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Assess business strengths, weaknesses, opportunities and threats with SWOT analysis

How far is my company away from failure? The question itself sounds like an admission of inadequacy. The confident manager surely doesn't walk around waiting for nemesis to strike. Rather, confident people strut the stage like a colossus, with all the certainty, say, of Bill Gates. The question, though, was inspired by Gates, who observed that 'Microsoft is always just two years away from failure.' This wasn't self-deprecation, but sober analysis.

One of management's trustiest tools is the SWOT analysis. You take a calm, cool look at the organisation's Strengths, Weaknesses, Opportunities and Threats. Then you seek to capitalise on the Strengths, Eliminate the Weaknesses, seize the best Opportunities and counter the Threats. Could the magnificent success of Microsoft, with its 90% gross margin and $9 billion of cash, really be threatened? In a brilliant study in Worldlink magazine, Howard Anderson has shown that the answer is Yes - a dozen times over. Although the threats are specific to the software industry, they are also generic. Try them on your own firm:

1. Could newcomers (including breakaways from your own company) create damaging competition?
2. Is there an equally powerful force in the market which could muscle into your territory?
3. Is there a rival technology or other differentiator which could come out on top?
4. Are you weak compared to the competition in a key market segment?
5. Is the market developing in ways that favour competitors more than you?
6. Could your customers takes major sources of revenue away?
7. Is there a major area in the market where you lag rather than lead?
8. Does a competitor have a stronger hold on your biggest customers?
9. Is there a growing market where you are being left behind?
10. Are there environmental/regulatory threats?
11. Could unsuspected challenge arrive from outside the existing industry?
12. Is your market too broad for all threats to be safely covered?

AN INTIMIDATING LIST

The thirteenth question, of course, is whether, if any of the dozen apply to your business, you are doing anything effective to counter the Threat or, better still, to convert Threat into true Opportunity. It's an intimidating list, even for mighty Microsoft, especially when you see the names of its leading enemies: Sun Microsystems, the big banks, Cisco, Compaq, Netscape, Oracle, SAP and IBM. The latter giant provides Anderson with his starting point. Could what happened to IBM afflict Microsoft? His company, The Yankee Group, had been deeply impressed by the Strengths deployed by IBM in 1982 - and not surprisingly.

IBM led in every important market of the time: mainframes, communications, mainframe storage, mincomputers, and personal computers. It earned more profit than the next nine computer firms generated in total sales, spending more on R&D than they made in earnings. The Yankee Group concluded that IBM was therefore invulnerable - yet the giant was about to embark on a prolonged slide that, amazingly, leaves its market value lagging behind both Microsoft and Intel, and by no small margin, either. IBM's $86 billion of mid-1997 market capitalisation compares to $149 billion for Microsoft and $124 billion for Intel: IBM should plainly have held on to its old strategic investment in the latter. How could the Yankee Group's assessment be so spectacularly wrong?

In the first place, never concentrate just on your own or anybody else's Strengths. That's highly dangerous, partly because they can so easily turn into Weaknesses. Thus IBM's domination of mainframes, and dependence on them for the bulk of its profits, became an incubus as the market moved away to the PCs from which Intel and Microsoft drew their super-growth. The latter's similar domination and dependence in PC operating systems almost moved from Strength to Weakness as the Internet took off - and Gates was much nearer than his 'two years away from failure' when, with a mighty effort, he reversed engines and poured billions into Net, software probably just in time.

Second, market share and leadership by size are not strongpoints in themselves. In PCs, Compaq was able to exploit a world share of around 3% far more effectively than IBM, which had three times the market. The issue is how the market share, whether leading or not, has been achieved and sustained. Is the product or service perceived as superior? Is it cheaper? Is the distribution more effective? Is the cost level lower? Is speed-to-market faster? Are customer requirements met more accurately?

REACTION IN CRISIS

In the case of Compaq v IBM, curiously enough, the answers were all negative. Compaq had no significant advantage in product, distribution, costs, price, speed-to-market or customer satisfaction. But in the money-losing crisis into which Compaq suddenly plunged, it reacted radically on every point to create a stronger platform than its rival. The cost ratio, for instance, came down from 31% to 12.5% - an astonishing performance - as new products were launched at high speed, and the premium price policy was abandoned in favour of leading price levels downwards.

The key Strengths at Compaq were therefore intangibles, as were the Weaknesses at IBM. The smaller company was able to react and reform at speed; the larger could only react slowly and reluctantly. So the Yankee Group's second error was to concentrate on static Strengths, which are the results of past performance, rather than analysing the factors which will govern performance in the future. Even IBM's massively higher R&D spending was irrelevant in this context - the quantum of expenditure was less important than the uses to which its results were being put. The Yankee research consequently missed the low rate of conversion of R&D into saleable products - clearly shown, for example, by the strange RISC saga.

IBM's discovery of Reduced Instruction Set Computing, primarily the work of a technologist named John Cooke, was potentially a big winner, since it much enhances the performance of smaller computers. IBM, though, didn't use its own discovery in a work-station until 1990 - three years after Sun Microsystems and twice as long after RISC's availability. How could such absurdity be allowed? The explanation is that RISC was resisted by people who were dedicated to extending the 360-370 mainframe architecture. That's a perfect (or imperfect) example of how Strength turns into Weakness. Exactly the same mindset also allowed Compaq to seize the advantage, and a market share of nearly one third. in client-servers, powerful PCs which serve networks.

The resilience which IBM's rivals have shown, compared to their opponent's fateful conservatism, rests on people. In any industry today, the brighest and best employees are aware that their own SWOT analysis could lead to breakaway. They could stay with the company and develop their ideas within its embrace. But fragmented markets and booming stock prices, coupled with increasingly plentiful venture capital, offer a constant temptation.

Keeping people one by one, buying them off, so to speak, is no solution. The company has to create a culture that's so attractive, so hard to leave, that the retention rate will remain very high. In other words, Putting People First has to be the base strategy. An unhappy workforce is both a Weakness and a Threat - as British Airways has recently found. Its resurgence was founded on a programme actually called Putting People First - but, after a pilots' strike threat last year, in late June cabin crew and ground staff were equally alienated.

Look at what Fortune magazine calls the 'four-pronged approach' adopted by chief executive Bob Ayling, and the missing element is immediately obvious:

1. Develop a marketing plan with universal appeal
2. Help employees understand the company's global vision
3. Benchmark off mistakes that others have made in the past
4. Select the right partners for joint ventures overseas.

MISSION STATEMENT

The wording of the only reference to people is curious. So long as they 'understand' that BA wants to be seen as a global airline, not a national carrier, that's fine. But consider this quotation: 'At a recent employee gathering in New York, none of the 75 people in the audience could remember the company's... mission statement' - which was only a single sentence. To put it mildly, there's not much point in a mission that everybody has forgotten.

The massive facelift on which BA is engaged went down well with the same audience ('there were audible oohs and ahs when images of the new planes and tocket jackets flashed up on a big screen.') The author's conclusion was that; 'If you give somebody a product they can be proud of and tell them why it's changing, you stand a good chance of helping them sell it better.' That is far from the truth. There are some key questions that need to be answered:

1. Have the people helped to create the new product?
2. Did they contribute to the thought processes that led to change?
3. Are they constructively involved in deciding how to sell the product better?

The answers at BA appear to be negative. One report accuses Ayling of being someone who 'may not have grasped the finer points of dealing with real people, as opposed to numbers on a page.' The curious issue here, though, is that BA has confronted similar problems before. Some of its managers have learned the powerful lesson that change accomplished through people is far more effective than change forced upon them. In the last 1980s, the troubles with its engineering division became so acute that management was forced to take a strike, keeping the airline going with white-collar labour, until the unions capitulated.

Alastair Cumming, the manager in charge, concluded that 'very determined management' could only go so far. Unless the employees could be positively involved and their willing support obtained, further progress would be impossible. The results of changing the management culture - from order and obey to cooperation - were spectacular. Cumming sold off its engineering overhaul business to GE, cut staff numbers by 500, and took £38 million out of costs in the first year - without any dispute. Once improvement had become the shared objective, and the necessary tools had been provided, examples soon abounded of employees taking the initiative in raising quality and reducing cost.

The BA engineering exercise rubs in the point that the SWOT exercise needs to be in two parts: internal and external. The first category includes matters like R&D strengths, engineering know-how, the cash in the bank, and so on. But these are passive. The second category is what actively turns the physical assets into achievements in the external world. This was brought home to me forcefully by reading Ryuzaburo Kaku's account of how he devised the two plans - in 1972 and 1982 - which converted Canon into, first, a premier Japanese company and, second, the world technology leader that it is today.

INTERNAL DEFECTS

The process, according to Kaku's article in the July-August Harvard Business Review, began with a meeting at which the young Kaku argued that Canon's obvious weakness of the time (a cash shortage so severe that it couldn't pay dividends) resulted from internal defects: 'poor decision-making and bureaucratic organisation'. Given his chance, Kaku 'radically decentralised decision-making, redesigned the organisation' and 'poured resources into R&D'. As the fruits poured forth, Kaku developed his ideas on 'kyosei' or 'a spirit of cooperation'.

He describes kyosei as a five-stage journey, starting with economic survival. That's where the vast majority of companies stop - making reliable profits from strong market positions: just like IBM or BA, in other words. But Kaku argues that this stage is not enough - the company must move on to cooperation between management and labour. Salaries, bonuses and training are all involved in this process: 'The two sides are in the same boat...sharing the same fate'. Plainly, this is the stage where BA has fallen short. Instead of emulating his own engineering side's later enlightenment, Ayling is adopting the strong-arm methods of its former, unhappier days.

Even cooperation is still not enough - 'this stage of kyosei can become so inwardly focused that it does little to solve problems outside the company'. Kaku goes on to call for cooperation with both suppliers and customers and with communities. Suppliers, for instance, are 'provided with technical support and in turn deliver high-quality materials on time'. But even that's not enough. In this third stage, 'companies often focus so much on local and national problems that they neglect global problems' - which leads on to Kaku's next two stages, globalism and partnership with governments.

Now, for most businesses these two stages seem infinitely remote - though globalism, thanks partly to the Internet, is a rising force in many markets today, and may well become decisive. But Kaku's five stages raise a crucial point: nothing is ever enough. No matter how great your Strengths, how limited your Weaknesses, how minimal the Threats and well-taken the Opportunities, there is always a next stage. The organisation must continually challenge itself and move onwards and upwards. An encouraging internal and external SWOT analysis is simply a foundation - an encouragement to do better still, and then more.

Nevertheless, the foundations laid by Kaku, together with the principles of employee cooperation which he used, make an instructive guide and form a penetrating two-part questionnaire:

1. Have you formed a large overall ambition? (Canon's was to join the top ranks of global companies and move from cameras to all-round high-technology manufacturer).
2. Have you set aggressive, long-term performance targets for every part of the organisation?
3. Have you got the right set-up? (Canon formed a matrix with three main product lines as vertical pillars, linked by three horizontal activities - manufacturing, marketing and R&D).
4. Are you investing heavily in all the horizontal activities?

Turn from Canon to BA, and the four questions would reveal similar foundation strengths, starting with the fact that it carries more passengers than any other airline. Its planned alliance with American Airlines should create a dominant force in an industry where BA already boasts the highest profitability. Its plans to cut costs and employment by radical reorganisation, including the outsourcing or disposal of services, will add to the Strengths and ward off any Threats. But the whole edifice (including those plans) rests on the next four questions based on the Canon experience:

5. Have you eliminated all distinctions between different types of employee?
6. Have you based excellent employee relations on investing in high salaries, extensive training programmes, generous vacations., etc?
7. Do you dislike and seek to avoid lay-offs, early retirements,etc.?
8. Do you make it a prime objective never to engage in confrontation with your employees?

Here BA's answers are far less satisfactory. Yet the two parts, the strategic exploitation of commercial assets and the creation of a one-company, cooperative culture go hand-in-hand. You can see the fruits of Canon's two-part octet in a decade of growth in net profits by 20% annually, with sales rising at 9%, and the return on both sales and equity more than doubling. In copiers and desktop printers, its main products, too, Canon is world leader. To take today's abundant Opportunities in like style, against multiplying Threats, never forget that Strengths can become Weaknesses - but, equally important, Weakness can be turned into Strength.

Robert Heller