COMMERCE PAPER No.12 : Strategic Management MODULE No.17 : SWOT ANALYSIS
Subject COMMERCE
Paper No and Title 12. STRATEGIC MANAGEMENT Module No and Title 17. SWOT ANALYSIS
Module Tag COM_P12_M17
COMMERCE PAPER No.12 : Strategic Management MODULE No.17 : SWOT ANALYSIS
TABLE OF CONTENTS
1. Learning Outcomes 2. Introduction
3. The Purpose of SWOT Analysis 4. The Elements of a SWOT Analysis
4.1 Identifying Company Internal Strengths 4.2 Identifying Company Internal Weaknesses 4.3 Identifying a Company’s Market Opportunities
4.4 Identifying Threats to a Company’s Future Profitability 5. The TOWS Matrix: A Modern Tool for Analysis of the Situation
5.1 Four Alternative Strategies 6. Advantages of SWOT Analysis 7. Limitations of SWOT Analysis 8. Summary
COMMERCE PAPER No.12 : Strategic Management MODULE No.17 : SWOT ANALYSIS
1. Learning Outcomes
After studying this module, you shall be able to
Know about Strengths, Weaknesses, Opportunities and Threats
Understand how to conduct a SWOT analysis
Learn how to generate a SWOT Matrix
Learn about the advantages and limitations of SWOT analysis
COMMERCE PAPER No.12 : Strategic Management MODULE No.17 : SWOT ANALYSIS
2. Introduction
SWOT analysis is a business analysis technique useful in creating strategic substitutes from examining a situation. It applies both to the business level and the business unit level and often appears in marketing plans. The abbreviation SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. The numerous stages in the process involve identifying the strengths and weaknesses of the organization, and opportunities and threats existing in the market that it functions in. It is very essential to scan both the external and internal situation as a part of strategic planning procedure.
There is a high likelihood that the internal and external situation analysis produce a large amount of irrelevant information. Therefore the SWOT analysis serve as an interpretive filter to reduce unwanted information and only information related to key issues is taken into consideration. The SWOT analysis classifies strengths or weaknesses as the internal aspects of the company and opportunities or threats as external situational factors.
Strengths serve as bedrock for building a competitive advantage while on the other hand weaknesses may hinder it. A firm is in a better position to leverage its strengths, correct its weaknesses, capitalize on golden profitable opportunities, and deter potentially devastating threats by properly understanding these four aspects of its situation.
3. The Purpose of SWOT Analysis
The SWOT analysis permits companies to identify the positive and negative influencing factors inside and outside of a company or organization. The chief job of SWOT is to help develop a full awareness of all factors that may affect strategic planning and decision making, a goal that can be applied to most any aspect of industry.
The analysis provides a list of an organization’s Strengths and Weaknesses as indicated by an internal analysis of its resources and capabilities plus a list of the Threats and Opportunities identified by an external analysis of its environment.
After the analysis has been done, a SWOT matrix can be created and used as the basis of goal setting, strategy formulation, and implementation. A completed SWOT matrix is represented by a 2×2 matrix and is arranged as follows:
COMMERCE PAPER No.12 : Strategic Management MODULE No.17 : SWOT ANALYSIS
Table 1: Overview SWOT Matrix SWOT ANALYSIS POSITIVE/
HELPFUL to achieving the goal
NEGATIVE/
HARMFUL/ RISKS to achieving the goal INTERNAL Origin
facts/ factors of the organization
Strengths Good things, maintain them, build on
them and use as leverage.
Weaknesses Bad things, remedy, change or eliminate.
EXTERNAL Origin facts/ factors of the
environment in which the organization operates
Opportunities prospective good things,, prioritize them,
capture them, build on them and optimize
Threats prospective bad things, put in plans to manage them
or counter them
SWOT is meant to act originally as an assessment strategy, which provides the base for formulating a technique that contributes to the company’s strengths, aims squarely at capturing the company’s best opportunities, and defends against the threats to its well- being. It acts as a forerunner to any sort of company action, which makes it apt for the following moments:
Exploring ways for new initiatives
Making decisions about execution strategies for a brand new policy
Identifying possible areas to modify a program
Refining and redirecting efforts mid-plan
The SWOT analysis is a simple but an influential tool in organizing information and presenting solutions, identifying roadblocks and emphasizing opportunities.
COMMERCE PAPER No.12 : Strategic Management MODULE No.17 : SWOT ANALYSIS
4. The Elements of a SWOT Analysis
A SWOT analysis mainly focuses on the four elements included in the acronym, allowing companies to identify the forces influencing a strategy, action, or initiative. Knowledge of these positive and negative impacting elements can aid companies more effectively communicate what components of a plan need to be recognized.
4.1 Identifying Company Internal Strengths
A strength is something a company is exceptional at doing, or some attribute that enhances its competitiveness in the industry/market, enabling it to accomplish its mission. These are the basis on which continued success can be made and sustained. A company’s strengths depend on the quality of its resources and capabilities. Common types of valuable resources and competitive capabilities that management should consider include:
• A skill, specialized expertise, or competitively important capability —examples include skills in low-cost operations, proven capabilities in creating and introducing innovative products, cutting-edge supply chain management capabilities, expertise in getting new products to market quickly, and expertise in providing consistently good customer service.
• Valuable physical assets —such as attractive real estate locations, state-of-the-art plants and equipment, or ownership of precious natural resource deposits.
• Valuable human assets and intellectual capital —a skillful and accomplished workforce, talented employees in important areas, collective learning rooted in the organization, or proven managerial know-how.
• Valuable organizational assets —established quality control systems, proprietary know- how, vital patents, and a robust network of distributors or retail dealers.
• Valuable intangible assets —an influential or renowned brand name or solid buyer loyalty.
• Competitively valuable alliances or cooperative ventures —associations or joint ventures that provide access to valuable technologies, specialized knowhow, or geographic markets.
A company that is well gifted with effective resource strengths and core capabilities normally has substantial competitive power—especially when its management team skilfully utilizes the company’s resources in ways that build sustainable competitive advantage.
4.2 Identifying Company Internal Weaknesses
A weakness of a company basically means lack of vital resources or poor performance or any condition that puts it at a disadvantage in the market. Weaknesses stop a company
COMMERCE PAPER No.12 : Strategic Management MODULE No.17 : SWOT ANALYSIS
from realizing its mission and achieving its full potential.
These weaknesses weaken influences on the
organizational success and growth. Weaknesses are manageable and must be curtailed and eliminated. As a law, strategies that place hefty demands on zones where the company is weakest or has unproven ability are doubtful and should be avoided. A company’s resource weaknesses can relate to:
• Substandard or unverified skills, expertise, or intellectual capital in competitively vital areas of the business.
• Insufficiencies in competitively important physical, organizational, or intangible assets.
• Missing or competitively inferior competences in key areas.
Nearly all companies have inner weaknesses of one kind or another. Whether a company’s weaknesses make it competitively susceptible depends on how much they matter in the square and whether they are offset by the company’s resource strengths.
Table 2 lists the kinds of factors to consider in amassing a company’s resource strengths and weaknesses. Sizing up a company’s complement of resource capabilities and deficits is parallel to constructing a strategic balance sheet, where strengths represent competitive assets and weaknesses signify competitive liabilities.
4.3 Identifying a Company’s Market Opportunities
Market opportunity is a huge factor in modeling a company’s plan. These arise when the company can take advantage of conditions in its environment to plan and implement strategies that enable it to become more profitable. Companies can gain competitive advantage by making use of opportunities. Opportunities may result from market, competition, industry/government and technology. (See Table 2, under “Potential Market Opportunities”)
Managers can’t properly mold strategy to the company’s situation without first identifying its market opportunities and reviewing the growth and profit potential each one holds. In gauging the attractiveness of a company’s market opportunities, managers have to guard against viewing every industry opportunity as a suitable opportunity. The most relevant market opportunities to a company are those that match up well with the company’s financial and organizational assets and capabilities, offer the best growth and cost-effectiveness, and present the most potential for competitive advantage.
4.4 Identifying Threats to a Company’s Future Profitability
Time and again, certain factors in a company’s external environment pose threats to its profitability and competitive well-being. Threats can arise from the emergence of cheaper or superior technologies, competitors’ introduction of innovative or improved products, the entry of lower-cost foreign entrants into a company’s market stronghold, new regulations that are more troublesome to a company than to its competitors, susceptibility to a rise in interest rates, the potential of a hostile takeover, negative demographic shifts,
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or adverse changes in foreign exchange rates. (See Table 2, under “Potential External Threats”)
External threats may pose no more than a moderate degree of adversity or they may be so imposing as to make a company’s situation and outlook quite fragile. On rare occasions, market shocks can throw a company into an instantaneous crisis and battle to survive. It is management’s job to detect the threats to the company’s future prospects and to evaluate what strategic actions can be taken to counteract or lessen their impact.
Modifying strategy to a company’s state requires (1) tracking market opportunities well- matched to the company’s resource capabilities and (2) building a resource base that helps defend against external threats to the company’s business.
Table 2: Factors to reflect when identifying a Company’s Strengths, Weakness, Opportunities and Threats
Potential Strengths
A great strategy backed by good skills and expertise in crucial areas
A strong financial condition; plentiful resources for business growth.
Solid brand name reputation of firm
A far and wide renowned market leader and an attractive customer base
Capability to take benefit of economies of scale and learning and experience curve effects
Proprietary technology/important patents/superior technological skills
Cost benefits
Strong promotion and advertising
Product innovation skills
Proven skills in improving production processes
A reputation for good customer service
Better product quality relative to rivals
Wide geographic coverage and distribution capability
Amalgamation /joint ventures with other firms
Potential Weaknesses
No clear strategic direction
Outdated facilities
A feeble balance sheet; loaded with too much debt
Higher overall unit costs relative to key opponents
Missing some key skills or capabilities/lack of management depth
Subpar profitability
Beleaguered with internal operating problems
Falling behind in R&D
Too narrow a product line relative to rivals
Weak brand image or reputation
Weaker dealer or distribution network than key rivals
Subpar marketing skills relative to rivals
Short on financial resources to fund promising strategic initiatives
Lots of underutilized plant capacity
Behind on product quality
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Potential Company Opportunities
Serving additional customer groups or expanding into new geographic markets or product segments
Expanding the company’s product line to meet a broader range of customer needs
Transferring company skills or
technological know how to new products or businesses
Integrating backward or forward
Falling trade barriers in attractive foreign markets
Openings to take market share away from rival firms
Ability to grow rapidly because of strong increases in market demand
Acquisition of rival firms
Alliances or joint ventures that expand the firm’s market coverage and competitive capability
Openings to exploit emerging new technologies
Market openings to extend the company’s brand name or reputation to new
geographic areas
Potential External Threats
Likely entry of potent new competitors
Loss of sales to substitute products
Slowdowns in market growth
Adverse shifts in foreign exchange rates and trade policies of foreign governments
Costly new regulatory requirements
Vulnerability to recession and business cycle
Growing bargaining power of customers or suppliers
A shift in buyer needs and tastes away from the industry’s product
Adverse demographic changes
Vulnerability to industry driving forces
5. The TOWS Matrix: A Modern Tool for Analysis of the Situation
For a long time, the SWOT analysis has been in practice to recognize a company’s strengths, weaknesses, opportunities, and threats. Nonetheless, this kind of analysis is immobile and occasionally leads the development of different alternative strategies based on it. Consequently, the TOWS (Threats-Opportunities-Weaknesses-Strengths) Matrix has been established which is a conceptual structure for a methodical analysis of the competitive situation of a company that expedites matching of the external threats and opportunities with its internal weaknesses and strengths leading to the development of four diverse sets of strategic alternatives i.e.
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• SO strategies — make the most out of the available opportunities by using strengths;
• ST strategies — build upon strengths to counter the threats;
• WO strategies – use opportunities to improve weaknesses; and
• WT strategies — defend against the threats and weaknesses.
In other words, TOWS matrix is used to put the SWOT analysis into action.
5.1 Four Alternative Strategies
Table 3 presents the four alternative strategies of the TOWS Matrix. The strategies are built on the analysis of the external environment (threats and opportunities) and the internal environment (weaknesses and strengths). In practice, of course, some of the strategies overlap or they may be pursued synchronously.
Table 3: A TOWS Matrix
The WT Strategy (mini-mini). This is unquestionably the most defensive position on the matrix. The company in this case is devoid of any development opportunities. It operates in hostile environments, and its prospective for change is small. It does not have substantial strengths, which could survive threats. Mini- mini strategy boils down to a negative version of the liquidation or in optimistic situation - to fight for survival, or merger with another organization.
The WO Strategy (mini--maxi). In this situation company has the more vulnerabilities-weaknesses, but its environment gives more opportunities. The strategy should include the use of these opportunities while reducing or fixing weaknesses within the organization.
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The ST Strategy (maxi-mini). The source of development difficulties for the company is
unfavorable external conditions (frequency of threats). The company may use huge internal strengths in attempt to overcome threats from environment.
The SO Strategy (maxi-maxi). This situation is applicable to the company for which dictates strengths in the environment and opportunities within. This situation resembles to the maxi-maxi strategy: strong expansion and diversified development.
6. Advantages of SWOT Analysis
SWOT examination make available information that helps in coordinating the firm’s resources and capabilities with the competitive environment in which the firm operates in such a way as to develop a benefit in meeting strategic goals. SWOT Analysis is instrumental in strategy formulation and selection and helps in strategic planning in following manner:
Data Integration: SWOT analysis necessitates that quantitative and qualitative information from a number of sources be merged. Access to a variety of data from numerous sources improves enterprise-level planning and policy-making, boosts decision-making, improves communication and helps to coordinate operations.
Simplicity: SWOT analysis requires neither technical skills nor training. Instead, it can be performed by anyone with knowledge about the business in question and the industry in which it operates. The procedure involves a facilitated brainstorming session during which the four dimensions of the SWOT analysis are discussed. As a result, individual contestants’ beliefs and judgments are aggregated into collective judgments validated by the group as a whole.
Clarity: One of the benefits of SWOT analysis is that it helps to summarize and elucidate whatever opportunities and issues are fronting a business or project. For this reason, a SWOT analysis is often valuable and can play a crucial role in how a business sets its objectives and develops strategies for achieving goals.
Cost: A SWOT analysis makes it possible for new ideas to be generated without costing the business much in the process. Hiring a business strategist or a marketing team would cost time and resources, but a SWOT analysis can be performed by anyone with time available and an understanding of how the business is run.
Versatility: SWOT analysis is applicable to an organization, organizational unit, individual or team. In addition, it can also support a variety of project objectives.
For example, the SWOT method can be used to gauge a product or brand, an acquisition or partnership, or the outsourcing of a business function. Also, SWOT
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analysis can be helpful in evaluating a particular supply source, a business process, a product market or the implementation of a particular technology.
7. Limitations of SWOT Analysis
How to make decisions is a notion that is of utmost significance to managers and employees of any business. SWOT analysis has been a structure of choice among several managers for a long time because of its uncomplicatedness and its portrayal of the crux of sound strategy formulation-matching a form’s opportunities and threats with its strengths and weakness. Though it can be a valuable planning tool, it suffers from the following limitations:
Other Planning Methods: Perchance one of the biggest drawbacks of using a SWOT analysis arises when the organization makes the decision, whether mindful or not, to only rely on the analysis for planning. While it may generate some beneficial information, other planning methods and tools are suitable in helping an organization achieve its mission. The list of items produced by this analysis provides information or items it needs to look into deeper using other tools such as statistical surveys, focus groups or even employing a test-market strategy for a new product or service. SWOT analysis should help management begin to think about the organization and its future, instead of ending any other planning efforts.
Weighting Items: SWOT analysis creates lists of strengths, weaknesses, opportunities and threats facing the organization. While these lists provide items to consider, the list may get used wrongly. The items do not carry certain weight or points that represent how important each item is to the organization. As a result, any one factor's true effect on the objective can't be determined. Members may conclude that a shorter list of threats versus a longer list of strengths means the organization is doing well, when in fact the threats are more significant than its strengths. Therefore, further analysis is required to appraise the impact of the individual strengths, weaknesses, opportunities and threats on the objective of the study.
Ambiguity: SWOT analysis creates a one-dimensional model in which each problem attribute is viewed as a strength, weakness, opportunity or threat. As a result, each attribute is seen to have only one influence on the problem being analyzed. However, one factor might be both a strength and a weakness. For example, locating a chain of stores on well-traveled streets that grant easy access to customers might be reflected in increased sales. However, the costs of operating high-visibility facilities can make it difficult to compete on price without a large sales volume.
Subjective Analysis: Business decisions must be based on reliable, relevant and comparable data to significantly impact company performance However, SWOT
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data collection and analysis require a subjective process that reflects the bias of the individuals
who collect the data and partake in the brainstorming session. In addition, the data input to the SWOT analysis can become out-of-date fairly quickly. Thus the analysis may lead to business decisions based on unreliable or irrelevant data.
Lack of Detail/ Further Research Required: A SWOT analysis should be concise and to the point. This is important in terms of communicating a complex situation to others on paper or in a meeting. However, it does overgeneralize the problem or challenge by not allowing a thorough analysis or depth of description of multiple factors. Further, SWOT does not require any rationalization for classifying something under the element in which it was classified. While a SWOT analysis can be simple and straightforward, more investigation and analysis is usually needed in order to obtain a comprehensive picture.
Large or Heterogeneous Groups: This kind of analysis involves a huge amount of time and energy when used in a large organization or in a small business that is heterogeneous, since an effort at just agreeing on the common mission may result in fighting among the different members of the group. While recognizing a common mission helps give direction to its activities, SWOT analysis will not provide any results if the members cannot agree.
As a consequence, in order for a SWOT analysis to be truly efficacious, it should spread out beyond a simple list of strengths, weaknesses, opportunities and threats. For example, a business should consider what degrees of strengths and weaknesses it possesses in comparison to competitors in order to determine how strong those strengths actually are.
An in-depth SWOT analysis should also look at an opportunity or threat's size in order to see how it is associated with the company's strengths and weaknesses. They also should aim for more detail in their SWOT analysis and weight each strength, weakness, opportunity and threat so as to rank and rank each element.
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8. Summary
SWOT Analysis is the most popular tool for audit and analysis of the general strategic position of the business and its environment.
Its main purpose is to identify the strategies that will create a firm specific business model that will best align an organization’s resources and competences to the requirements of the environment in which the firm functions.
It is also appreciated for a versatile application, for example strategic planning, business planning, strategic marketing planning, competitor evaluation, business and product development and research reports.
In the light of benchmarking, it derives critical success factors for the market and evaluates strengths as a competitive advantage and weaknesses. By the SWOT analysis a company is able to exploit strategic windows to increase its profit potential. A company is also enabled to escape or to diminish unfavorable constellations of weaknesses and threats.
Satisfactory to the SWOT profile of a company, the SWOT provide possible strategic directions of impact that that points out a profitable way for strategy definition.
A regular study of the environment in which the firm operates helps in forecasting the changing tendencies and also helps in including them in the decision-making process of the organization.
