Accurately grasp your company’s situation
Research and analysis: easily overlooked
Research and analysis is the very first preparation that must be done when taking a step toward the direction and goals set by the executive.
There are four types of research and analysis: “preliminary research,” “external environment analysis,” “internal environment analysis” and “integrated analysis.” If any of these is excessive or insufficient, the balance of research and analysis is lost.
When our company supports a client, we first conduct interviews and preliminary research on its products and services, then examine the external and internal environment surrounding the company’s products and services. By analyzing the compiled research results in further detail, we identify the situation and issues the company currently faces, and set out guidelines for reviewing strategy and for strategic design to make improvements.
Specifically, we use the following methods.
(1) Preliminary research
This research grasps the current state of the company, for example by interviewing the president and staff in charge to obtain information, or through self-assessment.
There are two kinds of preliminary research: “preliminary interviews” and “self-assessment.” In “preliminary interviews,” outside consultants or strategists are engaged to meet directly with executives, senior managers, staff in charge and others and conduct thorough interviews on every detail of products, businesses and so on. Having a third party look objectively can be expected to uncover not only issues and problems that had gone unnoticed, but also new resources.
The other is “self-assessment,” in which people check things themselves without outside consultants or strategists. In this case, the president, senior managers and other members of management each perform a “self-assessment” based on multiple checklist items. Management should understand their own company’s business environment best, so we have them reflect on it. There have been very many cases where self-assessment led companies to rediscover their own resources.
Above all, it is important first to analyze your own company. Knowing yourself provides important data for making accurate diagnoses when formulating corporate strategy going forward.
● Preliminary interviews: Interview the president and those in charge of products and businesses to obtain information on the issues.
● Self-assessment: Have the president and management perform an assessment to grasp the company’s current overall corporate strength.
(2) External environment analysis
External environment analysis, as the name suggests, is for grasping the situation outside the company. Information is collected from various perspectives, such as “opportunities,” “threats,” “competitors” and “industry conditions,” to objectively judge what kind of situation the company is in.
Companies that are constantly exposed to competitive pressure and environmental change will simply be weeded out if they merely keep operating. Companies must always respond to change. Changes in the business environment are extremely complex and rapid, so it is important to adapt quickly to changing circumstances and transform yourself.
Analysis has its limits, but if issues become even a little clearer, that can be the trigger for turning company operations around. You cannot draw up a strategic plan without looking at how the environment surrounding your company will change.
To achieve sound survival and prosperity, a strategic plan premised on external environment analysis is necessary.
External environment analysis comes in several types, but here I will broadly divide it into two.
One is “macro environment analysis.” As the name suggests, this looks at your company’s business environment from a broad perspective.
Even highly capable executives often drive their companies into a corner because they have not analyzed and understood this macro environment. For example, they may carelessly overlook a legal regulation that could have been foreseen, with their products later becoming subject to it, or their service may become stale before they notice that consumer needs have suddenly changed.
I have seen many executives who, while running their businesses, gradually prioritize day-to-day operations, become oblivious to changes around them, and truly “can’t see the forest for the trees.” That is exactly why it is necessary to step back, take a broad perspective, and survey your company’s business environment.
There are several types of frameworks (*note) for macro environment analysis, but a representative one is “PEST analysis,” devised by Professor Philip Kotler, the renowned American management scholar. PEST analyzes the business environment from four perspectives: Politics, Economy, Society and Technology. The other type of external environment analysis is “micro environment analysis.” After looking at the external environment from a macro perspective, you then narrow your focus. It is an analysis of “looking at the grove after looking at the forest.”
Famous in micro environment analysis is the “Five Forces analysis” of Professor Michael E. Porter, who is said to have become the youngest professor at Harvard Business School. The macro analysis mentioned earlier has an indirect impact on your company’s business environment, whereas Five Forces analysis organizes the power relationships with competitors and others that directly affect a company’s business environment.
For example, if a field that previously had high barriers to entry is deregulated and any company can enter, the threat of “new entrants” arises. Especially if they come from other industries, it is difficult to predict what tactics they will use, and they could have a major impact on your company. Industries that anyone can enter are always placed in a fiercely competitive environment.
“Bargaining power of sellers (suppliers)” represents the power relationship between your company and its suppliers when you procure something. If what you procure is a scarce product or service, there will be competition for it. In that case, suppliers gain the upper hand, and procurement prices may soar or procurement itself may become impossible. As a result, your company’s profits may decrease, or you may become unable to provide your products and services.
“Bargaining power of buyers (customers)” is your relationship with customers. If you bake delicious bread like no other, a line will form and customers will try to buy it even if they have to wait an hour; if the bread is ordinary, no one may come into the shop even if you call out to passersby in front of it. If your products and services have scarcity value for customers, your company’s advantage increases, but if customers do not feel a need for them, customers gain the upper hand.
“Threat of substitute products or services” requires understanding what could replace your company’s products and services. For example, suppose you develop a groundbreaking diet supplement, a boom occurs, and the company grows rapidly. The company continues to beat competitors’ products and maintains a high share of the diet supplement market, yet for some reason sales suddenly start to fall. What could be the cause?
People who want to lose weight do not want diet supplements; their goal is to “lose weight.” Any means will do as long as they can “lose weight.” In this case, perhaps a groundbreaking fitness gym opened that promised guaranteed weight loss, or a running boom occurred and fewer people relied on supplements, turning to running instead. The cause often lies in unexpected places, and this is an example showing that your competitors are not necessarily companies offering similar products and services.
The last is “rivalry within the industry,” at the center. Many executives tend to be captivated by the moves of competitors, and very often, while focusing on their rivals, they overlook analysis of the other four forces.
Thus, reviewing your company’s business environment from five perspectives is very important. When you write it out, you may discover that the environment surrounding your products and services was actually very harsh, or find a weakness in one of the forces and immediately think of countermeasures.
Analysis tends to seem difficult, but I recommend writing it out once, even if only as simple notes.
(3) Internal resource analysis
After analyzing the external environment, we then move on to analyzing internal resources.
This is a method of re-examining and evaluating everything from a third-party standpoint—from your company’s strengths and weaknesses and the training status and abilities of employees, to the abilities and qualities of executives and senior managers. This part is also surprisingly often overlooked, so it is a point executives should pay attention to.
In internal resource analysis, you compare your company with competitors in terms of internal systems, human resources, technology, management capability, finances, networks, production capacity, location and so on, and evaluate whether you are “superior” or “inferior.”
A company’s “strengths” are its competitive advantage factors—that is, the factors in which it is superior to competitors. In recent years, “brand strategy” has been emphasized, and the brand is one of the factors that has a major influence as an “internal environmental factor.”
Where there are “strengths,” there are also the opposite: “weaknesses.” Technically called “inferiority factors,” “weaknesses” must be clearly recognized. If, in formulating corporate strategy, there are “weaknesses” such as “weak technical capability,” “difficulty developing talent” or “poor location” that hinder management, you must think of countermeasures to overcome them.
By properly grasping “strengths and weaknesses,” it becomes possible to think about “how to fight.” It is important to know that internal environment analysis has this significance.
Now, let me introduce a representative framework for internal resource analysis. It is “VRIO analysis,” advocated by Professor Jay B. Barney, also called “internal resource analysis.”
This is an evaluation method that analyzes from four perspectives: economic Value, Rarity, Inimitability and Organization. However, because it focuses on internal analysis, using it alone leaves gaps in the analysis results.
Well-known marketing analysis frameworks each have their pros and cons, with some kind of bias or difference in scale, so I believe it is difficult to use them to comprehensively evaluate and analyze Japanese SMEs.
I have introduced only representative frameworks for each type of analysis. There are many kinds of frameworks for research and analysis. You can look them up online, so please research them if you are interested or as needed.
Examples of other frameworks
“Positioning analysis”
“Strategic positioning” refers to the position of each company within its industry. In company analysis and strategic planning, “strategic positioning analysis,” which confirms where your company stands, is a very important method.
Generally, a representative approach to strategic positioning is to create and analyze a two-axis matrix (positioning map).
“Value chain analysis”
The “value chain” is a way of viewing corporate activities—from procuring raw materials to delivering products and services to customers—as a chain of value. In simple terms, it represents the chain of business activities until profit is generated.
Value chain analysis clarifies the costs, strengths and weaknesses of each activity (internal business operation) in this value chain.
“Service profit chain”
The service profit chain is a framework showing the causal relationships among employee satisfaction, customer satisfaction, corporate profit and so on that arise along with sales and profits.
When employee satisfaction (ES) improves, the level of service provided improves. When the service level improves, customer satisfaction (CS) rises, and when customer satisfaction rises, customer loyalty improves. As a result, increased sales and profits become possible—this is the idea.
(4) Integrated analysis
Corporate strategy cannot be formulated without considering the environment in which your company is placed. That is why we conduct integrated analysis. This analysis combines the elements derived from external environment analysis and internal environment analysis.
It is the work of integrating all the information obtained so far from preliminary research, external environment analysis and internal environment analysis, firmly grasping the overall picture, filling any gaps by collecting further information if missing information is found, and comprehensively identifying the core of the corporate strategy. In other words, the external environment analysis and internal resource analysis so far were the gathering of ingredients for formulating strategy.
What were the macro and micro environments in which your company is placed?
What were your company’s strengths and weaknesses?
Please look back.
As you integrate these, the moves your company should make—that is, its corporate strategy—gradually come into view.
I think this process is similar to cooking. Once you have the information ingredients of the macro and micro environments and the internal resource ingredients, this is the process of thinking about what dishes you can make from them.
A famous framework for this integrated analysis is SWOT analysis.
SWOT analysis is a framework for clarifying the environment in which your company is placed and deriving strategies and strategic issues from it, and it is a highly regarded analytical method as a tool for “strategic thinking.”
It is a method for analyzing your company from four perspectives—“Strengths,” “Weaknesses,” “Opportunities” and “Threats”—and formulating corporate strategy. Integrated analysis is carried out by inserting “Strengths” and “Weaknesses” from the internal environment analysis obtained in the previous stage, and “Opportunities” and “Threats” from the information obtained in the external environment analysis. Since “Strengths” and “Opportunities” are positive factors and “Weaknesses” and “Threats” are negative factors, it has the advantage of making the color-coding of strong and weak points easy to see at a glance.
However, SWOT analysis has been used extensively and is becoming a commonplace method, and depending on the individual character of a company, SWOT may not be usable. Actual strategists do not use SWOT analysis but rather use integrated analysis frameworks developed uniquely for each company every time; however, I recommend that you first try using SWOT. Information from environment analysis and internal resource analysis can be entered smoothly into SWOT, and even just organizing it can be expected to have a great effect.