Meaning of SWOT
SWOT analysis is popularly used in strategic management literature where ‘S’ is referred to as strength, ‘W’ as weaknesses, ‘O’ as opportunities and ‘T’ as threats. SWOT analysis is used by a business enterprise to understand and analyse its internal and external environment. Different individuals as organisations can identify their strengths and weaknesses and match them with opportunities and threats lying in the external environment. This analysis helps in formulating the plans and strategy by which a firm can have maximum profit by utilizing opportunities in the best possible way. It helps maximum profit by utilizing opportunities in the best possible way. It helps in minimising business risks also.
Different authors use several terms in place of SWOT analysis such as SCOT strengths, constraints, opportunities and threats, WOTS, ETOP Environmental Threats and opportunities, SAP analysis strategic Advantage Profile and so on.
Components of SWOT Analysis
The main components and of SWOT analysis are as follows :
- Strengths: All factors and elements which enables a business enterprise to compete effectively and earn maximum profit are called strength of that business enterprise. Adequate amount of capital, skilled workers, the ability of managers, research facilities etc. are the strength of a business enterprise through which it stands in a better position than its competitors.
- Weaknesses: Inherent limitations of a business is termed weaknesses of an organisation. These weaknesses impose restrictions and limitations on the working, efficiency and profitability of an enterprise.
For example over-dependence on a supplier for materials etc.
- Opportunities: Inherent limitations of a business is termed as weaknesses of an organisation. These weaknesses impose restrictions and limitations of the working efficiency and profitability of an enterprise. For example over-dependence on a supplier for materials etc.
- Threats: Unfavourable conditions which create problems in the progress and smooth running of a business is termed as threats. Labour unrest, unfavourable changes in the government policies, shortages of raw materials etc. create problems in the smooth running of a business.
Firms determine the corporate strategy based on the strengths, weaknesses, opportunities and threats identified, and then proceed to develop business-level strategies.
SWOT analysis presents an excellent opportunity for a company to evaluate and relate its resource strength with the current market position.
Four different types of strategies can be developed by using the combination of SWOT:
Advantages of SWOT Analysis
SWOT analysis provides a framework for strategic planning and decision making. A wide array of systematic decisions can be made based on the SWOT analysis. Apart from strategic planning and decision making, SWOT analysis provides a number of benefits to the firms. The
importance of SWOT analysis can be stated as follows :
- Consolidate Strengths: SWOT analysis pinpoints not the strengths but also the weaknesses Of the organisation vis-a-vis competitors. The weaknesses may be in any or many of its functional areas such as production, R & D, finance, purchase, marketing etc. For instance, the firm may lack proper R & D facilities as a result of which the firm may not be in a position to improve its quality and also fails to bring innovative or new products in the market, which in turn affects its market position and profits. The firm would then make every possible effort to minimise its weaknesses.
2. Helps to Grab Opportunities: Through SWOT analysis business firms continually tune into the environmental forces that influence the demand for existing products and services and that create opportunities for new ones. Firms need to identi$’ correctly or to anticipate all the developments that would influence the future and to be ready for the resulting opportunities.
3. Minimize Threats: SWOT analysis not only helps to grab opportunities, but it also helps to minimize threats. Farsightedness management can anticipate threats from the environment such as from the technological fronts and gear them to face the threats by remaining proactive. It helps business firms to develop an early warning system to prevent threats or to develop strategies, which can turn a threat to the firm’s advantage. Thus, a business firm may close down existing business and enter into new ones before it is too late.
4. Facilitates Planning: SWOT analysis helps the management to recognize that products and services have life cycles and that today’s winners may be losers in the course of time, and thus, if can plan for their successors-tomorrow’s breadwinners. The management can plan for the resource to produce and market these successors to a receptive environment.
5. Facilitates Alternative Choices: SWOT analysis helps business firms to narrow the range of available alternatives and to eliminate unsuitable alternatives, and to process most promising alternatives. It helps business firms to reduce time pressure and to concentrate on those areas or activities, which are more important and result oriented.