This post will address two analytical tools that will help you understand the business climate you are operating in.
The first question we tackled in our Strategic Choice Cascade was “What is our Winning Aspiration”. To help us answer that, we focused on self-awareness to gain clarity around our critical constraints and areas of excellence. We then focused on our Purpose which includes defining our vision, mission and values.
The next question in our strategic choice cascade is: “Where are we going to Play?” This really is about defining the specific niche, or target market where you can be successful. There are several analytical tools to assist in honing in on your target market. These tools include SWOT & PEST analysis, Priorities and Leverage, 2×2 Quadrant and Blue Ocean/Red Ocean Analyses. This post will focus on the first topic: SWOT & PEST Analysis.
SWOT stands for:
We generally look at Strengths and Weaknesses as internal to our company or organization and Opportunities and Threats as being External. It’s very important that you make an honest and objective assessment of the strengths and weaknesses of your organization and the people in it, including yourself. Understanding where you are excellent and where you need to grow and improve is essential to developing your strategy, plans and goals. It’s also important that you look at what is happening in the environment around you. What trends are happening in your industry? How are business models changing? What opportunities can you go after? Who are your competitors and what threats are present? Detail your SWOT and prioritize the top 3-5 in each category that are most important for your business.
Depending on the type of business you are in, you may need to take a deeper look at the macro business environment. PEST analysis looks at Political, Economic, Social and Technological factors. Many of these issues vary by country and are particularly important if you are looking to sell your product or services in other countries. But, it also provides an in-depth assessment of the external factors in your own country.
Political factors are basically how the government intervenes in the economy. Political factors such as regulations, tax policy, laws, trade policies & restrictions, and political stability.
Economic factors include economic growth, interest rates, exchange rates, inflation rates.
Social factors bring in the people aspect – demographics, shifting lifestyle trends, generational changes, and religious and cultural aspects.
Technological factors include technological aspects like R&D activity, automation, technology incentives and the rate of technological change.
Some people expand the analysis to PESTLE, which adds:
Legal factors include specific laws that impact all aspects of business from employment law, consumer laws, health & safety laws, etc. These factors can affect how a company operates, its costs, and the demand for its products.
Environmental factors include ecological and environmental aspects such as weather, climate, natural resources, and climate change. Certainly an entire sector of green products, services and business models has evolved in response to environmental concerns.
In summary, PEST Analysis looks at “big picture” factors that might influence a decision, a market, or a potential new business. SWOT Analysis explores these factors at a business, product-line or product level. These tools are complementary and are often used together.
In light of recent political changes in the United States and around the world, using PEST Analysis to explore the potential impact on your organization may be a good exercise to work through. The PEST Analysis is basically a deep dive into the Opportunities and Threats in the SWOT analysis, breaking them into 4-6 categories (see above) for further discovery.
Here are the key steps:
– Create a cross-functional group to conduct the PEST analysis
– Brainstorm each category (PEST/PESTLE) to come up with a list of factors
– Identify which factors may impact your business and how
– Prioritize the factors in terms of importance or significance; may sort by functional area impact
– Determine which factors to create action plans or “watch lists” for based on potential consequences to the business, product, employees, etc.
– Execute your action plan or schedule intervals (quarterly, annually?) for reviewing your “watch list” items
Many of the factors will require assumptions which don’t always lead to clear solutions. You will have to decide how much research you will need to do to further understand the impact. Some factors are very clear, like changes to minimum wage laws, and action plans can be created to handle them. Other factors, like policy changes or regulations, can take a very long time to be implemented, and they may or may not directly impact your business. In either case, working through the PESTLE Analysis is an important exercise to add to your strategic management and planning processes.