In this lesson, we're going to move on to the second stage of strategic management. In this stage, we confront what Jim Collins the author of Good to Great refers to as our brutal facts of reality. situational analysis is a holistic and Frank assessment of the current state of affairs. The assessment of current state is typically performed and documented using a SWOT analysis. As its name implies, this analysis identifies and classifies the good or bad strategic drivers as either strengths, weaknesses, opportunities or threats. And the reason this tool is so popular for this purpose is that it forces us to assess both the external context and the internal capabilities.

Both require an unbiased and objective assessment to arrive at a conclusion about our starting point. Most executives have a pretty good sense of these factors already. However, you should not be limited to taking their word as gospel Having multiple data points confirming the same insights helps to validate analysis and should include data from outside the organization. A SWOT analysis can be applied to almost anything, it could be applied at the company level, to specific lines of business, to specific product lines to specific segments of customers, or even to a new opportunity. In fact, you can even perform a SWOT analysis for your direct competitors to gain insight on how they may be formulating strategy. SWOT is a very versatile tool that helps you articulate the reasons for doing something along with your concerns for doing it.

The SWOT analysis can be completed on its own or supplemented with other strategic analysis tools. And I'll show you a couple of these tools. But these are by no means exhaustive summaries. for external analysis. I'm going to show you the PEST analysis and Porter's five forces for internal analysis. I'm going to refer to To the Bureau and the value chain analysis, regardless of the tools we use, and there's a lot of them out there.

Remember the intent. The intent is to identify and document strengths, weaknesses, opportunities and threats. Stage one is going to be coming up with a list of those relevant factors to consider. Now often a brainstorming technique is a useful facilitation tool for getting as many of these factors identified as possible. Now stage two then is to pare down the list to identify only those factors that are material and strategic to the success or failure of the business. And often you'll find a list of dozens of factors can be narrowed down to a handful that really matter.

So let's take a look at some of these tools. pestle analysis is a helpful tool for documenting what I say the velocity and the direction of the Jetstream underneath your business. So PES stands for political legal, economic, social media. Cultural and technological? In other words, what are the trends of your industry. So for instance, aging demographics could be a trend.

New technological advancements could be a key trend. These trends can positively or negatively impact your business in the future. Some of them may be more material than others large organizations may actually try to influence some of these trends such as, say government policies. For many small and medium sized organizations. just maintaining an awareness is the key activity. Porter's five forces is used to analyze industry structure or the competitive forces of the industry.

High competitive forces makes an industry less attractive in other words, posing threats in our business, which will eventually factor into our thinking about how we want to position our organization. Low competitive forces, on the other hand may represent opportunities. Warren Buffett talks about looking for businesses with moats around them often because there are others Low competitive forces that play. Think about insurance companies and railroads and electric utilities. When this happens, you have opportunities to generate higher returns. The five forces tool helps you to identify a position in our universe where there are moats and define their width.

So quickly, the threat of new entrants speaks to how easy it is for a new competitor to enter your industry, the easier it is, the higher the possibility of a threat to the business. Alternatively, a business that uses say a patent for instance, creates a competitive advantage creating a higher barrier to entry, resulting in a line of business that would be less likely to be challenged. The bargaining power of customers and suppliers in the same way it can be either an opportunity or a threat. When you rely on say a few large customers or suppliers exposure and concentration risk become a factor to consider. Substitute products or services can pose a threat if a customer can easily see Which this effectively puts a cap on the prices that you can charge? And finally, look at the degree of competitive rivalry or within the industry.

Is the industry highly fragmented or highly consolidated? If someone in the industry cuts their prices, how does the competition and the customers react? Do they leave you or do they remain loyal? The higher the degree of competitive rivalry, the higher the threat is to your business. Let's look at a few tools that can be used to evaluate your internal environment. Now, the V ROI analysis which stands for value rareness, imitability, and organization helps identify distinctive competency.

This should not be confused with a core competency, which is something you do exceedingly well. A distinctive competency, on the other hand, is something that you do better than your competition. And when you have an internal capability that has these four characteristics, it's going to give you some sort of a special power over your competition. In other words, it creates competitive advantage. Now knowing your special powers helps you to identify where they may be best applied in the marketplace. value chain analysis is another tool that helps you to identify areas of competitive advantage.

Areas of your company's value chain that represent competitive advantage. Get listed as strengths in your SWOT analysis. And at the same time as you're working your way through analyzing primary and supporting activities, you'll also likely identify things that you perhaps aren't so good at, and these will get documented as weaknesses. So here I populated a SWOT analysis for one of my former hotels, we had a portfolio of hotels across the country, and each hotel had its own SWOT analysis, then vary considerably based on such strategic drivers as the geographic market, the age of the property, the degree of competition, the strength of the general manager, the stability of the local economy, and so on, and so on. Fourth, and because the SWOT analysis was different, it'd be mistake to walk away from this activity without making an overall assessment. This is the T lease that I referred to in the introduction.

So consider asking yourself first of all, do your strengths outweigh your weaknesses? In other words, how well do you know yourself? And then consider do your opportunities outweigh your threats? In other words, how well do you know by enemy? As you weigh each side of this equation, start to imagine each of the four boxes, changing in size based on the cumulative weight of all the relevant strategic drivers. Now, this is a step that's not often associated with a SWOT analysis.

But you'll see in our next lesson, why I've included this in my approach to facilitating strategic management. For this particular hotel, if I were to conceptually represent the SWOT analysis, it would look something like This, the strategic factors driving this hotel performance work. It was an old entire property with poor management, significant weaknesses in the hotel business in a very competitive market, which was a significant threat. And these boxes far outweighed the decent location which was a minor strength and the other higher and better use opportunities, which required incremental investment and came with higher risks. This created a lesser opportunity. have each person on the senior management team prepare their own conceptual depiction of the SWOT, then have a discussion to reconcile any differences between the individual perspectives.

Different conceptual representations will lead to a formulation of entirely different strategies, as we'll see in our next lesson, so stay tuned.