Strategic Analysis Tools: SWOT, BCG Matrix, Porter, VRIO
Strategic Analysis: SWOT, BCG, Porter & VRIO
SWOT is an analysis of the strengths and weaknesses present internally in the organization, coupled with the opportunities and threats that the organization faces externally.
BCG Growth–Share Matrix
The BCG growth–share matrix is one means of analyzing the balance of an organizations product portfolio, the purpose being to produce the best balance of growth versus stable products within a diversified company.
The matrix classifies products into four categories:
1. Stars (Cash Neutral)
Stars (cash neutral) are products with high relative market shares operating in high-growth markets. They require heavy investments and are cash users, but they have economies of scale and can be able to generate large amounts of cash.
2. Cash Cows (Cash Generator)
Cash cows (cash generator) are product areas that have high relative market shares but exist in low-growth markets. The business is mature, requires lower investment, and generates cash and profit.
3. Problem Child (Cash User)
Problem child (also called question marks) are products with low relative market shares in high-growth markets. They are typically cash users and require strategic decisions on investment or divestment.
4. Dogs (Cash Neutral)
Dogs (cash neutral) are products that have low relative market shares in low-growth businesses. Such products will need low investment but are unlikely to be major profit earners.
There are weaknesses in the BCG matrix; other matrices have been developed, for example the directional policy matrix based on industry attractiveness and competitive position.
Role of Corporate Headquarters
The role of corporate headquarters (CH) is to add value to the subsidiaries that are associated with the organization; otherwise, the cost of running a CH cannot be justified. Five main areas of activity undertaken by CH include:
- Ethics and corporate social responsibility
- Stakeholder management and communication
- Control and guidance of subsidiaries
- Remuneration, incentives, and people evaluation
- Legal and treasury
Porters Five Forces
Porters Five Forces assess competition and the ability of a firm to earn returns in an industry; the framework encourages firms to compete to be unique.
Potential Entrants (the threat of new entrants)
The threat of new entrants depends on the barriers presented and the likely reaction existing competitors will have to a new entrant. Major sources of barriers to entry include:
- Economies of scale
- Product differentiation
- Capital requirements
- Cost disadvantages independent of size
- Access to distribution channels
- Government policy
Bargaining Power of Suppliers and Buyers
Bargaining power of suppliers and bargaining power of buyers affect industry profitability and strategic options for firms.
Substitutes (the threat of substitute products or services)
Substitutes represent threats from alternative products or services that meet the same customer need.
Value Chain
The value chain identifies where value is added in an organization and links processes with the main functional parts of the organization. It is used for developing competitive advantage because such chains tend to be unique to an organization.
Primary activities include:
- Inbound logistics
- Operations
- Outbound logistics
- Marketing and sales
- Service
Support (secondary) activities include:
- Procurement
- Technology development
- Human resource management
- Firm infrastructure
Perspective and Emergent Models
The perspective model (sequential) assumes resources deliver a definite result to the organization and its future strategies. The emergent model (simultaneous) assumes resources and subsequent strategies are much more fluid and interrelated.
VRIO Framework
The VRIO framework can be used to test resources for their ability to contribute to competitive advantage. The criteria are:
- Valuable : The organizations resource needs to allow a firm to choose strategies that exploit environmental opportunities or neutralize competitive threats.
- Rare : Resources must be uncommon so they generate competitive advantage and superior economic performance.
- Inimitable : Resources cannot be easily imitated by competitors.
- Organizing capability : The firm must be capable of organizing itself to capture the value from the resource.