If you've ever listened to Warren Buffett talk about investing, you've heard him mention the idea of a company's moat. The moat is a simple way of describing a company's competitive advantage. A strong competitive advantage, or a wide moat, gives a company sustainability, which, as investors, we're highly interested in.
In this article, we review a popular tool for evaluating competitive advantage, called SWOT analysis. SWOT analysis should be done on every company we're thinking of making an investment in.
SWOT stands for:
Strengths
Weaknesses
Opportunities
Threats
Analyzing these four factors will help you make better investment decisions. It's a brainstorming exercise, so take your time. A good SWOT analysis takes effort, but the more you put into SWOT analysis the better you will understand the company. Let's look at each factor in turn.
Strengths
First, we look at the company's strengths. What does the company do well? What makes it better than others? What does the company have, or do, that sets it apart from its competition?
These are important questions, and should include aspects of the company that made you consider it for investment in the first place. Look at branding, image, pricing power, size, market share, financial position (balance sheet strength), etc.
Here are some strengths to look for:
Weaknesses
Now that you've determined how wonderful the company is, it's time to look for the weaknesses. The same questions should be asked when looking for weaknesses. What does the company do poorly, or not so well? What are other companies doing better? What is keeping the company from greater success.
It's important that you don't gloss over this section. SWOT analysis is a brainstorming effort, so don't discount anything that comes to mind. If you perceive a weakness, list it. The weakness you fail to list today could be why your investment turns out poorly next year.
Some weaknesses to look for:
Opportunities
We shift our focus to external factors when we look at opportunities. Here we try to identify areas of business we think the company is looking to enter, or should be looking to enter. We also look for opportunities to gain market share from competitors, or grow the company's market to new customers.
But there are more than just external opportunities. There are opportunities within a company that should be considered. Can the company combine product lines to increase sales? Maybe the company has duplicate costs that can be streamlined. Companies can always find ways to do things better.
Some opportunities to look for:
Threats
Finally, we need to consider threats to the company. Again, threats can be internal as well as external. In fact, I've found that internal threats usually come first, which opens the door to external threats. Therefore, it's important to do a good threat analysis.
Internal threats aren't usually classified as such, which I think is a mistake. Any internal problem is a threat to the company's well-being and should be evaluated alongside the external threats. For example, a company that relies on developing innovative products, such as Microsoft or Intel, faces the threat of losing engineering talent every day. This is an internal threat that could easily pave the way for external threats.
Some possible threats are:
SWOT analysis is a brainstorming activity, and you should learn from it. Focus on the weaknesses and the threats when doing SWOT, because that's what will turn around and bite you after you make your investment. I'm not saying you should look only for the negatives, and ignore the company's potential. But you should analyze the risks with as much, or more, scrutiny then the opportunities. Opportunities don't always show up, but somehow risks always do.
About The Author
Chris Mallon is the editor and publisher of the Undervalued Weekly, a financial analysis newsletter. Chris holds a Master of Science in Finance and is the leading analyst for the Dynamic Investors partnership. He is available at chrismallon@dynamicinvestors.net or the through the website at chrismallon@dynamicinvestors.net.
Succession planning requires the owner of a small or medium-sized... Read More
Writing a business plan is an essential part of the... Read More
The current state of the available technology at the disposal... Read More
Why do so many companies languish and watch as their... Read More
Can you imagine going on a road trip without knowing... Read More
With the help of balanced scorecard strategy map, it is... Read More
If ever there were an industry where we want zero... Read More
"Begin with the end in mind," says Stephen Covey in... Read More
Storytelling and writing a business plan actually go hand in... Read More
If you are in the parking business and own or... Read More
What gets measured gets done.How do you keep your business... Read More
Part 1A few weeks ago I attended a seminar sponsored... Read More
"Did you hear what your competitor is doing?" This question... Read More
1. Attempt Succession Planning Without Other Strategic Plans. Succession plans... Read More
Many movies have been made about the tragic story of... Read More
This will make some people angry as hell, but it's... Read More
1. Largest Selection -One way that you can make your... Read More
Writing a Business Plan these days is tough, venture capitalists... Read More
A recent conversation started with a typical question, "How's business?"... Read More
Is there really anything as a problem? Does chaos or... Read More
Does the competition drive you crazy?Are they relentless about taking... Read More
Succession planning, like any business acumen, is both an art... Read More
I read once that something like 30 percent of all... Read More
Imagine an office without a desk, or lights, a computer,... Read More
In this small article we'll concentrate on farmers associations and... Read More
If you are a manufacturer wanting to use your business... Read More
Although North Americans were the dominant population on the Internet,... Read More
By cranking up others development to meet your business needs,... Read More
Canada's lean leaders need to look beyond the horizon and... Read More
The time when a website was just a simple set... Read More
One Research Scientist at the Hewlett-Packard (HP) Imaging Systems laboratory... Read More
It is always said "If you Fail to Plan, you... Read More
How you finance the expansion of your business is important.... Read More
When looking at Akron carefully one cannot help but notice... Read More
Regroup?is this a new management trend? Not a chance! Regroup... Read More
When in doubt, cut that out! Yeah, yea, doubting Thomas... Read More
Much of what we heard in the mass media about... Read More
Writing a business plan to help you direct and manage... Read More
Making money doesn't make your reputation... your reputation makes you... Read More
Microsoft Business Solutions Great Plains serves mid-size and large clients... Read More
Strategic planning is vital while starting a new business or... Read More
Human beings are rational agents. Rationality endorses one to take... Read More
One of the key challenges for any business is to... Read More
There is a story, about a business owner who wasn't... Read More
Many very successful business owners may never have had a... Read More
A significant advantage of some business ideas is that the... Read More
What do Mark Victor Hansen, Robert Allen, Anthony Robbins, Andrew... Read More
Some analysts credit [Larry] Ellison with anticipating the consolidation in... Read More
Growing your own small business can be one of the... Read More
Business planning is widely acknowledged as one of the keys... Read More
Strategic Planning |