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Sunday, November 6, 2016

S.W.O.T. analysis

What is a S.W.O.T. analysis?  Why is it so important?  No matter what form of outside financing you are seeking, often you will be asked for your S.W.O.T. Analysis.

Young bankers who are learning to make small business loans are trained to look for a SWOT analysis.  Sometimes they don’t understand what one is, but they know it is important to have one.

So, what is a SWOT analysis and why is it important?  We first must understand what the letters in SWOT stand for.  For the sake of this discussion, we will call each letter a category and the descriptive words under each category a characteristic.

There are no right or wrong characteristics.  You will find some in the academic world who will try to say something is, or is not, a characteristic.  They are just being a bit too strict with the definition of the word.

The first two categories, strengths and weaknesses, are things that are internal to the company.  These are things the company possesses that are within the company and, presumably, within the company’s control.
Strengths: A strength is anything a company can do or possesses that makes it better able to perform its duties.  Some possible characteristics of strength might be: plenty of cash, a low debt load, great work force, patents, new facilities, a large customer base, well-known brand names, etc.

Weakness: Weaknesses are things that the company vulnerable or what the company needs to improve.  Some example characteristics might include: aging facilities, poor management, heavy debt load, products that are maturing and losing marketability, poor market share, lack of employee training, declining workforce, etc.

The last two categories, opportunities and threats, are external to the company and, for the most part, out of the control of the company.

Opportunities: Opportunities are things that will happen or might happen that are outside of the company’s control which will be beneficial to the company. This could be things like the state building a new road that makes getting into the facility easier.  It could be something like the government announcing that it will purchase large quantities of a product similar to one you are currently manufacturing. 
Other examples of opportunities might be a large plant announcing that it will build a new building near your restaurant, a new government policy that reduces regulation of your product, etc.

Threats: Threats are the opposite of opportunities. These are things which take place outside of the control of your company that may be detrimental to it.  Some examples might be the government regulating your product or banks raising the fees your company has to pay to accept credit cards. 

The idea behind conducting a SWOT analysis is to get your company to plan ahead.  If you identify potential problems, your company may find ways to avoid the problems.  If you identify potential possibilities for your company, you may be able to take advantage of these before your competition does.

One example of one thing being both an opportunity and a threat would be the Y2K crisis of 1999.

Many companies were seeing the possibility of Y2K problems to be a threat.  The general public became convinced that at the stroke of midnight between December 31, 1999, and January 1, 2000, all the food was going to disappear off the grocery store shelves.  They thought that electric generators would shut down and the fuel pumps would no longer work.

This created quite a bit of concern for many companies.  What if the power grid went down?  What if the automated systems stopped working? What if the computers could not compute?  This led to many companies stocking up on supplies and printing out everything.

But, the same things that many in general public were seeing as threats were opportunities for some companies. Sales of personal home generators took off.  Sales of survival foods went through the roof.  Many people stockpiled guns and ammunition.

Many people made sure they stockpiled all the non-perishable foods they could afford. Sales of gas cans, propane tanks, fuel oil, etc. went through the roof.

For many of the companies that sold items that people stockpiled, January 2, 2000, was the day they could start a long vacation.  No one needed eggs, bread, milk, bologna, etc., that week.  They had bought all they could the week before.

SWOT is a tool.  If a company tries to identify every characteristic in all four categories and plans accordingly, the company should be able to navigate the business world better than they would have if they had not used this tool.

Any good business plan, marketing plan, or business financing plan will contain a SWOT analysis.

One caveat here is that the SWOT analysis must be based in reality.  I once saw two men who were thinking strongly about opening a barbeque restaurant.  They sat down at a computer to compile a business plan.  The entire plan was based on simple, uninformed guesses.  There was no thought to the creation of the plan.  A SWOT only works if you put some actual thought into it. 
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The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances.
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