SWOT analysis
A framework listing a company's Strengths and Weaknesses (internal) against the Opportunities and Threats (external) in its environment, to judge growth potential and resilience.
In plain language
The environment keeps changing. Each change is an opportunity for some companies and a danger for others. SWOT asks which companies are placed to take the opportunity and which are exposed to the danger.
The split that carries the marks is simple: strengths and weaknesses are internal to the company; opportunities and threats come from outside it. The Covid-19 lockdown was a threat to every business; a weak balance sheet was the weakness that decided which ones did not survive it.
How it works
Section 7.5 gives two ways to build the grid:
- Strengths and weaknesses first, then the opportunities they allow and threats they expose — suited to a company deciding its strategy.
- Opportunities and threats first, then the strengths that let the company exploit them and the weaknesses that leave it vulnerable — suited to an external observer such as an equity analyst, and the natural order in an E-I-C (economy-industry-company) framework.
Strengths in the workbook: strong financial position, valuable intellectual property, low customer concentration, low cost or high margins, support from a parent or government, strong execution track record.
Weaknesses: weak financial position, high fixed cost, thin margins that can turn negative in a slowdown, high customer concentration, significant legal cases, lack of experience in a strategy or environment.
Two disciplines follow. Focus on strengths and weaknesses that relate to the opportunities and threats — a sequential fall in profit is not a weakness unless it creates a vulnerability. And list threats with a reasonable probability of occurring, rather than every conceivable black swan.
A worked example
Illustrative. An Indian electronics contract manufacturer, revenue Rs 6,000 crore, analysed in the analyst's order — outside first:
| Opportunity | Global buyers moving production and procurement outside China after Covid-19 (the workbook's example) |
| Threat | Economic recession cutting orders from its consumer electronics clients |
| Strength | Net cash of Rs 900 crore — it can add capacity without borrowing |
| Weakness | Top three customers supply Rs 3,300 crore, or 55% of revenue |
Reading them together: the net cash lets it chase the China-plus-one opportunity; the 55% concentration is what makes the recession threat dangerous — the average top-three customer is worth about 18% of revenue, so losing one hurts badly.
Note what the concentration is not: it is not a threat, however risky. It is internal, so it is a weakness.
Why NISM asks about it
Chapter 7 (Company Analysis – Business and Governance) covers SWOT in section 7.5, and its sample questions ask which approach an analyst should take first. Chapter 6 (Industry Analysis) notes that SCP structure analysis overlaps with Porter and SWOT, and the Chapter 13 sample checklist ends its qualitative section with strengths, weaknesses, opportunities and threats.
Common exam traps
- High customer concentration is a weakness, not a threat. The workbook uses exactly this example: it is a risk, but it is internal.
- For an external equity analyst the recommended order is opportunities and threats first, then strengths and weaknesses. Strengths-first suits a company setting its own strategy.
- Deregulation can be a threat — RBI's on-tap bank licences created competition risk for existing banks.
- An outsider cannot see everything. No company discloses its clout in government, and creative accounting hides weakness — the workbook's own caveat on SWOT.
- Do not confuse the tools: PESTLE scans a country's environment, Porter an industry's structure, SWOT a single company against its environment.
Check yourself
1.In SWOT analysis, which two elements are internal to the company?
- a)Opportunities and threats
- b)Strengths and weaknesses
- c)Strengths and opportunities
- d)Weaknesses and threats
Show the answer
Answer: (b) Strengths and weaknesses
The workbook states it directly: strengths and weakness are internal to the company while opportunities and threats emanate from external conditions.
Option A reverses it. Options C and D each pair one internal with one external element — they are built for candidates who remember that two are internal but not which two. The reliable memory hook is that S and W describe what the company is, while O and T describe what the world is doing.
2.A company’s revenue declined 2% sequentially last quarter. Nothing else followed from it — no loan covenant was breached and no business opportunity was lost. In a SWOT analysis, this should be treated as:
- a)A weakness, because any decline in revenue weakens the company
- b)A threat, because falling revenue comes from weak external demand
- c)Not a weakness, because it does not make the company lose an opportunity, become ineligible for a loan, or create any other vulnerability
- d)An opportunity, because a low base makes future growth look stronger
Show the answer
Answer: (c) Not a weakness, because it does not make the company lose an opportunity, become ineligible for a loan, or create any other vulnerability
The workbook applies a relevance filter to strengths and weaknesses, and gives this exact case: "a sequential decline in revenue or profit is not a weakness unless it is likely to make the company lose out on a new business opportunity, or makes it ineligible for a loan, or creates any other vulnerability."
Option A is the reflex answer — bad news, therefore weakness — and it is wrong because SWOT is not a list of everything unpleasant. It is a list of things that change what the company can and cannot do about its opportunities and threats.
Option B misplaces it externally; the revenue figure is the company’s own. Option D is not a SWOT judgement at all.
The companion example: lack of experience in self-driving cars is a weakness for an auto company only if industry catalysts are likely to grow that segment. Otherwise it remains a weakness but not of immediate relevance.
3.According to the workbook’s comparison of technical and fundamental analysis, which pairing is correct?
- a)Technical analysis — uses historic price and volume data, is geared to short/medium-term trading strategies, and is followed by traders, chartists, speculators and short-term investors
- b)Technical analysis — assumes that market prices may at times deviate from their intrinsic values
- c)Fundamental analysis — its objective is to forecast price movements and trading opportunities
- d)Fundamental analysis — its main tools are chart patterns and indicators such as RSI, MACD and OBV
Show the answer
Answer: (a) Technical analysis — uses historic price and volume data, is geared to short/medium-term trading strategies, and is followed by traders, chartists, speculators and short-term investors
The workbook’s comparison table lines up each feature. For technical analysis: data source — "historic price and volume data"; time horizon — "short/medium term trading strategies"; followed by — "traders, chartists, speculators, short-term investors". Option A combines three rows correctly.
The others take a row from one column and hang it on the other. Option B is the fundamental assumption — "at times market prices may deviate from their intrinsic values"; the technical assumption is that the "current market price captures all the information; trend is likely to continue". Option C is the technical objective; fundamental analysis aims to "identify undervalued or overvalued assets". Option D lists the technical toolkit; the fundamental tools are "cash flow statements, DCF valuation, SWOT analysis, ratio analysis", and fundamental analysis is followed by "fund managers, portfolio managers, value investors, long-term investors".
Where this is taught
- Series XV · Chapter 7: Company Analysis – Business and Governanceintroduced here
- Series X-A · Chapter 8: Investing in Stocksintroduced here
Related terms
- BCG matrixThe Boston Consulting Group's grid classifying a company's business segments as Stars, Cash Cows, Question Marks or Dogs by market growth, market share and cash generation.
- Fundamental analysisEstimating what a share is worth from the profits and cash flows the business will generate, then buying only when the market price sits below that estimate.
- MoatThe durable competitive advantage that lets a company keep earning high returns while competitors try and fail to take its business.
- PESTLE analysisA scan of a country's Political, Economic, Socio-cultural, Technological, Legal and Environmental conditions — the external factors that shape a business operating there.
- Porter's Five ForcesMichael Porter's framework for judging how much profit an industry can sustain, through five competitive pressures: rivalry, new entrants, substitutes, and the bargaining power of suppliers and of buyers.
- Industry life cycleThe four stages an industry passes through over time — introduction, growth, maturity, and decline — each with a different pattern of sales growth and profit margin.