Unit-6 SWOT Analysis

7/28/2019 Unit-6 SWOT Analysis

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UNIT 6 SWOT ANALYSISObjectives -After reading this unit you should be com e familiar with the :

Meaning of organization strengths and weaknesses.Bases for classifying situations and charac eristics into strengths and weaknesses,Proced ures for evalua ting the impact of organiz ation's streng ths and weaknesses..

* Meaning of Synergy.Structure

6.2 SWOT Analysis6.3 Meaning of Strengths and W eaknesses6.4 Criteria far Determining Strengths and W eaknesses6.5 Measuring Strengths and W eaknesses6.6 Alternative Fonnats to Analyse Strengths and Weaknesses6 .7 Identifying the Strengths and Weaknesses6.8 Matching Strengths and Weaknesses6.9 The Con cept of Synergy6.10 Summary6.1 1 Self-Assessment Que stions6.12 Further Readings6.1 INTRODUCTIONYou will recall that in our discussions on environm ental op portunities and threats unit 2we had introduced the concept of relevant environment. We had mentioned that afirm's relevant environment to a large extent, is a function of organization's strengthsand weaknesses. In other words the opportunities which can be successfully exploitedlargely depend upon corpo rate capabilities. You should, therefore, begin to realise thepivotal role wh ich capab ilities play in strategic succe ss, ,organizations capabilities, inthis sense, become a lynchpin over which hinges the performance and survival of afirm. But identifying and exploiting the strengths and remov ing the weakne sses is notan arithmetic game of additions and subtractions. It is much beyond the quantifiablenum bers like sales, profits, net worth and a ssets. It is an issue largely linked with one'sstate of mind and outlook. Yes, it is a matter of entrepreneurial inrerpretation, Forexample, to a large majority of people huge population may be a major weakness ofIndia, but to a few may be a major asset i.e. its strength. In this unit we will makeattempts to approach the subject enabling a better perspective on an d an entrepreneurialview of organization's strengths and weaknesses. Ev en at the cost of repetition. it maybe a good idea to rememb er that strategy is ultimately a 'matching g ame' be tweenenvironmental op ponunities and organizational strengths to gain com petitive advantage.The process of assessing organizational strengths and weaknesses is also known as'organizational audit'.


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SWO T ANALYSISIf you are ready to start developing a strategic plan, you must first attempt to see wh ereyour organization is at present. The re are various wa ys in which you can do this, and allcf these just give you tools to understand yo urself and recogn ize the challenges you fa cefrom the ou tside, One such tool is the SW OT analyses.SW OT analyses are undertaken by orga nization s at the start of their strategic plann ing -and SWOT stands for Strengths, Weaknesses, Opportunities and Threats.A SWO T starts with another exe rcise- an external analysis of the business environmen t,often called a PEST an alysis. PES T stand s for Political, Econ omic, Socio-cultural andTechno logical aspects. So you can see this exercise will give you a good g rasp of the kindof outside situation you a re in.We have already studied PESTLE Analysis in U nit2 ofth is block. Just to get an overview,ofP ES T analysis (also sometimes called as STEP, PESTLE or STEEP an alysis) looks atthe external business environment. As we h ave seen, PEST stands for political, economic.s*xio-cu ltural and technological factors and the extra Land E stand for legal andEnvironm entnl aspr::ts which are very impo rtant for NG O com munities, Th e analysisexamines the impact of each o f these factors (and their interplay with each other) on thebusiness. The results can then be used to take advantage of opportunities and to makecontingency plans for threats.SWOT AnalysisSW OT An alysis builds on the results of the PESTLE a nalysis. Its purpose is to identifyand build on the organization's strengths and weaknesses. It also serves to identifyopportunities and threats from exte rna l factors - especially those rhat have an impa ct onthe company's strengths and weakneskes.A good approach for carrying but a SWOT analysis is to get your team together. Givethem a few sheets of paper and ask then1 to list strengths, weaknesses, opp ortunities an dthreats under each of these hea dings. Use eac h item to help you fulfill your goals ratherthan discourage you into stepping back.Discuss all the SW OT items and highlight key areas of concern or areas that requireaction. These becom e the focus for correctives for immediate action as well as areas o ffocus for future planning. Since we have discussed the external env ironm enthe re w e willrestict ourselves in studying the internal environmen t.

MEANING OF STRENGTHS AND WE AKNESSESOrganization's strengths and weakn esses, a s stated earlier, are a matter of interpretation.Thus, a large cash reserve may ap pear to be a strength for a firm, but if it is not investedwell it may cease to be a strength. Similarly, absen ce of own flee t of cars may be take nas a weakness, but if cars are frekly availab le at economical rentals it may cea se to be aa weakness. Though, no definition may ever be complete, we would define strengths andweaknesses as follows:Organizations' Strength: It refers to competit ive advantages and other distinctcompetencies.which a com pany can exert in the market place.Organizations' Weakness: It refers to constraints or obstacles which check movementin c e h i n desired direction, and may also inhibit organization in gaining a distinctivecompetitive advantage.

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Strategy and Planning 6.4 CRITERIAFOR DETERMININGSTRENGTHS AND WEAKNESSES

A major problem which must be resolved prior to any analysis of organizations capabilitiesis the criteria that would determine whether element under examination is a strength or aweakness. Earlier we had mentioned that to a large extent it is 'state of mind' which,determines whether a particular element or situation is a strength or a weakness. Judgment,in this sense, is an implicit ingredient in our analysis. However, this judgment, as you willappreciate, is also a function of the criteria which is used. Four types of criteria havebeen suggested to classifL an element into strength or weakness. These are:i) historical;ii) normative; iii) competition parity; and iv) critical factors for success.The Historical Criterion ' \Here, the analyst compares the characteristicsunder examination with past performances.Thus, sales, profits after tax, capacity utilisation etc. may be compared with those of thepast. An improvement over the past performance may be seen as a strength, and adecline, a weakness. Before, arriving at such conclusions, it is always advisable to checkthe replicability of the 'past' in future. In a large number of situations 'past' may not bevalid for future and this would certainly invalidate our assessment or judgment.The Normative CriterionHere, the basis of judgment is 'what ought to be' the level of performance to classify aparticular element into a strength or a weakness. Thus, based 01.1 theory, expert opinion,industry practices or personal opinions, one can develop norms' for evaluation. For example80% capacity utilisation for thermal power plants may be considered a strength andbelow that, a weakness.The Competition Parity CriterionAs its basis for judgment, this criterion utilises the action of successful direct competitorsor potential competitors. It is based on the premise that a firm must, at the minimum,meet the actions of the competitors. This, if the industry practice of providing 60 dayscredit to the trade is not followed, it may be considered a weakness. As a comparativeyardstick, it is always desirable to know and compare with what other competitors aredoing, but it may or may not be prudent to limit the assessment to only this criterion.Attimes, industry practices may not be optimum and as such not generalisable for all thefirms as the product market, scopes may vary amongst the members. Besides, thecompetition criterion, it is always advisable to identify the dimensions of uniquenessesand use other criteria to classify a particular situation either as a sttength or a weakness.The Critical Factors for Success CriterionEach organizations in some sense, is unique. It requires a set of minimum performancestandards and hence capabilities. We would call these as 'critical factors' or 'keyfactors' of success. The three criteria discussed earlier in this section do not directlyassess along the KFS. This criterion helps to examine the strengths and weakness inthe context of meeting the minimum requirements for success. For example, if T. V,advertising is a must and an organization is not able to afford it, then it may beconsidered'a weakness.One criterion is seldom sufficient for a complete evaluation of a firm. Some elementslike 'financial strengths' may be evaluated better on 'historical' and 'competition'criteria; and 'marketing' may be best evaluated op the basis of 'competition' and'critical factors for success criteria'. Likewise, 'managerial climate' may be betterascertained on a 'normative criterion'. To cover all the facets of organizations capabilities


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and weaknesses, it may be desirable to follow a 'multiple criteria method'. It isimportant to recall that to a large extent- your assessment of strength or weakness ofa flntl, depends on the criterion you have selection evaluate and your frame of m ind.Swot Analys

Activity 11 . Identify an NGO you a re familiar with.

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.............................................................................................................. 1"""'.......................................................................................................................2. List all elements you consider a s its important strengths or weakness.

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......................................................................................................................3. In terms of various c riteria (historical, normative, competition parity, andfactors for success), e valuate its. strengths and weaknesses.

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........................................................................................................................ .4. Suggest some corrective actions based o n your assessment. , .

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6.5 MEASURING STRENGTHS AND W EAKNESSESStrengths and weaknesses may exist in varying degrees. Som e may view an organizationI as very strong which othe rs may consider it not that strong. The sa me may apply to itsweaknesses. This would call f or measurement o f strengths and weakn esses. In earlier

I section we had discussed various criteria for assessment. In this section, we will discussthe techniques which a n analyst can app ly to judge the degree of a strength or a weakness.There are three 'measures': i) Attribute Measures, ii) Effectiveness Measures, and iii)Efficiency Measures.Attribute MeasuresThis statement is developed to identify or list a characteristic or quality which anorganization possesses or is expected to possess' in the near future. Some exam ples ofattribute measurements are: 'our key strength is the high morale of the workers' or 'o urbigger weakness is the lack of centialisation of the control systems'. Statements likethese reflect the presence o f a characteristic without attaching a unit of measurement,i.e. to wha t extent the strengthOis genuin ely co ntribu ting to gain a com petitive advantage.It might be a strength for strength sake with no substantial purpose behind it. Thus,leaying the analysis on lya t the 'attribute statement' level may be incomplete and inadequate.In m any situations it may however, be the on ly alternative to express one's strengths orweaknesses. 15


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Strategy and Planning Effectiveness MeasuresIn this approach, a characteristic is represented by a statement that identifies a capabilityof an organization that will help in the accomplishment of a particular task or objective,Thus, a statement like "our company e.ercises for fitness plan have helped inmaintaining the high energy levels of our managers who are now able to devote onemore additional hour of work each day" is reflectiv,: of an effectiveness measure of astrength. Similarly, a statement of weakness could be "the location of our plant entailsmore travel time to reach the market place, hence .t dissuades our sales people toachieve their targets for field visits".The Efficiency MeasuresAs the word 'efficiency' suggests, it measures the productivity of an organization inconverting inputs into desired outputs. Thus, "ten per cent rejection rates is a big loss toour production", is a statement of weakness hinting at poor quality control arrangements.Apparently efficiency measure is implementable only in quantifiable situations.The use of three types of the measurements is a function of the degree of specificitypossible for a given element or characteristic. Attribute measurement is simply a listingof the capabilities of an organization; an effectiveness measure relates to the abilitiesof an organization to achieve objectives; and an efficiency measure is concerned withthe optimum conversion of firm's resources into desired output. The type of measurementa firm would employ will be a function of (a) the characteristic (in terms of strengthsor weaknesses) which is being measured and (b) the level within the organizationwhich is to utilize the measurement. In many situations, especially when dealing withsofter variables like 'shared values', 'managerial climate and culture', 'depth of mangerialcompetence' 'human relationship skills' etc., it may be difficult to use effectiveness andefficiency measures. Only attribute measures are used in such situations. You wouldsoon begin to realise that at lower levels i.e. at the functional levels like, marketing,finance, etc. efficiency and effectiveness measures can be usefully applied. However,at higher levels which is concerned with the total organization, attribute measures andeffectiveness measures are more feasible. To put it differently, attribute and effectivenessmeasures increase in importance as the scope of internal analysis is broadened to meetthe demands of the higher management.

6.6 ALTERNATIVE FORMATS TO ANALYSESTRENGTHS AND WEAKN ESSES

A comprehensive and objective analysis of strengths and weaknesses may be facilitatedby use of a format or a framework. In this section we will study a few of such formatsor frameworks.The Check ListSome writers have suggested the use of organizational checklists to evaluate organization1capabilities and weaknesses. One such checklist contains 446 checkpoints. Obviously,all 446 checkpoints may not be ielevant for a particular organization. Pearce andRobinson suggest the following checklist.Market ing

Firm's products/services; breadth of product line.Ability to gather needed information about markets.Market share or submarket shares.


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Product/service mix and expansion potential; life cycle of key products; profit/sales balance in produce/se~ice.a Chann els of distribution.

Effective sales organization; knowledge of customer needs.a Concen tration of sales in a few products or to a few customers.e Product/service image reputation, and quality.a Imaginative, efficient, and effective sa les promotion and ad vertising. .

Pricing strategy.Producers for digesting market feedback and developing new products/service or

I markets.After sales service and follow-up.Goodwill/ brand loyalty.

Finance and AccountingAbility to raise short-term c apital.Ability to raise long-term capital, debt, equity.

m Corporate-level resources (multibusiness firm).e Cost of Capital relative to industry a nd com petitors.e Tax considerations.e Relations with owners, investors, and stockho lders.r Leverage position: Capacity to utilise alternative financial strategies such a s lease o rsale and leaseback.

Cost of entry and barriers to entry.Presence of financial planning and b udgeting practices.Working capital.

a Effective cost control; ability to reduce cost.Financial size.. a Efficient and effec tive acco unting system for cost, budget and profit plannin g.

Pr~duction/Op~rations/TechnicalRaw material cost and availability.

a Inventory control systems.C, Locationof facilities.a Layout and utilisation of facilities.a Technical efficiency of facilities and utilisation of c apacity. 1. .a Effective use of subcon tracting.a 'De gre e o f vertical integration: value added and profit margin.

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Strategy and Planning Efficiency and costlbenefits of equipment.Effective operation control procedures: design, scheduling, purchasing, qualitycontrol and efficiency.Costs and technological competencies relative to industry and competitors.Research and development/technology/innovation.Patent, trademarks, and similar legal protection.

PersonnelManagement personnel.Employees' skill and morale.Labour relations/costs compared to industry and competition.Efficient and effective personnel policies.

e Effective use of incentives to motivate performance.Ability to level peaks'and valleys of employment.Employee turnover and absenteeism.

. Specialised skills.Experience. .

OrganizationIGeneral ManagementOrganizational structure. IFirm's image and prestige.Firm's record for achieving objectives.Organization communication system.Overall organizational control system effectiveness and utilisation.Organizatiollal climate.Use of systematic procedures and techniques in decision making.Top management skill, capabilities and interest.

The Conceptual ApproachBates and Eldredge have suggested what has been described as conceptual ap~roachto analyse shengths and weaknesses. According to them, the format for analysis canbe divided into three dimensions: management, operations, and finance. These threedimensions would be common for a majority of the organizations. 'Management'dimension covers top management functions and broader issues encompassing the totalorganization. Some of these could be strategic planning processes and systems,organization climate and culture managerial succession, top management values, etc.'Operations' dimension includes resource conversion and distribution functions likeproduction, material management design, marketing, etc. 'Finances' include issues likecapital structure, working capital, credit policies, etc:


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Analysis of Management DimensionAt the corporate level, i.e. at the level o f corporate strategy, the strategist must beginthe assessment of organizational strengths and weaknesses with an analysis oforganizations management. To a large extent, the quality of top management determ inesand affects corporate strengths and we;ak ness, not only the current but the 'potential'strengths as well. As an illustration, B ates and Eldredge have suggested the follow ingdimensions to evaluate the strategic planning system of a firm. This can be applied incase of NGOs.Critical Factors: ldent if icat io~~f the present and future conditions having a bearingon the achievement of objectives.Resources: Identification and provision for resources required to meet present andfuture condit io~ ~sor achieving objectives.Objectives: Clearly spelt out results and details of the means to be used to measureaccomplisl~ment.Appraisal: Com pairing actual with expec ted performan ce that results in timely correctiveaction.Deployment of Resources: Establishing and delegating areas of responsibility andauthority for critical factors. For its strategic planning system , an organiza;tionY strengthsand weaknesses can be evaluated on the above dimensions.Analysis of 'Financial' DimensionAn organizations performance is largely determined through its financial performancelike sales revenue, profits, net worth, dividend payout, etc. A number of dimensionswithin finance capital structure, capital budgeting, dividend policy, debt policy, interestcost, credit policies, management of working capital etc., need to be examined toassess a firm's strengths and weaknesses. A caution, however, needs to be observedwhile drawing inferences 'financial analysis' may reflect only the 'sym ptoms' and notthe causes. For strategic decisions, w e need to unfold the underlying causes and theirrelationship with other business fun ction. Thus, an outstanding receivable accoun t with90 days may reflect poorly on the wo rking capital management, but if it is a marketingnecessity, then it may not be interpreted as a weakness.Analysis of the 'Operations' DimensionsThe resource conversion process requires operational arrangements. The efficiency o fthe 'conversion' process reflects strengths or weaknesses. Besides conversion, theorganization also needs to transform th e products and services through the process ofmarketing and distribution into liquid or cash resources which are then recycled.Organizational audit, therefore, must include the assessment of organization s strengthsand weaknesses in each functional area. .In the area of marketing, this may meanassessment of factors like familiarity with the industry breadth o f the products/servicesoffered, quality of the marketing rksearch, 'customer care and after sales service,consumer loyalty, etc. A similar type of 'audit' can be done for human resources,materials management production and so on.Strengths and Weaknesses Profile

Swot Analy

After the corporate audit on three dimensions: m anagement, finance, and operation h asbeen done. Bates and Eldredge suggest consolidation of all these dimensions to de velopa profile. This is shown in Exhibit 6.1 19I


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Strategy and Planning

1. The purpose is to ensure that the strategist is aware of a bMis of comparlson andits appropriateness to the factor under assessment.

2. Ranking indicates degree of importance of the factor under assessment to theorganization s ;r~ccess.All ritical factors should have aranking of in their respective

3. A brief description of what exists.4. strengths or weaknesses are coded as follows: 0 = neutral; -' strength, and the

more pluses, the greater the strength; - = weakness arld the Inore minuses, the.greater the weakness. The profile gives a quick view of the total situation 84uell


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-6 7 IDENTIFYING STRENGTHS AND W EAKNESSES Swot AnalysSo far our major preoccupation has been with 'what' are strengths and weaknessesand 'how' they have to be measured. An equally important step in the whole exerciseof organizational audit is; the process which an analyst can follow to identify, diagnose,and assess tlie situation in the form of strengths and weaknesses. Basically, there arethree approaches to performing the 'organizational audit' .

i) Ask queations: This is some form of executive survey. It can involve therespondents from both within organization and from outside; those who are wellfamiliar with the organization e.g. customers, and suppliers are two such examplesof outside respondents, There can be marly forms to this survey like structuredquestionnaire, informal depth interviews and so o n .

i Observation: Here the analyst observes tlie beliaviour and reaction of theexecutives to draw his ow11 inferences on some specific situations. Issues likeleadership styles, work cutture, participatio~i re best studied by observation:'

iii) Examine Records: Records are all excellent source of past performance and anumber of other issues which are seldoni articulated i n a 'questionnaire survey' orobservations. Usually, examination of records becomes essential for all the'characteristics' where 'efficiency measures' are being used.

A good and comprehensive audit would require tlie use of all the three approaches.This requires enormous amount of information and efforts. At the corporate levelespecially for large organizations, this may require a 'team effort' and may take 6 to 8months before a review of organizatio~i's trengths and weaknesses can be complete.A major pre-requisite for tlie analysis would be tlie 'breadtli' and the 'depth' of theirexperience and an ability to 'm~~ddle'Iil.o~~ghvast pool of information, opinions andreactions.

MATCHING STRENGTHS AND WEA KNESSESWe have been discussing organizational strengths and weaknesses. Tlie purposeis to arrive at a 'match' between orga~iiza tionalstrengths and environnientalopportunities for competitive advantage. The purpose is to improve corporateperformance. A simple but powerful questio~i o keep us on the right track, lest theexercise become unwieldy and an end in itself is to ask: 'so what'? This 'so what'?question sliould lead us to recognise the payoff from a strength. It sliould also enableus to identi@ the degree of damage or hiilderance which a weakness can cause toorganization's performance. If the response to a 'so what'? question is neutral orinconclusive, then the characteristics have to be dropped from our analysis. Theorganization audit of organization revealed a supplier's excel le~it eputatio~i orconsistency in the supply of high quality products. However, its limited productioncapacitytprevented it from becoming a market leader in terms of market share. It will,therefore, be a strategic error to assume that expansion may lead to a larger marketshare as large markets may essentially be for low price, low quality products. Thus, anexcellent strength may have limited to no payoff unless the entire orga~iizations trategyis changed. Sin~ilarly, resence of highly qualified scie~itists nd e~igineers or R & Dmay become meaningless if there is no opportunity for R & D to flourish and make~wortliwhilecontribution. In short, a strength is meaningless if it cannot abet in theorganizations performance of present and future. In the same way presence of aweakness may not always be damaging.


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,ategy and Planning THE CONCEPT OF SYNERGYUpto this point we ha ve been discussing the issues related to organization audit. Beforewe conclud e it may be a good idea to briefly introduce the concept of synergy. In itssimple form, the con cept of synergy recognjses that in the organizational context, thecombined effect of certain parts is greater than the sum o f their individual effects. Forinstance, if produced separately, the contribution o f product A may be x and productB's contribution may be y. The conce pt of synergy, implies that if produced jointly, theircontribution m ay be x + y + z instead of x + y alone. Thi s extra contribution i.e. 'z' iscalled the synergistic effect of A and B together. Th us 'z' represents positive synergy.There can be negative synergy also. Some writers describe synergy as a 2 + 2 = 5effect. This conce pt, which is difficult to quantify, is a ve ry helpful c oncep t in identifyingwha t we would like to call 'potential strengths'. Thus, the 'reputation'of a firm canprovide positive synergestic pay off to launch high quality products. Image, R & Dfacilities, availability o f competent professionals are some more exam ples where anorganization can reap synergistic benefits for comp etitive adv antage.6.10 SUMMARYThe analysis of organizations capabilities and we aknesses b ecomes a pre-requisite fo rsuccessful formulation and reformulation of organization strategies. This analysis canbe do ne at various levels: functional, divisional, an d corporate. T he classification of anitem o r characteristic in terms of strength and weak ness can be done on the basis ofsome criteria like historical criterion, normative criterion, competitive parity criterionand th e critical factor of success criterion. In orde r to m easure the d egree of strengthor weakness, we can use three measures: attribute measures, effectiveness measuresand efficiency mea sures. A format like a 'check list', a grid or a matrix helps in makinga comp rehensive analysis. It also helps in conso lidating the analysis on corporate audit.While performing th e audit, it is important to reme mb er that in the ultimate analysis, itis the entrepreneurial viewpoint o f strengths and weak nesses which can make or breaka company. In this view, the concept of synergy holds the key to enhance the payoffsfrom the existing corporate capabilities. A strong mind, even w ith limited capabilities,may build a giant organization and a weak m ind may cripple a sound organization bymagnifying the minor weaknesses. Th e frame of mind, thus, may appear to be a moreimportant intangible strength than all the tangible assets.6.11 - SELF-ASSESSMENT QUESTIONS1. How w ould you determine whether a particular element is a strength or a weakness?2. What are the different cri teria for classifying elements into strengths andweaknesses? Explain briefly by giving suitable examples. Are different criteria

exclusive?3 . What m easures can be used for judging the d egree of a p articular strength or a

weakness? Are they equally applicable in all situations?4. If you were to conduct organization audit of an NGO firm, what approacheswould you u se? D iscuss briefly.5 . Th e purpose of analysing organizations strengths and weaknesses is to ultimatelymatch them Explain.6 . Explain the concept of synergy. Drawing upon your organizational experience,

recal]~situations/decisions n which the synergy came into play or it played a major


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Swot Analysis

' ' , Middlesex, England.

and Competitors,The Free Press, A Division of ~ a c m il la n ublishing C o., Inc.: New

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Unit-6 SWOT Analysis

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