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.
Business organizations undertake ‘situation analysis’ for evaluating the firm’s resources and capabilities as well as environmental influences.
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.
What is SWOT?
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.
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, ft 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.
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 be it intent 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 framework 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, 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 Step-by-Step Procedure
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 Interna! 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 Managers must 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 for achieving its goals/ objectives.
Conclusion: 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 have also 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.