In the strategic planning process, defining the strategy is a function of combining goals and objectives that define what the organization would like to accomplish with the realities of the situation. The situation analysis is a vital part of the planning process because it sets the context in which the organization will operate in the planning period and results in a clear view of priorities.
The situation analysis provides the basis for the decisions to be made in the definition of strategy and the implementation steps for moving forward. It is sometimes referred to as the SWOT (strengths, weaknesses, opportunities, and threats) analysis but we should think of it more broadly than people generally view SWOT analysis. The situation analysis should not be an onerous documentation of everything we know about the market and our position. Rather it provides a disciplined opportunity to think through and identify the particular factors that will affect our market and our ability to be effective in it. It’s better to have five bullet points of the things that will prompt a decision about where and how to compete than five pages of data, tables, and graphs that have no bearing on the way that we will do business in the future.
The situation analysis examines both the external and internal factors that will affect the business and its ability to compete in the planning period. In other words, it answers the questions “what will affect the market in which we compete?” and “what will affect our ability to be successful in competing?”
The external elements of the situation analysis can be divided into macro and micro factors. Macro factors would include analysis of political/legal, economic/demographic, social/cultural, or technological (sometimes called PEST analysis) changes or trends that will affect, either positively or negatively, the market or our ability to compete in the market.
The micro factors focus on customers and competitors. Regarding customers, we answer the question of “what are the important elements or what changes will we see in potential customers and their need, willingness, or desire to purchase products or services similar to ours?” This might include the number or health of potential customer, changes in industry structure, changes in end markets, etc. Regarding competitors the analysis addresses similar questions, such as “who are the key competitors and what are their capabilities that impact our ability to compete?”, “what changes are we likely to see in the number or the capabilities of competitors?”, or “what is the competitive environment and how is it likely to change?”
Again, the purpose of the situation analysis is to identify the factors that will affect our ability to compete and achieve the goals and objectives. We are searching for the threats and opportunities that will impact the organization over the planning period or beyond. We need enough information to enable us to understand the threat or opportunity and then to craft a strategy that will appropriately respond.
The second major part of the situation analysis is the analysis of internal factors. The internal analysis is focused on where we stand, how well we compete, where we need to improve, and what are we able to capitalize upon. It examines the strengths and weaknesses relative to customer needs and relative to other competitors in the market. In preparing the internal analysis we need to examine areas such as market position (market share, brand awareness and position, distribution or channel position, sales capability, etc.), technology (product or process capabilities), staff or culture, access to resources (financial and other), operational capability (efficiency, capacity, etc.), and other areas that might affect our ability to compete in the market. The goal in the internal analysis is to provide the information that will enable us to identify and prioritize the way to use resources that will strengthen our ability to compete.
The biggest challenges that organizations struggle with in the situation analysis portion of strategic planning is either 1) not thinking broadly enough about the areas that might affect their market opportunities and ability to compete or 2) spending a lot of time documenting things that have no impact on their future. The analysis that backs up the strategic planning process should be an ongoing effort of the organization to understand the market, the customers, the competitors, and themselves. The plan itself is then a distillation of all of these areas to identify where the threats and opportunities exist and where our strengths can be applied or our weaknesses shored up to make us a more effective competitor. The end result of the situation analysis should be a crisp and clear description of the factors that lead to strategic choices.
Is your strategic plan crisp and clear? Where do you find the greatest struggle in analyzing and communicating the situation that your organization faces?