SWOT ANALYSIS
SWOT ANALYSIS FRAMEWORK
A SWOT analysis compares the strengths, weaknesses, opportunities and threats of any situation. It is an effective tool for business to use to work out what they do well and what could be improved. It may be the study of the following in the context of a business or a company:
Ø Special/unique abilities.
Ø New/proprietary technology that may benefit or threaten the business.
Ø Changes in the economy (positive or negative).
Ø Requirement for or loss of key personnel.
Ø Access or lack of access to critical materials.
Ø Changes in government policies or regulations.
Ø Availability or lack of availability of capital.
Ø Transportation or communication changes (cost or availability).
Ø Market entry of new competitors.
Ø Social or environmental changes.
A SWOT analysis is the first piece of analysis to be undertaken when developing a business or marketing plan. SWOT analysis is a tool for auditing an organisation and its environment. It is the first stage of planning. It is a methodology of examining potential strategies derived from the synthesis of organisational strengths, weaknesses, opportunities and threats. It helps to refine the current strategies or generation of new strategies can be made. It is a very effective way of identifying the strengths and weaknesses, and of examining the opportunities and threats that a business faces. It helps a strategist in focusing the activities underlining the areas where the business is in strong positions and where the greatest opportunities will be available, to the business.
Firms need to perform a knowledge-based SWOT analysis, mapping their knowledge resources and capabilities against their strategic opportunities and threats to better understand their points of advantage and weakness. SWOT analysis help firms define their strategies in the context of fluctuating and competitive environments.This analysis will help a business to focus and build strengths, minimise weaknesses, maximise its opportunities and mitigate any weaknesses and is the foundation of any business plan or marketing plan. Strengths and Weaknesses are internal analyses; Opportunities and Threats are external analyses.
Basic questions of SWOT Analysis are:—
(1) How to find the strengths an organisation has that they can exploit against their competitors to win more customers?
(2) How to find weaknesses that need to be improved and ignore those that don't require investment?
(3) How to find all the untapped market opportunities available for a business to exploit?
(4) How to ensure that any threats to the business are taken account of in all action plans a business develops?
(5) How to implement focused action plans based upon the analysis undertaken that ensures that any investment made in the business is targeted to pulling in additional profitable customers?
The various components of SWOT are explained briefly as under:—
Strengths:
Every organisation has some strength for example, may be the dominant market shares.
To evaluate the strengths of a company, the following questions (samples only) are generally asked for and the answers to the questions in a positive form will definitely indicate the sources of strength of the so called company:
• What are the major sources from which the company earns revenue and profit?
• What is the market share the company is enjoying in respect to its various products?
• Does the company have strong brand image and also branded products?
• Are the marketing, advertising and after sales service effective?
• Does the company have skilled mangers?
• Is the morale of the employees high?
• What is the weighted average cost of capital, in the context of financial break-even point?
• Does the company’s information technology is effective enough?
• Does the company manage its inventories efficiently?
• Is the company adaptable to fast change in the environment?
• Does the company has the ability to innovate as quickly as possible as compared to its competitors?
• How the company handles competition?
Weaknesses:
Each organisation also has some weakness, for example, may be a stricter regulatory environment. To analyse the weaknesses of a company, the following questions are generally asked (samples only) and answers to these questions, will guide a company to locate its weaknesses:
• What products/product lines are the least profitable for the company?
• what are the areas in which the company is unable to recover costs?
• Is there any weak brand ?
• Is the marketing function improper?
• Is the company not focused properly as compared to its main competitors?
• Is the company capable of hiring cream employees?
• Is the company able to mobilse money at the nick of time?
• Is the company in a position to cope with the sudden changes in price by its competitors?
• Has the company been able to bring new ideas and products to the market place?
• Do employees feel facilitated to perform their best?
• Are the employees faithful to management?
• Are the corporate governance standards high enough?
• Is the company losing out to competitors on the technology front?
Opportunities
All organisations have some opportunities that they can gain from, may be for an example diversification in the related or unrelated field.
To analyse the opportunities for a company, the following questions (samples only) may be asked and the answers to the questions will indicate the opportunities:
• What is the competitive position of the company?
• Are there new technologies that the company can use to innovate new products at lower costs?
• Are there real opportunities to extend brands into related fields?
• Are there any inexpensive acquisition opportunities?
• Is there any scope for implementation of incentive plans to boost the employee performance?
• Can the company spread its activities/ business internationally?
• Can quality of operations, products and inventory management be improved without
incurring much higher cost?
• Can the company move up the value chain?
• Is there an opportunity to demand better prices from suppliers?
• Is the time right for upstream or downstream diversification?
• Can the company get more predictable cash flows by establishing better relations with customers?
Threats:
No organisation is immune to threats and these could be internal, such as fall in the productivity or they could be external, such as lower price charged by the competitors. The answers to the following questions (samples only) will give an idea about the threats the company is facing:
• Does the company have sufficient reserves to withstand sudden changes in the environment?
• What is the extent of regulation in the industry?
• Is there any trade union move that could have an adverse effect on the activities of the company?
• Do the products of the company have enough brand equity to withstand price competition?
• Is there any international competition that will eat away the market share?
• Are employees adequately trained and motivated to perform the desired tasks?
• Is the company facing financials crisis ?
• Is the company adaptable to technological changes?
• Are the margins of the company inadequate?
• Is the volume of sales decreasing?
The implementation of SWOT analysis involves the following six important steps:
First Step : A proper scanning of the environment.
Second Step : The identification of possible actions.
Third Step : The external analysis of opportunities and threats.
Fourth Step : Internal analysis of strengths and weaknesses.
Fifth Step : Classification of possible actions (Strategic Guidelines).
Sixth Step : Evaluation of a strategy.
Advantages of SWOT Analysis
SWOT Analysis is instrumental in strategy formulation and selection. It is a strong tool, but it involves a great subjective element. It is best when used as a guide, and not as a prescripttion. Successful businesses build on their strengths, correct their weakness and protect against internal weaknesses and external threats. They also keep a watch on their overall business environment and recognize and exploit new opportunities faster than its competitors.
SWOT Analysis helps in strategic planning in following manner-
- It is a source of information for strategic planning.
- Builds organization’s strengths.
- Reverse its weaknesses.
- Maximize its response to opportunities.
- Overcome organization’s threats.
- It helps in identifying core competencies of the firm.
- It helps in setting of objectives for strategic planning.
- It helps in knowing past, present and future so that by using past and current data, future plans can be chalked out.
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SWOT Analysis provide information that helps in synchronizing the firm’s resources and capabilities with the competitive environment in which the firm operates. |
Limitations of SWOT Analysis
SWOT Analysis is not free from its limitations. It may cause organizations to view circumstances as very simple because of which the organizations might overlook certain key strategic contact which may occur. Moreover, categorizing aspects as strengths, weaknesses, opportunities and threats might be very subjective as there is great degree of uncertainty in market. SWOT Analysis does stress upon the significance of these four aspects, but it does not tell how an organization can identify these aspects for itself.
There are certain limitations of SWOT Analysis which are not in control of management. These include-
- Price increase;
- Inputs/raw materials;
- Government legislation;
- Economic environment;
- Searching a new market for the product which is not having overseas market due to import restrictions; etc.
Internal limitations may include-
- Insufficient research and development facilities;
- Faulty products due to poor quality control;
- Poor industrial relations;
- Lack of skilled and efficient labour; etc
Conclusion
It is not sufiicient for the company to identify its strengths, weaknesses, opportunities, and threats only, but to go into deep to take necessary actions to reduce to a great extent or avoid both weaknesses and threats, wherever possible. Weaknesses should be looked at in order to convert them into strengths. Similarly, threats should be converted into opportunities. Finally, strengths and opportunities should be matched in such a manner, so that it will maximise the shareholders wealth as well as the potentialities of a company.
Importance of SWOT Analysis for the Students:-
Just like is business SWOT Analysis can be implemented by students to do well in their respective examinations.
Strength and Weakness are the internal Factors : Like very good in certain subjects (Strength) a little weak in certain subject (Weakness). Good at Practical part (Strength). Not so good at theoritical part (Weakness).
Oppurtunities and Threats are external factors: Like more objectives in certain papers (Oppurtunity). Unpredictability of question pattern (Threat).
I have always beleived to be successful in any field of Life, be it Business, Studies or Sports or anything else, Planning is most Important. And to plan properly we have to do SWOT Analysis of Factors surrounding us.
Hope this will make the concept more clear to you and all of you will implement this topic which you study in your subjects in your real life situation.
Regards
CMA. Sanjay Gupta
CAclubindia
