This article intends to show the workings of the SWOT analysis tool and examine its place as an essential strategy tool.
SWOT is useful because it helps companies to: 1) play to their biggest strengths; 2) exploit the opportunities in their business environment; 3) work out the best ways to manage their areas of weaknesses; and 4) devise means to overcome the threats to their business. No surprise that many leading businesses adopt the SWOT analysis as their business strategy tool.
What is it?
The tool "SWOT" is an acronym for Strengths, Weaknesses, Opportunities, and Threats. It is often represented as a four-quadrant matrix (each quadrant represents S, W, O, or T).
It is split horizontally into two rows corresponding to internal (S and W) and external (O and T) factors affecting your business.
It is split vertically into two columns corresponding to favorable (S and O) and unfavorable (W and T) factors affecting your business.
These four factors are then considered together as the critical inputs of what a business must do in order to outperform in its environment.
SWOT Analysis is crucial because it helps a company to find the most potentially profitable business model. This model is to be deduced by carefully considering and analyzing the internal and external factors influencing the company's business. It is essentially a thinking tool to help define a strategy and action plans.
When do we use it?
The SWOT Analysis is a very flexible tool that can be applied across many use cases. For example, you can use it to:
Explore potential areas of interest and specialization for your new business.
Identify the business sectors with the best working conditions and market potential to suit your available resources.
Assess important business decisions, such as new business strategies, changes in existing business model, partnerships, market entries, and product diversification.
Evaluate the efficiency of key operations in your business and identify areas that need improvement, adjustment, or overhaul.
What business questions is it helping us to answer?
SWOT analysis can help you to answer:
What factors influence our business, e.g., government policies, market trends, economic movements, or environmental trends?
What are the greatest challenges we face? Which of them is within our control? Which of them is outside our control?
What is the most favorable competitive position for optimum performance?
How should we make the best use of our resources?
How can we manage and overcome the challenges and pitfalls that present themselves in our business?
How do we use it?
To use the SWOT, take the following steps:
Start by establishing your objective for initiating the SWOT Analysis.
Proceed to gather relevant data for the analysis. If you can, engage key team members, industry and market players, and knowledgeable industry experts.
Create a dirty list of all the key entries and variables in your SWOT Analysis.
Review and curate the list. Identify the most critical entries and remove the less important ones.
Create a well-curated and carefully researched list of your business's strengths, weaknesses, opportunities, and threats.
Proceed to define the so-what/implications of that list. Brainstorm ideas, take suggestions, discard non-feasible initiatives, and create a consensus.
Sum up all the helpful implications and create a workable business strategy based on them.
Practical Example
A car production company wants to do a SWOT analysis. The steps it needs to take will be as follows:
Step 0: The company decides the objective of the SWOT analysis is to determine its strategy related to a novel emission technology.
Step 1: The company starts by listing its top three strengths: a strong brand name, skilled personnel, and unique manufacturing capability.
Step 2: Then, it lists its top three weaknesses: a huge debt outlay, a significant capital demand, and a less receptive customer base.
Step 3: Next, it identifies the top three opportunities in its industry: a novel emission technology, the potential of a friendly tariff and a government funding (related to the new technology).
Step 4: It then goes on to list the top three threats: unfavorable government legislation on the existing technology, global climate impact concerns, and a growing interest in the new emission technology by various stronger competitors.
Step 5: It then considers all four factors together to define the so-what for the company. After deep examinations and consulting with key stakeholders, it decides to commit to the existing technology. This way, it can stay within its means to win the current customers while avoiding the distractions from the novel technology.
Advantages
Strategy development
SWOT is useful for identifying the best strategy for your business.
Simplicity
SWOT is simple to use and doesn't require expert input.
Risk analysis
SWOT helps you identify problem areas and potential pitfalls to avoid.
Cost-effective
SWOT is cost-effective because it doesn't require serious support or resources.
Emphasis on data
SWOT analysis requires the company to gather and analyze data from various sources.
Flexibility and time-saving utility
SWOT is a flexible and quick tool that can provide immense value.
Disadvantages
Unspecified order of relevance
SWOT doesn't define the magnitude of each component's impact. Therefore, it is challenging to choose which components to focus on. For example: Is this a serious weakness that will jeopardize the entire operation or a small weakness that we can ignore?
Lack of Intrinsic Problem Solving Capacity
On its own, a SWOT Analysis does not provide solutions to the challenges of your business.
Risk of data overload
There is a risk of excess data collection, which will lead to analysis-paralysis.
Subjectivity
The data collected from various sources may be outdated, unreliable, or subjective.
Risk of one-dimensionality
Each component of the SWOT framework is often treated independently, reducing its effectiveness (i.e., all the strengths, weaknesses, opportunities, and threats need to be considered together).
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