SWOT Analysis

To most business and management students, the SWOT (which stands for Strengths, Weaknesses, Opportunities, and Threats) analysis probably looks and feels like an uninteresting scholastic exercise; it’s either the sort of thing instructors like to make students do to make sure they’ve actually read the assigned case study, or alternately, a good way to pad out an essay with a challenging word limit. Yet despite its deceptive simplicity and its age – the method has been a staple of strategic planning and management textbooks for about 40 years – the SWOT analysis is still a very current and very useful planning tool for business, and well worth learning.

What Is a SWOT Analysis?

The SWOT analysis is attributed to Dr. Andrew S. Humphrey, who developed the method while working at the Stanford Research Institute in the early 1970s. SWOT can best be described as an environmental analysis tool; it combines an assessment of the company’s internal environment (Strengths and Weaknesses) with the relevant external environment (Opportunities and Threats). The SWOT typically takes the form of a 2×2 matrix, which allows planners to look at all the factors at the same time.

Here is an example of a brief SWOT analysis, from a strategic assessment of a pharmaceutical company:

Strengths Weaknesses
  • Leading position in R & D spending and organization
  • Well-developed presence in global markets.
  • Facilities are strategically dispersed to increase research volume.
  • Testing processes are highly automated.
  • Market reach and diversity help moderate effects of downturns in any one segment or market.
  • Strong brand identity.
  • Strong corporate responsibility images with the initiative to increase generic drug availability in underprivileged markets.
  • Good financial position with respect to current assets & liabilities: current ratio of 1.64, and acid-test ratio of 1.31.
  • Less-than-ideal debt & liability position
  • High tax liability of 9.46%.
  • Short-term debts greatly reduced in 2008, but long-term obligations correspondingly increased.
  • Debt-to-equity ratio (at end of 2008) of 1.95.
Opportunities Threats
  • Consumer health issues are opportunities for new products
  • High rates of vascular and heart disease increase demand for drugs to treat these conditions and their symptoms.
  • Lower smoking rates increase demand for smoking-cessation drugs.
  • Increasing obesity rates increase demand for weight-control drugs.
  • Growing emerging markets, for example in Asia and Africa.
  • Government support in the form of scheduled pharmaceutical price increases from 2009 – 2011.
  • Strong generic drug competition in established markets, primarily the UK and the US.
  • Mandated generic drug availability policies in large markets, for example, the UK and Brazil.
  • Expiry of patents on some key products. Cautious or skeptical assessments from financial analysts can weaken investor confidence.

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Advantages of the SWOT Analysis:

The biggest advantage in using the SWOT analysis as a basic strategic planning tool is that it is an uncomplicated way to gather all the necessary information in one place; the methodology behind the SWOT is largely self-explanatory, and thus almost everyone in the organization can have input to it. This was the overall objective of Dr. Humphrey in developing it, as he was a champion of what he called “Total Action Management” (or TAM), an early conceptualization of what we know today as “flat” or “horizontal” organizational architecture, Total Quality Management (TQM), and the stakeholder approach to strategic planning.

The SWOT analysis has an advantage over more complex and detailed environmental analysis methods like the PESTEL analysis because it categorizes the important factors – internal or external, good or bad. This can help the organization more easily determine which factors need attention. Finally, the arrangement of factors can help to identify other points that may have been overlooked; for example, an obvious threat from the external environment might reveal an internal weakness.

Disadvantages of the SWOT Analysis:

The biggest advantage of the SWOT analysis – its simplicity – is in some ways its biggest weakness; the analysis is only as good as the information put into it, and if key factors are not included, subsequent strategic planning can be adversely affected. One of the biggest flaws of SWOT analysis is not in the tool itself, but in its users, according to Professor Malcolm McDonald of Oxford University, who has called the SWOT, as it is taught in business schools these days, the SWAG (which stands for “Scientific Wild-Ass Guess”). The common problem, in McDonald’s view, is that many weaknesses and threats are generic and applicable to any organization’s environment – things like the threats of natural disaster, political instability, or poor global economic conditions – and are therefore not very helpful in planning for the specific circumstances of a particular organization and its market.

The SWOT analysis is also not a stand-alone tool. It is an effective way to gather and organize information needed for strategic planning, but it gives no priority to the factors. In the example above, for instance, the various points are presented in a completely random order, as they were recalled by the managers helping to build the SWOT; beyond arranging the factors into their correct places in the matrix, the analysis by itself does not suggest which ones are the most important.

Alternatives to the SWOT Analysis:

In a regularly-cited 1997 article (“SWOT Analysis: It’s Time for a Product Recall,” Long Range Planning, Vol. 30, February 1997) authors Terry Hill and Roy Westbrook argue that the SWOT analysis produces ineffective results so often – largely due to the SWAG factors described by Professor McDonald – that it ought to be scrapped altogether. To compensate for some of the method’s shortcomings, variations of the SWOT analysis such as the POWER SWOT, the TOWS analysis and the Defensive/Offensive Evaluation (DOE) have been developed in recent years. These variations add depth and detail to the standard SWOT analysis and are valuable tools in the strategic planning toolbox. The traditional SWOT analysis, however, remains important for management studies even if its capital as a real-life assessment tool may be a bit diminished these days because it is the basis for more advanced and complex tools that followed. Understanding the SWOT not only makes it possible to use this very simple tool to its full advantage but provides a necessary background for learning and applying more sophisticated strategic planning tools.

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