Get a solid perspective on that investment you’re considering.
© YinYang—iStock/Getty Images
When embarking on a new business initiative—a merger, joint venture, or new product line, for example—many companies begin with a classic strategic planning tool called SWOT analysis. An acronym for strengths, weaknesses, opportunities, and threats, SWOT is designed to help companies gain a comprehensive understanding of the competitive environment, taking into account all the positives, negatives, and hypotheticals, both internally and externally.
Companies use SWOT to inform a course of action; investors can use it to strategically assess a company’s competitive position. Along with other strategic planning frameworks—such as Porter’s five forces and Blue Ocean Strategy—SWOT can offer investors yet another angle to assess a company’s potential for growth (or decline).
Key Points
- SWOT analysis is one of the oldest and most widely adopted strategic planning tools.
- The SWOT framework provides four distinctive angles to inform your analysis.
- You can apply SWOT to almost any investment, regardless of its scope or size.
Let’s take a look at each of its four components.
Strengths are internal attributes that can positively contribute to a company’s growth. Typically, strengths include various tangible and intangible assets—from workforce, technologies, and capital to skills, operational processes, and novel ideas—that can differentiate a company from its rivals. A strength is something that a company does well or something it has that allows it to outperform its rivals.
- A few examples: A company’s strength(s) can include a strong brand, premium locations, unique focus or expertise, proprietary technologies and processes, and differentiated products and services.
- Why is it important? It’s generally in the best interest of a company to capitalize on its strengths and focus on areas where it has a significant industry advantage.
Weaknesses
Weaknesses are internal attributes that can hinder or hurt a company’s performance, or areas where a company may be lacking in comparison to its competitors.
- A few examples: A weakness could be a weak brand presence, lack of differentiation, inefficient systems, limited capital, or outdated technologies, to name a few.
- Why is it important? A company’s growth relies heavily on identifying and either eliminating or diminishing the impact of its weaknesses. It may decide to strengthen its weak spots, or it may decide to focus instead on what it does well (its strengths). But ignoring internal weaknesses can make a company more vulnerable to external threats like rival companies or shifting industry demands (see below).
Opportunities
Opportunities are external situations, developments, and events that a company can exploit to its advantage.
- A few examples: Factors that may serve as opportunities could include shifts in consumer tastes, demand for products that a company can efficiently produce, new technologies that a company can adopt to improve its output, or a competitor’s weakness.
- Why is it important? By detecting and seizing opportunities, a company can advance its position—achieving growth, expanding its market share, and getting ahead of its competitors.
Threats
Threats are external situations, developments, and events that can potentially cause harm to a company.
- A few examples: Factors that can threaten a company’s performance could include declining demand for its products, new market entrants, a rise in input costs, technological changes, bad press, and pending litigation.
- Why is it important? Failing to identify external threats can make a company vulnerable to negative developments, whether sudden or gradual.
SWOT analysis example: Tesla, Inc.
Suppose you’re interested in investing in electric vehicle (EV) producer Tesla, Inc. (TSLA) because you believe the future of the automotive industry will turn green, with electric motors replacing the internal combustion engine. An industry leader with celebrity CEO Elon Musk at the helm, Tesla is also in the crosshairs of its competitors, and all EV makers are subject to shifting dynamics in the energy market and geopolitical landscape.
Strengths. Tesla’s global brand recognition and market leadership are virtually unparalleled. A company that’s solely dedicated to producing electric vehicles and driving technology, Tesla’s industry dominance is reinforced by its leadership vision, innovation-driven workforce culture, and its unorthodox zero-spend marketing strategy (relying on word of mouth and other less conventional marketing means).
Weaknesses. Despite its market leadership, Tesla has had several highly publicized manufacturing complications resulting in accidents, especially related to its self-driving software. Its high pricing also narrows Tesla’s customer base to a smaller segment of mass demand. Another big issue is that Tesla’s manufacturing process, which seeks to pioneer innovative methods and technologies, is highly complex and vulnerable to error. This has resulted in delayed launches, slow production, and manufacturing issues.
Opportunities. There has been growing global demand for sustainable transportation, which Tesla’s vehicles can fill. On a global scale, the United States makes up the largest portion of Tesla’s sales; second is China. This means that Tesla has plenty of room for global expansion. Its in-house battery production and increasing economies of scale give the company a formidable competitive advantage in manufacturing capacity, as well as quality and cost controls. Tesla leads the global industry in self-driving vehicles—a technology that has yet to meet wide-scale demand and adoption.
Threats. Tesla may have had a first mover advantage in the EV space, but several top automakers—including new entrants—are now entering the fray, narrowing Tesla’s technological moat. This will likely increase competition, not only for customers, but also for rare earth metals, whose scarcity in production and distribution will likely drive up costs. Finally, the political, public, and regulatory environment surrounding sustainable transportation and self-driving vehicles will likely present ongoing challenges in the years ahead.
As an investor, you’re not limited to narrowing the scope of your SWOT analysis to individual companies. You can apply it to industries, sectors, asset classes, economies, and pretty much any investment, regardless of size and category.
The time and effort required to gather and interpret the data will vary according to the breadth of your analysis. But it’s a worthwhile effort. Once you’ve got it all mapped out, SWOT analysis can give you a distinct perspective, generating insights that may be unattainable through other analytical methods.
Specific companies and strategies are mentioned in this article for educational purposes only and not as an endorsement.
This article was most recently revised and updated by Karl MontevirgenThis article was most recently revised and updated by Doug Ashburn
