What Is SWOT Analysis?
SWOT analysis is a strategic planning tool commonly used by organizations and individuals to assess their current situation. By making such an assessment, they can make plans for the future. In business terms, SWOT — which stands for Strengths, Weaknesses, Opportunities, and Threats — serves as a mechanism for evaluating the company’s competitive edge.
As such, it provides the business owner with invaluable data and insights into their company’s inner workings, performance, and potential for growth. It can be used for assessing various external and internal factors that could potentially impact the viability of a business decision, and it allows businesses to engage in the proper strategic planning. In doing so, a company can learn which approach to take to achieve a specific goal or even a set of plans.
SWOT analysis can also help businesses uncover challenges and, sometimes, find the most efficient way to bypass them.
SWOT Analysis Explained
As mentioned, SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. These four aspects comprise a framework that can be applied in several ways. However, these four components consistently underpin all approaches. Let’s take a look at what each of them represents.
Strength epitomizes a company’s unique selling proposition (USP) or unique value proposition (UVP). It represents the firm’s internal factors and characteristics that can provide the organization (or an individual) with some competitive edge.
Strengths can take on various forms within a company, including things like advanced technology, unique skills, valuable assets, a talented team, a dedicated and robust customer base, a solid financial foundation, a prominent market presence, exclusive features, efficient processes, or any other positive attributes that can help the company achieve success.
Weaknesses depict the specific area within the service segment where businesses have reduced competitive advantage. These also represent internal factors that may put the company at a disadvantage. Sometimes, it might be something with direct negative effects on the company’s position, while at other times, it may simply be a lack of strengths in a specific area.
As such, weaknesses can encompass a variety of aspects or situations, such as the lack of resources, poor management, outdated technology, vulnerable brands, inefficient supply chains, inadequate capital, and similar shortcomings. Weaknesses prevent the company from operating at maximum capacity and to the best of its ability. As a result, businesses must be at least aware of their shortcomings and, hopefully, resolve them as soon as possible.
Unlike the previous two aspects, Opportunities typically represent external factors that could be considered favorable for the company, should it choose to act on them. Simply put, they can offer a competitive edge that comes from the outside. That can include emerging markets, technological advancements, changing consumer preferences, new partnership opportunities, and new trends that the firm can leverage and like. Once these opportunities are explored in a SWOT analysis, you will be better prepared to exploit them.
Finally, we have Threats — another set of external factors, but this one can hurt the company or individual conducting the SWOT analysis. Essentially, threats represent issues that might jeopardize the firm’s success. These can range from minor challenges to significant problems that the company has to deal with.
Increasing competition, decreasing demand, the rising cost of raw materials, tight labor supply, economic downturns, regulatory changes, and even natural disasters are all excellent examples of things that might threaten the company. This is why so many firms were affected by COVID-19 in 2020, when the entire world went into a lockup, utterly unprepared for such drastic measures.
Purpose and benefits of conducting a SWOT analysis
Conducting a SWOT analysis can allow the company to become more aware of its inner workings, but also of external factors that can positively or negatively affect its business. Again, this can also be applied on an individual level, but for business purposes, we will discuss the impact of the analysis on the company.
Thanks to SWOT analysis, businesses can identify internal and external factors relevant to them. They can evaluate the impact and significance of each element and how it relates to their objectives and goals. They can then develop strategies in response to the findings, allowing them to capitalize on strengths and opportunities while mitigating weaknesses and threats. Finally, the companies can use the insights gained from the analysis to create detailed action plans, which could lead to increased performance and achievement of goals.
Most importantly, SWOT analysis raises the company’s awareness of their competitive situation based on facts. Firms become better informed of positives and negatives, which can lead to better and more efficient decision-making. Each data point can mean a difference in what the company will do next. As a result, more data points from as many data sources as possible will generally make the company better-informed and give it a more significant advantage in dealing with competition, handling market opportunities and challenges, responding to changes in demand, and more.
Origin of SWOT Analysis
SWOT analysis definition was established between the 1960s and 1970s by Albert Humphrey, a business and management consultant at the Stanford Research Institute.
In 1974, Humphrey published “Getting management commitment to planning,” and in it, he introduced Participative Planning. This was a 17-step approach that emphasized management participation, which, according to him, should start with identifying the Strengths, Weaknesses, Opportunities, and Threats a company faces.
After Humphrey coined the term and explained the approach, the strategic planning technique conquered the business world. Before long, numerous Fortune 500 firms have tried to adopt it, some more successfully than others. But, in the end, the approach has been proven more than helpful to some, as we will soon discuss.
Commercial enterprises have favored SWOT analysis for a long time, and it has also become a commonly used tool for non-profit organizations. Even individuals who sought to evaluate their performance properly have found a use for it, allowing SWOT to cement its presence further.
SWOT Analysis examples
While various companies may approach their SWOT framework differently, the ultimate objective remains to provide an insightful perspective on the business’s actual performance.
For instance, in a 2015 Value Line SWOT analysis of the Coca-Cola brand, the company identified core strengths such as a globally recognized brand name, a robust supply chain, and opportunities in emerging markets.
However, the SWOT analysis also brought to light significant inefficiencies, including challenges related to foreign currency fluctuations, a growing public preference for “healthy” beverages, and heightened competition from health-focused beverage manufacturers.
This analysis prompted Coca-Cola to critically evaluate its strategies and devise ways to maintain its position as a leading global beverage manufacturer.
After completing the SWOT analysis, Coca-Cola successfully sustained its presence in the industry despite increasing competition, and its value surged by 60% over five years after the analysis.
Another example comes from Starbucks in the early 2000s when the company encountered several challenges while pursuing rapid expansion. Up to that point, Starbucks was seeing quick growth, which allowed it to open numerous stores worldwide. However, the company also started seeing a slowdown in sales, which led to a drop in profitability.
It conducted a SWOT analysis to understand the situation, revealing its strengths in brand recognition, a wide range of products, and its global presence. Its weaknesses, however, included overexpansion, high prices, and limited food options.
Starbucks also identified several opportunities, such as the growing trend in health and wellness and digital innovation. Finally, it encountered several threats worth mentioning, like an economic downturn of that period coupled with rising competition and its negative publicity.
The company used this information to reevaluate its expansion strategy. It decided to take a step back and close some of its underperforming stores — especially in situations where the stores were too close to one another. It focused on international expansion, especially in certain regions with significant potential, such as China.
It also had to address two other issues — limited food options and high prices. To solve this, it opted to introduce a broader range of food items while focusing on cost-effective options. On the plus side, the company was well-known worldwide, so it doubled down on brand recognition and access to emerging technologies, such as mobile ordering, rewards programs, and the like. This brought greater convenience to the customers, which made Starbucks stand out from the competition, thus inspiring customer loyalty to the brand.
Lastly, the company took the rise of the general health and wellness trend seriously, so it started offering healthier foods and drinks alongside nutritional information to make its customers better informed about the products that they had access to.
As a result, the firm saw rapid recovery and solved most of the challenges that threatened its business. Eventually, it was able to continue its global expansion, which led it to become even more successful and grow into a company that we see today.
SWOT Analysis may seem simple at first, but its simplicity works in its favor, as it points out the main strengths, weaknesses, opportunities, and threats that the company has/encounters. Without complicating matters, it shows the firm precisely what works in its favor, what does not, what things can contribute to its business, and what challenges it needs to bypass and stay away from.
SWOT analysis is a valuable strategic planning tool that empowers individuals and organizations and serves as a compass, guiding decision-makers toward informed choices that can lead to improved performance, sustainable growth, and competitive advantage.