How to use strategic analysis to analyse market potential
Before making strategic decisions on future opportunities conduct thorough analysis, argues Daniel Callaghan
Strategic analysis is the process by which you take a high level view of the market around you and decide where within the landscape your organisation sits and is best placed to succeed.
Without conducting the appropriate strategic analysis, it is highly likely that the direction in which you turn your business will lead you down an unrewarding path.
There are some key components to conducting strategic analysis and gaining insights into how you can plan for the future.
Conducting external analysis
When conducting strategic analysis it is important to look at six market factors through which you will identify whether this is an attractive industry in which to operate. The six factors and the type of questions you need to ask of your company are:
- Supplier power – Do the people who give my company the components for my industry or service have all the power? Can they raise their prices or stop serving us at will?
- Buyer power – Does the client have all the power? Can they stop using us at will?
- Threats of substitutes – Are there lots of alternatives for the people to use? Can we easily be replaced?
- Complementors – Will my business have to survive on direct industry sales ? If another industry grows will this help to lift our sales?
- Barriers to entry – Can anyone enter this industry or do they need to spend lots of money to do so? Do government regulations make it hard for others to enter?
- Competitors – Are there lots of competitors in the market already? Are they strong or weak?
If you answer all of these questions and the answers are favorable with low supplier power, low buyer power, low threats of substitutes, numerous complementors, high barriers to entry and low competitors then this is certainly a market you want to continue in. If not, then more caution and further analysis into the specific points of danger must be conducted.
Conducting internal analysis
Once you have looked at the market, you must now look to your business and determine how best to conduct and position yourself. This can be done using a simple SWOT (strengths, weaknesses, opportunities, threats) analysis. This framework breaks down your business profile into four categories:
- Strengths – What you are good at
- Weaknesses – What you are bad at
- Opportunities – Where you can grow both within the market and as an organisation
- Threats – Where you have to defend your position or will be later exposed.
The purpose of strategic analysis is then to examine these four areas and work out a plan that would play to your strengths and focus on the opportunities whilst helping to fend off threats and making your weaknesses redundant or helping to build competences so that they are no longer as weak.
Strategic postures and timelines
After your strategic analysis you need to consider your strategy development. This involves taking your findings from the previous phases and identifying the timeframes in which they should be acted upon. An opportunity may be apparent today, but will not be market ready for another three years and as a result is less profitable than one in play today.
At this stage, place each of the opportunities within your strategic timeline of short term (one to two years), medium term (three to five years) and long term (five years plus).
Based on these options you may wish to choose a different ‘strategic posture’ for each one. These can vary from ‘making a big bet’ – i.e spending a lot of money on an acquisition, or it could be ‘shaping’ where you look to define a category and the service levels within it, which is a common move among new market entrants or it could be a ‘no regrets’ posture which would see you stick with the status quo.
This will help with the allocation of resources that need to be dedicated to each set of activity. These should roughly be as follows:
- Short term – 60% of current resources
- Mid term – 30% of current resources
- Long term – 10% of current resources.
This type of allocation will not draw too much away from your existing activities but will also help you prepare for the future when the distant opportunities finally become mature.
So in summary, the first phase of a strategic analysis is to conduct an external market analysis and look at the six industry factors in which you operate. Then you must look internally at your organisation and identify how using your existing assets you could best operate. Finally based on this you must rank your opportunities on attractiveness and an appropriate timeline providing you with the information required to decide on your course of action and allocate your resources as you see fit.
Daniel Callaghan is the founder of MBA & Company, an online marketplace which enables companies to hire MBA-level talent on a freelance basis. We have partnered with MBA & Company to offer Growing Business readers a 15% discount on your first project. For more information, visit the MBA & Company website.