Uses and Limitations of Strategy Tools
31.03.12
In the first technical article published on our new website we will consider the uses and abuses/limitations of four popular tools used in strategic planning. The two positioning tools SWOT and Gap Analysis and the two environmental tools PEST and Porter's Five Forces. They are all useful and valid tools but when misused they can be very dangerous and can give a very misleading picture.
In order to be able to develop a rational and workable strategy/strategies you first need to develop a clear understanding of the business that you're in. In developing this understanding you may actually find that you're not in just one business but in many, each requiring a different strategy of set of strategies. When you look into the matter still further you may find that some of these businesses are at best marginal and add very little to the whole and could and should be divested.
Let's begin with SWOT analysis, an easy to use and familiar positioning tool. It creats a powerful visualisation of the business' position, putting factors into categories and is evaluative (Strengths and Opportunities are positve, Weaknesses and Threats are negative) When used in isolation however, SWOT analysis can be somewhat superficial, often biased and potentially dangerously incomplete if carried out by an untrained person. As a tool SWOT does not rank the factors it identifies and it also does not extract the implications of the factors which have been identified. For SWOT to be effective the factors need to be ranked and the implications identified and addressed. e.g What are the main patterns or themes identified in the SWOT. Is the business out of balance, is it slow to respond has it lost it competitiveness. Do some of the threats affect areas of weakness in the business thus increasing its vullnerability. Are there specific opportunities arrising in areas where the business is particularly strong, suggesting that offensive strategies could be employed to good effect.
Gap Analysis is another powerful positioning tool. It identifies the difference between where the business wants to be and where it is likely to be given the current strategies. It is a powerful way of framing the degree of stretch which the business wants to set itself and is essential before carrying out any strategic option evaluation. In Gap Analysis it is important that the stretch is not too great. IN setting strategic objectives they shoudl be SMART - Specific, Measureable, Achievable, Relevant and TIme-Bound. All too often senior management set too great a stretch on the objectives without giving the operational teams enough support and training to enable them to devise appropriate strategies to achieve the objectives thus rendering them un-achievable. Using gap analysis without setting SMART objectives leads to the perpetuation of underachievment.
As well as knowing where the business is now and where it wants to get to it's important to undestand the external influences on the business since the external environment can have a significant affect on the business.PEST analysis is helpful in analysing these external influences or changes,. P stands for Political (and regulatory) influences or changes, E stands for Economic, S for Social (and demographic) and T for Technological. PEST analysis needs to be kept under frequent review as not all the factors have an obvious influence. The Political and Economic influences of a sovereign debt crisis are fairly obvious but some factors are less noticeable, trends that may be weak now but gradually build up over time and gather momentum.
Porters Five Forces analysis examines the five basic forces at work in the immediate market that your business is in as they can have a huge influence on profitability. These five forces are buyer power, entry barriers,competitive barriers, substitutes and supplier power. Understandinf how these forces work can lead to developing competitive advantage.
Whilst each of the above tools are important and valid tools in thei rown right, when developing strategy its when they are used together that they provide the greatest benefit. When due care is exercised in the application of each tool and they are used as a set the results can be dramatic.