Today we’re going to go over what is a SWOT analysis, how to use a swot analysis to formulate strategies using the TOWS matrix, how to use a swot analysis in strategic planning, and the most common mistakes that people make when using a swot analysis, and which you may to be making too.
But let’s get started.
What is a SWOT analysis?
SWOT stands for strengths, weaknesses, opportunities, and threats.
And because these are such general terms, you can do a SWOT analysis for a wide variety of situations.
You can do a SWOT analysis for a product already in your portfolio, or for a new one, you can do a SWOT analysis for a business unit, you can do a SWOT analysis for an entire corporation… you can even do a personal SWOT analysis, or a SWOT analysis for just a specific aspect of your personal life. It’s really that versatile.
In this post though, I will assume that you’re performing a SWOT analysis for business, for strategic planning purposes. Ok?
In that case, a SWOT analysis is a summary of a business’ main sources of competitive advantage and disadvantage (referred to as strengths and weaknesses), as well as of trends in the market, industry, or macro-environment, which can either be beneficial for the future of the business (opportunities), of that can in some way be damaging to the business’ future (threats).
These strengths, weaknesses, opportunities and threats are usually organized in a matrix format.
Strengths and weaknesses are internal (they exist within the business), while opportunities and threats are external (they happen in the business’ environment).
Strengths allow you to take advantage of opportunities and help you avoiding threats, while weaknesses prevent you from fully taking advantage of opportunities, and expose you to threats.
And as hard to believe as it may sound, one of the biggest mistakes that I see in SWOT analysis, comes from people not fully understanding what the strengths, weaknesses, opportunities and threats are. Seriously.
And the most frequent mistake I see, is people confusing opportunities with project ideas. But those are completely different things.
Projects don’t belong in the SWOT.
So what are strengths, weaknesses, opportunities and threats, really?
Strengths in SWOT analysis
Strengths are things that are internal to your business, which can have a positive impact on your business’ profitability, because they may for for example:
- Allow you to sell more easily to target customers, and/or
- Allow you to provide what target customers or clients consider to be a more valuable product or service, and/or
- Allow you to have lower costs to perform an activity when compared to your competitors,
So, strengths derive from your business’ resources, capabilities, or reputation, and they give you a competitive advantage over your competitors.
When talking about resources, we can be talking about things that you own, or that you can have access to if you need to use them.
These can include a huge variety of things, such as cash (that you have, or can borrow or raise), equipment, raw materials, employees, a network of retailers or affiliates to help you sell your products, a solid portfolio to showcase… etc. The type of resources that may constitute a strength for you will depend a lot on your industry, and the type of work that you do (or aspire to do).
But your strengths can also come for your capabilities. These are things that you and you employees are able to do, that again, give you an advantage comparatively to your competitors, because your competitors cannot perform as well as you can in these areas.
And then, your reputation can also be a strength, given that it can help you sell your products or services more easily when compared to your competitors. Or it can even help you get access to resources. For example, you may be able to negotiate better contract terms because people trust you, possibly increasing your profitability.
At the end of the day, strengths are things that can help you achieve a business goal.
Weaknesses in SWOT analysis
Weaknesses are the flip side of strengths.
They derive from a LACK of resources, capabilities, or reputation, and put you at a competitive disadvantage when compared to competitors.
Weaknesses make it more difficult for you to achieve a goal.
Opportunities in SWOT analysis
Opportunities are circumstances and events external to your business, which if taken advantage of, can have a positive impact on the business.
These can be things that are happening in your market or industry (for example new trends), or even on a macro-environmental level. Think for example of economic growth, or regulations that require the use of products or services that can have a positive impact on your sales levels either because you supply them directly, or because your clients do, and they need to buy more from you to increase their own output.
Threats in SWOT analysis
Logically, threats are the flip side of opportunities. So here, we’re talking about circumstances and events that are external to your business, which can have a negative impact on it.
Important considerations and common mistakes when doing a SWOT analysis
A very important thing to keep in mind here, is that this analysis is specific to the business or business area that you are making it for.
Having capabilities and resources available are only strengths if you can put them to use to compete in the market you’re going after and/or to achieve a business goal. Otherwise they’re just a stockpile of stuff with no relevance to your business performance.
For example, if you want to open a restaurant, your deep knowledge about geology isn’t a strength in the context of that restaurant business. It’s not relevant to compete in that industry. See my point here? Not all resources and capabilities are necessarily strengths. Only the ones that help you compete where you want to compete.
Therefore, to identify your strengths and weaknesses, you obviously need to be clear on what you want to achieve. So… sometimes you may want to start your SWOT analysis by analyzing the market, identifying what may your opportunities and threats be, and only then think about what your strengths and weaknesses are, in the context of what you want to achieve or avoid.
But it’s important to note that at the same time, your strengths and weaknesses will have an impact on whether a same event in your environment is an opportunity or a threat to you.
Some events that happen in the market can be opportunities for you, while being threats to your competitors, because you have the strengths to take advantage of them while competitors don’t. And vice-versa. Something can be an opportunity to your competitors while being a threat to you, because your competitor can take advantage of it, and you cannot.
For example, when covid hit and a people had to stay inside, for businesses that were already selling online this was an opportunity, while for those who didn’t have an online presence, this was a threat. Same event, but different impact depending on businesses’ resources and capabilities.
So… what needs to be identified first, whether the strengths and weaknesses, or the opportunities and threats, can become a bit of a chicken and the egg kind of situation.
But from a practical point of view, you’ll often get your SWOT done a lot faster if you start with the external analysis, because it avoids wasting time with internal analyses that aren’t relevant to achieve any business goals. And you can always move things from the opportunities to threats quadrant and vice-versa, if later on, when doing a deeper analysis in light of your strengths and weaknesses, you realize that your first assessment was actually incorrect.
Not being clear regarding these interconnections is a common mistake when performing a SWOT analysis.
Another common SWOT analysis mistake, is forgetting that the SWOT analysis is just a description of a current situation. It’s just meant to be an overview of what you’re dealing with, right now.
You’re not supposed to include projects or initiatives that you could implement in the future to take advantage of any opportunities, or to minimize any threats.
It’s just a description of resources, capabilities, and reputation in the form os strengths and weaknesses, and of market conditions and trends in the form of opportunities and threats, in the present moment.
Actions that you might take DO NOT belong in the SWOT. Ideas for new projects aren’t opportunities. Ideas for new products or services aren’t opportunities. They’re not external conditions.
They are what you believe that might help you take advantage of the opportunities, or minimize the threats, but they’re not the opportunities themselves. Opportunities are always external.
And they aren’t strengths or weaknesses either. So they don’t belong in the SWOT.
Where might new projects and product ideas belong then? Well, they belong in an extended SWOT matrix sometimes referred to as the TOWS matrix (yes, as in SWOT read from right to left). Anyway, we’ll talk about the TOWS in a second; first we need to address...
How to identify strengths, weaknesses, opportunities and threats
Very briefly put, to identify strengths and weaknesses you’re going to look inside your business, while to identify opportunities and threats, you’re going to analyze your industry, and the macro-environment at large.
Let’s go step-by-step.
Identifying strengths and weaknesses in SWOT analysis
Let’s start with strengths in the SWOT analysis.
What we want to put in this strengths’ quadrant of the matrix, are answers to questions such as:
- What do you do well? What do you do better than competitors? (Again, keeping in mind your business goals)
- What makes customers prefer to buy from you?
- What resources do you have access to, that your competitors don’t?
- What is the size and engagement level of your follower base? Or of your email list?
- How strong is your affiliate network? Or how many retailers carry your product? Or whatever indicator is relevant for your type of business?
- What are you able to do more efficiently than competitors?
The relevant questions to ask about your business depend a lot on your industry, because different types of businesses have different sources of competitive advantage, and therefore require businesses to build strengths in different areas.
For example, if you’re an online seller, the size of your social media following and of your email list are important sources of competitive advantage. They can be huge strengths or weaknesses. But if you’re an airplane manufacturer, not so much. You get my point, right?
Where do you find the information to answer theses questions?
Well, you could use the KPIs you generally track to measure your business performance (assuming you’re measuring the important things), as well as your own perception, and your team’s.
Important note here: for information related to how your products and services perform and are perceived, it’s always a good idea to make sure you get feedback from customer facing team members, since they are the ones who have direct access to customers’ feedback (for example customer support and sales team).
And whenever possible, try to get feedback from customers directly. It’s very hard to be objective when assessing your own performance. So… try to get an outside perspective if you can.
Weaknesses in the SWOT analysis
When it comes to weaknesses, they are the flip side of strengths, so the questions would be similar, but from a negative perspective. I don’t think there’s a need to spend more time on those, so I’ll skip them.
Which leads us to…
Identifying opportunities and threats in SWOT analysis
Here we can have industry-specific things going on, but we can also have macro-environmental trends and effects affecting your business.
Opportunities in the SWOT analysis
When it comes to opportunities, some questions you may want to go over to identify them, could include for example:
- Is the economy growing? Is the industry growing?
- Is the demographic group that you target growing? Are there more people interested in what you offer? Are they willing to pay more?
- Are there any legal or regulatory changes that can be advantageous to your business?
- Are there any technological changes that have a positive impact on your business?
Threats in the SWOT analysis
And when it comes to threats, you could then flip some of these questions around and add a few more. Some interesting ones could include:
- Is the economy shrinking? Is the industry shrinking? Or is the demographic that you target? Or their willingness to pay?
- Are people moving away to different types of products and services?
- Are there more competitors coming to the market? Or are there more products or services competing with yours?
- Are competitors becoming stronger? Or more efficient?
- Are you having more difficulties finding suppliers? Or materials? Or are they becoming more expensive?
- Are there any legal or regulatory changes making it more difficult to conduct business?
- Are there any technological changes that may have a negative impact on your business?
Where do you find the information to answer theses questions?
When it comes to finding the information to answer these, depending on your industry, you may have access to industry reports that discuss the current state of the industry, what current trends the analysts have identified, as well as where they expect the industry to move in the future. Or, you may be able to find industry associations that publish some data about it.
But regardless of whether you have access to that type of data and reports, there are a few sources of information that you might want to consider.
For macroeconomic data, you can usually count on your national institute of statistics, as well as your government and central bank’s economic forecasts. Those 3 sources will usually publish the country level data.
If you need a basic, high level, yet more global data source, try taking a look at the OECD economic outlook report. This is very high-level macro though.
When it comes to gathering information about your own market, a great source, again, can be your client facing team members. Sales team, customer service, social media managers… anyone who is in close contact with current or target clients or customers, and who can get first hand data about how the market is changing.
Changes in what people request, or ask about, or pay attention to, or complain about can be great hints regarding changes in the market. And this is information that you already have, or can easily generate.
And then there’s keeping an eye on what your competitors are publishing, or what is being published about them.
And… the news. Yes, the good old news.
Back in the day when I worked in business planning, a part of my job was to calculate my employer’s market size for it’s different business units. Apart from the macroeconomic sources I just mentioned, especially the national institute of statistics, a great source of information I had, was the news.
In this case, my employer sold electric and electronic equipment, so I would look for news about investments that would require that that type of equipment was used, and I could then ask the business units during the strategic planning process how those investments were reflected in their business plans. So… the information you get from traditional news may not be as straightforward, or in a ready to use format, but it can be very useful.
But it’s finally time to talk about how to use the SWOT analysis in strategic planning. And for that, we need to talk about the TOWS analysis that I mentioned previously.
SWOT vs. TOWS: What is the TOWS matrix in strategic management?
Well, a TOWS is an expanded SWOT.
You keep the first row where it is, and transpose the second one, to create another 2 by 2 matrix inside the original SWOT matrix. The new expanded matrix that we get, is what is usually nowadays referred to as the TOWS matrix.
The purpose of displaying the information this way, is to use the swot analysis to formulate strategies that we may need to incorporate in our strategic planning.
And how does this TOWS analysis help with that?
How to use the TOWS matrix in strategic planning
In these new 4 quadrants that we just added, we will fill in ideas for potential projects and initiatives.
- In the first quadrant of the TOWS matrix, we have a combination of opportunities and strengths. So, what we will include here, are ideas for projects, initiatives, or actions, through which we could make use of our existing strengths, to take advantage of market opportunities. Some people refer to these as maxi-maxi strategies, since we're trying to maximize both strengths and opportunities.
- In the second quadrant of the TOWS matrix, we have a combination of weaknesses and opportunities. So, what we will include here, are ideas for projects, initiatives or actions, meant to overcome our internal weaknesses, so that we are better positioned to take advantage of an opportunity in our market.
- In the third quadrant of the TOWS matrix, we have a combination of strengths and threats. So, what we will include here, are ideas for projects, initiatives, or actions, through which we would use an existing strength to mitigate a threat.
- In the fourth quadrant of the TOWS matrix, we have a combination of threats and weaknesses. So, what we will include here, are ideas for projects, initiatives or actions that we can take to try to overcome our weaknesses, so that we can mitigate a threat. This is sometimes referred to as a mini-mini strategy, since we're trying to minimize both weaknesses and threats.
An important note: remember that we cannot change opportunities and threats.
They are external, and the SWOT is a snapshot t a specific moment in time. So they are what they are. What we can do, is take advantage of our strengths and address our weaknesses.
So in the first column we have ideas for projects and initiatives that make use of resources and capabilities that we already have, to take advantage of opportunities or to mitigate threats. We are working with what we are already good at.
In the second column, we have ideas for projects and initiatives to mitigate weaknesses. So, these projects require that you acquire resources, capabilities, or reputation that you don’t have at this point. They’re about removing things from the weaknesses’ quadrant in the SWOT.
In the first row we have ideas to make the most out of the environment our business is in, while in the second, we have ideas for things that we can do to avoid being crushed by it.
As you can see, this structure is helpful to see the purpose of each project and initiative, as well as to check whether we’re addressing all the issues that we should be addressing.
A TOWS matrix analysis is a great way to check the completeness of the proposed projects, actions, and initiatives, that you include in your strategic plan in addressing what you want to make sure you’re addressing.
So… that’s one of the ways in which you can use a SWOT analysis to formulate strategies.
Evidently, after you have all these project and initiative ideas, you should score them and put them in a prioritization matrix or scoring model so that they’re properly prioritized in your strategic plan. I’m afraid the SWOT and TOWS frameworks aren’t designed for setting priorities. That’s a subject for another day though.
For today, I hope this helped you using a SWOT analysis and a TOWS matrix in your strategic planning process to structure your strategy sessions, and for initiative completion checking.