A SWOT analysis, due to its simplicity, can be used on many different levels, ranging from a formal strategic analysis to an informal mental exercise used to help with an everyday decision.

SWOT stands for Strengths - Weaknesses - Opportunities - Threats.

It makes a nice little acronym, and easy to remember, but what does it really mean? Well, imagine a grid - four quadrants. On one dimension, you have "pros" and "cons." This is what any normal person weighs when making any decision. But what makes a SWOT analysis at once more complex without being any harder to use, is that second dimension: imagine it reads "internal" and "external."

These four quadrants are really what make up the four aspects of your SWOT analysis: Your strengths and weaknesses are the internal pros and cons of your company/strategy/venture. What do you do well, and in what areas are you weak? What is the appeal of the strategy, or what will you have to sacrifice in order to implement it?
Likewise, your opportunities and threats are the external pros and cons. Contrary to what you do or do not do well, this comprises your potential rewards and risks.
Another way to think of it would be to consider strengths/weaknesses as things that you have within your control, and opportunities/threats as things beyond your control.

The practical application of a SWOT analysis is that, no matter what you are applying it to, it can outline clearly not only whether it is a good idea to continue with the proposed idea, but also what to watch out for when you do implement the idea.

For instance, if you are thinking of buying a house... though this is not a strictly business-related example, it is one that most people can relate to, and translates easily into any other money-related venture.
If you are thinking of buying a house, analyzing your strengths and weaknesses might give you a result like this:
Strengths: Savings account (good for down payment)
Weaknesses: Blemish on credit (may affect interest rate)
Opportunities: Bank-owned home is affordable
Threats: Someone else may make a better offer on the home we want

In the case of your strengths and weakness, the money in your savings account and your credit score are things that belong to you: You may or may not be able to change them now, but you are still responsible for them.
In the case of your opportunities and weaknesses, the prices set by the bank on the house, or the actions of others are completely beyond your control. But knowing these things will help you to decide on a budget range for the home you want to buy, and what you should offer on it to have the best chances of getting it.

The hardest part of a SWOT analysis is making sure that you've covered all of the possible answers to each of the four quadrant's "questions." That is not always possible. Some analyses are simple, and others require much research and thought. But if you can come up with at least a few satisfactory answers for each of the four aspects of your SWOT grid, then you have at least that many tools in your arsenal for success.

Learn more about this author, Rian Winters.
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