SWOT Analysis Definition
SWOT analysis refers to strategic planning techniques undertaken by a company or organization to help in evaluating its internal and external strengths, weaknesses, opportunities, and threats. A SWOT analysis can be used to evaluate different items or entities including a business, a place, an industry or a product.
However, businesses evaluation is the most common entity in SWOT analysis. The analysis focuses on specifying the business objectives as well as identifying the favorable and unfavorable internal and external factors. This way, users of this analysis are able to measure the extent to which these factors affect the business and come up with a better plan that will help in achieving the business objectives.
SWOT analysis helps implementers to ask and answer different questions which help them to come up with vital information. They then use the information to assess the situation of the organization. From the evaluation, they are able to suggest and establish what will enable an organization to realize its objectives as well as fix hitches that need to be addressed so as to attain the desired results.
Further,through the analysis an organization is able to know where it is today and its future position. In SWOT analysis, the strengths and weaknesses are mostly from within whereas, threats and opportunities are from the external environment. SWOT is an acronym which stands for four elements (parameters) which implementers use to analyze businesses’ or project’s position.
A Little More on What is SWOT Analysis
The following parameters are used in SWOT analysis to evaluate the projects or businesses.
- Strengths– This refers to features that make an organization to excel hence separating it from the competition. Indicators of strengths in an organization may include the following: loyal customer base, a strong brand, strong balance sheet, motivated employees, unique technology among others. The presence of these features in your business or project is an indication that the business is succeeding in meeting its objectives.
- Weaknesses– These are features that place the business or the project at a disadvantage compared to others. Weaknesses in business stop it from performing at its prime level. Weaknesses are an indication there is a need to work on improving certain areas in your business so that you can improve and remain competitive. Examples of weaknesses may be as follows: high level of debts, business location, high staff turnover, insufficient supply chain or lack of capital.
- Opportunities– Opportunities refers to various favorable elements from the environment in which a firm can use to its advantage. When opportunities are well exploited, they help the business to scale higher. A good example is when a car manufacturer takes advantage of a country’s cut in its tariffs to export many cars in the market network so as to increase its sales and market shares.
- Threats– These are the factors that are likely to trouble your business or project. For instance, drought is a threat to farmers as it will interfere with yields hence making them suffer from a poor harvest. From a business perspective, threats may include things like increased costs of inputs, tight labor supply, increased competition among others. All these and other factors are likely to threaten the performance of a business or project if not adequately addressed.
Generally for a company to be able to achieve its objectives, it has to be realistic about its strong and weak points. Also, objectives achievement can only be possible if the company is able to keep the analysis specific by analyzing them in relation to real-life perspective.
Therefore, users of SWOT analysis should try to be simple and precise because much of the information is subjective. This means they should use the information as a tool to guide them and not as a remedy.
A visual Overview of SWOT Analysis
The users of SWOT analysis present as a square which forms four areas. These four areas make up a quadrant. With this visual set up, one is able to have a quick overview of the company’s position.
In each of the four areas, points are noted under headings. It is important to note that what is noted under the headings may not be of equal importance. However, it is able to give insight on how the number of opportunities measures up to the number of threats and so on.
How SWOT Analysis is Executed
When executing a SWOT Analysis, there is a procedure that you will need to follow to be able to come up with comprehensive and accurate results. The procedure is as follows:
- Pre-SWOT Homework
This is the preparation stage. In SWOT analysis, there is the preparation that needs to be done by those who will be carrying out the exercise. The management team and any other group that will be involved in the analysis exercise are involved in the preparation process.
Pre-SWOT is simply a procedure for creating a company’s profile. It gives a description of the business and its main customers. Pre-SWOT homework should profile each segment of the business so as to capture what they add to the business. It is at this stage that the strengths, weaknesses, opportunities, and threats are identified and outlined.
- Leading Process
This is a stage where questions and answers are asked to specific individuals and group(s) in order to collect useful information that can be used for evaluation. At this stage, you need to start with a clean chart. The clean chart here means that you lay out the four quadrants that will help you in outlining the content you wish to collect as per what was pointed out in the above stage.
In case of a highly segmented business, the laid out chart should cover several SWOT segments so as to comprehensively capture the current situation of the business. However, in small segmented businesses, a single segment of the SWOT chart is enough to give out the actual condition of the business.
First, you will need to get every information you can form the group. From there, you can then go over the chart and drop any duplicate or overlapping entries to ensure that each one of them is in the correct category. You need to include the group members when eliminating or combining any of the concepts so that they understand the reason for doing so.
This is an act of courtesy and shows the company that you value their input in this process. When eliminating and combining concepts, you can also give the group an opportunity to add or eliminate any entry within the SWOT chart that they feel is not adding up. This ensures that you are both working on a mutually agreed core.
- Working with the Chart
The element of imbalance between internal and external factors will always crop up during the analysis process. This is because people are more aware of the happenings within the company as compared to the external factors. To address this, you have to prompt more entries under the opportunities.
You need to encourage the group to think of how the current strength can be used to create new opportunities. They can also think of how fixing a weakness concrete a larger opportunity for the company. They can also think of how the current strengths and weaknesses are a threat or danger to the company.
Examples of SWOT Analysis
ABC is a shop that uses local ingredients to make ice cream. It makes a profit with strong margins. However, the ABC company is skeptical about the single store approach which it thinks it is limiting its potential to expand.
Analyzing the ABC business
In the above example, strengths and weaknesses are factors from within the ABC business. However, some may be external factors such as a weak economy. We can, therefore, identify the following strengths and weaknesses from ABC business:
- Robust sales and a large profit margin.
- High-quality product with unique flavors that competitors are unable to produce.
- Loyal customers that help to advertise the product by word of mouth.
- Inability to penetrate the market due to a single location
- Lack of capital for expansion
- Problem finding skilled workers who can make ice cream
- Time and labor extensive
Opportunities and threats are mostly external factors. They are mostly things that are likely to happen that may affect the business. Opportunities if exploited are advantageous to the company while threats are a limitation to the business. The following opportunities and threats can be identified in business ABC:
- Chance to increase the number of stores to reach more customers.
- Focus on production and sell to retailers.
- Buy improved equipment to reduce production time and labor.
- Introduce artisan ice cream training to train and recruit skilled employees.
- Health conscious customers may affect the consumption of ice cream.
- Big ice cream brands are using the artisan in the production of their ice cream.
- Competitors have dominated the market.
- As restaurants and big buyers focus on local food, the local ingredients’ price rise may hence become expensive.
The main aim of SWOT analysis is to generate general ideas for the organization. This way the organization can be able to come up with strategies that will help it to move forward its agenda.
Advantages of SWOT Analysis
- It helps the company to be aware of the factors that are affecting its business of which were it not for the team’s input, it would not have noticed. Issues such as the company’s strengths, weaknesses, opportunities, and threats are able to be identified through SWOT analysis.
- The organization can use SWOT analysis to picture how it can use the identified strengths and opportunities to its advantage. It can also use the weaknesses to avert or lessen the risks. By doing so, the company will be able to achieve its business objectives.
- The analysis helps in evaluating the status of the company. In this case, the company is able to know its current position and where it is likely to be in the future.
- It creates an opportunity for the company to have everyone on board to engage in the company’s important discussions. In other words, it forms a basis through which a company can encourage conversation among its team. Engaging your team in company’s matters makes them feel valued, and it boosts their moral in their workplace.
Using SWOT Analysis to Evaluate Investments
- A SWOT analysis is commonly known for evaluating business plans. However, it can also be used as an investment tool, to give an overview of the potential pros and cons of buying stock in a company. The strengths and weaknesses in SWOT analysis should be able to reflect the position of the company as of today, while opportunities threats should tell more about the position of the in future.
- Using strengths from SWOT analysis, you can be able to tell the areas that the company is doing well in and also why and how well it does it. Strengths are features that form the foundation of above-average performance for potential shares. For instance, a major consumer company can measure some of its great strengths in the value of its brands.
However, it is imperative to note that, having above-average revenue growth or superior margins is not a measure of your company’s strengths. It is through the popularity of the products or the efficiency of the manufacturing process that represents the actual strengths. For instance, a major consumer company can measure some of its great strengths in the value of its brands.
- An industry with a long chain of competitors is seen by investors a possible weakness. This is because a company in such a situation becomes vulnerable and the chances of it surviving are minimal due to stiff competition. Such companies may not attract investors because its future existence is unpredictable. Investors would want to invest in a company whose future is promising.
- On the other hand, investors see opportunities as a meaningful avenue through which a company can expand itself. For instance, introducing a crucial product in the market or reaching out to the untapped customer with your product can change the wave of your business. Such opportunities can easily attract more investment to your business because it has the potential for good revenue returns.
- Threats can also affect an opportunity for investment. They are able to tell investors what is likely to go wrong in your company. For instance, when the government increases regulation on a major new product, would likely present meaningful threats to a company’s returns. An economic condition such as inflation is interest rates is sensitive and is likely to affect the company. Such economic conditions may drive away investors because of the high level of uncertainty.
Advantages of Using SWOT for Investing
- It creates a basis through which an investor can make a decision on whether to invest in a company or not. The analysis is able to bring to light the stability of a company’s advantages and vulnerabilities. Through the analysis, the potential investors are able to assess the organization’s strengths and weaknesses and also future opportunities. This way, they can easily know whether the organization is a hub for investment or not. Most organizations who have been able to work on their strengths, have been able to draw many investors to invest in their businesses.
- From SWOT analysis, the company is able to know whether engaging in a particular investment can improve its performance. This way, it can decide whether to go ahead with the investment or to switch to another investment strategy that can adequately address its needs.
- If used consistently, SWOT analysis can help track well company’s information. This allows investors to easily make comparison across industry participants. It can also help limit the dangers of biasness from investors when making their comparisons about companies. A consistent analysis of your company will help you beat your competitors when competing for a specific investor.
- To investors, SWOT analysis is a good screening tool for ideas and investment prospects that qualify further research. It is a valuable way of tracking assets and comparing the development and progress of those companies to the original acquisition plans.
Disadvantages of Using SWOT for Investing
A SWOT analysis does not tell the investor the actual stock price or value.
- Since SWOT analysis process is based on the judgment and knowledge of the analysts, it becomes subjective. There is a possibility of biases in the process. The results of the analysis may, therefore, not be that reliable to a potential investor.
- SWOT analysis does not consider valuation and other major fundamental metrics such as margins, cost of capital and return on capital.
- The analysis does not give a scale to the size or importance of various opportunities and threats. It is, therefore, difficult for an investor to measure the scope of these two elements. The only way out is for the investor to quantify the impact of these two elements on a company’s returns which is also not trustworthy.
The Bottom Line
The main purpose of SWOT analysis is to provide general ideas that encourage discussion regarding the status of your company. It remains a popular tool due to its speed and flexibility to evaluate different concepts and strategies in business and investment circles. It should, therefore, help you to screen issues and generate actions that will give you a concrete foundation from which you can grow your company.
However, it is important to note that, SWOT analysis can only be helpful if you are able to comprehensively capture the main strengths and weaknesses of the company being evaluated. The quality of SWOT analysis, therefore, relies heavily on the quality of data collected from the company.
If there are chances that a company over-rates its strengths, weaknesses, opportunities or threats, then it is likely to get misleading information. This might be catastrophic to the company as it might not get the right information that it needs to be able to improve itself.
References for SWOT Analysis
- https://www.investopedia.com › Investing › Financial Analysis
Research articles for SWOT Analysis
SWOT analysis: it’s time for a product recall, Hill, T., & Westbrook, R. (1997). Long range planning, 30(1), 46-52.
Recent research on team and organizational diversity: SWOT analysis and implications, Jackson, S. E., Joshi, A., & Erhardt, N. L. (2003). Journal of management, 29(6), 801-830.
Strategic development and SWOT analysis at the University of Warwick, Dyson, R. G. (2004). European journal of operational research, 152(3), 631-640.
What’s swot in strategic analysis?, Pickton, D. W., & Wright, S. (1998). Strategic change, 7(2), 101-109.
A SWOT analysis of the field of virtual reality rehabilitation and therapy, Rizzo, A. S., & Kim, G. J. (2005). Presence: Teleoperators & Virtual Environments, 14(2), 119-146.
Utilizing the analytic hierarchy process (AHP) in SWOT analysis—a hybrid method and its application to a forest-certification case, Kurttila, M., Pesonen, M., Kangas, J., & Kajanus, M. (2000). Forest policy and economics, 1(1), 41-52.
Using the analytic network process (ANP) in a SWOT analysis–A case study for a textile firm, Yüksel, İ., & Dagdeviren, M. (2007). Information Sciences, 177(16), 3364-3382.
A knowledge-based SWOT–analysis system as an instrument for strategic planning in small and medium sized enterprises, Houben, G., Lenie, K., & Vanhoof, K. (1999). Decision support systems, 26(2), 125-135.
SWOT analysis from a resource-based view, Valentin, E. K. (2001). Journal of marketing theory and practice, 9(2), 54-69.
Making SWOT analysis work, Piercy, N., & Giles, W. (1989). Marketing Intelligence & Planning, 7(5/6), 5-7.