Marketing theory can be understood as a toolbox of techniques to help an organisation understand its target market, and promote its goods and services. Famous marketing theorist Philip Kotler (1976, p.5) defined marketing quite simply as “satisfying needs and wants through an exchange process”; but, in order to understand customer needs and wants, it is necessary to first analyse or scan a marketplace to appreciate what competitor products and services exist, and whether there are general trends in the market which might influence consumer behaviour.
Once an organisation has an understanding of its wider operating market, attention can be directed internally, and a SWOT analysis is ideal for this activity. SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats, and a SWOT analysis is usually displayed as a matrix. For real life examples based on businesses of all sizes from a range of industries, take a look at our SWOT analysis examples.
As the first step of a SWOT analysis, an organisation should carefully and objectively identify its strengths. Much like the PESTEL analysis, the true value of a SWOT analysis is derived from a detailed and meaningful assessment at organisational level (Valentin, 2001). To illustrate, simply stating that ‘the organisation has a strong brand’ lacks the necessary detail to identify precisely how this brand strength can be used to further promote marketing activity. Granular detail is necessary, such as recognising that in certain segments a brand is more widely recognised, or that the organisation has stronger brand presence in particular countries if the organisation operates internationally.
The organisation also needs to be honest in its assessment of its weaknesses. Again, it is important to have clear and detailed identification of weaknesses, such as acknowledgement that because of seasonality in the market or sector there might be periods of potential cash flow difficulty, or the organisation might recognise that its social media presence is not fully optimised and thus is potentially failing to reach target consumers. This is not opportunity to be unduly negative, but an honest assessment of weaknesses is important to appreciate how any threats might be repelled.
Assessing opportunities also requires a realistic interpretation of how organisational strengths might be used to take advantage of opportunities (Helms and Nixon, 2010). This is where any previous wider analysis such as a PESTEL can be invaluable in identifying current and future potential opportunities in a marketplace. For example, if wider external analysis has revealed that social/consumer trends are moving swiftly towards environmentally responsible products, then this would represent an opportunity if an organisation can align its marketing resources to promote the environmental and social credentials of its products and services.
The final element of SWOT is an assessment of any threats in the marketplace which can either be rebutted through the strengths of the organisation, or managed according to organisational resource (Gürel and Tat, 2017). Understandably, any weaknesses in the organisation might represent a source of direct competitive threat, for example if a competitor has a superior product. It might be the case that it is impossible to mitigate the threat altogether, but at the very least an awareness of potential threats in the marketplace gives an organisation the opportunity to control these threats as well as possible, and take steps to promote strengths of the organisation as part of their marketing strategy.
The first step in understanding the marketplace at a macroeconomic (i.e. broad or holistic) level, is a PESTEL analysis. PESTEL is an acronym for Political, Economic, Social, Technical, Environmental and Legal. For real life examples based on businesses of all sizes from a range of industries, take a look at our PESTEL analysis examples.
Occasionally, differing versions of this analysis are used, such as PEST, which is a short form, excluding the legal and environmental elements, and also STEEPLE, which is an extension of PESTEL but includes the additional element of ethics. The purpose of conducting a PESTEL analysis is to understand external factors which might influence organisational marketing activity, but which are beyond the direct control of organisations. Simple examples include changing social demographics, for example ageing populations, or improvements in technology which consumers are embracing.
To be effective, a PESTEL analysis needs to be sufficiently focused on the organisation and its industry sector (Kotler and Armstrong, 2013). A broad generalised analysis will offer little benefit to an organisation, and so it is a worthwhile exercise to carefully research industry trends and consider how the market might be affected. An awareness of political, environmental and legal factors can be very useful to help anticipate future opportunities, and also potential threats in the marketplace if legal changes are going to cause a disruption to a market.
There are some weaknesses to a PESTEL analysis, because it is not a prescriptive process meaning that it cannot be used by an organisation to precisely determine how it should market its goods and services, or to identify precisely which market segment an organisation should market to. It is also important to recognise that depending on the nature of business activity, not all of the elements of the PESTEL analysis will necessarily be equally important, and so some level of subjective judgement is necessary in interpreting the output of a PESTEL analysis (Jobber and Ellis-Chadwick, 2012). This being said, the general application of a PESTEL analysis can be valuable in understanding operating conditions, which might affect business activity, particularly customer trends.
Competitive threats are a reality of any marketplace, which is why another marketing analysis tool which can be useful is Porter's Five Forces (2008). Michael Porter is a famous strategic theorist, and his theory of Five Forces argues that any organisation faces potential competitive threats. These threats are: (1) potential new market entrants; (2) bargaining power of buyers; (3) bargaining power of suppliers; and (4) threat of direct/indirect substitutes. The fifth competitive force which Porter refers to, is the overall level of competition in the marketplace.
Potential new market entrants are an obvious competitive threat, and one which could perhaps be identified through a PESTEL analysis in terms of market trends. However, it could also be the case that an indirect rival firm expands their operations because they have identified a market opportunity. This becomes a competitive threat, particularly if the rival firm has superior quality product, or a product which is considerably cheaper or better value.
The bargaining power of buyers refers to what are known as transaction costs (Tyagi, 2004). Any purchaser makes a decision about the perceived value of a product or service, taking into account the hidden transaction costs such as postage or delivery charges, or the inconvenience of travelling to a specialist retailer which might be some distance away. Brand loyalty is a powerful rebuttal to transaction costs, and can be used to overcome the threat of consumers switching to a viable alternative.
The bargaining power of suppliers indicates the extent to which key suppliers to an organisation can influence aspects of costing or supply. If there are very few suppliers an organisation can use, the bargaining power of suppliers would be very high. From a marketing perspective, supplier relationship can be quite important to ensure availability of products.
Lastly, the threat of direct/indirect substitutes, which can be tangentially linked to the bargaining power of buyers. Dubé (2019) reveals that often organisations can fail to recognise indirect substitutes as part of the consumer decision-making journey. For example, when referring to products of high desirability that are usually only purchased with discretionary income, a consumer might not simply choose to spend their money on another product in the same category, they might choose another category altogether. Consumers are also known to use products in novel ways, meaning that having a deep understanding of customer preferences through good marketing relationships can help identify some of these indirect substitutes giving an organisation competitive advantage.
Finally, it is worth noting that it is not necessarily problematic if the overall level of competition in the market is high, because as Porter himself recognised, a competitive market suggests that it is a growing market with strong demand. The key is to continually monitor a market and maintain close contact with key stakeholders such as suppliers and customers to properly understand market trends.