Q 1.

SWOT ANALYSIS:

Strategic thinking requires the generation of a series of strategic alternatives, or choices of future strategies to pursue, given the company's internal strengths and weaknesses and its external opportunities and threats. The comparison of strengths, weaknesses, opportunities, and threats is normally referred to as a SWOT analysis The environment in which an organization exists can be described in terms of the opportunities and threats operating in the external environment apart from the strengths and

weaknesses existing in the internal environment. The four environmental influences could be described as follows:

Strength: Strength is an inherent capability of the organization which it can use to gain strategic advantage over its competitors. Weakness: A weakness is an inherent limitation or constraint of the organization which creates strategic disadvantage to it. Opportunity: An opportunity is a favourable condition in the organisations environment which enables it to strengthen its position.

 Threat: A threat is an unfavourable condition in the organisations environment which causes a risk for, or damage to, the organisations position.

An understanding of the external environment, in terms of the opportunities and threats, and the internal environment, in terms of the strengths and weaknesses, is crucial for the existence, growth and profitability of any organization.

A systematic approach to understanding the environment is the SWOT analysis. Business firms undertake SWOT analysis to understand the external and internal environment.

SWOT, is the acronym for strengths, weaknesses, opportunities and threats. Through such an analysis, the strengths and weaknesses existing within an organization can be matched with the opportunities and threats operating in the environment so that an effective strategy can be formulated. An effective organizational strategy, therefore, is one that capitalizes on the opportunities through the use of strengths and neutralizes the threats by minimizing the impact of weaknesses.

Its central purpose is to identify the strategies that will create a firmspecific business model that will best align, fit, or match a company's resources and capabilities to the demands of the environment in which it operates. Strategic managers compare and contrast the various alternative possible strategies against each other with respect to their ability to achieve major goals and superior profitability.

The significance of SWOT analysis lies in the following points:

It provides a Logical Framework: SWOT analysis provides us with a logical framework for systematic and sound thrashing of issues having bearing on the business situation, generation of alternative strategies and the choice of a strategy. Variation in managerial perceptions about organizational strengths and weaknesses and the environmental opportunities and threats lead to differences is approaches to specific strategies and finally the choice of strategy that takes place through an interactive process in dynamic backdrop.

It presents a Comparative Account: SWOT analysis presents the information about both external and internal environment in a structured form where it is possible to compare external opportunities and threats with internal strengths and weaknesses. This helps in matching external and internal environments so that a strategist can come out with suitable strategy by developing certain patterns of relationship. The patterns are combinations say, high opportunities and high strengths, high opportunities and low strengths, high threats and high strengths, high threats and low strengths. In case a different strategy is needed, as situation varies.

It guides the strategist in Strategy Identification: It is natural that a strategist faces a problem when his organization cannot be matched in the four patterns. It is possible that the organization may have several opportunities and some serious threats. It is equally, true that the 3

organization

may

have

powerful

strengths

coupled

with

major

weaknesses in the light of critical success factors. In such situation, SWOT analysis guides the strategist to think of overall position of the organization that helps to identify the major purpose of the strategy under focus.

SWOT analysis helps managers to craft a business model (or models) that will allow a company to gain a competitive advantage in its industry (or industries). Competitive advantage leads to increased profitability, and this maximizes a company's chances of surviving in the fast-changing, global competitive environment that characterizes most industries today. Faced with a constantly changing environment, each business unit needs to develop a marketing information system to track trends and developments, which can be categorized as an opportunity or a threat. The company has to review its strength and weakness in the background of environments opportunities and threat, i.e., an organizations SWOT analysis.

Potential Resource Strengths and Competitive

Potential Resource Weaknesses and

Capabilities A Potential Opportunities C

Competitive Deficiencies B

Company Potential External Threats to Companys Well-Being D

Analysis is the critical starting point of strategic thinking.

Kenichi Ohmae
If youre not faster than your competitor, youre in a tenuous position, and if youre only half as fast, youre terminal.
George Salk

The idea is to concentrate our strength against our competitors relative weakness.
Bruce Henderson

Q.2

DIFFERENCE BETWEEN INTERNAL & EXTERNAL FACTORS:

The environment in which an organization exists could be broadly divided into two parts the external and the internal environment.

Since the environment is complex, dynamic, multi- faceted and has a far reaching impact, dividing it into external and internal factors enables us to understand it better. We start with gaining an understanding of the concept of environment.

The external environment

includes all the factors outside the

organization which provide opportunity or pose threats to the organization.

The internal environment refers to all the factors within an organization which impart strengths or cause weaknesses of a strategic nature.

Figure: Companys Business Environment

The process of strategy formulation starts with, and critically depends on, the appraisal of the external and internal factors of an organization.

EXTERNAL

FACTORS

consists

of

demographics

and

economic conditions, socio-cultural factors, political and legal systems, technological developments, etc. These constitute the general environment, which affects the working of all the firms.

INTERNAL

FACTORS

consist

of

suppliers,

consumers,

marketing intermediaries, etc.

These are specific to the said business or firm and affects its working on short term basis. LEGAL

CULTURAL TECHNOLOGICAL EXTERNAL ENVIRONMENTAL FACTORS

POLITICAL GOVERNMENT ECONOMIC

DEMOGRAPHIC

MARKET ORGANIZATION INTERMEDIARIES INTERNAL ENVIRONMENTAL FACTORS CUSTOMERS SUPPLIERS Q. 3 ANALYSIS OF WAYS IN WHICH IKEA HAS MANAGED TO COMPETITORS MINIMISE THREATS TO ITS BUSINESS: 8

The success of any Organisation depends basically on the analysis of the environment in which it is operating, to find out the strengths, weaknesses, opportunities & threats posing an organization.

An awareness and a strategic study is most critical for survival of any organization. Every business has got its own threats & weaknesses. The threats can only arise if there are certain weaknesses. Thus, the review of the weaknesses gives us an understanding of the threats & the ways in which it can be counteracted.

IKEA is facing the following threats which could be critical for its survival: 1. SOCIAL TRENDS: Slowdown in first time buyers

entering the housing market which is its core segment.

2.

MARKET FORCES: More competition in household & furnishing markets.

3.

ECONOMIC consumer

FACTORS: spending &

Recession disposable

slows

down

the

income

reduces

substantially.

IKEA has managed to minimize the threats to its business in the following manner:

1.

SOCIAL TRENDS: IKEA is building online help to guide customers to a more sustainable life. Here it can focus on home improvement in the slowing housing market. It supports customers with tips and ideas on its website to reduce their impact on the environment. This will also save them money.

Staff are trained on sustainability, both on what IKEA is doing and how they can take responsibility to become sustainable for themselves.

2.

MARKET FORCES: IKEA is large enough to enjoy economies of scale. This lowers average costs in the better use of long run through, or for example, technology employing

specialized managers. Economies of scale also give a business a competitive edge if cost savings are then passed on to customers in the form of lower prices. This puts up high barriers to entry for smaller companies entering the market.

3. ECONOMIC FACTORS:

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IKEAs low prices create appeal amongst its customers in tough financial times. It is vital to keep prices as low as possible when the retail sector is depressed. IKEAs pricing strategy targets consumers with limited financial resources. Its products will also appeal to those with higher budgets through good quality and design. The company must ensure that it is always recognised as having the lowest prices on the market in the future.

In the given case of IKEA, it is also worthwhile to consider the weaknesses inherent in the business due to the nature of the organization:

1.

The size & scale of its global business leads to lapses in control standards, quality & Weak link in Supply chain Mngt.

2.

Need for low cost raw material

3.

Communication with the consumers & stakeholders about its environmental activities.

IKEA has managed to minimize the threats arising from these weaknesses in the following manner: 1. The IWAY code is backed up by training & Inspectors visiting factories to made sure that suppliers meet its requirements.

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2.

The problem of availability of low cost raw material is balanced by production of high quality goods which will nullify the shift in demand.

3.

Production of publications in print & online media, TV & Radio campaigns.

Q. 4 CONTRIBUTION OF SWOT ANALYSIS TO IKEAS BUSINESS GROWTH:

The IKEA group currently owns more than 253 stores & 32 franchisees in over 24 countries and has a turnover of over 21.2 billion Euros. Such figures & high growth are mind boggling for a business started in 1943 and the key contributor to this business growth of IKEA is mainly attributable to the SWOT ANALYSIS being performed from time to time.

SWOT Analysis has contributed to IKEAS business growth in the following ways:

1.

IKEA has created the opportunities & countered the threats by making the most of its strengths & addressed its weaknesses confidently due to which it has been so successful.

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2.

IKEA has identified its strengths & has been innovative throughout by making constant modifications in its products for optimum utilization of its resources.

3.

It has been using the policy of using no more material than necessary & use of waste as a result of which it is able to produce the goods at a lower price and that too of high quality. Eg: Nordon table, OGLA Chair etc.

4.

Thus the strengths contribute to IKEA being able to attract and retain its customers.

5.

It has become a Strong global brand & perceiving this as an opportunity, it makes full use of the Brand value created by IKEA.

6.

Through

the technique of SWOT

Analysis,

it has

identified its KEY PERFORMANCE INDICATORS which can show the progress path of the organization which helps the business.

7.

The

IWAY

approval by

was

earlier with

conceived IWAY

as

weakness by SWOT Analysis. This weakness has been overcome dealing only approved suppliers as a result of which the company is assured of High Quality Material.

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8.

Economies of scale for instance, bulk buying at cheaper unit costs.

9.

Sourcing materials close to the supply chain to reduce transport costs.Delivering products directly from the supplier to IKEA stores. This slashes handling costs, reduces road miles and lowers the carbon footprint.

10.

Using new technologies for example, IKEAs OGLA chair has been in its range since 1980.

11.

Smarter use of raw materials IKEA increased the use of recycled or reclaimed waste products in energy production across all stores from 84% in 2007 to 90% in 2009.

12.

Increasing use of renewable materials IKEA improved its overall use from 71% in 2007 to 75% in 2009. A business uses its strengths to take advantage of the opportunities that arise.

13.

IKEA

believes

that

its

environmentally

focused in a

business conduct will result in good returns even price sensitive market.

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Thus, the SWOT Analysis has played a major role in taking all the above business decisions due to which the IKEA Group has been flourishing.

Reference: Study Material of ICAI, India.

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