Definition of SWOT Analysis:« Back to Glossary Index
Keeping one step ahead of the competition whilst identifying and leveraging business strengths makes for a sound business strategy. Wouldn’t it be great if there was a clear and effective framework to help do that?
With SWOT analysis, we may just have the perfect tool for you.
Overview: What is SWOT analysis?
Strengths, weaknesses, opportunities, and threats (SWOT) analysis is a pan-industry business strategy tool that looks at internal and external factors that can both positively and negatively impact business metrics.
Internal business factors are classified as:
- Strengths: Things that give an edge over competitors
- Weaknesses: Things that are harmful if exploited by competitors
External business factors are classified as:
- Opportunities: Favourable situations that if exploited can bring competitive advantage
- Threats: Unfavourable situations that if exploited can negatively impact the business
By completing a SWOT analysis, we gain a detailed understanding of our business, the business environment, and the competition. This allows us to set a business strategic direction, map and assign our resources, and manage our stakeholders.
Most often depicted in the four-box layout as shown below, the internal business factors are typically considered first, followed by the external factors. Care should be taken to use clearly defined and specific terms for each category, avoiding ambiguity in language.
For example, if company culture is cited as a strength, it could also be a weakness; clarity is required on what elements of company culture bring the advantage. When considering external factors, think beyond competitors, which could include suppliers, legislation, societal changes, and market forces.
Image source: corporatefinanceinstitute.com.
2 benefits and 1 drawback of SWOT analysis
Like most business strategy tools and processes, there are benefits and drawbacks to be aware of when conducting a SWOT analysis. Let’s explore some of these further.
1. It’s a well-defined and structured business strategy tool
Business strategy development isn’t hocus pocus. SWOT analysis offers four well-defined categories and a process that steps us through an evaluation of what we do well and what we could do better, how we can grow our business, and how to defend our position.
2. It can be relatively quick and simple to perform
If we get the right cross-functional team together and do our homework, especially for the external business environment, we can make swift progress. Keep it pacey and punchy; don’t get bogged down in huge lists of items for each of the four categories.
3. It doesn’t automatically provide prioritization or next steps
Performing SWOT analysis is just the start; we don’t automatically get a neat set of actions that just drop out of the process. We need to take the items from the four categories and set some priorities (more on this later).
Why is SWOT analysis important to understand?
The SWOT analysis offers a logical and structured approach that helps us formulate our business strategy and assign our resources appropriately.
Define your strategic direction
Whether you are a new startup or a well established business, the ever-changing competitive landscape means you need to be smart with your resources. The ability to scan and assess the internal and external business environment is a fundamental part of strategy development.
Critically appraise the health of your internal business
Taking time to honestly appraise your strengths and weaknesses can be both uncomfortable and liberating. We can use this information to protect and grow our strengths and remove or lessen the impacts of our weaknesses.
Critically appraise the impact of your competition
Often, your competition is grappling with the same business issues you are, and a clear understanding of the opportunities that can bring a competitive advantage whilst mitigating and defending against threats helps bring focus to your strategy.
An industry example of SWOT analysis
A large engineering consultancy recognized the trend of increasing usage of electrification in on-road transport and needed to adjust its business strategy to stay competitive in the market. Having successfully used SWOT analysis previously, a cross-functional team of business development and technical engineering staff were brought together and facilitated by a seasoned SWOT analyst.
Over a period of three months, internal business strengths and weaknesses were reviewed and collated, ensuring use of clear descriptive and unambiguous language. The business development staff appraised the external factors, performing detailed opportunity and threat analysis against all major competitors.
All SWOT items were ranked and prioritised, enabling a strategic action plan to be created for business growth. Funds for upskilling were approved as well as for new hires as a result of the SWOT analysis.
3 best practices when thinking about SWOT analysis
As with many process-driven activities, there are some key things to consider when conducting a SWOT analysis. Let’s explore three of these.
1. Get the right team together
Never underestimate the power of a motivated and aligned team when delivering a SWOT analysis. You need a broad cross-section of people who can objectively analyse your internal business performance and accurately assess the external landscape.
Don’t be afraid to use experienced SWOT facilitators to keep the team on topic and on track.
2. Prepare and do your research
Whether you are looking at products, processes, or services, you need a detailed understanding of your business, the business environment, and your competition. Benchmarking and data analysis can be crucial to accurately assessing opportunities and threats.
3. Plan ahead to life after SWOT analysis
When the four categories are populated with a number of items, you will need to decide what to do next. A process for ranking items as well as assessing the probability of success and overall business importance is a valuable addition to classical SWOT analysis.
In addition, don’t just bookshelf the analysis; use it to continue to refine your business and strategic objectives.
Frequently Asked Questions (FAQ) about SWOT analysis
1. How do you perform a good SWOT analysis?
Start with a clear definition of the scope for the analysis, and ensure all team members understand the task. Use clearly defined and specific terms for each category, avoiding ambiguity in language. Limit the number of items in each category to a manageable number and use facts and data, not opinions.
2. What is the most difficult part of SWOT analysis?
There is no simple answer to this; it depends upon the company, product, or process under review. Often the external factors (i.e., opportunities and threats) are more difficult to accurately quantify without detailed competitor or market knowledge.
3. What are the limitations of SWOT analysis?
The lack of clear prioritisation of outcomes is often cited as a limitation of SWOT analysis, along with long unmanageable lists of items in each category. However, these can be addressed effectively by setting clear guidelines on expected maximum number of items per category and using prioritisation matrices.
Keeping one step ahead with SWOT analysis
It is often said that business success today does not guarantee success tomorrow, and the business world can be a harsh environment for all companies. If we are diligent and pragmatic with our SWOT analysis, we have a step up on the ladder to continued business success.« Back to Dictionary Index