The SWOT analysis is an instrument used by businesses and organizations to organize internal and external factors that affect a product or business into separate categories. Due to its simplicity, the SWOT is a popular method for companies to identify their competitive advantages and disadvantages. The outcome of a SWOT analysis can be used to make strategic decisions that are consistent with a company’s capabilities.
On the internal side, you will want to gain a sense of the organization’s strengths and weaknesses; on the external side, you will want to develop some sense of the organization’s opportunities and threats. Together, these four inputs into strategizing are often called SWOT analysis which stands for strengths, weaknesses, opportunities, and threats.
The SWOT can be used to help organizations answer four basic questions during the strategic planning process:
- What can we do?
- What do we want to do?
- What might we do?
- What do others expect us to do?
Strengths (Internal Environment)
A firm’s strengths are, to put it simply, what it is good at. Nike is good at marketing sports products, McDonald’s is good at making food quickly and inexpensively, and or example, American Express is good at maintaining a prestigious brand reputation and affluent customer base. When a firm analyzes its strengths, it compiles a list of its capabilities and assets. Does the firm have a lot of cash available? That is a strength. Does the firm have highly skilled employees? Another strength. Knowing exactly what it is good at allows a firm to make plans that exploit those strengths – also known as competitive advantages. Nike can plan to expand its business by making products for a sport it doesn’t currently serve. Its sports marketing expertise will help it successfully launch that new product line. The hardest thing for an organization to do is to develop its competitive advantage into a sustainable competitive advantage where the organization’s strengths cannot be easily duplicated or imitated by other firms, nor made redundant or less valuable by changes in the external environment.
Weaknesses (Internal Environment)
A firm’s weaknesses are what it is not good at—things that it does not have the capabilities to perform well. Weaknesses are not necessarily faults—remember that not all firms can be great at all things. When a firm understands its weaknesses, it will avoid trying to do things it does not have the skills or assets to succeed in, or it will find ways to improve its weaknesses before undertaking something new. A firm’s weaknesses are simply gaps in capabilities, and those gaps do not always have to be filled within the firm. While we identified one of American Express’ strengths above, we could also say that the fact that fewer merchants accept its card over its rivals – Discover, MasterCard, and Visa – is a weakness for the company.
Opportunities (External Environment)
While strengths and weaknesses are internal to an organization, opportunities and threats are always external. An opportunity is a potential situation that a firm is equipped to take advantage of. Think of opportunities in terms of things that happen in the market. Opportunities offer positive potential, however sometimes a firm is not equipped to take advantage of an opportunity which is why considering the entire SWOT is important before deciding what to do. For example, as cities are becoming more populated, parking is becoming scarcer. Younger consumers who live in cities are starting to question whether it makes sense to own a car at all, when public transportation is available and parking is not. This change in demographics and consumer preferences itself is the opportunity that would appear on a SWOT chart. By analyzing external opportunities as part of a broader strategic analysis, companies can enhance or adapt their business models. For example, while many young city residents opt out of owning a car, they sometimes still might need a car to travel outside the city or have access to a vehicle to transport a special purchase. Daimler, the manufacturer of Mercedes-Benz and Smart cars, started a car-sharing service in Europe, North America, and China called Car2Go to offer cars to this new market of part-time drivers. By establishing Car2Go, Daimler has found a way to sell the use of its products to people who would not buy them outright.
Threats (External Environment)
When managers assesses the external competitive environment, they labels anything that would make it harder for their firm to be successful as a threat. A wide variety of situations and scenarios can threaten a firm’s chances of success, from a downturn in the economy to a competitor launching a better version of a product the firm also offers. A good threat assessment looks thoroughly at the external environment and identifies threats to the firm’s business so it can be prepared to meet them. Opportunities and threats can also be a matter of perspective or interpretation: the Car2Go service that Daimler developed to serve young urban customers who don’t own cars could also be cast as a defensive response to the trend away from car ownership in this customer group. Daimler could have identified decreasing sales among young urban professionals as a threat and developed Car2Go as an alternative way to gain revenue from these otherwise lost customers.
The SWOT analysis can alert firms to gaps in their capabilities so they can work around them, find help in those areas, or develop capabilities to fill the gaps. For example, Paychex is a firm that handles payroll for over 600,000 firms.1Paychex (2017). Company History. https://www.paychex.com/corporate/history.aspx Accessed July 28, 2017. Paychex processes hours, pay rates, tax and benefits deductions, and direct deposit for firms that would rather not have to perform those tasks themselves. A large firm would need to have a team of employees dedicated to fulfilling that task and equip that team with software systems to do the job efficiently and accurately. For Paychex, these capabilities are a company strength—that’s what it does. Other companies that do not have the resources to develop this capability or may not be interested in doing so can hire Paychex to do the job for them.
The Limitations of SWOT Analysis
Although a SWOT analysis can identify important factors and situations that affect a firm, it only works as well as the person doing the analysis. The SWOT can generate a good evaluation of the firm’s internal and external environments, but it is more likely to overlook key issues because it is difficult to identify or imagine everything that could be a threat to the firm.
Avoid a Common Mistake
Most students do well with strengths and weaknesses but lose points on their opportunities and threats. Remember that opportunities and threats must come from the company’s external environment. As you place factors into these boxes, ask yourself, “Is this something the company can control?” If the answer is “Yes”, then it likely isn’t an external factor and should not be listed as an opportunity or threat. For example, some students may try to classify “healthier menu options” as an opportunity for McDonald’s. Because McDonald’s has control of its menu selection, this would be an internal factor. In this case, McDonald’s “lack of healthy menu items” should actually be classified as an internal weakness. Or, the broader “consumer-driven trend toward healthier food options” could be considered an external threat because it reflects an external sociocultural trend that could harm McDonald’s business model.
SWOT Analysis by Mark Parfitt, 2020 is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. This is a remix derivative adapted from the following Creative Commons open educational resources: Launch! Advertising and Promotion in Real Time by Saylor Publishing, 2012; Principles of Management by Saylor Publishing, 2012; Principles of Management by David S. Bright & Anastasia H. Cortes, OpenStax, 2019.
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