Situation analysis

A situational analysis often is called the foundation of a marketing

plan.
A situational analysis includes a thorough examination of internal
and external factors affecting a business.
It creates an overview of the organization that will lead to a better
understanding of the factors that will influence its future.
Utilizing market research, a situational analysis will define
potential customers, projected growth, competitors and a realistic
assessment of your business.
It involves targeting the specific objectives in the business and
identifying the factors that will support or hinder those objectives.
This assessment often is called a SWOT (strengths, weaknesses,
opportunities and threats).
Strengths and weaknesses involve an internal analysis of the
company, while opportunities and threats are derived from an
external analysis.
A SWOT analysis usually is presented as a list of information but
also can fit into a matrix model.
A systematic collection and evaluation of past and
present economical, political, social, and
technological data, aimed at:

(1) identification of internal and external forces that
may influence the organization's performance and
choice of strategies, and
(2) assessment of the organization's current and
future strengths, weaknesses, opportunities, and
threats.
Internal Analysis
The internal analysis is a thorough knowledge
and understanding of the strengths and
weaknesses within an organization.
These factors are seen in company culture and
image, organizational structure, staff, operational
efficiency and capacity, brand awareness,
financial resources, etc.
Strengths are positive attributes, which can be
tangible or intangible, and are within the control
of the organization.
Weaknesses are factors that may hinder the
achievement of the desired goal.

External Analysis
Opportunities and threats are measured as part of an external
analysis.
Both can occur when things happen in the external
environment that may require a change within the business.
These external changes can be attributed but not limited to
market trends, suppliers, partners, customers, competitors,
new technology and economic environment.
Opportunities present themselves as attractive factors that
can positively influence the organization in some way.
Threats are external factors that could place the
organizations goal at risk.
These often are classified by their level of severity and
probability of occurrence.

Organizational (internal) analysis
Resources can be defined as an asset, competency, process, skills,
knowledge controlled by the organization.
A resource is strength if it provides competitive advantages to the
organization.
Strength is the potential to do will relative to the abilities of existing
or potential competitors.
A resource is weakness if it doesnt have the capacity to do in
comparison with competitors.
All organizations use different kinds of resources such as people,
money, material. Management, knowledge, etc.
All organizations are not strong in respect of all factors, similarly all
organizations are not weak on all resources.
Resources are important elements in internal environment of an
organization and have strategic importance.
Major areas of internal analysis
1. Finance and accounting: deals primarily with raising,
administrating and distributing financial resources to order to
achieve the organizational objectives. Factors related with
availability, usage and management of funds are associated with
finance and accounting. Analysis of this factor involves checking
on the following aspects:
Total financial resource and strength liquidity, leverage,
profitability, cash flows.
Cost of capital in relation to the industry and competitors (stock
price and dividend policy).
Capital structure, allowing flexibility in raising additional capital as
needed.
Relationships with owners and stockholders.
Accounting system cost, budget, profit planning, auditing.
Financial planning capital budgeting, working capital.
Inventory valuation and control.
2. Human resources: the quality of managerial, technical and
other employees, the organizational climate, union
management relations, personnel policies, and practices are
related with personnel factors which play significant role when
managers try to formulate and implement strategies. Analysis of
HR includes following factors (Jauch and Gluck):
corporate image and prestige, organization culture, organization
size (no. of employee) in relation to industry, strategic
management system, records for reaching objectives, influence
of regulatory bodies, quality of employees, relations with trade
unions, experience and track record of top management,
policies related with staffing-appraisal-promotion-training-
development-compensation, cost of labor (compensation,
turnover, absenteeism), information management. working
conditions, commitment and loyalty of employees.
3. Production and operation: all activities related to the production
of product and services using material and other resources.
Conversion of raw materials into finished goods are major aspects
of production and operation. It covers following aspects:
cost of production compared with competitors, capacity to meet
market demand, availability of raw material and sub assemblies
and their cost, location of facilities and office, equipment and
machinery, inventory control system, maintenance policies,
relationship with supplier, flexibility in operations.
4. marketing: it is related with moving goods and services from
producer to customer. It starts with finding customers need and
want. Marketing deals with market research, developing product,
testing customer reaction, setting distribution channel,
promotional activities. Following factors related with marketing
should be analyzed to determine their contribution for
achievement of organizational objectives:
competitive structure and market share, marketing research system,
product mix and quality, leadership in market, patent protection,
feelings of customer about product and firm, packaging, pricing
strategies, sales force, promotional activities, after sales services,
channel of distribution.
5. Research and development: it includes development of new product
and innovations in product design and production processes. This
determines success and future growth of an organization. R&D work
includes exploratory research, new product or process research,
improvement research, cost reduction research, new material
adaptation research. Following factors should be analyzed to
ascertain the capabilities in the area of R&D:
basic research capabilities within the firm, development capability for
product engineering, excellent in product design, development in
packaging, improvement in use of material, ability to meet customer
requirement, well equipped laboratories and testing facilities,
experienced technicians and scientists, environment for creativity
and innovation, abilities of technological forecasting.



Process of organizational (internal) analysis
Organizational analysis process consists following steps:
1. Identify key organizational capability factors: at first stage
capabilities of the organization are identified. Capabilities refers
what organization can do well. They can be:
I) Unique resources: valuable, rare, costly to imitate and easily
exploitable by organization which can be human, physical,
financial, intellectual, etc.
II) Functional capabilities: exist in functional areas. Key capabilities are
identified in finance, marketing, production, HR, R&D.
2. Access strengths and weaknesses: strength and weaknesses of key
capability factors are assessed.
Strength is the organization does well relative to competitors.
Weakness is the organization does poorly than competitors.
Contribution of each factor in achieving objectives serves the
basis to identify strengths and weaknesses.
Past results, comparison with standard, benchmarking can be
used to access contribution.
3.Locate strategic advantages: strategic advantage is located
which can gain advantage over competitors. It is the
combination of:
Unique resources: not possessed by competitors.
Core competencies: well performed activities resulted from
innovation, special skills, information technology, low cost,
etc.
4.Prepare strategic advantage profile (SAP): a profile is prepared
on the basis of strategic advantage which shows various areas
of strengths and weaknesses.
Identify key
Capability
factors
Assess strengths
And weaknesses
Of key capability
factors
Locate
Strategic
advantage
Prepare
Strategic
Advantage
profile
Concept of external environment
Environment includes factors outside the firm which can
lead to opportunities for or threats to firm (Jauch &
Gluck)
Business environment is the aggregate of all conditions,
events and influences that surround and affect it.
Environment refers to institutions or forces that affect
the organizations performance.
An organization is a product of environment and exists in
environment.
The environment is dynamic with full of uncertainty,
complexity.
All the activities of business are affected by
environment.
Environment consists all external forces which affects
the development, performance and outcome of and
organization.

Nature of business environment
1. complex:- business environment is complex due to
unpredictability. It is the combination of number of
factors, events and conditions. All factors interact with
each other to create new influences.
2. Dynamic:- it is continuously changing. Certain forces are
changing faster than other components of environment.
3. Multi-faceted:- shape and character of the environment
depends on the perception of observers. A particular
change in environment can be opportunity for one
organization and threats for other organization.
4. Far reaching impact:- it creates long-term impact. Growth
and profitability of the organization depends on the
environment
Over view of components of external environment
External factors:- located outside the organization and
beyond the control of organization. it consists:
A. Political: government stability, taxation policy, foreign
trade regulation, social welfare policy.
B. Economic: business cycle, GNP trends, interest rate,
money supply, inflation, unemployment, income.
C. Socio-cultural: demographics, lifestyle, attitudes to work
and leisure, consumerism, education.
D. Technological: government spending on research, pace of
technological change, rate of obsolescence, technology
transfer.
E. Environmental: environment protection laws, waste and
disposal, energy consumption.
F. Legal: monopoly legislation, employment laws, health
and safety, product safety.
Process of environmental analysis
Environment analysis is a process of acquiring information about
environmental uncertainty, complexity and dynamism. It monitors
and interprets current changes and future developments which will
create potential impact on organization. It is done to identify
opportunities, threats, strategic position of a business organization
and to formulate strategies. It consists following steps:
1. Identify relevant forces in the environment: external forces
(political-legal, economic, socio-cultural, technological) and internal
forces (technology, HR, financial, information, competencies)
2. Determine the sources of information: spying and supervision -
personal experience of employee and managers studies by
experts, researcher and consultants meetings, conferences,
committees newspapers, journals, reports, books banks,
competitors, suppliers, customers trade and industry publication
files, database, documents
3. Select analysis methods: scenarios building (generating forecasts of
different future conditions when environment has high level of
uncertainty), survey (gathering opinions of expert, customers and
others), delphi technique (pooling of expert opinions in different
stages), model building (mathematical and econometric models of
environment), intuitive reasoning (rational intuition by scanner on
the basis of past experience), extrapolation (past information used to
explore future).
4. Scan and respond data: the collected data is studied, analyzed and
interpreted. Important developments and signals of environment are
pinpointed to access their impact on organization. They can be:
Events: specific occurrence of events taking place in environment.
Trends: direction and sequence of events and their tendency.
Issues: current concerns arising from events and trends.
Expectations: stakeholders demand arising from issues.
Identify relevant
Forces in
environment
Determine
Sources of
observation
Select
analysis
methods

Scan and
Respond
To data

Environment (PESTEL) analysis
PESTEL analysis is related with analysis of forces of external
environment. It helps to identify future opportunities and
threats to the organization. It helps to know which forces
are affecting the organization and which of them are most
important. The impact of environmental forces differs
according to the nature of the specific organization.
1. Political and legal environment:
a) Political system: political parties, election procedure,
stability, strength of opposition parties, etc.
b) Political institutions: legislature (parliament), executive
(government), Judiciary (court of law).
c) Political philosophy
d) Laws: rights of consumer, organizations, employees
provisions relating to licensing, employment, monopoly
foreign investment, foreign exchange, environment
protection, industrial location, import, export, pricing,
taxation.

2. Economic environment: all economic surroundings which influence
organization.
a) Economic systems: determines scope of private sector participation
and market forces.
I) Free market economy: based on private sector ownership in
factors of production. Profit is the driver of economic engine.
Price is determined by market.
II) Centrally planned economy: based on public ownership on factors
of production. Economy is planned, controlled and regulated by
government. Public enterprises play dominant role. No consumer
sovereignty.
III) Mixed economy: mix of free market and centrally planned
economies. Both private and public sectors exist. Basis industries
are owned by public sector.
b) Economic policies: economic guide lines of the government.
I) Monetary policy: money supply, inflation rate, interest rated,
credit availability.
II) Fiscal policy: government income (taxation) and expenditure
policies, government purchase, subsidies.
III) Industrial policy: licensing, location, incentives, facilities, foreign
investment, technology transfer, nationalization.
c) Economic conditions: health of the economy in which organization
operate.
I) Stage of economic development: least developed, developing and
developed.
II) Income: level and distribution of income affect consumption,
saving and investment.
III) Employment: level of employment determines income and
availability of labor.
IV) Business cycle: prosperity, recession, depression, recovery.
V) Inflation: rise in price level influences cost, price and profit of
organization.
d) Regional economic groups: promote cooperation and free trade
among members of group by removing tariff and other barrier.
Economic group provides opportunities for member countries
and threats for non-member countries.
3. socio-cultural environment: organization exists in society. It receives
inputs from society and provides output to the society. This
environment is related with human relationship factors which
consists:
a) Demographics: size, distribution and growth of population, age mix,
urbanization, migration.
b) Social institutions: family, reference groups (sports, music,
cinema, personalities), social class (upper, middle, lower).
c) Pressure groups: consumerism, environment protection, human
right, women right, good governance, child labor, etc.
d) Social change and mobility: modification in relation ship and
behavior patterns, life style changes, change in social value such
as entering of women in job market, increasing concern in quality
of work life issue.
e) Cultural factors: customs, traditions, norms, values, beliefs,
religion, language, etc. can influence consumption pattern,
attitude towards work, value and belief.
4. Technological environment: it consists skills, methods, systems and
equipment. Innovations depend on technology. It makes work
more efficient. Technology brings changes in jobs, skills, life style,
products, production methods and process.
a) Level of technology: capital or labor intensive.


b) Pace of technological change: it is dynamic force. Pace of
technological change determines innovation and diffusion.
Skills of HR should be upgraded to cope with the demand of
technological changes.
c) Technology transfer: used to import technology from
technologically advance countries through globalization,
projects, trade, technical assistance, training, publication.
Technology transfer help to increase efficiency and reduce
cost, new product development and product innovation,
improve production system and process, better satisfaction
of customer needs,
d) Research and development budget: R&D budget allocated by
government and private sector is an important aspect of
technological environment. R&D is the essence of
innovation. Customers expect new product of superior
quality which are safe, comfortable and environment-
friendly. This demands research and development budget
by organization.
5. Environmental
6. Legal
SWOT analysis
The term SWOT is used to describe strength, weakness,
opportunity, and threat that are strategic factors for a
company.
It combines strategic advantage profile (SAP) and environment
threats and opportunity profile (ETOP).
It compares key external opportunities and threats with
internal capabilities and weaknesses.
It is a systematic identification of internal strengths and
weaknesses and environmental opportunities and threats to
formulate the strategies and to achieve best match between
them.
The objective of SWOT analysis is to provide a framework to
reflect organizational capabilities to avail opportunities or to
overcome threats presented by the environment.
Strength (S): basic capabilities of the organization in which it can
be used to gain competitive advantages. It is a distinct
competence of an organization which gives competitive
advantages. Examples:

Well developed strategies, strong financial condition, human resource
competencies, strong brand name/image/reputation, strong
advertisement, broad market coverage.
Weaknesses (W): limitation or constraints of the organization which
creates competitive disadvantage. It is the deficiency in resources,
skills, capabilities and knowledge which negatively affect the
performance of organization. Examples:
weak marketing plan, no clear strategic direction, weak financial
position, inadequate HR, obsolete technology, rising cost.
opportunities (O): favorable conditions in the external environment
which enables strength in its position. It provides competitive
advantages to the firm exploiting organizations strength in relation to
its competitors. Examples:
expanding new market/segment, diversify the business, acquisition of
rivals, alliance or joint venture, exploit new technology.
Threats (T): unfavorable conditions in external environment which cause
risk and damage. examples:
growing power of customer and supplier, keen competition, change in
customer taste, rise of substitute, increase in industry rivalry, rising
labor cost.

The threats-opportunities-weaknesses-strengths (TOWS)
matrix
TOWS matrix in an important matching tool that helps to develop
four types of strategies: SO, WO, ST, and WT.
Internal factors

External factors
Strengths (S)
List 5-10 internal
strengths
Weaknesses (W)
List 5-10 weaknesses
Opportunities (O)
List 5-10 external
opportunities
SO strategies
Generate strategies
that use strengths to
avoid threats
WO strategies
Generate strategies that
take opportunities by
overcoming weaknesses
Threats (T)
List 5-10 external
threats
ST strategies
Generate strategies
that use strengths to
avoid threats
WT strategies
Generate strategies that
minimize weakness and
avoid threats
SO strategies used to take advantages of external opportunities
by using internal strengths. This is most favorable situation. The
firm has several environmental opportunities and numerous
strengths. In this situation firms follow growth oriented and
aggressive strategies to exploit the numerous opportunities.
WO strategies aims to take advantages of external environment
by improving internal weaknesses. In this situation the firm faces
impressive market opportunities but constrained by several
internal weaknesses. The firm has to focus on such strategies
which help to eliminate weaknesses to pursue opportunities.
ST strategies used to avoid or reduce the impact of external
threats by using strengths. In this situation firm has key strengths
but face unfavorable environment. Current strengths should be
used to build long-term opportunities. Firm should diversify the
business.
WT strategies are defensive tactics directed at reducing internal
weakness and avoiding external threats. It is the least favorable
condition in which firm faces threats and weaknesses which calls
to reduce market expansion and use defensive strategies or
withdraw the business to secure another opportunities.
SBU model
Strategic Business Units or SBUs have been defined as
autonomous divisions or organizational units, small enough to be
flexible and large enough to exercise control over most of the
factors affecting their long-term performance.
They focus on product offering and market segmenthaving clear
marketing plan, campaign and analysis.
They have autonomous mission and objective.
They inspire the owning empire to respond quickly to changing
economic situations.
What is an SBU?
As a company grows, it gradually adds new products (covers
services also) to its basket of business.
To start with, the new products are variants or derivatives of the
original products, like an automobile company launching new
models of cars.
Later on, even products of different segment or industry are
added, e.g. a heavy engineering company going for software
business, etc.

However, as the business grows, the management becomes
complex and tough.
New business divisions are created to ensure better operational
efficiency.
In the earlier days, the business efficiency of an individual division
was measured by the amount of turnover achieved by it.
It was a top line approach.
Profit-making companies were trying to add more and more
products to their basket of business without giving much thought
to the margin from each such new addition.
However, with fierce competition after liberalisation and
globalisation of economy coupled with limited resources for
expansion, the profit from operation took the center stage.
Consequently, turnover concept-based business division was
transferred into an SBU (strategic business unit), which is a profit
centre focusing comprehensibly on product offering, market
creation as well as profit from operation.
Efficiency of an SBU is measured on profitability rather than
turnover alone.



Characteristics of Strategic Business Units (SBUs)
It is a single business or collection of related businesses
It has its own competitors
It has a manager who is accountable for its operation
It is an area that can be independently planned for within the
organization
A strategic business unit (SBU) is a profit centre which focuses on
product offering and market segment.
SBUs typically have a discrete marketing plan, analysis of
competition, and marketing campaign, even though they may be
part of a larger business entity
An SBU may be a business unit within a larger corporation, or it
may be a business unto itself or a branch. Corporations may be
composed of multiple SBUs, each of which is responsible for its
own profitability.
SBUs are able to affect most factors which influence their
performance. Managed as separate businesses, they are
responsible to a parent corporation.


Boston Consulting Group (BCG) Matrix
It uses relationship between market share and market
growth.
Market share is the share in relation to the largest
competitor.
Companies that are large enough to be organized into
strategic business units face the challenge of allocating
resources among those units.
In the early 1970's the Boston Consulting Group developed
a model for managing a portfolio of different business units
(or major product lines).
The BCG growth-share matrix displays the various business
units on a graph of the market growth rate vs. market share
relative to competitors.
The vertical axis shows market growth rate (percentage
growth rate in sales) and horizontal axis shows market
share (ratio of share compared with largest competitor).


BCG Growth-Share Matrix
Resources are allocated to business units according to where they are
situated on the grid as follows:
Cash Cow - a business unit that has a large market share in a
mature, slow growing industry. Cash cows require little
investment and generate cash that can be used to invest in other
business units. It is a high share and low growth quadrant which
should be the sources of substantial amount of cash that can be
channeled to other business areas. low growth, high market
share, high cash generation are the features.
Star - a business unit that has a large market share in a fast
growing industry. Stars may generate cash, but because the
market is growing rapidly they require investment to maintain
their lead. If successful, a star will become a cash cow when its
industry matures. It is high share and high growth quadrant
which is important to current business and should receive
resources if needed. Rapid growth which needs mare amount of
cash to maintain position. When market growth rate slows, stars
become cash cows.

Dog - a business unit that has a small market share in a mature
industry. A dog may not require substantial cash, but it ties up capital
that could better be deployed elsewhere. Unless a dog has some
other strategic purpose, it should be liquidated if there is little
prospect for it to gain market share. It is low growth and low market
share quadrant which needs cash to survive. It is the declining stage
of product and there is no more future prospective. Low competitive
position, high costs, low quality, less effective marketing are the
features. If there is no attractiveness for long term point of view then
divestment or liquidation strategies can be used
Question Mark (or Problem Child) - a business unit that has a small
market share in a high growth market. These business units require
resources to grow market share, but whether they will succeed and
become stars is unknown. It is low share and high growth quadrant
which needs heavy cash needs before they can convert into stars and
cash cows. It generates low cash. Question mark can be developed,
whether they reach on stars or dogs. Great care should be given to
develop strategies (drop or build strategies).

Limitations: BCG growth matrix is a well-known concept. It is
very quantifiable, easy and simple to use. It indicates the
area of strategic search for and organization. It has some
serious limitations:
Market share and market growth are not the sole
determinants of profitability. Product life cycle, strategic
fit, competitive advantages are another dimensions not
considered by this tool.
It is suitable for large multi-product companies only.
Business cannot be classified in high and low dichotomy.
Some companies with low market share can generate
superior profitability and cash flows with careful
strategies based on differentiation, innovation or market
segmentation.
General electric matrix (GE matrix)
GE nine cell matrix is developed to overcome the limitations of
BCG matrix.
The concept was created by General Electric planners and the
counseling firm McKinney & company USA.
Tow dimensions i.e. market attractiveness and competitive
position are used for strategic choice.
Market attractiveness refers all the strengths and resources
relating to market such as competitive intensity, customer
satisfaction, market size and growth, cyclicality, barrier to entry,
technology, workforce availability, inflation, industry profitability,
regulation, political-legal-social environmental issues, etc.
Competitive position is a composite of several factors such as
market share, marketing and sales force, R&D, manufacturing,
distribution, financial resources, quality of product and services,
customer loyalty, etc.
In this business screen both factors are divided into high, medium
and low.
;;
GE nine cell grid suggests three basic strategic approaches
depending on its location within the grid: a) invest to grow b) invest
selectively and manage for earning c) harvest or divest for
resources.
The resource allocation decisions remains similar as BCG matrix.

Invest
1
Selective
growth 2
Grow or
let go 3
Selective
growth 4
Grow or
let go 5
Harvest
6
Grow or let
go 7
Harvest
8
Divest
9
Competitive position
M
a
r
k
e
t

a
t
t
r
a
c
t
i
v
e
n
e
s
s

High
medium
Low
High
medium Low
The nine cell matrix is divided into three zones.
The three cells of upper left corner indicate strong SBUs in which
the company should invest or grow.
The diagonal three cells from lower left to upper right indicate
SBUs that are medium in overall attractiveness. In these SBUs the
company should pursue selectivity and manage earning.
The three cells of the lower right corner indicate SBUs that are low
in overall attractiveness. The company should give serious thought
to harvesting/diverting these companies.
First condition
Both strengths and opportunities are high
Opportunities are high and strengths are medium
Opportunities are medium and strengths are high
Features
Represents green colors i.e. go ahead.
Strong and successful business
Needs more investment or grow business which is named
successful.
This is the stage of developing business. So protect the business,
invest to build and growth strategies are needed.
Second condition
Both opportunities and strengths are medium.
Strengths are high but opportunities are weak.
Strengths are weak but opportunities are high.
Features
Represents diagonal cells of lower left to upper right.
Average successful business.
Needs huge capital to invest to reach strong position.
This is the position of yellow color i.e. wait and see.
Protect and refocus, selective/manage for earning, build selectively
are the strategies can be used.
Third condition
Strengths and opportunities both are in weak position.
Strengths are medium and opportunities are weak.
Strengths are weak and opportunities are medium.
Features
Less attractive business, Stage of danger of declining, Needs rational
decision whether to start or liquidate, Represents red color i.e. stop.