SWOT analysis is a means of evaluating the internal and external factors that impact an organization in order to formulate business strategy. The technique takes its name from the four elements it evaluates: (1) the company's strengths (S), (2) its weaknesses (W), (3) the opportunities in its competitive environment (O), and (4) the threats in its competitive environment (T). SWOT analysis was developed by Kenneth R. Andrews (1916–2005) in the early 1970s, and it continues to be used with only minor modification and development into the twenty-first century.
Conducting SWOT analysis requires a company to evaluate both its internal workings and its external environment. The required assessment of strengths and weaknesses occurs as a part of organizational analysis. It is an audit of the company's internal workings, which are relatively easier to control than outside factors. Examining opportunities and threats, meanwhile, is a part of environmental analysis. The company must look outside of the organization to determine opportunities and threats, over which it has less control.
Andrews's original conception of the strategy model that preceded the SWOT asked four basic questions about a company and its environment: (1) What can we do?; (2) What do we want to do?; (3) What might we do?; and (4) What do others expect us to do? The answers to these questions provide the input for an effective strategic management process. While Andrews's original conception evolved into the more streamlined SWOT model used today, his work is the foundation of this activity.
STRENGTHS, WEAKNESSES, OPPORTUNITIES, AND THREATS
Strengths, in the SWOT analysis, include a company's capabilities and the resources that allow it to engage in activities to generate economic value and perhaps competitive advantage. A company's strengths may include its ability to create unique products, to provide high-level customer service, or to have a presence in multiple retail markets. Strengths also include such factors as connections with suppliers that allow the company to purchase Page 1065 | Top of Articleraw materials at a cost advantage or a strategically located hub that facilitates shipping and receiving. People factors, such as a strong organizational culture, exemplary staffing and training procedures, or high-quality managers are also significant organizational strengths.
A company's weaknesses are a lack of resources, experience, or capabilities that can prevent it from generating economic value or gaining a competitive advantage. There are many examples of organizational weaknesses. For example, a firm may have a large, bureaucratic structure that limits its ability to compete with smaller, more dynamic companies. High labor costs can also be a major weakness if a competitor achieves a similar level of quality and productivity with lower labor costs. Characteristics of an organization can also be a weakness. For example, a weak organizational culture, marked by a lack of uniform purpose and vision across the company, can be a major weakness as it impedes decision making and creates friction and factionalism.
Opportunities provide the organization with a chance to improve its performance and its competitive advantage. Some opportunities may be anticipated; others arise unexpectedly. Opportunities may arise when there are niches for new products or services, or when these products and services can be offered at different times and in different locations. For instance, the increased use of the internet has provided numerous opportunities for companies to expand their product sales. The rise of lifestyle blogs and social media sites such as Pinterest present opportunities for companies to market to crafters and do-it-yourself enthusiasts. Changes in government policies (such as deregulation) can also be a significant source of opportunity if they open new markets.
Every company faces threats in its environment. Threats include factors that influence production, such as increased costs for raw materials or reduced availability of skilled workers. They can also come from individuals, groups, or organizations outside the company that aim to reduce the level of the company's performance. Often the more successful companies face the strongest threats, because many other companies want to claim some of their market share. Threats may come from new products or services from other companies that aim to take away a company's competitive advantage. They may also come from government regulation or even consumer groups that advocate against a company or its products. A company that manufactures soft drinks, for example, faces threats from the growing popularity of healthier beverages, groups that oppose the sale of soft drinks in schools and the marketing of soft drinks to children, and, in some locations, taxes levied on soft drink purchases to offset the health costs associated with sugar consumption.
To gain a competitive advantage, a company's strategy should address all four elements of the SWOT analysis. It should help the organization determine how to use its strengths to take advantage of opportunities and neutralize threats. Finally, a strong strategy should help an organization avoid or address its weaknesses. If a company can develop a strategy that makes use of the information from SWOT analysis, it is more likely to have high levels of performance.
Nearly every company can benefit from SWOT analysis. Larger organizations may have strategic-planning procedures in place that incorporate SWOT analysis, but smaller firms (particularly entrepreneurial firms) may have to start the analysis from scratch. Additionally, depending on the size or the degree of diversification of the company, it may be necessary to conduct more than one SWOT analysis. If the company has a wide variety of products and services, particularly if it operates in different markets, one SWOT analysis will not capture all of the relevant strengths, weaknesses, opportunities, and threats that exist across the span of the company's operations.
LIMITATIONS OF SWOT ANALYSIS
One limitation of SWOT analysis is that, while it emphasizes the importance of the four elements associated with the organizational and environmental analysis, it does not address how a company can identify those elements within itself. Some organizational executives may struggle to determine what these elements are, and the SWOT framework provides no guidance. For example, what if a strength identified by the company is not truly a strength? A company may pride itself on customer service without realizing that the quality of its service has declined over time or failed to keep up with that provided by competitors. Weaknesses are often easier to determine than strengths, but they are typically recognized after it is too late to create a new strategy to offset them. A company may also have difficulty identifying opportunities. Depending on the organization, what may seem like an opportunity to some may appear to be a threat to others. Opportunities may be easy to overlook or may be identified long after they can be exploited. Similarly, a company may have difficulty anticipating possible threats in order to effectively respond to them.
While the SWOT framework does not provide managers with the guidance to identify strengths, weaknesses, opportunities, and threats, it does tell them what questions to ask during the strategy development process. Managers know they must determine a strategy that will take advantage of a company's strengths, minimize its weaknesses, exploit opportunities, or neutralize threats.
Some experts argue that making strategic choices for the firm is less important than asking the right Page 1066 | Top of Articlequestions in choosing the strategy. A company may think it has solved a problem, whereas in fact it may only have provided the correct answer to the wrong question.
One other limitation of SWOT analysis is that it does not weight or rank the elements that it analyzes. Users are therefore left to draw their own conclusions about the relative merits of potential solutions that the technique generates.
USING SWOT ANALYSIS TO DEVELOP ORGANIZATIONAL STRATEGY
SWOT analysis is just the first step in developing and implementing an effective organizational strategy. After a thorough SWOT analysis, the next step is to rank the strengths, weaknesses, opportunities, and threats and to document the criteria for ranking. The company must then determine its strategic fit given its internal capabilities and external environment in a two-by-two grid (see Figure 1 ). This fit, as determined in the grid, will indicate what strategic changes need to be made. The quadrants in this grid are as follows:
- Quadrant 1—internal strengths matched with external opportunities
- Quadrant 2—internal weaknesses relative to external opportunities
- Quadrant 3—internal strengths matched with external threats
- Quadrant 4—internal weaknesses relative to external threats
Quadrant 1 lists the strategies associated with a match between the company's strengths and its perceived external opportunities. It represents the best fit between the company's resources and the options available in the external market. A strategy from this quadrant would be to protect the company's strengths by shoring up resources and extending competitive advantage. If a strategy in this quadrant can additionally bolster weaknesses in other areas, such as in Quadrant 2, this would be advantageous.
Quadrant 2 lists the strategies associated with a match between the company's weaknesses with external opportunities. Strategies in this quadrant would address the choice of either improving upon weaknesses to turn them into strengths, or allowing competitors to take advantage of opportunities in the marketplace.
Quadrant 3 matches the company's strengths and external threats. Strategies in this quadrant may aim to transform external threats into opportunities by changing the company's competitive position through use of its resources or strengths. Another strategic option in this quadrant is for the company to maintain a defensive strategy to focus on more promising opportunities in other quadrants.
Quadrant 4 matches a company's weaknesses and the threats in the environment. These are the worst possible scenarios for an organization. However, because of the competitive nature of the marketplace, any company is likely to need to consider the possibilities that this quadrant raises.
Even after a strategy is determined for each quadrant, organizations must remain vigilant. Strategies require frequent monitoring and periodic updates. An organization is best served by proactively determining strategies to address issues before they become crises.
An example of how a firm can develop strategies using these quadrants is as follows. A corporation produces high-quality, high-priced specialty kitchen items. It sells these products in stores and through a catalog and is known for its excellent customer service. This strength has created a loyal base of repeat customers. That has helped to offset its major weaknesses, which include having a small number of physical stores and no infrastructure for online sales. One major opportunity comes from the explosion of internet shopping, which offers the possibility of attracting new customers who cannot easily reach Page 1067 | Top of Articleone of the brick-and-mortar locations. Other opportunities include opening more brick-and-mortar stores, selling a wider range of items to attract customers who cannot afford its high-priced goods, or selling its goods through other retailers that already have an established online sales presence. Threats include other more high-profile competitors that operate primarily on the internet, with reduced overhead that allows them to sell items of similar quality at lower price points, and economic conditions that have consumers spending less and shopping for bargains.
Matching its strengths to its opportunities (Quadrant 1), the kitchen-products company may choose to capitalize on the popularity of online shopping by building an online store, still providing its excellent twenty-four-hour telephone customer service. Ideally, this strategy will offset the weakness of not having an established online presence, which addresses the concerns of Quadrant 2. Additionally, by moving some sales online, the company may be able to reduce overhead and become more competitive with rival stores' prices, simultaneously addressing customers' desire to get the best price (Quadrant 3). A strategy for Quadrant 4, which considers the company's weaknesses and threats, is that the company sell some products at a loss in the hope of competing with online retailers for price-conscious customers and thereby growing its customer base. It could also embrace its brick-and-mortar identity and eschew online sales, launching a campaign to position itself as a desirable alternative to online shopping.
Having mapped out these possible approaches, the company can weigh which strategy or combination of strategies is most likely to produce success. It must consider, for example, whether the cost of building enough brick-and-mortar stores to significantly increase its retail presence is a wise investment at a time when customers are focused on online and comparison shopping. It must consider whether its brand identity would be significantly weakened if it began to sell lower-priced goods, and, ultimately, whether it is possible to survive without a digital sales presence.
THE FUTURE OF SWOT ANALYSIS
SWOT analysis has such a wide range of applicability that it can be used in virtually any context. As Lawrence G. Fine notes in his 2009 book The SWOT Analysis, “Many people wrongly assume a SWOT analysis is only relevant for businesses, but it can be invaluable for individuals, organizations, and even team building.” This broad applicability has helped to promote the use and popularity of SWOT analysis.
In the twenty-first century, SWOT analysis is evolving to incorporate elements of other models of analysis. These hybrid models offer additional value to SWOT analysis and may help guarantee its long-term appeal. One emerging hybrid model involves bringing together elements of SWOT analysis with aspects of the analytic hierarchy process (AHP), an analysis technique that aids in priority setting and decision making. AHP was developed by the mathematician and statistician Thomas L. Saaty (1926–2017) in the 1970s and outlined in his 1980 book The Analytic Hierarchy Process. AHP requires decision makers to carefully evaluate options based on a hierarchy of goals and criteria that they set as part of the process. The advantage of adding AHP to SWOT analysis is that it offers a means of weighting and ranking the SWOT elements and makes the process more robust from a quantitative perspective.
Another hybrid approach involves incorporating into SWOT analysis elements of another method of decision analysis, the technique for order of preference by similarity to ideal solution (TOPSIS). TOPSIS was first introduced by Ching-Lai Hwang and Kwangsun Yoon in their 1981 book Multiple Attribute Decision Making: Methods and Applications. Like AHP, TOPSIS involves weighting criteria and scoring potential decisions mathematically, adding to the value of SWOT analysis by providing a consistent means of evaluating strategies that emerge from the SWOT process. Although both AHP and TOPSIS involve complex formulas, they are often programmed into a spreadsheet program to ease computation.
As a business tool, SWOT analysis is an early but critical step in developing an organizational strategy. Examining a company's internal capabilities (its strengths and weaknesses), and external environment (its opportunities and threats) helps to create strategies that can proactively contend with organizational challenges.
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