SWOT Analysis. Idea, Methodology And A Practical Approach.

Table of contents

List of abbreviations

List of figures

1 Introduction

2 Idea behind the SWOT analysis
2.1 Development of the SWOT analysis
2.2 Placement of the SWOT analysis within the strategic planning process

3 Methodology of the SWOT analysis
3.1 Strengths and Weaknesses – Internal business analysis
3.2 Opportunities and Threats – External analysis
3.3 Strategic fields of action

4 Wal-Mart – A practical approach of the SWOT analysis
4.1 Wal-Mart – Company profile
4.2 Strengths and Weaknesses
4.3 Opportunities and Threats
4.4 Strategic options – SWOT matrix of Wal-Mart

5 Conclusion
5.1 Advantages and disadvantages of the SWOT analysis
5.2 Requirements of application and implementation
5.3 Résumé

Appendix 1 Core competency requirements

Appendix 2 Integral Total Management (ITM) checklist

Bibliography

List of abbreviations

illustration not visible in this excerpt

List of figures

Figure 1: The Strategic Planning Process

Figure 2: External and Internal Analysis

Figure 3: The placement of the SWOT analysis within the strategic planning process

Figure 4: SWOT matrix

Figure 5: Strategic fields of action

Figure 7: SWOT profile of Wal-Mart

Figure 8: Core competency requirements

1 Introduction

Due to strong competition and a continuous market change, most companies engage in strategic planning today to become or stay competitive in the long run. Strategy is all-embracing. Strategy has to capture internal and external aspects, that means to comprise competencies and market opportunities. Strategy has to keep in view the own company, the customers and the competitors.

The challenge is to create customer values and competitive advantages to assure benefits and growth. As a result, the starting point of every strategic decision demonstrates the recognition and the analysis of the company’s current situation containing a high variety of parameters. These parameters are generally defined by the company’s influence into internal and external parameters. However, the understanding of the company’s situation is only defined in absolute by analysing parameters and its bilateral dependencies. Therefore, the combination of the company’s internal factors and the external environmental circumstances presents the basis for the strategy development and the resulting organisational marketing goals and application of the marketing instruments.¹

The SWOT analysis is a strategic planning tool used to evaluate the Strengths, Weaknesses, Opportunities and Threats of a company. It provides information that is helpful in matching the company’s resources and capabilities to the competitive environment in which it operates. The resulting SWOT matrix contrasts the results of the internal analysis (strengths and weakness) and the external analysis (opportunities and threats) to define strategic fields of action. That application of a SWOT analysis is therefore instrumental in strategy formulation and selection.

2 Idea behind the SWOT analysis

2.1 Development of the SWOT analysis

“It all began with the corporate planning trend, which seemed to appear first at Du Pont in 1949. By 1960 every Fortune 500 company had a 'corporate planning manager' […] and 'associations of long range corporate planners' had sprung up in both the USA and the UK.”²

This trend following Philip Selznick was the first who relates organisational factors with environmental parameters in general and points out the complex dependencies between them in 1957. In his book “Leadership in administration” he also presents the overall influences on the business itself.³

This first idea of matching internal and external parameters in general was transformed in a more precise method of the SWOT in the 1960’s. At the one hand, from 1960 to 1970 the research team at Stanford Research Institute, consisting of Marion Dosher, Dr. Otis Benepe, Albert Humphrey, Robert Stewart and Birger Lie, can be mentioned. SWOT resulted from SOFT (Satisfactory, Opportunity, Fault and Threat) and the necessity to find out why corporate planning failed. The research was funded by 500 companies to find out what could be done about this failure. “When this was presented to Urick and Orr in 1964 at the Seminar in Long Range Planning at the Dolder Grand in Zurich Switzerland they changed the F to a W and called it SWOT analysis.”⁴ SWOT was promoted by Urick and Orr in Great Britain.⁵ On the other hand, at the same period the Harvard Business School General Management Group, consisting of Edmund P. Learned, C. Roland Christiansen, Kennneth Andrews and William D. Guth, can be mentioned. In this case the SWOT analysis has been developed as part of the Harvard Business Policy and was published in “business policy, text and cases” in 1969.⁶ It becomes clear that the SWOT is not a method that was introduced first by one inventor or a team of inventors. In fact, the SWOT model was developed step by step and grew over time to a powerful technique. According to this, other variations basing on the fundamental idea of the SWOT were developed.

For example, the TOWS matrix (Threats, Opportunities, Weaknesses and Strengths) by Heinz Weihrich is one of the best known modification of the SWOT.⁷ Weihrich presents another approach of strategic planning and the evaluation of the company’s situation. He emphasises not to “[…] ignore important relationships, such as the challenge of overcoming weaknesses [...] to exploit opportunities.”⁸ The TOWS matrix or “situational analysis” provides a conceptual framework to verify a clear strategic context and stresses environmental factors. Several matrices identify high, low or non-existent dependencies of the internal and external parameters.

Another example is the WOTS-UP analysis (Weaknesses, Opportunities, Threats and Strengths - Underlying Planning) by Edmund R. Gray and Larry R. Schmeltzer. They claim that the WOTS-UP analysis should “[…] suggest strategies for the firm and supply information for evaluating alternative strategies.”⁹ This should lead to the choice of an optimal strategic plan.¹⁰

2.2 Placement of the SWOT analysis within the strategic planning process

Today, most companies engage in strategic planning, although the degrees of sophistication and formality vary considerably.¹¹ A strategy means a long-term action plan to achieving the objectives defined.¹² A strategy leads to single measures that are necessary to achieve the objectives. The strategic planning process consists of the following six steps:

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Figure 1: The Strategic Planning Process Source: See www.netmba.com, 09.10.2007.

As you can see on the above-mentioned figure 1, strategy begins with objectives, which naturally follow from a company’s mission that is the reason for being.¹³ Objectives are concrete goals that a company seeks to reach. They should be challenging but achievable and measurable. To devise a strategic plan to achieve these objectives, a company has to analyse its situation. The SWOT analysis is a tool for such a situation analysis. The abbreviation SWOT stands for Strengths, Weaknesses, Opportunities and Threats. The basic assumption of a SWOT analysis is that a company must align internal activities with external realities to be successful. The SWOT analysis provides a framework for analysing strengths and weaknesses (internal), and opportunities and threats (external). It helps to focus on strengths, to minimise weaknesses, and to take the greatest possible advantage of opportunities available.¹⁴ As a result, considering both external and internal factors is essential because they clarify the world in which the business or the unit operates, enabling it to better envision its desired future:¹⁵

illustration not visible in this excerpt

Figure 2: External and Internal Analysis

Source: Harvard Business School Press (2005), chapter 1, p. 3.

The SWOT analysis is therefore a significant tool within the situation analysis to collect all necessary strategic basics of decision-making from different sources.¹⁶ The aim of the SWOT analysis is to evaluate and align a company’s strengths and weaknesses with the opportunities and threats to generate strategic alternatives.

The following figure visualises the placement of the SWOT analysis within the strategic planning process:

illustration not visible in this excerpt

Figure 3: The placement of the SWOT analysis within the strategic planning process

Strengths are capabilities that enable your company or unit to perform well- capabilities that need to be leveraged.¹⁷

Weaknesses are characteristics that prohibit your company or unit from performing well and need to be addressed.¹⁸

Opportunities are trends, forces, events, and ideas that your company or unit can capitalise on.¹⁹

Threats are possible events or forces outside of your control that your company or unit needs to plan for or decide how to mitigate.²⁰

3 Methodology of the SWOT analysis

3.1 Strengths and Weaknesses – Internal business analysis

To create and implement the best strategy for a company, you have to look inward a company and evaluate its strengths and weaknesses.²¹ The internal business analysis imparts a practical sense about what company goals and strategies are most feasible and promising. The comparison of a company’s strengths and weaknesses with the ones of the main competitors results in the identification of areas where the company has a competitive advantage.²²

Internal factors can be influenced by companies. They can be divided in five main parts:²³

- Material resources: e.g. manufacturing facilities, estates, computer hardware, communication network, capital structure, liquid assets²⁴
- Internal immaterial resources: e.g. planning and controlling systems, organisation structure, information systems and processes, licences, contracts, patent rights, trademark rights²⁵
- External immaterial resources: e.g. image and name recognition of product brands and company brands, quality and quantity of the customer base, customer satisfaction and loyalty, reputation of the company²⁶
- Human Resources: e.g. knowledge, motivation and qualification of the employees, corporate behaviour²⁷
- Competencies: e.g. Prime competencies: Quality, supply, marketing, cost reduction, globalisation, core competencies; meta-competencies: flexibility, innovative ability, implementation ability²⁸

There is much to be considered in an internal analysis. The following describes three of the most important areas in which a company’s strengths and weaknesses should be evaluated: core competencies and processes, financial condition, and management and culture.²⁹

Core competencies

A core competence is a potential foundation for any new or revised strategy. The term core competency refers to a company’s expertise or skills in key areas that directly produce superior performance. One of Sony’s core competencies, for example, is its ability to unite microelectronics and innovative design in a stream of useful consumer products. To define the own core competencies does not mean to state what the company makes. Instead, a company has to determine what it is uniquely good at - better than others - and that customers value.³⁰

Attachment 1 gives a detailed overview of core competency requirements.

In some cases, what a company is good at may be a core process. A core process is a key activity that turns inputs into outputs. Core processes are the ones that make or break your business. But being exceptionally good at something does not in itself confer a strategic advantage. A company must be exceptionally good at something valued by customers. It must also be better than others. One way to assess the relative power of a company’s core competencies and core processes is through benchmarking, an objective method for rating one’s own activities against similar activities performed by organisations recognised for best practice. In addition, to providing a method for rating oneself, benchmarking aims to identify opportunities for process improvement.³¹

Ratings can help managers and executives identify strengths and weaknesses in the areas that matter most. These ratings can often be obtained by means of brainstorming among company personnel. But employees’ views may lack objectivity and suffer from incomplete knowledge. So, if a company adopt this method, it should be sure to bring in the voices of salespeople, defectors from rival companies, and consultants who know the industry well. A company should make use of any survey data its market research has conducted on customers and distributors. It should also look to quality and repair incidences compiled by objective third parties to get an unvarnished assessment of where it is strong and weak relative to key competitors.³²

Financial condition

If a new strategy is the point of the internal analysis, a company has better assess its current financial strengths. After all, a new strategy may be costly to implement, especially if it potentially involves the purchase of assets or the acquisition of some other operating company or unit. It is therefore necessary to ask the company’s Chief Financial Officer (CFO) to provide a full report that includes the following:³³

-Cash flows: To what extent are cash flows from current operations sufficient to support a new initiative? A fast-growing company usually gobbles up cash flow from operations and then has to go hunting for outside capital to finance growth. A mature, low-growth company, in contrast, can often finance a new initiative from operating cash flow from current operations.³⁴
- Access to outside capital: If cash flow is insufficient to finance a new strategy, the company will have to look to outside creditors and/or investors. The company’s (1) borrowing capacity, (2) ability to float bonds at a reasonable rate of interest, and (3) in the event of a major initiative, its ability to attract equity capital through a sale of company stock, should be determined.³⁵
- Other scheduled capital spending plans: A company may have already approved other capital spending projects. If it has, those might absorb all available capital. It is important to get a list of these scheduled projects and determine the extent to which they will compete for resources with any new strategy.³⁶
- Hurdle rate of new projects: The hurdle rate is the minimum rate of return expected from new projects that require substantial capital investments. It is usually calculated as the company’s cost of capital plus some expectation of profit.³⁷

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¹ See Meffert (2000), p. 63.

² www.businessballs.com, 02.10.2007.

³ See www.v7n.com, 28.09.2007.

⁴ www.businessballs.com, 02.10.2007.

⁵ See ibid.

⁶ See www.v7n.com, 28.09.2007.

⁷ See Weihrich (1982), p. 54-66.

⁸ Weihrich (1982), p. 1.

⁹ http://64.78.45.9/swot/swot_man.asp, 08.10.2007.

¹⁰ See ibid.

¹¹ See Weihrich (1982), p. 1.

¹² See www.investorwords.com, 08.10.2007.

¹³ See Harvard Business School Press (2005), chapter 1, p. 2.

¹⁴ See Caulfeild (2003), p. 3.

¹⁵ See Harvard Business School Press (2005), chapter 1, p. 3.

¹⁶ See Frey (2002), p. 166.

¹⁷ See Harvard Business School Press (2005), chapter 1, p. 2.

¹⁸ See ibid.

¹⁹ See ibid, p. 3.

²⁰ See ibid.

²¹ See Harvard Business School Press (2005), chapter 2, p. 2.

²² See Meffert (2000), p. 76.

²³ See König (s.a.), s.p.

²⁴ See ibid.

²⁵ See ibid.

²⁶ See ibid.

²⁷ See ibid.

²⁸ See ibid.

²⁹ See Harvard Business School Press (2005), chapter 2, p. 2.

³⁰ See ibid, p. 2-6.

³¹ See ibid, p. 2f.

³² See Harvard Business School Press (2005), chapter 2, p. 2-6.

³³ See ibid, p. 7.

³⁴ See ibid.

³⁵ See ibid.

³⁶ See ibid.

³⁷ See Harvard Business School Press (2005), chapter 2, p. 7f.