Understanding SWOT Analysis, Explained | Business Essentials

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Understanding SWOT Analysis

Business Essentials · Chapter 5: Management Functions and Strategic PlanningSection 5.4 · lesson 27 of 10512 min · free with a free account

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In this lesson

Running a SWOT that produces decisions, not lists.

  • Classify entries on SWOT's 2 axes
  • Avoid the 5 errors that make a SWOT useless
  • Ground every entry in evidence
  • Convert a SWOT into strategic options

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Transcript

Everything said in the video, section by section (1,746 words). Read along, or search it.

Management Functions and Strategic Planning

Understanding SWOT Analysis

SWOT analysis may be the most widely used planning tool in business. It's also one of the most misused. Done badly, it produces four tidy lists, and no decisions. This section shows how to run a SWOT that actually produces decisions. We'll cover the two axes that organize it, the disciplines that make it useful, and the errors that destroy it. Then we'll follow a fictional printer through a full analysis, all the way to two strategic options.

What SWOT Is

4 Categories on 2 Axes

SWOT analysis is a structured way to assess an organization's position. It sorts the relevant factors into four categories. Strengths, weaknesses, opportunities, and threats. Strengths are internal characteristics that help the organization achieve its objectives. Weaknesses are internal characteristics that hinder it. Opportunities are external conditions the organization could use to its advantage. Threats are external conditions that could harm it. Behind those four boxes sit two axes, and both need to be stated out loud. That's because misclassification along either axis is the tool's main failure. The first axis is internal against external. Strengths and weaknesses concern the organization itself. They're present, and controllable. Opportunities and threats arise outside it. They're prospective, meaning they concern what may happen. The second axis is positive against negative. Strengths and opportunities help. Weaknesses and threats hinder.

Useful, Not Decorative

Three Disciplines That Make SWOT Work

Three disciplines separate a useful SWOT from a decorative one. The first is evidence. Every entry should rest on something that can be checked, like sales records, customer feedback, or a competitor's published prices. Impression doesn't count. The second is that claims are relative, not absolute. A strength is a strength only compared with competitors. We deliver quickly is a strength only if rivals deliver more slowly. Weaknesses are defined by comparison, too. The third discipline is a limited number of entries. A short list of what matters most forces judgment. A long list simply records everything, and prioritizes nothing.

Classification Errors

Five Errors That Destroy a SWOT

Five classification errors recur, and each one is easy to make. The first is placing internal items in the external columns. A firm lists its own poor hiring as a threat, because it feels like something happening to it. But poor hiring is a weakness, and the firm controls it. The second is recording aspirations as strengths. We aim to be the friendliest shop in town is a wish, not a present strength. Recording it as a strength hides the gap between the wish and reality. The third is generic entries. A dedicated team, or changing technology, could describe any business at all. The fourth is unevidenced assertion. Customers love our product may well be true. But without a source, it can't be tested, or weighed. The fifth is a list so long that nothing is prioritized. The analysis turns into an inventory. The remedy for each is the same discipline. Classify by the two axes, and state each entry specifically. Then name the evidence, and keep only what matters.

Sourcing The Entries

Where Each Half of the Grid Comes From

Where do the entries come from? Each half of the grid draws on different sources. Strengths and weaknesses come from an internal capability assessment. That means examining the organization's records, processes, people, finances, and reputation. And comparing each one with those of competitors. Opportunities and threats come from the environmental analysis of chapter one. That covers the economic, legal, technological, societal, and global forces. They also come from the competitive analysis of section one point three. Rivals, entrants, substitutes, buyers, and suppliers. This section treats that earlier work as inputs. It doesn't repeat it.

Table 5.4.1 (Part 1)

Larkspur Print and Pack: The Internal Half

Here's a completed SWOT for a fictional business, Larkspur Print and Pack. The figures are illustrative. Larkspur is a small regional printer of packaging for food producers. First, its strengths. Its average turnaround on short runs is three days, against about a week at regional rivals. The evidence is twelve months of order records, plus competitors' published lead times. Its operators are experienced on short-run digital presses, with a low reprint rate. Training records and the reprint log back that up. And it has long-standing relationships with local food producers, who account for most repeat orders. The sales ledger shows it. Now the weaknesses. Two customers account for a large share of revenue. Older presses cause frequent downtime, unlike competitors' newer equipment. That's from the maintenance log, and from visits to rival premises. And there's no online ordering, while national rivals offer it. That comes from comparing websites, and from customer requests logged by sales staff. Notice that every entry is specific, relative to competitors, and tied to a named source.

Table 5.4.1 (Part 2)

Larkspur Print and Pack: The External Half

Now the external half. First, three opportunities. Regional producers are switching to compostable packaging. The evidence is trade association bulletins, customer inquiries, and the societal analysis of section one point four. Local direct-to-consumer food brands need short print runs. Local business registrations, and inquiries received, show that. And a state grant program for equipment upgrades has opened, according to a notice from the state economic development agency. Then three threats. Two national printers with online ordering are entering the region. That's the entrant force from section one point three. The evidence is competitor announcements, and sales lost in the past year. The price of coated paperboard is rising, according to six months of supplier price notices. And retail-chain customers are consolidating their purchasing, which is buyer power at work. Three entries per category, not twenty. And the evidence column is what lets a reader challenge any entry. An entry that can't name its evidence should be removed, or investigated.

The Paired Analysis

From Four Lists to Four Kinds of Move

Four lists are not a strategy. The step that turns them into decisions is the paired analysis. Each internal category is set against each external category, and that produces four kinds of move. A strength set against an opportunity gives the attacking move. Use what the business does well to seize a chance. A strength set against a threat gives the defensive move. Use what the business does well to blunt, or absorb, a danger. A weakness set against an opportunity gives the conversion move. Fix the weakness, so the opportunity can be used. And a weakness set against a threat gives the avoidance, or exit, decision. Where a weakness meets a threat, the business may be unable to defend itself. So it should consider withdrawing, or reducing its exposure. Pairing forces the analysis to say what to do. That's exactly what separates a strategic option from a list of observations.

Limits And Practice

Weighting, the People in the Room, and Review

SWOT has a limitation that has to be acknowledged. It's an unweighted snapshot. It records what's true at one moment, but it doesn't say how much each item matters. So a minor strength and a decisive one sit side by side, looking equal. The remedy is to weight the entries. Ask how large the effect on the objective would be, and how likely. Then concentrate on the few that score highest. Who's in the room matters too. Weaknesses get stated honestly only where people can name them without penalty. So include people from several levels and functions, including some who work close to customers and operations. Not only the managers whose work is being described. And review a SWOT on a trigger, not on an annual default. A competitor's entry, a change in regulation, or the loss of a major customer is a reason to revisit it. A calendar date alone is not. Finally, remember where SWOT fits in the planning process from section five point three. It's an input to issue identification. It doesn't formulate a strategy, allocate resources, or set objectives. An organization that treats the finished grid as its strategy has skipped the later stages.

Running The Analysis

Larkspur, Step by Step

Now let's run the whole analysis for Larkspur, step by step. First, the team gathers evidence from the records and sources in the table, and drafts entries in specific, relative terms. Next, it classifies each entry along the two axes. Someone had placed the paperboard price on the internal list. It moves to threats, because the firm doesn't control it. Then the team cuts the list to three entries per category, and weights them. Two items are judged the largest. The weakness is dependence on two customers. The threat is the arrival of national rivals. The reasoning is simple. Losing one customer would reduce revenue sharply. Finally, the team pairs the entries, generates options, and chooses two to develop.

Two Strategic Options

What Larkspur Chooses, and What It Costs

Here are the two options Larkspur chooses. The first is an attacking move, pairing strengths with an opportunity. It targets local direct-to-consumer brands that need short runs of compostable packaging. It uses the firm's turnaround and operator skill, and needs only a modest investment in compostable stock. The trade-off is that these customers are small, and each brings little revenue. Growth depends on winning many. The second is a conversion move, pairing a weakness with an opportunity. It uses the state grant to replace the older presses, and to add online ordering. That fixes the weakness the national rivals will exploit. The trade-off is that the grant covers only part of the cost. The firm must fund the rest, while managing the downtime of the transition. Each option then goes into the planning process from section five point three, where it gets objectives, owners, and resources. And the SWOT has done its job. It produced choices, not a list.

Case Vignette (Composite)

The Strength That Was Only an Aspiration

We'll finish with a case, a composite constructed for instruction. Owen is operations director of a regional bicycle repair and sales business. He leads his management team through a SWOT. Under strengths, the team lists its mission statement. To be the most trusted cycling shop in the region. It's recorded first, and treated as the firm's main asset. From it, the team concludes the business can hold its prices against a new online competitor, since customers trust it. Then a colleague objects. The mission is an aspiration, not a present strength. What evidence shows customers trust this shop more than its competitors? There's none. The records tell a different story. Repair turnaround is actually slower than a rival's, and repeat purchases have been flat. The one evidenced strength is a small group of loyal customers, who value the shop's workshop skill with older bicycles. So the conclusion changes. Trust can't defend the prices. The real strength is narrow: specialist repair of older bicycles. The trade-off is between a broad claim that feels reassuring, and a narrower position the evidence supports. And the narrow position gives up some of the general trade. Owen's reasoning sums up the section. Record aspirations as strengths, and you'll build a strategy on a position the business doesn't hold.

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FAQ

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About Understanding SWOT Analysis

What is a SWOT analysis?
A SWOT analysis is a structured way to assess an organization's position by sorting factors into strengths, weaknesses, opportunities, and threats. Strengths and weaknesses are internal characteristics the organization controls; opportunities and threats are external conditions that may help or harm it. Two axes organize the grid, internal versus external and positive versus negative, and misclassifying an item on either axis is the tool's main failure.
What are common mistakes in a SWOT analysis?
Five errors recur: putting internal items in the external columns, recording aspirations as strengths, writing generic entries, making unevidenced assertions, and listing so much that nothing is prioritized. For example, a firm's own poor hiring is a weakness, not a threat, because the firm controls it. The remedy is to classify by the two axes, state entries specifically and relative to competitors, cite evidence, and keep only what matters.
How do you turn a SWOT analysis into a strategy?
Pair each internal category with each external one to generate strategic moves, an approach often laid out as a TOWS matrix. Strengths with opportunities give an attacking move; strengths with threats, a defensive move; weaknesses with opportunities, a conversion move that fixes a weakness to seize a chance; and weaknesses with threats, an avoidance or exit decision. The chosen options then need objectives, owners, and resources through the planning process.
What are the limitations of SWOT analysis?
SWOT is an unweighted snapshot: it records conditions at one moment without showing how much each item matters. Remedy this by weighting entries for the size and likelihood of their effect, then focusing on the highest scores. Include people from several levels so weaknesses are named honestly, and revisit the analysis when a trigger occurs, such as a competitor's entry. SWOT feeds issue identification; it doesn't formulate strategy or set objectives.

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