Analyze This

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."

This article was originally published in the June 1999 print edition of Entrepreneur with the headline: Analyze This.