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SWOT (-Analysis)

By Dagmar Recklies

Strengths – Weaknesses – Opportunities – Threats

When I started to write this paper about the SWOT-model, I compiled theory and researched literature. This is part 1 of this paper. However, after several years of practical experience with the SWOT, I found this was not enough. I have worked as a consultant and in the strategic planning department of a global player. During this time I had the chance to do some SWOTs by myself, and – more importantly – I saw lots of SWOT-matrixes prepared by others. Thus I learned that the SWOT is not as easy as it seems. In part 2 of this paper I share my work experience with you and highlight some common misunderstandings. With this I hope to make it easier for you to gain some real value from your SWOT-exercises.

Part 1: Description of the Model

The SWOT-Analysis is one of the most common strategic management models. According to Mintzberg, the SWOT originates from the so called “Design-School”, which seeks to establish a fit between an organizations strengths and weaknesses with the opportunities and threats in its external environment.

The SWOT compiles the most important results from the analysis of external drivers and the analysis internal competences of an organization. The objective of the SWOT is to determine to what degree the actual strategy is suitable and appropriate to meet the challenges and changes in the organizations environment. 

The SW-Part comprises internal factors – the strengths and weaknesses of the organization. These are competences and resources, that the organization possesses and that are under its control. Strengths and weaknesses can relate to a variety of aspects and may depend on the actual situation. Typical areas from which strengths or weaknesses can arise are for instance:

·          employees know-how and competences

·          quality of internal processes

·          financial situation, financial structure

·          ownership / shareholder structure

·          market position

·          relationships to customers, suppliers and networks

·          R&D-capabilities, - resources and – capacities

·          corporate culture and many more

It may be helpful to determine critical success factors for the organizations industry or business model prior to doing the SW-part. Any identified strengths or weaknesses can be tested in relation to these key success factors:

·          Does an identified strength help you to be superior at a key success factor? If it does, you really have a major strength. If you are superior at something that is not really critical for success in your business – is it a strength worth mentioning? Or have you just identified something that could it be a basis for an advantage that nobody ever thought of?

It should further be noticed that all strengths and weaknesses are relative. They gain significance only by benchmarking them against competitors’ competences or industry standards.

·          For example: You think the regional coverage of your sales force is an asset. Map it against your strongest competitor and see if you are really that strong.

Internal analysis may be structured in different ways, e.g. for particular business units, product groups or by function. There are several models and tools available for this purpose; the value chain is one of the most popular. 

The OT-Part of the SWOT identifies Opportunities and Threats that the organizations faces from trends and changes in its environment. These external factors are not under the control or influence of the organization. For example, a high customer loyalty is an (internal) strength of the organization, since it has to satisfy its customers again and again in order to keep them loyal. If, however, the industry faces a new trend that customers become less loyal to any organization, this is an external threat that might undermine the companies competitive advantage. 

There are several business models that help to do the external analysis which leads to the opportunities and threats. One of the most common tools is the PEST. It analyses political, economical, socio-cultural and technological drivers and trends. Here it is important to identify the most important drivers for change, that might have serious impact on the organization and its environment. This will draw your attention to the really critical issues, whereas a mere list with as many drivers as possible will not tell you on what you should focus your attention. 

In the result, the organization should know, to which degree its existing competences and resources will help to address the expected external changes. The SWOT raises various questions. The SWOT-exercise itself will not give any answers on these questions, but it helps organizations to start thinking about the right things: 

·          Is our actual strategy suitable and sufficient to successfully face the expected changes?

·          In order to exploit our opportunities or to minimise our threats – which strengths should we improve even more and which weaknesses should we try to fix?

·          Will our actual strengths and core competences fit the world of tomorrow?

·          Could our actual strengths become weaknesses tomorrow if we don’t enhance them?

·          In view of our opportunities, which is the best way to exploit our strengths?

·          How can we use our specific competences to prepare ourselves for the changes to come better than our competitors can do?

·          What in particular can we do better?

·          Could this be the basis for new core competences / businesses / services etc.? 

In order to make a SWOT-exercise the basis for answering these and other questions, it is important to understand that this model is more than a compilation of internal and external factors. Rather The key point is the identification of and the focus on the major drivers. A very detailed analysis of every bit of information is as unsuitable as the use of the model as a mere checklist. 

True strengths are those factors that give the organization a strong competitive position, compared to other players in the market. True weaknesses hinder the organization to gain competitive advantages. Opportunities of real importance are of a kind that the organization is able to exploit and that fit to its specific strategic resources. Real threats, however, are those risks that the organization has to face anyway – and for which it is not well prepared. 

Part 2: Practical experience from working with the SWOT  

1 – The SWOT really is of relevance

After several years of work experience I can say that the SWOT model has passed the test of practice. If done and used properly, it really is of relevance.

The SWOT is still very popular. It survived the rise and fall of New Economy and it is still a great tool for contrasting a companies strengths and weaknesses with the opportunities and threats in its environment.

I guess, the SWOT is one of the most often used management models at all. There is hardly any top-management presentation on strategic issues, which does not present the four boxes labeled with the letters S-O-W-T. One reason might be that the SWOT is perceived as a very easy and intuitive tool.

In my experience this last point is true more for the reader of a SWOT, than for the one who prepared it.

2 – Many users do not really understand the theory behind the SWOT

At least this is true for the SWOT’s I have seen.

The greatest problem is the clear distinction between internal and external factors. The meaningfulness of the tool is based on the distinction between the organizations (internal) strengths and weaknesses – i.e. those factors that it can influence – on one hand and between the external opportunities and threats from its environment on the other. The latter ones are those factors that affect organization, if it does something about it or not.

In practice, people seem to have difficulties with this distinction. Sometimes the identified factors are categorized into “good for us” and “bad for us”, followed by some more or less intuitive allocation to strength or opportunity (if “good for us”).

Some Examples: 

·          “The launch of product xy” is called an opportunity. This is wrong!
If a company has a great product with the potential for a real competitive advantage in its development pipeline, than it as a portfolio of promising new products and thus a strength. Possibly, the R&D-departments ability to bring competitive products to market is also a strength. The market (i.e. the external environment) did not do anything so far.
An opportunity would be a sudden change in customers preferences and the product idea from the R&D-department is the only solution in the whole industry that can meet these new customer requirements.

·          “The loss of market share to competitor yz” is often attributed to the risks-box.

 


This might be true only if the expected loss of market share is the result of an aggressive movement of yz, e.g. a change in strategy. It might also be a risk that market conditions change and the products of yz are the better solution to these changed customers requirements.
In both cases, however, the loss of market share is the result, not the risk itself. It shows what will happen if the organization fails to address the risks (aggressive competitors, changing customer requirements) properly and in time.
In most cases, the own products will simply fall behind competition under unchanged or even unchanged market conditions. Be it that they are too expensive, of poor quality or become technically out of date. Than the organization has a cost problem, a wrong R&D-strategy, an outdated product portfolio or something similar – a self-made weakness. The decreasing market share is again only the result.
 

If the SWOT is understood in such a wrong way, it is nothing more than is list of issues that are worth thinking about.  

But there is another misunderstanding: 

3 – The SWOT is not an analysis

I try to avoid the term “analysis” in the context of the SWOT wherever possible. To my understanding, the SWOT is not an analysis. It is a summary of a set of previous analyses – even if those were not more than 15 minutes of mini-brainstorming with yourself in front of your computer. 

Many management presentation try to impress by starting with a SWOT. After that follow lots of slides with different analyses. In the best case, they repeat the content of the SWOT in more detail. Then the SWOT in the beginning should be called “Executive Summary”. In the worse cases, the slides full of analyses have nothing to do with the SWOT they follow. You don’t want to bore your audience with repetitions, do you?

This is the problem. In the end of the day, the SWOT is not more than a summary of a set of different analysis of the organization itself and its environment. This is the real value of the SWOT methodology.  Five slides that address trends in the industry environment and five more slides full of competitor benchmarking might be to confusing to bring your core message across. Those ten slides are valuable backup for decision making. The SWOT allows to present the core findings and the bigger picture in a structured and concise way. 

To summarize:

The SWOT is a clear and easily understandable tool for presenting a set of influencing factors and their interdependency.

The user should avoid, however, to allocate everything that comes to his mind in the context of the organization and its environment to the four boxes labeled S-W-O-T.

He should even more avoid to think that he is halfway through his strategy-making-process when he has successfully finished his SWOT. Here I like to repeat my statement from the year 2000, that is still valid:

“Management tools can help to better understand particular aspects of an organization or its environment. For the following step – the analysis of insights provided by the models – however, there is no model. Management models are effective only if their users are able to realize connections and gaps and to draw appropriate conclusions.”1

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More information on the use of management models and Tools

Management models - What they can do and what they cannot do

Literature Recommendations

     

 

© Dagmar Recklies, 2005

1 http://www.themanager.org/resources/Managementmodels.htm

  

  

 
 
 
 
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Status: 10. April 2012