A SWOT analysis, which is an acronym for a business’s strengths, weaknesses, opportunities and threats, helps business managers think in new ways, sometimes about things they would prefer to avoid considering, such as the business’s weaknesses. When performed before starting a venture or as part of regular strategy development in an existing enterprise, SWOT analysis helps business owners develop effective strategies.
A SWOT analysis is often prepared as a series of lists or in a two-by-two grid. It is a quick and easy way to force managers to think about a business in new ways.
Steps in SWOT Analysis
The core of a SWOT analysis is the development of four lists, one each for strengths, weaknesses, opportunities and threats. Before beginning to create these lists, it is a good idea to try to decide on an objective for the SWOT analysis. For instance, it could be intended to develop an overall strategic direction for the company, or in a more limited sense to help with decisions about new products or expansions.
After choosing an objective, the next step is to gather information. SWOT analysts are encouraged to use diverse sources for data, including business managers, employees, suppliers, customers and others. The information gathered will concern the company, its offerings, staff, and finances, as well as external factors such as competitors, market trends and business cycles.
After doing necessary research, it’s time to start on the lists. Often lists are compiled during brainstorming sessions, again incorporating a variety of viewpoints. For instance, a SWOT brainstorming session might gather together the CEO, operations manager, sales manager, accountant or bookkeeper, design chief, human resources person, etc. As is the case with other brainstorming sessions, the emphasis is on an efficient and free flow of ideas, not on being selective about which viewpoints to include or exhaustively exploring any topic.
Strengths is usually the first list compiled, although they can be done in any order. Strengths include any internal features of the business that give it an advantage over competitors. These could include loyal and talented employees, innovative designs, strong brands, key patents, convenient locations, strong finances and low costs.
Weaknesses are internal features of the business that could put it at a disadvantage. Weaknesses may resemble the flip side of strengths, as in low-skilled and often-absent workers, outdated designs, weak brands, lack of patents, low-traffic locations, a cash flow problem and built-in excess costs. Other weaknesses could be low market share, over-dependence on a small number of customers, unreliable suppliers and so on.
With opportunities, the focus turns to external features of the business landscape. Opportunities are elements outside your business that could potentially work to your advantage. For instance, opportunities could include the presence of an expanding market for your offerings, prospect of looser regulation, declining prices for necessary raw materials and key competitors encountering trouble.
Threats are also external to the business and could include labor unrest, arrival of new competitors, economic recession, higher costs for borrowing or raw materials, and so on. Threats are anything outside the business that could potentially cause a problem.
Using SWOT Lists
Once the lists are put together, SWOT analysts examine each and prioritize the factors so that the most urgent and important are at the top. Often lists are trimmed to the most critical three or four items to encourage focus. After lists are prioritized and trimmed, they can be set side by side to gain insight into how the strengths, weakness, opportunities and threats may be related.
Often, SWOT factors are placed in a two-by-two matrix. For instances, strengths may be in the upper left quadrant, weaknesses in the upper right quadrant, opportunities in the lower left and weaknesses in the lower right. This can help to reveal relationships between the SWOT factors.
At this point SWOT analysts attempt to develop responsive strategies. For instance, a business is likely to try to find ways to leverage its strengths to counter threats. Similarly, SWOT analysis may suggest ways to compensate for weaknesses and exploit opportunities. For instance, some of the opportunities that are available may help to render weaknesses irrelevant. On the flip side, identifying weaknesses may aid in identifying the most worrisome threats.
SWOT Analysis Pros and Cons
SWOT analysis can be done in a short time. For a small business, SWOT analysis may require only an hour or two. This makes is easy to repeat the SWOT analysis on a regular basis. Depending on how quickly conditions in the business and environment are changing, SWOT analysis should be updated once a year or more often.
A SWOT process can be unproductive if idea-generating sessions are dominated by groupthink or people feel unable to express unpopular viewpoints. Well-done SWOT analysis encourages open and free and open exchange of ideas to make the lists as representative as possible.
The Bottom Line
SWOT analysis, whether for a small business or a larger one, encourages a full-circle examination of a business’s internal and external environment and helps planners see how key elements of that environment work with and against each other. SWOT analysis is not difficult or time-consuming and has proven effective, which has helped make it one of the most commonly used strategic planning tools. At the same time, because it generates concrete suggestions for action, it helps avoids “paralysis by analysis.”
Tips for Business Owners
- Consider working with an experienced financial advisor who can help you develop strategies in response to your business’s SWOT factors. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SWOT isn’t the only analytical tool that can boost a business’s results. The 80/20 Rule can help businesses gain insight into issues and opportunities so they can respond more effectively and efficiently.
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