SWOT Analysis - Explained
What is a SWOT Analysis?
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What Strategy to Pursue?
Choosing a competitive strategy is not as simple as setting a course and following it. Rather, you have to take into account all of the internal and external conditions of your business and the industry. Perhaps a market exists for a differentiated, low-volume product, but not for a low-cost, high-volume product.
Likewise, you may be incapable of producing a low-cost product that compares with industry competitors. In any event, it is important to choose a single strategy that matches both with market opportunity and business capability.
Below we introduce and explain the most widely accepted methods of internal and external business and industry evaluation.
Back to: STRATEGY & PLANNING
Back to: Entrepreneurship
What is a SWOT Analysis?
The most widely known and accepted method of strategically evaluating a business is known as the SWOT analysis (developed in 1960 by Albert Humphrey). SWOT is an acronym for the components of the analysis:
The SWOT analysis allows you to understand each of these components, as they exist internally (i.e., within your business). Further, you can use this understanding to adopt a business strategy that allows you to compete effectively within the market.
- Note: The SWOT Analysis looks primarily to internal aspects of the business. Following the SWOT analysis, we discuss the TOWS analysis. TOWS is a variation of SWOT that take a more environmental or external look at factors affecting the business.
What are Strengths?
In this portion, you are trying to identify the core competencies of the business or the internal team. Understanding these competencies allows the entrepreneur to assess the advantages that he or she can leverage in the market. That is, how can you use your core competencies to offer a product or service that customers value.
Going back to Porters Generic Strategies, core competency is the basis for creating a product or service that is differentiated from others in the market. (Note: Without a differentiated product, firms must compete on price.) The business must leverage its competency to produce or offer the produce or service in a manner that offers a unique value proposition for the customer.
- What are the key strengths of the business or, collectively, the members?
- Note: Sometimes it is difficult to determine what are your business strengths. You may start by looking at the main attributes that characterize your business.
- Examples: Speed, Efficiency, Access to Resources, Connections, Funding, Brand/Goodwill, etc.
- Do any of those strengths provide an advantage in your core business?
- How do these strengths translate into a unique aspect of your business that customers value?
- Are any of these strengths related to the core competency of the business (i.e., the one thing that the business must do well in order to be successful in the market or industry)?
- Note: This forces you to examine whether your strengths are adequately employed to benefit your business.
- Are your key strengths easy to imitate or is it unique to your business?
- Note: A strength that is unique to your business gives you a competitive advantage. If it is difficult to imitate, then it means you stand in a favorable position to maintain your competitive advantage going forward.
- Can your strengths be leveraged to expand the business?
- Note: You have likely heard the expression, in business, if youre not growing your dying.
Further, this text has reiterated the importance of growth to a startup venture. Your strengths may provide you an advantage in your core business processes and within the current market. Eventually, however, those strengths will have to move you forward into new or larger markets in order to grow.
Try to look at the strength analysis from the perspective of an internal member and an external customer or competitor. This may require assistance from an outsider who has knowledge of the market, but is less entrenched in your business.
In this section, you are trying to identify aspects of the business or team that need improvement. This will help you understand the aspects of the business that do not create or detract from the creation of value. The purpose of understanding your weaknesses is two-fold:
- To help you focus on the attributes of the business that require improvement, and
- To allow you to employ a strategy that avoids these deficiencies.
Again, it is important to view your weaknesses both internally and from the perspective of your customers and competitors. Examples of areas of weakness include:
- General Business Knowledge or Experience
- Operational Knowledge or Experience
- Technological Knowledge or Resources
- Financial Resources and Availability
- Research and Development Capabilities
- Internal relations (conflicts) and governance issues
- Marketing Deficiency (Brand Image and Notoriety)
- Sales Experience
- Legal Constraints (Lawsuits, Personal Debt, etc.)
What are Opportunities?
We previously discussed the concept of a valid business opportunity. We also examined the opportunity within the context of determining whether your business idea is feasible. In that sense, we looked at whether, in the existing market, the business idea could feasibly create the type and amount of desired value. Here, we are looking for potential opportunities to create customer value that is generated from the business core competencies.
Now that you understand your strengths, you need to determine how these strengths propel the business within its core business. You should also determine how those strengths could open up additional opportunities. Do not confine your analysis to the present market. Your strengths may open up opportunities in other markets. In the previous material, we discussed the concept of the strategic pivot. Many businesses begin in one industry and pivot strategically to either serve a different target market or to enter a completely new industry.
- Note: Many opportunities arise from large environmental changes. Below we discuss environmental changes and how they can be relevant to new opportunities, as well as new business threats.
What are Threats?
Threats are any internal or external factors that could jeopardize the present operations or future intentions of the business. Most people think of threats in terms of external occurrences, such as competitor action or regulatory changes; however, it is critical to examine internal threats as well. Internal threats include the risk of occurrence of any event that could disrupt operations. For example, the risk of a bank calling a line of credit that hinders the ability to make payroll. Further, it includes the non-occurrence of any assumptions made in the plan for the business future operations. For example, your business ventures growth path may include assumptions about the availability of debt financing or equity investments at a given rate of interest. The equity market drying up for your size of business or specific industry is an external threat.
Here are some tips for helping you identify potential internal and external threats:
Internal: Look for any hurdles that are currently causing you problems in your business operations and extrapolate on the potential effects.
- Examples: Cash Flow Problems, Operational Issues, Team & Employee Issues, Resource Issues (Equipment).
External: Look to the operations of your competitors and see what, if any, factors are causing them significant problems.
- Example: Competition (Competitors), Market Demand (Trends), PESTEL (discussed next).
- Note: You will also want to look at the competitors themselves to determine if they are the source of a problem for your business. For example, they could be ready to stage a price war to compete for market share.
Below we discuss multiple external environmental factors (PESTEL) that could cause new threats (or opportunities) to arise.
- How Strategies Arise
- Intended, Deliberate, Realized, and Emergent Strategies
- Management and Strategic Planning
- Mintzberg's Schools of Strategic Development
- Design School
- Planning School
- Positioning School
- Entrepreneurial School
- Cognitive School
- Learning School
- Power School
- Culture School
- Environmental School
- Configuration School
- Mintzberg's 5Ps of Strategy
- McKinseys 7s Model
- ***Industry Analysis to Build a Strategy***
- Strategic Analysis
- SWOT Analysis
- SPACE Analysis
- Situational Analysis - 7C
- Competition Profile Matrix
- Stakeholder Analysis
- Stakeholder Mapping
- Resources and Capabilities
- Core Competency
- VRIO Analysis
- Value Chain Analysis
- Internal Factor Analysis
- Value Creation Index
- Minimum Efficient Scale
- PEST(LE) Analysis
- Industry Lifecycle Analysis
- Company Lifecycle - Definition
- Porter's Five Forces
- Modes of Management
- External Factor Evaluation
- Business Performance Measurement
- Balanced Scorecard
- Economic Value Added
- Activity-Based Management
- Quality Management
- Action Profit Linkage Model
- Business Activity Monitoring
- Gap Analysis
- Strategy Diamond
- BCG Growth-Share Matrix
- GE McKinsey Matrix
- Value Reporting Framework
- Pyrrhic Victory