MBA
Video Transcript
On Monday morning, as you’re getting ready for work, you see an email from Mike, your manager. When you meet Mike in his office, he greets you with a big smile. “Listen,” he says, “You’ve been doing a spectacular job—I’ve been getting a lot of positive feedback on your performance.” He gestures to a folder on the table in front of you. “In fact, given your recent achievements, I thought you would be the perfect person for this project.” He opens the folder, revealing a report titled Situation Audit, dated 10 years ago. “I did that report, and now it’s your turn to do an updated version.” You leaf through the report, noting the length and the amount of information in it. You look at Mike expectantly. “What we need is a report that summarizes the current situation, focusing on key internal factors that contribute to the organization’s strengths and weaknesses.” He continues, “It’s intended to be a source of information for key organizational stakeholders, but we probably wouldn’t circulate it in its entirety. We would use parts of this report to brief new employees and board members, among others. As you can see, this report would serve a very important function in our organization. Many, many people at all levels would use it.”
Mike tells you the report must include particular elements:
● a description of the organization’s current situation;
● an analysis of the path ahead;
● a review of significant changes that have occurred in the last five years, which should offer the leadership team insights that might be useful for future decision-making; and, finally, any recommendations you have for change or action, given that you might discover some things that merit attention.
“We need this report in four weeks,” Mike advises. “To enable you to focus solely on this report, we’re taking you off your other projects and designating you a special projects consultant—because we need a consultant’s eye for this. You need to put aside your preconceived ideas about the organization and look at it as objectively as possible, like an outside consultant would.” Mike smiles, and shakes your hand. “We know you can do this. You’re the best person for this job.”
Your situation audit report should include the following elements:
· cover page—not included in page limit
· executive summary—1 page; not included in page limit
· introduction—1 page
· fact sheet—1 page; see Step 2
· mission, vision, values and goals—1 page; see Step 3
· strategy and objectives—1 page; see Step 4
· strategy types and competitive advantage—2 to 3 pages; see Step 5
· organizational size and structure—2 to 3 pages; see Step 6
· critical resources—2 to 3 pages; see Step 7
· leadership, governance, and management—2 to 3 pages; see Step 8
· strengths and weaknesses—1 to 2 pages; see Step 9
· learning and change—1 to 2 pages; see Step 10
· conclusions and recommendations—1 page; see Step 11
· references—not included in page limit
· addenda—if needed, is not included in page limit
· submit—see Step 12
Note: The Situation Audit Report is expected to be 18 to 22 pages, excluding the cover page, executive summary, and references. The page ranges listed above are guidelines. The student can decide how many pages to allocate to a given topic so long as the report does not exceed the maximum number of pages allowed. However, where the suggested page ranges are longer, the intent is to highlight the areas of the report deemed to require more analysis. These particular areas of the report go beyond a statement of organizational facts. They require significant academic readings and a grasp of relevant concepts, which are expected to be integrated into the student’s analysis. Please carefully read the Student Expectations section in Step 1, Organize Your Work.
In developing the report, students should follow the exact order of the template using the same headings to separate sections of the report. Each step is to be included in the final submission. APA format must be followed throughout. See Writing Skills under Grading in the Syllabus for writing expectations. In Step 1, Organize Your Work, please read carefully the section entitled, Student Expectations.
Now that you've identified the key facts about your organization, turn your attention to your organization's mission, vision, values, and goals. Taken together, these elements can help drive organizational decisions, positively impact employee performance, and influence many of the other organizational components you'll be examining for this report.
The mission, vision, values, and goals should be reviewed periodically to determine whether adjustments are needed in light of key environmental factors or changes in the organization's performance or capacity.
Follow the steps below to analyze your organization’s mission, vision, values, and goals:
· Find your organization's mission and look at whether and how it has changed over time. If it has changed, what process changed it?
· Analyze the extent to which your organization's mission (1) is well understood, (2) continues to inform key decisions, and (3) is well aligned with what the organization is actually doing.
· If your organization does not have a formal mission statement, read deducing a mission.
· Analyze your organization's vision and core values. Consider whether the vision and core values are in alignment with and supportive of the organization's mission. Are the vision and core values widely understood and accepted within the organization?
· If you cannot find formal statements about your organization’s vision or core values, read Deducing Vision and Core Values.
· Next, determine whether your organization practices strategic goal setting. Analyze whether these goals are explained clearly and whether they make sense given the organization's mission, vision, and values. In other words, look for alignment of mission, mission, values, and goals.
Step 4: Analyze Organizational Strategy and Objectives
While it is important to have a clearly defined and well-understood mission, along with key goals, vision, and values, success is unlikely without corresponding actions guided by an organizational strategy with measurable objectives.
Your audit should include a brief overview of your organization's strategy. Remember, this report will be used in part to orient new employees to the company, so you don't need to conduct a detailed analysis. You will, however, have a chance to do a more thorough examination of these elements in future projects.
Follow the guidelines below while working on this part of your report:
· Find and analyze your organization's organizational strategy. For publicly traded companies, this should be relatively easy to locate, whichmay not be true for the organization where you work.
· If possible, confirm the process used in creating, reviewing, and revising these objectives, as well as who contributes and how.
· Include a preliminary evaluation of success in achieving objectives.
· Cite the tools and methods you used to reach your conclusions, such as the balanced scorecard and key performance indicators (KPIs) .
When analyzing your organization's strategy and objectives and their implications for performance, it is useful to consider critics of strategic planning who point out that very successful ventures sometimes result from a series of unintended or unexpected activities. Therefore, you will also want to be on the lookout for evidence that some of the successes realized by your organization may not be the result of a rational strategic planning process.
Balanced Scorecard and Key Performance Indicators
The article Balanced Scorecard (2009) in the Resources section below, describes a popular framework developed by Kaplan and Norton (1992). When implemented well, the balanced scorecard can help leaders and managers set strategic goals that are informed by multiple important perspectives (e.g., customers, shareholders, and implications for innovation and learning). The scorecard enables the inclusion of nonfinancial information when evaluating an organization’s situation, determining strategic priorities, and identifying needed changes in structure and systems (Kaplan, 2005). However, while the scorecard serves as an organizing framework for strategy formulation, it has proven less useful as a tool for measuring performance in accomplishing specific goals and objectives. Another criticism of the balanced scorecard is that it may be less useful for organizations in especially dynamic industries.
To supplement the balanced scorecard, organizations also need specific measures or indicators that can be used to evaluate their performance in achieving goals and objectives. Key performance indicators, or KPIs, serve this purpose. Read more about key performance indicators in the article located in the Resources section below, and in the journal literature.
Some organizations use neither the balanced scorecard nor KPIs. If this is the case, it is still important to examine the extent to which multiple perspectives are considered in formulating the organization’s strategy or in making changes to structure and systems. It is also important to explore what indicators—even informal indicators—are being used, or might be used, to evaluate an organization’s performance.
Step 5: Identify Strategy Types and Competitive Advantage
Now that you have reviewed your organization's strategy and objectives, it is time to critically analyze the type or types of strategies your organization may be using, and include that analysis in your audit.
Business Unit and Corporate Strategies
First, review the major types of organizational strategies. Then, figure out which apply to your organization.
Competitive Advantage
Even if your organization is successfully implementing its strategic and financial objectives, its activities may not be contributing to competitive advantage.
Try to identify what your organization's sources of competitive advantage are (if any) and present a preliminary assessment of the relative value of these advantages. You will have an opportunity to examine competitive advantage in greater depth later in your MBA program.
Also, see if you can identify your organization's core competencies and reach any supportable conclusions about whether they are used to achieve competitive advantage, and how.
After your review of strategy types and competitive advantage, continue to Step 6, which examines organizational size and structure.
Organizational Strategy
The definition of organizational strategy often covers decisions about which opportunities an organization will pursue and the development of a long-term action plan for achieving a goal. Osinga (2006) defines the concept as "a mental tapestry of changing intentions for harmonizing and focusing our efforts as a basis for realizing some aim or purpose in an unfolding and often unforeseen world of many bewildering events and many contending interests" (p. 55).
Organizational strategies occur at four levels: global, corporate, business, and functional:
· Global-level strategies are decisions surrounding the methods of pursuing international markets. The most important question here is whether or not the firm can continue to use what it does better than any other competitor (such as a competitive advantage) in that foreign market, and whether or not it can financially meet the specific needs of consumers in that foreign market.
· Corporate-level strategies are long-term actions designed to select the appropriate industry or industries in which to operate. The following questions can serve as guidelines for corporate-level strategies:
· Should we compete in areas similar to our current products?
· Should we purchase one of our suppliers so that we can buy our component parts cheaper?
· Should we buy a business unrelated to what we do now to spread out the economic risks we face?
· Business-level strategies are long-term actions designed to confer competitive advantage over industry rivals. Business-level strategies are concerned with, identifying consumers, meeting consumer needs, and defining the competencies needed to meet those needs.
· Functional-level strategies are the most specific of the levels of strategy, and are concerned with the actions of each function in a company. These must support the business-level strategies and involve the actual implementation of strategy. Generally, the lower levels of management are the executors of functional-level strategy.
Global-Level Strategy
Many organizations make the mistake of taking their existing domestic marketing model and simply dropping it into another location without forethought regarding the many cultural, social, economic, technological, and legal factors that are at play—and without deeply analyzing the conditions that may or may not be conducive to their business.
Sound global-level strategies identify opportunities that allow the firm to build on its competitive advantages, yet are customized to the local market conditions and realities. Of course, the very definition of a competitive advantage is market-specific; when moving into a different market, the competitive advantage may be put at risk. Strategists must be very careful that the competitive advantage can be protected and used, as opposed to being copied or stolen in other markets.
Poor global-level strategies are those that can be realized only by doing something the organization cannot currently do well. For instance, a US chocolate company entering the European chocolate market is not a good strategy if the organization does not have the brand recognition required to overtake many centuries-old brands already present in Europe.
Corporate-Level Strategy
Corporate-level strategy, considered from a single-market perspective (eliminating the global, in other words) requires the firm to think about itself at the highest level. Corporate-level strategy dictates where and how the organization aspires to improve, or to identify other opportunities it wishes to develop. A central aspect of corporate-level strategy is the idea of competitive advantage—an offering or competency the firm does better than anyone else that can it protect from being copied.
A firm that makes shoes may not have a competitive advantage in the shoes themselves (especially if they are considered by the consumer to be relatively generic), but it can develop such an advantage in the manufacturing and supply chain behind the distribution of the shoes. In this case, a good corporate-level strategy allows the company to use this same supply chain and distribution capability in an industry that does not have good supply chain utilization. This practice may seem counterintuitive, but think about the example. Say, for instance, that the electronics industry currently has terrible supply chain management. This firm could use its mastery of supply chain and distribution to improve that industry and meet organizational growth goals. It has nothing to do with shoes—only with opportunity.
Business-Level Strategy
Business-level strategy is concerned primarily with determining whether the organization’s existing set of products (determined in the global- and corporate-level strategies) are taking full advantage of the market opportunities available. For instance, are the products fully meeting the needs of the consumers? Of all segments of consumers? Are there opportunities to more fully meet the needs of the consumer—thereby creating more value, for which consumers are willing to pay more?
This part of organizational strategy is where the firm makes sure it is fully aligned with the needs of the consumer (whatever segment is in focus) in every way possible. It may find it needs to change product attributes, think of different segments to pursue, or engineer better products.
Functional-Level Strategy
Functional-level strategy is all about implementing the strategies determined at the global, corporate, and business levels. Here’s where the individual departments and units get their marching orders to fulfill the higher-level strategies. The product development office, for example, may get instructions to redesign the product for a foreign market; the marketing office may get directions to identify whether a new product offering would meet the needs of a specific segment. The production unit may get instructions to take over the operations of a subsidiary that was purchased; HR may be assigned to bring two workforces together. Only where the strategies are handed to the functional units do any of the higher-level strategies get accomplished.
It should be apparent that all four levels of strategy must be aligned and be complementary. The CEO’s office—the leaders most likely to approve global- and corporate-level strategies—can do nothing to realize a strategy without the functional-level units. All four must be directly aligned with overall organizational strategy, and all strategies must have specific time frames attached to them to ensure each part is accomplished in the appropriate time frame. Planning is a critical component to organizational strategy.
Strategy Frameworks
Low-Cost Producer versus Differentiation
The first dimension of business-level strategy relates to the approach a company takes to satisfy its customers. The concepts of low-cost producer and differentiation are essential for understanding business-level strategy because they define the two fundamental options a firm must consider when formulating its business-level strategy. The concept of low-cost producer refers to a strategy where the business concentrates on keeping its costs of operations at the lowest possible level. This means that significant effort is directed toward keeping costs for raw materials, labor, manufacturing, etc. as low as possible. Frequently, low-cost producers will also have fewer products with fewer options, which further aids in keeping costs low.
An example of a low-cost producer is Payless ShoeSource. If you visit a Payless shoe store, you will notice that there are few employees. Usually there is a cashier and a stockperson. The store décor is not expensive. The flooring is industrial strength, solid-color carpet, and the shelves are very functional, but made of metal and similar in design to what you would find in a warehouse. The shoes themselves are made from lower-quality materials. All of these characteristics are indicators of a low-cost producer.
A common area of confusion regarding low-cost producers is that low cost means low price. Usually, low-cost producers compete by selling for a lower price, but this is not always true. For example, Nike sells some athletic shoes for over $150 even though the cost to make that shoe is under $30. The point to remember is that the term "low-cost producer" refers to the cost of manufacturing, not the cost (price) to the customer.
The low-cost producer strategy has two primary advantages. Due to the lower costs involved, the company can better survive price wars with competitors because it can still make money when other higher cost competitors may actually lose money on a sale. A second advantage is that a low-cost producer makes it more difficult for a new entry into the market because newcomers can’t realize the same cost economies of the more experienced firm.
There are also two disadvantages of this strategy. The first is that competitors can usually imitate the processes that produce the cost reductions, so the advantage may be relatively short term. Second, the company might focus so much on cost reduction that the its products and services become inferior enough to lose business to the higher-priced competitors’ products.
Differentiation refers to the methods companies use to set their products and services apart from the competition. There are many ways a company may differentiate its products or services, including the features offered, the expected life of the product, the way it advertises, the technology incorporated into the product, the level of customer service, and the convenience of the company’s location (Grant, 2008). When a company is able to differentiate itself effectively in one of these areas, it is called a distinctive competency. The best distinctive competencies are difficult to imitate.
There are several advantages to the differentiation strategy. First, differentiation tends to develop customer loyalty that protects the company from the competition. It is also possible to pass increases in the cost of operations on to the consumer. The difficulty in sustaining the differentiation strategy is that it may be easy to imitate, which erodes the product’s distinctiveness. A second threat to differentiation is the introduction of a substitute product that makes an older product obsolete. For example, the introduction of the miniaturized cell phone has negatively affected not only the sales of traditional landline phones, but also the sales of personal computers.
The final lesson concerning the low-cost producer and differentiation strategy concepts is that is takes an attitude of continuous improvement and adaptability to sustain any advantage gained by either approach.
Broad Market versus Focus Market
A second dimension of business-level strategy is the number of industry market segments a company chooses to compete in. The concept of a market segment refers to a subset of the products and services that constitute an industry. For example, the automobile industry has market segments: sedans, coupes, sports cars, sport utility vehicles, light trucks, vans, etc. If a company competes in virtually all of the market segments, it is said to have a broad market strategy. General Motors and Toyota, for example, compete in virtually all the market segments.
Companies that compete in only one market segment or just a few market segments are pursuing a focus market strategy. A focus company generally has a narrow product line. Ferrari persues a focus strategy, in that it makes only sports cars. (Actually, Ferrari is an extreme example of the focus strategy because it makes only high-priced, high-performance sports cars.) It is common for companies that begin with a focus strategy to expand into other segments of the market. Toyota began as a company focused on producing small, economy cars, but has evolved into a company that follows a broad strategy. Companies expand into new segments to spur growth.
Both the broad and focus strategies can be paired with either the differentiation or low-cost producer strategies, creating four possible business-level strategy choices, according to the marketing strategist, Michael Porter. Years after popularizing his original four-strategy concept, Porter added a fifth strategy option. These five types of business-level strategy are discussed in the next section.
Porter’s Five Business-Level Strategies
Porter’s business level strategies are sometimes referred to as generic because they apply to any type of business such as manufacturing, services, or nonprofit (Hill & Jones, 1994). Choosing a generic strategy is an important strategic planning step because each of the five strategies significantly influences the way company decisions are made. For example, decisions involving the differentiation approach are quite different from decisions involving the low-cost producer approach. To help you better understand these generic strategies, they are illustrated in the figure below, followed by a description of each of the five strategies.
Five Business-Level Strategies
Broad Differentiation Strategy
Broad differentiation strategy describes actions taken by a company to compete in all or most of an industry’s market segments by differentiating its products from those of competitors. Once again, differentiation may be accomplished in the areas described in the previous section. Another way to think of differentiation is to use the categories of quality, customer service, and innovation. A product or service may be perceived as better than the competition because its quality, customer service, or innovation is better than the competition. Generally, companies that pursue the broad differentiation strategy will charge higher prices for their differentiation. Some well-known companies that pursue this strategy are Sony (consumer electronics), Nordstrom (retail clothing, etc.), and McGraw Hill (publishing).
Focused Differentiation Strategy
Focused differentiation strategy is similar to the broad differentiation strategy, except that a company pursuing this strategy only competes in a single market segment or just a few of the market segments in the industry. Companies using this strategy seek to set themselves apart from the competition through differentiation. Generally speaking, these companies offer products in the higher end of the price range. Ethan Allen Furniture pursues this strategy, and its products are usually significantly higher priced than the competition because the company believes the value added or level of differentiation (primarily due to quality or innovation) justifies the higher price. Some other companies that pursue this strategy are Ferrari (sports cars), Rolex (watches), and Apple (select consumer electronics).
Broad Low-Cost Producer Strategy
This strategy describes actions taken by a company to keep its costs of operations as low as possible. Every aspect of the business is analyzed to identify a cheaper way to perform a given task. A broad low-cost producer strategy also means that the company offers products or services in virtually every market segment of the industry. A good example of a company pursuing this strategy is Payless Shoes, whose cost-cutting measures were described earlier. The advantage of this approach is that a lower price to consumers can be charged and the company can still make a profit.
Wal-Mart may be the most famous company that pursues the broad low-cost producer strategy. Wal-Mart’s particular strength is its supply chain. Although the stores may not appear to be high-tech, the company’s ordering and delivery systems are highly automated, and the organization has spent years finding the cheapest way to supply its stores with merchandise. Wal-Mart's strategy is considered to be broad, because the company offers thousands of products in its stores.
Focused Low-Cost Producer Strategy
The focused low-cost producer strategy also seeks to keep the costs of operations as low as possible, but the company competes only in one or a few market segments. Companies pursuing this strategy select the market segment or segments where they believe there is the best opportunity to make a profit. McDonald's is a well-known focused low-cost producer. The company seeks to compete by having efficient processes to prepare a limited menu. Its menu items require relatively few ingredients, and most of the items are delivered in single serving–size portions to make food preparation faster and easier. Companies pursuing the focused low-cost producer strategy (as well as those applying the broad low-cost producer strategy) make their profit through the volume of their sales.
Best-Cost Strategy
This strategy was added to Porter's framework to recognize the feasibility of simultaneously pursuing both a differentiation strategy and a low-cost strategy. When Porter first published his typology of business-level strategies, he stated that pursuing both the differentiation strategy and the low-cost producer strategy wouldn’t work. His reasoning was that a company would be trying to do too many things at once, resulting in poor performance in both differentiation and low-cost approaches. He referred to this type of effort as stuck-in-the-middle.
Years later, Porter had to recognize that pursuing both the differentiation and low-cost producer strategies was possible due to major changes in technology. More specifically, technology related to manufacturing had evolved so companies could produce custom ordered products at virtually the same cost they incurred for mass-produced items.
One of the early pioneers of this strategy was Dell Computers. The Dell business model allowed customers to design the computer they wanted. Dell would build it, then charge a lower price than the other computer companies. Dell’s cost savings were in lower costs for component part inventories and a flexible manufacturing process that allowed different computers to be made with very little time spent adjusting the production line. Another way to think of the best cost strategy is that it attempts to offer the best value for the products. This means that you will get a product closer to your specific needs for a price that is probably lower than the competition’s. Many companies have grown into this strategy over a period of years. Toyota and BMW have evolved in their manufacturing processes so that they allow customers to make many custom-feature choices on their automobiles without any significant production cost increases.
Application of Business-Level Strategy
The descriptions of low cost and differentiation should provide you with the ability to determine if a company is pursuing one or both of these approaches. Whether the company is pursuing a broad or a focused strategy is determined by looking at the number of products or services offered compared to the total number of market segments in the industry. Due to technological advances, identifying a specific strategy has become more complicated, but the descriptions provided here should help you to determine the business-level strategy being pursued by any company.
Conclusion
Business-level strategy choices determine how a company chooses to compete in its industry. The strategy types are based on two concept pairs: differentiation vs. low-cost producer, and broad vs. focused market segments. Success by one company using a specific business-level strategy will draw the attention of competitors, who will try to imitate the competency or competencies of that successful company. The more complex the mix of competencies that create a company’s competitive advantage, the longer it will take competitors to copy it. It took the other personal computer manufacturers almost twenty years to imitate Dell’s supply chain and manufacturing competencies. Generally speaking, however, distinctive competencies in pursuing a business-level strategy are becoming more and more short lived. This trend puts a lot of pressure on companies in competitive industries to continuously seek to improve and adapt their business-level strategies.
Step 6: Determine Organizational Size and Structure
Like strategy types and competitive advantage, organizational size and structure also have implications for accomplishing the organization’s mission, vision, goals, and objectives (MVGOs).
Organizational Size
Review your organization's size and determine how much it has changed over the last five years. Include in your audit an analysis of how your organization's size impacts its ability to accomplish its strategic objectives.
Organizational Structure
Organizational structure refers to the pathways that define who reports to whom. It is most easily discovered by studying an organizational chart. If your organization does not have a chart, or if the chart doesn't reflect reality, read Organizational Structure for help constructing an organizational chart. Having a chart for your organization will be helpful in determining which of the numerous structural types best apply.
Include in your report an analysis of whether the current structure aligns with and impacts the organization's MVGOs and, if not, the likely consequences.
Step 7: Analyze Critical Resources
Now that you've examined your organization’s big picture—MVGOs, size, and structure—you're going to analyze the critical resources of your organization for inclusion in your report.
Critical Resources
As you analyze your organization’s critical resources, follow the guidelines below:
· Consider whether your organization has the critical resources needed to accomplish its MVGOs, whether these are being used effectively, and whether they are being leveraged for competitive advantage.
· Read about resource-based theory and resource dependency theory to learn more about how and why certain resources may serve as a source of strength for an organization.
· Consider whether your organization has valuable, rare, inimitable, and nonsubstitutable (VRIN) resources (characteristics of resources) that it can use toward a competitive advantage, and whether these are sufficient given the market or markets in which your organization is operating.
Types of Critical Resources
Briefly explain the relevance of resource-based theory and resource dependency theory to an organization's critical resources; then analyze and discuss two or three highlights that pertain to your organization's human, financial, technological, and physical resources. Integrate, as appropriate, the VRIN characteristics (valuable, rare, inimitable, and non-substitutable) in your discussion of the four critical resources listed below. Each critical resource should be discussed separately.
· buildings and equipment (physical resources)
· other types of resources you consider important (e.g., information)
When Step 7 is complete, prepare your findings for inclusion in the final report. Then proceed to Step 8.
Step 8: Examine Leadership, Governance, and Management
Now it's time to shift your focus to the organization's leadership. Management styles, leadership styles, and governance structures can have an immense impact on the daily experience of employees at all levels. Leadership can also positively or negatively affect the execution of all the elements you've studied thus far: strategy, resource allocation, competitive advantage, etc.
Read the resources below and prepare a summary and analysis of how each principle applies to your organization. (If you believe one of these topics is not relevant for your organization, you may be able to skip it. Before making this decision, consult with your professor):
· management and leadership styles and effectiveness
· organizational leadership
When you have completed Steps 7 and 8, submit them for feedback in the drop box located in the last step of this project. Then proceed to Step 9, where you will review the elements of a SWOT analysis.
Step 9: Evaluate Strengths and Weaknesses
An analysis evaluating the strengths, weaknesses, opportunities, and threats, known as a SWOT analysis, is an important task when analyzing an organization's situation, especially when the information is intended for use in strategy development and related decision making.
For the purposes of this report, however, your interest is in internal organizational factors, and you will therefore focus on strengths and weaknesses.
Review the elements of a SWOT analysis, concentrating on the S and W portions.
Then use the results of your analyses in Steps 2 through 8 to help identify the strengths and weaknesses of your organization.
When Step 9 is complete, prepare your findings for inclusion in your final report. Then proceed to Step 10.
SWOT Analysis
Porter's five forces analysis examines the situation faced by the competitors in an industry. Strategic groups analysis narrows the focus by centering on subsets of these competitors whose strategies are similar. SWOT analysis takes an even narrower focus by centering on an individual firm. Specifically, SWOT analysis is a tool that considers a firm’s strengths and weaknesses along with the opportunities and threats that exist in the firm’s environment, as represented in the table below.
Executives using SWOT analysis compare these internal and external factors to generate ideas about how their firm might become more successful. In general, it is wise to focus on ideas that allow a firm to leverage its strengths, steer clear of or resolve its weaknesses, capitalize on opportunities, and protect itself against threats. For example, untapped overseas markets have presented potentially lucrative opportunities to Subway and other restaurant chains such as McDonald’s and KFC. Meanwhile, Subway’s strengths include a well-established brand name and a simple business format that can easily be adapted to other cultures. In considering the opportunities offered by overseas markets and Subway’s strengths, it is not surprising that entering and expanding in different countries has been a key element of Subway’s strategy in recent years. Indeed, Subway currently has operations in nearly 100 nations.
**SWOT Analysis**
|
SWOT point |
Organizational examples |
Individual examples |
|
Strengths |
Having high-levels of cash flow gives firms discretion to purchase new equipment if they wish to. |
Strong technical and language skills, as well as previous work experience, can help individuals rise above the competition. |
|
Weaknesses |
Dubious leadership and CEO scandals have plagued some corporations in recent years. |
Poor communication skills keep many job seekers from being hired into sales and supervisory positions. |
|
Opportunities |
The high cost of gasoline creates opportunities for substitute products based on alternative energy sources. |
The US economy is increasingly services based, suggesting that individuals can enjoy more opportunities in service firms. |
|
Threats |
Concerns about worldwide pollution are a threat to petroleum-based products. |
A tight job market poses challenges to new graduates. |
SWOT analysis is helpful to executives and is used within most organizations. Important cautions need to be offered about SWOT analysis, however. First, in laying out each of the four elements of SWOT, internal and external factors should not be confused with each other. It is important not to list strengths as opportunities, for example, if executives are to succeed at matching internal and external concerns during the idea generation process.
Second, opportunities should not be confused with strategic moves designed to capitalize on these opportunities. In the case of Subway, it would be a mistake to list “entering new countries” as an opportunity. Instead, untapped markets are the opportunity presented to Subway, and entering those markets is a way for Subway to exploit the opportunity. Finally, and perhaps most important, the results of a SWOT analysis should not be overemphasized. SWOT analysis is a relatively simple tool for understanding a firm’s situation. As a result, SWOT is best viewed as a brainstorming technique for generating creative ideas, not as a rigorous method for selecting strategies. Thus the ideas produced by SWOT analysis offer a starting point for executives’ efforts to craft strategies for their organization, not an ending point.
In addition to organizations, individuals can benefit from applying SWOT analysis to their personal situation. A college student who is approaching graduation, for example, could lay out her main strengths and weaknesses and the opportunities and threats presented by the environment. Suppose, for instance, that this person enjoys and is good at helping others (a strength) but also has a rather short attention span (a weakness). Meanwhile, opportunities to work at a rehabilitation center or to pursue an advanced degree are available. Our hypothetical student might be wise to pursue a job at the rehabilitation center (where her strength at helping others would be a powerful asset) rather than entering graduate school (where a lot of reading is required and her short attention span could undermine her studies).
Key Takeaway
Now that you have an understanding of how SWOT analysis can play a role in strategic planning, review the quick walkthrough of how to apply SWOT analysis in the resources section below.
Executives using SWOT analysis compare internal strengths and weaknesses with external opportunities and threats to generate ideas about how their firm might become more successful. Ideas that allow a firm to leverage its strengths, steer clear of or resolve its weaknesses, capitalize on opportunities, and protect itself against threats are particularly helpful.
Step 10: Explore Capacity for Learning and Change
The last step before working on all your conclusions and recommendations for this report is to examine your organization's capacity to learn and change. Learning organizations are organizations that systematically measure their performance against sound criteria and metrics and then take concrete actions to change and make improvements.
However, organizations—and people—vary considerably in their ability to decide upon, implement, and manage change. Therefore, managing change is extremely important and often goes hand-in-hand with the desire to improve organizational performance.
Think about your organization’s attempts to improve its performance in key areas. If the organization has tried to make changes in key areas, were the attempts a success or a failure? Explain the reasons you associate with the organization’s success in making changes or the organization’s failure to succeed. (If you cannot identify any attempts by your organization to make changes, think of a key area in your organization that could be improved and briefly explain the reasons you think your organization would succeed or fail if an attempt to make changes in that area was launched.)
For further guidance, read these resources on organizational change and learning organizations.
Step 11: Form Conclusions and Recommendations
It's time to wrap everything up. You will now finalize your situation audit report by making recommendations based on the conclusions and research that you've done.
In priority order, with one (1) being the highest rank, list and explain, in no more than a few sentences for each conclusion, your report’s 3 to 5 most important conclusions. Follow each conclusion with a specific recommendation that is expressed in no more than a few sentences.
Once discussed with senior management, these recommendations and conclusions may form the basis of future strategic plans and objectives for your organization.