1.0 Introduction

The ever-changing complex competitive business environment makes huge challenges for the organization and managers to pay much more attention on their business strategic plan. Therefore, they must have essential analytical tools of different levels to help and identify what factors will affect the environment, which kinds of elements impact on the competition and how to assess the resource of the firm very well. This essay explains the value of various strategic analytical tools in the context of competitive analysis at the macro environmental, industry level and firm level. The essay in the following sections is structured as follow. Firstly we will discuss the PESTEL Analysis Framework which is useful for competitive analysis in the macro environment level. Then we will discuss the Porter’s Five Forces model which is useful to analyze competitive position of a company in the industry context. Lastly, we will discuss the SWOT Analysis Model to analyze and chart the strategic directions of a firm in the competitive business environment. For each of this model, we will discuss the origins, applications and usage, the advantages and limitations of the model.

2.0 Strategic Analysis at Macro Environmental Level

2.1 Introduction to PESTEL Analysis

PESTEL model is the selected tool for analyzing macro environment. It is widely used and it is a popular concept in strategic and competitive analysis. However, the origin of this model unknown – it is hard to determine who the first researcher who started the application of this concept. Perhaps the concept of environmental analysis was already understood since the first merchant. However, to understand how the environmental analysis research had evolved through the last four decades, we can review the work of Dill (1958), Thompson (1967), Starbuck (1976), and Lenz and Engledow (1986).

It is commonly agreed that the concept of PESTEL comes from PEST Analysis Model; it is a method of analyzing the macro environment by strategists, which involves all factors that influenced in the industry and organization. Basically, the PEST framework encompasses four factors as follow: Political, Economic, Social and Technological. PESTEL Framework even goes even further to consider the Environmental and Legal factors.

2.2 Applications and Functions of PESTEL Analysis

PESTEL framework is often used as a generic tool to analyze the position of the organization or product in the market place. The model incorporates various factors in the changing external environment and how these factors affect the organization. Six factors under the model are discussed in the following points.

1. Political factors concern about the changes in political climate of a nation. In a globalized business world, this is increasingly important. For example, any businesses having subsidiaries in Thailand must stay alert when the political climate in Thailand had become uncertain and gloomy.
2. Economic factor which are related to the economical landscape and atmosphere in the business landscape. For example, continuously increasing in unemployment rate indicates the economy of the country is not optimistic.
3. Social factors which are mainly about what is occurring in societal aspects and how these aspects influence the business environmental as well as the strategy of the organization. It is about the characteristics of the societal context in which the organization exists. For instance, high pressure work and life making people much more concerned about relaxing had helped in the emergence of health and spa industry.
4. Technological factor means how the technologies change has significant impact on the organization and market. For example, digital communication, bio-technology, chemicals, energy revolution, nano-technology are just some examples of technology changes that should be aware by managers in formulating the company strategic and competitive analysis.
5. Environmental factors are concerning what is occurring in environment aspects, and under this context, all the factors in physical and biological environments within which an organizations should be considered by the manager. For example, global climate changes and the emergence of green technology are pressing all the businesses to become aware of pollution issues and to exercise corporate social responsibility; they should proactively implement green technology in their business processes.
6. Legal factor however, is about the changing of legislations and about the way government interferes with or manages the business environment, such as changes in the tax policy and enforcement of tariffs to certain products.

The six factors are really powerful and useful tool widely applied for business planning, marketing planning, organizational change, product development and research report. In business and strategic planning, it provides context background and information about targets such as growth, new product development and brand positioning for the managers and organizations. Providing essential elements to review the situation and understand the market during marketing planning process. As a PESTEL analysis provides a view of what is occurring in the external world, this will help when making the decision to enter or leave an area of product development. For organizational change, PESTEL analysis could help where the changing is happening and which is the potential area to focus well in the context. A PESTEL will provide information about potential opportunities and threats around labor changes with best result association with a SWOT analysis in research report.

2.3 Advantages of PESTEL Analysis

PESTEL Analysis is popular because the model has many advantages. Firstly, the model is simple and only costs little time to do. Due to the simplicity of the model, such a framework is easily understandable and popular. Besides, since the model does not take a long time to be applied in analysis, the framework is easily applied in meeting. People, even without much background or knowledge in the business management, can relate to the model and thus, can then contribute their ideas in discussion. Secondly, the model is comprehensive enough and able to provide an understanding of the wider business environment. This makes the model remarkable useful and practical, as the model direct and guide managers to think in a holistic manner, while not troubling the managers with complexity and technicality. Thirdly, the model is beneficial in management process because the model encourages the development of strategic thinking. To explain, in the application of the model, managers are forced to think about various factors in the environment, such as the political, economic, social, technology factors and etc. This makes the thinking process to be more objective. The model also provides a practical guideline to managers so that the mangers are forced to consider the strategic and competitive environment from various areas. With this, the model is also helpful in the sense that it may raise awareness among managers regarding threats to a project. Apart from that, the model is also useful as it is forward looking. It can help an organization to anticipate future difficulties and thus provoke the managers to take actions to avoid or minimize the negative effect. On the other hand, the model is also powerful as it can help an organization to spot opportunities and exploit the potential opportunities.

2.4 Disadvantages of PESTEL Analysis

However, as a theoretical tool, PESTEL inevitably possess several disadvantages and limitations. Once the company adopted PESTEL to do analysis, the data collection and process must be subject to regular accumulation of data. Besides, it is also critiqued that the process takes is a long time for identifying, gathering information and evaluating the findings. It is costly as many people need to be involved. Apart form that, due to the simplicity of the model, researchers have argued that such a simple list may not be sufficient and comprehensive. Then, practitioners also found that the results and strategies generated from the model are not useful in the long term. Realistically speaking, the rapid pace of change in society makes it increasingly difficult to anticipate developments that may affect an organization in the future, and the model is not capable to cope with these changes. Not only that, as the model requires large data as input, collecting large amounts of information may make it difficult to see the wood for the trees and lead to “paralysis by analysis.” Perhaps the most critical disadvantage of the model is that the PEST analysis only covers the external environment and the results alone may not be useful or complete. It is argued that we still need to consider many other factors, such as the internal factors affecting the organization, the actions of competitors and the industry in which the organization is operating.

3.0 Strategic Analysis at Industry Level

3.1 Introduction to Porter’s Five Forces Analysis Framework

The origin of Porter’s five forces model was developed in early 80s by Michael Porter. Since then, this framework becomes increasingly popular and is widely used in business strategy planning till today. It is used primarily for the analysis of competitive strategy as well as the competitive environment of industry. Apart form that, it is also argued that the tool is useful to research whether a new products, services or businesses have the potential to be profitable. In some context, the model is also a frequently used model to understand the balance of power between industry players.

Porter suggested that there are five important forces that should be considered in the strategic and competitive analysis of a company. The five forces are bargaining power of suppliers, bargaining power of buyers, threat of new entrants, threats of substitutes and rivalry among existing companies. All of these forces are illustrated in the figure below. Besides, these forces will also be discussed in greater details in the paragraphs beneath.

Supplier Power: According to Porter, in this dimension, we assess how easy it is for suppliers to increase prices. The bargaining power of supplier is driven by the quantity of suppliers of each raw material and input resources, the uniqueness of the supplier’s product or service, the supplier ability to exert control over the organization, and the cost of switching from one products to another. Generally, the fewer the supplier choices an organization has, the more the organization will be dependent on the suppliers, and thus the more powerful and impactful the suppliers are towards the organization.

Buyer Power: In this dimension, we analyze how easy the buyer of a product can drive down the selling prices. The bargaining power of buyer is driven by the number of buyers, the importance of each individual buyer to the organization’s business and the switching cost of buyers from the company’s products and services to those of someone else. Often, the stronger the bargaining power the buyer possess, the lower selling prices the company able to quote, and thus the lower profit margin the company able to achieve.

Competitive Rivalry: The dimension of the rivalry among competitors is all about the amount of competitors in the same industry, the capability of the competitors as well as the intensity of competition in the industry. Generally, the more competitors exist in an industry, and particularly they able to offer outstanding products and services with attractive pricing, then it is said that the competitive rivalry among the industry players is very intense. This is a negative situation. On the other hand, when there are fewer competitors in a market segment or industry, then the competition forces are not so intense among industry players, which is a good sign and situation for a company in the industry.

Threat of Substitution: The substitution effect often refers to the ability of a company’s customers to find a different way of doing what they do. If the customer able to find substitute products easily, then it is said that the switching costs of substitute is low. Substitution effects not only happen at the products level, but services can also be substituted. However, even the company supplying a unique software product that automates an important process may also face the threat of substitution because people may substitute by doing the process manually or by outsourcing it. Generally, if substitution is easy and does not cost much, the threat of substitution for a company is very high.

Threat of New Entry: According to Porter, the balance of power in an industry is also affected by the ability of potential competitors to enter a particular market segment or industry. Generally, the threat of new entrant is high when it costs little in time or money to enter the market, it is easy for new entrant to compete effectively in the industry, or if there are few economies of scale by current industry players, or if the existing companies in the industry have little protection for their vital technologies. New entrants will often weaken a company’s position. However, in contrast, if a particular company has strong and durable barriers to entry, then the company can preserve a favorable position and enjoy a higher profit margin.

3.2 Applications and Functions of Porter’s Five Forces Analysis Framework

Porter’s Five Forces have many usage and functions in the practical world. Firstly, the model enable an understanding of the nature of each of the five forces which in turn provide the organizations with necessary information in the formulation of appropriate strategies and business direction (Thurlby, 1998). The model is widely used because any company must consider the nature of the competitive environment if it is to enhance the chances of success in terms of achieving the company’s objectives with the formation of appropriate strategies. The rationale is simple - if a company can fully comprehend the characteristics of the Porter’s five forces in its industry, and able to ferret out the factors which are more powerful and impactful towards organizational performance, the company will be able to prepare itself into a stronger position to defend itself against any major threats. In other words, the application of the Porter’s Five Forces model is crucially helpful for organizations to build long-term business strategy and sustaining competitive advantages.

Apart from that, the model is also helpful for managers to comprehend the strength and weaknesses of a firm’s current competitive position, and also powerful in assisting managers to plan for enhancement of their companies’ competitive advantage in the future. Through the application of the Porter’s Five Forces model, managers can obtain a clear understanding of where the power lies in an industry, and this is vitally important as such knowledge will enable a company to take actions which could maximize its strengths, while minimizing the weaknesses. It is useful because the results from the model will also prevent the managers from forming wrong and dangerous strategic direction or mission for the organization. Through the application of the framework, and by identifying the strength and direction of each competitive force, it provides managers with an opportunity to identify the strength of a particular company’s position, the formation of generic strategy (i.e., either a differentiation, low cost of focus strategy), the sharpening of the company’s strength to achieve competitive advantages, which is essential later in the process to achieve sustainable profitability in the industry. The application of the Porter’s Five Forces model towards the formation of the generic strategy for a company is shown in table below.

3.3 Advantages of Porter’s Five Forces Analysis Framework

First of all, the advantage of the model lies in its common sense and simple to apply framework. The simplicity of this application is the main factor that encourages numerous companies as well as business schools to adopt its usage (Wheelen and Hunger, 1998).

Secondly, the model can be used in static analysis and dynamic analysis. To explain, when the model is applied in static analysis, the model will enable the manager to craft a reactive positioning strategy that matches the firm’s strengths and weaknesses with the current industry structure. In contrast, in the dynamic analysis, with the application of the model, the researcher can craft a proactive strategy designed to influence industry’s competitive rules to a company’s favour. This is made possible because the model explicitly considers the component of industry evolutionary and thus enables the company to grip the opportunity to capitalize on changes in any of the five forces of industry structure.

Thirdly, the value and importance for the Porter’s Five Forces lies in the framework’s capability to become the extension of SWOT analysis and the “resource-environment” construct of strategy theory. When this model is combined with other framework, such as the SWOT analysis as well as the PESTEL framework, the combined model can introduced an interdisciplinary application of industrial economics to the purview of strategy.

Apart from that, the emphasis that the framework places on industry evolution creates a strong foundation for scenario analysis. The addition and application of this model often made the scenario analysis for a firm become more comprehensive and complete. By examining the five forces, the analyst is placed in a proper mindset for long range planning as he is made aware of the concept of mutual dependency between the forces, and the idea that these forces change over time. The analyst will also recognize the assertion that a business strategy can and should both reactively defend against and proactively manage these forces to improve competitive position of an organization.

3.4 Disadvantages of Porter’s Five Forces Analysis Framework

Despite the fact that the Porter’s Five Forces framework is powerful and popular, the model has also been challenged by practitioners and strategists. According to them, the weakness of the framework lies in the three spurious assumptions behind the five forces. The first unrealistic assumption is that the model assumes that buyers, competitors, and suppliers are unrelated and do not interact and collude with each other, while in reality, people do form collaboration and strategic alliances to gain higher profit margin in the market place. The second flaw assumption is about that the source of value for a firm is due to the industry structural advantage only. The main take away from this limited viewpoint is that to create sustainable profits, the company should focus on building high barriers to entry. However, it is found in real life that value innovation as well as technological breakthrough is also some powerful methods to create huge profitability in the marketplace. Thirdly, the model also implicitly assume that uncertainty is low, allowing participants in a market to plan for and respond to competitive behavior. However, practitioners know well that market is filled with uncertainty, where any technological breakthrough will impacts the society and business environment seriously.

Due to the uncertainty of the environment, this leads us to found the second weakness of the model. The second weakness of the model is that under the rapid change of business environment, the model must be updated and reviewed on a frequent basis. As the situation is fluid and fast changing, the nature and relative power among industry players as well as the direction and strengths of the competitive forces will change. Consequently, the application of the model will require us to monitor continuously and stay observant towards the environment.

Another weakness of the Porter’s Five Forces model is that its lack of explicit recognition of the social and political factors in the framework. Both these factors are incorporated as sub-factors that could influence the five forces. The problem with this is that when these factors are not explicitly stated, the managers or users may neglect or forget about the importance or even the existence of these powerful factors in their discussion.

4.0 Strategic Analysis at Firm Level

4.1 Introduction to SWOT Analysis Framework

According to various academic journals, the origin of the SWOT analysis framework is credited to Albert Humphrey from Stanford University. Initially, Professor Albert Humphrey created the SOFT analysis, which identified company qualities as positive or negative, in the present or the future, after extensive research on the subject of why corporate planning failed. The SOFT Analysis Framework has the following meanings. What is positive at present is named ‘Satisfactory’ and what is positive in the future is named ‘Opportunity’, while on the other hand, a present negative is a ‘Fail’ and a future negative is a ‘Threat’. Over time, however, some changes are made to the model. The Fail became known as Weakness. Eventually the analysis examined Strengths and Weaknesses rather than Satisfactory and Opportunities, resulting in the SWOT analysis framework that is well-known today. Figure below shows the SWOT framework.

4.2 Applications and Functions of SWOT Analysis Framework

As discussed above, SWOT stands for Strengths, Weaknesses, Opportunities and Threats. The model has a lot of applications in the real world. In fact, the SWOT model is something which can come in relevant and powerful for a situation, personality or organization analysis. Besides, although the model is more widely used in business and marketing areas, it is also an effective tool to analyze personality in a methodical manner.

In the business and management context, SWOT analysis is usually applied in evaluating a company, a business plan, a product segment, or a marketing strategy. The application of SWOT analysis is applicable to various contexts because by listing down in details about the strengths and weaknesses, it will enable and guide the researcher to investigate the dimensions of various opportunities and the potential impact of threats. SWOT analysis is simply a powerful planning tool.

In the SWOT model, the strengths and weaknesses are internal factors while opportunities and threats are potential external factors. The model suggests that the component of strengths can serve as a foundation for building a competitive advantage, while the element of weaknesses may create obstacles fro the management to achieve competitive advantage in the market place. The functions of the SWOT is to come out with an understanding these four aspects of a company, so the management can better leverage to the company’s strengths, while minimizing the impacts due to the company’s weaknesses, while at the same time, to guide the management to capitalize on golden opportunities, and deter potentially negative threats from the environment. A clear and correct analysis should enable a company to continuously improve itself and to adapt to the environment in a fast manner.

4.3 Advantages of SWOT Analysis Framework

There are several benefits from the application of SWOT model. Firstly, by using the SWOT analysis to research on business situations or elements of a company can creates a fast, objective and easily communicated analysis of what initially can be a complicated and confusing issues. Apart from that, as the model is objective, the model also enables researchers to carry out uniform (i.e., analysis-based) decision making as opposed to spur of the moment (i.e., hunch-based) decisions. This is very useful for an organization, as the development of uniform decision making procedures contributes to the cultivation of a body of corporate knowledge. If a decision results in a failure, the process can be reviewed for errors, while on the other hand, if a decision is successful, the knowledge created in the model can be more confidently applied to future decisions. In contrast, if decisions are made on the basis of hunches, we simply cannot evaluate the accuracy of the research outcomes as objective as possible.

Not only that, the SWOT model is powerful and valuable because the model can provide insight into the direction of a business can focus to grow. The outcome from the model can be used to define and formulate business goals and milestones. Besides, as the results from the model is forward looking, completion of such analysis will also enable management to focus a company’s advertising and marketing on areas that give them a competitive advantage in the marketplace. On the other hand, besides suggesting and charting a strategic direction for a company, the model also enhance the management foresight to see looming threats and react proactively.

4.4 Limitations of SWOT Analysis Framework

While SWOT is definitely a great start in analyzing, investigating and researching a business situation or an organization, both academicians and practitioners have argued that the model still suffers from several blind spots or limitations.

First of all, it is argued that SWOT is a linear analysis, while the market environment is increasingly exhibiting chaos and complicated patterns. According to researchers, from a chaos and complexity theory perspective, SWOT model is insufficient because it ignores those chaos factors that will lead to success or failure.

Secondly, the outcomes of the SWOT model is do not place important and probability. As such, even the model generates a lot of outcome, management still have to rely on other method to determine which outcomes or events should be placed higher importance and probability. This can be dangerous and misleading as without proper framework, management may focus on low-probability events that are unlikely to occur in real life.

Thirdly, the SWOT analysis is highly dependent on the accuracy of the input data. If the management provides wrong data or assumption into the model, the results may not be accurate, or even worst, can be misleading. Thus, we still need to rely on other model or methods to judge if the input provided into the model is accurate, objective, and reflective of the real business world.

Apart form that, there are also arguments stating that SWOT model is an expert’s monophonic analysis (A monophonic SWOT model means that there is just one voice, one expert’s view). Such argument comments that a SWOT model is often just a simple interview with a CEO or a focus group with a few players (where many stakeholders are not involved). Reasonably speaking, it is argued that for a more comprehensive analysis many stakeholders (customers, vendors, competitors, and employees) should be involved in providing the input.

5.0 Conclusion

From the discussion above, we have analyze the origins, functions, applications, benefits as well as the limitations of three commonly used but powerful strategic and competitive analysis model. Firstly, at the macro-environment level, we have discussed about the PESTEL mode, which is useful for management to run an analysis on the environment the company is sitting in. Such kind of analysis is very important so that management will take the various environmental factors into account when charting a business future strategic direction. In the second part, we deal with the Porter’s Five Forces model, which is powerful to analyze the industry context of a particular organization. We witness that the model is powerful in the sense that it illustrate the various sources of competitive forces in an industry. With such a model, under the industry structure, we can formulate better plan for the firm to achieve competitive advantage in the market place. Lastly, at the firm level, we investigate the SWOT analysis model. The model is powerful as it matches both the internal as well as external factors in the analysis. By considering the situation inside the organization, the model suggests how a company can exploit opportunity in the external environment.

Although all the three models are powerful, there are not without limitations. However, these limitations can be minimized when we employ a combination of these models in our analysis. In fact, all the three models discussed above can be readily and effectively combined in an analysis. The results will be more practical, outstanding, comprehensive and accurate. For example, PESTEL analysis will provide us the information from the environment, while the Porter’s Five Forces will enable us to see the industry structure and point out the possible future direction that should be followed by a company. The SWOT model then is useful to combine the inputs from the PESTEL and Porter’s Five Forces model so the management can ensure a match of external and internal factors in the implementation of a strategy.

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