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The SWOT Analysis

The SWOT Analysis
The SWOT analysis on a clipboard.

An important aspect of understanding any business is to understand where a business has a source of competitive advantage over others, where a business is vulnerable and how it can respond to events in the marketplace. The SWOT analysis is a tool that helps provide answers to these questions.

The SWOT tool identifies the Strengths and Weaknesses of a business and the Opportunities and Threats that it may encounter. The strengths and weaknesses relate to internal factors affecting the business, whilst the opportunities and threats concern the external factors related to the business.

The strengths can come from a variety of sources. For example, a reputable brand name could be a source of competitive advantage that allows a company to charge a premium for its products, such as is the case with many of Apple’s products. A loyal customer following helps a company maintain market share so companies that have strong loyalty reward schemes tend to hold on to customers for longer.

Also, a strong financial position can make it easier for a company to expand and compete in more challenging economic times. Other factors could include the reliability of products or the size of the organisation. All of these examples show areas where a company can claim competency or superiority over their competitors in some shape.

Weaknesses can include inefficient product distribution that can affect sales and poor customer service that can dissuade customers from purchasing from you in the future.

The weaknesses can prevent businesses from expanding and can also lead to existing market share to be taken by competitors. A company that is fairly new to a market may lack experience and the lack of experience could also be viewed as a weakness. This is why it is important to identify weaknesses so that they can be addressed at an early stage.

Opportunities refer to the external market conditions that have the potential to positively affect a company if they can be taken advantage of in the correct way. For example, a company might identify a new potential market overseas or notice a new consumer fashion trend that they have the capabilities to service.

There may even be an improvement in technology that allows a company to potentially produce their products faster and/or cheaper. Therefore, it is important that a company is always exploring potential new opportunities that it has the resources to pursue.

Threats also need to be identified, as they refer to potential changes in market conditions that could negatively impact the business. For example, new legislation that prevents a manufacturing firm from using certain materials can have an impact on profitability.

Perhaps your competitor is about to launch a new product or a new competitor is about to enter the market and begin a price battle by selling their products for a lot cheaper. These threats need to be taken seriously as they can have a substantial impact on the business, so the business needs to be prepared to take action to safeguard themselves.

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