As a business owner, your success can often depend on how well you understand your company.
Internally, for instance, you have to be aware of the strengths and the weaknesses of your organisation – as well as how to improve both. Externally, meanwhile, you need to be able to identify any potential opportunities – as well as threats – on the horizon.
Of course, keeping constant tabs on all these simultaneous factors is near impossible, even for larger organisations. Just within the day-to-day operations of the company, there are too many things that will require your attention.
This is why a Strengths-Weaknesses-Opportunities-Threats analysis – better known as a SWOT analysis – is an essential tool in the arsenal of a business owner.
To illustrate why, we've produced a breakdown of what exactly this process can tell you, as well as the potential impact it can have on your company. So, if you've never conducted one before, now is the time: this is the importance of SWOT analysis in business.
The Importance of SWOT Analysis
Due to its relative simplicity, SWOT analysis is a very accessible tool with far fewer disadvantages than advantages. It offers unparalleled value through critical insights into both your organisation and the market. Primarily, though, its importance to your business can be gleaned from these two fundamental points:
It Contributes to Business Growth and Increased Profits
By allowing you to identify new opportunities in the market, SWOT analysis provides you with alternative pathways for business expansion. Information about core strengths can be used to improve the overall efficiency of your organisation further, leading to increased revenue.
The identification of weaknesses can also be leveraged for better financial performance. Losses can be cut down by reducing operating costs if they are too high, while productivity can be improved by upgrading your machinery, IT infrastructure, and other similar assets.
It is Essential for Effective Strategic Planning and Risk Mitigation
The success of your plans – both short-term and long-term – hinges on how much you know about your business and its market. Without a SWOT analysis, you do not have the complete picture of the current state of your organisation, or the environment it exists in.
Gaps in information lead to uncertainty, which elevates the level of risk surrounding your organisation; therefore, strategic plans made in these circumstances have a high chance of failure. The insights gained from a SWOT analysis allows you to minimise this risk.
What Can SWOT Analysis Tell You About Your Business?
As touched upon already, SWOT is a basic analysis tool used by business administrators and managers to gain valuable insights into their departments or enterprises. It can be used to scrutinise the primary attributes of any business entity.
Indeed, larger corporations usually bring in external consultants and experts to provide this analysis. Most big enterprises conduct such reviews periodically, in order to learn how to improve their organisation internally, as well as within the wider market.
In smaller organisations, however, where purse strings are tighter, you can carry out an analysis internally, with inputs from all the stakeholders in the business. This can include management, employees, accountants, legal advisors, suppliers, and even your clients.
These insights can have a significant effect on how you move forward with your business, and can generally be divided into four different categories:
By analysing your company's strengths – be they a strong brand, a unique product or an effective production process – you can determine which course of action might be the most effective in the long run. For example, one option might be to try and improve on them further, such as focussing on the skills of your employees through advanced training. Alternatively, you might want to try extracting more value from your strengths, such as reinvesting idle cash reserves, or leasing out (or licensing) your intellectual properties.
In a SWOT analysis, this is often the most critical category. Some of the issues discovered here will require your urgent attention, and neglecting them could lead to serious problems in your organisation in the long term. These are the aspects of your company that hold it back from achieving its full potential, restricting growth in the process and giving an edge to your competition. For instance, a lack of modern IT infrastructure is often a weakness for many small businesses.
Some of the most successful corporations in the world today exist because their founders were able to identify and exploit new opportunities in the market. By assessing market conditions, you can also open up new avenues, such as the demise of a competing brand, or even the possibility of takeovers and mergers to increase your reach.
Indeed, given the expansion possibilities presented by such opportunities, analysing the business world around you can be critical – especially for small businesses, who often benefit the most.
Analysis of external threats is another hugely important aspect of the SWOT process. This could mean the rise of a new contender in the marketplace or the introduction of new laws and increased compliance in your niche. It could even be socio-economic factors, such as changing consumer tastes, political upheaval, or a slowdown in the economy.
As such, the importance of the threats section, though often significant, may vary depending on the situation. Some threats, like an economic downturn, cannot be avoided; you have to batten down the hatches and weather the storm. However, others, such as the introduction of a better, more accessible product by a rival, may require urgent and aggressive action.
As Miguel de Cervantes once observed in Don Quixote, "the man who is prepared has his battle half fought." This is more applicable than ever in today's business world, where those who are caught unawares by changes in the market often disappear into obscurity.
SWOT analysis enables you to avoid this fate and allows you to stay on top of all the crucial aspects of your business. It is one of the most commonly used tools of leadership and is taught on all serious management courses. Every business owner – big or small – can benefit from it, and it's a highly recommended process wherever you are on your entrepreneurial journey.
Why else is SWOT analysis important? Let us know your thoughts in the comment section below.