The Mind of the Strategist: The Art of Japanese Business
(New York: McGraw Hill, 1982)
Think strategy and the first picture that comes into mind is a SWOT matrix. A SWOT Analysis attempts to identify a set of internal and external factors (SWOT attributes) which help the firm to understand its stand in the external environment that it operates in. SWOT stands for Strengths, Weaknesses, Opportunities and Threats. Strengths and Weaknesses are the internal factors – Opportunities and Threats being the external ones. Firms which prepare SWOTs understand the vitality of performing the analysis on their own company as well as on the competitors. However, the one thing that typically lacks in most SWOT Analyses is the impact of relativity. The following hypothetical case makes it clearer:
Hyopthetics, Inc. is in the business of manufacturing and selling photocopiers. The company competes with only two other players which boast of a similar line of products – Imaginary, Inc. and UnReal, Inc.
If Hypothetics chooses to exit from the market, it clearly creates an opportunity both for Imaginary and Unreal. In other words, Hypothetics’ exit becomes a generic opportunity for all the other players operating in the said market – In this case, Imaginary and Unreal. The traditional SWOT Analysis captures this as an opportunity for both the companies. However, what it fails to capture is the relative positioning of the two companies to tap this opportunity. In other words, it doesn’t answer how strongly/moderately/weakly positioned each of the companies is to take advantage of the opportunity. Imaginary, Inc. with a sales force of >1,000 would be better positioned to tap the new markets than Unreal which has a modest sales strength of ~200.
Hypothetics’ exit also creates another opportunity – an inorganic growth opportunity. Again, the traditional SWOT Analysis captures this as an opportunity for both the companies. UnReal is a conglomerate with business interests in other areas as well. With a market capitalization of $50 billions and current assets worth $12 billions, the company will be better positioned to takeover Hypothetics (market cap of $10 billions and current assets worth $1 billion). Imaginary on the other hand is only into photocopiers and boasts of a modest market cap of $11 billions and current assets worth $1.5 billion. Also, a traditional SWOT Analyses doesn’t take into account factors like the willingness of the management to go for an inorganic haul etc.
Having said all these, I do acknowledge that traditional SWOT Analyses framed internally are not executed in vacuum and the management takes a host of other factors into consideration before actually planning and executing a strategy. However, the bottom-line is the fact that SWOT Analyses are not prepared by keeping a specific target audience in mind. Also, in most of the cases, multiple third parties (External consultants/Research houses) are involved in preparing a SWOT Analysis. If the analysis doesn’t prompt the audience to go further down and investigate the relativity aspect, it doesn’t serve a purpose.
“More than 90% of the SWOT Analyses performed on healthcare companies consider “Graying population” an opportunity, “Regulatory hurdles”, “FDA’s gate-keeping” and “Ever-increasing R&D costs” are considered threats. Similarly, almost all SWOT Analyses performed on oil companies consider “Depleting oil reserves” a threat. What these SWOTs essentially tell is nothing.”
The trick is to build a framework that places a company vis-à-vis its competitors by a comprehensive consideration of all the SWOT attributes for all the competitors. Here I propose a framework that attempts to answer some (if not all) of the questions.
Typical to any strategy framework, a SWOT matrix has its own set of limitations
- A SWOT analysis is a stand-alone and one off analysis and becomes obsolete with every change (s) in the internal and external operating environments;
- A SWOT analysis answers the whats but keeps mum on the whys and hows; and
- Since the analysis is non-relative, it prompts the strategist to overemphasize/underemphasize the different SWOT attributes
The proposed framework doesn’t make the analysis dynamic. However, as you will probably appreciate, it definitely eases the efforts that go into making it dynamic. The analysis doesn’t directly answer the whys and hows. What it rather does is – it prompts the target audience to understand the impact of relativity and encourages them to investigate the whys and hows. The analysis almost fully succeeds in making sure that no single attribute is over or underemphasized.
It’s important to note that, the flow of the analysis has to be both by attribute-to-attribute and by company-to-company. To start with, you need to look for an answer to the following questions.
- For each attributes considered strength of a specific company, what’s the magnitude? Is the company highly, moderately or lowly strong?
- For each attributes considered weakness of a specific company, what’s the intensity? Is the company highly, moderately or lowly weak?
- For each attributes considered opportunity for a specific company, how strongly/moderately/weakly positioned the company is to take advantage of the opportunity?
- For each attributes considered threat for a specific company, is the company highly/moderately/lowly prone to the threat?
When we say attribute-to-attribute, it actually means the identification of all generic attributes, internal and external, ones that make sense to all your competitors. Once all the generic attributes are identified, the next flow has to be a company-to-company one i.e. the identification of attributes, internal and external, that make sense to specific company (s) and not all.
Now comes the most important part. Each attribute for each competitor has to be scored by taking into consideration its magnitude if it’s a strength, its intensity if it’s a weakness, the positioning factor if it’s an opportunity and the prone factor if it’s a threat. Since the scores are relative, they make sure that no particular attribute is over or underemphasized.
Let’s get back to the case that was presented earlier. Considering Hypothetics’ exit a market opportunity, Imaginary will have a higher score than Unreal. Let’s remember, it’s the same attribute - Hypothetics’ exit from the market. Similarly, considering Hypothetics’ exit, an inorganic growth opportunity, UnReal will have a higher score than Imaginary.
One can consider several other factors while zeroing on the scores. One such factor could possibly be the probability that a specific opportunity or threat will actually see the light of the day. For generic attributes, this doesn’t have relevance as the probability will apply to all the competitors. However, for attributes specific to a company (s), a weighted average of the Intensity/Prone factor and the “Probability Score” (Highly/Moderately/Lowly probable) can be considered. Multiple different factors can be considered and weighed to reach at a consolidated score for a particular attribute.
UnReal has traditionally been inactive as far as acquisitions and takeovers are concerned and the company’s growth has primarily been an organic one. Although the company is better positioned to tap the inorganic growth opportunity following Hypothetics’ exit, it’s highly probable that the company would stick to its strategy of growing organically. Also, the company is a multi-business conglomerate. It might not find the opportunity lucrative enough to cough up so much money for one business only. All these factors, when taken into consideration and weighed will significantly reduce UnReal’s score for the opportunity.
Similar analysis can be performed on each attribute to arrive at a consolidated score for each one. What makes the analysis strong is the sheer volume of facts and insights that goes into each score.
Time now is to obtain consolidated scores for the Ss, Ws, Os and the Ts for all the competitors. That can be done by taking simple averages of all the attributes. Please recall that we started with some stand-alone qualitative information and ended of relatively quantifying each one to arrive at four consolidated SWOT scores, one each for the strengths, weaknesses, opportunities and threats for each competitor. The comparative SWOT standings of the competitors can then be obtained by plotting the scores in an X-Y format.
Such an analysis not only helps a firm identify its position itself relative to its competitors, it also helps in evaluating and executing the ideal SWOT strategy – SO, ST, WO or WT.
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