16 SWOT Analysis

Dr.Shafali Nagpal

16.1 Learning Objective

16.2 Introduction

16.3 Evolution of SWOT Matrix

16.4 Breakdown of SWOT Matrix

16.5 Advantages of SWOT

16.6 Procedure to conduct SWOT

16.7 How to create SWOT

16.8 Limitations of SWOT Matrix

16.9 Summary

Learning Objectives

After completing this module, you will be able to:

1. To know about SWOT
2. To understand the importance of SWOT
3. To analyze the strategic aspects of SWOT

Introduction

Over the past few decades, one strategic management technique that has gained increased acceptance or which has rather excelled in the field of strategic planning is the SWOT analysis. Despite all its popularity, most users have no idea about when or how this technique evolved, and who can be credited with the conceptualization or development of SWOT. History of this method is somewhat elusive, but largely the evolution of this concept can be ascribed to Albert Humphrey – an American management consultant.

Evolution History of the SWOT analysis:

While working on a research project at the Stanford University sometime around the 1960s to 1970s, Albert Humphrey developed an analytical tool to evaluate the strategic plans and find out why corporate planning failed. He coined this technique as SOFT analysis where –

S stood for what things are Satisfactory at present,

O denoted what Opportunities can be explored in the future, F meant the Faults in the present and

T signified the Threats that could surface in the future.

While the majority agrees that SOFT is the predecessor of SWOT, some people believe that the concept of SWOT analysis emerged separately and had nothing to do with SOFT.

How SWOT evolved from SOFT?

The first mention of the term SWOT can be traced back to the Long Range Planning seminar held in Zurich in 1964. In this seminar, Urick and Orr proposed the concept of SWOT analysis which was derived from SOFT by replacing the F for faults with W for Weaknesses. With its initial promotion in the Britain, the concept soon gained recognition among strategic planners and management consultants the world over.

Emerging of the SWOT matrix

Another important development in the history of the SWOT analysis was the development of the SWOT matrix. In 1982, Dr Heinz Weihrich proposed the use of a 2×2 matrix for carrying out a SWOT analysis. This matrix was initially popular as TOWS matrix, which is another name used for referring to a SWOT matrix even today.

Ever since the 1980s, the SWOT interests management professionals and forms an integral part of strategic planning mechanism. Looking at history, one can see that a lot many similar concepts were introduced during various researchers, but none of them survived for too long. In fact, some of the tools were very similar to SWOT. History is proof enough that SWOT is by far the best and the most widely used strategic planning tool.

Concept

SWOT analysis is a process that identifies an organization’s strengths, weaknesses, opportunities and threats. Specifically, SWOT is a basic, analytical framework that assesses what entity (usually a business, though it can be used for a place, industry or product) can and cannot do, of factors both internal (the strengths and weaknesses) as well as external (the potential opportunities and threats). Using environmental data to evaluate the position of a company, a SWOT analysis determines what assists the firm in accomplishing its objectives, and what obstacles must be overcome or minimized to achieve desired results: where the organization is today, and where it may be positioned in the future.

As its name states, a SWOT analysis examines four elements:

Strengths – internal attributes and resources that support a successful outcome.

Weaknesses – internal attributes resources that work against a successful outcome. Opportunities – external factors the project can capitalize on or use to its advantage. Threats – external factors that could jeopardize the project.

Once the SWOT factors are identified, decision-makers should be able to ascertain better if the project or goal is worth pursuing and what is required to make it successful. Often expressed in a two-by-two matrix, the analysis aims to help an organization match its resources to the competitive environment in which it operates.

BREAKING DOWN ‘SWOT Analysis’

A SWOT analysis is usually presented as a square with each of the four areas making up one quadrant. This visual arrangement of the information provides a quick overview of the company’s position. Although all the points under a particular heading may not be of equal importance, there are some insights to be had in seeing how the number of opportunities measures up to the number of threats, and so forth.

Elements of a SWOT Analysis

When using SWOT analysis, an organization needs to be realistic about its good and bad points. Analysis needs to be kept specific by avoiding grey areas and analyzing about real-life contexts. For example, how do the organization’s products and services compare to those of competing firms? SWOT analysis should be short and simple and should avoid complexity and over-analysis, as much of the information is subjective. Thus, companies should use it as a guide and not a prescription.

Strengths describe what an organization excels at and separates it from the competition: things like a strong brand, loyal customer base, strong balance sheet, unique technology and so on. For example, a hedge fund may have developed a proprietary trading strategy that returns market-beating results; it must then decide how to use those results to attract new investors.

Weaknesses stop an organization from performing at its optimum level. They are areas where the business needs to improve to remain competitive: things like higher-than-industry average turnover, high levels of debt, a small supply chain or lack of capital.

Opportunities refer to favourable external factors that an organization can use to give it a competitive advantage. For example, a car manufacturer may be able to export its cars into a new market, increasing sales and market share, if tariffs in a country are substantially reduced – the “opportunity” in this case.

Threats refer to factors that have the potential to harm an organization. For example, a drought is a threat to a wheat-producing company, as it may destroy or reduce the yield of the crop. Other common threats include things like rising costs of inputs, increasing competition, tight labour supply and so on.

Advantages of SWOT Analysis

A SWOT analysis is a great way to guide business-strategy meetings. It can be mighty to have everyone in the room to discuss the core strengths and weaknesses of the company and then move from there to defining the opportunities and threats, and finally to brainstorming ideas. Often the SWOT analysis that you envision before the session changes throughout to reflect factors you were unaware of and would never have captured if not for the group’s input.

SWOT can be used for overall business strategy sessions, but it can also be used to for a specific segment of marketing, production, or sales. This way you can see how the overall strategy developed off the SWOT analysis will filter down to the segments below before committing to it. You can also work in reverse and do segment specific SWOT analysis that feeds into an overall SWOT analysis.

When drafting a SWOT analysis, individuals typically create a table split up into four columns to list each impacting element side-by-side for comparison. Strengths and weaknesses won’t typically match listed opportunities and threats, though they should correlate somewhat since they’re tied together in some way. Billy Bauer, managing director of Royce Leather, noted that pairing external threats with internal weaknesses can highlight the most serious issues faced by a company.

“Once you’ve identified your risks, you can then decide whether it is most appropriate to eliminate the internal weakness by assigning company resources to fix the problems, or reduce the external threat by abandoning the threatened area of business and meeting it after strengthening your business,” Bauer said.

Internal factors

The first two letters in the acronym, S (strengths) and W (weaknesses), refer to internal factors, which means the resources and experience readily available to you. Examples of areas typically considered include:

Financial resources (funding, sources of income, investment opportunities) Physical resources (location, facilities, equipment)

• Human resources (employees, volunteers, target audiences)
• Access to natural resources, trademarks, patents and copyrights
• Current processes (employee programs, department hierarchies, software systems)

External factors

External forces influence and affect every company, organization and individual. Whether these factors are connected directly or indirectly to an opportunity or threat, it is important to take note of and document each one. External factors typically reference things you or your company do not control, such as:

Market trends (new products and technology, shifts in audience needs) Economic trends (local, national and international financial trends)

• Funding (donations, legislature and other sources) Demographics
• Relationships with suppliers and partners
• Political, environmental and economic regulations

Once you fill out your SWOT analysis, you will need to come up with some recommendations and strategies based on the results. Linda Pophal, owner and CEO of Strategic Communications consulting firm, said these strategies should be focused on leveraging strengths and opportunities to overcome weaknesses and threats.

Procedure to conduct SWOT Analysis

Using a SWOT Analysis Matrix

A SWOT matrix is usually depicted as a square divided into four quadrants. Each quadrant represents one element of the SWOT analysis — Strengths, Weaknesses, Opportunities, Threats.

Questions to Ask During the Process

The easiest way to start filling in each quadrant in the matrix above is by answering a series of questions. Use the list below to get started, focusing on the questions that are most relevant to your business and current situation.

Strengths: For this quadrant, think about the attributes of yourself and your business that will help you achieve your objective. Questions to consider:

• What do you do well?
• What are your unique skills?
• What expert or specialized knowledge do you have? What experience do you have?
• What do you do better than your competitors?
• Where are you most profitable in your business?

Weaknesses: For this quadrant, think about the attributes of yourself and your business that could hurt your progress in achieving your objective. Questions to consider:

• In what areas do you need to improve? What resources do you lack?
• What parts of your business are not very profitable?
• Where do you need further education and experience? What costs you time and money?

Opportunities: For this quadrant, think about the external conditions that will help you achieve your objective. Questions to consider:

What are the business goals you are currently working towards? How can you do more for your existing customers or clients?

• How can you use technology to enhance your business?
• Are there new target audiences you have the potential to reach?
• Are there related products and services that provide an opportunity for your business?

Threats: For this quadrant, think about the external conditions that could damage your business’s performance. Questions to consider:

• What obstacles do you face?
• What are the strengths of your biggest competitors? What are your competitors doing that you’re not?
• What’s going on in the economy? What’s going on in the industry?

Using Data Compiled in a SWOT Analysis

One of the most important parts of your SWOT analysis is using the data you compiled to identify new strategies and goals for your business. For example, you can:

Create a plan to build up your strengths even more

List ways you can work on building up your weaknesses

Set SMART goals for each of the opportunities you identified

Devise a plan to use your strengths to decrease the threats you identified Then, look for ways to combine data from different quadrants in even more ways:

Explore how you can combine your strengths and opportunities to develop new strategies Try combining strengths and threats to identify threats you can eliminate

Look at your weaknesses and opportunities to create a list of areas ready for improvement Make a list of areas to avoid that fall under weaknesses and threats

Once you understand how to compile your SWOT data and find ways to use it strategically, the SWOT analysis will be a tool that you can use over and over in your business to explore new opportunities and improve your decision-making process.

Listing Your Internal Factors: Strengths and Weaknesses (S, W)

Internal factors include your resources and experiences. General areas to consider:

Human resources – staff, volunteers, board members, target population Physical resources – your location, building, equipment

• Financial – grants, funding agencies, other sources of income
• Activities and processes – programs you run, systems you employ
• Past experiences – building blocks for learning and success, your reputation in the community

Don’t be too modest when listing your strengths. If you’re having difficulty naming them, start by simply listing your characteristics (e.g.., we’re small, we’re connected to the neighbourhood). Some of these will probably be strengths.

Although the strengths and weakness of your organization are your internal qualities, don’t overlook the perspective of people outside your group. Identify strengths and weaknesses from both your point of view and that of others, including those you serve or deal with. Do others see problems–or assets–that you don’t?

How do you get information about how outsiders perceive your strengths and weaknesses? You may know already if you’ve listened to those you serve. If not, this might be the time to gather that type of information. See related sections for ideas on conducting focus groups, user surveys, and listening sessions.

Listing External Factors: Opportunities and Threats (O, T)

Cast a wide net for the external part of the assessment. No organization, group, program, or neighbourhood is immune to outside events and forces. Consider your connectedness, for better and worse, as you compile this part of your SWOT list.

Forces and facts that your group does not control include:

Future trends in your field or the culture

The economy – local, national, or international

Funding sources – foundations, donors, legislatures

Demographics – changes in the age, race, gender, culture of those you serve or in your area

The physical environment (Is your building in a growing part of town? Is the bus company cutting routes?)

Legislation (Do new federal requirements make your job harder…or easier?) Local, national or international events

How do you create a SWOT analysis?

Who develops the SWOT?

The most common users of a SWOT analysis are team members and project managers who are responsible for decision-making and strategic planning.

But don’t overlook anyone in the creation stage!

An individual or small group can develop a SWOT analysis, but it will be more effective if you take advantage of many stakeholders. Each person or group offers a different perspective on the strengths and weaknesses of your program and has different experiences of both. Likewise, one staff member or volunteer or stakeholder may have information about an opportunity or threat that is essential to understanding your position and determining your future.

When and where do you develop a SWOT analysis?

A SWOT analysis is often created during a retreat or planning session that allows several hours of brainstorming and analysis. The best results come when the process is collaborative and inclusive. When creating the analysis, people are asked to pool their individual and shared knowledge and experience. The more relaxed, friendly and constructive the setting, the more truthful, comprehensive, insightful, and useful your analysis will be.

Every company–even the largest ones that dominate their markets–has a finite supply of workforce, production capacity and capital. Evaluating the company’s strengths helps it determine how to allocate these resources in a manner that will result in the highest possible potential for revenue growth and profitability. The management team examines where the company can compete most effectively. The company often discovers it has competitive strengths that have not been fully utilized in the past.

Improving Operations

When the management team looks at the company’s weaknesses, it is not to assign blame for past shortfalls in performance. It is to identify the most critical areas that need to be improved for the business to compete more effectively. A realistic assessment of weaknesses also prevents strategic blunders like entering a market with products that are inferior to what well-entrenched competitors are offering. Continuous improvement in all areas of a company’s operations is an important aspect of staying ahead of competitors. Current weaknesses can–and must–be turned into future strengths.

SWOT Analysis is instrumental in strategy formulation and selection. It is a reliable tool, but it involves a significant subjective element. It is best when used as a guide, and not as a prescription. Successful businesses build on their strengths, correct their weakness and protect against internal weaknesses and external threats. They also keep a watch on their overall business environment and recognize and exploit new opportunities faster than its competitors.

SWOT Analysis helps in strategic planning in the following manner-

a. It is a source of information for strategic planning.

b. Builds organization’s strengths.

c. Reverse its weaknesses.

d. Maximize its response to opportunities.

e. Overcome organization’s threats.

f. It helps in identifying core competencies of the firm.

g. It helps in a setting of objectives for strategic planning.

h. It helps in knowing the past, present and future so that by using the past and current data, plans can be chalked out.

SWOT Analysis provides information that helps in synchronizing the firm’s resources and capabilities with the competitive environment in which the company operates.

SWOT ANALYSIS FRAMEWORK

Limitations of SWOT Analysis

SWOT Analysis is not free from its limitations. It may cause organizations to view circumstances as very simple because of which the organizations might overlook certain key strategic contact which may occur. Moreover, categorizing aspects as strengths, weaknesses, opportunities and threats might be very subjective as there is a great degree of uncertainty in the market. SWOT Analysis does stress upon the significance of these four aspects, but it does not tell how an organization can identify these aspects for itself.

There are certain limitations of SWOT Analysis which are not in control of management. These include-

a. Price increase;

b. Inputs/raw materials;

c. Government legislation;

d. Economic environment;

e. Searching a new market for the product which is not having an overseas market due to import restrictions; etc.

Internal limitations may include-

a.Insufficient research and development facilities;

b. Faulty products due to poor quality control;

c. Poor industrial relations;

d. Lack of skilled and efficient labour; etc

Summary

SWOT analysis is a process that identifies an organization’s strengths, weaknesses, opportunities and threats. It is a basic, analytical framework that assesses what entity can and cannot do, of factors both internal as well as external. SWOT Analysis is instrumental in strategy formulation and selection. It is a reliable tool, but it involves a significant subjective element. Successful businesses build on their strengths, correct their weakness and protect against internal weaknesses and external threats and exploit new opportunities faster than its competitors. Despite of its limitations, SWOT analysis is used widely in organisations.

References

• Pickton, D.W. and Wright, S. (1998). What’s swot in strategic analysis? Strategic Change Vol. 7, pp. 101-109, 105-106
• Rothaermel, F. T. (2012). Strategic Management: Concepts and Cases. McGraw-Hill/Irwin, p. 105-106
• Johnson, G, Scholes, K. Whittington, R. (2008). Exploring Corporate Strategy. 8th ed. FT Prentice Hall, p. 156, 160
• Coman, A. and Ronen, B. (2009). Focused SWOT: diagnosing critical strengths and weaknesses. International Journal of Production Research Vol. 40, Issues 20, pp. 5677– 5689
• Kotler, P. (1991). Marketing Management. 7th ed. Prentice-Hall
• David, F.R. (2009). Strategic Management: Concepts and Cases. 12th ed. FT Prentice Hall, p. 125-126, 166-168