SWOT Analysis

Discover New Opportunities.
Manage and Eliminate Threats.

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Analyze your situation with James Manktelow &
Amy Carlson.

SWOT Analysis is a useful technique for understanding your Strengths and Weaknesses, and for identifying both the Opportunities open to you and the Threats you face.
Used in a business context, a SWOT Analysis helps you carve a sustainable niche in your market. Used in a personal context, it helps you develop your career in a way that takes best advantage of your talents, abilities and opportunities. (Click here for Business SWOT Analysis, and here for Personal SWOT Analysis.)

Business SWOT Analysis

What makes SWOT particularly powerful is that, with a little thought, it can help you uncover opportunities that you are well placed to exploit. And by understanding the weaknesses of your business, you can manage and eliminate threats that would otherwise catch you unawares.
More than this, by looking at yourself and your competitors using the SWOT framework, you can start to craft a strategy that helps you distinguish yourself from your competitors, so that you can compete successfully in your market.

How to Use SWOT Analysis

Originated by Albert S Humphrey in the 1960s, SWOT Analysis is as useful now as it was then. You can use it in two ways - as a simple icebreaker helping people get together to "kick off" strategy formulation, or in a more sophisticated way as a serious strategy tool.

Tip:
Strengths and weaknesses are often internal to your organization, while opportunities and threats generally relate to external factors. For this reason the SWOT Analysis is sometimes called Internal-External Analysis and the SWOT Matrix is sometimes called an IE Matrix.

To help you to carry out a SWOT Analysis, download and print off our free worksheet, and write down answers to the following questions.

Strengths:

• What advantages does your organization have?
• What do you do better than anyone else?
• What unique or lowest-cost resources can you draw upon that others can't?
• What do people in your market see as your strengths?
• What factors mean that you "get the sale"?
• What is your organization's Unique Selling Proposition (USP)?

Consider your strengths from both an internal perspective, and from the point of view of your customers and people in your market.
Also, if you're having any difficulty identifying strengths, try writing down a list of your organization's characteristics. Some of these will hopefully be strengths!
When looking at your strengths, think about them in relation to your competitors. For example, if all of your competitors provide high quality products, then a high quality production process is not a strength in your organization's market, it's a necessity.

Weaknesses:

• What could you improve?
• What should you avoid?
• What are people in your market likely to see as weaknesses?
• What factors lose you sales?

Again, consider this from an internal and external basis: Do other people seem to perceive weaknesses that you don't see? Are your competitors doing any better than you?
It's best to be realistic now, and face any unpleasant truths as soon as possible.

Opportunities:

• What good opportunities can you spot?
• What interesting trends are you aware of?

Useful opportunities can come from such things as:

• Changes in technology and markets on both a broad and narrow scale.
• Changes in government policy related to your field.
• Changes in social patterns, population profiles, lifestyle changes, and so on.
• Local events.
  

Tip:
A useful approach when looking at opportunities is to look at your strengths and ask yourself whether these open up any opportunities. Alternatively, look at your weaknesses and ask yourself whether you could open up opportunities by eliminating them.

Threats

• What obstacles do you face?
• What are your competitors doing?
• Are quality standards or specifications for your job, products or services changing?
• Is changing technology threatening your position?
• Do you have bad debt or cash-flow problems?
• Could any of your weaknesses seriously threaten your business?

Tip:
When looking at opportunities and threats, PEST Analysis can help to ensure that you don't overlook external factors, such as new government regulations, or technological changes in your industry.

Further SWOT Tips

Mind Tools on Strategy:

• SWOT Analysis
• TOWS Analysis
• PEST Analysis
• Core Competence Analysis
• Value Chain Analysis
• Porter's Five Forces
• Porter's Generic Strategies
• Bowman's Strategy Clock
• Scenario Analysis

If you're using SWOT Analysis as a serious tool (rather than as a casual "warm up" for strategy formulation), make sure you're rigorous in the way you apply it:

• Only accept precise, verifiable statements ("Cost advantage of US$10/ton in sourcing raw material x", rather than "Good value for money").
• Ruthlessly prune long lists of factors, and prioritize them, so that you spend your time thinking about the most significant factors.
• Make sure that options generated are carried through to later stages in the strategy formation process.
• Apply it at the right level - for example, you might need to apply SWOT Analysis at product or product-line level, rather than at the much vaguer whole company level.
• Use it in conjunction with other strategy tools (for example, USP Analysis and Core Competence Analysis) so that you get a comprehensive picture of the situation you're dealing with.

Note:
You could also consider using the TOWS Matrix. This is quite similar to SWOT in that it also focuses on the same four elements of Strengths, Weaknesses, Opportunities and Threats. But TOWS can be a helpful alternative because it emphasizes the external environment, while SWOT focuses on the internal environment.

Example SWOT Analysis

A start-up small consultancy business might draw up the following SWOT Analysis:

Strengths:

• We are able to respond very quickly as we have no red tape, and no need for higher management approval.
• We are able to give really good customer care, as the current small amount of work means we have plenty of time to devote to customers.
• Our lead consultant has strong reputation in the market.
• We can change direction quickly if we find that our marketing is not working.
• We have low overheads, so we can offer good value to customers.

Weaknesses:

• Our company has little market presence or reputation.
• We have a small staff, with a shallow skills base in many areas.
• We are vulnerable to vital staff being sick, and leaving.
• Our cash flow will be unreliable in the early stages.

Opportunities:

• Our business sector is expanding, with many future opportunities for success.
• Local government wants to encourage local businesses.
• Our competitors may be slow to adopt new technologies.

Threats:

• Developments in technology may change this market beyond our ability to adapt.
• A small change in the focus of a large competitor might wipe out any market position we achieve.

As a result of their SWOT Analysis, the consultancy may decide to specialize in rapid response, good value services to local businesses and local government.
Marketing would be in selected local publications to get the greatest possible market presence for a set advertising budget, and the consultancy should keep up-to-date with changes in technology where possible.

Key Points

SWOT Analysis is a simple but useful framework for analyzing your organization's strengths and weaknesses, and the opportunities and threats that you face. It helps you focus on your strengths, minimize threats, and take the greatest possible advantage of opportunities available to you.
SWOT Analysis can be used to "kick off" strategy formulation, or in a more sophisticated way as a serious strategy tool. You can also use it to get an understanding of your competitors, which can give you the insights you need to craft a coherent and successful competitive position.

When carrying out your SWOT Analysis, be realistic and rigorous. Apply it at the right level, and supplement it with other option-generation tools where appropriate.

PEST Analysis

Identifying "Big Picture" Opportunities and Threats

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Understand your environment,
with James Manktelow & Amy Carlson.

Changes in your business environment can create great opportunities for your organization - and cause significant threats.
For example, opportunities can come from new technologies that help you reach new customers, from new funding streams that allow you to invest in better equipment, and from changed government policies that open up new markets.
Threats can include deregulation that exposes you to intensified competition; a shrinking market; or increases to interest rates, which can cause problems if your company is burdened by debt.
PEST Analysis is a simple and widely used tool that helps you analyze the Political, Economic, Socio-Cultural, and Technological changes in your business environment. This helps you understand the "big picture" forces of change that you're exposed to, and, from this, take advantage of the opportunities that they present.
In this article, we'll look at how you can use PEST Analysis to understand and adapt to your future business environment.

About the Tool

Harvard professor Francis Aguilar is thought to be the creator of PEST Analysis. He included a scanning tool called ETPS in his 1967 book "Scanning the Business Environment." The name was later tweaked to create the current acronym.
PEST Analysis is useful for four main reasons:

1. It helps you to spot business or personal opportunities, and it gives you advanced warning of significant threats.
2. It reveals the direction of change within your business environment. This helps you shape what you're doing, so that you work with change, rather than against it.
3. It helps you avoid starting projects that are likely to fail, for reasons beyond your control.
4. It can help you break free of unconscious assumptions when you enter a new country, region, or market; because it helps you develop an objective view of this new environment.

Note:
PEST Analysis is often linked with SWOT Analysis, however, the two tools have different areas of focus. PEST Analysis looks at "big picture" factors that might influence a decision, a market, or a potential new business. SWOT Analysis explores these factors at a business, product-line or product level.
These tools complement one another and are often used together.

How to Use the Tool

Follow these steps to analyze your business environment, and the opportunities and threats that it presents.

1. Use PEST to brainstorm the changes happening around you. Use the prompts below to guide your questioning, and tailor the questions to suit the specific needs of your business.
2. Brainstorm opportunities arising from each of these changes.
3. Brainstorm threats or issues that could be caused by them.
4. Take appropriate action.

Our worksheet guides you through these steps.

Step 1: Brainstorm Factors

Political Factors to Consider

• When is the country's next local, state, or national election? How could this change government or regional policy?
• Who are the most likely contenders for power? What are their views on business policy, and on other policies that affect your organization?
• Depending on the country, how well developed are property rights and the rule of law, and how widespread are corruption and organized crime? How are these situations likely to change, and how is this likely to affect you?
• Could any pending legislation or taxation changes affect your business, either positively or negatively?
• How will business regulation, along with any planned changes to it, affect your business? And is there a trend towards regulation or deregulation?
• How does government approach corporate policy, corporate social responsibility, environmental issues, and customer protection legislation? What impact does this have, and is it likely to change?
• What is the likely timescale of proposed legislative changes?
• Are there any other political factors that are likely to change?

Economic Factors to Consider

• How stable is the current economy? Is it growing, stagnating, or declining?
• Are key exchange rates stable, or do they tend to vary significantly?
• Are customers' levels of disposable income rising or falling? How is this likely to change in the next few years?
• What is the unemployment rate? Will it be easy to build a skilled workforce? Or will it be expensive to hire skilled labor?
• Do consumers and businesses have easy access to credit? If not, how will this affect your organization?
• How is globalization affecting the economic environment?
• Are there any other economic factors that you should consider?

Tip:
Use Porter's Diamond to align your strategy with your country's business conditions.

Socio-Cultural Factors to Consider

• What is the population's growth rate and age profile? How is this likely to change?
• Are generational shifts in attitude likely to affect what you're doing?
• What are your society's levels of health, education, and social mobility? How are these changing, and what impact does this have?
• What employment patterns, job market trends, and attitudes toward work can you observe? Are these different for different age groups?
• What social attitudes and social taboos could affect your business? Have there been recent socio-cultural changes that might affect this?
• How do religious beliefs and lifestyle choices affect the population?
• Are any other socio-cultural factors likely to drive change for your business?

Tip:
Values take a central role in any society. Use the Competing Values Framework to identify your organization's values, and Hofstede's Cultural Dimensions to explore the values of your customers.

Technological Factors to Consider

• Are there any new technologies that you could be using?
• Are there any new technologies on the horizon that could radically affect your work or your industry?
• Do any of your competitors have access to new technologies that could redefine their products?
• In which areas do governments and educational institutions focus their research? Is there anything you can do to take advantage of this?
• How have infrastructure changes affected work patterns (for example, levels of remote working)?
• Are there existing technological hubs that you could work with or learn from?
• Are there any other technological factors that you should consider?

Note:
There are variations of PEST Analysis that bring other factors into consideration. These include:

• PESTLE/PESTEL: Political, Economic, Socio-Cultural, Technological, Legal, Environmental.
• PESTLIED: Political, Economic, Socio-Cultural, Technological, Legal, International, Environmental, Demographic.
• STEEPLE: Social/Demographic, Technological, Economic, Environmental, Political, Legal, Ethical.
• SLEPT: Socio-Cultural, Legal, Economic, Political, Technological.
• LONGPESTLE: Local, National, and Global versions of PESTLE. (These are best used for understanding change in multinational organizations.)

Choose the version that best suits your situation.

Step 2: Brainstorm Opportunities

Once you've identified the changes that are taking place in your business environment, it's time to look at each change, and brainstorm the opportunities that this could open up for you. For example, could it help you develop new products, open up new markets, or help you make processes more efficient?

Step 3: Brainstorm Threats

It's also important to think about how these changes could undermine your business. If you understand this early enough, you may be able to avoid these problems, or minimize their impact.
For example, if a core part of your market is in demographic decline, could you open up other areas of the market? Or if technology is threatening a key product, can you master that technology and improve the product? (Risk Analysis can help you to assess these threats and devise strategies to manage them.)

Step 4: Take Action

Where you have identified significant opportunities, build the actions you'll take to exploit them into your Business Plan. Where you've identified significant risks, take appropriate action to manage or eliminate them.

Key Points

PEST Analysis helps you understand the Political, Economic, Social, and Technological changes that will shape your business environment.
You can use these headings to brainstorm the "big picture" characteristics of a business environment (this could be a country, a region, or a new or existing market), and, from this, draw conclusions about the significant forces of change operating within it.
This provides a context for more detailed planning, within which you will be able to minimize risk and take full advantage of the opportunities that present themselves.

Scenario Analysis

Exploring Different Futures

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© iStockphoto

Imagine that you're facing a really significant decision, which could fundamentally affect your personal life, or could determine the future of your business. Maybe you're thinking about "stretching your finances" to buy a bigger house. Or maybe you're thinking of launching a new product which you know could "cannibalize" existing sales.
Perhaps you've done the numbers, and these seem OK. But deep down, you dread what could go wrong. After all, no one has a foolproof vision of the future, and while you may have strong instincts as to how things may develop, any single projection of the future is clearly vulnerable to disruption by a range of different factors.
Scenario Analysis helps you bring these fears into the open and gives you a rational and professional framework for exploring them.
Using it, you can make decisions in the context of the different futures that may come to pass. The act of creating scenarios forces you to challenge your assumptions about the future. By shaping your plans and decisions based on the most likely scenarios, you can ensure that your decisions are sound even if circumstances change.

How to Use the Tool

In Scenario Analysis, the scenarios are stories about the way the world might turn out if certain trends continue and if certain conditions are met.
We offer a simple five-phase Scenario Analysis process, as follows:

1. Define the Problem

First, decide what you want to achieve, and think about the time horizon you want to look at. This will be driven by the scale of the plans and scenarios that you want to test.
Example:
Barry Holtz was starting to plan a new business that focused on helping corporate clients implement a popular financial management software package. He wanted the business to grow to a reasonable size over the next five years. With this in mind, he decided to use scenario thinking to look at what the future might hold over this period.

2. Gather Data

Next, identify the key factors, trends, and uncertainties that may affect the plan. If your plan is a large-scale one, you may find it helpful to do a PEST Analysis of the context in which it will be implemented to identify political, economic, socio-cultural, and technological factors that could impact it. Then, identify the key assumptions on which the plan depends.
Example:
Amongst others, Barry identified the following factors as important:

• The state of the economy (people don't buy much new software in a recession).
• The ongoing importance of new software in increasing clients' productivity.
• Whether the software package would maintain its market position.
• Whether he could recruit enough skilled implementation consultants.

3. Separate Certainties From Uncertainties

You may be confident in some of your assumptions, and you may be sure that certain trends will work through in a particular way. After challenging them appropriately, adopt these trends as your "certainties." Separate these from the "uncertainties" – trends that may or may not be important, and underlying factors that may or may not change. List these uncertainties in priority order, with the largest, most significant uncertainties at the top of the list.
Example:
Based on analysis of recent vacancy rates, Barry was confident that, provided he paid attention to recruitment, he could find a sufficient number of new employees. And seeing the new technologies shortly to be deployed by the software vendor, he was confident that clients would reap considerable efficiency gains by implementing the next versions of the software.
He was anxious, however, that a global software giant might enter the market and displace the current vendor. Furthermore, he'd seen plenty of implementation companies go bust in the previous recession.

4. Develop Scenarios

Now, starting with your top uncertainty, take a moderately good outcome and a moderately bad outcome, and develop a story of the future around each that fuses your certainties with the outcome you've chosen.
Then, do the same for your second most serious uncertainty.
Don't do too many scenarios in this step, or you may find yourself quickly hitting "diminishing returns."
Example:
Barry decided to prepare the following scenarios:

• "All's going well": The economy grows steadily over the five-year period with only minor slowdowns, and he's "backed the right horse." The software vendor consolidates itself in the market and moves into a position of market leadership.
• "Economic slowdown": Toward the end of the period, a commodity price shock pushes the economy into mild recession. While some new software implementations do go ahead, many clients decide to defer implementation until things pick up.
• "Intensifying competition": The global giant enters the market. While it takes time to get its products established, toward the end of the period, it is starting to squeeze the current supplier.

5. Use the Scenarios in Your Planning

You can now use the scenarios you came up with in your planning.
Example:
Having looked at the scenarios, Barry's aware that there's some risk to the business in the medium term.
In his business planning, he decides to gear the business to use a mix of full-time staff and short-term contractors so he can scale his business quickly, depending on the circumstances.
And he notes that he's going to have to monitor the activities of software companies entering the market so he can cross-train personnel if a new entrant starts to threaten the existing supplier.

Tip 1:
In identifying trends, be careful to base your assessment on evidence rather than supposition. And make sure that trends are built on secure foundations.
Also, remember that trends tend to be damped down by other factors. No revolution is instantaneous.
Tip 2:
Peter Schwartz, one of the fathers of scenario thinking, mentions the following as plots of common scenarios:

• Evolution: All trends continue as expected. Things gently move toward a predictable end point.
• Revolution: A new factor fundamentally changes the situation.
• Cycles: What goes around comes around. Boom follows bust follows boom follows bust.
• Infinite Expansion: Exciting trends continue. Think of the computer industry in the 1950s.
• Lone Ranger: The triumph of the lone hero against the forces of inertia.
• My Generation: Changes in culture and demographics affect the situation.

Key Points

Scenario planning is a useful way of challenging the assumptions you naturally tend to make about the situation in which your plans will come to fruition. By building a few alternative scenarios, you can foresee more unknowns that may come to pass, and therefore you will be able to plan measures to counteract or mitigate their impact.

Risk Impact/Probability Chart

Learning to Prioritize Risks

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Preparing sufficiently for the worst.

© iStockphoto

Risk management is an important function in organizations today. Companies undertake increasingly complex and ambitious projects, and those projects must be executed successfully, in an uncertain and often risky environment.
As a responsible manager, you need to be aware of these risks. Does this mean that you should try to address each and every risk that your project might face? Probably not – in all but the most critical environments, this can be much too expensive, both in time and resources.
Instead, you need to prioritize risks. If you do this effectively, you can focus the majority of your time and effort on the most important risks.
The Risk Impact/Probability Chart provides a useful framework that helps you decide which risks need your attention.

How to Use the Tool

The Risk Impact/Probability Chart is based on the principle that a risk has two primary dimensions:

1. Probability – A risk is an event that "may" occur. The probability of it occurring can range anywhere from just above 0 percent to just below 100 percent. (Note: It can't be exactly 100 percent, because then it would be a certainty, not a risk. And it can't be exactly 0 percent, or it wouldn't be a risk.)
2. Impact – A risk, by its very nature, always has a negative impact. However, the size of the impact varies in terms of cost and impact on health, human life, or some other critical factor.

The chart allows you to rate potential risks on these two dimensions. The probability that a risk will occur is represented on one axis of the chart – and the impact of the risk, if it occurs, on the other.
You use these two measures to plot the risk on the chart. This gives you a quick, clear view of the priority that you need to give to each. You can then decide what resources you will allocate to managing that particular risk.
The basic form of the Risk Impact/Probability Chart is shown in figure 1, below.
Figure 1 – The Risk Impact/Probability Chart

The corners of the chart have these characteristics:

• Low impact/low probability – Risks in the bottom left corner are low level, and you can often ignore them.
• Low impact/high probability – Risks in the top left corner are of moderate importance – if these things happen, you can cope with them and move on. However, you should try to reduce the likelihood that they'll occur.
• High impact/low probability – Risks in the bottom right corner are of high importance if they do occur, but they're very unlikely to happen. For these, however, you should do what you can to reduce the impact they'll have if they do occur, and you should have contingency plans in place just in case they do.
• High impact/high probability – Risks towards the top right corner are of critical importance. These are your top priorities, and are risks that you must pay close attention to.

Tip 1:
It's natural to want to turn this into a two-by-two matrix. The problem here is where the lines dividing the quadrants of the matrix lie. For example – should you ignore a 49 percent probability risk, which will cause a 49 percent of maximum loss? And why, in this example, should you pay maximum attention to a risk that has a 51 percent probability of occurring, with a loss of 51 percent of maximum loss?

Tip 2:
In some industries, you need to pay close attention to even very unlikely risks, where these risks involve injury or loss of human life, for example. Make sure you pay due attention to these risks.

To use the Risk Impact/Probability Chart, print this free worksheet, and then follow these steps:

1. List all of the likely risks that your project faces. Make the list as comprehensive as possible.
2. Assess the probability of each risk occurring, and assign it a rating. For example, you could use a scale of 1 to 10. Assign a score of 1 when a risk is extremely unlikely to occur, and use a score of 10 when the risk is extremely likely to occur.
3. Estimate the impact on the project if the risk occurs. Again, do this for each and every risk on your list. Using your 1-10 scale, assign it a 1 for little impact and a 10 for a huge, catastrophic impact.
4. Map out the ratings on the Risk Impact/Probability Chart.
5. Develop a response to each risk, according to its position in the chart. Remember, risks in the bottom left corner can often be ignored, while those in the top right corner need a great deal of time and attention. Read Risk Analysis and Risk Management for detailed strategies on developing a risk response plan.

Key Points

To successfully implement a project, you must identify and focus your attention on middle and high-priority risks – otherwise you risk spreading your efforts too thinly, and you'll waste resources on unnecessary risk management.
With the Risk Impact/Probability Chart, you map out each risk – and its position determines its priority. High-probability/high-impact risks are the most critical, and you should put a great deal of effort into managing these. The low-probability/high-impact risks and high-probability/low-impact risks are next in priority, though you may want to adopt different strategies for each.

Low-probability/low-impact risks can often be ignored.

Contingency Planning

Developing a Good 'Plan B'

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Have a solid Plan B ready.

© iStockphoto/WendellFranks

Fires, floods, tornadoes – these are the things we often connect with contingency planning. But what if your main supplier suddenly goes bankrupt? Or, what if your entire sales force gets sick with food poisoning at your annual sales conference? Or, your payroll clerk simply calls in sick on payroll day? These things can all cause confusion and disorder if you haven't prepared for them properly. Contingency planning is a key part of this preparation.
As you see, contingency planning is not just about major disasters. On a smaller scale, it's about preparing for events such as the loss of data, people, customers, and suppliers, and other disruptive unknowns. That's why it's important to make contingency planning a normal part of your everyday business operations.

Risk Assessment

The need for contingency planning emerges from a thorough analysis of the risks that your organization faces. It's also useful in thinking about new and ongoing projects: what happens when 'Plan A' doesn't go as expected? Sometimes Plan A simply means 'business as usual.' Other times, with more sophisticated risk management plans, Plan A is your first response to deal with an identified risk – and when Plan A doesn't work, you use your contingency plan.
Use these principles in your risk assessment process:

• Address all business-critical operations – No matter where your contingency planning starts, a good plan identifies critical business functions, and it outlines a way to minimize losses.
• Identify risks – The first part of an effective risk analysis is to identify the various risks that your business may face. What has the potential to significantly disrupt or harm your project or business operations? The end result of a risk analysis is usually a huge list of potential threats. If you try to produce a contingency plan for each, you may be overwhelmed. This is why you must prioritize.
• Prioritizing risks – One of the greatest challenges of contingency planning is making sure you don't plan too much. You need a careful balance between overpreparation for something that may never happen, and adequate preparation so that you can respond quickly and effectively to a crisis situation when necessary.
• Risk Impact/Probability Charts help you find this balance. With these, you analyze the impact of each risk, and you assign a likelihood of it occurring. Then it's easier to determine which risks require the expense and effort of risk mitigation. Business processes that are essential to long-term survival – like maintaining cash flow, staff support, and market share – are typically at the top of the list.
• Note that contingency planning isn't the only action that emerges as a result of risk analysis – you can manage risk by using existing assets more effectively or by investing in new resources or services that help you manage it (such as insurance). Also, if a risk is particularly unlikely to materialize, you may decide to do nothing about it, and manage around it if the situation arises.

Contingency Planning Challenges

You should be aware of a few common obstacles as you begin your contingency planning process:

• People are often poorly motivated to develop a strong ‘Plan B’ because they have too much of an emotional investment in the ‘Plan A’ they want to deliver. Stress that Plan B should be properly thought-through.
• There’s usually a low probability of a crisis occurring, so people often don’t feel a sense of urgency to create a contingency plan, meaning that it gets stuck at the bottom of their To Do Lists. Unfortunately, this may mean that contingency planning ends up as a task that never gets done.
• Organizational politics can interfere with prioritizing risk, because many people may want to be seen as an essential part of recovery efforts. If you include all key business managers in the risk assessment and prioritization process, this may help you reach agreement.

Developing the Plan

Remember these guidelines when it's time to prepare your contingency plan:

• Your main goal is to maintain business operations – Look closely at what you need to do to deliver a minimum level of service and functionality.
• Define time periods – What must be done during the first hour of the plan being implemented? The first day? The first week? If you break down the plan, you're less likely to leave out important details.
• Identify the trigger – What specifically will cause you to implement the contingency plan? Decide which actions you'll take, and when. Determine who is in charge at each stage and what type of reporting process they must follow.
• Keep the plan simple – You don't know who will read and implement the plan when it's needed, so use clear and plain language.
• Consider related resource restrictions – Will your organization be able to function the same way if you have to implement Plan B, or will Plan B necessarily reduce capabilities?
• Identify everyone's needs – Have people throughout the company identify what they must have, at a minimum, to continue operations.
• Define 'success' – What will you need to do to return to 'business as usual'?
• Include contingency plans in standard operating procedures – Make sure you provide initial training on the plan, and keep everyone up-to-date on changes.
• Manage your risks – Look for opportunities to reduce risk, wherever possible. This may help you reduce, or even eliminate, the need for full contingency plans in certain areas.
• Identify operational inefficiencies – Provide a standard to document your planning process, and find opportunities for performance improvement.

Disaster recovery specifics are beyond the scope of this article. For more information on this topic, can listen to our Expert Interview with Kathy McKee, 'Leading People Through Disasters'.

Maintaining the Plan

After you prepare the contingency plan, you need to do several things to keep it practical and relevant – don't just create a document and file it away. As your business changes, you'll need to review and update these plans accordingly.
Here are some key steps in the contingency plan maintenance process:

• Communicate the plan to everyone in the organization.
• Inform people of their roles and responsibilities related to the plan.
• Provide necessary training for people to fulfill these roles and responsibilities.
• Conduct disaster drills where practical.
• Assess the results of training and drills, and make any necessary changes.
• Review the plan on a regular basis, especially if there are relevant technological, operational, and personnel changes.
• Distribute revised plans throughout the company, and make sure the old plan is discarded.
• Audit the plan periodically:
  
  • Reassess the risks to the business.
  • Analyze efforts to control risk by comparing actual performance to the performance level described in the contingency plan.
  • Recommend and make changes, if necessary.

Key Points

Contingency planning is ignored in many companies. Day-to-day operations are demanding, and the probability of a significant business disruption is small, so it's hard to make time to prepare a good plan. However, if you're proactive in the short term, you'll help ensure a quicker and more effective recovery from an operational setback in the long term, and you may save your organization from failure in the event that risks materialize.

A contingency planning process also helps you gain significant insight into the risks your organization faces. This enables you to develop an effective planning strategy that will immediately add value to the business. Contingency planning requires an investment of time and resources, but if you fail to do it – or if you do it poorly – the costs could be significant if a disaster happens.

Risk Analysis

Evaluating and Managing Risks

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Find out how to do a risk analysis,
with James Manktelow and Amy Carlson.

Almost all of the things that we do at work involve risk of some kind, but it can sometimes be challenging to identify risk, let alone to prepare for it.
Risk Analysis helps you understand risk, so that you can manage it, and minimize disruption to your plans. Risk Analysis also helps you control risk in a cost-effective way.
In this article, we'll look at how you can identify and manage risk effectively.

What is Risk Analysis?

Risk Analysis helps you identify and manage potential problems that could undermine key business initiatives or projects.
Risk is made up of two things: the probability of something going wrong, and the negative consequences that will happen if it does.
You carry out a Risk Analysis by first identifying the possible threats that you face, and by then estimating the likelihood that these threats will materialize.
Risk Analysis can be quite involved, and it's useful in a variety of situations. To do an in-depth analysis, you'll need to draw on detailed information such as project plans, financial data, security protocols, marketing forecasts, or other relevant information.

When to Use Risk Analysis

Risk analysis is useful in many situations, for example, when you're:

• Planning projects, to help you anticipate and neutralize possible problems.
• Deciding whether or not to move forward with a project.
• Improving safety and managing potential risks in the workplace.
• Preparing for events such as equipment or technology failure, theft, staff sickness, or natural disasters.
• Planning for changes in your environment, such as new competitors coming into the market, or changes to government policy.

How to Use Risk Analysis

To carry out a risk analysis, follow these steps:

1. Identify Threats

The first step in Risk Analysis is to identify the existing and possible threats that you might face. These can come from many different sources. For instance:

• Human - from illness, death, injury, or other loss of a key individual.
• Operational - from disruption to supplies and operations, loss of access to essential assets, or failures in distribution.
• Reputational - from loss of customer or employee confidence, or damage to market reputation.
• Procedural - from failures of accountability, internal systems and controls; or from fraud.
• Project - from going over budget, taking too long on key tasks, or experiencing issues with product or service quality.
• Financial - from business failure, stock market fluctuations, interest rate changes, or non-availability of funding.
• Technical - from advances in technology, or from technical failure.
• Natural - from weather, natural disasters, or disease.
• Political - from changes in tax, public opinion, government policy, or foreign influence.
• Structural - from dangerous chemicals, poor lighting, falling boxes, or any situation where staff, products, or technology can be harmed.

It's easy to overlook important threats, so make sure that you do as thorough an analysis as you can. You can use a number of different approaches to do this:

• Run through a list such as the one above to see if any of these threats are relevant.
• Think about the systems, processes, or structures that you use, and analyze risks to any part of these. Then, see if you can spot any vulnerabilities within them.
• Ask others who might have different perspectives. If you're leading a team, ask for input from your people, and consult other people in your organization or those who have run similar projects.

Tools such as SWOT Analysis and PEST Analysis can also help you uncover threats, while Scenario Analysis helps you explore threats that you might encounter in the "different futures" that your organization might face.

2. Estimate Risk

Once you've identified the threats you're facing, you need to work out both the likelihood of these threats being realized, and their possible impact.
One way of doing this is to make your best estimate of the probability of the event occurring, and then multiply this by the amount it will cost you to set things right if it happens. This gives you a value for the risk:

Risk Value = Probability of Event x Cost of Event

As a simple example, let's say that you've identified a risk that your rent may increase substantially.
You think that there's an 80 percent chance of this happening within the next year, because your landlord has recently increased rents for other businesses. If this happens, it will cost your business an extra $500,000 over the next year.
So the risk value of the rent increase is:

0.80 (Probability of Event) x $500,000 (Cost of Event) = $400,000 (Risk Value)

You can also use a Risk Impact/Probability Chart to assess risk. By using these charts, you can quickly identify which risks you need to focus on.

Tip:
Don't rush this step. Gather as much information as you can so that you can estimate the probability of an event occurring, and its costs, as accurately as possible. Probabilities are particularly hard to assess: where you can, base these on past data.

3. Manage Risk

Once you've identified the value of the risks you face, you can start to look at ways of managing them.
When you do this, it's important to choose cost-effective approaches - in many cases, there's no point in spending more to eliminate a risk than the cost of the event if it occurs. So, it may be better to accept the risk than it is to use excessive resources to eliminate it. Be sensible in how you apply this, though, especially if this involves ethical decisions or affects people's safety.
You can manage risks by:

• Using existing assets - this may involve reusing or redeploying existing equipment, improving existing methods and systems, changing people's responsibilities, improving accountability and internal controls, and so on.
• You can also manage risks by adding or changing things. For instance, you could do this by choosing different materials, by improving safety procedures or safety gear, or by adding a layer of security to your organization's IT systems.
• Developing a contingency plan - this is where you accept a risk, but develop a plan to minimize its effects if it happens.
• A good contingency plan will allow you to take action immediately, and with the minimum of project control, if you find yourself in a crisis. Contingency plans also form a key part of Business Continuity Planning (BCP) or Business Continuity Management (BCM).
• Investing in new resources - your Risk Analysis will help you decide whether you need to bring in additional resources to counter the risk. This can include insuring the risk - this is particularly important where the risk is so great that it can threaten your solvency.
• You might also want to develop a procedural prevention plan. This defines the activities that need to take place every day, week, month, or year to monitor or mitigate the risks you've identified. For example, you may want to arrange a daily backup of computer files, yearly testing of your building's sprinkler system, or a monthly check on your organization's security system.

4. Review

Once you've carried out a Risk Analysis and have managed risks appropriately, conduct regular reviews. This is because the costs and impacts of some risks may change, other risks may become obsolete, and new risks may appear.
These reviews may involve re-doing your Risk Analysis, as well as testing systems and plans appropriately.

Key Points

Risk Analysis is a proven way of identifying and assessing factors that could negatively affect the success of a business or project. It allows you to examine the risks that you or your organization face, and decide whether or not to move forward with a decision.
You do a Risk Analysis by identify threats, and by then estimating the likelihood of those threats being realized.
Once you've worked out the value of the risks you face, you can start looking at ways to manage them effectively. This may include using existing assets, developing a contingency plan, or investing in new resources.

Be thorough with your Risk Analysis, and be sensible with how you apply your findings.

The McKinsey 7S Framework

Ensuring That All Parts of Your Organization Work in Harmony

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Learn how to use the 7S Framework,
with James Manktelow & Amy Carlson.

How do you go about analyzing how well your organization is positioned to achieve its intended objective? This is a question that has been asked for many years, and there are many different answers.
Some approaches look at internal factors, others look at external ones, some combine these perspectives, and others look for congruence between various aspects of the organization being studied. Ultimately, the issue comes down to which factors to study.
While some models of organizational effectiveness go in and out of fashion, one that has persisted is the McKinsey 7S framework. Developed in the early 1980s by Tom Peters and Robert Waterman, two consultants working at the McKinsey & Company consulting firm, the basic premise of the model is that there are seven internal aspects of an organization that need to be aligned if it is to be successful.
The 7S model can be used in a wide variety of situations where an alignment perspective is useful, for example to help you:

• Improve the performance of a company.
• Examine the likely effects of future changes within a company.
• Align departments and processes during a merger or acquisition.
• Determine how best to implement a proposed strategy.

Tip:
The McKinsey 7S model can be applied to elements of a team or a project as well. The alignment issues apply, regardless of how you decide to define the scope of the areas you study.

The Seven Elements

The McKinsey 7S model involves seven interdependent factors which are categorized as either "hard" or "soft" elements:

Hard Elements	Soft Elements
Strategy Structure Systems	Shared Values Skills Style Staff

"Hard" elements are easier to define or identify and management can directly influence them: These are strategy statements; organization charts and reporting lines; and formal processes and IT systems.
"Soft" elements, on the other hand, can be more difficult to describe, and are less tangible and more influenced by culture. However, these soft elements are as important as the hard elements if the organization is going to be successful.
The way the model is presented in Figure 1 below depicts the interdependency of the elements and indicates how a change in one affects all the others.

Let's look at each of the elements specifically:

• Strategy: the plan devised to maintain and build competitive advantage over the competition.
• Structure: the way the organization is structured and who reports to whom.
• Systems: the daily activities and procedures that staff members engage in to get the job done.
• Shared Values: called "superordinate goals" when the model was first developed, these are the core values of the company that are evidenced in the corporate culture and the general work ethic.
• Style: the style of leadership adopted.
• Staff: the employees and their general capabilities.
• Skills: the actual skills and competencies of the employees working for the company.

Note:
Placing Shared Values in the middle of the model emphasizes that these values are central to the development of all the other critical elements. The company's structure, strategy, systems, style, staff and skills all stem from why the organization was originally created, and what it stands for. The original vision of the company was formed from the values of the creators. As the values change, so do all the other elements.

How to Use the Model

Now you know what the model covers, how can you use it?
The model is based on the theory that, for an organization to perform well, these seven elements need to be aligned and mutually reinforcing. So, the model can be used to help identify what needs to be realigned to improve performance, or to maintain alignment (and performance) during other types of change.
Whatever the type of change – restructuring, new processes, organizational merger, new systems, change of leadership, and so on – the model can be used to understand how the organizational elements are interrelated, and so ensure that the wider impact of changes made in one area is taken into consideration.
You can use the 7S model to help analyze the current situation (Point A), a proposed future situation (Point B) and to identify gaps and inconsistencies between them. It's then a question of adjusting and tuning the elements of the 7S model to ensure that your organization works effectively and well once you reach the desired endpoint.
Sounds simple? Well, of course not: Changing your organization probably will not be simple at all! Whole books and methodologies are dedicated to analyzing organizational strategy, improving performance and managing change. The 7S model is a good framework to help you ask the right questions – but it won't give you all the answers. For that you'll need to bring together the right knowledge, skills and experience.
When it comes to asking the right questions, we've developed a Mind Tools checklist and a matrix to keep track of how the seven elements align with each other. Supplement these with your own questions, based on your organization's specific circumstances and accumulated wisdom.

7S Checklist Questions

Here are some of the questions that you'll need to explore to help you understand your situation in terms of the 7S framework. Use them to analyze your current (Point A) situation first, and then repeat the exercise for your proposed situation (Point B).
Strategy:

• What is our strategy?
• How do we intend to achieve our objectives?
• How do we deal with competitive pressure?
• How are changes in customer demands dealt with?
• How is strategy adjusted for environmental issues?

Structure:

• How is the company/team divided?
• What is the hierarchy?
• How do the various departments coordinate activities?
• How do the team members organize and align themselves?
• Is decision making and controlling centralized or decentralized? Is this as it should be, given what we're doing?
• Where are the lines of communication? Explicit and implicit?

Systems:

• What are the main systems that run the organization? Consider financial and HR systems as well as communications and document storage.
• Where are the controls and how are they monitored and evaluated?
• What internal rules and processes does the team use to keep on track?

Shared Values:

• What are the core values?
• What is the corporate/team culture?
• How strong are the values?
• What are the fundamental values that the company/team was built on?

Style:

• How participative is the management/leadership style?
• How effective is that leadership?
• Do employees/team members tend to be competitive or cooperative?
• Are there real teams functioning within the organization or are they just nominal groups?

Staff:

• What positions or specializations are represented within the team?
• What positions need to be filled?
• Are there gaps in required competencies?

Skills:

• What are the strongest skills represented within the company/team?
• Are there any skills gaps?
• What is the company/team known for doing well?
• Do the current employees/team members have the ability to do the job?
• How are skills monitored and assessed?

7S Matrix Questions

Using the information you have gathered, now examine where there are gaps and inconsistencies between elements. Remember you can use this to look at either your current or your desired organization.
Click here to download our McKinsey 7S Worksheet, which contains a matrix that you can use to check off alignment between each of the elements as you go through the following steps:

• Start with your Shared Values: Are they consistent with your structure, strategy, and systems? If not, what needs to change?
• Then look at the hard elements. How well does each one support the others? Identify where changes need to be made.
• Next look at the other soft elements. Do they support the desired hard elements? Do they support one another? If not, what needs to change?
• As you adjust and align the elements, you'll need to use an iterative (and often time consuming) process of making adjustments, and then re-analyzing how that impacts other elements and their alignment. The end result of better performance will be worth it.

Tip:
For similar approaches to this, see our articles on the Burke-Litwin Change Model, and the Congruence Model. You may also find our articles on the Change Curve, Impact Analysis and Lewin's Change Management Model useful.

Key Points

The McKinsey 7Ss model is one that can be applied to almost any organizational or team effectiveness issue. If something within your organization or team isn't working, chances are there is inconsistency between some of the elements identified by this classic model. Once these inconsistencies are revealed, you can work to align the internal elements to make sure they are all contributing to the shared goals and values.

The process of analyzing where you are right now in terms of these elements is worthwhile in and of itself. But by taking this analysis to the next level and determining the ultimate state for each of the factors, you can really move your organization or team forward.