What is a Strength, Weakness, Opportunity, and Threat (SWOT) Analysis?

A SWOT analysis is like a report card…

When you got your report card as a kid, your teacher would grade your performance in each subject. They’d indicate which topics were your strengths, and which needed some improvement. Sometimes it may have even provided insight into opportunities for next year, such as recommending you consider the advanced math class instead of the basic one. A SWOT analysis is like a report card for your business — It shows you what areas you’re getting a good grade in, what areas you could use a little work, and what external opportunities and potential challenges are out there.

The purpose of a SWOT analysis is to look at your organization’s strengths, weaknesses, opportunities, and threats before moving forward with any new business strategies. You can use this analysis to identify what factors are currently helping your business to succeed, and which are holding you back. It can also help you determine how to grow your business (what opportunities to capture) and how to stay ahead of your competition (threats).

Using a SWOT analysis helps you to have all of the information you need to make informed decisions about the future of your company. You move forward in your business decision-making with the knowledge of what strengths and opportunities are working in your favor, and you can capitalize on them. You’ll also be aware of any weaknesses and threats you’ll have to overcome to be successful.

A SWOT analysis has four primary elements that it takes into account — strengths, weaknesses, opportunities, and threats. Strengths and weaknesses are internal factors. They look at the characteristics the company already has. Opportunities and threats are external because they take into account factors outside the company that will have an impact on the company’s success or failure.

One of the internal factors you’ll look at during your SWOT analysis is your company’s internal strengths. You’re going to consider all of the things your company does well. Think about something your company does better than your competitors and that has led to your company’s current success. Something is a strength if it gives you a competitive advantage over your competitors — This is important because something that might seem like a strength isn’t if you could say the same about everyone in your industry.

Let’s talk about some examples of strengths within a company. First, you might have strengths related to your employees. Maybe you pay higher salaries than your competitors, which has allowed you to bring in excellent staff. You also might have an exceptional management team that allows you to rise above your competitors.

Strengths could also be related to the product or service you sell. A product that stands out among the competition for its exceptional quality would be a strength. Or maybe your company offers services and has a reputation for being the best in town.

Your company might also have significant financial strengths. For example, maybe you’ve been able to reduce your cost of goods sold. You’ve done this without sacrificing the quality of your product, and this has helped to increase your profit. Or maybe you’ve expanded your streams of revenue.

Your company’s weaknesses are also internal factors — These are the characteristics that are holding your firm back from being as successful as others in the market and that you’ll have to do better with to excel above other companies. The good news is that because your weaknesses are internal, they are generally within your power to control.

When you begin to think about your company’s weaknesses, think about factors such as your personnel, your physical and financial resources, and your systems and processes.

For example, perhaps an inefficient system means it takes more hours and money to produce your goods than it takes your competitors. This inefficiency would be a weakness and something that will keep your profit margins lower than those of your competitors.

Weaknesses could also be related to the physical attributes of your business. One example of such a physical trait would be your location. Maybe you’re a small novelty shop in a part of town without a lot of foot traffic, while your competitors are downtown.

Your weaknesses could also be related to your company’s reputation. Suppose you’re a new competitor in the market, and you don’t yet have name recognition. It could also be that a public relations disaster in your past has hurt your reputation, and you’ll have to overcome it to become a leader in the market.

Unlike strengths and weaknesses, opportunities are external factors. They aren’t entirely within your control, but you can certainly do your best to take advantage of them. These opportunities could be specific to your industry or your region.

One example of an opportunity might be a newly emerging market trend you’ve become aware of where you believe your company can get in ahead of the curve. Or maybe the economy is going through a period of significant economic growth and people are buying houses at record rates — If you happen to be a realtor, this is an opportunity for you.

Opportunities can also be regional. Imagine that you own a restaurant in a town that is hosting a major sporting event, and your community will be hosting more people than ever before. Though you can’t control the opportunity, you can do your best to capitalize on it.

On the other side of opportunities are threats, which are external factors that could hold your business back. Threats are particularly problematic because you can’t control whether they take place, and it’s not always within your power to avoid them.

One example of a threat could be increasing government regulation. Suppose that you produce cars, and the federal government has just released new vehicle safety standards. If your company does not already meet those standards with your existing product, you could be in a situation where you have to redo your process completely.

A threat could also be economic, such as in the case of a recession. Let’s say that you run a travel agency. During an economic downturn, people might not be taking as many vacations. Either they can no longer afford them, or they’re trying to build their emergency fund in case of an impending job loss. In that case, the recession would be a threat to your business.

For a threat related to market trends, consider the example of a company that sells junk food. If people start purchasing healthier snacks over traditional treats, that change in the market could serve as a threat to that company.

To conduct a SWOT analysis for your company, you’ll first want to gather a team of participants. Having more than one person working on the analysis will help to ensure you don’t use biased, subjective information. It’s also helpful to have people from different parts of the company, so they can chime in about factors of which other leaders might not be aware.

An easy way to simplify the SWOT analysis process is to put the four components into a matrix. Go through each factor one by one, asking team members to identify characteristics related to each one.

Once you have the information, be sure to take it one step further and use it to move the needle forward in your business. Look at your strengths and opportunities and craft a plan for how you can take advantage of them even more. Look at your weaknesses and threats and determine how you can best address them or ward them off.

Now that we’ve talked about how to perform the analysis, let’s look at a SWOT analysis example. Suppose that Roy and Sam have just opened a bar in an up-and-coming neighborhood. They want to perform a SWOT analysis to determine what their next move should be in terms of business growth.

First, Roy and Sam look at their strengths. They both have a lot of experience in the bar industry, which will certainly give them a leg up. They also have a great location with a lot of nighttime activity.

But they know they have weaknesses as well. For instance, they’re brand new to the game and know that other bars in town have more name recognition. They also have a small marketing budget, which will undoubtedly impact their ability to get their name out there.

As for external opportunities, there are more people than ever moving into the neighborhood, which will only increase their potential customer base.

Finally, there are threats to Roy’s and Sam’s business as well. First, the bar industry is one where new competitors enter all the time, which could mean retaining a customer base may be challenging.

Once Roy and Sam have run their SWOT analysis, they know what they can work on. Since they don’t have much name recognition or money, they decide to use social media to attract new customers for free. And they’ll use their extensive experience in the industry to make sure every customer leaves satisfied. They also choose to make an effort to get to know people in the neighborhood, which will help set them apart from the other competitors opening their doors.

Advantages

A SWOT analysis can be an extremely beneficial tool for companies that are considering making business decisions or changes. Doing this type of analysis forces you to look proactively for internal and external factors affecting your company of which you might not otherwise be aware.

Doing a SWOT analysis can help prepare you for the possible outcomes of whatever business decisions you’re considering. While a SWOT analysis can only be so predictive, you can use the information to anticipate the possibilities.

It can also be a great way to get everyone in the organization on the same page. Suppose that a corporation is considering a significant business decision and brings in the heads of several different departments to help conduct the SWOT analysis. Department leaders might be able to learn about specific weaknesses or threats that are problematic to a different department, but that they haven’t experienced. Once everyone has the same information, it’s easier to make well-informed decisions.

Disadvantages

Despite its benefits for business settings, SWOT analysis has its limitations as well. First, a SWOT analysis done incorrectly can be incredibly subjective. Rather than relying entirely on evidence-based or data-driven information, these analyses rely heavily on the personal experience of the person or people conducting them. This subjectiveness can result in an analysis full of bias and one-sided opinions, which can disrupt the integrity of the review.

Another problem with a SWOT analysis is that they don’t require you to create a hierarchy of the different components. As a result, it’s hard to know where to direct your attention.

For example, your SWOT analysis is likely to contain several different strengths and weaknesses. What it won’t show you is which of the flaws is most likely to hold your business back from success, or which strengths might greatly outweigh your weaknesses.

It’s also important to remember that a SWOT analysis is only one part of the equation. There’s a lot more than a SWOT analysis that goes into significant business decisions.

Additionally, the window where any particular analysis is relevant can be quite small. A SWOT looks at the characteristics of a company at a given moment in time. If one of those factors changes, so perhaps do the results of the SWOT analysis.