SWOT analysis is a simple framework for generating strategic alternatives from a situation analysis.

It is applicable to either the corporate level or the business unit level and frequently appears in
marketing plans. SWOT (sometimes referred to as TOWS) stands for Strengths, Weaknesses,
Opportunities, and Threats. The SWOT framework was described in the late 1960's by Edmund P.
Learned, C. Roland Christiansen, Kenneth Andrews, and William D. Guth in Business Policy, Text
and Cases (Homewood, IL: Irwin, 1969). The General Electric Growth Council used this form of
analysis in the 1980's. 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 following diagram shows how a SWOT analysis fits into a strategic situation analysis.

Situation Analysis
/ \
Internal Analysis External Analysis
/\ /\
Strengths Weaknesses Opportunities Threats
|
SWOT Profile

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. The SWOT analysis classifies the internal
aspects of the company as strengths or weaknesses and the external situational factors as
opportunities or threats. Strengths can serve as a foundation for building a competitive advantage,
and weaknesses may hinder it. By understanding these four aspects of its situation, a firm can better
leverage its strengths, correct its weaknesses, capitalize on golden opportunities, and deter
potentially devastating threats.

Internal Analysis
The internal analysis is a comprehensive evaluation of the internal environment's potential strengths
and weaknesses. Factors should be evaluated across the organization in areas such as:
Company culture
Company image
Organizational structure
Key staff
Access to natural resources
Position on the experience curve
Operational efficiency
Operational capacity
Brand awareness
Market share
Financial resources
Exclusive contracts
Patents and trade secrets
The SWOT analysis summarizes the internal factors of the firm as a list of strengths and
weaknesses.
External Analysis
An opportunity is the chance to introduce a new product or service that can generate superior
returns. Opportunities can arise when changes occur in the external environment. Many of these
changes can be perceived as threats to the market position of existing products and may necessitate
a change in product specifications or the development of new products in order for the firm to
remain competitive. Changes in the external environment may be related to:
Customers
Competitors
Market trends
Suppliers
Partners
Social changes
New technology
Economic environment
Political and regulatory environment
The last four items in the above list are macro-environmental variables, and are addressed in a
PEST analysis.
The SWOT analysis summarizes the external environmental factors as a list of opportunities and
threats.

SWOT Profile
When the analysis has been completed, a SWOT profile can be generated and used as the basis of
goal setting, strategy formulation, and implementation. The completed SWOT profile sometimes is
arranged as follows:
Strengths Weaknesses

1. 1.
2. 2.
3. 3.
. .
. .
. .
Opportunities Threats

1. 1.
2. 2.
3. 3.
. .
. .
. .
When formulating strategy, the interaction of the quadrants in the SWOT profile becomes
important. For example, the strengths can be leveraged to pursue opportunities and to avoid threats,
and managers can be alerted to weaknesses that might need to be overcome in order to successfully
pursue opportunities.

Multiple Perspectives Needed

The method used to acquire the inputs to the SWOT matrix will affect the quality of the analysis. If
the information is obtained hastily during a quick interview with the CEO, even though this one
person may have a broad view of the company and industry, the information would represent a
single viewpoint. The quality of the analysis will be improved greatly if interviews are held with a
spectrum of stakeholders such as employees, suppliers, customers, strategic partners, etc.

SWOT Analysis Limitations

While useful for reducing a large quantity of situational factors into a more manageable profile, the
SWOT framework has a tendency to oversimplify the situation by classifying the firm's
environmental factors into categories in which they may not always fit. The classification of some
factors as strengths or weaknesses, or as opportunities or threats is somewhat arbitrary. For
example, a particular company culture can be either a strength or a weakness. A technological
change can be a either a threat or an opportunity. Perhaps what is more important than the
superficial classification of these factors is the firm's awareness of them and its development of a
strategic plan to use them to its advantage.

Which part of a SWOT organization is specific to external factors? How might a SWOT
analysis help an organization plan a budget?

By adding a SWOT analysis in their business plans, small businesses can better clarify their short-
and long-range strategies. The SWOT analysis, often found in marketing plans, becomes a useful
tool for planning and competitive analysis. Organizations often provide a SWOT analysis in a chart
format with each segment represented in a different quadrant.

What part does strategic planning play in the budget-making process?

By developing budgets that accommodate change, companies can respond to competitive threats or
opportunities more quickly and with greater precision. They can use resources efficiently to take
advantage of the most promising opportunities. Furthermore, knowing that budgets have some
flexibility frees budget developers from the need to "pad" budgets to cover a wide variety of
possible developments. This leads to leaner, more realistic budgets.

Companies typically review budgets quarterly, monthly, or even weekly. By including in these
reviews reports on changes in business conditions, companies alert managers that new tactics may
be called for, if they are to meet their targets for the year. While it is important that budgets not be
revised to cover up for poor performance or poor planning, best practice companies choose to revise
budgets rather than adhere to budgets that do not reflect current conditions. Some companies rely on
"rolling" or "continuous" forecasts rather than on traditional annual budgets. The chief difference
between such forecasts and traditional budgets is that the forecast is updated with actual results as
the company moves through the year. Figures for three or more subsequent quarters are projected in
decreasing degree of detail.
One way in which companies build flexibility into budgets is to prioritize according to strategic
importance action plans that were rejected due to resource limitations. By doing this, they can act
swiftly and decisively if additional resources become available.
Another way in which best practice companies develop budgets that accommodate change is to
require managers to create scenarios based on a variety of assumptions about business conditions.
The affordability of powerful information technology allows for the creation of many "what if"
scenarios. This practice makes it possible for companies to respond more quickly and effectively if
actual conditions follow the pattern of a particular scenario. Companies also build flexibility into
budgets by setting aside funds at the business-unit level to take advantage of competitive
opportunities. Some companies even establish separate subsidiaries to look into promising products
or technologies.