What is SWOT Analysis?
The SWOT Analysis is a framework for evaluating a company’s competitive positioning, typically completed for purposes of internal strategic planning.
How to Conduct SWOT Analysis (Step-by-Step)
SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.
Simply put, a SWOT analysis is performed to determine the internal and external factors contributing to a company’s relative competitive advantage (or disadvantage).
SWOT analysis is presented in the form of a square, which is segmented into four distinct quadrants – with each quadrant representing a factor that measures:
- Strengths → Competitive Edge to Sustain Future Long-Term Performance
- Weaknesses → Operational Weaknesses Needing Improvement
- Opportunities → Positive Industry Trends and Growth Potential (i.e. “Upside”)
- Threats → Competitive Landscape and Risks
The visual arrangement of the four quadrants helps facilitate simple, structured assessments of companies.
SWOT Analysis Framework: Diligence Mental Model
However, a pitch book or client deliverable with a slide explicitly titled “SWOT Analysis” is a rare sight (and is not recommended).
SWOT analysis is taught in the academic setting and is meant to influence the internal mental models and general thought processes used for assessing companies.
Therefore, even if you find the SWOT analysis framework useful, it is best to come up with your own process of evaluating companies (and investment opportunities).
Internal vs. External SWOT Analysis
The SWOT analysis structure is split between internal and external factors:
- Strengths → Internal
- Weaknesses → Internal
- Opportunities → External
- Threats → External
Internal factors can be improved upon, whereas external factors are largely out of the direct control of the company.
Strengths in SWOT Analysis
Strengths pertaining to a SWOT analysis refer to the positive attributes of a company and the initiatives that perform particularly well, which allows the company to distinguish itself from the rest of the market.
- Relative to our market, what is our competitive advantage (i.e. “economic moat”)?
- What products/services are offered and how do they differ from comparable offers in the market?
- Which specific products are selling well with high customer demand?
- Why might customers opt for your company’s products/services?
Examples of Strengths
- Branding, Credentials, and Reputation
- Capital (Equity and/or Debt Financing)
- Loyal, Existing Customer Base
- Long-Term Customer Contracts
- Distribution Channels
- Negotiating Leverage Over Suppliers
- Intangible Assets (Patents, Intellectual Property)
Weaknesses in SWOT Analysis
By contrast, weaknesses are the aspects of a company that detract value and place it at a competitive disadvantage relative to the market.
To compete with market leaders, the company must improve upon these areas to decrease the odds of losing market share or falling behind.
- Which specific areas in our business model and strategy could we improve?
- What products have been underperforming in recent years?
- Are there any non-core products that are draining resources and time?
- Compared to the market leader, in which specific ways are they more effective?
Examples of Weaknesses
- Difficulty Raising External Financing from Investors
- Lack of (or Negative) Reputation Among Customers
- Inadequate Market Research and Customer Segmentation
- Low Sales Efficiency (i.e. Revenue Per $1 Spent on Sales & Marketing)
- Inefficient Accounts Receivable (A/R) Collection
Opportunities in SWOT Analysis
Opportunities refer to the external areas to allocate capital that represents potential profits for the company if properly capitalized upon.
- How can operations be made more efficient (e.g. leverage technology)?
- Are our competitors more “innovative” than us?
- Which type of expansion opportunities is out there?
- What untapped market segments could we attempt to enter?
Examples of Opportunities
- Geographical Expansion Opportunities
- Newly Raised Capital to Hire High-Quality Employees and Talent
- Introduce Incentive Programs (e.g. Loyalty Programs)
- Streamlined Operational Processes
- Trends to Capitalize On (i.e. “Tailwinds”)
Threats in SWOT Analysis
Threats are the negative, external factors that are beyond the control of a company, yet could disrupt the current strategy or put the future of the company itself at risk.
- What external threats could negatively impact operations?
- Is there any regulatory risk that threatens our operations?
- What are our competitors currently doing?
- Which developing trends have the potential to disrupt our industry?
Examples of Threats
- Fixed Costs Rising and One-Time Expenses
- Supply-Chain and Logistical Issues
- Price-Sensitive Customers Amid Recession Fears (Declining GDP)
- Highly Concentrated Revenue (i.e. High % of Total Revenue)
- Incumbents Solidifying (and/or Growing) Current Market Share
- High-Growth Startups Attempting to Disrupt Market