What is SWOT Analysis?
Any organisation attempting to formulate strategies will do so on the basis of what it is intending to achieve, on its capabilities, and its environment.
To evaluate an organisation’s capabilities, it must look inward to identify its strengths and weaknesses. To evaluate environmental opportunities and threats, it must look outward, not only to its immediate industry1 but also to the wider environment in which it and the industry resides.
Taken together, the analysis of Strengths, Weaknesses, Opportunities, and Threats makes an easy to remember acronym SWOT.
When Do We Use SWOT Analysis?
A SWOT analysis can be used any time to get a read on the organisation’s status, but SWOT is often used when developing strategies such as Business Strategy, more inward-looking, and Competitive Strategy, more outward-looking.
Strengths are what the organisation is good at.
Strength may be relative, not great in itself, but better than the competition’s capabilities. In such cases, a relative strength could be seen as a potential vulnerability or weakness if the competition were ever to improve.
An example of strength is better cost-performance and integration of certain activities. A strong brand is also a strength.
An organisation uses strengths to exploit opportunities and to avoid or defend against threats.
Weaknesses are what the organisation is not good at.
Weaknesses are not necessarily the opposite of strengths. If competitors have the same alleged weakness, then it can be said that there is no relative weakness between competitors.
Organisations overcome weaknesses to take advantage of opportunities, and they minimise weaknesses to avoid threats.
Opportunities are changes or developments outside the organisation that it should exploit.
Example opportunities are a competitor consolidating its activities and exiting the industry or leveraging the potential of a patent by selling licenses to use it.
Threats are changes or developments outside the organisation that it should defend itself from.
Two example threats are increased costs of electricity and higher costs of borrowing, without the ability to recover costs.
1 See The 9-Forces Model for industry analysis.