Why SWOT analysis is key to a successful business

Investors need to differentiate strong firms from those merely benefiting from a positive external environment

Identifying strong companies that can weather the storm is key for investors. Courtesy Getty Images

SWOT analysis has become a normal tool in business strategic planning. SWOT is an acronym for strengths, weakness, opportunities and threats. It works along two dimensions.

The first dimension is internal to the company versus external to the company. For example, the procedures and processes of a company are internal whereas the competition and the economy are external.

The second dimension of SWOT is positive or negative. For example, GDP growth of 5 per cent is considered a positive external event, whereas an unfilled CEO position is considered a negative internal event. The idea with SWOT is to build on strengths to take advantage of opportunities and defend against threats whilst at the same time working on improving weaknesses.

In the UAE, for a long time the external environment was strongly positive and there were plenty of opportunities. Even in 2008 during the global financial implosion and its aftermath, strong oil prices ensured a short-lived negative external event.

Today that is gone. The external environment has moved predominantly from opportunities to threats. Of course, threats can create opportunities as I will explain later but that needs the internal environment that is strong. And that is the million dollar question: Which companies are strong and which companies were simply enjoying a positive external environment? More importantly, in either case what can you do to respond to the changed external environment?

Let's look at a company that might have been buoyed by the external financial environment and now faces the external issues of a challenging economy and a handful of unethical competitors. As with all solutions, there is the long-term resolution and a short-term phase that bridges the current situation to the proposed situation. In a previous article I wrote about the importance of effectiveness and not just efficiency.

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To combat the two challenges that I outline above, a third element needs to be introduced: quality for money. In terms of surviving a large drop in the price of oil and its natural effect on the economy, competition increases. Why? Clients spend less and so companies must compete to grab market share from their competitors.

As chronicled repeatedly in this column, there has been a lot of work on efficiency as evidenced by large cuts in operating expenditure. This is not a guarantee of efficiency, as the cuts could be simply a decrease in production capacity or quality. But lets go with at least some efficiency. So if the cost wars are effectively ending, except for the desperate who sell below cost, what’s left? Quality.

Those companies that can increase the quality of their products and services whilst maintaining cost control will be able to grab market share from their competitors. Happily, this is also the solution when some of your competitors use non-commercial methods. If they cut corners with the regulators they will cut corners with their clients. If the regulators will not act, the clients will.

Finally, we come to the short-term bridge. It is corporate governance. A strong board can help a company. That means having independent non-executive directors. It also means having knowledgeable directors and good corporate governance. Such a framework will attract funding to businesses, which in turn allows them to transform into efficient quality providers of products and services.