SWOT analysis stands for strengths, weaknesses, opportunities, and threats. It's a popular framework investors, executives, and managers use for analysing businesses and understanding their potential on multiple levels.
What is a SWOT analysis?
A SWOT analysis provides a quick way of understanding whether a business or a segment of that business has a competitive advantage, where it might be in five or 10 years, or how it can be improved.
Typically, an investor will make a grid with four squares to do a SWOT analysis and individually put strengths, weaknesses, opportunities, and threats in subsequent squares. Strengths and weaknesses show the present state of the business, and opportunities and threats focus on the future and can help guide investment decisions.
A typical strength could be strong market share, while a weakness could be low customer satisfaction. This type of analysis is often taught in business schools as a way to start examining a company. Since it doesn't involve any high-level math or valuation considerations, just about anyone can do it, and it helps investors look at a business from multiple angles.
Like other frameworks, it works best when used in combination with other analytical tools.
What are its uses?
There are many different use cases for a SWOT analysis. You may be an investor deciding what stocks to buy or an entrepreneur considering different start-up ideas. You could be a small business owner looking to buy a company or a manager interested in improving your department or a particular product line.
Whatever the reason, you can use the SWOT analysis to get a high-level sense of whether a company or an industry looks attractive. If you're familiar with the company in question, finding at least one or two traits to add to all the squares shouldn't be difficult.
Similarly, you might also do a SWOT analysis to fortify your company, brainstorming for potential weaknesses or threats.
How to conduct a SWOT analysis
One of the advantages of a SWOT analysis is that you can use it at multiple levels to analyse a business. You can start at a high level by analysing a company's corporate strategy and overall competitive position.
From there, you can look at individual business segments, product lines, regions, and departments. You could do this as a regular review every six months or once per year or use it as a tool to evaluate a new investment.
The SWOT analysis may reveal that some components are stronger than others within the business. For example, Amazon.com, Inc's (NASDAQ: AMZN) e-commerce is more robust in North America than in Europe due to various factors. Such insight could lead a manager to sell off or close the underperforming parts of the company or invest more resources in the details of the business where the opportunity lies.
What is an example of a SWOT analysis?
The easiest way to understand a SWOT analysis is to look at one. Below is an example of a SWOT analysis for Apple Inc (NASDAQ: AAPL).
| Apple Inc SWOT analysis | |
|---|---|
| Strengths – Brand loyalty | Weaknesses – Almost half of the sales are from iPhone |
| Opportunities – New devices (mixed-reality headsets) | Threats – App Store regulation |
Using a SWOT analysis for a company like Apple opens up more areas for discussion and debate. For example, you could analyse Apple's pricing power and whether it's sustainable, especially in light of some of its weaknesses and threats.
As the Apple example shows, you can use a SWOT analysis both internally and externally. If you were an executive, you could use the grid above as a guide to leverage your strengths and pursue opportunities while trying to neutralise weaknesses and deter threats.
For instance, investors have long been concerned that too much of the company's revenue came from the iPhone. Apple has taken steps to diversify over the years, including building its services business.
Foolish takeaway
The SWOT analysis is a tool investors and managers can use to understand better the businesses they're looking at and make better decisions. SWOT analysis can help investors find stocks that will thrive in the next bull market, focusing on those with appealing strengths and opportunities and limited weaknesses and threats.
Meanwhile, managers can use the SWOT analysis to improve their business internally, looking at each part of the business and adjusting strategy to leverage strengths and take advantage of opportunities while minimising weaknesses and threats.
If you're new to a company or looking for a way to begin understanding a business, the SWOT analysis is a great way to do it.
