Sizing up a company’s internal strengths and weaknesses and its external opportunities and threats is commonly known as SWOT analysis.
It is an easy-to-use technique for getting a quick overview of a firm’s strategic situation. SWOT analysis underscores the basic principle that strategy must produce a good fit between a company’s internal capability (its strengths and weaknesses) and its external situation (reflected in part by its opportunities and threats).
Identifying Internal Strengths and Weaknesses
A strength is something a company is good at doing or a characteristic that gives it an important capability. A strength can be a skill, important expertise, a valuable organizational resource or competitive capability, or an achievement that puts the company in a position of market advantage (like having a better product, stronger name recognition, superior technology, or better customer service). A strength can also result from alliances or cooperative ventures with a partner having expertise or capabilities that enhance a company’s competitiveness.
A weakness is something a company lacks or does poorly (in comparison to others) or a condition that puts it at a disadvantage. A weakness may or may not make a company competitively vulnerable, depending on how much the weakness matters in the marketplace. Table 4-1 indicates the kinds of factors managers should consider in determining a company’s internal strengths and weaknesses.
Once managers identify a company’s internal strengths and weaknesses, the two compilations need to be carefully evaluated from a strategy-making perspective. Some strengths are more important than others because they matter more in determining performance, in competing successfully, and in forming a powerful strategy. Likewise, some internal weaknesses can prove fatal, while others are inconsequential or easily remedied. Sizing up a company’s strengths and weaknesses is akin to constructing a strategic balance sheet where strengths represent competitive assets and weaknesses represent competitive liabilities. The strategic issues are whether the company’s strengths/assets adequately overcome its weaknesses/liabilities (50-50 balance is definitely not the desired condition!), how to meld company strengths into an effective strategy, and whether management actions are needed to tilt the company’s strategic balance more toward strengths/assets and away from weaknesses/ liabilities.
From a strategy-making perspective, a company’s strengths are significant because they can form the cornerstones of strategy and the basis for creating competitive advantage. If a company doesn’t have strong capabilities and competitive assets around which to craft an attractive strategy, managers need to take decisive remedial action to develop organizational strengths and competencies that can underpin a sound strategy. At the same time, managers have to correct competitive weaknesses that make the company vulnerable, hurt its strategic performance, or disqualify it from pursuing an attractive opportunity.
The strategy-making principle here is simple: a company’s strategy should be well-suited to its strengths, weaknesses, and competitive capabilities. It is foolhardy to pursue a strategic plan that cannot be competently executed with the skills and resources a company can marshal or that can be undermined by company weaknesses. As a rule, managers should build their strategies around what the company does best and avoid strategies that place heavy demands on areas where the company is weakest or has unproven ability.
Core Competencies One of the “trade secrets” of first-rate strategic management is consolidating a company’s technological, production, and marketing know-how into core competencies that enhance its competitiveness. A core competence is something a company does especially well in comparison to its competitors. In practice, there are many possible types of core competencies: excellent skills in manufacturing a high quality product, know-how in creating and operating a system for filling customer orders accurately and swiftly, the capability to provide better after-sale service, a unique formula for selecting good retail locations, unusual innovativeness in developing new products, better skills in merchandising and product display, superior mastery of an important technology, a carefully crafted process for researching customer needs and tastes and spotting new market trends, an unusually effective sales force, outstanding skills in working with customers on new applications and uses of the product, and expertise in integrating multiple technologies to create whole families of new products. Typically, a core competence relates to a set of skills, expertise in performing particular activities, or a company’s scope and depth of technological know-how; it resides in a company’s people, not in assets on the balance sheet.
The importance of a core competence to strategy-making rests with (1) the added capability it gives a company in going after a particular market opportunity, (2) the competitive edge it can yield in the marketplace, and (3) its potential for being a cornerstone of strategy. It is always easier to build competitive advantage when a firm has a core competence in performing activities important to market success, when rival companies do not have offsetting competencies, and when it is costly and time-consuming for rivals to match the competence. Core competencies are thus valuable competitive assets, capable of being the mainsprings of a company’s success.
Identifying External Opportunities and Threats
Market opportunity is a big factor in shaping a company’s strategy. Indeed, managers can’t match strategy to the company’s situation without first identifying each industry opportunity and appraising the growth and profit potential each one holds. Depending on industry conditions, opportunities can be plentiful or scarce and can range from wildly attractive (an absolute “must” to pursue) to marginally interesting (low on the company’s list of strategic priorities).
In appraising industry opportunities and ranking their attractiveness, managers have to guard against equating industry opportunities with company opportunities. Not every company in an industry is well-positioned to pursue each opportunity that exists in the industry—some companies are more competitively situated than others and a few may be hopelessly out of contention or at least limited to a minor role. A company’s strengths, weaknesses, and competitive capabilities make it better suited to pursuing some industry opportunities than others. The industry opportunities most relevant to a particular company are those that offer important avenues for profitable growth, those where a company has the most potential for competitive advantage, and those which the company has the financial resources to pursue. An industry opportunity that a company doesn’t have the capability to capture is an illusion.
Often, certain factors in a company’s external environment pose threats to its well-being. Threats can stem from the emergence of cheaper technologies, rivals’ introduction of new or better products, the entry of low-cost foreign competitors into a company’s market stronghold, new regulations that are more burdensome to a company than to its competitors, vulnerability to a rise in interest rates, the potential of a hostile takeover, unfavorable demographic shifts, adverse changes in foreign exchange rates, political upheaval in a foreign country where the company has facilities, and the like.
Opportunities and threats not only affect the attractiveness of a company’s situation but point to the need for strategic action. To be adequately matched to a company’s situation, strategy must (1) be aimed at pursuing opportunities well-suited to the company’s capabilities and (2) provide a defense against external threats. SWOT analysis is therefore more than an exercise in making four lists. The important part of SWOT analysis involves evaluating a company’s strengths, weaknesses, opportunities, and threats and drawing conclusions about the attractiveness of the company’s situation and the possible need for strategic action. Some of the pertinent strategy-making questions to consider, once the SWOT listings have been compiled, are:
- Does the company have any internal strengths or core competencies an attractive strategy can be built around?
- Do the company’s weaknesses make it competitively vulnerable and/or do they disqualify the company from pursuing certain industry opportunities? Which weaknesses does strategy need to correct?
- Which industry opportunities does the company have the skills and resources to pursue with a real chance of success? Which industry opportunities are “best” from the company’s standpoint? (Remember: Opportunity without the means to capture it is an illusion.)
- What external threats should management be worried most about and what strategic moves should be considered in crafting a good defense?
Unless management is acutely aware of the company’s internal strengths and weaknesses and its external opportunities and threats, it is ill-prepared to craft a strategy tightly matched to the company’s situation. SWOT analysis is therefore an essential component of thinking strategically about a company’s situation.