Need to make an important business decision? Try a SWOT analysis. An acronym for strengths, weaknesses, opportunities and threats, SWOT is an analytical framework that can help your company face its greatest challenges and find its most promising new markets.
The primary objective of a SWOT analysis is to help organizations develop a full awareness of all the factors involved in a decision. This method was created in the 1960s by Edmund P. Learned, C. Roland Christensen, Kenneth Andrews and William D. Book in their book "Business Policy, Text and Cases" (R.D. Irwin, 1969).
"It is impossible to accurately map out a small business's future without first evaluating it from all angles, which includes an exhaustive look at all internal and external resources and threats," said Bonnie Taylor, chief marketing strategist at CCS Innovations. "A SWOT accomplishes this in four straightforward steps that even rookie business owners can understand and embrace."
When should you use SWOT?
SWOT analyses can serve as a precursor to any sort of company action, such as exploring new initiatives, making decisions about new policies, identifying possible areas for change, or refining and redirecting efforts midplan. Performing a SWOT analysis is also great way to improve business operations, said Andrew Schrage, founder and CEO of Money Crashers.
"It allowed me to identify the key areas where my organization was performing at a high level, as well as areas that needed work," said Schrage, who expanded on his thoughts about business decision making in a blog post. "Some small business owners make the mistake of thinking about these sorts of things informally, but by taking the time to put together a formalized SWOT analysis, you can come up with ways to better capitalize on your company's strengths and improve or eliminate weaknesses."
While the business owner should certainly be involved in creating a SWOT analysis, it could be much more helpful to include other team members in the process. Shawn Walsh, president and CEO of Paradigm Computer Consulting, said his management team conducts a quarterly SWOT analysis together.
"The collective knowledge removes blind spots that, if left undiscovered, could be detrimental to our business or our relationship with our clients," Walsh said.
The elements of a SWOT analysis
A SWOT analysis focuses on the four elements included in the acronym, allowing companies to identify the forces influencing a strategy, action or initiative. Knowing these positive and negative elements can help companies more effectively communicate what parts of a plan need to be recognized.
When drafting a SWOT analysis, individuals typically create a table split up into four columns to list each impacting element side-by-side for comparison. Strengths and weaknesses won't typically match listed opportunities and threats, though they should correlate somewhat since they're tied together in some way. Billy Bauer, managing director of Royce Leather, noted that pairing external threats with internal weaknesses can highlight the most serious issues faced by a company.
"Once you've identified your risks, you can then decide whether it is most appropriate to eliminate the internal weakness by assigning company resources to fix the problems, or reduce the external threat by abandoning the threatened area of business and meeting it after strengthening your business," Bauer said.
The first two letters in the acronym, S (strengths) and W (weaknesses), refer to internal factors, which means the resources and experience readily available to you. Examples of areas typically considered include:
- Financial resources (funding, sources of income, investment opportunities)
- Physical resources (location, facilities, equipment)
- Human resources (employees, volunteers, target audiences)
- Access to natural resources, trademarks, patents and copyrights
- Current processes (employee programs, department hierarchies, software systems)
External forces influence and affect every company, organization and individual. Whether these factors are connected directly or indirectly to an opportunity or threat, it is important to take note of and document each one. External factors typically reference things you or your company do not control, such as:
- Market trends (new products and technology, shifts in audience needs)
- Economic trends (local, national and international financial trends)
- Funding (donations, legislature and other sources)
- Relationships with suppliers and partners
- Political, environmental and economic regulations
Once you fill out your SWOT analysis, you will need to come up with some recommendations and strategies based on the results. Linda Pophal, owner and CEO of Strategic Communications consulting firm, said these strategies should be focused on leveraging strengths and opportunities to overcome weaknesses and threats.
"This is actually the area of strategy development where organizations have an opportunity to be most creative and where innovative ideas can emerge, but only if the analysis has been appropriately prepared in the first place," Pophal said.
SWOT analysis template
Bryan Weaver, a partner at Scholefield Construction Law, was heavily involved in creating a SWOT analysis for his firm. He provided Business News Daily with a sample SWOT analysis template used in the firm's decision to expand its practice to include dispute mediation services.
Construction law firm with staff members who are trained in both law and professional engineering/general contracting. Their experience gives a unique advantage.
Small (three employees) — can change and adapt quickly
No one has been a mediator before or been through any formal mediation training programs.
One staff member has been a part of mediations, but not as a neutral party.
Most commercial construction contracts require mediation. Despite hundreds of mediators in the marketplace, only a few have actual construction experience.
For smaller disputes, mediators don't work as a team, only as individuals; Scholefield staff can offer anyone the advantage of a group of neutrals to evaluate a dispute
Anyone can become a mediator, so other construction law firms could open up their own mediation service as well.
Most potential clients have a negative impression of mediation, because they feel mediators don't understand or care to understand the problem, and rush to resolve it.
Resulting strategy: Take mediation courses to eliminate weaknesses and launch Scholefield Mediation, which uses name recognition with the law firm, and highlights that the firm's construction and construction law experience makes it different.
"Our SWOT analysis forced us to methodically and objectively look at what we had to work with and what the marketplace was offering," Weaver said. "We then crafted our business plan to emphasize the advantages of our strongest features while exploiting opportunities based on marketplace weaknesses."
SWOT alternatives and resources
The SWOT analysis is a simple, albeit comprehensive strategy for identifying not only the weaknesses and threats of a plan, but also the strengths and opportunities it makes possible. However, a SWOT analysis is just one tool in the strategy toolbox. Additional analytic tools to consider include PEST (political, economic, social and technological), MOST (mission, objective, strategies and tactics) and SCRS (strategy, current state, requirements and solution) analyses.
SWOT can also prompt businesses to examine and execute strategies in a more balanced, in-depth way. The following websites can help you conduct a thorough SWOT analysis of your own business:
Additional reporting by Katherine Arline and Ryan Goodrich. Some source interviews were conducted for a previous version of this article.