SWOT is an acronym for Strengts (strengths), Weaknesses (weaknesses), Opportunities (opportunities) and Threats (threats). The internal situation of the company is reflected mainly in S and W, and the external environment in O and T. SWOT analysis is a stage in the development of a marketing strategy
The SWOT analysis methodology involves, firstly, identifying the internal strengths and weaknesses of the company, as well as external opportunities and threats, and, secondly, establishing links between them.
SWOT analysis helps answer the following questions:
- Does the company use internal strengths or distinctive advantages in its strategy? If the company does not have distinctive advantages, what potential strengths could be?
- Are the company’s weaknesses its competitive vulnerabilities and/or do they prevent it from taking advantage of certain favorable circumstances? What weaknesses require adjustment based on strategic considerations?
- What are the opportunities that give the company a real chance of success when using its skills and access to resources? (opportunities without a way to implement them are an illusion, the strengths and weaknesses of the firm make it better or worse adapted to exploiting opportunities than other firms).
- what threats should the manager be most concerned about and what strategic actions should he take to protect himself well?
Classical SWOT-analysis involves the identification of strengths and weaknesses in the company’s activities, potential external threats and favorable opportunities and their assessment in points relative to industry averages or in relation to data from strategically important competitors. The classic presentation of the information of such an analysis was the compilation of tables of strengths in the activities of the company (S), its weaknesses (W), potential favorable opportunities (O) and external threats (T).
At the intersection of SW with OT, an expert assessment of their mutual influence in points is put down. The total score for rows and columns shows the priority of taking into account one or another factor in the formation of a strategy.
Based on the results of the SWOT analysis, a matrix of strategic measures is compiled:
SO — activities that need to be carried out in order to use the strengths to increase the company’s capabilities;
WO — activities that need to be carried out, overcoming weaknesses and using the opportunities presented;
ST — activities that use the strengths of the organization to avoid threats;
WT — activities that minimize weaknesses to avoid threats.
Rules for conducting a SWOT analysis
In order to avoid possible mistakes in practice and get the most out of a SWOT analysis, you need to follow a few rules.
If possible, specify the scope of the SWOT analysis as much as possible. When conducting a business-wide analysis, the results are likely to be too general and useless for practical application. Focusing the SWOT analysis on the position of the company in the context of a specific market/segment will give much more useful results for practical application.
Be correct when assigning one or another factor to strengths/weaknesses or opportunities/threats. Strengths and weaknesses are internal features of the company. Opportunities and threats describe the situation on the market and are not subject to the direct influence of management.
SWOT analysis should show the real position and prospects of the company in the market, and not their internal perception, therefore, strengths and weaknesses can be considered as such only if they (or their result) are perceived in this way by external buyers and partners. They must correspond to objectively existing differences between the company’s products and competitors. It is necessary to rank strengths and weaknesses in accordance with their importance (weight) for buyers and only the most important ones should be included in the SWOT analysis.
The quality of a SWOT analysis directly depends on objectivity and the use of diverse information. You can not entrust its conduct to one person, because the information will be distorted by his subjective perception. When conducting a SWOT analysis, the points of view of all functional divisions of the company should be taken into account. In addition, all identified factors must be confirmed by objective facts and research results.
Long and ambiguous wording should be avoided. The more specific the wording, the clearer will be the impact of this factor on the company’s business now and in the future, the more practical the results of the SWOT analysis will be.
Limitations of SWOT analysis
SWOT-analysis is only a tool for structuring the available information, it does not give clear and well-formulated recommendations, specific answers. It only helps to visualize the main factors, as well as to evaluate, as a first approximation, the mathematical expectation of certain events. Formulating recommendations based on this information is the analyst’s job.
The simplicity of the SWOT analysis is deceptive; its results are highly dependent on the completeness and quality of the source information. SWOT analysis requires either experts with a very deep understanding of the current state and trends of the market, or a very large amount of work in collecting and analyzing primary information to achieve this understanding. Errors made in the formation of the table (inclusion of unnecessary factors or loss of important ones, incorrect assessment of weight coefficients and mutual influence) cannot be identified in the process of further analysis (except for very obvious ones) — they will lead to incorrect conclusions and erroneous strategic decisions. In addition, the interpretation of the resulting model, and therefore the quality of the conclusions and recommendations, is highly dependent on the qualifications of the experts conducting the SWOT analysis.
History of SWOT analysis
The pioneer of the direction of strategic analysis, aimed at finding a balance between the resources and capabilities of the company with factors and environmental conditions, is Kenneth Andrews (He developed a model that became the prototype of SWOT analysis. This model is based on four questions:
- What can we do (strengths and weaknesses)?
- What would we like to do (corporate and personal values)?
- What could we do (opportunities and threats of external environmental conditions)?
- What do others expect of us (intermediary expectations)?
The answers to these four questions served as the starting point for the formation of the strategy.
SWOT analysis in its modern form appeared thanks to the work of a group of scientists from the Stanford Research Institute (SRI): R. Stewart (research leader), Marion Dosher, Otis Benepe and Albert Humphrey (Robert Stewart, Marion Dosher, Dr Otis Benepe, Birger Lie, Albert Humphrey). Researching the organization of strategic planning in Fortune’s 500 companies (the study was conducted from 1960 to 1969), they eventually came up with a system they called SOFT: Satisfactory, Opportunity, Fault, Threat. In the future, the moddel was modified and renamed to the SWOT presented above.
The task of the SWOT / SOFT analysis, according to the authors, was to identify the key factors that should be taken into account when developing a strategy. Therefore, the analysis was carried out in 6 key areas:
- Product (What do we sell?)
- Processes (how do we sell?)
- Buyers (to whom do we sell?)
- Distribution (how does it reach customers?)
- Finance (what are the prices, costs and investments?)
- Administration (how do we manage it all?)
Based on the factors identified during the analysis, strategic decisions were further made.
The SWOT model was first published in 1966, the final modification of the SWOT analysis was presented by the authors in 1973.