SWOT Analysis Explained: Definition, Role, and Importance for Growth

SWOT Analysis

A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis. It provides information that is helpful in matching the firm's resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection. The following diagram shows how a SWOT analysis fits into an environmental scan:

SWOT Analysis Definition

The process by which the enterprises monitor their relevant environment to identify their business opportunities and threats affecting their business is known as environment analysis or SWOT analysis. In other words, analyzing the surrounding environment before framing policies and taking business decisions is called as SWOT analysis.

SWOT Analysis is the most renowned tool for audit and analysis of the overall strategic position of the business and its environment. Its key purpose is to identify the strategies that will create a firm specific business model that will best align an organization’s resources and capabilities to the requirements of the environment in which the firm operates. In other words, it is the foundation for evaluating the internal potential and limitations and the probable/likely opportunities and threats from the external environment. It views all positive and negative factors inside and outside the firm that affect the success. A consistent study of the environment in which the firm operates helps in forecasting/predicting the changing trends and also helps in including them in the decision-making process of the organization.

The four factors (Strengths, Weaknesses, Opportunities and Threats) are Given below –

1. Strengths - Strengths are the qualities that enable us to accomplish the organization’s mission. These are the basis on which continued success can be made and continued/sustained. Strengths can be either tangible or intangible. These are what you are well-versed in or what you have expertise in, the traits and qualities your employees possess (individually and as a team) and the distinct features that give your organization its consistency. Strengths are the beneficial aspects of the organization or the capabilities of an organization, which includes human competencies, process capabilities, financial resources, products and services, customer goodwill and brand loyalty. Examples of organizational strengths are huge financial resources, broad product line, no debt, committed employees, etc.
2. Weaknesses - Weaknesses are the qualities that prevent us from accomplishing our mission and achieving our full potential. These weaknesses deteriorate influences on the organizational success and growth. Weaknesses are the factors which do not meet the standards we feel they should meet. Weaknesses in an organization may be depreciating machinery, insufficient research and development facilities, narrow product range, poor decision making, etc. Weaknesses are controllable. They must be minimized and eliminated. For instance - to overcome obsolete machinery, new machinery can be purchased. Other examples of organizational weaknesses are huge debts, high employee turnover, complex decision-making process, narrow product range, large wastage of raw materials, etc.
3. Opportunities - Opportunities are presented by the environment within which our organization operates. These arise when an organization can take benefit of conditions in its environment to plan and execute strategies that enable it to become more profitable. Organizations can gain competitive advantage by making use of opportunities. Organization should be careful and recognize the opportunities and grasp them whenever they arise. Selecting the targets that will best serve the clients while getting desired results is a difficult task. Opportunities may arise from market, competition, industry/government and technology. Increasing demand for telecommunications accompanied by deregulation is a great opportunity for new firms to enter telecom sector and compete with existing firms for revenue.
4. Threats - Threats arise when conditions in external environment jeopardize the reliability and profitability of the organization’s business. They compound the vulnerability when they relate to the weaknesses. Threats are uncontrollable. When a threat comes, the stability and survival can be at stake. Examples of threats are – unrest among employees; ever changing technology; increasing competition leading to excess capacity, price wars and reducing industry profits; etc.

Role and Importance of SWOT Analysis

1. Identify strengths – The analysis of the internal environment helps to identify the strengths of the firm. The internal environment refers to plans and policies of the firm, its resources-physical, financial and human resources e.g. If company has good relations with workers, the strength of the company can be identified through the workers loyalty and dedication on the part of workers.
2. Identify weaknesses – A firm may be strong in certain areas, whereas it may be weak in some other areas. The firm should identify such weaknesses through SWOT analysis so as to correct them as early as possible e.g., Lack of capital may be a weakness of the company, but company should try to raise additional funds to correct the weaknesses.
3. Identify Opportunities – An analysis of the external environment helps the business firms to identify the opportunities in the market. The business firm should make every possible effort to grab the opportunities, as and when they come for a example
4. Identify threats – Business may be subject to threats from competitors and others. Identification of threats at an earlier date is always beneficial to the firm as it helps to defuse the same. For instance, a competitor may come up with innovative product. This not only affects the firm’s business but also endanger its survival, so business firm should take necessary steps to counter the strategy of the competitors.
5. Effective Planning – A proper study of environment helps a business firm to plan its activities properly. Before planning, it is very much necessary to analysis the internal as well as external environment. After SWOT analysis, the firm can list out well-defined and time-bound objectives, which in turn help to frame proper plans.
6. Facilitates Organising Resources – Environment analysis not only helps in organizing the resources of right type and quantity. A proper analysis of environment enables a firm to know the demand potential in the market. Accordingly, the firm can plan and organize the right number of resources to handle the activities of the organization.
7. Face Competition – A study of business environment enable a firm to analyse the competitor’s strengths and weaknesses. This would enable the firm to incorporate the competitor’s strengths in its working. The firm may also try to exploit the competitors’ weaknesses in its favour.
8. Flexibility in Operations – The environmental factors are uncontrollable and a business firm finds it difficult to influence the surrounding of its choice. A study of environment will enable a firm to adjust its operations depending upon the changing environmental situation.

How to Use SWOT Analysis

Strengths

•  What advantages does your organization have?
•  What do you do better than anyone else?
•  What unique or lowest-cost resources can you draw upon that other can't?
•  What do people in your market see as your strengths?
•  What factors mean that you "get the sale"?
•  What is your organization's Unique Selling Proposition (USP)?

Consider your strengths from both an internal perspective, and from the point of view of your customers and people in your market. Also, if you're having any difficulty identifying strengths, try writing down a list of your organization's characteristics. Some of these will hopefully be strengths! When looking at your strengths, think about them in relation to your competitors. For example, if all of your competitors provide high quality products, then a high-quality production process is not strength in your organization's market, it's a necessity.

Weaknesses

•  What could you improve?
•  What should you avoid?
•  What are people in your market likely to see as weaknesses?
•  What factors lose you sales?

Again, consider this from an internal and external basis: Do other people seem to perceive weaknesses that you don’t, see? Are your competitors doing any better than you? It's best to be realistic now, and face any unpleasant truths as soon as possible.

Opportunities

• What good opportunities can you spot?
• What interesting trends are you aware of?
• Useful opportunities can come from such things as:
• Changes in technology and markets on both a broad and narrow scale.
• Changes in government policy related to your field.
• Changes in social patterns, population profiles, lifestyle changes, and so on.
• Local events.

Threats

• What obstacles do you face?
• What are your competitors doing?
• Are quality standards or specifications for your job, products or services changing?
• Is changing technology threatening your position?
• Do you have bad debt or cash-flow problems?
• Could any of your weaknesses seriously threaten your business?

The results of the analysis of positive and negative factors for management to address:

	Positive Factors	Negative Factors
Internal Factors	Strengths	Weaknesses
External Factors	Opportunities	Threats

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