SWOT ANALYSIS

SWOT stands for Strengths and Weaknesses of a business and environmental Opportunities and Threats a business faces. SWOT analysis identifies systematically these factors and the strategy that reflects the best match between them.
Based on the assumption that an effective strategy maximizes a business’s strengths and opportunities and minimizes its weakness and threats.

• An opportunity is a major favorable situation in the firm’s environment. Major trends, such as identification of a previously neglected segment of the market, changes in competitive structure or regulatory circumstances, technological advancements and improved buyer or supplier relations are the sources of opportunities for a firm. 
• A threat stands for a major unfavorable situation in the firm’s environment or an impediment to the firm’s current and/or desired future position. 
• The major threats to a firm’s future success might include the factors such as the entry of new competitor, increased bargaining power of buyer or supplier, major technological change, slow market growth and changing regulations. For instance increasing use of personal computers was a major opportunity for IBM. 
• An opportunity for one firm can be a strategic threat to another. If the managers of a firm clearly understand the opportunities and threats their firm is likely to face, it assists them to identify realistic strategic alternatives and clarifies the most effective niche for the firm. 
• Strength is a resource, skill, a distinctive competence or other advantage and the needs of markets a firm serves or anticipates serving that gives the firm a comparative advantage relative to competitors in the marketplace. Financial resources, image, market leadership, and buyer/supplier relations are examples of strength. 
• A weakness is a limitation or deficiency in resources, skills and capabilities that seriously impedes effective performances.  Different facilities, financial resources, capabilities of the  management, marketing skills, and brand image could be sources of weaknesses.
•  Identification of key strengths and weaknesses of the firm helps in narrowing down the choice of alternatives and choosing a strategy. 
• While identification of distinctive competence and critical weaknesses in relation to key determinants of success for different market segments provides a useful framework for choosing the best strategy.

SWOT analysis helps in two ways in strategic choice decision-making. It provides a logical framework for guiding systematic discussions of the business’s situation, alternative strategies, and, the choice of strategy. It provides a structured approach for the systematic comparison of key external opportunities and threats with internal strengths and weaknesses. For strategy formulation, the firm attempts to build upon its strengths and eliminate its weaknesses. 

When a firm does not possess the skills required to take advantage of opportunities or avoid threats, the necessary resources may be identified from the SWOT analysis and steps taken to procure the strengths or to reduce any weaknesses.