Description
sw0t anaysis
Analysing the micro-environment
The micro-environment consists of stakeholder groups that a firm has regular dealings with. The way these relationships develop can affect the costs, quality and overall success of a business. Issues in the micro-environment include:
•
Suppliers: can they provide high quality products at a good price? Can they do this reliably in the volumes required? Have they got the flexibility to respond to a firm's demands? What is the bargaining power of these suppliers? How dependent is the firm on them? Does their approach to their staff and resources fit with your ethics? Firms must decide on issues such as who to use to supply them, on the responsibility it takes for these suppliers and on the terms and conditions it adopts. Some firms take quite an aggressive attitude towards their suppliers by trying to push down the prices and delay payments. Others view the relationship more as a partnership in which they are working together with suppliers and that by helping each other both can benefit. The importance of suppliers can be seen if things go wrong. In 2000 Ford's image was damaged when tyres on its Explorer vehicles started exploding. These tyres were produced by Bridgestone and the supplier ended up re-calling over 6.5 million tyres. In 2007 Sony batteries in several Dell laptops caught fire which caused a terrible public relations issue for the computer manufacturer and led to over 4 million laptop batteries being recalled.
•
Distributors: often getting products to the end customers can be a major issue for firms. Imagine you sell shampoo - what you need to sell this is to get it on the shelves in the leading chemists and supermarkets but this means moving someone else's products off the shelves! So the challenge is to get stores to stock your products; this may be achieved by good negotiating skills and offering appropriate incentives. The distributors used will determine the final price of the product and how it is presented to the end customer. When selling via retailers, for example, the retailer has control over where the products are displayed, how they are priced and how much they are promoted in-store. You can also gain a competitive advantage by using changing distribution channels. Banks, insurance companies, holiday firms, hotels and many others businesses have seen the opportunities created by the internet. Direct Line insurance, Dell computers and Amazon have reduced costs by selling direct. Some firms such as Betterware and Avon have used alternative distribution channels to their competitors by selling door to door; Ann Summers' products have sold well via parties.
•
Customers: customers are obviously the key to sales. Managers must monitor customer needs and try to anticipate how these will develop so that they can meet these requirements effectively now and in the future. To help understand their customers firms are increasingly trying to gather information on them through mechanisms such as loyalty cards. By gathering data on shopping patterns and matching this to data on the individual shoppers firms can build up detailed pictures of their buyers and then offer them appropriate deals. Many firms are also trying to develop relationships with customers to help ensure they come back time and time again. Loyalty cards, frequent flyer programmes and frequent shopper incentives are all aimed at rewarding customers who buy a firm's product regularly. Newsletters, email lists and recommendations to online shoppers of what else they might be interested in are all ways of trying to build a relationship with customers. Of course, potential buyers usually have many choices and so may be able to use their bargaining power in relation to firms. The growth of the internet has enabled customers to search quickly for alternatives and compare deals more easily; this puts pressure on firms to provide better value for money or they will lose their customers.
•
Competition: the success and behaviour of any business will depend on the
degree of competition in its market. In some markets one firm is dominant. This is called a monopoly. Technically in the UK a monopoly exists when a firm has a market share of over 25%. If you are in a monopoly position this may allow you to exploit the consumer with relatively high prices (assuming your position is protected in some way) and you may be able to offer an inferior service if customers have no other choices. In other markets a few firms dominate; this type of market structure is called an oligopoly. In oligopolistic markets there is a high degree of interdependence and so firms will think carefully how their rivals might react to any actions they take. This can lead to an emphasis on non price competition; a price change is relatively easy to imitate and so firms may rely more on methods such as branding or product development. Oligopolies exist in many markets in the UK such as insurance, banking, car manufacturing, supermarkets. In more competitive markets where there are many firms providing similar products customers have more choice; this may put downward pressure on prices and means that excellent customer service is essential.
Porter's Five Forces analysis of market structure
The competitive structure of an industry can be analysed using Porter's five forces. This model attempts to analyse the attractiveness of an industry by considering five forces within a market.
According to Porter (1980) the likelihood of firms making profits in a given industry depends on five factors: 1. The likelihood of new entry i.e. the extent to which barriers to entry exist. The more difficult it is for other firms to enter a market the more likely it is that existing firms can make relatively high profits. The likelihood of entering a market would be lower if:
• •
the entry costs are high e.g. if heavy investment is required in marketing or equipment there are major advantages to firms that have been operating in the industry already in terms of their experience and understanding of how the market works (this is known as the "learning effect")
•
government policy prevents entry or makes it more difficult; for example, protectionist measures may mean a tax is placed on foreign products or there is a limit to the number of overseas goods that can be sold. This would make it difficult for a foreign firm to enter a market
• • •
the existing brands have a high level of loyalty the existing firms may react aggressively to any new entrant e.g. with a price war the existing firms have control of the supplies .e.g. entering the diamond industry might be difficult because the majority of known sources of diamonds are controlled by companies such as De Beers.
2. The power of buyers. The stronger the power of buyers in an industry the more likely it is that they will be able to force down prices and reduce the profits of firms that provide the product. Buyer power will be higher if:
• • •
there are a few, big buyers so each one is very important to the firm the buyers can easily switch to other providers so the provider needs to provide a high quality service at a good price the buyers are in position to take over the firm. If they have the resources to buy the provider this threat can lead to a better service because they have real negotiating power
3. The power of suppliers.
The stronger the power of suppliers in an industry the more difficult it is for firms within that sector to make a profit because suppliers can determine the terms and conditions on which business is conducted. Suppliers will be more powerful if:
• • •
there are relatively few of them (so the buyer has few alternatives) switching to another supplier is difficult and/or expensive the supplier can threaten to buy the existing firms so is in a strong negotiating position
4. The degree of rivalry This measures the degree of competition between existing firms. The higher the degree of rivalry the more difficult it is for existing firms to generate high profits. Rivalry will be higher if:
• •
there are a large number of similar sized firms (rather than a few dominant firms) all competing with each other for customers the costs of leaving the industry are high e.g. because of high levels of investment. This means that existing firms will fight hard to survive because they cannot easily transfer their resources elsewhere
•
the level of capacity utilisation. If there are high levels of capacity being underutilised the existing firms will be very competitive to try and win sales to boost their own demand
• •
the market is shrinking so firms are fighting for their share of falling sales there is little brand loyalty so customer are likely to switch easily between products
5. The substitute threat. This measures the ease with which buyers can switch to another product that does the same thing e.g. aluminium cans rather than glass or plastic bottles. The ease of switching depends on what costs would be involved (e.g. transferring all your data to a new database system and retraining staff could be expensive) and how similar customers perceive the alternatives to be. Using Porter's analysis firms are likely to generate higher returns if the industry:
• • • • •
Is difficult to enter There is limited rivalry Buyers are relatively weak Suppliers are relatively weak There are few substitutes.
On the other hands returns are likely to be low if:
• • • • •
The industry is easy to enter There is a high degree of rivalry between firms within the industry Buyers are strong Suppliers are strong It is easy to switch to alternatives
MACRO ENVIRONMENT: PESTEL ANALYSIS
There are many factors in the macro-environment that will effect the decisions of the managers of any organisation. Tax changes, new laws, trade barriers, demographic change and government policy changes are all examples of macro change. To help analyse these factors managers can categorise them using the PESTEL model. This classification distinguishes between: •Political factors. These refer to government policy such as the degree of intervention in the economy. What goods and services does a government want to provide? To what extent does it believe in subsidising firms? What are its priorities in terms of business support? Political decisions can impact on many vital areas for business such as the education of the workforce, the health of the nation and the quality of the infrastructure of the economy such as the road and rail system. •Economic factors. These include interest rates, taxation changes, economic growth, inflation and exchange rates. As you will see throughout the "Foundations of Economics" book economic change can have a major impact on a firm's behaviour. For example: - higher interest rates may deter investment because it costs more to borrow - a strong currency may make exporting more difficult because it may raise the price in terms of foreign currency
- inflation may provoke higher wage demands from employees and raise costs - higher national income growth may boost demand for a firm's products •Social factors. Changes in social trends can impact on the demand for a firm's products and the availability and willingness of individuals to work. In the UK, for example, the population has been ageing. This has increased the costs for firms who are committed to pension payments for their employees because their staff are living longer. It also means some firms such as Asda have started to recruit older employees to tap into this growing labour pool. The ageing population also has impact on demand: for example, demand for sheltered accommodation and medicines has increased whereas demand for toys is falling. •Technological factors: new technologies create new products and new processes. MP3 players, computer games, online gambling and high definition TVs are all new markets created by technological advances. Online shopping, bar coding and computer aided design are all improvements to the way we do business as a result of better technology. Technology can reduce costs, improve quality and lead to innovation. These developments can benefit consumers as well as the organisations providing the products. •Environmental factors: environmental factors include the weather and climate change. Changes in temperature can impact on many industries including farming, tourism and insurance. With major climate changes occurring due to global warming and with greater environmental awareness this external factor is becoming a significant issue for firms to consider. The growing desire to protect the environment is having an impact on many industries such as the travel and transportation industries (for example, more taxes being placed on air travel and the success of hybrid cars) and the general move towards more environmentally friendly products and processes is affecting demand patterns and creating business opportunities. •Legal factors: these are related to the legal environment in which firms operate. In recent years in the UK there have been many significant legal changes that have affected firms' behaviour. The introduction of age discrimination and disability discrimination legislation, an increase in the minimum wage and greater requirements for firms to recycle are examples of relatively recent laws that affect an organisation's actions. Legal changes can affect a firm's costs (e.g. if new systems and procedures have to be developed) and demand (e.g. if the law affects the likelihood of customers buying the good or using the service).
Different categories of law include: •consumer laws; these are designed to protect customers against unfair practices such as misleading descriptions of the product •competition laws; these are aimed at protecting small firms against bullying by larger firms and ensuring customers are not exploited by firms with monopoly power •employment laws; these cover areas such as redundancy, dismissal, working hours and minimum wages. They aim to protect employees against the abuse of power by managers •health and safety legislation; these laws are aimed at ensuring the workplace is as safe as is reasonably practical. They cover issues such as training, reporting accidents and the appropriate provision of safety equipment Typical PESTEL factors to consider include: Political e.g. EU enlargement, the euro, international trade, taxation policy Economic e.g. interest rates, exchange rates, national income, inflation, unemployment, Stock Market Social e.g. ageing population, attitudes to work, income distribution Technological e.g. innovation, new product development, rate of technological obsolescence Environmental e.g. global warming, environmental issues Legal e.g. competition law, health and safety, employment law
Developing a strategy: SWOT analysis
To determine what their strategy should be managers must consider the internal strengths and weaknesses of their organisation and compare these with the external opportunities and threats. This process is known as SWOT analysis. Strengths are internal factors that a firm may build on to develop a strategy. For example, they may include:
• • • •
Marketing strengths e.g. a strong brand or access to a good distribution network Financial strengths e.g. a high level of cash, access to loan capital if needed and a good credit rating Operations strengths e.g. a high level of efficiency, flexible production systems and high quality levels HRM strengths e.g. a well trained workforce, a creative and motivated workforce and good employer-ee relations
Weaknesses are internal factors that a firm may need to protect itself against such as:
• • • •
Marketing weaknesses such as limited distribution, a poor product range and ineffective promotion Financial weaknesses such as high levels of borrowing and low rates of return Operational weaknesses such as old, inefficient equipment and poor quality HRM weaknesses such as a high rate of labour turnover and industrial disputes
Managers must identify the specific strengths and weaknesses of their business and rate these according to how significant they are. They should then compare these with the external opportunities and threats identified by PESTEL analysis. This is SWOT analysis. A strategy may be developed by using a firm's strengths to exploit the opportunities that exist. For example, a strong brand name may be used to extend a firm's products into new markets. It may also use these strengths to protect itself against threats; for example, a retailer may use its finance to acquire key locations to prevent a competitor buying them. A firm may also want to protect itself against its weaknesses. For example, it may try to find alternative suppliers to reduce an over-reliance on a particular one; it may invest in a rebranding exercise to reposition itself. Undertaking a SWOT analysis effectively is not as easy as it may seem. First managers have to correctly identify what all the relevant factors are and how important each one is. Too often managers have their own perspective on a situation and therefore may only see what they want to see (as with PESTEL analysis). This is known as "perceptual filtering". Kodak's managers spent several years watching other camera manufacturers when they should have been watching consumer electronics firms such as Sony who were developing digital cameras.
Secondly, managers need to work out the most appropriate strategy that combines the strengths and opportunities and actually implement the plan successfully. Putting a plan into action can be more difficult than coming up with it in the first place due to resistance from staff or unexpected problems getting things done. It is also important to undertake this type of analysis regularly because the competitive landscape and the internal situation will be constantly changing. The importance of strategy should not be underestimated. Changing the price of an item, changing the distribution strategy and investing in new equipment are all important decisions but if you are fighting in the wrong market with the wrong products then the details are almost irrelevant. The strategy sets out where and how the battles will be fought and a good strategy is essential to business success. This involves an understanding not only of what happens within the firm but also the ability to forecast changes in the external environment and their significance successfully. As the internal and external environments change so must a firm's strategy to maintain an appropriate fit. In "Foundations of Economics" you will read about all kinds of economic factors that can change; these will alter a firm's playing field and the rules of the game. This in turn means that managers need to consider carefully what team they pick and how they decide to play the match. i.e as the economy changes the strategy may need to change as well.
doc_430178587.doc
sw0t anaysis
Analysing the micro-environment
The micro-environment consists of stakeholder groups that a firm has regular dealings with. The way these relationships develop can affect the costs, quality and overall success of a business. Issues in the micro-environment include:
•
Suppliers: can they provide high quality products at a good price? Can they do this reliably in the volumes required? Have they got the flexibility to respond to a firm's demands? What is the bargaining power of these suppliers? How dependent is the firm on them? Does their approach to their staff and resources fit with your ethics? Firms must decide on issues such as who to use to supply them, on the responsibility it takes for these suppliers and on the terms and conditions it adopts. Some firms take quite an aggressive attitude towards their suppliers by trying to push down the prices and delay payments. Others view the relationship more as a partnership in which they are working together with suppliers and that by helping each other both can benefit. The importance of suppliers can be seen if things go wrong. In 2000 Ford's image was damaged when tyres on its Explorer vehicles started exploding. These tyres were produced by Bridgestone and the supplier ended up re-calling over 6.5 million tyres. In 2007 Sony batteries in several Dell laptops caught fire which caused a terrible public relations issue for the computer manufacturer and led to over 4 million laptop batteries being recalled.
•
Distributors: often getting products to the end customers can be a major issue for firms. Imagine you sell shampoo - what you need to sell this is to get it on the shelves in the leading chemists and supermarkets but this means moving someone else's products off the shelves! So the challenge is to get stores to stock your products; this may be achieved by good negotiating skills and offering appropriate incentives. The distributors used will determine the final price of the product and how it is presented to the end customer. When selling via retailers, for example, the retailer has control over where the products are displayed, how they are priced and how much they are promoted in-store. You can also gain a competitive advantage by using changing distribution channels. Banks, insurance companies, holiday firms, hotels and many others businesses have seen the opportunities created by the internet. Direct Line insurance, Dell computers and Amazon have reduced costs by selling direct. Some firms such as Betterware and Avon have used alternative distribution channels to their competitors by selling door to door; Ann Summers' products have sold well via parties.
•
Customers: customers are obviously the key to sales. Managers must monitor customer needs and try to anticipate how these will develop so that they can meet these requirements effectively now and in the future. To help understand their customers firms are increasingly trying to gather information on them through mechanisms such as loyalty cards. By gathering data on shopping patterns and matching this to data on the individual shoppers firms can build up detailed pictures of their buyers and then offer them appropriate deals. Many firms are also trying to develop relationships with customers to help ensure they come back time and time again. Loyalty cards, frequent flyer programmes and frequent shopper incentives are all aimed at rewarding customers who buy a firm's product regularly. Newsletters, email lists and recommendations to online shoppers of what else they might be interested in are all ways of trying to build a relationship with customers. Of course, potential buyers usually have many choices and so may be able to use their bargaining power in relation to firms. The growth of the internet has enabled customers to search quickly for alternatives and compare deals more easily; this puts pressure on firms to provide better value for money or they will lose their customers.
•
Competition: the success and behaviour of any business will depend on the
degree of competition in its market. In some markets one firm is dominant. This is called a monopoly. Technically in the UK a monopoly exists when a firm has a market share of over 25%. If you are in a monopoly position this may allow you to exploit the consumer with relatively high prices (assuming your position is protected in some way) and you may be able to offer an inferior service if customers have no other choices. In other markets a few firms dominate; this type of market structure is called an oligopoly. In oligopolistic markets there is a high degree of interdependence and so firms will think carefully how their rivals might react to any actions they take. This can lead to an emphasis on non price competition; a price change is relatively easy to imitate and so firms may rely more on methods such as branding or product development. Oligopolies exist in many markets in the UK such as insurance, banking, car manufacturing, supermarkets. In more competitive markets where there are many firms providing similar products customers have more choice; this may put downward pressure on prices and means that excellent customer service is essential.
Porter's Five Forces analysis of market structure
The competitive structure of an industry can be analysed using Porter's five forces. This model attempts to analyse the attractiveness of an industry by considering five forces within a market.
According to Porter (1980) the likelihood of firms making profits in a given industry depends on five factors: 1. The likelihood of new entry i.e. the extent to which barriers to entry exist. The more difficult it is for other firms to enter a market the more likely it is that existing firms can make relatively high profits. The likelihood of entering a market would be lower if:
• •
the entry costs are high e.g. if heavy investment is required in marketing or equipment there are major advantages to firms that have been operating in the industry already in terms of their experience and understanding of how the market works (this is known as the "learning effect")
•
government policy prevents entry or makes it more difficult; for example, protectionist measures may mean a tax is placed on foreign products or there is a limit to the number of overseas goods that can be sold. This would make it difficult for a foreign firm to enter a market
• • •
the existing brands have a high level of loyalty the existing firms may react aggressively to any new entrant e.g. with a price war the existing firms have control of the supplies .e.g. entering the diamond industry might be difficult because the majority of known sources of diamonds are controlled by companies such as De Beers.
2. The power of buyers. The stronger the power of buyers in an industry the more likely it is that they will be able to force down prices and reduce the profits of firms that provide the product. Buyer power will be higher if:
• • •
there are a few, big buyers so each one is very important to the firm the buyers can easily switch to other providers so the provider needs to provide a high quality service at a good price the buyers are in position to take over the firm. If they have the resources to buy the provider this threat can lead to a better service because they have real negotiating power
3. The power of suppliers.
The stronger the power of suppliers in an industry the more difficult it is for firms within that sector to make a profit because suppliers can determine the terms and conditions on which business is conducted. Suppliers will be more powerful if:
• • •
there are relatively few of them (so the buyer has few alternatives) switching to another supplier is difficult and/or expensive the supplier can threaten to buy the existing firms so is in a strong negotiating position
4. The degree of rivalry This measures the degree of competition between existing firms. The higher the degree of rivalry the more difficult it is for existing firms to generate high profits. Rivalry will be higher if:
• •
there are a large number of similar sized firms (rather than a few dominant firms) all competing with each other for customers the costs of leaving the industry are high e.g. because of high levels of investment. This means that existing firms will fight hard to survive because they cannot easily transfer their resources elsewhere
•
the level of capacity utilisation. If there are high levels of capacity being underutilised the existing firms will be very competitive to try and win sales to boost their own demand
• •
the market is shrinking so firms are fighting for their share of falling sales there is little brand loyalty so customer are likely to switch easily between products
5. The substitute threat. This measures the ease with which buyers can switch to another product that does the same thing e.g. aluminium cans rather than glass or plastic bottles. The ease of switching depends on what costs would be involved (e.g. transferring all your data to a new database system and retraining staff could be expensive) and how similar customers perceive the alternatives to be. Using Porter's analysis firms are likely to generate higher returns if the industry:
• • • • •
Is difficult to enter There is limited rivalry Buyers are relatively weak Suppliers are relatively weak There are few substitutes.
On the other hands returns are likely to be low if:
• • • • •
The industry is easy to enter There is a high degree of rivalry between firms within the industry Buyers are strong Suppliers are strong It is easy to switch to alternatives
MACRO ENVIRONMENT: PESTEL ANALYSIS
There are many factors in the macro-environment that will effect the decisions of the managers of any organisation. Tax changes, new laws, trade barriers, demographic change and government policy changes are all examples of macro change. To help analyse these factors managers can categorise them using the PESTEL model. This classification distinguishes between: •Political factors. These refer to government policy such as the degree of intervention in the economy. What goods and services does a government want to provide? To what extent does it believe in subsidising firms? What are its priorities in terms of business support? Political decisions can impact on many vital areas for business such as the education of the workforce, the health of the nation and the quality of the infrastructure of the economy such as the road and rail system. •Economic factors. These include interest rates, taxation changes, economic growth, inflation and exchange rates. As you will see throughout the "Foundations of Economics" book economic change can have a major impact on a firm's behaviour. For example: - higher interest rates may deter investment because it costs more to borrow - a strong currency may make exporting more difficult because it may raise the price in terms of foreign currency
- inflation may provoke higher wage demands from employees and raise costs - higher national income growth may boost demand for a firm's products •Social factors. Changes in social trends can impact on the demand for a firm's products and the availability and willingness of individuals to work. In the UK, for example, the population has been ageing. This has increased the costs for firms who are committed to pension payments for their employees because their staff are living longer. It also means some firms such as Asda have started to recruit older employees to tap into this growing labour pool. The ageing population also has impact on demand: for example, demand for sheltered accommodation and medicines has increased whereas demand for toys is falling. •Technological factors: new technologies create new products and new processes. MP3 players, computer games, online gambling and high definition TVs are all new markets created by technological advances. Online shopping, bar coding and computer aided design are all improvements to the way we do business as a result of better technology. Technology can reduce costs, improve quality and lead to innovation. These developments can benefit consumers as well as the organisations providing the products. •Environmental factors: environmental factors include the weather and climate change. Changes in temperature can impact on many industries including farming, tourism and insurance. With major climate changes occurring due to global warming and with greater environmental awareness this external factor is becoming a significant issue for firms to consider. The growing desire to protect the environment is having an impact on many industries such as the travel and transportation industries (for example, more taxes being placed on air travel and the success of hybrid cars) and the general move towards more environmentally friendly products and processes is affecting demand patterns and creating business opportunities. •Legal factors: these are related to the legal environment in which firms operate. In recent years in the UK there have been many significant legal changes that have affected firms' behaviour. The introduction of age discrimination and disability discrimination legislation, an increase in the minimum wage and greater requirements for firms to recycle are examples of relatively recent laws that affect an organisation's actions. Legal changes can affect a firm's costs (e.g. if new systems and procedures have to be developed) and demand (e.g. if the law affects the likelihood of customers buying the good or using the service).
Different categories of law include: •consumer laws; these are designed to protect customers against unfair practices such as misleading descriptions of the product •competition laws; these are aimed at protecting small firms against bullying by larger firms and ensuring customers are not exploited by firms with monopoly power •employment laws; these cover areas such as redundancy, dismissal, working hours and minimum wages. They aim to protect employees against the abuse of power by managers •health and safety legislation; these laws are aimed at ensuring the workplace is as safe as is reasonably practical. They cover issues such as training, reporting accidents and the appropriate provision of safety equipment Typical PESTEL factors to consider include: Political e.g. EU enlargement, the euro, international trade, taxation policy Economic e.g. interest rates, exchange rates, national income, inflation, unemployment, Stock Market Social e.g. ageing population, attitudes to work, income distribution Technological e.g. innovation, new product development, rate of technological obsolescence Environmental e.g. global warming, environmental issues Legal e.g. competition law, health and safety, employment law
Developing a strategy: SWOT analysis
To determine what their strategy should be managers must consider the internal strengths and weaknesses of their organisation and compare these with the external opportunities and threats. This process is known as SWOT analysis. Strengths are internal factors that a firm may build on to develop a strategy. For example, they may include:
• • • •
Marketing strengths e.g. a strong brand or access to a good distribution network Financial strengths e.g. a high level of cash, access to loan capital if needed and a good credit rating Operations strengths e.g. a high level of efficiency, flexible production systems and high quality levels HRM strengths e.g. a well trained workforce, a creative and motivated workforce and good employer-ee relations
Weaknesses are internal factors that a firm may need to protect itself against such as:
• • • •
Marketing weaknesses such as limited distribution, a poor product range and ineffective promotion Financial weaknesses such as high levels of borrowing and low rates of return Operational weaknesses such as old, inefficient equipment and poor quality HRM weaknesses such as a high rate of labour turnover and industrial disputes
Managers must identify the specific strengths and weaknesses of their business and rate these according to how significant they are. They should then compare these with the external opportunities and threats identified by PESTEL analysis. This is SWOT analysis. A strategy may be developed by using a firm's strengths to exploit the opportunities that exist. For example, a strong brand name may be used to extend a firm's products into new markets. It may also use these strengths to protect itself against threats; for example, a retailer may use its finance to acquire key locations to prevent a competitor buying them. A firm may also want to protect itself against its weaknesses. For example, it may try to find alternative suppliers to reduce an over-reliance on a particular one; it may invest in a rebranding exercise to reposition itself. Undertaking a SWOT analysis effectively is not as easy as it may seem. First managers have to correctly identify what all the relevant factors are and how important each one is. Too often managers have their own perspective on a situation and therefore may only see what they want to see (as with PESTEL analysis). This is known as "perceptual filtering". Kodak's managers spent several years watching other camera manufacturers when they should have been watching consumer electronics firms such as Sony who were developing digital cameras.
Secondly, managers need to work out the most appropriate strategy that combines the strengths and opportunities and actually implement the plan successfully. Putting a plan into action can be more difficult than coming up with it in the first place due to resistance from staff or unexpected problems getting things done. It is also important to undertake this type of analysis regularly because the competitive landscape and the internal situation will be constantly changing. The importance of strategy should not be underestimated. Changing the price of an item, changing the distribution strategy and investing in new equipment are all important decisions but if you are fighting in the wrong market with the wrong products then the details are almost irrelevant. The strategy sets out where and how the battles will be fought and a good strategy is essential to business success. This involves an understanding not only of what happens within the firm but also the ability to forecast changes in the external environment and their significance successfully. As the internal and external environments change so must a firm's strategy to maintain an appropriate fit. In "Foundations of Economics" you will read about all kinds of economic factors that can change; these will alter a firm's playing field and the rules of the game. This in turn means that managers need to consider carefully what team they pick and how they decide to play the match. i.e as the economy changes the strategy may need to change as well.
doc_430178587.doc