SWOT analysis is one of the best-known of all theoretical frameworks in management. Adrian Haberberg suggests that it has outlived its usefulness.
Perhaps more than any other piece of management theory, the analysis of organisations’ Strengths, Weaknesses, and of the Opportunities and Threats confronting them, has struck a chord with practising managers. Simple to understand, and blessed with a catchy acronym, SWOT analysis is widely used as a tool for the evaluation of a firm’s position. Managers not only believe that it is useful – research in both the UK and the USA has found that they also think of it as having a strong foundation in theory and empirical research.
In this, however, they are mistaken. Nobody really knows who invented SWOT analysis, though it was certainly being used by Harvard Business School academics during the 1960s. There is no piece of underlying theory that shows how, by examining strengths, weaknesses, opportunities and threats, and only those four factors, we can arrive at a complete appraisal of an organisation’s position. In fact, SWOT bears all the hallmarks of a gadget that a professor sketched out on the back of an envelope one day, and that just caught on!
However, there are good reasons for believing that SWOT analysis may have had its day. Some of the objections to it are practical: the technique’s seductive simplicity seems to lead people to use it sloppily, so that the results really are not that helpful. There are also theoretical objections – in the light of what we have learnt about the nature of competitive advantage over the last thirty years, the four SWOT factors are no longer enough for an assessment of an organisation’s position.
The Curse of the Three-Word Bullet Point
Terry Hill and Roy Westbrook looked at 20 SWOTs that had been prepared by consultants for firms participating in the Department of Trade and Industry’s Manufacturing Planning and Implementation initiative. Most suffered from the "curse of the three-word bullet point":
Trade-offs and Nuances
Apart from its built-in imprecision, SWOT analysis has other drawbacks, based on the way that our understanding of the world of competition has changed since it was developed. We now appreciate that strategy is a matter of trade-offs – firms choosing deliberately to disappoint some potential customers so that they are better able to satisfy others. SWOT analysis, with its black-and-white distinction between strengths and weaknesses, does not handle this kind of situation at all well.
For example, Amazon.com, the on-line bookseller, has targeted affluent, computer-literate bookworms. Its range and their pricing structure are geared to people who like books, are prepared to buy them in quantity, like to interact with other book-lovers and don’t mind waiting a couple of days for delivery. Someone who wants a best-seller at a low price is better served by Waterstones or Tesco. It would be ridiculous to say that Amazon has a weakness in the best-seller segment – it has chosen not to compete there.
On the other hand, it is difficult to say whether Amazon has any enduring strengths – it has gained a foothold in the market, but has yet to show a cent of profit. In cases like this, SWOT analysis is not a great deal of use – and yet Amazon.com still needs a strategy. What that company has done, of course, is to assess, as best it can, which of its (still unproven) strategic resources have some enduring value, and base its strategy upon them. It is using its reputation and its capabilities in on-line commerce and distribution to push into neighbouring markets such as music.
Most modern strategic management theorists agree that it is these kinds of intangible resources – capabilities, competences and reputation – that make the difference between a firm’s being a success and an also-ran. The importance to an organisation of "core competences" – skills that are rare, difficult to copy and make a real difference to customers – is now quite well known. But lesser competences are also important; firms often gather a range of skills in fields, like instrumentation or materials technology, that are peripheral to their main business, but might just be the basis of something important in the future.
Here again, SWOT analysis comes up short. There is no place in it for technologies that have yet to prove themselves as strengths or weaknesses. Yet, nowadays, firms jockey for position by trying to understand their customers’ needs just a little better than their competitors do, and providing a service that is slightly faster and better tailored to users’ requirements. Competitive advantage is increasingly a matter of nuance, and so by classifying a firm’s attributes baldly as strengths and weaknesses we risk discarding important information about areas where its resources might be a source of advantage if they were only developed a little further. A firm can usefully direct its attention to other places than where it is definitely strong or definitely weak.
The moving target
One final gap in SWOT’s radar relates to the dynamic aspects of strategy – the fact that every organisation’s strategy is an attempt to hit a target that is not just moving, but following a highly unpredictable path at an uncertain speed. Inside most successful firms, subtle internal processes are at work to tempt them into investing effort and emotion in fine-tuning their proven existing competences and to postpone exploring newer and riskier ones. Outside it, a changing environment may be about to transform the value of their assets and capabilities.
For example, the best retail banks have invested a great deal in new capabilities to reduce the cost of running their branch network. Yet they cannot rely on them as a source of enduring advantage; these hard-won capabilities will count for little if, as many people predict, financial transactions increasingly happen in supermarkets or over the Internet. Can Lloyds-TSB afford to run down its branch network before this change occurs? Can it afford to be left saddled with the excess costs if the transformation happens quicker than was planned? There is a threat built into every strength – and so, of course, an opportunity within every weakness.
A Bad Tool – or Bad Workmanship?
So, can SWOT analysis be rescued? Are the problems I have highlighted above inherent within the technique, or just the result of its being used imprecisely?
The consultants whose work Hill and Westbrook reviewed in the DTI scheme, some of them from large international firms, made the exactly the same kinds of mistake in their SWOT analyses as we see from raw undergraduate students. To me, this indicates that at least part of the problem lies with the technique rather than the technician. And we must remember that, when SWOT was first popularised, the Beatles were high in the charts and skills in areas like marketing were relatively rare. Back in those days, a firm knew a strength when it saw one. In these post-modern times, things are far less clear-cut – though arguably more interesting.
As we tell our strategy students at Westminster Business School, SWOT analysis is fine for an initial classification of the issues when one is getting to know a company, a situation or a case study. But this kind of back-of-the-envelope analysis is something we should keep to ourselves – it has no place in our final report or our presentation to management. For a true appreciation of a strategic situation, as a basis for concrete strategic proposals, we need a far more detailed assessment of the organisation’s resources and their likely value in a changing world.
©Adrian Haberberg, 2000