A SWOT involves the analysis of Strengths, Weaknesses, Opportunities and Threats to provide a holistic perspective of favorable and unfavorable circumstances in the internal and external environment that influence an organization. Its durability as an analytical tool is impressive, as it has been a mainstay in strategy-setting methodologies for well over a half century. Yet it is often criticized as too simplistic and subjective. Often expressed in a matrix format, a SWOT analysis is a convenient way to summarize points relevant to a strategy and is an intuitive tool. However, its use may supplant more granular analysis and can create misleading assessments if management gives the entity too much credit or not enough credit in certain areas. More important, we often hear the “so what” critique questioning whether a SWOT is actionable, largely because of the lack of linkage to the strategy itself.
Despite the criticism, the SWOT is rooted in the curriculum of every business school and its use in the private and public sectors is commonplace. Our interest below is on how to make the SWOT analysis more meaningful in strategy setting.
Advantages and Disadvantages
A SWOT offers several advantages. As an intuitive and relatively straightforward tool, it offers a simple format on a single page evaluating the enterprise’s strengths, weaknesses, opportunities and threats, both individually and as interacting factors. As a framework for gathering and organizing information from different sectors of the business in a coherent and cohesive manner, it helps decision makers get on the same page and can be used to make the strategy more robust.
A SWOT has its disadvantages, however. Like any other tool, if poorly prepared, it may not reflect the true business realities. The information-gathering process itself may be oversimplified, and information presented for each area of the matrix can be too detailed, subject to bias, omit important points and become outdated quickly as the business environment changes. Other criticisms point out that the SWOT can identify issues without providing solutions and does not prioritize the issues within the four areas.
Determining Strengths and Weaknesses
We will now discuss the SWOT itself and how to make the process as meaningful as possible. With regard to strengths and weaknesses:
- A strength is any existing or potential resource or capability within the organization that provides a competitive advantage in the marketplace in achieving the organization’s strategic objectives; and
- A weakness is any existing or potential internal force that could serve as a barrier to maintaining or achieving a competitive advantage in the market.
These definitions are important. Strengths and weaknesses are internal factors that must be specific to the enterprise, including its mission, vision and objectives and must be considered relative to competitors. For example, at a business-unit level, the focus is on product offerings, market positioning, distinctive capabilities and viable funding sources. At the functional level, the focus is on innovative processes and systems. At both levels, the focus is on crosscutting strategies around reputation, financial stewardship and human capital and a strong positive culture. It is important to be realistic and objective, and one way to do that is to solicit feedback directly from customers regarding the entity’s strengths and weaknesses.
When evaluating strengths, rank them according to their potential source of competitive advantage. To illustrate, the following are examples of strengths (ranked from the top according to the order of advantage from high to low):
- Multiple sources of advantage
- Economies of scale (due to size, output or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread over more units of output)
- Distinctive, proprietary product offerings
- Quality reputation
- Differentiating brands
- Proprietary systems and equipment, superior managerial skills, specialized knowledge, etc.
- Innovative processes driven by new technologies, changing customer needs, etc.
- Access to distribution channels
- Switching costs
- Cost and time advantages
- Superior customer service
- Favorable government policy
- Value for money
We recognize that there may be disagreement on the ranking − but that misses the point. What’s important here is that strengths ranked at the top are more durable during the planning horizon because they cannot be replicated easily by a competitor. Strengths at the bottom are fleeting because competitors can more easily replicate or leapfrog them in the marketplace. The following questions facilitate the identification of true strengths:
- What do we do well relative to our direct and indirect competitors?
- How does our organization differentiate itself from our competitors?
- What is our value proposition?
- What is unique about the resources available to us?
- What does the market consider to be our strengths? Does the market provide us with validation that we are achieving/realizing our mission, vision and objectives?
The key takeaway is if the organization does something well, it is not a strength if competitors do it well also.
When evaluating weaknesses, the following considerations may indicate their existence:
- What is inhibiting the development of a competitive advantage? What is impeding the sustainability of an existing competitive advantage?
- What are our competitive disadvantages in the market?
- What don’t we do well relative to competitors? What could we improve (through benchmarking, best practices, etc.)?
- How do competitors differentiate themselves from us?
- What are our competitors’ value propositions?
- What do our customers tell us we need to improve? What does the market consider to be our weaknesses?
The above considerations are not for the timid. They require absolute objectivity and a commitment to obtaining the truth. One other thought is that Porter’s Five Forces Model provides useful insights on possible sources of strengths and weaknesses.
Determining Opportunities and Threats
With regard to opportunities and threats:
- An opportunity is any existing or potential force in the external environment that, if properly exploited, could provide a competitive advantage.
- A threat is any existing or potential force in the external environment that could inhibit the attainment or sustainability of a source of competitive advantage.
Opportunities and threats refer to the external business environment in which an organization operates, although their source may be one or more of its strengths or weaknesses. When evaluating opportunities, consider the following:
- Circumstances and developments in the external environment that would generate opportunities – these may be social/cultural, technological, economic, political/regulatory, ecological and demographic.
- Opportunities that are aligned with the entity’s mission, vision and objectives.
- How the organization’s unique individual and collective strengths present opportunities that are unavailable to competitors.
- How a company’s weaknesses, if addressed by management, would generate opportunities and/or improve the likelihood of success in executing the strategy.
- Unsatisfied demand existing in the market and other markets in which demand for our services exists.
- Complimentary services we could develop and new and innovative technologies that could enhance our services.
- Current and emerging trends in the market that could present opportunities.
Express opportunities as “market potentials” and make sure they are consistent with the entity’s overall corporate purpose, mission and strategy.
When evaluating threats, recognize that they represent external factors, situations or circumstances that can substantially inhibit the enterprise in executing its strategy and achieving its objectives. Consider the following:
- Who are our existing and emerging competitors, both direct and indirect?
- What services, if developed by our competitors, would threaten us?
- What developments in the business landscape threaten us? For example, what are the assumptions underlying our strategy over the planning horizon, and what if those assumptions were no longer valid? Is there exposure to disruptive change from technological innovations introduced by a competitor?
- What current and emerging trends exist in the market today? What obstacles do those trends present to the achievement/realization of our mission, vision and objectives?
- What weakness(es), if unaddressed, pose a threat to us (or, conversely, an opportunity to competitors)?
We’ve found that after listing items to place on the SWOT matrix, a “cheat sheet” can be useful to validate their relevance to the strategy:
- Do we really do this well?
- Does this help us achieve our mission, vision and objectives?
- Does this provide us with a competitive advantage?
- Do any of our competitors do it better than us (i.e., just because we do it well, does it mean it’s a strength)?
- Is this still a strength of ours?
- Do we need to improve this to be successful?
- Does this create challenges in achieving our mission, vision and objectives?
- Does this hurt us in the marketplace?
- Are our competitors better at avoiding this than us?
- Does this provide our competitors with a competitive advantage in the eyes of our customers?
- Is this still a weakness of ours?
- What benefits does the opportunity provide?
- Is this aligned with our mission, vision and objectives?
- Do we have (or can we develop) the appropriate skill sets to leverage the opportunity?
- Is the opportunity already being addressed in the marketplace (i.e., are we a laggard)?
- Is this still an opportunity for us?
- What impact would the threat have on us, if realized?
- Is the threat being realized?
- Will the threat impact all participants in the market?
- Does this threaten the achievement of our mission, vision and objectives?
- Can we be impacted more than others?
- Is this still a threat to us?
Making It Actionable
How do we make the SWOT actionable? That is an important question. Obviously, we should avoid preparing a SWOT and doing nothing with it. But how is that done? The following are some ideas to consider when carefully reviewing the overall results of the SWOT analysis:
- Drive what you want out of the analysis. Provide top-down clarity around what management seeks from the SWOT and how the SWOT will benefit the overall strategy-setting process. If there are multiple business units, explain how their respective input contributes to the overall corporate combined SWOT. For example, in addition to considering the relative contribution to the entity as a whole, consideration should be given to the corporate-wide impact (e.g., a threat in one area could compromise an opportunity in another program). Communicate unit-specific goals around growth, revenue and margins, and provide guidance around expectations on the use of internal and external data sources and creating explicit links between the SWOT components and the strategy.
- Pair external threats with internal weaknesses to highlight the serious issues. Enhance the strategy by (a) converting weaknesses or threats into strengths or opportunities (e.g., find new markets), (b) reducing critical threats to an acceptable level or avoiding them entirely (through exit strategies) or (c) addressing weaknesses through improvements in people, processes and offerings.
- Match internal strengths with external opportunities and improve business performance. In doing so, consider the organization in the context of the environment from the perspective of customers and competitors.
- Solicit strategic customer feedback to create a fact-based analysis of strengths and weaknesses that cannot be ignored in strategy-setting. An analysis of the external business landscape provides context for identifying opportunities and threats, which enhances the value of the SWOT in strategy-setting.
- Evaluate existing/proposed strategic initiatives to determine if updates are needed. For example, consider whether strengths have been sufficiently emphasized or leveraged in the strategy, identified weaknesses require improvements in infrastructure, opportunities merit allocation of resources to exploit and threats require actions to reduce the risk to an acceptable level.
- Use inputs from the SWOT when updating the annual risk assessment to include strategically relevant risks. Preferably, this risk assessment should be an integral part of the strategy-setting process.
A point that is often overlooked is that a SWOT is an assessment as of the beginning of the planning horizon; therefore, it may be useful to project a future SWOT as of the end of the planning horizon to reflect where management intends to be as a result of executing the strategy. This thinking is sound because a strategy is all about taking advantage of projected strengths, capitalizing on identified opportunities, overcoming projected weaknesses and reducing significant threats to an acceptable level (or else accepting them as a risk compensated for by the upside expected in the pursuit of the strategy). The development of two SWOTs – one a current state and the other a desired future state – can help drive the thinking underlying the development of the strategy with a sharp focus on strengths, weaknesses, opportunities and threats.