Introduction to SWOT Analysis

SWOT analysis or Strength, Weakness, Opportunity, and Threat analysis is a business strategy building tool which 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 which is commonly used by business to assess their position in the market before taking up any new ventures. It has always proved to be helpful both 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 which depend on the firm’s own abilities and drawbacks whereas opportunity and threat are the external factors which relate to the areas of opportunity the firm can utilize upon or the threat in terms of competition prevailing in the market.

It is an efficient and effective planning tool which helps business, develop a strategy either when building a start-up or driving forward an existing company. A SWOT analysis organizes the strength, weaknesses, opportunities, and threats faced by a business into a two two grid list and thus the presentation part about it is simpler and easy to understand. A SWOT analysis to be an effective one 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 giving their ideas.

Purpose of SWOT Analysis

The purpose of SWOT analysis is relatively clear and simple 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 business 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, weakness, opportunities, and threats prevailing in the market.

The prime aim to do SWOT analysis is also to make use in the best possible way the firm’s available resources. 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 to identify the risk and make themselves prepared to mitigate them.

Characteristics of SWOT Analysis

The characteristics are as follows:

It requires the involvement of leaders and founders along with 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.
SWOT analysis is can be used by both start-ups and existing business firms.

How to do SWOT Analysis?

A SWOT analysis requires mapping all the recorded strength, weakness, opportunity and threats into a 2×2 grid or matrix. It involves gathering people from all the aspects of the business and its related departments and doing a brainstorming session with regards to the internal and external factors the business operates in. Every time any member in the discussion identifies any of the factors it is recorded in the relevant grid.

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To better understand which idea belongs to which grid the strength and weakness 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 and anything which is related to the wider 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 CEO of a firm 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 than what 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 the 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 expose on 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 upon before building a new strategy or taking up ma new venture. Each part of the grid is important to the CEO of a business as one and all are inter-dependant on each other and together can bring about a synergic growth to the business.

Need of SWOT Analysis

The needs are as follows:

It helps business understand their strong areas and weak areas.
It defines whether business or any of 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 business.
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 tool. However where SWOT caters to both internal and external factors faced by a business, PEST only caters to the 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 and extensive PEST analysis and include the findings of it 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 in building a summary of the external and internal factors crucial to the success and failure of the business.
It helps in identifying the key areas of action required by the management of the firm and hence helps in setting 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 in the evaluation of the strategic environment to help the firm make good and intelligent decisions in the future courses of action.

The disadvantages are as follows:

SWOT analysis is only a single stage of business planning out of many stages and thus the business just cannot focus on its result and proceed.
SWOT analysis goes out of toss when there is a lack of hierarchy.
For some elements which do not fit into the four categories, it is not taken into account even though it might be an important factor.
In SWOT analysis too many structures can at times end upon poor decision making.
Too much information made fit into the grid can sometimes end up hampering the desired result.

Conclusion

SWOT analysis has both pros and cons to it but in my view, the merits of it clearly outweigh the demerits. It’s one of the most efficient planning tools trusted by business in strategy formulation.