Is SWOT Enough?

by Merlin Hernandez

Many consultants swear by the SWOT analysis and often develop a strategic focus on that basis. I share the notion that the SWOT remains fundamental to building strategy but by itself, it is incomplete. Strategy should be multi-perspectival using different tools for broad-based analytics that leverage risks across the business profile. A SWOT analysis is a conceptual approach to strategy formation that can overemphasize internal strengths and ignore the fact that a strength that does not directly impact the opportunities and threats in the external environment may not necessarily be a source of competitive advantage. Furthermore, SWOT analysis does not usually factor changing environmental threats.

Strategic analysis should integrate the strengths and weaknesses of the SWOT with the necessary activities for creating value for the customer through Value Chain Analysis (VCA). VCA examines activities throughout the supply chain, production processes, and distribution networks that add value to the product. Each step or link in the process adds value to the product along the way.  Best practices which are repeatable and can be further used for on-going product improvement or new product development, can be extracted from the VCA as a template for quality delivery.

The SWOT analysis is also enhanced by Resource-Based Analysis to determine the degree to which available resources can become the basis of sustained competitive advantage. Resource capabilities that support organizational strengths and reduce the impact of weaknesses should be shown to mitigate threats to customer and supplier relationships, delay competitive entry and rivalry, and retard the threat of substitute or alternative products in the market.

Resource capabilities can be analyzed through the value, rarity, inimitability, and organization (VRIO) framework for the strategic process. VRIO is part of internal analysis that can be used to audit all resources and capabilities of the firm to evaluate the competitive potential and sustainability of a venture. As a complement to the SWOT analysis, VRIO poses four questions about the value of resource capabilities in exploiting opportunities and mitigating threats; the rarity or uniqueness of resource capabilities in sustaining competitive advantage; the difficulty to imitate or duplicate the resource base on the part of a competitor (due to significant cost or other disadvantages), and organizational readiness to exploit available resources to advantage.

VRIO ANALYSIS
Strength (1 – 5)	Value	Rarity	Inimitability	Organizational Readiness	Market Advantage
Organic Food	5	4	4	5	4.5
Total Customer Service	5	4	3	5	4.25
Exotic Cuisine	5	4	4	5	4.5
Elegant Setting	5	3	3	5	4
Customization	5	5	5	5	5
Nutritional Value	5	4	4	5	4.5
Supplier Relationship	5	4	3	5	4.25
Expansion Capability	5	4	5	5	4.75
AGGREGATE SCORES	5	4	3.88	5	4.47
			Market Advantage		4.47

Fig. 1    The VRIO analysis is linked to market advantage based on criteria that offer growth opportunities in value creation. It is a way of defining the market space to determine the strategy map. The venture scored high on market advantage, driven by high scores for value creation and organizational readiness. But the median score for inimitability is an indication of some competitive pressure.

In the above scenario, decision-making would be enhanced by considering the imitability factor. If the new product is no more than a clever amalgam of available methods and technologies, then no wall of patents could stop opponents from getting in on the opportunity. Recognizing this vulnerability, an entrepreneur might want to think more carefully about the length of the expected entry lag between insertion and meaningful competition. This critical period allows the business to build some market power through brand identification before the entry of direct competition (expectational advantage).

An appropriate response might be more aggressive advertising, publicity and/or customer incentives. There may also be some possible advantage due to firm-specific learning or asset mass efficiencies i.e. the years of accumulating those efficiencies in the knowledge base – recipe building, skills mastery, specialized talent  – or the cost and availability of specialized equipment. Additionally, it might help the business to utilize the expectational lag to take advantage of gains for enhanced contingency planning. 

The business that offers a well-differentiated, inimitable product might consider trying to use this head start to build other cospecialized resources that are less available e.g. customization or a reputation for service on a new technology. The general point is that by analyzing the value chain the business would be able to evaluate the maturity of the business idea as well as its readiness to exploit the opportunity. An analysis of the resource position would give a clearer indication of whether the situation meets necessary conditions for a sustainable advantage.  Approaching the feasibility of the business idea from several angles means that fewer strategic mistakes would be made. This combination of resources and strategies can satisfy VRIO questions and Value Chain Analysis for sustained competitive advantage, and only begins with a SWOT Analysis.

Related articles on this blog

• Decision Making

• Developing the Business Idea

• Focusing the Business

• Resource Planning and Costing Systems

• Strategic Capacity Planning

• Supply Chain Management 

Merlin Hernandez is an entrepreneurial development and management consultant who operates mainly in the small and medium enterprise sector. For more information on this and other topics, please send enquiries to businesssolutions1168@gmail.com

Managing Small Business Financing

by Merlin Hernandez 

 

       The fundamental difference in requirements for start ups and established businesses is that since start ups do not have a track record of financial statements that can be analyzed for operational efficiency and business acumen, there is a strong reliance on personal finances, and the level of personal financial investment. Starts up loans are usually difficult to obtain because they are often undercollateralized. Lending agencies would require a personal background statement and resume, and a personal financial statement with at least two years personal tax returns. The examination of personal finances can be rigorous and detailed – a credit score of 600+, no late bill or mortgage payments for at least 12 months, and no history of bankruptcy or foreclosure in the past 2-3 years. A co-signer to the loan may also be necessary and may be subject to similar scrutiny. This needs to be backed by a solid business plan. Start up funding may also require a business that is somewhat operational for at least six months with evidence of a steady cash flow.

Established businesses would need to provide two or three financial statements – income statement, balance sheet, cash flow statement – to prove the viability of the business and its potential to re-pay the loan. Projected revenues and expenditures that bear a close relationship to existing statements are needed as well. This type of loan may also require a co-signer based on collateral needs. Banks and lending institutions are often more open to lines of credit for existing businesses which is a flexible proposition with several advantages – it provides an available cushion for unexpected expenses, can be used for any purpose at any time, affords reduced loan payments which are only made on money actually used, supports strong relationship banking as bank becomes more familiar with your financing needs, and reduced debt liability offers better debt to equity ratios for a healthier financial picture.

Financial Ratios are important as no financial statement or even group of statements can fully measure the nuances of operational efficiencies. These ratios are the tools to analyze and interpret the data presented and answer critical questions about a company’s financial strengths and weaknesses. Issues of profitability, liquidity, and solvency can be addressed by an examination of the relationships among items contained in the financial statements or between statements. Industry financial benchmarking may be a part of the comparative/competitive analysis of opportunity and the readiness of the business to exploit it.

Benchmarking is a process of systematic diagnostic valuation for identifying and implementing best practices and may involve a comparison of performance levels among organizations to determine the methodologies that produce exemplary results. Financial benchmarks are industry norms or standards that relate to the costs associated with business activities. The cost of manufacturing a product will depend on the cost of each manufacturing element – materials, labor, overheads etc., and comparisons across businesses can present standards of efficiency and best practices to arrive at optimum costs for profitable operations. Financial and operating ratios like the Receivables Turnover Ratio or the Times Interest Earned Ratio, when compared with the industry in which a business operates, aid in understanding if the business is performing above or below industry averages. Industry benchmarks may be obtained from the North American Industry Classification System (NAICS) Code developed by the Office of Management and Budget (OMB) to allow for a high level of comparison of business statistics.

The SWOT analysis is of great value in outlining to a lender the internal strengths of a new business venture and how you propose to deal with potential weaknesses. It also demonstrates that the business derives from a coherent external opportunity and how threats to success can be mitigated. The SWOT is a useful way to define how a business might map its success as well as a valuable baseline developmental tool for strategic planning. Its inclusion in the business plan assures the lender of capable management and well crafted planning. The business plan, however, must demonstrate capabilities that are much broader in scope as it brings great insight into the critical issues that will affect the new business and tells the lender that that there are plans and structures in place to deal with them. 

Many small businesses prefer to use the cash accounting method once they are not required by law to use accrual accounting. But with a strong reliance on credit card usage and significant sales increases closer to the end of a monthly accounting period, monthly accounts may not reflect a true picture. This is especially important if a company is operating with a line of credit and may need to provide monthly financial statements. Accrual accounting can provide a better picture of the company’s financial position through the accrual of unrecorded expenses/revenues, and recognition of unearned revenues to present a more lucid liquidity picture on the balance sheet.

As small businesses go lean, they may no longer hold inventory, and the accrual system would not be mandated by the IRS. But accrual accounting still offers the better alternative as it also allows greater tax flexibility where the company can project sales and credit needs to show increased revenues or decreased liability if necessary. By having customers place orders in advance in a low income year or the company advance-ordering supplies and being invoiced in a high income year can help to reduce the tax burden. Some expenses can also be paid off in a high income year to increase deductible expenses.

Benchmarking is more easily facilitated by accrual accounting which is really the more realistic tool to represent what’s happening in the business and making comparisons with prior periods and industry standards. Accrual accounting might be a little harder to read for people with limited accounting skills because of the increased number of transactions needed to record the same financial event. But it gives a much more accurate representation of the financial position of the business and more effectively positions a small business for future growth.

Related articles on this blog

• Business Structure for Family Business

• Financing a Small Business
• Decision Making

• Supply Chain Management

• Strategic Capacity Planning

• Focusing the Business

• Diversifying a Small Business