Strategic Analysis Tools - Coursework Example

Strategic Analysis Tools Name Institution Course Date Strategic Analysis Tools Strategic analysis can be defined as the method and procedure of conducting intensive research on a given business environment of an organisation for the purpose of formulating strategy (Cadle, Paul and Turner, 2010). Strategic analysis of any business involves the understanding of environment of an organisation in order to enhance efficiency and effectiveness through the improvement of organisation’s capacity to deploy its resources. When operating a business, it is imperative to make the business successful through a number of objectives (Jenskin, 2015). There are many methods which assist in analysing an organisation’s current state before any decision is made. Some strategic analysis tools include SWOT Analysis, PEST Analysis, Porter’s five competitive forces etc. PEST and Porter’s Five Forces Analysis are two fundamental concepts for organisational leaders and B2B sales professionals (Kotler et al., 2009). This can be witnessed by their ability to reveal vital information regarding the external factors that affects a business, which can be utilized by business leaders in decision making. For business leaders, PEST and Porter’s Five Forces Analysis concepts are important in strategic planning used to gain information about a business (Cadle, Paul and Turner, 2010). For B2B sales professionals, these concepts are critical for preparing for meetings since they can be utilized to gain understanding of the external trends that affect prospects’ buying decisions (Henry, 2011). In this essay, I will argue that PEST Analysis is essential in developing strategy as a precursor to using Porter’s Five Forces Analysis. The paper will offer the merits of PEST analysis over Porter’s Five Forces Analysis and will highlight the reasons why Porter’s Five Forces Analysis is insufficient in strategic development. It will also offer a case study that will illustrate the effectiveness of PEST analysis and will then critically analyse the preposition of using PEST Analysis as a precursor to Porter’s Five Forces Analysis. Today, business organisations are operating and conducting their businesses in an environment that is ever-changing that ever before (Marcovici, 2014). Managers and business leaders are expected to contribute their expertise where strategic concerns are discussed. Whether it is a large multinational corporation or just a small company, an understanding of effective business analysis techniques and tools will assist in contributing to effective strategic decision-making processes (Kaplan and Norton, 2011). All organisations are expected to identify external factors that could influence their operations (McDonald and Wilson, 2012). Many of these factors will be factors that a company has no control over. Popular tools for identifying and analysing these factors are PEST Analysis and Porter’s Five Forces Analysis. PEST Analysis is a useful strategic tool that is used to identify the external factors that affects an organisation (Cadle, Paul and Turner, 2010). On the other hand, Porter’s Five Forces Analysis entails external factors that affect the nature of competition between firms, and the internal factors that influence methods in which organisations compete. PEST Analysis identifies Political, Economic, Social, and Technological factors (Cadle, Paul and Turner, 2010). PEST analysis divides the external environment into four segments which represents the most important issues that affect an organisation. This is why it is considered a fundamental tool for strategic development. PEST Analysis can work alone in strategic analysis or can be used together with other strategic analysis tools such as Porter’s Five Forces Analysis and SWOT Analysis (Cadle, Paul and Turner, 2010). PEST Analysis can also be used in combination with Porter’s Five Forces since it is like transposing the PEST Analysis ideas onto the Porter’s Five Forces. PEST Analysis helps organisations improve on decision making (Zanoni, 2012). The best results are possible when an organisation makes the right decision by analysing different factors. It also assists in predicting the future by taking into consideration the present performance (McDonald and Wilson, 2012). In addition, it also assist in detailing out the opportunities that an organisation can cash in on together with the threats that could damage the business. Concerning PEST Analysis, in the political factor, an organisation assesses the government regulations and laws and legal factors that affect the business operations (Zanoni, 2012). Issues addressed in this factor include tax guidelines, safety regulation, trade laws, and political stability among others (Mcgowan and Mahon, 2000). In economic factors; companies assess the economic issues that have an impact on their operations. Such issues include unemployment policies, inflation, economic growth etc. In addition, in the social factor, a company analyses socio-economic environmental issues such as education, demographic, lifestyle, culture etc. (Cadle, Paul and Turner, 2010). And in technological factor, a company assesses issues such as technological advances, the importance of internet, technology spending and lifecycle of technology. PEST factors can be defined as the opportunities and threats in SWOT analysis or the competitive forces in Porter’s Five Forces Model (Cadle, Paul and Turner, 2010). Therefore, sometimes it is useful to complete a PEST Analysis before Porter’s Five Forces or a SWOT Analysis. Although PEST Analysis and Porter’s Five Forces are used to analyse situations and assist companies boost their competitive advantage, they have some differences (Cadle, Paul and Turner, 2010). Porter’s Five Forces focuses highly on how power is achieved in a competitive situation while PEST Analysis identifies some macro environmental factors that might influence a business and its competitive standing (Cadle, Paul and Turner, 2010). In addition, while PEST Analysis determines how a business is affected by four forces: political, economic, social and technological, Porter’s Five Forces assist managers and senior leaders explore five forces that determine a balance in a competitive situation: threat of new entry, competition, threat of new substitute, supplier bargaining power and buyer bargaining power. Generally, PEST Analysis is used to develop business strategies and evaluate potential new markets (Johnson and Flaherty, 2010). The Porter’s Five Forces Analysis focus on the basic factors affecting an organisation such as current competition, customers, eases of entry etc. On the other hand, PEST Analysis focuses on comprehensive factors that occur in a country or market and analyses how such factors influence customers (Zanoni, 2012). PEST Analysis allows managers and experts to evaluate and analyse more factors than money during decision making process concerning a product or service. Normally, PEST Analysis is broad compared to other strategic analysis tools. Strategic planning and development is not a defined science; no particular tool is mandatory. It highly depends on pragmatic choice based on what will be more beneficial to a particular situation (Zanoni, 2012). PEST Analysis may be more advantageous than Porter’s Five Forces Model since it assist in identifying SWOT factors. PEST Analysis is more useful in larger and complex business settings. It is also useful in smaller businesses and identifies one or more important issues that might have been missed by other tools. The PEST Model has prompted a number of variations (McDonald and Wilson, 2012). PEST is also extended to more factors like environmental, legal and Industry Analysis. It just depends on personal choice. However, in most circumstances, PEST Model covers all areas of business environment. PEST Analysis is also used in business development and expansion and marketing. It also encourages proactive thinking. PEST Analysis also can adapt to many markets unlike Porter’s Five Forces Model. Conducting PEST Analysis will be reliable compared to Porter’s Five Forces Analysis since it tends to strongly affect further strategic choices (Cadle, Paul and Turner, 2010). Often, in any organisation, it is considered insufficient to conduct a competition analysis. External environment analysis should also be conducted. Therefore, PEST analysis covers both external environment analysis and competition analysis while Porter’s Analysis is based largely on the competition Analysis (Cadle, Paul and Turner, 2010). This is why Porter’s Five Forces Analysis is insufficient in developing strategy. The nature of competition in any given industry sector is highly affected by the five forces suggested by Porter (Johnson, Whittington and Scholes, 2009). When the bargaining power of buyers and suppliers increase and the degree of threat of entry and substitute intensify, the more the competition increases within the industry. Nevertheless, these five forces are considered not the only once that influences the competitiveness of a firm. The structure of a given industry may also take part too. Indeed, the Five Forces framework is founded upon an economic theory that argues that the structure of a business determines competiveness behaviour which in turns determines performance (Cadle, Paul and Turner, 2010). In a concentrated industry sectors, according to the framework, companies are expected to compete less aggressively and make more profits. However, the culture and nature of the companies in the industry sectors also play a vital part in shaping competitive behaviour. Therefore, Porter’s Five Forces is considered insufficient in strategic development (Cadle, Paul and Turner, 2010). In order to show the importance of using PEST Analysis as a precursor of Porter’s Five Force, I will analyse the analysis of Coca-Cola Company. PEST Analysis will evaluate effects of the changes in Political, Social, economic and technological factors that affects Coca-Cola Company. Concerning the political analysis, the government plays a vital role in manufacturing of Coca-Cola products (Henry, 2011). The company is affected by factors including changes in accounting standard, new tax laws, non-alcoholic business environment, civil unrest, international restrictions etc. Concerning the economic factor; Coca-Cola Company has been affected by economic downfall of United States and the negative GDP growth. However, economic growth is expected to rise in the years to come. In addition, since the country sales are high in the international markets, most markets have experienced economic improvement which is good for the company (Henry, 2011). On the other hand, social factors affecting the company include the demand for healthier drinks by customers. This has affected non-alcoholic beverages. The need for healthier drinks has increased significantly. Technological factors affecting Coca-Cola Company include advanced technology which has led to new machinery used in production which has increased production speed. Introduction to good packaging such as plastic and can bottles has led to the increase of sales. Technology also affects the company’s advertising and marketing programs (Henry, 2011). Use of internet make products look attractive thus assists in increasing sales. As seen in the case study, PEST Analysis has assisted the company identify changes in the market that affect its operations. PEST Analysis is essential and preferable in developing strategy due to the many limitations of Porter’s Five Forces Model (Johnson, Scholes and Whittington, 2008). Porter’s Five Forces in the current market tends to assume various static market structures. This strategic method does not have the capability to keep up with the new business models as well as the dynamic nature of the industries (Boundless, 2015). These are inclusive of technological innovations and active market entrants which make modification in the business models within a very short time. For example, computer and software industry is considered to belong to such an industry which portrays high competition because of continuous revolution which Porter’s Five Forces model can’t be able to match (Chen et al, 2001). This directly shows why PEST Analysis is a favourable strategic method to Porter’s Five Forces and can be used as a precursor to the latter. According to Porter, his model is best utilized when dealing with the whole industry. When used in assessing smaller levels of areas, competitive groups will not return relevant information. Porter’s Five Forces model is specifically used based on the level of the industry (Boundless, 2015). Therefore, when using this framework, one has to keep in mind the limitations that comes with this model especially when carrying out an analysis of markets which are too wide as well as smaller industries when focusing on specific areas (Chen et al, 2001). This vividly indicates the demerits of Porter’s Five Forces strategic method over PEST Analysis method which has fewer limitations with regards to market analysis. Hence, PEST Analysis is a more preferred methods when it comes to market analysis to Porter’s Five Forces thus can be effectively utilized as a precursor to Porter’s Five Forces framework (Strategic Business Forecasting, 2010). In addition, in terms of adaptability and evolution, Porter’s Five Forces model demonstrates great disadvantage because of its static nature (Boundless, 2015). It tends to represent only the present day aspects which are considered very predictable within a short time. On the other hand, PEST Analysis model is considered dynamic and can adapt very fast to various changes in the market. This model can be depended upon when it comes to aspects that are related to planning long term objectives (Chen et al, 2001). This demonstrates the advantage associated with using PEST Analysis to using Porter’s Five Forces. Therefore, PEST Analysis can be used a precursor to Porter’s Five Forces. Furthermore, conclusions that are drawn from Porter’s Five Forces model are mostly said to be highly debatable. This comes about since the model is designed in such a way that they spark discussions and emphasizes on fundamental concerns (Grundy, 2001). This exposes the model to occurrences of false conclusions. Since the functions of strategic models is to encourage brainstorming which entails thinking in order to validate the subjective appeal of an industry, Porter’s Five Forces model is not designed to adopt optimal industries with certainty (Porter, 1998). Then again, PEST Analysis does not spark such discussions therefore cases of false conclusions are very rare making it more viable and a preferable choice making it the best precursor of Porter’s Five Forces (Grundy, 2002). Moreover, Porter’s Five Forces model tends to over-stress macro analysis. This overemphasis is felt on the industry level rather than on the analysis focused on the precise product-market section at a micro level (Grundy, 2002). It also fails to directly connect to the possible management actions. For example, cases where some industries demonstrate low effects which are over any of Porter’s Five Forces, the model becomes irrelevant since methods that can be used to deal with such influences are inadequate (Chen et al, 2001). When compared to PEST Analysis, Porter’s Five Forces framework demonstrates more limitation in this scenario therefore making PEST Analysis the perfect precursor to Porters Five Forces (Gorgenländer, 2010). Additionally, in earlier researches, Porter’s Five Forces is considered very obsolete. Aspects such as digitization, deregulation as well as globalization have become fundamental forces over the past years (Grundy, 2001). Since Porter’s Five Forces doesn’t take them into thought, it makes the model obsolete and incapable of coping with the emerging changes (Boundless, 2015). Therefore, in today’s market, characterized by rapid technological innovations, Porter’s Five Forces proves its inefficiencies. On the other hand, PEST Analysis, being the second most utilized strategic method after SWOT Analysis, takes into account all these aspects. It also demonstrates its dynamic capabilities such as adaptability to the current market. This makes PEST analysis a more preferable strategic model over Porter’s Five Forces making it a proper precursor for the latter. In addition, comments from critics’ state that Porter’s Five Force offers snapshots of an industry rather than the whole dynamic constitute of the industry (Boundless, 2015). The dynamic constitute of an industry tells about the future of the industry hence it can be easily converted into a strategy. Therefore, when it comes to the process of assessing the existing market, Porter’s Five Forces model is considered inadequate since it misses out a very vital stage of the process (Rao, Rao and Sivaramakrishna, 2008). Since Porter selected industries that are easy to identify, this comes as a blow to the model since it becomes worthless due to the different ways in which people perceive the market (Grundy, 2001). Therefore, when compared with PEST Analysis, Porter’s Five Forces model doesn’t hold enough water. This makes PEST Analysis a proper precursor to Porter’s Five Forces model. In conclusion, the most utilized strategic analysis tools include Porter’s Five Forces and PEST Analysis. PEST Analysis Model is considered operative in developing strategy as a precursor to Porter’s Five Forces. PEST Analysis is used in identifying external forces affecting an organization. There are some differences between the two frameworks. For instance, PEST Analysis determines how an organization is affected by four forces: political, economic, social and technological. On the other hand, Porter’s Five Forces assist in exploring five forces that determines balance in a competitive situation. Moreover, PEST Analysis is therefore considered to be a more preferable strategic analysis tool as compared to Porter’s Five Forces model because of the following occurrences: Porter’s Five Forces is more static when it comes to market analysis whereas PEST Analysis portrays a dynamic nature in the same. Also, PEST Analysis is more consistent to adaptability and evolution than Porter’s Five Forces model. Porter’s Five Forces is also considered obsolete than PEST Analysis when it comes to aspects that are related to globalization, deregulation and digitization. This makes PEST Analysis a more preferable strategic method than Porter’s Five Forces model and hence can be used as a precursor to using the latter. References Boundless 2015, “Limitations of the Five-Forces View,” Boundless Management. 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