Finance: SWOT Analysis

SWOT Analysis

Written by Chris Mallon

If you’ve ever listened to Warren Buffett talk about investing, you’ve heard him mention repparttar

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 repparttar 112596 more you put into SWOT analysis repparttar 112597 better you will understand repparttar 112598 company. Let’s look at each factor in turn.

Strengths

First, we look at repparttar 112599 company’s strengths. What does repparttar 112600 company do well? What makes it better than others? What does repparttar 112601 company have, or do, that sets it apart from its competition?

These are important questions, and should include aspects of repparttar 112602 company that made you consider it for investment in repparttar 112603 first place. Look at branding, image, pricing power, size, market share, financial position (balance sheet strength), etc.

Here are some strengths to look for: •The size of repparttar 112604 company relative to others in repparttar 112605 industry •Balance Sheet strength •Cash flows •Perception of repparttar 112606 company’s products •Perception of repparttar 112607 company’s brand(s) •What advantages repparttar 112608 company has over its competitors •In general, what does repparttar 112609 company do well?

Weaknesses

Now that you’ve determined how wonderful repparttar 112610 company is, it’s time to look for repparttar 112611 weaknesses. The same questions should be asked when looking for weaknesses. What does repparttar 112612 company do poorly, or not so well? What are other companies doing better? What is keeping repparttar 112613 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: •Deteriorating balance sheet •Poor perception of company’s brand(s) and/or products •Advantages other company’s have? •Lack of management or other employee talent •In general, what does repparttar 112614 company do poorly?

Porter's Five Forces Analysis

Written by Chris Mallon

This article looks at an analysis tool called repparttar

Porter’s Five Forces Analysis. In his book Competitive Strategy, Harvard professor Michael Porter describes five forces affecting repparttar 112595

profitability of companies. These are repparttar 112596

five forces he noted: 1) Intensity of rivalry amongst existing competitors 2) Threat of entry by new competitors 3) Pressure from substitute products 4) Bargaining power of buyers (customers) 5) Bargaining power of suppliers These five forces, taken together, give us insight into a company's competitive position, and its profitability. Rivals Rivals are competitors within an industry. Rivalry in repparttar 112597

industry can be weak, with few competitors that don’t compete very aggressively. Or it can be intense, with many competitors fighting in a cut-throat environment. Factors affecting repparttar 112598

intensity of rivalry are: • Number of firms – more firms will lead to increased competition. • Fixed costs – with high fixed costs as a percentage of total cost, companies must sell more products to cover those costs, increasing market competition. • Product differentiation – Products that are relatively repparttar 112599

same will compete based on price. Brand identification can reduce rivalry. New Entrants One of repparttar 112600

defining characteristics of competitive advantage is repparttar 112601

industry’s barrier to entry. Industries with high barriers to entry are usually too expensive for new firms to enter. Industries with low barriers to entry, are relatively cheap for new firms to enter. The threat of new entrants rises as repparttar 112602

barrier to entry is reduced in a marketplace. As more firms enter a market, you will see rivalry increase, and profitability will fall (theoretically) to repparttar 112603

point where there is no incentive for new firms to enter repparttar 112604

industry. Here are some common barriers to entry: • Patents – patented technology can be a huge barrier preventing other firms from joining repparttar 112605

market. • High cost of entry – repparttar 112606

more it will cost to get started in an industry, repparttar 112607

higher

barrier to entry. • Brand loyalty – when brand loyalty is strong within an industry, it can be difficult and expensive to enter repparttar 112609

market with a new product.

Substitute Products This is probably repparttar 112610 most overlooked, and therefore most damaging, element of strategic decision making. It’s imperative that business owners (us) not only look at what repparttar 112611 company’s direct competitors are doing, but what other types of products people could buy instead. When switching costs (the costs a customer incurs to switch to a new product) are low repparttar 112612 threat of substitutes is high. As is repparttar 112613 case when dealing with new entrants, companies may aggressively price their products to keep people from switching. When repparttar 112614 threat of substitutes is high, profit margins will tend to be low.

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