INTRODUCTION

Nowadays, all business is operating within an ever-changing complex environment. To gain more profit and compete well among many of rivals, it is essential to understand and analyze the environment very well before establishing the business plan. Therefore, the analytical tool plays very important role in modern business competitive analysis. In this writing, we will discuss the origins, functions, advantages as well as disadvantages of these analytical tools. Three tools will be selected for analysis purposes, where one strategic tool each will be chosen from (i) the macro environmental level, (ii) the industry level and (iii) at the firm level. At the macro-environment level, the selected tool is PESTEL analysis model; while at the industry level, the selected tool is Porter’s Five Forces; and at the firm level, SWOT analysis model is selected.

PESTEL analysis – Strategic Analysis Tool at the Macro Environmental Level

Overview of the PESTEL Analysis Tool

The selected tool at macro environmental level is a PESTEL analysis model. PESTEL Analysis Model is originated from the famous PEST (Political, Economic, Social and Technological) Analysis Model. It is often regarded as the improved version of PEST model because PESTEL model incorporate and consider another two factors in the environmental analysis, namely, the Ecological as well as the Legal factors. The figure below illustrates how the six factors can exert influence on an organization.

It is critically important for the manager to be aware that at the environmental level, there are various factors which could affect a company’s performance. Not only that, they should also have some understanding on how these factors intervene and affect each others. All the PESTEL factors that should be considered by a manager in a environmental analysis will be discussed in greater detail below.

Political factors: the government has the political power or potential influence to intervene the organization with some policies, such as tax policy, business laws, inter-country relationships, governmental leadership and political stability. Furthermore, government’s purchase scale and government structure also have strong impact on the organization’s strategy.

Economic factors: include Gross domestic profit (GDP), home economic situation and overseas economies and trends. Besides, it also includes economic growth, interest rate, exchange rate, unemployment rate and the inflation rate. For example, as the export company, exchange rate is very important. When exchange rate of China is higher than USA, under the purchased contract, export from China to USA is much better; but if non-purchased contract, when the exchange rate of China is lower than USA, exporting is much suitable, depend on with or without the purchased contract.

Social factors: include education level, lifestyle change, health conscious, the gap of income, career attitude and population growth rate. Furthermore, personal value, consumer preference and emphasis on safety. For example, trend in growth in consumer health has increased demand for vitamin and herbal products and weight loss services.

Technological factors: include technology development, replacement technology, automation, R&D activities and the rate of technology change. Moreover, the shift of technology could affect the costs, quality of the products or services. For example, innovative online banking service brings much more convenience for consumers.

Environmental factors: include ecological aspect protection such as global climate change, besides that, environmental regulations, environmental pollutions and sustainable development. For example, much more organic and green-no-pollution products avoid polluting and destroying the environment.

Legal factors: include discrimination law, consumer law, environmental law, employment law and competitive law. These factors could affect a company’s strategy on how to operate and compete legally.

Application of the PESTEL Analysis Tool

By using PESTEL model, it can analyze many factors in firm’s macro environment. It is useful to describe or investigate the big picture of understanding the external environment, assessing the market for a business strategic plan and market planning. In addition, PESTEL model also fascinates an understanding of the firm to diagnose the external environment accurately before implementing a strategic plan, avoids the risk-taking minimize and prevents the threats when taking action plan. Apart from that, the model also provides a good viewpoint for an organization to do external development and strategic thinking. Application of the model will also enable us to understand how the six factors are inter-related each other. For example, an analysis may discover that political stability and political statement and behavior, directly result in both positive and negative impact on economic; a vary economic level and different degree of economic development speed affect the social lifestyle change; meanwhile, sustainable and rapid development of economy provides a platform for technology, and technology reform also push forward the economy develop. The development economy and technology need relative legislation to guarantee it operate as normal. Environmental protection is the root of human beings sustainable development.

Advantages of the PESTEL Analysis Tool

There are many advantages of the PESTEL analysis tool compared to other framework. First of all, the PESTEL is a simple framework and it is easily applied. Although it is simple, the analysis tool is somehow comprehensive. The model does consider many possible factors in the environment which could affect an organizational performance. Despite the simplicity, the model really provide a reference for the organizations to understand the outside big environment analysis. All these make it a really useful and effective tool for analyzing the external environment. Secondly, the model is a great analysis tool for group discussion purposes. It often encourages brainstorming among the researchers, because the tool has open-ended discussion points, which resemble to a mind map. The tool simply allows any discussion to become comprehensive and holistic. Thirdly, the tool also forces the manager to think. Through the application of the tool, managers are forced to list down all the possible factors and investigate how these factors will influence the organization performance. It is useful as a platform to guide the management thinking process to truly know what is happening outside that will affect what is happing inside an organization.

Disadvantages of the PESTEL Analysis Tool

However, the PESTEL model has its inevitable limitations and disadvantages. First of all, not all the factors are equally important to the managers or the organization. Some factors could exert more forces towards an organizational performance. In the discussion, the model does not assign weight to each factor. The model simply does not differentiate the degree of importance of each factor to the organization. Even the manager try to assign weight to the factors, they may not reach an objective judgment on what weight is relevant to a particular factors.

Secondly, the accuracy of the tool is highly subjected to the accuracy of the input data: namely, garbage in garbage out. If the users do not provide correct input to the tool, the results or conclusion generated from the tool may not be accurate and dependable.

Thirdly, the tool suffers from a short term orientation. This is because those important factors, such as the political, economic, social, technological, ecological and legal factors may change from time to time. This cause the results generated from the tool is only valid for a short time frame. Managers should be aware of such limitations because if they used outdated results, the may make wrong managerial decisions.

Porter’s Five Forces – Strategic Analysis Tool at the Industry Level

Overview of the Porter’s Five Forces Model

In the industry level, the Michael Porter’s Five Forces Model is a very practical and famous strategic analysis tool. It is originally developed by Michael E. Porter as a framework for industry analysis and business strategy development, and today it is used for the competitive strategy analysis, and effective analysis of customers’ competitive environment.

Five forces model considers and had identify the five main competitive powers that can be possessed by a firm, namely the bargaining power of suppliers, threat of new entrants, threat of substitute products or services, bargaining power of buyers and rivalry among existing firms. All these competitive forces are shown in the figure below, and in the following paragraph, we will discuss each and every one of these competitive forces in great details.

Bargaining power of suppliers: This competitive element refer to the ability of suppliers to reduce the price of raw materials and ability to increase the quality of input material to enhance existing firms’ profitability and product competitiveness within an industry. Generally, the bargaining power of suppliers of a particular firm will much be weaker under the following situation: (1) Suppliers have a stable market or being under control by competitive marketing, where there are plentiful buyers so that any of buyer impossible to be the important customers to them, (2) The products of suppliers have specification that caused very difficulty for buyers to switch to other products (i.e., the switching cost is very high), (3) it is very difficult to find substitute products from other suppliers, and (4) the strong ability of suppliers to take forward integrates, but buyers hard to have ability to backward integration.

For example: CVRD, BHP Billition and Rio Tinto, the three giant iron ore supplier companies, continuously raising the selling price, and even the import price is much higher and the three giant iron core companies charge excessively high for their unique source of iron ore, the many China iron and steel companies still have to buy without other choices. In such as case, the China iron and steel companies is said to have very little bargaining power of supplier.

Threat of new entrants: new entrants bring new productivity and resources for the industry, simultaneously; they want to take up their market share in existing industry. Thus, the competition may happen with existing firms in raw materials and market share, and finally, causing the profitability of existing firms become low. In some serious cases, this may endanger existing firms’ survival. The threat of the entry of new competitors depends on two aspects, that is the existence of barrier to entry the field; and the other is existing firms’ expectant reaction to the new entrants.

The existence of barriers to entry mainly include the scale of economy, product differentiation, capital requirements, switch cost, sales channel distribution and government behavior and policies. Furthermore, natural resources, geographic environment such as the ship company only built in the city by sea. Some of the barriers are difficult to copy or imitate to breakthrough. Expectant of existing firms’ reaction to the new competitors mainly is the degree of retaliation, which determine with the firms’ financial power, fixed assets, the growth of organization and so on. Whatever, the possibility of the new competitors of entry the new industry, depending on the potential profit, expenditure spending and risky-taking as what assessed by the entrants, the more profitable market has more attractiveness to make new competitors to entry.

Threat of substitute products or services: even two firms in different industry may incur competition because of their products could substitute each other, thus, the competitiveness exist between them. The source of substitute competition may affect the existing firms’ strategies with. First of all, the price of products would be restricted due to the existence of substitute products, and the profit will be low. Secondly, due to various substitute products, the existing firms have to improve their product quality, or reduce the price for sale, or spend money to differentiate their products. Thirdly, the degree of threat of substitute products can be influenced by the low switching costs of buyers. The lower price and higher quality of the substitutes indirectly means the lower switching costs to the customers. For example, an orange juice seller may face indirect competition from the soft drink such as Coca-Cola. Although Coca-Cola is not a sort of fruit juice, it is a feasible substitute for orange juice.

The bargaining power of buyers: the bargaining power of buyers mainly about the buyer’s ability to reduce the price and require a higher quality products or services from an organization in an industry. Generally speaking, the following conditions determine the buyers have strong bargaining power: (1) the total amount of buyers is few, but each buyer is bulk buying, which made up of much proportion for sellers, (2) the seller industry is composed of large number but small scale enterprises, (3) the products sold to the buyers are basically standard products, making it is also economically feasible for the buyer to buy from various other sellers, and (4) the buyers have ability of backward integrate, but the sellers don’t have ability of forward integrate. For example, in the automotive industry, Toyota has a strong bargaining power of buyer. Toyota can choose its best suppliers, while the many smaller scale and less powerful suppliers have no choice but to agree to terms and conditions set by Toyota.

Rivalry among existing firms: the profitability of a firm in an industry is interrelated to the other firms in the industry. Each enterprise competitive strategies aim to gain much more advantages among competitors; therefore, the conflict is inevitable. The degree of the competition depends on many kinds of factors. Generally, the barriers to entry is lower when: (1) there are many evenly matched competitors, (2) the existence of comprehensive range of competing among industry players, (3) the market is mature and the growth of product demand is slow, (4) there is a tendency among the competitors to use price-cut strategy, (5) the products and services provide by the competitors are similar or nearly same, (6) low switching costs for the customers, and (7) the barriers to exist is higher than competing. For example, the automotive industry is suffering from huge rivalry among existing firms. When the competition is intensive, we witness that the profit margin of the car makers are increasingly squeezed.

Application of the Porter’s Five Forces Model

Each organization within an industry more or less must face with the threats comes from several competitive forces, and a firm must face the actions did by each competitor within an industry. Generally, Porter’s five forces model is a useful tool for conducting industry analysis. The following paragraphs will discuss some of the application areas for this model.

Firstly, the model is often used as a framework when conducting a qualitative evaluation of a company’s strategic position. Such a framework is important as a starting point for further discussion.

Besides, the model is useful for an entrepreneur or investor to decide which industry they should expand to. It is generally believed that the competitive structure of an industry is very important as many practitioners have observed that it is the industry outlook and competitive landscape that determine the future and expected profitability of a company. For this, Porter suggested that for a diversified conglomerate, the first fundamental issue in corporate strategy is the selection of industries in which the company should compete.

Besides, with a little adaptation, the model is also useful as a way of assessing the balance of power in the industry context. Such an analysis is possible by looking at the strength of five important forces that affect competition, as follow: (1) supplier power: the power of suppliers to drive up the prices of your inputs; (2) buyer power: the power of your customers to drive down your prices; (3) competitive rivalry: the strength of competition in the industry; (4) the threat of substitution: the extent to which different products and services can be used in place of your own; and (5) the threat of new entry: the ease with which new competitors can enter the market if they see that you are making good profits (and then drive your prices down). By analyzing how each force could affect a company, and by identifying the strength and trend of each force, it enables us to quickly assess a company’s position in making a sustained profit in the industry.

Apart from that, the model can be used to obtain insight on the forces at work in the business landscape of a smaller strategic business unit (which may need particular attention in the development of a corporate strategy). The model is very importance in developing strategic options or formulation of strategic direction for a business (Johnson and Scholes, 2001). For example: a leading manufacturer of vacuum tube with strong presence in the electronic vacuum segment will suffer lower return on asset if it plans to compete in the semiconductor sector.

Advantages of the Porter’s Five Forces Model

First of all, the Porter’s five forces model provides one simple approach to investigate industry structure. The five forces analysis helps to analyze objectively the attractiveness of an industry, as well as the source of competition. As Porter’s five forces do provide insights on profitability, it can assist in decision making about whether to leave or enter a particular industries or sectors. Moreover, the model can be used to compare the effects of competitive forces on a particular company with their impact on competitors. Competitors may have different strategies to react to changes in competitive forces, given that they have different resources and competences (Pearce and Robinson, 2002).

Secondly, the tool is particularly useful and practical because it highlights the risk and opportunities involved in an industry. The application of the model will enable strategic managers to arrive at a shared understanding of the threats and opportunities facing the firm (Porter, 2001). According to Porter, a strong competitive force can be viewed as a threat (as it drives down profits), while a weak competitive force can be regarded as an opportunity to obtain higher profits. When the managers are aware of the inherent opportunities and threats, they will be more able to formulate relevant strategies to alter the strength and direction of the five forces to its advantage (Hill and Jones, 1995).

Thirdly, it is a model easily applied and practical, as the model is pretty comprehensive and able to explain the profitability of a firm from the industry context. The model is also straightforward as it links directly these competitive forces to the profits of a company. The model enables us to see how the factors at the industry context can influence the bottom line of a company.

Disadvantages of the Porter’s Five Forces Model

However, in practice, there are also several arguments pointing out the limitations in the use of five forces model. It is found that the most common argument is that the model is more theoretical rather than practical. Researchers commented that the theory is based on three assumptions as follow: (1) the strategic planner could understand all information of the industry (which indeed this is probably not true in practice), (2) there are only competitive relationship between industry players, and the possibilities for cooperation are neglected (however, we witness that often, businesses tend to form win-win situation through cooperation with each other), and (3) industry scale is assumed to be steady, and to get market share from rivalries, a company has to act aggressively (But, in the real life, market can be increasing in size, and it is also possible for us to tap into unknown market through research, development and innovation).

SWOT Analysis – Strategic Analysis Tool at the Firm Level

Overview of the SWOT Analysis Model

At the company level, a famous analysis model is the SWOT Model. SWOT is the acronyms for strengths, weaknesses, opportunities and threats. The origins of SWOT analysis was make popular by Albert S Humphrey. It is a practical and commonly used technique for understanding the Strengths and Weaknesses of a firm, while suggesting the Opportunities and Threats facing the particular firm. The analysis tool considers both the internal and external factors into the analysis (Strengths and Weaknesses are internal factors of a companies, while Opportunities and Threats are external factors of the market). The SWOT Analysis framework is shown in figure below, and the discussion of each of these factors will be presented in the following paragraph.

Strengths. Strengths are the ability of the firm beyond its competitors or the specifications of the firm to improve its competency. Such as strong brand and reputation of the firm, premium and innovative product or services, tangible assets advantages, personnel and financial resources.

Weaknesses. Weaknesses are what the firm lacks of or which could impact on organization’s objectives badly, may include lower quality products or services, bad brand image, undifferentiated products or services compared with the competitors, manufacturing capacities and so on

Opportunities. Opportunities are the potential chances of the firm growth and development. Such as low barriers to entry a new market, the ability to acquire.

Threats. Threats are the dangerous factors brought forward by the competitors or outside marketplace, which are substitutes from competitors, new rivalry, and innovative technology, which would reduce the market share of a company.

Applications of the SWOT Analysis Model

There are wide applications for SWOT analysis. Generally, SWOT analysis is applied as a subset of the broader situation analysis, and is used to assess the fit between an organization’s strategy, its internal capabilities as well as the external possibilities. It is particularly useful because it incorporate both the internal and external factors into the analysis.

Usually, SWOT analysis is useful when we want to take the situation into account, in order to ensure a fit of organizational capabilities with the environment. The SWOT analysis tool is powerful for developing an understanding of an organization as well as the situation, for the purpose of decision-making in business and organizations.

Apart from that, the model is also useful and able to provide a good framework for reviewing strategy, position and direction of a business, a particular project and etc. The applications can be very wide. It’s not only applicable for the organizations, but also could be used in non-profit organization, decision-making and individual. For example, the SWOT Analysis can be used for: (1) workshop sessions, (2) brainstorm meetings, (3) problem solving, (4) planning and execution, (5) product evaluation as well as (6) competitor evaluation. Besides, the tool can be easily combined with other strategic tools for better analysis and decision making. For example, it can be combined with the PESTLE analysis tool.

Advantages of the SWOT Analysis Model

There are many advantages to SWOT analysis, which make it such a popular tool. Firstly, the application of SWOT analysis is straight forward. Short and simple but powerful are the most obvious advantages of SWOT; which helps the organization to know well about its strengths, weaknesses, threats and opportunities, thus, the firms could focus on the strengths, eliminate the weaknesses, minimize threats, and take great advantages of opportunities among competitors.

Secondly, the tools can be used in conjunction with many other strategic tools. SWOT analysis also could combine with PEST analysis and Porter’s five forces model. Thus, the significance of SWOT is its apparent systematic structure.

Thirdly, the main theoretical foundation of the SWOT analysis structurally stressed from analyzing of enterprise internal and external environment of the resources. The important contribution of SWOT method is though systematically and synthetically matching up the independent factors (both internal and external factors) for analysis, makes the organizations strategic plan more comprehensive and scientific.

Disadvantages of the SWOT Analysis Model

However, there are many critiques to the usage of SWOT Analysis model as well. Firstly, as it is short and simple, such an attribute reduce the model ability in mastering the information comprehensively; inevitable could cause some shortages of accuracy. Just list down S, W, O, and T formed an unclear description on the competitive position of organizations, the judgment inevitably subjective based on this description, finally could affect the accuracy and professional.

Besides that, the limitation of the SWOT is only a guide not a final prescription for the organization in operation, due to existence a long time; this analysis model has limitation of times. The organizations should immediately change their strategies according to their own preferred to achieve their strategic objectives. For example, may the organization prefer opportunities as the main growth strategy, but may other organization prior its own ability as the main strategy.

Apart from that, it is also argued that the SWOT analysis tool is less effective to be applied to the entire firm level. Many researchers suggested that the most effective SWOT analysis must link to a market segment. Establish SWOT analysis for entire company is a wrong approach because it only can get generic results.

Furthermore, SWOT analysis also base on assumptions, it excessively stress the S&W as internal and O&T as external, but in modern business, most of time, the internal and external cannot be distinguished separately, for example, O&T could exist in external environment, S&W exist in internal environment, but the true is that O&T also could exist in internal environment and vice-versa. Because the internal and external are interconnected, the opportunities of enterprises to develop also exist internally, and the internal resource and capability also provide the external opportunities of development, both of them are interdependent, consequently, it is difficult to test separately, and lack of explicit testing standards. Which requires the organizations provide certain data as much as possible to make complete the disadvantages of SWOT analysis, as well as in the list as fact with real, accurate and objectivity for senior qualitative analysis of structural basis.

CONCLUSION

PESTEL, Porter’s five forces model and SWOT analysis, all are analytical tool for business strategic development. Three of them have big value in competitive analysis of different levels. At the macro environmental level, PESTEL effectively facilitate the organizations identify and analyze the strategically relevant components of the external environment; at industry level, Porter’s five forces model evaluate the industry competition situation by helping to identify the main industry characteristic on how to influence competition and profitability. Finally, at firm level, SWOT analysis tool help the managers identify and assess the firm’s position through its own strengths, weaknesses, opportunities and threats.

We have investigated how different tools are useful in different situation, and each has its own strengths and weaknesses. Interestingly, we found that to make our analysis more accurate, comprehensive and holistic, we can combine all the tools in the strategic analysis. Three of analytical tools provide a comprehensive big picture for organizations and managers to do market planning and product development. These tools providing a broad point of view for organizations and managers, effectively help them identify the strategies in complex competition environment. A combination of all the three models enables us to perform research from the macro environmental level, the industry level as well as the firm level.

As the theoretical, the three tools play important role in competitive analysis, critically, they also exist different own limitations. All of them base on theoretical assumption may not correspond with the real situations. And all of them existence for a long time, may have certain time constraints, much more limitations for modern business operations. Therefore, the three analytical tools only a guide but not prescription; they have to consider and combine their own business circumstances with their strategic plan together, rational system thinking with its own strengths and opportunities, discard the dregs and absorb the essence.

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