What is Situation Analysis, and why is it so important?
February 01, 2022
In the workplace, we tend to prize people who can make snappy decisions. But in reality, while this is a good trait to have in emergencies — like ‘should you run away from that falling tree?’ — it’s not so useful for long-term business decisions. Why? Because gut instinct is based on emotion, rather than logical reasoning. And while it definitely has value, it shouldn’t be your guiding light.
That’s not to say indecisiveness is a good thing. It just means decisions are better when they’re fully thought out. This is where a Situation Analysis comes in.
What is a Situation Analysis?
Situation Analysis is a process that helps you identify opportunities and challenges, both internal and external, to your organization, service, or product. You can also use it to define the scope of a problem.
Once you’ve worked these out, you can use your findings to help you plan a route from where you are right now to where you want to be.
You can conduct a Situation Analysis at any time, but it’s especially crucial before you implement a new process or start a project. It helps you work out the best course of action and move forward without wasting your efforts by repeating things or making false moves.
How to run a Situation Analysis in five steps
1. Analyze your customers
Customers or clients should be your focal point, so start by defining who this group is and their needs and challenges.
If this sounds like a big task, you’re right — it is! But don’t let that scare you. Set some time aside to work this out properly. You may already have a good idea, in which case, it’ll be a matter of updating and refining your previous findings. If you haven’t, then utilize tools like Google Trends, customer surveys, and data collection (GDPR-compliant, of course) to learn more about your customers.
As part of this stage, you could also create a customer journey map, like the one below. This will help you work out issues and goals your customers have at specific points during their interaction with your business.
2. Analyze your products and services
It’s always good to take a step back and assess your current offering. Take note of all your products and services, and analyze whether they currently meet the demands of your customers or clients.
Again, a customer journey map can help you identify specific issues and opportunities. You can also collect customer feedback via reviews, surveys, interviews, or focus groups. As part of the assessment, you should review your suppliers and distributors (if applicable), as well as the tools and software you use.
A SWOT diagram can help you work out your business’s strengths, weaknesses, opportunities, and threats (which, as you’ve probably worked out, is exactly what S-W-O-T stands for).
You can also apply this tool to specific products or services within your business. The beauty of this technique lies in its simplicity. Just create a two-by-two grid (like the one below) and fill in the different sections.
3. Suss out the competition
Run a competitor analysis to see what others in the marketplace are doing, including their strengths and weaknesses. Once you’ve worked this out, you’ll be in a better position to compete.
You can do this stage as part of a 5C Analysis — a framework designed to help you assess your environment from five different areas, each of which impacts your business decisions.
- Customers (current and potential): note down their key features (i.e., age, hobbies, location, and anything else that’s relevant), as well as their needs, channels, and growth.
- Competitors: work out who your closest competition is, as well as their strengths and weaknesses.
- Company: analyze everything to do with your business, including your branding, market share, company culture, strengths, weaknesses (a SWOT chart will come in handy here), products, and services. Note how this compares to your biggest competitors.
- Collaborators: assess your current suppliers or distributors, influencers, marketers — in short, any external ties you have. You can also include technology and tools here.
- Climate: take a closer look at the market, including competitors, growth, recession, trends, opportunities, tech, and culture.
4. Analyze the environment
Take a step back and review your operational environment. Examine external factors, including economic trends that could affect you and/or your customers. Note down any potential or real threats or opportunities.
A PESTLE Analysis gives you insight into your company’s political, economic, sociological, technological, legal, and environmental situation. Again, a diagram can help you organize your thoughts here.
- Political: take note of current trading regulations and government policies. Consider how upcoming elections could influence these things.
- Economic: assess economic trends and import/export regulations that could affect your operations.
- Sociological: take into account any cultural movements and changes to your target demographic’s lifestyle.
- Technical: assess your technology and developments in the wider world. You should also include cybersecurity and changes to legislation here.
- Legal: examine legislative changes, including employment law.
- Environmental: look at how your business impacts the environment on a local and global scale. Consider how climate change could impact your business, and make sure you’re meeting current and upcoming regulations or have a compliance plan.
5. Assess your resources
Before you put your plans into action, you’ll need to know what you have at your disposal. If you have a team or work as part of one, find out who can help you and what their schedules are. Also, note down tools and budgets available to you, along with any limitations that could affect them.
A VRIO Analysis is a helpful tool for evaluating your ability to use organizational resources to their fullest potential. VRIO is an acronym for Value, Rarity, Imitability, and Organization. Here’s how to use it.
- Value: how valuable is a particular resource to your business success? Consider how the value compares to any short-term or long-term costs.
- Rarity: is the resource rare or easy to acquire? You have less flexibility in your business model when a resource is harder to obtain.
- Imitability: is the resource easy for competitors to imitate? If so, consider any adjustments you can make to differentiate your resources.
- Organization: is your business or team in a suitable position to leverage the resource? A resource that will take considerable investment or improvement to use increases your operating costs.
The VRIO framework can apply to a range of assets, including human resources, finances, information, property, and material goods. Evaluate each of the factors above in terms of:
- Competitive parity/equality
- Competitive disadvantage
- Temporary competitive advantage
- Unused competitive advantage
- Long-term competitive advantage
A VRIO Analysis allows you to see which resources are integral to your business and should be prioritized and managed as closely as possible. It also helps you decide when to outsource a resource or process or improve it to increase your competitive advantage. Once you have everything mapped out, you’re ready to roll.
The benefits (and limitations) of a situation analysis
Businesses of all sizes are vulnerable to market changes, and as they grow, there’s even more opportunity for something to go wrong. Performing a situational analysis can never harm your business but can certainly change it for the better. Here are a few ways to make use of it and mistakes to avoid along the way.
Understand the full scope of problems
All too often, managers are aware of organizational problems but assume they aren’t bad enough to require immediate attention. A thorough analysis can help you uncover the source of ongoing issues and evaluate their impact on different aspects of the business.
However, the subjective nature of a situation analysis makes it important to gather information from as many sources as possible. If you fail to gain a clear picture of your strengths and weaknesses, you won’t succeed at making your business more competitive. Use a combination of concrete data and feedback from internal and external stakeholders, so you can draw accurate conclusions.
Engage and motivate the team
Stagnant businesses are prone to losing great team members because there isn’t a meaningful vision for the future. Don’t simply look at a situation analysis as a decision-making tool; use it to get your team talking and innovating. Ultimately, your team has the most insight about what is or isn’t working in the business. Let them guide you toward opportunities you might otherwise overlook.
Knowing the ins and outs of the business is the only way to continuously refine your operations. Analyzing your resources, processes, and position in the market at least once a year allows you to cut out projects that aren’t profitable or beneficial to clients. If you face pushback from some stakeholders, the analysis provides data-based evidence for your decisions.
Set achievable business goals
A situation analysis gives you the insight to identify more realistic and advantageous goals. It’s an unfortunate blunder for business teams to conduct analyses but then do little with the information. For every analysis, develop an implementation plan and get sign-off from major stakeholders.
But don’t worry — you don’t have to act on everything that comes up in your evaluation. Prioritize fixing problems that are the biggest threats to your success and opportunities involving the most value and least expense or logistical effort.
Displaying information visually makes it easier to process stats and large amounts of text, so get acquainted with the diagrams we’ve mentioned above and use them whenever you can.
If you plan to create diagrams as part of your Situation Analysis, make sure you’ve got the right tools for the job. The beauty of things like a SWOT diagram, 5C Analysis, and PESTLE Analysis is they’re easy to use. No training’s required, although we recommend using a dedicated tool for convenience.
Online diagramming tools make it easy to draw, edit, and share your creations, thanks to premade templates and cloud storage. This means you can spend less time formatting and file-finding and more time making good decisions.
This post was originally published on March 11, 2020, and updated most recently on February 1, 2022.