Purpose of a SWOT Analysis
Every business to include the largest ones that control their areas of industry–has a limited supply of manpower, production capacity and capital. Evaluating the company’s strengths, weaknesses, opportunities, and threats helps it determine how to allocate these resources in a manner that will result in the highest possible potential for revenue growth and profitability. The management team examines where the company can compete most effectively.
The company more times than not discovers competitive strengths that have not been fully utilized in the past in addition to critical areas that needs to be improved in order for the business to more effectively compete. A realistic assessment also prevents strategic blunders like entering a market with products that are clearly inferior to what well-entrenched competitors are offering. Continuous improvement in all areas of a company’s operations is an important aspect of staying ahead of competitors.
Weaknesses and opportunities can–and must–be turned into future strengths. PURPOSE OF A SWOT ANALYSIS 3 Strengths, weaknesses, opportunities, and threats (SWOT) analysis is a necessary, straightforward standard that assists in direction and serves as a foundation for the development of business’s marketing strategy. It brings about this process through assessment of the organization’s strengths (what it can do) and weaknesses (what it cannot do) in addition to opportunities (potential
favorable conditions for the company) and threats (potential unfavorable conditions for it). SWOT analysis is also an important step in the planning process but sometimes its value is often minimized in spite of how simple it is in creating it. The role of SWOT analysis is to take the information from the environmental analysis and separate it into internal issues (strengths and weaknesses) and external issues (opportunities and threats).
Once this is completed, SWOT analysis determines if the information indicates something that will assist a business in meeting its objectives (a strength or opportunity), or if it identifies an obstacle that must be overcome or minimized to achieve desired results (weakness or threat). The purpose of a SWOT analysis is to get managers into the mindset and thinking about everything that could possibly be an impact to the success and failure of a new project. Failing to acknowledge an essential strength, weakness, opportunity or threat could and usually does lead to terrible management decisions.
Take for example, a software company that might hold a patent for a new computer processor failed to recognize a threat from its competitors who were also developing comparable products, it might overestimate conceivable sales of its new processor and assume debt to finance the growth of its project only to notice down the line that the company’s promising product will not make enough money to make a profit or even pay off the assumed debt. A SWOT analysis could have helped this company’s management avoid expensive mistakes early on and alerted them to which products were more likely to succeed.
PURPOSE OF A SWOT ANALYSIS 4 With SWOT’s origins dating back to the 1960s with Albert Humphrey, it is as useful now as it was back then. Businesses utilize the process in two different ways-as an easy icebreaker assisting individuals come together to “kick off” strategy development or as a more serious strategy tool. A great SWOT analysis case study is Starbuck’s Coffee. By 2010, the company was losing money and had a major drop in its stock price. Its stock price had dropped to around $10 in 2009 from its high of $35 a few years earlier.
The economic crisis throughout 2008 and 2009 really hit Starbucks’ stock price hard (“SBUX Basic Chart | Starbucks Corporation Stock – Yahoo! Finance,” 2011). Even though Starbucks’ stock price took a huge hit, its net revenues did not. Starbucks’ profits went from $7. 8 billion in 2006, to $10. 4 billion in 2008, down to $9. 8 billion in 2009, and back up to $10. 7 billion in 2011 (Starbucks Corporation, 2010). The amazing thing here is that the company endured an economic crisis and still come out stronger
than when its stock price was at its highest. Lauren Roby (2011) performed a well researched SWOT analysis of Starbucks covering this time frame and identified the following strengths, weaknesses, opportunities, and threats. Strengths: #1: Market leader in the coffee industry including almost 17,000 stores as of the end of the 2010 (Starbucks Corporation, 2010). #2. Starbucks is recognized by customers worldwide due in part to its high quality products and consumer friendly environment. #3. Starbucks is on good footing financially.
Its stock price might have fallen in the late 2000’s, but its profits barely took a hit (Starbucks Corporation, 2010). Weaknesses: PURPOSE OF A SWOT ANALYSIS 5 #1: One of Starbucks’ biggest weaknesses is what its customers have to pay for the product. McDonald’s uses Starbucks’ high price directly against the company in their attempts to lure customers away from the company and into the arches. #2: 75% of the company’s profits come from its coffee products and other specialty drinks (Starbucks Corporation, 2010).
This means that when global coffee bean prices fluctuate, the company will take a direct hit every time the price of coffee rises. Opportunities: #1. International Markets. With Brazil being one if not the world’s largest coffee consumer in the world, it offers a huge market for Starbucks to enthusiastically enter and develop (Murphy, 2011). #2. Starbucks has joined forces with Tata coffee in India, which is the fifth largest exporter of coffee, to begin selling their coffee worldwide (Bose, 2011). This gives Starbucks more
access to coffee. Threats: #1. Competition. One of Starbuck’s biggest competitors, McDonald’s, can open their McCafe brand beverages in current franchise stores globally to include Europe. This gives McDonald’s an upper hand on Starbucks who has to invest over $300,000 to open a brand new store in Europe while McDonald’s investment would run around $100,000 (Liu, 2009). If McDonald’s continues down this path, it could greatly reduce the geographic scope advantage that Starbucks currently has over McDonald’s.
These days, It is not enough to just recognize the strengths, weaknesses, opportunities, and threats of a business. In exercising a SWOT analysis it is essential to reduce or avert both PURPOSE OF A SWOT ANALYSIS 6 weaknesses and threats. Weaknesses should be viewed as something to be turned into strengths as threats should be turned into opportunities. Strengths and opportunities should be allied to optimize the business’s potential. Utilizing SWOT in this manner can help a company gain the leverage most so desperately need these days. (Ferrell, Hartline, Lucas, Luck, 1998).