Aug 2 / Ray Fletcher

A comprehensive approach to SWOT

What is a SWOT?

SWOT, an acronym for Strengths, Weaknesses, Opportunities, and Threats, is a strategic planning tool designed to help organizations develop strategies by leveraging their strengths to address weaknesses and exploiting opportunities to mitigate threats. Developed in the 1960s by Albert S. Humphrey, a revolutionary figure in business strategy, SWOT has remained a vital tool in today's dynamic business environment despite some opinions that it has become outdated.

The misconception about SWOT's effectiveness often stems from its traditional approach, which has limitations. SWOT must be used in conjunction with other situational analysis tools to provide a clear picture of a company's standing in the competitive landscape. When used in isolation, SWOT can result in a superficial list of observations about the organization's strengths, weaknesses, opportunities, and threats. To be truly effective, SWOT analysis should be integrated with other strategic planning tools to develop comprehensive and actionable insights.

The Correct Way to Conduct a SWOT

A SWOT analysis is not merely a simple list of strengths, weaknesses, opportunities, and threats compiled during a quick workshop session. Critics argue that SWOT’s simplicity, lack of actionable insights, and isolated use limit its effectiveness. However, these criticisms overlook that SWOT was never intended to be used in isolation.

A successful SWOT analysis requires extensive preliminary work. It is the culmination of thorough internal and external analyses and a deep understanding of the business model. Think of it as a formula: internal analysis + external analysis + business model canvas analysis = SWOT.
It is important to note that during the development of a SWOT, the focus is not on analyzing but on observing, researching, and immersing oneself in a discovery process. The analysis comes later, once all relevant information has been gathered and integrated.
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How to Conduct a SWOT Analysis

Step 1: Conduct an External Analysis

An external analysis involves examining external factors that can affect an organization. These factors are generally beyond the control of the company but can have a significant impact on its performance. Thus, the first step in the process of generating a SWOT is to identify these external forces, the analysis comes later. 

There are many external analysis tools you can use to complete this step. We encourage you to do some research into the different analysis tools you can use and choose the ones that suit your needs best. We present two popular analysis tools for this stage: PESTEL and Porter's 5 Forces. 
PESTEL

PESTEL can be used to identify macro-environmental forces that could benefit or damage an organization. There are 6 forces in PESTEL which correspond to each letter in the tools name, they are, political, economic, social, technological, environmental, and legal.

Political: Include all political factors that could influence your companies position in the marketplace such as new policy, taxes, and duties

Consider:

+ Elections
+ Labor and tax policies
+ Government funding
+ Subsidies
+ Lobbyists and interest groups

Economic: Include any macro or micro economic factors that could influence your organization's decision making. These could be long term trends or cyclical events.

Consider:

+ Inflation
+ Interest rates
+ Sentiment
+ Compound Annual Growth Rates

Social: Include social and cultural trends that could impact your offering or brand in the marketplace.

Consider:

+ Segment demographics
+ Customer lifestyles
+ Beliefs
+ Education levels
+ Branding trends

Technology: Include all technological developments that could impact your organization.

Consider:

+ Automation
+ Internet of Things
+ Technology requirements
+ Advances in production or distribution
+ Artificial Intelligence

Environmental: Include environmental trends, needs, or constraints that might influence your organization.

Consider:

+ Environmental Policies
+ Resources Availability
+ Customer Beliefs
+ Energy
+ Sustainable Practices

Legal: Include any changes in laws and regulations that may impact an organization. 

Consider:

+ Competitive regulations
+ Health and safety
+ Copyrights and patents
+ Import / Export
+ Compliance

Porter's 5 Forces
 
Porter's 5 Forces is a competitive analysis tool used to assess industry-specific factors. This tool differs from PESTEL in that it focuses more on the organization's industry rather than the broader macro-environment. While PESTEL examines external factors such as political, economic, social, technological, environmental, and legal aspects, Porter's 5 Forces delve into the competitive dynamics within the industry. These five forces surround companies, presenting both challenges and opportunities.
 
1. Competitive Rivals: Identify your direct and indirect competitors and assess similarities and differences in your value proposition, prices, positioning, and promotions.

2. Threat of New Entrants: Evaluate the barriers to entry within your industry. Various factors can help determine how easy it is to enter your market, such as value proposition differentiation, capital requirements, and regulations. Your goal will be to develop strategies that can shield your organization from the risk of new entrants.

3. Power of the Supplier: Evaluate the number of suppliers you rely on and determine the level of dependence on each one. Organizations tied to key suppliers are at risk of price hikes and high switching costs.

4. Customer or Buyer Power: Assess the strength of your buyers. Higher buyer power means it is easier for them to leave and find alternatives to your product or service.

5. Threat of Substitutes: Consider how easy or difficult it is for customers to find alternatives to your product or service. Are substitutes better or cheaper elsewhere? What keeps your customers loyal to you?

External Analysis Summary

An external analysis involves both broad and focused assessments. It is twofold: one tool examines macro-environmental trends, while the other addresses your specific industry. By the end of this process, you'll have a comprehensive understanding of the threats and opportunities your organization currently faces.

Step 2: Conduct an Internal Analysis

The primary purpose of an internal analysis is to generate a detailed list of the organization's strengths and weaknesses. This analysis identifies areas where the organization excels and areas needing improvement. The process starts by identifying and describing resources and capabilities, followed by a VRIO analysis to evaluate how effectively the organization utilizes these assets. This structured approach ensures a thorough understanding of the internal environment, paving the way for strategic planning and gaining a competitive advantage.

Capabilities and Resources

Understanding the resources and capabilities of your organization is crucial for crafting creative strategies that leverage your strengths and address your weaknesses, ultimately leading to a sustainable competitive advantage. Knowing your unique resources and capabilities helps in differentiating your offerings from competitors and forming strategies that capitalize on your strengths while mitigating weaknesses.

Resources vs. Capabilities

Understanding the difference between resources and capabilities is vital for a comprehensive internal analysis. This knowledge helps develop stronger strategies that leverage existing assets and enhance the organization's ability to perform critical activities, ensuring a sustainable competitive advantage.

Resources are the assets an organization possesses. They can be tangible or intangible:

+ Tangible Resources: Physical assets such as buildings or machinery.
+ Intangible Resources: Non-physical assets such as brand reputation, customer understanding, patents, and human capital.

Capabilities refer to an organization’s ability to utilize its resources effectively to achieve desired outcomes. They encompass the processes and activities a company excels at. 

Examples include:

+ Operational Capabilities: Efficient processes with high-quality control.
+ Innovative Capabilities: Research and development activities.

VRIO Framework

The VRIO framework is a strategic planning tool used to evaluate the effectiveness of an organization’s capabilities and resources. It stands for Valuable, Rare, Inimitable, and Organization. These four dimensions help determine whether a resource or capability can provide a lasting competitive advantage:

1. Valuable: Does the resource or capability enable the organization to exploit opportunities or neutralize threats?

2. Rare: Is the resource or capability unique among current and potential competitors?

3. Inimitable: Is the resource or capability difficult for competitors to imitate or substitute?

4. Organization: Is the organization structured and managed in a way that allows it to fully exploit the resource or capability?

By applying the VRIO framework, organizations can systematically evaluate their resources and capabilities to identify which ones offer a sustainable competitive advantage.
Step 3: Conduct a Business Model Canvas Analysis

Another valuable tool to enhance your SWOT analysis is the Business Model Canvas, originally developed by Alex Osterwalder. The Business Model Canvas helps you describe and visualize the interactions between your value proposition and how it is delivered.

The template consists of nine sections, each designed to cover critical aspects of a business model. These nine sections can be grouped into three main areas: Frontstage, Backstage, and Profit Formula.

Frontstage:

The Frontstage refers to the elements of the Business Model Canvas that interact directly with customers and define the customer experience. These sections focus on how the company presents itself to its customers and how it delivers value to them.

+ Customer Segments: The specific groups of people or organizations the business aims to serve.

+ Value Propositions: The unique bundle of products and services that create value for customers.

+ Channels: The means by which the company communicates with and delivers value to its customer segments.

+ Customer Relationships: The types of interactions a company establishes with its customers.
Backstage:

The Backstage refers to the internal operations and infrastructure that support the Frontstage activities. These elements are crucial for delivering the value proposition but are not directly visible to the customers.

+ Key Activities: The essential actions required to operate the business and deliver value.

+ Key Resources: The critical assets needed to support key activities and offer value.

+ Key Partnerships: The network of suppliers and partners that support the business operations.
Profit Formula:

The Profit Formula encompasses the financial aspects of the Business Model Canvas. It includes how the business makes money and the costs associated with running the business.

+ Revenue Streams: The various sources of income generated from customer segments.

+ Cost Structure: The total costs incurred in operating the business model
Looking for Areas for Innovation

The purpose of developing a Business Model Canvas in the context of strategic planning is to identify opportunities to introduce innovative and creative strategies. By analyzing the three sections of your Business Model Canvas—Frontstage, Backstage, and Profit Formula—you can uncover areas ripe for innovation. 

Putting it Together

Your SWOT will only begin to take shape now that you have gathered all insights generated throughout your analysis. Throughout this process, you identified key external factors that could put your organization at risk. Although these factors may seem distant, they are worth considering when formulating strategies.

You’ve examined your internal operations, assessing what you do well and identifying areas for improvement. Additionally, you analyzed your business model canvas for opportunities to enhance your performance. This introspection resulted in a clear list of strengths and weaknesses.

At the end of the process, you and your team can meet to discuss the findings and insights gathered. With this comprehensive understanding of both internal and external factors, your team can confidently formulate strategies, ensuring they are based on the most critical and relevant information about the business context in which you operate.

In conclusion, a SWOT analysis is far more than a quick brainstorming session aimed at listing strengths, weaknesses, opportunities, and threats. It is the culmination of an immersive and comprehensive examination of an organization’s internal and external environments, designed to provide actionable insights and strategic direction.

Just as Albert S. Humphrey intended, the true power of SWOT lies in its integration with other analytical tools, creating a detailed and nuanced picture of the competitive landscape. By embedding SWOT within a broader strategic framework, organizations can leverage their strengths, address their weaknesses, seize opportunities, and mitigate threats more effectively.

When conducted correctly, a SWOT analysis transcends its perceived simplicity, becoming an essential component of strategic planning that drives sustained organizational success in today's dynamic business environment.
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