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NOTE ON SWOT ANALYSIS

SWOT is an acronym which stands for Strengths, Weaknesses, Opportunities and Threats.

Strengths and weaknesses are internal factors which can help or hurt our chances of succeeding,

while opportunities and threats are external. We use these as we make business decisions,

because we want to exploit strengths and opportunities, fix weaknesses, and avoid threats.

Your textbook does a good job describing environmental analysis. The purpose of this

document is to add some practical advice to the last three of the four steps of a SWOT analysis:

1. identify relevant environmental factors,

2. identify possible strengths and weaknesses,

3. compare the two to identify opportunities and threats, and

4. highlight the key SWOT factors.

Details about the four steps follow.

1. Environment

We have no control over the environment, but since it can affect our customers, suppliers,

competitors and business partners, we must understand what is going on. Later, we will

compare our list of strengths and weaknesses to environment factors to identify opportunities

and threats. For now, we list the possible external factors and; in step 3, we will see which

might lead to opportunities and threats.

What we are looking for are changes in the environment which might affect our success.

That means each must important to our business and have a long-lasting effect. For example,

while Krispy Kreme was expanding nationally, the low-carb craze hurt them badly and forced

them to retrench.

Large, quick changes are the most important. As a sage once said, "Change offers both

threats and opportunities." If we identify and react to relevant environmental issues sooner and

better than our competitors, then we win. Procter & Gamble, for example, reversed declining

sales of Downy fabric softener by taking advantage of consumers' growing sensitivity to the

environment, specifically too much trash going to land fills. When they launched concentrated

Ultra Downy in small bottles, fabric softener sales began to grow again after a long decline.

I split the environment into the broad and narrow. The difference is that the narrow

environment is concerned with issues close to our business rather than more distant issues.

For the broad environment, I use the acronym STEEP as a checklist to make sure I don't

forget any:

Note on SWOT analysis

S Social, cultural, demographic

T Technology

E Economy

E Environment

P Political, legal, regulatory

Examples of social, cultural and demographic factors, respectively, are an increased sense

of insecurity because of terrorism, popular trends such as fashion, and an aging U.S.

population.

Technology is changing all the time. New technology might affect our suppliers, our

competitors and our customers. In addition, we might be able to take advantage of it in a new

product, to make our operations more efficient, or to serve our customers better. The Internet is

an example of the latter.

The state of the economy affects all parties, too. In boom times, consumers are more willing

to spend, but raw-material shortages might raise our costs. In a depression, customers cut back

on spending, but we might find better employees to hire. Since a recession is typically short-

lived (2009 being an exception), it does not affect strategy.

The environment E refers to raw materials and pollution. People's attitudes towards the

environment are covered in the S of STEEP, while regulations are part of the P of STEEP, which

consists of political, legal and regulatory factors. Regulations are the law–we must comply.

Law suits and political threats might be enough to affect the behavior of a player.

I use the acronym MCCCS for the narrow environment:

M Market

C Customer

C Channels of distribution

C Competition

S Suppliers

We are interested in the market for our product, new or contemplated. What is the growth

rate of sales? Is it concentrated (few competitors) or fragmented (all competitors have a small

share)? What is our rank for market share? Slow growing, concentrated markets are the

toughest to enter, while fast growing, fragmented ones are the easiest.

Regarding the customer, we need to know where we stand from their perspective. How do

they view our brand and product? How much of their purchases of this product category do

we capture? Is a large fraction of our sales concentrated among a few customers or spread out

over many? What do customers need? How do they shop and decide what to purchase?

We want to know similar things about channels of distribution. How do they view our

brand and product? Do we have our fair share of their purchases of this product category? Is a

large fraction of our sales and category sales concentrated among a few intermediaries or

spread out over many? What do the channels need? How do they decide what to carry and

offer to their customers?

Note on SWOT analysis

The obvious competitors are in the same product category, like Coke and Pepsi. Other

important competitors are also able to satisfy the needs of our customers. For instance, if I need

to be in New York tomorrow for a meeting, I can fly Delta or US Airways, but I can also take

other means of transportation such as Amtrak, a bus, or a rental car. Or maybe I do not actually

have to be there to participate in the meeting. Then the competition is even broader, because I

can attend the meeting by videoconference or through a web meeting service.

What we want to know about the competition is information such as market share,

strengths and weaknesses, and how important our product category is to them, so we can

gauge their possible reaction to our move.

Suppliers can affect our business with price changes and disruptions in delivery. They

might also be helpful in making us more competitive.

Another useful Michael Porter tool, if your textbook covers it, is the Five Forces which drive

industry competition. It helps us analyze the Competition, Channels of distribution (or

Customer if we sell direct), and Suppliers elements of the STEEP-MCCCS checklist. Briefly, the

Five Forces are:

Industry rivalry. This concerns the narrow competition. We look at factors such as

industry growth rate, number of and relative sizes of competitors, cost structure, and

intangibles like corporate culture to determine how competitors might react to our

actions.

New entrants. These are companies which are not in the industry yet but might enter

it with similar products, if the barriers to entry are not too high.

Substitutes. This concerns broad competition, in other words, products different from

the current industry's which can also satisfy our customers' needs. For example, Delta

Airlines and Continental can both fly me to New York, while I can take Amtrak, drive,

or attend via a web conference instead.

Suppliers. When suppliers have great bargaining leverage, they can affect industry

competition through actions such as raising prices and allocating their products.

Buyers. Buyers with leverage can also affect the industry by playing the competitors

off against one another, getting better deals.

As you identify environmental factors, they might remind you of a strength or weakness

which you overlooked earlier. If so, be sure to add it to your list.

2. Internal–strengths and weaknesses

We have some sense of the company, the product, and the general situation. The purpose of

this step is to identify the company's strengths and weaknesses, the positive (strength) or

negative (weakness) factors of the company. In other words, strengths help us to reach our

goal, while weaknesses hinder us from getting there.

Strengths are capabilities, skills, assets, traits or resources which give the company a

competitive advantage. Examples include:

Note on SWOT analysis

* patent, trademark or copyright

* brand name

* special engineering and design capability

* management discipline

* employees with special abilities

* loyal customers

* special manufacturing abilities or equipment

* special access to inputs (labor, material).

Most of these relate to only the product P. You might also find strengths regarding positioning

and the other three of the Four Ps. For instance, one of Procter & Gamble's strengths is its

strong relationships with supermarkets. In addition, strengths can be found in other functions,

such as financial strength.

Unless it is obvious, like a patent, be sure the explanation includes why the capability, skill,

asset, trait or resource gives the company a competitive edge. For example, if you omitted the

boldest phrases below, it would not be at all clear why these items are strengths:

* six manufacturing plants across the USA ensuring reliable delivery to all customers

* freshest ingredients based on contracts giving us preferred treatment

* employee training programs with a proprietary learning model.

Weaknesses, of course, are the opposites of strengths–the lack of a capability, asset,

resource, trait or skill which prevents the company from matching or exceeding the competition

in some regard. Examples include lack of patents and a tarnished brand name.

The best strengths are enduring. Your product might have a unique, important feature

which is a strength, but if the competition can copy it, then it’s not much of a strength. In

contrast, patents, trademarks and copyrights have legal protection. Some strengths do not have

that kind of protection but can still last a long time, such as reputation, loyal customers, and

strong relationships with retailers. Enduring strengths ought to be the focus of your SWOT

analysis.

Be sure to identify real strengths and weaknesses. Sometimes an item is mistaken for a

strength (or a weakness) when it is actually evidence of a strength (or a symptom of a

weakness). Examples include:

* sales level

* sales growth

* market share or rank

* price

* cost

* profitability

* employee turnover.

Note that none of these is a capability, skill, asset, trait or resource. A true strength or weakness

is the explanation for the evidence or symptom. An example is high price listed erroneously as

Note on SWOT analysis

a weakness. It might be a symptom of a weakness that raises cost, a symptom of a management

weakness, or perhaps a deliberate decision for premium pricing.

Similarly, strengths and weaknesses ought not include marketing decisions. For instance, a

product feature which is now better than any competitive product (such as lighter, faster or

better tasting) is only a temporary advantage if competitors can copy it. If the company can

prevent competitors from copying it, though, such as with a patent or proprietary

manufacturing technique, then the means of prevention is the real strength.

Analysis can uncover strengths and weaknesses. Value-chain analysis, if your textbook

includes this topic, is a good tool to identify in a systematic way strengths and weaknesses.

This analysis was developed by Michael Porter of Harvard Business School, who is a recognized

guru of corporate strategy. Briefly, this analysis examines the various activities of an

organization to find where customer value is actually being created:

* primary activities

inbound logistics

operations

outbound logistics

marketing and sales

service

* support activities

general administration

human resource management

research, technology and systems development

procurement.

Since we are brainstorming in this first step, we include all ideas so far and create two lists,

one of all likely strengths, the other of all likely weaknesses. Later, we will use strengths and

weaknesses to make sound decisions. For example, if a company wants to compete on price,

then it must have low-cost production and logistics as strengths.

3. External–opportunities and threats

All competitors face the same STEEP factors, and even many MCCCS, but some companies

react in horror to a change in the environment, while others jump for joy. How can this be? The

answer is because that change combines with a weakness of the first company to create a threat,

while for the other company, the same change combines with a strength to present an

opportunity.

An opportunity is a favorable combination of circumstances which offer the chance for

advancement, to paraphrase the definition found in The American Heritage Dictionary, 2d college

edition. In business, it is a specific measure of success, such as increased sales in a new market,

increased sales to existing customers, or greater financial strength from lowered cost.

Note on SWOT analysis

Actions are not opportunities but ways to achieve them–opportunities are strategic in

nature, while actions are tactical. For instance, for the opportunity of increased sales, some

actions are to:

* enhance an existing product

* develop a new product

* enter a new geographical territory

* acquire another business.

None of these is an opportunity, although each might lead to one.

Threats are possible unfavorable outcomes such as sales lost to a competitor, lost sales from

a weak economy, lower profit from higher raw-material costs, or even bankruptcy.

In this third step of the SWOT analysis, we compare combinations of the STEEP-MCCCS

factors and our strengths and weaknesses to identify opportunities and threats. Opportunities

occur when we can use strengths to take advantage of changes in the environment, as noted

above for P&G's Downy fabric softener.

In another example, Southwest Airlines began as an airline within Texas and thus avoided

federal regulations. They had the foresight to see Greyhound buses running between large

Texas cities as their direct competition, and then had the discipline to squeeze their costs. They

were able to lower their fares and prospered. When federal airline deregulation occurred, they

seized the opportunity for increased revenue by attracting economy-minded passengers on

interstate flights. This opportunity is the combination of federal airline deregulation (a

environmental factor affecting all airlines) and Southwest's strengths of management foresight

and discipline.

Conversely, a threat is the combination of one or more weaknesses and changes in the

environment. For example, at the time of deregulation, Southwest Airlines had far less capital

than most interstate carriers. This weakness combined with federal airline deregulation

resulted in the threat of bankruptcy if even one interstate carrier targeted interstate passengers

seeking to save money on their flights.

Note that the same environmental factor helps to create both the opportunity and the threat.

This is not necessarily the case and is in fact uncommon.

Since we are still brainstorming, we include all ideas so far and create two more lists, one of

all possible opportunities, the other of all possible threats.

4. SWOT factors

We now have all the information we need for the SWOT analysis (Strengths, Weaknesses,

Opportunities and Threats), which helps us to identify the factors which will either help us to

succeed or else hinder us. In this step, we focus on the important elements.

Start by identifying one or two (no more!) key opportunities and one or two (no more!) key

threats. Then select the strengths and weaknesses from step 3 which created them. These are

Note on SWOT analysis

the results of the SWOT analysis. As we make decisions later, we always try to take advantage

of these strengths and opportunities, fix these weaknesses, and avoid these threats.

One way to show the results of this analysis is to summarize them in a SWOT table; another

is to use numbered or bulleted lists. Since it is important to focus on the few, key issues, you

ought to include only the elements from the previous paragraph. Delete all the rest, or else put

them in an appendix.

Including the SWOT analysis in a report

When you write up a completed SWOT analysis, provide a brief explanation of each

element in step 4. Be sure to include the combinations of strengths/weaknesses and the relevant

environmental factors which create each opportunity and threat. If you want to keep a record

of all the detail you generated in steps 1-3, do so in an appendix, but spare the reader those

details in the body of the document.

Check your work by answering these questions:

1. Is each strength a capability, skill, asset, trait or resource possessed by the

organization (rather than evidence of a strength) which gives them an edge over the

competition, and related to one of the key opportunities?

2. Is each weakness the lack of a capability, skill, asset, trait or resource (rather than a

symptom of a weakness) which gives the competition an edge over them, and related

to one of the key threats?

3. Is the list of environmental factors in the body of the report limited to those related to

the few, important opportunities and threats?

4. Does each opportunity define success rather than an action?

5. Does each threat define a possible bad outcome for the organization?

6. Is there a description of the combination of the strength(s) and environmental

factor(s) which create each opportunity?

7. Is there a description of the combination of the weakness(es) and environmental

factor(s) which create each threat?

If each answer is yes, then you have completed an excellent SWOT analysis.

Example

Let's use the Southwest Airlines example above to demonstrate the four steps. For brevity,

this example is limited to one opportunity and one threat.

Step 1–environment. The federal government passed legislation that the airlines would be

deregulated for interstate flights in 1978. Until then Southwest flew only within Texas and thus

avoided federal regulation.

Note on SWOT analysis

Step 2a–strength. Because Southwest Airlines saw their competition as Greyhound, they

focused on lowering costs and became the low-cost airline. Their strengths are management

foresight and discipline that continue to make this happen.

Step 2b–weakness. Southwest Airlines has much less capital than interstate carriers.

Step 3a–opportunity. The combination of Southwest's strengths of discipline and

management practices to become the low-cost carrier and the imminent change of airline

deregulation created an opportunity for Southwest’s expanded business with economy-minded

interstate passengers.

Step 3b–threat. The combination of Southwest's financial weakness and the imminent

change of airline deregulation created the threat of bankruptcy if one interstate carrier targeted

interstate passengers seeking to save money on their flights. (Note that it is rare that the same

external factor creates an opportunity and a threat as in this example.)

Step 4–SWOT table. These factors result in the following portion of a SWOT table:

Strengths

1. Foresight

2. Discipline

Weaknesses

1. Low capital

Opportunities

1. Increased sales from a

new market of economy-

minded interstate

passengers

Threats

1. Bankruptcy

Adding SWOT analysis to a document. The steps above show how you do the analysis,

but not all this detail belongs in a report. Following the advice in "Including the SWOT analysis

in a report" above, we would not include steps 1-3 in our document, unless in an appendix. We

would present the SWOT table from step 4 along with brief explanations of any items requiring

it, and a description of each combination creating an opportunity threat from step 3. The rest of

this section would be added to a document about Southwest Airlines after a heading such as

"SWOT analysis results":

At the time of airline deregulation, Southwest had the strengths of management foresight

and discipline which allowed them to be the low-cost airline, because they had seen their

main competition as Greyhound buses and consequently worked on lowering their fares.

Since their flights were limited to within Texas, however, they were much weaker in

financial resources than the interstate carriers. The following table shows the results of a

SWOT analysis on Southwest Airlines.

Note on SWOT analysis

Strengths

1. Foresight

2. Discipline

Weaknesses

1. Low capital

Opportunities

1. Increased sales from a

new market of economy-

minded interstate

passengers

Threats

1. Bankruptcy

The opportunity was created when the strengths of management foresight and discipline

combined with federal airline deregulation, allowing Southwest to carry passengers

across the Texas border. The threat was created by the combination of Southwest's weak

finances and the same airline deregulation, which also allowed any existing interstate

carrier to target economy-minded passengers.

Next steps

With the SWOT complete, you will be ready to continue your analysis and ultimately to

make successful recommendations. The SWOT serves as a key part of the justification for all

following conclusions and recommendations. Think of it as building a solid foundation for the

entire plan–a sloppy job in this early step will doom all later steps.

You must justify each recommendation using a chain of logic. What this means is that after

you make a recommendation, you explain why it will help the company succeed by citing facts

already presented (including assumptions), your analysis of those facts, prior

recommendations, or a combination of those items.

At a minimum, your set of recommendations must take advantage of each key strength and

opportunity, fix or minimize all key weaknesses, and avoid threats. If you don't, the reader will

wonder, "Now, they told me this was a big threat [or weakness], but why aren't they doing

anything about it?"

Definitions

Important terms in this note include:

SWOT –an acronym for Strengths, Weaknesses, Opportunities and Threats

environment–external factors over which an organization has no control, and which can

affect its customers, suppliers, competitors and business partners

strength–a capability, skill, asset, trait or resource possessed by the organization which

provides it with an edge over the competition; evidence of a strength is not a strength

weakness–the lack of a capability, skill, asset, trait or resource which prevents the

organization from matching the competition; a symptom is not a weakness

Note on SWOT analysis

opportunity–a specific, promising measure of success; an opportunity is created by the

combination of one or more strengths and one or more environmental factors; an action is not

an opportunity

threat–a possible unfavorable outcome; a threat is created by the combination of one or

more weaknesses and one or more environmental factors; environmental factors by themselves

are not threats.

Summary

The four steps in conducting a SWOT analysis are:

1. identify possible strengths and weaknesses by looking inside the company for

capabilities, assets, resources, traits and skills which help us to maintain a competitive

advantage, or else the lack of those items which keep us from matching the

competition,

2. identify relevant environmental factors which might affect our customers, suppliers,

competitors and business partners, by looking at broad factors (STEEP) and narrow

(MCCCS),

3. compare strengths and weaknesses to environmental factors to identify opportunities

and threats; an opportunity arises through the combination of one or more strengths

and a environmental factor, while a threat is the combination of one or more

weaknesses and an environmental factor,

4. highlight the key SWOT factors to focus on the few, important issues confronting the

business.

With the SWOT complete, you are ready for the next step of your report.