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What is SWOT Analysis in Business?
The term “SWOT analysis” refers to the framework that deals with the strengths, weaknesses, opportunities and threats of an entity to evaluate its competitive position which can be used to develop a strategic plan. SWOT analysis is a useful technique for scanning the internal and external environment wherein the strengths and weaknesses stem from the internal environment while opportunities and threats come from the external environment. It helps to match the company’s resources and capabilities to the competitive environment in which it operates. The visual representation of a SWOT analysis is as below.
Components of SWOT Analysis in Business
Now, let us have a look at each of the components of SWOT analysis separately:
#1 – STRENGTHS
Under this category of SWOT Analysis in Business, those things are mentioned in which an organization excels or something that sets it apart from the competition. The points of strength may include a loyal customer base, a strong brand value, unique technology, a strong financial position, etc. For instance, Apple enjoys a strong brand value and a very loyal customer base, while Samsung has a wide range of products that cater to low budget to high-end mobiles. The strengths of an organization can be seen from an internal perspective and from the perspective of the market or your customers.
#2 – WEAKNESSES
Under this category of SWOT Analysis, those points are discussed that usually prevent an organization from performing at its optimum level. These are basically the unpleasant truth on which the organization has to work to keep itself competitive. The points of weakness may include higher-than-average employee attrition rate, a weak brand recall, highly leveraged capital structure, inadequate supply chain control, lack of capital, etc. For instance, most of the small business owners suffer a lack of capital as a major weakness. Again, the weaknesses of an organization can also be seen from an internal perspective and from the perspective of the market.
#3 – OPPORTUNITIES
Under this category of SWOT Analysis in Business, those external factors are mentioned which are favorable and could give a competitive advantage to an organization. For instance, if a government imposes high import duty, then it offers opportunities for the local indigenous businesses to explore the market in the absence of any bigger foreign entity and in the process increase their sales and market share. The analysis of the external environment can reveal opportunities for growth or value addition that can contribute to an organization’s success.
#4 – THREATS
Under this category of SWOT Analysis, those factors are referred that have the potential to hurt the reputation or the performance of an organization. They are the external factors on which an organization has no control but it may consider to put in place a contingency plan in order to mitigate its impact to some extent if they occur. For instance, drought poses a serious threat for any agricultural based economy as it may potentially reduce or completely damage the crop yield.
Advantages of SWOT Analysis in Business
Now, let us have a look at the advantages of a SWOT analysis:
- It can be applied to an organization, an individual or a team for setting up objectives for strategic planning.
- It involves multi-level analysis that provides valuable information about an organization by looking at each of the four elements of the SWOT analysis.
- It requires the combination of both qualitative and quantitative information which eventually warrants data integration from multiple sources that helps in improving the enterprise-level planning.
- It does not require any technical skills nor training, rather it can be conducted by anyone who has the knowledge of the business in question.
- It is also a low-cost technique as there is no requirement of hiring an external highly paid consultant.
- It is a simple method that can be conducted in a relatively shorter period of time vis-à-vis other problem-solving techniques.
- It can help in identifying the core competencies of an organization.
- It can help in understanding the past, present and future such the past and current information can be used to chalk out the future plans.
Disadvantages of SWOT Analysis
Now, let us have a look at the disadvantages of a SWOT analysis in Business:
- Since it does not use any weight for the factors, it fails to provide any mechanism to rank the significance of one factor over others. As such, it is very difficult to ascertain the true impact of any factor on the overall objective.
- It makes each factor one-dimensional as it which categorizes them as a strength, weakness, opportunity or threat. As such, each attribute or factor apparently has only one one-dimensional effect on the problem being analyzed.
- The outcome of the process can be very biased because the data collection and analysis is basically a subjective process that echoes the bias of the person who collects the data and participates in the analysis.
Limitations of SWOT Analysis
Now, let us have a look at some of the limitations of a SWOT analysis:
- It can lead to a situation where an organization may view the circumstances to be very simple and eventually may end up overlooking certain key strategic areas.
- It categorizes the attributes or factors as a strength, weakness, opportunity and threat, which in itself is very subjective and entails a great degree of uncertainty, i.e. what might be a threat in one’s opinion might not be a threat at all for someone else.
- Although the process emphasizes the importance of these four aspects, it does not specify how an organization can identify these aspects for itself.
Therefore, it can be seen that SWOT analysis in Business is a very simple but useful framework that helps an organization to focus on their weaknesses, build on their strengths, diminish the threats and take advantage of opportunities available to them. It can also be used to prepare the “kick-off” strategy of any project or new product. It can also be used to do competitor analysis, which can provide strategic insights for an organization to craft a successful competitive position.
This has been a guide to what is SWOT Analysis and its definition. Here we discuss its components which include strengths, weaknesses, opportunities, and threats and its advantages and disadvantages. You can learn more about financing from the following articles –