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:
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Strengths
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:
- patents
- 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
Weaknesses
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.
Opportunities
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
Threats
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:
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.
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