SWOT Analysis: Used Or Abused?

What is SWOT analysis? As William R. Osgood had defined that SWOT analysis is the process of carefully inspecting the business and its environment through the various dimensions of Strengths, Weaknesses, Opportunities, and Threats.

It is a way to analyse a companys or a departments position in the market in relation to its competitors¨ (Stacy Collett, 1999) Strengths are skills and resources that the firm has more abundantly than other firms. They can be classified according to their value to the business and firms ability to exploit. On the contrary, weaknesses represent a lack of important skills or competencies relative to the presence of those resources in competing firms. They should be classified according to their risk to the business and firms ability to address.

Opportunities are outside conditions or circumstances that the company could turn to its advantage, and could include a specialty niche skill or technology that suddenly realizes a growth in broad market interest. Opportunities can be classified according to their success probability and their attractiveness. Threats are current or future conditions in the outside environment that may harm the company, and might include population shifts, changes in purchasing preferences, new technologies, changes in governmental or environmental regulations, or an increase in competition. Threats should be classified according to their probability of occurrence and seriousness.

SWOT analysis concept Source: Paul Elkin, Mastering Business Planning and Strategy, p.14 The ultimate objectives of the SWOT analysis, then, are to identify the overall strategy and the CSFs of the firm and to begin to develop a consensus among executives and managers regarding them.

In devising a SWOT analysis, there are several factors that will enhance the quality of the material: Keep it brief V pages of analysis are usually not required.

Relate strengths and weakness, where possible, to critical success factors.

Strengths and weaknesses should also be stated in competitive terms, if possible. It is reassuring to be good at something, but it is more relevant to be better than the competition. Statements should be specific and avoid blandness V there is little point in stating ideas that everyone believes in.

Analysis should distinguish between where the company wishes to be and where it is now. The gap should be realistic.

Sufficient accurate information available on which to base judgments.

It is important to be realistic about the strengths and weaknesses of ones own and competitive organisations. (R1) The process described thus far assumes that strategists are analytically objective in estimating the relative capacity of their company and the opportunity they see or anticipate in developing markets.

Here is a good illustration of how Dell Computer Corporation can use a SWOT analysis to carve out a strong business strategy: At first, Dell recognized that its strength was selling directly to consumers and keeping its costs lower than those of other hardware vendors. As for weaknesses, the company acknowledged that it lacked solid dealer relationships. Identifying opportunities was an easier task. Dell looked at the marketplace and saw that customers increasingly valued convenience and one-stop shopping and that they knew what they wanted to purchase. Dell also saw the Internet as a powerful marketing tool. On the threats side, Dell realized that competitors like IBM and Compaq Computer Corp. had stronger brand names, which put Dell in a weaker position with dealers. Dell put together a business strategy that included mass customization and just-in-time manufacturing (letting customers design their own computers and custom-building systems). Dell also stuck with its direct sales plan and offered sales on the Internet.¨ (R1)

Advantages From the exposition of SWOT analysis mentioned above, SWOT analysis can be regarded as a systematic procedure for helping companies identify critical success factors based on objective facts and on marketing research findings and then can build on vital strengths, correct glaring weaknesses, exploit significant opportunities, and avoid disaster-laden threats. Viewed in this light, SWOT analysis combines key environmental influences with the capability of the organisation and hence the agenda for developing new strategies. Therefore, it provides highly competence of integration, which helps firms formulate strategies through all-round consideration.

The SWOT analysis will also help management identify ways to capitalize on company’s strengths, correct any weaknesses, and ultimately assist in mapping out a plan for the future success of your business.¨ (Buhler & Patricia 1994) A SWOT analysis is a very important component of a company’s overall business plan.¨ (Kenneth Fox) The goal is to identify all the major factors affecting competitiveness before crafting a business strategy.¨ (Collett & Stacy, 1999) In addition, in the increasingly competitive marketplace, a challenge is generated that strategists have to structure and analyse complex situations with large amount of information within a highly limited time scope. Consequently, strategists have to limit their efforts to those issues that have the most impact on the situation. Thus, SWOT analysis provides a framework for identifying these critical issues and helps strategists accomplish strategic analysis efficiently.

A SWOT analysis of the organisation V its strengths, weakness, opportunities and threats V is a useful way of summarizing the current status of the organisation.¨ (Kenneth Andrew) A SWOT analysis is relatively simple to carry out, yet it can reveal key factors that influence your business, both right now and in the future, helping you make key decisions for your business.¨ (R2) Furthermore, by carefully identifying the critical success factors in this way, executives and managers can discover differences in viewpoints. For example, what some managers might view as a strength others might view as a weakness. SWOT analysis is being incorporated into all the large organisations and levels, therefore serves as a means for obtaining greater understanding and provides a highly productive way to get the key personnel involved in the management decision-making process. Thus, it develops consensus among managers regarding the factors that are crucial to the firms success.

For capitalising the external opportunities, the company needs to possess an internal strength in that area. If the capacity of company is weak for an opportunity, the opportunity should be foregone or the capacity should be improved. That is, SWOT analysis assists firms to analyse a situation and develop suitable strategies and tactics as shown in the following table.

The TOWS Matrix Strength Weakness Opportunity SO Strategies WO Strategies Generate strategies here that use strength to take advantage of opportunity Generate strategies here that take advantage of opportunity by overcoming weakness Threat ST Strategies WT Strategies Generate strategies here that use strengths to avoid threats Generate strategies here that minimize weakness Source: Adapted from Long-Range Planning, April 1982, H. Weihrich, The TOWS MatrixXA Tool for Situational Analysis¨ p. 60.

Here is a good example that demonstrates how SWOT analysis benefits the company: At GE, SWOT analysis is designed to give managers a platform for rethinking how to compete with other firms. Using SWOT analysis, Welch has more than tripled GE’s productivity growth rate, doubled the proportion of annual revenues coming from high-growth technology and service sectors, and initiated joint ventures with foreign firms like the Tungsram Company of Hungary (light bulbs) and Ericsson of Sweden (cellular communications). Welch is continuing to reshape GE by applying SWOT to both domestic and global businesses.¨ Disadvantages Nevertheless, the practicability of SWOT analysis has been the subject of controversy such as Richard Lynchs commentary in 1997: Probably the biggest mistake that is commonly made in SWOT analysis is to assume that it is certain to be correct because it contains every conceivable issue and is truly comprehensive.

Nothing could be further from the truth. This merely demonstrates a paucity of real thought and a lack of strategic judgment about what is really important for that organisation. Another common error is to provide a long list of points but little logic, argument and evidence. A shortlist with each point well argued is more likely to be convincing.¨ (R3) First of all, as mentioned that the process assumes that strategists are analytically objective in estimating the relative capacity of their company and the opportunity they see or anticipate in developing markets. However, here is the evidence against this assumption: The study of 303 INSEAD MBAs and executives, using the Minnesota bank case, found that southern European managers were more likely to interpret an issue as a threat or a crisis, while northern Europeans tended to be more phlegmatic (Schneider and De Meyer 1991).¨ (R4)

Therefore, it can be seen that national culture can make a difference to how manager analyses firms SWOT, which means that the SWOT analysis is very likely subjective. This circumstance can be also revealed from the following experiment: Jackson and Dutton (1998) tested eighty-three American MBA alumni with eight different (threatening or opportunity) scenarios involving a fictional Minnesota bank. They presented these scenarios in different kinds of language-neutral, ambiguous, threat-distinctive and opportunity-distinctive. The result of the experiment was that presentation in up-beat language improved the average ratings of opportunities, and threatening language increased ratings of threats. However, ambiguous language significantly increased respondents anxiety over threats, while making little difference to opportunity ratings. Moreover, while threatening language decreased ratings for opportunities, optimistic language did not significantly reduce rating for threats.¨ (R4) Moreover, this experiment obviously illustrates that people are not only influenced by the language of issue presentation but also do not follow the same cognitive rules for opportunities and threats, noticeably being more subjective and sensitive about threats.

Neither can strengths and weaknesses be objectively determined.¨ (R5) Doing a SWOT analysis actually has little to do with logical analysis, but in reality is nothing less than a creative interpretation of a problem situation.¨ (R5) Likewise, due to that top managers put a great deal of emphasis on financial issues and very little on technical ones; middle and lower managers were concerned for technical issues but most completely ignored finance, position in the organisational hierarchy makes a difference to what issues get identified as. This point can be proven by another scholars study: Ireland et al.s (1987) study of fifty-six Latin American managers likewise found very little commonality on issues between different levels in the hierarchy.¨(R4) On the other hand, in theory, SWOT framework suggests that a sound strategy should match the firms strengths and weaknesses to the opportunities and threats encountered in the firms environment.

However, when striving for this fit, should the company be primarily strength driven, weakness driven, opportunity driven or threats driven? Here is an actual example: Managers at Texas Instruments (TI) split between those who wanted TI to stick to industrial electronics (where it had clear strength) and those who wanted the company to continue introducing consumer electronic products (where it lacked some required marketing strengths.¨ (R2) Meanwhile, matching these factors, as the TOWS matrix shows, will creates strategies that may not make sense. For instance, one of the organisation’s strengths is “plenty of cash” and one of its weaknesses is “lack of training”. Therefore, mixing these two factors together, SWOT straightforward develops a new strategy that has more training for the staff members. The obvious remark for this purposeless strategy will be so what! A successful training program must have a specific target in response to external changes. Firms have to determine their specific needs for training in line with the external and internal factors. That is to say, the strategy must have an external factor as a trigger in order to be feasible.

From both examples above, therefore, on some occasions, SWOT analysis can not lead the company to a right direction.

Moreover, while pursuing SWOT analysis, strategists consider the firms major factors horizontally without vertically thinking of their causes and consequences, which might mislead the strategies. For example, company A has a considerable advantage over company B in lower production costs, but company B is about to commission its new plant based on the newest, most efficient technology. This situation apparently is a threat for company A rather than an advantage recognized through SWOT analysis. That is, another problem of SWOT is over simplifying problems.

For all its simplification, SWOT is often used poorly, and for purposes different from those it has been designed for.¨ (Adam J. Koch) In addition, although many scholars have clearly defined strength, weakness, opportunity and threat, strategists actually found that SWOT framework is handicapped by difficulties in distinguishing strengths from weaknesses and opportunities from threats. The following two cases will reflect the practice problem of SWOT analysis: Is Michael Eisner a strength or a weakness for Walt Disney Company? To the extent that he has masterminded Disneys revival over the past 17 years, he is an outstanding strength. Yet, his quadruple heart-bypass surgery and inability to implement a management succession plan suggest that he is also a weakness.¨ (R1) Was the emergence of networked computing during the late 1990s a threat or an opportunity to Dell Computer? To the extent that computer networks shift computing power from PCs to servers, their expansion represented a threat to Dells core business.

Nevertheless, while PCs have fallen in price and their margins have narrowed, so Dell moved strongly into servers, and it has simultaneously expanded into computer servers. Therefore, that computer networking represented both a threat and an opportunity for Dell.¨ (R1) Lastly, in view of dramatically changing and complex commercial world, the development of SWOT analysis since 1960s seems out of keeping pace with times. Especially with the development of technology, companies may retain their original technological superiority over most or all of their competitors, but this strength may in time diminish, or lose altogether, its significance. For example, introduction of industrial robots to the car-making industry has had a considerable effect on the relative quality of car finish. Leading the world in deployment of robots in coating, painting and assembly of cars, Japanese carmakers were able to more quickly catch up with and even better the standard of car finish of a vast majority of European and American companies. By contrast, possessing superior skilled mechanics is not a strength for car manufacture companies any more.

Conclusion To sum up, SWOT provides a framework for identifying Strengths, Weaknesses, Opportunities and Threats. It enables key factors to be visibly recorded as a high level summary of a business situation.

However, a number of problems would need to be concerned for the effectiveness of the SWOT analysis. Due to the misconceptions (appendix 1) and the evaluation of SWOT which depends on the idiosyncratic views held by strategists, the SWOT analysis is very likely conducted by subjective ideas with deviation. These shortcomings can be resulted in poor decisions and poor performance.

In particular, within a volatile and strongly competitive business world, we saw evidences mentioned above that the SWOT analysis is not as useful as before. At present, what firms need is accurate information and decision-making. Once a firm makes wrong decisions, it is very likely to be thrown out the industry.

To promote the efficiency of the SWOT analysis, the first challenge is how to enhance its accuracy. Fortunately, with the development of information technology, it assists firms to collect valid information faster by POS system, database, Internet and so on. Thus, the traditional SWOT analysis can be improved by providing general views with further objective numbers and weighing for each internal and external factors.

Furthermore, as many new theories and analysis tools such as balanced scorecard have been introduced, each method has advantages and disadvantages; it is advantageous to draw on the strength of each to offset the weakness of the other and to make better analysis. Especially from the new article Building balanced scorecard with SWOT analysis, and implementing Sun Tzu’s The Art of Business Management Strategies on QFD methodology¨ written by S.F. Lee, Andrew Sai On Ko, they have integrated balanced scorecard, SWOT analysis, QFD, even ancient Chinese strategic ideas Sun Tzu V The Art of War and produce a novel strategic analysis tool which is much more effective than SWOT analysis. In conclusion, the conventional SWOT analysis is no longer effective for the changing marketplace. It is an overview approach, which is unsuited to todays complex and changing markets; otherwise, it is only appropriate to the early stages of strategic analysis.

References

1. Robert M. Grant (2002), Contemporary Strategy Analysis 2. Philip Kotler (1997), Marketing management 3. Richard Lynch (2000), Corporate Strategy 4. Whittington, R. (1993), What is Strategy and Does It Matter? 5. Bob de Wit & Ron Meyer, Strategy, 2nd edition 6. Turner & Myra Faye, How Does Your Company Measure Up, Black Enterprise, Nov2001, p.52 7. Flores Luis G. & Saxena N., Energizing Strategic Planning, Banking Strategies, Jan/Feb2000, p.6 8. Chan Chui-Ying & Forster, M. J., Strategy Formulation in Small Business, International Small Business Journal, Apr-Jun2001, p.56 9. Frigo Mark L., Pustorino P. G., Krull Jr. & George W., Translating e-Business Strategy into Action, Bank Accounting & Finance, Summer2001, p.29 10. Suutari R., Understand Industry Structure, CMA Management, Dec99/Jan2000, P.34 11. Buhler P., Strategic management: A process for supervisors organisationwide, p.7 Bibliography 1. Richard Lynch (2000), Corporate Strategy 2. Whittington, R. (1993), What is Strategy and Does It Matter? 3. Robert M. Grant (2002), Contemporary Strategy Analysis 4. Turner & Myra Faye, How Does Your Company Measure Up, Black Enterprise, Nov2001 5. Philip Kotler (1997), Marketing management 6. Flores Luis G. & Saxena N., Energizing Strategic Planning, Banking Strategies, Jan/Feb2000 7. Chan Chui-Ying & Forster, M. J., Strategy Formulation in Small Business, International Small Business Journal, Apr-Jun2001 8. Frigo Mark L., Pustorino P. G., Krull Jr. & George W., Translating e-Business Strategy into Action, Bank Accounting & Finance, Summer2001 9. Suutari R., Understand Industry Structure, CMA Management, Dec99/Jan2000 10. Buhler P., Strategic management: A process for supervisors organisationwide 11. Bob de Wit & Ron
Meyer, Strategy, 2nd edition 12. Johnson G (1993), Exploring Corporate Strategy 13. McCarthy D J (1975), Business Policy and Strategy: concepts and readings 14. Ansoff H I (1987), Corporate Strategy 15. Grieve-Smith J (1990), Business Strategy 16. Ledgerwood G (1992), Environmental Audit and Business Strategy: a total quality approach 17. Katz R L (1970), Cases and Concepts in Corporate Strategy 18. Channon D F (1973), Strategy and Structure of British Enterprise 19. www.ismall-business.net 20. http://www.utoledo.edu/~bbhatt/ibsp97.ppt 21. http://www.pegasus.rutgers.edu/~yyc/html/body_ibm.html 22. Stacy Collett, July 19, 1999, SWOT analysis, http://www.computerworld.com/cwi/story/0,1199,NAV47-68-85-1950-1974_STO42968,00.html 23. http://www.simplyinbusiness.com/content/static/businessinfo/planning/swot.asp Appendix 1 V Common Misconceptions about SWOT Misconception What’s wrong about it Consequences of this misconception SWOT has got an analytical capacity of its own SWOT is essentially only an analytical framework of the internal and external audit. Any SWOT generated inputs may be wrongly considered a reliable basis on which to found strategy making.