SWOT analysis is an acronym for the Strengths, Weaknesses, Opportunities and Threats associated with a business. This analysis is used to see if there are strengths that a business can build upon to improve its competitive position, weaknesses to be minimized, opportunities to pursue, and threats to be guarded against. The strengths and weaknesses relate to the internal capabilities and structure of a business, while the opportunities and threats relate to the environment in which it operates. In essence, this tool informs management of the potential actions that can be taken to improve the position of a business.
Examples of the different elements of SWOT analysis are:
- Strengths. Having a strong brand, patent or copyright protection, a unique distribution network, an unusually low cost structure, and long-term access to a rare raw material.
- Weaknesses. Having a high product failure rate, poor order fulfillment rate, no patent protection, excess fixed overhead costs, and a facility that is subject to seasonal flooding.
- Opportunities. An impending change in regulatory approvals, a new technology that can be used to improve products, and a possible new market that is not being addressed by any competitors.
- Threats. A reduction in demand caused by changing customer demographics, the impending opening up of a market to foreign competitors due to a new trade deal, and the appearance of lower-cost substitute products.
SWOT analysis is typically conducted in relation to the same analysis for competitors. By doing so, one can see how a business stands in relation to other entities, which can suggest certain actions to improve the company’s comparative competitive standing.
The outcome of a SWOT analysis can be a redirection of company resources. The intent is not necessarily to eliminate all weaknesses, or to pursue all opportunities. Instead, management may conclude that attention must be focused on just one or two items, while all other alternatives are ignored. Ideally, an existing strength can be aligned with a perceived opportunity. Certain weaknesses may be left alone, under the reasoning that they are unlikely to occur, or that there are other weaknesses that are more critical.
A problem with this analysis is that it only describes an organization’s standing in relation to the existing competitive environment. It does not provide any indication of new directions that a business might take in order to uncover entirely new markets where there is little competition.