___ Swot Analysis ee Learning Objectives After studying this chapter, you should be able to: * Explain the meaning of SWOT analysis. * Outline the SWOT framework * Discuss the importance of SWOT analysis in an organization Identify the sources of data for SWOT analysis = Explain the step-by-step procedure for analysis * Visualize what should be the steps that need to be followed after the completion of SWOT analysis tance of SWOT Analysis in Organizations of Data for SWOT Analysis y-Step Procedure for Analysis ults for the Choice of StrategySWOT Analysis prepares the groundwork for matching the firm's strategy both to the external market circumstances and its internal resources and competitive capabilities, SWOT stands for strengths, weaknesses ‘opportunities ‘and tnreats Within all the internal and external data relevant to the organization are four categories of information: strengths, weaknesses, opportunities and threats. Strategic Management / Dr. MA Mannan vAn organization needs to have a © overall situations. This requir organization. One approach Analysis’. SWOT analysis is practically. internal and external situations. Business situation analysis’ for evaluating capabilities as well as the environ the groundwork for matching the external market circumstances and competitive capabilities. Insightful precondition for identifying the needs to address and for tailoring strategy and competitive capabilities as well as to in conditions. a2 1 swoT Framework ‘SWOT stands for strengths, weakne is already said, strengths and we: ‘and opportunities _and_threats are a aryanization. In SWOT analysis, the data framework structure looks jike the following: « iikextheNollowing-— strategic issues comprehensive view of its es a ‘Situation Analysis’ of the to. situation analysis is ‘SWOT a way to analyze a firm's organizations undertake the firm's resources and ‘mental influences. It prepares firm's strategy both to the its internal resources and situation analysis is a that management to company resources dustry and competitive sses, opportunities and threats aknesses_are intemal S, external factors of an Data sources Negative Factors Internal data STRENGTHS WEAKNESSES _ External data OPPORTUNITIES, THREATS Internal data relate to information concerning internal operations of the organization. These include financial structure, personnel characteristics, organizational structure, production issues, and so on. External data are ‘external’ in organization, They include environmental characteristics such as legal requirements, political circumstances, economic scenario competitors’ strategies and tactics, cultural and social patterns, demographic trends, technological progress, etc. Within all the internal and external data relevant to the organization are four categories of information: internal strengths, internal weaknesses external opportunities and external threats. Have a look at Figure 7.1. You will find that the strategists in a0 organization assess the organization's internal strengths and weaknesses, and evaluate its environmental opportunities and threats. SWOT analysis facilitates a firm to formulate appropriate sicatenien in the context 6 the firm's vision and mission. The EiEeoeR Del in accomplishing the firm's vision/mission bY exploting its strengths and opportunities as well as by overcoming eats and correcting/avoiding the weaknesses. their relationship to theCHAPTER 7 SWOT Analysis Figure 7.1 presents a scenario that shows how SWOT analysis leads to strategy formulation. You can see in the figure that the vision of a company sets the ground for developing a mission statement. In order for the managers to understand the company situations, they undertake an analysis of company's strengths, weaknesses, opportunities and threats on the basis of internal and extemal data respectively. Then, based on the SWOT results, they formulate appropriate strategies to support the mission through exploiting opportunities and strengths, neutralizing the threats identified in the external environment, and overcoming the weaknesses. VISION ion’s aspirations for the future MISSION n’s fundamental purpose SWOT ANALY: Undertaken to develop appropriate strate} Internal Analysis External Analysis 2 me i Strengths Weaknesses Opportunities Threats APPROPRIATE STRATEGIES Formulated to support the organization's mission through exploiting opportunities and strengths, neutralizing threats and overcoming weaknesses SWOT analysis leads to strategy formulationswor analysis reveals the company’s actual situation regarding resources, capabilities, external opportunities and external threats. Internat _sources of data. 7£Amportance of SWOT Analysis in Organizations 3 lyzing_an organiza geful tool for ana ae Qe ihe and weaknesses of the ogee ation with the extemy Spportunilies and threats. It provides 2 good overview of wheiner 5 Gompany’s- condition Is healthy or unhealthy. It reveals the company’s actual situation regarding resources, | Capabities i |. threats lps to dray external opportunities and external = ow tlusions about (a) how strategy can De matched to both it, co oetees and market opportunities; and (b) how weaknesses can Ie corrected and threats can be guarded against. More specifically, SWOT analysis is important for a company fo, the following reasons: ‘J. It evaluates strengths, weaknesses, opportunities and threats of the company and helps in drawing conclusions about the attractiveness of its situation. 2. It points out the need for strategic action. 3. The strengths identified through SWOT Analysis can be used as the cornerstones of strategy and the basis on which to build competitive advantage. 4, It enables the company to build its strategy around what the company does best on the basis of the strengths and should avoid strategies whose success depends heavily on areas where the company is weak. 4% The results of SWOT analysis are helpful in correcting competitive weaknesses that make the company vulnerable & Based on the opportunities identified through SWOT analysis mangers can aim their strategies at pursuing opportunities well suited to the company's capabilities and provide a defense against external threats. V3 Sources of Data for SWOT Analysis As has already been said, SWOT is conducted for analyzing the external and internal environmental factors that affect a company’s business activities. Thus, the sources of data for SWOT analys® will differ based on the environmental factors. The sources of 42 for external factors will never be same for different industries However, there are some common sources which a company ™) explore: the | Inlemet, trade associations like chambers exhibitions, f industry, export promotion bureaus, trade fairs and ibitions, foreign trade missions/consulates, board of invest" concemed ministries, other business units in the same industry research organizations, consulting firms, market survey fi adCHAPTER 7 SWOT Analysis = 1 independent think tanks like the Center for Policy Di The intemal sources of data include personal files of employees production records, sales reports, inventory registers, marketing information, accounting information, Management information systems, various financial statements, annual reports ol the organization, own publications and reports, and any other kind of logue (CPD) records the organization maintains Personal files Production records ales records/ purchase records Marketing reports Inventory SOURCES OF DATA FOR sSwoT ANALYSIS EXTERNAL SOURCES Internet ‘ade associations Export promotion bui ‘Trade fairs and exhibit Board of Investment Concerned mi Research organ ns, ete Figure 7.2: Various sources of data for use in SWOT analysis 7 4 SWOT: A Step-by-Step Procedure for Analysis There is no hard and fast rule regarding the sequence of steps to. swor analysis be followed in SWOT analysis. However, while undertaking SWOT involves analysis of analysis of your organization you may follow the following major external steps (see Figure 7.3): environment, 7 a industry and *. Analysis of the general external environment competition; Analysis of the (external) industry environment Gantncation or ication of the external opportunities and threats onatnenee ed is of internal environment and identification of the threats, strengths and weaknesses analysis of internal nt of the attractiveness of the organization's environment; and and drawing conclusions regarding the need for drawing conclusions. actionSS jannan Strategic Management / Dr. MA Mann ale SWOT ANALYSIS: \___ 1. Analyze general environment — C* 2. Analyze industry environment 3. Identify opportunities and threats from both general and industry environments ———— 4. Analyze internal environment ee 5. Conclude SWOT analysis and draw strategic conclusions Rinne ‘gure: 7.3: The steps associated with SWOT analysis: eeCHAPTER 7 SWOT Analysis, 93 We now discuss the details of the steps involved in the SWOT analysis. Step-1: Analysis of General External Environment + Identify the key political, economic, social-cultural, demographic, natural/ecological and technological forces that are most likely to affect the organization * Monitor information on the environmental forces * Select the methods to be used in forecasting these forces. * Forecast the trends in these forces. + Identify the market opportunities on the basis of the forecasts of these forces. Identifying the threats to the organization's future profitability Step-2: Analysis of Industry Environment + Analyze the industry structure + Analyze the nature of competition. + Identify and analyze individual competitors + Identify the key industry-related opportunities and threats Step-3: Identification of External Opportunities and Threats External analysis will provide you information for identification of | One method of threats and opportunities in the external environment. It is the Performing an responsibility of the management to ensure that information opportunity derived from environmental scanning is summarized and srciiiyeet analyzed to determine what characterizes these threats and fiat. threats. One method of performing an opportunity and threat Categorive the analysis is simply to categorize the environmental factors in ¢nvironmental terms of opportunity potential and threat potential. Then factors in terms management should summarize the emerging implications for of opportunity future organizational direction. A sample opportunity and threat potential and analysis for Comilla Foundry (producer of tubewells) is threat presented in the Table 7.4. potential Table 7.4: A sample format for identification of opportunities and threats ENVIRONMENTAL FACTORS OPPORTUNITIES THREATS General Environment 1. Decreasing disposable income of customers a 2. Society is getting more comfortable with using cheaper tubewells a (industry) Environment Ip (one competitor) has introduced new product a ss provided by TARA Pump is superiorga The skills and capabilitios thal serve as enablers for strategy formulation and implementation are to be listed as strengths. Management / Dr. M A Mannan Step-4: Analysis of Internal Environment + Identify the areas for analysis (such as financial position Product position, etc.) * Analyze each of the selected areas. * “Identifying organization's internal strengths and resource capabilities + Identifying organization's intern deficiencies. * Evaluate the strengths and weaknesses for their strategy. making implications. ial weaknesses and resource After analyzing the internal environment, the next step is to Identity the internal strengths and weaknesses. The information derived from the internal analysis would provide you the basis for identification of strengths and weaknesses of your organization. While identifying the strengths and weaknesses, you need to bear in mind that the skills and capabilities which are likely to serve as enablers for strategy formulation and implementation are to be listed as strengths. Those which are not enablers should be listed as weaknesses. You can use the example-based format, as shown in Table 7.5, for identification and listing of strengths and weaknesses. Table 7.5: A sample format for identification of internal strengths and weaknesses INTERNAL ENVIRONMENTAL FACTORS STRENGTHS WEAKNESSES 1. Comilla Foundry is hiring more professional sales executives and managers a 2. Comilla Foundry has high employee turnover a 3, The firm has not yet introduced MIS, which hampers timely use of information for decision making a 4. The firm often suffers from working capital deficiency a 5. The firm is purchasing raw materials at a relatively cheaper prices a Step-5: Concluding SWOT Analysis and Drawing Conclusions * Assess the attractiveness of organization's situation on the baste of identified strengths, weaknesses, opportunities and reats. * Draw conclusions regarding the need for strategic action. A format for comprehensive SWOT analysis with examples from a bank is given in Table 7.6 for your better understanding of how to write down statements for strengths, i iio, gown gths, weaknesses, opportunitiesCHAPTER 7 SWOT Analysis a 95 Table 7.6: An example-based format for SWOT analysis (information used from a private-sector commercial bank) Two non-professional directors create obstacles in effective decision- making * Ten out of 54 branches are not making profits. Overhead expenditures are high. + Top managers are visionary. + Ithas adequate physical facilities. + Ithas sound organization structure showing clear reporting relationships. STERNAL TH Depression in the economy. Slow growth in industrialization Many firms are increasingly becoming sick Undue political pressures for granting loans to financially unviable projects. * Freedom granted by Bangladesh Bank to charge discriminatory interest rates on various accounts. * People’s shift in attitudes toward hire purchase through bank loans and in using credit cards for regular shopping 7.5 Use of SWOT Results for the Choice of Strategy Strategy-makers can use the results of SWOT analysis for the choice of strategy. In successful companies, the strategists gi-aiegy. systematically compare the key internal strengths and weaknesses manors’ can with the key external opportunities and threats. They identify, based use the results on their understanding of opportunities and threats, realistic options of SWOT from which to choose an appropriate strategy. Again, based on the analysis for the examination of the organization's strengths and weaknesses, the _ choice of strategists try to understand the overall internal capability. They strategy. narrow down the choice of strategy alternatives and selection of strategy depending on their understanding of strengths and weaknesses. They identify the distinctive competences and critical weaknesses, and then compare them with the market's determinants of success. The whole exercise serves as a useful framework for making the best strategic choice. SWOT provides a When systematically done, SWOT analysis covers all aspects of an Gynamic organization. Thus, it provides a dynamic framework for choosing a framework for strategy. Strengths, weaknesses, opportunities and threats point to choosing a the need for strategic action. The results of the analysis provide _ strategy. to the strategists/managers in a business-firm need to: actions to protect/improve the firm's strengths; matched with resource capabilities; external threats to the firm's96 Long-range objectives ‘Specify the results desired in the organization's mission Strategic Management / Dr. MA Mannan As a strategist, you need to keep in mind that when your firm has many opportunities, it may also face some key threats in its external environment. Similarly, side by side with severa) weaknesses, your firm might have some unique strengths relative to the competitors. That means, SWOT analysis would simply help you'to visualize the overall position of your firm in terms of market conditions. And this would enable you to identify appropriate strategy for the market 7.6 Concluding Remarks: What Next to SWOT Analysis? From the results of SWOT analysis, mangers/strategy-makers by now have understood the situations of the organization in the context of industry and the general external environment as well as the internal conditions of the firm. They have also adequate information for setting organizational objectives. Based on the information and their understanding of the environment, they should now be in a position to decide about the firm's objectives, both long-term and short-term. As stated earlier, long-range objectives specify the results desired in the organization's mission. They normally extend beydnd current fiscal year. Short-range objectives (one year or less) should follow logically from long-range objectives Once the long-range objectives have been determined, the stage has now been set for formulating appropriate competitive strategies. The strategies must be formulated keeping in view the realities of the overall environment so that the predetermined objectives can be achieved effectively and efficiently. The next chapter deals with the setting of objectives that would form the basis for strategy formulation. TERMS USED Value chain Primary activities Support activities Strength Weakness Opportunity Threat sworee [—~] a - Setting Objectives: The Initial Stage for Strategy Formulation “Establishing objectives is generally a political process, characterized by bargaining and conflict coupled with rational analysis.” ~ Peter Fitzroy and James. Hulbert’ Learning Objectives After studying this chapter, you should be able to: * Understand why setting. objective is the first-task, after SWOT analysis, in formulating strategy * Explain the meaning of objective with examples * Classify the organizational objectives = Discuss the necessity of an organization's having objectives = State the approaches to objective setting and give arguments in favor of or against Top-Down or Bottom-Up approach to objective setting98 . eeenn or Ame” Chapter Outline 8.1 Introduction uve 8.2 Meaning and Nature of Object! 8.3 Classification of ORT 8.4 Necessity of Objective 10 8° Approaches to Objective Setting Approach? Strategy acl ong-Term objectives and Competitive 8.7 Concluding Remarks p Down or Bottom Up 8.1 Introduction Once the strategic analysis of the firm has been cornpleted, the Top managers _strategy-makers’ responsibilty is now to take initiative for settny oe Objectives. These objectives would form the basis for formulating objectives with strategy. As stated earlier, there can be no strategy withos nalteroen a objective. In fact, strategic analysis provides adequate information secon © for setting objectives for the firm, Strategy-makers review the lower levels of information and uge them for establishing (or setting) objectives managers. Choosing appropriate objectives requires a deep understanding « the external environment and the opportunities it presents, togethe with an analysis of the competences of the firm, the vision ané values of the firm, and the demands of financial markets.* Setting objective is a direction-hetting task. A mission statement provides an overall goal for the organization but does not enable managers to go for action. Me ede therefore need to convert the mission into specific’ perfornfance objectives. Setting objectives An objective is@ converts vision and mission into specific performance outcomes ee Objectives must be set for financial performance and stratexe achieve a Performance for success. To. managers,.set.broadar objective manmuretio with longer time horizons than do successively lower levels % result withina ‘Managers. Lower level managers set objectives based on the given time frame. middle-level objectives, In effect, lower-level objectives provide the means for achieving middle-level objectives A in oa middie level objectives provid mediee provide the means for achieving top-le 8.2 Meaning and Nature of Objective An objective describes the end results to be achieved by the firm. refers to measurable targets. An objective is a foci Sommitment to achieve a measurable result within a given time frame. A’ objective must clearly show what the cree wants to achiev? a “Abid. p. 168,CHAPTERS etting Objectives and when it wants to achieve it. An objective needs to be written in quantitative, measurable and concrete terms. A well-formulated objective must be SMART, where S stands for specific, M for measurable, A for achievable (or ‘Appropriate’— appropriate to resources, environment and technology of the company), R for realistic, and T for time-bound. Examples of SMART Objectives: 1. To increase the sales of all products of the company by 5% during the year 2014. 2. To reduce overhead costs of the company by Tk. 100,000.00 during the next six months. 3. To achieve 20% increase in the sales of brand-X by December 31 2014 4. To increase unit sales of ‘5M Family Software-APANJON’ in Chittagong area by 5000 units by June 30, 2015. Some writers are of the view that there should be a distinction between ‘goal’ and ‘objective."? However, managers generally prefer to use both the terms interchangeably. The above are the examples of operating objectives, used by operational mangers and mid-level mangers for implementing their plans with specific targets in mind, Ricky W. Griffin, in his famous management book, viewed that ‘operating goals’ are also termed as _ ‘obj : meng In strategic management, we are more concerned with strategic performance objectives and financial performance objectives. Strategic performance objectives are concerned with sustaining being concerned with the nd “objective” are distinguished, goal is scen as lerm end-points that the organization secks to achicve. And, objective ts scen as euiting out the steps along the way to achieve the goal. Formulation of stratcgy usually Marts with the broad, wider vision, and from there moves to the specific. The move is ‘made from the mission through to goals to objectives. The focus in the move shifts from ‘broad to the narrow and detailed. Or we can say that the move flows from the strategic 10 the operational, 99 Ricky W GriffinStrategic performance objectives are concerned with sustaining and improving company’s long: term market position and competitiveness Financial performance objectives are related to achieving financial gains for having a ‘strong financial standing. Short-term means ‘one year or less than one year. Long-term means more than one year. ta ait Strategic Management / Dr. MA Mannan and improving company's long-term market _ position competitiveness. On the other hand, financial Performan, objectives are related to achieving financial gains for having’ Below are some examples of straié strong financial standing performance objectives and financial performance objectives * Examples of Strategic Performance Objectives + Alonger market share * Higher product quality Lower costs relative to key competitors Superior customer service Quicker on time delivery than competitors Increased goodwill in the industry Exceeding customer satisfaction Wider geographic coverage Achieving |SO certificate Increased ability to compete in international markets Examples of Financial Performance Objectives + Faster revenue + Higher dividends Larger profit margins Stable earnings during recessionary periods Higher returns on invested capital Rising stock price Higher earnings per share Bigger cash flow Enhancing financial resources 8.3 Classification of Objectives Based on time dimension, there may be broadly two types of objectives: short-term and long-term objectives. Short-term means one year or less than one year. Long-term means more than one year. However, some people in the business world talk of ‘intermediate-term objective’, which is established for a time-period between one and three years. In such a situation, the long-term objective is one which is set for a period of more than three yea’S. However, we should keep in mind that the definition of long-term objective differs from author to author and also from organization !0 organization. For example, Pearce and Robinson? are of the view that long-term objectives are “results a business seeks to achiev? over a specific period of time, typically five years.” According ' them, strategic planners commonly establish long-term objectives in seven areas: profitability, productivity, competitive positio” employee involvement, employee relations, technologic@l leadership, and public responsibility. In order to ensure attainabill. the long-term objectives need to be acceptable, _ flexible nah Hh hernpeon and St land, op.cit, loin A. Pearce Hand Richard B. Robinson, 1R, 5 Formulation and Imphemenaiion Richard D ievin, 068 peCHAPTER 8 Setting Objectives 101 measurable over a period of time, motivating, suitable, understandable, and achievable. Based on the business-structure of an organization, the corporate objectives, business-unit objectives, functional and operating objectives. These objectives cascade do top to the lowest levels of the organization, hierarchy (see Table 8.1) Corporate objectives are set at the top Stine too lovel of level of the organization by the board of directors and the senior ihe orgonization managers. The business-unit level objectives are formulated on the _ by the board of basis of the corporate objectives. Based on the business-unit directors and the objectives, the functional objectives are set by the mid-level or senior managers. departmental level managers that are meant to be achieved in the short run. re may be objectives, wn from the Conporate thus creating a objectives are set Table 8.1: A Downward Cascade of Objectives with Typical Examples __Levels of Orgai [Object _—Exampies Corporate level Corporate '* Increasing shareholder objectives return * Diversification of business * Achieving synergy + Improving corporate ie PAGAL cc ¥ 5 citizenship Business-unit level Business-unit Double-digit annual objectives earnings growth + Improving quality of products + Expanding market share a at - + Employee development Functional Functional * Increasing profits on level/departmental level objectives Brand-A by 10% during the year + Expansion of market share by 5% during the ices er Operating level Operating = Adding 20 more objectives salespeople in the northern sales territory * Increasing number of dealers in the southern sales territory by 30 it percent 8.4 Necessity of Objective Organizational success depends substantially on sound objectives. Organizational Objectives are essential for a variety of reasons. They — success depends * Provide direction to the organization as a whole and to substantially on employees in particular; ‘sound objectives. * Help in evaluation of the performance of employees and the departments;102 Under top down @pproach, the Senior managers Set the objectives Dased on the needs of the organization, and then they pass down these to the lower levels. The time frame for Jong-term objective should also be same, for both long-term objective and competitive strategy are interdependent. Strategic Management / Dr. MA Mannan * Reveal priorities in what the organization wants to achieve and also in the allocation of resources; * Provide a basis for effective planning in the organization; * Assist in organizing, motivating and controlling the activities 8.5 Approaches to Objective Setting: Top-Down or Bottom-Up Approach? Objectives need to be set for the entire organization as well as for each division and department. Even individual objectives consistent with departmental objectives, are also common Organizations may use different approaches for setting objectives at different levels. What should be the approach for setting objectives in an organization? There is no short-cut answer. You can follow either top-down approach or bottom-up approach. Some organizations follow a combination of both the approaches. In the case of top down approach, the senior managers set the objectives based on the needs of the organization, and then they pass down these to the lower levels. When managers at the top level foresee that there would be a downslide in the market in near future due to some environmental reasons, they may find no alternative but to take Grastic measure to improve profitability. So, they may set an objective like this: “To reduce the number of operating level employees by 7% in Factory A and Factory C within the next three months.” The mid-level and operating level managers would simply undertake steps for the realization of the objective. This is a toy down approach. On the other hand, in some organizations, mangers follow bottom-up approach. That means, the senior 8.6 Long-Term objectives and Competitive Strategy Strategic management is Primarily concerned with formulating and implementing competitive strategy. \t does not mean that functional pualegies are ignored. Management specialists argue that the time frame for competitive strategy should be consistent, usually from two to five years.° The time frame for long-term objective should also be same, for both long-term objective and competitive strategy common among business firms to set long- term objectives in terms of growth in assets, growth in sales, growth in market share, improvement of Profitability, adoption of vertical integration, expansion of business through diversification, corporate social responsibilty, etc. Competitive strategy is fomulited based on long-term objective, which should have a time-line tor effective ee {ER David, Strategic Management: Concepts ‘and Caxex (New Delhi: Premtice-LIall of India, 2006, p. 158), : ( en eaaCHAPTER 8 Setting Objectives implementation of competitive strategy, long-term objectives are broken down to annual objectives. We should keep in mind that annual objectives serve as milestones for reaching the long-term objectives. Each long-term objective may require a set of annual objectives. An organization should set annual objectives. for production, marketing, finance, research and development, human resources, management information systems, etc. As a strategy. maker, you have to use the annual objectives for strategy implementation. You will use the long-term objectives for strategy formulation. Since long-term objectives are important measures of managerial performance, they should be established at corporate and functional levels of an organization. All objectives should be communicated to the stakeholders so that they can understand their role, make appropriate decisions, reduce conflicts among themselves during strategy implementation, set organizational priorities, and set standards for evaluating the performance of the departments, divisions, employees and the entire organization 8.7 Concluding Remarks Once you have decided and set long-term objectives for your organization, you are now ready to formulate strategies in line with the objectives. The chapters in Part III detail out the issues related to formulation of business-level strategies and corporate-level strategies. TERMS USED Annual objective Bottom up objective setting Cascading of objectives Financial performance objective Goal Long term objective Objective Short term objective SMART objective Strategic performance objective Top down objective setting 103 Since long-term objectives are important measures of managerial performance, they should be established at corporate and functional levels of an organization.