What is SWOT Analysis? SWOT analysis is a business tool by which, a firm wishing to implement a strategic analysis, analyzes and recognizes its corporate Strengths and Weaknesses as well as the existed or forthcoming Opportunities and Threats from its external environment. Only when these four critical information elements are well elaborated and known, the enterprise is able to formulate and implement the strategy leading to its business aims. SWOT analysis methodology is implemented in two phases as follows: How SWOT Analysis is applied? External or Environment Analysis During the external analysis phase the company investigates a number of possible opportunities and threats from the several dimensions of its external environment. The level and depth of analysis varies according to the company needs, sector, and competitive environment but in any case all the critical issues affecting directly or indirectly the company operation should be considered and taken into account. The overall aim of the external analysis report is to provide conclusions of practical importance in order the company managers formulate the appropriate strategy according to the several opportunities and threats found. All the conclusions referred to Opportunities or Threats are listed in the final tables of the SWOT analysis as will be presented later.
Corporate or Internal Analysis During the corporate analysis phase the company investigates a number of possible strengths and weaknesses existed in its corporate (internal) environment. The selected framework of this analysis is the Business Value Creation model. The SWOT analyst investigates all the main and supportive operations in order to conclude which of this need improvement (weakness) or need enforced and could be used as core competences to face the competition (strengths). EXTERNAL ANALYSIS In order to evaluate the opportunities and threats for a company it is necessary to carry out an external analysis. This analysis should focus on the following topics and should be carried out by an experienced person and/or with the help of an external consultant. The SWOT analyst might choose not to fully analyse all the issues listed bellow but in most cases all the proposed control points are useful and must be seriously considered prior to any business strategy formulation.
Social/cultural Economic Competitive environment
Company Orgnanisation Culture
Labor Market Political/ Legal
Figure 1: The firm and its environment GENERAL ENVIRONMENT ANALYSIS Financial issues-Control Points: Gross domestic product Inflation rate Rates Employment rate and anticipation Level of salaries and day’s wages Momentary deflation or overpricing Energy cost and availability Political-legal issues-Control Points: Tax laws Laws for environment protection Investment motives Import/export regulations Employment law
Government stability Social/Cultural issues-Control Points: Life style changes Demographic trends Population movements Other issues Technological issues-Control Points: Research activities Patent protection New products Technology transfer activities in the business sector Productivity improvement technologies State of the art technology COMPETETIVE ENVIRONMENT ANALYSIS Customer's issues-Control Points: Customer characteristics and behavior Is the company critical for the customer? * Is the customer critical for the company? * Other alternative solutions the costumer has? Can the costumer claim better prices? Any possible benefit for a cooperation agreement with the costumer *A customer is critical for the company when the customer number is small and the number of competitors big and vice-versa. Suppliers issues-Control Points: Who offer raw materials? What is the quality of the raw materials? Reliability of suppliers Terms of Credit How possible is a specific supplier to follow a price raising policy? Are there any alternative solutions? What are the alternative solutions?
Competitors issues-Control Points: Competitors identity Market share they own Market entry barriers Structure of their stock capital and possible recent changes Level of integration-Level of concentration (competitors) Structure of fixed assets and operational efficiency Strength of development Availability of key personnel or are there staffing problems?
Labor market issues-Control Points: Availability of key personnel Capability of internal training Willingness of someone to work for the enterprise Desirable salaries COMPETITION ANALYSIS Newcomers threat issues-Control points: The strength of this competitive threat is mainly determined from the easiness to enter the market, which is specified by the tolerance of the several market entry barriers. The most usual market entry barriers are: • Effectiveness of the product differentiation. • Policies of reduced prices and extra discounts for existed costumers. • Cost of production advantages compared to the current competitors. • The mere amount of capital investment required entering the market. • Government enterprise policy. Substitutes threat issues-Control points: The substitutes threat analysis is facilitated by setting the following questions: • Are there any other products offered satisfying the same customer needs? • How easy is to persuade the current firm’s costumers to follow a different direction to satisfy their needs? • Are there any other substitute products, which are quite better and quite cheaper? • Is anyone in the market trying to satisfy the company customers with a different approach? • Is there anyone from other business sector who could try to pull current customers somehow? Costumer Negotiation Power issues-Control points: The powerful customers can: • Press for lower prices • Negotiate for better quality • Lead the competitors to struggle The customers are powerful when: • They buy a considerable proportion of the production. • They could produce what they currently buy (backwards vertical organization). • There are many alternative suppliers as the product is very common.
The supplier change doesn’t cost so much.
Supplier Negotiation Power issues-Control points: Powerful suppliers may affect the company profits by raising the prices or reducing the quality. In order to do that must by in a powerful negotiating position. The suppliers are powerful when: • There are a small number of suppliers and a big number of buyers. • The product they sell is rare. • There aren’t many or product substitutes in the market or not available at all. • They could produce what their customers produce and turn to be a straight competitive threat (forwards vertical organization). • Their product is protected by a commercial agreement providing them exclusive rights (patent, trademark, etc). Level of competition strength Supplier-Control points: Competition analysis is facilitated by setting and answering the following questions: • Who is the most powerful competitor? • How the company is compared to the most powerful competitors? • What is the customer’s perception for the competitor’s quality, service, and reliability? • Cost structure and comparative advantages and disadvantages of the competitors? • What is the current financial strength of the competitors? • Is there any way to reduce the competition strength? • What are the main strength sources of the company competitors? • Under what conditions the competition strength might raise, reduce?
SYNOPSIS OF EXTERNAL ANALYSIS Opportunities & Threats In order to elaborate the most important part of the SWOT analysis, which is the synopsis, the firm managers must
THINGS TO CONSIDER Using this methodology the analyst reviews the material on the business firm available to him. However judgment is needed here since what, for example may appear to be a weakness may, in fact, be strength. It should be mentioned that the SWOT analyst could expand the issues considered for investigation or the questions answered in order to cover all the possible areas of analysis. Moreover, the analysts will discover that often a data bit fits into more than one category. This is because of the interdependency of the functional areas, the general management area and the demands of an effective strategy. Using this methodology the analyst reviews the material on the business firm available to him. However judgment is needed here since what, for example may appear to be a weakness may, in fact, be strength.
identify the general forces affecting the company and/or the business sector. This will be done by a careful review of the answers and details given to the analysis section described before. The next step is to identify the specific opportunities and threats these forces generate now or will generate in the future and evaluate them according the following example. Identification of the external opportunities and threats Forces (opportunities, threats) 1. New strong competitor from abroad (threat) 2. A very friendly amendment of the legal framework directly affecting the company business (opportunity) 3…. 4…. Possibility to occur (Low, medium, large) Medium Possible impact to the company (Low, medium, large) Large
Large …. …. …. ….
Priority identification of the opportunities and threats The priority for each force is given according to the following matrix: Possible impact to the company High High Medium Low Large Priority Large Priority Medium Priority Medium Large Priority Medium Priority Low Priority Low Medium Priority Low Priority Low Priority
The shadowed cells refer to opportunities and threats placed by the external environment and deserve high, medium or low priority consideration from the company management team. This matrix helps the SWOT analyst to develop the outline of an action plan. INTERNAL ANALYSIS A methodology to identify the most critical and important business operations and processes the company should monitor in its corporate environment. After this analysis the company will be able to identify its internal strengths or weaknesses. The proposed framework of analysis is the Value Creation Chain Analysis represented in the following image.
Possibility to occur
Business Infrastructure (Administration, Finance, Strategic Planning, etc) Human Resources Management (Staffing, Training, Development) Technological Development (Research & Development, Products & Process Improvement) Supplies (Supplies of raw materials, technological machinery, other materials) Customers Marketing Distribution Production Supply Satisfaction Installation Advertising Storage Delivery of Processes Repair Distribution of Sales raw materials Assembling Spare parts promotion end products Control Storage Sail prices
Main Operations Value Creation Chain Model MAIN OPERATIONS Supplies-Control Points: Efficiency of the Material Management systems Effectiveness of the raw material storage processes Production-Control points: Firm productivity in relation to that of the competitor Suitability of any production automotive system Is production control effective for Quality improvement? Cost reduction? Effectiveness of the production spatial planning and product flow Distribution-Control points: Keeping level of the delivery program Delivery Effectiveness Product availability (direct demand satisfaction) Marketing-Control points: Market Research efficiency Innovation level in promotion and advertising operations Firm capability to identify alternative promotion channels Level of expansion of the products good will Growth of the market share
Customer Service-Control points: Terms and coverage of guaranty Customer complaints feedback exploitation Firm responsiveness to the customer queries Spare parts availability and repair service supply SUPPORTIVE OPERATIONS Business Infrastructure-Control points: Capability to identify alternative new markets entry opportunities with new products Achieved percentage of the strategic plan aims Coordination of all the supportive processes Capability of fund and working capital raising Information systems support and use On time information for decision making Human Resource Management-Control points: Effectiveness of the staffing, training and personnel development operations Salary-motivation system effectiveness Work environment and personnel absents Firm relationships with the relative Unions Level of personnel satisfaction from its employment Technology Development-Control points: Effectiveness of the R&D department R&D department relationships with the other departments Responsiveness to the product development time Quality of the R&D laboratories and the relative equipment Skills of the high level R&D executives Supplies-Control points: Alternative suppliers On time delivery of raw materials in low cost and acceptable quality Delivery of fixed asset equipment (machinery) Optimization of the delivery schedule Long-term relationships existence with suppliers Identification of the most critical and important Operations There are two main methods to evaluate or appreciate the level of importance of the most critical business operations, the quantitative and qualitative method. The overall aim remains the internal Strength and Weaknesses identification. QUANTITATIVE ANALYSIS Financial Quantitative Analysis-Control Points: Added value Financial indexes Capital Cost Fund raising capacity Relationships with creditors and suppliers Dividend share policies
Financial Indexes When a company implements a quantitative analysis in a SWOT analysis, it must select and discuss only those ratios that have an impact on the company problems. For instance accounts receivable and inventory may provide a source of funds. If receivables and inventories are double the industry average, reducing them may provide needed cash. The SWOT analyst should compare these ratios with industry averages to discover if the company is out of line with others in the industry. A typical financial analysis of a firm would include a study of the operating statements for three or five years, including a trend analysis of sales, profits, earnings per share, return on investment plus a ration study comparing the firm under study with industry standards. Basic information resources: Incomes statements and balance sheets The SWOT analyst should: • Compare historical statements over time if a series of statements is available. • Calculate changes that occur in individual categories from year to year. • Determine the change as a percentage as well as an absolute amount. • Adjust for inflation if this is a significant factor. Table of Financial indexes-Control Points: Formula Liquidity ratios (Current Assets)/(Current Liabilities) A short-term indicator of the company’s ability to pay its short-term liabilities assets. How much of the current assets are available to cover each Euro of current liabilities. Measures the company ability to pay off its shortterm obligations from current assets, excluding inventories. Measures the extent to which borrowed funds have been used to finance the How expresse d Meaning
Quick ratio (Acid test)
(Current AssetsInventory)/(Current Liabilities
Leverage ratios Dept to asset ratio (Total debt)/(Total assets) Percentag e
(Profit before taxes + Times interest Interest charges)/Interest earned charges (Profit before taxes + Interest charges+ Coverage of Lease charges) fixed asset /(Interest charges+ Lease obligations) Activity ratios Inventory turnover (Net sales)/(Inventory)
company’s assets. Indicates the ability of the company to meet its annual interest rates. A measure of the company’s ability to meet all of its fixedcharge obligations.
Fixed asset turnover
Average collection period
(Accounts receivable)/(Sales for year/365)
Measures the number of times that average inventory of finished goods was turned over or sold during a period of time, usually a year. Measures the utilization of all the company’s assets. Measures how many sales are generated by each Euro of assets. Measures the utilization of the company’s fixed assets (i.e. plant and equipment). Measures how many sales are generated. Indicates the average length of time in days that a company must wait to collect a sale after making it. May be compared to the credit terms offered by the company to its customers. Measures the rate of return on the total assets utilized in the company. A measure of management’s efficiency. It shows the return on all assets under its control regardless of source of financing Shows how much after-tax profits are generated by each Euro of sales Indicated the total margin available to cover other expenses beyond cost of goods sold, and still yield a profit.
Return on Investment (ROI)
(Net profit after taxes)/ (Total assets)
Net profit margin Gross profit margin
(Net profit after taxes)/(Net sales) (Sales-Cost of goods sold)/Net sales
Percentag e Percentag e
Non-Financial quantitative analysis The financial indexes cannot show some competitive advantages characteristics such as the product differentiation or the quick responsiveness to customer questions. Control Points: Time of new product development Total time of personnel employment Accidents per 100.000 man-hours Number of customer complaints Time between order-delivery Market share Percentage of personnel absences Number of new products Number of sales points Level of inventory in stock QUALITATIVE ANALYSIS Qualitative analysis focuses to some critical issues that might reflect potential or current strengths or weaknesses of the firm under consideration. Leadership and Culture (HRM)-Control Points: Feeling of recognition and embedment of the executives Coordination of the several departments accordingly with the company aims Company capacity to adapt and absorb new ideas and innovations Personnel training Personnel motivation (financial and other short of motives) Market Power-Control Points: Advertisement efficiency Product good will and quality Company recognition and power Customer’s acceptance of new products Image and good will-Control Points: Conformance to severe constraining laws, regulations (i.e. Environmental policies) Relationship with customer institutions Relationship with Public Media (TV channels, radios, newspapers) Relationship with Governmental Bodies Ability to access financial sources and support (National & European Programs, etc) Identification of the internal strengths and weaknesses Forces (strengths, weaknesses) 1. Many customer complaints (weakness) 2. Big market share (strength) Level of change (relative or absolute) (Low, modest, large) Medium Large Possible impact to the company (Low, modest, large Large Large
3…. …. …. 4…. …. …. Priority identification of the strengths and weaknesses The priority for each force is given according to the following matrix: Possible impact to the company High High Medium Low Large Priority Large Priority Medium Priority Medium Large Priority Medium Priority Low Priority Low Medium Priority Low Priority Low Priority
Strengths/Weaknesses – Opportunities/Threats – Matrix In order to derive the necessary conclusions and decisions for the firm under study, it is of utmost importance to confront the strengths and weaknesses of the company on the one hand and the Opportunities and Threats on the other. It is recommend the SWOT analyst to describe the knot points taking into account the results of the external and internal analysis.
Possibility to occur
Opportunities Strengths I Big Market share (strength)+ A competitor faces financial problems (opportunity)= Great opportunity for business expansion and new costumers …. …. III …. ….
Threats II …. ….
IV …. Many customer complaints (Weakness)+ Newcomer with better service and low prices (Threat)=Great danger for the company (Urgent actions needed) …. ….
Useful Remarks • Critical for the company is sector IV where a weakness is confronted by a market threat (danger for the company to fail in the market)
Special emphasis should also be given to sector I where a strength meets a market opportunity. Here, the company should be eager to fully exploit its advantages.
Bibliography 2001-2002, Prof. Emeritus Dimitrios Psoinos, Post Graduate Studies Program in ΄΄Management of Production Systems΄΄, Faculty of Industrial Management, Department of Mechanical Engineering, Engineering School, Aristotle University of Thessaloniki, Notes from Lectures. 1998, Strategic Management and Business Policy-Entering the 21st century Global Society, Thomas L. Wheelen & J. David Hunger, Addison Wesley. Internet sites http://www.bpa.arizona.edu/~dmeader/MIS341/341files/341.SWOTAnalysis.pdf http://www.planonline.org/planning/strategic/swot.htm http://www.amputee-coalition.org/communicator/vol2no4pg1.html http://www.gla.ac.uk/rcc/images_tdw3/Design_evaluation/sld008.htm http://www.panasia.org.sg/iirr/ikmanual/swot.htm http://cbae.nmsu.edu/~dboje/sbc/pages/page3.html