The Effectiveness of SWOT, PEST and Five Forces Analysis to Improve Business Strategy
The Effectiveness of SWOT, PEST and Five Forces Analysis to Improve Business Strategy
Businesses use a variety of measures to consider their effectiveness in and relationship to the market. These provide an avenue for determining what is working, what needs improved on, and what threatens a business’s longevity from both inside and outside forces (Hass et al., 2008). Three of the most commonly used approaches are the SWOT analysis, the PESTLE analysis, and consideration of Porter’s Five Forces. Each if these models focuses on a different element, or set of elements which are considered crucial to the company’s success, and from which dynamic , p.20) decisions can be made about how to move the business forward within the market. While the models are, in some ways similar, they come at the problem of business success from different vantage points.
What should be more seriously determined, however, is the degree to which each of these measure is effective at improving a business’s performance or generating a meaningful analysis of the business environment. More specifically, it is interesting to consider the ways in which these frameworks can be useful in examining, and implementing, change in different areas of the business. In doing so, it can be made clear how each model can be incorporated into the process of building corporate strategy, and developing a fact-based approach to making decisions within the business environment (Jarzabkowski & Giulietti, 2007, p.1). In this essay, I will discuss the key features of the SWOT Analysis, the PESTLE analysis and Porter’s Five Forces, and the way that they are useful in altering or structuring a business’s expansion strategy, and business’s marketing approach.
The SWOT analysis stands for Strength, Weakness, Opportunity and Threats. Strengths and refer to assets, or areas of weakness inside the company (Bohn, 2009. P.1 ). It is a significant tool to use in the business environment when creating a strategy for improving the business, and making decisions about future policy. A clear analysis of strength and opportunities, for example, are both essential to developing a strategic plan for business expansion, as it allows the business’s decision makers to determine what their unique and leveragable features are, and what opportunities have yet to be explored but hold true potential as a next step. It is similarly useful for exploring new markets, or targeting the correct market, based on a company’s unexplored, but most viable, opportunities.
Somewhat similarly, the PESTLE analysis stands for Politics, Environment sociological, technological, legal and environmental. It is designed to contextualize a business’s operations, and affective factors. As such, it is solely concerned with the macro environment, unlike the SWOT which considers the micro and macro environments jointly. However, in doing so the PESTLE can be extremely useful in analyzing how a business is likely to do both in its current position and in the future, based on the impact of various factors. In terms of marketing, this is essential, because it allows a business to analyze how their marketing fits with the larger macroenvironment that the business is operating in, and adhere to the legal and social demands of the market that is being approached. It is further recommended that PESTLE may be made more effective when specifically paired with Porters Five Forces, by allowing PESTLE to identify the significant factors and then analyzing their affect via Porter’s framework (Partridge & Hunt, 2005, p. 76).
This logically brings us to Porter’s Five Forces, which is concerned solely with the microenvironment (Porter, 2008, p.5). The five forces under consideration within the framework include Bargaining Power of Suppliers, Threat of New Entrants, Threat of Substitutes, Bargaining Power of Buyers, and Industry Rivals. What is interesting, and separates Porters framework from the others pictured here is that it represents and active and cyclical pattern between macro factors, rather than simply organizing items in a list (Porter, 2008. p.5). As previously mentioned, it can be powerfully used when paired with the PESTLE analysis, within the business environment. When considering marketing approach, for example, the PESTLE can be used to determine the best approach to the target market, based on social factors, but then Porter’s Five Forces can be used to determine how to execute that marketing approach based on supply chain, specifically as it relates to the power of suppliers within the marketing approach and supply chain, and with a relevance to industry rivals. This allows the business to ensure that their marketing approach is competitive and well executed.
Business Expansion Strategy
It is essential for a business to develop in a strategic way. A large part of that is knowing when, how, and into what markets to launch a business’s expansion. There are a variety of factors which need to be seriously considered when electing to expand business, whether it be entering into a new market, or expanding within an existing market. Entry strategy, global integration, selection of partnerships, supply chains, existing resources, strengths which can be leveraged, weaknesses that insinuate vulnerability and a variety of other factors all play their own unique part in determining how, and when, a business should move to expand (Luo, 1999 p.202). As such, it is significant that a business analyze both themselves, and the surrounding market before making expansion decisions. SWOT and PESTLE are both very significant to planning a business’s expansion.
The SWOT analysis offers an evaluation of four key factors in any business: strength, weaknesses, opportunities, and threats. The opportunities section of this analysis is especially useful when determining a direction for business expansion. Both opportunities and threats are useful in defining the competitive environment (Harvard Business School 2005, p.9). For example a construction company, studied by Gunhan and Arditi (2005, p. 928) had the opportunity to engage in foreign contracting and expand to the international market. However, they realized that in order to successfully expand abroad they needed to engage with a “well-informed” strategy. As such, they used a SWOT analysis to consider the company’s strengths as they relate to international markets, and to consider the threats and opportunities specific to working overseas. The construction workers for the company, for example, already had experience working in a variety of climate settings, because they had worked in various regions in the United States, ranging from arid desert conditions, to inner city work, and even working in the Alaskan tundra. This versatility and experience serves as a significant strength for the company when expanding to the international market. It is also useful in identifying what international companies are already operating in the area that is being expanded into, which could pose a threat. For example, if there is a small local company already fulfilling the same niche in construction and architectural development, it could be hard to enter into that particular international market. However, it can similarly identify nations which have no current provider of the possible contraction services, so there is opportunity to fill a void, and meet currently unaddressed construction needs.
However, it should be remembered that PESTEL analysis is especially significant when planning expansion, especially international expansion because the political, cultural and legal factors that impact business success may be very different in the market that the business is expanding into than it was in their market of origination (Carpenter & Dunung, 2016). Further considering the example above, it is likely that the legal process for obtaining a construction permit in Dubai is different than the process for getting the same permit in New York. Also, the insurance demands, licensing and bonding requirements and other legal factors very significantly from international market to international market. As such, a PESTLE analysis that explores these political and legal issues as they relate to expansion can expose key factors in the expansion, and allow the company to adequately prepare for them, and strategically approach management of these issues.
Market Approach
Another very significant area of business management or business strategy is in selecting and marketing to a target audience, or engaging in target marketing. SWOT and PESTLE are also extremely significant when planning a market campaign. Their unique features allow the business to target a market who is actively seeking a product like the one offered, and help the business to approach that target market in a meaningful way that will improve ROI and sales.
ROI, or return on investment, is essential to marketing, because marketing comes at great cost, as such, every marketing campaign should be launched with profitability, or the company’s ability to ensure return on investment, at its focus. Porter’s Five Forces is extremely meaningful when meeting this end, because it considers the most important elements of the supply chain, and the degree to which they have bargaining power. For example, when launching a pay-per-click advertising campaign online, it is essential that the bargaining power of the advertising supplier, or the cost per click, be weighed against the number of people who are likely to make a purchase as the result of that campaign. The cost per click must be low enough that the return on investment remains positive (Gangeshwer, 2013, p.189). This is fully dependent on the relationship between the supplier and the company. However, this needs support from a strong analysis of other factors, as given by SWOT and PESTLE in order to ensure that the campaign is capable of generating a steady flow of traffic, with a high conversion rate (Gangeshwer, 2013, p.187).
The use of strengths and opportunities, within the SWOT analysis, allows the business to determine how best to leverage strengths and to identify the best target market when planning a marketing campaign. Also, the use of threats allows the business to consider how the competition is approach the target market so that the target market can be approached in a better or more strategic way (Kurtz, 2010, p.13). This allows the business to increase market shares over existing threats, and to block the entrance of new threats. For example, when the Sri Lanka tourism industry struggled to rebuild after the 2004 Tsunami, the SWOT analysis was used to determine the best promotional strategy for increasing tourism in the area (Wickramasinghe & Takano, 2010 p. 954). The tourist resort in question leveraged their strengths, including beautiful beaches and luxurious condos in an exotic location, in order to create a new marketing campaign to draw attention to the location as an attractive vacation destination. However, they had to do so in a way that was mindful of their weakness as a tsunami devastated area. Their marketing needed to show that they were fully operational and that the tsunami was no longer a factor that tourists needed to be worried about (Wickramasinghe & Takano, 2010, p.954).
In contrast, PESTLE can be used to design a marketing approach, in that all the factors included should be used specifically when designing a marking campaign to maximize its effect and the resulting profitability. This is especially true of the social and legal elements of the PESTLE analysis. For example, in the United Sates, there are strict laws about the way that tobacco products are advertised (Saffer & Chaloupka, 2000, p.1117). For example, they cannot be advertised using cartoon animals or other images that are knowingly attractive to young children. This is an issue which would have been exposed by a PESTLE analysis of the marketing campaign and dealt with. Similarly, the way in which products for women are advertised in the United States and the way in which it is advertised in Dubai are very different. In America, products for ladies are sold via sexual or sensual images, through models. If Victoria Secret, for example, wanted to market specifically to Muslim women, they should consider the sociocultural implications of that marketing campaign and launch a more modest campaign in keeping with the sociocultural beliefs of the target group (Deng, Jivan, & Hassan, 1994, p. 153).
Human Resources
A third and final element of strategic planning that can be managed using these frameworks is the determination of policy and action as it relates to Human Resources. It is imperative that management consider manpower as a resource that should be protected, just like capital and other physical or financial resources (Bohlander & Snell, 2010). As such, a strategic plan must be put into place, which ensures that it is both analyzed within the business environment, and leveraged in a meaningful way. One way in which this can be effectively managed is by using forecasting techniques and analysis to determine the best HR strategy for the company. HR is very closely tied to business success, and poor HR will certainly lead a business to ruin (Condrey, 2010). As such, both SWOT and PESTLE can be useful tools for establishing a company’s macro and micro environment as it relates to HR.
Using SWOT to analyze whether manpower is a strength or a weakness, to measure moral, and to consider loyalty is extremely useful. More specifically, a study by Soliman, and Spooner (2000) determined that “intellectual assets and resources can be utilized more efficiently and effectively” if an organization actively manages the human resources which pose a strength, as a means of enhancing personnel management. For example, Apple Inc. is known for recruiting unique talent and working to recruit employees with a high level of diversity, in order to gain a more varied teams with a wide range of talents (Lev-Ram, 2014, p.1). This diversity has proven a major strength for the company, which could be revealed, and leveraged through a SWOT analysis. Similarly, a company which has handed down layoffs is likely to have very low employee moral, and weakened loyalty and support from remaining employees as a result, which is a significant weakness (Villano, 2007, p.1). As such, the SWOT analysis can identify this weakness and a strategy can be developed to manage the weakness and improve moral.
Similarly, PEST of the Pestle analysis can be closely tied to HR matters and ensuring that legal, political, social, and economic issues are addressed in a meaningful way (Gilani, Zadeh, & Saderi, 2012, p. 227). For example, one of the factors studied by Gilani, Zadeh, and Saderi, (2012, p.230) was the degree to which the business appeals to the social needs, or conforms to the expectations of, the youth population. By examining the company’s ability to appeal to the social needs of this group via PESTLE, the company increases its ability to recruit from a young, newly graduated talent pool. This recruiting system must also pay heed to the salary and wage set by the government, from a legal perspective, and salary, wage and benefit expectations established by social business norms. Similarly, recruitment practices, and hiring methods must adhere to legal standards (p.230). For example, in the United States, hiring practices are strictly required to follow the Equal Opportunity guidelines, offering those with disabilities or cultural differences the same opportunities as the social majority. In essence, each of these factors externally effect the way that employees feel about their relationship with a business, and so should be carefully considered in constructing a strategy for managing employees. As employee satisfaction rises, so does employee performance, and so managing human resources well can significantly increase profitability and long term success for any business.
Conclusion
SWOT, PESTLE and Porter’s Five Forces are all useful in determining how best to create strategy within the business environment because they allow specific features of the business and its situation to be identified, and their effect to be measured and adjusted. As has been demonstrated by the given examples, SWOT Analysis, the PESTLE analysis and Porter’s Five Forces, and the way that they are useful in altering or structuring a business’s expansion strategy and business’s marketing approach
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