Table of Content
Overview
Isaiah Berlin once said that the world is divided into hedgehogs and foxes: “The fox knows many things, but the hedgehog knows one big thing.” Regardless of whether you find the fox's strategy of strengthening weaknesses or the hedgehog's strategy of focusing on strengths more sensible, SWOT can help.
SWOT analysis is undoubtedly the most commonly used strategic tool, but at the same time, it is the one from which meaningful conclusions are most rarely drawn.
This is confirmed, for example, by a relatively old publication from 1997, when Terry Hill and Roy Westbrook from the London Business School conducted research on the experiences of 140 companies, highlighting the most common shortcomings that arise during SWOT-based strategic analysis. These are:
problems with choosing priorities;
problems related to the length of the lists (on average over 40 factors)
generalities (often meaningless);
vague and ambiguous phrases;
conflicts;
lack of logical connection with the strategy implementation phase.
The authors' conclusions: “It seems that SWOT has survived and been accepted as a way to structure a long list of attributes and trends. It has become a peg on which to hang a wide-ranging group discussion about a company's strategic position.”
If you are looking for other critical studies, but with alternatives, I recommend Valentin's publication “Away with SWOT analysis: Use defensive/offensive evaluation instead.”
This simple tool is also subject to a lot of heuristics, the most popular of which is probably the confirmation effect – the search for information that reinforces our opinion, which in group processes means strengthening socially powerful individuals, leading to another mistake – herd mentality.
And yes, SWOT analysis as everyone knows it, whose infamous symbol for me is “HBR Tools: SWOT Analysis,” is undoubtedly not very useful.
Tools are nothing, context is everything
SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats) is one of the oldest strategic tools, and it is difficult to use it without understanding the context in which it was created. It originated as the SOFT model (Satisfactory; opening Opportunities; fixing Faults; or thwarting Threats).
Its creator, Stewart, developed it in the 1970s as a System of Plans tool within a precisely planned strategic process in which all company managers participate in strategy development.
For Stewart, a company was an organism that needed “the inseparable identification of its parts with the whole,” and this process gathered, in some cases, thousands of different points of view, which were then segregated into groups, analyzed, and prioritized, i.e., areas where changes would have the greatest effect, leading to a dialogue that took into account the needs of all stakeholders.
The SOFT process itself was very time-consuming, although I think it was quite useful. It was later simplified at HBS, making it one of the simplest, fastest, and least insightful strategic tools.
Those interested in this traditional approach should refer to “The origins of SWOT analysis” by Prof. Richard Puyt, while everyone else is invited to try a slightly shallower, faster, but still classic and quite useful analysis of strengths and weaknesses, which we will combine with Kahneman's observations. Such an analysis should be based on the following five observations:
Five principles of effective analysis of strengths and weaknesses
Observation #1: structured analysis is better than unstructured analysis
SWOT analysis is usually conducted in an unstructured manner – it begins and ends with an assessment of the entire organization during a brainstorming session.
Although this process results in long lists of components, both very important and not very important, this abundance does not always, or even usually, mean a better strategy, especially if unimportant elements distort judgment.
Forecasts and decisions made in a structured manner are more accurate and yield better results than unstructured ones (there is a lot of research on this topic, but we refer you to the book “Thinking, Fast and Slow” by Nobel Prize winner Professor Kahneman).
In business, structured analysis focuses on only five/seven key areas in building competitive advantage. In simple terms, these are:
after-sales service and support,
marketing and distribution,
finance,
people management,
technology,
production,
organization and management.
Although we usually look at all areas, each industry has its own dominant type of advantage, and it is important to understand this well in order to play in the chosen field.
Let's take a look at tomato sauces – it would be wrong to assume that the fundamental source of competitive advantage in such an FMCG market could be the product, recipe, and taste. After acquiring Rao's sauce, Sovos' management focused on something else, increasing the marketing budget from several hundred thousand dollars a year to $20 million.
They rolled out a broad distribution and promotional campaign for the brand, which had previously been limited to the northeast and west coasts of the United States. The result? Campbell acquired the brand for $2.7 billion. If we don't understand why this had such an effect, we can't compete.
The same is true for many FMCG brands, such as beers, where it is not the product itself, but first and foremost excellent distribution and secondly promotion, that constitute a primary competitive advantage.
No one has structured competitive advantages better than Porter; we recommend his “Competitive Strategy,” for example.
Observation #2: everything can be broken down into its constituent parts
To avoid cognitive errors in complex decision-making processes, it is worth breaking down each key factor into its constituent parts. Therefore, at this stage of SWOT, it is crucial to create a comprehensive list of independent elements for each area and type of competitive advantage, without assigning them to the group of strengths or weaknesses.
The list must be comprehensive in the sense that it should include every element that is relevant from the perspective of the industry and the organization, and these aspects should be independent in the sense that it is ineffective to leave closely related and overlapping points on the list. Anything that is repeated at this stage should be removed from the list so that you don't have to revisit the same thing twice.
Can this be done based on science and objective data rather than intuition?
Of course it can.
Flexibility is a basic measure that allows you to determine how to prioritize different business factors. It is simply the total percentage change in financial results such as ROI, ROE, and ROS for a 1% increase in market share.
Elasticity of factors in relation to financial results (Edeling and Himme, 2021):
average elasticity of market share = 0.132
For comparison, other factors (Edeling and Fischer, 2016):
average elasticity of advertising expenditure = 0.04
average elasticity of marketing assets = 0.54
average elasticity of brand-based marketing assets (e.g., brand value or customer lifetime value) = 0.33
average elasticity of customer-based marketing assets (e.g., customer satisfaction or perception of quality relative to company value) = 0.72
The result of this stage is a list of types of competitive advantages and their components, e.g., marketing and distribution: distribution channels. Product quality, market penetration, or technology: component quality, fixed asset consumption, etc.
We used precisely these types of objective indicators when creating our structured SWOT analysis using AI.
Observation #3: strengths are only strengths in relation to something
It is impossible to assess strengths and weaknesses without good benchmarks. Looking at rivals from the outside allows you to correct all kinds of intuitive assessments. The point of reference can be the most dangerous competitor, all competitors from the strategic group, or leaders from outside the industry. From a business strategy perspective, the latter solution is extremely useful, while from a brand perspective, it is better to stick with the former.
In this process, it is crucial to choose competitors that are similar to us, e.g., in terms of market share, but preferably those that are growing faster and are better in many other respects—we want to learn from them, draw conclusions, and know where we are incomparable.
Most organizations know their competitors extremely well and have quite good data about them, which is all the better in such a process. The assessment and comparison of the key components of our organization with competitors should be based, as far as possible, on facts and data.
Usually, when comparing our organization with a competitor, we rate ourselves on a five-point scale, precisely in comparison to the competitor, from “definitely weak” to “definitely strong.”
No one has written better about benchmarking than Robert C. Camp, and we have used his insights in our automated SWOT analysis framework to help you select the right benchmarks.
Observation #4: the stupidity of the crowd
Most organisational processes can’t tap into the wisdom of crowds—in fact, they usually do the opposite. For the effect to appear, two conditions have to be met:
The crowd must represent genuinely diverse points of view.
Each answer has to be given independently.
Miss either one and you don’t get wisdom—you get a stampede.
Methodologically, the best-in-class solution is the classic Delphi method. It unfolds over several rounds: participants estimate and vote, adding a short rationale for every rating—completely anonymously—moving, round by round, toward convergence.
The definitive book on the Delphi method is by Harold Linstone and Murray Turoff.
Unfortunately, business rarely has that kind of time…
As the late Nobel laureate Daniel Kahneman wrote, “A simple algorithm is better than you.” A well-tuned AI can protect people from herd behaviour, biased scoring, office politicking and the heuristics you can’t dodge any other way—unless you spring for an expensive Delphi study or a cheap AI.
Observation #5: the whole exercise is pointless unless we aggregate the data and line up our five—or seven—competitive advantages side-by-side
At this stage we collectively sort out what counts as a strength, a parity factor and a weakness for our organisation. The orthodox advice says: shore up the weaknesses by copying what your rivals do. But before you clone anything, figure out which weaknesses are the unintended by-product of strategic choices (leave those alone) and which are simply the fallout of poor management (those you neutralise by copying).
Just as crucial: pin down your signature strength and ask whether, in the real world, our mix of strengths and weaknesses actually delivers—or could deliver—a bona-fide competitive edge. If yes, great: that’s your first hook for brand positioning—though, candidly, it rarely works out that neatly.
For a deep dive into data aggregation in SWOT analysis, see Professor Obłój’s book Strategia.
We’ve baked all these principles into our own framework—you can give it a spin here:
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