To implement a strategy, company executives must have access to the relevant information, sourced both internally and externally, so they can make informed decisions. However, gathering this information can be challenging, especially for small and medium-sized businesses (SMEs) with limited resources.
That’s where situational analysis comes in. Situational analysis provides a framework which can be used to assess the internal and external factors impacting your company.
This article explores situational analysis and explains how companies can translate the results into action.
What is a situational analysis?
Situational analysis assesses the internal and external factors that impact your company. Internal factors include its strengths and weaknesses and the customer experience, while external factors take into account competitive behavior and market trends.
Why should you run a situational analysis?
The main reason a company, especially an SME, runs a situational analysis is to support the strategic planning process. Executives have to make major decisions regularly, like whether to launch a new product, acquire a competitor, or invest in equipment. They need as much information as possible to ensure they choose the right course of action for the long-term benefit of the company.
However, there are other reasons your company may decide to run a situational analysis. For example, it can identify and resolve challenges such as reducing wastefulness. It can also help human resources engage team members who are tempted to leave if they aren’t motivated by your company’s vision.
Aspects to analyze during a situational analysis
Here’s a list of the internal and external factors a situational analysis should cover.
Your company’s strengths are the competitive advantages that allow it to produce better or more affordable products than its rivals. Examples of a company’s strengths could be a strong brand or proprietary technology.
Your company’s weaknesses are aspects of the business that prevent it from achieving its objectives or competing with rivals or cause losses in terms of time or money. Examples of weaknesses are low margins on products or high employee turnover.
Your company must assess how successfully its current products- an umbrella term which can refer to a physical good, service, experience, or event- meets (or may meet) the needs of its customers. It should also evaluate its delivery of related services, including customer support.
A brand plays an important role in situational analysis because it measures how your company’s product is differentiated from its rivals and how customers feel about it.
Competitor analysis helps your company to understand where its rivals stand and what they do differently to expand their market share.
Distribution influences the customer experience because it’s the way your company delivers its products. Optimizing your distribution channels can help to attract potential customers and retain existing customers.
Your company needs to closely monitor the external business environment because economic events like recessions or political instability can have a major impact on financial performance.
Assessing external factors helps your company identify opportunities to grow or improve the business, such as new markets or tech developments which streamline operations.
Threats are external factors that present risks to your company and ultimately its ability to continue as a going concern, like a consumer trend reducing demand for your product.
Types of situational analysis
Here’s a list of the most common tools used to run a situational analysis.
SWOT stands for strengths, weaknesses, opportunities, and threats. A SWOT analysis is a framework which identifies the internal (strengths and weaknesses) and external (opportunities and threats) factors impacting your company. They’re typically listed on a chart divided into four corresponding sections. You should conduct a SWOT analysis with representatives from different departments to get a comprehensive view of the business.
PESTEL analysis assesses factors at play in the external environment:
- Political: government policies affecting day-to-day business operations.
- Economic: the state of the global and local economies.
- Social: lifestyle trends influencing your company’s target market.
- Technological: tech developments in your industry and accompanying legislation.
- Environmental: environmental regulations designed to combat climate change, such as offsetting carbon emissions.
- Legal: laws and regulations like health and safety standards.
Porter's Five Forces
Devised by Harvard professor Michael Porter in the 1970s, the Five Forces analysis framework helps your company analyze its competitors:
- Threat of substitutes: could a new product replace an existing one?
- Threat of new competitors: could a new rival emerge?
- Threat of established competitors: could an existing rival improve its product?
- Bargaining power of suppliers: would your company have leverage if a supplier decided to raise its prices?
- Bargaining power of customers: how much influence do your customers have on the price of your product?
The 5C analysis framework explores some of the key inputs required to develop a marketing strategy:
- Company: what are your company’s goals and products, and how strong is its team?
- Competitors: what are rivals doing to capture market share?
- Customers: what are the demographics of your customers?
- Collaborators: who are your suppliers, and are there alternatives?
- Climate: how does the external business environment impact your company?
A VIRO analysis measures to what extent your company’s resources, such as raw materials or labor, provide a competitive advantage.
- Value: how important is a particular resource to your company’s success?
- Rarity: how easily can your company obtain the resource?
- Imitability: can competitors duplicate or substitute the resource?
- Organization: is your company or team best positioned to leverage the resource? A resource that requires investment or specialized skills increases operating costs.
How to run a situational analysis
The first step in running a situational analysis is choosing the appropriate tools. You must review each tool and figure out which one is most suitable for your company. Many companies start with a SWOT analysis and then back it up with a couple of the other tools. Once you decide, gather the information, for example by interviewing stakeholders or brainstorming.
To run an effective situational analysis, it's important to have financial systems in place which provide easy access to financial data. This data is a key input for internal analysis, particularly the SWOT analysis.
How to interpret the results of your situational analysis—and translate them into action
You can use the information gathered during the situational analysis to assess your company’s current strategy. Are there opportunities you should seek to exploit or threats you need to mitigate?
You can also use this information to inform a strategic decision your company is planning to implement.
Let’s take launching a new product, for instance. If one of your company’s strengths is access to low-cost raw materials, it might be able to sell the product at a lower price than its competitors. But a potential threat could be your competitors’ response, such as starting a price war.
Finally, you can improve your company’s performance by identifying and addressing weaknesses that prevent it from achieving its objectives.
Financial transparency and spend control are crucial to improving your business situation
To run a situational analysis, you need full transparency into your company’s finances. Financial data provides key insights into how your company is performing and its financial wellbeing, for example its ability to meet short and long-term financial obligations. You also need tools to track business expenses.
Ramp provides several products to help improve your company’s financial situation. Our corporate cards, which are accepted everywhere, allow department heads or the accounting team to set spending limits automatically enforced at the point of purchase, such as blocking categories like dining or limiting spending to a specific vendor.
Ramp also provides a real-time reporting tool which delivers full visibility into your company’s expenses, highlights trends, and forecasts spending.
Situational analysis assesses the internal factors, such as strengths and weaknesses, and external factors, such as market trends, impacting your company.
There are five main tools to run a situational analysis:
- SWOT analysis is a framework for identifying the internal (strengths and weaknesses) and external (opportunities and threats) factors impacting your company.
- PESTEL analysis assesses the external factors impacting your company: political, economic, social, technological, environmental, and legal.
- Porter’s Five Forces analyzes competition from the perspective of the threat of substitutes and new and established competitors and the bargaining power of suppliers and customers.
- 5C analysis assesses your company and its competitors, customers, collaborators, and (business) climate to support the development of a marketing plan.
- VRIO analysis identifies your company’s competitive advantage by assessing the value, rarity, and imitability of its resources, such as raw materials, and the organization’s ability to leverage them.
The main reason your company runs a situational analysis is to support strategic planning, like launching a new product. The information gathered informs decision-making.
You can use the information collected during a situation analysis to assess your company’s current strategy or guide upcoming strategic decisions. You can also use it to address weaknesses.