In the strategic analysis process the organization identifies where it is today, where it wants to go and how it intends to get there. With increased firm value as the basic objective, the role of strategic analysis is vital in self-examination and knowing competitors. The purpose of industry situational analysis is not to provide answers but to help organizations understand the issues. Many of the analytical tools are simply frameworks to identify, classify and understand the principal factors that influence strategic decisions. This paper discusses several industry situation analysis techniques, namely, PEST analysis, value chain analysis (VCA), competitive forces, and SWOT Analysis.
In strategic analysis, the most commonly used tool is SWOT analysis (Cervone, 2009). SWOT Analysis, is a strategic planning tool used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a in a business venture. It is a tool for auditing an organization and its environment. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieving that objective. Strengths and weaknesses are internal factors that create value or destroy value - e.g. assets, skills, or resources. Opportunities and threats are external factors that create value or destroy value - they emerge from demographic, economic, political, technical, social, legal or cultural factors. SWOT helps a company to see itself for better and for worse. SWOTs are a means by which a company can better understand what it does very well and where its shortcomings are. SWOT analysis has been a framework of choice among many managers for along time because of its simplicity and its portrayal of the essence of sound strategy formulation. Central to making SWOT analysis effective is accurate internal analysis, that is, the identification of specific strengths and weaknesses around which sound strategy can be built. SWOT Analysis is a simple but powerful framework for analyzing a company's strengths and weaknesses, and the opportunities and threats it faces. This helps the company to focus on its strengths, minimize threats, and take the greatest possible advantage of opportunities available to it.
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This paper also examines PEST analysis to investigate the business environment and understand its effect on the international direct marketer. This organizing framework - PEST - is one of the most commonly used tool for environmental analysis. As noted by McGee et al.,(2005) cited in Thomas (2007), one way for managers to analyze their exposure to the set of potential contextual factors is through the application of a PEST analysis. PEST analysis acronym stands for "Political, Economic, Social, and Technological analysis" and describes a framework of macro-environmental factors used in the environmental scanning component of strategic management. Political factors consist of the laws, regulations and governmental policies that facilitate or hinder direct marketing. The economic environment includes macro level economic indicators, such as GDP,purchasing power parity (PPP), and wealth distribution that can be used in market selection and macro-segmentation (Wilkinson et al., 2007). The social environment includes variables related to consumer behavior and cross-cultural communications. Technology involves both the level of technological and infrastructure development and the breadth of consumer use of technology. Both can have great impact on the method direct marketers used to reach the consumers.
Some analysts have added Legal and rearranged the mnemonic to SLEPT; inserting Environmental factors expanded it to PESTEL or PESTLE, which is popular in the United Kingdom. The model has recently been further expanded to STEEPLE and STEEPLED, adding education and demographic factors. STEER analysis systematically considers Socio-cultural, Technological, Economic, Ecological, and Regulatory factors. PEST analysis is a part of external analysis when conducting a strategic analysis or doing market research, and gives an overview of the different macro-environmental factors that the company has to take into consideration. It is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations. With the PEST output as background the organization then highlights the key forces and drivers influencing the future strategic evolution of the firm, namely demographic, technology, globalisation and entrepreneurship drivers. In turn, these forces impinge directly on the competitive dynamics of the industry and indicate both current competitive positioning strategies and future competitive pathways which organizations may choose to follow. The external context of strategic decisions is very broad-ranging. It can include governments, competitors, technological and social change and the dynamics of buyer and supplier markets. Firms that engage in international business should make use of the PEST framework for the purpose of market selection as well as for strategic decision making while operating in overseas markets. The PEST environment is not static, and it has both a direct and an indirect impact on firm opportunities and firm performance. It should be noted that the PEST factors, combined with external micro-environmental factors and internal drivers, can be classified as opportunities and threats in a SWOT analysis.
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Five Competitive Forces model
There is a continuing interest in the study of the forces that impact on organizations, especially, those that can be harnessed to provide competitive advantage. The competitive forces model, as proposed by Michael Porter, identified five forces which would impact on an organization's behaviour in a competitive market. These include the following: the rivalry between existing sellers in the market; the power exerted by the customers in the market; the impact of the suppliers on the sellers; the potential threat of new sellers entering the market; and the threat of substitute products becoming available in the market. Porters model of Five Competitive Forces allows a structured and systematic analysis of market structure and competitive situation. The model can be applied to particular companies, market segments, industries or regions. Therefore, it is necessary to determine the scope of the market to be analyzed in a first step. Following, all relevant forces for this market are identified and analyzed Hence, it is not necessary to analyzer all elements of all competitive forces with the same depth. The Five Forces Model is based on microeconomics. It takes into account supply and demand, complementary products and substitutes, the relationship between volume of production and cost of production, and market structures like monopoly, oligopoly or perfect competition.
Value Chain Analysis
The notion that key processes across the supply chain form a value chain and the method of analyzing the value chain for competitive advantage was introduced by Michael Porter (Zokaei and Simons,2006p 147). VCA is a structured method of analyzing the effects of all the core activities on cost and/or differentiation of the value chain. Its objective is to improve supply chain performance. VCA requires the selection of a specific value stream (product) as the focus for initial analysis and improvement (Taylor, 2005,p 748). Performing value chain analysis on important customers helps to identify high value new business opportunities. A problem with the VCA approach is that it demands considerable resources in terms of management & time. According to Crain and Abraham (2008) there is internal and external value chain analysis (VCA).Internal VCA follows Porter's original concept - which includes value-added stages from purchasing to distribution as well as support functions. External VCA consists of the important upstream/supply and downstream processes. The value chain as a strategic analysis tool emerged when Nike set a precedent by outsourcing the manufacturing and assembly of athletic shoes in the 1980s.Nike had realized that its core competencies were in product development and marketing. As a result, management developed the company around a strategy of designing innovative products that met evolving customer needs.
Industry situation analysis can explain how sustainable competitive advantage can be created and maintained. One stresses market position (PEST, competitive forces, VCA & SWOT) and the other core competence (resource-based view). The market positioning approach to strategy development as demonstrated by PEST analysis, value chain analysis, competitive forces model and SWOT analysis is associated mainly with the work of Michael Porter. Within the positioning perspective, strategic choice is focused primarily on the structure of the industry and how it might be shaped to advantage. The objective is to establish a privileged hard-to-replicate position in an industry that is difficult to enter.