How to Effectively Use the SWOT Framework

I’ve just finished my stint as a preliminary round judge for the Venture London Business Competition, reading six new business plans.  Some of the plans featured great ideas, but were poorly written or did not do a great job of developing the business model.  But the biggest error most of the would-be entrepreneurs made was misusing the SWOT analytical framework.

Anyone who has taken a business course in the last twenty years has heard of SWOT (Strengths, Weaknesses, Opportunities and Threats). But because most people don’t use it correctly, most business profs HATE the framework.

There are two basic problems with SWOT. The first is that most people mix up the Strengths & Weaknesses (S/W) with the Opportunities & Threats (O/T). The second is that most people develop a SWOT and then move on without out drawing any conclusions or actions that should happen as a result of the SWOT.

So let’s start with the first problem. Strengths and weaknesses are a result of the internal environment of the organization. In other words, they are an assessment of the organizations resources, capabilities and core competencies. Opportunities and threats reflect the potential impact of the external environment on the organization. They consider the general environment, political, economic, social and technological trends, as well as the changes within the industry of an organization.  It’s important to rigourously observe the distinctions between these two categories, or the analysis gets so muddled, it’s useless.

Slapping a SWOT table down on paper without interpreting what this means for the business is a waste of time. So now, it’s important to ask “So what do this mean that I have to do in order to address these strengths, weaknesses, opportunities and threats?”

Typically we try to defend against threats and exploit opportunities. So list the specific actions that you will take to defend or exploit. Be specific. What are the competitive actions you plan to take to defend? How do you plan to deal with a change in technology, or anticipated regulatory changes?

Then we try to either offset weaknesses or maintain and/or build strengths. For example, if you have a weakness in technical skills, you might plan to hire or to identify potential business partners with those skills. If you lack the cash to launch your new product innovation (a weakness), then you need to find investors. If your strength is in new product development, you might want to consider how to maintain and build that strength. For example, if customer preferences are shifting, investing in marketing research might be a good way to build your product development skills.

Bottom line, any analytical framework it only useful if you can draw conclusions and proposed actions from your analysis. If my favourite answer is “It depends”, then my favourite question is “So what?”.

The Facebook Movie

Image via CrunchBase

It’s funny how a movie can be interesting, even if you know how the story ends.  That’s the case for the new Facebook movie, written by Aaron Sorkin, which I saw last weekend.  It’s a great movie, even if it exaggerates everyone’s character, especially that of Mark Zuckerberg, one of the founders of Facebook. One of the characters says to Zuckerberg, “every creation myth has to have a devil”, and that is indeed how Zuckerberg is played in the movie. 

There are a lot of lessons for would-be entrepreneurs in the movie:

1. Get your own lawyer
2. Make sure you have anti-dilution protection
3. Be ware of venture capitalists bearing money
4. Friendship means nothing when billions of dollars are at stake
5. An idea is intellectual property

But the most intriguing question in the movie from a business perspective is the question of monetization.  That is, how can Facebook make money?  According to Reuters,  FB made almost $800 million in revenue, and in the tens of millions in profit in fiscal year 2009. 

 Let’s start with FB’s much vaunted 500 million users.  If we used the traditional 20/80 rule, that is 20% of the users account for 80% of the activity, we would have 100 million active users.  I suspect that this rule might be a bit off here, so I’m going to be generous and suggest that its more like 40% of users accounting for 80% of activity.  That leaves us with 200 million users.  Not bad.  According to the Lubin School of Business, 84% of the millennial generation don’t notice advertisements on social network sites. But if only 15% of users notice the ads on FB, that leaves advertisers with an audience of 30 million users.  Which is a respectable number of users, but, as an advertiser, certainly isn’t something that is the next new thing.

According eMarketer, 73% of millennials see social networking as entertainment.  In this environment, advertising is going to be a more difficult proposition.  When people do a Google search, they are open to being advertised to, since they are searching out information.  When we’re on FB, we’re communicating with our friends, not looking for info about products.  Just because you know a lot about my interests, doesn’t mean that I’m interested in hearing about them when I’m on FB. 

That said, for certain types of products, FB might be just the thing. Millennials are hot to jump on a trend, especially if it is a technological trend.  FB might be the ideal venue for these types of products and services.

While I’m sceptical about the impact of FB, the jury is still out on it as an effective advertising method.  My recommendation?  Engage with social media.  Test it and measure the results.  Social media is a very labour intensive marketing tool.  Make sure that it is generating results that reflect the effort and money required to support it.

Business Planning and Flexibility

“Rely on planning, but don’t trust plans”. This is a quote from Eisenhower as he was planning D-Day. This insightful quote encapsulates my message to entrepreneurs and managers about business planning.

Business plans are not just for bankers. Yet most managers tend to toss their business plans in the desk and never look at them again once they have received their funding. I’ve posted before about the value of business plans.  They provide structure, accountability and communicate the goals and objectives of a business to employees.

But as Joseph Badaracco Jr noted in his book “Leading Quietly”, great leaders expect surprises. They realize that although they’ve planned, they can’t plan for everything, and that plans must change as circumstance changes. In trying times, you sometimes must “feel your way through” a complex situation.

To be effective, plans must be living documents. That’s why, for all but the largest businesses, plans must be concise and focused.  For most small and medium size businesses, a plan with overall objectives and five key action items is enough. Six pages. With enough detail that it is clear when the action items have been achieved. That’s it. Concise, focus plans mean that it is more likely that a plan will become an ongoing management tool, not a dusty pile of papers in your desk.

Concise, focused plans also mean that when change is necessary, it is a simple matter to adjust the plan.

Learning to expect surprises and having the resiliency to roll with them is a key part of leadership of any organization.

Strategy vs. Business models vs. Business plans

Now that we know about strategies (how we’re going to compete externally) and business models (the internal logic of a business), we now need to know about business plans.  What are they? How are they different? Why do you need one?

A business plan is the operational details of the business for a specific time period. Typically strategies and models are longer term, while a business plan is shorter term. A business plan consists of the specific actions and activities that will be undertaken to achieve financial and strategic objectives. It is usually bound by timelines and by financial targets. It is used to measure progress.  A business plan is concrete.

A business plan covers both internal and external elements of the business.  The business plan is the nitty-gritty stuff that outlines how you are going to implement your strategies and business model. Essentially, the business plan ties together your strategic choices and the operational/economic logic of your business.

Business plans are important because they create an executional path.  They specify the details of how you plan to achieve your goals and strategies. They create accountability and allow you to measure your progress. They ensure that key projects don’t “slip”. They are an important management tool for a business.  The also put your plans on paper , which can help you identify any mistaken logic or operational issues with your proposed plan.  Business plans also help communicate the tasks that must be accomplished to staff, and sets priorities for them.

You can’t keep your business plan in your head. It’s important to more than your banker.