The effectiveness of a SWOT analysis

Every firm has distinctive competencies that contribute to its success, and weak areas that need improvement. SWOT analysis is a strategic business planning tool used to review an organization's current position in the market. The acronym SWOT stands for Strengths, Weaknesses, Opportunities and Threats. Business managers plot out these four components in a chart, also called a SWOT Matrix, to help identify successes and failures and determine how both can be used to improve overall performance.

Components of SWOT analysis

Strengths and Weaknesses are internal conditions that either help or hinder business growth. These include core competencies among the organization's workforce, as well as competitive disadvantages.

Opportunities and Threats are external factors that positively or negatively impact a firm’s performance. Key external factors are: (1) economic; (2) social, cultural, demographic, and environmental; (3) political, governmental, and legal; (4) technological; and (5) competitive.

Evaluating SWOT effectiveness

Effective decision making requires the assessment of each individual SWOT component. An organization's decision makers evaluate the quality of information they receive by analyzing both the internal and external factors that impact their decisions.

Strengths

A firm’s strengths include a strong brand name, high quality products or services, superior customer service, competitive pricing, competitive market positioning, and so on. Strengths are evaluated realistically and from the point of view of the market to ensure effective strategic planning.

Questions that help identify a firm’s strengths are:

• What are the firm’s distinctive competencies?
• Does the firm have competitive pricing?
• Is the firm strategically positioned?
• What are the firm’s perceived strengths?

Weaknesses

A firm’s weaknesses can include a weak brand name, low quality products or services, poor customer service, lack of marketing expertise, high cost structure, poor reputation, and limited access to key distribution channels. Once weaknesses are identified, managers craft suitable strategies to improve or eliminate them. With proper evaluation, weaknesses can be turned into strengths.

Questions used to evaluate a firm’s weaknesses include:

• What needs to be improved or avoided in the firm’s competitive strategy?
• What factors are causing the firm to lose market share?
• What are the firm’s perceived weaknesses in the marketplace?

Opportunities

Opportunities are favorable environmental factors that impact a firm’s operations. Such factors include the development of new technologies, unfulfilled customer needs, identification of niche markets, strategic alliances, joint ventures, loosening or abolition of governmental regulations, elimination of trade restrictions, and more.

Questions to review a firm’s opportunities include:

• How can the firm exploit favorable industry trends?
• Can the firm identify and satisfy unfulfilled customer needs?
• Can the firm capitalize on technological developments related to its operations?
• Can the firm capitalize on government policies related to its operations?

Threats

Unfavorable environmental factors can hinder a firm’s performance. Such factors include new competitors, changing consumer preferences, substitute products, trade barriers, new distribution channels from competitors, price wars, and high taxation.

Questions that identify a firm’s threats are:

• Where are the firm’s competitors standing?
• Is changing technology threatening the firm’s positioning?
• Do substitute products affect the firm’s sales?

The importance of SWOT analysis

SWOT analysis is an opportune way for a firm to identify its market positioning and assess how customers perceive its products or services in relation to its competitors. SWOT analysis contributes to the evaluation of the firm's functional areas by involving employees at all organizational levels, and individuals from outside of the firm. In this context, SWOT analysis as a strategic planning tool that provides management the opportunity to gain new perspective on the relative effectiveness of the firm.

SWOT analysis should realistically portray a firm’s strengths and weaknesses to help management evaluate where the firm stands today, how it can take advantages of opportunities, and anticipate threats. Through SWOT analysis, decision makers assess their strategic objectives and decide on the proper competitive strategy to better position the organization in the marketplace.