SWOT Analysis Meaning

Scanning the internal and external environment facilitates in-depth analysis of a process, organization, industry, place, and even individual personalities. The concept focuses on utilizing strengths to avail the opportunities while overcoming weaknesses to deal with the threats.

Key Takeaways

  • SWOT analysis is defined as the review of an individual, company, product, or industry by assessing strengths, weaknesses, opportunities, and threats of the object of study.It is an essential practice for revealing the internal and external constraints that affect a business’ performance and growth.While the internal environment poses strengths and weaknesses which are controllable, the external environment exhibits uncontrollable elements that are opportunities and threats.The analysis is visualized in the form of a matrix with four quadrants usually set in a 2×2 format.

Understanding SWOT Analysis in Business 

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A SWOT analysis determines the actual position of a business entity while revealing its shortcomings and areas of improvement. Other than the evaluation of products and business organizations, it can be applied to different spheres like:

  • self-inspection by individualsassessment of an investment product by investorsreview of a placeproject analysis by entrepreneursevaluation of government projects and programs, etc.

SWOT analysis plays a vital role in a dynamic environment for business sustenance, continued profits and competitive edge. It comprises internal factors – strengths and weaknesses; and external factors – opportunities and threats. The former are the constraints that the management can rectify and control. The latter can only be managed and prevented to a certain extent since these factors are beyond the management’s control.

It helps the management gain business insights on the company’s competitiveness, market trends, preferences, and uncertainties. It chalks down overall positives and negatives influencing the company’s performance, thus mapping the areas requiring corporate action. It also provides a basis for comparative study with the competitor’s SWOT.

For example, up-gradation of business processes, products, technology as per the current trends could result from such analysis. Additionally, the SWOT matrix represents strengths, weaknesses, threats and opportunities within a grid of a four-quadrant template. 

Components of SWOT Analysis

There are four components of SWOT analysis which can be distinguished into two broad categories as follows:

Internal Factors

The internal environment of a business organization defines its positive and negative attributes. The management can work on them to attain success. Below are the internal factors –

  • Strengths: Any company’s unique selling proposition (USP) is structured by its strengths that give it market stability. They keep the company in business and ensure its sustenance. They could be high performing areas, valuable assets or resources. Some examples include skilled labor, advanced machinery, low cost of productionCost Of ProductionProduction Cost is the total capital amount that a Company spends in producing finished goods or offering specific services. You can calculate it by adding Direct Material cost, Direct Labor Cost, & Manufacturing Overhead Cost. read more, powerful market presence in two segments, etc.Weaknesses: These are the shortcomings or flaws of a business entity which can result in a setback. These aspects could relate to inadequate resources, limited capital, confused USP or ill-performing products. For example, poorly skilled workforce, low market shareMarket ShareMarket share determines the company’s contribution in percentage to the total revenue generated within an industry or market in a certain period. It depicts the company’s market position when compared to that of its competitors.read more, high debt, etc.

External Factors

The external environment of a company brings multiple possibilities of growth as well as risks of failure. Controlling such factors is beyond the management’s control, but early detection can help put up a good defense to minimize losses.

  1. Opportunities: A company deals with many factors falling outside its control as part of the external environment. They comprise multiple chances for growth such as uncaptured market potential, government subsidies, increasing demand or few competitors. For instance: expanding online marketplace, lesser trade barriers, international tradeInternational TradeInternational Trade refers to the trading or exchange of goods and or services across international borders. read more treaties, etc.

  2. Threats: Forecasting and preparing for uncertainty and potential dangers can save an enterprise from losses. Some of these could be entry barriers, government regulations, high taxes, political disturbance, rising costs of raw materials or changing consumer taste. For example, negative reviews on social media, tax hikes, cultural differences in the global market, etc.

Business Examples

Example 1

  • Strenghts

  1. Weaknesses

  2. Opportunities

  3. Threats

Example 2

SWOT analysis has been a popular method used in the healthcare industry for ascertaining the success and growth of medical procedures, equipment and organization. Additionally, SWOT analysis of a person is also a suitable method for self-analysis of individual strengths and flaws.

It helps in personality development, especially when adopted as a framework for career planning and goal attainment. Thus, through such visual interpretation, individuals can work on their shortcomings and prepare for unfavorable circumstances.

SWOT Analysis Benefits 

  • It is a matrix documentation that makes it a visual analytical tool for a quick preview of critical points related to a business. Being an easy-to-use format, it has a widespread application for strategic planning and business decision making.It is a highly affordable framework and hardly requires any technical expertise during preparations.Directors, managers, employees and other stakeholders, can better understand the company’s position, health and loopholes using such analysis. Thus, the management can work on corporate weaknesses, enhance competitiveness, prepare for the unfavorable situations and grab the upcoming opportunities.Moreover, it brings all the information in a single place to facilitate correlation of distinct factors. It also promotes discussion and exchange of ideas for problem-solving.

Disadvantages

SWOT analysis is prone to individual biases and improper understanding of key focus areas. The analyst can miss out on specific points since it requires manual entry of the data. Furthermore, it doesn’t have a long-term relevance as the data keeps changing with time and volatile markets. Also, the information gap and misleading data make it highly subjective at times.

It is an initial level of business planning that segregates every information into four segments. Since it is a highly structured process, it may seem unsuitable for resolving complex problems. Moreover, in some cases, it fosters the need for further analysis using other tools and techniques.

This article has been a guide to what is SWOT Analysis and its definition. Here we discuss its components, including strengths, weaknesses, opportunities, and threats and their advantages and disadvantages. You can learn more about financing from the following articles –

SWOT analysis refers to the structured interpretation of the internal and external factors comprising strengths (S), weaknesses (W), opportunities (O) and threats (T) that influence the focus area. A sample SWOT matrix for a clay and bone crockery manufacturer is given below:Strengths (S)• Superior quality products • Advanced machinery Weaknesses (W)• Limited capital • Better prices offered by competitors Opportunities (O)• Scope of online platforms and internet-savvy consumers Threats (T)• Changing consumer preference • Low entry barrier for new companies

To execute a good SWOT analysis, you first need to ascertain the purpose of evaluation. Then make a 2×2 matrix and label the four quadrants as strengths, weaknesses, opportunities and threats. Next, list out the elements in bullet points under these quadrants. Lastly, interpret the conclusion from the visual information.

It is an essential tool for strategic planning and decision making for personal life, products, places and business projects.

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