Definition and limitations of SWOT analysis, Porter’s five forces analysis and Ratio analysis

Definition and limitations of SWOT analysis, Porter’s five forces analysis and Ratio analysis

SWOT Analysis

All companies need certain strategy analysing tools to assess their ability or inability to do something. To be more precise, SWOT is an acronym, where S means Strengths, W means Weaknesses, O means Opportunities and T means Threats (Management study guide, 2009). This model suggests what strengths a company has which can help it prosper and what weaknesses it contains which might diminish its performance. Both strengths and weaknesses are internal factors of a company, which are easier to work on since company has control over it. Opportunities and threats are external factors since they come from outside of the organisation itself, on which a company doesn’t have much control yet it can comprehend the situation to fully utilise an opportunity for its own advantage while avoid the threat by taking necessary measures.

Limitations

A SWOT Analysis is more common because of its easy to use nature. But there are situations in which its limitations surpass its benefits.

• There are times where SWOT analysis can oversimplify factors in order to grasp a better understanding of the factor since it will now allow a more detailed or in depth description and explanations of more than one factor (Firth, 2013). Thus it should be noticed that SWOT analysis is only one stage of the business planning process and for more complex situations business might need to refer to other strategy models as well as doing much more relevant research (Queensland Gov, 2012).

• Issues which cannot be simply categorised in to either strengths and weaknesses or opportunities and threats cannot be d...

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... which are completely useless as they will not be providing any true picture of where the company stands.

• No certainty exists if the two businesses in comparison must have used the same accounting principles to prepare financial statements or similar financial statement figures to come up with the numerator or denominator of a ratio (Ratio Analysis Org, 2010).

• Most of the organisations do not have the same fiscal period; this means 2 different companies in the very same industry might have gone through different circumstances and business conditions (Murray state, 2012). This can relate to inflation or different tax rates or changing government policies etc.

• Interpretation can be misleading as one ratio might suggest a positive aspect or strong point of the company yet digging deeper will only situation is quite on the opposite of what appears to be.