SWOT is an acronym that stands for Strengths, Weaknesses, Opportunities, and Threats. The SWOT analysis is used to assess the viability of a new business or strategy regardless of the field. The analysis is divided between factors that are internal to the organization, being strengths and weaknesses, and external factors, being threats and opportunities, which is why the SWOT analysis is sometimes referred to as an internal-external analysis. The analysis helps a business observe where it stands in the market, how it can grow, and where the business is vulnerable. When drafting your SWOT analysis, the most important part is to explain the nature of each section, getting into the why and how rather than just stating it. For example, if your management staff is a strength, explain why and how they excel. For each of these four categories, it is important to evaluate your company from a personal standpoint, but also to compare it with respect to your competitors in order to get the most holistic and objective view.
A SWOT analysis’ benefit is that it can help a business uncover opportunities that it already possesses, enabling the business to be well placed to exploit them. At the same time, by understanding the weaknesses of one’s business, the business can manage and eliminate threats that would otherwise remain hidden. A SWOT analysis can be used to observe the business itself and its competitors, enabling the business to create a strategy that helps it distinguish itself from competitors and position the business to better compete against competitors in the market.
Strengths
Strengths are defined as something that adds positive value to your business or product and provides it with a competitive advantage over your rivals. It is not necessary for strengths to be something tangible, such as having a superior product; it could also be intangible, like having great salesmanship skills, or a recognizable brand name. Make a list of the business’ internal strengths; internal strengths are skills, proficiency, experience, competitive advantages, and talent. Internal strengths can be any factor that improves the business’ position in the market and cannot be easily imitated or replicated. Some examples of internal strengths are an established brand reputation, superior cutting-edge technology, low staff turnover, and solid financing.
Strengths are the key drivers of your business. Your goal as a business owner is to cultivate, maintain and develop specific strengths that leverage your firm’s unique position and outlook. Consider the business’ strengths from both an internal perspective and an external perspective, from the point of view of the business’ customers, consumers, and competitors in the market. Performing a SWOT analysis can help you identify your existing strengths so you can build off of them or identify areas where strengths can be developed to help create a greater competitive advantage for your company.
Weaknesses
Any area where your company’s product is exposed, or where your competitors have a clear and distinct advantage is considered a weakness. Weaknesses are factors that reduce your company’s ability to achieve its objectives. Similar to strengths, weaknesses can be both tangible and intangible. Some examples of a tangible weakness include a lack of working capital and a lack of financing, while examples of intangible weaknesses might be stiff competition in the market for your product or a weak brand name. In some cases, a weakness could be the consequential flip side of a strength; for example, an industrial firm may have a large amount of manufacturing capacity. Although this manufacturing capacity may act as a strength that the business’ competitors do not possess, this capacity could also be considered as a weakness for the business if the large investment put into manufacturing capacity prevents the firm from being promptly responsive to changes in the outside strategic environment of the market.
It is important to be cognizant of your weaknesses because these could be areas that are undermining the potential profitability of your company. They could also be areas where your competitors are gaining a strategic advantage over your company. Either way, it is important to address weaknesses to mitigate potential harmful effects.
Opportunities
Opportunities represent something that can be seized to become a potential strength for your company that allows it to grow and become more profitable. This could be in the form of an opening in the market for a new product, opening a new location, or adding a new delivery service. The opportunities section of the SWOT analysis assesses the external environment of the business, as opposed to the internal environment that the strengths and weaknesses section of the SWOT analysis assesses. Some examples of opportunities include arrival of new technology, loosening of regulations, and decreased international trade barriers. Opportunities should reference demand for the business’ products and services or any potential for development.
To grow your company, it is essential that you continually look for new opportunities to expand your business so you can turn these opportunities into strengths, and in turn, make them into your competitor’s weakness. Assessing opportunities can help a business identify ways to use its strengths to pursue potential opportunities.
Threats
Threats can be thought of as an opportunity for something negative to impact your business. Similar to opportunities, the threats section of the SWOT analysis also assesses the external environment of the business; this section looks for any changes in the external environment that could be presented as a threat to the business. Usually, threats are intangible but create a tangible effect on your business, such as new tax law or environmental legislation having a negative effect onto your income statement. Some examples of threats include shifts in consumer preferences and trends away from a business’ products, entrant of a substitute product, and increasing international trade barriers. It is a good idea to take a closer and detailed investigation into your competitors’ strengths in order to identify any potential external threats to your company.
Typically, it is difficult to forecast threats, and it is even more difficult to ascertain the effect they may have on your business. However, it is important to think about what they might be, where they could come from, and from that, generate an idea about what impact they could have on your business and how best to mitigate this impact. Assessing potential threats helps a business establish a defensive plan that mitigates the company’s susceptibility to threats in the external business environment.
Limitations of SWOT Analysis
A SWOT analysis can be very useful for a business to utilize, but it does have its limitations. The most important of these limitations is that it ignores financial and valuation multiples.
Furthermore, a SWOT analysis uses subjective rather than objective analysis, and this creates the potential for biases, errors in judgment, or knowledge limitations to have a dramatic impact on the results of the analysis. For instance, one owner might consider substantial R&D spending as an opportunity, but another may see it as a weakness as that money could be better spent elsewhere.
Usefulness of a SWOT Analysis
The most important aspect of a SWOT analysis is that it forces the owner to research and critically engage with the key drivers of their business, their competitor’s business, as well as the industry as a whole before a big decision is made. This also provides a track record of the decision-making process and keeps a tab on the development of your business over time. It also allows you to consider non-balance sheet issues that affect your company.
Conclusion
Although SWOT analysis does have its drawbacks, it is an essential tool for business owners to fully understand the possible outcomes a big decision, as well as finding out their relative position in the market. A SWOT analysis does not necessarily have to be comprised as a complex and lengthy document. An effective SWOT analysis can still be conducted with a couple pages of point-form notes; the most significant factor is that the analysis must refer to all strengths, weaknesses, opportunities, and threats that are crucial to the company’s core business.
Furthermore, SWOT analysis should not be the only tool that you use before you make big decision for your company as it is also critical for you to make a detailed financial analysis and forecast before making a decision.
There is no way to be ready for every situation that may result from making a business decision, but business owners that perform a SWOT analysis are invariably better off, and better prepared, than their counterparts that do not.