Before making a big decision, a business takes stock of where it stands. SWOT analysis is the classic framework for that: Strengths, Weaknesses, Opportunities, and Threats — two factors from inside the business and two from the outside world.
What SWOT Is
A SWOT analysis assesses a business's internal strengths and weaknesses alongside external opportunities and threats. It's a quick, structured way to see the whole picture before setting strategy — what you have to work with and what you're up against.
Strengths and Weaknesses (Internal)
Strengths are the internal things a business does well — a loyal customer base, a strong brand, skilled staff, low costs, a great location. Weaknesses are internal shortcomings — limited resources, a single location, thin margins, a gap in skills. Both are inside the business, which means they're largely within its control.
Opportunities and Threats (External)
Opportunities are favorable outside factors a business could take advantage of — a growing trend, an underserved market, a new technology. Threats are unfavorable outside factors — new competitors, an economic downturn, changing regulations. These come from the environment and connect directly to a PESTEL scan.
Internal vs. External Is the Key Distinction
The most common SWOT mistake is mixing these up. Strengths and weaknesses are internal (about the business itself); opportunities and threats are external (about the world around it). Keeping that straight is what makes a SWOT useful instead of just a list.
Turning a SWOT into Strategy
A SWOT is only valuable if it leads to action: use your strengths to seize opportunities, shore up weaknesses, and prepare for threats. For example, a fitness studio’s SWOT — strong community (strength), single location (weakness), on-demand apps (opportunity and threat) — might point it toward launching an app and adding classes rather than rushing to expand.
Key Takeaways
- SWOT = Strengths, Weaknesses (internal) and Opportunities, Threats (external).
- Strengths/weaknesses are inside the business; opportunities/threats come from the environment.
- Opportunities and threats connect to a PESTEL scan of external forces.
- A SWOT should drive strategy: use strengths on opportunities; guard against weaknesses and threats.
Check Your Understanding: SWOT Analysis
Five practice questions on SWOT Analysis. Tap an answer to see whether you're right and why each choice is right or wrong.
1. Marisol owns Lantern Café, a small coffee shop that roasts its own beans. Which item belongs in the Weaknesses box of her SWOT analysis?
Answer: D. Depending on one person to run the roaster is an internal skill gap, a shortcoming inside the business that Marisol could fix by training staff. That makes it a weakness.
Why the other choices are wrong:
- A. A supplier's price increase comes from outside the café, so it is an external threat. It raises the café's costs, but the café doesn't control the supplier's decision.
- B. A new competitor is an outside factor the café can't control, so it is a threat. Weaknesses are shortcomings inside the business.
- C. Growing demand from remote workers is a favorable outside trend, so it is an opportunity the café could take advantage of.
2. Kenji's metal shop is having trouble hiring because few people in the region are trained as welders. His team is debating where to list "few trained welders in our region" in their SWOT analysis. Which reasoning is best?
Answer: C. The supply of trained welders in the region is an unfavorable condition outside the business, so it is an external threat.
Why the other choices are wrong:
- A. A factor that hurts the business isn't automatically a weakness. This shortage comes from the outside environment, so it belongs with threats, not internal weaknesses.
- B. Hiring is an internal process, but the factor being listed is how many trained welders exist in the region, which the shop doesn't control. That makes it external.
- D. Starting a training program is a possible strategy in response to the shortage. It doesn't change the fact that the shortage itself is an unfavorable outside factor.
3. Coral Cove Swim School's SWOT analysis lists:
• Strength: several instructors are fluent in Spanish
• Weakness: it has only one pool, so evening lanes fill up
• Opportunity: many Spanish-speaking families are moving into the area
• Threat: the city rec center now offers cheaper lessons
Which strategy best uses a strength to seize an opportunity?
Answer: B. This pairs an internal strength (Spanish-speaking instructors) with an external opportunity (new Spanish-speaking families), which is how a SWOT turns strengths into growth.
Why the other choices are wrong:
- A. Renting more pool time shores up the one-pool weakness. That can be a smart move, but it doesn't use a strength to go after the opportunity.
- C. Cutting prices is a response to the rec center threat. It doesn't use any of the school's strengths, and it could also squeeze profits.
- D. This uses the strength, but it aims it at the threat by defending current customers. It doesn't go after the new families, which is the opportunity.
4. While doing a PESTEL scan for his bike repair shop, Tomás learns that the city will add 20 miles of protected bike lanes next year. Where does this finding belong in his SWOT analysis?
Answer: A. PESTEL findings are external, and more bike lanes should mean more riders needing repairs. A favorable factor from outside the business is an opportunity.
Why the other choices are wrong:
- B. More repair work is a likely result, but the bike lanes are a city project, not something inside the shop. Favorable outside factors are opportunities, not strengths.
- C. Weaknesses are internal shortcomings. Being outside the shop's control is what makes a factor external, and since this one helps the shop, it is an opportunity.
- D. Government actions are external, but not every one is unfavorable. Lanes that encourage biking help the shop, so this is an opportunity rather than a threat.
5. Gianna gathered these facts about her restaurant, Pine Street Pizza:
• Average delivery time: Pine Street 48 minutes; local competitors 31 minutes
• Food cost as a percentage of sales: Pine Street 27%; local competitors 33%
• Online review rating: Pine Street 4.6; local competitors 4.1
• Food-delivery app orders across town: up 25% this year
Which entry belongs in Pine Street Pizza's SWOT analysis?
Answer: D. Ratings reflect the restaurant's own food and service, which are internal. A 4.6 versus 4.1 is half a point better than competitors, so this is a strength.
Why the other choices are wrong:
- A. Slow delivery is a problem inside Pine Street's own operations, so it is a weakness. Comparing it with competitors doesn't turn an internal factor into a threat.
- B. Growth in app ordering across town is an outside trend, so it is an opportunity. Strengths are things the business itself does well.
- C. Pine Street's food cost is 27% of sales versus 33% for competitors, so its costs are 6 points lower, not higher. That makes low food cost a strength.
Keep Studying
Related: Porter’s Five Forces, KPIs.
These guides are educational and written for the AP Business with Personal Finance course. They explain concepts in simplified terms for study purposes.