What is Situational Analysis? A Beginner's Guide

It is crucial for businesses to understand where they stand in the market. One of the best ways to do this is situational analysis. A proper situational analysis helps us understand the strengths and weaknesses all the while identifying opportunities and threats.

However, to perform the analysis, we would require data such as market trends, customer needs, and more.

Through this blog, I intend to help you understand the concept of situational analysis, the tools and techniques to use, and how to conduct it.

Without further ado, let's get started.

What is Situational Analysis?

Situational analysis is the method followed by businesses to learn their current situation in the market. Businesses can learn where they stand in the marketplace and the factors that affect their success. 

There are mainly two components that come into play in situational analysis. They are -

• Internal - This includes the strengths and weaknesses of the company.
• External - These are opportunities or threats from external elements like market trends and competition.

So, why is it essential?

I'd say, it's mainly because of three reasons.

• It provides market data that can help make decisions based on facts.
• It guides businesses in setting realistic and achievable goals and plans for growth.
• Lastly, it allows companies to see potential problems before they happen. Meaning? They can prepare for what's coming, best or worst. 

5 Situation Analysis Tools and Techniques

If you are looking into situational analysis, the following key tools are for you to have.

1. SWOT Analysis

If you didn't know, SWOT stands for - Strengths, Weaknesses, Opportunities, and Threats. It's a pretty much straightforward and effective tool to have.

Here's a closer look at the components.

Strength

These are the positive attributes of a company that gives it an advantage over competitors. For example, Apple's strength is in its brand reputation. Having an Apple product is considered a luxury.

Weakness

These are areas where the organization may be lacking or facing challenges. To give you an idea, let's take a startup for example. Though the business idea and the team are great, they have limited financial resources.

Opportunity

These are favorable external conditions that the business can leverage for growth. A great living example is ChatGPT, and how it leverages Gen AI for growth.

Related Read: See how you can create surveys within ChatGPT using SurveySparrow plugin.

Threat

Quite opposite to opportunity, these are external conditions that could negatively impact the growth of a company. A great example here is the effects of recession on the market.

2. PESTLE Analysis

PESTLE analysis is another framework organizations can use to assess the external environment in which they operate. It stands for -

Political

This includes the government policies, political stability, and regulations that affect the business. For example, a change in tax laws can impact the profitability of the business. It can go up or down based on the law.

Economic

These focus on economic factors such as inflation rates, interest rates, economic growth, and so on. For instance, high inflation can reduce consumer purchasing power.

Social

This includes social factors like demographics, cultural trends, and consumer behavior. The growing demand for sustainability has increased the demand for eco-friendly products. This is how social factors impact businesses.

Related Read: Demographic survey questions to ask.

Technological

This involves advancements in technology that can impact operations and market dynamics. For example, the rise of e-commerce has redefined how retail businesses run.

Legal

Legal factors include laws and regulations that govern business practices. A few examples are:

• Labor laws affecting hiring practices.
• Environmental regulations impacting production processes.

Environmental

This considers ecological factors that may influence business operations. For instance, climate change can affect supply chains and resource availability.

3. Porter's Five Forces

Porter's Five Forces model analyzes the competitive dynamics within an industry. They do this by assessing five key forces.

Threat of New Entrants

This force examines how easy it is for new competitors to enter the market. Factors influencing this threat include barriers to entry (e.g., high capital requirements) and regulatory requirements.

Bargaining Power of Suppliers

This assesses how much power suppliers have over prices and terms. High supplier power can occur when there are few suppliers for critical materials. Also, offering unique products that are hard to substitute can be a good bargaining chip.

Bargaining Power of Buyers

This looks at how much influence customers have on pricing and quality.

Buyer power increases when customers have many alternatives available. They can also negotiate in cases where they are purchasing in bulk.

Threat of Substitute Products or Services

This force examines the likelihood of customers switching to alternative solutions. One key factor that drives this is the availability of similar products that fulfill the same need (e.g., tea vs. coffee).

Industry Rivalry

This assesses the intensity of competition among existing firms in the industry. High rivalry can arise from many competitors vying for market share. Moreover, slow industry growth also leads to aggressive competition for customers.

4. 5C Analysis

If you want a complete view of both internal and external factors affecting your organization, try 5C analysis. The 5 C's are as follows.

Company

This involves evaluating the organization’s strengths, weaknesses, resources, and capabilities. An example is assessing your company’s market share, product quality, and operational efficiency.

Customers

Understanding customer needs, preferences, behaviors, and demographics is crucial. The best way to go about this is using surveys. Conducting surveys can help gather insights about customer satisfaction and buying habits.

Collaborators

This includes analyzing relationships with partners, suppliers, distributors, and other stakeholders. Like you can evaluate the reliability of the supplier.

Competitors

This is one of the common analyses done across industries. Organizations assess the competitive landscape by identifying direct and indirect competitors.

Climate

Climate as not in the sense of weather. What I meant was the market environment. This includes external factors such as economic conditions, social trends, and technological changes. For example, monitoring economic indicators like GDP growth.

The insights gained from a 5C analysis help organizations develop targeted strategies for growth and competitive advantage.

5. VRIO Analysis

The VRIO analysis framework evaluates an organization's resources based on four criteria. They are Value, Rarity, Imitability, and Organization. Let's discuss each in detail.

Value

Does the resource provide value to customers? Resources should contribute to customer satisfaction or efficiency.

Rarity

Ask yourselves - Is the resource unique compared to competitors? The more unique your resources are, the more competitive edge you can get. For instance, unique brand identities or exclusive supplier relationships can be rare assets.

Imitability

Again, ask yourselves - Is it difficult for your competitors to imitate this resource?

The resources should be challenging to replicate to sustain an advantage. A strong company culture is an example to be considered here.

Organization

Is the organization structured to fully utilize this resource? Effective management and systems must be in place to leverage valuable resources.

An example here is a company with strong leadership and efficient processes. They are more likely to be better positioned to exploit their resources effectively.

How to Conduct Situational Analysis?

There are numerous steps to follow through to conduct a proper situational analysis. What I will be doing is that, I will explain the entire process with the help of an example. Or a sample situational analysis.

Let's take Machinery Solutions Inc. for example. They specialize in producing high-quality CNC (Computer Numerical Control) machines. Their target is companies in the automobile and aerospace industries.

Keep this in mind as I guide you through the process.

Step 1 - Fix Your Goal

Before we dive into how to process, we should have a clear-cut idea of what the end goal should be.

In this case, Machinery Solutions wants to expand its market share in aerospace over the next two years. The end goal is to understand its current position and identify opportunities for growth.

Step 2 - Gather Relevant Data

For any kind of analysis, we need data. Though there are research papers and other related materials available, I'd suggest collecting data on your own. Why? Because this way the data we collect is fresh and from the audience designed by us.

What kind of data should you be focusing on? Well, let's see the example to understand.

• Customer feedback on product quality and service
• Employee insights on production capabilities and challenges.
• Research on customer needs in the aerospace industry.
• Competitor analysis focusing on other manufacturers of CNC machines.

Related Read: What is competitor analysis survey.

Step 3 - Analyze Internal Factors

This is where we evaluate the internal environment of the organization. The key here is to understand the key strengths and weaknesses. If you are having doubts about which tool or technique to use, try SWOT analysis.

When we do the analysis on the example, the strengths and weaknesses look something like the following.

Strengths:

• High-quality products with advanced technology.
• Strong relationships with existing clients in the automotive sector.
• Experienced engineering team with expertise in CNC technology.

Weaknesses:

• Limited brand recognition in the aerospace sector compared to competitors.
• Higher production costs due to reliance on specialized materials.
• Slow response time to customer inquiries.

Step 4 - Analyze External Factors

Here, the best option is PESTLE analysis. Since we are looking more at the opportunities and threats, PESTLE seems to be the right choice.

When done for Machinery Solutions, we found the following.

• Political: Government regulations regarding aerospace manufacturing and safety standards.
• Economic: Growth in the aerospace industry driven by increased air travel demand post-pandemic.
• Social: Growing emphasis on sustainability; customers prefer suppliers with eco-friendly practices.
• Technological: Advances in automation and AI that could enhance CNC machine capabilities.
• Legal: Compliance with international trade laws affecting exports to foreign markets.
• Environmental: Pressure to reduce carbon emissions in manufacturing processes.

Step 5 - Competitive Analysis

Understanding your competitors can give you ideas for improving your offerings. Using Porter’s Five Forces, Machinery Solutions Inc. assesses its competitive environment:

Competitive Rivalry:

There are several established competitors in the aerospace CNC market. Therefore, intense competition on price and innovation.

Threat of New Entrants:

Moderate. While there are barriers like capital investment and technology requirements, new players can enter with innovative solutions.

Bargaining Power of Suppliers:

Very high. Specialized materials are sourced from a few suppliers, giving them significant power over pricing.

Bargaining Power of Buyers:

High. Aerospace companies often have multiple options for suppliers and can negotiate prices aggressively.

Threat of Substitutes:

Moderate. While CNC machines are specialized, advancements in alternative manufacturing technologies could pose a threat.

Related Read: Top competitive analysis tools.

Step 6 - Synthesize Your Findings

After gathering all this information, it’s time to synthesize it into actionable insights. Create a summary that highlights:

• Key strengths and weaknesses.
• Major opportunities and threats.
• Insights from competitive analysis.

In the case of Machinery Solutions Inc. summarizes its insights as the following.

• Strengths include high product quality and engineering expertise.
• Weaknesses involve brand recognition and customer service responsiveness.
• Opportunities exist due to industry growth and technological advancements.
• Threats include strong competition and high buyer power.

Step 7 - Formulate Strategies

Based on our findings, it's time to create strategies to improve our offerings. We need to leverage strengths and opportunities while addressing weaknesses and threats. We have to ask ourselves the following questions.

• How can we capitalize on market trends or consumer preferences?
• What steps can we take to improve areas identified as weaknesses?

For Machinery Solutions Inc., we can develop the following strategies based on the data.

To Enhance Marketing Efforts

Increasing brand awareness in the aerospace sector through target marketing campaigns. The company should showcase successful case studies and testimonials from existing clients.

To Improve Customer Service

Train and implement a dedicated customer service team for aerospace clients. This should ensure faster response time and better quality support.

Step 8 - Setting Actionable Goals

Finally, set clear, actionable goals based on the analysis. While doing so, make sure that it adheres to SMART (Specific, Measurable, Achievable, Relevant, and Time-bound) goals principles.

In the case of Machinery Solutions Inc., the goals could be -

• To achieve a 20% increase in market share within the aerospace sector in the next two years.
• To improve the customer service response time by 30%.

Et voila...there you go. 

How SurveySparrow Can Help with Situational Analysis

Situational analysis is essential for any business to understand where they stand in the market. And as someone who already knows the importance of data collection and analysis, I can safely say to consider a VoC tool.

If you don't have a tool in mind, might I suggest SurveySparrow?

It's one of the best VOC tools out there with AI-powered features. The AI survey feature makes the survey creation process a lot simpler and quicker. You add in the prompt, and it will create one for you with a temporary design.

Its omnichannel distribution makes it easier to reach out to customers where they are. Be it offline, Slack, or WhatsApp, the tool has got you covered. Not to mention the AI-text analytics feature. From understanding customer (or employee) sentiments to key drivers of business, it has it all.

Intrigued yet?

Do not take my word for it. The tool offers a free forever plan, and try it for yourself. Most of the features are available with the free version and other top-tier features are available with the 14-day free trial.

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