SWOT analysis definition
/What is SWOT Analysis?
SWOT analysis is an acronym for the Strengths, Weaknesses, Opportunities and Threats associated with a business. A SWOT analysis is used as part of the strategy formulation process. It can be used to see if there are strengths that a business can build upon to improve its competitive position, weaknesses to be minimized, opportunities to pursue, and threats to be guarded against. The strengths and weaknesses relate to the internal capabilities and structure of a business, while the opportunities and threats relate to the environment in which it operates. In essence, this tool informs management of the potential actions that can be taken to improve the position of a business. Examples of the different elements of SWOT analysis are noted below.
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Strengths
One element of a SWOT analysis is the strengths of the organization. Examples of strengths are having a strong brand, patent or copyright protection, a unique distribution network, an unusually low cost structure, and long-term access to a rare raw material.
Weaknesses
Another element of a SWOT analysis is the weaknesses of the organization. Examples of weaknesses are having a high product failure rate, poor order fulfillment rate, no patent protection, excess fixed overhead costs, and a facility that is subject to seasonal flooding.
Opportunities
Another element of a SWOT analysis is the opportunities of which the organization could take advantage. Examples of opportunities are an impending change in regulatory approvals, a new technology that can be used to improve products, and a possible new market that is not being addressed by any competitors.
Threats
Another element of a SWOT analysis is the threats to which an organization is subjected, either now or in the future. Examples of threats are a reduction in demand caused by changing customer demographics, the impending opening up of a market to foreign competitors due to a new trade deal, and the appearance of lower-cost substitute products.
When to Use SWOT Analysis
SWOT analysis is typically conducted in relation to the same analysis for competitors. By doing so, one can see how a business stands in relation to other entities, which can suggest certain actions to improve its competitive standing.
The outcome of a SWOT analysis can be a redirection of company resources. The intent is not necessarily to eliminate all weaknesses, or to pursue all opportunities. Instead, management may conclude that attention must be focused on just one or two items, while all other alternatives are ignored. Ideally, an existing strength can be aligned with a perceived opportunity. Certain weaknesses may be left alone, under the reasoning that they are unlikely to occur, or that there are other weaknesses that are more critical.
Example of a SWOT Analysis
The following is an example of a SWOT analysis for a mid-sized coffee shop chain that wants to expand its operations:
Strengths
Strong brand loyalty. The company has built a loyal customer base through excellent customer service, locally sourced products, and a cozy atmosphere that appeals to both students and professionals.
Consistent revenue growth. The company has shown steady revenue growth year over year, with increasing same-store sales and successful loyalty programs.
Experienced management team. The leadership has deep experience in hospitality, supply chain management, and marketing, contributing to efficient operations.
Prime locations. Most shops are located in high-traffic urban areas with proximity to universities and business districts, driving strong foot traffic.
Weaknesses
Limited online presence. The company lacks a strong digital platform for ordering, delivery, and customer engagement, putting it behind competitors with robust mobile apps.
High dependency on local suppliers. While local sourcing supports the brand image, it creates risks related to supply consistency and price fluctuations.
Inefficient inventory management. Several locations struggle with overstock or shortages, leading to unnecessary waste or missed sales.
Underdeveloped franchise model. The business is currently company-owned only, limiting rapid expansion potential compared to a franchise-based model.
Opportunities
Expansion into suburban markets. With increased remote work, suburban areas are seeing more daytime foot traffic, opening new growth opportunities outside city centers.
Digital transformation. Investing in mobile ordering, a rewards app, and delivery partnerships could capture a broader customer base and improve convenience.
Product diversification. Introducing ready-to-drink products or expanding food offerings could boost average ticket size and attract new demographics.
Sustainability initiatives. Going green with compostable packaging and carbon offset programs could strengthen brand reputation and attract eco-conscious consumers.
Threats
Rising competition. National chains and boutique coffee shops are aggressively expanding, increasing pressure on pricing, branding, and customer retention.
Economic downturns. Coffee is a discretionary expense, so economic slowdowns may lead to reduced consumer spending on premium beverages.
Supply chain disruptions. Events like climate change or geopolitical instability could affect coffee bean prices and availability.
Labor shortages. The hospitality industry is facing ongoing staffing challenges, which could impact service quality and operational efficiency.
In short, the company has a solid foundation and brand, but to continue its growth trajectory, it should prioritize digital transformation and improve operational efficiencies. Capitalizing on suburban expansion and sustainability trends while managing competitive and supply chain risks will be crucial for long-term success.
Problems with SWOT Analysis
A problem with this analysis is that it only describes an organization's standing in relation to the existing competitive environment. It does not provide any indication of new directions that a business might take in order to uncover entirely new markets where there is little competition.