SWOT and PESTEL Analyses in Business Planning - Essay Example

?SWOT and PESTEL Analyses in Business Planning This paper is going to investigate the importance of SWOT (Strength, Weaknesses, Opportunities, Threats) Analysis and PESTEL (Political, Economic, Social, Technological, Environment and Legal) Analysis in the area of business planning, particularly in the business environment analysis stage of the process. This objective works within the notion that both of these models are useful in order to develop and implement a business planning strategy. Business Planning For the purpose outlined above, it is imperative to discuss what is business planning first and how the analysis of the business environment figure play its part. Essentially, the concept of business planning should be self-explanatory or that its meaning should be plain and obvious. However, the process is actually technical and scientific and claims an important field of research in the area of business management. Perhaps the simplest but best understood definition is that it is an undertaking in the real world done in order to understand where an individual or an organization is coming from and what the future may hold. Out of this conception, it easy to understand how business planning can be fundamental in successfully starting a business and in operating established businesses. Mylonas, Harvey and Hodges (2007) listed several reasons why a business plan is crucial for start-up organization. The four most important of these are: 1) to determine the feasibility of a business idea; 2) to set the goals and outline the plan of action to achieve them; 3) develop business strategies; and, 4) help in implementing research to subsequently establish a business direction. (p393) And yet, business planning is needed by companies that are long past their startup stage and that they, as a rule, are useful in all stages of an business organization’s life span. For established businesses, a typical business plan would include “sections on the product, markets, technology, development, production, marketing, human resources, financial estimates with contingency plan, and the timetable and funding requirements.” (Bessant & Tidd 2007, p170) A complete outline of these sections, however, does not guarantee an effective business plan. Many of these are prone to inadequacies. According to Bessant and Tidd, most of these are in the area of marketing and finance, and that most plans are also bound to fail in identifying analysis on potential competitors and comprehensive financial forecast, among others that contribute to limited successes. (p170) Ideally, a business plan, according to Kariv (2011), “guide a firm’s management and staff in carrying out new projects; to guide retailers weighing the prospects of mergers; to manage mergers; to deal with rapid growth; to set priorities when planning changes; to capture new clients; to deal with difficulties and contingencies” or to address “a new financial situation relevant to the company; significant changes in the market, such as shifting tastes, changes in regulations, fluctuations in the purchasing climate; development of new products” and so on. (p138) Evidently, the list of reasons is quite numerous and diverse. But these underscore the fact that the requirement is based on the issue of survival for companies in today’s highly dynamic and competitive business landscape. In other words, a business plan can be used as a roadmap that addresses each need and requirement of an organization in all stages of its operations including the circumstances encountered. It is a tool for individuals within the organization so they can align for the company’s organizational processes and strategies to business objectives, among other goals such as change intervention, crisis management and so forth. In order to do this, however, there is a requirement for sufficient information and analysis on the business environment. The Analysis of the Business Environment A critical stage in business planning is the analysis of the business environment. The idea is that such environment provides the conditions by which an organization must operate in. Knowledge can empower an organization to respond effectively. This is underscored by the highly volatile environment of business today. In the business planning process, the analysis of the business environment falls in the first stages. Since the business plan is considered as a map, there is a need for a great deal of information and their analyses in order to identify opportunities, risks and threats. Some organizations adopt a formal environmental analysis model in a careful study of different variables that influence their businesses. According to Jain, Trehan and Trehan (2009), this helps to “identify opportunities and to plan to take appropriate actions to avail these opportunities” and “it also helps in developing an early warning system to prevent threats or to develop strategies which can turn a threat to the firm’s advantage.” (p21) Through environmental analysis, the current characteristics of the business landscape are understood and, henceforth, provide the tools and resources to make effective decision-making. Some of the most important variables that compose the environment that impacts businesses include economic, legal, political, social, technological factors and even the globalizing forces today, among others. By examining these, a business plan is in a better position to seize benefits, avoid risks and address threats. Specific measures to examine the business environment can loosely be depicted in the following stages: exploration of the contextual environment; analysis of the current system’s situation; identification of obstacles and opportunities to reach the desired objectives; and, the selection and design of the courses of action. (Ramirez, Van der Heijden & Selsky 2010, p38) Each of these stages must confront challenges regarding the availability of information as well as difficulties that result in lack of resources and data. In order to provide a deeper insight in regard to this issue, one could take the case of the economic variables and how it impacts the business environment. Say, in an effort to correct failed lead campaigns and implement an effective direct marketing program, a list of financial goals are needed to be set through the adoption of a new business plan. In order to do this, however, methodical financial calculations are needed as part of the investigation of the business environment in order to arrive at effective business decisions and strategies. The organization could determine the size, coverage and financial resources needed for a lead generation initiative through working backwards. Without sufficient data and resources, however, this attempt can be problematic. Such circumstance is unfortunate because this kind of calculation can enable the organization to determine the appropriate number of sales necessary for the corporate sales objectives to be achieved including other pertinent information necessary to gain specific usable data. For instance, the best media combination for the lead generation program can be determined by understanding each of the lead generation method. The following table is the financial calculation of telemarketing as an example of evaluation provided by Kern (2001) in an examination of previous organizational data. (p30) Table 1: Calculation of the Sales Inquiry Volume Sales transaction goal 100 Percentage of sales that result from a telephone sales inquiries 50% Number of sales appointments required =200 Percentage of sales appointments set from qualified leads ? 15% _________________________________________________________________________________________________ Number of qualified leads required = 1,333 Percentage of the entire sales propositions that qualified as turnover to the sales force / 30% _________________________________________________________________________________________________ Number of the gross sales inquiries required =4,444 Similar calculations can be done in other sales platforms such trade shows, direct mail, newspaper/magazine advertising, broadcast and the internet media, so that sufficient information allows the identification of the opportunities and risks of each lead generation channel. For the telemarketing campaign, the gross sales inquiries required reached 4,444. Other media may have better or worse performance. But, in the end, the previous environment has been revealed and future opportunities are identified without having to make mistakes committed in the past. Calculations may involve surveys to determine competition, demand, and risks, among other factors. Evaluations are also employed. For instance, the rapid development of new technologies typifies the volatility of the business environment. Technology impacts business significantly mainly because of its disruptive capabilities that could transform businesses for the better or for worse. Information technology or IT, particularly, is considered one of the most important resources through which an organization could respond to business opportunities and is, therefore, considered a business investment. (Watkins, p130) All in all, the variables mentioned above, demonstrate the need for systematic analysis models that can scientifically provide the correct depiction of the business environment landscape to allow informed and effective decision-making. It is in this stage, hence, wherein the SWOT and PESTEL analyses play very important functions. SWOT Analysis In business planning, SWOT is imperative because it provides a framework by which strategy and programs could be reviewed and analyzed. It also provides a framework that can effectively describe the current situation of a company and prescribe its direction in the future. Table 2 demonstrate the model how SWOT can be applied to all stages of the business planning process: Table 2 Pahl and Richter explained that “SWOT Analysis affords a brief overview of essential and relevant information about internal assets as well as the market audit,” and that, “in light of benchmarking, it derives critical success factors for the market and evaluates strengths as a competitive advantage and weaknesses.” (p27) SWOT is particularly helpful in investigating the business environment. As a matter of fact, the technique of environmental analysis mentioned earlier works excellently with this model, positively affecting its input factors. The discussion on business planning process and its business environment analysis stage underscores the importance clearly. In the analysis of the business environment, SWOT is indispensable because it can describe where an organization is standing presently, a crucial element in business planning. Kariv is helpful in this regard by stressing that SWOT analysis helps identify and categorize strengths, weaknesses ,opportunities and threats “by asking pertinent questions about the firm’s performance and its environment.” (p138) Table 1 is part of an example of SWOT Analysis in action. First, there was a clearly set objective, which was a venture to determine the most effective media mix for the lead generation program in terms of sales generated. For this purpose, both internal and external factors were analyzed and calculated in order to determine the positive activities that can be again adopted and perhaps modified and those negative ones that could be rejected. PESTEL Analysis What has been explained in the business planning and business environment sections of this paper should also highlight the relevance of. Since PESTEL Analysis is concerned with the political, economic, social, technological, environmental and legal factors that affect businesses, it is an important model in business planning, particularly in the analysis of the business environment. In contrast to the coverage of the SWOT analysis, PESTEL analysis is mostly confined to the macro-environment factors in business. The framework allows the management of organizations to classify and analyze factors such as new tax regimes, the enactment of new statutes, once trade barriers are built, changes in demography and those enacted by the policy networks. The political factor is a case in point. When a regime changes, say in Japan, transpires, the governmental policy can change as well. PESTEL Analysis can provide the tools for managers to evaluate how such change could impact business in the country. It can answer questions such as: What goods and services does the Japanese government want to provide? What is the degree by which it could subsidize firms? How are new education and labor policies impact an organization? (Oxford University Press 2007) As one would understand from this example, the PESTEL model is concerned with the external factors. The information that it can reveal can be crucial in undertaking business planning activities such as market research, strategic analysis and in-depth study of macroenvironmental factors that an organization must deal with in its operations. This aspect of the PESTEL framework also makes it work excellently with the SWOT analysis. In this case, the identified macroenvironmental factors are considered part of the opportunities and threats categories under the former’s framework. Conclusion Business planning is an important aspect in business operations. It prevents organizations from adopting strategies blindly and making decisions that are incompatible with business objectives. Otherwise, those firms that engage in business without any systematic planning are doomed to failure. As has been explained by this paper, it is a roadmap that guides an organization to take the right direction. The investigation of the business environment is a crucial component of this process. It provides all the data, information and analyses that enable the creation of effective strategies, making effective business decisions and appropriate management responses to opportunities, risks and threats. This stage, however, cannot be as effective without the systematic models that enable it to determine not just correct but also appropriate information - its evaluation and analysis. This underscores the importance of SWOT Analysis and PESTEL Analysis. Each of these models provides the frameworks by which those objectives can be successfully achieved. References Bessant, J. and Tidd, J., 2007. Innovation and Entrepreneurship, Wiley Jain, TR, Trehan, M. and Trehan, R. 2009. Business Environment. FK Publications. Kariv, D., 2011. Entrepreneurship. Oxon: Routledge. Kern, R., 2001. S.U.R.E.-fire direct response marketing. New York: McGraw-Hill Professional. Mylonas, A., Harvey, J. and Hodges, J., 2007. Business Organisation and Management for Queensland. Macmillan Education Australia. Oxford University Press 2007, “PESTEL analysis of the macro-environment.” Oxford University Press. [Online] Available at: http://www.oup.com/uk/orc/bin/9780199296378/01student/additional/page_12.htm [Accessed 16 August 2011]. Pahl, N. and Richter, A., 2009. SWOT Analysis - Idea, Methodology And A Practical Approach. Norderstedt: GRIN Verlag. Ramirez, R., Van der Heijden, K. and Selsky, J., 2010. Business Planning for Turbulent Times: New Methods for Applying Scenarios. New York: Earthscan. Watkins, J., 1998. Information technology, organisations, and people. Oxon: Routledge. Read More