Business Business Analysis

[The TOWS Matrix] An Operational Model for Analysis of the Situation


An Operational Model for Analysis of the Situation
As pointed out above, it has been common in the past to suggest that companies identify their strengths and
weaknesses, and the opportunities and threats in the external environment. But what is often overlooked is that combining these factors may require distinct strategic choices. To systematize these choices, the TOWS
Matrix is proposed in which ‘T’ stands for threats, ‘O’ for opportunities, ‘W’ for weaknesses and ‘S’ for
strengths. Before describing this matrix, however, one should be aware of other ‘tools’ that have been used
effectively in strategy formulation.
Today, strategy designers have been aided by a number of matrixes showing the relationships of critical
variables. For example, the Boston Consulting Group developed the Business Portfolio Matrix, which
essentially shows the linkages between the business growth rate and the relative competitive position of the
enterprise (identified by the market share). However, this approach has been criticized as being too simplistic,
and the growth rate criterion has been considered insufficient for the evaluation of the industry’s attractiveness.
Similarly, the market share as a yardstick for estimating the competitive position may be inadequate.

Another useful matrix for developing a firm’s strategy is General Electric’s Business Screen. Basically, the GE
matrix consists of two sets of variables: business strengths and industry attractiveness. Each variable is divided
into low, medium and high ratings, resulting in a nine-cell grid. Business strengths, for example, evaluates
size, growth, share, position, profitability, margins and technology position, to mention a few of the items.
Industry attractiveness, on the other hand, is judged in terms of size, market growth, market diversity,
competitive structure, industry profitability and so on. But Charles W. Hofer and Dan Schendel suggest that
the GE Business Screen does not give adequate attention to new industries that are beginning to grow.
Consequently, they suggest a matrix in which the ‘competitive position’ and their ‘stage of product/market
evolution’ are plotted.11 Both matrixes, however, appear to give insufficient attention to the threats and
constraints in the external environment.
The TOWS Matrix, described in this paper, has a wider scope and has different emphases than the ones
mentioned above. This matrix does not replace either the Business Portfolio Matrix, the GE Business Screen,
or the matrix by Hofer and Schendel, but it is proposed as a conceptual framework for a systematic analysis
that facilitates matching the external threats and opportunities with the internal weaknesses and strengths of
the Organization.
The TOWS Matrix: A Conceptual Model
The process of strategy formulation, shown before in Figure 1, is now surrounding the TOWS Matrix in Figure 2. Preparation of the enterprise profile, Step 1, deals with some basic questions pertaining to the internal and external environments. Steps 2 and 3, on the other hand, concern primarily the present and future situation in respect to the external environment. Step 4, the audit of strengths and weaknesses, focuses on the internal resources of the enterprise. Steps 5 and 6 are the activities necessary to develop strategies, tactics and more specific actions in order to achieve the enterprise’s purpose and overall objectives. During this process attention must be given to consistency of these decisions with the other steps in the strategy formulation process. Finally, since an organization operates in a dynamic environment, contingency plans must be prepared
(Step 7).
There are different ways of analyzing the situation. One is to begin with the identification of important
problems. A second approach is to start with determining the purpose and objectives of the firm. A third way is to focus on opportunities.12 The question may be raised whether one should start with the analysis of the
external environment or with the firm’s internal resources. There is no single answer. Indeed, one may deal
concurrently with the two sets of factors: the external and the internal environment. It is important, therefore,
to remember that the process followed here is just one of several option.

The TOWS Matrix-Figure 2

The External Environment. Within the suggested framework, the analysis starts with the external environment. Specifically, the listing of external threats (T) may be of immediate importance to the firm as some of these threats (such as the lack of available energy) may seriously threaten the operation of the firm. These threats should be listed in box ‘T’ in Figure 2. Similarly, opportunities should be shown in box ‘O’.
Threats and opportunities may be found in different areas, but it is advisable to carefully look for the more
common ones which may be categorized as economic, social, political and demographic factors, products and
services, technology, markets and, of course, competition. As mentioned above, the analysis of these factors
must not only pertain to the present but, even more important, the future environment.

The Internal Environment. The firm’s internal environment is assessed for its strengths (S) and weaknesses
(W), and then listed in the respective spaces in Figure 2. These factors may be found in management and
organization, operations, finance, marketing and in other areas. Since they were previously discussed, they will
not be repeated here.
Strategies, Tactics and Actions. The TOWS Matrix, Figure 2, indicates four conceptually distinct alternative
strategies, tactics and actions. In practice, of course, some of the strategies overlap or they may be pursued
concurrently and in concert. But for the purpose of discussion the focus is on the interactions of four sets of
variables. The primary concern here is strategies, but this analysis could also be applied to the development of
tactics necessary to implement the strategies, and to more specific actions supportive of tactics.
(I) The WT Strategy (mini-mini). In general, the aim of the WT strategy is to minimize both weaknesses and
threats. A company faced with external threats and internal weaknesses may indeed be in a precarious position.
In fact, such a firm may have to fight for its survival or may even have to choose liquidation. But there are, of
course, other choices. For example, such a firm may prefer a merger, or may cut back its operations, with the
intent of either overcoming the weaknesses or hoping that the threat will diminish over time (too often wishful
thinking). Whatever strategy is selected, the WT position is one that any firm will try to avoid.
(2) The WO Strategy (mini–maxi). The second strategy attempts to minimize the weaknesses and to maximize tile opportunities. A company may identify opportunities ill the external environment but have organizational weaknesses which prevent the firm from taking advantage of market demands. For example, an auto accessory company with a great demand for electronic devices to control the amount and timing of fuel injection in a combustion engine, may lack the technology required for producing these microprocessors. One possible strategy would be to acquire this technology through cooperation with a firm having competency in this field.
An alternative tactic would be to hire and train people with the required technical capabilities. Of course, the
firm also has the choice of doing nothing, thus leaving the opportunity to competitors.
(3) The ST Strategy (maxi-mini). This strategy is based on the strengths of the organization that can deal with threats in the environment. The aim is to maximize the former while minimizing the latter. This, however, does not mean that a strong company can meet threats in the external environment head-on, as General Motors (GM) realized. In the 1960s, mighty GM recognized the potential threat posed by Ralph Nader, who exposed the safety hazards of the Corvair automobile. As will be remembered, the direct confrontation with Mr. Nader caused GM more problems than expected. In retrospect, the initial GM response from Strength was probably inappropriate. The lesson to be learned is that strengths must often be used with great restraint and discretion.
(4) The SO Strategy (maxi-maxi). Any company would like to be in a position where it can maximize both,
strengths and opportunities. Such an enterprise can lead from strengths, utilizing resources to take advantage
of the market for its products and services. For example, Mercedes Benz, with the technical know-how and the quality image, can take advantage of the external demand for luxury cars by an increasingly affluent public.
Successful enterprises, even if they temporarily use one of the three previously mentioned strategies, will
attempt to get into a situation where they can work from strengths to take advantage of opportunities. If they
have weaknesses, they will strive to overcome them, making them strengths. If they face threats, they will cope with them so that they can focus on opportunities.

The TOWS Matrix-Figure3

Time Dimension and the TOWS Matrix
So far, the factors displayed in the TOWS Matrix pertain to analysis at a particular point in time. External and
internal environments are dynamic; some factors change over time while others change very little. Because of
the dynamics in the environment, the strategy designer must Prepare several TOWS Matrixes at different
points in time, as shown in Figure 3. Thus, one may start with a TOWS analysis of the past, continue with an
analysis of the present, and, perhaps most important, focus on different time periods in the future.
Complexity of Interactions of Situational Factors
The conceptual model provides a good framework for identifying relationships, but it can become a complex
process when many factors are being identified. The matrix, shown in Figure 4, is an example of one approach to identity combinations of relationships which, in turn, may become the basis for strategic choices. (See Figure 4)
In Figure 4, a ‘+’ indicates a match between the strengths of the company and external opportunities, while an
‘0’ indicates a weak or nonexistent relationship. Analysis of Figure 4 indicates that Strength No. 1 can be
matched with several opportunities. Similarly, many strengths can be utilized to exploit Opportunity No 7.
Although this figure shows only the relationship between strengths and opportunities, similar tables can be
used for analyzing the other three strategy boxes (WO, ST, WT) shown in Figure 2.
A word of caution is in order here. One cannot simply add up the number of pluses (although especially strong relationships could be indicated by two pluses such as ‘+ + ‘) in each row and in each column to determine the best match between several strengths and opportunities. Clearly, different relationships may have different weights in terms of their potential, so each should be carefully evaluated. Still, it is suggested that this matrix is a relatively simple way of recognizing promising strategies that use the company’s strengths to take advantage of opportunities in the external environment.

The TOWS Matrix-Figure 4


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