Developed by Melody Parsa
The SWOT matrix is a tool for making an objective analysis of any given company. SWOT is an acronym for Strengths, Weaknesses, Opportunities, Threats. These are the main areas to be analysed and researched, to get an overview of what the company is good at, not good at, which threats lies ahead, and what opportunities does the company have. The four Areas can be broken up into positive and negative, where strengths and opportunities are positive and weaknesses and threats are negative. The overall purpose of SWOT matrix is to analyse and "understand" the business in a better way. The main goal is to address weaknesses, determine threats, capitalise on opportunities, take advantage of strengths and in the end develop business goals and strategies for achieving them.
The tool that frequently comes up in the business environment and which a lot of different businesses use is what we call a SWOT matrix(figure 1) or SWOT analysis. SWOT is acronym for strengths, weaknesses, opportunities and threats. SWOT analysis is a tool that a company(or e.g. a project manager) uses to complete and objective analysis of that particular company. You don't have to necessarily work for a particular company, to conduct a SWOT analysis but there are a lot of different benefits. First thing, there are four different quadrants or four different areas that businesses, have to complete an analysis in, which means they have to do research and find out, what are the things they're good at and the things they’re not so good at. The way the SWOT analysis is broken up, is that there are categories that are considered to be internal and there are categories that are considered to be external. Something that is internal is something that the firm or the company has control over. They typically have some effect on what goes on in the internal environment and those are actually strengths as well as weaknesses. Those are considered to be internal factors, because the company usually has some control over what they're good at and what they are not so good at. The SWOT can be helpful in many situations. E.g. if the business is in a situation where there's a new competitor emerging, it will often be a good idea for the company to perform a SWOT, to optimize their competitive ability, i.e. be completely updated on their strengths, weaknesses, opportunities and threats.
How does the SWOT analysis work
The SWOT matrix usually starts with collection of data, such as sales trends, profit trends and employee and customer satisfaction surveys. There is of course a difference whether it's a small business or large worldwide business, which is being analysed. In a small business, it will often be enough to involve managers and key employees, whereas in a large company, the research will be much more extensive and probably involve more stakeholders. Multiple stakeholder viewpoints lead to a more comprehensive and participative analysis, which has the additional advantage of laying the groundwork for future strategic initiatives and process improvement plans. Hence, it will as well be a good idea for a small business to involve as many stakeholders as possible. When the research is done, the data is used to identify the key strengths, weaknesses, opportunities, and threats. With this in place it’s now possible to see if any of the strengths match up with opportunities, and maybe convert weaknesses and threats into strengths and opportunities. For Example: A company is in an industry where the general website standard is very low (opportunity). The company's website is also very bad/old (Weakness), but there is a large budget for improvements (strength), which makes a great chance to pass the competitors on line.
Strength is something that the company does, that provides itself a competitive advantage. Questions a company or project could ask to find its strengths: What advantages does your organization have? What do you do better than anyone else? What unique or lowest-cost resources can you draw upon that others can't? What do people in your market see as your strengths? What factors mean that you "get the sale"?
Very low cost, Walmart
A company like Walmart for example, one of their largest strengths is the fact that they can maintain a very low cost, which allows them to price their products much lower than a lot of their competitors can, because they have the ability to keep their costs low and that has a lot to do with the fact that they're just so large of a corporation they can demand certain concessions from suppliers because they're purchasing such a large quantity of goods. That is a strength for Walmart.
Positive brand recognition
Positive brand recognition is another example of strength. Some companies are well known, you see the image and the logo and you instantly have positive feelings that evoke positive emotions regarding, a particular brand. Those types of companies merely have to put their logo on a particular product and people would buy it regardless, because they have strong brand recognition. They’re viewed positively, they’ve produced quality products and services before and of course that contributes, to strong brand recognition.
Skilled workforce, Costco
Another example is a skilled workforce. A skilled workforce is a very significant strength because human resources in large part, is the greatest asset that most companies can have. Good quality skilled employees are very hard to come by and employers that can retain their workers and continually train them, can serve as a competitive advantage. One example is Costco. Costco is very well known for having a longer or higher tenure track then most other companies in that same industry. The retail environment is very heavily dependent upon people, but there is a lot of turnover. People are constantly being hired and leaving. The typical retail model if you’re trying to maintain low prices, is that you typically have to maintain low cost, meaning that you don't pay your employees very significantly. Costco has done something of outside of norm for that industry. They pay very high wages for the industry. They offer benefits for part-time employees and a lot of other attractive perks that some of the other retailers don't necessarily offer and that provides them with the benefit of having workers that stay there longer. The tenure for the average worker at Costco is much greater than the tenure for a worker at Walmart .For example which historically pays very low wages comparatively speaking to other companies within the industry and so that gives them an advantage because, if you're not having to retrain your workers over and over they’re probably going to get good at what they do over time. Someone who's worked for a company for 3 to 5 years is properly going to do that job better and more efficiently and someone who has worked for less than a year. On top of that, that also has a cost savings effect, because instead of committing resources and management resources into training new employees those resources could be devoted to other areas. So that provides a significant advantage.
Financial resources, Apple
Another strength is financial resources and that includes access to cash. Cash is a very important resource because without it, not a lot of things can happen, so if companies have a large amount of cash on hand, that enables them to pursue different options, they have options if an opportunity presents itself. The company can take advantage of that opportunity. One example is Apple that has a significant amount of cash on hand, somewhere in the realm of $110 billion in cash, which is a significant amount more than any other US company and to put that in perspective, roughly Apples operating costs on annual basis are about $10 billion, so that essentially means that Apple can continue to operate for 11 years without making any money whatsoever and still cover its operating costs which is very significant. It probably won't happen, people will continue to purchase Apple products, but obviously comforting to know that you have that much money set aside for the rainy day, that in the event that something would happen, economy worsens for any reason, your positioned well to weather the storm and that's a very significant strength especially in economic times in which we’re in.
Weaknesses are things that the company does that aren’t necessarily positive – It can potentially be a liability for them. What generally is not a strength, can potentially be a weakness but not all the time. Certain things companies might be somewhat good at it might not be a significant weakness but it still can be, so obviously very negative brand recognition. Companies that have poor customer service and it's widely known and that is a significant weakness because that affects future customers going to that particular company to purchase products if they've heard of someone having a bad experience in the past. Things like expiring intellectual property, patents, trademarks and copyrights. Certain things that are no longer going to be renewed can be a weakness. Here's some examples of question you could ask to find weaknesses: What could you improve? What should you avoid? What are people in your market likely to see as weaknesses? What factors lose you sales?
Rising cost, unskilled work force, lack of financial resources
Rising costs is a significant weakness because it reduces margins. Having an unskilled work force provides a weakness because you're committing multiple resources into the training and obviously lack of financial resources. These are merely a few examples of some things that maybe you could look at to determine if a company is strong in one area or maybe that they're not. Maybe they’re additional resources should be committed to a particular area. Just because something is a weakness doesn't mean it has to stay weakness, but the benefit of using such a tool is to identify those weaknesses, put resources towards them and turn those into strengths or at least not as a significant weakness.
When a opportunity occur, it’s up to the company to try and recognize it and if they do so, it can serve as a potential avenue for growth and profitability. If an opportunity is not seized it can quickly turn into a threat. Useful opportunities can come from such things as changes in technology and markets on both a broad and narrow scale. Changes in government policy. Changes in social patterns, population profiles, lifestyle changes, and so on.
The most notable example probably especially in the time that we live in, is new technology and technology is rapidly changing, it has so over the last several decades and that has provided a lot of opportunities for some firms if you look at companies like Amazon, who was able to look at the opportunity of digital books and digital media and was the first to market, when they came out with their Kindle e-reader no other company was in that particular market at the time in fact that, in the sentiment at least, prior to that was that digital books would never surpass physical books in popularity. Physical books you like to open them, you could feel them, you had the ability to show them and it's very prestigious, everyone likes the smell of a new book and that was the thought process why would people want a digital book? This was a new technology, that at one point provided a great opportunity for Amazon because we all know we have the benefit of seeing what happened and knowing that digital books have even surpassed physical books in terms of sales and so that technology obviously is a significant opportunity for Amazon or was and opportunity for them.
Relaxing government regulations
Other additional examples of opportunities are relaxing government regulations. Initially regulations that you have to abide by, the government is to relax those, obviously that is cost savings and that could be an opportunity.
Elimination of international trade barrier
Elimination of international trade barriers can be an opportunity. If you're prohibited from trading your product with a certain country and all of a sudden those barriers go away, that obviously would be an opportunity.
Threats are changes in the external environment, that have the ability to negatively impact the company. Opportunities and threats are very interlinked, they are very related, an opportunity that is not seized, tend to become a threat. Questions a company could use to find its threats could be: What obstacles do you face? What are your competitors doing? Are quality standards or specifications for your job, products or services changing? Is changing technology threatening your position? Do you have bad debt or cash-flow problems? Could any of your weaknesses seriously threaten your business?
The technology of digital book posed a threat for companies like Borders. Borders is unfortunately no longer operating. But they failed to adopt that technology they failed to foresee the impact it would have on the entire industry and that of course led to their eventual demise.
Since Apple came out with iTunes, people could purchase digital rights to songs, not necessarily a physical CD, so a lot of businesses that specialized in selling CDs obviously no longer continue to operate because that was a threat. An opportunity at one point but they failed to adjust to.
Elimination of international trade barriers
As we talked before, elimination of international trade barriers can be an opportunity and if you're prohibited from trading your product with a certain country and all of a sudden those barriers go away, that obviously would be an opportunity. One the other hand it would be threat, if you are a company operating in that country and your government prohibits, any outside companies from doing business with the consumers in that country, that would obviously be a threat because now there's more competition. Consumer preferences change very frequently and companies try to stay in tune with what customers are interested in, what products they want, what services they want and things change fairly regularly, so if the customer preferences changed that can provide an opportunity if the company’s well-positioned take advantage of that. It can also be a threat if consumers are changing away from using a particular product or service, that you frequently sell, which isn’t good
Emergence of new competitors into the market
Examples include emergence of new competitors into the market, certain companies that do well in a certain industries. The example of Amazon with regards to selling digital books, did so fairly well obviously was successful and you see the emergence of a lot of new competitors. Apple obviously is a key player, you have Google who is now offering a digital books marketplace. Barnes & Noble does the same thing. You have to evaluate how significant a thread is and it may not be significant, but that's something that you would have to look into.
A pending lawsuits
A pending lawsuits is another threat of course. Lawsuits not only require you to commit financial resources, which goes back to do you have financial resources? If that's a weakness then a lawsuit can pose a significant threat because those gets expensive, especially the longer that they are drawn out, but they also hurt your image, the lawsuits are not very positive, typically most companies who want to settle before going to court and the long drawn-out court proceedings because they can be very detrimental to a brand and new technology, which not only applies to digital books but also when you look at streaming technology, you saw Blockbuster, Hollywood Video and other companies that actually rented DVDs out, being out-competed by Netflix, who is streaming content directly to consumers and obviously making it so that going to a actual physical location to access those materials wasn't necessary any more.
Type of factors
Strength and weakness are considered to be internal to the company and what that means is that the company can affect or change these things:
- Financial resources, such as funding, sources of income and investment opportunities.
- Physical resources, such as your company’s location, facilities and equipment.
- Human resources, such as employees, volunteers and target audiences.
- Current processes, such as employee programs, department hierarchies and software systems
Opportunities and threats are considered to be external to the company and what that means is that the company can’t necessarily affect or change these things:
- Market trends, such as new products and technology or shifts in audience needs.
- Economic trends, such as local, national and international financial trends.
- Funding, such as donations, legislature and other foundations.
- Demographics, such as a target audience’s age, race, gender and culture.
Strength(internal) and Opportunities(external) are considered positive factors:
- Political support (Strength).
- Funding available (Strength).
- Market experience (Strength).
- Strong leadership (Strength).
- Project may improve local economy (Opportunity).
- Will improve safety (Opportunity).
- Project will boost company's public image ( Opportunity).
Weaknesses(internal) and Threats(external) are considered negative factors:
- Complex project(Weakness)
- Likely to be costly(Weakness)
- Negative environmental impact(Weakness)
- Staff resources are already stretched(Weakness)
- Environmental constraints(Threat)
- Time delays(Threat)
- Opposition to change(Threat)
Limitations of SWOT
The SWOT matrix, has its limitations. It is important to keep in mind that its only one step in the business planning process. If it’s a complex situation/issue there’s usually a need to conduct a more in-depth research and analysis to make the right decisions. Sometimes it’s possible to encounter factors where it’s uncertain which area it belongs to, i.e. whether it’s a strength, a weakness or both. E.g. a prominent location can be a strength, but also a weakness because the lease may be expensive. The Swot Matrix doesn't distinguish between the importance of the factors. This means that a business may have a long list of strengths and only a small list of weaknesses, but one of the weaknesses, may be so influential and serious that it overwhelms the strengths and thus provides a undifferentiated picture of how the business perform.
The SWOT matrix consists of four areas to be considered, when doing a SWOT analyse.
- Strengths: things that the company do well internally.
- Weaknesses: things that the company can control, but do not do very well.
- Opportunities: external potential avenues to achieve greater profitability and greater growth.
- Threats: things that have the ability to negatively the company.
To perform a good analysis it is required that you make a thorough research. It is not enough to make a superficial research, as there is a risk to miss some important factors. SWOT has its limitations and it may be a good idea to combine/compare performance with one of the other tools that are used to analyze companies, such as Porter's Five Forces (Link)