SWOT Analysis
SWOT Analysis
SWOT Analysis
SWOT Analysis
The SWOT analysis provides information that is helpful in matching the firm's
resources and capabilities to the competitive environment in which it operates.
As such, it is instrumental in strategy formulation and selection. The following
diagram shows how a SWOT analysis fits into an environmental scan:
Environmental Scan
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Internal Analysis External Analysis
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Strengths Weaknesses Opportunities Threats
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SWOT Matrix
Strengths
A firm's strengths are its resources and capabilities that can be used as a basis
for developing a competitive advantage. Examples of such strengths include:
• patents
• strong brand names
• good reputation among customers
• cost advantages from proprietary know-how
• exclusive access to high grade natural resources
• favorable access to distribution networks
Weaknesses
In some cases, a weakness may be the flip side of a strength. Take the case in
which a firm has a large amount of manufacturing capacity. While this capacity
may be considered a strength that competitors do not share, it also may be a
considered a weakness if the large investment in manufacturing capacity
prevents the firm from reacting quickly to changes in the strategic environment.
Opportunities
The external environmental analysis may reveal certain new opportunities for
profit and growth. Some examples of such opportunities include:
Threats
Changes in the external environmental also may present threats to the firm.
Some examples of such threats include:
A firm should not necessarily pursue the more lucrative opportunities. Rather, it
may have a better chance at developing a competitive advantage by identifying a
fit between the firm's strengths and upcoming opportunities. In some cases, the
firm can overcome a weakness in order to prepare itself to pursue a compelling
opportunity.
To develop strategies that take into account the SWOT profile, a matrix of these
factors can be constructed. The SWOT matrix (also known as a TOWS Matrix) is
shown below:
Strengths Weaknesses
• S-O strategies pursue opportunities that are a good fit to the company's
strengths.
• W-O strategies overcome weaknesses to pursue opportunities.
• S-T strategies identify ways that the firm can use its strengths to reduce
its vulnerability to external threats.
• W-T strategies establish a defensive plan to prevent the firm's
weaknesses from making it highly susceptible to external threats.
Recommended Reading
Bradford, Robert W., Duncan, Peter J., Tarcy, Brian, Simplified Strategic Planning: A No-
Nonsense Guide for Busy People Who Want Results Fast!
Competitive Advantage
When a firm sustains profits that exceed the average for its industry, the firm is
said to possess a competitive advantage over its rivals. The goal of much of
business strategy is to achieve a sustainable competitive advantage.
• cost advantage
• differentiation advantage
A competitive advantage exists when the firm is able to deliver the same benefits
as competitors but at a lower cost (cost advantage), or deliver benefits that
exceed those of competing products (differentiation advantage). Thus, a
competitive advantage enables the firm to create superior value for its customers
and superior profits for itself.
Resources
Capabilities
Resources are the firm-specific assets useful for creating a cost or differentiation
advantage and that few competitors can acquire easily. The following are some
examples of such resources:
Value Creation
The firm creates value by performing a series of activities that Porter identified as
the value chain. In addition to the firm's own value-creating activities, the firm
operates in a value system of vertical activities including those of upstream
suppliers and downstream channel members.
To achieve a competitive advantage, the firm must perform one or more value
creating activities in a way that creates more overall value than do competitors.
Superior value is created through lower costs or superior benefits to the
consumer (differentiation).
Recommended Reading
Porter, Michael E., Competitive Advantage: Creating and Sustaining Superior Performance
In Competitive Advantage, Michael Porter analyzes the basis of competitive advantage and
presents the value chain as a framework for diagnosing and enhancing it. This landmark work
covers:
Competitive Advantage makes these concepts concrete and actionable. It rightfully has earned its
place in the business strategist's core collection of strategy books.
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