CHAPTER 12
Strategic Tools
Back to statistics. The global statistic is that more than 50 percent of companies’ strategies only achieve 60 percent of their forecasted financials. And this is despite many of these companies taking consultants’ advice to be conservative in their forecasts. Why is this?
Rainmakers suggest two reasons. First, company CEOs drive for growth when they actually need a more coordinated strategy. Second, when they do have a solid strategy, the execution of such a strategy is poor and ineffectual.
The Rainmaker looks at how to avoid these errors by viewing strategic planning and sales execution as inextricably linked. Both must rise in unison to achieve effective and real growth. The starting point to effectively manage both simultaneously is to continually apply straightforward rules, including the following:
• Keep your strategy simple and easy to implement.
• Follow your predetermined strategy as to resource allocation.
• Monitor performance as you implement sales strategy.
By following these rules, you reduce the potential to cause cash-flow shortfalls and have the ability to quickly identify strategic problems and to effectively make corrections.
Preferred Types of Strategies
Most entrepreneurs write business plans without basing their forecast and strategies on a sound foundation of research. As such, while you must set out your vision, mission, and goals, it is crucial to establish how these will be achieved within the environment you are operating. This includes three analytical strategies, namely, PESTEL analysis, Porter’s Five Force analysis, and SWOT analysis. These three establish a solid foundation for the establishment of a business and an understanding of the environment within which the business will operate.
Three Strategic Methods
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Strategy |
Explanation |
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PESTEL analysis |
• PESTEL stands for political, economic, social, technological, legal, and environmental. • It is used to assess the viability of your business within a broader economic environment. |
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Porter’s Five Forces analysis |
• An analytical model to analyze a company relative to its peers:
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SWOT analysis |
• SWOT stands for strengths, weaknesses, opportunities, and threats. |
These three research methods enable you to establish how strong your business is compared to competitors’ (Porter’s), how strong it is relative to the market (PESTEL), and how it fares in an assessment of itself (SWOT).
PESTEL Analysis
This form of analysis is intended to provide you with an understanding of the external environment in which the business intends to operate, from the global markets to your more specific area of business. Many researchers tend to conduct PESTEL analysis to please management and funders. This is a complete waste of time and money. The analysis should highlight whether your company will prosper or fail within the market. Then take weaknesses and implement strategies to correct these.
Take cognizance of the following:
• Political factors highlight whether governments, or local authorities influence your specific industry with tariffs and country-specific area taxes. Under this heading you can add labor unions and their direct influence on your company that could have long-term negative or positive effects.
• Social factors assess cultural trends, demographics, population and socio-economic conditions.
• Technology factors pertain to changing trends that may affect the operations of the industry and the market via for instance new automation methods.
• Legal factors can be macro when laws are made or changed to a country or industry. Micro variables relate to laws that affect companies’ structures.
• Environmental factors include all analyses of climate, weather, geographical location, and global changes in climate.
PESTEL analysis aims to identify major macroeconomic factors that have impacted or could in future impact your business and thus profitability.
Porter’s Five Forces
Constituting what is called Porter’s Five Forces analysis, the following factors are important to consider:
• Strengths and Capabilities of Management: Skills and capabilities of management and its team are important aspects to the ultimate success of your company.
Each member of your team must be regularly assessed to establish how relevant, experienced, and skilled they are. These include the following:
Leadership ability.
Communication skills.
Vested interest in the business’ success.
• Ability to Sustain a Competitive Advantage
Funders are concerned that your company will be able to pay them back. As such, they are always interested in your company’s ability to keep its competitive edge.
Some variables to keep your edge are as follows:
Ensure that your products and services have copyrights and patents.
Continually implement marketing and promotional strategies to justify a higher price.
Keep a check on supply–demand variables to assess demand trends. You should be looking for patterns that help you assess whether your product is at risk of becoming obsolete.
• Differentiation
Some products or services are inherently unique by technical or patent designs; others achieve uniqueness through marketing or by combining products and services.
Your product should have an inherent uniqueness.
You also must have excellent marketing abilities.
Your product and marketing skills should be your competitive edge in the market.
For a technical product, you must possess significant internal skills.
• Barriers
It is important to establish barriers of entry to prevent new entrants from copying your model. Simply put, the more the firms that enter your market, the less the chances you have to dominate it.
The following must be considered:
Is it expensive or difficult for customers to switch away from your offering?
Do you have proprietary and protected technology?
Do you have all the significant distribution channels locked up?
Can you significantly benefit from economies of scale?
• Prominence of Your Company
Small or start-up businesses often fail to consider the impact of larger companies currently selling or soon entering the same market.
Do you have an established presence in the market?
Does your company’s founder have a positive reputation in the market?
Do you have brand recognition or other intangible assets?
The point of this exercise is to identify only those items that are considered a possible strength or weakness in the context of the PESTEL analysis. The reality is that strengths and weaknesses are often relative to the environment at a specific time. Thus, strengths and weaknesses can fluctuate in response to environmental fluctuations. Today’s strength could be tomorrow’s weakness and vice versa. Once the strengths and weaknesses are matched to the environmental issues identified in the PESTEL analysis, the pertinent opportunities and threats can be identified.
In essence, a threat is an external, macroenvironmental issue that is likely to have a negative impact on your business because of insufficient funds or product strength to counter opposition. Similarly, an opportunity is an environmental issue that is likely to have a positive impact on the business because of internal strengths, such as management, marketing and product demand strength
The SWOT analysis should also highlight what steps need to be taken in the short, medium, and long term to offset threats. The following is an example of variables considered during a SWOT analysis:
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SWOT variables |
Criteria |
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Strengths |
• Competitive strength compared to peers • Availability of resources and assets • Skilled and experienced CEO, board, and key personnel • Knowledge of products or services • Strong financial systems • A solid marketing plan • Location • Price, value, and quality • Processes, systems, and IT • Communications • Management succession plans |
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Weaknesses |
• Gaps in management • Lack of strength against peers • Poor reputation • Weak financials • Cash flow under strain • Reliability of market data • Weak processes and systems |
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Opportunities |
• Ability to take advantage of new opportunities • Competitors not fully aware of new opportunities • Technology development and innovation • Niche target markets • Strategies in place |
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Threats |
• Politics, legislation, and environmental effects? • IT developments • Competitor intentions unsure • Market demand not fully established • Loss of key staff is a possibility • Economic growth remains uncertain |
Strategic Importance
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Strategy Analysis |
Most used tools |
Most valued tools |
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• SWOT • Porter’s Five Forces • PESTEL |
• PESTEL • Porter’s Five Forces |
Consultants and researchers use strategy tools to identify and implement organizational plans. In fact, in an increasingly competitive business world where the ability to spot new opportunities needs to be efficient and timeous, these kinds of tools are critical. The challenge for managers, however, is deciding which of these tools to use and when best to use them.
In exploring the use of strategy tools in organizations, the following was concluded:
• That there are 10 global strategy tools, namely, SWOT analysis, key success factors, core competences analysis, scenario planning, value chain, Porter’s Five Forces, resource-based analysis, industry life cycle, PESTEL analysis, and portfolio matrices.
Strategy tools most used are Porter’s Five Forces, SWOT, and PESTEL.
Scenario planning is more useful in strategy sessions to determine true potential market values of a company or product.
An analysis of key success factors tends to be used for strategy implementation.
• However, there is a word of warning for Western economies and managers in general. Research highlights that business leaders in Asia, Africa, Middle East, or South America use a higher number of tools than managers from companies in Western countries, in the United States and Europe. This may have repercussions for the future competitiveness of Western firms in global markets.
Rainmaker Observation: It must be stressed that the foregoing tools are an integral part of the analytical entrepreneurial process of establishing a solid company structure and must be combined with feasibility studies.