SWOT analysis (also known as TOWS analysis or the TOWS matrix) is a situational analysis method, first introduced in the early 1980s by management professor Albert Humphrey from the University of San Francisco. It has been in use for more than three decades. SWOT is an acronym for Strengths, Weaknesses, Opportunities, and Threats, which are the first letters of these four key components.
SWOT analysis is commonly applied in the following areas:
Strategy and vision formulation, strategy breakdown, goal setting;
Competitor analysis, benchmark management;
Product analysis, marketing activity analysis;
Project achievement analysis, feasibility analysis of change initiatives;
Other topics, such as employee satisfaction analysis, team cohesion analysis...
In modern business management, through SWOT analysis, companies can objectively assess their external environment and internal capabilities, clearly understand their strengths, weaknesses, opportunities, and threats, and proactively develop competitive strategies to ensure their position in the market.
This article will introduce the application of SWOT analysis from the following six aspects:
I. SWOT Analysis of Strengths and Weaknesses (Internal Environment Analysis)
Competitive advantage refers to a company's ability to outperform its competitors, or the unique factors that enhance its competitiveness. Competitive disadvantage refers to areas where a company performs poorly or fails to achieve compared to its competitors, resulting in a weaker position. SWOT analysis primarily examines the following areas:
Q - Quality: The safety, stability, reliability, aesthetics, durability, and cost-effectiveness of the product.
C - Cost (Price): The production, sales, and service costs of products at the same level, and their selling prices.
D/D - Production, Efficiency, Delivery Capability: Total production, production capacity (CT), overall efficiency, per capita output, per capita added value, and on-time delivery.
D/L - Product Technology and Manufacturing Technology: New product design and development capabilities, development cycles, patents, technological innovation capabilities, etc.
M - Manpower/Equipment/Materials/Methods/Measurement: Excellent management and technical talent, advanced high-efficiency production lines, modern high-precision production equipment, stable and high-quality material supply at competitive prices, advanced management methods, systems, and seamless information flow, advanced measuring instruments, scientific measurement methods, and complete quality control systems.
S - Sales/Service: A strong sales network, an excellent sales team, excellent brand value and market recognition, good customer relationships, a comprehensive after-sales service system, high-quality service, and a satisfied customer base.
II. OT Analysis of Opportunities and Threats (External Environment Analysis)
Environmental opportunities refer to areas that are attractive to the company's operations, where it will have a competitive advantage. These opportunities significantly influence the company’s strategy. Business managers should identify and fully seize every opportunity, evaluating the growth and profit potential each opportunity brings to the company. Environmental threats refer to challenges arising from adverse development trends in the environment. If not addressed decisively, these trends can weaken the company's competitive position. Factors such as policies, the economy, social environment, technological barriers, and competitors pose threats to the company’s current or future performance. Business managers should identify these threats and take appropriate measures to mitigate risks. OT analysis mainly uses the following two methods:
PEST Analysis
Porter's Five Forces Model
For external environment analysis, Porter, based on SWOT analysis, proposed the "Five Forces Analysis" to refine and deepen strategic analysis of industry structure. The members of the industry are determined by five competitive forces, which are collectively known as the "Five Forces."
① Existing Competitors
When any company formulates strategies and conducts business activities, it must first face existing competitors. The intensity of competition among peers is determined by the competitive structure of the players and the future prospects of the industry. The competitive landscape of an industry can take the following forms:
If between businesses:
Peer Competitor Analysis Indicators:
Market Share
Sales Growth Rate
Product Profitability
② Potential Competitors
The threat of entry depends on two factors:
Height of Entry Barriers:
Market Barriers — Barriers in competitive market conditions.
Non-market Barriers — Barriers caused by government regulations (statutory entry requirements).
Retaliatory Measures by Existing Firms:
Price Suppression
Material Monopolies
Market Monopolies
Supply Chain Integration, etc.
③ Substitutes:
Substitutes are products with the same function as existing products, but whether substitutes can have the same effect depends on whether they offer a better cost-performance ratio than existing products. Thus, the actual function of substitutes imposes price constraints on existing products, which in turn affects the overall industry's profits.
If substitutes can provide a better cost-performance ratio than existing products, they can pose a significant threat, sometimes even disrupting the entire industry. Therefore, producers of existing products should be cautious.
④ Customers:
Choosing high-quality customers is very important:
Market share of customer products
Share of customer's purchasing volume (position in the customer's supply chain)
Customer bargaining power
Customer reputation and payment delays
Profitability of the customer's products
Customer's backward integration power, etc.
⑤ Suppliers:
Choosing high-quality suppliers is equally important:
Supplier pricing
Supplier quality and service levels (position in the supplier’s view)
Supplier payment terms
Substitutability of the supplier's products
Supplier product monopoly
Supplier's forward integration power, etc.
The market is ever-changing, and businesses are constantly within this change. Therefore, any static analysis cannot timely reflect the fast-moving shifts within industries. It is only through timely and flexible use of the Five Forces Analysis that one can achieve optimal results.
3. Constructing the SWOT Matrix
In the process of constructing the SWOT matrix, the analyzed factors should be prioritized based on their urgency and impact. Those factors that have a direct, important, significant, urgent, and long-term impact on the company’s development should be placed at the top of the list, while indirect, secondary, minor, non-urgent, and short-term factors should be placed lower.
4. Developing Strategic Plans
Leverage the strengths, analyze the weaknesses, and work to overcome the weaknesses. Utilize the opportunities, identify the threats, and mitigate or avoid those threats. Consider the past, focus on the present, and look towards the future. Using a comprehensive analysis method based on systems analysis, match and combine various environmental factors to derive a series of strategic options for the company’s future development.
5. Example of SWOT Application
6. Common Mistakes and Considerations
Common Mistakes:
Jumping straight into the SWOT analysis without a clear framework or preparation.
The analysis lacks focus, and doesn't prioritize critical factors.
Failing to conduct a dynamic analysis of the SWOT factors (i.e., not taking into account how internal and external factors may change over time).
The team involved in the analysis lacks diversity in viewpoints, leading to biased or narrow insights.
The SWOT process lacks a well-defined structure or planning.
Key Points to Consider:
SWOT should be used in conjunction with other tools: To ensure a comprehensive and effective analysis, it’s crucial to combine SWOT with other strategic tools (such as PEST analysis, Porter’s Five Forces, or Value Chain analysis) to capture all aspects of the business environment. This approach helps avoid important omissions in the analysis.
Example: For a company entering a new market, combining SWOT with market research tools (such as PEST) will provide insights into both internal capabilities and external conditions, ensuring that no critical factors are overlooked.
Focus on Prioritization: The results of the SWOT analysis should be focused on the most critical factors that will directly influence the company's strategy. It is important to categorize the factors by urgency and impact to avoid getting distracted by minor issues.
Dynamic SWOT Analysis: It’s crucial to view the SWOT analysis as a living document, which evolves as the internal and external environment changes. Regular updates to the analysis can help the organization adapt to emerging opportunities and threats in a timely manner.
Encourage Diverse Perspectives: Involve a variety of stakeholders in the SWOT analysis process to ensure different viewpoints are considered. This can include team members from different departments, as well as external consultants or customers. A broad range of perspectives ensures a more accurate and holistic view of the situation.
Strategic Process and Planning: A well-organized and structured process for conducting the SWOT analysis is necessary for effective outcomes. Ensure that the team follows a clear methodology, from data collection and analysis to action plan formulation, to maximize the impact of the findings.
Forward-Looking Thinking in SWOT
Ignoring the important time dimension and not considering how key aspects of SWOT will change in the future. To avoid this mistake, it’s essential to ask key questions for each dimension of SWOT and answer them effectively. In his book The Effective Executive, Peter Drucker pointed out: "We cannot predict the future. But that does not mean we cannot think proactively about the future that has already happened."
Classic example questions:
Focus on Key Factors
A common mistake among novice SWOT analysts is the belief that the more factors identified, the better, leading to a sense of accomplishment. However, this is another typical error in SWOT analysis. While it's not bad to have many factors in the initial analysis, if a large number of factors remain at the later stages, it becomes problematic. This can lead to shallow strategic thinking, unfocused actions, scattered resources, and lack of emphasis in execution. Strategy is about the key priorities we focus on during a period, not everything.
Present Different Perspectives
As Peter Drucker said, good decisions always start from different viewpoints. A decision that everyone agrees on from the outset often has serious problems—either the decision itself is flawed, or people haven’t thought deeply enough about it. One of the keys to strategic analysis is identifying the right people. Strategic analysis itself is a listening process: listening to external and internal voices, listening to the present and the future, listening to customers and competitors... and these insights need to be gathered and understood by different people. Knowledge is held in the minds and hearts of different individuals. Therefore, it's essential to include a variety of people. These can include seasoned salespeople, experienced R&D veterans, newcomers who bring fresh perspectives, or specialists in certain fields. When applying various analysis tools, it’s important to involve different people in the discussion. By using effective methods to highlight differences and reaching a consensus based on diverse perspectives, this forms a strong foundation for successful strategic execution.
Use Facilitation Techniques and Carefully Plan the Discussion Process
The SWOT facilitation process should clearly define six key points and introduce the seven stages of process planning.
SWOT analysis is only the first step in strategic development. Companies need to further identify the intersection between internal factors and the external environment, effectively adjust and integrate internal elements to align with or surpass external environmental changes, thus gaining a lasting competitive advantage.
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