SWOT Analysis - Definition, Advantages and Limitations

SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats.

By definition, Strengths (S) and Weaknesses (W) are considered to be internal factors over which you have some measure of control.

Also, by definition, Opportunities (O) and Threats (T) are considered to be external factors over which you have essentially no control.

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.

An overview of the four factors (Strengths, Weaknesses, Opportunities and Threats) is 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.

Advantages of SWOT Analysis

SWOT Analysis is instrumental in strategy formulation and selection. It is a strong tool, but it involves a great 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 following manner-

1. It is a source of information for strategic planning.
2. Builds organization’s strengths.
3. Reverse its weaknesses.
4. Maximize its response to opportunities.
5. Overcome organization’s threats.
6. It helps in identifying core competencies of the firm.
7. It helps in setting of objectives for strategic planning.
8. It helps in knowing past, present and future so that by using past and current data, future plans can be chalked out.

SWOT Analysis provide information that helps in synchronizing the firm’s resources and capabilities with the competitive environment in which the firm 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 great degree of uncertainty in market.

SWOT 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-

1. Price increase;
2. Inputs/raw materials;
3. Government legislation;
4. Economic environment;
5. Searching a new market for the product which is not having overseas market due to import restrictions; etc.

Internal limitations may include-

1. Insufficient research and development facilities;
2. Faulty products due to poor quality control;
3. Poor industrial relations;
4. Lack of skilled and efficient labour; etc

Common Mistakes to Avoid While Conducting a SWOT Analysis

The concept of SWOT analysis can be easy to understand. However, at the same time, it is notoriously difficult to execute. Over the years, many companies have failed at coming up with actionable data points as a result of this analysis. This is because there are some common mistakes which are repeated across organizations and disrupt the SWOT analysis process.

1. Data Over Intuition: It is common for SWOT analysis process to be filled with opinions and perceptions instead of reality. For instance, some leaders at a company may believe that their core strength is having a better product than their competitors. However, the product cannot be considered to be better unless there is data to back the same.

   Any factor which is recorded in the SWOT analysis must be backed by data such as market research, competitor analysis, financial statements etc. SWOT analysis must be based on facts or else it ends up perpetuating the opinions of the management about themselves.

2. Keeping It Short: Another mistake commonly made by companies during a SWOT analysis is listing too many strengths and weaknesses. The ideal SWOT analysis should not consist of more than three or four bullet points in each category. However, many companies tend to come up with long laundry lists in the SWOT analysis.

   The purpose of SWOT analysis is to enable strategic focus on a few action points. This focus gets diluted if a very long list of possible strengths and weaknesses is considered.

3. Align Strengths with Market Priorities: It is also important for the company to ensure that they align their strengths and weaknesses in the light of market priorities.

   For instance, if a company believes that it can provide fastest delivery on a product and are planning to utilize that as a strategic strength, they must first check whether rapid delivery of such products is valued by the target customers and will lead to a strategic gain in the market.

4. Welcoming Weaknesses: Another common mistake when it comes to SWOT analysis is about the fact that there is generally more emphasis on listing strengths as opposed to listing weaknesses. This is because employees hesitate while listing the negative points of the company they work for. However, it is important to be honest for the exercise to be successful.

   It is important for the management to encourage people to voice their views about the weakness of the company either directly or via anonymous channels.

5. Diversity of Opinions: Last but not the least, it is also important to ensure that people from different departments and strata of employees participate in the SWOT analysis process.

   It is important to view the organization’s strengths, weaknesses, opportunities as well as threats from as many different points of view as possible. The diversity of opinions helps in creating a more diversified and holistic analysis with detailed pros and cons as compared to people who have similar opinions.

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