SWOT Analysis Explained for Dummies

 

What is a SWOT analysis? 

  A SWOT analysis is an effective analytical tool to help the management of an organisation or business to assess, comprehend, and evaluate different factors that may provide opportunities for or pose risks to the organisation or business.    It is sometimes referred to as situational assessment or situational analysis.   

🏆10 Best Forex Brokers in South Africa

Overview of SWOT analysis 

  A SWOT analysis is a means to the development of an informed strategy (or strategies) for a business or organisation, guiding it through times of ebb and flow.   The analysis is a useful tool for startups or existing companies.   SWOT is an acronym, composed of the first letters of the words Strengths, Weaknesses, Opportunities, and Threats.    The four components of SWOT can be classified into two broad categories, namely internal factors and external factors.   

• Internal factors of a business (organisation) refer to its positive and negative qualities. The two internal factors in a SWOT analysis are strengths and weaknesses. 

  Strengths Strengths are positive attributes of a business, enabling it to gain a relative advantage over competitors in the specific market. Strengths are factors that are within the control of management, allowing them to use them to achieve success.     Examples of strengths are, amongst others, low production costs, skilled and qualified employees, visionary leadership, valuable assets, and a significant market presence.     When considering the strengths of a business (organisation), managers and leaders can ask, inter alia, the following questions: 

1. What competitive advantages do we have compared to our competitors? 
2. What is unique about our business (organisation)? 
3. What processes and operations are successful? 
4. What are our qualitative advantages and intellectual assets - such as skills, knowledge, and education - available in our business (organisation)? 
5. What are our physical assets, for example, equipment, customers, and capital, to name a few? 
6. What does our target group like about our business (organisation)? 

  Weaknesses Weaknesses refer to the shortcomings or flaws of an entity that cause underperformance and setbacks. These shortcomings affect the strengths of an entity negatively.    Identifying weaknesses is a starting point for a business (organisation) to make improvements.  Weaknesses include, amongst others, limited capital, products that underperform, high debt, poorly skilled labourers, wrong location, and low market share.    Some questions concerning weaknesses are: 

1. What processes and initiatives are underperforming and need improvement? 
2. How is the business ranked against competitors in the market? 
3. What is the need for capital and new equipment? 
4. What is the motivation and commitment of employees? 
5. How does location affect the success of the business? 

 

• External factors of an entity include external forces that provide numerous possibilities of growth and/or areas of improvement - referred to as opportunities, or, conversely, external forces that pose financial risks to a business and its ability to operate efficiently - referred to as threats. 

  Opportunities  Opportunities refer to all things external to a business which affect the organisation and operations of the business, but which are likely to contribute to the success of the business.    Opportunities may transpire from the existing strengths and weaknesses of an entity, such as weaknesses that need improvement or areas that were not identified during the first two phases of the SWOT analysis.       Opportunities for growth and improvements comprise, inter alia, the following possibilities: 

1. Technological advancements 
2. Uncaptured market potential 
3. Growing demand for products or services 
4. Few competitors 
5. Online Marketing 

  Questions that may be helpful when contemplating the opportunities for a business (organisation): 

1. Is the business’s target market increasing, and are there improvements that will encourage customers to buy more of the business's products? 
2. What resources can be utilised to improve weaknesses? 
3. What are the goals of the business for the quarter/year? 
4. What are the impressions of customers and other people of the business (organisation)? 

  Threats Threats are external forces that represent risks of failure to a business and its operational abilities.   Contrary to weaknesses (an internal factor), threats are external and are typically beyond the control of the managers of a business. However, a threat like load shedding in South Africa can be minimised by businesses which can afford generators, inverters, or solar power.     Early detection of threats and contingency plans to deal with them can help to mitigate the effects of threats.  Examples of threats, amongst others, are changes in consumer preferences, political disturbance, negative comments and reviews on social media, government regulations, increasing costs of raw materials and transport, and load shedding. A classic example of a threat is the COVID-19 global pandemic during 2020 - 2022.    Questions that can be used as guidelines to counter threats include the following:  

1. Are there potential competitors who may penetrate the target market of the business? 
2. What will be the effect of developments in technology? 
3. Could changes in consumer behaviour negatively impact the sales of the business? 
4. Which competitors outperform the business? 
5. Are there trends (currently or in the future) in the market that could become a threat? 

   

Uses of a SWOT analysis 

  A SWOT analysis is seldom prepared and used in isolation. Although in itself an assessment framework of the strengths, weaknesses, opportunities, and threats of a business (organisation), a SWOT analysis is also a useful tool to summarise other reports and findings.    Furthermore, to use a SWOT analysis effectively, business management has to understand the industry in which the business operates, as well as the broader business environment. For example, what does the industry life cycle look like? Is it growing, stable, or in decline?     SWOT analyses can be applied to almost any business, organisation, or project. However, an in-depth analysis is not always needed, depending on what the management of a business wants to achieve.    Generally, a SWOT analysis is regarded by numerous managers as one of the most effective tools available for strategic and business planning.    A SWOT analysis can be a useful tool in the following scenarios: 

• To support a management team in risk management and strategic planning. 
• When a new initiative is launched by a business or organisation. 
• Identifying opportunities for growth and improvements. 
• Business management requires a full overview of the performance of the business. 
• Managers want to understand where and how the business (organisation) should dedicate resources, either to growth or improvements or to reduce risks. 

 

Guidelines to create a SWOT analysis 

  The process to create a SWOT analysis usually differs from entity to entity. Although the following basic guidelines are helpful in the process. 

• Convene the right people to work on the SWOT analysis. They must represent the different teams and departments (if applicable) in the business or organisation. Typically, different groups will have different perspectives and opinions, which are important to create an effective SWOT analysis. 
• Hold a brainstorming session, meaning throw ideas around. This technique can help to provide new, creative, and innovative ideas.  
• Prioritise the ideas by talking through each idea and ranking it on a scale of 1 to 10. Eventually, one person should be appointed to make a final call on the priority of the ideas. These brainstorming and prioritising processes are followed for each of the four components of the SWOT analysis: strengths, weaknesses, opportunities, and threats. 
• Get going, because the SWOT analysis is only the trigger to start the actual work to strengthen the business (organisation). An implementation plan may be helpful to put the SWOT analysis into practice.    

 

Advantages of SWOT analysis 

 

• It is an affordable management tool that hardly needs any technical expertise to prepare. 
• It allows stakeholders (directors, managers, and employees) to understand an entity’s position concerning its strengths, weaknesses, opportunities, and threats. 
• A SWOT analysis promotes the exchange of ideas to solve problems. 
• It is an easy-to-use format for strategic planning.  

 

Disadvantages of SWOT analysis 

  WallStreetMojo mentions some of the disadvantages of SWOT analysis, including the following cons: 

• ‘It doesn’t have a long-term relevance as the data keeps changing with time and volatile markets.’ 
• ‘Since it is a highly structured process, it may seem unsuitable for resolving complex problems.’ 
• Furthermore, ‘SWOT analysis is prone to individual biases and improper understanding of key focus areas.’ 

  Note: This article does not constitute investment, financial or trading advice. Please obtain the advice of a professional, reputable, and regulated broker before making trading and investment decisions.  

Recommended brokers