Understanding a SWOT analysis
SWOT analysis is a method for evaluating the performance, competition, risk, and potential of a business, as well as a part of a business such as a product line, division, industry, or other entity.
Using internal and external data, a SWOT analysis can tell a company where it needs improvement internally, and also aid in developing strategic plans.
Using internal and external data, this technology can guide companies toward strategies that are most likely to be successful, and away from those that have been or are likely to be least successful. Independent SWOT analysis analysts, investors, or competitors can also guide them about whether and why the company, product line, or industry is strong or weak.
Analysts present a SWOT analysis as a square with each of the four domains making up one quadrant. This visual arrangement provides a quick overview of the company's status. Although all the points under a particular heading may not be of equal importance, they should all represent basic insights about the balance of opportunities, threats, advantages, disadvantages, etc.
SWOT analysis was first used for business analysis. Now it's often used by governments, nonprofits, and individuals, including investors and business.
Example of a SWOT analysis
In 2015, a SWOT analysis of Coca-Cola's Value Line indicated strengths such as the world-famous brand name, extensive distribution network, and opportunities in emerging markets. However, he also cited vulnerabilities and threats such as foreign currency fluctuations, growing public interest in "healthy" drinks and competition from healthy beverage suppliers.
His SWOT analysis prompted the Value Line to ask some tough questions about Coca-Cola's strategy, but also to indicate that the company "will likely remain a top-tier beverage provider" providing conservative investors with "a reliable source of income and little capital gain exposure."
Five years later, the SWOT analysis of the Value Line has proven effective as Coca-Cola remains the sixth strongest brand in the world (as it was at the time). The value of Coca-Cola shares (traded under the ticker symbol KO) rose by more than 60% in the five years after the analysis was completed.
The strengths describe what the organization excels at and what separates it from the competition: a strong brand, a loyal customer base, a strong balance sheet, unique technology, etc. For example, a hedge fund may have developed a proprietary trading strategy that returns results of outperforming the market. You must then decide how to use these results to attract new investors.
Weaknesses prevent the organization from performing at an optimum level. They are areas where the business needs improvement to remain competitive: weak brand, above average turnover, high levels of debt, insufficient supply chain, or lack of capital.
Opportunities refer to favorable external factors that can give the organization a competitive advantage. For example, if a country lowers tariffs, a car manufacturer can export its cars to a new market, increasing sales and market share.
Threats refer to factors that are likely to harm an organization. For example, drought is a threat to a wheat producing company, as it can destroy or reduce crop yields. Other common threats include things like high material costs, increased competition, labor scarcity etc.
Advantages of a SWOT Analysis
A SWOT analysis is a great way to guide business strategy meetings. It is a powerful thing to have everyone in the room discussing the company's core strengths and weaknesses and then move from there to identify opportunities and threats, and finally share ideas. Often times, the SWOT analysis you envision before a session changes all the time to reflect factors you were not aware of and would never have picked up without group input.
A company can use the SWOT for overall business strategy sessions or for a specific sector such as marketing, production or sales. This way, you can see how the overall strategy developed from the SWOT analysis will move to the parts below before committing to it. You can also work backwards using the sector-specific SWOT analysis that feeds into the comprehensive SWOT analysis.
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