SWOT Analysis - Definition, Advantages and Limitations

SWOT Analysis - Definition, Advantages and Limitations

SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. By definition, Strengths (S) and Weaknesses (W) are considered to be internal factors over which you have some measure of control. Also, by definition, Opportunities (O) and Threats (T) are considered to be external factors over which you have essentially no control.

SWOT Analysis is the most renowned tool for audit and analysis of the overall strategic position of the business and its environment. Its key purpose is to identify the strategies that will create a firm specific business model that will best align an organization’s resources and capabilities to the requirements of the environment in which the firm operates.

In other words, it is the foundation for evaluating the internal potential and limitations and the probable/likely opportunities and threats from the external environment. It views all positive and negative factors inside and outside the firm that affect the success. 

A consistent study of the environment in which the firm operates helps in forecasting/predicting the changing trends and also helps in including them in the decision-making process of the organization.

An overview of the four factors (Strengths, Weaknesses, Opportunities and Threats) is given below-

 Strengths – 

Strengths are the qualities that enable us to accomplish the organization’s mission. These are the basis on which continued success can be made and continued/sustained.

Strengths can be either tangible or intangible. These are what you are well-versed in or what you have expertise in, the traits and qualities your employees possess (individually and as a team) and the distinct features that give your organization its consistency.

Strengths are the beneficial aspects of the organization or the capabilities of an organization, which includes human competencies, process capabilities, financial resources, products and services, customer goodwill and brand loyalty. Examples of organizational strengths are huge financial resources, broad product line, no debt, committed employees, etc.

 Weaknesses – 

Weaknesses are the qualities that prevent us from accomplishing our mission and achieving our full potential. These weaknesses deteriorate influences on the organizational success and growth.

Weaknesses are the factors which do not meet the standards we feel they should meet.

Weaknesses in an organization may be depreciating machinery, insufficient research and development facilities, narrow product range, poor decision-making, etc.

Weaknesses are controllable. They must be minimized and eliminated. For instance - to overcome obsolete machinery, new machinery can be purchased.

Other examples of organizational weaknesses are huge debts, high employee turnover, complex decision making process, narrow product range, large wastage of raw materials, etc.

Opportunities – 

Opportunities are presented by the environment within which our organization operates. These arise when an organization can take benefit of conditions in its environment to plan and execute strategies that enable it to become more profitable.

Organizations can gain competitive advantage by making use of opportunities. Organization should be careful and recognize the opportunities and grasp them whenever they arise.

Selecting the targets that will best serve the clients while getting desired results is a difficult task. Opportunities may arise from market, competition, industry/government and technology.

Increasing demand for telecommunications accompanied by deregulation is a great opportunity for new firms to enter telecom sector and compete with existing firms for revenue.

Threats – 

Threats arise when conditions in external environment jeopardize the reliability and profitability of the organization’s business.

They compound the vulnerability when they relate to the weaknesses.

Threats are uncontrollable.

When a threat comes, the stability and survival can be at stake.

Examples of threats are - unrest among employees; ever changing technology; increasing competition leading to excess capacity, price wars and reducing industry profits; etc.

Advantages of SWOT Analysis

SWOT Analysis is instrumental in strategy formulation and selection. It is a strong tool, but it involves a great subjective element. It is best when used as a guide, and not as a prescription.

Successful businesses build on their strengths, correct their weakness and protect against internal weaknesses and external threats. They also keep a watch on their overall business environment and recognize and exploit new opportunities faster than its competitors.

SWOT Analysis helps in strategic planning in following manner-

1.     It is a source of information for strategic planning.
2.     Builds organization’s strengths. 
3.     Reverse its weaknesses.
4.   Maximize its response to opportunities. 
5.   Overcome organization’s threats.
6.  It helps in identifying core competencies of the firm.
7.   It helps in setting of objectives for strategic planning.
8.   It helps in knowing past, present and future so that by using past and current data, future plans can be chalked out. 

SWOT Analysis provide information that helps in synchronizing the firm’s resources and capabilities with the competitive environment in which the firm operates.

Limitations of SWOT Analysis

SWOT Analysis is not free from its limitations. It may cause organizations to view circumstances as very simple because of which the organizations might overlook certain key strategic contact which may occur. Moreover, categorizing aspects as strengths, weaknesses, opportunities and threats might be very subjective as there is great degree of uncertainty in market. SWOT Analysis does stress upon the significance of these four aspects, but it does not tell how an organization can identify these aspects for itself.

There are certain limitations of SWOT Analysis which are not in control of management. These include- Price increase;

1.  Inputs/raw materials;
2. Government legislation; 
3. Economic environment;
4. Searching a new market for the product which is not having overseas market due to import restrictions; etc.
5.  Internal limitations may include-
6.   Insufficient research and development facilities;
7.  Faulty products due to poor quality control;
8. Poor industrial relations;
9. Lack of skilled and efficient labour; etc

BIBLIOGRAPHY

John A. Pearce II , Richard B Robinson , JR., Amita Mital “Strategic Management” 10^th Addition Tata Mc Graw Hill Education Pvt.Ltd New Delhi.

STRATEGIC CONTROL AND CONTINUOUS IMPROVEMENT

STRATEGIC CONTROL AND CONTINUOUS IMPROVEMENT

BY

SMART LEARNING WAY

Strategic control is concerned with tracking a strategy as it is being implemented, detecting problems or changes in its underlying premises, and making necessary adjustments. In contrast to postaction control, strategic control is concerned with guiding action in behalf of the strategy as that action is taking place and when the end result is still several years off. Managers responsible for the success of a strategy typically are concerned with two sets of questions:

      1.    Are we moving in the proper direction?

      2.    How are we performing?

ESTABLISHING STRATEGIC CONTROLS

·  Premise Control:

Every strategy is based on certain planning premises—assumptions or predictions. Premise control is designed to check systematically and continuously whether the premises on which the strategy is based are still valid. Key questions for management are:

·  Which premises should be monitored: environmental factors—those over which the firm has no control but those that can influence strategy and industry factors—that influence success in a particular industry.

·  How are premise controls enacted: the strategy’s key premises should be identified and recorded during the planning process and responsibilities for monitoring those premises should be assigned to those with qualified sources of information.

·   Special Alert Control: 

A special alert control is the thorough, and often rapid, reconsideration of the firm’s strategy because of a sudden, unexpected event.

·         Strategic Surveillance: 

 Strategic surveillance is designed to monitor a broad range of events inside and outside the firm that are likely to affect the course of its strategy. The basic idea behind strategic surveillance is that important yet unanticipated information may be uncovered by a general monitoring of multiple information sources.

·         Implementation Control: 

 Implementation control is designed to assess whether the overall strategy should be changed in light of results. Two types of implementation controls are:

·         Monitoring strategic thrusts: 

projects that need to be done if the strategy is to be accomplished and information on the strategy’s progress.

·         Milestone reviews: critical events and resource allocations through time, and full-scale assessment to scrutinize the strategy.

 Implementation control is also enabled through operational control systems like budgets, schedules and key success factors. To be effective, operational control systems must take four steps common to all potation controls:

·         Set standards of performance

·         Measure actual performance

·         Identify deviations from standards set

·         Initiate corrective action

The Quality Imperative: Continuous Improvement

TQM stands for total quality management, an umbrella term for the quality programs that have been implemented in many businesses worldwide in the last two decades.

 TQM was first implemented in several large U.S. manufacturers in the face of the overwhelming success of Japanese and German competitors. 

TQM is viewed as virtually a new organizational culture and way of thinking. 

It is built around an intense focus on customer satisfaction; on accurate measurement of every critical variable in a business’s operation; on continuous improvement of products, services, and processes; and on work relationships based on trust and teamwork. 

One useful explanation of the quality imperative suggests 10 essential elements of implementing TQM as follows:

      1.    Define quality and customer value.

      2.    Develop a customer orientation.

      3.    Focus on the company’s business processes.

      4.    Develop customer and supplier partnerships.

      5.    Take a preventive approach.

      6.    Adopt an error-free attitude.

      7.    Get the facts first.

      8.    Encourage every manager and employee to participate.

      9.    Create an atmosphere of total involvement.

     10.    Strive for continuous improvement.

Six-Sigma Approach to Continuous Improvement

Sometimes referred to as the “new TQM,” Six-Sigma is a highly rigorous and analytical approach to quality and continuous improvement with an objective to improve profits through defect reduction, yield improvement, improved customer satisfaction and best-in-class performance.

Critics of TQM see key success factors differentiating Six-Sigma from TQM:

·         Acute understanding of customers and the product or service provided

·         Emphasis on the science of statistics and measurement

·         Meticulous and structured training development

·         Strict and project-focused methodologies

·         Reinforcement of the doctrine advocated by Juran such as top management support and continuous education

 ISO 9001 and the Era of International Standards

The ISO 9001 quality management system standard, introduced in 1987, is international in both scope and impact.  The ISO 9001 standard focuses on achieving customer satisfaction through continuous measurement, documentation, assessment, and adjustment. 

The standard specifies requirements for a quality management system where an organization:

Needs to demonstrate its ability to consistently provide product and services that meet customer requirements, and

Aims to enhance customer satisfaction through the effective application of the system, including processes for continual improvement of the system and the assurance of conformity to customer requirements.

 The Balanced Scorecard Methodology

Recognizing some of the weaknesses and vagueness of previous implementation and control approaches, the balanced scorecard approach was intended to provide a clear prescription as to what companies should measure in order to “balance” the financial perspective in implementation and control of strategic plans.

The balanced scorecard methodology adapts the TQM ideas of customer-defined quality, continuous improvement, employee empowerment, and measurement-based management/feedback into an expanded methodology that includes traditional financial data and results. 

BIBLIOGRAPHY

John A. Pearce II , Richard B Robinson , JR., Amita Mital “Strategic Management” 10^th Addition Tata Mc Graw Hill Education Pvt.Ltd New Delhi.

http://en.wikipedia.org/wiki/Strategic_management

BCG Matrix

BCG Matrix

BY

SMART LEARNING WAY

INTRODUCTION 

Boston Consulting Group (BCG) Matrix is a four celled matrix (a 2 * 2 matrix) developed by BCG, USA. It is the most renowned corporate portfolio analysis tool. It provides a graphic representation for an organization to examine different businesses in it’s portfolio on the basis of their related market share and industry growth rates. It is a two dimensional analysis on management of SBU’s (Strategic Business Units). In other words, it is a comparative analysis of business potential and the evaluation of environment.

According to this matrix, business could be classified as high or low according to their industry growth rate and relative market share.

Relative Market Share = SBU Sales this year leading competitors sales this year.

Market Growth Rate = Industry sales this year - Industry Sales last year.

The analysis requires that both measures be calculated for each SBU. The dimension of business strength, relative market share, will measure comparative advantage indicated by market dominance. The key theory underlying this is existence of an experience curve and that market share is achieved due to overall cost leadership.

BCG matrix has four cells, with the horizontal axis representing relative market share and the vertical axis denoting market growth rate. The mid-point of relative market share is set at 1.0. if all the SBU’s are in same industry, the average growth rate of the industry is used. While, if all the SBU’s are located in different industries, then the mid-point is set at the growth rate for the economy.

Resources are allocated to the business units according to their situation on the grid. The four cells of this matrix have been called as stars, cash cows, question marks and dogs. Each of these cells represents a particular type of business.

Stars-

 Stars represent business units having large market share in a fast growing industry. They may generate cash but because of fast growing market, stars require huge investments to maintain their lead. Net cash flow is usually modest. SBU’s located in this cell are attractive as they are located in a robust industry and these business units are highly competitive in the industry. If successful, a star will become a cash cow when the industry matures.

Cash Cows- 

Cash Cows represents business units having a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be utilized for investment in other business units. These SBU’s are the corporation’s key source of cash, and are specifically the core business. They are the base of an organization. These businesses usually follow stability strategies. When cash cows loose their appeal and move towards deterioration, then a retrenchment policy may be pursued.

 Question Marks- 

Question marks represent business units having low relative market share and located in a high growth industry. They require huge amount of cash to maintain or gain market share. They require attention to determine if the venture can be viable. Question marks are generally new goods and services which have a good commercial prospective. There is no specific strategy which can be adopted. If the firm thinks it has dominant market share, then it can adopt expansion strategy, else retrenchment strategy can be adopted. Most businesses start as question marks as the company tries to enter a high growth market in which there is already a market-share. If ignored, then question marks may become dogs, while if huge investment is made, then they have potential of becoming stars.

 Dogs- 

Dogs represent businesses having weak market shares in low-growth markets. They neither generate cash nor require huge amount of cash. Due to low market share, these business units face cost disadvantages. Generally retrenchment strategies are adopted because these firms can gain market share only at the expense of competitor’s/rival firms. These business firms have weak market share because of high costs, poor quality, ineffective marketing, etc. Unless a dog has some other strategic aim, it should be liquidated if there is fewer prospects for it to gain market share. Number of dogs should be avoided and minimized in an organization.

Limitations of BCG Matrix

The BCG Matrix produces a framework for allocating resources among different business units and makes it possible to compare many business units at a glance. But BCG Matrix is not free from limitations, such as-

 BCG matrix classifies businesses as low and high, but generally businesses can be medium also. Thus, the true nature of business may not be reflected.

 Market is not clearly defined in this model.

 High market share does not always leads to high profits. There are high costs also involved with high market share.

Growth rate and relative market share are not the only indicators of profitability. This model ignores and overlooks other indicators of profitability.

 At times, dogs may help other businesses in gaining competitive advantage. They can earn even more than cash cows sometimes.

 This four-celled approach is considered as to be too simplistic.

BIBLIOGRAPHY

John A. Pearce II , Richard B Robinson , JR., Amita Mital “Strategic Management” 10^th Addition Tata Mc Graw Hill Education Pvt.Ltd New Delhi.

CORE COMPETENCIES - AN ESSENTIAL FOR ORGANIZATIONAL SUCCESS

CORE COMPETENCIES - AN ESSENTIAL FOR ORGANIZATIONAL SUCCESS

BY

SMART LEARNING WAY

What is Core Competency?

Core competency is a unique skill or technology that creates distinct customer value. For instance, core competency of Federal express (Fed Ex) is logistics management. The organizational unique capabilities are mainly personified in the collective knowledge of people as well as the organizational system that influences the way the employees interact. 

As an organization grows, develops and adjusts to the new environment, so do its core competencies also adjust and change. Thus, core competencies are flexible and developing with time. They do not remain rigid and fixed. The organization can make maximum utilization of the given resources and relate them to new opportunities thrown by the environment.

Resources and capabilities are the building blocks upon which an organization create and execute value-adding strategy so that an organization can earn reasonable returns and achieve strategic competitiveness.

Resources are inputs to a firm in the production process. These can be human, financial, technological, physical or organizational. The more unique, valuable and firm specialized the resources are, the more possibly the firm will have core competency. Resources should be used to build on the strengths and remove the firm’s weaknesses. Capabilities refer to organizational skills at integrating it’s team of resources so that they can be used more efficiently and effectively.

Organizational capabilities are generally a result of organizational system, processes and control mechanisms. These are intangible in nature. It might be that a firm has unique and valuable resources, but if it lacks the capability to utilize those resources productively and effectively, then the firm cannot create core competency. The organizational strategies may develop new resources and capabilities or it might make stronger the existing resources and capabilities, hence building the core competencies of the organization.

Core competencies help an organization to distinguish its products from it’s rivals as well as to reduce its costs than its competitors and thereby attain a competitive advantage. It helps in creating customer value. Also, core competencies help in creating and developing new goods and services. Core competencies decide the future of the organization. These decide the features and structure of global competitive organization. Core competencies give way to innovations. Using core competencies, new technologies can be developed. They ensure delivery of quality products and services to the clients.

Core Competency Theory of Strategy

Core Competency Theory

The core competency theory is the theory of strategy that prescribes actions to be taken by firms to achieve competitive advantage in the marketplace. The concept of core competency states that firms must play to their strengths or those areas or functions in which they have competencies. In addition, the theory also defines what forms a core competency and this is to do with it being not easy for competitors to imitate, it can be reused across the markets that the firm caters to and the products it makes, and it must add value to the end user or the consumers who get benefit from it. In other words, companies must orient their strategies to tap into the core competencies and the core competency is the fundamental basis for the value added by the firm.

Core Competencies and Strategy

The term core competency was coined by the leading management experts, CK Prahalad and Gary Hamel in an article in the famous Harvard Business Review. By providing a basis for firms to compete and achieve sustainable competitive advantage, Prahalad and Hamel pioneered the concept and laid the foundation for companies to follow in practice.

Some core competencies that firms might have include technical superiority, its customer relationship management, and processes that are vastly efficient. In other words, each firm has a specific area in which it does well relative to its competitors, this area of excellence can be reused by the firm in other markets and products, and finally, the area of strength adds value to the consumer. 

The implications for real world practice are that core competencies must be nurtured and the business model built around them instead of focusing too much on areas where the firm does not have competency. This is not to say that other competencies must be neglected or ignored. Rather, the idea behind the concept is that firms must leverage upon their core strengths and play to their advantages.

Some Examples

If we take the examples from real world companies and evaluate their core competencies, we find that many firms have benefited from the application of this theory and that they have succeeded in attaining competitive advantage and sustainable strategic advantage. For instance, the core competencies of Walt Disney Corporation lie in its ability to animate and design its shows, the art of storytelling that has been perfected by the company, and the operation of its theme parks that is done in an efficient and productive manner. Hence, Walt Disney Corporation would be well advised to configure its strategy around these core competencies and build a business model that complements these competencies.

Closing Thoughts

The important aspect to be noted is that core competencies provide the companies with a framework wherein they can identify their core strengths and strategize accordingly. Of course, the identification and evaluation of core competencies must be done as accurately and reliably as possible since the divestment of non-core areas must not lead to the firm missing key areas of operation and competitive advantage. Finally, care must be taken when building the organizational edifice around the core competencies to avoid the situation where many or too few of the competencies are identified leading to redundancies or scarcity.

BIBLIOGRAPHY

John A. Pearce II , Richard B Robinson , JR., Amita Mital “Strategic Management” 10^th Addition Tata Mc Graw Hill Education Pvt.Ltd New Delhi.