SDA Professor of Strategic and Entrepreneurial Management
In a strategy process, the current situation is often depicted as a SWOT (strengths, weaknesses, opportunities, threats) analysis. A SWOT analysis is not much more than a simple listing of the factors falling under the four categories. It highlights the interaction among the company’s strengths and weaknesses, and the opportunities and threats in the marketplace. Strengths and weaknesses are judged by comparing the company’s own resources and capabilities with those of (potential) competitors. Opportunities and threats are determined through market analysis.
Surveys have revealed that the SWOT analysis ranks very high in the list of the most often used management tools. Maybe because the methodology is apparently simple to understand and to use. In a brainstorming session, it is relatively easy to come up with a list of internal and external factors that potentially shape the future of the firm.
However, I have seen too many flawed SWOT analysis’ in my professional life. The purpose of the article is therefore to discuss the most common mistakes made while using the tool and to contribute to a more sophisticated application of the SWOT methodology.
Five common mistakes
Here's a list of the five most common mistakes:
- Not a corporate strategy tool. The SWOT analysis is not a corporate strategy tool as it does not support resource allocation decisions. It can only be used in relation to a specific market segment with the objective to develop a competitive strategy. Hence, you should not try to make a SWOT analysis for an entire firm, but for specific market segments the firm is competing in.
- SW ≠ OT. Another common mistake in the use of this method is confusing the SW and the OT. When analysing opportunities and threats in themarketplace,managers should not think about their own company’s situation but try to identify the general trends of the specific market segment. Failure to remember this important point can lead to misunderstandings and incorrect assumptions, as would be the case if the following statement was placed under the “opportunities” category: “Because we have a strong brand name (= strength), there is a market opportunity.” In fact, by using a SWOT analysis incorrectly, the company may find itself in a saturated market where customers prefer the product with the lowest price to the product with a strong brand name.
- In a nutshell. The SWOT analysis is not a brainstorming tool, but serves as a method to summarize a more detailed analysis of the situation the company is in. Strengths and weaknesses, for example, are identified in a detailed benchmark analysis that compares a firm’s resources and capabilities with the ones of its peers.
- Threat or opportunity? Some management teams lack a method to distinguish threats from opportunities. Is e-learning and Massive Open Online Courses an opportunity for the executive education segment of Bocconi? Probably, one has to drill down more deeply and sub-segment the executive education market. Is increasing digitalization of learning positive an opportunity for the full-time MBA? To respond, one has to understand the impact this market trend has on the average profitability of existing market players. In other words, opportunities are market trends that increase the attractiveness of a market segment.
- The foundation for a vision statement. The SWOT analysis should not end with a laundry list of strengths, weaknesses, threats and opportunities. Instead, the analysis should highlight the gaps between the market requirements and the current resources and capabilities of the firm and identify strategies to close these gaps. The SWOT analysis is therefore a tool to develop a vision statement: how do we see the firm in the market in 5 to 10 years? The vision statement should focus on the gaps, i.e. opportunities that are strongly linked to a firm’s strengths as well as threats that hit an area where the firm has weaknesses. Therefore, the SWOT matrix should list the SWOT elements outside the matrix and focus inside the matrix on listing vision and strategies.
If you manage to avoid these 5 major mistakes, the SWOT analysis can be a useful tool to summarize your insights of the situation analysis and to guide you towards a vision statement that contains clear indications for change.
The SWOT Analysis inside the Strategy Process
The strategy process is like a visit to the doctor. At the doctor’s office, the first stage after an initial consultation is usually to take blood tests, check the patient’s blood pressure and examine other factors. This might be equivalent to an analysis of performance indicators in the business world.
Then, based on the laboratory report and other results, the doctor can start phase two: identifying problem areas. In business terms, this phase two might be identification of strategic themes. If the patient is overweight, has high cholesterol or suffers from high blood pressure, the doctor will analyze how the risk of a heart attack can be minimized. An examination of the patient’s eating habits and lifestyle are then required. In management terms, this might be similar to the first analysis of the market, company resources and company capabilities.
As the figure shows, the SWOT analysis is used in a strategy process to summarize the situation analysis and support the development of a vision.
Following the second phase, the doctor will then make a diagnosis that clearly defines the causes of the present situation. A prognosis for the future state of health is often made as well, such as “If you continue living in this manner, you have a maximum of five years left to live”. In order to change this situation, a vision of a healthier life is worked out in collaboration with the patient. Goals might be established: quitting smoking, no liquor or fatty foods, a blood pressure of 110/90, weight loss of 14kg, regular exercise and less stress. In order to realize this vision, a strategy must be developed and a path mapped out. The doctor describes this as treatment.
Putting this proposed treatment into practice demands a great deal of self-discipline. Suggestions for supporting the treatment strategy might include a stay at a health spa or a period of reduced working hours. Regular checkups with the doctor and possible changes in treatment ensure that the process continues and the patient’s health is maintained or even improved.
This analogy of a visit to the doctor – in which a process encompassing a number of various stages, such as analysis (including SWOT), planning, prevention and response, is launched and then repeated – can easily be applied to any business.