The Components of SWOT Analysis Technique and Its Application to Different Business Situations - Essay Example

?Business programmes teach techniques such as SWOT analysis. Outline the components of SWOT analysis technique and illustrate its application to different business situations. Evaluate their effectiveness The purpose of this essay is to evaluate the SWOT analysis as a strategic planning tool. The first part of this essay will provide the relationship of the SWOT analysis to strategic management, which will be followed by a brief description of the SWOT analysis. The next part of the paper will evaluate the advantages and disadvantages of the SWOT analysis in relation to its application as a strategic planning tool, which will be followed by a typical case in the use of the SWOT analysis. The final part will be a summation of all that has been presented in this paper. According to Henry 2008, p.6, business organizations face “a constantly changing external environment and need to ensure that their own internal resources and capabilities are more than sufficient to meet the needs of the external environment”. Mere survival is not the objective of a business organization. Growth and prosperity are the essential ingredients of any successful business organization and the focus of the strategic management activity in a business organization. For successful strategic planning strategic information is essential. This information pertains to an understanding of the current situation to ensure the desired future. Such strategic information is arrived at through business organizations undertaking an analysis of the external environment in which they conduct their business operations and the internal environment of the business organization itself (Henry, 2008). Two key components in strategic management involve analysis of the operating external environment of the business organization and the analysis of the internal environment of the business environment. The external environment analysis consists of analysing the three interconnected external environment factors of the industry environment, the national environment and the socioeconomic environment. Analysis of the internal environment is focused on an assessment of the resources, capabilities and competencies of the organization. Frameworks for such analysis have been developed and the Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis is one such framework (Hill & Jones, 2008). The main objective in a SWOT analysis “is to identify the strategies to exploit external opportunities, counter threats, build on and protect the company and eradicate weaknesses” (Hill & Jones, 2008, p.19). Leigh 2010, p.115, defines the SWOT analysis “as a process by which a group of stake holders (a) identify internal and external inhibitors and enhancers of performance, (b) analyse those factors based on estimates of their contributions to net value and approximations of their controllability, and (c) decide what future action to take with regard to those factors.” For a SWOT analysis to be meaningful all three parts of the analysis has to be undertaken (Leigh, 2010). The SWOT analysis is a necessary analysis for business organizations to face competition, through identifying and exploiting opportunities in the business environment based on its internal strengths, eliminate internal weaknesses that restrain it and ward of threats, so as to sustain its business activities and grow and prosper (Groucutt, 2005). The SWOT analysis is a simple yet efficient strategic planning tool that enables identifying of environmental opportunities for exploitation, employing the organizational strengths that have been identified, with the objective of securing future gains. The SWOT analysis tool thus enables an organization to efficiently leverage itself to face and overcome expected competition in its business activities in an ever changing environment (Schermerhorn, 2011). The SWOT Analysis Since its emergence as a strategic planning tool, the SWOT analysis has been a popular technique used by organizations to gain an understanding of its strategic situation. According to Pearce, Robinson and Mital 2008, p.172, the SWOT analysis framework was built on the “assumption that an effective strategy derives from a sound fit between a firm’s internal resources (strengths and weaknesses) and its external situation (opportunities and threats)”. Through this it is implied that a good fit provides maximization of the strengths and opportunities of a business organization and minimization of its weaknesses and threats. Proper and accurate use of this simple assumption in the SWOT analysis offers meaningful contributions to the design of a successful strategy for a business organization (Pearce, Robinson & Mital, 2008). Figure – 1 in Appendix – 1 provides the SWOT Analysis Diagram. Strengths in the SWOT analysis refer to resources and capabilities of the organization that provides it with a relative advantage over its competitors in satisfying the targeted market. Weaknesses on the other hand refer to any limitation or deficiency in any of the resources or capabilities of the organization in comparison with its competitors that is likely to be a disadvantage in meeting the needs of its targeted market effectively. Opportunities represent significant favourable situations in the environment of the organization, while threats pertain to the significant unfavourable situations in the environment of the organization that are likely to represent major obstacles in the organization’s present market position or desired position in the future (Pearce, Robinson & Mital, 2008). The aim in a SWOT analysis in strategic managerial planning is “identification of one of the four distinct patterns in the match between a firm’s internal resources and external situation” (Pearce, Robinson & Mital, 2008, p.174). The internal resources consist of its competencies and capabilities, present as strengths and weaknesses, over which an organization has a certain degree of control. The organization has a much lower degree of control over its external environment, which offers opportunities for exploitation and threats to sustained development (Pearce, Robinson & Mital, 2008). The SWOT analysis assists an organization to identify one of the four possible positions the organization is in, in terms of its internal resources and external environment. In the first position, the SWOT analysis may show that the environment offers several opportunities and the internal resources are primed for vigorously exploiting these opportunities. Such a situation for the company gives strategic planning the option of employing growth oriented strategies to seize the favourable situation shown by the SWOT analysis (Pearce, Robinson & Mital, 2008). The second possible position that a SWOT analysis may throw up is that though the organization has several key strengths, but the external environment is not favourable. Such a position offers strategic planning the option of choosing redeployment of its resources and competencies to business activities, where the external environment is more favourable. In the third position that can be thrown up by a SWOT analysis, an organization may find itself in a favourable external environment, but without the resources and competencies to exploit the opportunities offered by the external environment. In this position, it is best for the organization to try and eliminate the weaknesses in its resources and competencies before attempting to seize the opportunities offered by the external environment. In the final position shown by a SWOT analysis, an organization may find itself weak in internal resources and also in an unfavourable environment. In such a position, it is best for the organization to attempt to eliminate its weaknesses and also redeploy in a more favourable environment (Pearce, Robinson & Mital, 2008). Major Advantages of the SWOT Analysis The SWOT Analysis is one of the most used and easiest to comprehend analysis techniques. “It assesses the capability in seeing off threats and seizing opportunities, and highlights the priorities for enhancing or changing capability”, (Cheverton, 2004, p.84). Simplicity is the first advantage that the SWOT analysis presents. There is no need of extensive training or imparting of technical skills adept use of the SWOT analysis. There is only the requirement for a proper understanding of the nature of the organization and the industrial environment of the organization (Ferrell & Hartline, 2011). The absence of requirement for training and imparting of skills in the use of the SWOT analysis gives it the next advantage through lowers costs, thereby reducing expenditure incurred in strategic planning of an organization. Flexibility is the next advantage present in the SWOT analysis. The SWOT analysis works well with extensive input from efficient information systems. In the absence of such extensive information input, the SWOT analysis has the capacity to maintain the quality of the organization’s strategic planning. The presence of a comprehensive information system only increases the effectiveness of the SWOT analysis. Integration and synthesis of diverse information is another advantage with the SWOT analysis (Ferrell & Hartline, 2011). Disadvantages of SWOT Analysis The first disadvantage with the SWOT analysis pertains to the ease with which it is possible to develop information through a ranking process, but it is much more difficult to obtain an equal scale cross-factor comparison between strengths, weaknesses, opportunities and threats. Furthermore, in this assessment exercise, it is quite possible for the assessor to rank factors based on their own understanding of what is important (Leigh, 2010). Cheverton 2004, p.84 views this failing in the SWOT analysis as “a tendency to see the world through rose-tinted glasses of our own perception”, instead of perceiving it through the eyes of competition and the market. The other limitations of the SWOT analysis include the analysis overemphasizing internal strengths and downplaying external threats, thereby reducing the efficiency of the analysis. In addition, the SWOT analysis faces criticism of it being static and often ignoring changing circumstances. Organizations operate in a changing environment and this possible failure of the SWOT analysis could cause faulty strategic planning, which is detrimental to the growth and development of the organization. Furthermore, the SWOT analysis can lay overemphasis on just one element of strength or strategy. Finally, experiences of various business organizations demonstrate that strengths may not always be a source of competitive advantage ((Pearce, Robinson & Mital, 2008). Summing up, the purpose in using the SWOT analysis in strategic planning is to provide a platform for understanding the future choices available for the organization and the extent to which the organization is capable of supporting the strategic future choices. In the absence of an understanding of the limitations of the SWOT analysis and avoiding the probable pitfalls, the SWOT analysis reduces in its utility value (Johnson, Scholes & Whittington, 2008). SWOT Analysis Case Study Case study used in this paper pertains to the small business organization ProCD, USA founded by James Bryant in 1986. James Bryant was an executive in Nynes, which came out with an electronic phone book for the first time, but the electronic phonebook was restricted to the New York City. Bryan found in it a good business opportunity to create an electronic phone book for the whole of USA and in that lay the founding of ProCD. American telephone companies zealously guarded their highly profitable yellow pages business and ProCD found it impossible to get licensed digital copies of the telephone companies’ listings. To work around this difficulty, ProCD used cheap Chinese labour to copy the 70 million phone numbers, creating a master disk. ProCD then made thousands of copies and sold each at hundreds of dollars, while its production cost was less than a dollar. An easy way to success as a business organization, but the success was fleeting. Bigger competitors launched similar products and in the price war ProCD bit the dust (Dess, Eisner & Lumpkin, 2009). Were we to conduct a simple SWOT analysis of ProCD, it would show strengths as first mover advantage and lower labour costs; opportunities as demand for electronic phone books and sudden growth in use of digital technology; weaknesses as inexperienced new company and no proprietary information; and threats as easily duplicated product and market power of entrenched organizations (Dess, Eisner & Lumpkin, 2009). The SWOT analysis provides us with the strategic information of the position of Pro CD during the period of its success and tells us what caused Pro CD’s demise. The SWOT analysis of ProCD shows us the advantages of the SWOT analysis in terms of its ability to tell us what opportunities and threats are present and the priorities for changing the capabilities of the organization. It also demonstrates how easy it is to use, the negligible costs involved and its flexibility. The SWOT analysis also highlights the limitations of the SWOT analysis. The SWOT analysis fails to inform on how to convert the given strengths of ProCD into competitive advantages, to sustain the organization and the lay the groundwork for its growth and development. The SWOT analysis also has failed in providing a picture on the possibility and speed of changes in the environment that could hurt ProCD or demonstrates the static nature of a SWOT analysis. It also shows that strengths on its own need not provide competitive advantages. It also provides an example of how an organization can get stuck in just one dimension of the SWOT analysis, which in the case of ProCD was in its strengths of being the first mover with low cost of production (Dess, Eisner & Lumpkin, 2009). The SWOT analysis is a strategic planning tool that enables business organizations to understand their present situation in relation to the environment and their competition to enable to plan their business direction and activities to enable growth and development. The SWOT analysis attempts to provide this by finding a firm fit between its internal resources of strengths and weaknesses and the external environment of opportunities and threats. Therefore, the basis of the SWOT analysis is in arriving at the strengths, weaknesses, opportunities and threats that are integral to the organization. Once this has been done efficiently, the SWOT analysis can point to the strategic decisions that the organization ought to take for growth and development. The SWOT analysis provides several advantages to organizations choosing to use it. It is simple and easy to use and there is no need for training to develop skills in using it. Therefore, it is a cost effective tool for strategic planning. It also offers flexibility in use, based on whether the information gathering system used by the organization is simple or complex. However, it also suffers from several limitations. The results of the SWOT analysis may suffer from the bias of the user. There is the possibility of overemphasis on one or some of the components of the SWOT analysis. The SWOT analysis is limited in it providing an understanding of the changing environment in which the organization operates in and through that is limited in its ability to forecast the changes in the direction that the organization should take. In the light of the advantages and limitations that the SWOT analysis as a tool for strategic planning, it may be useful to use the SWOT analysis to provide the groundwork for strategic planning, but to use more sophisticated strategic planning tools to confirm the findings of the SWOT analysis and provide better guidance in the future strategic direction of the organization. Literary References Cheverton, P. 2004, Key Marketing Skills, Second Edition, Kogan Page Limited, London. Dess, G. Eisner, A. & Lumpkin, G. T. 2009, Strategic Management: Texts and Cases, Third Edition, Tata McGraw-Hill Education Private Limited, West Patel Nagar, New Delhi. Ferrell, O. C. & Hartline, M. D. 2011, Marketing Strategy, Fifth Edition, South-Western Cengage Learning, Mason, Ohio. Groucutt, J. 2005, Foundations of Marketing Palgrave Macmillan, Basingstoke, Hampshire. Henry, A. 2008, Understanding Strategic Management, Oxford University Press, Great Clarendon Street, Oxford. Hill, C. W. L. & Jones, G. R. 2008, Strategic Management Theory: An Integrated Approach, Ninth Addition, Mason, South-Western Cengage Learning Ohio. Johnson, G., Scholes, K. & Whittington, R. 2008, Exploring Corporate Strategy: Text and Cases, Seventh Edition, Dorling Kindersley (India) Pvt. Ltd., Patparganj, Delhi. Leigh, D. 2010, ‘SWOT Analysis’, in Ryan Watkins & Doug Leigh (eds.), Handbook of Improving Performance in the Workplace, Volume 2: Selecting and Implementing Performance Interventions, Pfeiffer, San Francisco, CA, pp.115-140. Pearce, J. A., Robinson, B. R. & Mital, A. 2008, Strategic Management: Formulation, Implementation and Control, Tenth Edition, Tata McGraw-Hill Publishing Company Limited, West Patel Nagar, New Delhi. Schermerhorn, J. R. 2011, Exploring Management, Third Edition, John Wiley & Sons, Inc., New York. Read More