Competitive rivalry in the industry is moderate;

Effect of substitutes is weak;

Buyer power is minimal;
Supplier power is high; and
Entry/exit barriers are high.
Competitive rivalry in the industry is moderate;
Effect of substitutes is weak;
Buyer power is minimal;
Supplier power is high; and
Entry/exit barriers are high.

WHAT IS A SWOT ANALYSIS AND WHY SHOULD

YOU USE ONE?
The name says it: Strength, Weakness, Opportunity, Threat. A SWOT analysis guides you to
identify the positives and negatives inside your organization (S-W) and outside of it, in the
external environment (O-T). Developing a full awareness of your situation can help with both
strategic planning and decision-making.
The SWOT method (which is sometimes called TOWS) was originally developed for business
and industry, but it is equally useful in the work of community health and development,
education, and even personal growth.
SWOT is not the only assessment technique you can use, but is one with a long track record of
effectiveness. The strengths of this method are its simplicity and application to a variety of levels
of operation.

WHEN DO YOU USE SWOT ?

A SWOT analysis can offer helpful perspectives at any stage of an effort. You might use it
to:

Explore possibilities for new efforts or solutions to problems.

Make decisions about the best path for your initiative. Identifying your opportunities for
success in context of threats to success can clarify directions and choices.
Determine where change is possible. If you are at a juncture or turning point, an inventory
of your strengths and weaknesses can reveal priorities as well as possibilities.
Adjust and refine plans mid-course. A new opportunity might open wider avenues, while a
new threat could close a path that once existed.

SWOT also offers a simple way of communicating about your initiative or program and an
excellent way to organize information you've gathered from studies or surveys.

DISADVANTAGE: NO WEI GHTING FACTORS

SWOT analysis leads to four individual lists of strengths, weaknesses, opportunities and threats. However, the tool provides no
mechanism to rank the significance of one factor versus another within any list. As a result, any one factor's true impact on the
objective can't be determined.

DISADVANTAGE: AMBIGU ITY

SWOT analysis creates a one-dimensional model in which each problem attribute is viewed as a strength, weakness, opportunity
or threat. As a result, each attribute is seen to have only one influence on the problem being analyzed. However, one factor might
be both a strength and a weakness. For example, locating a chain of stores on well-traveled streets that grant easy access to
customers might be reflected in increased sales. However, the costs of operating high-visibility facilities can make it difficult to
compete on price without a large sales volume.

DISADVANTAGE: SUBJEC TIVE ANALYSIS

To significantly impact company performance, business decisions must be based on reliable, relevant and comparable data.
However, SWOT data collection and analysis entail a subjective process that reflects the bias of the individuals who collect the
data and participate in the brainstorming session. In addition, the data input to the SWOT analysis can become outdated fairly
quickly.

SWOT Analysis
Discover New Opportunities. Manage and Eliminate Threats.
Find out more about SWOT,
with James Manktelow & Amy Carlson.

SWOT Analysis is a useful technique for understanding your Strengths and Weaknesses, and for identifying both the
Opportunities open to you and the Threats you face.
Used in a business context, it helps you carve a sustainable niche in your market. Used in a personal context , it
helps you develop your career in a way that takes best advantage of your talents, abilities and opportunities.
This article looks at how to use SWOT in a business context. (Click here to learn how to do a Personal SWOT
Analysis .

Business SWOT Analysis

What makes SWOT particularly powerful is that, with a little thought, it can help you uncover opportunities that you
are well-placed to exploit. And by understanding the weaknesses of your business, you can manage and eliminate
threats that would otherwise catch you unawares.
More than this, by looking at yourself and your competitors using the SWOT framework, you can start to craft a
strategy that helps you distinguish yourself from your competitors, so that you can compete successfully in your
market.

How to Use the Tool

Originated by Albert S Humphrey in the 1960s, the tool is as useful now as it was then. You can use it in two ways
as a simple icebreaker helping people get together to "kick off" strategy formulation, or in a more sophisticated way
as a serious strategy tool.
Tip:
Strengths and weaknesses are often internal to your organization, while opportunities and threats generally relate to
external factors. For this reason, SWOT is sometimes called Internal-External Analysis and the SWOT Matrix is
sometimes called an IE Matrix.
To help you to carry out upir analysis, download and print off our free worksheet, and write down answers to the
following questions.

Strengths

What advantages does your organization have?

What do you do better than anyone else?

What unique or lowest-cost resources can you draw upon that others can't?

What do people in your market see as your strengths?

What factors mean that you "get the sale"?

What is your organization's Unique Selling Proposition (USP)?

Consider your strengths from both an internal perspective, and from the point of view of your customers and people in
your market.
Also, if you're having any difficulty identifying strengths, try writing down a list of your organization's characteristics.
Some of these will hopefully be strengths!
When looking at your strengths, think about them in relation to your competitors. For example, if all of your
competitors provide high quality products, then a high quality production process is not a strength in your
organization's market, it's a necessity.

Weaknesses

What could you improve?

What should you avoid?

What are people in your market likely to see as weaknesses?

What factors lose you sales?

Again, consider this from an internal and external basis: Do other people seem to perceive weaknesses that you don't
see? Are your competitors doing any better than you?
It's best to be realistic now, and face any unpleasant truths as soon as possible.

Opportunities

What good opportunities can you spot?

What interesting trends are you aware of?

Useful opportunities can come from such things as:

Changes in technology and markets on both a broad and narrow scale.

Changes in government policy related to your field.

Changes in social patterns, population profiles, lifestyle changes, and so on.

Local events.

Tip:
A useful approach when looking at opportunities is to look at your strengths and ask yourself whether these open up
any opportunities. Alternatively, look at your weaknesses and ask yourself whether you could open up opportunities
by eliminating them.

Threats

What obstacles do you face?

What are your competitors doing?

Are quality standards or specifications for your job, products or services changing?

Is changing technology threatening your position?

Do you have bad debt or cash-flow problems?

Could any of your weaknesses seriously threaten your business?

Tip:
When looking at opportunities and threats, PEST Analysis can help to ensure that you don't overlook external
factors, such as new government regulations, or technological changes in your industry.

Further SWOT Tips

If you're using SWOT as a serious tool (rather than as a casual "warm up" for strategy formulation), make sure you're
rigorous in the way you apply it:

Only accept precise, verifiable statements ("Cost advantage of US$10/ton in sourcing raw material x",
rather than "Good value for money").

Ruthlessly prune long lists of factors, and prioritize them, so that you spend your time thinking about the
most significant factors.

Make sure that options generated are carried through to later stages in the strategy formation process.

Apply it at the right level for example, you might need to apply the tool at a product or product-line level,
rather than at the much vaguer whole company level.

Use it in conjunction with other strategy tools (for example, USP Analysis and Core Competence
Analysis ) so that you get a comprehensive picture of the situation you're dealing with.

Note:
You could also consider using the TOWS Matrix . This is quite similar to SWOT in that it also focuses on the same
four elements of Strengths, Weaknesses, Opportunities and Threats. But TOWS can be a helpful alternative because
it emphasizes the external environment, while SWOT focuses on the internal environment.

Example
A start-up small consultancy business might draw up the following SWOT Analysis:

Strengths

We are able to respond very quickly as we have no red tape, and no need for higher management
approval.

We are able to give really good customer care, as the current small amount of work means we have
plenty of time to devote to customers.

Our lead consultant has strong reputation in the market.

We can change direction quickly if we find that our marketing is not working.

We have low overheads, so we can offer good value to customers.

Weaknesses

Our company has little market presence or reputation.

We have a small staff, with a shallow skills base in many areas.

We are vulnerable to vital staff being sick, and leaving.

Our cash flow will be unreliable in the early stages.

Opportunities

Our business sector is expanding, with many future opportunities for success.

Local government wants to encourage local businesses.

Our competitors may be slow to adopt new technologies.

Threats

Developments in technology may change this market beyond our ability to adapt.

A small change in the focus of a large competitor might wipe out any market position we achieve.

As a result of their analysis, the consultancy may decide to specialize in rapid response, good value services to local
businesses and local government.
Marketing would be in selected local publications to get the greatest possible market presence for a set advertising
budget, and the consultancy should keep up-to-date with changes in technology where possible.

Porters Five Forces

Assessing the Balance of Power in a Business Situation
Assess the balance of power in a business situation, with
James Manktelow & Amy Carlson.

The Porter's Five Forces tool is a simple but powerful tool for understanding where power lies in a business situation.
This is useful, because it helps you understand both the strength of your current competitive position, and the
strength of a position you're considering moving into.

With a clear understanding of where power lies, you can take fair advantage of a situation of strength, improve a
situation of weakness, and avoid taking wrong steps. This makes it an important part of your planning toolkit.
Conventionally, the tool is used to identify whether new products, services or businesses have the potential to be
profitable. However it can be very illuminating when used to understand the balance of power in other situations.

Understanding the Tool

Five Forces Analysis assumes that there are five important forces that determine competitive power in a business
situation. These are:
1.

Supplier Power: Here you assess how easy it is for suppliers to drive up prices. This is driven by the
number of suppliers of each key input, the uniqueness of their product or service, their strength and
control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you
have, and the more you need suppliers' help, the more powerful your suppliers are.

2.

Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven
by the number of buyers, the importance of each individual buyer to your business, the cost to them of
switching from your products and services to those of someone else, and so on. If you deal with few,
powerful buyers, then they are often able to dictate terms to you.

3.

Competitive Rivalry: What is important here is the number and capability of your competitors. If you have
many competitors, and they offer equally attractive products and services, then you'll most likely have little
power in the situation, because suppliers and buyers will go elsewhere if they don't get a good deal from
you. On the other hand, if no-one else can do what you do, then you can often have tremendous strength.

4.

Threat of Substitution: This is affected by the ability of your customers to find a different way of doing
what you do for example, if you supply a unique software product that automates an important process,
people may substitute by doing the process manually or by outsourcing it. If substitution is easy and
substitution is viable, then this weakens your power.

5.

Threat of New Entry: Power is also affected by the ability of people to enter your market. If it costs little in
time or money to enter your market and compete effectively, if there are few economies of scale in place,
or if you have little protection for your key technologies, then new competitors can quickly enter your
market and weaken your position. If you have strong and durable barriers to entry, then you can preserve
a favorable position and take fair advantage of it.

These forces can be neatly brought together in a diagram like the one in figure 1 below:
Figure 1 Porter's Five Forces

Using the Tool

To use the tool to understand your situation, look at each of these forces one-by-one and write your observations on
our free worksheet .
Brainstorm the relevant factors for your market or situation, and then check against the factors listed for the force in
the diagram above.
Then, mark the key factors on the diagram, and summarize the size and scale of the force on the diagram. An easy
way of doing this is to use, for example, a single "+" sign for a force moderately in your favor, or "--" for a force
strongly against you (you can see this in the example below).
Then look at the situation you find using this analysis and think through how it affects you. Bear in mind that few
situations are perfect; however looking at things in this way helps you think through what you could change to
increase your power with respect to each force. Whats more, if you find yourself in a structurally weak position, this
tool helps you think about what you can do to move into a stronger one.
This tool was created by Harvard Business School professor, Michael Porter, to analyze the attractiveness and likelyprofitability of an industry. Since publication, it has become one of the most important business strategy tools. The
classic article which introduces it is "How Competitive Forces Shape Strategy" in Harvard Business Review 57,
March April 1979, pages 86-93.

Example

Martin Johnson is deciding whether to switch career and become a farmer he's always loved the countryside, and
wants to switch to a career where he's his own boss. He creates the following Five Forces Analysis as he thinks the
situation through:
Figure 2 Porter's Five Forces Example: Buying a Farm

This worries him:

The threat of new entry is quite high: if anyone looks as if they're making a sustained profit, new
competitors can come into the industry easily, reducing profits.

Competitive rivalry is extremely high: if someone raises prices, they'll be quickly undercut. Intense
competition puts strong downward pressure on prices.

Buyer Power is strong, again implying strong downward pressure on prices.

There is some threat of substitution.

Unless he is able to find some way of changing this situation, this looks like a very tough industry to survive in. Maybe
he'll need to specialize in a sector of the market that's protected from some of these forces, or find a related business
that's in a stronger position.

Key Points
Porter's Five Forces Analysis is an important tool for assessing the potential for profitability in an industry. With a little
adaptation, it is also useful as a way of assessing the balance of power in more general situations.
It works by looking at the strength of five important forces that affect competition:

Supplier Power: The power of suppliers to drive up the prices of your inputs.

Buyer Power: The power of your customers to drive down your prices.

Competitive Rivalry: The strength of competition in the industry.

The Threat of Substitution: The extent to which different products and services can be used in place of
your own.

The Threat of New Entry: The ease with which new competitors can enter the market if they see that you
are making good profits (and then drive your prices down).

By thinking about how each force affects you, and by identifying the strength and direction of each force, you can
quickly assess the strength of your position and your ability to make a sustained profit in the industry.
You can then look at how you can affect each of the forces to move the balance of power more in your favor.

In general, the meaningfulness of this model is reduced by the following factors:

In the economic sense, the model assumes a classic perfect market. The more an
industry is regulated, the less meaningful insights the model can deliver.

The model is best applicable for analysis of simple market structures. A comprehensive
description and analysis of all five forces gets very difficult in complex industries with
multiple interrelations, product groups, by-products and segments. A too narrow focus on
particular segments of such industries, however, bears the risk of missing important
elements.

The model assumes relatively static market structures. This is hardly the case in todays
dynamic markets. Technological breakthroughs and dynamic market entrants from start-ups
or other industries may completely change business models, entry barriers and relationships
along the supply chain within short times. The Five Forces model may have some use for
later analysis of the new situation; but it will hardly provide much meaningful advice for
preventive actions.

The model is based on the idea of competition. It assumes that companies try to
achieve competitive advantages over other players in the markets as well as over suppliers
or customers. With this focus, it dos not really take into consideration strategies like
strategic alliances, electronic linking of information systems of all companies along a value
chain, virtual enterprise-networks or others.
Overall, Porters Five Forces Model has some major limitations in todays market environment. It is not able to take
into account new business models and the dynamics of markets. The value of Porters model is more that it enables
managers to think about the current situation of their industry in a structured, easy-to-understand way as a starting
point for further analysis.