Analyzing a company inside and out
Consider the following typical business situations:
? A small company has applied to a bank for financing an expansion ? An entrepreneur has applied to an investment house for venture capital ? An investment advisor evaluates whether or not to invest in a company's stock ? A firm is looking to diversify by purchasing several small companies ? A firm seeks to strengthen its position by purchasing a supplier of its raw material ? A firm is downsizing and wants to unload one of its subsidiaries
Each of these situations requires a manager to evaluate the attractiveness of a company for a specific purpose. Sizing up an organization's internal strengths and weakness and its external opportunities and threats is commonly know as SWOT analysis (strengths, weakness,
opportunities, and threats), an easy-to-use technique for getting a quick overview of a firm's strategic situation.
SWOT analysis tries to produce a good fit between a company's internal capability (its strengths and weaknesses) and its external situation (reflected in party by its opportunities and threats). In other words, a company should (a) exploit its opportunities and strengths while (b) neutralizing its threats and (c) avoiding (or correcting) its weaknesses.
INTERNAL STRENGTHS AND WEAKNESSES
A strength is something a company is good at doing or a characteristic that gives it an important capability. A strength can be a skill, important expertise, a valuable organization resource or competitive edge, or an achievement that puts the company in a position of market advantage like having a better product, stronger name recognition, superior technology, or better customer service).
A weakness is something a company lacks or does poorly (in comparison to others) or a
condition that puts it at a disadvantage. A weakness may or may not make a company
competitively vulnerable, depending on how much the weakness matters in the market place.
In practice, many organizations have a difficult time focusing on weaknesses, in part because managers are often reluctant to admit that they do not poses all the kills and capabilities needed. Evaluating weaknesses also calls into question the judgment of managers who chose the
organization's mission in the first place and who failed to invest in the skills and capabilities needed to accomplish it.
EXTERNAL OPPORTUNITIES AND THREATS
Many factors are beyond the ability of an individual company to control. Factors such as interest
rates, government regulations, new technology, or even a competitor's fortunes or misfortunes
can affect a company's ability to prosper. Depending on industry conditions, opportunities can
be plentiful or scarce and can rage from wildly attractive (an absolute "must" to pursue) to
marginally interesting (low on the company's list of strategic priorities).
In appraising industry opportunities and ranking their attractiveness, managers have to guard
against equating industry opportunities with company opportunities. Not every company in an
industry is well positioned to pursue each opportunity that exits in the industry. A company's
strengths, weaknesses, and competitive capabilities make it better suited to pursuing some
industry opportunities than others.
Often, certain factors in a company's external environment pose threats to its well being. Threats
can stem from the emergence of cheaper technologies, rival's introduction of new or better
products, the entry of low-cost foreign competitors into a company's market, new regulations that
are more burdensome to a company than to its competitors, vulnerability to a rise in interest rates,
the potential of a hostile takeover, unfavorable demographic shifts, adverse changes in foreign
exchange rates, political upheaval in a foreign country where the company has facilities, and the
MAKING SENSE OF IT ALL
SWOT analysis is more than an exercise in making four lists. The important part of SWOT
analysis involves evaluating a company's strengths, weaknesses, opportunities, and threats, and drawing conclusions about the attractiveness of the company's situation. For example, what good is expertise in buggy-whip production (an internal strength) if automobiles are looming on
the horizon (an external threat)? How serious a weakness is a cable TV company's poor
advertising skills (an internal weakness) if the government plans to grant it a monopoly (an
It is only by factoring an external opportunities and threats that internal strengths and weaknesses
takes on their full meaning. Some strengths are more important than others because they matter
more in determining performance, in competing successfully, and in forming a powerful strategy.
Likewise, some internal weaknesses can prove fatal, while others are inconsequential or easily
remedied. Sizing up a company's position is akin to conducting a strategic balance sheet, where
strengths and opportunities represent competitive assets and weaknesses and threats represent
Sources: Gregory G. Dess and Alex Miller, Strategic Management (New York: McGraw-Hilll, 1993): 361-364Ricky W. Grifin, Management, th5 ed. (Boston: Houghton Mifflin, 1996): 202-207; Vernn McGinnis, "The Mission Statement: A Key Step in Strategic Planning," Business 31, thno. 6 (November-December 1981): 41; Arthur A. Thompson, Jr., and A.J. Strickland, III, Strategic Management: Concepts and Cases, 8 ed. (Chicago: Irwin, 1995): 92-95.
Factors to Consider in SWOT Analysis
Internal Strengths External Opportunities Acknowledged market leader Ability to grow rapidly because of increases Adequate financial resources in market demand Better manufacturing capability Ability to serve additional customers, Cost advantages expand into new markets, or expand product Economies of scale line (diversification) Effective procedures for recruiting, training, Complacency among rival firms and promoting employees Declining trade barriers in attractive foreign Good long-term relationships with reliable markets supplier Decreasing costs of labor, supplies, Good public relations equipment, and/or funds Innovative sales promotion and advertising Deregulation (or increased regulation) Product-innovation skills Emerging technologies Prompt attention to customer complaints Favorable demographic changes (such as Proven management age, income, education, changing tastes and Stable and trained work force attitudes, and amount of leisure time) Superior technological skills Politically stale international political Well-thought-of by customers situation Other strengths? Other opportunities?
Internal Weaknesses External Threats Excessive dependence on a single supplier Adverse demographic changes Inability of the organizational culture to Adverse shifts in foreign exchange rates and foster innovation and creativity trade policies Inability to raise additional funds Changing buyer needs and tastes Inadequate financing Costly regulatory requirements Inadequate information support for making Growing bargaining power of customers or decisions suppliers Inadequate R & D Increased domestic competition Internal operating problems Increasing costs of labor, supplies, Low profitability equipment, and or funds Narrow product line International unrest No clear strategic direction Market penetration by lower-cost foreign Obsolete facilities or equipment competitors Poor relationships with the media Rising sales of substitute products Poor track record in implementing strategy Slower market growth Weak managerial talent Social or cultural changes that depress Weak market image demand Other weaknesses Vulnerability to recession and business cycles