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I N T R O D U C T I O N
S t r a t e g y - S W O T a n a l y s i s 1
Definition:
SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats.
SWOT analysis is an important tool for auditing the overall strategic position of a business and its environment.
Once key strategic issues have been identified, they feed into business objectives, particularly marketing objectives. SWOT analysis can be used in conjunction with other tools for audit and analysis, such as PEST analysis and Porter's Five-Forces analysis. It is also a very popular tool with business and marketing students because it is quick and easy to learn.
The Key Distinction - Internal and External Issues
Strengths and weaknesses are internal factors. For example, a strength could be your specialist marketing expertise. A weakness could be the lack of a new product.
Opportunities and threats are external factors. For example, an opportunity could be a developing distribution channel such as the Internet, or changing consumer lifestyles that potentially increase demand for a company's products. A threat could be a new competitor in an important existing market or a technological change that makes existing products potentially obsolete.
it is worth pointing out that SWOT analysis can be very subjective - two people rarely come-up with the same version of a SWOT analysis even when given the same information about the same business and its environment. Accordingly, SWOT analysis is best used as a guide and not a prescription. Adding and weighting criteria to each factor increases the validity of the analysis.
Areas to Consider
Some of the key areas to consider when identifying and evaluating Strengths, Weaknesses, Opportunities and Threats are listed in the example SWOT analysis below:
(^1) Source: http://www.tutor2u.net/business/strategy/SWOT_analysis.htm
P r o d u c t p o r t f o l i o s t r a t e g y - I n t r o d u c t i o n t o t h e B o s t o n C o n s u l t i n g b o x 2
Introduction
The business portfolio is the collection of businesses and products that make up the company. The best business portfolio is one that fits the company's strengths and helps exploit the most attractive opportunities.
The company must:
(1) Analyse its current business portfolio and decide which businesses should receive more or less investment, and
(2) Develop growth strategies for adding new products and businesses to the portfolio, whilst at the same time deciding when products and businesses should no longer be retained.
Methods of Portfolio Planning
The two best-known portfolio planning methods are from the Boston Consulting Group (the subject of this revision note) and by General Electric/Shell. In each method, the first step is to identify the various Strategic Business Units ("SBU's") in a company portfolio. An SBU is a unit of the company that has a separate mission and objectives and that can be planned independently from the other businesses. An SBU can be a company division, a product line or even individual brands - it all depends on how the company is organised.
The Boston Consulting Group Box ("BCG Box")
(^2) Source: http://www.tutor2u.net/business/strategy/bcg_box.htm
(2) Hold: here the company invests just enough to keep the SBU in its present position.
(3) Harvest: here the company reduces the amount of investment in order to maximise the short- term cash flows and profits from the SBU. This may have the effect of turning Stars into Cash Cows.
(4) Divest: the company can divest the SBU by phasing it out or selling it - in order to use the resources elsewhere (e.g. investing in the more promising "question marks").
S t r a t e g y - P o r t f o l i o a n a l y s i s - G E m a t r i x 3
The business portfolio is the collection of businesses and products that make up the company. The best business portfolio is one that fits the company's strengths and helps exploit the most attractive opportunities.
The company must:
(1) Analyse its current business portfolio and decide which businesses should receive more or less investment, and
(2) Develop growth strategies for adding new products and businesses to the portfolio, whilst at the same time deciding when products and businesses should no longer be retained.
The two best-known portfolio planning methods are the Boston Consulting Group Portfolio Matrix and the McKinsey / General Electric Matrix (discussed in this revision note). In both methods, the first step is to identify the various Strategic Business Units ("SBU's") in a company portfolio. An SBU is a unit of the company that has a separate mission and objectives and that can be planned independently from the other businesses. An SBU can be a company division, a product line or even individual brands - it all depends on how the company is organised.
The McKinsey / General Electric Matrix
The McKinsey/GE Matrix overcomes a number of the disadvantages of the BCG Box. Firstly, market attractiveness replaces market growth as the dimension of industry attractiveness, and includes a broader range of factors other than just the market growth rate. Secondly, competitive strength replaces market share as the dimension by which the competitive position of each SBU is assessed.
The diagram below illustrates some of the possible elements that determine market attractiveness and competitive strength by applying the McKinsey/GE Matrix to the UK retailing market:
(^3) Source: http://www.tutor2u.net/business/strategy/ge_matrix.htm
Factors that Affect Market Attractiveness
Whilst any assessment of market attractiveness is necessarily subjective, there are several factors which can help determine attractiveness. These are listed below:
- Market size.
- Market growth.
- Market profitability.
- Pricing trends.
- Competitive intensity / rivalry.
- Overall risk of returns in the industry.
- Opportunity to differentiate products and services.
- Segmentation.
- Distribution structure (e.g. retail, direct, wholesale.
Factors that Affect Competitive Strength
Factors to consider include:
- Strength of assets and competencies.
- Relative brand strength.
- Market share.
- Customer loyalty.
- Relative cost position (cost structure compared with competitors).
- Distribution strength.
- Record of technological or other innovation.
- Access to financial and other investment resources.
SOLUTION
Strategic Business Unit, SBU
(A)
Market Growth Rate, MGR (%)
(B)
Relative Market Share, RMS
Type
(C)
Net Cash Flow, NCF 1 25,99 2,00 Star -79, 2 12,62 2,00 Star 23, 3 0,00 0,63 Dog 14, 4 14,47 2,67 Star -32, 5 18,56 0,38 Question Mark 4, 6 25,99 0,29 Question Mark -11, 7 81,71 0,35 Question Mark -697, 8 100,00 3,00 Star -470, 9 14,47 0,10 Question Mark -7, 10 35,72 2,00 Star -53, ? --- --- --- -1310,
(A) MGR = (v^3 [SI (0) / SI (-3)]) - 1
Further explanation:
SI (0) = SI (-3) x (1 + MGR) 3? (1 + MGR) 3 = SI (0) / SI (-3)? (1 + MGR) = v^3 [SI (0) / SI (-3)]?
? MGR = (v^3 [SI (0) / SI (-3)]) – 1
(B) RMS = SB / SMC
(C) NCF = NA x (RONA – MGR) = RONA x NA x (1 – [MGR / RONA])
Further explanation:
NCF = NPAT – IN = RONA x NA – IRONA x NA = NA x (RONA – IRONA) =
= RONA x NA x [(RONA – IRONA)] / RONA = RONA x NA x (1 – [IRONA / RONA])
If we consider IRONA = MGR (scenario to keep stable the current market share), then:
NCF = RONA x NA x (1 – [MGR / RONA])
Note that:
NPAT = Net Profit After Tax.
IN = Investment Needs.
IRONA = Investment Rate On Net Assets.
EXERCISE 2
HUELVA CORPORATION, PLC is the parent of a group of companies comprising thirteen businesses, of which the following information is known, referring to the close of the latest financial year (time 0):
Business SB NA % RONA NCF %GSB SMC %GSMC %MGR 1 81.4 53.5 2.2 -4.52 3 98 10 12 2 27.2 7.7 14.7 -3.69 25 15 20 20 3 38.2 23.8 -5.9 -7.13 10 70 12 10 4 5.2 3.0 -5.3 -0.79 10 15 5 8 5 5.8 1.7 19.4 0.51 5 4 6 4 6 1.2 0.5 12.0 0.07 5 1.4 6 4 7 39.9 23.2 6.8 -3.41 10 34 12 10 8 9.4 4.3 9.3 0.44 3 8 0 2 9 6.7 2.9 13.1 -0.05 10 6.3 10 9 10 23.3 10.2 19.1 -0.71 0 12 0 0 11 9.6 2.8 58.0 0.88 15 10 20 17 12 91.7 39.2 13.1 3.50 5 60 5 6 13 3.3 2.0 6.5 -0.57 40 3 30 30 Total 342.9 174.8 - -15.47 - - - - SB: Sales of the Business. NA: Net Assets. RONA: Return On Net Assets (%). NCF: Net Cash Flow. GSB: Growth of Sales of the Business (%, forecast). SMC: Sales of the Main Competitor. GSMC: Growth of Sales of the Main Competitor (%, forecast). MGR: Market Growth Rate (%).
Additional data:
- The MGR that differentiates between strong and weak growth is 10% p.a.
- In the "question mark" businesses, disinvestment can be achieved for the full value of the net assets. In the “dog” businesses, it can be achieved for half of the value of the net assets.
- The corporation could absorb a negative NCF, but never in excess of 5% of the total NA.
- The corporation does not accept an overall rate of growth of less than 2% p.a.
- The minimum rate of return set by the corporation is 7%.
Tasks to be completed:
- Analyze the situation of the businesses portfolio applying the BCG growth-share box. The scenario should be constructed and the recommendations formulated for a time horizon of two years.
- With respect to SBU 1, this pursues a strategy of growth by means of investments financed with the profits generated annually and with resources from the rest of the corporation or from outside, up to an annual figure equal to the external funds required at time 0. The company knows that, while it may grow at a rate of less than or equal to that of the market, it can maintain the current margin on sales, and that its main competitor will continue to grow in the next few years at the present rate. Knowing that the investment for repositioning is equal to the depreciation of its assets, you are requested to: 2.1. Calculate the sales, net assets, net cash flow, sales growth, profit, return on net assets, and investments in the next five years. 2.2. Represent the position of this business in a growth-share matrix and the evolution foreseen for this business over the 5 year period, differentiating between high and low growth as above or below the rate of 7% p.a. 2.3. Comment on the results.
() Condition 1 fulfilled. () Condition 2 fulfilled: annual growth > 2%. (**) Condition 3 fulfilled: RONA > 7% (14.36 / 200.83 = 7.15%).
(F) SB (2) = SB (1) x (1 + GSB) = SB (0) x (1 + GSB)^2
(G) NA (2) = NA (1) x (1 + GSB) = NA (0) x (1 + GSB)^2
(H) NPAT (2) = NA (2) X RONA
(I) IN (2) = NA (2) – NA (1)
(J) NCF (2) = NPAT (2) – IN (2)
(K) SMC (2) = SMC (0) x (1+ GSMC)^2
(L) RMS (2) = SB (2) / SMC (2)
Part 2
Year (A) NA
(B)
%RONA
(C)
NPAT
(D)
NCF
(E)
IN
(F)
SB
(G)
%GSB
(H)
SMC
(I)
RMS
(A) NA (i) = [NA (i-1) + 4.52] / 0.
Further explanation:
IN (i) = NPAT (i) + 4.
NPAT (i) = NA (i) x RONA = NA (i) x 0.
IN (i) = [NA (i) x 0.022] + 4.
NA (i) = NA (i-1) + IN (i) = NA (i-1) + [NA (i) x 0.022] + 4.52? NA (i) x 0.978 = NA (i-1) + 4.52?
? NA (i) = [NA (i-1) + 4.52] / 0.
(B) It is supposed as a constant.
(C) NPAT (i) = NA (i) x 0.
(D) Constant, as a consequence of the company’s policy.
(E) IN (i) = NPAT + 4.
(F) ROS (0) = NPAT (0) / SB (0) = [NA (0) x RONA] / SB (0) = [53.5 x 0.022] / 81.4 = 0.01446 (constant, as sais in the text).
0.01446 = NPAT (i) / SB (i)? SB (i) = NPAT (i) / 0.
(G) GSB (i) = [SB (i) – SB (i-1)] x 100 / SB (i-1)
(H) SMC (i) = SMC (i-1) x 1.
(I) RMS (i) = SB (i) / SMC (i)
SOLUTION
SBU Profit Investment (assets) 8 400 1, 6 300 3, 7 150 2, 12 110 1, 4 100 1, 11 90 1, ? 1,150 11, % 78 65
SBU Investment (assets) Profit 6 3,900 300 7 2,160 150 12 1,620 110 3 1,600 20 1 1,500 50 11 1,430 90 4 1,400 100 ? 13,610 820 % 76 56
SBU (A)
%Investment
(B)
%Profit
(C)
%ROI
(D)
%ROS
(E)
ROT
(F)
%ROM
(G)
%ME
(A) Business Assets / Total Assets
(B) Business Profit / Total Profit
(C) Return On Investment = Profit / Assets
(D) Return On Sales = Profit / Sales
(E) Assets Turnover or ROTation = Sales / Assets
(F) Return On Marketing = Profit / Commercial Costs
(G) Marketing Effort = Commercial Costs / Sales
Notes: ROI = ROS x ROT ROS = ROM x ME
Example
This is an example to show how the commercial efficacy matrix works; concerning the question of how the Return On Sales (ROS) can be increased raising the company’s Marketing Effort (ME):
ROS = ROM x ME
Profit Profit Commercial Costs ------ = ---------------------- x ----------------------- Sales Commercial Costs Sales
Imagine the following situation, related to business 2 in the portfolio of exercise 3:
Since ROM is 133,33%, this means that, in this business, each euro devoted to marketing generates 1,33 euros of profit.
So, the current situation is, for each 100 euros of sales:
Commercial Costs = 4,29 (ME = 4,29%) Sales = 100 Profit = 5,71 (ROS = 5,71%)
According to the commercial efficacy matrix, the recommendation is to increase the company’s commercial expenses (zone 3).
If these expenses are doubled, of course an increase in the volume of sales will be expected. It is reasonable to assume that this increase won’t be the double, but significant any way, such as a 50%, for instance. Under this hypothesis, the new data will be the following:
Commercial Costs = 8,58 (double) Sales = 150 (50% increase) Profit = 11,41 (*)
(*) Remember that each euro devoted to marketing generates 1,33 euros of profit. This is why 11,41 = 8,58 x 1,33.
The new value of the marketing effort is:
8, ME = ----- x 100 = 5,72% 150
And the new value of the Return On Sales:
11, ROS = ------ x 100 = 7,61% 150
To sum up:
ROS (%) ROM ME (%) Before 5,71 1,33 4, Now 7,61 1,33 5,
