SWOT analysis OBJECTIVES The analysis of strengths weaknesses opportunities

85 9 SWOT analysis OBJECTIVES The analysis of strengths, weaknesses, opportunities and threats brings together the results of the analysis of the firm (internal), the environmental analysis (external) and the portfolio analysis. A swot analysis allows you to look at the strengths and weaknesses in the context of the opportunities and threats. Implicit in the swot analysis is the aim of achieving the optimum match of a firm’s resources with the environment in order to gain sustainable competitive advantage by: building on a firm’s strengths; reducing weaknesses or adopting a strategy that avoids weaknesses; exploiting opportunities, particularly using the firm’s strengths; reducing exposure to or countering threats. A swot analysis used on its own is a crude, rather subjective tool. However, this is also an advantage because it can be done quickly. In any event, a swot analysis should be short and simple; complexity and over-analysis are to be avoided. This means a swot analysis is easily understood and communicated and can fit on one page. Therefore you could use a swot analysis to carry out a quick strategic review. The process of creating a swot analysis is valuable because it involves discussion among managers or key people in a business. This stimulates thinking in a way that is not too structured or restrictive. CONDUCTING A SWOT ANALYSIS A swot analysis (see Chart 9.1 on the next page) could be viewed as bringing together the outputs from the strategic review, in particular: the analysis of the firm (internal elements); the market analysis (internal and external elements); the product, portfolio and matrix analysis (internal and external elements); the analysis of the general environment (external elements). The first step of the swot analysis is to list strengths, weaknesses, opportunities and threats. Only important factors should be included, but some factors will invariably be more important than others. Factors should be listed in order of importance or ranked, and an importance score could be assigned to each factor. Each factor should be a short bullet point, so that the swot analysis fits on one page. Assertions should be specific and if possible include some quantification. For example, a statement about strength in distribution might say: “Our products are distributed through 86 9. SWOT ANALYSIS 1,000 outlets, compared with our nearest rival’s 400 outlets.” Some explanation may also be required, but this can be provided in a supporting paragraph on a separate sheet. This could include a more detailed quantification of factors, such as demand growth projections or the number of pieces of environmental legislation under discussion. It is not necessary to provide a long list of all possible factors. It is better to focus on factors that really matter and follow a rationale that links factors, for example weaknesses in the context of identified threats. In a larger business, ideally the swot analysis is carried out by a multi-disciplinary team in a workshop dedicated to producing such analysis. The workshop techniques suitable for this process are the same as for the political, economic, social and technological (pest) analysis (see Chapter 5). Chart 9.1 SWOT analysis Analysis of the firm VRIO analysis Key differentiators and USPs Value add analysis Value chain Value system Resource audit – Operations – Human – Organisational – Financial POSITIVE NEGATIVE Strengths INTERNAL Weaknesses Market analysis Product, portfolio and matrix analysis Industry and competitor analysis 5 forces Competitor analysis KSF analysis Industry life cycle EXTERNAL Environmental analysis PEST Relevance Opportunities Threats Strengths and weaknesses The strengths and weaknesses analysis should be closely related to the analysis of the firm, which is an input into the strengths and weaknesses analysis. However, it is important to look at strengths and weaknesses in the context of opportunities and threats. The crucial question is relevance. Strengths matter only if you can use them to exploit an opportunity or counter a threat. Similarly, a weakness is problematic if it relates to a threat. Thus an external factor can be an opportunity or a threat. For example, if new technology is becoming available and a business has an excellent product-development department that can take advantage of the new technology to develop products, this is an opportunity. In contrast, if a business cannot make use of the new technology, there is a threat from substitution if rivals make use of the technology. Conducting a SWOT analysis 87 The analysis should be made bearing in mind the objective of strategic planning: to gain sustainable competitive advantage. A strength is a potential source of competitive advantage, such as core competencies or financial strength. Because competitive advantage can only be sustained if customer needs are addressed, the market analysis is an important input into the swot analysis. Enormous marketing strength is derived from a well-positioned product. This means a swot analysis should, like your business, have a customer focus. To derive real advantage from a strength, it must be useful in satisfying the needs of customers. Similarly, a weakness that relates to specific customer needs should be addressed as a priority. The analysis of the firm focuses on resources and does not address weaknesses. Entrepreneurs and managers generally find it easier to think of strengths rather than weaknesses. Weaknesses may not be immediately apparent, so considerable time should be spent on identifying potential weaknesses. After an initial pass and following the listing of threats, the list of weaknesses should be revisited. The inability to neutralise or sidestep a threat is a fundamental weakness. The matrix analysis of products may also identify weaknesses, such as an unbalanced portfolio with too many products in the mature stage of the product life cycle, or too many sbus with a weak business position. Carrying out a swot analysis for competitors is recommended. A competitor’s strengths may well be a potential weakness for your business. Chart 9.2 on the next page provides a non-exhaustive checklist of factors that may be relevant to your swot analysis. However, since these are specific to each business and environment you may use other factors. You can also use Chart 8.10 on page 76 as a checklist. Opportunities and threats An essential input into the analysis of opportunities and threats is the pest analysis (see Chapter 5). You must be aware of the major changes in the environment in which your business operates. Again, opportunities and threats should be considered in the context of strengths and weaknesses. For example, there may a new market opportunity but at present your business does not have the resources to exploit it. Indeed, you may be preparing a business plan to raise funds for this purpose. To be successful in this, you must use resources to acquire the strengths that are necessary to exploit the opportunity. Changes in the competitive environment may pose a threat. Therefore the industry and competitor analysis is an input into the analysis of opportunities and weaknesses. For example, a business could be threatened by consolidation taking place in the industry which may relegate the business to a secondary position unless that business also becomes part of the consolidation process. 88 9. SWOT ANALYSIS Chart 9.2 Checklist for SWOT analysis Internal Strengths Market dominance Core competencies Economies of scale Low-cost position Leadership and management skills Financial resources Manufacturing skills and technology Research and development Brand and reputation Differentiated products Patents and copyrights Distribution network External Opportunities Technology innovation New demand Diversification opportunity Market growth Demographic and social change Favourable political support Economic upswing Acquisition and partnerships Cheap funds Trade liberalisation Threats New market entrants Competitive price pressure Higher input prices Changing customer needs Consolidation among buyers Threat from substitutes Capacity growth outstrips demand growth Cyclical downturn Demographic change Regulation and legislation Threat from imports Weaknesses Low market share Few core competencies Old plant High cost base Weak balance sheet and cash flow Low R&R capability Undifferentiated product Weak positioning Quality problems Lack of distribution Skills gap Source: Based on Lynch, R., Corporate Strategy, Prentice Hall, 2000 USES OF OUTCOMES IN THE BUSINESS PLAN A swot analysis is a snapshot of a business’s position and provides an input into the generation of strategic options. It gives management an outline of the major issues affecting the industry and the business and identifies the basis for developing strategies. A swot analysis is well understood and easily communicated. Of particular value is the identification of weaknesses and threats. In addressing these realistically, a business plan will become more plausible and robust. It demonstrates that you are not just looking at the upside but are aware of the challenges that face your business.