# SWOT: What Is It, How It Works, and How to Perform an Analysis

These frameworks are essential to fundamentally analyzing companies

> **Definition**
>
> A SWOT analysis is a study conducted by a company to identify its strengths, weaknesses, opportunities, and threats.

## What Is SWOT?

A SWOT analysis is a realistic, fact-based, data-driven review of an organization. It helps define a company's competitive position, assesses internal and external issues, and evaluates its current and future potential.

### Key Takeaways

*   A SWOT analysis is a strategic planning technique that a [business](https://www.investopedia.com/the-best-high-yield-business-savings-accounts-8780948) can use to examine its standing in four key areas.
*   It evaluates information from all sources that may have uncontrollable impacts on a company's decisions.
*   A SWOT analysis works when diverse groups within an organization provide realistic data points rather than prescribed messaging.

![SWOT Analysis](https://www.investopedia.com/thmb/ErOpYCP-uZwFuuE78PTNOhmjrTY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/SWOTAnalysis_final-d57d99fb6e1a45bf81e84763736d87f0.png)

*While SWOT can identify opportunities and challenges, it's best used with other planning techniques. — Investopedia / Xiaojie Liu*

## How SWOT Works

A SWOT analysis is a technique for assessing the performance, competition, risk, and potential of a business. It can also be applied to part of a business, such as a product line or division; an industry; or other entity.

Using internal and external data, the technique can guide businesses toward strategies more likely to succeed and away from those that have been (or are more likely to be) less successful. Independent SWOT analysts, investors, or competitors can also guide them on whether a company, product line, or industry might be strong or weak and why.  

> **Important**
>
> The SWOT analysis was first used to analyze businesses. Now, it's often used by governments, nonprofits, and individuals, including investors and entrepreneurs. There are seemingly limitless applications to the SWOT analysis.

## Components of a SWOT Analysis

![SWOT quadrants displayed in a circle with labels showing what each quadrant stands for](https://www.investopedia.com/thmb/JGU5lTmWbHmeaPtK9h1nXzf7h50=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/SWOTQuadrants-v1-9f77c64af60a445aadd94a65c49fec4b.png)

*— Investopedia / Julie Bang*

Every SWOT analysis includes four categories. Though the elements and discoveries within these categories will vary from company to company, a SWOT analysis isn't complete without each of the following elements:

*   **Strengths**: Strengths describe what an organization excels at and what separates it from the competition: a strong brand, loyal customer base, a strong [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp), unique technology, and so on. For example, a hedge fund may have developed a proprietary trading strategy that returns market-beating results. It must then decide how to use those results to attract new investors.
*   **Weaknesses**: Weaknesses stop an organization from performing at its optimum level. These are areas where the business needs to improve to remain competitive: a weak brand, higher-than-average turnover, high levels of debt, an inadequate supply chain, or lack of capital.
*   **Opportunities**: Opportunities are favorable external factors that could give an organization a competitive advantage. For example, if a country cuts tariffs, a car manufacturer can export its cars into a new market, increasing sales and market share.
*   **Threats**: Threats refer to factors that can potentially harm an organization. For example, a drought is a threat to a wheat-producing company, as it may destroy or reduce the crop yield. Other common threats include things like rising costs for materials, increasing competition, tight labor supply, and so on.

## SWOT Table

Analysts typically present a SWOT analysis as a square segmented into four quadrants, each dedicated to an element of SWOT. This visual arrangement provides a quick overview of the company’s position. Although all the points under a particular heading may not be of equal importance, they should all represent key insights into the balance of opportunities and threats, advantages and disadvantages, and so forth.

The SWOT table is often laid out with the internal factors on the top row and the external factors on the bottom row. Additionally, the items on the left side of the table are usually more positive/favorable aspects, while the items on the right are more concerning/negative elements.

## How to Do a SWOT Analysis

A SWOT analysis can generally be broken into the following steps:

### Step 1: Determine Your Objective

A SWOT analysis can be broad, though more value will likely be generated if the analysis is pointed directly at an objective. For example, the objective of a SWOT analysis may be focused only on whether or not to perform a new product [rollout](https://www.investopedia.com/terms/r/rollout.asp).

With an objective in mind, a company will have guidance on what it hopes to achieve at the end of the process. In this example, the SWOT analysis should help determine whether or not the product should be introduced.  

### Step 2: Gather Resources

Every SWOT analysis varies, and a company may need different data sets to support pulling together different SWOT analysis tables. A company should begin by understanding what information it has access to, what data limitations it faces, and how reliable its external data sources are.

A company must also have the right combination of personnel involved in the analysis. Some staff may be more connected with external forces, while others within the [manufacturing](https://www.investopedia.com/terms/m/manufacturing.asp) or sales departments may have a better grasp of what's going on internally. Having a broad set of perspectives is also more likely to yield diverse, value-adding contributions.  

### Step 3: Compile Ideas

The group of people assigned to perform the analysis should begin listing ideas within each category. Examples of questions to ask or consider for each group are in the table below.

Internal factors serve as a great source of information for the strengths and weaknesses categories of the SWOT analysis. Examples include financial and [human resources](https://www.investopedia.com/terms/h/humancapital.asp), tangible and intangible (brand name) assets, and operational efficiencies.

Potential questions to list internal factors are:

*   (Strength) What are we doing well?
*   (Strength) What's our strongest asset?
*   (Weakness) What are our detractors?
*   (Weakness) What are our lowest-performing product lines?

External factors are equally important to a company's success as internal factors. Influences like [monetary policies](https://www.investopedia.com/terms/m/monetarypolicy.asp), market changes, and access to suppliers are categories to pull from to create a list of opportunities and weaknesses.

Potential questions to list external factors are:

*   (Opportunity) What trends are evident in the marketplace?
*   (Opportunity) What demographics aren't we targeting?
*   (Threat) How many competitors exist, and what's their market share?
*   (Threat) Are there new regulations that potentially could harm our operations or products?

Companies may consider performing this step as a white boarding or sticky note session. The idea is there's no right or wrong answer; all participants should be encouraged to share whatever thoughts they have. These ideas can later be discarded; in the meantime, the goal should be to come up with as many items as possible to invoke creativity and inspiration in others.  

### Step 4: Refine Findings

Next, clean up the ideas. By refining the thoughts that everyone had, a company can focus on only the best ideas or the largest risks to the company. This stage may require substantial debate among analysis participants, including bringing in [upper management](https://www.investopedia.com/terms/u/upper-management.asp) to help rank priorities.

### Step 5: Develop the Strategy

Finally, convert the SWOT analysis into a strategic plan. Members of the analysis team take the bulleted list of items within each category and create a synthesized plan that guides the original objective.

For example, the company debating whether to release a new product may have identified that it's the market leader for its existing product, and there's an opportunity to expand to new markets. However, increased material costs, strained distribution lines, the need for additional staff, and unpredictable product demand may outweigh the strengths and opportunities of doing so. As such, the analysis team develops a plan to revisit the decision in six months, in hopes that costs decline and market demand becomes more transparent.  

## Common Mistakes When Preparing a SWOT Analysis

When preparing a SWOT analysis, several common mistakes can undermine its effectiveness. Let's take a look at some ways your SWOT analysis may go awry.

One easy error to make is failing to be objective and honest in the assessment. Companies tend to overemphasize their strengths while downplaying weaknesses, resulting in an overly optimistic and unrealistic analysis. This bias can lead to missed opportunities for improvement and leave the organization vulnerable to unforeseen threats.

Another significant mistake is analyzing in isolation, without input from diverse key stakeholders. You should try to get input from employees at various levels, customers, suppliers, and industry experts. Each may have a unique view of your company, and each may come up with different items to be listed in each SWOT quadrant based on how they specifically interact with the company.

> **Tip**
>
> A SWOT analysis can identify challenges affecting your business and opportunities that can enhance it. However, keep in mind that it's just one of many strategic planning techniques you can use.

Then there's the common pitfall of neglecting to prioritize or weigh the factors identified in the SWOT analysis. Not all strengths, weaknesses, opportunities, and threats are equally important or impactful. Failing to distinguish between major and minor factors can lead to misallocation of resources and misguided strategic decisions. It can be easy for the important items to be buried if too many non-material items are identified.

Another frequent error is treating the SWOT analysis as a one-time exercise. You should be prepared to do a SWOT analysis periodically, The business environment is constantly changing, and a SWOT analysis should be regularly updated to remain relevant. The analysis itself is also just the beginning; its true value lies in using the findings to develop and implement strategic actions. You can then check future SWOT analyses to make sure the company is addressing the major points.

## Benefits of a SWOT Analysis

A SWOT analysis won't solve every major question. However, there are benefits to a SWOT analysis that make strategic decision-making easier.

*   **Complex problems are more manageable**: There may be an overwhelming amount of data to analyze and relevant points to consider when making a complex decision. In general, a SWOT analysis that has been prepared by paring down all ideas and ranking bullets by importance will aggregate a large, potentially overwhelming problem into a more digestible report.
*   **It requires external considerations**: A company may be tempted to only consider internal factors when making decisions. However, there are often items out of the company's control that may influence the outcome of a business decision. A SWOT analysis covers both the internal factors a company can manage and the external factors that may be more difficult to control.
*   **It can be applied to almost every business question**: The analysis can relate to an organization, a team, or an individual. It can also analyze a full [product line](https://www.investopedia.com/terms/p/product-line.asp), changes to brands, geographical expansion, or an acquisition.
*   **It leverages different data sources**: A company will likely use internal information for strengths and weaknesses. The company will also need to gather external information relating to broad markets, competitors, and [macroeconomic](https://www.investopedia.com/terms/m/macroeconomics.asp) forces for opportunities and threats. Rather than relying on a single, potentially biased source, a good SWOT analysis compiles various angles.
*   **An analysis may not be overly costly to prepare**: Some SWOT reports don't need to be overly technical; therefore, many different staff members can contribute without training or external consulting.

## Example of a SWOT Analysis

Let's perform a SWOT analysis by analyzing the strengths, weaknesses, opportunities, and threats of Tesla ([TSLA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA)).

*   **Strengths**: Tesla has a strong position in the electric vehicle (EV) market because of its strong brand recognition as an industry pioneer. The company's advanced battery technology allows for superior range in its vehicles. Tesla's extensive Supercharger network also provides a significant advantage in terms of charging [infrastructure](https://www.investopedia.com/terms/i/infrastructure.asp).
*   **Weaknesses**: Tesla has struggled with production capacity limitations, often failing to meet demand and delivery targets. Quality control issues are also a recurring problem from time to time. Its vehicles are generally priced higher than those of competitors, which may limit market penetration in more price-sensitive regions.
*   **Opportunities**: Tesla stands to benefit from the growing global demand for EVs. The company has opportunities to expand beyond automotive into related fields like energy storage and solar power, leveraging its battery expertise. The development of autonomous driving technology also presents another significant growth avenue, as Tesla has already begun implementing self-driving cars. The company also has the potential to tap into large, [emerging markets](https://www.investopedia.com/news/emerging-markets-catch-investor-interest-ubs/) where EV adoption could accelerate (where it hasn't already).
*   **Threats**: The competitive landscape for Tesla is intensifying as traditional automakers and new entrants invest heavily in EV technology. This increased competition could erode Tesla's market share and profit margins. External factors like economic downturns could impact sales of Tesla's primarily luxury-oriented vehicles. The company also faces risks related to [supply chain](https://www.investopedia.com/terms/s/supplychain.asp) disruptions, particularly for critical materials used in battery production, where it may already have manufacturing constraints.

## What Are the 4 Steps of a SWOT Analysis?

The four parts of a SWOT analysis are strengths, weaknesses, opportunities, and threats. These four aspects can be broken into two analytical steps. First, a company assesses its internal capabilities and determines its strengths and weaknesses. Then, a company looks outward and evaluates external factors that may create opportunities or threaten existing operations.

## How Do You Write a Good SWOT Analysis?

Creating a SWOT analysis involves identifying and analyzing the strengths, weaknesses, opportunities, and threats of a company. It's recommended to first create a list of questions to answer for each element. The questions serve as a guide for completing the SWOT analysis and creating a balanced list. The SWOT framework can be constructed in list format, as unstructured text, or, most commonly, as a four-cell table, with quadrants dedicated to each element. Strengths and weaknesses are usually listed first, followed by opportunities and threats.

## Why Is a SWOT Analysis Used?

A SWOT analysis is used to strategically identify areas of improvement or competitive advantages for a company. In addition to analyzing things that a company does well, a SWOT analysis also takes a look at the more detrimental, negative elements of a business. Using this information, a company can make smarter decisions to preserve what it does well, capitalize on its opportunities, mitigate risk, and plan for events that may adversely affect the company in the future.

## What Are the Limitations of a SWOT Analysis?

While the SWOT analysis is a powerful tool, it does have some limitations. It can sometimes oversimplify complex situations and is susceptible to the subjectivity and bias of participants. The analysis also doesn't provide specific guidance on how to address identified issues and can lead to analysis paralysis if not followed by concrete action.

## The Bottom Line

A SWOT analysis is a great way to guide business strategy meetings. A company can use a SWOT for overall business strategy sessions or a specific segment like marketing, production, or sales. This way, you can see how the overall strategy developed from the SWOT analysis will filter down to the segments below before committing to it. You can also work in reverse with a segment-specific SWOT analysis that feeds into an overall SWOT analysis.

Although a useful planning tool, SWOT has limitations. It's one of several business planning techniques to consider and shouldn't be used alone. Additionally, each point listed within its categories aren't prioritized the same, as SWOT doesn't account for the differences in weight. Therefore, a deeper analysis will typically be required.

> **Article Sources**
>
> 1.  Pepperdine Graziadio Business School. "[SWOT Analysis Best Practices: Tips for Success](https://bschool.pepperdine.edu/personal-growth/article/best-practices-for-successful-swot-analysis.htm)."
>     
> 2.  Tesla. "[Supercharger](https://www.tesla.com/supercharger)."
>     
> 3.  TST Technology. "[Why Elon Musk Had to Push Back Tesla Delivery Deadline 7 Times](https://tsttechnology.io/blog/tesla-delivery-delays)."
>     
> 4.  Tesla. "[Autopilot and Full Self-Driving Capability](https://www.tesla.com/support/autopilot)."