Utrecht University. SWOT Analysis. Method Engineering

Utrecht University SWOT Analysis Method Engineering Georgios Kormaris 3331571 24/3/2009

Table of contents I. Introduction... 3 II. SWOT Analysis: method description... 4 III. SWOT Analysis: example... 8 IV. Meta process model... 10 V. Meta Process model: Activity Table... 11 VI. Meta deliverable model... 13 VII. Meta deliverable model: Concept table... 14 VIII. Process Deliverable Diagram... 16 IX. Background and related literature... 17 X. References... 19 XI. Appendix... 21 List of figures Figure 1: A basic SWOT Analysis matrix as described by Jackson, Aparna, & Erhardt, (2003).... 4 Figure 2: SWOT Analysis for Microsoft (see Appendix for larger version)... 9 Figure 3: The Meta Process model of the strategic planning process as described by Bernroider, (2002). (see Appendix for large version)... 10 Figure 4: The Meta Deliverable model of strategic planning, which includes SWOT Analysis. (see Appendix for large version)... 13 Figure 5: The Process Deliverable Diagram (see Appendix for large version)... 16 List of Tables Table 1: The steps that have to be followed in order to carry out a successful SWOT Analysis as described by Bernroider, (2002).... 6 Table 2: The activity table of the meta process model... 12 Table 3: Concept table for the Meta Deliverable model... 15 Georgios Kormaris 2

I. Introduction In the past twenty to thirty years many changes and developments have taken place in the software industry which started off during the 60s mainly in the United States of America and experienced a revolutionary boom since the 1980s, Steinmueller, (1995). There are many different ways and methods of developing software and planning the strategy of a software development company and as it is shown in many recent research projects. Most of these projects are usually concerned with the way that software is developed and not the way that the strategy of the company as a whole is planned, Cusumano, MacCormack, Kemerer, & Crandall, (2003). Another important factor is which techniques and methods are used to analyze company s environment and how the strategy is formulated and implemented. In this paper we will try to analyze in detail a popular method for strategic planning which has been mostly used for product portfolio planning and/or strategic planning on an abstract level, Houben, Lenie, & Vanhoof, (1999). We will focus our interest in the software industry and base our research on the case study of the Austrian software industry as it is presented by Bernroider, (2002). Additionally, we will try to present certain guidelines, in order to carry out a successful internal and external analysis for any software development company. Combining these two types of analysis, certain guidelines of a company s core competences and main flaws are drawn. This method is called SWOT Analysis, which was developed from Albert Humphrey during the 1960s, as part of a research project for Stanford University. In the following sections we will try to elaborate on SWOT analysis in Section II, present an example for a SWOT Analysis diagram for a software development company, in Section III. Finally, in Section IV, we will elaborate on the background of the method and how it is related with other scientific fields or business areas. Georgios Kormaris 3

II. SWOT Analysis: method description The initials SWOT stand for Strengths, Weaknesses, Opportunities and Threats.. As we can derive from Jackson, Aparna, & Erhardt, (2003), these are the four main building blocks of the SWOT Analysis matrix. The strengths and weaknesses are part of the internal analysis and opportunites & threats are part of the external analysis of an organization. Figure 1: A basic SWOT Analysis matrix as described by Jackson, Aparna, & Erhardt, (2003). As it is quite visible in Figure 1 we also have some other categorizations within matrix of SWOT Analysis; elements concerning the organization itself which are called Internal (Strengths and Weaknesses ), elements which are about the company and its relationship with its environment, named External (Opportunities and Threats), elements which are Helpful for the organization (Strengths and Opportunities) and elements which are Harmful for the organization (Weaknesses and Threats). First of all we have to define the four main building blocks of our diagram; Strengths: The strengths of an organization are the core competencies of the company, the key factors which enable it to excel in certain aspects and gain all kinds of profit, whether that is purely economical, organizational or other. Weaknesses: As weaknesses we define the flaws that an organization has, something which means that these weaknesses might lead to serious problems in Georgios Kormaris 4

the company s strategic planning and might even lead to worse situations, such as becoming a serious threat for the organization s existence. Opportunities: These are certain steps which will help a company to perform better, generate more profits etc. The opportunities can be of many different perspectives, such as entering a new market, or in creating a new business unit and etc. Threats: As threats we name the potential reasons which might harm a company, such as a new entrant in the main market of operation, a big economical recession and other reasons which might threaten the current position of an organization. Having defined the main building blocks of the SWOT analysis matrix, we will try to dig deeper into these elements and try to link them with certain aspects of an organization. The two main aspects of this effort were already mentioned above and two most important ones are the Internal and the External aspect of an organization. As it is mentioned in Chapter 2 of the book by Ward & Peppard, (2008), an important step in formulating a business strategy is the so called Situation Analysis, which if put into words answers to the question Where are we now?. This is where the Internal and External analysis of an organization really come into play and help managers realize the different dimensions of their business Internal analysis The internal part of an organization can vary, depending on the size, but the main principles on which we focus our interest remain the same and according to Bernroider, (2002) these are the following; Resources, meaning the available resources which are enabling the company to develop and deliver the software which it sets out to provide to its customers. Capabilities, that is the critical success factors which the company possesses and that give it a competitive advantage. Quality, which is quite clear as a term, referring to the quality of the products / services provided by the company and to the quality of the internal organization of the company, such as the quality of the business processes. Efficiency, meaning how efficient the company is having a solid structure where all different departments, units and processes are properly organized and communicate well, in order to have a smooth operation of the company. Customer responsiveness, which is not only referring to the obvious, that is how many customers does a company have, but also to how extensive is the diversification of a company s products, what different price levels exist and how satisfied are those customers. Innovation, which is about the level of a company s desire to invest in new technologies, follow technological breakthroughs, keep up with the emerging business trends and in which extend is part of the profits re invest in research & development. Georgios Kormaris 5

External analysis The external analysis of an enterprise is a task which is a bit more complicated (see Background and related literature), but it mainly is an analysis of the current competition and of the market in which the company operates. In order to give an example of external analysis factors we will mention some external barriers and drivers as they are mentioned by Bernroider, (2002): Marketing / distribution in foreign countries Culture, which refers to certain restrictions or difficulties in communication that might arise due to different languages and other cultural aspects. Trade / commerce law issues, which are sometimes different from country to country and might cause problems when trying to enter new markets. EU regulations that might be rather complicated and restrictive in the standards of quality that must be followed in order to market a software product in the EU Market size Steps and Deliverables If we were to describe how a generalized process of carrying out a successful strategy planning procedure for a software development company, one should go through the following steps, which include SWOT Analysis, Bernroider, (2002); Pre SWOT SWOT Analysis SWOT Analysis Pro SWOT Pro SWOT Step Activity 1. 2. 3. 4. 5. Define current situation, create a mission statement and abstract business goals. Analysis of the organization s external competitive environment (Define Opportunities and Threats ) Analysis of the organization s internal operating environment (Define Strengths and Weaknesses) Selection of strategies Implementation of strategies Table 1: The steps that have to be followed in order to carry out a successful SWOT Analysis as described by Bernroider, (2002). Georgios Kormaris 6

In step 1, the management board has to derive its mission statement, which is a rather important statement, since it is the driver of an organization to become better in the future. Another activity of step 1 is the determination of abstract business goals, which will represent the actual developments that should take place, in order to fulfill its mission. In step 2 and 3 the main activities that constitute SWOT Analysis are carried out; External and internal analysis are the activities which help to determine the main building blocks of the SWOT Analysis matrix; Strengths, Weaknesses, Opportunities and Threats. As it was previously mentioned, during the external analysis part opportunites in new or existing markets are defined and threats from competitors, economic developments etc., are identified. Internal analysis serves as a mean to gain a complete view of an organization s inner situation and identify its strengths and weaknesses. Step 4 is when certain different solutions are constructed and then certain different strategies are formulated. These strategies may include a new marketing strategy to acquire a new market segment or a new cost reduction strategy in order to avoid a certain economic crisis and other similar strategic decisions. Finally in Step 5 the organization has to decide which strategic plan is the most appealing and will result in benefits which are wanted by its stakeholders and be aligned with its mission statement. Georgios Kormaris 7

III. SWOT Analysis: example Since we have explained the SWOT analysis principles, how it should be carried out and how it is linked to the environment of a company, it is time to actually describe an example for this method. For our example we will try to carry out a SWOT Analysis of Microsoft, a famous and international company which creates software (such as the Microsoft Windows Vista operating system and others) and other kinds of technology equipment and gadgets. Step 1 First of all we need to define the mission of Microsoft: As it is mentioned in Microsoft s website the company s mission is defined as follows At Microsoft, our mission and values are to help people and businesses through the world realize their full potential Source: http://www.microsoft.com/about/default.mspx#values Microsoft is a vast corporation, with customers of all sizes, from big companies to single users. They develop a large variety of software packages, such as Microsoft Office, Microsoft Project, Microsoft Dynamics and others. If we were to define some goals of Microsoft these would mostly concentrate around the company s desire to rule the software market worldwide, maintain its current global influence and overpower its competitors. Step 2 and Step 3 As mentioned in the method description in Section II, these two steps are the ones that are directly linked with SWOT Analysis; the steps of internal and external analysis. Firstly we have to go through the external analysis of the market in which Microsoft is active in; this is not a hard task, since Microsoft is perhaps the most dominant software company since the early 90s, especially in the market of Operating Systems and other personal computer software, such as Microsoft Office Suite. A brief description like that could be the summary of Microsoft s current situation for the external side, but there are other emerging markets such as the Online office suite market, in which Microsoft only recently began to show interest in. In such a situation many different aspects must be taken in account, in order to formulate a good and solid strategy for the next moves of the company. Competitors in this market must be evaluated, new opportunities to be identified and other significant elements which add up to a thorough market research. Then we move to the current situation within the company itself and the strengths and weaknesses that it has; Microsoft is a powerful company with millions of individual users worldwide and with many companies using its software products for their Georgios Kormaris 8

businesses to function. Its weak points might be hard to realize, since Microsoft has been so successful of the past 20 years but every single detail has to be taken in account in order to maintain the current situation and if possible to become even better in the future. Step 4 and 5 Figure 2: SWOT Analysis for Microsoft (see Appendix for larger version) In the next two steps certain decisions have to be taken and implemented, about the strategy of Microsoft, but we will not go into detail, since it is not so close to the subject of the method we are describing. To mention a couple of examples of what follows, the managers of Microsoft should decide whether more money should be invested in the emerging market of Online office or will Microsoft just try to fight Google, since it seems that Google is the main competitor. Georgios Kormaris 9

IV. Meta process model In Figure 3 we present the meta process model of the strategic planning process according to Bernroider, (2002). It is a rather simple diagram, since most of the activities are closed due to the fact that they are complicated processes on their own and require many different procedures and steps in order for them to be completed in full detail. Another fact worth pointing out is the fact that the roles in charge of the activities in this model are mostly organizational roles. This is a result of the high level and abstract nature of these activities which are of a strategic nature, such as the External and Internal Environment analysis, which are the two main elements of SWOT Analysis. Figure 3: The Meta Process model of the strategic planning process as described by Bernroider, (2002). (see Appendix for large version) Georgios Kormaris 10

V. Meta Process model: Activity Table Activity Subactivity Description Corporate mission and goals definition Define corporate mission Defining the MISSION STATEMENT is rather significant, since it reflects on the goals and strategy that the organization will follow. External environment analysis Internal environment analysis Strategy selection Determine corporate goals Define threats Identify opportunities Define strengths Identify weaknesses Realize strategic goals In order to have a well functioning organization, certain CORPORATE GOALS must be determined that will be aligned to the CORPORATE MISSION. Analyzing the external environment of an organization helps the managers realize certain THREATS that might exist, whether these come from the competitors in a certain market or a new government policy etc. The other result of the external analysis of an organization is the identification of possible OPPORTUNITIES, such as a new niche in a market or the creation of a new product. Another important factor of SWOT Analysis is the definition of an organization s STRENGTHS. Examples of a strength could be a certain product, a department, a planning process etc. But when looking in the internal situation of an organization we also encounter certain flaws. These flaws are called WEAKNESSES they can be of many different natures; organizational, material etc. Having analyzed both the external and internal environment, an organization must realize its STRATEGIC GOALS, which define the near and/or distant future of the Georgios Kormaris 11

organization. Strategy implementation Select future objectives Formulate strategic plan Design organizational structure Design control systems While realizing the strategic goals of an organization, there might be many different goals for different timeframes. This is why the management board has to decide which are the FUTURE OBJECTIVES of the organization. These objectives usually have to be fulfilled in the near future. Having selected the future objectives of the company, the board of managers has to put everything together and formulate the STRATEGIC PLAN of the organization, which then has to become the driving shaft of the organization. In order to implement the STRATEGIC PLAN successfully, there has to be a certain organization of the corporation. This is called an ORGANIZATIONAL STRUCTURE and it differs among companies. It can be as simple as an organization chart, up to complicated organizational structures for different kinds of processes and functions of a corporation. Implementing the STRATEGIC PLAN is based upon a certain ORGANIZATIONAL STRUCTURE but it can t be properly implemented without a certain CONTROL SYSTEM. It is used to monitor all different aspects of an organization, from machine performance to email restrictions for better staff efficiency. Table 2: The activity table of the meta process model Georgios Kormaris 12

VI. Meta deliverable model In Figure 4 we present the meta deliverable model in which we can see that the strategic planning process is quite simple in concept and most of the relations included are straight forward, since many of the concepts can be the result of separate activities. This is in correspondence with figure 3, where we identified many closed activities, which are too complex to describe in this paper. A relation that is worth pointing out for the readers is the relation between the External and Internal environment analysis; these two concepts combined result in the concept of SWOT Analysis, which in turn affects the definition of the organization s future objectives. This is one of the reasons why SWOT Analysis has been used so broadly and why it has become a useful tool for managers, helping them realize certain goals and objectives for the future of their organizations. Figure 4: The Meta Deliverable model of strategic planning, which includes SWOT Analysis. (see Appendix for large version) Georgios Kormaris 13

VII. Meta deliverable model: Concept table Concept MISION STATEMENT STRATEGIC OBJECTIVES LIST OF THREATS LIST OF OPPORTUNITIES LIST OF STRENGTHS LIST OF WEAKNESSES SWOT ANALYSIS Description A mission statement is an unambiguous statement of what the organization does and its long term purpose (Ward & Peppard, 2008). A goal / objective is the target that the organization is setting to take it toward achieving its vision (Ward & Peppard, 2008). A threat is any unfavourable situation in the organisation's environment that is potentially damaging to its strategy. The threat may be a barrier, a constraint, or anything external that might cause problems, damage or injury (Richards, 2009). An opportunity is any favourable situation in the organisation's environment. It is usually a trend or change of some kind or an overlooked need that increases demand for a product or service and permits the firm to enhance its position by supplying it (Richards, 2009). A strength is a resource or capacity the organisation can use effectively to achieve its objectives (Richards, 2009). A weakness is a limitation, fault, or defect in the organisation that will keep it from achieving its objectives (Richards, 2009). An assessment of Strengths, Weaknesses, Opportunities and Threats. SWOT Analysis is used within organizations in the early stages of strategic and marketing planning. It is also used in problem solving, decision making or for making staff aware of the need for change, (BNET, 2009). Georgios Kormaris 14

FUTURE CORPORATE OBJECTIVES STRATEGIC PLAN ORGANIZATIONAL STRUCTURE CONTROL SYSTEM A goal / objective is the target that the organization is setting to take it toward achieving its vision (Ward & Peppard, 2008). A comprehensive, integrative program that considers, at minimum, the future of current decisions, overall policy, organizational development and links to operational plans. (U.S. Environmental Protection Agency, 2007). Organizational structure is the form of an organization that is evident in the way divisons,departments, functions and people link together and interact. (BNET, 2009). A system for controlling the operation of another system (Princeton WordNet Search, 2009) Table 3: Concept table for the Meta Deliverable model Georgios Kormaris 15

VIII. Process Deliverable Diagram Combining the previously presented meta models in figures 3 & 4, we result in the process deliverably diagram. This diagram shows the relations between the activities shown in the meta process model of figure 3 and the concepts shown in the metadeliverable mode of figure 4. These relations are quite simple, since the concepts that are derived from the activities are in general quite abstract. Figure 5: The Process Deliverable Diagram (see Appendix for large version) Georgios Kormaris 16

IX. Background and related literature In order to gain some more insight in the creation of the SWOT Analysis method, it would be useful to know some more details about its origin; this is where we come to a paradox, since very little is actually known on how the method was developed. There actually are no papers that first present the method, since it was created during a research project funded by a large number of companies making it rather confidential. As it is mentioned in an article by Chapman, A., (2008) about SWOT Analysis and its origin, SWOT analysis came from the research conducted at Stanford Research Institute from 1960 1970. The background to SWOT stemmed from the need to find out why corporate planning failed. The research was funded by the fortune 500 companies to find out what could be done about this failure. The Research Team were Marion Dosher, Dr Otis Benepe, Albert Humphrey, Robert Stewart, Birger Lie. As it is quite easy to understand, SWOT Analysis can be used in many different areas of management, since it is a method which gives managers the opportunity to analyze a certain problem and put to paper the pros and cons of a situation, a company etc. Thus it helps them to begin their research in the certain problem and provides the basic concepts in order to decide what the next move will be. For example it is also used for Marketing management, in order to define whether it is profitable to enter new markets of create new products etc. according to Wilson & Gilligan, (2005). Another interesting quote from the article by Chapman, A., (2008) would be the following; A SWOT analysis measures a business unit, a proposition or idea; a PEST analysis measures a market. According to the quote above, a market in which a company is active in should be well measured. Current trends in marketing analysis usually start with the external analysis dimension of the SWOT Analysis matrix. The way that an organization s external environment is perceived is identified and analyzed. Being more specific, software companies have to pay close attention to their external environment, since competition and market status play a huge role in the success of a software company. As mentioned by Bernroider, (2002), many companies tend to use another, complementary, method in order to analyze their external environment and in continuum to define certain Opportunities and Threats. The two most broadly used methods are PEST (or PESTEL) and the 5 Forces model by Porter, (1998) and also mentioned by Grundy, (2006). PEST stands for Political, Economical, Social and Technological and it revolves around these dimensions of the external environment of an organization, in order to define potential threats and/or opportunities. Georgios Kormaris 17

The 5 forces model by Porter is a rather known model, which consists of the five main elements of a company s environment; (Existing) Competitors, (Bargaining power of) Suppliers, (Bargaining power of) Buyers, (Threat of possible) Substitutes and (Threat of possible) New Entrants. Due to the fact that SWOT Analysis method is so high level and quite abstract, it can be used by many different types of organizations; from software companies, which are addressed in this paper, other businesses of all types and sizes, up to universities and other large institutions. To set some examples of the multidisciplinary nature of the SWOT Analysis method, Guzmán, Moreno, & Tejada, (2008) used it in order to define all different aspects of the travel agencies in the area of Andalucia, a higly touristic area of Spain. In another case study, Dyson, (2004), used SWOT Analysis in order to define the main strengths, weaknesses, opportunites and threats of the University of Warwick. Despite all of these examples, another advantage of SWOT Analysis is that it can be easily combined with other methods and techniques, such as PEST & the 5 forces model mentioned above, in order to conduct thorough research of a specific company, product or even just an idea. It can also be used to create new hybrid tools and/or methods in order to create a new customized solution for a specific problem that an organization might face. For example Houben, Lenie, & Vanhoof, (1999) used SWOT Analysis to create a knowledge based system for small and medium enterprises. To sum up, SWOT Analysis is a very useful tool for decision making and for organizing ones thinking about a certain situation or idea, whether that is a company s current situation, a certain problem within a company s process etc. It should be combined with other analyzing techniques, in order to achieve a high level of analysis of a company, so as to succeed and make the most rewarding and efficient choices, since the final result of SWOT Analysis is to formulate a general plan for a new strategy and ways to implement it. Georgios Kormaris 18

X. References Alonso, I. A., Verdún, J. C., & Caro, E. T. (2008). The Importance of IT Strategic Demand Management in Achieving the Objectives of the Strategic Business Planning. 2008 International Conference on Computer Science and Software Engineering (pp. 235-238). IEEE Computer Society. BNET Business Network. (2009). BNET Business Network. Retrieved 3 5, 2009, from Strategic Goal: Definition and additional resources from BNET: http://dictionary.bnet.com/definition/strategic+goal.html BNET Business Network. (2009). BNET Business Network. Retrieved 3 20, 2009, from Organizational Structure: Definition and additional resources from BNET: http://dictionary.bnet.com/definition/organization+structure.html BNET Business Network. (2009). BNET Business Network. Retrieved 3 5, 2009, from SWOT Analysis: Definition and additional resources from BNET: http://dictionary.bnet.com/index.php?d=swot+analysis Bernroider, E. (2002). Factors in SWOT Analysis Applied to Micro, Small-to- Medium, and Large Software Enterprises: An Austrian Study. European Management Journal, 20 (5), 562-573. Chapman, A. (2008). SWOT analysis method and examples. Retrieved 2009, from http://www.businessballs.com: http://businessballs.com/swotanalysisfreetemplate.htm Cusumano, M., MacCormack, A., Kemerer, C. F., & Crandall, B. (2003). Software Development Worldwide: The State of the Practice. IEEE Software. Dyson, R. G. (2004). Strategic development and SWOT analysis at the University of Warwick. European Journal of Operational Research, 152, pp. 631-640. Fowler, M. (2003). UML Distilled: A Brief Guide to the Standard Object Modeling Language (3rd Edition). Addison-Wesley Professional. Grundy, T. (2006). Rethinking and reinventing Michael Porter's five forces model. Strategic Change, 15 (5), 213-229. Guzmán, J., Moreno, P., & Tejada, P. (2008, September). The tourism SMEs in the global value chains: the case of Andalusia. Service Business, 2, pp. 187-202. Houben, G., Lenie, K., & Vanhoof, K. (1999). A knowledge-based SWOT-analysis system as an instrument for strategic planning in small and medium sized enterprises. Decision Support Systems, 26, 125-135. Jackson, S. E., Aparna, J., & Erhardt, L. N. (2003, May 21). Recent Research on Team and Organizational Diversity: SWOT Analysis and Implications. Journal of Management, 29 (6), pp. 801-830. Porter, M. (1998). How competitive forces shape strategy. In M. Porter, On Competition (pp. 21-38). Boston, MA.: Harvard Business School Press. Prefontaine, L., & Bourgault, M. (2002). Strategic Analysis and Export Behavior of SMEs: A Comparison Between the United States and Canada. International Small Business Journal, 20, pp. 123-138. Georgios Kormaris 19

Princeton WordNet Search. (2009). WordNet Search 3.0. Retrieved 3 5, 2009, from Princeton WordNet: http://wordnetweb.princeton.edu/perl/webwn?s=control%20system Richards, H. (2009). University of Cambridge. Retrieved 3 9, 2009, from SWOT (Strengths, Weaknesses, Opportunities, Threats): http://www.ifm.eng.cam.ac.uk/dstools/paradigm/swot.html Steinmueller, E. (1995). The U.S. Software Industry: An Analysis and Interpretive History. In D. C. Mowery, The International Computer Software Industry. Oxford University Press. U.S. Environmental Protection Agency. (2007). U.S. Environmental Agency Retrieved 3 21, 2007, from US EPA Program Evaluation Glossary: http://www.epa.gov/evaluate/glossary/s-esd.htm Ward, J., & Peppard, J. (2008). Strategic Planning for Information Systems, third edition. John Wiley & Sons, LTD. Wilson, R. M., & Gilligan, C. (2005). Strategic Marketing Management, Third Edition: planning, implementation and control. Butterworth-Heinemann. Zheng, Y., & Mou, Z. (2008). Organizational Structure Adjustment of Agent Team Based on Task. 2008 International Conference on Computer Science and Software Engineering (pp. 557-560). IEEE Computer Society. Georgios Kormaris 20

XI. Appendix Georgios Kormaris 21

Georgios Kormaris 22

Georgios Kormaris 23

Georgios Kormaris 24