The use of SWOT Analysis in Small Business.
SWOT analysis is a vital tool you can use while planning to start a new business. If you search through the internet today, you will see thousands of business ideas you can possibly do. While you can start some business ideas with little capital, there are some that require large investment of funds. If you should ask anyone business person why he is into business, he will tell you that he wants to make profits. There is no rational being that will like to invest his money in a business that will not be profitable. The big question is, how can one know whether a business will be profitable or not? Every business idea has two sides. That is, it can be profitable and it can turn out to be unprofitable. That is why it is usually said that business is all about taking risks. There is no business idea that is profitable or unprofitable on its own. There are many things that determine whether a business will be profitable or not. The fact that a business idea is profitable for someone does not mean that it will be profitable in the hand of another person. Also, that a business was profitable last year does not mean that it will be profitable this year. The fact that a business idea is profitable in India does not mean it will be profitable in another country, say Nigeria.
In order to be able to assess the likelihood that a business idea will be profitable, you can use SWOT Analysis to assess the idea before you start the business. What is SWOT? SWOT is the acronym for Strengths, Weaknesses, Opportunities and Threats. Therefore, SWOT analysis involves thorough assessments of one’s strengths, weaknesses, opportunities and threats regarding project or business idea under consideration. So, we shall be looking at each element one by one and how you can use each of them to analyse your business ideas.
Read Also: How To Choose The Right Small Business Idea
Before you go into any business, you need to carry out SWOT analysis of your strengths. You cannot isolate yourself from your business. You are the driver of the business and you are expected to have some levels of competence regarding the business you want to start. You cannot see two individuals that are exactly the same. This is one of the reasons you will see somebody successful in a particular business, but if another person should start the same business, it can be a disaster. Therefore, you need to identify those things you consider your strengths. This time around, you are not looking at your strengths in general. But you are looking for the strengths that can help you achieve success in the business you want to start. If a particular strength will not add value to the business that you want to start, such strength is not relevant in this context. For example, one of my strengths is the ability to run very fast. Supposing I want to start a gift shop, there is no correlation between my ability to run very fast and selling of gift items. Therefore, when you are conducting your SWOT analysis, you need to consider those strengths that can be exploited in running your business. These can be special skills and knowledge, certification, access to funds etc. It can also mean that you have a patent right of a product or you have a good reputation among customers. Why this SWOT analysis? It is not enough to list your strengths. The purpose is for you to identify those strengths that you can use to run your business effectively and also use them to outsmart your competitors.
Everyone has one weakness or the other. No matter how strong you are, you will have your own weak points. Your SWOT analysis is not complete without identifying your weaknesses. No one likes talking about his or her weaknesses. You need to be sincere to yourself here. In case, you find it difficult to determine your weaknesses, you can ask somebody you trust to tell you your weaknesses. Such persons can be your spouse, close friends, relations or colleagues. You cannot ask a stranger to help you identify your weaknesses if you are truly conducting a SWOT analysis. Also, don’t ask someone that will tell you what you will like to hear. For example, if you ask your subordinate to tell you your weaknesses, he/she may not feel free to tell you the truth. After you have known your weaknesses, you can then begin to isolate those ones that may not impact your business in any way. You will only focus on those weaknesses that may affect your business. If you do your SWOT analysis very well, knowing your weakness is like telling you that the break oil of your vehicle is low. With this alert, you will know that you need to top the break oil before you set on a journey in order to avoid accident. So, if you know your weaknesses, you can quickly work on them before your business is affected. However, if the weakness is such that you cannot overcome, it is either you forgo the business idea or you engage someone who is strong at that area. You cannot afford to build your business around your weak areas. If you do, you will find it difficult to compete in the market. After SWOT analysis, until you see your weaknesses as your limiting factors, you may not take appropriate steps about them.
The third element in our SWOT analysis is ‘Opportunities’. This is what I will call the reason for your business. Before you decide to start a business, there must be opportunities you have seen which make you to believe that the business will be successful. This aspect of SWOT analysis is not difficult for people. In most cases, what people see is opportunities. Perhaps, SWOT analysis is totally new to you. In this segment, you will be looking at favourable conditions that can help your business to thrive. If you want to start a business without seeing any opportunity in it, you may find it difficult to explore the opportunities effectively. One of the opportunities you can tap into when starting a business is the growing needs of customers in your environment. It is possible that the existing business cannot adequately cater for the needs of the market population. For instance, if you live in a place where the number of day care providers cannot meet the need of the population size and the children need to go to far places before they can find a good place, this becomes an opportunity to start a day care services there. There may be construction of estate building around that place. This means that there is going to be an upsurge of the population there very soon. You can see it as an opportunity to start a new school or to expand the existing facilities if you have already started.
Why I like SWOT analysis is that it is all encompassing. In most cases, when a person wants to start a business, only what he sees are opportunities. SWOT analysis will force you to consider those external factors that may make your business not to succeed. Threats are external to you. You may not be able to do anything about them. However, you can arrange or conduct your business in such a way that the impact of the threats can be mitigated. Threats may include the presence of too much competition, change in government policies or the future trends that seem unfavourable. If the SWOT analysis reveals threats that you may not be able to mitigate and the impact on your business is so high, it may make sense not to start such a business.
SWOT Analysis Template
SWOT analysis template is a quadrant containing the four elements discussed above. The template will help you in carrying out your own SWOT analysis. In each box, you can bullet point the factors you need to consider.
SWOT Analysis Example
The example of SWOT Analysis below will guide you on the information you can include under each section. Please note that this is just an example. Your own business situation may be different. Therefore, you need to identify your own strengths, weaknesses, opportunities and threats.
How to use the SWOT Analysis report
It is important to note that SWOT Analysis on its own will not help you achieve anything except you take the right steps about its results. Let’s assume that the SWOT Analysis example above is the outcome of your own SWOT Analysis. How can you make use of the information?
The first thing is for you to define your objectives. Your main objective for carrying out SWOT analysis is to be able to determine the right steps you can take which will help your business succeed. To achieve this, you need to come up with strategies that will capitalise on your strengths. You need to take steps that will mitigate the impact your weaknesses might have on the business. Weaknesses here are not limited to personal weaknesses. You need to consider the weaknesses of the business too. You need to consider the external factors in your SWOT Analysis, that is, opportunities and threats. You should find ways of exploiting the opportunities to the maximum while you look for solution that can help you overcome or mitigate the threats.
Let’s take the points from the SWOT Analysis example one by one.
- Special Skills
If your SWOT analysis reveals that you have special skills that are relevant to your business, then you need to leverage on those skills. This alone can distinguish you. However, having a special skill is not enough. You need to use the skill to the benefits of your customers. Demonstrate the skills to the point that your customers will notice it. You don’t need to noise it that you have a particular skill. If you allow your work to showcase your skills, it is your customers that will announce you. This will make you enjoy referrals.
- Product Knowledge
This is different from being skilful. Without SWOT analysis, one may likely think that having special skills and product knowledge are the same. If you have a good knowledge about the product you sell, you will be able to offer free advisory service to your customers on the use of the product. This alone can increase your customer retention rate. So, don’t just sell to your customers. Give them information that will be useful for them about the products. If you don’t do this, then you are not making best use of the result of your SWOT Analysis.
- Patent right
This is a strong point. In a SWOT analysis, having a patent right is a strength. If you have such, then you need to make most of it and quickly recoup your capital. Since possibly you are not competing with anyone now or the level of competition is low, you can afford to charge high price to maximize your profits. You need to work as fast as possible before the customers begin to have substitutes.
- Adequate Fund
Having enough funds can allow you buy in bulk. This can make you enjoy bulk discounts from your suppliers. Also, you will be able to expand very fast. This will make you capture more market. With this, you can dominate the market and become a major player.
- Good Location
From the SWOT analysis example above, location is one of the strengths identified. Supposing this is your own SWOT analysis result, you can leverage on good location to outsmart your competitors. You can make your shop a one stop point for your customers where they can buy almost all they need by selling related or complementary items to them.
- Good reputation
If you go to the market, you will discover that there are many fake products. At times, customers find it difficult to distinguish between the original and fake products. If you have the reputation for selling quality items, customers will be willing to pay higher prices for your products. But your price should be moderate.
- Good brand
After carrying out the SWOT analysis of your business and you realise that your brand stands out in the market, nothing stops you from making the product a premium brand. However, you need to protect the brand. The quality of such product should not be undermined. You can also use the product as sales lead to sell other products.
From the SWOT analysis examples above, we can as well turn the strengths to weaknesses. So what do you do with the weaknesses? Below is the summary:
- If you lack a particular skill, then you need to learn it.
- If it is necessary that you need to have more information about the product you sell, you can ask for more information from your suppliers. At times, manufacturers conduct training for their representatives or distributors. You can attend such training.
- You may not know that you or your business doesn’t have good customer relation unless you conduct a SWOT analysis. Once you identify this, you need to work on this. This may require that you send your staff for training. You may even need to sack a staff that customers complain about before he damages your business.
- If funding is your weakness, you may choose to source for funds from outside. However, you need to consider other factors in your SWOT analysis result before you take any step about this.
- From your SWOT analysis, if you think that the location where you are operating from is affecting your business, then you may need to relocate. Alternatively, spending some bucks on advertisement may resolve this problem.
- Stiff competition is one of the weaknesses mentioned in the SWOT analysis example above. If the competition is becoming too stiff for your business, you can try to differentiate. You can easily differentiate by offering your customers added value. Please, note that price reduction is not a good way to differentiate especially in a very competitive market. This can lead to price war. If you have already seen your business disadvantaged, it is most likely that you may not be able to compete on price.
- High Cost. Changing your source of supplies or asking for better prices from your suppliers may help you resolve this issue.
If your SWOT analysis result reveals that there are opportunities for your business, what you need to do is to explore such opportunities. This may mean that you need to open new branch, increase your selling price buy over another business.
In SWOT analysis, threats are those external factors that can mitigate your business performance or profitability. For example, if you consider that a government policy may affect your business, the best option may be that you quickly diversify from such business. Except you have power or influence or lobby, to continue with such business may spell a doom.
Further Illustration of SWOT Analysis
The SWOT analysis example above is the SWOT analysis in the simplest form. Let’s take it by looking at different scenario which the result of your swot analysis may reveal. This time around, instead of focusing on just one cell of the quadrant, we shall be combining and matching different factors and how you can develop a strategy that can help your business to make most of your situation.
Let’s assume that after conducting your SWOT analysis, you discover that there are opportunities in the area of your strengths. Following the initial explanation of the the four quadrants of the SWOT analysis template, it was explained that strengths and weaknesses are internal factors while opportunities and threats are external factors. In this scenario, it means that you have internal capabilities to pursue the business opportunities which the external factors present. The opportunity here can be that there is a new market for your product elsewhere. Your strengths may also be that you have sufficient funds and trained workers. In this type of SWOT analysis example, it makes sense for you to develop a growth strategy by quickly opening a new branch in the new market. You can deploy your trained staff there for immediate kick off of operations.
In this second scenario of our SWOT analysis, let’s assume that there are opportunities in the areas of your weaknesses. This type of situation will always happen in business. Now that your SWOT analysis has revealed the true picture of your situation, instead of bemoaning the situation,you should be able to come up with good strategy that will make you to be able to compete favourably in the market. Doing nothing will not help you in this situation, otherwise, your competitors may soon take over the who market. If your weakness is the lack of funds, you can decide to raise fresh funds either by bringing in new investor as partner or you can approach banks for loans. You can also combine forces by forming alliance with another company that has strength in the areas where you are weak. If your staff are not skilled enough, sending them for training will be a good investment.
It is not unusual that, after conducting a SWOT analysis, you discover that there are external factors posing as threats in the areas of your strengths. The strategy you will develop in this scenario will depend on which direction the threat is coming from. If the threat is from competitors, you can decide to create a niche for yourself by focusing on the areas of your strengths. However, if the threat is as a result of adverse government policies, it may be better to pursue diversification strategy. You can use your existing resources to pursue another business.
In our first SWOT analysis example, it was mentioned that the best strategy to adopt when you are faced with weaknesses is to find a way of overcoming them. You may need to adopt a different strategy if your SWOT analysis revealed that there are threats in the areas of your weaknesses. In this situation, it is of no use focusing your energy on how to overcome such weaknesses except you are sure that it will help you in pursuing other businesses. The best strategy in this circumstance is to quickly diversify.
With the the illustration of what SWOT analysis is all about followed by the SWOT analysis template and the SWOT analysis examples given above, it should be easier for you to carry out your own SWOT analysis.
Additional Tips on How to Prepare SWOT Analysis
I don’t want to assume that everybody reading this article should be able to prepare a SWOT Analysis following the example given above. In every class, there will be fast learners while certain people require the use of various approaches before they can fully understand the subject matter. So, if you are still finding it difficult to prepare your SWOT Analysis, this additional tips will be of help.
As already mentioned,SWOT means Strengths, Weaknesses, Opportunities and Threats. The challenge you may be facing is how to come up with list of items to put under each heading in your SWOT Analysis template. To solve that problem, let’s adopt the approach below:
- What are those special skills you have that are relevant to your business?
- What resources do you have that can give you an edge over your competitors?
- What are those things you can do with ease?
- What are the good things people are saying about you or your business?
- What supports or backing do you enjoy from stakeholders
- What are those things you lack which are important to your business?
- What skills do you lack which are negatively affecting your business?
- In what areas are your competitors better than you?
- What bad comments you receive from customers?
- What loopholes do you have in your system?
- What are the new trends that impact your business positively?
- What government policies you consider favourable to your business?
- What are those things that open new window of business opportunities to you?
- What are the external unfavourable situations that can negatively affect your business?
- List Porter’s Five Forces that are threats to your business. That is:
- Threat of new entrants
- Threat of customer bargaining power
- Threat of supplier bargaining power
- Threat of substitutes
- Threat of rivalry
The preparation of SWOT Analysis may require some brainstorming, but at the end, you will discover that it is worth the efforts.
Why Small Businesses Need to Use SWOT Analysis
- The Use of SWOT Analysis as a tool is cost effective. You don’t need to spend much money researching before you obtain your results. As you can see from the above SWOT analysis example given above, the information regarding your strengths and weaknesses can be gotten from the tips of your finger. Also, by being sensitive to your environment, you can get information about the external aspects as the SWOT analysis is concerned.
- SWOT Analysis helps small businesses in forecasting to the future. It forces business owners to project into the future to identify possible threats to their businesses so that they can take a proactive steps.
- SWOT analysis helps in identifying opportunities which would have ordinarily been ignored. It prepares businesses to prepare for possible opportunities. Without preparation, opportunity can easily pass by.
- The fact that SWOT analysis reveals one’s weaknesses make individuals or businesses to quickly take steps before such weaknesses affect the business negatively.
- It is simple to use. Almost everybody can use SWOT analysis.The use of SWOT analysis template makes it easy to follow. It does not require any scientific formula or interpretation.
- SWOT analysis helps the management in decision making. The outlines of strengths, weaknesses, opportunities and threats can be used for the formulation of new strategies that will help the business to achieve its objectives
SWOT analysis is a means to an end and not an end in itself. The main purpose of SWOT analysis is for you to be able able to identify your strengths, weaknesses, opportunities and threats concerning your business so that you can develop a strategy that can give you a competitive advantage in the market. Therefore, what you do with your SWOT analysis results is more important than the SWOT analysis itself.