SWOT analysis is a very old and traditional technique used by management accountants. SWOT analysis was developed as part of corporate planning tends in mid of the 20th century.
It was a tough task to plan the activities of any organization while not having a clear picture of the resources, capabilities, opportunities and threats. This tool was developed with a sole purpose to help manager prepare planning road map to achieve the targets of company.
SWOT is a tool that allows managers to take a snapshot of their firm’s internal strengths and weaknesses as well as the opportunities and threats that are evident in the external environment.
Although it involves external factors but it is regarded as an internal analysis of organization. It is always a foundation for formulating a strategy. Conducting SWOT analysis is one of the most important steps in formulating a strategy, it provides a good starting point.
SWOT analysis is a systematic identification of these factors (Strengths, Weakness, Opportunity, Threats) and the strategy that reflects the best match between them. Generally the goal of SWOT is to create, affirm or tune in a company specific business model that will best align, fit or match company’s resources and capabilities as against the demands of the environment in which it operates.
Managers create and compare many different set of strategies to select a strategy that will create and sustain competitive advantage. Internal strengths might include highly qualified staff, latest technology etc. Weaknesses are potential vulnerable aspects in a firm’s operations.
Using organization’s mission statement as a context, manager assesses internal strengths (distinctive competencies) and weaknesses as well as external opportunities and threats. While formulation of strategy is purely an internal matter, it is dependent on internal as well as external matter.
In SWOT analysis Strengths and weaknesses are considered as internal matter of organization. On the other hand threats and opportunity always exist in outside environment of organization.
SWOT analysis summarizes the key issue from the business environment and the strategic capabilities of an organization that impacts strategy development. The purpose of the SWOT analysis is to indicate these strengths and identifies the opportunities which can be entertained with current strengths.
At the same time help manage the threats to business by timely informing the management. SWOT analysis particularly supports a combined and integrated approach of the company’s situation ending well balanced comprehensive decision.
Although the analysis is developed and improved over a long period of time there are still weaknesses in it. These are either inherent in nature of analysis or dependent on data used for the purpose of analysis. Some of them are explained below:
- Scope of SWOT analysis on external environment is too narrow
- Chances exist where strengths may be confused with opportunities and weaknesses with threats
- SWOT emphasize a single aspect of strategy (i.e. Strength or weakness) and ignores other factor needed for competitive success
- SWOT analysis reveals limited possibilities when analyzing all business units of large companies.