What is a SWOT analysis and how do I use it?

How many businesses start operations without a plan? Certainly, most businesses will have an idea of what type of product or service to provide, which is obviously important. From there the new business owner will then decide on a price and a distribution method for the new product or service to be provided. Once these decisions have been made the new business is born and the company is moving in a direction. In the end though the direction of the business is not clear and the strategy is non-existent. Although some businesses are able to fumble through life without a plan and earning reasonable revenues, too many businesses fail within the first year, while many will close doors in the second year.

In order to limit your chances of failure in the first or second year or as the business progresses later in life, you should approach business with a plan. Specifically a business plan is an ideal tool to determine the feasibility of a business. One of the primary tools associated with a business is a SWOT analysis. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.

The first part of a SWOT analysis is the determination of "strengths." Strengths are features of your business, product, or service that provides benefit to your organization. Strengths should be approach from the position of what factors provide an advantage over other companies, products or services. What does our company do better than our competitors? When looking at your strengths, you should approach it from two different directions. First, you should look internally at what you feel are the strengths of the organization. Then you should look inwardly at the organization, as if you were a competitor to try to determine how other companies perceive you.

It is often much harder to analyze the second factor, "weaknesses", than it usually is to determine strengths. The first thing to keep in mind when working on weaknesses is to be honest with ones self. Some factors to consider are what could you do to improve your product, service, organization, and industry in general. It will do you no good to come up with a flimsy list of weaknesses that have no real relevance or weight. If you can honestly look into your organization and come up with a hard analysis of your organization you will find that is much more helpful and will be an excellent guide to you in the future.

The third factor "opportunities" actually is outward looking in nature. The idea is to analyze your industry and business environment for potential opportunities that can be developed by your organization. This step is often glossed over in a simple SWOT analysis, but it should really be a major focus of the company. The opportunities portion of the SWOT analysis is where you will find your future high ground once you have conquered your businesses original high ground challenge.

The fourth factor "threats" are another focus where many businesses gloss over. Some business threats are relatively obvious and can clearly be defined. Others are unimaginable and are not realized until it is too late to remedy. Your organization will gain a great deal of benefit from doing a proper analysis of the threats that face your company, industry, and economy.

About a year ago I had the opportunity to sit down with a woman that had opened a self-storage company. She expressed her concerns that the business was not doing as well as she had expected it should have done. She was facing the possibility of failure and in it would lose her life savings. Through our discussion we determined that she did not do a great deal of planning in advance of opening the business. Her original plan was reasonable in that most self-storage businesses do well once certain milestones are surpassed. In her case though there were too many weaknesses and threats to allow the business to be successful. Had she done an honest SWOT analysis in conjunction with a feasibility business plan it would have been determined that the business had little opportunity for success and that she would have been better off investing her funds in a conservative investment portfolio.

In an alternative scenario that I encountered also last year, I found a young organization that had done their due diligence in analyzing the industry and completing a very honest and specific SWOT analysis. The results of that degree of preparation helped them to steer through some very difficult situations and in the end are looking at some very healthy profits in the second year.

Do yourself a favor. Before embarking upon a new venture do your due diligence in preparing or having a third party prepare a SWOT analysis for your business. By the way most comprehensive business plans will have a SWOT analysis built into it. Make sure that this analysis is also comprehensive and that it is appropriate for your business.