Business Tools: Using a SWOT Analysis for Small Business
Analyzing the strengths, weaknesses, opportunities, and threats (SWOT) of a business is a well-established tool that is widely used by MBA students, business consultants, and strategic advisors. Despite it being a simple concept, business owners & entrepreneurs often struggle when trying to use it because it is so broad. It is difficult to determine where to start, what questions to ask, and where to focus. It’s a useful step when developing your business plan as well. The obvious problems get attention while many other important issues get overlooked. Being objective is key to it becoming an integral part of you small business strategy. The SWOT analysis is a great tool, but its effective use requires additional structure.
Strengths & weaknesses relate to internal factors, while opportunities & threats cover external ones.
The internal factors can be divided into five categories:
- sales and marketing
- operations, and
The external factors are also divided into five categories:
- threat of new entrants
- bargaining power of suppliers
- bargaining power of customers
- threat of rivalry from competitors, and
- threat of substitution
Make a SWOT Checklist
To approach the analysis in a structured way, prepare a checklist using the categories mentioned above. Identify factors within each category that are important to your business. Under management for example, a major weakness for virtually every small business is relying too heavily on the owner. What would happen to the business if something happened to the owner? In the workforce category a factor could be employee turnover and the availability of new hires. The threat of new entrants might include the possibility of a big box retailer opening near your business. The bargaining power of suppliers and customers categories should consider the possibility of losing a major supplier or customer. Come up with several factors for each category to complete the checklist. It is important that you do not try to rate or solve each issue as you identify them. If you do, you will get bogged down on each factor and never complete the analysis.
Once the checklist is complete, you should rate each factor based on its importance to your business. Use an alphabetical scale from A to E, where:
- A = very important
- B = important
- C = some importance
- D = little importance, an
- E = not important.
Next rate each factor based on proficiency (internal) or vulnerability (external). Use a numerical scale from 1 to 5, where:
- 1 = very proficient or not vulnerable
- 2 = proficient or little vulnerability
- 3 = average proficiency or some vulnerability
- 4 = poor proficiency or vulnerable, and
- 5 = deficient or very vulnerable
The factors with the lowest letter and highest number (A5) are the biggest weaknesses or threats. The ones with the lowest letter and lowest number (A1) are the biggest strengths or opportunities.
Using this structured approach makes a SWOT analysis possible and practical for any small business. To make this process worthwhile you must use this information to take action. Work to fix the worst problems first, prepare for the biggest risks, take advantage of the best opportunities, and build your secondary strengths.