Bad SWOT Analysis

If you use the right tool in the wrong way, you can do a lot of damage – and too often, I have seen SWOT analyses used the wrong way, and the output is a disastrous strategy that is pursued with great confidence.   I’m used to seeing this sort of foolishness from people who have no training or education in strategic planning – but recently, I was in a planning session with an MBA (granted, it was from a diploma mill) who did exactly the same thing, so it’s worth mulling over a bit.

Essentially, the SWOT analysis is a method for matching the strengths and weaknesses (SW) of a firm against opportunities and threats (OT) in the environment.   This identifies opportunities that can be seized immediately (because the company has the strength), opportunities for which the firm must gear up (because it is lacks the strength to pursue them), threats that the firm doesn’t need to worry about (because it already has strong defenses), and threats against which the firm must bolster its defenses (because it has a weakness).   It’s a very good tool when the analysis is done properly, and a very bad one when the analysis is poor.

The Wrong Way

The wrong way to SWOT is to begin by making a list of strengths and weaknesses and then considering what opportunities and threats may arise because of them.   This is the way untrained strategists approach the  task, because they are following the acronym in order: first S then W then O then T.  And apparently, it is the way SWOT analysis is taught in at least one specious “school” of business.

The problem with this approach is that it presumes the firm is unchangeable: its strengths and weaknesses are natural qualities that cannot be overcome.   It may be possible to recognize that the firm lacks the strength to advance on an opportunity, then to consider what changes can be made to gather the resources needed – but this is seldom done.  Instead, the conclusion is “we cannot pursue that opportunity” and no thought is given to making strategic changes to strengthen the firm where it is currently weak.

A second and more serious problem is that once strengths and weaknesses have been discussed and documented, this becomes a cognitive filter for the identification of opportunities and threats.   Any opportunity that does not correspond to an identified strength is simply ignored because the analyst’s mind has been primed to consider only opportunities that align with existing capabilities.

When SWOT is done the wrong way, it leads inexorably to the conclusion that the firm should remain exactly the way it is and keep doing exactly what it is doing – to capitalize on its strengths and ignore its weaknesses – meanwhile ignoring most of what is going on in the industry and the market.  This effectively prevents innovation, or even reaction to obvious problems.

The Right Way

The right way to SWOT is to begin with a list of opportunities and threats in the external environment, and then to recognize whether the firm is strong or weak in regard to those environmental factors.  From there, the analyst might recognize threats that can be ignored and opportunities that can be seized due to existing positions of strength – but he also recognizes the need to make strategic changes so that the firm can move in a different direction to seize opportunities or defend against looming threats for which the firm is not currently prepared.

Ideally, an independent researcher conducts the analysis of opportunities and threats in the environment.   This is critical because the analysis must be objective rather than being biased according to the current capabilities of the firm, or by any insider’s agenda to take actions that are motivated by personal ambitions.   It is only in this way that a firm can have a comprehensive and realistic perspective of the opportunities and threats it is facing.

It is only after the environmental scan that the strengths and weaknesses of the firm can be considered: a firm can have significant capabilities at something that is completely irrelevant to the market, which means that those capabilities are not a strength (and the resources consumed to maintain that power can and should be redirected).   This is a task for insiders who know the firm’s capabilities – through one must take care to avoid including those who are complacent or happy with the way things are: such people are averse to change and will make whatever distortions are necessary to defend the status quo and carry on with business as usual, even when it does not make sense.

Done correctly, the SWOT analysis will highlight the need to make strategic changes: opportunities and threats have been identified for which the firm does not have sufficient strength - but rather than abandon the opportunities and ignore the threats, this analysis will quickly identify ways in which the company can gain strength by taking action (build or reorganize a department, acquire or partner with a firm who can supply the necessary strength).   It can also identify areas in which the firm can divest itself of unnecessary and unprofitable operations that drain its resources by finding strengths and weaknesses that have no relevance to any threat or opportunity.

Conclusion

While the right tool can generate substantial benefits if it is used in the right way, it can do significant damage if used incorrectly, and this is the fundamental problem of improper SWOT analysis.   Moreover, because decision-makers feel that due diligence has been done and their plans are informed by intense research and analysis, it gives them great confidence to charge off in exactly the wrong direction.   This dangerous blend of ignorance and confidence is the ideal recipe for disaster.