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Definition And Limitations Of Swot Analysis, Porter’s Five Forces Analysis And Ratio Analysis

1275 words - 6 pages

Definition and limitations of SWOT analysis, Porter’s five forces analysis and Ratio analysis

SWOT Analysis
All companies need certain strategy analysing tools to assess their ability or inability to do something. To be more precise, SWOT is an acronym, where S means Strengths, W means Weaknesses, O means Opportunities and T means Threats (Management study guide, 2009). This model suggests what strengths a company has which can help it prosper and what weaknesses it contains which might diminish its performance. Both strengths and weaknesses are internal factors of a company, which are easier to work on since company has control over ...view middle of the document...

• Not allowing for a proper communication between those who suggest different internal and external factors as well as discussing and verifying them when conducting SWOT analysis, this can lead to a lower than desired quality of input for strategy formulation process resulting into SWOT generated outcome to be of no or little use (Koch, 2000).

• SWOT cannot be reliable all the time because although it does put emphasis mainly on what might be strength and what might be a weakness but it does not explain it for the businesses as to how to evaluate what factor would go into what category (Firth, 2013).

• SWOT analysis can produce quite a lot of ideas but many of them are not usable (Queensland Gov, 2012).

Porter’s five forces analysis
“Competitive Strategy: Techniques for Analyzing Industries and Competitors” (Porter, 1980), a book by Michael E. Porter where he has explained how certain five competitive forces can help an organisation change its position in industry positively (Recklies, 2001). These five forces are: bargaining power of suppliers, bargaining power of customers, competitive rivalry within the industry, threat of new substitutes and threat of new entrants (Porter, 1980). This model has proven to be not only applicable in industry but market sector too (Berry, 2007). If these forces are highly intense then the ability of an organisation to generate profits can be in jeopardy to the extent it might be hard for it to continue. Thus management can use this analysis to identify what competitive force needs a particular strategy to make sure company is profitable and this way they can find the solution to their problem by knowing how to deal with these external forces s well as how to exploit an emerging opportunity (Recklies, 2001).

Limitations

• One of the very basic assumptions of the model is that there is a classic perfect market. Being one of those assumptions which in reality never exist since industries have much more complex structures than the perfect market competition considers them to be.

• Classic perfect market assumption can make it seem that the model can be used to look for more or less of a short term solution while what industries are trying to achieve are long term feasible strategies.

• It is lacking reliability when it comes to taking regulations of a government into account (Desai, 2013). Regulations at the time when this model was created and regulations today have different fierceness and strictness thus its application was more practical twenty four years ago than it is today. Regulations for one organisation might be much more lenient than its other competitors given the nature of diverse products and service industry the organisation is in. If a particular industry is highly regulated, then using this model would not be a wise choice.

• Not taking dynamics and change into account is what this model was criticised in a large number and it...

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