Evaluating Entrepreneurial Opportunities: What’s wrong
with SWOT?
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 {visit the website: In2EastAfrica. net to see the figure}.
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.
- What is happening in the competitive environment?
- What changes are occurring?
- Will these changes continue to occur?
- What do I know that others don’t know (or behave like they don’t know)?
- How can I carve out a unique or novel place within the competitive environment where others don’t exist?
- Can the idea be accepted?
- Do I have the skills, competencies, capabilities, resources and networks (or can I build them up and/or acquire them)?
- 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;
- 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).
- 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),
- 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).
- 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
- 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.
I wish to thank Professor Hunter for passing to me this article which was published by In2EastAfrica. net.
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