SWOT is the acronym for Strengths (S), Weaknesses (W), Opportunities (O), and Threats (T). By definition, strengths and weaknesses are considered to be internal factors over which there are some measures of control. On the other hand, by definition, opportunities and threats are considered to be external factors over which there are essentially no controls. SWOT is a strategy analysis tool. It combines the study of the strengths and weaknesses of an organization, a geographical area, a sector, an industry, a product or a project with the study of the opportunities and threats to their environment.
SWOT analysis is a simple but powerful tool for sizing up the organizational resource capabilities and deficiencies, its market opportunities, and the external threats to its future. It is also referred to as SWOT matrix and can also be formulated as TOWS analysis or Weihrich’s TOWS matrix. TOWS matrix identifies potential tactical strategies which can be deployed for the purpose of exploiting opportunities or defending against threats through the leverage of the existing strengths and the reduction of weaknesses. The TOWS matrix seeks to develop tactical strategies based on four different positions. These are SO strategies, WO strategies, ST strategies, and WT strategies and shown in Fig 1.
SWOT analysis technique is credited to Albert Humphrey, who led a research team at the Stanford Research Institute. SWOT analysis came from this research which was conducted from 1960 to 1970. The research was funded by the Fortune 500 companies to find out what had gone wrong with corporate planning and to create a new system for managing change. SWOT analysis is shown in Fig 1.
Fig 1 SWOT analysis and TOWs matrix
SWOT analysis is an important strategic management tool for carrying out the external and internal analysis. By conducting an external analysis, the organizational management identifies the critical threats and opportunities in its competitive environment. It also examines how competition in this environment is likely to evolve and what implications that evolution has for the threats and opportunities the organization is facing. While external analysis focuses on the environmental threats and opportunities facing an organization, internal analysis helps the organizational management identify its organizational strengths and weaknesses. It also helps the organization understand which of its resources and capabilities are likely to be sources of competitive advantage and which are less likely to be sources of such advantages. Based on SWOT analysis, the organizational management chooses the appropriate strategy.
Strengths and opportunities are helpful to achieve the organizational objectives. They are favourable for the organization. Weaknesses and threats are harmful to achieving the organizational objectives. They are unfavourable for the organization. Hence, underlying any successful selection of strategies is an analysis of the organization’s internal strengths and weaknesses which are posed by internal environment and the opportunities and threats which are posed by the external environment. In other words, the management role is to try to ‘fit’ the analysis of externalities and internalities, to balance the organizational strengths and weaknesses in the light of environmental opportunities and threats.
SWOT analysis is a useful tool which can help in handling both ordinary and unusual situations by exploring both internal and external factors which can be influencing. It is a structured planning method for strategy formulation. It involves specifying the objective and identifying the internal and external factors which are favourable and unfavourable for achievement of the objectives. SWOT analysis normally starts with defining of a desired end state or objective. Strengths are the attributes which are helpful in achievement of the objective. Weaknesses are the attributes which are harmful in achieving the objective. Opportunities are the external conditions which are helpful in achievement of the objectives. Threats are the external conditions which can do damage to the objectives. Thus strengths and weaknesses are the internal factors over which there are some measures of control while opportunities and threats are external factors over which there are essentially no controls.
To understand SWOT analysis, it is necessary to understand the four factors of SWOT analysis. These are explained below.
Strengths – These are the qualities which enable to accomplish the organizational mission. These are the basis on which continued success can be made and sustained. Strengths can be either tangible or intangible. These are in what the organization is well-versed in or what it has expertise in. It includes the traits and qualities the employees possess (individually or as a team) and the distinct features which give the organization its consistency. Strengths are the beneficial aspects of the organization or the capabilities of the organization. It includes human competencies, process capabilities, financial resources, products and services, customer goodwill, and brand loyalty. Examples of organizational strengths are huge financial resources, diversified product line, zero debt, and committed employees etc.
Weaknesses – Weaknesses are the qualities which prevent the organization to accomplish its mission and to achieve its full potential. These weaknesses have deteriorating influences on the organizational success and growth. Weaknesses are the factors which do not meet the standards which are to be normally met. Weaknesses in the organization can be depreciated machinery, insufficient research and development facilities, narrow product range, and poor decision making capabilities etc. Weaknesses are controllable. They are required to be minimized and eliminated. For example, to overcome obsolete technology and machinery, new technology and machinery can be procured and installed. Other examples of organizational weaknesses are huge debts, high employee turnover, complex decision making process, narrow product range, and large wastage of raw materials etc.
Opportunities – Opportunities are presented by the environment within which the organization operates. These arise when an organization can take benefit of conditions in its environment to plan and execute strategies which enable it to become more successful in its operations. Organization can gain competitive strength by making use of opportunities. Organization is to be careful and recognize the opportunities and grasp them whenever they arise. Selection of the targets which serves the stakeholders while getting the desired results is a difficult task. Opportunities can arise from market, competition, industry / government, and technology.
Threats – Threats arise when conditions in external environment endanger the reliability and profitability of the organization. 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 reduction in the industry profits etc.
SWOT analysis is not only useful to the profit seeking organization but it can also be used in any decision making situation where an objective has been defined. SWOT analysis can provide (i) a framework for identifying and analyzing the strengths, the weaknesses, the opportunities and the threats, (ii) an impetus for analyzing a situation and developing suitable strategies and tactics, (iii) a basis for assessing core competencies and capabilities, (iv) an evidence for and a key to change, and (v) a stimulus for participating in a group.
Steps for SWOT analysis
The following are the steps employed in SWOT analysis.
- The first step is to define the desired state or objective. The purpose of conducting a SWOT analysis can be wide or narrow, general or specific.
- The selection of the contributors for the SWOT analysis is the next step and is Important since it influences the final outcome. SWOT analysis is the result from consultation and discussion with the contributors and not just from their personal views, however they may be experts.
- The third step is background preparation which is important for the subsequent analysis to be effective. This preparation is carried out in two stages. The first stage is exploratory, followed by data collection, and the second stage is detailed, followed by a focused analysis. The information on strengths and weaknesses is to focus on the internal factors of skills, resources and assets, or lack of them while the information on opportunities and threats is to focus on the external factors over which there is little or no control such as social or economic factors.
- It is essential that there is flow of information from the contributors. It is important that the information is specific, evaluative and analytical at the stage of compilation and recording of the SWOT analysis lists. Mere description is not enough.
- The next step is listing of strengths. Strengths can relate to the group, to the environment, to the perceptions, and to the people.
- After listing of strengths, listing of weaknesses comes. In this listing it is to ensure that it does not constitute an opportunity to focus on the negative but be an honest appraisal of the way things are. Important issues for this listing are to identify (i) the obstacles which can prevent progress, (ii) the elements which need strengthening and (iii) the real weak links in the chain.
- The step of opportunities is designed to assess the socio-economic, environmental and demographic factors, among others, to evaluate the benefits which can bring to the SWOT analysis, for examples the availability of new technology.
- The next step is the listing of threats. It is the opposite of opportunities and this can be done with a shift of emphasis or perception has an adverse impact. Weighing threats against opportunities is not a reason to indulge in pessimism. It is rather a question of considering how possible negative experience can be limited or eliminated. The same factors can emerge as both a threat and an opportunity. Most external factors are in fact challenges, and whether these are perceived as opportunities or threats is often a valuable indicator of morale.
- The facts and ideas listed above are sorted and grouped in relation to the objectives. It can be necessary for the SWOT analysis to select the five most important items from the lists in order to gain a wider view. Clarity of the objectives is the key to the process, as evaluation and elimination is necessary to remove the unnecessary items. Although some aspects can require further information, a clear picture is to emerge at this stage in response to the objectives.
- It is to be ensured that the SWOT analysis is used in subsequent planning and for the formation of the strategy.
Advantages of SWOT analysis
The making of plans or decisions is a concept that is critical to the management and the employees of the organization. SWOT analysis is a very popular method used for strategic management and marketing. It is a tried-and-true tool of strategic analysis. It is possible to mention many characteristics which affect the preferability and usability of SWOT analysis. These characteristics which can be considered as advantages are listed below.
- SWOT analysis is an analysis technique which has a general perspective and presents general solutions. Details and specific issues are not the focus of SWOT analysis, but the other analyses which normally follows. In this sense, SWOT analysis is a road map which guides the management from the general to the specific.
- SWOT analysis is an interactional analysis technique which makes macro evaluations possible. As an analysis tool, SWOT analysis provides the opportunity to focus on positive and negative aspects of internal and external environment of the organization. In other words the elements in this environment which add plus and minus value, all together in a related perspective. In this regard, it is also possible to describe SWOT analysis through TWOS matrix.
- SWOT analysis can help organizational managements to uncover opportunities to take advantage. By understanding weaknesses, threats can be managed and eliminated. To examine the organization and the competitors through SWOT analysis, strategies which help distinguish the organization from competitors can be formulated.
- SWOT analysis forms a thinking model for the organizational management as an approach and analysis technique. This model gives one the opportunity to limit the agenda in the steps of information gathering and interpretation, and shows the points on which the decisions are based on. In other words, SWOT analysis prepares the substructure for strategic decisions.
- SWOT analysis fits other theories and strategic decision tools. For example, SWOT analysis encompasses a number of different forms of analysis, such as Porter’s five forces model, Delphi panel, and Norton balanced score card etc.
- SWOT analysis promotes group discussion about strategic issues and strategy development. By using creative participatory techniques such as brain storming sessions, group meetings, it enables the pool knowledge.
- SWOT analysis helps organizational management to start a discussion for the future and goals of the organization by moving beyond daily problems and the current situation.
- SWOT Analysis can be applied at different analytical levels which include individual level, organizational level, national level, or international level etc.
Limitations of SWOT analysis
SWOT analysis is one of the most widely used techniques of the strategic management process. There are certain criticisms associated to SWOT analysis in spite of its wide use as an analysis tool. In this regard, the criticisms include that it is not effective enough as a part of organizational strategy, it cannot go beyond making a definition regarding the current situation, and for this reason it is not to be accepted as an analysis technique. Some people prefer TOWS matrix over SWOT analysis, since as per them; the only logical starting point for analysis is with opportunities and threats. They are outside the organization, largely beyond its control, and are to be managed using the organizational strengths and weaknesses. Systematic and comprehensive assessment of external and internal factors determines current competitive position and growth potential of an organization. The criticisms of SWOT analysis are described below.
- Listing strengths on paper is prone to bias and is very different from testing the organization and experiencing the strengths at work.
- SWOT analysis has a general perspective as an approach and present general solutions. It has been developed in the periods when the environmental conditions were still. For this reason, it is not a valid technique in today’s environment which is based on change and competition. Dynamic and structural changes at the level of system, sub-system, and super-system affect the validity of entries in a SWOT analysis.
- There are various studies showing that SWOT analysis is poorly formulated. It needs experience and training for a systematic construction and use.
- SWOT analysis is an analysis technique which has a problem in terms of quality and quantity. In applying SWOT analysis, many factors can be identified. However, quantity does not mean quality. It is not possible to determine the priorities of the factors identified in SWOT analysis, focus on them in detail, solve the developments and conflicts in different dimensions, and include views and suggestions based on different data and analyses. There are several techniques to be used along with SWOT analysis to suggest a quantitative basis to analytically determine the ranking and weight of the factors, to verify views and suggestions, to eliminate weaknesses in the measurement and evaluation of steps in SWOT analysis.
- SWOT analysis has high cost, but fewer benefits. The discussion environment which it creates can mean a loss of time for organizational management.
- Categorization of variables into one of the four SWOT analysis quadrants is challenging. The same factor can be fitted in two categories. A factor can be strength as well as weakness at the same time. In addition, strengths which are not maintained can become weaknesses after some period of time. Opportunities not taken, but adopted by competitors, can become threats. The classification of a variable also depends on the purpose of the practice.
- SWOT analysis begins with current strengths, weaknesses, opportunities and threats. However, to generate suitable strategies for a certain period, SWOT analysis needs to revise its inventory to arrive at one which reflects accurately the anticipated organization strengths, weaknesses, opportunities and threats for that period. Otherwise, generating strategies are to be based on the current or past, and not the future.
- SWOT analysis lacks comparison with competitors. The lack of a quantitative index to provide an operational criterion for benchmarking hinders the competitive analysis, especially in a highly inter-dependent setting to evaluate the size of competitive gaps, the organization needs to know the relevant performance levels of all its close competitors.
- The information contained in a SWOT analysis, under the influence of corporate culture, can be unreliable, all bound up with aspirations, biases, and hope of the individuals involved in organizational management.
Based on the above criticisms, it is possible to conclude that SWOT analysis is an analysis technique which has some limitations. By listing the organizational attributes, management has the raw material needed to perform more in-depth strategic analysis. However SWOT analysis cannot show the management how to achieve a competitive advantage. The management is not to make SWOT analysis an end in itself, temporarily raising awareness about important issues but failing to lead to the kind of action steps necessary to enact strategic change. The important limitations of SWOT analysis are given below.
- Strengths not necessarily lead to an advantage. The organizational strengths and capabilities, no matter how unique or impressive, cannot enable it to achieve competitive advantage in the marketplace.
- SWOT analysis focuses on environment which is too narrow. Strategists who rely on traditional definitions of their industry and competitive environment frequently focus their sights too narrowly on current customers, technologies and competitors.
- SWOT analysis gives a one-shot view of a moving target. A key weakness of SWOT analysis is that it is primarily a static assessment. It focuses too much of the organizational attention on one moment in time.
- SWOT analysis overemphasizes a single dimension of strategy. Sometimes organization becomes pre-occupied with a single strength or a key feature of the product or service which it is offering and ignores other factors needed for competitive success.
- SWOT analysis is rarely deployed at lower than the organization level. This is a risky situation that each strength and weakness is related to and is equally important for all strategic departments and the products organization produces. This can even lead to wrong strategies for the entire organization.
In general, SWOT analysis is a very popular and useful in management tool. It has much to offer, but only as a starting point. SWOT analysis is a situation analysis and it can also be used as the starting point for a more comprehensive review. It is important since it can inform later steps in planning to achieve the organizational objectives. SWOT analysis is a summary tool, frequently featured in organizational planning which can be applied and used beneficially in any decision-making process or to analyze a situation. It can be a valuable planning tool.