Session 2:

Session 2:

Setting Organization Direction:

The SWOT analysis and understanding the environment

(revised: Friday, December 22, 2000)

In this session we look at an analysis of the external environment. We introduce you to the SWOT analysis which is a major means (along with the house of quality) to help the organization understand the environment it faces. In this session we will do an analysis of the environment faced by an industry culminating in a statement of opportunities and threats. This is the O/T part of the SWOT analysis. Next, we will focus on a company analysis via a competitive analysis, culminating in a statement of strengths and weaknesses. Next, we will construct a strategic match table to compare the product's strengths and weaknesses with the opportunities and threats posed by the market. Then we will construct summary statements for each competitor.

Putting things in perspective

In this session and the last we are focusing on how to get a better understanding of the competitive environment and have a better understanding of the customer wants and needs for a specific product or product line. This reflects what needs to be done in category 3 of the Baldrige criteria (customer and market focus) and as we move to defining the direction of the organization which is done in category 2 of the Baldrige criteria. I encourage you to read both of those categories in the Baldrige web site as it will help to give you a perspective of what we are trying to do at this stage of the driver triad which sets the direction for the organization.

The SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats)

Assessing the External Environment's Opportunities and Threats (the O/T portion)

The SWOT analysis is a major means to assess the competitive environment of an organization. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. The Strengths and Weaknesses relate to specific organizations. The Opportunities and Threats relate to the external environment influencing a product or the industry as a whole. First we will focus on the OT part looking at the external environment. The text looks at the external environment in a rather unfocused way which drives me nuts. Hence, we created the external environment model that focuses on customers, competitors (to be dealt with in the SW portion), the competitive environment, trends in the environment external to the industry, and power relationships. These 5 key areas analysis is the basis for the "OT" part of the SWOT analysis

The 5 key areas, as mentioned above include:

Customers
The competition
Trends in the environment external to the industry (product or product line)
The structure of the industry and trends within the industry
Power relationships.

1. Customers

One of the better ways to analyze the wants and needs of customers is to use a house of quality also called quality function deployment (QFD). We did that in session 1 so refer to that session notes and power point slides for the details. We will use the information you did on your first assignment in this part to help us determine the industry's opportunities and threats. I introduce the house separately as it can be used in the S/W part of the SWOT analysis as well.

Major segments wants and needs would come directly from the house and would be discussed as you analyze the house or you could refer to the house here and do the analysis (all but the competitive evaluation) as this point).

Demographic and psychographic trends in what customers' demand. In this section we might want to find some data that might support our claims. For example, see the following exhibit.

Exhibit 1

Data & Trends

	1995	1996	1997	1998est	1999est	Comments
U. S. Family income levels	100	105	111	120	134
United States Ice Cream Industry Growth rate (in gallons consumed)	100	105	107	109	110
U. S. Consumption rate of low cal ice cream & yogurt	100	110	115	118	120
U. S. Family discretionary income growth rate	100	105	112	130	140
U. S. % households with 2 kids or more under 12	50	48	46	45	44
U. S. Ave # of ice cream choices in fine dining restaurants	2	2	2	3	3	This item would relate to our direct customer not the final customer
U. S.: # of firms featuring a specific ice cream brand on their menu (restaurants, airlines, or rail passenger carriage)	155	220	338	500	600	This item would relate to our direct customer not the final customer
U. S.: Avg. # of ice cream brands stocked by major food & discount chains	11	15	15	15	15	This item would relate to our direct customer not the final customer
U. S.: Avg shelf space allocated for ice cream (linear foot of shelf space)	20	22	24	25	25	This item would relate to our direct customer not the final customer
World consumption rate of ice cream	100	110	125	155	200
U. S. Consumption rate of premium ice cream	100	106	110	112	115
U. S. Consumption rate of regular grade ice cream	100	100	101	100	95

1995 is being treated as a base year in some cases and given the value of 100. 105 for a subsequent year would mean a 5% increase in that value over the base year. A 95 would indicate a decrease in a given year compared to the base year.

From data like this, we would be able to focus on where the market is going in terms of customer wants and needs. Here is where the library or internet might be of some value. See the link to the library resource "How to Find Company Information." The expectations are that you would have some data and report what the trends you found. You do not need to make a table like the above. I am just trying to show you how you might link different customer trends to the sales of your product. Some of this date will not have a direct reference to the product such as in household size or household income changes. You must link the data to sales or consumption of your product or service in the oral presentation. The sort of outcome you would have appears in the following table.

Trend	Implications for the travel industry	Source of information
Those aged 65 or higher in increasing in numbers at the rate of 3% per year.	This group has greater leisure time and a higher rate of discretionary income and will be inclined to spend this money on leisure travel.	Simpson, Abe, 1998, "On the Road with my son Homer," National Geographic Explorer, Vol 112, No. 1, pg 344-398.

2. Competition - (we did this in the competitive evaluation section under S/W part of the SWOT analysis and was done in the first session).

3. The Environment External to the industry that will affect the industry

Trends in the environment external to the product or product line. Here we look at political, social, economic, and other factors that the text alludes too. In addition we consider which alternative product might affect demand for products and services in this industry (such as yogurt) or complementary products (condiments like chocolate syrup or product packaging (for ice cream cartons). Note in the instructions for the case, we ask you to put the information in table form with citations of their source. I would go ahead and number these to help referencing later on. Many of these, like above, will not be directly linked in the data to your choice of product or service. You will need to make the intuitive link in your rationale. The following is an example of one trend and how it would be reported.

Trend	Implications for the travel industry	Source of information
Unemployment rate is at a 10 year low and expected to remain stable for the next year.	Higher employment supports more income available to families, hence more travel is expected.	http://marketguide.yahoo/socialtrends.htm - recorded July 19, 2000.

4. The structure of the Industry and trends in the industry.

What is the market growth rate? Market growth rate is calculated as the rate of change in sales or in number of units sold for a given product line over a period of time quoted as an annual growth rate. The equation is….

(Sales latest year - sales previous year)/sales previous year

In cases where the years are not consecutive, then you need to divide in order to develop an annual rate of change.

What is the nature or structure of the industry? Here analysis ismade regarding rate of change in products or how service is provided. In addition consider how hard it is to succeed (degree of hostility) in this industry. This is related to the number of competitors, the concentration of competitors and social and market forces that may make it easier or harder to succeed. For example, the U.S. hog market is a disaster right now. Lack of foreign markets, the cost of feed, and low market prices have made it very difficult for a hog farmer to succeed.

Success Factors? This is similar to meeting customer wants and needs. However, the analysts looks beyond those items to determine what does it take in meeting those needs to be competitive. One success factor is being the low cost producer giving the organization the ability to price more aggressively than its competitor or make more profit is similar items are priced the same. Other factors might indigenous to the industry but examples might be factors such as high tech innovation, high after sales service, greater customer responsiveness, product availability, or image. In essence, this list should be those factors that you think are most important for the product or product line for a company in this industry to succeed.

What trends are going on in the industry that will influence competitors in the industry (note these are trends within the industry - stuff competitors are doing).

5. Power relationships.

This last segment is related to Porter's five forces (text page 149). In this section we look at the level of power between:

Those who supply the industry with raw materials and the level of power in the industry has to keep raw material prices down (alternative suppliers, alternative materials). For example, electric utilities rely on coal producers if they generate electricity using fossil fuels. As there are limited numbers of low sulfur mines, the producers have the power as the electric producers have limited choices.
The degree that new entrants could enter the market for this product or product line. Kinkos has a greater threat than U.S. Steel just because the cost of getting the equipment makes it easier to start a copy service over a steel mill.
The threat of substitute products. For example, if coffee prices get too high, consumers will switch to tea or caffeine soft drinks. If gas prices increase, consumers will switch to more fuel-efficient equipment, but still do not have much choice.
Power of customers. In buying cars you have many choices, that gives you more power than if you were dealing with the only car dealership in a small town in the middle of Montana with the next dealership 100 miles away. However, you have less power than AVIS, which may be shopping around for a few thousand cars versus your one.
Rivalry within the industry relates to the intensity of competition for this product or product line. There are fewer rivalries for students between most universities than there is a rivalry between Target and Wal-Mart.

The O & T summary statements

The O & T part of the SWOT analysis is really a summary of what you have found in the analysis that you have done above (the 5 key areas and the house of quality). These are stated as a list of opportunities and a list of threats that come from the environment external to the industry or product or product line. Here are some examples. We do not ask you to do this chart in this class as we combine this into the strategic match table to be reviewed below.

Opportunity	Effect on Industry	Source
1. Growing number of baby boomers.	Increased savings level by baby boomers.	Demographic Trend #3
2. Internet usage increasing	More consumers will engage in online banking services.	Demographic Trend #5
3. Increasing usage of credit scoring	Allows banks to offer more tiered rate risk-based pricing.	External Trend #2
4. Increased household spending	More investment management opportunities.	Demographic Trend #6
5. Only 5% of households were using online banking.	Huge market to penetrate to increase market share in this sector.	Demographic Trend #7
6. Number of newly incorporated companies has increased.	Greater need for commercial banking services.	External Trend #1
7. Growing Hispanic population.	Banks must begin to cater the needs of this market.	Demographic Trend #10
8. 72.3% of US population was between the ages 25-54.	Primary wage earning years means more income for spending/saving.	Demographic Trend #9
9. More institutions will have a direct link-up between the Internet and their loan origination functions.	Quicker response time to consumers regarding approval decisions.	Demographic Trend #8

Threat	Effect on Industry	Source
1. High tech industry witnessed a 56% increase for executive labor in 1999.	Brain drain from banks to dot coms (employees of banks).	Demographic Trend #4
2. By the year 2010, 56% of population will be at least 55 years old.	Proportion of consumers in age bracket most likely to use consumer installment credit is declining.	Demographic Trend #1
3. Growth of non-bank finance companies.	Increased competition	External Trend #3
4. Regionalization of financial instituitions.	Producing huge financial institutions.	External Trend #4
5. Corporations relying on fewer number of banks.	Increased competition.	External Trend #5
6. Repealing the Glass-Steagall Act.	Blurring the lines between insurance companies, brokerage houses, and investment banks.	External Trend #6
7. Percentage of outstanding home equity credit has declined.	Fewer secured assets for banks.	External Trend #7
8. Low unemployment rate.	Lower quality workers filling job vacancies in banking due to tight labor market.	External Trend #9
9. Increasing rate environment.	Slow down of lending.	External Trend #10
10. Introduction of Riegle-Neal Interstate Banking and Branching Act of 1994.	Frenzy of mergers.	External Trend #8

Column 3 would normally record the direct source citation of this information. Or in this case, the column refers to where the material was originally cited in the SWOT analysis report which provided for detail analysis of each of the 5 steps outlined above.

The competitive evaluation

An example of a competitive evaluation appears in the notes for session 1.

Strategic Match

The strategic match is a means to get a better understanding of how an organization relates to its external environment. The strategic match compares the opportunities and threats that you recognized in your analysis in the external environment analysis compared to the organization's ability to meet that need (relating to the S/Ws that you discovered in the competitive analysis in session 1). See the power point slides for a format example and sample narrative.

Final summary statement of the competitors

The last part of a SWOT analysis is to put all the stuff together you have learned about the industry, its environment, the competitors, their strengths and weaknesses, and how they fit (match or mismatch) with their environment. This culminates in a brief statement of analysis. An example appears below.

Citibank: They have positioned themselves well in the changing bank environment. The recent merger with Travelers, coupled with the repeal of the Glass Steagall Act, have put Citibank in a position to capitalize in today’s environment. The strengths of a broad range of services (including investments), reputation, and online banking will enable Citibank to prosper. Vulnerabilities are minimal. The weak scale of personalized service is a by-product of consumers requesting more convenient ways to bank. More convenience means less personal attention. Overall, we rate Citibank high in financials and non-financials (note you will have to do much better than this example as you will need to add material relating to the structure of the industry and Porter's power relationship - see power point slides for more information).

Summary

The above is a SWOT analysis, a powerful tool to learn about the organization or product or service under study and the environment faced by this organization. This seems a bit like marketing and it is. A manager must know marketing and all the business disciplines (Accounting, Finance, Economics, and Marketing) to understand how to best compete in the changing environment. In the next session we relate this understanding into a set of strategies to guide the organization.

end of session 2 notes.