SWOT analysis is a time-tested management technique credited to Albert Humphrey, a Stanford Professor who in the 1960s and 1970s undertook groundbreaking research on business growth.
SWOT stands for “Strengths, Weaknesses, Opportunities and Threats”. The acronym is a favorite research tool used to identify areas of strength and weaknesses of firms. SWOT analysis also helps to uncover areas of potential opportunities for businesses or threats that might be lurking in the corner (or anticipated). The SWOT framework is often used for generating strategic alternatives after a situation analysis and serves as a simple but powerful technique for understanding and evaluating the areas of strength or weakness of an organization. It is also adopted for looking at the opportunities and threats involved in a project or a business venture.
What makes SWOT particularly powerful is that with a little thought, it can help uncover opportunities that one can be well placed to take advantage of.
By understanding the weaknesses of a business, one can easily manage and eliminate threats that could prove to be costly.
The SWOT framework also allows analysts to craft strategies that helps distinguish a business from its competitors .
The role of SWOT analysis is to take the information from the environmental analysis and separate it into internal factors and external factors.
Environmental factors internal to the business are usually classified as strengths (S) or weaknesses (W), and those external to the business firm can be classified as opportunities (O) or threats (T).
Once this is done, SWOT analysis determines if the information indicates something that will assist the firm in accomplishing its objectives (its strengths or opportunities), or it indicates an obstacle that must be overcome or minimized to achieve desired results (weaknesses or threats).
Because it concentrates on the issues that potentially have the most impact, the SWOT analysis is useful when a very limited amount of time is available to address a complex strategic situation.
The internal and external situation analysis can produce a large amount of information, much of which may not be highly relevant.
The SWOT analysis can serve as an interpretative filter to reduce the information to a manageable quantity of key issues.
By understanding these four aspects of its situation, a firm can better leverage its strengths, correct its weakness, capitalize on opportunities, and deter potentially devastating threats.