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How to Perform a SWOT Analysis
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# How to Perform a SWOT Analysis

These frameworks are essential to fundamentally analyzing companies

By

Will Kenton is an expert on the economy and investing laws and regulations. He previously held senior editorial roles at Investopedia and Kapitall Wire and holds a MA in Economics from The New School for Social Research and Doctor of Philosophy in English literature from NYU.

Updated June 29, 2024

Reviewed by

Reviewed byCierra Murry

Cierra Murry is an expert in banking, credit cards, investing, loans, mortgages, and real estate. She is a banking consultant, loan signing agent, and arbitrator with more than 15 years of experience in financial analysis, underwriting, loan documentation, loan review, banking compliance, and credit risk management.

Fact checked by

Fact checked byAriel Courage

Ariel Courage is an experienced editor, researcher, and former fact-checker. She has performed editing and fact-checking work for several leading finance publications, including The Motley Fool and Passport to Wall Street.

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## What Is SWOT Analysis?

SWOT (strengths, weaknesses, opportunities, and threats) analysis is a framework used to evaluate a company's competitive position and to develop strategic planning. SWOT analysis assesses internal and external factors, as well as current and future potential. A SWOT analysis is designed to facilitate a realistic, fact-based, data-driven look at the strengths and weaknesses of an organization, initiatives, or within its industry.

### Key Takeaways

- SWOT analysis is a strategic planning technique that provides assessment tools.
- Identifying core strengths, weaknesses, opportunities, and threats leads to fact-based analysis, fresh perspectives, and new ideas.
- A SWOT analysis pulls information from internal sources (strengths or weaknesses of the specific company) and external forces that may have uncontrollable impacts on decisions (opportunities and threats).
- SWOT analysis works best when diverse groups or voices within an organization can provide realistic data points rather than prescribed messaging.
- The findings of a SWOT analysis are often synthesized to support a single objective or decision that a company is facing.

## Understanding SWOT Analysis

SWOT analysis is a technique for assessing the performance, competition, risk, and potential of a business, as well as part of a business such as a product line or division, an industry, or other entity.

Using internal and external data, the technique can guide businesses toward strategies more likely to be successful, and away from those in which they have been, or are likely to be, less successful. Independent SWOT analysts, investors, or competitors can also guide them on whether a company, product line, or industry might be strong or weak and why.

SWOT analysis was first used to analyze businesses. Now, it's often used by governments, nonprofits, and individuals, including investors and entrepreneurs. There is seemingly limitless applications to the SWOT analysis.

## Components of SWOT Analysis

Investopedia / Julie Bang

Every SWOT analysis will include the following four categories. Though the elements and discoveries within these categories will vary from company to company, a SWOT analysis is not complete without each of these elements:

### Strengths

Strengths describe what an organization excels at and what separates it from the competition: a strong brand, loyal customer base, a strong balance sheet, unique technology, and so on. For example, a hedge fund may have developed a proprietary trading strategy that returns market-beating results. It must then decide how to use those results to attract new investors.

### Weaknesses

Weaknesses stop an organization from performing at its optimum level. They are areas where the business needs to improve to remain competitive: a weak brand, higher-than-average turnover, high levels of debt, an inadequate supply chain, or lack of capital.

### Opportunities

Opportunities refer to favorable external factors that could give an organization a competitive advantage. For example, if a country cuts tariffs, a car manufacturer can export its cars into a new market, increasing sales and market share.

### Threats

Threatsrefer to factors that have the potential to harm an organization. For example, a drought is a threat to a wheat-producing company, as it may destroy or reduce the crop yield. Other common threats include things like rising costs for materials, increasing competition, tight labor supply, and so on.

## SWOT Table

Analysts present a SWOT analysis as a square segmented into four quadrants, each dedicated to an element of SWOT. This visual arrangement provides a quick overview of the company’s position. Although all the points under a particular heading may not be of equal importance, they all should represent key insights into the balance of opportunities and threats, advantages and disadvantages, and so forth.

The SWOT table is often laid out with the internal factors on the top row and the external factors on the bottom row. In addition, the items on the left side of the table are more positive/favorable aspects, while the items on the right are more concerning/negative elements.

## How to Do a SWOT Analysis

A SWOT analysis can be broken into several steps with actionable items before and after analyzing the four components. In general, a SWOT analysis will involve the following steps.

### Step 1: Determine Your Objective

A SWOT analysis can be broad, though more value will likely be generated if the analysis is pointed directly at an objective. For example, the objective of a SWOT analysis may focused only on whether or not to perform a new product rollout. With an objective in mind, a company will have guidance on what they hope to achieve at the end of the process. In this example, the SWOT analysis should help determine whether or not the product should be introduced.

### Step 2: Gather Resources

Every SWOT analysis will vary, and a company may need different data sets to support pulling together different SWOT analysis tables. A company should begin by understanding what information it has access to, what data limitations it faces, and how reliable its external data sources are.

In addition to data, a company should understand the right combination of personnel to have involved in the analysis. Some staff may be more connected with external forces, while various staff within the manufacturing or sales departments may have a better grasp of what is going on internally. Having a broad set of perspectives is also more likely to yield diverse, value-adding contributions.

### Step 3: Compile Ideas

For each of the four components of the SWOT analysis, the group of people assigned to performing the analysis should begin listing ideas within each category. Examples of questions to ask or consider for each group are in the table below.

Internal Factors

What occurs within the company serves as a great source of information for the strengths and weaknesses categories of the SWOT analysis. Examples of internal factors include financial and human resources, tangible and intangible (brand name) assets, and operational efficiencies.

Potential questions to list internal factors are:

- (Strength) What are we doing well?
- (Strength) What is our strongest asset?
- (Weakness) What are our detractors?
- (Weakness) What are our lowest-performing product lines?

External Factors

What happens outside of the company is equally as important to the success of a company as internal factors. External influences, such as monetary policies, market changes, and access to suppliers, are categories to pull from to create a list of opportunities and weaknesses.

Potential questions to list external factors are:

- (Opportunity) What trends are evident in the marketplace?
- (Opportunity) What demographics are we not targeting?
- (Threat) How many competitors exist, and what is their market share?
- (Threat) Are there new regulations that potentially could harm our operations or products?

Strengths

1. What is our competitive advantage?

2. What resources do we have?

3. What products are performing well?Weaknesses

1. Where can we improve?

2. What products are underperforming?

3. Where are we lacking resources?Opportunities

1. What new technology can we use?

2. Can we expand our operations?

3. What new segments can we test?Threats

1. What regulations are changing?

2. What are competitors doing?

3. How are consumer trends changing?

Companies may consider performing this step as a "white-boarding" or "sticky note" session. The idea is there is no right or wrong answer; all participants should be encouraged to share whatever thoughts they have. These ideas can later be discarded; in the meantime, the goal should be to come up with as many items as possible to invoke creativity and inspiration in others.

### Step 4: Refine Findings

With the list of ideas within each category, it is now time to clean-up the ideas. By refining the thoughts that everyone had, a company can focus on only the best ideas or largest risks to the company. This stage may require substantial debate among analysis participants, including bringing in upper management to help rank priorities.

### Step 5: Develop the Strategy

Armed with the ranked list of strengths, weaknesses, opportunities, and threats, it is time to convert the SWOT analysis into a strategic plan. Members of the analysis team take the bulleted list of items within each category and create a synthesized plan that provides guidance on the original objective.

For example, the company debating whether to release a new product may have identified that it is the market leader for its existing product and there is the opportunity to expand to new markets. However, increased material costs, strained distribution lines, the need for additional staff, and unpredictable product demand may outweigh the strengths and opportunities. The analysis team develops the strategy to revisit the decision in six months in hopes of costs declining and market demand becoming more transparent.

Use a SWOT analysis to identify challenges affecting your business and opportunities that can enhance it. However, note that it is one of many techniques, not a prescription.

## Common Mistakes When Preparing SWOT Analysis

When preparing a SWOT analysis, several common mistakes can undermine its effectiveness. Let's take a look at some ways your SWOT analysis may go awry.

One easy error to make when preparing a SWOT analysis is failing to be objective and honest in the assessment. Companies often tend to overemphasize their strengths while downplaying weaknesses, resulting in an overly optimistic and unrealistic analysis. This bias can lead to missed opportunities for improvement and leave the organization vulnerable to unforeseen threats. As difficult as it may be to be honest in your analysis, the validity of underlying assumptions is the cornerstone of how useful the SWOT analysis will be.

Another significant mistake is conducting the analysis in isolation, without input from diverse key stakeholders. You should try get to input from employees at various levels, customers, suppliers, and industry experts. Each may have a unique view of your company, and each may come up with different items to be listed in each quadrant based on how they specifically interact with the company.

Yet another common pitfall is neglecting to prioritize or weight the factors identified in the SWOT analysis. Not all strengths, weaknesses, opportunities, and threats are equally important or impactful. Failing to distinguish between major and minor factors can lead to misallocation of resources and misguided strategic decisions. It can be easy for the important items to be buried if too many non-material items are identified.

Another frequent error is treating the SWOT analysis as a one-time exercise. You should be prepared to do a SWOT analysis periodically, The business environment is constantly changing, and a SWOT analysis should be regularly updated to remain relevant. In addition, the analysis itself is just the beginning; its true value lies in using the findings to develop and implement strategic actions. You can then check future SWOT analysis to make sure the company is addressing the major points.

## Benefits of SWOT Analysis

A SWOT analysis won't solve every major question a company has. However, there's a number of benefits to a SWOT analysis that make strategic decision-making easier.

- A SWOT analysis makes complex problems more manageable. There may be an overwhelming amount of data to analyze and relevant points to consider when making a complex decision. In general, a SWOT analysis that has been prepared by paring down all ideas and ranking bullets by importance will aggregate a large, potentially overwhelming problem into a more digestible report.
- A SWOT analysis requires external considerations. Too often, a company may be tempted to only consider internal factors when making decisions. However, there are often items out of the company's control that may influence the outcome of a business decision. A SWOT analysis covers both the internal factors a company can manage and the external factors that may be more difficult to control.
- A SWOT analysis can be applied to almost every business question. The analysis can relate to an organization, team, or individual. It can also analyze a full product line, changes to brand, geographical expansion, or an acquisition. The SWOT analysis is a versatile tool that has many applications.
- A SWOT analysis leverages different data sources. A company will likely use internal information for strengths and weaknesses. The company will also need to gather external information relating to broad markets, competitors, or macroeconomic forces for opportunities and threats. Instead of relying on a single, potentially biased source, a good SWOT analysis compiles various angles.
- A SWOT analysis may not be overly costly to prepare. Some SWOT reports do not need to be overly technical; therefore, many different staff members can contribute to its preparation without training or external consulting.

## SWOT Analysis Example

Let's perform a SWOT analysis together by analyzing the strengths, weaknesses, opportunities, and threats of Tesla.

- Strengths: Tesla has a strong position in the EV market because of its strong brand recognition as an industry pioneer. The company's advanced battery technology allows for superior range in its vehicles. Tesla's extensive Supercharger network also provides a significant advantage in terms of charging infrastructure.
- Weaknesses: Tesla has struggled with production capacity limitations, often failing to meet demand and delivery targets. Quality control issues have also been a recurring problem from time to time. Tesla's vehicles are generally priced higher than those of competitors, which may limit market penetration in more price-sensitive regions.
- Opportunities: Tesla stands to benefit from the growing global demand for electric vehicles. The company has opportunities to expand beyond automotive into related fields such as energy storage and solar power, leveraging its battery expertise. The development of autonomous driving technology also presents another significant growth avenue, as Tesla has already begun implementing self-driving cars. Additionally, Tesla has the potential to tap into large, emerging markets like China and India where EV adoption could accelerate where it hasn't already.
- Threats: The competitive landscape for Tesla is intensifying as traditional automakers and new entrants invest heavily in electric vehicle technology. This increased competition could erode Tesla's market share and profit margins. Economic factors such as economic downturns could impact sales of Tesla's primarily luxury-oriented vehicles. The company also faces risks related to supply chain disruptions, particularly for critical materials used in battery production where it may already have manufacturing constraints.

## What Are the 4 Steps of SWOT Analysis?

The four steps of SWOT analysis comprise the acronym SWOT: strengths, weaknesses, opportunities, and threats. These four aspects can be broken into two analytical steps. First, a company assesses its internal capabilities and determines its strengths and weaknesses. Then, a company looks outward and evaluates external factors that impact its business. These external factors may create opportunities or threaten existing operations.

## How Do You Write a Good SWOT Analysis?

Creating a SWOT analysis involves identifying and analyzing the strengths, weaknesses, opportunities, and threats of a company. It is recommended to first create a list of questions to answer for each element. The questions serve as a guide for completing the SWOT analysis and creating a balanced list. The SWOT framework can be constructed in list format, as free text, or, most commonly, as a 4-cell table, with quadrants dedicated to each element. Strengths and weaknesses are listed first, followed by opportunities and threats.

## Why Is SWOT Analysis Used?

A SWOT analysis is used to strategically identify areas of improvement or competitive advantages for a company. In addition to analyzing thing that a company does well, SWOT analysis takes a look at more detrimental, negative elements of a business. Using this information, a company can make smarter decisions to preserve what it does well, capitalize on its strengths, mitigate risk regarding weaknesses, and plan for events that may adversely affect the company in the future.

## What Are the Limitations of SWOT Analysis?

While SWOT analysis is a powerful tool, it does have some limitations. It can sometimes oversimplify complex situations and is susceptible to the subjectivity and bias of participants. The analysis also doesn't provide specific guidance on how to address identified issues and can lead to analysis paralysis if not followed by concrete action.

## The Bottom Line

A SWOT analysis is a great way to guide business-strategy meetings. It's powerful to have everyone in the room discuss the company's core strengths and weaknesses, define the opportunities and threats, and brainstorm ideas. Oftentimes, the SWOT analysis you envision before the session changes throughout to reflect factors you were unaware of and would never have captured if not for the group’s input.

A company can use a SWOT for overall business strategy sessions or for a specific segment such as marketing, production, or sales. This way, you can see how the overall strategy developed from the SWOT analysis will filter down to the segments below before committing to it. You can also work in reverse with a segment-specific SWOT analysis that feeds into an overall SWOT analysis.

Although a useful planning tool, SWOT has limitations. It is one of several business planning techniques to consider and should not be used alone. Also, each point listed within the categories is not prioritized the same. SWOT does not account for the differences in weight. Therefore, a deeper analysis is needed, using another planning technique.

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