Continuing on with the Business Life series beginning with this post, the next step in the strategic process for most companies is to gain an understanding of the internal and external environment in which they are operating. This involves analyzing factors within their environment that may impact their success in reaching their long-term vision. If a business doesn’t know what it does well it may lose sight of this and fail to meet its customers’ expectations, and if it doesn’t know what it fails at it will never know how to improve. If a business doesn’t know what opportunities or threats there are, it will never take advantage of the opportunities or prepare for the threats. Understanding all of these factors of the environment in which they operate are crucial for any business to succeed long-term.
Personal Finance Environment Scanning
From a personal finance perspective, it’s important to understand a variety of factors unique to your environment in order for you to be able to develop a strategy going forward. Are you married? Do you have or plan on having children? How much can you expect to earn in your chosen career? Are you able to take on additional work? Do you have any debt? Is it cheap or expensive where you live?
There are all sorts of questions you could consider when it comes to scanning your environment, before you can really formulate a strategy of how you want to reach your ultimate vision.
A variety of tools can be used in order for a business to gain this crucial understanding, but the most succinct and applicable one that could be used from a personal perspective would be a SWOT analysis. A SWOT analysis looks at your current internal strengths and weaknesses, as well as your potential external opportunities and threats. Think of it like this:
- Strengths – Anything that currently either reduces costs or increases income
- Weaknesses – Anything that currently either increases costs or reduces income
- Opportunities – Anything in the future that could reduce costs or increase income
- Threats – Anything in the future that could increase costs or reduce income
It’s important not to just think of things you are in control of, but also external factors that you may not be in control of, such as economics.
So what might a typical SWOT analysis look like? Here’s an example of one for my family (click to expand):
Stock Market Ninja Environment Scan
Once you have prepared your SWOT analysis, you start to gain an understanding of what you are currently doing well (strengths), where you can improve (weaknesses), future opportunities take advantage of (opportunities) and things you want to try and avoid, prepare for or mitigate if possible (threats).
This develops a pretty thorough understanding of your life right now and potentially in the future, and gives you an understanding of actions you might want to take going forward.
Scanning the Stock Market Ninja Environment
Using my SWOT analysis as an example, our strengths are largely revolved around better than average income, no debt and low costs in certain areas of our life. Opportunities are that we will likely gain promotions but might need more education, we could take on more work if time permits and we could take on debt if the time is right.
Our weaknesses mostly revolve around expenses we either can’t avoid or have chosen as one of our core values. We could potentially give some of these up if we had to, but for now, we have decided not to. Finally, our threats mostly revolve around the economy, with my wife potentially losing her job, our stock investments falling and Canada being heavily reliant on a housing bubble.
So what do you do with all this information now that you have it? Well, this is where the next step in the cycle comes into play, developing a strategy. You should have already decided upon your vision and values, and now you should have an understanding as to your strengths, weaknesses, opportunities, and threats. With this information you now need to develop a strategy of reaching your vision whilst harnessing your strengths, taking advantage of any opportunities, realizing your weaknesses and mitigating your threats as best possible.
In the next post in this Business Life series, we are going to look at types of strategies you can employ in order to align your SWOT with your vision to develop a plan of action for reaching your ultimate goal.