A situational analysis refers to a set of techniques employed to assess both the internal and external factors affecting a business.

 

What constitutes a situational analysis?

A situational analysis refers to a set of techniques employed to assess both the internal and external factors affecting a business. It enables the utilization of market research to gauge anticipated growth, identify potential customers, evaluate competitors, and analyze the current status of your business.

A comprehensive situational analysis encompasses a review of both internal and external factors. 

The primary components of this analysis include:

Strengths: Positive attributes related to your brand, products, services, and marketing strategies.

Weaknesses: Areas concerning your products, brand perception, and marketing strategies that require enhancement.

Opportunities: Potential avenues for increasing success, such as innovative methods to engage customers or new markets to explore.

Threats: External factors that may adversely affect your sales or profitability.

How to perform a situational analysis

A situational analysis entails employing various methods of critical evaluation.

 Below are the fundamental steps to undertake in order to execute a situational analysis:

1. Execute a 5C analysis

The 5C analysis represents company, competitors, customers, collaborators, and climate. This form of analysis is advantageous for assessing the market environment.

Company

When evaluating a company through this framework, the primary focus is to pinpoint a sustainable competitive advantage. This may include aspects such as brand equity or technological advancements. The VRIO model, which stands for valuable, rare, imitable, and organized, can be employed to assess whether a company's assets confer a sustainable or merely temporary advantage.

Competitors

Major competitors can be identified by analyzing market share within the industry. However, some competitors may operate across various industries or cater to niche markets that differ from your conventional industry. Compile a comprehensive list of competitors, then refine it after conducting further research on each one.

Customers

A company can target three distinct market sizes with its products and services: total available market (TAM), serviceable available market (SAM), and serviceable obtainable market (SOM). TAM represents the broadest market segment encompassing all potential customers. SAM is a subset of TAM, consisting of individuals who could realistically utilize a product or service. SOM, being a subset of SAM, represents the most focused segment of the market, comprising the most viable customers that a company should strive to attract.

Collaborators

Collaborators are the entities that assist a company in delivering goods and services. This typically pertains to an organization's supply chain, which includes suppliers, distributors, agencies, and partnerships.

Climate

Climate—often referred to as context—pertains to the aspects of a business over which it has limited or no control. Changes in climate may affect the industry as a whole rather than just the individual company. Consequently, any advantages arising from climate factors are unlikely to translate into a competitive edge.

2. Complete a SWOT analysis

A SWOT analysis is a technique used in situation analysis that evaluates a company's strengths, weaknesses, opportunities, and threats, considering both current and future scenarios.

It is generally advisable to collaborate with multiple individuals to generate the maximum number of ideas for the SWOT matrix, which is why performing a SWOT analysis resembles a brainstorming session. Throughout this process, you evaluate the strengths of the business, including aspects such as brand attributes, unique selling propositions, effective leadership, or a strong team.

In terms of weaknesses, it is important to scrutinize the areas where the business has room for improvement. This may include issues like a lack of personnel or budget constraints.

When considering opportunities, you should assess whether there are any factors that could lead to new markets or demographic segments. Lastly, regarding threats, identify any elements that could negatively affect the business, such as legislative changes, new competitors, or other factors that could influence your company or its profits.

3. Perform a Five Forces analysis

In the final stage of your situational analysis, you will apply Porter's Five Forces Framework to evaluate your competition and mitigate any potential threats they may pose to your business. The primary objective is to compare and assess a business's profitability in relation to its direct and indirect competitors.

 Below are the elements of a Five Forces analysis:

Assess competitors

Begin by examining the level of competition that your organization encounters. Assess the number of rivals present in your sector and how their offerings compare to yours.

Identify if substitute products pose a risk

Subsequently, analyze the accessibility of alternatives to your products and whether there are features of your products that customers can replicate manually or at a reduced cost.

Investigate the bargaining power of customers

Following the assessment of substitute products, it is essential to evaluate the extent of power held by your customers. If your business solely involves selling products, their power is generally limited to the volume of their orders and the possibility of product customization. However, if you are providing a service, clients may anticipate negotiations.

Evaluate the potential threat from new customers

Next, reflect on the risk posed by new entrants in your industry. Determine if there are any entry barriers that provide your company with a competitive edge.

Analyze the bargaining power of suppliers

Lastly, assess the suppliers within your market. A greater number of suppliers available to you facilitates the search for alternatives should you require them at a lower price. Consider how switching suppliers might affect your products and services.