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MARCH 20, 2012

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Strengths,
Weaknesses,
Opportunities, Threats:
The SWOT Analysis

When you are making an equity investment

decision, the first place you often turn to is the
numbers: how successful has this company
been financially? How many shares of stock
does it have outstanding? What is the
company spending its money on and how
much cash does it have on hand?

Sometimes that data doesn’t exist,

especially if you want to invest in a private
company or a startup . In those cases,
you can complete a SWOT analysis to
examine the opportunities and challenges that
a company faces. A SWOT analysis can also
supplement what you learn from the numbers.

‘Numbers Give the Illusion of Security’

SWOT stands for strengths, weaknesses,

opportunities and threats, says Ray Baker, a
professor of economics , business and
accounting at Rockford College in Rockford,
Ill. By identifying factors under each of those
four groupings, a person can more clearly
analyze virtually any business problem. “There
is lots of data around, but how do you
combine these pieces of information in such a
way that you can use it to get a group of
people thinking together?” notes Baker. “It’s a
way of setting up thinking about internal and
external forces so you can formulate a clearer
path to an outcome, whether it’s the right one
or not.”

For investors, using a SWOT analysis can give

insight into a company’s worth beyond what
the data shows, says James Early, a former
hedge fund manager who is now an
advisor to the investor newsletter service
run by the Motley Fool, a financial services
company. “The great lie of investing is that
models are precise. Numbers give the illusion
of security,” Early notes. “Having that SWOT
analysis is pretty essential in some cases to
make sure you don’t miss something about a
company. Having some system you go
through, having a process you can standardize
and apply to all companies, is useful to most
investors.

Take the example of Apple. Although

gigabytes of data exist analyzing the tech
giant’s financial performance , a quick
SWOT analysis can give anyone with even a
basic understanding of the computer industry
a sense of what Apple has going for it and
where its weaknesses lie. For example:

Strengths include the well-designed products

that the company puts out, such as the
iPhone, iPad and Macintosh computers. Apple
has loyal customers and the strength of its
products allows it to charge more than its
competitors.

Weaknesses include Apple’s relative softness

in the business market. Most of its products
are bought by everyday consumers and aren’t
widely used by businesses – PCs are more
common computers to find in an office, and
Research In Motion, which makes Blackberry
phones, has long produced preferred tools for
those in the working world.

That market gap is an opportunity for Apple,

too. For example, businesses have been using
iPhones more frequently for their employees
as the device has grown and expanded its
features.

Threats include the growing use of the

Android platform for smartphones from
companies like HTC and Motorola, and the
growing tablet computer market — although
the iPad reigns supreme for now.

For years, a SWOT analysis was the primary

way to analyze how a company was doing
financially, says Paul Escobar, an investment
consultant and founder of Somerset Financial
Partners in Boston. More recently, however,
the federal government has changed the rules
of how much data a company trading on the
stock market must release to the public,
giving rise to more sophisticated analytical
tools.

‘Touch-feely Stuff’ Not Enough

Plus, Escobar adds, a SWOT analysis is a

long, qualitative process, meaning it’s based
on a person’s observations and opinions and
not as much on data and research. “In the
long run, for (people who buy a lot of stocks),
that touchy-feely stuff doesn’t work as an
investment analysis. No one has time to do it,”
he says. “You can argue about whether the
accounting is bad or not, but in the modern
world, that’s what we need.”

Even so, the SWOT analysis does have value

in areas where data isn’t available, Escobar
says, and can be used to determine what
kinds of new companies and industry sectors
are worthy of investment. If an investor wants
to put some money into a start-up energy
company that is environmentally friendly, for
example, a SWOT analysis can help him or her
look at all segments of the emerging
alternative energy industry — including wind,
solar or geothermal — and offer direction on
the prospects for each and on specific
companies. “If you’re trying to say which of
these small companies have an advantage,
you may have nothing more to go on than
what you would see in a SWOT analysis,” he
says.

Conversation Starters
What does the advisor mean when he says,
“numbers give the illusion of security?” Why is
this insight important to remember when
researching companies?

How can a SWOT analysis help build on what

you learn from a company’s numbers?

Have you ever used a SWOT analysis for

research and evaluation? If so, how? Was it
effective?

2 thoughts on “Strengths,
Weaknesses, Opportunities,
Threats: The SWOT Analysis”

Saba S. says:
December 4, 2015 at 3:26 am

What makes Apple so great? There are

thousands of books writing about Apple’s
managerial structure, plenty of people talking
about Apple’s unique vision and methods.
Though, the majority, is still struggling to
understand why exactly Apple revolutionized
the mobile tech market.

Every business in the world knows what they

do, fewer know how they do it and very, I
mean very, few know why they do it. Don’t
mistake the “why” for making a profit. The
“why” stands for the purpose, the reason why
we do something, the reason why our
organization exist.

Log in to Reply

Alvin G. says:
September 14, 2018 at 9:48
pm

I hate to necro this comment, but one

thing that Apple uniquely has that
perhaps no other company has is
their phenomenal usage of marketing
and extremely clever commercials.
On paper, there are tons of phones
that are faster, sleeker, and cheaper
than iPhones, yet nobody chooses to
use those options. One reason is how
deeply the iPhone has actually
permeated American culture as a
whole, hence why despite Apple’s
significant disregard for consumer
demands, nonetheless they seem to
have a cult that buys their product
regardless. In addition, unlike pretty
much any other company, Apple uses
a completely independent OS,
creating a pretty significant mental
barrier to prevent switching to other
phones or providers. On the topic of
the Apple OS, it’s better optimized to
perform quite a variety of tasks.
Overall, Apple seems to have
captured the needs of Consumer
America.

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