SWOT is an acronym for Strengths (S), Weaknesses (W), Opportunities (O), and Threats (T). SWOT analysis is a framework for generating strategic alternatives from a situation analysis.
It serves as a simple but powerful technique for understanding and evaluating the strengths and weaknesses and for looking at the opportunities and threats involved in a project or a business venture.
The technique is credited to Albert Humphrey, who led a research project at Stanford University in the 1960s and 1970s using data from Fortune 500 companies.
What makes SWOT particularly powerful is that with a little thought, it can help you uncover opportunities that you are well placed to take advantage of.
And by understanding the weaknesses of your business, you can manage and eliminate threats that would otherwise catch you unawares.
More than this, by looking at yourself and your competitors using the SWOT framework, you can craft a strategy that helps you distinguish yourself from your competitors so that you can compete successfully in your market.
The role of SWOT analysis is to take the information from the environmental analysis and separate it into internal factors and external factors.
Environmental factors internal to the business usually classified as strengths (S) or weaknesses (W), and those external to the business firm can be classified as opportunities (O) or threats (T).
Such an analysis of the strategic environment is referred to as a SWOT analysis.
Once this is done, SWOT analysis determines if the information indicates something that will assist the firm in accomplishing its objectives (its strengths or opportunities), or it indicates an obstacle that must be overcome or minimized to achieve desired results (weaknesses or threats).
Because it concentrates on the issues that potentially have the most impact, the SWOT analysis is useful when a very limited amount of time is available to address a complex strategic situation.
The internal and external situation analysis can produce a large amount of information, much of which may not be highly relevant.
The SWOT analysis can serve as an interpretative filter to reduce the information to a manageable quantity of key issues.
As we indicated earlier, the SWOT analysis classifies the internal aspects of the firm or company as strengths or weaknesses and the external situational factors as opportunities or threats.
Strengths can serve as a foundation for building a competitive advantage, and weakness may hinder it.
By understanding these four aspects of its situation, a firm can better leverage its strengths, correct its weakness, capitalize on golden opportunities, and deter potentially devastating threats.
What is SWOT?
SWOT analysis is a useful tool for analyzing an organization’s overall situation. This approach attempts to balance the internal strengths and weaknesses of the organization with the external opportunities and threats.
It provides a good overview of whether a company’s condition is healthy or unhealthy. It reveals the company’s actual situation regarding resources, capabilities, external opportunities, and external threats. It helps to conclude;
- how strategy can be matched to both its resources and market opportunities, and
- how weaknesses can be corrected and threats can be guarded against.
Strengths, weaknesses, opportunities, and threats point to the need for strategic action. Managers need to;
- undertake actions to protect/improve the company’s strengths,
- initiate efforts to overcome the weaknesses,
- pursue market opportunities well-suited to the company’s resource capabilities, and
- take actions to defend against external threats to the company’s business.
An organization needs to have a comprehensive view of its overall situations. This requires a Situation Analysis of the organization.
One approach to situation analysis is the SWOT Analysis. SWOT analysis is practically a way to analyze a firm’s internal and external situations.
It prepares the groundwork for matching the firm’s strategy both to the external, market circumstances, and internal resources and competitive capabilities.
Insightful situation analysis is a precondition for identifying the strategic issues that management needs to address and for tailoring strategy to company resources and competitive capabilities as welt as to industry and competitive conditions.
Again SWOT stands for strengths, weaknesses, opportunities, and threats.
Strength is something that a company is good at doing.
Anything can be a strength if it gives the company enhanced competitiveness. Strength can take the form of skill/expertise, valuable physical assets, valuable human assets, valuable intangible assets, fruitful alliances, etc.
Weakness is something a company lacks or does poorly or a condition that puts the company at a disadvantage.
A company’s internal weaknesses can relate to
- deficiencies in competitively important skills;
- a lack of competitively important physical, organizational or intangible assets, or
- weak/missing competitive capabilities in key areas.
An opportunity is something that a company may grab for growth and profitability. It is a favorable condition in a company’s external environment.
Opportunities offer important avenues for profitable growth and indicate the potential for competitive advantage.
A threat is something a company may be exposed to in the external environment that may cause suffering in growth or profitability.
It is an unfavorable trend in the external environment. Certain factors in a company’s external environment may pose threats to its profitability and competitive well-being.
Threats can stem from;
- the emergence of cheaper/better technologies;
- introduction of new or imported products by the competitors;
- the entry of low-cost foreign competitors;
- new government regulations that are more burdensome to a company than its competitors;
- vulnerability to a rise in interest rates bank loans;
- adverse changes in foreign exchange rates;
- political upheaval, and the like.
Strengths and Weaknesses in SWOT Analysis
In SWOT analysis, strengths and weaknesses are internal factors. A firm’s strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage.
For example, strengths could be
- Specialist and effective marketing expertise
- A new, innovative product or services
- Competitive capabilities
- The convenient location of your business
- Strong brand names
- Good reputation among customers
- Favorable access to distribution networks
- Cost advantages from proprietary know-how
In looking at your strengths, think about them about your competitors, for example, if all your competitors provide high-quality products, then a high-quality production process is not your strengths, it is a necessity.
The absence of certain strengths may be viewed as a weakness. A weakness could be
- Lack of marketing expertise
- A weak brand name
- Inconvenient location of your business
- Poor quality goods or services
- Damaged reputation.
- Lack of access to key distribution channels
In some cases, a weakness may be the flip side of strength. Take the case in which a firm has a large amount of manufacturing capacity.
While this capacity may be considered a strength that competitors do not share, it also may be considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly to changes in the strategic environment.
The SWOT analysis summarizes the factors of the firm as a list of strengths and weaknesses.
Opportunities and Threats in SWOT Analysis
In SWOT analysis, opportunities and threats are external factors. The external environmental analysis may reveal certain new opportunities for profit and growth. An opportunity could be
- A developing market, such as the Internet.
- An unfulfilled customer need.
- The arrival of new technologies.
- Removal of international trade barriers.
Changes in the external environment may also present threats to the firm. Some examples of such threats include:
- Shifts in consumer taste away from the firm’s product.
- The emergence of substitute products.
- New regulations.
- Increased trade barriers.
The SWOT Matrix
A firm should not necessarily pursue more lucrative opportunities.
Rather, it may have a better chance of developing an advantage by identifying a fit between the firm’s strengths and upcoming opportunities. In some cases, the firm can overcome weaknesses to prepare itself to pursue a compelling opportunity.
To develop strategies that take into account the SWOT profile, a matrix of these factors can be constructed.
The SWOT matrix is as follows:
|Opportunities||S-O strategies||W-O strategies|
|Threats||S-T strategies||W-T strategies|
- S-O strategies pursue opportunities that are a good fit for the company’s strengths
- W-O strategies overcome weaknesses to pursue opportunities
- S-T strategies identify ways that the firm can use its strengths to reduce its vulnerability to external threats
- W-T strategies establish a defensive plan to prevent the firm’s weaknesses from making it highly susceptible to external threats.
Uses of SWOT Analysis
The usefulness of SWOT analysis is not limited to profit-seeking organizations. SWOT analysis may be used in any decision-making situation when a desired end-state (objective) has been defined.
Here are some examples of what SWOT analysis can be used to assess:
- A company (its position in the market. Commercial viability, etc.;
- A method of sales distribution;
- A business idea;
- A strategic option, such as entering a market, or launching a new product;
- An opportunity to make an acquisition;
- A potential partnership;
- Changing a supplier;
- Outsourcing a service, activity or resources; and
- An investment opportunity.
Example: Wal-Mart SWOT Analysis:
Strengths: Wal-Mart is a powerful retail brand. It has a reputation for value for money, convenience, and a wide range of products all in one store.
Weaknesses: Wal-Mart is the World’s largest grocery retailer and control of its empire, despite its IT advantages, could leave it weak in some areas due to the huge span of control.
Opportunities: To take over, merge with, or form strategic alliances with other global retailers, focusing on specific markets such as Europe or the Greater China region.
Threats: Being number one means that you are the target of competition, locally and globally.
Importance of SWOT Analysis in Organizations
SWOT analysis is a useful tool for analyzing an organization’s overall situation.
This approach attempts to balance the internal strengths and weaknesses of the organization with the external opportunities and threats. It provides a good overview of whether a company’s condition is healthy or unhealthy.
It reveals the company’s actual situation regarding resources, capabilities, external opportunities, and external threats.
It helps to conclude;
(a) how strategy can be matched to both its resources and market opportunities; and
(b) how weaknesses can be corrected and threats can be guarded against.
More, specifically, SWOT analysis is important for a company for the following reasons:
- It evaluates strengths, weaknesses, opportunities, and threats of the company and helps in concluding the attractiveness of its situation.
- It points out the need for strategic action.
- The strengths identified through SWOT Analysis can be used as the cornerstones of strategy and the basis on which to build a competitive advantage.
- It enables the company to build its strategy around what the company does best based on the strengths and should avoid strategies whose success depends heavily on areas where the company is weak.
- The results of SWOT analysis help correct competitive weaknesses that make the company vulnerable.
- Based on the opportunities identified through SWOT analysis, managers can aim their strategies at pursuing opportunities well- suited to the company’s capabilities and provide a defense against external threats.
How SWOT Analysis Leads to Strategy Formulation
SWOT Analysis (Strength, Weakness, Opportunity, Threat Analysis), like a skilled musician who has to continuously practice to be masterful at his art, organizations, too, have to continuously develop their resources and skill base.
The manager’s job as a strategist is to create a competitive advantage. It is not a once-in-a-lifetime creation that endures, but rather something that has to be consistently re-configured in tandem with the changing context of business.
The internal analysis enables managers to spot the vulnerable as well as the strong areas within the organization, which can hinder or enable a proactive response to the given opportunity.
The areas within the organization that are vulnerable are the weaknesses, and the strong areas are its strengths.
The figure presents the basic rule of thumb approach to the strength-weakness-opportunity-threat analysis (SWOT analysis).
The opportunities presented by the external environment have to be made good by using the strengths, whereas the threats that can destabilize the organization must be kept at bay or converted into strengths.
The SWOT analysis is a tool used for analysis before any decision of a strategic nature is it intended or corporate strategy or testing of strategic options and choices.
At a given time, the organization has ongoing operations to serve a designated market through products/ services and technology.
SWOT analysis enables it to see if the current operations are doing well or if there any internal processes that are weak and likely to threaten the projected return on investment and prospects.
SWOT stands for strengths, weaknesses, opportunities, and threats. As already said, strengths and weaknesses are internal factors, and opportunities and threats are external factors of an organization.
In SWOT analysis, the data frame structure looks like the following:
|Data sources||Positive Factors||Negative Factors|
Internal data relate to information concerning the internal operations of the organization.
These include financial structure, personnel characteristics, organizational structure, production issues, and so on. External data are ‘external’ in their relationship with the organization.
They include environmental characteristics such as legal requirements, political circumstances, economic scenario, competitors’ strategies and tactics, cultural and social patterns, demographic trends, technological progress, etc. within all the internal and external data relevant to the organization are four categories of information;
- internal strengths,
- internal weaknesses,
- external opportunities, and
- external threats.
You will find that the strategists in an organization assess the organization’s internal strengths and weaknesses, and evaluate its environmental opportunities and threats.
SWOT analysis facilitates a firm to formulate appropriate strategies in the context (if the firm’s vision and mission.
The strategies help in accomplishing the firm’s vision/mission by exploiting its strengths and opportunities as well as by overcoming its threats and correcting/avoiding the weaknesses.
The figure presents a scenario that shows how SWOT analysis leads to strategy formulation.
You can see in the figure that the vision of a company sets the ground for developing a mission statement.
For the managers to understand the company situations, they undertake an analysis of the company’s strengths, weaknesses, opportunities, and threats based on internal and external data, respectively.
Then, based on the SWOT results, they formulate appropriate strategies to support the mission through exploiting opportunities and strengths, neutralizing the threats identified in the external environment, and overcoming the weaknesses.
Sources of Data for SWOT Analysis
As has already been said, SWOT is conducted for analyzing the external and internal environmental factors that affect a company’s business activities.
Thus, the sources of data for SWOT analysis will differ based on environmental factors. The sources of data for external factors will never be the same for different industries.
However, there are some common sources which a company may explore: the Internet, trade associations like chambers of commerce and industry, export promotion bureaus, trade fairs and exhibitions, foreign trade missions/consulates, a board of investment, concerned ministries, other business units in the same industry, research organizations, consulting firms, market survey firms, independent think tanks like the Center for Policy Dialogue (CPD).
SWOT Analysis Process: Step-by-Step Procedure of SWOT
There is no hard and fast rule regaining the sequence of steps to be followed in SWOT analysis. However, while undertaking a SWOT analysis of your organization, you may follow the following major steps
- Analysis of the general external environment,
- Analysis of the (external) industry environment,
- Identification of external opportunities and threats,
- Analysis of internal environment and identification of the internal strengths and weaknesses.
- Assessment of the attractiveness of the organization’s situations and concluding the need for strategic action.
We now discuss the details of the steps involved in the SWOT analysis;
Step-1: Analysis of General External Environment
- Identify the key political, economic, social-cultural, demographic, natural/ecological, and technological forces that are most likely to affect the organization.
- Monitor information on the environmental forces.
- Select the methods to be used in forecasting these forces.
- Forecast the trends in these forces.
- Identify the market opportunities based on the forecasts of these forces.
- Identifying the threats to the organization’s future profitability.
Step-2: Analysis of Industry Environment
- Analyze the industry structure.
- Analyze the nature of the competition.
- Identify and analyze individual competitors.
- Identify the key industry-related opportunities and threats.
Step-3: Identification of External Opportunities and Threats
External analysis will provide you information for the identification of threats and opportunities in the external environment.
It is the responsibility of the management to erasure that information derived from environmental scanning is summarised and analyzed to determine what characterizes these threats and threats.
One method of performing an opportunity and threat analysis is simply to categorize the environmental factors in terms of opportunity potential and threat potential.
Then management should summarize the emerging implications for future organizational direction.
A sample opportunity and threat analysis.
Step-4: Analysis of Internal Environment
- Identify the areas for analysis (such as financial position, product position, etc.)
- Analyze each of the selected areas.
- Identifying an organization’s internal strengths and resource capabilities.
- Identifying an organization’s internal weaknesses and resource deficiencies.
- Evaluate the strengths and weaknesses of their strategy-making implications.
After analyzing the internal environment, the next step is to identify internal strengths and weaknesses.
The information derived from the internal analysis would provide you the basis for the identification of strengths and weaknesses of your organization.
While identifying the strengths and weaknesses, you need to bear in mind that the skills and capabilities which are likely to serve as enablers for strategy formulation and implementation are to be listed as strengths.
Those which are not enablers should be listed as weaknesses.
Step-5: Concluding SWOT Analysis and Drawing Conclusions
- Assess the attractiveness of an organization’s situation based on identified strengths, weaknesses, opportunities, and threats.
- Conclude the need for strategic action.
A Format for SWOT with Examples (Given in the context of a banking company)
A format for SWOT analysis with examples from a bank is given below for your better understanding of how to write down statements for strengths, weaknesses, opportunities, and threats.
Use of SWOT Results for the Choice of Strategy
Strategy-makers can use the results of SWOT analysis for the choice of strategy. In successful companies, the strategists systematically compare the key internal strengths and weaknesses with the key external opportunities and threats.
They identify, based on their understanding of opportunities and threats, realistic options from which to choose an appropriate strategy.
Again, based on the examination of the organization’s strengths and weaknesses, the strategists try to understand the overall internal capability.
They narrow down the choice of strategy alternatives and selection of strategy depending on their understanding of strengths and weaknesses.
They identify the distinctive competences and critical weaknesses and then compare them with the market’s determinants of success. The whole exercise serves as a useful framework for making the best strategic choice.
When systematically done, SWOT analysis covers all aspects of an organization. Thus, it provides a dynamic framework for choosing a strategy.
Strengths, weaknesses, opportunities, and threats point to the need for strategic action. The results of the analysis provide clues to the strategists/managers in a business-firm need to:
- undertake actions to protect/improve the firm’s strengths;
- initiate efforts to overcome the weaknesses;
- pursue market opportunities matched with resource capabilities; and
- take actions to defend against external threats to the firm’s business.
As a strategist, you need to keep in mind that when your firm has many opportunities, it may also face some key threats in its external environment.
Similarly, side by side, with several weaknesses, your firm might have some unique strengths relative to the competitors.
That means; SWOT analysis would simply help you to visualize the overall position of your firm in terms of market conditions. And this would enable you to identify an appropriate strategy for the market.
What must Managers do after the SWOT Analysis?
Once the SWOT analysis has been completed, managers have at their disposal adequate information for setting organizational goals/objectives (long-range and short-range).
Long-range goals/objectives specify the results desired in the organization’s mission. They normally extend beyond the current fiscal year. Short-range objectives (one year or less) should follow logically from long-range objectives.
Once the long-range objectives have been set, the stage has now been set for formulating appropriate strategies. The strategies must be formulated, keeping in view the realities of the overall environment so that the predetermined objectives can be achieved effectively and efficiently.
By the time, a company’s managers/strategy-makers have been able to understand the situations of the organization in the context of industry and the general external environment as well as the internal conditions of the company.
Based on this understanding, they should now be in a position to decide about the competitive strategies that the organization needs to achieve its goals/objectives.
Limitations of SWOT Analysis
While useful for reducing a large number of situational factors into a more manageable profile, the SWOT framework tends to oversimplify the situation by classifying the firm’s environmental factors in which they may not always fit.
The classification of some factors as strengths or weaknesses, or as opportunities or threats is somewhat arbitrary.
For example, particular company culture can be either a strength or a weakness. Technological change can be either a threat or an opportunity.
Perhaps what is more important than the superficial classification of these factors is the firm’s awareness of them and its development of a strategic plan to use them to its advantage.
What Next to SWOT Analysis?
From the results of SWOT analysis, managers/strategy-makers by now have understood the situations of the organization in the context of industry and the general external environment as well as the internal conditions of the firm.
They also have adequate information for setting organizational objectives.
Based on the information and their understanding of the environment, they should now be in a position to decide about the firm’s objectives, both long-term and short-term.
As stated earlier, long-range objectives specify the results desired in the organization’s mission. They normally extend beyond the current fiscal year.
Short-range objectives (one year or less) should follow logically from long-range objectives.
Once the long-range objectives have been determined, the stage has now been set for formulating appropriate competitive strategies.
The strategies must be formulated, keeping in view the realities of the overall environment so that the predetermined objectives can be achieved effectively and efficiently.
It is not simply enough to identify the strengths, weaknesses, opportunities, and threats of a company.
In applying SWOT analysis, it is necessary to minimize or avoid both weaknesses and threats. Weaknesses should be looked at to convert them into strengths. Likewise, threats should be converted into opportunities.
Lastly, strengths and opportunities should be matched to optimize the potential of a firm. Applying SWOT in this fashion can obtain leverage for a company.
As can be seen, SWOT analysis can be extremely beneficial to those who objectively analyze their company. The marketing manager should have a rough outline of potential marketing activities that can be used to take advantage of capabilities and convert weaknesses and threats.
However, at this stage, there will likely be many potential directions for the managers to pursue.
Due to the limited resources that most firms have, it is difficult to accomplish everything at once. The manager must prioritize all marketing activities and develop specific goals and objectives for the marketing plan.