Monday, February 06, 2012

How To Do a SWOT Analysis

I recently shared how to evaluate a business. It's pretty awesome and helpful. Not surprisingly though, there are MANY frameworks to use when evaluating a business. Today I'd like to review the most common/classic framework: a SWOT analysis. It's mostly used for evaluating your own business, but can also be used when looking at new companies.

There are 4 parts, 2 internal, 2 external. The diagram above spells out the relationships.

These are things (capabilities/resources/processes) the company is good at, and preferably better at than everyone else. Some examples...

  • Patents, like for a machine that makes gravity opposing magnets
  • A strong brand, like Matel
  • Cost advantages from proprietary know-how

The opposite of a strength. The company is worse at it. Some examples...

  • A poor/non-existent brand
  • A high cost structure, for making something like a sturdy plastic board

Something (the environment/industry/competition) that's missing. That's not currently being met in the market place. Some examples...

  • An unfilled customer need, like riding a skate board over gravel AND water
  • Some new technology that can be used, like new mini-multi-direction jet engines

The opposite of opportunities. Some examples...

  • Shifts in customer demand, like to riding bicycles instead of skateboards
  • New regulations, not allowing skateboarding at school

How To Get The Information
To create ideas for the SWOT, you need to do research. One lazy way to do it is sit around, staring at each other, and write ideas down on a white board. Here's a better way:

Do some primary research by seeking feedback from real customers and employees. Ask about the company's capabilities, about the resources (financial, human, capital, brand, etc), and how the company's processes work.

Do some secondary research on the environment, industry and competitors too. Ask similar types of questions.

Use this research for the basis of filling out each section of the SWOT.

What Does It All Mean? - Create Action Plans
The next step is to do something about this new-found information. As my diagram above brilliantly displays, you create plans based around what you found.

Capitalize Strengths
Are there opportunities that align with your strength? Are there creative ways to diminish a weakness? This is where value begins to be created.

Shore Up Weakness
Can a solution be found with the company? Does it make sense to buy something to over come this weakness? If this isn't solved, the ride to prosperity may not last very long, or ever get off the ground.

Invest in Opportunities
How can you use your strengths to meet the demand?

Identify Threats
Can you diminish this?

From some of the examples above, perhaps a company like Matol could make a board that hovers, but include those mini-jet engines so it can go over water. I don't know, perhaps something like this...

This gets really interesting when you look at the combinations. Consider the following diagram:

  • Focus on doing the actives in the green area as much as possible.
    • For example, Apple is excellent at making beautiful computers. They saw that smart phones where not living up to people's dreams. So they made a beautiful smart phone. Now 50% of their revenues come from the iPhone.
  • The red area should keep you up at night. This is a big area of concern. Figure out ways to reduce this as much as possible. The best way is to focus on shoring up those weaknesses.
    • For example, Google's Android phones were potentially in trouble because they were threatened by Apple lawsuits and Google had weak patent protections. One solution was to buy Motorola Mobility to shore up their patent protection. That might have been enough.
  • The orange areas require smart decisions. You need to invest in shoring up a weakness to take advantage of an opportunity. And, on the other square, figure out a way to have your strength be relevant again in the face of threats.

So, that's how to use a SWOT analysis. I now certify you knowledgable enough to really get into trouble with this framework.


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