SWOT analysis

SWOT analysis
See also
Strategic planning tools TOWS analysis Strategic foresight Change management Relevant information Strategic management Strategic issues Change management model Strategic analysis methods

SWOT analysis is one of the basic methods of strategic analysis but can also be used in other areas of managerial analysis and consulting as a technique for the situational diagnosis of the company's internal and external circumstances. It can be used in different areas such as: sales, marketing, finance, production, research and development. The method name is an acronym of following words: Strengths, Weaknesses, Opportunities (the chances of potential or positive change occurring in the environment) and Threats (probable or actual threat in the environment). In some sources word Weaknesses is changed to Challenges which lead to SCOT analysis. But it is misleading because challenges has mixed positive/negative meaning, and using it in this context may lead to ambiguity in performing further analysis.

The origins of SWOT analysis

The basic assumptions of the SWOT analysis were developed in the 50s and 60s of the twentieth century by scientists and business consultants working in the Harvard Business School, and described in [Learned, A., Christensen, C., Andrews, RS and Guth, D. 1965].

In the years 1960-1970 the Stanford Research Institute conducted the study on behalf of the largest US companies, whose goal was to identify ways to improve strategic planning processes and to avoid mistakes in planning future activities of big companies. The result of this study, was the list of four groups of factors determining the effects of planning activities efficiency:

• Factors which are good in the present - Satisfactory,
• Factors which may have good (positive) influence in the future - Opportunity,
• Factors which are bad in the present - Faults,
• Factors which may have bad (negative) influence in the future - Threats.

The original abbreviation SOFT evolved to SWOT, the word fault has been changed into the weakness (more on SWOT history in article by A. Humprey). From that moment the popularity of the method began to grow rapidly not only in the US but also around the world. An alternative to SWOT, TOWS analysis, based on the same set of categories of factors was proposed by H. Weinrich in 1982. after studies conducted at the Volkswagen factory in the 70s of the 20th century.

SWOT analysis practically unchanged since its inception. Although many models and specific methods have been described in the literature, all are variation on the same basic theme. Today, SWOT analysis is taught throughout the world on all courses of strategic management as a basic method of strategic analysis of the company.

Stages of preparing a SWOT analysis

SWOT analysis of the enterprise is usually venture in which many people in management positions are involves including also professionals at lower levels. It could be carried out by an external consultant or employee with the right skills. The main stages of analysis include

1. Define the objective and substance of the SWOT analysis in the organization, explanation to all involved employees why it is performed,
2. Presentation of analysis procedure to all participants, this step is necessary to ensure a uniform approach to the analysis in participating team,
3. Develop individual lists of strengths/weaknesses and opportunities/threats - each team member first independently make a list of all factors that is considered relevant for describing strategic position of the company,
4. Integration of individual lists, development of common SWOT matrix, making terminology more coherent, selection and eliminating of less important factors,
5. Discussion and frank dialogue between all participants involved in the study, preparing common conclusions arising from the list of factors presented an integrated, looking at issues from different points of view,
6. Development of plans and options for action in the future, includes the presentation of the initial strategy, which will then be substantiated by the management of the organization and then implemented.

In practice, managers should classify all factors affecting the current and future position of the organization. There are two classification criteria: external and internal factors that influence negatively or positively the organization. From the intersection of these two divisions emerge 4 categories of SWOT analysis.

Analytical categories in SWOT analysis

The combination of the above-mentioned groups of factors emerge four specific analytical categories, filling the fields SWOT matrix (Fig. 2):

Fig. 1. SWOT framework

Strengths

Strengths are the internal factors, positive characteristics of the organization, which distinguish it in the environment and from the competition, they are often called: key success factors. They enable adaptation to changing conditions of the market environment.

Analysis of the strengths of the organization should include at least the following areas:

• area of ​​knowledge and human resources,
• area of logistics, production, technology, research and development,
• area of sales and customer service,
• area of finance and capacity development,
• area of management systems and business processes.

Examples of strengths, which can serve as a template to help prepare a comprehensive SWOT analysis is presented in article: Examples of strengths.

Weaknesses

• Weaknesses (internal negative factors, or challenges in SCOT analysis) - mostly consequences of resource constraints and insufficient skills. Each organization has limits to its fitness, but the rapid and objective diagnosis and definition can reduce their negative impact. Areas of organizational analysis is the same, as above mentioned.

Examples of weaknesses, which can serve as a template to help prepare a comprehensive SWOT analysis is presented in article: Examples of weaknesses.

Opportunities

• Opportunities (external positive) - phenomena and trends in the environment that if used appropriately could stimulate the development of company and weaken the threat. An opportunity within the meaning of strategic management, is always something outside the organization, something on what the leadership does not have direct influence, something that can change in an unexpected way without relations to the company's activities.

The most distinguished sources of opportunities in the environment of the company, are:

• political factors,
• economical factors,
• social and cultural factors,
• technological factors affecting business,
• legal factors,
• environmental factors,
• ethical factors.

Examples of opportunities which can serve as a template to help prepare a comprehensive SWOT analysis is presented in article: Examples of opportunities.

Threats

• Threats (external negative) - all the external factors, which is perceived as barriers to the development of the company, inconveniences causing additional costs of the action. A threat according to strategic management, is always something outside of the organization, something on what managers does not have any influence, something that can change in an unexpected way without relations to their decisions and actions.

Examples of threats, which can serve as a template to help prepare a comprehensive SWOT analysis is presented in article: Examples of threats.

SWOT analysis and selection of strategies depending on a combination of factors

Following step after collecting above factors, is to produce a summary that could be used to set strategic objectives of the organization. It could be simplified by adding the number of opportunities and threats, strengths and weaknesses. On this basis, managers can specify the range of possible, acceptable and feasible strategy options.

The most general set of strategies (or rather recommendations) resulting from the SWOT analysis is a set of two actions that management should take in every situation, i.e.:

• Reduce threats and take advantage of opportunities - threats tend to have quick and direct impact on the effectiveness of the organization, managers should build protective barriers (financial, human, resources, informational) to protect the company against their negative impact. Also note that if all market agents are equally threatened, it can be a paradoxically a chance for a company, because it is possible that competitors do not have these barriers and will suffer the consequences in the long term, this could lead to their elimination from the market (and in consequence improvement of competitive position). Opportunities however, usually require certain measures and actions, to make their positive impact felt by the organization. Managers should implement a system of continuous monitoring and reducing the inevitable internal resistance against the introduction of changes in the organization needed to take advantage of these opportunities.
• Eliminate weaknesses and reinforce strengths - management should identify and eliminate these weaknesses, which have the greatest negative impact on the efficiency of the company. It should be noted that the process of identifying and monitoring the functioning of the interior of the organization should be a continuous process. New, emerging weakness which for various reasons may occur, require a flexible response from management (e.g. departure of qualified personnel).

With regard to the strengths of the organization (i.e. key success factors), management should also actively identify and monitor internal situation. The postulate of reinforcing the strengths stems from the fact that it is generally easier to improve something that works well, than to fix something that is not working at all.

The next step is to develop a set of possible actions, to achieve pre-defined strategic objectives of the organization. Selecting the optimal strategy is done by adding the amount of opportunities and threats, strengths and weaknesses, and identify possible, acceptable and feasible strategies. The following types of strategies are considered:

• defensive strategy - elected in a situation of greatest number of weaknesses and threats,
• competitive strategy - weakness dominate, but the business environment gives more opportunities,
• conservative strategy - selected when the company has an overwhelming number of strengths, but major threats is in its environment,
• aggressive (offensive) strategy - applicable, when strengths and opportunities in the environment of the organization dominate the SWOT matrix.

It should be noted that usually above strategies are selected for the whole company, but it is often necessary to choose the strategy to a specific combination of factors. For example, the general conclusion of the SWOT analysis is to adopt an aggressive strategy for the whole company, but to a combination of factors: strong financial position and high risk from financial markets, recommended strategy would be rather conservative.

Such specific treatment of strategies involving detailed analysis of the combination of all the factors highlighted in strategic analysis, is adopted by TOWS analysis method.

Advantages of SWOT/SCOT analysis

Although most management methods and techniques over time are eventually phased out of use and replaced with new solutions, the SWOT analysis, after more than half a century has lost nothing of its popularity.

This is because it can be used in any situation, flexibly adapts to the specifics of each organization, and it can also be the starting point for the application of other concepts of strategic analysis (Porter's 5 forces, scenario analysis, resource analysis, etc.). Another explanation may be its simplicity, giving management the ability to quickly and systematically collect information on the most important factors characterizing the situation of the organization.

Criticism of SWOT analysis

SWOT analysis is usually used in a relatively loose manner and is prone to subjectivity and prejudice of people using it. The simplicity of the method, and the lack of clear methodological guidelines for its application in combination with the fact that almost every manager believes that it has sufficient competence to apply it, constitutes its main defects, i.e.:

• The results are trivial, obvious and can lead to misinterpretations (in connection with a high degree of subjectivity in determining the significance and the number of factors)
• There is no strong theoretical basis proving its real effectiveness,
• It suggests that all factors characterizing organizations can easily be divided into two categories: "positive" and "negative", which is a gross simplification which may lead to erroneous conclusions,
• Enforces generating a random list of factors without a deeper reflection of their importance, it often causes excessive growth of a number of factors,
• Does not take into account the relationship between factors located in different fields of SWOT matrix,
• Characteristics of the factors often are confusing, unclear, ambiguous and contradictory. It happens that there are factors matching more than one category, which causes difficulties of interpretation and discussion between managers doing analysis.
• There are factors that do not fit into any of the 4 categories, are described too general and lack specificity,
• In a typical arrangement of a SWOT analysis, there is no requirement to determine the weights defining the importance of the identified factors,
• Manager preparing the list of factors does not need to provide reasons for its opinion by means of analyzes based on real data. Because of this there analysis lacks connection with the authoritative basis for determining the validity and effect of a specific factor to a specific organization,
• Lack of clear measurement of values ​​indicated as factors in SWOT analysis, these factors are rather a "opinion" of the manager, often lists of factors does not reflect reality,
• No clear logical connection of SWOT analysis of with further phases of the strategic management process, i.e. strategic planning and implementation of the strategy,
• Often SWOT analysis is commissioned to external experts, who use copy-paste mechanism and lack knowledge of the situation of a specific organization,
• The perception of the strengths and weaknesses of the organization depends primarily on attitudes of people (those with pessimistic assessment of the situation will see more negative aspects, than a person positively oriented)
• Operational factors dominates assessment (of which the managers have more information), which causes that the results of the analysis are not useful for evaluating strategic aspects of organization and its environment,
• Factors that are given by people higher up in the organizational hierarchy, have more weight than factors given by people lower in the hierarchy (their voice does not count as much)
• Giving the list of weaknesses, analysts do not delve in the analysis of their causes,
• Dominates the SWOT analysis at the level of the entire organization, despite the fact that at the level of organizational units or product groups there can be significant differences in results.

SWOT analysis is a fairly primitive method. It should therefore be used with other strategic analysis techniques such as: ASTRA analysis or The concept of Porter's five forces, and its variant TOWS analysis.

See also:

• Strategic planning functions

Examples of SWOT analysis

• One example of a SWOT analysis is the analysis done by a company trying to decide whether or not to enter a new market. They would look at the Strengths they have in terms of existing products, services, and customer base. They would look at the Weaknesses they have in terms of lacking certain necessary resources or having fewer resources than their competitors in the market. They would then look at the Opportunities that exist in the new market, such as potential customers, new products, and services, and potential partnerships. Lastly, they would consider the Threats, such as competition, regulations, and high startup costs.
• Another example of a SWOT analysis is that of a company trying to decide whether or not to invest in a new technology. They would look at the Strengths they have in terms of existing technology and knowledge base. They would look at the Weaknesses they have in terms of lacking the necessary resources or having a limited budget. They would then look at the Opportunities that exist with the new technology, such as potential cost savings, improved efficiency, and new markets. Lastly, they would consider the Threats, such as the risk of failure, the cost of implementation, and the requirement of additional training.

Limitations of SWOT analysis

One of the main limitations of SWOT analysis is that it is often too focused on the present situation and does not take into account future trends. Below are some further limitations of the SWOT analysis:

• The analysis is subjective, as the results depend on the individual or group conducting it.
• It may be difficult to prioritize the strengths, weaknesses, opportunities, and threats as they can be of varying levels of importance.
• The analysis can be too basic and superficial, as it does not take into account more complex factors such as emotions and dynamics.
• It does not always provide a clear direction for action, as the results may be inconclusive or difficult to interpret.
• The analysis does not always take into account potential external factors that could influence the company's decision-making.

Other approaches related to SWOT analysis

One of the most popular strategic analysis techniques is SWOT analysis, but there are also other methods that can be used to analyze an organization's internal and external environment. These include:

• PESTLE Analysis – PESTLE stands for Political, Economic, Social, Technological, Legal and Environment. This approach considers the external environment of an organization and helps to identify how external factors can affect the organization.
• Porter’s Five Forces – This approach focuses on five competitive forces that shape the competitive landscape of an industry: supplier power, buyer power, competitive rivalry, threat of new entrants, and threat of substitute products.
• BCG Matrix – The BCG Matrix is a tool used to analyze the competitive position of products or businesses in an industry. It is based on the relative market share of products or businesses and the growth rate of the industry.
• Value Chain Analysis – This approach focuses on the activities of an organization and how they create value for customers. It helps to identify where the company can create competitive advantages.

In summary, SWOT is one of the most popular strategic analysis techniques, but there are several other approaches which can be used to analyze the organization's internal and external environment. These other approaches include PESTLE Analysis, Porter’s Five Forces, BCG Matrix, and Value Chain Analysis.

References

• Dyson, R. G. (2004). Strategic development and SWOT analysis at the University of Warwick. European journal of operational research, 152(3), 631-640.
• Houben, G., Lenie, K., & Vanhoof, K. (1999). A knowledge-based SWOT-analysis system as an instrument for strategic planning in small and medium sized enterprises. Decision support systems, 26(2), 125-135.
• Humphrey, A. (December 2005), SWOT Analysis for Management Consulting, SRI Alumni Newsletter (SRI International).
• Jackson, S. E., Joshi, A., & Erhardt, N. L. (2003). Recent research on team and organizational diversity: SWOT analysis and implications. Journal of management, 29(6), 801-830.
• Learned, A., Christensen, C., Andrews, R. S. and Guth, D. (1965), Business Policy: Text and Cases, Homewood, Illinois: Irwin.
• Watkins M., (2007) From SWOT to TOWS: Answering a Reader’s Strategy Question, Harvard Business Review, march.
• SWOT analysis @ Wikipedia