What you'll learn to do: show how common analytic tools are used to inform the organization's strategy
When a company is developing its strategy, it is faced with a vast array of considerations and choices. It needs to take into account its resources and capabilities, the strength of existing customer relationships, the competitive landscape, the economic and legal environments, important societal trends—the list of inputs goes on and goes on. Then, based on that information, it must devise a plan—a strategy—that contains the best options for addressing the inputs. But which inputs are most important, and which options should be included in the strategy? To answer these questions, businesses have at their disposal a number of strategic planning tools that help to simplify, organize, and focus both the inputs and the possible strategy options. In this section you'll learn about three: the SWOT analysis, the Boston Consulting Group matrix, and the strategic growth matrix.
The specific things you’ll learn in this section include:
- Conduct a SWOT analysis and describe how it informs the organization's marketing strategy
- Explain how businesses use the Boston Consulting Group matrix to inform growth strategies
- Explain how businesses use the strategic growth matrix to inform growth strategies
A situation analysis is often referred to by the acronym SWOT
, which stands for strengths
, and threats
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 "situation" in which it operates and helps it identify which strategies to pursue.
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 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
- 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
A SWOT analysis benefits organizations in two key ways:
The 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.
The SWOT Analysis 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.
Even this rudimentary analysis highlights some strategic issues, discussed below, which the college needs to consider.
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.
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.
When a company has many different products or even many different lines of business, strategy becomes more complex. The company not only needs to complete a situation analysis for each business, but also needs to determine which businesses warrant focus and investment. The BCG matrix (sometimes called the Growth-Share matrix) was created in 1970 by Bruce Henderson and the Boston Consulting Group to help companies with many businesses or products determine their investment priorities.
The BCG matrix considers two different aspects of a business unit or product:
- What is the current market share?
- What is the market's growth potential?
Market share is the percentage of a market (defined in terms of units sold or revenue) accounted for by a specific product or entity. For instance, if you run a neighborhood lemonade stand that sells 200 glasses of lemonade each summer, and there are two other competing lemonade stands that sell 50 glasses and 150 glasses, respectively, then you have 50 percent market share. Out of 400 glass sold, you sell 200 glasses, or 50 percent of the total.
Companies track market share data closely. For example, what is the market share for different types of cell phones in the U.S.? The International Data Corporation reports these numbers quarterly. As the following table shows, Android phones have had the dominant market share over the past several years.
Smartphone Market Share 2017–2019
The market-growth potential is more difficult to quantify, but it's the other important factor in the BCG matrix. Let's use some of the products in Proctor & Gamble's portfolio to identify markets with different growth potential. How about bathroom tissue—is that a high-growth market? Probably not. Data shows that, in the U.S. anyway, bathroom tissue use tracks closely with population numbers, which have declined 0.7 percent since 1992. How about the market for high-end skin-care products? Generally, markets for products that serve Americans born between 1946 and 1964—the baby boomers—are growing rapidly. The reason is that this large generation is aging with more income and a longer life expectancy that any previous generation.
Market-growth potential generally includes analysis of similar markets, as well as analysis of the underlying drivers for marketing growth. It can be thought of as a "best guess" at what the future value of a market will be.
Applying the BCG Matrix
The BCG Matrix is comprised of four quadrants that show high and low market share and high and low growth potential. Each quadrant has a name and specific characteristics.
A product or business with low market share in a mature industry is a dog. There is no room for growth, which suggests that no new funds should be invested in it.
A cash cow is a product or business that has high market share and is in a slow-growing industry. It's bringing in more money than is being invested in it, but it doesn't have much growth potential. The profits from a cash cow can be used to fund high-growth investments, but the cash cow itself warrants low investment.
A question mark is a product or business that has low market share currently, but in a growing industry. This case is trickier: the product/business is consuming financing and creating a low rate of return for now, but its direction isn't clear. A question mark has the potential to become either a star or a dog, so close monitoring is needed to determine its growth potential.
A star has high market share in a fast-growing industry. This kind of product or business is poised to bring strong return on the funds invested. It also has the potential to become a cash cow at the end of the product life cycle, which can fund future investments.
According to the logic of the BCG matrix, as an industry grows, all investments become cows or dogs. The intent of the matrix is to help companies make good portfolio-management decisions, focusing investment in the areas that are likely to provide returns and fund future growth.
The last strategic framework that we will consider is the strategic opportunity matrix (sometimes called the Ansoff matrix, named after its creator, Igor Ansoff). Whereas the SWOT analysis can help organizations identify new market and new product opportunities
(it's the "O" in SWOT), the strategic opportunity matrix focuses on different growth strategies
for markets and products. The matrix examines the following:
- New vs. existing markets
- New vs. existing products
As the diagram shows, each quadrant represents a different growth strategy:
- Market penetration: focus on current products and current markets with the goal of increasing market share
- Market development: use existing products to capture new markets
- Product development: create new products that can be sold in existing markets
- Diversification: create completely new opportunities by developing new products that will be introduced in new markets
Each strategy entails a different level of risk. Market penetration has the lowest risk since it emphasizes known markets and existing products. Diversification has the highest risk because it involves the development of new products and taking them to new markets. The company must consider whether it can achieve the desired returns without risking a move into new markets or introducing new products. Often, though, higher risk leads to a higher return.
Which strategy should the company pursue? The answer can be informed by a SWOT analysis, which takes into account the strengths and weakness of a company's existing products, as well as the opportunities and threats in the competitive market.