Before entering a new market or deciding to produce a new product, it’s imperative that every business performs a comprehensive internal and external analysis (a.k.a. ‘competitor analysis’). Most business schools use theoretical frameworks of well-known strategists or Harvard professors from the likes of Michael Porter, David Aaker, Francis Aguilar, and so on. However, these tools are useless unless you know what each purpose is and how to use them effectively in order to provide a clear picture of where your company currently stands in the marketplace.
Three of the most used and highly developed marketing analytical tools are the SWOT Analysis, Porter’s Five Forces and the PESTLE Analysis. Before making any quick business decisions, it’s important that you identify your company’s strengths and weaknesses, research the industry you’re in and use these tools as guidelines to help you position your business amongst competitors and ultimately strengthen your brand.
The essence of strategy is choosing what not to do. – Michael Porter
Purpose: to create a list of the company’s internal strengths and weaknesses, as well as its external threats and opportunities to inform strategic planning decisions.
SWOT analysis should help businesses improve on its strengths, eliminate weaknesses, pursue opportunities, and avoid or prepare for threats.
Strengths: Capabilities that enable your company to perform well and must be leveraged properly.
Examples: strong brand identity, customer loyalty, unique products/service, high quality, low cost.
Weaknesses: Characteristics that prevent your company from performing well and must be addressed.
Examples: limited online presence, lack of variety, too niche of market, no brand awareness.
Opportunities: Trends, events, and ideas that your company can capitalize on to succeed.
Examples: expand into niche market, launch online store, expand product line, target new audience.
Threats: Possible trends or events beyond your control that your company must either plan for or decide how to deal with.
Examples: threat of new entrants/competitors, threat of substitute/alternative products/services, new trends or customer habits.
Porter’s Five Forces
Purpose: determine the attractiveness of an industry and provide a starting point for formulating strategy and understanding the competitive landscape in which a company operates.
This model, named after acclaimed business strategist Michael E. Porter, identifies and analyzes 5 competitive forces that shape every industry – while helping to determine an industry’s strengths and weaknesses. When analyzing these 5 forces, determine whether your company has Low, Medium or High risk based on the examples provided.
- Industry Rivalry/Competition: The degree of competition amongst existing firms in the marketplace. Tough competition within an industry and/or high market concentration leads to decreased profit potential for all companies in the same industry.
Examples: increased competition, industry growth, international or local threats, regional or national market concentration, diversity of competitors, product differentiation, switching costs, and brand identity.
- Threat of New Entrants (aka ‘barriers to entry’): The degree to which new competitors/entrants act as a deterrent to existing companies in the industry.
Examples: government policy/regulation, capital requirements, proprietary products, cost advantages, access to inputs and suppliers, and economies of scale.
- Threat of Substitutes (products or services): The availability of substitute or alternative products will limit a company’s ability to raise prices and maintain customer base.
Examples: switching costs, buyer’s inclination to substitute, price performance tradeoffs, and quality of alternatives.
- Supplier Power: Powerful suppliers can demand premium prices and limit a company’s profit.
Examples: differentiation of inputs, supplier concentration, importance of volume to supplier, threat of forward integration, cost relative to total purchases in industry, and switching costs.
- Buyer Power: Powerful buyers (i.e. distributors or direct customers) have a significant impact on prices based on their buying behaviour.
Examples: bargaining leverage, buyer volume, product differentiation, price sensitivity, substitutes available, buyer’s incentives, buyer concentration vs. industry.
Purpose: To identify all of the various external factors (i.e. political, economic, social, technological, legal, environmental) that might affect a business.
Political: to what degree the government intervenes in the industry.
Examples: tax policy, trade restrictions, tariffs, political stability.
Economic: factors that have major impacts on how businesses operate and make decisions.
Examples: interest rates, exchange rates, economic growth, inflation rates.
Social: trends that affect the demand for a company’s products/services and how that company operates. Examples: population growth, health consciousness, age/gender distribution, behavioural trends, career attitudes, habits.
Technological: trends that can determine barriers to entry, minimize production level and influence outsourcing decisions.
Examples: automation, technology incentives, research and development activities.
Legal: factors that can affect how a company operates, its costs, and the demand for its products.
Examples: consumer law, antitrust law, health and safety, discrimination, employment.
Environmental: factors that include ecological and environmental aspects that affect how companies operate and the products they offer.
Examples: climate change, weather, farming/agriculture conditions.