SWOT analysis is a critical process that a business, a non-profit entity, or even an individual needs to develop SMART goals and working strategies. It is a process that helps to increase efficiency, cut costs, and fuel growth.
This post is meant to equip you with the information you need to have about this widely used management tool.
The history of SWOT analysis
SWOT analysis is the invention of Albert Humphrey, an American business consultant specializing in management and cultural change in organizations. In addition to SWOT analysis, Albert Humphrey is known for being the inventor of Team Action Management (TAM), a popular tool for managing change within organizations, and in particular, team dynamics.
Albert Humphrey developed the SWOT analysis management tool in the 1960s while working at the Stanford Research Institute. During this time, he researched the planning strategies of numerous businesses. Many of these were fortune 500.
After processing the data, Albert Humphrey and his team noticed patterns regarding factors that affected the businesses’ growth. It is from these patterns that he developed the SWOT model.
Albert Humphrey designed SWOT analysis to be used not only on whole organizations but also on specific elements within the organization. This includes teams, products, and projects.
The SWOT analysis meaning
So, what is SWOT analysis exactly?
In essence, a SWOT analysis is a framework or a tool that an organization, and even an individual, can use to identify factors that affect how they perform. In particular, it highlights factors that can help them grow and achieve their goals as well as those that might hinder or hold them in one way or another.
The primary goal of conducting a SWOT analysis is to leverage the positive factors for even better results and avoid, remove from the way or mitigate the negative factors.
The factors that can help a business, a non-profit, a department, a team, or even an individual perform well, grow, and achieve their goals are classified into two categories: strengths and opportunities.
Strengths are internal factors, and opportunities are external factors.
Meanwhile, the factors that can hinder growth or stand in the way of a business achieving its goal are classified into two categories as well: weaknesses and threats.
Weaknesses are internal factors, and threats are external factors.
We end up with the following list;
The first letters of these four categories form the word SWOT.
Strengths and weaknesses are internal factors because the business is in full control of them and can indeed do something to change them in one way or another. Opportunities and threats are external factors because they exist in the business’s environment, but the business has little control.
Meanwhile, Strengths and Opportunities are positive factors. They help the business to perform well, achieve its goals, and grow. Weaknesses and Threats are negative factors. They harm or hinder the business from growing.
This arrangement creates a matrix that looks as follows:
Let’s look at each one at a time.
Strengths in SWOT analysis include processes that work, adequate resources (including human resources), great products, and a location that exposes the business to traffic converted to sales.
Another way to describe strengths in a business is by having a great marketing mix of the 4Ps. That means having the capacity to deliver a great product, at the best price, at the right place, and through efficient promotion.
Weaknesses in SWOT analysis are basically the lack of everything we listed under strengths. It is having inefficient processes, lacking the necessary resources, having products that don’t connect well with the market, and being in a location that doesn’t expose the business to traffic that converts to sales.
Indeed, it also means having a poor marketing mix of the 4Ps. And that is having an inferior product, unfriendly pricing, not delivering at the right places, and or having ineffective promotion campaigns.
Opportunities in SWOT analysis include anything in the environment that a business can exploit or take advantage of to grow and achieve its goals. It could be a favorable tax regime, friendly regulatory environment, low-interest credit, and generally low cost of doing business.
It is important to point out that small businesses have the least influence on the environment in which they operate. On the other hand, larger corporations, especially multinationals, can influence regulations and even negotiate favorable tax treatment in the countries they serve.
Indeed, through massive PR campaigns and lobbying political power, larger corporations can create opportunities for themselves, including locking out competition. This difference between small businesses and larger ones is a nuance, you should take note of when looking at SWOT analysis, and particularly the opportunity factor.
Threats in SWOT analysis include things in the environment that can hinder a business from achieving its goals. They include unfavorable economy, punitive regulations, high tax regimes, change in culture, and disruptive new technology.
Like opportunities, a business, especially a small business, has little control over threats. The best such businesses can do is change their strategy to avoid the threats or minimize the impact. For example, if new technology threatens a business, it can adopt technology or create new products relevant to the new environment.
SWOT analysis examples
The following is an example of a simple SWOT analysis for a medium-sized fictional grocery store in the UK. The company has been around for decades and has seen marginal growth annually. After brainstorming, this is what its management team came up with:
- The grocery store has built a loyal customer base through consistency and a reward point scheme.
- It has also nurtured a reliable supply chain by always paying manufacturers and suppliers on time.
- It has high brand visibility achieved through promotional campaigns over the years in TV and magazines.
- It has many branches placed at strategic locations in major cities and towns across the country.
- The company has a high employee turnover with a significant capital used to hire and train new staff members annually.
- Customers have reported and rated their customer support to be poor. Across major review sites, the company scores an average of 3 stars.
- The company loses a large amount of stock through pilferage, especially to employees and contractors.
- Customers complain that they struggle to find products in the stores due to poor store layout and product placement.
- The middle class, which is the grocery store brand’s target market, is growing, creating a broader market to target.
- Technology is providing new ways of doing things. For example, the store can easily build an online store and have some of their customers shop there. Indeed, they could easily delegate shipping to suppliers, thus cutting the cost of warehousing and store floors.
- The growing fast internet connectivity will make it easier to reach more customers with targeted marketing.
- There are more differentiating opportunities. For example, the store could easily choose to serve customers of organic or vegan products.
- The company can easily turn their customers into a cohesive tribe around its brand through social media.
- While technology offers opportunities, it is also a threat as younger companies with less overhead can easily overtake them with better pricing, marketing, and delivery.
- They have to deal with the shoplifting problem, which reports more than 4 million offenses each year and over £1.3 billion losses in goods stolen.
- They have to compete with big discounters, which are very attractive to the middle class.
- There is a culture change. For example, physical shopping is losing its value as a pastime activity.
- Magazines and TV, two media platforms that have been so effective for the grocery store to create visibility, are losing the audience.
Importance of SWOT analysis
Using SWOT analysis for strategic planning happens in major and small organizations.
By getting the SWOT analysis right, an organization increases its chances of getting other critical business processes right. In particular, they stand to set SMART (Specific, Measurable, Achievable, Realistic, and Timely) and relevant goals and develop a strategy to achieve them with the least friction.
For example, let’s consider the fictional grocery store we looked at in the SWOT analysis example section. If it is considering expanding operations, the knee jerk decision might be to open more branches.
However, a closer look with the help of a SWOT analysis report might prove this to be a terrible goal. A better plan might be to open an online store and invest more in shipping or home delivery infrastructure.
Indeed, the SWOT analysis might direct them to where there are better opportunities and fewer threats. It could also help them identify what they need to change within their system to attain specific goals such as cutting costs and increasing efficiency.
Again from our SWOT analysis example, the grocery store should focus on reducing employee turnover. They should also train customer support teams and hire a stocking and product placement expert to improve customer experience.
Indeed, the importance of SWOT analysis in strategic planning includes helping an organization develop a list of goals for their short, medium, and long term plan. While SWOT analysis does not help prioritize these goals, it gives an organization a list to work with.
An organization also stands to foresee obstacles and opportunities way before they happen. With this information, they can plan to sidestep the obstacles and prepare to exploit the opportunities.
Who should conduct a SWOT analysis
Who should carry out the SWOT analysis of a company or any other entity?
This is a question that an organization has to consider. The obvious option is to conduct the process in-house. That means putting together an ad hoc team for the purpose, or assigning the responsibility to a particular individual.
The other option is to outsource the process to a consultant. This might seem like the proper way to go about it, especially if an organization is not confident about the skills, knowledge, and experience internally.
The ideal option is to use people within the organization. A consultant can be engaged, but only to offer the internal team technical advice on how the process should be carried out.
The one who usually conducts a SWOT analysis for a business must understand it very well. They need to have intimate knowledge about their market, customers, processes, and products. That means that even within the organization, the person picked and tasked with leading the process should be the one with the highest level of knowledge about the business.
Nevertheless, ideally, all departments should be represented in the team to carry out this process. Each department is likely to contribute information and perspective that is only with them.
Besides, the roles of everyone involved should be clearly defined, and that includes the external consultant.
When to do the SWOT Analysis
How often a SWOT analysis should be performed is another critical question an organization has to consider. It is important to point out that businesses are not the same, and therefore we can’t rely on a one fit all answer when it comes to this question.
With that said, having a SWOT analysis before the launch of a business is a necessity. It is the only way the founders can develop an actionable and realistic short, medium, and long term business plan.
Once the business is running, it might also help to carry out a SWOT analysis before the beginning of every fiscal year. The purpose of this is to match the company’s actions and resources with specific goals.
There are instances when special reasons for a SWOT analysis arise. For example, when the company is about to merge with another, acquire another, or be acquired by another.
An organization may also need to do a SWOT analysis before it carries out critical changes to its structure or product design. The same need might arise when expanding to new markets.
How to conduct a SWOT analysis
Now that you know what SWOT analysis is, how important it is to an organization, who should conduct it, and when to do it, what are the exact steps of conducting it?
The SWOT analysis process should start with the formulation of a plan, including what sources of data to rely on.
The second step is to collect data from within the organization. That starts with the team leading the process brainstorming on how to do it, and capturing their own views. The rest of the employees might be asked to fill survey forms.
The third step is to collect data from outside the organization. That includes requesting customers, suppliers, and other external stakeholders to fill in survey forms. It could also include consulting experts in different areas. For example, it may be necessary to talk to lawyers about regulation changes, economists regarding anticipated economic trends, and others.
The final step is to process and compile the data collected into a report. It has to be presented in a way that is easy to consume and implement.
How to implement SWOT analysis
Understanding how to use the SWOT analysis report is important because otherwise, all the effort is likely to go to waste. In particular, an organization has to figure out how to use a swot analysis to formulate strategies.
A SWOT analysis report is only of value if it is used in a way that improves business performance. Implementing the report should be methodical and executed with a high level of accuracy.
The first step is to make sure every management team member has read and understood the report. Each department head should then make sure that employees understand the report and, in particular, what it means regarding their individual input to the department and the organization as a whole.
Indeed, the report should become part of the company’s mission, objectives, and goals.
The goals that need to be achieved should be broken down into objectives and then further into tasks. The tasks should be assigned to the relevant departments. Each department will break down its own tasks into even smaller tasks assigned to particular teams and individuals.
For example, training customer support to increase efficiency and improve customer experience is a task that can be assigned to the human resource department. The human resource department will assign the tasks of coming up with the training manual and the instructing content to the relevant teams.
The team managers should create a framework to monitor the implementation’s progress to achieve the goals according to the plan.
Advantages of swot analysis
The advantages of SWOT analysis include:
- Simple and easy to perform
- Does not cost much to carry out
- A company does not have to engage the services of an external consultant.
- Highlights the critical factors that impact the business
- It can be used for the organization, a department, a team, an individual, and even a product.
- An apt way to give a visual overview of the status of a company and the factors affecting its operations
- It helps teams develop cohesion and collaboration by working together to generate it and having a common understanding of the company’s strengths, weaknesses, opportunities, and threats.
Limitations of SWOT analysis
The following are the disadvantages of SWOT analysis:
- Depends too much on subjective intuition.
- One must assume and trust that those performing the analysis are objective enough to capture the business’s right status.
- Lacks predictive power
- Does not capture or disclose complex and nuanced issues that affect the business
- It requires a proper understanding of the environment, which calls for environmental analysis first.
- It can be ambiguous in categorizing factors. Some factors are challenging to categorize. For instance, in our grocery store example, it is easy to categorize Shoplifting as both a weakness and a threat.
- It does not provide actual answers or solutions but only helps a business to identify gaps.
- It can’t rank the factors according to the level of impact, therefore, you need a different tool to determine the sequence of actions.
Alternatives to SWOT analysis
Of course, SWOT analysis is not the only tool that an organization can use to understand its performance. The following are some of the other tools that are used for the same purpose:
- TOWS-This is a tool that categorizes the same factors in SWOT, but emphasizing a lot more on how the different factors influence one another and how it can be exploited for its benefit. TOWS is often considered a step to be taken after the SWOT analysis has been done.
- SOAR-This is a tool that borrows two of SWOT’s four categories, Strengths, and Opportunities. It then replaces weaknesses and threats with Aspirations and Results. This makes it a lot more forward-looking than SWOT.
- NOISE-This is an analysis that has Needs, Opportunities, Improvements, Strengths, and Exceptions as its core components. It focuses more on what a business doesn’t have than what it needs to do.
- PESTLE-This is a model that focuses on how changes in the environment affect a business. The word PESTLE is taken from the first letters of the words Political, Economic, Social-cultural, Technological, Environmental, and Legal.
- Porter’s 5 Forces-This is an analysis method that focuses more on the competition. It is meant to equip a business with the ability to grow through high competitiveness.
- Benchmarking value chain-This is an analysis tool used to determine the competitive advantage through the study of others within its industry or niche.
SWOT analysis is a great tool to employ in an organization’s strategic planning. Even with its limitations, it can provide great value and even more when used to complement other management tools. In addition to businesses, it can be used to analyze the potential and performance of other entities, including individuals.