UNDERSTANDING THE TOOL - …
SWOT ANALYSIS SWOT ANALYSIS SWOT is an analysis of an organization’sStrengthWeaknesses Opportunities andThreats present in the internal and external environment.SWOT involves the collection and portrayal of information about internal and external factors which have, or may have, an impact on business.SWOT is?a framework that allows managers to synthesize insights obtained from an internal analysis of the company’s strengths and weaknesses with those from an analysis of external opportunities and threats.UNDERSTANDING THE TOOLThe answer to the question is simple: it’s a tool used for situation (business or personal) analysis! SWOT is an acronym which stands for:Strengths: factors that give an edge for the company over its competitors.Weaknesses: factors that can be harmful if used against the firm by its competitors.Opportunities: favorable situations which can bring a competitive advantage.Threats: unfavorable situations which can negatively affect the business.Strengths and weaknesses are internal to the company and can be directly managed by it, while the opportunities and threats are external and the company can only anticipate and react to them. SWOT is often presented in a form of a matrix as in the illustration below:SWOT is widely accepted tool due to its simplicity and value of focusing on the key issues which affect the firm. The aim of SWOT is to identify the strengths and weaknesses that are relevant in meeting opportunities and threats in particular situation.?BENEFITSThe SWOT tool has 5 key benefits. It isSimple to do and practical to use.Clear to understandFocuses on the key internal and external factors affecting the company;Helps to identify future goals;Initiates further analysis.LIMITATIONSAlthough there are clear benefits of doing the analysis, many managers and academics heavily criticize or don’t even recognize it as a serious tool.?According to many it is a ‘low-grade’ analysis. Here are the main flaws identified by the research:Excessive lists of strengths, weaknesses, opportunities and threats;No prioritization of factors;Factors are described too broadly;Factors are often opinions not facts;No recognized method to distinguish between strengths and weaknesses, opportunities and threats.HOW TO PERFORM THE ANALYSIS?SWOT can be done by one person or a group of members that are directly responsible for the situation assessment in the company. Basic SWOT analysis is done fairly easily and comprises of only few steps:Step 1. Listing the firm’s key strengths and weaknesses?.Step 2. Identifying opportunities and threatsSTRENGTHS AND WEAKNESSESStrengths and weaknesses are the factors of the firm’s internal environment. When looking for strengths, ask?what do you do better or have more valuable than your competitors have??In case of the weaknesses, ask?what could you improve and at least catch up with your competitors?WHERE TO LOOK FOR THEM?Some strengths or weaknesses can be recognized instantly without deeper studying of the organization. But usually the process is harder and managers have to look into the firm’s:Resources: land, equipment, knowledge, brand equity, intellectual property, etc.Core competenciesCapabilitiesFunctional areas: management, operations, marketing, finances, human resources and R&DOrganizational cultureValue chain activitiesSTRENGTH OR A WEAKNESS?Often, a company’s internal factors are seen as both, strengths and weaknesses, at the same time. It is also hard to tell if a characteristic is strength (weakness) or not.?For example, firm’s organizational structure can be strength, a weakness or neither! In such cases, you should rely on:Clear definition. Very often factors which are described too broadly may fit both strengths and weaknesses.?For example, “brand image” might be a weakness if the company has poor brand image. However, it can also be a strength if the company has the most valuable brand in the market, valued at $100 billion. Therefore, it is easier to identify if a factor is a strength or a weakness when it’s defined precisely.Benchmarking. The?key emphasize?in doing SWOT is to identify the factors that are the strengths or weaknesses in?comparison to the competitors.?For example,?17% profit margin would be an excellent margin for many firms in most industries and it would be considered as strength. But what if the average profit margin of your competitors is 20%? Then company’s 17% profit margin would be considered as a weakness.VRIO framework. A resource can be seen as a strength if it exhibits VRIO (valuable, rare and cannot be imitated) framework characteristics. Otherwise, it doesn’t provide any strategic advantage for the company.OPPORTUNITIES AND THREATSOpportunities and threats are the external uncontrollable factors that usually appear or arise due to the changes in the macro environment, industry or competitors’ actions. Opportunities represent the external situations that bring a competitive advantage if seized upon. Threats damage your company so you would better avoid or defend against them.Where to look for them?PESTEL PESTEL represents all the major external forces (political, economic, social, technological, environmental and legal) affecting the company so it’s the best place to look for the existing or new opportunities and PETITION. Competitor’s react to your moves and external changes. They also change their existing strategies or introduce new ones. Therefore, the company must always follow the actions of its competitors as new opportunities and threats may open at any time.MARKET CHANGES. The most visible opportunities and threats appear during the market changes.?Markets converge, starting to satisfy other market segment needs with the same product.?New geographical markets open up?allowing the firm to increase its export volumes or start operations in a new country.Often?niche markets become profitable?due to technological changes. As a result, changes in the market create new opportunities and threats that must be seized upon or dealt with if the company wants to gain and sustain?competitive advantage.OPPORTUNITY OR THREAT?Most external changes can represent both opportunities and threats.?For example, exchange rates may increase or reduce the profits gained from exports, depending on the exchange rate, which may rise (opportunity) or fall (threat) against the other currencies. The organization can only guess the outcome and count on analysts’ forecasts. In such cases, when organization cannot identify if the factor will affect it positively or negatively, it should gather unbiased and reliable information from the external sources and make the best possible judgment.GUIDELINES FOR SUCCESSFUL SWOTThe following guidelines are very important in writing a successful SWOT analysis. They eliminate most of SWOT limitations and improve its results significantly:Factors have to be identified relative to the competitors. It allows specifying whether the factor is a strength or a weakness.List between 3 – 5 items for each category. Prevents creating too short or endless lists.Items must be clearly defined and as specific as possible.?For example, firm’s strength is: brand image (vague); strong brand image (more precise); brand image valued at $10 billion, which is the most valued brand in the market (very good).Rely on facts not opinions. Find some external information or involve someone who could provide an unbiased opinion.Factors should be action orientated.?For example, “slow introduction of new products” is action orientated weakness.SWOT analysis example ASWOT analysis of Company "A"StrengthsWeaknessesSecond most valuable brand in the world valued at $76 billionDiversified income (5 different brands earning more than $4 billion each)Strong patents portfolio (15,000 patents)Investments in R&D reaching 4 billion a petent in mergers & acquisitionsHave an access to cheap cash reservesEffective corporate social responsibility (CSR) projectsLocalized productsHighly skilled workforceEconomies of scale or economies of scopeInvestments in R&D are below the industry averageVery low or zero profit marginsPoor customer servicesHigh employee turnoverHigh cost structureWeak brand portfolioRigid (bureaucratic) organizational culture impeding fast introduction of new productsHigh debt level ($3 billion)Brand dilution (the firm has too many brands)Poor presence in the world's largest marketsOpportunitiesThreatsMarket growth for the main firm's productGrowing demand for renewable energyNew technology, that would drive production costs by 20% is in developmentOur country accession to EUChanging customer habitsDisposable income level will increaseGovernment's incentives for 'specific' industryEconomy is expected to grow by 4% next yearGrowing number of people buying onlineInterest rates falling to 1%Corporate tax may increase from 20% to 22% in 2013Rising pay levelsRising raw material pricesIntense competitionMarket is expected to grow by only 1% next year indicating market saturationIncreasing fuel pricesAging populationStricter laws regulating environment pollutionLawsuits against the companyCurrency fluctuationsADVANCED SWOTAt the most, SWOT is considered to be only a reference to further analysis as it has too many limitations and cannot be used alone in the situation analysis. The previous guidelines identified in this article meet the most of SWOT limitations except one: “prioritization of factors”. An advanced SWOT goes a step further and eliminates this important drawback.In a simple SWOT, strengths and weaknesses or opportunities and threats are equal to each other, therefore a minor weakness can balance a major strength. Without prioritization, some factors might be given too much or too little emphasis and the most relevant factors might simply be overlooked.The?aim of advanced SWOT?is to identify the most significant factors of the analysis from all the items listed on it. How to perform it?Step 1. Identify strengths, weakness, opportunities and threats.Step 2. Prioritize themPRIORITIZATIONStrengths and weaknesses are evaluated on 3 categories: (1) IMPORTANCE, (2) RATING, (3) SCOREIMPORTANCEImportance shows how important strength or a weakness is for the organization in its industry as some strengths (weaknesses) might be more important than others. A number from 0.01 (not important) to 1.0 (very important) should be assigned to each strength and weakness. The sum of all weights should equal 1.0 (including strengths and weaknesses).RATING A score from 1 to 3 is given to each factor to indicate whether it is a major (3) or a minor (1) strength for the company. The same rating should be assigned to the weaknesses where 1 would mean a minor weakness and 3 a major weakness.SCORE. Score is a result of importance multiplied by rating. It allows prioritizing the strengths and weaknesses. You should rely on your most important strengths and try to convert or defend your weakest parts of the organization.Opportunities and threats are prioritized slightly differently than strengths and weaknesses. Their evaluation includes:IMPORTANCE. It shows to what extent the external factor might impact the business. Again, the numbers from 0.01 (no impact) to 1.0 (very high impact) should be assigned to each item. The sum of all weights should equal 1.0 (including opportunities and threats).PROBABILITY. Probability of occurrence is showing how likely the opportunity or threat will have any impact on business. It should be rated from 1 (low probability) to 3 (high probability).SCORE. Importance multiplied by probability will give a score by which you’ll be able to prioritize opportunities and threats. Pay attention to the factors having the highest score and ignore the factors that will not likely affect your business.SWOT analysis of Company 'A'ImportanceRatingScoreStrengthsSecond most valuable brand in the worldDiversified incomeStrong patents portfolio (15,000 patents)Investments in R&D reaching 4 billion a yearCompetent in mergers & acquisitionsHave an access to cheap cash reservesEffective corporate social responsibility (CSR) projectsLocalized productsHighly skilled workforceEconomies of scale/economies of scope0.030.010.150.100.050.020.030.010.080.0212323111230.030.020.450.200.150.020.030.010.160.06WeaknessesInvestments in R&D are below the industry averageVery low or zero profit marginsPoor customer servicesHigh employee turnoverHigh cost structureWeak brand portfolioBureaucratic organizational cultureHigh debt level ($3 billion)Brand dilution (the firm has too many brands)Poor presence in the world's largest markets0.030.080.100.050.030.020.030.030.010.1223223111120.060.240.200.100.090.020.030.030.010.24ImportanceProbabilityScoreOpportunitiesMarket growth for the main firm's productGrowing demand for renewable energyNew technology is in developmentOur country accession to EUChanging customer habitsDisposable income level will increaseGovernment's incentives for 'specific' industryEconomy is expected to grow by 4% next yearGrowing number of people buying onlineInterest rates falling to 1%0.100.010.130.050.050.020.030.010.080.0221131322330.200.010.130.150.050.060.060.020.240.06ThreatsCorporate tax may increase from 20% to 22% in 2013Rising pay levelsRising raw material pricesIntense competitionMarket is expected to grow by only 1% next yearIncreasing fuel pricesAging populationStricter laws regulating environment pollutionLawsuits against the companyCurrency fluctuations0.120.030.090.070.050.010.010.010.020.0922313331120.240.060.270.070.150.030.030.010.020.18 ................
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