Evaluating
Entrepreneurial Opportunities:
What’s wrong with SWOT?
Murray Hunter
University Malaysia Perlis
SWOT
analysis is one of the most commonly used strategic planning tools around the
world. However SWOT’s origins are unclear and ambiguous. The SWOT analysis is
believed to have been developed by Stanford University’s Albert Humphery during
the 1960s where he led a research project to assist executives manage change.
Another source cites Harvard academics of developing the concept at the same
time (Haberberg 2000), while yet another source attributes SWOT to Igor Ansoff
(Turner 2002). Although the origins of SWOT are not clear, this single matrix is
probably the most well know of all the strategic tools available to managers.
SWOT analysis has
become an important opportunity evaluation tool in evaluating entrepreneurial
opportunities of late. Although being so popular, SWOT is also one of the most
misused strategic management tools, particularly by the inexperienced. However
this may be partly the cause of a fundamental flaw in the tool, when applied to
evaluating entrepreneurial opportunities. Besides the fundamental structural
flaw of SWOT, the subjective nature of this tool leaves it open to misuse. The
misuse of SWOT will lead to fundamental mistakes in evaluating entrepreneurial
opportunities and developing subsequent strategies which are very dangerous to
any entrepreneur.
The
Opportunity-Entrepreneurial Process
Before looking
at the SWOT analysis proper, one must consider the opportunity-entrepreneurship
process that will be analysed by SWOT.
The
opportunity-entrepreneurial process is decision demanding across the whole
spectrum right into the gamut of strategy and daily operations. The feasibility
of any spotted opportunity will only truly be known during the implementation of
strategies selected to exploit it, as only then the true nature of the
opportunity can be observed. Before actual start-up the real nature of the
opportunity is mysterious and the real issues involved only emerge as strategy
is implemented, and we can only suppose and speculate about its nature and
characteristics.
The
opportunity-entrepreneurial process is shown in figure 1. This begins with our
perceptions and personal creativity, supported by our competencies in spotting
ideas. The rest of the process involves the evaluation of an idea to determine
whether an opportunity actually exists. Innovation is required to evaluate and
elaborate on the idea. Suitable strategies out of a number of possible options
need to be selected which involves strategic thinking. Our skills, resources,
networks, capabilities and strategies should then match the nature of the
opportunity for exploitation to be successful, as it is our management
capability that is important in effectively exploiting the opportunity. As we
progress in the exploitation of the opportunity, we learn more about its nature
and modify our strategies in accordance with what we learn. This together with
the accuracy that we have matched our strategy with the perceived nature of the
opportunity identified, and level of competitive effectiveness we have developed
within the competitive environment determines performance.
Figure 1. The
Opportunity-Entrepreneurial Process.
The depiction of
the opportunity-entrepreneurship process infers that it is a learning process
where the entrepreneur/firm selects the strategies and operational processes
that best serve them – becoming a unique theory applicable for the
entrepreneur/firm in question. Although the opportunity-entrepreneurial process
is unique for every firm, there is a common structure that defines the process
of opportunity exploitation depicted in figure 1.
Some of the
skills needed for the successful operation of a particular business maybe unique
to that business and cannot be formally learnt. For example, the character
Miranda Priestly in the David Frankel directed film The Devil Wears Prada
had an uncanny ability to pick next season’s fashion successes which was one of
the primary reasons that the Runway magazine was so highly successful.
These types of skills enhance the perception of opportunity in specialized
domains and themselves attributes that can assist effective business
performance.
In addition,
because of a unique environmental position and combination of resources existing
with each firm, the barriers to entry and obstacles to successful implementation
will also tend to be unique to each firm. What is an insurmountable barrier to
one firm may be a strength for another. This in part gives ideas various levels
of attractiveness as opportunities to different firms.
Opportunity is a
relative concept which can be measured by the potential return that it may
provide a person perceiving it. The value of this return will vary according to
individual. For an idea to qualify as an opportunity, it has to provide a viable
return for the individual, which is not a static benchmark, as it differs
between people. Therefore what might be an opportunity for one person may just
remain an idea for another.
Another factor
influencing the viability of an opportunity is the uncertainty and risk
involved. There will always be uncertainty with any potential outcome of a new
venture. This includes the uncertainty regarding demand and uncertainty
regarding capability. Both of these forms of uncertainties create some
probability of failure, but individuals see these uncertainties very
differently. For example, some individuals will exhibit biases of overconfidence
and high perceptions of self-efficacy which lowers their perceptions of
uncertainty and risk about an idea and thus deem the idea an opportunity in
their personal perception.
Uncertainty will
always exist with a venture and there is no way of eliminating this (Shane 2003,
P. 7). As the opportunity-entrepreneurship process is also a learning process,
this infers that we start out not knowing what the future will be and where we
will quite end up. The future cannot be known in advance and this is a source of
uncertainty about what will occur (Knight 1921). What will potentially occur can
only be calculated as a probable outcome. Forecasting is a matter of
extrapolating historical data which will provide different results depending
upon the methods used and in the case of new products and new ventures there is
no historical data to base any forecasts on. The future cannot be forecast, only
expected and there are dangers in using forecasts as imaginary maps we believe
to be true (Schumacher 1974, P. 195). The environment will always change
unexpectedly which requires changes in strategy to accommodate these phenomenon.
There are two
aspects of entrepreneurial risk. First there is risk of firm failure. In the
worst case scenario, a business failure can lead to a loss of investment, and
even bankruptcy. Venture failure also carries the personal stigma of failure for
the individual which is viewed differently in various countries. The second form
of risk is in changing lifestyle and that mishaps in pursuing an entrepreneurial
opportunity will result in a loss of current income and lifestyle.
Due to the wide
and varied nature of ideas, there is no one correct way to evaluate opportunity
viability. Imitative and allocative opportunities can be analysed in terms of
market demand at the customer level, market size, and margin analyses based on
historical data. Critical to underpinning the viability of imitative and
allocative opportunities is the marketshare that the entrepreneur can
potentially gain and the size of the market (Gaglio 1997). This will not just
depend upon the qualities of the product, but the abilities of the firm to
promote and distribute the product.
However discovery
and construction opportunities rely on much more intuition and ‘gut feel’
in evaluating viability. The high levels of uncertainty of these types of
opportunities makes conventional forms of strategic analysis of very limited
value (March 1991, Mintzberg 1994). These types of opportunities are usually
best if evaluated informally or even unarticulated (Timmons 1987). Formal
business plans and forecasts based on historical information do little to assist
in the analysis of the viability of the idea and any large amount of time spent
analysing the idea in depth will probably not shed much further understanding or
reduce uncertainty about its potential success. Entrepreneurs will probably look
at the opportunity cost of investing time and resources into the idea under
conditions of risk and uncertainty and then compare this to a situation where he
or she had pursued other actions of choice (Casson 1982). The only way to
understand the viability of the opportunity is to learn about it through
implementation, where the willingness to continue experimenting is a further
expression of commitment by the entrepreneur (Staw 1981).
The only aspect
of discovery and construction opportunities that can be evaluated is to consider
the probable customer perception of the value proposition and price-value
relationships – which are purely subjective. These perceptions can be further
tested as to how easily this value is perceived by potential customers through
focus groups. The longer it takes for individuals to perceive value, the more
risk in the inherent opportunity (Spinelli et. al. 2007, P. 6).
The value of
opportunities will vary between industries, but this does not appear to be a
major factor influencing entrepreneurs in their focus upon industries that have
opportunities of higher value. The average value of opportunities in one
industry may be lower than another but an individual’s types of experiences and
aspirations will influence where their focus and attention is applied. Weight is
apparently given to areas where an individual feels interested and is capable of
exploiting.
There are also
timing and resource costs, among other factors that influence opportunity
viability. For example, Butler Lampson and Chuck Thacker, two researchers at
Xerox who invented the first personal computer – the Alto, cost over USD $10,000
to build. Steve Jobs and Steve Wornack’s Apple design cost around 20% of the
Lampson and Thacker design to build, making the Apple more viable as an
opportunity. Although there were other factors involved like Jobs and Wornack’s
intention to go into business prior to designing the Apple, this example shows
that other environmental and motivational factors create different scenarios of
viability for potential opportunities, and that individuals make different
decisions based upon these factors.
Figure 2. An
opportunity evaluation framework.
Opportunity
Evaluation and SWOT
Opportunity
evaluation becomes a complex interrelationship of subjective and objective
issues that need to be considered. A SWOT analysis must also consider issues of
uncertainty, risk, and recognize our initial biases to provide us with useful
information. Strengths and weaknesses refer to internal influences on the
individual or firm and affect the ability to exploit any opportunity. These
would include issues that the individual perceives as strengths that can be
capitalized upon and weaknesses that must be improved so that they don’t inhibit
potential opportunity exploitation. Threats relate to issues from the external
environment which is perceived to be critical to the activities and wellbeing of
the enterprise that would exploit the opportunity. Risks and uncertainties would
include factors that would either make outcomes uncertain in the future or that
may lead to venture failure. Strengths, Weaknesses (internal) and threats, risks
and uncertainties (external) should be examined around the opportunity. The
viability of the potential opportunity is a function of the surrounding
strengths, weaknesses, threats, risks, and uncertainties. It must also be
remembered that our perceptions of opportunities are influenced by emotions,
cognitive biases and heuristics which affect of judgments about viability. This
framework is shown in figure 2.
For an idea to
become an opportunity it must;
a)
Represent a future desirable state that an individual has aspirations for,
b) It must be
achievable, and
c) An individual
or firm has the skills, resources, and networks, or can acquire them to exploit
the opportunity.
The analysis will
lead to a set of questions that can help determine whether the above criteria
can be met.
1. What is
happening in the competitive environment?
2. What changes
are occurring?
3. Will these
changes continue to occur?
4. What do I know
that others don’t know (or behave like they don’t know)?
5. How can I
carve out a unique or novel place within the competitive environment where
others don’t exist?
6. Can the idea
be accepted?
7. Do I have the
skills, competencies, capabilities, resources and networks (or can I build them
up and/or acquire them)?
8. Will this be
beneficial to the consumer and me?
But as every idea
is unique, at least situationally, a different set of criteria is required to
evaluate different types of ideas.
The consideration
and determination of the answers to the above questions may be influenced by
some higher order heuristics like;
1. Risk-reward
profile: the valuation of relative rewards and risks, where a person will
weigh up the worth of forgoing guaranteed income and health insurance, etc,
against the potential benefits that could be gained by pursuing an opportunity
(Parker 1996, Bosma et. al. 1999).
2. The
reference benchmark: Individuals use reference points to decide on what they
may do based on their pertinent aspirations at a point of time (Fiegenbaum
et. al. 1995),
3. Reasoning:
Every individual seeks to control the flow of events they are involved in with
their own expectations, anticipations, hypothesis to test and experiments to
conduct and as a consequence has different viewpoints from others (Kelly 1970).
4. Pareto
optimal solutions: the idea maintains a level of well-being for all without
causing any personal loss or psychological stress to any participant in the
market space, while increasing the personal well being of the entrepreneur (Headey
& Wearing 1992), and
5. For socially
conscious entrepreneurs a Nash equilibrium outcome: a solution that has
all individuals satisfied with a pattern of outcomes that improves the position
of the entrepreneur, and for members of the new venture team, while also
increasing the level of satisfaction with life as a whole for the society at
large (Miller 2003).
As a consequence,
information will be interpreted differently by individuals who may think of
similar ideas, but have completely different vectors of that idea in mind.
There are many
types of businesses where it is extremely difficult to identify the elements of
success, e.g. restaurants, boutiques, and spas, etc. They rely on very tight
(but not necessarily apparent) formulas for success, which the entrepreneur may
not even understand. Also quite often what looks like a solid viable opportunity
that appears very logical and may even gather favourable market research
(Schindler 1992) may fail dismally in the marketplace. Some examples of
spectacular market failures include Federal Express’s launch of ZAP Mail
facsimile service in 1984, The Coca Cola Company’s launch of New Coke in 1985,
and the launch of 3G video calling around 2003.
To realistically
utilize SWOT to evaluate entrepreneurial opportunities, the issues of
uncertainty and risk must be brought into the equation. In addition we must be
aware of our biases in order to be aware of the emotional influences upon our
thinking. Just because one likes fine food, shopping, or massage, does not
necessarily mean that opportunities exist for developing for example, a
restaurant, boutique or spa. One must follow the syntax very closely, what is a
weaknesses, threat and strength must be clearly understood and recorded, not
wishful thinking. Finally by structural definition an opportunity can only be an
opportunity after strengths, weaknesses, threats, uncertainties and biases are
known. Thus the identification of opportunities only comes after the analysis
has been done.
References
Bosma, N.S.,
Zwinkels, W.S. & Carree, M.A. (1999). Determinanten voor toe- en uittreding van
ondernemers: een analyse van de ontwikkelingen in Nederland over de period
1987-1997, EIM Business Policy and research, Zoetermeer.
Casson, M. (1982). The Entrepreneur, Totowa, NJ, Barnes & Noble Books.
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