A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis. The SWOT analysis provides information that is helpful in matching the firm’s resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection. The following diagram shows how a SWOT analysis fits into an environmental scan:
SWOT analysis is a strategic planning method used to evaluate the strength, weakness, opportunities and threats involved in a planning of a city, town or a ward. It involves specifying the objective of the plan or project and identifying the external factors that are favourable and unfavourable to achieve that project.
- A SWOT analysis must first start with defining a desired end state or objective. A SWOT analysis may be incorporated into the strategic planning model.
- Strength: The characteristics that give an advantage.
- Weakness: The characteristics that give disadvantage.
- Opportunities: External factors that help.
- Threats: External factors that can harm.
SWOT Analysis Framework
SWOT analysis framework include understanding the environment where it is being applied. This is known as “Environmental Scan”. It has 2 components as mentioned below:
- Internal Analysis – Strengths & Weakness
- External Analysis – Opportunities & Threats
A firm’s strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage. Examples of such strengths include:
- strong brand names
- good reputation among customers
- cost advantages from proprietary know-how
- exclusive access to high grade natural resources
- favorable access to distribution networks
The absence of certain strengths may be viewed as a weakness. For example, each of the following may be considered weaknesses:
- lack of patent protection
- a weak brand name
- poor reputation among customers
- high cost structure
- lack of access to the best natural resources
- lack of access to key distribution channels
In some cases, a weakness may be the flip side of a strength. Take the case in which a firm has a large amount of manufacturing capacity. While this capacity may be considered a strength that competitors do not share, it also may be a considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly to changes in the strategic environment.
The external environmental analysis may reveal certain new opportunities for profit and growth. Some examples of such opportunities include:
- an unfulfilled customer need
- arrival of new technologies
- loosening of regulations
- removal of international trade barriers
Changes in the external environmental also may present threats to the firm. Some examples of such threats include:
- shifts in consumer tastes away from the firm’s products
- emergence of substitute products
- new regulations
- increased trade barriers
The SWOT Matrix
A firm should not necessarily pursue the more lucrative opportunities. Rather, it may have a better chance at developing a competitive advantage by identifying a fit between the firm’s strengths and upcoming opportunities. In some cases, the firm can overcome a weakness in order to prepare itself to pursue a compelling opportunity.
To develop strategies that take into account the SWOT profile, a matrix of these factors can be constructed. The SWOT matrix (also known as a TOWS Matrix) is shown below:
SWOT / TOWS Matrix
|Opportunities||S-O strategies||W-O strategies|
|Threats||S-T strategies||W-T strategies|
- S-O strategies pursue opportunities that are a good fit to the company’s strengths.
- W-O strategies overcome weaknesses to pursue opportunities.
- S-T strategies identify ways that the firm can use its strengths to reduce its vulnerability to external threats.
- W-T strategies establish a defensive plan to prevent the firm’s weaknesses from making it highly susceptible to external threats.
Applications of SWOT analysis
SWOT analysis is implemented in any situation related to decision making when the desired objective is defined. It can also be used in preventive management of the crisis or the planning of any pre-crisis circumstances. SWOT is also applied in the creation of a recommendation during a survey or viability study. Now let us see in detail the areas of the application of SWOT analysis.
During Strategy Planning
SWOT is often used to plan individual or organization strategies. This involves the identification of external and internal factors by employing the 2X2 matrix, evaluation and selection of the most feasible factors, and identification of the relation between the external and internal features of that factor.
As a part of the development, plans and strategies are vital to achieving the objectives of an organization. Thus an enterprise implements a rigorous and systematic process known as corporate planning. SWOT analysis forms the foundation of the analysis of environmental and business factors. The role of SWOT analysis in corporate planning is:
- Setting the required objectives about what the organization is going to do
- Scanning of the environmental factors
- Complete analysis of the existing strategies
- Strategic Issues are defined
- Development of revised or new strategies
- Preparation and implementation of operational, project and resource plans
- Minute monitoring of every strategy and their results
- Establishment of the critical factors for the success
Matching and Converting
Another way to use SWOT analysis is through matching and converting. Matching is utilized to find out the competitive benefit by matching the potency of the opportunities. Weaknesses or threats can also be converted to opportunities and strengths.
During competitor analysis, SWOT analyst creates detailed profiles of every competitor of the organization, by comparing the weaknesses and strengths. Cost structure, resources and competencies, source of profits, differentiation of the products, vertical integration degree, and competitors positioning were examined by the marketing managers. Some of the most common techniques to conduct surrounding market research through SWOT analysis are:
- Focus groups (Qualitative marketing research)
- Statistical surveys (Quantitative marketing)
- Test markets as experimental techniques
- Ethnographic or onsite observation as observational techniques
SWOT analysis is a simple and useful framework for analyzing the Strength, weaknesses, opportunities, and threats of an enterprise. It helps them to build a strategy on what they do the best and to address what they are lacking to reduce the risks in the future. Through SWOT analysis the organizations take full benefit of the chances for success. SWOT analysis is employed to start a strategy formulation, understanding the nature of the competitors, and insight into a coherent competitive position.