To make sure your business engine runs as smoothly as possible and operates at peak efficiency, you need to fine-tune your processes regularly. One of the best ways to assess and improve your company is to conduct a “strengths, weaknesses, opportunities, and threats” (SWOT) analysis, so you can identify and overcome chronic problems and pursue more productive strategic directions.
What is a SWOT analysis?
A SWOT analysis helps companies develop a clear understanding of the factors needed to make sound business decisions by analyzing their strengths, weaknesses, opportunities, and threats. Albert Humphrey of the Stanford Research Institute developed the SWOT assessment method in the 1960s during a study aimed at identifying why corporate planning often failed. Since then, SWOT analysis has enjoyed widespread use as a tool for business owners to start and grow their companies.
The SWOT analysis framework assesses internal and external factors in order to conduct an objective, data-driven examination of an organization’s strengths and weaknesses as well as its current and future potential.
A SWOT analysis provides the tools to assess the performance, possibilities, and competitive risks of an entire business, or just part of it, such as a product line or division. It can help businesses steer away from strategies that are likely to fail so they can focus on those with a greater likelihood of success.
Elements of a SWOT analysis.
The four principal elements of a SWOT analysis include:
- Strengths: These can describe what a business excels in and what separates it from the competition. It could involve a strong brand, loyal customers, a robust balance sheet, disruptive technology, etc. Other strengths could include internal resources, such as skilled staff, or tangible assets, such as intellectual property or capital.
- Weaknesses: These are areas that an organization needs to improve in order to stay competitive as well as barriers that keep it from peak efficiency. The category can include a lack of resources or knowledgeable staff, an unclear selling proposition, a weak brand, an undependable supply chain, and the like.
- Opportunities: Favorable external factors can give a business a competitive advantage, including a great volume of leads generated by the marketing department, a growing need for the organization’s products and services, discovering an underserved market, or a lack of strong competitors.
- Threats: These are the external factors that could harm the company, such as rising material costs, increased competition, a scarce labor supply, a changing regulatory environment, negative media coverage, and changing consumer preferences.
Why SWOT analysis is important.
A SWOT analysis provides a simple but important method of analyzing your company’s current market position and future potential. It helps you to address what your organization may lack to build on your strengths, minimize risk, and maximize the possibilities for successful outcomes. It can help you improve your internal processes and develop a strategy for growth and competitive advantage.
This low- or no-cost process can help you:
- Understand your business better
- Address weaknesses
- Take advantage of your strengths
- Head off threats
- Make the most of opportunities
- Develop business goals and strategies for achieving them
While a SWOT analysis can be extremely useful, providing strong insights into your business and the challenges it faces, it doesn’t necessarily give you solutions to your problems. For complex issues, you will probably need to do more in-depth research and analysis.
Other limitations of SWOT include:
- Doesn’t prioritize issues
- Can generate too many ideas and not provide guidance as to which one is best
- Not all of the abundant information SWOT produces is equally useful
Where a SWOT analysis fits into a strategic plan.
A SWOT analysis can play an important role in developing a strategic plan for your business. To prepare for strategic planning, you need to understand your business in its current form, with data inputs that help you get ready for strategic planning by looking inside and outside your organization.
These data inputs can include internal factors, such as:
- Financial resources
- Physical resources (location, facilities, and equipment)
- Human resources
- Access to natural resources, trademarks, patents, and copyrights
- Current processes (employee programs, department hierarchies, and software systems)
The data inputs can also include external factors, such as:
- Market trends
- Economic trends
- Relationships with suppliers and partners
- Political, environmental, and economic regulations
A SWOT analysis provides a structured framework to understand these internal and external inputs. It can help you organize your data for review and, in some cases, point to some important conclusions about what to do with it.
With this done, you can craft a strategic plan that might contain these common elements: a vision, mission, goals, and contingency plans for whatever may lie ahead. Finally, you can execute your strategic plan, building in enough flexibility to overcome the inevitable roadblocks that will pop up.
Afterwards, you can evaluate your strategic plan’s execution, generating invaluable insights that will improve your strategic planning process in the future.
How to do a SWOT analysis.
A SWOT analysis is often structured in a 2x2 grid or a 4-column table, with each of the quadrants representing a concept contained in the acronym:
- S trengths
- W eaknesses
- O pportunities
- T hreats
Under each of the headings, you make a list of the key insights generated by your team. Taking these positive (strengths and opportunities) and negative (weaknesses and threats) elements together, a company can assess the forces affecting a strategy, action, or initiative.
Matching external threats with internal weaknesses can be one of the most valuable parts of the exercise, helping you determine whether to assign resources to fix the internal problems or change business focus to negate the external threat, or both.One advantage to arranging your SWOT analysis in four side-by-side columns is the ability to align and compare the elements under each heading, so correlations can be mapped and identified more easily.
SWOT analysis examples.
An example of a SWOT analysis is the Value Line assessment of The Coca-Cola Co. in 2015. It noted strengths, including its globally famous brand name, huge distribution network, and opportunities in emerging markets. It also noted weaknesses and threats, such as foreign currency fluctuations and growing public interest in “healthy” beverages.
While Value Line posed some tough questions about Coke’s strategy, it ultimately concluded that it would remain a good opportunity for conservative investors. Indeed, five years later, the soft drink manufacturer increased in value by 60% and remains the world’s sixth strongest brand.
When to do a SWOT analysis.
A SWOT analysis works best before a decisive company action is undertaken, such as pivoting to explore new business opportunities, planning an expansion, or revamping internal policies. Some industry analysts advocate doing a SWOT analysis regularly at the end of the year, so you can think about the achievements and challenges of the previous year as you plan for the next one.
When doing a SWOT analysis, it’s a good practice to get more than the business owner involved. By involving a variety of team members, or even people from all different parts of your company, you get more valuable input into the process and a more comprehensive analysis of the results.
Difference between a SWOT and PESTLE analysis.
A PESTLE analysis is another acronym-based tool for evaluating an organization’s strengths and weaknesses. However, while a SWOT analysis considers the internal and external factors that can help or hinder the outcome of a planned project, PESTLE mainly focuses on the external factors. The acronym stands for:
- P olitical: Laws, global issues, legislation, and regulations that may affect your business
- E conomic: Taxes, stock market trends, interest rates, and inflation
- S ocial: Lifestyle changes, buying trends, and major events
- T echnological: Innovations, research, and technology access
- L egal: Proposed or passed legislation that may affect your business
- E nvironmental: Local and global environmental issues and their social and political impacts
The kinds of questions a PESTLE analysis asks can include:
- What are the prevalent economic factors?
- What is the political situation of the country, and how can it affect the industry?
- What technological innovations are likely to rise and change the market structure?
- Are there any proposed changes to the legislation that regulates an industry?
- Does the industry have environmental concerns?
A PESTLE analysis is more focused than SWOT on the broad external factors that could affect the position of your business, the reasons for the shrinkage or growth of a market, and so on. While deeply focused on external factors, PESTLE does not give the same focus on internal factors as SWOT, so you might have trouble mapping your organization’s strengths to external opportunities.
That said, SWOT and PESTLE don’t have to be either-or propositions. Since SWOT doesn’t look at external factors as deeply as PESTLE, you could supplement your internal SWOT findings with insights from the other methodology, deepening insights into the opportunity and threat categories that lead to better strategies and plans of action.
Use a SWOT analysis to outline a strategic plan for your business.
Ultimately, a SWOT analysis is a useful tool for improving your business and guarding against unexpected challenges. Armed with key insights about your organization’s strengths, weaknesses, opportunities, and threats, you’ll be better prepared to outline a successful strategic plan.