Strategic Management > SWOT Analysis

SWOT Analysis

SWOT analysis is a simple framework for generating strategic alternatives from a situation
analysis. It is applicable to either the corporate level or the business unit level and frequently
appears in marketing plans. SWOT (sometimes referred to as TOWS) stands for Strengths,
Weaknesses, Opportunities, and Threats. The SWOT framework was described in the late
1960's by Edmund P. Learned, C. Roland Christiansen, Kenneth Andrews, and William D.
Guth in Business Policy, Text and Cases (Homewood, IL: Irwin, 1969). The General Electric
Growth Council used this form of analysis in the 1980's. Because it concentrates on the issues
that potentially have the most impact, the SWOT analysis is useful when a very limited
amount of time is available to address a complex strategic situation.

The following diagram shows how a SWOT analysis fits into a strategic situation analysis.

Situation Analysis
/ \
Internal Analysis External Analysis
/\ /\
Strengths Weaknesses Opportunities Threats
|
SWOT Profile

The internal and external situation analysis can produce a large amount of information, much
of which may not be highly relevant. The SWOT analysis can serve as an interpretative filter
to reduce the information to a manageable quantity of key issues. The SWOT analysis
classifies the internal aspects of the company as strengths or weaknesses and the external
situational factors as opportunities or threats. Strengths can serve as a foundation for building
a competitive advantage, and weaknesses may hinder it. By understanding these four aspects
of its situation, a firm can better leverage its strengths, correct its weaknesses, capitalize on
golden opportunities, and deter potentially devastating threats.

Internal Analysis

The internal analysis is a comprehensive evaluation of the internal environment's potential

strengths and weaknesses. Factors should be evaluated across the organization in areas such
as:

 Company culture
 Company image
 Organizational structure
 Key staff
 Access to natural resources
  Position on the experience curve
 Operational efficiency
 Operational capacity
 Brand awareness
 Market share
 Financial resources
 Exclusive contracts
 Patents and trade secrets

The SWOT analysis summarizes the internal factors of the firm as a list of strengths and
weaknesses.

External Analysis

An opportunity is the chance to introduce a new product or service that can generate superior
returns. Opportunities can arise when changes occur in the external environment. Many of
these changes can be perceived as threats to the market position of existing products and may
necessitate a change in product specifications or the development of new products in order
for the firm to remain competitive. Changes in the external environment may be related to:

 Customers
 Competitors
 Market trends
 Suppliers
 Partners
 Social changes
 New technology
 Economic environment
 Political and regulatory environment

The last four items in the above list are macro-environmental variables, and are addressed in
a PEST analysis.

The SWOT analysis summarizes the external environmental factors as a list of opportunities
and threats.

SWOT Profile

When the analysis has been completed, a SWOT profile can be generated and used as the
basis of goal setting, strategy formulation, and implementation. The completed SWOT profile
sometimes is arranged as follows:

Strengths Weaknesses
1. 1.
2. 2.
3. 3.
. .
. .
. .
 Opportunities Threats
1. 1.
2. 2.
3. 3.
. .
. .
. .

When formulating strategy, the interaction of the quadrants in the SWOT profile becomes
important. For example, the strengths can be leveraged to pursue opportunities and to avoid
threats, and managers can be alerted to weaknesses that might need to be overcome in order
to successfully pursue opportunities.

Multiple Perspectives Needed

The method used to acquire the inputs to the SWOT matrix will affect the quality of the
analysis. If the information is obtained hastily during a quick interview with the CEO, even
though this one person may have a broad view of the company and industry, the information
would represent a single viewpoint. The quality of the analysis will be improved greatly if
interviews are held with a spectrum of stakeholders such as employees, suppliers, customers,
strategic partners, etc.

SWOT Analysis Limitations

While useful for reducing a large quantity of situational factors into a more manageable
profile, the SWOT framework has a tendency to oversimplify the situation by classifying the
firm's environmental factors into categories in which they may not always fit. The
classification of some factors as strengths or weaknesses, or as opportunities or threats is
somewhat arbitrary. For example, a particular company culture can be either a strength or a
weakness. A technological change can be a either a threat or an opportunity. Perhaps what is
more important than the superficial classification of these factors is the firm's awareness of
them and its development of a strategic plan to use them to its advantage.

Strategic Management > SWOT Analysis

Strategic Management > BCG Matrix

The BCG Growth-Share Matrix

The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce Henderson
of the Boston Consulting Group in the early 1970's. It is based on the observation that a
company's business units can be classified into four categories based on combinations of
market growth and market share relative to the largest competitor, hence the name "growth-
share". Market growth serves as a proxy for industry attractiveness, and relative market share
serves as a proxy for competitive advantage. The growth-share matrix thus maps the business
unit positions within these two important determinants of profitability.

BCG Growth-Share Matrix

This framework assumes that an increase in relative market share will result in an increase in
the generation of cash. This assumption often is true because of the experience curve;
increased relative market share implies that the firm is moving forward on the experience
curve relative to its competitors, thus developing a cost advantage. A second assumption is
that a growing market requires investment in assets to increase capacity and therefore results
in the consumption of cash. Thus the position of a business on the growth-share matrix
provides an indication of its cash generation and its cash consumption.

Henderson reasoned that the cash required by rapidly growing business units could be
obtained from the firm's other business units that were at a more mature stage and generating
significant cash. By investing to become the market share leader in a rapidly growing market,
the business unit could move along the experience curve and develop a cost advantage. From
this reasoning, the BCG Growth-Share Matrix was born.

The four categories are:

 Dogs - Dogs have low market share and a low growth rate and thus neither generate
nor consume a large amount of cash. However, dogs are cash traps because of the
money tied up in a business that has little potential. Such businesses are candidates for
divestiture.
  Question marks - Question marks are growing rapidly and thus consume large
amounts of cash, but because they have low market shares they do not generate much
cash. The result is a large net cash comsumption. A question mark (also known as a
"problem child") has the potential to gain market share and become a star, and
eventually a cash cow when the market growth slows. If the question mark does not
succeed in becoming the market leader, then after perhaps years of cash consumption
it will degenerate into a dog when the market growth declines. Question marks must
be analyzed carefully in order to determine whether they are worth the investment
required to grow market share.
 Stars - Stars generate large amounts of cash because of their strong relative market
share, but also consume large amounts of cash because of their high growth rate;
therefore the cash in each direction approximately nets out. If a star can maintain its
large market share, it will become a cash cow when the market growth rate declines.
The portfolio of a diversified company always should have stars that will become the
next cash cows and ensure future cash generation.
 Cash cows - As leaders in a mature market, cash cows exhibit a return on assets that
is greater than the market growth rate, and thus generate more cash than they
consume. Such business units should be "milked", extracting the profits and investing
as little cash as possible. Cash cows provide the cash required to turn question marks
into market leaders, to cover the administrative costs of the company, to fund research
and development, to service the corporate debt, and to pay dividends to shareholders.
Because the cash cow generates a relatively stable cash flow, its value can be
determined with reasonable accuracy by calculating the present value of its cash
stream using a discounted cash flow analysis.

Under the growth-share matrix model, as an industry matures and its growth rate declines, a
business unit will become either a cash cow or a dog, determined soley by whether it had
become the market leader during the period of high growth.

While originally developed as a model for resource allocation among the various business
units in a corporation, the growth-share matrix also can be used for resource allocation
among products within a single business unit. Its simplicity is its strength - the relative
positions of the firm's entire business portfolio can be displayed in a single diagram.

Limitations

The growth-share matrix once was used widely, but has since faded from popularity as more
comprehensive models have been developed. Some of its weaknesses are:

 Market growth rate is only one factor in industry attractiveness, and relative market
share is only one factor in competitive advantage. The growth-share matrix overlooks
many other factors in these two important determinants of profitability.
 The framework assumes that each business unit is independent of the others. In some
cases, a business unit that is a "dog" may be helping other business units gain a
competitive advantage.
 The matrix depends heavily upon the breadth of the definition of the market. A
business unit may dominate its small niche, but have very low market share in the
overall industry. In such a case, the definition of the market can make the difference
between a dog and a cash cow.
While its importance has diminished, the BCG matrix still can serve as a simple tool for
viewing a corporation's business portfolio at a glance, and may serve as a starting point for
discussing resource allocation among strategic business units.

Strategic Management > BCG Matrix

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Strategic Management > Turnaround Management

Turnaround Management

Times of corporate distress present special strategic management challenges. In such

situations, a firm may be in bankruptcy or nearing bankruptcy. Often turnaround consultants
are brought into the company to devise and execute a plan of corporate renewal, assuming
that the firm has enough potential to make it worth saving.

Before a viable turnaround strategy can be formulated, one must identify the root cause or
causes of the crisis. Frequently encountered causes include:

 Revenue downturn caused by a weak economy

 Overly optimistic sales projections
 Poor strategic choices
 Poor execution of a good strategy
 High operating costs
 High fixed costs that decrease flexibility
 Insufficient resources
 Unsuccessful R&D projects
 Highly successful competitor
  Excessive debt burden
 Inadequate financial controls

While each case is unique, the turnaround process frequently involves the following stages:

1. Management change - consultants may be called in to manage the turnaround of the

firm.
2. Situation analysis - a situation analysis is performed to evaluate the prospects of
survival. Assuming the firm is worth turning around, depending on the root causes of
the distress one or more of the following turnaround strategies may be selected and
presented to the board:
o Change of top management
o Divestment of certain assets
o Reformulation of strategy
o Revenue increase
o Cost reduction
o Strategic acquisitions

3. Emergency action plan - achieve positive cash flow as soon as possible by

eliminating departments, reducing staff, etc.
4. Business restructuring - once positive cash flow is achieved, the strategic plan is
implemented, improving continuing operations, adjusting the product mix and
repositioning products if necessary. The management team begins to focus on
achieving sustained profitability.
5. Return to normalcy - the company becomes profitable and the changes are
internalized. Employees regain confidence in the firm and emphasis is placed on
growing the restructured business while maintaining a strong balance sheet.

Abandonment Strategy

In some cases the prospects of the firm may be too bleak to continue as an ongoing operation
and an exit strategy may be appropriate. Different strategies may be pursued that vary in their
immediacy. An immediate abandonment strategy exits the market by immediately liquidating
or selling to another firm. In other situations, a harvest strategy is appropriate by which the
firm plays the end-game, maximizing near-term cash flows at the expense of market position.

Strategic Management > Turnaround Management

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This web site is operated by the
Internet Center for Management and Business Administration, Inc.