Comparative Analysis- SWOT and Porter’s Five Forces
SWOT Analysis
SWOT analysis is a strategic planning tool used to evaluate the strengths, weaknesses, opportunities, and threats involved in a business venture, project, or in some cases, an individual. A SWOT analysis serves as a foundation for strategic planning, providing a holistic view of factors influencing a particular situation, enabling better decision-making and strategy formulation.
• Strength: Strength of a company can be identified from internal attributes and resources that give an entity an advantage over others. These could include factors like a strong brand, skilled workforce, unique technology, or efficient processes. Investing in companies with strong fundamentals or unique competitive advantages can be a part of a strategy focusing on long-term growth.
• Weakness: Weaknesses could involve issues such as poor management, limited resources, outdated technology, or high production costs, placing the entity at a disadvantage compared to others. Recognizing weaknesses is crucial for risk management and strategy formulation. Investments with glaring weaknesses might be approached cautiously or may require specific strategies to mitigate risks.
• Opportunities: Opportunities indicates the external factors that could be beneficial if leveraged properly. Opportunities might arise from market trends, new technologies, changing consumer behavior, or even regulatory changes. Investing in sectors poised for growth or companies with potential for expansion due to market shifts can be a part of a growth-oriented strategy. Opportunities in emerging markets, technological advancements, or shifting consumer trends can guide investors to allocate resources strategically.
• Threats: External elements that could pose a risk or challenge to the entity can be identified as threats to the company’s growth. Threats could come from competitors, economic downturns, changing regulations, or technological disruptions. Understanding threats is vital for risk assessment and mitigation. Potential threats like industry disruptions, regulatory changes, or intense competition can influence investment decisions. Strategies might involve diversification across industries or regions to mitigate sector-specific risks or investing in companies capable of adapting to market changes.
Porter’s Five Forces Analysis
The concept of Porter’s Five Forces was coined by Michael Porter, a Professor of Strategy at Harvard Business school. It states that a company’s profitability in an industry is determined by five-industry factor – Bargaining Power of Buyers, Bargaining Power of Suppliers, Rivalry among Existing Competitors, Threats of Substitutes products, and Threat of New Entrants. Porter’s Five Forces Analysis helps investors evaluate the attractiveness of an industry and make informed investment decisions by understanding the competitive forces at play.
• Bargaining Power of Buyers: Bargaining power of buyers refer to the ability to put pressure on the company and show the consumer power to the price of the product. An industry with high bargaining power of buyers is one where buyers can choose from a variety of products offered by multiple companies. Now a days, power of customers is high in many industries to attract buyers for the company as price lure customers. Companies gives out offers and discounts for attracting customers. If buyers have limited power, companies can maintain higher prices and better profit margins. Strong brand loyalty, unique products, or a lack of substitutes can limit the ability of buyers to negotiate prices down.
• Bargaining Power of Suppliers: Bargaining power of suppliers refer to the pressure put by the suppliers on the company for their raw materials. The power of bargaining of suppliers decreases when there are more suppliers in order to attract companies. The power of bargaining of suppliers increases when there are less suppliers as the demand of suppliers are high. It is often determined by how much value addition does a supplier do in the raw material or finished product that is sold by them. The cost of switching from one supplier to another, for a particular raw material, determines the bargaining power of that supplier. When suppliers have limited bargaining power, it can benefit investors. If a company can control its input costs or switch easily between suppliers without affecting quality or price, it creates stability and potentially higher margins for the invested company.
• Rivalry among Existing Competitors: Companies having same idea or moto will be having rivalry between themselves. There are many advantages by this factor. Companies will have price wars and discounts for products to attract customers. The quality of service and interaction with customer increases to get attention from consumers. These rivalries will influence positively in new innovation and marketing attempts. High rivalry can lead to reduced profitability. If competitive rivalry is low, it can be beneficial for investors. In industries where a few dominant players control the market, they often enjoy higher profits due to limited competition, provided they maintain their market position.
• Threats of Substitutes products: Substitute products are products that have functions and use same as the product produced by a company. Working on a business that has high chance of substitute products increase the risk on marketing. An industry that has less differentiated products has the highest risk. When there are few viable substitutes, it can be positive for investors. Companies in such industries are often protected from losing market share to alternative products or services, allowing for more consistent revenue and profits.
• Threat of New Entrants: Threat of new entrants refers to the risk by the newly formed competitors on company’s business. Studies and understand the probability of new competitors in the workspace. If a competitor can enter easily, it increases the risk of the business we are in. Barriers to entry include absolute cost advantages, access to inputs, economies of scale, and strong brand identity. High barriers to entry can be beneficial for investors as they imply lower chances of new competition entering the market. High capital requirements, proprietary technology, or strong brand loyalty can deter new entrants, ensuring existing companies maintain their market share and profitability.
