SWOT Analysis is a frequently used term in strategic planning, but it’s often frequently misunderstood. Strategy doesn’t just happen, and strategic options don’t just emerge from thin air (and should not merely be handed down from the top leadership ranks by fiat).
Instead, an organization’s strategic goals should be decided in an organic process of analyzing the external and internal environments where the organization operates – evaluating the upsides and downsides, areas of potential growth and areas of potential risk.
This is why SWOT Analysis is so important: it’s not a one-off activity for annual executive retreats or a purely theoretical, intellectual exercise. SWOT Analysis – done properly – can drive your entire organization’s trajectory and needs to be integrated into the life of your strategic planning to guide the organization’s strategic direction at the highest levels, as well as for evaluating and implementing everyday initiatives.
Here are a few key points about what SWOT Analysis really is, how it should be used, and how it can help your organization succeed:
SWOT Analysis: What it Means
Most people have some familiarity with what the letters “SWOT” stand for, but it’s worth doing a quick refresher in plain language:
· Strengths: Skills, attributes and key capabilities that your company is already good at. What does your company already do well? How can you get more mileage out of these existing strengths?
· Weaknesses: Areas within your control where your company is not performing well. Where could your organization improve? How can you manage and minimize your weaknesses, without undermining your existing strengths?
· Opportunities: Emerging trends, ideas, innovations, events, or broader forces that your organization could capitalize upon. What are you excited about? What is the biggest positive change in your industry, category, market or sector that might be on the horizon for your organization?
· Threats: Events, disruptive forces, or risks beyond your control that could damage your organization. Just as you prepare to capitalize on opportunities, you must plan to mitigate or avoid threats.
External vs. Internal Analysis
Broadly speaking, every organization operates within an environment of “external” and “internal” factors that affect its performance. SWOT Analysis needs to include and account for both of these types of factors. For example:
External Analysis includes weighing the implications on your organization of opportunities and threats. This list of opportunities and threats is not all-inclusive – not all of these might apply to your organization, and you might have other opportunities and threats that are specific to your industry or your markets. Some of these factors can be both opportunities andthreats, depending on your perspective.
But this is a start to help you think about the full picture of upsides and risks facing your business:
· Technology: Technology is always changing; new technologies might emerge that cause your product or service to be obsolete. Conversely, new technologies might open up new opportunities for growth for your organization – by expanding your market or giving you new use cases for existing products/services.
· Substitutes: Sometimes new technologies arise that completely replace an existing product, while still serving the same function – these are known as “substitutes.” For example, the rise of word processing software made personal computers a substitute for the typewriter. Kodak used to be the leading camera company in America, until the rise of digital photography made Kodak film unnecessary – today, people carry smartphones in their pockets that have more camera power – digital photos and video – than the biggest, bulkiest professional cameras of previous generations.
· Customers: Use market segmentation analysis to divide up your customer base into identifiable segments to learn more about them – for example; who are your customers, which customer segments are your ideal target market, which customers are most loyal, which customer segments have potential for sales growth?
· Competitive environment: What is the overall competitive environment? What are your competitors’ strengths and weaknesses? How does your organization compare to competitors in the minds and wallets of your customers? (Be honest.)
· Macroeconomic performance: Are you in an industry that is growing, stagnating or shrinking? Do you rely upon a fixed geographic territory to find customers, or can you serve customers anywhere in the world via the Internet? Can you expand into international markets? Can you find support via unconventional channels? Thinking expansively and creatively about how to maximize your potential for growth in your organization’s “economy” – regardless of what’s happening in the broader economy, in good times and bad – is an essential exercise for external analysis.
· Demographic changes: Are your customers getting older, younger, more diverse, more international? Many countries in Europe, Japan, Korea, and to a lesser extent the United States are confronting the challenges (and opportunities) of an aging – sometimes shrinking – population. Where does your organization fit into the broader demographic trends in your market?
· Potential Partners: What are other organizations that you can partner with, for example – for cross-selling, strategic marketing partnerships, collaborative product development, and more?
· Suppliers: Many organizations are finding that their supply chain is becoming subject to greater scrutiny from regulators and consumers. This is an opportunity to take a closer look at your business partners throughout the supply chain – are their business operations, ethics, and sustainability practices aligned with your organization’s values?
· Pricing constraints: what is the price elasticity of demand for your products or services? What effect would a change in price have on customers’ demand for your products?
· Workstyle and lifestyle trends: How are people changing the way they work and live in relation to your business? Are you prepared for the possible disruptions to your business model, or ready to think ahead and embrace the opportunities that might not have fully emerged yet? For example: more employees are working from home (telecommuting) with online technology, and other employees are doing more business travel than ever before – these transformations are leading to new disruptions (for businesses that sell cubicles and office equipment) and new opportunities (for businesses that sell airfare, lodging, or travel substitutes such as videoconference solutions).
Five Forces Framework
One of the most effective ways to think about external SWOT analysis is to use Michael Porter’s “Five Forces Framework,” which encourages strategists to use a broad perspective on their competitors, industry economics, and other external actors and influences that affect the competitive landscape.
Porter’s Five Forces are:
1. Threat of new entrants
2. Bargaining power of suppliers
3. Jockeying for position among current competitors
4. Bargaining power of customers
5. Threat of substitute products or services
How can you find a comfortable, profitable, sustainable strategic position for your organization among these five forces? Porter writes: “stake out a position that is less vulnerable to attack from head-to-head opponents, whether established or new, and less vulnerable to erosion from the direction of buyers, suppliers, and substitute goods.”
Possible strategies include: build stronger relationships with profitable customers, differentiate your product (with marketing or product redesign), integrate your operations, or gain technical leadership.
Remember: external analysis is not a one-time thing or a once-a-year endeavor. The best companies are always looking outside the organization to find opportunities and be mindful of threats.
The other major piece of a SWOT Analysis is the examination of the internal factors within your organization – the internal Strengths and Weaknesses that are within your ability to manage.
A few factors to consider as part of your internal analysis include:
· Core Competencies: how do your expertise and skills combine to produce superior performance? This is not “what your company does,” this means: what does your company do better than anyone else, and what do your customers value most? What are your company’s “superpowers?”
When evaluating your core competencies, also analyze whether they are…
o Hard to copy, or easily imitated by competitors?
o Offering durability (enduring value), or likely to go away?
o Appropriable – will your organization truly capture the value of this competency, or will the value-capture go to a partner or client higher on the value chain?
o Sustainability – do you have a lasting competitive advantage or could it be replaced by a substitute?
o Superiority – are you truly better than your best rivals?
· Benchmarking: Part of evaluating your core competencies is measuring your operational performance according to industry-leading standards, or benchmarks. You can benchmark your organization’s performance against direct competitors or against leading companies in other categories – for example, when evaluating logistics performance or order-processing efficiency.
· Financial condition: do you have the financial strength to implement a new strategy? Consider these elements:
o Cash flow
o Access to outside capital
o Other capital spending plans already in progress
o Hurdle rate of new projects – minimum ROI expected on new capital projects
· Management and culture: Organizations that are best situated to successfully implement change have an adaptable culture with “change-ready” managers who are ready to rethink their operations, let go of what doesn’t work, and embrace new initiatives. Ask yourself if your organization’s culture…
o Has leadership from respected, effective managers
o Gives your people personal motivation to change
o Is nonhierarchical, with a spirit of collaboration
o Rewards performance
Evaluating Internal Strengths and Weaknesses
This is a simple framework of specific action steps to conduct an internal analysis of Strengths and Weaknesses – adapted from Harvard ManageMentor® on Implementing Strategy, an online product of Harvard Business School Publishing
1. Choose one person to lead the analysis who is respected and trusted, objective and not aligned with any factions within the organization.
2. Create a SWOT Team of subject matter experts, leaders and individual contributors from various departments/job functions.
3. Brainstorm a list of Strengths – focusing on the key areas of core competencies, financial condition, management and culture. Record as many ideas as possible on a big chart; then consolidate and clarify the ideas. Try not to start thinking about solutions just yet; focus on listing and clarifying Strengths.
4. Identify and summarize your Top 3 Strengths – achieve consensus among the team. Take a vote if needed. Try to hone it down to just 3 Strengths that everyone can agree upon.
5. Repeat steps 1-4 for Weaknesses. Same process, different topic.
SWOT Analysis is not the “end” of your strategic planning process – it is the beginning! But with a spirit of honesty, candor, teamwork, objectivity, and a willingness to explore some possibly uncomfortable truths about your organization’s challenges, your team can use SWOT Analysis to create a strong foundation for smarter strategies.