SWOT is both the most powerful and least understood strategic management tool. Used correctly, it translates the outputs of many other market analyses into a small number of key issues.
The most powerful strategic management tool is also the most misunderstood
Consultants often use military analogies, comparing competitors to enemies and strategies to battle plans. This tradition arose in the early days of strategic planning in the 1950s, when many executives and writers had personal experience of military life. But for the life sciences sector it is a flawed analogy, neglecting both the role of customers and the reality of cooperation between rivals. Much closer are the parallels to biology, where success depends on achieving the best fit with the environment. The idea of “strategy as fit” emerged in the late 1960s and central to it was the SWOT (strengths, weaknesses, opportunities, threats) analysis, which almost every life science firm uses as part of its strategic planning.
Despite its widespread use, SWOT remains the most misunderstood and abused technique in the strategists’ toolkit. Academic research reveals that most SWOTs produce lists of meaningless, unverified factors that are of little practical use. This means that many firms are wasting valuable executive time doing useless SWOTS and are failing to realise the benefits of a powerful aid to strategy making. In my work, researching the evolution of competitive capabilities in the life sciences, I’ve observed the differences between firms that gain value from using SWOT and those that don’t. Three practically useful lessons emerge from my work.
SWOT is typically used independently from other tools but the effective use of SWOT involves using it as part of a process. Here, SWOT becomes a tool that makes sense of the outputs of other techniques, as shown in figure 1.
In the life science companies that I have observed, to use SWOT effectively, the practice was to feed the SWOT with the inputs from a wide range of other strategic management tools. Typically, market segmentation, Porter’s 5-forces, Life Cycle Analysis and SLEPT (or PEST) were the most useful tools for clarifying factors external to the firm. When used correctly, those tools cover the whole gamut of factors that shape pharmaceutical and medical technology markets, from regulation and market access to technological developments and clinical practice. For factors within the firm, value-chain comparison, benchmarking, and market-mapping are useful. These reveal both tangible factors, such as product advantages and IPR, and important but less obvious factors, such as customer relationships and core competencies.
When used in this way as a processor of the outputs of other tools, SWOT classifies positive, internal factors as strengths and negative internal factors as weaknesses. Similarly, positive external factors are classed as opportunities and negative external factors as threats. Later in the process, these are aligned. But for now the critical difference to note between useful and useless SWOTs is that effective SWOTs don’t stand alone, they use the outputs from all the other analyses.
Surprisingly, my work finds that most effective SWOTs are usually much shorter than those of less effective companies, which are characterised by repetition, overlap and contradiction. For example, life science companies are particularly prone to adding lots of technical and clinical factors into the SWOT that have little strategic relevance. Equally, they often overstate the importance of local or temporary changes in the market environment. In my research, I uncovered a novel filtering process that leading firms use to avoid this; whereas most firms dump their ideas into the SWOT, better firms sieve them, allowing only useful information into the SWOT.
The mechanism of this filtering process is based on a body of research known as the Resource Based View of the firm. It is critically important to the success of SWOT and is shown in tables 1 and 2. Importantly, these filters are cumulative: a factor must pass all four tests to qualify as a genuine strength, weakness, opportunity or threat. When used well, this approach filters out the irrelevant noise in the environmental analysis and reduces the real, strategically relevant strengths and weaknesses to a small number of very important factors.
If the first two lessons are applied and SWOT is used as part of a process with filtered inputs, the result is four very succinct lists (strengths, weaknesses, opportunities, threats) with typically 5-10 factors in each. In life science markets, strengths and weaknesses usually include factors about the firm’s technology but also about capabilities in managing customer relationships. The opportunities and threats include newly identified market segments and competitive activity but also factors arising from the payer environment. Importantly, these four lists now contain everything that is strategically important and nothing that is not. Using these, the strategist can now extract real value and insight from the next and final stage of SWOT process.
In those life science companies who wasted time on fruitless SWOTs, it was typical to see large amounts of data analysis, a habit that is exacerbated by data availability and cheap processing power. By contrast, the more effective companies, whilst still valuing data, did less analysis and concentrated on aligning the factors that had emerged from their filters. This alignment process involves two sequential steps:
Looking for two sets of connectivity: those between strengths and opportunities and those between weaknesses and threats.
Identifying the critical success factors implied by that connectivity.
Firms that try to leap to lesson 3, without learning lessons one and two, waste resources on invalid SWOT analyses. Those that are more thorough usually find that the connections are obvious and clear. VRIO validated strengths almost always align obviously to CLAL validated opportunities as do MUDU validated weaknesses to USUL validated threats. As a small but useful practical tip, this first step of alignment is made easier when the connected factors are written in the left and right hand columns of a table, as exemplified in table 3.
Only when this first alignment step between internal and external factors is complete, can the second alignment step be executed. Effective firms ask themselves questions about what needs to happen for each strength to exploit its connected opportunity and for each weakness to be mitigated in the face of its connected threat. If the first alignment step has been done thoughtfully, the answers to these questions emerge as clear, unequivocal key issues that the strategy must address. As another practical tip, this second step is made easier when the key issues are written in the central column of the table, as in the example of table 3. When observing what life science companies do in practice, it is noticeable that best practice always involves an iterative process, repeating the whole process from initial analysis, through filtering to alignment and identification of key issues, several times. Ineffective practice was typified by rushing through the process and reluctance to reiterate, a habit that simply failed to cope with the complexity of typical pharmaceutical or medical technology markets.
Although table 3 is a simplified and disguised example, it illustrates the key features of an effective SWOT. Using only a small number of filtered inputs, the output of a useful SWOT is a limited number – typically 5 to 10 – of key issues. Despite and perhaps because of this succinctness, these key issues make it clear to the firm’s executives what they must do to align its internal strengths and weaknesses to the opportunities and threats arising from the market environment.
Although the key issues that come out of SWOT do not dictate what the strategy should be, they help the strategist identify what really matters. Especially in complex, turbulent markets like those for pharmaceuticals and medical technology, this makes SWOT an important and arguably essential tool for senior executives. However, like any tool, it can do more harm than good if used badly. Used alone, without filtered inputs and without the alignment step, SWOT deserves the other meaning it is sometimes given: A Silly Waste Of Time. But used correctly, to process the outputs of other techniques, with carefully filtered inputs and a thoughtful, two-part alignment step, it is perhaps the single most useful tool available to the strategist.