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Wednesday, January 29, 2020

CEO Journal

The Danger of SWOT Analysis

Business People

In the context of our increasingly disrupted, globalizing, and multicultural world, leaders greatly appreciate the security and comfort of clear-cut strategic plans for the future. After all, following our in-the-moment intuitions frequently leads to business disasters, and strategic plans help prevent such problems.

Tragically, popular strategic business analyses meant to address the weaknesses of human thinking are deeply flawed. They give a false sense of comfort and security to business leaders who use them, leading these leaders into the exact business disasters that they seek to avoid.

Take the most popular of them, the SWOT analysis, where you try to figure out the Strengths, Weaknesses, Opportunities, and Threats facing your business. SWOT doesn’t account for the dangerous judgment errors revealed by recent research in behavioral economics and cognitive neuroscience, what scholars call cognitive biases.

Relying on SWOT to inform your strategic plans without accounting for cognitive biases results in appalling oversights that ruin profitable businesses and bring down high-flying careers. Cognitive biases harm us not only in our careers, but also in other life areas.

Fortunately, recent research shows how you can use pragmatic strategies to address these dangerous judgment errors, such as by deliberately constraining your choices and going against your intuitions.

Mental Blindspots in Business Leadership

One of the most dangerous mental blindspots for business leaders is overconfidence bias. Scholars have found that business leaders at all levels make bad decisions due to overconfidence, especially those who have been most successful in the past. They tend to believe themselves infallible, a dangerous judgment error called the bias blind spot. To quote Proverbs 16:18, “Pride goeth before destruction, and an haughty spirit before a fall.”

A related problem is the optimism bias, our tendency to look through rose-colored glasses. Research shows that top business leaders are especially likely to be excessively optimistic about their success. Such optimism harms their ability to make effective strategic plans.

Cognitive Biases and SWOT

When taking on new coaching and consulting clients, I always whether they did a SWOT. In literally all cases when they did one, I’ve seen their overconfidence and optimism biases lead them to disregard risks and overestimate rewards.

For example, consider Saraj, a technology startup founder. His venture capital investors encouraged him to turn to me for coaching as his company passed $10 million in equity.

Saraj showed me the SWOT he did himself several months earlier for his own role as a leader. I was surprised that he didn’t list effective delegation as an area of weakness, since some of the investors who directed him to me expressed that as a topic of concern.

Asking him about it, I heard an immediate defensive tone. Clearly, I hit on a sore spot. He felt strong ownership of what he perceived as the core activities in the startup, flinching away from the possibility of delegating these tasks.

Indeed, SWOT allows business leaders to sweep under the rug those areas of weakness and threats about which they feel defensive. Their optimism and overconfidence serve to justify failure to address these problems. Eventually, I was able to persuade Saraj that effective delegation makes him a stronger leader, one capable of best serving the startup in the long term.

It’s particularly problematic when SWOT is performed in a group setting, since cognitive biases are often exponentially increased in such environments. One particularly big problem is known as groupthink, where groups tend to coalesce around the opinions of a powerful leader.

Martha, the CEO of a Midwestern healthcare company for whom I started consulting in early 2016, showed me her SWOT analysis from mid-2015. I was surprised to see no discussion of political threats to Obamacare, despite her company’s growing reliance on patients covered under that program.

She told me that she didn’t see much probability of a threat to Obamacare and neither did other leaders in the healthcare company. To me, it was a clear example of groupthink, ignoring the elephant in the room (and on the ballot).

I eventually convinced her otherwise, and we developed some plans in the event of problems arising in this area. She was very glad we had done so when political headwinds threatened Obamacare from 2017 onward.

So next time you’re thinking about doing strategic planning, take some time to consider the dangers of the excessive confidence and optimism that you and your team very likely experience, at least if you’re successful. Rather than using SWOT to make a simple strategic plan, focus on addressing cognitive biases when assessing potential threats and opportunities for your plan. Emphasize much more than you intuitively feel is appropriate risks, threats, and dangers, rather than achievements, hopes, and rewards. Try to make your plan flexible and resilient, able to handle unanticipated developments that you didn’t consider when you made the original plan. If you notice yourself or anyone else flinching away from an uncomfortable topic, double down your commitment to explore it thoroughly.

Only through vigilance and discipline will you ensure that you can avoid the pride that goeth before a fall.


Written by Dr. Gleb Tsipursky. Have you read?
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Dr. Gleb Tsipursky
Dr. Gleb Tsipursky is a cognitive neuroscientist and expert on behavioral economics and decision making. As CEO Of Disaster Avoidance Experts, he spent over two decades consulting, coaching, speaking and training hundreds of clients across North America, Europe, and Australia, including Aflac, Honda, Wells Fargo, the World Wildlife Fund, and Xerox. He authored the bestselling The Truth-Seeker’s Handbook. His new book is Never Go With Your Gut: How Pioneering Leaders Make the Best Decisions and Avoid Business Disasters. He lives in Columbus, Ohio. Dr. Gleb Tsipursky is an opinion columnist for the CEOWORLD magazine.
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