One of the advantages of running a small business is the ability to view through all the different units. If you are a sole proprietor running a small business with a few employees, you can accurately know the position of your business at any point. This is because you probably make all the decisions, adjust the company to any external changes and run the financial accounts, among others. However, businesses do not always stay small, as every owner aspires to scale up at some point.
When this happens, you need to bring in more people to handle the work and eventually managers to oversee what these people are doing. Here, the decision-making role is broken down as the managers and employees get the authority to make some calls, as long as they understand the vision of the business. At this point, you become the leader who gives the general direction to be taken and leave the others to implement it at a tactical level. Business leaders do not have the short-term view other employees have as they need to ensure the company is sustainable and survives the ever-changing macro environment. As a result, they need a proper framework to assess the position of the business and make proper decisions from this.
One common framework that has been adopted across the globe is the SWOT analysis. It gives leaders a better view of the business status and informs the next steps required to either avert a pending crisis or improve operations for long-term sustainability.
In this piece, we will break down what SWOT analysis is and highlight why it is vital for any business today;
A Brief History of SWOT Analysis
SWOT analysis was first used in the 1960s by a management consultant named Albert Humprey at the Stanford Research Institute. Before, corporate planning was full of challenges as businesses found it hard to produce a long-term planning framework that was executable and reasonable.
Humphrey and his team proposed SWOT analysis to bring accountability and objectivity into this process, and it became popular since then. He advocated using this framework on different facets of the business such as products, processes, customers, finance, administration, and distribution channels, among others.
Since then, several experts in the business management niche have moved to refine the concept of SWOT analysis depending on the application and context. Thanks to the scholars and experts who wrote papers about SWOT analysis, it has undergone multiple variations, but the founding principles still hold.
Today, SWOT analysis is globally accepted as a standard framework that businesses use for multiple applications. It is not cast in stone and can fit any business process depending on the expected outcome.
Overview of SWOT Analysis
SWOT is an acronym for “Strength, Weaknesses, Opportunities, and Threats”, and these four words sum up what it is about. There is no hidden meaning as it is a mechanism employed by companies to identify any strengths, weaknesses, opportunities, and threats. It is used to establish a business’s competitive position as well and inform any strategic planning decisions. Rather than leaders making decisions based on assumptions, it facilitates a realistic, fact-based, and data-driven process that is often better.
A breakdown of the four pillars of SWOT analysis is;
These are the areas your business is strong in and can give you an advantage over competitors. They are positive internal factors that you mostly have control over and are often the bedrock of your success.
Strengths are integral since they give you a clear perception of how you understand everything else. Comparing it to an individual, you have to understand your abilities and what you are good at before taking any step forward. When facing any situation, always strive to leverage some of these strengths since they can increase your chances of success.
An excellent example of business strength is good customer loyalty and relationship. With such a luxury, you can extend any product line and even charge a premium. Another one is a strong financial resource, where you have a lot of resources that can allow you to take risks and even face loss without affecting your company’s stability. Check out Tesla’s SWOT analysis for more ideas.
These are the direct opposite of strengths. No company is perfect, and as much as you can appreciate and wax lyrical over the strengths, be wary of the weaknesses. These are the realities of a business that put it at a disadvantage compared to others. They are things you do not thrive on and might have held you back for a long time.
Weaknesses can derail anything you try to do to take the business ahead, especially if they are connected to it, and it is imperative to be alive to them. You can either work on them or find a way to circumnavigate them if they threaten to derail progress and you cannot do much about them.
Examples of weaknesses include a culture problem due to unmotivated employees. You might not have the financial resources to compensate employees the way the competition does, leading to a motivation problem that cuts across the organization. Here, it’s hard to cultivate a culture of innovation where employees go over and beyond to do good for the business. On the contrary, they give the bare minimum and do just enough to keep the company afloat. Another weakness can be technological challenges, stemming from a lack of financial resources to keep everything up to date with the industry norms. As a result, all your technological systems remain inferior or problematic, and you cannot do much about it.
Companies cannot stay static and should aspire to exploit new chances to grow and scale up. Opportunities are what a business is looking to take in in the future to help them achieve its long-term goals. They should not be headline-catchy ones that will disrupt the industry as they can be subtle ones that take you a step forward towards your goals or a step closer to the competition. Businesses should be prudent about the opportunities they want to take up as they all have a risk factor to them. This way, it is prudent to do some due diligence when identifying opportunities.
Opportunities are external, and you do not have much control over them. An example includes low competition in the niche you operate in or one you want to venture into. With low competition, you can take strides to increase your customer base since they do not have many options to ponder over. Another example is the possibility of striking a strategic alliance with a big industry player while still retaining the independence of your business. This allows you to tap into their customer base and leverage on some of their strengths.
These are any external factors that can cause damage to your organization, venture, or product. They mainly consist of the activities other companies are doing or how the industry is shaping in the niche you operate in. It can also include a player’s downfall in your value chain, says a shortage of supplies that might hinder you from sustaining the production process.
Threats are negative and external, and you cannot do much to stop them from happening. However, once you identify them, you can tweak what is in your control to avert the storm and be ready for them. Unforeseen threats can be detrimental to any company, a reason why threats are a vital part of any SWOT analysis.
An example of a threat is a new law that affects your products or services. Another common one is the introduction of a new and better product in the market. If you have offered the same product in the industry for many years without improving it considerably, there is a chance that another player will step in with a better one that will catch the eyes of your customers.
What Are The Benefits of SWOT Analysis?
SWOT analysis is a flexible framework applicable to any industry, company, or business unit. It all goes down to the outcomes business leaders want to get out of it, as this determines where and how it is applied. If you are running a unique business project and want to analyze it to check its feasibility, SWOT analysis is a great framework to use. It is not limited to large organizations or strategic leaders, as people working at the tactical level can equally employ it to get the visibility required to make decisions. This flexibility makes it popular since it does not limit you to anything, and there is room to tweak it to your needs.
Good for Multi-Level Analysis
Leaders can use SWOT analysis on different levels of a business to unearth any high and low-level issues. Business leaders can apply it on a strategic level and assess the position of the business before trickling the results down to the managers and mid-level employees. They can conduct independent analyses in their respective business units to find low-level items that feed up to the high-level ones. This can be taken a step further to the lowest level of the business to good effect. The net result of this is that it gives one a multi-level view of the business, which is ideal when making any decisions.
SWOT analysis does not require any special skills to run. It only needs an understanding of the business operations and the context this study will be carried under. Remember, SWOT analysis is applied depending on the context, and as long as the people carrying it out are aware of the realities around the business, they should be good to go ahead with it. However, a proper analysis might require a few experts such as data analysts and business intelligence experts, but it all depends on the needs and objectives of the study.
SWOT analysis does not require a special set of tools or training as the ideas to be uncovered can be done through a brainstorming session of the people involved. Rather than hiring an external consultant to do it, a company can task a specific group of people to conduct the analysis, which might not be very far from the job they do daily. There are many resources on the web that small companies can leverage to understand how best to do the study in their context.
Allows Companies to be Proactive
Most businesses relish over their strengths and forget about their weaknesses. However, this is not the right way to lead, as threats and faults can quickly bring down good things that have been built for many years. A SWOT analysis helps companies understand the good, which might be obvious, and uncover the negatives, both internally and externally, that leaders should be wary of. This way, companies can play offense while still holding fort defensively to try and attain the balance needed to steer the business forward.
Useful for Generating Business Insights
Businesses often find themselves in perpetual motion, especially when things seem to be moving alright. However, challenges can creep in, and without the proper reflection, it is easy to pass them up and continue in cruise control until things become worse and you can’t move forward anymore. It is prudent to conduct sessions where all the responsible people can reflect on the status of the business and make decisions based on the insights rather than working on cruise control.
SWOT analysis is a great framework to gather critical business insight, as it uncovers things you did not know about your current situation. If the process involves data analytics, it is better since all the insights are factual and not assumptions. In addition, SWOT analysis defines strengths as weaknesses, so they are clear, and the leadership understands what has to be prioritized. Threats are also identified, and the business can keep a close eye on how they are moving, waiting to take action when the right time comes.
In a nutshell, SWOT analysis is a great tool that should not only be applied when taking a new project or changing niches. It serves as a great health-check tool where business leaders can pause and assess how the business is doing regarding the internal and external factors before moving on or changing paths. Awareness is the first step to any business decision, and without this, most of the things you do will be assumptions that may not bear you any fruits.
Limitations of SWOT Analysis.
No Progressive Action Points
SWOT analysis uncovers the strengths, weaknesses, opportunities, and threats but does not recommend what to be done with this information. This, in a way, beats the purpose of the tool, as some businesses find it hard to chart a way forward once they gather findings from the analysis. It is only a single step of what could be a hundred-step journey to get to the solution. This way, some businesses opt for other analysis frameworks with recommendations or clear directions on the next steps once the findings are gathered, especially if they are stuck on what to do.
It can be Subjective
The SWOT analysis details are known globally, but they can be subjective to an extent. In most cases, the analysis is done by internal business teams who rely on their data to identify the different aspects of the study. Here, the results might reflect the bias and experience of the individual creating it rather than the reality of the business environment. The effectiveness of the study is always in jeopardy since it is a function of the data put into it.
SWOT analysis tries to group internal and external factors into four categories, which is a bit too simplistic. The business world is full of hybrid factors that can be a strength and weakness depending on how you treat them. As a result, it becomes hard to accurately classify these factors well, which can misguide the findings’ application. The one-dimension nature of the SWOT analysis limits its application since some attributes are considerably connected and can serve as just about anything on the model depending on how you choose to look at it.
Too Many Opinions
One dilemma of conducting a SWOT analysis is identifying who to go with. You cannot enlist every employee to help with the study as you will get a vast pool of diverse opinions that will make it hard to arrive at a meaningful conclusion. Even if you involve a few leaders and managers, you will get mixed opinions since they all face different challenges. All these opinions are valid since they represent the whole company, but it is hard to compress them into a simple SWOT framework. As a result, some will be left out, and the results won’t reflect the accurate picture on the ground.
How To Conduct a SWOT Analysis?
The process of conducting a SWOT analysis is straightforward. It can be done through the following steps;
Understand the Objectives
Never make the mistake of conducting a SWOT analysis without linking it to specific business objectives. The main question you should be asking here is what do you expect to use the results for? Do you want to conduct a regular business health check? Are you considering taking up a new project and want to assess your position first? This will help direct the way the SWOT will be conducted, especially in the later stages, where the results have to inform your desired objectives.
You might not want to engage everyone in the business and pick those that will be helpful. Leaders want to get a wide range of opinions, but some companies have thousands of employees, and gathering all their thoughts is challenging. You will have to do some work to prioritize who will be involved in the activity, depending on your objectives. The group should be a good representation of the entire population.
Get a Facilitator
You will need to pick an individual to lead the exercise. Typically, this is a leader in the organization, but they might have some bias at times, so it is best to get a third party. The leaders should also give their opinion like the rest of the employees. If the exercise is done through an interview format, you want to get someone the employees will be happy to give an honest opinion. You can hire an expert in doing this kind of job to compile the ideas and report the findings.
Brainstorm and Collect Ideas
Find a way to engage the team members participating in this activity to brainstorm and collect their ideas on the strengths, weaknesses, opportunities, and threats to the business. Before, this was done in a meeting where the facilitator would interview the participants, but with the increased uptake of collaboration tools, you can pursue other methods. The facilitator does not have to ask the questions blatantly, as they can tweak them and find an intelligent way to get the participants’ responses. You can mail them surveys to record their responses, gather the data, or even make a temporary online form that they can fill. Regardless of the methodology you pick, find an appropriate one that will get the responses you want from the participants.
Start the data cleanup process by removing any duplicates. The idea here is to have a set of unique insights rather than a large set of opinions that are not any different. You need to make the insights unique and combine any points that speak about the same thing.
Clarify and Identify
Once you have unique points, get to the clarification phase, where you answer all the team’s questions. Some might have queries about the strengths, weaknesses, threats, and opportunities that will help them dive deeper into their insights. This is more of a two-way session since some of the ideas presented by the team might not be clear. Here, the facilitator can also engage the specific people who gave those points to expound and clarify them. In a nutshell, this session should put everyone on the same page regarding the exercises and contextualize everything so that the participants understand why they are doing what they have been asked to do. This step will also weed out some of the opinions that might not suit the context of the exercise to allow the team to focus on a manageable number of subjects without being overwhelmed.
Compile and Present
The facilitating team should compile the insights gathered and present them back to the relevant leadership team. It is good to connect the thoughts and insights to the research objectives so that it makes sense to them without much thought. Depending on the receiving team, you might have to schedule a session to take them through the insights or send it directly. It is good to give suggestions and recommendations on the next steps, stemming from the insights gathered, rather than just presenting them and stopping there. From here, the team will decide on what next, albeit from an informed position.
SWOT Analysis Best Practices
It is evident that SWOT analysis has some shortcomings, and the best practices listed here will help avert them and improve the outcome of the whole exercise. They include;
SWOT analysis is a general exercise, and it has no specified way of prioritizing anything. This forces the people running the exercise to do the prioritization, which can beat the whole purpose of doing it in the first place. Leaders might want to get prioritized actionable insights from the outcomes, and one step to getting that is prioritizing the essential elements of the SWOT analysis. This helps everyone understand the most significant issue that should be addressed first, looking at how many businesses are strapped on resources and might gradually solve issues.
Be Wary of the Competition
Regardless of the issue that prompted the leadership team to conduct a SWOT analysis, they should always be alive to the competitive advantage in the market. Be realistic on how you can match up, but do not throw out the possibility of disruption, which might change things competitively in your niche. Competition is always a critical factor in SWOT analysis and can be a huge advantage or disadvantage in the steps stemming from the insights gathered.
Find the Right Information
The steps for conducting SWOT analysis have been listed, but they might not be that simplistic. We live in a data-heavy world, and most of the insights should be backed up by data for credibility purposes. No business wants to make major decisions based on feelings and subjective statements. Gathering data to back up insights can be daunting, especially if the people involved have other jobs to handle. Understand where to get the correct information to feed the four elements of a SWOT analysis. For internal strengths and weaknesses, check with the core departments such as human resources, R&D processes, and value chain-related activities. External information can be obtained by assessing the competition by examining how the market is shaping out and conducting a separate PESTEL analysis.
Get the Buy-In from the Start
Always communicate the intent of the study from the word go. Keep the stakeholders in the loop on any matters regarding the study to help them understand and commit to supporting the bigger cause. This way, they will do some research and feed more accurate responses to your questions, which is vital to the success of the entire exercise.
Frequently Asked Questions
Question: What is an example of opportunities in SWOT analysis?
Answer: These are external factors that can give a business a competitive advantage. For instance, if a country cuts taxes in a line you deal in, it can allow you to increase market share and ramp up your production process.
Question: What is SWOT analysis for individuals?
Answer: The same concepts hold as everyone has factors that fall into the four elements of the SWOT analysis. Strengths include skills, experience, mindset, and financial resources. Weaknesses include bad habits such as overspending, procrastination, lack of motivation, or limited financial resources. Opportunities include investment options you can take up and threats, and changes in laws that affect your skills, jobs, or investments. Once the study’s objectives and context are established, a SWOT analysis can be done on just about any individual.
Question: What are the common mistakes when conducting a SWOT analysis?
Answer: One mistake is adding long lists of ideas in the four elements. This is often done when the objectives are not clear and the scope is not defined clearly. Good practice dictates that each element should have between 3 and 5 points. Other mistakes include generalizing factors, overestimating strengths, ignoring PEST analysis, and brushing over weaknesses.
SWOT analysis is an impressive tool that has worked for many businesses over the years. It gives you a different perspective of where your business stands and how the factors around it affect your day-to-day operations. However, it is not a perfect framework as it has its fair share of shortcomings that you should be worried about. Think of it as a diagnosis step, which only uncovers the issues you might have been blindsided on. What matters is the steps you take after discovering these issues, as they will determine the direction your business will head to. Today, you can enlist an experienced consultant who will advise the best way to conduct this study and get value from it.