Q. What is SWOT analysis ? What are its main components ? How is it useful in business?
Ans. Meaning of SWOT analysis: SWOT analysis is an analysis undertaken by business firms to understand their external and internal environment. The term SWOT consists of four words :
S — Strengths
W — Weaknesses
O — Opportunities
T — Threats
It is also known as WOTS–UP analysis. SWOT analysis is applied to formulate effective organisational strategies. The business firms can match through SWOT analysis, the strengths (S) and weaknesses (W) existing within an organisation with the opportunities (O) and threats (T) operating in the environment. An effective organisational strategy according to SWOT analysis is that strategy which capitalizes on the opportunities through the use of its strengths and neutralizes the threats by minimizing the impact of weaknesses. Thus, SWOT analysis enables a business firm to use its strengths to exploit the opportunities provided by the environment. On the other hand, threats of environment are neutralized by reducing its weaknesses to the minimum level.
Components of SWOT Analysis: The SWOT analysis consists of following components:
1. Environment: The term business environment means the aggregate of all conditions, events and influences that surround and affect the business organisation. It may be of two types:
(a) External Environment: The external environment of a business firm is that environment which includes all the factors outside the organisation. These factors provide opportunities or pose (present or constitute (make) threats to the organisation. Thus, external environment provides opportunities as well as threats.
(b) Internal Environment: Internal environment is that environment which includes all the factors within an organisation. These factors impart strengths or cause weaknesses of a strategic nature.
In short, the environment in which an organisation exists can be described (i) in terms of opportunities and threats operating in the external environment and (ii) in terms of strengths and weaknesses existing in the internal environment.
2. Strengths (S): The strength of a business organisation refers to an inherent capacity by which an organisation can gain important advantages over its competitors. For example, superior research facilities and presence of developmental skills are the strengths of a business organisation. These can be used as development of new products, enabling the business organisation to have competitive advantages over its competitors.
3. Weaknesses (W): The weakness of a firm refers to an inherent limitation of a business firm. It results in significant disadvantages for a firm in comparison to its competitors. For example, over-dependence of a firm on a single product line is its weakness. It can result in losses in times of crisis.
4. Opportunities (O): The availability of opportunity is a favourable condition in the organisation’s environment. It enables it to consolidate and strengthen its position in comparison to its competitors. For example, an increasing demand for the product, produced by the business organisation is an indication of an opportunity.
5. Threats (T): The presence of a threat is an unfavorable condition in the environment of a business organisation. It causes damages to and creates a risk for the organisation. For example, the emergence of strong new competitors is a threat to the business organisations because of the possibility of a stiff competition.
Uses of SWOT Analysis: Following are the uses of SWOT analysis:
1. It helps to determine the strategy of the business.
2. It is used in the initial stage of decision-making.
3. Use of external and internal factors of this analysis, help in visualising a complete picture about the future of the business.
4. It also helps in facing the competition successfully.
5. SWOT analysis is helpful in minimising the weaknesses and maximising the strengths of the business.
We can conclude that SWOT analysis is a systematic approach to understand the environment and formulate strategic policies.
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