by: Chris Mallon
If youíve ever listened to Warren Buffett talk about investing, youíve heard him mention the idea of a companyís moat. The moat is a simple way of describing a companyís competitive advantage. A strong competitive advantage, or a wide moat, gives a company sustainability, which, as investors, weíre 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 weíre thinking of making an investment in.
SWOT stands for:
Analyzing these four factors will help you make better investment decisions. Itís 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. Letís look at each factor in turn.
First, we look at the companyís 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:
Now that youíve determined how wonderful the company is, itís 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.
Itís important that you donít gloss over this section. SWOT analysis is a brainstorming effort, so donít 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:
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 companyís 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:
Finally, we need to consider threats to the company. Again, threats can be internal as well as external. In fact, Iíve found that internal threats usually come first, which opens the door to external threats. Therefore, itís important to do a good threat analysis.
Internal threats arenít usually classified as such, which I think is a mistake. Any internal problem is a threat to the companyís 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 thatís what will turn around and bite you after you make your investment. Iím not saying you should look only for the negatives, and ignore the companyís potential. But you should analyze the risks with as much, or more, scrutiny then the opportunities. Opportunities donít always show up, but somehow risks always do.
Article Source: https://www.bharatbhasha.com
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