state affect business
- Impact of climate (for agriculture / tourism based organizations)
Strategic Analysis is done by asking questions like “Why”, “Who”, “When”, “Where”, “How” and “What” about each of the factors affecting the enterprise.
Porter’s Five Forces
It involves the analysis of 5 forces that affect the company’s profit margins and its ability to provide service.
- Threat of new entrants / competition
- Threat of substitute products and services in the market
- Buyers’ bargaining power
- Suppliers’ bargaining power
- Competitive Rivalry