SWOT is an acronym for strengths, weaknesses, opportunities and threats.
It is the culmination of much internal analysis and external research. Thinking about the outcome, one can define SWOT analysis as the extent to which a firm’s current strategy, strengths and weaknesses are relevant to the business environment that the company is operating in.
SWOT analysis is often presented in a matrix form:
Strengths and weaknesses are internal aspects and Kotler (1988) suggests that these should cover the four areas of marketing, financial, manufacturing and organisational.
Opportunities and threats look at the main environmental issues such as the economic situation, social changes such as the population getting older and technological developments including the internet.
A SWOT can be performed for companies, departments and divisions as well as individual people. Whatever the focus is the results will be very individual, even to companies competing in the same sector. One company may see new technology increasing the number of consumers who wish to buy online as an opportunity for ecommerce yet another player in the market, without any in-house internet expertise, may see this as a threat.
The importance of SWOT analysis lies in its ability to help clarify and summarise the key issues and opportunities facing a business. Value lies in considering the implications of the things identified and it can therefore play a key role in helping a business to set objectives and develop new strategies. The ideal outcome would be to maximise strengths and minimise weaknesses in order to take advantage of external opportunities and overcome the threats. For example, the environment may present an opportunity for a new product but if the company does not have the capacity to produce that product it may either decide to invest in new plant and machinery or to just steer clear.
The biggest advantages of SWOT analysis are that it is simple and only costs time to do. It can help generate new ideas as to how a company can use a particular strength to defend against threats in the market. If a company is aware of the potential threats then it can have responses and plans ready to counteract them when they happen.
There are also disadvantages of SWOT analysis. A typical SWOT analysis is a usually a simple list and not critically presented. If a company is thinking about compiling lists it may not be focused sufficiently on how to achieve its objectives. Taking a list approach can also result in items not being prioritised. For example, a long list of weaknesses may appear to be ‘cancelled out’ by a longer list of strengths, regardless of how significant those weaknesses are.
A SWOT analysis is a strategic tool but it is generally not used in a formal way. However there are now several pieces of SWOT analysis software available to help formalise the process and give the analysis structure. This software can help companies brainstorm and create a SWOT analysis and then present it as a report or presentation.
The best SWOT analysis will be more than a simple checklist. It will consider the degree of strength and weakness versus its competitors to determine how good that strength really is. A company may have a strong research and development team but a competitor’s could be even stronger. A good SWOT should also look the size of an opportunity or threat and show how these inter-relate with its strengths and weaknesses.
Source: ChinaStones - http://china-stones.info/free-essays/business/SWOT-analysis-guide.php