From the June 1999 issue of Entrepreneur

Before taking a swing at his business plan last year, David Dayton took a SWOT. The co-founder and CEO of AlumiPlate Inc., a 14-person Minneapolis metal-coating company, used the time-tested management tool called Strength-Weakness-Opportunity-Threat analysis to not only identify his strengths and weaknesses, but to pinpoint potential pitfalls and prospects as well.

"We took all the things we know about our business and listed them in four columns labeled strengths, weaknesses, opportunities and threats," explains the 44-year-old entrepreneur. This brief exercise, done as part of the 4-year-old company's annual strategic planning process, highlighted a handful of areas for AlumniPlate to focus on in the coming year. Specifically, Dayton identified a high barrier to competition as a strength, while the company's proprietary aluminum coating technology is its best opportunity. Lack of a high-volume production demonstration was one weakness that was revealed, and heavy demands on key personnel were shown to pose the biggest threat.

Countless other entrepreneurs have used SWOT analysis to recognize and organize crucial factors determining their companies' success or failure, says Eileen Shapiro, president of management consulting firm The Hillcrest Group Inc. in Cambridge, Massachusetts, and author of The Seven Deadly Sins of Business (Capstone). SWOT analyses are easy and intuitive, and can be done quickly. Perhaps most significant, the technique helps harried entrepreneurs avoid missing important connections in complex situations. "A SWOT analysis," Shapiro says, "gives you the framework to make sure you're being thorough."


Mark Henricks is an Austin, Texas, writer who specializes in business topics and has written for Entrepreneur for nine years.

Back To Basics

Nobody knows who the first SWOT analyst was, but the technique has been widely used for decades. In recent years, SWOT had a somewhat lower profile, overshadowed by newer, trendier techniques such as scenario forecasting. Alhough these sophisticated tools are more complex, that doesn't necessarily make them better. "People often believe if a question isn't complicated, it isn't valid," Shapiro says. "But there are real advantages to SWOT because [it requires entrepreneurs to ask] very fundamental questions."

A SWOT analysis should be done annually as part of preparing the coming year's business plan, according to Barbara Lewis, president of Centurion Consulting, a business consulting company in Los Angeles. Fred Fry, a management professor at Bradley University in Peoria, Illinois, recommends using SWOT when working on multiyear strategic plans and ad hoc plans in response to changes in the business environment. A SWOT analysis is also a good vehicle for explaining your strategy to investors, customers and others.

Getting Down To Business

Many entrepreneurs find SWOT analysis almost intuitive. Although Dayton hadn't heard of the technique before a partner suggested it, he instantly grasped its appeal. "My partner introduced me to the four words," he said, "and my response was, `Let's do it.' "

Before sitting down to do your SWOT analysis, it's a good idea to go off-site, away from ringing phones and other distractions. Some experts recommend hiring a facilitator to help you consider all the angles. Others say you can get the same effect by soliciting the perspective of customers, vendors or other crucial contacts outside the company.

Limiting the group to anywhere from two to 12 people will help you avoid getting bogged down in procedural issues, says Lewis. And speed is basic to SWOT's appeal. A good analysis can be completed in anywhere from several hours to two or three days, although Fry suggests spreading meetings over a week or two to give yourself time to gather information.

A SWOT analysis essentially consists of brainstorming about the key variables that affect your company. Strengths may include special skills, motivations, technology, or the distribution or financial capacities that you possess. Weaknesses are negative factors, such as lack of capital, shortages of skilled personnel or unproven products.

Opportunities are positive circumstances that, if exploited, will boost your company's success. They may include untapped markets, promising customer relationships and weak competitors. Threat factors should include not only clearly visible threats, such as pending regulations, but potential problems, such as economic downturns, new competitors or changes in consumer tastes.

Just thinking about SWOT isn't enough. As with any successful strategy session, it's essential to write the factors down. There are many workable formats. Dayton's four-column approach is the simplest. Fry recommends a five-column technique. He labels rows with factors critical to success in your industry (strong weaknesses, weaknesses, neutral factors, strengths and strong strengths) and places positive and negative numbers in the columns to show how your company stacks up. This system is used to rate key strategic issues including production costs, management skills and so on, and to determine which weaknesses need attention and which strengths can be exploited.

Other experts recommend a square with quadrants for each of the four elements. For companies with complex issues, Lewis sometimes prepares elaborate computer spreadsheets, with SWOTs quantified and expressed numerically and highlighted with colors.

No matter the format, you have two main goals in a SWOT analysis. First, you want to identify areas where your strengths match your opportunities. For example, you're a low-cost producer--a strength--and one of your opportunities lies in the existence of an untapped cost-sensitive market.

And second, you'll want to spot places where weaknesses make you vulnerable to threats. For instance, if there's a trend toward more regulation in your industry and your business has an image as an outlaw, that could be a problem.

A SWOT analysis isn't supposed to be a list of action items, but it should suggest such a list. After doing your analysis, use it to identify specific moves you can make to leverage strengths, maximize opportunities, remedy weaknesses and defuse threats. The low-cost producer mentioned above, for instance, might choose to target-market cost-conscious customers, while the company with the renegade reputation might polish its image with a public service program.

When preparing a SWOT, restrict yourself as much as possible to simple, factual statements such as "We're the largest competitor in this niche" or "Our president reaches retirement age in June." Being concise and specific will help you make the most of your analysis.

Don't restrict yourself, however, to analyzing information that's easily obtainable. Fry suggests devoting an initial meeting to identifying information you'll need for your analysis. Then set up another meeting a few days or weeks later to allow time for the necessary research.

Nor should you limit your inquiries to your own company. It's a good idea to do a SWOT analysis of your three or four top competitors. While this will be less complete than the SWOT analysis of your own company, it will help you understand where you fit in the market.

In addition to analyzing your entire strategy, you can do SWOT analyses of departments or functions. For instance, you may do a SWOT analysis of customer service, product development or distribution functions.

Whatever you analyze, keep the written document for future reference. Looking at last year's SWOT can give you a base line for preparing the current analysis, in addition to pointing out areas where you were too optimistic, too pessimistic or lacked adequate data.

Simple, effective and time-tested, SWOT analysis should probably have a place in every entrepreneur's strategic toolbox. While it's not something you'll do every day, having the analysis can give you a basis for guiding all sorts of actions on a continuing basis.

"With every decision, I filter what we're good at and what we're not so good at," says Dayton. "In a subconscious way, SWOT has filled in that background for me."

Nextstep

Strategic Planning in New and Emerging Businesses (Upstart) by Fred Fry, Charles Stoner and Laurence Weinzimmer includes a section on SWOT analysis for entrepreneurs.

Contact Sources

AlumiPlate Inc., (612) 786-3788, http://www.alumiplate.com

Centurion Consulting, (310) 471-8979, BALewis@aol.com

The Hillcrest Group Inc., (617) 495-0020, http://www.hillcrestinc.com