When you have a big business decision to make, one of the smartest things you can do during the planning process is conduct a SWOT analysis.

SWOT, which stands for strengths, weaknesses, opportunities and threats, is an analytical framework that can help your company face its greatest challenges and find its most promising new markets. The method was created in the 1960s by business gurus Edmund P. Learned, C. Roland Christensen, Kenneth Andrews and William D. Book in their book "Business Policy, Text and Cases" (R.D. Irwin, 1969).

In a business context, the SWOT analysis enables organizations to identify both internal and external influences. SWOT's primary objective is to help organizations develop a full awareness of all the factors involved in a decision, said Bonnie Taylor, chief marketing strategist at CCS Innovations.
"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," Taylor said. "A SWOT accomplishes this in four straightforward steps that even rookie business owners can understand and embrace."

When to use SWOT

SWOT analyses are often used during strategic planning. They 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," Schrage said. "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 entirely 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.

Internal factors

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, such as funding, sources of income and investment opportunities
  • Physical resources, such as your company's location, facilities and equipment
  • Human resources, such as employees, volunteers and target audiences
  • Access to natural resources, trademarks, patents and copyrights
  • Current processes, such as employee programs, department hierarchies and software systems
Mitchell Weiss, business professor at the University of Hartford in Connecticut, recommended fully analyzing your strengths and weaknesses first.

"Companies can't hope to take advantage of or control the external factors until the internals have been objectively assessed," he said.

External factors

External forces influence and affect every company, organization and individual. Whether or not 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, like new products and technology or shifts in audience needs
  • Economic trends, such as local, national and international financial trends
  • Funding, such as donations, legislature and other sources
  • Demographics, such as a target audience's age, race, gender and culture
  • 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.
STRENGTHS
·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
WEAKNESSES
·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.
OPPORTUNITIES
·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
 
THREATS
·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 supplements and alternatives

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.
Cleighton DePetro, founder of Bare Tattoo Removal, noted that a SWOT analysis is just one tool in the strategy toolbox.

"When SWOT is used in conjunction with other analysis models, these frameworks for strategic thinking are well worth your time and should guide your decision-making," DePetro said.
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.

"A SWOT analysis is helpful in broadly addressing questions to develop a business plan, but it doesn't go far enough," said Alan Lobock, co-founder of SkyMall and Convrrt. "The exercise alone won't identify your key value drivers of your business. Planning without first knowing your goals and the metrics by which you will measure your progress toward achieving those goals is inefficient and misguided."

More information

The following websites can help you conduct a thorough SWOT analysis of your own business:
Additional reporting by Katherine Arline and Ryan Goodrich.