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Competitive Advantage

Competitive Advantage Matrix aka BCG Advantage Matrix

The Competitive Advantage Matrix (also known as the Advantage Matrix or even the Strategic Environments Matrix) is one of the more interesting generic strategy models and was created by the famous strategy consulting firm, the Boston Consulting Group (BCG).

The Two Dimensions Of the Competitive Advantage Matrix

This is a two-by-two matrix which looks at two factors:

  • The number of different approaches to competitive advantage available
  • The potential size of the competitive advantage

The Four Categories In The Competitive Advantage Matrix

The competitive advantage matrix therefore has four boxes

  • Few advantages – and those that exist are small – Stalemate.
  • Few advantages – but those that exist are large – Volume.
  • Many advantages – but those that exist are small – Fragmented.
  • Many advantages – and they can be large – Specialised.

Since most of the possible advantages will refer to differentiation, the Competitive Advantage Matrix can also be thought of as a Differentiation Advantage Matrix.

The Origins Of The Competitive Advantage Matrix

The Boston Consulting Group had developed and popularised the ideas of managing to achieve scale economies and learning curve economies and developed the famous Growth Share matrix (this split businesses into stars, cash cows, question marks and dogs based on the growth of the industry and the relative market share of the business.)

The Competitive Advantage Matrix helped to bring out the key assumptions which made the ideas behind scale, learning and the Growth Share Matrix and explains why they worked well in some strategic environments (volume) and didn’t work so well in others.

A More Detailed Look At the Competitive Advantage Matrix Categories

Volume businesses benefit from large scale which helps them to lower production and service costs by spreading out a cost over a larger number of units. A great example is software – initial costs are enormous to develop a software program but incremental costs for the next copy are tiny. In this environment average unit costs fall quickly as volume increases.

Volume businesses also benefit from being able to spread their marketing and brand building costs over numerous sales. This is the advantage that Coca-Cola has over Pepsi. It costs each the same to create advertisements and to buy the time on TV but because Coke has approximately twice the market share, its unit costs are about half – giving Coca-Cola the choice of taking the cost advantage or spending twice as much on promotion.

Volume businesses thrive where customer needs are very similar and get into trouble as customer needs disperse across many customer value attributes.

Stalemate businesses – where there are few competitive advantages and those that could exist are small – are often trapped into thinking determined by standard industry recipes – “That’s the way this industry works, it always has done and always will do.”

As technology changes, these industries can be shaken up and the old approach made to look foolish. Think of Amazon versus music CD stores.

The Fragmented and Specialised sections are where most small businesses should be positioned, and they deserve their own special posts focusing on the opportunities. If you think that you’re trapped in a stalemate industry, you need to listen to my mp3s on the 7 big questions of business success.

Why I Like The Competitive Advantage Matrix

I like the Competitive Advantage Matrix for several reasons:

  • First it shakes up the idea that big is better. It works in volume businesses but in other businesses, getting too big and expanding outside the niche damages the differentiation that creates success.
  • Second, it’s not that well known. I’ve seen it mentioned in a few books on strategy but they rarely go into much detail and instead prefer to trot out the traditional thinking from the Growth Share Matrix.

What Do You Think About The Competitive Advantage Matrix?

Do you find the insights from the Competitive Advantage Matrix useful?

Is it a self-fulfilling prophecy where businesses who think they are in a stalemate will act as if they are in a stalemate and businesses who think they can specialise will develop significant competitive advantages?

The Competitive Advantage Matrix As A Strategic Planning Model

The Advantage Matrix is one of many strategic planning models which helps you to think through a particular situation, understand the implications and possibly identify the way to improve the position of the business.

One of my favourites which isn’t as well known as it should be is SPACE Analysis which puts the level of competitive advantage into perspective with three other critical dimensions of strategy.

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Competitive Advantage In The SPACE Matrix

The SPACE matrix assesses a business along four dimensions to find an appropriate strategic thrust and in this article, we’ll look at the SPACE factors for competitive advantage.

Competitive Advantage In The SPACE Matrix

According to the creators of the Strategic Position and Action Evaluation Matrix, (Strategic Management – A Methodical Approach”, Rowe, Mason, Dickel, Mann and Mockler. Published by Addison Wesley) the following items should be considered when assessing Competitive Advantage:

  • Market share (small to large)
  • Product quality (inferior to superior)
  • Product life cycle (late to early)
  • Product replacement cycle (variable to fixed)
  • Customer loyalty (low to high)
  • Competition’s capacity utilisation (low to high)
  • Technological know-how (low to high)
  • Vertical integration (low to high)
  • Speed of new product introductions (slow to fast)

Each variable within the competitive advantage dimension of SPACE is assessed from 1 to 6 with high scores good, low scores bad.

Interpreting Competitive Advantage In The SPACE Matrix To Your Situation

While the list of potential sources of competitive advantage is interesting, this dimension more than any other in the SPACE matrix needs to be adapted to your business sector.

The competitive advantage matrix shows that even market share isn’t necessarily a strong cause of advantage in some situations.

For more general sources of competitive advantage (or disadvantage) I’d look to the PIMS database and Porter’s generic strategies.

However to best assess competitive advantage to use in the SPACE matrix, you need to look in detail at your business, your customers and competitors to see who is providing the best customer value.

The following strategy techniques will help:

Value chain analysis

Customer value attribute maps

Key Success Factors

This may mean that using SPACE analysis at different stages of your strategic planning work will generate different conclusions as you better get to understand the sources of competitive advantage.

The Impact On Strategic Direction For Different Levels Of Competitive Advantage

The competitive advantage rating will either reinforce or counteract the rating for industry attractiveness as they are on the same axis in the SPACE matrix. The other axis compares financial strength and environmental stability.

A strong rating on the Industry Attractiveness / Competitive Advantage axis (i.e. the business has a strong competitive advantage in an attractive industry) points to an aggressive strategy or a competitive strategy.

A weak rating (an unattractive industry and/or a competitive disadvantage) indicates that a Conservative strategy or defensive strategy is appropriate.

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Advantages & Disadvantages Of Value Chain Analysis

Value Chain Analysis is the big idea in Michael Porter’s classic strategy book Competitive Advantage.

Image Rights for diagram

The Advantages Of Value Chain Analysis

  1. A big advantage is that the value chain is a very flexible strategy tool for looking at your business, your competitors and the respective places in the industry’s value system.
  2. The value chain can be used to diagnose and create competitive advantages on both cost and differentiation. I’ve written about this in Using The Value Chain To Create Competitive Advantage.
  3. It helps you to understand the organisation issues involved with the promise of making customer value commitments and promises because it focuses attention on the activities needed to deliver the value proposition.
  4. Comparing your business model with your competitors using the value chain can give you a much deeper understanding of your strengths and weaknesses to be included in your SWOT analysis.
  5. The value chain is well known and has been a mainstay of strategy teaching in business schools for the last 20 to 25 years. The book, Competitive Advantage was published in 1985.
  6. It can be adapted for any type of business – manufacturing, retail or service, big or small.
  7. The value chain has developed into an extra model, the industry value chain or value system which lets you get a better understanding of the much broader competitive arena. If you’re interested in this aspect of the value chain, watch the Value Chain Videos for an easy-to-understand introduction.

The Disadvantages Of Value Chain Analysis

  1. It’s very strengths of flexibility mean that it has to be adapted to a particular business situation and that can be a disadvantage since, to get the best from the value chain, it’s not “plug and play”.
  2. The format of the value chain laid out in Porter’s book Competitive Advantage, is heavily oriented to a manufacturing business and the language can be off-putting for other types of business.
  3. The scale and scope of a value chain analysis can be intimidating. It can take a lot of work to finish a full value chain analysis for your company and for your main competitors so that you can identify and understand the key differences and strategy drivers.
  4. Many people are familiar with the value chain but few are experts in its use.
  5. Michael Porter’s book is excellent but it is a tough read. It’s also dated in its examples which can make some ideas more difficult to relate to and understand how things fit together in the Internet age.
  6. The value chain idea has been adopted by supply chain and operations experts and therefore its strategic impact for understanding, analysing and creating competitive advantage has been reduced.
  7. Business information systems are often not structured in a way to make it easy to get information for value chain analysis.

A Partial Analysis Of The Value Chain

A full value chain analysis can make the strategy process long, time-consuming and complex.

I don’t believe it’s necessary in many cases.

Strategy is about finding insight to create competitive advantage and then taking the actions necessary to put the ideas into action.

It can be very effective to identify the business processes and the individual roles they can play – positive and negative – for implementing a particular strategy.

Using the Value Chain To Find Value Destroying Activities

Sometimes stopping a value destroying activity is more important than strengthen a value creating process. These happen because the use of individual goals, targets and incentives can lead to actions that harm the bigger business goals.

A great example is the buyer in a steel company who is targeted with getting the lowest cost when the business has an overall differentiation strategy of fast lead times and reliable due date supply to customers. Something has to give – it may be the service promise or  inventory levels are forced to rise and may create as many costs as the buyer hopes to save.

Using the Value Chain For Focused Improvement Of Processes

The most critical processes can then be broken down into value activities for more detailed analysis of what the business is trying to achieve and how it is currently operating. That opens the opportunity for focused process improvement on the areas of constraint which offer most leverage.

Yes the belt and braces approach of doing the full value chain analysis can be comforting because you know everything has been looked at, analysed and considered.

But often, resources and time aren’t available.

My view is that some value chain analysis is better than none. Focus on the important stuff that really matters.

The Value Chain And The Six Step Profit Formula

I use a Six Step Profit Formula to help keep strategic management grounded in what can help you to increase profits in the short and long term.

The value chain is useful in a number of steps. In particular, it has a role to play in helping you to develop your irresistible promise and making sure that you deliver it consistently. It also helps you to think through how you continue to get revenue and profit from the relationship.

What Do You Think Are the Advantages & Disadvantages of Value Chain Analysis?

I’d welcome comments based on your own experience or knowledge of the value chain.

What advantages or disadvantages do you think I have missed?

What should be emphasised more?

I encourage you to contribute to the debate on the value chain as a way to develop your own understanding on it and to help others.

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Is Your Differentiation Shallow Or Deep?

For me, differentiation is about creating customer preference by having a clear message about what you do and for whom and what you don’t.

But this brings up an important issue.

Your differentiation can be shallow or deep.

What do I mean by that?

Well shallow differentiation is based on having a marketing message which is distinct and differentiated from your competitors and valued by your customers.

Deep differentiation goes further. It also has a distinct and differentiated marketing message but the differences between you and your competitors ripple through everything your business does so that the business delivers a unique customer experience.

Shallow differentiation has a clear promise, deep differentiation consistently delivers on that promise.

The difference is critical to your long term success since a promise kept creates satisfied customers who are eager to buy again. A broken promise leads to disappointment and a need to keep finding new customers.

It comes back to how you look at differentiation.

Shallow differentiation comes from seeing it as a marketing and sales issue – the responsibility of the Sales & Marketing Director or the Chief Marketing Officer and their staff. It’s a criticism I have of the USP concept created by Rosser Reeves.

Deep differentiation comes from seeing it as a general management issue where the responsibility belongs to business owner, the chief executive officer, the senior management team and everyone else in the business who has a responsibility to deliver on the promises made to customers.

In shallow differentiation you tell your customers.

In deep differentiation you tell your customers and your employees.

I shudder with horror when I read some blogs and see differentiation as one small topic in a list of marketing tactics.

How you differentiate your business is the key strategic decision in your business.

It’s not something to do quickly and think “I’ve done that. I can now cross it off my to do list and move on.”

Shallow differentiation can require some difficult decisions. For example, it’s often difficult to narrow your focus on a particular customer niche or specialisation since it means saying “no” to many opportunities.

Deep differentiation requires hard work. Yes that four-letter word you should never mention because it puts some people off.

But that’s good.

Differentiation is the source of competitive advantage which has the potential to lead to long term improved profitability.

But the key phase is “sustainable competitive advantage.”

The easier it is to copy, the sooner you are back in the undifferentiated world of commodity products and services.

Shallow differentiation is easy to copy. At its heart, it is just a marketing promise so it’s easy to see and easy to do.

Deep differentiation is hard to copy. It’s embedded in the activities, the routines, the skills and the culture of the business. The impact of deep differentiation is easy to see but it’s hard for a competitor to diagnose and even harder to copy. You only get deep differentiation if you go through a differentiation process.

Back to my original question…

Is your differentiation shallow or deep?

If on reflection you think it’s shallow, then you’ve got more work to do to make sure that the essence comes through in the business activities. If you don’t, then any differentiation advantage you have will be short-lived because your business is based on foundations of sand.

What do you think about the concept of shallow or deep differentiation?

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Using Value Chain Analysis To Create Competitive Advantage

My thinking on strategy is heavily influenced by Michael Porter and his classic book Competitive Advantage introduced the concept of the value chain analysis.

The value chain is an original Porter concept although he built on the idea of the business system from strategy consultants McKinsey and its main purpose is to help you to find, create or develop competitive advantages.

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Types of Competitive Advantage

Michael Porter argues that there are only two types of competitive advantage:

  • competitive advantage that comes from differentiation – providing some kind of unique value to particular customers
  • competitive advantage that comes from having the cost leadership position

While it would be nice to have both, under normal conditions, the two forms of competitive advantage are mutually exclusive and, if businesses fail to choose, they get stuck in the middle.

Michael Porter believes that these competitive advantages derive from the activities the business does which are:

  • done better than competitors;
  • done differently than competitors;
  • that create unique benefits; or
  • done at a lower cost than competitors.

To understand the source of competitive advantage then you need to perform a value chain analysis which identifies the separate value activities.

The Formal Elements of Value Chain Analysis

Porter built his value chain analysis model on a manufacturing business – back in 1985 there were many more around in the United States.

He split the value chain into two parts:

  • Primary value activities
  • Support value activities

Primary value activities included:

  • Inbound logistics
  • Operations
  • Outbound logistics
  • Marketing & sales
  • Customer service

Support value activities include:

  • Procurement
  • Technology
  • Human resources
  • Firm infrastructure

This is a very general, helicopter view of a business and when you’re carrying out your value chain analysis you are supposed to go much more specific and detailed for your business.

You keep analysing activities which give a differentiation advantage (or have the potential to do so)  or disadvantage and which have a cost advantage or disadvantage.

The idea of value chain analysis is that you understand how your business compares with competitors at a detailed level. You can go into a lot of detail for your own business but you’ll be surprised at what you can learn about your competitors by talking to ex-employees (who may already work for you), suppliers, customers and being the customer yourself.

The value chain has been criticised as too prescriptive because the value chain elements don’t fit all types of businesses. This is missing the point entirely.

You don’t have to follow Michael Porter’s categorisation – and I suspect that he’d be astonished if you did – but if you want to understand the sources of your competitive advantages in terms of differentiation and cost, you do need to perform a value chain analysis which fits your business/industry.

It does take some thought and effort but that can be more of a reason to do it. Your lazy, superficial competitors either won’t understand the value chain or will look at what’s involved and think “That’s too difficult”.

Adapting Value Chain Analysis For Differentiation Or Cost Leadership

In his book Competitive Advantage (a must-read for any strategy professional), there are long chapters for how you can use value chain analysis to create cost or differentiation competitive advantages.

You’ll have guessed from the title of my blog, I’m not a huge fan of the cost leadership. That’s because I think there’s always someone who can come along and product whatever [product or service you sell a bit cheaper. For a cost leadership strategy to work, you have to have a significant cost differential which competitors recognise. Otherwise, you’re caught in a commodity trap selling an undifferentiated product at lower and lower prices.

But you can’t ignore costs if you follow the differentiation advantage path.

If your main differentiators are in marketing and customer service then you must keep a focus on costs in the logistics and operations activities and all the support activities. Your differentiation advantage only excuses you incurring extra costs in the activities which create a competitive advantage and only then if the advantage outweighs the extra costs.

How To Do Value Chain Analysis: Identify Your Value Activities

Use Michael Porter’s model if you find it helpful but otherwise create your own high level process map for your business which can also be used for your competitors.

Then drill down to identify the individual activities which create a differentiation advantage or which incur significant costs. Group minor activities together in categories like “other marketing activities”.

It helps if there are several people working on the value chain analysis. Functional specialists who know what’s happening and others who can provide an outsider’s perspective and ask the “dumb questions” which can challenge conventional wisdom and provide significant insight.

How To Do Value Chain Analysis: Allocate Costs To The Value Chain Activities

You can spend a lot of time trying to allocate costs precisely but it’s a false exercise.

It’s much better to be approximately right than precisely wrong.

Activities will incur some costs directly while other costs need to be apportioned based on various assumptions. Don’t confuse the two since you can draw very different conclusions if you change the underlying assumptions.

How To Do Value Chain Analysis: Identify Sources Of Differentiation Advantage

Differentiation comes from:

  • the way individual activities are performed
  • the way related activities link together
  • the way the entire value chain is structured

I recommend you work both ways:

From your current or desired key success factors and differentiation factors through to your value activities in a deliberate challenge to see what you can do to support your differentiation advantages.

Then from your individual activities back out to your customers by asking “is there anything in the way we do this activity (or could do the activity) which creates special value for the customer?”

Differentiation & Your Customer’s Value Chain

You can learn a lot from applying value chain analysis to your own business and thinking through how all the parts fit together to support your customer value proposition.

You may get even more insights by looking at the value chain of your typical customer (or different groups of customers) and identifying ways that you can add value or reduce costs to their business by better understanding:

  • What your customers are trying to do.
  • How they operate.
  • Their problems and frustrations.

Having a better understanding of your market and the customers who make it up is potentially a big competitive advantage since it lets you develop better products and to respond to changing needs faster than your competitors.

Is The Value Chain Analysis Only For Big Businesses?

No I don’t think so.

Small businesses are often simpler to understand so it means a value chain analysis can be put together quicker.

There’s no getting away from the idea that competitive advantages and disadvantages flow from the activities you do in your business but you can only understand them and how they link together by doing value chain analysis.

The Value Chain And The Six Step Profit Formula

I use a Six Step Profit Formula to help keep strategic management grounded in what can help you to increase profits in the short and long term.

The value chain is useful in a number of steps. In particular, it has a role to play in helping you to develop your irresistible promise and making sure that you deliver it consistently. It also helps you to think through how you continue to get revenue and profit from the relationship.

The Value Chain Is A Strategic Planning Model

The Value Chain is one of the frameworks included in my Strategic Planning Models guide.

Click the link to fined out what other models could help you to develop a winning business strategy.

What Do You Think About Value Chain Analysis?

Do you find Michael Porter’s ideas for value chain analysis a useful technique for creating competitive advantage, analysing the advantages of competitors and spotting opportunities for advantage?

I’d like to know what you think so please leave a comment.

In particular, do you believe that value chain analysis is a suitable technique for SMEs and businesses that don’t have strategic planning specialists.


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SWOT Analysis: What is SWOT Analysis & How Do You Do A SWOT?

One of the most popular tools in business planning and strategic planning is SWOT Analysis.

What is SWOT Analysis?

SWOT stands for:

  • Strengths – factors that are good in the business now
  • Weaknesses – factors that are bad in the business now
  • Opportunities – factors that could be good in the future
  • Threats – factors that could be bad in the future

Image from Jean-Louis Zimmermann

The SWOT Analysis lets you summarise a business strategy and the major issues so that it can be understood quickly and simply. A SWOT matrix – it is usually presented in four sections – is therefore a common element in business plans prepared for bank managers and other financial providers.

According to Wikipedia the SWOT analysis was developed by Albert Humphrey at Stanford University in the 1960s.

SWOT Analysis is a relative tool:

  • There must be an overall goal or objective to base the SWOT assessments. Opportunities are things that help you to reach the goal, threats are things that may stop you reaching the goal. As the goal changes, the assessment of the SWOT elements changes.
  • Strengths and weaknesses are relative to competitors. Let’s jump from business to athletics for a moment. Anyone running in the 100 metres sprint in the Olympics is going to be very fast by normal standards but some runners will have explosive starts and others will finish very quickly. It’s the same in business so don’t confuse qualifying criteria which are necessary to play the game with winning criteria.

What Is TOWS Analysis?

Sometimes the SWOT acronym is changed around to be TOWS – Threats, Opportunities, Weaknesses and Strengths.

Inevitably these are very similar but the emphasis is different.

Strengths and weaknesses focus on the internal aspects of the business while opportunities and threats refer to the external environment.

SWOT Analysis therefore leads with the emphasis on the internal aspects of the business and how they can relate to the external.

TOWS Analysis leads with consideration of the external issues and how they can be influenced or mitigated by the internal issues.

When To Use SWOT Analysis Instead Of TOWS Analysis

Different strategy consultants will prefer one approach rather than the other while others may be flexible and say the use of SWOT or TOWS analysis depends on issues facing the business.

If the external environment is considered fairly certain, then it makes sense to lead with the internal analysis of strengths and weaknesses.

If the external environment is rocky and with high government debts, austerity measures, the potential collapse of the Euro and the knock-on effect of a banking crisis, then it may make more sense in 2011 to lead with the big external issues and identify the major threats and opportunities.

The Importance Of SWOT Analysis

A SWOT Analysis is important for both the person doing the strategic business planning and for anyone reading the business plan and thinking about investing money or time in the business.

For the business manager who is preparing the strategy or the business plan, SWOT analysis helps to avoid a positive bias. An entrepreneur can get excited about an idea and fall into the trap of focusing on the opportunity and the available strengths.

There are important and it is important to play to your strengths but people often fail to implement their business plans because they don’t stop to consider what could go wrong. How weaknesses can prove to be critical and if the gap is closed, then the plan hits a brick wall. Or how external threats can come along and change expectations of the future.

For the reader of the business plan, the SWOT analysis has two important features:

  1. It provides evidence that the business owner has considered the upsides and downsides and may identify a few issues that the investor wasn’t aware of.
  2. Inevitably the reader of the business plan will be having ideas and may be preparing a SWOT analysis as he or she reads through the plan. Comparing the two versions of the SWOT analysis and finding a lot of common ground can give confidence in other aspects of the plan. Divergence may reveal that the business owner hasn’t given the plan as much attention as it deserves.

Every SWOT analysis is different.

Two businesses in the same industry may have similar goals but very different strengths and weaknesses which could impact on the assessment of the external opportunities or threats.

The same business may consider two different big strategic goals and do a SWOT analysis for each. There are likely to be some common factors to each but there will also be significant differences because particular SWOT elements are relevant or irrelevant to different goals.

Advantages Of SWOT Analysis

The advantages of doing a SWOT Analysis are:

  • It is relatively simple to start although it often needs challenging and refining to produce something of value.
  • Preparing a SWOT analysis is a collaborative exercise and helps to get other management team members involved because it looks across the entire business. Operations people can feel left out when talking about customers and marketing needs but SWOT brings the issues together.
  • It’s a strategic planning tool that is relevant to small businesses and huge organisations and they can both get something out of thinking about strengths, weaknesses, opportunities and threats.
  • SWOT is very flexible and can be done for a business or even an individual thinking about changing jobs.
  • It is a great way to combine and present insights from the various other strategy tools and models available like the Five Forces, versions of PEST analysis and the Competitive Advantage Matrix.

Disadvantages Of SWOT Analysis

The disadvantages of doing a SWOT Analysis are:

  •  Doing a SWOT Analysis is not the beginning and end of the strategic planning work. Some people place too much emphasis on it but it is only one tool or common framework.
  • SWOT Analysis has almost become too familiar and therefore isn’t given the rigorous thought it deserves.
  • It can become a box filling exercise. The SWOT template has spaces for 6 of each so you get 6 of each meaning some categories are forced and others ignore potentially important issues.
  • Strengths and weaknesses are often listed as absolutes rather than relative to the competition. I remember one business wanted to export more and listed as a strength that the sales team were learning German which was seen as a potentially big market – but the business would have been competing against German suppliers.
  • The SWOT analysis is subjective – it is based on opinions and not facts.
  • Complicated situations have to be simplified to be included with the SWOT analysis and interrelationships may be lost.
  • Prioritisations of opportunities and threats are often unclear. Expectations are a combination of probability and pay-off/potential cost.

How Not To Do A SWOT Analysis

I have seen some lists of strengths, weaknesses, opportunities and threats where it appears that you go through and cross out the ones that don’t apply and the one’s that you’re left with is your SWOT analysis.

Do not do it like this. Remember GIGO – garbage in, garbage out.

If you’re going to do a SWOT analysis, take the time and effort to think through your business and what’s really happening now and what may happen in the future. It’s the only way you’ll find insight which will help you to make better decisions in your business.

How To Do A SWOT Analysis

A SWOT analysis can be a very simple starting point for strategic planning or it can be part of the end results of a much more elaborate strategic planning process.

It can also be done by one person as a briefing for a management meeting to kick-start discussions or it can be prepared as a group brainstorming session to get the management team involved.

  1. Start your SWOT analysis by getting clear on your goal and time-scale – for example you could start your SWOT analysis with the challenging objective of “doubling profits within the next year” or “selling $ 1million of exports to the United States in the next six months”.
    The issues involved with those two different goals are very different and will colour your thinking. The longer the time-scale, the greater the uncertainties that come from the external environment. It’s relatively easy to think 6 to 12 months ahead but much more difficult to think 5 to 10 years into the future.
  2. Decide if you are going to do a SWOT analysis or TOWS analysis depending on whether you think the bigger issues are inside or outside your business. I’m going to assume you stick with SWOT and follow the traditional sequence of strengths, weaknesses, opportunities and threats.
  3. Identify your strengths. I recommend you start off by listing general strengths about the business including special skills and capabilities, resources including people, brands, machinery, money, contacts and relationships.
    Do a reality check when you’ve got a provisional list of strengths.Are they relevant to the goal you’ve set? If not take them off the list because they are clutter. Yes it’s nice to have a long list of strengths and it may make you feel good if you list more strengths than weaknesses but if any don’t apply, cross them off.
    Are they a relative strength compared with competitors who may be trying to achieve the same goal. Sometimes strengths fight strengths e.g. relative buying power of two businesses may give one a cost advantage, other times strengths fight against weaknesses.
  4. Identify your weaknesses relative to the goal. What could stop you from achieving it that’s a factor inside your business. This time it might be a lack of skills and capabilities, resources including people, brands, equipment, money, contacts and relationships.
    Threats may include an over-reliance on one or two key people. If anything were to happen to them (and it may include you) then your plans may be in disarray.
  5. Switch from looking inside the firm and look outside. It can be useful to run through Michael Porter Five Forces model of industry analysis and wider environmental scanning like PEST (Political, Economic, Social, Technological) which are combined in the SKEPTIC environmental scanning model.
    Some external forces nag away at managers as a constant source of concern and they don’t need any help to identify them but others, potential just as big but not as tangible today need some coaxing out of minds onto paper.
  6. Identify the positive forces and opportunities which may help you to reach your goal. These may include a rapidly growing market, changing customer tastes in favour of your product, general economic prosperity, favourable exchange rate movements which are particularly important if you are exporting/importing while your competitors are domestically based.
  7. Identify the negative forces and threats in the external environment which may stop you from reaching your goal. Threats and opportunities can be prioritised by assessing the probability of them happening and their likely impact. The tsunami and nuclear power problems happened in Japan earlier in 2011 and were devastating but the threat had existed for many years. Then consider grading from 1 to 5 or high, medium and low to help you to prioritise and keep the SWOT matrix focused on the big issues.

Practical Tips When Preparing Your SWOT Analysis

Sometimes you’ll look at a particular issue and think it could be a strength or a weakness, or an opportunity or a threat. If it’s minor, ignore but if it could be a big issue, split it into two aspects and list as both

e.g. strategic issue – technology is very close to allowing the super widget to be created.

Opportunity – being first to market with a reliable super widget will create a huge buzz inside and outside the company.

Threat – competitor A is working on a super widget prototype and, if it works, prices are normal widgets could fall sharply.

When looking at your products or services for strengths and weaknesses, try to see through the eyes of customer. We all have a tendency to fall in love with our own products so use customer feedback from surveys,  complaints and informal discussions.

Try not to be overly critical or positive. I’ve seen SWOT matrices where it is clear there is positive or negative bias.

Don’t try to create equal numbers just for the sake of making the chart look sensible but if it looks unbalanced, have a think about the other squares. How is your business performing? If it is doing well, especially when compared with competitors, then it’s likely you have more strengths. If is is struggling while competitors are prospering, then you have weaknesses.

Using A SWOT Analysis

There are two elements to SWOT analysis:

  1. Putting the matrix together
  2. Drawing conclusions that influence decisions and actions

Get a view on your strategic position compared to competitors. Is it strong, average or poor? Does the future look full of promise or can you expect things to be difficult over the next few years?

The SWOT Analysis gains much more power when you use the internal logic to help you to think about strategic options rather than just using the SWOT matrix to summarise what you intend to do. That is, you can start looking at the dependencies between strengths, weaknesses, opportunities and threats.

There are four options within the SWOT analysis matrix:

  • Strengths & Opportunities – how you can use the strengths within your business to take advantage of opportunities in the external environment – this is an offensive strategy where you are taking the imitative and making good things happen.
  • Strengths & Threats – how you can use your internal strengths to make sure that external threats don’t cause severe impacts on your business. Like much of SWOT thinking, this is relative to competitors and “forewarned is forearmed” is an effective way to think about these issues.
  • Weaknesses & Opportunities – what you can do to stop existing internal weaknesses affecting your ability to take advantage of opportunities.
  • Weaknesses & Threats – what you can do to stop internal weaknesses compounding with external threats – for example you may believe that you have a higher break even level than competitors and if you sense difficult times ahead, you can take action now to reduce your fixed costs or improve contribution margins.

SWOT Analysis Template

You can search on the internet for a SWOT analysis template but really there is nothing to it.

If you go into Word and create a 2 x 2 table and head up the top two columns Strengths and Weaknesses and the bottom two columns Opportunities and Threats and then click on the order list or bullet points for each table cell, you have built your own SWOT template. These have the advantage that provided you are brief, you can get the entire SWOT matrix on one page.

For TOWS analysis you just reverse.

You don’t have to follow the 2 x 2 matrix format so you can create a 1 column 4 row table instead and give more details. This allows you to capture more fully your thoughts and issues on the individual strengths, weaknesses, opportunities and threats but you lose the advantage of seeing the entire SWOT analysis on one page.

Some business planning software has a SWOT analysis template included.

SWOT Analysis & Differentiation

If your business has been following a differentiation strategy and you have established a clear gap between you and your competitors, then strengths may include:

  • Customer loyalty & high levels of satisfaction
  • Strong brand and reputation – the business name means something
  • Ability to charge a price premium and make higher profit margins
  • Patents that stop competitors imitator key parts of the product

Weaknesses may include:

  • Higher costs
  • Lost competitiveness on one customer value criteria you believe is important because a competitor has innovated in a way that you didn’t expect.

Opportunities may include:

  • Strengthening the differentiation advantage
  • Taking those advantages and expanding into new markets.

Threats may include:

  • Changes in customers needs, wants and tastes -these will change the appeal of customer value attributes and their relative importance.
  • Losing focus on the key differentiators by trying to broaden customer appeal too much.

SWOT Analysis Examples

I believe very strong that your SWOT analysis should be different from in some respects to your closest competitors and I’m wary of using SWOT proforma checklists and ticking off those that apply.

However if you search the Internet, you will find plenty of SWOT examples all the way down to individual businesses (for business student questions like “What are the important factors a SWOT analysis for Google will show?”) and for trade and industry sectors like restaurants, hotels and retailers.

You can use these SWOT examples in two ways:

  1. To get you started – sometimes it is tough starting with a blank piece of paper or your SWOT template although some SWOT issues are usually very clear.
  2. To help you to review what you’ve included in your SWOT analysis. This is particularly true if you are preparing your SWOT matrix without doing the strategic analysis from the Five Forces, PEST and customer value analysis.

Feedback On My SWOT Analysis page

Have you found my summary of SWOT analysis helpful?

What points would you emphasise about doing a SWOT matrix?

Let me know please by leaving a comment.

in 3 – Your Strategic Positioning

Value Disciplines & Differentiation

The value disciplines are an interesting extension to Michael Porter’s generic strategies for competitive advantage.

The Origin Of The Value Disciplines

The value disciplines have been developed and promoted by Michael Treacy and Fred Wiersema in a famous Harvard Business Review article “Customer Intimacy and Other Value Disciplines” and in their book “The Discipline Of Market Leaders”.

The conclusions are based into research into successful businesses in the USA and Europe and emphasise the importance of market segmentation and staying focused on the key success factors of your decision.

The Three Value Disciplines

The three value disciplines are:

  1. Operational excellence – based around the market segment who want a standard product at a low price
  2. Customer intimacy – based around the market segment who value customised products and close relationships
  3. Product leadership – based around the market segment who want and appreciate the latest innovations and fancy product features

According to Michael Treacy and Fred Wiersema, every market divides into these three generic segments although the size of each will vary.

For a firm to be successful, it must choose to follow one of the value disciplines while striving for reasonable levels of performance in the other two.

The Value Discipline Of Operational Excellence

The authors define operational excellence as “providing customers with reliable products or services at competitive prices and delivered with minimal difficulty or inconvenience.”

At first glance that sounds like a low cost operator providing a standard product and winning business by providing it at the lowest price in the marketplace. That doesn’t sound like it offers much opportunity for differentiation.

It’s certainly true that firms following the operational excellence value discipline will tirelessly look for ways to take cost, time and energy out of the production process.

But it doesn’t mean that the customer doesn’t value the “quick and easy” way of doing business with a company following this strategy.

Price is one factor in the buying decision but I’d like you to just stop for a moment and think about examples where you wanted to buy but the supplier got in the way:

  • what you wanted wasn’t in stock
  • they couldn’t get it quickly enough
  • the transaction was difficult for some reason – poor knowledge, bad attitude, difficult payment process etc

It’s true that if multiple competitors in a market follow the operational excellence value discipline there will be a tendency towards commoditisation but that doesn’t mean that they will all excel at all aspects of operational excellence.

Trade-offs exist and even in a commodity business like steel, there is a chance to emphasise different aspects of operational excellence like cost, quality, speed and reliability of delivery.

The Value Discipline Of Customer Intimacy

In this second of the value disciplines, the focus moves from internally within the business to the customers.

In particular how the market can be segmented into different groups of wants and needs and how products can be created to closely fit the requirements of the niches.

Businesses that choose to excel at customer intimacy will also need to develop flexible operational capabilities to allow products to be customised to meet special requests from customers.

The customer intimacy value discipline is very much one of product and service differentiation.

Recognising that the market has many combinations of needs doesn’t mean that the business has to offer solutions in all of them. It can pick and choose which are most appropriate to its capabilities and where the biggest opportunities appear. This means that many competitors can follow a customer intimacy strategy without driving the market towards commodity levels.

Following the customer intimacy value discipline rather than operational excellence will move the focus away from transaction profits to customer lifetime relationship profits.

The Value Discipline of Product Leadership

In the third value discipline, the emphasis moves away from the customer and its current needs towards creating a continuous stream of state-of-the-art products and services which anticipate and create future customer needs.

Companies following the product leadership strategy know that they must make their own successful products obsolete with the next generation of solutions, because if they don’t, a competitor will and the business will lose its reputation for product leadership.

This product leadership value discipline is another classic differentiation strategy focused on providing unique features to win customer preference.

The emphasis is on generating new innovations and speed to market them before a competitor can beat them to the punch.

Choosing Which Of the Value Disciplines Is Best

Michael Treacy and Fred Wiersema argue that for a business to be successful, it must choose which of the three value disciplines – operational excellence, customer intimacy or product leadership – it must follow.

This is a multi-dimensional decision since it combines:

  • Who the customer should target as its customers – price and convenience buyers, relationship buyers, innovation seekers.
  • How to compete.

This makes sense and although it seems obvious when presented here, you may be able to think of examples where there is a mismatch which leads to confused customers and broken promises.

It’s not done intentionally but is often a reaction to competitive pressures. If a competitor appears to be getting an advantage from following a particular strategy, it is tempting to copy aspects of it rather than improving the way the business implements its own chosen value discipline.

I think this is a difficult choice because of the need to maintain some kind of proximity on all three of the value disciplines. Yes you will lead with one which you want to excel but you need competence in all three. I discussed this in The Experience Curve & Innovation.

Do You Find The Value Disciplines Approach Helpful?

I’d appreciate your thoughts on whether the value disciplines approach to business strategy and differentiation in particular is helpful so please leave me a comment.

Have they added to your understanding of the generic strategies created by Michael Porter?

in 3 – Your Strategic Positioning

Key Success Factors And Their Link To Factors Of Difference

There’s a big temptation to make business strategy and strategic planning too complicated to be successful. This is why the idea of focusing on your key success factors (KFS) and your key factors of difference (KFD) is so important.

There are so many things that you could do to make your business more successful. There are plenty of experts promoting their methods as the one you must master if you’re going to achieve your big goals.

There is a problem. Following too many ideas can confuse and distract you when you need focus on the things that really matter.

That’s why the concepts of key success factors and factors of difference are vital to understand and use effectively.

First some definitions:

Definitions of Key Success Factors & Factors Of Difference

A key success factor for a trade, profession or industry is something that a business must do to be successful. It is a necessary condition for success.

A key factor of difference is a dimension of performance which influences customers in their choice of supplier and a criteria you have chosen to emphasise in a) your marketing and b) your business design, processes and personnel.

Critical success factors are a unique combination of industry key success factors and particular key factors of difference which together summarise the strategic plan of the business to achieve its mission.

Contrasting Key Success Factors & Factors of Difference

To contrast these two, KSFs are performance dimensions that you’d expect any successful business in an industry to perform well, the KFD are performance dimensions that make individual successful businesses in an industry unique and distinct from each other.

Key success factors can be internal or external factors in the business. Cost competitiveness may be a key success factor in a mature business. Key factors of difference focus on extra factors that add value to the customer.

Both may be used to differentiate one business from its competitors.

On the KSF, think good, better, best.

Everyone is good but it is possible to win customer preference by being better. You can aspire to be the best in a particular purchase criteria.

Key success factors can be order winners and order qualifiers.

The Difference Between Order Winners & Qualifiers

Order winners provide reasons why customers should choose your business, product or service.

In contrast, failure to meet the minimum standards on order qualifiers provide reasons why customers will reject or ignore your business, product or service.

I don’t like airlines (see Airlines Suck But We Still Fly) but you can see the contrast in order qualifiers and order winners as key success factors clearly. (For more information about the difference between order winners and qualifiers please read my article called Order Winners & Qualifiers)

Order Winners & Qualifiers Example 1 – The Airline Industry

A good safety record for an airline is a qualifying key success factor.

I don’t care how cheap a flight is, if there is a significant risk that it will crash, I don’t want to fly and nor do you. Some things are just too important to save a little money.

A high on time take-off and landing record is an order winning key success factor.

We don’t fly because we want to fly, we fly because it’s the best way of getting from point A to point B quickly. Waiting around for hours in an airport or being stuck on the plane sitting on the tarmac isn’t part of the deal I want.

Order Winners & Qualifiers Example 2 – Hotels

In another example, I recently wrote about differentiating hotels. Here cleanliness is a qualifying key success factor. The room is clean enough or it’s not. And if it’s not, then I don’t want to stay there but if I don’t have any choice, then I’ll complain until it’s fixed.

A great breakfast is an order winning key success factor. I haven’t reached a level of delight yet where I think it just can’t get any better although I have had some super breakfasts and especially in South Africa.

The Fit Between Key Success Factors & Key Factors Of Difference

So where do the key factors of difference fit in if you can differentiate your business with key success factors?

The key factors of difference create uniqueness.

They are order winner performance criteria which competitors don’t offer or don’t offer in the combination that you do.

They are optional extras that you choose to deliver to make your business stand out.

I must be hungry but returning to the breakfast theme, then every safari I’ve been on has sundowners out in the bush when you have a drink and perhaps a few nibbles as you watch the sun go down before you drive back to camp looking out for the nocturnal animals.

Only one has ever given me a proper full breakfast in the bush. It was great. An experience I’ll remember for the rest of my life although I did worry about whether a leopard might fancy my bacon, sausage, tomato, eggs etc.

Following the safari theme as a way to give you examples of KFD, another camp had a resident academic elephant researcher to study the large elephant population. We had the chance to go out with her one morning. It was terrific to hear about the family stories and how she could tell one huge elephant from another. This, together with other specialist researchers for animals was one of this safari lodge’s  key factor of difference.

Key success factors and key factors of difference are similar concepts which help focus the business and its management and staff on what it must do well.

Industry Key Success Factors Can Be Taken For Granted

Sometimes key factors of success get taken for granted. That becomes a weakness for firms in the industry, an opportunity for any company looking at the industry as a new entrant.

Industries think “we have to do X, Y and Z because we’ve always done X, Y and Z.”

But it may not be true.

Market changes happen in terms of what customers want and expect and what technology can deliver which render traditional key success factors obsolete.

How A Blue Ocean Strategy May Change Your Focus

A very popular book on strategy called Blue Ocean Strategy specifically looks at innovation to create new market space which isn’t being contested by competitors. This includes six different pathways to find new solutions to existing problems.

One of the main techniques is to map out the key success factors from the customer’s perspective on a strategy canvas to highlight areas of similarity and difference.

Industry Success Factors Can Be Broken By A New Business Model

A new business model can be created which delivers a very strong competitive advantage because it breaks one of the traditional key success factors.

In banking, having a wide brand network used to be a key success factor and it still is for some customer groups. But First Direct challenged this idea with the development of telephone banking and it’s been pushed much further with Internet banking.

The infrastructure to operate a bank is still a huge investment to get the IT systems, people and processes established (these are still key success factors) but it’s a much lower cost than the brand network with a physical branch on every High Street.

Another example is Amazon.

To sell books, CDs and DVDs on a large scale to retail customers, you used to need plenty of stores with location choice as a main key success factor. Now Amazon don’t care about store locations but do need an accurate picking and packing system and prompt distribution.

Key Success Factors & Increasing Profit

The purpose of strategic management is to review and then help to find better ways to achieve its goals which for a business is usually an increase in long term profitability.

My six step profit formula fits in well with the success factor thinking since every step can provide one or more critical performance indicators. Some businesses will put more emphasis on particular steps than others.

Have You Used Success Factor Analysis?

I’m very interested to hear stories of how you’ve used success factors to help guide your business towards its mission and vision.

in 3 – Your Strategic Positioning

Key Success Factors And Their Role In Strategic Planning

A key success factor (KSF) for a trade, profession or industry is something that a business must do to be successful. It is a necessary condition for success.

The Difference Between Key Success Factors, Key Factors Of Difference & Critical Success Factors

There are a number of similar sounding phrases that mean different things. To help understand key success factors, you also need to understand:

Key Factors Of Difference (KFD) – performance dimensions that make individual successful businesses in an industry unique and distinct from each other.

Critical Success Factors (CSF) – performance factors which are individually necessary and together sufficient for your business to succeed in its defined mission.

To summarise in less formal terms:

Key Success Factors are common across firms within a product-market or industry.

Key Factors Of Difference are the factors a particular business chooses to differentiate itself on.

Critical Success Factors are the essential elements of a strategy for success in a particular business in a particular industry at a particular time. Your CSFs should vary every time you make significant changes to your strategic plan and the emphasis may change with minor tweaks in strategy.

Success Factors And The Value Chain

As you think through the factors for success in your particular industry and business, it is recommended that you look at both:

  • The value chain for your business – all the interlocking processes you use to create value for your immediate customers.
  • The industry value chain – how the entire industry from the start of the supply chain to the end create value for the final customer.

The ideal position for any business is the ability to create a product or service for the lowest quality in the quickest time and for the best quality.

This ideal isn’t possible but it’s a useful “perfect product” to keep in mind when thinking about product innovation and process innovation.

Where are the big differences in cost, time taken and quality arising? Do particular processes or steps create trade-offs in these three main areas of performance.

Success Factors & Your SWOT Analysis

When you put together your SWOT Analysis, your strengths hopefully include your key success factors or you have opportunities to develop the extra strengths you need for success.

It would be simple if key success factors stayed constant over a long period of time to allow the business to build superior skills in the vital areas but key success factors change.

Factors That Will Change Key Success Factors

Key success factors can change through:

  • Moving through the product life cycle – in the early stages of a product life, design and marketing may be vital but as the market matures, emphasis switching to low cost, efficient operations.
  • Changes in customer needs, wants and priorities – purchase criteria that were important may be replaced by new criteria
  • Changes in PEST factors – technology changes in particular

If you ignore the idea that Key Success Factors evolve over time, you are likely to find that your strategy makes you less and less competitive.

Your Strategic Plan

Your strategic plan will bring together what you intend to do on:

  1. The industry key factors for success as they are now and as you expect them to develop in the future
  2. The particular key factors of difference that you believe you can use to create unique customer value to create a competitive advantage.

At this stage, they become critical success factors and need to be backed up with key performance indicators so that you can track performance.

in 3 – Your Strategic Positioning

Stuck In The Middle Of Porter’s Generic Strategies

Harvard professor and world famous business strategist Michael Porter has a simple view to business and how you can generate superior returns from your business – the generic strategies –  but you can get stuck in the middle, not one thing or the other.

These ideas were introduced in the book Competitive Strategy by Michael Porter.

The Keys To Successful Competitive Strategy


  1. Work in a business which is an attractive industry – this is a business that is well positioned against the five competitive forces that Porter identified (threat of new entrants, threat of substitutes, buyer power, supplier power and intensity of competition).
  2. Have a competitive advantage.

Michael Porter & The Generic Strategies

And when it comes to competitive advantage, Porter was equally simple because your competitive advantage can either be:

  1. From being the lowest cost operator supplier acceptable goods and services at a reasonable price (and having the ability to beat anyone else on price if necessary)
  2. From winning buyer preferences based on providing a product or service which is differentiated.

Those two cost advantages can either be applied to the broad market or to narrow focused or niched markets.

The Danger Of Being Stuck In The Middle

Unfortunately many businesses fall into the trap of being “stuck in the middle” of the generic strategies of differentiation and cost leadership.

They don’t offer the high value for money and distinctive product or service that you get from a differentiated business.

And they don’t offer the low prices that can come from buying from the cost leader.

It happens because the business managers don’t know that they have to choose or think that they can be both.

Effectively being stuck in the middle comes from trying to compromise and it creates a muddle.

A muddle for your customers who don’t really know what you stand for or what to expect from you.

And a muddle for your employee who don’t understand the priorities of their work performance.

Other Stuck In The Middle Concepts

Stuck in the middle in this strategic context does not mean:

  • Being in the middle of a value chain from raw material supplier at one end to end user of final product at the other. It can be uncomfortable being squeezed by big suppliers and big buyers but that’s even more reason to follow a cost leadership or differentiation strategy.
  • Nor does it mean being stuck in mid market between the premium priced luxury products and the low-priced economy brands although that can also be uncomfortable if it’s not clear what your business stands for. This mid market position is sometimes combined with Porter’s stuck in the middle concept but it is a big simplification of what he’s trying to say. There is no reason why a business can’t have a very distinct and differentiated product offering and charge mid market prices for example in cars, think of the Mazda MX5 sports car.

How A Business Gets Stuck In The Middle

A stuck in the middle position happens when a business designed to be low cost starts adding little extra frills which don’t add a corresponding amount to the customer value of a product.

The business suffers the cost, the customer doesn’t get the benefit.

Or when a differentiated business comes under pressure on prices – perhaps there has been a market disruption from new technology or an ultra low-priced competitor from overseas – and starts cutting costs in areas which damage the differentiation advantage.

What To Do If Your Business Is Stuck In the Middle

If you think that your business is stuck in the middle – or heading in that direction – then you need to get to grips with your business strategy.

You need to decide what your business is and isn’t.

You need to decide who your business will sell to and who it won’t.

You need to decide what your business will sell and what it won’t.

Strategy is about making wise choices and then having the courage and conviction to follow through and commit to turning words and ideas into action.

The Role Of The Value Chain In Creating Competitive Advantage

In his follow-up book, Competitive Advantage, Michael Porter introduced the concept of value chain analysis to help you to analyse, understand and create competitive advantage so that a business isn’t stuck in the middle.

The value chain is an important technique which helps you to focus on advantage based on differentiation or cost leadership.

in 3 – Your Strategic Positioning, Business Problems And Mistakes