Theory Tutorial No.05
SWOT Analysis
Content
1. Introduction
2. SWOT Analysis
3. TOWS Matrix
4. Critical Success Factors
5. Key Performance Indicators
6. Summary
7. Questions
1. Introduction
In this very short chapter, we bring all the work we have done so far together; this is the last stage
before we get into the phase of generating all the different strategies we can and then deciding
which we actually follow.
2. SWOT Analysis
In addition to carrying out a study of the broad industry environment and the industry and
competition in the markets where the organisation operates, the next stage in strategic position
analysis is to assess the strengths and weaknesses of the organisation's resources and competences,
and the threats and opportunities that exist in the organisation's environment. This approach to
position analysis is called SWOT analysis.
SWOT analysis is simply an analysis of the results of environmental scanning, and the review of
resources and competences, to identify:
• In what areas is the organization strong, and where is it weak?
• What are the main threats to the organization and its business, and what business opportunities
might exist?
Definition: SWOT Analysis
SWOT analysis is the analysis of the strengths and weaknesses of an organization, and also the
threats and opportunities it faces in its environment.
In its simplest form, SWOT analysis can be carried out by listing important strengths, Weaknesses,
opportunities and threats in a 2×2 matrix, as follows.
1
SWOT Analysis
Resources & Competences
Strengths
Weaknesses
Environmental Factors
Opportunities
Threats
Having identified strengths weaknesses, opportunities and threats, the organization can take
strategic planning to the next stage:
• What strategic options are available to exploit the strengths of the organization in order to achieve
its objectives?
• What strategic options should be considered to remedy the major weaknesses of the organization
in order to improve its chances of achieving its objectives?
• What strategic options are available to exploit opportunities in the market place?
• What strategic options should be considered to protect the organization against the major threats
it faces?
Strategic choices are discussed in more detail in the next chapter.
3. The TOWS matrix
Weihrich (1982), one of the earliest writers on corporate appraisal, originally spoke in terms of a
TOWS matrix in order to emphasize the importance of threats and opportunities. This is
therefore an inherently positioning approach to strategy. A further important element of
Weihrich's discussion was his categorization of strategic options:
•
SO strategies employ strengths to seize opportunities
•
ST strategies employ strengths to counter or avoid threats
•
WO strategies address weaknesses so as to be able to exploit opportunities
•
WT strategies are defensive, aiming to avoid threats and the impact of weaknesses
2
One useful impact of this analysis is that the four groups of strategies tend to relate well to
different time horizons. SO strategies may be expected to produce good short-term results, while
WO strategies are likely to take much longer to show results. ST and WT strategies are more
probably relevant to the medium term.
This consideration of time horizon may be linked to the overall resource picture: SO strategies
can be profitable in the short term, generating the cash needed for investment in WO strategies,
improving current areas of weakness so that further opportunities may be seized. ST and WT
strategies are likely to be more or less resource-neutral, but care must be taken to achieve an overall
balance.
It is important to remember the TOWS matrix when considering the strategic options available to
an organisation. We will look at these strategic options later in this Study Manual.
Question: Strategic Gap
Strategic opportunities may take the form of strategic gaps. These are potentially profitable aspects
of the competitive environment that are not currently being exploited by rivals. State three
examples of how strategic opportunities may arise.
Answer
Here are four suggestions.
(a) Potential substitutes for existing products might be created. This is largely a technology-based
opportunity.
(b) It may be possible to target different strategic customers. In the case of consumer goods, for
example, the growth in online selling via the internet means that producers are able to target
different types of customer – the end consumer, rather than retailers or other distributors of their
products.
(c) There may be potential to market complementary products. For example, capital goods
suppliers (such as car sales firms) routinely offer credit services to assist the customer to buy.
Some sellers of domestic equipment such as washing machines and cookers may offer after-sales
maintenance services for the capital goods item.
(d) New market segments may be identified that have commercial potential, though there may be
a need to adapt the product to meet the needs of customers in the new targeted segment.
3
4. Critical success factors (CSFs)
A formal strategic planning process involves setting objectives at SBU level and subsidiary
objectives at operational or functional level. To achieve a strategic objective, there will be one or
two factors critical to the success of the strategy. These are known as critical success factors or
CSFs.
Critical success factors (CSFs) are those actions that must be performed well in order for the goals
and objectives established by an organization to be met successfully.
4.1: Definitions of CSFs
There are many definitions of CSFs. One is given above, another is provided below.
Johnson, Scholes and Whittington (JS&W) define CSFs as: 'those components of strategy where
the organization must excel to outperform competition. These are underpinned by competences
which ensure this success'.
The consistent factor across these and other definitions is that to 'qualify' as a CSF the item must
be essential to an organization achieving success. Common examples of CSFs include product
quality, brand awareness, customer satisfaction and employee satisfaction.
Remember though that the environment, and an organization’s goals, changes over time.
Therefore, an organization’s critical success factors are also likely to change over time.
4.2: Using CSFs
JS&W describe a six stage process for using CSFs for operational or functional strategies.
Using Csfs
Identify the CSFs
Identify the underlying
competences
Check for competitive
advantage
Develop performance
standards for each CSF
Review competitors
Comments
Identify the CSFs for the process under review. Try to restrict the
number of CSFs to six or less. If there are too many success factors,
it is unlikely that they will all be 'critical'.
Identify the underlying competences required to gain a competitive
advantage in each of the CSFs.
Ensure the competences of the organization are sufficient to
generate the required competitive advantage.
Key performance indicators (KPIs) are described later.
Ensure these standards cannot be matched by competitors. (If they
can be matched by competitors they will not form the basis of
Competitive advantage.)
Monitor competitors when Assess the impact on the CSFs of any response competitors may
the chosen strategy is
make.
implemented
4
4.3: Example: CSFs
For example, the objective of a SBU may be to increase sales of its products over the next five
years. Factors that are critical to achieving this objective may be identified as:
• Effective selling by the company's sales team
• Improving the quality of products
• Producing a regular stream of innovative new products
Unless each of these critical requirements is achieved, the objective of increasing sales might fail.
Consequently, it is critically important that targets for each of these critical factors should be met.
4.4: Identifying CSFs
The critical success factors for an organization’s strategy will depend on:
• The nature of the organization and its markets
• The objectives that it has identified at SBU or operational/functional level
• Its strengths, weaknesses, opportunities and threats
CSFs therefore vary between organizations and situations.
5. Key performance indicators
The importance of this definition is that it links to the idea of performance. If an organization has
identified the components of its strategy where it needs to outperform the competition, it also needs
some way of being able to measure its performance in those areas.
These key performance measures, known as key performance indicators (KPIs), are a key part of
the control system for reviewing how successfully a strategy has been implemented and how well
an organization is performing.
There should be a key performance indicator (or a small number of KPIs) for every CSF.
Definition:
Key performance indicator (KPI): an important measure of a critically important aspect
performance, for which a target is set and actual performance, is measured.
Having identified which areas an organization needs to perform well in, its performance in those
areas also needs to be measured. Therefore, one or more key performance indicators (KPIs)
have to be established for each CSF. The purpose of KPIs is to enable management to measure
and control progress in each of the CSFs.
5
Critical success factors are not limited to financial factors. Organizations have to perform well
across a range of activities to succeed strategically. Therefore CSFs and KPIs should focus on key
value chain processes and supply chain processes, as well as on financial performance.
Some possible KPIs are outlined below.
Sphere of activity
Marketing and
sales
Critical Success factor
Sales growth
Production
Reduce production costs
Logistics
Reliable delivery service
Key performance Indicators
Sales volume
Market share
Sales per sales representative
Number of new accounts
Capacity utilization
Level of defects
% of deliveries on time
It is important to appreciate the relationship between, and the difference between, objectives,
CSFs and KPIs.
Objectives, CSFS, and KPIs and targets
Objective
CSF
KPI
Target
An aim that the organization wants to achieve within the strategic planning
period.
A factor that will be critical to success in achieving that objective.
A measure for the CSF and comparing actual results against the strategic
requirement and target. KPIs give a measurable quantity to a CSF.
A measure for a KPI that is set as a target for achievement within the strategic
business plan.
6
6. Summary
After carrying out a study of the broad industry environment and competition in the markets
where the organisation operates, the next stage in strategic position analysis is to assess the
strengths and weaknesses of the organisation's resources and competences, and the threats and
opportunities that exist in the organisation's environment. This approach to position analysis is
called SWOT analysis.
A formal strategic planning process involves setting objectives at SBU level and subsidiary
objectives at operational or functional level. To achieve a strategic objective, there will be a few
factors critical to the success of the strategy. These are known as critical success factors or CSFs.
Critical success factors (CSFs) are those actions that must be performed well in order for the
goals and objectives established by an organisation to be met successfully.
The importance of the definition of KPI is that it links to the idea of performance. If an
organisation has identified the components of its strategy where it needs to outperform the
competition (ie a CSF), it also needs some way of being able to measure its performance in those
areas.
These key performance measures, known as key performance indicators (KPIs), are a key part
of the control system for reviewing how successfully a strategy has been implemented and how
well an organisation is performing.
There should be a key performance indicator (or a small number of KPI’s) for every CSF.
7
7. Questions
01) A manufacturing company has identified that good customer service is a CSF;
which one of the following would be a suitable KPI?
A To improve customer quality by 5% over the next year
B To make customers happier over the next six months
C To reduce time it takes to answer a query
D Over the next six months, to reduce the number of complaints to less than fifty per week
02) Which of the following might you expect to find in a TOWS matrix analysis
A SO
B WS
C OT
D WT
03) A company is carrying out a SWOT analysis. Under which heading would an overdraft appear
where the amount owing is close to the overdraft limit?
04) Which of the following arise when a company can take advantage of conditions in its
environment to formulate and implement strategies that enable it to become more profitable?
a) Strengths
b) Weaknesses
c) Opportunities
d) Threats
05) The merging of the analyses of internal and external factors influencing the organization’s
strategy is known as ____________.
a) complete studies
b) organizational behavior and theory
c) definitional analysis
d) SWOT analysis
06) The acronym SWOT stands for
a) Special Weapons for Operations Timeliness
b) Services, Worldwide Optimization, and Transport
c) Strengths Worldwide Overcome Threats
d) Strengths, Weakness, opportunity, threats
8
Answers
1) The correct answer is D. It seems to follow the SMART rules.
A: What is ‘customer quality’?
B: What is happiness? Customer satisfaction might be acceptable as it is more specific
C starts off well; ‘time to answer a query’ is something you could quantify, but then it tails off. If
it has said that it would be reduced to say, two days, then it would have been fine.
2) The correct answers are A and D; remember, it has to be one of the internal elements (strengths
and weaknesses) and one of the external elements (opportunities and threats).
3) Weakness
If you have cash available, that is always a strength. A shortage of cash is always a weakness.
04) C
05) D
06) D
7.1: Past Paper Questions Analysis
Area
SWOT and TOWS
Question Numbers
2008-April-Question No.01
2008-april-Question no.02
2011-June-Question No.01/part A
2011-June-Question No.02/Part b
2012-June-Question No.03
2012-December-Question No.1/A
2013-June-Question No.01-Part A
2016-June-Question No.07(b)
2017-June-Question No.05 (a)
2018-December-Question No.07(a)
2006-April-Question No.04-i-b
2008-April-Question No.02
2013-June-Question No.02/Part d
2013-December-Question No.02/part b
2015-June-Question No.05
CSFs and KPIs
127
9