SWOT stands for strengths, weaknesses, opportunities and threats. A SWOT analysis is designed to evaluate both the industry and the company, specifically looking at how the company responds to both internal and external events. Market segmentation attempts to divide a customer base into segments which can then be targeted with goods and services sold by the company.
The 80/20 Rule
There is a saying in business that is referred to as the Pareto Principle. It states that 80 percent of a company's sales are from 20 percent of the customers. This is a very powerful statement for companies focused on increasing revenues. Tapping into this 20 percent of customers with additional products may result in additional sales dollars. One way leadership identifies and targets the top 20 percent is by using SWOT analysis.
Internal vs. External
There are two different ways for a company to respond to change: internally or externally. Internal responses consist of internal communication, changes in policy, and shifts in management or leadership. External responses consist of name changes, product launches and fundraising efforts such as debt or equity offerings.
Opportunites & Threats
SWOT is split between internal and external analysis. Strengths and weaknesses refer to internal events and performance, while opportunities and threats refer to external events and performance. For instance, if sales in the industry are going up and the company has a strong brand, it is a considered an opportunity. The opportunity is created externally and the company's brand name allows them to capitalize on it.
Strengths & Weaknesses
Strengths and weaknesses are created from within the organization. For instance, if the company receives an award from its employees for workplace excellence it is considered a strength. The award does not affect the entire industry, only the company. It is important to understand the difference, otherwise it is difficult to use SWOT for market segmentation and analysis.
Industry analysis is used to help determine company opportunities and threats in terms of segmentation, while internal customer information is used to help determine strengths and weaknesses. As an example, if sales are expected to grow exponentially, this type of analysis can help a company figure out what people buying and which customers are buying it. Internal customer information is then used to dig deeper. Internal data mining may show that your customers are located in the same city as company headquarters. In this example, SWOT analysis tells you to focus market segmentation on customers buying a particular product located in a certain geographic area.
- QuickMBA: SWOT Analysis
- BetterExplained: Understanding the Pareto Principle (The 80/20 Rule)
- Michael E. Porter. “Competitive Strategy: Techniques for Analyzing Industries and Competitors,” Pages 1-2. Simon & Schuster, 2008.
- University of Minnesota. “SWOT Analysis: A Tool for Making Better Business Decisions,” Page 1. U.S. Department of Agriculture; Risk Management Agency, 2008.
- Harvard Business School. "Competitive Strategy: Techniques for Analyzing Industries and Competitors." Accessed April 23, 2020.
James Collins has worked as a freelance writer since 2005. His work appears online, focusing on business and financial topics. He holds a Bachelor of Science in horticulture science from Pennsylvania State University.