Importance of Swot Analysis

Importance of Swot Analysis

Introduction to S.W.O.T Analysis 

With a substantial increase in the number of business organizations over the past number of years, many strategic planning techniques have been developed and employed by business organizations to know and plan about the various aspects of the business world. One such strategic planning tool that is used by business organizations is the SWOT analysis. This strategic planning tool was developed in the 1960s at Stanford research institute by a management consultant named Albert Humphrey. Let’s know the Importance of Swot Analysis. The four letters of SWOT represent the following characteristics of a business organization –

  •  S – Strengths
  • W – Weaknesses
  •  O – Opportunities 
  •  T – Threats 

SWOT Analysis can be used by professionals for business as well as individuals for personal application. This article throws light on the importance of SWOT analysis 

Understanding S.W.O.T analysis

SWOT analysis has been widely used by business organizations all over the world to assess their strengths, weaknesses, opportunities, and threats. Through the application of the SWOT framework, business organizations can match their internal strengths and weaknesses with the opportunities and threats operating in the external business environment. SWOT analysis is one of the most sought-after strategic planning tools. The four components of SWOT analysis are explained briefly as follows – 

  •  Strengths – Strength can be defined as the inherent capacity of the business organization which it can use to function efficiently and gain a strategic advantage over its competitors. Strengths exist within the internal environment of the business organization. Examples of strength are – financial resources, brand image, assets, and employees of the organization.
  • Weaknesses – Weakness can be defined as an inherent constraint that hinders the growth of the business organization and creates strategic disadvantages. Weaknesses also exist within the internal environment of the business organization. Examples of weaknesses are – financial constraints, lack of skilled employees, and dependence on a single product line.
  • Opportunities – Opportunities can be defined as conditions arising in the external business environment, of which the organization can take advantage and generate higher revenue and strengthen its market position. Following Points are the examples of opportunities –
  1. Innovative technologies can be adopted by the business organization.
  2. New regulations allowing a wider flow of business products and services.
  3. Favorable condition of the economy.
  • Threats – Threats are the unfavorable conditions arising in the external business environment. Threats can bring along business risks which may also damage the reputation and financial resources of the business organization. Following points are the examples of threats – 
  1. The emergence of new business competitors.
  2. Unfavorable condition of economy hindering the growth of the business.
  3. Consumer taste shifting to competitor’s products or services.

Process of S.W.O.T Analysis  

The application of SWOT analysis involves the following steps-

  •  Establishing objectives – The first step of SWOT analysis involves setting the objectives of the organization or the departments within the organization.
  • Identify SWOT – The second step involves careful identification of various strengths, weaknesses, opportunities, and threats.
  • Analysis of SWOT characteristics –  This stage involves a thorough analysis of strengths, weaknesses, opportunities, and threats. A business organization looks to answer the following four questions in this stage- 
  1. What can we do to maximize our strengths?
  2. What can we do to minimize our weaknesses?
  3. What can we do to take advantage of the opportunities?
  4. What can we do to safeguard our organization from threats?
  • Formulating strategies – The last stage in SWOT analysis involves formulating and implementing the strategies to help the business organizations to optimize the answers received in the previous stage. The analysis is done through the preparation of a SWOT matrix, which is a four-cell matrix with four cells representing strengths, weaknesses, opportunities, and threats.

Importance of S.W.O.T Analysis

SWOT analysis has been used by business organizations as an effective strategic planning tool. The application of SWOT analysis in the business organization plays a paramount role in the success of a business organization. The following points highlight the importance of SWOT analysis – 

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  • Achieving objectives – Every business organization strives to achieve the predetermined objectives. All the efforts in an organization are coordinated to attain these objectives. The strengths of an organization play an important role in achieving the organizational objectives SWOT analysis provides a clearer view to the organization about its strengths. So, it helps the organization to maintain and enhance its strengths. Thus, a business organization operating on its strengths can maximize its operational efficiency and smoothly achieve its short-term and long-term objectives. 
  • Eliminating weak points – SWOT analysis makes the business organization aware of its weaknesses of different types. In an increasingly competitive business world, any organization with excessive weak points cannot survive in the long run. Business organizations by locating their weaknesses through the SWOT framework can make efforts to get rid of these weaknesses and through constant improvements can also turn these weaknesses into strengths. 
  • Capitalizing on opportunities – In the modern business world, changes are occurring at a pace faster than ever. An array of technological changes and innovations engulf the business world in a short period. Every business organization is keen to incorporate these changes and reap the various benefits that come along. Any organization that lags behind its competitors is eventually ruled out of the business world. So business organizations using SWOT analysis can identify various opportunities in the external business environment. Proper plans and policies can be formulated on time to fully capitalize on these business opportunities. These opportunities may come in the form of increased consumer demand, launching a new product line, entering into a partnership with other firms, or incorporating innovative technology into the organization. Capitalizing on every available opportunity is the trait of successful business organizations.
  • Negate threats – In the business world threats keep looming at regular intervals. These threats may bring along a variety of negative implications for the business. Any business organization that is unable to face these threats is ultimately driven out of business. Some business organizations fail to identify the looming threats until the time these threats cannot be eliminated. Such situations may lead the business to close one of its units or it may ultimately lead to the closure of the business organization. So, SWOT analysis helps the organizations to identify these threats beforehand and facilitates a smooth and timely action to face these threats and minimize their negative consequences on business activity. 
  • Aid in strategic planning – Effective strategic planning is one of the most important prerequisites of a successful business organization. SWOT analysis is a strategic planning tool that helps the organization to effectively plan its goals and objectives. In absence of strategic planning, confusion arises among different departments of the organization, and the overall progress of the organization is hindered. So, SWOT analysis helps the organization to develop clear business goals and formulate effective strategies to achieve these goals. 
  • Source of information – SWOT analysis helps the business managers to gather large volumes of data, which are processed to obtain useful information. This information is used by the managers to make critical business decisions that affect the working of the firm. Moreover, the information obtained by SWOT analysis helps to synchronize the firm’s resources in a better and efficient way.
  • Business decision making – SWOT analysis facilitates effective business decision making, as it provides the business managers with an insight into the future opportunities and threats, and business managers can make appropriate decisions to prepare the organization for future challenges. SWOT analysis helps the management of the firm to make more accurate, thoughtful, and clear decisions. These decisions help the firm to be more goal-oriented and make leaps towards more successful projects. 
  • Analysis of competition – The present business scenario is characterized by fierce competition between firms. No organization can afford to lag behind its competition. SWOT-analysis helps the business organization to know and analyze their competition in a better way. Competition analysis helps to assess the strengths and weaknesses of the firm’s major competitors. This also facilitates understanding of the pricing strategy followed by the competitor and firms can take suitable pricing decisions to compete with the rival firms. Moreover, it helps the business organizations to identify the areas where it lags behind the competition and improvements can be made in these areas to catch up with the competitors. 
  • Assessing the impact of internal and external factors – Every business organization functions in a business environment comprising of the internal environment and external environment. SWOT-analysis helps business firms to correctly ascertain the various implications of internal environmental factors and external environmental factors. The internal factors are the factors that are within the control of the firm, and external factors are those which are beyond the control of the firm. Internal environmental factors include – financial resources, human assets, brand image, the vision of the organization, and corporate culture. On the other hand, external environmental factors include -customers, suppliers, competitors, regulating agencies, and technological changes. 
  • Project evaluation – Business organizations carry on several projects over time. For selecting a new business project, each business project has to be carefully evaluated before selecting the most suitable business project. SWOT-analysis helps the business organization to evaluate potential business projects. A SWOT analysis evaluates the projects in terms of the strengths and weaknesses of each project and also evaluates the opportunities and threats attached to each business project.
  • Assess the business health – SWOT analysis helps the senior management to assess the health of the business. This assessment of business health helps to comprehensively evaluate the crucial elements of the business. Organizations can address the areas which require more attention and effort. It helps to assess whether the business is healthy or sick. In large-scale organizations, SWOT analysis can be used to identify sick units and such units can be closed or innovations can be introduced to revive such units.
  • Assess the current position –  SWOT analysis helps the business organization to assess the present position of the firm. This assessment can also be used to know where the organization wants to be in the future.
  • Better resource allocation – Every business organization looks to allocate its resources properly to fully utilize them. SWOT-analysis helps the business organization to identify its strong areas. Thus, more resources can be allocated to the strength areas to maintain and enhance the strength of such areas. This can help the business organization to generate more profits and improve its financial situation. Similarly, the resources allocated to weaker areas of business that do not provide adequate returns to the organization can be reduced, and improvements can be made to nourish and strengthen the weaker areas of the organization.

Conclusion

To recapitulate, it can be said that SWOT analysis has emerged as one of the most effective strategic planning tools in the business world. The simple and easy-to-use framework of SWOT analysis helps the business organization to identify its strengths, weaknesses, opportunities, and threats. SWOT analysis helps the organization to enhance its strengths, address the weaknesses, take advantage of the opportunities, and minimize the risks. Most business organizations employ SWOT analysis to facilitate strategic planning. As the business environment becomes more and more dynamic, the need for SWOT assessment and other strategic planning tools becomes more and more imperative to enable the business organizations to be able to cope with the dynamism. 

Frequently Asked Questions 

Question 1. Can an individual use SWOT analysis for personal evaluation?

Answer 1.  Yes, apart from its professional application in the business world, SWOT analysis can be used in a personal context. SWOT matrix can be used to categorize the individual’s strengths and weaknesses and the opportunities and threats that the individual may face in the future. Moreover, a personal SWOT analysis can simply be done with the help of pen and paper. 

Question 2.  Can small-scale organizations use SWOT analysis?

Answer 2. Yes, any organization, whether it be small-scale or large-scale can use the SWOT analysis for business assessment and ensuring proper strategic planning. 

Question 3. What are the other tools available for strategic planning?

Answer 3. Some other commonly used strategic planning tools are enlisted below-

  • PEST(political, economic, socio-cultural, and technical) Analysis.
  • OKR( objectives and key results)
  • Balanced scorecard
Importance of Swot Analysis

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