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 in a Business
Now let us break down the SWOT analysis further and understand how an enterprise can conduct a strategic analysis to plan for better performance with each passing year.
1. Strengths of the Business
There are several attributes of a business that makes them stand out from the other competitors in the market. These elements are the strengths of an organization. There are certain strategies and resources within an organization that has been carried on for years. These resources or plans are known as strengths. Knowing these factors is very vital to remain ahead of the rivalries in the industry. A firm’s strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage Through SWOT a company can be:
- A strong brand
- Can include a strong balance sheet
- Can build a loyal customer base
If the following questions can be answered during strategic analysis, then those are the strengths of an organization.
- What are the advantages of the company over other competitors?
- In which section the organization does well?
- Will this plan enhance the current profitability of the organization
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
- favourable access to distribution networks
2. The weakness of the Business
An organization can’t have only strengths and not many weaknesses. The factors that need to be corrected or need to perform better to compete in the market are known as the weaknesses. Most of the problems can be detected beforehand and can be corrected in time with preventive measures. Some of the weaknesses of the company that are noticeable are:
- The higher level of debt
- A weak brand reputation
- Insufficient supply chain
- Lack of capital
To find out the weaknesses of an organization, the following questions must be answered.
- What are areas which are lagging and could do better?
- Which areas should be avoided?
- What are the consistent complaints of the customers and the employees?
- What are the internal and external processes that are too slow?
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.
3. Opportunities for the Business
If an organization can detect the opportunities that lay for them in the future and follow those steps, then success will be doubled for the business. Through Strategic analysis, you just have to find out those positive traits that will be beneficial for an organization. The golden opportunities for the enterprise can be determined if the below questions are answered during strategic analysis.
- What are the obvious opportunities that can be grabbed in the future?
- What are the existing and predicted future trends that will be ruling the market?
- Are there any chances of exploitation of the social, population and lifestyle changes?
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
4. Threats to a Business
Certain factors can harm the growth of a business. These factors can also be detected via Strategic analysis and a proper risk management system should be implemented so that they cannot affect the growth of a company. Strong competitor brand value, multiple companies with the same product, better advertising campaigns by the rivals, down in the economy and good relationship of the competitor with the retailers are examples of such negative aspects that can be a sure threat to any organization. Strategic analysis notices these treats and dealt with them very tactfully. The biggest threats for the company can be detected if the below questions get an affirmative response during the analysis.
- What is the biggest obstacle in the external field?
- What difference are the competitors doing to remain ahead of the company?
- Are there any regulatory and government changes?
- How can we keep up with the advanced technological changes?
- What is the nature of the relationship between the organization and the suppliers?
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 analysing 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.