A Closer Look at SWOT Analysis
SWOT is an acronym that stands for Strengths, Weaknesses, Opportunities, and Threats. It is used to assess the viability of a new business or marketing plan. The analysis is divided between internal (strengths and weaknesses), and external (threats and opportunities). When drafting your SWOT analysis, the most important part is to explain why and how something is the way it is. 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 in respect to your competitors, because that is the best judgment of how you are doing.
Strengths are defined as something that add positive value to your business or product, and provide 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.
Strengths are the key drivers of your business. Your goal as a business owner is to maintain, and develop as many strengths as possible. Performing a SWOT analysis can help you identify your existing strengths so you can build off of them, or identify areas where strength could be developed to help create a competitive advantage for your company.
Any area where your company’s product is exposed, or where your competitors have a clear and distinct advantage is considered a weakness. As with strengths, weaknesses can be both tangible and intangible. An example of a tangible weakness would be a lack of working capital, and an intangible weakness might be stiff competition in the market for your product.
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 represent something that can be seized to become a potential strength for your company. 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.
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.
Threats can be thought of an opportunity for something negative to impact on your business. Usually threats are intangible but create a tangible effect on your business, such as a new tax law, or environmental legislation negatively affecting your income statement.
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.
Limitations of SWOT Analysis
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, SWOT analysis uses subjective rather than objective analysis, and this creates the potential for biases, errors in judgment, knowledge limitations, or optimism 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 SWOT Analysis
The most important aspect of 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.
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. 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.