SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis is a framework to help assess and understand the internal and external forces that may create opportunities or risks for an organization.
Strengths and weaknesses are internal factors. They are characteristics of a business that give it a relative advantage (or disadvantage, respectively) over its competition.
Opportunities and threats, on the other hand, are external factors. Opportunities are elements of the external environment that management can seize upon to improve business performance (like revenue growth or improved margins).
Threats are elements of the external environment that may endanger a firm’s competitive advantage(s), or even its ability to operate as a going concern (think regulatory issues or technological disruption).
SWOT is used to help assess the internal and external factors that contribute to a company’s relative advantages and disadvantages.
A SWOT analysis is generally used in conjunction with other assessment frameworks, like PESTEL and Porter’s 5-Forces.
Findings from a SWOT analysis will help inform model assumptions for the analyst community.
Strengths may be any number of areas or characteristics where a company excels and has a competitive advantage over its peers. Advantages may be more qualitative in nature and therefore difficult to measure (like a great corporate culture, strong brand recognition, proprietary technology, etc.), or they may be more quantitative (like best-in-class margins, above-average inventory turnover, category-leading return on equity, etc.).
Weaknesses are areas or characteristics where a business is at a competitive disadvantage relative to its peers. Like strengths, these can also be more qualitative or quantitative. Examples include inexperienced management, high employee turnover, low (or declining) margins, and high (or excessive) use of debt as a funding source.
The “Opportunities” section should highlight external factors that represent potential growth or improvement areas for a business. Consider opportunities like a growing total addressable market (TAM), technological advancements that might help improve efficiency, or changes in social norms that are creating new markets or new sub-segments of existing markets.
Threats are external forces that represent risks to a business and its ability to operate. The categories tend to be similar to the “Opportunities” section, but directionally opposite. Consider examples like an industry in decline (which is the same as a decreasing TAM), technological innovation that could disrupt the existing business and its operations, or evolving social norms that make existing product offerings less attractive to a growing number of consumers.
How to Conduct a SWOT Analysis
A SWOT analysis is rarely completed in isolation; it generally makes up one part of a broader business analysis. And while it is itself an assessment framework, a SWOT analysis is also an effective tool to help summarize other findings.
For example, an analyst can’t really assess a company’s strengths and weaknesses without first understanding the business and its industry. They may wish to leverage other tools and frameworks in order to accomplish this, including:
Ansoff’s Matrix – This will help visualize the relative risk of a management team’s growth strategies.
Financial ratio analysis – This will help identify trends (year-over-year), as well as a firm’s relative performance (using benchmarking data).
The same is true for external factors – opportunities and threats. It’s nearly impossible to understand these without first considering:
The industry life cycle – Does the business operate in a growing, mature, or declining industry? This itself informs both opportunities and threats.
An analysis of the broader business environment or the industry itself – Think frameworks like PESTEL or Porter’s 5 Forces.
What is a SWOT Analysis Used For?
A SWOT analysis is used differently by different stakeholders.
For example, a management team will use the framework to support strategic planning and risk management. SWOT helps them visualize the firm’s relative advantages and disadvantages in order to better understand where and how the organization should allocate resources, either towards growth or risk reduction initiatives.
The analyst community, on the other hand, may seek to understand (and quantify) strengths, weaknesses, opportunities, and threats in order to assess the business more completely.
Consider that findings from a SWOT analysis may help inform model assumptions among analysts. It could be an equity researcher trying to estimate the fair market value of a company’s shares, or a credit analyst looking to better understand a borrower’s creditworthiness.
In general, the SWOT framework is considered by many to be one of the most useful tools available for strategic planning and business analysis.
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