What is SWOT analysis?

1. What is SWOT analysis?

SWOT analysis is an analytical method used for strategic planning and decision-making in organizations.

It is widely employed in the fields of business strategy and project management, helping organizations understand their current situation, identify internal and external factors, and make strategic decisions on how to address them in the future.

SWOT stands for Strengths, Weaknesses, Opportunities, and Threats, representing the combination of these four elements.

In essence, it is a highly useful tool for formulating plans that leverage strengths, overcome weaknesses, seize opportunities, and mitigate threats within an organization.

2. Elements of SWOT analysis

Let's take a look at each of the four elements targeted in a SWOT analysis. “Strengths” and “Weaknesses” are elements of the internal environment while “Opportunities” and “Threats” are elements of the external environment.

2.1. Strength

"Strengths" refers to the internal characteristics of a company that give it an advantage in achieving business and management goals. For example, patents, special technological capabilities, the company's brand power, high customer satisfaction, etc. These are the "strengths".

Examples of “strengths”:

Customer network, technology/know-how, number of sales offices, service quality, market share, etc.

Build the foundation for your organization's success by maximizing your identified strengths and increasing your competitiveness.

2.2. Weakness

"Weaknesses" refers to internal problems within a company that become obstacles to achieving business and management goals. For example, these "weaknesses" include a lack of resources such as human resources, funds and a lack of production capacity.

Examples of “weaknesses”:

The quality and price of products and services, areas that cannot be covered by our own technology, name recognition, etc.

Develop improvement measures to overcome weaknesses and improve organizational efficiency and operational quality.

2.3. Opportunity

"Opportunity" refers to environmental factors external to the company that are positive for the company. For example, such "opportunities" include social conditions and market trends that are beyond the company's control.

Examples of "opportunities" include

Market size and growth potential, changes in customer needs and trends, legal revisions, technological innovations, etc.

Identify opportunities from the external environment and develop strategies accordingly.

2.4. Threat

A "threat" refers to an environmental factor external to a company that is negative for the company. Examples of such "threats" include the rise of competitors or the contraction of the market due to changes in social conditions.

Examples of “threats”

Social and economic conditions, trends of competitors, market trends, etc.

We consider measures to deal with external risk factors for the organization, reduce risks, and ensure the sustainability of the organization.

3. Benefits of performing a SWOT analysis

By objectively analyzing both internal and external environments, as well as strengths and weaknesses, SWOT analysis leads to the development of integrated strategies that capture opportunities and address threats.

For example, when a company considering an M&A deal conducts a SWOT analysis, it can identify the conditions of potential target companies that can generate synergistic effects by understanding its own weaknesses and external threats.

Furthermore, the process of conducting analysis through discussions helps stakeholders understand the current state of the organization and functions as a process for fostering cooperation towards common goals.

4. Notes on SWOT analysis

When conducting a SWOT analysis, it is not uncommon for internal stakeholders to unconsciously make subjective judgments.

For example, the interpretation of elements within the internal environment as "strengths" or "weaknesses" can vary depending on the analyst's thoughts and position.

Furthermore, even for factors traditionally considered as "strengths," it is necessary to reevaluate whether they can truly be classified as strengths based on objective data and evidence.

Therefore, it is important to base the analysis on objective data and ideally engage in discussions involving multiple individuals to make a well-rounded judgment.

5. How to proceed with SWOT analysis

5.1. Clarification and Preparation of Objectives and Goals

SWOT analysis is commonly conducted by multiple individuals. Without clear objectives and goals, the analysis may end up as a mere collection of elements with differences in interpretation and understanding among participants. Therefore, it is important to first clarify and share the purpose of conducting a SWOT analysis among stakeholders.

To establish a common understanding, it is crucial to quantify objectives and goals as much as possible. For example, instead of using abstract expressions like "increase company value," incorporating specific numbers such as "increase revenue by 50%" can improve the accuracy of subsequent analyses and approaches.

When selecting members to conduct the analysis, it is important to carefully choose the most appropriate individuals based on the objectives and scope. It is also important to gather relevant materials and data, including quantitative and qualitative information from both internal and external sources, to serve as references when identifying and analyzing elements.

5.2. Identifying Each Element of SWOT

Next, we will list the four elements: "Strengths," "Weaknesses," "Opportunities," and "Threats." It is ideal to involve multiple individuals from different perspectives to ensure a balanced and unbiased information-gathering process.

There are no specific rules for listing each element, but it is generally recommended to start with the external environment before the internal environment, as this allows for a more objective assessment of the internal factors. Therefore, it is advisable to fill in the "Opportunities" and "Threats" first, followed by the "Strengths" and "Weaknesses."

5.3. Conducting Cross SWOT Analysis

By combining the identified elements, we analyze and develop strategies. For example, we examine how to leverage strengths and opportunities to maximize growth potential by considering the combination of "Strengths" and "Opportunities."

This analysis, known as Cross SWOT analysis, involves four combinations:

【Strengths】×【Opportunities】

We combine the strengths of the company with the identified opportunities. We consider the necessary actions to leverage the strengths and take advantage of the opportunities for company growth. For example, in the case of "Price competitiveness compared to competitors (Strengths)" × "Increasing consumer demand (Opportunities)," strategies such as emphasizing cost-effectiveness in marketing campaigns can be considered.

【Weaknesses】×【Opportunities】

We combine the weaknesses of the company with the identified opportunities. We consider strategies to address and overcome weaknesses while capitalizing on the opportunities. For example, in the case of "Low brand recognition compared to competitors (Weaknesses)" × "Increasing international interest (Opportunities)," initiating targeted PR campaigns in international markets can be considered.

【Strengths】×【Threats】

We combine the strengths of the company with the identified threats. We consider strategies to reinforce strengths and mitigate the impact of threats. For example, in the case of "High service quality (Strengths)" × "Increased competition from rival companies (Threats)," differentiating the company through superior service quality and implementing targeted marketing strategies can be considered.

【Weaknesses】×【Threats】

We combine the weaknesses of the company with the identified threats. We consider strategies to address weaknesses and minimize the impact of threats. For example, in the case of "Low brand awareness (Weaknesses)" × "Decreasing customer base due to ageing population (Threats)," conducting awareness campaigns targeted at new customer segments and proposing usage scenarios can be considered.

Based on the results derived from the Cross SWOT analysis, we determine the final strategies to be implemented.

6. Two frameworks useful for SWOT analysis

In SWOT analysis, the following two frameworks may be used to more precisely analyze the external environment, such as "opportunities" and "threats."

6.1. PEST Analysis

PEST analysis is an external environmental analysis method proposed by Professor Philip Kotler of Northwestern University. It is used when the external environment has a significant impact on businesses, such as when conducting large-scale operations or expanding into foreign markets.

PEST analysis involves analyzing the external environment surrounding a company from four perspectives: Politics, Economy, Society, and Technology. By understanding the potential impact of the external environment's changes, it helps predict future developments.

When conducting a PEST analysis, it is important to list the external environmental factors related to these four elements.

6.2. Porter’s Five Forces Analysis

Porter’s Five Forces is a framework proposed by Professor Michael E. Porter of Harvard Business School as a method to analyze the "Threats" component in SWOT analysis.

It categorizes the competitive factors that a company faces in the market into five threats and analyzes the industry trends to determine how the company can establish a competitive advantage. The five threats in Five Forces Analysis include:

The threat of Existing Competitors:

This threat involves analyzing the competitive strength of rival companies based on their brand recognition and reputation, as well as analyzing industry size and growth rates.

The threat of New Entrants:

This threat involves analyzing the ease of entry and the required technological capabilities for new players entering the industry and assessing the potential impact on the company.

The threat of Substitutes:

This threat involves analyzing how the emergence of substitute products could fundamentally change the industry's revenue structure. Examples of substitute products that can significantly alter the industry's revenue structure include subscription-based music streaming services replacing CDs.

The threat of Buyer Power:

This threat involves analyzing the power dynamics between the company and its buyers, considering factors such as market size, competition, and analyzing the impact on product pricing and profitability.

Threat of Bargaining Supplier Power:

This threat involves analyzing the power dynamics between the company and its suppliers, considering factors such as market size, competition, and evaluating the costs and threats associated with switching suppliers.

By conducting a thorough analysis of these five threats, a company can gain valuable insights into its competitive position and make informed strategic decisions.

7. Summary

SWOT analysis, which classifies the company's surrounding situation into four elements and helps formulate the company's strategic plan, is highly effective. SWOT analysis has a wide range of applications and can be used not only for creating business plans but also for M&A planning and business due diligence, where it can greatly demonstrate its effectiveness.

However, conducting a SWOT analysis solely with internal personnel tends to involve subjective judgments, which may lead to incorrect decision-making.

To avoid such situations, it is recommended to involve external individuals who can provide objective judgments in conducting a SWOT analysis. Especially for matters that can have a significant impact on the company's future, such as M&A, it is advisable to involve advisors or consultants who are knowledgeable about the situation.