Conducting A Strategic Analysis + 8 of The Best Tools To Use
by Maddy Mirkovic, on May 7, 2020 4:52:13 PM
What is meant by Strategic Analysis?
Strategic Analysis is the process of researching and analyzing the environment an organization operates in, as well as the organization itself in order to inform the strategy formulation process. The environment of an organization is comprised by two components - the internal environment and the external environment. Both internal and external environments should be scrutinized in order to identify factors that influence organizations and aid decision making.
If you're not sure where or how to begin, there's no need to panic. This guide will take you through how to conduct a strategic analysis with your team, and walk you through the best strategic analysis tools & frameworks you can use to aid you through the process.
Where does a Strategic Analysis Fit in the Strategy Management Cycle?
Before we get into the nitty gritty of actually conducting a strategic analysis and the different tools you can use, we should look at how a strategic analysis fits into the overall strategic management cycle. You might be wondering why this is needed? And no, we're not just trying to make up a word count. We want to give you a holistic understanding of the entire strategic management cycle, as your strategic analysis will inform the next part of the cycle, which you'll need to move to once you're finished here, and so on, and so on. Having an understanding and appreciation of every step in the process will allow you to better plan and implement your strategy overall. So, without further ado, let's get into it.
The Strategic Management Cycle is basically a back and forth between strategic planning and implementation. You plan your strategy, and then you implement it. Once implemented or after a certain time period, you will go back to planning and redefining your strategy and then move to the implementation phase once again.
The infographic above does a good job of giving a very high-level understanding of the elements involved in the strategic management process. However, to understand how strategic analysis fits into the process, we need to break this down even further. The Strategic Planning Phase is made up of Strategic Analysis and Strategy Formulation, and should be completed in this order.
The analysis phase sets 'the stage' for formulation, as mentioned previously, the strategic analysis you complete will inform the activities you undertake in strategic formulation. Now that we have a better idea of how a strategic analysis fits into the bigger picture, we can move to dissecting how to actually conduct one.
How do you conduct a Strategic Analysis
Conducting a strategic analysis will vary, depending on the strategy level at which you're completing the strategic analysis for. For example, the team involved in undertaking a strategic analysis in order to create a strategic plan for a corporation with multiple businesses will have different focuses in the analysis compared with the manager of a team within a department of an organization. So, instead of trying to give you an exact list of things to cover and steps to blindly follow, it's more useful to equip you with the concepts of what should be covered in a strategic analysis. That way, no matter what strategy level you're involved with, you'll understand how to complete a strategic analysis. With that being said, let's have a look at the core concepts that should be involved in every strategy analysis:
- Understand the strategy level you're completing the analysis for
- Complete an Internal Analysis
- Complete an External Analysis
- Share Key Findings
The content of the internal and external analysis is what will vary depending on your strategy level. Throughout this guide, we will give examples of what should be covered at each strategy level. Let's now take a look at each step we've listed above in a bit more detail...
1. Understanding the Strategy Level you're completing the Analysis for
Strategy comes in different levels depending on where you are in an organization and what size your organization is. You may be creating strategy to guide the direction of an entire organization with multiple business or you may be creating strategy for your marketing team. As such, the process will differ for each as there are different objectives and needs for each. The three strategy levels include:
- Corporate Strategy
- Business Strategy
- Functional Strategy
If you're not sure which strategy level you're completing your strategy analysis for, you can check out a post we wrote a while back explaining each of the strategy levels. Once you're clear on your strategy level, jump back here to keep going.
2. Internal Analysis
An internal analysis looks inwards at the organization and assesses the elements that make up the internal environment. Performing an internal analysis allows you to identify the strengths and weaknesses of your organization. This knowledge combined with that of the external analysis will aid the strategic decision making of management while carrying out the strategy formulation process. Let's take a look at the steps involved in completing an internal analysis:
- Assessment of tools to use
- Research and collect information
- Analyse information
- Communicate key findings
The first step of an internal analysis should be deciding on the tool or framework you will use to conduct the analysis. There are many tools you can use to assist you during an internal analysis, and we delve into that a bit later in the article, but to give you an idea for now, Gap Analysis, Strategy Evaluation, and VRIO are all great tools that can be used to gain a clear picture of your internal environment. Once you've selected the tool you will use (hint - you can use more than one), you will need to start researching and collecting data. The tool you use should give you some structure around what information and data you should be looking at.
After the data research and collection stage, you'll need to start analyzing the data and information you've gathered - how will the data and information you've gathered have an impact on your business or potential impact on your business? Looking at different scenarios will help you pull out possible impacts. Finally, you should be communicating your findings to the rest of the team involved in the analysis.
As mentioned earlier, an internal analysis will highlight an organization's strengths and weaknesses in the areas of their competencies, resources, and competitive advantage. Once complete, the organization should have a clear idea of where they're excelling, where they're doing OK and where current deficits and gaps lie. The analysis will arm management with the knowledge to exploit their strengths and opportunities. It also allows management to develop strategies to mitigate any threats and compensate for identified weaknesses.
Beginning strategy formulation after this analysis will ensure your strategic plan has been formulated to take advantage of strengths and opportunities, and offset or improve weaknesses & threats. Your organization can then be confident that you're funneling your resources, time, and focus effectively and efficiently.
3. External Analysis
An external analysis looks at the environment an organization operates in and how those factors currently impact or could impact the organization. A key difference between the factors external to an organization and the internal factors, is that the organization generally has little to no control over external components. Organizations must simply scan and react to the environment. On the other hand, the organization generally holds complete control over internal factors, and can make changes to influence these internal factors. External factors of the organization includes things such as the industry the organization competes in, the political and legal landscape the organization operates in and the rules they have to play by, and the communities they operate in.
The steps for conducting an external analysis are much the same as an internal analysis:
- Assessment of tools to use
- Research and collect information
- Analyse information
- Communicate key findings
You'll want to use a tool such as PESTLE or Porter's 5 Forces to help you add some structure to your analysis. We look at the tools in a little more detail further down this post!
4. Share Key Findings
Once you've gone through the process of researching and analyzing the different elements of your internal and external surroundings and pulled out key findings, it's important to communicate these findings with your strategy or management team. Likely, you didn't complete the entire analysis on your own, perhaps you managed the project of a particular internal analysis, such as the gap analysis, while another team member scanned the external environment and another completed a value chain analysis. Each team member has a particular piece of information, but no one has the entire picture.
Setting up a specific location where everyone can access the data should be your first step, but it shouldn't stop there - a strategy meeting should be held to go through all the key findings everyone has found and ensure all are on the same page regarding the organization's environment.
What are the Strategic Analysis tools
There are a wealth of strategic analysis tools at your disposal, and in this part we'll show you 8 of the best strategic analysis tools for your organization. The Strategic Analysis tools include:
- Gap Analysis
- VRIO Analysis
- Four Corners Analysis
- Value Chain Analysis
- SWOT Analysis
- Strategy Evaluation
- Porter's 5 Forces
- PESTEL Analysis
A quick note before we keep going - analytical tools rely on historical data and prior situations to infer future assumptions. With this in mind, caution should always be used when making assumptions based on your strategic analysis findings.
The Gap Analysis is a great internal analysis tool that's helps you identify the gaps in your organization that are impeding progress towards your objectives and vision. The analysis gives you a process for comparing your organizations current state to it's desired future state, in order to draw out the current gaps which you can then create a a series of actions for that will bridge the identified gap.
The gap analysis approach to strategic planning is one of the best ways to start thinking about your goals in a structured and meaningful way. If you're interested in employing this tool, check out the article we recently wrote which walks you through the entire process and gives you a free template to use.
The VRIO Analysis is an internal analysis tool for identifying organizational resources that may have potential to create sustainable competitive advantages for the organization. This analysis framework gives you a process for identifying and categorizing the resources in your organization based on whether they hold certain traits outlined in the framework. The framework then encourages you to begin thinking about how you can move those resources to the 'next step' to ultimately develop those resources into competitive advantages.
Four Corners Analysis
Another internal analysis tool is the Four Corners Analysis which focuses on core competencies of the organization, however what differentiates this tool from the others is its focus on the long term, rather than short. To clarify, most of the other tools are evaluating the current state of an entity yet, the four corners analysis asses the company’s future strategy which is more precise because it makes the corporation one step ahead of its competitors. By using the four corners, you will know your competitors’ motivation and consequently their current strategies that are powered by their capabilities. This analysis will aid you in formulating the company’s trend or predictive course of action.
Value Chain Analysis
Similar to VRIO, the Value Chain Analysis is a great tool to identify and help establish competitive advantage for the organization. The analysis achieves this through examining the range of activities in the business, to gain an understanding of the value each activity brings to the final product or service.
The concept of the analysis is that each activity should directly or indirectly add value to the final product/service and if you are operating efficiently should you be able to sell for more than the total cost of adding that value. Hubspot have put together a pretty solid guide to Value Chain Analysis, so if you want to conduct one for your organization or even just learn a little more about it, this is the article to check out.
A SWOT analysis is a simple yet effective way of conducting a strategic analysis. It covers both the internal and external perspectives for business.
When using SWOT, one thing to keep in mind is the importance of using specific and verifiable statements, otherwise when it comes to actually applying that information found in the strategic analysis to inform strategic decisions, it risks people relying on vague information.
Generally, every company will have a previous strategy that needs to be taken into consideration during a strategic analysis. Unless you're a brand new start-up, there will be some form of strategy in the company, whether explicit or implicit. This is where a strategy evaluation comes into play. Previous strategy shouldn't be disregarded or abandoned, even if you feel like it wasn't the right direction or course of action, it's still important to analyse why a certain direction or course of action was decided upon.
A Strategic Evaluation should look into the strategy previously or currently implemented throughout the organization and should identify what went well, what didn't go so well, what should not have been there, and what could be improved upon. This is a very basic description of what's involved in a strategic analysis because we've already written a detailed guide on how to conduct a Strategy Evaluation.
Porter's 5 Forces
Supplementing an internal analysis should always be an analysis of the external environment and Porter's 5 Forces is a great tool to help you achieve your external scan. Porter's 5 forces will help you get a picture of the current market your organization is playing in by answering questions such as - why does my industry look the way it does today? What forces beyond competition shape my industry? Where can I find a position amongst my competitors that is profitable and difficult to replicate?
With the answer to the above questions, you'll be able to start drafting a strategy to ensure your organization can find a profitable position in the industry. Check out our Porter's 5 Forces Guide to help you find your strategy focus.
As mentioned above, external analysis tools are critical to your strategic analysis, as the environment your organization operates in will heavily impact your organizations success. PESTEL analysis is one of the best external analysis tools you can use due to its broad nature. The name PESTEL is an acronym for the elements that make up the framework which include the following:
Basically, the premise of the analysis is to scan each of the elements above, to understand the current status and how they can potentially impact your industry and organization - giving extra focus to certain elements that may have a larger ranging impact on your organization. PESTEL will then give you a birds eye view of the entire environment.
These 8 tools are our top picks for giving you a helping hand through your strategic analysis, however they're by no means the whole spectrum. There are many other frameworks and tools out there they could be useful and provide value to your process, so don't let this list be your be all and end all.
Hopefully this post has brought some clarity to you and gives you a structure for when you're ready to complete you own internal analysis. If you have any other tools which you think should be in our list, let us know in the comments below!