The second step of the strategic planning process is analyzing the environment. This is also known as situation analysis. A situation analysis focuses on those features in a company’s environment that most directly affect its options and opportunities. This analysis has three parts: industry and competitive situation analysis, company situation analysis, and identification of a competitive advantage.

Industries vary widely in their makeup, competitive situation, and growth potential. Determining the position of an industry requires answering questions such as these: “How large is the market?” According to Michael Porter, competition in an industry is a composite of five competitive forces that should be considered in analyzing the competitive situation. A company situation analysis is used at the business level to determine the strategic issues and problems that need to be addressed through the next three steps of the strategic planning process.