What It Is
The situation assessment is less of a specific tool and more of a disciplined practice. It is the honest appraisal of the environment shaping your decisions.
In the Bible Jesus used a couple of analogies to teach the importance of “counting the cost” of your decisions, saying “For which of you, intending to build a tower, does not sit down first and count the cost, whether he has enough to finish it — lest, after he has laid the foundation, and is not able to finish, all who see it begin to mock him, saying, ‘This man began to build and was not able to finish’? Or what king, going to make war against another king, does not sit down first and consider whether he is able with ten thousand to meet him who comes against him with twenty thousand? Or else, while the other is still a great way off, he sends a delegation and asks conditions of peace.” (Luke 14:28–32 NKJV)
An honest situation assessment similarly considers the internal (in Jesus’ example — the status of your resources) and the external (e.g. the relative strength of your competitors) to avoid making a foolish decision.
The product of your assessment can take one of many different forms. The simplest and probably most popular is the SWOT (Strengths, Weaknesses, Opportunities, and Threats) framework which can summarize the situation on a single page. In contrast, when serving as a strategy executive for large corporations, my teams would often take the first 3 months of the annual planning cycle to assess various dimensions of the external and internal environment resulting in a 100+ page PowerPoint deck informing the leadership team of key topics and trends that would shape our planning for the year.
A complete assessment looks both internally (the Strengths and Weaknesses of the SWOT) and externally (the Opportunities and Threats).
When To Use It
Sound decisions require an accurate and up-to-date understanding of the environment in which those decisions are being made. For any given organization, the vast majority of their decisions will be made within a common setting — relying on the same internal capabilities, serving similar customers, competing against similar rivals, impacted by similar technological, economic, and political/regulatory forces.
Therefore, it is wise for organizations to regularly fully refresh a complete environment (e.g. annually) and then monitor the environment for changes in between the full refreshes. For example, while I was vice president of corporate strategy at Sprint, my full team would spend the first three months each year developing a company-wide external situation assessment. We would work closely with partners in specialist organizations (e.g. the CTO and CIO’s offices on technology, the Finance organization on the economy, Legal and Regulatory teams for those domains, and the Consumer, Business, and Wholesale business units on those customer markets and competitive landscapes).
A small part of my team would then regularly monitor the external environment throughout the year. Every Monday they would issue a report on events and trends (e.g. a competitor announcement or a new technology) and the implications for our strategic plans. They would lead discussions across the company and about once a month they would develop a deep dive report on a particular opportunity or threat that required broad attention.
In other words, the “when” of situation assessment is “always”.
But, when facing a specific decision, it may also be wise to perform a situation assessment more specific to the decision being made. How do your internal capabilities align with this decision? How do external factors specifically impact this decision? Most of that information may be available from your organization’s broad ongoing situation assessment work, but taking the time to apply it to your specific decision can be very helpful in avoiding foolish decisions.
How To Use It
Using the situation assessment falls into three sub-sets of activities:
- Assessing the situation
- Updating the assessment
- Applying the assessment to a decision
Assessing the situation
Developing a comprehensive situation assessment can be a lot of work. Big companies often have teams of people with situation assessment in their job description and these teams produce formalized situation assessment documents that are referenced across the organization. Small companies often don’t have the resources to formally assess the situation and produce a comprehensive document, but it’s still really important to at least informally think through all of the same factors before making important decisions.
In this section, I’ll describe the “big company” version and I hope it’s helpful even for companies that can’t invest the man-hours to fully develop a similar document.
Assessment Dimensions
A comprehensive situation assessment will look at the external situation and the internal situation through several lenses:
- External:
- Global situation and trends
- Industry situation and trends
- Internal:
- Competitive situation and trends
- Capabilities and resources situation and trends
Key Questions
While the SWOT tool is often maligned, I think the general concepts are helpful in directing the focus of your situation assessment work, and so I generally use a framework that asks specific questions of each dimension of the assessment:
- For External Dimensions:
- What is the current state?
- What are the known trends and disruptions?
- What don't we know or are unsure about?
- What key opportunities are emerging?
- What key threats are emerging?
- For Internal Dimensions:
- What is the current state?
- What are known trends and disruptions?
- What don't we know or are unsure about?
- What are our relative strengths?
- What are our relative weaknesses?
Now, let's look a little closer at each of the dimensions.
Global Situation and Trends
The most commonly used framework for evaluating the global environment is PESTLE, which stands for Political, Economic, Sociocultural, Technological, Legal, and Environmental. I think these categories are pretty good, but I find it easier to use a slightly modified version:
- Demographic
- Sociocultural
- Political/Legal
- Economic
- Technological
- Global
For your industry and your company, you might choose a slightly different set of factors, but keep it as broad as possible. Using my categories above, I create a spreadsheet to start capturing the key questions:
Industry Assessment
In the 1970s Harvard Professor Michael Porter developed a model for evaluating the attractiveness of industries based on the strengths of five forces on the industry:
- The threat of new entrants
- The threat of substitutes
- The bargaining power of suppliers
- The bargaining power of buyers
- The level of industry rivalry
I find these same categories helpful in assessing the situation within the industry, focusing less on the forces and more on the players themselves. I create a spreadsheet similar to that below:
Competitive Assessment
The internal assessment considers your own strengths and weaknesses, most importantly relative to key competitors (both established and emerging). A great tool to help with this is the Strategy Canvas introduced by W. Chan Kim and Renée Mauborgne in their 2005 book Blue Ocean Strategy. In the book, the Strategy Canvas is primarily used to identify new uncontested (blue ocean) markets for companies to create. It identifies the key dimensions of competition within an industry (both traditional and potential). These same dimensions can be used in our situation assessment.
For example, in the book, the authors use Southwest Airlines as an example, using this strategy canvas:
Using these same competitive dimensions, you could create a spreadsheet to assess your company’s strengths and weaknesses relative to competitors:
Capabilities and Resources Assessment
The second way to evaluate your internal strengths and weaknesses is by honestly evaluating your company relative to capabilities and resources that are critical for your type of business. For example, it might look something like this:
The most important attributes of the internal situation assessment are honesty and humility. We tend to think too highly of ourselves and we don’t like pointing out weaknesses in our own organization. Research has shown that some of the most common cognitive biases leading to bad business decisions are overconfidence bias, optimism bias, and blind spot bias. As the ancient proverb warns “Pride goes before destruction, And a haughty spirit before a fall.” (Proverbs 16:18 NKJV)
Summarizing the Situation
Once you’ve completed the external and internal assessments, you likely want to summarize what you’ve learned into a document that can be easily referenced across the organization in making sound decisions. The right format will depend on your company culture.
For some, a narrative can be powerful, telling a story of how the world is changing and how it will impact your business. You don’t need to include every detail you’ve uncovered, but find those elements that are most surprising and create the greatest impact on potential decisions.
For others, a well constructed PowerPoint deck will get the most attention. Spend time thinking through how best to organize what you’ve learned so that it will be easiest for the audience to pick up on the most impactful information and be able to reference it in the future. Use images and graphs more than words and use slide titles to tell the important stories.
Whether you use words or pictures to paint the panorama of the situation assessment, it can be very helpful to identify and name key themes that are likely to impact your strategy and your decisions. These are themes that you will want to continue to monitor as they develop.
Some may choose to use the traditional four-quadrant SWOT. If that’s what will work best in your organization, don’t list every strength, weakness, opportunity, and threat you uncovered in your assessments, but rather focus on the short list that will have the greatest impact on decisions in the coming weeks and months.
Updating the Assessment
As I mentioned above, as you develop and summarize the situation, you likely will identify some key themes that you will want to continue to monitor. These might be impactful trends, potentially disruptive new technologies or competitors, or key uncertainties (for example related to the economy or regulations). Keep an eye out for signals that can give more clarity about how these trends are playing out. When you see those signals, share them broadly within the organization and talk about how they impact your plans.
But even with regular updates, all situation assessments will eventually become outdated. The baseline is no longer relevant and the key themes you’ve been tracking are no longer the ones most likely to impact your business. How quickly that happens depends on how dynamic your industry is and how much the global environment is changing. For example, major global shocks like pandemics, wars, and recessions can fundamentally change many dimensions of how your business operates and should trigger a complete revisit of your situation assessment. In these cases, you start the entire process from scratch.
Applying the Assessment
Even the best situation assessment is worthless if you never do anything with it. Understanding how the world is changing and how well your business is prepared for those changes should influence every strategic decision you make (more or less depending on the decision). To help you understand what this looks like, let me spell out two ways you might do so.
With clearly articulated non-negotiable Principles and a deeply understood Panorama, you are ready to define your Purpose.
The first is in developing different future industry scenarios. I will cover Scenario Analysis in a future article, but the way that I develop scenarios is by choosing two key uncertainties and then choosing two potential outcomes for each uncertainty to create four possible potential scenarios. Scenario Analysis then involves evaluating each of those scenarios to determine the impact on the business and what you should do to maximize success in that scenario. Although the future likely won’t actually play out exactly like any of the four scenarios, if done well, this approach prepares your business to respond well to whatever actually happens.
The work that you do in developing a situation assessment feeds directly into this Scenario Analysis. First of all, if you’ve used spreadsheets like I described above, you will have identified uncertainties for each internal and external dimension. Scenario Analysis starts by identifying which of those uncertainties would be most impactful on your business. The research work that you’ve done in situation analysis will also help you determine different potential outcomes, the likelihood of each, and what the implications might be for your business.
A second way to use the situation assessment in strategic decision making is by using the Strategy Sieve. This will also be a topic for a future article, but in short, the Sieve involves testing a small list of strategic alternatives against a series of filters to discover what is attractive and what is challenging about each alternative. In using the Sieve, I typically have a filter for “Leveraging Capabilities” and another filter for “Independence from Constrained Resources”.
The capabilities for the first filter often come straight out of the Strengths columns in the situation assessment spreadsheets and the resources for the second filter often come straight out of the Weaknesses columns. There is also often a filter associated with changing market needs and these can often be identified through the external situation assessment. Even the strategic options often flow out of the Opportunities of the external assessment and the Weaknesses of the internal assessment.
Even if you don’t use a formal framework like the Strategy Sieve, the situation assessment work should help you evaluate the likelihood of success of any strategic decision you are considering.