Definition of SWOT Analysis
SWOT analysis or Strength, Weakness, Opportunity, and Threat analysis is a business strategy building tool that helps the firm to understand better their current position in the market before taking up a new strategy where it lists down the internal factors like the company’s own strength and weakness and the external factors like opportunities and threat prevailing in the market in terms of newer areas or venture or competition which exists.
Explanation
SWOT analysis is a strategy-building tool commonly used by businesses to assess their position in the market before taking up any new ventures. It has always proved helpful in designing new strategies and upgrading the current ones. SWOT stands for strength, weakness, opportunity, and threat. It includes both internal and external factors that affect the firm. Strength and weakness are the internal factors that depend on the firm’s abilities and drawbacks. In contrast, opportunity and threat are the external factors that relate to the areas of opportunity the firm can utilize or the threat of competition prevailing in the market.
It is an efficient and effective planning tool that helps businesses develop a strategy when building a start-up or driving forward an existing company. A SWOT analysis organizes the strengths, weaknesses, opportunities, and threats an industry faces into a two-grid list. Thus the presentation part about it is more straightforward to understand. A SWOT analysis to be compelling needs constant involvement of the founders and leaders who need to be thoroughly and deeply involved in the process. But only leaders giving their ideas are not enough for SWOT as it requires a holistic approach and a mix of people sharing their ideas.
Purpose of SWOT Analysis
The purpose of SWOT analysis is relatively straightforward as it is primarily used as a planning tool to design the strategy needed for the business to grow. It can be used both for start-ups entering the new company and even by existing firms to drive forward their business and growth. It identifies the internal and external factors which may affect directly or indirectly their business growth in the form of the strength, weaknesses, opportunities, and threats prevailing in the market.
The prime aim of SWOT analysis is also to use the firm’s available resources in the best possible way. The best way to do this analysis is to involve people from various aspects of the departments associated with the business and brainstorm with each one of them about how to drive the business forward. SWOT analysis helps to create a summary analysis of the internal and external factors. It also helps the firm identify the risk and prepare to mitigate it.
Characteristics of SWOT Analysis
The characteristics are as follows:
- It requires the involvement of leaders, founders, and other members involved in the crucial stages of the business.
- It depicts whether a business is sick or healthy.
- It takes into consideration both the internal and external factors affecting the firm.
- SWOT analysis is an effective forward-looking planning tool to design the strategy of a business.
- Both start-ups and existing business firms can use SWOT analysis.
How to do SWOT Analysis?
A SWOT analysis requires mapping all the recorded strengths, weaknesses, opportunities, and threats into a 2×2 grid or matrix. It involves gathering people from all aspects of the business and its related departments and brainstorming about the internal and external factors in the company’s operations. Whenever any member in the discussion identifies elements, it is recorded in the relevant grid.
To better understand which idea belongs to which grid, the strength and weaknesses are framed under the internal factors, and thus, this has to do with the organization, its assets, people, and processes. The other two sections, i.e., opportunity and threat, are categorized under external factors. Anything related to the broader economy, competition, and market-related scenarios must be recorded under these segments.
Example of SWOT Analysis
An example of SWOT analysis can be as follows: Let us, for example, assume a scenario where a firm CEO wants to expand his present business and has prepared a SWOT based on the same.
Strength
- What is the area the company is doing well?
- What are the unique resources the company can draw upon?
- What do others perceive as the strength of the company?
Weakness
- What are the shortcomings or weaknesses of the company?
- Where does the company lack resources that other companies have?
- What do others perceive as the weakness of the company?
Opportunity
- What new options are open?
- What is the trend in the market the company can take advantage of?
- What steps does the company need to take to convert the strength into opportunities?
Threat
- What are the threats that could affect the company?
- Who are the competitors, and what are they doing?
- What are the threats that the weakness of the company exposes to itself?
Thus by recording all these answers to the above question in a 2×2 grid or matrix, the CEO can get many scenarios he needs to work upon or utilize before building a new strategy or taking up a new venture. Each part of the grid is essential to the CEO of a business as one and all are interdependent and together can bring about synergic growth to the company.
Need for SWOT Analysis
The needs are as follows:
- It helps business understand their vital areas and weak areas.
- It defines whether a company or its departments are sick or healthy.
- It helps us understand any risk associated with the expansion or growth of a business and, to some extent, also helps to mitigate it.
- The business comes to know about the external and internal factors affecting the success or failure of the company.
- It is a forward-looking approach and planning tool that helps the business to design a strategy for its future course of action.
SWOT Analysis vs. PEST Analysis
Both SWOT and PEST analysis are very efficient planning and strategy design tools. However, where SWOT caters to a business’s internal and external factors, PEST only caters to external factors. SWOT stands for Strength, Weakness, Opportunity, and Threat, whereas PEST stands for Political, Economic, Social, and Technological. Thus, PEST can be considered as a subset of SWOT. It is best to do an extensive PEST analysis and include its findings in our SWOT analysis, particularly in the opportunity and threat section.
Advantages and Disadvantages
The advantages are as follows:
- It helps to materialize or prepare the strategic options available related to the risk and solutions to solve it.
- It helps build a summary of the external and internal factors crucial to the success and failure of the business.
- It helps identify the critical areas of action required by the firm’s management and hence helps set up a priority task list.
- It sheds light on whether a business is sick or healthy.
- It helps businesses to prepare the firm to face possible threats from competitors.
- It helps evaluate the strategic environment to help the firm make reasonable and intelligent decisions in future courses of action.
The disadvantages are as follows:
- SWOT analysis is only a single stage of business planning out of many stages; thus, the company cannot focus on its result and proceed.
- SWOT analysis goes out of toss when there is a lack of hierarchy.
- Some elements that do not fit into the four categories are not considered, even though they might be an essential factor.
- In SWOT analysis, too many structures can sometimes result in poor decision-making.
- Too much information that fits into the grid can sometimes hamper the desired result.
Conclusion
SWOT analysis has pros and cons, but in my view, its merits outweigh its demerits. It’s one of the most efficient planning tools trusted by businesses in strategy formulation.
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