Why SWOT Confuses and How to Fix it

I believe most organizations have difficulty with SWOT analysis primarily because of the implicit assumption that organizations can categorize differently the external factors that impact their business. Factors that are favorable to their business are Opportunities to exploit, while those that may cause problems are Threats to defend against. I prefer to approach the exercise with the perspective that there are only external Trends. Either organizations adapt to important trends or risk disruption that may be fatal to their business.

Before digging into this idea, a quick refresher. According to Wikipedia, SWOT analysis is a strategic planning and management technique used to help a person or organization plan for future success. It is sometimes called situational assessment or situational analysis.

The name is an acronym for the four components the technique examines:

  • Strengths: internal characteristics the business does well that give it an advantage over others
  • Weaknesses: internal characteristics that place the business at a disadvantage relative to others
  • Opportunities: external elements in the environment that the business could exploit to its advantage
  • Threats: external elements in the environment that could cause trouble for the business

The output of these components is then put into a 4×4 matrix (sometimes called the TOWS matrix) to determine key strategies and initiatives needed at the intersection of the internal and external components. The matrix looks like this:

The sad face in the bottom right corner highlights my perceived weakness of the approach. Historically, companies that have tried to defend themselves from external threats suffer disruption. They are still building horse whips for faster buggies when the world wants cars. Or, to be more current, they focus on exploiting a strength like building incremental features for an existing product when their customers are seeking a step change like a different cost structure or new architecture. In the end, items falling into the external threats category likely overcome any defenses the business tries to create.

Instead, I have participants in this exercise think about external Trends that may impact their business. It doesn’t matter whether these trends are favorable or troublesome. Because it depends on the reaction from the business, many participants have difficulty categorizing external factors as opportunities or threats initially anyway. Kennedy once declared the word “crisis” was composed of both danger and opportunity.

So, simply list key Trends that are important from changes happening in context categories like your:  1. Competition; 2. Industry Evolution; 3. Social, Cultural, Demographic; 4. Physical Environment; 5. Legal, Politics, Regulatory; 6. Technology; and 7. Economy.

Ideas may come from your: Customers, Competitors, New Entrants, Suppliers, Markets, Channels, Substitute or Complementary Products, Creditors, Regulators, Special Interests, Labor Relations, Community, and your Natural Environment.

The result should be a prioritized list of external Trends happening in the business Context that may impact the business going forward.

These external Trends then lead to a simple matrix to contemplate strategic action when crossed with internal Strengths and Weaknesses:

For simplicity’s sake, I still call this swot analysis. I just spell it SW-T or SWoT. My experience is that this approach is simpler, less confusing and leads to better ideas about how to prepare for future success.

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