SWOT and PEST Tools - Usefulness and Limitations - Essay Example

SWOT and PEST Tools: Usefulness and Limitations By SWOT and PEST Tools: Usefulness and Limitations Introduction An organization uses several strategic planning tools to scan its internal and external market environments and thoughtfully plan for the future. This paper will discuss the usefulness and limitations of SWOT and PEST tools in relation to the business operations of Tesco. SWOT Analysis As Brill, Baldwin, and Munro (1998, p. 11) point out, SWOT analysis is a structured planning tool used to assess strengths, weaknesses, opportunities, and threats involved in a project or a business proposal. Generally a SWOT analysis is performed for a product, place, person, or industry. Strengths and weaknesses are related to the internal factors whereas opportunities and threats are identified to evaluate the external environment. Usefulness A SWOT analysis is really beneficial for its users to evaluate whether or not a particular objective is attainable or a business venture would be successful. Strategy building is one of the major uses of this structured planning method. A SWOT matrix is easy to construct and simple to understand. Evidently, this evaluation matrix can assist an organization to better understand its business. For instance, currently Tesco is the second largest retailer in the world measured by both revenues and profits, and the company has identified this reputed corporate status as one of its key internal management strengths. The SWOT matrix is also able to aid an organization to recognize its key areas of improvement. In the case of Tesco, lack of geographic diversification appears to be potential weaknesses as the company’s operations are increasingly focused on the UK retail sector. This planning tool can greatly assist a business concern to capitalize on the emerging market opportunities. The predicted £20 billion growth of revenues in the food retail market segment over the 2009-2014 period may benefit the company to focus more on the food sector and to capitalize on this potential market opportunity. Finally, a SWOT analysis may also assist the firm to identify and address external threats timely and effectively. To illustrate, this evaluation matrix can aid Tesco to be informed of the fierce competition in the UK grocery market, and hence to take immediate strategic measures to address this unfavorable situation (Undercurrent News, 2014). Limitations A SWOT analysis is only a single stage of the business planning process, and therefore more in-depth researches have to be conducted to make well-informed and sound decisions. According to Goodwin (2006, p.171), one of the major limitations of the SWOT matrix is that it does not prioritize issues. Even though the Tesco management, with the help of this planning technique, is able to identify a wide range of weaknesses and threats that are challenging its business, it cannot help the company list the issues in the order of their priority. In addition, this strategic planning tool is unable to suggest the company solutions for managing the issues identified. Although this planning method may identify too many opportunities in the market environment, it cannot advise the management which is the best one to seize. All the information obtained through a SWOT analysis may not be actually useful for the company management. PEST analysis PEST is an acronym for Political, Economic, Social, and Technological factors whereas a PEST analysis is used to perform environmental scanning, which is a major component of strategic management. This framework can assist the management to gain detailed understanding of the macro-environment of the organization. Recently some analysts expanded this strategic framework from PEST to PESTLE, inserting legal and environmental factors additionally. Usefulness PEST analysis is really a useful strategic tool that would assist the organizational management to form a clear view of the market growth or decline, current business position, and direction of operations. In the view of Teague (2009, p.14), this strategic framework can help organizations respond proactively to the ever changing market environment. As PEST analysis facilitates forward thinking, it is easy for business managers to anticipate issues in advance. A properly structured PEST analysis can aid firms to focus on both strategic and tactical issues. It is evident that this strategic framework is useful for businesses to analyze the opportunities and threats existing in the political and economic environments. In the light of Tesco’s operations, China’s accession to the World Trade Organization (WTO) is a great political opportunity for the company, because this policy change removes all cross border trade barriers and helps Tesco enter the world’s most profitable market encompassing over 1.3 billion people (Na et al 2014). In addition, PEST analysis can greatly benefit the company to be informed of the opportunities emerging in the global economy, which is recovering fast from the dreadful impacts of the recent global recession. Similarly, this strategic tool is extremely beneficial for Tesco to obtain good understanding of the socio-cultural environment of the markets in which it operates. For instance, this framework can assist the organization to know the negative effects of an ageing UK population on its business future (Chan, 2014). Finally, based on this macro-environmental scanning tool, the organization can identify how the technological landscape would add value to its business. Growing popularity of online retail shopping in UK appears to be a potential opportunity for the company (OGrad, 2014). Limitations One of the key limitations of the PEST analysis is that many of the macro-environmental factors considered for analysis are dynamic, and hence they may change in a very short time. As a result, strategic measures taken during a PEST analysis may become irrelevant in the immediate future, and there would be a certain level of uncertainty remaining even after the completion of a detailed PEST analysis. In many cases, updated information may not be available easily, and this situation would end up in too many assumptions. An environmental scanning process based on unfounded assumptions would result in planning disasters. Unlike a SWOT matrix, a PEST analysis covers broad area of information, and hence it is a time consuming as well as expensive task. Another major drawback of this strategic framework is that it completely ignores the internal environment of the organization. Tesco SWOT analysis Strengths Great brand recognition (The Guardian, 2 October 2013). FTSE Top 100 employer (Tesco, News release, 22 March, 2013). A large pool of loyal customers An attractive business growth rate Establishment of Tesco online Loyal workforce Strong financial performance over the years Product and service customization (Griffith, 2002) Weaknesses Decline in growth over the last few years Lack of geographic diversification (e-commerce digest). Overdependence on the UK market (Dudovsky, 2014). Weaknesses in market trend identification Supply chain inefficiencies Inadequate risk management capabilities Uncompetitive CSR strategies Non-sustainable competitive advantages Opportunities Strong global presence (The Grocer, 20 April 2004). Effective spreading of supply chain risks Further diversification of services (Winterman, 2013). Fast emerging economies like BRICS countries Free cross border trade Rising commercial network portfolio Fast growing popularity of the company Forecasted future market growth in the retail food segment Threats Intense market competition (Weston, 2014). Discount supermarkets Rising cost of operations Sales decline due to UK economic crisis Decline in consumer income Rise in unemployment Strategic alliance between Wal-Mart and Asda Tightening profit margins in UK. Tesco PEST analysis Political factors Governments worldwide force retailers to create new job opportunities locally so as to address the ongoing financial instability China’s accession to WTO made Chinese market entry easy (BBC, 2001). The global political spectrum encourages liberalization in trade policies Growing diplomatic relations between continents and countries Promotion of free trade zones worldwide Stable governments in fast emerging countries like China and India Governments worldwide have recognized the significance of the retail industry (Metrics.com). Favorable tax rates Economic factors The global economy is fast recovering from the recent recession (Douglas & Winning, 2014). UK government’s supportive economic policies such as interest rate reduction Improved spending power of consumers Financial uncertainty is yet to be resolved completely Consumers tend to spend less on premium products In the context of recession, consumer eats more at home (The Economist, 2012). Economic meltdowns would not affect food intake Growing scope of mergers and acquisitions Social factors Fast changing shopping patterns An aging UK population (21st Century Challenges). Growing cultural diversity Increasingly health-conscious consumers worldwide Growing influence of CSR Increasing demand for nutritional content food Rise in the number of young professionals and working women Growing organic food culture Technological factors Worldwide popularity of internet services Fast growing online retail shopping sector (Center for Retail Research, 2014) Loyalty programs based on information technology Use of mobile Apps in the food retail sector Use of self-service checkout points Progressing energy efficiency Reduced toxic emission based on technological advancements Advanced logistics industry Conclusion From the above discussion, it is clear that the management tools such as SWOT and PEST are really useful for business managers to make well informed business decisions. When the SWOT analysis gives a clear view of both the internal management and the external market, the PEST analysis focuses specifically on the macro-environmental factors. Despite their limitations, both these evaluation tools can assist Tesco to deal with its strategic management efficiently. References Brill AE, Baldwin, FN & Munro RN (1998) Cybercrime and security. US: Oceana Publications. BBC News (10 July, 2001) China concedes in WTO talks. Available at: http://news.bbc.co.uk/2/hi/business/1430770.stm Center for Retail Research (2014) Online Retailing: Britain, Europe and the US 2014. Available at: http://www.retailresearch.org/onlineretailing.php 21st Century Challenges (n.d.). Britain’s ageing population. Available at: http://www.21stcenturychallenges.org/focus/britains-greying-population/ Chan SP (29 Oct 2014) UK faces debt time bomb from ageing population. The Telegraph. Available at: http://www.telegraph.co.uk/finance/economics/11192855/UK-faces-debt-timebomb-from-ageing-population.html Douglas J & Winning N (July 25, 2014) U.K. Economy Grows, Passing Precrisis Peak. The Wall Street Journal. e-commerce-digest (n.d.) 9.38 Tesco plc. 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