SWOT analysis is a powerful tool for understanding a company’s market position. If you haven’t already used SWOT analysis, you should. Read on to learn more about what SWOT analysis is, how to use it and why.
What is a SWOT Analysis?
SWOT stands for Strengths, Weaknesses, Opportunities and Threats. This method of analyzing a business‘ strong and weak points can help you in a lot of ways. Primarily, SWOT analysis helps you better recognize the best opportunities for a business, as well as the potential pitfalls.
What do each of these categories mean? Strengths and weaknesses are internal categories. They look at the structure and integrity of your business. Opportunities and threats are external factors.
– Strengths are things a company excels at, things that sets a company apart from its competitors – a loyal customer base, strong employee culture and so on.
– Weaknesses are internal factors that are keeping a company from reaching its full potential. This can include debt, high turnover rates in employees and low capital.
– Opportunities are positive chances the company has externally to gain a competitive edge.
– Threats are external factors that have the potential to harm a business. Things like a shortage of materials, decrease in labor supply, a new competitor and others.
Typically, SWOT analysis is done as a box with four squares, each of the categories in one quadrant.
How to Conduct a SWOT Analysis
Begin by compiling a set of questions for each category, things to probe into the inner workings of a business. You may choose to use a standard SWOT diagram, or simply make lists. If you are doing this for your own company, ask for input from other leaders in the company – perhaps issue a survey to other employees to get their thoughts, too. If it is for a company that you are analyzing, look at what other analysts and industry press is saying. You may wish to survey the buyers, customers and even competitors to flesh out insights about the company and the external factors affecting it.
Only include verifiable statements. Use this tool in conjunction with other strategic mechanisms. Make sure that you are able to draw conclusions from the information include – and try to make those conclusions actionable.
Why Should You Use SWOT Analysis?
Here are a few reasons you should consider using a SWOT analysis:
– It can help you identify weak points in a company before they become an issue, helping you avoid investing in businesses that look safe on the surface but may have issues bubbling underneath.
– Conducting SWOT analysis of a company and competing companies can help you understand the competitive dynamics in the industry.
– Most importantly for a long term value investor, a SWOT analysis can uncover durable competitive advantages or MOAT that can help grow and protect your investments into the future.
There are many other reasons to do SWOT analysis, but this has hopefully shown you why it’s worthwhile and important!