SWOT Analysis is the primary stage of strategic planning and concentrates on collecting information from the environment. The full form of SWOT is Strength (S), Weakness (W), Opportunity (O), and Threats (T) that an organization has to face and capitalize on. It is a process of matching organizational strengths and weaknesses with environmental opportunities and threats to determine the organizational right niche.
SWOT Analysis focuses on organizational mission and objectives. Top management needs to collect information from the environment before formulating a strategic plan for the organization.
SWOT Analysis Definition
According to Ricky W. Griffin, “SWOT analysis is a careful evaluation of an organization’s internal strengths and weaknesses as well as its environmental opportunities and threats.”
Strengths and weaknesses are based on the internal environment of the organization whereas opportunities and threats are the outcomes of the external environment. A SWOT analysis provides useful information to the managers that will be helpful to formulate and implement a strategic plan.
4 Factors of SWOT Analysis
An overview of the four factors of SWOT Analysis (Strengths, Weaknesses, Opportunities, and Threats) is given below:
Strength is the competitive strong position of the organization in terms of resources. Resources consist of capital, skilled manpower, brand image, advanced technology, market leadership, and business alliances of the organization. It gives advantages to an organization as compared to its competitors in business. The strength position should be capitalized on to meet the organizational objectives.
Weakness is the deficiency or shortcoming of resources to meet organizational mission and objectives. It involves the lack of sufficient capital, skilled manpower, brand image, advanced technology, market leadership, and a business alliance of the organization. It is the responsibility of management, as far as possible, to improve weaknesses to meet defined objectives. And it is necessary to modify the present mission and objectives if it is not possible to improve weaknesses.
Opportunity is a favorable situation created by the external environment to the organization. If such an opportunity is exploited it may generate high performance. Opportunity is created by a favorable change in the environment which involves a decrease in competition, creation of a new market, government policy high economic growth rate, change in technology, etc. It is the responsibility of the management to grab such opportunities to meet or goals.
It is an unfavorable situation created by the external environment of the organization. if such a threat is not a problem identified it may generate low performance. The threat is created by an unfavorable change in the environment which involves increase competition, losing market share, low economic growth rate, change in technology, change in government policy, etc. The management needs to develop a new strategy to cope with new challenges.
Advantages of SWOT Analysis
SWOT Analysis is instrumental in strategy formulation and selection. It is a strong tool, but it involves a great subjective element. It is best when used as a guide, and not as a prescription. Successful businesses build on their strengths, correct their weakness and protect against internal weaknesses and external threats. They also keep a watch on their overall business environment and recognize and exploit new opportunities faster than their competitors.
SWOT Analysis helps in strategic planning in the following manner-
- It is a source of information for strategic planning.
- Builds the organization’s strengths.
- Reverse its weaknesses.
- Maximize its response to opportunities.
- Overcome organization’s threats.
- It helps in identifying the core competencies of the firm.
- It helps in setting objectives for strategic planning.
- It helps in knowing past, present, and future so that by using past and current data, future plans can be chalked out.
Disadvantages/Limitations of SWOT Analysis
SWOT Analysis is not free from its limitations. It may cause organizations to view circumstances as very simple because of which the organizations might overlook certain key strategic contact which may occur. There are certain limitations of SWOT Analysis that are not in control of management. These include-
- Price increase;
- Inputs/raw materials;
- Government legislation;
- Economic environment;
- Searching a new market for the product which is not having an overseas market due to import restrictions; etc.
Internal limitations may include-
- Insufficient research and development facilities;
- Faulty products due to poor quality control;
- Poor industrial relations;
- Lack of skilled and efficient labor; etc
SWOT Analysis Framework
SWOT Analysis provides information that helps in synchronizing the firm’s resources and capabilities with the competitive environment in which the firm operates.
How To Do SWOT Analysis?
First, draw up a SWOT Analysis matrix, or use our free downloadable template. This is a 2×2 grid, with one square for each of the four aspects of SWOT. The below figure shows what it should look like.
A SWOT Analysis Matrix
You can approach a SWOT Analysis in two ways: to get people together to “kick-off” strategy formulation informally, or as a more sophisticated and formal tool.
A SWOT Analysis Example
For Example, Alice is the CEO of a small start-up consultancy and wants a clear picture of its current situation, to decide on a future strategy for growth. She gathers her team and draws up the SWOT Analysis shown in the below image.
A Completed SWOT Analysis
As a result of the team’s analysis, Alice decides that the consultancy’s main strengths lie in its agility, technical expertise, and low overheads. These allow it to offer excellent customer service to a relatively small client base.
The company’s weaknesses are also to do with its size. Alice will need to invest in training, to improve the skills base of the small staff. She’ll also need to focus on retention so that she doesn’t lose key team members.
Alice sees opportunities in offering rapid-response, good-value services to local businesses and to local government organizations. The company can likely be the first to market with new products and services, given that its competitors are slow adopters.
The threats require the consultancy to keep up-to-date with changes in technology. It also needs to keep a close eye on its largest competitors, given its vulnerability to large-scale changes in its market. To counteract this, the business needs to focus its marketing on selected industry websites, to get the greatest possible market presence on a small advertising budget.