The Limitations of SWOT Analysis

“SWOT can be a good tool if used wisely. It offers the standard framework for discussion. But in the wrong hands it can also do damage by reinforcing the status quo mindset.” So says Paul Schoemaker as published on Inc.com in September 2014 (‘five-traps-swot-analysis’ accessed on 22.9.14.) The commonly used tool which looks at internal strengths and weaknesses along with external opportunities and threats has some inherent limitations. The author suggests that there are five common strategic planning pitfalls which could “set your company in the wrong direction.”

Here are the limitations of SWOT analysis along with further considerations (“et alors”):

The Limitations of SWOT Analysis

Schoemaker suggests there are five common pitfalls to avoid when using SWOT analysis to make strategic plans:

1.       Too much navel-gazing

With an internal focus, the ‘strengths’ and ‘weaknesses’ may become a laundry list of all and sundry ranging from micro-issues to macro-ideas.

Labeling an item as a plus or minus involves a “value judgment in which your current strategy becomes the implicit reference point.” To avoid these pitfalls, make sure the focus in outside-in (cf. point #4.)

2.       Imprisoned by the status quo

The concept of ‘opportunities’ and ‘threats’ “forces you to prejudge whether external change is a positive or a negative with the current strategy as the natural reference point.”

It is therefore better to consider “neutral” language such as asking which external forces orissues could impact your business.

3.       Insufficient Systems Thinking

Systems thinking (“grasping how external trends and uncertainties may be changing your playing field”) is very difficult; in addition, trends are useless when viewed in isolation.

The strategist needs to ask when the key trends might stop, “over what time frame the key uncertainties could play out and how the pieces of the puzzle interact.”

4.       Poor Outside-in Analysis

Internal topics tend to get preference in the SWOT analysis. The changing world needs to be considered before looking internally. The analysis needs to be “outside-in.”

Instead of asking “how can we serve our customers better”, ask “why aren’t more customers buying from us” and instead of “how should we improve” ask “how are our competitors superior?”

5.       Little “Future-Back” Thinking

SWOT analysis can reduce value by taking complex strategy questions and reducing them to a list of items that “in isolation are hard to assess.”

Instead, “by reimagining how the entire market can be served better… strategic leaders discern which actions today will create new options for tomorrow.”

Et alors

There are two principle tenets to Schoemaker’s critique of SWOT analysis: firstly that it is too internally focused and therefore ‘anchors’ the strategy analysis to center around the status quo. This is a huge risk for companies as the changing environment is not fully taken into account. An arbitrary judgment of opportunities and threats can overlook how easily both of those can change, whereas what is really needed is “options.” The second main point is the challenge of seeing the dynamic. The SWOT analysis is at a point in time and can be likened to the ‘snapshot’, when what really needs to be reviewed is the changing ‘movie.’ Simply put, a current strength can be your biggest future weakness! The solution to address these two key points is to use scenario planning to focus the strategy review on an outside-in basis, to consider the forces and issues at play and to look for options in every eventuality so that you can be best placed to win tomorrow (and not just today)!

From Corporate Strategy to Corporate Theory

In the corporate environment, strategy is often synonymous with “sustainable competitive advantage”. Strategic analysis is about discovering and targeting attractive markets and then forming “positions” which can be occupied and defended; however Todd Zenger points out that “equity markets are full of companies with powerful positions and sluggish stock prices.” In “What is the Theory of Your Firm?” (June 2013 HBR) he asserts that companies should focus less on competitive advantage and more on growth that continues to create value. To do so he suggests considering what is your corporate theory – a reference point to organize assets, activities and resources in order to create value.

Here’s how to move from Corporate Strategy to Corporate Theory followed by further considerations (“et alors”).

From Corporate Strategy to Corporate Theory

The “occupy and defend a position” of corporate strategy should be reconsidered by instead focusing on a corporate theory whereby there is a “rulebook” (and/or a toolkit) for creating value. A good corporate theory requires three strategic “sights” which are:

Foresight

There must be good foresight about the industry’s future. Beliefs and expectations need to be fully “articulated”, but they need to be balanced: neither too generic nor too specific; and well communicated but still a unique offer. (Think Apple 1997-2011.)

Foresight highlights domains in which to search for cross-sight.

Insight

Corporate insight is needed to identify which unique internal capabilities (rare, distinctive and valuable) can optimize the future. If competing companies own identical assets and resources and replicate or surpass your activities, then your foresight might be undermined.

Insight focuses the search for foresight and cross-sight.

Cross-sight

Cross-sight is the key to see which assets can be configured to create value. Identifying “complementarities” is necessary to create value by assembling (or buying) assets that can be combined with existing ones to create value. (Think Disney…)

Cross-sight reveals valuable complementarities, highlighting the domain of foresight.

Et alors

In the article by Zenger, two words are often repeated: consistency and coherence. This is potentially what differentiates corporate strategy from corporate theory. The theory is upstream of the strategy and if well defined should mean that your subsequent strategies are coherent and consistent. The example of Disney is cited as a success story in the article. Disney had a good theory which was coherent and consistent (the foresight of fantasy family entertainment, the insight that design and animations were their key offers and cross-sight of combinations between parks, films, tv, comics and merchandise etc..). So even though it looked like they were diversifying, they were in fact coherent and consistent with their “theory”.  Any deviation from this tends to result in less success whether that is corporate failure (e.g. AT&T) or underperforming share price due to lack of growth prospects (e.g. Walmart). To have a theory, ask how you consistently and coherently create value!

Generic Strategies in a VUCA World

The term VUCA – volatile, uncertain, complex and ambiguous – is currently very popular in business and strategy analysis but it is fast becoming an excuse for inaction! What can be done when everything is VUCA? As Bennet and Lemoine say in “What VUCA Really Means for You” (HBR, February 2014), VUCA is easy to use “as a crutch, a way to throw off the hard work of strategy and planning…” To help address this type of reaction, the authors therefore propose some generic strategies and methods for dealing separately and in turn with volatility, uncertainty, complexity and ambiguity.

 

Here’s how to deal with a VUCA world followed by further implications (“et alors”):

 

Generic Strategies in a VUCA World

 

The authors have classified each sub-term according to 1/ “How well can you predict the results of your actions [“Predictability”]” and 2/ “How much do you know about the situation [Knowledge]?”  Putting the two together yields the following:

 

Volatility

 

The challenge is “unexpected” or “unstable” but it’s not necessarily hard to understand and further knowledge is often at hand.

 

It is high predictability in the context of high knowledge.

 

The generic approach is therefore to “build in slack” and “devote resources for preparedness” (for example building stock to cover variations in demand).

 

Uncertainty

 

Whilst uncertain, the event’s “basic cause and effect are known.” Change is possible but not a given.

 

Knowledge of the situation is high but predictability is low.

 

The generic approach is to therefore use the current “knowledge” to increase predictability (for example running scenario planning).

 

Complexity

 

With many interconnected parts and different variables the volume or the nature of the event (or “situation”) can be overwhelming.

 

Knowledge is actually low because you are missing the key parts, but predictability can be high.

 

The generic response is to hire experts or develop your own specialists to address the gaps in the understanding.

 

Ambiguity

 

Causal relationships are completely unclear – this can be the domain of the “unknown unknowns.”

 

Both knowledge and predictability are low.

 

The generic response is to advance with try-and-see approaches to “test” the ambiguity. Invest in real-time feedback loops.

 

Et alors

 

In a positive sense, these strategies are very simple – for example the approach to volatility might well rank as “common sense”. (However the real challenge with volatility comes from recognising the potential for volatility and planning for it an advance before it happens…) For the other sub-categories, whilst the strategies are sound, the way of dealing with uncertainty and complexity might be subject to cultural preferences. Scenario planning is in some way accepting at least some uncertainty, whereas some cultures which are less accepting of uncertainty might propose heavy planning processes as a strategy to really increase the “knowledge”. (The use of experts however does seem to be a globally generic pan-cultural solution to complexity…) The strategy for ambiguity is, well, ambiguous from a cultural point of view: some cultures would prefer to try-and-see in a practical, pragmatic sense whereas others might try-to-see through rationalising and reasoning…

 

Strategic Leadership

The Economist’s “World in 2013” suggested that as 2013 begins, the “denial phase will end.” Lucy Kellaway in the business section goes on to explain: “Throughout the financial crisis, companies have been pretending that their business model isn’t broken” and that now “a few may put in a call to McKinsey or BCG for slicker strategic thinking…” Whilst strategic management might be considered the internally focused execution of strategy; strategic leadership might be considered the externally focused analysis of strategy. So in 2013, which tools to use in order to devise a strategy to lead your business ahead of the competition? There are plenty to choose from but there is one venerable model that stands out as one of the best for strategic leadership: Porter’s five forces.

Here’s a summary of that “five forces” framework followed by further implications (“et alors”).

Strategic Leadership

In “Competitive Strategy” (Free Press, 1980) Porter defined the model for assessing a firm’s business profitability and its variance so management can find a strategic position to maintain and enhance that profitability. The stronger the forces are, the lower the likely profitability of the business. The five forces are:

Competitors

How strong are they in eroding your profits? They can compete by reducing the price, or increasing the quality of their offer.

Threat of new entrants

What is the potential for new entrants? There may be barriers-to-entry for others starting similar operations (e.g. high capital costs).

Threat of substitutes

With what can your customers replace your offer? There may be alternative products/services or your offer could be “commoditised”.

Bargaining power of customers

Can customers switch between suppliers?  Customers’ power may be increased due to concentrated numbers or a high quantity of alternative suppliers.

Bargaining power of suppliers

Can suppliers command high prices?  Suppliers’ power may be increased due to concentrated numbers or a high quantity of alternative buyers.

Et alors?

Whilst this model has its critics, it still endures as valid for 2013 as 1980 and is still one of the best starting points for the strategic position analysis of a business at any one time. The key is the external focus but any analysis has to be considered a “snap shot” of a dynamic environment. The analysis needs to be refreshed and reviewed on a regular basis and organisations that focus too much on strategic management without recourse to strategic leadership will be putting themselves at a disadvantage compared to their competitors. This risk is exacerbated in companies that are convinced that they are doing things not only the right way but the best way and fail to look outside...

Many commentators have suggested adding a “sixth” force which is usually referred to as regulation and/or government. This constructive criticism may be of particular importance in Europe. Whereas the five forces can be found anywhere, the government influence can appear to be more pronounced in Europe than in other regions on the world. It might be considered that Porter’s model is a “pure-play” capitalist model; whereas the “old world” is heavily impacted by the workings of the “state” or in a larger sense (and as referred to in France) the “system”. The power of this sixth force might go some way to explain the mediocre profitability of some European firms compared to their (say) American counterparts…

Strategic Leadership

Having visited Singapore this week, I was struck with just how successful this country appears to have been in achieving their vision since independence. In terms of education levels, gross domestic product per person and population health, they are now one of the most advanced countries in the world. In “HQ – Redefining Business Leadership” (an Asian Leadership journal, Issue 2, 2012), an article by Hampden-Turner et al., attributed this success to a Confucian/Taoist worldview which “allows them to reconcile two apparently opposing positions”. According to the authors, these two positions are capitalism (competition and individualism) and socialism (cooperation and community).

The assertion is that the reconciliation has been possible due to Singaporean culture which is neither too “individualist” nor too “collectivist”; and neither too “universal” nor too “particular”. So can this success be replicated elsewhere? Is the culture the driver of success or incidental? Notwithstanding the local culture, there must have been a sense of “strategic leadership” to achieve a vision such as Singapore’s. One of the most interesting writers on strategy has published a short article on “Inc.” (March 2012, www.inc.com) which details the definition of strategic leadership. According to Paul Schoemaker, it’s hard to be a strategic leader unless you know what strategic leaders are supposed to do...

Here is a summary of the “6 Habits of True Strategic Thinkers” along with further implications (“et alors?”).

Strategic Leadership

Adaptive strategic leaders do six things well:

Anticipate

·         Look for “game-changing” information on the peripheries – search beyond the boundaries

·         Build wide external networks to better scan the horizon

Think Critically

·         Reframe problems to get to the root causes and uncover bias in organisational decisions

·         Challenge current beliefs and mindsets, including your own

Interpret

·         Seek patterns in multiple sources of data and encourage others to do the same

·         Question prevailing assumptions and test multiple hypotheses

Decide

·         Frame the decision to get to the crux of the matter – balance speed and rigour

·         Take a stand even with incomplete information – balance quality and agility

Align

·         Understand others’ agendas and bring tough issues to the surface

·         Assess risk tolerance and follow through to build the necessary support

Learn

·         Encourage and exemplify honest, rigorous debriefs and shift course quickly if necessary

·         Celebrate both successes and failures that provide insight

Et alors?

Singapore certainly seems to have exemplified strategic leadership in positioning itself relative to its “competitors”. Not only was there an internal drive to develop, but success appears to have come from promoting its relative merits compared to alternative locations. Singapore has previously sought to attract all talent and businesses arriving in the region and they appear to have succeeded with this objective. Strategic leadership is about “anticipation” – the external view of the context is critically important. Furthermore this is dynamic – it applies as much to timing as to location since the learning and adaptation has to be quicker than the competition. The success achieved by Singapore could be seen to be specific to a particular place and time and therefore potentially not easily transferable elsewhere.

There is no denying the cultural context. The organizational culture of “family” as proposed by Mintzberg is recognizable in Singapore – organizations are built around one strong leader who is an omnipotent yet benevolent “father figure”. This type of culture is certainly transferable in Asia being seen in, for example, China and Indonesia, but is not as easy to apply in other national cultures, esp. Western cultures. The “family” culture works “well” where there is low uncertainty avoidance, i.e. the individuals are comfortable with risk and uncertainty; and where there is high power distance, i.e. the individuals are comfortable with an unequal distribution of power. The way of executing a strategy is therefore going to be dependent on the cultural context. So whilst the Singapore strategic success might be transferrable to other Asian nations, it might not be transferable elsewhere.