SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis is a strategic tool for evaluating the internal and external factors that can affect the future prospects of a business. Strengths and Weaknesses are the internal factors of the firm which would be specific to it which accounts for the uniqueness of the firm. Opportunities and Threats are the external factors which are typically not specific to the firms but to an industry as a whole and would impact the firm.
Why Conduct SWOT Analysis?
SWOT analysis helps in accomplishing the following major goals:
- Effective Utilization of Resources: Every firm faces a resource constrain be it labor or raw materials or technology etc. It’s not possible to have unlimited supply of resources. Since the resources are limited the success of the business depends on how effectively it makes use of the available resources. SWOT analysis helps the firm to identify the strengths so that it can deploy resources in areas where they can generate highest possible ROI there by avoiding wastage of resources.
- Improvement of Operations: The weaknesses identified by the SWOT analysis represent the past mistakes that the firm has committed. It is important that the firm evaluates these weaknesses critically and identify the key areas in which the operations has to be improved in order to compete effectively.
- Identification of Opportunities: Growth of the firms requires identification of new opportunities like new markets or new customer base or new products. SWOT analysis helps to understand the present strengths and forecast future opportunities so that the firm can plan in advance and grab the opportunities at the right time.
- Handling of Risks: Risk is an occurrence that is outside the control of the firm that can negatively impact the performance of the firm. SWOT analysis captures this as Threat. The threats can be anything like changing customer preferences or change in regulatory environment etc. Having a contingency plan helps to navigate through these kinds of risks easily. Identification of probable threats beforehand can help in preparing the contingency plan which is facilitated by model.
Limitations of SWOT Analysis
SWOT analysis is only an initial step in the strategic planning process in order to gain deeper insights one needs to do an in depth research. Also SWOT analysis identifies issues that can be classified into one of the 4 categories, it leaves out on issues that lie somewhere in between. For example being located in a prime city would give an advantage of closeness to the market and at the same time increased cost of daily operations would be a weakness. These kinds of issues are often ignored by SWOT analysis.
Other limitations include non-prioritization of issues, neither provides solutions nor alternative decisions, can generate many ideas but offers little help in choosing one and gives a lot of information but not all of it will be useful for the firms’ strategic decision making.
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