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SWOT Analysis - Do It Properly!

Ovidijus Jurevicius | 13.02.2013

Definition
1. Swot analysis an analysis of an organizations strengths and weaknesses

alongside the opportunities and threats present in the external environment.

[1]

2. Swot analysis involves the collection and portrayal of information about internal

and external factors which have, or may have, an impact on business.

[2]

3. It is a framework that allows managers to synthesize insights obtained from

an internal analysis of the companys strengths and weaknesses with those

from an analysis of external opportunities and threats.

[3]

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Understanding the tool

What is SWOT analysis? The answer to the question is simple: its a tool used for
situation (business or personal) analysis! SWOT is an acronym which stands for:

Strengths: factors that give an edge for the company over its
competitors. Weaknesses: factors that can be harmful if used against
the firm by its competitors.
Opportunities: favorable situations which can bring a competitive advantage.
Threats: unfavorable situations which can negatively affect the business.

Strengths and weaknesses are internal to the company and can be directly
managed by it, while the opportunities and threats are external and the company
can only anticipate and react to them. Often, swot is presented in a form of a
matrix as in the illustration below:

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Swot is widely accepted tool due to its simplicity and value of focusing on the
key issues which affect the firm. The aim of swot is to identify the strengths and
weaknesses that are relevant in meeting opportunities and threats in particular
situation.

[4]

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Benefits

Swot tool has 5 key benefits:

Simple to do and practical to use;
Clear to understand;
Focuses on the key internal and external factors affecting the company;
Helps to identify future goals;
Initiates further analysis.

Limitations

Although there are clear benefits of doing the analysis, many managers and
[2]

academics heavily criticize or dont even recognize it as a serious tool. According to

many, it is a low-grade analysis. Here are the main flaws identified by a research:
[2][5]

Excessive lists of strengths, weaknesses, opportunities and threats;

No prioritization of factors;
Factors are described too broadly;
Factors are often opinions not facts;
No recognized method to distinguish between strengths and
weaknesses, opportunities and threats.

How to perform the analysis?

Swot can be done by one person or a group of members that are directly
responsible for the situation assessment in the company. Basic swot analysis is
done fairly easily and comprises of only few steps:

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Step 1. Listing the firms key strengths and weaknesses

Step 2. Identifying opportunities and threats

Strengths and Weaknesses

Strengths and weaknesses are the factors of the firms internal environment.
When looking for strengths, ask what do you do better or have more valuable
than your competitors have? In case of the weaknesses, ask what could you
improve and at least catch up with your competitors?

Where to look for them?

Some strengths or weaknesses can be recognized instantly without deeper

studying of the organization. But usually the process is harder and managers have
to look into the firms:
Resources: land, equipment, knowledge, brand equity, intellectual property, etc.

Core competencies
Capabilities
Functional areas: management, operations, marketing, finances,
human resources and R&D
Organizational culture
Value chain activities

Strength or a weakness?

Often, companys internal factors are seen as both, strengths and weaknesses, at
the same time. It is also hard to tell if a characteristic is a strength (weakness) or
not. For example, firms organizational structure can be a strength, a weakness or
neither! In such cases, you should rely on:

Clear definition. Very often factors which are described too broadly may fit both
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strengths and weaknesses. For example, brand image might be a weakness if the
company has poor brand image. However, it can also be a strength if the company
has the most valuable brand in the market, valued at $100 billion. Therefore, it is
easier to identify if a factor is a strength or a weakness when its defined precisely.

Benchmarking. The key emphasize in doing swot is to identify the factors that are
the strengths or weaknesses in comparison to the competitors. For example,
17% profit margin would be an excellent margin for many firms in most industries
and it would be considered as a strength. But what if the average profit margin of
your competitors is 20%? Then companys 17% profit margin would be
considered as a weakness.
VRIO framework. A resource can be seen as a strength if it exhibits VRIO
(valuable, rare and cannot be imitated) framework characteristics. Otherwise, it
doesnt provide any strategic advantage for the company.

Opportunities and threats

Opportunities and threats are the external uncontrollable factors that usually
appear or arise due to the changes in the macro environment, industry or
competitors actions. Opportunities represent the external situations that bring a
competitive advantage if seized upon. Threats may damage your company so
you would better avoid or defend against them.

Where to look for them?

PESTEL. PEST or PESTEL analysis represents all the major external forces (political,
economic, social, technological, environmental and legal) affecting the company so its
the best place to look for the existing or new opportunities and threats.

Competition. Competitors react to your moves and external changes. They also
change their existing strategies or introduce new ones. Therefore, the company
must always follow the actions of its competitors as new opportunities and
threats may open at any time.
Market changes. The most visible opportunities and threats appear during the

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market changes. Markets converge, starting to satisfy other market segment needs
with the same product. New geographical markets open up allowing the firm to
increase its export volumes or start operations in a new country. Often niche markets
become profitable due to technological changes. As a result, changes in the market
create new opportunities and threats that must be seized upon or dealt with if the
company wants to gain and sustain competitive advantage.

Opportunity or threat?

Most external changes can represent both opportunities and threats. For
example, exchange rates may increase or reduce the profits gained from
exports. This depends on the exchange rate, which may rise (opportunity) or fall
(threat) against the home country currency. The organization can only guess the
outcome of the change and count on analysts forecasts. In such cases, when
organization cannot identify if the external factor will affect it positively or
negatively, it should gather unbiased and reliable information from the external
sources and make the best possible judgement.

Guidelines for successful SWOT

The following guidelines are very important in writing a successful swot analysis.
They eliminate most of swot limitations and improve it's results significantly:

Factors have to be identified relative to the competitors. It allows specifying

whether the factor is a strength or a weakness.
List between 3 5 items for each category. Prevents creating too short
or endless lists.
Items must be clearly defined and as specific as possible. For example, firms
strength is: brand image (vague); strong brand image (more precise); brand
image valued at $10 billion, which is the most valued brand in the market
(very good).
Rely on facts not opinions. Find some external information or involve
someone who could provide an unbiased opinion.
Factors should be action orientated. For example, slow introduction of new

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products is action orientated weakness.

SWOT analysis example A

This is a basic example of the analysis:

SWOT analysis of Company "A"

Strengths

1. Second most valuable brand in the world valued at $76 billion

2. Diversified income (5 different brands earning more than $4 billion each)
3. Strong patents portfolio (15,000 patents)
4. Investments in R&D reaching 4 billion a year.
5. Competent in mergers & acquisitions
6. Have an access to cheap cash reserves
7. Effective corporate social responsibility (CSR) projects
8. Localized products
9. Highly skilled workforce
10. Economies of scale or economies of scope

Weaknesses

1. Investments in R&D are below the industry average

2. Very low or zero profit margins
3. Poor customer services
4. High employee turnover
5. High cost structure
6. Weak brand portfolio
7. Rigid (bureaucratic) organizational culture impeding fast introduction of new

products
8. High debt level ($3 billion)
9. Brand dilution (the firm has too many brands)
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10. Poor presence in the world's largest markets

Opportunities

1. Market growth for the main firm's product

2. Growing demand for renewable energy
3. New technology, that would drive production costs by 20% is in development
4. Our country accession to EU
5. Changing customer habits
6. Disposable income level will increase
7. Government's incentives for 'specific' industry
8. Economy is expected to grow by 4% next year
9. Growing number of people buying online
10. Interest rates falling to 1%

Threats

1. Corporate tax may increase from 20% to 22% in 2013

2. Rising pay levels
3. Rising raw material prices
4. Intense competition
5. Market is expected to grow by only 1% next year indicating market saturation
6. Increasing fuel prices
7. Aging population
8. Stricter laws regulating environment pollution
9. Lawsuits against the company
10. Currency fluctuations

(If you need more examples for SWOT factors please visit our SWOT
analyses examples)

Advanced SWOT

At the most, swot is considered to be only a reference to further analysis as it has too
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many limitations and cannot be used alone in the situation analysis. The previous
guidelines identified in this article meet the most of swot limitations except one:
prioritization of factors. An advanced swot goes a step further and eliminates
this important drawback.
In a simple swot, strengths and weaknesses or opportunities and threats are equal
to each other, therefore a minor weakness can balance a major strength. Without
prioritization, some factors might be given too much or too little emphasis and the
most relevant factors might simply be overlooked.
The aim of advanced swot is to identify the most significant factors of the
analysis from all the items listed on it. How to perform it?

Step 1. Identify strengths, weakness, opportunities and threats.

Step 2. Prioritize them.

(The first step was discussed earlier so please refer to it when doing advanced
swot analysis. See example B when reading further instructions.)

Prioritization

Strengths and weaknesses are evaluated on 3 categories:

Importance. Importance shows how important a strength or a weakness is for
the organization in its industry as some strengths (weaknesses) might be
more important than others. A number from 0.01 (not important) to 1.0 (very
important) should be assigned to each strength and weakness. The sum of
all weights should equal 1.0 (including strengths and weaknesses).
Rating. A score from 1 to 3 is given to each factor to indicate whether it is a
major (3) or a minor (1) strength for the company. The same rating should
be assigned to the weaknesses where 1 would mean a minor weakness
and 3 a major weakness.
Score. Score is a result of importance multiplied by rating. It allows prioritizing
the strengths and weaknesses. You should rely on your most important

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strengths and try to convert or defend your weakest parts of the organization.
Opportunities and threats are prioritized slightly differently than strengths and
weaknesses. Their evaluation includes:
Importance. It shows to what extent the external factor might impact the
business. Again, the numbers from 0.01 (no impact) to 1.0 (very high
impact) should be assigned to each item. The sum of all weights should
equal 1.0 (including opportunities and threats).
Probability. Probability of occurrence is showing how likely the opportunity or
threat will have any impact on business. It should be rated from 1 (low
probability) to 3 (high probability).
Score. Importance multiplied by probability will give a score by which youll be
able to prioritize opportunities and threats. Pay attention to the factors having the
highest score and ignore the factors that will not likely affect your business.

SWOT analysis example B

This swot example is adopted from the previous example and additionally
includes prioritization. Underlined scores point to the most significant factors
affecting the organization.

SWOT analysis of Company 'A'

Importance

Rating

Score

Second most valuable brand in the world

0.03

0.03

Diversified income

0.01

0.02

Strong patents portfolio (15,000 patents)

0.15

0.45

Investments in R&D reaching 4 billion a

year

0.10

0.20

Strengths

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Competent in mergers & acquisitions

0.05

0.15

An access to cheap cash reserves

0.02

0.02

Effective corporate social responsibility

(CSR) projects

0.03

0.03

Localized products

0.01

0.01

Highly skilled workforce

0.08

0.16

Economies of scale/economies of scope

0.02

0.06

Investments in R&D are below the industry

average

0.03

0.06

Very low or zero profit margins

0.08

0.24

Poor customer services

0.10

0.20

High employee turnover

0.05

0.10

High cost structure

0.03

0.09

Weak brand portfolio

0.02

0.02

Bureaucratic organizational culture

0.03

0.03

High debt level ($3 billion)

0.03

0.03

Brand dilution (the firm has too many

brands)

0.01

0.01

Poor presence in the world's largest

markets

0.12

0.24

Importance

Probability

Score

Weaknesses

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Opportunities
Market growth for the main business
product

0.10

0.20

Growing demand for renewable energy

0.01

0.01

New technology is in development

0.13

0.13

Our country accession to EU

0.05

0.15

Changing customer habits

0.05

0.05

Disposable income level will increase

0.02

0.06

Government's incentives for 'specific'

industry

0.03

0.06

Economy is expected to grow by 4% next

year

0.01

0.02

Growing number of people buying online

0.08

0.24

Interest rates falling to 1%

0.02

0.06

Corporate tax may increase from 20% to

22% in 2013

0.12

0.24

Rising pay levels

0.03

0.06

Rising raw material prices

0.09

0.27

Intense competition

0.07

0.07

Market is expected to grow by only 1% next

year

0.05

0.15

Threats

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Increasing fuel prices

0.01

0.03

Aging population

0.01

0.03

Stricter laws regulating environment

pollution

0.01

0.01

Lawsuits against the company

0.02

0.02

Currency fluctuations

0.09

0.18

Sources
1. Thompson, J. and Martin, F. (2010). Strategic Management: Awareness

& Change. 6th ed. Cengage Learning EMEA, p. 140, 817

2. Pickton, D.W. and Wright, S. (1998). Whats swot in strategic analysis?

Strategic Change Vol. 7, pp. 101-109, 105-106

3. Rothaermel, F. T. (2012). Strategic Management: Concepts and Cases.

McGraw-Hill/Irwin, p. 105-106
4. Johnson, G, Scholes, K. Whittington, R. (2008). Exploring Corporate

Strategy. 8th ed. FT Prentice Hall, p. 156, 160

5. Coman, A. and Ronen, B. (2009). Focused SWOT: diagnosing critical

strengths and weaknesses. International Journal of Production Research

Vol. 40, Issues 20, pp. 56775689
6. Kotler, P. (1991). Marketing Management. 7th ed. Prentice-Hall
7. David, F.R. (2009). Strategic Management: Concepts and Cases. 12th ed.

FT Prentice Hall, p. 125-126, 166-168

8. Virtual Strategist (2008). SWOT analysis: How to perform one for

your
organization
(VIDEO).
Available
http://www.youtube.com/watch? v=GNXYI10Po6A

at:

9. Wikipedia (2013). SWOT analysis. Available at: http://en.wikipedia.org/wiki/

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SWOT_analysis

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