Critical Evaluation of SWOT Analysis Model - Case Study Example

Evaluation of SWOT model Table of Contents Table of contents: page number 1.0 Introduction …………………………………………………………………....3 2.0 Literature review…………………………………………………………….…3 3.0 Benefits of SWOT analysis .......................................................................…...4 4.0 Criticism of SWOT analysis …………………………………………………...7 5.0 Application of SWOT analysis in a globalised world………………………….9 6.0 Conclusion…………………………………………………………………….10 7.0 Reference List………………………………………………………………....11 Critical evaluation of SWOT analysis model 1.0 Introduction The SWOT (strengths, weaknesses, opportunities, and threats) analysis became a basis from which a company strategy is built. However, when used in a wrong manner it can jeopardise the future of a company. SWOT analysis model was created by Albert Humphrey during a research project at Stanford University in the 1960s and 1970s and utilised data from many leading companies (Saxena 2009). The strategic planning tool identifies the internal and external environmental factors that either facilitate or hinder the attainment of the business objectives (Lynch 2006). The internal analysis focuses on the strengths and weaknesses that are inherent to the company while the external analysis focuses on the opportunities and threats that exist in the external environment and which the company has not control (Bohm 2009). The weaknesses are the problems that are inherent in the company such as low product awareness, high debt and limited free cash flow (Porter 2008). The paper will critically evaluate the use of SWOT analysis model in company strategy formulation, the benefits of the model and inherent drawbacks of the model. SWOT analysis model is widely used in company strategy formulation, but the model has certain weaknesses that may jeopardise the future of a company if used wrongly. 2.0 Literature review Cullen (2005) describes SWOT analysis as a strategy tool that is useful in many purposes within the business. SWOT analysis can be useful at the corporate level, departmental or business segment level and the product level. The recent years have witnessed use of SWOT analysis in comparison of the attractiveness of geographical markets and countries in management expansion strategies. According to Mintzberg, the model is widely acceptable since it originated from the ‘design school’ that seeks to establish the fit between the identified strengths and weaknesses with the opportunities and threats in the industry. In this case, Mintzberg concludes that the model is ideal in business strategy since the industry drivers exist in the external environment and organisations are capable of understanding the key success factors (KSF) that will determine the future success of the company (Hill and Jones 2007). SWOT analysis also considers the external environment that determines the success of the business and the factors outside the control of the management. In this case, the model is aligned with other widely used models such as the PEST (political, economic, social-cultural and technological) environment analysis model that purely considers the impact of the trends in the external environment on the future business performance (Bohm 2009). However, critics point out that models such as PEST analysis offer the best solution to analysing the dynamics that shape the external business environment. For instance, the political changes may include political instability while the social-cultural changes may include the shifts of consumer attitudes towards healthier foods and quality products. The threats are associated with negative factors in the external environment that may jeopardise the operations of the firm and lead to negative growth (Henry 2011). SWOT analysis is associated with simplicity and lower costs since managers do not require specialised training. The model has the ability to integrate information from diverse sources such as competitor information, production statistics and economic statistics. The management will have an overview of the competitive strengths of their business before formulating new growth strategies. 3.0 Benefits of SWOT analysis model Proponents of SWOT analysis further outline that the model is effective in business strategic formulation since it is concise, actionable and significant. The model identifies the main strengths and weaknesses that are significant and the management is able to remedy the weaknesses that are inherent in the business (Hill and Westbrook, 1997, p 48). For instance, strong brand awareness and extensive distribution network are essential attributes of the firm that may lead to competitiveness and high market share in the future (Dransfield 2011). In this case, SWOT analysis is capable assisting the management to identify the core competencies of the business. For instance, British Telecom which has a large market share in the UK, strong financials and high brand awareness is capable of identifying its core competencies that include a culture of integrated telecommunication solutions and continuous innovation capabilities. Accordingly, SWOT is widely used in identification of the weaknesses within the organisation and which detract the company from attainment of the desired objectives (Kachru 2009). Examples include the lack of innovation capabilities or poor product quality that may hinder sales growth and customer loyalty. SWOT analysis facilitates the selection of the product-market strategies that are useful for the company depending on the results of the analysis. For instance, the company can either choose a market penetration strategy if it has the necessary marketing capabilities or a new product development strategy if the resources of the analysis indicate a shift in consumer preferences and availability of extra production and financial resources (Grant 2010). The proponents of the model assert its goes further to consider the external environment unlike other models such as the resource-based view of the firm model (Daft 2008). Models such as resource-based view and VRIO framework only concentrate on the tangible resources and competencies thus ignoring other intangible attributes and external analysis in formulating a competitive strategy. The identified strengths can enable firms be a key success factor (KSF) and such strengths are usually not available in the competitors or rare to attain (Daft 2008). For instance, a SWOT analysis of Coca Cola identifies the strengths as the global brand awareness and identity, the strong marketing and advertisement capabilities, high customer loyalty, and extensive distribution channels across the globe. Coca Cola weaknesses include significant overreliance on the carbonated drinks, high debt levels and negative publicity due to unhealthy soft drinks (Kachru 2009). Analysis of Coca Cola opportunities and threats will identify some opportunities as the future growth in the demand for bottled water, the increase in the demand for healthier foods and beverages and growth through acquisitions and strategic partnerships with smaller bottling firms in emerging markets. The threats facing the beverage company include the stiff competition from PepSi Co, shifts in consumer preferences towards healthier soft drinks and legal suits due to negative product label information on the ingredients of the products. I believe the model is accurate since Coca Cola controls more than 40 percent of the beverage market and serves more than 200 countries across the world. In this case, the Coca Cola is expected to use its high brand awareness, extensive distribution network and marketing capabilities to grow market share in emerging markets through acquiring smaller beverage firms and introducing healthier soft drinks. Another case is Tata motors SWOT analysis that identifies the motor manufacturer as the largest commercial vehicles manufacturer in India with extensive dealership, sales and service access points across the country (Baker 2014). 4.0 Criticism of SWOT analysis SWOT model may be flawed since it requires the management to align the strengths of the company to the opportunities in the external environment and also safeguard the company weaknesses from threats in the market. The quality of strategic business planning decisions using the SWOT analysis depend on the reliability and validity of the organisation’s understanding of the internal and external environment and the factors that cause changes over time (Smelling 2012). The company must be capable of identifying the key success factors or capabilities that will influence future growth or profitability of the sector. Five forces model considers the ease of entry in to the market, the bargaining power of suppliers, the power of buyers, and the threat of substitutes and degree of rivalry in the industry in order to determine the best strategy in attaining competitive edge (Ferrell and Hartline 2012). In this case, Michael Porter’s generic strategy theory has identified the broad corporate strategies that can be implemented as cost leadership that aim at offering products at the lowest price due to costs advantages and efficiency of the firm, the differentiation strategy that aims at adding extra benefits to the product offering and finally the focus strategy that aims at serving a niche market with superior quality product than the competitors (Russell and Russell 2006). According to Griffin (2015), SWOT analysis may deceive the management to identify the advantages and disadvantages of the business rather than the attributes of the business that are essential in attainment of competitive edge in the industry (Nijssen and Frambach 2001). Accordingly, the model or tool should be able to assist the management in identification of changes or trends in the environment such as shifts in consumer attitudes and changes in technology. In this case, SWOT analysis may ignore the current trends in the environment and key success factors that are essential in attaining a competitive advantage in the industry. The company strategies aim at attaining future growth or future market share thus SWOT analysis ignores the future weaknesses and future strengths since it does not focus on the key success factors (KSF) in the industry (Botten 2009). According to a survey of 100 Fortune 500 company managers, SWOT analysis harms business performance since it relies on subjective perceptions without any quantification measures and a straightforward methodology that is essential in identifying the strengths and weaknesses. The managers claimed that SWOT is just a snapshot of the specific issues facing the firm and external environment since excellent business analysis and strategy formulation requires continues monitoring of the operating environment (DuBrin 2008). The critics of SWOT analysis assert that its simplicity leads to basic analysis of company situational outlook thus leading to errors in company strategy formulation. The model conducts a shallow business scanning and leaves false impressions on the strengths of the business since it does not accommodate for tradeoffs in comparison (Staples 2013). For instance, Southwest Airlines lacks customary in-flight meals and some and this may be construed as either a strength or weakness of the business. It is worth pointing out that no-meals policy makes the airline a low-cost carrier and reduces the time required in service-planes. Accordingly, introducing meals with provide customers with enhanced benefits, but this would also increase the out-of-pocket costs thus increasing the overall costs to customers (DuBrin 2008). 5.0 Application of SWOT analysis model in the globalized world SWOT analysis may not be appropriate in comparisons of different geographical markets in globalised economy. The recent globalisation has led to stiff global markets and liberalisation of markets and thus multinational companies need to continuously update their strategic choices in order to remain at pace with the rapid changes in the global markets (Karami 2007). In this case, companies require global business intelligence and SWOT analysis may fail to provide enough data and insights to make informed strategic choices. Global companies often use Porter’s Diamond theory that consider the factor conditions, demand conditions, firms structure and strategy and availability of related industries in order to assess the attractiveness of emerging markets. For instance, the multinational companies are attracted to markets with cheap raw materials and labour or markets that have high demand of the company product (Karami 2007). 6.0 Conclusion SWOT analysis became a basis from which business strategy is formulated since it uses an integrated approach that considers both the internal and external environment of the firm. However, it can jeopardise the future of the company if used in the wrong manner due to its simplistic approach in analysing the business environment. The model may fail to identify the trends in the industry and key success factors that are essential in attaining competitive edge due to the snapshot approach in evaluating the current business position in the environment. The managers may identify just the advantages and not the attributes that competitors do not posses thus leading to future business failure since such advantages and resources may not have any competitive capabilities and may be easily obtainable by competitors. The model fails to account for tradeoffs in value between strengths and weaknesses. However, the current empirical research on effectiveness of SWOT model is limited and further research is needed in establishing the reliability of the model in a globalised world. 7.0 Reference List: Baker, M.J. 2014. Marketing strategy and management. London: Palgrave Macmillan. Bohm, A. 2009. The SWOT analysis. Muchen: GRIN Verlag. Botten, N. 2009. Enterprise strategy. London: Elsevier. Daft, R.L. 2008. The new era management. New York: Cengage Learning. Dransfield, R. Corporate strategy. London: Heinemann. DuBrin, A. 2008. Essentials of Management. New York: Cengage Learning. Ferrell, O.C and Hartline, M. 2012. Marketing strategy. New York: Cengage Learning. Grant, R. (2010). Contemporary Strategy Analysis: Concepts, Techniques and Applications. 7th Ed. Massachusetts: Blackwell. Griffin, R. 2015. Fundamentals of Management. New York: Cengage Learning. Henry, A. (2011). Understanding strategic management. Oxford: Oxford University Press. Hill, C & Jones, G. (2007). Strategic management: An integrated approach. New York: Cengage Learning. Hill, T and Westbrook, R. (1997). ‘SWOT Analysis : It’s time for a product recall’, Lone Range Planning, Vol 30, No. 1, pp. 46-52. Kachru, U. 2009. Strategic Management: Concepts and cases. New Delhi: Excel Books. Karami, A. 2007. Strategy formulation in entrepreneurial firms. London: Ashgate Publishing. Lynch, R. (2006). Corporate Strategy. 4th Ed. Harlow: Financial Times Prentice Hall. Nijssen, E.J & Frambach, R.T. 2001. Creating customer value through strategic marketing planning: a management approach. London: Springer & Business media. Porter, M.E. (2008). Competitive advantage: creating and sustaining superior performance. London: Simon and Schuster. Russell, J and Russell, L. 2006. Strategic Planning 101. New York: American Society for Training and Development. Saxena, R. (2009). Marketing Management. 4th Ed. New Delhi: Tata McGraw-Hill. Smelling, J. 2012. The influence of the SWOT analysis in organizational development strategic planning. Muchen: GRIN Verlag. Staples, B. 2013. Transformational strategy. London: iUniverse. Read More