What is SWOT Analysis?
SWOT analysis, which stands for strengths, weaknesses, opportunities, and threats, serves as a framework for assessing a company’s competitive standing and developing strategic plans. This comprehensive tool evaluates both internal and external factors, examining current conditions and future prospects.
The primary purpose of a SWOT analysis is to provide an objective, data-driven examination of an organisation’s strengths and weaknesses, whether they pertain to the organisation itself, its initiatives, or its industry. To maintain accuracy, it’s important to approach the analysis without preconceived notions or uncertainties, instead focusing on real-life situations. Companies should view the SWOT analysis as a guiding tool rather than a rigid prescription for action.
Understanding SWOT Analysis
SWOT analysis is a strategic tool designed to evaluate the performance, competition, risks, and potential of a business or its components, such as product lines, divisions, industries, or other entities.
Using both internal and external data, this technique assists businesses in formulating strategies that are more likely to yield success while steering them away from less successful approaches. Independent SWOT analysts, investors, or competitors can also provide valuable insights into the strength or weakness of a company, product line, or industry and explain the reasons behind such assessments.
Components of SWOT Analysis
A SWOT analysis comprises the following four components. While the specifics within each category may vary across different companies, a thorough SWOT analysis includes each of the components below.
Strengths highlight an organisation’s areas of excellence and what sets it apart from competitors. This may include a strong brand, a loyal customer base, a strong balance sheet, unique technological advantages, and more. For instance, a hedge fund may possess a proprietary trading strategy delivering superior market results, prompting the need to strategically leverage these results to attract new investors.
Weaknesses are the areas where an organisation needs improvement to achieve optimal performance and competitiveness. Examples include a weak brand, higher-than-average turnover, excessive debt, an inefficient supply chain, or insufficient capital.
Opportunities include external factors that could provide a competitive advantage to the organisation. For example, if a country reduces tariffs, a car manufacturer may capitalise on this opportunity by exporting its cars to a new market, thereby increasing sales and market share.
Threats encompass elements with the capacity to adversely impact an organisation. Examples include natural disasters like drought affecting a wheat-producing company, rising material costs, intensifying competition, and a tight labour supply.
Analysts present a SWOT analysis as a square divided into four quadrants, each dedicated to one component of SWOT. This visual arrangement offers an overview of the company’s position. Although the points under each heading may vary in significance, they collectively provide insights into the balance of strengths, weaknesses, opportunities, and threats.
The SWOT table often arranges internal factors in the top row and external factors in the bottom row. Also, items on the left side are positive or favourable aspects, while those on the right highlight more concerning or negative elements.
How to Do a SWOT Analysis
A SWOT analysis comprises several steps, including actionable items both before and after examining its four components. In general, the process involves the following steps.
Step 1: Define your Objective
While a SWOT analysis can be broad, it generates more value when directed towards a specific objective. For instance, the objective might focus solely on deciding whether to launch a new product. Having a clear objective can help a company gain guidance on the desired outcome. In this case, the SWOT analysis aims to determine the feasibility of introducing the product.
Step 2: Collect Resources
Each SWOT analysis is unique, requiring different data sets to construct various SWOT tables. A company should initiate the process by understanding its available information, recognising data limitations, and assessing the reliability of external data sources.
Aside from data, it’s necessary for a company to identify the personnel who will engage in the analysis. Some staff may be more attuned to external factors, while others in manufacturing or sales departments may possess a better understanding of internal operations. Inclusion of diverse perspectives is key for generating varied and value-adding contributions.
Step 3: Compile Ideas
In this phase, the team tasked with conducting the SWOT analysis should initiate the process of compiling ideas for each of the four components: strengths, weaknesses, opportunities, and threats. A set of guiding questions for each category is provided in the table below.
Examining what transpires within the company is required to get insights into strengths and weaknesses. Internal factors include financial and human resources, tangible and intangible assets (such as brand name), and operational efficiencies.
Potential questions for listing internal factors:
- (Strength) What aspects are we excelling in?
- (Strength) What constitutes our most formidable asset?
- (Weakness) What are the factors hindering our progress?
- (Weakness) Which product lines exhibit lower performance?
External factors, such as market changes, monetary policies, and supplier accessibility, are equally critical to a company’s success. By exploring these external factors, a comprehensive list of opportunities and threats can be compiled.
Potential questions for listing external factors:
- (Opportunity) What trends are prevalent in the marketplace?
- (Opportunity) Which demographics are currently not targeted?
- (Threat) How many competitors are currently in the market, and what is the distribution of their market shares?
- (Threat) Are there new regulations that could potentially impact our operations or products?
Consider adopting a collaborative approach, such as a “white-boarding” or “sticky note” session, where participants are encouraged to freely share thoughts without right or wrong answer. The emphasis is on creativity and inspiration, and ideas generated during this session can be refined later in the analysis process.
Step 4: Streamline the Findings
Having compiled a list of ideas within each category, the next step involves the refinement of these thoughts. This process allows the company to narrow down its focus to the most promising ideas or significant risks. Achieving this refinement may necessitate thorough discussions among analysis participants, potentially involving upper management to assist in prioritising and ranking the identified priorities.
Step 5: Formulate the Strategy
With the prioritised list of strengths, weaknesses, opportunities, and threats at hand, it’s time to transform the insights gained from the SWOT analysis into a comprehensive strategic plan. Team members responsible for the analysis take the detailed list of factors in each category and create a cohesive plan to achieve the original objective.
To illustrate, consider a company thinking of launching a new product. The SWOT analysis may reveal that the company holds a dominant position in the market with its existing product, presenting an opportunity to venture into new markets. However, challenges such as rising material costs, strained distribution channels, the need for additional staffing, and uncertain product demand may potentially outweigh the identified strengths and opportunities.
The analysis team formulates a strategy suggesting a reevaluation of the decision after six months. This strategic approach is hoping for decline in costs and a clearer understanding of market demand during that timeframe, with the aim of making a more informed decision.
Advantages of SWOT Analysis
A SWOT analysis may solve all the questions a company may face, but it offers several advantages that facilitate strategic decision-making.
- A SWOT analysis simplifies complex problems by breaking them down into manageable components. In the face of an overwhelming amount of data and considerations for a complex decision, a well-prepared SWOT analysis streamlines the process by prioritising and condensing ideas. By ranking key points by importance, it transforms a potentially daunting challenge into a more digestible report.
- A SWOT analysis emphasises the need for external considerations. While some companies may be tempted to focus solely on internal factors when making decisions, a SWOT analysis prompts a comprehensive evaluation. It covers both controllable internal factors and external variables that may impact the outcome of business decisions, acknowledging the broader context in which decisions are made.
- The versatility of a SWOT analysis is noteworthy. Applicable to a wide range of scenarios, it can assess an entire organisation, a team, an individual, or aspects like product lines, brand changes, geographical expansion, or acquisitions. This adaptability makes the SWOT analysis a valuable tool across diverse business contexts.
- A SWOT analysis leverages diverse data sources. Internal information is used for strengths and weaknesses, while external data related to markets, competitors, and macroeconomic forces is gathered for opportunities and threats. This multidimensional approach ensures a more comprehensive understanding, mitigating the risk of bias associated with relying on a single information source.
- The cost-effectiveness of preparing a SWOT analysis is an advantage. Many SWOT reports don’t require advanced technical expertise, allowing staff members to contribute without extensive training or external consulting. This accessibility makes the SWOT analysis a practical and inclusive tool for decision-making processes.
An Example of SWOT Analysis
In 2015, a Value Line SWOT analysis highlighted The Coca-Cola Company’s strengths, including its globally recognised brand name and expansive distribution network, along with opportunities in emerging markets. However, it also identified weaknesses and threats, such as susceptibility to foreign currency fluctuations, increasing public interest in “healthy” beverages, and competition from providers focusing on healthier options.
This SWOT analysis prompted Value Line to pose challenging questions about Coca-Cola’s strategy. Nevertheless, it acknowledged that the company “will probably remain a top-tier beverage provider,” offering conservative investors a “reliable source of income and a bit of capital gains exposure.”
Five years later, the effectiveness of the Value Line SWOT analysis became evident, as Coca-Cola retained its position as the 6th strongest global brand. During the subsequent five years, Coca-Cola’s shares (traded under the ticker symbol KO) increased in value by over 60%, validating the insights gained from the analysis.
To illustrate the application of a SWOT analysis, consider a hypothetical organic smoothie company. Conducting a SWOT analysis revealed strengths such as effective ingredient sourcing, personalised customer service, and a strong relationship with suppliers. Identifying weaknesses within its operations, the company recognised challenges related to limited product diversification, high turnover rates, and outdated equipment.
Examining external factors affecting its business, the analysis revealed opportunities in emerging technology, untapped demographics, and a cultural shift toward healthy living. Simultaneously, it identified threats, including potential crop damage from a winter freeze, the impact of a global pandemic, and vulnerabilities in the supply chain. Employing the SWOT analysis in conjunction with other planning techniques, the company strategically leveraged its strengths and external opportunities to mitigate threats and reinforce areas of weakness.
A SWOT analysis serves as a valuable tool to steer business-strategy discussions. Engaging everyone in the room to explore the company’s core strengths and weaknesses, identify opportunities and threats, and generate ideas proves to be a powerful approach. Notably, the initial expectations of the SWOT analysis may evolve during the session as unforeseen factors emerge, enriching the analysis with insights that might have been overlooked without collective input.
A SWOT analysis can be applied to overarching business strategy sessions or focused on specific segments like marketing, production, or sales. This dual approach enables a holistic view, allowing stakeholders to assess how the overarching strategy derived from the SWOT analysis aligns with and impacts individual segments. Segment-specific SWOT analyses can feed into and shape the broader strategy.
While SWOT analysis is a useful planning tool, it is not exhaustive and should be complemented by other business planning techniques. It’s important to recognise that the points within each SWOT category may vary in significance, and the method doesn’t inherently provide a weighted prioritisation. However, a more in-depth analysis, using supplementary planning techniques, becomes necessary for a comprehensive strategic evaluation.
DISCLAIMER: This article is for informational purposes only and is the opinion of the author.