What is a 'SWOT Analysis'
SWOT analysis is a process that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, analytical framework that assesses what an organization can and cannot do, as well as its potential opportunities and threats. A SWOT analysis takes information from an environmental analysis and separates it into internal strengths and weaknesses, as well as its external opportunities and threats.
BREAKING DOWN 'SWOT Analysis'
A SWOT analysis determines what assists the firm in accomplishing its objectives, and what obstacles must be overcome or minimized to achieve desired results. When using SWOT analysis, an organization needs to be realistic about assessing its strengths and weaknesses. Analysis needs to examine where the organization is today, and where it may be positioned in the future.
SWOT analysis needs to be kept specific by avoiding gray areas and analyzing in relation to the competition. For example, how do the organization’s products and services compare to the competitions? SWOT analysis should be short and simple, and should avoid complexity and over-analysis, as much of the information is subjective. Thus, use it as a guide and not a prescription. For more details, see"Executing A Swot Analysis".
Strengths and Weaknesses
Strengths describe what an organization excels at, allowing decisions on how to gain a competitive advantage. For example, a hedge fund may have developed a proprietary trading strategy that returns superior results in comparison to its competitors. It must then decide how to use those superior results to attract new investor capital.
Weaknesses stop an organization from performing at its optimum level. They have the potential to reduce progress or to give a competitive edge to the competition. An organization needs to minimize weaknesses and analyze how they can be improved. An inadequate supply network or lack of capital are example of weaknesses.
Opportunities and Threats
Opportunities refer to favorable external factors that an organization can use it its advantage. If utilized effectively, opportunities have the potential to create a competitive advantage. For example, a car manufacturer may be able to export its cars into a new market if tariffs in a country are substantially reduced. This is likely to increase sales and market share, which may create a competitive advantage in terms of scale.
Threats refers to factors that have the potential to negatively impact an organization. For example, a drought is a threat to a wheat-producing company, as it may destroy or reduce the yield of a wheat crop. Market share is likely to be lost if a competitor has not diversified operations in terms of location. It is prudent for an organization to have a comprehensive contingency plan that addresses possible risks and specifies how to deal with them.