SWOT analysis or SWOT Matrix was developed by the middle of the 1960s for large organizations to determine the strategic fit between an organization's internal, distinctive capabilities and external possibilities and to prioritize actions. SWOT stands for Strengths, Weaknesses, Opportunities and Threats.
SWOT analysis is a process of situational analysis. Evaluating a firm’s strengths, weaknesses, opportunities, and threats through a SWOT analysis is an easy process that provides valuable insights relating to critical issues affecting an organization.
The internal and external situations can provide valuable information which can come in handy at times. The SWOT analysis categorizes the internal organizational factors as strengths and weaknesses and the external situational aspects as opportunities or threats. The strengths can be used for building a competitive advantage, whereas weakness may hinder the process. With a clear understanding of these four aspects, any organization can increase its strength, overcome weakness, cash on good opportunities and put aside the potential threats.
The purpose of SWOT analysis is to identify crucial factors for realizing the goals. The internal factors of an organization can be considered as strengths or weaknesses depending upon their impact on the organization. These may include all 4P's, personnel, manufacturing capabilities, finance, etc, whereas external factors are technological changes, macroeconomic factors, socio-cultural changes and legislation, as well as changes occurring in the marketplace.
An organization's strengths are its resources that lie in:
- Cost advantages from proprietary know how
- Influential brand names
- Access to natural resources
- Accessible distribution network
The weakness can be lack of certain strengths that include:
- Lack of patent protection
- Deprived of access to main distribution channels
- Weak brand name
- Poor customer reputation
- High cost structure
- Inaccessible natural resources
The assessment of external environment may bring forth certain new opportunities which are as follows:
- Technologies innovations
- Elimination of international trade barriers
- An untapped market need
Unfavorable changes in external environment may pose threat to the organization. Some of them are as follows:
- Consumers shift to different brand
- Arrival of substitutes
- Strict regulations
- Growing trade barriers
The steps in the common three phase SWOT analysis process are
Phase 1: Detect strategic issues
- Identify external issues relevant to the firm's strategic position in the industry and the general environment at large with the understanding that opportunities and threats are factors that management cannot directly influence.
- Identify internal issues relevant to the firm's strategic position.
- Analyze and rank the external issues according to probability and impact.
- List the key strategic issues factors inside or outside the organization that significantly impact the long-term competitive position in the SWOT matrix.
Phase 2: Determine the strategy
- Identify firm's strategic fit given its internal capabilities and external environment.
- Formulate alternative strategies to address key issues.
- Place the alternative strategies in one of the four quadrants in the SWOT matrix. Strategies that combine:
- internal strengths with external opportunities are the most ideal mix, but require understanding how the internal strengths can support weaknesses in other areas;
- internal weaknesses with opportunities must be judged on investment effectiveness to determine if the gain is worth the effort to buy or develop the internal capability,
- internal strengths with external threats demand knowing the worth of adapting the organization to change the threat into opportunity;
- internal weaknesses with threats create an organization's worst-case scenario. Radical changes such as divestment are required.
- Develop additional strategies for any remaining "blind spots" in SWOT matrix. Select an appropriate strategy.
Phase 3: Implement and monitor strategy
- Develop action plan to implement strategy;
- Assign responsibilities and budgets;
- Monitor progress;
- Start review process from beginning.