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SWOT analysisa framework for identifying the internal strengths (S) and weaknesses (W) of a firm, and the external opportunities (O) open to it and the threats (T) it faces, which can be used by corporate planners in formulating the firm's COMPETITIVE STRATEGY and MARKETING STRATEGY in individual product markets and its overall BUSINESS STRATEGY.
The internal appraisal of a firm's strengths and weaknesses involves looking at the firm's current resources: the amount and quality of these resources, how well they are being managed in terms of achieving operating economies and developing core skills, and how the firm's resources match up to the requirements of the MARKET place as identified by the external appraisal of threats and opportunities. This kind of audit typically reveals a checklist of strengths and weaknesses of the firm as seen by its incumbent management (but their perception could be endorsed or changed by employing the services of an outside team of MANAGEMENT CONSULTANTS). For example, the analysis may reveal that the firm is especially strong in PRODUCTION but that the firm's products have failed to sell well because of poor MARKETING. This can then be remedied by upgrading the marketing function with a more careful focus on understanding customer needs.
The appraisal of the firm's external environment involves looking both at the immediate threats and opportunities encountered in the firm's present markets and also at the long-term strategic possibilities open to the firm for developing its business interests in other directions (see PRODUCT-MARKET MATRIX, BOSTON MATRIX). A typical threat facing a firm in its existing market is loss of business to competitors and to new entrants (due possibly, as in our example above, to the firm's poor marketing), but for firms possessing COMPETITIVE ADVANTAGE (lower costs, superior products) over rivals, opportunities abound, particularly in expanding markets. The ultimate threat facing firms in an existing market is, of course, the danger of market obsolescence, i.e. the market itself goes into decline as new substitute products emerge. In consequence, careful attention needs to be paid to the identification of opportunities for successful DIVERSIFICATION, where, for example, the firm's core internal skills can be carried over and transferred to new markets.
Having drawn up a checklist of possible SWOT factors, caution needs to be exercised in interpreting them. For example, many feature film makers who made movie films for screening through cinemas (often their own vertical chains), initially saw the advent of television as a threat to their traditional business and refused TV companies permission to screen their films. The reality was and still is, of course, that television is simply another form of viewing, representing an opportunity for market development and concentric diversification, i.e. the basic materials and skills involved in film-making (actors, film crews etc.) are the same irrespective of whether a film is being produced for the cinema or television; the key thing, strategically, is the perception of the true dimensions of the market which is being supplied. See also PEST.