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In this study, SWOT analysis is presented with elaborating the steps. Defining and articulating it roles in strategic planning and development steps are also covered. Besides, it exemplified in the case of organizational performance for small and medium enterprises in Egypt.
SWOT which stands for an abbreviation of (strength, weakness, opportunity and threat); is an analysis that defined as method to examine organization's internal factors dealing with strengths and weaknesses, and its environmental opportunities and also the threats. SOWT analysis usually use in the preliminary phase of decision making as a general tool which it designed for being antecedent to strategic planning in different case and applications. (Johnson et al., 1989; Bartol et al., 1991). Based on some other definitions like Formisano (2003), SWOT Analysis can be used as a model, process, technique or framework to generate information about those factors in organization by having many applications with possibility of being used in all the levels of the organization. So, SWOT can be defined as internal analysis of organizational Strengths (what an operation does well) and Weaknesses (what an operation does not do well) and as well as the external analysis of environmental Opportunities (potential favorable conditions for an operation) and Threats (potential unfavorable conditions for an operation); and it is a general tool at the initial stages of policy making and strategic planning and as well, it is a part of the latter stages of analyzing the performance and planning for further development of the organization on. SWOT analysis is used as a technique in order to develop a planning process and solutions for the problems that are related with different internal and external factors and maximize the potential of strengths and opportunities as well as minimizing the negations of weakness and threats (Sharma &Singh, 2010; Schermerhorn, 2006; Bennett, et al., 2003).
The first step of SWOT analysis is a systematic evaluation of the organization's resources and capabilities. Strength in SWOT analysis is connected to competitive advantages and distinguishing competencies of the company in its market environment. But weaknesses can be considered as limitations that can affect the progress of the company in a negative way. This evaluation includes identifying core competencies by considering special strengths which are superior to the competitors. The core competency is a special strength which gives an organization a competitive advantage and it may be found in special knowledge or expertise, superior technologies, efficient manufacturing technologies, or unique product distribution systems, among many other possibilities. Strategy formulation has an aim which is to form strategies that leverage core competencies for competitive advantage by constructing organizational strengths and minimizing the impact of weaknesses (Houben et al., 1999; Schermerhorn, 2006).
Figure 1. SWOT Analysis of Strengths, Weaknesses, Opportunities, and Threats
(Schermerhorn, 2006, p.88)
Strengths: Strength of an operation is the first internal element of the SWOT analysis. The strengths cover what an operation does well. The strengths may be being low-cost producer or high quality product producer. It depends on the perspective (Bennett, et al., 2003, p.2).
Weaknesses: The weakness of an operation is another internal element of the SWOT analysis. Examining weaknesses cover identifying what an operation does not do well. They must be examined from the internal and external perspective of the operation. Usually all operations, regardless of size or profitability have weaknesses (Bennett, et al., 2003, p.2).
Opportunities: Opportunity is the first external element of the SWOT analysis. The opportunities cover any convenient situation in the business's environment that the operation may gain an advantage form. The range can be from diversification and the use of new technologies to market trends and relationship developments. And usually all operations have some opportunities. It is important to analyze them well (Bennett, et al., 2003, p.2).
Threats: Another element of the SWOT analysis is the external threats. All operations can face threats and the threats can range from lower international prices to key relationships that have some problems. The operation of the organization must take some actions to prevent the external threats (Bennett, et al., 2003, p.2). SWOT analysis is used as inputs to generate possible strategies. And next step is to decide these strategies after the identification and analysis of strengths, weaknesses, opportunities and threats (Houben et al., 1999).
2.1 SWOT Analysis Steps
Based on Houben et al. (1999) as a first step in the development of a strategic planning system, business managers therefore commence with the identification and evaluation of these strategic factors which assist or hinder the company in reaching its full potential. Normally every company is confronted with a dynamic environment; the relative importance of a strategic factor will change constantly, so the SWOT analysis is correspondingly to be of a permanent nature. The list of strategic factors can be used as a point of departure for the actual strategic plan within a small or medium sized enterprise. It is a flexible instrument. The greatest advantage is that it helps managers of small and medium sized enterprises survey the different management areas, gain insight into the significance within the framework of the company, and accordingly initiate suitable actions. Bartol et al. (1991) mentioned that responding to internal strengths and weaknesses is therefore an essential component of the strategic management process. But success can only be achieved in this respect to the extent that one is familiar with the opportunities and threats resulting from the external environment. The recognition of the internal strengths and weaknesses, as well as external opportunities and threats, takes place on the basis of a study, which called SWOT analysis. Generally no standard list of crucial factors which apply for all companies exists because of the specificity of this set. Within the framework of this study, however, we chose to concentrate solely on the internal business environment. This therefore only concerns the identification of strengths and weaknesses.
Strengths thereby relate to the competitive advantages and other distinguishing competencies which can be exploited by the company on the market. A distinguishing competence is something which can be done very capably by a company. Weaknesses, on the other hand, are limitations which hinder the progress of a company in a certain direction. Weaknesses are those attributes of the organization that impede achieving the objective and limitations or deficiency in one or more resources or competencies relative to competitors that impedes a firm's effective performance. Opportunities are outside conditions that help to achieve the objective major situation in a firm's environment. Key trends are one source of opportunities and identification of a previously overlooked market segment, changes in competitive or regulatory circumstances, technological changes, and improved buyer or supplier relationships could represent opportunities for the firm. Threats are also outside conditions that impede achieving the objective and impediments to the firm's current or desired position. The entrance of new competitors, slow market growth, increased bargaining power of key buyers or suppliers, technological changes, and new or revised regulations could represent threats to a firm's success (Mintzberg and Quinn, 1991). According Johnson et al. (1989) ; Bartol et al. (1991) taking strategic actions is advised for the organizations to preserve or sustain strengths, offset weaknesses, avert or mitigate threats, and capitalize on opportunities. Strategies can consider as the balancing act between the external environment like opportunities and threats and the internal capabilities of the firm such as strengths and weaknesses. Basically SWOT analysis is an extremely useful tool for understanding and decision-making for all sorts of situations in business and organizations.
As a first step in the development of a strategic planning system, business managers should therefore commence with the identification and evaluation of these strategic factors which assist or hinder the company in reaching its full potential. Because every company is confronted with a dynamic environment, the relative importance of a strategic factor will change constantly, so this analysis is accordingly to be of a permanent nature. In identifying SWOT a particular factor is relevant only with reference to a specific objective. For example, a large cash balance is strength if the objective is expansion. If the objective is to discourage a hostile take-over, a large cash balance is a weakness. The SWOT analysis headings provide a good framework for reviewing strategy, position and direction of a company or business proposition, or any other idea. Completing a SWOT analysis is sometimes simple and useful which can be used for business planning, strategic planning, competitor evaluation, marketing, business and product development and research reports (Houben et al.1999).
The strengths and weaknesses can be found in the functional company fields, or they may be a consequence of abnormal interaction between different fields. Furthermore, the strengths and the weaknesses of an aspect must be measured at different levels of the organization; this can be at group level, at individual company level or at product or market level. The evaluation of the performances of the past may not be neglected with the measuring of strengths and weaknesses because it provides historic insight into the strategy of the company previously implemented as well as the successes accordingly achieved (Glass, 1991). Historic investigations may not only be limited to the pure analysis of the paths followed by the company in the past and the results achieved, they must also devote attention to the reasons for this success. With the lists compiled, sort and group facts and ideas in relation to the objectives. It may be necessary for the SWOT participants to select their five most important items from the list in order to gain a wider view. Clarity of objectives is a key to this process, as evaluation and elimination will be necessary to cull the wheat from the chaff. Although some aspects may require further information or research, a clear picture should, at this stage, start to emerge in response to the objectives (Johnson et al., 1989; Bartol et al., 1991).
3. SWOT Analysis and Strategic Planning
SWOT analysis is mainly part of the strategic planning process buy studying on internal and external forces in the business environment of a company of organization. As a first step of a strategic planning system, the strategic factors that are related with the potential of the company, should be identified and evaluated. The identification and evaluation of the strategic factors helps to reach an actual strategic plan and as a result the managers are able to gain insight of internal and external nature of the company and establish suitable actions in order to reach good performance (Houben et al., 1999, p.2) In order to have good performance in strategic planning, the future objectives on the company's strength and the weaknesses of the company must be considered by the company. Internal strengths and weaknesses are the main components of the strategic management process but it must be reinforced with considering opportunities and threats from the external environment.
According to Hill and Roy (1997, p.46), SWOT analysis is one of the most straightforward approaches for analyzing the strategy of an organization. SWOT as it explained before, is the acronym for "strengths, weaknesses, opportunities and threats" which according to Zack (1999, p.126) SWOT framework is one of the well-known approaches to define a strategy. Considering Zack, Hill and Roy statements about SWOT, it can conclude that this approach can be used in order to define and analyze organization's strategy. This analysis consists of two parts. First, we have to analyze the internal characteristics and capabilities of the organization, which analysis helps us to identify the strengths and the weaknesses that the organization has. In the second part, we have to analyze the external situations in the competitive environment, which this analysis helps us to identify the opportunities and the threats that the company may faces. After identification of these four factors, a strategy for the company can be presented. Based on Zack statement (1999, p. 127) strategy is the act of balancing between internal and external situations of a given organization. And a good strategy is the one which ensure a fit between external situations of the company with its own internal capabilities (Hill and Westbrook, 1997, p.47). This analysis was in power for at least 30 years. Zack (1999, p.128) believes that companies who have superior knowledge, can sustain their competitive advantage by the use of those knowledge in order to combine, coordinate, develop and exploit their resources and capabilities in a new way and better than their competitors. Buckman Labs competed in certain markets based on its superior knowledge of how to apply its chemicals to solve the process treatment problems of its customers.
After explaining SWOT framework in previous section, and talking about knowledge as a strategic asset and the sustainable competitive advantage which could be achieved through the application of the knowledge that exists in an organization, the author (Zack, 1999, p. 130) proposes that: "Firms need to perform a knowledge-based SWOT analysis, mapping their knowledge resources and capabilities against their strategic opportunities and threats to better understand their points of advantage and weakness". The outcome of this analysis could be a map that can help the organization to strengthen its knowledge advantages and reduce its knowledge weaknesses. This map reveals the knowledgebase resources and capabilities of one organization and the knowledge that this organization needs in order to be competitive in the market by providing the products and services. As we mentioned earlier, we can thought of this as a knowledge strategy.
Zack (1999, p.131) mentions three steps that should be taken in order to describe the link between strategy and knowledge:
"1. Organization needs to identify its strategic goals.
2. Organization must evaluate the knowledge that it needs in order to achieve its strategic goals.
3. Comparison between the knowledge that one organization has and the knowledge that one organization needs reveals the strategic knowledge gaps of that organization."
A firm, according with its current knowledge, must identify the best product and market opportunities for exploiting that knowledge. For example, Most importantly, it recognized the difference and managed and developed its strategic knowledge accordingly (Zack, 1999, p.131).
Therefore, we can consider the knowledge as an important strategic resource for sustaining the competitive advantage. There are 3 reasons why knowledge makes the advantage sustainable, as first that knowledge which is gained from organizational procedures through experience is unique and cannot easily be reproduced. Because acquiring this knowledge require competitors to engage in similar experiences which need time and money. Second is that, those firms which know more can learn more in comparison to their competitors who have just started to gather knowledge. Third reason is that, the integration between newly gained knowledge and the knowledge that the firm already has can create unique insights and more valuable knowledge that is difficult for the competitors to gain. These reasons all lead to a sustainable competitive advantage.
Strategic management is a collection of decisions and actions that are taken by the business management to determine the long-term activities of the company. Basically strategic management has three elements (Houben et al., 1999, p.126), "the formulation of a strategy; the implementation of a strategy; the control and evaluation of the strategy. Internal and external environment analysis must be done before applying these stages. While analyzing of the internal and external environment will result in an overview of all opportunities and threats and also weaknesses and strengths will be reviewed and these are SWOT analysis results. If we want to define the internal and external environments, the external environment include the variables existing outside the company, they are in the short-term and not under the control of the company and they are from the context in which company exists and functions. The external variables are divided as; direct and indirect environment. The elements or groups are directly influenced by the actions of the company are considered as the direct environment (industry environment), such as; the shareholders, the government, the suppliers, the local authorities, the competitors, the clients, the creditors and the employee's organizations. The general forces that have an impact on the long term decisions of the company are considered as indirect environment (macroenvironment) such as; economic, socio-cultural, technological, political and juridical influences (Houben et al., 1999, p.126; Schermerhorn, 2006, pp.87-88).
The variables of the internal environment within the company belong to the business management of the company that does not have an influence in the short-term. These variables include the company structure, the company culture and the resources of the company. One of the three elements of strategic management was the formulation of a strategy and it is a process for the development of long-term plans, to respond to environmental opportunities and threats effectively by considering the strengths and weaknesses of the company (Houben et al., 1999, p.126). Figure.3.1.1 illustrates the SWOT analysis of strengths, weaknesses, opportunities and threats.
Companies need to take some specific actions to identify and understand their competitive strengths and weaknesses; and the development of the competitive strategy depends on building a global overview that considers the strengths and weaknesses. The strengths and weaknesses can place in the functional company fields, or can be a consequence of unusual interaction between different fields. In addition, the strengths and the weaknesses must be analyzed at the different levels of the company such as; organization, group, individual, company, product or market level (Houben et al., 1999).
The current strategic position forms a very important point of departure for the development of a future strategy. It is very difficult to understand the current strategy if a formal planning system was previously absent. The studying of the competition, the current strategic prospects, performances from the past, the market possibilities and the market environment provide us with insight concerning information required for the indication of strengths and weaknesses. Where possible these strengths and weaknesses are to be represented in objective terms. It must be commented that most strengths concern the capabilities of certain personnel members or the resources at hand. A distinction can accordingly be made according to the present product/market combinations. It is therefore sensible to make a distinction according to the extent to which these strengths and weaknesses are of a critical nature. As regards the critical factors, an attempt must be made to sort them on the basis of strengths (Johnson et al., 1989; Bartol et al., 1991).
Good performances within a company are the results of correct interaction of the business management with its internal and/or external environment. To operate successfully in this respect, the company must concentrate its future objectives on its strengths, while averting tendencies related to the companies weaknesses. Responding to internal strengths and weaknesses is therefore an essential component of the strategic management process. But success can only be achieved in this respect to the extent that one is familiar with the opportunities and threats resulting from the external environment. Mintzberg and Quinn (1991) explained the recognition of the internal strengths and weaknesses, as well as external opportunities and threats, takes place on the basis of a SWOT-analysis. Within the framework of this study, however, we chose to concentrate solely on the internal business environment. This therefore only concerns the identification of strengths and weaknesses. Companies must undertake specific actions in order to distinguish their competitive strengths and weaknesses. The strengths and weaknesses are found in the functional company fields, or they may be a consequence of abnormal interaction between different fields. Furthermore, the strengths and the weaknesses of an aspect are measured at different levels of the organization; this can be at group level, at individual enterprise level or at product or market level.
4. SWOT Analysis in Practice
In this section we can overview the SWOT analysis of organizational performance of small and medium enterprises in Egypt through promoting the human factors in quality management systems. This analysis has been done by the survey results (the answers in the studied questionnaire) were analyzed by the SWOT method in order to identify the Egyptian manufacturing SMEs' Strengths, Weaknesses, Opportunities, and Threats, in order to generate information about their effects on organizational performance and to determine if there is a need to support systems for the organization's development or a need for system improvement (Shobery et al. 2010).
This analysis the research team used as a guideline for developing the QMS model with focus on human factors. Egyptian manufacturing SMEs (Small-Medium Enterprises) have much strength and weaknesses, and many opportunities and threats which are generated from the business environment and have effects on the whole organization. Strengths of SMEs were confirmed by the results of the questionnaire and have supported, developed and promoted as a part of the basic infrastructure needed to achieve the criteria of the business excellence practices. Weaknesses indicated the problems and ineffective work systems which need to be solved and improved gradually to get a new and better infrastructure (Shobery et al. 2010).
In their research they figured it out that opportunities mainly increase the number of international markets open to Egyptian manufacturing SMEs. Threats are mainly generated through competitive situations from the international trading competitors and free trade areas (FTAs). There is an increase in the number of overseas competitors most of which have a higher potential for international trade than Egyptian firms. Generally, strengths and opportunities influence the organization's performance in positive ways and also support the development of a QMS. In contrast, the weaknesses and threats have negative effects on the organizational performance, which hamper a successful implementation of a QMS. Effects of strengths, weaknesses, opportunities, and threats on the organizational performance in Egyptian manufacturing SMEs are presented in Table 1 and Figure 2.
Based on their findings, a systematic schedule for the analysis of strengths and weaknesses is something constantly gaining popularity. Companies must undertake specific actions in order to distinguish their competitive strengths and weaknesses. History has shown this to be not particularly simple. Many companies only have vague ideas of the source of certain competencies and the extent to which they possess them. The absence of a global company overview prevents a clear picture being obtained. Despite these problems the development of a competitive strategy depends on having a global overview as regards strengths and weaknesses.
By doing the SWOT analysis usually there are some ready expected advantages such as, an impetus to analyze a situation and develop suitable strategies and tactics, a basis for assessing core capabilities and competences, the evidence for, and cultural key to, change, a stimulus to participation in a group experience.