Step 3 – SWOT Analysis

Business Planning Start-Up Guide

In this step, you’ll look into your competition, the market, and your business.  We’ll use the SWOT acronym for Strengths, Weaknesses, Opportunities, and Threats.  The SWOT analysis is commonly taught in business school and it’s not necessarily evaluated in that order.  Some b-schools teach TOWS, because it’s the order you’ll mostly use.  In the “T” and “O” you’ll assess the competition.  In the “W” and “S” you’ll assess your company.  I prefer the TOWS because we look at the competition before evaluating how our strengths and weaknesses can exploit the market place.

Beakers

Business “Analysis.”

It is critical that you make an honest assessment.  If you’re not critical, you’ll be entering a market that may be more competitive than you first thought.  You may also find opportunities to exploit.  It’s a jungle out there:  some “eat their young” and some “co-habitat together.”  Know which industry and market you’re entering.

Assess the Competition

Identify the top three and then the top 10 competitors (four through 10) in your market.  Is your market local or world-wide on the internet?  Know the geography or territory you’ll be operating in.  

Competitive Threats

Is there a lot of competition or very little?  You’ll not likely find an industry which is wide open – without competition.  If you do, you’ll have to create a market for your product or service.  That’s not good or necessarily bad.  However, creating a market is often a lot harder than selling to ready and willing customers.  Then again, you’ll be the only one (at that time) doing it.  

Competition is often a good thing:  It means people are buying.  But, if prices are diving downward, that market probably has too much competition.  You may want to say away from that market.   The question really is:  Can you make money doing it?  

At minimum, you should find a market where you can earn two- (2x) to three-times (3x) what you acquire a product or the money, time, and effort involved in a service.  Your product or service delivery expenses should (in my opinion) be at most one-third of what you’ll acquire the product or provide the service for.  Typically, you’ll have a lot of overhead and the market prices may swing to extremes.  With a decent “margin,” you can weather the highs and lows?  Some industries require a 5x and some require a 2x margin.  Again, you’re determining if your risks and expenses allow you to make sufficient money in this space.  

Some industries have low margins, but the major competitors sell a lot of volume.  That’s Walmart’s model.  Can you compete with Walmart?  Or can you carve out a niche and do well there?  In Step 2 we discussed specialization.  Is there an opportunity in a particular niche?

Threats are also what your competition does well.  You have to be able to identify what they do well and then compare that with your company – with your strengths and weaknesses, which we’ll discuss shortly.

Opportunities

You looked at your competitors.  You know what they are good at.  You know how their market power threatens your entry into the market?  By looking critically, you’ll often find opportunities the “big guys” missed or ignored.  There may be a niche opportunity ripe for the picking.  There may also be opportunities available from competition four through 10.  Can you enter that market?  How can you exploit an advantage.  How can you do it better?

Look at your most likely competition.  What are they good at?  What are they weak at.  Keep in mind, you may want to consider seasonal variables when looking at them.  When I assessed the competition in Project 2, For-Sale-By-Owner Multiple Listing Service, I looked at the online competition in December and January.  By the time I started up the business in late March, we were in the “hot” Spring season.  We were also in a real estate upswing.  The competition in March was a lot greater than it was in January and the prices dropped for my service like a rock.  I couldn’t compete and make any money with my particular model.

Look at the top three competitors.  Can you compete toe-to-toe with them?  Then look at the rest of the the top 10.  Where do you fit?  Can you fit in?  What could you do differently?  Where do they “suck?”  Knowing their problems  may give you a competitive advantage — if you can improve upon it or do it cheaper.  Keep in mind, if your competition is keenly aware of their market, they’ll adapt to your competition.  Where will you be then?

Make a List

If you haven’t already, make a list of the competitors in your space and and identify their advantages and disadvantages.  I suggest writing this out.  You many want to make bullet points of these qualities.

Assess Your Company

Now that you’ve looked at your competition, it’s time to consider how you’ll compete with them.  It’s time to really take a hard look at your company’s weaknesses and strengths.

Your Company’s Weaknesses

Is your company managed by you?  Will you perform the service yourself?  What you don’t like to do?  What are you poor at?  Really think about it.  What outside “things” put your company at a disadvantage?

Can you acquire a product at a good wholesale price?  Can you make money if you’re performing the service yourself?  What does your competition do so well that you can’t match or surpass?  Is your weakness selling?  If so, it’s time to get over that!  Do you have the creative or marketing genius to approach sales differently?  Can you outsell the competition?  If not, how will you adapt or overcome this deficit.

It’s not uncommon for our weaknesses to simply be “baggage” we haul around.  Do you think “I must” or “I should” be able to do x-y-z.  Let me suggest another way.  Think how you can sidestep the “must” and do it differently.  If the industry “zigs” can you “zag?”  Where does technology come in?  Is technology a weakness or can it be leveraged to do something differently or cheaply?  Often, a weakness is only a weakness because of your lack of imagination.  How can you do “x-y-z” differently?

Your Company’s Strengths

Alright, we’ve assesses the good and bad of the competition.  We’ve torn your company apart looking for weaknesses – which we’ll seek to overcome!  Now, knowing all of this, what are your strengths?  What makes you better, more innovative, more efficient, or more whatever?  Some companies don’t really have anything different to offer.  That’s not what we’re looking for.  However, some industries are mature and nearly everything’s been exploited.  If that’s the case, why?

Let’s assume you have a nice list of strengths.  How do they offer you a competitive advantage?  What about you?  Some entrepreneur’s strengths are their will power or their ability to see the good in the bad.  There are countless example of people simply doing something ten-percent better and dominating their market.  Your strength may be engineering, social, or sales. What are they?

Make A List

If you haven’t already, make a list of your strengths and weaknesses.  I suggest writing this out.  You may want to make bullet points of these qualities.

Do the Analysis

Now that you have your TOWS list, it’s time assess how you’ll overcome the challenges.  Can you adapt and improvise sufficiently to overcome your competitors’ strengths?  Can you exploit their weaknesses?  Are there any competitor advantages that are deal breakers?  “Deal breakers” are advantages your competition has that you simply cannot overcome — they “own” the market.  If they own enough qualities, move on to a different industry or product.  Some deal breakers are financial considerations and others are technical.  Yet, other deal breakers may very well be your weaknesses.  

A force field analysis may be a useful exercise.  Draw a line down the center of a page and write out the competitor’s strengths on the left side and address how you’ll over come them on the right side.  Do this for your competitor’s weaknesses as well, except on the right side explain how you will exploit their weaknesses.  By the way, “exploit” isn’t negative or illegal, it’s how you’ll use their weaknesses in your favor — to win over their customers or earn new ones.

Leaps of Faith

Sometimes, we don’t do a critical analysis of ourselves or competition.  We simply take a leap of faith and jump in. Some leapers have the “knack for it” and land on their feet. Others need to learn their market and industry to find opportunities to exploit. A lot of businesses have taken this route and done well. A lot have done miserably. If this is you, how will you sustain the company and your family until you slowly grow into a profitable business? If you take this route, make sure the industry is growing and expanding.  For some, momentum and their ability to claw their way to the top was all that they needed.  

Others take the leap and drown.  If you’re in the horse-drawn buggy business at the turn of the 20th century you may have thought you had it made. But by the 1920s, that industry was on its way out; and if you didn’t understand the market cycle, your leap was into a very deep ocean. Later, if you didn’t know to jump out soon enough, you eventually were out of business. Think of Kodak cameras and film a decade ago? Do children know what film is today?  

Some Advice

So if your strategy is to simply “leap,” do yourself a favor — do enough research to leap into a growing or expanding industry or market. Since no one is perfect, sometimes your “go” decision wasn’t sustainable. How will you exit if you must? Don’t mortgage your family’s house or your three-generation farm on risky ideas. Go slow. Don’t make a decision that dooms your entrepreneur career from the start. You may need several attempts before you find success.

Like a job, we often have to start at the bottom and work our way up into management. You can do that with startups if you’re patient and wise with your dreams, money, time, and resources.

Consider These Questions

There is so much to consider when doing a TOWS/SWOT analysis.  So, let me give you some structure and a few things to consider.  Use these questions to start your analysis:

Competitor’s External Threats

  • Is the space “owned” by a monopoly or strong player(s)? Explain.
  • What are the national, regional or local economic conditions (as appropriate for your scope)?
  • What are the governmental or regulatory threats?
  • Logistical considerations:  Transportation? Supply? Sourcing?
  • Expanding industry or declining?
  • Technical? Will you be irrelevant soon?
  • Personnel costs? Can you find the right employee or contractor with the right mix of skills?

Competitor’s External Opportunities

  • What does your competition not do well?
  • Are you in a growth industry?
  • Are you limited by a geographic area?  
  • How well does the competition market, advertise, price, or use technology?
  • Do customers prefer quality over price?
  • How competitive is the market place for your product or service?
  • What innovation is coming?
  • Where is your product or industry in its product cycle (see Step 2, Exhibit-A in Step 2 for more on the Product Cycle)?

Company’s Strengths

  • What strengths will you bring to the market? The industry?
  • How will you be innovative? Efficient? Different? Unique?
  • Financial strengths? Can you sustain operations for one year?
  • Logistical? Transportation? Supply? Sourcing?
  • Skilled personnel?  
  • What do you know that the competition doesn’t know?  
  • Do you have patients, trademarks, copyrights?
  • What are your scientific or technical strengths?

Company’s Weaknesses

  • Do you have the right mix and quantity of personnel with the right skill set, knowledge, and experience? Explain.
  • Do you have marketing, sales, or advertising weaknesses? What are they?
  • How are your sales staff? Do you have the right managers on staff?
  • Do you suffer from lack of innovation or inefficiencies?
  • Financial weaknesses? Can you sustain your company for the first year?
  • Do partners work well together?
  • Do  you have weaknesses in logistics (transportation, acquisition, supply or sourcing)?
  • Do you need a particular technology or knowledge which you don’t have?
  • How can you “zag” to make your weaknesses go away?

 

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