Compensation of the SWOT Analysis Limitations - Research Paper Example

I. Introduction SWOT analysis is one of the best-regarded frameworks in determining a company’s strategy for a long period. Over the years, however, SWOT analysis has drawn significant criticisms both from academicians and practitioners alike due to its inadequacy and its many limitations in determining strategy. The purpose of this paper is to explore how Michael Porter’s five forces model, another analytic tool for environmental scanning and assessment, can improve SWOT analysis. This paper first looks at the various limitations of the SWOT analysis, then the attributes of Porter’s five forces model, and finally incorporating Porter’s five forces model in order to address the limitations of the SWOT analysis. Porter’s five forces model contributes to the improvement of the SWOT analysis by addressing some of the latter’s limitations that are discussed. II. Body A. Limitations of SWOT analysis 1. Poor analysis due to ‘open nature and unstructured method’ When it comes to strategy determination, environmental scanning has played an important role in the process (Bartol & Martin 2001). One of the frameworks that have commonly been used is the SWOT or ‘strengths, weaknesses, opportunities, and threats’ analysis. According to Wang, the SWOT analysis is no doubt a valuable tool in the field of business strategy because it invites decision makers to consider important aspects of their organization’s environment and helps them organize their thoughts (2007, 1). The strength of SWOT analysis lies in its ability to prompt the company to look and list the factors in the four dimensions that constitute the environment of the business. However, according to Panagiotou, the SWOT analysis includes a couple of significant limitations: its ‘open nature and unstructured method’ (Wang 2007, 1). The open nature of SWOT is apparent in the model’s ability to be used in almost any situation. Basically, anything can be analyzed by listing the strengths, weaknesses, opportunities, and threats that are related to it. After the factors have been listed, the model’s lack of structure on how to proceed with the findings in order to determine a company’s strategy shows its unstructured approach to strategy determination. As according to Panagiotou, with SWOT analysis: Planners are left without indication as to where to search for such variables, or what to do after finding them in terms of how best to incorporate them in strategy formulation (Panagiotou 2003, 9). According to Pickton and Wright, SWOT’s oversimplicity can lead companies to just come up with a list of the factors under the dimensions (1998, 104-105). In their article in Strategic Change, Pickton and Wright have provided an example of oversimplified SWOT analysis of Firkin Pubs and Brewery, which is adapted from Brown and McDonald’s book entitled “Competitive marketing strategy for Europe.” According to the figure (Pickton & Wright 1998, 104), Firkin Pubs and Brewery’s strengths include the following: “monopolies commission hostile to big brewers, strong and broad cult following, strong cash flow, and financial backing of Stackis Group” (Figure 1, Pickton & Wright 1998, 104); weaknesses include: “dubious name may limit expansion opportunities, management complacency, erosion of Firkinism, and poor location of current pubs” (Figure 1, Pickton & Wright 1998, 104); opportunities include: “increasing availability of licensed premises, guest beers, brewing of lager, further growth in London, [and] high growth potential in rest of the UK (Figure 1, Pickton & Wright 1998, 104)”; lastly, threat include: “lack of direction under Stakis management, loss of entrepreneurial management, increasing competition from similar, saturated London market, [and] the risk of declining appeal of Firkin pubs {analogy of fads like skateboards, etc.)” (Figure 1, Pickton & Wright 1998, 104). Pickton and Wright criticized this simplistic SWOT analysis as ‘no more than a listing or categorizing of ‘environmental’ factors under [the four category headings]’ (1998, 104). Koch further adds some points as regards this limitation of SWOT, which are mainly attributed to the differing perception of the individuals who propose the factors (2009). According to him, the usage of SWOT results in a ‘hastily conducted exercise that produces unverified, vague and inconsistent inventories of factors’ (Koch 2009). These factors according to a study of Scheider and De Meyer, ‘could be influenced by culture’ (Fahy & Smithee 1999, 9), and usually result in differing interpretation and distortion of classification of the factors (Hussey 2002, 45-46). 2. Naïve tool which could lead to strategic errors Because of SWOT’s ‘open nature and unstructured method’ (Panagiotou 2003, 9) in determining strategy for the company, there is a tendency for the model’s simplicity to be used in a very basic level. Pickton and Wright has regarded it as a ‘naïve tool which could lead to strategic errors if used simplistically’ (1998, 101). In a table in their article entitled “What’s swot in strategic analysis?” the limitations of SWOT have been classified into three categories: ‘inadequate definition of factors, lack of prioritization of factors and over-subjectivity in the generation of factors’ (Pickton & Wright 1998, 105). This table provides a comprehensive summary of SWOT’s limitations in terms of listing of environmental factors. SWOT analysis requires listing and compiling the environmental factors under the headings strengths, weaknesses, opportunities and threats. However, the open nature of the model requires the compiler to list any factor that can be considered under each of the four categories. This leads to inadequate definition of factors according to their fit in the headings, as well as the basis for the determining which factors should belong to each heading (Table 1, Pickton & Wright 1998, 105). Environmental factors that are listed and compiled under SWOT analysis are not classified according to the emphasis that the firms should give in order to craft strategy (Table 1, Pickton & Wright 1998, 105). Lastly, the oversubjectivity on the part of the individuals that propose the factors is also an issue that is included in the table (Table 1, Pickton & Wright 1998, 105). The absence of definite criteria that will enable SWOT to come up with a comprehensive list of factors, as well as its lack of objectivity by relying more on opinions than facts are also mentioned in the table (Table 1, Pickton & Wright 1998, 105). Even when SWOT can provide a list of environmental factors that could impact the organization these limitations show that SWOT does not provide an adequate analysis that could prompt the company for concrete strategic actions. Furthermore, if the company misinterprets and fails to act on the factors that require immediate action, due to SWOT’s failure to determine which factors to prioritize, the company can commit major strategic errors. B. Addressing the limitations of SWOT by Porter’s model There are other analytical tools that can be used alongside SWOT in order to improve the model’s analysis for strategy formulation. One of these is Michael Porter’s five forces model of the industry (AUEB.gr 2009). Some of SWOT’s limitations which include its open nature, unstructured approach to determining the next course of action, as well as the model’s inability to adequately define and determine which factors to prioritize can be addressed by Porter’s five forces model. This coherence between the two models in providing an adequate analysis to come up with strategy is expressed by Farjoun as follows: … the SWOT model of strategic choice is now characteristically accompanied by explanatory models of the external environment (e.g., Porter, 1980) and of internal resources (e.g., Barney, 1991). A prime reason for this coherence is the shared but largely implicit views on time, flow, and coupling. These were influenced to a large extent by Newtonian mechanics and its application to microeconomics, and by the ideas prevailing in the behavioral and economic disciplines when the formal study of business strategy began (Farjoun 2002, 565). 1. Incorporates internal elements into the external business context Porter’s five forces model adds structure to SWOT analysis by placing the internal elements of the organization in relation to the external setting of the business. When assessing the industry according to the five forces that affect the organization, Porter’s five forces model connects the SW to the OT in the SWOT analysis. According to Hussey: Industry analysis, based on the concepts of Porter (1980), places various internal elements of the organization into an external setting, and is, of course, closely related to the market analysis that appears in another section of the model. The box headed ‘External business environment’ really means the remaining external factors that have a bearing on the organization (2002, 47) By making the internal elements of the organization relevant to the external context of the business, Porter’s five forces model addresses SWOT’s unstructured method to approaching strategy determination. By linking the organization’s internal capabilities to forces that Porter’s five forces model identifies, the internal environment becomes more relevant in terms of the industry context (Bowler et al 1995). 2. The context of the OT analysis defined more clearly Porter’s five forces model defines the context of the business environment from which the environmental factors that are compiled in the SWOT model are derived, especially the factors that constitute the opportunities and threats categories. According to Black and Boal, ‘Porters framework has provided many useful insights to both practitioners and researchers by concentrating on the external OT side of the analysis’ (1994, 131). The forces in Porter’s model provide cues as to where the company should look at in order to identify opportunities and threats—industry’s ability to deter new entrants and its impact on the organization, the relevant substitutes to the industry’s products and how much is their ability to nudge the customers away from the incumbent, the power of suppliers and the power of buyers over the organization. All these influence the degree of rivalry in the industry. By providing cues that will definitely affect the organization’s position in the market, Porter’s model addresses SWOT’s limited ability to come up with a comprehensive list of external environmental factors based on a definite set of criteria. As according to Foss: ‘industry analysis supplies the “Opportunities-Threats” part’ (Spanos & Lioukas 2001, 911). Porter’s ability to address this vagueness on the part of SWOT is apparent in an article of Siaw and Yu in the International Journal of Management. When Siaw and Yu analyzed the impact of the Internet on the competition in the banking industry, they found out that many executives looked at the factors either as opportunities or weaknesses, depending on their individual perceptions (2004, 521). In order to determine whether it is an opportunity or a threat, one of their recommendations include understanding the whole industry, hence, using Porter’s five forces model (2004, 521). Thus, understanding the effect of Internet to the banking industry as a whole is key in order to classify the factors. 3. Overcoming compiler bias in SWOT analysis Another weakness of SWOT analysis is the oversubjectivity in terms of generation of factors (Pickton & Wright 1998, 105). Because there is no concrete set of criteria to determine what needs to be included in the analysis, the individual’s perception usually serves as the criteria. This leads to the model’s failure to come up with a comprehensive list of factors, based on facts and not on the contributor’s opinions. The Porter’s five forces model expresses the specific factors that constitute the forces. Although not purely derived from statistical figures to provide the most accurate facts, it is less dependent on vague opinions of contributing individuals in the SWOT analysis. Although Porter’s five forces model does not eliminate the subjectivity element in the SWOT analysis, it aims to lessen this subjectivity factor when it is incorporated with the SWOT analysis. 4. Relative intensity of threats to determine which to prioritize SWOT’s limitations include its inability to determine which factors need to be prioritized as they would have larger impact on the organization’s position in the industry (Pickton & Wright 1998, 105). The major contribution of Porter’s five forces model to SWOT is its ability to relatively determine the intensity of the factors that the company could include in the Threats category of the SWOT analysis. By knowing the intensity of these factors, the organization will have a better idea on which factors to prioritize over the others, as it crafts its strategy (AGSM.edu 1997). By looking at the forces in the industry and these forces’ impacts on the organization, the firm can better gauge its relative position in order to come up with a strategic action. As according to Pickton and Wright: It should be noted that other authors (e.g. Porter, 1985; Tilles, 1968; Ansoff and McDonnell, 1990; Johnson and Scholes, 1993; Davidson, 1987; Mercer, 1992; Argenti, 1989; Brassington and Pettitt, 1997) also emphasize that the analysis should be undertaken by reference to the firms competitors so that strengths and weaknesses are only such in comparison to the competition and opportunities and threats only arise out of the collective actions or inaction within the marketplace of the firm and its competitors in their response to changing environmental forces (Pickton & Wright 1998, 103). Porter’s ability to help a company determine a strategy based on the external factors that are identified according to their intensity can be seen in Min’s article in the Journal of American Academy of Business. According to Min’s assessment of the automobile industry in China, knowing the relative forces that affect the rivalry such as the industry’s ability to deter new entrant, Volkswagen is able to defend its position in the Chinese market (Min 2005, 102). Although Volkswagen’s position is destabilized by the entry of American and Japanese competitors, knowing this threat has enabled it to defend its monopoly position since the 1980s (Min 2005, 102). 5. Porter’s model “provides baseline for sizing up a company’s strengths and weaknesses” As mentioned earlier, Porter’s model’s major contribution is at the opportunities and threats side of the SWOT analysis. While the former does not directly affects the SW side of the latter, Porter’s model provides cues for the company to look at its relative strengths and weaknesses in relation to the other external forces in its environment. As according to Michael Porter: The forces reveal the most signifi cant aspects of the competitive environment. They also provide a baseline for sizing up a company’s strengths and weaknesses: Where does the company stand versus buyers, suppliers, entrants, rivals, and substitutes? (Porter 2008, 78). This is especially true in the study that Molina, Del Pino and Rodriguez have published in Managerial and Decision Economics. By focusing on the service sectors in the province of Santa Cruz de Tenerife, according to Molina, Del Pino and Rodriguez: We have jointly assessed variables representative of the characteristics of the industry where the firm performs (economic paradigm), based on the five competitive forces defined by Porter, with variables characteristic of the organizational paradigm, which locate the firm’s internal factors in the epicentre of competitive success. For the latter, we have concentrated on managerial capabilities because of the significant role played by executives in the strategic decision-making process (2004, 275). III. Conclusion Using SWOT analysis alone for environmental scanning in line with strategy determination does not give a firm a strong analysis of the environmental factors that could shape its strategy. Because of SWOT’s inherent limitations such as its open nature, unstructured method of analysis, and lack of prioritization, as well as inadequate identification of factors, the company can better benefit from its analysis if other analytical tools for strategy determination are used alongside it. One of these analytical tools include Porter’s five forces model. With the five forces that are identified by Michael Porter to shape the strategy of the organization, the analysis is narrowed down to the factors that influence the degree of rivalry among the competition, from which the company can base its strategy. Also, as the degree of rivalry is determined by the intensity of the threats of the five forces, the company can determine for itself which among the environmental factors should be prioritized. Thus, utilizing Porter’s five forces model can improve the SWOT analysis by addressing some of the latter’s inherent limitations. References AGSM.edu. 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