Situational analysis: how to perform this crucial business research step
As a small business owner, you’re no stranger to the ebb and flow of the marketplace. The nature of business is ever-changing, and it can be tempting to make quick decisions in order to keep up with the competition. However, successful businesses don't just rely on gut feelings — they take their time, carefully assessing the big picture and making a plan before changing direction. This is where situation analysis comes into play.
In this article, we’ll take a look at what situational analysis is, why it’s important, and what you need to do to conduct one.
What is a situational analysis?
A situational analysis is a methodical, investigative process used to understand the internal and external elements influencing a company's performance. Basically, a situational analysis evaluates several factors in order to identify a business’s strengths and weaknesses, as well as areas of growth.
It can help you uncover important details about your business and the overall marketplace, including:
Customer motivation and satisfaction
Your ability to capitalize on market trends
Your standing in relation to your competitors
Strategies to implement to overcome obstacles
You should always conduct a situation analysis before coming up with any concrete plan or shifting the direction of your business. But we also recommend conducting one on a regular basis, such as quarterly. And while you’re at it, you might as well add “situational analysis” to your end-of-year checklist, too — it’ll help you keep your finger on the pulse of the marketplace and empower you to make informed decisions throughout the year.
Why is situational analysis important?
Situational analysis is important because it provides a comprehensive snapshot of the current conditions and dynamics that affect your business at any given time. It empowers you to make decisions with a full understanding of internal capabilities and external environments, giving you a true “big picture” of your business and its market.
Situational analysis helps with risk management, strategic positioning, resource allocation, trend analysis, and opportunity identification. It empowers you to make informed decisions that directly impact your bottom line.
5 ways to complete a situational analysis
You can think of situation analysis as an umbrella term for other activities that need to be done in order to understand your business and its competition. Basically, situational analysis is a phase of strategic planning, and you might use several analytical tools during that phase.
So, what are those tools?
1. SWOT analysis
When it comes to situational analysis, SWOT is where most people start. It’s a great foundational process that allows you to take stock of your company’s strengths, weaknesses, opportunities, and threats. Once you’ve performed your SWOT situational analysis, you’ll get a comprehensive look at your company’s overall health.
Breaking down SWOT:
Strengths: Internal positive attributes that give your business an edge
Weaknesses: Internal limitations that need addressing
Opportunities: External chances for growth and improvement
Threats: External factors that could pose challenges
Tips to conduct a SWOT analysis:
List your company's core competencies and advantages.
Identify areas where your company has fewer resources or capabilities, and keep an eye out for ways to automate time-consuming tasks (like preaccounting).
Look for emerging market trends or changes that could be advantageous.
Recognize potential obstacles such as regulatory changes or shifts in consumer behavior.
2. 5Cs analysis
The 5Cs analysis is similar to the SWOT analysis — but instead of evaluating the overall health of your business, the 5Cs create a framework for marketing and understanding your customer base.
What are the 5Cs?
Company: Your company's mission, vision, product quality, and unique selling points (Conducting a SWOT analysis first provides a good foundation for this C.)
Customers: Who they are, what they need, and how they behave
Competitors: Direct and indirect competitors and their market positions
Collaborators: Suppliers, distributors, and partners who contribute to your business
Climate: The macro-environmental factors affecting your business
Tips to conduct a 5Cs analysis:
Review your company’s internal resources and capabilities.
Gather customer feedback through surveys, social polls, or focus groups.
Analyze competitors’ strategies and market presence.
Evaluate current partnerships and supply chain effectiveness, and explore other partnerships and integrations if you find room for improvement.
Examine the broader market trends and economic conditions.
3. PESTEL analysis
A PESTEL analysis is all about understanding the environment in which your business operates. It examines key factors across several dimensions, offering insights into external influences that could impact your business strategy and decision-making processes.
PESTEL stands for:
Political: Government actions and policies that affect your business
Economic: Economic trends and their impact on consumer behavior
Social: Demographic and cultural aspects influencing your market
Technological: Technological changes and innovations
Environmental: Ecological concerns and regulations
Legal: Relevant laws and legal frameworks
Tips to conduct a PESTEL analysis:
Research political stability and policy changes in your market areas.
Analyze economic indicators like GDP growth and inflation rates.
Study social trends and shifts in consumer lifestyles.
Investigate new technologies and their potential disruptive effects.
Evaluate your company’s environmental impact and sustainability practices.
Review the legal landscape for possible liabilities.
4. Porter’s Five Forces analysis
Porter’s Five Forces analysis helps you understand and inspect your competition to see how you measure up and identify opportunities for improvement.
The Five Forces are:
Competitive rivalry: How intense the competition is in your industry
Supplier power: The influence suppliers have on your business
Buyer power: The impact of buyers’ choices on your operations
Threat of substitution: The possibility of customers finding alternative solutions
Threat of new entry: The ease with which new competitors can enter the market
Tips to conduct Porter’s Five Forces analysis:
Evaluate the level of competition and market saturation.
Consider your dependency on certain suppliers and possible alternatives.
Understand your customers' sensitivity to your pricing strategies and product quality.
Identify potential substitute products or services in your industry.
Assess barriers to entry for new players.
5. VRIO analysis
A VRIO analysis is your go-to tool for identifying your business’s competitive advantages. It helps you determine which of your resources and skills are the most valuable and unique, as well as how they can be used to gain a competitive edge.
VRIO stands for:
Value: Resources or capabilities that provide value to customers
Rarity: Offerings that are not available from competitors
Imitability: How easily competitors can replicate the offerings
Organization: Whether a company is structured to exploit these resources
Tips to conduct a VRIO analysis:
Identify resources and capabilities that differentiate you from competitors.
Consider the scarcity of these resources in the market and their value proposition.
Assess whether these resources can be easily copied or acquired by others.
Evaluate your company's readiness and ability to capitalize on its resources to ensure a competitive edge.
How to complete a situational analysis
We get it — that’s a lot of information to process. Fortunately, situation analyses are methodical processes, and when you break them down, it’s not too difficult to execute. Here’s how you can complete a situational analysis of your own business.
Set the objective of your analysis: Clearly outline what you hope to achieve with the analysis. Whether it's to refine marketing strategies, prepare for potential threats, or identify new market opportunities, clarity of purpose is key. Plus, it’ll help you decide which analysis to perform.
Collect data: Gather data about your company’s internal operations, market conditions, customer demographics, competitor behavior, and anything else that might be relevant to your objective. This data forms the basis of your analysis.
Analyze the data: This is where you get to have some fun. Using one of the methods above, dive deep into the collected data to identify patterns, trends, and anomalies.
Develop strategies: Based on your analysis, develop strategies that leverage strengths, mitigate weaknesses, capitalize on opportunities, and defend against threats.
Implement and monitor: Apply the strategies developed and continuously monitor their impact, adjusting as necessary to maintain alignment with your business objectives.
Another tip? Leveraging tools for financial planning and insights and reporting can streamline this process. Armed with the realtime data that this software provides, situational analysis becomes clearer and, ultimately, a whole lot faster.
Situational analysis is easier with the right tools
You don’t have to go it alone. With Expensify on your side, collecting and analyzing realtime data is easier than ever, so you can complete situational analysis regularly without any fuss.
Ready to make smarter business decisions in record time? Get started with Expensify today.
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