Term Paper
Rationale
SWOT Analysis is an important tool for
mangers to get an overview of their internal and external environment. By
listing the strengths-weakness-opportunities-threats of the firm, the manager can
match strengths with opportunities, work on the weaknesses, and take actions
for the threats. SWOT analysis highlights the central role that the
identification of internal strengths and weaknesses plays in a manager’s search
for effective strategies[1].
A manager can use this tool for formulating successful strategies.
Objective
This paper will give an overview of
SWOT analysis. Each element of SWOT will be discussed, with practical ways.
This paper will also aimed to be a practical guide to formulate SWOT and
analyze its results for young manager candidates.
Executive
Summary
SWOT is an important tool for managers.
It is helpful for a quick overview of the company’s current strategic
situation. It also offers, new strategic actions for improvement. SWOT name
comes from the first letters of Strength-Weakness-Opportunity-Threat. Each of this four
elements are crucial tools for understanding company’s condition compared with
its environment. Basically, strength and weakness are internal, opportunity and
threats are external factors. To implement SWOT analysis, the manager must
match these areas in order to formulate a successful plan.
After listing SWOT, manager should use the some tools for
evaluating the results. For example, if there are numerous opportunities and
the strength of the firm is high, the manager can use an aggressive strategy
for capturing the market.
SWOT analysis should periodically be
revised. Although the internal factors do not change too much, the external
environment, which affects opportunities and strengths, changes rapidly in our
century. The rapid innovations, increasing computer technologies, and change in
the customer tastes make the environment in a continuous changing form.
SWOT
Analysis
Organizations have certain characteristics-strengths-which
make them uniquely adapted to carry out their tasks. Conversely they have other
features-weakness-which inhibit their ability to fulfill their purposes.[2]
Howard H.
Stevenson
SWOT is an
acronym for the internal Strengths and Weaknesses of a
firm and the environmental Opportunities and Threats facing that firm. SWOT analysis is an easy technique through
which managers create a quick overview of a company’s strategic situation. SWOT
analysis is grounded on the principal that strategy must produce a strong fit
between a company’s internal capability (its strengths and weaknesses) and its
external situation (which are its opportunities and threats)[3].
Each elements of SWOT will be discussed in the following paragraphs.
Strengths:
Strength is a
resource, skill, or other advantage relative to competitors and the needs of
the markets a firm serves or expects to serve. Strength of a firm is its distinctive competence, which gives a
comparative advantage in the industry. As an example we can give many types of
distinctive competence as manufacturing excellence, good quality control,
superior design capability, customer loyalty, location, and a strong
distribution network. It will be easier to develop competitive advantage in a
market when a firm has a distinctive competence in one of the key requirements
for market success, when rival companies have no offsetting competences, and
rivals can’t match the competence without spending much time and money. From a
strategy making perspective, a company’s strengths are significant because they
can be the cornerstones of a strategy and the basis on which to build
competitive advantage[4].
This part of the SWOT is very important because, strategy should be grounded on
a company’s best skills and market strengths. A firm should ask the below
questions to find out some of its strengths:
· What distinct advantages does your company offer?
· Why do customers say they enjoy doing business with you?
· Is there anything you currently offer that cannot be copied by a competitor, now or in the future?[5]
The answers of
these questions can be helpful for a quick overview of the distinctive
competence of the company. In the following figure, some of the potential
internal strengths can be found.
|
Potential Internal Strengths |
|
·
A distinctive competence ·
Adequate financial resources ·
Good competitive skill ·
Well thought of by buyers ·
An acknowledged market leader ·
Well-conceived functional area strategies ·
Access to economies of scale ·
Insulted (at least somewhat) from strong competitive
pressures ·
Proprietary technology ·
Cost advantages ·
Better advertising campaigns ·
Product innovation skills ·
Proven management ·
Ahead on experience curve ·
Better manufacturing capability ·
Superior technological skills |
Source: Table4-1 from Thompson, Arthur
Weaknesses:
Weakness is a
limitation or deficiency in resource, skills, or capabilities that seriously
impedes a firm’s effective performance. A weakness can be strategically
important or not, depending on how much it matters in the competitive battle
the company is in. A good strategy necessarily needs to aim at correcting
weaknesses that make the company vulnerable or that disqualify it from pursuing
an attractive opportunity.[6]
Finding out the weaknesses of the firms is not so easy. For more accurate analysis,
weaknesses should be searched from the management point of view and also from
the firm’s competitors. The answers to the questions below can also give a
brief view of the firm’s weaknesses:
· What does your company do that can be improved?
· What does your company do poorly?
· What should be avoided?
· What do your competitors do better than you?
· Do competitors have a particular market or segment locked up? [7]
In the following table there are some
possible issues for looking the company’s weaknesses:
|
Potential Internal Weaknesses |
|
·
No clear strategic direction ·
Obsolete facilities ·
Subpar profitability because… ·
Lack of managerial depth and talent ·
Missing some key skills or competence ·
Poor track record in implementing strategy ·
Plagued with internal operating problems ·
Falling behind in R&D ·
Too narrow a product line ·
Weak market image ·
Weaker distribution network ·
Higher overall unit costs relative to key competitors |
Source: Table4-1 from Thompson, Arthur
Opportunities:
Opportunity is a
major favorable situation in a firm’s environment. Market opportunity is a big
factor in shaping a company’s strategy. However, there is an important
distinction between industry opportunities and company opportunities. Not every
company in an industry is well positioned to pursue each opportunity that
exists in the industry- some are always better situated than others and some
companies may be hopelessly out of contention[8].
Opportunities seem more linked to the external environment than strengths and
weaknesses, but this is not always the case. Opportunities for improvement and
new ventures exist within the organization[9].
What are opportunities depend on the resources available an uncommitted. The
following list gives some suggestions to help identify the main opportunities
facing a particular firm[10]:
1. Market share
2. Experience
3. Financial
strength
4. Technological
leadership
5. Good products
(especially trade names)
6. Low cost
7. Economies of
scale
8. Distribution
system
9. Skilled
personnel
10. Favorable
public image.
And also a manager
should answer the following questions to identify the company’s opportunities
in its environment:
· What and where are the interesting opportunities in your market?
· What are the interesting trends occurring in your local area as well as across the nation?
· What do you anticipate happening in the future that may represent an opportunity?[11]
The following table also addresses some of the potential external opportunities:
|
Potential External Opportunities |
|
·
Serve additional customer groups ·
Enter new market or segments ·
Expand product line to meet broader range of customer
needs ·
Diversify into related products ·
Vertical integration ·
Falling trade barriers in attractive foreign markets ·
Complacency among rival firms ·
Faster market growth |
Source: Table4-1 from Thompson, Arthur
Threats:
Threat is a major unfavorable situation in a firm’s environment. Threats are key impediments to the firm’s current or desired position. Historically, threats have been defined in terms of the firm’s competitors, but more recently the focus has expanded to include government, unions, society, and other stakeholders[12]. Many times the threats are out of management’s control. Because of this it is very important to cope with threats. Threats are not also come from external environment. There can be cases, that the internal environment of the firm is the sources of threat. Threats can be identified by the responds to the following questions[13]:
· What are the obstacles that your company faces?
· What is your competition doing that could take business away from you or stunt your company's growth?
· Are the required specifications for your products or services changing?
· Is the changing technology threatening your position in the market?
· Do you have cash-flow problems that could keep your company from acquiring new technology, staff or equipment?
Moreover, the following table can be helpful managers to see the potential threats to their organizations:
|
Potential External Threats |
|
·
Entry of lower-cost competitors ·
Rising sales of substitute products ·
Slower market growth ·
Adverse shifts in foreign exchange rates and trade
policies of foreign governments ·
Costly regulatory requirements ·
Vulnerability to recession and business cycle ·
Growing bargaining power of customers or suppliers ·
Changing buyer needs and tastes ·
Adverse demographic changes |
Source: Table4-1 from Thompson, Arthur
The
Practice of SWOT Analysis
SWOT analysis
can be used in many ways to aid strategy analysis. The most common way is to use
it as a logical framework guiding systematic discussion of a firm’s situation
and the basic alternatives that the firm might consider. What one manager sees
an opportunity, another may see as a potential threat. And also, strength to
one manger may be a weakness to another.
SWOT for Defining Strategic Analysis1:
Key external
opportunities and threats are systematically compared with internal strengths
and weaknesses in a structured approach. The objective is identification of one
of four distinct patterns in the match between a firms internal and external
situation. The four cells in the figure on the next page represent these
patterns. Cell 1 is the most favorable situation; the firm faces several
environmental opportunities and has numerous strengths that encourage pursuit
of those opportunities. This situation suggests growth-oriented strategies to
exploit the favorable match. Cell 4 is the least favorable situation, with the
firm facing major environmental threats from a position of relative weakness.
This situation clearly calls for strategies that reduce or redirect involvement
in the products or markets examined by means of SWOT analysis.
Numerous
Environmental
Opportunities
|
Supports a
turnaround-oriented strategy Supports an
aggressive strategy Substantial Internal Strenghts Critical Internal Weaknesses |
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Supports a
defensive strategy Supports a
defensive strategy |
|
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Major
Environmental
Threats
In cell 2, a firm
with key strengths faces an unfavorable environment. In this situation,
strategies would use current strengths to build long-term opportunities in more
opportunistic product markets. Finally, in cell 3 a firm faces impressive
market opportunity but is constrained by internal weaknesses. The focus
strategy for such a firm is eliminating the internal weaknesses so as to more
effectively pursue the market opportunity. Thus, after listing the SWOT
elements, the manger can choose the best action plans in the light of this
4-cell analysis.
Johnson and Scholes Analysis for Interpreting SWOT[14]:
It is a simple
procedure for matching up the identified opportunities and threats against the
strengths and weaknesses of the organization. The following five-step model
procedure is adapted from Johnson and Scholes (1988):
1. Identify the
current or prevailing strategy or strategies in the organization
2. Identify the
key changes in the firm’s environment.
3. Identify the
key capabilities (strengths) and key limitations (weaknesses) of the
organization. (i.e. consider its resources)
4. List the key
environmental issues against the relevance of the current strategy and the
strengths and weaknesses of the organization.
5. Then examine the
statements against each other, and score either a + (or a weighted ++) or a –
(or a --) or 0, as follows:
a. Mark + if there
would be a benefit to the organization, i.e., a strength that would enable the
firm either to take advantage of, or counteract, a problem from an
environmental change, or offset a weakness caused by the change.
b. Mark – if there
would be an adverse effect on the firm, i.e. either strength would be reduced
by the change or a weakness would prevent the firm from overcoming the problems
associated with an environmental change.
c. Score 0 if
there is no (only a minimal) effect.
Another Way for Evaluating SWOT[15]
The primary strength of SWOT analysis arises from matching specific internal and external factors and evaluating the multiple interrelationships involved. The matching process can be greatly facilitated by the construction of a SWOT matrix, which is constructed by creating a table showing the strengths, weaknesses, opportunities and threats that the manager has identified.
|
SWOT Matrix |
Opportunities |
Threats |
|
|
1. |
1. |
|
2. |
2. |
|
|
3. |
3. |
|
|
Strengths |
O/S Matches |
T/S Matches |
|
1. |
O1 and S2 |
T2 and S2 |
|
2. |
O3 and S3 |
T2 and S1 |
|
3. |
|
|
|
Weaknesses |
O/W Matches |
T/W Matches |
|
1. |
O1 and W1 |
None |
|
2. |
|
|
|
3. |
|
|
Next, the matrix can be used to methodically compare each relevant pair of lists to generate logical matches. Analyzing each of the four SWOT cells of the matrix should yield a variety of matches that will help generate strategic alternatives to facing your competition.
There are four basic categories of matches for which strategy alternatives can be considered:
· S/O matches show the company's strengths and opportunities. Essentially, the company should attempt to use its strengths to exploit opportunities.
· S/T matches show the company's strengths in light of major threats from competitors. The company attempts to use its strengths to avoid or defuse threats.
· W/O matches illustrate the company's weaknesses coupled with major opportunities. The company attempts to overcome its weaknesses by taking advantage of opportunities.
·
W/T matches show the company's weaknesses against
existing market threats. Essentially, the company must attempt to minimize its
weaknesses and avoid threats. These strategy alternatives are generally
defensive.
SWOT Analysis
Example:
In this section I want to give an example related with how SWOT analysis is applied.
This example was taken from http://www.indiadairy.com/ind_swot.html.
After listing each of the SWOT elements I suggested a strategy for Indian Dairy Industry. As can be seen from the SWOT Analysis they have more opportunities than threats. And also their strength is a little more than their weaknesses. Thus, at the end of this list you can find a suggestion that offers the company to apply an aggressive strategy to penetrate the market. But also, they should be cautious when applying Aggressive Strategy due to their number of internal weaknesses.
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|
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SWOT ANALYSIS OF INDIAN
DAIRY INDUSTRY
Strengths:
Demand profile: Absolutely optimistic.
Margins: Quite reasonable, even on packed liquid milk.
Flexibility of product mix: Tremendous. With balancing equipment, you can keep on adding to
your product line.
Availability of raw material: Abundant. Presently, more than 80 per cent of milk produced is
flowing into the unorganized sector, which requires proper channelization.
Technical manpower: Professionally-trained, technical human resource pool, built
over last 30 years. |
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Weaknesses:
Perishability: Pasteurization has overcome this weakness partially. UHT gives
milk long life. Surely, many new processes will follow to improve milk
quality and extend its shelf life.
Lack of control over yield: Theoretically, there is little control over milk yield.
However, increased awareness of developments like embryo transplant, artificial insemination and properly managed
animal husbandry practices, coupled with higher income to rural milk
producers should automatically lead to improvement in milk yields.
Logistics of procurement: Woes of bad roads and inadequate transportation facility make
milk procurement problematic. But with the overall economic improvement in
India, these problems would also get solved.
Problematic distribution: Yes, all is not well with distribution. But then if ice creams
can be sold virtually at every nook and corner, why can’t we sell other dairy
products too? Moreover, it is only a matter of time before we see the
emergence of a cold chain linking the producer to the refrigerator at the
consumer’s home!
Competition: With so many newcomers entering this industry, competition is
becoming tougher day by day. But then competition has to be faced as a ground
reality. The market is large enough for many to carve out
their niche. |
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Opportunities:
"Failure is never final, and success never ending”. Dr
Kurien bears out this statement perfectly. He entered the industry when there
were only threats. He met failure head-on, and now he clearly is an example
of ‘never ending success’! If dairy entrepreneurs are looking for opportunities in India, the following areas
must be tapped:
Value addition: There is a phenomenal scope for innovations in product
development, packaging and presentation. Given below are potential areas of
value addition:
Steps should be taken to introduce
value-added products like shrikhand, ice creams, paneer, khoa,
flavored milk, dairy sweets, etc. This will lead to a greater presence and flexibility
in the market place along with opportunities in the field of brand building.
Addition of cultured products like
yoghurt and cheese lend further strength - both in terms of utilization of
resources and presence in the market place.
A lateral view opens up opportunities
in milk proteins through casein, caseinates and other dietary proteins,
further opening up export opportunities.
Yet another aspect can be the
addition of infant foods, geriatric foods and nutritionals.
Export potential: Efforts to exploit export potential are already on. Amul is
exporting to Bangladesh, Sri Lanka, Nigeria, and the Middle East. Following
the new GATT treaty, opportunities will increase tremendously for the export
of agri-products in general and dairy products in particular. |
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Threats:
Milk vendors, the un-organized
sector: Today milk vendors are occupying the
pride of place in the industry. Organized dissemination of information about the
harm that they are doing to producers and consumers should see a steady
decline in their importance. Suggested
Strategy for Indian Dairy Ind. |
Numerous
Environmental
Opportunities
|
Substantial Internal Strenghts Critical Internal Weaknesses |
|
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|
|
Major
Environmental
Threats
Conclusions
& Recommendation
I believe that
this paper can able to show the importance and application of SWOT analysis. A modern
manager should have to have some skills for analyzing his/her firm. SWOT is a
simple but an effective tool for analyzing.
For a quick
listing of SWOT elements, simply answer the questions I mentioned before. But
keep in mind that SWOT is not just a list of items. It is not a magical tool
that gives you directions. After you make list related with each area, you must
evaluate what this list offers. I mentioned some of the strategies for
evaluating SWOT. But the manager can have different intuition and view of
evaluating these items. It is up to you. As long as you match your company’s
needs with its resources, no matter how you evaluate SWOT, you will probably be
successful.
SWOT analysis
should have to be done continuously for the success of the strategic plan.
World is changing rapidly, thus your external environment which are opportunity
and threats for you can be reversed. Your distinctive competence may become a
weakness for you. So, SWOT analysis should be revised and adapted to the firm’s
ongoing strategy.
I believe that,
SWOT analysis is not just for the firms. In every area of the life we can use
it. For example, you can apply SWOT to yourself. By this method, you can get an
overview of your internal strengths and weaknesses with external opportunities
and threats for your future career. By applying SWOT, you can realize what is
your difference among other people and also your skills that needed to be
improved.
To summarize,
SWOT analysis is a powerful way to see where are you, and where are you going.
The guidelines and methods in this paper can helpful for you to improve your
management style in your organization and your quality of life.
Bibliography
1. Pearce II, John
A.; Robinson, Richard B., Formulation, Implementation, and control of competitive Strategy (1998)
2. Higgins, James
M., Strategic
Management and Organizational Policy (1986)
3. Thompson,
Arthur A., Strategic
Management: concepts and cases (1990)
4. Web Site of
Office.com http://www.office.com/biztools/sales/analyze_competition.html
5. Hatten, Kenneth
J., Strategic
Management (1987)
6. Dobson, Paul, The Strategic Management Blueprint, (1993)
7. Web Site of http://www.indiadairy.com/ind_swot.html