Tag: strategy

Pulverize your competitors with this tool to analyze the environment that shapes your organization’s performance.

A PESTLE or PESTEL (or formerly, just plain PEST) analysis is a useful tool to deploy when starting a new business or entering a new market. It’s also a powerful sidekick for assessing external factors when used with the more inward facing models, SWOT analysis and Porter’s Five forces, to provide a comprehensive “inside-and-out” perspective on your firm and strategy.

PESTLE stands for:

Political

To what degree does a government intervene in the economy or industry (or with an individual company if it’s nearing or exercising monopoly power)?  All influences on your business could be listed here: tax, procurement policy, treaty implementation, trade and environmental policies etc. The government could well be a mixture of negative (eg regulations that constrain) and positive (eg large buyer of health and education services) influences.

Economic

These are the key determinants of an economy’s performance: growth, exchange rates, inflation, interest rates, consumer income, confidence, and unemployment rates. Since all these factors might impact demand and supply in the economy, they all might impact the demand for and cost and supply of your company’s goods and services.

Social

Here you would list out population trends, cultural norms and shifting attitudes (eg be greener and leaner, focus more on experiences than material possessions). These factors are important for marketeers to understand and target their product to customer segments and niches.  

Technological

Does new tech threaten or provide an opportunity to your business? Or some combination of the two? This factor refers to the amount of R&D in an industry, technological incentives, and the amount of technological awareness in the market. These factors can influence build or buy decisions, whether to enter certain markets and stop you spending a fortune on technology that may soon become obsolete because of disruption elsewhere.

Legal

Like the political factor but more specifically about the rules and regulations, current and probable-future legal states that provide the rails for your current business or where you might expand. Legal counsel is advised for this sort of thing. A good example would be how the rules and regulations have changed for British companies who sell to or have supply chain in the European Union following Brexit.

Environmental

The emphasis on ESG and particularly the E given global warming means companies, especially large firms, must examine their environmental footprint and try to minimize their environmental impact or risk alienating stakeholders.

Watch out for

Not all factors will be of equal importance to all industries and businesses. Eg a games developer is less concerned about environmental considerations than a utility company.

List out as many factors under each category and rank them in order of importance.

Top tip: try to imagine how this list might change in 6 to 12-months’ time. Don’t just try to observe the here and now but try to foresee upcoming changes, such as disruption in an adjacent industry.

If we’re fairly confident the environment may change, we may reap rewards by adapting now. This explains why some large companies go beyond both the spirit and letter of the law on CSR and ESG. It’s because they can see the tide moving out (eg public opinion on plastic straws) and they don’t want to be standing there with no clothes and their reputation in tatters.

Resources

Kaplan, R. & Norton, D. (January, 2008) Mastering the Management System. Harvard Business Review
Richardson, J. (2019) A Brief Intellectual History of the STEPE Model or Framework (i.e., the Social, Technical, Economic, Political, and Ecological)

Possibly the most popular strategy tool ever (strategists and business consultants love a 2×2) the SWOT box helps you identify strengths, weaknesses, opportunities, and threats.

A SWOT analysis can help you carve out a sustainable niche in you market, or on a personal level, help develop your career that best uses your talent and opportunities.

The model can be used in two ways: as a kick-off to a deeper strategic dive or as a more sophisticated strategic tool. It’s particularly powerful when combined with other strategy models such as Porter’s 5 forces, PESTLE and scenario analysis.  

How to use the model

From a business perspective, these questions should help you flesh out a SWOT:

Strengths

• what advantages does your business have?
• what do you do better than anyone else?
• how does the market see your strengths?
• what is your USP?
• what low-cost or unique resources can you draw on that others can’t?

Weaknesses

• what can you improve?
• what should you avoid?
• what does the market see as your weaknesses?

Opportunities

• what good opportunities are there?
• what trends are you aware of?
• what new technology could you combine from adjacent industries?

Threats

• what obstacles do you face?
• what are your rivals doing?
• is changing technology threatening your position?
• are standard for your products and services changing?

When used as an in-depth tool, quantifiable statements should be used rather than vague statements such as “better customer service”. And prune and prioritise your points in each category.

Watch out for

One downside of the conventional SWOT analysis is that it doesn’t take into account the dynamic forces at work in modern business. Instead, Adam Brandenburger says we should tweak SWOT to look at our strengths (and weaknesses of our competitors) as threats and our weaknesses (and strengths of competitors) as opportunities. This echoes Clayton Christensen’s work on disruptive innovation and his explanation of how company competencies can become obstacles.

A surprising number of innovations fail not because of some fatal technological flaw or because the market isn’t ready. They fail because responsibility to build these businesses is given to managers or organisations whose capabilities aren’t up to the task. Corporate executives make this mistake because most often the very skills that propel an organisation to succeed in sustaining circumstances systematically bungle the best ideas for disruptive growth. An organisation’s capabilities become its disabilities when disruption is afoot.

Clayton Christensen & Michael Raynor, (2013) The Innovators Solution. p.177

Resources

Brandenburger, A. (August 22, 2019). Are Your Company’s Strengths Really Weaknesses? Harvard Business Review
Christensen. C. & Raynor, M. (2013). Innovator’s Solution, Revised and Expanded: Creating and Sustaining Successful Growth. Harvard Business Review Press
Helms, M. H. & Nixon, J. (2010). Exploring SWOT analysis – where are we now? A review of academic research from the last decade. Journal of Strategy and Management
Leonard-Barton, D.  (1992). Core Capabilities and Core Rigidities: A paradox In Managing New Product Development. Strategic Management Journal 13

Use this model to understand where power lies in a business situation.

Michael Porter’s five forces model is a useful tool to understand and cope with competition. It helps you frame both the strength of your current position and the strength of a position you’re thinking about moving into.

If these forces are intense within an industry, it’s hard for companies to earn attractive returns. In Porter’s 2008 update to his 1979 paper, he lists airlines, textiles, and hotels as being in this camp. If the forces are benign, companies can earn attractive returns – such as software, soft drinks and toiletries, according to Porter.

Understanding the competitive forces, and their underlying causes, reveals the roots of an industry’s current profitability while providing a framework for anticipating and influencing competition (and profitability) over time.

Michael Porter, p.26

The 5 forces that shape competition

1. Threat of new entry. This puts a cap on the profit potential of an industry. If it costs little time or money to enter your market, new competitors can quickly enter your market and weaken your position.
   
2. Supplier power. How easy is it for suppliers to drive up process or limit quality? The fewer suppliers you have the, and the more you need their help, the more powerful your suppliers are.
   
3. Buyer power. On the flip side, powerful buyers can capture more value by driving down prices or asking for more. A few powerful buyers can often dictate terms.
   
4. Competitive rivalry. The number and capability of your competitors will determine how much power you have here. If you provide a homogenous product you will have little power, but if no one can do what you do, you may have tremendous strength.
   
5. Threat of substitution. Easy to overlook, substitutes can take many forms. For example, a consumer might forgo buying a car if there’s a reliable ride hailing service in the area. If substitution is easy and cheap, this weakens your power.

How to use the model

By understanding these forces, you can develop a strategy to improve returns by:

Positioning your business where the forces are weakest. For example, selling high-end electric sports cars.

Exploiting changes in the forces. For example, the emergence of music streaming platforms as broadband speed and smart phone usage increased.

Reshape forces in your favour by using tactics to reduce the share of profits leaking to other payers. For example, expand your services to limit buyer power by making it harder for them to leave for a rival and limit competitive rivalry by producing differentiated products and services.

Watch out for

While the strongest forces determine the profitability of an industry, they are not always easy to identify. Porter gives the example of the photographic film industry. The intense rivalry between Kodak and Fuji was not the factor limiting profitability, rather a better substitute – digital photography. Here, coping with the substitute becomes the top strategic priority.

Porter’s model shows that strategists should not only be concerned with their company’s competitive position versus rivals, but the competitive position of the industry as a whole. For example, consider the impact of Big Tech firms and platformification on traditional media industries such as terrestrial and cable TV, and newspapers.

The model assumes relatively static market structures, which can be a limitation in industries that are moving quickly – such as software development. To make up for this, it’s best to combine Porter’s 5 forces with other strategy models such as SWOT and PESTLE analysis.

Resources

Porter, M. (January 1, 2008). The Five Competitive Forces That Shape Strategy. Harvard Business Review
Porter, M. (1979). How competitive forces shape strategy. Harvard Business Review