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Executive Overview
Strategic managers and researchers have long been interested in understanding sources of competitive advantage for firms. Traditionally, this effort has focused on the relationship between a firm's environmental opportunities and threats on the one hand, and its internal strengths and weaknesses on the other.
Summarized in what has come to be known as SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis, this traditional logic suggests that firms that use their internal strengths in exploiting environmental opportunities and neutralizing environmental threats, while avoiding internal weaknesses, are more likely to gain competitive advantages than other kinds of firms.(l)
This simple SWOT framework points to the importance of both external and internal phenomena in understanding the sources of competitive advantage. To date, the development of tools for analyzing environmental opportunities and threats has proceeded much more rapidly than the development of tools for analyzing a firm's internal strengths and weaknesses. To address this deficiency, this article offers a simple, easy-to-apply approach to analyzing the competitive implications of a firm's internal strengths and weaknesses.
The history of strategic management research can be understood as an attempt to "fill in the blanks" created by the SWOT framework; i.e., to move beyond suggesting that strengths, weaknesses, opportunities, and threats are important for understanding competitive advantage to suggest models and frameworks that can be used to analyze and evaluate these phenomena. Michael Porter and his associates have developed a number of these models and frameworks for analyzing environmental opportunities and threats.(2) Porter's work on the "five forces model," the relationship between industry structure and strategic opportunities, and strategic groups can all be understood as an effort to unpack the concepts of environmental opportunities and threats in a theoretically rigorous, yet highly applicable way.
However, the SWOT framework tells us that environmental analysis--no matter how rigorous--is only half the story. A complete understanding of sources of competitive advantage requires the analysis of a firm's internal strengths and weaknesses as well.(3) The importance of integrating internal with environmental analyses can be seen when evaluating the sources of competitive advantage of many firms. Consider, for example,
--WalMart, a firm that has, for the last twenty years, consistently earned a return on sales twice the average of its industry;
--Southwest Airlines, a firm whose...