Importance of SWOT Analysis

What do we mean by SWOT Analysis?

SWOT Analysis is an aggregation and analysis of FOUR different aspects of the business with a view to assessing the current status and future prospects of the business. These Four aspects that are covered under SWOT Analysis are Strengths, Weaknesses, Opportunities, and Threats. It is a comparative framework that describes and lists out the present strengths and weaknesses of a company. Then it lists out the possible opportunities the company has to grow, and the threats endangering the company. This analysis is useful in strategic planning within the organization. Also, it gives a clear picture of where any company stands at the present day vis-à-vis the competitors. The analysis is not just theoretical but is based on real-time data and facts. Hence it is realistic in nature.

Strength and Weakness

Any organization can have multiple strengths. These may include an established brand name, global presence, strong vendor and dealer network, multiple patents and trademarks, broad and loyal customer base, technically competent and experienced team, etc. Similarly, the analysis may list out multiple weaknesses such as high rate of attrition, capital crunch, a heavy burden of debt and interest charges, poor customer service, etc.

Opportunity and Threat

Many times, companies may have a number of opportunities around them to grow and prosper. The analysis may help to shed light on such opportunities, like an opportunity to launch a new product line due to changing tastes and income, changes in government rules and regulations resulting in the opening of new lines or reduction in duties or costs, etc. Threats are mostly external to a company and not in control of the management.  They may be simple and weak, or may even be of high risk and strong. For example, a change in government rules may prohibit a particular line of activity in near future. This may pose a serious threat and repercussions to the existing businesses. Other threats to a business can be changes in prevailing technology, new market entrants resulting in intense competition and price war, rising inflation and input prices, etc.

What is the importance of SWOT Analysis?

Self-analysis and introspection

The SWOT Analysis provides a chance for the management to do a thorough self-analysis. Managers of bigger companies may become complacent and over-confident. They may not take out time and introspect over the ever-changing external business environment properly. For example, they may not be aware of upcoming threats such as threats from a new competitor who is planning to take on the company with a similar product line and at lower prices. Doing the SWOT analysis may open up the eyes of the management to such imminent threats. Also, they may start adopting a more cautious approach and be better prepared for any such upcoming threats. Net net the management does not go into the comfort zone and remain agile to the business dynamics.

Also, the analysis may throw light on the opportunities within the current business set-up or a new business stream. As an agile team, the management would start looking the things from a different perspective and angle. And that may lead to innovation or the generation of new ideas for the overall improvement of the performance.  This may provide a chance to increase business and profitability, cut down costs, and improve the ROI. The management will start keeping its eyes and ears open. Moreover, they will constantly look for growth opportunities, and capitalize on them at the right time.

Importance of SWOT Analysis

Change in resource allocation

The management may decide to alter its resource allocation according to its strengths or the result of the SWOT analysis. The analysis encourages the business to sustain, nourish and improve its strengths. As opposed to threats the strengths are always remaining internal to the Organization. And therefore, the management has all the controls to use them to their advantage. It may increase the deployment of resources to a particular area of work which shows potential and an opportunity to grow and generate more profits.

Also, it may reduce resources assigned to those areas of work that have been showing stagnant or negative returns. The analysis gives a chance to either start putting efforts to improve the weaknesses or remove that stream altogether so that it does not hurt the organization. Thus, SWOT analysis helps in optimum allocation of scarce resources of a business and putting them to their most efficient use.

Analysis of competitors

The SWOT analysis provides an opportunity for any organization to place itself in a comparative analysis grid along with the competition. It can clearly see how well it is placed to take on the competition. It gets an insight into the strengths, weaknesses, opportunities, and threats of the competitors too.

And this may give very critical insight to the management about the areas where it is behind the competition. Or where it is lacking and needs to make a catch-up effort. It can either improve upon those grey areas or let the competition stay ahead of them so as to not waste its scarce resources unnecessarily. The analysis helps to identify the firm’s USP or its unique selling proposition. It can make a strategy to exploit its USP or its core competitive advantage to the maximum to get ahead of the competition in those particular fields which are its specialty. This will help it to make the best possible use of its resources and beat the competition too at the same time.

Conclusion

SWOT analysis is an inexpensive tool that can help in strategic management to a great extent. It gives an understanding of the health of the business, how to maintain it and improve it where necessary.

Managers should keep in mind that the SWOT analysis is only suggestive in nature. It does not give concrete and definite results. The management cannot solely rely on its results and take action based on it as the business environment is dynamic and ever-changing. Also, it may be affected by various types of bias of the persons who are preparing it. They may include only those points which they want to include or are on the top of their minds. Hence, the management should use the SWOT analysis as a tool for strategy formulation and implementation in unison with other such tools and methods and not just in isolation. 

Share Knowledge if you liked
Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

Related Posts

Leave a Comment