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Opportunities
We shift our focus to external factors when we look at opportunities. Here we try to identify areas of business we think company is looking to enter, or should be looking to enter. We also look for opportunities to gain market share from competitors, or grow 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 company combine product lines to increase sales? Maybe company has duplicate costs that can be streamlined. Companies can always find ways to do things better.
Some opportunities to look for: •New markets for products •Financial or legal trouble for competitors •New technologies company could adopt •Changes in regulatory / tax burdens •Strategic investments •Internal efficiencies
Threats
Finally, we need to consider threats to company. Again, threats can be internal as well as external. In fact, I’ve found that internal threats usually come first, which opens 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 company’s well-being and should be evaluated alongside external threats. For example, a company that relies on developing innovative products, such as Microsoft or Intel, faces threat of losing engineering talent every day. This is an internal threat that could easily pave way for external threats.
Some possible threats are: •Internal obstacles company is facing. •Financial constraints on company. •Cash flow problems. •The relative position of company’s largest competitors. •Technological advances in industry (if company isn’t keeping pace). •New technologies that threaten to displace company’s products. SWOT analysis is a brainstorming activity, and you should learn from it. Focus on weaknesses and 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 negatives, and ignore company’s potential. But you should analyze risks with as much, or more, scrutiny then opportunities. Opportunities don’t always show up, but somehow risks always do.
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 www.dynamicinvestors.net/index8.html.