What is SWOT Analysis? Steps, Advantages, Limitations

What is SWOT Analysis?

SWOT stands for strengths, weaknesses, opportunities and threats. SWOT analysis is a widely used framework to summaries a company’s situation or current position.

Any company undertaking strategic planning will have to carry out SWOT analysis: establishing its current position in the light of its strengths, weaknesses, opportunities and threats.

Environmental and industry analyses provide the information needed to identify opportunities and threats, while internal analysis provides information needed to identify strengths and weaknesses. These are the fundamental areas of focus in SWOT analysis.

SWOT analysis stands at the core of strategic management. It is important to note that strengths and weaknesses are intrinsic (potential) value-creating skills or assets or the lack thereof, relative to competitive forces.

Opportunities and threats, however, are external factors that are not created by the company but emerge as a result of the competitive dynamics caused by ‘gaps’ or ‘crunches’ in the market.

We had briefly mentioned about the meaning of the terms opportunities, threats, strengths and weaknesses. We revisit the same for purposes of SWOT analysis.

Strengths

Strength is something a company possesses or is good at doing.

Examples include a skill, valuable assets, alliances or cooperative ventures, experienced sales force, easy access to raw materials, brand reputation etc. Strengths are not a growing market, new products, etc.

Weaknesses

A weakness is something a company lacks or does poorly.

Examples include lack of skills or expertise, deficiencies in assets, inferior capabilities in functional areas etc. Though weaknesses are often seen as the logical ‘inverse’ of the company’s threats, the company’s lack of strength in a particular area or market is not necessarily a relative weakness because competitors may also lack this particular strength.

Opportunities

An opportunity is a major favourable situation in a firm’s environment.

Examples include market growth, favourable changes in the competitive or regulatory framework, technological developments or demographic changes, increase in demand, opportunity to introduce products in new markets, turning R&D into cash by licensing or selling patents etc.

The level of detail and perceived degree of realism determine the extent of opportunity analysis.

Threats

A threat is a major unfavourable situation in a firm’s environment.

Examples include an increase in competition; slow market growth, increased power of buyers or suppliers, changes in regulations etc.

These forces pose serious threats to a company because they may cause lower sales, higher cost of operations, higher cost of capital, inability to make break-even, shrinking margins or profitability etc. Your competitor’s opportunity may well be a threat to you.

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Carrying out SWOT Analysis

The first thing that a SWOT analysis does is to evaluate the strengths and weaknesses in terms of skills, resources and competencies. The analyst then should see whether the internal capabilities match with the demands of the key success factors.

The job of a strategist is to capitalize on the organisation’s strengths while minimizing the effects of its weaknesses in order to take advantage of opportunities and overcome threats in the environment. SWOT analysis for a typical firm is given below

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Steps in SWOT Analysis

The three important steps in SWOT analysis are:

1. Identification
2. Conclusion
3. Translation

Identification

• Identify company resource strengths and competitive capabilities
• Identify company resource weaknesses and competitive deficiencies
• Identify the company’s opportunities
• Identify external threats

Conclusion

• Draw conclusions about the company’s overall situation.

Translation

Translate the conclusions into strategic actions by acting on them:

• Match the company’s strategy to its strengths and opportunities
• Correct important weaknesses
• Defend against external threats

In devising a SWOT analysis, there are several factors that will enhance the quality of the material:

1. Keep it brief, pages of analysis are usually not required.
2. Relate strengths and weaknesses, wherever possible, to industry key factors for success.
3. Strengths and weaknesses should also be stated in competitive terms, that is, in comparison with competitors.
4. Statements should be specific and avoid blandness.
5. Analysis should reflect the gap, that is, where the company wishes to be and where it is now.
6. It is important to be realistic about the strengths and weaknesses of one’s own and competitive organisations.

Probably the biggest mistake that is commonly made in SWOT analysis is to provide a long list of points but little logic, argument and evidence. A short list with each point well argued is more likely to be convincing.

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TOWS Matrix

TOWS matrix is just an extension of SWOT matrix. TOWS stand for threats, opportunities, weaknesses and strengths.

This matrix was proposed by Heinz Weihrich as a strategy formulation – matching tool. TOWS matrix illustrates how internal strengths and weaknesses can be matched with external opportunities and threats to generate four sets of possible alternative strategies. This matrix can be used to generate corporate as well as business strategies.

To generate a TOWS matrix, the following steps are to be followed:

• List external opportunities available in the company’s current and future environment, inthe ‘opportunities block’ on the left side of the matrix.
  
  
• List external threats facing the company now and in future in the “threats block” on the left side of the matrix.
  
  
• List the specific areas of current and future strengths for the company, in the “strengths block” across the top of the matrix.
  
  
• List the specific areas of current and future weaknesses for the company in the “weaknesses box” across the top of the matrix.
  
  
• Generate a series of possible alternative strategies for the company based on particular combinations of the four sets of factors.

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Four sets of emerging strategies

SO Strategies

SO strategies are generated by thinking of ways in which a company can use its strengths to take advantage of opportunities. This is the most desirable and advantageous strategy as it seeks to mass up the firm’s strengths to exploit opportunities.

For example, Hindustan Lever has been augmenting its strengths by taking over businesses in the food industry, to exploit the growing potential of the food business.

ST Strategies

ST strategies use a company’s strengths as a way to avoid threats. A company may use its technological, financial and marketing strengths to combat a new competition.

For example, Hindustan Lever has been employing this strategy to fight the increasing competition from companies like Nirma, Procter & Gamble etc.

WO Strategies

WO Strategies attempt to take advantage of opportunities by overcoming its weaknesses.

For example, for textile machinery manufacturers in India the main weakness was dependence on foreign firms for technology and the long-time taken to execute an order. The strategy followed was the thrust given to R&D to develop indigenous technology so as to be in a better position to exploit the opportunity of growing demand for textile machinery.

WT Strategies

WT Strategies are basically defensive strategies and primarily aimed at minimizing weaknesses and avoiding threats.

For example, managerial weakness may be solved by a change of managerial personnel, training and development etc. Weakness due to excess manpower may be addressed by restructuring, downsizing, delayering and voluntary retirement schemes.

External threats may be met by joint ventures and other types of strategic alliances. In some cases, an unprofitable business that cannot be revived may be divested. Strategies which utilize a strength to take advantage of an opportunity are generally referred toas “exploitative” or “developmental strategies”.

Strategies which use a strength to eliminate a weakness may be referred to as “blocking strategies”. Strategies which overcome a weakness to take advantage of an opportunity or eliminate a threat may be referred to as “remedial strategies”.

The TOWS matrix is a very useful tool for generating a series of alternative strategies that the decision-makers of the firm might not otherwise have considered. It can be used for the company as a whole or it can be used for a specific business unit within a company. However, it may be noted that the TOWS matrix is only one of many ways to generate alternative strategies.

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Critical Assessment of SWOT Analysis

SWOT analysis is one of the most basic techniques for analysing firm and industry conditions. It provides the “raw material” for analysing internal conditions as well as external conditions of a firm. SWOT analysis can be used in many ways to aid strategic analysis.

For example, it can be used for a systematic discussion of a firm’s resources and basic alternatives that emerge from such an analysis. Such a discussion is necessary because a strength to one firm may be a weakness for another firm, and vice-versa.

For example, increased health consciousness of people is a threat to some firms (e.g. tobacco) while it is an opportunity to others (e.g. health clubs). According to Johnson and Sholes (2002), a SWOT analysis summarises the key issues from the business environment and the strategic capability of an organisation that impacts strategy development.

This can also be useful as a basis for judging future courses of action. The aim is to identify the extent to which the current strengths and weaknesses are relevant to, and capable of, dealing with the changes taking place in the business environment.

It can also be used to assess whether there are opportunities to exploit further the unique resources or core competencies of the organisation. Overall, SWOT analysis helps focus discussion on future choices and the extent to which the company is capable of supporting its strategies.

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Advantages of SWOT Analysis

• It is simple.
  
  
• It portrays the essence of strategy formulation: matching a firm’s internal strengths and weaknesses with its external opportunities and threats.
  
  
• Together with other techniques like Value Chain Analysis and RBV, SWOT analysis improves the quality of the internal analysis.

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Limitations of SWOT analysis

• It gives a static perspective and does not reveal the dynamics of competitive environment.
  
  
• SWOT emphasizes a single dimension of strategy (i.e. strength or weakness) and ignores other factors needed for competitive success.
  
  
• A firm’s strengths do not necessarily help the firm create value or competitive advantage.
  
  
• SWOT’s focus on the external environment is too narrow.

In spite of the above criticism and its limitations, SWOT analysis is still a popular analytical tool used by most organisations. It is definitely a useful aid in generating alternative strategies, through what is called a TOWS matrix.