A huge part of developing a strategic plan is a reliable, in-depth strategic analysis. An organization is separated into internal and external environments. Both components should be scrutinized to identify factors influencing organizations and guiding decision-making.
In this article, we'll cover:
- What is strategic analysis?
- Why conducting a strategic analysis improves your strategy formulation
- A strategy formulation case study
- How to do a strategic analysis
- The core concepts of strategic analysis
- Strategic analysis tool examples
- How to choose the right strategic analysis tool
What is Strategic Analysis?
Strategic analysis is the process of researching and analyzing an organization along with the environment in which it operates to formulate a strategy. This process of strategy analysis usually includes defining the internal and external environments, evaluating identified data, and utilising analytical strategic analysis tools.
Why conducting a Strategic Analysis improves your strategy formulation
The analysis phase sets “the stage” for your strategy formulation.
The strategic analysis informs the activities you undertake in strategic formulation and allows you to make informed decisions. If strategy is a plan to deal with a specific challenge, then a big part of its development is the framing of the challenge.
Strategic Analysis example - Walmart
At the very least, the right framing can improve your understanding of your competitors and, at its best, revolutionize an industry. For example, everybody thought that the early success of Walmart was due to Sam Walton breaking the conventional wisdom: “A full-line discount store needs a population base of at least 100,000.”
But that’s not true.
Sam Walton didn’t break that rule, he redefined the idea of the “store,” replacing it with that of a “network of stores.” That led to reframing conventional wisdom, developing a coherent strategy, and revolutionizing an industry.
How to do a Strategic Analysis?
Strategy is not a linear process.
Strategy is an iterative process where strategic planning and strategic implementation interact with each other constantly.
First, 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.
Strategic planning includes the strategic analysis process.
The content of your strategic analysis varies, depending on the strategy level at which you're completing the strategic analysis.
For example, a team involved in undertaking a strategic analysis for a corporation with multiple businesses will focus on different things compared to a team within a department of an organization.
By the end of this article, you will be equipped with the concepts and the strategy tools that will help you complete a thorough strategic analysis on every strategy level.
The key components in strategic analysis:
- Understand the strategy level you're completing the analysis for
- Complete an Internal Analysis
- Complete an External Analysis
- Share Key Findings
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 your organization's size.
You may be creating a strategy to guide the direction of an entire organization with multiple businesses or you may be creating a strategy for your marketing team. As such, the process will differ for each level as there are different objectives and needs. The three strategy levels are:
If you're not sure which strategy level you're completing your strategy analysis for, read this post 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 management's strategic decision-making 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
- Analyze 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.
You can use many tools to assist you during an internal analysis. We delve into that a bit later in the article, but to give you an idea, for now, Gap Analysis, Strategy Evaluation, McKinsey 7S Model, and VRIO are all great tools that can be used to gain a clear picture of your internal environment.
The second step of an internal analysis is research. Once you've selected the tool you will use (hint - you can use more than one), you will start researching and collecting data.
The tool you use should give you some structure around what information and data you should look at and how to draw conclusions.
The third step of an internal analysis is the process of the collected information. 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 a potential impact on your business? Looking at different scenarios will help you pull out possible impacts.
The final step of an internal analysis is sharing your conclusions. What is the value of your analysis’ conclusions if nobody knows about them?
You should be communicating your findings to the rest of the team involved in the analysis and go even further. Share relevant information with the rest of your people to demonstrate that you trust them and offer context to your decisions.
Once the internal analysis is 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 take advantage of 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.
You can then be confident that you're funneling your resources, time, and focus effectively and efficiently.
3. External Analysis
An external analysis looks at an organization's environment and how those factors currently impact or could impact the organization.
A key difference between the external and the internal factors is that the organization has little to no control over external components.
On the one hand, the organization holds complete control over internal factors and can influence them. On the other hand, organizations simply scan and react to the environment, rarely influencing it.
External factors of the organization include 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
- Analyze information
- Communicate key findings
You'll want to use a tool such as SWOT analysis, PESTLE analysis, 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
There is no such thing as overcommunication.
If you have to keep only one rule of communication, it’s that one. Acting on your findings is what gives them value. Communicating those findings with your people enables acting on them.
Much like strategy, this information is useless if not shared with everyone.
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. At the same time, another team member scanned the external environment, and some other completed a value chain analysis.
You gathered feedback from everyone willing to share it. Collect all the information and then share the entire picture it builds with every relevant person inside your organization.
Setting up a specific location where everyone can access the data should be your first step, but it shouldn't stop there. A meeting should be held to go through all the key findings and ensure all are on the same page regarding the organization's environment.
Strategic Analysis tools
There are a number of strategic analysis tools at your disposal. We'll show you 8 of the best strategic analysis tools out there.
The 8 best Strategic Analysis tools:
- Gap Analysis
- VRIO Analysis
- Four Corners Analysis
- Value Chain Analysis
- SWOT Analysis
- Strategy Evaluation
- Porter's 5 Forces
- PESTEL Analysis
Note: 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 helps you identify the gaps in your organization, impeding your progress towards your objectives and vision.
The analysis gives you a process for comparing your organization's current state to its desired future state to draw out the current gaps, which you can then create a series of actions 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 and focuses on improving a specific process.
It identifies organizational resources that may potentially create sustainable competitive advantages for the organization. This analysis framework gives you a process for categorizing the resources in your organization based on whether they hold certain traits.
The framework then encourages you to begin thinking about moving those resources to the “next step'' to ultimately develop those resources into competitive advantages.
👉 Grab your free VRIO strategy template that will help you to develop and execute a strategy based on your VRIO analysis.
Four Corners Analysis
The Four Corners Analysis framework is another internal analysis tool that focuses on your organization's core competencies.
However, what differentiates this tool from the others is its long-term focus. To clarify, most of the other tools evaluate the current state of an entity, but the Four Corners Analysis assesses 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 their current strategies 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 a competitive advantage for your organization.
The Value Chain framework achieves this by examining the range of activities in the business to understand the value each brings to the final product or service.
The concept of this strategy tool is that each activity should directly or indirectly add value to the final product or service. If you are operating efficiently, you should be able to charge more than the total cost of adding that value.
A SWOT analysis is a simple yet ridiculously 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, you won’t be able to use that information to inform strategic decisions.
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.
The previous strategy shouldn't be disregarded or abandoned, even if you feel like it wasn't the right direction or course of action. Analyzing why a certain direction or course of action was decided upon will inform your choice of direction.
A Strategic Evaluation looks into the strategy previously or currently implemented throughout the organization and identifies 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 comprehensive 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 this.
Porter's 5 forces framework performs an external scan and helps 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.
We might sound repetitive, but external analysis tools are critical to your strategic analysis.
The environment your organization operates in will heavily impact your organization's 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:
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, thus, your organization.
It gives extra focus to certain elements that may have a wide-ranging impact. PESTEL gives you a birds-eye view of the entire environment.
How to choose the right strategic analysis tool
There are as many ways to do strategy as there are organizations.
So not every tool is appropriate for every organization. These 8 tools are our top picks for giving you a helping hand through your strategic analysis.
They're by no means the whole spectrum. There are many other frameworks and tools out there that could be useful and provide value to your process.
Choose the tools that fit best with your approach to doing strategy. Don’t limit yourself to one tool if it doesn’t make sense, and of course, be faithful to each framework as long as it makes sense again.
Hopefully, this post has brought some clarity to you and gives you a structure for when you're ready to complete your own internal analysis.
If you’re interested in the next step of your strategy, its formulation, take a tour of our platform to understand how Cascade can help you.