Business Diagnostic Models

A large number of business diagnostic models exist and it can be tempting, therefore, to overanalyse.  But the use of just three of these models, SWOT analysis, PESTLE analysis and Porter’s Five Forces provides a comprehensive overview of the key areas of business operation.

• The SWOT analysis looks at a business or operation, proposition or idea
• The PESTLE analysis looks at the environment within which an organisation operates
• Porter’s Five Forces looks at the industry within which an organisation operates, and specifically competition within it

The SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis is probably the best known and most widely used business diagnostic model.  It is often used to analyse specific strategic options, for example, launching a new product, a new method of distribution or the opportunity to make an acquisition.  As such, the SWOT analysis looks at areas that are specific to a particular business and over which the business has direct control.

In contrast, the PESTLE analysis looks outside an organisation, analysing Political, Economic, Social, Technological, Legal and Environmental factors; in other words, aspects of doing business that are outside an organisation’s direct control.  The purpose of using a PESTLE analysis is to better understand these factors and how they might influence an organisation, placing the organisation in a better position to deal with external changes and influences.

According to Michael E. Porter in his book “Competitive Strategy: Techniques for Analyzing Industries and Competitors”, there are five competitive forces that apply to every industry and every market, and these have become known as “Porter’s Five Forces”.  Analysis of
Porter’s Five Forces allows an organisation to understand the competitiveness of its industry and to formulate ways to influence this.  Porter’s Five Forces are:

• Competitive rivalry within the industry
• Threat of new entrants
• Threat of substitutes
• Bargaining power of customers
• Bargaining power of suppliers

By understanding, for example, the threat posed by new entrants to the market, an organisation can take action to either raise the barrier or stay one step ahead with new product development.