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Business

How to Use SWOT Analysis to Make Business Decisions

Written by MasterClass

Last updated: Mar 31, 2020 • 3 min read

As entrepreneurs embark on strategic planning initiatives to set business strategy and define decision-making protocols, they may need space for a sober analysis of strengths, weaknesses, opportunities, and threats. This popular type of business analysis is known as a SWOT analysis.

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What Is a SWOT Analysis?

A SWOT analysis is a four-point analysis that businesses use to evaluate internal and external positives and negatives. SWOT stands for "strengths, weaknesses, opportunities, threats." The first two components of a SWOT analysis—strengths and weaknesses—refer to internal factors within an organization. The latter two components of a SWOT analysis—opportunities and threats—represent external factors that might affect the organization.

  1. Strength. Strengths could consist of assets like a strong corporate structure, a robust human resources department, or owning the real estate at company headquarters.
  2. Weakness. Internal weaknesses could be things like low employee morale, insufficient cash flow, or an undefined business plan.
  3. Opportunity. External opportunities could be low prices on raw materials, dominance of market share, and new technology developments that will help future manufacturing.
  4. Threats. Threats from the external environment could be negative factors like an unreliable supply chain, a start-up looking to undercut the company's price point, or an intellectual property lawsuit.

What Is the Purpose of a SWOT Analysis?

Company leaders typically perform a SWOT analysis before they pursue new business opportunities. Awareness of a company’s strengths, weaknesses, threats, and opportunities helps the company's team members craft an action plan that doesn't expose the company to unpleasant surprises down the road. Consider all four SWOT metrics during the following types of scenarios, among others:

  • The planning process for a new product launch.
  • The expansion or contraction of a product line.
  • The addition of new team members.
  • Expansion into new markets.
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4 Tips for Doing a SWOT Analysis

Here are some tips for analyzing a company’s strengths, weaknesses, opportunities, and threats:

  1. Create a SWOT matrix. A SWOT matrix is a document that helps you visually organize your SWOT analysis. Divide the document into four boxes—strengths in the top left, weaknesses in the top right, opportunities in the bottom left, and threats in the bottom right. This 2x2 matrix allows you to group your positive factors on the left and negative factors on the right, with internal factors on the top, and external factors on the bottom.
  2. Evaluate with honesty. If you want to use SWOT analysis data to maximum effect, it pays to be utterly candid about your company's current situation. Be candid in your evaluation of your company’s weaknesses and threats. If you don’t address them now, they’ll likely become more severe with time.
  3. Work with team members from across the company. To ensure a holistic view made of different perspectives, invite representatives from various parts of the company to contribute to the SWOT analysis. Start your process by having team members create SWOT matrices on their own, then invite them to discuss their results in a group brainstorm. This can yield unique insights, and it will allow you, as the team leader or business owner, to take advantage of those insights.
  4. Use the results of your SWOT analysis. To fully take advantage of a SWOT analysis, you must actually factor its results into your decision-making process. A thorough SWOT analysis might reveal an organizational strength or competitive advantage that you wouldn't have otherwise considered. If so, you may find your company is able to take advantage of opportunities you'd never thought possible. Commit to the SWOT process to net the full benefit it can provide.

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