Chapter 2: Analyzing the External Environment of the Firm

Division of External Environment

An organization's external environment has three components: the remote environment, the
industry environment, and the operating environment.
Remote Environment:
• The remote environment is the
external environment over which
companies have no control.
• Elements of the remote
environment include current and
expected economic, social,
ecological, technical and political
factors.
• Analysis of the remote business
environment helps firms to
understand the nature and direction of the current conditions.
• Remote analysis spots potential issues and predicts trends.
Industry Environment:
• The industry environment in an environment in which a business competes and
functions.
• Elements of the industry environment includes barriers to entry in a market, supplier
power, buyer power, threats of substitutes, and degree of competition.
• Cannot be controlled fully (slightly controlled) by the organization.
• Competitive or industry analysis helps business managers know how to make their
products different and better than competitors.

Operating Environment:
• The operating environment involves customers, creditors, investors, employees, the
marketing environment, and how a business uses and acquires resources.

Creating the Environmentally Aware Organization

Managers use three important processes—scanning,
monitoring, and gathering competitive intelligence—to
enhance their environmental awareness, better understand
the environment that surrounds them, and develop
forecasts about the future.
Environmental Scanning:
• Environmental scanning involves information gathering
for assessing the nature of the environment in terms
of uncertainly, complexity and dynamism in order to
 Identifies early signs of future environmental changes.
 Detects changes already underway. They are happening.
• Successful environmental scanning alerts the organization to critical trends and events
before the changes have developed a visible pattern and before competitors recognize
them.
• Spotting key trends requires a combination of knowledge and familiarity with the
business and the customer, as well as keeping an eye on what is happening around
us.
Environmental Monitoring
• It involves tracking the environmental trends, sequences of events or streams of
activities.
• It frequently involves following signals or indicators discovered during environmental
scanning.
• The purpose of monitoring is to assemble sufficient data to ascertain whether certain
trends are emerging. Thus, as monitoring progresses, the data turn frequently from
imprecise to precise.
• Three outcomes emerge out of monitoring:
a. A specific description of environmental trends and patterns to be forecast.
b. The identification of trends for further monitoring and
c. The identification of areas for further scanning.
Competitive Intelligence:
• Competitive intelligence
(CI) helps firms better
define and understand
their industry as well as
identify rivals’ strengths
and weaknesses.
• It includes the
intelligence gathering
associated with the
collection of data on
competitors and the
interpretation of such
data for managerial
decision making.
• Competitive intelligence
helps a company avoid
surprises by anticipating
competitors’ moves and decreasing its own response time.
Forecasting:
• Environmental forecasting involves the development of plausible projections about the
direction, scope, speed, and intensity of environmental change.
• Its purpose is to predict change. It lays out of path for anticipated changes.
• For example, it asks: how long the new technology will take to reach the market
place? Are current lifestyle trends likely to continue?
The General Environment:
The general environment consists of a set of broad dimensions in an organization’s
surroundings that
- A business typically has no control over,
 - Have less direct impact on the business activities (influence not on a day to day
basis)
- Generally affect everyone in an industry or market in more or less similar manner.
The success of the company depends on its ability to adapt.
Segments of the general environment include:
The Demographic/Psychographic Segment
• Demographics are the most easily understood and quantifiable elements of the general
environment. They are at the root of many changes in society.
• Demographics include elements such as an aging population, , rising or declining
affluence, changes in ethnic composition, geographic distribution of the population, and
disparities in income level.
The Sociocultural Segment
• Sociocultural forces influence the values, beliefs, and lifestyles of a society.
• Examples include a higher percentage of women in the workforce, more dual-income
families, increases in the number of temporary workers, greater concern for healthy
diets and physical fitness, greater interest in the environment, and more and more
people choosing to postpone having children.
The Political/Legal Segment
• Political processes and legislation define the regulations that industries must comply
with.
• Key elements of the political/legal arena include environmental regulation, occupational
health and safety legislation, immigration policies, deregulation of utilities, mandated
minimum wages.
The Technological Segment
• Developments in technology lead to new products and services and improve how they
are produced and delivered to the end user.
• Innovations can create entirely new industries and alter the boundaries of existing
industries.
• Notable technological developments and trends are genetic engineering, nanotechnology,
and research in artificial and exotic materials.
The Economic Segment
• The economy affects all industries, from suppliers of raw materials to manufacturers of
finished goods and services, as well as all organizations in the service, wholesale,
retail, government, and non-profit sectors.
• Key economic indicators include interest rates, unemployment rates, the consumer price
index, the GDP, and net disposable income.
The Global Segment
• More and more firms have been expanding their operations and market reach beyond
the borders of their “home” countries.
• Globalization provides opportunities to reach much larger potential markets as well as
access a broader base of factors of production, such as raw materials, labor, skilled
managers, and technical professionals.
• Examples of important elements in the global segment include exchange rates, global
trade, the fast-growing economies of China and India, trade agreements among
regional blocs (e.g., North American Free Trade Agreement [NAFTA], European Union
[EU], Association of Southeast Asian Nations [ASEAN]), and the General Agreement on
Tariffs and Trade [GATT]).
The Competitive Environment
 A competitive environment is a dynamic external system in which a business competes
and functions.
 Also sometimes referred to as the task or industry environment.
 The nature of competition in an industry, as well as the profitability of firm, is often
more directly influenced by developments in the competitive environment.
 The competitive environment consists of competitors (direct or indirect, existing or
potential), customers, and suppliers.
Porter’s Five Forces Model of Industry Competition
 A framework for analyzing the level of competition within an industry.
 Michael E. Porter, identifies five competitive forces that shape every industry, and helps
to determine a firm's weaknesses and strengths by identifying who holds the balance of
power within the industry.
 These forces are:
The threat of new entrants:
• The threat of new entrants refers
to
- The ability of new companies
to enter into an industry.
- The possibility that the profits
of established firms in the
industry may be eroded by
new competitors.
• When new competitors enter into
an industry offering the same
products or services, a company’s
competitive position will be at
risk.
• The position of existing firms is stronger if there are high barriers to entering the
market such as-
• Economies of scale
• Product differentiation
• Capital requirements
• Switching costs
• Access to distribution channels
• Cost disadvantages independent of scale
The bargaining power of buyers:
• A profitable company depends on its ability to attract and retain customers and charge
high prices.
• Buyers threaten an industry by
 Forcing down prices,
 Bargaining for higher quality or more services and
 Playing competitors against each other.
• A buyer group is powerful when
 There are lots of sellers within the industry.
 They can easily switch to a competitor’s products and services.
 The buyer faces few switching costs
 When buyers are fewer in number and more concentrated
 They purchases large volumes relative to seller sales

 The purchased products are standard or undifferentiated.

 They are lower profitable, as lower profitable buyer are more price sensitive.
 The buyers pose a credible threat of backward integration- buyers demand
concessions, and may engage in producing some components in-house and
purchasing the rest from outside suppliers.
 The industry’s product is unimportant to the quality of the buyer’s products or
services
 The buyer has full information (their knowledge of demand, market prices and
supplier costs provides them with leverage)
The bargaining power of suppliers:
• Suppliers can exercise power by threatening to raise prices or reduce the quality of
purchased goods and services
• A supplier group will be powerful when
 The supplier group is dominated by a few companies and is more concentrated
than the industry it sells to
 The industry is not an important customer of the supplier group.
 The supplier’s product is an important input to the buyer’s business
 The supplier group’s products are highly differentiated
 The supplier group poses a credible threat of forward integration
 If there are high switching costs associated with a move to another supplier.
 When firm cannot raise prices as fast as suppliers
 If they have specific expertise or technology needed to manufacture goods.
• The more different suppliers a firm has, the greater control it can exercise over
suppliers in terms of price, quality, and delivery schedules.
The threat of substitute products:
• All firms within an industry compete with other industries producing substitute
products and services.
• If there are many substitutes to a
firm's product, customers might
use, if prices become too high,
e.g. iTunes substitutes for CDs.
• Substitutes products limit the price
that can be charged and reduce
industry profits. Firms have to
improve the performance of their
products by reducing costs and
therefore prices and by
differentiation.
The Intensity of Rivalry among Competitors in an Industry
• All firms share market space with competitors who are continuously devising new, more
efficient way to produce by introducing new products and services, and attempting to
attract customers by developing their brands and imposing switching costs on their
customers.
 Direct competitors are businesses that are selling the same type of product or
service as firm. For example, McDonalds is a direct competitor with Burger King.
 Indirect competitors are businesses that still compete even though they sell a
different service or product. The products or services offered by indirect
competitors tend to be those that can be substituted for one another.
• Firms use certain tactics, such as price competition, advertising battles, product
introductions, and increased customer service or warranties, to win over customers and
build their businesses.
• Intensity of Rivalry is high if…
• Competitors are numerous
• Industry growth is slow
• Fixed costs are high
• Competitors have equal size
• Products are undifferentiated
• Brand loyalty is insignificant
• Consumer switching costs are low
• Competitors have equal market share
• Competitors are strategically diverse
• There is excess production capacity
• Exit barriers are high

Ques: Identify and explain the several forces that can act as sources of entry
barriers for organizations trying to enter into an industry.

Barriers to New Entry

Economies of scale
• Economies of scale are the cost advantages that enterprises obtain due to their large
scale of operation, as increasing output leads to lower long-run average costs.
• When existing competitors in an industry have achieved economies of scale, new
entrants have to either compete on a large scale or accept a cost disadvantage in
order to compete on a small scale.
• Overcoming economies of scale requires innovation and bold moves, such as devising
lower-cost manufacturing methods or sourcing overseas.
Product differentiation
• Product differentiation can be accomplished through strong brand recognition, great
customer service, or a network effect.
• When existing competitions have strong brand identification and customer loyalty, new
entrants have to spend more time and money to differentiate their products in the
marketplace and overcome existing customer loyalties by educating customers about the
unique qualities and benefits of their specific products.
Capital requirements:
• New entrants are required to invest large financial resources in order to enter, establish
and compete in an industry.
• Costs may include start-up costs, ongoing capital investments required (e.g. to cope
with rapid changes in technology), risky or unrecoverable advertising costs, research
and development costs, costs of inventories, customer credit, and various start-up
losses.
Switching costs
• Switching costs refer to the one-time costs that buyers face when switching from one
company's products to another's.
• To overcome the switching cost barrier, new entrants may have to offer buyers a
bigger price cut or extra quality or service.
• All this can mean lower profit margins for new entrants.
Access to distribution channels
• In many industries, established competitors control the distribution channels through
long-standing relationships.
• In order to persuade distribution channels to accept a new product, new entrants often
must provide incentives in the form of price discounts, promotions, and cooperative
advertising. Such expenditures reduce the profitability of new entrants.
Cost disadvantages independent of scale
• Existing firms may have cost advantages that are not available to potential entrants or
cannot be replicated by the competition.
• These advantages can include access to the best and cheapest raw materials,
possession of patents and proprietary technological know-how, the benefits of learning
and experience curve effects, advantageous locations, lower borrowing costs etc.
Governmental and legal barriers:
• Government policies can limit or prevent new competitors from entering industries
through licensing requirements, limits on access to raw materials, pollution standards,
product testing regulations, etc.
• National governments commonly use tariffs and trade restrictions (antidumping rules,
local content requirements, and quotas) to raise entry barriers for foreign firms.

Ques: Explain the situation when buyers are most powerful.

Buyer Concentration: When buyers are fewer in number and more concentrated, they have
a higher power over the firm. The firm’s sales revenue will be dependent on these few
customers and they will not be able to ignore any demands.
Purchase large volumes relative to seller sales:
 If a large percentage of a seller’s sales are purchased by a single buyer then the
seller will not want to risk of losing business.
 Large volume buyers are also powerful in industries with high fixed costs (e.g. steel
manufacturing).
Undifferentiated products: If the firm sells a standard or undifferentiated product, then there
is a potential threat of switching of a buyer. Because there may be many firms supplying
the same type of product. Ex: Buying wheat and yeast is the same across all suppliers.
Switching Cost: Switching costs lock the buyer to particular sellers. If switching costs are
low for a buyer, then any dissatisfaction with a firm or a product will enable the buyer to
find an alternate with minimum hassle and inconvenience.
Threat of Integration: The buyers pose a credible threat of backward integration- buyers
demand concessions, and may engage in producing some components in-house and
purchasing the rest from outside suppliers.
Information: If buyers have full information regarding the demand, market prices, seller’s
operations and what their actual costs are, then they will be able to demand better prices
from the seller.
Price Sensitivity: If the buyers are sensitive to changes in prices and may stop purchase,
the seller will not be able to ignore their demands.
Available Substitutes: If there are many substitutes or alternatives in the market, then the
buyers will have a lot of options to switch and shop around, making their power over the
firm’s substantial.
Profits earned are low: Lower profitable buyer are more price sensitive.
The industry’s product is unimportant to the quality of the buyer’s products or services
A buyer group is powerful when the good or service purchased by the buyer group is of
limited importance to the quality of the buyer's offerings.

Ques: Explain the situation when suppliers are most powerful.

Suppliers will be powerful in the following circumstances:
1. The supplier industry is dominated by a few companies and is more concentrated
(Few firms dominate the industry) than the industry it sells to:
Suppliers selling to fragmented industries exercise power over prices, quality, and terms.
2. The industry is not an important customer of the supplier.
When suppliers sell to several industries and a particular industry does not represent a
significant fraction of their sales, suppliers are able to exert power.
3. The supplier’s product is an important input to the buyer’s business.
When such inputs are important to the success of the buyer’s manufacturing process or
product quality, the bargaining power of suppliers is high.
4. The supplier’s products are differentiated
When buyers are unable to substitute among different inputs, their suppliers can exert
substantial power in determining prices and terms. (Conversely, even large suppliers can
be affected if they have to compete with substitutes.)
5. The supplier group poses a credible threat of forward integration.
 If they are able to integrate forward or selling the product directly to the end users.
 If there are strong end users who can exert power over the organization in favor of a
supplier.
6. If there are high switching costs associated with a move to another supplier.
7. When firm cannot raise prices as fast as suppliers
8. If they have specific expertise or technology needed to manufacture goods.
9. If there are no substitutes available.

Factors affecting intense rivalry

Numerous competitors. When there are many competitors, some companies believe that
they can make competitive moves without being noticed.
 Competitors have equal size: Even when there are relatively few firms, and they are nearly
equal in size and resources, they are more likely to engage in competitive battles for
market leadership.
Slow industry growth. In a slow growth market, companies can only grow by capturing
market share from each other, which leads to increased competition.
High fixed costs.
High fixed costs create pressure for all companies to fill capacity, thus leading to price
cutting when there is excess capacity.
Lack of differentiation or switching costs. When products are not differentiated or perceived
as commodities, choice is often determined by price and service, which then leads to
increased competition in price and service.
Low switching cost: Lack of switching costs has the same effect, as competitors can easily
replace each other’s product offerings.
Capacity increased in large increments
When economies of scale require large increases in capacity, it causes disruptions in the
industry supply/demand balance, which then leads to periods of overcapacity and price
cutting.
Diverse competitors Companies with diverse strategies, origins, personalities and
relationships to parent companies (especially foreign competitors) have different competitive
goals and strategies than “typical” companies within the industry. Their diverse approaches
to the market and unique competitive strategies can upset the status quo of doing
business.
High exit barriers
Economic, strategic and emotional factors can prevent companies from leaving the industry,
even when they are earning low or negative returns on investments. Major sources of exit
barriers include:
 Specialized assets
 Fixed costs of exit
 Strategic interrelationships
 Emotional barriers
 Government and social restrictions
How the Internet and Digital Technologies Influences Industry
Benefit to Industry Disadvantages to Industry
Threats of • Internet-based technologies lower barriers to entry.
New Businesses that reach customers primarily through the
Entrants Internet may enjoy savings on traditional expenses, such as
office and retail space rent, sales-force salaries, printing,
and postage.
• Competitors from other countries and distant locations can
use their presence on the Internet to compete with local
businesses without the need to establish a physical
presence.
• Many internet based capabilities can be easily imitate.
Bargaining Businesses can access • Switching costs decrease.
Power of consumers directly, bypassing • Information availability online empower end users.
Buyers intermediaries, such as Consumers can access more information about
wholesalers, distributors, and companies’ performance, products information, price etc.
retailers, and share some of faster and more efficiently, with a click of the mouse.
the savings in the form of
lower prices.
Bargaining Online procurement methods • Internet gives suppliers access to more customers an
Power of can increase bargaining power make it easier to reach end user
Suppliers over suppliers as businesses • Online procurement practices deter competition and reduce
can shift from single source of differentiating features
supply
Threat of By making the overall industry • Internet based capabilities create more opportunities for
substitutes more efficient, internet/digital substitution.
technology can expand the • New products may displace old.
size of the market • One market may ‘steal’ customer spending from other
markets. E.g. spending on smart phone apps may
reduce spending on PC software.
Industry • Since location is less important, the number of
Rivalry competitors increases.
• Reduces differences among competitors as offerings are
difficult to keep proprietary.
• Migrates competition to price,
• Lowers variable cost relative to fixed cost, increasing
pressures for price discounting.
Some Caveats using in five force model:
• Industry analysis helps a firm to evaluate the profit potential of an industry. Managers
must not always avoid low profit industries. Low profit industries can still yield high
returns for firms who pursue sound strategies.
• Five forces analysis implicitly assumes a zero- sum game, determining how a firm can
enhance its position relative to the forces and overlook the many potential benefits of
developing constructive win–win relationships with suppliers and customers.
E.g. establishing long-term mutually beneficial relationships with suppliers improves a
firm’s ability to implement just-in-time inventory systems, which allow it to manage
inventories better and respond faster to market demands. By working together as
partners, suppliers and manufacturers can provide the greatest value at the lowest
possible cost.
• Five forces analysis is essentially a static analysis. Yet external forces can still change
the structure of all industries. The model should not be used to describe the structure
of an industry at a single moment in time.
• Organizations need to prepare for the effects of forces beyond those of entrants,
suppliers, buyers, substitutes, and competitors. Porter’s Five Force model does not
consider corporate responsibility, social awareness, industry culture, or legislation.
• Finally, it is worth noting that the point of industry analysis is not to declare the
industry attractive or unattractive but to understand the underpinnings of competition and
the root causes of profitability.
The Value Net
On the basis of game theory considerations, the concept of the value net is an extension
of the five-force analysis. The value net represents all the players in the game and
analyzes how their interactions affect a firm’s ability to generate and appropriate value.

- The vertical dimension of the net includes suppliers and customers. The firm has
direct transactions with them.
- The horizontal dimension includes substitutes and complements, with whom a firm
interacts but may not necessarily transact.
Complements are products or services that have a potential impact on the value of a
firm’s own products or services. A firm must acknowledge its potential partnerships here.
Strategic Groups within Industries
In an industry analysis, two assumptions are unquestionable.
1. No two firms are totally different; and
2. No two firms are exactly the same.
The analysis can be enhanced by identifying groups of firms that are mostly similar to
each other, which are known as strategic groups.
Strategic Groups refers to a group of companies who follow the same strategy within a
particular industry.
Internal competition between strategic group firms is greater than between firms outside that
strategic group due to
- Similar market positions
- Similar products
- Similar strategic actions
There is more heterogeneity in the performance of firms within strategic groups.
What dimensions to use to map the firms?
Dimensions include
 Breadth of product and geographic scope,
 Extent of technological leadership
 Price or quality,
 Degree of vertical integration,
 Type of distribution (e.g., dealers, mass merchandisers, private label),
 Customer service and so on.
Dimensions should be selected to reflect the variety of strategic combinations in an
industry.
What is the value of the concept of strategic groups as an analytical tool?/ What are the
performance implications?
The performance implications are that firms can group themselves with close competitors
and
• Identify barriers between groups
Strategic groupings help a firm to identify barriers to mobility, which protect a group from
attacks by other groups. Mobility barriers are factors that resist the movement of firms
from one strategic position to another.
• Identify positions within the industry that are marginal or tenuous
Strategic grouping helps a firm to identify groups whose competitive position may be
marginal or tenuous. One may anticipate that these competitors may exit the industry or
try to move into another group.
• Chart directions for future strategic development.
Strategic groupings help to chart the future directions of firms’ strategies.
Arrows flowing from each strategic group can represent the direction in which the group
(or a firm within the group) seems to be moving.
If all strategic groups are moving in a similar direction, this could indicate a high degree
of future unpredictability and intensity of competition.
• Strategic groups are helpful in thinking through the implications of each industry trend
for the strategic group as a whole
• Strategic group analysis is a more fine-grained way to conduct competitor analysis, as
the competitive environment of an industry may differ from the competitive environment
of the strategic group.
Strategic Group Map
The figure provides a strategic grouping of the worldwide automobile industry.
We have identified four strategic groups.
• In the top left-hand corner are high-end luxury automakers, who focus on a very
narrow product market.
• At the other extreme, in
the lower left-hand
corner, is a strategic
group that identifies with
low-price, simple features,
still narrow product range
and targets a narrow
market. These players,
Hyundai and Kia, limit
competition from other
strategic groups by pricing
their products as low as
possible.
• Another group, near the middle, consists of firms high in product pricing and quality
and average in their product-line breadth.
• The final group, at the far right, consists of firms with a broad range of products and
multiple price points. These firms compete with both the lower end of the market
(e.g., Ford Focus) and the higher end (e.g., Chevrolet Corvette).

SWOT analysis:
 SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.
 A SWOT analysis helps a business owner to identify his own strengths and
weaknesses, as well as any opportunities and threats that may exist in a specific
business situation.
Strengths:
 Characteristics of the business that give it an advantage over others.
 Examples of strengths may be superior knowledge, strong brands; unique
access to certain markets, highly motivated workforce, extensive distribution
networks, deep financial pockets, and strong leadership and so on.
Weaknesses:
 Characteristics of the business that place the business at a competitive
disadvantage relative to others and stop the business from performing at its
optimum level.
 E.g. high levels of debt, an inadequate supply chain or lack of capital,
difficulties in accessing raw materials, wounded brands, and pending lawsuits.
Opportunities:
 Elements in the environment that the business could exploit to its advantage.
 Opportunities can arise from technological developments, such as the Internet
and telecommunications, or advances in biotechnology.
 One can find opportunities almost everywhere, in identifying new market
needs, new and better ways to respond to existing needs, new ways of
delivering products and services, new applications of technology, easing
regulatory conditions, industry consolidation, or technology convergence.
Threats:
 Elements in the environment that could cause trouble for the business.
 Threats can mount from formidable competitors, new legislation, an aging
population, shifts in the tastes and values of consumers, protectionism,
terrorism, an oil crisis, increasing commodity prices, or a new technology that
threatens to make the firm’s products obsolete.

What are the basic principle of SWOT Analysis?

1. SWOT Analysis has a defined process and rules, which have to be followed to
achieve best results
2. SWOT Analysis should be short to produce most significant results.
3. Managers systematically consider each area of their general and competitive
environments for specific opportunities as well as for looming threats.
4. Not to cast the net too narrow: Strategists who rely on traditional definitions of their
industry and competitive environment often focus too narrowly on current customers,
 technologies, and competitors. Hence, they fail to notice important changes in the
condition of their environment that may need to redefine industry boundaries and identify
a whole new set of competitive relationships.
5. Not to focus too much on one moment in time: Strategy and competition unfold over
time. As circumstances change, a static analysis cannot capture the dynamics of the
competitive environment.
6. Not all trends, opportunities, and threats apply equally to all companies within an
industry, and one firm’s SWOT analysis is not applicable to another. Specific trends
may benefit some companies but harm others.
Advantages of SWOT:
1. SWOT analysis provides an organization a clear view of its strengths, allowing it to
build on them and meet business objectives.
2. It is a source of information for strategic planning.
3. Builds organization’s strengths.
4. Highlights weaknesses and provides analysts a chance to reverse them
5. Showcases possible opportunities that lie ahead. This gives the firm an opportunity to
draft strategic growth plans for the future accordingly
6. Helps an organization recognize possible threats and take necessary measures to deal
with them. Companies can introduce new policies and establish growth plans to
eliminate any possible threats.
7. SWOT analysis allows a company to create matching and converting strategies
8. SWOT analysis sheds light on the company’s existing resources which may have been
ignored or have not been used to their full potential
9. SWOT focuses on the skills, capabilities, attitudes, abilities and capacities.
10. It helps in identifying core competencies of the firm.
11. It helps in knowing past, present and future so that by using past and current data,
future plans can be chalked out.
12. Cost-effective: Conducting a SWOT analysis does not require any form of technical
skill, extensive training or hiring an external consultant. All a firm need is staff
members who have prior knowledge of business.
13. Wide Range of Applications: SWOT analysis can be used to conduct competitive
analysis, strategic planning or any other study. This is because, through a SWOT
analysis, a business can identify any environmental factor that plays a favorable or
unfavorable role in any particular objective.
14. Offers Insight: SWOT can be used to gain insight about the market, giving a firm a
better understanding of competition.
15. Integration and Synthesis: SWOT analysis gives the analyst the opportunity to
integrate and synthesize diverse information, despite it being qualitative or quantitative in
nature. SWOT analysis organizes information that is already known, as well as
information that has just been acquired or discovered. This makes it easier for a
company to transform information diversity from a weakness into a possible strength.
16. Fosters Collaboration: SWOT analysis fosters collaboration and encourages open
information exchange between a variety of functional areas in a firm that would
otherwise not collaborate or interact much.

Limitation of SWOT:
1. SOWT doesn't priorities issues: Performing a SWOT s generates a long list of
strengths, weaknesses, threats, and opportunities but does not provide any
mechanism for determining which of the identified factors have more weight.
2. SOWT doesn't provide solutions or offer alternative decisions
3. SWOT can generate too many ideas but not help to choose which one is best
4. SWOT can produce a lot of information, but not all of it is useful.
5. SWOT analysis cannot, however, yield environmental forecasts nor show managers
how to achieve a competitive advantage.
6. Strengths may not lead to an advantage: A firm’s strengths and capabilities, no
matter how unique or impressive, may not enable it to achieve a competitive
advantages in the marketplace.
7. SWOT’s focus on the external environment is too narrow: Strategists rely on
traditional definitions of their industry and competitive environment often focus too
narrowly on current customers, technologies, and competitors. Hence, they fail to
notice important changes in the condition of their environment that may need to
redefine industry boundaries and identify a whole new set of competitive
relationships.

10. Tendency to be subjective: Although performing a SWOT does not require technical
skills, however, inexperienced individuals have the tendency to rely on questionable data