SWOT analysis is a tool that offers a wide range of means for strategic planning.
Why is it different from the others and when is it more appropriate to use it?
And, of course, what does it consist of in detail?
In this guide we will answer all the questions that are now going through your head.
How many times – in everyday life and for various reasons – do you find yourself evaluating the pros and cons of one choice rather than another?
So many that you probably don’t even notice.
This is not the case for companies which, on the other hand, are aware that each objective corresponds to a series of appropriate reasoning and expected future scenarios.
In this sense, starting from the 60s / 70s of the last century, one of the main techniques available to them is the so-called “matrix” or “analysis” SWOT.
The authorship of this model is still debated today – some associate it with the American University of Stanford. And, in particular, to the person of Albert Humphrey.
He, on the other hand, has never claimed it – but it is certainly Anglo-Saxon in style.
ALTERNATIVE MEANS TO SWOT ANALYSIS
As mentioned, SWOT analysis is a means of strategic planning like many others: what are they and how do they work?
Without claiming to be exhaustive with the entire range, the three most suitable will be considered in the next paragraphs.
As well as the VRIO reference model – for comparative reflection: PEST Analysis, Porter’s Five Forces Analysis and BCG Matrix.
PEST ANALYSIS
The first of these is the PEST Analysis, which can also be used in conjunction with – or before – the SWOT Analysis.
Its purpose is to intercept external changes that affect the conditions in which the company operates. And to ensure that these are positively exploited.
On the contrary, the firm would remain at the mercy of events that are beyond its control.
The major difference with the SWOT matrix is that the latter focuses less on external factors and more on internal responses.
PEST ACRONYM OF 4 VARIABLES: POLITICS, ECONOMICS, SOCIETY AND TECHNOLOGY
- Politics : includes, for example, the issuing of new legislation by the government.
They can allow / prohibit certain practices or outlaw the action of certain actors / competitors.
Reference is also made to the entry of the state into certain sectors (tobacco, gambling). Or to the regulation of workers’ rights. - Economy : it means, among others, that a crisis or an economic boom can respectively determine a restriction. Or a present / future increase in the expenses of users and public administrations.
As well as the general ability to access credit – understood as how to obtain loans and at what interest rates. - Society : implies changes in citizens’ attitudes / perceptions regarding key issues.
Changes that may be due to news events or the influence of the respective ‘social bubbles’ of belonging.
Similarly, a demographic boom or a decline in births can have, this time more in the long term than in the short / medium term, considerable effects on the demand or supply of services. - Technology : it has to do with the new scientific discoveries that apply to the production process.
Or with the improvement / construction of new infrastructures that are added to the existing ones.
As in the case of the adoption of high-speed railway lines or the construction of a canal that allows to reduce maritime navigation times.
And, therefore, of the delivery of containers with goods – the consequence of which is to alter the environment in which a company operates.
Once these factors have been identified, it will be necessary to separately identify which opportunities and which threats loom ahead and, of course, act accordingly.
WHEN NOT USING SWOT ANALYSIS: THE TRANSITION FROM PEST TO SLEPT
In more recent times, the PEST analysis sometimes integrates another factor – Legal – becoming SLEPT.
For example, we think about the jurisprudence that has been consolidated in the courtrooms or about the rights of the consumer.
Insisting on this point, sometimes the SLEPT analysis integrates two other factors, which are Environment and Ethics:
- Environment can mean an expected abundance or shortage of resources.
For example in the hydroelectric sector.
That is, due to extended periods of drought or to the drying up of the surrounding aquifers due to excessive human exploitation.
Or of non-renewable natural resources – oil, copper etc. – with regard to the mining industries. - Ethics takes into account the positive / negative responses of customers / media / holders of interests in various capacities ( stakeholders ).
A blatantly denier attitude of climate change, for example, could be the subject of a protest campaign by an influential environmental group.
ANALYSIS OF PORTER’S 5 FORCES
Another strategic planning tool available to businesses is the “five competitive forces model” (or Porter’s five forces analysis).
Its purpose is to assess the degree of competitiveness of the company in relation to the competition.
Again, integration with SWOT Analysis is possible.
First theorized in 1979, it includes – as the title suggests – five factors that determine which elements make the firm’s strategy a profitable one.
And, moreover, attractiveness in the market in a long-term scenario.
The greater the intensity of these forces, the lower the profitability. These are the following variables:
DIRECT COMPETITION
It is understood as coming from companies operating in the same sector.
The more companies, the more difficult it is to exploit a series of competitive advantages.
Likewise, the greater the diversity between companies, the more likely it is that one or the other will be able to escape a logic based solely on price.
For example, because they are more creative in the creation of the product or in its promotion.
ENTRY POTENTIALS
The lower the barriers to entry into the sector, the higher the likelihood of new companies joining the ranks of competitors.
The strength of an entrant can be measured by the amount of investments he can make.
In addition to the previous knowledge of the sector and goods, its reputation, perhaps consolidated in another economic branch.
And to the links with the distribution apparatus or the possession of the means necessary to distribute the products on their own and without the need for intermediaries.
THE PRODUCTION OF SUBSTITUTE GOODS
Different from those of the reference company, they satisfy the needs of the consumer in the same way – or more – by influencing sales.
The scenario may arise in the case of products with a better quality / price ratio.
PROVIDERS
Intended as those from whom the company purchases the raw materials or semi-finished goods it needs to complete its production process.
When they are few, suppliers have a lot of power and can decide either to raise prices – decreasing supply – or to join together.
The entire procurement cycle depends on their decisions.
One of the possibilities that the company has in order not to be found unprepared is to respond by providing alternative starting goods to create the same final goods or through a diversification of the final product.
CUSTOMERS
The recipients of the company’s output.
They have the ultimate power to influence the sales cycle either by privileging a competitor or by becoming producers and, therefore, competitors of the company.
Once the brainstorming has been completed, the company will evaluate the best strategies to pursue to respond to these forces, to which two more have recently been added.
That is, the presence of producers of complementary goods and the intervention of government agencies / state regulatory bodies.
BCG MATRIX
The third tool that is considered in this guide is the BCG Matrix, also – like the SWOT analysis – composed of four areas extended on the Cartesian plane.
The horizontal axis – x-axis – allows you to compare your market share with that of the strongest competitor.
If the value is greater than one, you are in the leading position; if, on the other hand, it is lower, one is in the position of competitor of the reference company.
Instead, the vertical axis – y-axis – describes the market growth for a given product, i.e. the current market volume compared to that of the previous period.
THE VALUE IS EXPRESSED IN PERCENTAGE
On the basis of these two dimensions, a classification of the products is made into the four types mentioned, which are the following:
- Question mark (the upper left quadrant).
The products that are part of it are those that have only recently made their appearance on the market.
And that, therefore, have drawbacks when estimating their future development – that is, they may or may not be successful.
These assets have low market shares and depend on large investments to generate greater volumes of business. - Star (top right): products with a high and growing market share. Here, too, substantial investments are required, above all to face the competition that sees unexpressed potential.
- Cash cow (bottom right): some Star products sometimes flow into this category where the goods have a very high yield.
And important market shares to the point that the market no longer has ample room for growth.
It develops in few significant volumes or remains stable.
The gain is almost guaranteed – and serves to finance the other three areas – until the system enters a phase of decline.
The investments of the single company are generally smaller and purely defensive of the previously invested capital. - Dog (bottom left): they are, finally, products or services with low market shares whose growth is marginal or even negative which makes them unprofitable.
Firms generally tend to disengage invested capital before the losses are too great.
However, the model is not totally inclusive because it ties the company’s competitive advantages to only two factors. And it does not sufficiently take into account other factors such as external ones (which were seen with the two previous instruments).
SWOT ANALYSIS: OBJECTIVES AND RESULTS
So far we have seen three alternative methods – or, sometimes, complementary as in the case of PEST analysis and Porter’s five forces.
Now is the time to proceed with a complete guide to SWOT analysis.
Let’s start by saying that, even on this occasion, it is the acronym itself that defines the stakes of brainstorming.
SWOT means, in fact, Strengths-Weaknesses-Opportunities-Threats (in Italian: Strengths-Weaknesses-Opportunities-Threats).
After setting goals, the firm will insert these factors into a 2 × 2 matrix.
So composed of four sections – where two distinctions are made: positive / negative factors (on the one hand Strengths and Opportunities; on the other Weaknesses and Threats) and internal / external factors (therefore Strengths-Weaknesses and Opportunities-Threats respectively) .
Clearly, that factor over which the firm has direct control is internal.
For example, personnel and finance management, arrangement of production capacity or even choice on the location of branches.
While the external ones are not controllable and are to be considered to be exploited in one’s favor or to prevent them from damaging the business.
Among these are changes in the legislative order or in the political orientation of the executive, the economic situation.
In addition to an increase / decrease in competition, the behaviors / policies of other companies or suppliers that are part of the sector and so on.
DEFINITION OF THE 4 FACTORS
Instead, what do the four factors we have seen mean? We can describe them as follows:
- Strengths (upper left quadrant: internal and positive factor – to be maintained).
Given a goal, what are the positive factors available to the company to achieve it?
Consequently, a strength will be identified by determining what are the competitive advantages of the company, if it has an advantage over its competitors (and why) or if there is an element that pushes customers to purchase products.
Similarly, the existence of a precise corporate culture, the scope of the brand and the presence of a clear organizational structure will also be considered. - Weaknesses (upper right quadrant: internal and negative factor – to improve). What makes it more difficult to achieve the objectives set?
In answering this question, the company will question the complaints of customers, the lack (of stimuli, knowledge, resources, etc.) of the working groups.
As well as on the narrowness of the brand or the scarcity of corporate culture. - Opportunities (lower left quadrant: external and positive factor – to be exploited).
What external factors can help the business grow?
Among the scenarios taken into consideration there will be legislative, macroeconomic, social changes – as well as consumer tastes. In the same way, it will be considered whether new suppliers have appeared on the market, in charge of large-scale distribution or technological tools that allow for lower costs. - Threats (lower right quadrant: external and negative factor – to be circumscribed).
Finally, questioning the threats to business means weighing the potential of competition, the (decreasing?) Development margins of the reference market.
As well as the prospects of an increase in the costs of raw materials and / or semi-finished goods or of a legislative change that restricts the range of choices available to the company.
EXPLANATION OF THE 4 FACTORS
With respect to the first factor, cases such as privileged access in the purchase / procurement of a raw material, such as hydrocarbons in the energy sector or wool in the textile sector, are exemplary.
Or have a large amount of data: this is the case of giants like Google or Apple.
Or even having developed a scientific patent – consider, in this regard, an active ingredient in the pharmaceutical sector.
One of these will give the firm a solid foundation from the competition.
These are key competences / resources possessed and it is possible to recognize them thanks to the so-called VRIO Model, where the English-speaking acronym stands for Valuable (of value), Rare (rare), Inimitable (difficult or impossible to imitate).
And finally, Organized (organized in the sense of a company that is able to exploit the resource / advantage in question to obtain value).
THE PROCEDURE
In a practical sense, it proceeds as follows:
- If the element allows you to take advantage of an opportunity or mitigate a threat, it is right to consider it a strength; otherwise, it must be discarded.
Next, it must be understood whether – in addition to being of value – it is also rare. - Therefore, the hypothetical resource must not be abundant (but reasonably obtainable in the long term, therefore not exploitable in the short term).
Conversely, if these conditions are not present, it is not a competitive advantage. - At this point the question arises: is it an imitable advantage (duplication) or can it be replaced with other means and resources?
If the answer to either question is yes, the competitive advantage is temporary. And it will not be enough to guarantee a lasting positive cycle for the company. - Finally, if it has been seen that the advantage is difficult to imitate or replace in other forms, the company only has to ask itself if it is able to fully exploit its potential.
The answer to this last question lies – among others – in an analysis of the degree of internal organization, of the effectiveness of the control chain. And the ability to remedy the errors in the production process that are available to the company.
THE ANALYSIS
The treatment of the second factor is, at this point, specular. With the difference that – to be taken into consideration – will be exactly the competitive shortcomings of the company.
If a resource / competence does not pass the selection of the VRIO model – and, in particular, if it does not go beyond the wording Valuable – it will be a weakness.
As for the third and fourth factors, being both external and therefore outside the control of the company, it has been said that the PEST Analysis and Porter’s five forces are certainly useful.
In this sense, the first thing to observe is that every reasoning that includes external agents starts from the so-called “macro-trends”.
That is to say a series of particularly consolidated political / economic / technological / social trends, etc.
And over which the company has very little or no possibility of influence.
In selecting the opportunities and threats to be taken into account most for a comprehensive risk assessment, you will need to proceed by creating a table.
The lines represent the probability level, which can be “very high”, “medium”, “low” and “very low”.
On the other hand, the columns represent the level of expected repercussions / effects.
In this sense, we proceed from 1 (very negligible effects) to 4 (very important effects).
On the one hand, when cross-referencing data, a firm will have to pay particular attention to external factors that combine a “very high” probability with level 4 effects.
Conversely, factors will gradually lose priority until they have “very low” probability and level 1 effects at the same time.
TRACKING THE PRIORITIES
Fill in all four boxes (Strengths-Weaknesses-Opportunities-Threats), you will have a complete picture of the factors to be considered.
In this way it is possible to proceed with the realization of the objective (or objectives) that the company has set itself.
This will be as detailed as possible when the SWOT Analysis has been detailed.
That is, the more actors and the more points of view have been involved, the greater the debate will have been.
And with him the subjectivity of the elements considered, such as the variety of the items in question.
Obviously, this has respectively less or no value in the case of very small or self-managed companies.
It will be of equal importance to have started with a series of quality information.
However, it is foreseeable that, for some reasons, this will not happen.
The information may be unavailable, inaccessible, otherwise interpretable, unreliable.
Or, again, due to linguistic uncertainties (translated with approximation or not fully understood in their original sense).
Finally, the information could simply refer to phenomena that are objectively difficult to catalog. And to predetermine another type of uncertainty (precisely, objective and not subjective).
Net of these considerations, at this point there will be some particularly inclusive lists, where the points could even be partially contradictory.
SEE WHAT IS EMERGING IN EACH OF THE DIALS
Looking at the guidelines seen above, it will be necessary to see what emerged in each of the four quadrants.
And make some cuts in order to get narrower lists. Ideally comprising one or two factors at most per category.
Once the main factors to be taken into consideration have been outlined, and ascertained that the objective is achievable with the means available, an action plan will be defined. In order to limit the waste of human capital and investments.
Working on the two external factors, this will mean above all:
- Prepare – starting from opportunities – new methodologies. They must make it possible to exploit the strengths already present. And to reduce those of weakness in order to create other opportunities. In addition, in the long run, other strengths.
- Starting with threats, leverage existing strengths to minimize their impact. And, at the same time, avoid that these aggravate the weaknesses.
As it turns out, there is a bit of all four tools seen earlier in the SWOT analysis.
The PEST and Porter analyzes are primarily concerned with external factors and are actually useful as a basic exercise.
The VRIO model and the BCG matrix are useful in reference to the strengths of the company. In many cases, however, none of these seem to offer the same overview.
SOME EXAMPLES
In the previous paragraphs we proceeded with a guide to the SWOT Analysis and the principles to follow for its optimal use.
But what kind of company uses it?
In addition to large, small and medium-sized enterprises (SMEs) – also NGOs and government bodies and the aim is to make strategic decisions, as seen.
Strategic implies, among other things, that these decisions are sustainable over the long term.
And they influence a series of aspects such as how the company is managed internally and how it relates to the outside.
A company may, for example, want to acquire new market share. Consider streaming video, as Amazon Prime did. But, be undecided about if and how to do it.
It could also add another good. For example, a type of shoe with memory foam or trekking shoes higher than 2 centimeters, to those it already produces and which have guaranteed profits so far.
Will it be appropriate to invest in a sector that is still a niche or will there be a risk of being trapped in a Dog sector?
Or again, in the field of marketing, should a company choose to develop a software itself rather than use an open source one?
And, in the case of the second hypothesis, which shareholders should it rely on and in anticipation of what benefits?
The SWOT Analysis cannot provide all the answers.
There are many variables to consider. And it is still a process of human abstraction that presents a certain possibility of error.
However, it is one of the best tools and does not require a lot of effort.
The habit does not make the monk, but his decisions, yes, define his conduct.
