Time to modernize SWOT?
Ever since the 1960s, organizations have analyzed their company’s market position using a SWOT analysis. The word SWOT is an abbreviation of Strengths, Weaknesses, Opportunities and Threats. The usefulness of SWOT is however, (and quite rightly so) disputed. First, studies have shown that SWOT does not always function in practice. American researchers Terry Hill and Roy Westbrook (1997) pointed out something they call “The Curse of the Three-Word Bullet Point”:
The analysis is made of long lists of short, unfounded and imprecise points such as “poor product quality” without specifying what is wrong with which products. No formal evidence is produced to determine why, for example, product quality is the problem, or whether the product quality is actually poorer than competitors’. The same points are often presented as both strengths and weaknesses with no discussion as to whether one outweighs the other.
Also, our understanding of competition has changed since the 1960s. We now know that a company must knowingly choose to disappoint certain target groups in order to have the resources to be the absolute best for others. The SWOT analysis merely lists strengths and weaknesses. It does not say anything about which types of things we need to be good at – and which things we do not need to do (Haberberg 1999).
This means that you don’t have to be an expert in multiple areas. It is often enough to have one unique ability that makes you perfect for solving your customer’s problem.
For example, Microsoft has struggled to succeed in the market for mobile devices. Their organization is not well suited to rapid prototyping of software and quick releases, which are necessary to compete in the mobile space. However, they are very well suited to large-scale software releases that require large amounts of coordination. The Microsoft Office platform is an excellent example of a company’s ability to release software in the face of a very complex ecosystem. If you take a step back and look at Microsoft as a whole, they are very good at large product releases but struggle with smaller, more tactical innovations. This means that Microsoft could do better if they focused on the larger platform related products and avoided the smaller, more agile projects. If you understand and accept your weaknesses and strengths, you have a better chance to avoid failure as you can focus on high yielding pursuits.
You also must consider your competitors. Your customers will always have alternatives to buying your products or services. You need to know the strengths and weaknesses of the ones offering these alternatives. It is important that you focus on what is relevant for your business. If a competitor makes a product that is generally excellent, but not suited for your chosen target group, he is not relevant.
Finally you do not operate in a vacuum. Whichever strategic decision you make, your customers, partners and competitors may react to it. Both your company and your competitor’s strengths and weaknesses will constantly change. The demands of your customers will also change. This means that an analysis of your weaknesses and strengths may not be valid for more than a few hours after you have made it.
Strengths, weaknesses and Business Modeling
Let us start with the first two letters of the SWOT. Perhaps the new trend of business modeling can add an alternative to the traditional way of considering strengths and weaknesses. If you create a business model for your startup, it is a normative description of how you want your business to function in the future. This particular point is missed by many startups. It is quite easy to mix up the desired future situation (which should be the business model) and the current situation.
Let’s compare running your company with a mountain hike. The business idea is to organize an expedition to Mount Everest. Your objectives and tasks tell you when you should reach the peak and how to make each leg of the journey. Now, at what premise do you start? Are you at the foot of the mountain, or are you still sitting at home in the living room? What shape are you in? Do you have the climbing gear, or do you have to go shopping for it?
The point is that you need to analyze your strength and weaknesses while considering your business model. Take any one of the business model elements and judge how close you are to achieving the desired outcome. When you are far away from the desired situation, it is a weakness. When you are close to the desired situation, it is a strength.
Now, go through the same process for your most important competitors. And – here is the trick: You need to compare them to your business model, not their own. Only the competitors’ strengths and weaknesses that are relevant to your business model should be taken into consideration. If you are going to play chess against Usain Bolt, it is totally irrelevant that he is the fastest sprinter in the world. If you are operating under a chess business model, only his chess-related strengths and weaknesses are important.
Finally – a strength and weakness analysis must be continuously updated. If we manage to improve on one of our weaknesses, the competitor may react to this by improving even more. If one of our weaknesses is that our prices are considered to be a bit high, on Monday morning, we cut our prices 30%. The price level is now a strength. Monday by lunch the competitor across the road slashes his prices by 40%. We are back to square one, and need to re-evaluate whether we are weak or strong on this issue.
Opportunities, threats and risk
One paradox we have come across is that many companies have both an opportunity and threat analysis as part of their SWOT, and a separate risk management program. These two things are usually not coordinated. However, we believe that opportunities and threats on one side and risk on the other side are the same thing, and should be merged together as one single part of your business development.
When we use the term risk in daily speech, most often we refer to something negative that we wish to minimize. We talk about the risk of an aircraft crashing, or that the Euro will collapse. For us, risk is a more nuanced concept. We use the term risk simply as the chance that something will go differently than expected. While we strive for predictability, we can prepare for the unexpected. Winning the lottery is not something we anticipate either! If we compare to SWOT, we can call the positive risks “opportunities” and the negative risks “threats”. With this as a starting point, we can define risk as “the likelihood of an externally-created incident that makes things go differently than planned, multiplied with the effect of the event happening.”
One example of how the consequences of an unexpected development can affect a company is Eastman Kodak (founded in 1892). For almost 100 years the company was the world leader in roll film. Everyone who had anything to do with photography was familiar with Kodak, and the company had one of the world’s strongest brand names. Towards the end of the previous century Kodak’s engineers developed a camera in which the images were stored digitally instead of on a traditional roll of film. The advantage of this method was that it eliminated the need to develop the pictures. However, Kodak’s management chose to hold onto the traditional product that historically had generated incredible revenues for the corporation.
As we know, new and existing competitors rapidly introduced digital solutions for both cameras and mobile telephones. The demand for the old film rolls disappeared within just a few years. Consumers could store thousands of images on digital media with an acceptable quality and avoid the expensive and time-consuming developing process. Kodak could not adapt to this change, and tens of thousands of employees lost their jobs. The traditional, long-established company ultimately went bankrupt.
So, similarly to the SW part (strengths and weaknesses), the OT part (opportunities and threats) should be managed continuously. You need to have one eye on both positive and negative risks at all time, and evaluate the probability for them to occur, and the consequence of doing so. Finally you need to have some idea of what you can do, either to influence the odds of the opportunities or threats really occurring, or to handle the situation if they do. We hope that this blog post may inspire you, and perhaps start a discussion. If some of the entrepreneurship terminology used is new to you, you will find it better explained in the Gap and Risk chapters of our Lean Business Planning book.