The SWOT analysis is among the most popular business tools for assessing where a business stands and where it may go in the future. Some may think that running a SWOT analysis of a company needs both an internal and external analysis, but that’s sort of the glory of the SWOT — it covers inside and outside the business if you do it well.
TL;DR (Too Long; Didn't Read)
A SWOT analysis is a look at the strengths, weaknesses, opportunities and threats facing a company, and it’s ideally conducted before making major choices or changing directions with the business.
What Is a SWOT Analysis?
In the six decades since it was first employed by the Stanford Research Institute, the SWOT analysis method has become a go-to in the business world. Sometimes, people mention “SLOT” analysis, and it’s basically the same thing except “weaknesses” are replaced with “liabilities”. Either way, both SLOT and SWOT analysis are all about figuring out where a company stands before making decisions.
By analyzing the strengths, weaknesses, opportunities and threats to a plan, a product, a campaign or the business as a whole, the choice-making process should be simplified. Ideally, a SWOT should be a simple and quick exercise to give perspective. It’s not meant to be in-depth or laborious, but there’s nothing stopping you from getting comprehensive in your SWOT work either.
Countless websites, like Creately, Bplans and Mindtools, among others, offer great downloadable templates for clear SWOT workings. Typically, they use color blocks so that each category is distinct on the document, allowing for at-a-glance clarity.
Difference Between Internal and External Analysis
When it comes to SWOT, it is both internal and external in the same exercise.
Strengths and weaknesses are essentially internal factors. They can include everything from people working on the team to assets on hand. They are essentially the experience/labor and resources available to you. Opportunities and threats, meanwhile, are the external considerations in the analysis. These are everything outside the company — uncontrollable elements — that can influence and affect how things play out.
Internal Analysis: Strengths and Weaknesses
When considering what influences inside the company will determine any given outcome, there are several factors that are integral to any analysis conducted. These include:
- Human resources: This phrase is typically used to describe employees, but in this context, it means any person who affects the outcome of any business decision. From customers and target audiences to volunteers and employees, all sorts of outcomes are influenced by human behaviors. A workforce is a strength if it is productive and profitable, but if it is aging or otherwise compromised, it becomes a weakness. Consumer demand is a strength, but inability to meet that demand is a weakness.
- Physical resources: This includes all property and assets, such as computers, vehicles, locations, facilities and any included equipment. When it’s working well, it’s a strength, but if there are repairs or burdensome taxes or other inefficiencies, it becomes a weakness.
- Financial resources: This includes savings, debts, investments and any other relevant capital, liability or revenue. Debts are weaknesses, while government grants are strengths.
- Processes: How the company hierarchy weighs in — perhaps there is an internal power struggle or ineffective leadership, both being weaknesses — can really affect the efficacy of any upcoming plans. The workflow methods, the software being used, employee programs and other methods at work within the company are all things that have great impact on the outcome of any actions or decisions made. What those impacts are dictates whether they are strengths or weaknesses.
External Analysis: Opportunities and Threats
The world outside the business's doors is filled with threats and opportunities, and all of it is external. These include:
- Regulatory factors: Climate change, for instance, is an external factor that has become a $1.5-trillion threat to businesses worldwide but which is also generating trillions in opportunities over the next half decade as well. This is all because of changing policies as a result of environmental scenarios. Regulations crop up for environmental, economic and political reasons, and they can all be threats or opportunities, and sometimes, they're both_._
- Demographics: Aging customers, urban gentrification and people migrating to other states or cities all fall under demographics — how people and their age, class, culture, habits and geography can influence a business. A high school being near a café, for instance, can be an opportunity for 10 months a year, but that missing influx of daily hungry teens can be a threat in the summer months.
- Economic trends: Truly outside any business’s control are the realities of the world economy. No one can predict when the president is going to demand new trade tariffs. No one can foresee the rise and fall of markets or the cratering of a local summer economy because a freak forest fire shuts down the town for a month. These realities are rife with opportunities and threats.
- Market shifts: Emerging technologies and new products, new competitors, market demands — these are all market-related trends that can present opportunities or threats for a company. The only control a business has is how it reacts to market fluctuations or whether it chooses to do nothing. A pizza company with an overtaxed delivery driver may be getting negative reviews (a weakness) because deliveries are made slowly, but new customers and less overhead (an opportunity) could be achieved in changing to a third-party delivery service while driving awareness for itself through those delivery app listings (another opportunity).
- Critical relationships: Suppliers and partners can profoundly influence business. A sandwich store whose go-to baker decides to retire is faced with both an opportunity and a threat. Choose the wrong bread, and clients could be turned away; buy the right bread, and it could attract even more clients — and cost will matter too. Perhaps the old producer couldn’t meet increasing demands, and perhaps there weren't attractive price breaks. This could be an opportunity to get a more flexible producer with a more attractive profit margin.
The Eye of the Beholder
Considering internal and external analysis in strategic management is always a tricky game. It comes down to seeing the big picture well. It’s like understanding a game of dominoes — what's the outcome when pieces topple and to whose benefit?
Analysis in these situations is only as good as the data and the person plugging that data in. Do you have all the relevant information, and do you understand which factors influence which?
People analyzing the same data can reach different conclusions because it ultimately all comes down to interpretations and the gut instinct one has. That gut instinct is the ingredient that can’t be taught. It can only be developed through experience and with a keen understanding of the cause-and-effect dynamics behind market and business realities. The SWOT analysis isn’t a substitute for that gut instinct, but it can be extremely helpful in reducing the risk behind choices.