Strategic analysis: choose the model that answers your question
Nine models for the external and internal analysis, each matched to the question it answers.
In this topic: Strategy 7
Analyse to make a choice, not to fill a binder
Nine models for the world outside and the business inside, and the question each one answers.
Strategic analysis often ends as a thick document full of trends, strengths and competitors that nobody acts on. The model is rarely the problem; the missing question is. A PESTLE analysis made "because a plan needs one" produces forty trends. Made to decide whether to open a second site, it produces five, and you know what to do with each.
Your industry matters more than most owners assume. McKinsey's analysis of the world's 2,393 largest companies found that about 50 percent of a company's position on the profit curve is driven by its industry (source: McKinsey, February 2018). Much of the rest is down to your own choices. Strategic analysis therefore looks outwards, at the wider world, the industry, customers and competitors, and inwards, at your results, activities, capabilities and organisation.
Which strategic analysis model answers which question?
Choose the model by the question you need to answer, not by habit.
| Your question | Model | Side | What you get |
|---|---|---|---|
| Which developments in politics, the economy, society, technology, law and the environment will affect us? | PESTLE analysis | External | A ranked shortlist of opportunities, threats and key uncertainties |
| How attractive is our industry, and who captures the profit? | Porter's five forces | External | The forces that cap prices and margins, and where you can shield yourself |
| Who are our competitors, and what will they do next? | Competitor analysis | External | A profile of each main rival and its likely response to your moves |
| Which market do we play in, who buys, and how big is our real chance? | Market and customer analysis | External | Segments, buying criteria and an obtainable market size |
| How do we decide when the future is uncertain? | Scenario planning | External | A few plausible futures and a strategy that holds up in most of them |
| Which activities create value, and which mainly cost money? | Porter's value chain | Internal | Cost and customer value per activity: what to keep, improve or outsource |
| Which capabilities give us an advantage that lasts? | Core competences and VRIO | Internal | The few capabilities rivals find hard to copy |
| Does our organisation fit the strategy we choose? | McKinsey 7S model | Internal | The gaps between strategy, structure, systems and people that need closing |
| Do we earn enough, and where do we differ from the industry? | Financial analysis for strategy | Internal | Ratios against industry benchmarks, and which deviations are deliberate |
External analysis: from far away to close by
The external analysis works inwards, from the macro environment through the industry to the customers and competitors you meet every week. The outcome is a short list of opportunities and threats, ranked by impact and likelihood, plus a handful of key uncertainties to explore with scenarios.
PESTLE analysis
The macro environment in six factors, where to find reliable signals and how to rank them into opportunities, threats and key uncertainties.
Porter's five forces
Why some industries keep more profit than others, with questions per force and the pitfalls Porter warns about.
Competitor analysis
Direct and indirect competitors and new entrants, a profile per rival and a way to predict how they will respond to your moves.
Market and customer analysis
Market definition, segmentation, buying criteria and a worked example of total, serviceable and obtainable market size.
Scenario planning
Several plausible futures instead of one forecast, and the early signals that show which one is arriving.
Internal analysis: an honest look at your own business
The internal analysis asks what you are good at, where you fall short and which advantages will last. A strength you cannot back with a figure or a fact is an assumption, so start with the numbers and work towards activities, capabilities and organisation.
Financial analysis for strategy
The ratios that matter for strategy, and how industry benchmarks show which deviations are a deliberate choice and which are a problem.
Porter's value chain
Your business split into activities, with the cost and customer value of each and what to keep in-house.
Core competences and VRIO
From a long list of strengths to the few capabilities competitors struggle to copy, using the tests of Prahalad and Hamel and of Barney.
McKinsey 7S model
Whether structure, systems, style, staff, skills and shared values fit the strategy you have chosen.
Before you judge your own margins, look up the industry figures for your sector and enter your own numbers in the profit and cost benchmark. A gap with the industry average is where the internal analysis starts, and an industry's cost structure often says more about its competitive forces than a list of trends.
How much strategic analysis is enough?
Agree before you start which decision each analysis must support, and stop when more work would no longer change that decision. The scope differs with the size and spread of the business.
Small business
Three models usually carry the load: a short PESTLE limited to the factors that really hit you, a five forces analysis of a narrowly defined market and a financial comparison with your industry. Add a one-page profile of the three to five rivals you meet most often, and update it when something big changes.
Larger organisation
An analysis per business unit and per country, scenarios for the main uncertainties, a portfolio view across units and a check of organisational fit before a large change. Give each part an owner and a fixed moment in the planning cycle, so it is kept up to date instead of redone every year.
The findings come together in the SWOT analysis, and the TOWS matrix turns them into options. Where the models sit in the planning process is explained under external analysis and internal analysis in strategy in five steps. Choosing between options is the subject of strategic choices, and every other topic is in Strategy.
What is the difference between an external and an internal analysis?
Which strategic analysis model should I use first?
How do I stop the analysis from becoming a long list?
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