•Was the Chinese supplier ethical in shipping more than 300,000 cases made of real leather instead of the requested faux leather material, even though the supplier was not charging NBD anything extra for the higher cost of real leather? Explain why or why not using ethical theory and principles.
Instructions for Report
The CEO has asked the task force to write a report with its findings and recommendations for how NBD should handle this situation. Specifically, the report needs to answer the following questions:
•Was the Chinese supplier ethical in shipping more than 300,000 cases made of real leather instead of the requested faux leather material, even though the supplier was not charging NBD anything extra for the higher cost of real leather? Explain why or why not using ethical theory and principles.
•When the manufacturing VP contacted the Chinese supplier to complain, the supplier could not understand why NBD was not pleased about receiving a real leather case, given that NBD was still paying for the less expensive faux leather one. Is there a cultural difference between customer expectations and business transactions in the West and in Asia? Explain.
•As an organization, what strategic errors did the task force observe in the decision making by various individuals in this situation? By the design VP? By the manufacturing VP? By the marketing VP?
•What is the appropriate strategy going forward? Conduct a SWOT analysis and PESTEL analysis to decipher what NBD should do in light of these strategic errors.
Using your outline and research notes write a report for the CEO. Be sure to meet the following requirements:
•Include APA-formatted in-text citations and an APA-formatted reference list (do not format the body of the report using APA style, just the reference list). See references and citations for details.
•Include a specific recommendation on what action, if any, the CEO should take based on your analysis and conclusions.
•Support your conclusion with references to cultural norms, strategy, and the principles of SWOT and PESTEL.
•The report should be no more than five pages (double spaced, 12-point font; the reference list does not count towards page limit).
Case
Colossal Corporation maintains a subsidiary in Serafini, a small country in Eastern Europe. This subsidiary is incorporated in the state of Delaware as New Brand Design, Inc. (NBD), a company that designs, brands, and manufactures innovative electronic products and markets and distributes them for resale across the globe. NBD has been admitted to conduct business in Serafini.
NBD’s executive board is composed of ten members from three different countries, including a vice president of design, a vice president of marketing, and a vice president of manufacturing. Due to recent conflicts among the board members, communication among them has been less than efficient, and they are regularly blaming each other for mistakes made by NBD.
The design vice president’s staff originally proposed two alternative materials for laptop cases that are packaged and sold with certain high-end laptops manufactured by NBD, such as its best-selling product, the Dualplex 360: real leather (pig skin) and faux leather made from a synthetic material (polyurethane). Both laptop cases were very similar in appearance, although the real leather case was a little heavier than the faux leather case. Both cases could be sourced from an established supplier in China, with whom the design VP had a long-term relationship. The marketing VP evaluated the cost of the two cases from this Chinese supplier and decided that he would go with the faux leather case because it was available at a 20 percent lower cost in comparison to the real leather case.
An initial order of 500,000 faux leather cases was placed with the Chinese supplier, and within about a month, the shipment of cases arrived at NBD’s South African facility, where the laptops were assembled and packaged for sale all over the world. When the newly delivered cases were inspected by NBD’s product team in South Africa, they discovered that more than two-thirds of the cases were actually made of real leather. After NBD’s VP of manufacturing contacted the Chinese supplier to complain about the cases being “out of spec,” he was told that it was not an error—the supplier was aware of the fact that over 300,000 cases in the shipment were made out of real leather. After some persistent questioning, the supplier revealed that as a result of an order cancellation from another customer, they had suddenly found themselves overstocked with an inventory of pig leather. Rather than let this extra inventory go to waste, the Chinese supplier decided to use up that inventory toward fulfilling a major part of NBD’s order!
The Chinese supplier was not willing to apologize for their decision to ship over 300,000 real leather cases to NBD without first obtaining approval for the switch. In fact, the supplier did not feel that NBD had any grounds to complain because the supplier was willing to accept the lower payment as per NBD’s original order of faux leather cases. Instead of insisting that the supplier take back the 300,000 or so cases that were out of spec, the manufacturing VP accepted the entire shipment and then conveyed this news to the marketing VP in an internal company memo.
Upon receiving the memo, the marketing VP realized it was too late for the real leather cases to be returned to the supplier in China, and he would have to make the best of out of an undesirable situation. He made a decision that the faux leather cases would be packaged for laptops shipped to Europe and North America, given that they were lighter in weight. The real leather cases would be used for laptops packaged and sold in Africa and Asia. Previous marketing surveys conducted by NBD had revealed that consumers in the West preferred lighter laptop cases, while consumers in Africa and Asia equated heavier cases with better quality and longer life. Of course, the marketing VP forgot that the advertising materials and product inserts for the laptop had already been printed in multiple languages and all of this product literature stated that the laptop case was made of synthetic material.
The laptop cases were shipped to retail outlets, and within a couple of weeks, the marketing VP had a potential crisis on his hands. Tech writers and product reviewers from two well-known South African and Kenyan newspapers had called and emailed to inquire about what they rightly suspected was a pig leather case and not the synthetic material that was specified in NBD’s product literature. They informed the marketing VP that if they revealed the truth about the origins of the case material in their reviews, it would have a tremendously negative impact on NBD’s sales in Africa and Asia, where a significant number of consumers opposed the use of pigskin in products on religious grounds. They wanted to know how the company was going to resolve this issue before they went to press.
The marketing VP contacted the manufacturing and design VPs to find out what they should do to get the company out of this potential crisis. After a lot of finger-pointing and talking past each other, the three individuals arranged a conference call with Colossal’s CEO and brought the CEO up to date. The CEO promised the three VPs that her international task force would research and address the issue. End of Case
Managing in a Global Environment
Managing in a global environment presents particularly difficult challenges as well as the potential for significant rewards. A manager must be acutely aware of all possible cultural, linguistic, legal, and ethical issues when managing a diversified workforce. There are many tools available to the international manager for engaging stakeholders, strategizing, and learning about how different cultures do business.
International Expansion and Global Market Opportunity Assessment
Choosing to expand internationally is rarely black and white. A wide variety of internationalization moves are available after choosing to expand. Moreover, some flatteners make global moves easier, while some make them more difficult. Indeed, even importing and outsourcing can be considered stealth, or at least early, steps in internationalization, because they involve doing business across borders. The first section of this resource discusses the rationale for international expansion and the planning and due diligence it requires.
In the second section of this resource, you will learn about PESTEL, the framework for analyzing the political, economic, sociocultural, technological, environmental, and legal aspects of different international markets.
Global Strategic Choices
The Why, Where, and How of International Expansion
The allure of global markets can be mesmerizing. Companies that operate in highly competitive or nearly saturated markets at home, for instance, are drawn to look overseas for expansion. But overseas expansion is not a decision to be made lightly, and managers must ask themselves whether the expansion will create real value for shareholders. Companies can easily underestimate the costs of entering new markets if they are not familiar with the new regions and the business practices common within the new regions. For some companies, a misstep in a foreign market can put their entire operations in jeopardy, this section explores the rationale for international expansion as well as how to analyze and evaluate markets for international expansion.
Flow chart with four boxes. The top box asks, Why? Positive economic logic? Supported by our differentiators? Strengthens our differentiators? If no, stop. If yes, proceed to the next box, Where? What new countries fit our differentiators? Which ones chan strengthen our differentiators? Where is the best business fit? This box proceeds to a box labeled How? Do it on our own? Do we need a local partner? How big and how fast? The bottom box, showing hard criteria, soft criteria, and fit proceeds to the Where box. Hard criteria include market size, future growth, parking levels, and competitive environment. Soft criteria include economic and political stability, restrictions on foreign ownership and freedom of capital flows. Fit includes human resources, geographic proximity, and cultural differences.
Analysis and Evaluation of Markets for International Expansion
Rationale for International Expansion
Companies embark on an expansion strategy for one or more of the following reasons:
•improve the cost-effectiveness of their operations
•expand into new markets for new customers
•follow global customers
For example, the US chemical firm DuPont, Brazilian aerospace conglomerate Embraer, and Finnish mobile phone maker Nokia are all investing in China to gain new customers. Schneider Logistics, in contrast, initially entered a new market, Germany, not to get new customers but to retain existing customers who needed a third-party logistics firm in Germany. Thus, Schneider followed its customers to Germany. Other companies, like the microprocessor maker Intel, are building manufacturing facilities in China to take advantage of the less costly and increasingly sophisticated production capabilities. For example, Intel built a semiconductor manufacturing plant in Dalian, China, for $2.5 billion, whereas a similar state-of-the-art microprocessor plant in the United States can cost $5 billion (“2011 Global R&D Funding Forecast, 2010). Intel has also built plants in Chengdu and Shanghai, China, and in other Asian countries (Vietnam and Malaysia) to take advantage of lower costs.
Planning for International Expansion
As companies look for growth in new areas of the world, they typically prioritize which countries to enter. Because many markets look appealing due to their market size or low-cost production, it is important for firms to prioritize which countries to enter first and to evaluate each country’s relative merits. For example, some markets may be smaller in size, but their strategic complexity is lower, which may make them easier to enter and easier from an operations point of view. Sometimes there are even substantial regional differences within a given country, so careful investigation, research, and planning are important to do before entry.
International Market Due Diligence
International market due diligence involves analyzing foreign markets for their potential size, accessibility, cost of operations, and buyer needs and practices to aid the company in deciding whether to invest in entering that market. Market due diligence relies on using not just published research on the markets but also interviews with potential customers and industry experts. A systematic analysis needs to be done, using tools like PESTEL.
Evaluating whether to enter a new market is like peeling an onion—there are many layers. For example, when evaluating whether to enter China, the advantage most people see immediately is its large market size. Further analysis shows that the majority of people in that market can’t afford US products, however. But even deeper analysis shows that while many Chinese are poor, the number of people who can afford consumer products is increasing (Kleiner, 2010).
Regional Differences
The next part of due diligence is to understand the regional differences within the country and to not view the country as a monolith. For example, although companies are dazzled by China’s large market size, deeper analysis shows that 70 percent of the population lives in rural areas. This presents distribution challenges given China’s vast distances. In addition, consumers in different regions speak different dialects and have different tastes in food. Finally, the purchasing power of consumers varies in the different cities. City dwellers in Shanghai and Tianjin can afford higher prices than villagers in a western province.
Let’s look at a specific example. To achieve the dual goals of reducing operations costs and being closer to a new market of customers, for instance, numerous high-tech companies identify Malaysia as an attractive country to enter. Malaysia is a relatively inexpensive country, and the population’s English skills are good, which makes it attractive both for finding local labor and for selling products. But even in a small country like Malaysia, there are regional differences. Companies may be tempted to set up operations in the capital city, Kuala Lumpur, but thorough due diligence reveals that the costs in Kuala Lumpur are rising rapidly. If current trends continue, Kuala Lumpur will be as expensive as London in five years. Therefore, firms seeking primarily a lower-cost advantage would do better to locate to another city in Malaysia, such as Penang, which has many of the same advantages as Kuala Lumpur but does not have its rising costs (Chamania, Mehta, & Sehgal, 2001).
Understanding Local Consumers
Entering a market means understanding the local consumers and what they look for when making a purchase decision. In some markets, price is an important issue. In other markets, such as Japan, consumers pay more attention to details—such as the quality of products and the design and presentation of the product or retail surroundings—than they do to price. The Japanese demand for perfect products means that firms entering Japan might have to spend a lot on quality management. Moreover, real-estate costs are high in Japan, as are freight costs such as fuel and highway charges. In addition, space is limited at retail stores and stockyards, which means that stores can’t hold much inventory, making replenishment of products a challenge. Therefore, when entering a new market, it’s vital for firms to perform full, detailed market research in order to understand the market conditions and take measures to account for them.
How to Learn the Needs of a New Foreign Market
The best way for a company to learn the needs of a new foreign market is to deploy people to immerse themselves in that market. Larger companies, like Intel, employ ethnographers and sociologists to spend months in emerging markets, living in local communities and seeking to understand the latent, unarticulated needs of local consumers. For example, Dr. Genevieve Bell, one of Intel’s anthropologists, traveled extensively across China, observing people in their homes to find out how they use technology and what they want from it. Intel then used her insights to shape its pricing strategies and its partnership plans for the Chinese consumer market (Radjou, 2009).
Differentiation and Capability
When entering a new market, companies also need to think critically about how their products and services will be different from what competitors are already offering in the market so that the new offering provides customers value. Companies trying to penetrate a new market must be sure to have some proof that they can deliver to the new market; this proof could be evidence that they have spoken with potential customers and are connected to the market (“How We Do It,” 2011).
Related to firm capability, another factor for firms to consider when evaluating which country to enter is corporate fit, the degree to which the company’s existing practices, resources and capabilities fit the new market. For example, a company accustomed to operating within a detailed, unbiased legal environment would not find a good corporate fit in China because of the current vagaries of Chinese contract law (Wingard, 2002). While a low corporate fit doesn’t preclude expanding into that country, it does signal that additional resources or caution may be necessary. Two typical dimensions of corporate fit are human resources practices and the firm’s risk tolerance.
Industry Dynamics
In some cases, the decision to enter a new market will depend on the specific circumstances of the industry in which the company operates. For example, companies that help build infrastructure need to enter countries where the government or large companies have a lot of capital, because infrastructure projects are so expensive. The president of the Spanish infrastructure company Fomento de Construcciones y Contratas said, “We focus on those countries where there is more money and there is a gap in the infrastructure,” such as China, Singapore, the United States, and Algeria (“Practical Advice,” 2011).
Political stability, legal security, and the “rule of law”—the presence of and adherence to laws related to business contracts, for example—are important considerations prior to market entry regardless of which industry a company is in. Fomento de Construcciones y Contratas learned this the hard way and ended up leaving some countries it had entered. The company’s president, Baldomero Falcones, explained, “When you decide whether or not to invest, one factor to take into account is the rule of law. Our ethical code was considered hard to understand in some countries, so we decided to leave during the early stages of the investment” (“Practical Advice,” 2011).
Ethics in Action
Companies based in China are entering Australia and Africa, primarily to gain access to raw materials. Trade between China and Africa grew an average of 30 percent in the decade up to 2010, reaching $115 billion that year (Redfern, 2011). Chinese companies operate in Zambia (mining coal), the Democratic Republic of the Congo (mining cobalt), and Angola (drilling for oil). To get countries to agree to the deals, China had to agree to build new infrastructure, such as roads, railways, hospitals, and schools. Some economists, such as Dambisa Moyo, who wrote Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa, believe that the way to help developing countries like those in Africa is not through aid but through trade. Moyo argues that long-term charity is degrading. She advocates business investments and setting up enterprises that employ local workers. Ecobank CEO Arnold Ekpe (whose bank employs 11,000 people in twenty-six African states) says the Chinese look at Africa differently than the West does: “[The Chinese] are not setting out to do good,” he says. “They are setting out to do business. It’s actually much less demeaning” (Perry, 2009). Deborah Brautigam, associate professor at the American University’s International Development Program, agrees. In her book, The Dragon’s Gift: The Real Story of China in Africa, she says, “The Chinese understand something very fundamental about state building: new states need to build buildings and dignity, not simply strive to end poverty” (Bloomfield, 2010).
Steps and Missteps in International Expansion
Let’s look at an example of the steps—as well as the missteps—in international expansion. American retailers entered the Chilean market in the mid- to late 1990s. They chose Chile because of the country’s strong economy, the advanced level of the Chilean retail sector, and the free trade agreements signed by Chile. From that standpoint, their due diligence was accurate, but it didn’t go far enough, as we’ll see.
Retailer J. C. Penney entered Chile in 1995, opening two stores. The French retailer Carrefour also entered Chile, in 1998. Neither company entered through an alliance with a local retailer, and both companies were forced to close their Chilean operations due to the losses they were incurring. Analysis by the Aldolfo Ibáñez University in Chile explained the reasons behind the failures: the managers of these companies were not able to connect with the local market, nor did they understand the variables that affected their businesses in Chile (“The Globalization of Chilean Retailing,” 2007). Specifically, the Chilean retailing market was advanced, but it was also very competitive. The new entrants (J. C. Penney and Carrefour) didn’t realize that the existing major local retailers had their own banks and offered banking services at their retail stores, which was a major reason for their profitability. The outsiders assumed that profitability in this sector was based solely on retail sales. They missed the importance of the bank ties. Another typical mistake that companies make is to assume that a new market has no competition just because the company’s traditional competitors aren’t in that market.
The Chilean retailers were successful in their own markets but wanted to expand beyond their borders in order to get new customers in new markets. The Chilean retailers chose to enter Peru, which had the same language.
The Peruvian retailing market was not advanced, and it did not offer credit to customers. The Chileans entered the market through a partnership with local Peruvian firms and introduced the concept of credit cards, which was an innovation in the poorly developed Peruvian market. Entering through a domestic partner helped the Chileans because it eliminated hostility and made the investment process easier. Offering the innovation of credit cards made the Chilean retailers distinctive and offered an advantage over the local offerings (“The Globalization of Chilean Retailing,” 2007).
PESTEL, Globalization, and Importing
Know the Components of PESTEL Analysis
PESTEL analysis is an important and widely used tool that helps show the big picture of a firm’s external environment, particularly as related to foreign markets. PESTEL is an acronym for the political, economic, sociocultural, technological, environmental, and legal contexts in which a firm operates. A PESTEL analysis helps managers gain a better understanding of the opportunities and threats they face; consequently, the analysis aids in building a better vision of the future business landscape and how the firm might compete profitably. This useful tool analyzes for market growth or decline and, therefore, the position, potential, and direction for a business. When a firm is considering entry into new markets, these factors are of considerable importance. Moreover, PESTEL analysis provides insight into the status of key market flatteners, both in terms of their present state and future trends.
Firms need to understand the macro environment to ensure that their strategy is aligned with the powerful forces of change affecting their business landscape. When firms exploit a change in the environment—rather than simply survive or oppose the change—they are more likely to be successful. A solid understanding of PESTEL also helps managers avoid strategies that may be doomed to fail given the circumstances of the environment. J. C. Penney’s failed entry into Chile is a case in point.
Finally, understanding PESTEL is critical prior to entry into a new country or region. The fact that a strategy is congruent with PESTEL in the home environment gives no assurance that it will also align in other countries. For example, when Lands’ End, the online clothier, sought to expand its operations into Germany, it ran into local laws prohibiting it from offering unconditional guarantees on its products. In the United States, Lands’ End had built a reputation for quality on its no-questions-asked money-back guarantee. However, this was considered illegal under Germany’s regulations governing incentive offers and price discounts. The political skirmish between Lands’ End and the German government finally ended when the regulations banning unconditional guarantees were abolished. While the restrictive regulations didn’t put Lands’ End out of business in Germany, they did inhibit its growth there until the laws were abolished.
There are three steps in the PESTEL analysis.
1.Consider the relevance of each of the PESTEL factors to your context.
2.Identify and categorize the information that applies to these factors.
3.Analyze the data and draw conclusions.
Common mistakes in this analysis include stopping at the second step or assuming that the initial analysis and conclusions are correct without testing the assumptions and investigating alternative scenarios.
The framework for PESTEL analysis is presented below. It’s composed of six sections—one for each of the PESTEL headings (Carpenter, 2009). The framework includes sample questions or prompts, the answers to which can help determine the nature of opportunities and threats in the macroenvironment. These questions are examples of the types of issues that can arise in a PESTEL analysis.
Political Factors
The political environment can have a significant influence on businesses. In addition, political factors affect consumer confidence and consumer and business spending. For instance, how stable is the political environment? This is particularly important for companies entering new markets. Government policies on regulation and taxation can vary from state to state and across national boundaries. Political considerations also encompass trade treaties, such as NAFTA, ASEAN, and EU. Such treaties tend to favor trade among the member countries but impose penalties or less favorable trade terms on nonmembers.
Economic Factors
Managers also need to consider macroeconomic factors that will have near-term and long-term effects on the success of their strategy. Inflation rates, interest rates, tariffs, the growth of the local and foreign national economies, and exchange rates are critical. Unemployment, availability of critical labor, and the local cost of labor also have a strong bearing on strategy, particularly as related to the location of disparate business functions and facilities.
Sociocultural Factors
The social and cultural influences on business vary from country to country. Depending on the type of business, factors such as the local languages, the dominant religions, the cultural views toward leisure time, and the age and lifespan demographics may be critical. Local sociocultural characteristics also include attitudes toward consumerism, environmentalism, and the roles of men and women in society. Making assumptions about local norms derived from experiences in your home market is a common cause for early failure when entering new markets. However, even home market norms can change over time, often caused by shifting demographics due to immigration or aging populations.
Technological Factors
Technological factors have a major bearing on the threats and opportunities firms encounter. For example, new technology may make it possible for products and services to be made more cheaply and to a better standard of quality. New technology may also provide the opportunity for more innovative products and services, such as online stock trading and remote working. Such changes have the potential to change the face of the business landscape.
Environmental Factors
The environment has long been a factor in firm strategy, primarily from the standpoint of access to raw materials. Increasingly, this factor is best viewed as both a direct and indirect cost for the firm.
Environmental factors are also evaluated on the footprint left by a firm on its respective surroundings. For consumer product companies like PepsiCo, for instance, this can encompass the waste management and organic farming practices used in the countries where raw materials are obtained. Similarly, in consumer markets, it may refer to the degree to which packaging is biodegradable or recyclable.
Legal Factors
Finally, legal factors reflect the laws and regulations relevant to the region and the organization. Legal factors can include whether the rule of law is well established, how easily or quickly laws and regulations may change, and what the costs of regulatory compliance are. For example, Coca-Cola’s market share in Europe is greater than 50 percent; as a result, regulators have asked that the company give shelf space in its coolers to competitive products in order to provide greater consumer choice (“EU Curbs Coca-Cola,” 2005).
Many of the PESTEL factors are interrelated. For instance, the legal environment is often related to the political environment, where laws and regulations can only change when they’re consistent with the political will.
PESTEL and Globalization
Over the past decade, new markets have been opened to foreign competitors, whole industries have been deregulated, and state-run enterprises have been privatized. So, globalization has become a fact of life in almost every industry (Yip, 1989). This entails much more than companies simply exporting products to another country. Some industries that aren’t normally considered global do, in fact, have strictly domestic players. But these companies often compete alongside firms with operations in multiple countries; in many cases, both sets of firms are doing equally well. In contrast, in a truly global industry, the core product is standardized, the marketing approach is relatively uniform, and competitive strategies are integrated in different international markets (Porter, 1986; Yip, 1989). In these industries, competitive advantage clearly belongs to the firms that can compete globally.
A number of factors reveal whether an industry has globalized or is in the process of globalizing. The box below groups globalization factors into four categories: markets, costs, governments, and competition. These dimensions correspond well to Thomas Friedman’s (2005) “flatteners” (as described in his book The World Is Flat), though they are not exhaustive.
Markets
The more similar markets in different regions are, the greater the pressure for an industry to globalize. Coca-Cola and PepsiCo, for example, are fairly uniform around the world because the demand for soft drinks is largely the same in every country. The airframe manufacturing industry, dominated by Boeing and Airbus, also has a highly uniform market for its products; airlines all over the world have the same needs when it comes to large commercial jets.
Costs
In both of these industries, costs favor globalization. Coca-Cola and PepsiCo realize economies of scope and scale because they make such huge investments in marketing and promotion. Since they’re promoting coherent images and brands, they can leverage their marketing dollars around the world. Similarly, Boeing and Airbus can invest millions in new-product R&D only because the global market for their products is so large.
Governments and Competition
Obviously, favorable trade policies encourage the globalization of markets and industries. Governments, however, can also play a critical role in globalization by determining and regulating technological standards. Railroad gauge—the distance between the two steel tracks—would seem to favor a simple technological standard. In Spain, however, the gauge is wider than in France. Why? Because back in the 1850s, when Spain and neighboring France were hostile to one another, the Spanish government decided that making Spanish railways incompatible with French railways would hinder any French invasion.
These are a few key drivers of industry change. However, there are particular implications of technological and business-model breakthroughs for both the pace and extent of industry change. The rate of change may vary significantly from one industry to the next; for instance, the computing industry changes much faster than the steel industry. Nevertheless, change in both fields has prompted complete reconfigurations of industry structure and the competitive positions of various players. The idea that all industries change over time and that business environments are in a constant state of flux is relatively intuitive. As a strategic decision maker, you need to ask yourself this question: how accurately does current industry structure (which is relatively easy to identify) predict future industry conditions?
SWOT Analysis
A situation analysis is often referred to by the acronym SWOT, which stands for strengths, weaknesses, opportunities, and threats.
Graphic showing opportunities and threats grouped as external factors that encompass technology, competition, and economic, political, legal, and social trends. Strengths and Weaknesses are grouped as internal factors and encompass financial, technical, competition position, human resources, and product line.
SWOT Analysis
Essentially, a SWOT analysis is an examination of the internal and external factors that impact the organization and its strategies. The internal factors are strengths and weaknesses; the external factors are opportunities and threats. A SWOT analysis gives an organization a clear picture of the business situation in which it operates and helps it identify which strategies to pursue.
Internal Factors
Strengths and weaknesses include the resources and capabilities within the organization now. Since the company has the most control over internal factors, it can craft strategies and objectives to exploit strengths and address weaknesses. Examples of internal factors include the following:
•financial resources
•technical resources and capabilities
•human resources
•product lines
All of these are controlled by the organization. Competitive positioning can also be a strength or a weakness. While competitors’ strategies and tactics are external to the company, the company’s position relative to the competitors is something that it can control.
External Factors
External factors include opportunities and threats that are outside of the organization. These are factors that the company may be able influence—or at least anticipate—but not fully control. Examples of external factors include the following:
•technology innovations and changes
•competition
•economic trends
•government policies and legislation
•legal judgments
•social trends
While a company can control how it positions itself relative to the competition, it can’t control competitors’ actions or strategies.
Benefits of a SWOT Analysis
Encourages Realistic Planning
Imagine a growing company that is able to attract new customers more easily than the competition because it has a strong reputation and visible leader. These strengths should be considered and exploited in the strategy. Now imagine that the company also has a poor history of delivering on customer commitments. If this weakness is not addressed, it will not only make it difficult to retain customers but also likely damage the reputation of the company and its leader—which would eliminate key strengths. By conducting a situation analysis, the company is more likely to consider both of these factors in its planning.
Improves Ability to Forecast Future Events
What’s the worst thing that could happen to your business? Most organizations can answer this question because they have assessed the environment in which they operate. For instance, perhaps they know of pending legislation that might adversely affect them. Or perhaps they recognize legal risks, or unique challenges from past economic cycles. By considering threats and worst-case scenarios during the planning process, organizations can take steps to avoid them, or minimize the impact if they do they occur.
SWOT Analysis Example
A situation analysis can benefit any organization. The example below shows the SWOT analysis for a fictional college.
Graphic showing opportunities and threats grouped as external factors. Opportunities include, expand online programs, create custom programs for local employers, credit for prior learning. Threats include, reduced state funding, economic recover, and aggressive marketing by for-profit competitors. Strengths and Weaknesses are grouped as internal factors. Strengths include bright, committed faculty, strong and trusted leaders, student completion rates, student advising initiative, and community partners. Weaknesses include aging tech infrastructure, training for part-time faculty, nursing program under capacity and inefficient transfer process.
SWOT Analysis Example
Even this rudimentary analysis highlights some strategic issues, discussed below, which the college needs to consider.
Internal
The college has a number of strengths. Committed faculty and trusted leaders have collaborated to build academic programs that are showing high completion rates among students. The student advising program is also contributing to that success. Also, the college has excellent relationships with businesses in the community.
Among the weaknesses, the technology infrastructure is outdated. The college also employs a large number of part-time faculty members, but doesn’t provide them with adequate training or support. Nursing, one of the more expensive programs at the college, is not attracting enough students to keep it full. Also, the college has learned from some of its recent graduates that students are not receiving transfer credit at the local university for all of their courses taken at the college. The students wonder if the college faculty and advisers really understand their academic goals or the requirements of the four-year degree programs at the university.
By completing a SWOT analysis, the college can shape its strategies and objectives to align with both the internal resources and capabilities it has, as well as the external factors it faces.
External
The college leadership is feeling pulled by conflicting economic factors. The region has been through an economic downturn, which resulted in cuts to state funding. At the same time, an economic recovery has just begun. During the previous economic recovery, college enrollment dropped when students who were pursuing additional education returned to the workforce. How might the timing of those two funding issues work out? The college is also being affected by a local institution that is aggressively marketing to its students— especially students in the nursing program.
Still, there are opportunities. Students have expressed interest in more online courses and programs. That might also slow the local competitor, though it would also require the college to address its aging technology infrastructure. The college has identified a number of innovative programs that would enable students to earn degrees more quickly and at the same time expand its partnership and collaboration with local businesses.
SWOT Examples for Organizations and Individuals
Chess master Bruce Pandolfini has noted the similarities between business and chess. In both arenas, you must understand your own abilities as well as your flaws. You must also know your opponents, try to anticipate their moves, and deal with considerable uncertainty. A very popular management tool that incorporates the idea of understanding the elements internal and external to the firm is SWOT (strengths, weaknesses, opportunities, and threats) analysis. Strengths and weaknesses are assessed by examining the firm, while opportunities and threats refer to external events and trends. These ideas can be applied to individuals too.
Porter’s five-forces analysis examines the situation faced by the competitors in an industry. Strategic-groups analysis narrows the focus by centering on subsets of these competitors whose strategies are similar. SWOT analysis takes an even narrower focus by centering on an individual firm. Specifically, SWOT analysis is a tool that considers a firm’s strengths and weaknesses along with the opportunities and threats that exist in the firm’s environment, as represented in the table below.
SWOT point
Organizational examples
Individual examples
Strengths
Having high-levels of cash flow gives firms discretion to purchase new equipment if they wish to.
Strong technical and language skills, as well as previous work experience, can help individuals rise above the competition.
Weaknesses
Dubious leadership and CEO scandals have plagued some corporations in recent years.
Poor communication skills keep many job seekers from being hired into sales and supervisory positions.
Opportunities
The high cost of gasoline creates opportunities for substitute products based on alternative energy sources.
The U.S. economy is increasingly services based, suggesting that individuals can enjoy more opportunities in service firms.
Threats
Concerns about worldwide pollution are a threat to petroleum-based products.
A tight job market poses challenges to new graduates.
Executives using SWOT analysis compare these internal and external factors to generate ideas about how their firm might become more successful. In general, it is wise to focus on ideas that allow a firm to leverage its strengths, steer clear of or resolve its weaknesses, capitalize on opportunities, and protect itself against threats. For example, untapped overseas markets have presented potentially lucrative opportunities to Subway and other restaurant chains such as McDonald’s and KFC. Meanwhile, Subway’s strengths include a well-established brand name and a simple business format that can easily be adapted to other cultures. In considering the opportunities offered by overseas markets and Subway’s strengths, it is not surprising that entering and expanding in different countries has been a key element of Subway’s strategy in recent years. Indeed, Subway currently has operations in nearly 100 nations.
SWOT analysis is helpful to executives, and it is used within most organizations. Important cautions need to be offered about SWOT analysis, however. First, in laying out each of the four elements of SWOT, internal and external factors should not be confused with each other. It is important not to list strengths as opportunities, for example, if executives are to succeed at matching internal and external concerns during the idea generation process.
Second, opportunities should not be confused with strategic moves designed to capitalize on these opportunities. In the case of Subway, it would be a mistake to list “entering new countries” as an opportunity. Instead, untapped markets are the opportunity presented to Subway, and entering those markets is a way for Subway to exploit the opportunity. Finally, and perhaps most important, the results of SWOT analysis should not be overemphasized. SWOT analysis is a relatively simple tool for understanding a firm’s situation. As a result, SWOT is best viewed as a brainstorming technique for generating creative ideas, not as a rigorous method for selecting strategies. Thus the ideas produced by SWOT analysis offer a starting point for executives’ efforts to craft strategies for their organization, not an ending point.
In addition to organizations, individuals can benefit from applying SWOT analysis to their personal situation. A college student who is approaching graduation, for example, could lay out her main strengths and weaknesses and the opportunities and threats presented by the environment. Suppose, for instance, that this person enjoys and is good at helping others (a strength) but also has a rather short attention span (a weakness). Meanwhile, opportunities to work at a rehabilitation center or to pursue an advanced degree are available. Our hypothetical student might be wise to pursue a job at the rehabilitation center (where her strength at helping others would be a powerful asset) rather than entering graduate school (where a lot of reading is required and her short attention span could undermine her studies).
