SWOT stands for Strengths, Weaknesses, Opportunities, and Threats and is a simple framework that forces you to think about possible consequences, pros, cons, and obstacles prior to making a business decision. One of the advantages of a SWOT analysis is that it considers inside and outside forces that affect business outcomes.
A SWOT analysis is very flexible and is useful in any scenario ranging from decisions with a low strategic value such as designing a website to high strategic value decisions such as whether to enter a new market.
Assessing the strengths your business has today will boost your confidence in your business’s abilities to handle tasks. This part of the SWOT analysis will also help you identify areas of your business that are performing above the expectations. Identifying these areas of strength is key to growing your business and provides much more than “nice to know information”. Continuing to be successful in these areas of strength will need to become a priority as the business grows. The areas of success that differ from the competition can be identified as “competitive advantages” and will need to be developed further.
In contrast with competitive advantages, weaknesses are the characteristics that put your business at a disadvantage to others. By conducting a SWOT analysis, you are able to identify these characteristics and actively work to improve them as a way to reduce your competition’s competitive advantages. For this part of the analysis, it is extremely important, to be honest, realistic, and open about the weaknesses in your business. The more you are able to pinpoint weaknesses objectively, the more opportunity you will have to improve or minimize these weaknesses and minimize the competition’s ability to use your weaknesses as their competitive advantage.
The first two parts of the SWOT analysis: strengths and weaknesses are your business’ internal factors that determine the ability to successfully pursue an opportunity. Opportunities are created by external factors such as changes in the market. If you were to pursue an opportunity which your business was not equipped to handle, it could be devastating to your objectives and to your business’ credibility. However, if your business has the capability to seize an opportunity and you decide not to pursue it; you are essentially leaving money on the table.
Just like opportunities, threats are created by external factors that could potentially generate negative issues for your business. These threats can come from changes in the market, actions from a competitor, or even a new law or policy. Using the SWOT analysis, you will be able to identify these threats and their potential negative impact on your business. Depending on the level of potential negative impact and the likelihood of realization, you will prioritize which threats you have to neutralize first. To develop a strategy to counteract threats, you will need to focus once more on your strengths and weaknesses.