What Is the Relationship of the SWOT Analysis to Strategic Planning in Budgeting?
Part of a small business’s annual planning process -- also called budgeting -- is the development of business strategies. These are action steps the small-business owner intends to take to increase revenues, operate the company more efficiently and, as a result, increase profits. To be successful, strategies must be aligned with the business environment in which the company operates. SWOT analysis involves looking at the company’s strengths and weaknesses, the growth opportunities the company has, and threats the company faces from factors such as competitors. The information obtained during the SWOT analysis helps the business owner and his team get an accurate picture of the business environment.
Strength assessment means the business owner and his team determine what the company does particularly well compared to competitors. A company’s strengths are the basis of its competitive advantage. They shape the strategies that will be chosen. A company with an outstanding research and development staff, for example, would capitalize on the strength by implementing a strategy of continually bringing product innovations to the market. In the strategic plan, the company crafts a marketing message to communicate its strengths to prospective customers.
It’s not being negative, but simply realistic and honest, for the business owner and her team to recognize weaknesses in the company’s operations that are preventing it from reaching peak performance and maximizing its growth potential. As part of the strategic planning process, the company devises means to eliminate the weaknesses or at least reduce their impact. The business owner might, for example, identify low employee morale as a weakness that is negatively impacting productivity and customer service. She has a host of strategies she could employ to address morale issues, including reducing workload for staff members experiencing burnout or increasing salaries and bonuses.
The essence of strategic planning is determining the best growth opportunities for the company and the actions necessary to take full advantage of these opportunities. The “O” in SWOT means constantly being on the lookout for ways to find new markets for existing products or unmet needs in the marketplace that the company could create products or services to address. To identify opportunities, the management team must keep an eye on the environment year-round, not just when the strategic plan is being prepared. Opportunities can emerge at any time -- but they can also be overlooked by companies whose managers are too focused on current operational challenges and not attuned to factors such as trends in consumer preferences or changes in technology.
Also referred to as risk factors, threats are forces in the environment that could negatively impact a company’s revenue and profit performance. Threats vary in the severity of problems they can cause, and some threats may not materialize at all. Competitors always pose a threat to a company. They have their own strengths that allow them to acquire new customers and build market share. Threats can also come from deteriorating economic conditions, which can cause both consumers and businesses to reduce their spending. In the strategic planning process, understanding the threats her company faces allows the small-business owner to prepare a realistic strategic plan that is achievable. She and her team also prepare contingency plans that describe changes in strategies to deal with risks that turn out to be real and severe.